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Benjamin Graham and Warren Buffett on Volatility

Updated: Sep 16, 2020

"The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored." Benjamin Graham (1894-1976), Legendary American Investor, scholar, teacher and co-author of the book, Security Analysis.

The stock market is volatile. There is no doubt about that. But volatility is the friend of the patient investor and should be embraced and not be feared. 

Benjamin Graham is regarded as the father of value investing and is considered an investment legend by most people. His book, The Intelligent Investor, changed many lives - especially Warren Buffett's - who was a student of Graham at Columbia Business School. Graham is generally thought of as Buffett's key mentor. 

Warren Buffett understands that volatility is part of stock market investing and is NOT a fan of following the crowd. He has often said that investors should be “fearful when others are greedy, and greedy when others are fearful.” This reflects a contrarian view on stock markets and relates directly to the price of a stock. When others are greedy, prices typically go higher, and an investor should be cautious of overpaying for an asset that subsequently leads to poor returns. When others are fearful, the market often presents a good value buying opportunity. According to Buffett, "You pay an exceedingly high price for a cheery consensus. It won't be the economy that will do in investors; it will be the investors themselves. Uncertainty is actually the friend of the buyer of long-term values." 

Charlie Munger, Buffett's partner, also tells us to avoid the thinking of crowds: "What investors need is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.” 

In times of volatility, it is best to "stay the course" (and to take advantage of market declines). 

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