A true value investor is likely to perform better in a bear market than in a bull market.

Patience is a virtue for value investors

The last part of Buffett’s 1957 letter carries a very important lesson in patience for value investor. Here is what he wrote…

To some extent our better than average performance in 1957 was due to the fact that it was a generally poor year for most stocks. Our performance, relatively, is likely to be better in a bear market than in a bull market so that deductions made from the above results should be tempered by the fact that it was the type of year when we should have done relatively well. In a year when the general market had a substantial advance I would be well satisfied to match the advance of the Averages.

Despite calling ourselves “value investors”, a lot of us lose patience when stock prices are falling and get elated when they are rising.

But as Buffett wrote, a true value investor is likely to perform better in a bear market than in a bull market.

This is simply because when you are value investor, you buy good quality stocks and that too only at reasonable margin of safety (around 30-50%).

So when stock prices fall in a bear market, your good quality stocks bought at reasonable margin of safety may earn you lesser losses than the broader markets.

On the other hand, in a bull market, when even garbage is considered a dessert, and people are lapping up everything that’s rising in price, Mr. Market usually ignores good quality “boring” businesses which you hold in your portfolio…

…and thus you must be happy to earn just as much as the broader markets. That’s when you must not try to ride the bull but instead tell those riding it – “I’ll see you in the next bear market!”

This wouldn’t be arrogance on your part. This would be sensibility, as Buffett has proved over the past six decades.

http://www.safalniveshak.com/wit-wisdom-warren-part1/