### Attractive Buying Opportunities arise through a Variety of Causes

Attractive buying opportunities for the enterprising investor arise through a variety of causes.

The standard or recurrent reasons are
(a) a low level of the general market and
(b) the carrying to an extreme of popular disfavor toward individual issues. 

Sometimes, but much more rarely, we have the failure of the market to respond to an important improvement in the company's affairs and in the value of its stock.

Frequently, we find a discrepancy between price and value which arises from the public's failure to realise the true situation of a company - this in turn being due to some complicated aspects of accounting or corporate relationships.

It is the function of competent security analysis to unravel such complexities and to bring the true facts and values to light.


Benjamin Graham
Intelligent Investor


Summary:

Attractive buying opportunities (discrepancy between price and value) occur due to various causes:
1.  low level of the general market
2.  extreme of popular disfavour towards individual stocks
3.  failure of market to respond to improvement in the company
4.  failure to realise hidden value in the company due to some complicated aspects of accounting or corporate relationships

Bargain-issue pattern in Secondary Companies

We have defined a secondary company as one which is not a leader in a fairly important industry.

Thus, it is usually one of the smaller concerns in its field, but it may equally well be the chief unit in an unimportant line.

By way of exception, any company that has established itself as a growth stock is not ordinarily considered as "secondary."

In the 1920's relatively little distinction was drawn between industry leaders and other listed issues, provided the latter were of respectable size.

The public felt that a middle-sized company was strong enough to weather storms and that it had a better chance for really spectacular expansion than one which was already of major dimensions.


The 1931-33 depression

The 1931-33 depression, however, had a particularly devastating impact on companies below the first rank either in size or in inherent stability.

As a result of that experience investors have since developed a pronounced preference for industry leaders and a corresponding lack of interest in the ordinary company of secondary importance.  

This has meant that the latter group has usually sold at much lower prices in relation to earnings and assets than have the former.

It has also meant further that in many instances the price has fallen so low as to establish the issue in the bargain class.

When investors rejected the stocks of secondary companies, even though these sold at relatively low prices, they were expressing a belief or fear that such companies faced a dismal future.

In fact, at least subconsciously, they calculated that any price was too high for them because  they were heading for extinction - just as in 1929 the companion theory for the "blue chips" was that no price was too high for them because their future possibilities were limitless.

Both of these views were exaggerations and were productive of serious investment errors.

Actually, the typical middle-sized listed company is a large one when compared with the average privately-owned business.

There is no sound reason why such companies should not continue indefinitely in operation, undergoing the vicissitudes characteristic of our economy but earnings on the whole a fair return on their invested capital.  

This brief review indicates that the stock market's attitude toward secondary companies tends to be unrealistic and consequently to create in normal times innumerable instances of major undervaluation.



Benjamin Graham
The Intelligent Investor

Purchase of Bargain Issues

We define a bargain issue as one which, on the basis of facts established by analysis, appears to be worth considerably more than it is selling for.

The genus includes bonds and preferred stocks selling well under par, as well as common stocks.

To be concrete as possible, let us suggest that an issue is not a true "bargain" unless the indicated value is at least 50% more than the price.

What kind of facts would warrant the conclusion that so great a discrepancy exists?

How do bargains come into existence, and how does the investor profit from them?

There are two tests by which a bargain common stock is detected.

The first is by our method of appraisal.  This relies largely on estimating future earnings and then multiplying these by a factor appropriate to the particular issue.

The second test is the value of the business to a private owner.  This value also is often determined chiefly by expected future earnings - in which case the result may be identical with the first.  But in the second test more attention is likely to be paid to the realizable value of the assets, with particular emphasis on the net current assets or working capital.


Courage in depressed markets

At low point in the general market a large proportion of common stocks are bargain issues, as measured by these standards.

It is true that current earnings and the immediate prospects may both be poor, but a level-headed appraisal of average future conditions would indicate values far above ruling prices. 

Thus the wisdom of having courage in depressed markets is vindicated not only by the voice of experience but also by application of plausible techniques of value analysis.

The same vagaries of the marketplace which recurrently establish a bargain condition in the general list account for the existence of many individual bargains at almost all market levels.

The market is always making mountains out of molehills and exaggerating ordinary vicissitudes into major setbacks.  Even a mere lack of interest or enthusiasm may impel a price decline to absurdly low levels.

Thus we have two major sources of undervaluation:  (a) currently disappointing results, and (b) protracted neglect or unpopularity.


The private-owner test

The private-owner test would ordinarily start with the net worth as shown in the balance sheet.  The question then arises as to whether the indicated earning power is sufficient to validate the net worth as a measure of what a private buyer would be justified in paying for the business as a whole.

If the answer is definitely yes, we suggest that an ordinary investor should find the common stock attractive at a price one-third or more below such a figure.

If instead of using all the net worth as a starting point the investor considered only the working capital and applied his test to that, he would have a more convincing demonstration of the existence of a bargain opportunity.

For it is something of an axiom that a business is worth to any private owner at least the amount of its working capital, since it could ordinarily be sold or liquidated for more than this figure.

Hence, if a common stock can be bought at no more than two-thirds of the working -capital value alone- disregarding all the other assets - and if the earnings record and prospects are reasonably satisfactory, there is strong reason to believe that the investor is getting substantially more than his money's worth.



Benjamin Graham
The Intelligent Investor

When evaluating the price, look at the potential return and the risk you must take to get that return.

When it comes to evaluating the price of a stock, you're really interested in just 2 things:

1.  The potential return, and
2.  The risk you must take to get that return.

If the potential return is worth the risk, the price is right.

If it is not, you can simply wait until it is.

As volatile as the stock market is, most stocks will sell at a favourable price sometime during the year.

To estimate the potential return, you will have to come up with a reasonable forecast of how high the price might go.  Knowing the hypothetical potential high price, you can estimate the potential return.

To evaluate risk, you will need to conservatively estimate the stock's potential lowest price.  If your potential gain is at least three times as much as you risk losing, your stock is probably selling at a fair price.



For example:

Stock TUW

Potential high price = $20
Potential low price = $10
Market price = $12

Potential gain = $20 - $12 = $18
Potential loss = $ $12 - $10 = $2
Therefore, potential gain : potential loss = $8 : $2 = 4 : 1

As the potential gain is at least 3x as much as you risk losing, the stock is probably selling at a fair price.

Prospecting for Good Quality Stocks at the Right Price at any given time.

There are about 16,000 publicly owned companies in the U.S. for you to select from.  There are also about 3 times this number (48,000) of publicly owned companies in the other countries for you to select from too.

With so many companies, of course, some are much better candidates for your consideration than others.

Of these companies, fewer than 2% are likely to make the cut so far as your quality standards are concerned.

And perhaps, only 5% of THOSE might be available at the right price at any given time- and even this could be an overestimate.


Illustration:

1000 stocks

Only 20 are quality stocks (20/1000 = 2%)

Of these 20 quality stocks, only 1 is available at the right price at any given time, if at all. (1/20 = 5%)

There is no price low enough to make a poor quality company a good investment.

If you're in doubt about the quality of a company as an investment, abandon the study and look for another candidate.

When in doubt, throw it out.

Abandon your study and go on to another.  There is no price low enough to make a poor quality company a good investment.


The worse a company performs, the better value its stock will appear to be.

Because declining fundamentals will prompt a company's shareholders to sell, the price will decline.  This will cause all the value indicators to show that the price has become a bargain.  It's not!

When the stock is selling at a price below that for which it has customarily sold, you will want to check to see why - what current investors know that you don't.

A stock price must past 2 tests to be considered reasonable.

The most important task in buying a stock is to determine that the company is a good company, in which to own stock for the long term. 

However, no matter how good the company, if the price of its stock is too high, it's not going to be a good investment.

A stock price must pass two tests to be considered reasonable:

1.  The hypothetical total return

The hypothetical total return from the investment must be adequate - enough to contribute to a portfolio average of around 15 percent - sufficient to double its value every 5 years.

2.  The potential risk 

The potential gain should be at least 3 times the potential loss.




























To complete these tests, you have to learn how to do the following:

• Estimate future sales and earnings growth
• Estimate future earnings
• Analyse past PEs (check the present PE relative to its usual average PE)
• Estimate future PEs.
• Forecast the potential high and low prices
• Calculate the potential return.
• Calculate the potential risk.
• Calculate a fair price.

Key Points about Risks

Risk unequivocally exist in investing in any stock  ...

... but important to distinguish between volatility in stock price and business risk ...

... and my point is that none are large or imminent enough to explain why shares are so cheap.

Buffett: In my early days I, too, rejoiced when the market rose. Now, low prices became my friend.

Buffett highlights the irrational reaction of many investors to changes in stock prices.


Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%.  Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us.  Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period?

I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years.

----



The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter:

• Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. 
• These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.

Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus. And here
a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.

In the end, the success of our IBM investment will be determined primarily by its future earnings. But an important secondary factor will be how many shares the company purchases with the substantial sums it is likely to devote to this activity. And if repurchases ever reduce the IBM shares outstanding to 63.9 million,  I will abandon my famed frugality and give Berkshire employees a paid holiday. 

-----


When Berkshire buys stock in a company that is repurchasing shares, we hope for two events:

• First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and 
• second, we also hope that the stock underperforms in the market for a long time as well. A corollary to this second point: “Talking our book” about a stock we own – were that to be effective – would actually be harmful to Berkshire, not helpful as commentators customarily assume.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

The best investment opportunities arise when other investors act unwisely

There is nothing inherent in a security or business that alone makes it an attractive investment.  Investment opportunity is a function of price, which is established in the marketplace.

• Whereas some investors are company- or concept-driven, anxious to invest in a particular industry, technology, or fad without special concern for price, a value investor is purposefully driven by price.  
• A value investor does not get up in the morning knowing his or her buy and sell orders for the day, these will be determined in the context of the prevailing prices and an ongoing assessment of underlying values.  

Since transacting at the right price is critical, trading is central to value - investment success.

• This does not mean that trading in and of itself is important, trading for its own sake is at best a distraction and at worst a costly digression from an intelligent and disciplined investment program.  
• Investors must recognize that while over the long run investing is generally a positive sum activity, on a day-to-day basis most transactions have zero sum consequences.  
• If a buyer receives a bargain, it is because the seller sold for too low a price.  If a buyer overpays for security, the beneficiary is the seller, who received a price greater than underlying business value.  

The best investment opportunities arise when other investors act unwisely thereby creating rewards for those who act intelligently.

• When others are willing to overpay for a security, they allow value investors to sell at premium prices or sell short at overvalued levels.  
• When others panic and sell at prices far below underlying business value, they create buying opportunities for value investors.  
• When their actions are dictated by arbitrary rules or constraints, they will overlook outstanding opportunities or perhaps inadvertently create some for others.  
• Trading is the process of taking advantage of such mispricings.

Risk is dependent on both the nature of investments and on their market price

The risk of an investment is described by both the probability and the potential amount of loss.

The risk of an investment - the probability of an adverse outcome - is partly inherent in its very nature.

• A dollar spent on biotechnology is a riskier investment than a dollar used to purchase utility equipment.  
• The former has both a greater probability of loss and a greater percentage of the investment at stake.

In the financial markets, however, the connection between a marketable security and the underlying business is not as clearcut.

• For investors in a marketable security the gain and loss associated with the various outcomes is not totally inherent in the underlying business; 
• it also depends on the price paid, which is established by the marketplace.

Greater risk does not guarantee greater return, risk erodes return by causing losses.

Greater risk does not guarantee greater return.

To the contrary, risk erodes return by causing losses.

It is only when investors shun high-risk investments, thereby depressing their prices, that an incremental return can be earned which more than fully compensates for the risk incurred.

By itself risk does not create incremental return, only price can accomplish that.

Margin of Safety Concept in Undervalued or Bargain Securities

The margin-of-safety idea becomes much more evident when we apply it to the field of undervalued or bargain securities. 

• We have here, by definition, a favorable difference between price on the one hand and indicated or appraised value on the other. 
• That difference is the safety margin. It is available for absorbing the effect of miscalculations or worse than average luck. 
• The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments. 
• For in most such cases he has no real enthusiasm about the company’s prospects.

True, if the prospects are definitely bad the investor will prefer to avoid the security no matter how low the price. 

But the field of undervalued issues is drawn from the many concerns—perhaps a majority of the total—for which the future appears neither distinctly promising nor distinctly unpromising. 

• If these are bought on a bargain basis, even a moderate decline in the earning power need not prevent the investment from showing satisfactory results. 
• The margin of safety will then have served its proper purpose.

Ref:  The Intelligent Investors by Benjamin Graham

CHAPTER 20  “Margin of Safety” as the Central Concept of Investment





Also read:

• Margin of Safety Concept in The Business Venture of Buying and Selling Stocks
• Margin of Safety Concept in Conventional and Unconventional Investments
• Margin of Safety Concept in Speculation and Investment
• Margin of Safety Concept in Diversification
• Margin of Safety Concept in Undervalued or Bargain Stocks
• Margin of Safety Concept in Growth Stocks
• Margin of Safety in Good-Quality and Low-Quality Stocks.
• Margin of Safety Concept in Common Stocks
• Margin of Safety Concept in Bonds and Preferred Stocks

Price Matters

Price matters in the stock market.

Just like you wouldn't run out and pay $10 a gallon for gasoline, why would you pay 100 times earnings for a company that is growing 15% a year?

Do you think the people who paid $212 for Yahoo YHOO in January 2000 are ever going to get their money back?

Yahoo's a good company, but it may take a very long time for the stock to get back to its old highs.

The same could be said of many other technology stocks and also even those technology companies with moats around them that got clobbered in post 2000.

Remember - the single greatest determinant of a company's return in your portfolio is the price you pay for its shares.

As important as it is to understand the quality of a company - its growth prospects, competitive position, and so forth - it is even more vital that you pay a fair price for the firm's shares.

You'll make a lot more money buying decent firms with low valuations than by paying premium prices for premium companies.  Why?  Because the future is uncertain, and low valuations leave a lot more room for error.

Handling stock price falls

• 30 May 03

When a stock price falls, do you sell, buy more or hold on? It all depends, but there are some techniques to help you with your thinking, and your emotions.

One of the questions we're frequently asked is how to handle a tumbling stock price. Should you cut your losses, buy more or sit on your hands nervously and do nothing?

Unfortunately, the Zen art of value investing doesn't lend itself particularly well to never-fail formulas, so absolute answers are impossible. There are, however, some basic principles that you can look to for guidance.

First of all, you should be looking to sell (or not buy) shares that look expensive and aiming to buy shares that look cheap. The direction in which a share price has recently travelled is not in itself an indicator of this.

When to hold

Secondly, too much trading will just hand the returns from your portfolio over to your broker. That means that there's usually a large grey area between buy and sell where you should be happy simply to hold.

Finally, you should always maintain a sensibly diversified portfolio so that your fortunes are not too closely tied to a few holdings.

If a share falls and you keep adding large chunks, then it might end up accounting for too much of your portfolio. That's not a happy situation even if you think it's the cheapest share on the market.

It's worth noting that all of this has just as much relevance if a stock in your portfolio has gone up in price, or even if it hasn't moved at all. What matters is the relationship between the price and the underlying value, subject to diversification and keeping your trading costs down. Putting this all together, we can get an idea of what to do in certain situations.

If a share has fallen by, say, 20%, but you estimate that its underlying value has fallen by less, or indeed grown, then generally we believe it makes more sense to at least consider buying more (subject to keeping sensibly diversified).

An example of this would be Macquarie Bank (see page 4), which we've consistently seen as being undervalued. As its price fell from above $30 last year, we continued to recommend buying and it became a strong buy in issue 114/Oct 02 (Strong Buy up to $21 - $20.39). The shares have now recovered to $27.70.

Time to sell

If a share has fallen by a certain amount but you estimate that its underlying value has fallen by more, then you certainly shouldn't be buying more. That would just compound the original mistake. Instead, you'd want to face up to the mistake and think about selling.

If a share has fallen and you estimate that its underlying value has fallen by a similar amount, then you'd sit on your hands and do nothing.

To avoid too much expensive trading, this should probably be your starting point. To either buy more or sell, your views should be very strongly held.

Our recommendations on AMP are an example of the sell and hold situations. At the beginning of last year, with its share price up near the $20 mark, we had it as a hold. But we were unimpressed by its results in March 2002 noting, in particular, that its 'international or bust attitude' was cause for concern.

So we downgraded it to sell in issue 98/Mar 02 (Sell/Switch to Suncorp - $19.12) and continued to recommend selling as the price fell (and as its underlying value evaporated).

We finally reverted to a hold in issue 113/Oct 02 (Hold while Unstable - $11.78), because we considered that the fall in the share price had finally caught up with the deterioration in the underlying value of the stock.

Since then, we've felt that the falling share price has been matched by a fall in business value (such as we're able to judge it) and have continued with the Hold while Unstable recommendation.

Different thinking

It can sometimes help to imagine that you don't actually own your downtrodden shareholding, but instead have its value in cash. If that was the case, would you use the cash to buy those shares at the current price or invest in something else?

If you find you get a definite no, then it might be time to sell. If you get a definite yes, then you'd think of buying more.

If you get a maybe, then you're probably in the area where the transaction and tax costs of taking any action would outweigh any potential benefits. In this case, it's usually best to to sit on your hands and hold on to your shares.

It's never easy to deal with a falling share price and there are no clear-cut rules to follow. But this approach, used advisedly, can be a useful way of addressing the issue. We hope it helps.

http://www.intelligentinvestor.com.au/articles/128/Handling-stock-price-falls-.cfm

What is the correct company value? Value versus Price

S@R | 15/02/2009

Nobel Prize winner in Economics, Milton Friedman, has said; “the only concept/theory which has gained universal acceptance by economists is that the value of an asset is determined by the expected benefits it will generate”.

Value is not the same as price. Price is what the market is willing to pay. Even if the value is high, most want to pay as little as possible. One basic relationship will be the investor’s demand for return on capital – investor’s expected return rate. There will always be alternative investments, and in a free market, investor will compare the investment alternatives attractiveness against his demand for return on invested capital. If the expected return on invested capital exceeds the investments future capital proceeds, the investment is considered less attractive.

One critical issue is therefore to estimate and fix the correct company value that reflects the real values in the company. In its simplest form this can be achieved through:

Budget a simple cash flow for the forecast period with fixed interest cost throughout the period, and ad the value to the booked balance.

This evaluation will be an indicator, but implies a series of simplifications that can distort the reality considerably. For instance, real balance value differs generally from book value. Proceeds/dividends are paid out according to legislation; also the level of debt will normally vary throughout the prognosis period. These are some factors that suggest that the mentioned premises opens for the possibility of substantial deviation compared to an integral and detailed evaluation of the company’s real values.

A more correct value can be provided through:

• Correcting the opening balance, forecast and budget operations, estimate complete result and balance sheets for the whole forecast period. Incorporate market weighted average cost of capital when discounting.

The last method is considerably more demanding, but will give an evaluation result that can be tested and that also can take into consideration qualitative values that implicitly are part of the forecast.
The result is then used as input in a risk analysis such that the probability distribution for the value of the chosen evaluation method will appear. With this method a more correct picture will appear of what the expected value is given the set of assumption and input.

The better the value is explained, the more likely it is that the price will be “right”.

The chart below illustrates the method.

http://www.strategy-at-risk.com/2009/02/15/what-is-the-correct-company-value/

Why bargains occur

 "The market is fond of making mountains of molehills and exaggerating ordinary vicissitudes into major setbacks. Even a mere lack of interest or enthusiasm may impel a price decline to absurdly low levels." 

The Value Equation

European Stocks Find Fans among U.S. Funds

European Stocks Find Fans among U.S. Funds
Posted by: Ben Steverman on June 24, 2010

Despite a fiscal crisis in Europe that is dragging stocks lower day after day, European stocks are finding enthusiastic buyers among an unlikely group: American fund managers.

That’s the clear impression from the Morningstar Investment Conference, an annual gathering in Chicago of 1,350 financial advisors, fund managers and other investing pros.

On June 24, the second day of the three-day conference, the Dax Index, a measure of the German stock market, fell 1.4%, and the Euro Stoxx 50 index, covering 50 stocks from across Europe, dropped 2.2%, bringing its year-to-date losses to a negative 10.8%.

But also on June 24, managers of global stock funds were extolling the virtues of European equities in panel discussions.

The common theme for these investors: The problems in Europe are serious, but the stock market has overreacted and many European stocks are selling at terrific discounts.

“What’s happening in Europe is of great concern,” said Franklin Mutual Series portfolio manager Philippe Brugere-Trelat, “and that’s the main reason stock markets in Europe are so cheap.”

But, he said at a panel discussion on “stock picking across the globe”: Many companies headquartered in Europe are “not European at all” in the sense that a large portion of their sales and earnings come from outside the continent.

Furthermore, the weaker euro gives a big advantage to European companies selling outside Europe. “The Euro at $1.20 is a very big cherry on the cake in terms of earnings and sales,” Brugere-Trelat said. The Euro on June 24 was trading at $1.23, down 13.9% from the beginning of 2010.

At a different panel discussion, Artisan Partners portfolio manager Mark Yockey admitted he has a relatively high exposure to European stocks — especially to financial issues that could be most vulnerable to debt problems.

However, he said, many European banks are like his holding, ING, which is one of three main banks in the Netherlands. An oligopoly like that gives ING and other similarly situated banks extra strength and staying power. “We think once things settle down they’re going to grow their earnings,” he said.

Another speaker and manager of foreign stocks on the same panel, Janus Capital Management portfolio manager Brent Lynn, said he has a relatively lower exposure to Europe but that he’s ready to start buying.

“We have more compelling valuations in Europe than I’ve seen in a number of years,” he said. The sovereign debt problems make him “worried … but intrigued by the prospect of buying high quality companies” at cheap prices.

The deals are so good that Lynn said he was considering buying domestically oriented banks in Italy and Spain, two of the most indebted European nations. His targets are “franchises that we think will be survivors.”

If investors are convinced the Europe stock slide has gone too far, this could be a great time to buy. Extending that logic, the market’s continued slide means that European stocks could be an even better deal in the future.

Referring to this, Yockey won a laugh from his audience when he said: “The opportunities are getting better and better every day.”

http://www.businessweek.com/investing/insights/blog/archives/2010/06/european_stocks_find_fans_among_us_funds.html

Buffett (1997): Would much prefer an environment of lower prices of equities than a higher one.

"Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."




Warren Buffett talked about the discipline in investing by using a baseball analogy in his 1997 letter to shareholders. Let us go further down the same letter to see what other investment wisdom he has to offer.

Have you ever wondered, "Why is it that whenever departmental or garment stores announce their yearly sales, people flock to these places and purchase goods by the truckloads but the very same people will not put a dime when similar situation plays itself out in the stock market." Indeed, whenever one is confident of the future direction of the economy, like we currently are of India, corrections of big magnitudes in the stock market can be viewed as an excellent buying opportunity. This is because just as in the case of departmental or grocery stores, a large number of stocks are available at 'sale' during these corrections and hence, one should not let go of such opportunities without making huge purchases. This is exactly what the master has to say through some of the comments in his 1997 letter to shareholders that we have reproduced below.

"A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves."

"But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

Simple isn't it! If someone is expected to be a buyer of certain goods over the course of the next few years, he or she will definitely be elated if prices of the goods fall. So why have a different attitude while making stock purchases. Having such frames of reference in mind helps one avoid the herd mentality and make rational decisions. Hence, the next time the stock market undergoes a big correction; think of it as one of those sales where good quality stocks are available at attractive prices and then it will certainly be difficult for you to not to make an investment decision.