Warren Buffets Public Secret In his preface to the book The Intelligent Investor, Warren Buffet says; If you

follow the behavioural and business principles that Graham advocates - and if you pay special attention to the invaluable advice in Chapter 8 and 20 you will not get a poor result from your investments. Chapter 8 is entitled: The investor and market fluctuations and chapter 20 is entitled: Margin of safety as the central concept of investment. Chapter 8 warns of the pitfalls of following the herd and Chapter 20 emphasizes the protection against loss or discomfiture. This article will concentrate on the secret in chapter 8 as it is used widely by most successful fund managers. Recalling that Warren Buffet refers to Benjamin Graham as his mentor, my quest is to endeavour the extraction from chapter 8, of the wisdom that Buffet uses. Chapter 8 The Investor And Market Fluctuations The market mood pendulum swings from unjustified pessimism to unsustainable optimism. This means that in all directions either up or down the stocks become mispriced. The mistake that most investors make is that they avoid stocks as they fall (as they become cheaper) and buy them as they go up (become more expensive). This is the herd mentality where a wave of movement in a certain direction sparks more and more group movement in the same direction. A stampede that results from animals such as buffalos engaging in this chaotic run produces severe casualties when they step on each other as they run towards a cliff. Graham was of the opinion that the market can be either your master, when it decides your investment course of action, or you servant when you do not take cues from it but merely use it as your pricing mechanism. When asked what keeps most individual investors from succeeding Graham answered the primary cause of failure is that they pay too much attention to what the stock market is doing currently. Dollar cost averaging works very well when you hold your investment for long periods at least 25 or 30 years this is a technique where you buy consistently at predefined or undefined intervals and take advantage of price fluctuations to average your buying price. For example if you have bought a stock consistently as follows: January February March April May June July August 10 15 20 30 26 24 15 10

Your average price would be $18.75 if you had bought a parcel of shares of $1000 every month. However an investor who may have decided to jump into the stock in April, with a lump sum of $8,000, as market euphoria dominated, would be down $5,333 in August as compared to the dollar averaging investor who would be down only $2,965 in the same month.

As Graham puts it, the typical investor would be better off if his stocks had no market quotation at

all, for he would then be spared the mental anguish caused him by other persons mistakes of judgement. Someone who checks the price of his stocks at 10 minute intervals would be equated to someone who calls the estate agent to check the price of his house every 10 minutes. That sounds very unrealistic does it not? Research has proved that investors who get frequent updates of stock price performance have been reported to get half the returns of those who do not! Buffet seems to be in the latter group. He lives far from both exchanges and does not have a stock ticker (quotron) on his desk, not even a calculator let alone a PC. In the words of Buffet; Mr Market is in chapter 8 of the Intelligent Investor, probably the most important thing Ive ever read in my life! (Quoted from the BBC Documentary: Warren Buffet The Worlds Greatest Money Maker). Why he said such an implicating statement may be proved by the examples of investors below. Here are examples of how the notable investors of our time have used this knowledge Sir John Templeton is noted for buying 100 shares of each NYSE listed company which was then selling for less than a $1 a share later making many times the money back when USA industry picked up as a result of WWII. Templeton was known for avoiding the herd and for taking profits when values and expectations were high. Peter Lynch would target those companies that were still under the Wall Street radar and were thus cheap or he would buy turnarounds right at the point where they hit rock-bottom. This was in line with using the market to your advantage and prospecting in bad news . Peter Lynch had the tendency to sell when the P/Es became too high. Warren Buffet is probably the best at value investing. According to him this concept is like buying Christmas cards in January. He buys when the price is a bargain. This concept focuses on priceearnings and market-to-book ratios. He has also been known for buying troubled companies as was the case with General Electric and Goldman Sachs.