If you have ever shopped for groceries in Singapore, you will know the thrill of finding a good bargain. Maybe it is fresh chicken at half price, or your favourite biscuits marked down for the week. If it is something you like, trust, and buy regularly, you do not hesitate. You fill your basket.
As it turns out, the same common-sense principle works beautifully in the stock market.
When Cheap is Good
The father of value investing, Benjamin Graham, once said we should shop for stocks the same way we shop for groceries. If a product you use often goes on sale, you do not assume it is bad quality. You see it as an opportunity.
Warren Buffett takes this a step further. He once said that if you are going to be buying hamburgers for the rest of your life, you should be delighted when prices fall and disappointed when they rise.
Strangely, many investors behave in the opposite way with stocks.
They rush in when prices are high and avoid them when they are on sale.
Fear, Greed and the Herd
Why do we do this?
Part of the problem is that the stock market is not as perfectly efficient as textbooks suggest.
Prices can be driven by fear and greed more than by logic.
When everyone is buying, prices go up. When everyone is selling, they go down.
This herd mentality can make bargains plentiful if you are willing to go against the crowd.
The Real Rule of Investing
Buffett has another famous rule: “Never lose money.” He does not mean never experiencing a paper loss. He means avoiding overpaying in the first place.
The best insurance against losing money is buying stocks below their intrinsic value, which is what the business is truly worth.
That requires patience, discipline, and knowledge.
I own companies I know inside and out. I understand their products, markets, and management teams.
More importantly, I have a good idea of what they are really worth. So, when the market offers me those same companies at a discount, I am happy to load up.
It is no different from buying more of my favourite groceries when they are on offer.
Get Smart: Practice Common-Sense Investing
Next time the market wobbles and prices drop, resist the urge to follow the herd.
Look for quality businesses you understand, and ask yourself if they are trading below their true value.
If they are, take a leaf out of Graham’s book and fill your basket.
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