Risk is digested when you buy
On flights to safety, perceptions of risk, and why a bad day in the stock market shouldn't ruffle truly cautious investors
The panicked state of global stock markets has made for some real turbulence as cliche-addicted financial writers fill their column-inches with predictable phrases like "flight to safety" and filler about "risk". It's all a rather silly way of looking at things, since any one-day decline of 3% in a stock-market index projects out on an annualized basis to the market zeroing-out completely, which is an obviously impossible proposition.
■ Even the phrase "sell-off" is awfully misleading, since by definition, every stock sale by one party was a stock purchase by another. It's easier, though, to make a big story out of emotional reactions rather than cool logic.
■ In 2015, Warren Buffett told the assembled shareholders of Berkshire Hathaway, "We've been very cautious about what we've done because of the people among our families and friends who are invested in the company. We could have played harder at times, but I'd rather be 100 times too cautious than 1% too incautious. People looking at our past would say we've missed plenty of good opportunities."
■ People who think that "safety" is found in selling stocks -- especially when they're in a tizzy -- get it completely backwards. The time to make "safety" a priority is when you buy an asset: If you're quite positive that you've paid a price that is less than (or, at least, no more than equal to) the intrinsic value of that asset, then you can sleep soundly, no matter what everyone else does around you.
■ That's the kind of caution Buffett was talking about: Letting anxiety prevail before a purchase (sometimes to the point it keeps one from "playing harder" and taking a chance on what might turn out to be profitable later), so that there's no cause for panic after the purchase. Everyone is liable to make mistakes in that process, but people who look first to the intrinsic value of all investments -- from stocks to real estate to even education -- and only secondly at price have no need to be alarmed.
