Posted over 4 years ago

Can You Pass Buffett's Investing Quiz?

Do you remember your thoughts the first time one of your stocks dropped 10, 20, 30 or even 40%? Did you create an investing philosophy to help you understand the market volatility and stay focused? If you did then you're in good company! In one of Warren Buffett's essays, he explained how to invest in the stock market with a simple quiz- and with no BS!

If you're like most then you probably have a convoluted view of how to invest in the stock market. High paid brokers and "Wall Streeters" do their best to keep the general public confused about making money in the market. Thankfully Warren Buffett (arguably one of the greatest investors of all time) broke down the complexity of how to invest in the stock market into a simple quiz. Below is the excerpt from his essay:

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.

What a perfect analogy! If you ever find yourself struggling to stay focused on your strategy or panicking when the market crashes, then remember - hamburgers!

Do you have another great analogy or philosophy for investing in the stock market? Do you agree with Buffett's philosophy?