How should investors face market volatility?
As we all know, buying stocks means that you have to constantly face price fluctuations and account profits and losses, which is a very test of psychological quality.
Graham believes that the irrational price of stocks is largely due to human fear and greed.
The market is a combination of rationality and sensibility, which means that large fluctuations in stock prices are difficult to avoid.
Graham's point is that investors should not focus on market volatility, let alone buy stocks immediately after a sharp rise in stock prices, and do not sell stocks immediately after a sharp drop in stock prices.
Graham pointed out that price volatility has an important significance for real investors, that is, to give investors the opportunity to buy the stock of their choice when the price drops sharply.
Stop buying or even selling stocks when they rise sharply to dangerous heights, and when the market corrects mistakes, it is time for investors to make money.
At the beginning of this chapter, Graham mentions that whether it is a bond or a common stock, it is bound to fluctuate in value over any longer term.
Therefore, investors who follow value investing need to recognize and prepare for this reality. What do I need to prepare?
Graham made two points: financially and psychologically prepared.
Before going into these two points, we must first understand the two ways in which it is possible to make a profit in the market, which are also proposed by Graham and are closely related to the previous speculative and investment ideas. The two ways to make a profit are: the timing method and the valuation (value investment) method.
The timing mentioned in the book is equivalent to those who choose to buy high and sell low, or buy low and sell high, according to the fluctuations of the market in the short term.
Graham believes that this type of investor is easy to fall into the trap of speculation, if once caught in the speculative trap, investors completely according to their own predictions to time-choose trading, then be sure to let themselves know that they may lose money financially and psychologically prepared.
The valuation method, on the other hand, chooses to buy and sell based on the value of the company behind the stock, which helps us ensure that the price of the stock we buy is not too high.
When investors choose this method, they will also face psychological and financial tests, and when the market gives a profit that can be quickly obtained, or the holding profit is declining, it is a great test for investors who want to hold it for a long time.
This approach is also the lifelong emphasis of Graham and Buffett's faction on value investing. It's hard because very few people can do it.
In fact, the market is full of various investment methods that can "help" investors profit, and Graham also gives examples in the book, such as the Dow investment method. But in the end, most methods similar to this one have not been able to withstand the long-term test of the market.
As for why, Graham also gave his opinion:
1. Some methods are supported because they perform well over a certain period of time or simply because they are compatible with previous statistical records.
2. As a theory becomes accepted by the masses, the phenomenon that everyone will use will itself have an impact on market behavior.
Smart investor Dreham
