1997

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🧠 Key Takeaways

• When the entire market is going up, don’t start patting yourself on the back just because your portfolio is in the green. That’s not necessarily a reflection of your skill—it might just be the result of a rising tide lifting all boats.

• In almost every other area of life, whether we’re buying hamburgers, a new car, a Tudor Black Bay 54, or anything else, we want the lowest possible price. But when it comes to stocks, that logic tends to go out the window.

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✍️ Memorable Quotes

“In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond.”

Putting this back into investing terms, what Warren’s really saying is that when the entire market is going up, don’t start patting yourself on the back just because your portfolio is in the green. That’s not necessarily a reflection of your skill—it might just be the result of a rising tide lifting all boats.

Instead, compare your performance to other investors. Chances are, they’re also seeing gains. So the question isn’t whether or not you made money—it’s you did relative to all the other ducks paddling in the same pond?

“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.”

This is one of the most counterintuitive things about investing—and it really speaks to how much psychology plays a role in all of this.

In almost every other area of life, whether we’re buying hamburgers, a new car, a Tudor Black Bay 54, or anything else, we want the lowest possible price. That’s just common sense—why would you want to pay more for the exact same thing?

But when it comes to stocks, that logic tends to go out the window.

Investors love it when share prices go up, even if they’re still regularly buying more shares. In effect, they’re celebrating because the “hamburgers” they’re buying just got more expensive. And that doesn’t make much sense…unless you’re planning on selling soon.

I think this “hamburger pricing model,” as we’ll call it, is a bit easier for dividend investors to wrap their heads around.

That’s because as a dividend investor, you’re buying a stream of cash flow. You’re not dependent on the share price going up in the short term—you’re focused on growing your income over time.

And when share prices fall, you’re able to buy more cash flow for the same amount of money. So in that sense, lower share prices—like cheap hamburgers—can actually be something to get excited about.

With that said, there’s a balance here. You don’t want prices to stay down forever, because that could be a sign the company isn’t growing earnings—which is a major red flag, especially if you believe share prices follow profits over the long run.

Buffett accounts for this nuance when he mentions the five-year timeframe. He’s not saying you want stocks to fall forever—he’s saying that if you’re going to be a net buyer over the next five years or so, lower prices are your friend.

And going back to hamburgers: if you’re planning to eat a lot of them soon, you’d want them to be cheap. But if you’re eventually planning to sell those hamburgers for a profit, then yes, you’ll want prices to go up—but only after you’ve built up your stockpile.

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