Wednesday, September 17, 2008

Why you might root for yourself to lose money

The current economic problems are very serious and will continue to cause a lot of suffering. I say that to clarify that I'm not forgetting it when I point out that I'm always mildly amused to see news stories assuming that rising stock prices are good news and falling stock prices bad.

Here's the famous (in some circles) Warren Buffett passage on this issue:

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.

I don't think this is knowledge people want to recognize. It means that you need to root for your own assets to fall in value, and it means that you may have rooting interests that conflict with those of your parents or children. I have no idea what the stock market will do, but I would definitely bet on a prosperous future for the good news-bad news convention of reporting on its progress.

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