What has not already been written about Warren Buffett? No investor has been more prolific and enjoyed more success in the realm of investing than the “Sage of Omaha”. Indeed, many investors have deified Buffett, hanging on every word that the “Oracle” can deliver. Warren himself is only too happy to freely dispense of his earnest advice with a flair for an amusing gab. I suspect that Warren would be very content had he been a comedian in a past life.

Since so many out there enjoy Warren’s wisdom, let’s take a look at some of the opinons, doctrines and idealogies that Buffett has made popular — his investing tenets. Investorial will be hosting a series on Buffett’s Tenets with the coming posts in the next few days. I want to also invite our readers to share with us some of your favourite tenets of investing; whether they’re from Buffett or not. Today we start by examining my favourite Buffett thoughts on the market in general.

I love the above tenets (if you can’t see them, you should turn images on!) because they allow me to know how the stock market ticks and how to take advantage of it. I’m not a subscriber of the “efficient-market theory”, at least not for the short-term. You may want to take a look at The Big Picture who has some good thoughts on the theory itself. The comments / arguments on that article are equally interesting to read. I’m still wondering if “expert coin tossers” is an oxymoron?

The Manic-Depressive Mr. Market
Benjamin Graham, Warren’s investment mentor, thought up the allegory of Mr. Market that still lives on through Warren. The idea is stating that the investing/trading population can at times operate at the extreme levels of the investor sentiment spectrum, thus making opportunities available to those hip to Mr. Market’s behavioural flaws. It’s normally not nice to take advantage of emotional wrecks, but we’ll forgive you just this once!

What Stock Market?
Buffett does not have a stock quote service in his office. He often offers the mental exercise about what investors would do if the stock market shuts down for 5, 10 years. The Sage believes that by owning shares in an outstanding business for a number of years, what happens in the market on a day-to-day basis is inconsequential. What matters is the big picture trend of the company’s operations, management and culture. There will be more about Buffett’s tenets on selecting outstanding business as our series moves along.

Predicting The Stock Market
In my opinion, one of the worst things a stock analyst can do is becoming too much like a full-fledged economist. At times, they steer too far away from their realm of focus and/or expertise. But let me take a shot at predicting the stock market. Let’s see ….. hmmm…. ok, “The stock market will go up sometimes and go down sometimes but in the long term view, the stock market is trending upwards”. The prediction is too simplistic? I wouldn’t mind being proven wrong. In fact, you have the entire history of the stock market at your disposal!

Besides, so what if the market is trending down? The real issue should be about how your company, your stock is continuing to operate on a day-to-day basis. It seemed like the end of the world in 2001, 2002, but the silver lining eventually shone through the grey clouds. Were you able to predict when the market will come out of its funk in 2001? I doubt it. And if you did, can you guarantee success the next time? The point is actually that such a prediction is irrelevant! As an investor, you better focus on what your company is doing to keep earning profits and building value for you, the shareholder!

Irregardless of the economy / market, an outstanding company with a strong management that knows how to make money, can make money, and will keep making money. Your decision should be based on your company’s operations rather than the short-term economical news-du-jour.

Institutional “Lemmings”
If you don’t know what lemmings are, you should really play the video games and watch each lemming follow the one in front of them — as they fall off the cliff! Imagine the following thoughts of three fund managers on the same stock that just reported dissappointing earnings figures:

Fund Manager A: Hmm… this next earnings report isn’t good news. They’re still profitable, but not as much as I expected. Rather than admit that my expectations may be incorrect / unrealistic, I better get out before anyone else drives down the price.

Fund Manager B: Alright, the earnings report is on the low end of the estimates. Wow, the oil prices are certainly very high. I’m sure everything is somehow related and this is going to be a negative on the stock. Besides, manager A got out. The market’s got to be efficient so I’m getting out too!

Fund Manager C: I don’t know what they’re thinking but A and B got out. They must know something I don’t? I’m not going to be left hanging onto a loser! My unit-holders will kill me. Before I get fired, I better cut my losses and get out while the getting out is good. I’ll just have to do well with my other picks. Thank heavens I still have a job because of diversification! If I’m lucky, most of my stocks will be winners and I’ll become an “expert coin tosser”!

Still think the market acts efficiently in the short term? Eventually the general investing population will oscillate into an agreement, preserving the precious integrity of the long-term efficient market theory. But not before Buffett has already taken advantage of the situation!

Finally, my favourite Buffett tenet on dealing with the market is the following:

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

Remember to share with us your favourite investment tenets, and come back for more Buffett tenets in the coming days!