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View Full Version : You pay a high price for reassurance.


Steve
03-11-2011, 01:36 AM
Investor Warren Buffett wrote an article in 1979 entitled 'You pay a very high price in the stock market for a cheery consensus (http://www.forbes.com/2008/11/08/buffett-forbes-article-markets-cx_pm-1107stocks.html).'

It is a fascinating article and it points out a glaring problem when it comes to investing and human nature. Few people feel comfortable going against the grain or against the common consensus. If the common consensus says 'buy this stock' or 'buy that stock' and investors rush to buy them, they may feel good that they bought what others are buying, however all this buying of such a stock will shoot the price up.

The price can continue to shoot up and form into a bubble. We all know what happen to bubbles don't we? They ultimately burst.

So when you are thinking of investing, you have to keep in mind, if there is a lot of talk and praise about a certain stock and the general consensus of that stock is 'cheery,' the price is going to be increased. It may be increased more than it is intrinsically worth. If purchased at such a time, it may be hit with a value correction where the price drops to a more reasonable level. After such a price correction, it may take quite a bit of time for it's value to increase to the price you purchased it at, if it ever does.

Don't invest in a company simply because your friend, uncle, sister, or neighbor is, without first investigating it. If after investigation, you find the stock is reasonably priced and the company has a good shot of future growth, go for it. Otherwise, pass on the stock tip and let others pay that high price for the warm fuzzy feeling they get inside because they bought a stock that had a cheery consensus.