Succumbing to Panic and Euphoria

There may be no better illustration of the danger of reacting to panic and euphoria than the two newspaper headlines from September 1, 1998.

 news1  news2

The one on the left was the morning edition reporting the market action from the day before, and the one on the right is the afternoon edition reporting the day following the big decline.

Warren Buffet is credited with telling the story about who your business partner is when you buy a share of a company. According to Mr. Buffet, your partner is Mr. Market, and Mr. Market has a manic-depressive personality. One day he is in a panic and wants nothing to do with your business and will almost give you his interest for nothing. The next day Mr. Market is euphoric about the future of your business and will pay you almost anything to buy your interest.

The point of the story is to ignore Mr. Market, or you too will develop a manic-depressive personality. Good advice from a man who has done well in life by ignoring Mr. Market’s day to day personality swings.

The principal reason for developing an Investment Policy is to protect your portfolio from ad hoc revisions of sound long-term policy. Putting it in writing will help you maintain a long-term policy when short-term market movements may be distressing and the policy is in doubt.

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