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Why Warren Buffett Wants His Stocks to Fall

During the recent Berkshire Hathaway Inc Annual General Meeting chaired by billionaire investors Warren Buffett and Charlie Munger (the Chairman and Vice Chairman, respectively, of Berkshire), Buffett made the following curious comments in response to a question on one of his current holdings (emphasis mine):

“We are often asked about investments that we own. People think that we want to talk about them. We have no interest in talking about the company that we own. We or the company will buy the stock in the future. Why would we want it to go up? The mentality of Wall Street is that people think you’re better off if it goes up the next day. If we talked our book, we’d say bad things about our stocks. People don’t seem to get that point.”

Some people might find wanting your own stocks to fall an extremely curious sentiment to have. But that’s what Buffett has as alluded to by the emphasized portion of his quote above.

It’s even odder when we consider that Berkshire owns more than US$100 billion worth of stocks in its investment portfolio as of 31 March 2015. So, why on earth would Buffett want his own stocks to fall?

The mind of the long term investor

In my opinion, the statement from Buffett above has to be taken in the context of Buffett being a long- term investor.

Some of the best performers in Buffett’s portfolio of stocks come from holdings that are more than two decades old. It thus follows that when Buffett commits cash to a business, he is looking to profit from it over the long term.

This also means that he would be looking to add to the company as its business progresses over the years to come. If so, I reckon that he would want to add to his holding at a price that’s low relative to the intrinsic value of the business rather than at an enthusiastically high price.

A local example

Let’s use the experience of Raffles Medical Group Ltd (SGX: R01) as a real-life example of why it can be beneficial if your stock holdings fall in price.

Raffles Medical Group's operating income, operating cashflow, free cashflow, and net income from 2004 to 2014

Source: S&P Capital IQ

The chart above plots the financial performance of Raffles Medical’s business over the past decade. Judging from the ten-fold increase in Raffles Medical’s share price since 2004 (seen in the chart below), the performance of the company’s business – with the growing profits and cash flows – has not gone unnoticed.

2015 Raffles Medical Share Price

Source: Google Finance

With the benefit of hindsight, hawk-eyed Foolish investors may note that some of the best times to add to Raffles Medical over the past decade would have been during the 2008/2009 Global Financial Crisis when the shares had fallen by more than half and were changing hands at less than 70 cents each despite the company’s growing cash flows and profits.

Foolish take away

If your time horizon is short, then volatility in the share market becomes a risk. But if you are a long term investor, volatility becomes an opportunity.

As Foolish investors, we are focused on the business behind the ticker. If we find a business which we would like to own for the next decade and add more to it over time, it follows that we should be wishing that its stock price would fall even if we own it – just like Buffett – so that we may buy it at even more advantageous share prices.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Berkshire Hathaway Inc.