I take a late lunch, and go over to the gym to work out. I do this because the gym is much less crowded in the afternoon than if I go right at 12. While I do my 1 hr cardio workouts, I have been reading The Essays of Warren Buffett: Lessons for Corporate America. It is a fantastic read. Buffett’s style of prose is both easy to read and amusing. What is more however, is his remarkable insight into business shines through in every page.

I am reminded as I read it, of Richard P. Feynman and his book “Surely you are Joking Mr. Feynman.” While the topics are different the authors view of the world is the same. That is, they both break down topics that initially appear to be complex into their simplest components. Boiling down a subject into the easiest pieces is both the best way to understand it, and the fastest.

Feynman also said that if you can’t explain a topic to someone in 60 seconds, then you don’t really understand it yourself.

While reading Buffett’s work I came across something I had read in his financial reports before (they are all well worth reading) and it struck me just as strongly as I had read it the first time. Currently, the market is falling badly, and bank stocks in particular are taking a hit. Some of them should be taking a huge hit as they are in danger of a collapse, others should not as they are fundamentally strong.

And that brings me to Buffett. Everyone is panicking and selling bank stocks, regardless if the bank is actually strong or not. In fact, the stronger banks are falling in price, and the ones in serious danger of collapse have their share price going UP. So, in light of that, I reprint the Buffett Quiz:

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.

This quote, attributed to Baron Rothschild in 1871 should be the mantra of any person calling themselves an investor. And by “investor” I am referring to the Ben Graham use of the term as found in his classic work, The Intelligent Investor.

There is another full market panic on today, I bought some stocks in a US based bank yesterday, and wish I had more capital to do the same again today. Are there risks associated with this purchase? Yes. Have I taken steps to mitigate this risk? Of course. Still, everyone is panicking, and bank stock prices are in free fall mode.

Strangely, no one seems to remember the “buy cheap, sell dear” advice. Everyone seems to be selling their shares to “protect” themselves. They are taking a loss so they can buy the shares back at a higher price when things are more “stable”. The funny thing is, 10 years from now, everyone will look back at stock prices today, and wish they had bought.

There is indeed blood in the streets, some big banks are in trouble and it is serious. So what to do? I say listen to Baron Rothschild.