The Psychology of Investing
Warren Buffett’s first common stock investment was a disappointment, both financially and emotionally. I think we can excuse him, though; he was only 11 years old. You might remember from Chapter 1 that Buffett and his sister Doris pooled their savings and bought a total of six shares of Cities Service Preferred stock at $38.25 per share. A few months later, it was trading at $26.95, down 30 percent.
Even at that young age, Buffett had done his homework, which at the time included analyzing the price charts and piggybacking on one of his dad’s favorite stocks. Still, Doris was beside herself at the thought of losing money. Not a day went by that she didn’t pester her younger brother about their investment. As soon as Cities Service Preferred recovered and their investment was safely in the black, Buffett sold the stock, then watched in disbelief as it later soared to more than $200 per share.
Despite this painful experience, Buffett’s first at-bat in the stock market was not a total waste of time. He did learn two very important lessons. First was the value of patience; second, although short-term changes in stock prices may have little to do with value, they can have a lot do with emotional discomfort. In the next chapter, we will examine the role of patience in long-term investing. For now, we will study the debilitating effect that short-term changes in stock prices often have on investor behavior. This takes us into the fascinating realm ...