How Investors Differ From Traders

A good deal of success in investing comes from a clearer understanding of why you buy. You can invest in businesses or you can purchase shares with the hope, even expectation, of being able to resell them at a higher price in the future. Usually the near future.

Warren Buffett has used an interesting analogy to help people think differently.


How We Think About Market Fluctuations

From Berkshire Hathaway – Chairman’s Annual Letter to Shareholders – 1997

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.


Warren Buffett is a spectacularly successful Investor. Much of his success comes from his attitude to price changes of the stocks he owns. In general, it comes to this. We buy businesses and so long as the business doesn’t weaken we would like to own more.

You could be more successful if you adopted a different approach to thinking about your investments. What a business is worth is what it will earn. If you value the earnings, the price someone else might pay for your shares is a matter of indifference.

The bits to take away

There are just two times when price matters. The day you buy and the day you sell.

Buffett doesn’t use leverage. If you do, worrying about the portfolio value is a cognitive drag. Investors don’t use leverage.

When you are going to invest money each year in the future, you should hope for lower prices.

“I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household.  When hamburgers go up, we weep. For most people, it’s the same way with everything in life they will be buying–except stocks.” Warren Buffett

You might find more wisdom the library of  Buffett’s letters to shareholders.


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I build strategy and fact-based estate and income plans. The plans identify alternate ways and alternate timing to achieve both spending and estate distribution goals. In the past I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning, have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email to don@moneyfyi.com

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