QUALIPORT
Don't Be Afraid Of Buying On A War Scare

By Maynard Paton (TMFMayn)
January 30, 2003

"Don't be afraid of buying on a war scare." They're the words of Philip Fisher, the legendary US investor and author of the book Common Stocks and Uncommon Profits.

The FTSE 100 has dived 13% so far this year, a performance that follows the 10% stock market fall during 2000, the 13% decline in 2001 and the 25% plunge in 2002. For most investors, this is uncharted stock market territory. Not since 1973 and 1974 has the London market fallen so far.

In these dark days, when the talk is of war, recession and further stock market turmoil, it pays to revisit the successful investors who've seen it all before.

Here are some quotes from five well-known stock pickers. We'll kick off with Philip Fisher and continue with his thoughts on a 'war scare'.

War

"Any decent human being becomes appalled at the slaughter and suffering caused by the mass killings of war... This worry, fear, and distaste for what lies ahead can often distort any appraisal of purely economic factors. "

"The results are always the same... whenever American forces have become involved in any fighting whatever, the American stock market has plunged sharply downward...Nevertheless, at the conclusion of all fighting -- regardless of whether it was World War I, World War II or Korea -- most stocks were selling at levels vastly higher than prevailed before there was any thought of war at all."

"To sell stock at the threatened or actual outbreak of hostilities so as to get into cash is extreme financial lunacy. If an investor has decided to buy a particular common stock and the arrival of a full-blown war scare starts knocking down the price, he should ignore the scare psychology of the moment and definitely begin buying... If war occurs, then increase the tempo of buying significantly." -- Philip Fisher, Common Stocks and Uncommon Profits.

Mental anguish

"But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all times, he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused by other persons' mistakes of judgement."

"Incidentally, a widespread situation of this kind actually existed during the dark depression days of 1931-1933. There was then a psychological advantage in owning businesses that had no quoted market." -- Benjamin Graham, The Intelligent Investor.

Recession

"There was a 16-month recession between July 1981 and November 1982. Actually this was the scariest time in my memory. Sensible professionals wondered if they should take up hunting and fishing, because soon we'd all be living in the woods, gathering acorns. This was a period when we had 14% unemployment, 15% inflation and a 20% prime rate, but I never got a phone call saying any of that was going to happen..."

"Then at the moment of greatest pessimism, when eight out of ten investors would have sworn we were heading into the 1930s, the stock market rebounded with a vengeance, and suddenly all was right with the world." -- Peter Lynch, One Up On Wall Street.

Pessimism

"Nevertheless, fears of a California real estate disaster similar to that experienced in New England caused the price of Wells Fargo (NYSE: WFC) stock to fall almost 50% within a few months during 1990. Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new, panic prices."

"Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall. They show no such confusion in their reaction to food prices: Knowing they are forever going to be buyers of food, they welcome falling prices and deplore price increases. (It's the seller of food who doesn't like declining prices.)"

"The most common cause of low prices is pessimism - sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer." -- Warren Buffett, Berkshire Hathaway (NYSE: BRK.A) Shareholder Letter 1990.

No shame

"It is only too easy to be frightened and to find plausible reasons for one's fears... Just as many people were quite willing [in a rising market] not only to value shares on the basis of a single year's earnings but to assume that increases in earnings would continue geometrically, so now they are ready to estimate capital values on today's earnings and to assume that decreases will continue geometrically."

"I feel no shame at being found still owning a share when the bottom of the market comes." -- John Maynard Keynes, memoranda to Provincial Insurance Company and National Mutual Life Assurance Society, 1930s.

Suffice to say, take heed of these proven investors in the present gloom and doom.

More: Learn more about the investment techniques of: Philip Fisher | Ben Graham | Peter Lynch | Warren Buffett | John Maynard Keynes

A version of this article was first published in September 2001.