Avoid its sharpness and strike when it is sluggish : Choosing the right timing for stock trading

 “Avoid its sharpness and strike when it is sluggish”

(The Art of War : Maneuvering)

First, avoid the enemy’s initial vigor, and then wait until their morale wanes to attack. This strategy from The Art of War emphasizes the importance of timing. When the enemy's morale is strong, avoid attacking because they are difficult to defeat at that time; when their morale is weak, seize the opportunity to strike, as it is easier to win.

In stock investment, there are two important issues: selecting the right stocks, which is "stock picking", and choosing the right timing for buying and selling, which is "timing". Selecting the right stocks is a prerequisite for success in stock investment, while choosing the right timing is crucial and should not be overlooked.

Timing investments is one of Warren Buffett's most important investment philosophies. Regarding timing, Buffett once said, "Be fearful when others are greedy, and be greedy when others are fearful." When most people are overly greedy, the market is often significantly overvalued, making Buffett fearful and reluctant to buy. Conversely, when the market is excessively fearful and drives stock prices down too much, leading to significant undervaluation, Buffett becomes greedy and boldly buys at low prices.

Astute investors always avoid the peak periods of stock prices and wait until prices fall to reasonable levels before buying. The stock prices of quality companies are often high and relatively stable, making it difficult to find the right time to buy at a reasonable price during market booms. However, sudden events can occasionally cause the stocks of quality companies to be undervalued.

Patient investors can often resist market temptations, avoid the frenzy of the market, and quietly wait for the opportunity to buy quality stocks at low prices. Buffett is one of the best at this, deeply understanding the importance of avoiding sharpness and striking when sluggish in investment. When stock prices are excessively driven up to unreasonable levels, Buffett rationally avoids buying during that period, no matter how prosperous the market may seem. What Buffett does is patiently wait for the market to present opportunities to buy quality stocks at low prices, and then seize those opportunities to buy in batches at reasonable prices. His buying behavior is not influenced by economic prosperity or market pessimism.

Buffett's strategy of buying stocks at low prices when they are undervalued is an application of the strategies in The Art of War, such as taking advantage of chaos and assisting attacks with fire.

Take advantage of chaos

(The Art of War : Laying Plans)

When the enemy is in disarray, seize the opportunity to attack. When a company encounters problems that cause its stock price to drop, take advantage of the situation and buy.

When an outstanding company faces a one-time significant problem, most investors panic and rush to sell the company's stock, leading to a sharp drop in its price, creating an excellent investment opportunity. Buffett believes that wise investors should seize this opportunity and buy the stock of such companies at a low price. This includes sudden legal issues, product recalls, management problems, etc., which typically cause a sharp decline in stock prices in the short term.

Buffett's strategy is not to blindly buy troubled companies but to first assess the nature of the problem to determine if it can be resolved. If the problem is solvable, Buffett believes that once resolved, these excellent companies will continue to grow, creating long-term value for investors.

Overall, Buffett's strategy is to identify and seize investment opportunities when the market overreacts to problems faced by excellent companies. He focuses on the solvability of the problem and the company's long-term prospects, rather than being swayed by short-term market sentiment. This strategy requires investors to have deep insight and patience, waiting for the "chaos" to appear and analyzing whether this "chaos" is temporary. "A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable problem." – Warren Buffett

Case Study:

In late 1963, American Express received a shipment of "salad oil" from Allied Crude Vegetable Oil Refining Corporation at a warehouse in New Jersey, for which the warehouse issued a receipt to Allied. Allied then used the receipt as collateral to obtain loans. Later, Allied declared bankruptcy, and creditors began to demand the goods from American Express, only to find that most of the containers held seawater rather than salad oil. Since American Express had issued receipts for salad oil, the company became the target for compensation claims after Allied's bankruptcy. Although American Express was deceived in this incident, the company chose to bear the responsibility to maintain public trust. As a result, American Express suffered a $60 million loss, severely threatening shareholder interests. After the news broke, the company's stock price quickly dropped from $60 per share to $35 per share.

Buffett had great confidence in American Express's credit card and traveler's check businesses and believed the company had the strength to overcome the crisis. He knew that American Express's traveler's check business provided them with a large amount of float. Buffett understood that float, equivalent to low-interest loans, had significant commercial value.

To ensure that this unexpected event would not affect the company's core business, Buffett conducted thorough research and found that merchants still accepted American Express cards. This incident only caused a short-term financial loss, and the company's core businesses, such as credit cards and traveler's checks, still held a "consumer monopoly" position. In the long run, it would not cause serious harm to the company. Buffett believed that when a great company faces a resolvable crisis, it presents an excellent investment opportunity. So, Buffett decided to purchase American Express stock, which was still depressed at the time, spending $14 million to acquire 5% of the company. Over the next two years, American Express's stock price more than tripled, earning Buffett substantial profits.

This case emphasizes Buffett's investment principle: when a great company faces a temporary crisis, investors should seize the opportunity to invest rather than blindly sell. Buffett's calm and thoughtful decision-making allowed him to successfully capitalize on this investment opportunity and reap significant rewards.

Using Fire to Aid the Attack

(The Art of War : The Attack by Fire)

Using fire as a means to assist the army's offensive. In the stock market, taking advantage of a market crash to buy stocks at low prices. When the stock market crashes due to some unfavorable news, panic selling ensues, leading to a broad decline in stock prices. The stock price board at this time appears as if it’s engulfed in flames, with everything showing red. During this period, most ordinary investors are either trapped in their positions or are still on the sidelines, too afraid to enter the market. At this moment, Warren Buffett would seize the opportunity brought by the crash to snap up quality stocks whose value has been underestimated.

Buffett typically views market crashes with a calm and rational attitude. When stock prices drop below their intrinsic value due to a market crash, he sees it as an investment opportunity rather than a disaster. What Buffett hopes for is that stock prices continue to decline, so he can keep expanding his investment portfolio at lower prices.

"If you expect to continue to purchase stocks throughout your life, you should welcome price declines as a way to add stocks more cheaply to your portfolio." – Warren Buffett

Case Study:

In 1969, the U.S. economy was experiencing significant growth, and the stock market was booming. Buffett's partnership achieved its best performance since its inception in 1968, with returns increasing by 59% compared to the previous year, while the market index only rose by 9%.

However, behind this prosperous market, some crises were looming. During this period, the U.S. witnessed a wave of mergers. Some large companies expanded aggressively, while others created false earnings growth by merging with companies that had low price-to-earnings ratios. This led to wave after wave of market surges, attracting investors with soaring stock prices and pushing market sentiment to an all-time high. Wall Street entered its most frenzied era of stock speculation, with stock prices rising at an astonishing pace and stocks being crazily snapped up day after day.

However, Buffett anticipated that a crisis would come sooner or later, so he decided to avoid the market's sharpness and began to dissolve his fund, redistributing the capital back to his shareholders. Afterward, he remained patient, observing the market's trends and waiting for the right opportunity.

By early 1970, the U.S. stock market began to fluctuate sharply, with some well-known stocks plunging one after another. It was at this moment that Buffett's hunting instincts resurfaced. He established a small company called "Berkshire" and began greedily snapping up quality stocks in the market. The subsequent market recovery turned this small company into one of the most renowned holding companies, with its stock price miraculously increasing thousands of times over the next 30 years.

Selling off stocks and dissolving the fund at the market peak, then reorganizing the company and snapping up stocks during the subsequent market downturn – through this series of maneuvers, Buffett brilliantly executed his investment strategy of avoiding the sharpness and striking at the sluggish.