During the Berkshire Hathaway’s annual shareholders’ meeting, a value investor from China asked Buffett and his right-hand man Charlie Munger for advice on how to spread the value investing philosophy in a market system where so many are speculating.
“There’s always some speculations, always some value investors in the market,” Buffett said.
The problem arises when people start to see others benefitting from playing the market.
“When speculation gets rampant and when you’re getting what I guess Charlie [Munger] would call ‘social proof’ that it’s worked recently, people can get very excited about speculating in markets. And, we will have it from time-to-time in the market,” Buffett said, adding, “There’s nothing more agonizing than to see your neighbor, who you think has an IQ 30 points below you, getting richer than you are by buying stocks, whether it’s internet stocks or whatever. And people succumb to it. They’ll succumb to it in this economy and elsewhere.”
Buffett noted that in developing markets, there’s probably a tendency to be more speculative than already established markets.
“Markets have a casino characteristic that has a lot of appeal to people, particularly when they see people getting rich around them,” Buffett said. “And those who haven’t been through cycles before are probably a little more prone to speculate than people who have experienced the outcome of wild speculations.”
Munger added that China will probably have more trouble.
“They’re very bright people. They have a lot of action. Sure, they are going to be more speculative, but it’s a dumb idea. And to the extent that you’re working on it, why you’re on the side of angels. Lots of luck.”
Buffett noted that there will be “more opportunities” for investors if they can “keep their wits about them.”
“Fear spreads like you cannot believe until you’ve seen a few examples of it,” Buffett said, pointing to the panic in U.S. money market funds in 2008 as an example.
“The way the public can react is really extreme in markets and that actually offers opportunities for investors,” he added. “People like action and they like to gamble.”
The lesson here: the market rewards patience.
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Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.