“The key is that the stock market basically just sets prices, so it exists to serve you, not instruct you.”
To Warren, the stock market is just a place where shares of companies are valued on their short-term economic prospects, which creates lots of price gyrations over the short term, which means prices often get out of line with the long-term realities of the business. Sometimes these short-term price swings push share prices well below the long-term economic value of the business—just as they sometimes push them way above the long-term value of the business. As a rule the stock market tends to overvalue stocks. Warren buys stocks when they go below the long-term value of the businesses, then waits for the market’s equalizing forces to return the stock prices back upward to being overvalued. If he gets his hands on an exceptional business when prices are cheap, he will continue to hold the business and let the business’s retained earnings increase its underlying long-term value, which will eventually increase the price of the company’s stock. Over long periods, the economic power of an exceptional business will correct any short-term underpricing mistakes that the stock market makes. But a business is worth what it is worth over the long term, regardless of what the shortsighted stock market says, and you, not the stock market, are in control of what and when you buy.