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Learn a Lesson from Chicken Little
Date Added: June 9th, 2004

By Chris Stallman  |  E-mail

   Chicken Little always thought the sky was falling.  With every little acorn that fell on her head, it was sign that the whole sky would come crashing down. It wasn't only her, though--she even managed to recruit others who thought the same thing because they just didn't know any better and I am sure they would rather try and prepare themselves for the sky falling then risk not being prepared. The sky never fell and Chicken Little just had to get used to the fact that acorns might fall on her little head every time she walked in the forest.

   This is much like the market of today. With every acorn that falls, the Chicken Little's of the market yell that the sky is falling. As always, they manage to recruit many others who feel it is their job to run and tell anyone who will listen that the sky is falling and that we are all in for gloom and doom for many years to come. As acorns continue to fall more and more join in until eventually even those who know better start to try and figure out if the sky is really falling. They sit outside the forest and warn anyone who tries to enter that the sky is falling and they should join them rather then going into the forest and getting to were they needed to go in the first place.

   This, of course, seems absurd to us because we all know the sky is not going to fall and that acorns are a natural occurrence. Yet this happens in the stock market all the time. At every drop of the acorn (bad news), bears or people who just bought because everyone else was doing it, yell and run out the forest (the stock market). They then sit outside and yell from their stools to anyone who will listen that the sky will fall if we go in there. Many of us listen even if we think the sky isn't falling.  We still go along because it is better than to risk being wrong. Of course, the sky never falls and it turns out that a big deal was made out of what turned out to be an acorn. This very mistake, while not fatal, did prevent many people from going into the forest and getting were they needed to go.

   Now how do we avoid the same fate as Chicken Little? Let us keep in mind that while she eventually realized the sky wasn't falling, she still didn't get where it was she was going by traveling through the forest. The first way we can avoid the fate is to send someone else into the forest who already knows a little bit about avoiding acorns, which can be accomplished by using a mutual fund. The second way is to actually do the research yourself; so when an acorn drops you know what it really means. If chicken had just done her research, she would have found out that the sky was not falling. She could have tried to select the routes where acorns are least likely to fall.

   So in the end, even though acorns of bad news do get quite annoying and we should try and select the roads with the least acorns we can find, we still must not let occasional bad news deter us from our end goal of getting where it is we need to go. After all that is the reason for entering the forest in the first place, right? Most of all, we have to avoid the Chicken Little's of the world, whose sky is falling chant gets all the more tempting to listen to as more and more acorns fall.

    Finally I leave you with a quote especially for those of us who are tempted to believe Chicken Little that the sky will fall sooner or later. The quote comes from Warren Buffet, the legendary value investor whose investing calls should not be ignored by anyone who wants to be successful.

"We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

But, surprise - none of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results."

--Warren Buffett, 1994 Berkshire Hathaway Shareholder Letter

 

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