You'll often hear us value-oriented investors telling you that long-term investing is best and short-term volatility is meaningless. Berkshire Hathaway's
These value-oriented philosophies are sound, and I agree with them. Yet investing is not a rigid science. Always seeking to buy low and sell high will help you maximize your profits, but even the best investing principles can sometimes take a back seat to short-term market fluctuations. The crucial factor in those cases is to let Mr. Market's erratic moods serve you and not guide you.
Let the market serve you
When a company faces financial trouble and needs to raise capital just to survive, short-term price volatility hurts. Investors with no say in the matter will find their investments diluted, often to an unfavorable price.
The most glaring contemporary example is the financial sector. Countrywide Financial
The brighter side
Short-term volatility isn't always bad, especially if investors are patient and strike at the right time. During the height of the dot-com bubble, for example, investors who weren't blinded by excessive greed could have taken advantage of Mr. Market's generous mood on certain stocks. In 1999, Microsoft
Hindsight is 20-20, of course, but it would've been best to take your gains and run when Microsoft -- or any company, for that matter -- was trading at nearly 50 times earnings in 1999.
On the flip side, investors with the conviction to buy during periods of extreme pessimism can also benefit magnificently from short-term price fluctuations. Anybody who swooped in on Jan. 22, when the Dow opened with nearly a 500-point drop, can attest to the wisdom of that approach. The Dow made up most of the decline on that day alone, and since then, the Dow has risen by 6%.
Price is what you pay. Value is what you get.
If you keep buying at cheap, attractive prices, you can take comfort in knowing that whatever the market does in the short term, Mr. Market won't take advantage of you with its temporary fluctuations. Ultimately, you will be taking advantage of Mr. Market.
Berkshire Hathaway is a recommendation of both Stock Advisor and Inside Value. Microsoft is an Inside Value recommendation. Bank of America is an Income Investor pick. Yahoo! is a former Stock Advisor selection. You can try any of these market-beating services free for 30 days.
Fool contributor Sham Gad is the managing partner of the Gad Partners Fund, a value-centric investment partnership operating in similar fashion to the 1950s Buffett Partnerships. He and the Fool have a stake in Berkshire Hathaway. The Fool has a disclosure policy.