Professor Burton Malkiel of the Rebalance Investment Committee tells the story of Warren Buffett’s “cost of hamburgers” quiz that shows how people misunderstand stock prices. See more powerful advice on stock prices for everyday savers.
Warren Buffett is probably the world’s greatest investor. And he tells this wonderful story in one of his essays. Suppose you love hamburgers and you’re going to be buying hamburgers all your life. Here’s a quiz: Do you want the price of hamburgers to go up or down? Well, you sort of, you know, it’s an obvious question. If I’m going to be buying hamburgers next week and the week after that, I’d rather have a lower price for hamburgers.
Buffett says, “Fine, you got that one right. Now, suppose you are buying automobiles throughout your life and you’re not an automobile manufacturer, you’re a consumer of automobiles. Do you want the price of automobiles to go up or down?” And people say, “Yeah, if I’m going to buy a car three or four years from now, I’d like it to be at a lower price.”
And Buffett says, “Okay. Now, here’s the final exam. If you’re going to be buying stocks all your life, you’ve got a 401(k) plan and you’re going to be putting money in every pay period, do you want the price of stocks to go up or down?” And Buffett says this is the thing that most people get wrong. They’re delighted when the price goes up. They are unhappy when the price goes down. But, in fact, you can make more money if you just keep buying when the price goes down because of these advantages for dollar-cost averaging. It’s only in retirement when you’re taking the money out that you want the prices to be up. Otherwise, you would much prefer prices to be down, rather than up. And that’s the final exam that most people get wrong. And again, it’s a wonderful illustration of dollar-cost averaging.