The stock market swings from one extreme to another. At the depth of despair, gold trades at the price of dirt. At the height of euphoria, dirt trades at the price of gold. (Gold is a metaphor for a good quality company; dirt for a poor quality one.)

Right now, you and I are both in cold state. Therefore we understand that when there is despair the right thing to do would be sell dirt and buy gold. In trader lingo, that would be shorting dirt and going long on gold. And on the day when even dirt sells at the price of gold, we’d want to sell our gold and laugh all the way to the bank.

It sounds too simple to be true. But there is one problem — fear. On the day of despair, we are likely to be in a hot state. We are more likely to be fearful rather than greedy. Seeing no one else buy gold, we are unlikely to buy it ourselves; we may even dump whatever we have. We are likely to rationalize our inaction by saying that if everyone else thinks gold is worthless, why buy gold? What if the price of gold falls further and never rises again? What if the price of dirt rises further? What if this and what if that…

Don’t believe this could happen to you? Take a look at the table below. It shows the price per share of some companies around November 2009. These were companies that were already recognized as some of the best American companies. If you went gold shopping in the stock market, chances are that you may have picked at least one of the below.

Now, take a look at the table below that shows the price per share of these companies as of today and see the multiples by which they have risen since.

(The way to interpret the above table above: $1 invested in Apple would be worth $8 today. It’s almost as if that $1 compounded at the rate of 26% every year for the last 9 years.)

So… did we go gold shopping when gold was trading at the price of dirt? Did we not know that these are good or great companies already? Did we not know that the stock prices had crashed recently and so these companies were trading at around their their lowest prices? And finally- did we act? Even if we were not a stock picker and instead bought the index of 100 companies, we would’ve done so much better than Wall Street. But unfortunately, we were probably fearful when we should have been greedy.

On the other hand, here is what Warren Buffett, Chairman and CEO of Berkshire Hathaway, did. He purchased 77% of Burlington National Santa Fe (BNSF) for $ 24 Billion in November 2009. Berkshire already owned 23% of BNSF prior to this and so this purchase made BNSF a fully owned subsidiary of Berkshire. Buffett joked in his trademark self deprecating style:

This is all happening because my father didn’t buy me a train set as a kid.

Since that purchase, BNSF has generated a cumulative profit after taxes of $28 Billion between 2010 and 2017. A $24 Billion investment that has paid for itself in just 9 years and decades of useful life ahead of it!

So let me summarize:

1. The markets will swing back and forth between the heights of euphoria to the depths of despair. This is a certainty, but no one knows with what timing.
2. In order to make the most of market’s folly, it’s best to resort to paper and pen. Write down a list of companies and the prices at which you want to buy or sell. Our judgement is likely to be cloudy on the day of panic. Therefore keeping a buy list or sell list ready and going through it with without thinking much will be crucial.

Happy shopping!

(Disclosure: A senior friend of mine first used the phrase of dirt and gold, that I loved so much.)