Warren has understood that in a combination to good news about it often enough begun growth of stock quotations of the company to raise the prices for shares in a stratosphere. This phenomenon usually calls “a phenomenon of good news”. Certainly, there is also an opposite situation. Pessimistic quotations of the company at a stock exchange, strengthened by bad news about the company, lead to sharp falling of a stock price. It, of course, this is “a phenomenon of bad news”.
Warren has found out that in both situations long-term economic force and value of the company is at all ignored. The short-term mentality of a stock exchange leads sometimes to strong revaluation of the company, and sometimes to its serious underestimation.
The second success factor of Warren is concluded in understanding of that in due course long-term economic value of business levels position and shares of company gradually start to be estimated in so much how many they really cost.
Cost of the overpriced enterprises is corrected in due course towards lowering owing to that shareholders become poorer. It means that many “fashionable” investments address sooner or later in a dust, ruining investors, instead of enriching them. The burst bubble of the Internet companies which have led to ruin of shareholders shows this popular and constantly repeating scenario.
On the other hand, the same underestimated companies to which very few people pays attention are gradually overestimated towards increase, doing the shareholders more richly. It means that shares, of which the market gets rid today, can begin shinning tomorrow like a bright star.
Excellent example of such phenomenon is the insurance industry which has worried in 2000 recession for which time of the share of the insurance companies has fallen in price by half. At that time shares of other company – the giant of automobile insurance were on sale on 19 dollars for a piece, and papers belonging to Warren “Berkshire Hathaway” made 40,8 thousand dollars for the share.
In a year of the share of this giant insurance company were quoted on 40 dollars and shares of “Berkshire Hathaway” have risen to 70 thousand dollars. Thus, those who have taken shares of these companies in recession, for a year have increased the capital by 75 % and more.
The rich man Warren has made ingenious understanding of that the short-sighted mentality dominating in the security market leads to that the magnificent enterprises are periodically considerably underestimated.
He has found out that the stock exchange at times too sharply reacts to the bad news concerning the excellent company and hastens to get rid of its shares, doing their purchasing favorable from the point of view of long-term economy.
When it occurs, Warren comes on a stock exchange and buys so much shares how many he can knowing that in due course the strong economic basis of the company will have an effect and also this negative situation will be corrected having caused increase of quotations.
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