Warren Buffett and his Effect on the Stock Market!

 When Warren Buffett speaks, people listen! Buffett not only has a real effect on the stocks when he buys and sells large positions in companies, but he has an effect on the overall psychology of the market.  

He really influences the influencers, but sometimes his messages are very misinterpreted and these misinterpreted messages can lead to stock market bubbles.  

A lot of people can really go wrong when listening to Warren Buffett too passively and perhaps even too literally as well.   Don't get me wrong it is through no fault of his own, but when he is misinterpreted or taken out of context his words carry so much weight that they can have a large negative effect. 

If you listen to him today, you might think that he is eternally optimistic about the economy and the stock market.  

Buffett is optimistic now about the long term outlook of the economy, but who really isn't? When someone spends a lot of time talking about how the economy and the market will be better in 10 -20 years from now, you know things are on the surface are not that good. 

Investors should always be cautiously optimistic (like Buffett) about the long term and nothing should ever be taken for granted. 

This long term optimism leads to short and medium term euphoria which leads to bubbles, and we have seen this in the real estate market and twice in the stock market in the last 10-15 years.

Investors should never be locked into long term optimism, because it leads to too many passive decisions about their money, such as the belief that the long time horizon will take care of everything. I will not deny a certain degree of truth to this, but our investments deserve more attention. 

We should be cautiously optimistic about the long term, and only when everything has gone to hell in a hand basket should we be completely optimistic about the long term (like Buffett).  When there is nothing else to be optimistic about! 

Just so I am not taking Buffett out of context, when you hear Buffet speak now, he is about 75% optimism and 25% pessimism. A couple of years ago when things seemed OK he was at least 75% pessimism and 25% optimism. 

He was very bearish on real estate and who can forget his calls on the weapons of mass destruction.  This ties right into his philosophy to get fearful when everyone is greedy and greedy when everyone is fearful! 

At the very least even the most basic 401k investor should be concerned about the medium term trends and perhaps even short term trends in markets.