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A random DM conversation about the VIX reminded me of something I wanted to share with you...
Lots of people misunderstand what the VIX actually is and why it doesn't matter much to us as long-term investors.
The VIX measures how volatile traders expect the S&P 500 to be over the next 30 days, based on options prices — it doesn’t predict what will happen, it just reflects expectations. That's it. It’s based entirely on what options traders expect over the next month.
Think about that for a second. Thirty days. When's the last time you made a serious long term decision based on something that MIGHT happen in the next 30 days?
You've probably heard it before when the market drops 5%, the VIX spikes, and suddenly everyone's posting about how Warren Buffett says, "Be fearful when others are greedy and greedy when others are fearful."
That's a great quote, but what I never see mentioned is the full quote from Buffett's 2004 shareholder letter where he said: "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."
That's Buffett saying "okay, if you're gonna try to time the market anyway, at least do it this way."
I love it when people start slapping that quote on any stock that's had a steep price decline, because, if you bought WorldCom when everyone was fearful... Enron when everyone was fearful... or Lehman Brothers when everyone was fearful... that didn't work out too well, did it?
Here's what Buffett really cares about - and this might be a paraphrase of his teacher Ben Graham, but the concept is spot-on: "Stocks surge and swoon, seemingly untethered to any year-to-year buildup in their underlying value. Over time, however, Ben Graham's oft-quoted maxim proves true: 'In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.'"
The VIX? That's the voting machine. It's just noise. Short-term emotions. Thirty-day panic attacks.
The weighing machine? That's business fundamentals. Cash flows. Competitive advantages. Management quality. The stuff that actually matters 10 years from now.
Buffett said: "Charlie Munger – my partner – and I in 54 years now never made a decision based on an economic prediction."
Fifty-four years! He literally said: "We make business predictions about what individual businesses will do over time, and we compare that to what we had to pay for them. But we have never said yes to something because we thought the economy was gonna do well in the next year or two years. And we have never said no to anything because we were right in the middle of a panic."
So if Buffett doesn't make decisions based on economic predictions — why would he care about a 30-day fear index?
Look, the VIX isn't useless. It's just not for us.
It's for day traders. Options traders. People making short-term bets. Those trying to quickly move in and out of positions.
For us? The long-term, buy-and-hold, fundamentals-focused investors? The VIX is just background noise.
Actually, belay my last - it might give us better entry prices on businesses we already wanted to own anyway.
The VIX tells us absolutely nothing about whether Apple's iPhone business will be strong in 2030. Nothing about whether Coca-Cola will still be selling drinks a decade from now. Nothing about if Costco (COST) will still be selling 55-gallon drums of cheese balls when the Chicago Cubs win the next World Series.
It's just measuring fear. For 30 days. That's it.
So next time you see someone reminding us to "be fearful" because the VIX is spiking, or to "be greedy" when a stock is getting crushed, just remember - that's not what Buffett does. He's not watching the VIX. He's reading annual reports, studying businesses, and thinking about what these companies will look like 10 years from now.
Maybe we should do the same.
I'd love for you to hit reply and let me know if you pay attention to the VIX or if I'm way off base here!
Disclaimer: This is not investment advice, just one person's opinion that may be incorrect. Do your own research before making any investment decisions.
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