January 1, 2026
Editor’s note: Equitymaster wishes you a happy and prosperous New Year!
The stock market is a fantastic invention of the modern world.
The reason I say this is because both buying and selling is so easy when you have a large, liquid stock market.
If you don’t like a stock you recently bought because its management isn’t working so well, you can sell the stock on the stock market and get out the next day.
I don’t think there is any other market that offers this much convenience.
Now imagine that you are a 10% partner in a privately held company, and you want to get out for the same reason, namely your disappointment with management.
Will your exit be as easy as the stock market? Well, I don’t think so.
You may have to do a lot more work to convince potential buyers of your 10% stake, and even then, an exit may be difficult.
In the worst case scenario, this could result in you leaving your bet at a significant discount or at a significant loss.
There is no such risk in the stock market. If the shares you own are sufficiently liquid and traded in large enough quantities, you can get out in the short term and may not have to make a significant discount.
So, in my opinion, the liquidity and democratic nature of the stock market is nothing less than a blessing for humanity.
However, there is every possibility that this privilege will be abused.
In fact, it is regularly abused. I’m talking about investors who use the stock market as a dumping ground for shares of poor quality companies and rob poor, hapless retail investors of their hard-earned money.
Often companies with weak fundamentals and unproven business models are presented as ‘the next big thing’ and allowed to trade on the stock market.
Lured by the promise of big, quick returns, retail investors end up buying these so-called “junk” companies and losing their hard-earned money in the process.
While the stock market can act as a great wealth creation tool by allowing you to quickly fix your mistakes and switch from one stock to another if necessary, the stock market can also lead to massive wealth destruction as it makes it easy for promoters of questionable companies to transfer their shares to unsuspecting buyers.
Well, Warren Buffett has a hack to help you stay out of trouble in the stock market and guide you into fundamentally sound stocks.
He asks a simple question before considering a stock purchase. “Would I be able to comfortably hold this stock if the market remains closed for five years?”
What a simple yet profound question, right?
Often we give in to greed and end up buying a stock without paying any attention to fundamentals or valuations.
We trust that someone else will buy the shares from us at a higher price. However, according to Buffett, this is dangerous.
Shares should not be purchased for trading purposes, but for the strength of the underlying company and its favorable price relative to its fair value.
And the question Warren Buffett was referring to perfectly captures this sentiment.
If you’re okay with holding on to a stock even if the market remains closed for five years, then you’ll definitely buy it based on the strength of the underlying company and its cash flows.
You don’t want to make a quick buck by buying today and selling tomorrow or a few weeks later. And that’s how it should always be.
Rest assured that Warren Buffett’s question is at the heart of every BUY recommendation we make.
However, our preferred time frame for the stock market closure will not be five years, but rather two to three years.
You see, the core idea behind buying stocks should be to view them as investments and not as speculative bets.
And that’s why it shouldn’t matter whether your upside comes from the gap between price and value closing or from the growth of the underlying earnings themselves.
For example, it’s fine to buy a stock that is currently available at a price-to-earnings ratio of 10x, hoping that the market will pay you the rightful multiple of 15x in the next 2-3 years.
Or you can buy something at 15x and benefit from the earnings growth even if you sell it several years later at the same 15x.
In the first case you benefit from the multiple PE expansion, while in the second case you get returns from the earnings growth. Both can be considered investments and not speculation.
So if you follow sensible investment rules and don’t indulge in speculation, you will be fine. The purpose of Warren Buffett’s question is to lure you towards investments and keep you away from speculation as much as possible.
Keep in mind that investments enable wealth creation, while speculation leads to wealth destruction. So buy a company based on its underlying strength and do not simply trade it on the stock exchanges.
So as we navigate 2026, make this principle the cornerstone of your investment philosophy. It will help you immensely in creating wealth in the long run and staying away from dangers.
Have fun investing.
Kind regards,
Rahul Shah
Editor and research analyst, Profit hunter
Quantum Information Services Private Limited (Research Analyst)
Rahul Shah co-head of research at Equitymaster is editor of (Research Analyst), Editor, Microcap Millionaires, Exponential Profits, Double Income, Midcap Value Alert And Momentum gains. Rahul has over 20 years of experience in the financial markets as an analyst and editor. Rahul first joined Equitymaster as a Research Analyst, fresh out of university in 2003, but left shortly afterwards to pursue his dream job at a Swiss investment bank. However, he soon became disillusioned working for the ‘financial establishment’. He learned firsthand that the greedy stereotype of an investment banker is true and felt uncomfortable working for a company that put profit above all else. In 2006, Rahul rejoined Equitymaster to serve honest, hard-working Indians like his father, who want to take control of their financial future – and not leave it in the hands of greedy money managers. According to the investment principles of Benjamin Graham (the bestselling author of… The intelligent investor) and Warren Buffet (considered the world’s greatest living investor), Rahul has recommended some of the biggest winners in Equitymaster history.
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