Novel Investor

We do pay attention to what’s going on; we read extensively; we listen to what our friends in the business say, what the sell side people say, what people on television say. All of that is input into the way we think about things. But, our judgment is that the market is pretty good about incorporating the present state of affairs into stock prices or bond prices. And so, as I’m fond of telling the analysts, if it’s in the newspapers, it’s in the price. So you really need to understand what isn’t in the price, what isn’t being discounted, what events can happen that will lead the market to think differently about things. — Bill Miller (source)

While the classic growth companies may continue to generate new sources of earning power, the question is: Can they do this rapidly enough to justify the valuation placed on their current earning power?

One can repeat the question just asked: Is a growth rate triple the potential growth of the economy sustainable indefinitely? If a company can double its earnings over the next 6 years but then needs 10 years before its earnings double again—and perhaps 15 years the next time—then its present P/E ratio will fade with the passage of time. In other words, the price will rise more slowly than the earnings.

And at every moment the investor runs the risk that a change in management, a spry competitor, a shift in customer preferences, or a fundamental economic or social change may slow earning power a lot faster than anticipated. Admittedly, pleasant surprises may come along too, but 40 times earnings already anticipates those. — Peter Bernstein (source)

Financial markets, then, are volatile and unpredictable. Importantly, the markets themselves are far more volatile than the underlying businesses that they represent, which collectively account for their aggregate market capitalization. Put another way, investors are more volatile than investments. Economic reality governs the returns earned by our businesses, and Black Swans are unlikely. But emotions and perceptions — the swings of hope, greed, and fear among the participants in our financial system — govern the returns earned in our markets. Emotional factors magnify or minimize this central core of economic reality, and Black Swans can appear at any time. — John Bogle (source)