Investors must appreciate that, while there is a pattern to events, no pattern is perpetual. The more widely-held the belief in the persistence of a current trend, the less likely it is to continue.
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Most portfolio managers still pursue the elusive goal of “better than the market” performance. However, one should not dismiss the general premise because of its uncomfortable conclusions.
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Generally speaking, bad news tends to develop on the installment plan, and the first earnings revision is usually not the last.
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It is not the low multiple by itself that provides unusual opportunity nor the high evaluations that carry excessive risk. It is, rather, that the level of investment anticipations is low on one side and high on the other.
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Like the basic laws of physics, where action creates reaction, economic and political trends tend to develop their own countervailing pressures.
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As history has taught us, most of the time, most of the crowd moves long after the optimum time to have moved is passed. So it is with investment trends, which start with the belief of a few and end with the conviction of the many.
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Extrapolating existing conditions too far into the future is likely to lead to disappointment. But as long as people continue to make this mistake, and as long as the market consensus reflects it, history will continue to repeat itself in Wall Street.
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Trends are not endless. In fact, the greater the consensus belief in the persistence of a trend, the less likely it is to persist.
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The important question for the investor is not whether conditions are good or bad (if, in fact, they can be measured on such a scale), but whether they are changing for the better or for the worse relative to expectations.
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The important question is not whether conditions are good or bad, but whether they are changing for better or worse.
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Investor anticipations, similar to the laws of economics, are shaped at the margin. That is why changes in earnings estimates follow, for the most part, changes in stock prices, and not vice versa as it should be.
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Experience teaches us that earnings estimates, especially those of a longer-term nature, are not particularly reliable.
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Many investors get “nickeled and dimed” into penury by failing to appreciate that the first loss is not only the best, but usually the smallest. They must learn to avoid defensive rationalization of their past bad judgments.
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Most investors underestimate the stress of a high-risk portfolio on the way down.
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Knowledge of the past is indispensable to understanding and managing the future.
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Too many investors fail to follow some simple, time-tested tenets that improve the odds of achieving success and, at the same time, reduce the anxiety naturally associated with an uncertain undertaking.
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As all of us were taught, but most of us have long since forgotten, economic change occurs at the margin, where the action takes place.
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Most investors tend to cling to the course to which they are currently committed, especially at turning points.
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It is more important to know what will happen than when it will happen, because it is impossible to forecast with precision the timing of critical events.
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