The true measure of common stocks values, of course, is not found by reference to price movements alone, but by price in relation to earnings, dividends, future prospects and, to a small extent, asset values.
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The chief hazard of a careful common stock program is not that it may bring unexpected losses, but that its profits will turn the investor into a speculator greedy for quicker and bigger gains — and therefore headed for ultimate disaster.
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My experience teaches me that by far the largest losses have been sustained by investors through buying securities of inferior quality under favorable general conditions.
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It is an axiom of investment that securities should be purchased because the buyer believes in their soundness, and not because he needs a certain income.
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In the halcyon days of prosperity, the investor is satisfied with increased dividends and a rising market, and cares very little about dry statistics.
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The Street, unfortunately, is fairly well inured to the bursting of bubbles.
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To my mind, the so-called growth-stock investor — or the average security analyst for that matter — has no idea of how much to pay for a growth stock, how many stocks to buy to obtain the desired return, or how their prices will behave.
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The only thing you can be sure of is that there are times when large numbers of stocks are priced too high and other times when they’re priced too low.
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The value approach has been founded on the premise that in many — but by no means in all — cases a dependable range of valuation can be established for a common stock by analytical techniques; that often this range differs substantially from the current price; and that such differences offer rewarding opportunities for investment operations.
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Real investment risk is measured not by the percent that a stock may decline in price in relation to the general market in a given period, but by the danger of a loss of quality and earning power through economic changes or deterioration in management.
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The idea of measuring investment risks by price fluctuations is repugnant to me, for the very reason that it confuses what the stock market says with what actually happens to the owners’ stake in the business.
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To establish the right price for a stock the market must have adequate information, but it by no means follows that if the market has this information it will thereupon establish the right price.
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Knowledge is only one ingredient on arriving at a stock’s proper price. The other ingredient, fully as important as information is sound judgment.
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I don’t see how you can say that the prices made in Wall Street are the right prices in any intelligent definition of what right prices would be.
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They used to say about the Bourbons that they forgot nothing and they learned nothing, and I’ll say about the Wall Street people, typically, is that they learn nothing, and they forget everything.
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I think this business of greed — the excessive hopes and fears and so on — will be with us as long as there will be people.
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There are two requirements for success in Wall Street. One, you have to think correctly; and secondly, you have to think independently.
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I am an exponent of the philosophy that the main objective of common stock investment should be pricing, not timing; and by pricing I mean the endeavor to buy securities at prices which are attractive, letting timing take care of itself.
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If all that can be promised is an average result, how can managers expect to be paid large fees for providing that average result?
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It is a safe prediction for me to make that, in future years as in the past, common stocks will advance too far and decline too far, and that investors, like speculators — and institutions, like individuals — will have their periods of enchantment and disenchantment with equities.
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I think the future of equities will be roughly the same as their past; in particular, common stock purchases will prove satisfactory when made at appropriate price levels.
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I deny emphatically that because the market has all the information it needs to establish a correct price the prices it actually registers are in fact correct.
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I insist that more damage has been done to stock values and to the future of equities from inside Wall Street than from outside Wall Street.
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