Patterns of price movement are not random. However, they’re close enough to random so that getting some excess, some edge out of it, is not easy and not so obvious.
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The most important question in markets is always, what is discounted? What does the market expect, as reflected in prices, and how do my expectations differ?
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Active managers are paid to add value over what can be earned at low cost from passive investing, and failure to do that is failure.
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As I often remind our analysts, 100% of the information you have about a company represents the past, and 100% of the value depends on the future.
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The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don’t always accurately reflect your weight, the markets don’t always accurately reflect that information. Usually they are too pessimistic when it is bad, and too optimistic when it is good.
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While markets constantly change and adapt, grow ever more complicated, interconnected and global, the principles that underlie successful, long-term investing have remained pretty much the same as they have always been.
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When growth becomes scarcer and the discount rate becomes lower, growth becomes more valuable.
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One of the enduring features of the findings in behavioral psychology as it applies to finance, a subject I have discussed many times over the years, is the almost complete inability of those who are aware of them to actually apply them.
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About the only advantage of being old in this business is that you have seen a lot of markets, and sometimes market patterns recur that you believe you have seen before.
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As long-term investors, we position portfolios for the 95% of the time the economy is growing, not the unforecastable 5% when it is not.
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In any investing environment, the scarce resource becomes more valuable relative to the abundant resource.
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Price and value are not only different, it is precisely that they can differ widely that creates the opportunities for value investors to earn excess returns. The greater the difference, the greater the potential return.
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For value investors, price is one thing, and value is another. When prices move against us, it usually means that the gap between price and value is growing, and our future expected rates of return are higher.
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It is an old cliché that they don’t ring a bell at the tops and bottoms of markets, but it is not entirely true. Occasionally someone climbs up in the belfry and does just that, as a public service, but knowing that few are likely to heed the bell.
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It has been well and correctly remarked that the only things that go up in credit crisis and financial panic are correlations and volatility.
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Economic numbers report the past, and corporations observe the present, while the market lives in the future.
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Bull markets typically begin when the following four conditions are present: the economy is bottoming, profits are bottoming, the Fed is stimulating, and valuations are low.
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Inflation can only arise if labor or business, or both, have pricing power.
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The tools that get investors and speculators in and out of the market only after some widely followed average has turned must obviously exaggerate the movements of the market.
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Some people are not congenitally equipped to sell short. It goes against their psychological makeup.
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To me our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness.
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The fact is that our theories of rationality in economic behavior rest upon introspection. We are as apt to deceive ourselves about the prudence and rationality of our plans as about their moral worth.
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When I started, I didn’t realize that the biggest profits usually come from sitting on a great position — from doing what looks like nothing to the outside world. You have more time than you think, so be patient.
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