10-06-2013, 09:34 PM
Chapter 1: Speculators and Unsuccessful Investors
I really love Chapter 1 of this book. It is probably old hat to most of you, and to me even, but it is so well and clearly stated that it feels like new knowledge.
Chapter 1 is devoted to discussion of investment versus speculation. The concept is applied both to people and to investments. With respect to people: Investors are those who compare the price of a security to its underlying value; speculators focus on price alone while trying to predict whether others will pay more for the security in the future. With respect to securities: “investments throw off cash flow for the benefit of the owners; speculations do not. The return to the owners of speculations depends exclusively on the vagaries of the resale market.”
And Chapter 1 contains this old gem:
I like to think that I act pretty rationally in making my stock decisions, but on reading this chapter, if I am honest about it, I can see places where I let speculative thinking take over. Perhaps this hasn’t bitten me badly as yet because I am generally well-anchored with an investing mindset. But I’ll definitely try to be more aware of it going forward.
I really love Chapter 1 of this book. It is probably old hat to most of you, and to me even, but it is so well and clearly stated that it feels like new knowledge.
Chapter 1 is devoted to discussion of investment versus speculation. The concept is applied both to people and to investments. With respect to people: Investors are those who compare the price of a security to its underlying value; speculators focus on price alone while trying to predict whether others will pay more for the security in the future. With respect to securities: “investments throw off cash flow for the benefit of the owners; speculations do not. The return to the owners of speculations depends exclusively on the vagaries of the resale market.”
And Chapter 1 contains this old gem:
Quote:Mr. Market stands ready every business day to buy or sell a vast array of securities in virtually limitless quantities at prices that he sets. He provides this valuable service free of charge. Sometimes Mr. Market sets prices at levels where you would neither want to buy nor sell. Frequently, however, he becomes irrational. Sometimes he is optimistic and will pay far more than securities are worth. Other times he is pessimistic, offering to sell securities for considerably less than underlying value. Value investors—who buy at a discount from underlying value—are in a position to take advantage of Mr. Market's irrationality.
Some investors—really speculators—mistakenly look to Mr. Market for investment guidance. They observe him setting a lower price for a security and, unmindful of his irrationality, rush to sell their holdings, ignoring their own assessment of underlying value. Other times they see him raising prices and, trusting his lead, buy in at the higher figure as if he knew more than they. The reality is that Mr. Market knows nothing, being the product of the collective action of thousands of buyers and sellers who themselves are not always motivated by investment fundamentals. Emotional investors and speculators inevitably lose money; investors who take advantage of Mr. Market's periodic irrationality, by contrast, have a good chance of enjoying long-term success.
I like to think that I act pretty rationally in making my stock decisions, but on reading this chapter, if I am honest about it, I can see places where I let speculative thinking take over. Perhaps this hasn’t bitten me badly as yet because I am generally well-anchored with an investing mindset. But I’ll definitely try to be more aware of it going forward.