Properties vs Tools
Skepticism and Introspection
Anytime you think you know something others don’t, you should examine the basis. Ask yourself – Who doesn’t know better? Why should I be privy to exceptional information? How do I know this that nobody else knows? Am I really that smart, or am I just wrong? Am I certain that I am right and everyone else is wrong? If it’s an advice from some else, ask – why would somebody give me potentially valuable information? And why would he give it to me? And why is he still working for a living if he knows the future so well? I am always skeptical of people who will tell you the future for five dollars.
Optimists and Cynics
If the optimist is right, he gets the further advantages of applying the idea. The cynic only gets to say “I told you so.”
Stillness and Moderation
Remember to conduct yourself in life as if at a banquet. As something being passed around comes to you, reach out your hand and take a moderate helping. Does it pass you by? Don’t stop it. It hasn’t yet come? Don’t burn in desire for it, but wait until it arrives in front of you. Act this way with children, a spouse, toward position, with wealth—one day it will make you worthy of a banquet with the gods.
Focus and Persistence
Trading Sardines vs Eating Sardines
There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.”
Like sardine traders, many financial-market participants are attracted to speculation, never bothering to taste the sardines they are trading. Speculation offers the prospect of instant gratification; why get rich slowly if you can get rich quickly?
Moreover, speculation involves going along with the crowd, not against it. There is comfort in consensus; those in the majority gain confidence from their very number. Today many financial-market participants, knowingly or unknowingly, have become speculators. They may not even realize that they are playing a “greater-fool game,” buying overvalued securities and expecting—hoping—to find someone, a greater fool, to buy from them at a still higher price.
Estimating Intrinsic Value
Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.
The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover – and this would apply even to Charlie and me – will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value.