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i'm a value investor i try to figure out the intrinsic value in a situation i like to buy if the price is low relative to the intrinsic value i like to sell if the price is high relative to the intrinsic value what is the main determinant of that relationship it's emotion psychology investor sentiment if people are excited and bullish and optimistic regarding to the the asset chances are its price will be above the intrinsic value and of course that is a source of danger and that is a source of below par returns but if the investors are pessimistic and unexcited and have given up on an asset then chances are perhaps that its price is languishing low relative to the intrinsic value and that is a source of great opportunity so we want to buy when people are depressed and pessimistic and we want to sell when people are optimistic and excited the difficulty is that many people's emotions or psychology i use the terms interchangeably and it's not easy to say why most people's emotions fluctuate the same we're all subject to the same influences we all read the same headlines we all hear the same stories on tv we all see the same economic reports so the things that get other people excited and positive and optimistic would tend to get us excited and positive and optimistic so the things that force people to bid securities up and make the prices high those same forces would tend if permitted to make us excited and to buy when prices are high and depressed and to sell when prices are low so the point is that if your thinking and your emotion is the same as everybody else's then you cannot do the out thinking and what i call the second level thinking which is required to act against the herd the common word is contrarian and to sell at high prices which are high because other people are optimistic and buy at low prices which are low because other people are depressed we have to be aggressive when people are depressed and defensive when people are excited in other words we have to think and feel differently from others and that's not easy we have to be either unemotional people or we have to learn the importance of emotional restraint and how to do it and these things are not easy so most people on it are unable to do it you know there is proof that most people are optimistic at the top and the proof is that it's a top the proof is that the prices are higher than ever before that can only happen if optimism predominates over pessimism there's proof that people are depressed at the bottom and the lowness of prices is the proof prices can only be that low relative to intrinsic values if most people are depressed so we have to be excited when they're depressed and we have to be uh defensive when they're uh when they're excited and it's just a hard thing to do and and and and let me i know you're ready to speak but but but let me uh say one more thing one reason it's hard to do this is because there are not many opportunities to do it well i was talking to my son those of you who read the memos no i referenced my son in the memos from time to time andrew and we worked together on investments and i said i was working on the book and and i said to him you know i really think that essentially my market calls have been correct and he says yes dad that's because you made five market calls in 50 years and it's true if you wait until there is a market extreme when it's really high or really low and you make your calls on only those occasions i believe that at those times the the error of the cycle is obvious and if you reach that proper conclusion it is highly likely to to work if you if you're impatient and you try to make market calls other than at the extremes i think that the logic will be difficult and i think you're unlikely to be able to do it often so the things i recommend in the book will not work weekly or monthly or annually they will only work at the extremes and if if you know most people don't have that kind of patience and they try to make the calls more often and and when you're not in the vicinity of an extreme uh they're not going to work those of you who read the first book know that there's a chapter which says that the most important thing is is patient opportunism and i think the last sentence says that um when there's nothing clever to do the mistake lies in trying to be clever so trying to make these calls other than at market extremes is is a mistake you don't get to do it often but if you do it at the at the at the real extremes uh it's extremely profitable and you don't have to do it often to have it make a real addition to your investing record
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