Investing mixes enough art with science to require that our purchases be
priced extremely low relative to their intrinsic value. This strategy does
two things: It reduces the likelihood of “negative surprises,” and it keeps our
portfolio turnover low. Being disciplined about the price we pay for a
security provides our margin of safety.
Wall Street is an emotional place. How else could you explain 10 or 20
percent daily swings in the prices of stocks? Investors driven by emotion
are the intellectual equivalent of a teenager afraid of acting differently than
his classmates. Whether they admit it or not, these investors - and they
dominate the entire spectrum, from institutions to individuals - they have ceded
a part of their decision making process to others.
Our approach often leads us to purchase when others are selling and to sell
when others are purchasing. Our best investments, the ones that in
hindsight seem like free money, are often the ones that require the most
emotionally difficult decisions. To keep a rational outlook when the
investing herd is panicking (or irrationally euphoric) is difficult - but