“Investing is anticipating the return of an asset. Speculating is anticipating the psychology of the market.”

The value of an asset is the discounted sum of the cash flows - estimated in the most conservative way possible - that the asset will put in the pocket of its owner, subtracted of the cost of the capital.

The price of an asset is the consensus of the market at a certain moment. It varies each second - for the most liquid shares - and often fluctuates from one extreme to another, meaning between periods of euphoria and panic.  

Investing and speculating are two activities that differ greatly from each other, and those who are going to venture on the market need to choose sides: are they doing estate planning - are they doing business? - or are they more in a risk-taking mindset - are they going to a casino?


“In order to succeed, an investor needs a good business judgment and to isolate themselves from the super-contagious emotions on the market.”

The recipe for success lies in the investors’ ability to conjugate a more or less accurate valuation of the asset they’re interested in - because it’s better to be roughly right than to be exactly wrong - and a placid and courageous temperament. Because that’s what it takes if you want to go against the crowd, even more so when the latter panics.

Because investing is acquiring an asset based on its value, generally when the market price underestimates the latter - a characteristic of a bargain. Alas, things are rarely too good to be true: in order to seize these kinds of opportunities,  you generally have to venture there where no one else wants to go.

Therefore we must think properly - already a huge challenge in itself! - and then be able to act independently.


“The prices are low when a pessimistic context prevails - sometimes generally, sometimes linked to certain industries. We want to do business in this kind of context, not because we like pessimism, but because we like the prices it creates. A rational buyer should always be wary of optimism.”

A context of maximum pessimism is ideal to do business in because the valuations are low and sometimes underestimate the value of the assets. On the other hand, it is much more tricky to move in an optimistic context because the valuations overestimate the value of the assets and pose a maximum risk for the portfolios when the inevitable return to the mean sets in.

We’ve said it before, it’s when certain assets of remarkable quality are sold off with the entire industry to which they belong that the best investment opportunities arise. At the moment, this is, for example, the case with the car industry, the oil industry and the commercial real estate sector in North America.

Investors instinctively wonder where the best prospects are before investing capital. Perhaps it would be better if they’d ask themselves - not always, but sometimes - where the prospects are the worst so that they’d look for a few rare birds which are unfairly penalized by the downfall of their respective industries instead…. 


“In the short term, the market is a voting machine. In the long term, it’s a weighing machine.”

The short-term market fluctuations illustrate the feverish reactions of the masses to the latest news. In the longer term, however, they always follow the value of the assets.

It’s up to each and every investor to decide how they will manage their business: by following the direction of the wind - or by setting a target and sticking to it, even - especially - when adversity hits.

Simple in theory, of course, but so much more challenging in practice….


“The chains of habit are very light to be felt until they become too heavy to be broken.”

This magnificent quote, often cited by Buffett and borrowed from the British poet Samuel Johnson can be used in various contexts, for example to stress the dangers of the continuity aspect in the psychology of investors: after all, when a trend lasts for twenty or thirty years, we find it hard to believe it will suddenly reverse.

Your habits determine your character and your character makes your destiny: let’s make sure to choose our habits carefully if we want to make our destinies come true.


For the first part of the article go here.