A friend of ours likes to tell this story: A man and his wife go shopping and the woman goes into the grocery store. Noticing that cans of tuna fish have been marked down by 50 percent, she decides to take advantage of the low prices and stock up. Her husband, meanwhile, wanders over to his stockbroker, who tells him about some stock that he says is a good investment. The man buys it. A week later, when the two go shopping again, the woman sees the tuna fish selling for twice what she paid the previous time, so instead she buys chicken. The man, on the other hand, goes into his broker's office, finds to his joy that the stock has doubled because “everyone is buying it,” and buys twice as much as he bought the week before.
Which of these two people is doing the right thing? The woman, of course. She is buying value based on her own private lights. The man is speculating, but without the real speculator's keen insight into human nature and actual odds. He is not buying a business; in fact, he may not even know what business the company is in. He is buying to be in the market, to be in that great, modern brotherhood of money‐savvy alphas, up there with George Soros and Peter Lynch.
A real investor buys a stock as though it were a can of tuna fish. He knows what it is worth to him and buys it when it is a bargain. But how do you know what a business is worth? How do you know when the perfect market has slipped up?
Traditionally and sensibly, the ...