Mobs, Messiahs, and Markets

Never Buy What Someone Else Really Wants to Sell

Our next prohibition is this: The more someone wants to sell you an investment, the more you don't want to buy it.

This applies to the expensive suits on Wall Street, who specialize in selling U.S. Treasuries to their rich clients, as well as to the cheap suits in brokers’ boiler rooms in Boca Raton, who specialize in calling poor clients on the phone to sell them small‐cap stocks. Both the cheap suits and the expensive suits have to earn a living. On Wall Street, the average salary is $300,000—and that includes the janitors. As for Boca Raton salaries, we don't know, but Florida is no longer cheap.

But there's more to it than just the cost of the inter‐ mediaries—what Warren Buffett calls the “friction” in the system. The owner of an investment usually knows the asset better than the buyer does. If it were such a good business, why would the owner want to sell it to complete strangers? If it could earn a decent return on equity, why share it?

You could expect to buy a good used car, for example, simply because the previous owner needed a bigger one or wanted a snappy convertible. So, too, might you get a good deal on a watermelon if the farmer had an especially bountiful crop. A nice house might be offered to you if the previous owners’ children had grown up and moved away. They might feel it was time to downsize.

But no sensible investor downsizes a portfolio on a whim or sells an investment just because he has too many of them. ...