There are three or four attributes that define Price’s approach to investing. One is discipline: Don’t deviate from the valuation standards, especially as the sirens of momentum are enticing the unwary. Also, don’t alter the policy you have established for the composition of the portfolio just because other approaches are currently more favored. Price’s own structure was carefully designed to control risk and still provide excellent returns. A second quality is patience: After the analysis has been completed and the intrinsic value is determined, don’t chase the stock. It is important to wait for the market to offer a price with a discount large enough to allow for a margin of safety. The third virtue is focus: Don’t be distracted by global predictions or macro forecasts, either by listening to them or making them yourself. It is much easier to understand a security than an economy, and the way to profit is by using that understanding. Finally, do your homework. Each investment is a wager against the party on the other side of the trade. Only one of you will be right, and the prize usually goes to the person who knows more about the security and knows it sooner. The best strategy for the investor is to broaden and deepen the store of relevant knowledge. Each of the areas Price focuses on-cheap stocks, arbitrage, and bankruptcies-leads him to examine the businesses as a control buyer would look at them. The arbitrage positions are generally takeovers; they offer useful information about how much acquirers are paying for what kinds of businesses. The bankruptcies add additional information; as assets are sold off by the restructuring company, Price records the prices at which they change hands. Cheap stocks, such as Chase bank in 1995, and expensive stocks, such as GE in 2000, all have business segments that can be valued by reference to what buyers are paying for similar operations. The store of knowledge expands with each deal, each stock purchase, and each arbitrage position. With a large and current base of knowledge, the value investor can move quickly to take advantage of a fleeting opportunity. Patience is certainly a virtue for investors, but so is alacrity when the situation demands.”
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Full-time professionals in other fields, let’s say dentists, bring a lot to the layman. But in aggregate, people get nothing for their money from professional money managers. – Warren Buffett