The Most Important Thing by Howard Marks
The Relationship Between Price And Value
Price has to be the starting point for a value investor. No asset is so good that it can’t become a bad investment if bought at too high a price. There are few assets so bad that they can’t become a good investment if bought cheap enough.
It takes a lot of hard work or luck to turn something bought at too high of a price into a successful investment.
In the era of the "Nifty Fifty Investing", many of those companies traded at a price-to-earnings (P/E) ratio between 80 and 90. By comparison, the post-war average P/E ratio of stocks, in general, has been in the mid-teens. Well, if you are unaware of the Nifty-Fifty style of investing, the author explains that its goal was to identify the companies with the brightest outlook for earnings growth over the long term.
What goes into the price?
The underlying fundamental value of course.
Most of the time, the short-term fluctuation of a security’s price will be determined by two other factors:
Most investors know little about technicals.
Technicals are non-fundamental factors (things unrelated to value) that affect the supply and demand for securities.
Two examples of technicals:
1.The forced selling that takes place when market crashes cause levered investors to receive margin calls and be sold out.
2.The inflows of cash to mutual funds that require portfolio managers to buy.
Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity.
The safest and most potentially profitable thing is to buy something when no one likes it.
You must invest the time and energy to understand market psychology. The fundamental value will be only one of the factors determining a security’s price on the day you buy it.