- Rule number one: most things will prove to be cyclical
- Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.
"The herd applies optimism at the top and pessimism at the bottom. Thus, to benefit we must be skeptical of the optimism that thrives at the top, and skeptical of the pessimism that prevails at the bottom."
"In bubbles, infatuation with market momentum takes over from any notion of value and fair price, and greed (plus the pain of standing by as others make seemingly easy money) neutralises any prudence that might otherwise hold sway."
"Most important in the late stages of the great bull markets, people become willing to pay prices for stocks that assume the good times will go on ad infinitum."
"There`s only one way to describe most investors: trend followers. Superior investors are the exact opposite. Superior investing, as I hope I`ve convinced you by now, requires second-level thinking-a way of thinking that`s different from that of others, more complex and more insightful. By definition, most of the crowd can`t share it. Thus, the judgments of the crowd can`t hold the key to success. Rather the trend, the consensus view, is something to game against, and the consensus portfolio is one to diverge from. As the pendulum swings or the market goes through its cycles, the key to ultimate success lies in doing the opposite."
"But our purpose in investing is serious, not fun, and we must constantly be on the lookout for things that can`t work in real life. In short, the process of investing requires a strong dose of disbelief... inadequate skepticism contributes to investment losses. Time and time again, the postmortems of financial debacles include two classic phrases: "It was too good to be true" and "What were they thinking?""
"What makes investors fall for these delusions? The answer often lies in the ease with which- often in service to greed- they dismiss or ignore the lessons of the past. " Extreme brevity of the financial memory," to use John Kenneth Galbraith`s wonderful phrase, keeps market participants from recognizing the recurring nature of these patterns, and thus their inevitability:"
"You simply cannot create investment opportunities when they`re not there. The dumbest thing you can do is to insist on perpetuating high returns- and give back profits in the process. If it`s not there, hoping won`t make it so."
"To avoid losing money in bubbles, the key lies in refusing to join in when greed and human error cause positives to be wildly overrated and negatives to be ignored. Doing these things isn`t easy, and thus few people are able to abstain."
"The seven scariest words in the world for the thoughtful investor – too much money chasing too few deals…"
"Economics and markets cycle up and down. Whichever direction they’re going at the moment, most people come to believe that they’ll go that way forever. This thinking is a source of great danger since it poisons the markets, sends valuations to extremes, and ignites bubbles and panics that most investors find hard to resist."
"I’d say the necessary condition for the existence of bargains is that perception has to be considerably worse than reality. That means the best opportunities are usually found among the things most others won’t do. After all, if everyone feels good about something and is glad to join in, it won’t be bargain-priced."
"We must strive to understand the implications of what’s going on around us. When others are recklessly confident and buying aggressively, we should be highly cautious; when others are frightened into action or panic selling, we should become aggressive."
"When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there`s chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. And it will ever be so."