In other words you get what you pay foralways Warren Buffett disagrees So do I

In other words you get what you pay foralways warren

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therefore, the current price is the current value of the stock. In other words, you get what you pay for—always. Warren Buffett disagrees. So do I, as well as every millionaire who makes a killing in the market when it tanks. EMT is based on a serious error about the real world. It assumes investors act rationally all the time. But they obviously don’t. Fear is a powerful emotion that overrides rational thought in the stock market, as it does in many situations in life. For more information about the power of emotions in the market, read Robert Shiller’s Irrational Exuberance . Dr. Shiller called the top of the market in 2000 and the top of the real estate market in 2005.
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Anyone who gets it right that often deserves to be read. When the Big Guys panic, it makes a huge difference, because 85 percent of the money in the market is being managed in large funds—by exactly those same panicking Big Guys. Most fund managers were trained to expect Mr. Market to be rational and price things properly at their real value. Therefore, when Mr. Market isn’t rational, his huge emotional waves sweep individual fund managers into their own upwardly spiraling irrational exuberance (driving prices up) or down into irrational fear of utter ruin (pushing prices down) and they begin to act irrationally out of greed or fear. And they take the entire market with them. We don’t get caught up in these emotional waves because we don’t subscribe to EMT. We do love Mr. Market, though, because once you understand him he’s such a predictable partner. When he gets very fearful, we buy, because he is, predictably, going to become greedy in the future and everything we bought when he was fearful is going to go straight up. He does it over and over and we love him for it. It is our job to hit hard when Mr. Market is overly emotional: We will buy when he’s fearful and sell when he’s greedy. The rest of the time we just lurk in the bushes, waiting for the next great opportunity from Mr. Market. By doing so, we’re able to achieve remarkable returns even if the overall market goes nowhere. All the price has to do is to return, post-fear, to its value, and our profits will be excellent. Once you see a potential opportunity, and you’ve done your valuation, the next step is to watch it. You wait for Mr. Market to get off his meds and go crazy. Factoring Dividends into Valuation Before we move on to the next step, I need to cover a bit about dividends here. A lot of people are interested in buying stocks with dividends these days. It’s nice to own equity in a business and get paid as if you owned a T-bill on top of it. Some people even think the dividend is the only reason to own equity in a public business, since it’s the only real cash you’ll ever see from the business itself. Any other
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gains you make from owning the business come entirely from selling what you own to someone else. This is quite different from owning a private business. In a private business, the free cash flow is yours to do with what you will. Keep it and invest it in some other business (or trip around the world) or let the business use it and, perhaps, grow.
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  • Spring '20
  • Warren Buffett

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