Let’s figure out what something is worth before we buy it.

This is not a unique concept. You do it all the time for almost everything you buy. But for certain (but wrong) reasons, that’s what investors very clearly do NOT do when they consider buying into a business. Well, that’s not true. Investors most certainly do do that when they buy a piece of a private business like a restaurant or a laundry. But they don’t do it when they buy a piece of a PUBLIC business – when they buy shares of stock. When they buy stock they assume that because there are so many smart people buying the stock that day at that price, the price must be what its worth. In fact, in the stock market, EMOTION is huge player. Its definitely not the uber-rational place its made out to be. Robert Shiller, a Yale economist, made that very point in his best seller, “Irrational Exhuberance”. In it, in 1999, he predicted the coming stock market crash. He also predicted the real estate crash. People get very emotionally caught up in the stock market because so much money is at stake. When the market is going up, they get greedy and buy just because they don’t want to miss out on easy money. And they freak out when the market is going down and they sell because they are afraid of losing everything.

The key to great investing is to be rational. To NOT get caught in the emotion of the moment that’s sweeping the country. If we can stay rational and figure out what a business is worth as a business before we buy it, and then buy it for less than its worth, we’re going to be very successful investors.

Now go play.

Phil Town