That's not to say there aren't other reasons why people buy stocks. People buy stocks because my wife works at the company, I think it's a great company, or I love the product, or I heard at a cocktail party that it was going to go up. Lots of stocks get bought that way, but that's not what fundamental value investors do. So one of the first concepts we talk about is this notion of circle of competence. And that is what are the-- every investor should think about OK, what are the industries, what are the situations, what are the geographic areas, what are the size of companies that I'm going to look at and I'm going to become an expert in that will allow me to get an edge over what is a very efficient market?
And I think the basic concept is explained really well in this quote from Julian Robertson who's one of the best, most successful hedge fund managers of all time. "A baseball player never really gets paid, no matter how many home runs he hits or what his batting average is unless he gets to the big leagues. Then he's guaranteed to make a lot of money. But in the fund business, you can find a minor league where you can hit for a better average because that's what you're paid on." "I remember one of our guys taking us into Korea in the early 1990s and the market was so inefficient that it was a goldmine if you knew what you were doing. My point is that to be successful in this business, you don't have to be better than everybody everywhere, just better than everybody in the league in which you play. It's maybe today more difficult to find those inefficient areas, but it's not impossible." So the central conceit of any investor is that you figured something out that the market doesn't know or the market has just got wrong. If what's priced into the stock is just what everybody assumes and what the consensus is, it's very unlikely that that stock is going to be a successful investment. The price reflects the future, as the consensus sees it. And I think that's something I think people don't-- it's like, OK, Google is a great company, but that doesn't always mean that investing in Google stock is a great investment. It may be that the market is so enamored with Google's future that the price you'd have to pay it own a share of Google isn't a value, and it won't be a great investment. That doesn't mean it's not a great company and won't still perform extremely well, but it may not be a great investment. So I think one quote that captured that kind of notion really well, which is really important, was from a publisher of "The Daily Racing Forum," of all places. He said, "The issue is not which horse in the race is the most likely winner, but which horse or horses are offering odds that exceed their actual chances of victory. There's no such thing as liking a horse to win a race, only an attractive discrepancy between his chances and his price." OK, so that puts a premium on what successful investors often call the variant perception. Actually knowing what it is or identifying what you think are the reasons a stock is mispriced. A lot of investors may just imagine, OK, the stock is cheap and that's eventually going to work its way out. But I think what we found is that a lot of the best investors go beyond that, and they want to understand at least why it's cheap. Why would these be cheap? What's going on that could make this cheap? And that is the subject of this quote that I thought said it pretty well from Curtis Macnguyen who's at Ivory Capital. "Why something is mispriced is too often ignored by value investors. The general thinking is that it doesn't really matter.
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