The Most Important Thing Illuminated

Investing, like economics, is more art than science. And that means it can get a little messy.

For investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point. Without it, any hope for consistent success as an investor is just that: hope.

A portfolio can be set up to withstand 99 percent of all scenarios but succumb because it’s the remaining 1 percent that materializes. Based on the outcome, it may seem to have been risky, whereas the investor might have been quite cautious. • Another portfolio may be structured so that it will do very well in half the scenarios and very poorly in

Value investors buy stocks (even those whose intrinsic value may show little growth in the future) out of conviction that the current value is high relative to the current price. • Growth investors buy stocks (even those whose current value is low relative to their current price) because they believe the value will grow fast enough in the future to

participating when prices are high rather than shying away is the main source of risk.

Investment risk comes primarily from too-high prices, and too-high prices often come from excessive optimism and inadequate skepticism and risk aversion.

the future were knowable by all, investing wouldn’t be very challenging (or, consequently, very profitable). Because it’s not, my final key theme surrounds the importance of understanding uncertainty. The graphic above illustrates the essence

Risk means uncertainty about which outcome will occur and about the possibility of loss when the unfavorable ones do.

It’s hard to consistently do the right thing as an investor. But it’s impossible to consistently do the right thing at the right time. The most we value investors can hope for is to be right about an asset’s value and buy when it’s available for less.