McElvaine Minutes
Spock vs Homer: why bargains exist
Two characters live in every investor's head. Their argument is what creates the prices we go looking for.
What it's about
If everyone were Spock, there would be nothing for us to do
Spock weighs the evidence and reaches a conclusion. Homer does whatever feels good at the time. Both of them turn up whenever anybody buys or sells anything, and most of the time Homer is louder.
That matters to us more than it might sound. If every investor behaved like Spock, prices would already be right and there would be no bargains to find. Bargains exist because people sell good businesses at bad moments, for reasons that often have very little to do with the business itself. Somebody needs the money. Somebody is frightened. Somebody's fund is being wound up and everything has to go by Friday.
The catch is that it only works if we can stay reasonably Spock-like while everyone else is being Homer, and that is harder than it sounds. In practice it means owning companies you would rather not have to explain at a dinner party, holding cash while the market is running, and sitting through stretches where we look wrong for longer than is comfortable.
The short version
Other people's impatience is where our opportunities come from. The price of using it is being patient ourselves, which is the part most investors underestimate.
Keep going
Where this leads
Knowing why something is cheap is the first of the four questions we ask before buying anything. The other three are about whether the business can survive being cheap, and whether the people running it are on your side.