CHAPTER 7Failures, Errors, and Value Traps

“Some things happen for a reason. Others just come with the season.”

—Ana Claudia Antunes

I have spent many pages detailing the reasons why we should buy only good companies. With a good company, time is on your side. If you can buy at an attractive price, you will achieve great returns. If you can buy at a fair price, you grow with the company and will still do well. If you pay a high price, over time the growth of the business value will compensate for the initial cost. Although your return will be subpar, you will still be able to someday get your money back.

With a company that is eroding value, the risk you face is the permanent loss of capital. This is why I would rather buy the right company and pay a little more than buy the wrong company on the cheap.

There are many ways to lose money in the stock market. Beginning investors lose money on hot stocks and speculation. Growth investors expect speculative growth to endure and pay too much for it. Value investors are addicted to price bargains and overlook the quality of the underlying business.

The stock market is just weird. Every time someone sells, someone else buys, and they both think they're smart!

The Wrong Companies

You can easily lose a lot of money in the stock market by buying when the market is exciting and optimistic, then selling when it is distressed and in a panic. Or by playing with stock options and futures or by buying on margins—if you do, you can lose money ...

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