Notes Chapter 2: Margin of Safety

 

  • What is good for Wall Street is not necessarily good for investors, and vice versa.
  • Wall Street firms perform important functions for our economy: they raise capital for expanding businesses and (sometimes) provide liquidty to markets.
  • Up-front fees clearly create a bias toward frequent, and not necessarily profitable, transactions.
  • Investors even remotely tempted to buy new issues must ask themselves how they could possibly fare well when a savvy issuer and greedy underwriter are on the opposite side of every underwriting.
  • Investors must never forget that Wall Street has a strong bullish bias, which coincides with its self-interest. Wall Street firms can complete more security underwritings in good markets than in bad.
  • Some people work on Wall Street solely to earn high incomes, expecting to depart after a few years.
  • A few Wall Street partnerships have done a particularly good job of motivating their employees to think past the current transaction.
  • The bullish bias of Wall Street manifests itself in many ways. Wall Street research is strongly oriented toward buy rather than sell recommendations.
  • Although high stock prices cannot be legislated, regulation can cause overvaluation to persist by making it easier to occur and more difficult to correct.
  • Many of the same factors that contribute to a bullish bias can cause the financial markets, especially the stock market, to become and remain overvalued.
  • [Talking about new type of securities] There is something – lower risk, higher return, greater liquidity, an imbedded put or call option to the holder or issuer, or some other wrinkle – that makes it appear superior (new and improved, if you will) to anything that came before.
  • The value of a company selling a trendy product, such as television shopping, depends on the profitability of the product, the product life cycle, competitive barriers, and the ability of the company to replicate its current success.
  • All market fads come to an end. Security prices eventually become too high, supply catches up with and then exceeds demand, the top is reached, and the down ward slide ensues.

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