Whenever we attempt to lead markets, we have to deal with uncertainty. To the extent that any company’s outlook is predictable, that outlook is already priced into its stock. The way successful investors earn their keep is by anticipating future events before other investors do. Generally, if we wait until we see the whites of an investment’s eyes, it’s too late. We need to think beyond that which is clear at the moment, and in doing so we take risks. If our analysis is right, our investments will eventually re-price higher (sometimes much higher) as our expectations prove to be valid. Similarly, when the future develops differently than we expect (which will happen from time to time when we try to anticipate the future beyond current consensus expectations), our investments will fall. The key to success lies not in eliminating risk (which would eliminate winners as well as losers), but rather in taking wise risks.
Mar 1998