1. "At the racetrack ... every bettor is playing only against the other bettors.... Your opportunity for profit at the racetrack consists entirely of mistakes that your competition makes in assessing each horse's probability in winning."It's both important and sobering to remember that on the other side of every transaction is another person,who holds an exactly opposite view. Achieving above-average returns (on a risk-adjusted basis) requires seeing value where others currently don't.
2. "This is the way we all have been conditioned to think: Find the winner, then bet. Know your horses, and the money will take care of itself. Stare at the past performances long enough, and the winner will jump off the page.... The issue is not which horse in the race is the most likely winner, but which horse or horses are offering odds that exceed their actual chances of victory."A good company is easy to spot, a good value is not. Many people spend all of their time searching for the next big stock idea, yet wouldn't have a clue about what's already priced into the stock of whatever company they find. Knowing how to value a business is key.
3. "...Handicap[ing] horses is work that you do before the betting opens. As soon as those first prices go up on the board, you are looking for discrepancies between your odds and those set by your opponents....You must have a clear sense of what price every horse should be, and be prepared to discard your plans and seize new opportunities depending solely on the tote board."The key is that good investors, like good horseplayers, do their homework ahead of time to become familiar with what they're looking at. Good investors put themselves in the position to act quickly when bargains emerge because, as every shopper knows, a good bargain doesn't last long.
4. "It might not be a great deal of fun, but you could sit around and wait for mismatches, races in which one horse is so clearly superior to the competition that anyone could fairly agree that he has a better than 50 percent chance of winning the race.... There is no shame in passing a race because you just don't see any value in it.""Sitting around and waiting for mismatches" is exactly what Warren Buffett has done for the past half-century. He is well aware that "shame" comes not from shrewdly "passing a race," but recklessly entering one. "You don't get paid for activity," Buffett instructed, "You get paid for being right."
5. "What defines sucker money is not the horse selected, but the acceptance of odds on that horse that are substantially out of line with its chances of winning." A bad (or good) investment has as much to do with what price was paid as it does with what business was bought. So it's entirely possible that the stock of a bad business can offer attractive returns. And just as a bad company can make for a good investment bet, a good company can be a bad investment bet.
6. "...The world's savviest bettor cannot win with bad opinions"There are plenty of people who come up with very precise valuations for companies (down to the penny in some cases), yet their knowledge of the companies is scant, and therefore, their valuations worthless. Truly understanding the business is a prerequisite for valuation.
7. Finally, as Crist says, "If all of this seems too calculating and joyless, by all means feel free to forget about it and enjoy yourself at the races betting horses you fancy regardless of their price. You'll have plenty of company, and the rest of us could use your money."
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