240 The Business of Value Investingbusiness, because debt holders come before equity holders. You can
compare book value to market value, but I would look at hard book
value, which excludes all goodwill and intangible assets from the cal-
culation. Focusing on hard book value provides a crucial margin of
safety; during periods of economic distress, the chances increase sig-
nifi cantly that impairments of goodwill and intangible assets occur.What Matters Most
Successful investing includes making mistakes. The greatest miscon-
ception in investing is that to be successful over the long term, you
have to eliminate mistakes. This perception is fl awed. To be suc-
cessful in investing, you have to eliminate repeating the same mistakes
again. Successful investors are the ones who study their mistakes,
taking great care to learn from them, understand why they were
made, and work to avoid repeating them again.
Human beings, it turns out, are innately wired to make dumb
investing mistakes. Even worse, we are not wired to learn from them
but to repeat those mistakes over and over again. Is there any hope
for investors? The truthful answer is a resounding yes, but only if we
are aware of the most common mistakes and why they are so easy to
make. We can minimize them if we understand them. Warren Buffett
is a brilliant human being, but his edge as an investor stems from his
unwavering discipline and ability to separate the real picture from
the perceived one. Unfortunately, the human mind is psychologi-
cally programmed to react in ways that can be futile to investing.
The most common human psychological tendencies include:- Gambler ’ s fallacy. Humans tend to believe, incorrectly, that
if a coin toss comes up tails three times in a row, it is more
likely to come up heads on the next toss, thus ignoring the
fact that each toss is an independent event with a probability
of 50/50. Similarly, just because a stock has gone up or down
CH011.indd 240CH011.indd 240 9/2/09 11:51:54 AM9/2/09 11:51:54 AM