An Analogy to Understand Value Investingby Tom Murcko
Warren Buffett has said that Wall Street is a little like a movie theater that has a special rule where if you want to leave the theater you need to find someone outside the theater to take your seat. This is because for every trade there is both a buyer and a seller. This analogy is useful in understanding why investors can collectively behave irrationally and drive stock prices up or down far beyond their intrinsic value. When consensus is reached about what the next big thing will be, everyone piles in, paying any price to get a seat. At other times, people see smoke in the theater, and everyone wants to rush out but there are no buyers and so the prices crash. Savvy value investors look for instances where there's smoke but no fire, enabling them to get good companies at substantial discounts to intrinsic value.