Friday, 10 October 2014

Cinderella at the Ball. Warning investors about the "sedation of effortless money".

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs.  Nothing sedates rationality like large dose of effortless money.  After a heady experience of that kind, normally sensible people drift into behaviour akin to that of Cinderella at the ball.  They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice.  But they nevertheless hate to miss a single minute of what is one helluva party.  Therefore, the giddy participants all plan to leave just seconds before mid-night.  There's a problem, though:  They are dancing in a room in which the clocks have no hands. 

Warren Buffett's Cinderella parable in his 2000 shareholder letter.

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