When an Investor Creates Value
When we sell an investment, we feel the pain of a loss or the joy of a gain (offset in part by the tax bill). It is at this point that we know if our investment was “successful”, or so goes the common wisdom. We “lock in” our gains and either admit we failed or take pride in our obvious skill.
However, an investor doesn’t create value when he sells; he creates value when he buys. An investor creates value by buying investments whose current value is greater than the current market price. There are very few things the investor has control over but if, over time, he buys undervalued assets, he should be successful. One of the things he does not control is the future price.
So, by definition, if he does not control price, the success of the investment can not fully depend on the future price. It’s hard to think this way. Over time, someone who makes intelligent decisions should reap the rewards, but he will not be successful in every investment he makes. So, a long-term successful track record is indicative of success while individual picks are not. A successful long-term track record indicates that the investor probably has enough ability to put the odds in his favor and create value.
