--2--

3. For investors as a whole, returns decrease as motion increases

Getting into stock because everyone around you is and hoping to make money from it money successfully is not everyone's cup of tea. As more and more investors get into the same stock, and price rises, the chances of making money from the stock go down.

In his 2005 letter Buffett wrote, "Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: he lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: 'For investors as a whole, returns decrease as motion increases.'"

4. There is a thin line separating investment and speculation

Buffett explains this beautifully in his letter to the shareholders in the year 2000. "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 doses of effortless money."

"After a heady experience of that kind, normally sensible people drift into behavior 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 midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands."