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How we keep our portfolio free of exuberance

An old adage in the financial markets for seekers of value is 'follow the misery.' The concept of misery is subjective and means different things to different people but the basic idea is that disappointed investors bid down prices to eventual bargain levels.Times of great misery for investors such as March 2009 coincide with terrific buying opportunities for patient, long-term owners of good businesses.The opposite of misery is exuberance. This is when risk-taking is well-rewarded and the financial markets appear benevolent. Many participants attribute investment success in such an environment to their own special insight. A bubble is when exuberance becomes so pronounced that the seeds of capital destruction are sown due to extreme overvaluation.In a bubble prices rise to levels that imply perpetually low or negative returns because investors pay too much for future cash flows. High-quality businesses like Microsoft ( MSFT ), Oracle ( ORCL ) and Cisco ( CSCO ) famously reached this l...

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