Investing / Finance / Decision-Making
Investing / Finance / Decision-MakingBuffett's Law
Price and value are not the same thing.
Popularity
Usefulness
Aliases
Buffett maxim / contrarian value-investing principle / "be fearful when others are greedy"
Domains
Investing, value investing, capital allocation, market psychology
Definition
- Buffett's Law, in popular shorthand, is the idea that investors should make decisions based on value rather than crowd emotion, and that when sentiment matters they should be fearful when others are greedy and greedy only when others are fearful.
Core Idea
- Price and value are not the same thing.
- Crowd enthusiasm can push prices too high, and crowd fear can push them too low.
- Independent judgment matters more than simply following or opposing the herd.
How It Works
- Estimate the underlying value of a business or asset.
- Compare that value with the market price being offered.
- Act patiently when pessimism creates a favorable gap, and stay disciplined when excitement erases it.
Usage Example
- An investor buys a strong business during a broad market selloff because the price has fallen below a sensible estimate of intrinsic value, not because the business itself has permanently deteriorated.
Famous Example
- Example: Warren Buffett's 2004 Berkshire Hathaway shareholder letter: investors should try to be fearful when others are greedy and greedy only when others are fearful.
- Why it fits this rule: It ties contrarian behavior to disciplined valuation rather than to novelty for its own sake.
- Verification status: The quote is Buffett's. The narrower claim that wealth comes simply from investing "where others have not" misses the valuation discipline at the core of Buffett's approach.
Use Cases / Situations Where It Applies
- Value-oriented investing.
- Capital allocation during bubbles or panics.
- Decisions where market sentiment diverges from underlying business value.
When Not to Use or Common Misuse
- Do not equate contrarianism with correctness.
- Do not buy falling assets blindly without analyzing intrinsic value and balance-sheet risk.
- Do not reduce Buffett's approach to a slogan while ignoring patience, quality, and margin of safety.
Rule Invention / Origin
- Invented by: Associated with Warren Buffett.
- Year of invention: Popularized through Buffett's letters and remarks; the quoted wording appears in Berkshire Hathaway's 2004 annual letter.
- Country / context of origin: United States investing.
Evidence / Research Basis
- Rooted in value-investing practice and market-sentiment logic; its success depends on sound business analysis, not on contrarianism alone.