Kal Kotecha
321Gold
“Shouting fire in a crowded theatre” is a popular old adage for speech or actions made for the primary reason of creating unnecessary panic. Warren Buffett has adopted this saying into a metaphor that ties in the idea of swinging investor sentiment.
Buffett has said that Wall Street is a little like a movie theater that has a special rule where if you want to leave the theater you need to find someone outside the theater to take your seat. This is because for every trade there has to be both a buyer and a seller. This analogy is useful in understanding why investors can collectively behave irrationally and drive stock prices up or down far beyond their intrinsic value.
When consensus is reached about what the next big thing will be, everyone piles in, paying any price to get a seat for the box office movie of the year. At other times, people see smoke in the theater, and everyone wants to rush out but there are no buyers and so the prices crash as sellers try to offer an attractive price for someone else to take their place. Savvy value investors look for instances where there’s smoke but no fire, enabling them to get good companies at substantial discounts to intrinsic value.