The essence of investing is about predicting the future, and therefore necessarily involves the risk of loss. Nobody, including successful investment managers, can bat 100% when predicting the future. The next best thing good investment managers can do is to identify investments possessing financial attributes that tilt the odds for success in their clients' favor.
Of course, any one investment might not work out despite having the odds of success in its favor, just as another investment might ultimately work out despite having the odds against it. However, by applying an investment process in a disciplined fashion that tilts the odds in our clients’ favor across a diversified portfolio of investments, clients will likely produce more winners than losers and achieve satisfactory overall results. This process is not unlike insurance operations, where the insurance company underwrites a whole spectrum of diversified risks. Despite prudent and careful underwriting, there will be losses, but the entire portfolio of policies should yield satisfactory results overall.
When we talk about tilting the odds in our clients’ favor when investing, qualitatively we are thinking about something completely different from, for example, rolling the dice in Las Vegas. Successful investments tend to share certain attractive financial characteristics (e.g. genuine stock repurchases, clean balance sheets, high returns on capital, heavy buying by insiders etc.), just as poor ones tend to possess certain negative characteristics. No investment is perfect, and every investment will by necessity possess both positive and negative attributes. It is the job of competent investment professionals to analyze and weigh these characteristics, to decide on balance whether an investment should be bought.
Here at PDV we strive to tilt the odds in our clients' favor by using our knowledge to ferret out those investments whose positive attributes greatly outweigh the negative. Then we make sure we buy these attractive investments at a favorable price. Paying too high a price can negate many positive characteristics, while the benefits of paying a dirt cheap price might help overcome certain negative investment attributes.
Why is price important? Because the price paid determines what kind of return is possible. Overpaying for high-quality companies may have the same negative effect on the return as buying low-quality companies. Overpaying for quality is sometimes known as "price risk," a poorly understood and very dangerous risk factor that is commonly ignored.