Leave something in itfor the next man

Dubai: "Leave something in it for the next man" ... how many times have you heard this phrase?

If the money gurus were to award a prize for the most useful adage of all time, running Warren Buffett into every other place from second to tenth, this has to be it. But is it understood?

So let's dig deeper into three aspects of "next man" thinking: the price journey, understanding value and human behaviour. For those wondering why we should care about "the next man", when we are actually talking about our own assets (our stock, our house, our business), I understand your concerns just hang on a bit.

First up, it's about understanding prices and value. As background, we need to know the one basic rule of making money. This is the "buy low sell high" rule. The "buy high, sell low" version represents misjudgement or error.

Back to Buffett for his input on the subject: "investors making purchases in an overheated market need to recognise that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid".

Translated: If there is no next man (if you have bought very high), there is no value. As Adam Smith said in his Wealth of Nations, an asset is only worth the price a man is prepared to pay to cover the hassle of acquisition. The "next man" has been around for a long time.

Intrinsic value

Currently, Buffett is a buyer of assets he likes because he believes that current values will present opportunities for the next man to appear at a point in the future. However, note the bit where he says "he likes" — he doesn't buy because he believes it's cheap (or the market is cheap); he buys "on the assumption that they could close down the market the next day and not reopen for five years".

The asset needs to provide other intrinsic value outside of market liquidity such as profit or cash.

The money gurus should award second place to Buffett's "If past history was all there was to the game, the richest people would be librarians". "Next Man" thinking is all about future prices, future value, future liquidity.

Moving to value: I wish it were easy. Complicating the issue are differing attitudes to value such as "momentum" investing (buy high sell higher).

Seems like we would need to know the difference between a market "heating up" and an overheated market. Then you have "value" investing, implying that the selector of the asset has the ability to predict that the price is cheap, and that future profits and the macro-economic conditions behind the asset are blowing in a favourable direction.

Complicating further would-be high-profile errors, Buffett talks of Isaac Newton's brilliance, but condemns the man for his South Sea Bubble error (buy high, receive nothing), for investing money when there could be no "next man"; Newton admitted, " I can calculate the movement of stars, but not the madness of men".

Key component

Which takes us to human behaviour. One of the big shocks for inexperienced investors is the high failure rate of experts. Advisers take the flak, but excellent asset allocators are often working on being wrong frequently.

Learning to understand the "failed" selection, learning to manage expectations around not winning all the time, is a key component to managing profit-taking when assets are up: "leaving something in it for the next man".

The successful asset, the successful trade, is often a reason to celebrate. Fine, but make sure it pays the rent, puts bread on the table, and educates the children first. Let the next man worry about next season's results.

The writer is Chairman of Mondial Financial Partners.