Profitable industries attract competition. The same forces push out competitors in loss-making industries. For this reason, wonderful businesses tend to be fair investments, and fair businesses tend to be good investments. Wonderful stocks lag because investors overestimate future growth and profits. Fair businesses beat the market because investors underestimate the change in the stocks’ price-to-value ratio. Undervalued stocks trend toward the average value, and the price rises. Expensive stocks trend toward the average value, and the price drops.
