Klarman starts out by distinguishing investing from speculating. He uses a Mark Twain quote to illustrate the two times in life when one shouldn't speculate: "when you can't afford it, and when you can!". Speculators buy in the hopes or assumptions that others will want to buy the same asset (be it a painting, a baseball card, or a stock) later, while investors buy the cash flow the investment returns to its owner. (As such, a painting can never be an investment by this definition!)
Examples are provided which describe various speculative bubbles, discussing the faulty logic that first propells speculators to bid up prices followed by the inevitable bursting which destroys the wealth of many.
Klarman suggests that what determines whether an investor will make money in the market or not is his psychological make-up. If he does his own stock analysis and views the prices offered by Mr. Market as an opportunity to buy low and sell high, he will do fine. If Mr. Market's offering prices guide the investor's outlook of what the stock price should be, he should get someone else to manage his money!
Klarman argues that most market fluctuations are the result of day-to-day distortions between supply and demand of particular stocks, not of changes in fundamentals. Investors who take advantage of these distortions by focusing on the fundamentals will be successful. Those who invest with their emotions are sure to fail in the long-run.
Read the rest of the chapters.