Kahneman showed **we feel losses more sharply than equivalent gains**. That should make us cautious investors. But in a bull market, **when everyone around you is getting rich, the loss you fear changes: it's no longer losing your capital, it's missing out on profit.** Losing money starts to feel impossible, and to **avoid the pain of missing gains you'll buy at any price.**
Risk isn't what you buy. It's how much you pay for it. A $500 ticket for a 10% shot at $1,000 is risky. At $100, questionable. At $10, a great deal. Same ticket, different risk.
Stocks work the same way, just messier. **Is Google risky?** Strong moat, so it doesn't sound risky, and ASML sounds safer still. But the real question is the price. **If you pay more than the company will ever return in free cash flow, that's not investing, it's speculating that someone will pay more later**. Buy below the FCF yield and you've got a great deal: even if the price drops 50% tomorrow, the business still pays you back.
In bull markets we price companies on forward P/E, assuming profits and prices keep climbing. In bear markets we look at debt ratios and FCF yield, because you can't count on a greater fool.
That's the trap: a **stock looks safe because the company has a strong moat** and a great track record. But everyone knows it, so everyone pays up and the price climbs, and **now it's genuinely risky**, because the **business can't generate enough to justify the price. You're just betting on the next idiot.**
A smart investor knows timing the top is impossible; all you can do is **measure the risk by how the market is behaving and what it's charging you**.