84 The Business of Value Investingthem, they were being test marketed by Hanes. Lynch came to fi nd
out that women absolutely loved L ’ eggs for their superior comfort
and durability. This plus the convenience of not having to make a
special trip to a department store to purchase them led Lynch to
believe that L ’ eggs was a blockbuster product for Hanes. He fol-
lowed up his theory by doing lots of research: visiting grocery stores
and observing how many women had plastic eggs in their shop-
ping carts. I ’ m sure Lynch pored over the fi nancials, but the idea
of Hanes and the blockbuster L ’ eggs panty hose came from his wife
who tried them and loved them. Lynch, with all his fancy Quotron
machines, brokers, and analysts, was fi nding his best ideas by eating
a burrito and listening to his wife and kids.Search Far and Wide
In searching for stocks, value investors naturally lean toward the low-
est P/E stocks, lowest price-to-book (P/B) stocks, stocks trading at or
near new low prices, and other indicators of “cheapness” or value.
On the whole, I think this is a generally prudent approach, as some
very fantastic opportunities can be found in unloved areas. However,
fi nding the diamonds in the rough requires that investors navigate
through minefi elds.
While it is a great idea to look for bargain investments among
such categories, understand that Mr. Market generally has it right and
many investments trading at new lows or uncharacteristically low P/E
or P/B ratios are there for a reason. A business that earned $4 a share
and trades for $20 and has a P/E of 5 is only the beginning. If such
earnings power can’t grow or be sustained, then the seemingly low
P/E might not be low at all; in other words, the investment is not as
cheap as you might think. Similarly, a business that trades for $20 a
share but has book value of $30 looks very appealing until you fi nd
out that the $30 of book value is really worth $10. This was the case
with many fi nancials in 2008. Generally, book value is a very valuableCH005.indd 84CH005.indd 84 9/2/09 11:08:06 AM9/2/09 11:08:06 AM