The Business of Value Investing.pdf

132 The Business of Value Investing

opened mom and pop with a shingle reading “ Mortgages Available

Here, ” the money to be made by lending, selling the loans, and

lending some more was too easy to pass up. There was no need

to hold back and be disciplined; houses were the safest asset next to

Treasuries, the fi nancial pros told us, because house prices would

always go up over time and there would always be buyers. Hundreds

of billions of dollars were invested based on complex models that

all relied on one simple assumption: The price of a house could

never decline. Never was the question asked “ But what if ...? ”

Despite the fact that these fi nancial institutions were home to some

of the most brilliant fi nancial experts in our industry, their lack of

discipline (and their large dose of arrogance) prevented them from

asking the most elementary of rational questions. You can ’ t expect

an investment banker to drive a BMW when the mortgage broker is

driving a Ferrari. The regrettable outcome is that the consequences

are usually borne by many more than just those who were caught

reaching for the cookie jar one time too many.

Be Prepared to Look Stupid

The economic crisis that began in late 2007 turned into one of the

worst recessions since the Great Depression. Trillions of dollars of

stock market value were wiped out in little over a year ’ s time, and

many investors suffered life - altering fi nancial consequences. As the

recession continued to affect businesses and the economy, many

investors ’ distaste for equities grew. What is certain is that some-

thing will come along again and capture the heart of Wall Street.

It happened with tulips in the seventeenth century, 1 with Internet

stocks in the late 1990s, and with the housing and credit markets

in the second half of the 2000s. In the meantime, value investors

should be comforted and excited by the fact that the market is pro-

viding bargains and, in some cases, investment opportunities of a

lifetime for those willing to be patient.

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