The Business of Value Investing.pdf

136 The Business of Value Investing

Buffett was shunning technology while the used car salesmen were

doubling their money in months investing in Internet stocks, it was

said that Buffett was stupid and out of touch with the new era of

investing.

If your goal is to invest in undervalued businesses, prepare to

look stupid in the short run. Often some of the best investment

opportunities can be found in unloved areas. The market punishes

stocks without abandon if it doesn ’ t like what it sees ahead. Just

as stock prices can overshoot when the mood is euphoric, stock

prices can easily get below intrinsic value when the mood is dour.

Wall Street has a vested interest in promoting the popular invest-

ments of the day, and what is popular is expensive. You won ’ t fi nd

battered - down stocks being talked about at cocktail parties. Instead,

United States, the Whole Foods brand is synonymous with natural and

organic foods. Ask any rational businessperson if they could replicate

all of that for $2.2 billion and the answer you will get is no. Even Wal-

Mart, which has added some organic foods in its superstores, hasn’t

had any meaningful effect on Whole Foods.

Whole Foods is in a class by itself. Even knowing this, investors

need to have the discipline to say no when the company is valued

at 2 times annual sales and 40 times earnings. On top of all this, the

company will very likely be earning more profi ts several years from

now than it did before the economic recession took hold. Investors

who understand the important characteristics about a business and

invest at a bargain price will not abandon the company after a

few quarters that don’t meet Wall Street expectations. They won’t

sell a cheap business at a cheaper price. When the consensus is

cheery, however, disciplined investors refrain from paying an expen-

sive price. Remembering that the price you pay refl ects the value

obtained and knowing when to say no will eliminate a lot of unforced

mistakes.

(Continued )

CH007.indd 136CH007.indd 136 9/2/09 11:47:25 AM9/2/09 11:47:25 AM