138 The Business of Value Investingthe situation and determines that she still has an attractive invest-
ment with superior fundamentals. As a result, she ignores the noise.
Investor B, who also favors ABC Corp., begins buying shares a
year later at about half of Investor A ’ s cost basis. Over the next cou-
ple of years, Mr. Market catches up with ABC, and the stock doubles
in year 2 and rises by another 60 percent in year 3. Thrilled with his
100 percent return, Investor B cashes out. Investor A continues to
hold on. Table 7.2 shows the investment results for both investors.
Which investor would you rather be? Naturally it would be great
to be Investor B, and there is nothing wrong with buying a cheap busi-
ness for much cheaper. That part is without dispute. With hindsight, it
seems that Investor B looks smarter, while Investor A just got unlucky
buying at the wrong price or the wrong time. Unfortunately, the
immediate preference of Investor B over A is putting the cart before
the horse. Indeed, over a substantial period of time — say, at least
10 years — Investor B ’ s 9 percent outperformance over Investor A
is extremely signifi cant and could be used to qualify the two inves-
tors. Even so, if Investor A ’ s biggest fl aw is arriving to the party
before B but her analysis still turns out to be correct, a 17 percent
annual rate of return will get you nothing but praise. Both inves-
tors could be smart and savvy, or they both could be victims of lucky
timing, one more favorable over the other. But that ’ s not the correct
way to look at the situation. Instead, the situation should be viewed
from a totally different perspective: that both investors ’ resultsTable 7.2 Timing Isn’t Everything
ABC Corp. Share
Price $50Year 1 Stock
Price $25Year 2 Stock
Price $50Year 3 Stock
Price $803-Year Annualized
Return
Investor A
performance–50% 100% 60% 17%Investor B
performance0% 100% 0% 26%CH007.indd 138CH007.indd 138 9/2/09 11:47:26 AM9/2/09 11:47:26 AM