140 The Business of Value Investingdecline because it offers an even better bargain investment. Again,
she makes the investment solely on the basis of intrinsic value, not
Mr. Market ’ s value.
Just as having the discipline to say no is crucial, it is equally
important to know when not to split hairs. If a business is truly
a good investment, it makes no difference whether you invest at
$ 32 or $ 33 or $ 34 a share. Your qualifi cations as an investor aren ’ t
weaker if you deliver 15 percent returns while the other guy earns
18 percent. If you ’ re looking to buy a private company with strong
earnings and growth power and your offer is $ 500 million, you ’ re
not going to walk away from it at $ 520 million if you ’ re reasona-
bly confi dent that the business will be earning more profi ts several
years into the future. You should apply a similar mind - set when
buying partial ownership stakes in public companies via the stock
market. Attempting to bottom fi sh often produces the opposite
result and ultimately leads to investors paying a higher price for
the stock than they would otherwise have. As an investor decides
for to wait for a $ 32 stock to reach $ 30 before buying, one of two
mistakes may occur. The fi rst is that the target price to invest starts
to move. Once the stock reaches $ 30, the investor now decides to
wait until $ 29. As this train of thought continues, the approach
no longer is about investment but about market timing. In some
cases, investors can get lucky, but in taking on this unnecessary
element of luck, they may miss out on a bargain investment. Or
worse — and the source of the second mistake — the investor ends
up paying more for the stock, and the future returns are no longer
satisfactory. Being a disciplined investor cuts both ways. Table 7.3
illustrates the folly of stock price anchoring. The table shows the
one - year return based on an initial share based on an ending price,
P. Anchoring is a common mistake of many investors. The concept
relates to investors fi xating on the price to pay for a share of stock.
Price does matter but only in relation to the assessed intrinsic
value of a company. Because value investors often seek investmentsCH007.indd 140CH007.indd 140 9/2/09 11:47:26 AM9/2/09 11:47:26 AM