The Business of Value Investing.pdf

Have the Discipline to Say No 143

the difference of the market ’ s short - term voting machine reaction

compared with the market ’ s assessment of the long - term quality

of the business fundamentals. Depending on the price paid, inves-

tors were sitting on losses with Apple for three years before earning

a return. If you bought at the high price in 2000, the 2001 reces-

sion cut your investment by up to 80 percent. You can see what

happened when the market votes were outweighed by fundamen-

tals beginning in 2004 and beyond. The table chart could easily

include over 100 stocks with a similar pattern. And they would all

be excellent businesses capable of earning more and more profi ts

over the years.

Back in 2001, I began buying the refi ners Tesoro and Valero,

paying four and fi ve times earnings respectively. I got in around

$ 8 for Tesoro. In 2002, the stock hit a low of 60 cents as earnings

went from $ 1.05 a share in 2001 to a loss of $ 0.97 in 2002. In 2003,

the stock was still languishing, trading between $ 1 and $ 7 during the

year. Within a year, I was down over 80 percent on this investment

and still down two years later. The stock was performing poorly, but

the company ’ s fundamentals were sound and the balance sheet was

strong. In 2005, I sold at around $ 30. Two years later, the stock was

Table 7.4 Short-Term Vote versus Long-Term Fundamentals

Company Business 2000 Price 2001 Price 2003 Price 2007 Price

Apple

Computer

Computers $7–$38 $7–$13 $6–$12 $82–$200

Vulcan

Materials

Aggregates $36–$50 $37–$55 $29–$49 $77–$129

Tesoro Oil refining $4–$6 $5–$8 $2–$7 $32–$66

Transocean Oil-drilling rigs $30–$65 $23–$57 $18–26 $73–$150

Note: Prices reflecting lows and highs for the year are rounded to nearest dollar for illustrative

purposes.

Data source: Value Line.

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