The Business of Value Investing.pdf

144 The Business of Value Investing

trading at $ 65. I held the shares for four years, the fi rst two of which

I was down on my investment. In the end, my gains were in excess

of 300 percent.

This stroll down memory lane is not meant to defend the notion

that it is always best to sit and wait out your investments. Every

market correction and economic recession is different in terms of

duration and ultimate severity. But where the market hasn ’ t failed

investors is in restoring fair valuations to those businesses that are

capable of earning more and more profi t. No single business can

ever expect to generate continuous increasing profi tability. What

matters is how the business will look several years down the road. If

that particular business will be earning more profi ts and generating

greater levels of cash fl ow, the market price will catch up to its fun-

damental performance.

It ’ s very diffi cult for investors to sit on 50 percent - plus losses

and not be tempted to sell out. If you ’ re managing money for

others, it ’ s nearly impossible to hold such losses and not do any-

thing. The principal reason many investment funds fail is because

many investment managers feel pressured to deliver short - term

results to their clients. In many cases, this pressure stems from

the fact that many investors are taught to focus on short - term

returns. Money managers with the greatest yearly return are

rewarded with an infl ux of new capital, and managers with an

underperforming year can fi nd themselves out of a job. While the

ultimate success or failure of an investment manager will depend

on his track record, the majority of individuals are taught to think

of outcome fi rst and process second. This backward approach to

evaluating investment results is just as foolish as suggesting that

Buffett had “ lost his touch ” because he failed to participate in the

Internet boom. Many investors are quick to discount discipline

and are eager to participate in whatever is popular. The conse-

quence of such thinking is a lose - lose proposition for both man-

ager and investor.

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