148 The Business of Value Investinginvestor understands that patience is an asset, not a hindrance.
A slight revision to Pascal ’ s quote might apply to our investment
managers today: “ All investment managers ’ miseries derive from
not being able to sit quietly in a room alone. ”
Too many investors approach the stock market as a speculative
endeavor, often because share prices go up regardless of underlying
valuation. Investing, however, rests on the foundation that securities
are purchased at a discount to estimates of intrinsic value, thereby
implying that the basis for investment gain will result from pur-
chase price nearing intrinsic value. Unlike speculators who strive
to achieve rapid gain, value investors strive to limit capital loss. As
such, true value investors will gladly wait for as long as it takes to
make investments that satisfy those investment philosophies. Along
with discipline and risk aversion, the fi fth element essential to the
value investing approach is patience.
There are tremendous benefi ts to being patient in investing.
The most obvious reason is that less activity reduces transaction costs
and helps defer taxes. Moreover, in investing, you are afforded the
luxury of waiting until opportunity arises. There are no time limits,
18 holes, or strikes that restrict the opportunity fi nd the investment
ace. This luxury is crucial in the markets because the prevalence of
networks like CNBC and Internet trading all serve to turn investing
into a minute - by - minute activity. The ability to buy and sell securities
in a split second has led to havoc for many investors. Patient inves-
tors welcome the buy - and - hold approach, knowing that the ultimate
determinants of when to “ buy ” and for how long to “ hold ” is predi-
cated on a market value being below intrinsic value.
Underpinning all of the above, the powerful advantages of
patience will only be fully appreciated when a basic understanding
of stock valuation is understood.
Stocks derive their valuations from the cash fl ows they will pro-
duce in the future. Simply stated, stocks are worth the present value
of the future cash fl ows they will provide to their owners. A businessCH008.indd 148CH008.indd 148 9/2/09 11:48:53 AM9/2/09 11:48:53 AM