154 The Business of Value Investingwill wait patiently and continue to analyze securities, learning as
much as they can in anticipation of a better buying opportunity.
Armed with more capital and information, the value investor is in the
ultimate sweet spot when bargains do begin to crop up. Patience is a
painstaking process in investing because you never know how long
the wait will be. But the future opportunity to make signifi cant invest-
ments at bargain prices alongside a minimal probability of permanent
capital loss rewards patient investors magnifi cently. The philosophies
of value investing — deep fundamental analysis, limiting risk, and
margin of safety — are by nature designed for unfavorable (or bear)
market environments. During bull markets, the value investing
approach is deemed unnecessary. If bull markets were constant, the
need for the value investing framework would not be required.
Many might be surprised to fi nd out that Warren Buffett ’ s invest-
ment strategy often has consisted of long periods of doing nothing,
or what Buffett likes to call “ sitting on my butt. ” The next excerpts
from an article by value investor Mohnish Pabrai illustrates Buffett ’ s
periods of inactivity and shows why many more people would benefi t
more (and lose less) by simply sitting on their butts. It ’ s an insightful
examination of the benefi ts derived from simply sitting still.“Buffett Succeeds at Nothing”
Why should portfolio managers sit and do nothing? And why would
that be good for them? Well, let’s start with the story of D.E. Shaw &
Co. Founded in 1988, Shaw was staffed by some of the brightest math-
ematicians, computer scientists, and bond trading experts on the
planet. Jeff Bezos worked at Shaw before embarking on his Amazon.
com journey. These folks found that there was a lot of money to be
made with risk-free arbitrage in the bond markets with some highly
sophisticated bond arbitrage trading algorithms.CH008.indd 154CH008.indd 154 9/2/09 11:48:54 AM9/2/09 11:48:54 AM