160 The Business of Value Investingon the side. Value investing has nothing to do with such anomalies.
When stock prices are overvalued, as was clearly the case during
the height of the Internet boom of the 1990s, the rational decision
is to be on the sidelines analyzing the securities. Value investing is
an investment framework that focuses on the process, not the out-
come. With the right process, the outcome usually will be satisfac-
tory investment returns.
Market liquidity has its place, however. Aside from enabling
investors to access capital in times of need, liquid markets can
serve investors by letting them sell that which is cheap to buy some-
thing cheaper. Realize that this is just the value investing process at
work: scouring the market for the best available bargains. But when
you are selling a 50 - cent dollar to buy a 30 - cent dollar, you are uti-
lizing the markets for what they are: arenas to acquire ownership
stakes in businesses at the cheapest possible price. Once you make
an investment, the stock price will change daily based on the whims
of investors on any given day. If your analysis was sound, then any
short - term decline in price is merely price volatility. Before rushing
to sell a stock that ’ s declined 25 percent weeks after a purchase, ask
this question: What has happened to the long - term fundamentals
of the businesses over the past two weeks to make the entire busi-
ness worth 25 percent less? For good businesses acquired at sensi-
ble prices, the answer is nothing at all. Occasionally, you may come
to discover that you neglected some important information that,
when incorporated back into your analysis, leads you to reduce
your estimate of intrinsic value. In such instances, you will have to
determine the appropriate course of action. Selling out is tempting,
and the liquid markets make it easy to do so. But by doing so, you
turn volatility into a permanent loss of capital.
For an effective comparison, consider today ’ s real estate market.
In 2007 and 2008, home values were declining across the board,
reaching double - digit percentages in California and Florida. But
whether they realize it or not, homeowners actually benefi t fromCH008.indd 160CH008.indd 160 9/2/09 11:48:58 AM9/2/09 11:48:58 AM