The Business of Value Investing.pdf

168 The Business of Value Investing

difference is that value investors have a limit as to how much they

will pay for growth. The greatest investment that a value inves-

tor can fi nd often is referred to as a growth at a reasonable price

(GARP) business. The logic is simple: If you buy a security today

and that business continues to earn greater profi tability and free

cash fl ow, the intrinsic value also will grow. And as that intrinsic

value grows, the investment becomes more and more undervalued

from the price paid.

Ben Graham, the man commonly known as the architect of value

investing, focused on fi nding businesses selling at less than the net

liquidating value of their assets. Back during Graham ’ s time, the

proverbial “ 50 - cent dollar ” was more abundant, as the stock markets

had fewer participants and the information fl ow was not as rapid

as it is today. I think most investors will agree that today ’ s markets

are much more effi cient when compared to the markets that Ben

Graham and even Warren Buffett (during his early years) were

involved in many decades ago.

But Mr. Market is not perfect, and the markets occasionally will

confuse true value with market value. During the Internet boom,

for example, market valuations far exceeded intrinsic valuations for

many companies. Similarly, after the bear markets of the early 1970s,

plenty of stocks were selling for cheap and discounting any future

earnings growth. By defi nition, investing is simply the acting of seek-

ing value by attempting to buy something for less than it is worth.

You fi nd such investments in one of two forms. The fi rst, discussed

earlier, are those businesses that would sell for more than the stated

market price in a private transaction. The second, and more pre-

ferred form, is buying cheap growth.

Believe it or not, most “ value investors ” prefer the latter over

the former. Value is created as a company continues to grow its busi-

ness and, consequently, its profi ts. The best investment is one that

promises steady growth and is selling at a discount to that growth.

For instance, a likely GARP investment would be a business that

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