Practicing the Art of Patience 169trades for, say, 10 times earnings and grows its profi ts by 15 percent
or more a year, along with similar returns on equity.
It cannot be stressed enough that discovering a business with
future growth prospects selling at a reasonable price is only the
fi rst step in the investment process. Never, ever invest simply
because such conditions exist. But if you do fi nd them, you can go
on to determine whether the business can sustain this growth for a
period of years and whether this growth will require high levels of
capital expenditures. As the company grows, so will intrinsic value
and, ultimately, so will the market value. Johnson & Johnson is a
wonderful example of this second type of business. A look at the
most recent report of the Value Line Investment Survey shows that
since 1992, Johnson & Johnson has grown profi ts by over 10 per-
cent per annum. 3 Further, the dividends declared per share have
also increased every single year since then. Book value per share
has demonstrated a similar growth in value over the same time.
However, what the Value Line report doesn ’ t show is that Johnson
& Johnson has grown both sales and earnings by greater than 10
percent for over 100 years. This type of tested stability coupled
with the strong future prospects for the company justify a reduced
margin of safety and still satisfy the conditions of an undervalued
investment. As intrinsic value continues to grow each year, the orig-
inal purchase price grows to offer a greater discount to intrinsic
value. This is indeed evidenced by the Value Line report. Shares in
Johnson & Johnson could have been acquired at an average of $ 30
each in 1997 with earnings of $ 1.21 per share. 4 At the end of 2008,
the share price was near $ 60 with earnings of approximately $ 5.50
after a two - for - one stock split in 2001. Thus, the investor in 1997
was today earning $ 5.50 a share on a split adjusted purchase price
of $ 15. On top of this, a dividend payment of $ 1.80 was received in
2008.
Buffett ’ s renowned investment track record is a result of a
handful of truly terrifi c investments that fi t the mold of GARP - styleCH008.indd 169CH008.indd 169 9/2/09 11:48:59 AM9/2/09 11:48:59 AM