The Business of Value Investing.pdf

xvii

Introduction

This is a book about how to think about investing intelligently.

Due to the unrivaled success of investor Warren Buffett, value

investing has become the only intelligent manner in which to

approach investing. The philosophies of value investing emphasize

an approach that focuses on preservation of capital, risk aversion,

discipline, and avoidance of crowd psychology. Contrary to the aca-

demic belief that greater return can only be achieved by taking on

greater risk, value investing confi rms that returns can be maximized

by taking on very little relative risk.

Reciting the value investing rhetoric is one thing, but doing

it is something else entirely. Value investor Seth Klarman of the

Baupost Group suggests that the philosophies of value investing

may very well be genetically determined: “ When you fi rst learn of

the value approach, it either resonates with you or it doesn ’ t. ”^1 My

interpretation of Klarman ’ s assessment is that the foundations of

value investing — patience, discipline, and risk aversion — aren ’ t sub-

jects that are taught in school. You either possess them or you don ’ t.

Business schools can teach how to analyze a business and how to

value a business, but they can ’ t teach you patience or discipline

to say no to a popular security. More so, business schools can ’ t teach

you to have the courage to make a signifi cant investment during

the maximum point of pessimism. Education is invaluable and cer-

tainly aids in investment success, but it ’ s not the sole determinant

of investing acumen.

The aim of this book is to defi ne and examine the essential frame-

work that encompasses the foundation of value investing. Like a golf

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