16 The Business of Value Investingwhat you ’ re selling and selling what you ’ re buying. When someone
is realizing a gain, someone is taking a loss somewhere down the
line. For every winner there has to be a loser somewhere in the
chain. When Tiger Woods wins a golf tournament, he does so at the
expense of the entire fi eld.Stocks Prices Aren ’ t Always Rational
When it comes to stocks, this zero - sum characteristic might not hap-
pen immediately. Consider the Internet boom. For years, it seemed
that stock prices would only go up. Someone could buy shares in
a dot - com, sell them after they doubled (or even tripled) in price,
and the new buyer would experience the same pleasure. When the
euphoria ended, the losses were just as severe on the way down as
the joy was on the way up. Buy shares at a $ 100 and sell them at
$ 50. The new buyer would see the purchase price halved, and on
the cycle went. While some people made out with fortunes, the pro-
portion is very small when compared with the overall participant
pool. Make no mistake: There is a winner and a loser on every side
of the trade.
However, there are scores of successful long - term investors
who have found themselves more on the winning side of the trans-
action. Besides Buffett, these include guys like Bill Miller at Legg
Mason who beat the Standard & Poor ’ s (S & P) index for 15 consec-
utive years; Bruce Berkowitz at the Fairholme Funds; and Mason
Hawkins at the Longleaf Funds. Their long - term success rate is a
result of more than just mere luck. In 1982, Warren Buffett wrote
a wonderful essay titled “ The Super Investors of Graham and
Doddsville, ” where he defended the success of a value investing
approach over long periods of time. Rebuttals were posited that
Buffett ’ s performance was a six sigma type of event (an event so
rare that it could probabilistically occur only once every 2.5 million
days). Yet all the recent market slumps, including the 1987 stockCH002.indd 16CH002.indd 16 9/2/09 11:06:24 AM9/2/09 11:06:24 AM