3

CHAPTER

The Six Elements of

Intelligent Investing

One of the many unique and advantageous aspects of value

investing is that the larger the discount from intrinsic value, the

greater the margin of safety and the greater the potential return

when the stock price moves back to intrinsic value. Contrary to

the view of modern portfolio theorists that increased returns can

only be achieved by taking greater levels of risk, value investing is

predicated on the notion that increased returns are associated with

a greater margin of safety, i.e., lower risk.

— The Partners of Tweedy Browne

Imagine for a moment that you ’ re a real estate investor and that

a series of tropical storms has caused beachfront houses in Hawaii

that were once selling for $ 2 million to now sell for $ 400,000 apiece.

How many would you buy?

After you determined that the construction was solid and that

the land doesn ’ t sit on a toxic dump, you probably would jump in

and buy as many as you could afford. While the threat of another

tropical storm exists, it ’ s also expected and factored into the cost

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