The Business of Value Investing.pdf

Establish a Sound Investment Philosophy 49

advanced intellectual capability but hinges on understanding the

value investing approach. The philosophies of the value investing

approach either will take hold with an investor or they will not.

It ’ s that simple. This doesn ’ t mean that you must be born with

a value investing orientation; it does mean that once you under-

stand the philosophies of value investing, it immediately clicks in

your brain or it doesn ’ t.

And the philosophies underlying value investing are straight-

forward. Value investors focus on capital preservation fi rst and

capital appreciation second. The main focus of value investing is

avoiding permanent losses of capital. Value investors understand

that buying a stock at $ 20 per share and holding it until it declines

to $ 10 is not a permanent loss of capital but a mere move in the

stock price. Value investors distinguish between risk — the proba-

bility of a permanent capital loss — and volatility — the mere move-

ment in stock price. They also understand that the price paid for

an investment ultimately determines the future investment results.

But value investors don ’ t worry over whether to pay $ 15 or $ 15.50

for a share of stock; instead they focus on whether $ 1 of assets can

be bought for substantially less. Also, value investors seek to elimi-

nate as much risk as possible from investing by seeking out only

those investments selling at valuations that create a very comfort-

able margin of safety.

The value investing approach is an all - or - none proposition.

You don ’ t choose to be risk averse yet pursue the popular invest-

ments of the day without any regard to margin of safety. Without

the foundation of a sound investment philosophy, an attempt at

investing based on the risk - averse tenants of value investing is lost.

Preservation of Capital Is the Name of the Game

Value investing, by its nature, is a highly contrarian approach. The

aim of every investor is to sell an asset at a higher price than that

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