The Business of Value Investing.pdf

52 The Business of Value Investing

writer for investing sites, I recently got an e - mail from an investor

who was concerned about the precipitous decline in one of his

investments. This e - mail stood out because of the timing. The man

writes about a particular security and remarks, “ The stock... is

being hammered... I am very fearful and thinking about selling

it tomorrow. ” This note came on the evening after a near 500 - point

drop in the Dow.

Such fears run rampant during periods of market turmoil. It is

very easy to surrender to your emotions and exit in a state of panic.

The human brain is not designed to tolerate or ignore pain, and

fi nancial loss is arguably one of the most painful experiences a

human can face. Emotional pain can surpass physical pain in terms

of severity and longevity. This behavior often is responsible for most

capital losses many investors, both individual and professional, real-

ize. Selling at a loss is not the problem; as investors, we will all make

mistakes and must realize that, at times, the most prudent course of

action is to cut our losses and move on. The key point is to differ-

entiate between deterioration in the economics of the business and

a drop in share price. Several days of stock price declines usually

have nothing to do with the quality of the business but more with

the general mood of the market. Usually more than a week is nec-

essary to determine if the underlying business has lost some of its

economic advantages or earning power.

Price Paid Determines Value Received

Before investing, it is vital to understand the function the markets

play. Stock markets are important only because they allow you to

buy and sell ownership interests in businesses. Everything else is

just noise. I like to say that the best investors are pretend investors:

those who can pretend that the stock market does not exist.

One of the best advantages of a stock market, liquidity, also hap-

pens to be one of the worst. Being able to buy and sell stock at the

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