The Business of Value Investing.pdf

54 The Business of Value Investing

1987 stock market look like a dress rehearsal. On September 15, the

Dow dropped over 500 points, or 4.4 percent, on news that insur-

ance titan AIG was facing collapse. On Wednesday, the Dow declined

another 450 points, or 4.1 percent. The fi nal two days of the week, the

Dow gained nearly 800 points, or 8 percent, to leave the stock market

average basically unchanged over the week. Had you let the price vol-

atility instruct your decisions, you were selling during the drops out of

fear and buying again at the end of the week when the mood became

more optimistic. Without even realizing it, you were selling low and

buying high.

In fact, most equity portfolios were worth more at the end of

the week as the two - day surge in the market recaptured the declines

earlier in the week and then some.

Investors would benefi t tremendously if they would remember

to echo the sentiments of Bill Ruane and Richard Cuniff during

moments of great market turmoil. Before succumbing to your emo-

tions and rushing to sell at moments of pessimism (or buying at

moments of jubilant optimism), step back and ask yourself whether

the movement in the stock price refl ects the intrinsic or true value

of the business. Absent some discovery of fraud or any other illegal

activity, a quick decline in stock price should not persuade you to

head for the exit. Instead, you need to look at the business. If your

fundamental thesis remains intact, then do nothing or buy more of

a good thing for less.

The Starting Point Matters

Value investors often are credited with espousing the buy - and -

hold approach to investing. Warren Buffett is famous for say-

ing “ My holding period is forever. ” A buy - and - hold technique

enables the greatest attribute of investing to play out: compound-

ing. If you are constantly buying and selling stocks, the frictional

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