The Intelligent Investor - The Definitive Book On Value Investing

• each 3Com share was entitled to receive 1.525 shares of Palm


• each share of Palm closed at $95.06


• 1.525
  $95.06 = $144.97

That’s what each 3Com share was worth based on its stake in

Palm alone. Thus, at $81.81, traders were saying that all of 3Com’s

other businesses combined were worth a negative $63.16 per share,

or a total of minus $22 billion!Rarely in history has any stock been

priced more stupidly.^9

But there was a catch: Just as 3Com wasn’t really worth minus

$22 billion, Palm wasn’t really worth over 1,350 times earnings. By

the end of 2002, both stocks were hurting in the high-tech recession,

but it was Palm’s shareholders who really got smacked—because they

abandoned all common sense when they bought in the first place:

480 Commentary on Chapter 18

Palm’s Down

$83

$2,576

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

3/2/006/2/009/2/0012/2/003/2/016/2/019/2/

01

12/2/013/2/026/2/029/2/0212/2/02

Dates

Value of $10,000 investment

Palm

3Com

FIGURE 18-3

(^9) For a more advanced look at this bizarre event, see Owen A. Lamont and
Richard H. Thaler, “Can the Market Add and Subtract?” National Bureau of Eco-
nomic Research working paper no. 8302, at http://www.nber.org/papers/w8302.
Source: http://www.morningstar.com