The Business of Value Investing.pdf

Practicing the Art of Patience 171

careful detail and analysis should be given to the annual report,

which lays out the results of the year and the future prospects of the

company. In addition, investors should be well aware of the indus-

try and competitive forces that might affect the investment. Doing

all of this analysis will signifi cantly increase the likelihood that the

investment is disposed of when it reaches intrinsic value, which

should result in a gain if the security was purchased at signifi cantly

below the intrinsic value. If not, then again, investors face a good

possibility that the investment will be sold at a minimal loss.

Conservative Tests of Safety a Must

Most readers of this book (including the author) are not old

enough to recall the pain of the Great Depression, and some

may not even remember the bear market of the early 1970s.

Unfortunately, many were exposed to the severe market decline

in 2008 as a result of decades of excessive borrowing in the United

States.^5 The year 2008 managed to eclipse the 1973 bear in terms of

total loss for a year: 38.5 percent for the S&P 500 index. Not since

1931, at the height of the Great Depression, has a market lost so

much in a single year.^6

The severe economic recession that took hold in 2008 high-

lights the need for conservative tests for safety when analyzing

investments. Going a step further, 2008 illustrated the need for

investors to analyze companies under the severest of operating

conditions. No longer was it satisfactory to assess future intrinsic

values based on earning results of the past several years. In time,

many companies likely will be earning record profi ts as severe eco-

nomic conditions force out weaker, less effi cient competitors. The

market collapse of 2008 simply reinforces the absolute requirement

for a margin of safety that can pass the test during prolonged peri-

ods of economic contraction. In the case of DryShips, it was abso-

lutely necessary to reevaluate the carrying costs of the assets in light

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