180 The Business of Value Investingfor many. The instant reaction when it comes to stocks is simply to
sell off the loser so the “ loss ” is no longer visible. Successful inves-
tors understand this erratic behavior and seek to exploit it. Back in
1973, after nearly two decades of stock price appreciation, the mar-
kets fell hard. Most people fl ed the equity markets, thus missing out
on one of the century ’ s best buying opportunities. A similar situa-
tion occurred from late 2002 into 2003, after the tech bubble: Dirty
laundry was washed out and securities were cheap again, but every-
one was afraid — even though the gap between value and price was
wider than it had been in a decade. Investors who are overcome by
emotion always disregard market fundamentals, buying when they
should be selling and vice versa.
A brilliant illustration of this madness - of - crowds syndrome
occurred in 1987 as U.S. equities underwent an enormous surge in
share prices between January and August only to collapse by 22.6
percent on October 19. Echoing the comments by William Ruane
and Richard Cuniff that were given in Chapter 4 , it ’ s pure folly to
believe that the value of American businesses were worth 44 percent
more in eight months or 23 percent less in a single day.
The comments by Ruane and Cuniff are very insightful for both
their simplicity and their convincing logic. The comment clearly
illustrates their businesslike approach to investing. Great businesses
spend many years — in some cases, decades — growing and becoming
more profi table. If this is the case, are investors behaving rationally
when they value a business 23 percent less in a single day when it
can take years for a business to be worth 23 percent more? It was
this type of thinking that sent value investors buying on October 20,- One of the worst days in the stock market just happened to
be one of the best buying opportunities in the stock market.
Value investors thrive when markets are consumed with fear.
A fearful market environment leads to an ineffi cient market. When
markets are ineffi cient, the discrepancy between market value
and true value is as wide as ever. Instead of fi nding 50 - or 60 - cent
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