182 The Business of Value Investingdelivered a 14.5 percent annual rate of return; a $ 10,000 invest-
ment, assuming all dividends were reinvested, would have been
worth $ 2 million. All great investors always have had the courage to
make signifi cant investments in a business during maximum points
of pessimism. Warren Buffett did just that with American Express
in the 1960s when the company was suffering from the salad oil
scandal, a major corporate scandal in 1963 that involved American
Express extending millions in loans to Allied Crude Vegetable Oil
backed by Allied ’ s salad oil inventory. When it was discovered that
the collateral was containers of water and not oil, American Express
shares declined over 50 percent as a result.
With many investing luminaries exhibiting similar traits in their
investing activities, it ’ s worthwhile to go deeper into their approach
to see why it pays to invest during the direst of situations. Examining
these activities by understanding the opposite approach — invest-
ing in businesses at the maximum point of optimism — offers great
value. Since the market punishes the stock prices of those busi-
nesses to which it assigns maximum pessimism, then it would make
sense that the most highly valued business in the world are the ones
that the market views with maximum optimism.
Table 9.1 , taken from an article written by Mohnish Pabrai,
“ The Danger in Buying the Biggest, ” offers great insight as to why it
is often harmful to investment returns to invest in the most valuable
businesses.
Pabrai examined this list and determined that if you had started
with $ 10,000 invested in the most valuable businesses in 1987, when
Fortune released its list, and every subsequent year reinvested the
funds in what was at the time the most valuable business, in 2002,
you ’ d have an annualized gain of 3.3 percent. During the same
period, the Standard & Poor ’ s (S & P) index delivered about a 10
percent annualized return.
You can clearly see from the results that buying the darlings
of Wall Street is not as intelligent as it might initially appear.CH009.indd 182CH009.indd 182 9/2/09 11:49:57 AM9/2/09 11:49:57 AM