184 The Business of Value InvestingAuction houses are proof positive of this theory. By attracting
more bidders, auction houses are attempting to extract the best
possible price they can. Many distressed assets are sold via auction
in an attempt to maximize the price attained for the asset. Realizing
this, value investors understand that the best possible time to buy
securities is when very few buyers are present. The absence of
demand creates a very high probability of purchasing assets for
substantially less than replacement cost or intrinsic value. By invest-
ing in a business during the rosiest of times, investors almost guar-
antee that the price paid will be at a premium to the underlying
intrinsic value, thus creating an investment without any meaningful
margin of safety. As a result, investors place their capital at greater
risk for loss should the business suffer a slight mishap. During bull
markets, this investment approach will surely be confused with an
intelligent approach, as a rising tide lifts all boats. Then again, if
all we had were bull markets, a value investing approach would not
be needed, since all the attributes of investing — exercising due dili-
gence, investing with a margin of safety, looking for companies with
excellent economics and honest and able management — are for
the purpose of weathering the bear market storms and emerging
with your capital intact.
As renowned investor Shelby Davis astutely observed: “ A down
market lets you buy more shares in great companies at favorable
prices. If you know what you ’ re doing, you ’ ll make most of your
money from these periods, you just won ’ t realize it until much
later. ”^6 Bear markets are characterized by widespread disdain
toward equities, causing many buyers to exit the markets at the fi rst
sign of trouble. This disdain is fueled by endless negative newspaper
headlines and television programs that further fuel investors ’ dis-
regard for equities. Forgetting that media outlets are talking about
the current state of affairs while the markets focus on the future
state of affairs, investors abandon equities at the height of bad
news, thereby selling low and buying high. As the saying goes, whatCH009.indd 184CH009.indd 184 9/2/09 11:49:58 AM9/2/09 11:49:58 AM