The Business of Value Investing.pdf

Invest Significantly at the Maximum Point of Pessimism 185

has risen shall fall, and what has fallen shall soon rise again. Surely

not every stock that deteriorates will again rise — it ’ s up to you to

provide the thorough analysis and determine whether a superior

investment opportunity exists.

It ’ s not easy going at it alone and buying securities when every-

one is selling and companies are experiencing setbacks. Investing

during times when the market mood is at its worst requires inves-

tors to be comfortable with the fact that prices could go lower still.

Many investors have a misguided fascination with trying to buy at

the bottom and sell at the top. That idea rests on the belief that

investors can time markets perfectly, suggesting that the quoted

price of the stock is the central object of focus. Value - oriented

investors, however, rely on the stock price only in as much as it

serves to determine whether the business is undervalued. And as

is often the case, value investors usually buy before the bottom is

reached and sell before the absolute top. But what counts is what

happens in between: buying low even though the price may go

lower and then selling high even though the price may go higher.

In the end, the result is a gain on investment. Also, armed with

the knowledge that the security is undervalued, investors have the

added benefi t of buying more as the price declines and thus get-

ting an even greater bargain. The result of the value approach is

ultimately a win - win for value investors. They buy cheap regardless

of whether the purchase is being made at the bottom. Should the

price decline further still, value investors see this as an even better

opportunity to buy more for less.

The late Benjamin Graham and David Dodd summed up their

investment philosophy brilliantly in a passage from their seminal

work Security Analysis. During Graham ’ s day, the concept of value

investing was oxymoronic in the sense that if you weren ’ t invest-

ing with the goal of buying assets for less than they ’ re worth, then

you were speculating. The term “ value investing ” was not even

used 60 years ago during Graham ’ s time, but what Graham and

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