The Business of Value Investing.pdf

Invest Significantly at the Maximum Point of Pessimism 187

It is very easy for investors to take the lessons and philosophies

of value investors and conclude that the approach is rigid in its

nature. Four common myths include:

1. Value investors only invest in bear markets.


2. Only low price to earnings (P/E) ratio stocks qualify as bargain
   investments.


3. High - growth businesses cannot be value investments.


4. Value investors never sell stocks short.

These myths are discussed in the next sections.

Myth: Value Investors Only Invest in Bear Markets

Value investors love bear markets only inasmuch as they provide

more fertile hunting for bargain securities. Value investors invest in

any type of market as long as the ability to buy an asset for less than

its intrinsic worth exists with a comfortable margin of safety. Bear

markets offer greater opportunity to fi nd such investments, but not

the only opportunity.

Myth: Only Low P/E Stocks Qualify as Bargains

Value investing is, by its very nature, a very fl exible approach. That ’ s

not to say that the four aforementioned “ myths ” don ’ t appeal to

value investors because in fact they do. Many value investors love

to search for low P/E stocks, but while a business trading at three

times earnings merits a very close look, it certainly doesn ’ t mean the

business is a screaming bargain. If the business is able to continue

increasing profi tability, then the opportunity becomes very intrigu-

ing. Otherwise, the P/E of 3 this year can easily become a P/E of 25

next year. What matters most in investing is the future performance

of the company over a reasonable period of time. In fact, many bar-

gain investments arise from opportunities in which the business has

suffered a temporary net loss, thus leaving it with no P/E multiple.

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