The Business of Value Investing.pdf

188 The Business of Value Investing

The market often punishes the stock prices of these businesses to

the point that they may qualify as the best bargain opportunities.

When discussing P/E ratio in the context of whether the fi gure

is too high, fair, or too low, the discussion becomes very arbitrary.

While many investors might agree on the fact that paying 75 times

earnings for any business is grossly high, what qualifi es as an appro-

priate P/E multiple for the value investor is far from specifi c. The

P/E multiple is important but not so much on its own and more

so with regard to the overall fundamental strength of the business.

A company like Berkshire Hathaway that trades for 17 times earn-

ings in 2009 cannot be considered expensive on a P/E basis, once

the quality and operating performance of the company over the

past 40 years are taken into account. Similarly, electronics giant

Best Buy cannot automatically be assumed to be cheap trading at

a P/E of 10 in 2009 in relation to a P/E of 14 for the S & P ’ s 500

Index. The goal of the value investor is to determine whether low

valuations are a temporary or a permanent issue. If temporary, then

the work begins in determining if the current price justifi es making

the investment.

Myth: High - Growth Businesses Cannot Be Value Investments

Again, the mistake of this assumption is that there exists a different

set of analytical assumptions and investment underpinnings that

is used to classify a business as a value or growth security. In fact,

both aspects of a business are no more than two sides of the same

coin: growth creates value. Indeed, the best investments that value

investors can hope to make are in those securities that hold the

greatest promise for long - term future growth in revenues and profi ts.

What distinguishes value investors, however, is that they have a price

limit that they will pay for this future growth. The concept of “ price

is what you pay, but value is what you get ” is at the cornerstone of a

value investing approach.

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