The Business of Value Investing.pdf

192 The Business of Value Investing

Four things that are true about value investors is that:

1. They only invest in business they understand.


2. They get excited when equity prices are declining.


3. They first think about the probability of capital loss before
   thinking about the capital gain.


4. They tend to find great bargains in unloved areas of the market.

These characteristics signify a complete resonance with the prin-

ciples of value investing. Unlike the four myths, these four character-

istics are not fl exible. Just as keeping your head down is essential to a

consistent and effective golf swing, so are these four characteristics.

All or Nothing

If an investor does not truly understand the business under consid-

eration, the approach is speculative regardless of the bargain offered.

Not knowing the strengths and weaknesses of the business, the indus-

try the business operates in, or how to effectively value the business

will eliminate any possibility of intelligently and analytically buying the

business at an undervalued price and selling it later at a higher price.

Lower prices excite value investors because they understand that

when general equity prices are declining, many great businesses

will also suffer unwarranted price declines. The abundance of low

equity prices provides the foundation for future great returns.

Risk aversion is the name of the game for value investors.

Preserving investment capital is the cornerstone of an absolute

return investment approach. Unlike relative return investing, where

investment performance tracks the broad market index, absolute -

return - oriented investors focus on the skill and ability of the

investment manager to outperform the market. A focus on capital

preservation, the number - one goal for value investors, recognizes

the fact that value investing focuses on bear markets and how to

best weather the storm.

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