More Than One Way to Find Value 197A Reminder: Process First, Outcome Second
The effectiveness of any fundamental analysis hinges on the quality
of the analysis. As such, value investing emphasizes the process fi rst
and the outcome second. Indeed, the outcome ultimately matters:
If you continue to do thorough analysis on potential investments
and all outcomes lead to poor results, then there is a fl aw of some
sort in the analysis. The point of focusing fi rst on the process is that
it ensures that the work is done in the most rational manner. Value
investors are fi rst concerned with whether the particular business
is trading at a discount to its intrinsic value, not with the possibility
of future gain. The purpose of putting the process before the out-
come is to seek safety fi rst and capital appreciation second. During
up markets, it seems that many businesses can be bought at fair or
overvalued prices and still continue to deliver investment gains. Of
course, this outcome is due solely to the general nature of the mar-
ket and has nothing to do with the underlying fundamentals of the
business. Then again, the value approach would be unnecessary if
markets continuously went up.
Because markets fl uctuate and an investor ’ s primary focus
should rest on capital preservation, focus has to rest on the proc-
ess. Tiger Woods doesn ’ t go out and hit 500 golf balls on the
driving range. He goes out and hits 500 golf balls with a specifi c
target and ball fl ight in mind for each shot. Tiger ’ s concentra-
tion is not on practicing but on practicing as perfectly as he can.
This too is the goal of value investors: to ensure their data and
reasoning behind their research and analysis is satisfactory and to
use that analysis to determine whether the investment should be
made.
Readers will maximize the benefi ts of the case studies by
approaching them in this “ process fi rst, outcome second ” man-
ner. This distinction cannot be emphasized enough as Sunrise
Senior Living in particular would no longer pass the rigorous test
of investment suitability. Each analysis is annotated to tie it to anCH010.indd 197CH010.indd 197 9/2/09 11:50:53 AM9/2/09 11:50:53 AM