222 The Business of Value Investingasset classes assume when participating in the capital markets. But
these business risks are exactly the reason the philosophies of value
investing have become such a relied - on foundation for long - term
investment success.
The best value investors concentrate their efforts on avoiding
avoidable mistakes, such as investing in a business they don ’ t under-
stand because it looks cheap on the balance sheet or income state-
ment. Diligent investors are keen on learning from both successful
and unsuccessful investments. Even more important, capable inves-
tors expend time and effort in avoiding making the same mistake
twice. Value investors also strive to avoid falling in love with crowd
stocks just because Wall Street continues to favor them. Value inves-
tors love businesses that are undervalued based on analytical meas-
ures of business valuation.
However, value investors will never be able to avoid buying
before the bottom and selling before the top. Such buy - and - sell
activities often can be misinterpreted as mistakes, but that interpre-
tation is widely misguided and based on false assumptions. This is
because often, many great investment opportunities are discovered
in businesses in the midst of a company turnaround or a dip in
the business cycle. Value investors aren ’ t concerned with catching
bottoms; they only are concerned with buying a dollar ’ s worth of
value for substantially less. Once the price of the security approxi-
mates fair value, value investors move on to other undervalued
opportunities without any regard to whether the price is likely to
rise further. A process - fi rst, outcome - second approach to investing
minimizes the likelihood of avoidable and expensive investment
blunders.
Common traps include:Investing for capital appreciation when instead you should be
investing for capital preservation. Investing in this mannerCH011.indd 222CH011.indd 222 9/2/09 11:51:51 AM9/2/09 11:51:51 AM