224 The Business of Value Investing- The multiple that investors are willing to pay for the
underlying earning and growth potential of the business
increases. - The gap between market value and intrinsic value
narrows.
Speculators, however, buy and sell based on beliefs as to whether
the stock price will rise or fall. Those beliefs are not anchored on
fundamental characteristics of the business but on the behavior of
others. Speculators treat stocks as tickers with little regard for the
underlying business. They base their decisions on the popular sen-
timent of the day. Speculation involves going along with the crowd,
not against it. There ’ s great attraction in speculation as it requires
no rigorous analysis of the business.
Value investors, on the contrary, pay very close attention to business
fundamentals and fi nancial reality when making investment decisions.
They exert painstaking time and effort in getting to know specifi c busi-
nesses, industries, and various other sources of data in order to have
the greatest possible edge in making their investment selections.
This chapter examines and supports the view that the differ-
ence between value investing and growth investing is in name only.
A true investor, in the mold of Ben Graham, realizes that growth is
an integral part of value creation. The litmus test is that for value
investors, there is a limit as to how much they are willing to pay for
that future growth, while speculators will pay up as long as they are
in the company of the masses.
What matters most in investing is not to take what may seem obvi-
ous at face value. The attempt to separate growth from value is a case
in point. Also, it would be easy to assume that because value investors
like to buy a business for less than it is worth, then book value should
be the yardstick by which to measure this approach. While investing
in businesses at less than book value can be a very successful route, it ’ s
hardly a consistent approach. Book value is an accounting number pro-
vided on the balance sheet, and the quality of the balance sheet mustCH011.indd 224CH011.indd 224 9/2/09 11:51:52 AM9/2/09 11:51:52 AM