The Business of Value Investing.pdf

Avoiding Common Stumbling Blocks 225

be scrutinized before blindly relying on equity, or book value. Investing

can yield some astronomical dividends to those who practice it success-

fully. Such success demands intensive effort and analysis and requires

the investors arm themselves with a healthy dose of skepticism.

Growth and Value: Two Sides of the Same Coin

Value investors are really no different from growth investors. All

investors, if they are truly investing, are attempting to seek out

value — buying one dollar of assets for less than one dollar. The

size of the markets today makes it so that most great investments

are those that can grow over time. That is, the availability of other

highly prized value investment situations, such as arbitrage invest-

ments, is extremely limited compared to 50 years ago. So the best

investment for a value investor is what is commonly referred to as a

growth at a reasonable price (GARP) business.

The most visible metric in determining whether an investment

offers long - term value is its discount to intrinsic value. However, an

undervalued security is not only one that must sell at 50 cents on the

dollar if your research and analysis determine that the business has a rea-

sonable growth opportunity ahead of it. In other words, a business that is

bought at a modest discount or even no discount to intrinsic value,

but with the expectation that the intrinsic value will grow substantially

over a period of years, may be considered an undervalued invest-

ment. The future growth in intrinsic value implies that a discount

to intrinsic value does in fact exist. As intrinsic value grows in subse-

quent years, then the business, at today ’ s price, is indeed an underval-

ued investment opportunity and should be analyzed accordingly.

There are only two ways that a company ’ s market price can

become a greater discount from intrinsic value:

1. The intrinsic value grows.


2. The market price declines without the intrinsic value declin-
   ing at a greater rate.

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