The Business of Value Investing.pdf

226 The Business of Value Investing

The obvious preference is to have intrinsic value grow; the lat-

ter situation, which is combination of a declining market price and

intrinsic value, is fraught with speculative characteristics. Trying to

play a seesaw game with declining market prices and intrinsic values

can lead to permanent losses of capital if the loss in intrinsic value

turns out to be something more than a temporary impediment.

Value investors, of course, love to explore in industries currently

suffering from lack of interest in the market due to a temporary set

of problems. Indeed, when this is the case, investors must demand

a high margin of safety to compensate for any further declines that

are very likely to occur as the business adjusts itself. Just as easily as

they can overshoot, it ’ s very possible that markets may undershoot

and remain depressed for a prolonged period. Witness the charac-

teristics of the bear market that took fi rm hold in 2008 and con-

tinued into 2009. By November 2008, the Dow touched a multiyear

low of 7,500 before rising back above 9,000 in January 2009. Less

than six weeks later, the Dow was back to 6,700, a level that erased

any market gains achieved during the late - 1990s bubble and the

2003 to 2007 rally.^1

In any event, companies that continue to increase intrinsic value

reward the investor doubly by an accompanying rise in the stock price

and a higher price to earnings (P/E) ratio multiple being assigned

to the business. There is no rule in investing that a growing intrin-

sic value will lead immediately to a growing market value. Indeed, in

periods of market pessimism, market values can continue to decline

even though intrinsic values may not. That ’ s why value investors heed

Ben Graham ’ s assertion: In the “ short run, the stock market is a vot-

ing machine; in the long run, it is a weighing machine. ” Ultimately,

a business that grows its profi ts and net worth will be followed by a

stock price that refl ects those strong fundamentals. And often, when

this happens, the market assigns a higher multiple on that perform-

ance. Thus, all of a sudden a company that earns $ 2 per share and

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