The Business of Value Investing.pdf

234 The Business of Value Investing

However, the book value issue is a paradoxical one, because it

can reward those investors who are willing to be patient. For exam-

ple, many industrial businesses, as a result of the severe economic

recession that took hold in 2008, experienced such severe price

declines during the end of that year that many were trading at sig-

nifi cant discounts to book value. And unlike fi nancial companies,

whose primary assets are pieces of paper, industrial companies

own plants, machinery, and tools. In some cases, these plants can

be quite expensive to rebuild. Even better, regulatory hurdles may

make it nearly impossible or not worth the time to try to build a

similar plant. In such cases, patient investors can reap magnifi cent

rewards from investing in these businesses.

Published 70 years ago, The Theory of Investment Value , by John

Burr Williams, is a book that should be right up there with Ben

Graham ’ s Security Analysis in terms of quality and timeless value. 6

The author was certainly writing with the Great Depression in

mind, meaning that the book ’ s ideas offer tremendous value and

insight for today ’ s investors. Although much of the lengthy work is

fi lled with dry mathematical formulas, Williams expressly states that

one of the most attractive opportunities to buy equities is when the

assets of the business can be bought below true replacement cost.

Williams ’ s theory is of enormous value for two good reasons:

1. If you are really buying a company for below its true replace-
   ment costs, it ’ s very unlikely that you will suffer a perma-
   nent loss of capital because the assets can be sold — even at a
   discount — and still yield a profit to the common stockholder.


2. Other businesses looking to expand in times of turmoil will
   find great value in acquiring assets for below replacement
   value via buying up other companies.

As this book went to press, a wonderful example of such an

investment opportunity appeared to exist with Horsehead Holding

Company, a producer of zinc - based products. A quick look at the

balance sheet (Table 11.3 ) reveals that in March 2009, shares of

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