An example of what is being explained is the case of BMW (BAMXF). BMW is a solid company that in the 1990s, due to the New Economy boom, was largely depreciated. At that time, new shares were commanding the market, and in BMW things were not fruitful. It did not have the growth glamorous firms perceived. The premium automobile manufacturer’s Rover subsidiary had recorded losses for consecutive years, and by 1999 the company’s CEO was dismissed. BMW´s commitment to the Rover division brought concerns about ongoing losses and erosion of the company´s value. The company’s joint venture with Rolls Royce to manufacture aerospace engines also failed to show a profit. Despite the situation, BMW was still a premium automobile manufacturer with competitive advantage, good brand image and high profile. The company’s conservative accounting practices, geared to minimize the tax burden in the German economy, presented a chance to find hidden value. An astute investor would have invested particularly as shares were trading very low.
In 2002, the company's situation started to attract the attention. BMW sold the Rover division and started to recognize better opportunities for capital investment. As a result, investors who purchased BMW shares in 1999 at prices between $12 and $17 saw the company’s share price appreciate to $30 in 2002. The BMW example represents the rewards available to investors who think and act differently than crowds.
Value investment strategies are profitable because those who apply them do not follow judgmental errors or emotional biases like the majority of investors do. Other investors follow their emotions and tend to overreact even when the facts contradict their belief.
Human behavior is not always affected by rational thought. However, it is predictable. This is applicable to investing. The best is to follow policies and procedures that are objective and are not negatively affected by emotional views. As Ben Graham wrote, “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.” Accepting the truth of these ideas does not mean they are easy to apply in the challenging financial markets.
Value investing works because the investor does not try to benefit from predicting fluctuations in interest rates or economic outcome. Value investing does not depend on corporate earnings.
Value investors first, last, and always, think of buying the business, not the stock. That is the key to success. It reflects a consistent focus on the relationship between value and price, and it takes advantage of innate human short-comings.