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Finding an Edge
Field of Play
Uncovering Value
Research and Analysis
Portfolio Management
Learning Curve
Of Sound Mind
The Craft of Investing
 
Value Investor Insight 
2
Winter 2008www.valueinvestorinsight.com
While we certainly believe there arecore principles upon which sound invest-ments are made, it’s equally clear that,like snowflakes, no two investing strate-gies are exactly alike. Equally talentedand accomplished investors can view thesame investment opportunity in preciselyopposite ways. That’s a central reason welaunched
Value Investor Insight 
fouryears ago (and
SuperInvestor Insight 
twoyears ago), to help inform the ongoingdevelopment of our readers’ own uniqueinvestment strategies with the experience,wisdom and ideas of a wide variety of superior investors.The differences in strategy and styleamong value investors are many: Someinvest primarily in small-cap stocks whileothers stick to large-caps; some investoverseas while others stick to U.S. mar-kets; some run concentrated portfolioswhile others are more diversified; someare activists while others never are; someare long only while others actively short.The list goes on.At the same time, there are severalfundamental characteristics that valueinvestors tend to share as well. We’veidentified an even dozen:
»
They tend to buy what’s out of favorrather than what’s popular.
»
They focus on intrinsic company valueand buy only when there is a substantialmargin of safety, rather than trying toguess where the herd will go next.
»
They understand and profit from rever-sion to the mean rather than projectingthe recent past indefinitely into the future.
»
They understand that beating the marketrequires a portfolio that looks differentfrom the market.
»
They focus on absolute returns, ratherthan outperforming a benchmark, and onavoiding permanent losses.
»
They typically invest with a multi-yeartime horizon rather than focusing on themonth or quarter ahead.
»
They pride themselves on in-depth andproprietary analysis in search of “variantperceptions,” rather than acting on tips orrelying on Wall Street analysts.
»
They spend far more time reading thingslike business publications and financialreports than watching the ticker or televi-sion shows about the market.
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They focus more on analyzing and under-standing micro factors, such as a compa-ny’s margins and future growth prospects,and less on trying to predict the directionof interest rates, commodity prices or theoverall economy.
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They cast a wide net, seeking mispricedsecurities across industries and types andsizes of companies rather than acceptingartificial limitations on market capitaliza-tion or other criteria.
»
They make their own decisions and arewilling to be held accountable for them,not seeking safety in what everyone else isbuying or decision-making by committee.
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They admit their mistakes and seek con-stantly to learn from them.
It’s in this spirit of continuous learningthat we offer this collection of wisdomfrom the pages of each of the 46 issues of 
Value Investor Insight 
, celebrating boththe similarities and differences in how thebest investors apply their craft.
TOPICS INCLUDE:
John HeinsCo-Editor-in-ChiefWhitney TilsonCo-Editor-in-Chief
Words of 
Investing Wisdom
A “Greatest Hits” collection of investing insight from
Value Investor Insight 
EDITORS’ LETTER:
03
Finding an Edge
“Efficient” MarketsConcept of Time
05
Field of Play
Circle of CompetenceDoes Size Matter?Sector InsightGoing Abroad
11
Uncovering Value
Where the Values AreIdea Generation
15
Research and Analysis
The Research ProcessAnalytical RigorManagement EducationDefining Value
23
Portfolio Management
Active ManagementBuying and SellingConcentrate or Diversify?Managing RiskGoing to CashThe Short SideActivism
33
Learning Curve
37
Of Sound Mind
40
The Craft of Investing
The Big PictureInvestor as ManagerFinding Motivation
 
Finding an Edge
WORDS OF INVESTING WISDOM
Value Investor Insight 
3
Winter 2008www.valueinvestorinsight.com
“EFFICIENT” MARKETS
So if the entire country became securitiesanalysts, memorized Benjamin Graham’s
Intelligent Investor
and regularly attend-ed Warren Buffett’s annual shareholdermeetings, most people would, neverthe-less, find themselves irresistibly drawn tohot initial public offerings, momentumstrategies and investment fads. Peoplewould still find it tempting to day-tradeand perform technical analysis of stockcharts. A country of security analystswould still overreact. In short, even thebest-trained investors would make thesame mistakes that investors have beenmaking forever, and for the sameimmutable reason – that they cannothelp it.
Seth Klarman, 3.23.05
Human beings are subject to wild swingsin their levels of fear, risk tolerance andgreed. That won’t change. I base mywhole approach on buying when othersare fearful and selling when others aregreedy. The reason Shakespeare is so rele-vant still today is that his plays were allabout human nature, and human naturenever changes.
Mark Sellers, 6.19.05
“Humans have a strong desire to be partof a group,” says Legg Mason equitystrategist Michael Mauboussin in a 2004research paper that dissects howinvestors make decisions. “That desiremakes us susceptible to fads, fashionsand idea contagions.”
VII, 9.28.05
On the behavioral-finance side, one of many inefficiencies comes from peopleanchoring on the past. People assumesomething is cheap, say, just because ithasn’t traded at such a low valuation forfive or ten years. But that doesn’t matter,what matters is what will be.
Ric Dillon, 6.29.07 
We always ask whether we ourselveshave any competitive advantage in ana-lyzing a particular company. Can weknow the business better because no oneelse seems to be paying attention? Is themarket’s view being distorted by somebehavioral or structural bias that wedon’t have?
Brian Bares, 9.30.08
The reason [GE traded at $55 in 2001]was because I’d estimate that 95% of thedollars invested in the U.S. stock marketwere either indexed or closet indexed –people had to own it to keep up with thebenchmark. If they thought it was over-valued, their response would be to maybebuy only a 3% position rather than the4% weighting in the benchmark. That’sthe type of irrational behavior that cancreate inefficiency.
Ric Dillon, 6.29.07 
Investors overreact to the latest news,which has always been the case, but Ithink it's especially true today with theInternet. Information spreads so quicklythat decisions get made without particu-larly deep knowledge about the compa-nies involved. People also overemphasizedramatic events, often without checkingthe facts. It's the classic, “Are more peo-ple killed each year by sharks or by beingtrampled by pigs?” type of situation – thedramatic event can get more play than itdeserves. These types of overreactions arewhat we're trying to take advantage of.
 John Dorfman, 10.31.08
One way of dealing with informationbeing more available is to stop playing thegame and seek out securities or assetclasses where there’s less information orcompetition.
Seth Klarman, 9.30.08
Wall Street’s view is that if you don’tmake your projections, you’re a bad per-son. That’s because they don’t want to dothe hard work of making their own pro-jections to see if the company’s projec-tions make sense.
Richard Pzena, 2.22.05
Wall Street sometimes gets confusedbetween risk and uncertainty, and youcan profit handsomely from that confu-sion. The low-risk, high-uncertainty [sit-uation] gives us our most sought aftercoin-toss odds. Heads, I win; tails, I don’tlose much!
Mohnish Pabrai, 6.29.07 
CONCEPT OF TIME
It’s still true that the biggest players in thepublic markets – particularly mutualfunds and hedge funds – are not good attaking short-term pain for long-termgain. The money’s very quick to move if performance falls off over short periodsof time. We don’t worry about headlinerisk – once we believe in an asset, we’rebuying more on any dips because we’refocused on the end game three or fouryears out.
 Jeffrey Ubben, 1.31.06
I like to talk about the long term withmanagement because that’s how you real-ly determine if someone is going to createbusiness value. Most stocks are reason-ably priced in the short term – it’s thelong term where you’re most likely to put
Finding an Edge
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