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Munger at Berkshire Hathaway years later, “If the job has been correctly done when a common stock is purchased, the time to sell it is –almost never.”68

There are thus many roads to heaven -- many more than the easy quantitative tests, such as a low price/earnings ratio, that financial economists simplistically equate with value investing. For example, a company’s price/earnings ratio may indeed be attractive, but the quality of the earnings – meaning the free cash flows available to pay dividends, expand the business, and the like – might be poor. Or it might have, say, a strong balance sheet, perhaps even net current assets per share in excess of the stock price, but then again management gives signs of squandering resources on ill-conceived acquisitions. The qualitative, judgmental aspects of how value funds operate constitute huge obstacles for the mathematical modeling so favored by economists.

Some years ago, Bill Ruane of the Sequoia Fund ventured a guess that value investing accounted for about 5% of all professionally managed money. Given the growth of privately run hedge funds, Rodriguez thought that the 5% figure was still about right. Whatever the precise figure, it simply takes too much analytic effort, discipline and independence of spirit to appeal to more than a handful. Why would such uncommon results ever be common? While their techniques vary, however, the group of ten all stand on the common ground of patient, company by company analysis, always mindful that the stocks they are buying are part interests in a business.

Economic theory attributes far too big a role to value investors

At the start, we noted that scholars believe the smart money keeps the market honest for the rest of us. They hypothesize that a band of rational investors assiduously buys underpriced stocks and avoids (or shorts) dear ones and thus keeps prices at reasonable levels.

The scholars never looked for these rational investors, but we did, and found a representative group. And yet, as we have seen, stock prices are often manifestly irrational. So the question remains: if Clipper and the rest of the group are, so to speak, doing the Lord’s work


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