As we have discussed numerous times, the best and easiest way to make money in the stock market is to follow the principles of value investing. Removing noise from the market and focusing solely on the economics of a given business allows an investor to form a clear conclusion about the company. As Warren Buffet once said, buy on the assumption that they could close the market, and not reopen it for five years.” Read on to see a real life example of value investing.

Close the Market in 2008…

For investors who watched the market collapse into year-end 2008 and were looking for buying opportunities, finding the best value was imperative. Stock prices had sunk to levels previously unseen, and if you could locate companies that were not only cheap, but also had high quality earnings, the payoff could be enormous. This backdrop of the market in 2008 brings us to one of our favorite companies, Western Digital (WDC).

At the end of 2008, Western Digital was trading at $12/share, down 67% from its high of $39 in June 2008. At $12/share Western Digital had a price to economic book value (PEBV) ratio of 0.8. This ratio implied that the market expected Western Digital's operating profit (NOPAT) to decline by 20% and never recover. However, at that point, Western Digital had a return on invested capital (ROIC) of 48% and had been growing NOPAT by 42% compounded annually for the past five years.

A company with high profitability and in high growth mode that is priced for zero growth going forward is exactly the type of company value investors dream of.

…And Reopen it Five Years Later

Let's assume you purchased Western Digital at year-end 2008 after realizing the discrepancy between the company's stock price and the value of its business. As the Buffet quote states above, “close the market for five years.”

How would your investment have performed? At the end of 2013, five years removed from the market crash of 2008, Western Digital was trading at ~$84/share, an almost 700% upside from when you first invested. This appreciation outperformed the 97% gain of the S&P 500.