Mike won “The Little Book of Value Investing” (2006), by Chris Browne and a couple of visits ago I borrowed it from him. The author is a managing director of investment firm Tweedy, Browne who were the legendary Ben Graham’s brokers apparently. What Has Worked In Investing: A Tweedy Browne Case Study made the rounds of PF blogs a while back, so the author definitely has value investing “cred” (Mr. Cheap is in touch with his urban roots).
The basic idea of value investing is you figure out some way to appraise a company, then look for companies that are selling for valuations significantly below that. Graham used the idea of assets of a company and managed to find stocks that were selling significantly below the sum of its assets (e.g. the company could just sell off everything they owned and raise more cash than the total value of their company according to the stock market). This worked out quite well for Graham but, because its such an obvious arbitrage opportunity, its very difficult to buy companies at this sort of discount anymore.
Browne touches on quite a few of the big ideas of value investing such as “buy stocks like groceries: when they’re on sale” and Buffet’s famous “Rule number 1: don’t lose money”. He spends a couple of chapters outlining how to value stocks, but my feeling was that these were incomplete and would do more harm then good (if someone, using just these two chapters as their basis for stock evaluation, started buying stocks I think they would be very naive buyers). At one point Browne suggests that the book could be used to inform readers about value investing so they understand the concepts better if they’re talking to a paid advisor, which I think would be the best usage of this book. He also suggest it can be useful for DIYers, which I disagree with (unless the DIYers read more before putting any of his ideas into practice).
Browne is a big believer that value opportunities lie outside the US and suggests that global bargain hunting can be the best approach for buyers. He hedges this recommendation with concerns about limited oversight of corporations in some countries, which definitely does balance the extra reward in my opinion.
He attacked active trading and made a pretty convincing case against being able to profit over the short-term by stock picking. He was preaching to the choir with me here though, so he might not make as convincing a case to someone who is a believer in active trading.
I was a little disturbed when he dismissed asset allocation and index investing. His feeling was that a value oriented approach makes it trivial to beat the indexes, which I’m not totally convinced about. He presents research saying how low P/E stocks pretty consistently outperform high P/E stocks. From this perspective, an ETF that just tracks the low P/E stocks in a market should do very well – I’m not sure if such a beast exists and if it has had as good of a track record as he claims. He attacked asset allocation with the idea that when you rebalance your allocations you’re selling your winners to buy losers. However, he advocates buying out of favour stocks and selling them when they become fairly valued – so he’s selling winners to buy losers too.
Value investing makes a lot of sense to me, I just don’t seem to be able to get a handle on the whole process of evaluating stocks for purchase. If I got to the point where I had faith that the “under valued” deals I was finding would give me a strong return, I’d be delighted to go bargain hunting, but at this point I’m just not a believer.
I would recommend this as a great primer on value investing, but would caution anyone repeatedly not to make any changes to their investment strategy based just on this book (unless it was to move from actively managed funds to passively managed funds). If you like the concepts presented in this book, please do further reading.
Mike (who also read this) may do his own review – so encourage him in the comments to write it up if there’s any interest in another perspective on this book.
5 replies on “The Little Book of Value Investing”
I borrowed this book out of the library to read a while back and couldn’t get past the first chapter or so. I kept thinking that an aspiring value investor would learn as much if not more by simply reading Buffett’s letters available on the Berkshire website.
Selling winners and buying loosers.
I diagree with the comment that value investing also sells winners and buys loosers. This is not correct because the whole primise of buying stocks in value investing to buy mispriced assets (Stocks on Sale) and selling them when they are fully priced. This would mean that the market has fully understood the potential of this stock and will not increase in multiples further.
Asset allocation though single handedly does not work in the same manner because in that scenario the inevstor will redistribute his assets across different sectors or countries only because he has become overweight in that area when that area is still under priced and has potential to move further.
CC: Probably a good call. I liked the book, but I don’t know all that much about value investing, probably it would have been way too introductory for you (you should get it for your twins in a few years! ;-).
Siddharth: I’m with you that “loser” is a inappropriate term, I was just trying to say that I think its inappropriate for asset allocation too. In both situations you’re identifying some thing that you think is undervalued, and buying more of it. You’re right that this doesn’t make it a loser.
With value investing, you’re using a formula to calculate the “intrinsic value” then buy companies that are selling cheaper than what they’re “worth”.
With asset allocation, you’re using the recent performance of you portfolio as a whole to identify the under-performing areas, then to increase your investment in them in the expectation that there will be a reversion to mean (i.e. the index is selling for cheaper than what they’re “worth”).
I just felt it was a bit of the pot calling the kettle black for a value investor to disparage asset allocation (or vice versa)
I thought the book was ok. I found it was more of a refresher for value investing rather than a textbook for it.
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