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on 2 June 2017
This book taught me a lot, well worth a read
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on 11 December 2003
I totally disagree with an other comment here that this book is complex. It is a very clear and complete introduction to value investing (but, yes, it is useful if you have seen the income statement of a company before). Contrary to 'The Intelligent Investor' of Mr. Graham himself, this book doesn't just discuss the value-investing philosophy, but it also gives some practical guidelines of how to apply value investing in practice, including some calculation examples.
The profiles of the famous value investors give some ideas of different ways to apply this philosophy in practice. It is true that if you have read the letters of Warren Buffett already, this book doesn't give you any new information about him, but who can better explain Mr. Buffetts way of investing than he himself? Overall, this book provides a good introduction to value investing.
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on 4 January 2008
I've read The Intelligent Investor as a starter into the world of investing and it is clear why this is considered the "Bible" of investing. But there was a problem for me: where do you find these undervalued businesses? And of course most undervalued businesses are low-priced for good reason.
So upon reading Value Investing I was happy to find that the authors also realised this dilemma and explained a valuation method that I found simple and sensible. As Buffet says: "It's better to be approximately right than exactly wrong." It's hard to predict the future with any investment, but I found this book was right on the money in terms of the underlying philosophy. It even shows how to...which I found refreshing.
For example, the authors explain how to value businesses three different ways, each based on where the business lies on the growth curve. From how to value assets -including what to leave in and what to leave out in your calculations- to how to run a Discounted Cash Flow projection, you can go deep in understanding a business. Like the Intelligent Investor before it, this book aims to take the speculation out of investing.
As a business owner myself, I also learned a lot about my own business, because after all you are investing in a business, not in bits of paper. Now I approach my own business as if it were an equities investment and I have found it a very useful approach because it sharpens how you apply your strategy to the markets you compete in.
The end result is I have been able to understand and price investments that actually work. The Intelligent Investor is essential background, but this book gives you a current perspective and blueprint without breaking any of the tenets put forward by the gurus Dodd and Graham.
11 Comment| 7 people found this helpful. Was this review helpful to you?YesNoReport abuse
Value investing is so unpopular now that many do not know about this highly successful form of investing as practiced by its greatest masters. Value Investing helps to overcome that ignorance among the newest generation of investors. That is good and timely, because we seem to be entering a time when value investors often make their greatest coups.
If you believe that the stock market is totally efficient (current prices accurately discount everything that is or could be known about the company to accurately price a company’s securities), you will think this book is irrelevant. If you think that stock prices normally over or under value a company’s worth, you will find this book fascinating.
If you want to have a decent chance of learning how to outperform indexed mutual funds, this book is one of a handful that can help you. The methods and investors outlined in this book have successfully beaten the market averages for decades. So whether you try to do apply the concepts for yourself, or have your money invested by one of these top value investment managers, value investing is a discipline that can help you achieve superior investing results.
In some of the many back tests run in recent years to test for market efficiency concerning stock prices, simply buying stocks with low price/earnings and price/book ratios proved to outperform the market averages. More thoughtful stock-picking can do even better.
But the ideas in this book are far more important than that. Value Investing shows the many ways that situations where securities are underpriced can be found and exploited. The masters of this approach do a lot of fundamental homework, and look carefully from several different perspectives.
Many people identify value investing with Benjamin Graham and the early Warren Buffett. This book expands that perspective by also profiling Mario Gabelli, Glenn Greenberg, Robert Heilbrunn, Seth Klarman, Michael Price, Water and Edwin Schloss, and Paul Sonkin. You will find out about how they were educated, the value disciplines they have used, their long-term track records, and how they differ from one another.
You should realize that value investing is above-all an intellectual and cross-checking exercise (a bit like chess), far removed from emotion of day-trading and the thrills of following trading momentum. You need to be patient. Years can pass without any good opportunities arising. You will often sell stocks far before their ultimate peak. So you will have to think about how well the psychology of the careful hunter with one bullet in your rifle matches the way you like to do things. One of the hardest things to accommodate is that your results will look worst when everyone else is picking up easy money, mindlessly, by running with the herd of rampaging bulls.
As helpful as this book is, Value Investing has a number of weaknesses. First, new investors will probably get a little lost in the discussions. The authors usually begin at a level of understanding that people who have attended business school have. Second, you will find it hard to run down more details on concepts you don’t quite get. Third, you will get a flavor of what each investor has done . . . but not the full detail. So, think of this as a wine tasting. If you find some styles you like, plan to do more reading and studying. Fourth, if you were only taught the investing creed according to efficient markets, you will probably wonder what all the fuss is about. The book could have used more references to the new research that challenges the assumptions built into CAPM (the Capital Asset Pricing Model).
In your personal life, do you ever find it rewarding to get a great bargain on something of value that you care about? If so, value investing may be for you. The sense of satisfaction is similar, and the financial rewards can be greater.
Be cautious as you apply any investing method to outperform the market averages. Limit the size of your potential losses until you have fully developed your skill.
Look carefully, think . . . and be skeptical! There are many people trying to make the future seem rosier than it will be.
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This is a very lucid, practical introduction to the principles of value investing. It is detached, relatively objective considering the authors' bias in favor of the subject, doesn't hype or hard-sell and, on the whole, would be a valuable addition to any investor's bookshelf. If you're a relative beginner, your shelf will also need to include a dictionary of financial terms - the authors assume you already know the vocabulary. And who is the Graham cited in the title? He is Benjamin Graham, who all but invented security analysis. With coauthor David Dodd, he produced the book Security Analysis in 1934. Later, Graham wrote The Intelligent Investor. Both books are investment classics and have been revised and re-issued. This one may endure, as well, based on its thorough exposition on how to value a company and its instructive profiles of value investing heavyweights. Our recommendation: strong buy, long term hold.
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on 2 May 2014
This book is written in propeller-head language, and typical Wiley double-dutch. Which is fine for propeller heads, but makes it practically impenetrable for most other people. You would have thought that with so many people involved in writing the book, that they would have hired a decent writer to put it all together for them. What these turkeys have done is put together a book for niche section of the population that excludes most other ordinary folks. Instead what you've got is page upon page of damned hard work unless you have the patience to read it at least four or five times to get an understanding of what they're talking about. Life's far too short for such a brain bending merry-go-round and these people should have known better. It's strictly for the birds.
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on 11 February 2007
It's not an easy read if you're not familiar with investment terminologies and reading company accounts. But if you want to pursue value investing, this book will furnish you with some interesting ideas. Central to its valuation is a concept called earnings power value (EPV). The authors hold that this value, calculated by dividing the distributable earnings by the cost of capital, represents the intrinsic value of the company. EPV assumes no growth so the authors contend that growth serves as a margin of safety. There are analogies with discounted cashflow analysis and I've never come across EPV any where else. What I found most interesting about this book are the two case studies applying the EPV: WD-40 and unusually for value investors, Intel. It is complicated and academic, as another reviewer pointed out, but if you can take it in your stride, there are many useful ideas here. Strongly recommended to serious value investors.
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on 27 October 2007
The authors announce their intention to bravely go "beyond" Graham and Buffet. I found their effort extraordinarily interesting. Not because it brings new ideas from the frontiers of Value Investing; but rather because it forced me to revalidate old ones.

Written mainly by academics, the book attempts - with undeniable clarity - to provide a simple framework for valuation of a firm using Value Investment principles. First, three sources of value are defined: Asset Value; Earnings Power Value; and Value of Growth. Second, some conceptual tricks are employed to link them in a theoretical structure capable of supporting hours of animated tutorial discussion.

The importance of Asset Value in the scheme derives from the idea that if a firm that has no defenses against competitors it is worth no more, or less, than the replacement value of the assets necessary to set up a similar business.

To illustrate, imagine a defenseless firm that is worth 2x on the stockmarket while its productive assets are worth only 1x. Attracted by the absence of barriers to entry and by the high market value achievable with a substantially lower investment, enterprising businessmen set up similar businesses.

As the new capacity comes on stream the market is inundated with products of the same type and prices and profits consequently fall. The process only ends when the market value of all the firms has fallen to the value of their assets, thus eliminating the differential that attracted new market entrants in the first place.

For this to happen we must have an idealized market of perfect competition: lots of buyers and sellers, undifferentiated products, no barriers to entry, perfect information, etc. In practice, however, a dozen firms with similar assets will generate a dozen different levels of profit. And in the end, as the book admits, it is profit expectations, not assets, that determine the value of an on-going business.

I wondered if Graham and his associates ever subscribed to this concept. In my 5th edition of "Security Analysis" I found the ambiguous comment: "ECONOMISTS believe that high returns on capital attract competition which ultimately forces down the rate of profit" (my capitalization). This same edition affirms that it is "The earning power of the assets in use (that) determines their investment value" (rather than the replacement value of these assets). I could find no evidence that the notion formed a key part of the valuation process described in the value-investing classic.

Moving on, We are told that the major difference between Earnings Power Value and Value of Growth, when used to estimate intrinsic value, is the confidence we can place on the result. It is notable, however, that both definitions of value exist in the same continuum. To calculate Earnings Power Value we can simply assume growth to be zero in the traditional Discounted Cashflow formula for estimating intrinsic value.

Beyond a certain point it is reasonable to suppose that the degree of confidence we can put on an intrinsic value calculation falls with the size of profit growth projected. How much faith would we have in a value based on a growth projection of 30% per annum, for example? But why should zero growth produce an intrinsic value closer to the truth than 5% per annum? Is one really inherently safer than the other? What about the risk of deceleration in the case of an assumption of zero growth? Conservatism does not mean ignoring reality.

Once again it all seems part of a jolly academic game. The questionable differentiation between Earnings Power Value and Value of Growth allows the authors to find a role for another element: the franchise - the defenses the firm possesses against competition. They thus arrive at a tidy little conceptual framework. If a firm has no franchise then its intrinsic value is represented by its Asset Value. If the franchise is weak then we base our estimate on its Earnings Power Value. And if it has a rock-solid franchise we might just be able to introduce the Value of Growth. Does all this have any useful meaning in the real world?

Aside from these conceptual questions I found the book exceptionally practical in describing the details of how to value the assets and evaluate the franchise of a firm. On the other hand I found the profiles of eight value investors rather tedious.
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on 25 November 2015
I actually thought this was a pretty good book. It covers a lot of ground and is quite precise in outlining the key issues facing investors, both professional and retail. There is a measured introduction to the central issues before the authors move on to discuss valuation methodology. As a value PM myself I found the explanations very clear and reinforced several points in the way I think about these things. In the stock examples the authors make a decent effort to analyse the valuation based on the information available at the time. One thing that occurs to me, both from this book and others, is how frequently different portfolio managers vary in their approach. For example the authors themselves have little time for DCF analysis but one of the 'value greats' that they document makes it a central part of his valuation approach. I believe Buffett himself uses some variation of the DCF (he once referred to 'somethings need to be done in private' (or words to that effect) when asked about this). Similarly some PMs like to do a lot of due diligence (scuttlebutting as Phil Fischer called it) but others recognise the limits of this approach (Buffett once turned down the opportunity to inspect a factory of one of his Israeli investments by saying 'it's okay I believe it's there' or words to that effect. One thing that does not come through as clearly as it should is how many mistakes even great fund managers make - Buffett is quite clear on this and frequently notes 'mea culpa' in his shareholder letters. More generally, however, it is an unfortunate aspect of the industry that talking about investment mistakes can be detrimental to one's investment career. However it leaves the public with the view that a good fund manager may get 80-90% of their investment decisions 'right'. On the contrary a good fund manager will get 51-52% right and an exceptional manager may not get more than 60% right.
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on 10 September 2013
So, what's in the Appendix to chapter 3 that makes it so good ? Only the best explanation of 'The Present Value of Future Cash Flows' I have ever read. Come to think of it, the rest of the first half is worth studying as well.

There are one or two surprises in the 'Buffett and Beyond' section, enough to make you read it to the end anyway.
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