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.