Customer Reviews

Value Investing: From Graham to Buffett and Beyond

5 star:		(23)
4 star:		(9)
3 star:		(4)
2 star:		(6)
1 star:		(1)

 

 

I am a professional investor (CFA charter holder and portfolio manager) and would suggest this book for anyone interested in the value style of investing. I would not recommend the book for a novice investor since some terminology is not explained. (Perhaps read this book after reading and understanding Benjamin Graham's The Intelligent Investor.) However, the book is an excellent read for someone with an understanding of investing. The book is divided into two main parts: The authors' views of different ways to value a company and profiles of successful value investors.

I think the authors' Earnings Power Value (EPV) approach to valuing a company is cutting edge. (Basically EPV is a rehash of Enterprise Value.) Most investors tend to value stocks based on P/E ratios - only looking at equity in a company. However, the proper way to value a company is to look at its whole capital structure - Debt, Equity & Cash. EPV is a much better tool than the P/E ratio for calculating whether a company is undervalued.

The second part of the book that profiles a half dozen or so successful value investors is interesting. It illustrates there are many different ways to execute a value oriented approach. The profiles do not give any hard cut rules that each investor follows, but it does give you a general idea. (I have been successful at applying some of the ideas in managing my own account.) The only flaw of the profiles is the lack of any type of track record. It would have been helpful to list the year-by-year returns for each investor compared to an index. (i.e. S&P 500 Index)

Overall, it's a great book and it deserves a spot behind Ben Graham's Security Analysis and Intelligent Investor.

A must-read for investors of any stripe, growth or value. This book, written by a couple of the most popular professors at Columbia Business School, explains the innovations in the field of value investing as practiced by some of the most successful investors in the field. (fair disclosure: I took Prof. Greenwald's courses in 2007) This book successfully bridges the gap between the traditional Graham & Dodd style of value investing to what works today. Although it's a paperback, it's written with the density of a textbook. The writing style is not light, and the actual meat of the book takes some time to wade through. If you don't have some experience in accounting or corporate finance, then Joel Greenblatt's The Little Book That Beats the Market is good to read first.

The substance of this book is a process for modern value investing: value investing is not investing in lousy companies just because they appear cheap. The authors also teach a structured way to value a company. Finally, the authors address how to value growth.

First, before reading this book I had the mistaken impression that value investing was all about investing in the ugliest, least interesting company you could find just because it had a low P/E ratio. I was completely wrong! (Maybe I have attended too many stock pitch sessions and heard too many poultry stocks and encyclopedia companies get pitched.) Modern value investing, according the authors: "When B. Graham went scouring financial statements looking for his net-nets, it did not concern him that he may have known little about the industry in which he found his targets. All he was concerned with were asset values and a margin of safety by that measure. A contemporary value investor had better be able to identify and understand the sources of a company's franchise and the nature of its competitive advantages. Otherwise he or she is just another punter, taking a flier rather than making an investment." What a breath of fresh air to read this passage.

Second, this book lays out a structured way to value a company by first looking at reproduction costs of assets, then earnings power, and finally the value of profitable growth. I, like the authors, find traditional DCF valuations to be plagued by false precision. The authors' more practical method starts by adjusting the balance GAAP balance sheet to calculate the cost of the assets for a potential business entrant. Next, the company is valued based on the earnings generates consistently, assuming no growth. A key insight is the value of the franchise: the difference between asset value and Earnings Power Value is the value created by a company that has significant competitive advantage. Last, the value of profitable growth is considered.

As a self-admitted recovering growth stock addict, I learned from this book that value investors are skeptical about growth for two reasons. One reason is that it is so hard to predict, but more important, many times growth is not worth much. Unless the return on capital (ROC) of the company is higher than the cost of capital, growth does not create value. (I am a slow learner; Greenblatt's example in The Little Book That Beats the Market of opening an additional gum store is even clearer to me.) The growth matrix and formulas in the book were a revelation to me. The surprising thing is how little multiple expansion a stock deserves based on growth. Unless a company truly has a franchise, expanding into other areas and "diversifying" the business often destroys value. And growth for growth's sake will not make a stock go up.

This book brings value investing into the modern stock market. Modern value investors still use traditional valuation principles in a structured way, but they also consider the value of growth and the attractiveness of the business. What a relief, I not restricted to buying typewriter and pay phone stocks! The authors quote Warren Buffett: It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

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.

Ben Graham may have done for investing what Euclid did for geometry, but the Graham student must take a long and winding road to collect and organize Grahamian "theorems." Greenwald modernizes and thoughtfully organizes the value framework originally expounded by Graham, and shows how investors might take -and in the final section of the book, how several master investors DO take- Graham's notion of buying dollar bills for fifty cents and apply this central idea in creative ways to some of the less frequented areas of the market.

Greenwald et.al. show a terrific aptitude for remaining informal and conversational while maintaining brevity and orderliness. Neophytes are unlikely to encounter a clearer, more concise explanation of `discounting future cash flows', and most students of value investing will be well-served by Greenwald's order of equity valuation: (1) Asset Value, (2) Earnings Power, (3) Growth, all of which are clearly explained. Additionally, Greenwald discusses a useful addition to common metrics such as `net asset value' and `liquidation value' with the concept of `replacement cost'. Greenwald also acknowledges and thoughtfully attempts to quantify the value investor's less traditionally acknowledged principle of `franchise value', which he judiciously attributes to Warren Buffett as the latter's singular contribution to investment analysis.

The book's admirable brevity is also its primary shortcoming. Whereas Graham included senior debt and convertible debt vehicles both in Security Analysis and in his investment practices, this text is for all practical purposes only an examination of equities. If the authors of "Value Investing" ever opt to write about a value approach to bonds and other instruments, I'll bet they'd have a captive audience.

I have read numerous books on the topic of investing, including Security Analysis, The Intelligent Investor, Common Stocks and Uncommon Profits, One Up on Wall Street, Beat the Street, The Warren Buffett Way, and more. But this book is the most detailed and usefully instructive that I have found - at least since The Intelligent Investor. If you have an interest in accurately modeling the investment philosophies of the most successful investors, you will find this book to be invaluable.

"Value Investing" is a book most value investors will want to read. As I progressed through the early Chapters of the book I was starting to form the impression that this book was the best of its type I have read - and I have read more than a few!! In the end I backed off giving the book "superstar" status but would still without reservation place it in the 5 stars must read category - especially for those about to read their first book on "value investing".

Chapter 3 discussing the "Three Slices of Value" is the highlight of the book. The book is very readable - and unlike many similar texts has a good blend of the conceptual with quantitative examples. For those that have already read extensively in this area the second part of the book on famous value investors will be going over old ground.

From time to time the book raises concepts such as "Enterprise Value" and "Dividend Discount Model" with little or no explanation which could leave the novice reader frustrated. The book also leaves few clues about further resources that the reader might tap to dig even deeper into the topic.

Despite these negatives a great addition to my library which I have already gone back to for reference purposes.

Good content and good approach. I'm a fan of value investing. The book teaches the reproduction cost of assets and the earning power value. It also hints on how to incorporate growth.

The problem is that information is all scattered around and the wording is not very reliable. The authors mix capital with ROIC with ROE. They also don't make it clear when they mean cost of capital or WACC. Also, the definitions are not there and that creates confusion.

I found a few typos in tables. The values are carried from one table to another and sometimes are rounded sometimes are not. Some entries in the tables just don't mean anything because the values are never used nor referred to. That's a very bad practice for authors coming from academia. They should know better.

The book would improve to a 5-star rating had them fixed all typos, explained all terms, and put all calculations in tables in math formulas instead of just saying something along the lines of "we multiply the WACC by the ROIC and divide by the tax rate and we get a P/E of 10.5". (Example exagerated). Suggestion: List all the steps so we can follow. Add text to explain whats being done. Refer to rows and columns in the table so we know what values came from where. Also, clearly differentiate between tables with original facts (e.g., balance sheet from annual report) from tables that contain either speculation or derived numbers. Anything discounted or adjusted is speculation or derived.

This is a required read for any practicing or prospective value investor. I have read most of the books on value investing and found this one to be both insightful as well as practical compared to the others. It offers a great mix of both philosophy and practice. A great starting point for the aspiring value investor. This book also introduces a lot of new content. The principles of sound investment will never and have never changed, but the application of those principles is constantly changing. This book brings us to the future by showing us the different ways in which value investing can be applied. There are various examples from Glenn Greenberg at Chieftain Capital Managment, who applies a concentrated value approach, to Walter Schloss who applies a diversified value approach. There are plenty of methods for the aspiring value investor to choose from. There is also a great profile on one of the future's great value investors-Paul Sonkin. Rarely do we hear about the next generation of value investors.

A highly readable addition to the value-investing greats that manages to impart a great deal of the "details" while still remaining an easy-to-follow, literate book. Only drawback is that the investor profiles are not consistent -- they were evidently written by different authors and their quality is sporadic.

In short, this book is grounded on economics and common sense. It summarizes "the intelligent investor", "security analysis", and the modern books on Buffett pretty well (there are other paths to heaven besides Buffett's). Its verbiage is beautifully chosen and a joy to read, especially for avid value investors. Best of all it is a scholarly work - if you're sick and tired of the commercial investing books that flood bookstores, buy this book.