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22 of 23 people found the following review helpful
5.0 out of 5 stars Interesting and educational, September 3, 2012
This review is from: The Value Investors: Lessons from the World's Top Fund Managers (Hardcover)
This book isn't just about value investing. It's about value investing throughout the world, especially in emerging markets where the risks and rewards can be substantial.

Chan's approach to investing is summarized in Chapter 13 "The Making of a Value Investor." I recommend the reader read this last chapter first. This is not to say that the stories about the careers of the twelve featured fund managers are not interesting. In fact I found the mini biographies fascinating and even uplifting. But the real value in this book is in the lessons from each of the investors.

First lesson: Have a "humble" portfolio, that is one that is diversified and consists of stocks chosen through a fundamental analysis of the underlying value of the companies. There are two styles: a diversified portfolio such as most investment professionals recommend and a more daring approach, a "concentrated portfolio" such as kept by Warren Buffet. Of course Buffet with his unparalleled expertise could afford to focus on his best bets. Chan firmly recommends a diversified portfolio.

Second lesson: value analysis itself. Here is where we learn why Chan travelled around the world to interview these very successful fund managers. It turns out that while the fundamentals of value are almost always the same, the way to find them out differs according to the ability and opportunities of the investor. The twelve people Chan interviewed show the reader how they did it. Some investors look more closely at "competitive advantage," some are more interested in understanding the business itself, while others (like Warren Buffet) are expert at evaluating those who manage the company.

Third lesson: read widely and well. Chan believes investment ideas don't just drop out of the air. An understanding of the world beyond the actual markets can be invaluable in making investment decisions.

Fourth lesson: Go beyond the fundamentals. This is especially true when investing in foreign markets. Understanding national politics, the particular cultural history as well as "macro" events can help the investor make good decisions and avoid some very risky situations. (Fund manager Teng Ngiek Lian gives some good advice on this aspect of trading in Asian countries in Chapter 9; see especially pages 141-144).

Fifth lesson: an exit strategy based on "when ...[your investments] have become fully valued, or their business conditions begin to deteriorate." (p. 208)

Sixth lesson: have the right temperament for value investing (!). Yes, it's hard to sit and wait years for the value of the companies you have invested in are finally recognized by the market. But to be successful at value investing you have to be able to ride the ups and downs of the market like a boat firmly tethered to shore. Often you just have to ignore the daily swings in prices and stay firm in your conviction that the value of the stocks you hold is true regardless of what the fickle market may say on any given day.

Value investing--that is, investing guided by fundamental analysis as opposed to technical analysis (which measures trends)--would be the nearly unanimous approach by market professionals except for three annoying problems:

One, for a host of reasons ranging from complexity to outright fraud, you can't always get the real numbers.

Two, the market is not always rational and efficient. (Think bubbles, recessions and depressions, greed and fear.)

Three, (to repeat for emphasis) even though the stocks you buy may clearly be undervalued they may stay that way for a long time, not just for weeks and months but for years, and in some cases perhaps for a decade or more. (I won't quote John Maynard Keynes here, but you know what happens if the long run is long enough!)

It should be noted (as Chan reminds us through a quote from Warren Buffett on page 87) that value analysis cannot be separated from an analysis of growth. Value and growth, Buffet posits "are joined at the hip."

Now for some bons mots from Chan's sparkling text:

"To minimize the chances of encountering...shoddy business dealings..." one of the things that fund manager Thomas Kahn does is to make "sure that executive pay is fair by industry standards and that top managers have a sizable portion of their net worth in the company through direct stock ownership rather than through the issuance of stock options or warrants." (p. 41)

"It is better to buy a good business at a fair price than a fair business at a good price!" --Warren Buffett (p. 56)

"The four most dangerous words in investing are: `This time it's different.'" --Sir John Templeton (p. 89)

"Go for a business that any idiot can run--because sooner or later, any idiot probably is going to run it." --Peter Lynch (p. 90)

"Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future." (p. 93) Warren Buffett again. By the way, the guiding spirit behind the investing philosophy presented in this book comes primarily from original value investor Benjamin Graham and new school value investor Warren Buffett.

"In essence, we look for the next big crash in emerging markets because in value investing, money is made after the crash, not before..." --emerging markets fund manager Mark Mobius (p. 128)

"When it comes to emerging markets, you cannot rely on the numbers because they cannot be entirely trusted. You have to go out there and start kicking tires. Then you have to talk to company management, look into their eyes, and determine whether they are reliable." --Mark Mobius (p. 129)

"A market correction in an emerging economy can easily mean 20 to 30 percent, which is equivalent to a crash in a developed market." --Teng Ngiek Lian (p. 144)

Warren Buffet "improved his strategy by monetizing brand value, which was not a traditional value principle" during the time of Benjamin Graham.--SPARX Group fund manager Shuhei Abe (p. 160)

"In the short run, the market is a voting machine, but in the long run it is a weighing machine." --Benjamin Graham (p. 71 and p. 202)

This is a valuable book for any investor.

--Dennis Littrell, author of "The World Is Not as We Think It Is"
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Showing 1-2 of 2 posts in this discussion
Initial post: Sep 5, 2012 6:29:53 AM PDT
Last edited by the author on Sep 5, 2012 6:31:51 AM PDT
Magellan says:
Dennis,

Great review of this book, with lots of useful discussion of the important and fine points of value investing.

Unfortunately, based on my own wide reading and experience value investing isn't as rewarding as it was in decades past. Even the great Benjamin Graham admitted this in an interview near the end of his life where he said that although meticulous methods of stock valuation and analysis were profitable in his time, he no longer believed it was as effective a technique as in the old days, although certainly Warren Buffet does use this method himself and was a student of Graham and Dodd's ideas.

Today with so many thousands of hedge funds offshore which do not have to obey U.S. rules about mutual funds (which are often prohibited in the fund's rules of incorporation from using heavy leverage, selling short, and outright speculation) the market today is mostly momentum rather than value driven in my opinion.

Other changes have contributed to this such as the removal of the uptick short selling tule, changes in the authority of the PCAOB, the Public Company Accounting Oversight Board's authority to enforce rigorous accounting and auditing rules, the repeal of Glass-Steagal which means that ordinary commercial banks, insurance companies, and the investment banks can all make the same risky investments if they so choose, makes today's market far more risky for the value investor than before in that the market can continue to remain irrational long past your ability to maintain liquidity.

In reply to an earlier post on Sep 5, 2012 7:35:24 AM PDT
Hi, magellan: Your expertse is obvious. Chan makes some of these same points. The opportunities today in value investing (and the dangers) are especially there in emerging markets. But I don't think I want to go there! Dennis
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Review Details

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Dennis Littrell
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Location: SoCal

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