Value Investing: From Graham to Buffet and Beyond
Review
Value Investing
VALUE INVESTING is written by Columbia University professor Bruce C. N. Greenwald along with co-authors Judd Kahn (PhD University of California), Paul D. Sonkin (Hummingbird Value Fund), and Michael Van Biema (Phd Columbia, Finance Faculty Columbia).
Similar to other value investing authors, Greenwald et al. proposes that the market is not perfectly efficient and that individual investors can beat the market indices by investing in undervalued stocks. Greenwald et al. also proposes that risk does not equal volatility (as is common in many finance texts) but rather the permament loss of capital. These are both very important philosophies and the underpinnings of many value investors.
Greenwald et al. first propose that the value of a company is equal to all the discounted cash flows that the owners (shareholders) will receive. The problem with this approach, Greenwalds contends, is that significant variations in this simple calculation are the result given even small changes in key underlying assumptions.
Instead, Greenwald et al. propose a three element approach to valuation that includes valuing assets, earnings power, and profitable growth. Asset valuation is a balance sheet approach to valuation where the figures are generally known and quantifiable. Earnings power and profitable growth are income statement and forecasting approaches that are less reliable but still very much a valuable approach.
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While the authors begin with the balance sheet when attempting to understand the value of a company, they also try to build the replacement cost of the asset. This includes not only physical plant and equipment but also what it costs to build the required customer relationships, distribution networks as well as specialized products or services. Accordingly, the authors also give value to research and development costs as well as sales and marketing.
The authors contend that identifying the long-term earnings power of a company is essentially a qualitative exercise whereby one has to be able to identify whether or not a company has differentiated products or brands and whether or not it is able to achieve sustainable competitive advantage.
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Potential areas to identify opportunity are those companies that have hidden assets that management may or may not know about. Companies with complicated businesses or financial statements are also opportunities to identify possible value situations. This is an interesting comment given that Warren Buffet (who the authors themselves profile) has often contended that if a company is too complicated, he will pass.
The last half of the book highlights practical implementations of value investing by investment managers including:
- Warren Buffet
- Mario Gabelli
- Glenn Greenberg
- Robert H. Heilbrunn
- Seth Klarman
- Michael Price
- Walter and Edwin Schloss
- Paul D. Sonkin
While Greenwald et al. contends that it is possible for the individual investor to beat the market indices that comes with a very serious caution. “We think that direct and active investing is a dangerous game, not a trick one can do casually at home.” (p. 158)
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Book Information
Title: Value Investing: From Graham to Buffet and Beyond
Author: Bruce C.N. Greenwald, Judd Kahn, Paul D. Sonkin, Michael van Biema
Publisher: John Wiley & Sons, Inc., Hoboken, New Jersey
Publication date: 2001
Number of pages: 291
Review Information
Reveiwer: DeepValueInvestor.com
Date of First Review: July 2011
Updated:
Stars (9/10)
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