Value Investing: Book Review
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)
About DeepValueInvestor.com
DeepValueInvestor.com is dedicated to value and deep value investing. Our website has a variety of resources including education, the latest deep value investing news, discussion on value and deep value investing strategies, related book reviews, deep value investing quotes, and our Coattail Corner newsletter that follows selected stock purchases of successful investors.
*** Learn more about value investing and follow value investing stock picks - sign-up for our free newsletter! ***
DeepValueInvestor.com regularly reviews books on deep value investing and value investing. Check out our dedicated page on value investing book reviews.
Copyright © 2011 by DeepValueInvestor.com. All rights are reserved.
You Can Be a STOCK MARKET GENIUS: Book Review
You Can Be a STOCK MARKET GENIUS: Uncover the Secret Hiding Places of Stock Market Profits
Review
You Can Be a STOCK MARKET GENIUS is the first book written by Joel Greenblatt. This book is probably the most advanced of the three books he has now written (his second book is The Little Book that Beats the Market; and his third book is THE BIG SECRET for the Small Investor).
Greenblatt starts by explaining “why” an individual investor can beat the market averages even though the vast majority of both professional and individual investors actually underperform the market. The basic premise is that the stock market is not efficient – particularly in the short term. This means some securities will, from time to time, trade at compelling prices that do not reflect the true underlying value. Greenblatt also explains that there are areas of the stock market which larger investors ignore for a variety of reasons – it is these areas where an individual investor has an opportunity to uncover bargains.
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Greenblatt also takes an interesting view on diversification. Greenblatt proposes that purchasing 6 to 8 stocks in different industries is usually sufficient to substantially reduce the nonmarket risk of owning just one stock. Overall stock market risk, however, is not eliminated and the investor is still subject to this risk. (It is equally interesting to note, however, that one of Greenblatt’s latest investing undertakings is value-weighted indexing which actually involves the purchase of several hundred stocks).
Moving on to “how” to achieve success in the stock market, Greenblatt explains that dedication, hard work and patience are all prerequisites. Greenblatt also stresses the importance of, first and foremost, selecting investments that provide the investor with downside protection – rather than focusing on how much of a return is possible.
Some of the secret places to make money in the stock market are listed below but you’ll have to read the book to understand how and why. Here’s a listing of the secret investing places that Greenblatt discusses:
- spinoffs;
- following insiders;
- risk arbitrage and merger securities;
- bankruptcies;
- restructurings;
- recaps;
- stub stocks;
- leaps;
- warrants; and
- options.
Greenblatt also lists specific resources you can use to help find opportunities. This includes raw data sources such as regulatory filings but also selected secondary sources from newsletters and other publishers. (Of course, you can also sign-up for our free Deep Value Investing newsletter here).
For those willing to engage in hard work, dedicate themselves and their time, and demonstrate the required patience, You Can Be a STOCK MARKET GENIUS is a must-read.
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Book Information
Title: You Can Be a STOCK MARKET GENIUS
Author: Joel Greenblatt
Publisher: Simon & Schuster, New York
Publication date: 1997
Number of pages: 285
Review Information
Reveiwer: DeepValueInvestor.com
Date of First Review: April 2011
Updated:
Stars (9/10)
About DeepValueInvestor.com
DeepValueInvestor.com is dedicated to value and deep value investing. Our website has a variety of resources including education, the latest deep value investing news, discussion on value and deep value investing strategies, related book reviews, deep value investing quotes, and our Coattail Corner newsletter that follows selected stock purchases of successful investors.
*** Learn more about value investing and follow the stock picks of value investors - sign-up for our free newsletter! ***
DeepValueInvestor.com regularly reviews books on deep value investing and value investing. Check out our dedicated page on value investing book reviews.
Copyright © 2011 by DeepValueInvestor.com. All rights are reserved.
The Little Book that Beats the Market: Book Review
THE LITTLE BOOK THAT BEATS THE MARKET
Book Review
“Make everything as simple as possible, but not simpler,” is what Einstein said. Joel Greenblatt has done a fantastic job of writing a book that will appeal to both novice and professional investors alike. Greenblatt has a rather unique resume of being an extremely successful practitioner, a professor, and now an author.
“The Little Book That Beats The Market” is a very quick read and Greenblatt keeps the concepts interesting and uses very plain, simple and easy to understand language. Each chapter also highlights key points to remember which further assists in learning the concepts.
The book focuses on two key concepts that are not dissimilar to Warren Buffet’s practice of buying “a wonderful company at a fair price.” Although he doesn’t mention Buffet, these two key concepts are the components of Greenblatt’s “Magic Formula.” Greenblatt defines great companies as having a high return on capital (i.e. the company makes a very good profit relative to the amount of capital needed to run the business). Once great companies are identified, the challenge is to buy them at great prices. This is where Greenblatt explains the concept of earnings yield (i.e. the amount of earnings relative to the current stock price).
Greenblatt does an excellent job of explaining the technical aspects of the Magic Formula. More importantly he explains why the Magic Formula works.
“The Little Book That Beats The Market” is highly recommended and will prove to be a timeless book for anyone interesting in successful investing.
Key concepts discussed:
- Return on Capital
- Earnings Yield
Stars (9/10)
About DeepValueInvestor.com
DeepValueInvestor.com is dedicated to value and deep value investing. Our website has a variety of resources including education, the latest deep value investing news, discussion on value and deep value investing strategies, related book reviews, deep value investing quotes, and our Coattail Corner newsletter that follows selected stock purchases of successful investors.
*** Learn more about value investing and follow value investing stock picks - sign-up for our free newsletter! ***
DeepValueInvestor.com regularly reviews books on deep value investing and value investing. Check out our dedicated page on value investing book reviews.
Copyright © 2011 by DeepValueInvestor.com. All rights are reserved.
THE BIG SECRET for the Small Investor: Book Review
THE BIG SECRET for the Small Investor: A New Route to Long-Term Investment Success
Book Review
There are actually a number of big secrets and for more people than just the small investor. Joel Greenblatt answers the question “how to invest in the stock market.”
Greenblatt provides another easy read crammed with valuable information. With each subsequent book he writes, his message is further and further simplified. His writing style is extremely entertaining, thought provoking, and understandable.
The thought process that Greenblatt is trying to instill into readers is very similar to Margin of Safety written by Seth Klarman. Greenblatt’s approach is certainly very different but at a high level he explains: first, why many individual and professional investors don’t and/or can’t beat the market; second, a philosophy that explains and demonstrates why an individual can beat the market and most professionals; and third, how to easily implement a successful long-term investing strategy.
“THE BIG SECRET for the Small Investor” is a must-read for active and passive investors, individual and institutional investors, pension plans, and yes, even mutual fund companies.
There is a big secret to investing at the beginning of the book and another big secret to investing at the end of the book. Most importantly, however, the entire book explains why others fail and why you can succeed. As Greenblatt explains early on “understanding…is…crucial” (p. 18).
The Big Secret will only make sense if you read the entire book in order to develop a solid understanding and that is really the big secret. Join our newsletter — as we add tools related to THE BIG SECRET, you will be notified. Our newsletter also follows stock picks of successful value investors.
Key concepts discussed:
- Why most investors don’t beat the market indices
- Why you can beat the market indices
- How you can beat the market indices
- Margin of Safety
- Value Weighted Index
- Numerous Big Secrets to Investing
Book Information
Title: THE BIG SECRET for the Small Investor
Author: Joel Greenblatt
Publisher: Crown Publishing Group, a division of Random House Inc., New York
Publication date: 2011
Number of pages: 156
Review Information
Reveiwer: DeepValueInvestor.com
Date of First Review: April 2011
Updated:
Stars (9/10)
About DeepValueInvestor.com
DeepValueInvestor.com is dedicated to value and deep value investing. Our website has a variety of resources including education, the latest deep value investing news, discussion on value and deep value investing strategies, related book reviews, deep value investing quotes, and our Coattail Corner newsletter that follows selected stock purchases of successful investors.
*** Learn more about value investing and follow value investing stock picks - sign-up for our free newsletter! ***
DeepValueInvestor.com regularly reviews books on deep value investing and value investing. Check out our dedicated page on value investing book reviews.
Copyright © 2011 by DeepValueInvestor.com. All rights are reserved.
From the publisher:
When it comes to investing in the stock market, investors have plenty of options:
1. They can do it themselves. Trillions of dollars are invested this way.
(Of course, the only problem here is that most people have no idea how to analyze and choose individual stocks. Well, not really the only problem. Most investors have no idea how to construct a stock portfolio, most have no idea when to buy and sell, and most have no idea how much to invest in the first place.)
2. They can give it to professionals to invest. Trillions of dollars are invested this way.
(Unfortunately most professionals actually underperform the market averages over time. In fact,it may be even harder to pick good professional managers than it is to pick good individual stocks.)
3. They can invest in traditional index funds. Trillions of dollars are also invested this way.(The problem is that investing this way is seriously flawed–and almost a guarantee of subpar investment returns over time.)
4. They can read The Big Secret for the Small Investor and do something else. Not much is invested this way. Yet…
Let top hedge fund manager, Columbia business school professor, former Fortune 500 chairman and New York Times bestselling author, Joel Greenblatt, take you on a journey that will reveal the Big Secret for both individual and professional investors. Based on path-breaking new research, find out how anyone can beat the market, the index funds and the experts by following a new approach that relies on the principles of value investing, common sense and quantitative discipline. Along the way, learn where “value” comes from, how markets work, and what really happens on Wall Street. By journey’s end, small investors (and even not-so-small investors) will have found their way to some excellent new investment choices.
About the Author
JOEL GREENBLATT is the founder of Gotham Capital, an investment partnership that achieved 40 percent annualized returns for the twenty years after its founding in 1985. He is a professor on the adjunct faculty of Columbia Business School, a managing principal and co-CIO of Gotham Asset Management, the former chairman of the board of a Fortune 500 company, and the author of You Can Be a Stock Market Genius and The Little Book That Beats the Market. Greenblatt holds a BS and MBA from the Wharton School at the University of Pennsylvania.
Think and Grow Rich: Book Review
THINK AND GROW RICH
Book Review
Although not a “value investing” book per se, we chose to review “Think and Grow Rich” for several reasons. First, value investing is a mindset – you have to be in a frame of mind that will allow you to grow and learn. Further, just like Napoleon Hill studied financially and otherwise succesful people to determine the quickest and surest route to success, DeepValueInvestor.com studies and follows successful value investors. Finally, this is an action book that you can use on your value investing quest.
Napoleon Hill’s book “Think and Grow Rich” shares and explains “the secret” and “the magic formula” to attaining wealth or, indeed, success of any kind. The secret was explained to Hill by Andrew Carnegie in the early 1900s. At the time, Hill was a boy and Carnegie asked him to spend the next 20 years preparing so that he could share the secret with the rest of the world. Hill kept his promise and anyone who reads the book and opens their mind will learn the secret that the most wealthy and powerful already know.
“Think and Grow Rich” is the book you need to think yourself to wealth or to think yourself to accomplish anything in your life. This is a book of thoughts and actions! Required reading!
Key concepts discussed:
- Think and Grow Rich (expanding further will give away the secret – read the book!)
Stars (10/10)
About DeepValueInvestor.com
DeepValueInvestor.com is dedicated to value and deep value investing. Our website has a variety of resources including education, the latest deep value investing news, discussion on value and deep value investing strategies, related book reviews, deep value investing quotes, and our Coattail Corner newsletter that follows selected stock purchases of successful investors.
*** Learn more about value investing and follow value investing stock picks - sign-up for our free newsletter! ***
DeepValueInvestor.com regularly reviews books on deep value investing and value investing. Check out our dedicated page on value investing book reviews.
Copyright © 2010 by DeepValueInvestor.com. All rights are reserved.
Value Investing Made Easy: Book Review
VALUE INVESTING MADE EASY
Book Review
Janet Lowe has written several books about value investing and Warren Buffet. In “Value Investing Made Easy” Lowe condenses the theories of Benjamin Graham, David Dodd and Warren Buffet into an easy read. Furthermore, each chapter has a conclusion and highlights key points to remember which helps drive home the main ideas.The book is also sprinkled with various quotes from value investors who are disciples of Graham. The book moves from explaining concepts and importance of value investing and then moves into the basic mechanics of understanding financial statements. Lowe explains to the reader the basic but important calculations, including how to value stocks, that Graham and Dodd shared. Building a portfolio and risk management methods are also described.
“Value Investing Made Easy” is a good introductory book for the investor who is just starting out or a great book to remind the seasoned investor to stick to the time-tested basics of value investing.
Key concepts discussed:
- Margin of safety
- Intrinsic value
- Net current asset value
- Dividends
- Earnings growth
Stars (8/10)
About DeepValueInvestor.com
DeepValueInvestor.com is dedicated to value and deep value investing. Our website has a variety of resources including education, the latest deep value investing news, discussion on value and deep value investing strategies, related book reviews, deep value investing quotes, and our Coattail Corner newsletter that follows selected stock purchases of successful investors.
*** Learn more about value investing and follow value investing stock picks - sign-up for our free newsletter! ***
DeepValueInvestor.com regularly reviews books on deep value investing and value investing. Check out our dedicated page on value investing book reviews.
Copyright © 2011 by DeepValueInvestor.com. All rights are reserved.
Margin of Safety: Book Review
MARGIN OF SAFETY: Risk-Averse Value Investing Strategies for the Thoughtful Investor
Book Review
Seth A. Klarman’s very limited print of “Margin of Safety” is in such short supply that used copies sell for between $825 and $1300 (as per latest check on Amazon).
Klarman explains the value investing philosophy, the logic of the value investing strategy, and why value investing succeeds over the long term. Klarman holds, and has indeed demonstrated by his outstanding investment performance, that the market is not always efficient. This means that, in the short run, market inefficiencies present the value investor with opportunities to purchase stocks at substantial discounts to their intrinsic value (i.e. buying stocks with a margin of safety). Klarman asserts that purchasing stocks with a significant margin of safety also serves to reduce portfolio risk. The value investing strategy calls on the value investor to hold the stocks purchased at a discount until the market bids up the price as the value or worth is recognized by the market. Klarman also describes that consideration should be given to selling existing stocks if better opportunities become available. Cash should also be held as necessary to take advantage of opportunities and/or in the event that there is a lack of current investment opportunities.
“Margin of Safety” is organized into three sections:
Where Most Investors Stumble
A Value-Investment Philosophy
The Value-Investment Process
Section 1 examines why most investor and other investment philosophies ultimately fail or underperform. Klarman is also quite critical of the investment industry and explains to the reader how the financial interests of others can negatively impact the individual investor. Klarman also uses the example of the junk bond mania that occurred in the 1980s and some readers may see this as dated; however, it was only to serve as a then recent example of how a mania and lack of fundamental analysis ultimately hurt many investors.
Section 2 explains the value investment philosophy and even introduces the technical aspects of valuing businesses (i.e. how to value stocks). Klarman asserts that value investors must first consider the risk of loss and avoid losing capital before even considering potential returns. Value investing is performed by analyzing individual companies (also known as a “bottom-up” approach). Valuation methods that are introduced include: discounted cash flow or net present value, private market, liquidation value, stock market value (with some major caveats!). Other valuation methods (or inputs into valuation) that have some significant shortcomings in the opinion of Klarman include: earnings per share, book value, and dividend yield.
Section 3 details the implementation of a value investing strategy. At the individual company or stock level, research and analytical processes are examined and a selection of specific types investment opportunities are presented. At a higher conceptual level, portfolio management and trading strategies are discussed as well as the process of selecting an investment professional.
What Klarman does particularly well is provide context for the investor. The environment in which the investor must operate is described and flags are waived at potential pitfalls. Klarman also does an excellent job of explaining why a value investing strategy can be consistently profitable while at the same time reduce risk. Finally, Klarman explain why market inefficiencies occur and ways that the value investor can capitalize on these opportunities.
“Margin of Safety” is a must-read for investors. Klarman’s book is straight-forward, honest, thought-provoking, and enlightening.
Please read more about the value investing theory of margin of safety.
Key concepts discussed:
- Margin of Safety
- Investment vs. Speculation
- Market efficiency vs. Market inefficiency
- Mr. Market
Book Information
Title: MARGIN OF SAFETY: Risk-Averse Value Investing Strategies for the Thoughtful Investor
Author: Seth A. Klarman
Publisher: HarperCollins
Publication date: 1991
Number of pages: 249
Review Information
Reveiwer: DeepValueInvestor.com
Date of First Review: December 2010
Updated:
Stars (9/10)
About DeepValueInvestor.com
DeepValueInvestor.com is dedicated to value and deep value investing. Our website has a variety of resources including education, the latest deep value investing news, discussion on value and deep value investing strategies, related book reviews, deep value investing quotes, and our Coattail Corner newsletter that follows selected stock purchases of successful investors.
*** Learn more about value investing and follow value investing stock picks - sign-up for our free newsletter! ***
DeepValueInvestor.com regularly reviews books on deep value investing and value investing. Check out our dedicated page on value investing book reviews.
Copyright © 2010 by DeepValueInvestor.com. All rights are reserved.