Value Investing from Graham to Buffett and Beyond

by Greenwald et al (Wiley) 2001 paperback

Going to and from France in December 2005, I read most of Value Investing from Graham to Buffet and Beyond. I enjoyed the book and its many ideas on value investing. It's an easy read in most places, a bit heavy on accounting data in others, even though the lead author is a professor of Finance and Asset Management at Columbia University (where Ben Graham taught beginning in 1928) Graduate School of Business. The text contains great ideas on value investing, especially in the last eight chapters when they look at what eight famous value investors "actually do when they are at work".

Some ideas...as I work on this book report and finish reading Value Investing in January 2006
"Value investing...the only strategy that took care to limit risk while still holding out the prospect for attractive returns over time"232.
"A value investor estimates the fundamental value of a financial security and compares that value to the current price Mr Market is offering for it. If the price is lower than value by a sufficient margin of safety, the value investor buys the security." page 4
If your stock does not pay a dividend, you are left with only one way to realize any return: hope the price goes up and then sell the shares to someone else. From an idea on page 237

So far, I have these pages down to read again very carefully: 284 on reducing risk, 270 when to buy/when to sell, 148 on concentrated portfolios, 232 measures of safety, 228 dividend yield investing, 178 buy wonderful businesses,

1. Value Investing -
2. Searching for Value in corporate securities - interesting ideas on biases and variables (fundamental, technical, that relate to price. "portfolios of stocks ranked high on value outperformed the market as a whole and trounced portfolios ranked high on glamour"18
3. Valuation in Principle, Valuation in Practice - Here are the first two sentences. "Adherents to value investing as an investment discipline believe that financial securities, like all other assets, have an intrinsic value that can be determined by careful analysis. Opportunities for profitable investment emerge when the current market price of the securitiies deviates significantly from this intrinsic value." There are many methods for estimating an asset's true value. "This chapter argues that the methods pioneered by Graham and Dodd possess significant practical advantages over commonly used alternatives."
4. Valuing the Assets - I read this quickly on our flight from CDG to YUL
5. Earnings Power Value - yet to be read
6. A Wonderful Little Franchise - eighteen pages about WD-40 - 'kind of' interesting
7. Inside Intel from page 107 to 145 - yet to be read
8. Constructing the Portfolio - These seven pages are full of interesting ideas especially on page 148 where they discuss the more concentrated portfolios value investor run. It made me feel better about our own concentrated portfolios. And there's more on risk and diversification.
9. Warren Buffett: It's worth buying this book to obtain the 35 pages in Chapter 9: treasured selections from various letters of Warren Buffett to the shareholders of Berkshire Hathway over the years. The authors have "thought is wiser to let Buffett speak for himself" rather than write about him. I particularly like Buffett's thoughts about risk pages on 168 and 169, and have read these paragraphs a number of times already. In addition, I have listed these topics to read again too: margin of safety 167, avoid mistakes 167, value investing 165-166, buy good businesses 162, hold for years 176, turnarounds 182, volatility 169
Here's one line from Buffett's 1980 letter: "We believe that short-term forecasts of stock or bond prices are useless."
If I had to summarize it all, I'd use these words: buy good businesses. Note that this is quite different than buying just any high yield stock...the dogs of the TSE.
10. The chapter on Mario Gabelli is mostly about private market value (PMV) "the value an informed industrialist would pay to purchase assets with similar characteristics". The chapter ends with two specific examples.
On pages 200, 201 and 203 there are some interesting thoughts on catalysts - 'an event, a person, a change in perception-to narrow the spread between the market price and the PMV' - a source of change, if you'd rather. As I key this in January 2006, BCE at about $27 needs a catalyst to get its price moving. "All investment strategies require a catalyst to make them pay off...certainly what we do requires a catalyst as we tend to buy out of favour companies as identified by high yield and then wait patiently for a catalyst.

11. I was interested in the material about Glenn Greenberg because he did very well (a compound rate of growth of 25% annually from 1984 to 2000) and had a very concentrated portfolio. Value investors tend to have concentrated portfolios: mine certainly are concentrated. If this topic interest you look to the ideas on pages: 283, 211, 213, 148, 164, 211 and
Also,Greenberg began in the money management business in 1973. The years 1973-1974 are important years in market history: the Dow-Jones average was about 1,000 in 1973. Toward the end of 1974, the average hit a low of 570. Lessons were learned. For Greenberg, on of the lessons was: "be skeptical of prevailing wisdom". At the time the Nifty-Fifty were all the rage. Those 50 stock did poorly for the next decade, as did the Dow-Jones index...yet Greenberg, a value investor did well.
12. Robert H. Heilbrunn worked with Graham and took his course at Columbia in the early 1930s. They found bargains in depression-era investments that paid off handsomely. One method they used (page 228-229) was to study dividend histories and establish ranges of the dividend yield within which the securities had traded. Sound familiar? "The investment strategy based on this infomration is to buy stocks when they sell with the lower range of their historical P/E multiple range, within the higher portion of their dividend yield range, or both. By establishing the ranges with percision, this approach provides a check on the emotions that can distort investment judgement" top 229.

13. Seth Klarman - "he [Klarman] sees it as essential that he worry about risk before he begins to think about the potential return". 231 I liked Klarman's idea of margins of safety (notice the 's' on margins). "The securities he [Klarman] likes to buy are cheap on a host of measures: price to book, price to earnings, price to cash flow, break-up value, dividend yield and private market value". 232 There is some material in chapter 13 on dividends and interesting thoughts on bonds: "the price for this predictability is a lower rate of return" 238. I like Klarman's ideas a lot: you will too if you are concerned about the security of your capital. Seth Klarman's 1991 book, Margin of Safety, now out of print, sells for upwards of $600.

14. Michael Price - The funds Price became associated with in the 1970s "held up well" in the disastrous years of 1973-1974 when the Dow-Jones Industrial Index was down some 40%. (I remember, in this period, how friends of mine were so very discouraged about stock market investing. They had been talked into buying mutual funds in the late 1960s. It was not a good experience. I began my report as the market recovered in the early 1980s and nine of those people are still with me. They; the people that worked with me on a day to day basis, and knew me, and had faith in what I was doing; are my most precious subscribers. I rarely see them now that we have moved away, but these former collegues keep in touch with very kind notes, when they renew, about how well their stocks are doing.)
This chapter about Michael Price has a lot in it about IPOs (how investment bankers really make money and their research material -"Trust the Street at your peril" 252) pages 249-250, and bankruptcies. I have the bottom half of page 260 marked to read again - the four attributes that define Price's approach to investing. "One is discipline. Don't deviate from the valuation standards, especially as the sirens of momentum are enticing the unwary." I liked this thought particularily: "Each investment is a wager against the party on the other side of the trade. Only one of you will be right..."

15. Walter and Edwin Schloss - perhaps my favourite chapter - more here in a few days

16. Paul D. Sonkin - mostly about out of favour small companies - some great ideas especially on 278, 284 and 289. For example: Why value investors tend to sell too soon. 289
The last line in the book "value investors aren't supposed to have this much fun"

You can only read and digest a few pages from Value Investing at a time. It gets you thinking about your own portfolio's structure. I started Value Investing in early December 2006 and I'm still at it in mid-January...reading a few pages and then thinking and flipping back to what else was said on a particular point elsewhere in the book: diversification vs a concentrated portfolio, measures of safety, catalysts, Why value investors tend to sell too soon...

It's not like Jarislowsky's book and not for everyone.