Thursday, October 05, 2006

Book Review of "Little Book of Value Investing"

"The Little Book of Value Investing"

This is the second in the “Little Book” series by Wiley Publishing. The first book, of course, was the best selling “Magic Formula” book by Joel Greenblatt.

What Is It About?

It will come as no surprise that this book is about value investing; that much is clear from the title. It is written by Christopher Browne, the managing director of Tweedy, Browne Company. Tweedy, Browne’s roots in value investing reach back several decades, most notably as broker to Benjamin Graham and Warren Buffett in the post-war period.

What Did I Get Out of It As A New Investor?

The book is well organized. It provides a road map that introduces value investing, describes what value investing is and is not, how to practice the art of value investing, and why (in the author’s opinion) value investing is the superior method of investing.

I wish this book was available last November when I first began thinking about and exploring investing ideas. The book presents in a straight forward manner a comprehensive overview of what comprises value investing. It does so in a manner that even the newest investor can grasp.

The first several chapters cover the basic thought process behind value investing, i.e. the concept of buying companies that are on sale at bargain prices much like one waits for a bargain sale at their local retailer. The next few chapters discuss exactly why one must purchase stocks at those bargain prices. This is where the book excels.

In Chapters 3 and 4, the book sets forth, in a manner a new investor can easily grasp, several concepts crucial to understanding the rationale behind requiring a “margin of safety” in one’s stock purchase. Can you find this information elsewhere? Yes, but not as clearly stated as in this thin volume. For me these two chapters make the book a worthwhile read.

Later, the book describes common characteristics of stocks suitable for value investors. Browne takes you through a simple but effective explanation on how to identify worthwhile, but inexpensive, companies to invest in. He does this by examining how to weed out the cheap and good from the simply cheap, using the balance sheet, income statement, and an easy to follow checklist for evaluating a company’s competitive advantage.

The last part of the book describes why sitting tight with financially strong, well-run companies provides exceptional returns over time. It does this by contrasting the simplicity of value investing against the more difficult strategy of market timing.

This is not to say that this book is perfect. My enthusiasm for the book springs from my status as a new investor. As a new investor I often struggled with unfamiliar terms and concepts; therefore, any material that simplifies the learning process I deem worthwhile.

However, the more experienced practitioner of value investing, who has experience and knowledge on how to value a company may find this book to be lacking in depth sufficient to provide anything new, other than a refreshing of the key concepts.

This book was not written for the experienced practitioner of value investing. Rather, it is clear that this book was meant for the broader audience who may not have the time or inclination to wade through the more detailed works on security analysis.

This book is a great complement to Joel Greenblatt’s book. “The Little Book That Beats the Market” provided a formula to new investors allowing them to quickly identify high quality, undervalued stocks. “The Little Book of Value Investing” goes one step further by providing the basic tools necessary to refine the results produced by the “magic formula.”

The Good News

If you are struggling to understand the concepts presented in other books on value investing, this book should help clear things up for you. The time saved in gaining this knowledge more than makes up for the cost of this little book.

The Bad News

Simply put, if you have been investing for a number of years, or can quote specific passages from Graham and Dodd's “Security Analysis”, this book may help remind you of the key points, but does not reveal anything new. The book jacket makes this point clear; experienced value investors are not the intended audience.

The Bottom Line

This is a good book for new investors and certainly worth purchasing.


Jason said...

Does Browne give any detailed examples on how he himself determines 'intrinsic' or 'fair market' value of companies? Or is it more or less theory?

Steven said...

more or less theory...he gives a check list to go over...some thoughts on thinking about the companies comp. advantage..but no real breakdown on how to do a valuation...but i will look agian to make sure.

Jason said...

Thanks for the comment Steven.

I just received the book, so I am about to start reading. I guess my concern was...I am already "sold" on value investing, so I don't need to be pitched anymore reasons on why it is "better" than anything else. What I look for is how professionals themselves value companies and what type of quantitative analysis they may use.

penny stocks said...

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Excellent book