Book Review – Brandes On Value: The Independent Investor by Bruce Grantier, CFA, CFA Institute
Brandes on Value: The Independent Investor presents excellent long-term insights into the field of value investing by well-known value investor Charles H. Brandes, CFA, a colleague of Benjamin Graham and founder of Brandes Investment Partners. In 1971, Brandes, an investment dealer fresh out of school (he studied math and economics), met Graham, the father of value investing, in La Jolla, California, where Graham lived after retiring from teaching at Columbia University. The two met frequently back then; Graham loved teaching, and Brandes reread Graham’s two most famous books (Security Analysis and The Intelligent Investor) and became a fervent disciple of value investing. Brandes on Value, a follow-up to Brandes’s 2004 book, Value Investing Today, provides a broad and timely update to what the author calls a “myriad of tumultuous” topics that have evolved since his earlier book. Value investing, however, remains the same: buy cheap with a margin of safety, avoid the herd, and think long term. Brandes presents all this and much more in a very clear and enjoyable fashion. (In the interest of full disclosure, I have been a member of the Brandes Institute, which develops investment ideas and research, since 2003.)
Brandes on Value has four main parts:
- “Why Do Value Investing?” discusses 50 years of market history, shows what value investing has produced, and details the main benefits of value investing — higher returns, lower volatility, and lower trading costs.
- “Where One Finds Value” covers behavioral biases (a major generator of value stocks), Graham’s concepts of intrinsic value and the margin of safety, and the fact that value is everywhere, including small-cap stocks; the European, Australasian, and Far Eastern (EAFE) markets; and emerging markets.
- “Value Investing in an Ever-Changing Market” discusses value versus glamour, shorting, 130/30 funds, target-date funds, active versus passive indexing, smart beta, fixed income, and hard assets (gold, commodities, art, and real estate).
- “Value in Portfolio Management” covers the long-term superior performance of equities despite periods of negative returns, explains the various types of portfolio risk, and includes a very well-done discussion of value investing in bonds, an often-overlooked topic that Graham wrote about extensively in Security Analysis.
A number of major themes run through the book, of which I would like to mention three: behavioral biases, the need for independent judgment, and the long-term view.
Behavioral biases in real-world investing continually present opportunities in value stocks. People unconsciously make investment decisions on the basis of psychological biases. Studies in behavioral finance have identified the main flaws as faulty intuition, extrapolation, overoptimism, anchoring, and hindsight. As Brandes says, “Value investing . . . based on decisions on fundamentals and looking for cheap and often out-of-favor stocks has proven to be successful over 80 years . . . certainly before behavioral finance became a topic of formal study.”
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Brandes On Value - Description
Brandes on Value: The Independent Investor by Charles Brandes
Value investing isn't for everyone. Like practically everything in life, however, you can't know for sure until you’ve tried it and seen how, where, and especially when value investing can get results. Anyone can stumble onto bargains. But knowing whether the companies behind the cheapest stocks and bonds are the genuine articles for the long run is part science and part judgment.
Brandes on Value: The Independent Investor is your opportunity to experience both sides of the equation. From the time-tested Graham-and-Dodd fundamentals introduced in the 1930s to the contemporary lessons of Japan's lost decades, the financial crisis of 2008-2009 and the rapid globalization of the investment arena, Brandes on Value: The Independent Investor is a modern take on a classic approach to a timeless discipline.
Through real-world examples and time-tested perspectives on classic Graham-and-Dodd principles, Brandes on Value: The Independent Investor is more than just a "how to" for value investors. It also answers "how come" and "how now" in the modern investment world--one that is too often distracted by short-term thinking and short-lived trends.
ON MARKET CYCLES and how boom-and-bust speculation lays the foundation for value investing opportunities that are often hidden in plain sight.
ON INVESTOR PSYCHOLOGY and why behavioral biases work against the average investor and in favor of the patient, persistent value strategist.
ON PRODUCT TRENDS and the trappings of old ineffective investments constantly repackaged into new ones.
ON "MR. MARKET" and proof that value investing pioneer Ben Graham's bipolar parable is more vocal now than ever.
ON RISK and its misperceptions that lead to costly long-term setbacks for individual and institutional investors.
ON VALUE and why this investment discipline with roots in the 1930s is more relevant and needed than ever before.
Brandes On Value - Review
"If you're not different in the way you think from the majority, it's harder to be successful." -- From Chapter 5
Most people love a bargain. But no one likes anything cheap and nonlasting. This is the essence of value investing--finding companies built to last at bargain prices. If this sounds easy, you'll find that it's not. With the right know-how and time, however, it can be done effectively and consistently.
You don't hear much about value investing these days, but it is always at work. With time on its side, it is content to take the back burner to trendy investment approaches that dominate the financial and mainstream media. The allure of the "quick fix" from ETFs, alternatives, commodities, quant, risk-on risk-off, IPOs, and private equity certainly captures the investor's imagination more than long-term strategies involving active value stock picking. But if you're a value investor, this is good news. That is, if you're going to succeed at value investing over the long run, the opportunities are usually found where the flock doesn't fly.
Brandes on Value: The Independent Investor is about this independent journey, not just for Charles Brandes, but for the many investors who attribute their success to the unwavering pursuit of value principles.
Brandes on Value: The Independent Investor by Charles Brandes
