This is part two of a multi-part interview with Anurag Sharma, author of a new book on value investing, Book of Value: The Fine Art of Investing Wisely. The interview is part of ValueWalk’s Value Fund Interview Series.
Throughout this series, we are publishing weekly interviews with value-oriented hedge funds, and asset managers. All the past interviews in the series can be found here.
The first part of the interview, along with an introduction to the book and a brief summary can be found here.
Author Interview: The Book Of Value [Pt. 2]
RH: What do you hope readers will take away from the book?
AS: Book of Value synthesizes several different streams of thinking, so readers may find some sections more novel than the others. I hope the synthesis itself is compelling and clearly communicates that focus on value can help build highly productive investment portfolios.
Specifically, the prologue would interest those wanting to know a bit of history of the turn away from Graham’s work in investing education. The rest of the first half of the book provides insights into investor psychology: confirmation bias, principle of negation, and perception.
The second half of the Book of Value is an elaborate discussion of analytical concepts like implied growth rates and discount rate. Qualitative analysis and portfolio construction in the last two sections of the book should be useful to readers.
RH: There are a lot of books on value investing and how investors can use a value strategy to outperform. What makes Book of Value stand out from the rest of the pack?
AS: Book of Value is different in that it formalizes value investing as an intellectual framework for investors, one in which value is the guiding principle for making commitments of capital—as opposed to those frameworks that emphasize price movements and momentum (e.g., modern portfolio theory and charting).
And value investing is not simply a heuristic but a productive way of thinking—a unique constellation of ideas—that can be learned and taught. In a sense, that is what Benjamin Graham was trying to do in the 1930s when he wrote Security Analysis.
Unfortunately, somehow we lost Graham’s ideas (at least in business schools) during the rise of mathematical finance in the latter half of the twentieth century. But value investing never left the street, as generations of Graham’s disciples have continued to practice what he preached—adapting the basic precepts of security analysis to new circumstances. It is time to pick Graham back up and formalize value investing as a discipline worthy of serious study. This, I hope, readers will see as the contribution of the Book of Value.
RH: Do you look at valuation in the book or do you concentrate on style only?
AS: I discuss valuation in the third section, Foundations, and provide insights about how to estimate or reverse engineer the discount rate based on expectations of growth built in the price. But valuation is much more than running simple arithmetic equations, as the key is always the assumptions built into the numbers and the equations themselves. So, qualitative analysis is integral to valuation, as it gives investors insights about the economic character of the company and the security. This I discuss in the fourth section, Diligence. Both quantitative and qualitative factors inform judgments about value.
RH: Based on your research and experience, what would you say is the biggest mistake investors (both experienced and inexperienced) make when it comes to the stock market?
AS: Investing can be difficult, and mistakes are almost inevitable. It is not that investors make mistakes; more important is what they learn from those mistakes and avoid them next time.
To my mind, most major mistakes in investing come from investors not having a clear sense of themselves as thoughtful capitalists deploying precious capital in well-run businesses. Instead, caught in the hype or emotion of the moment, those with poorly formed or non-existent identities as value investors begin to act like gamblers and speculators, with little or no conscious awareness of the fundamentally different ways of knowing/doing that value investors bring to the table.
Gambling and speculating makes investors vulnerable to the really egregious errors.
Most successful value investors are self-taught, either from following well-known value investors or by trial and error. Because no business school (except one) in the United States teaches a full curriculum devoted to value investing, there really is no formal way for an average individual to grasp the temperament and analytical orientation necessary for being a value investor. This is unfortunate. Many individuals are temperamentally well-suited to be successful value investors, but they have almost no place to go for formal training in that way. For the most part, they must figure it out for themselves, through trial and error and self-evaluation.
In all, I’d say that not having a clear identity as value investors induces modes of thinking and behaviors that lead to big unforced errors.