The Art of Value Investing How the World’s Best Investors Beat the Market: Book Review

Note to readers: I plan on doing a series of book reviews over the next few weeks.  I may do more than a dozen.  I hope you enjoy them.

The Art of Value Investing

I am a value investor.  That’s what I do for a living, and I do it well.  One month ago. I wrote a piece called “Value Investing Flavors.”  In it, I took a broad view of value investing, because there are many common principles to value investing employed by all, but many variations on implementation. [Note to those reading at Amazon; they don’t me post links, but if you Google Inc (NASDAQ:GOOG) “Aleph Art of Value Investing” you will find it.

The Art of Value Investing takes a similarly broad view, quoting well over 100 value investors (I lost count) on topics where professional value investors agree & disagree. The authors have interviewed the grand majority of those cited, and have useful historical quotes from well-known figures familiar with the subject.  Better known and more accomplished value investors tend to get more play in the book — I think the authors chose well.

The book is organized by topic.  It covers these questions:

  • The importance of a margin of safety
  • Buy high margin quality businesses, or cheap low margin businesses?
  • What attention should be paid to growth opportunities? (Controversial)
  • What is your circle of competence? (I.e. what opportunities do you rule out because you don’t get how to value them?)
  • How small of a company would you consider buying?
  • How much do you incorporate top-down macroeconomic considerations?
  • What countries would you not consider buying a company within?
  • The advantage of being able to buy and hold for years.
  • How careful research often conquers uncertainty.
  • Do you buy turnarounds or not? (Controversial)
  • How do you generate good buy ideas?
  • How do you create a firm that ignores the conventional perspective, and generates correct ideas that few know?
  • How do you analyze what could go wrong with a company?
  • Do you look for catalysts to unlock value or not? (Controversial)
  • Do you analyze value through one framework or many?  Cheap going concern or transformation of underused assets? Both?
  • Do you manage for absolute value or relative value?  I.e., what is the value of safe assets, or even gold?
  • When do you establish an position?  How do you size it?
  • How diversified do you want to be?  How do you weight positions?
  • How much do you care about stocks being correlated within the portfolio?
  • How long are you willing to wait to see if an idea works?  When do you admit that you are wrong?
  • Are you willing to advise management?  Are you willing to fight management?  When does it make sense?
  • Do you short bad stocks or not?
  • When do you sell?  Do you do it never, gradually or rapidly?
  • How do you maintain a sound mind and humility amid all of the clamor of the markets?
  • How do you admit mistakes, so as to avoid them in the future, and show humility to your clients?

If you want to understand the nuances of how a firm doing value investing works, I can’t think of a better book, because this book implicitly goes over all of the choices that a value investor has to make.  What factors will I focus on, and what will I ignore?  How detailed will my analysis be?  How much will I diversify?  How will I make choices among so many stocks vying for my attention amid all of the news noise?

I have strong views on value investing myself, but I questioned my own ideas as I read the replies of those more successful than me.

Quibbles

Initially, as I read the book, I wondered if a better book could be made by organizing by each firm, rather than topic.  By the end of the book, I realized I was wrong.  Not all firms have opinions on many questions, and doing the book by topic highlights the variation in opinions across a wide spectrum of organizations.

Who would benefit from this book: Amateur and professional value investors will benefit from this book; if the reader does not want to put the effort into learning value investing, this book will be of no use to him.  If you want to, you can buy it here: The Art of Value Investing: How the World’s Best Investors Beat the Market.

Full disclosure: I received a free copy from the publisher.  I personally know a few of the value investors cited.  I would like to meet more of them.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon.com, Inc. (NASDAQ:AMZN) do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

By David Merkel, CFA of alephblog




About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.