Book of Value: The Fine Art of Investing Wisely (2016, Columbia Business School Publishing) by Anurag Sharma is a must-read and keeper for value investors. I took far more notes than are written below, but I think you’ll get a sense of the value the book offers from these notes. In addition, where appropriate I tried to mention other ideas that pair well.
First, 10 bullet points that I had originally tweeted comprising some of my notes from the prologue and chapter 1. Following that, I share briefly some of the notes that I jotted down while reading Book of Value.
- Having just read Peak, which I recom., many thoughts brewing re. #valueinvesting, #study, etc. Now prep notes from Book of Value -Sharma.
- Peak really abt mastery in one area; interesting late in book a hint at value of multi-discp exp. In Sharma’s Book of Value prologue:
- interesting point: shortcoming of behavior finance is no concern w/ an investment itself; in this way, it’s similar to MPT!
- Sharma basically saying math and psych profs respectively self-serving w/ their journal articles; protectionists.
- Sharma advocates and employs principle of negation (process of disconfirmation). Essentially the reading, sifting and “too hard” pile.
- Sharma: investing is fundamentally a problem of choice (large universe of potential investments, prices in constant motion)
- investing a prob of choice cont., also including “unrelenting pull of internal urges and external inducements.”
- investing a prob of choice not chance; spec/gambling requires lrg vol of transx, short hold per. and constant search for new opps; luck.
- seems w some exceptions (e.g. Soros/Druck, PTJ outsize “bets”) investing far less transx than trading bec seeking high odds of success.
- end Ch1 Sharma mentions primacy effect (Francis Bacon), tendency of quick opinions based on avail info then seek/use info to support.
From the end of chapter 2:
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy Read More
“Efficiency” (i.e. market) invokes the engineering image of a machine, which is partly because economists take deep inspiration from physics (mother of all sciences) and are forever searching for regularities and laws that are free of human intervention. Says Sharma: yet, markets are human constructs of people and algos made by people; conceiving markets as efficient machines hides what may be most interesting about them: being prone to excesses and instability (see Minsky: Stabilizing an Unstable Economy).
I like the title of chapter 3: The Dark Arts (and ch. 4 Purveyors of the Dark Arts). Sharma briefly describes the history and techniques of manipulation, the art of mass suasion, including a mention of Rhetoric (Aristotle) and its three essential elements of effective persuasion: 1. ethos – indicating the credibility of the source, 2. pathos – indicating the emotion of the audience, and 3. logos – the logic and reasoning in arguments. Where is Sharma going with this: the vulnerable investor, the psychology of peoples, engineering consent, hidden persuaders, persuasion everywhere — these are all subsections of chapters 3 and 4.
Chapter 5, Victims of the Dark Arts, is short and self-explanatory. Here’s a passage that serves as a good reminder; it follows a mention of how manipulators know human frailties that can lead to an overriding of normal behavioral restraints. Read/re-read your Cialdini folks!
[…] knowing that visceral influences subside rapidly, skillful fraudsters emphasize immediate action. Get on board now, they say, because the train is leaving the station; this [is] a limited-time opportunity; this house will be snapped up, so buy now. Students of human behavior, as con artists are apt to be, they understand that visceral factors are their best friends, readily leveraged or deftly invoked to their advantage.
Jumping ahead to Chapter 7, Investing as a Negative Art, I immediately thought of Bruce Berkowitz (Fairholme Capital), who every time one hears him being interviewed he’s talking about not being able to kill a particular company (and hence xyz being a solid investment despite whatever current shortcomings the market is aware of and may have discounted too much or conversely, opportunities the market doesn’t recognize and therefore is not reflected in valuation). Two points I jotted down that again serve as good reminders: the hope of gain intensifies confirmation bias; need clear thinking via willingness and ability to disconfirm prior beliefs.
Skipping ahead (fyi the chapters are on the short side) to Chapter 10, The Art of Looking, there are more keepers/reminders. Firstly, I couldn’t agree more with:
It pays for investors to learn to dig into the facts precisely because most people care not to do so.
Reading Japanese securities filings in particular is rewarding in this regard. I don’t know if analysts or investors in Japan read them or not, but I suspect perhaps not so much or many (analysts) are so grounded in what Marty Whitman calls the primacy of the income statement that they miss integral components to the valuation on the balance sheet or many (individuals) are watching candlestick charts and playing momentum. Thank you for the investment opportunities, however it tends to make the lead time for value realization longer!
Sharma argues that to battle various biases one needs to be skeptical — [needs] a systematic process of disconfirmation, a way of seeking and approaching data so as to try to refute whatever hopeful thesis you may have begun to form. I’m reminded here of Kierkegaard’s De omnibus dubitandum est (everything must be doubted). Says Sharma:
[what’s also useful about engaging in the process of disconfirmation or refutation] is that it forces you to pay attention to inconvenient facts of the case that you would have likely ignored were you not actively looking for them during the disconfirmation analysis.
Logic, data, and doubt are the three key ingredients of this process, which is the art of looking.
Chapter 11 is entitled Price and Value. From it, I’ll only share one of Sharma’s conclusions:
[…] since emotion and the desire to justify a particular price can corrupt analysis, the key to good valuation is a careful application of the principle of negation.
I’m deliberately not going to share much from the second half of Book of Value. This is the actual hands on how-to do valuations and of course do so purposefully to try and kill your investment idea. Wal-Mart is the main company used in the exercise and I found it an interesting choice considering how its stock performed during 2015 and 2016:
The last several chapters of the book were quick reads. To conclude this post, I want to share one point of Sharma’s that resonated with me and how I approach investing (concentrated portfolio):
When bought at attractive prices and in sufficient quantities to have a meaningful impact on portfolio performance, such companies [Sharma’s referring obviously to ones that have survived negation/disconfirmation] also obviate the need for their constant monitoring. Instead, through selective and periodic reading of the mandatory company filings (say, once every quarter), investors maintain focus on the fundamental attributes that drive their ability to deliver steady economic performance. — from Chapter 23 (Core Holdings)