I just finished reading the book mentioned in the title. As you probably guessed, it is all about value investing. See my post on common investment strategies for an explanation of that. The book was written by Christopher H. Browne, is paper back size, 180 pages long and was rented from my local library for free. I’m considering buying it though. The foreword of the book has a story by a different individual that I think pretty clearly illustrates my opinion that an objective valuation of a companies stock and the stocks actual price have little in common, but I’ll save that for another day.
The basic principle the author espouses is, of course, value investing. As I’m coming to find out, every book in finance has facts and figures to support why it has the best strategy for increasing your net worth, and this book is no exception. Through out the book he touts success stories like Warren buffet and Benjamin Graham. My only disagreement with those stories is that if his strategy is so successful, there should be more names than the handful of people he talks about. That, combined with the fact that half the book is a pep talk about value investing indicate to me that there are other barriers to executing this strategy.
Chapter 1 talks about how value investing can be accomplished by any one of average inelligence and draws the analogy of buy stocks cheaply to buying steaks on sale.
Chapter 2 talks about the intrinsic value of a stock, usually bases on price to earning(P/E) multiples and how looking at that would have saved investors from most of the boom and bust cycle that markets go through.
Chapter 3 starts to lay the ground rules for value investing. He recommends buying stocks when they are less than 2/3rds their intrinsic value. This provides a margin of safety and an edge over an index fund when the stock readjusts to market value. Avoid companies with excessive debt. Diversify your portfolio. He dosen’t give a hard number, just ask the question: “If one of my stocks went bankrupt, could I just slough it off?” And finally ignore what the general market trend is and stick to your investment strategy.
Chapter 4 is more in depth about P/E. He cites a study showing the Low P/E stocks outperformed higher P/E stocks over periods from 5-20 years. I don’t recall if he mentions it, but I would be leery of companies that have low P/E multiples due to a poor future outlook.
Chapters 5-16 go over other methods of uncovering value. Some I think would be useful others I don’t think I could realistically benefit from. He talks frequently about investing in foreign markets as well as in the US, but the examples his gives of finding value have largely to due to with uncovering hidden caveats of that countries tax code. He also recommends looking at insider and institutional buying. Insider selling is not very indicative of a company’s health since insiders usually have stock options, but buying can be a strong indicator of management’s faith in the company. Use online search stock screener to find companies that fit the value criteria, and then examine them more closely. Chapters 11-15 in particular lay out a list of things to look at when examining a company closely. The author recommends looking at 5 years worth of company balance sheets and comparing trends. He goes more in depth about what to look for on a company’s balance sheet than Cramer did [see my review of Cramer’s book], and again advises the if the balance sheet looks too complicated to truly understand, avoid the stock. Here he advises that the ratio of a company’s liquid assets to short term debt should be approximately 2-1 or less.
Chapters 17-21 are mostly pep talk chapters.
There are actually many similarities between Cramer’s advice and Browne’s, but Browne goes into more detail on every subject. Overall this book was fairly easy reading, but to truly benefit from it I’ll have to reread portions and have it by my side as I evaluate particular companies.
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