The Art of Value Investing: How the World’s Best Investors Beat the Market (Wiley Finance), written by John Heins and Whitney Tilson is not a traditional book on value investing. I’ll elaborate on my use of the word traditional. If you’ve read a lot of books on value investing (and I’ve read a lot), they are normally written from the perspective of a single author laying out his framework for his brand of value investing. The Art of Value Investing differs from other books in that the authors essentially compiled quotes from the world’s best known value investors on contentious topics within the value investing community. I think a lot of investors incorrectly view value investing as being a monolithic type of endeavor where there is only “one” right approach. I think the book aids the reader in better understanding that there are a lot of different methodologies and ways to practice value investing. Benjamin Graham developed the underlying philosophy that governs all forms of value investing. Essentially there are two values for a stock at any given time. The first is market value, which is easily observable. The second value is intrinsic value which is much more difficult to ascertain. Most of the Art of Value Investing delves into how various investors determine intrinsic value. Whether you’re a believer in Graham’s net-nets, Greenwald’s EPV or Buffett’s owner earnings, you’ll find some thought provoking quotes within the book. The following quote from Jim Roumell, succinctly sums up the the basic investment strategy that value investors follow:
When I got much more interested in individual securities analysis in the early 1990s I read as widely as I could and a light bulb just switched on when I read everything that Marty Whitman wrote. I was thinking it was critical to understand the ins and outs of how the stock market really worked, but his basic message was to ignore the market, which was just the bazaar through which you had to make trades. He was all about valuing what a company was worth-independent of what the market was saying it was worth at the time-and buying when the market was giving you a big discount and selling when it was paying you a premium.
As obvious as that sounds, it was very liberating to come across such a straightforward approach. Using whatever analytical tools I want, whether it’s valuing net assets, calculating private-market values or discounting future cash flows, I can arrive at a clear estimate of what a company is actually worth. From there, the actual buying and selling decisions aren’t that hard.
Each chapter in the book tackles a different step in a value investor’s investment process. Beginning from where to look for investing ideas all the way through fundamental analysis and when to exit positions. If you’re new to value investing, I think Chapter 7 will provide you with the best explanation of how value investors differ in their approach to determining intrinsic value. The authors purposely provide quotes from investors with differing points of view. Rather than taking a stand, I think their approach was to generate healthy debate among professionals and to provide a glimpse of the various investment styles currently being practiced in the world of value investing. I think the other interesting topic that they brought up was the inclusion of macroeconomic analysis in the investment decision making process post the 2008 financial crisis. As would be expected most value investors took the view that a “bottom-up” approach is all that matters. What I found more interesting is the nuanced view that the macroeconomic uncertainty can produce wide volatility in individual stocks, which a value investor can then exploit because they are focused on intrinsic value as opposed to market value.
Overall, I would recommend the book to both professional and novice investors. For the professional investor, the book will be thought provoking and will most likely test many of your closest held assumptions about how you approach value investing. For the novice investor the book does a good job of outlining the current debates within the value investing community. I would recommend reading at least one traditional book on value investing before tackling The Art of Value Investing to ensure you get the most out of the book. If you’re just starting out, I would highly recommend reading either Pat Dorsey’s The Five Rules for Successful Stock Investing: Morningstar’s Guide to Building Wealth and Winning in the Market or Vitaliy Katsenelson’s Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance), before tackling The Art of Value Investing. You can read my review of Active Value Investing here.