A Review of The Little Book of Value Investing

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The Little Book of Value Investing by Christopher H. Browne is part of the Little Books Big Profits series. Many investors tend to write these books off because of the silly titles. However, I’ve found that they are written by serious authors who have the wonderful ability to simplify complex topics. Some of the famous authors in the series include Joel Greenblatt, Pat Dorsey, and Jason Zweig. The Little Book of Value Investing is no exception and does an excellent job of succinctly summarizing the key tenets of value investing.

Christopher Browne was the son of Howard Browne, one of the original partners in the brokerage firm Tweedy, Browne, and Reilly. Benjamin Graham was one of the firm’s primary customers and Walter Schloss still maintains an office at the firm. Additionally, Warren Buffett became a brokerage client in the 1950s and amassed his controlling position in Berkshire Hathaway through the firm in 1965. Tweedy, Browne, and Reilly eventually morphed into the money management firm Tweedy, Browne. Thus, Christopher Browne’s value investing lineage was about as blue-blooded as it comes. He spent 40 years at Tweedy, Browne as a senior partner and passed away in 2009 at the relatively young age of 62. He published The Little Book of Value Investing in 2006.

Why value investing?

The book’s initial emphasis is on defending value investing as an investment philosophy. Despite the significant success enjoyed by numerous value investors across time and geographies, value investing still hasn’t received widespread acceptance in the investment community. The main thrust of Browne’s argument in support of value investing is simply that it works.

In my view, the reason that there aren’t more value investors is due to human nature. Like a moth attracted to a flame, investors flock to the latest “hot” stocks that are being touted on financial news channels and internet forums. To be a good value investor, you must overcome many of the numerous foibles of human nature. Most people are not cut out for it. However, if you can overcome the fear that surrounds the vast majority of investors when stocks are falling, you have obtained a golden ticket to wealth and riches. Successful value investing comes down to avoiding the background noise and buying stocks on sale.

What are the three most important ideas?

Value investing is not a set of hard and fast rules. It is a set of principles that form a philosophy of investing. There are basically two underlying principles that Browne used to define value investing:

  1. Intrinsic Value. This principle simply means that all securities have an underlying value that is separate from their quoted market prices. Browne defined intrinsic value using two broad techniques. The first involved using a variety of financial ratios to determine whether a stock was statistically cheap. The second method involves determining the price a knowledgeable buyer would pay to control the company.
  2. Margin of Safety. As you probably know a margin of safety entails only purchasing a stock when it’s trading below its intrinsic value.

Clearly, the principles are not earth-shatteringly complex. The main issue is not understanding the principles but actually implementing them.

The second major idea in the book is that buying earnings cheap is one of the most effective methods to compound your money over time. Browne states, “Value investing, buying earnings cheaply, is the most reliable way I know to grow your nest egg, not because I say so, but because it’s also been shown to be so – time and again, throughout the decades in numerous academic studies.” The main benefit of buying low P/E stocks is that it forces you to purchase stocks when they are on sale. Typically it’s a high level of economic uncertainty and investor pessimism that produces low P/E ratios. Furthermore, numerous academic studies have shown that buying statistically cheap stocks as measured by a low P/E ratio outperforms buying high P/E ratio stocks that tend to be high growth companies. However, the key to buying earnings cheaply centers on your ability to identify businesses that have strong long-term growth prospects. Otherwise, you run the risk of purchasing “value traps”.

The third major takeaway from the book is that you should look for investment opportunities globally not just in your home country. Although it appears that global equity markets have a higher positive correlation following the 2008 financial crisis, there will always be pockets of opportunities in markets that buck the overall trend. The main benefit of global investing is that you significantly increase the number of potential investment opportunities available to you. In a rapidly globalizing world, it makes sense to find the best companies available regardless of where they happen to be domiciled.

Is the book worth reading?

In the last chapter of the book, the author stated the following: “In fact, I don’t know a single poor value manager who has been in the business more than 10 years. Value investing requires more effort than brains and a lot of patience. It is more grunt work than rocket science. But over time, investors should continue to be rewarded for buying stocks on the cheap.” The Little Book of Value Investing is a great introductory text for someone new to value investing. The principles of value investing as delineated in the book are timeless. By learning the fundamentals of the value investment methodology you’ll be far ahead of the vast majority of investors. If you’re serious about improving your investment results, reading the book is a great way to start on your value investing journey. It would also be the perfect book to recommend to a friend or spouse curious about value investing but having little practical experience. Even if you’re an experienced investor it sometimes helps to review the fundamentals. With the avalanche of data available to us as investors, it’s easy to lose focus on the core principles of investing. Browne’s book is a great refresher course for those of you who have been grinding along on your path to investing success. Just like in sports it’s always a good idea to return to the fundamentals.

If you’ve already read a few books on value investing or are an active practitioner then I would highly recommend Vitaliy Katsenelson’s Active Value Investing or Chris Mayer’s 100 Baggers. You can access my review of both books by clicking on the following links:

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