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In the era of fascination for growth investing particularly in India, what attracted me to this book “The Little Book of Value Investing” by Christopher H. Browne was the curiosity to understand the age-old success stories of legendary value investors like Benjamin Graham, Warren Buffet, and the author of this book itself Christopher Browne. The book definitely gives a bird’s eye view of the nuances of value investing and myself being a staunch follower of various sports, leading to firming of my belief “The Form is temporary but the class is permanent” – value investing could take a while to bear fruits (underperformance could be temporary in nature) but the returns could be significant as and when they happen (the benefits could be permanent).
The book has laid down the principles of value investing in very simple words that any novice investor would understand. Just as the shopper would go around various shops to pin down his desired requirements, the book lays down simple guidelines that would lead to selecting the right stocks and avoid some of the stocks that would otherwise qualify as a value stock.
The key learnings for me have been the importance of assessing the inherent value of the business (called the intrinsic value) and then applying the necessary discount to it for taking the investment decision (called the margin of safety). The various methods of arriving at the intrinsic value can be based on financial/statistical ratios (like price to book, price to earnings/ EBIDTA) or based on the appraisal method (like looking into any M&A deals, assessing the investments made by some of the successful value investors). The margin of safety is important for riding out the bad times that companies/ businesses would inevitably encounter.
The other important aspect of value investing is one’s ability to figure out “When is a bargain not a bargain?” Some of the checks to discard the stocks that I particularly found intriguing include excessive pension liabilities or a contentious labor environment, technology risk, and over obsession with short-term earnings estimates ignoring the long-term potential/ problems. Upstream oil companies have not been a great bargain for me as they have displayed the inability to improve the operating performance and have continuous stress on the cash-flows with high maintenance CAPEX and obligations to acquire overseas expensive assets.
Lastly, the most lasting effect of this book on me is the ability to remain patient in the world of investing while swaying away from the hot and popular stocks / short term underperformance and the ability and courage to move away from the herd mentality. I can relate this to our holdings in oil marketing companies rewarded once they were allowed to earn a reasonable return on retailing business.
The next book in line for me would be why one behaves opposite to the things discussed in this book – “The Little Book of Behavioral Investing” by James Montier.
– Repost from UTI Mutual Fund
