Paul D. No one can doubt there's an urgent need to think clearly about investing, since many investors in Silicon Valley companies have suffered a stock market decline comparable to the Crash of ' The burned investor could find no better starting place than this superb book by four New York City value investors, all descended from the master of value investing, Benjamin Graham They have written one of the most intelligent overviews of investing I've ever read, combining analytical rigor with intuitive description.
A leading authority on value investing, productivity, and the economics of information, he teaches executive seminars on value investing for professional investors from leading Wall Street firms.
PAUL D. He holds an MBA from Columbia, where he teaches courses on applied value investing. The final step for the value investor involves estimating the value of profitable growth. This stage is most sensitive to assumptions and error. Greenwald reminds his readers that growth in sales or earnings does not always create per-share value for owners.
This is because growth requires reinvestment and additional liabilities. For companies with zero competitive advantages, and industries with no barriers to entry, gains from new investments will be offset by the cost of capital.
Only companies with franchise value can create value through growth. The higher the present value of a company whose cash flows are growing, the higher the margin of safety is for the value investor.
Readers should note that the adjusted earnings used for calculating profitable growth may differ from the adjusted earnings used to calculate current earnings power. The latter is concerned with earnings that are distributable to shareholders if the company decides not to grow. The former is likely to differ because growth requires additional investment. Two factors determine the value of growth. Put in other words, it is when the profitability of incremental capital employed is large.
Secondly, value creation depends on how much capital is used to generate franchise returns. For an even stricter constraint, as described in Narrative and Numbers , Professor Aswath Damodaran highlights that long-run growth rate of companies are unlikely to exceed to the nominal growth rate of the economies in which it operates. Greenwald highlights that there are very few types of competitive advantages. These are demand advantages, supply advantages and economies of scale.
Government protections such as licenses, patents and copyrights can confer such advantages as well. Cost advantages describe processes and know-how that are difficult or costly for competitors to access or replicate over time. Economies of scale, where the average cost per unit falls with each additional unit produced, is another potential source of competitive advantage.
Companies that can combine economies of scale with a demand advantage are more likely to create enduring franchise value. Improved demand will enable such companies to translate scale into lower costs, higher margins and higher profits. This is particularly so for companies with high fixed costs. However, size does not automatically confer economies of scale. Greenwald notes that it depends as well on the business structure and relative market shares of companies in competition.
Management should implement business strategies that maximise their competitive advantages. For example, the company with economies of scale should focus on protecting market share. Greenwald goes into great detail on competitive advantages and strategies in Competition Demystified , another important read for value investors. Spread funds around so as to limit potentially embarrassing losses and on the flip-side, limit potentially lucrative, out-sized gains.
This will ensure that the stated objective of investing is not achieved. Croupiers fear not, for you will be obscenely compensated for failing your 'clients' and your fiduciary responsibility. Small investors should be very fearful, as this is the retirement money and the kids' college fund we are handling- see the last sentence on Page Value Investing goes on to reveal the theory and practice behind one approach to investing, and the many subtle variations that a few of its more famous practitioners bring to it.
Along the way, it also spends a lot of time successfully slaying the sacred cows of modern portfolio theory, discounted cash flow analysis and the ever-present growth projections that come with it and the elusive hunt for growth. Additionally, it also makes a good, solid case for fundamental analysis, which, oddly enough, is up-ended by the profiles of a few of the value investors profiled in-depth who basically eschew it and the one lone value investor who swears by discounted cash flow analysis- the very technique for which the authors have a dim view.
In passing, the authors waited until nearly the end of the book to present their take and an adequate and succinct one at that on the differences between contrarian investing and value investing, something which I personally feel should have been addressed in detail at the beginning of the book. The approaches presented function best when evaluating the worth of companies that make use of tangible, physical assets to produce wealth though they may need to make significant investments in knowledge capital beforehand via research and development and then translate that knowledge through physical capital into a tangible product.
In general, I found the book lacking in specifics on how to evaluate those highly profitable outfits whose principal assets are intangibles in the form of computer code, accumulated data and other forms of knowledge capital that do not as a rule require significant investments in physical plant and the use of associated debt capital in order to produce wealth.
In addition to covering the institutional imperative and outlining the basic underpinnings of value investing, the book also provides two thoroughly worked examples using the fundamental principles of value investing as well as profiles of a few of the leading lights- the luminaries- of value investing.
These luminaries all put their own idiosyncratic spin on value investing. Some emphasize comparable sales of assets or whole companies , while others emphasize growth within the context of an identifiable franchise. Still others focus solely on the balance sheet, while others focus on earnings power value. A couple focus squarely on negative sentiment combined with an eye on either assets or earnings, while others look for catalysts or motivated sellers here for reasons that have little or nothing to do with the present or future prospects of the outfit.
Overall, I found the book to be a very worthwhile read, considering 1 the length of time it took me to read it almost three months , 2 how many times I had to stop and re-read certain sections, 3 how many passages I underlined within the book, 4 the volume of notes I took when reading the book and 5 the complete, degree reversal I had in my thinking and approach to investing after reading this book.
Readers with an interest in the topic of value investing in practice should consult Kirk Kazanjian's Value Investing with the Masters, and Ronald W. Value Investing, by Bruce C.
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