Want to get an MBA for $9? This is the book to get. Although not an easy read like other value investing books, Professor Greenwald and company provide an informative read that should have a place in every value investor’s library.
The fact that Bruce Greenwald is a professor at the Robert Heilbrunn Professorship of Finance and Asset Management at Columbia Business School is a must read. I stumbled across this book about four years ago when I was buying everything that was related to value investing. Even though I re-sold most of the value investing books, I kept the must reads like The Intelligent Investor, All of the David Dreman books, Joel Greenblatt’s Little Book, and a few others. I kept this book because it has its own little niche in the value investing arena, its truly a modern approach to Ben Graham and Warren Buffett. Bruce Greenwald’s 3-Step approach to valuing a company is one that a) makes sense and b) does not put too much emphasis on future growth. For those individuals that have not had a chance to read the book, Greenwald advocates a 3 step approach to valuing a company.
- Value the assets
- Find the company’s Earnings Power Value (EPV = Adjusted Earnings x 1/R, where R is the current cost of capital or rate of return
- Only when the company displays a franchise can we incorporate growth into the equation
Especially during the dot-com boom, #1 (Assets) was highly ignored. Companies that had little to no assets were valued greater than a stalwart like Proctor and Gamble (PG). The beauty about investing in companies with hard assets is, if the company disappoints on in the earnings front, one can sleep conferable at night knowing the assets are there (like a safety net). Dot-com companies never had this safety net and the stock price experienced catastrophic declines when earnings disappointed. #2 can be applied to just about any company but I highly suggest looking at companies who have a history of consistency. Third on the list is factoring growth where a franchise is in place. Greenwald defines a franchise as when the firms EPV exceed the company’s Asset Value (43). Another way to think about this is what Warren Buffett calls a moat. Companies with a moat tend not to require additional investment, but can still increase its earnings (think See’s Candies, Burlington Northern). Now, Greenwald and Co. do a tremendous job in walking the reader on how to analyze a company and valuing the company using his 3 step approach ( he values WD-40 Co (WDFC) and Intel (INTC)) but the second half of the book is devoted to value investors and some of the techniques they employ.
The second half of the book profiles value investors that have outperformed the market. Greenwald devotes the most attention to Warren Buffett 9bug surprise there right?) and highlights some of Warren Buffett’s shareholder letters. Below are the value investors highlighted and the chapter title
- Warren Buffett :Investing Is Allocating Capital
- Mario Gabelli : Discovering and Unlocking the Private Market Value
- Glenn Greenberg : Investigate, Concentrate and -Watch that Basket
- Robert H. Heilbrunn : Investing In Investors
- Seth Klarman: Distressed Sellers, Absent Buyers
- Michael Price: Discipline, Patience, Focus, and Power
- Walter and Edwin Schloss: Keep It Simple, and Cheap
- Paul D. Sonkin: Small Is Beautiful, Especially When It’s Ugly
I have read this book twice, and each time I re-read the book I pick up a nugget or two. I have taken this book out of my library and have set it aside to re-read. Finally, the book is selling for 8.99 on Amazon.com and I highly reccommend it. As stated above, its definately not the easiest read, but its definately not the hardest either.
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{ 6 comments… read them below or add one }
I agree – this is an interesting read. Just wondering if you felt like writing a short post with any recommendations from the other (value) investing books you’ve read. There are lots out there, and it isn’t always easy to identify the good ones.
From my reading, obviously “The Intelligent Investor” must be first. I agree with Greenblatt’s “Stock Market Genius” (haven’t picked up the others) and also like Cunningham’s collection of Buffett’s writing (all from the shareholder’s letters, but nicely organised by theme).
My current favourite is “Active Value Investing” by Katsenelson – he makes the argument that the market will revert to (beyond) historical P/Es and historic profit margins; in that scenario, even growing firms will stagnate in terms of price and value investing becomes even more attractive. He can state his own case better than I – check out the interview links at http://contrarianedge.com/ if you are interested.
J-
Thanks for recommending that idea. I will take care of that soon.
I have heard great reviews of Active Value Investing but was a bit turned off when he kept recommending JTX and the stock took a 50% haircut.Maybe I will get around to it once day, but in the mean time I have a couple of books in mind that I want to read .
AlexG,
From your review I judge that the value investing book did speak negatively about dot com stocks. But if you calculate any moat for financials like C, BAC, WB etc, does it give you a good buying or a good “not touching” opportunity? I am just curios!
I have read Mr. Greenwald’s book and can safely say that you should stay away from MOST financial companies at the moment. The first step of his approach is to value the assets and I strongly believe that this cannot be done for most financial companies out there. There is simply not enough disclosure as to what they own and it would take thousands and thousands of pages of readings to understand some of the packaged products that are on their books. If you have that type of patience, by all means start reading, but I will spend my time trying to find situations that are more within my circle of competence…
Agree with you to a certain extent. If you look at US Bank (USB) financial statement, its really not that hard to understand. Its when you get into AIG’s, MBIA ,WM,etc… that we start running into problems. I have been burned by AIG and I highly suggest to stay away as you mention. I know Greenwald had a Bloomberg TV interview in which he was recommending AXP in the $55- $60 range. I wonder what he thinks now.
Of course, Security Analysis would have to be one of the top books for any aspiring value investor!