Book Summary: The Little Book of Value Investing

Book: The Little Book of Value Investing

Author: Christopher Browne

Key takeaways:

  • Value Investing works: Browne relentlessly argues that value investing is the only long-term game in town.
    With my extremely limited experience, I find that there’s no better way to understand a stock than understanding the industry, looking at the financial statements, and coming up with a conservative estimate — essentially value investing. Having said that, I do fear that in today’s age where a lot of liquidity is chasing a limited number of stocks, it would be hard for a professional money manager to stick to only value investing as a means to generate returns.
  • Don’t try to time the market: Browne says that the highest returns are achieved by staying fully invested at almost all times
    Market timing is futile; also you have to be in the game to win it. I did not find this very convincing. For example, with Dow around 10,500 today, stock market has a lot more downside to it than upside, and it would be hard to argue that being fully invested in stock market at this stage is the most prudent strategy. A more convincing argument is a study by William Sharpe  of the Sharpe ratio fame — a market timer needs 82% accuracy to match a buy and hold return.
  • If invested, be committed:  …committed enough to stay invested for, say a decade.
    I find this thought process very useful, as this will force me to buy a stock for what I find the business worth (or, rather, less), as opposed to mere expectation that someone would soon want the stock for more.
  • Be familiar with international accounting standards: more value stocks are found this way.
    This might not be very useful, after say 2015, by when IFRS and GAAP would likely would have brought the accounting standards even closer, continuing on the path that the two groups have set on in early 2000s.

My closing thought: I consider Value Investing analysis an indispensable tool for myself, but I find it hard to accept it as the only useful investing strategy. Mike Burry, of the Scion Capital fame is a great example of someone who upon analysis, chose a different strategy — he started out as a value investor, picking stocks, but found that he could generate better returns by trading CDS on the MBS.

Postscript (March 27th, 2013): It is always interesting to look back at what your believed to be true in the past, and less than 2 years after I  wrote this post, as I read this, I am snickering at my old self. My idea of value investing has evolved many-fold (and will evolve far more going forward). I now believe that that value investing is a much more encompassing (in terms of securities), but also more specific (not all fundamental investing is value investing) label than I previously believed it to be (fundamental conservative investments in stocks). It is sad to see my ignorance back in Jun-10, but very exciting to see my own evolution–an unexpected gift of writing down my thoughts as I read books.


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