Book-review: Value Investing: From Graham to Buffett and Beyond, by Bruce Greenwald

I added this classic about value investing to my reading list some time ago. I read the recently updated verion (Dec 2020).

First things first: The directory stole the name of my blog, kind of 🙂

The book is less about investing philosophy but mostly about valuation methods and rather technical compared with the other books I read. The valuation methods are based on traditional value investing approaches, suggested by the title, as Graham bought net-nets. Some readers might perceive a rather grim tone throughout the book.

Why is that? Readers are constantly reminded about a simple economic truth: excess returns are destroyed by competition! This is the basis of capitalism (and econ 1010) and a net benefit for consumers. Excess returns are defined as returns above the cost of capital, which is the rate of return to attract capital for a project/business voluntarily by (informed) investors. When there is no protection from competition, growth-investments usually do not create shareholder value. Based on this sobering understanding, there are three methods to value a business

  1. Asset based valuation usually starts with the balance sheet. If an industry is in terminal decline or isn’t economically viable, liquidation value is the way to go for (die hard) value investors. If it is viable, asset reproduction value can be calculated by asking what does it cost to replicate the current assets, including skilled and trained employees as well as customer relations.
  2. The earnings power value is basically the capitalization of sustainable annual (cash) earnings using an appropriate multiple or capitalization factor. Skilled managers should produce a reliable stream of earnings making use of the business (assets) within a viable industry.
  3. If and only if, a company is protected by competition by sustainable competitive advantages it has the opportunity (but not the right) to create value by investing in growth. In this case it’s franchise value.

The differences between the valuations approaches and neccessary prevailing industy conditions become much clearer through the various case-studies. One such case study is about Intel (INTC) and is very much fun to read since it’s (competitive) position is very much in crossfire today (again). The book provides useful general thoughts to get valuations inputs/parameters about right, without using ‘sophisticated’ methods. I.e. to get a feeling for the ‘correct’ (range of a) discount rate, the approach is usually to look at the lower (corporate bonds) and upper bound (VC), looking at the company’s features this range can be easily narrowed down further.

The last (easy to read) section is about a bunch of famous investors (i.e. Buffett, Klarman, Schloss) and their styles.

I read the book on my kindle. For this book I do not recommend the kindle version. The book includes many calculations, tables, financial statements and you might want to attach notes / your own calculations or simply have a more comfortable handling with a paper book. Tables do not come handy using the kindle IMO. This book is a recommendation for you if you want to learn about discomforting economic truths, analysing businesses’ competitive poistion and related valuation methods.

More: these slides transport the basics very well. More from MOI Global: If you are interested you can listen to Professor Greenwald’s comments on the evolution of value investing and how it needs to change in order to remain relevant and successful.

The second edition comes two decades after the first, with each edition coinciding almost perfectly with a market boom in Internet stocks. Whether the publication of the second edition is a contrarian signal remains to be seen.

MOI Global

Right after Greenwald’s book I started Fooled by randomnes which was on my reading list for too long already. I always knew that I would love the book! I was right!

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