Gregg and I attended the Value Investor Congress in Vegas last week. I downloaded a couple of books to read on the flights. Let me just say that we highly recommend the book and is one of the best investment books I have read in years. The book is not a “how to analyze a company” book, nor does it have any “magic formulas”. The main goal of the book is to show “how to think and how to deal with the psychological influences that interfere with investment thinking.” There are lots of investment books that talk about traits of successful investors and characteristics of stocks that perform well over time, but there are few books that deal will the other side of the investment equation, dealing with emotion in real time. This website is an attempt to do that by showing investors what we are thinking at the time we are building the portfolio. The book uses quotes from previous shareholder letters he wrote and expands on them. Other well-known investors such as Joel Greenblatt, Paul Johnson and Seth Klarman also make comments throughout the book.
Book Review: Abnormal Returns- Winning Strategies From The Frontlines of the Investment Blogosphere – by Tadas Viskanta
Instead of reviewing some of my long-time investment favorites, most of which were published more than 20 years ago, I thought I would take a look something more contemporary. Since we are just starting an investment blog, Mr. Vinkanta’s title caught my eye. I was admittedly skeptical, because the title sounds a little too much like a get rich quick book.
Found another article, “The World’s Smartest Man Syndrome,” by Bennett Goodspeed while I was searching the Internet. Despite it’s original publication date of 1978, it encompasses many of the principles we talk about that are relevant today.
A few of Goodspeed’s important words:
“Just as forecasters have their problems with change, so do analysts. This is because initially change is numberless – the new numbers that measure the change will not be available for some time after the change has already occurred. Therefore, to deal with change, one has to rely on skills of the non-analytic or intuitive mode. Thus, a portfolio manager needs to identify change early before it can be empirically measured by everyone (before they can see the iceberg). In other words, to be effective, he must operate in the inefficient side of the market by having the courage to make decisions with only partial information.He must accept the responsibility for dealing with changing situations.”
Without going into a lot of detail, I think the main points of the article are:
I am very partial to the 1962 edition of this classic. Even though only the first 97 pages are relevant to security analysis today, what a great 97 pages they are. The editions published since Graham’s death in 1976, can best be characterized as garbage. In many cases the new authors have so badly mischaracterized Graham’s work that it is unrecognizable. Graham’s own writing in the editions before 1962, are a reasonable substitute, but the 1962 edition is by far the best.
Since this book has been reviewed in so many places, I am going to attempt to tell you 4 things that you might not already know from the first 97 pages.
- Graham is often thought of as the champion of intrinsic value, or in today’s terms the absolute value of the security. However, way back in 1962 Graham relalized that the relative valuation method was also valid. Very few realize he said of relative valuation, “This approach is valid when employed in connection with capital committed to permanent full investment in common stocks, a commitment which now appears to be accepted for many investment funds. p. 27” Of course, today the asset allocation decision is even more likely to be separated from the stock selection decision. Graham saw merits in both absolute and relative methods of valuation.
- Graham has several paragraphs about what he calls, “The Critical Function of Security Analysis” p. 34 Do you really know what that critical function of security analysis is? Are you sure? The critical role that Graham explains is the analyst’s responsibility as a financial statesman. He discusses the important role of the analyst in the capital allocation process. If Ben Graham were alive today watching Jim Cramer jump around trading stocks and making cow noises, do you suppose that is what he had in mind when he called for all analysts to be financial statesmen. I doubt it.
- How often have I seen just about any quantitative approach to investing characterized as a “Graham and Dodd” approach? Way too often. Nothing could be further from the truth. Graham has an entire chapter entitled, “Quantitative and Qualitative Factors In Security Analysis.” p. 85 Even in 1962 Graham realized that qualitative factors were very important. He says, “Figures alone are not sufficient, they may be completely vitiated by qualitative considerations of an opposite import.” This chapter is so critical that it should be reread every few years. Modern financial texts have nothing that comes close to the insights Graham had in this chapter.
- Graham studied the classics of literature extensively. He had countless verves to use as his book’s dedication. He chose the Greek poet Horace, “Many shall be restored that are now fallen and many shall fall that are now held in honor”. Let these words ring in your ears even time you pick a stock.
Of course, there are many other important concepts discussed in these first 97 pages. Graham’s discussion of the “margin of safety” approach is a central focus of this website. Many of us in the investment business read this text early in our career and then put it on shelf. This is a mistake. Please take a moment to read it again.
This book is available for $4 on Amazon. It is by far the best purchase a value investor will ever make. If your background is accounting, statistics, science, mathematics, or any other “hard” discipline I beg and plead with you to read this book. Below we also have a good summary of Goodspeed’s ideas in a review of the article ” TheWorld’s Smartest Man Syndrome”. The article used to be in the CFA curriculum, but it was replaced by an article on underwater Zambian currency swaps.
If you have ever built a financial model more than 50 lines long, I beg and plead with you to read this book. If you background is philosophy, literature, or the fine arts you should read the book to reinforce what you might already understand.
After reading the latest Third Avenue Value Funds shareholder report, I decided to go back a read Marty Whitman’s book, The Aggressive Conservative Investor. I first read the book when I was in college. I admit that I was intrigued by the juxtaposed adjectives in the title. How could one be both aggressive and conservative at the same time? Isn’t that what everyone wants? Conservative implies low risk, while aggressive implies potentially huge rewards. Who could resist?
So what is aggressive conservative investing? [Read more…]