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The Little Book of Value Investing
Book: 'The Little Book of Value Investing'
Author: Christopher H Browne
Publisher: John Wiley & Sons, Inc., 2007
The latest book in the “Little Books Big Profits” series comes from Christopher Browne, who is a passionate advocate of value investing. That’s no surprise, since he is a Managing Director of Tweedy, Brown Company LLC, which has previously included some of the world’s greatest value investors among its customers – including Benjamin Graham and Warren Buffett.
Browne sees value investing as plain common sense. You don’t need to have a high IQ to understand the underlying philosophy, since “it’s not rocket science”. You just have to buy good stocks when they are cheap, and sell them if they become over-valued. It’s much like buying groceries or electrical goods. If strawberries are expensive at the supermarket, you buy some other fruit instead. And you buy electrical goods when they are on sale.
But there is an obvious disconnect here. Most investors use exactly the opposite approach to manage their share portfolio. They buy popular stocks when the prices are going up, and sell them when they go down. Only about 10% of investors follow the principles of value investing. Browne attributes this odd behaviour to herd mentality. If everyone else is buying the latest hot stocks, we believe they must be good stocks to have – even if the price is high.
Of course, there is more to this than just herd mentality. An additional problem is that most investors don’t know whether low-priced stock is good value, or a warning that the company isn’t worth investing in. In The Little Book of Value Investing, Browne shows how to estimate the intrinsic value of stocks – so you can decide whether the price really is a bargain. He also explains why it is important to maintain a safety margin in the price you pay.
As you would expect for such a compact book, the approach is simple and straightforward. There are no equations, no complex jargon and no detailed examples to work through. Instead, Browne explains the underlying principles in clear, intuitive terms and gives insightful hints on how to separate the bargains from the lemons.
Browne recommends value investing “because it has worked since anyone began tracking returns”. And he reminds us that the seven greatest investors of all time were value investors. In The Little Book of Value Investing he shows how value investing works. This is very useful reading for all investors needing a “little” help to break the buy-high-sell-low habit.