by Bruce Grantier, CFA
The Art of Value Investing: How the World's Best Investors Beat the Market. 2013. John Heins and Whitney Tilson.
The Art of Value Investing is a collection of quotations from prominent value investors. It was originally published by Value Investor Media, Inc., which was co-founded by the authors, both of whom have published widely and have extensive contact with hundreds of funds and managers. The book is packed with invaluable insights and is relevant to both the novice and the experienced investor. Each chapter is well organized around one of a dozen themes.
Investment style is among the book's most interesting and enlightening themes. Many contributors make the point that the factors "value" and "growth," enshrined in financial theory by Eugene Fama and Kenneth French's three-factor model, should not automatically pigeonhole investors in mutually exclusive style buckets because growth is an important component of value. Similarly, growth at a reasonable price (or GARP), as a style, should not be automatically consigned to a growth bucket. However, momentum is not a value trait and constitutes a distinct factor.
It is true that the dot-com bubble, in retrospect, was built on growth devoid of value. Value investors did extremely well coming out of that era by downplaying growth and seeking a "margin of safety." In ordinary times, however, most value investors diligently seek growth.
Evolution of style is a theme discussed throughout the book. Warren Buffett's style evolution, a function of both growth in assets and partnership with Charles Munger, is the classic example. Buffett evolved from buying stocks of small-cap, "cigar-butt" companies, with little regard for quality of management, to owning stocks of large-cap companies with high-quality management and strong franchises. Net net working capital stocks, like cigar-butt stocks, are rare nowadays, but their perceived value still reflects original Benjamin Graham principles.
Quality of management is a theme related to style. Although those who emulate Buffett insist on quality of management, there is still a sizable faction of value investors who are willing to take on companies with not-so-good management provided they have attractive margins of safety, possibilities for turnaround, or potential for improvement in-- or change of -- management. The recent developments in Canada's CP Rail (CP) are an example of this. The hedge fund Pershing Square acquired some 30% of CP Rail in 2011 for about $1 billion and-through activist influence on the board and management - turned the company around, increasing the value of the fund's holding to more than $3 billion.
Efficient markets (highlighted in a chapter titled "Deficient Market Hypothesis") is another recurring theme. One contributor makes the excellent point that markets will always be inefficient and create mispriced security opportunities because of the unavoidable and pervasive human behavioral traits that create these anomalies.
Process and research is a major theme discussed in a chapter titled "Cutting through the Noise." This chapter alone accounts for more than 20% of the book's length and addresses focus on process, organizing principles, indifference to short-term outcomes, macro versus micro, putting the business first, number crunching, catalysts, consideration of what could go wrong, and red flags.
"Circle of Competence" is a great, straightforward chapter about knowing and understanding your skills, being successful at what you are good at, and knowing where and to which company types, sectors, and capitalization levels to apply those skills.
The scope of value investing topics touched on in this book is quite remarkable. Among them are diversity and concentration, risk and modeling, behavioral investing, macro and micro, learning and adapting, and long versus short investing. One slightly disappointing aspect of the book is that it does not include direct quotes from a number of famous value investors, Sir John Templeton being a good example. Templeton is quoted only by other contributors - indeed, only twice in the whole book. I attribute this shortcoming to the method of sourcing the material - that is, from publications of the authors' firm. Value Investor Media was founded in 2004, by which time Templeton was 92.
Nevertheless, this book provides a valuable contribution to the industry literature on value investing. It is well written, well organized, and quite enjoyable. The Art of Value Investing should be read by all investors who are seriously interested in enhancing their understanding of this important field.
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