By Arnold T. Davis, CFA
The Manual of Ideas: The Proven Framework for Finding the Best Value Investments provides an overview of nine value investing strategies, including why each one is expected to work, the uses and misuses of each, and how to identify specific investment opportunities for each strategy. It is a useful book both for those looking for a current overview of value investing and for the more experienced value investor seeking a critical analysis of value investing strategies and thoughts on methods for identification of specific investment opportunities.
The strategies outlined in The Manual of Ideas are discussed in detail in such investing classics as Security Analysis, by Benjamin Graham and David Dodd; Margin of Safety, by Seth Klarman; and You Can Be a Stock Market Genius, by Joel Greenblatt. This book's distinction lies in examining these strategies in a contemporary setting and in critically exploring how to implement them with the tools available to today's investor.
Author John Mihaljevic, CFA, edits a monthly publication also called The Manual of Ideas and is managing director of ValueConferences, which hosts online conferences for value investors. His book is well organized, with a clear and logical structure. Mihaljevic interviewed more than 100 value investors in his research. The result is a book that lives up to its title by presenting a wealth of ideas for investors.
Each of the book's nine primary chapters covers a specific value investing strategy. These strategies are classic "Benjamin Graham-style" deep value investments, sum-of-the-parts value plays, quantitative screens for companies with attractive earnings valuation and capital return metrics, businesses run by well-regarded executives, following the investments of well-regarded investors, small- and micro-capitalization stocks, special situations, highly leveraged situations, and international investing opportunities.
Mihaljevic outlines what each strategy is, why it is expected to work, common uses and misuses of the strategy, screening techniques, and the analysis that needs to be completed once the screening is performed to identify the right opportunities.
The chapter on underfollowed small- and micro-cap stocks explains that little research attention is given to many of these stocks. In addition, there may be a lack of institutional investor interest because of the size of institutional portfolios relative to the capitalizations of these stocks. Mihaljevic also examines challenges to this strategy, such as liquidity issues and the possibility of opportunities with small companies eluding quantitative screens because their financial performance can be more volatile than that of large-cap companies. Mihaljevic suggests looking at small- and micro-cap companies with several lines of business that are performing dissimilarly because the profits of one line of business may be poised to grow significantly.
In his discussion of the strategy of following the investments of well-known investors, the author cautions against blindly following these "super investors." Mihaljevic notes that stock purchases by a well-regarded investor should not necessarily be taken as an endorsement of a stock's prospects. For example, the purchase may have been a hedge or a small part of a macro investment strategy. These potential pitfalls can be partially mitigated by thoroughly understanding the celebrated investor's overall strategy, including such details as average portfolio turnover and historical use of short selling.
By writing a book that looks at value investing strategies through the lens of present-day events and available tools, the author assumes the risk that the book will become outdated faster than it otherwise might. For example, Mihaljevic's suggested stock screening tools could eventually be superseded by other offerings. In addition, his brief observations about specific executives and investments may not stand the test of time.
In summary, The Manual of Ideas is a useful survey of value investing. Those seeking an introduction to value investing will receive a solid, up-to-date overview. Experienced value investors will find a number of good suggestions for developing new investment ideas.
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