Book Review: Bruce Greenwald's Value Investing

by: Davy Bui

Value Investing, by Bruce Greenwald

My Ranking: 9 of 10

What I particularly liked about it:

  • It details several valuation methods that I haven’t seen in other non-academic, mainstream investing books.
  • It gives several real-world examples to apply valuation methods
  • It has great treatment of brands vs. franchises

What needed work:

  • Various investor profiles unnecessarily fill the second half of the book.
  • Attempts at quantifying “franchise” value felt a bit forced.

Greenwald’s book ranks at the very top of my investing bookshelf. I read this after having read Graham, Greenblatt, Klarman, Lynch, P. Fisher, Cramer (yes, that Cramer!), Dorsey, Buffett, and Browne among others. Amazingly, this book broached a number of topics not covered by those prominent authors. As such, this book is required reading for the discerning investor.

No book or person can show you how to be a great investor. The most you can hope for are diverse toolsets, tricks of the trade and the proper mindset to prepare for what may come. That’s why Warren Buffett’s primary requirement for Berkshire’s next investment chief isn’t a business degree but rather, the ability to adapt to economic conditions and threats never-before seen. As everyone’s journey is different, I will relate Greenwald’s book to my experience.

The most important concepts this book gave me were valuation methods based on net asset value [NAV] and earnings power value [EPV]. Before this, I had trouble valuing companies that didn’t generate steady cash flow or have commodity assets. Now I have more angles from which to examine a prospect and find undervalued companies besides running a DCF analysis. We’ve heard about past opportunities where you could have bought a company like McDonalds for the price of its real estate and gotten the business for free. Greenwald shows you how to find these opportunities, using his asset valuation methods. He also gives you the tools to fairly value “tech” companies (or any enterprise with heavy intangible capital). Less convincing is his discussion of earnings power value but nonetheless, it’s still helpful to be able to examine a company’s earnings ability.

Greenwald also spends time discussing problems with discounted cash flow analysis [DCF] as well as franchises. While his thoughts on these subjects were thought-provoking, I don’t completely agree with his conclusions.

On DCF, Greenwald says that trying to project future growth rates 5-10 years forward is folly and will distort your DCF analysis. While he is right that future growth projections are problematic, that doesn’t mean DCF isn’t helpful for individual investors. Greenwald concedes that his preferred methodologies require, in some instances, in-depth knowledge of the business and industry of the company being examined. The non-professional (me!) may not have this expertise and any estimates of asset worth or capital costs would be just as faulty as analyst growth estimates. In fact, an adjusted future growth rate derived from a number of industry-knowledgeable analysts may be more generally accurate (if imprecise).

As for Greenwald’s treatment of franchises, I’m reminded of the free-jazz musician, Ornette Coleman. Coleman made waves when he burst onto the jazz scene and crafted a “music theory” to describe his style of music after the fact. In this same vein, Greenwald’s attempts to quantify franchise value comes off as an academic trying to document something (franchises) that comes naturally to true practitioners (Warren Buffett). I don’t disagree with his position that franchise assets generate returns far above the cost to replicate those assets. It just feels like academia making things overly complicated, while simultaneously missing the essence of the subject. After all, any half-breathing iPod user could have predicted that Microsoft’s Zune player would be an abysmal failure without the need for complicated EPV/WACC analysis. Leave it to the academics to dissect all the reasons why, in time-draining detail. That said, Greenwald’s distinction between brands versus franchises was very insightful and not one I’ve seen elsewhere.

These “disagreements” I have with the book are not a knock on it but rather, a strength. Any book that engages the reader in a “conversation” has achieved something meaningful. All of Greenwald’s methodologies and positions are well-reasoned and neatly laid out for the reader to take in.

The main knock against the book is the whole second half consisting of eight investor profiles. There’s nothing wrong with them per se, except that they shouldn't be in the book at all. If I had wanted a book on famous value investors, I would have picked up something by Kirk Kazanjian. The chapter on Warren Buffett is almost exclusively quotations taken from freely available public reports and Seth Klarman has written his own book on investing. Surely, there could have been something else to write about.

So my advice is to soak in the first half of the book and skip the second half entirely. Dig into an annual report instead and start applying what Greenwald has shown you.