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The Little Book of Value Investing by Christopher H. Browne

The Little Book of Value Investing by Christopher H. Browne

This is the first book I have read in the “Little Book” Series.

Value investing is the term used to describe the general investing philosophy of Warren Buffett and his mentor Benjamin
Graham – it seeks solely to find companies whose stocks are undervalued compared to the strength of the company itself. A good place to start reading on Value Investing before moving to a more advanced topic. The author illustrates quickly the main principles of value investing and gives a basic framework for finding cheap companies.

Best Takeaway:

  • Buy Stocks Like Steaks … On Sale: The idea that buying stocks is often analogous to shopping in the supermarket. Some investors buy the sexy, well-packaged glamour products – and sometimes they pay off and have something delicious inside. Which is why the price to performance ratio is most likely to get the nod from buyers.
The Little Book of Value Investing
  • What’s It Worth? When considering an investment opportunity, think like a Credit Analyst. First, look at what amount the borrower pledged to secure the loan and then the income for paying the interest of the loan, this idea gives you a good bargain opportunity.
  • Belts and Suspenders for Stocks: The author talks about the concept of “margin of safety” investing. Benjamin Graham, the father of this philosophy, had a two-thirds margin of safety, meaning that stock had to be priced at one third or less of the expected value of the stock – that margin is basically impossible to find today, but a one-half margin or a one third margin is quite doable.
  • Buy Earnings on The Cheap: Screen for stocks with low P/E, P/BV or other relevant price-to-fundamental metrics can give cheap companies but there are a lot of other reasons for being cheap. So before investing investigation is a must. Some stocks are trading below their book value, which can be considered as cheap.
  • Give the Company A Physical Exam: You have got a company to look at in detail. Start by looking at the Balance sheet, Income Statement, and Cashflow to catch the Red flags and scrutinize it. Basically, the less debt you see, the better, especially in comparison to the assets. High debt is considered as Double-Edged Sword. Moreover, the company with steady and stable growth in revenue and margins for a long time-frame can be a good bargain. Most importantly look at ROC (Return on Capital) – which indicates how the company is reinvesting in itself. If it is steady (or even better, increasing over time), that’s good – if it’s dropping, that’s bad.
  • Stick to Your Guns: The book concludes that no matter whether you believe in value investing or other investing philosophies, you should stick to your guns and consistently apply those principles.
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