Value Investing: From Graham to Buffett and Beyond Paperback – January 1, 2004

A must-read for investors of any stripe, growth or value. This book, written by a couple of the most popular professors at Columbia Business School, explains the innovations in the field of value investing as practiced by some of the most successful investors in the field. (fair disclosure: I took Prof. Greenwald's courses in 2007) This book successfully bridges the gap between the traditional Graham & Dodd style of value investing to what works today. Although it's a paperback, it's written with the density of a textbook. The writing style is not light, and the actual meat of the book takes some time to wade through. If you don't have some experience in accounting or corporate finance, then Joel Greenblatt's The Little Book That Beats the Market is good to read first.The substance of this book is a process for modern value investing: value investing is not investing in lousy companies just because they appear cheap. The authors also teach a structured way to value a company. Finally, the authors address how to value growth.First, before reading this book I had the mistaken impression that value investing was all about investing in the ugliest, least interesting company you could find just because it had a low P/E ratio. I was completely wrong! (Maybe I have attended too many stock pitch sessions and heard too many poultry stocks and encyclopedia companies get pitched.) Modern value investing, according the authors: "When B. Graham went scouring financial statements looking for his net-nets, it did not concern him that he may have known little about the industry in which he found his targets. All he was concerned with were asset values and a margin of safety by that measure. A contemporary value investor had better be able to identify and understand the sources of a company's franchise and the nature of its competitive advantages. Otherwise he or she is just another punter, taking a flier rather than making an investment." What a breath of fresh air to read this passage.Second, this book lays out a structured way to value a company by first looking at reproduction costs of assets, then earnings power, and finally the value of profitable growth. I, like the authors, find traditional DCF valuations to be plagued by false precision. The authors' more practical method starts by adjusting the balance GAAP balance sheet to calculate the cost of the assets for a potential business entrant. Next, the company is valued based on the earnings generates consistently, assuming no growth. A key insight is the value of the franchise: the difference between asset value and Earnings Power Value is the value created by a company that has significant competitive advantage. Last, the value of profitable growth is considered.As a self-admitted recovering growth stock addict, I learned from this book that value investors are skeptical about growth for two reasons. One reason is that it is so hard to predict, but more important, many times growth is not worth much. Unless the return on capital (ROC) of the company is higher than the cost of capital, growth does not create value. (I am a slow learner; Greenblatt's example in The Little Book That Beats the Market of opening an additional gum store is even clearer to me.) The growth matrix and formulas in the book were a revelation to me. The surprising thing is how little multiple expansion a stock deserves based on growth. Unless a company truly has a franchise, expanding into other areas and "diversifying" the business often destroys value. And growth for growth's sake will not make a stock go up.This book brings value investing into the modern stock market. Modern value investors still use traditional valuation principles in a structured way, but they also consider the value of growth and the attractiveness of the business. What a relief, I not restricted to buying typewriter and pay phone stocks! The authors quote Warren Buffett: It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Value investing is one style of investing. The current market is not made for this style there will need to be another melt-down to be a small, successful value investor. People point to Warren Buffet as the best value investor there is - he certainly is the most visible and successful - and people forget many of his rules of engagement. Berkshire makes between 8 and 20 billion dollars a year and W.B. maintains a war chest between 40 and 80 billion dollars while looking for something to buy. How many of us can walk into BofA and purchase the top of the line, 'redeem me first' stocks? If you walked in the door with a suite case filled with 5 billion dollars you could also - this does not make BofA a good stock nor a good purchase for the average Joe. Even with all that Value Investing is still a good investing strategy when the market allows.

Its pretty rare to find a book that actually has something to say about value investing that is an improvement over the original book from Ben Graham, The Intelligent Investor (1934 edition). Value Investing delivers a good overview of the value investing approach and then also delivers hands on practical advice about some recent innovations in equity analysis for value investors.Using the approach popularized by Ben Graham this book describes the theoretical approach and then walks through two detailed examples of how to apply the notion of enterprise value to WD-40 and Intel. With detailed analysis of financials from both companies the book demonstrates how to understand financial structures that help predict and quantify a company's competitive advantage.I've read a lot of value investing books that talk about competitive advantage, but this is the first book I've found that attempts to demonstrate directly from the balance sheet how to calculate the economics of that competitive advantage.I still want to apply everything I've read here to a dozen companies and see how well the analysis works in the real world, but the theoretical framework appears to offer a very easy way to determine who really has a franchise and then place a fair value on that advantage and establish a fair price for the stock.

At last, theory and practice meet!Warren Buffett teaches that the value of a business equals the cash that can be taken out of the business during its life, discounted back to present value. This book will show you how to practically estimate those cash flows and calculate their present value.Another Warren Buffett technique - identifying a superior business that possesses a strong franchise - is also covered in detail and then practically illustrated with a fascinating case study.Asset based approaches, e.g. using the estimated reproduction cost of assets as a valuation yardstick, are also discussed. The final part of the book provides valuable insights into the different approaches used by eight famous value investors.Throughout, explanations of key principles are crisp and easy to follow and are illustrated with interesting examples. This book is a delight to read and a "must have" for value investors.