More on the Value Approach

From the Preface to Graham and Dodd’s 1934 classic, Security Analysis:

 . . . we have striven throughout to guard the student against overemphasis upon the superficial and the temporary. Twenty years of varied experience in Wall Street have taught the senior author that this overemphasis is at once a delusion and the nemesis of the world of finance.


Colombo or Clouseau?

Graham’s (via Zweig) admonition to be a critical thinker is, well, critical to being a good value investor. So what does that mean? What do I need to think critically about? Zweig gives us a clue when he refers to “Wall Street ‘fact.'” Obviously, that would refer to fact and figures in annual reports and 10-Ks. It would include any form of advertisement, be it an ad in Smart Money magazine or listing in an “unbiased” assessment in an article in The Wall Street Journal, touting the stocks you should be in now.

Not so obvious is the need to read between and behind the lines of such “facts” as you assess the relative merits of the stocks your screener tells you to look into further.

  • Why are they undervalued?
  • Is there or could there be a regulatory problem?
  • Why did that insider sell (or buy)?
  • Is there a problem with that newly announced product? Why isn’t the market responding to it?
  • Is something amiss with management or a location?
  • What are shareholders saying on the Internet and in the press? Are the positives really positive and the negatives negative?

And so on. Value investing is detective work, pure and simple, and the Colombos of the investment world will virtually always be taking money from the Detective Clouseaus.

Four Principles Jump Out from Zweig’s Note about Graham

Like I said in my previous post, I’ve read The Intelligent Investor (2003) before. I began thumbing through it again. Four items in Jason Zweig’s Note at the beginning struck me in a way they didn’t the last time through, though they are quite obvious (pp. xii-xiii):

  • The intelligent investor is a realist who sells to optimists and buys from pessimists.
  • Only by insisting on what Graham called the “margin of safety”–never overpaying, no matter how exciting an investment seems to be–can you minimize your odds of error.
  • Become a critical thinker who takes no Wall Street “fact” on faith.
  • Finally, Graham became a master at researching stocks in microscopic, almost molecular, detail.

I tend to be an optimist, so I have my work cut out with the first item. The second simply augers for caution–and I can be cautious. I think I can take a pretty good stab at the third. Detail? I like digging. Will I like digging as much as Graham?

And you?

In the Beginning . . .

This blog is an experiment. I’ve read off and on in the value investing literature, but that’s it. I’ve decided to go beyond mere reading. Value investing has always impressed me as an investment style, so I’ve decided to investigate it further, to learn the ins and outs, to bring together the necessary tools to play the part of a value investor, and eventually, become a talented value investor.

This blog will act as my working papers in that endeavor. And so as I learn, so will you. If you’re interested in becoming a value investor, I hope what I discover and write about will be of help to you.

At bottom I like fundamental analysis. I like seeing how the parts work and interact. I like detective work. I like discovering something that few, if any, know besides me. If that describes you, then you’ll probably like the value investing approach too.