Human nature never changes. During an extended bull run, the markets always get taken over by amateurs. People who have never dreamt of buying stocks suddenly pawn their family jewels to build rotten portfolios. The dem-and for investment-related literature also rises as wannabe investors perceive the need to rationalise their stock plays and make intelligent conversation with friends and brokers.
Much of the literature churned out at the fag end of a bull run consists of semi-digested pap. Right now the market for such books has increased dramatically with Wall Street into its sixth year of record advances. An entire generation of American investors believes that markets always return 20 per cent or more. This book was written with that target audience in mind.
Its treatment is simplistic and the target reader is the classic mug driven by greed and hype. But oddly enough, the theories underpinning the book were developed in the crucible of the 1929 Crash and the Depression that followed.
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Value-investing is the most conservative of investment styles and its original proponent, Benjamin Graham, learnt his trade in that most evil of bear markets. He was a visiting professor at Columbia B-School and partner in Graham-Newman, which was among the few Depression success stories on Wall Street. He wrote several classics -- Security Analysis (1934) and The Intelligent Investor (1954) bei-ng the best-known. This book attempts to precis from those classics. Graham constantly harped on "Margin of Safety" -- in fact, that was his watchword. He was also the quintessential honest broker, working without commission to restore the fortunes of clients who had lost money in the crash of 1929-30. He lost money in two out of 50 years and returned better than 17 per cent on average.
In 1952, Graham employed one of his favourite students, Warren Buffet, who thus got his first break onto Wall Street. Buffet has done better than his Guru. Refining val-ue-investment theory to give more emphasis to growth versus safety, he has not yet lost money in 42 years and has returned over 24 per cent in that period. The American markets average an annual return of 11 per cent, so the superiority of the Buffet-Graham style is obvious. In fact, Buffet's track-record single-handedly debunks the "Efficient Markets" hypothesis.
Between them, Buffet, Graham, Munger and several others developed the theories of value investing and have run them through the wringer of seven decades of practical experience. The original Graham value-investing model places great store on financial conservatism and investment with limited downside risks. The Graham model emphasises balance-sheet assets and always looks for low-debt high-asset bargains. A Graham-style investor will never pay more than intrinsic value for a stock though several different models of calculating intrinsic value exist.
Buffet subscribes to most of Graham's classic theory. Points of similarity relate to the safety factor and past track record. Both would pass up a brilliant stock with a great future if it has a lousy past. Both refuse to touch tainted managements. Both underweighed the possibility of quick capital appreciation. Buffet's spin on Graham is to look harder at intangibles and place more emphasis on growth and stable earnings rather than on merely tangible assets. To judge what his possible returns would be, he will compare those earnings growth rates to risk-free investments such as T-bills or AAA bonds.
He will not buy if he considers the stock low-return and not simply pick it up as a bargain. In Buffet's words: "Ben bought a lot of medi-ocre businesses because they were bargains. I try not to do that". The other difference is that Graham would take profits when his portfolio rose above intrinsic value during bull runs, Buffet waits for the next bear-market. He never takes profits unless he thinks the business perspective has somehow changed.
This book takes the reader on a short tour through the value-investing universe explaining theory with specific examples. It assumes a complete lack of investment knowledge or experience. Unfortunately, it isn't detailed enough to help readers at that level. Nor is such a reader likely to develop the discipline and patience required for value-investing. The irony is that the book will be bought by tiphunters in a hot bull market when the man it is dedicated to (Buffet), considers every stock fully-priced. The tipseeker will be disappointed. So will the serious investment student.