The scarcity of Graham’s preferred security, one that is selling below asset value, has forced value investors be more sophisticated in the searches and valuations. Value Investing is an explanation and summary of these ideas derived from Graham’s investment philosophy. It is not an intellectual exercise but is endowed with copious examples for each of the concepts. The authors aim to teach the principles, not merely expound them.

Value investing is, fundamentally, buying securities for less than they are worth and selling them when the market properly values them. This leaves the problem of valuation. Graham used asset value, that is, the liquidation value of the assets, which discounts values of inventories, technical equipment (which may be near obsolescence), etc. Although certain emperical discount values are given for the various assets, one can find a separate valuation by looking at what similar assets have sold for in recent transactions. Graham would buy securities whose market valuation was significantly less than this adjusted asset value such that it provided a good return and a margin of safety in case the market did not approach a proper valuation within a few years.

After the Depression these companies became harder to find and nearly impossible in recent years. Furthermore, Warren Buffett’s experience with Graham’s method was that indiscriminantly buying cheap companies did not work as well as the theory predicted: if the underlying economics of the business were bad, they stocks generally did not recover. There is a second method of valuing companies, however: earnings power value. EPV = constant earnings / cost of capital, is a measure of the return that investing a certain amount of capital will produce. If EPV > book value, then the company has a franchise, that is a market protected by barriers to entry. If the company invests within this francise it will create value. (Investing outside it will generally not increase value)

Some unusual companies can sustain high rates of growth in their franchise market. Fin de ciècle excitement over such companies led to a premium paid for growth. The authors examine Intel in the 1980s and determine that if the growth is likely to continue for a relatively long time and that both the growth rate and return on capital are substantially higher than the cost of capital, then a premium for growth may be warranted. However, the further one strays from assets, the less certain the valuation becomes. Growth is the most uncertain, and since the mark of a value investor is the margin of safety, in such extraordinary cases as Intel, growth may be used as the margin of safety.

The fundamentals having been explained, the second half of the book is devoted to eight successful value investors. These range from the best known, Warren Buffett, to quiet investors such as the Schloss’s. They have a significant range in ideology: Buffet buys entire companies with a strong franchise (Buffett), Klarman buys companies that have a non-economic factor depressing their price (such as being dropped from the S&P 500), Paul Sonkin invests in small companies, and the Schloss’ adhere much more closely to a Grahamian approach. Each of the eight investors’ principles are summarized and a historical example is provided, which illustrates the principles in valuation and the large variations within value investing.

Value Investing is an unassuming book that on first glance may fail to live up to its subtitle, especially if one is expecting an intellectual treatment of the material. Instead, it more closely resembles an instruction manual or a handbook. In fact, the copious examples and the well-explained concepts are reminiscent of Graham’s own handbook, The Intelligent Investor, although it is not as clear, as comprehensive, or as tempered with personal experience. Although the writing may not win any awards, the ideas are well summarized with valuable tidbits hidden in the biographical section and understanding and remembering these concepts with be a great aid to value investors in their endeavors.
Review: 8.99
Quality content, but lacks the spark of great content. Likewise, quality writing but not outstanding from a literary standpoint. The book aims to teach, and does so, but without the finesse necessary for the highest rankings. That notwithstanding, I would recommend this book to all beginning and moderately experienced value investors. Given that recommendation, I would rank this book as just under the 9.0 value that outstanding writing would achieve.