Noob Value Investing Questions

Hi,

As the title says, I hope these questions aren't completely stupid, but basically, I have been developing an interest in value/fundamental investing, and I was wondering about a couple of things:

  1. What styles are associated with non-quantitative, more fundamental methods? I.e. its a given that deep value funds are less quantitative, but what about some of the other styles, such as merger arbitrage, long/short, etc.? Are they also fundamental driven or more quantitative?

  2. I have done a search and so far, it seems like "Security Analysis" and Warren Buffett essays are great for prospective fundamental/value investors. Is there any other material you would recommend for someone looking to learn these things that I should read/check out frequently? I know Buffett is obviously top class in terms of value investing, but are there any current or former hedge fund managers whose essays/books I should check out for this topic?

Thanks a ton guys!

 
Best Response

graham and dodd security analysis graham and dodd intelligent investor ^^ both are the equivalent of the bible....i have pdf versions of both as well. PM me if you want me to forward them on.

Here's the thing. If you can't spot the sucker in the first half hour at the table, you are the sucker.
 
bullbythehorns:
graham and dodd security analysis graham and dodd intelligent investor ^^ both are the equivalent of the bible....i have pdf versions of both as well. PM me if you want me to forward them on.

+1 SB :)

 

Graham and Dodd are Old Testament. Buffet's letters are the Talmud. Margin of Safety is the Gospel. Fooling Some of the People All of the Time and Joel Greenblatt's books are the New Testament.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

If you don't believe that technical analysis works, then why would you trust is for entry/exit? Think about it this way: if technical analysis has the predictive power to tell you what will happen, even in the very near future, for entry and exit it should have the same predictive power to help you profit by trading on that information actively. That's been my line of thought lately at least, I fully respect anyone who proves me to be an idiot.

 

Best way to learn is by doing. Get people to pitch lots of stocks, then usually healthy debate ensues. We have a really active SMIF at my program and it only exists because people are motivated to practice stock pitches for IM interviews, which gives us ideas for the fund. Generally, it's really hard to teach valuation over a lunch session. Same for strategy, special situations, etc. But after seeing lots of ideas, people tend to start to pick it up.

 

Try to figure out what your school curriculum is missing and build up from there. For example, if you didn't take certain classes at my school or join the student managed fund, then you wouldn't even SEE valuation until senior year. So if we had freshman and sophomores joining the club, we literally had to start with teaching how to use P/E multiples.

 

I just finished the Greenwald book. I'm still learning about value investing, but I thought it was quite good.

I think the tricky thing about the valuation strategies that he's talking about is that it simply requires a great deal of judgment and knowledge in order to do it correctly, and there's no guarantee that you're "right," or even that anyone knows what the right answer is. It's not like calculating beta of black-scholes option values or something.

 

I have the Klarman PDF, but didn't feel it was technical enough. Maybe I quit too early, but I felt like all he was saying is the philosophy behind value investing is "blah blah blah" and didn't explain the details on how to do it. I like how Greenwald is a bit more technical, I just don't feel like he's explaining things that well. Like for inventory, he's saying add LIFO reserve, then adjust based on whether you think prices will go up or not, but doesn't explain the process of by how much one should adjust, etc, which is really frustrating.

 

The fact is that the kind of detail that you're looking for is either a) too case-specific to be easily explained in a book or b) not quantifiable. The only way to learn what you're looking for is by doing. I recommend trying to apply the things he mentioned for yourself, deciding if a company is over/undervalued, and then (ideally) taking a position, or at the very least tracking the company's performance.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 
Tartarus:

The Intelligent Investor is pretty much the cornerstone of value investing. I would start there.

I second this, just picked up a copy the other day. However, after further review, it would appear that the "revised" edition by Jason Zweig is not as good as the vanilla edition originally written by Graham. Zweig contradicts a lot of what Graham wrote in his original edition, according to the reviews. Still a great book from what I hear. One Up on Wall Street by Peter Lynch is another must-read.

 

One book / person that has helped me is Greenwald. He distills how to value different companies using multiple methods, which kind of opens the eyes to some degree.

Some people say use DCF for everything but that's not the best option for various company types. It works for solid, durable companies that are reasonably predictable. Greenwald helps you understand the other options for calculating a value range and how to do it.

The other books listed will help with the mindset of a value investor.

Thanks to Simple As for exposing me to the value of Geeenwald.

 

As a student also interested in value investing I think the best places to start are the Intelligent Investor (but I personally have never read the whole book, only Chapters 8 & 20, and that's what others had recommended to me) and Margin of Safety by Klarman which is easily found online. Watching videos of Buffett speaking was also helpful. But I think the basic concepts of value investing are really simple, basically a) treat the purchase of a stock as the purchase of a business, so your main focus in investing is getting to know the business and looking to the market only as a source of opportunities, b) give preference to situations where the business has a "moat"/competitive advantage, c) invest with a "cushion" ("margin of safety") between the price you pay and what you think value is; focus on the downside in potential investments.

So given the concepts are pretty simple I'd say rather than read the same theory 10x over, practical experience evaluating companies is the best thing you can do. So I like to look on Valueinvestorsclub.com, the high rated pitches tend to be really in-depth and great places to start understanding how to put the concepts into motion. Then if I find the situation interesting/manageable I start to read up and investigate on my own.

 

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