The Value Investors: A book review by Bob Morris

The Value Investors: Lessons from the World’s Top Fund Managers
Ronald W. Chan
John Wiley & Sons, Singapore Pte. Ltd. (2012)

Unique perspectives on how to attempt to achieve and then sustain a “stellar” record in value investment

In an earlier book, Behind the Berkshire Hathaway Curtain: Lessons from Warren Buffett’s Top Business Leaders, Ronald Chan shares what he learned during interviews of nine executives who head companies owned by Berkshire Hathaway: Business Wire, Justin Brands, Buffalo News, Jordan’s Furniture, Acme Brick Company, See’s Candies, The Pampered Chef, and MidAmerican Energy Holdings Company. He devotes a separate chapter to each of nine executives and focuses on a valuable lesson he learned from each that provides “a sense of what life is, can be, or should be.

Now in his latest book, Chan extends the scope of his focus to 12 value investing legends. He conducted interviews of each of them, during which he learned about their career experiences and, especially, their views on value investing. As Bruce C.N. Grunwald explains in the Foreword, “By combining descriptions of investment approaches with investor background, he illuminates the connection between individual character and effective investment practice. Taken as a whole, the book provides each practical value investor with the necessary material to sift through the historical records to find the style that is most appropriate to them. Ronald Chan’s work is an essential starting point for any nascent value investor and an invaluable reference for experienced investors.”

I am neither a nascent nor an experienced value investor. As was also true when I began to read Behind the Berkshire Hathaway Curtain as well as The Essays of Warren Buffett: Lessons for Corporate America, Second Edition, edited by Lawrence A. Cunningham, my interest in this book is in the information, insights, and wisdom provided by a dozen of the world’s most intelligent, erudite, and successful fund managers. Better yet, Chan has selected a diversified group: five value investors are from North America, four from Asia, and three from Europe. And even better yet, several have extensive multi-cultural experience. “Mark Mobius of Templeton Emerging Markets Group, for example, was born in New York but has lived in Asia for 40 years. Frenchman Jean-Marie Eveillard moved to New York when he was in his late thirties and has lived there ever since. In many ways, the value mindset of these men has been shaped by their cultural experiences.”

These are a few of the several dozen passages that caught my eye:

Warren Buffett  (chairman and CEO, Berkshire Hathaway): “Success in investing doesn’t correlate with I.Q. once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble when investing.” (Page xvi)

Walter J. Schloss (Walter & Edwin Schloss Associates) and Benjamin Graham (Buffett’s professor, mentor, and associate) “had very different mindsets. Schloss’s priorities were not to lose money and to survive in the market, whereas Graham’s were to seek downside protection and to diversify his investment portfolio to minimize individual stock risks. Working for Graham from 1946 to 1955, Schloss’s duty was to find stocks that were selling below their working capital – net-nets.’” (Page 8)

Irving Kahn (Kahn Brothers Group) believes that Wall Street has always been a poor judge of value. “First, it never learns from the past, often repeating the same investment mistakes…Second, people on Wall Street often put so much effort into making money that they lead stressful, unhealthy lives. Kahn questions the value of a life with wealth but without health. A centenarian who has now been in the investment business for more than 80 years, Kahn has learned a bit about how to stay both healthy and wealthy…As long as you keep your mind sharp and busy, you will see good things happen!” (30)

William H. Browne (Tweedy, Browne Company): “People often think ‘value’ means that you go into a trash can and find some junk that has value. If you pick it up for free and sell it for a dollar, then you have a value deal! I think this perception is insufficient, if not inaccurate, because if you think about real value, it is about buying a good business [one that is organic, adaptive, and can reinvest its own profit, both its human and physical capital] that does the long-term work for you!” (57)

Jean-Marie Eveillard (First Eagle Funds): “Value is a big tent. You have Graham who does it mathematically, and you have Buffett, who made a substantial adjustment to Graham’s teaching by looking not just at the numbers, but also at the long-term prospects and quality of the business. The Graham approach was less time-consuming, and so I could work on the numbers on my own. Toward the end of the 1980s, I began to hire analysts so we could apply the Buffett approach. Having more people allowed us to spend a lot of time trying to find out the major characteristics of businesses and their sustainable competitive advantage – what Buffett calls a ‘business moat.’” (73)

Francisco García Paramés (Bestinver Asset Management): “Warren Buffett said that ‘risk comes from not knowing what you’re doing!’ Reducing risk is not about adding assumptions and complicating your investment model, but about simplifying by investing in what you know best. If you believe that a business is sustainable, then you should think like an entrepreneur and try to calculate how much the business is worth, as if you were taking it over. If it is selling at a discount, then you have found value.” (91)

Anthony Nutt (Jupiter Asset Management): “When it comes to value investing, my investment team and I believe that the difficult part lies not in finding out whether a stock is cheap or dear. We can always look at a business objectively and come up with a fair opinion about it. The more difficult part is that we never know if other investors are identifying the very same stock and thinking the same thing as us. In essence, determining how long it takes for an undervalued stock to perform is totally out of our control. Because of that, we never have a time horizon for our investments. We focus purely on valuation instead.” (109)

These brief excerpts offer at least some indication of several different “value investing legends” consider when making a decision. Each has a different “style,” to be sure, but all of them seem to share common qualities such as patience, self-knowledge, humility, self-discipline, and erudition that includes but is by no means limited to the financial world, in general, and to investments, in particular. Chan notes, “People often ask how successful value investors come up with their investment ideas. The simple answer is that they read a great deal.” That also helps to explain why they know a great deal. It should also be noted that all of those whom Ronald Chan interviewed learned much of value from Benjamin Graham and are well aware of his observation: “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

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