I am presenting my summary of the book "The Little Book of Value Investing" by Chris Browne. Chris Browne who passed away in 2009 was one of the great value investors over the past 30+ years.
This is an excellent book to re-inforce all the value investing principles and is a pretty quick read too. I will post the summary over multiple articles since my notes are long.
Chapter 1: Buy stocks on sale. The basic concept of Value Investing is "Buying a business for far less than it is worth". Value investing is not a set of hard and fast rules. When prices drop, people buy more of the things they want and need, except in the stock market. Everyone seems to think that they should buy stocks that are rising and sell those that are falling. Reasons: Herd mentality. It’s ok for me to lose money as long as long as others are also losing. Investors feel disillusioned when the stocks they own or markets decline significantly. This prevents them from buying stocks when they go down. They get scared. The time to buy stocks is when they are ON SALE and not when they are high priced because everyone wants to own them. Growth investing: There is nothing wrong with owning great businesses that can grow at fast rates. The fault lies in the price that investors pay. Just like it makes sense to buy cars and jeans on sale, it makes sense to buy stocks on sale too. Stocks on sale will give you more value in return for your dollars.
Chapter 2: What’s a business worth? Two principles of value investing: What is a business worth (intrinsic value) Don't lose money (margin of Safety) Intrinsic value enables investors to determine if a particular stock is a bargain and also if a stock they own is overvalued. When overvalued stocks are revalued by the market, there is permanent capital loss. Two approaches to intrinsic value. Financial ratios are indicators of value. 2nd is the appraisal method. Stock prices often trade for far more or far less than intrinsic value. Most investors move from extreme pessimism to jubilant optimism. These emotions drive stock prices to extreme overvaluation and under-valuation. Rational value investors sit back and wait for the market to offer stocks for less than they are worth and to buy the same stocks back for more than their worth.
Chapter 3: Don't lose money. As a company increases it net worth or intrinsic value over time, the value of the shares will increase. If the price of the stock rises from less than intrinsic value to intrinsic value over time, you have a win/win. When you pay full price for a stock ( intrinsic value), future gains may be limited to company's internal growth rate and dividends Graham wanted to buy stocks selling at two-third (66%) or less of their intrinsic value. If correct, the stock could rise 50% and still not be overvalued (99% of IV). If the market hit a rough patch, he knew what he owned was worth more than what he paid for it. Avoid investing in companies that have a lot of debt relative to their net worth. Such companies are far riskier investments than companies with excess cash. Also, such companies cede a measure of control to their lenders. Diversification provides a margin of safety and insurance against downturn in a few stocks/ industries. Have a broadly diversified portfolio of stocks across industries. Hold a minimum 10 stocks in a portfolio. Lets you be contrarian. Lastly, if stocks are cheap buy them. Ignore the noise around you and take advantage. Reverse is true also. If stocks valuations are reaching or exceeding intrinsic value and there is no margin of safety, one must sell. Buy in bad times and sell in good times.
In future posts, I will continue with the book summary.
This is an excellent book to re-inforce all the value investing principles and is a pretty quick read too. I will post the summary over multiple articles since my notes are long.
Chapter 1: Buy stocks on sale. The basic concept of Value Investing is "Buying a business for far less than it is worth". Value investing is not a set of hard and fast rules. When prices drop, people buy more of the things they want and need, except in the stock market. Everyone seems to think that they should buy stocks that are rising and sell those that are falling. Reasons: Herd mentality. It’s ok for me to lose money as long as long as others are also losing. Investors feel disillusioned when the stocks they own or markets decline significantly. This prevents them from buying stocks when they go down. They get scared. The time to buy stocks is when they are ON SALE and not when they are high priced because everyone wants to own them. Growth investing: There is nothing wrong with owning great businesses that can grow at fast rates. The fault lies in the price that investors pay. Just like it makes sense to buy cars and jeans on sale, it makes sense to buy stocks on sale too. Stocks on sale will give you more value in return for your dollars.
Chapter 2: What’s a business worth? Two principles of value investing: What is a business worth (intrinsic value) Don't lose money (margin of Safety) Intrinsic value enables investors to determine if a particular stock is a bargain and also if a stock they own is overvalued. When overvalued stocks are revalued by the market, there is permanent capital loss. Two approaches to intrinsic value. Financial ratios are indicators of value. 2nd is the appraisal method. Stock prices often trade for far more or far less than intrinsic value. Most investors move from extreme pessimism to jubilant optimism. These emotions drive stock prices to extreme overvaluation and under-valuation. Rational value investors sit back and wait for the market to offer stocks for less than they are worth and to buy the same stocks back for more than their worth.
Chapter 3: Don't lose money. As a company increases it net worth or intrinsic value over time, the value of the shares will increase. If the price of the stock rises from less than intrinsic value to intrinsic value over time, you have a win/win. When you pay full price for a stock ( intrinsic value), future gains may be limited to company's internal growth rate and dividends Graham wanted to buy stocks selling at two-third (66%) or less of their intrinsic value. If correct, the stock could rise 50% and still not be overvalued (99% of IV). If the market hit a rough patch, he knew what he owned was worth more than what he paid for it. Avoid investing in companies that have a lot of debt relative to their net worth. Such companies are far riskier investments than companies with excess cash. Also, such companies cede a measure of control to their lenders. Diversification provides a margin of safety and insurance against downturn in a few stocks/ industries. Have a broadly diversified portfolio of stocks across industries. Hold a minimum 10 stocks in a portfolio. Lets you be contrarian. Lastly, if stocks are cheap buy them. Ignore the noise around you and take advantage. Reverse is true also. If stocks valuations are reaching or exceeding intrinsic value and there is no margin of safety, one must sell. Buy in bad times and sell in good times.
In future posts, I will continue with the book summary.
