After reading several recommendations for Bruce Greenwald’s Value Investing book, I went to my local library and a picked up a copy. (Checking books out of a public library versus purchasing them is always great way to save money.)
This book looks very promising, and I plan on sharing my notes with you as I go through the book. Let me start with the Preface.
Greenwald discusses how Benjamin Graham’s Security Analysis and Intelligent Investor established the discipline of security analysis and value investing. Benjamin Graham’s course at Columbia University started many famous investors careers such as Warren Buffett. Eventually the course was taught by Roger Murray and then more recently by Mario Gabelli. Mr. Greenwald attended Gabelli’s lectures, and then later convinced Gabelli to teach a revised version of the course with him. This is Greenwald’s connection to the investors of Graham and Doddsville.
It is generally agreed that the value of a company is the present value of the sum of its cash flows to its investors over the life of the company. However, this approach requires forecasting cash flows far into the future, but value investors like Graham prefer to look at currently known values versus future projections. Therefore, value investors prefer to estimate the intrinsic value of a company by looking first at assets and then at current earnings power. The only time growth is worth something is when it produces returns that exceed the costs of additional capital that is necessary to fund the growth. This usually only occurs in companies where there are barriers to the entry of competitors. Therefore, it is critical that investors assess the strategic position of a company as part of the process of determining its value.
Graham loved “net-nets“, stocks trading substantially less than the current assets of the company minus all its liabilities. However, net-nets are very rare now and require us to move beyond this basic reliable asset value approach.
The next chapter is Chapter 1: Value Investing Definitions, Distinctions, Results, Risks, and Principles.