Meet the Street: The Virtues of Value Investing

A classic, according to Mark Twain, is a book that people praise and don't read.

Let's be honest: For most of us, Security Analysis, the 1934 classic on value investing by Benjamin Graham and David Dodd, falls into that category.

Bruce Greenwald Professor, Columbia University

Recent Meet the Streets

Yorkton Securities' Jacques Kavafian

The Toy Report's Chris Byrne

CSI Capital Management's Leland Faust

Smith College's Andrew Zimbalist

Lucky for us, Bruce Greenwald rode to the rescue this year. A professor at Columbia University like the legendary Graham, Greenwald updated his value-oriented philosophy with Value Investing: From Graham to Buffett and Beyond, co-written with Judd Kahn, Paul Sonkin and Michael van Biema and published by John Wiley & Sons.

Sophisticated yet accessible to people outside the orbit of business schools, Greenwald's book is a lively defense of, and handbook for, value investing, complete with glimpses of how it's practiced by pros like Warren Buffett and Mario Gabelli.

Because "value" has replaced "growth" as the market's mantra (for a few months, at least), it seemed like a good time to ask Greenwald a few questions about the subject.

TheStreet.com: You make the point in your book that value investing is like motherhood and apple pie: There is no one who would say he's not a value investor. What is a value investor in this post-Graham and Dodd world?

Greenwald: A Graham and Dodd value investor is somebody who basically is a fundamental as opposed to a technical investor ... [someone] who tries to compare the price that they're paying to the level of value they're getting.

What almost everybody on Wall Street does is they try and value things relative to their judgment of what Wall Street's opinion is. They don't say, "What's this really worth, in some long-term fundamental sense?" They say, "What am I paying for this in light of, say, immediate future prospects, compared to what seems to be implied about Wall Street's expectations by the price?"

TSC: Why do you think it's better to be a value investor?

Greenwald: The first reason is obviously that you have a much quieter life.

Say I'm a [growth] investor. And I spot something that's trading at 60 times earnings. And I think that realistically, of course, it's not going to stay there. But the fact of the matter is that all sorts of similar stocks that are going to do less well in the coming quarters are trading at 80 times earnings. And I think that this is a similar stock that's going to catch people's eye. What it means is I've got to watch very carefully what happens. That I've got to really keep track of what the latest development is.

My dentist thinks that he identifies these kinds of unspotted trends. And his idea of doing that is looking at demographic information. So he thinks that nobody understands that there are a lot of kids being born, so toy companies are a really good buy. That's crazy. ... But he's got to watch the toy companies and watch when the information gets priced into the stock. And wait for the news that he's expecting, as opposed to what the market is expecting, to come out. There's no comfort that you could put this thing in a safe for 10 years, and you ought to be able to take it out and have a reasonable return.

That's the first advantage. The second, of course, is the tax advantage. That if you're trading on superior information, it's almost always short-term information. Your profits are going to be taxed at income rates as opposed to long-term capital gain rates. ...