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.
Recent Meet the Streets
The Toy Report's
CSI Capital Management's
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
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.
TSC: But from reading your book, it seems difficult to put the idea of value investing into practice. It's like ski jumping -- if you're not really good at it, you shouldn't do it at all.
But you've got to be really good at everything you do.
The one inescapable fact is, whenever you're buying a stock, somebody else is selling it. And in broad, general terms, one of you is wrong. ... If you're an amateur and they're professionals, you're going to be wrong most of the time. So I think for all styles of investing, it's not easy to do. You want to probably think of having professional investors handle your money rather than do it yourself, if you're not going to spend the time to do it.
TSC: So your advice for individual investors is to look for mutual funds run by long-term value investors?
Look for successful value investors, or buy index funds.
TSC: Why is an index fund a good value investment?
If you're doing an index fund, you're on average, on the same side as the market on every trade. So you're not going to do worse than the market. If you're picking your own stocks, you're going to be trading with somebody else -- to the extent you buy more, somebody else is buying less. And if that person knows more than you do, you're dead.
TSC: But everybody thinks they're smart.
The example we use at the business school is that they ask the entering class how many of them think they're going to finish in the top half of the class. And about 94% of them think they are. And they're wrong. Or at least 44% of them are wrong.
TSC: So who should be investing your money for you?
You want a person, an investor, who has picked his spots. Who is not just going to be down there in the gutter with everybody else chasing the same fifty tech names. Who's looking for obscure. Who's looking for oversold. Who's looking for small. Who is looking for an area of the market. That is, they have a strategy to buy things that other people are not interested in, and selling at a discount.
You want to be able to answer the question, "Why are you going to make money here?" Now, Mario Gabelli's answer and really, actually, Warren Buffett's answer, is that they are experts only in certain fields. Gabelli in media and communications, Buffett really in media and insurance and consumer nondurables. And you look at how they've done outside those areas, and it's not inspiring.
The second thing is ... you would like to have somebody managing your money who knows what they know. That if they're trading on inside information because they're close to management and they're basically taking management's word for it, that they know that. And they don't pretend that they're an expert in a bunch of industries from drugs to trucking.
You want somebody who knows when things are fundamentally unknowable.
TSC: You're asking for a humble person. But humble is not an adjective you'd necessarily use to describe someone who has billions of dollars of other people's money and thinks he can invest it well.
I agree. But I think if you look at my book, one of the emphases -- after recognizing the competitive nature of investing in an intelligent way -- is knowing what you know. The assets are the most reliable information you have. So buy on that basis first. So at least you know there's that much value there. The current earnings power is a hell of a lot more reliable than a long term forecast of growth. So buy that next.
TSC: What's your investment strategy now?
I do not follow stocks anymore. So the answer is I'm in that category of people who are looking for intelligent investors
to manage my money, according to the two criteria that we described: They have a sensible strategy for a competitive environment, and they know what they know. And they're careful about that. And for the rest, it's in index funds and it's asset allocated. Because I don't know squat.