In Rubicoin’s latest Five Minute Read, we review Christopher H. Browne’s The Little Book of Value Investing – the go-to guide for value investing.
Continuing on from our last review of Roger Lowenstein’s biography of Warren Buffett, this month’s Five Minute Read is rather Buffett-themed.
Originally, the idea was to review The Intelligent Investor by Benjamin Graham – the book Buffett called the “best book on investing ever written”. However, I decided that it might be more appropriate for our readers to start with The Little Book of Value Investing by Christopher H. Browne before we move on to Graham.
The reasons for this are two-fold.
Firstly, The Intelligent Investor is quite a tome, and though it’s often cited as the first book any inspiring investor should read, I’m sure many have been immediately put off by the idea of investing based on this advice.
Secondly, I’m currently working my way through a new edition of The Intelligent Investor that includes commentary by Jason Zweig, who breaks down Graham’s concepts with more modern examples that might be more suited to our users. So, hold tight for that review.
For now, we’ll focus on The Little Book of Value Investing by Christopher H. Browne.
About the Author
Christopher H. Browne was an American Investor and author who worked for Tweedy Browne & Co – a prominent investment firm started by his father. From 1969 to his death in 2009, Browne was a highly respected value investor, known for heavily scrutinizing poor management and uncovering fraud at the highest levels of corporate America.
Browne was the first to publicly suspect that Conrad Black was embezzling from his company Hollinger. A shareholder-initiated prosecution in 2004 led Black to be convicted and sentenced to six years imprisonment.
Browne wrote The Little Book of Value Investing in 2006.
The Little Book of Value Investing
This is the fourth in the ‘Little Book’ series on investing we have reviewed, along with The Little Book that Builds Wealth, The Little Book of Common Sense Investing, and The Little Book that Beats the Market.
Browne begins the book by comparing value investors and growth investors with a supermarket analogy. Browne suggests growth investors are those that go in and look for the best products, while value investors are the bargain hunters.
For a value investor, the hype surrounding a company is not important – all they want is to buy something for cheaper than it’s worth. It doesn’t matter to a value investor how fast a company is growing or how marvelous the management is; if a company is undervalued you should buy it, if it’s overvalued you should sell it.
Of course, that brings up an interesting question – what exactly makes a company undervalued?
Valuing a Company
Browne posits that investing should be conceptualized as buying a share of company earnings.
To do this, you need to know two things – how much is a company earning, and how much it is going to cost to buy a share of that. In other words, you should look at P/E ratio (price-to-earnings ratio). This can found on any finance website you choose, usually in the main statistics of the stock’s page.
Browne is also a proponent of watching how insiders behave. Insiders are those that own a significant stake in the company or work in upper levels of management. Browne suggests that when insiders are buying shares, you should be buying shares too as these are the people who know what’s really going on behind the scenes.
So finding a company with a low P/E ratio and high insider buying is a quick glance way that Browne identifies good investment opportunities.
Of course, it’s not all that simple though.
Kicking the Tires
First off… if a company has a low P/E ratio, there might be a good reason why. You need to investigate this further to come to a conclusion as to whether this stock is undervalued or headed for zero.
The methods Browne suggests for this are pretty straightforward and regular readers of our blog will be more than familiar with them.
Does the company have more cash than debt? Are they in a position to service the debt they do have? Do they have steady revenue growth and margins? All these questions should be asked before you make a decision on investing in any company.
Browne then goes further with a list of 16 questions you should ask yourself regarding the company, like “can the company control expenses?” or “what will the company do with the excess cash generated by the business?”
It’s actually a pretty exhaustive list and one that would certainly have any investor thinking deeply about a company they are about to invest in.
Browne believes that the principles of value investing apply in many regions, and is an advocate of looking beyond the U.S. for foreign investment opportunities.
However, this comes with some serious caveats.
The most serious of these admonitions is basically a warning not to invest in Chinese companies. Browne is very skeptical of Chinese accounting practices and suggests that you should avoid them at all costs.
He also advises investors that investing abroad will bring up its own challenges, including dealing with foreign currency fluctuations and reporting metrics that may not be comparable to American companies.
Should I Buy This Book?
This is certainly a shorter and more accessible introduction into the world of value investing than Ben Graham’s Intelligent Investor. You basically get a taste of all the same concepts, without getting down into the nitty-gritty.
However, at times the layout of the chapters can be confusing, and Browne seems to jump from topic to topic at random. His writing style can also be a bit hard to get excited by and I found myself struggling at times.
One thing to note also is his reliance on a company’s P/E ratio. As we’ve discussed before, just looking at a company’s P/E ratio is a bit of a lazy way to value companies. There are a lot more to valuable companies than this somewhat outdated metric, and any serious investor should always look deeper.
However, there are very valuable takeaways from this book, and following Browne’s advice before investing would no-doubt put you well ahead of the pack in terms of research.