We'd make Benjamin Graham proud
Upside of the Down Dow
By Whitney Tilson, Contributing Editor
John Heins, Contributing Editor
From Kiplinger's Personal Finance magazine, December 2008
At the top of that list is the eighth chapter of Benjamin Graham's The Intelligent Investor, in which the patron saint of value investing explores how market fluctuations can, and should, impact investment decisions. Buffett has called this chapter, along with Chapter 20 on margin of safety in the same book, "the two most important essays ever written on investing." In light of the market's recent behavior, now appears to be an excellent time for a Graham refresher course:
"Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices," Graham wrote, "the intelligent investor should be interested in the possibilities of profiting from these pendulum swings.... He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored."
Graham makes a distinction between trying to profit by "timing" and by "pricing." He likens making bets on the anticipated direction of the overall market (timing) to speculative folly, providing "a speculator's financial results." The true opportunity presented by volatility, he writes, is simply to take advantage of the resulting price changes "to buy stocks when they are quoted below their fair value" and to sell them when they rise above that value. Graham adds:
"The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment."
The "basic advantage" to which Graham refers is your freedom as an individual investor to ignore Mr. Market's whims -- a luxury not always enjoyed by professionals dealing with cash inflows and outflows or obsessively focused on perform-ance compared against some benchmark.
"It might be best," he writes, "for [the conservative investor] to concentrate on issues selling at a reasonably close approximation to their tangible-asset value -- say, at not more than one-third above that figure. Purchases made at such levels, or lower, may with logic be regarded as related to the company's balance sheet, and as having a justification or support independent of the fluctuating market prices.... The investor with a stock portfolio having such book values behind it...can give as little attention as he pleases to the vagaries of the stock market."
While he focuses on book value, Graham also highlights the importance of a satisfactory price-earnings ratio and "a sufficiently strong financial position" when identifying investments that can best weather market storms. This is part of the value investor's catechism: The best way to deal with a chaotic and unpredictable market is to own extremely undervalued stocks with strong balance sheets.
Finally, some truly vintage Ben Graham -- his core message: "Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies."
Timeless advice, indeed. A stock price matters at any given time only in relation to the value of the company behind it. Staying focused on value rather than price during times of market turmoil is most likely to pay financial (not to mention psychological) dividends.
By Whitney Tilson, Contributing Editor
John Heins, Contributing Editor
From Kiplinger's Personal Finance magazine, December 2008
At the top of that list is the eighth chapter of Benjamin Graham's The Intelligent Investor, in which the patron saint of value investing explores how market fluctuations can, and should, impact investment decisions. Buffett has called this chapter, along with Chapter 20 on margin of safety in the same book, "the two most important essays ever written on investing." In light of the market's recent behavior, now appears to be an excellent time for a Graham refresher course:
"Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices," Graham wrote, "the intelligent investor should be interested in the possibilities of profiting from these pendulum swings.... He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored."
Graham makes a distinction between trying to profit by "timing" and by "pricing." He likens making bets on the anticipated direction of the overall market (timing) to speculative folly, providing "a speculator's financial results." The true opportunity presented by volatility, he writes, is simply to take advantage of the resulting price changes "to buy stocks when they are quoted below their fair value" and to sell them when they rise above that value. Graham adds:
"The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment."
The "basic advantage" to which Graham refers is your freedom as an individual investor to ignore Mr. Market's whims -- a luxury not always enjoyed by professionals dealing with cash inflows and outflows or obsessively focused on perform-ance compared against some benchmark.
"It might be best," he writes, "for [the conservative investor] to concentrate on issues selling at a reasonably close approximation to their tangible-asset value -- say, at not more than one-third above that figure. Purchases made at such levels, or lower, may with logic be regarded as related to the company's balance sheet, and as having a justification or support independent of the fluctuating market prices.... The investor with a stock portfolio having such book values behind it...can give as little attention as he pleases to the vagaries of the stock market."
While he focuses on book value, Graham also highlights the importance of a satisfactory price-earnings ratio and "a sufficiently strong financial position" when identifying investments that can best weather market storms. This is part of the value investor's catechism: The best way to deal with a chaotic and unpredictable market is to own extremely undervalued stocks with strong balance sheets.
Finally, some truly vintage Ben Graham -- his core message: "Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies."
Timeless advice, indeed. A stock price matters at any given time only in relation to the value of the company behind it. Staying focused on value rather than price during times of market turmoil is most likely to pay financial (not to mention psychological) dividends.
THURSDAY, APRIL 9, 2009
A Back to the Future Value Strategy
By MARK HULBERT
Adhering to Ben Graham's 75-year-old approach to value investing can protect a portfolio better than latter-day value approaches.
A Back to the Future Value Strategy
By MARK HULBERT
Adhering to Ben Graham's 75-year-old approach to value investing can protect a portfolio better than latter-day value approaches.
For Benjamin Graham fans, seems there's a recent book out now containing some of his earliest investment writings.
Benjamin Graham on Investing: Enduring Lessons from the Father of Value Investing
Benjamin Graham on Investing: Enduring Lessons from the Father of Value Investing
Graham's strategy still stands tall
Father of value investing and security analysis offers a steady, long-term strategy that sill applies today
Father of value investing and security analysis offers a steady, long-term strategy that sill applies today
Re: We'd make Benjamin Graham proud
NormR wrote:
I'm reading Value Investing which is the latest collection of articles / book by James Montier. (Highly recommended, it's perhaps the best value investing book of the year.) He makes the case for long holding periods. (As did David Dreman in his book.)
Just want to thank Norm for the heads up regarding the book above. I picked up the only copy at the Queensway Chapters in Toronto this morning. I'll give you a warning though. If you're old fashioned like me, and like to buy directly from the store, they'll charge the full price of $47.95, before tax. Order online from Indigo/Chapters and it's only $31.64.
Re: We'd make Benjamin Graham proud
Ditto on the thanks to Norm, I've requested my local library get a copy.Taggart wrote:NormR wrote:
I'm reading Value Investing which is the latest collection of articles / book by James Montier. (Highly recommended, it's perhaps the best value investing book of the year.) He makes the case for long holding periods. (As did David Dreman in his book.)
Just want to thank Norm for the heads up regarding the book above. I picked up the only copy at the Queensway Chapters in Toronto this morning. I'll give you a warning though. If you're old fashioned like me, and like to buy directly from the store, they'll charge the full price of $47.95, before tax. Order online from Indigo/Chapters and it's only $31.64.
Show me the incentive and I will show you the outcome
--Charlie Munger
--Charlie Munger
- Peculiar_Investor
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Re: We'd make Benjamin Graham proud
Calgary Public Library has 4 copies on order and I'm near the top of the Hold queue.FinEcon wrote:Ditto on the thanks to Norm, I've requested my local library get a copy.Taggart wrote:NormR wrote:
I'm reading Value Investing which is the latest collection of articles / book by James Montier. (Highly recommended, it's perhaps the best value investing book of the year.) He makes the case for long holding periods. (As did David Dreman in his book.)
Just want to thank Norm for the heads up regarding the book above. I picked up the only copy at the Queensway Chapters in Toronto this morning. I'll give you a warning though. If you're old fashioned like me, and like to buy directly from the store, they'll charge the full price of $47.95, before tax. Order online from Indigo/Chapters and it's only $31.64.
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Re: We'd make Benjamin Graham proud
Ditto here for the thanks Norm, I was thinking you were talking about the Ben Graham book "On Investing" until I noticed taggart wrote of the price which is different. I'm picking up the other book tomorrow with a gift card I have.
Maybe this one will be next.
Maybe this one will be next.
"Whenever I'm about to do something I think, would an idiot do that? And if they would, I do not do that thing." - Dwight K. Schrute
Re: We'd make Benjamin Graham proud
My pleasure, I just hope that everyone enjoys it!Taggart wrote:NormR wrote:
I'm reading Value Investing which is the latest collection of articles / book by James Montier. (Highly recommended, it's perhaps the best value investing book of the year.) He makes the case for long holding periods. (As did David Dreman in his book.)
Just want to thank Norm for the heads up regarding the book above.
There's something about buying a book on value investing at full price that just seems wrong. (The less said about the premium on Klarman's book the better!)Taggart wrote:I picked up the only copy at the Queensway Chapters in Toronto this morning. I'll give you a warning though. If you're old fashioned like me, and like to buy directly from the store, they'll charge the full price of $47.95, before tax. Order online from Indigo/Chapters and it's only $31.64.
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Re: We'd make Benjamin Graham proud
Norm, give me an idea of what the new Montier is really worth. You could start by comparing and contrasting the price and value of Klarman.
Nothing can protect people who want to buy the Brooklyn Bridge.
Re: We'd make Benjamin Graham proud
I can't do that as I've not read Klarman's book. Too $$$. (But reports are that it's a little dull.)Norbert Schlenker wrote:Norm, give me an idea of what the new Montier is really worth. You could start by comparing and contrasting the price and value of Klarman.
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Re: We'd make Benjamin Graham proud
Then you missed this thread, http://www.financialwisdomforum.org/for ... 48#p316548. The price is excellent for a value investor, FREE!NormR wrote:I can't do that as I've not read Klarman's book. Too $$$. (But reports are that it's a little dull.)Norbert Schlenker wrote:Norm, give me an idea of what the new Montier is really worth. You could start by comparing and contrasting the price and value of Klarman.
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Reason: replace old domain name with www.financialwisdomforum.org to reflect new domain name effective 19-Jan-2014
Reason: replace old domain name with www.financialwisdomforum.org to reflect new domain name effective 19-Jan-2014
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Re: We'd make Benjamin Graham proud
I've seen PDF copies around, but I've not indulged for ethical reasons. Klarman really should just republish the thing.Peculiar_Investor wrote:Then you missed this thread, http://www.financialwisdomforum.org/for ... 48#p316548. The price is excellent for a value investor, FREE!NormR wrote:I can't do that as I've not read Klarman's book. Too $$$. (But reports are that it's a little dull.)Norbert Schlenker wrote:Norm, give me an idea of what the new Montier is really worth. You could start by comparing and contrasting the price and value of Klarman.
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Re: We'd make Benjamin Graham proud
Presumably google's republishing of orphans will soon solve that problem.
I also should confess that I have read Klarman and I wouldn't pay $20 for a new or used copy. I think I found maybe 25 worthwhile paragraphs on first reading. And most of those, on second reading, I would classify as well worn platitudes.
So now I really want to know about the Montier.
I also should confess that I have read Klarman and I wouldn't pay $20 for a new or used copy. I think I found maybe 25 worthwhile paragraphs on first reading. And most of those, on second reading, I would classify as well worn platitudes.
So now I really want to know about the Montier.
Nothing can protect people who want to buy the Brooklyn Bridge.
Re: We'd make Benjamin Graham proud
I've enjoyed it. I guess I'll have to write up a little review. But, until then ...Norbert Schlenker wrote:So now I really want to know about the Montier.
The book is basically a collection of his recent articles. So, you get 5-10pg 'chapters' which is a nice length for a little read over coffee. Montier likes to use lots of graphs, #s, and various keen little studies. Little bits of catnip for the empirically minded. (The book is oriented to practitioners.) For instance I just got through his piece that reviews the recent world-wide performance of Graham Net Nets. (Very good performance (35%/yr vs 17%/yr for the market from 1985-2007), and a reasonable number of stocks to select from internationally, but they do tend to be quite small.)
Anyway, I'm a little reluctant to recommend it to people who aren't value investors. For instance, Montier does start out with a little rant against efficient markets and CAPM.
Re: We'd make Benjamin Graham proud
Ok it's not really a review but Montier on Value Investing contains links to 15 articles that make up about half (wild guess) the book. So, you should be able to get a good idea of what it's all about.
Re: We'd make Benjamin Graham proud
I've only read the preface of Montier's "Value Investing". It's difficult to find time to read when you're trying to get through 410 minutes of a movie based on George Eliot's "Middlemarch". So far Ms. Eliot has drawn me in to her time and place, and if you ever think you can't learn anything regarding how living beyond your means and spending money affects relationships, even in the 19th century, then think again.
However, I was browsing through the index of Montier's book this morning and took a look at what he said about one of my favourite financial writers from the 1930's, John Burr Williams. Montier goes on to say on page 49, "Ever since John Burr Williams wrote The Theory of Investment Value, we have known the correct way to value an asset is via the present value of its discounted cash flows. That is to say, an asset's value is nothing other than the sum of the cash flows that it can deliver (obviously discounted to reflect the impact of time)."
The trouble with the above statement is that it's completely untrue to be attributing that remark to Williams. He never said or implied anything of the kind regarding cash flow. In fact, Buffett made the very same mistake over ten years ago. Again John Burr Williams doesn't even mention cash flow. Williams states on page 542 of his book, "Let us define the investment value of a stock as the present worth of all the dividends to be paid upon it."
However, I was browsing through the index of Montier's book this morning and took a look at what he said about one of my favourite financial writers from the 1930's, John Burr Williams. Montier goes on to say on page 49, "Ever since John Burr Williams wrote The Theory of Investment Value, we have known the correct way to value an asset is via the present value of its discounted cash flows. That is to say, an asset's value is nothing other than the sum of the cash flows that it can deliver (obviously discounted to reflect the impact of time)."
The trouble with the above statement is that it's completely untrue to be attributing that remark to Williams. He never said or implied anything of the kind regarding cash flow. In fact, Buffett made the very same mistake over ten years ago. Again John Burr Williams doesn't even mention cash flow. Williams states on page 542 of his book, "Let us define the investment value of a stock as the present worth of all the dividends to be paid upon it."
Re: We'd make Benjamin Graham proud
I'm moving Doug's quote from the Power Of Dividend Growth thread, since I don't want to get off track there.Doug wrote:On January 28, the Japaneses stock market had a P/E of 34.6 and a dividend yield of 1.8%. Some of the European countries have low P/E ratios: UK 11.8 (dividend yield of 3.4%), Spain 11.3, Greece 11.1. Compare that to Canada 20.9, USA 21.1, China 16.8. Venezuela 0.4 (that's not a typo).
I'm an indexer. But when you look at those numbers, it makes me question my faith in indexing. I wonder whether I should be investing in single country ETFs. For example, why not take the money I have invested in the Japanese stock market and invest it in the UK market? With a P/E ratio close to three times greater and a dividend yield close to 50% less, the Japanese stock market would have to show much greater growth than the UK market to give similar results over the next 10 years.
Sometimes if you look at other ratios instead of P/E and/or dividend yield, you may get a different picture, and most emphatically in the Japanese small cap market. I'm noticing many investors are turning away from Japan, while a few pros are getting enthusiastic for the bargains available there. It sort of reminds me of the oil and precious metals markets in the late 90's when they were in a near 20 year funk at a time when the herd couldn't get enough of overpriced Tech and Telecom stocks, and we all know where that all ended.
Re: We'd make Benjamin Graham proud
I came across an interesting stat recently (don't remember where, can't immediately confirm it) that very few Japanese (as a %) invested in stocks domestically. A classic contrarian indicator.Taggart wrote:It sort of reminds me of the oil and precious metals markets in the late 90's when they were in a near 20 year funk at a time when the herd couldn't get enough of overpriced Tech and Telecom stocks, and we all know where that all ended.
Re: We'd make Benjamin Graham proud
Thanks for the excellent links Taggart. Less than 7% of Japanese household assets are in stocks. The TOPIX index (about 1700 Japanese stocks) has a P/B of 1. It's very interesting how one can draw different conclusions using different valuation metrics.
Re: We'd make Benjamin Graham proud
If you use Vanguard's Total Stock Market Index ETF as a proxy for the entire US stock market, the US stock market has a P/B of 2.1. Is it time to invest in the Japanese stock market? I don't know, but I'm not to decrease my Japanese exposure.
Re: We'd make Benjamin Graham proud
Do you mean stock of domestic firms or do you mean they (Japanese invertors) currently have a preference for domestic firms which are export based, i.e. having a high % of revenue that is non Yen denominated? AFAIK, there are some good reasons for the former. IIRC, Japanese firms operating domestically are quote bloated, inefficient, and non competitive which is starkly in contrast to Japanese export oriented firms.NormR wrote:I came across an interesting stat recently (don't remember where, can't immediately confirm it) that very few Japanese (as a %) invested in stocks domestically. A classic contrarian indicator.Taggart wrote:It sort of reminds me of the oil and precious metals markets in the late 90's when they were in a near 20 year funk at a time when the herd couldn't get enough of overpriced Tech and Telecom stocks, and we all know where that all ended.
Personally, I have not been able to convince myself to look at cigar butts in a country/area which I know so little it's almost comical. Does that enter into your gameplan at all or is it completely quantitative?
Show me the incentive and I will show you the outcome
--Charlie Munger
--Charlie Munger
Re: We'd make Benjamin Graham proud
More a qualitative, than a quantitative investor, here's a recent interview with David Herro who talks about Japan in this video. It's in the second video to the right of the webpage, "Market Missing the Value in Asset Managers".
David is the winner of U.S. Morningstar's International Manager of the Decade award. He was awarded the prize based on his work on three funds: Oakmark International, Oakmark International Small Cap, and Oakmark Global Select.
David is the winner of U.S. Morningstar's International Manager of the Decade award. He was awarded the prize based on his work on three funds: Oakmark International, Oakmark International Small Cap, and Oakmark Global Select.
Re: We'd make Benjamin Graham proud
David Herro, of Harris Associates, in Chicago is the real deal. (Harris runs/offers the Oakmark funds.) Unfortunately, the firm no longer managers money for Canadian retail investors. AGF consulted me on the issue and if they had listened to me, Harris would still be running money for Canadian retail investors. Herro launched the international effort for Harris in 1992 and he's been there ever since. As you allude to, more of a Bob Krembil type of investor vs. a Ben Graham investor.Taggart wrote:More a qualitative, than a quantitative investor, here's a recent interview with David Herro who talks about Japan in this video. It's in the second video to the right of the webpage, "Market Missing the Value in Asset Managers".
David is the winner of U.S. Morningstar's International Manager of the Decade award. He was awarded the prize based on his work on three funds: Oakmark International, Oakmark International Small Cap, and Oakmark Global Select.