The Value Investors: Lessons from the World's Top Fund Managers

250 Pages·2012·1.33 MB·English

by  Ronald Chan

Contents
Foreword
Preface
Chapter 1: Free to Choose in Value Land
Living through the Great Depression
The Meaning of Survival
Net-Nets
Setting the Right Pace
Know Thyself
Chapter 2: Once Upon a Time on Wall Street
Becoming Graham’s Disciple
Preaching Value
A Centenarian Diet
Chapter 3: The Making of a Contrarian
A Modified Graham Approach
The Case for Obscure Securities
Market Reflection
Chapter 4: On the Shoulders of Value Giants
A Valuable Detour
Statistics and Beyond
Setting a Global Standard
The Social Science of Investing
The Market Ahead
Chapter 5: A Journey to the Center of Value
Valley of Tears
The Inefficient Market
The Meaning of Value
The Courage to Say No
Seeking Protection
Chapter 6: The Self-Taught Value Spaniard
On a Solo Value Hunt
Investing Made Simple
Austrian Economics and the Market
A Global Rebalancing
Chapter 7: The Income-Conscious Englishman
A Victorian Mindset
Finding the Right Investment Culture
Trusting Only Tangible Income
The Courage to Keep Going
Chapter 8: The Frequent Value Traveler
Reading between the Minds
Thinking Big and Small
Trouble is Opportunity
Feeling the Market
Chapter 9: The Value-Oriented Businessman
Learning the Numbers
The Art of Contrary Thinking
Targeting Good Businesses in Asia
The Relativity of Valuation
A Value Lifestyle
Chapter 10: Value Investing in the Lost Decade
A Musical Beginning
Breaking the Language Barrier
Learning from the West
The Evolution of SPARX
Building a Westernized Asia
Searching for Value
Chapter 11: Eternal Sunshine of the Value Mind
A Multidisciplinary Path
Seeking a Comfortable Price
Finding a Value Partner
Spotting Value Minds
Becoming a Man of Value
Chapter 12: The Accidental Value Investor
Starting an Investment Hobby Shop
Building a Value Temple
An Industrialized Process
A Value March Forward
Chapter 13: The Making of a Value Investor
A Humble Portfolio Construction
The Art of Valuation
Reading for Ideas
More than Just the Fundamentals
Timing for an Exit
Having the Right Temperament
Acknowledgments
About the Author
Index

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To my wife, Jacinth, who reviewed this manuscript more times than I did
Foreword
Students of investing look for a formula, a way of combining accounting and
other information that will produce infallibly good investment results. Even
Benjamin Graham, the founder and leading spirit of by far the most successful
school of investment practice, spent a good deal of his time looking for such a
formula. To this end, students read both technical works and the retrospective
testimonies of high-performing investors. In both areas, they are largely
disappointed.
The technical approaches have a meager record of success. A few notably
good books have been written (for example Joel Greenblatt’s You Can be a
Stock Market Genius and Graham and Dodd’s Security Analysis). But reported
technical investment approaches rarely, if ever, lead to consistent, high-level
returns (if they did they would be adopted by everyone and would become self-
defeating).
Investment memoirs generally also disappoint students. They tend to be long
on philosophy and short on advice for how to buy particular securities. However,
as the works of successful investment practitioners, the memoirs do have much
to recommend them. They describe, however non-specifically, investment
approaches that worked in practice. And they capture an important aspect of
investment success: that it depends more on character than on mathematical or
technical ability. This is the consistent message of investment memoirs as a
group.
The problem is that each memoir presents a unique perspective on the
character traits necessary for investment success. Different authors emphasize
different characteristics: patience, coolness in a crisis, wide-ranging curiosity,
diligence in pursuit of information, independent thought, broad qualitative as
opposed to detailed quantitative understanding, humility, a proper appreciation
of risk and uncertainty, a long time horizon, intellectual vigor and balance in
analysis, a willingness to live outside the herd, and the ability to maintain a
consistently critical perspective. Unfortunately, an investor with all these
qualities is a rare bird indeed.
That is why Ronald Chan has done such a valuable service in writing this
book. He has put together a set of thorough and rigorous portraits of a
comprehensive range of notable value investors in a manageably short number
of pages. His descriptions cover multiple generations from Walter Schloss and
Irving Kahn to William Browne, multiple geographies from Asia to the United
States to Europe and the full gamut of value investing styles. By combining
descriptions of investment approaches with investor background, he illuminates
the connection between individual character and effective investment practice.
Taken as a whole, the book provides each practical value investor with the
necessary material to sift through the historical records to find the style that is
most appropriate to them.
Ronald Chan’s work is an essential starting point for any nascent value
investor and an invaluable reference for experienced investors.
Bruce C. N. Greenwald
Director, Heilbrunn Center for Graham and Dodd Investing
Robert Heilbrunn Professor of Finance and Asset Management
Preface
Try not to become a man of success but rather to become a man of value.
—Albert Einstein
The best advice I have ever received came from my father. When I began
searching for a career after finishing college, he advised me to stay away from
three potential headaches in business: labor, rent, and inventory.
As any labor-intensive business is likely to lead to office politics, my father
advised that I look for a business that requires little manpower. Then, as the high
office rents in a world city such as Hong Kong can easily squeeze profits, he said
the ideal is to find a business that requires little office space. Finally, as handling
any type of inventory requires both manpower and space, an inventory-based
business should also be avoided.
Taking his advice to heart and looking for a business that met these three
criteria, I found investment management to be a perfect fit. The labor force is my
brain, the office need only accommodate a few desks, and the inventory is the
investment positions recorded in brokerage accounts.
Although investment management may allow one to avoid the aforementioned
headaches, becoming a successful investment manager still involves
considerable challenges. It requires extensive knowledge of the financial markets
and the ability to react to different market circumstances. It also requires a
prudent strategy to achieve sustainable investment returns and a sensible
investment philosophy to build the right investment model.
In developing my own investment philosophy, I read the work of Benjamin
Graham, became aware of the phenomenal investment success of Warren
Buffett, and came to realize that the value investing concept makes perfect sense.
As Graham said, a value investment is “one which, upon thorough analysis,
promises safety of principal and adequate return.”
It is also difficult to argue with Buffett, who asked: “What is ‘investing’ if it is
not the act of seeking value at least sufficient to justify the amount paid?
Consciously paying more for a stock than its calculated value—in the hope that
it can soon be sold for a still-higher price—should be labeled speculation.”
After becoming a value investor myself, I began to explore the different types
of investment valuation methods for sizing up businesses and investment
opportunities. At first, I thought that the perfect valuation formula was the holy
grail of investment success, but I soon came to realize that this is not the case.