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My investing philosophy mostly centers around the Value discipline and GARP- Growth at a Reasonable Price. This blog includes commentary on market conditions as well as fundamental analysis of specific companies. Graduated from Rhodes College with a degree in Business with concentration in Finance & Marketing. Currently working on obtaining the CFA designation. Previously worked in Mortgage Trading for a major bank. Use MS Excel extensively for developing investment models, notably valuation models based on DCF methods.

Monday, November 19, 2007

Book Review:Getting Started in Value Investing by Charles Mizrahi

I just read Charles Mizrahi’s new book, Getting Started in Value Investing just released this month from Wiley Publishers, (amazon book link) and I found it to be phenomenal. I wanted to discuss my views on Value Investing and why I liked the book so much.

Getting Started in Value Investing is a terrific guide for anyone studying the discipline of Value Investing. The text is also an excellent companion for experienced investors as well. The author does a excellent job explaining the Value Investing process. He presents the material in a manner that really helps the reader get in the Value Investing mindset. Regardless of investing experience and knowledge, all investors seeking better results will benefit from reading Charles Mizrahi’s book.

Value Investing is one of the most written about subjects in the finance/investing space. There are dozens of books just covering methods of Warren Buffet specifically, plus dozens of other texts on the value approach. It’s never difficult to find this kind of reading material, yet it can be difficult to discern the truly meaningful content from the vast pool of titles. That being said, there are good number of Value Investing books that pretty much contain the same information thereby conveying same message. At least, that is what I have encountered from reading scores of writings on this subject.

Essentially, after reading many Value Investing guides, I began to have the notion that if I’ve read several, I must have read them all. Yet, When I discovered Getting Started in Value Investing, I quickly recognized that it was no ordinary investing guide. The value methodology and principals remain the same, but the presentation of the material and the manner the author delivers the message is highly effective. Mr. Mizrahi has unique and wonderful writing style that is entertaining and captive, allowing the material to really “sink-in”.

Getting Started in Value Investing is not just another investing book, and it’s not just a beginner’s manual either. It engages the reader, and the flow of information is so well organized that it reads effortlessly. Mizrahi’s examples and illustrative stories train the reader’s mind to think and operate in the Value Investing mental framework. Knowing the principals and methods to Value Investing is rather worthless unless they are properly practiced- when it counts- differentiating the noise from the news, when money is at stake.

I have come across little investment literature that provides level of beneficial information received from reading Mr. Mizrahi’s work. It’s helped shape my thinking- by adopting a stronger focus on value, which I have gained through the text’s memorable examples and pep-talks.

Mr. Mizrahi opens with a quote from Warren Buffet commenting that in 35 years of investing, he has not witnessed a trend towards the value approach. “There seems to be a perverse human characteristic that likes making easy things difficult.” Successful investing is not difficult if one applies the Value principles correctly, along with reducing preventable mistakes as possible. Success is about making more good investment decisions than bad ones. Reading this book explains how Value Investing increases the probability of good decisions and limits the risk of making poor investment decisions.

Getting Started in Value Investing begins with the author stating the book will teach all the methods one needs in order to invest successfully. Yet, he adds a caveat: successful investing will depend on the ability to keep emotions in check as well as avoiding the latest fad on Wall Street. The book demonstrates how to remove emotion and act on the facts.

Getting Started in Value Investing contains all the tools that the reader needs to be an successful Value Investor. Each method is clearly explained, and also demonstrated with effective examples. Mizrahi explains how to analyze firm management, financial statements, competitive position, and how to calculate a stock’s intrinsic value along with applying a margin of safety. These are the tools needed to identify attractive investment opportunities.

My biggest investing weakness is making a trade on emotion without doing the necessary research. When I analyze my poor investment decisions, often the reason is “Just wasn’t thinking.” It just happens, I get caught up in the market noise and act without much thought, or even the realization of what I am doing. Investors must resist being transfixed on the whims and emotions of the market. The Value Investing approach hinges on taking advantage of the Market’s mood swings by purchasing stocks at a considerable discount to true value. A stock price less than its true worth provides a margin of safety. This reduces risk because an investor has more leeway with the accuracy of his/her intrinsic value opinion. For example, if one believes a stock to be worth $50, but in reality, the true value is $40, the investor will still make out all right buying at $30, when unreasonable investor sentiment causes a stock to be undervalued.

It’s very easy to lose sight of the pillars and principals of Value Investing when the market is being testy. Remaining steadfast to the value tenets and not wavering during volatile times can be challenging. This requires the confidence to believe that he/she has the correct view, versus the collective view of investors. Mr. Mizrahi provides motivating insight on how to deal with Mr. Market’s psychosis, and illustrates the mental framework needed to resist succumbing to market distractions.

The hardest part can be pulling the trigger on an undervalued investment even though one has performed extensive and thorough research. Market noise can lead to excessive pessimism of investors causing them to overlook the long-term value of a company. The market can ignore a firm’s strong and honest management, the longevity of the competitive moat, and its solid profitability and return on capital. The Value Investor must determine if those factors are likely to remain intact going forward, which thereby answers whether or not, the excessive pessimism is warranted. Reading this book will teach how to distinguish value plays from value traps.

Who’s right? The Market or the Value Investor? To paraphrase a quote from Ben Graham that Mr. Mizrahi shares in his book: if you base your investment decision on exhaustive research and factual data, then take action regardless if others disagree. The opinion of others doesn’t determine whether you are right or wrong. Your opinion is right because it’s founded on extensive research and judicious reasoning. Reading this book stimulated my thinking and decision process, helping me to be cautious when I haven’t performed necessary research, and aggressive when I have.

It’s much easier for humans to cope with making a bad decision as long as everyone else did as well. A Tough pill to swallow is a poor decision made against the grain. Getting it wrong when everyone else gets it right, evokes considerable emotional distress, as opposed to everyone getting it wrong with nobody getting it right. Those disproportionate emotional/mental pay-offs spawn the herd mentality because it shields us from “Looking Dumb” which is a title for the section addressing that issue in the book.

The author provides anecdotal illustrations of how to think and act in order to invest successfully. I love an example he gives about buying “straw hats in the winter” may appear to be stupid, but combine the low winter price and the Summer demand, and six months later, that stupidity turns into high profitability.

I truly found this book to be an instrumental addition to my library. The writing and explanation are excellent, and the examples and anecdotes are highly illustrative. The book provides the necessary tools and explanation for evaluating investments. In addition, and probably most important, the book succeeds with illustrating the proper mindset and thinking needed to take action. I recommend buying a copy.


5 comments:

john said...

That was a good Buffett quote, Buffett was referring to the momentum and growth investors to buy higher highs when he mentioned that in Grahams book the Intelligent Investor.

Unfortunately, it is fallacious to claim a book on value investing will teach investors all they need to know to invest successfully, That is just plain wrongheaded and ignorant.

There are still considerable risks to value investing value investors do not always discuss. First, there is always a reason a company trades near book value or less, something has distressed it.

Many of these companies are highly stressed, in fact and only end up being a value trap for investors. Only a few of these distressed companies merit investment consideration.

Turley M Muller said...

I agree with the fact that companies are often cheap for a reason and a low P/B doesn't indicate value.

The book is not about buying stocks with low P/B multiples are necessarily low P/E's either. It's not a value approach in that sense. Rather not a "deep" value approach, but rather buying the strongest companies when the market is pessimistic. Think about the returns from buying on the day after 9/11 when the market reopened.

The recommends buying large-cap stocks that have a long historical record that is consistent and predictable. You look for companies with high profitability and asset investment efficiency.(ROA). Then evaluate the competitive position and determine if the firm has a moat to protect its margins and growth, Essentially buying the blue-chip names at times when they are out of favor. And buy stocks you would hold for at least 5 years preferable 10-20.

It's a simple approach, but the book can teach one how to invest successfully. Granted, the returns won't be huge, but they will be decent.

Personally, I use many approaches, and growth and momentum is a great strategy.

But I think the author's point is not to chase momentum, because unless one is a very knowledgeable investor as well as involved daily, they will probably end up doing more harm than good. Stick to what you know and don't make mistakes by investing in things you don't understand. And have patience. It's a good read.

john said...

About not chasing momemtum Graham had this to say,

“Never buy a stock immediately after a substantial rise or sell one immediately attar a substantial drop.”

The wisdom of what he says has more merit on the upside, personally, I advocate cutting bait and running when there is a huge downside shift in expectations.

Selling on a sudden downshift in expectations is consistent with Grahams primciple that "The mkt is a pendulum that forever swings between unsustainable optimism and unjustified pessimism"

Turley M Muller said...

John,

Thanks for sharing the Graham quote.

I don't know that I completely agree with graham on momentum. Yes, there are instances where his prescription is appropriate, but there are instances where I think one should buy strength and se;; weakness.

Stocks that are going up tend to continue to go, and stocks that are falling usually continue to fall. Classical physicists referred to phenomenon as "Inertia" which underpins Newton's first Law of Motion. Essentially, it's what we know as momentum- requires more force to reverse direction of a moving object than it does to sustain it.

In the short run, generally stocks trend in a constant direction.

I also think one should never buy a stock on the way down nor sell on the way up. "Let your winners run and never catch a falling knife"

Trying to call tops and bottoms is a crap shoot, ie pure gamble. Yet, I would like to see a stock rebound with the technicals firming up and some sort of external catalyst before I jump in.

Giving up a few points from buying after price bottoms and returns upwards, is much more favorable than giving up a ton of points from buying a stock in freefall yet to find support.

I believe if there is a major downward revision in expectations, it's likely to result in a value trap.

I think what you look for, at least, what I try to do is find stocks unfairly punished by shifts in expectations which actually doesn't affect that specific company. That way, it's not a guessing game if the expectations are too pessimistic and the reaction in the share price is overdone. If that company doesn't have any exposure to whatever factor the market is worried about, then- there is no need to worry about it.

CHK Energy last year was nearly 100% hedged on nat gas, locking in close to $10. NG had fallen from the teens down to $5-8 range causing investors to jump out of nat-gas stocks. Plummeting gas prices hit most all producers EPS, yet CHK was only slightly effected, and has beaten estimates the past 20 qtrs by avg of 15%.

It's interesting, CHK was trading @ $30 and below when it was fully hedged and growing earnings.

Recently the share price topped $40, and currently trading just below that. However, CHK is not nearly as hedged as they were a couple years ago. Futures curve has flattened out and CHK NG selling price has decline resulting in earnings to fall. Yet the stock price is higher. Intriguing how the Market works.

I remember Cramer recommending CHK about two years ago or so, saying that he is predicting NG prices to bottom and then rebound sharply, thus he said buy CHK because it's a pure play on NG and they stand to benefit from rising NG prices.

Uh, No, not at that time, they would have lost money on the hedge. Cramer was wrong about CHK and wrong about direction of NG. I think CHK ended up having over a billion $ hedge gain.

http://financial-alchemist.blogspot.com/2007/07/chesapeake-energy-follow-smart-money.html

CHK is an example how the market sometimes focuses on less relative issues for a specific stock due to generalizing across the whole industry.

Another Example is when CVS sold off after WAG's EPS miss,fearing an industry-wide problem, but actually WAG had mis-budgeting and spent to much on overhead costs. MGMT screw-up, and CVS subsequently recovered and has continues to move higher.

http://financial-alchemist.blogspot.com/2007/10/walgreen-company-wag-reasonably-valued.html

Now, buying in on WAG sell-off thinking it was overdone, would not have yielded much profit thus far. This stock appears to have found a range just off its lows. I assume the market is still unsure about WAG's future. My point is that WAG deserved skepticism, while CVS really didn't, and making a bet that the Market on WAG was much more risky than CVS.

Darren Rickard said...

Mizrahis book maybe indeed a good one but I prefer the master of all followers, Benjamin Graham and his Bible on investing. "The Intelligent Investor"

It is a must.

Cheers, Darren

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