Book Summary: The Little Book of Value Investing by Christopher H. Browne

2020 has been a pretty tumultuous year for the stock market. We’ve had one of the biggest black swan events in history that had almost crippled the global economy. Additionally, rising tensions between the two biggest nations in the world to the mix exacerbates uncertainty and volatility in the markets. However, volatility sometimes brings about opportunities for the long-term value investor. Therefore, I thought I’ll revisit my learnings about value investing to see if I can take advantage of the current situation.

Value investing is a mindset that needs to be cultivated over time

The Little Book of Value Investing by Christopher H. Browne revisits the topic of, well, value investing. #noshitsherlock. At its core, value investing is all about owning businesses for a price that is lower than it’s intrinsic value. Identifying such businesses and opportunities to buy into them is a skill that requires practice.

Like anything that has a learning curve, we will make mistakes and even fail sometimes. What’s important here is that we don’t be too hard on ourselves and embrace the learnings. By understanding our intentions and practising the right concepts, we will get better. This was the underlying message of the book to me; it’s a little guide book to help me become a better value investor.

Much of the content is a rehash of what I’ve read in The Warren Buffett Way. I’ve also shared my thoughts about it here, so do check it out if you’re curious about it! Instead of sharing my top three takeaways, I’ll share the three new things that I’ve learnt from this reading below!

Key Highlights

1. Value investing is like grocery shopping

2. Understand the intrinsic value of the businesses you invest in

3. Value investing can appear to be counter-intuitive

Takeaway #1 – Value investing is like grocery shopping

“The time to buy stocks is when they are on sale, and not when they are high priced because everyone wants to own them”

Christopher H. Browne

You might have heard about this philosophy reiterated and paraphrased in so many different ways by investors of varying calibres. In the world of investing, this is probably the most clichéd principle ever. However, I personally still find it a challenge to guide my decisions by it. The reason for this difficulty can be summarised in one word – emotions.

The market is not perfect, and emotions affect many investors to varying degrees. In fact, I believe that this affects even the most seasoned fund managers on Wall Street; client expectations, promotions and other incentives that may not fully-align with the long-term value investing philosophy can sway these professional investors to make decisions that are less than ideal.

Instead, the rational value investor should remain indifferent to emotional swings. Sometimes, it’s better to be patient and wait for the market to put great offers and stock up then. The late John Bogle was also often quoted, “don’t do anything, just stand there!” in the context of staying the course for the long game.

Takeaway #2 – Understand the intrinsic value of the businesses you invest in

How do we know if a stock is “on-sale”? This is where understanding the intrinsic value, or “true value”, of the business comes into play. In value investing, we always strive to buy stocks at a margin of safety, which is a price target set at a discount from its intrinsic value.

There are many ways to evaluate the intrinsic values of stocks; the book even explains a few of them. Again, some of these concepts are revisited by other books that I’ve read, like The Warren Buffett Way and The Neatest Little Guide to Stock Market Investing. That’s not all; there are also countless resources and opinions available online for different types of stocks as well as investors.

Knowing everything there is out there can be pretty overwhelming, as I had felt from personal experience. Even reading about the different methods in the book got me feeling a little anxious. However, value investing shouldn’t feel like that; it should be an exciting and pleasant experience! To achieve this, I turn to another one of Warren Buffett’s investing principles: only invest within your “circle of competence”.

By investing only within your circle of competence, you insulate yourself against the emotional swings of the market. Buffett himself was famously quoted for not investing in tech companies because he simply doesn’t understand the business. It is only with such deep understanding can you then develop a strong conviction in your buys to allow you to sleep soundly at night.

Takeaway #3 – Value investing can appear to be counter-intuitive

“Value stocks are about as exciting as watching grass grow. But have you ever noticed just how much grass grows in a week?”

CHRISTOPHER H. BROWNE

Value investing is a game of patience, preparation and opportunity. Oftentimes, value investors don’t get much action; they spend most of their time on the sidelines, just watching the market go by. But do not mistake inactivity with a lack of intelligence. Seasoned value investors are always doing their research, being ever ready to pounce hard on a gem of a buy when it presents itself.

According to Browne, in order to find these gems, it sometimes requires us to “go against the herd – and risk being called a dummy from time to time”. This is more commonly known as contrarian behaviour, where we seek out stocks that have fallen out of favour of the market. This closely resonates with one of Buffett’s most popular quote, “Be fearful when others are greedy and greedy when others are fearful”.

I personally consider this one of the hallmarks of value investing. As far as 2020 goes, Mr Market has proven himself to be pretty irrational. When COVID-19 hit the streets worldwide, economies were in shambles. Objectively, you’ll expect Mr Market to go into meltdown, and he did – just for a while. After the crash around 26 Mar 2020, the markets were fluctuating wildly in so conceivable pattern. Needless to say, I felt a lot of uncertainty in Mr Market.

However, volatility should be considered a friend to the long-term value investor. As long as the fundamentals of the businesses don’t change, these price fluctuations can present opportunities to buy a piece of them at a discount. Going back to my first takeaway above, this is how we can buy stocks on sale. Therefore, it’s imperative that we’re not idly waiting around. We should be spending the time building our knowledge and conviction. When the time comes, seize it and go in hard.

Noteworthy Quotes from The Little Book of Value Investing

• “… [buying] opportunities do not come on the heels of great times; they can be preceded by much pain.”
• “Insiders are usually investors, not traders. They tend to buy for the long term, not the short term.”
• “Today’s worst stocks become tomorrow’s best stocks, and the darlings of the day turn into tomorrow’s spinsters.”
• “As a long-term investor, the real danger and threat to your nest egg is being out of the market when big moves occur.”
• “Mr Market grades you on a daily basis rather than waiting for a salary review.”
• “The investing world now equates activity with intelligence. If you are a portfolio manager, you are paid to act.”
• “Good long-term performance results from beating the market in the bad times. Caution should not be seasonal. One should not rediscover caution when markets are falling and forget about it when they are rising.”

Closing thoughts

The Little Book of Value Investing is what it calls itself to be – a little book with bite-sized lessons about the principles of value investing. I felt that it was useful in building the foundations for newbie investors looking to pursue the value investing route. For me, it was a timely reminder of the principles which I should be following. When you’re doing this over a period of time, it’s always good to revisit past lessons to make sure you’re on the right track. Overall great book, and something that I’ll definitely recommend to those looking to join the value investing club.

Share your thoughts with me!

If you’ve read The Little Book of Value Investing, I’d love to hear your thoughts on it. Drop a comment below, or share this post with your friends with the tag @kopithoughts on Instagram or Twitter!