Books About Value Investing | My Top Five for 2018

Great Reads About Value Investing

Published on:
December 22, 2017
Written on:

About The Author

Noam Ganel, CFA is the founder of Pen&Paper, a value-oriented, contrary-minded journal of the financial markets. Noam worked as a Vice President in Capital Markets at Silvergate (publicly traded on NYSE under SI since Nov-2019.) At SI, which he joined in 2010, Noam was responsible for advisory services to family offices,  private companies, and financial advisors.

Standard & Poors 500 Guide 2013

The 2013 guide provides a 10-year operating performance on 500 companies. Forget sifting through annual reports. The balance sheet items and income statement ratios are at your fingertips. And most importantly, the guide allows you to see how a hypothetical investment would materialize now, after a reasonable five-year holding period. This is a mental exercise I enjoy greatly.

The guide is organized alphabetically. So flip through it randomly and come across very different businesses, from firms that provide filters for healthcare and aerospace industries, such as Pall Corporation to companies that underwrite an array of personal and commercial lines of insurance, such as Progressive Corp. In short, the guide offers a unique, bird’s eye glance at the operations of businesses and allows you to test investment concepts.

Berkshire Hathaway Letters to Shareholders 1965 to 2014

The last time I read Warren Buffett's letters to shareholders was in 2011. My goal at the time was simply to understand his business lingo. I studied amorphic terms such as “intrinsic value” and “moat” and a bit more technical ones, such “tangible book value,” “earnings per share” and to how to look at depreciation estimates. I learned greatly and so will you. But now my purpose is different.

This time, I will be looking for observations about business. Most of us can recite the clichés: that it is only when the tide goes out do you discover who's been swimming naked. Or that price is what you pay but value is what you get. But this time, I will be looking for the overlooked, unpopular thoughts and reflections. For example, in 1983 Buffett commented on free market:

We are aware of the pie-expanding argument that says that such activities improve the rationality of the capital allocation process.  We think that this argument is specious and that, on balance, hyperactive equity markets subvert rational capital allocation and act as pie shrinkers.  Adam Smith felt that all noncollusive acts in a free market were guided by an invisible hand that led an economy to maximum progress; our view is that casino-type markets and hair-trigger investment management act as an invisible foot that trips up and slows down a forward-moving economy

Or, in 1994, he commented on the value of macroeconomics in making investment decisions:

We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or  treasury bill yields fluctuating between 2.8% and 17.4%.

By the way, while many authors have written about Buffett’s principles and wisdom, to discover some of the principles for yourself will make you remember them better. But finding enduring principles is really the topic of our next book.

The Intelligent Investor

To rediscover investing principles, I plan to read again Benjamin Graham’s book. His principles endured from the lure of investing in conglomerate companies in the 80s to investing in tech stocks in the late 90s. The same principles, written in the late-40’s, apply to us almost 70 years later. Besides, the principles are pragmatic. I bought shares in Famous Dave and Terra Nitrogen, only because I was looking for companies that Graham would find agreeable to invest in.

At this point, the careful reader would realize that I love financial history. And the Intelligent Investor offers plenty of historical wisdom that is relevant to today's capital markets. Graham discusses how the airline industry, a marvelous discovery that forever changed the way we travel and commerce, proved to be a poor place in which to invest. Using a pen and paper, Graham provides us an overview of market irrationalities throughout the book. 

Yet Graham will leave students of finance unsatisfied. In the Intelligent Investor, he hardly offers valuation formulas, nor provides us with financial statement analyses. For that, we will need to head to the next book choice.   

Security Analysis: Sixth Edition

When I read Security Analysis for the first time, I must have felt the same joy that Darwin experienced when he walked the Galapagos Island for the first time in 1835. Read Security Analysis and you will get a new, profound appreciation of the profession of stock investing. You will realize how each rock must be turned before making a stock purchase; you will see how tricky it is to truly understand financial statements. And besides, it is a very practical read. When I wrote What Rait Financial Taught Me, I based the entire analysis using preferred stock adjustment methods discussed in chapter 14: The theory of preferred stocks.  

Security Analysis focuses on equity and bond investing. And readers may argue that the intense focus on those two asset classes is really its weakness. Our investing world now consists of esoteric asset classes from currency to derivative trading. So, for those who favor the hedgehog over the fox view on investing, the final set of books  will do the trick for you. 

CFA Program Curriculum 2018 Level 1 Volumes 1-6 Box Set

This curriculum includes a wide array of topics, from probability and descriptive statistics to corporate finance issues, such as mergers and acquisitions. The last time I reviewed the level 1 material was in 2010 and because in my day to day work I don't follow macroeconomics nor wealth planning, I could use a refresher.

I view the Level 1 material as a gym for the (financial) mind. Knowing how to value bonds with embedded options and how the theory behind the optimal capital structure works is most likely meaningless in what you do. But it will make you better at what you do.

A word of caution, unless you intend to participate in the CFA program: The price of the curriculum for the six-volume CFA Institute Level 1 curriculum is a hefty $233 price tag. Write to me if you can't afford to register for the program or the curriculum. 

For five individuals, I will contribute 50% of the curriculum costs in 2018. 

Finally, two points of disclosure. First, while I am an active board member of CFA Society of San Diego and a current CFA charter holder, I do not receive any compensation from the CFA Institute. I recommended the level 1 curriculum solely because I think it’s the best resource out there for students and practitioners who are interested in expanding their knowledge in investment management.

Second, if you purchase any of the books using the links above, Amazon pays me up 10% of the proceeds. I donate 100% of these Amazon proceeds. Write to me if you would like to know which charities I support or if you have a specific charity in mind.

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