BOOK REVIEW: Better Value Investing
An investment manager at Baillie Gifford, Andrew Hunt?s book covers value investing from share selection to portfolio construction, and much in between.
He starts with ?Value investing 101? and the worlds of Benjamin Graham, Warren Buffett and James Montier ? involving margins of safety, patience, the ?fat pitch? and dealing with Mr Market. He then discusses how to improve the approach, emphasising an understanding of a company?s financial strength, its degree of focus on shareholder value and of different approaches to valuation, all of which can uncover the ?not just nearly cheap, but really cheap?. Along the way he quotes academic and empirical evidence to support the value approach and behavioural and institutional reasons why, with the right practitioners, it has a history of outperforming. Portfolio construction and risk controls are covered.
He acknowledges that implementing a value investing strategy can be difficult in practice ? buying unloved shares and then waiting patiently for the bargain to come good requires individual and institutional nerves of steel in a world that is firmly outcome rather than process based. In reality these, with (for fund managers) career risk and the option of index hugging, are powerful forces ? value investing is not for committees. Given these forces, he stresses the need to have really clear and really simple plans, a short list of ?must have? characteristics for an investment, and suggests writing down your own process on the back of a postcard. He also suggests using checklists as a help in complex and pressurised situations ? airlines use them! - and most chapters include checklists dealing with the topic being discussed.
I stumbled over one or two things, for example it has been drummed into me (by traders and my own experience) that ?averaging down? (he describes this, more approvingly, as ?munching?) is to be avoided. And there are fewer war stories than I expected. But these are minor gripes about what is a clear and well-researched book that has thought-provoking ideas for the private and professional investor alike.