Bruce C. Greenwald - Value Investing: From Graham to Buffett and Beyond

1. Chapter 4
2. Chapter 5
3. Chapter 6
4. Chapter 7
5. Chapter 8

1. Chapter 1
2. Chapter 3
3. Chapter 8
4. Schloss

SECOND EDITION

BRUCE C. GREENWALD

JUDD KAHN

ERIN BELLISSIMO

MARK A. COOPER

TANO SANTOS

Copyright 2021 by Bruce C. Greenwald and Judd Kahn. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Names: Greenwald, Bruce C., 1946- author.

Title: Value investing : from Graham to Buffett and beyond / by Bruce C. Greenwald, Judd Kahn, Erin Bellissimo, Mark Cooper, Tano Santos.

Description: Second edition. | Hoboken, New Jersey : Wiley, [2021] | Series: Wiley finance | Previous edition entered under title.

Identifiers: LCCN 2020025628 (print) | LCCN 2020025629 (ebook) | ISBN 9780470116739 (Hardcover) | ISBN 9781118220085 (ePDF) | ISBN 9781118233818 (ePub)

Subjects: LCSH: Investment analysis. | CorporationsValuation. | Value investing. | Graham, Benjamin, 1894-1976. | Buffett, Warren.

Classification: LCC HG4529 .V35 2021 (print) | LCC HG4529 (ebook) | DDC 332.63/2042dc23

LC record available at https://lccn.loc.gov/2020025628

LC ebook record available at https://lccn.loc.gov/2020025629

Cover image: filo/Getty Images

Cover design: Wiley

To Diana Greenwald, without whose gentle encouragement this book would not exist, and Gabriel Kahn, wonderful son, marvelous father

We hope we have made it clear how much we have learned since the first edition of this book was written, in 19992000. For those improvements we would like to thank the many energetic and intelligent students in the value investing classes at Columbia Business School, including the executive education students and the teaching assistants who helped deliver those courses. We also are indebted to the distinguished roster of speakers who have addressed those classes; to those who spoke at the annual Graham and Dodd breakfast; to the speakers and panelists who participated in the very professional annual conferences run by the Columbia Student Investment Management Association; to the associates, board members, and staff of the Heilbrunn Center for Graham and Dodd Investing, especially Sid and Helene Lerner, who midwifed the creation of the Center, and Meredith Trivedi, who administers it; and to the broader value investing community. We have also benefited greatly from our associations with practicing value-oriented investment firms including First Eagle Investment Management, Paradigm Capital Management, Hummingbird Capital Management, Davidson Kahn Capital Management, Omega Advisors, Pequot Capital, and PIMCO. Finally, we are deeply grateful to Warren Buffett for allowing us to quote extensively from his annual letters and to the outstanding investors who have permitted us to profile them in this book. Any errors, shortcomings, or deterioration from the first edition are entirely our responsibility.

It takes a lot of work to get a manuscript into print, and we thank our John Wiley counterparts, especially Bill Falloon, for enduring patience and enthusiasm. Our agent John Wright has stayed the course. Without Ava Seave and Anne Rogin, this book would still be on the drawing board. Ava made possible a written dialogue between Paris and New York that extended over two Premier League seasons. Even more crucial, she has been author, director, and producer of the videos that accompany this volume. If it weren't for her modesty, she would be listed as an author.

In 1999, when we began to write the first edition of this book, value investing as conceived by Benjamin Graham and David Dodd and developed by their successors was in eclipse as a method of stock selection. Academic finance had for 30 years embraced the Efficient Markets Theory (EMT), which rejected the possibility of consistently successful active investing. The stock market boom produced by the first Internet bubble appeared to invalidate all the analytical principles on which value investing was based. Value practitioners, with the notable exception of Warren Buffett, were dismissed as old-fashioned and out of touch with contemporary economic reality. Fortunately, the collapse of tech and telecom stocks between 2000 and 2002, coupled with the superior performance by value investors, revived interest in the Graham and Dodd approach. At the same time, a mass of published academic evidence powerfully contradicted EMT. Statistically constructed value portfolios generally outperformed the stock market as a whole over almost all extended periods in almost all the national markets for which sufficient historical data were available.

Increasingly accepted academic studies in psychology, pioneered by Daniel Kahneman and Amos Tversky, spawned the field of behavioral finance and provided an explanation for the historical outperformance of these value portfolios, grounding it in deeply embedded human behavioral biases. As a result, a value premium in returns appeared likely to be a persistent feature of future financial markets. These studies and continuing innovation by value practitioners led to a more thorough understanding of Graham and Dodd principles and marked improvements in value investing practices, especially with respect to identifying and evaluating what are designated as franchise businesses.