If you like the site and want to learn more about value investing, below are some great resources.
1. The Intelligent Investor
The Intelligent Investor is Benjamin Graham’s attempt to make value investing accessible to people outside of Wall Street. It is required reading for anyone who wants to start buying individual stocks. The book is accessible to a large audience and beautifully explains the philosophy of value investing. The key chapter is chapter 20, where Benjamin Graham explains the importance of demanding a margin of safety from your investments. I would recommend The Intelligent Investor over Graham’s more weighty tome, Security Analysis, which is more rigorous and geared towards financial professionals. The Intelligent Investor is accessible to everyone and establishes the right mindset when approaching investing.
2. You Can Be a Stock Market Genius
You Can Be a Stock Market Genius is a book with a ridiculous title that is packed with incredibly useful information. Greenblatt is a value investing legend. His fund returned 50% (!) annual returns from 1985 to 1995. In the book he generously explains the advantages that the little investor has in trying to identify bargain stocks. He gives you a road map to the market and the unusual places to look for bargain stocks. The information about spin-offs in particular is worth the price of the book. Joel was incredibly generous to write this book, as was Graham to write The Intelligent Investor. Both men could have kept this knowledge to themselves, but they were generous enough to share it with small investors so we could reap the rewards as well.
3. The Little Book That Beats the Market
Greenblatt’s other book is also an incredibly generous attempt to communicate a sound investment strategy to broad audience. Joel does an excellent job of communicating the key principles around value investing. He wrote the book so it would be accessible to his children and the clear thinking shines throughout. The book ultimately unveils Joel’s quantitative strategy, which he calls “The Magic Formula”. Joel ranked all of the cheapest companies (as measured by earnings before interest and taxes divided by enterprise value) and then ranks all of the best companies (as defined by return on invested capital). Joel’s goal was to mechanically recreate Buffett’s twist on Graham’s ideas (trying to find cheap companies that are also good companies) and the results were quite impressive. Much like Joel’s work in You Can Be A Stock Market Genius, this book is incredibly generous.
Joel even maintains a free screener for the strategy outlined in the book, making the strategy easily implementable for the average investor.
4. Deep Value
Deep Value by Tobias Carlisle is packed with eye opening insight and compelling stories of famed value investors such as T. Boone Pickens and Carl Icahn. One of the key takeaways from Deep Value is that the magic formula component that identifies cheap stocks (the enterprise multiple) actually performs better without the quality component, return on invested capital. In other words, cheap and bad outperforms cheap and good. Tobias goes on to explain the concept of mean reversion and expands the concept beyond what most people think it is. The stories that are interspersed with the data are also compelling and enjoyable. Tobias maintains a great value investment blog as well.
5. What Works on Wall Street
In the 1990s, James O’Shaughnessy embarked on a data mining experiment to identify which stock variables “work” to deliver returns that beat the market. The result was the first edition of What Works on Wall Street. James has since updated the book and it is now in its fourth edition. In the book, James looks at each popular valuation ratio (price-to-sales, price-to-book, price-to-earnings, ebitda-to-enterprise-value) to see if buying the “value” end of the spectrum delivers any outperformance. Spoiler alert: they all work. Simply buying large baskets of cheap stocks outperforms expensive stocks and the market as a whole.
6. When Genius Failed
When Genius Failed isn’t a book about value investing. It’s a book about how not to invest. Long Term Capital Management, a hedge fund established in the 1990s, was created by some of the smartest people on Earth. They had the best bond traders and two Nobel Prize winners. After years of incredible returns, their fund went on to spectacularly fail in 1998 and the failure of the fund led to the intervention of the Federal Reserve. The experience turned out to be a dress rehearsal for the financial crisis that would envelop the financial markets 10 years later in 2008. The lesson? If the smartest men on Earth can be ruined by leverage, then you can too.
7. The Snowball: Warren Buffett and the Business of Life
The Snowball is the definitive biography of the greatest value investor of all time, Warren Buffett. It traces Warren Buffett’s life story through all of its ups and downs. It also gives you a sense of the evolution of Buffett’s investment philosophy, from his focus on beaten down “cigar butt” Ben Graham bargain stocks in the 1950s to his eventual focus on buying quality businesses with the ability to compound wealth over long stretches of time. More important than the business insight are the life insights that can be learned from Warren’s story. Warren Buffett isn’t just a first class businessman, he is a first class human being.