“The Little Book of Value Investing”

“Just finished reading “The Little Book of Value Investing” – amazingly simple and interesting book on
“Value Investing”. It reminded me of Einstein’s statement “Simplicity is the highest form of intellect” –
Christopher Browne, a known value investor, truly, proves this in his work. Christopher Browne has been part of
Tweedy, Browne Company – the oldest value investing firm on Wall Street. This firm boasts of having served
customers like Dean of Wall Street – Benjamin Graham and other legends on investing such as Walter Schloss,
Warren Buffett etc. Learnings from the book are captured here:

On Value investing as a concept: Key concept in value investing is differentiation between price and value –
‘Price’ is what we pay to buy the business and ‘Value’ is what we will get from the business. Value from business
would flow to owners in the form of claims on its Earnings/Cash flows (as a going concern) and Assets (as a dead
business). Roger Lowenstein in the foreword of this book states “Value investing is buying securities for less
than their intrinsic worth – of buying them on the basis of their underlying business value, as distinct from what
is happening at the superficial level of the stock market.”

Logical simplicity of value investing is the key. Important concepts introduced by Benjamin Graham on Value
Investing were – “Intrinsic Value of a business” and “Margin of Safety”. He observed that paying less than
Intrinsic Value is “Value Investing” and larger the gap between “Price” and “Value”, higher is the margin of
safety – Safety from the perspective of losing the money. Graham wanted to buy stocks selling at two third or
less of their intrinsic value. By paying less in comparison to our estimate of intrinsic value, we do following
things:

· accommodate error in our estimates of intrinsic value

Net- net, concept is – lesser we pay, lower is the money at risk and higher is the potential for return.

In view of above, as value guys are looking for great businesses at cheap prices, not surprising that they are
always analyzing businesses, which Mr. Market is throwing away. Accordingly, they are excited when markets
are down and not essentially when markets are up. Buying cheap is an undisputed mantra of value investors. As
Christopher Browne states “Buy stocks as you would buy groceries – when they are on sale, and not when they
are high priced because everyone wants to own them. Just as it makes sense to steaks, cars and jeans on sale,
it makes sense to buy stocks on sale, too. Stocks on sale will give you more value in return for your dollars
invested. Bargains are found in the sales flyers and the new low lists, not in highfliers.” He further states “What

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you would like is some mechanism that forces you into the market when stocks are cheap and eases you out
when they are dear. Getting in at the bottom of a stock market cycle produces better returns than getting in at
the top. In other words, great investment opportunities do not come on the heel of great times; they are
preceded by much pain.”

Question in our mind may be – why is ‘Intrinsic Value’ so important? Market prices jump up and down without
any regard for intrinsic value. True; and, that is where the opportunity for value investors is. They are disciplined
and observe this game of ‘Price-Value’ differentiation and take advantage of as and when opportunity presents
itself. Only thing they believe in is that over long period of time, price and value converge, given the history as
evidence. Christopher Browne states “Most investors are driven by emotions that run the gamut from extreme
pessimism to jubilant optimism. These emotions can drive valuations. The job for the smart investor is to
recognize when this is happening and to take advantage of the emotional swings of the market. A rational
investor sits back and waits for the market to offer stocks for less than they are worth and to buy the same
stocks back for more than they are worth.” He further states “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. Maintaining a steady state of mind, whether we are in good
times or bad, is the key to successful long-term investing.”

Another question in the mind of investors may be – “a cheap stock may continue to be cheap”. Rightly so – for
unexpectedly long period of times. However, if history is any evidence and we go with what Benjamin Graham
stated “We know from experience that eventually the market catches up with value”, we would derive lots of
comfort from the approach. Several logical reasons for this to happen are – market may recognize the price-
value differentiation over a period of time; promoters may buy the stock as it is cheap; company may buy back
the stock based on the same principle or a potential acquisition may pull the prices up. Indeed, Christopher
Browne states “if intrinsic value is your benchmark, you can profit in two ways. First, value of your shares will
increase while you own them (most companies increase their net worth or intrinsic value, over time). Second, if
the price of the stock rises from less than intrinsic value to intrinsic value over time, you will have a win/win
situation. When you pay full price for a stock – a price equal to its intrinsic value-your future gains may be
limited to the company’s internal rate of growth.”

One may also ask – if value investing is so valuable, why there are so few money managers or investors
following this. Christopher Browne answers that question by stating “The answer is not intelligence. It is
temperament. Also, the reputational and career risk of being a contrarian is far greater than the risk of going
with the flow. Value Investing requires the ability to go against the herd – and risk of being called dummy from
time to time. It requires mettle to buy those stocks that the majority of investors don’t want to own. They have

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warts. They are out of favor. Of course, they are. Why else would they be cheap?” He further states “Being a
contrarian, which true value investors are, is not easy. Lots of pressures are working against you. The wild
swings of momentum and growth investing tend to subject investors to more thrills, and ultimately more spills,
than the value approach. Value investing is more like a long trip to a pleasant destination than a ride on a roller
coaster.” As my Guru Mr. Chetan Parikh puts it “Principles of value investing are fairly simple, but practicing
them is quite difficult”.

Another answer to above question is ‘Value investing does not always work’. Indeed, it works in some years
precisely because it does not work in some years. Mantra of success is doing the same thing religiously year
after year without deviation. Warren Buffett once said “Returns using the value approach are ‘Lumpy’. There will
be periods of underperformance to achieve higher long-term results. I know that; most of our investors know
that. Nevertheless, it can be difficult for even committed value investors to remain steadfast in the face of so
much hype and excitement.” On the subject, Christopher Browne states “Patience is sometimes the hardest
part of using the value approach. When I find a stock that sells for 50 percent of what I have determined it is
worth, my job is basically done. Now, it is up to the stock. It may move up towards its real worth today, next
week or next year. It may trade sideways for five years and then quadruple in price. There is simply no way to
know when a particular stock will appreciate, or if, in fact, it will. There will be period when the value approach
will underperform other strategies, and that can be frustrating. Perhaps even more frustrating are those times
when the overall market has risen to such high levels that we are unable to find many stocks that meet our
criteria for sound investing. It is sometimes tempting to give in and perhaps relax one criterion just a bit, or
chase down some of the hot money stocks that seem to go up forever. But, just about the time that value
investors throw in the towel and begin to chase performance is when the hot stocks get ice cold.”

In investing, what we do is important and what we avoid is equally important. Christopher Browne states “Value
investing is not set of hard and fast rules. It is a set of principles that form a philosophy of investing. It provides
guideline that can point you in the direction of good stocks, and just as importantly, steer your away from bad
stocks.”

Do we really need to be extraordinarily intelligent to be successful as value investor? Answer is no. As Warren
Buffett sated “No more than 125 IQ points are needed to be successful investor. Any more and they are
wasted.”

On Mr. Market’s behavior: If prices of stocks going up and down surprise you, that is fine – as most of the market
participants have the same feeling. My learning on this game is that “Liquidity, Sentiments and Fundamentals
influence market prices in the same sequence”. What does it mean is that first factor to contribute to price rise

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is always liquidity; with increasing prices, psychology comes in to play – driving people to put more cash on the
table to buy businesses; further increase in prices builds confidence of market participants and again results in
more cash walking into the market; Both Liquidity and Sentiments create a positive feedback loop and market
keeps going up and up (making people to believe that there is only one direction of market – up) till it is taken
away significantly from the Fundamentals. Then, some prudent guys will start talking about markets being away
from Fundamentals. All sorts of psychology – refusal, denial and then acceptance would come in to play off and
on. And, then more and more discussions on stretched valuations would drive the prices to meet with the
intrinsic value. On this downside, again, liquidity sucked from the system, along with psychology would create
negative feedback loop to restart the process of market being quite away from fundamentals – this time on the
downside. And, this is what moves the market up and down. Roger Lowenstein in the foreword of this book
states “Wall Street teaches, variously, that stocks are driven by all manner of concerns – by war and peace, by
politics, by economics, by the market trend, and so forth. My inheritance was a credo: Stocks are driven by the
underlying earnings.” Christopher Browne also states “It is important to understand that the prices of solid
companies with strong balance sheet and earnings usually recover. In my experience, if the fundamentals are
sound, they always have and they always will.”

Mr. Market always moves with expectations and unexpected results – called surprises in the market language.
As surprises happen in both positive and negative sides, stocks keep reflecting them on prices continuously.
Christopher Browne writes “low P/E stocks are usually low expectation companies. The stock market does not
perceive them to have a bright future, perhaps because they got beat up during a down period, perhaps
because they have simply fallen out of favor or there are shinier-looking stocks in the store. High P/E stocks, on
the other hand, are usually high expectation stocks. Various studies reveal when a low P/E, low expectation
stock reports disappointing news, the effect is minimal. The market anticipated bad news and there was no
need to knock the price down much further. Conversely, when a low expectation stock surprises the market with
good news, the price can pop. The reverse is proven to happen with high expectation stocks. If they report good
quarter, the stock does not necessarily jump. It was already priced to anticipate good news. But, bad news can
crater a high-expectation stock.” Our experience at “Jeetay Investments” reveals that best bets are available
when a great company is ‘temporarily’ suffering – poor profit margins and or return ratios (ROCE and ROE)
because of some factors – internal or external. Question there is – whether the company could return to its past
days of glory. Answer to this question lies in understanding reasons of the temporary setback and analysis of
various situations, which could change in favor of company. As John Neff, legendary manager of Vanguard
Windsor Fund once stated “Every trend goes on forever until it ends.”

On ability of market participants to predict Mr. Market’s move, Christopher Browne states “I have no faith in my

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ability, or in the ability of most others, to predict the direction of stock prices over the short term. What I know is
that owning a diversified portfolio of stocks that meets the standards of a margin of safety and are cheap, based
on one or more valuation methods, has proven to be sound way to invest my money. I have no reason to believe
it will not continue to be so.”

On markets continuous up and down, Christopher Browne states “There seems to be a boom-bust cycle in all
the less developed markets. Early investors reap fast profits and then excess flood of foreign investment and
cash pushes the local economy to the point of a speculative bubble. It is a dangerous way to invest, as those left
holding the bag will find the bag is empty.” One has to be really patient in the market place not to get
influenced/carried away by fashion parade, which is indeed difficult. Here, I am reminded Blaise Pascal, who
stated “Most of men’s problems arise from their inability to sit quietly and alone.”

On Sources of Value in Business: What are the sources of value to owners from the business/stocks? If we reflect
on this question, we find primarily two sources – Earnings (to be more precise Cash Flows) and then Assets. As
businesses are bought to generate profits each year going forward, Earnings/Cash flows are the primary source
of value to owners as going concern. Assets are always a fall back piece of value – to be dependent on when
earnings are not sufficient or they die down and owners proceed to collect their money from liquidation of
business/assets. Now, as a principle, we need to pay as little as possible in comparison to these two sources of
value. In other words, price to earnings (reverse of earning yield) and price to net-worth (price to book value of
stocks) has to be lower. Question here may be with regard to which earnings to be used – reported last financial
year, trailing (last four quarters) or forward looking (estimated next year). Graham’s focus was to look for
companies with a reasonably stable record of earnings, a degree of predictability, rather than to search vainly
for the specific future earning estimates that Wall Street seeks. Christopher Browne states “it is better to just
buy the cheapest stocks based on earnings that have already been tallied, audited and reported to the
shareholders.”

Another source of value for owners, as stated above, is the assets. It means capability to assets in business to
pay to them after satisfying all its obligations – what business owes to people. This value from the perspective
of owners is called net-worth or book value of the stocks – what business owns (all assets) minus what business
owes to creditors. To find per share data, we simply divide this number by total number of shares. Finding
stocks which were trading below their book value or current assets value or better cash in the balance sheet
was Graham’s chief investment criterion. Christopher Browne states “Buying stocks below book value can lead
to some of the best investments you can make – it works.” Important to note that buying below book is not the
only criterion for stock selection. If we initiate our research on businesses with this criterion and go to discover
the solid businesses, then it could generate a lot more better results for investors. Some caveats here : First –

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one needs to diversify adequately as some of these businesses may potentially die; Second – value of assets
could be a lot lower than what they appear in the Balance Sheet for but liabilities are cash; Third – There could
be intangible assets in the book such as goodwill, softwares, revaluation reserves etc., and one needs to be
careful about actual market value of these assets; Fourth – there could be lots of off Balance Sheet items such
as guarantees, mark-to-market losses on outstanding derivatives transactions and other contingent liabilities;
Fifth – While, financials may look great at stand-alone basis, on consolidation basis financials could be really
poor (if subsidiaries of the company have incurred/are incurring significant losses); Sixth – Market may be
concerned about the quality of promoters or their capability to deploy the cash in the Balance Sheet, prudently.

In addition, while last few years’ financials can capture what has happened in the past, they don’t communicate
future and we, as investors, put our capital on future performance of a business. Therefore, it is critical to go
beyond financials and understand where the business is headed. My Guru Chetan Parikh states “Quality results
in quantity – Qualitative parameters would reflect in Annual Reports only over a period of time.” Christopher
Browne states “Book value, cheap earnings, balance sheet analysis – all these metrics are key to identifying
good prospects. But, if successful investing was a mathematical formula, everyone would have nothing but
winners in their portfolios. There is some art to identifying the best prospects, and so you should analyze your
list of companies in greater details.” Analyzing qualitative dimensions of the company today would ensure we
have great quantities tomorrow.

In language of Dr. Michael Porter, a strategist – we need perspective on Strengths, Weaknesses, Opportunities
and Threats in a business, as an investor, to understand value in a business – source of income and assets.
While analyzing businesses, we should look at various factors: – Pricing power – ability of company to increase
prices of its products/services without affecting demand (It is a function of uniqueness of product/service,
competition and loyalty of customers towards business); Scalability – ability of the company to produce more
and sell more. Operating leverage, keeping the fixed cost constant or marginal increase therein, could add a lot
to the operating profits and bottom line; Expansion of profit margins – ability of company to control
costs/expenses without affecting operations or changing the product mix to more profitable products/services;
Restructuring – integration of operations, selling unprofitable operations, reducing debt etc.; Growth prospects –
growth over next few years and how would that growth be achieved; Competitive environment – Basis of
competition has to be differentiation of products and services and not pricing. Lack of differentiation, most of
the times, results in consistent pressures on profit margins; Cash flows – What does management intend to do
with cash, it generates. Unrelated diversifications could be a negative news; Sources and allocation of capital –
Debt: Equity mix in the capital structure and various returns such as Return on Capital Employed (ROCE) and
Return on Equity (ROE) etc.; Valuation – what would the company be worth to private buyers; Insiders’ actions –

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whether insiders are buying. Standing with insiders could be comforting; And, corporate actions like buy back
etc.

While there are several sources of quantitative parameters, unfortunately, there is no consolidated single source
of qualitative parameters and it is much harder to understand and work on in comparison to quantitative
parameters. Interaction with people around – company, competitors, customers, consultants, academia, credit
rating analysts, equity analysts may give one good perspective on parameters, captured in above para. Visiting
various exhibitions also helps one understand the businesses better and develop contacts, which could be great
value later in terms of accessing people to understand businesses. We find that in exhibitions, companies are
there to talk about their businesses – hence, sourcing information is much easier than approaching companies
for information. Also, conviction in voice and body language of people you talk to/meet could be another source
of qualitative piece, which is not there in numbers anywhere. Unequivocally, it is quite time consuming and
painful process as we would always be dependent on others’ wish to meet us/ talk to us and share the
perspective.

Clearly, a business with great financials and poor qualitative aspects as of today may not be an investment
candidate for us or may be parked unemotionally in ‘No-thank-you pile’ – an interesting concept introduced by
Christopher Browne in the book. Indeed, if we are honest in the work we are doing, this ‘no-thank-you pile’
would always be much bigger than the portfolio of businesses, we would ever like to own.

On Buying Value with Growth: Value with growth is an amazing combination from investors’ perspective. It is
important, not to view ‘value’ and ‘growth’ in contradiction to each other. Indeed, Warren Buffett stated
“Growth and value are joined at the hip.” Value buying may give upside on standalone basis without any growth
in the business. But, it layered with earning growth would definitely be better – because, at the same P/E, higher
earnings will enhance the price of stock and if perception of investors towards growth opportunity shifts, it may
result in complete rerating of stock and so expansion of P/E. All put together, it could offer significant
opportunity of stock appreciation to the investors. Christopher Browne states “I paid a little more than I might
have in the old days of just buying stocks based on book value but found great bargains like American Express,
Johnson and Johnson, and Capital Cities Broadcasting. Companies like these were able, and in many cases still
are able, to grow at rates significantly greater than the economy overall and were worth a higher multiple of
earnings than a basic manufacturing business.”

On Value Trap: Value Trap is the term one uses when we catch a bad business in the falling market thinking
this is a great value buy. It is like when on sale in a retail showroom, one needs to be really careful on choosing
merchandise – Buying things recklessly without quality consideration on sale may be pain later. My guru Chetan

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Parikh states “Be aware of catching donkeys painted to look like horses (Mr. Market has peculiar habit to do
this). We need to catch horses painted to be donkeys and that is where the value is.” Christopher Browne states
“Don’t try to catch an overpriced, cheaply made falling knife.” Question here may be – “how do we know
whether we are in value trap?” Answer to this question lies in awareness about the features of product one is
buying and reasonable sense of its valuation. In context of investments, it means understanding businesses one
is buying and their valuation. Remember, religion and guiding force of a value investor has to be only “Price-
Value difference”. Now, error of judgment on understanding business, if any, is to be handled by selling (coming
out) of the business (booking losses) and error of valuation is handled by “margin of safety.” And, if one is sure
of the quality of business, every falling price is clearly a buying opportunity – if something was of value at X,
clearly at X minus some money, it would look better value. Important here is the availability of cash at that time
and more so guts and conviction in one’s own homework.

Christopher Browne captures this point interestingly “Screening for stocks that seem cheap on the surface is
only a beginning. Blindly buying the new low list or the screens results could well end in investment disaster.
These names are just a list of possible candidates for the shelves of our wealth-building store. We still need to
examine the merchandise to make sure we are being offered quality goods at low prices and not shabby
obsolete articles that are hopelessly overpriced even while appearing to be cheap.” We have to remember that
winning in investment game begins with not losing.

Also, when something appears cheap, never forget to ask “is it good quality and whether I would own this
otherwise i.e. in case, this was not available cheap. This would ensure that we are buying desired stuff cheap.”
Most of the times, things would be cheap for right reasons. Another question could be – what do we mean by
good quality? Good quality in businesses mean moat/competitive advantage/differentiation – which could be in
the form of great execution capabilities, wide distribution reach/proximity to customers, customers’ relationship,
unique product and service, honest and capable management, strategic location etc. etc. Christopher Browne
states “There will always be competition, and no moat lasts forever. But a moat can permit a company to make
significant profits for many years.” Also good to look at simple, mundane day to day businesses with little or no
technology dependence as they would always be in demand irrespective of cycles of economy (though may get
affected a bit).

I think, mishaps of this kind can be reduced drastically, if not eliminated, by following ‘Disciplined approach to
investing – preparing checklist for each of our investment decisions’. There is a great learning from Dr. Atul
Gowande, a surgeon in U.S., who has written the book titled “The Checklist Manifesto: how to get things right” –
Message of the book is that checklist approach to even surgery reduces the chances of mishap. Christopher
Browne suggests the same approach to investing by listing down several questions in the book – qualitative,

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quantitative, valuation, price-valuation difference and what can potentially be the value changer in the
business. In our investing approach at Jeetay Investments (PMS), we too follow a checklist approach to
investing. We found that this approach creates discipline among us as investors and helps us avoid mistakes,
we could otherwise do just under influence of our biases.

On Insider’s actions: How to look at insider’s actions is always a question in the mind of investors. Do these
actions give us some clue? What if promoters, directors and top management people are buying their own
stock? Is it worth looking at the business at that point in time? Answer is absolutely Yes! As my Guru Chetan
Parikh would state “There could be several reasons for promoters to sell, but there is only one reason for them
to buy – make money”. In most of the cases, we have found that whenever management is buying there are
turning points in the business, which are generally not seen to public at large or are not there in the public
domain. Obviously, insiders – promoters, directors and senior management have intimate knowledge of the
business and would be the first ones to know that business is turning around/becoming better. Christopher
Browne states “Insider buying of stocks selling at low multiples of earnings or below asset value is even better.
Consistent purchases by insiders is an even better indication – with below book-value stocks.”

Another point is – what is indication by company buying back its shares? Christopher Browne states “Clearly,
any share buyback at below book value will increase the per share book value of the remaining shares and so it
makes sense to look closely at companies announcing stock buybacks that appear to be cheap relative to
earnings or assets.” Also, what if a savvy/known investor on the street is buying the stock (lots of people just
focus on information/various filings by specific set of investors on their investments) or someone else is buying
from the perspective of acquiring the company? Clearly, this should be a trigger for investigation. Christopher
Browne states “Sometimes the only thing standing in the way of a cheap stock and a profit for an investor is a
catalyst that can make the market take notice. Both insiders buying and activist investors can provide the push
that makes the market realize a stock is a good value.”

While, all these situations should definitely trigger investigation in to a business, I don’t think one should buy
just because any of these guys are buying as we may not be sure of their motives ever. Independent analysis of
business, its valuation and comparison to price would always be of help to us in building our confidence.
However, we have to be cognizant of the fact that doing research may take some time and investors may risk
losing the opportunity – if stock climbs up too fast.

On Selling: Selling is always a more difficult decision to make than buying. For buying, principles are quite
simple and there is consensus among value investors (buy cheap) but unfortunately, there is nothing sort of
consensus among great investors on the topic of selling. My guru Chetan Parikh states “One has to be as

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disciplined with selling as with buying. Discipline means one has to think through the selling principles and stick
to them. First piece may be to have clear distinction in mind whether a stock is bought opportunistically just
because it is cheap (may not be a great business though) or it is a great business bought cheap. This distinction
would make you sell opportunistically bought stocks with probably pre-determined profit targets, while one may
continue with great businesses for very long time without being too bothered about short time price movements
in the mood of Mr. Market.” I would state reasons to consider sell of the stock – First, when you think, price has
touched full value of the stock (your estimates of value); Second, when thesis behind purchase of business is no
more good; Third, when you find more compelling opportunity/opportunities in the market to buy (better
opportunity presenting itself). Going to cash is critical to create room for exploitation of further opportunities, if
market were to present them.

On Timing the market: Timing the market is virtually impossible. Short term success may make us believe that
we have learnt the art of timing the market but that is the belief, which is disastrous. “Fooled by randomness”, a
book written by Nassim Nicholas Taleb, is all about that – success generated by random events may make us
belief that we have learnt the art of being successful, but, that is not true. Christopher Browne states “In more
than 35 years in investment business, I have yet to find a short-term timing strategy that works. All nature of
pundits have come and gone over the years. For a short time, any of them may be right, and may make one or
two amazingly accurate predictions. Eventually, all of them lost the interest of the public when the predictions
prove inaccurate. I simply do not believe that there is a way to accurately and consistently time short-term
market movements, and again, the research of scholars seems to bear me out. Predicting short-term stock
market direction, however, is a fool’s game and a disservice to the investing public.” Statement made by
Warren Buffett on the subject is quite precious – “it is time in the market, not market timing, that counts.” He
also stated “We don’t try to time but price the market.” I strongly believe that investment is best when minute-
to-minute prices are either not available or not paid attention to. At least, money made by great investors
seems to communicate that.

On Comparing Bonds with Stocks: Can we compare the investing in equity with lending viz investing in bonds.
Let us explore. In case of lending, creditor is looking at borrower’s capacity to pay from his earnings and in case
of his inability to do so, analyzing the collateral to be able to recover his money. Should not the same principles
apply to investing in equity. I think so; indeed, equity owners need to be more prudent because creditors are
anyway seniors and equity is the last in pack of cards on various instruments in capital structure. Warren Buffett
would go a step beyond to see the returns on equity – like in case of debt, we are looking at return on debt,
similarly, he would look at paying not more than X times price for ROE to accommodate bond kind of returns or
better on his equity investments. For example, if sustainable Return on Equity (ROE) in a business is 30%, to

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generate say minimum 10% return on his investments, he would not be willing to pay more than 3 times of book
value of stock. Also, book value here is the tangible book value. Similar parameter he would apply at the firm
level to compare EV (value of Bonds + Value of Equity) with Capital Employed to generate bond comparable
returns or better from Return on Capital Employed (ROCE).

However, Christopher Browne, on the subject of book value states “Radio and television stations and
newspapers are examples of businesses that can generate enormous earnings with little in the way of physical
assets and thus have fairly low tangible book value. The ability to learn new ways to look at value allows you to
make some profitable investments that you might well have overlooked had you not adapted with the times.”

On diversification: Graham always emphasized investment is an “operation.” In other words, performance needs
to be analyzed on the portfolio basis and not on individual stock basis and that too over a period of time.
Christopher Browne states “In any given year, every stock portfolio will hold winners and losers, and it is
virtually impossible to sidestep every loser. The point is to hold more winners than losers. By diversification, you
provide yourself with insurance that if one of your stocks blows up, it will not severely impact your net-worth.”
Now, another question comes to mind on the subject is how many stocks would suffice from diversification
perspective – 10, 20, 30, 50 or more. My Guru Chetan Parikh states “While there is no hard and fast rule on the
subject, if we are holding so called top tier companies in the portfolio, we may live with 10-15 stocks. But, if
holding is the small and mid capitalized stocks, diversification needs to be wider to 25-30 stocks as chances of
accident (stock selection risk) are higher here.”

On Money managers: There are two major things investors look for in a money manager – Competence and
Track Record. Other important personality traits investors should look for in their money manager are –
simplicity, investing philosophy – should have applied that religiously over time, transparency – honest in
dealing and communication, integrity, energy, intelligence, alignment of interest with that of investors –
commitment of own capital and fee primarily linked to return to investors rather than fixed, less portfolio churn
(believes in power of compounding), no conflicting interest like broking arm etc. Another important point is that
money manager should not be ‘Asset Under Management (AUM)’ focused. My Guru Chetan Parikh, Director –
Jeetay Investments (PMS firm) would all the time state “We are aiming at not becoming big (AUM wise) but
remarkable (performance wise).”

Here, one may ask the question – whether, professionals are able to control their emotions and take an
independent and prudent view and so decision on the investments. Answer probably is ‘No’. Christopher Browne
states “It is not just everyday individual investors who fall prey to the herd mentality; it also happens to
professional portfolio managers. If they own the same stocks as everyone else owns, they are unlikely to be

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 “The Little Book of Value Investing”

fired if the stocks go down. After all, they won’t look quite so bad compare with their peers, who will also be
down. This unique situation fosters a mind-set that allows investors to be comfortable losing money as long as
everyone else is losing money, too.”

Measuring performance on quarter to quarter or even year to year from value investing perspective is not
correct. In some years, it could be at par with market or even worse and in some years it could be better than
market. Performance needs to be evaluated over say 5 yrs or so. Challenge is to find that kind of patient
investors – it is really tough.

Let me put my pen down stating “Tree grows in silence and it takes time to produce fruits. We can’t precipitate
the process. So, is the case with Value Investing.” Christopher Browne states “By paying attention to the basic
principle of buying below intrinsic value with a margin of safety and exercising patience, investors will find that
the value approach continues to offer investors the best way to beat the stock market indices and increase
wealth over time.” At the end of the book, Christopher Browne has quoted various independent researches on
the subject along with their results to corroborate “Continued success of the Value method of Investing”. I think,
a piece of knowledge, until becomes experience, is only theory. But, one needs to make conscious and intense
efforts to transform knowledge in to experience. I would conclude stating “Invest when you don’t feel like
investing and quit when you feel like investing”.”

Manish Bansal

Manish.bansal@jeetay.com

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