Value investing books

These books have had the greatest impact on the development of the UK Value Investor investment strategy.

The New Buffettology

An easy to read, somewhat simplified but detailed description of a Warren Buffett-style investment strategy.  The focus is on large companies that consistently grow earnings and dividends over long periods of time, which is exactly what you’d expect from a book about Warren Buffett’s investment strategy.

If you wanted to read a book about defensive value investing then this would be a very good place to start, and it’s my favourite book on the subject.

Warren Buffett and the interpretation of financial statements

A step-by-step walk through the balance sheet, income statement and cash flow statement using the approach laid out in the New Buffettology book.  I think it works well with the Buffettology book and fills in some additional details.  It’s also a handy book for people who don’t know anything about accounting as it walks through most of the most important bits in a methodical and relatively simple manner.

The Intelligent Investor

Most people who get into value investing will at some point read one of the various versions of this classic text.  I prefer the updated reprint of the original 1949 edition.  I consider myself a ‘defensive value investor’ and I borrowed the name from this book.  Graham’s idea of a defensive value investor was somebody who invested in a diversified group of successful and leading companies, bought at prices which were not excessive relative to their earnings and dividend payments.

If you’re new to Ben Graham then hopefully you will like his style.  It’s a bit old-fashioned but it’s unlikely that there has ever been a more understated and fact-based investment writer.  He is constantly at pains to point out the difficulties that are inherent in stock picking and effectively suggests index tracking for all but the most intrepid.  As Warren Buffett said, “By far the best book on investing ever written”.

Fooled by Randomness

One thing which many investors struggle with is the inherent uncertainty of the stock market.  People generally do not like uncertainty and they will pay (through lower returns of a safe cash account for example) to avoid it.

Taleb does a good job of ramming home just how uncertain everything is – not just the stock market.  Investors should embrace the uncertainty in order to understand it, and once they understand it (or at least get a feel for its magnitude) they can develop strategies to both profit from it and protect against it.  The inherent uncertainty of the world is one of the main reasons why I prefer to invest in a widely diversified group of relatively defensive companies.

Wall Street Revalued: Imperfect Markets and Inept Central Bankers

In this book Andrew Smithers goes through the empirical data which backs up the idea that markets can be defined as overvalued and undervalued, and that the price to value ratio is positively correlated to future returns.  This means that if you can calculate the market’s value today you have a reasonably useful tool for estimating future returns over the next 1 to 30 years (although the sweet spot for forecasts may be around the 7-10 year mark).

Smithers values the market using both Tobin’s Q and CAPE (Cyclically Adjusted PE).  Both of these tools appear to be highly useful when trying to minimize downside risk while retaining upside potential.  This book is the main reason why I use PE10 (a non-inflation adjusted version of CAPE) to value individual stocks, in order to build a portfolio where CAPE (or PE10 in this case) is permanently low relative to the wider stock market.