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Book Review

Value Investing Made Easy
by Janet Lowe
reviewed by Marco den Ouden

Originally published at About.com - Oct. 7, 1997
Also available at Stocknowledge

Some time ago while browsing through a bookstore I came across Benjamin Graham and David Dodd's Security Analysis. It was a fairly fat meaty looking book, and somewhat daunting. Then I noticed another book called Value Investing Made Easy by Janet Lowe. I wanted to know more about Value Investing but didn't want to get bogged down in heavy reading. A 200 page book published in 1996 made more sense to me than a volume four times that size written in 1934. So I bought it. It was a good read.

Lowe is a former financial editor and columnist for the San Diego Tribune and an expert on Benjamin Graham, security analysis and value investing. In this work she brings clarity and precision to her topic, explaining it in easy to understand prose and illuminating it with many anecdotes and case studies.

For the uninitiated, value investing is as much a philosophy as a methodology. It is a philosophy of independent thinking rather than following the crowd. It is a philosophy of discerning lasting value rather than noting temporary and superficial price.

Lowe starts with a brief overview. In a nutshell, she says, "A value investor buys shares in a company as though he were buying the whole company, paying little attention to stock market temperament, the political climate or other exterior conditions." She goes on to give a brief biography of Graham and elaborates on the essence of value investing quoting various sources including Warren Buffett and Irving Kahn. Three key concepts emerge:

  • the right attitude

  • the importance of margin of safety

  • intrinsic value

The right attitude means discerning between investment and speculation and avoiding the latter. Margin of Safety means creating a safety net when investing. And intrinsic value means analyzing a stock to determine its real value and seeing if it is undervalued by the marketplace.

Lowe goes on to elaborate these themes in subsequent chapters. In discussing margin of safety, she gives a superb explanation of the balance sheet and the income statement and shows us how to read them and understand them. Such important concepts as the debt to equity ratio, the current ratio, the acid test and the price to earnings ratio are also explained. She summarizes all these important concepts in a handy "Formulas and Ratios at a Glance" page at chapter's end.

She discusses the role of management in a company and goes on to discuss how to build a successful portfolio. Her discussion on picking stocks of value is particularly enlightening with her enumeration of Graham's "Ten Attributes of an Undervalued Stock".

Discussing Benjamin Graham's "Mr. Market", that schizophrenic personification of the stock market Graham used to make his point, Lowe points out that value investors recognize the folly of trying to predict Mr. Market's mood swings (i.e.: bulls and bears) and continue to focus on fundamentals regardless of the market. The key thing for value investors is to recognize when a particular stock is undervalued or overvalued in a given market. When the stock becomes overvalued in a roaring bull market, the value investor will sell and hold cash. This, notes Lowe, "requires steady nerves" as "it pains many investors to sell a stock when its price is still rising."

A bear market, on the other hand, is a value investor's friend. It offers a wealth of opportunity to find real bargains.

Lowe continues with a couple of chapters on risk management and special circumstances. Such topics as convertible shares, preferred stocks, warrants and arbitrage are explained. Junk bonds, takeovers and bankruptcies are also discussed. Lowe concludes with a final chapter reviewing the basic principles.

Throughout the book Lowe quotes Graham in highlighted sections. She gives examples and case studies to illustrate points. And she gives us great personal insight into such investors as Graham and Buffett. The book is never pedantic or dry. It is always highly readable and entertaining. One can only profit by reading this excellent book.


Contents copyright Marco den Ouden       All Rights reserved
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