reviewed by Marco den Ouden
Originally published at About.com - Oct.
Also available at
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
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
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.