Suggested Reading for The Potential Value Investor

Getting lots of emails lately about value investing. A common theme is “investing vs trading” or “how can I be a value investor”, along those lines. Seems people are interested but not sure which is best for them. Here is a suggestion.There are three books you should read.  I chose these because they are  short (can be read in a few hours) but also do a great job of getting their points across.

The first is “The Little Book of Value Investing” from Christopher Browne. This is a good general overview of value investing that touches the main points of it without diving into minute detail.

You can buy it here:

The other is “Psychology of the Stock Market” by G. C. Selden. This book speaks to how human impulses lead to speculative bubbles in the market.

Buy it here:

Finally, “The Art of Contrary Thinking” by Humphrey Neill

Why these diverse books? The Browne book speaks to the mentality of the value investor and what we typically are looking for in an investment.  He also lays out a basic outline for beginning investors to operate from.

Finally, as value investors we by nature must be contrary in out thinking. BUT, too often those who think they are contrary simply take the opposing side of every issue. This is not being contrary but simply cynical. Critical contrary thinking is very difficult and the cruxt of successful value investing. To quote Neill:

The art of contrary thinking consists in training your mind to ruminate in directions opposite to general public opinions; but weigh your conclusions in the light of current events and current manifestations of human behavior.

Each of these books speaks to a separate but very important part of value investing. It is not enough to simply be able to do one of the three and succeed just a someone who can only shoot but not dribble cannot be a great basketball player.  Being a value investor is as much a way of thinking and seeing the investing landscape as it is the ability to evaluate a balance sheet.

A cheap company that has no reason to be anything other than cheap may remain that way for a very long time meaning any investment in it is dead money.  The successful value investor is able to discern that the common thinking regarding the investment is erroneous (through contrary thinking) and make the investment as eventually the correct view of the security will emerge.  A company may be currently cheap because its fundamentals are deteriorating, the value investor who does not see this is buying something that will only get “cheaper” without eventually rising (see banks in 2008-09).

Then there are the time where panic in the market emerges and securities  become so cheap that the value investor buying these is buying a $1 for $.20 (see the market in March 2009). The ability to understand the difference is essential. All three of the above book will enable you to do this.

Selden teaches us how to notice and avoid bubbles. This is perhaps the most important lesson as bubbles almost always lead to large losses for huge swaths of the investing public yet in the middle of them, few know they are participating. By seeing a bubble the value investor can get out of it, wait for it to pop and then begin their buying as the inevitable panic begins to set in and prices fall below reasonable values.

If, after reading these books the messages in them make sense to you and fits your personality, you may be a value investor. It is then time to go deeper into the subject. If you think they are bunk (that is ok) you are not and do not try to be as you will not be successful at it. You have to invest based on your personality, you cannot be something you are intrinsically not meant to be.

Hope this helps….

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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