Bookshelf

Financial statements and filings are the bread and butter of value investors, but it is also very important to develop your mental models and toolkit by reading the great investing thinkers and practitioners. To that end I thought it might be helpful to share some selections that I have read and recommend. More experienced investors will probably be familiar with most of these works, but I have thrown in a few works off of the beaten path and I hope to add more over time.

(I receive a small commission from Amazon if you click through and buy, but I do not receive stock options or use of the corporate jet. The price you pay stays the same.)

The Basics

Start from the beginning by internalizing the basic principles of value investing. The basics like intrinsic value and margin of safety come up in just about every work on value investing to the point of annoyance. But remember that the greater your discipline in sticking to these principles the more profitable you will be in the long run.

The Intelligent Investor – Benjamin Graham

This is where it all starts. The Intelligent Investor lays the foundation of value investing. The rest is commentary.

Common Stocks and Uncommon Profits and Other Writings – Phil Fisher

This is the only book Warren Buffet mentions in the same breath as The Intelligent Investor. Phil Fisher sought value in the qualitative aspects of businesses to gain an investment edge. There are still few books that show you how to do that better than Common Stocks.

The Essays of Warren Buffett: Lessons for Corporate America, Second Edition – Warren Buffett, arranged by Lawrence Cunningham

I once heard someone say, “You want to be the best? You got to learn from the best.” Buffett has a knack for doling out his investment wisdom in a folksy and disarming way that sticks with the reader. Definitely combine this volume with reading the early Buffett partnership letters available online.

The Five Rules for Successful Stock Investing: Morningstar’s Guide to Building Wealth and Winning in the Market – Pat Dorsey

The first half of the book is a good introduction to value investing and basic financial statement analysis. It hews closely to the latter day Buffett/Munger style of great companies with large moats at decent prices. The second half of the book has very useful overviews of sector specific analysis.

Branching Out

The principles of value investing have been applied in many different ways and it is still an evolving discipline. Some prefer to stick with a particular approach to value investing that they can get comfortable with over time. I think most value investors like to keep their options open by being willing to apply multiple approaches to finding value.

Security Analysis – Benjamin Graham

Graham’s earlier tome geared to the professional security analyst. The principles are similar to The Intelligent Investor, but Graham goes into much greater detail in some areas like the nitty gritty of financial statement analysis. Lots of additional insight here, but some of the particulars are dated (and the book is quite huge) so I probably would not start here after The Intelligent Investor. As a bonus, the Sixth Edition has a nice series of introductions from prominent contemporary investors bringing Graham to bear on the current investing scene.

Buffett: The Making of an American Capitalist – Roger Lowenstein

Lowenstein’s biography of Buffett is exceptionally well written and provides additional insight into the evolution of Buffett’s investing style over the years.

The Aggressive Conservative Investor – Martin Whitman, Martin Shubek

Marty Whitman has developed a fairly unique investing philosophy focusing on asset conversions. He comes to his approach by considering the standing of the passive minority investor.

Expectations Investing: Reading Stock Prices for Better Returns – Alfred Rappaport, Michael J. Mauboussin

The duo stresses inverting the typical value investment process by first asking what the market price of a stock implies about investor expectations and then asking if one might have a contrary set of expectations. They provide a quantitative and qualitative framework in which to explore those questions.

Value Investing: From Graham to Buffett and Beyond – Bruce Greenwald

Greenwald accomplishes the rare feat of an original approach to valuation that is both theoretically sound and applicable in practice.

Value Investing: Tools and Techniques for Intelligent Investment – James Montier

This collection of Montier’s articles contains original ideas and some very strong opinions with a heavy focus on empirical testing of strategies and behavioral finance. Plus, he has a great sense of dry humor.

The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy – Robert Hagstrom

Portfolio construction is a topic that often gets overlooked with the value investor focus on individual stock picking. This book is a good overview of both the arguments for the concentrated portfolio approach and how to carry it out in practice.

Sweating the Details

For serious value investors there is no getting around digging through financial statements and creating detailed valuations. And hey, you just might learn to enjoy it.

(If you buy any of the textbooks below make sure to save your money and buy an older edition.)

Analysis for Financial Management – Robert Higgins

A nice concise overview of financial statement analysis and corporate finance topics. Not too academic.

Financial Statement Analysis and Security Valuation – Stephen Penman

This is a really dense book in a good way. It is chock full of insight on both financial statement analysis and valuation. Penman has developed a comprehensive, systematic approach to both (much of it based on the work of Jim Ohlson for you accounting geeks out there). Even if you don’t follow his complete system there is much to be gleaned.

Security Analysis and Business Valuation on Wall Street – Jeffrey Hooke

As the title states this is a guide to how analysis and valuation is performed out there in the “real world”. Hooke outlines the process that goes into creating the typical analyst report you will see from the investment banks. He is aware of the limitations of the typical sell side analyst method, but acknowledges they drive much of the market thinking. The most valuable parts of the book teach you how to deal with companies that are not easily valued with basic valuation approaches- money losing companies, natural resource companies etc.

Quality of Earnings – Thornton O’glove

One of the first books teaching investors to challenge the accounting in financial statements. This is critical knowledge for determining a more realistic economic value of a company as well as guarding against fraudulent companies and management manipulation.

Something Special

You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits – Joel Greenblatt

A great book on investing in special situations like spinoffs and post-bankruptcy equities with many interesting case studies. With so many professional investors now looking at these situations I am not sure it is quite as lucrative of an area as it was even fifteen years ago, but there do seem to be these opportunities every once in a while.