Book Review: The Value Investors
The Value Investors: Lessons from the World’s Top Fund Managers. 2012. Ronald W. Chan.
Ronald W. Chan explores the strategies of 12 highly successful investors from around the globe in The Value Investors: Lessons from the World’s Top Fund Managers. Chan is the founder of Chartwell Capital Limited, an investment management company based in Hong Kong. He is a frequent commentator and contributor in the financial press and the author of Behind the Berkshire Hathaway Curtain: Lessons from Warren Buffett’s Top Business Leaders.
The foreword was written by Bruce Greenwald, in my opinion the ideal person to introduce Chan’s book given that Greenwald co-authored a leading book on value styles. Greenwald points out that other memoirs on investment styles and investors present “a unique perspective on the character traits necessary for investment success. . . . Unfortunately, an investor with all these qualities is a rare bird indeed.” Chan’s book, however, recognizes that a variety of approaches can be effective within the value style that constitutes his consistent theme. He describes value investors of different generations, geographies, individual characters, and backgrounds and illuminates the success of each particular value style in light of many of these differences.
Chan’s 12 outstanding investors are distributed across three main geographical regions: the United States (4), Europe (3), and Asia (5). To me, the geographical aspect is a very significant contribution of this book. Having researched value styles myself, I have noticed how U.S.-centric much of the literature on value styles is. (See, for example, Value Investing: From Graham to Buffett and Beyond, Investment Titans, and Investment Gurus.)
Chapters 1–4 cover four U.S. value investors: Walter Schloss of Walter & Edwin Schloss Associates; Irving Kahn of Kahn Brothers Group (no relation to Judd Kahn, who has co-authored several value-oriented books with Bruce Greenwald); Thomas Kahn, also of Kahn Brothers Group; and William Browne of Tweedy, Browne Company.
Walter Schloss was born in New York City and passed away at the age of 95 in February 2012. He grew up strongly affected by the Depression (his father lost his job, and so Schloss never attended university) and the trauma of World War II. Beginning his investment career as a runner, he took Benjamin Graham’s night-school course at Columbia University and was eventually hired by Graham. He will probably be remembered as a strong margin-of-safety advocate, a man of utmost integrity, and a great believer in knowing yourself. He was greatly admired by Warren Buffett.
Originally Tweedy & Company, the firm of William Browne’s father was a brokerage house specializing in illiquid, mainly small-cap stocks. Because this was fertile ground for value investors, Ben Graham was a significant client, and William Browne got to know him quite early in his life. This friendship eventually led to Browne’s complete conversion to value beliefs and to his joining the firm, which by then had switched to asset management. In addition to developing an extensive quantitative analysis approach, Browne placed a strong emphasis on qualitative analysis of management, the business, and the environment.
Chapters 5–7 cover three European investors: Jean-Marie Eveillard of First Eagle Funds, Francisco García Paramés of Bestinver Asset Management, and Anthony Nutt of Jupiter Asset Management.
Jean-Marie Eveillard spent 17 frustrating years following instructions from his employer to concentrate on growth investing before persuading his boss to switch to value investing. He was bored and believed that growth did not suit his style. He heard about value investing from friends who also recommended he read Ben Graham and David Dodd’s Security Analysis. He went on to read Graham’s The Intelligent Investor, which he realized was his epiphany.
Eveillard’s childhood influenced his investment beliefs. Born in west-central France in 1940, he remembers the German occupation, bombardments, and his family’s forced moves. He acknowledged the growing competitiveness of the value strategy as the world became more efficient in the 1970s, when he came across the writings of Warren Buffett, who looked at not only the numbers but also the long-term prospects and quality of the business, as well as sustainable advantage. Eveillard certainly begins with the numbers and reads annual reports and footnotes, making sure all are comprehensible. He recalls reading Enron Corporation’s footnotes, finding them incomprehensible, and throwing its annual report in the wastebasket.
Anthony Nutt provides great insights into the contrasts between European and U.S. value investing. He notes that the word “value” is seldom used in the United Kingdom; rather, income and dividends are stressed. Nutt points out that although value investing has been made famous by many legendary U.S. investors, it has been around for a long time in the United Kingdom. To call it value is redundant, in his opinion. What else, he asks, is there but seeking value in the first place? As with Eveillard, his early years were influenced by geopolitical uncertainty that led him to look for tangible returns. Moreover, like Eveillard and Buffett, he realized that temptingly high yields arising from high payout ratios are not enough and that one should also seek sufficient return on capital and sustainable cash flow.
In Chapters 8–12, Chan discusses five Asian investors: Mark Mobius of Templeton Emerging Markets Group, Teng Ngiek Lian of Target Asset Management, Shuhei Abe of SPARX Group, V-Nee Yeh of Value Partners Group, and Cheah Cheng Hye, also of Value Partners Group. The Asian section of the book is quite intriguing, and I encourage readers to peruse the whole thing rather than my brief excerpts alone.
With a PhD from MIT and as the author of 11 books, Mark Mobius was very well known and had a background in consumer data research before being picked by John Templeton to manage emerging-market funds based in Hong Kong. In his chapter, Mobius makes the very interesting point that in emerging markets, an investor cannot trust the numbers entirely, owing to the lack of sophisticated and transparent accounting systems. Thus, financial analysis in emerging markets requires far more detailed assessment of management, the business, and the environment than in advanced-economy markets.
Teng Ngiek Lian of Singapore has an accounting background and began investment management at the relatively late age of 46. His accounting experience, which progressed to very senior financial positions, led him increasingly into investment-related activities until he started his own fund management firm. His background and character have trained him to first look for a good business and then determine whether it is a good investment. Although he follows Western-developed value investment strategies, he recognizes the differences in emerging markets: higher volatility, higher growth, political uncertainty, weaker corporate governance, shorter business cycles, and lower liquidity.
Shuhei Abe of Sapporo, Japan, came from an entrepreneurial family, was a top-notch student, learned English on his own, and earned an MBA in the United States before returning to his native country to specialize in Japanese stocks. He adopted value-investing principles in the difficult market of Japan’s “lost decade” (the 1990s) and quickly recognized how Warren Buffett’s refinements of Ben Graham’s methods enabled an astute investor to capitalize on the franchise value of such great companies as Coca-Cola.
The two founding partners of Value Partners Group — V-Nee Yeh (Hong Kong) and Cheah Cheng Hye (Malaysia) — have very different backgrounds and skills but together have formed a phenomenally successful firm. Founded in 1993, Value Partners Group is currently the largest asset management firm in Asia.
From a prominent and respected family in Hong Kong, Yeh studied in the United States, graduating from Columbia Law School with distinguished honors. He gained investment finance experience in a senior position at Lazard Frères before returning home to reorganize his family’s businesses, which he did quite successfully and profitably. He greatly enjoyed the research, due diligence, and careful valuation he was doing — without even knowing what value investing was until he met Cheah Cheng Hye. Hye came from a very poor Malaysian family that he had to support from a very early age. He persisted and eventually received a scholarship to an excellent secondary school, where he discovered a talent for research and writing. Hye’s considerable success in financial reporting at the Wall Street Journal Asia earned him a job in investment management, which soon led to his own firm. Hye approached Yeh, who shared his views on investing, and the result was Value Partners, with Hye doing the investment analysis and stock picking and Yeh doing the fund-raising. Their business principles (called “My Promise”) would be an inspiration to any firm:
Be honest and straightforward; put my pride, not my ego, into the job; always strive for self-improvement; put clients’ interests first; be fair and responsible to shareholders; keep our workplace free from office politics; keep secrets, maintain confidentiality; uphold our reputation for creative high-value solutions; emphasize a user-friendly, cost-effective approach; focus on concrete results, not excessive procedure.
My overall conclusion is that this book provides a valuable contribution to the literature on global value styles. Well researched and well written, in addition to being an enjoyable read, The Value Investors is a must for anyone even remotely interested in investment management styles.
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