Book Review: Strategic Value Investing

Categories: Equity Investments, Portfolio Management
Strategic Value Investing: Practical Techniques of Leading Value Investors

Strategic Value Investing: Practical Techniques of Leading Value Investors. 2013. Stephen M. Horan, CFA, CIPM; Robert R. Johnson, CFA; and Thomas R. Robinson, CFA.

Reviewed by Barry M. Gillman, CFA

Strategic Value Investing: Practical Techniques of Leading Value Investors aims to provide a broad perspective on the spectrum of investment disciplines that can be grouped under the value banner. With backgrounds in academia and professional investment management and as CFA charterholders, the three authors’ combination of experience and interests provides both a rationale and a solid underpinning for the book. Coming from such strong, fundamental backgrounds and with a self-acknowledged bias in favor of the value style, the authors aim to create an “all you ever needed to know about value investing” volume. This book is for the serious student of investing, with enough charts, tables, and graphs to satisfy the numerically inclined and a writing style that is straightforward and (relatively) free of jargon.

Section 1 provides an overview, appropriate for a book with “strategic” in its title. In this context, strategic covers a wide range of value-based investment methodologies. That breadth is one of the book’s strengths, in that virtually every investing approach that can be encompassed in the word value is included and described in thorough detail. In practice, however, most professional value investors are much more focused and may reject at least certain aspects of some disciplines described by the authors. For instance, top-down macro analysis receives significant attention (e.g., in Chapter 4, “Strategic Selection”), but many value investors are pure bottom-up stock pickers who reject any reliance on macro analysis.

With liberal use of quotes and anecdotes from Warren Buffett and other luminaries, the authors set out their basic principles, including the importance of behavioral issues. Interestingly, they address the behavioral topics in a chapter titled “Barriers to Successful Investing,” even though many value investors regard behavioral errors (by others, of course) as a key opportunity for, rather than a barrier to, successful investing.

Section 2 will be a favorite of the analytically inclined, with its careful and detail-rich descriptions of the various models that are useful to the value-minded investor. To be fair, many of these models are not designed exclusively for value investing. Dividend discount, free cash flow, and residual income models are all part of the basic fundamental analysis toolkit. Nevertheless, Section 2 is a useful reference section.

The final section ranges more broadly, with descriptions of the approaches of numerous value “gurus” as well as comments on methods that test the boundaries of the definition of value, such as technical analysis. This treatment is consistent with the authors’ overall objective — namely, to provide an encyclopedic “soup to nuts” overview of value investing in its broadest sense. The inspiration may be Buffett, but the reading experience is more like “buffet.” Readers should pick and choose from the approaches presented because gorging on all of them at once may result in financial indigestion. The authors make it clear that they leave it to readers to make those choices. A key challenge for successful investors is deciding which techniques are philosophically and practically most appropriate for their own purposes.

Despite their commendably broad perspective, the authors devote little attention to a noteworthy aspect of today’s value investing: the world outside the United States. Although the history of value investing has been predominantly a US story, many prominent value investors, including some featured in Chapter 12’s “most acclaimed” list, have succeeded with global approaches. It can be argued that value opportunities are greater outside the United States, in markets where prices may be less efficient. The globalization of both opportunity and the value-investing community is a topic that could profitably be addressed in the next edition.

Some years ago, noted value investor Charles Brandes (featured in Chapter 12) was addressing a group of financial advisers on how to be a value investor. “You make this sound very simple. Couldn’t we just do this ourselves?” asked one adviser. “Of course,” Brandes replied, “if you’re prepared to put in the time to do the research.” “How much time is that?” asked the adviser. “Not much. No more than 40 to 60 hours a week,” responded Brandes. Admittedly, his goal was to turn the group into paying clients, but his point — that doing your homework as a value investor is a full-time job — remains valid.

Those who make their living as value investors have presumably already selected their disciplines from those covered in Strategic Value Investing. They may find the book interesting as background, but the most receptive audience is likely to be “serious amateurs” — individuals who are prepared to put in the effort to devise their own personal investment disciplines. Candidates in the CFA Program may also find the book helpful as supplemental reading — if they have any time left in their day. Finally, for those interested in the financial markets but not committed to the rigors of studying for the CFA exams, Strategic Value Investing offers a useful, concise, and practical guide and reference work.

More book reviews are available on the CFA Institute website or in the Financial Analysts Journal.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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3 comments on “Book Review: Strategic Value Investing

  1. Benjamin Graham – also known as The Dean of Wall Street – was a scholar and financial analyst who mentored legendary investors such as Warren Buffett, William J. Ruane, Irving Kahn and Walter J. Schloss.

    Warren Buffett once gave a speech at Columbia Business School explaining how Graham’s record of creating exceptional investors (such as Buffett himself) is unquestionable, and how Graham’s principles are everlasting. The speech is now known as “The Superinvestors of Graham-and-Doddsville”.

    Graham’s first recommended strategy – for novice investors – was to invest in Index stocks.
    For more serious investors, Graham recommended three different categories of stocks – Defensive, Enterprising and NCAV – and 17 qualitative and quantitative rules for identifying them.
    For professional investors, Graham described various special situations or “workouts”.

    The first requires almost no analysis, and is easily accomplished today with a good S&P500 Index fund.
    The last requires more than the average level of ability and experience. Such stocks are also not amenable to impartial algorithmic analysis, and require a case-specific approach.

    But Defensive, Enterprising and NCAV stocks can be reliably detected by today’s data-mining software, and offer a great avenue for accurate automated analysis and profitable investment.

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