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VALUE INVESTING TODAY FM_Brandes_141738-9 8/14/03 2:51 PM Page i This page intentionally left blank. VALUE INVESTING TODAY Charles H. Brandes Third Edition McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto FM_Brandes_141738-9 8/14/03 2:51 PM Page iii America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. 0-07-143628-6 The material in this eBook also appears in the print version of this title: 0-07-141738-9 All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. 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Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inac- curacy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of lia- bility shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. DOI: 10.1036/0071436286 ebook_copyright 6x9.qxd 10/21/03 10:28 AM Page 1 Copyright © 2004 by Charles H. Brandes. All rights reserved. Manufactured in the United States of To L. F. B. FM_Brandes_141738-9 8/14/03 2:51 PM Page v This page intentionally left blank. Contents Preface ix Introduction xi Part 1. What Is Value Investing and Why It Makes Dollars and Sense 1 1 What Is “Value Investing”? 3 2 Behavioral Biases: Why Value Investing Works 17 3 The Value Pedigree and the Rewards of Value Investing 31 Part 2. How to Find Value Companies 47 4 Characteristics of Value 49 5 Narrowing Your Focus 61 6 Gathering Company Information 71 7 Corporate Governance and the Value Investor 79 Part 3. Learning to Think Globally 95 8 Why Go Overseas? 97 9 How to Invest in Companies Worldwide 119 10 Unique Aspects of Global Investing139 Part 4. Value Investing and You 157 11 Managing Risks and Your Value Portfolio 159 12 Are Stocks an Intelligent Investment? 173 vii FM_Brandes_141738-9 8/14/03 2:51 PM Page vii For more information about this title, click here. Copyright 2004 by Charles H. Brandes. Click Here for Terms of Use. 13 Staying the Course 185 14 Above All, Be Patient 203 Epilogue 207 Index 209 viii C ONTENTS FM_Brandes_141738-9 8/14/03 2:51 PM Page viii Preface environment also has changed quite a bit from when the second edition was published in 1998. From advances in technology, medicine, and communi- cation to broader adoption of free enterprise practices and free trade agree- ments, today’s world reflects unprecedented opportunity—and unique risks. Yet through all the changes, I believe the essential principles of suc- cessful investing endure. Updated with new chapters, sections, and examples, this third edition of Value Investing Today seeks to demonstrate how the combination of rational fundamental analysis and irrational stock market prices can create opportunity for the diligent value investor. Throughout this book, I frequently cite the philosophy and writings of Benjamin Graham. With David Dodd, Graham wrote the cornerstone book in the canon of investment publications, Security Analysis. Graham also wrote The Intelligent Investor, a book Warren Buffett called “the best book about investing ever written.” 1 I had the privilege to meet and learn from Graham, a man many consider to be the father of security analysis and value investing. I am greatly indebted to Benjamin Graham, my mentor. His basic principles formed the solid foundations for my worldwide invest- ment success. For help in the preparation of this book, I share my deep appreciation with my colleagues at Brandes Investment Partners. With the dedication and hard work of the professionals with whom I work on a daily basis, we have built a respected investment management firm. This book was written for investors who understand that the most pre- cious things in life have to be earned, those who know that quick fixes often ix “I ntelligent investing.” In many ways, the global investment landscape is far different than it was in 1989 when I wrote the first edition of this book. Today’s FM_Brandes_141738-9 8/14/03 2:51 PM Page ix Copyright 2004 by Charles H. Brandes. Click Here for Terms of Use. [...]... intentionally left blank VALUE INVESTING TODAY This page intentionally left blank P 1 A R T What Is Value Investing and Why It Makes Dollars and Sense The goal in Part 1 is to define value investing and establish clearly that the combination of rational fundamental analysis and irrational market prices creates opportunity for value investors As such, Part 1 is designed to address value- investing principles,... differences between value and growth investing CHAPTER 1 WHAT IS VALUE INVESTING ? 5 Before I do that, I want to illustrate the margin of safety concept using two charts In Exhibit 1-1, a horizontal line represents a hypothetical company’s intrinsic value the underlying value of the business Later in this book, I’ll explain how this value is derived For now, understand that a company’s intrinsic value does... recognize the true value of the company, its share price will climb toward its intrinsic value As this happens, the margin of safety shrinks When the share price equals or exceeds the company’s intrinsic value, the margin of safety has disappeared and the shares should be sold EXHIBIT 1-1 The Margin of Safety Concept Intrinsic Value Discount to Intrinsic Value Time 6 WHAT IS VALUE INVESTING AND WHY... adopt and maintain a disciplined approach for evaluating business value They are confident of their research and analysis and patient in implementing their strategy CHAPTER 1 WHAT IS VALUE INVESTING ? VALUE AND GROWTH INVESTING 7 Company-specific fundamental research and analysis enable the value investor to assess intrinsic business value, independent of the volatility of short-term stock price movements... discipline and patience to accumulate substantial wealth The book includes fresh evidence reinforcing the benefits of value investing and draws on my more than 30 years in the investment industry Beyond mere facts and figures, this edition of Value Investing Today explores why the value approach to money management has been successful since first introduced by Benjamin Graham in the 1930s I discuss... below the company’s intrinsic value These price fluctuations create opportunities for value investors When the stock price of the company falls sufficiently below the intrinsic value, it creates a buying opportunity The shaded area between the company’s stock price and its discount to intrinsic value illustrates when value investors should consider purchasing the stock Value investors expect that over... financial oceans without so much as a chart to guide them In Value Investing Today, you will find a way to design and implement a conservative and effective investment philosophy It is a philosophy, I emphasize, that has proved to be a successful means of building wealth and preserving capital WHAT TO EXPECT FROM THIS BOOK This edition of Value Investing Today has been updated with lessons designed to protect... something—whether onions or steaks or stocks—is only relevant as it relates to its underlying value This is the essence of value investing, that is, purchasing shares of a company at a price that is substantially lower than the company’s underlying value 3 Copyright 2004 by Charles H Brandes Click Here for Terms of Use 4 WHAT IS VALUE INVESTING AND WHY IT MAKES DOLLARS AND SENSE Some people believe there is no difference... buy an item for pennies on the dollar That shopper is a value investor The “buying straw hats in winter” analogy neatly captures two hallmarks of value investing: evaluating the true worth of an item (whether a hat or a stock) and purchasing it when it’s out of favor and its price is below its true value As mentioned earlier, the soul of value investing is to buy company shares at a discount The heart... I’ve already addressed regarding value investing in this chapter (its focus on individual company analysis to determine intrinsic value, the margin of safety concept, and its success over the long term), it certainly meets Graham’s definition of investing The distinction between investing and speculation is important for a reason Graham cited in 1949 and remains true today: “ in the easy language . What Is Value Investing and Why It Makes Dollars and Sense 1 1 What Is Value Investing ? 3 2 Behavioral Biases: Why Value Investing Works 17 3 The Value. VALUE INVESTING TODAY FM_Brandes_141738-9 8/14/03 2:51 PM Page i This page intentionally left blank. VALUE INVESTING TODAY Charles H.