Applied value investing the practical application pdf

Investment is most intelligent when it is most businesslike. Buffett both studied under and worked for the late Benjamin Graham, the founder of what has come to be known as value investing. This book takes a different approach; rather than introducing a new variation on the value investing theme, it adopts the modern Graham and Dodd approach and applies it in a variety of unique and practical ways.

Explain how macro-related insights can be used in a Graham and Dodd context. Show how the basic concepts of Graham and Dodd valuation can be applied to the emerging area of catastrophe-based alternative investments. Incorporate the practice of valuation into an integrated business framework that can be used to either assess or manage a franchise which is a firm that is operating with a sustainable competitive advantage.

In short, this book extends the modern Graham and Dodd approach in a number of ways that, it is hoped, will prove useful to current and future practitioners of the discipline. The book is structured with seven chapters and a Conclusion that summarizes an applied value investing approach and clarifies several practical aspects of it for implementation purposes.

The first chapter reviews the basic concepts of net asset valuation and earnings power valuation, the first two levels of Graham and Dodd—based valuation, and it introduces the base-case value profile via a case study of an actual equity investment. This case is the first of four relatively highprofile valuation case studies, and thus it is important to note that I have no special information on any of those valuations other than what is publicly available. While growth-based margin of safety acquisitions can be incredibly successful, as the GEICO case fairly dramatically demonstrates, the intangible nature of growth carries with it substantial risk.

This risk is illustrated in Chapter 4 through another Buffett acquisition, this one being the acquisition of the General Reinsurance Corporation Gen Re. The fifth chapter pertains to a topic that is not frequently addressed from a Graham and Dodd perspective: macro-based analysis. Relatively few people would disagree with the statement that two of the most successful investors of the late twentieth century were Warren Buffett and George Soros.

Despite the long-term investment success that both of these men have in common, the approaches they use are vastly different: Buffett uses a bottom-up approach that is rooted in the Graham and Dodd tradition, whereas Soros uses a seemingly eclectic top-down or macro-based approach. During a question-and-answer session at the conference, I asked a presenter about integrating macro-based analysis and value investing.

That reply was obviously said in jest, but it did highlight the fundamental differences between the two approaches. Those differences, however, need not be considered insurmountable. Furthermore, there is much that practitioners and researchers of each approach could learn from the other. Chapter 6 changes gears somewhat by addressing catastrophe-based alternative investments, which are relatively new instruments that have grown in popularity in recent years.

This chapter extends the basic concepts of Graham and Dodd to the field of super catastrophe valuation by way of the Pepsi Play for a Billion sweepstakes case. This case study pertains to the pricing of a super catastrophe—based, insurance policy—like alternative investment that was underwritten by a Berkshire Hathaway subsidiary in The chapter ends with overview commentary on the somewhat related field of catastrophe bond valuation.

Furthermore, many businesspeople do not think like investors. This divergence even applies to academia in that finance, management, and strategy professors tend to approach their subjects and their research very differently, often with very little overlap across disciplines. Finally, in the Conclusion, I highlight some of the key lessons of the book, and I also provide some practical suggestions for implementing an applied value investing approach.

The Conclusion is followed by a description of additional information sources that could be referred to by those interested in exploring the Graham and Dodd approach further. I am grateful to the editors of each of these publications for allowing me to develop and expand the research that they published for a broader audience. The Graham and Dodd approach to investing is inherently practical, as its track record since it was first introduced vividly illustrates. For example, if one were to look for Graham and Dodd—based published research, one would essentially find material that empirically shows that the approach does, in fact, work, along with applied case studies published by me and my coauthors.

If this book helps to inspire such research, while at the same time assisting Graham and Dodd—based practitioners, it will have achieved its objectives. Several years later, in , Hurricane Andrew struck southern Florida, and the devastation that this storm caused convinced me that the insurance industry would soon be undergoing substantial changes. To better understand those changes, I began a relatively intense research program on a variety of economic and financial topics.

Therefore, when the first catastrophe bond issue emerged in the mid-nineties, it did not come as a surprise to me; on the contrary, I sensed that this type of vehicle would grow in popularity, so I began studying derivatives. Me being me, after a period of study, I decided to try my hand at trading, and I did very, very well at it, even though trading was not my full-time job: I did all of the analysis and tactical decision making after hours.

This obviously took a substantial amount of time, but I am a natural workaholic with a very, very understanding spouse, so I was able to manage the work flow rather well. While I did not blow out as a result of the contagious volatility, my portfolio did experience a substantial decline.

More significantly, however, I did not understand why the decline had occurred: according to the models that I was using at the time, such a loss was just not supposed to happen at least not in my hopefully long lifetime , and yet it did happen, and it happened to me. After the Asian contagion, I stopped trading so that I could figure out what exactly had happened and why I had missed it so completely.

I knew that the economy was not new, but I did not know why so many other people thought that it was. Yes, the Internet itself was new, and yes, it had a great deal of potential for example, were it not for the Internet, it is very doubtful that I would have ever written this book or the papers that preceded it , but the telephone had been new a hundred years before and it had not ushered in a new economy, so why would the Internet?

And then something else happened: Warren Buffett acquired the firm that I was working for at the time, Gen Re. At that time, a number of my friends asked me to explain the rationale for this acquisition to them, but I could not make sense of it either. That simply was not acceptable to me, so I decided to engage in a different kind of research program. For example: I bought and studied everything I could find on Benjamin Graham and value investing.

I began to study Austrian economics, which is a school of economics that is often ignored by mainstream economists. I reasoned that, as mainstream economics and economists are frequently wrong—many times spectacularly so—perhaps an alternative school would provide a greater level of practical insight. In retrospect, that was an incredibly good decision. The letters are very candid documents, and they give great advice on what to do, but they do not tell you how to do it.

This is consistent with the structure of many books on investing in general, meaning that they give great advice on what to do, but they really do not explain how, exactly, to do it. Therefore, to get a better understanding of the nuts and bolts of the Graham and Dodd approach, I decided to attend the executive version of the value investing course that is offered at Columbia University every year.

The firm that I was working for at the time would not pay the tuition for the course, so I paid for it myself and attended the sessions on my vacation again, I have a very understanding spouse. I began to apply the approach immediately, and the first case I analyzed was the Gen Re acquisition. Significantly, I later showed the valuation to others who were familiar with the deal, and they were also impressed with it.

That valuation is the subject of Chapter 4 of this book. A number of articles have, appropriately, been published on that acquisition, and it is also the subject of a popular University of Virginia case study. That valuation is the subject of Chapter 3. Around this time, I was approached to teach at the University of Connecticut. After preliminary discussions, it was agreed that I would teach two MBA courses, one of which would be on value investing.

As part of the course, I wanted to bring in practicing value investors as guest speakers, and I was very fortunate to secure two of the best: Mario Gabelli, the legendary mutual fund manager, and Robert Wyckoff of Tweedy, Browne Company. I left regular teaching after a couple of years to take a position in the consulting industry. As luck would have it, my first consulting engagement entailed a substantial valuation, which helped to make the transition to consulting rather seamless for me.

Publishing papers can be an important part of a consulting career, so I started to publish the value-based research that I had produced, beginning with my valuation of the Pepsi Play for a Billion case, which you will find as part of Chapter 6. Ironically, that was a case that I had never intended to write. I got the idea of writing an insurance-based case study while I was preparing to teach a class on insurance pricing theory, which can be a somewhat dry subject for students and professor alike.

I had priced that risk transfer in the past, and the price that I came up with closely tracked with the premium range that was purportedly charged. I did this, ironically enough, on a bet. I thought that case would be a great way to spruce up my class, but I could not find either my pricing analysis or the materials that I used to formulate it. That was odd because I normally do not misplace things like that although I tend to misplace just about everything else.

I tried to re-create my valuation, but without the source materials that I had used, I was having considerable trouble doing so. The Pepsi case just happened to be in the news at the time, so I decided to use it instead, and the rest, as they say, is history. Fortunately, my published papers were very well received, but it did take a while for a number of them to make their way through the academic review process.

Significantly, no book like it had yet been published, but if someone had published it, I would certainly have bought it. Therefore, I felt hoped really that demand for the book would be reasonably good, which is a fairly good reason to pursue a book project. However, I had absolutely no idea how to go about publishing a book, so I pretty much put the project out of my mind for the time being.

Robert recommended that I write a book, and he explained exactly how to go about doing so. Founded in February by Andrew Atkeson, Humberto Merino-Hernandez, and myself, the Benjamin Graham Value Investing Program gives undergraduate economics students an exceptional education in finance and investing. With a track record of outstanding course evaluations, program instructors — the three founders plus Simon Board, the first holder of the Benjamin Graham Centennial Chair — teach students to understand the fundamentals of value investing from both a technical and a historic perspective, and to develop the positive behaviors and mindset that will enable them to flourish as they begin their careers.

A key strength of our program is its intensive focus on real-world experience and our collaboration with leading firms and practitioners. These range from program alumni to highly successful investors who have much practical insight to share with our students.

Students who complete the concentration will be well-prepared for a wide range of careers in which they will need to assess investment opportunities, as evidenced by the superior job placements of recent graduates.

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Read e-book online Hedge fund investing: a practical approach to understanding PDF Hedge money are a vital a part of the choice making an investment area, and should stay so for the foreseeable destiny. In addition to its cutting-edge applications of value investing principles, Applied Value Investing sets itself apart by drawing on material published in leading academic journals to form the foundation of its presentation.

However, value investing is inherently practical, and this comprehensive resource provides helpful guidance for successfully implementing value investing strategies in the real world. To profit like the masters you have to think like them. Applied Value Investing can open new doors to value creating opportunities. Download this book.

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