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Tuesday, December 11, 2007

Buy out-of-favor quality stocks, be patient, get rich - the case for value investing

The CNNMoney.com article presents an interview with Christopher Browner, one of the five managing directors of Tweedy Browne, and author of The Little Book of Value Investing. A staunch devotee of value investing and a follower of Benjamin Graham and Warren Buffett, Browne favors buying out-of-favor stocks on the cheap. As per him, value investing has produced better results than growth or any other stock investing strategies. As per him,

There are plenty of academic studies confirming that if you buy stocks that are undervalued by simple metrics like low price/earnings and price/book ratios and you are patient, you'll beat other strategies in the long run.
.......
Most people want to own sexy, fast-growing stocks. But as Buffett says, you pay a dear price for a cheery consensus. As a value investor, you hold your nose sometimes and buy a boring stock because it's cheap. Then you have to be patient.

As per Browne, even though it is possible that cheap stocks can stay cheap but generally if investors are patient, they are likely to be rewarded. Despite the ongoing subprime problems of financial stocks, Browne is not averse to and owns financials.

Yes, but ours have very limited subprime exposure: PNC Financial, U.S. Bancorp and Lloyds. The first yields nearly 4%, the second over 5%. Lloyds is takeover-able. Once people realize there's not a warehouse full of subprime out back, the stocks will rebound.

Although Browne shies away from momentum stocks, he is not averse to buying growth stocks if they are selling at a reasonable price but he also recommends have a good amount of cash.

I always keep two years' worth of expenses in cash. No matter what happens in the markets, I'll always have food.

I have read Browne’s The Little Book of Value Investing. It's a small book, a decent read and makes a good case for value investing. However, I wish he had gone into more detail on how to analyze the fundamentals, how to compute the intrinsic value of stock, margin of safety, etc. The book seems to be geared more as an introduction to value investing.

For complete article, see:

CNNMoney.com: The prince of value

posted by Ruby @ 6:21 AM

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