The Art of Value Investing

Says Bill Ackman of Pershing Square Capital Management about The Art of Value Investing:

"I learned the investment business largely from the work and thinking of other investors. The Art of Value Investing is a thoughtfully organized compilation of some of the best investment insights I have ever read. Read this book with care. It will be one of the highest-return investments you will ever make."

Based on interviews with the world's most-successful value investors, The Art of Value Investing offers a comprehensive set of answers to the questions every equity money manager should have thought through clearly before holding himself or herself out as a worthy steward of other people's money. What market inefficiencies will I try to exploit? How will I generate ideas? What will be my geographic focus? What analytical edge will I hope to have? What valuation methodologies will I use? What time horizon will I typically employ? How many stocks will I own? How specifically will I decide to buy or sell? Will I hedge, and how? How will I keep my emotions from getting the best of me?

Who should read The Art of Value Investing? It is as vital a resource for the just starting out investor as for the sophisticated professional one. The former will find a comprehensive guidebook for defining a sound investment strategy from A-to-Z; the latter will find all aspects of his or her existing practice challenged or reconfirmed by the provocative thinking of their most-successful peers. It also is a must read for any investor – institutional or individual – charged with choosing the best managers for the money they are allocating to equities. Choosing the right managers requires knowing all the right questions to ask as well as the answers worthy of respect and attention – both of which are delivered in The Art of Value Investing.

Introduction 1

Chapter 1 “All Sensible Investing Is Value Investing” 5

What It Means to Be a Value Investor 6

Does Quality Matter? 13

The Value of Growth 19

The Value Mindset 25

Part One Field of Play 33

Chapter 2 Circle of Competence 35

The Right Size 36

Industry Preference 45

Where in the World? 57

Chapter 3 Deficient Market Hypothesis 65

The Human Element 66

It’s a Matter of Time 74

Chapter 4 Fertile Ground 81

In Search of Uncertainty 82

Special Situations 86

Operating Turnarounds 93

Chapter 5 Generating Ideas 99

Behind the Screen 99

Follow the Lead 106

Reliable Sources 111

Part Two Building the Case 115

Chapter 6 Cutting Through the Noise 117

Second-Level Thinking 118

Macro versus Micro 120

Business First 127

What Quality Means 131

Crunching the Numbers 135

What Could Go Wrong? 139

From the Top 147

How Important Is Management? 147

Handicapping the Jockeys 149

Red Flags 157

Catalysts 164

Getting It Done 169

Organizing Principles 174

Chapter 7 Getting to Yes 183

Cash (Flow) Is King 184

Multiple Angles 190

The Informed Buyer 192

Model Behavior 194

Playing the Odds 199

Theories of Relativity 202

Pulling the Trigger 206

Part Three Active Management 213

Chapter 8 The Portfolio 215

Concentration versus Diversification 215

The Size That Fits 222

Cognizance of Correlation 227

Chapter 9 Playing the Hand 233

Trading Mentality 233

Dealing with Adversity 239

Taking a Stand 248

Attracting Activists’ Attention 251

Chapter 10 Guarding Against Risk 257

Margin of Safety 258

Building a Position 261

Cash Management 263

Midas Touch 267

Hedging Bets 268

To Short or Not to Short? 268

Value Destroyers 271

Portfolio Hedging 276

Is Shorting Inherently Evil? 277

Chapter 11 Making the Sale 281

Why to Sell 282

Selling by the Numbers 286

Getting the Timing Right 290

Sale Process 293

Part four Of Sound Mind 297

Chapter 12 Of Sound Mind 299

Competitive Spirit 300

Independent Thought 303

Perpetual Student 306

To Err Is Human 309

Be Ever So Humble 312

The Final Word 315

About the Authors 317

Index 319

“John Heins and Whitney Tilson, co-founders of the Value Investor Insight newsletter, have done a thorough job of explaining how to look for stocks that are trading at significant discounts to what they are worth — the concept known as the value style of investing.…the authors present a clear framework for ferreting out undervalued companies.”
—The New York Times

“[The Art of Value Investing] is packed with invaluable insights and is relevant to both the novice and the experienced investor. …This book provides a valuable contribution to the industry literature on value investing. It is well written, well organized, and quite enjoyable. The Art of Value Investing should be read by all investors who are seriously interested in enhancing their understanding of this important field.”
—CFA Institute Book Review

JOHN HEINS is the cofounder and President of Value Investor Media, Inc., a media company founded in 2004 to provide investing ideas and insight to sophisticated professional and individual investors, and Editor-in-Chief of Value Investor Insight and SuperInvestor Insight. Previously, Mr. Heins was President and Chief Executive Officer of Gruner + Jahr USA Publishing, Bertelsmann AG's U.S. magazine subsidiary, Senior Vice President and General Manager of America Online's Personal Finance business, and a reporter and staff writer for Forbes magazine. He graduated magna cum laude from the University of Pennsylvania's Wharton School with a bachelor's degree in Economics and also holds an MBA from Stanford University's Graduate School of Business.

WHITNEY TILSON is the cofounder of hedge funds Kase Capital and T2 Partners, the Tilson Mutual Funds, Value Investor Media, Inc. and the Value Investing Congress. He coauthored the book, More Mortgage Meltdown: 6 Ways to Profit in These Bad Times, is a CNBC Contributor, has written for Forbes, the Financial Times, Kiplinger's, the Motley Fool and TheStreet.com, and was one of the authors of Poor Charlie's Almanack, the definitive book on Berkshire Hathaway Vice Chairman Charlie Munger. He was one of five investors included in SmartMoney's 2006 "Power 30," and was named by Institutional Investor in 2007 as one of "20 Rising Stars." Previously, Mr. Tilson was a founding member of Teach for America and the Initiative for a Competitive Inner City, and was a consultant at The Boston Consulting Group. He received an MBA with High Distinction from the Harvard Business School and graduated magna cum laude from Harvard College with a bachelor's degree in Government.

You know what value investing is: it's how Warren Buffett made his billions. Perhaps you're even familiar with value investing terminology, such as margin of safety and intrinsic value. And maybe you've already found success with value investing and know from experience that it's the most reliable way to achieve market-beating returns and accumulate significant wealth. Congratulations!

Whether you're a complete beginner in need of an A-to-Z value investing primer, an experienced investor looking to expand and fine-tune your repertoire of value investing skills, or an individual or institutional investor looking to identify the best money managers, this book is for you. In writing it, authors John Heins and Whitney Tilson have achieved a remarkable feat: They've brought together the collective wisdom of today's most successful value investors and distilled it into a series of actionable lessons you can put into practice right away.

Based on extensive interviews with market-beating money managers, superstar hedge fund managers and mutual fund heroes, and featuring many real-world examples, The Art of Value Investing expertly describes:

• The philosophies behind today's most successful value investing strategies
• The key skills top market-beaters think of as absolutely indispensable to success
• The types of situations and market inefficiencies value investor legends look to exploit
• How top value investors generate new investing ideas
• How to research companies, with insights on company valuation and deciding what and when to buy
• How the best value investors maintain mental and emotional discipline
• How value investing superstars learn from their mistakes and the key lessons they've learned
• Portfolio management techniques, including guidance on diversification, risk management, position-sizing, and more

But The Art of Value Investing does much more than impart information. It was designed to help you develop an approach to value investing that's just right for you.

Sit ten or a dozen of the most successful practitioners down in a room and you're likely to get as many opinions on which value investment flavor is best. While they're certain to agree on the core principles, when it comes to particulars, such as large-cap versus small-cap, telecom versus transportation, East versus West, onsite research versus pure data analysis, there's bound to be disagreement—some of it vehement.

The trick is to find the combination of tools, techniques and strategies that is right for you, addresses your specific financial goals, and best fits your personality and emotional makeup. And that's where The Art of Value Investing comes in.

Giving you unparalleled access to the thinking of the brightest and best of the value investing world, The Art of Value Investing can save you years of frustrating (and expensive) trial-and-error. With the helping hand of value investing luminaries such as Julian Robertson, Seth Klarman, David Einhorn, Joel Greenblatt, Mason Hawkins, Jean-Marie Eveillard, Bill Ackman and Bill Nygren, to name a few, you'll discover your preferred strategies for exploiting market inefficiencies, researching and valuing companies, identifying industry sectors and geographic regions in which to invest, timing buys and sells, managing your emotions, and much more.

Praise for The Art of Value Investing

"I learned the investment business largely from the work and thinking of other investors. The Art of Value Investing is a thoughtfully organized compilation of some of the best investment insights I have ever read. Read this book with care. It will be one of the highest-return investments you will ever make."
—William A. Ackman, founder, Pershing Square Capital Management

"An outstanding addition to the volumes written on value investing. Not only do the authors offer their own valuable insights but they have provided in one publication invaluable insights from some of the most accomplished professionals in the investment business. I would call this publication a must-read for any serious investor."
—Leon G. Cooperman, founder, Chairman and CEO, Omega Advisors

"In this treasure chest of quotes by proven money managers, it is the love of the game and the joy of meeting the challenges put forth by a very demanding business that captivated me. The lessons are like scars and they are revealed here firsthand."
—Jeff Ubben, founder, ValueAct Capital

"A must-read for any serious investor. John and Whitney have produced a veritable bible that reveals the secrets of some of the greatest contemporary investment minds in the world."
—Jonathon S. Jacobson, founder and CIO, Highfields Capital Management

"There's hard-won wisdom on every page from a who's who of value investors. If you want to understand the thinking behind their long-term success, The Art of Value Investing will be valuable reading."
—David Herro, Harris Associates

"John Heins and Whitney Tilson have put together an incredibly well-compiled set of thoughts, many from my favorite peers, on every important topic for investors."
—Staley Cates, President and CIO, Southeastern Asset Management

"I often judge a book by how many times I get my highlighter out and dog-ear pages. On that metric, this book is wonderful—simply packed with insight from some of the best long-term investors. Everyone will learn something from this book."
—James Montier, GMO