Christopher Browne authored The Little Book of Value Investing to teach the principles of value investing he used throughout his career. The book discusses finding companies trading at a discount to their intrinsic value and holding them until the price reflects the true worth. It emphasizes buying when others are fearful and prices are low, having a long-term perspective through market fluctuations, and avoiding overpaying for growth. The key is thorough analysis of financials and patience to allow investments to appreciate over time.

1. THE LITTLE BOOK OF VALUE INVESTING
Submitted to - Mr. Ankur Kulshreshtha
Submitted by - Mihir Manchanda (20DM120)

2. About the Author
• Christopher H. Browne (1946 – December 13, 2009) was a
famous value investor and longtime director at the firm
Tweedy, Browne.
• Browne was often known as one of the best value investors
ever.
• He graduated from the University of Pennsylvania in 1969 with
a B.A. in history.
• He started his career at the firm Tweedy, Browne, co-founded
by his father Howard Browne and a favorite brokerage firm
among prominent value investors like Benjamin Graham and
Warren Buffett.
• His success as an investor and shareholder, who held
business management accountable, was renowned.
• In 2006 Browne authored a book, The Little Book of Value
Investing, in order to teach ordinary investors the principles
used throughout his career.

4. CONTENTS

5. Buy stocks on sale - The basic concept of Value Investing
is “Buying a business for far less than it is worth”.
• When prices drop, people buy more of the things they
want and need, except in the stock market. Everyone
seems to think that they should buy stocks that are
rising and sell those that are falling.
• Investors feel disillusioned when the stocks they own or
markets decline significantly. This prevents them from
buying stocks when they go down as they get scared.
• The time to buy stocks is when they are ON SALE and
not when they are high priced because everyone wants
to own them.
Growth investing - There is nothing wrong with owning
great businesses that can grow at fast rates. The fault lies
in the price that investors pay.

6. Two principles of value investing:
• What is a business worth(intrinsic value)
• Don’t lose money (margin of Safety)
Most investors move from extreme pessimism
to jubilant optimism.
Rational value investors sit back and wait for
the market to offer stocks for less than they are
worth and to buy the same stocks back for
more than their worth.
What’s a business worth?

7. • As a company increases it net worth or intrinsic value overtime,
the value of the shares will increase.
• If the price of the stock rises from less than intrinsic value to
intrinsic value over time, you have a win/win.
• Avoid investing in companies that have a lot of debt relative to
their net worth.
• Such companies are far riskier investments than companies
with excess cash.
• Also, such companies cede a measure of control to their
lenders.
• Diversification provides a margin of safety and insurance
against downturn in a few stocks/industries.
Don't Lose Money

8. • (The lower the price, the higher the return) –
Buying Low P/E has worked over the years in all
countries and all industries.
• Earnings yield= inverse of P/E – Use it to compare
to other investments.
• Buying cheap on past earnings for such stable cost
is good.
• Low P/E works in good and bad markets- Wait
longer in bear markets to see returns.
• Best part of Low P/E approach is that it forces you
to buy stocks when cheap and while fear is high.
BUY EARNINGS ON CHEAP.

9. • When: Poor earnings, Poor Industry
conditions. Buy below book value (BV)
per share
• Examples: insurance, banks.
• Use global search approach to uncover
stocks below BV. Sometimes stocks sell
below cash balances.Buying stocks that
sell cheaply when compared to asset
values works.
Low P/B stocks

10. Value in friendly countries
• International investing is easier with
standardized international accounting
(IFRS).
• Example of Roche which setup
Contingent liabilities reserves in
profitable years.
• Then, after reserve was reversed, they
would add it directly to book value and
not have to report as income.

11. • Insider buying can help find companies
whose fortunes could turn for the better
• Insiders could sell for various reasons and
is not as useful, there is only one logical
reason to buy as they think stock price is
going up.
• Insider buying of stocks selling at low P/E
or below asset value is even better
• Insider buying and activist investors can act
as catalyst for stock appreciation.
Buy when insiders buy

12. Falling prices can be a double edged sword
• Markets fall time and again because of political or economic
announcements.
• Similarly, individual stocks and sectors often fall on weaker than expected
earnings or unforeseen events.
• This is the time to be buying, but investors panic and go to cash.
• Risk is more often in the price you pay than the stock itself
• Prices of solid companies with strong balance sheets and earnings
usually recover.
• Today’s worst stocksbecome tomorrow’s best stocks

13. Seek value the modern way
Grahams Net-nets method.
• Net Current Assets = Current Assets (cash + inventory + receivables) – Total
Liabilities
• NCAV = Net current assets / Shares outstanding
• Look at prices paid in mergers and acquisitions to find stocks that are selling at a
significant discount to what they are worth to a knowledgeable buyer.
• Look at other companies in the same industry and compare P/E, P/S and P/B.
• When an acquisition happens, you can take the purchase price to calculate the P/S,
P/E, EBIT, EV, EBITDA etc and keep them for future reference.

14. When a bargain is NOT a bargain?
We have to determine why a company’s shares are cheap and which ones have
little chance of recovery.
WHY DO STOCKS BECOME CHEAP
• Company has taken on too much debt – Future is unknown.
• Company should own twice as much as it owes
• Cyclical stocks (automobiles, large appliances, steel and construction)
Avoid overly leveraged companies.
• Increased competition- If facing strong competition from a more efficient
competitor with lower costs, then move on to the next candidate.
• Avoid companies that are subject to technological obsolescence.
• Stay away from companies whose financial reports are overly
complicated.

15. • Avoid too much debt.
• Ability to pay short term obligations.
• Check long term liabilities versus assets over
years.
• Computer shareholder equity or book value.
• Take both ST and LT debt/shareholder equity.
Compare this number to other companies in
the industry – The less debt means greater
margin of safety.
• Strong balance sheet shows ability to survive
when the going gets tough.
• Calculate Current ratio, Debt to Equity ratio of
different companies for sake of analysis and
comparison
Balance sheet checkup

16. Income statement checkup
• Compare revenues across the years to
see growth
• See revenues from different divisions
to spot problems or spot strength in
core business.
• See COGS as a % of sales.
• Steady gross profit means steady
business and the better it is.
• SGA, the lower this number as % of
sales the better.
• EBIT or operating profit is used bythe
author in valuation ( also Magic
Formula )
• CALCULATE BOTH EPS AND DILUTED
EPS.
• USE EBIT TO DETERMINE EPS AND
DILUTED EPS
• Revenues rising
• Expenses in line with
revenues
• Consistency of profits
• Cyclical earnings
• Growing profits
• Lot of one time charges
• Shares outstanding: Are they
growing,flat or falling?

17. Thorough examination of an investment candidate
• Does company have pricing power?
• What is the outlook for prices?
• Can the company sell more?
• Can company increase profits on existing sales?
• Can the company control expenses?
• If company raises sales, how much of it will fall to the bottom line?
• Can the company be as profitable as it used to be or at least as profitable as competitors?
• Does the company have one-time expenses that will not have to be paid in the future?
• Does the company have unprofitable operations that can be shut?
• How much can the company grow over the next five years?
• How will growth be achieved?
• What will the company do with the excess cash generated by the business? Dividends? New stores/
factories? Acquisitions/ Buy back of shares?
• What does the company expect its competitors to do?
• How does the company compare financially with other companies in the same business?What would the
company be worth if it were sold?Does the company plan to buy back stock?

18. International accounting
• Globally comparable accounting
standards promote transparency,
accountability, and efficiency in
financial markets around the world.
• This enables investors and other
market participants to make informed
economic decisions about
investment opportunities and risks
and improves capital allocation.

19. Currency issues, hedging
• When you invest in foreign
stocks,another aspect to
consider is the currency.
• Currency could fluctuate against
your local currency.
• You could choose to hedge the
currency so that your return is
dependent on the underlying
investment.
Example: If you buy 1000 pounds
worth of a company stock, you
could SELL a currency forward
contract for 1000 pounds.

20. How do you pick a money manager?
• Does the manager have an investment approach and
can explain it to you or any layperson in plain English.
Has he applied it consistently over time?
• How is his Track record? Min 5 years, Prefer 10 years.
• Whose record is it? Is it the manager who is
presenting or his predecessor?
• Do they eat their own cooking?
• Does he own the investment management firm?

21. Why do people not follow value investing principles
• Temperament: Read Behavioral finance.
• Herd instinct. People feel confident when investing with the crowd.
• Reputational and career risk of being a contrarian.
• Periods of under performance when following value investing.
• These are boring investments often.
• People seek instant gratification.
• Value investors are like farmers.
• They plant seeds and wait for the crops to grow.
• Overconfidence is another flaw of investors.
• The investment world equates activity with intelligence.
• Good long term performance results from beating the market in bad times.
• Caution should not be seasonal.
• Maintaining a steady state of mind in good and bad times is the key to successful
long term investing.

22. Stick to your guns
• Value investing requires more effort than brains and a lot of patience.
• Growth and value are joined at the hip.
• Difference is a question of price.
• Track acquisitions P/BV, EV/EBIT.Use this to screen companies that are
selling in the stock market at asignificant discount to what an LBO
group may pay. This is called the”appraisal method” which is 3rd
approach along with P/E and P/B.
• Buying stocks for less than they are worth and selling them as they
approach their true worth is at the heart of value investing.
• Buy below intrinsic value with amargin of safety, exercise patience.
Patience is the hardest part of using the value approach.

23. • To sum up, value investors look to buy stocks below their intrinsic value with
a margin of safety, but it is easier said than done.
• Even when armed with our facts and research, we can still be swayed by
our emotions and the markets.
• So if you ever need some words of advice whenever it feels like you're
going against the tide, Browne writes:'Value investors are more like farmers.
They plant seeds and wait for the crops to grow. If the corn is a little late in
starting because of cold weather, they don't tear up the fields and plant
something else. No, they just sit back and wait patiently for the corn to pop
out of the ground, confident that it will eventually sprout.'
Final Summary