How To Find Cheap Shares - Ask Benjamin Graham

A couple of days ago I read the transcript of a speech given by Chris Browne (of Tweedy Browne fame) to the Columbia Business School back in 2000.  The speech was called Value Investing and Behavioral Finance (you can find a link to it on the Investing Resources page). While the title is a little dry, the ideas presented were very interesting.

The main message of the speech (for me at least) is that despite overwhelming evidence that value investing produces better results over the long term than other investment styles, very few investors (professionals and non-professionals alike) choose to apply the principles of value investing to their own investments.

He than concludes that one of the reasons could be the herd mentality. It hurts far less to be wrong about an investment if everyone else is wrong as well. It feels worse if you're the only one who gets it wrong.

But the main thing that struck me about the speech was the following description of Benjamin Graham's approach (considered by most to be the father of value investing) to investing:

He found that buying stocks below net current assets (current assets less all liabilities), buying stocks where the earnings yield was greater than the long-term bond yield by a margin of 50% or 100%, and buying stocks at two-thirds of tangible book value when stockholders’ equity was greater than all liabilities, produced better than market returns.

There are 3 very simple approaches to value investing described succinctly in that quote.  Despite the sophisticated and complex investment strategies being taught and practiced today, Graham found that a simple yet disciplined approach worked best.