Preface
I have a pet theory about Ben Graham—the father of value investing—and the lasting impact of his books on generation after generation of investors. Certainly, the logic of his thinking is both compelling and convincing, but I think it’s the emotional impact that has made his ideas particularly widespread. Emotional impact is not something one usually expects in a business book.
Reading The Intelligent Investor for the first time gave me a somewhat euphoric feeling—a feeling of insight, of “I can understand this.” Almost immediately, I found the confusing and anxious world of stocks and investing becoming understandable. For many of us, this initial feeling of insight was followed quickly by a secondary feeling of greed, of “I can get rich doing this.” For most, this second feeling passes, and life returns to its normal daily habits. For some, it lasts a lifetime (greetings, Mr. Buffett).
But I think the emotional impact is unmistakable—and its deepest roots are in the appeal of a logical method to those of us with overly rational minds. We have been completely won over by its staunchly logical approach to business and investing.
With Graham’s value approach as their weapon, generations of investors have laid siege to confusing and seemingly chaotic markets. And slowly and grudgingly, previously inscrutable markets and systems have become both understandable and actionable. Graham’s approach has proved to not only be exceedingly profitable but also fascinating. The opportunity to understand the business world as it really exists, outside of our limited perceptions, is as satisfying as the returns. Graham’s thinking offers what physicist and Nobel Laureate Richard Feynman called “the pleasure of finding things out.” Unsurprisingly, value investing tends to attract both the ambitious and Feynman-type “curious characters.”
This book started with a similar emotional reaction. Almost a gut feeling—that at the start of the first global century, confusion and anxiety seem to be growing. I am increasingly struck by the sense of gloom and doom Westerners in particular have about globalization and a changing world. The U.S. is in decline? Globalization will move my job overseas? The global financial system is precariously unstable and will inevitably collapse? The future is one of belt tightening and lowered ambitions? China’s rise fundamentally threatens the West? (How many ways can the word dragon be used in a book title?)
Since returning to the U.S. after a decade in the emerging markets, and particularly following conversations with and readings of macroeconomists, I have been startled by the pervasive sense of anxiety and pessimism. And this mostly Western anxiety is such a stark contrast to the feeling of ambition and excitement I encounter almost everywhere else. If nothing else, this book is intended as a good solid whack at what I believe is an overly fearful and completely false worldview with an almost Hobbesian sense of human limitation. And my baseball bat of choice is a worldview and investment strategy based on Graham’s thinking—rational, value-focused, ambitious, curious, and optimistic.
One of the nice things about being a value investor is that we are occupationally optimistic. We are almost always betting on prices going up. We are also one of the few groups that get excited by recessions (but we generally try to keep quiet about this). And rather than being frustrated by changing times, we both learn and profit from them. Graham’s value concept gives the rational mind an anchor in times of changing markets, companies, and actors. And somehow, surprisingly, occupational optimism leads to real optimism. Somehow, out of this stubbornly rational approach, comes an optimism about business and life—and a deep belief in principles-based capitalism.
For value-obsessed investors, the arrival of a new and chaotic global investment landscape is anything but anxious or depressing. It is truly fascinating. And I suggest that if you are willing to walk out onto this new global terrain, you will re-encounter, as I have, those same original Intelligent Investor feelings. A blast of insight and confidence, of “I can understand this” and “I can get rich doing this.” These are truly thrilling and unique times. Good hunting.
Chapter Descriptions
Chapter 1 introduces some of the opportunities and challenges value investors face in a rapidly changing world. How to deal with fundamentally different economic systems and their increasing impact on developed markets? How to apply Ben Graham’s thinking to such situations? I begin to introduce a framework for investing, making deals, and building wealth in a global age.
Chapters 2 and 3 introduce value point as an extension of and complement to traditional value investment strategies. I reapply Graham’s method to various investment environments and from this generate a series of frameworks and methodologies for global value-based investing.
Chapters 4 and 5 introduce political access as a tool in value-added deal-making. This is about recognizing and taking advantage of the fundamental role of government in many markets, industries, and companies. This view stands in contrast to the traditional value investing view that most often sees government involvement as something that decreases the attractiveness of specific companies or creates additional long-tail risks.
Chapters 6 and 7 discuss the strengths and limitations of reputation and capital in various environments. As new markets emerge and cross-border deals increase in number and size, differences in politico-economic systems, cultures, regulatory structures, and behavioral patterns become more important. Within this, reputation can have a particularly strong effect and can be used to turn these large cross-border inefficiencies—inherent to a colliding world—into returns.
Chapters 8 and 9 extend investing and deal-making to include the use of various businesss capabilities. Capabilities such as brands, technologies, operating systems, and management are continually migrating into developing economies from more advanced economies. Leveraging such capabilities into deal-making can be particularly effective in many situations and can create significant advantages for the investor.
Chapter 10 pulls everything together and shows how all the introduced tools (political access, reputable capital, capabilities, and management) can be combined into investments in a powerful way. I detail how this approach has been used by private equity firms, multinationals, entrepreneurs, and global tycoons.
Chapter 11 presents various tactics for finding and structuring investments. This includes going from focusing on screening investments to more actively networking. It includes expanding traditional concerns about competitive advantage to concerns about defensibility. And it focuses on simplifying deal-making in complicated locations to the primary goal of capturing companies of the highest possible quality at the lowest possible price.
Chapter 12 details a global investment playbook for the next several years. I show where I believe the most attractive opportunities are and the strategies to capture them.
Finally, Chapter 13 looks ahead to the next twenty years. We are only at the beginning of global investing. Investors and deal-makers from around the world are beginning to meet, but the strategies are still evolving. This chapter looks at the various investors and market players and assesses their various approaches going forward.