Imagine you're a farmer visiting a local fruit market.
Your aim is to buy the healthiest apple trees for your orchard, but you're on a budget. Some trees have glossy leaves and are pricier because they're in high demand. Everyone wants them, and they shine in the sunlight.
However, the others are overlooked.
They might have a few blemishes or aren't as shiny, but beneath the surface, they are healthy and will promise apples in the coming seasons.
Buying the glossy, in-demand trees is like chasing trendy stocks – they might look attractive now, but you're paying a premium.
On the other hand, the overlooked trees represent value investments – stocks that are undervalued by the market but have strong fundamentals and promise future growth.
As a smart farmer, you recognize the potential in these undervalued trees.
You buy them at a bargain and take them home.
With patience, you nurture them in your orchard. Over time, those once-overlooked trees flourish, bearing apples and proving to be the best value for your money.
Just like in farming, in investing, it's not always about the immediate appeal. It's about seeing the potential others miss, understanding the true value, and waiting for your investments to bear fruit.
This is the essence of value investing.
Buying a stock that is trading below its book value but still looks promising based on analysis.
By now you’re probably wondering how to actually do this.
The good news is that I’ve created a list of all the books that will teach you how to become a value investor. These are books written by some of the world's best investors like Warren Buffet, Ray Dalio, and Christopher Browne.
The best value investing books for long-term returns
1. The Little Book of Common Sense Investing by John C. Bogle
John C. Bogle was the founder of Vanguard Group and a pioneer in the creation of low-cost index funds for individual investors. The Little Book of Common Sense Investing offers a compelling case for low-cost index funds over pricier, actively managed funds. While value investors might prefer individual stocks this book is still worth reading.
Bogle notes that capturing the full returns of the broader market, minus fees, is more effective than attempting to beat the market. This reminds me of the popular phrase ‘time in the market over timing the market’.
“Don't look for the needle in the haystack. Just buy the haystack!”John C. Bogle
The moral of the story is that we should consider simple, long-term-focused investments, and avoid excessive costs when investing. It's a must-read for anyone exploring value investing since the same principles can be adopted.
2. The Little Book of Value Investing by Christopher H. Browne
Christopher H. Browne was a renowned value investor and the managing director of the investment firm Tweedy, Browne Company. Browne was celebrated for his disciplined approach to value investing. The Little Book of Value Investing presents time-tested principles of value investing in a concise and accessible manner.
“THE BEAUTY OF VALUE INVESTING is its logical simplicity. It is based on two principles: What’s it worth (intrinsic value), and don’t lose money (margin of safety).”Christopher H. Browne
The book provides a roadmap for investors to identify undervalued stocks and benefit from their long-term appreciation. He emphasizes the importance of patience, discipline, and a contrarian mindset, advocating for thorough research instead of following market trends. If you’re serious about value investing then I suggest reading this as soon as possible. It’s easy to make irrational decisions based on the latest news and market trends but this is almost guaranteed to ruin your portfolio.
3. The Intelligent Investor by Benjamin Graham
Benjamin Graham is often labeled the ‘father of value investing’. He was an economist, professor, and financial analyst. His philosophies on investing have influenced some of the world's top investors, including Warren Buffett. The Intelligent Investor is a timeless classic full of value investing principles that I still reference today. Graham emphasizes the importance of analyzing and understanding a company's long-term fundamentals rather than short-term market fluctuations.
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”Benjamin Graham
One thing I like about this book is that it introduces the concept of ‘Mr. Market’ to illustrate the volatile nature of the stock market and to teach investors to remain rational and disciplined.
By adhering to Graham's strategies, we can all make sound decisions and grow our wealth over time, the same way Graham grew his portfolio to $1,000,000. Keep in mind that you’re investing in a company not just a volatile stock symbol.
4. A Random Walk Down Wall Street by Burton G. Malkiel
Burton G. Malkiel is a renowned economist and writer, best known for his classic book A Random Walk Down Wall Street which challenges conventional investment strategies. Malkiel was a strong advocate for the efficient market hypothesis, which states that asset prices reflect all available information making it impossible to beat the market consistently. However, value investors will benefit from understanding these concepts too.
“It is not hard to make money in the market. What is hard to avoid is the alluring temptation to throw your money away on short, get-rich-quick speculative binges. It is an obvious lesson, but one frequently ignored.”Burton G. Malkiel
Malkiel argues that no one can consistently predict market changes, making stock picking largely unfruitful. Although, I disagree with this idea to some degree. However, the book covers a range of investment strategies and the history of their performances which serves as proof. Similar to John C. Bogle of Vanguard, Malkiel concludes that a low-cost, broad-based index fund is often the most sensible choice for most investors.
5. The Bond King: How One Man Made a Market, Built an Empire, and Lost It All by Mary Childs
Mary Childs is a financial journalist known for her in-depth coverage of financial markets. The Bond King provides a deep analysis of the rise and fall of Bill Gross, one of the most influential figures in the bond market. Childs offers a detailed examination of Gross's strategies, personality, and the broader financial world in which he operated.
“People who self-select into finance often share character traits: they enjoy working with numbers and predicting the economic implications of everything from current events to playing lacrosse.”Mary Childs
I’ve included this book since investors will gain insight into the complexities of the bond market and the tumultuous world of finance. Which, according to Childs, is largely underscored by ambition, innovation, and hubris.
6. The Psychology of Money by Morgan Housel
This is one of my favorite books since it showcases the intersection between investing and psychology. I’m confident value investors will find it helpful. Morgan Housel is a distinguished financial writer and partner at The Collaborative Fund. He’s known for his ability to intertwine human psychology with finance. With a deep understanding of behavioral economics, Housel teaches us how emotions and perspectives influence our financial decisions.
“Spending money to show people how much money you have is the fastest way to have less money.”Morgan Housel
One thing I noticed is that Housel stresses the importance of self-awareness, adaptability, and long-term thinking. In other words, chasing quick profits is a fool's errand. Value investors in particular need to take this advice and be patient with their investments.
7. The Essays of Warren Buffett: Lessons for Corporate America by Warren E. Buffet and Lawrence A. Cunningham
Even if you’re new to investing you probably know who Warren Buffet is. He’s the chairman and CEO of Berkshire Hathaway and is regarded as one of the most successful investors of all time. Known for his value investing approach and unmatched track record, The Essays of Warren Buffet is a book you don’t want to ignore.
“A horse that can count to ten is a remarkable horse—not a remarkable mathematician.”Warren E. Buffet
Buffet has a no-bullsh*t approach to business and investing which makes his books easy to read. Buffet distills his investment wisdom, insights into corporate governance, and views on management. With a focus on long-term value creation, integrity, and the importance of a shareholder-friendly approach, the book serves as an invaluable guide for business leaders and investors alike.
8. Principles by Ray Dalio
Ray Dalio is one of my favorite investors, I’ve read Principles twice and I frequently watch his YouTube videos. Dalio is the founder of Bridgewater Associates, one of the world's most successful hedge funds. He’s also considered one of the top investment thinkers in modern history. Beyond his financial success, Dalio is recognized for his deep reflections on life, decision-making, and the mechanics of achieving personal and organizational success.
“I learned that if you work hard and creatively, you can have just about anything you want, but not everything you want. Maturity is the ability to reject good alternatives in order to pursue even better ones.”Ray Dalio
Dalio divides the book into Life and Work principles, emphasizing the value of radical transparency, meritocracy, and thoughtful decision-making. By combining lessons from his career with his unique approach to life, Dalio provides readers with tools to achieve better outcomes in both personal and professional domains. It's a masterclass in navigating complex challenges, making decisions, and building a successful, purpose-driven life.
9. The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein
William J. Bernstein is a prominent financial theorist and historian with deep-rooted expertise in modern portfolio theory. What’s interesting about Bertsein is that he was initially trained as a neurologist, but transitioned to finance. As a result, he published several influential books, cementing his status as a thought leader in the investment world. In The Four Pillars of Investing: Lessons for Building a Winning Portfolio Bernstein delves into the intricate relationship between for following:
- Investment theory
- Business elements that influence the market
“If your portfolio risk exceeds your tolerance for loss, there is a high likelihood that you will abandon your plan when the going gets rough.”William J. Bernstein
By synthesizing these four key pillars, he provides readers with a holistic understanding of how markets work and how to make informed investment decisions. The book stands as a beacon for both novice and experienced investors, offering insights into avoiding common pitfalls and building long-term wealth. Value investors should pay close attention to this book.
10. Common Stocks and Uncommon Profits and Other Writings by Philip Arthur Fisher
Philip A. Fisher was one of the most influential investors of his time, known for his insights into growth investing. His investment philosophies focussed on the long-term potential of companies. Common Stocks and Uncommon Profits and Other Writings is a perfect option for all value investors since it focuses on finding the long-term potential of growth stocks through the ‘Fifteen Points’ framework.
“Even in those earlier times, finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear.”Philip Arthur Fisher
Rather than relying solely on financial statements, Fisher emphasizes the importance of qualitative factors, including company management and competitive advantages. Through a combination of investment philosophy and practical advice, investors can access timeless wisdom that has influenced generations of investors.
11. Security Analysis: Seventh Edition by Benjamin Graham, David Dodd, and Seth Klarman
Benjamin Graham and David Dodd are regarded as the fathers of value investing, having shaped the discipline with their groundbreaking methodologies. Seth Klarman, another accomplished investor, builds on their legacy by providing modern context and perspectives, solidifying the relevance of their foundational principles in today's financial world. If I were to suggest three books to value investors this would be on that list, especially since Warren Buffet wrote the forward.
“In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.”Benjamin Graham
By reading this book you can expect to learn how to assess the value of stocks and bonds. One thing I found interesting was the emphasis on thorough research, intrinsic value estimation, and margin of safety.
Frequently asked questions
If I had to choose the best book for value investing it would be The Little Book of Value Investing by Christopher H. Browne. This would be followed closely by Principles by Ray Dalio. These two books will teach you both the practical theory with timeless principles that you can apply for the rest of your life.
Different investors apply different rules. I like to reference Warren Buffet’s number one rule which is “Don’t lose money”. This is easier said than done but it’s a good way to make sure you don’t rush decisions or enter positions that are risky. If you’re number one rule is to not lose money then you will avoid rushed, risky and irrational decisions.
This is a forever-changing answer based on a company's financials, the market, and a whole list of other factors. However. If you’re interested in receiving a report on two growth stocks each month that have major potential then consider signing up for a Ticker Nerd free trial.