Value Investing: From Graham to Buffett and Beyond, 2nd edition
Open Library records first publication as 2021; Wiley published it in 2020.
Summary
Bruce Greenwald teaches value investing at Columbia, and this book with Judd Kahn, Paul Sonkin and Michael van Biema sets out the analytical framework he developed there. The second edition revises it substantially for businesses whose value rests on intangibles.
The framework values a business in three layers, in increasing order of uncertainty. Asset value is what it would cost to reproduce the company's assets, which for a business in a competitive industry is the appropriate value. Earnings power value is current sustainable earnings capitalised at the cost of capital, assuming no growth. Comparing the two is the analytical move: if earnings power value exceeds asset value, the business earns above its cost of capital, which cannot persist without a barrier to entry, so the analyst must identify what that barrier is. Growth value is added only where a franchise exists, because growth without a barrier consumes capital at the cost of capital and creates nothing.
Greenwald's account of competitive advantage reduces it to a small number of sources: customer captivity through habit, switching cost or search cost; production cost advantages including proprietary technology; and economies of scale combined with customer captivity, which he treats as the most durable. The book also covers search, meaning where to look for candidates, and the profiles of practitioners including Mario Gabelli, Glenn Greenberg, Robert Heilbrunn, Seth Klarman, Michael Price, Walter Schloss and Paul Sonkin. The second edition's treatment of intangible-heavy businesses addresses the standard objection to the framework.
Key takeaways 7
- A business should be valued first by asset reproduction cost, then by earnings power, and only then by growth.
- Earnings power exceeding asset value implies returns above the cost of capital, which cannot persist without an identifiable barrier to entry.
- Growth creates value only inside a franchise, because growth without a barrier consumes capital at exactly the cost of capital.
- Competitive advantage reduces to customer captivity, production cost advantage, and scale combined with captivity.
- Economies of scale produce durable advantage only when combined with customer captivity, since scale alone can be replicated.
- The analyst's central task is identifying the specific mechanism preventing competitors from entering, not forecasting growth rates.
- The second edition extends the asset reproduction approach to businesses whose value rests on intangibles, which was the framework's main gap.
Who should read it
Investors who want a disciplined valuation framework that forces an explicit statement of where competitive advantage comes from.
About Bruce Greenwald
Robert Heilbrunn Professor Emeritus of Finance and Asset Management, Columbia Business School; former director of the Heilbrunn Center for Graham and Dodd Investing
Value Investing: From Graham to Buffett and Beyond is the canonical modern restatement of the Columbia value framework, and Competition Demystified is its standard companion on barriers to entry.
Where it sits in the reference 2
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