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Greenwald doesn't know much about investing.
le 21 février 2002
The back cover of this book modestly proclaims that Mr. Greenwald is the "guru of Wall Street's gurus". I don't know what kind of gurus there are on Wall Street but if Mr. Greenwald is their mentor then I really feel sorry for them.
The very next day after I finished reading 'Value Investing' I attended a presentation, sponsored by NYSSA's Private Wealth Management Committee, where the author (editor?) presented the book. The presentation confirmed my first impressions: Not only is Mr. Greenwald confused about what Value Investing is but he doesn't seem to understand some fundamental concepts in Finance. For example, he claims that Compaq's major problem stems from the fact that the company put Alta Vista at market value on the balance sheet and then they had to write it off. Hasn't Mr. Greenwald heard about sunk costs? Investing in Alta Vista may have been a poor decision that destroyed shareholders' value but it is something that pertains to the past. It is not something that will continue to influence the firm's operating results in the future.
Greenwald claims that using asset valuation based on reproduction costs provides more accurate estimate of what the company might be worth then using NPV. According to him, NPV is too difficult to estimate and therefore is almost useless. I agree that NPV is difficult to estimate but if it was easy then everyone could be rich, right? In order to do better an individual investor must have a competitive advantage. Competitive advantage is something that one can do but the competition cannot. If balance sheet reading is easier than future cash flow forecasting then more investors should be able to do the former rather than the later. But if many people can do it then it does not give any competitive advantage. Those lucky few who have the exceptional ability to forecast future cash flows will have the competitive advantage and they will be the ones who will make billions of dollars. If Warren Buffet could not do something that is difficult for others then he wouldn't be so rich. The fact that NPV is difficult to estimate does not make it useless. On contrary, the difficulty makes it even more valuable because it gives competitive advantage to those who have the rare gift to see farther than the average individual.
The author claims that markets are not efficient but his idea of market inefficiency is very peculiar. According to him, for example, there cannot be any value in K-Mart because if there were any value in that stock then the horde of analyst, who follow the company, would have discovered it by now. I am not familiar with K-Mart but the statement he made sounds familiar to what the proponents of Efficient Market Hypothesis keep telling: markets are efficient because thousands of bright analysts are working day and night to uncover hidden value. If one can't find value because analysts have already dug out everything there is to know then what makes markets inefficient? Selling stocks to buy Christmas gifts? This can hardly be enough.
The authors do make some good points but overall the book is bad.