Book of Value by Anurag Sharma
‘Value investing’ is a broad church to which a wide variety of investors profess their faith. Anurag Sharma, in Book of Value: The Fine Art of Investing Wisely, brings a multidisciplinary flavour to the value investment genre, drawing from psychology, business, accountancy, mathematics and philosophy along the way.
Behavioural finance is a particularly important theme in Sharma’s book, and he provides a whistle-stop tour of the psychological traps we may fall into as investors. The stock market is a particularly dangerous place for us homo sapiens as we face a noisy barrage of often-conflicting, minute-by-minute news to which our imperfect cognitive functions are keen to react, not always sensibly. A good part of investing is therefore the mind-game we constantly play against ourselves.
To guard against our weaknesses, Book of Value advocates an investment framework that incorporates consistent business model, management, financial and valuation analysis, all washed down with a thorough assessment of risk.
Central to Mr Sharma’s book is Karl Popper’s concept of falsification, and the importance of subjecting any investment idea to both initial and on-going tests, using a systematic filter or checklist. This discussion reminded me of Atul Gawande’s excellent book The Checklist Manifesto, which has been quite influential in value investment circles.
On the subject of risk. Book of Value criticises modern portfolio theory’s obsession with mathematics and its desire to reduce risk to a single, volatility-derived number. This can lead to a focus on shares as ‘pieces of paper’ rather than stakes in real businesses. Sharma suggests a more sensible approach to risk management is to consider a wide variety of fundamental and valuation factors, not all of which are easy to quantify.
He also rightly points out that there is no way to completely eliminate risk- a large part of investing wisely is to understand and manage the errors that are inevitable when making decisions under uncertainty, as investment choices are apt to be.
Book of Value’s message resonates with me. A robust investment process, consistently applied, is critically important for the long-term investor. Mr Sharma makes two other good points on process.
First, you should find an approach you are emotionally suited to. Second, you should always look for ways to improve your process and modify it over time (an investment process is a tool that should help protect you from yourself, but you should not become a thoughtless slave to it).
Much of the material in Book of Value will be familiar to readers of both the well-trodden value investment classics, and behavioural finance works from authors such as Daniel Kahneman and Amos Tversky.
But Mr Sharma pulls this material together well, and the result is an enjoyable discussion on the patient craft of fundamental valuation-based investing.
Hugh Yarrow is lead portfolio manager of Evenlode