Suggested Books for Value Investor

One of the questions people often asked, if I want to learn about stock investing, especially the method of value investing, then what books you are recommend the most? And I think that’s a good question, which shows that ones are eager to learn before start buying stocks. Because it is impossible for a soldier to enter the battlefield without any weapons, right?

But frankly, although I like reading, but until I wrote this article, I have never read a single books about stock investing until the last page (I usually stop reading the book after several chapters). You can find many book about stock investing and trading in the bookstore, either it is about value investing or another method, in which either written by professional writers, lecturers, or investors themselves. I have several books written by famous investors like Ben Graham, Joel Greenblatt, Peter Lynch, and Seth Klarman in my house (The books are in English. If they translate the books into Bahasa Indonesia, they might mistranslate them, the translator may only know how to translate English into Bahasa, but do not understand about stock investment).

But most of the books usually ended only as displays on my desk. Including The Intelligent Investor by Ben Graham, I only finished reading about three quarters of it. Because, if you read the book, the first two chapters explained value investing method and margin of safety well. While the next chapters only give examples of application and use of the method itself, in this case in the Wall Street in the United States. The problem is, if you are seasoned investor in Indonesian stock market, you will see there are many examples in the book that are not relevant enough with the conditions and characteristics of our market (on the other hand, the book was written in 1934, aka longtime ago), thus it would be better if we just take the basic of the method first, while for the practice we could learn from the experience in doing the investment itself.

You have not finished reading the book The Intelligent Investor, have you?? Same!

But if there are any writings (not books) that I often read, it's the Berkshire Hathaway’s Annual Letters. They are written directly by Warren Buffett, that since he started his partnership in 1956 until today (the latest letter is for year 2016). You can get it at www.berkshirehathaway.com. Unlike most books on stock investments that often only give you theoretical content, in this annual letter you feel the journey and progress of Buffett's investment.  You may also get many lessons and wisdom from it (Buffett writes his letter in a telling-story style, so it’s like reading a novel). The bonus is that Buffett always write his letters in a casual and easy-to-understand language, so it’s easy to read even for those who do not know much about economy, finance, or investment itself.

Besides annual letters mentioned above (Indeed, I have not read all of them, because there are more than 50 letters). I also spend most of my time to read Wikipedia, Investopedia (if I find a trouble understanding stock related term, usually Investopedia has good explanation), and the latest annual reports from companies in BEI. Some investors may want to deepen their knowledge and information by reading Bloomberg, Forbes, the Economist, and even subscribing business and finance newspaper. But honestly I am not that diligent (even though I am a columnist in Forbes Indonesia). At the end, I’m just an investor, not a minister of finance.

The best ‘book’ and the most expensive: the Practice

And last, as mentioned above, the ‘book’ I always read every day is the practice in stock investing itself. It is arguably from this ‘book’, I get the most precious lessons and the most applicable for the investment, but on the other hand, the ‘book’ is way more expensive than the other books I have ever read. Yup, because to get a valuable practice, you have to overcome a result that no other investor would like to have: sell a stock in a loss position.

For example, in 2014, I found that Salim Ivomas Pratama (SIMP), a palm oil plantation, cooking oil, and margarine company, its PBV is only 0.9 times than its stock price 900 then. SIMP is the subsidiary of Indofood Sukses Makmur (INDF), the parent of PP London Sumatera (LSIP), and Sister Company of the Indofood ICBP (ICBP). Then, I remembered the PBV of INDF was 1.7 times, ICBP was 4.9 times, and LSIP was 2.4 times. As a result, I inferred that SIMP had undervalued price, if someone wanted to buy INDF at the price that reflected PBV 1.7 times, so it was wiser to buy SIMP which had half value, knowing that half the assets of INDF owned by the SIMP.

Then I bought at least 30% of the managed funds in the SIMP, at the price of 900, in March 2014. Then after some time, its stock price rose to 1,000s. But I did not sell it (my target was 1200 at least), further, the enterprise released its first quarter financial statement in 2014 where its profit started to skyrocket. But in the beginning of July, somehow SIMP fell… and kept sinking at the 750. I said ‘somehow’, because Jakarta Composite Index (JCI) was just fine, it even climbed up, so I had no idea about its downfall. But then, I believe that SIMP was underpriced, so I decided to hold it.

But after some time later, I knew the reason of the downfall of SIMP: the decreasing price of CPO occurred in the beginning of March 2014 where it was US$ 861 before. Then it kept falling to the $600 per ton. And after I had researched it, the prices of commodities were falling, including the price of CPO which might continue to fall down, and SIMPs stock price would likely to get the effect. And indeed, with my deepest regret, I sold SIMP at 700. I forced to suffer a loss which had the same value as monthly spending for a full year. But as you might guess, I did not tell my family anything because I did not want to sleep outdoor. I had just told them the story two years later.

But from the experience above, I get at least three lessons. First, to assume that a stock was underpriced because of its PBV lower than the others in the same group (SIMP was lower than INDF, ICBP, and LSIP), was a false belief. In the end, people would only see the firm’s performance and it’s prospect, in the case related to CPO price, while SIMP’s performance was not fine enough if compared to INDF, ICBP, and LSIP. Second, if a stock suddenly falls when its performance (for a short time) is still good, and JCI also goes up, you need to evaluate it immediately instead of doing nothing.  Something suspicious might be happening. I was late to evaluate after SIMP had reached the price of 750. When it fell from 1,000 from 900, I should have reviewed it. And third, it doesn’t matter how comfortable you are about the prospect of a certain stock, it is best for you not to spend big money. You may take it on account, if the performance is good enough, you may buy another, but if it is bad/even falls, we will not feel reluctant to cut the loss. The reason I still held SIMP at the price of 700 because I felt reluctant to sell a loss. After the case of SIMP, except for one or two cases, I only invest 15 – 20 % of my managed funds in a certain stock.

Fortunately, I did not have to pay too much money to get the lessons above, because I sold SIMP at the price of 700, meanwhile SIMP kept falling until it reached 300’s. And although it starts to go up in the recent time (when SIMP could not break 300’s, I did not buy it anymore). But in the last two years, I invested the money resulted from cut loss of SIMP to other stocks, which gave greater profit later. From the loss experience of SIMP, and another event in other stocks, I invested knowledge which later became precious lessons in investing itself. I wrote some of them in an article whether I write them on a blog or books. If you read my book title ‘Value Investing: Beat the Market in Five Minutes!’ (You can buy in Gramedia), you can check if I almost do not quote another book/source, but my own experiences as a value investor itself inspire it.

For exception, in the early chapters about value investing, I quoted many of Warren Buffet’s statements. Because before we advance to the illustrations of value investing practices, then of course we must first understand what value investing is? And how about it’s basic idea? And there is no better source to understand value investing other than reading the straightforward explanations from Ben Graham and Buffet as ‘guru’ of value investing itself.

Okay, so we need to answer the question mentioned above: What books or articles to read especially for the beginner of value investor? The answers are annual letters written by Warren Buffet himself, any articles about investment and finance in Wikipedia and Investopedia. You may buy any stock investment books in the store, but if the books make you sleepy then do not force yourself to read it till the end. Because the purpose is to get grasp the idea and the basic understanding of the book about investment in general, stock investment, and value investment itself.

As for its application, then you may learn from the practice. And the ‘book’ called the practice is not priced-off; it can be tens, hundreds of millions, even billions of Rupiah (in the form of losses. As usual, an investor has to overcome a loss, and then he has a want to learn. But if in the beginning he gets profit, then why does he have to study?). You can see the books in Gramedia do no even cost more than one hundred thousand (my book mentioned above is only RP 58,800). However, the ‘book’ called the practice will finally present you a lesson to remember in a lifetime. Thus, no matter how expensive the ‘cost’ you need to spend, but if you can get the lesson later and apply it well, then trust me, the profit will be far bigger!

Original article was written (in Indonesian Language) in May 24, 2017. For inquiries, please contact the author by email, teguh.idx@gmail.com.