How does one write a review for a book when it has been praised by Jack Bogle, Jeremy Grantham, Joel Greenblatt, Seth Klarman, and Warren Buffett?  I am a midget among giants.  I can’t write this, but I am going to try.

Being a teensy part of the investment fraternity that calls itself value investors, I do have some perspective on this book.  The joke of sorts is that there are many things that are “the most important thing.”  But I think the point of the author is that what is most important shifts, depending on the market environment.

But all of “the most important things” can be boiled down to four main concepts:

• Margin of Safety
• Buy it Cheap; Valuation
• Contrarianism
• Think beyond the initial effects to secondary effects.  Think holistically.

By margin of safety, there are many things implied — a strong balance sheet, strong cash flows, conservative accounting, and/or protected market position.  The important thing is to prevent a large loss.  If you can prevent large losses, the gains will come eventually.

Buying it cheap is also a simple concept, though hard to implement well.  What metric to use?  Price to Earnings, Cash Flow, Book, Free Cash Flow, EBITDA?  Where to look in the capital structure for value?  The equity may be too risky, but maybe the preferred stock or bonds might be interesting.

Contrarianism means looking for what others rely on that may not work, and investing against it, whether positively or negatively.  It can’t be mere opinion; the other side has to be invested, and relying on their hypothesis to succeed.  That is the situation where investing contrary to the consensus can succeed.

Thinking holistically comes from being a bright student whether in the sciences or the liberal arts.  It comes from being a life-long learner, and applying oneself to the problem until it yields at least a hint of an answer.  Where it doesn’t, cutting losses pays off.

I recommend this book to all who aspire after value investing.

Quibbles

None.

Who would benefit from this book: All value investors, and those who want to be value investors can benefit from this book.  Those that want to understand how the economy really works will benefit as well.  If you want to, you can buy it here: The Most Important Thing: Uncommon Sense for the Thoughtful Investor (Columbia Business School Publishing).

Full disclosure: The publisher asked if I wanted the book.  I said “yes” and he sent it to me.

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