Jim Grant on Value Investing and Investing in Japan

Jim Grant's Foreword to Security Analysis by Graham and Dodd 

Security analysis itself is a cyclical phenomenon; it, too, goes in and out of fashion, Graham observed. It holds a strong, intuitive appeal for the kind of businessperson who thinks about stocks the way he or she thinks about his or her own family business.

What would such a fount of common sense care about earnings momentum or Wall Street’s pseudo-scientific guesses about the economic future? Such an investor, appraising a common stock, would much rather know what the company behind it is worth. That is, he or she would want to study its balance sheet.

Well, Graham relates here, that kind of analysis went out of style when stocks started levitating without reference to anything except hope and prophecy. So, by about 1927, fortune-telling and chart-reading had displaced the value discipline by which he and his partner were earning a very good living. It is characteristic of Graham that his critique of the “new era” method of investing is measured and not derisory. The old, conservative approach—his own—had been rather backward looking, Graham admits. It had laid more emphasis on the past than on the future, on stable earning power rather than tomorrow’s earnings prospects.

But new technologies, new methods, and new forms of corporate organization had introduced new risks into the post–World War I economy. This fact— “the increasing instability of the typical business”—had blown a small hole in the older analytical approach that emphasized stable earnings power over forecast earnings growth. Beyond that mitigating consideration, however, Graham does not go.

The new era approach, “which turned upon the earnings trend as the sole criterion of value, (. . .)  was certain to end in an appalling debacle.” (p. 366) Which, of course, it did, and—in the CNBC-driven markets of the twenty-first century—continues to do at intervals today.

(Source: 6th Edition of Security Analysis)

Jim Grant on Investing in Japan

B: (...) So, are we Japan, as some people say? (...)

G:: No, I am an authority on Japan, even though I live in Brooklyn (...). (...) we went to Japan in 98 and began to accumulate shares in companies valued in the market at less than their net current assets, and there was a business value for free. does that sound like a good idea?

B: It would strike one as a good idea, except, maybe, in Japan.

G: Right, as it turns out all things are local politics (...) Japan has one major social infirmity, which is a collective refusal or reluctance to admit error let alone to reprice it and move on to the next thing (...)

B:(...) You talked earlier about how you went to Japan (...) and tried to scoop up some home undervalued value stocks. First, how did that work out?

G:(..) by 1998 the small cap indices had been going down for 14 years and you could run screens of companies that were trading below net current assets, meaning the business value was for less than nothing. They paid a dividend, they were profitable and in some cases management was buying back stock, so this was as the living and breathing Graham and Dodd in the year 1998-1999 !?.

(...) In this country not so much. It was the era of levitation and we thought it's be a great a contrary thing to do. Not just for the sake of being bloody- minded, but for the sake of seeking out value in that part of the world where stocks were in not only a bear market, but well deep into the revulsions cycle. So it made (... ) now and then it made great sense. We've been at it twelve years (...). we've had some good years, but it's mainly been very very frustrating. Because the Japanese really do not have a market in corporate control. (...) one of the distinguishing features of capitalism is this prod to corporate managements. They couldn't just sit on cash, they couldn't just mismanage. If they did they would likely be hostile.

How about a "clarifying" bid by an outside shareholder to wrest control from the incumbents. It's a great way of enforcing market discipline on what John Kenneth Galbraight incorrectly regard as the 'technocracy' (...) So that's what Japan does not have, and we have keenly felt the lack of that in our value stocks. We own these things and they continue to pay dividend but management typically owns not enough shares. Even if they do, they seem not very interested in the price going up. I still can't figure that out. Not only do they not get rich, they make sure we don't get rich.

So I have come to learn a great deal by that namely the Graham and Dodd, the gospel of Graham and Dodd, the gospel of value investing is not universally applicable. I am here to attest to that, Henry.


Conclusion:

• In theory value investing is easy, but in practise it is hard to implement. 

• Being successful with value investing has nothing to do with intelligence, but rather with patience 

• Value Investing can be extremly frustrating and can take rather long time until the strategy bear fruits

• Value investing without market of corporate control extremely tricky

Source:

http://www.businessinsider.com/henry-blodget-jim-grant-2010-10?IR=T