Bruce Greenwald conducts THE value investing course at Columbia Graduate school. His summer seminars ($2,900 for 2 days) are extremely popular. Of course, that is not the reason I have put him into the list of Gurus I admire and try to follow. The reason is : I try to pay close attention to people whose names start with Green - Greenwald, Greenblatt, Greenspan, ... Green being the color of the money, how can you go wrong?
Greenwald has written an outstanding book titled 'Value Investing: From Graham to Buffett and Beyond'. He takes 3 tiered approach to value investing.
Bottom tier: Asset values
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Think about reproduction cost of assets.
This is the realm of deep value investors like Graham. You find companies selling below their net realizable asset values and/or reproduction cost value. Put together a diversified portfolio of these and wait. No need to dig deep into quality of management or the competitive positioning.
Middle tier: Earnings power value
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Think about franchise value from current competitive advantage.
You find companies with simple, understandable businesses which are available at very attractive prices. These are typically small businesses which occupy a local niche. The niche is small enough to support only one or two players. The businesses that Buffett likes to own as independent subsidiaries of Berkshire Hathaway fall in this category: Newspapers, See's Candy etc.
Top tier: Value of Growth
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Think about profitable growth within the established franchise. This is where companies consistently enjoy above average ROIC thanks to their competitive positioning.
In my opinion, this is the most difficult tier for Value investors. You need to gauge how long the competitive advantage will last and there is a real risk of overpaying. The famous names here are Peter Lynch, Buffett, Bill Miller. Note that they hold multi-billion dollar portfolios. With those big portfolios, you need to hunt for elephants to move the needle on performance and these big sized beasts are simply not be found in the bottom or middle tier in sufficient quantities.
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This 3 tiered approach is a very good way to think about the investing choices and helps me to articulate the rationale behind a particular investment.
In the next few posts I would like to share my best ideas in each tier. I would love to hear from you on your best ideas.
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5 comments:
hey i m also a great admirer of prof bruce greenwald and try to approach a stock with same 3 tier method. Most of the times the asset values turn out to b a value trap as it is in the case of cheviot company where the value can b unlocked only by the management or only if one has a controlling stake in it. i think one should emphasize on industry analysis and competitive advantages of a business in a particular industry rather than just concentrating on asset values without ne catalyst to unlock the value. i believe finding good business with outstanding returns and buying it cheap is a good proposition rather than just having asset plays. most of the greenwald admirers tend to limit themselves just to asset plays and dont move further.
have you read competition demystified by prof greenwald.
looking forward to discussing value investing on google talk.
by the way did u watch this interview of prof greenwald
mms://media2.bloomberg.com/cache/vYyowoQGJ96o.asf
sandeshtrivedi@gmail.com
i admit that i own cheviot but it shld b part of a diversified portfolio like those of sonkin and tweedy browne
one cannot bet heavily on it.
Sandy,
Thanks for the comments.
I have not read Greenwald's 'Competition Demystified' as I could not find it in book stores - at least in Pune. Is it available readily?
In general, I agree with your comments regarding catalyst - without a catalyst on the horizon you could end up waiting forever. However, sometimes the valuation is so cheap that 'hopefully' that itself becomes a catalyst.
Ben Graham called it a mystery as to how and why the valuation converges with intrinsic value over time. Here is how Graham put it on 11 March 1955, at the conclusion of his testimony to the Committee on Banking and Commerce of the U.S. Senate (Chaired by Sen. William Fulbright of Missouri)
Graham summarised its essence:
Chair: One other question and I will desist. When you find a special situation and you decide, just for illustration, that you can buy for 10 and it is worth 30, and you take a position, and then you cannot realize it until a lot of other people decide it is worth 30, how is that process brought about–by advertising, or what happens? (Rephrasing) What causes a cheap stock to find its value?
Graham: That is one of the mysteries of our business, and it is a mystery to me as well as to everybody else. [But] we know from experience that eventually the market catches up with value.
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I have sent you an email to discuss some of the things offline.
well i bought the book from strand book stall in mumbai....n guess wat dat too at a discount to its intrinsic value. the market value of the book is 1000 rs and u could get it for 500rs frm strand book stall - http://www.strandbookstall.com/store/search/search.php
in fact the intrinsic value is much greater than the market value.
the book is kinda a compiled version of lectures at columbia business school. its a must read for a value investor.
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