Gabelli Value Investing Conference held at Princess Gate in London.
Professor Bruce Greenwald’s Lecture on an Investment Process via CSInvesting
On Thursday August 4, 2005 in London England
View Lecture on the Web at: http://gabelli.savvislive.com/ValueInvestingSeminar/index_player.html
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This lecture is a thorough discussion of an investment process. A good supplement to this lecture is the book: Value Investing: From Graham to Buffett and Beyond (Hardcover) by Bruce C. N. Greenwald and the book, Competition Demystified (A great book in the Editor’s opinion).
You can read the Intelligent Investor and Security Analysis by Ben Graham; you can study the books written by Philip A. Fisher—these authors provide a thorough investment process. What YOU want to attempt is to carve out your own process and areas of expertise.
From Buffett: The Making of an American Capitalist by Roger Lowenstein, 1995. Page 318: Columbia’s Graduate Business School program was less one-sided than most. It hired Wall Street pros as part-time lecturers, some of whom used a Graham-and-Dodd approach. But the finance program was, as Buffett maintained, dominated by Efficient Market Theory. A stroll through the business section of the university bookstore suggested that a student could get an M.B.A at Columbia without ever hearing the named Graham and Dodd, and without even a faint exposure to value investing. Eventually, Columbia established a Graham-and-Dodd chair, but oddly assigned it to Bruce Greenwich. Bruce Greenwald, an MIT-trained economist had married into money, made a million or two in bond futures, lost a similar sum in oils, and quit at the insistence of his in-laws. “At investing I’m a complete idiot,” he noted, rather affably, adding that it was speculating that turned him on. He invited Buffett to give a guest lecture but did not think him imitable. “I’m sympathetic to the Graham-and-Dodd point of view,” Bruce Greenwald said, “but I’m not really a Graham-and-Dodder.”
Gabelli Management had its inception in 1977.
Value investing (“VI”) is a rational, disciplined approach to help navigate the investment world ruled by speculation, unjust emotions, confusion and momentum. The core value is very basic: that the underlying value of financial security is measurable and stable regardless what the market does to it. The goal is to purchase securities when their market prices differ significantly from their fundamental value. Value investors have been forced to be a little more ingenious in their ways of identifying, measuring and defining value. From Warren Buffett, Walter Schloss and Mario Gabelli–the disciples of value investing are plentiful and to date no other investment method has proved to be more successful as professor Greenwald will go into.
Columbia Business School has long been the house of value investing. Ben Graham and David Dodd taught there followed by Professor Murray who was a teacher of our founder, Mario Gabelli.
Today the mantel is held by Prof. Greenwald. He is considered to be a leading expert on value investing, economics of information and productivity. His recent book, Value Investing from Graham to Buffett and Beyond, is considered the third tome on the practice of value investing after 1934 Security Analysis and the 1948 Intelligent Investor. I highly, highly recommend that you read it.
The more interactive these sessions are the better. Don’t wait for the Q&A session to ask questions.
Bruce Greenwald (“BG”): Let me thank Frederico. I will be happy for you to ask questions.
Value Investing And A Well-Conceived Investment Process
Bruce Greenwald: I am not here to talk about value investing. I am here to talk to you about what a professional, well conceived investment process looks like just in general. Obviously, I will be making the case that the criteria that I am going to be talking about obviously is fulfilled by value investing practices and are fulfilled to a degree that are not covered by other approaches.
But there are other approaches that are characterized by investors who have been strikingly successful—there are not many of them but at least some of them are. If you do pursue those approaches, you ought to have an idea that within the context of those alternatives what an appropriate system for investing looks like. This is prostelizing to improve the overall quality of investment management.
Now value investing (VI) belongs to the genre of fundamental investing. It involves looking at underlying securities. It involves buying securities at a 2/3 or ½ or less of their actual value. VI is simply buying bargains in financial markets. And having bought bargains, holding them for a reasonably long period of time. Having described it that way, of course, the natural question that most of you who would want to ask is: What non value investing is? If you are buying the bargains, who are the people who are selling to you? And I think it would be useful to get a sense of that. Ask who is on the other side of your trade? Be humble because one of you is always wrong!
Other Schools of Investing
First, there are a lot of short-term approaches to investing. The most common approach to short-term investing at least in terms of the research disseminated is what might be called short-term fundamental investing. What you do is forecast either a quarter out or a year or two years out some appropriate quantity to do with the companies’ securities that you will be buying. Most commonly, of course, that is earnings. Then you compare your forecast to the consensus either as it is apparent in surveys or as you can infer it from stock price level of that security or the bond price level of that security. And if you think your forecast is more optimistic than the implied consensus, you buy on the theory that when the news is revealed, you turn out to be right and everyone else turns out to be wrong. The stock is going to go up, and you will make money. If the opposite is true, the more pessimistic estimate becomes apparent that you are right and everybody else is wrong …the stock will go down.
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