One of the best ways of learning something is to teach it to others. When Benjamin Graham, the father of value investing, started teaching at Columbia University in 1928 he was already an accomplished investor but I’m sure that the process of articulating his investment strategy helped himself as well as his students. These classes also resulted in the investment classic Security Analysis written together with Graham’s Columbia protégé professor David Dodd. It is number 2 on our list of the best investment books ever.
Up until 1978 the value investing course was subsequently taught by Roger Murray who also edited several editions of Security Analysis. The list of investors who over the years have taken the course reads like a who’s who of successful money managers including Warren Buffett, Mario Gabelli, Charles Royce, Walter Schloss, Glen Greenberg and countless others. If there is one institution in the teaching of value investing, this is it. Columbia, one of the six Ivy League business schools and situated on Manhattan, is still retaining this proud heritage and the person carrying the torch for the last several decades is Bruce Greenwald who teaches the present course in value investing. Other high profile investing names currently associated with Columbia are Jean-Marie Eveillard and Joel Greenblatt.
With an academic background in electrical engineering and a Ph.D. in economics Bruce Greenwald might not strike you as the obvious candidate as Graham’s successor but he’s grown into being one of the world’s premier authorities on value investing. The New York Times has – no doubt to his liking - dubbed him “a guru to Wall Street’s gurus”. Bruce Greenwald has also co-authored numerous books on investments and strategy including Competition Demystified and Value Investing, number 5 and 18 on our top list of investment literature. All those who have taught the value investing course over the years have developed their own personal touch with regards to what they present. So what is it that Bruce Greenwald teaches, what is the Bruce Greenwald Method? Given his background he has carved out a very interesting niche in-between the areas of microeconomics, corporate strategy, franchise value investing and deep value investing.
This is “the story of investing according to Bruce” as I to my best ability can interpret it.* After an introduction the text will cover Bruce Greenwald’s process that consists of a search strategy, a valuation method, a research method and a risk management practice. In the end we wrap up.
The Bruce Greenwald Method
There are a number of approaches to investing. If you are going to succeed as an investor you should really pick just one or potentially two – in the latter case they should be kept mentally separate.
The first distinction to make is if you are a believer in efficient markets or not. If you are, you should simply index your securities holdings and focus on asset allocation and cost minimizing. If you are not (and you would have the evidence on your side), you have to choose a strategy that fits your personality and specifically whether you need instant gratification or not. If you do, you should use a short-term strategy – either a technical momentum style or a short-term fundamental strategy. Momentum trumps value in the short term - even though you will have the trading costs working against you. There are successful managers in the technical quant type of camp with Renaissance Technologies as a shining example. The problem is that the short duration of the strategies they are using makes them have to reinvent themselves every 12 or 24 months. Very few firms have this capacity. Most investors, and almost the entire sell side, are short term fundamentalists who try to forecast short term changes in corporate financials – typically estimates of EPS – and map this against consensus numbers. The issue here is that this is a strategy that depends on an information advantage and since everybody crowds into this space, that advantage of having information that no one else has is really, really hard to sustain.
This leaves us the longer term investing approaches such as so called growth investing or value investing where you aspire to buy securities that are priced lower by the market than you think they are fundamentally worth. The notion here is that price and value are not the same; “price is what you pay, value is what you get.” Value investors have dubbed the discrepancy between a security’s price and its intrinsic value “margin of safety” and often demand a 30 to 50 percent discount to be interested in a stock. Value investing is simply looking for bargains in the financial markets. This is a strategy that in fact almost everybody claim they use. Certainly few claim to be buying securities for a higher price than they think they are worth. Further, the evidence is quite clear that – while value investing works - investors overpay for stocks with the highest expected growth rates with underperformance as the result. So in this longer-term area, value investing is the more rational choice.
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