Bruce Greenwald – The Quintessential Starting Point For All Value Investors

Q3 2017 hedge Fund Letters

One of our favorite finance professors here at The Acquirer’s Multiple is Bruce Greenwald. Greenwald holds the Robert Heilbrunn Professorship of Finance and Asset Management at Columbia Business School and is the academic Director of the Heilbrunn Center for Graham & Dodd Investing. Described by the New York Times as “a guru to Wall Street’s gurus,” Greenwald is an authority on value investing with additional expertise in productivity and the economics of information.

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Following is an interview with Greenwald in which he discusses how to get started with a value investing strategy including where to look for undervalued opportunities and how to initiate the valuation process. The interview also includes some of Greenwald’s famous investing quotes.

Here’s an excerpt from that interview:

You are looking for things that are ugly, cheap, boring, out of fashion, small and obscure. Or otherwise on the other side of the existing finance industry mania.

“If it’s on the recommended list of one of the big retail brokerages my advice to you is watch out!”

Value investing consists of a basic approach to the process of investing. The first thing you have to do is identify potential investments that you’re going to look at.

“What you are looking for is stocks that are obscure. It’s stocks that are small capitalization because big institutions aren’t going to be able to afford the time to concentrate on analyzing those stocks in detail.”

When you have identified a security that you’re interested in you still have to figure out what is that security worth.

“Not all value is measurable. If we were sitting here at the height of the internet boom, I don’t think anybody knew what those internet stocks, not even God knew, what those internet stocks were ultimately going to be worth.”

There is a value approach to valuation and this is really what distinguishes it more than anything else, starting to look at the balance sheet, which most people don’t look at. Most people project earnings. What Buffett has added to this is a systematic way that’s much more intelligent than the standard valuation approaches for looking at growth stocks. A good valuation approach will also clearly identify the critical information that you are uncertain about and that is going to focus your research effort.

“When you add bad information to good information what do you get? You get bad information! It’s not a good way to go about trying to pin down a value.”

So it’s in the area of how you look for stocks, how you value stocks, how you focus your research and collect all the relevant information. It’s ultimately how you analyze and manage risk and construct a portfolio that value investing is very different from almost all other current practice. The evidence that it’s successful is that if you look in every dimension. What investment strategies are successful statistically overwhelmingly, they’re the value strategies. Modern financial academics have established that beyond a reasonable doubt.

“You want to go to the part of the market where other investors are crazy. Either crazy on the optimistic side if you’re a short seller or crazy on the pessimistic side if you’re gonna just be buying stocks. So you’ve got to look intelligently for those opportunities. You’ve got to ask where is the craziness today.”

What creates opportunities is the fact that most investors and most human beings are constitutionally oriented to buying lottery tickets. They love to buy the dream and when money is going into the dream it’s leaving other areas and it is that tendency of human beings to pursue those kinds of get-rich-quick opportunities that creates the value
opportunities for the plotting careful investors.

It’s painstaking. It’s careful. You don’t buy your stocks all at once. You buy them over time because you recognize the market fluctuates. You start with a good price and to your shock and surprise the stock actually falls and you got to be ready to buy more in a slow steady confident way.

My job, given that I’ve decided to concentrate in the area of investment management, is to improve the way people deploy their wealth. This is the best mechanism for doing it and I think if they’re doing it for their clients they’re going to do a much better job for their clients. If they’re doing it for themselves they’re gonna do a much better job picking good managers or deciding where to allocate their money, and if they’re professional managers managing for people’s retirement that’s a huge gain to society at large.

“You wanna look for opportunities that most investors are turned off by. Non-glamour stocks that may not be growing that rapidly. When a stock is ugly and bad people are sure it’s going to lose money when a stock looks good they’re overly confident that it’s going to continue to look good.”

Article by Johnny Hopkins, The Acquirer's Multiple

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About the Author

The Acquirer's Multiple
The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”

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