Greenblatt defends value investing; SmileDirectClub & Align crashing


Whitney Tilson’s email to investors discussing a value investor defends value investing; SmileDirectClub and Align Technology crashing; class participation strategy No. 10.

1) I really enjoyed this Wall Street Journal interview with legendary investor (and my friend and mentor) Joel Greenblatt: a value investor defends value investing (despite its recent track record). Excerpt:

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WSJ: Some people don't worry about the value in value investing, because they believe all active management is dead. How do you respond to that?

MR. GREENBLATT: I started a talk at Google a number of years ago by saying, "Warren Buffett says most people should index, and I agree with him. But Warren Buffett doesn't index, and neither do I."

I read Joel's first book, You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits, not long after it was first published in March 1997 and immediately became a fan.

I remember how thrilled I was when I discovered that he was teaching a course on value investing at Columbia Business School in the spring of 2000. I somehow found out when and where the class was, showed up on the first day, and sat quietly in the back. When it was over, I approached Joel and told him I was a big fan and had just started my own little fund a year earlier (it had less than $5 million in assets at the time). I asked if I could sit in on the class for the rest of the semester. I remember that he frowned, but said, "Well, I'm not supposed to do this, but if you sit in the back and don't say a word, I'll allow it." I never missed a day of class...

Learning from a brilliant value investor during the very months that the tech/Internet bubble was in its final blow-off phase was a transformative experience... It was the defining moment that caused me to shift away from my old, speculative ways and become a true value investor.

2) Last Friday, short-seller Nate Anderson of Hindenburg Research – who has an incredible track record – released an in-depth bearish report on the latest unicorn stock to be foisted on the public markets: SmileDirectClub: Moving Fast and Breaking Things in People's Mouths – 85% Downside.

Then on Monday, I'm sure you'll be shocked – SHOCKED, I tell ya! – to learn that the "analysts" at 10 underwriters of the IPO issued buy ratings on the stock of the teledentistry company.

This is all par for the course (some things never change)...

But here's where it gets unusual... SmileDirectClub (SDC) shares have been in free fall ever since! After closing at $14.72 on Friday, they steadily declined all week. As of this morning, SDC is trading around $11 per share, a roughly 25% tumble...

For more on this, I asked my dentist, Dr. Yehia Massoud, who's at the top of his field, for a comment. He e-mailed me:

I am familiar with this company. It caters to low-cost Invisalign seekers.

Frankly, I do not understand how you can package such a complex treatment into a do-it-yourself project. The problems are bound to show up several years later, and they are. Certain things you cannot cut corners with...

I have been utilizing Invisalign since it first came out, and have not jumped ship for the cheaper brands exactly for this reason.

3) Speaking of Invisalign – a product of Align Technology (ALGN) – kudos to Wharton MBA student Allison Zhao, who absolutely nailed this. As I shared in my April 23 e-mail, two other investors and I picked her short pitch of Align as the winner of an investment idea competition that was part of the seventh annual Wharton Investment Management Alumni Reunion. ALGN has crashed more than 40% since then...

4) Here's my 10th (and final) strategy for winning the class participation game:

  1. Track and grade every comment.

Halfway through a semester, you will want to think about which classes will require more or better class participation over the rest of the term to earn you the highest grade. But will you really be able to remember all the comments you made in each class? Not likely...

Therefore, it's easy to default to over-participating in your favorite classes and under-participating in other classes. But that's the exact opposite of what you're likely to need to ace every class, since you may need top-notch class participation in your less-favorite classes to offset the higher possibility of a weak exam.

To make sure this doesn't happen, you need to track, by course, every comment you make during the semester, and grade each one. I just did it on a sheet of paper and used a simple grading scale: a "1" was a great comment, a "2" was average and a "3" was poor, while a "0" meant no comment.

So at mid-semester, my list for a course might look like this: 2, 0, 2, 1, 0, 3, 0, 0. This means that in the first eight classes, I made four comments – no problem there – but the average score was only a 2, which told me that I had to really prepare extra diligently in that class to bring up my class participation grade.

Best regards,