“If you are going to be an investor,you have to do the numbers yourself.” – Glenn Greenberg
Glenn Greenberg: Background & Bio
Glen Greenberg is a relatively unknown value investor but his returns over the past few decades have been nothing short of astonishing.
Surprisingly, Greenberg never wanted to be an investor. He majored in English at college, after which he moved on to teaching for three years, serving as a high school principal. After, he ended up going to Columbia business school, followed by five years at J.P. Morgan. Greenberg first became interested in value investing when he was asked to analyze a company that owned land with redwoods growing on it, while working at J.P. Morgan. As it turns out, the land was worth three times the company’s market value. From this experience, Greenberg figured out that you don’t need to be a genius to profit from value investing.
Greenberg and his partner, John Shapiro founded Chieftain Capital Management during 1984. From 1984 through 2000, Chieftain achieved a compounded annual growth rate of 25% on its investments, before fees. The S&P 500 achieved a return over 16% over the same period. Annual returns through 2010 were 18%, after which the firm split into two entities as a result of conflict among partners. Up until 2008 Greenberg had achieved a record that was as good, or better, than that of Warren Buffett.
During 2009, split with his original co-founder, John Shapiro, in what has been described as a personality conflict. Shapiro relaunched under the Chieftain company name. Greenberg remained at the original business but renamed the operation Brave Warrior.
Greenberg will never invest in a company unless he is willing to put around 5% of his clients assets into it. The portfolio will not be full of, what Greenberg calls, ‘tracking positions’ miniscule amounts of a large number of stocks that an investor buys on the basis of a cursory research, as a reminder that additional work needs to be done before a real commitment can be made. Greenberg will not initiate a position until he knows the company inside out, with a strong conviction of success.
Like Buffett, Greenberg wants to buy ‘good’ businesses, those that are unchallenged by new entrants, have growing earnings and are not vulnerable to be technologically undermined. The company’s must also be able to generate enough free cash flow to keep investors happy. Unlike traditional value investors, who search for companies trading below the value of their assets, Greenberg and his partners see themselves as owners of a business and its surplus capital.
Greenberg looks for what he calls, ‘two-inch putts’, investments that can provide a high level of return for a low level of risk.
Mr. Greenberg is an investor not a trader. His philosophy is simplistic: a person should have an approach that over the long-term will win and will not fail. Investors should not use an approach which can provide both huge returns and huge losses. An investor must figure out an approach that will allow them to be a long-term winner because this is a long-term business. Investors need to win successively because they will be taking profits and reinvesting them continuously over their lifetime.
Chieftain predominantly avoids equities outside the United States. Mr. Greenberg believes they can not understand the politics, language, and accounting with the same degree of confidence as in the United States. There are enough companies in the United States that Chieftain wants to be ready to strike when opportunities arise. Traditional Wall Street research is superficial, and they want to really understand the economics of the businesses they invest in.
Chieftain does not perform relative valuations; they rely strictly on discounted cash flow analysis. When using a discounted cash flow model so much of one’s return is based on the terminal value, that an investor is putting a lot of faith in the longevity of the business. General Electric is the only one of twelve companies remaining in the Dow Jones Industrial average since its beginning in 1896. If an investor went through their portfolio today how much certainty would they have that the companies they owned would exist in fifty years?
What investors are really doing is buying the stream of free cash flows over the life of the business. When assessing this stream of free cash flow, Chieftain uses a hurdle rate of 14-15% (Columbia Lecture March 2006). Their hurdle rate was 20% but they adjusted it lower for the current interest rate environment. If they had not adjusted their hurdle rate lower for the present environment, little to no investments would have been made. They know their modeling is faulty and they will make errors, therefore this 14-15% discount rate gives them a “margin of safety,” as prescribed by Benjamin Graham in The Intelligent Investor.
A great example of Greenberg’s style is his Google investment, which he spoke about at a lecture to business students at Columbia University. He admitted that there was a lot he did not know about Google but the company had become a part of life, noting that people now spend 30% of their time online and that 10% of advertising is done online. Greenberg assumed that over the next five to ten years the percentage of advertising done online will catch up with the percentage of people’s time spent online. Google, with a 50% market share in online advertising, will get its fair share.
Simplistic investing methods:
- Buy great businesses
- Buy at low prices, allow for compounding and growth over time.
- Have a clear understanding of the business, only invest in what you know and understand, what rate of growth is the company forecasting, don’t be caught out by surprises.
- Use simple, methods of analysis, common sense over computer models, notes on a yellow pad can often prove to be more valuable than extensive computer models.
The Graham & Doddsville Spring Newsletter 2010 which Columbia Business School puts out quarterly, contains and indepth interview with Glenn Greenberg. Here is the first Q and A:
Graham & Doddsville: What are some of the characteristics you look for in a high-quality business?
Glenn Greenberg: There are a number of models of what could be an investible business. For example, the Ryanair model is similar to the Geico model in my view, which is to take a big fragmented business that is commoditized, where one company is so much lower cost that they are in a position to gain market share. So as the market grows, the company grows much faster. Their costs are so low that when other people are barely earning acceptable rates of return, they’re still earning very acceptable rates of return. When the industry is having good times, they’re having great times. That’s one model.
Another model is the Lab-Corp model. It was terrible business in the early 90’s, when there were 7 or 8 national lab companies all of whom could perfectly well perform a blood test. But it’s quite a different thing when there are two national lab companies and reimbursement is coming from 3rd parties who are interested in the lowest cost and who make contracts with LabCorp and Quest and basically force people who use other labs to make a higher co-pay. Suddenly, you can’t just get into the business. It’s the model of a maturing business that’s growing, but not fast enough to attract new competition, and where new competition would have a difficult time getting scale and getting reimbursement. So there’s natural barriers to that business, very high returns on capital, very high profit margins, very high free cash flow generation, some opportunities to do fold-in acquisitions, where once you buy another lab you can kick out almost all of the costs.
Here’s the link to the rest of the interview.
A Motley Fool 2004 interview with Columbia’s Bruce Greenwald, in which he mentions Glenn Greenberg as “just about the value investor out there.” (…) “He’s got a phenomenal record.” (…) “He’s just a brilliant, sort of natural industry economist. And he’s just naturally good at judging these franchises, almost unconsciously so. And I think that’s the thing I would find most impressive. I think Seth (Klarman) has it. I think Glenn Greenberg has it. I think there’s some other value — and, Buffett, obviously also has it.”
Glenn Greenberg: Portfolio management
The average number of positions in his portfolio over the years has been around 12 and he generally invests upwards of 5% per security. It is not uncommon to have an allocation of over 20% to a single security. As of November 2014, Greenberg’s top three holdings represent almost 55% of the portfolio. The top five holdings account for 72% of the entire portfolio. The portfolio’s largest holding was Valeant Pharmaceuticals, which has been in the portfolio since Q1 2011 and now accounts for around 32% of the portfolio. (Note form 13F-HR does not include their cash balances.)
Holdings as of November 2014, rebalanced 11/21/14
- Valeant Pharmaceuticals
- Express Scripts Holding (NASDAQ:ESRX)
- Cimpress NV (NASDAQ:CMPR)
- Charles Schwab Corporation (NYSE:SCHW)
- Kinder Morgan Management LLC (NYSE:KMR)
- Microsoft Corporation (NASDAQ:MSFT)
- JPMorgan Chase & Co. (NYSE:JPM)
- Primerica Inc. (NYSE:PRI)
- Equinix Inc. (NASDAQ:EQIX)
- Comcast Corporation (NASDAQ:CMCSA)
“There are these really simply things that you don’t have to be a genius to figure out.”
“Many of the companies we look at are what I refer to as geodes, stones that from the outside, to a casual observer, look to be ordinary rock, but when you crack them open and look very carefully you see beautiful crystals.”
“Going for too much certainty can hold you back – there is no certainty.”
“So the question is why should a decent quality or good quality business be priced to give you a 13-15% return when the market is priced to give you a return of about half that? Eventually somebody discovers this, somebody wakes up – it is not necessarily that the boring company with a double-digit cash flow yield has got some major trick up its sleeve; it just gets recognized as mispriced relative to the market. I would say that even though the equity market has run up quite a bit, there are still a lot of those companies around.”
Glenn Greenberg: Books
- There is a chapter devoted to Greenberg in the Bruce Greenwald book Value Investing: From Graham to Buffett and Beyond
- Notes on a lecture Glenn Greenberg gave at Bruce Greenwald’s class during 2010 in Columbia University: Glenn Greenberg Guest Lecture
- Another summary of the above lecture on the Base Hit Investing blog.
- Notes on How A Great Investor Thinks
- EDGAR Search Results Brave Warrior Advisors, LLC
- Nov 2014 13F Form
- A 2003 profile of Glenn Greenberg as a top sportsman
- The Objective of an Investor
- A badly formatted 1989 article by Fortune magazine about potential “future Buffetts”.
- Buysider.com profile
- Glenn Greenberg: Spring 2006 Lecture – Columbia University