Building wealth with a successful technique
Published: Monday, May 10, 2010
Updated: Monday, May 10, 2010 06:05
The Portfolio Practicum class of 2009-2010 at Creighton University's College of Business hosted a panel on value investing during the busiest weekend of the year in Omaha, Nebraska, on Friday, April 30. There, four panelists discussed a myriad of topics centered on investment and company valuation.
The panel discussion was in line with the purpose of the Portfolio Practicum class. The program is a selective, "hands-on" undergraduate course that runs for two semesters, with the class managing $2.5 million in equity investments for the Creighton University Endowment Fund. It has outperformed the S&P 500 in many instances over its decade-long existence.
According to the program's site, "We employ the value investing strategy developed by Benjamin Graham and David Dodd and refined by Warren Buffett. The principle behind this is to find a stock that has an intrinsic value that we calculate below what the market perceives it to be worth."
The moderators were two Creighton University alums: Charles Heider, president of the private investment firm Charles Heider Company, and John Maginn, president of the financial consulting firm Maginn Associates.
Two panelists were Patrick Brennan, CFA and a senior analyst at RBO & Co., LLC, and Bruce Greenwald, a Ph.D., Columbia Business School professor and "a guru to Wall Street's gurus," according to The New York Times. The other two panelists were Vitaliy Katsenelson, CFA and director of research at Investment Management Associates, and David Winters, CFA and CEO of Wintergreen Advisers.
Greenwald spoke on what value investing is and the common characteristics of value stocks.
"The first thing you have to recognize is that nobody in the world thinks that they're not non-value investors," said Greenwald, further adding that "nobody tries to systematically overpay for securities."
The charismatic professor explained that all investors buying stocks believe they are buying into a great idea but they do not realize that someone else on the other side is selling on that idea in order to make that stock available, therefore that idea might not be the greatest idea. There is always one side that will inevitably be wrong.
In order to engage in value investing, Greenwald said investors intending to buy need to look for securities they believe will be oversold.
"You wanna concentrate on ugly, cheap, disappointing, diseased and therefore undervalued [stocks]," said Greenwald, who then added, "The fundamental thing about value investing is cheap, cheap, cheap, ugly, ugly, ugly ... when you do that, you have to be able to tell the difference between terminally diseased and merely temporarily diseased."
Greenwald warned audience members to stay away from overvalued stocks.
"High-growth glamour stocks are always going to be overvalued because people are going to pay for the dream [of getting rich]," said Greenwald.
The professor then said value investors need to understand value in terms of the worst that could happen, taking advantage of systematically irrational behavior. A way to do this is to triangulate among valuation methodologies to approach the dark side as closely as possible. Investors can look at metrics such as assets and earnings power and determine whether growth is there and if it is sustainable using a focused research approach.
The panelists also discussed the importance of the brand name of a company. Brennan, a former investment banker, said, "A company with a very strong brand name … will have high margins and higher return on invested capital … [which] will produce significant value for business."
An audience member asked how equity investors could protect themselves from inflation and one of the panelists shouted out "chocolate companies."
Katsenelson joked that "cigarettes are currency in jail, if you're looking for alternative currency, you've got it," further reflecting on the times when cigarette prices go up and consumers face a price shock for a few days, then on the third day they would go buy cigarettes again, linking the analogy to companies with pricing power and strong brands.
Greenwald suggests investors organize their portfolios into three buckets and devise whether there are vulnerabilities. He said fixed income investments protect investors against deflation and hurt them during inflationary periods. Real assets and mining properties protect against inflationary periods, causing the opposite effect. Strong franchise businesses protect against both inflation and deflation, like Wal-Mart.
To the amusement of the audience, Greenwald did not hesitate to disagree with his peers on many of the topics discussed. For example, after panelists shared their views on how to time the market, he countered, "Well, I'd like to take a slightly different perspective. Back in the 1970s, there were stocks trading at fabulously low prices. If you waited for that to happen again, you are still waiting. Rather than timing the market, look carefully and you are always going to find bargains out there."
He also warned about the dangers of being too analytical. "As an academic, I always focused on the economics of a company and paid less attention to management. Now that I am the director of an investment firm and I meet managements, I have to tell you, I am shocked at how bad they are," he said. "Now I want companies that any idiot can run, because sooner or later, one will."
Greenwald showed little reservation about his contrarian views. "The purpose of my life is to disagree with almost everybody all the time, as you can probably tell from this panel," he joked. "The key is to be disciplined and independent when doing so — having a process and sticking with it."