Wednesday, 8 October 2014

Value Investing Process by Prof Bruce Greenwald

Greenwald Value Investing Class on February 12, 2008 

Retail stocks are in the tank so investors may be unreflectively selling. You will find many low market to book stocks.  You will find growing companies being dumped indiscriminately. But remember at the end of the day why are you applying this type of search strategy?   Because when you think this stock is a bargain you have to be able to explain why you are the only one who spotted that opportunity.  You have to have some rational for why the opportunity exists. 

You start with sensible search

Then value the stock: basically look at three basic elements of value: 
1. Asset Value
2. Earnings Power Value
3. Franchise Value   

Value Investing Process
SEARCH:  Obscure, distressed, Poor performance, small
VALUATION: Asset Value, Earnings Power Value
REVIEW: key issues, collateral evidence, personal biases
MANAGE RISK:  Margin of Safety, patience, You

Anybody does a DCF, I just throw it out.  Unless it is associated with a short term liquidation.

We spoke about asset values (AVs) and earnings power value (EPV). Earnings, if they are sustainable, are supported either by assets or by barriers to entry. If you had a company with a lot of earnings but no assets what sooner or later will happen to profits if there are no barrier to entry in this market?   They will be competed away.  I can do that for no assets.  No net assets, no barriers to entry and then no protection, no value.

The value of Growth is the least reliable element of value.  
You have to be able to forecast what is going to happen to growth.  It is not just looking there now and applying a value to it, you have to forecast what the changes are going to be. When you look at these things when you have done them yourself, if you look at terminal values for growing companies, you ought to have an immediate sense that it is highly sensitive to the assumptions.  And that is not comforting to a value investor who wants to have an immediate sense of what they are buying with a reasonable amount of certainty.

Notes from video lecture by Prof Bruce Greenwald

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