Bruce Greenwald

Supported by Greenhaven Road Capital, finding value off the beaten path.

Bruce Greenwald spoke in 2005 about value investing. He noted, “There is overwhelming statistical evidence that markets are not efficient.”

But finding inefficiencies is tricky. Ask, said Greenwald, “Why has God been so kind – or whoever it is who does this – as to make this opportunity available only to you?”

This is something a lot of analysts, value investors or otherwise, miss said Sonkin and Johnson. They said there are four questions investment pitches must answer; how much can I make, how much can I lose, why haven’t others grabbed this, and when will others get it?

Josh Wolfe puts it this way, we hope others agree with us, just later.

Greenwald, Sonkin and Johnson, and Wofle all want something that costs less now and more later. Usually that means it smells funky, is complicated, or unloved. “Ideally, you want to be the only one seriously studying a particular security.”

And there could be lots of reasons you get first crack at something. It could be too small. It could be the wrong category. It could have a catalyst. “Boring is your friend…people like exciting but that is not where you want to be.”

This approach works if it has support.

“But as any professional investor knows, they run up the score whether you swing or not because you’re being compared to indices.”

The organizations stakeholders are important. For investors it’s LPs. For parents it’s kids. We all have them.

“You get in trouble as an institutional money manager by significantly deviating from the performance of other institutional money managers.”

Ideally, you self select as Brent Beshore told Ted Seides, “We like to get in situations where people have educated themselves on us, people know who we are, there’s already trust built through our writings, through what we’ve talked about and they want us to buy the business. They’re coming out and seeking us.”

Once everyone is aligned, Greenwald warns investors to focus on what they know. Want to forecast returns ten years out? Good luck, said Greenwald.

“It’s about developing a circle of competence, and if their circle of competence is every industry in every country, lots of luck.”

“You want an approach to valuation that uses all the information as effectively as possible.”

That means putting more value on some things, the tangible and immediate, and less on others, the distant and intangible. Greenwald said to start with assets and current earnings and then cautiously expand from there. Pat Dorsey went to India to see what he could see and realized consumer brands were beyond his scope, noting that “We didn’t know if it was diligence-able.”

If it’s different (ideally with few eyeballs), if everyone’s aligned and if there were no big assumptions we may have a great investment.

Just hopefully not too great.

Annie Duke said the returns to poker have gone down the longer it’s been on TV. Jeff Luhnow said the moneyball advantage has dissipated. Dan Rasmussen said this happened in PE. Albert Wenger saw it in network effect businesses.

Alpha erodes.

Unless…

“Unless there is something to interfere with the process of entry, this market and earnings power value is sooner or later going to be driven to the reproduction value of the assets.”

“If you have earnings power in excess of the reproduction value of the assets, there had better be something to interfere with the process of entry.”

Can you raise prices like Harley Davidson, asked Eddy Elfenbein. Can you raise switching costs like in B2B software, asked Michael Porter. Do you have a Network effect, asked Tren Griffin.

There’s a lot in Greenwald’s presentation about DCF models (models in general). Thanks to this thread for the nudge.