Contrary to what basic finance theory says, the stock market is not efficient, which makes it possible to successfully invest by exploiting the inefficiencies, a visiting professor told a group of Fordham University students this week.
Bruce Greenwald, a distinguished Columbia University Business School professor, on Monday gave his guest lecture to students in the value investing program, launched by James Kelly, who teaches at the Gabelli School of Business, three years ago. Greenwald has spoken at Fordham several times since the beginning of the program.
Investing is not a win-win experience, said Greenwald, whose book, Value Investing: From Graham to Buffett and Beyond, is used in Kelly’s introductory course.
“This is a zero-sum game,” Greenwald told the students. “If you outperform, someone else has to underperform.”
Every transaction has two sides to it: someone who is buying and someone who is selling, he said. The object of the game is to be on the right side of that transaction as much as possible. The analysis process helps determine why one method and what security put an investor on the right side of the transaction.
Two methods, Greenwald suggested, are having a good search strategy and being specialized in a specific industry.
“People think they know more than they do,” Greenwald said, which is why being specialized creates premium knowledge above the average investors.
Greenwald’s appearance included a discussion about the process of picking a value investment security. The steps included a search, valuation, review and risk management. The search process involves finding unconventional securities that are cheap, ugly, obscure and ignored in the eyes of other investors.
Once a security is chosen, there is a valuation process of the assets that is more accurate than the typical discounted cash flow. This valuation is then compared with the earnings power value to determine if the company has a franchise value. A review evaluates the key issues of the company or industry and assesses collateral evidence and personal biases. The risk management portion measures the margin of safety on the investment and requires patience uncharacteristic of other investors.
“Mr. Greenwald’s presentation provided great insight into the core concepts of value investing as a strategy,” said Joseph Buccheri, BS ’16, who is concentrating in value investing.