Gabelli100 | Nov 23, 2020 | Michael Benigno
Bruce Greenwald Discusses the Evolution of Value Investing
By Claire Curry
When the first edition of Value Investing: From Graham to Buffett and Beyond, was published in 1999, many believed that value investing was dead.
The second edition of the book, released this month, once again arrived at a time when the investment philosophy—first taught by Benjamin Graham and David Dodd at Columbia Business School in the 1920s—has been out of favor, outperformed by growth investing.
On Nov. 18, Bruce Greenwald, the Columbia finance professor who The New York Times described as “a guru to Wall Street’s gurus,” discussed the timeliness of the edition at a Gabelli School Centennial Virtual Speaker Series event, co-sponsored with the CFA Society New York, the Gabelli Center for Global Security Analysis, and the Museum of American Finance.
“We have not lost our gift for producing these books at exactly the right time,” said Greenwald, who wrote the original edition, now considered a classic in the investment community, with colleagues Judd Kahn, Paul D. Sonkin, and Michael van Biema. “The good news is that today, we have an idea of what the issues are, and this second edition is designed to address them.”
Don’t Abandon the Bedrock Principles
Greenwald urged investors to hold on to the key cornerstones of value investing that have led to the historic success of investors like Mario Gabelli, the Gabelli School’s namesake who introduced Greenwald at the event, and the iconic financier Warren Buffett.
“What’s going to put you on the right side of the trade?” Greenwald asked, noting that it’s wise to bypass glamorous stocks for out-of-fashion, cheap stocks. “You want to search intelligently for bargains.” He stressed the importance of understanding what you’re paying for, collecting data that is often overlooked, such as balance sheets and private market value, avoiding speculation, and above all, being patient.
“You have to be really disciplined about knowing what you’re buying, and not jumping in when there aren’t any particular bargains and everything is overpriced,” he added. “Sit on the sidelines and be patient.”
Franchises and the Effects of Globalization
According to Greenwald, between 1950 and the late 1980s, globalization undermined great stocks like GE, DuPont, RCA, and GM because their markets became increasingly competitive and increasingly global, so they couldn’t dominate.
“Growth values were steadily eroding as bigger markets, which were harder to dominate and harder to keep people out of, went away,” he said.
Another trend contributed to this and changed the landscape of the technology sector: Technology companies like IBM which previously provided an entire range of products got eroded by what Greenwald called “mix-and-match technology,” or technology companies that offer one slice of the tech pie. Microsoft started out with operating systems, Google provides search capabilities, LinkedIn supports specialized social networks, and Oracle offers database systems, he explained.
This created smaller markets that have barriers to entry, which is what creates growth value. Ultimately, to be sustainable, they are rooted in economies of scale, and to have economies of scale, a company has to be the dominant competitor in the market.
“Big markets are impossible to dominate,” Greenwald said, citing the global automobile industry as an example. “Companies can be viable at 1 percent marketshare and you’re not going to keep anybody out. It’s the small, local markets that create opportunities.”
Value investors have to increasingly become “franchise investors” and that means that they need to understand how to value growth. The challenge in buying growth is not only looking intelligently for opportunities and being patient, but also figuring out how to measure what you’re buying—topics Greenwald discussed in the session and covers in depth in the book’s second edition.
Does ESG create value?
Asked by an audience member whether environmental, social and governance (ESG) factors create value, Greenwald referred to it as the “glamour stock industry today,” and said that like anything else, it creates value in some industries, but not others.
“The good ESG companies, those that can afford to do it, are going to be the powerful franchises,” he said, because they have economies of scale. The actual impact on value, he added, will vary based on industry, specialty, and geography. “To do it well, you better be specialized and not only in just ESG.”
On the flip side, there are also some advantages to investing in non-ESG companies today. “If you’re talking about cigarettes, guns, and in some cases, drugs these days, those are despised areas,” Greenwald said. “If you’re an expert in those areas, that’s going to be an opportunity for you.”