Bruce Greenwald: The Landscape Has Changed For Traditional Value Investing

Johnny HopkinsBruce Greenwald2 Comments

Here’s a great interview with Bruce Greenwald on the Grant’s Current Yield Podcast, discussing the changing landscape for traditional value investing. Here’s an excerpt from the interview:

So I think, as you know, value has not done well, and sort of primitive value especially. Which is just low P/E, low market to book, has not done well for almost 10 years now. I think that the obvious cause is that we are shifting from a real asset heavy manufacturing and industrial economy to a software, service driven economy where really most of the capital is intangible. and you see that on the balance sheet.

So people who are going to try and look at traditional tangible book value are going to miss most of where the value is across firms and the ones who sort of look cheap on tangible book value are going to have very bad intangibles, and are not going to do particularly well.

So I think it’s much harder to assess asset values today because there is so much in intangibles than it was historically. And I think that’s affected the value community. If you dumb it down.

I think what goes along with that is a lot of the accumulation of intangibles, acquiring a book of business, developing a product portfolio, gets expensed. It doesn’t appear as investment. It gets expensed and therefore not included in profits. So that again, if you want to do a proper profit calculation you’ve got to sort of add back that investment. And again that’s a complicated process.

So I think the traditional metric that in an industrial economy, manufacturing economy, people depended on as value investors are just not there anymore. That means they’re going to have to construct income statements and balance sheets for themselves.

You can listen to the entire interview here:

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2 Comments on “Bruce Greenwald: The Landscape Has Changed For Traditional Value Investing”

  1. Johnny,

    I enjoy listening to After Hours and I have read Deep Value and The Acquirer’s Multiple.
    I also know Allen Benello from when he worked at PICO. The Chairman of PICO, at the time, and I have worked together at various companies since 1972. I am planning to buy Zig, my only reservation being that I will duplicate a number of my existing holdings.
    My reason for writing today is your email referring to the Bruce Greenwald interview.
    I doubt if I will listen to it because the precis you sent indicates that it is just another example of someone expressing opinions on a subject that they know nothing about. Total nonsense.
    The Bloomberg girl interview featured on the website also highlighted her lack of understanding of value investing.

    To be specific, here are some of the shortcomings that particularly annoy me.

    1. Value investing is about intrinsic value. Most of these columns and podcasts that claim value investing has underperformed, like this one, go on to talk about factors that are totally unrelated to intrinsic value. The S&P 500 Value Index is based on just three measures: PE, Price to book and Price to Sales. Not even one of these measures is of any use in estimating intrinsic value. The company president’s belt size would be just about as useful. Pick up the phone and call any accounting firm that does business valuations and ask them if they use any of these three measures. Apart from laughing, they will tell you NO.
    The reason why The Acquirer’s Multiple is useful is that it does assist in estimating intrinsic value. I get reports from a US firm that monitors acquisitions and the reports indicate that the vast majority of acquisitions are done at between six and nine times EBITDA. Buying at less than six times stacks the odds in your favor. When buyers overpay, it leads to massive write-offs. Teva’s acquisition of the genetics division of Allergan is a good example of such a disaster.

    2. Performance should not be measured using stock prices at any particular point in time. Performance should be measured based on the change in intrinsic value compared to the price paid. If you look back to the 1999 – 2000 period the dotcom stocks had spectacular price increases. But they were not supported by parallel increases in intrinsic value. In Canada, Nortel saw spectacular price appreciation and represented over 30% of the composite index at one point before it crashed. The intrinsic value went in the opposite direction. Also in Canada there has been an absurd boom in pot stocks. Many of these companies, valued in the billions on the market, are not just overpriced but likely worthless.

    3. For the last ten years, and throughout my investing career that started in 1972, value investing has actually produced excellent returns. However, if you measure returns at any point in time the results may not look so good.
    Back in December 2015 I bought Micron at $14.65. By May 2016 it was around $9.
    I still have it because the intrinsic value continues to outpace the price.
    I bought it primarily based on my value screen that starts with Enterprise Value to Forward EBITDA for the next 12 months and 3 to 5 years.
    Greenwald’s comment on the “traditional metric” that value investors depended on is just nonsense. When I went to work with Ron Brierley in 1972 making spectacularly successful takeovers of undervalued companies we never used book value, PE or Price to Sales. Greenwald is out of date by at least 50 years. The last factor is particularly useless. If you compare a thin margin business such as trucking with a high margin business such as semiconductors you would conclude that trucking is a far better place to invest.

    Keep up the good work. I don’t know where Tobias gets the time to do all that he does.

    Best regards,
    Jim Hamilton
    (Toronto, Canada)

  2. Jim,

    I think Mr. Greenwald is referring to those traditional value metrics, because those are traditional value metrics. Most funds that claim to be *value funds* use metrics like low P/B, and P/E, so it would make sense for him to refer to those. I’ve heard Joel Greenblatt make the same comparisons.
    I think *value* will always be something that is subjective to a degree, and one man’s value may not be another man’s value. I don’t think Mr. Greenwald’s use of those commonly cited metrics completely disqualifies his arguments and years of experience.


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