In this discussion with Rich Pzena and Pzena President Bill Lipsey, Pzena explains why they choose to stay the course with their value investing strategy, and why value investing requires discipline in periods where prices become so far detached from fundamental value. One of the question’s his firm regularly gets asked is – Why don’t you guys change, adjust, or adapt your investment process? Here’s Pzena’s answer to that question:
Pzena: I think a lot of the questions stem from the fact that people have in their mind what value is. It’s not what we have in our mind. They have in their minds is that value is a factor. That value is low price-to-book, or low price-to-earnings. They’re sort of saying in that question, “Don’t you guys know? Do you read the data? Don’t you know that book value is flawed? Don’t you know that companies manipulate their earnings? Isn’t the world a different place?”
But you know when you define value as the price you pay for a company, compared to what its long-term future cashflows might be. I don’t really know how you can say, you should change that. What would you change it to? We’re not going to think about the future earnings capability? I mean that part of it never never made sense to me. So the fundamental basic view of what we do hasn’t changed. It can’t change because it’s arithmetic.
That doesn’t mean we haven’t tweaked our process over time. That doesn’t mean we don’t alienate people who think we’re stuck in our ways. But the reality is that when let’s just say growth, or momentum strategies spiral up, and I would call it out of control on the upside, you have to sit back and say was this driven by fundamental cashflows or was it driven by something other than that, that would make you have a different perspective on answering that question.
You can listen to the entire discussion here:
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