In their recent Value Investing Masterclass, Rich Pzena and Joel Greenblatt discuss all things value investing including their days spent worked together on a Ben Graham paper in college. During the interview Rich Pzena also discusses his thoughts on why value investing and excess financial leverage are not good bedfellows. Here’s an excerpt from the masterclass:
Pzena: The second [lesson] for me, and they’re only two substantive ones, is excess financial leverage and value investing are not good bedfellows. Because if you have companies that have historically done well and find themselves in a situation where something has gone wrong but they’re facing a big debt burden, you’ve effectively changed the dynamic of what you’re doing from investing to gambling.
Because you have no idea how the principles are going to behave when faced with the stresses of excess financial leverage and we’ve watched it happen.
I’ve made some mistakes which is how you watch it happen. You see great businesses and they’re selling for low prices and you buy them and the banks foreclose because they were short-sighted, and the first one that hit me which was going back into the 90s which was Fruit of the Loom actually wound up in Warren Buffett’s portfolio out of bankruptcy.
So the point is you have to be very very careful about the balance sheets and that I think we’ve tried to systematically eliminate any of those risks from our portfolios.
You can watch the entire masterclass here:
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