Pzena: Value Investing Opportunities Don’t Have To Be Optically Cheap Junk

Johnny HopkinsRichard PzenaLeave a Comment

In their latest educational video, Pzena Investment Management discuss why value investing opportunities don’t have to be optically cheap junk. Here’s an excerpt from the video:

There are two important things to keep in mind. The first is we’re looking to buy good businesses. I think sometimes when people hear value investing they think you’re buying a bunch of optically cheap junk.

That’s not what we’re doing here. We have concentrated portfolios and we really look at each opportunity as though we’re buying the whole business. So we’re looking to buy businesses that would generally return, or exceed their cost of capital through the business cycle, and businesses operating in industries with decent structure and decent positions within those industries.

Kind of the way to think about it is it’s like a car driving down the road and it’s hit a pothole, is it going to straighten out or is it gonna careen off into the median. That’s sort of a way to think about it.

And the last point that I really can’t emphasize enough is that we obsess about what will happen if things go wrong. What if the path to normalization is rockier than we would have thought. What if the business deteriorates before it gets better. What kind of protection do we have.

It may mean a strong balance sheet with flexibility in lending lines or even a net cash position. It may mean that there are ancillary or subsidiary businesses that could be sold off to raise cash if need be.

Basically the most painful thing that can happen is you can be right about the normalization of the business in the years to come but have lost your equity stake in the meantime or been massively diluted because the business deteriorated in that interim period.

We already know that we’re hunting for ideas in the cheapest part of our investment universes and so we have that massive upside potential and then if we can limit the downside then you have a really attractive risk reward skew and that’s what we’re really focused on.

You can watch the entire discussion here:

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