Lessons from Rich Pzena: Mastering Value Investing

During their recent episode, Carlisle, Taylor, and Andrew Wellington discussed Lessons from Rich Pzena: Mastering Value Investing. Here’s an excerpt from the episode:

Tobias: They were going to hire and then just said, “You’re going to be rejected.” What did you learn from Rich?

Andrew: From Rich, I learned all the fundamentals. I knew about business. I’d gone to The Wharton School of Business as an undergrad. I had the raw tools, but I had never done research and analysis. So, at the core of what we do, as I mentioned before, you got to get the earnings right. So, that is about how do you research a company and ultimately convert that to a forecast of future earnings that has a chance of actually being right.

Anyone can build a model. Building a model that’s right is a lot trickier. And so, that’s a learned skill, how to think about businesses that are currently having problems, and what kinds of problems are temporary and fixable, and in you’re modeling, what should the margins be in the future? How do you think about that? How do you break down income statements, balance sheets, cash flows, build models that work.

It’s amazing how many models I see on the sell side that don’t add up. They have all these profits for years and then the balance sheet, no debt gets paid off, no cash accumulates. It all has to fit together. So, it’s not exciting stuff, but it’s crucial table stakes skills you have to learn and develop if you ultimately want to be successful as an investor.

The other thing was learning how to be a value investor, which is different than being analyst. And in a way, it didn’t feel like it at the time, but I’m blessed that I was there for the years leading up to the tech bubble, through the tech bubble and then for a year on the other side. So, got to be there to see our beliefs get questioned, see everything go against us, see how holding firm paid off and then ultimately get that payoff and see how everything was right.

And then, I Left there in 2001 for the chance to run my own value portfolio at Neuberger Berman, but the core foundation on which everything else in my career has been built was established in those years at Pzena. It was a really small firm at the time. It was roughly zero dollars and zero cents in assets on day one. It was a little over a billion by the end of year five when I left. But I got a lot of one-on-one time with Rich. Very humbling in the early years, trying to figure things out. He’s just so smart and such a good analyst. I’m very lucky. I got trained really well.

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