Monthly Archives: May 2010

Glenn Greenberg Thinks Google is Cheap

In the Spring 2010 issue of Graham and Doddsville, an investment newsletter from the students of Columbia Business School, value investor Glenn Greenberg argues that Google is cheap. His reasoning: “It is generating about $30/share of free cash flow this year and $34 next year. At the end of 2010 it will be sitting on $100/share of cash, as long as they don’t spend it all on high-priced acquisitions. Thus, at $540, you are paying $440 for $34 of free cash flow in 2011, an 8% yield. That seems really cheap.”

As of today, Google is trading below $500 a share.

Brave Warrior Capital, Greenberg’s investment firm, shows a new holding of 134,361 shares in its most recent 13F. Blue Ridge Capital, run by the highly regarded John Griffin, also initiated a material position in Q1, 2010.

Buffett has said that a durable competitive advantage is the most important thing to look for in an investment. The Curse of The Mogul, co-authored by Bruce Greenwald of the Columbia Business School, an expert on value investing and competitive strategy, states that, “Google is the rare company that seems to have strong elements of all three sources of competitive advantage identified – economies of scale, customer captivity, and cost.”

If you’re interested, here are a few places to start if you wish to research google further.

Googled: The End of the World As We Know It by Ken Auletta

Google Technology (a sample chapter from Stephen Arnold’s The Google Legacy)

Full Disclosure: The author owns shares of Google.

Patience and Finding an Edge

In the world of Star Trek there is a simulated training exercise called the Kobayashi Maru that presents Starfleet cadets with a no-win situation in order to test their character. As Wikipedia describes it, “The cadet is faced with a decision:

– Attempt to rescue the [freighter] Kobayashi Maru’s crew and passengers, which involves violating the Neutral Zone and potentially provoking the Klingons into hostile action or an all-out war, or

– Abandon the Kobayashi Maru, potentially preventing war but leaving the crew and passengers to die.”

As a cadet, James T. Kirk secretly reprograms the simulator and thereby rescues the freighter. Kirk is commended for his originality. Kirk did not play the game in the conventional way; he played it in a way that he could win. (Want to beat Bobby Fisher? Play him in anything but chess.)

Imagine going to the Harvard Business School and being invited to play a complex game with ninety-nine MBA students. Imagine that the rules of the game were comparable to bridge and that some students had been playing the game for many years. Finally, assume that it is played individually, takes an hour to play a round, that the game would be played each week, and that at the end of a round all hundred players would be ranked 1 to 100. How would you fare? Do you think you would be above average and, if so, based on what? I think for most, it would be hubris to imagine even being in the top 50%.

But what if you discovered in the rules that there was no rule you had to play each round. Further imagine that the game was such that every so often a scenario would arise that would give you near certain odds of being in the top 10%. Why would you play every round when you had such an advantage? Why would you continue to play every round against opponents who were either smarter or more experienced, when the key to victory was simply waiting for the right opportunity.

As Munger has pointed out, most of the time the market is like a parimutual horse race where the payouts accurately reflect the odds of a given horse winning. Yet, according to Munger, there are a select few who both do the math and wait (and wait) for the right opportunity and then bet in scale when it develops.

In Atul Gawande’s book The Checklist Manifesto investor Guy Spier speaks about a phenomenon called “cocaine brain” which occurs when an investor begins to fall in love with a stock. This can lead to irrational thinking and mistakes. This condition is opposed to patiently waiting for an obvious winner. Yet the greed that a certain stock will get away is a siren song that lulls us into making sub-optimal investments.

There is no magic to having the patience to wait for the perfect fat pitch, although honest self-awareness and understanding are a good place to start. Each investor must devise systems that will develop this essential virtue of value investors.