The following notes are from a lecture given by investor Glenn Greenberg in the spring of 2010 at the Columbia Business School.
Bruce Greenwald introduces Greenberg by saying that, up until the crisis in 2008, Greenberg had achieved a record that was as good, or better, than that of Warren Buffett.
Greenberg was an English major in college and never contemplated going into investing. He ended up going to Columbia business school with no real career objective. He went to work for J.P. Morgan after b-school. A light bulb went off for Greenberg when he was asked to analyze a company that owned land with redwoods growing on it. He made some enquiries and discovered that the land was worth three times the price at which the company was trading. That shaped his thinking because he learned that there are situations out there where you don’t need to be a genius to figure them out.
He does feel that there are fewer such opportunities today because schools are turning out large numbers of value investors who are competing against each other.
Greenberg worked for five years at J.P. Morgan but was dissatisfied because he did not think he was being trained to be a good money manager. He left and went to work for a small money management firm where he spent five years doing research. He then started his own firm, ten years after leaving school. He believes he profited from the ten years of experience and cautioned audience members about starting their own firm without adequate preparation.
At the small firm where he worked, he was trained to internalize the numbers of a potential investment so he could really think about the business. His boss, who was the only one who could buy and sell stocks, would bring Greenberg into his office and grill him about a potential investment. Greenberg was expected to know the business and its numbers inside out. He does not believe in using pre-made spreadsheets. The investor has to become intimate with the financials.
He started Chieftain in 1984 with $40 million, which was primarily family money. From the start, he chose to spend as little time on marketing as possible so he could focus on research. He also spent little time talking to clients which he views as non-productive. Those who need of a lot of hand holding are not a good fit for his firm. Since inception, he said he has beaten the market by an average of 8% annually.
He recently started a new firm called Brave Warrior Capital. He said he re-focused on reading the source material himself rather than relying on prepared data. He said that you should not use numbers prepared by others, but rather generate them yourself. This will also teach you what numbers you need to focus on. You need to boil it down to a small set of key drivers, because the performance of each business is typically driven by a set of key variables.
He first wants to know if a prospective investment is a good business, i.e. could it survive a severe downturn. He then looks to see if it is cheap enough. He again stressed how it is critically important to read the 10-K’s. He was using Capital IQ but decided to drop it because he found too many errors. But more importantly by using it, he and his analysts were not becoming personally immersed in the numbers.
He recently invested in Google.
Greenberg admits that there is a lot that he does not know about Google. But he does know that people now spend 30% of their time online and that 10% of advertising is done online. He is willing to bet that over the next five to ten years the percentage of advertising done online will catch up with the percentage of people’s time spent online. He does not know exactly how it will play out, but he does believe that Google, with a 50% market share in online advertising, will get its fair share. He also likes the optionality value of all its other businesses where they have invested a lot of money.
You could build various models for Google, but in the end it’s a bet that Internet advertising will grow and that Google will get its share. He believes making an investment is making a bet. (Note: I am reminded here of Buffett who said, “I would rather be approximately right than precisely wrong.”)
He cited a scene from the movie A Beautiful Mind to explain how he views investing and analyzing data. In a scene, John Nash is looking at formulae in his mind; he is able to pick out the key numbers which, in his mind, he sees as highlighted. Analogously, a good investor must be able look at all the data surrounding a company and determine the numbers that really matter. (Note: Buffett talks about the same idea, i.e. that each business has a handful of important drivers. For example, for banks it’s return on assets. For Coke, it’s cases sold and the number of shares outstanding. For insurance companies, it’s the cost of float and how fast it’s growing.)
You need to indentify and think about the key variables that drive an investment. He tells young analysts that they should imagine, when preparing for an interview with a CEO, that they could administer truth serum and be assured of truthful answers. The catch is that they could only ask three questions. These are the questions you need to identify and try to answer. These should be strategic questions, not what the company’s EPS will be next year. Go after the questions that would allow you to make up your mind about an investment.
Bruce Greenwald asks Greenberg if he could give some examples of this in practice. Greenberg says he is very interested in Abbot. At $52 a share it’s trading at about 10x cash flow. It has a great track record. It has one drug, Humira, that accounts for about 45% of earnings and the percentage is growing. Greenberg says that because Humira is a large molecule drug it will be harder for generics to copy. This may prevent sales from “falling off a cliff”, but eventually the Humira franchise will come to end.
If he was going to meet with the CEO, Greenberg would ask him how he thinks about the challenge the company faces when this drug comes off patent. He would press hard on this point because this is the major investment issue – this is the central question in deciding whether to invest.
Another example is Ryanair where Greenberg has a large position.
It was started 20 years ago and was designed to be a low-cost provider. If you looked at its financials, you would not know that it is an airline because the results are so good. They grew quickly and were able to purchase airplanes inexpensively. This supply of cheap planes has dried up, and they have few or no new airplanes in the pipeline to continue growing the business.
The key investment question is where do they want to go from here, i.e. do they want to be a growth company, what if they never bought another plane or never added another route? Greenberg analyzed what the company would look like if they never bought another plane and just cherry-picked good routes and paid out the cash. They concluded that the only thing that would really change is that the company would need to increase CapEx to maintain its fleet. Using very reasonable assumptions, Greenberg calculated that, under this scenario, they could still generate a 13.5% return for investors. If you have done this analysis, it sets a high hurdle rate for investment in new planes. This is an example of how he thinks about and analyzes an investment.
This concludes my notes on the first part of the lecture. I plan to post my notes on part 2 within the next few days. I welcome your comments.