The following notes are from a lecture given by investor Glenn Greenberg in the spring of 2010 at Columbia Business School.
Bruce Greenwald introduced Greenberg by stating that, up until the 2008 financial crisis, Greenberg had achieved a track record comparable to or better than Warren Buffett’s.
Greenberg, an English major in college, never originally intended to pursue a career in investing. He attended Columbia Business School without a clear career objective and eventually joined J.P. Morgan after graduation. His “light bulb” moment came when he was asked to analyze a company owning land with redwoods. After some investigation, he discovered that the land was worth three times the company’s trading price. This realization shaped his investment philosophy, teaching him that some opportunities are straightforward and don’t require genius-level insight.
However, Greenberg believes that such opportunities are less common today due to the large number of value investors emerging from business schools who are competing with one another.
After five years at J.P. Morgan, Greenberg felt dissatisfied, believing he wasn’t being trained to be a good money manager. He left to work at a small money management firm, where he spent another five years conducting research. Ten years after finishing school, he started his own firm. He emphasized the importance of gaining substantial experience before starting a firm, cautioning against jumping in without proper preparation.
At the small firm, Greenberg learned to internalize the financials of potential investments deeply. His boss, the only one authorized to buy and sell stocks, would regularly grill Greenberg on potential investments. Greenberg was expected to know the business and its financials inside and out, and he does not believe in relying on pre-made spreadsheets. He argues that an investor must become intimately familiar with the financial details.
Greenberg founded Chieftain in 1984 with $40 million, mainly family money. From the outset, he prioritized research over marketing and minimized client interactions, focusing instead on the investment process. He believes that clients who require constant reassurance are not a good fit for his firm. Since the firm’s inception, he stated that they have outperformed the market by an average of 8% annually.
Recently, he started a new firm called Brave Warrior Capital. Greenberg has refocused on reading primary sources himself rather than relying on prepared data. He insists that investors should generate their own numbers to understand which ones are crucial, emphasizing the importance of identifying the key drivers of a business’s performance.
When evaluating a prospective investment, Greenberg first determines if it’s a good business that could withstand a severe downturn. Then, he assesses whether it’s attractively priced. He strongly advises reading 10-Ks, having dropped Capital IQ after finding too many errors and realizing that it distanced him and his analysts from truly understanding the financials.
One of his recent investments is Google.
Greenberg acknowledges that there’s much he doesn’t know about Google, but he’s confident in the broader trend: people now spend 30% of their time online, while only 10% of advertising is done online. He’s betting that, over the next five to ten years, online advertising will grow to match the time people spend online, and that Google, with a 50% market share in online advertising, will capture a fair share of this growth. He also sees value in Google’s optionality across its other ventures where they’ve invested heavily.
Greenberg likens investing to making a calculated bet, aligning with Buffett’s idea of being “approximately right rather than precisely wrong.”
To explain his approach to investing, Greenberg referenced a scene from the movie A Beautiful Mind. In the scene, John Nash visualizes formulae and highlights the key numbers. Similarly, Greenberg believes a good investor must sift through a company’s data to pinpoint the critical numbers that truly matter. (Buffett expresses a similar idea, emphasizing the importance of identifying key drivers for different businesses, like return on assets for banks or the cost of float for insurance companies.)
Greenberg advises young analysts to focus on the key variables that drive an investment. He suggests imagining they have only three questions to ask a CEO under truth serum. These questions should be strategic, aimed at understanding the core issues that would influence an investment decision.
Bruce Greenwald asked Greenberg for examples of this approach in practice. Greenberg mentioned his interest in Abbott, which at $52 a share was trading at about 10 times cash flow. Abbott has a strong track record, with Humira, a drug that accounts for about 45% of earnings. Given that Humira is a large molecule drug, it’s harder for generics to copy, potentially preventing a steep drop in sales when the patent expires. Greenberg would press the CEO on how the company plans to address the challenge when Humira comes off patent, as this is the central investment issue.
He also cited Ryanair, in which he holds a large position.
Ryanair, founded 20 years ago, was designed as a low-cost airline. Its financials are so strong that you wouldn’t guess it’s an airline. They grew rapidly by purchasing planes inexpensively, but this supply of cheap planes has dwindled, and they have few new planes in the pipeline.
The key investment question is their strategy moving forward. Greenberg analyzed what Ryanair would look like if they never bought another plane, focusing on cherry-picking profitable routes and paying out cash. His analysis showed that even with reasonable assumptions, they could still generate a 13.5% return for investors, setting a high hurdle rate for investing in new planes. This illustrates his approach to analyzing investments.
This concludes the notes on the first part of Greenberg’s lecture. I plan to post notes on part 2 in the coming days and welcome your comments.