Brendan Byrnes: Hey, Fools, I'm Brendan Byrnes, and I'm joined by Bruce Greenwald, who is the so-called "Guru to Wall Street's Gurus," according to The New York Times, also a professor at Columbia University's Graduate School of Business, and a senior advisor at First Eagle Fund. Bruce, first of all, thank you so much for joining us.
Bruce Greenwald: Brendan, it's a pleasure to be here, as always.
Brendan: Let's start with your value investing approach, because I think value investing can mean different things to some different people, or it's defined in different ways. How do you view value investing? How do you define that? Talk a little bit about your approach.
Bruce: It's exactly as you say. There's nobody who thinks of themselves as a non-value investor. There's nobody out there who energetically looks for chances to spend $100 for things that are worth $50, so everybody thinks they're value investors in some degree.
I think that the Graham and Dodd tradition is based, really, on two ideas. The first idea is that you want to look for cases or situations where you're likely to be on the right side of the trade. The one absolutely inescapable fact about investing is that whenever you buy a security, thinking it's going to do relatively well, somebody else is selling it to you and they typically think it's going to do relatively badly.
Brendan: Someone's got to be right, someone's got to be wrong.
Bruce: Somebody's got to be wrong, so what you want to think about is what's going to make you right. I think there's a lot, now, of behavioral finance that confirms Ben Graham's original judgment, which is if you look at what's ugly, out of favor, boring, disappointing, and therefore cheap, you will be on the right side of the trade, because, of course, the natural instincts that people have, which travel over into the market, are they love lottery ticket stocks, which are the opposite of that. They hate things that are ugly, and of course they're sure that the good stocks are good, and they're sure that the bad stocks are bad.
That just makes the opportunities on the low end of the scale, because nobody really knows for sure. If you're sure it's going to do badly, and price it that way, and the chance that it's going to do badly is only, say, one out of three, that's going to be a bargain. The first thing is looking in those sorts of areas.
The second thing, I think, that Warren Buffett has talked about, which is also in this area of where you look, is if I'm a specialist in some industry, and you've just flown in from Zurich to look at it, I'm going to be on the right side of that trade more often than you are.
I think specialization, and I think Buffett's word for this is "circle of competence," is a very important part of what you do. You want to not think you can do everything.
Then I think the second whole half of it is that you have to know what you're buying. There, I think it's just a discipline in valuation. You want to look at assets, because that's the most reliable element you have without having to forecast anything.
You want to pay for growth rather than current earnings only as a last resort. I think when you buy growth stocks, which again is not something that, unless they're really available at bargain prices, most Graham and Dodd value investors are interested in doing, you want to have a good idea what you're paying for.
Again, Buffett and others have developed techniques for doing that that are now widely used, that are far superior to the sort of discounted cash flow and ratio valuations that people do.
It's where do you focus? Ugly, unpleasant, in your specialty. And how do you focus? Which is knowing what you can value based on assets, current earnings, and when you have to deal with growth, knowing when growth creates value.