Hailed by The New York Times as a "guru to Wall Street's gurus," value investing expert Bruce Greenwald takes some time to offer his insight and advice to The Motley Fool. A professor at Columbia University's Graduate School of Business, Greenwald has also authored multiple books, including Value Investing: from Graham to Buffett and Beyond.
The financial sector is reviled by many, with scandal and malfeasance cropping up in the biggest-name companies. Will they suffer as a result? Greenwald discusses reputational risk and its real-world impacts.
Full transcript below.
Matt Koppenheffer: In a similar vein -- this actually could apply to any sector -- but you've had a lot of headline risk, reputational risk for the financial sector. We just saw today, the headlines are coming out about JPMorgan settling the big fines for the London Whale trade.
When you're thinking about the value of a company, does reputational risk and headline risk come into that at all?
Bruce Greenwald: In the long run, the evidence seems to be that -- as long as it stays out of bankruptcy -- reputational risk does not that significantly impair the situation of a company. I'll give you a couple of examples of that.
The first was American Express in 1964 -- and Buffett talks about all this -- the Salad Oil Scandal, the stock price falls. Ten years later, nobody gives a crap. It just doesn't have an effect.
The latest one, if you think about it, is AIG. Now, AIG does lose a lot of money, but the reputational risk doesn't seem to be the problem anymore, so that even five years after probably the worst malfeasance that's out there, it just is not visible in the overall profitability numbers.
I think reputational risk... and by the way, if Jamie Dimon has learned nothing from this, it's that you don't want to criticize the administration, because they'll kill you. Now, assuming he's learned that lesson...
Koppenheffer: Hopefully, he's learned that lesson by now.
Greenwald: The reputational risk is not... again, do the numbers. He's paid $100 million in the fine. What is their quarterly earnings, $4-5 billion? It's just not a big number and it's not a repeatable number.
Usually, that kind of thing is your friend because what you want to buy is diseased stocks that are beaten down in price and are a bargain because we know people irrationally shy away from those stocks. They tend to assume that the problems today are going to be the problems forever because they overemphasize certainty.
That's where, in general, you want to look. Reputational risk, perversely, is your friend. But you still have to have the expertise to tell the difference between terminally diseased and slightly, just temporarily diseased.
Matt Koppenheffer owns shares of JPMorgan Chase and AIG. The Motley Fool recommends American Express and AIG. It owns shares of AIG and JPMorgan Chase and has the following options: long January 2014 $25 calls on AIG. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.