In anticipation of our first company valuation, the comments links are now active for all existing and future posts. I look forward to having some good discussion on this site about recommended companies and value investing topics in general. I'm sure many of you have thoughts on existing ideas or have new ideas to share and I encourage you to do so.
As mentioned previously, I am currently in the midst of a job search which I have been devoting a lot of my time to. As such, I haven't had much time for screening potential investments never-mind conducting valuations on them. Thank you for your patience and for continuing to check this site regularly. I plan to start discussing specific companies on a regular basis sometime within the next week...
Until then please read my basics course on value investing and ask any questions you may have via the comments. Also, if you'd rather not check back here every day just subscribe with your RSS reader by using the orange link to the right. Until next time... have a great week and I look forward to your involvement either in the comments for each post or through email at jonathan (at) jonathangoldberg (dot) com.
All the best... JG
Jonathan - I have a question for you? I am in the midst of figuring out how I can learn value investing more formally. Can you throw light on how your MBA program compares to Columbia's Value Investing Program? Any help you can provide will be greatly appreciated.
ReplyDeleteJoe
Hi Joe,
ReplyDeleteAs I haven't taken the course at Columbia I can't give you any direct comparisons unfortunately. One way you can get the benefit of both however is to read the book "Value Investing" by Bruce Greenwald and THEN taking the executive education value investing course offered by George Athanassakos. I think this way you'd get the best of both worlds as George definitely builds on Greenwald's approach with his own research, etc. I hope this helps!
Best,
Jonathan
Hi Jonathan,
ReplyDeleteI took Bruce Greenwald's executive education course at Columbia University this year, and he pretty much goes through the framework that he describes in his book. Based on your comments on valuation and your overall approach to investing, it seems George's course is very similar to Greenwald's - Asset Reproduction Value, EPV & Growth. It is worth mentioning that Greenwald has changed his approach to evaluate growth in a substantive way (he is revising his book).
I have heard great things about Athanassakos and I am sure there are some subtle differences in his approach to investing, but overall I am sure that he and Bruce follow a very similar framework to valuation.
As an individual investor, I am curious what tools you use for investment analysis? Do you do any modeling / DCF's; if so, do you use Capital IQ or Compustat for financial data? Greenwald says that if you have to fire up excel to evaluate a possible investment, then you should take a pass, and though I generally agree I still believe in the exercise of building a model if only to understand the drivers of the business that i am analyzing. Thoughts?
Hi Luis,
ReplyDeleteGeorge and Greenwald definitely subscribe to similar methodologies, although George does have his own ways of doing certain specific calculations as I'm sure we all do once we start thinking for ourselves. Boh very well known in the field however and I wish I could take both their seminars.
In what way is Greenwald revising his approach to valuing growth? I'd be interested to hear more about this.
If by modeling you mean projecting out financial statements and key business drivers then no I do not do this. Once you do then you start playing the dangerous game of forecasting. As I'm sure you know, value investors want to pay for value that we know is there, not value that can materialize if everything works out as forecasted. So no forecasting or growth DCF's etc.
I agree with what you are saying in terms of it helping you understand the drivers of the business, it is definitely not a bad skill to have. That's why having experience as a sell side research associate/analyst is so valuable as you really dive deep into the business and its drivers. What confuses me though is Greenwald's comment regarding Excel. While I may not be forecasting statements, etc I am definitely using excel to build valuation models based on no growth... wouldn't it be very cumbersome to do this outside of excel?
I look forward to your reply.
Best,
Jonathan
I agree with all your comments. Sell side analysts certainly have some valuable skills with respect to digging deep into the intricacies of the business they are analyzing. On the other hand, forecasting will definitely get you into trouble as an investor. Having said that, building a model out assuming steady state / no growth scenarios will force buy side analysts to take a critical look at the dynamics of the business while getting a feel for sensitivity on margins and other operational metrics.
ReplyDeleteGreenwald's comment with regards to excel was more to make a point that he wanted to find opportunities so obvious that a back of the envelope thesis would suffice. I am skeptical that this "rule" can be applied on an ongoing basis, however, I must admit that the grand majority of my most successful investments have been ideas that didn't require an excel model or much quantitative analysis at all. I think Greenwald was just trying to make the point that simplicity is something that should be seeked out, and that complex models, and as you mentioned forecasts, should be avoided.
With respect to his approach to evaluating growth that he outlines in his book, he basically told us that it was garbage and to ignore it because it was to complex and wasn't very intuitive. His new way of "valuing" growth is to take a company's earnings yield (E/P), determine the ditribution (cash) return component, and then add the reinvestment return component (which is calculated by estimating the future return on Incremental Capital capitalized using the cost of equity - i.e. ROIC/Re), finally he adds an organic growth component that is based on GDP growth, possible margin expansion etc... He used AMEX as an example ... P/E of 13 therefore an E/P of 7.5%. 2/3 of that is distributed in cash earnings = 5% (Distribution return). The remaining 2.5% is reinvested, Greenwald assumes a ROIC of 20% & Cost of Capital of 10%, so 2.5% x 2 = 5% (Reinvestment Return). Finally he assigns 4.5% growth due to GDP, 2% income gap & 0.5% to services = 7.5% (Organic Growth Component). If you add all this up, you get a total return (E/P) of 17% or an implied P/E of 5.8X. I am not particularly in love with this approach, but it is simpler than the one he talks about in his book (it is essentially the same thing, but thought about in a simpler, more intuitive way).
Wow, this was a long message. Hope this helps!
Agree with your points on the benefit of modeling to better understand a business and it's drivers - especially if one has the time and resources to do this. Professional investors can usually just grab models from their favorite sell-side analysts.
ReplyDeleteThanks for the info on Greenwald's new growth method. So how is this applied once you find the implied P/E that you mentioned?