Here is a continuation of the video interview of Bruce Greenwald from my previous article. To see the previous video
I will write a short introduction for Bruce Greenwald to people unfamiliar with him.
Bruce Greenwald is interviewed by an Financial Times Reporter on value investing. Bruce Greenwald is one of my favorite value gurus. He is the author of Value Investing: From Graham to Buffett and Beyond which is a superb book on value investing. The book is required reading for guru Joel Greenblatt’s class in Columbia business school. Bruce Greenwald is also a director of research at First Eagle Funds. First Eagle Funds are a family of value funds that have outperformed the market by significantly over a long time frame. Greenwald was described by the NY Times as “a guru to Wall Street’s gurus”.
Greenwald has written a variety of books on economics and investing. In his book Competition Demystified Greenwald describes what makes some companies while others fail. Greenwald has a must read chapter on how Wal-Mart overtook Kmart to become king of retail USA. He also wrote about globalization and trade issues between China and the USA .
In this video Bruce Greenwald talks about shorting stocks. Bruce Greenwald believes shorting is not part of the value investing process except in extreme circumstances.
Short gains are taxed as short term capital gains.
The main reason to be skeptical of shorting is the risk of shorting. As the stock rises it becomes a bigger part of an investor’s portfolio. This goes against Benjamin Graham’s principle of avoiding risk, and investing with a margin of safety.
You also have to perfect with timing, because you can short during a clear bubble, but the bubble can continue for many years like in Japan and during the tech bubble, which could wipe an investor out.
Real value investing is buying at a bargain and being disciplined.
Bruce Greenwald discusses value traps. For example with Fannie and Freddie many value investors piled in as the stocks went down. They both had great earnings power; however the companies were highly leveraged and did not focus on the balance sheet.
Bruce Greenwald explains that value investor’s focus on ugly, but they did not focus on the fact that everything was ugly during the financial crisis. Even companies with great balance sheets suffered huge declines.
However, when the rally bottomed there was a classic value opportunity, and stocks like American Express with strong balance sheets that were extremely undervalued rallied significantly.
Now(several months ago), the large value plays are gone, however there are still franchises that are slightly undervalued and have good pricing power if inflation strikes.
The interviewer asks Greenwald if he believes in light of the current events the efficient market theory is dead. Bruce Greenwald answers that he believes that efficient market theory has always been dead in asset management. For the past twenty years, Greenwald states even most finance departments have started to reject the efficient market theory.
For anyone who wants to see my new resource page on Bruce Greenwald. It can be found by following this link http://valuewalk.com/resource-page-2/current-value-investors/bruce-greenwald/