Bruce Greenwald is a former professor at Columbia University, where he taught a course on value investing. He is the author of "Value Investing: From Graham to Buffett and Beyond," as well as a range of other texts on the subject of value investing. In this mini-series, we will look at a lecture given by Greenwald at the Gabelli Value Investing Conference on the investment process.
Cheap and small
“What you got to do it seems to me, and this is what the evidence shows, is you want to start looking at things that are obscure. If you decide to buy Microsoft, you are competing with about 200 other analysts and thousands of investors who are looking at that company too. That competition, no matter how smart you are, is a tough competition. That is true of all the large cap global stocks. Ideally, to be on the right side of the trade most often, you would like to be the only one seriously studying a particular security, or one of a few people. That’s small capitalization, small companies, small markets, particular cases like spin-offs, where people get one share for every 10 shares of a big company they own and because the market capitalization is so small, they tend to dump it on the market”.
Underfollowed stocks tend to also be undervalued stocks. Conversely, a popular glamour stock is unlikely to be undervalued simply by virtue of the fact more people hold shares and are wont to bid the price higher. Of course, not all small-cap stocks are value plays, and not all value plays are small-cap stocks. But focusing on smaller companies and markets increases the probability you will happen across something that no one else has.
Boring is your friend
“And boring is your friend. We will talk about why the psychological and institutional evidence shows that is going to continue to be the case. But people like high tech, people like potential lottery tickets. People like exciting securities and exciting industries and that is not where you want to be because it minimizes the chance that you will be on the right side of the trade, so you want secure and boring. And it turns out for psychological and institutional reasons that ugly in the stock market, as in the marriage market, is your friend. Financial distress and bankruptcy, people didn’t use to touch - there were huge bargains there...The reason that these seem to be your friend is that those are the things that seem to to get investors to dump securities reflexively. It means that the person on the other side of the trade is just getting rid of those securities”.
People like to chase the hyped glamour stocks, which means those stocks are more likely to be overvalued. These stocks are more likely to come from rapidly growing industries like tech. For this reason, it is a good rule of thumb to look for value in sectors that are not on the front pages of the financial news media - logistics, services and industrials. By sticking to boring markets, you are more likely to find a good value play.
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