Glenn Greenberg (Trades, Portfolio) is the managing director and founder of Brave Warrior Advisors, a private investment firm. Brave Warrior used to be known as Chieftain Capital Management before it was renamed when Greenberg split from his longtime partner, John Shapiro.
Although relatively unknown compared to value investors like Warren Buffett (Trades, Portfolio) and Howard Marks (Trades, Portfolio), he has produced some interesting letters and commentary of his own. The following is an excerpt from an essay of his that was included in the sixth edition of Graham and Dodd’s "Security Analysis."
Cash over earnings
Like any value investor, Greenberg performs his due diligence by focusing on financials and other public disclosures:
“We evaluate an investment opportunity based on the predictability of the business and a dispassionate calculation of its expected rate of return. We read all of a company’s public filings, we analyze its industry and competitors (of which, ideally, there should not be many), we talk to its management team and industry experts, and we gather any other relevant data we can find, distilling it all into a historical analysis of the performance of the business.”
By organizing all this information, a value investor can then proceed to asking questions that will determine whether the business in question really is worth investing in: what is happening with margins? Are sales growing or shrinking? How much debt is management taking on? Can that debt be serviced?
Notably, Greenberg prefers to look at cash flows rather than earnings. The reason for this is that it is much easier for management to to obfuscate earnings than cash flows. Another is that earnings rarely give a good estimate of the cash that is available to its shareholders.
“It has always struck me as curious that the first questions asked by a private investor are, how much money must I put up, how much cash will I get back, and how fast? Why should investors in publicly traded stocks ask different questions?”
Things change
Greenberg generally doesn’t accept a rate of return lower than 15% on his investments. Interestingly, this hasn’t always been true - in the 1970's, the investing environment was very different:
“In 1974 our investment hurdle would have been much higher—perhaps 25%—because there were so many undervalued stocks to choose from and interest rates were higher. By insisting on a very high rate of return, compared to the high-single-digit return we calculate to be offered by the broader market, we give ourselves significant margin for error.
Our goal is to set the bar very high knowing that there will be few times when we find a great business selling at a price that will also give us a great rate of return. We seldom find a stock meeting these criteria, so when we do, we build a large position: never less than 5% of our assets and often as much as 25%. We sell a stock when the return in our model drops to 10%—even though our alternative may be cash earning less than 5%.”
This kind of extreme portfolio concentration requires a lot of discipline and self-confidence, something Greenberg clearly has. It’s also clearly something that is required in an environment where value opportunities are becoming more and more scarce.
Read more here:
- What Can Investors Expect From the Coming Rate Cut?
- 2 Pieces of Investing Wisdom From Seth Klarman
- Buffett on Using Options as Compensation
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