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A Chat with a Value Investing Legend: Professor Bruce Greenwald

Last week, my colleague Stanley Lim and I were invited to Columbia Business School’s Pan-Asian Reunion 2014: Investment, Innovation, and Impact Symposium, which was held in Singapore.

The Columbia Business School was where value investing started – Benjamin Graham, the intellectual father of the discipline, first lectured on the topic there in the late 1920s. Warren Buffett is perhaps the most famous student from Graham’s lectures.

Today, the Columbia Business School is still very much in the thick of value investing, with its involvement being led by Professor Bruce Greenwald. A well-known authority on value investing, Greenwald is hailed by The New York Times as a “guru to Wall Street’s gurus.” He is also the author of multiple books, including Value Investing: From Graham to Buffett and Beyond.

As Greenwald was speaking at the event, Stanley and I couldn’t pass up on the opportunity to speak with him and hear his thoughts about investing within an Asian context.

A transcript of our chat follows.


The Motley Fool (TMF): So we want to find out more. When it comes to Asia, corporate governance isn’t as strong as in the States, especially in China…

Greenwald

Professor Greenwald: Yes, absolutely.

TMF: How do you factor that in when it comes to say, valuing a company? Do you make provisions for it?

Greenwald: You know what a value trap is. The assets are there, and the management takes the income and either wastes it or doesn’t generate a return. That’s a huge problem. So when you have that abuse and you have no effect on their behaviour, you have to pay enormous amount of attention to how carefully they reinvest. If they do stupid acquisitions, you can’t get a return; if they hold it all in cash, you can’t get a return. If they invest it, or buy-back stock, or give dividends, that’s what is important. You have to look at the quality of management – absolutely. And there are huge variations in the quality of management when it comes to Asia.

FANUC has a terrific management so you don’t care about the fact that you have no impact on them. You know who FANUC is? They make all the robots in the world. They have a terrific management. You don’t care what they do in listening to you because they run a good company.

There are some other Japanese industrials that do really well. They dominate markets, they focus on their products, they don’t make stupid outside investments, and they’re actually beginning to buy back stock. That’s where you’ve got to go. If it’s a company with a piece of crap management, unless they’ve got terminal cancer, you can’t go there.

If you have no control and are living with the management you’ve got, then you have to look at how are they focused on cost control. Are they good at reinvesting the money for organic growth? Do they not do stupid acquisitions? Do they not pile up cash in favour of distributing it? And do they have a decent succession plan? Those are the five things you have to look at really carefully.

TMF: So the next question would be, what advice would you give to individual investors especially in Asia?

Greenwald: I mean, I would give the Motley Fool advice. You have to do a value strategy. You’ve got to search for the economies that are out of fashion, the industries that are in trouble, and the companies that are diseased. And then you’ve got to find out which companies are terminally diseased versus which ones aren’t.

Why do we think the investment strategy should be any different in Asia than it is in any place else?

TMF: Good point. Very good point. So, there’s this interesting dynamic – at least in Singapore – where you get companies trading below their net-net values.

Greenwald: You’ve got to be really careful with those. The history is that net-net portfolios do really well – they’ve done less well in Asia. I mean, in Japan there are companies trading below cash. But my impression is that I know people who have built those portfolios. They’ve not done particularly well – they’ve actually been disappointed. So again, if you’ve got a net-net with a terrible management, you’re never going to see the value of those assets. So I think your first question is: Find a net-net with a half-way decent management and it’s going to be a good investment; find a net-net with a bunch of clowns, forget it. Okay?

TMF: Okay. Regarding the dynamics of activism in Asia and the United States…

Greenwald: It’s a waste of time. People have beaten their heads against Asian managements for years. You should interview activists who’ve tried it in Japan and they’ve come out bloodied and bruised and not having made much money. It will take another 30 years before they get the Japanese companies to listen and if the Japanese companies aren’t going to listen, I guarantee you, Singapore companies aren’t going to listen. Chinese companies are not going to listen, the Korean companies don’t really listen. But the Korean companies are actually a little bit better – they’re a little more shareholder friendly. The Malaysian companies are not going to listen, Indonesia they’re not going to listen.

TMF: So basically all of Asia?

Greenwald: That’s right.

TMF: So, thank you so much for your time, Professor.

Greenwald: Okay. I’m a big fan of The Motley Fool as you know!


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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.