Glenn Greenberg at Columbia: How a Great Investor Thinks (Par...

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Greg Speicher
Ideas for Intelligent Investing

Glenn Greenberg at Columbia: How a Great Investor Thinks (Part 2)

What constitutes a good business?
Greenberg asks the students to consider what they would look for in a stock if, over their entire career, they had to put all their savings into one stock and then live o that stock in retirement. The
idea is to force you to think carefully about the qualities of a good business.
The students oer answers which include nding a business that has 1) a strong moat, 2) high returns on invested capital, 3) few competitors, 4) high prot margins, and 5) good management.
Greenberg comments that living with his Comcast investment for many years has convinced him of
the importance of management having good capital allocation skills.
He mentions that he likes managers who are intensely focused on their business.
The severe market decline in 1987 convinced Greenberg to only own high quality businesses where
he had high condence in the fundamentals. That way he can hold his stocks with condence
through severe future market dislocations. If you buy low quality, Greenberg thinks youll be more
likely to sell it and take permanent losses during a serve downturn. [Note: As an extension of that
thought, it is likely that investors feel psychologically better about holding lower-quality cheap stocks when
the market is relatively stable. An investor needs to think carefully about whether he would have the discipline to hold onto these types of stocks in a 1987 (or 2008) type downturn.]
GAAP earnings may not capture economic reality.
Greenberg then spends several minutes talking about Lockheed Martin, which is one of his holdings,
and its large pension obligations. There are several dierent ways to measure the obligation and its
impact on the companys cash ows. Greenbergs point is that GAAP earnings do not necessarily cap-

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ture and reect the true economic earnings of a business and that investors need to go beyond
GAAP earnings and try to arrive at an investments true economic earnings.
Regarding Lockheed Martin specically as an investment idea, although he did not give specic numbers, Greenberg suggests that the market punished Lockheeds stock price because it has had to
make several large payments into its pension funds which have impacted cash ows. The majority of
these payments will be reimbursed by the government. Starting in a few years, when these reimbursements are made, this situation will reverse and cash ows will be materially greater than reported earnings. He cites this as example of value hiding in plain sight, if you do your homework.
Capital IQ is no substitute for thinking.
He then speaks briey about Time Warner and Comcast. Both are in a sweet spot because they provide high-speed internet connectivity a growing service which is in high demand to large parts of
the U.S. Time Warner is focused strictly on cable and is committed to returning capital to shareholders. Comcast is diversied into content and is run by an empire builder. Greenberg owns Comcast
which is a lot cheaper than Time Warner and has a better balance sheet. His point is that Capital IQ
(or any computer nancial data service) will not help you decide whether to invest in one of these
companies or which one is a better investment. There is no substitute for thinking and doing your
own homework.
How can you get an edge when you buy large, widely followed companies?
A student prefaces a question by saying that value investors look for cheap and ugly companies
(which are the most likely candidates for mispricing). He then asks Greenberg how he can get an
edge and be on the right side of the trade when his portfolio is full of large-cap leading companies.
Greenberg responds by rst noting that there is much more competition today in the eld of value
investing and that hedge funds have the resources to put a dedicated analyst on a single industry. He
acknowledges that it may make sense to look for obscure companies with little or no following, but
that there is no guarantee that these are good businesses. This may make sense if you are managing
a small sum of money. Greenberg has had to move up in size as his funds have grown. Greenberg
then says that just because something is big and widely followed, does not mean that it is properly
understood. Analysts can become myopic and focus on the wrong things.
The student further challenges Greenberg by asking how he could get an edge by investing in
Google. Greenberg responds by saying that there is little or no real research being done on the company and that none of what is being done seems to be focused on what will happen in 3 to 5 years.
No one is really looking at how Googles various assets outside of search will develop over the
long-term.

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Glenn Greenberg at Columbia: How a Great Investor Thinks (Par...

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Greenberg says that his rm is looking at many companies but they are not seeing a lot of growth.
They see many cheap stocks, but little growth. He is convinced that Google will grow. He compared
Google to Goldman Sachs in that the best talent wants to work for these rms and that will give them
an edge. They also have the money to buy up-and-coming companies with a lot of promise.
LabCorp and Varian Medical Systems oer low-risk growth.
The next question is about Greenbergs investment in the healthcare industry and the impact of the
new healthcare bill on these investments. Greenberg rst speaks about his investment in LabCorp,
which operates in competition with only one other national rm, Quest Diagnostics. LabCorp has better economics than Quest. The business has high barriers to entry because most of the payments
come through third-party reimbursements, and it would be nearly impossible for a new entrant to
set up shop. It is slow growing and absolutely necessary. Genetic testing is growing rapidly. LabCorp
has a 9% cash ow yield and can grow 3-4% per year which will give a satisfactory return. He thinks
that, in a few years, there will be tests for cancer that will be the standard of care; this will be a huge
windfall for LabCorp. Labcorp should make 13-14% per year with very little downside.
Greenbergs other healthcare investment is Varian Medical System which sells products for treating
cancer with radiation. They have 60% of the market in the U.S. The market is growing world-wide
with a long runway. It has high returns on capital.
Why DCF analysis is overrated and how to set an appropriate hurdle rate
Greenberg then speaks about discounted cash ows, hurdle rates and valuations. He came up doing
all his analytical work on a yellow pad. He then went on to hire younger associates who were well
versed in discounted cash ow analyses, and he began to use them. He has now come to the conclusion that these models have been worthless over the past three years, and he has gone back to his
old methods.
Essentially what he does, and what he feels is more important, is to have a very clear view of why a
company is a good business and a very clear view of where he thinks the business can be in a few
years. He likes to start out with the free cash ow yield today and then look at how much he thinks
the business is capable of growing over the next few years. If the sum of a the free cash ow yield
plus his estimate of the growth rate over the next ve years comes up to 15%, then he feels he has a
pretty good investment. Given the expectation that the general market will return 6-8%, Greenberg
holds that an investment is clearly undervalued if it can deliver 13-15%. He is really against using
computers to value stocks and mentions that so is Buett.
His old hurdle was to ask if a stock could go up 50% in the next two years. 2007 was particularly

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tough because Greenberg could not nd anything to buy and yields on cash were extremely low. He
had to keep lowering his hurdle as the markets got higher and competition increased. He successively lowered his hurdle rate in light of these new realities and arrived nally at 15%. He asked Buett the same question and he said he will not go below 13%. Greenberg considers this a simpler and
better approach. He wants a portfolio of high quality businesses that wont shock him by falling
apart.
How Greenberg sizes his investments
He is asked how he weights his position sizes. His answer is that it is a matter of judgment. You nd
the best opportunity you can and then assess your level of condence. Sometimes the one you think
can go up the most you also judge to have the most risk. This may cause you to moderate your position size. He cites Ryanair as an example of a business with greater upside and greater risk, for example, the price of oil, or that the earnings are in Euros. The larger positions have greater certainty.
Greenberg has had 20% positions.
He is asked about his worst investment. They have a rule that unless they are willing to invest 5% of
their capital in a stock, they wont invest at all. They have all their own money in the fund. They broke
their own rule and put 2% in an LBO where they lost all their investment. They once bought puts on
the S&P when the market was high; the market kept going up and they lost their money.
He thinks that you should not go away from the things you know about.
Iron Mountain
A student asks him about his investment in Iron Mountain which Greenberg no longer owns. Greenberg bought the stock because he liked Iron Mountains national footprint. He also thought data storage would be a sticky application and that they would have pricing power because data storage
seemed like a relatively small expense for the rms, such as hospitals, that were buying it. These assumptions turned out to be incorrect. Iron Mountain also ended up having higher capital expenditures than Greenberg originally envisioned.
Lessons learned from the 2008 crisis
The nal question is about the lessons that Greenberg learned when he lost 25% of his portfolio in
2008. [Note: it was not clear if this meant that the value of the portfolio declined 25% or that he lost 25%
of the funds capital through redemptions.] He said to never work with people who operate on margin
because they tend to panic. Do your own research carefully and buy good businesses. Good businesses have come back. He cites American Express as an example. You make the most money when

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the sky is falling. If you know a company well and youve done your homework, you can take advantage of these situations. (Mr. Market) He thought very deeply about whether he should change his
approach given 2008 and decided to stay with his existing process/philosophy.

This entry was posted in Great Investors on September 8, 2010 [http://gregspeicher.com/?p=1334] .

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