Monday, 14 February 2011 00:00

Glenn Greenberg's Speech Highlights

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Selected Highlights from the Glenn Greenberg's Columbia Speech (Spring 2010)

Mr. Greenberg is the managing director of Brave Warrior Capital (formerly he was one of the founders of Chieftain Capital). He is a concentrated investor with a superb long-term track record.His comments on investing are rare so when I happen to find a new source of information on or about him I devour it. This blog covers comments from a presentation he gave at the Columbia business school.

In this blog I have attempted to transcribe comments that I thought were especially interesting.In the interest of keeping the length (cough) reasonable I was forced to leave out quite a bit of material and so I would recommend anyone who has the interest to listen to the speech via the Columbia internet site (see links at the end of the document.)

I have tried to transcribe his comments verbatim with a minimum of adjustments to provide better flow of his ideas.As such any mistakes found are entirely my own.In certain areas of the document I paraphrased portions of his comments and I have annotated theareas as such in the write-up.

I hope you can accept the limitations of the document as I feel there is a lot to learn by a careful study of his comments. Feel free to email me if you would like a copy of this blog in PDF format.


[13:16] I have a new company and I've learned a lot of things that I had forgotten over 26 years (at Chieftain). Number one I learned that when I don't read 10ks and study the numbers myself I don't really have the tools to make good investment decisions and I didn't really realize it because the young guys that came out of [intelligible} Hall were computer literate and started building models.Wow this is pretty cool, you can project out, put in more variables so it became a very model driven place.It used to be a yellow pad, studying the 10K and putting down key numbers, looking at the historicals, asking questions of management and getting a good sense of where business might be heading in the next couple of years.Trying to decide is this a good business, is this a business I want to own if we go through another 1987 or 2008 or is this something the wheels could fall off.

First you decide that the business is a good business then you decide is it cheap, what is the outlook [intelligible] but I've rediscovered without reading the source material you really don't have the information.Another thing that I found since we have now brought on two younger people to work with us is that they come in and they use Capital IQ which I'm sure some of you are familiar with and I have now after a few months of working with them decided that we should ban Capital IQ because it's so riddled with errors that whatever time you think your saving, the numbers just aren't useful.They're wrong and if they're wrong you're going to be totally misguided and you're not going to get anywhere.

I urge you to lay off the numbers that are prepared by others and take the extra few hours, at first it will be slower and more cumbersome to do them yourself and scrub the numbers but soon you will be get super quick at it.It will tell you what numbers you really need to focus on.I have memos that have 761 lines of stuff, masses of numbers,but really any company that you're looking at you want to boil it down to a much smaller number.They're certain major issues at any company you look at.

An example, we own Google.You can say how there is so much you don't know?One thing I do know is that people now spend about 30% of their time on the internet.Thirty percent of the time and its only 10% of where all advertising is done.I'm willing to make the bet that over the next five to ten years the amount of advertising is going to catch up with the amount of time people are spending on the internet.I don't know what shape it will be and I don't know if Facebook will be able to do it better but I'm convinced that Google with 50% share on online advertising will get its fair share.There is also a lot of optionality in all the things that have poured money intothat aren't on anyone's radar screens yet. Obviously the nature of their business generates a staggering amount of cash.I can do a little model of that obviously but in a sense it's really a bet that people spending thirty percent on their time on the internet that advertisers are going to find a way to get in front of those people when their on the internet.

You can model a lots of different things and they are a lot of numbers but in the end investing is making a bet.Being a good investor is going through all the numbers and picking out those that really say something, that are very meaningful, and those are of you that want to be investors are going to have to learn about what's key in driving an investment.

When you are going to talk with management start by saying to yourself if there were three questions I could ask that I could give truth sermon to the CEO what three questions would I ask that the answers to would tell me whether I should be an investor.And I'm not talking about whether their earning are going to be $4 a share.Ask more strategic questions, don't get lost listing 35 questions that you have pulled out that are in no particular order and then you start working your way through the list.Go for the questions that are really going to make your mind up pretty quickly about whether this is something you want to explore further or something to forget about.

[20:15] I can give an example.I'm very interested in Abbott.Abbott trades at 52 and this year it's free cash flow will be about $5.20.It's trading at 10 times free cash flow.It's a hell of a company, it's had a great record, it has a very astute management that has made great acquisitions, it's not overspent on R&D.It's orientated towards prime illness which will be a long, long runway [intelligible].The problem is that it has onedrug which is a treatment for rheumatoid arthritis, called HUMIRA, that is about 45% of their earnings and growing fast and will eventually go off patient.A very complicated, there is only one example of this kind of a large molecule drug being made generically.This could make the end more gradual but eventually all things come to an end.

So if I'm going to meet with the CEO the question I would ask is how he thinks about the maturation, how he thinks about a company that has about 45% of its earnings coming from one drug and will probably have 55 plus percent of its earnings coming from that drug when it has its first competitor come off patent and then we it comes off patent.How is he thinking about it, what steps is he taking to prepare because that is really the key investment issue.Press him on his answers.

[22:20] Another example, Ryanair in which we have a big position. Ryanair is a low cost European carrier which was designed from scratch to be (modeled after Southwest Airlines)...

The big question is that they are running out of ordersso in 2012 they will go into a very different mode.Instead of growing 15-20% per year in new capacity they will essentially have no new capacity.

The number one question would be do you want to stop growing or do you want to make another order?If you can make another order with Boeing what rate of growth do you want to go for?(Paraprhased)He is looking to see how their growth would affect yield (i.e. how many people in seats versus total plane capacity) and how they themselves think about the issue.He thinks that if the company never ordered another plane(they have a very young fleet) that conservatively projecting the cash flow of the company (taking into account higher maintenance expense as the fleet ages) and discounting it back to the present would yield about a 13.5% return (not certain what stock price he was considering).He would ask management if they had thought about that and base their plans against that bogey.

[38:15]Find managers that are ruthless in the way they run their business.

[39.07]I completely believe in investing in good businesses.One of the time that it was driven home to me was in 1987 when the market fell 18% in one day, 40% in one month,I made 23% in one day.I made up my mind at that point that could happen again and I was just going to own only businesses that if that happened again I'm fine with.I'm fine with the stock being down, I believe in the business, the value will recover.Not get into short-term plays, buying some junk because you hear stories.That is when you would no doubt sell for huge losses.

[52.09] I can't say enough about doing your own homework and then thinking about it.

[1:12:34] Question: I wanted to as you about DCF model and what hurdle rate you using now and how did you get it.Also do you use the same hurdle rate for different companies and different sectors?Do you also use it to decide the selling price as well?

When I first started in the business every company that I ever analyzed I did on a yellow pad which wasn't exactly conducive to a DCF model. The young people who came into my firm all were computer literate and developed the DCF model which became the model around the office.The model was utterly useless in the last few [intelligible], utterly useless.So I am now, in my new firm, going back to the way I used to do things which is basically have a very clear view on why I think it is a good business, a business that can grow, the quality of the business and a very clear view of where I think the business will be in the next few years.

(My comment:In the book, Value Investing from Graham to Buffett and Beyond, p. 219 discusses his early years and provides additional background information:

"Greenberg likes companies that produce a stream of free cash flow, so it makes sense that he uses an estimate of cash flow to tell him the value of those firms.Before the arrival of the personal computer and the electronic spreadsheet, he and his partner would analyze a company by isolating its business segments and projecting revenues and expenses no more than two or three years into the future.By assuming that it would grow steadily from then on, they could calculate its current value by discounting that cash flow back to the present, using only a hand calculator.")

The way I would probably think about the DCF I would start out with the FCF yield today and think about what I think the business is capable of growing say over the next five years and if that comes up to something like 15%, the combination of the free cash yield today plus the grow rate that I think is reasonable then I think I've got a pretty good investment.The reason I think that is because I think the market probably, over time,you tell me, you pick a rate, 7, 8, or 9 percent if I have something that is going to get me 14 or 15 percent that is clearly undervalued relative to the market that is priced to give me 7, 8 or 9 pick a number.I think that I'm very down on computers, I think they are a complete waste of time.I don't know how Warren Buffett feels about them, you should ask him about them.

(My comment:It's interesting that his son Spencer, has developed an computer AI based approach to investing at Rebellion Research, a small NYC based hedge fund.As of July 2010 the firm was doing quite well.)

Bruce Greenwald:You did.He feels the exact same way expect for instead of using the hurdle rate of fifteen percent use thirteen (My comments:Is this because of his smaller investment universe?I think so and so don't believe that comment is as relevant to smaller investors).

Greenberg:That was a time when stocks were really high.Believe it or not, when the business was easier, I used to ask myself couldI see how the stock would be up at least 50% on the next two years based on where I saw the earnings develop over the next two years.That was sort of the hurdle rate.{Paraphrased) Over time as market when higher this got to tough to do without projecting extremely aggressively and in the 2008 area interest rates were low.

I asked Warren how low (hurdle rate) do you go and his answer was 13%.

So that is my new way of thinking about things:free cash flow yield plus reasonable rate of growth, business that I have confidence in and I'm not going to wake up one day and the thing has fallen apart and I try and get the best group of those in my portfolio.

(My comment:Interesting that he is willing to adjust his approach because at one time the DCF spreadsheet model seemed to be a key part of his investment process.)



The Spring 2010 speech:


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