Space is limited!  

Early Bird pricing avaliable until April 1, 2020. To learn more or apply for this program please contact Julia Kimyagarov at [email protected].

Course Description

This course aims to familiarize participants with the principles and techniques of value investing, the investment philosophy pioneered by Ben Graham and David Dodd during their years at Columbia Business School and further deepened by Roger Murray and Bruce Greenwald. This will be done through a combination of formal lectures and in class valuation discussions.

Value investing focuses on the economic analysis and the valuation of the business operations of the firm with the aim of obtaining an estimate of its fundamental value. It calls to invest in the firm if the fundamental value is sufficiently above the market value so that there is a margin of safety to protect the investor against unforeseen contingencies. The approach is integrated, that is, the economic analysis and the valuation approach inform and support each other. In this way, the value investor obtains a coherent view on the firm.

The valuation approach is rather different than the DCF-like calculations that are standard in the industry. The DCF method starts by positing a model of the dynamics of cash-flows. These cash-flows, properly discounted, are then added up to provide an estimate of the value of the firm. Operationally, these models typically start with an assumption regarding the rate of growth of earnings and the payout policy of the firm. DCF models are notoriously unreliable and moreover unnecessary in most situations. Our approach starts with the economics of the firms and in particular with the competitive position of the firm in the industry in which it operates. Assumptions on the rate of growth of earnings are needed if and only if the business operations of the firm are protected by barriers to entry. Otherwise … we can simply forget about modeling (real) earnings growth for the simple reason that there is none. In that case an investor should not be willing to pay for any growth option, just for the existing operations of the firm. This is the earnings power value calculation.

It follows from the above discussion that a key component of the value investing process is the assessment of the existence of barriers to entry. We develop a protocol to assess the competitive position of the firm and what kind of evidence we should be looking for to ascertain the existence of competitive advantages. In the presence of barriers to entry we develop a valuation approach that estimates the expected rate of return of investing in the company; it is an approach pioneered by Charlie Munger and Warren Buffett at Berkshire.

Value investing is a process. It starts with an intelligent search for investment ideas. Value investors build on screens and monitor the investments of their most admired competitors by tracking their 13Fs; they are voracious in their readings and get ideas from reading not just the financial press but also industry periodicals and other specialized publications. Once an interesting idea has been selected, they proceed to the economic analysis as well as the valuation just described. A review of the entire process is undertaken in a third step. In particular, value investors are cognizant of the fact that if they are buying, someone else is selling and constantly ask themselves where the other side of the transaction is coming from. Value investors are keen observers of Mr. Market and its mistakes. For this, a good understanding of the institutional and behavioral constraints under which the market operates is essential.

Finally, there is a fourth step devoted to risk management and portfolio construction. Given that most value investors hold relatively concentrated portfolios they don’t have the benefits of diversification. As a result, they have to have a detailed understanding of the risks in their portfolio, whether they are temporary or permanent in nature, whether they are holding excessive regulatory, technological or industry risk and what is that can be done to ameliorate the risk profile of the overall portfolio.

What arises from this analysis is a rich and coherent view of investing, one that integrates a sound understanding of the economics of the business operation of the firm, a robust valuation approach, and a toolbox of risk management techniques beyond mindless diversification.