David: I know. We all know this. You think about your business. But how does your behavior change in year four? I went from deep value to have some value. Again, Bernstein was my first entree into that. So, you must have had some idea that value was where you wanted to go at the end of being at Stanford. I went to school at Tulane, so I think you should have huge, great inflation for simply surviving four years in New Orleans.
So, I was fortunate enough to attend Columbia, and really had an amazing experience there and got more and more exposure to value. And it was really—. David: I was there for about 9 or 12 months. I watched what he did, and it was fantastic, again exposure to a really smart analyst, how he talked to companies.
If you think about it, well, what questions do I ask a company? How do I interface with a company? And you can say no to my help, but again, we have aligned interest, so listen. And then, I ended up joining up with a long-short fund called Perennial, which has morphed into an RIA.
There, I got some exposure to the short side. And this is where I had a slightly different experience where I actually covered some of the subprime housing companies on the long side. And they were really cheap, and you could look at New Century and they had these huge dividend yields. I was having problems with the financial statements. And instead of saying that— it was so naivety. Tobias: You viewed it as a failure to analyze it properly, rather than something wrong with their financial statements.
What I realized, through so much of looking at the institution of managing money was that you would have a conversation with someone, and they would talk about how they were investing. At a long short book, the shorts worked, the hedges worked. One of the things that really resonated with me at the time was that you would basically see things go bitless. You would see microcapsule go bitless.
At the time, Lending Tree— I think it had been a spin-off, it was relatively new to the market and at eight bucks in cash, and I was buying it for between and 3. I hate when people talk about a short book in a vacuum, how are your shorts doing? What shorts do is allow you to do other things on the long side.
Why are you shorting? I was able to take more exposure than you were because you only had cash as a hedge. And so, it has to be viewed holistically. It worked incredibly well. And I should have because I was kind of front and center. I believe that sort of thing. You have to look at the action before. But the point is, if you look at the parabola, you have to look at the left side of it.
Of course, they came down. While I thrived, I was frustrated because it caught me off guard. You can get things wrong and make money, you can get things right and lose money, and this was an instance where portfolio construction helped me, but I was wrong. Who am I not listening to? Who called this? And then, okay, well, what causes all this and this low-interest rates and pushing everybody in TINA and trying to get everybody into stocks. This is what I got wrong. Now, will it work?
I suspect it will. I fought it. You try to learn, and you try to do better, and you go back to the lab and look at what you did wrong. I decided to give the capital back. I was frustrated. You have a book about it, and you have a fund about it. What if you wanted to tweak it? As a value investor, you laugh at this. There are a lot of paths to heaven. Six years is a long time.
If you think about the job of managing money, and how many balls there are to juggle, this is the other mistake I made. I went at it alone. I joke the second most important decision after finding your spouse is really finding a partner that has the same vision you do and looks at the world the same way you do because you can start a business with them. I got a little too wrapped around the axle, and so I stopped.
David: No, it was everything. It was long, short. I had micro-cap, but I went anywhere and did everything, in equities for the most part. It was sort of death by cuts. David: I bled out. Yeah, I did not blow up. What world events, the worst thing that could happen? What are you not prepared for?
So, basically, the institutions would have collapsed. They have fire insurance. They have life insurance. They have zero portfolio insurance. I spent all that money on insurance. Why do we have this loser? Oh, you went away for a week? I have a claim on your time. I took it upon myself and said I want to create a hedge for these people so that when things do collapse, which they will, they have some protection. The portfolio will perform well, just as it did in the past cycle.
Whether or not maybe if they wanted that, maybe they would have gone to Spitznagel. Maybe they would have gone to a short-only fund. I sort of morphed in that sense. The economics of running capital, it has to work. And we can talk a little about that because I think the incentives are a little bit misaligned with your classical— Well, with most asset management, but hedge funds in particular.
LP has made zero money, but you have a [unintelligible . But I think that the narrative about price to book value has followed the more recent performance of it, which has been terrible. And then, prior to that, you have to go back to to see this level of underperformance. But that seems to be the— narrative is almost pervasive now that value investing is just a ridiculous concept.
Talking about is value dead, and I know you recently had a pod with with Cliff Asness, and he was talking about the fact that for seven years—. David: It was justified. This brings into my question, what is value? I think you call that wrong.
Buffett buys it at six and a half times adjusted earnings in But those are the numbers, six or seven times. How do you make money? Well, we make money two ways. One, if someone bids the 7 up, they pay 8, they pay 9, they pay This went from 7 to 6. And even Buffett does this, are equities cheap? They earn a buck, you pay And back to our original endogenous. Okay, you know what? The same way with the treasury, you have this— it comes due in a decade. So, if you go back from to — and Montier did work on this.
And what you have to be careful with— whenever I look at a security or think about a security, you have to think— and this— so much of investing is about the crowd and convincing people of other thing and getting them to believe. Instead of it being invested and speculating as X, I actually think you can break it down at the security level.
Am I okay with this earnings stream accruing to me based on the price I pay? But— this is another thing, and this comes up sometimes when I hear you talk to other managers, we talk about cost to market. He blew it up. You just expressed a view. Well, look, does anyone in our business want the markets to be efficient? Of course not. They have no job. So, wait, you want them to be inefficient just for long enough for you to get a position on?
And then they become somewhat efficient. David: It sounds perfect. And he gets dragged through the mud and fired. You are a deep value guy. And so, I think as a portfolio manager, it does help. If they step out of their box and lose money, how that might look particularly bad? Oh, you bought puts on Tesla? Since when are we put buyers? How are you teaching valuation? How do you think about it? How do you structure evaluation? David: What we do is we— Bruce Greenwald wrote a book years ago, and now Paul Sonkin and Paul Johnson wrote a new book that touches on valuation.
I co-teach with my co-professor, Eric Almeraz, who runs a fund called Apis Capital. And so, what are a few things that are going to resonate? You just talk to— deep value, and you read all the books. So, they will get lucky, essentially when the cycle turns, using no different methodology. That happens too. Value is of mindset, you are a shareholder in a company, you are owning fractional value of a company.
And at no point, technicals aside, you can even add that in. But the point is, you are the owner of a business, you view that cash if they earn it as accruing to you. I think always having that in the back of your mind— Buffett bought Snowflake or Berkshire bought Snowflake. One of the reason I said earlier is talking about how you define value, I mean, Bill Miller was deemed a value investor and is considered a value investment, in the late 90s he was buying tech companies.
I know how they look. I know 25 looks bad, but I also have a good idea or some confidence in how it will look in five years. We try to expose them to all that. William E. Simon, Jr. With another academic year under our belts and a new one about to begin, we are excited to share with you our third annual Benjamin Graham Value Investing Newsletter!
We hope you will be encouraged by what you read, as we could never have achieved such a high level of success without your hard work and commitment along the way. We could not be more grateful for all the hours they spent to produce such an informative and attractive newsletter. Here, Mr. On the right is the letter Mr. The Benjamin Graham Value Investing Program is intended to prepare undergraduates for a wide range of careers in which they will be faced with the challenge of evaluating investment opportunities and making active decisions to direct capital to enhance value.
Such careers include high level executive positions within companies, careers in alternative investment firms such as private equity or distressed debt firms, or in actively managed mutual funds. A student graduating from this program will be able to understand the full set of fundamental economic and strategic forces that favor or disfavor a particular investment opportunity from both a theoretical and historical perspective.
E-mail: hmhernandez econ. E-mail: twinston econ.
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Creating Strategic Value: Applying Value Investing Principles to Corporate Published by: Columbia University Press, Columbia Business School Publishing. A guide to Columbia Business School, covering academics, class profile, with MBA students are Applied Value Investing, Family Business Management. VALUE INVESTING Tano Santos David L. and Elsie M. Dodd Professor of FinanceColumbia Business SchoolHeilbrunn Center for Graham & Dodd InvestmentValue.