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Subject:  Value Lessons from Graham and Doddsville Date:  10/14/2012  5:59 PM
Author:  yodaorange Number:  406002 of 489651

Each Year, Columbia Business School students publish a lengthy newsletter entitled “Graham and Doddsville.” It was inspired by Graham and Dodd’s seminal book on value investing: Security Analysis [1] which was originally published in 1934. Graham and Dodd both taught at Columbia. The students published this year’s edition last week. [2] It weighs in at 32 pages and has several interesting interviews. One of the interviews is with well known value investor Joel Greenblatt. He is best known for writing The Little Book That Still Beats the Market (Little Books. Big Profits). [3]

There are several pertinent investment points in the lengthy interview. I have excerpted 4 of the points verbatim.

1. Joel: My definition of value in-vesting is figuring out what something is worth and paying a lot less for it. I make a guarantee the first day of class every year that if you’re good at valuing companies, the market will agree with you. I just don’t guarantee when. It could be a couple weeks or it could be two or three years. And the corollary is simply that, in the vast majority of cases, two or three years is enough time for the market to recognize the value that you see, if you’ve done good valuation work. When you put together a group of companies, that process can often happen a lot faster, on average. One argument I make in another one of my books (which few have read), called The Big Secret for the Small Investor, is that the world has become much more institutionalized over the years, even more than it was when I wrote You Can Be a Stock Market Genius, and that is a real advantage for longer-term investors. For institutional investors, you can track all money flows by one simple metric – which managers did well last year and which did poorly. Managers who did well last year attract all the money and managers who did poorly lose the money.

If you’re an active manager, you may have a long-term horizon but your clients probably don’t. So, most managers feel that they need to make money over the short term. Therefore, professionals systematically avoid companies that are perhaps not going to do as well in the short term. In some ways, there’s actually more opportunity in those areas now than ever before due to the greater institutionalization of the market.

2. Question: Do you see anything that could lengthen institutional investors’ time horizons, thereby reducing the “time arbitrage” from which many value investors’ profit?

Joel: No, not really. The reason is that there is an agency problem where the people who are allocating the capital are not making the investment decisions. I was talking to a gentleman at one of the top endowments, and he said, “I would like to tell you that we have a long-term horizon, be-cause we should. But I’ve been here 11 years, we’ve had three chief investment officers, and none of them left after a period of po