Bruce Berkowitz held up a pilot’s pre-flight checklist at the end of his presentation on developments in value investing. The analogy was clear: flying at altitude can be a risky business if you don’t know about the equipment you’re using.
The Fairholme Fund president was among the distinguished guests who spoke as part of the 75th anniversary celebration of the publication of Security Analysis hosted by Columbia Business School and the Heilbrunn Center for Graham & Dodd Investing on Oct. 2.
Three panels made up of contributors to the sixth edition of the book, including Prof. Bruce Greenwald, discussed value investing in today’s market as well developments since the book was published in 1934. The dismal news from Wall Street — and managing risk in the current environment — permeated the discussion.
“In some fundamental way, the current market is what Security Analysis is about. We do the same thing regardless of the market: we look for value,” said David Abrams, managing member of Abrams Capital Management, who spoke as part of the first panel with Seth Klarman and Howard Marks.
“Quantifying risk is an oxymoron,” said Marks, chairman of Oaktree Capital. “It cannot be measured in numbers. Volatility can be measured but the job of measuring risk requires the same thing as measuring prospective return and requires superior skill.”
Prof. Bruce Greenwald moderated the day’s second panel with Berkowitz, Glenn Greenberg ’73 and Thomas Russo to discuss what has changed in the 75 years since Security Analysis was first published. Greenwald discussed how controlling that risk has changed.
“Today, value investors are managing risks in more sophisticated ways, starting with cash flows,” said Greenwald. “One of the real lessons is that you better understand the determinants of those cash flows, rather than just taking the historical average and slapping it on. You have to understand whether a company’s superior returns are going to be able to be sustained in the face of relentless competition.”
Greenwald asked the panelists where they see the opportunity in today’s market climate. Russo pointed to international markets and consumer products, and Berkowitz said he was looking for companies with “double-digit free cash flow yields,” citing Pfizer as as an example.
What not to buy?
“Things where you can lose all your money,” cautioned Greenberg. “I am not joking. If you can lose all your money, don’t buy it. If it has great potential but is dependent on the next round of financing, we wouldn’t buy it.”
Berkowitz agreed. “You’re right. When you die, you die. There’s no more spinning the roulette wheel.”
Photo credit: Leslye Smith
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