Glenn Greenberg: I’ve had returns of around 18% over 30 years - I wish I could tell you how to do it. When I started, I thought I had no chance of compiling such a record. It’s not easy.

I’ve learnt it’s important to bring together the analytical skill – financial statement analysis, meeting management, modeling etc. – with the ability to buy and sell. It doesn’t make sense splitting the two apart. I never work with more than 3 other professionals and I always do all the work myself. I worked as an analyst for a great investor who no one has heard of because he didn’t want publicity. I was in business 10 years before I went out for myself and started my own firm with family’s money.

Don’t be in a huge hurry to start your own fund; it’s easier to develop your methodology and contacts, when you step out on your own and it’s are a whole different ball game. You may lose and never be in business again – you’ll have no one to bounce ideas off etc. just you, so you better need conviction. We started with $40m and we never marketed again – if we are good they will come to us. We weren’t hedge fund, we didn’t want fast money – they wanted unrealistic, short-term gains. It saved us so much time in marketing etc. We also never called Wall Street – we wanted all our own ideas, not what others are looking for. We put a lot of money in each of our concentrated stocks so we need a lot of research, so getting a call from someone on the street takes a month to finish studying anyway – so I don’t waste time on that.

How would you approach investing if modeling didn’t exist? Imagine no calculators exist, no excel and a model – how would you think about it? Would you invest the same way?

Student: focus on long-term strategic issues, I would build models and get focused on short-term numbers, not on strategic stuff – how the business builds its moat/develops its business model

GG: Who uses excel here? Anyone want to answer what he or she would do?

Student: I agree with the above. People would stop thinking about short-term measures.

GG: Yep, I think it gives them comfort – your stock is getting creamed and then you reach into your drawer for your model. I’m down on how much emphasis is on numbers – it’s really perverted, it makes you think that it’s concrete and predictable, although it may have almost nothing to do with reality. Einstein said that “not everything that counts can be counted and not everything that can be counted counts”. Probabilities matter much, much more. I’m really down on how much emphasis there is on numbers for people studying investments. To me the most logical thing is that if you invest money in a company, then you should have an idea where that business is going to be in a few years – so few competitors. Can’t imagine how you’d figure it out if there were lots of competitors.

Q: When you do your homework, do you select on an industry basis?

GG: Absolutely. I don’t invest where there is lot of competitors. I don’t want cyclical businesses or low margins – this cancels out a lot of areas. I want high returns on capital, high margins etc. not necessarily growing – that attracts competitors too. Lot of businesses get more mature, they get hard to enter – Ratings agencies, Coke and Pepsi, Freddie and Fannie were hard to enter

There is also the Schwab-type business, it has a lot of competitors, but they are in a strong position because of their business model. So there are exceptions. I like to find businesses where you think you know where there in a few years. We bought a company that makes sensors for automobiles where they had 9x market share compared to the next guy, there are laws forcing certain specs on these things – which cost huge amounts if they are wrong and there is a recall - so automobile manufactures trust certain companies and so there is high barriers to entry.

Investing really is the last liberal art – you are going to have to know a lot from different streams of thought: economics, business, psychology etc.

Like… Did anyone buy a stock that went up a lot recently?

Student: Yes

GG: How did you feel?

Student: Really smart

GG: You are not alone! And we always think the next one is going to do just as well too.

Student: How do you decide when you look at something to invest or not and when do you sell?

GG: I ask my analysts if you had the CEO on truth serum but only for 3 questions, what would you ask? It should take a few seconds to see what you are counting on. It’s really that simple, understanding good business isn’t hard – within 25 words you should summaries all the issues. With Freddie Mac, we made 30x and sold at the top. There was one competitor – you could breakup according to costs and funding as well as splitting the market 60%/40% with Fannie Mae and figure things out. That’s it. Just follow the basis points of funding and cost. I spend most my day looking at management transcripts – how they think about business, how they answer questions. To be a great investor you have to be able to cut to the essence of things instantly.

You are never going to have to come up with a strategy that never fails – you will face so many crises. You need to be a survivor over long periods of time. You have to come up with something that doesn’t risk all your clients’ money. My approach is to know the business I’m investing in better than anyone else – if I can’t find attractive rates of return, I’ll own cash.

Q: In terms of valuation, do you look at cheap metrics now, or things that are high on today’s metric but will become cheap in the future?

GG: I’m neither. I do a study of the next 2-3 years; I’m a price to cash flow guy. You can buy 9% FCF yields, but they aren’t growing – I like to look for likely things in years 2 and 3 that take companies to a next level (grow the yield) not stagnate – not always but usually. I add back stock compensation, but use a diluted shares outstanding figure. E.g. in Canada, the price of gas was once $1 or something and in the US it was $3 but there was no pipeline yet – it was coming. But there was this company that was so cheap already because the price didn’t account for all these things. Those are low risk versus management saying they’ll grow earnings – and all you’re left asking is “how do you know that?” Unless its like a MasterCard or Visa or something great like which both have for a $1 of revenue: 20% of cost and 50% margins – rest is discretionary: they spend on advertising even though banks decide which card you go on, which is really unneeded expenditure. Google falls in this category too; in 08 they cut expenses and had record margins. So they can influence that to make earnings as they need – it’s that high quality. Most aren’t that great.

Q: What’s your calculation for FCF?

GG: We do the usual: EBITDA – MCX and we add stock compensation, but use a fully diluted shares outstanding figure when dividing our intrinsic value. But we don’t count positive working capital into cash flow (like a license company or something which gets upfront payments) because I see it as a denominator figure on the ROIC, so we dock them for working capital but don’t add positive working capital as cash flow. I just think I want 15% on investment as a hurdle, as a minimum its probably higher – calculated on my earnings method – then I think of probabilities of good and bad things happening to the business.

It’s different for different companies of course. We own an insurance company, Primerica, they are so amazing and they have such a low cost of distribution that they can sell insurance to middleclass people and they are so low cost that they buy reinsurance policies on 80% of policies they write so there is a really low underwriting risk in this thing.

Q: Can you talk about VistaPrint?

GG: In 2011, it grew from nothing into $700-800m; the CEO said that the old model of acquiring micro business customers (yoga teachers etc.) and selling them business cards/other printing and only retaining 20% isn’t a sustainable model. The one time customer spends $50, after one year they drop-off, then second they retain for some reason. The people who spend $50 in year one and drop off hardly contribute anything for gross margins, where as 2nd year retainers where extremely high margin customers. They want to change into customer orientation that drives marketing lower and keeps customers. But, in order to do this, they had to have massive one-time expenses to set up customer call centers, extra customer support etc. So margins cut in half in one year, but after that, it wasn’t clear where they would remain.

Managers were compensated with options on 3-year income growth, so they lost their 3-year income bonuses because of this – which is very interesting. The stock dropped from $60 to $30. We bought a lot of stock and we got a call about how management should be compensated. I said we would like to see management see a good job and that’s how it should be decided. How about we strike the options at $50 and the CEO can only exercise if it gets to $75! I’ve never seen that. Before we’ve talk about numbers, we think about these kinds of things.

We asked what if they are wrong and can never grow again? Their margins are forever like 15% margins. They had a big capital plant, which didn’t need CapEx anymore so D&A was abnormally high relative to economic reality. We thought that they had a FCF per share of $4 without growth so the downside was small – there was not much risk on a $30 stock. It could grow to $10 or $12 per share of FCF in a few years. People went into granular detail about how high the customer acquisition costs were going to be and everything else. But it seemed like our downside was so limited.

Another fact I didn’t mention by the way was that the same CEO went out and bought like 10-20% of the company’s stock in 4 months when the stock price dropped in half. Now he got authorization to buy 20%. We defined the downside, unrealistically bad, then decided what the upside was – then simply watched management. We thought risk/reward was really good. Our only next step was to decide how much to put into it. For us to make it a 10% position we needed 15% of outstanding shares, so we gave up liquidity. These things aren’t all about numbers

Q: What about regulatory exposure?

GG: We bought 15% of what I thought was one of the best companies I had seen. They automated borsches office process, Higher One Limited is it’s name, they acquire the student as a customer by sending out a debit card and they ask how do you want it? Through this card or some other method? Most people activate the card. They acquire customers for next to nothing. 600 colleges were signed up for those millions of students. 1st students get 1/3rd market share, then 50% and then it keeps going up. They had no CapEx plus 60% gross margin. Net cash. Early last year, an organisation came out with a report on the financial industry and how it charges students and was enraged about the fees etc. in the election year, politicians got really raged too. The company had to make the sign up process way more complex, the student subscription dropped substantially. It shows no matter how careful your analysis - the founder was a client - They were never off on their revenue by more than a few percentages, no competitors, yet stuff

can go wrong. It hasn’t happened many times but. That’s why I don’t like playing for growth. Now schools aren’t even signing up.

Q: How many companies do you look at?

GG: 40-50 that we have studied and visited and we would own. We’ve thought about FCF and exit multiples etc. They go on our watch list. E.g. Lockheed martin was on our list but we sold it because we were concerned about military budget etc. My risk assessment wasn’t worth it.

With Schwab, if interest rates don’t change, you’ve got a great business. You can see looking over their history what happens in different interest rate environments - $2 trillion of which a lot is in cash. Add the