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ValueInvesting

EMBABlockWeek–Fall2016

Preliminarysyllabus

TANOSANTOS

Classroom:TBD

ProfessorOfficeLocation:TanoSantos–Uris815

OfficePhone: 212-854-0489

Fax: 212-851-9509(HeilbrunnCenter)

E-mail:js1786@columbia.edu(TanoSantos)TAs:TBD

YoushouldcontacttheTAwithanyquestionsthroughoutthecourse.Allemailcommunicationswiththeteachingassistantormeshouldhave“EMBA-Saturday-ValueInvesting”inthesubjectline.

Youcanalsosubmitquestionsaboutclassmaterialtomeeverydayuntil8:00p.m.Iwillanswereitherbyemailornextdayinclass.QuestionsaboutanyoftheassignmentsshouldbesubmittedtotheTA.Asbeforeallemailsshouldread“EMBA-Saturday-ValueInvesting”inthesubjectline.

RECOMMENDEDCOURSEMATERIAL

RequiredTextbooks

Thereisonerequiredtextbook:

• ValueInvesting:FromGrahamtoBuffettandBeyond.BruceC.N.Greenwald,JuddKahn,PaulD.SonkinandMichaelvanBiema,WileyFinance,2004.

Otherimportantreferences

Thereisofcourseexcellentliteratureonthesubjectofvalueinvestingandrelatedtopics.IstronglyrecommendGraham’sclassic.• TheIntelligentInvestor:TheDefinitiveBookonValueInvesting.ABookofPracticalCounsel(RevisedEdition)

[withcommentsbyJasonZweigandintroductionbyWarrenBuffett].

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Otherinterestingbooksthatimmediatelycometomindare:

• TheLittleBookthatStillBeatstheMarket.JoelGreenblatt.JohnWiley&Sons,2010.• AccountingforValue,StephenPenman,ColumbiaBusinessSchoolPublishing,2011.• MarginofSafety:RiskAverseValueInvestingStrategiesfortheThoughtfulInvestor.SethKlarman.Harper

Business,1991.• TheMostImportantThing:UncommonSensefortheThoughtfulInvestor.HowardMarks,ColumbiaBusiness

SchoolPublishing,2011.• TheLittleBookofBehavioralInvesting.JamesMontier.JohnWiley&Sons,2010.• ValueInvesting:ToolsandTechniquesforIntelligentInvestment.JamesMontier.JohnWiley&Sons,2009.• ValueInvesting:ABalancedApproach.MartinWhitman.FrontiersinFinanceSeries,JohnWiley&Sons,2000.• BerkshireHathaway,Letterstoshareholders.WarrenBuffett.• TheessaysofWarrenBuffett.EditedbyLawrenceCunningham.CarolinaAcademicPress.

Therearetwobooksintheintersectionofaccountingandvaluationthatareusefulsupportingmaterial

• TheAnalysisandUseofFinancialStatements.GeraldWhite,AshwinpaulC.SondhiandDovFried.J.Wiley,2013,3rdedition

• FinancialStatementAnalysisandSecurityValuation.StephenPenman,5thedition

AllthematerialsrelatedtothecasesdiscussedinclasswillbepostedonCanvas.Thisincludes10Ks,andsupportingmaterials;IwillhavepresentationsaboutthecasesaftertheclassdiscussionbutIwillnotdistributethem.Thelecturesnoteshavetwoversions:Astudentonethatwillbedistributedinclassandaprofessoronewithadditionalmaterialandthatwillbetheoneprojectedinclass.Therearealsopresentationsassociatedwiththecasesbutthismaterialwillnotbeposted.

REQUIREDPREREQUISITESANDCONNECTIONTOTHECORE

Co-requisite:CapitalMarkets

Thelearninginthiscoursewillutilize,buildonandextendconceptscoveredinthefollowingcorecourses:

CoreCourse ConnectionwithCoreCorporateFinance 1. CostofCapital

2. Valuation3. FinancingOptions4. Timevalueofmoney5. Opportunitycost(ofcapital)6. TheCapitalAssetPricingModel(CAPM)7. FirmValuationModel

FinancialAccounting 1. The“accountingequation”2. Revenueandexpenserecognition3. Resourcesandobligations–measurementanddisclosure

GlobalEconomicEnvironment

1. RiskManagement2. WhatisGrossDomesticProductandhowisitmeasured?3. Whatcausesinflation?

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4. Whatcauseschangesinexchangerates?5. Whatarethecausesofbusinesscycles?6. Whataretheeffectsofmonetarypolicy?7. Whataretheeffectsoffiscalpolicy?8. Whatistheroleoffinancialmarketsintheeconomy?

ManagerialEconomics 1. Barrierstoentry2. Moats3. Maximizationandthinkingonthemargin4. Analyzingcomplexdecision-makingunderuncertainty5. Decision-basedcostanalysis6. Pricingwithmarketpower7. Marketsegmentationandotheradvancedpricingstrategies8. Understandingmarketcompetitionandequilibriumthinking(inthe

short-run)9. Marketequilibriumthinking(inthelong-run)andbarrierstoentry10. StrategicinteractionamongfirmsandNashequilibrium

StrategyFormulation 1. Trade-offs,value-added,efficiencies2. Creationofvaluevs.valuecapture3. Competingfirms4. Co-optitionandComplementors5. Strategicinteractionanalysis6. Diversificationandscope7. Ethics&IBS8. Behavioralandevidence-basedstrategy9. Management

COURSEDESCRIPTION&OBJECTIVES

Thiscourseaimstofamiliarizethestudentwiththeprinciplesandtechniquesofvalueinvesting,theinvestmentphilosophypioneeredbyGraham&DoddduringtheiryearsatColumbiaBusinessSchool.Thiswillbedonethroughacombinationofformallectures,inclassvaluationdiscussions(seebelow)andpresentationsbyleadinginvestors.Theareascoveredwillinclude:

1. Thefundamentalassumptionsandapproachestovalueinvesting2. Designingstrategiesforsearchingefficientlyforvalueinvestingopportunities3. Techniquesforassessingfundamentalvalueinarobustway4. Riskmanagementforthevalueinvestor

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CONTENTS

PartI:FoundationsofValueInvesting

1. Introduction• ValueInvesting:Adefinition• Comparisonwithotherapproaches• Whyvalueinvestingissorarelypracticedandsowidelypraised?

2. Thevaluepremiumandthevaluepremiumpuzzle

• Portfoliosorts• TheBook-to-Marketsortandthevaluepremium• Isitrisk?Thevaluepremiumpuzzle• Behavioralevidenceregardingthevaluepremium• Othersorts:Momentum,longtermreversals• Quantitativevaluestrategies

3. BehavioralFinance:WhyisMr.Marketthewayitis?

• Behavioralfinance:individualbiasesandtheirconsequenceso Lossaversionandreferencepointso Preferenceforskewnesso Therepresentativeheuristic:Extrapolationo Overconfidence

• Institutionalbiaseso Windowdressingo Herding

• Limitsofarbitrage:Theseparationofcapitalandknowledge• Theempiricalevidence

PartII:TheValueInvestingProcess

4. Introduction:Anoverviewofthevalueinvestingprocess

• Thecomponentsofthevalueinvestingprocess• Differenceswithotherapproaches• Adverseselection:Thefundamentalproblemofexchange

5. Search:Wheredoideascomefrom?

• Specialization:Searchinginthecircleofcompetence• Thevalueofsorts:BE/ME,E/P,…

o Doaccountingsortswork?o Doublesortso Anexample:Greenblatt’sMagicFormula

• Specialsituations• 13Fs:Imitatingwhatsmartinvestorsdo• News,periodicalsandothersources

6. Valuation–I:Assetandearningpowersvalues

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• Themainidea• Theapproach

o AssetValues1. Liquidationandnet-nets2. Reproductionvalues

o EarningsPowervalues1. Sustainableearnings2. Adjustments

o Comparingassetandearningspowervalues• Anexample:Walmart

7. Valuation–II:Growthandprofitability

• Evidenceonprofitability• Growthaccounting• Capexandgrowth• Howtocalculatethereturnonadditionalinvestedcapital?• Canfirmscapitalizeonmarketgrowth?

8. Anexampleindepth

PartIII:ValueInvestingandtheEconomicsofStrategicBehavior

9. TheeconomicsofStrategicBehavior:Acrashcourse

• Thelogicoffreeentry• Thelimitsofproductdifferentiation• Thelimitsoffirstmoveradvantages• Barrierstoentry

o Demandadvantageo Supplyadvantageo Othersourcesofadvantages

• Industrymaps:Performingstrategicanalysis

10. Assessingmanagement• Capitalallocation

o Incentivesforempirebuilding:Acquisitionso Theempiricalevidence

• Incentivesinsidetheorganization

PartIV:MacroeconomicRisksandValueInvesting:RiskManagement

11. Macroeconomicsrisksandvalueinvesting• TheGreatRecessionandthestateoftheUSeconomy• TheEurozoneCrisis• Case:Ferrovial• Thenextcrisis

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12. Riskmanagementandreview• RiskManagement

o Themarginofsafetyo Thecontinuousreviewprocesso Portfolioformation

1. Checklists2. Theroleofcash

o Exitstrategieso Hedgingo Theroleofleverageo Shorting

• Reviewo Analyzingsuccess:Wasitluckorwasitskill?o Analyzingfailure:

1. Whatdidyoumiss?2. Repeatingmistakes

NOTE

BecauseofthepeculiarpedagogicalneedsoftheEMBAblockweekthematerialhasbeensuitablyre-arranged:Valuationessentialsareintroducedearlyinthecoursesothatcasescanbetackledfromthefirstday.Thepreviousindexshowsthe“textbook”sequenceofthematerial.PleaseseetheEMBAgridto.

COMPANIESCOVERED

Amazon2016,Walmart2016,Deere2016,Nestle2016,Trimble2016,Magna2008,Ferrovial2011,DollarGeneral2016,Viscofán2016

METHODOFEVALUATION

Thegradewillbebasedon:

1. Classparticipation:Studentswillbeaskedquestionsthroughoutthesemester.Thisisintendedsimplytoelicitparticipationandattention.

2. Casesdueinclass.• Onesheetvaluationofacompanytobespecified.

3. Avaluationexerciseprojecttobechosenamongalistofnamesgiveninclassandtobedevelopedbyagroupofnomorethanfourstudents.Thebulkofthegradingwillbebasedonthelasttwoitems(about80%ofthegrade).

CLASSROOMNORMSANDEXPECTATIONS

ClassParticipation:Preparation,Discussion,Organization,Engagement