Our next presenter is Joseph Calandro from the University of Connecticut, and he's going to be talking to us about his new book, Applied Investing.
Thank you. It's Applied Value Investing.
To give you a background on the talk, I'm going to start with kind of an overview of Benjamin
Graham who founded Value Investing and then segue that into how modern value investing
practice is practiced. For the simple reason that today's economy is much different than
the economy that Graham founded a discipline in and talk a little bit about my research
and get into some of the research contained in my book, Applied Value Investing and then
Benjamin Graham founded what's known as value investing in the 1920s and 1930s. He was heavily
influenced by the new era boom of the 1920s and the subsequent bust or Great Depression.
It's essentially a price arbitrage strategy. He referred to it as cigar butt investing.
What he meant by that was companies that were selling at less than their liquidation value
were analogous to like an old cigar butt that had a couple puffs of smoke left in it.
If you could purchase it below its liquidation value, you essentially could achieve an arbitrage
profit, a riskless profit, and that gave you what he called a margin of safety, and that
is the cornerstone of the approach, it remains so today, and it's what differentiates an
investment from a speculation to Graham and his students.
The most famous student obviously is Warren Buffett, the chairman and CEO of Berkshire
Hathaway.
I actually worked for him at one of his subsidiaries for a number of years.
I'll talk about that if anybody has a question.
What differentiates value investing from what's typically being taught in MBA schools today
is it's strictly a bottom-up approach, it is not top-down.
And as a result, value investors pretty much opposed modern financial economic theory from
from the beginning. And to give you an idea of what that means, it essentially has to
do with, it's an accumulation of theories, efficient market theory, portfolio theory,
a theory that says capital structure doesn't matter, which is probably the dumbest theory
on that slide, asset pricing models, option pricing models, pretty much from the beginning.
Now they've opposed all that and they've also substantially outperformed the market averages
over time. So the modern approach to value investing occurs over a continuum of value,
and what I mean by that is it starts with net asset value, and that's essentially reproducing
the balance sheet. Balance sheet analysis formed the basis of what Graham did in the
1920s and 30s, and it remains a cornerstone of the approach today. Next we go to earnings
power value, and this is different than the traditional discounted cash flow that MBA
are taught and by that I mean it's based on a level of past earnings that should be sustainable
into perpetuity.
So it's much more tangible than discounted cash flow because you're not projecting out
to the future and discounting back.
Next you move to franchise value and if there's a spread between your earnings power and your
net asset value, that's a tip off that either A, there's a sustainable competitive advantage
that you have to value or B, if there's not one and there aren't many, then your earnings
One of the keys to the approach is the assumptions are upfront in each level because it's bottom
So, that's important. Investment is not, and never will be, purely quantitative.
Everybody kind of says that, but when the rubber hits the road, most people want a simple equation.
And the only way to get that is either you assume away all the qualitative and behavioral elements that are inherent in an investment, or you address them up front.
So, by way of my background, I came to Austrian economics and value investing late.
I was trading currencies and commodities in the 90s and I did, you know, real well for about four years.
Year five, fortunes changed very, very quickly in the Asian Contagion.
And I really don't want to say too much more about that because it's pretty painful.
But re-examining the mistakes I made led me to study value investing formally and also to study Austrian economics, which was fortunate timing-wise, in a sense.
And I say in a sense because if I had done this 10 years before, I'd probably be very wealthy right now.
But during that time, I mean, the new economy was booming and there were direct parallels between what I was seeing in the quote-unquote new economy and what Graham wrote about the new era.
And obviously, there were definite parallels between what, especially what Murray wrote
about the Great Depression and the boom, and again, what I was saying.
And significantly, Austrian business cycle theory predicted both the boom and bus waves
of both business cycles, which is important, right?
Graham, like I said, this is a bottom-up orientation, and Graham's kind of approach to top-down
was you know buy during periods of pessimism when prices are low and sell
when everybody's like happy and prices are high well I mean I think it could be
easier to do that if you understand the macroeconomic reasons driving the
optimism and pessimism that's the first thing and then the second thing you
could use I think macro based insights in a Graham and Dodd context
to screen for potential investment opportunities and in chapter 5 of my
In my book, I essentially present an approach that does that, that integrates Austrian business
cycle theory, George Soros' boombust model and behavioral characteristics.
Now these are based on a paper that I initially presented at an earlier Austrian Scholars
Conference that turned into a published paper in the Quarterly Journal of Austrian Economics
and then a working paper, subsequent working paper that's posted at Mises.
Several chapters of the book present valuation case studies on high-profile deals. Eddie
Lampert's acquisition of Sears, Buffett's acquisitions of Geico and Jean-Rie, and Buffett's
alternative investment on the Pepsi Play for a Billion Sweepstakes. Now, I essentially
hit the price of each of those investments, and I do so using very, very basic assumptions,
and you can see them as you track the cases level by level. Incredibly, this is the first
book that actually applies Graham and Dodd to value investments, significant value investments.
I'm not sure why that is. I hope it's not the last. There's another chapter presents an approach on
managing, on management, managing for value creation and I'm a manager so that has particular
applicability to me and assessing management for valuation purposes. I'm very fortunate that the
investment community has really taken to the book top investors like Seth Klarman, Mario Gabelli,
and Mitch Jules have given very positive endorsements and it also received two
positive reviews from Doug French and CJ Maloney at Mises Daly's. So, questions
later. Thank you.