Über die Autorin bzw. den Autor

Joseph Calandro, Jr., is the enterpriserisk manager of a global financialservices firm. He previously taught value investingand risk management courses in theMBA program at the University of Connecticutand worked as a financial managementconsultant with IBM Global Services.

Von der hinteren Coverseite

Brand-new ways to apply theinvesting ideas of GRAHAM and BUFFETT

“This thought-provoking work takes value investing to the next level.”
—Seth A. Klarman, President, Baupost Group, L.L.C.,Lead Editor of Graham and Dodd’s Security Analysis, 6th Ed.

“After 75 years, Graham and Dodd remains the true North Star for those seeking the Rosetta Stoneto unlock values. Professor Joseph Calandro adopts Graham and Dodd’s fundamental premises anduses them to focus on new dynamics.”
—Mario J. Gabelli, CFA, Chairman and CEO, GAMCO Investors, Inc.

“Calandro’s application of Graham and Dodd principles outside the traditional realm of value investinginvolves multi-disciplinary thinking, a necessary skill for constructively framing and reframing theinvestment landscape in today’s chaotic world.”
—Mitchell R. Julis, Co-Chairman and Co-CEO, Canyon Partners, L.L.C.

“Applied Value Investing is the most important business book of our time.”
—Dr. John J. Sviokla, Vice Chairman, Diamond Management & TechnologyConsultants, and former Associate Professor, Harvard Business School

“Calandro’s groundbreaking book integrates [key] lessons into a holistic and practical businessframework, which can be used to either assess or manage a business.”
—Robert M. Randall, Editor, Strategy & Leadership, and coauthor of The Portable MBA in Strategy

“If executives will adopt the discipline that Joseph Calandro lays out, they will avoid many,many costly mistakes.”
—Paul B. Carroll, coauthor of Billion-Dollar Lessons

“A must-read for all Graham and Dodd followers, and valuation practitioners.”
—Patrick Terrion, Principal, Founders Capital Management, andauthor of The Company You Keep

“A useful addition to every value investor’s library.”
—Bruce Greenwald, Robert Heilbrunn Professor of Finance and Asset Management,Columbia Business School

Auszug. © Genehmigter Nachdruck. Alle Rechte vorbehalten.

APPLIED VALUE INVESTING

The McGraw-Hill Companies, Inc.

Contents

Chapter One

Every corporate security may best be viewed, in the first instance, as an ownership interest in, or a claim against, a specific business enterprise. —Benjamin Graham

There should be some advantage to the valuation process in cases where asset values coincide with and reinforce the earnings power value. We may then be able to return to the older, private business approach and to say that in the case of Company X the fair value of the shares is the same as its book value because the earnings, dividends, and prospects support the book value. —Benjamin Graham and David Dodd

INTRODUCTION

At its core, the Graham and Dodd approach to valuation and investment is a method for identifying and profiting from significant price-to-value gaps. While all long-side investors intend to "buy low and sell high," Graham and Dodd–based practitioners (who are popularly referred to as "value investors") seek to buy at a level that is appreciably less than an investment's intrinsic value, or its inherent worth. The result is a margin of safety that "is available for absorbing the effect of miscalculations or worse than average luck." In other words, by investing in "businesses with satisfactory underlying economics at a fraction of the per-share value," Graham and Dodd practitioners significantly increase the probability that their investments will be successful, or at least not ruinous. The uniqueness of this approach is perhaps best illustrated in a diagram, such as the one presented in Figure 1-1.

The diagram plots price on the x axis and value on the y axis, inasmuch as value is a function of price, and highlights the difference between a Graham and Dodd–based opportunity and risk. An investment is an opportunity if it is offered for less than its intrinsic value, and an investment is a risk if it is offered at or above its intrinsic value. Risk in this context means that there is no financial buffer, or margin of safety, between the value of an investment and the price at which it is offered. Such an investment is risky because the only way to profit from it is through growth, which is extremely intangible and is influenced by a variety of internal and external factors.

Note that both General Electric (GE) in 1939 and Microsoft are listed as risks in the diagram. Graham and Dodd themselves commented on GE in the second edition of their seminal work Security Analysis, which was published in the year 1940:

We have intentionally, and at the risk of future regret, used an example here of a highly controversial character. Nearly everyone on Wall Street would regard General Electric stock as an "investment issue" irrespective of its market price and, more specifically, would consider the average price [in 1939] of $38 as amply justified from the investment standpoint. But we are convinced that to regard investment quality as something independent of price is a fundamental and dangerous error.

I will have more to say about GE in the coming pages, but comments similar to these could be made about Microsoft today. For example, according to Columbia University Professor Bruce Greenwald and his coauthors, "The ability of even the best analysts in the year 2000 to forecast accurately Microsoft's earnings at 10 years in the future is likely to be limited. Under these circumstances, it is impossible to justify Microsoft as a value investment."

Benjamin Graham originally found investment opportunities in net-net stocks, or stocks that were selling for less than their net-net value, which is calculated as current assets less total liabilities. Graham referred to this approach as cigar butt–style investing because it involved buying troubled companies for what amounted to appreciably less than their liquidation value, which was analogous to picking up spent cigar butts that have a couple of puffs left in them. Cigar butt–style investing has, for the most part, been arbitraged away; for example, the late 1970s was probably the last time it could have been used on any scale in the capital markets of the United States.

To put this into perspective, consider a 1979 article published by Forbes magazine titled, "The Return of Benjamin Graham: Think of a Time When Stocks of 191 Important American Corporations Are Selling for Less than Net Working Capital per Share. Are We Talking about 1932? No, 1979" (October 15, 1979, pp. 158–161). Table 1-1 is an excerpt from that article, and it illustrates market conditions that represent near nirvana for traditional Graham and Dodd–based investors.

Capital markets have become substantially more efficient (or, more accurately, proficient) since 1979, and therefore Professor Greenwald and his coauthors updated the traditional or cigar butt style of Graham and Dodd valuation and investment to better reflect the dynamics of modern financial markets. Value is now discerned, and investment opportunities assessed, along a unique continuum such as the one shown in Figure 1-2.

As can be seen from Figure 1-2, the value continuum begins with net asset value, the most tangible level of value, then proceeds to earnings power value and franchise value (or the value of a sustainable competitive advantage) before ending with growth value, the last and least tangible level of value. Not all investments require the utilization of all four levels along the continuum, however. In fact, the valuation of most firms will probably not proceed to the third level, franchise value, because most firms do not operate with a sustainable competitive advantage. In these valuations, earnings power value will not exceed net asset value, as it does in Figure 1-2, but instead will relatively reconcile to it, as illustrated in Figure 1-3.

I refer to the value profile shown in Figure 1-3 as base-case value because the firms that reflect it are for the most part simply fulfilling their fiduciary (or base-case) duty; in other words, the firms are generating profit consistent with the cost of their capital and the reproduction value of the assets under their control—no more, no less. Despite the relatively common occurrence of the base-case value profile, it can present a lucrative investment opportunity if it is offered at a reasonable margin of safety (or discount from estimated value). This is illustrated in the introductory valuation of Delta Apparel, Inc.

BASE-CASE VALUATION

In October of 2002, the equity of Delta Apparel, Inc. (stock symbol DLA), hit one of my screens as a possible investment opportunity. At the time, DLA stock was selling at $14.00 per share, and thus the valuation objective was to determine if that price qualified as a Graham and Dodd–based investment (in other words, to determine if the stock fell within the upper left quadrant of Figure 1-1). To make this determination, I will follow the value continuum shown in Figure 1-2 level by level, beginning with net asset value (NAV).

NAV involves transforming a firm's balance sheet from historical cost to a reproduction- based value so that it...