Value Investors Must Adapt or Face Failure: Bruce Greenwald

book on value investing. He's been teaching so many thousands of students about value investing during his days at Columbia over the past several decades, me being one of them. I remember very difficult days poring over the book of case studies that Bruce Greenwald used to hand out. But excited that he's back on for a fully updated edition of the seminal book Value Investing from Graham to Boot and beyond. So Bruce, welcome, Very great to have you

on the program. It's been a rough decade for value investing, of course, but there was a little bit of talk recently that we might be heading into the value cycle again. What did you make of all of that. Look, I think, let me first say, Vanni, it's a real pleasure to talk to YouTube after so many years. The fact of the matter is that I think, in contrast to what happened in the tech boom at the end of the nineties, there are fundamental changes in the economy that have taken place.

So even though the basic value principles are still going to be there, which is, you want to look intelligently for opportunities where you're more likely to be better positioned than the other side of the trade. You want to know the value of what you're buying, and you want

to be disciplined. The changes in the world means you're going to have to apply them differently, and I think if value investors don't adapt, there may be short periods when they do well, but I don't think for the long term they're they're going to have the kinds of records that they historically had. So, Professor, what types of adaptations do you think investors should take to the extent

that they really want to pursue value investing. Well, okay, so let's actually start with just what it is that's changed. So you have an idea of what you're adapting to. And there are two dominant trends in the global economy that affect investors. The first is manufacturing is dying and we're becoming a service economy, which means we're going from big centralized manufacturing facilities to very dispersed service facilities. And the second thing is, and this really amounts to the

same thing tchech has basically disaggregated organizations. So you see it in the way that people work separately, which is the gig economy, but you also see it in the way in which organizations are separated out. So in the old days, if you are doing I t IBM did everything. If you look at it today, you know Microsoft does the operating system and basic functions, or Echo does the databases, Google does search, Intel does only the CPU chips, and

Facebook does the interactions. So you're really going from large centralized organizations to really very decentralized one and that has three absolutely critical consequences. The first is that productivity growth is currently much harder on a decentralized basis, So going forward, you're not going to see the rate of improvement in productivity that you saw in the path. Although we're big organizations like McDonald's in the US learn to do it. We're going to do probably in the US better than

other people. Second thing is when people work individually they get paid for what they do. They don't get paid the average wage, and that means that the distribution of income becomes much much more unequal, and that's going to continue. And I think the third thing, which is really what's crucial for value investors, is that you are moving from broad global markets, the gms, the gas of the world,

to niche local markets. And big global markets are competitive small niche market I mean, for example, if you're gonna be viable at one percent market share, you're never going to keep anybody out of those big global markets, whereas small local markets are markets in which dominant competitors can enjoy barriers to entry based on economies of scale. And once that happens, once you've got these what Buffett refers to a franchise businesses, the whole investment world changes. So

you have high returns on investment capital. So capital allocation can be hugely value creating as well as value destructive. You benefit from organic growth and revenue. I mean, if you're in a competitive market and revenue grows organically. Temporarily profits may go up, but then everybody enters and they just divide the business more finally, and the profits go away. And the same thing happens with the benefit of tech based margin growth, you know, is productivity goes up. In

a competitive market, everybody rushes in. But if you benefit from barriers to entry, you get to enjoy that. And you see that, by the way, and what's happened to profits. In the early in the late eighties early nineties, profits were eight of national income. Today they're twelve to cent or higher, and they're probably going up. But here is the critical thing. Old fashioned asset based value investing is

not going to do it for you. It's too small a part of the overall picture that assets aren't that important in a world where has got barriers to entry and franchise businesses, and there by the way, where you've got services and intangible assets, they're much harder to measure. So I think the first thing investors have to do is understand franchise businesses. Interesting case where we almost have a time, but I do want to get in one

more question. If you talk to the likes of Joel greenbatt or Richard Bosina or Bill Miller, you'll come away with a very different style of value investing. A piece. Well, what distinguishes all of these different styles of value investing? Well, I don't think that they are as I say, there

are three fundamental things that they all do. I think that, you know, the crucial difference between traditional value investors and them is that they've actually adapted much better, that they understand that growth creates value in this world, and you can't invest and look for value without understanding how to put value on growth. And I think that is the single overwhelming style difference. And I think, frankly the future lies with the Bill Millers and the Joel Green plots

for the world. And in fact, what the book is really about is about adapting to this new environment where all of a sudden, the historical distinction between growth investing what you would call varieties of value investing and traditional sort of cigar but asset has gone away. A Bruce,

thank you so much for joining us there. Bruce Bruce Greenwald, Professor Emeritus at Columbia Business School, Chairman of the Paradigm Capital Management, and senior advisor at First Eagle investment manager and of course author of the book Value Investing From Graham to Buffett and beyond. We always appreciate listening to the thoughts of Professor Greenwald. I think about value investing.

It's really been challenging in this market where growth has really been the dominant theme really for a couple of decades. Right now and at this time now to take a look at the credit markets and maybe the markets more broadly, let's bring in MinC you count on Depine, chief investment officer of Western Asset Management. I say the credit markets because they're top of mind today, Mike, what with a

MC being in a little bit of trouble. We know that the movie theaters have already tapped all the credit that possibly is available to them, except for private individuals that are looking to do that. And just curious as to where you see the credit markets right now, Well, there's no question and by the way, Vanni and Paul, thank you for having me on UM. There's no no question that UM, there is still stress in the credit market.

You mentioned amc Um. There's a lot of companies, there's a lot of industries that have done pretty much everything they possibly could to survive to this point, UM, some aren't going to make it, and you actually see that in the default numbers. UM. I think many because the capital will markets up so quickly back in late March and early April UH, some were able to access that

rescue financing and even though they paid dearly for doing that. UM. I think it's going to be a wise move on their part, and UM will at least minimize how many of these companies actually had to ultimately restructure or or file so UM. I think the credit markets right now, there's no question that some of the rally that we were expecting to occur in two thousand one, some of that has been pulled forward into two thousand twenty, just with clarity on the vaccine. UM. I think everyone's expecting

as we are bouncing growth, a bouncing earnings UM. But that being said, I still think the credit markets have room for performance as we move forward over the next few quarters, probably going to be more of a focus on income, focus on carry trade versus what we've seen over the last two or three quarters, which has really

been you know about capital appreciation and spread tightening. I think the magnitude of that spread tightening is probably behind us but but still opportunity UM in fixed income resectors broadly and UM in particular in credit. So, Mike, you talked about some performance maybe being brought forward a little bit here in let's talk about high yield. Is there

any value left in high yield? It's amazing to me, you know, how well that market has performed, given some of the potential credit risks out there that are are quite likely, you know, even going well into Yeah, it is surprising. And if you just think about where we were uh in the depths of March and into early April, and you know, now high yields up over six percent year to date. UM. But I would say this, there's

a lot of disparity in high yield UM. If you look at you know, just even by rating category UH, double B high quality is doing very well, you know, up nine and a half percent, triple CS uh. You know, just think of the lowest quality within high yield UH just up over a little over four percent year to date, and then take that even further UM by industry energy is negative still two percent year to date. UM. So there is a lot of disparity within the high yield market.

And yes, we do still think there are opportunity. I think it's um. You know, again, if you go back to late March and early April, it was really just get risk in high yield. Clearly the downside had overshot and you just want to capitalize on that trade. I think going forward you're gonna see, um, just just a lot more disparity or um, you know, just different markets

out performing in different markets under performing. So I think it's really gonna end up being you know, you got to pick the right credits, you gotta pick the right industries, really focus on bottom up discipline, fundamental research. Um. So. I I do think that's there's opportunity there. Um. But again, I don't think it's going to be as obvious, and I think it's gonna take a little more work to identify those trades. That said, we're not getting any new

stimulus that we know of. Yes, I mean maybe it will happen, but we don't know how that will impact businesses. Surely there's going to be another round of bankruptcy, is Mike, Um, I do think. I mean, I don't think there's going to be an elevated spike of bankruptcies. UM. I think we know or at least have a reasonable idea of which companies are on the verge of having to file UM. If you look at trading levels, I think the market does a pretty good job of identifying those credits, and

they tend to trade it very stressed or distressed prices. UM. I only I think the only way that we would get UM sort of a new flare up, if you will, or another round of defaults or bankruptcies, is if we had disappointment on the vaccine. I think between now and when we expect the vaccine to make its way into the broad population, let's call that maybe over the next two quarters. UM. I think the market is is expecting that.

I think the liquidity and on most of the balance sheets of companies that are in the high old market is sufficient to get to that point. However, again, if we had disappointment and UM, you know that vaccine wasn't as successful or the vaccines aren't as successful, and this extends into the latter part of two thousand twenty one, I do think then you know you're you're you're going

to see some more vulnerabilities. You're going to see some of these at risk sectors and at risk companies either have to get another round of secured financing, or perhaps, as you alluded to, UM, have to to restructure. But I don't think that's in our base case. Hey Mike, what's uh, what's your thoughts on Janet Yelling as by the Treasury Secretary nominee. Yeah, I think that was a

wise choice. UM, definitely calming to the markets. UM. You know, even saw uh Larry Cudlow comment on that, and you know he's one of the few from the Trump administration to say anything, but clearly, I mean Janet Yell, you know, sensible views on the economy as a former FED chair. Um. You know, I think there's a certain level of comfort in the market knowing that she understands the cohesion that's

necessary between between Fed and White House policy. UM. So I think that was a wise choice and I think definitely UM was was calming to the markets. So Michael, will you be looking out now through year end? Are we going to see this Santa calus while I continue? Yeah, I think you know the new issue volume that m in both the investment grade market and the high old market. You know, those are two records. There's just an extra

ainary amount of new issuance UM. Now, a lot of that was for refinancing, which I think is a good thing. If you're a lender UM and you want to uh classify new issuance into something that's either bondholder friendly or bondholder not friendly, we'd obviously rather see more friendly purposes, which we would call refinancing. Is definitely a friend friendly use of proceeds UM. But clearly you're going to see a slowdown in new issue volume over the next couple

of weeks. Um money continues to come into these markets, both investment grade and high yield have seen uh you know, an extraordinary amount of flows into both institutional as well as retail funds, So, you know, good technical backdrop from that perspective. More money continuing to come in, uh, you know, less new issue should result in at least stable spreads and stable markets. In my opinion, Hey, Mike, thanks so

much for joining us. We really appreciate your thoughts. Might be Cannon, Deputy Chief investment officer for Western Asset Management based out in Pasadena, California, really giving us their thoughts on the fixed income markets. Again, new issuance all time high. Well, we have seen several shots now of nurses critical care and nurses getting their first adviser beyond take shots. So

the first vaccines are out there. Let's get straight to Bob Landgrath, who is a Bloomberg healthcare reporter here for us on this rollout. So deaths are approaching three hundred thousand and continuing to rise. Bob, how fast can the distribution network get this vaccine out to where it needs to be? Oh? Yeah, no, this is going to take a while. This is a long slow process. And you

mentioned the gas approaching three hundred thousand. Unfortunately, those deaths are going to continue to increase because many of them are essentially you know, they're based on people who have already been infected weeks ago. So the numbers want to continue to to go to to go up, to go up in the terms of the guests for a few weeks because the number of vaccines that are available, you know, that's just not going to make you a big impact

on death for a while to come. But it's very important to get this rollout going absolutely, and the people that are being vaccinated now are you know, healthcare workers and then the nursing home residents as small fraction of the population those are kind of the priority people that haven't decided that will get it first, because you know,

they're on the front lines. And in terms of the healthcare workers, and then the nursing home residents obviously have some of the highest death rates and account for a large percentage of the death toll in the United States. So right now there's in this initial way there's only two point nine million doses available, so that's a very small faction of even healthcare workers uh and uh uh nursing home residents, and and then the next week there's

only more. In the week after that's gonna be more, and hopefully by the end of this week will get the moderna vaccine as well, not you approximately double the number of doses you know, available per week. Uh, So you know, it is starting to roll out. As people have said, this is kind of the who we hope this is the beginning of the end, but still only the beginning, and it's going to take a while, and

that's very important. People still should take precautions until we get to this difficult period right now and much larger percentage of population is able to be vaccinated. Dr Faucci just now on MSNBC says Americans with no underlying conditions should get the vaccines at the end of March or the beginning of April can according to Dr Fauci, just now an MSNBC. UM, So interesting, Bob, what do we know about the MODERNA drug again? It we It looks like they're going to be just a week behind Fiser.

Get the approval Thursday, I guess, and then maybe start rolling it out over the weekend like we just saw with Fiser. Is there any reason to believe that Moddarian will run into any roadbox. No, there are actually no reason to believe I'm the Durnal run into any load box. It's actually a very similar vaccine to the Fiser vaccine that they're both based on this messenger RNA technology. It's

a new technology. It turns out to work be working very well against the coronavirus U. Both of these vaccines about efficacy rate, uh, and so this is very similar. So you know, unless there's some surprises, Yeah, this should should roll out around, start rolling out around and say Friday, unless there's some showstopp or surprise. We don't don't know

about that. That's that's the very good news. You know that the bad news is that both of these because they're a new technology, isn't the manufacturing experience, and they have to make this enormous quantities and these factories are still current just gearing up now and that's why you're at first for the first few months, there's definitely, you know, going to be a shortage of vaccine to go around. Can you give us some idea of the supply chain and how it works and how you know a vaccine

gets from a factory to a hospital. Yeah, there are several steps involved, and there's distribution hubs and UH. I know that UPS and set X are involved and helping ship uh the the Friser vaccine UH to to the right places where it's needed. Uh. It's a very complicated supply chain. Those governments monitoring it very closely. Once it gets into individual states and locations, then it's more the responsibility of the local states and hospital change to distribute

it once they get their allocations. But the U. S. Government is kind of setting the allocations for the individual states and territories and that's kind of the first step. And then and then the manufacturing that's complicated as well. Because these are injections. There's a manufacturing of the raw ingredients, the m or and A itself at one factory, but then there's a separate factory that does you know, puts it into vials and insures it as sterile. So there's

several steps there as well. So it's all kind of a very complicated system, made more complicated by the fact that, as everyone's probably heard by now, Fighter's vaccine, these extreme cold storage requirements, uh. And that means either extra ultracold freezers, special ultracote fezers, or special dry ice containers that fisers developed for places that don't have those freezers. Hey Bob, how do we or how does the how is it

determined how much each state will receive? As it simply pop elation is an infection rates the we Is there a formula? Yeah? I believe that the government, I'm not totally sure sure the government's kind of U S government has set that that those figures, and I believe it's you know, due to you know, it's more in the total population in the group's uh, in the groups at risk for the vaccident, But I don't know the fine details of that. Where are we looking at more? Lockdown's

build a Blasio here? In New York, the mayor of the city talking about the potential for New York City to go into lockdown. Is that happening around the country still? Yeah, so, uh, I mean, I think what people need to think about is uh that, yes, these vaccines are starting to law, and that's very very good news, you know. But the fact is we're still you know, in the thick of like the worst ways of the pandemic, and these vaccines are not gonna impact what's happening right now in terms

of infections and deaths. You know, they're not kind of significant impact on that, you know, on a kind of broad basis, uh, for for quite you know, quite a while. Quite a number of people you know are vaccinated. Obviously they'll help the people who get the vaccines. That's just a very small percentage right now. So in terms of the big picture, you know, what we need to do to to to control this right now, it's the same

things that we need to be doing more of. It's you know, avoiding credit places, wearing masks and all those things, and those are gonna need to replace day in place or quite some time. Hey, Bob, thanks so much for joining us. As always, you always appreciate your reporting about Langreth Bloomberg Healthcare reporter giving us the latest on the

vaccine rollout. Again, we've all probably seen images from this morning vaccines being given around the country, Day one of vaccines and what is sure to be a long process. Did it's time now to take a look at the credit markets and then maybe the markets more broadly, let's bring in Mike Puccount and Deputy Chef Investment Officer of Western Asset Management. I say the credit markets because they're top of mind today, Mike, what with a MC being

in a little bit of trouble. We know that the movie theaters have already topped all the credit the possibly is available as them except for private individuals that are looking to do that. And just curious as to where you see the credit markets right now. Well, there's no question and by the way, Vanni and Paul, thank you for having me on UM. There's no no question that, Um, there is still stress in the credit markets. You mentioned

amc Um. There's a lot of companies, there's a lot of industries that have done pretty much everything they possibly could to survive to this point. Um, some aren't going to make it. And you actually see that in the default numbers. UM I think many because the capital markets up so quickly back in late March and early April UH, some were able to access that rescue financing and even

though they paid dearly for doing that. UM I think it's going to be a wise move on their part, and UM will at least minimize how many of these companies actually had to ultimately restructure or or file. So UM I think the credit markets right now, there's no question that some of the rally that we were expecting to occur in two thousand one, some of that has been pulled forward into two thousand twenty, just with clarity on the vaccine. UM I think everyone's expecting as we

are bouncing growth a bouncing and earnings UM. But that being said, I still think the credit markets have room for performance as we move forward over the next few quarters, probably going to be more of a focus on income, focus on carry trade versus what we've seen over the last two or three quarters, which has really been you

know about capital appreciation and spread tightening. I think the magnitude of that spread tightening is probably behind us, but but still opportunity UM in fixed income resectors broadly and UM in particular in credit. So, Mike, you talked about some performance maybe being brought forward a little bit here in let's talk about high yield. Is there any value

left in high yield? It's amazing to me, you know, how well that market has performed, given some of the potential credit risks out there that are are quite likely, you know, even going well into Yeah, it is surprising. And if you just think about where we were, uh in the depths of March and into early April, and you know, now high yields up over six percent year to date. UM. But I would say this, there's a

lot of disparity in high yield UM. If you look at you know, just even by rating category UH, double B high quality is doing very well, you know, up nine and a half percent, triple CS UH. You know, just think of the lowest quality within high yield UH just up over a little over four percent year to date, and then take that even further UM by industry energy is negative still two percent year to date. UM. So there is a lot of disparity within the high yield market.

And yes, we do still think there are opportunity. I think it's um you know again, if you go back to late March and early April, it was really just get risk in high yield. Clearly the downside had overshot and you just want to capitalize on that trade. I think going forward you're going to see, um, just just a lot more disparity or um, you know, just different

markets out performing in different markets underperforming. So I think it's really gonna end up being you know, you got to pick the right credits, you gotta pick the right industry is really focus on bottom up discipline, fundamental research um. So I do think that's there's opportunity there um. But again, I don't think it's going to be as obvious, and I think it's gonna take a little more work to identify those trades. That said, we're not getting any new

stimulus that we know of. Yes, I mean maybe it will happen, but we don't know how that will impact businesses. Surely there's going to be another rout of bankruptcies, Mike, Um, I do think. I mean, I don't think there's going to be an elevated spike of bankruptcyes. Um. I think we know, or at least have a reasonable idea of which companies are on the verge of having to file UM.

If you look at trading levels, I think the market does a pretty good job of identifying those credits and they tend to trade it very stressed or distressed prices. Um all. I think the only way that we would get UM sort of a new flare up, if you will, or another round of defaults or bankruptcies, is if we had disappointment on the vaccine. I think between now and when we expect the vaccine to make its way into the broad population, let's call that maybe over the next

two quarters. UM. I think the market is is expecting that. I think the liquidity and on most of the balance sheets of companies that are in the high you old market is sufficient to get to that point. However, again, if we had disappointment and UM, you know that vaccine wasn't as successful or the vaccines aren't as successful, and this extends into the latter part of two thousand twenty one, I do think then you know you're you're you're going

to see some more vulnerabilities. You're going to see some of these at risk sectors and at risk companies either have to get another round of secured financing or perhaps as you alluded to, UM have to to restructure, but I don't think that's in our base case. Hey Mike, what's uh, what's your thoughts on Janet Yelling as Biden's Treasury Secretary nominee. Yeah, I think that was a wise choice. UM.

Definitely calming to the markets. UM. You know even saw uh Larry Cudlow comment on that, and you know he's one of the few from the Trump administration to say anything, but clearly I mean Janet Yelling, you know, sensible views on the economy as a former FED share UM. You know, I think there's a certain level of comfort in the market knowing that she understands the cohesion that's necessary between

between Fed and White House policy. UM. So I think that was a wise choice and I think definitely UM was was calming to the markets. So Michael, will you be looking out now through year end? Are we going to see this Santa calls while I continue? Yeah? I think you know the new issue volume that UM in both the investment grade market and the high old market. You know, those are two records. There's just an extraordinary

amount of new issuance. UM. Now, a lot of that was for REEF financing, which I think is is a good thing. If you're a lender UM and you want to classify new issuance into something that's either bondholder friendly or bondholder not friendly, we'd obviously rather see more friendly purposes, which we would call reefing dancing is definitely a friendly use of proceeds UM. But clearly you're going to see a slowdown in new issue volume over the next couple

of weeks. Um money continues to come into these markets, both investment grade and high yield have seen, uh, you know, an extraordinary amount of flows into both institutional as well as retail funds, so you know, good technical backdrop from that perspective. More money continuing to come in, uh, you know, less new issue should result in at least stable spreads and stable markets in my opinion, Hey Mike, thanks so

much for joining us. We really appreciate your thoughts. Mike P. Canon, Deputy Chief Investment Officer for Western Asset Management based out in Pasadena, California, really giving us up their thoughts on the fixed income markets again, new issuance all time high. Thanks for listening to Boomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Monnie Quinn. I'm on Twitter at

on e Quinn. And I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio