The Value of Quality, and a Consistent Process — Summit Street Capital

Winter 2011

Artie Williams, Jenny Wallace and Judd Kahn are the Managing Partners of Summit Street Capital Management. Together they manage quality-biased value portfolios of U.S. Equities that have returned 89% net since launching in April, 2009. Artie also teaches Applied Value Investing here at Columbia and Jenny sits on the Advisory Board of the Heilbrunn Center for Graham and Dodd Investing.

G&D: Artie, you have a unique background prior to become an investment manager. Why did you make the transition?

Artie Williams (AW): I majored in accounting as an undergraduate. I was drawn to financial statements and financial information and was always interested in investing, although upon graduating from college, my path was predetermined. I went into our family business which operated convenience stores and truck stops throughout the South- east. I worked in that business for twenty-plus years, but was always investing on my own and eventually I decided that I wanted to do something else with the rest of my life. I guess you could say I retired, although I was too young to retire.

I began to learn about value investing and attended the two day value-investing course taught by Bruce Greenwald. I realized that while I knew a lot, there was a lot more that I didn’t know and decided to go back to business school to get the formal training that I could couple with my business experience to help me become a better investor. Warren Buffett often says, “I am a better businessman because I am an investor and I am a better investor because I am a business- man.” I think of myself as a businessman who has transitioned into being a professional investor. I applied to Columbia because it is the birthplace of value investing. In my business life, we were value investors. We didn’t know how much we could sell our business for. We really did-an active market for the business. We concentrated on operating efficiency and cash flow. We wanted to know how much cash we had at the end of the year, and how much cash we had to reinvest to maintain our competitive situation, and if it was wise to deploy cash into new markets, which were new locations. We managed for cash flow, period. I took that mindset as I went into business school and have kept it as an investor.

G&D: Jenny, how did you find the calling to value in- vesting?

Jennifer Wallace (JW): I am a graduate of the first value- investing class that was offered when Professor Greenwald reintroduced it. Several people have said, you either get value investing in the first five minutes or you never do and I think that is right. I absorbed the concepts that Bruce taught and I read Seth Klarman’s book Margin of Safety and then never looked back.

After graduating from business school, I joined McKinsey & Company, Inc. I knew that ultimately I wanted to end up as an investor, and I spent a few years gaining hands-on business experience as a consultant to complement the investment training I received at Columbia. I left McKinsey when I was introduced to Bob Bruce, who became my mentor and we managed money for members of the Bass family. In Artie’s case, he ran a business and then went back to business school. I went to business school and then decided to work inside some business- es before migrating to in- vesting. I had known Artie through our association with Columbia Business School and when Bob decided it was time for him to retire, Artie and I decided to start our partnership.

G&D: How did your experience working with Bob Bruce influence your investment approach?

JW: My first day on the job, Bob put me in an office without a computer, Bloomberg, or phone. I had nothing but a big desk and a stack of Value Line reports. He told me not to come out until I had found a couple of good businesses to talk about. Bob taught me to focus on a company’s financial characteristics to determine whether it was a high quality business. It may sound obvious, but many people focus on stories and short-term price movements instead of fundamental financial information when judging a company. Bob also taught me about the risks of illiquidity and the perils of getting stuck in a value trap of a low priced, low quality business — that there is usually no price low enough to justify buying an overly leveraged or low- margin business. While working with Bob I learned that successful investing boils down to answering two basic questions: “Is this a good business?” and “Is it trading at a discount to what it is worth?” And those are the two questions that we seek to answer each day.

I had been an investment banker in the late 1980s and started investing around the time of the Asian meltdown and Russian debt crisis and then the dot-com buildup and subsequent bust. Going through periods when value was recognized in the market and when value was ignored, and seeing how the financial markets can move and react has shaped my thinking about investing. These experiences have reinforced for me the importance of consistency in a research and investment process and to not let the short term whims and fluctuations of the market throw you off. The challenge in investing is that decisions are not black or white. There is always a tradeoff between price and quality and we have constructed our process to help us weigh that tradeoff.

AW: You can’t determine what value to put on a business unless you know the quality of the business. Higher quality businesses are worth more than the lower quality businesses. The two are really intertwined. Buffett says value and growth are joined at the hip; we agree and add that the quality component is an important element of value.

G&D: Judd, you co- authored a book with Professor Greenwald.

Judd Kahn (JK): I came to the investing business through my academic connections to Bruce Greenwald. He and I were colleagues in the 1970s at Wesleyan University and after Bruce had moved to Columbia Business School, we began collaborating on a corporate finance textbook. During the course of that project, there was a write- up in the New York Times about the two-day Value Investing seminar that he taught and that small article led to phone calls from three publishers. By the following week, we had put aside the corporate finance book and began writing Value Investing from Graham to Buffett and Beyond. We fol- lowed it later with Competition Demystified and then Globalization. So my introduction to Artie and Jenny was through Bruce and the work that we did together on those books.

G&D: Can you tell us a little bit about Summit Street?

JW: We invest in well- capitalized, high-quality companies when they are available at attractive prices. We look for mispricings across a wide universe of stocks and then, drawing on our investment and business experience, we try to deter- mine whether the market is offering us a genuinely attractive investment opportunity or just a stock that is deservedly cheap. We are active managers in the classic stock-picking sense of the word. We do not construct our portfolios to match the sector allocations of an index. Rather we look at every potential investment on its individual merits and own the stocks that we believe offer the highest sustainable quality at the most attractive valuations.

JK: Equities have tradition- ally played an important role in the total return expectation of most investment portfolios. The question now is how best to get those returns. Over the long bull market that began 1982 and ended in 2000, the S&P 500 index compounded at over 16% a year and a raft of academic and popular literature argued that markets are efficient. During this time, individual stock selection came to be seen as both pointless and expensive and investors were lulled into believing they could capture high equity returns by simply owning index funds. That strategy fell apart over the next ten years when people were burned by owning “the market” as a whole as the S&P 500 had negative returns over the decade of the 2000s. Our clients get the equity returns they require with- out exposing themselves to owning the whole market.

G&D: Your fund is defined by a process. Can you give us an overview of what the process is?

JW: Conceptually, our investment process is the melding of business fundamentals into a financial and valuation framework. We refined our investment methodology and process based on our business and investing experiences as well as our own (primary) research and other published secondary research. We begin by identifying the characteristics we want in our investments and we evaluate companies in a disciplined and comprehensive way to make choices business quality and attractiveness of valuation.

AW: We have fundamental and pricing data on over twelve thousand companies that we receive daily. Right off the bat, we eliminate about nine thousand companies from our investment universe as either too small or too illiquid. Out of the remaining three thousand companies, there are roughly fourteen to fifteen hundred that we would not own at any price because the companies do not have sufficient financial strength or a history of profitability. So we eliminate those as well, which leaves roughly fifteen hundred companies, many of which we would be willing to own at the right price. And these we rank from one to fifteen hundred, based on valuation and sustainable profitability. In that group you have great businesses at good prices and good businesses at great prices, and our evaluation reflects both aspects.

JW: It is worth pointing out that we invest alongside our clients. Therefore, we are interested in absolute re- turns and we think very carefully about capital preservation. What that means in practice is that we are discriminating about the investments we make and we will hold cash when we do not find enough sufficiently attractive investment opportunities.

G&D: What are some of the characteristics you look for?

JK: We need to see strong balance sheets, a history of adequate returns on capital, and sufficient size and trading liquidity to be able to get in and get out of a position. After we have confirmed that our minimum requirements for these characteristics are met, we are willing to invest across all capitalization sizes if the price/ quality tradeoff is right. The mid-cap space usually presents us with more opportunities than others, but we own small and large cap names as well. We invest where we find the value.

G&D: So you have touched on the quality of the business. Now, from a valuation standpoint, what are some of the main criteria that you use to evaluate companies?

JW: The measure that we find to be most useful for assessing valuation is what we call “demonstrated earnings yield,” which is normalized cash earnings divided by enterprise value.

AW: The reason we use enterprise value is that it allows you to compare companies with different capital structures, and it also answers a question that a strategic buyer would ask — if you bought this company in its entirety, what would you pay? You would buy the equity, you would buy the debt, and you would own the cash and the other assets.

G&D: How do you normalize earnings?

JW: We normalize over several years. We start with a simple average and then make adjustments in order to estimate the normal earnings power of a company. This is very similar to the methodology advocated by Bruce and Judd in their book. Normalizing does two things from an investing standpoint. First, it allows us to identify companies that might be trading at a high multiple of current earnings but at a low multiple of normalized earnings. By doing this, we identify prospective investments that may be temporarily under-earning their norm, and our job then is to determine the probability that they will earn something close to normal again. The other benefit of normalization is that it helps us to avoid companies that might be at peak earnings, unsustainable in the future at that level, but which look cheap relative to recent earnings. By normalizing the earnings, you see that some of these companies are not interesting from an investment standpoint. In our experience, failing to adjust for a company’s normal earnings power can lead to mistakes on both ends, ignoring some including some that don’t.

AW: We calculate normalized earnings in a consistent way for all the stocks that we evaluate. If a company looks potentially interesting to us based on this first pass valuation, we then look at it in greater detail. So when we start our company- specific research, we already have a pretty good idea why it may be an attractive in- vestment. But we don’t take the initial calculation at face value. We adjust for any nonrecurring events that may be skewing the numbers. And then after we make the adjustments if it still looks interesting, we determine whether the revenues and margins are defensible. So our normalization process has three steps, history, history adjusted, and estimates going forward.

G&D: You are touching upon the fact that reported GAAP financial statements often do not reflect the economic earnings power of the company.

JW: We focus on operating cash flow as opposed to GAAP earnings. We start with published financial statements, and then we make systematic and company-specific adjustments to understand each unique situation. Obviously there are strengths and weakness- es to any method of evaluation, whether it is earnings, book value, cash flow, etc. It is old news to talk about the ways that management teams can inflate GAAP earnings. For this and other reasons, we find operating earnings more useful than net. Given current accounting standards regarding impairment tests and write- offs, book value has also become more of a moving target and is less stable than it once was. Also, it doesn’t capture the potential value of investments in R&D, customer relations, or other expensed items that are essential to the valuation of service businesses. In our experience, the cash generating history and future potential of a company is the best indicator of value. We do make adjustments, but we begin with reported financials.

G&D: So part of your re- search process is determining whether that normalized earnings power is sustainable. In a way, are you fore- casting the future earnings power as well based on your qualitative assessment?

AW: Yes, to some degree we are, but we have not found that building ten-year DCF’s down to three decimal points is ever very helpful in developing our investment theses. Our primary focus is on what a company has earned in the past, and when making investment decisions we rely on whether we believe a company can return in the next few years to a demonstrated level of earnings, or whether the market may have correctly identified a likely future decline but perhaps over-penalized a company’s valuation. We buy at a significant discount to normalized earnings, and if we get it right and the earnings do recover, we know that the stock price will follow and that the investment will probably work out well for us.

JW: Because investing is about looking forward not backward, all investors make forecasts. We use past demonstrated performance as the starting point to inform our judgments about the future. Our re- search process is like a sieve with increasingly finer gradations on the mesh. The initial cut is a systematic, comprehensive fundamental look at the universe by which we weed out companies that we do not want to own. Then, on the remaining companies, our next pass is an evaluation to assess valuation and quality. If after that, we become interested in a particular company, we do more research.

In the course of our company-specific research we focus on three questions. First, are the numbers right? That is, is there anything misleading in the history that is like a mirage, making the company look on first blush like a good potential investment, but maybe not. For example, one company we looked at recently had significant liabilities that were not reflected on the balance sheet. Based on the company’s financial statements, enterprise value looked low, but once the liabilities disclosed in the footnotes were added, in fact it was much less attractive — it had a much higher valuation.

Second, are the demonstrated earnings sustainable? Is it likely that recent earnings will recover to a past level, or is a company temporarily over-earning and therefore not a bargain? We are looking at the fundamentals, and that is when we con- struct our model. We look two to three years out — no more. Our decisions are based on rational, business judgments about the future for a company. Is the company trading at a discount to its fundamental value based on its likely earnings power?

Third, are there potential problems we call the “unquantifiables?” I always joke about Murphy’s Law as it applies to investing — everything that can go wrong will go wrong with a stock, most likely the day after you buy it. So we try to minimize that. We look at governance, ownership structure, historical capital allocations, and management incentives. Anything that could be a barrier to value realization increases the risk with an investment. Depending on how serious, it may be a good reason not to invest in an otherwise attractive opportunity.

AW: We buy stocks when they are undervalued but after we own them, we obviously want that value-gap to close. As you know, for value names to become fairly priced, either there has to be a change of perception in the market or some sort of outside force comes in, an activist investor, or strategic partner, or a financial buyer. We do not necessarily invest with the expectation that this will happen, but it is one way that value can be unlocked. If there are significant impediments to any method of value realization, we won’t invest. We want low bars. We want companies that have demonstrated profitability, that are trading at attractive valuations and if the market doesn’t recognize the intrinsic value, we want the bar low enough so that somebody else can come in and unlock it.

G&D: You have mentioned financial strength several times. Specifically what do you mean when you say you like financially strong companies?

AW: We like companies with low or no debt and excess cash because that gives them strategic flexibility and the wherewithal to withstand a temporary downturn. They can run their businesses without worrying about meeting payroll, they can return cash to shareholders, or they can reinvest for growth. The strategic options created by the presence of excess cash add to our margin of safety in an investment. This is how we ran our family business and I think most well- run companies operate for long-term financial stability as well.

JW: Many of our companies do generate excess cash and have meaningful accumulations of cash on their balance sheets. It is worth noting that capital allocation risk is a risk that goes along with investing in cash-rich companies. As Artie says, it can add to our margin of safety but that is only if the management team uses the cash wisely. We look quite carefully at the capital allocation decisions the management team has made. We like to see a document- ed history of wise decisions. Conversely, big expenditures on questionable projects turn us off.

G&D: One thing you touched upon is the tradeoff between price and quality. There are great businesses at a good price, and there are good businesses at a great price and everything in between. After all the quantitative work is done, how do you make that tradeoff?

JK: Actually, we make this trade off in a systematic fashion as part of our quantitative work and rankings. This allows us to objectively compare apples and oranges. We then focus our company-specific research on the situations that we think offer us the best combination of low price and high quality. In practice, we screen out low quality stocks right from the start. So even though we weigh valuation more heavily than quality, in some ways it’s almost equal, not mathematically, but conceptually, be- cause the pool in which we are looking already consists of high quality companies. The names we own are in the top three-to-five% of all companies that we evaluate.

G&D: The initial part of your process is designed to eliminate many of the emotional or distracting behavioral patterns exhibited by investors, but there is a step later on where you reintroduce your human element. How do you compensate for your personal biases?

JW: As you point out, our process is designed to counteract the detrimental effects of behavioral biases whether stemming from human nature or personal experience. We cast a wide and unbiased net and look at all companies in an objective and systematic way. One of the many virtues of a good partnership and a comprehensive and consistent process is that they act as helpful counterbalances to preconceptions and subjective judgments. For example there are certain companies and industries that based on prior experience each of us is predisposed against. But we know the financial characteristics that we are looking for and we respect the story that is told in a company’s documented financial performance. Every company that hits our radar is subject to the same kind of research. Are the numbers right? Is there a reason to expect sustained profitability? What are the barriers to value realization? That is a long answer to a tough question. Maybe a better (and shorter) answer is that we compensate by being aware. It is certainly not easy or cut and dried, but I do believe that being aware of potential risks goes a long way to helping protect against them.

AW: Incidentally, we track every name that we look at, whether we buy it or not. For the names that we re- search but don’t buy, we keep a record of the specific reasons we passed. We obviously know the out- comes for the names that we own, and we look at those — both the successes and failures. We also keep records of whether there was something that we missed that we should have known. Sometimes things happen that are outside of your control, but what we are most concerned with is making sure that in the course of our research process we stay focused on the things that matter.

JW: As Artie says, we do behavioral documentation every day. And in our company-specific research which is the step that I think you are specifically asking about, we try to be very clear in the distinction between business judgments based on numbers and evidence versus gut reactions. An example of this kind of judgment-based decisions is some work we did looking at a company that makes H1N1 vaccines. The company has had terrific earnings over the past couple of years which is not surprising in light of the 2009/2010 swine flu outbreak when demand was high and the company was operating at full capacity. When it hit our watch list, the stock was trading at a very low multiple of its recent earnings. But when we haircut next year’s earnings to reflect the significantly lower demand that the company was projecting, it was just not cheap enough to be an attractive investment. We are making business judgments about the probabilities of various in the business of making emotional decisions.

G&D: You talk about quantitative analysis — would you say you are ‘quant’ investors?

JW: No, we would not characterize ourselves as quants in any way. People talk about black boxes and I have also heard people talking about glass boxes (meaning they can see how a model works). But these descriptions do not apply to us. We are fundamental value investors and we use technology to help us be more efficient in finding the kind of investments that we like. Some people have asked if we are afraid that we miss things because of the systematic nature of our search approach. In my experience, everyone in this business starts with a search strategy that includes some things and excludes others. There is a limit to the number of things one can look at. Time is the biggest constraint facing all investors. Our search strategy reduces down to a set of sensible ways to eliminate companies that do not meet our basic threshold and then to evaluate those that do. It is a powerful first step. Some investors start by looking at events or catalysts that might cause a stock to be- come mispriced. We cut right to the chase and look for actual mispricings first, and then do our research to determine if the mispricing allows us to be very effective at finding a host of opportunities, and applying our capital and our client’s capital towards the most attractive ones available.

G&D: Would you mind elaborating a bit on what you see as the major source of your investment returns and perhaps tell us about a specific investment you’ve made?

JW: Our investment returns come from a combination of three things. The first is, the “trend reversion of earnings”. We have found that the earnings of cash generating, financially strong companies are powerfully trend reverting. A company may temporarily under-earn its historic norm, or have a blip and then go back to a steady industry rate of return. In many cases, the market suddenly realizes that the company will eventually be earning closer to its norm and the valuation gap closes before the earnings actually improve. That’s a very powerful double effect, where you see earnings improving and valuation expanding at the same time.

The second source of our investment returns is the “mean reversion of multiples.” We have found that companies which are trading at low valuations relative to a sustainable earnings level are likely to see their multiple recover. Typically, this is a situation where a company is being priced at a very low multiple relative to its current earnings because the market doesn’t believe that those earnings will be sustained. So our job is to figure out whether these earnings are likely to continue. Are they being fairly penalized? Perhaps earnings will decline, but will they fall as much as the market is expecting?

The third source of our investment returns come from the “high grading” of the quality of our portfolio companies. The quality overlay adds meaningfully to returns because by avoiding losers we improve overall results. This final point is very important from a capital preservation standpoint. An example of a high quality company whose valuation we believed would recover is Research in Motion, the maker of BlackBerry handheld devices. In late September 2010, RIMM’s price essentially reflected the market view that it was a declining business and that it could not sustain its past earnings level. Here was a company that consistently has earned high 20s to low 30s% return on equity. It had 5% of its market cap in cash and generated nearly $8B in free cash over the past 4 years trading at an enterprise value of 6x normalized earnings, which is a 16% demonstrated earnings yield. At 2.5x book, we were essentially offered the opportunity to invest for north of 13% on our equity. The market was saying that current earnings were not sustainable, but on the surface the numbers were very interesting to us. After doing our research we concluded that at $47 with almost $3 per share of cash, not very many things had to go right for RIMM for the investment to work out well for us.

AW: In fact, we thought that a lot had to go wrong to justify the then current valuation.

G&D: Were there any specific expectations that the market had which you disagreed with, or was there just a lot of negativity already priced in?

AW: Both. It appears that the market is fixated on RIMM losing market share, but the pie itself is growing, and that is something we focused on. RIMM may be losing some share, but I would rather have 20% of a large and growing market than 50% of a small and stagnant one. The really good part of RIMM’s business is the Enterprise business where it has security advantages that have allowed it to keep its grip on the Enterprise. The story has been that the iPhone and the Google OS Android will meaningfully encroach on RIMM’s share in the Enterprise but we see that part of their business as potentially more defensible. International growth is accelerating and Enterprise is not dead.

JW: An interesting point is that RIMM is selling more Blackberry devices world- wide today by orders of magnitude than it was be- fore the iPhone was introduced. Then there’s the notion of bandwidth capacity limitations for wireless providers. RIMM has a proprietary ability to compress data so that is very efficient for the providers to transmit. Companies that do not have this compression technology use more bandwidth to transmit the same information. For years this has been part of many bull scenarios for RIMM but it has not materialized as a quantifiable economic benefit. Maybe that’s because there has been no shortage of bandwidth. But we are now approaching some real capacity limitations. There is talk about who should pay the price for bandwidth-use and by extension, who can secure the benefit of efficiency. If any of this materializes into an actual economic story, one of the key beneficiaries should be RIMM. I can’t tell you what that would be worth in terms of RIMM’s stock price; it is one of several good things that could line up for RIMM. By our analysis, more negativity and bad news, and more earnings degradation was priced into the stock at $47 than was justified.

G&D: What would make you think about selling a company like that?

JW: We think RIMM is still attractive, though obviously less so above $60 than it was at $47. We are happy to own it as long as the fundamentals of our investment thesis are still in place. Generally we expect to hold our positions for a year or more, but sometimes prices appreciate quickly and a stock approaches our estimate of intrinsic value soon- er than that. In that case, of course we sell.

G&D: Talking about selling, do you have specific sell rules?

AW: As Jenny said, we sell when a stock’s price reach- es our estimate of its value. We also have position limits and we trim names that hit those limits. As we have described, we buy companies with a specific financial profile but sometimes due to a corporate action the financial characteristics change such that the company no longer meets our desired profile. For example, a company with excess cash on its balance sheet may announce that it’s going to spend the cash and take on debt to make an acquisition. In this kind of situation, we will typically sell. Additionally, there are times when we uncover material new information about a company that we own — this requires new analysis and may lead us to sell. We also have a fair number of companies that get acquired. We’re not in merger arbitrage though, so when a company we own announces that its board has approved a sale we generally look to redeploy the funds. The final reason that we sell, which is the hardest one to explain, is if there are better opportunities. Because we have the benefit of the first step of our re- search in which we look at all companies with the same disciplined evaluation of valuation and quality, we have an objective way of comparing what is available in the market against the stocks in our portfolio.

G&D: Do you want to walk through another example?

JW: Sure — we can talk about King Pharmaceuticals. It was recently acquired but it is a good example of a company we bought be- cause we expected its earnings and its valuation to re- cover. KG has an excellent franchise in pain medications but its sales were under pressure and it was earning less than it had in prior years because of increasing generic competition. As a result, it was trading at a low multiple of demonstrated earnings, but at a higher multiple of last year’s earnings. So KG hit our interest- list because of our normalization process, when it might not have if we were looking only at trailing twelve-month results. The company had a pipeline of potential drugs leveraging off of their pain franchise, many of which are near approval.

When we bought it, it was trading at 10x free cash, and with a 20% demonstrated earnings yield, meaning an enterprise value of 5x normalized cash earnings. We paid about $10 per share for it in April, and in October Pfizer announced that they were buying it at a 40% premium. We did not invest expecting a takeover, but rather we were willing to bet on the likelihood that the company’s earnings would recover if one or two of the many drugs in its pipeline were approved. This is the kind of situation where, because of our normalizing and our research to determine whether normal was a reasonable expectation, we see things that a strategic buyer may also find quite attractive.

G&D: Did you have a view on what would cause it to get back to normal.

JW: They had a deep pipe- line of potential new drugs — we were getting current (albeit declining) earnings at a very low price and essentially any new drugs for almost nothing.

AW: There are very few people with a consistent long-term record in accurately predicting the future and we have a healthy dose of realism about our ability on that score as well. Meaning, we do not presume to have a crystal ball and therefore are cautious about investing on the basis of a multi-step, catalyst-by- catalyst timeline. Instead, we try to eliminate as many potential risks up front, and then make our investments in companies with as many potentially good things lined up to happen as possible.

AW: Having a longer term focus is a big advantage. Rather than obsessing about whether a company is going to make its next quarterly numbers, we look at what a business does in a normal environment. As long as you buy at a good price and the company has the run- way and wherewithal to get to that point and there are no major impediments to value being realized, you are not likely to lose money.

G&D: You are long only. What are some of the reasons that you don’t consider adding shorts to your portfolio?

AW: One would think that you could take what we do and simply add a short book of stocks with the opposite characteristics of what we own on the long side, but it just doesn’t work that way. We have looked at it extensively and as a rule we do not like the risk reward profile of short selling. When a short goes against you it becomes a bigger problem. The most you can earn if you are right is 100% and your downside is unlimited.

JW: We are quite interested in downside protection, but we do not believe that shorting stocks would necessarily give us that protection and instead it could add significant risk to our port- folio. We believe that we can deliver superior returns by focusing on what we consider to be alpha generating long opportunities. There’s a notion of a circle of competence and a circle of comfort. We do what we do well, and we stick to that.

G&D: Artie, you’re an adjunct professor with Columbia’s Value Investing Pro- gram. How did you get involved?

AW: After I had graduated, a couple of professors I had in school asked me to come and talk to their classes which I did, and teaching a course was a natural out-growth of that. About eight years ago Bruce Greenwald asked me to co-teach a class alongside him and two other portfolio managers. Every- body who was teaching was a value investor but we all go about it in a different way. I think Bruce liked the interaction between multiple styles and the class benefited from seeing different people’s point of view. That’s when the Applied Value Investing course evolved to what it is today with more of a team approach and all the sections having two professors. For the past three years, T. Charlie Quinn and I have taught together. It is a real pleasure.

G&D: How have you seen the program evolve over the years?

AW: Well, the number of applicants has mushroomed and the program has grown from two sections to four to accommodate some of the increased interest. More importantly, the quality of the students is much higher. What has not changed is that students get out of the program exactly what they put in. AVI is a lot of hard work, but if you put in the effort, the payoff is invaluable.

G&D: Jenny, you mentioned that you were in the first Value Investing class with Professor Greenwald. Can you describe the experience?

JW: As I recall, there were about thirty people in the class, and Bruce had to recruit some of the people to take it because value investing was still somewhat under the radar. The course was taught by Bruce and Roger Murray, who had started teaching it after Ben Graham retired. There were additional contributions from some legendary value investors who came in to speak. I’ve watched it go from that one course offering to the current program but I agree with Artie — it was the same when I took the class as it is today. Some people got it and put in the work and were re- warded. Some people did not.

G&D: Any parting words of wisdom for our readers?

JW: Value investing is a broad way of thinking and there are many effective ways to apply it. Develop an approach that suits your personality and your skills and then stick with it.

AW: Be sure that the mind- set and time horizon of your investors are compatible with your investment strategy. Committed capital allows a value strategy to work.

G&D: Thank you so much for speaking with us.

JW: Our pleasure.