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Graham and Doddsville An investment newsletter from the students of Columbia Business School Volume 1, Issue 1 December 2006 Inside this issue: Graham and Dodd 3 Breakfast with An Interview with Richard Pzena Thomas A. Russo We recently had the oppor- sort of problem which issue that caused the drop in Tracking the 9 tunity to sit with Rich Pzena, causes the price of the price is temporary or perma- Superinvestors head of Pzena Investment nent. International Coal 12 Management. Founded in A typical scenario will see a Group 1996 after heading the US company’s earnings and busi- Equities group at Sanford C. ness chugging along, and then Strattec Security 14 Bernstein, Pzena Investment get hit with a problem. It Corp. Management’s Value fund has isn’t always clear, says Pzena, compiled an annualized com- What’s Happening 21 if a downturn is cyclical or pounded return of 16.3% on Campus secular in nature. He cites since inception, compared to Kodak and the newspaper a compounded annualized industry as examples where return of 9.3% for the S&P he passes on trying to under- Editors: 500. stand how their core businesses are going to unfold in Joseph Esposito Pzena’s investment approach MBA 2007 the years ahead. By con- is very straightforward: he Richard Pzena, Founder and trast, housing and auto part purchases shares in good Co-Chief investment Officer Abigail Corcoran companies are clear exam- businesses that are selling at of Pzenal Asset Management MBA 2008 ples of firms experiencing a low price. He understands cyclical downturns. that it is often unrealistic to shares to drop. The ques- David Kessler expect such opportunities to tion Pzena and his team try MBA 2008 (Continued on page 2) be available absent some to answer is whether the Contact us at: Welcome to “Graham and Doddsville” [email protected] We couldn’t be more forum for exchanging ideas provide a truly remarkable Visit us at: www.grahamanddodd.com pleased to present the first and keeping abreast of what interview. Luciano Ferre- edition of Graham and is happening at Columbia – ria and David Bernfeld, www0.gsb.columbia.edu/students/ Doddsville, Columbia Business the longtime home of value leaders of the school’s Best organizations/cima/ School’s student-led invest- investing. We aim to pro- Ideas Club, helped coordi- ment newsletter. Co- vide readers with content nate the inclusion of our sponsored by the Heilbrunn whose insight is timeless, student write-ups on Inter- Center for Graham & Dodd alongside specific investment national Coal Group (ICO) Investing and the Columbia ideas that are relevant today. and Strattec Secuirty Corp Investment Management (STRT). And, of course, Association, our goal is to Our thanks go first to Rich special thanks go out to the provide students, alumni, and Pzena, who sat down with us staff of the Heilbrunn Center the investment community a for an extended period to (Continued on page 2) Page 2 Welcome to Graham And Doddsville (continued from page 1) for Graham & Dodd Invest- ing, and to Burak Alici and Kevin H. Byun, Co- Presidents of CIMA for their support and constructive feedback throughout the process of putting all the pieces together. Please feel free to contact us if you have comments or ideas about the newsletter, as we continue to refine this Students at Columbia Business School have the un- publication for future edi- paralleled advantage of learning from value investing tions. luminaries including Joel Greenblatt of Gotham Capi- tal and Bruce Greenwald Enjoy! -G&Dsville Richard Pzena (continued from page 1) Asked to provide an example industry average that the firm it in both places I’ll cut the “...you have to listen of when his team misread an had about $2/share in normal- price.” Because that’s the only for things which are impaired business’ problems as ized earnings power. way you’re going to incent temporary rather than perma- them to do it: somebody has a going to tell you that nent, he offered the example of Pzena: Here’s a good exam- business relationship here and Tenet Healthcare. ple. A company says, “We they have a different business the senior have local expertise and local relationship here and you’re management thinks “Tenet Healthcare was a busi- presence but we’re now going saying “I can offer you one-stop ness whose margin structure to go national or global and shopping.” Well, what do I the margin structure went from being the best to we’re going to have a sales want one-stop shopping for the worst in the industry” for force dedicated to calling on unless there’s something in it of the industry in the several reasons, explains Pzena, national accounts.” The only for me, like a lower price? future is lower than including a government lawsuit thing that can mean is that and a management team in you’re lowering the price. So you have to listen for things it was in the past.” turmoil due to alleged Medi- which are going to tell you that care insurance fraud. It really is the only thing that the senior management thinks can mean because you’re either the margin structure of the Pzena and his team reasoned going to bundle things together industry in the future is lower that there was no structural and lower the price or you’re than it was in the past. And reason why Tenet’s margins going to say “If you have my either assess whether it’s still should remain the lowest in the business in California you cheap or not, or decide to industry, and projected that if should have it in New York pass. margins simply reverted to the also, and to incent you to have (Continued on page 4) Volume 1, Issue 1 Page 3 A Value Approach to Global Equity Investing Graham and Dodd Breakfast was also encouraged to think or to make value-destroying with Thomas A. Russo globally by Jack McDonald, the acquisitions. On October 27th hundreds of legendary professor of finance. private investors, alumni, and Warren Buffett came to But be careful which family you investment management pro- McDonald’s class to talk to get into bed with. Asked how fessionals converged on the students, and told them to an investor can distinguish fami- Marriott Marquis to attend the think about the tax break the lies that are running public 16th annual Graham & Dodd government allows investors by companies for the benefit of all Keynote Speaker Tho- Breakfast. Organized by allowing them to defer taxes shareholders, from those who mas A. Russo, Partner, on their gains until they sell. view the assets of the compa- school’s Heilbrunn Center for Gardner Russo & Graham & Dodd Investing, the Buffett also advised the stu- nies they control as their own Gardner crowd included a veritable dents to “find people you can private piggy bank, Russo re- “Who’s Who” of value invest- to do business with.” plied that the family’s ability to ing greats, including Mario attract and maintain Russo advised high-quality manage- Gabelli (’67), Jean-Marie young investors Eveillard, Walter Schloss, ment is an important William von Mueffling indicator. He also starting out to (’95), David Winters, suggested focusing on Curtis Jensen, and keynote potential conflicts of think and act speaker Thomas Russo. interest, providing the example of the Rigas’ globally, remain The topic of this year’s gath- family ownership of ering was Global Value Equity cable systems outside generalists, and Investing, an activity Russo of the holdings of Adel- Dean Glenn Hubbard and Professor phia as a situation that has been engaged in for years, Bruce Greenwald to concentrate much to the benefit of his cli- raises a red flag. ents. Since December 31st Clearly Russo absorbed both their portfolios. Russo advised young investors 1992 through September 30th lessons. Not only is his invest- starting out to think and act 2006, his Semper Vic Partners ment style characterized by a globally, remain generalists, and LP has generated a 16.3% com- long-time horizon and low to concentrate their portfolios. pounded annualized return on portfolio turnover, he has also He also told the audience of its equity holdings, compared taken positions in several fam- students, alumni and other to a 10.5% and 12% return, ily-run businesses over the investors to stay mindful of the respectively, for the S&P 500 years. He observed that fam- fact that, even for value inves- and Down Jones Industrials. ily-run businesses didn’t seem tors, growth is required for to get the same valuation as good returns. Walter Schloss and Ben Gra- Russo’s global perspective was similar franchises, yet reasoned ham Jr. at this years Graham shaped early in life. He de- that family-run businesses The Graham & Dodd breakfast, and Dodd Breakfast scribed how as a child his might actually be less prone to a long standing tradition at the mother thought it would be a engage in foolish behavior. school attracted over 300 in- good idea for him to subscribe Russo felt that if a family was vestors in New York and was to newspapers from around truly focused on running the telecast to London to an audi- the world (despite the fact that business to maximize long-term ence of about 50 people, he couldn’t read them). While gains that they would be less hosted by GAMCO Investors pursuing his joint MBA/JD at apt to grant large option grants at the Dorchester Hotel. that would dilute their equity, Stanford in the early 80’s, he -G&Dville Page 4 Introducing The CBS Best Ideas Club The Best Ideas Club at Columbia Business School had its first meeting on September 19, 2006.

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