i3 Podcast Ep 22: Rich Pzena

Richard ‘Rich’ Pzena is the founder and Chief Investment Officer of Pzena Investment Management, a value-style investment firm.

We talk about how Rich got started as a value investor: what he learned  about investing from his father, his research project with the legendary Joel Greenblatt at Warton, working for Lew Sanders at Bernstein and much, much more.

Unlike what some investors believe, technological disruption is not destroying value-style investing, but is creating opportunities for them, Rich says. This because history tells us that ultimately it is the incumbent that benefits from innovation, not ‘the next guy on the block’.

 

Outline

2:11 My father was a value investor until, 25 years ago, he became convinced electric cars would take over the world
3:30 Trying to recreate Benjamin Graham’s work from ‘The Intelligent Investor’
4:30 But we didn’t have unlimited resources, so we limited our research to stock starting with the letter ‘A’ or ‘B’
5:00 There is never a reason to buy things full price
6:30 Is the fact that the value premium is easy to measure today has affected its effect?
8:00 The issue with value is not measurement; it is human nature.
11:00 Taking a detour in the oil industry
13:00 Crazy valuations in the oil industry in the 1980s.
16:30 As a sell-side oil analyst I learned the difference between having the data and guessing the data.
19:00 Switching to establishing a small cap portfolio
21:00 I saw what happened when you went from a boutique manager to a multi-billion dollar manager.
25:00 Did you ever made stuff up as a sell side analyst?
28:30 Highly engineered statistical (quant) models can’t possibly work
29:50 Value is not a factor; price to book is a factor.
32:30 Value is behavioural.
36:00 Comparing our process to a simple, low price-to-book model
37:00 Leaving Sanford C. Bernstein
42:00 Joel Greenblatt told me to exclude the bottom third worst return on equity businesses and I was shocked at the result.
45:00 Regression to the mean is just human behaviour: people don’t want to believe that management can fix the problems.
46:00 Value is created when you don’t know what is going to happen.
48:30 Value cycles happen because everyone adopts the same opinion on the market.
52:00 Disruptive technologies have always been around and most of the time it is the incumbents that benefit. It is not always the new guy on the block.
55:00 Tesla’s decision to make cars was a dumb idea.
57:00 The next opportunity is the market’s obsession with the next financial downturn.
1:00:00 Which lessons did you learn the hard way?

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