Bruce Greenwald: From Graham to Buffett and on to Modern Value Investing

“It is not the strongest or the most intelligent who will survive but those who can best manage change.” —Leon C. Megginson

The Past, Present, and Future of Value Investing

There’s a new video out, as part of the celebration of Columbia Business School’s storied history over the past 100 year, in which Professors Bruce Greenwald and Tano Santos sits down and discusses a few different topics related to value investing.

Click image below to watch and listen to the interview.


Bruce Greenwald on Warren Buffett’s Approach to Industry and Business Analysis

Below is a transcript of a part of the interview where Bruce Greenwald discusses a few different industries and businesses that Warren Buffett successfully has invested in, and why these industries may have caught Buffett’s interest. Transcript is from 28:05 — 33:57 (emphasis added).

Tano Santos: But what I mean with evolution is something different. I want to understand a little bit, you know, a want to think… if I think about Warren Buffett’s career, and if I think about the distinct phases he’s gone through, you know the traditional Graham & Dodd, his practice of franchise, his recent partnership with 3G, and…

Bruce Greenwald: So let me talk about that. If you’re talking about the intellectual evolution

Tano Santos: Exactly, that’s what I’m talking about.

Bruce Greenwald: We’ve done the exact right thing. We’ve watched what’s successful practitioners have done, and we’ve shamelessly appropriated them. And basically, what I think Graham didn’t understand, although he had inklings of it was that you could make money without assets if you were in an economic position that kept out the competition. That if you were in, what in Warren Buffett’s language is now called a franchise business, and the next evolution is that, I think mostly Warren Buffett, but I think there are others who understand this fairly early on in the 60s and 70s too, begin to understand that these economic forces will create hugely valuable businesses, and valuable businesses in a sense that the old Ben Graham businesses were not. So to grow profits in the old Ben Graham world you had to invest. And in the face of competition you were likely to earn what you had to pay the investor. So the growth didn’t add value. I mean you had to raise money at 10 percent, and there were lots of people willing to invest at 10 percent, and there where no protected economic positions competition was gonna drive the return to 10 percent. So you make 10 percent and you pay 10 percent, there’s no value in growth. And that’s why Benjamin Graham was never particularly interested in growth companies. He talks a little about how R&D can create pattern protected industries. But there is a sense that he had that it’s rare, and the cost of finding those technologies may be just another form of assets.

What Buffett does is he looks very carefully at these industries that’s interestingly enough. He does it in industries that he knows a lot about. And the first one I think, going back, are industries around Omaha. So he right away understands things like Nebraska Furniture Mart, and dominate the Omaha furniture market. And it it’s got 70 percent of the business, it’s got distribution economies, advertising economies that are gonna be very hard for a competitor to replicate. And Omaha is sort of an isolated city. And he understood that the force of that dominant market position meant first of all that they we’re gonna have in the end, cost advantages due to economies of scale and that they could exploit… and pricing power cause they could keep other people out. And as the market grew they we’re gonna get that market without having, because they had the economies of scale, additional investment. He clearly understands that about newspapers. Local newspapers have a hugely expensive distribution, advertising sales and reporting infrastructure. If you are established as a local paper and everybody is renewing their subscription, then nobody is gonna be able to enter that market. And again, you’re gonna be able to charge for it and have the economies in distribution and you get the growth. And then he understood, I think, in banking… there are famous instances in banking. The one was, for years, tobacco lending in actually Virginia and North Carolina and the rest of the back of the south was dominated by Wachovia Bank, and they knew all about the growers, and they knew all about the warehouse processes, they knew everything. And that meant they knew about good risk and bad risk. And I think a foreign bank decided these were the most profitable loans out there and they we’re gonna go in and enter that market. And what they did was of course they went to the Wachovia customers and they offered them lower loan rates. If that lower loan rate was profitable, Wachovia knew it and they would match it and they kept all the good risks. And if it was a marginal credit that wasn’t, Wachovia would call ’em in and say “God, we really like to keep you but that’s such a good offer. We suggest you go to this European bank.” And the European bank wound up with a 90 percent default rate. And in addition there were all the economies of scale in information collection in news. And really all economies of running local branches, which are like local economies. So he seems to have understood that. And then with Coca-Cola where there are huge economies in distribution. And in all these cases you could protect your market share cause there’s a lot of customer captivity. So he started to develop an idea of what these franchise businesses looked like. And I think also how you go ahead and value them, cause now assets are irrelevant and you have to think about other things, and growth matters a lot. And I think it’s that evolution that really starts to get you into modern value investing.


Consumer Services: A Look at Retail (Part I)

“The crowd of companies in this section [Manufacturing, Service and Retailing Operations] sells products ranging from lollipops to jet airplanes. Some of these businesses, measured by earnings on unleveraged net tangible assets, enjoy terrific economics, producing profits that run from 25% after-tax to far more than 100%. Others generate good returns in the area of 12% to 20%. A few, however, have very poor returns, a result of some serious mistakes I made in my job of capital allocation. I was not misled: I simply was wrong in my evaluation of the economic dynamics of the company or the industry in which it operated.

—Warren Buffett, Letter to Shareholders 2013

What Everyone Should Know Before Investing in the Retail Sector

The mantra “understand the business before you invest in it” may seem like a trivial statement. But it’s not. I have done it myself, and I guess that many of you know what I’m talking about. Sinned by buying shares in a business I didn’t understand good enough (I say enough, since you cannot know everything—at some point you have to make a buy/sell decision or just move on). It’s easy to buy shares in a business before having collected enough facts about the situation and circumstances at hand. Psychological factors and emotions often play too big a role when it comes to buying and selling shares.

Understanding why it is important to know the fundamentals of a business before investing in it most likely seems like a no-brainer to most of us—at least in theory. The hardest part, I guess, is to live as you learn. To start with, you have to understand yourself. Never fool yourself. Easier said than done, I know, but that doesn’t make it less relevant. It probably makes it even more important to repeat it time and time again. Becoming aware of the problem in situations like these is the first step. We all need to be aware of things before we can do our best to address them.

Except for the business, you need an understanding of the industry—the playing field where competitors battle each other. This is where the fight for profits takes place. The inherent industry structures will impact the way in which incumbent businesses compete, and also whether any entry and exits is likely to happen. The inherent industry characteristics differ between different industries in terms of entry barriers, number of competitors, profitability, growth, number of competitors, competitive advantages (or moats) and returns on invested capital etc. Beyond understanding the business, an understanding of the industry is highly critical since it will impact the profit and return potential.

Understanding the industry could of course be part of “understand the business.” Anyway, understanding a certain business most likely requires basic understanding the industry (or industries) in which it operates. All this talk about “understanding” has one, and only one goal in the end, to mitigate the risk of a permanent loss of capital.

Now that we’ve discussed the importance of understanding the business and the industry, a fair question to ask is; How do you obtain this understanding? As always, you have to start somewhere. You have to start building your own circle of competence. No one will do it for you.

In this post we will take a closer look at the retail industry, too learn what this industry looks like, what could be expected from a retailer, the likely returns on invested capital, the degree of competition, among other things. For now, we’ll leave the part about understanding the business. Let’s improve our understanding of retailing and the retail industry in general.

Basically, everything you read could give you hints and improve your knowledge and understanding of the things at play in a certain area. Your knowledge data base (your brain) will accumulate new facts along the way, building on the things you’ve processed earlier, hopefully replace any facts that turned out to be wrong. All this in an attempt to increase and improve your skills when it comes to industry structure, profitability, returns on invested capital. The more you learn, the better you will get at detecting differences between industries and businesses, and also understand why there are differences—what forces can explain and sometimes even predict what happens. Some industries are inherently more attractive (that is, more likely to provide sustainable above-average returns on invested capital) than others.

A few useful sources to start with are:

  • Annual reports
  • Shareholder letters (for example Warren Buffett’s shareholder letters)
  • Earnings calls or transcripts
  • Research reports (some could be found via a Google search if your lucky)
  • Investor presentations or transcripts from such events
  • Books (for example Competition Demystified, Competitive Strategy, The Five Rules for Successful Stock Investing, Why Moats Matter, The Little Book That Builds Wealth, Good Strategy Bad Strategy)
  • Business journals
  • Articles or white papers
  • Lectures and other public presentations (for example Google Talks, Greenwald lectures on YouTube)
  • Lecture notes
  • Business and investing blogs/sites (for example CSInvesting, Value Investing World, The Manual of Ideas, Fundoo Professor—see below for excerpt from

The above examples are just that, examples.  There is a ton of stuff to learn from that I didn’t include.

The Oracle of Omaha on the Difficulties of Retailing

Someone who’s been in the investing game for some time is Warren Buffett. And when it comes to investing in retailer even Buffett has his fair share of, let us say less satisfactory results. Let’s see what Buffett himself has to say about the difficulties an investor could encounter in this area.

What is your opinion of the prospects for the Kmart/Sears merger? How will Eddie Lambert do at bringing Kmart and Sears together?

Nobody knows. Eddie is a very smart guy but putting Kmart and Sears together is a tough hand. Turning around a retailer that has been slipping for a long time would be very difficult. Can you think of an example of a retailer that was successfully turned around? Broadcasting is easy; retailing is the other extreme. If you had a network television station 50 years ago, you didn’t really have to invent or being a good salesman. The network paid you; car dealers paid you, and you made money.

But in retail you have to be smarter than Wal-Mart. Every day retailers are constantly thinking about ways to get ahead of what they were doing the previous day.

Retailing is like shooting at a moving target. In the past, people didn’t like to go excessive distances from the street cars to buy things. People would flock to those retailers that were near by. In 1966 we bought the Hochschild Kohn department store in Baltimore. We learned quickly that it wasn’t going to be a winner, long-term, in a very short period of time. We had an antiquated distribution system. We did everything else right. We put in escalators. We gave people more credit. We had a great guy running it, and we still couldn’t win. So we sold it around 1970. That store isn’t there anymore. It isn’t good enough that there were smart people running it.

It will be interesting to see how Kmart and Sears play out. They already have a lot of real estate, and have let go of a bunch of Sears’ management (500 people). They’ve captured some savings already.

We would rather look for easier things to do. The Buffett grocery stores started in Omaha in 1869 and lasted for 100 years. There were two competitors. In 1950, one competitor went out of business. In 1960 the other closed. We had the whole town to ourselves and still didn’t make any money.

How many retailers have really sunk, and then come back? Not many. I can’t think of any. Don’t bet against the best. Costco is working on a 10-11% gross margin that is better than the Wal-Mart’s and Sams’. In comparison, department stores have 35% gross margins. It’s tough to compete against the best deal for customers. Department stores will keep their old customers that have a habit of shopping there, but they won’t pick up new ones. Wal-Mart is also a tough competitor because others can’t compete at their margins. It’s very efficient.

If Eddie sees it as impossible, he won’t watch it evaporate. Maybe he can combine certain things and increase efficiencies, but he won’t be able to compete against Costco’s margins. (Source: BuffettFAQ)

Retail is a tough game to play, or as Buffett says; “Retailing is like shooting at a moving target.” Buffett’s advice? “We would rather look for easier things to do.” Let’s look at one more before we move on (emphasis added).

What economic laws have worked best for Berkshire?

It is all a matter of trying to find businesses with wide moats protecting a large castle occupied by an honest lord. Moats might be a natural franchise, brand loyalty, or being a low-cost producer. In a capitalistic society, all moats are subject to attack: if you have a good castle, others will want it. What we want to figure out is what keeps the castle standing and how smart is the lord. [Charlie Munger: We also like to look for low agency costs on that lord, economies of scale and ““economies of intelligence.””]

Buffett elaborated on the ““economies of intelligence””: the idea is to find businesses where you have to be smart only once instead of being smart forever. Retailing is a business where you have to be smart forever: your competitors will always copy your innovations. Buying a network TV station in the early days of television required you to be smart only once. In that kind of business, a terrible manager can still make a fortune. Given the choice between the two (a business where you have to be smart forever or one where you have to be smart once), Buffett advised, pick the great business – be smart once. (Source: BuffettFAQ)

A Closer Look at Retail

One of the books mentioned above is a book written by Pat Dorsey—The Five Rules for Successful Stock Investing. There is a section in this book that discusses and goes through a number of different industries, of which one is retail (as part of consumer services). The remaining part of this post will focus on the consumer services sector, and more specifically retail.


As we’ve mentioned numerous times in earlier chapters, great companies in attractive industries generate returns on invested capital that far exceed the cost of capital. However, retail is generally a very low-return business with low or no barriers to entry. Retail bellwethers Wal-Mart and Walgreen earn little more than 3 cents profit for every dollar of sales, so store management is critical. The problem is that many retailers don’t execute as flawlessly as these two and flame out as soon as trouble hits.

The sector is rampant with competition. Think of all the specialty apparel shops that try to imitate Abercrombie &2 Fitch and Gap. A few succeed; most fail, but the point is that nothing exists to prevent new concepts and stores from being launched. There are few, if any, barriers to entry. Customers may be swayed to buy a cool $50 sweater, but they’ll quickly go to the store next door if the same sweater can be had for $40.

The primary way a firm can build an economic moat in the sector is to be the low-cost leader. Wal-Mart sells items that can be purchased just about anywhere, but it sells it all for less than the competition, and consumers keep coming back for the bargains. Others may try to imitate Wal-Mart’s strategy in the short run but lack the economies of scale to remain profitable employing the strategy in the long run.

Investor’s Checklist: Consumer Services

Most consumer services concepts fall in the long run, so any investment in a company in the speculative or aggressive growth stage of the business life cycle needs to be monitored more closely than the average stock investment.

Beware of stocks that have already priced in lofty growth expectations. You can make money if you get in early enough, but you can also lose your shirt on the stock’s rapid downslide.

• The sector is rife with low switching costs. Companies that establish store loyalty or store dependence are very attractive. Tiffany’s is a good example; it faces limited competition in the retail jewelry market.

• Make sure to compare inventory and payables turns to determine which retailers are superior operators. Companies that know what their customers want and how to exploit their negotiating power are more likely to make solid bets in the sector.

• Keep an eye on those off-balance sheet obligations. Many retailers have little or no debt on the books, but their overall financial health might not be that good.

• Look for a buying opportunity when a solid company releases poor monthly or quarterly sales numbers. Many investors overreact to one month’s worth of bad same-store sales results, and the reason might just be bad weather or an overly difficult comparison to the prior-year period. Focus on the fundamentals of the business and not the emotion of the stock.

• Companies also tend to move in tandem when news comes out about the entire sector falls—keep that watch list handy.

Learn Something New Each Day

Charlie Munger once said that “I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.”

I hope that reading through this post, and reflecting on the content, made you a little wiser.

Wish you all a great weekend.

Click here to Retail (Part II): Edward S. Lampert on Same-Store Sales

Additional Weekend Reading

Swedish Banking: Industry Map (part 1)

Industry Map

Industry map below based on figure 3 Illustration of banks’ various sources of funding and the risk of contagion effects, see page 83 here. Click on image to increase size.

BS22Structure of the Swedish Banking Industry

Number of banks

There are four main categories of banks on the Swedish market: Swedish commercial banks, foreign banks, savings banks and co-operative banks. In December 2012, Sweden had a total of 117 banks. The number of commercial banks and foreign bank branches in Sweden has increased from 42 in 2000 to 66 in 2012. The increase is due to the fact that, among other things, more foreign banks have been established in Sweden. In addition, the number of Swedish commercial banks have increased, including new Internet- and telephone banks as well as securities firms and credit market companies that has become banks.

BS19Swedish commercial banks

Swedish commercial banks are divided in three categories. The largest are the four big banks: Swedbank, Handelsbanken, Nordea and SEB. These banks are important players on most segments of the financial market. The second category is savings banks that have been converted into joint stock companies, often with Swedbank as a shareholder. The third category constitutes other Swedish commercial banks with a diverse business focus and ownership structure. Most of the other commercial banks were formed during the mid-1990s and ahead. At first these banks were mainly focused on the retail banking market and distributed their products and services online, but also through e.g. retail stores. In recent years several new banks have a background in securities trading and financing business. The new established banks have in course of time increased the selection of financial products and many of these banks are today regarded as universal banks.

Foreign banks

The first foreign bank was established in 1986, when foreign banks were first allowed to open subsidiaries. During a few years, in connection with the financial crisis in the beginning of the 1990s, the number of foreign banks declined. Foreign banks were permitted to open branches in 1990 and, since then, they have increased. In December 2012, they amounted to 29. Most foreign banks focus on the corporate banking and securities market. The largest foreign bank is Danske Bank which at the same time is the fifth largest bank in Sweden.

Savings banks

There are numerous independent savings banks in Sweden. Generally, they are small and active in regional or local markets. Most savings banks operate in co-operation with Swedbank as regards technical solutions and the provision of a common range of products and services. The number of savings banks has declined due to small savings banks having merged.

Co-operative banks

A co-operative bank is an economic association that has as its purpose to produce bank services for its members. To be able to use the bank services of a co-operative bank the customer must become a member by paying a member share. There are two small co-operative banks in Sweden.” (Source: Banks in Sweden)

The major banking groups
“Swedish banking groups

From the mid-1990s, Sweden’s leading banks have evolved into financial groups with extensive international activities. This development is partly due to areas such as life insurance, fund management and mortgage lending becoming an increasingly important part of the groups’ business activities alongside traditional banking. It has also involved geographical expansion by the groups, especially within the Nordic and Baltic regions.

BS20Nordea is the largest financial company in the Nordic region with around 33,000 employees. The group includes leading banks in Sweden, Finland, Denmark and Norway. Nordea’s lending consists of 75 per cent of lending from countries outside Sweden. The Bank’s Swedish operations include one of the largest finance companies and major players in fund management and mortgage credits. Nordea also owns the credit transfer payment system Plusgirot.

SEB is the name of the financial group formed around Skandinaviska Enskilda Banken. SEB has developed extensive international activities among others in the Baltic region and Germany. In Sweden, SEB has a strong position in fund management and life insurance, as well as in the mortgage and finance company sectors. SEB is also a strong player on the stock market and in currency trading as well as international payments.

Svenska Handelsbanken (SHB) has more than 460 branch offices in Sweden. From the 1990s the bank has also expanded in the Nordic region, both through acquisitions and by opening branch offices. The wholly owned mortgage institution Stadshypotek belongs to the largest players on the Swedish mortgage credit market. Handelsbanken also has extensive operations in the fund management and finance company sectors.

Swedbank has an extensive network of around 320 bank branch offices in Sweden. In addition, Swedbank is in close co-operation with the independent savings banks and partly owned banks among the savings banks movement. Swedbank also has major activities in the Baltic region. The group includes Swedbank Robur, Sweden’s largest fund management company, and Swedbank Hypotek, which is one of the largest mortgage finance institutions.

BS21Other Nordic financial groups

Other Nordic financial groups with a strong position in Sweden are Danske Bank, Länsförsäkringar and Skandia. Danske Bank is Denmark’s largest bank and has banking operations in all the Nordic countries. Danske Bank is, after Nordea, the largest financial group in the Nordic region. Länsförsäkringar consists of 23 regional insurance companies in co-operation, and together they own Länsförsäkringar Bank. Skandia is the market leader in life insurance but also has a strong position in mutual fund investments. SkandiaBanken is owned by the insurance company Skandia.” (Source: Banks in Sweden)

Operations of the Major Banking Groups in Sweden

OMBIS2013(Source: The Swedish Financial Market)

Bank Assets

To get some grasp of how big the different banks are, see image below.

BS5BS6BS14BS15BS16(Source: The Swedish Financial Market)

Geographical breakdown

BS4BS13(Source: The Swedish Financial Market)

Average Deposit and Lending Rates

BS12(Source: The Swedish Financial Market)

Bank Liabilities

BS18BS7BS17(Source: The Swedish Financial Market)

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.

The Swedish Food Retail Market


The Swedish food retail market has long been dominated by ICA, Axfood and Coop, three chain-store operations with a combined market share of 85-90%. Except for the market share being very high for these three companies, it has also been rather stable over the years.

Market Share 1994-2002

The market shares in the Swedish retail food-market between 1994-2002 is shown in the table below.

ICA is the biggest operator with a market share of approximately 44%. Coop is second and holds approximately 22%, slightly down compared to the earlier years in the period. In 1998, Axel Johnson and the D-Group merged under the name Axfood, that currently holds about 23% of the market.

MS1Source: Entry into Local Retail Food Markets in Sweden: A Real-Options Approach

Market Share 2011-2013

So, the question is what it looks like today.

I have been able to find some data showing the market share in the Swedish retail market for the years 2011-2013. I’m not really sure if this data is directly comparable to the one presented in the table above. But it should give a pretty good view of what it looks like today.

The source of this data is Dagligvarukartan, a collection published once every year containing yearly statistics of the Swedish retail market.

I have found this data from Dagligvarukartan for 2013, 2012 and 2011. See images below.

Dagligvarukartan 2014 (showing market share per 2013):

DK2014Dagligvarukartan 2013 (showing market share per 2012):

DK2013Dagligvarukartan 2012 (showing market share per 2011):DK2012For the period 2011-2013 we see that ICA holds a market share of about 50%, Coop 21% and Axfood 15-16%. The absolute change is pretty low between the different years.

I will try to find some more market data, preferably from Dagligvarukartan. If anyone out there has any good statistics or market share data, feel free to share.

Also, yesterday ICA put out a press release saying that they are divesting ICA Norway to Coop. See here for press release.

PR1Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.