From Value Investing To Modern Value - Columbia University

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From value investing to modern valueTano SantosDavid L. and Elsie M. Dodd Professor of FinanceColumbia Business SchoolHeilbrunn Center for Graham & Dodd InvestmentMay 2020

VALUE INVESTING FOR PEOPLE INA HURRY

The Value Investing ProcessSearch Cheap Ugly Obscure and otherwise ignoredValuation Assets Earning Power FranchiseReview Key issues Collateral evidence Personal biasesRisk Management Margin of safety Some diversification Patience – Default strategy Tano SantosHeilbrunn Center3

Value and growthFranchise ValuesFV 0Growth creates valueyesAsset ValuesAVEarnings Power ValuesEPVBarriers to entry?Growth destroys valuenoFranchise ValuesFV 0Risk Management Tano SantosHeilbrunn Center4

Value and growthFranchise ValuesFV 0Growth creates valueyesAsset ValuesAVEarnings Power ValuesEPVBarriers to entry?Growth destroys valuenoFranchise ValuesFV 0Risk ManagementA bit about this today Tano SantosHeilbrunn Center5

OF SHOCKS AND TRENDS Tano SantosHeilbrunn Center

On shocks: classificationNature of risksTemporaryIdiosyncraticPermanentManaging the stock: Themany taxonomies of riskManagementOperationalInput litical Tano SantosHeilbrunn Center

On shocks: classificationNature of risksTemporaryIdiosyncraticWhatare the effects theof a dropin oil prices?Managingstock:The Example: Energy and value trapsPermanentManagementmany taxonomies of riskHow to think about technology and value? Disruption and value creation Example: The payments industry and AdyenOperationalInput nWhat triggers regulation? Regulation and value creation Example: Should we regulate AMZN, FB, at are the effects of import penetrationon local industries? Import substitution and value creation Example: The bankruptcy of FBIPolitical Tano SantosHeilbrunn Center

On shocks: classificationNature of risksTemporaryIdiosyncraticPermanentManaging the stock: Themany taxonomies of riskManagementOperationalInput liticalCOVID-19 Tano SantosHeilbrunn Center

On shocks: risk managementAdverse shocks: Is the shock permanent?NoYesIs the firm highly levered?Are there barriers to entry?NoYesAre the shocks industry-wide?YesNoSurvivalExitDo they eliminate barriers to entry?YesNoPermanent impairments Patent expiration Technological / process innovations International trade openness Expropriation Limits to profitability Regulation Bounds on practices Bundling, pricingNoYesShort term impairment Cycles in demand Temp. disruptionsin the supply chain Temp. disruptionsin operations Management turnover Lawsuits ExitHORIZONREINVESTMENT MARGIN OF SAFETY Tano SantosHeilbrunn Center

On shocks: What do disruptions (permanent shocks) do?1. They kill a particular economic activityExample: Technology – Horse carriage and the carExample: Regulation – The jitney craze of of 1914 – 19182. They transform how a particular economic activity either supplied or consumedExample: e-retailing,Example: The payments industry3. They unbundle how particular economic activities are either supplied or consumedExample: advertising and news Tano SantosHeilbrunn Center

On trends: What do trends do? Trends refer to the widespread adoption of practices, behaviors andinstitutions that are already operational in another:– Country– Sector– Demographic groups It is the process of diffusion rather than of disruption– It is predictable and dominated by the trend rather than by the fluctuations aroundthe trend It is irreversible, though it can be overtaken by another trend Companies benefit from that trend if, and only if, their business operations areprotected by barriers to entry. Tano SantosHeilbrunn Center12

SHOCKS 13

The evolution of the payments systemCustomerProductProductMerchant Tano SantosHeilbrunn Center

The evolution of the payments systemCustomer“Cash”goldProductMerchant Tano SantosHeilbrunn Center

The evolution of the payments systemCustomerCashcoinProductRoyalMintThe KingMerchant Tano SantosHeilbrunn Center

The evolution of the payments systemCoin tProductCapitalThe KingRevenue?GoldCoinServicesMerchant Coin (taxes)Tano SantosHeilbrunn Center

The evolution of the payments systemCoin (taxes)CustomerServicesCoinProduct seignorageCashcoinProductGold–inflation taxRoyalMintCapitalThe KingRevenue!CoinServicesMerchant Coin (taxes)Tano SantosHeilbrunn Center

The evolution of the payments systemCash ProductCheckCashCheckMerchantbankMerchant Cash – t/2Tano SantosHeilbrunn Center

The evolution of the payments systemCredit card: An open systemStep 1: tionrequestPresentsCardProductCredit ntMerchantbank Tano SantosHeilbrunn Center

The evolution of the payments systemCredit card: An open systemStep 2: rizationrequestPresentsCardProductCredit ntyesMerchantbankyes Tano SantosHeilbrunn Center

The evolution of the payments systemCredit card: An open systemStep 3.a: Clearing & settlement: 24 – 48 hrsCustomerDebitCustomer/issuingbankPayment – Interchange feePresentsCardProductCredit cardPayment – Interchange fee –– Assessment & processing feePayment – Interchange fee –– Assessment & processing fee –– Merchant Discount RateMerchantMerchantbank Tano SantosHeilbrunn Center

The evolution of the payments systemCredit card: An open systemStep 3.b: Clearing & settlement: end of the monthCustomerPayment ( interest)Customer/issuingbankCredit cardMerchantbankMerchant Tano SantosHeilbrunn Center

The evolution of the payments systemCredit card: An open systemWhere is the risk?CustomerCredit riskCustomer/issuingbankCredit cardMerchantFraud, CNP riskMerchantbank Tano SantosHeilbrunn Center

The evolution of the payments systemCredit card: An open systemIndustrial Organization – sCardProductCitiChaseBank of America Credit cardCiti Merchant Serv.Chase PaymentechBofA Merchant Serv.Wells Fargo Merchant Serv.MerchantbankMerchant Tano SantosHeilbrunn Center

The evolution of the payments systemCredit card: An open systemIndustrial Organization – rchantCredit cardNon-merchant bank acquirersIndependent Sales Org. (ISOs)Merchantbank Tano SantosHeilbrunn Center

The evolution of the payments systemCredit card: An open systemIndustrial Organization – sCardProductCitiChaseBank of America Credit cardCiti Merchant Serv.Fiserv (First Data)Chase PaymentechFIS (Worldpay)BofA Merchant Serv.Global Payments (TSYS, Heartland) Wells Fargo Merchant Serv.MerchantNon-merchant bank acquirersIndependent Sales Org. (ISOs)Merchantbank Tano SantosHeilbrunn Center

The evolution of the payments systemCredit card: An open systemIndustrial Organization – 4Customer/issuingbankCustomersM1M2 MnCredit cardPOS Infrstr.PaymentAggregatorsNon-merchant bank acquirersIndependent Sales Org. (ISOs)Merchantbank Tano SantosHeilbrunn Center

The evolution of the payments systemCredit card: An open systemIndustrial Organization – 5Customer/issuingbankCustomersMastercardVisaM1M2 MnPOS Infrstr.PaymentAggregatorsCitiChaseBank of America Credit cardSquareStripePaypalAdyenCiti Merchant Serv.Chase PaymentechFiserv (First Data)BofA Merchant Serv.FIS (Worldpay)Global Payments (TSYS, Heartland) Wells Fargo Merchant Serv.Non-merchant bank acquirersIndependent Sales Org. (ISOs)Merchantbank Tano SantosHeilbrunn Center

The evolution of the payments systemCredit card: An open systemIndustrial Organization – 5Customer/issuingbankCustomersMastercardVisaM1M2 MnPOS Infrstr.PaymentAggregatorsCitiChaseBank of America Credit cardSquareStripePaypalAdyenCiti Merchant Serv.Chase PaymentechFiserv (First Data)BofA Merchant Serv.FIS (Worldpay)Global Payments (TSYS, Heartland) Wells Fargo Merchant Serv.Non-merchant bank acquirersIndependent Sales Org. (ISOs)Merchantbank Tano SantosHeilbrunn Center

The evolution of the payments systemCredit card: An open systemIndustrial Organization – 6Customer/issuingbankCustomersMastercardVisaM1M2 MnPOS Infrstr.PaymentAggregatorsCredit cardSquareChase PaymentechNon-merchant bank acquirersIndependent Sales Org. (ISOs)Merchantbank Tano SantosHeilbrunn Center

Where is Adyen in the payment orizationIssuing bankCredit cardAcquiringbank Tano SantosHeilbrunn Center

TRENDS 33

Trends: TaxonomyTrendsThe consumer Wealth accumulationDemographic changesBehavioral changesTechnology adoptionThe firm Governance & InstitutionsBusiness process adoptionAutomatizationDirect to consumerStandardizationHR practicesCompliance RegulationMarket adoptionPolitical trends Tano SantosHeilbrunn Center34

Trends: The death of the movie theater1,700 15.00 14.501,600 14.001,500 13.50 13.001,400 12.501,300 12.00 11.501,200 11.001,100 10.501,000 61995Tickets Sold (in millions; left)Box Office (adjusted for inflation; in billions; right)US: Tickets sold (in millions) and Box office receipts (in billions). 1995 – 2019Source: The Numbers Tano SantosHeilbrunn Center35

Trends: The death of the movie theater353025201510502019201820172016Sony Pictures2015201420132012Paramount Pictures20112010200920082007200620th Century t DisneyUniversalUS: Major releases by big studios. 1995 – 2019Source: The numbers Tano SantosHeilbrunn Center36

Travel agencies: Stock Prices: This /202/2/203/2/204/2/20TUI AG: Stock price ( )2/2/203/2/204/2/20Bookings: Stock price ( ) Tano SantosHeilbrunn Center37

TUI AG: Stock price ( ): 03/17/2006 – /17/1703/17/1803/17/1903/17/20 Tano SantosHeilbrunn Center38

TUI AG80016,00060025.0EBIT: Guidance ( 622) divided by ,00010.0-4004,000-6000-800Revenues (left)EBIT (Operating Income; right)TUI AGRevenues and operating income (mns. of )2000 – 20190.02020 IT:FY2019 EBIT5.0TUI EV/EBIT2006 – 2019 Tano SantosHeilbrunn Center39

Is it 01720182019-21.5bn visitors-4-6Rate of growth of international arrivals. Source: UNWTO Tano SantosHeilbrunn Center40

The “Travel” business: A bird’s eye viewThe “Travel” ate travelReligiousHouseholdsFirms Tano SantosHeilbrunn Center41

The “Travel” business: Exposure to CoronavirusThe “Travel” ate ShortLowLowLowLowHighLong Tano SantosHeilbrunn Center42

The “Travel” business: Main economic determinantThe “Travel” BusinessCorporate sSpainSafariVeniceMiddle EastEconomiesof scaleIndustryWorld MobileCongressLimited supplyRetreatsYou know ConferencesAEA/AFAFirms’ balance sheet

From value investing to modern value. Tano Santos David L. and Elsie M. Dodd Professor of Finance Columbia Business School HeilbrunnCenter for Graham & Dodd Investment. May 2020. VALUE INVESTING . FOR PEOPLE IN A HURRY. Risk Management. Margin of safety Some diversification Patience –Default strategy.