Finding Value by Identifying Structural Industry ChangesVW Staff
TWST: When was Century Management established and how large is it?
Mr. Brilliant: Century Management was founded in 1974 by Arnold Van Den Berg. While we manage all-cap, small-cap, and largecap portfolios, our primary focus is on deep-value. We manage both separate accounts and mutual funds and have approximately $2 billion in total assets under management.
TWST: You described the firm as deep-value. Can you expand on your investment philosophy?
Mr. Brilliant: We have three primary tenants to our investment and valuation philosophy. First, we look to recognize and capitalize on what we call value gaps. Second, all of our valuations incorporate what we believe to be a worst-case analysis. Third, we employ a margin-of-safety approach, which, for us, is driven by a reward/risk analysis.
Let me first talk about value gaps. The goal for a value manager is to pay less for a stock than its underlying value. There are many approaches to arriving at this value, and probably the most popular is a discounted cash flow model, the shortcomings of which are often overlooked. The biggest shortcoming of a DCF model is that small changes in assumptions can make a huge change in the underlying output. For us, we see a second flaw, and that is that a DCF model is a straight-line valuation. It looks at the value of the business based on the current environment and extrapolates that into the future. Rarely do analysts using DCF models stress test the company’s valuation for recessionary scenarios.
In our analysis of a company, we go back through 20 years of history and look at its segments or various divisions. We really want to understand how the company operates and is priced in both good times and bad times. We look at what happens to the business fundamentals and how the market prices those fundamentals during the worst-possible situation for that company. It is in this analysis that we come up with our worst-case. We find that this provides a better measure of just how deep of a discount a company gets relative to its underlying value.
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