The Market Moved Not on the Basis of Fundamentals

Today’s conversation is with Jennifer Wallace, a wonderful expositor to the main ideas of value investing, but also a very deep thinker when it comes to the interaction of value investing and the market at large. Jenny is the co-founder of Summit Street Capital Management, where she is the portfolio manager of the US equity value fund. She's also a Columbian through and through as she holds a BA from Columbia College and an MBA from Columbia Business School. Jenny is a member of the advisory board of the Heilbrunn Center for Graham & Dodd Investing and a great mentor to me.

While working towards her MBA, Jenny joined the first cohort of students to take the value investing class offered by Bruce Greenwald. After being introduced to value investing, it became clear to Jenny that to be successful she needed to develop a skill set that would allow her to assess businesses, independent of conventional wisdom. To gain that perspective, she first went to work for McKinsey & Company. After leaving McKinsey, Jenny worked alongside investing legend Bob Bruce, before ultimately co-founding her firm.

On this episode, Jenny and I discuss her studies at Columbia Business School as a student in the first cohort of the value investing class, her early career with value investing legends, how Summit Street was started, how Jenny developed her investment philosophy, her approach to data analysis, the impact of the growth of the passive investing industry on active managers, and so much more!

Key Topics: 

• The events program for the Heilbrunn Center during the 2019/2020 academic year (1:03)
• Why you should sign up for the center’s email newsletter (6:15)
• Jenny’s experience as a student in the first cohort of the value investing class (8:26)
• The structure of the first value investing class (10:20)
• Why Jenny decided to work for McKinsey instead of in investing (11:33)
• How Jenny’s background in psychology helps her as a value investor (12:56)
• The impact of Jenny’s time at McKinsey (13:28)
• Summit Street’s investment philosophy (15:42)
• How business’ operational efficiency contributes to investors’ downside projection (16:37)
• Bob Bruce’s pitch to Jenny (17:23)
• The importance of being able to read financials and let the numbers tell you a story (19:20)
• Bob Bruce’s advice on building up your knowledge about select companies (21:12)
• The opportunities and crises in the late 1990s market (22:25)
• The parallels between the investment landscape of the 1990s and now (24:19)
• The qualities that Jenny believes sets value investors apart from others (25:37)
• Why Jenny thinks being a good value investor starts with a certain type of person (27:23)
• How Summit Street was launched (28:32)
• The evolving focus of Summit Street (29:13)
• Jenny’s approach to data analysis and searching for investment ideas (32:47)
• Jenny’s perspective on the changing significance of classic value metrics (34:41)
• How Jenny use cash flow as a valuation metric to avoid value traps (37:29)
• Why you should focus on the numbers in assessing the management team of a potential investment (42:26)
• “Every stock that we buy has something working against it” (44:23)
• Why Jenny considers leverage and return on invested capital as critical quality measurements (46:17)
• Summit Street’s qualitative and quantitative valuation methodology (49:25)
• Summit Street’s research and evaluation process for potential investments (52:53)
• Why models are so useful for testing your assumptions (55:36)
• Jenny’s approach to exiting a position (58:59)
• The importance of using guardrails to force investment discipline (1:02:35)
• Jenny’s opinion on the growth of passive investing and its effect on the practice of value investing (1:05:29)
• Why Jenny believes that the fee race to the bottom for exchange-traded fund (ETF) products are not necessarily good for investors (1:09:25)
• The façade of diversity being offered by ETFs (1:10:45)
• The opportunities created by ETFs for active managers by ETFs (1:16:11)
• And much more! 

Mentioned in this Episode:

• Meredith Trivedi, Managing Director, Heilbrunn Center for Graham and Dodd Investing
• The Heilbrunn Center for Graham & Dodd Investing Events
• Summit Street Capital Management
• Benjamin Graham and David L. Dodd’s Book | Security Analysis
• Benjamin Graham’s Book | The Intelligent Investor

Thanks for Listening!

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