Rich Pzena: The 3 Questions You Need To Ask With Any Investment

In a recent interview for Compound Insights, veteran value investor Rich Pzena shared the foundational principles that have guided his firm. Reflecting on the early days, he noted, “all you do is hope that you don’t go out of business.”

This dream was built on a disciplined approach learned from his past, but with a key modification. He observed that at his former firm, having “no limits on the assets you take in any individual strategy” made it “more and more difficult to execute a strategy.”

This led to a core tenet of his philosophy: “we wanted to be pure… not be impacted by those issues.”

Pzena’s commitment was severely tested during the internet bubble, a period where his firm found itself “6,000 basis points behind the S&P 500.”

Facing client redemptions and criticism, he recalled a memorable meeting where a client said, “My grandmother is a better investor than you are. all you have to do is buy Cisco.”

Pzena’s response was to stick to the arithmetic, pointing out the disconnect between Cisco’s valuation and its earnings. He stated, “we stayed disciplined,” a decision that paid off handsomely when the market turned.

His process remains straightforward: “We’re trying to buy fine businesses that are selling at a low price.” He cautions against the common fallacy that “good businesses don’t sell for low prices. What sells for low prices are things where there’s something going wrong.”

This requires a deep qualitative analysis, answering three questions: “Is this business any good? Are the problems facing it temporary and not permanent? And is the management’s plan to restore the earnings back to their historical luster a sound and sensible business plan?”

When it comes to the inevitable missteps, Pzena offers a clear-eyed perspective. “I don’t think you can be a value investor if you try to avoid value traps because you have no idea which are the value traps.”

The key is to buy at a price where the successes outweigh the failures. If a thesis changes, the approach is to “re underwrite the investment, start over again.” He emphasizes that “the fact that you lost money has no impact on what you should do today.”

For non-professional investors, he suggests starting with quantitative screens but stresses that the real work begins with understanding the business behind the numbers, a principle that has anchored his firm’s success for decades.

You can listen to the entire interview here: