Idea Brunch with Steven Grey of Grey Value Management
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Steven Grey!
Steven is currently the chief investment officer of Grey Value Management, which oversees
The Grey Value Opportunity Fund (the “Fund”), an absolute return fund with a global mandate that seeks to generate attractive risk-adjusted returns uncorrelated with the broader markets through a concentrated (15-20 positions), unlevered portfolio comprised of rigorously researched positions.
The Fund’s focus is on value-oriented equity investments characterized by “extreme mispricings” - positions that offer both a significant margin of safety and substantial upside. But the portfolio may also include short positions, special situations, distressed and reorganized securities, event-driven investing (including merger arbitrage), and capital structure arbitrage.
Prior to launching Grey Value Management in 2010 and the Fund in 2014, Steven served as the Chief Investment Officer of a single family office based in Alexandria, VA. Before that he was Managing Director of Risk at Albright Capital Management (ACM), a firm he helped launch with former Secretary of State Madeleine Albright. Prior to ACM, Steven co-managed an event-driven hedge fund based in New York.
He graduated from Columbia University’s Graduate School of Business (MBA) in 1997, the Tulane University School of Law (JD) in 1995, and the University of Texas at Austin (BA - Honors) in 1990. He studied law in both the US and Japan and has testified as an expert witness in securities litigation. He is also a member of the Investor Advisory Group (IAG) of the Public Company Accounting Oversight Board (PCAOB).
Steven is a trained first responder and carries the rank of Flotilla Commander in the United States Coast Guard Auxiliary, where he has been a member in good standing for over 10 years.
Steven, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Grey Value Management?
I’ve been interested in investing since I was a kid. If you go to the media section of our website (www.greyvm.com/#media), near the bottom you’ll see a link to a letter that I wrote to an investment advice columnist at The Star Ledger newspaper when I was 13. So I got a relatively early start, which I think can be a meaningful advantage in investing. I’ve seen a lot.
My father was a corporate pilot who was also very interested in investing. He used to read the Wall Street Journal every day from front to back, which I began doing at a young age.
For much of his career, my dad worked for a gentleman named Benno Schmidt, Sr., who in 1946 launched the first venture capital firm, J.H. Whitney & Company, with John Hay “Jock” Whitney.
Benno was literally the person who coined the term “venture capital.” As he saw it, investing in early-stage companies would be an adventure, which he shortened to “venture.”
In addition to being utterly brilliant, Benno was a very kind and generous person. From when I was very young, he was always happy to have me accompany them on business trips. While my dad was up front flying the plane, I would sit in back and listen to Benno and the other executives and board members talk about investments. It was a uniquely privileged education.
I attended the University of Texas at Austin for undergraduate, primarily because Benno had gone there and thought I would enjoy it as much as he did – and I did. Following that I studied law in the US and Japan and then went on to an MBA at Columbia University. I was naturally drawn to the security analysis program at Columbia Business School and its legacy – Benjamin Graham, Warren Buffett, the list goes on. But I was particularly intrigued by the opportunity to study under the extraordinary Jim Rogers. I’d read that about once every 5 years he taught a seminar that he ran like a hedge fund.
As luck had it, he taught his seminar while I was there. You didn’t just sign up for it – you had to apply. Of the 50 or so applicants, he accepted 12 to 15, and I was fortunate enough to be one of them.
There was only one ironclad rule: Wall Street research was absolutely prohibited. We were told that if he found out that we’d used outside research he would flunk us on the spot. And it wasn’t an idle threat.
Every week, 24 hours before class you would submit a write-up and financial analysis of your recommended investment. It had to be a buy or a sell – he used to say, “There are no ‘hold’ tickets.” The following day, you would have to defend your recommendation in formal Socratic fashion. You had to stand up while he and his two co-teachers, who were former students who ran funds themselves, would absolutely hammer you with questions. It was trial by fire, and I loved it.
Jim had a massive influence on me. I still remember him asking a question in class, and when I began to answer by saying, “I think…,” he slammed his hand down on the table and screamed, “I don’t care what you think! What you think is useless to me. Tell me what you know!”
That moment was something of an epiphany to me. Very few investors make the effort required to ensure that they actually know what they’re talking about.
You do upwards of 200 hours of research on each of your investments. Can you walk us through what your research process looks like? Do you do anything that few others do?
That’s a great follow-up to where I just left off, because in my opinion smart investing is about getting to the point that you authentically know and understand what you’re looking at.
How long should that logically take? Should you be able to understand a company after just reading an article and looking at a chart? Shouldn’t you at least have to read the 10-K? But if comprehending a company and the industry within which it operates requires understanding how it has evolved and adapted over time, you would have to read more than the most recent 10-Ks, 10-Qs, 8-Ks and proxies, wouldn’t you? How far back would you need to go? 5 years? 10? 15?
What about other resources, like the filings made by companies your target company competes with, as well as whatever articles you can find in the general media or industry-specific journals?
For example, if I’m investing in a hydraulics company, I’ll make a point to read the past 20 years of “Hydraulics Monthly,” or whatever the must-read magazine of the industry is.
How could I possibly know what I’m talking about if I don’t do all of that?
If you do all of the foregoing, which includes creating your own spreadsheets and financial analyses, you hit that 200-hour mark very easily.
But it, of course, doesn’t end there.
What do you mean by that?
One of the most dangerous mistakes an investor can make is falling prey to “fire and forget.” It’s critical to monitor your existing investments, because that’s the only way you’ll be able to anticipate if your investment thesis is about to run off the rails. I’ll give you a perfect example involving one of our recent positions.
We had an investment in a company called Avaya (AVYA). I wrote an article about it for the Financial Times (“Avaya Con Dios”), which you can find on our website.
Avaya got my attention because it had just been through bankruptcy, and it was a global leader in the contact center market and "UC" - unified communications - helping businesses integrate all of their communication capabilities. With a much cleaner balance sheet, an already attractive investment opportunity became only more so when demand for UC skyrocketed as a result of the pandemic.
So Avaya became a big position for our Fund, which for us is about 10% of our capital (before taking into account appreciation). And the stock price appreciated, significantly.
However, as we followed the company's performance - carefully reading the 10-Qs and 10-Ks as they became available - we began to notice something: Based on their own metrics, management was killing it. But based on the GAAP numbers, their performance was oddly anemic. And with each passing quarter, the disparity between the two kept widening, with the GAAP-based performance continuing to stutter and fall well short of what I thought were reasonable expectations for their performance.
So we blew out of the position - sold it all.
We made a nice profit, but of course the stock kept climbing.
We kept following it, and in June of 2022 they announced that with the help of several major Wall Street banks they were going to raise about $600 MM in debt.
Less than 2 months later Avaya slashed its forecasts by two-thirds and fired the CEO, citing “substantial doubt about the company’s ability to continue as a going concern.” The notes that had just been issued lost half their value, and a year later the shares became worthless when Avaya went bankrupt.
The investment bankers and those who purchased the notes predictably went ballistic, claiming they’d been defrauded, misled. But here's the question: How could anyone claim to have been misled when all the numbers they needed were readily available in the public domain?
Even if some wrongdoing was occurring behind the corporate veil, you didn't need to be privy to it to see the train wreck coming. It was staring you in the face - if you bothered to look.
Which speaks to another important point I want to emphasize: Anyone with basic training in investment analysis could have done what I did.
Everyone wants to make money. Where most investors fail is in simply not trying hard enough to not lose it.
Over the past 10+ years our Fund has delivered very solid performance, not least because we have an extraordinarily high hit ratio. Not all of our winners shoot the lights out. Over the years we’ve exited several positions with very slim profits. But our actual losses have been uniquely infrequent. Why? Because we make every rational, conceivable effort to not lose money.
It takes a constant, herculean effort, but we love what we do. If nothing else, that’s our edge: we’re genuinely passionate about the process. And performance follows process.
You helped launch Albright Capital Management alongside former U.S. Secretary of State Madeleine Albright. What was it like working with Secretary Albright in an investment context, and what did you learn from building an emerging-markets investment firm with such a high-profile partner? Did Secretary Albright’s global perspective influence how you think about emerging markets investing?
You’re probably picking up on a theme here: Benno Schmidt, Jim Rogers, Madeleine Albright – I’ve been unbelievably fortunate when it comes to the mentors I’ve had in my life.
Working closely with Madeleine Albright was the privilege of a lifetime. In addition to being incredibly intelligent, she was quite “street smart” – and those two qualities don’t often travel together. Her ability to synthesize, to distill complicated issues to their critical essence was remarkable. To witness her intellect in action, to take part in that process, had an immense impact on me.
That includes how I think about investing in the developing world. Unlike mature markets, politics plays a significant role in driving investment outcomes in emerging nations. Nobody weighs political risk when they’re thinking about buying shares in Microsoft. In developing countries and frontier economies, political risk never fades into the background. Think about how many of the ~150 developing countries in the world attract very little foreign capital simply because the political risk is too great or too complex for most investors to negotiate.
Because many emerging countries don’t have very developed stock exchanges or corporate debt markets, most of the opportunities that come your way will be some form of direct investment. Which means that, if things go wrong, you won’t have a ready means of exit. The liquidity simply doesn’t exist. So due diligence, along with how the investment is structured, are absolutely key.
EM investing is uniquely challenging in that it requires you to assess and address risk at two extremes, at both the political and practical level. Secretary Albright navigated that spectrum with formidable expertise and enviable ease.
She was also a tremendous amount of fun. Madeleine was consistently curious about the world around her and had a wonderful sense of humor. I miss her.
You have been described as a “fiercely independent thinker.” How do you maintain independent thought and avoid groupthink in an industry often driven by consensus?
Because I don’t utilize any outside research to begin with, groupthink is relatively easy to avoid. Practically speaking, it’s easy to ignore what you never look at to begin with.
Jim Rogers definitely encouraged a strong disregard for the consensus. But like a lot of value-oriented investors, I’m probably a contrarian by nature.
Experience plays a part as well; I’ve watched “the crowd” be too wrong on too many occasions to believe it possesses some kind of inherent, unfailing insight. There’s no reason to believe that individual ignorance somehow magically aggregates into collective wisdom. Besides, if every trade has a buyer and a seller, then every investment ultimately has two crowds. If only one can be right, both can’t be “wise.”
However we may feel about the prevailing view, as investors we of course understand that we don’t operate in a vacuum. So I follow the news. In my office, I normally have Bloomberg TV running in the background (on mute). You always want to maintain a basic awareness of what the rest of the market is thinking and doing. That information flow can throw off investment opportunities. If I see story after story about how some company is a disaster, it’s not unusual for me to take a look at it. The consensus always swings to irrational extremes, in both directions.
In terms of routine and especially idea generation, for approximately the past 30 years I’ve begun every day by spending the first 2 to 3 hours reading multiple newspapers, journals, websites, etc. Anything of interest gets copy-and-pasted into a Word document. On average, that daily compilation will run over 100 pages, single spaced. You can imagine the cumulative effect over the years. I have hundreds of thousands of pages of research and notes. It’s not unusual for my file on a single company to run over 5,000 pages.
It’s a lot of information. But logic dictates that it’s impossible to make a fully-informed decision without being fully informed.
Grey Value Management has a book slated for release in 2026 titled The Agile Investor. What prompted you to write this book, and what key message are you hoping to share with the world through it?
Thank you for asking about the book.
I suppose a number of factors prompted me to write it, but a key motivator was the fact that most of the books about investing that I’ve read – including many I’ve enjoyed and admired – tend to be long on the generalizations but short on the details.
It goes without saying that getting the basics right is critical – you need to buy low and sell high, not the reverse. But how do you know what “low” looks like? How do you recognize it when you see it? The most effective way to learn that is through application – that is, via examples.
That’s why most of my book will be devoted to actual investments I’ve made over the past 15 years or so. Like case studies in a law school text, each investment will have its own chapter. And each of those chapters will explain what first brought the opportunity to my attention, how I researched and analyzed the business, how I analyzed the financials, how I generated a valuation and purchase price target, etc.
So unlike those books about investing that offer only general advice, The Agile Investor will include 40 to 50 in-depth case studies of actual investments I’ve made. By explaining in extensive detail every step in the process, readers will be able to learn through application. They will have an abundance of real-world examples that show them, step-by-step, what buying low looks like across a broad spectrum, thus better enabling them to do it on their own.
Demonstrating that is essentially the key message of my book: With some effort, discipline and patience, the individual can not only succeed at investing, but can outperform most so-called investment professionals.
The thing is, most people don’t realize that they have one very important advantage over institutional investors: the freedom to not invest. Which is another way of saying that they can be as selective, careful and patient as they need to be. That’s a luxury and practical advantage that most fund managers are denied by their own clients, who demand constant activity (however detrimental) and are very intolerant of interim volatility.
It's stating the obvious, but to get high quality returns, you need high quality capital. While most fund managers largely have to accept what they get, every individual investor can choose to be the high quality capital they need to succeed.