Kramer Investment Corporation: A Value Investing Pioneer

Kramer Investment Corporation: A Value Investing Pioneer

Introduction:

Kramer Investment Corporation (KIC) is a Philadelphia-based investment firm that has consistently outperformed the market since its inception in 1984. Founded and managed by legendary investor Joel Greenblatt, KIC’s investment philosophy is rooted in the principles of value investing, emphasizing the identification of undervalued businesses with strong financial fundamentals. This article will explore the history, investment strategy, and performance of KIC, highlighting its contributions to the field of value investing.

History and Inception:

Joel Greenblatt, a Wharton School graduate, founded KIC in 1984. Prior to starting his own firm, Greenblatt worked as a research analyst for the investment banking firm Donaldson, Lufkin & Jenrette. During his time at DLJ, he developed a keen interest in value investing principles popularized by Benjamin Graham and Warren Buffett.

Greenblatt’s investment philosophy was heavily influenced by Graham’s concept of the "margin of safety," which emphasizes purchasing stocks at a significant discount to their intrinsic value. He also adopted Buffett’s long-term investment horizon and focus on businesses with strong competitive advantages.

Investment Strategy:

KIC’s investment strategy is based on a rigorous screening process that seeks to identify companies that meet the following criteria:

• Revenue Growth: KIC prefers companies with consistent and sustainable revenue growth, indicating a strong business model.
• Earnings Power: The firm seeks businesses with strong earnings power, as measured by net income margins, return on equity, and other profitability metrics.
• Financial Leverage: KIC favors companies with low levels of financial leverage, ensuring their financial stability.
• Valuation: Most importantly, KIC invests in companies that trade at a significant discount to their intrinsic value.

Intrinsic Value Calculation:

KIC uses a modified version of Benjamin Graham’s "net-nets" approach to calculate the intrinsic value of a company. This method involves calculating the company’s liquidation value (assets minus liabilities) and subtracting this amount from the share price. If the share price is significantly below the liquidation value, the company is considered undervalued.

Portfolio Construction:

KIC’s portfolio typically consists of a concentrated number of stocks (20-50). The firm invests in both large-cap and small-cap companies across various industries. KIC’s portfolio turnover is relatively low, as the firm prefers to hold stocks for the long term.

Performance:

KIC’s performance has been consistently impressive since its inception. The firm’s flagship fund, the Cramer Growth Fund, has outperformed the S&P 500 index by an average of 4% per year since 1986. KIC has also generated significant alpha, which is the excess return over and above the benchmark index.

Contributions to Value Investing:

Kramer Investment Corporation has made several significant contributions to the field of value investing:

• Popularization of "Net-Nets": KIC’s modified net-net approach has popularized this value investing technique among investors.
• Emphasis on Financial Leverage: KIC’s focus on low financial leverage has highlighted the importance of avoiding excessive debt in investment decisions.
• Development of Quantitative Screens: The firm’s use of quantitative screens to identify undervalued companies has paved the way for more sophisticated value investing strategies.

Conclusion:

Kramer Investment Corporation is a pioneer in the field of value investing. Joel Greenblatt’s rigorous investment philosophy and disciplined screening process have enabled KIC to consistently outperform the market. The firm’s contributions to value investing, including its popularization of net-nets, emphasis on financial leverage, and development of quantitative screens, have left a lasting impact on the investment community. KIC’s success serves as a testament to the enduring power of value investing principles in generating long-term wealth creation.

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