(Published November 17, 2016, at 2.15 PM EST)
Since 1997, Guy has been managing Aquamarine Fund, an investment partnership inspired by, and styled after the original Buffett partnerships of the 1950s. Guy made headlines in June 2007, by bidding USD 650,100 (with Mohnish Pabrai of the Pabrai Funds) for a charity lunch with a person no less than Warren Buffett himself!
Our founder Nitiin A. Khandkar has been in touch with Guy since 2011, over e-mail and the social media. Nitiin has exchanged notes with Guy over the last few years. Guy was gracious enough to immediately accept Nitiin’s invitation for an Interview for the “Interviewing the Investing Elite” Series, for Beyond Quant InvestTraining, in spite of having never personally met Nitiin.
Guy’s humility in giving this interview – a good 47 minutes of it – is astounding. We know that being a fund manager, Guy has several pressing demands on his time. Yet, he quite patiently addressed all of our questions, and spoke at length, sharing his invaluable insights and thoughts on the finer aspects of Value Investing.
We cannot thank him enough – this kind gesture will surely go a really long way in helping us further establish our brand within the International Value Investing Community – and within the Investment Training space.
Guy must have given countless interviews till date. But we are quite confident that the relevant audience across the world will gain new insights and learn a lot from Guy’s answers to our questions!
We welcome reader feedback at founder @ bqinvesttraining. com (spaces deliberately included, so as to avoid bots).
Interview with Guy Spier
Note: We are splitting this Interview into two parts, for ease of reading.
Part I of the Interview
(The audio file of Part I of the Interview is at the end of this text interview)
1. In general, how do you identify stocks for investing? Do you go by sectors, or follow certain screens? How many stocks do you track at any point in time, and how does that number stack up vs. your actual investments? (Say 100 stocks tracked, vs 15 invested in?)
Guy Spier: I think the right way to go about identifying stocks is to perhaps start with Warren Buffett’s statement, “Well, I start with the As” (alphabetically). I don’t think he really means he starts with the As. I think what he really means is he starts searching at the beginning, uses his rational intelligence to optimize the search, and improves his technique as he goes along. And so, my point being, I don’t think there’s any right way to search for great investment ideas. You have to search intelligently, and part of searching intelligently is to vary your approach, and to keep trying and experimenting and to figure out what one should be doing next. What I did yesterday or in the last five years or the last twenty years, may not be what I’ll do tomorrow, what I ought to do.
Forgive me if I’m belaboring this point, but It’s important not to apply a formula, but to be intelligent by whatever approach one applies and obviously to do it diligently, with intelligence and with thought, but also with variance of the approach with a sense of experimentation. The nature of good investment ideas is that they haven’t been seen before by somebody else – somebody who sees the world in a new way, who looks at an investment in a new way, or looks in a place other people haven’t looked. Those are all generalities; let’s get to some real specifics.
I do run stock screens, using Capital IQ, which is a phenomenal piece of software. And as you know from my book, I also have a Bloomberg monitor. But somehow, I have gotten used to doing screens on Capital IQ, and that feels easier and better to me. And I have about 30 or 40 saved screens and I go into them from time to time. Some of them I use infrequently; some of them more frequently. But I think saved screens or screening is a great place to see just what comes out. However, I try not to screen in particular geographies. So, if I am slicing through all 30,000 publicly traded companies in Capital IQ, then I try to do the first slice across. Maybe it will bring up a company in Mongolia or Oman. I think that is kind of part of learning and part of the being open serendipity.
Another thing I try to do increasingly is not to rely on accounting estimates in the screen. There are numbers which are much harder to fudge like shares outstanding, or sales and those numbers are better to screen for, I think, as they’re closer to the underlying reality. We should remember that a company’s accounts are just a map, it’s not the territory. The map is being created by humans, by accountants. But some numbers like EBITDA or earnings are open to enormous fudge factor. Whereas sales are a lot more difficult to fudge; the number of shares outstanding is the number of shares outstanding, for example.
I think it’s going to be inevitable if you start studying anything carefully. To you there’s probably kind one of snow, it’s just snow. To me, living here in Switzerland, I can probably distinguish between four or five different kind of snow. And we know that for an eskimo, there’s like twenty different kinds of snow. There’s the dry, very cold snow that sort of doesn’t come together in snowballs. There’s very wet, not so cold snow that will come together beautifully in snowballs, provided it doesn’t melt.
If I were to devote the next two or three months to consumer goods or skin care companies, then I’m quite certain I’ll start discerning things about these companies which I wouldn’t if I weren’t studying them. Just to give you a sense, there’s a company that has been covered somewhat I think now, based in Korea, called Amore Pacific. But then, at the same time, there’s a company here in Germany called Beiersdorf, which has a brand called Nivea. I see those two companies as branded skin care. If I were to go into them in much greater depth, I’d probably starting seeing some very significant differences between them, which might either drive an investment in one of those two companies, or it might drive a search in a related or different direction. So, I am going back to my original point – I don’t think there’s a right way or a wrong way. We just have to come at it with intelligence, enthusiasm, an open mind, a willingness to experiment, a willingness to look for new things in unusual places.
In terms of watchlists, I do have a stock monitor, and every now and then, I put stocks up there. But I try to open it infrequently, so I don’t think I look at it any more than once a month. And often I’m surprised by what I see up there. So, I do have a stock monitor. I also save spreadsheets of all sorts of different kinds. And then when a company interests me, often I will buy one share of it through my Charles Schwab account for the simple desire to receive the printed materials. So, I kind of buy the one share, like I just did it with a company where I paid six dollars a share and the trading cost was ten dollars a share. So, I paid sixteen dollars effectively, for a six dollar stock. But in my mind, I’m getting an incredible bargain, because Charles Schwab’s going to mail two or three times a year to me. They’re going to mail me printed materials that I would otherwise not be able to receive and so it’s a good deal for me. I’m pre-paying the mailing cost if you like.
So again, I just think that, rather than thinking of do I put my stocks up on a stock monitor or I save them in spreadsheets or do I look for them in my brokerage account, I’m trying to create around me a flow of valuable information and valuable idea streams. I think that more than anything else, what I’ve discovered is relationships with other smart human beings, who have good filters, who are not throwing a lot of noise at me, but who have a sense of who I am and what I’m looking for and who know what signal is and what noise is are likely to send me signals rather than noise, which does not necessarily mean that they’re sending me stock ideas.
I have this friend who attends ValueEx with me, Brian Lawrence, a classmate from business school. He’s written these white papers and he’s goes deep into the economics of the renewables industry in one case and natural gas transportation in another. He’s writing about stuff that drives understanding and obviously from understanding comes both more conversations and potentially investment ideas. I think that when people write books, including mine by the way, there’s a tendency to simplify what the causes of good results are. I think in the vast majority of circumstances, good results come because we work hard at many, many things and we don’t really know as we’re working on it, what’s going to deliver success, but we just have to try everywhere and in the knowledge that if we try everywhere, we’re more likely to get success than if we don’t. I just love the quote of Thomas Edison (who invented the light bulb) and I quote him often on this. He was on a path to invent the light bulb but he said more than once, that he was going to fail so many times at inventing the light bulb that he would eventually run out of ways to fail and then he couldn’t help but succeed. Therefore, trying stuff, seeing what works and doing more of it, and seeing what doesn’t work and doing less of it, I think, is just an intrinsic part to that.
2. You have a unique style of investing, wherein you do not use, or depend on sell-side research at all. Has absence of sell-side support proven to be a hindrance in your performance as investment manager?
GS: Now’s a good opportunity for me to say that there are a number of things I wrote in the last third of the book that I think are actually facile. That if I was writing it again, I would write something different. And at the time that I was writing the book, I was particularly enamored of this idea of not talking to management. When Mohnish Pabrai and I had lunch with Warren Buffett, we asked him about a particular company, whether he’d spoken to management and he said no, he hadn’t. I remember asking him if he’d met Raymond McDaniel who’s the CEO of Moody’s which is a Berkshire Hathaway holding and Warren said, “not recently”. And that you could count on the fingers of one hand the number of times that he met him. So obviously, I took that as an affirmation of this idea.
Well, given my more recent experience I actually think that that is not the right approach. I do think it’s appropriate to talk to management and potentially even sell-side analysts; the key is when you do it. I think that a careful study of the company or the industry and the personalities in it has to come before we reach out and talk to management. So, it’s all based in this idea, which is the first idea to enter your mind because those ideas tend to stick hardest. And so I want to form my impressions of the company from materials that were less likely to bias me like the written 10-Ks and 10-Qs and another more formalistic documents, before moving on to other kinds of less more biased documents that are more likely to influence me. So obviously, press releases, management presentations would be a step along that scale.
And then at the very end you have conversations with management and even sell-side analysts. I think that’s a more holistic and appropriate view of the investment process and we deny ourselves the opportunity to be influenced by those things that are peril. At the same time, we deny ourselves our independence of thought if we listen to those things too much and right away. I now have the dubious privilege of being able to say that I’ve invested in a company that went bankrupt! It’s not something I enjoy it all. I do think that if I had been closer to the management, in the case of Horsehead, I may have been able to see what was coming better. In my style of investing I maybe or at least in the way I do research, I mean maybe moving back towards the norms that most people expect which is that you do talk to management and the sell side.
3. Do you stick to “known” stocks, where you just have a contrarian take on the expected profit growth or moat, or management capabilities, or do you also try to identify “hitherto unknown” stocks, where no institution has invested before? In other words, do you actively consider small cap stocks, where you feel you have an edge over other institutional investors?
GS: I’d like to think I’ve done both. I’ve invested in some very small cap companies. One publicly traded company I invested in, had a market capitalization of ten million dollars. But I’ve also invested in one company in the Philippines if I’m not mistaken, that was around a hundred million dollar market cap at the time that I invested in it. But I think that at the same time two or three years ago, I made a pretty big bet on Money Center Banks and those were extremely large caps.
I’m not trying to stick to one or the other. I’m trying to intelligently choose between the one and the other. I think it’s probably a lot easier to get a sense of understanding of the large cap known stocks and so that’s an easier safer place to go to. But given the right amount of knowledge, risk-reward, or understanding of moat, then I’d like to believe that I can decide whether or not to go to what you call “unknown” small cap companies.
4. Since you are a long-term, value investor, how do you evaluate business models, and figure out the investee company’s strengths and weaknesses, with a 3-5-year perspective? For new stocks, for how many quarters do you track the financial performance, before deciding to invest?
GS: I have to tell you, Nitiin, I think this is a set of excellent questions. I reviewed them a few days ago and I just thought “wow”. These are not just throwaway questions. You’ve really taken the time to think about them and so it makes it more fun for me to answer them. And it’s a better investment of my time, because in fact for me to do this is not just something for you. It’s valuable for me to think through these questions. They’re not ones that are easily answered; they require thought.
I would tell you that I think in the case of many businesses recently, in the last three or four years, it’s become a lot harder to evaluate the moat. The impact of the Internet is just expanding and tearing through business models that are never high-rate.
The moats that are unaffected, say floor coverings is one, household paints is another. So, in floor coverings we have two companies: Mohawk which is publicly traded. And inside Berkshire, we have Shaw Industries. Similarly, with paints, outside Berkshire Hathaway, we have Sherwin-Williams. Those are two businesses that are not going to be disrupted by the Internet. Doesn’t matter what kind of robots or virtual reality we have, people are going to want to paint their walls and cover their floors. But those moats which haven’t changed become extraordinarily highly valued because there’s fewer and fewer places for people to find moats. Many, many companies have had their moats probably at least marginally narrowed, if not a lot worse than that. And so, I would tell you it’s become a lot harder.
And it’s worth saying that just seeing a high ROI return or ROIC return on invested capital may not be enough, because if you have a business that has higher ROIC, you’re actually attracting competitors and may actually bring you into the sights of those guys in Silicon Valley. And obviously looking at past performance is no guarantee of future results. So, I don’t think it’s a question of the number of horses, or having a three to five year perspective. I think every now and then if I study hard enough, I will see something that makes sense.
And hopefully if I studied half and hard enough and I’ll end with more experience, I’m less likely to make the kind of mistake that I made with Horsehead. I don’t think it’s an intelligent thing to give myself a rule I have to sort of look out a minimum number of quarters or look back a minimum number of quarters. With an intelligent searching way that is not the right question to ask and I’ve discarded that kind of question, because there’s a limit to how much I can fit into my brain. What I’m really looking for is improving economics and that may become obvious in all sorts of ways. There may not be any sources of data that show me that. And exactly where I would find that well. There’s the rub. It’s going to change each time I think.
5. In your book, you have mentioned that Warren Buffett “typically avoids meeting corporate managements”. Do you subscribe to this view, or follow it yourself? What in your view, are the pros and cons of meeting corporate management, before arriving at an investment decision? Do you believe that, the smaller the company, the more essential it is, to meet the management?
GS: I partly covered this in answer to question no. 2. I’m kind of locked in with sell-side research. I think if we want to unpack the management thing a little bit. And I’m not saying this is easy to do this or that I do it in every case or that if I do do it, I do it in this order. But here’s the ideal. The ideal is that I’m studying the company through its unbiased sources, Ks and Qs. And then let’s say I’m coming to management and I want to understand what kind of people run this company. Are they people I want to entrust with my or my investors’ money? And rather than meeting them which is going to result in all sorts of biases, I’m better off finding out what decisions they’ve taken, how much skin do they have in the game and what kind of decisions they’ve taken around their capital.
I looked at a company recently: General Nutrition Corp (GNC). If I remember correctly, there’s this reasonable insider ownership. It’s very clear that that company is getting levered up and is quite likely to be taken into bankruptcy and that the management are selling down their share ownership and letting the company get levered to the hilt and they will eventually go to bankruptcy. So much you can see, so much I can see without even having to meet them and it’s quite possible if I met them, I wouldn’t see those things. So the thing first is to meet the management virtually, by finding out what the results of their actions are. It’s always better to judge people by their actions, by what they are, than by what they say. At that point and having built up a very solid picture of who they are, it may make sense then to meet them for the sake of interest and for learning,
I think that’s fine, but I’d like to believe that in ninety-eight percent of the circumstances, I will learn what I need to know from just studying their past actions and studying how they reflect, the management accounts, the annual letter, the way the proxy materials are put together. One of that doesn’t happen in a vacuum. It is the product of management activity and management’s attitude and interactions with the company’s accountants and legal advisors and again if you start looking at those documents carefully. And look at many of them you’ll find that they are different. Their qualities are different. And the thing to do is to understand that there’s an underlying process that created those documents and the clues as to what kind of people they were who created those documents, what kind of interactions they had, are often in the notes and so that’s kind of what one is looking for.
But having said all of that, I still happily walk back and take back this idea that one should never meet with management. I think that there’s an enormous amount of information and insight that one can gain from meeting them, but with the right perspective. This is putting it very crudely, but don’t meet management in order to take dictation from them. Meet with them in order to observe them in their environment and see what other things one can glean, after all those other things are done.
6. You are a big fan of investing checklists. However, since investing is as much an art as it is a science, do you think a standard investing checklist has drawbacks? If yes, what are they? Should an investor devise checklists customized for sectors, or strategies or market cycles?
GS: You’re right; I’m a big fan of investing checklists. But I think that investment checklists (so this is just me talking) don’t substitute for an indication of how to analyze, or how to look for investments. It cannot be a substitute. This is not about evaluating qualitative things. The checklist, the way I understand it, is simply, ”Oh, I’m about to make this investment. And I need to go back and remember every single mistake that I or some investor that I know has made, to make sure I’m not making that same mistake here”. So, it’s not foolproof. It’s not a substitute for thought, creative search and analysis. It’s just a way to try and filter through some mistakes was to try and reduce the error rate. We know that we don’t have to reduce the error rate by much, to have a substantial impact on performance. So you know one checklist as far as I’m concerned is the short answer to that.
Audio File of Part I of the Guy Spier Interview
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