(Published November 17, 2016, at 2.15 PM EST)
Part II of the Interview
(The audio file of Part II of the Interview is at the end of this text interview)
7. How do you keep yourself updated on your investee companies? Do you do any scuttlebutt investing, or just stick to financial statements, other regulatory filings and analyst con-calls?
GS: I used to do more scuttlebutt. And I think that I probably don’t do enough scuttlebutt right now. I think that scuttlebutt is kind of the secret sauce and the heart of it. And often, it doesn’t even have to be scuttlebutt.
There’s somebody that I’ve met at the Berkshire Hathaway now for three or four years. She used to work at Wells Fargo. Maybe it’s just a coincidence, because she’s one of many hundreds of thousands of employees there, but she was very unhappy with what the management are forcing her to do. And they weren’t forcing her outside of the law or anything, but they were there pushing her to divide her job up and to only do one part of a job, and not another part of her job. It’s just one data point, but I find it interesting that the scandal on Wells Fargo broke after I’d been hearing this from her for a couple of years.
But I think that scuttlebutt is important. But again, start with this sort of ming potatoes. And then move on to scuttlebutt. I think it’s important to get the order right. And I think that one can lose the forest for the trees, or get a false image or impression of a company if one goes in the wrong order. So, I think that is all stuff that one should do after one has formed a basic sense of what’s going on and what the valuation is. I think it’s interesting that when I become a shareholder of a company somehow, the public news is coming at me anyway, with greater frequency.
Another analogy when it comes to keeping up with one’s investments is golf. I don’t know if any of your listeners play golf. But you don’t have to play golf to understand this analogy. Every golf hole is different. Some of them require five shots or more. Some have many sand traps, some have few sand traps. Some hook right, some hook left, conditions change. I think that each investment can be considered like a different kind of golf hole. Some golf holes you need to be able to have a good wedge or short shots. Some golf holes you need to be able to drive the ball. So, in every single investment the kind of ability to keep up with it and understand what’s going on is developing one’s investment game for that particular investment. The way I keep up with Berkshire Hathaway might be different to the way I keep up with a small cap company. As I’m doing the due diligence part of what I need to know is how would I know if this is going wrong and learning about the company. I’m learning about the kind of information environment I’m walking into and what would be a signal in the future and what wouldn’t be a signal.
8. Do you believe in shareholder activism? If the management of one of your investee companies were to act against the interests of minority investors, would you confront the management in shareholder meetings, or simply sell the stock and go away?
GS: I would tell you that in the past I’ve tried confronting management; it hasn’t worked very well. It’s got me yelled at in a restaurant one time. So, I think that it’s quite possible that the right thing to do is to sell the stock and go away.
I like to believe that at some point in my future I’ll have the opportunity to engage in some kind of successful agitation for change, partly just because I want to believe that I’ve done more than just buy and sell bits of paper. I would tell you that my experience has been that to react negatively to something the management is doing at that point, in a certain way, the game is lost, most likely in all cases because at that point to get the management to behave differently, is just very, very hard. People get upset and take all courses of action.
I think that finding ways to encourage managers to do the right thing is important. Of course, Warren is the genius at that, when he says to Ken Chenault (of American Express) or another manager of a publicly traded company: “Here are all my shares – you can vote my proxy for as long as you want to stay running the company. You’re there and I’m not going to change my mind”. That buys enormous royalty. And those people of course always consult with Warren before they do anything; so he has the best of both worlds. And so there are ways to behave in the world where you can rather than using the stick of sort of complaining, you can find carrots that draw people towards you. And that is the right way to do activism. In a certain way, Warren’s been doing that kind of activism. But the stick is just a tough row to hoe. If I get through my life without doing that, I’ll be happy. So, no negative activism, but positive activism. Why not.
9. Your fund’s investment portfolio seems to be concentrated across a few sectors, such as financials, and automobiles, with a smattering of cyclicals such as materials and energy. Since most of your fund’s holdings are well-known names, how do you propose to generate alpha for your investors?
GS: Yeah, it’s a lot harder to generate alpha for my investors if I’m in big names that are extremely well covered, as everybody knows, because they are far less likely to be undervalued. So, you’re right. And part of why I’m positioned that way is a reflection of what I found to be extraordinarily difficult times to invest.
As I go in small-cap companies, I think that many of those moats are under enormous threat from the Internet. Or at least, I found that to be the case. I think there are times to be offensively aggressive going to small caps, going to specific names. And there are times to be less aggressive and preservation of capital is more important. Before you get a return on capital, you need to have a return of capital. So, you could argue that Guy Spier is in a defensive posture with his portfolios; I think probably many people are. But you’re right; it will be a lot harder for me to generate outsized returns if I stay that way. I do hope that that will change, but that partly would also be a result of a changing investment environment.
10. What is your fund’s typical holding period? For how long have you held the longest-held stock in your fund portfolio? Is BRK that stock? What would be the circumstances under which you would consider exiting a stock like BRK.A or BRK.B, or any stock, for that matter?
GS: Yeah, I’ve probably held Berkshire Hathaway for twenty years. And I think that in a certain way I will do better as an investor if I consciously don’t try to optimize.
What I’m trying to do is build my investment house and I don’t want just chairs or just tables and so some of the pieces of furniture that I want to have in my house, include a chunk of Berkshire Hathaway, because it settles me and after all I’m managing my own wealth and my family’s wealth and I don’t want to manage separate pools – so one pool for my family with a chunk of Berkshire, and one pool for outside investors without a chunk of Berkshire.
Is Berkshire likely to perform as well as some of the other companies in the portfolio? No. But again, I’m trying to build a house in which I want to live effectively and the house in which I want to live has Berkshire is part of the landscape if you like, as well as having some companies that they’re moonshots. So, when would I sell? I think that if it’s a good compounder, meaning that if the company is on a path of growing intrinsic value, I’m going to own the company, even if on a current basis, it appears to be above intrinsic value.
When on the other hand, if intrinsic value is not growing very fast, I should be willing to be far more trigger happy with it. Ideally, I want to only buy businesses I’d like to own for 20-30 years.
But again, in an environment where I can’t find those things, I’d buy businesses which you would call maybe three to five year trades. I would argue that perhaps the U.S. banking sector is a three to five year trade and is a valid place to be, I guess. I would also tell you that the nature of compounding is such that or the nature of discount is such that if I’ve bought something which I think is fifty percent undervalued, and it doesn’t go up, or doesn’t respond within a five year period. Now my compounding is really going to suffer in a certain way. If I don’t get a significant move in the stock within five years or say seven years at the outset, or at the at the outer limits, then in a certain way the investment has not worked out because it’s simply very hard to deliver good compounding numbers when you’re waiting that long for a result that time will kill you. So, I think that my horizon is let’s say three to seven years.
11. You had in the recent past, taken some exposure to EMs including India. How in your view do EMs stack up v. US or European markets? Would you be willing to allocate a higher share of your assets towards EM stocks, going ahead?
GS: I expect to be in India some time in 2017, where I hope to have some interaction with some of the local companies. I had a very successful investment in Crisil that I wanted to hold on to, but I didn’t. You know I’m trying. I’ve said elsewhere that I’m trying to see the world as borderless. At the same time, I have to recognise that the world’s full of borders.
I would love to have more investments in India, that meet my criteria. And find those investments in a way that I can understand where I’ve identified it, without it being sold to me or pushed at me. Where I can confidently come to conclusions about the business and the management is something that is very very hard for me to do, but it is extremely rewarding if I get it right. Getting there is hard work, especially given that I have limits as to the amount of research and information I can take in, basically a sort of a sole manager with a small amount of help. But when I find opportunities to do something I’d like to believe that I’ll do that – I’ll take those opportunities. And even react to them aggressively and put a lot of money into them. The key thing about the Crisil investment in India was that I understood the company culture and the credit rating culture. I think they already had at the time that I invested a relationship with Standard & Poor’s and so many aspects of the analysis were not hard for me to complete. This was not a local cardboard producer – it was an internationally recognized rating agency and one of the top two firms in the world effectively. Well I guess at the time, Crisil had a very minor relationship with Standard and Poor’s. It was one of two rating agencies in India that were important and Moody’s had hooked up with one, ICRA. And Standard & Poor’s hooked up with Crisil, and it was clear that they would become part of that duopolistic system in the world, so that made it easy. In other cases, it’s a lot harder. Yes, I would be happy to have far more exposure to the emerging markets.
12. As far as I can tell, you have never really chased assets under management (AuM). Had you decided to go all out, you could possibly be managing assets 5x or 10x of what you are currently managing. How do you select investors for your fund? Do you interview potential investors for a fit with your investment philosophy, before admitting them into your fund? Do you see your fund grow into a USD 1 billion fund, ever, or would you on purpose, choose to remain a smaller fund? How difficult would it be, to maintain your fund’s performance, if the AuM were to grow to say 3x or 5x its current size?
GS: So, last question Nitiin.
It might be a misnomer to say that I’ve never chased assets under management and I think that what I’ve tried to do is I’ve certainly been very happy to receive new investments and interested to receive new investments. But I’ve tried to do it in such a way that didn’t compromise who I am and the way I want to live my life and the way I want to be an investment manager.
So to take a very simple and trite example, that many of your readers/listeners who are professional investors professionally managing money for others will know very well – there’s the personality type who actually doesn’t want an investment manager – they want a psychotherapist or a punching bag and I found that when I reacted to their desire to meet me for lunch before investing, for example. I found myself exposed to that kind of desire to sort of take things out on their investment manager and once I’d given in and sort of run to the lunch for the investor perspective investor because they wanted to see me, then I would have to do it again and suddenly I found myself in a circumstance where I just wasn’t happy and so I realized that it would be a very good thing to develop a very clear process as to how I qualify investors and that doesn’t mean that I interview them. You know I don’t need to like them. I don’t need to sort of think that they’re nice personalities or any of those things, but I need them to know that they’re following a process and that they need to jump through certain hoops in order to end up being an investor in the Aquamarine Fund.
It’s really a process that’s extraordinarily well described in the book called “Different: Escaping the Competitive Herd” by Youngme Moon, who’s a professor at Harvard Business School. She gives many examples, but the best example is like your example in which if you can’t wake here and you want red couch with polka dots, that’s assembled in your home, you’re not going to get it so businesses say no. They say no, you can’t have red polka dots; also you have one of these three colors and the furniture comes flat packed.
In a certain way, Ikea is being very clear about what they’re trying to do and who they’re trying to serve and they’re actually being helpful. But if you’re looking for high customer service, if you’re looking for customization, if you’re looking for assembled furniture, you’re in the wrong place with Ikea. That doesn’t make it a bad company, for not chasing growth. It’s just that they know what they can and can’t do. And so I think a better way to characterize me is to say that I know what I can and can’t do, and I know what I want to and what I don’t want to do, and I don’t want to gather assets. But if people come to me having jumped through the relevant hoops in my case that I’m certainly happy to take those investments. Do I need the money? I absolutely do not need the money. But somehow to be in a business where there are more asset inflows and outflows is something that feels good to me – it’s something that is a nice feeling and provides professional growth for people inside the business.
You know what would my performance be if I was three to five times, two to three times the size? You know Nathan right now. I just called you Nathan by the way, which is also the name of the dean of Harvard Business School – he goes by the name ‘Nathan’, he writes it with a ‘th’. So, you have a wonderful namesake in the Dean of Harvard Business School. But I guess without the ‘h’ I should just say Nitiin. So I hope pronouncing your name in a way that you don’t mind.
If I were to stay with the kinds of larger cap companies I have right now, I don’t think that that would impact performance. And I haven’t done the analysis recently, but I think that more than fifty percent of the performance of Aquamarine Funds has actually come from the larger cap ideas which would imply that there wouldn’t be such a drag on performance if the fund was larger. But I think that your point is one that’s important and is well taken. At some point it’s how many stakes can a man eat and would I be happy if I was running three times the amount of money to what I have now and the management. Quite probably not. And that was certainly part of my desire to move to Zurich. And part of my desire to try and set up my life in a way that is different to most professional investors.
I would like to deliver great results to my investors. But I don’t want to chase assets under management. You’re absolutely right and I think that I’m open to new investors, but I just want to get them in the right way like the Ikea wants the right customers – they just don’t want the wrong customers of people showing up. Well, I’m belaboring the point – I’m certain that you got it.
So, that was question 12 and Nitiin, that’s forty-seven minutes of me droning on. I need to go to your web page http://bqinvesttraining.com/; I think that I appreciate you’re paying attention to me. I appreciate your tweets. I have tried to reduce the amount that I’m tweeting because I think it’s a bit like eating peanuts out of a bowl. I’m not sure how much real value-add there is if you do it too often. The thing on my mind right now is the incredible power of white papers which serve two things and this just a closing thought because on my mind.
What I had to get over was the idea that the white paper had to be finished and had to be the final word. I realize it doesn’t have to be the final word. It just has to show my thinking at a particular point in time and state clearly that this isn’t my final word on the topic. I found far lower quality high paid white papers than Brian Lawrence has written have been really valuable in terms of generating a community for me around a particular topic and people I can then we each out to and learn from, and obviously I share that learning through the white papers. Then people react to the white papers, they send me valuable materials and then I update the white papers and I send them back out again. So, that’s just something I’m excited by and fascinated by.
So, thank you again for inviting me to interview with you. Thank you again for your patience and I hope that these are valuable and interesting answers. And I hope to meet you at some point in Zurich or an Omaha or on a trip to India when it eventually comes together. Thank you. Bye.
Audio File of Part II of the Guy Spier Interview
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