(Published: January 17, 2017 at 9.00 A.M. EST)
We are pleased to present our interview with Mariusz Skonieczny, investor and author based in Mishawaka, Indiana, United States. The interview is in podcast and transcript formats.
Just to give a quick introduction of Mariusz, he has authored as many as 8 books on investing so far, with 6 of them being written in the last 16-odd months! While all his books make great reading, three books stand out: “100 Ways to Find Investment Ideas”, “Due Diligence: How to Research a Stock” and “Scuttlebutt Investor: Guide to Scuttlebutt Investment Research”. He has been investing in the out-of-favor gold stocks for some time, and expects a bounce-back in gold prices and prices of gold companies’ stocks.
[Interviewer’s Note: If you like this interview, and if you would like to purchase any of the books mentioned here, please use the links provided herein. Your support is welcome. Separate links for these books on Amazon.com and Amazon.in are provided at the end of the interview transcript.]
In this interview, he shares key insights on his books and on investing. Mariusz beautifully blends his real estate due diligence experience, with his background research work, in carrying out due diligence and scuttlebutt on stocks. He has also taken a contrarian view on gold. He has been holding gold stocks since the last few years and is of the view that a turnaround in gold prices is likely.
Podcast of Interview with Mariusz Skonieczny
Transcript of Interview with Mariusz Skonieczny
Let us proceed with the questions.
1. Hi Mariusz, could you please share your professional background with us? What are the services your firm currently provides?
Mariusz: I graduated college in 2003 with a degree in finance, and right after I graduated initially I went to work, not in the investment industry, but in the commercial real estate industry, as a real estate appraiser and I was involved as a broker. During the time, I was investing money on my own. When the financial crisis hit, I left the commercial real estate industry and started Classic Value Investors because I just saw fantastic opportunities to make money and of course this happened very well really generating good returns right after that. However, over time, I realized that a lot of my clients just had huge problems with great volatility, especially to the downside. And that’s why at Classic Value Investors right now, I don’t necessarily cater to the investment public. I still have some existing clients, but I do not look for new clients at this moment. I just focus on writing books and investing my own money.
2. Alright. Are there any highlights of your training and evolution as an analyst and investor, that you would like to share? From whom did you draw the most useful and practical insights?
Mariusz: Well, to get started, I read the usual value investing books that everybody else reads like “The Intelligent Investor” and “Security Analysis”. I read and listened to a lot of interviews with Warren Buffett and all the other famous value investors. But after a while, after learning all that knowledge, I pretty much went on my all and at this point, I don’t really follow anybody. I just study my own companies, value them and kind of ignore what everybody else thinks.
3. Interesting. Coming to your books, Mariusz, in general, which of your books do you consider your best work till date? Could you please discuss in brief three of your books viz., “100 Ways to Find Investment Ideas”, “Due Diligence: How to Research a Stock” and “Scuttlebutt Investor: Guide to Scuttlebutt Investment Research”?
Mariusz: I wouldn’t say that one book is better than others. Because I like to think that when I write anything, I put my whole heart into it and I try to turn out a good product. My first book “Why Are We So Clueless about the Stock Market” book might be fantastic for a beginner, but for an intermediate investor, other books might be better, like “The Basics of Understanding Financial Statements”. It’s very popular – some of the universities actually are using it as a textbook. But the three books that you mentioned “100 Ways to Find Investment Ideas”, “Due Diligence: How to Research a Stock” and also “Scuttlebutt Investor”, I would say to those books are probably better for an intermediate or closer to an advanced investor. Because if we talk about “100 Ways to Find Investment Ideas”, yes, a beginner would benefit from it, but first they need to learn about value investing and then they can take that knowledge and look for investment ideas. And this book simply lists a hundred different places where you can go to find investment ideas, because a lot of times with investors it’s that they don’t know where to look for, they don’t know what to listen to.
Well, there’s plenty of ways to find it and “100 Ways to Find Investment Ideas” book is kind of like a reference. I’m not saying that you should follow them all – I don’t follow them all. Sometimes, when I cannot find investment ideas, I skim through it to remind myself of where to look. But you can find pretty decent choices for you to look for actionable investment ideas.
The “Due Diligence” book on the other hand, is a book for you if you already have a potential investment. Then how do you go about due diligence to make a decision of whether a particular investment belongs to your portfolio. And that’s another area that I found that investors have a potential investment idea and they might not have a systematic way of studying it. So, in this book I kind of gave them a roadmap and I divided the book into three separate sections – Quick Due Diligence, Medium Due Diligence and Full Due Diligence.
The idea of Quick Due Diligence is to spend a few minutes looking for just the obvious things so that you can eliminate and not waste a lot of time on ideas that you would never buy, because you eliminate them within the first ten minutes or so. And then those Investments that pass the criteria go into the Medium Due Diligence, where you go a little bit deeper. But not a lot, just a little bit deeper – maybe spend thirty minutes on it and eliminate those that don’t make the cut. And the investments that make the cut, all the way to the Full Due Diligence, where you go all out. You study the company, and I tell you the things that you should look for, what kind of documents to read, where to go. And this type of due diligence takes you a lot longer, maybe a week or something like that. So, that’s Due Diligence. That’s the second book.
And “Scuttlebutt Investor”. You see, personally when I when I invest in anything, I want to know what I own. I read something about scuttlebutt before, but it really kind of started with my commercial real estate investing experience. When we were on analyzing a particular property, let’s say an apartment building. It’s a business, right? People live there. They pay you rent, you have expenses. So, it’s a business. But in order to analyze a particular property, owners give you the financials. Well those financials could be completely fictitious.
So, you kind of have to put your detective hat on, and figure out which figures are real, which ones are not. And during the process, you really have to kind of do a scuttlebutt. You have to make a lot of phone calls and you have to go to certain websites like the assessors, check to see the real estate taxes are what they are, check to see that the utilities are in certain parameters, or if the owner is hiding certain expenses. So then when I got into stocks, I kind of followed the same procedure. Well, how do I know that this company is for real? Yes, I can read the publicly available 10-Ks and 10-Qs. But I always thought of those documents as kind of glorified brochures, where the management kind of tells you the best story they can possibly tell you and all the dirt you have to go and dig out on your own.
And you learn a lot of that kind of stuff by doing scuttlebutt which means calling the customers, current and former employees and anyone you can get your hands on and really learning what this company is all about. In this book “Scuttlebutt Investor”, I kind of give you a roadmap on how to do it, who to contact, where to find them, what kind of questions to ask and why, so that you are as knowledgeable as you can be, about your particular investments.
4. Sure, thanks for the great insights, Mariusz. In fact, institutional investors supposedly carry out thorough due diligence before investing. However, as far as individual investors are concerned, what are the challenges they could face, given that they may not be full time investors and have limited resources? How feasible would it be for them, to carry out “full due diligence” as per your book on the topic?
Mariusz: Well, everyone has an excuse, as to why they don’t have time to do due diligence. I like to look at it like this – if you don’t have the time or resources to do your own full due diligence, then you’ll probably not be very successful. You will have some years that are good and you will get lucky. But over a long period of time, you probably will not succeed. It’s kind of like if you want to be healthy and you want to lose weight. And at the same time, you don’t have the time to eat right and to exercise. It doesn’t matter what your excuse is – your body doesn’t care what excuse is. It’s not going to be in shape. You know what’s required. So, I see the same way about investing.
5. Could you please share some insights on your experiences in carrying out scuttlebutt, and the results it yielded for you? You need not share company names, unless you wish to. Just to share some thoughts, I have been an analyst myself for a long time, and of late, have used scuttlebutt as an individual investor, with some bit of success – but in consumption theme stocks. However, as far as the manufacturing or industrial sector is concerned, how feasible is it to carry out scuttlebutt?
Mariusz: Let me first address part of the question about some of the examples. I do scuttlebutt mainly to protect my downside as much as I can. And it doesn’t always work. I’ve had my failures, but one particular situation that comes to mind was this one company out of Florida. I am not going to mention a name. But it was a very interesting company, I read up about it on various websites. Some value investors were getting involved; it was really cheap and the stock declined by a lot. And I did some investigative work on the CEO and I ran his background check and what I found out was that this guy was like on his third wife. He had several houses. All kinds of cars. And he just seemed to me like a flamboyant rapper and I asked myself – Do I trust this kind of person to be running my company? And the answer is no and this company ended up being a total fraud. And people lost money and I simply didn’t invest in it and I didn’t follow it after I skipped on it, but then years later I mean it literally went bankrupt. I didn’t even have to do a full scuttlebutt. But I just kind of researched him and I ran some background check and I made a decision whether I wanted to invest in it based on the kind of human that he was and I didn’t like it. And therefore, I stayed away. So, as you can see that that saved me a big loss.
And then the second part of your question was about the manufacturing or industrial sector. Yeah, well you can do scuttlebutt about any company in any industry, because all companies have customers, suppliers, employees and management. So, if let’s say, I want to find customers. Well I want to put myself into the shoes of the kind of people that do business with that company and then research who might possibly be buying from that company. Or what kind of product they are manufacturing and if they are manufacturing, I don’t know, footballs or soccer balls. Then they need some kind of supplies, right? So, who supplies these kinds of supplies? I will try to find out who does, and does business with this company. And as far as figuring out who works there, now with Facebook and LinkedIn, it’s very easy to find out current employees or former employees. I like to talk to former employees more, because the current employees are very careful about what they tell you. Former employees can really tell you a lot of dirt on what’s going on. So, that’s really what I’m interested in.
But I mainly do scuttlebutt because I need conviction to hold on to something for the long term when Mr. Market gets idiotic, which is almost always the case with stocks that I own.
BQiT: Yes, in fact I recently read that one should avoid investing in hedge funds, whose fund managers drive the most fancied cars like a Ferrari or a Lamborghini or something like that. So, this is really gelling well with your insights.
Mariusz: There’s a lot of information that you can find out about people, especially now with social media. And you know I like frugal CEOs. I like CEOs that pay attention to expenses. If they’re driving a Ferrari or Porsche, and have three houses. I mean are they frugal? Are they the kind of people I want to be involved with? I don’t. Or if you have a CEO, you can even find out sometimes, what kind of license plate they have on their car. And if it says “Big Shot” on a license plate, do I want to be involved with someone like that? Probably not. Little things like these, tell you a lot about people.
6. You discussed Lumber Liquidators in your book on scuttlebutt investing. When the market believes in something, and your scuttlebutt / investigation leads to opposite conclusions, how do you ensure you are not wrong? Likewise, when the views of management and of the trade are opposite, how do you determine who’s right?
Mariusz: You’re never hundred percent right. And if you end up being wrong, then you lose money. That’s just the fact of life. However, if you do your homework, then you’re likely to be more right than wrong. And if the market has the opposite opinion, which a lot of times it does, you have to make sure that you have the staying power. And for me staying power means that I never ever buy a margin, and I never go short. There is this company that I am involved with right now. Now I don’t want to mention the name, but I have a friend who likes to buy on margin. And I told him hundreds of times – Don’t ever use margin to buy this particular company. Because this thing is so volatile, you will get shaken out of it, even though your long-term thesis is right.
7. Mariusz, in your book “100 Ways…”, you wrote “Form 13F reveals what various money managers hold in their portfolios. This is a great way to find investment ideas. Most professional money managers peek at each other’s 13F filings.” However, can coat-tail investing lead you to remarkable results, since what is already identified and invested in by someone else before you, could possibly be less attractive for you? Ditto for Schedule 13G declarations.
Mariusz: You know people like to look at other managers’ investments. They like to read about investments on the blogs and I used to be like that too. But over the years, what I learned is that when I read something on a blog or Value Investors Club or anything like that, I will a lot of times lose money on it, because too many people are already in it.
My best ideas are the ones that most money managers give up on. So, I will look at their old 13-Fs and look for stocks that declined 50 to 70 percent. I can almost guarantee you that these stocks are so hated and no one is talking about them, even though now they are even better thesis that they were before. So, I just don’t like to immediately invest in companies that were recently discovered by investment managers. They have friends that they talk to and other investment managers that they talk to. But for me it’s just too many people are in love with them. So, I wait until they get disappointed, worn out, or just totally exhausted. They don’t want to talk about it. They don’t want to hear about it. That’s when I want to be involved.
BQiT: Yeah sure, your way of utilizing 13-F is quite innovative and quite opposite to what most individual investors would do. And I think something like this can indeed help generate one alpha over a period of time.
Mariusz: Yes, I’ve been doing this for a while, and my best idea are always the ones that no one is talking about. That they were talking about before. That they were in love with – Value Investors Club or any of these websites or you know when they talk about it, I don’t want to hear it. When they stop talking about it, when there’s no comments and people ignore it, I’m ready to listen.
8. Coming to the next question. Can you discuss a couple of cases where your investment thesis in general worked as per your expectations, and those where your views were proven wrong or incorrect? What lessons could you share with investors, which originated from your successes and occasional failures?
Mariusz: Well, there were plenty of ideas that will worked out very well from the 2008 and 2009 buys, which is when I started my company. However, to be honest with you, I haven’t had much success over the last six years because I was involved in the gold mining space, and this space has been in a terrible bear market. I mean there are some companies that I invested in and even though they progressed, they made themselves more valuable, their stocks are still down 70 percent or so, because the price of gold is down. And one of them even went bankrupt.
So, again it’s kind of like going back to the previous question – the lesson that I learned is to never, ever listen and invest in an industry or company that people talk about, that’s favorable or popular, no matter how smart the people that are in it. So, I like to listen to smart people, but smart people most of the time are early. So, I want to look where smart people have gone and then when they get worn out, I want to go in. And that’s kind of what happened in the last six years – the thesis of gold and paper money and the economy is still the same. But when I entered this industry, too many people were of the same opinions as me. And as a result, I had to go through terrible pain over the last six or seven years.
9. What are the emerging trends in investment research and value investing? With technology, better access to data and information, growing awareness and refinement of investing skills across a significantly higher number of investors, do you think opportunities of generating alpha could get impacted going ahead?
Mariusz: To be honest, I don’t really care about the trends or how the technology impacts investing. In my opinion things will always be the same. Whether they will be using a computer or not, people will always want steady returns, which are impossible. That’s why Bernie Madoff was able to keep his scam going for so long, because he offered steady returns – 12 percent per year, no matter what. That’s what people want. So, because of that, when you don’t deliver, they will chase short term performance. And as a result, your investing skills, as an investment manager – they really don’t matter, because your clients’ impatience will be their downfall. So yes, consequently, this is an opportunity for us. But you have to have patience and willingness to study these companies.
10. Sure. What are your views on the quality, robustness and adequacy of 10-Q, 10-K data in SEC filings? Can these filings be misused by issuer companies, to actually present a better than warranted picture of the company’s operations and prospects? If yes, how do lay investors identify and avoid such traps in SEC filings?
Mariusz: Look, if the companies want to cheat, they will find a way to cheat. SEC will not prevent you from losing money. At this point, I know this one company whose CEO is a total criminal. He is also the CFO of this company. I know it for a fact that he bribes people. He literally makes up financial statements. He writes press releases as if they were fiction, as if he were writing a book – he says whatever he wants. He defrauds other companies. He even threatened a director of another company with a gun. I am not making this up. Do you think SEC is doing anything about it? Nothing. Not a single thing. I’ve been told by several people that the SEC has been contacted many times and no one at SEC cares. So, do your research, do your scuttlebutt. And don’t count on SEC to bail you out, when you don’t do your work.
11. Alright, very sound advice. Thanks for that. With the Dow Jones close to the all-time high of 20,000 and with rising interest rates, what is your outlook on US stocks? Do you think Emerging Markets could get back in favor, in focus in 2017?
Mariusz: Stock are expensive. Everyone is having a good time. I have zero interest in stocks. Emerging markets will eventually become popular, but I would focus on individual companies within that group.
12. Of late, a sizeable outflow of funds from actively managed funds to passively managed funds, is being observed. How do you view this phenomenon? Do you believe such shift could actually lead to better opportunities for value investors, if the number/size of actively managed funds actually reduces, going ahead?
Mariusz: Well, how can you beat the market if it just keeps going up, year after year? The thing is that, when you pick individual companies, it requires you to be patient. Because every company has its own story, right? So, individual stories have to play out, and it takes a lot of time. So, there is no way you can outperform stock market indices, which are simply in a giant bubble. So of course, there are opportunities for value investors – but the key is they have to have a lot of patience. Here’s the problem again – they might have the patience, but their clients don’t. That they watch the stock market going up every day. Everyone likes an investment thesis – I’m buying ABC because this is great. But now, are they willing to wait 5 or 10 years for the thesis to play out? At the beginning, they’ll tell you they will. But when they see the stock market and everyone else making money, then all of a sudden, they want to bail out and that’s the problem. That’s the problem with people not having enough patience. This is why I got out of this business of managing money for other people. I just manage for the current clients, but I don’t have the patience for this anymore. If I have the patience but my clients don’t, then the end result is we don’t have patience, right?
13. Right, sure. What are your views on HFT/Algo trading? Do you think computer programs or algorithms can beat the astounding human faculties of logic, thinking and creativity?
Mariusz: As humans, we will always keep coming up with things to make it better, and to beat the odds. HFT/Algo trading is all about short term, about delivering short term results. I don’t play in this space and therefore don’t care about it at all.
14. The sell-side business model appears to increasingly unsustainable. Apparently, a number of sell-side analysts are joining the buy-side. What are your views on the future of sell-side research? Could regulations re. unbundling of trading and research ensure the death of the sell-side as we know it? Can independent research boutiques fill in the gap that may get thus created?
Mariusz: Sell-side analysts research – is it really worth anything? Sell-side analysts work for investment banks, that sell securities of the companies that they represent. So, I wouldn’t even waste my time reading sell side analyst reports unless I’m just interested in reading the description of the company. But they will always write positive things about the companies because they want to get business. So, I’m not surprised. And whether the independent boutiques can fill that gap? I don’t know, because I used to write an investment newsletter, and I actually wrote it for five years. And I just stopped this December. It was very time consuming. So, I know what it’s like to be doing research. But what I learned over the years is that people don’t want to pay for research. Sell-side analysts are paid for it through a back door. How will the buy-side research make itself valuable, when there is so much free junk out there? I don’t know – that’s a good question. But to be honest with you, the kind of companies that I buy, they don’t even have coverage at all. I am like the only analyst or investor who knows the most. So even if I have access to research reports, I’ll read them. But again, for the particular companies I’m involved in, the research is useless. The kind of companies that I invest in have no coverage at all.
15. Apart from Equities, you appear to have done some work in precious metals (gold) too. What are your views on the future of gold prices, and on gold as an asset class?
Mariusz: I think I should be asking you this question, since you are from India.
BQiT: Well in India, people love gold. We are among the highest buyers of gold as a country, on the planet.
Mariusz: Why do people in India like gold?
BQiT: Because it’s a sentimental value thing. They buy gold to give it away to their daughters in their weddings. We are big time into wedding jewelry and we give away gold when our daughters get married or so on.
Mariusz: Do people in India buy gold, as they want to protect themselves against the depreciating paper money in India?
BQiT: Definitely people do buy gold as an investment, but these are the people who do not understand the equity market at all. So yes, the demand for gold in India is much higher than the demand for stocks. So, by that logic, the stock market in India could go up several times, as more and more people get educated on the same.
Mariusz: As far as United States is concerned, right now, gold is hated because stocks are in a bubble. When this reverses and we get another crisis, which we will at some point, gold will be loved again. This is when my gold stocks will come back to life. At this point, I am just accumulating more and more of the same gold stocks. Then, when things turn around, people will start loving them again, which they will, it always goes in cycles, that’s when I will be selling them. I would never tell investors how much gold they should have. But what I will tell them is to learn about gold and why it is important, how it can protect you against depreciating currencies. Then, investors can decide how much they want to own. But 60 or 50 years ago, an ounce of gold was $35. Now it’s over a thousand dollars. Not because gold became more valuable, but because paper money became less valuable. So, what I can tell you, is 10 or 20 years from now, I guarantee you the US dollar will buy you less than it buys you today. Therefore, gold will have a higher price in terms of US dollars.
BQiT: So, are you looking at any South African gold stocks at the moment?
Mariusz: No, I am pretty happy to have what I have. I hold what I have, I add to what I have. I don’t need to find any more gold stocks. I am happy with what I have.
16. Coming back to your books, Mariusz. You published six books in the last 15 months! That’s amazing and a lot of work. How did you manage to devote time to writing the books, and to your other professional activities? What would be the topic of your next book, and how soon do you intend to publish it?
Mariusz: And as you know investing is an interesting activity, because it requires a lot of patience but as Charlie Munger would say you have to sit on your ass and do nothing. Well that’s kind of what I’ve been doing for the past six years when it comes to investing. I have my thesis on these particular companies. And I’m waiting for the thesis to play out and the price of gold is just a distraction in the middle of it. Consequently, I had a lot of time on my hand and yes, I wrote 6 books in the last 15 months. But yes, it required 19 hours a day for 8 months. But that’s not the hardest part. Editing is the hardest part, that it’s so exhausting. So actually, I wrote 8 books over this time period, not six. I published six, I have two other ones – “How to Value a Company” and “MicroCap Investor”. But I am not publishing them, because I don’t want to deal with another editing session at this point.
BQiT: Alright, Mariusz, that brings us to the end of this wonderful interview. Thanks so much, for sharing those insights on scuttlebutt and due diligence, and your views on gold. I’m sure the audience of Beyond Quant InvestTraining will find great value in your interview. Thanks so much.
Mariusz: Thank you very much. Thank you very much for having me!
Links for Purchasing Books written by Mariusz Skonieczny
For International Readers (amazon.com)
For Indian Readers (amazon.in)
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