Key learnings from the book: “The Education of a Value Investor” – Guy Spier
For people who don’t know who Guy Spier is – he is one of the well-known figures in the value investing world. He got the media attention in June 2007, when he along with Mohnish Pabrai successfully bid for a charity lunch with Warren Buffett for whopping price tag of $650,000. However, that’s not his main credentials. He has been running Aquamarine Capital fund since 1997 and has provided compounded annual returns of 10.8% since its inception i.e. $10,000 invested in 1997 would have grown to $56,900 as of July 2014 far better than S&P 500 returns.
His recently published book – The Education of Value Investor is more like his memoir and how he transformed from a young, brash, Gordon Gekko styled investment banker to a successful and sophisticated value investor. I believe the book to be a spiritual awakening for any value investor. I won’t delve much into how the book is as book reviews can be found on amazon.com. Below are my key learning from the book.
1. Building an ecosystem that suits you –
As Guy mentions in his book “I gradually discovered that the environment is much stronger than the intellect.” I found this point to be most crucial in making of a successful investor. Your office location, office design, people you are surrounded with, fund structure or even your calendar makes an ecosystem. Having an ecosystem that suits you is of utmost importance.
a.Office location: To be a good value investor, I personally agree to the point that your office should be far away from the noise of the market. It is very easy to get dragged into the twister when there is an information overload around you. It is difficult to be indifferent towards your investments when every other day a sell side analyst is changing its valuation about a business. The same analysts who were touting Facebook to be an excellent $100 billion investment at its IPO, were doubting its business model by the next quarter. Point here is not to criticize sell side analysts, but the whole incentive structure makes it difficult for an investor to judge how unbiased the analysis is. As Guy describes in the book –
“The goal isn’t to be smarter. It’s to construct an environment in which your brain isn’t subjected to quite such an extreme barrage of distractions and disturbing forces that can exacerbate my irrationality”.
You can take most of the successful investors, be it Seth Klarman, Mohnish Pabrai, Warren Buffett, Guy Spier, Allan Mecham, etc. work from nondescript office locations. Having said that, if you can manage to stay rational despite the barrage of opinions and information then location should not matter you. To reiterate goal is to create a system that suits you as an individual investor.
b.Office design: Again the design of your office should be such that there are minimum distractions. Having a separate reading room with no computers and internet, no mobile phones, and no Bloomberg terminal can be of extreme help to stay focused. One point that Guy referenced in his book that I found to be most fitting on me was while reading on internet, it can lead you to thousand different directions. Hence reading physical editions of newspapers, publications, etc. can reduce lot of unwanted distractions. This might sound to be very trivial but can matter a lot over the longer run.
c.Inner circle: Warren Buffett quotes “Hang out with people better than you, and you cannot help but improve.” Having a right inner circle can be a decisive factor and change the playing field in your favor.
The story of Guy Spier is a real life example of how right kind of inner circle can change a person. It transformed him into not only a better investor but a better person. While Guy was working at infamous D. H. Blair & Co., where he was surrounded by greedy immoral thugs, he became nothing but a shadow of Jordan Belfort (protagonist of the movie “The Wolf of Wall Street”). However, his life changed upside down when he got surrounded by likes of Mohnish Pabrai, Warren Buffett, John Mihaljevic, etc. The goal is to make conscious effort to develop your network with best possible people. As Guy mentions that this can be easily achieved by joining clubs such as Toastmasters, or any of the good investors or entrepreneur clubs.
d.Company / Fund structure: If you have read about Berkshire Hathaway, you must be aware that the only job that Warren Buffett does at Berkshire is of Capital Allocation. All the wholly owned subsidies of Berkshire are completely managed by their respective CEOs with minimal interference from Warren Buffett. The operational power at Berkshire is completely decentralized. Point here is Warren Buffett does this not because he wants to advocate empowerment of CEOs, but because this kind of company structure suits him and he can stay focused on what he is good at.
e.Calendar: In the book, Guy refers that Warren Buffett and Bill Gates have their calendars setup in totally opposite ways. For Buffett most part of his calendar is empty, while in case of Bill Gates his calendar is filled up with exact details (ex – Take a shower 6:30 AM – 6:40 AM). No matter how cliché it might sound, keeping your time free for the things that are most important and productive to you is of critical importance.
2.Building an Investors checklist – The book mentions about building a checklist to avoid obvious and predictable errors. The checklist is nothing but a to-do list before you make any kind of an investment. It can either be solely based on your personal investment mistakes or it can be based on yours as well as some of the great investors’ mistakes. It need not be highly mathematical, formula based list. It can be as simple as:
Avoid investing in IPOs on first day, no matter how attractive the business might look like.
On a personal note I made this mistake during Facebook’s (FB) IPO. If the business of FB was attractive or not was a questionable aspect, but the point is investment frenzy caused NASDAQ stock exchange to flounder and my market orders got filled at much higher price.
Avoid investing in countries where you feel that the accounting rules and financial disclosures can be compromised.
I stopped investing in Chinese firms when I took a hit on one of the Chinese company because of issues in its financial reports.
Avoid commodity businesses.
I realized this when I made a mistake by investing in Barrick Gold (ABX) in April 2013 when gold prices were on decline. If you are betting your money on a commodity business your success is dependent on a. commodity price b. how well the business is being run.
The idea for a checklist was originated by Atul Gawande, a surgeon at Birgham and Women’s hospital in Boston. In 2007, he published an article in “The New Yorker” entitled “The Checklist” based on his experience as a surgeon to explore problem that was profound and practical in the field of surgery. The concept from this article was later adopted by Mohnish Pabrai and implemented in the investment world.
Goal is drawing inferences from the past mistakes and avoiding them in future.
3.Having an inner scorecard – Importance of having an inner scorecard as against outer scorecard in life or in an investment world has been spoken too often by Warren Buffett. Inner scorecard is nothing but set of standards by which a person judges himself. On the other hand, outer scorecard is judging yourself by the judgments passed on by others.
During the IT bubble, Warren Buffett was one of the few investors who stayed away from the high tech companies. His philosophy was simple – he doesn’t invest in something that he can’t understand. People who were making extraordinary profits and were hoping for stock market to go further up during the bubble started claiming that Buffett has lost the investment touch and he is too old to understand high tech businesses. Had he based his investments on the outer scorecard rather than the inner scorecard, you know what the result could have been.
Goal is to have an inner scorecard and to stick to it through thick and thin.
4.Perils of an elite education – Guy mentions in the book that how his education from Oxford and Harvard was not good enough to stop him working at D. H. Blair. He confesses that the elite education left him dangerously exposed and vulnerable.
Part of the education is that a finely trained but rarefied academic mind can be damaging to your long-term success. You can easily end up with the mental equivalent of a Formula 1 Ferrari, when what you need in the real world is a hardy Jeep that can operate adequately in a variety of environments.
From my personal experience of learning from an elite MBA school, I realized that it’s very easy to get driven into the rat race. You stop following what you want, but start following what others are following. As Guy describes in the book –
I was driven in large part by Outer Scorecard – that need for public approval and recognition, which can so easily lead us in the wrong direction. This is a dangerous weakness for an investor, since the crowd is governed by irrational fear and greed rather than the calm analysis. I would argue that this kind of privileged academic environment is largely designed to measure people by an external scorecard: winning other people’s approval was what really counted.
Goal is to succeed in a value investing world you need to go your own way.
The book is Guy Spier’s memoir as I mentioned earlier. But there are definitely many things to learn from him and his book. This book will certainly help you build a sound mental framework, which is very much of a requirement to succeed in the investment world. Folks who are genuinely interested in value investing field should definitely get their hands on this book.
I have posted few excerpts from the book. If you, as a copyright holder, feel I have violated or infringed on your copyright please let me know and I will modify the post in question.
[box type=”shadow”] Akhil Parekh is a Research Associate for the Rotman Asset Management Association. He will be graduating from the MBA program at the Rotman School of Management in 2015. Akhil can be reached at Akhil.Parekh15@rotman.utoronto.ca [/box]