The Education of a Value Investor by Guy Spier – A Review

The Education of a Value Investor by Guy SpierI have followed Guy Spier for many years, ever since he and Mohnish Pabrai plunked down $650,100 in an auction for lunch with Warren Buffett. So when the publisher palgrave macmillan wanted to send me a review copy of his book “The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment”, it was a quick yes.

For those who may be unfamiliar with Guy, he runs Aquamarine Fund that is modeled on the original Buffett partnership. The 17 year track record is impressive and the book tells the story of Guy’s transformation from a young investment banker on the Wall Street, his disillusionment with the practices at DH Blair (a boiler room operation similar to the one portrayed in the movie The Wolf of Wall Street), to a dyed in wool value investor.

My primary interest in reading this book was to learn about how other value investors think and behave. The story itself is interesting in as much as they contribute to the evolution of Guy’s philosophy, both in investing terms as well as his personal philosophy. To me, value investing is not just a technique for picking stocks – it is an attitude and mindset that you develop over the years and this ends up touching everything in your life. It is also building of a process that protects your investments from your own foibles. The key to doing this successfully is to understand your own self first, in a deep and non judgmental and objective way.

The Self Development Aspect of Value Investing

To become a value investor, you have to think like a value investor.

You may know the ins and outs of all the various techniques of valuing a business but unless you have conditioned your mind to think and act like a value investor, your reptilian brain will devolve into a fight-or-flight response during the periods of market stress. Being around other value investors and modeling your behavior based on them (the successful ones) helps mitigate some of this. There is a principle of Mastermind that has been around for centuries. Most successful business owners, investors, and leaders in any walk of life have a core group of friends and peers that they network with. Guy talks about his friendship with Mohnish Pabrai and their pursuit of the lunch with Buffett (they won the auction on the 2nd try) as a key part of building his core social circle. He even took on asking the question “What would Warren do?” when faced with critical decisions that he was unsure about.

This is probably the easy part. It takes a little gumption to find the right people and some initiative and time to build proper networks. Easy, yes, but very important, and one that most never do.

External versus Internal Scorecard

The bigger self development work is very well described in the quote from the book The Tiger by John Valliant towards the end of this article (hat tip to Ken for the reference).

Value investing by definition is a lonely practice. You take a position that majority of the market disagrees with. And they will likely continue to disagree with for a long time after you have taken this position. How do you react when you do not get any external validation for your stand? Do you cave in and go with the herd or do you stay consistent with your philosophy?

The easy thing to do is to cave in. After all, if everyone is buying IBM, and you buy IBM and you lose, no one is going to blame you for a bad choice.

It takes lot of discipline, for sure. But it also requires one to shift their benchmarks. For a value investor, it is not about investing in a way that gathers approval from others. It is about investing in a manner consistent with your own investment philosophy. There will be mistakes, and the process will then be tweaked, but you WILL have a process all your own that is independent of everyone else.

Now here is a point that is not mentioned much. No two value investors are alike. What I find to be a great value may not be perceived in the same way by another value investor that I respect. I will listen to the points and counter points and take them in consideration, but in the end I will make my own decisions (Example: contrary positions taken by Bill Ackman and Carl Icahn on Herbalife stock). Even in the cases we may agree on a given stock, we may be buying it for different reasons, we may have different appetite for risk, etc. and therefore our subsequent actions on this investment might be quite different.

So in addition to building your network, you also need to build yourself up for discipline, confidence, ability to ignore the noise, steadfastness, and develop your own internal scorecard. This is very hard to do for humans and as a result more often than not, a conscious design of your immediate environment is required.

Aside: Understanding one’s self calls for a great deal of introspection and reflection. It is not a coincidence that a great number of value investors have had some “wake up calls” before they went on to become successful. Buffett himself lost a good amount of capital on his first business venture, a Sinclair gas station that had to be shut down. Guy Spier details his disastrous career choice that almost destroyed his reputation and made him untouchable on the Wall Street. I had to walk away from my manufacturing business during the depths of the credit crunch in 2008/9. It is often during these times that you are forced to think deeply about what makes you tick and what doesn’t and how to fix the things that need to be fixed.

Spier’s Tools of Investing

These are actually rules that he developed to perfect his investment process. This is of great interest to me as over the years I have been adapting many of these as I suspect most other value investors have in some form or other. There are a few common ones such as Stop checking the stock price  and Don’t talk to management. I will not list them all here but a few that stood out for me were

If a Stock Tumbles after You Buy it, Don’t Sell it for Two Years

There is actually a great reason for this advice. When the stock tumbles, you are emotionally not in a position to make a rational decision right away. Waiting for some time is better than making a snap decision. So this advice protects you from yourself. Better yet, when you adopt this rule, before every new investment you will ask this question “Am I willing to hold on to this stock for two years even if it crashes 50% the day after I buy it?”. If the answer is no, do not buy the stock.

Don’t Talk About Your Investments

Once you start talking about your investments publicly, it becomes psychologically harder to change your mind later (people tend to act in a manner that is consistent with their earlier positions). I struggle with this occasionally as I make my investments public to my members and there have been times when I have a change of opinion later. In my case though, the well being of my members’ and my own portfolio is more important to me than an occasional loss of face so I do make the right decision. It helps to be shameless, but only to a certain extent – I do not speak about my investments in a public forum. People who give investment recommendations through public sites or through media do not have this luxury of being flexible.

Make a Checklist

As you experience more investments over time, you will make mistakes and learn to ask new questions. Write them down in a checklist and make sure you review it before every new investment. This checklist is not for things that you will do any way (example, check the P/E ratio, etc), but more about the intangibles that you want to check out to satisfy your gut. These could be things like, “have I checked the management history?”, or, “are there any pending lawsuits against the company”, or even, “is the CEO dealing with a divorce or family illness that is distracting from doing his/her job?”.

A large part of Spier’s evolution as a solid value investor resulted from his conscious decisions to re-design his lifestyle. These included avoiding temptations that actually hurt your investment process. For example, he stopped turning on his Bloomberg terminal. He also moved his office out of New York to Zurich, far away from the Wall Street. He decided not to be in the commercial center of the city to avoid the ritz and the tendency to overpay for things. He took up playing Chess and other games of strategy to learn to think a few steps forward. Many of these can be great tools to help develop a value investing mindset, although everyone has different needs.

The Book Review

I generally take my time reading and break it up over multiple days, but I did finish this book in a single stretch. It is well written and the personal stories makes the book very readable and quite different from other investing books. This book will not teach you about the principles of value investing, but it goes into details of developing the attitudes and mindset to be a successful value investor. The behavioral aspects of value investing are not always written about and in my opinion are much more important to success than merely learning the techniques.

In my opinion, this book belongs on every investor’s bookshelf.

[Buy on Amazon – generates a commission to VSG if you use this link. I do not normally write a book review unless I can recommend it, which is rare]

Comments

  1. anil nimmagadda says

    Hello Shailesh,

    Sorry for the late response .. was busy with some stuff. I finally got my copy of the book delivered and about to start off reading it. Shall let you know how it goes.

    Appreciate your clarification regarding “Don’t discuss investments ..”. It makes sense, like you said, to share it with the right group .. not with the general public.

    I am currently reading a book titled “The Intuitive Investor” by Jason Apollo Voss. I am in page 30 but, based on my intuition : ) it feels like a book with some valuable insights.

    ANIL

  2. anil nimmagadda says

    Shailesh,

    I ordered this book via the amazon link at the end of your article.

    As always, you bring insights into the area of value investing that are valuable and fresh.

    My digest of this article is:
    Value investing is not just a technique for stocks but an attitude and a mindset

    Knowing how to value a business does not necessarily make one a value investor !! ( Need to develop the philosophy and act on it). Like they
    say, “Knowing which path is right is wisdom. Taking it is integrity”

    I read the article by John Valian about contrarian thinking, and again, it points to originality of thought and the freedom and independence it
    provides. Just like the Greek general Themistocles, who, during the Persian invasion was fearful when other’s were celebrating victory at
    Olympus, and was encouraged and motivated when others were fearful after the defeat at Thermopylae, and led to a memorable win
    at salamis, independence of thought has been a valuable tool throughout history. Or like Mark Howards said, sometimes you should
    be willing to look foolish for a while ( when contrarian stance initially doesn’t pan out )

    No two value investors are alike

    Where I differ with some points in the article are:

    Guy Spier “If a stock stumbles … don’t sell for two years”:
    I would go a step further and ask “how thorough is your research and confidence in YOUR valuation of the stock”. If the answer is “very
    confident”, then, you should welcome the fall in price and load up on the stock even more.

    Guy Spier “Don’t talk about your investments”
    I disagree (again … no two value investors are same ). In the past two years, I utilized every opportunity to talk to similar minded investors
    about my investments (before becoming VSG member.. obviously, what I get from here is confidential) and let them punch holes in my
    theory or critic me. I have enjoyed the process because, as of now, I have not yet come across one occasion when I felt embarrassed.. on
    the other hand, it gave me so much more confidence . not only because of the high strike rate .. but also because of more visibility.. also,
    if one or two of the ten or twenty I discuss don’t perform well as investments, I am only going to be more sharp in my analysis next
    time around. I once even disagreed with my mentor about an investment and won.

    ANIL

    • says

      Hi Anil, Thank you. The Don’t talk about your investments point is a little more nuanced since Guy actually does recommend you have a group of peers or mastermind to talk about ideas. His recommendation is to discuss a stock and analysis without necessarily indicating that you are thinking of buying the stock (so it could be either long or short). At the same time, when others are discussing their own ideas, you should not ask either during the discussion or later if the person bought the stock or not. It is recognizing that ideas come and need to be aired but a level of objective detachment needs to be maintained. His emphasis is more on not making the investments public – such as at a cocktail party or on CNBC or writing about it in one of the industry rags.

      Few years ago, I published one of my recommendations in Seeking Alpha and it was a humbling experience. The stock took off after the article was published and tripled in the next 3 months, which was of course unwarranted. When I sold, I had to parry comments from SA readers about why and something to the lines of “you are a hypocrite for selling the stock”. Ever since then, I do not publish any of my ideas anywhere. Some of these sites get a feed of my blog writings and republish them but the actual recommendations are off limits.

      It is not necessarily ego. I just do not want my decisions to be influenced by a sense of commitment to millions of other investors who might have acted on it and who I do not even know.

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