The education of a value investor summary

Book: The education of a value investor by Guy Spier

Half biography, half “how-to” manual, the first part of this book tells how Guy Spier, disgusted by Wall-Street values, became a value investor and the second part gives plenty of insights on how he’s doing it with his friend Mohnish Pabrai.

Main ideas:

Guy’s background in Wall-Street

• Guy Spier is the son of an entrepreneur successful in the crop protection trading business, Aquamarine Chemicals, which later became his fund’s name.
• Guy graduated from Oxford then got a Harvard MBA.
• He wanted to become a Wall Street “Gordon Gecko”.
• He, therefore, chose to work for D.H.Blair, a company selling high-risk startups stocks – like cold fusion reactors – to unsophisticated retail investors through a boiler room, like in The Wolf of Wall Street. Guy’s job was essentially to put his pristine academic credentials on shady deals.
• It took 18 months for him to realize this unpleasant truth because he didn’t want to look like someone who quits on a challenge.

Personal development and social environment

• Disgusted by his Wall Street experience, he found help in personal development with Tony Robbins, Dale Carnegie, and Napoleon Hill.
• Most importantly, he recognized the importance of his social environment. Who we choose to hang up with and admire will have a big impact on our life. He later got the confirmation that his social environment was much more powerful than his intellect when he set up his funds and his lawyers pressured him into the typical Wall Street fund structure instead of Warren Buffet original partnership structure (getting 25% of what’s above 6% instead of 20% of all interests plus 1% of assets under management, 1-year money withdrawal instead of 30 days..)
• Therefore, he spent time in value investing groups and in shareholder’s meetings with a lot of value investors (like Berkshire Hataway).
• He learned the importance of modeling role models, with questions like “What would Warren Buffet do if he were in my shoes?”. He also reverse-engineered his role model major investments, ordering these companies’ annual reports.

Starting his fund in New York

• After being a passionate Buffet-wannabee for about 2 years, and with none of the value investing firms looking to hire anyone, his father lent him $1M to start his fund in 1997 at 30 years old. His father later invested $15M total with his associates.
• His fund significantly outperformed the market for 5 years and reached $50M in assets under management.
• His typical stock would be “Duff & Phelps Credit Rating”, which rose 7-fold: companies that are cheap, with an expanding moat and awash in cash.
• This initial success fueled his ego and envy, and the New-York environment, where there is always someone with more than you, lead him into a dangerous spiral: fancy offices, expensive tools, high-level employees.
• New York however helps him build his “mastermind”, his group of peers called “the Posse”, meeting once a week, which helped him learn a lot about investing and help mitigate his blind spots in analysis.
• He navigated through the internet bubble because of his value investor social environment.

The power of “thank you” notes in networking

• Initially, as a way to promote his fund, he started sending 15 thank-you notes a week to anyone he was genuinely grateful to, like after a pleasant meeting or for giving a great speech. Sometimes with attached research reports, articles, or books, he thinks that might interest them.
• Quickly, this practice shifted his mind from a self-promoting practice to a pleasant altruist approach. He started to enjoy it in itself and began to think only about how he could help these people. Which in turn leads more of them to get interested in Guy’s fund.
• This practice led him to befriend Mohnish Pabrai after attending one of his meetings and being the only one to thank him.
• Mohnish and Guy share a personal quest for authenticity.
• Guy learned the power of cloning from Mohnish. Most businesses succeed because they do plenty of small things right, like thank-you notes, instead of being amazing at one big thing.

Lessons from his lunch with Warren Buffet

• Warren thinks much faster than Guy, a thing Guy underestimated initially. However, instead of frightening him, it gave Guys a purpose in life: being the best version of himself.
• Warren emphasizes the importance of isolating oneself from market predictions to focus on a company that will significantly grow over the long term.

The financial crisis of 2008

• According to Guy, most value investors think they can resist the fear of crisis, but they could be sucked into the void in ways they might not expect, even with zero financial leverage.
• For example, Guy’s broker, Bear Stearns, went on the brink of bankruptcy before being bought in extremis by Goldman Sachs.
• Also, Guy’s father bought $1M of now-defunct Lehman’s Brothers bonds, without telling Guy, from a seller calling him, based on the fact that Guy was invested in the rating agency (Moody) that gave a good rate to the bonds. But Guy didn’t buy Moody’s for the quality of their (lagging) analysis, but for its moat.
• Several of his most trusted employees and first investors panicked and ask to withdraw their money, which, in conjunction with the 90-day short withdrawn policy instead of 1 year like Warren, make a big mental charge to find positions to sell at the worst possible moment and less cash to invest in the best buying market ever. Not to mention the back-stab at an already very stressful moment.
• The New York environment made it worse emotionally.
• Guy looked into industries like gas pipelines, to stay as far as possible from the housing market. Pipelines are the cheapest way to transport the growing shale gas industry. He also looked at companies valued way below their cash or assets value (prime real estate, proven reserve of minerals), in Graham investing style “cigar butts”.
• Nonetheless, Guy’s fund lost 46.7% in 2008. But regained most value in the following years.
• This crisis triggered the need to leave New York for Zurich, like many other investors who left financial district areas for quieter ones (Warren Buffet, Nick Sleep, Allen Benello, Seth Klarman, etc..).

The renaissance after 2008

• He started with Mohnish a mastermind group of 8 people, the Latticework Club.
• He started with John Mihaljevic VALUEx, a TEDx clone for value investing.
• He started playing bridge, a game that requires thinking in bets and making probabilistic decisions.
• Speaking of the skills developed by the bridge, Mohnish bought BYD stock much earlier and at a much lower price than Guy, mostly because he knew Warren Buffet, Charlie Munger, Li Lu and David Sokol (then all close partners of Warren) did invest in BYD, and that Munger even praised BYD’s CEO publicly.

Guy’s investing process

• Guy and Mohnish never buy during market hours to limit the emotional impact of price fluctuation. They send an email to their broker outside market hours.
• They don’t check stocks prices, unless during their monthly/quarterly reports to their fund’s shareholders.
• They don’t sell in the first 2 years, even if the stock price collapse.
• They don’t talk publicly about their current investments to avoid feeling entitled to them.
• They don’t buy from anyone trying to sell them something, including management of the company they buy, to avoid being influenced in their decisions.
• They gather business information in the right order to avoid anchoring bias (unconsciously putting more weight on the first information we receive), which is :
  1. The least biased sources: annual reports, 10K, 10Q, and proxy statements. These documents are heavily regulated in the US. If the management introductory letter in the annual report is a PR piece, it’s a less good sign than if it’s a candid, honest letter on the situation, admitting past mistakes.
  2. Accountant’s audit letters. They can subtly signal problems.
  3. Earning announcements, press releases, transcripts of conference calls, books about the founders.
• To avoid being distracted, he reads the paper version (not websites) of Wall Street Journal, the Financial Times, the Economist, Barron’s, Fortune, Bloomberg Businessweek, Forbes, American Banker, and International Railway Journal.
• He discusses his investment ideas only with his trusted peers, like Nick Sleep, Chris Hohn, Bill Ackman, Steven Wallman, Allen Benello, Ken Shubin Stein, Dante Albertini, Jonathan Brandt, and Greg Alexander. To avoid being influenced or judged, he has 3 rules on discussing investments: confidentiality, no advice, and no business relationship. He also asks permission to buy, sell or talk about this investment to anyone.

Investment checklist

• Every investor should have a list of past mistakes to avoid. Mohnish and Guy studied all 13F filling of known value investors to spot any sell at loss and try to retro-engineer if they had a way to prevent it before it happens.
• Here are some :
  • Is there anyone in the management having a personally difficult time (divorce..)? Or doing anything self-serving (taking cray pay)?
  • Is this company a win-win for its ecosystem? (customers, providers, employees, etc..)
  • How this company is dependent on its ecosystem? (ex: depending on credits market or price of a commodity)
  • Is this stock cheap enough in absolute terms (not just in today’s market), for the current state of business (not the future)?

Since this summary can’t cover all the insights of this book, I highly recommend that you read it!