The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment written by Guy Spier is a great book. It is the first one I read about value investing. It is Half life advice, half investment advices and stories.
This book has deepened my understanding of the philosophy behind value investing. Guy Spier stands out as an excellent role model to learn from. The education of a value investor motivates me to explore value investing further, as I see reflections of my own aspirations in the lives of successful value investors.
Guy Spier’s Life Journey
- Guy Spier attended Oxford and Harvard before starting his career at a shady Wall Street firm that focused primarily on marketing questionable projects to raise funds.
- As a confident graduate, he struggled to find a new job after leaving the firm, which had a poor reputation.
- During this challenging time, he turned to self-help, drawing inspiration from Tony Robbins and Dale Carnegie, both of whom played key roles in his personal growth. Later, his Jewish faith also became significant in his life.
- It was during this period that he discovered value investing, as his humbling experiences led him to question his firmly held beliefs about economic theories.
- Around this time, his father entrusted him with ~$1 million to manage, and some friends also invested. The fund initially started with $15 million.
- In the first five years, he achieved strong returns and began to gain recognition. However, living in New York and surrounded by highly successful individuals, he started to feel envy.
- After extensive self-reflection and the impact of the 2008 financial crisis, he decided to relocate to Zurich to create a more favorable environment for both his life and career.
Life lessons
- Beware of Highly Competitive Environments: These can foster an “if I don’t do it, someone else will” mentality, leading to ethical compromises. Surrounding yourself with the right people and choosing the right environment is vital. Warren Buffett famously advised, “Hang out with people better than you, and you cannot help but improve.”
- The Value of Like-Minded Communities: Being part of a community of like-minded individuals enriches your perspective and enhances decision-making.
- Inner vs. Outer Scorecard: Valuing yourself based on your “inner scorecard” is essential to becoming a good value investor. This approach demands comfort with being unconventional. Buffett’s question illustrates this: “Would you prefer to be considered the best lover in the world and know privately that you’re the worst—or would you prefer to know privately that you’re the best lover in the world, but be considered the worst?”
- Modeling for Success: Spier’s key habit is asking, “What would Warren do?” Modeling successful people has had a profound impact on his decisions.
- The Power of Gratitude: Writing 15 thank-you notes each week to people who have positively impacted him, Spier formed lasting connections, including with Mohnish Pabrai.
- Richness in Life: Spier emphasizes the value of balancing work with family, hobbies, and leisure. This shift allowed him to adopt a more relaxed, playful approach to life, contrasting with his earlier, intense focus on his career.
Investment lessons
- Fee Structure: Berkshire Hathaway’s initial structure was unique: a 25% carry above a 6% hurdle with no fixed management fee, and an annual withdrawal policy. Influenced by New York norms, Spier chose a traditional 1% annual fee and a 20% carry above a 5% hurdle with a 90-day withdrawal period. However, this policy became problematic during the 2008 financial crisis, forcing him to sell stocks at inopportune times.
- 2008 Crisis Impact: Though Spier’s fund wasn’t exposed to major financial institutions or real estate, it still lost 46.7% across 15 holdings. Trusting in value investing principles, he sold only one stock.
- Practical vs. Theoretical Knowledge: Academic economic theories, while appealing, often don’t hold up in the unpredictable realities of the market. The truly valuable knowledge lies in understanding practical skills like accounting and interpreting financial statements.
- Bias Recognition: You can’t outthink your brain’s biases with the brain alone. Acknowledging these limitations and structuring your environment and habits to counteract them is key to sound investment decisions. Rules to Facilitate Rational Investment
- Stop Checking the Stock Price: If you plan to hold a stock for years, checking the price daily is a waste of energy and may tempt your primitive brain to take unnecessary action. Check stock prices as infrequently as possible.
- Avoid Buying from Sellers: If someone is trying to sell you something, don’t buy it. If an idea comes from someone with a vested interest in your decision, it’s best to avoid taking action. The source of the idea is likely biased.
- Don’t Talk to Management: While some fund managers advise speaking with company executives, Guy’s experience shows that executives are often skilled salespeople and not reliable sources of unbiased information.
- Conduct Research in the Right Order to reduce confirmation bias: Start with objective sources like annual reports, 10-Ks, 10-Qs, and proxy statements before moving to more subjective materials like press releases, books and conference call transcripts.
- Discuss Investment Ideas Only with Peers: Share your ideas only with peers who have no conflicting interests and are also on the buy side. Use three ground rules borrowed from YPO for these discussions: maintain strict confidentiality, avoid giving advice or passing judgment, and ensure there’s no business relationship that could create bias. Before the conversation, confirm the other person agrees to these rules. Also, choose people who can keep their egos in check.
- Never Buy or Sell Stocks When the Market Is Open: This practice helps you detach from market noise and price fluctuations, allowing for more rational decision-making.
- Don’t Sell a Stock for Two Years if It Declines: If a stock you bought decreases in value, don’t sell it for two years from the time you buy. This rule acts as a circuit breaker, giving you time to make a well-considered decision. Conduct enough research to be confident in holding a stock for at least two years.
- Avoid Talking About Your Current Investments: Once you discuss your investments, your ego becomes involved, making it harder to admit you might be wrong.
- Avoid distractions: Building a distraction free environnement, sometimes reading in paper format is the way to think more clearly.
The building of an investment checklist
While nothing can fully protect us from irrational decisions, an investment checklist is a powerful tool to stack the odds in your favor. It forces you to slow down and make the best possible decisions. By analyzing past mistakes and identifying what could have prevented them, you can continually refine and improve your checklist, making it increasingly comprehensive over time.
Finding Investment Opportunities
Study the portfolios of successful investors to identify potential investments or find stocks with similar qualities. This approach not only reveals opportunities but deepens your understanding of effective investment strategies.
Learning from Mistakes
Maintain a record of past mistakes to avoid repeating them. Spier and Mohnish Pabrai studied 13F filings to see when renowned investors sold stocks at a loss and reverse-engineered these situations to identify early warning signs.
Key Questions for Your Investment Checklist
- Management Integrity: Is there anyone in the management team going through personal difficulties (like a divorce) or engaging in self-serving behavior (such as excessive compensation)?
- Ecosystem Compatibility: Is this company a win-win for its entire ecosystem, including customers, providers, employees, etc.?
- Ecosystem Dependence: How dependent is the company on external factors like the credit market or the price of a commodity?
- Absolute Valuation: Is this stock cheap enough in absolute terms, considering the current state of the business, not just in comparison to today’s market?
By consistently applying and updating this checklist, you can enhance your investment process and reduce the likelihood of costly mistakes.
References
- Robert Cialdini’s Influence: A significant influence on Spier, along with Charlie Munger’s lecture on “24 Standard Causes of Human Misjudgment.”
- Value Investing Influences:
- Tweedy, Browne: A value firm known for its disciplined approach.
- Walter Schloss: Buffett’s friend and esteemed investor, linked with Tweedy, Browne.
- Ruane, Cunniff & Goldfarb (Sequoia Fund): Highly recommended by Buffett for their value approach.
- Lou Simpson: Renowned Berkshire Hathaway investor.
- Mohnish Pabrai: An influential investor and author in Spier’s career.
- Further Reading:
- Journey to the Ants, which Spier found insightful for economic and systemic lessons.
- The author provides a list of recommended readings across various fields at the end of the book.