The Education of a Value Investor by Guy Spier

This is a very helpful book for investors. It's different than other investing books like Peter Lynch's Beating the Street and Phil Fisher's Common Stocks and Uncommon Profits because it gives much more of a mental framework on how to navigate the markets psychologically as opposed to the other 2 books which are mostly about just analyzing companies. In this book, Guy discusses some really important ideas that apply to investing like the stock market being much more of a complex adaptive system like an ant colony than a math equation. Guy also gives a lot of personal examples from his experience managing money which are extremely helpful. I give Guy a very big applause for being so open. It's not easy to share the amount of personal experiences that Guy shares in his book and those personal experiences are paramount in getting a much better idea of what it's like to manage money and invest. 

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We like to think that we change our environment, but the truth is that it changes us.

Pg 21 - Guy Spier asks himself why he went to DH Blair


I was driven in large part by what Warren Buffett calls "the 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 by calm analysis.... The real goal, perhaps, is not acceptance by others but acceptance of oneself.

Our consciousness changes our reality, and I began to see that the positive statements [Tony] Robbins got us to repeat were a powerful tool in reconfiguring my consciousness.  Since then, I’ve often found that we have to imagine our future before it happens.

A 20 ft fire walk by a self-help guy serves as a metaphor for helping Guy break through his limitations and build a better reality.  "Life can change in a heartbeat"  a goal that seems impossible in one instant can become entirely possible in the next if only you are willing to devote every ounce of your mind, body, and soul to reach it.

[Tony] Robbins hammered into my head the idea that, if you want to get somewhere, anywhere, and you’re stuck, just do it!  Just make a move.  Any move!  

Carley Cunniff at Ruane Cuniff shows Guy around the office and introduced him to her colleagues even though there was no position for him to work there.  Guy talks about the genuine care she showed toward him and how touched he was.  She taught guy a valuable lesson: "It’s so important to show kindness and be helpful to people early in their careers, even when they have done nothing to deserve it." 

Guy Spier buys a share worth 120 in the Sequia fund on eBay for 500.  He wasn’t in it for the profit but choosing the right people in his life who embody the values he admires. 

What I’m about to tell you may be the single most important secret I’ve discovered in all my decades of studying and stumbling.  If you truly apply this lesson, I’m certain that you will have a much better life, even if you ignore everything else I write.  "I began to myself one simple question, what would Warren Buffett do if he were here in my shoes?"  "I actively imagined that I was Buffett."

Guy Spier gets a million dollars from his father to invest just because his father knew that Guy was very interested in managing money. 

Guy Spier says him and the founder of Jet Blue have ADD.

The problem in a place like New York or London is that there are always so many people who are doing better than you.  My office didn’t have gleaming floor to ceiling windows to panoramic views of the Manhattan skyline.  I couldn’t match the elegance of Chris Hohn’s offices in Mayfair, London’s hedge fund epic center.  My beautiful home on one of the upper west sides loveliest streets lacked Bill Ackman’s leafy views of central park.

I got sucked into the NY vortex in other equally ridiculous ways.  I rented a plush office in Carnegie hall tower and in one fell swoop drove up my annual rental expense from $60k to $250k.  I rented a Bloomberg terminal - the informational equivalent of smoking crack cocaine - for about $20k a year.  I also hired a chief operating officer, an analyst, and a high-powered lawyer.  It turns out that envy and pride are expensive flaws.

There are plenty of things I regret about that period in New York.  But I made one decision that would prove hugely beneficial: I began to surround myself with a mastermind group of investors who would become lifelong friends and trusted sounding boards. It’s difficult it not impossible to become successful on your own.

When you have an agenda, people smell it, and this tends to put them on the defensive.

Indeed, this is often the way progress works: we copy the best ideas and make them our own.

After all, if you’re going to meet someone better than you, you had better work on yourself first.

It seemed unreal.  I was only just beginning to align myself with the universe, and I hadn’t even done that much that was right.  But when you begin to change yourself internally, the world around you responds.  I hope this idea resonates because its important - more important, perhaps, than the fact that I had lunch with Warren Buffett.  As I hope you can see from my experience, when your consciousness or mental attitude shifts, remarkable things begin to happen.  That shift is the ultimate business tool and life tool.

There was an extra seat at Guy and Pabrai’s lunch with warren and guy was offered $100,000 for it.  He brought the offer to Pabrai and he was adamant because he said this was a family event and a way of thanking Warren.  There was no hidden agenda.  Auctioning off the seat or allowing non family members to come with us would have quickly destroyed that spirit.  Pabrai is so smart for realizing this because I would have attempted to auction off the seat. 

Before the lunch, Buffett had obviously gone to the trouble of reading up on us.

Indeed, when Buffett spoke to Fox News about our lunch, he specifically mentioned Monish’s charity, remarking "he thinks as well about philanthropy as he does about investments...This guy has thought a lot about what he’s going to do with the money he makes over time.  He’s going to turn it to the benefit of really, I think, thousands of people...I admire him enormously.

Buffett believes that Newton is probably the smartest human in history.  That’s why Buffett would want to have lunch with him.  Munger agrees Newton is probably the smartest but he would rather have lunch with Ben Franklin because he thinks Franklin is wiser. 

At one-point Warren also spoke about a trip he had taken to China with Bill Gates.  Cruising up the Yangtze river, they had talked about a man whose job was to "drag the baits in" when they reached the dock.  Warren recalled telling Gates that, no matter how smart that guy was, he would never get a chance to do anything more with his life.  He said that in his own life it would have been a major disadvantage to be born anywhere but the United States since he might not have read Ben Graham’s Intelligent Investor which was only available in English.

"Charlie and I always knew we would become very wealthy," he told us but we weren’t in a hurry."  After all, he said "if you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy - if you’re patient."

Warren’s assistant once told Mohnish and me that Warren usually keeps his cell phone switched off and doesn’t even have an email address.  The fact that he has the right filters clearly helps him to guard against letting in the wrong type of information.

As Buffett had taught me, the path to success is through authenticity.

Value investors pride themselves on being able to buy when the market is imploding.  We like to think that we possess the calmness, courage, and strength - not to mention the intellectual clarity and understanding - to act rationally when almost everyone else is panicking.  What really happens when the market crashes and there's blood in the streets? I would find this out first hand in 2008 to 2009 when the financial world tumbled into the void dragging me and my fund with it.  As Warren Buffett said if you weren't scared you weren't paying attention. God knows I was scared.

Guy knew to stay away from Lehman because of a fabulous presentation Einhorn did at the Value Investing Congress where he picked apart the bank’s financial statements to show how vulnerable it was.  Guy’s father was invested in it though.

Never buy from Wall St. is advise from Guy Spier..at least when they call you.

Spier hired an analyst to help him with equity research and he was a very smart guy who made some good investments for Spier. I was stunned. Are you out of your mind, Guy asked unable to conceal [his] disgust.  Here was a guy who had proclaimed to be a value investor in whom I was paying to be rational. He was supposed to be a likeminded soul helping me to seize these incredible 2 opportunities that the market was gifting us.  Yet his emotions were so out of control that even he was getting swept up in the panic. [My note – Guy’s reaction was in response to the analyst saying that he went into a very large cash position during the 08 financial panic.]

It also helped that I had prepared myself for precisely this sort of turmoil.  One of the key financial decisions I had made as an adult was that I would never live beyond my means or fall into debt.   the most I have ever owed is a few thousand dollars on my credit cards which I have always repaid promptly. I have never leased a car or take it out of mortgage to buy a house.  In 2008 I was renting an apartment and had enough cash to set aside to ride out the storm.

I don’t invest borrowed money because this added stress would make it impossible for me to remain calm and clearheaded.

According to Buffett, temperament is more important than IQ.  

During the crisis, Spier read excerpts from Marcus Aurelius' meditations.  "He wrote of the need to welcome adversity with gratitude as an opportunity to prove one’s courage, fortitude, resilience.”  I found this particularly helpful at a time when I couldn’t allow myself to become fearful.

The key idea that I learned is to think of the economy as a complex adaptive system.  Economists hate this notion because we can’t model a complex adaptive system or use the type of math we’ve been trained to deploy.  We also tend to be drawn to attractive, harmonious, hard to learn ideas such as the general equilibrium theory.  This theory provides a wonderful account of how the world ought to work, and it can be a useful guide for policy makers.  But it distorts our perception of reality.

A book titled Journey to the Ants helps guy learn more about the economy than university because a colony of ants is a complex adaptive system like the economy is.  Guy sent a copy of this book to Munger who replies that he always intended to read it.  Guy starts to spend time reading biology and writes, "it’s helpful to think of the economy as an evolving and infinitely complex biological ecosystem.  Companies, like ant species, must adopt strategies that enable them to thrive or they will be at risk of extinction."

Anyone who’s smart enough to make it through business school can figure out how to dissect 10ks, 10qs, and other financial documents.  The real challenge in my view is that the brain itself - which got us to where we are today - is the weakest link.  It’s like a little boat, adrift in a sea of irrationality and subject to unexpected storms.  And its incompletely understood by even the most brilliant neuroscientists, let alone by investors.

As I read about the brain’s shortcomings, I would not knowingly, reassuring myself that I wouldn’t trip up now that I had a better understanding of where these mental tripwires lay. But I gradually learned that intellectual knowledge and self-awareness are simply not enough.  The difficulty is that we can’t use the brain to override the brain.  So, we remain vulnerable to these mental shortcomings even when we know about them.

Manhattan is extremistan because of the large disparities in wealth.  The disparity between our own wealth and our neighbor's wealth can play a significant role in our happiness.

Guy is asked about him living in  Zurich, but isn’t it boring there?  Boring is good says Guy.  As an investor, that’s exactly what I want.  Because distraction is a real problem.  

We all know that it’s important to be physically healthy, to have a satisfying personal life, and to maintain some kind of emotional equilibrium.  But this holistic perspective is not just an airy fairy, age dream: the truth is that it’s hard to invest well if your non-investing life is out of whack, in chaos, or stunted.

Guy starting to play bridge has helped him recognize that its simply not possible to have a complete understanding of anything.  We’re never truly going to get to the bottom of what’s going on inside a company, so we have to make probabilistic inferences.

When you see a good investment, look for a better one.  as Munger has pointed out, there’s a common tendency to like a particular idea - whether it’s a chess move or an investment - because it was the first one that popped into our heads.  But is it really superior?  Chess highlights the need to keep searching for a better move even after the brain has latched onto that first idea.  Playing chess also strengthens this particular mental muscle.

Mark Pincus looks at life as a game.  He says, "it’s not about how much money you make.  It’s about changing the world."  

The human brain is said to run on about 12 watts - in other words, only a fifth of the power that’s needed by a 60-watt light bulb.  That’s not much at all given the power consumption of some of the computers that exist today.  Yet we expect this relatively puny hardware to make immensely complex calculations about the investing world, and we even have the audacity to hope that we might get these calculations right.  

Pabrai decided that he will never put in a buy or sell order for a stock while the market is open.

Rule #1 - check stock prices as infrequently as possible.

Rule #2 - if someone tries to sell you something, don’t buy it.

Spier writes, "over a lifetime I have no doubt that will benefit much more by detaching myself from people with a self interest in getting me to buy stuff.  This is a simple application of adverse selection.  As Charlie Munger has joked, "all I want to know is where I’m going to die so I’ll never go there."  For me, if an investment is being sold, that’s a place where I certainly want to avoid going.

And if I want to assess the quality of management, I would rather do it in a detached and impersonal way by studying the annual reports and other public data, along with news stories.  It’s better to observe them indirectly like this instead of venturing into their distortion field by meeting them one on one.  

Rule #3 - beware of CEOs and other top management, no matter how charismatic, persuasive, and amiable they may seem.

We know from Munger’s speech on the causes of human misjudgment that the first idea to enter the brain tends to be the one that sticks.  As he explained, "The human mind is a lot like the human egg, and the human egg has a shut off device.  When one sperm gets in, it shuts down so the next one can’t get in.  The human mind has a big tendency of the same sort.  If that’s true, says guy, I need to be extremely careful about the order in which I gather research and explore investment ideas.
 

After working my way through the corporate filings (sec, 10k or 10q), I typically turn to less objective corporate documents - things like earnings announcements, press releases, and transcripts of conference calls.  There might also be helpful information to glean from a book about the company or its founder.

Rule #4 - gather investment research in the right order.  (Pay attention to the order in which you consume information)

Rule #5 - pool your knowledge with other investors, but stick with people who can keep their ego in check.

Rule #6. Never buy or sell stocks when the market is open.

Rule #7 - if a stock tumbles after you buy it, don’t sell it for 2 years.  This rule acts as a circuit breaker.  Since Guy and Pabrai  follow this rule, it makes them think twice as hard and do twice as much research before they buy.  "In fact, before buying a stock, I consciously assume that the price will immediately fall by 50% and I ask myself if I will be able to live through it.  I then buy only the amount that I could handle emotionally if this were to happen.

Don’t talk about your current investments.  Over the years, I began to realize that it was a bad idea to speak publicly about stocks that I own.  The issue isn’t that other investors will steal my ideas.  The real problem is that it messes with my head.  Once we’ve made a public statement, its psychologically difficult to back away from what we’ve said - even if we have come to regret that opinion.  The rule: don’t say anything publicly about your investments that you nay live to regret.

Rules summed up:  1) stop checking the stock price.  2)  if someone tries to sell you something, don’t buy it.  3)  don’t talk to management. 4)  gather investment research in the right order.  5) discuss your investment ideas only with people who have no ax to grind.  6)  never buy or sell stocks when the market is open.  7) if a stock tumbles after you buy it, don’t sell it for 2 years.  8) don’t talk about your current investments.

Buffett with characteristic candor confessed in his 2007 letter to shareholders, " To date, Dexter Shoe Company is the worst deal I’ve ever made.  But I’ll make more mistakes in the future - you can bet on that.  A line from bobby bares country so g explains what too often happens with acquisitions, "I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few." 

Some of Mahnish Pabrai’s are him underestimating the riskiness of leveraged companies.  Spier believes part of the problem might lie in what I described as "cocaine brain": the intoxicating prospect of making money can arouse the same reward circuits in the brain that are stimulated by drugs, making the rational mind ignore supposedly extraneous details that are actually very relevant.  

Spier has a hard time saying no to people he likes.  This makes him vulnerable on certain situations as these emotional needs could short circuit his rational judgments.  To help counter this, his checklist includes questions such as "Is there some way in which this investment idea is being sold to me? Does someone in this situation have an axe to grind?  Who benefits if I make this investment?  Does this investment appeal to any personal biases of mine that should be reexamined?"

"My other caveat is that a checklist is emphatically not a shopping list of the desirable attributes that were looking for in a business.  I’ve seen investment checklists that ask questions like: "Is this company cheap?" Or "does this company have a high return on equity?" In my opinion, this is a misguided way to use checklists.  I prefer to use them in much the same way that pilots use them.  They don’t ask does this plane fly fast?  Or am I flying to a sunny destination? Rather, the items on their checklist are designed to help them avoid mistakes that have previously led to plane crashes.  In investing too, the real purpose of a checklist is to serve as a survival tool, based on the haunting remembrance of things past.

Life is messy and we all go through trying times.  But it’s important to recognize that senior management - like the rest of us - can be derailed by this kind of personal turmoil.  After all, when a person’s back is up against the wall, it increases the likelihood that their judgement will suffer.  So I added a couple of items to my checklist as a formal reminder of some hard-earned lessons, courtesy of this education company. 

Checklist items: are any of the key members of the company’s management team going through a difficult personal experience that might radically affect their ability to act for the benefit of their shareholders?  Also, has this management previously done anything self-serving that appears dumb?

After Spier's investment in Tupperware doesn’t pan out, he writes that he forgot to ask himself the most obvious question, "Does this product offer good value for money?"  After the positive experience of hosting a Tupperware party, I had become too committed psychologically to the idea of owning the stock, and I lacked the detachment to see the pitfalls.  This misadventure taught him one valuable lesson.  I want to invest only in companies that are a win, win for their entire ecosystem.

Personally, I don’t want to invest in companies that make society worse even if their products are legal.  Call me irrational, but I think it’s bad karma.  In any case, I much prefer to invest in businesses that benefit society.  Checklist item: is this company providing a win-win for its entire ecosystem.

How could this business be affected by changes in other parts of the value chain that lie beyond the company’s control?  For example, are its revenues perilously dependent on the credit markets or the price of a particular commodity?  Guy invests in Car Max which he believes to be the Walmart or Costco of the auto dealership industry.  He underestimates how much the auto dealerships are dependent on access to credit markets in the U.S. because so many consumers lease their cars as opposed to buying them.

Spier overpays for Smart Balance because he was thinking of the company in relative terms instead of absolute terms. 

Smart balance was a fine brand, but it was no Nestle.  In other words, all brands aren’t created equally.

Spier buys Discover Financial which is a credit card company spun off of Morgan Stanley.  It should have been put in the too hard to value pile but Spier likes the challenge of valuing it even though it’s too hard and he thinks the other guys aren’t buying it because they’re not smart enough.  He buys at around 26 a share and then the company goes to 5 during the credit crisis.  He sells it at around 24 in Nov 2011.  [My note - what’s important to note here is how he hangs on to his company despite the most pessimistic times.  I just looked this company up though and its now trading for $62 a share showing how difficult it really is to be an investor.  In my opinion, Spier might have done some anchoring with his cost basis here.  He was content with taking a very minor loss on this stock after the brutal carnage it went through in 2008-2009.]

Checklist items: is this stock cheap enough (not just in relative terms)? Am I sure that I’m paying for the business as it is today - not for an excessively rosy expectation of where it might be in the future?  Does this investment satisfy me psychologically by meeting some unmet personal need?  For example, am I keen to buy it because it makes me feel smart?

I’m not sure that I fully grasped the overwhelming importance of our peer group until I came across a fascinating book and a subsequent TED talk by Nicholas Christakis.  He and his colleagues at Harvard studied obesity in human networks, and this research led them to an important discovery: if you have obese friends, you’re more likely to be obese.  Simmarly if you have fit and healthy friends, you’re more likely to be fit and healthy.  In other words, our close social connections count not only in the obvious ways, but also in subtle ways that we barely understand.  

Pabrai sends an email to Guy about a stock that he thinks could go up 4x.  "But at a deeper level, that simple email is a gift of true friendship - an act of sharing, trust, generosity, and affection.  This act is also built on an understanding of the unsurpassed power of friendship - a recognition that, when we join together with good intentions, we are much more than the sum of our parts.  As Mohnish often says, quoting an old adage that Ronald Reagan loved, "there’s no limit to what you can do if you don’t mind who gets the credit."

After Buffett visited his wife Susan in the hospital, he told the class of Georgia Tech, "When you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually love you.  I know people who have a lot of money and they get testimonial dinners and they get hospital wings named after them.  But the truth is that nobody in the world loves them.  If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.  That’s the ultimate test of how you have lived your life.  The trouble with love is that you can’t buy it.  You can buy sex.  You can buy testimonial dinners.  You can buy pamphlets that say how wonderful you are.  But the only way to get love is to be lovable.  It’s very irritating if you have a lot of money.  You would like to think you could write a check: I’ll buy a million dollars’ worth of love.  But it doesn’t work that way.  The more you give love away, the more you get.  Spier says of all the lessons Warren has taught him, this is the most important.

© 2018 Mike Gorlon                                                                                                                                                                                                                                         Amazon Affiliate