The Education of a Value Investor
I just want to start this post with saying:
Thanks a lot Guy for a great book. I enjoyed it a lot and picked up a few things that I will do my best to clone, and try to make a part of my own thought process when it comes to business analysis and investing.
So, today I finished reading Guy Spier’s new book The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom and Enlightenment. I think the book is well worth a read for everyone who wants to get to know Guy better, and follow him on his investing journey from New York to Zurich.
In the book Guy tells his story about how he changed his way of life, becoming a value investor and managing partner of the Aquamarine Capital working out of Zurich, Switzerland. William Green, a friend and shareholder in Aquamarine helped Guy in writing the book.
I didn’t know a lot about Guy before I started reading, so I enjoyed the part about his background and his story about his life in general and in investing in particular.
I especially enjoyed chapter 10 Investing Tools: Building a Better Process, and chapter 11 An Investor’s Checklist: Survival Strategies from a Surgeon.
I have included some of the parts I enjoyed from the book in the following text below, so for those about to read the book, make sure whether you want to continue reading this post or not.
Investing Tools: Building a Better Process
Starting with chapter 10, in which Guy describes his attempt to clone Mohnish Pabrai’s analytical rigor into his own thought process when it comes to investing, and his “eight […] rules, routines, and habits that [he] subsequently put in place” in trying accomplish this.
There are probably a few out there who have not read the book yet, so I will only point out the eight different rules in short as laid out by Guy in chapter 10. This since I thought the rules makes sense, and would be good to have written down in a post. The eight rules are as follows.
1. Stop Checking the Stock Price
“The Rule: Check stock prices as infrequently as possible.”
2. If Someone Tries to Sell You Something, Don’t Buy It
“The Rule: If the seller has a self-interest in me buying, I ain’t buying.”
3. Don’t Talk to Management
“The Rule: Beware of CEOs and other top management, no matter how charismatic, persuasive, and amiable they seem.
Exceptions to the rule: Berkshire’s chairman and CEO, Warren E. Buffett, and a small but growing minority of CEOs (at companies like Fairfax Financial, Leucadia National Corporation, and Markel Insurance) who take seriously the idea of sharing what they would like to know if they were in their shareholders’ shoes.”
4. Gather Investment Research in the Right Order
“The Rule: Pay attention to the order in which you consume information. And don’t eat your dessert until you’ve finished your meat and vegetables.”
- Start with the least biased and most objective sources, i.e., company filings, including the annual report and the important management’s introductory letter, 10K, 10Q, and proxy statements.
- Less objective corporate documents: earnings announcements, press releases, and transcripts of conference calls. Also, books about the company or its founder might provide some helpful information.
- Minimize exposure to the Internet since it requires a lot of energy to read a web page, with all its links to other information. Guy reads the physical editions of things like the Wall Street Journal, the Financial Times, the Economist, Barron’s, Fortune, Bloomberg Businessweek, and Forbes, along with more abstruse publications like American Banker and the International Railway Journal.
- Avoid reading any press coverage until after you’ve studied the corporate filings.
- As for the equity research published by brokerage firms, Guy reads little of them, and never relies on them. Sometimes, when finished with all other research he pulls up these reports to see what Wall Street is saying about a company or industry. Guy emphasizes that he’s “careful to make this research the lasting thing I read, so I’ve already formed my own impression”.
5. Discuss your investment Ideas Only with People Who Have No Axe to Grind
“The Rule: Pool your knowledge with other investors, but stick with people who can keep their ego in check. If the other person happens to be Buffett, Munger, or Pabrai, so much better.”
6. Never Buy or Sell Stocks When the Market is Open
“The Rule: Keep the market at a safe distance. Don’t let it invade your office or your brain.”
7. If a Stock Tumbles after You Buy It, Don’t Sell It for Two Years
“The Rule: Before buying a stock, make sure you like it enough to hold on for at least two years, even if the price halves right after you buy it.”
8. Don’t Talk about Your Current Investments
“The Rule: Don’t say anything publicly about your investments that you may live to regret.”
An Investor’s Checklist: Survival Strategies from a Surgeon
Below are a few notes from the chapter and what to think about when building your own checklist.
“The goal in creating a checklist is to avoid obvious and predictable errors. Before I make the final decision to buy any stock, I turn to my checklist in a last-ditch effort to prevent my unreliable brain from overlooking any potential warning signs that I might have missed. The checklist is the final circuit breaker in my decision-making process.”
The process of coming up with and designing checklist items is done through a postmortem analysis. This analysis looks at past investments, his and Mohnish’s as well as other investors, and tries to explore where it went wrong, all with the purpose to “design checklist items that would help prevent us from repeating these mistakes.”
The value in the checklist lies in that it “is invaluable because it redirects and challenges the investor’s wandering attention in a systematic manner.” Guy tells that he sometimes uses his “checklist in the middle of the investing process to deepen my understanding of a company, but it’s most useful right at the end as a way of backstopping myself.”
Guy also emphasize that “my checklist should not be your checklist” since your own “checklist has to reflect your own unique experience, knowledge, and previous mistakes.”
The purpose of the checklist is not to be “a shopping list of the desirable attributes that we’re looking for in a business.” Guy states that he “prefer to use them in much the same way as 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 checklists are designed to help them avoid mistakes that have previously led to plane crashes.”
Guy explains four case studies and situations where he made costly investment errors that then led him to develop specific checklist items, this “to get a clearer sense of how you might analyze your mistakes and blind spots in order to construct a checklist of your own.”
Below I will just quote the different checklist items that Guy came up with from the postmortem analysis that he performed for each case.
Case Study One: The Man Who Lost His Cool
- Investment: EVCI Career Holdings Corp.
- “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 team previously done anything self-serving that appears dumb?”
Case Study Two: Tortuous Tale of Tupperware
- Investment: Tupperware
- “Checklist Items: Is this company providing a win-win for its entire ecosystem?”
Case Study Three: What Lies Beneath?
- Investment: CarMax
- “Checklist Items: 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?”
Case Study Four: How I Lost My Balance
- Investment: Smart Balance
- “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?”
Some additional reading
- Book review from InvestingByTheBooks: Spier, Guy – The Education of a Value Investor
- CSInvesting: The Education of a Value Investor: Part 1: The Good
- CSInvesting: The Education of a Value Investor: Part II, The “Bad”
- Jason Zweig: Giving Yourself an Investing Makeover
Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.