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He worked from 2000 through 2003 as fund manager in “Abax Bank” in Milan. Since 2003 he has been the CEO of Cattolica Partecipazioni S.P.A, an investment vehicle; he is the co-founder of the “Value Investing Seminar” in Italy and founder of More Love Charity Association.
Interview on Manual of Ideas
Inspired by “The Most Important Thing” by Howard Marks, my two cents to the value investing community or the most important things we have learned are as follows:
1. Experience:
As Howard Marks says: “Experience is what you get when you didn’t get what you wanted. Good times teach only bad lessons: that investing is easy, that you know its secrets and that you don’t need worry about the risk. The most valuable lessons are learned in tough times.” I have "fortunately" lived through some of the most disastrous financial crises which include the tech bubble, the September 11thincident, the accounting scandal of 2002, the world financial crisis of 2007/2008, and the 2011 debt crisis.
2. Investment Philosophy:
You need to have a philosophy. Value-driven investment philosophy is developed by merging fundamental principles with psychology and price.
3. Investment Process:
For success, it is essential to focus on the process and not the outcome. We like to review our investment process, and see our past mistakes. A good investment process leads to good decisions and minimizes the frequency and severity of poor decisions. The basic process adopted by us includes the following steps:
1. Idea Generation
2. Analysis
3. Checklist
4. Expected value-risk reward
5. Margin of safety
4. Where to look for Investment Ideas – Pessimism & Technical Factors:
I think most important thing is where to look for ideas. Buffett has said “be fearful when other people are greedy, and be greedy when others are fearful.” Therefore, it is smart to look for pessimism as it creates a good price and look for what is not interesting and what is out of favor. Moreover, look for motivated sellers which arise as a result of technical factors such as spin-offs, bankruptcy, restructuring, and mergers. All these “technical factors” create an imbalance between demand / supply and a spread between price and value.
5. The Checklist:
I found checklists very important. I was influenced by Mohnish Pabrai to buy a check-list, and the Dr. Atul Gawande’s book “The Checklist Manifesto” is a great book that he created in surgery. Dr. Atul tried to apply it to other areas such as ICU, Engineering, Military, police, legal, chef etc. and surprisingly, there is no field where the checklist has not worked.
I went through every investment mistake I’ve made and learned from others’ mistakes, it took me 1.5 years to write it down. I felt stupid writing the checklist, and every step we do also takes a while as we are not built by discipline but driven from our emotions and the emotion felt was of embarrassment of writing down every mistake made. The catalyst-driven and portfolio management checklist is still under construction, and even today I added to my list “capacity to suffer” from Tom Russo. However, you can look at value investing in much less time owing to the checklist.
Our current business investing checklist includes:
· Business (Does the company operate in a bad or good industry? What are the true economics and quality of the business? Is it a great, good or marginal business?)
· Risk (Business Risk; Leverage Risk; Valuation Risk, Timing Risk, Process Risk, Execution Risk and Value Trap.)
· Cheapness (Is it Cheap? Are your assumptions conservative? How do the economics compare to reported earning? Why is it cheap?)
· Management (How are the interests of the decision maker aligned with investors? What are mgmt incentives? How did the management allocate capital in the past? What will they do with money? Buffett’s management test.)
· Market Implied Expectation(Reverse DCF is useful to see if the growth rate in EPS and discount rate would justify the current price. Graham's Implied Growth Rate. Implied probability of the expected value at current price.)
The best investors who have influenced me are Ben Graham, Warren Buffett, Charlie Munger, and Joel Greenblatt.
Why we share our investment ideas and our mistakes as it is a useful exercise for us and helps clarify our own thinking. We often get valuable feedback which helps to improve our investment process. Last but not least, Graham and Buffett taught us to share.
Using the check list, you focus on the risk first. It shows the red flags before looking at the stock. You can’t know everything about investing, but using conservative assumptions with check list helps. Why is this cheap? It is not because you are smarter than other people. It could be other reasons.
From our checklist, Prysmian and Esprinet seem like good investments while Fiat seemed to be a bad business based on quantitative and qualitative basis as there was high leverage, cyclical business and low downside protection. However, the judgment of the worth of investment and the price which is considered cheap is solely dependent on the person as everything is very subjective.
Our four major business mistakes were:
Telecom Italia - (Value trap) - Business fundamentals in decline such as deteriorating free cash flow, structural issues, high competition, obsolescence and regulatory changes.
Banco Popolare – (Bank Business) - Domino effect and regulatory risk which could lead to massive dilution from capital increase. Leverage of 20:1 magnifies the effect of managerial strength and weakness.
Leverage on leverage – Overconfidence - When you borrow money and you buy a leveraged company you are leveraged x2
Chinese Scam - (Fraud) - It looked like a great company that was super cheap. If something is too good to be true be careful. Compare local Chinese filings to SEC.
Disclosure: None
http://www.valuewalk.com/
About the author:
I am VP of Business Development for Sum Zero (http://sumzero.com), the largest community of buy-side analysts; consisting of over 5,900 hf and mf analysts, and over 3,600 extensive investment write-ups. I have prior experience in a value based pe firm focused on PIPE transactions in micro-caps, and at a value based research firm, which focused on smid caps. In my personal portfolio I have outperformed the market by a cumulative ~48% since 3/2008 (inception date). I can be contacted at jacob(at)sumzero.com for sumzero related inquires. My website is http://www.valuewalk.com/ Visit Jacob Wolinsky's Website
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