One of the dessert talks at the end of the first day was by Luis Ahumada, who decided that to become a better value investor he’d benefit from studying journalism, so he enrolled in the graduate journalism program at Columbia. Luis distilled the following similarities between journalists and value investors: they are naturally curious, want to tell a story, are good at developing sources (as Luis put it, if your mother tells you she loves you, get a second source), love complexity, and are good at gathering and distilling information.
Luis stressed the importance of understanding the motivations of stakeholders, something that is valuable both in journalism and investing. The very next day, Luis and I were having beers during lunch at a ranch; and we were discussing Gamestop, a retailer that sells used video games. This was a continuation of a conversation Luis and I have had over a year or two. This time, I used Luis’ “stakeholders” approach to analyze the video-gaming industry. The most important stakeholders in the industry are the video-game makers – the likes of Electronic Arts and ActiVision. Interestingly, though they’ll never admit it in public, they don’t want Gamestop to exist in the future. It is in their best interest to sell games directly to consumers through digital downloads. That way they can bypass Gamestop completely – much higher margins and no more costly inventory and physical media. In addition, with Gamestop out of the picture, the used-game market, which directly competes with new games and steals their sales, will decline dramatically.
While Luis was talking I was thinking about another similarity between a good investor and a good journalist: doing your own original, in-depth research and acting on it, even if it disagrees with the mainstream views. A few years ago I met Carl Bernstein, the journalist who, together with Bob Woodward, uncovered the Watergate conspiracy and caused President Nixon his presidency. I was so excited that I’d met him that I made my kids watch All The Presidents Men, the movie about Watergate. My kids were only four and nine, but they sat through the whole thing.
Anyway, the line from the movie that stuck with me was when Ben Bradlee, the editor of the Washington Post, asks Woodward and Bernstein (I am paraphrasing), “There are 1,600 newspapers in the country, why are we the only ones writing about this?”
What Nixon and his cadre did was very illegal and nearly unthinkable. Woodward and Bernstein were the ultimate contrarians. It required a lot of self-confidence and courage to keep investigating the President of the United States and writing, while almost two thousand newspapers in the country were silent. Let me clarify this; I am not talking about being contrarian for the sake of being contrarian. Standing in the middle of the highway is contrarian because nobody does it, but it is also plain stupid. But if we do our own research and it leads us to a conclusion at odds with mainstream views, that is when being a contrarian is warranted.
As a value investor you often own a stock that is hated by everyone. A lot of times the market is right, and the cheap stock is cheap for good reason, but not all of the time. Acting on the conclusions of your research while the world disagrees with you is difficult, but it is an integral part of value investing.
Luis also talked about a trick journalists use to get at the truth out they interview people for a story. No, not water-boarding. It is, simply, silence. Yes, silence. When you talk to company management, usually you are talking to a smart and experienced communicator, with skills that allowed that person to climb the corporate ladder. Most such people are decent and honest, but they have a bias to present everything in a positive light. But when you ask them a question, listen attentively to them, and when they are done answering, pause as if you are waiting for a further response. This may take them off their well-oiled track and they may give you a more honest answer.
About the author:
Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email or read his articles click here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy’s book Active Value Investing (Wiley, 2007).