Today we talk to Scott Thompson, chairman and CEO of Ameritrust Group and author of "Art & Science of Value Investing." Thompson is a devoted disciple of the strategies of Warren Buffett and is an investor in high-quality undervalued real estate assets.
1. How did you get started investing? What is your background?
I became an investor out of necessity. My background consists of international business, sales, real estate and financial industry. During my 20s I worked very hard in a Fortune 500 company, saved my money, lived below my means, did not buy expensive depreciating assets and soon arrived at a point where I’ve saved up quite a bit and needed to find intelligent places in which to wisely invest my investment capital.
2. Describe your investing strategy.
Value investing. I implement a valuation-based investment strategy, similar to Warren Buffett (Trades, Portfolio)’s, where I buy high-quality assets for less than they’re worth. I consider both quantitative and qualitative factors. If you know how to correctly value assets, understand the asset into which you’re investing and can consistently buy high-quality assets for significantly less than they’re worth, you’ll earn a lot of money.
3. What drew you to that specific strategy?
Value investing simply makes the most sense. There’s a sound logic and common sense to it. I studied Warren Buffett (Trades, Portfolio)’s value investment strategies for years, reading all Berkshire Hathaway's (NYSE:BRK.A)(NYSE:BRK.B) annual reports, even Buffett’s letters from his early Buffett Partnership, reverse engineering businesses in which Mr. Buffett announced Berkshire just invested, financial statement analysis, reading annual reports of competing businesses, reading public filings and disclosures, 10-Q, 10-K, etc.
4. What books or other investors influenced you?
Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway annual letters to shareholders have influenced me the most. This helped me immensely gain deeper insights into how to better think about investing, businesses, acquisitions, valuations, sense of humor and life.
5. How has your investing changed over the years?
I’m much more risk-averse now and have become a much better capital allocator. For instance, since I became CEO of Ameritrust Group LLC in 2014, 100% of all my investment selections have outperformed the Standard & Poor's 500 over the same period. We have expanded our value investment strategy to include acquiring strategic undervalued real estate assets, for less than reproduction cost. There are not many outperforming the S&P 500 index now in 2016, but we are one of them.
(For more info visit: http://www.AmeritrustCorp.com.)
6. Name some of the things that you do that other investors do not?
Due to our location in Florida, we also invest in high-quality undervalued real estate assets where we can make acquisitions significantly less than reproduction cost. Florida remains one of the best real estate markets in the U.S. We can earn significant returns on invested capital (ROIC) with very little risk and attractive returns to investors. For instance, I just closed a transaction earning investors 16% (net after fees) on that portion of their capital in less than six months. We’re lining up the next round of acquisitions now that we believe will also be very beneficial to investors.
7. Where do you get your investing ideas?
Many sources. Reading Wall Street Journal and several other financial publications. I have developed software that values and ranks all publicly traded stocks trading on U.S. financial markets, using several different valuation metrics and methods. We use stock screeners, perform rigorous financial statement analysis and read annual reports.
On the real estate side of our investment business, several sources of deal flow provide a large number of investment opportunities through which we analyze, visit in person, then carefully select the best of the best investments, offering the lowest risk, highest returns and greatest certainty.
8. Do you use any stock screeners?
Yes, but again our deal flow and investments we choose originate from multiple sources.
9. Name some of the traits that a company must have for you to invest?
I prefer businesses with little to no debt. A leader in their industry. High pretax operating income as a ratio to net tangible assets (or net tangible equity). High ROE and ROIC. High operating margins. Consistent history of increasing profitability, earnings and free cash flow growth. There are many more factors I could list, but this will give readers a good start.
10. What kind of checklist do you use when investing?
I outline this and other investment topics in my best-selling book "Art & Science of Value Investing" (foreword by Peter Buffett, son of billionaire value investor Warren Buffett (Trades, Portfolio)).
My book explains our value investment process, how best to think about value investing, developing investment screening criteria, rigorous financial statement analysis, multiple valuation models and a wealth of helpful information investors can learn and begin implementing right away to become better value investors.
11. Before making an investment, what kind of research do you do?
Before making an investment, we read the annual reports from the past several years up to the present, perform in-depth financial statement analysis, sometimes talk with management, reading all available public filings, etc. We thoroughly research and understand the underlying business before we invest.
We draw a clear distinction between value investment and price speculation. Contrary to what many price speculators believe, stocks are not lottery tickets. Instead, stocks are fractional ownership shares of owning a piece of the underlying business. Value investors think of equity investing as owning a piece of the underlying business, which tends to be very different from the perspective of price speculators.
After awhile, experienced investors begin to develop an innate ability to “see around corners” and begin to develop an accurate idea of how the business may perform over the next five, seven or 10 years.
12. What kind of bargains are you finding in this market?
One of the publicly traded businesses possesses no debt, is trading around 33% of its intrinsic value, ROE above 40 (compare 40 against the average ROE of S&P 500 index companies of 15), operating margins above 50%, net margins above 30% and above 50% of each revenue dollar converted into free cash flow (FCF). It also pays a higher dividend yield which is safe, so I get paid to wait.
13. How do you feel about the market today? Do you see it as overvalued?
There aren’t as many great opportunities today as there were a few years ago, but we’re still finding value selectively. You just have to keep looking. When we swing, we make it count. We are not macroeconomists. Instead, we take a more granular, microeconomic approach. Our successful track record outperforming the S&P 500 index speaks for itself.
14. What are some books that you are reading now?
Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway letters to shareholders. I recommend investors read and re-read this. You can request to download Warren Buffett (Trades, Portfolio)’s letters to shareholders for free from my book’s website at: www.ProValueSource.com.
There are many great books available about value investing from the following authors: Robert Hagstrom, Dr. Bud Labitan, Mary Buffett and David Clark all have written some insightful value investing books. Also check out my best-selling book "Art & Science of Value Investing" by Scott Thompson, MBA, with foreword by Peter Buffett, son of billionaire value investor Warren Buffett (Trades, Portfolio).
15. Any advice to a new investor?
Patience and a calm rational temperament are very important qualities to being a successful investor. Investors must remain true to their convictions, especially during times of extreme price volatility and market uncertainty.
For example, toward the end of 2008, Berkshire Hathaway invested $5 billion into Goldman Sachs (NYSE:GS) at $115 per share. Weeks later on Jan. 20, 2009, Goldman’s stock price plummeted to only $59 per share. Did Buffett panic sell? No, he was not distracted by short-term price volatility and instead focused on the intrinsic value of the underlying business. Now GS is trading above $170 per share. This is a great example of how the most successful value investors possess a calm rational temperament, are patient and stick to their convictions, especially through periods of extreme price volatility and market uncertainty.
New investors should remember temperament and patience are as equally important as the ability to correctly value a business. Qualitative information is also equally important as quantitative data. Use all these tools and information together to your advantage, and your returns will increase. Control your emotions, or they will control you. If you follow these simple steps, you’ll be well on your way to becoming a successful value investor.
Disclosure: No position in the stock mentioned.
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