How and why did you get started investing? What is your background?
How and why did I get started with anything in life? I consider much of my life to be a set of coincidences that all lead down different paths. In high school I was really into computers and computing. At this time (mid-90s), the market was rewarding any company with a dot-com in their name.
My grandfather owned his own business and was a very savvy investor on the side. Although he invested on the side, his investments ended up creating the bulk of his wealth. My father didn't have the same affinity towards investing that his dad did. But I did have an awareness of the market. When I was in high school, I used to look up some of the tech companies I was familiar with in the business section daily. I remember following Gateway Computer in 1995 and the stock was a rocket ship. I wanted to invest, but as a kid I couldn't open a brokerage account without my parents help, and it wasn't something they were interested in. So I let the issue drop and focused on hanging out with friends, sports and computers.
I went to college and studied computer science. My only interaction or brush with finance and economics was an economics class I was required to take. I skipped most classes and for the ones I attended I remember the professor drawing little graphs with two intersecting lines. It was excruciatingly boring and I just figured all finance was as bad as that.
My investing grandfather left his grandkids money for college, an outgrowth of his success. When I graduated from college, I had a small amount of this inheritance left still invested in stocks that he'd given to us. For a few years post-graduation I received statements monthly. I had no idea what I owned, or what I could do with it. I remember there was a line with the stock's yield and then a following line saying "Projected income". I foolishly thought they knew how much money I'd make over the next year and were estimating it for me. Here I was with $12 thousand in stocks thinking "It looks like I'll make $200 next year on my investments."
One day I woke up and realized I should know what I'm doing or figure out what these investment things are. One skill I have in spades is reading comprehension. I went to the local library and checked out every book I could find on investing. I then started to Google some of these concepts and eventually ended up on Morningstar, and from there some articles recommended books by Benjamin Graham and other value investors.
I latched onto the Graham-esque value philosophy because it was simple and straight forward. Somewhere in 2005 or 2006 I decided I was ready to call the shots and started to direct my investments myself instead of letting them ride.
Describe your investing strategy.
A few years ago while on the ski lift at Solitude Resort in Utah, I sat next to a New Zealand stock broker. I mentioned I was a 'value investor' and he said, "what is that?" My response was the party line "I like to buy stocks for less than their intrinsic value." And he responded with a very dry quip, "That's what everyone in the market is doing." I loved that response, it's so true. People like to label themselves as one style or another. But at the end of the day, I'm investing my own capital to make more capital.
Investing in the market for me is no different than looking at items on Craigslist. If I know a certain type of lawnmower retails for $150 on Craigslist and I can buy it for $75, I know I can flip it for $75 and double my money. That's the essence of my style. To use an analogy, some investors like to trawl garage sales looking for Monet paintings that will appreciate in value over time. I prefer going to garage sales and buying boxes of records for $15 that I can piece out for $85. Here's a related story on that point that's true. I do go to garage sales from time to time and at one sale I purchased a Singer sewing machine for $5. It was a machine from the early 1950s in pristine condition, I didn't know the true value, but felt it was probably more than $5. Sure enough these things go for $150-250, so that's a multi-bagger right there.
One last point on this, I am not strictly a 'market' investor. I invest money in low multiple stocks, Japanese net-nets, bank stocks, international stocks, big stocks, tiny companies. I have invested in my own business. I own a piece of land I purchased for 1/3 of the comps I have done conferences, I'm writing a book, I sell a newsletter. I have a lot of irons in the fire, and if something works I keep at it, if it doesn't I move on. I am looking to turn $1 into $2, if that's in stocks or via a business it doesn't matter to me. The second dollar isn't different from the first dollar because it was earned differently. At the end of the day they're all the same, and the type of investing that got them there doesn't matter. What matters is you don't lose it.
What drew you to that specific strategy?
I stick with things that work. Buying low priced value stocks worked for me because it's simple, results appear quickly and it's something I can repeat. Some of the ventures I've tried have failed by either not producing an adequate return for the time invested, or by just producing mediocre returns in general. When that happens I move onto something else.
What books or other investors influenced, inspired or mentored you? What investors do you follow today?
I really liked Graham's "Security Analysis," it's simple and straight forward. I've read it three or four times. Like most I've read the value investing canon, they're good books, and if you want to speak the lingo they're necessary. I've also found there are some excellent books that aren't classic investing books. Here are a few off the top of my head:
-"The Art of Profitability"
-"Marketing High Technology"
-"The Innovator's Dilemma"
-"The Origin and Evolution of New Business"
How has your investing changed over the years?
I used to spend more time researching companies. I would think that if I spent hours in the footnotes, I'd find a nugget of gold laying around. I was just wasting my time.
My process now is to find companies that broadly fit something I'm looking for. Then look at the company and try to determine why I wouldn't want to invest in them. If I can prove to myself that they are cheap and there isn't a reason to not invest, I will invest.
I prefer simple companies to complex companies. This is for two reasons. It's harder to make a mistake when something is simple, and mistakes lead to losses. And secondly, because I want to limit the time I spend on this. I'm not a professional investor in the sense that there is client fee income paying me to sit around and read all day. My results pay me, so it stands that I want the maximum amount of results in the minimum amount of time. Looking at smaller and simpler companies helps in this regard.
Name some of the things that you do or believe that other investors do not.
-You can own more than three stocks and still make money.
-Warren Buffett (Trades, Portfolio) isn't the only way to invest.
-The best investment is yourself.
-The second best investment isn't publicly traded. Most investors would do better to build a business for themselves.
What are some of your favorite companies? Where do you get your investing ideas from?
I like treasure hunts. I like the hunt, that's what's exciting for me. When I stumble upon a company others don't know about or others haven't found it gets exciting. I like finding treasure boxes as well. This might be a company that has a factory on a valuable piece of land, or has cash that exceeds their market cap or some other attractive feature. These treasure type companies aren't for everyone, but I enjoy them.
I love banks, I think every investor should be looking to add bank stocks to their portfolio. There are approximatley 6,000 banks in the U.S., of which about 1,000 are publicly traded. These banks are directly comparable to each other and all make money the same way. If you understand one bank, you understand 6,000 banks. On the other hand, I'm glad most investors think they're risky and black boxes because that means more opportunity for myself. One fascinating dynamic of the banking industry is there are so many banks and so much M&A activity that an investor doesn't need to rely on other investors to make the market efficient. Mergers and acquisitions unlock most of the value, which means you can buy a swath of undervalued banks then sit back and ignore them until you receive the M&A prospectus in the mail.
Do you use any stock screeners? What are some methods to find undervalued businesses apart from screeners?
Absolutely. My returns don't care where they came from, they don't know if I found the idea via a screener or from a friend. There is a macho factor in investing like everything else. If I were to get into boating, would I be looked down upon at the dock because I didn't build my own boat by hand? Or cut down the trees to use to build the boat? Nope. But yet, somehow in the investing world, someone who uses a screener (the equivalent of buying the boat you want) is less of an investor.
If I can screen for stocks I will screen for them. It helps reduce the amount of time required for research. But I also realize that many times certain segments of the market aren't screenable. In those cases, I do the macho thing and look at all the stocks A-Z. When this happens, I prefer to buy a book for a given market. I have the Japanese Company Handbook, a book for German stocks, New Zealand stocks, for OTC stocks. It's easier to leaf through a book verses opening hundreds of browser tabs, but you do what you have to do.
Name some of the traits that a company must have for you to invest in. What does a high quality company look like to you?
There aren't a set of traits I look for across companies. Similarly, I am perfectly happy to buy 'low quality' if the price more than compensates for the value.
People are hesitant to own low quality items even if the price is appropriate. I consider low quality a company that earns less than their cost of capital, isn't growing much, or is in some niche, but is profitable. I have no ego with investing. My own self-worth isn't determined by what companies exist in my portfolio. In the real world, these low quality companies provide a valuable service to their customers. That they aren't earning high returns is usually a result of management not focusing, or understanding what it takes to earn higher returns.
What kind of checklist do you use when investing? Do you have a structure or process that you use?
Structure, what's structure? Eric (my co-founder for CompleteBankData.com) pointed out this week that I have "shiny object syndrome," a disease that has infected most entrepreneurs. I have more ideas than time and resources to implement them. My process is to spend time on the things with the highest return potential. That is true for my business as well as in investing. If I sell a stock, I will go hunting for a replacement and if I find something satisfactory, I invest. There is no structure to it, it's chaotic and random, but it works and has continued to work for me.
Maybe the best way to understand this is to say that I'm the type of person that has dramatically changed a vacation destination an hour or two before we've left for vacation. I've done this multiple times. It's the same with investing. If I'm looking at a company that's so-so and something else hits my desk that's better, I'll drop the so-so one and move on.
 Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?
My research strategy is to kill ideas. I eliminate non-investments as fast as possible, and screening helps with this. Why spend time looking at a company that I'd never invest in? The moment I realize I'm not going to invest in a company, I stop researching.
I also like the idea of investments have a fulcrum point, or one or two items that the investment hinges on. I like to identify these points and then estimate the probability of this fulcrum happening.
What kind of bargains are you finding in this market? Do you have any favorite sector?
There is still a low of value in bank stocks, especially small banks. Some European and Canadian companies are still attractively priced. I ran a quick screen yesterday and there are 200 companies in Western Europe, Canada and the U.S. with a P/B less than 70%, a P/E less than 7 and an ROE greater than 4%. I'm sure there are at least a few dozen bargains buried in that list.
How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
There are always opportunities, as my previous answer shows.
What are some books that you are reading now?
Mostly books on sales, advertising, raising kids and travelogues about backpacking across the U.S.
Any advice to a new value investor? What should they know and what habits should they develop before they start?
You need to find what works for yourself. Don't blindly follow Buffett because he's rich, or any other investor because their name is well known or recommended. Find what works with your own personality and how you think. You need to understand how to read financial statements and how accounting works, and some basics on valuation. But beyond that, the opportunities are endless. Some investors focus on bankruptcy, or arbitrage, or special situations, or growth companies, or basement bargains. There is no 'right' way.
What are your some of your favorite value investing resources?
If you're looking for research into off-the-radar, oddball companies, I'd recommend checking out my newsletter The Oddball Stocks Newsletter. Likewise, if you are looking for bank stocks then take a look at CompleteBankData.
Describe some of the biggest mistakes you have made value investing. What did you learn and how do you avoid those mistakes today?
I think my mistakes could be broadly grouped into two categories:
1) Lack of patience. - This is where I give up on an idea too early because nothing is happening. I'll exit for a slight gain, slight loss, or almost flat and then a year or two later my thesis works out and I missed all the gains.
2) Misjudged a company's margin of safety - This mistake is where I estimate the chance of loss being small because of some factor. Maybe it's the asset protection, or something with how the business works. I see the downside to be much less than the upside. But the mistake is when it's misjudged, or an external factor happens that I didn't expect. Some of my largest losses are from misjudging the margin of safety.
How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?
The same way I manage stress in other parts of my life. I am not my investments. How my investments do has nothing to do with my person. My kids don't care if a company had an up or down day, they're interested in playing Legos or throwing the football. I try to keep that perspective in mind, that's what's important to me. If I'm having a bad day, I get outside and take a deep breath. The world continues day to day regardless of what crazy things us humans are doing. The squirrels continue to look for nuts, trees grow and lose their leaves, it rains, the sun shines, etc. The system works and we need to appreciate our position in it. Whatever we think is life or death really isn't, so on a bad day I take a step back and consider this.
I also enjoy running. Running gives me a chance to think, burn energy and push myself. Running is a great stress relief.
The finance world is a constant stream of information. We can be plugged in and overwhelmed by it, or just plug in on demand when we need to get something out of it. I used to be plugged in constantly and I was riding the emotional waves. I then unplugged and now I only visit finance websites or listen to news or commentary when it serves a purpose. I don't get the Wall Street Journal or business magazines. If I'm researching something, I'll visit news websites; otherwise, I'm working on other things.
My last pieces of advice are get good sleep and spend plenty of time with loved ones. Time is our most precious resource, don't squander it on busy work.
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