Dave Sather is the founder of Sather Financial Group, an asset management firm overseeing $400 million, based in Victoria, Texas, and a speaker at the 2017 GuruFocus Value Conference. He answers the questions below to introduce himself.
1.Ă‚ How did you get into value investing?
Early in my career I was working as a stockbroker for PaineWebber. I was very naïve. I didn’t realize it was just a sales job.
Fortunately, I stumbled across an article about Buffett. His approach just made sense. There was a simplicity and a logic to it that was easy to follow. It helped me to think independently.
2.Ă‚ Who inspired you the most in value investing? In which aspects?
Even though I have never met Buffett, he has been such a good communicator with his interviews and annual reports. That really opened my eyes to the other devotees of Graham & Doddsville.
Through the value investing program we teach at Texas Lutheran we have had the privilege of having truly world class investors speak. Don Yacktman, Wally Weitz, Arnold Van Den Berg (Trades, Portfolio), Zeke Ashton (Trades, Portfolio), Michael Shearn and Pat Dorsey have all been incredibly gracious with their time and knowledge. I have so much respect and admiration for what each of them have accomplished.
With a good value investor, I have also noticed they are generally all very good teachers. I have also found that if you want to determine if you really know a given topic, try teaching it. All of the people listed above are so good at communicating their process, their logic and their discipline.
Lastly, my parents were great teachers, but not in the traditional investment sense. They were right out of the book "The Millionaire Next Door." If you want money, go get a job, go earn it. Live below your means. Don’t take on debt. Think about how you spend money. Don’t buy stuff you don’t need.
3.Ă‚ What is the most important thing you look at in a stock?
That is such a broad-ranging topic that it is pretty difficult to say, “This is the key.” However, we find investment decisions are far more susceptible to risk and a wipe out, when they incorporate too much leverage into their capital structure.
Additionally, if you can find a business that puts up great return on capital figures over a 10-year cycle, it is worth digging deeper. There is a reason that Joel Greenblatt (Trades, Portfolio) uses this as a key component in The Magic Formula. Similarly, Buffett has repeatedly said his favorite metric is return on equity.
4.Ă‚ What kind of companies do you avoid?
Theoretically, we would tell you nothing is “off the table.” However, there are some businesses that are very difficult to assess. Generally, it is a better use of our time to focus on certain things and stay away from others.
Airlines, autos or anything where your product is a commodity. All of those, in general, have a flaw that greatly increases the level of difficulty.
The longer we are at this, the more we realize the key to success is just as much about “committing no unforced errors” as it is about finding great rate of return opportunities.
5. How would you describe your investing approach?
Boring. A good value investor is often a glorified accountant. It is a matter of reading financial statements and see what they say about the history of a business.
The quantitative analysis will tell you about what has happened in the past.
If it has told a good story, can you determine the future of the business. How do they make money? What is their competitive advantage? Is that likely to be duplicated going forward?
We are more comfortable with the strong consumer brand names. About 15 years ago Buffett said he liked Wrigley’s gum because the evolution of the internet would not change the way we chew gum. You can make similar assessments about the impact Google or Amazon will have upon a given company.
Google or Amazon are far less likely to negatively impact Nestle, Budweiser or Philip Morris. Again, that reinforces that simple decisions are often easier decisions to make.
6. Where do you find discounted stocks in the current environment?
The media companies have been crushed. Although there is a fair amount of disruption with the cable companies, that does not mean that people will not pay up for content. But it does change the way those businesses monetize their assets. Since Wall Street dislikes the unknown, they appear to have thrown out the baby with the bathwater.
7. What are your favorite investments currently?
Berkshire is always an easy one to talk about — especially when value is hard to come by. Although Fox has some noise, it appears to be investing for the long-run — especially in emerging areas.
Mastercard is rarely cheap, but appears to have a long path in front of it.
8. What’s the one piece of advice you would give individual investors?
Stop obsessing over what the S&P 500 is doing and instead figure out what your personal goals are. Most investors have a combination of investing goals. As such, they must understand that emergency money should be invested completely differently than long-term assets.
Also, Wall Street’s attention span is about three minutes… on its best day. Take advantage of that. Time is the friend of the great business and the enemy of the mediocre one. Think in terms of 10-year cycles.
9.What do you plan to cover in your talk at the GuruFocus value conference?
I’m not sure yet — but I think the value investing program we teach at Texas Lutheran University has a compelling story and track record. Using basic value investing disciplines, a bunch of undergraduate students have produced returns of more than 14% per year.
10. What is your outlook for the economy and the market right now?
Very mediocre. Historically, we might project returns from the financial markets of 8% per year over a 10-year cycle. Today, we counsel clients to expect 4% to 6%.
Unemployment completely misrepresents what is going on. Once you add back all of the people that are not working, functional unemployment is more like 10% -- more than double the official figure.
GDP is limping along at 1%. It is essentially at stall speed.
Businesses are taking on debt to buy back stock. They are not expanding in plant, property or equipment. Inventories are thin.
The Federal Reserve is stuck. Their financial engineering is producing less and less.
Interest rates are woefully low. However, the 10-year U.S. Treasury looks like a relative bargain compared to other sovereign debt.
Register for the 2017 GuruFocus Value Conference here.
