1. How did you get started investing? What is your background?
I grew up in a small town outside of Madison, Wisconsin. My parents came over from Italy for opportunity. They were very entrepreneurial. My family had several small businesses. As a kid I had lots of energy and passion. I didn’t really care for school much at the time. I knew upon graduating high school I didn’t want to go to college right away, and I didn’t really want to do the family business thing, either. I started frequenting Barnes & Noble (BKS, Financial) at the time and spent hours there reading books for free. I’m sure they weren’t very happy with me. I was reading business books knowing that I wanted to do something in business. It took many books before finally one really set me on fire and I accidentally stumbled upon it. I actually bought it and took it with me on my trip to Italy. It was called, "The Warren Buffett Way." It cost me $4.99. As soon as I picked it up it made total sense to me. It was like a light bulb moment. I was born skeptical and frugal so value investing really took hold. The rest is history.
2. Describe your investing strategy.
Start with the A’s. I use Value Line and I started at the A’s. I first look at the business description and glance over the financials and some ratios and then I go to the company website and read the letter to shareholders. I try and read every shareholder letter. I have read some unbelievable letters that have really impressed me. If the business is one that I feel I can pretty much grasp and the balance sheet is unlevered with a high return on capital and a moat I set the company aside and track it. I have well over 100 wonderful businesses that I track now. I’m certain that many if not most of the companies I track will do very well over a 10-year period.
3. What drew you to that specific strategy?
I was wired for value investing. After reading "The Warren Buffett Way" around the early 2000s and reading other books about Buffett I looked for high quality companies selling at a fair price. I made my first investment with what little money I had around '04-'05. I read annual reports and looked at what Buffett owned and liked. At that time I was doing discount cash flows. I liked Anheuser-Busch InBev (BUD, Financial). Buffett owned it and so I put everything I had into it which wasn’t much at the time. I held it until it was bought out by 3G Capital. It ended being a very good investment particularly in '08 when the financial crisis came.
I almost bought Home Depot (HD, Financial) just before the financial crisis but decided not to. After the financial crisis I got really excited and started swinging a lot. I bought things that were dirt cheap but not exactly high-quality businesses and made some money. I also made some mistakes though. But what I really learned through that experience was that in my opinion it is better to own high quality business and if you can get them with high quality management you will do really well. The thing about buying cheap companies (cigar butts) is you have to know when to sell and when to sell is very important when it comes to cheap companies. Also it is very difficult to have a highly concentrated portfolio of cigar butts. We all know of Walter Schloss and his great track record over many decades. He is one of the greatest investors of all times. From what I recall he wasn’t very concentrated. It’s a lot of work, too. It's Inevitable you will end up buying companies that eventually die.
4. What other investors influenced you?
Charlie Munger (Trades, Portfolio), John Maynard Keynes, Philip Fisher.
5. How has your investing changed over the years?
I spend a lot more time looking for high quality businesses with high quality management.
6. Name some of the things that you do that other investors do not.
I might put more value and emphasis on a good letter to shareholders. I find it to be very important and valuable the way in which the leader communicates about his company over a number of years.
7. Where do you get your investing ideas?
Barron's, Wall Street Journal, Value Line, what other investors are buying, spinoffs, Fortune, Forbes and the like.
8. Do you use any stock selectors?
I’ve subscribed to The Manual of Ideas a couple times. I think the best ideas are the ones that you find on your own.
9. Name some of the traits that a company must have for you to invest in it.
Integrity is huge. It’s on the top of the list. It’s easy to read about the importance of integrity but experience dealing with it and without it is what really gives you an understanding of its importance. Companies that are constantly looking at cutting expenses in good times and bad times. Cutting cost/frugality is part of the culture at the company. Companies that refrain from using leverage. Companies that are constantly working on their competitive advantage and expanding on it. Management that have a passion for the business, the vision and mission of the company. You usually can tell what’s most important to management buy looking at how they start and finish conference calls/investor presentations and letters to shareholders. A company that can earn a high return on invested capital.
10. and 11. What kind of checklist do you use when investing? What kind of research do you do?
I know several well regarded investors have been using and talking about checklists. I believe Munger was one of the first to talk about checklists. I know Mohnish Pabrai has also talked a lot about checklists. I don’t use a checklist per se. It’s not written down. Maybe I should and maybe I should write it down, but I don’t.
12. What kind of bargains are you finding in this market?
I don’t see any bargains in the market today. I don’t see it in spinoffs or anything. The first quarter of this year I was buying a little. I like what I own.
13. How do you feel about the market today? Do you see it as overvalued?
I think it’s fully priced. If rates stay where they are I don’t think it’s overvalued. I definitely don’t like bonds.
14. What is the best new investing book?
I used to read investment books and other books like they were food. I don’t read enough books and I need to get back on it. I have a long list of books I need to read.
15. Any advice to a new value investor? What should they know and what habits should they develop before they start?
Read like crazy. Start with Buffett. Make sure to read Chapter 8 and 20 and don’t forget what’s in those chapters. Start with the A’s. Find your true self. It takes time and you will make mistakes.
16. What are some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
I really like the Wall Street Journal and Value Line. I follow most of them. I tend to like the ones that have concentrated portfolios and hold positions for a long time.
17. Describe some of the biggest mistakes you have made value investing. What are your three worst investments that burned you? What did you learn and how do you avoid those mistakes today?
I’m wired to like cheap stuff. So the biggest mistakes I’ve made are buying things that look really cheap. I’ve learned that a lot of times something that is cheap is cheap for a reason and that turnarounds seldom happen. I’ve had to learn that the hard way. I bought a shipping company that went bankrupt. I first found it on Value Line, and it showed it as selling at a very wide discount to book value. It was a number of years ago, and it was in the beginning of the downturn for shipping. I thought it had enough cash on the balance sheet and that it was producing enough cash flow to sustain and possibly capitalize on the downturn. It also was located in the States as opposed to Greece.
I later learned that the guy running the company was not someone I respected or admired in the slightest bit. He lacked many characteristics that one would look for. The business didn’t have any kind of competitive advantage. It is also capital intensive. By the way sometimes at the top of markets companies can look attractive, Home Depot in the mid-2000s didn’t look expensive to me. I almost bought it. If you would have bought it you would have done nothing for a number of years but if you were to hold on to it until now you would be doing really well. In fact, you would be leaving the Standard & Poor's in the dust.
18. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?
This hasn’t be too much of an issue for me. I think in part because of the way I’m wired, but in part because all the reading I’ve done on the topic.
19. How does one avoid blowups in value investing?
I think if you are going to be an investor you have to accept the fact in your life time that you are going to be down 50% or so from time to time. Buffett has talked about this and I think that is just the way it is. John Maynard Keynes and Munger both have had experiences with this. I think even Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) has been down quite a bit from time to time.
20. If you are willing to share, what companies do you currently own and why? How have the last five to 10 years been for you investing wise compared to the indexes?
General Motors (GM, Financial) – I’ve owned GM for about two years, and it hasn’t done much in the way of price appreciation. I like it just as much today if not more. It’s my largest position, representation roughly 25% of my portfolio. It’s shed a number of unprofitable brands. The balance sheet is the strongest it’s ever been. It’s got roughly 20 billion is cash. They have been constantly working on lowering their expenses. Management has been improving the margin of the company. I really like management and think highly of CEO Mary Barra. The company is selling 5x earnings while the market is in the 20x earnings. It pays a nice dividend and buying back a significant amount of stock. It has prepared and is ready for the next recession when it comes. Of course we are at the top of auto sales, but that doesn’t mean that it is going to fall off a cliff either. GM is in a great position in America and China, and it is only improving that position.
Posco (PKX, Financial) – I first learned about Posco in and around '07-'08. I starting buying aggressively toward the end of '14 and the start of '15. I have been pleased with the new CEO. He has been getting rid of noncore assets and reinvesting in the high-end steel market. He been moving aggressively to turn things around. I took a real beating in this position last year. It has never been so cheap. This is a high-quality steel company. It just got rated for the seventh straight year the most competitive steel company in the world. Year to date it has performed very well, but I’m still down on this. I really like the way in which this company is being run right now.
Bank of America (BAC, Financial) – I’ve owned B of A for about five years. I’ve been happy with CEO Brian Moynihan. I think has done a really good job with the hand that he has been given. He has really worked on the cost side of the equation. B of A has some nice franchises, and it’s still cheap. The bonus is if rates go up B of A will do really well.
American International Group (AIG, Financial)Â – I’ve owned this for about five years too. It’s been a decent investment. It is starting to show some results. Finally we are starting to see real results on the expense side. It has been divesting as well and buying back a good amount of stock. The next couple of years could be pretty good. I’m hopeful that CEO Peter Hancock is the right guy for the job.
American Airlines (AAL, Financial) – I’ve owned this for about three years now. I started looking at American Airlines when US Airlines and American were talking about merging. Frankly, I wish I would have taken a position in US Airlines at the time. I like the airline industry. I’ve been following it now for a few years, and I think it has fundamentally changed. I don’t know which one is the best to own, but I’ve stuck with American Airlines. It’s been a good investment. I bought more when the whole Zika thing was going on. What a joke. I was really pleased to see Berkshire take a position in some airlines recently.
Distribution NOWÂ (DNOW, Financial) – This is a spinoff of National OIlwell Varco (NOV, Financial). I got in this over a year ago. I like the management. I like the balance sheet. I really like how it has been able to capitalize on the downturn. This investment thus far as really worked out.
FIAT (FCAM), Platform Specialty Products (PAH), IBM (IBM), Union Pacific (UNP), Restaurant Brands International (QSR), United Airlines (UAL), Valeant (VRX), Rolls Royce (LSE:RR.).
I hope this had some value for you. Thank you for asking me to do this. I actually enjoyed writing this.
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