1. How and why did you get started investing? What is your background?
I bought my first stock when I was 14 years old (Sony) and the investment was very unsuccessful, so I never tried again until I finished college. At the time I had studied in university about the efficient market hypothesis that basically stated, in its strong form, that it is impossible to generate alpha over time. A few years later I came across a book on Warren Buffett (Trades, Portfolio) and it was love at first sight with his investment philosophy, value investing. It just made sense.
2. Describe your investing strategy and portfolio organization. What valuation methods do you use? Where do you get your investing ideas from?
Strategy is global, long-short equity. On both long and short I believe in concentrated positions, deep due diligence, sophisticated analysis and unemotional behavior. Mostly, on the long side we look for Buffett-style, long-term compounders. On the short side, we look mostly for potential zeroes like frauds, illegal activities and failed business models.
3. What drew you to that specific strategy? If you only had three valuation metrics, what would they be?
My role models were Buffett and Munger on the long side and Muddy Waters on the short side. For valuation, three methods are not sufficient, but I would focus on P/FCF, EV/EBITDA and P/S.
4. What books or other investors changed the way you think, inspired you or mentored you? What is the most important lesson learned from them? What investors do you follow today?
There are so many great books, but I would mention especially the "Poor Charlie's Almanac," which stressed the importance of multi-disciplinary analysis and the dynamics for beating the market.
5. How long will you hold a stock and why? How long does it take to know if you are right or wrong on a stock?
On the long side, the holding period is indefinite. Essentially, I will hold a stock as long as the original thesis remains intact and the company keeps maintaining its moat, management talent and financial characteristics (as long as it does not become too overpriced). On the short side, instead, you do need a strong catalyst and I would not hold the stock beyond it. You must define the criteria for judging the success of a trade upon entering the position, not later. Otherwise, you risk to change the aim to adjust for the result. When the initial premises are no longer there you should fold. Price dynamics should be unimportant here.
6. How has your investing approach changed over the years?
I progressively moved away from "cigar butts" toward high-quality companies, and I kept stressing more and more the concept of deep due diligence.
7. Name some of the things that you do or believe that other investors do not.
I believe that the amount of uncertainty inherent in most stocks is way higher than most professional investors assume. The role of luck and chance is much higher than expected. It follows that a discounted purchase price is of paramount importance even when dealing with a high-quality stock. You should refuse to ever pay high multiples. Also I believe, because I have seen it often firsthand, that fraud and creative accounting are much more prevalent than most people think and that auditors are very easy to fool.
8. What are some of your favorite companies, brands or even CEOs? What do you think are some of the most well-run companies? How do you judge the quality of the management?
At the moment I have deep respect, among others, for Satya Nardella (Microsoft) and Ginny Rometti (IBM). They both seem to be doing a good job at steering their companies toward successful change. Quality of management should be judged mostly on candor, rational decision making and long-term thinking. Capital allocation in particular is very useful as a management quality indicator.
9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?
I rarely use screeners. I typically follow David Einhorn (Trades, Portfolio)'s advice and generally look in the sectors where mispricing is likely to exist at any given time (where fear, uncertainty or complexity are prevalent).
10. Name some of the traits that a company must have for you to invest in it, such as dividends. What does a high-quality company look like to you and what does a bad investment look like? Talk about what the ideal company to invest in would look like, even if it does not exist.
Here I like to follow mostly Donald Yacktman's approach. A high-quality companies tends be exhibit low cyclicality, low capital intensity, slow product cycle and fast product usage frequency. On top of that, you want low debt, a good management and powerful competitive advantages.
11. What kind of checklist or homework do you utilize when investing? Do you have a specific approach, structure, process that you use? Or do you have any hard-cut rules?
I do use a checklist, or better, a weighted-average system to gauge the quality of a company and identify problem spots. But that is just the beginning. Most of the value added is through deep due diligence.
12. Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?
If we are talking about a short or a small company, I perform so-called "deep due diligence". This consists in systematically approaching any person which may help us figure out a company's situation or nature better. Typically clients, suppliers, competitors, consultants, professors, etc. We also perform field due diligence, for example, visiting company's facilities or similar.
13. How do you go about valuing a stock and how do you decide how you are going to value a specific stock? When is cheap not cheap?
If a stock is really cheap enough, it should be obvious without using sophisticated valuation tools. P/E, P/FCF, etc., on a normalized basis, should all indicate a fairly cheap stock.
14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?
There are several bargains here and there. Biotech is an obvious one, but also media and finance are presenting some opportunities.
15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
Honestly I do not think the market is particularly overvalued. As a matter of fact, if you consider that interest rates are near zero (and likely to stay low for some time) you could make the case that the market is actually still undervalued. People are still shell-shocked by the financial crisis to some extent.
16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?
I am reading mostly books on physics. It teaches a precise, rigorous thinking style that is very useful in investing too. Currently "The Elegant Universe" by Brian Greene (on string theory).
17. Any advice to a new value investor? What should they know and what habits should they develop before they start?
You need to really have a good working knowledge of accounting, strategy and finance. You also must be aware of the fact that value investing does work over time, but it regularly goes through very long spells of underperformance. These tough times may even last longer than five years. It follows that you should build an infrastructure capable of handling that from a marketing and cash flow perspective. Staying power is everything in this business. You should seek staying power even if it means sacrificing AUM. This is hard to understand for a novice and hard to implement.
18. What are some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
I regularly use GuruFocus, Morningstar, ValueLine and Capital IQ.
19. 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?
So far, the only time I really lost much (say 50%+) on a stock has been with the recent collapse in oil prices. My value investing reflexes led me to hold on to those energy stocks even when it was clear that the downturn was going to be exceptionally long and steep. The correct response would have been to sell quickly.
20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections, and fluctuations?
There are many tricks. The most obvious one is avoiding looking at your stock quotes during sharply down days (unless you are looking to buy some stock). Same goes for the news. It helps to distract yourself with a hobby or any other activity. Personally, I enjoy focusing on my shorts in such days.
21. How does one avoid blowups in value investing?
Mostly with humility. There is an inherent level of uncertainty in ANY stock and no thesis, no matter how articulated, is a 100% sure. It follows that a minimum of diversification must be present. Also, you should never take any position that, if it goes in the wrong direction, it may generate a loss you cannot tollerate. Nine times of 10 you will regret it, but that tenth time could kill you.
22. If you are willing to share, what companies do you currently own and why? How have the last five to ten years been for you investing-wise compared to the indexes?
Our long portfolio contains mostly blue chips which have been bought quite cheaply. Our short portfolio has three companies that we believe are going to zero since they are frauds.
23. Here's a fun one - What stock would Warren Buffett (Trades, Portfolio) or Benjamin Graham buy today if he were you?
I believe people should take a good look at Gilead (GILD, Financial). It's trading at 6x earnings and if you carefully study its current situation, you will see that it does not make sense.
