1. How and why did you get started investing? What is your background?
I will tell you a short story. I loved numbers but was not particularly good with math. It all started when I was still at school. I downloaded an app related to stock trading, I tried it out, and, of course, I did not understand anything. The game's objective was to make as much money as possible using technical analysis trading several of the biggest names on Nasdaq. Obviously, charts were moving too quickly! Information related to astrophysics somehow impacted stock prices, and I went bust every time I played! I started asking questions in my head, and it did not make sense. “Well, I guess investing is not for me then,” I said.
I was on my summer vacation after graduation. I moved to London to work for a little while. Not knowing what to do with my free time, I started reading books, noninvesting related, mostly history, philosophy, etc. While visiting one of the bookstores, I stumbled upon a book called “The Intelligent Investor.” It was out of place there. Someone managed to place it on the wrong shelf. “I’m just going to check it out for a little while,” I said. “Why is this book even here?” Curiosity got the best of me. I ended up buying it. I read the whole book in just a week and the next week, I was back with a pen, marking the book. Stock market, watch out. I am coming back!
2. Describe your investing strategy and portfolio organization. What valuation methods do you use? Where do you get your investing ideas?
At first, I thought I would just go with net-nets. I picked a lucky number –Â 16. It was the number of stocks (net-nets) in my portfolio. My overall portfolio was doing fine; some of the net-nets tripled in price while some went bust. Average returns were just a little below average due to my inexperience and flaws. I was impatient, unorganized and did not know how to analyze business. Even though I read Graham, I still had my own impulses and energy bursts. I was an emotional wreck so I had to fight that. I picked more and more books to read, tearing them apart. Nowadays, I use a concentrated portfolio, usually no more than eight stocks at the time.
I weight position via Kelly criterion, then adjust it to possible outcomes either base or bearish case. I align safest ideas as highest percentage of my portfolio, either in quantitative terms or qualitative. I try to pick stocks that are unrelated, diversified among different business and sector cycles so that one stock cannot impact another that much; other than that, I pull the trigger every time a bargain comes under my radar. If a specific position has a lot of cash, then I feel safer to buy it unless its working capital is cracking. I need extra cushion, you know.
There are specific tables that I do. For every position, I follow its NAV and EPV, then sum all of them together (weighted, whole portfolio) and compare it against the weighted portfolio price; if the entire portfolio margin of safety is above 35% I feel somewhat safe. You can take into account various elements of specific positions, but it will make everything more complex than it needs to be. I don’t like complexity, not when it’s overdone. That’s why I don’t use DCF. There was a time when I tried to learn all possible ways to value a business, various tools like owner earnings, absolute price-earnings (P/E) models, Lynch Earnings Power and so on. I can list all that stuff! However, my valuation skills improved when I started to focus on the business itself, not on valuation metrics. Now I use the most simplistic tool: EBITDA – Maintenance Capex – Changes in WC = EBIT. EBIT/EV = Earnings yield (%). Earnings Yield (%) + Growth in earnings (%) = > 15%. As for a good business, there are various hidden gems. Some of the greatest business looked bad at first, and there’s a reason for that!
The best ideas come from the most unexpected places ever. I’m quite sure that you can get more great stock picks from worst performers of the year than via stock screening. Also, try out screening for garbage stocks (stocks with insane amounts of debt, terrible earnings, etc.). You may be surprised.
3. What drew you to that specific strategy? If you only had three valuation metrics, what would they be?
I believe that a decent businessman can’t manage 50 businesses so I don’t hold 50 stocks either. I can’t and couldn’t successfully manage that, either. Valuation depends on various things. I can’t state three metrics that are most important to me as every case is so much different. A “s****y” business was once a good business, you know. I like a lot of cash on the balance sheet. I feel attracted to that the same way I feel attracted to pretty women. I guess for this I’ll go with a high cash ratio to balance sheet assets, high ROC as defined by (EBIT) / (NFA + WC). For this I’ll add that I like to see honest earnings, somewhat PAT being successfully converted to CFO, and earnings derived from balance sheet similar to that. Successful WC management in short.
4. Which books or other investors changed the way you think, inspired you or mentored you? What is the most important lesson learned from them? Which investors do you follow today?
Well that’s a great question! All credit goes to Ben, Joel, Warren. I like their style, nowadays, I follow Stan Druckenmiller, Dr. Michael Burry, Norbert Lou, Francis Chou (Trades, Portfolio). I suppose there is too much to tell. There are great investors that are unknown. A lot of talented individuals you can chat with on forums. The best way to summarize life is to say: “Never give up.”
For books, I’d say "The Rediscovered Benjamin Graham" is a good one. Obviously "Security Analysis" and so on. So many books!
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?
I hold stock for two years minimum unless it reaches 90% of my defined earnings power or intrinsic value. If I trust the business, I might as well hold it for a little longer. Haven’t stumbled on such an opportunity yet. As for right or wrong, it depends on your thesis. If say, you were betting on a good business to keep being good and it's deteriorating, I’d say sell. It might work out in your favor or it might not. Stuff like that happens. I’ve seen a lot of bad stocks reaching crazy levels of prices so that they can explode in devastating ways. Don’t go in front of a truck! Let it pass.
6. How has your investing approach changed over the years?
I guess I’m more balance sheet oriented. Everything comes from that!
7. Name some of the things that you do or believe that other investors do not.
Well, I do not know what others do since there are staggering amounts of value investors nowadays! What do they do? Hunt for bargains. Where do they find bargains? I don’t know! I try to read as much as possible, even paying attention to the smallest detail on company Web sites! Yeah, and I use Google Earth too!
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?
Obviously, Berkshire (BRK.A, Financial)(BRK.B, Financial). Pay attention to working capital, accounts receivable, inventory management, watch profit conversion to cash flows, find out everything about them. Find them on LinkedIn (LNKD, Financial), on the news. In the end, the money they get tells the story. Beware of crooks.
9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?
Every now and then it’s OK to steal some ideas. Other than that, look for companies with boring stories. Since no one writes boring stories, you won’t find such in the media.
10. Name some of the traits that a company must have for you to invest in, 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.
Great debt utilization. If you see a company that is willing to increase debt so that later it can reduce it with earnings and fund operations, it’s much better than a company that continues diluting equity. It means management doesn’t want to give up more equity than it already has. You keep something precious, don’t you?
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 only use Excel for my spreadsheet; other than that, I always keep some books so I can quickly check them if I forget something. Having a checklist is great; I highly recommend it.
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?
Rarely. I start with SEC filings and grab some primers to see how an industry works. Once I’m finished with the whole business model, I work numbers out on a per-share basis; after I build my confidence with whole situation I move to minor things. I read everything that I can from various forums to news articles, statistic departments, reports and so on. If they can add something to my analysis, it’s good. Read competitor reports, their troubles. Take analyst reports, but don’t look at their numbers. Catch up with the current situation. Read VIC.
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?
This should be for all. Earnings yield 1.5x times more than AAA corporate bond yield. Then a stock sells at below 35% of its intrinsic value. At least for 75 cents on the dollar. Valuation depends on the type of company. There are companies with shrinking intrinsic values, stable intrinsic values and growing intrinsic values. You’d like to have bigger safety cushions for first ones, especially in asset base; for the second ones, margin of safety largely depends on capital expenditures, and for the last ones, what matters is not overpaying. At least 8% to 10% yield is fine. Depends on growth.
14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?
Airlines and mining companies are cheap. I don’t have favorite sectors. However there are particular competitive circles that I have so I’ll always prioritize those. I love special situations though!
15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
Overall market performance does little to interest me. However, I believe it’s overvalued.
16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?
I’m re-reading some of Whitman’s books. “The Aggressive Conservative Investor” is the one I took. I haven’t analyzed all of his principles; mainly I’m a slow learner. It takes time for me to get to the core principles and apply them. My favorite lessons are in quality of earnings and related to inventory. It took me some time to get it. I highly recommend it.
17. Any advice to new value investors? What should they know and what habits should they develop before they start?
The best way to get good at something is to start doing it. Value investing is all about patience. I don’t recommend it for athletes; they won’t be able to sit still and do nothing!
18. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
Oh, well, that’s a long one! I believe the list is too long for publishing here. On the tools side, I don’t like to get everything complicated, I use Excel plugins to get 15 years of financial data, then play around with it. I even type some numbers manually! I’m no tech expert. I’m glad I can still fit in with my pen.
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?
Sears (SHOS, Financial) was killing me with inventory so I got better at valuing inventory. I sold position at a loss even though it’s still undervalued. I was invested in ExxonMobil (XOM, Financial). I also closed the position at a loss; however it was a long time ago. I learned to avoid blue chips unless they are selling at much lower prices. There is however one advantage to blue chips; price catches value much faster due to available information. Smaller cap stocks have a tendency to become acquisition targets, especially ones that have the capacity to generate decent amounts of cash relative to their profits so they suit smaller investors better. In my early days, I had a position in Alpha Natural Resources which went bust. I thought the company could outlive its debt needs at that time once the cycle got better; well it didn’t happen that way. The company is now in the junkyard. You see, leverage is a risky thing, not only in stock investing but in business as well.
Other than that, I had picked some stalwarts in my portfolio, which didn’t move at all, and I got frustrated. But after holding them for a long period of time, they just jump out. I try to get stocks with at least some kind of catalyst nowadays; it makes me more comfortable although I still love illiquid stocks or positions that are very volatile. Too much action creates distraction – stocks getting hammered are bound to be mispriced, stocks getting too much following are bound to be overvalued. Optimism attracts optimism, pessimism – pessimism. The key lesson I learned is to let sinking ships sink. Also pyramiding is one of the cool techniques I employ on good stocks. Say Google continues growth, and share prices tend to increase. I’ll add a little more after that. Let winners be winners. Or so the saying goes. “Always go with a winner.”
20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?
I trust Mr. Market’s weighting machine. It has worked. It continues to work. My job is to do correct valuation. If I make a mistake, the market in the long term will reflect that. Also, I always use bearish scenarios so that in a sense my valuations are so conservative that it’s hardly possible to trade around that. I use 80% probability for a winning scenario. If I don’t believe that my position is that good I don’t take it at all. I was a soft child; I don’t want to be a soft man. Value investing is fun only when you have the stomach for it. Going alone or going against everyone is not for everyone. Also, find a partner to discuss things; better if he disagrees with you. That way you’ll come up with a stronger thesis to test it out.
21. How does one avoid blowups in value investing?
If we invert the question, we'll get “How does one blow up in value investing?” The answer to that is buying stocks at ridiculous multipliers and ignoring fundamentals. So don’t do that! Other than that, you can ask for a larger margin of safety; however there are limitations to that. As the market soars and roars, the lack of positions of such safety will leave you with cash and cash only. Also, never invest in a fraud, I’ve seen fraudulent stocks triple in share price only to get spectacularly blown out at the end. Learn business. Speak business. Do business.
22. 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 investingwise compared to the indexes?
Currently I hold a small position in Spirit Airlines (SAVE, Financial) at around $45 per share. The company has oil price exposure, and high margins are somewhat masked due to falling oil prices which obviously makes this not only a bet on airlines but on oil, too. On a readjusted OPM margin basis (15% to 16%) I derived at $61 to $64 per share valuation, having taken into account growing D&A expenses, and zero growth capex just to maintain its fleet. However, I do not think pressure from American Airlines (AAL, Financial) is enough to justify lower than $50 per share stock price. The company maintains a strong competitive position and is not going away. (I’m also looking at some oil companies just to reduce whole exposure thing.) My performance for the past five years is an average of ~20% per year. I’d say that is quite impressive; however it’s due to leverage on some positions. I do not expect to sustain that, neither do I try to; currently I’m looking at some Norwegian, Scandinavian, Baltic companies to invest in.
23. Here's a fun one – What stock would Buffett or Benjamin Graham buy today if he were you?
I love Graham, I respect Buffett. But I can’t possibly answer this. If I had all that knowledge I’d possible be very rich now.
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