Interview (Copyright Miguel Barbosa 2010)
1. You have a pretty interesting story, when did you first become interested in allocating capital?
I became exposed to investing when I took finance classes in college. The class that inspired me the most was a class on business valuation. Since then, I have been investing my own money. At first, I didn’t really know what I was doing, but after reading over a hundred books on investing I got better at it.
2. What motivated you to start your own business, Classic Value Investors?
I knew I wanted to manage money. I had two choices: 1) work for someone, or 2) start a business. Because I am just not cut out to be an employee, starting a business was a natural choice.
3. Where does Why Are We So Clueless about the Stock Market? fit into the picture, why did you write it, and who is the intended audience?
The audience for my book is beginning to intermediate investors. I wrote it because I like to teach people about investing. I wanted to write a book that I wished I had when I started. Many books on investing are kind of intimidating to beginners so I thought that if I could write a book that would teach the basics in an easy-to-understand language, it would be beneficial to new investors. I have been pleasantly surprised and encouraged by the positive feedback that I have been receiving from readers – it was beyond my expectations.
The title of my book came from watching a friend lose $18,000 within two days after investing $20,000 in Fannie Mae and Freddie Mac in 2008. Even though I advised against it, he still did it because he thought that his specialized knowledge of real estate gave him an edge over other market participants. For me, both Fannie Mae and Freddie Mac were way too leveraged. After this event, I kept asking myself, “Why is he so clueless about investing?” and that’s how I was inspired to title my book, Why Are We So Clueless about the Stock Market?
4. Given your role as a mentor and author – If you could change one thing about financial news and education what would it be?
The problem with financial news is that news providers such as TV stations are in the business of advertising. This is how they make money. So they tend to create content that keeps people glued to their TV screens whether the content is good or not. If scaring people keeps their attention, they will scare them. So how could this be changed? I am not sure if it can be changed because viewers are not willing to pay for programming.
As far as education, the first thing I would change is to stop teaching students that markets are efficient and that individual stock analysis is useless. I believe that what they teach these students is total nonsense.
Let’s talk investing.
5. What led you to choose the value style
Warren Buffett once said that you either get value investing or you don’t. That’s how I feel about it. It just makes sense to me. Every income-producing asset, such as a business or a piece of real estate, has some intrinsic value. My job is to estimate this value and only purchase these assets when I am getting a good deal.
6. Which investors do you admire? Besides these investors who else has influenced you?
The three investors that influenced me the most are Warren Buffett, Mohnish Pabrai, and Joel Greenblatt. Aside from these investors, there are some others who have inspired me. Not many people in the investing community know that I ballroom dance. Dima and Olga Sukachov are former professional Latin dance competitors who have had the most influence on my work ethic.
Dima and Olga Sukachov
There are many parallels between dancing and investing. When I first started dancing, I was told that you need to have a strong foundation before you start building a house. This is no different in investing. You cannot go out and look for investments if you don’t know what your philosophy is.[/list]Investment Questions:
7. Tell us about your approach to fundamental analysis-what is your specific focus/edge?
I look at both quantitative and qualitative factors. I try not to overanalyze the numbers, but I spend a lot of time on the qualitative factors such as interviewing the managers and former employees, customers, and industry experts. I cannot tell you how many times I walked away from deals after speaking with people on the phone even though the numbers looked good. So I would say that my edge is that I know more about my investments than other investors do.
8. Are you willing to share one of your current investments with us?
I recently invested in Dover Motorsports. This is an interesting investment opportunity because I usually look for good managers at the helm, but this company is run by incompetent managers. However, I still like this company because it is extremely cheap and because even if it went bankrupt, investors would get more for the company’s assets than the current market capitalization. If you wish, you can find my analysis on this company by visiting my blog.http://classicvalueinvestors.blogspot.com/2009/11/dover-motorsports-dvd_4409.html
9. How do you look at risk?
In schools they teach students that risk is equivalent to volatility and that it is represented by beta. I don’t believe in it at all even though this is exactly what I was taught in college. Volatility is not risk but opportunity. Risk to me is not understanding the underlying business well enough and paying too much for it.
10. We understand that you started a fund last year-what has the financial crisis taught you?
It has taught me to be patient when searching for investment opportunities. Don’t settle for average deals just because you need to put money to work. In 2007 and early 2008 I was getting impatient trying to put money to work but luckily I was not satisfied with anything I was finding until the economy started crashing. Being patient paid off because I had all this cash to invest.
11. Your book highlights 4 case studies can you give us a quick study of each particularly the BNI deal which seems to have been quite prophetic?
As many readers probably know, Warren Buffett is making a $26.3 billion investment in Burlington Northern Santa Fe (BNI). It also happens to be one of the case studies in my book. When the news came out about Buffett’s deal, it definitely put a smile on my face. I acquired some shares of this company at the beginning of 2009 when the stock market was in a complete panic. I figured that no matter what happens, we will always need railroads because it is impossible to e-mail goods over the Internet. While the stock seemed cheap, I had no idea that its price was going to recover so quickly.
Thor Industries was one of my favorites because it was not a well-known company as compared to the other companies I wrote about in my book. The company manufactures recreational vehicles. When people are worried about their financial survival, they are likely to defer purchases of recreational vehicles. As a result, the stock got hammered. From my analysis, I learned that the company was run by wonderful managers who are skillful at using recessions to acquire other struggling companies. In addition, the company had no debt; therefore, I was comfortable holding on to it even though everybody else rushed for the exit. Thor Industries’ stock price recovered wonderfully from below $10 per share to over $35 per share recently.
Wells Fargo was a classic Warren Buffett investment. I read hundreds of books on investing and Wells Fargo was repeatedly mentioned as one of Buffett’s favorites. In 2007, I analyzed about 20 different banks and made side-by-side comparisons using variables such as return on assets, return on equity, and growth rates, etc. Wells Fargo stood out from the crowd. Based my analysis, I told myself that Wells Fargo and US Bancorp would be the only banks that I would invest in if the price is right. I set my target at $20 per share for Wells Fargo. When the price first approached $20, I did not buy it because I was invested in other stocks, but when it hit $13 per share, I just could not justify holding what I had. I sold some stock to acquire Wells Fargo between $10 and $13 per share.
Moody’s Investor Services is a credit rating agency. I read the book, The Credit Rating Industry, and it became obvious to me that this company has a huge moat. At beginning of 2009, it was trading at a very cheap price so I bought it. However, I wish I had not included this company as one of my case studies. Even though it is trading at almost double the price noted in my book, I think I underestimated the regulatory consequences that this company can face as a result of its mistakes when rating mortgage securities. Time will show what will happen to this company. I don’t hold it anymore.
12. How have you evolved as an investor?
When I first started investing, I only focused on large companies because a lot of information was available on them. As I became more confident about my own analysis and research, I started investing in small companies that are not well known and are not followed by Wall Street analysts. I realized that my universe of companies is much larger than that of Warren Buffett or other famous investors who manage billions. Because the amount of money that I manage is smaller, I can generate much higher returns for myself and my clients by focusing on smaller companies that are not priced efficiently.
13. Which books have made you a better investor?
I read many books on investing, and they all shaped my investing philosophy in one way or another. But if I were to pick only three, they would be: The Little Book that Beats the Market by Joel Greenblatt, The Little Book That Builds Wealth by Pat Dorsey, and The Dhandho Investor by Mohnish Pabrai.
14. What advice do you have for active and passive individual investors? In addition, what advice would you give sophisticated investors?
For active individual investors: Don’t be too active. For example, I made most of my money in 2009 when I wasn’t trading at all. I was too busy writing my book. There is so much wisdom in learning how to sit still and do nothing. But, I still find it difficult. Hopefully, over time, I will get better at it.
For passive individual investors: Warren Buffett says that if you don’t have time to research stocks, invest in an index. I don’t think this is the best way anymore. There are so many good money managers out there that follow the value investing philosophy. Many of them can beat the market almost every year. Just hire them to do it for you. But pick good ones. You only need to do your research once. If you find a good money manager, he or she will deliver, and you will grow rich over time.
For sophisticated investors: Don’t cut corners on research. Many sophisticated investors only rely on SEC filings during due diligence. Pick up the phone and call industry experts, customers, suppliers, and managers, and you will learn so much about the business of a particular company that you will have an edge over your fellow investors.
15. What does the future hold for you and your website?
My full-time business is managing money for my clients, and this business is growing. I would like my blog to be a place where readers can become educated about investing and also be exposed to occasional investment ideas. I plan to start writing on my blog more often.
16. How can readers follow your success & progress?
The best way to follow me is to subscribe to my blog and my newsletter.