Guy Spier (Trades, Portfolio) is a renowned Zurich-based investor who founded Aquamarine Capital Management. He is also known for his strick adherance to Warren Buffett (Trades, Portfolio)'s princpiples of value investing and capital allocation, and he even submitted the winning bid for a charity auction lunch with Buffett in 2008.
In an April 2023 interview with SumZero, Spier discussed his “evolution as a value investor” and investment opportunities. Here are some of my notes from the interview, focusing in particular on the parts where Spier talked about his investment strategy and his bets in India.
The evolution of a value investor
Spier is known for writing the famous book “The Evolution of a Value Investor." This outlines his story, starting with his career as an investment banker on Wall Street at D.H. Blair. According to Spier, this was a corrupt firm not dissimilar to the “Wolf of Wall Street” movie. After Spier left, the firm was shut down for violations against various rules, as well as “ripping off the clients." From this experience, Spier learned that your “reputation is everything” and by associating with “bad people” you can damage your own reputation.
Spier then stumbled upon the teachings of Buffett, which changed his life as he engrossed himself in Buffett’s readings. A strategy Spier employed was to imagine what would Buffett do in his shoes when making a decision or in a situation. This is an immensely powerful tactic and can be useful in many walks of life.
He developed a true “passion” for the value investing approach, and this led to his father entrusting him with his wealth to start the Aquamarine Fund. Spier has also found inspiration from “self-development” leaders such as Tony Robbins and Dale Carnegie. He believes that when you act on something with true passion, the world opens up for you and the resources are attracted to you.
Investment strategy
Spier adopts a classic value investing approach as epitomized by Buffett and Benjamin Graham. He says he takes a “cursory glance” at around 600 companies per year, before deep diving into 10 to 20 investment opportunities. He is extremely open to instruments, asset classes and geographies.
One of his earlier investments was bonds related to the Euro tunnel which connects the U.K. and France. Spier used Buffett’s analogy of a “toll road” in order to justify this investment and its competitive advantages.
Another one of his investments was a credit rating agency named Duff & Phelps, which was acquired by Fitch in 2000. Credit agencies operate with a great business model that has “high margins” and also lowers the cost of doing business for their clients. This is because in most cases a company cannot issue a bond to the market unless it has a credit rating. The interest rate which needs to be paid on bonds also goes down by approximately “100 basis points” if a company has a credit rating. This led Spier on a search for other credit rating agencies across the world.
Spier also says he likes to invest in businesses in regulated industries and whose counterparties are also regulated.
In terms of position sizing, Spier tends to make each new position up to 5% of his portfolio, but then he doesn’t rebalance on average, and thus some positions “balloon” such as Chinese EV maker BYD Co (SZSE:002594, Financial).
In order to get a good valuation or deal, Spier believes it's best to buy shares from people who are “fearful” and “pessimistic” as opposed to “optimistic” as was the case in 2021, when a bubble in many growth stocks looked to have been formed.
Spier has previously invested in Fiat, which was trading at a “fraction of revenue” and under normal conditions would have traded at around “1 times” earnings, a true value investment.
When working with management, Spier takes a less antagonistic approach than most investors, especially activists. He prefers to communicate to management with a humble mindset of “how can I best serve you?” as opposed to thinking he knows more about the business than they do.
He has invested in far-flung places such as Oman, Jordan and even Zimbabwe. In the words of Charlie Munger (Trades, Portfolio), Spier likes to “fish where the fish are."
Spier also likes to ask himself where he would invest if the markets were closed and he could “sit on it forever." This helps to give perspective that an investment is in real assets or businesses and not ticker symbols.
Investments in India
Spier previously invested in the leading credit rating agency in India, Crisil (NSE:CRISIL, Financial), which had its financial accounts in English, making it easier to research. This was a “six-bagger” for Spier, but if he hadn’t sold it too early, it would have been a “1000-bagger,” which is astonishing.
In order to handicap the risk of “getting ripped off” in a foreign country, Spier likes to analyze the largest shareholders. For example, Spier discovered ICICI Bank (NSE:ICICIBANK, Financial), which is an extremely well-known and large bank in India, was an investor in Crisil, with another being S&P Global (SPGI, Financial), the company behind the S&P 500.
CARE Ratings (NSE:CARERATING, Financial) is another interesting credit agency in India, although it doesn’t have substantial foreign shareholders, which could make it more of a risk in Spier's eyes. A positive is the largest shareholder is a large Indian pension fund, and Crisil also owns shares. This is a smaller agency with a lower valuation than Crisil, at ~20 times cash earnings.
There are around six credit agencies in India, which is more than the two or three “oligopolies” in other parts of the world, and thus this is more of a risk here. CARE may not be a “winner” in the long term if the industry consolidates in the future.
In order to discover more investment opportunities in India, Spier visited Bandra Kurla Complex, a business district in India that houses many events in which brokers showcase Indian stocks. This led him to discover India Energy Exchange (NSE:IEX, Financial), which he says is one of his “current” fund holdings (as of late February 2023). This exchange is involved with the “trading of electricity” which matches the supply and demand of power.
These “exchanges” are common throughout most of the world. For example, in Europe, its equivalent business would be the European Energy Exchange or Nord Pool. As we move towards more renewable energy sources, this is expected to increase the trading volume of electricity due to its intermittent generation. India also needs to produce at least three times the amount of energy per capita over the next decade, according to Spier.
In addition, these exchanges are also “natural monopolies” due to their regulated and central nature. Spier has also done immense due diligence, sitting down with regulators to understand their role. In India’s case, the regulators look to be more focused on making sure the system works as opposed to stripping licenses from companies, which is a positive sign.
The only negative with this stock according to Spier is it is not exactly “cheap” and trades at a price-earnings ratio of 45.
Although Spier didn’t state exactly when he invested, he did admit to “paying a high multiple” of ~30 times earnings. A positive is this is “real earnings” and cash building up on balance. He said he did a “simple calculation” which assumed 70% market penetration long term (which is similar to Western energy exchanges), up from ~10% currently. This signals huge growth potential which could be “10 to 30 times larger long term."
A limitation of the business is it has been restricted from trading energy derivatives. The company also may face competition from entities that develop specialist skills in certain energy contracts.
There are also bilateral contracts between power generation and distribution companies which can cause fluctuations in exchange volume, both positively and negatively depending upon energy prices.
Final thoughts
Spier is an incredibly thoughtful investor who truly does take an independent-thinking approach to investing. His international investments in India have been lucrative so far, and given the forecasted rise in the country's middle class, I would expect companies in this country to have many tailwinds ahead. In my opinion, the biggest risk with India could be its seemingly close relationship with Russia as a trade partner, which could complicate things with U.S. investors.
