Since its founding in 2003, Mitch Kovitz and Jonathan Shapiro have built an incredible team at Kovitz Investment Group. The addition of Joel Hirsh in 2006 made the team all the more vigorous in its search for high-quality businesses that offer outsized return potential with a low probability of permanent capital loss. The group will be the first to tell you that its approach is a little âold schoolâ and unconventional to others in the industry, but it wouldnât change its approach for anything in the world.
Itâs hard to argue with its results. In fact, its returns have been downright stellar. Since inception, KIG has returned 11.17% vs. 7.81% for the S&P 500.
Currently, the team is finding value in high-quality businesses that it believes are mispriced by the general marketplace. They are finding value in such industries as airplane manufacturing, media, construction services, and retail.
How did you get started in the investing world? And how has your view of investing evolved (if at all)?
Mitch Kovitz: It began in '80s when I left the world of accounting. Once I began my career in the investment advisory business and asset management business, I started looking for people who were beating the markets and doing well versus their competition. Mainly because most of the track records I had seen were not doing any better than Index funds, which were just coming into vogue.
They had been around since the '70s. But people started to realize that passive investing had done very well. So in making sure that I was still adding value to my clients, I actually stumbled upon Peter Lynch. I read all his books, and in his books he talked about Warren Buffett (Trades, Portfolio) being the âbest investor of all time.â Itâs hard to believe, but I didnât know much about Warren Buffett (Trades, Portfolio). At the time there were a lot of people in the investment business that didnât follow the value stripe. And if you didnât follow value investing back then, there was a chance you would not have known of his investment philosophy.
I started to read about him. I read all of his investment letters and quickly discovered that I was very compatible with how he thought about investing. There was a system and process (a roadmap) I thought I could use to generate market-beating returns. And actually execute it over the long term. So it all started in the mid-'90s when I was actually executing the system. Nowadays I am focused more on a growing asset that is undervalued. Meaning, I focus on great businesses rather than just asset prices.
You never know when the discount between current price and intrinsic value will close. For instance, if the asset itself doesnât grow in value for the next 5 years, more than likely your rate of return wonât be so great. However, if we invest in great businesses where the intrinsic value keeps growing, we give ourselves a better opportunity for compounded returns. I am also much more paranoid of a disappearing moat than I used to be. Changes seem to occur much quicker these days compared to when I first started in this business in the later '80s. Whether itâs increased amounts of capital chasing in great ideas or the advent of the internet, competitive moats seem to be constantly under attack.
What does your typical day look like from beginning to end?
MK: For us itâs all about gathering information and then giving ourselves time to think. This means reading newspapers (New York Times, Financial Times, Wall Street Journal) and circulating all kinds of intelligent information among the three of us. Whatâs probably most telling about us is what we donât do compared to other companies in our business. We donât have any organized regular investment meetings. We donât believe itâs a good idea to have a situation where you feel forced to come up with great investment ideas every week. Most of the time you get the best results in investing by doing absolutely nothing.
âTake time to thinkâ
When there is a call to do something and constantly produce investment ideas with regularly organized meetings, it can cause harmful action. In order for a discussion to occur one of us has to send an email or walk in the other personâs office and say, âItâs time for us buy thisâ or âItâs time to sell thatâ or âItâs time to pare down here.â We let that process dictate the discussion, not an organized regular meeting.
Jonathan Shapiro: Itâs not overly unique, but I typically start the day digesting the news flow of the day on companies we own or are looking at. Essentially trying to get the âlay of the land.â We also look at other companiesâ news that may influence an industry. We are always on the lookout for how it could come back to impact our companies. Other than that, we are just reading. Typically, if weâre in the middle of looking at a company for potential purchase, I spend the time reading and getting as much information as I can. And other days when thereâs nothing urgent or time sensitive, Iâm just trying to increase my knowledge base. Itâs been really important for us for the last several years.
For example, we didnât know a great deal about the energy or media industry 3-4 years ago. But over the last couple of years, weâve really begun to understand the nuances of these industries. It really helps us gain conviction in our decisions of specific companies.
Joel Hirsh: There arenât many professional investors that âreallyâ look out several years. Everyone says they look out several years, but very few actually execute on this philosophy. What really differentiates our day compared to the rest of the industry is that we spend most of our day reading and thinking. Sometimes I will even read books during the workday. I donât know how many professional investors take the time to read books. Charlie Munger (Trades, Portfolio) and Warren Buffett (Trades, Portfolio) talk about this topic regularly. You want to expand your knowledge base to gain the confidence to make only a couple of decisions a year that youâll have to live with for years. I think itâs critical to our success. Thatâs what our day is set-up to accomplish: learn. Energy is a great example. We did a lot of reading in 2009/2010 on the oil and gas sector, that didnât really matter for years. But it became enormously valuable to us years later.
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