Today, I had the pleasure of having a conversation with Jason Rivera. Jason tells us his favorite books, the investors he looks up to, the books he recommends, as well as his findings in the OTC market.
How did you get started investing? What is your background?
I started learning about investing out of necessity. About 10 years ago I was dealing with severe dizziness issues, so I could not do much. But when my wife told me she was pregnant with our first daughter, I knew I had to do something that would allow me to provide for my family at some point when I got healthy.
At the time I thought about going into three different lines of work.
One was to become a politician but I figured the world didn’t need any more scum bag politicians.
The second was becoming a writer but I remember being told in high school by one teacher, “I hope you never want to become a writer because this paper is terrible.” And it was the truth then.
And third was that I remembered learning some basics about investing my senior year in high school and I remember being interested in it.
So almost by default I chose the path of learning about investing because it was the only path I was even a bit interested in.
I’ve run the value investment blog Value Investing Journey for five years now. And written a highly acclaimed value investment education book entitled "How To Value Invest."
I’m the chairman, CEO and founder of Rivera Holdings, an investment holding company that has just opened and is now accepting investors.
Describe your investing strategy.
I’m a strict and disciplined value investor who works to find and buy companies cheaper than what their true value is.
I concentrate on finding smaller companies – below $1 billion, and the smaller the better - that are undervalued by a significant margin to what I estimate is the company’s true value.
Some of the traits I look for are companies that produce a ton of free cash and operating profits. And have superb balance sheets with little to no debt and a lot of cash.
I love companies that produce consistently great profitability margins ROIC, ROE, ROCE, FCF/Sales, etc. And companies that have or can build competitive advantages.
What drew you to that specific strategy?
I don’t remember what initially got me interested in value investing but once I learned about it, I knew this was the investing discipline for me.
I’m a big believer in what both Warren Buffett (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) said in the past that value investing in some sense is genetic. Because to some people, it makes complete sense as soon as you read about it. And to others it makes no sense at all.
Value investing – buying a company for less than its true worth – made sense to me right away.
What books or other investors influenced you?
Some of the books that have influenced and still influence me and what I do are, in no particular order:
- The Buffett Partnership Letters
- The Berkshire Hathaway Shareholder Letters
- Warren Buffett (Trades, Portfolio)’s "Ground Rules"
- "The Intelligent Investor"
- "Dream Big – The Story of 3G Capital"
- "The Psychology of Human Misjudgment"
- "A Lesson On Elementary Worldly Wisdom"
- "Mindset"
- "The Brain That Changes Itself"
- "The Power of Habit"
- "Willpower: Discovering The Greatest Human Strength"
- "The Obstacle is the Way"
- "The Art of Learning"
I’ve also got six investment icons that I admire and try to learn as much as possible from.
In no particular order they are:
- Warren Buffett (Trades, Portfolio)
- Charlie Munger (Trades, Portfolio)
- Benjamin Graham
- Henry Singleton
- Shelby Davis
- Professor Sanjay Bakshi
The greatest overall concept, other than the general concept of value investing, that’s influenced me most over the years are Charlie Munger (Trades, Portfolio)’s concepts of mental models.
How has your investing changed over the years?
Not much honestly. I’ve always tried to be a disciplined value investor.
The major things that have changed over the years are that I’ve become more patient, disciplined, knowledgeable and better over time.
Name some of the things that you do that other investors do not.
I look for things like net operating loss carryforward’s (NOL’s) and investment float. Two things many investors care nothing about. And I also love looking through the OTC and ADR markets for companies.
Most American investors won’t invest in small companies. But even fewer look on the OTC and ADR markets for companies to invest in. I concentrate on finding great small companies to invest in regardless of where they’re listed or even if they’re on an exchange or not.
I have an advantage here because few people look in these areas. And the smaller the company the better for me.
The smallest company I’m currently invested in has a market cap of $12 million as of this writing. And the smallest company on my watch list has a market cap of $5 million.
I’m either invested in or have companies on my watch list located in 22 different countries. And most of these are on the OTC market.
Where do you get your investing ideas from?
Anywhere.
I look through individual country ADR lists. Read magazines and newspapers like Barrons, The Wall Street Journal, Investor’s Business Daily, The Financial Times, etc.
But over the last few years I’ve been going through the OTC market one company by one narrowing down the 20,000+ companies on the market to find companies to invest in.
Do you use any stock screeners?
No, not anymore.
I used to use screeners for things like companies selling below book value, high ROIC, high insider ownership and buying, etc. But the companies I search for don’t fit a fixed model. And things like significant NOL’s or hidden assets don’t show up in screens, so I no longer use screens.
Name some of the traits that a company must have for you to invest in.
When it comes to considering an investment in any company, I have five must meet requirements. If these aren’t met I won’t invest in the company no matter how great the opportunity is.
- Can I trust management?
- Is the company undervalued enough for me? Or at least fairly valued if a great business.
- Is there a high likelihood I’m going to lose money no matter what the upside/undervaluation is?
- Do I already own a better investment?
- Will I be happy owning this company for decades if necessary?
The can I trust management item is number one for a reason here.
If I can’t trust management, it doesn’t matter how great the undervaluation or opportunity is. I won’t invest in them.
The only way this rule is ever broken is if I have the chance to change management by owning a significant portion of the company.
What kind of checklist do you use when investing?
I use a preliminary investment checklist that shows margins in the trailing twelve month (TTM) period, and over the last five years. If book value has fallen or risen over the last five years. If share count has fallen or risen over the last five years. If the cash conversion cycle (CCC) of the company rose or fell over the last five years. I look to see what the company’s margins are today and how they’ve done over the last five years. What kind of free cash the company produces and is this rising or falling. And what percentages of the company's balance sheet is in cash versus debt.
And of course the five things mentioned above.
Before making an investment, what kind of research do you do?
I first do the strict preliminary analysis above. If a company doesn’t check enough boxes here I pass unless it's an NCAV type company.
If a company passes this then I go to the company filings – 10K’s, 10Q’s, proxies, 8K’s, etc. I take notes on all these and if I find too many red flags here I pass again.
If not, I then go into valuation, analysis of margins which I calculate myself, analysis of float if any, etc. If a company still passes this I then write an article about them and buy them.
If I get to this point I’ve put hundreds of hours into researching, taking notes on, writing about and evaluating the company.
The checklists and processes I use are great because I invest in fewer than 1 out of every 500 companies I research. And this number continues to fall as I get more disciplined.
This means fewer mistakes for me and greater returns for my investors.
What kind of bargains are you finding in this market?
None over the last few months. But since April 2015 I’ve found and recommended 10 companies who, as of this writing, have produced an average return of 34% in that time.
How do you feel about the market today? Do you see it as overvalued?
I don’t care what the markets doing. But yes, I see the market as overvalued.
I’ve said this for the last five years though and the markets kept going straight up.
While it is harder to find great cheap companies to invest in, they still can be found if you look enough.
What are some books that you are reading now?
I’ve recently finished up the following except the final two, which I’m still reading.
- "Why Should White Guys Have All The Fun" – Biography of Reginald Lewis
- "The Billionaire Who Wasn’t" – Biography of Chuck Feeney
- "Benjamin Franklin" by Walter Isaacson
- "Multipliers"
- "The One Thing"
- "Learn of Die"
- "The Sugar Barons"
- "Dynasties of the Sea"
”‹Any advice to a new investor?
Yes, and I write about them in my blog post 10 Tips To Becoming A World Class Investment Analyst.
Disclosure: No position in the stock mentioned.
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