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PJ Pahygiannis
PJ Pahygiannis
Articles (149) 

20 Questions With Elliot Trexler

Insight from the president and CIO of Global Return Asset Management

September 21, 2016

Elliot Trexler is the president and chief investing officer at Global Return Asset Management. We discuss risk management, alternative investments and his favorite resources.

How and why did you get started investing? What is your background?

  1. How: I bought my first stock when I was 12 years old and opened up my first brokerage account when I was 18.
  2. Why: I love the intellectual challenge and I love buying businesses.
  3. Background: My Mom told me I could be a lawyer or doctor, so I picked a lawyer. I studied political science and philosophy but I loved financial analysis, so I pursued investing instead.

Describe your investing strategy and portfolio organization. Where do you get your investing ideas from?

  1. Strategy: Long-only, value investors focused on risk management.
  2. Portfolio organization: Concentrated domestic equities with three styles:
    1. Core: Mid-to-large cap companies, non-discretionary, easy to understand/predictable business model, will hold 5+ years.
    2. Growth: Small-to-mid cap companies, expanding niche industries, rapidly growing sales, increasing ROIC and FCF, will hold 2-5+ years.
    3. Alternative: Rare market opportunities where stock prices reflect extremes, cyclical or discretionary, asset-rich, short-term holdings (under 2 years).
  3. Ideas come from reading. I read a lot and follow companies.

What drew you to that specific strategy?

  1. My beliefs in risk management.
  2. These styles allow me to maintain my investment principles yet respond to market opportunities.

What books or other investors changed the way you think, inspired you, or mentored you? What is the most important lesson learned from them? What investors do you follow today?

  1. I read 3 or 4 books at a time and finish about one book per week, so I couldn’t pick any one book that is a favorite. The people who have influenced me the most are Howard Marks (Trades, Portfolio), Phil Fisher and Charlie Munger (Trades, Portfolio). I’ve had many mentors, but other than books on investing I’ve never had a personal investing mentor. Successful investing is as unique as an individual’s finger print; I think part of the reason so many people fail is that they adopt a strategy that isn’t fully aligned with who they are.
  2. The most important lesson: Focus on risk management.
  3. Who do I follow: I spend no time watching what other investors are investing in.

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?

  1. I have several holdings that I’ll hold for the rest of my life and since I’m aiming to live beyond 100, that’s a little over 60 years of compounding.
  2. I hold a stock until it reaches my price target or I can find a higher reward/lower risk opportunity.
  3. Regarding length of time before knowing when I’m right or wrong, I don’t prescribe a time to this. I’ll know I’m wrong when my thesis breaks before my price target is achieved.

How has your investing approach changed over the years?

I’m investing/concentrating on fewer stocks. I used to believe that I needed to own 30+ stocks and I now think this is very dangerous, it’s a distraction and creates a moral hazard. I would much rather own a few stocks that I know very well, than own many stocks that I hardly know. It takes a phenomenal amount of work to identify and understand a great stock so when this happens I should allocate a meaningful amount of capital to the idea.

Name some of the things that you do or believe that other investors do not.

I look for reasons to exclude stocks from consideration.

Most people look for stocks to invest into so they can earn a return. People do this because they think that investing will generate a return. But this isn’t the case. Investing is actually the act of purchasing risk. It’s the act of purchasing risk that generates a return. There are no “risk-free returns.” Shifting our perspective to acknowledge that we are “purchasing risk” to generate a return radically alters our perception of a security.

Behavioral psychology states that people will find what they’re looking for. If when analyzing a security someone is looking for reasons it will generate a return they’ll find those reasons. Unfortunately, once the investor has found facts to validate buying the security, he often doesn’t consider much anything else; he has his answer. Furthermore, looking for risk is challenging, so people don’t like doing it; much more fun can be had fantasizing about returns.

Conversely, if we’re looking for reasons to exclude a security, due to risk, we’ll find it. Looking for risk is challenging because it’s latent and often buried within a company’s operations or industry dynamic, rarely is it found on a financial statement (Would anyone ever lose money investing if risk was listed on a financial statement for everyone to see?). Further, because risk is latent, identifying it requires critical thinking beyond financial statement analysis and first-level thinking.

Once we’ve identified a security’s risk we’re able to answer whether or not it possesses a risk/reward ratio sufficient enough to justify purchasing it.

Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?

I read a lot of 10-Ks. I’m looking for a certain type of business model and a screener won’t find that.

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.

High Quality/Ideal Company

  1. A defensible business model/product in an expanding and niche industry
  2. Minimal, if any, competitors
  3. High returns on invested capital
  4. Low leverage with strong ROE, ROA
  5. Growing sales and FCF
  6. Wide margins
  7. No dilution or excessive stock options
  8. Honest representation of company financials
  9. Significant insider ownership

A Bad Investment

  1. Companies that have weak quality earnings and financial statements
  2. Highly competitive industries
  3. Thin margins

What kind of checklist do you use when investing? Do you have a specific approach, structure, process that you use?

  1. Checklist. I have a very thorough checklist process I use to analyze a company, each step listed below has an associated checklist.
  2. Approach:
    1. Evaluate the business model
    2. Determine the quality of the financial statements
    3. Determine the quality and durability of sales
    4. Review 10-K’s and earnings call transcripts
    5. Conduct quantitative and qualitative analysis
    6. Evaluate industry and peers
    7. ESG Analysis
    8. Determine intrinsic value

Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?

As for research, everything above in 11B is part of my research. But I also employ a lot of what Philip Fisher talks about – I call customers, suppliers and competitors, I speak with current and previous employees/management. I use the product or service; if it’s a retail location I’ll go to it.

How do you go about valuing a stock and how do you decide how you are going to value a specific stock?

I use either a DCF or assets-based approach.

What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?

I bought several great bargains this year that have substantially increased in value. But frankly, I want the market to decline – my job is to buy as much stock as possible with the least amount of money, so it’s times like now that I’m selling positions and taking profits. With stock prices continuing to climb, I’m spending more time looking for Alternative investments (described in 2B above) so that when a correction does happen our portfolio will have a large margin of safety.

How do you feel about the market today? It’s difficult to find easy opportunity but opportunities still exist. Do you see it as overvalued? What concerns you the most?

Government and pension liabilities, the Federal Reserve and asset inflation.

What are some books that you are reading now? What is the most important lesson learned from your favorite one?

I read a lot of books and then host an event called “Author Series” where I interview the authors, people can attend in-person or online, so I don’t want to comment on favorites.

Any advice to a new value investor? What should they know and what habits should they develop before they start?

Read and learn as much as you can. Approach your education as you would a dinner buffet – taste a little of everything so you know what you like and don’t like, so you know what your stomach can handle, and then focus on what’s right for you. As for habits, you will become the person you act, so develop habits early in your career.

What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?

My favorite value investing resources are 10-K’s. I don’t follow any investors and I think doing so is an incredibly dangerous activity for wannabe professional investors.

Describe some of the biggest mistakes you have made value investing. What are your three worst investments? What did you learn and how do you avoid those mistakes today?

I think the biggest mistake I can make is not thinking rationally. We all have access to a company’s financial statements, why then do some people make money and others don’t? The reason is lack of rationality, or said differently, the lack of an accurate perception of reality. Yes, unexpected events happen but if I’ve planned for unexpected events then I won’t suffer significant consequences. Another big mistake is not learning from the first time I made the mistake!

How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?

I’m lucky, emotional management and fortitude is a key strength of mine. That said, I also have a lot of checks-and-balances in place, most important of which are my principles and investment strategy. Plus, I only buy businesses I’m comfortable adding more money to or holding for decades, so I don’t care how the market wants to value my businesses’ on a short-term basis.

If you'd like to share, how have the last five to ten years been for you investing wise?

Since inception (Jan. 1, 2013) my CAGR is just under 12% and that’s with maintaining a lot of cash. There have been times when I’m fully invested, and I’d love to be fully invested all the time, but on average I’ve maintained about 11% in cash since inception.

Disclosure: No position in the stock mentioned.

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Rating: 5.0/5 (3 votes)

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Comments

willeo17
Willeo17 - 2 years ago    Report SPAM

Out of curiosity I searched for information on Mr. Trexler and his firm, and am quite alarmed.

He does not have any sort of accrediation nor is his firm registered. The only item that shows up on his FINRA report is a bankruptcy. It also describes his company, Global Return Asset Management, as "INACTIVE" and "UNFUNDED". Forgive me if I'm missing something, but I don't believe this individual is an actual investment manager, but is only holding himself out to be so. He can't legally invest others' money without being registered, correct?

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