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PJ Pahygiannis
PJ Pahygiannis
Articles (149) 

15 Questions with John Szramiak of Vintage Value Investing

My first piece of advice would be to ask yourself why you actually want to be an investor'

September 26, 2016 | About:

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

I got started investing in a sort of roundabout way... actually, I owe it all to Google. In middle school and high school I was probably on Google for several hours every day - searching different topics and learning about whatever I was curious about that day (it was basically my equivalent to hanging out in a library and trying to read every book). I loved Google the search engine and how you could think of any question and then find the answer to it within a few seconds. And I also loved Google the company - its vision, its culture, its philosophy, its other products, and its success.

So when the financial crisis hit in 2008, I remember looking up Google stock on Google Finance. And it was trading somewhere around $150 per share (adjusted for stock splits) compared to a high of $357. I knew next to nothing about investing, but I knew enough to think to myself "there must be something wrong here" So I did a little research and it didn't take long to figure out that (a) Google as a company was doing fine, but (b) we were in a recession - the worst recession since the Great Depression! So I opened a brokerage account and bought as many shares as I could using all the money I had saved from birthdays and summer jobs.

The stock must've gone up a bit soon after I bought it, because I then became very excited about investing and started doing research (using Google of course) about how to become a better investor. And if you want to teach yourself about investing (and you want to do it for free), then you're pretty much required to start with the writings of Warren Buffett (Trades, Portfolio) - who just so happens to be the greatest teacher of investing of all time, as well as the greatest investor of all time. In college I studied finance and economics, but I continued to read and teach myself all about value investing outside of class (most value investing concepts are actually never even mentioned in business schools), and I would research stocks and manage my portfolio in my spare time.

As it turns out, I still own all the Google shares I bought and have no plans of selling.

2. Describe your investing strategy

I'm a long-term value investor. What does that mean exactly? Well, first it means that I think that every investment decision absolutely must be based on the comparison of price vs. intrinsic value, and that intrinsic value must be calculated using conservative, fundamental analysis. And second, it means that I like to buy-and-hold for very long periods of time.

On a more tactical level, I really try to follow Warren Buffett (Trades, Portfolio)'s strategy as much as possible: find stocks that are attractively priced, with good free cash flow characteristics, with good long-term prospects, and that I'd be happy to own if the stock market shut down for 5 years starting tomorrow.

3. What drew you to that specific strategy?

I think for some people, when they first learn about value investing, it either clicks right away and makes total sense, or it doesn't and they never really get it. I think it might come down to how some people's brains are hardwired. For me, it just clicked. I'm always baffled when I see people trying to time the stock market, or day trading, or speculating - even the people that end up making tons of money using those strategies, because I have no idea how they do it (in my opinion most of these people end up being lucky, rather than good). So I think intrinsically I've always been a value investor.

4. What books or other investors influenced, inspired, or mentored you? What investors do you follow today?

The books that have inspired me the most are: The Essays of Warren Buffett (Trades, Portfolio), The Intelligent Investor, The Snowball, Berkshire Beyond Buffett, Thinking Fast and Slow, and The Millionaire Next Door. Investors include Warren Buffett (Trades, Portfolio), Ben Graham, Peter Lynch, and actually my parents - who have never had a finance course or went to business school, but have actually had remarkable success investing in the stock market and in real estate.

5. How has your investing changed over the years?

When I first started out I was very raw at investing, obviously. So I didn't know much about finance. Now I know a lot more about financial statements, accounting, different industries, competitive dynamics, etc., so I've been able to dive much deeper into my research.

I've also experimented through the years with different strategies (Graham's net-nets, merger arbitrage, long/short trades) and with investing in different sectors (i.e. energy). Now I find myself sticking much closer to my circle of competence.

Lastly, I've realized the benefit of keeping a large percentage of your portfolio in cash. If you look back through the years - from Medici on to Buffett - the greatest "investors" have always been financiers and capital providers in times of economic trouble (in other words, they've always had very liquid wealth that they were able to lend or provide to others at very attractive rates of return during times of economic hardship). This is very powerful and highly applicable to investing in the stock market. Being liquid - when no one else is - allows you to take advantage of really attractive opportunities when they come your way.

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

I think that to be a successful investor, you always have to compare price to intrinsic value. Are you paying more than what you're receiving in return? If the answer is yes, then why would you ever make that investment? I know a lot of investors who focus too much on the price, and not enough on the value, hoping that a stock will go up so that they can sell it to a greater fool. That's a very dangerous game to play.

I also believe in investing for the very long-term. Even if you don't hold an investment forever, you should be investing and thinking as if you were going to. Most investors are way too short-termed focused, which causes them to miss out on many great investments.

Finally, many investors think that holding cash is the worst thing in the world - they want to be fully invested all the time, making sure their money is always working for them - I believe in keeping a large portion of my portfolio in cash (for the reasons that I mentioned above).

7. What are some of your favorite companies? Where do you get your investing ideas from?

I think Google, Apple, Berkshire Hathaway, and Walt Disney are all amazing companies (whether or not they are great investments would of course depend on what price they are trading at at any point in time).

I don't exactly have a set method of finding investment ideas. Inspiration can really come from any place - from a new product you just heard about, from a sector that you're interested in, from the news, from interviews, etc. I think the key is whenever you see the name or description of a company and think to yourself "this sounds interesting", then you should look it up and find out more about it. I also use stock screeners a lot to create a shortlist of companies that I could be interested in, and then I'll research the companies on that list.

Someone once asked Warren Buffett (Trades, Portfolio) where he got his investment ideas from. He said he would pick up a list of all the public companies on the NYSE and start with the letter A... So you could always find investment ideas that way, too!

8. Do you use any stock screeners?

I usually use the Google Finance stock screener. I also use Zachs Stock Screener, which has more advanced features than the Google screener.

9. Name some of the traits that a company must have for you to invest in. What does a high quality company look like to you?

The greatest company in the world would be a company that has a monopoly with an actually amazing product or service that customers love, that generates huge amounts of cash but needs very little cash to be reinvested in the business, is run by honest management and has an honest culture, and whose stock is selling for a reasonable price. I try to find these traits in any company I invest in. Analytically, things like high ROE, high ROIC, high margins, high FCF/low capex needs, and stable growth all hint that the above traits exist in a company.

10. What kind of checklist do you use when investing?

I don't have a standardized checklist, although I recognize the importance of having one and I plan on writing one out for myself in the near future. But I do have a checklist in my head when I invest. Some of the questions I ask myself are: Is the stock attractively priced? Do I have a margin of safety? Does the company generate strong FCF? Will the company be able to generate as much or more annual free cash flow going forward as it has in the past? Would I be happy to own this stock if the stock market shut down tomorrow and didn't reopen for 5 or 10 years?

11. Before making an investment, what kind of research do you do? Do you talk to management?

I'll read the company's 10-K's, its 10-Qs, I'll go on the website, I'll do a bunch of research on Google just asking different questions about the company and seeing what's already been written about it - about its products, its management, as an investment, etc. I also use Morningstar for a lot of financial research on a company. I don't talk to management, but I will watch or read interviews and look up bios to try to get a sense of what they're like and how good they are as managers.

12. What kind of bargains are you finding in this market? Do you have any favorite sector?

It's definitely tough to find bargains. We're in the second longest bull market in U.S. history - 7 years. This makes it especially difficult for value investors, who usually do better in bear markets. I thought there were some good value plays in energy a while back, but I don't have a favorite sector right now. I think the only real way to find bargains is to take the bottoms-up approach and go company-by-company, performing fundamental analysis.

13. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?

I think the market is probably overvalued. The current trailing P/E ratio for the S&P 500 is 25, compared to a historical average of about 15.5. This is mostly because the Fed is still keeping rates very low, which has been propping up asset prices. That's been my biggest concern - I think the Fed should be much more aggressive (within reason) on raising rates than they currently are in order to get us back to some normalized level. But I don't think that should keep anyone out of the stock market. I could've said the same thing at any time over the past several years, and I would've missed out on several years of this bull market. I think the economy isn't in danger right now, just that asset prices across the board are being propped up.

That being said, I think there is better value to be had outside of the stock market. For example, I'm currently looking at investing in digital properties (i.e. websites and online businesses). The market for buying and selling digital properties is highly inefficient, the businesses require virtually no reinvestment and are high cash flowing, and valuations are incredibly low - all of which creates a near perfect environment for a value investor.

14. What are some books that you are reading now?

I just finished a book that is literally called "How to Read a Book." The book is meant to teach you how to think analytically out of books and how to get more out of what you're reading. I'm currently reading "Sapiens", which has gotten great reviews and has been highly recommended by Bill Gates (Trades, Portfolio), Obama, and Mark Zuckerberg. And I recently read "Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future" - it's the first real biography on Elon Musk, who I think is one of the most fascinating businessmen today.

15. Any advice to a new investor?

My first piece of advice would be to ask yourself why you actually want to be an investor. Do you want to invest your savings for retirement? Do you want to get rich quick? Do you want to work for a hedge fund or run your own fund someday? Do you truly enjoy the work? Depending on the answers to these questions, active investing might not be right for you. For example, if you want to get rich quick then I think there are better ways to leverage your time. If you want to save for retirement then you should consider passively investing in an index fund. If you want to work for a hedge fund, then you should know that the industry is much, much tougher today than it was even 10 years ago - hedge fund fees have really come down and performance is very heavily scrutinized. I think its a really tough industry to be in right now.

If you truly enjoy the work, and analyzing companies, and pouring through financial statements, and thinking about business models and different industries, then you're probably on the right path. If you're one of these people, then I'd plea to you to (a) always compare value to price, and (b) always invest and think about the long-term. Not only do I think this makes for successful investing, I think it is the "right" way to invest - imagine if everyone on Wall Street thought this way, instead of trying to manipulate prices in order to make a quick buck

Finally, and this is my most important piece of advice, I would recommend that you read everything written by and written about Warren Buffett (Trades, Portfolio). Like I said before, he is the greatest investor of all time and the greatest teacher of investing of all time - surpassing even his own mentor, Ben Graham, in my opinion. Buffett has also written so extensively on so many topics and has given so many interviews on current events that you could spend almost a lifetime just reading his works.

So always keep price vs. value in mind, invest for the long-term, and read everything by and about Warren Buffett (Trades, Portfolio). Do that, and keep learning, and you'll be a successful investor in no time!


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