How and why did you get started investing? What is your background?
I always had a casual interest in the stock market, going back to high school in the late 70s when I opened an account at a local broker and bought a stock about which I knew little except that the New York Times stock tables said it had a really low PE ratio-- I think it was 4, or something like that. It was an Amex-listed company called Outdoor Sports International (the ticker was OSI) and I think it wound up getting bought out, thereby maybe doubling the $200 or so I put into it. (I had no real idea what I was doing-- it was just semi-dumb luck!) Then in my senior year of high school I worked part time in the local Paine Webber office doing clerical work for one of the brokers-- basically, just helping him keep track of his customers' trades. In college though I mostly lost touch with stocks and when I graduated I wound up spending 17 years as a commercial and industrial real estate broker in the "outer boroughs" (Queens, Brooklyn and the Bronx) of New York City. I didn't realize it at the time, but working with a lot of different kinds of businesses actually turned into terrific "real world experience" for when I later became an investment banker and then a full-time investor. In the late 90s-- while I was still in the real estate business-- stocks were going crazy and my interest in them was rekindled. I wound up making a nice chunk of money buying low-PE microcap "value tech" stocks before they really took off like their big-cap brethren, while simultaneously losing some money shorting several of the bubble stocks because I didn't have the experience and fortitude to stick with them before they collapsed. However, on a net basis I'd made good money on the long side (and kept it-- I sold what at the time seemed to be "too early" but in fact was only "months" too early) and decided in January 2000 to sell my half of my real estate company to my partner to try to invest full-time. (Talk about top-ticking the market, and not in a good way!) I then spent a couple of years teaching myself a lot more about finance, studying scores of accounting and financial analysis textbooks, books about Wall Street history, etc. I then paid the most useful (and expensive!) stock market tuition possible: I fell in love with a microcap tech story-stock, rolled almost all of my previous profits into it and went to work for the company in a sales & marketing position. Well, being "inside" a story-stock and comparing that experience with its simultaneous press releases and earnings conference calls was one of the most valuable experiences an investor can have! After spending a year there I sold the stock at a huge loss, left the company (the product failed and most of the sales staff was laid off anyway), and decided that with a combination of my real-world business knowledge (from my commercial real estate days), book knowledge (from all the financial textbooks and history books I'd read) and story-stock knowledge (the experience I just related), I was ready to actually get a real job on Wall Street. However, this was 2003 and NO ONE was hiring, especially a 42 year-old guy with no previous jobs on the Street. Fortunately, one young guy running the New York office of a tiny investment bank saw my resume and was intrigued by the commercial real estate experience. He figured "This guy helped CEOs find their offices and warehouses and we help CEOs find their money, so if he can relate to CEOs one way he can relate to them other ways too." So he hired me on an "eat what I kill" basis (i.e., I'd get a percentage of the banking fees I brought in) and sponsored me for my Series 7 & 63 licenses, and I was off and running, cold-calling companies. I got a few deals done and simultaneously started investing again, mostly in microcaps but this time-- thanks to my own experience-- with a much better "smell detector," lol. My portfolio grew nicely and then in 2006 I went to a larger investment bank and had enough success there that I was recruited to a still larger bank in late 2007. All this time I was investing my own portfolio (even within the somewhat restricted confines of the various i-banks personal trading policies) and in 2009 I left my last i-bank to invest full-time, but this time with the goal of using my accumulated experience to open a hedge fund. I had really good returns in my personal account from 2005 through 2011 and had them audited to use as part of my fund marketing materials, and then in 2011 I opened Stanphyl.
Describe your investing strategy.
On the long side, I'm a micro-cap (where the markets are less efficient due to lower liquidity) "deep-value" guy, but not a "cigar butt" guy; i.e., I look for companies that are cheap on an EV-to-revenue basis but have real growth prospects, and are at least breaking even or have strong enough balance sheets to get to break-even. On the short side, I tend to prefer either mega-cap bubble-stocks (companies that are too big and financially awful to be bought out) or macro bubbles, which I short via ETFs.
What drew you to that specific strategy?
I'm really cheap and I'm really skeptical, so it's the perfect combination for me!
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?
I've read nearly all the Buffett stuff, a number of financial analysis textbooks and lots of financial history, the latter teaching me that there's absolutely nothing new on Wall Street-- they just keep changing the names and the technology. Read "The Go-Go Years" by John Brooks and you'll see exactly what I mean!
How has your investing changed over the years?
I've learned to only get long "real companies" with solid balance sheets and put everything else in the "avoid" or "short" category!
Name some of the things that you do or believe that other investors do not.
There are all kinds of investors out there with vastly different time frames and liquidity needs; I think my greatest edge over many of them is that I'm very patient and can buy tiny public companies that guys managing a lot more money would like to be able to buy but can't because the companies are too small and their AUM is too big. (On the other hand, those guys are flying private and waking up to a view of Central Park while I spent last weekend crammed into coach-- okay, I did spring for the exit row, lol-- and look out my window at a bagel store on Second Avenue!) But in all seriousness, that's a choice I've consciously made; i.e., to keep my fund small enough that I can maximize performance without its size ever getting in the way. Also, I really don't want to have to deal with employees or "running a business" (I outsource administration audit, legal, etc.); all I want to do is invest.
What are some of your favorite companies or brands? Where do you get your investing ideas from?
I don't want to name specific companies here because things can change very quickly in this world. However, I do publish a detailed monthly fund letter for my investors and anyone else who's interested is free to read it. I get most of my ideas from various financial and technical screens I run, although occasionally I'll see an interesting company at a conference.
Do you use any stock screeners? What are some methods to find undervalued businesses apart from screeners?
Yes, I screen both fundamentally and technically. As noted above, conferences can also be a good source of ideas.
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? Talk about what the ideal company to invest in would look like, even if it does not exist.
I don't care about dividends because I'm primarily focused on capital gains. I look for small companies with strong balance sheets that are cheap on an EV-to-revenue basis because that makes them interesting to strategic buyers who may want to acquire their "cheap revenue" and can make them profitable by eliminating the expenses borne by a small independent public company that probably shouldn't be independent. My ideal metric is to be able to buy a company (on an EV basis) at 1x annual gross profit or less, and I've owned (and continue to own) a number of those.
What kind of checklist do you use when investing? Do you have a structure or process that you use?
Assuming I like the nature of the business (I usually don't), I'll look at a snapshot of the financials and figure out what I'd be willing to pay for it. (Remember, I'm really cheap!) If the stock price is anywhere near that number, I'll study the financials, make sure it has a legitimate auditor (pcaob.org is a good source for that), read through the last few conference call transcripts and do at least one call or meeting with management for answers to the questions that inevitably crop up after I've read the filings. I'll then put in a buy order at a price that's acceptable to me and wait patiently for days, weeks or months (or never!) for it to fill, while continuing to monitor the company and-- if necessary-- adjust my buy-price up or down (or drop the idea entirely).
Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?
See above.
How do you go about valuing a stock?
Again, please see above.
What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas?
Thanks to the insane central bank money-printers there are very few bargains left in this market. Thus, these days I'm much more inclined towards the short side. I tend to avoid companies with low gross margins, natural resources companies, and early-stage or clinical-stage biotech (except occasionally on the short side); almost anything else is fair game.
How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
I cover that extensively in my latest fund letter. Here's a cut-and-paste:
We continue to maintain large short positions in both the S&P 500 (via the SPY ETF) and the Vanguard Total International Bond ETF (ticker: BNDX), the latter comprised of dollar-hedged non-US sovereign debt with ridiculously low yields; i.e., what I believe to be the “root cause” of the stock market bubble. As of this writing, BNDX has an average duration of 8.2 years and an “SEC yield” of less than 0.5%, representing what may be the greatest asset bubble in history considering that Europe and Japan (which comprise most of its holdings) are printing massive amounts of money (over $180 billion a month!) yet are long-term insolvent due to their retiree liabilities. What will force the central bank bond buying to stop and thus pop the bubble? For Europe I suspect it will be pressure from banks, insurance companies, savers and pension funds, none of which can continue to stomach such low rates, as well as the very real threat of additional “Brexits” for the same reasons the U.K. left (immigration and resentment of centralized bureaucracy). Japan I think can never stop printing (its ratio of debt to GDP is too huge and growing too quickly) but will eventually crash the yen into oblivion (we’ve been short yen since 2012) and with that its bonds will crash too. (I discuss Japan more extensively in the last paragraph of this letter.) When will the bond bubble break? I don’t know, but the borrow cost for BNDX is less than 2% a year (plus the yield) and as I see around 5% potential downside to this position (plus the cost of carry) versus at least 30% (unlevered) upside, I think it’s a terrific place to sit and wait for the inevitable denouement.
As noted above, we also continue to be short SPY as I believe the stock market remains hugely overvalued, as despite sliding global trade…
…corporate defaults that are at their highest level since 2009, awful intermodal rail freight data that isn’t being offset by increased trucking and lousy ISM Services and manufacturing PMIs, the S&P 500’s price-to-sales ratio continues to set new highs while its GAAP trailing PE ratio = 25. However, one thing that tempers my bearishness is that Q2 GAAP earnings came in slightly better both sequentially and year-over-year:
Second quarter 2016: $23.28
First quarter 2016: $21.72
Fourth quarter 2015: $18.70
Third quarter 2015: $23.22
Second quarter 2015: $22.80
It’s thus plausible that S&P earnings may have stabilized (or maybe not), and if they’ve stabilized with bond yields in the bubble they’re in, I’m not certain that the multiple placed on those earnings can’t become more generous to the point of even greater absurdity. On the other hand, Japan has had multiple bear markets during its years of ZIRP and when markets are priced beyond perfection (as they are now) and accompanied by soaring corporate debt-to-EBITDA and plunging cash as a percentage of debt, stocks are susceptible to being wrecked by a wide variety of exogenous events; I’m just not sure if they can STAY wrecked with $180 billion a month of combined BOJ & ECB money-printing. Thus as noted in last month’s letter, in July I somewhat reduced the size of our SPY short concurrent with implementing the “root cause” bond short via BNDX.
What are some books that you are reading now? What is the most important lesson learned from your favorite one?
I highly recommend the "great investor interview books" written by John Train and think the most important lesson to be derived from any of them is "think for yourself"! Otherwise, I tend to read SO much finance stuff online and in various other media and periodicals that the rare time I have to read a book these days tends to NOT be finance (although I did just skim one about the history of the Bank for International Settlements). So I just finished an excellent novel about the Mexican drug cartels ("The Cartel" by Don Winslow), and I'm currently reading "100 Deadly Skills" by an ex-Navy SEAL (hey, you never know when they might come in handy!) and Bruce Springsteen's new autobiography.
Any advice to a new value investor? What should they know and what habits should they develop before they start?
Let the numbers speak for themselves (assuming they're real, of course) because management teams will always sound convincing-- after all, that's how CEOs get the job in the first place-- they sound convincing before they completely mess up!
What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
I never coattail anyone, although if Jim Chanos (Trades, Portfolio) says he's short something I'll give it a serious look, and I'll do the same on an Ackman short-- although that guy gets a bad rep (I've never met or spoken with him) I think he has some great ideas on the short side. On the long side, I'm a huge fan of David Einhorn (Trades, Portfolio) and Daniel Loeb but guys like that are so large that they're forced to play in far more efficient markets than I am; thus I'd be unlikely to follow them into anything because I don't have to. In fact, my ideal stock is a little company I'd pitch to a super-smart guy like Einhorn or Loeb and they'd say "Mark, that's a no brainer but it's so small we couldn't take even a 5 basis point position without quadrupling the price!" But again, the flip side of that is that I'm flying commercial.
Describe some of the biggest mistakes you have made value investing. What did you learn and how do you avoid those mistakes today?
Buying a stock that's cheap on current or trailing metrics with a rapidly declining business is a major pitfall for value investors. I did that once (before I opened the fund) with a solar inverter company-- inverters were backing up in the channels at the same time solar installations were slowing; in other words, there was a reason why the stock was cheap and it wasn't due to "market inefficiency." When I finally realized what was happening I sold it down 20% and it eventually fell over 50% before being acquired somewhere between those two prices. So the lesson is, spend some time studying trends in a company's industry!
How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections, and fluctuations?
My personal money comprises over 40% of my fund and I've now seen (and read about) enough market cycles that stock price fluctuations (either up or down) strike me as opportunities. So since I've had the fund, my biggest concern is that I always hope my investors will feel the same way about that as I do, and so far most of them have been terrific.
If you'd like to share, how has the last five to ten years been for you investing wise?
As you ask about "10 years," from 2005 through first quarter 2011 I was able to compound my personal account at 26.7% a year gross (there were no hedge fund fees in my PA), including being up 10% in the crash year of 2008 because I had a huge leveraged short position on the S&P 500. (My only down year in that era was -7% in 2007 because I got short too early, but then I'm usually too early; in fact, my all-time favorite investing quote is from Bernard Baruch who supposedly said-- and I'm paraphrasing here-- "I made all my money by selling too early.") I then opened the fund in June 2011 and since inception it's up around 106% net versus 81% for the S&P 500 total return index and 59% for the Russell 2000 total return index. Keep in mind though that I've managed to do this despite having a LOT of short positions-- in fact, the fund has been heavily net short all this year! (Despite that, we're still +19% year-to-date through September, as some of our microcap longs have done really well.) So hopefully when the bubble finally does pop, we'll do okay.
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