1. How and why did you get started investing? What is your background?
Much of my experience with finance and investing is self-taught as I grew up in humble beginnings. The first lesson I learned was to work hard and divide the first part of your paycheck to tithes and savings. For investing, the first spark came in the fifth grade through a stock pick competition. I remember picking Xerox (XRX, Financial) for one of my three stocks because the school had a bunch of Xerox machines. That one pick propelled me to the top percentage of my school's region. Granted, I had no idea what I was doing, but that experience would stick with me.
As I worked through high school and progressed into college, I continued to learn. One realization that stuck with me was the understanding that no matter what I did in life, I would invest a part of my income. That part started with index investing and would evolve into company specific investing. At the end of the day though, my goal would become to ensure it grew in the best way possible.
Interestingly, after graduating from Texas A&M, I commissioned into the Navy. I would serve for nearly 10 years, between 2001 and 2010, as a Navy SEAL. I will skip over the main portions, but suffice to say I had many lessons learned from that environment. The main lessons came from the tactical understanding of risk mitigation and execution; to the strategic application of intelligence fusion and networking; to the nuanced assessment of behavioral analysis and incentives. I would soon realize that these experiences are applicable to the value investing arena.
As I transitioned out of the military to attend the MBA program at Columbia, I read "The Intelligent Investor." That was a watershed moment for me as far as how I wanted to invest. This became my focus, and I applied to the Heilbrunn Center for Value Investing. The program provided a unique opportunity to learn from and have exposure to great value investors, many of whom I now consider mentors.
Upon graduation, I launched Sententia Capital.
2. Describe your investing strategy and portfolio organization. Where do you get your investing ideas from?
Sententia Capital is an opportunistic value fund. Our goal is to create and grow generational wealth for our investors. I started the fund with the original purpose of giving back a part of all my gains to families of fallen SEALs. That is still a core tenant of mine, and you can see that in our goal of creating and growing generational wealth.
Ultimately, we aim to capitalize on our deep fundamental work with opportunistic entry points and disciplined risk management. We generally have 20 positions in three buckets: core value, turnaround situations and special situations. Our fourth bucket is cash, which can range from 5-30%.
Like others, we use screens, read newspapers, monitors previous stocks and stay connected to other smart folks. Unlike others, we tend to be more opportunistic and look for smoke, or fire. When a company is under stress, whether through a market dislocation or through some idiosyncratic event, we become interested. Our goal is then to apply our process to mitigate risks and stack the odds in our favor to make any decisions.
3. What drew you to that specific strategy?
The Sententia Capital framework aligns with Buffett’s early fund. He had his Generals, Workouts and Controls. His Generals were undervalued companies; Workouts were special situations; and Controls were his activist positions. This structure works for us as it allows us to balance patience and action across a spectrum of value opportunities.
4. 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?
We are a product of our environment, and I’ve been fortunate to have incredible mentors throughout my experiences. Also, the value investing space has had many great investors that have gone before us. Here are a few main items I take from them: Walter Schloss- Discipline; Michael Price (Trades, Portfolio)- Clarity; Warren Buffett- Compounding; Mario Gabelli- Business fundamentals; Seth Klarman- Versatility; Howard Marks (Trades, Portfolio)- Perspective; Bill Miller- Alignment; Jean-Marie Eveillard- Wisdom; Daniel Loeb- Progression. For my mentors, I count many of these investors as mentors. And they are yet one aspect of my environment.
For books, "The Intelligent Investor" started it all for me. Read it. It provides the framework. But there are so many more subjects and topics that help expand our thoughts and views; such as books by Ayn Rand, books on psychology such as "Mindset," books on behavior such as "Habits." The list is vast, and it will continue to grow.
5. 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?
Sententia Capital hold times depend on the reason and valuation for our investment. If a thesis is tracking well and the stock doesn’t move, then we continue to hold the position. Why do you care what the market is doing if the company continues to do well? If the market gives you a gift and prices your position in the short term, it may be better to sell the position if fundamentals haven't changed. If your thesis falls apart and the stock holds steady, consider yourself lucky and sell the position before the market catches on. And if the thesis falls apart and it’s reflected in the stock, take your lumps and learn from your mistake.
Hold times depend on the dynamics of the fundamentals and valuation.
6. How has your investing approach changed over the years?
There is an old saying: "knowledge is knowing that a tomato is a fruit; wisdom is knowing not to put it into a fruit salad." Experiences assist in the transition.
Although the Sententia approach has generally stayed the same, the application of patience and discipline has improved. I’ve applied patience and discipline in my former profession, so it wasn’t for a lack of understanding, but rather the application in a different setting.
It’s like having a book understanding of what it takes to raise a child. And then looking back after your first two weeks together and realizing there it doens't do justice. With two young sons, there is growth all around.
For the fund, I tend to lean towards action, and portfolio management reflected that in my earlier years. I was more prone to jump into a large position earlier, and hold on longer. As the years have progressed, there is greater appreciation for true extremes; and also the opportunity to take advantage of those extremes.
Discipline has grown on the exit side as well. We have been more disciplined at paring positions should they climb rapidly towards intrinsic value. Before, I would temper my frustration with the idea that “value investors buy and hold.” Now, I’m more aware of taking advantage of what the market gives you, both on the entry and exit points. I’m still learning, and I imagine that will never change.
7. Name some of the things that you do or believe that other investors do not
I believe that the cheaper a stock is, the more protected it is. The more people hate a position, the more interested I am. In my former profession, many people thought Special Operations where the riskiest and most difficult. In some aspects, that was true. But we worked to stack many things in our favor and it was actually the safest environment to operate in.
At the darkest night, when the moon is down and no one wants to go outside, that is when we took a position and conducted our operations. I see it the same way in value investing. When the company or stock is at a point where no one wants to touch it, that is an opportunity for action. Through fundamental work, industry knowledge and technical applications, we aim to stack the odds before executing. It’s a mix between balls and brains.
8. What are some of your favorite companies, brands, or even CEOs? What do you think are some of the most well run companies?
Costco (COST, Financial) is a fantastic company. They are smartly managed with disciplined and thoughtful execution through their operations. Recently, it was fascinating to hear about their negotiations with American Express (AXP, Financial). They looked at the negotiations from a basic service-provider/client standpoint, and had the ability to do so due to the value they bring their concrete customer base. This surprised American Express, and actually insulted them a bit. American Express ultimately lost the contract.
Costso’s business fundamentals are one aspect of the many small items they continue to execute on to further solidify and expand their value proposition. I only wish they were cheaper from a valuation standpoint. And it remains on my wish list for when there is a major market disruption.
9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?
Stock screens are one tool we use to search for undervalued companies. We run separate screens that focus on high cash yield, strict net asset value discounts and then high quality returns with low valuations. Value comes in many different ways and we enjoy looking at the opportunities when time allows.
In addition to screens, we read a lot. Smoke and fire are also attractive as companies come under pressure. That may incline us to start work on a company or industry, or brush off previous research. Either way, our goal is to prepare so we may take advantage of opportunities as they present themselves.
10. 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.
We look for alignment in our companies. Does the narrative and decision making of a company’s management team match what the numbers are saying and what the operations are doing?
If it’s a high quality business based on the numbers, but management starts to expand beyond core strengths or shift in a different direction, we are cautious. If it is a low quality business based on the numbers, but management has a strong view on the strategic direction and execution that can be verified, then there may be an opportunity.
Alignment is important for the strengthening or weakening of an investment thesis. If we can’t make sense of what is happening or there is misalignment in what management is saying or doing, we will pass on an investment.
11. What kind of checklist do you use when investing? Do you have a specific approach, structure, process that you use?
The Sententia Capital process is based on a Special Operations targeting framework. In this process, we move from 1) identification of a target of interest, to 2) a collection period where we aim to gather company specific information and analyze the company fundamentals, to 3) a refinement period were we dig deeper into value added research of the company or industry. Once we move through these phases we further refine our thesis by determining buy and sell prices. Once finished, we stack it against current and other opportunities. If we decide to invest, we go to 4) an execution phase where we move to a full investment position. The 5) exploitation phase is where we track our thesis and the price. As we either close or pair a position down, we move to 6) our “hot wash”, or lessons learned phase. That last step may be the most important step and were we look back to see how we could have improved on not only our process, but also our execution of the process.
12. Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?
Sententia aims to fundamental analysis on many positions. But often, the type of investment dictates the type of deep due diligence conducted. Is the thesis based on a special situation, turnaround investment, deep value or core value? It could be a combination.
A simple example is Sterling Construction (STRL, Financial). This was a deep value stock that had a perceived liquidity event. This event caught our attention. The valuation of the stock, below our estimated liquidation value, further intrigued us. As they replaced the CEO, the new CEO took a $1 salary and 600 thousand in restricted stock. We liked that alignment. In this instance, our focus was on 1) the ability of the company to address the liquidity crunch (numbers focused) and 2) the ability of management to turn this company around (management focus). This was all predicated on 3) the fundamentals of the company and would it be possible to turn it around and 4) the strength of the industry and could we expect a head or tail wind (cyclical company).
The stock re-rated once management addressed number 1, and it has continued to climb as number 2 and number 3 progresses. But our deep dive focused on those initial variables. We continue to track Sterling as it has moved away from deep value territory. And our confidence in management and execution becomes more acute as the stock continues to climb.
13. How do you go about valuing a stock and how do you decide how you are going to value a specific stock?
Much like the specific nuances of research, the valuation we ascribe to an investment varies by company and industry. You expect to pay a higher valuation for a high quality business with a sticky customer base. You would expect to pay a lower valuation for a commoditized business in a cyclical industry. Both can provide value opportunities though. With that said, the best valuation is one where you can accurately determine the cash flows for the extent of the business’s life, and pay no more than 4x. The problem is having a high degree of accuracy for all the variables needed to determine the cash flows. And high precession of all variables does not mean high accuracy of the cash flows.
14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?
We are finding interesting opportunities in special situation stocks. One example is Loral Space & Communications (LORL, Financial). You have aligned parties who are incentived to unlock value, and they appear to be taking specific steps towards that goal. An expected IPO would re-rate the investment. You throw in strong company fundamentals and revenue streams options and it makes for an interesting investment opportunity.
15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
We continue to climb the wall of worry. On one hand, bond yields are forcing investors to find value and growth in the stock market. There is great concern in finance circles that once the Fed raises rates then it will have a lasting and adverse impact on the market. Yet, past data does not show that the market will implode due to only rate increases. The Fed will raise rates only as the economy continues to strengthen. Should this happen and there is a market dislocation, I believe it will be a buying opportunity. But, if the economy doesn’t pick up steam and falters, the Fed does not have much left in their toolbox to spark economic growth. And the political environment is so polarized that they are not likely to assist. The most concerning scenario will be if valuations continue to climb in the face of poor economic indicators, which I believe would end badly. At the end of the day, I have no clue what will happen, or when it will happen. So we continue to invest in our value positions and will keep a cash cushion to take advantage of opportunities that present themselves.
16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?
The most important lesson for me is philosophical, and comes from a summation of beliefs that are derived from a mix of upbringing and lessons learned: Work like it’s up to you, pray like it’s up to God.
17. Any advice to a new value investor? What should they know and what habits should they develop before they start?
Learn from other great value investors. Incorporate what is true to you and leave the rest for others. I think the best thing about this profession is that to a certain extent, it is ever evolving. Focus on the work and process and the growth won’t be too far behind.
18. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
There many great value investors out there, and they can be a source of great ideas. Yet there are many spokes around the value-investing hub of Graham and Dodd. The most important aspect is to invest in something that makes sense from your framework or point of view. I find that I have diverse interests that sometimes overlaps with a few spokes. And I get excited when I find something interesting and either 1) pay much less than someone else or 2) find that they invest after my initial stake. It’s all an illusion though, as you can both be wrong, so we have to be cautious about mixing feelings with reality. Invest in what makes sense to you.
19. 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?
There is a saying in the military that rules are written in blood. That is true about Sententia rules as well. Looking back, my biggest investment mistake came from a combination of factors found in Accretive Health (ACHI, Financial). The first mistake was when I weighed others insights greater than my own. A great friend presented this opportunity to me and after thorough conversations and due diligence, I took a stake. I’m not confident I would have invested had it not been for the weight I put in my friend’s analysis. I should have been more prudent in my own analysis. Another mistake that amplified the pain was the size of the position. Without protected downside, i.e. the balance sheet, I should not have positioned it greater than 4%, but it was nearly twice that size. Being a perfect storm, the third mistake in this investment was the customer concentration. Their main customer accounted for 50% of their revenue. Although we did our due diligence in vetting the contract and ensuring it was well protected, you can’t account for everything. So when the customer made a bid for half of the market cap, and threatened to not renew the current contract in three years, it was time to lay in the bed we had made. The stock was cut in half, after having already lost 30% of its value from our initial entry. Accretive was a great experience as as we learned a lot.
20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?
Coming from a Special Operations background, I’m fortunate to have had many opportunities to manage emotions in dynamic environments. In those environments it’s important to compartmentalize your emotions to a certain extent. We simply didn’t have the luxury of time for emotions, as they tend to cloud judgment when needed most. Our minds are curious and we tend to extrapolate, based on emotions, what could or may happen. That loop is often distracting and causes delays in objective observations or actions needed. At times is also accelerates actions, but the actions are based on fear or emotion rather than logic. I see a lot of similarities in the investing arena. There have been times when it makes sense to cut losses before they accelerate. And there have been times to hold on or even add to losses. Compartmentalizing emotions takes practice, and it doesn’t mean you work to get rid of them. To get rid of emotions would be un-human, but it’s important to recognize them and shut them down when the situation dictates. We find that it can be a great differentiator for Sententia Capital when it comes to capital allocation and portfolio management.
21. If you'd like to share, how have the last five to ten years been for you investing wise?
Fantastic. I’ve learned a tremendous amount, and I look forward to continued growth, both for my investors and me. Sententia’s objective is to create and growth generational wealth. And the better we do, the more we can give back.
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