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PJ Pahygiannis
PJ Pahygiannis
Articles (149) 

21 Questions for Bluegrass Capital's Founder

'I shy away from interacting with management as I am generally afraid the relationship will create bias'

November 01, 2016

Thank you for your interest in me. I am a longtime follower of your site and hope my responses prove useful to at least a few of your readers. I look forward to other interviews in this series.

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?

This is the most important question you asked so I rearranged it to be the first response.

Instead of my three worst investments, I will provide my three worst conceptual mental mistakes:

  1. Errors of omission. As primarily a long investor, these are the costliest mistakes, since missing out on one or two multibaggers can dramatically alter your career. Despite completing the analysis required and determining a very attractive risk/reward was present, I failed to commit capital at all or in enough size to have a meaningful impact to returns. My most important takeaway here is to be mentally flexible enough to add to positions whether the current price is significantly lower than my original basis or significantly higher. Sometimes a company’s stock price is two to three times higher than when I first analyzed it, yet the risk/reward setup has actually become more favorable due to business fundamentals or because some uncertainty has been resolved. Example: General Growth Properties.
  2. Unappreciated regulatory outcomes. Many companies have amazing financial performance looking backwards, but as shareholders we get paid based on future performance. Multiple times I have underwritten a company and assumed historical trends were likely to continue unabated, which is naïve if said company’s industry is heavily scrutinized and can become an egregious error if the industry is undergoing a sea change of new regulation. Example: William Erbey’s hodge podge of companies.
  3. Focusing primarily on valuation vs. business quality. All intelligent investing is “value” investing, but that moniker has become a limiter to much of the current generation of security analysts and, for many, fails to capture how its founding fathers intended for it to be applied. Consider this paragraph from Berkshire Hathaway’s 1992 letter to shareholders:

“Whether appropriate or not, the term 'value investing' is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price-book (P/B) value, a low price-earnings (P/E) ratio or a high dividend yield.  Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments.  Correspondingly, opposite characteristics – a high ratio of price to book value, a high price-earnings ratio and a low dividend yield are in no way inconsistent with a 'value' purchase.”

Through a variety of consistently losing investments, I have learned (and relearned) this lesson over and over. Just because one can buy something at a 10% FCF yield or 50% of its sum of the parts value does not mean it is a favorable investment, especially if revenues are declining; the company has no durable competitive advantages, the management team is of low quality and conflicted with shareholders in some way, or (if you are a lucky short seller) all of the above. Even if you pay too much for a high quality company up front, its underlying performance will eventually bail you out. And successful investing is all about finding ways to limit your losers. Example: MBIA Inc.

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

As a high school student, I observed the late 1990s technology and telecom bubble in the stock market with fascination. Maria Bartiromo told me every day about some new high-flying IPO, and I watched the stock tickers on financial television trying to understand what I was witnessing. I quickly determined many companies were selling cheaply in the market (based on traditional P/E, P/B, etc. valuation) while many were not and in fact could be wildly overpriced. I was shocked to realize this and subsequently developed an insatiable curiosity for public markets generally and capital formation specifically. This led to my studying finance as an undergraduate and then pursuing a master’s degree in taxation.

My nomad professional experience is as follows: Big Four public accounting, operations analyst at a publicly traded hospitality company, two-year analyst program at a regional investment bank, four years at a large middle market private equity firm investing up and down the balance sheet, three years as the CFO of a small health care services company and as an independent investor for the past three years. For someone in their 30s, I have been very fortunate to get a lot of repetitions in a wide variety of companies and industries. More importantly, I have observed up close many companies going through difficult periods, some life or death, and have learned from the mistakes of others and myself without impairing too much capital.

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

I manage a concentrated portfolio, targeting ownership in 10 to 15 companies at a time, with the goal of getting each company to at least a 5% weighting and with an upside cap of 10% (at cost) per position. I target companies with durable competitive advantages that defend their ability to keep generating revenue into the future, high returns on invested capital, long runways for reinvesting the free cash flow they generate, and owner/operator management teams that have a material portion of their net worth invested in the company they manage. My preferred holding period is forever, and while realizing that is completely unrealistic, it is a mental screen I use. If I can already identify reasons or scenarios why I will want to exit an investment in two, three or five years, there are risks at play with the company or industry that probably make for an unsuitable investment. Example: Autozone.

Ideas come from anywhere and anybody. I read constantly, as much as my family will allow, and share ideas liberally with other analysts, who often reciprocate. I constantly pester friends and relatives about their usage of everyday products and services, and especially when new ones pop up:

“Q: Why do you use that credit card? A: Because their loyalty points program is amazing and it paid for my last vacation.”

“Q: Why do you have DirecTV? A: Because it’s the only way I can get NFL Sunday Ticket.”

“Q: Have you ever used a third-party pest control service? A: Yes, actually the same one for 30 years. And, you know what, they raise prices every year. Maybe I should …”

“Q: How do you use Alexa? A: At first we just played music and asked about the weather. But yesterday we bought diapers.”

“Q: Why are you wearing that Porter Paints Group shirt? A: Because I manage the store on Main Street and think it’s an excellent company to work for.”

Keeping with this Peter Lynch theme, I have a working theory that any brand someone chooses to display proudly on their chest is probably owned by a good company. One sees Mickey Mouse and Coca-Cola paraphernalia all the time, but no one wears a Comcast T-shirt (although I see lots of Google Fiber T-shirts).

In addition to the companies I currently own, I have identified many companies with the above characteristics that I would possibly like to own and find that reading all of the news flow and EDGAR filings for this watchlist of companies consistently generates new ideas for other interesting companies to learn about. Examples: reading about a new competitor in a company’s 10K, listening to a management team discuss a competitor’s pending IPO, a company making an acquisition in an industry subsegment with which I am unfamiliar, a new spinoff filing.

3. What drew you to that specific strategy?

Position sizing: I know I do not have 30 good ideas. I probably do not even have 10 good ideas, so concentrating in your best ideas where you feel you have some edge (e.g., variant opinion on a material driver of business performance, known but ignored catalyst, holding period) over other market participants is the idea. Individual position size should be large enough to impact overall returns, but not so large where any one company can ruin overall performance. In the past, I have managed much higher levels of concentration than mentioned above but found it to be more of a distraction than a benefit to investment returns. A good analyst is most productive when she can go about her tried-and-true process each day, playing offense, instead of panicking when a 25% position goes down 10% on a bad earnings report and losing two to three days of what could have been productive research on another company or industry.

I will take a small (~2%) starter position in a company that I find highly desirable on most traits but still have some nagging concern around valuation or industry structure or capital allocation, etc. The goal is to continue to learn about the company while not missing out on any upside move, and I find that having capital at risk makes me a more efficient and more focused analyst. More information about the company usually comes out (e.g., management comments at an industry event, company makes an acquisition, a competitor alters their strategy, etc.) during my trial holding period that gives me increased confidence in my original assessment or creates a series of new questions that eventually change my mind.

Investment criteria: I had initial success as a special situations focused investor, specifically the type of capital structure arbitrage and event driven opportunities described in the works of Thorp, Stark, Klarman and Greenblatt. After deconstructing my 2008 to 2010 returns, which were driven by a very skewed available opportunity set in a few narrow niches that I was both knowledgeable enough to understand and exploit plus lucky enough to be turning over the correct rocks, I realized my performance for the period was likely fortuitous and unlikely to be repeatable. Many of these situations were very illiquid and would not translate into managing a larger capital base. I was also generating a high level of short-term capital gains, which obviously impair one’s capital compounding ability.

Over the next several years, I sought a repeatable investment framework that would generate the most consistent, highest after-tax returns for me based on my ability and experience but also utilizing concepts that were understandable to me. Jim Simons (Trades, Portfolio) is one of, if not the, best investors of all time, but Jim has a Ph.D. in mathematics and co-developed string theory so whatever methods Renaissance Technologies uses to generate returns probably will not work for me (but my IRA has an opening if they want to let me co-invest).

My strategy for investing generally falls into the buy and hold, growth at a reasonable price, compounder type grouping. It's logical to me, it's repeatable, the opportunity set is large, and I sleep well at night knowing the intrinsic values of the businesses I own are most likely growing higher every day.

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? Which investors do you follow today?

I have been very fortunate to work for several amazing mentors thus far, specifically three individuals inside each of the last three companies I worked for prior to becoming an independent investor. I observed and interacted with each of these leaders over multiyear periods, learning from their actions but also what they told me. Each is completely different (one foreign born, one Ivy League, one a former prison guard), but they all espoused a variety of similar characteristics in business and in life.

Some examples: family before anything else; the human relationship is the most important part, and incentives drive human behavior; partner with the smartest people you can find; give people as much autonomy as they can handle and give them what they need to succeed; systems are tools to help people, not vice versa; always explore the contrasting argument, and assign a formal devil’s advocate for investment committee meetings; good things are worth paying up for, otherwise practice extreme thrift; do not confuse inputs with outputs; understand the two to three primary drivers of something and do not get hung up in minutiae; ask the same important questions to the same players every so often and look for changes in response; try lots of things to see what works; do not be afraid to take small risks and fail; be humble. Thank you JM, MK and MR for making such a large investment in a young man.

As an investment analyst, I have benefitted from the great authors / teachers like everyone else. With a concrete security analysis framework outlined by Graham, and a business analysis framework outlined by Fisher, Munger bridged the gap between the two and then managed to work in various other engineering and scientific disciplines with his mental models approach. The product of these three thinkers equals Buffett, whose 40-plus years of shareholder letters offer some of the best investment education available. Outside of this Graham/Fisher/Munger bedrock, I would highlight a series of books that are essentially case studies of pioneering management teams and investors, or specialized investment strategies that worked for a period of time. These include Greenblatt, Klarman, Schwager and Thorndike. Finally, biographies of business leaders, especially those currently active, are almost always great investments in one’s time. The majority of my bookshelf is populated with this category.

The most important takeaway from the readings above is that there are many investment strategies and disciplines that work for many different types of investors. The Market Wizards books do a great job of highlighting this. Similar to the Munger ethos, I think the more tools an investor has at her disposal, the better her odds of success.

The primary investors I follow today manage concentrated portfolios of high quality businesses. A sampling includes: Akre, Altarock, Ancient Art, Arlington Value, Brave Warrior, Gardner Russo, Giverny, Makaira, Meritage, Ruane Cunniff (Trades, Portfolio), SPO, SQ Advisors, Stockbridge, ValueAct, Weitz and Todd Combs.

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?

I want to hold a stock forever to allow for tax-free compounding, and only enter a position if I think that is at least a remote possibility, however tiny the odds. But, back in reality, my recent holding period for core positions has approximated two to three years, which I attribute to a lot of attractive opportunities arising during 2015 and 2016 as many < $10 billion market cap companies on my watchlists sold off 30 to 50%. I also seek to max out my long-term taxable gains recognized each year, always trying to get my tax basis incrementally higher at the lowest marginal rates available. This tax “strategy” leads me to trade around core positions at times, creating more turnover than I would prefer.

I generally know within one to two quarters if I have made an investment mistake and cut my losses (but sometimes gains, through dumb luck) as soon as possible. Several times per year I will sell a starter position and recognize a 10% to 20% loss. Usually I get a deep nagging in my brain where that position becomes all I think about for several days in a row, and sometimes it may even disrupt my sleep. Similar to Soros describing his back pain. I want to confidently add to an existing position when the valuation becomes even cheaper; if I cannot force myself to do so, there may be a problem. Those are the telltale signs that my thesis is wrong, or there is something I do not understand happening with the company. Usually, I can determine analytically what is driving my paranoia, but sometimes I will just cut the position right away and protect capital. I know I can always restart the position if and when my understanding of the facts change. Summarized: I trust my gut, even though sometimes I only understand it after the fact.

Luckily, I have not had many blowups on individual positions. Some of the bad ones were mentioned above, however.

6. How has your investing approach changed over the years?

As an undergraduate, I was a member of a student investment team that managed a small sliver of the university’s endowment. Our professor was a Berkshire acolyte and took us on a trip to visit Buffett. While in Omaha, I actually met Bill Gates (Trades, Portfolio) in the elevator of Berkshire’s office building. So I am learning these value investment principles in class, and then, out in the real world, I watch Mr. Value Investor spend time with Mr. Technology Bubble, and I was more confused about investment strategy than ever.

I began investing in public securities for my own account a few years post college, utilizing the generic value investing methodologies. I read and re-read Security Analysis and utilized quantitative screening tools searching for statistical bargains. After finding and devouring the special situations texts, I dabbled in all of the following: net nets, convertible securities, special purpose acquisition companies, warrants, spinoffs, merger arbitrage, mutual conversions of community banks and insurance companies, self tenders and a variety of option strategies around pending events. With the market dislocation that occurred in 2008 to 2010, many of those strategies became highly relevant again after years of dormancy, and I was in the right place at the right time.

As I mentioned above, my performance during that earlier period is very likely unrepeatable for lots of reasons. So I sought out a repeatable process and strategy, where things I spend time on today will likely have increased value to me five or 10 years into the future, and I will never be starting at ground zero or constrained by the size of my capital base.

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

Due to the rise of indexation, ETFs and passive investment strategies, and their combined impact on asset flows, individual stocks have a higher chance of material mispricing today than at any time during the post WWII period. If curious, investigate the thorough research provided by the Horizon Kinetics team.

The composition of publicly traded U.S. companies has shifted over the prior 20 years resulting in a greater percentage of companies having higher ROICs, on average, than in the decades prior. McKinsey et al. have produced research supporting why higher ROIC companies should be valued at higher multiples of free cash flow, arguing today’s equity markets deserve a premium valuation versus past markets. In the early 1980s, when the risk-free rate was 15% and the average company’s ROIC was 10%, the average company wasn’t earning its theoretical cost of capital, and 7x earnings multiples for equities made sense because those companies were essentially in runoff. Today, with the top quartile of public companies earning ROIC of 20% or greater, and the risk free rate at ~2%, the same logic supports valuations of 25x or higher for these equities. But taking the other side of this argument, because so many of these higher ROIC companies employ very little tangible capital, they are more vulnerable to disruption than their historical capital intensive peers. So for every Facebook that may actually justify a 30x or 40x valuation, there is a Myspace that is a zero. Average the two, and maybe the correct average equity market multiple is 15x to 20x earnings. Summarized: Market participants are not accepting and recognizing this shift, resulting in sustainable high quality companies being undervalued and average companies being overvalued.

Technical analysis can be a very useful complement to fundamental investing. Price does not lie, and a company’s price history overlaid against its fundamental performance can help summarize a lot of disparate pieces of data into useful information.

The trend of management teams reporting ever more intricate “adjusted earnings” metrics is a direct result of arcane accounting rules and misguided regulatory efforts, not a widespread conspiracy to mislead investors.

Smart, vocal short sellers are a long investor’s best friend in markets. If I am long a stock, I should have already created a thorough short pitch for the company, and be glad if someone else points out where my analysis is lacking. If I am researching a potential long, I will accept any help figuring out what might go wrong with that investment. Either way, another objective critique is always helpful when one has capital at risk.

Cash is a free call option on the future with no expiration date, and should be a standalone position inside every portfolio, not a byproduct of other holdings.

8. What are some of your favorite companies, brands, or even CEOs? What do you think are some of the most well run companies?

Amazon, Autozone, Brookfield, Cerner, Cimpress, Cintas, Constellation Software, Costco, Credit Acceptance Corp., CVS, Danaher, Disney, Dollar Tree, Ecolab, Expeditors International, Fastenal, FleetCor, Gartner, Heico, InBev, Interactive Brokers, JPMorgan, Liberty Media, Markel, Middleby, Mohawk Industries, Nielsen, NVR, O’Reilly Automotive, Rollins, Roper, S&P Global, SBA Communications, Seacor, Sherwin-Williams, Starbux, TJX Companies, Transdigm, TripAdvisor, Verisk, Visa and Watsco.

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

I do not use any quantitative screening tools. But if I did, I would be looking for high insider ownership, > 20% ROIC, gross margin consistency or expansion, and share count consistency or reduction.

I do employ a variety of qualitative screens, even if I do not do so formulaically. Many of the companies mentioned above have some interesting, overlapping traits, including: the management teams are highly regarded in their industry and long tenured; said management teams pen detailed but plain spoken annual shareholder letters; management consistently discusses their capital allocation options and priorities, and openly discusses past investment failures and successes; the companies manage a transparent shareholder relations effort, e.g., putting their conference transcripts on the front page of their IR site.

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.

What is a good investment? Tom Gayner (Trades, Portfolio) of Markel has perfectly answered this question already. His criteria for an attractive investment are: the company generates free cash flow (or clear path to doing so), produces high returns on invested capital, has a talented existing management team, can be acquired for a reasonable price, and has numerous attractive internal reinvestment opportunities. That last criteria of reinvestment is the most important because it proves the existence of the first three criteria.

What is a high quality company? Buffett provided his response in Berkshire’s 1991 shareholder letter when he contrasted a good business with an “economic franchise.” Such a highly quality company “arises from a product or service that: is needed or desired, is thought by its customers to have no close substitute, and is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital.” So pricing power, and an ecosystem that allows for that pricing power to be utilized, probably has the highest accuracy rate in identifying high quality companies.

“High quality” generally correlates with high ROIC, and for high ROIC to be present, the company must have some or a combination of defensive moat qualities. In addition to pricing power (example: Sherwin-Williams), a list of said qualities might include being the low cost provider (Costco), being an industry currency (Moody’s), network effects (Facebook), brand loyalty (Heinz), switching costs (Fiserv), patents/intellectual property (Disney), regulatory license (Rolls Royce) and culture (Fastenal).

A bad investment would be in a company that simultaneously has several of the qualities outlined below in my wall of shame.

The ideal investment and company is a mash up of all of Gayner’s and Buffett’s criteria above.

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

I have a working checklist that roughly doubles as the outline I use for my investment writeup. It contains the same criteria I have discussed above but with additional caveats and real world examples, incorporating my own institutional history.

More importantly, I keep a related grid for every notable loss I have ever sustained, where the horizontal axis includes reasons why I have lost money and the vertical axis is populated with the names of companies. And yes, there is unfortunately a lot of overlap on some of the squares. This grid helps me formulate a written pre mortem for each new investment decision, which I believe is as, or more, important than my primary investment thesis.

A sampling of the “wall of shame” includes: business declining or not growing; cannot clearly articulate revenue model; competitive environment is in flux or not stable; complexity is increasing, not decreasing; conflicts between various key stakeholders; confusing related party structures; a startup funded with $1 billion could meaningfully disrupt the company; customer concentration; do not know where product demand will be in five years; entered the investment for a short-term trade; heavily dependent on commodity prices or interest rates; inexperienced and nonproven management team; no known catalysts; no moat qualities; no notable investors have ownership; not materially free cash flow positive; not returning capital to shareholders; position size too large; upside structurally capped.

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?

I will read multiple years of annual reports, proxies and conference transcripts for the target company, the most recent year’s same information for its closest competitors, and industry news flow from the prior few years via trade journals. I will discuss the business and management team with other analysts and with the employees of competitor firms if I can track any down. I start with an “I hate this company” attitude and try to prove that thought correct. If after a week’s reading I cannot poke a lot of holes in the long thesis, I know that it may be a worthwhile company to follow and continue learning about. If the valuation is reasonable or discounted, I may take a starter position.

In the annual report, I start with the risks section. If I come across a specific risk that is unexpected, I flag it for further study because that is a tell I still may not intuitively understand the business, even if I use it services or see its products in the real world all the time. Next I read the liquidity section, which is where an analyst can get clues about management’s capital allocation goals if they are not explicitly stated elsewhere.

In the proxy, I start with the compensation philosophy for management, and specifically note any quantitative performance metrics that the Board is hanging out in front of the management team. Do these metrics align with me as your potential shareholder, have they changed from the prior year, are they similar to your peer group, did you meet or exceed your targets in prior years? Then I look at shareholder composition. Does Blackrock own 8% and Vanguard own 6% of the outstanding shares, or do insiders own 20% while Quincy Lee and Brian Bares each own 5%? I want to partner with people who are smarter than me and who have more capital at risk than me.

I shy away from interacting with management as I am generally afraid the relationship will create bias (my favoring the company and its “story”) but will reach out to IR if I need some technical clarification regarding an opaque asset, liability, expense accrual, etc.

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

I create a simple DCF valuation, using a five- to 10-year projection for free cash flow, to reverse engineer what is priced into current valuation. I try to identify the smallest amount of input variables possible that account for the largest amount of business performance and spend time understanding what a likely forecast range could be for those key variables. An analyst can usually boil the exercise down to two or three primary revenue drivers, reasonable expectations for margin trends, sources and uses of working capital, PP&E and debt, project a share count, fiddle with the discount rate and back into the current share price fairly easily.

Every so often, the base line of inputs one forecasts will discount back to a price that is materially different from the current market, which simply means you have some (possibly extreme) variant view that you need to identify and unpack. For example, using an 8% discount rate, the current market price of Moody’s implies perpetual 4% revenue growth, no margin expansion and no share count reduction. The company has almost complete pricing power for its product and is the beneficiary of numerous tailwinds that could drive increasing product volumes over several decades. Management itself thinks Moody’s free cash flow will grow 10% to 15% indefinitely. If that happens for the next 10 years (by no means a given), the DCF spits out $160 to $230 valuation per share, versus a current share price of $110. The takeaway: I am not confident Moody’s equity is worth $200 per share today but am confident the assumptions necessary to value the company at $110 are likely to prove conservative.

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

Over the past two years, as growth in many developed economies stalled or turned negative, a subset of secular growth companies have continued to expand their revenues and cash flows straight through pockets of economic weakness and currency fluctuations, have improved their balance sheets, have increased their capital returns to shareholders, all while their equity valuation has notably compressed. Their end markets are gigantic and growing; they comprise only a small fraction of that landscape, have numerous attractive organic and acquisition opportunities in which to reinvest and generate ample free cash to do so. Examples: Priceline, SBA Communications.

There has been a lot of recent M&A activity to digest, but I have noticed extreme conservatism or skepticism from how sell side analysts are interpreting what to me seem like very favorable transactions. These transactions are all cash, nondilutive, long desired by management, loudly cheered by shareholders, further consolidate the related industry, increase the value of the existing network by layering on new distribution channels and may lead to step change growth for the earnings power generation of the resulting companies. Examples: Visa, Sherwin-Williams.

Although I have notable concentration amongst the business and information services, software, technology and telecom sectors, my favorite sector is media. That area has produced so many exceptional businesses and management teams over time and is also simply fascinating to observe. Exacerbated by the Internet and the subsequent adoption of new advertising channels, legacy visual media companies are going through numerous revenue model transitions simultaneously, most of which are involuntary and reactionary. It is difficult to underwrite the future earnings power for the cable networks, broadcasters, TV station owners as well as the OTT player, so best to just stay away until the inevitable industry shakeout happens. For what it's worth, I do believe the barbells in this sector of last mile/customer ownership (Comcast, Charter) and intellectual property ownership (Disney) will emerge with their economics intact.

Hopefully I avoid any businesses whose performance is completely dictated by variables beyond the control of management. Obvious examples are capital intensive energy companies and financial services companies with large, on balance sheet, recourse liabilities.

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

I feel a lot of things about the market today, but I know that my feelings do not provide much value to myself or other investors. It is an extremely confusing time for investors in most every asset class and country. Historical correlations that many investors (myself included) had come to rely on as informational crutches have lost their signaling ability before new ones have asserted themselves (except for Simons). Add to that the cascading effect of “If we have to throw ABC relationship between interest rates and __________ out the window, then why should we continue to rely upon XYZ relationship?”

Solely for the U.S., it is much easier for me to make a compelling downside case for debt markets than an upside case, with the inverse true for equity markets.

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

I spend most of my time reading shareholder letters, annual reports, transcripts and trade journals, and probably not enough time reading books. However, recently I have read and would recommend "Candlestick Charting Explained" by Morris, "Capital Returns" by Chancellor, "Dead Companies Walking" by Fearon and "100 Baggers" by Mayer.

The concept of an “equity yield curve” (discussed by Marathon, but also by Murray Stahl (Trades, Portfolio)) was a good synthesis for understanding why outsized returns sometimes exist for equity holders with a longer timeframe than one or two years.

17. Any advice to new value investors? What should they know and what habits should they develop before they start?

Do not choose this work or career because you want to get rich. You need to have a passion for the entirety of investing that transcends money. You must eat, sleep and drink your investment process, and outside of procreation and taking care of your family, investing must be your favorite activity, the one you will choose over others again and again. To be successful, you have to be obsessed with how businesses work, why management teams act like they do, and constantly reading, learning, questioning in a never-ending loop of confusion. You are committing yourself to a life spent 99.9% on the driving range (research), and during the 0.1% of the time you get to play in an actual tournament (make an investment), it’s a coin flip whether you embarrass yourself in public (lose money). The work is primarily thankless and often mentally anguishing for long stretches of time.

If you were my son, daughter, niece or nephew, I would put great stress on you to explain why you should not instead pursue computer science or mathematics or medicine.

All that being said, I cannot imagine doing something else for fun or for money. A friend occasionally says: “It’s the greatest game in the world and they pay us to play it.” So, if the above paragraph sounds like a job advertisement to you, I say: “Welcome. You found us.”

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

Via past work experience, friends of friends and public forums, I am lucky to have developed a small network of like-minded investors with strong work ethics that enjoy investing as much or more than I do. These contacts are invaluable informational sources and sounding boards for me, and I hope I provide some value back to them in return.

Twitter has become an excellent discovery and feedback tool for me, and I am also very happy with the Value Investors Club community.

I follow all of the investment firms and management teams mentioned above, and try to understand and learn from any new capital allocation decision they make that becomes public knowledge.

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

Exercising regularly, getting enough sleep, position sizing, observing price movements as little as possible during market hours, favoring securities with high levels of daily liquidity and always having a material cash balance on hand.

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

From October 2011 to September 2016, investment performance multiplied my capital by 2.3x, or 18% compounded annually (pretax). During the preceding five years, my capital compounded at a materially higher rate.

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