12 Questions With Joseph Calandro

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

I came to investing late, by way of trading. I began trading in the early 90s and did very well, at least initially. For example, my first four years I returned over 50% each year at minimal levels of volatility. That changed in my fifth year, 1997, during the “Asian Contagion” when I experienced a substantial drawdown. Significantly, at the time I did not understand how or why I drew down so severely. I therefore stopped trading and engaged in a research program to find the answers, which led me to Graham and Dodd, Austrian economics and true risk management.

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

My area of focus is the application of value investing theory to corporate management, broadly defined. For example, I will shortly be overseeing corporate investment and risk functions, which will employ professional value-oriented managers and techniques. All ideas are home grown.

3.What drew you to that specific strategy? If you only had three valuation metrics what would they be?

At the end of the day, those who are successful employ an approach that fits their personality. This may sound simple, but it is not. In fact, many things in investing sound simple but are incredibly difficult to implement, especially over time. I have written about this in a general principles paper, which is freely available for download.

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?

Regarding books, everything written by Ludwig von Mises, Benjamin Graham, Marty Whitman, James Grant, Maury Klein, David Stockman, Thomas Sowell and Nassim Taleb.

Regarding investors, I am fortunate as I have written a number of papers with input from top investors such as:

“Note on Rationality” forthcoming in the Journal of Investing.

“New insights for corporate strategists from a renowned value investor,” Strategy & Leadership, Vol. 42, No. 6 (2014), pp. 29-36.

"'The Most Important Thing' is Value Realization," Journal of Private Equity, Fall (2012), pp. 89-93.

“The Margin of Safety Principle and Corporate Strategy,” Strategy & Leadership, Vol. 39, No. 5 (2011), pp. 38-45.

“Henry Singleton: a pioneer of corporate strategic leadership and value creation,” Strategy & Leadership, Vol. 38, No. 6 (2010), pp. 29-37. Revised and expanded on Aug. 19 (2016), available here.

“Suggestions for Modern Security Analysts,” Financial History, Issue 98, Fall (2010), pp. 32-35, 38 . Revised and expanded on, April 21 (2015), available here.Â

“Lessons for strategists in Graham & Dodd’s ‘Security Analysis,’ 6th Edition,” Strategy & Leadership, Vol. 37, No. 2 (2009), pp. 45-49.

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

As noted above, I am a corporate executive, but I am an executive who thinks like a value investor and a value investor who thinks like an executive. There are not too many of us out there, at least not yet.

6. What are some of your favorite companies, brands or even CEOs? What do you think are some of the most well run companies? How do you judge the quality of the management?

As to management, I am a very big fan of the 19th century giant Jay Gould, whom I have recently written about with Professor Maury Klein.

I am also a fan of the late Henry Singleton, whom I have written about with the help of Lee Cooperman.

As to modern executives and strategies, information can be found in the following article I wrote for the Journal of Private Equity (“The ‘Next Phase’ of Strategic Acquisition” (2015), pp. 27-35).

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

Information is all bottom-up. As to management interaction, it depends on the nature of the investment, e.g., distressed investments do not (initially) require management interaction while secured lending requires a great deal of it.

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

I like gold for a variety of reasons: macroeconomic as I am not a fan of the “Ph.D. standard” of modern monetary policy, and distress given the drubbing metals took earlier. Same for mining in general and oil.

As to what to avoid: Diamondback Energy (FANG, Financial) and anything coming out of the bubble that is Silicon Valley today.

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

It’s been almost 10 years since the financial crisis began in 2007, and the amount of risk in the system today is greater than it was then. When the system tips into the next crisis—and there is always a next crisis in a highly leveraged economy—it will be interesting to see who the winners and losers are, and if the government continues to bail out the losers dollar-for-dollar.

It is widely believed that both political parties have failed the country macroeconomically, as the recent election certainly revealed. Therefore, change seems to be in the air: the word “seems” is important here as no-one knows for sure, of course, least of all me. However, any change will influence who wins and who loses, but I am not sure this is being considered “systemically.” For more information on how I view systemic risk, see a recent paper I authored on the subject.

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

Most of what I do is performed in a corporate setting, which makes it difficult to talk about. So let me answer this way: when I was teaching, the Marvel bankruptcy case was by far the most popular case I taught. I decided to write it up in article, which was published (“Distressed M&A and corporate strategy: lessons from Marvel Entertainment Group’s bankruptcy,” Strategy & Leadership, Vol. 37, No. 4 (2009), pp. 23-32). Shortly after publication, Disney (DIS, Financial) acquired Marvel for $4 billion so the editor asked me to write an article analyzing it. What luck!

I applied basic value investing theory to the deal and concluded it was overpriced. The editor liked the paper and published it (“Disney’s Marvel acquisition and strategic financial analysis,” Strategy & Leadership, Vol. 38, No. 2 (2010), pp. 42-51). Now, I was obviously wrong about Marvel being overpriced, but the question was why? I researched it heavily, which led me to conclusions that were published in the Journal of Private Equity (“The ‘Next Phase’ of Strategic Acquisition” (2015), pp. 27-35).

I also updated my earlier paper on Marvel with commentary on where my Disney analysis went wrong, which is available for download.Â

Note the use of mistakes to improve performance: The biggest mistake made by people in investing, business and academia alike is not learning from mistakes they have, literally, paid for.

11. How does one avoid blowups in value investing?

By taking advantage of operational leverage, avoiding financial leverage and keeping losses small. Both success and failure is a function of time and, therefore, you need to make time an ally, not an enemy. It is amazing how few people understand this.

12. What is the most contrarian investment you've ever made? Why did you make it and how did it turn out?

Most of what I do is contrarian, which is challenging in a corporate setting both to accomplish (not everyone understands what a contrarian does or why) and to talk about. So let me answer this way: in 1998, Warren Buffett (Trades, Portfolio) purchased Gen Re for $22 billion. Almost immediately, Gen Re began posting heavy losses. Initially, Buffett and those close to him indicated the firm had changed, unbeknownst to either management or him, and that as a result losses were being generated. I worked for Gen Re at the time and knew this was not true; meaning, management made a great many changes, which I assumed they briefed Buffett on before he shelled out $22 billion to buy it. Using basic value investing theory, I showed how Gen Re was not worth $22 billion at the time Buffett took it private, which I published in 2005. Virtually no one agreed with my analysis at the time, but several years later it was widely accepted.

Similarly, I used basic value investing theory to look at Lampert’s Sears acquisition and it led me to a contrarian point of view that I published in 2008. Virtually no one agreed with the analysis at the time, as evidenced by the hate email I received after I published it, but over time it proved correct (Both the Gen Re case and the Sears case are profiled in my book, “Applied Value Investing,” chapters two and four).

One more example, this one pertaining to Buffett’s acquisition of the Burlington Northern Santa Fe Railroad. When this deal was announced, Buffett was heavily criticized for it, including, somewhat incredibly, by his official biographer! I used basic value investing theory to show the deal was very favorably priced, which I published in the Journal of Private Equity (2010). Over time, this analysis was also proven correct.

As James Grant insightfully observed, the key to investing is having people agree with you, eventually.

Start a free 7-day trial of Premium Membership to GuruFocus.