1. How and why did you get started investing? What is your background?
My dad is the whole reason I have gotten involved with investing. My earliest television memories are of Louis Rukeyser on "Wall Street Week." That was high entertainment on a Friday night, much to my chagrin at the time. In addition to that, my dad and I have been very close and have been doing extended road trips together since I was in Kindergarten. The two topics that surfaced the most frequently were investing and vintage race cars. Not surprisingly, both of those topics are things that I am highly passionate about to this day.
My collegiate education is in kinesiology and applied physiology. The core of my financial education came from the Chartered Financial Analyst Program. I had done no finance courses before starting the journey to become a CFA, so everything on the first exam was basically brand new information to me.
2. Describe your investing strategy and portfolio organization. What valuation methods do you use? Where do you get your investing ideas from?
Our investment strategy has been to focus on large-cap stocks with long track records of success when they are out of favor. Having a background in options trading, the primary method I implement is to sell out of the money puts in beaten down stocks. I set my strikes based on a valuation where I believe there is a significant margin of safety. Then the idea is to hold those stocks for extended periods of time.
We usually find our investing ideas from watching the market. As we observe the market, we find sectors or individual businesses that are underperforming and we try to find the reason why they are underperforming.
3. What drew you to that specific strategy? If you only had three valuation metrics what would they be?
The strategy grew from experience. I was a Market Maker on the floor of the Philadelphia Stock Exchange for several years. I was undoubtedly the guy on the floor with the lowest trading volume. I came onto the trading floor with the mindset of an investor and not of a trader. My mindset was so wrong that market making never clicked with my mental models, but I observed a lot. My knowledge grew substantially when I started electronically streaming quotes on both sides of the market. That experience taught me a lot about hedging and I gained a great deal of experience pricing options over the full array of strikes and expiration dates. The on floor experience gave me the knowledge to appreciate where I could find options that I thought represented value opportunities.
It is really hard to pick three valuation metrics, but here are a quick three. Discounted cash flow models, DuPont analysis (ROE) and Shiller P/E. Tough to pick just three and I am pretty sure using the DuPont ROE is cheating.
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?
Well, first and foremost, I have to list my father. Without him I could not have begun this career and his guidance and expertise have been a tremendous tailwind. He is at the top of my list of most influential people and investors. He is incredibly bright and has decades of investing and trading experience that has shaped me in more ways than I can list.
I would not be the investor I am today without a couple other people. Stig Brodersen and Preston Pysh of "The Investors Podcast" have created this fabulous community and it has undoubtedly changed me. They have reignited a passion to learn and to keep digging deeper into investing. Before finding their show, I had been a bit bogged down in the details of investing and not looking at the process more holistically. Through the podcast, I was introduced to Guy Spier, who has made an incredible mark on my daily life. His book, “Education of a Value Investor,” really struck a chord. I have had the opportunity to meet with Guy on a few occasions and he lives up to and beyond his representation in the book. Another investor I was introduced to thanks to "The Investors Podcast" was Patrick O'Shaughnessy. He is incredibly bright and has a breadth of knowledge that I really aspire to. What I really connect with both of these incredibly bright guys is that they have turned the zero-sum game of investing into something much more accretive to the world around them. They both give so much, and ask for so little in return.
Outside of the normal value investing books, I have recently been reading a lot of psychology books that really have made me think a lot. “Influence” by Robert Caldini, “Mistakes were made (but not by me)” by Carol Travis and Elliot Aronson, “Thinking Fast and Slow” by Daniel Kahneman and “Never Split the Difference” by Chris Voss.
In addition to books, I have come in contact with a lot of investors through podcasts. As previously mentioned is "The Investors Podcast," but others that I listen to frequently are Patrick O'Shaughnessy’s recently launched "Invest Like the Best," Barry Ritholtz’s show "Masters In Business"Â and "Value Investing" with John Mihaljevic. All of those introduce me to new mentors and great thinkers on a weekly or monthly basis.
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?
Our fund has held stocks for generations. The first stock I ever looked at deeply was Winn-Dixie, which we owned at the time, and that one was purchased by my great-grandfather. We have a family history of being hoarders, so I think I am genetically predisposed to hold onto things too long. It is hard to beat the tax man so our goal is to hold things as long as possible.
6. How has your investing approach changed over the years?
I used to focus too much on macroeconomic factors. It is hard to ignore at times, but I am more successful when I move my eye towards more bottom-up investing. Macro is an interesting topic but timing macro events, I have found, is very challenging.
7. Name some of the things that you do or believe that other investors do not.
Frequently I run into really bright investors who do not use options. I am not sure if it is just from being unfamiliar or getting overwhelmed with the underlying mathematics, but I think options are great tools that should be in most investor’s bag of tricks.
8. 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?
I have never had a long position in either, but Amazon (AMZN, Financial) with Jeff Bezos really impresses me, as does Google (GOOG, Financial)(GOOGL, Financial) and its management team. Bezos has been able to figure out a model where he can come into any market space and just eat competitors alive. Google has impressed me with how well it has seen and developed new technology. They have deployed capital fairly successfully and continue to broaden the scope of the world they touch. Their vision and use of YouTube alone amazes me.
The book “Outliers” was an incredible read with a lot of examples of what to look for in good managers and companies. That is better to read than any suggestion I can give.
9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?
I use stock screeners fairly rarely. More often than not, I find short opportunities using screeners than I do buying opportunities. Shorting has not been an easy game lately though with short interest being an expense rather than a benefit.
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.
I have never limited myself to traits that a stock must have. From my experience, you can select traits that you want, but you have to dig into the company to parse out whether or not the trait you found is genuine and is able to be maintained going forward.
11. What kind of checklist or homework do you utilize when investing? Do you have a specific approach, structure, process that you use? Or do you have any hard cut rules?
I am working on a checklist as we speak. You learn so many lessons from your mistakes that it is hard to narrow them down into a nice quick list. Right now my checklist is heavily weighted towards leverage, leverage, leverage and knowing who holds it.
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 am a fundamental kind of guy so I always start with 10K and 10Q, then go out from there. It seems each time I look into a company, my pathway of knowledge accretion takes a different path. Sometimes I end up reading journals of the industry, other times I find reports from competitors or clients, and sometimes you even find something in academia.
I do not have a long track record of speaking with management. Recently though I did get to participate in an interview with a CEO of a micro-cap company (Acme United (ACU, Financial)) at the MicroCap conference in Philadelphia. It was a great opportunity and I did enjoy learning about the company from someone on the inside. Small investors have limited exposure to top management at large firms, but the opportunity to meet and speak with a CEO was great. I generally read conference calls on companies I like on Seeking Alpha, so I do read managements discussions.
13. How do you go about valuing a stock and how do you decide how you are going to value a specific stock? When is cheap not cheap?
I like doing discounted cash flow analysis, but then I try and probability weight difference scenarios that I think are plausible. I am usually very conservative with my probability weightings of positive surprises and overweight the probability of negative events. When my valuation comes in higher than the market is showing (or the strike price I am considering), that is usually when I determine that it is probably cheap. There is no fixed percantage for margin of safety that I have. If it is a big name like ExxonMobil (XOM, Financial) or Apple (AAPL, Financial), I will take a smaller margin of safety than if it is a small stock.
14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?
Right now the bargains I have been seeing are in the auto sector. I keep hearing the auto sector is at a cyclical peak, which may be true but valuations are quite low even at lower expected future earnings. Some of the parts makers like Borg Warner (BWA, Financial) and Tower International (TOWR, Financial) have been on my radar. With that said, I do not think the auto sector is going to set any world records for price performance, and it is a sector that is at risk during market downturns.
15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
I find it hard to ignore that Fed funds rates have been this low for this long. It is not something I ever expected to see, particularly in concert with a 300% trough to peak rally in the indices.
I do not think I can say it better than Buffett does, so I will paraphrase him and say that at these interest rates the market is not outrageously overpriced.
16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?
I read “Mistakes were made, but not by me” earlier this year. My key takeaway is that, “we systematically distort our memories and account of the event to produce the maximum consonance between what happened and how we see ourselves” (pg. 246). I think this is a pretty powerful message and one that we should all heed in investing as well as personal relationships.
Right now I am reading “Never Split the Difference.” This book has taught me so much already, but I think it is a book I am going to have to reread slowly and practice each chapter to fully integrate its lessons into my life. It is such a fun, entertaining read though that I have not wanted to slow down and take notes on the first pass.
17. Any advice to a new value investor? What should they know and what habits should they develop before they start?
My advice to a new value investor would be to read as much as you can and get familiar with finance and accounting. I chose getting familiar with finance and accounting through the Chartered Financial Analyst program. There are other ways to go about it but getting that baseline of knowledge is critical. Having the exam deadlines and the material presorted and prioritized helped me stay on track and really gain the baseline of knowledge. Going through that process taught me the tools of investing; now I am trying to learn the art. That process also taught me a lot about dedication and work ethic. I made it through college working hard, but studying for the CFA was a whole new level of work ethic that I am glad I found in myself.
For beginners, Preston Pysh and Stig Brodersen wrote a good introductory book titled “Warren Buffett (Trades, Portfolio) Accounting.” They have videos and other material to help explain the concepts further as well. I have read the book and think they explain things very well to someone new to investing.
Get into the habit of reading a lot and be like Munger, always invert!
18. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
Obviously, GuruFocus is a tool that I use and I follow a lot of investors on the site. I have not ever blindly ridden coattails. I do follow other investors and get ideas but I always do my own homework on them. One we will get to in the next question is Horsehead Holdings (ZINCQ, Financial).
Most of my favorite resources have been listed, but one that I have not mentioned that I like a lot is Oldschoolvalue.com. Jae Jun was the first source I found for affordable 10-year financial data, and his blogs are very insightful.
I also like going to the Corner of Berkshire & Fairfax. There are some incredibly bright people that post there and have insights and links that I do not find on my own. It is a forum though and you do get some nonsense mixed in with the gems. Overall, I think it is a great resource for small investors.
19. 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?
My biggest mistake recently was Horsehead Holdings. I was introduced to the position from following Guy Spier and Mohnish Pabrai. That said, I did a lot of work on this company and understood the zinc plating process, understood where the issues were in the plant, and thought the company had a decent chance of exceeding market expectations. My two takeaways were 1) know where the debt is and if it is closely held assume it can change hands quickly. 2) Never put much weight into what management says. They have a lot of legalese built into every document they put out for a reason.
Truthfully, my worst mistakes are from non-action. I have a very cautious personality and I often pass on investments that are good ideas.
20.How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?
This is a struggle for me. It is widely publicized that, on average, we feel losses 3x as much as we do similar gains. On top of that, I am much harder on myself and lay blame on my own shoulders when it comes to an investment that does not work out versus one that does.
Getting familiar with psychology and being aware of things like loss aversion bias helps because you can recognize when you are making those mistakes. That is one of the reasons I have listed so many psychology books. Learning the mistakes we all make and being aware of them is a key defense against allowing emotion to take control. I also have Warren Buffett (Trades, Portfolio) in my ear when I make a mistake saying, “You don’t have to make your money back the way you lost it.”
I also utilize hedges at times to limit downside exposure. My experience is that when the market has a correction and you are unhedged, you can get a bit handcuffed with emotions. Having a hedge on allows me to be more flexible during periods of down markets.
21. How does one avoid blowups in value investing?
I grew up skiing and we had a saying, “If you aren’t crashing you’re not trying hard enough.” I see investing mistakes in the same light. Taking the value approach means that at times you are buying something that has at least one trait that could become a serious issue. You can limit total loss with hedges, but sometimes those opportunities are not available in smaller equity positions. I do not think it is possible to avoid mistakes entirely.
22. Here's a fun one - What stock would Warren Buffett (Trades, Portfolio) or Benjamin Graham buy today if he were you?
I think Warren Buffett (Trades, Portfolio) and I might go into Diageo (DEO, Financial) together if the price ever got low enough. During market turn downs, I have found that some puts get attractive in this name. The company I met with at the MicroCap conference was Acme United (ACU, Financial). They make scissors, knives, shears, rulers and first aid kits. I think they would be a Buffett-type of investment at the right price as well. The company is too small for Buffett to look at now though. My most recent Graham-like position was Leap Frog, which was a net-net stock for a while. It got bought out though very cheaply.
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