1. How and why did you get started investing? What is your background?
I am actually an attorney by trade. I got interested in value investing when I was a young lawyer back in the late '90s working at a big firm. Soon after getting started, I came across an interview with Warren Buffett (Trades, Portfolio) where he said that if you are not an investing professional, you are better off putting your money in index funds and concentrating on your chosen field of endeavor. This advice made a lot of sense to me, and I stopped reading about investing and put my savings in a Standard & Poor's 500 fund. Then along came the financial crisis, and I lost all appreciation in my savings. I said to myself that Wall Street was taking me for a ride, and I had to get educated. So in about 2009 I started reading everything on value investing that I could get my hands on.
2. Describe your investing strategy and portfolio organization. Which valuation methods do you use? Where do you get your investing ideas?
There are a lot of terms used to describe my brand of value investing. It's referred to as GARP (“growth at a reasonable price”), wide moat investing or quality investing. I’m really just doing my best to mimic the Buffett/Munger approach to investing. I tend to value companies backward. I start with what a 15% FCF yield per annum would look like 10 years hence and see if the company can realistically achieve it. I focus on the company’s key drivers of FCF. This approach is drawn from Charlie Munger (Trades, Portfolio)'s famous speech on Coca-Cola (KO, Financial). I don’t buy the stock unless it seems easily achievable. By contrast, a discounted cash flow model makes all the sense in the world theoretically, but in practice small changes in assumptions can cause huge fluctuations in value. I stopped using DCFs for this reason although I do like to look at “reverse DCFs” to see what assumptions Mr. Market is building into the stock price.
3. What drew you to that specific strategy? If you only had three valuation metrics, what would they be?
I was drawn to wide moat investing for practical and emotional reasons. As a practical matter, it made intuitive sense to me that a company with sustainable competitive advantages was a less risky investment than a company that was vulnerable to competition. As an emotional matter, I guess something in my personality makes me more interested in tearing apart high quality companies and seeing what makes them tick than turning over rocks to find undervalued cigar butts (to mix metaphors).
4. Which 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?
As stated above, like everyone else, I am hugely indebted to Buffett and Munger for inspiring me and being so open with investors. Not only did they give me investing advice, but they changed my whole world view. I also think Howard Marks (Trades, Portfolio), Alan Meacham and Thomas Gayner are really great. I know that Sequoia has had its problems lately, but I have learned a lot from reading the transcripts of their annual investor meeting. I also like everything Intrinsic Investing, John Huber and Sanjay Bakshi put out. Beyond these well-known names, I am also lucky enough to hear from a lot of lesser-known investors who read my blog. I have learned a tremendous amount from these interactions.
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?
Well, to quote a famous guy, my “favorite holding period is forever.” Since I invest in compounders, I prefer not to sell them unless (1) there is a fundamental change in the business or (2) the valuation becomes crazy. To cite just one example, I bought Microsoft (MSFT, Financial) in 2010. Not only has it more than doubled, but the dividend yield is now about 6%. I see no reason to sell it. I have never bought a stock that I later came to regret although I have made some mistakes on my blog. I realized these mistakes pretty quickly after readers pointed out flaws in my logic.
6. How has your investing approach changed over the years?
I have developed more faith in my own point of view. At first, I was nervous about adopting truly contrary opinions. I didn’t have enough confidence in my analytical abilities to stray far from the crowd. With experience, I am more comfortable going out on a limb.
7. Name some of the things that you do or believe that other investors do not.
I think the valuation approach I described above is pretty unusual. I don’t think too many people work backward like that.
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?
John Malone is a favorite of mine. I learned so much by going through a bunch of his portfolio companies. I don't own any of the stocks, but I have been very impressed with Bruce Flatt at Brookfield Asset Management. Other than that, I think all of the classic compounders like Costco (COST, Financial), Alphabet (GOOG, Financial)(GOOGL, Financial), Fastenal (FAS, Financial)(FAST, Financial), Starbucks (SBUX, Financial), Visa (V, Financial) and MasterCard (MA, Financial) are well run and fascinating to study. I judge the quality of management by looking at their capital allocation decisions and by their stated views on company strategy. It's important that management understands the nature of their moat.
9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?
I don’t use any screeners. I don’t know if it’s efficient, but I find companies by reading and by talking to other like-minded investors. Also, often when I research one company it will lead to another and so forth and so on.
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.
The ideal company is Moody’s prior to regulatory risk appearing as a result of the financial crisis.
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 don’t have a checklist or any hard cut rules. My approach focuses on identifying a company’s competitive advantages, if any, and assessing whether they are sustainable. I spend the vast majority of my time on qualitative factors like competitive landscape, strategy and industry makeup.
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 have never talked to management except for one IR person who contacted me after I posted an analysis of their company. I decided not to talk to management because I am afraid that I might like them personally, and it would bias me in favor of the company or vice versa.
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? If you can, give some examples.
See above.
14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas and why?
I am not finding any bargains, and I have not bought a stock in over a year. When the price of oil dropped, I was intrigued by the oil sector, but I find commodities really difficult to analyze and value.
15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
I find it overvalued. I am also concerned that the market is not as inefficient as it was in the past. It is harder to find bargains.
16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?
I am currently reading "Submission" by Michel Houellebecq. I don’t think there are any lessons for investing, but it does give interesting insights into the rise of Trump and other illiberal movements in the West.
17. Any advice to new value investors? What should they know and what habits should they develop before they start?
The most important advice I can give a new value investor is to stop reading books on investment process or strategy and starting reading 10-Ks. The best way to learn is to apply the basic value investing principles to real life examples.
18. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
I have only piggybacked one investor. When Dan Loeb managed to oust the Yahoo! (YHOO, Financial) CEO and get seats on the board, I bought shares of Yahoo. I sold when it doubled a short time later.
As for resources, I like Sentieo a great deal.
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?
As stated above, I have not made any investments that burned me. I have made three mistakes on my blog that I regret. First, I bought into Conn’s (CONN) story that its earnings were being hit by short-term problems related to its financing arm. I overlooked real questions about its accounting and its business model. Second, I bought into OnDeck’s claim that it benefited from data network effects and its ability to disrupt the big banks. I still think OnDeck is basically a good company and becoming more attractive as it moves into SaaS activities and less direct lending. I think the stock was unfairly punished in the wake of the Lending Club fiasco. The third mistake was just recently. In my income projections for CBRE (CBG), I failed to adjust for the current CRE bubble.
20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?
If one of my stocks gets beaten up, I review whether my original reasons for buying the stock remain sound. If they do, I just dismiss the fluctuations of the market as irrational and try not to look at the stock price too often.
21. How does one avoid blowups in value investing?
I am of the view that the only way to avoid blowups in value investing is to invest in wide-moat stocks. This is the only reliable method for distinguishing a value stock from a value trap.
22. If you are willing to share, what companies do you currently own and why? How have the last five to 10 years been for you investingwise compared to the indexes?
I currently own:
- Berkshire Hathaway (BRK.A)(BRK.B).
- Wells Fargo (WFC).
- Charter Communications (CHTR).
- Discovery Communications (DISCA)(DISCB)(DISCK).
- Live Nation (LYV).
- Anthem (ANTM).
- Microsoft.
- Goldman Sachs (GS).
- Leucadia National (LUK).
- Nicholas Financial (NICK).
- AIG (AIG).
23. Here's a fun one – What stock would Warren Buffett or Benjamin Graham buy today if he were you?
If Buffett was as small as I am today, he would probably buy some of the smaller wide-moat stocks I have profiled on my blog like Winmark (WINA) or Collectors Universe (CLCT) or Hibbett Sports (HIBB).
24. What is the most contrarian investment you've ever made? Why did you make it and how did it turn out?
I have never made any outrageously contrarian investments. I would say that Anthem, Microsoft and Goldman Sachs in 2010 were all pretty contrarian. They have worked out fine.
25. If most fundamental investors study the greats (e.g., Buffett, Klarman, etc.), surely value investing is no longer a "contrarian" investment strategy?
I still think it is contrarian but not to the same degree as in the past. That is, the approach articulated by Buffett is widely known, but it still runs counter to human nature. As Michael Mauboussin once wrote: “Unfortunately, your investment tenets and my latest diet have much in common: both are relatively easy to understand but awfully difficult to stick to.” Therefore, I think certain inefficiencies will remain in the market for as long as humans are investing.
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