1) What is the best investment advice you have ever been given?
Benjamin Franklin said "An investment in knowledge pays the most interest." Or in other words “Don’t invest in anything you don’t fully understand”. This sounds like basic common sense or maybe naïve, but people do it all the time; laying down money in exchange for something they don’t know or understand simply because everyone else is doing the same thing (trading in complex options, buying stocks with no regards to fundamentals, …)
Another advise that compliments the first one is “Rule #1: don’t lose money, rule #2: don’t forget rule No. 1 by Warren Buffett (Trades, Portfolio). In order to be wealthy, you need some discipline managing your finances, the majority of people don’t have that discipline, they lose a lot of money irresponsibly in my opinion (gambling, living beyond their means, unsound business deals, …). To sum it up, “Don’t spend money on non-sense, and only invest in thing you understand 100%”).
2) What level of math is needed in order to understand the entirety of finance and investing?
Finance is a vast and evolving field; you don’t need to understand the entirety of it to be a good investor. To calculate a business’s intrinsic value, you only need simple algebra, nothing more. You don’t need a stratospheric IQ or inside information to invest successfully, all you need is to think for yourself and keep your emotions in check. Investing is not rocket science, if that was the case, the best investors would be mathematicians.
3) Is "value investing" (Warren Buffett (Trades, Portfolio) & Benjamin Graham approach) a good investment strategy for long-term goals like investing for retirement?
Definitely yes. And you just look at Graham or Buffett investment record if you’re in doubt. Many researches have been done showing that value stocks outperform the market over long period of time. Value investing makes sense because we tend to purchase stocks selling below their intrinsic value, basically looking to buy things at a discount. Buying a dollar for 50 cents will make you wealthier over time than buying a dollar for 105 cents.
4) What should I know before I start value investing?
Before you start investing, you must first know if you can control your emotions, many people think they can until the market takes a nose dive and they start panicking. Once you can control your emotions, you must think long term.
5) How should one invest in a bear market?
One should invest in a bear market the same way as he invests in a bull market, the discipline should be maintained. It’s just easier to find undervalued securities in bear markets than in bull markets.
6) What are the essentials of due diligence when investing?
An investor must do his research before investing in anything; it can be the stock market, a farm or a restaurant business. Reading the annual and quarterly reports allows investors to appraise the business. The best investment decisions are based on facts, not speculation. Value investors tend to focus on what they do know, not guessing or speculating on what they don’t.
“The worst thing you can do is invest in companies you know nothing about. Unfortunately, buying stocks on ignorance is still a popular American pastime”. Peter Lynch.
7) What kind of stocks would you rather avoid holding because they are riskier than others?
IPOs, (I wrote an article about how bad an investment they can be, you can read it on (http://www.lembirikgroup.com/articles/snapchat), other companies I avoid are businesses losing cash with no plans to reverse that, over-leveraged and overvalued companies. At Lembirik Group, we avoid those types of stocks. We only hold sound companies that are selling for less than what they’re worth.
8) What are some investment lessons you learned in 2016?
Being a disciplined investor and ignoring “market experts” is rewarding. The year 2016 began as the worst start in record as labeled by newspapers. We witnessed Brexit and the eventful US elections. Pundits predicting a market crash. However, the S&P500 ended the year up about 10%!
9) What discount rate do you use in your valuation?
We don’t have a discount rate to speak. We look to buy things that yield substantially more than our opportunity cost. We don’t use discounted cash flow models, they work in theory but not in practice: There are too many assumption and variables to consider. If you have 10 assumptions to make, and you’re right 90% on each, you’ll end up being right only 35% on your model. Probability to be correct is very low when you deal with many variables.
10) Which is more useful, earnings yield or P/E ratio? Why?
One is the inverse of the other. These formulas use GAAP earnings that don’t reflect the true earning power. P/E ratio or earnings yield are not efficient measures in valuing a company in my view.
11) With just public information, how can you be confident that your valuation is correct while the market is wrong?
You have to do your own research and trust in your judgment. Most of the time markets over react to some macroeconomic event not related to any business fundamentals. Or when they overestimate the challenges a company is facing. You don’t need inside information to have good investment returns, you only need to think independently and trust in your judgment.
"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it." Warren Buffett (Trades, Portfolio)
12) What are the key attributes of a great investor?
Great investors have different skills, invest in different companies yet they share some common attributes. Among them:
Avid learning
Discipline
Patience
Emotional control
13) What are the best books about special situations investing?
There are many books written about arbitrage or special situation investing, some are more detailed than others. “Margin of Safety” by value investor Seth Klarman (Trades, Portfolio) is an excellent book, another good book is “Risk Arbitrage” by Keith Moore.
14) What are the best websites to follow for value investing-oriented investment ideas?
At Lembirik Group, we generate ideas from anywhere we can, we read annual reports, newspapers, magazines … we scan through many ideas to find the perfect one. A lot of research is involved. We do not use a specific website for that.
15) For an individual relatively unsophisticated non-professional investor, what are the most under-valued asset classes today and what are the best funds or mechanisms to invest in them with a buy and hold mentality?
A low-cost ETF that tracks the market like Vanguard.
Interview with Sid Lembirik, Managing Partner at Lembirik Group Investments.
