Good Investing Talks - What has a bar to do with finding investment ideas? Guy Spier on idea generation, process & research

Episode Date: January 25, 2021

At the beginning of October 2019, we had the chance for a series of interviews with Guy Spier of Aquamarine (www.aquamarinefund.com and www.guyspier.com) in Zurich. In this part of the interview, you can learn more about Guy Spier's research process.

Hello YouTube. We just learned what the bar has to do with his research process. So be curious about it and subscribe to our channel. Thank you. Hello Guy. Welcome back to our interview. Yes. This time we want to talk about process. So let's start with the beginning. Where do you get your ideas from? Exactly. Where do I get my ideas from? I thought you might ask, how do I get my ideas?

And the answer is with great difficulty. And I'll give you an analogy that I actually used it in my annual meeting. But I really think it's true. So I feel that the way people want to talk about their investing process is they want to put themselves into the shoes or into the mindset or describe themselves as being like a fighter pilot. The fighter pilot is highly trained, has all the instruments right there, has this finely tuned machine, and he selects the target, and he flies towards it, and he drops a precision bomb on the target.

That is our idealized and subconscious idea of how an investor goes about selecting stocks and managing the portfolio. So I want to give you a different idea. give you a different idea. And I hope that this doesn't reflect badly on me. But I think that a better model is of a drunk stumbling around in a bar trying to find the drink. And he's trying to grab a drink, not a handle. And he's sort of stumbling around and his mind is all confused. And why do I say that? I say that because we have a very bad model of how our brains actually work. And the reality is that our brains are, we are highly rational.

And the worst is, I think, when you're smart. Because if you've had, what do I mean by smart? I mean smart, good grades at things like mathematics and other subjects which require you to be highly focused. So that develops the subjective sense that you're like a fighter pilot. And so you can start believing that through superior intelligence, analytical ability, that you can sort of hit the target. And I think a better self-image is of being a drunk. And if you perceive yourself as being a drunk in a bar, you're going to set up different rules for yourself. And so I believe that the vast majority of what I think you would call process and what I'm doing is I'm trying to set up an environment.

in that bar such that when I finally lunge for the drink, or quote, say, call the drinks in this analogy, the investment, I've lunged for a good one. So that process starts with just don't do anything to the portfolio. Don't engage in trading fees. Allow stocks to live in the portfolio for an extraordinarily long time.

Select stocks that you can allow in the portfolio for an extraordinarily long time without looking them too hard. So the process is all assuming, I'm assuming that at some point I will be irrational or that I'm continuously irrational. And, you know, I'm trying to also set up my investing life and world in such a way that I don't ever have to be smart. I would argue that the abilities that one needed to bring Berkshire Hathaway from where it was today, where it was when it started to where it is today, are far greater than the abilities that the current managers will need

to bring Berkshire Hathaway from where it is today going forward. You want to create an environment where you need less and less intelligence and ability over time. So that's what I'm trying to build in multiple ways around me. But specifically to where do I get my investment idea? Here's another thing that I believe that all investors should throw out the window. So I cannot, I have to accept that I come from a particular background. I have a particular set of ideas and knowledge about the world in my head.

And I need to work from where I am, not where I'd like to be. I would tell you that if I was starting my investing career again, or if I was starting my business career again and with the intent of becoming an investor. I would not have studied P.P. at Oxford and I possibly wouldn't have done an MBA at Harvard Business School. A course that I would very much have liked to have done is called Symbolic Systems at Stanford and it's the same course that Reid Hoffman did and it's a combination of computer science and then sort of general subjects around politics and psychology and sociology. I think that I'm at a huge disadvantage because that is a world that grew up mainly after I graduated

from business school and it's not a world that I have engaged with as much as I would have liked. But I can't start analyzing all the different parts of the world that I don't know. there may be some extraordinary companies in Indonesia. There have been some extraordinary companies that have come out of Silicon Valley. So I have to start with the world that I know and work incrementally. And I think that I have to accept. And my investors have to accept that that's where I'm coming from. But within that, where do my ideas come from?

So I'm trying to look at business models that have moats that are growing. To the extent that they have moats that are growing, I'm trying to get to know the managers. I'm trying to get to know the people who invest in those companies. I'm trying to get to get more insight into whether it's really the case that the motor is growing or not. I'm trying to find other businesses where maybe the motor is growing better and faster. And so I'm going from, if you consider the island of knowledge that I have, my circle of competence, I'm trying to see where I can grow it into other directions.

And that involves many different kinds of activities. I've only really started understanding, I think, well in a way that can really help me now. So when you ask, where do my ideas come from? It comes from an acceptance of my own limitations. But then work to expand my circle of competence in ways that I know how to do that. So just to summarize or to share with you, the places where that goes. So what is, you know, learn about new ideas, read about them.

But then a new thing for me is develop relationships with other investors who know about areas that I might want to learn about. So later this year, I'm going to visit with Sarab Madan in Richmond, Virginia. I already talked earlier that I spent time with Josh Tarasov and I spent time with Nick Sleep. And developing those relationships is finding ways to add values in their lives. So help them, try and understand what they're interested in the world and see if I can help them. I've also discovered that my investors, not all of them, but some of them are some extraordinarily interesting people. I didn't spend enough time learning from them.

and there are some of my investors that I can really learn from and I have some really, I've started having some really good conversations with them. And then something, you know, for those of the people who watch this interview, do not learn from my book that you should not speak to company management. One should. I simply, simply got that wrong. And if I write a sequel or an extra sort of like couple of chapters to the book, that's one of the first things I will talk about. So talking to company management, not just about their businesses, but trying to be a source of value in their lives and helping them with what they need to find, whether that's help with their children, help with where to go on holiday, restaurant choice, but also what's going on in their business and what their professional challenges are, but to be a source of value in their lives so that they can then reciprocate with, insights into their businesses, I think, are all ways, and all of those ways I would tell you are, and something that I figured out is human intelligence. So I think there are a lot of people

who are acting with the belief that artificial intelligence, machine learning, other kinds of kind of number crunching approaches to the world are going to help them deliver better investment results. And I actually believe that that's not the case. I think that it's going to be human intelligence. And actually, Berkshire Hathaway is a model for that, and I've been working hard to do that around me. And so the main part of the process, I would actually argue if you wanted me to summarize, is investing in the people around you. Creating goodwill is the expression that I like to use. Invest in your surroundings. Invest in people. help the people, help the people who will help me get insights into where to direct

Acro Marine Fund's investments. Make them feel happy that Guy Speer exists. Make them feel happy that Acro Marine Fund exists. Make them wake up one day and feel compelled to send me a great insight on a great investment idea because they're grateful for genuinely grateful, not pretend grateful, genuinely grateful for things that I've done for them value that I've delivered in their lives. So I would argue that's the most important process, if you like. You know, you talk, just now you talked about working together with other people.

How much time do you spend like to sit in a room and think for yourself to put it in this kind of picture? Not enough. You know, Pascal is the famous French mathematician who said all of man's problems come from the inability to simply sit in a room and think for oneself. That's what this room is about, is sitting in here and thinking for myself. And I would tell you that if I get half an hour a day, that's really, really good, really good. but something else that I think that is really important for viewers of this video

the Vali Dach community to think about is that we have this image and I don't even know exactly where it came from that Warren Buffett is sitting in a dark room just thinking and you know it's perhaps not helped by Todd Coombs saying that he reads 500 pages a day or something And I think that's something that, again, is something that I learned over the last few years. Warren Buffett maybe spends more time thinking in a room now than he used to in the past.

He used to go out a lot, meet people, talk to people, get to know who they are, find out what insights they can give you. We well know that he used to travel to New York and go visit all sorts of people in their offices. So I don't think that you can do this job well by just sitting a room and thinking and getting out and meeting people. I would actually argue that I travel a lot, but I think that I could do a better job at meeting people, meeting the right people. And actually, I've invested in that. So I used not to be a client of an expert network. I've now become a happy client of expert networks, which are basically dating services for industry. experts. And the insight that I got, though, and one of the reasons why I was willing to use them

is that I go through the expert networks. I work on a disclosed basis. So I let a person on the other end of the phone know who I am. They're welcome to Google me. And so it's some people used expert networks. They use them anonymously. So the experts they get put in touch with don't know who they're speaking to. I don't do that. And then over and above that, I try, if to the that the person is interested, to develop a relationship with them, bring them into my circle of people. Often those people are interesting. They're often former CEOs, former CFOs, former marketing offices of either the company that I'm investing in or perhaps a competitor. And they're worthwhile people to know and they can benefit. So I can't remember what that was in answer to.

But I'll tell you something that is perhaps, again, one of the more important things that I could say to the Value Dach community. If I want to be an investor, I need and feel good about myself, I need to justify my existence on the planet. I need to justify my existence to the communities that I'm a part of. They need to genuinely feel like I'm adding value. So if we talk about investors, hopefully I'm delivering good returns better than they could get elsewhere. And hopefully I'm charging them less for that. That's kind of the little strategy or the Costco strategy applied to investing.

But we also need to be value-added investors to the corporations that we invest in. And that means, I think, taking a genuine interest in the health of the corporations, their leaders, and their employees, and to think long-term about those companies in ways that maybe the managers don't have time to think. And that is both a moral imperative, if we're to justify existence on the planet.

It also is a way of making the world a better place. If we had really good owners of businesses, then managers of businesses could think more about how to deliver to their stakeholders. So we have an important role to play. I would actually say that there are some, there's a style of aggressive activist investors. that you get out of the Anglo-Saxon economies that I don't think long-term is value-added that's not that's not helping us build better societies and stronger democracies

how many companies do you research every year do you have a rough number and how many of them do you visit so not enough is a simple answer Look, so having talked about human intelligence, I really enjoy running screens. I used to run screens on capital IQ. I ended up deciding that I couldn't afford both capital IQ and Bloomberg. There were some things I liked about Bloomberg more.

I ended up sticking with Bloomberg. Their screening is really good. So, you know, I'm fully aware that there's this concept of a company that's screened. greens well, but it's not actually a good investment. And I think that the world has become far more difficult for those of us who studied accounting because so much, so many of the businesses that do well or that are extraordinary businesses today come out horribly in the accounting. So what is the point of analyzing them through accounting? I had a conversation with a, I think, highly respected investor that you should interview Jeremy Deal, who talked about

learning about companies from podcasts. And I've shared with him back a guy who runs a newsletter out of Taiwan called Ben Thompson. He runs a newsletter called Stratacoree. I find myself having to read these things because the company accounts don't give us what we're asking for. And I started, you asked me one question and I'm answering a different question. Remind me of the question because I have... How many companies do you research?

Yes. The reason why I went to screens is that screening is a way of glancing at a company and seeing what's going on with it. And, you know, just to rewind on a little bit on process or sort of like putting myself in the bar and trying to reach for a good drink, if you like, I'll constantly see companies on screens that I think look interesting and I kind of filter them down in a couple of kind of like watch lists and the first watch list well the first the screens will throw out a few hundred companies but the watch lists go from like sort of 200 companies to 50 companies and I try to be

discerning about moving them between those watch lists and I try to look at those watch lists extremely infrequently. So I think that you could say that I have a broad universe of maybe 200 to 250 companies, something like that. But many of them are getting less than five minutes of my time. And so it's a, I don't know what kind of distribution it is, but there is a small number of companies that I'm spending an awful lot of time with. There's a large number of companies I'm spending very, very little time with. But I'd say that very broad universe is is 500, but the ones that I really spend time with is maybe 2030. Having said that, I think that there's an enormous amount of fundamental analysis that I could have done

over the last 20 years that have not done. And mainly, I would tell you, Tillman, the reason for it is that there's running an investment business and then there's actually doing the investment research. And one of the greatest challenges that I've had is getting the investment business running well enough that I can spend my time on research. And I think that that's only really happened for me over the last year or two, actually. It's got something to do with scale. It's got something to do with having the right staff. I can tell you that getting regulated here in Switzerland was an enormous amount of work. It happened two or three years ago. and only now is everybody around me and myself comfortable.

So I think there's a lot more that I can do there. And one of the things that I've learned is do the analysis yourself, but go find people who can help you do the analysis. Interestingly enough, a company whose shares seem to have imploded recently is, well, I'm not going to name the name. I was almost going to name the name. But maybe that's not a smart idea. But I realized that I didn't understand their economics particularly well.

So rather than plow through their 10Ks or do endless internet searches, I've gone straight out to an expert network and I've said, I want to find somebody who's probably a former senior exec at one of these three companies who can explain the global economics of the industry to me. So analysis can also be reaching out to find the analysis. find me somebody who can show me. You know, you don't have to reinvent the wheel, but there's a lot more that I can do on that front,

an awful lot more. What makes you put a company in this small pocket with, I do research in it and I spend time, my time getting deeper into it? So, you know, I'm going to mention the name of a guy that I'm wondering how many in the Valu Dach audience know, but he's really fascinating personality, and I've no idea how I came across him. So I discovered reading probably Sports Illustrated something.

There's a man called Dan Bilzerian. You know who Dan Bilzerian is? So you're going to look up. This guy needs no more promotion. I don't know why I'm bringing his name up, but look up Dan Bilzarian. Now, amongst many things, he has a theory around women. So when he has a party, you know, his ideal ratio of women to men is like sort of 10 women to one man. And he basically says straight, their interviews where he just says straight, look, you know,

I've just found that it's much easier to get a nice girlfriend if I get myself in environments where the ratio of cute women to men is 10 to 1. I wish I'd thought of that when I was not married and looking, that was something. that I didn't do. I went to places where they were 50-50. But I'm looking to so what do you do? You're drunk in a bar who wants to reach for a good drink. Well, one of the things you do is you go to the person who runs the bar before and you say, listen, I'm going to be in the bar, I'm going to be drunk. And you're going to help me just to reach good drinks. You're going to take all the bad drinks, you're going to put them

far away. But all the good drinks, you're going to put them within arm's reach. So what am I trying to do? I'm trying to find those, quote, good drinks. or good companies and put them within arm's reach. And of course, it's really hard to tell. And I think that other people have better skills in this regard. So what I'm trying to do is to pull into these smaller and smaller watch lists, the things that are good companies that ought to do well, that where if there's something, some kind of price drop,

or if there's some development, I'm more likely to pick up on it and to buy into it. And that's what's sort of like pulling them in. But it's a, so this is descriptive, not prescriptive. In my case, it's a rough and haphazard process. And I don't know if being more disciplined about that would make it any better, if you like. But that's, that's what I'm doing. I'm just trying to, you know, in the times when I can, I'm trying to walk around that bar and put the things that are more likely to taste good and to be good for,

drinks a little closer to me that's what i'm doing with those watch lists if you like uh but in a certain way you know be careful who you pick as your friends so if if we just you know those watch lists can exist in the minds of friends so you know um why did i spend time with uh nick sleep and josh tarasov i think that they both have extraordinarily good filters uh they have an interesting way of looking in the world looking at the world. So the companies that I discuss with them in a way are sort of keeping them on a certain kind of a watch list, a mental watch list, if you like, and making them more present in my mind, making it more likely that I will invest. Having said that, I've had many conversations with,

mainly with Nick Sleep, and not so many with Josh Tarasoff on Amazon, and I've never owned Amazon to my great shame and to my great, you know, in a certain way, unrecognized cost. missed opportunities but so the watch list it doesn't just exist on a spreadsheet or in a in a monitor it also exists in the minds of the people that you hang out with who do you choose to hang out with how long does it take for you to grab a drink or buy into a position um so uh the fastest that i remember was um Bank of America where I read that Warren Buffett had given them five billion dollars and I instantly understood that that had de-risk the company and made it extraordinarily

cheap with no risk of bankruptcy. So that was very quick. That was within days. But then there are companies where I have a similar kind of flash of insight, but there are other aspects that I just find myself not able or willing to get comfortable with. So, You know, this is public domain, but there's, well, actually, it may not be public domain, but it took me a long time. It took me more than six months to figure out that I actually ought to own Fiat Chrysler at the time, which has been a great winner for me. And so that took, and Bank of America has been a great winner for me, but both took,

one took one week, one took six months. I think it's hard to tell because if you're genuinely interested in an industry, then in a certain way you're doing research on it all the time, if you like. My big insight is to stop actually trying to absorb information from reading stuff. There's nothing wrong with reading, but combine it with a knowledge of the personalities and the people involved. Because then you kind of get a stereo vision and you see what's being written about them or buy them and what's being written in the industry and then you hear what they're saying both publicly and privately and that becomes far far better and I have not I don't I just don't

think I've spent enough time talking to people actually and it's fun to talk to people so I need to find more opportunities to talk to them in the right places and you know Omaha is an amazing place to meet people and talk to people um I think that actually Tillman uh so here's an interesting thing and again something for your listeners or viewers so so to go back to the idea of cloning what part do you clone I and forgive me for mentioning him so many times but Nick Sleep is the most famous investor you've never heard of he's extraordinarily successful and he's achieved an enormous amount of success without being very well known at all.

And he's been highly effective. And but I, having learned at the altar of Warren Buffett, Warren Buffett, there's a site to Warren Buffett that likes to be famous that enjoys the crowds in Omaha. And I thought that that must have something to do with being a successful investor. So to some degree, after writing the book, writing the book, I sought out opportunities to develop a fan base, if you like, because I thought that's what was necessary. One of the problems with having lots of people who know

who you are is that if I show up in Omaha, a lot of people want to talk to me, but I don't have deep and interesting conversations with them. They all want to meet the guy who wrote the book. They want to press the flesh. And it's hard to create the time to have real learning. So if you have minor celebrity status, it can actually be a very, I wouldn't say lonely, but it can be a, what's the word, a, I want to say alienating, but it's not that you're alienated. It's you're distanced from normal conversation. And it's a normal conversation that you get to learn about the world.

So I realize that actually anonymity can be a very useful way to learn about the world. And when you're not anonymous, the conversations all turn into the same thing. They want to know about the same set of things that you wrote about. You know, the famous story of Siddharata is that he was a prince, but he disguised himself as a common man. He disguised himself as a common man so you could have real conversations. And I think the point that I'm making to you is that being well known is not actually a benefit when it comes to being a good investor. In fact, it can be a great cost because you can't get real information. And, you know, it's interesting for me that Charlie Munger likes to travel economy class and almost in semi-anonymity because he learns things about the world that he doesn't learn if he's traveling.

privately or first class where now the world's a stage. If you're walking through a stage constantly everything's been staged, you don't have real interactions with people. And so I went through a phase after my book, I believe, where I was having less and less real conversations with people. And now I'm finding ways to reset that, partly through the expert networks and partly through various Jeffersonian dinners that I've had. So when I put together a Jeffersonian meal, I pulled together nine to 12 people in a private room where there's only one conversation around the table and everybody learns from each other and you learn an enormous amount. And so I found ways to get that back actually. But more conversations, real conversations

with real people. How do you limit holding? So when is it enough? That percentage of a portfolio for a certain holding and how do you protect yourself from selling compounders too early yeah exactly i i think that my problem is not selling compounders too early it's selling non-compound it's not selling non-compounders so i think that one so so you know where does the simple insight come from not to sell compounders this is a study that I read about 20 years ago in which they picked dozens of random, well, this has appeared in the Wall Street Journal, and I'm sure that Jason Schweig has written about this, but they were looking at dead people, well, no, they were doing studies of portfolios at some brokerage

farm, and it turned out that dead people, so people where they had died and the portfolio had run for a few years before they distributed the funds in the portfolio did often way better than live people. They started asking themselves, how is this possible? So the reason why is that if you leave, take a random portfolio and do nothing with it, it will outperform many, many portfolios, even if you just run it statistically. But then when you examine those portfolios and ask why did that portfolio outperform? My memory of the article, and it influenced me a lot, was that in every portfolio, there'd be one or two bankruptcies, companies that went to zero, and there'd be like the vast majority of the portfolio where the company did absolutely

nothing for a decade. But then there'd be one or two companies which were rocket ships, which did 100x, and those were the companies that delivered all of the returns. And so if you apply that to if I apply that in my own life that's this idea of just let your winners run so the idea of portfolio rebalancing is a really bad idea you're selling your winners and buying your losers potentially and so I've taken that idea on board very very strongly and I'm very very reticent to sell anything to do any moves in the portfolio I think that I often buy things So from time to time, I buy things that are a solid double or triple, but they're not the world's great businesses.

And there I should be far more trigger happy. And what will happen is that I will own it for way longer. I mean, that was the case for me with General Motors, for example, where I got some returns out of it, but it took too long for me to realize that this was never going to be a long-term compounder. So my answer to your question is, first of all, develop a habit of just owning forever. And there I'm just learning the lesson of Warren Buffett. You know, he tries to, their favorite holding period is forever.

And then actually be very reticent to buy businesses that are not long-term compounders. Yeah. Interesting. You said you're a very cautious investor. What makes you feel uncomfortable with the company and sell? So I think that, first of all, I've gone it wrong too many times, but, you know, what I really ought to have done in the case of Horsehead was realize that the management was gambling with all of the shareholders' money. And it would have been hard for me to see, but there were worse, in retrospect, indication. So I think that the minute you realize that the management,

the minute I realize that the management's interests are not aligned with mine, that really is the time to sell. Pretty much, you know, if you're only selecting, so I would anyway only select a business where I think that the moat is at least the same, but hopefully it's improving. So, you know, if you've got that going on for you, you feel like I ought to be able to hold this business for the, rest of time. Now the focus is on the management and management don't wake up every day and say,

I'm going to get things wrong. They want to try and get things right. But the minute you realize that they're trying to get things right on a different time scale, they have their interests have diverged from mine because they own a different security, or they're focused on taking cash out of the business because they're getting a divorce, whereas I'm focused on them leaving the cash in the business because that's how we'll all make money long term. When there's a divergence like that, that is probably the right time to sell. Not that I've been successful in implementing that much of the time. Thank you very much for the second part of our interview. Thank you. It was fun.