We Study Billionaires - The Investor’s Podcast Network - TIP 015 : Guy Spier (Part II) - The Education of a Value Investor (Investing Podcast)

Starting point is 00:00:00 This is episode 15 of The Investors Podcast, and this is our second part interview with Guy Speer. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll teach you the basics so you can lay your businesses foundation. They'll teach you in steps so you'll never get lost. They'll give you actionable investing strategies. Your host, Preston Pish and Stig Broderson. All right, I think

Starting point is 00:00:36 Hari, I think you're up with And we'll get some investing, hardcore accounting investing questions going here. So Harry, go ahead and kick this one off. Sure. So, guys, the chapter 11

Starting point is 00:00:49 about checklist in the book was very helpful. And thank you so much for generously sharing your checklist, especially it helps for somebody like me who's just starting out. Because it's really, I think checklist comes out

Starting point is 00:01:04 of experience and somebody like me who has less experience doesn't have anything to go on or to start with. One of the lines that caught my attention and I kind of noted down in your book was that you mentioned that we can't use the brain to override the brain and that was profound to me. And the reason being I had read this book, Think Fast and Slow, where the author Daniel Kahneman, and I hope I'm pronouncing his name right, talks about this system one and system two and how system one works against us

Starting point is 00:01:40 because of the heuristics that it forms and shortcuts it takes. And when I looked at some of the checklist items that you have, like don't trade during the market hours, or don't sell a stock for at least two years after you buy it. If it goes down in value, you're basically applying. your principle of like you know countering the system one and that was very helpful my question about the checklist was how do you assess the quality of management in terms of integrity and competence are there checklist items that you would share with us or insights that you would

Starting point is 00:02:22 share with us by reading say the 10 case or 10 ques how would one go about figuring out the confidence of the management. You know, just before we get into it, what's so interesting for me is that, I mean, I didn't, first of all, the check this was developed by Monash. He's, and I'm not trying to be falsely modest. He's way smarter than I am, and he's an incredibly, he's got an extraordinary mind in that, you know, if you look at that, you know, those rules of don't sell a stock at least two years after you've purchased it or don't trade during market hours.

Starting point is 00:03:02 I, Harry, I was sitting with Monash in, I don't remember the hotel. It was a hotel in Delhi. And I was asking him how he dealt with, you know, these kinds of difficulties. And he gave me, he said he gave me these two rules. And, you know, my jaw dropped to the floor. I was like, that is so obviously right. And immediately after that, the next thing I thought was, why the hell they you think of that guy? I mean, that is not such a difficult thought to have. And that's what's

Starting point is 00:03:34 extraordinary is that his mind sort of finds these things, which the minute he said it, it's like, oh my God, that is just so obvious. So, and I would tell you that it's the same with the development of the checklist. And I think, again, what I find interesting, and this is not, we'll get to the direct question in a second. But, you know, in the tell mode, this is a sort of like book of Jewish law, a lot of emphasis is placed on crediting ideas to the person from whom you heard them. And I didn't want to use up anyone's ideas as my own. And what I find fascinating is that I think I take sufficient pains in the book to show the reader that, you know, these ideas are not my ideas.

Starting point is 00:04:23 They're primarily coming from Monish Pabry and some other people much smarter than me. But isn't it amazing how, or I find it amazing that when you truly attribute and give credit to where the idea came from, you know, you guys are interviewing me and you treat you as if they're my ideas, even though they're actually, I learn them from somebody else. So, and so that's just an interesting, interesting observation to me. In terms of assessing the quality of management, I think that I don't have any, any, simple, obvious answers. Although than I do think that over time, the more time we spend with materials produced by public companies, the more, I think that sometimes it's obvious and sometimes it's just a feeling that we get. And I think that I think that the time when I saw Warren Buffett used to speak to a group

Starting point is 00:05:19 of investors collected together by Morgan Stanley when Alice Schroeder was an analyst at Morgan Stanley, he would appear on either the Thursday or the Friday night and answer Q&A at Morgan Stanley dinner. And he was talking about Freddie Mac and he talked about how he'd sold Freddie Mac. And he talked about how he was looking at some of their securitizations and he noticed some things that didn't make him feel comfortable. He felt like it was time to sell. I think that that's an example of a mind that's extraordinarily well attuned to sort of these

Starting point is 00:05:55 minor things that just make you go, well, why would they do that? And if they're doing that, what else are they doing? And I don't think there's any substitute for just time spent reading annual reports. But it's time spent reading annual reports intelligently. So one is, you know, I imagine, I don't know. And that story really stuck with me or that event really stuck with me. I think it's quite likely that somebody would have said to Warren Buffett, oh, you know, Freddie Mac, or Freddie Mac and Fannie Mae, the policy of their securitizations is going down. And that thought would have been planted in his head,

Starting point is 00:06:33 and then he would have gone, and he would have been a little bit more attuned to looking for that to see if you could see that with his own eyes. So I think that sort of may, in a very, we have to integrate signals that we're getting from all sorts of places. And when we don't know an awful lot, and we know that we're not very knowledgeable, which is a great strength, by the way, Harry, is I think that to go after the world's great investors and to try and see what they saw.

Starting point is 00:07:02 So to look at every single investment that Warren Buffett is made and try and see what he sees. So I would tell you that this is absolutely current. So there's a company called CBI, Chicago Bridge and Iron, and Dr. Hathaway owns 10% of it. and there's a short seller who's squeezed it, or it's not squeezed it, sorry, he's just shorted it and he's written a report. It's taking the share price down quite substantially. And this is an accusation of, by the short seller of bad accounting,

Starting point is 00:07:36 misleading accounting. So this is just a fascinating petri dish because you've got Warren Buffett earns 10% of it and you've got a short seller. So you're saying, let's read what the short seller is saying. And now it's trying to understand what Warren Buffett saw in the company, because he would certainly not have invested if he didn't feel like the man, 10% of the company, he feels the management is incredibly solid. So what signals is Warren Buffett getting from the company and what signals is the short seller taking and then to try and sort of get a triangulation of what we ought to be looking for? And I'd just give you one other example of that is, you know, so I was really. impressed, not in a positive way, by how Warren Buffett just sold Tesco recently when these

Starting point is 00:08:25 accounting problems came up. And so you get, again, a really incredible example of, this is a guy who's well-known not to sell companies just because they're down. So what is it? It seems very likely that something about the accounting reservations made them completely re-evaluate the management. And I don't think that it provides any simple answers, but it provides clues very significant and simple clues as to how this one great mind thinks. And then I just think we need thousands of those examples. We just need to keep building them up and keep learning. But there's no short answers, basically. And I would tell you that that's a shortcoming of so many management books and how to books, because the nature of writing is that you have to tell the reader two or three big ideas.

Starting point is 00:09:13 otherwise it's not an interesting read. And what if the, you know, God is in the details, what if the answers is actually in many thousands of details? It's just not naturally, you can't naturally write a book about it. It would be a very boring book that wouldn't sell. And so much knowledge that ought to be captured is not captured in the literature of business because it's not, doesn't make interesting reading, I guess. The thing I took away from what you said, Guy, is really that it requires,

Starting point is 00:09:43 requires a lot of research and a lot of reading. And I mean, you really got to do your homework. You just can't say, oh, yeah, I looked at a couple things and the management's good and then just kind of move out. It requires a lot of maintenance. It requires a lot of due diligence on the part of the investor to continually look at that. Thank you, Guy. And you always say that God is in the detail. And thank you for kind of not oversimplifying it.

Starting point is 00:10:10 In fact, I have made mistakes where I read in this book, Give and Take, Adam Grant, talks about how Giver CEOs would have smaller pictures and the taker CEOs would have like, you know, big pictures in the annual report. And then I started looking at a lot of companies I'm interested. Like, you know, I saw HP, like, you know, Mick Whitman has a whole like, you know, one-page picture. Whereas even a mitra, like, you know. Jenny from IBM, she also has a big picture.

Starting point is 00:10:43 Then I thought that's stupidity because I'm kind of, you know, looking at the trees, not the forest. And thank you again, like, you know. But two things I think that's really interesting. I mean, so one last idea here is that I think that, you know, I learned that writing a book is a team effort. And I think that any way you look at it, the way I look at it, examining and learning about companies is a team effort. And the question is who we have in our team. So, you know, if our team is a bunch of cell side analysts, that's really bad. But with all of the graces of respect to Adam Brandt, he is an academic. He's not an investor. So it's a cute

Starting point is 00:11:27 idea about the size of the photographs, but it probably is not significant. And I'm not sure that I want to take my ideas about how to evaluate management from Adam Brand. And so it probably is not a useful, it's more confusing, it's maybe like reading charts, it may be, there may be certain charts that may be helpful, but by and large, you're better off not looking at them. So, you know, there's nothing wrong with, I think if you have a really sanitized group of friends, by sanitized, I mean that there are people who are not grinding an axe in one way or another, and that doesn't just mean that they're not sell-side analysts. That means that they don't, you know, they don't have an ego that they want to pop up.

Starting point is 00:12:11 They don't have a need to prove that they're right. There are all sorts of reasons why somebody might not speak honestly and openly about what they saw when they looked at something. But to get, you know, somebody like those engineers at Google, Rishi and Sara, when you say, hey, what do you think of this? And then ideally those people have an awful lot of experience is a valuable place to take it from. And, you know, I would tell you, learn about management from Adam. Brown don't necessarily learn about how to read out of annual reports from Adam Brown.

Starting point is 00:12:46 Okay. All right. Great discussion. Okay. So, Guy, I got to tell you, I thoroughly enjoyed this discussion that you had on owning the Tupperware stock because it led to kind of this deeper discussion of value creation and win-win relationships in society. And this is something that was really big on the Charles Koch book that we read, the Science of Success, where he, He talks about the same thing of how can I add value to society? And I just, I really found that amazing that you highlighted the same exact discussion.

Starting point is 00:13:18 And you talk about how you came to that conclusion in your book. Is this something that you can describe just in brief the story from the book and how that really taught you this fundamental aspect to your now investing philosophy? I mean, so, you know, it starts off with me reading in one of Charlie Among the speeches. about how Tupperware parties are a lollip loser of these psychological effects that make it possible for

Starting point is 00:13:49 Tupperware to be so successful. So being the person that I am, I then went and ordered up for Tupper annual reports, they arrived a few days later. I was orgasmic because this was a company with huge margins and a very

Starting point is 00:14:05 high return on capital. And I just thought, my God, this isn't awesome business. I need to buy it. And I raised out to buy the stock. I think I even wrote a letter to Charlie Munger saying, I'm so excited that you talked about it in this speech because here I am on my own Tupperware. I think Charlie Munger would have seen that letter and he would have yawned. And so, God, what a misguided soul. So there I am. I'm all excited. I own Tupperware. I went down to their, the investor relations meets down in Orlando a few times. And the guy who runs the company is an incredibly charismatic, very great guy,

Starting point is 00:14:46 Rick Guy, who, by the way, responds to every note that I write to him. He writes a note back to me, so I would argue that he's a giver. And, you know, two or three hours later, every time I'm expecting earnings to grow, that some region in the world is not doing well. And sales are just not growing. And I just, you know, it's obvious now, but I just couldn't figure it out. And I can't remember exactly what it was where it finally dawned on me that you can buy containers that do exactly the same job, the toppleware of those in all sorts of places now.

Starting point is 00:15:25 And this is pre-internet. So we couldn't buy them over the internet, but even then you could buy them more. sorts of stores for half the price. And it just took me time for the penny to drop to realize that this product was very, very highly priced. And we have a very highly priced product that's very, very hard for you to grow sales because you can only by creating this lollapaloozer of toppleware parties, where you have all these effects combining, can you convince people to pay so much money for your topperware? But in any normal circumstance, that's not going to happen. time, and this is an example of what doesn't make it into the book, I owned shares in a company

Starting point is 00:16:05 called RLI, Replacement Lens Insurance, based in Illinois. I don't remember the town of Illinois. It's not in Chicago, but one of the towns in Illinois. And I was attracted to this company by their extraordinary combined ratios. They had a very, very, very profitable underwriting operation. And I was so excited to own this, because, you know, as Warren Buffett says, the key the key for an insurance company is to do profitable underwriting and these guys were profitable. And again, premiums just did not grow. And it took me a long time to realize that the reason why premiums weren't growing is that, you know, everybody knew RLI will offer these excess and surface lines insurance.

Starting point is 00:16:49 But you only went to RLI when you couldn't find the coverage anywhere else because they would, with the greatest respect to RLA, price gouge you. So you would just, you know, people, people did business with them when they had to, but they were never going to come back with more unless they were forced to, and that wasn't a good recipe for growth. So that said, you know, it's not like I lost money with Tupperware. It's just that I invested a lot of time and energy. It could have been, you know, I could have invested probably over the same period in Birchah halfway and made a lot more money. That's what I say about every pick that I don't pick when it's breakfast. It creates, it's a very, very high bar to beat, you know,

Starting point is 00:17:33 there's a bar that's available in the stock market every day. So I think that, but then this idea, if you then compare and I think that moving back and forth, you know, what am I doing what's Warren Buffett doing? I started to see the pattern that every, I feel like, I mean, I don't know if it's true to say every single one, but so many of the Berkshire building businesses have this model where they've created something that they can do for lower cost than anybody else.

Starting point is 00:18:03 And so it just become, you become the natural resource or the natural place to go to for it, whether it's reinsurance or whether it's net jets or whether it's GEICO. They're all based on this idea of we're going to drive costs out of our system so that we're the lowest cost operator. And when you can provide something that's, You can profitably provide something to the market. At the lowest cost, you have an extraordinary formula for business, and that's FICO. You know, this goes to a common theme that we've talked about in some of the other books that we've done.

Starting point is 00:18:40 When you see these managers that rack and stack their interests in the right order, and what Stig and I obviously argue is the right order is, customers first, employees, second, shareholders last. when you rack and stack it in that order and that's where your focus is, it's really difficult for a company to not be successful unless they just got a bad service or a bad product. When they think in things in those terms, I mean, they need to try to balance it as much as possible. But if they have to actually prioritize what comes first and what comes last, that's how it always

Starting point is 00:19:15 has to go in order to have a long-term success of a business. And just your comments remind me of that. And it's really refreshing to hear. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future.

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Starting point is 00:23:31 All right. Back to the show. Yeah, and that's what, you know, I have a book now about IKEA. And that's what IKEA did. And I think what's also very interesting about those kinds of business models is that it's very hard to make successful very quickly and in a short period of time and up front, you have to work at it for many hours before they start becoming successful. So again, they're the kinds of businesses that reward people who are willing to build now or willing to invest now for a great future down the road.

Starting point is 00:24:02 And so you get certain kinds of people who are capable and willing to defer rewards who populate those kinds of businesses. And it also really reminds me of the Dando investor. Sorry, Harry, if I don't pronounce it correctly. I'm actually practicing. But Monos Pabra's book, Dando Investor, where he keeps talking about having this moat. And I actually think he also talks about GEICO.

Starting point is 00:24:29 Because even though everybody can see what another company is doing, like, for instance, Geico or a company like Walmart, it's simply impossible to clone because you don't have that competitive advantage. You cannot do it as cheaply as they can. And that's really the key to a long-term, yeah, a long-term mode. So now, just to loop this back to a previous thought, so, you know, we as individuals and or people with small businesses have an incredible advantage over people with bigger businesses, at least most businesses, other than some of these companies like Costco

Starting point is 00:25:07 or GEICO, which is that, so in a certain way, this goodwill strategy, is a marketing strategy. But it's a marketing strategy that is predicated on doing something for five years before you see any reward. If you go to your management in any kind of business and say, look, I've got this great marketing idea. This is what's going to happen. We're going to have these costs for about five years. And then rewards ought to start coming through. You'll be laughed out of the room.

Starting point is 00:25:37 The most of the management team ever going to give you is maybe 18 months. So if we can't show results in 18 months, then, you know, sorry, we can't do this. And that means that there's a skew in the world away from these kind of very, very long-term goodwill creation strategies that the vast majority of people just cannot follow them because they're caught in an environment which just doesn't reward it. And that means that we can follow those. And we have the potential to, we have a huge advantage over the people who don't see it and over the people in corporate environments.

Starting point is 00:26:12 And I would argue, I'd like to believe that every single one of these businesses, like Walmart, IKEA, or GEICO, Costco, the people who started those businesses started with the very same ideas of this good build creation. Or if we look at the Rose Blump in Nebraska Furniture Mart story, she was not concerned about how much money she was making. She was concerned about, as you were saying, Preston, delivering value to the customer. And she never thought about how much, it took decades or at least a decade before the benefits of that really started going through. So what's amazing about this is that when I understood this, when I understood what Nebraska Furniture Mart was about,

Starting point is 00:26:56 there was a part of me that wanted to go out and buy some furniture business in Brooklyn and see if I could recreate Nebraska Furniture Mart in New York City. but of course that would have required a lifetime of dedication and it was not my path. Okay, the next question, and Guy, I really had to apologize because that's actually also about Monish Paprai. So please, as I look down this, she's here with the questions that we send you in beforehand. I can see there are so much evolving about your good friend Monish. So I really hope that we don't offend you by asking so much about this. You know what we've got to do, Stig, we've got to get, we've got to get Guy to bring Monish onto the show. Yeah, and then only speak about Guy.

Starting point is 00:27:38 Yeah, exactly. There you go. I like that. We can ask Monash questions about Guy. Yeah, sure. I have no problem with you asking me questions about Monash, but. In fact, I've learned so much from him that you're asking me questions, even though I've written much about him in the book, helps me to reinforce those lessons.

Starting point is 00:28:01 So you shouldn't apologize at all. Okay, Guy, that's nice to know. But one thing that I learned from your book is that Moniz sometimes calls you up with an investment idea and says, hey guy, what do you think about this? Is that something that we should invest in? Well, the first of all, it must be really nice to have someone, one of the best investors in the world, call you up and say, this is my smartest idea, this is completely inside knowledge, do you want to invest with me? That was the first thing I thought. But then the next thing I thought was, So sometimes you must feel that this investment pitch is outside your circle of competence.

Starting point is 00:28:39 So even though that you get like the best knowledge from the best investors, from the best investor, sometimes you must reject this investment pitch. But how often do you do that or am I completely wrong in my thought of process here? So I would start off by saying that I don't think that Monash Pabrian needs a guy spirit to see if something is a good idea or not. And he's certainly not pitching these ideas to me. It would be more like he's curious, I think, to see how this individual, Guy Speer with his particular requiring reacts. So I think that the way to imagine what is going on is, you know, the investment idea is sitting in a, is some kind of reagent.

Starting point is 00:29:24 And he wants to see how that investment idea interacts with that quantity that is Guy Speer. them together to see what happened. So he's extremely independent-minded. He has, you know, no matter what Guy Spears reaction is, he may or may not make the investment. So he's, it's really, I'm just a sort of a, I would argue, a jar in his lab. And he's like taking the investment I do and pouring into that jar and seeing what color of terms. So that's what's going on, just to give you a sense. And I think that what, you know, he understands the way I'm wired and knows that I'm wired so differently to him. So there are things that he doesn't feel very strongly that I feel a lot more strongly.

Starting point is 00:30:12 And he's curious to observe how that plays out with me. And I would tell you that, so there are many circumstances in which I have an utterly, I have a violent negative response, but that doesn't stop him. And sometimes I see it and sometimes I don't. I don't think I feel bad about that at all. And I don't feel bad about the fact that I think that he's capable of taking much bigger bets when something is clear to him.

Starting point is 00:30:48 And even if something was as clear to me, I'm just not capable of taking his big bets. And I think that I struggle with that for a certain period of time. And I don't struggle with it anymore because, you know, it's about being authentic. And I have to, I'd rather be a true version of myself and have lower returns and have an inauthentic version of myself and have higher returns. So, yeah, so he's not pitching and it really doesn't matter what I think. And yeah, you're absolutely right. In certain cases, I just come.

Starting point is 00:31:25 And there are some cases where it's the other way around. I mean, I think I knew him quite well. I took a trip to Brazil and ended up investing in two for-profit education companies. They did very well. We had no interest for one reason or another, I mean. And I think that so it's not as if, and I don't think that this idea of pitching is not a good analogy. And this idea of going in our investment together is not a good idea. He's using me as just a test tube in a lab to see what color I turn when he calls the idea in.

Starting point is 00:31:59 And he absolutely doesn't need me to make the investments or not to make the investments. He's capable of doing that on his own. But I just give you one last idea on that, is that, you know, so we talk about diversity in the United States. And what we're really looking for is not when we're looking for diverse teams, is not physical diversity. We're looking for cognitive diversity. We're looking for people who think very differently.

Starting point is 00:32:28 I think that what we should be looking at for in our investment conversations is some qualities that you want, you want discretion, you want people not to talk about what you're talking to them about. You want intelligence, you want them to have low ego,

Starting point is 00:32:45 so they're not trying to prove anything to you when they respond. But then I think you're looking for somebody who thinks differently, who just thinks in a different way, who sees the world in a different way, because that contrast provides some value. And then it's sort of like to go away and say, this is the reaction that this person had.

Starting point is 00:33:05 Let me try and understand why they have that reaction, and there's a lot of learning in that. All right. Harri, you got the next question. Sure. So I would like to share with the listeners of this podcast that apart from Guy's book, his letters to the investors of Aquamarine Fund are a fascinating read. I believe there are three letters posted on the website.

Starting point is 00:33:35 And one of the ideas I got out of that the letter of 2012, I believe, is the idea of Hydra. Hydra is an organism that grows two heads when one of its head is cut off. This is basically where Guy is explaining Nasim Thalep's idea of anti-fragilities. It was a great read. My question is related to that. In that, and as well in his owner's manual, you talk about being in Hydra,

Starting point is 00:34:16 in the investing world that is being resilient. However, individuals like us who are not really full-time investors are fed or even scared by media and the investment gurus about either great operation on the one side of the spectrum or the coming hyperinflation. And we are usually confused at what should one do? So I wanted to ask you to share your advice with individuals like me about how to manage their personal finance and life to position themselves to be antifragile or Hydra as you put it in your letters. So, you know, when you figure out the answer, just let me know, I'm figuring it out as well. So very genuinely, I mean, I think that there's no easy or short answers, and I am triggering it out.

Starting point is 00:35:21 And I don't have, you know, again, I don't have one bullet that sort of deals with it all. Something that I, a subject that I don't understand very well, but it's so fascinating to me is how life exists. You know, I was telling my dad this morning of how I saw biochemists, at my undergraduate college walking around with bichemistry textbooks, and they'd be studying chemical pathways in the cell. And the way these chemical pathways were presented is it just, you know, it's one loop that exists on its own.

Starting point is 00:35:58 And it was a real revelation to me to realize that these chemical pathways, it's really better to think of networks of chemical pathways. And so it's very hard to predict what one chemical pathway. pathway will do because you have they exist, you know, you can have conclusions which are not obvious. And one example that Michael Pritchin talks about in one of his books is this idea of forest fires, which is now well known, where originally forestry services had this idea that if you just, if you just put out four forest fires, that was the right thing to do, it turns out that,

Starting point is 00:36:35 you know, it's counterintuitive that allowing small forest fires to burn is. prevents larger forest fires. And now I know that this is related to your question. Yes. So when you come to the hydra of the investing world, I think that all I can tell you is all sorts of things that I know it's right to do at the margin in order to improve the probability

Starting point is 00:37:02 that we will be able to seize upon opportunity when the world falls apart, if and when the world falls apart. So a few really important things improve the term. For me, it's to improve the terms on which the capital is sent to me. So if the capital is can be called away from me, within three months, I behave very differently. So if the capital can be pulled away from me in one year, and that would be very different to if the capital is never called away from me, which is what Burcha-Hapha-Hapaway has.

Starting point is 00:37:35 So those are sort of like three different stages. And you could go even further that the capital that Berkshire Hathaway has to invest, the insurance capital is completely uncorrelated. What's key about that leverage, some people say, well, Warren Buffett has leverage. It's just called insurance float. But the point is that that leverage is not dependent on the capital markets. It's dependent on events in the real world. And so it's completely uncorrelated with the financial market.

Starting point is 00:38:02 So if you take that to individual investors, the absolute key is, to not feel like I'm going to need the money anytime soon, to literally be able to just not think about it. And then, you know, and if you, if you want to take that one step further, if, if, if there are all these talking heads that are telling you to worry about fly hyperintration, you might want to turn those talking heads off. And as a conscious desire to improve your environment, basically. So I think that there are just dozens, if not hundreds of these micro decisions that one has to take that gradually improve who we are. And I think that if I come from the perspective of the Aquamarine Fund, what I need to do is look for the capital capital. It's not about becoming bigger.

Starting point is 00:38:50 It's about improving the terms on which capital is sent to me. And obviously, Monash has gone and done that in a very big way by doing Dan Doar Holdings, which is a permanent capital vehicle. I think that the best place as an individual investor is to work on who's got a call on our capital and why. And then I would tell you on the hyperinflation side, this is just me speaking. I agree that I fear that not because I listen to talking heads, but because I see the size of the central bank's balance sheets. And my answer is every single investment that I make has to be inflation protected. And just to give one example of that, masterpart in Visa, take a sort of a percentage slice, minuscule slice over every transaction that passes through their system. But it's a nominal slice.

Starting point is 00:39:40 So as prices go up, their revenues are completely tied or indexed to inflation, if you like. And you could argue that the money center banks are also indexed to inflation. So there's a few of the things. But, you know, as I wrote in the letter, my goal is. it's my goal. I haven't fully figured it out. If I'd fully figured it out, I probably would have written that down. One other thing I'll tell you is that all the letters are on the website. So you can go back and you can actually see the progression from not so well written letter to much better written letter as you go through. It's just you can download them all, basically.

Starting point is 00:40:16 Don't laugh at the early ones. I have a follow-up question for that. When you're, you categorize what is anti-fragile and what is fragile and you list a concentrated portfolio under fragile and i was a bit confused because uh charlie munger uh and warren buffett advocate concentrated portfolios and i wanted to know your thoughts on why you consider it as fragile oh that's it's such a such a painfully too painfully easy question for me to answer so when i went into the financial prices of two thousand and eight pretty much, the vast majority of my assets were in four stocks. And one of those went down by 95%.

Starting point is 00:41:03 And another one was American Express that went down by like 80%. So there's no question that the way I was structured having a concentrated portfolio in 2008 was fragile. And if it wasn't for some other aspects, dynamics of the sort of system that I was a part of that were anti-fragile, like father and family who's stuck with me and me having some relationships that help me to focus on the long term, I think that it's possible that I would no longer be running aquamarine from.

Starting point is 00:41:37 So I would still argue that in terms of Nassim Taleb's terminology, I think that a concentrated portfolio is fragile. It's more likely to show extraordinary swings in value, and unless you have other elements of your gain in place, that could result in an end to your business. So, Guy, I mean, are you seriously contemplating starting a holding company in the future? I mean, from your comments, that's how I took it, to be honest with you. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:45:29 All right. Back to the show. I mean, I think that it's a logical place to want to go. I think that what I just tell you, though, is that I don't think now is the right time for me. I think I'm a little bit, probably a little too focused on promoting my book because, you know, It's sort of my baby, and that's sort of where my mind is at right now. I would also argue that I have, the nice way for me to put it is I have a different skill set to manage by and I.

Starting point is 00:46:02 Just because I'm, you know, I'm an okay investor. I live in good returns. I think there's a much broader set of business skills that were required to have a holding company. You have to be able to raise the money in the first place. You have to be able to manage people. You have to be able to pick people. I mean, my higher-fire decisions right now are relatively simple, because it's a bit like just deciding whether I want to own the stock or not.

Starting point is 00:46:29 When you get into close contact with management, it's a whole different set of skills. It's something that I would just tell you, I think that I aspire to it, but I think that I have to be honest with myself and accepting that I may not have the skills to do that well. All right, guys, so I got the last question here, and I stole this question from Tony Robbins because it was such a good question. If you weren't allowed to leave your children any financial assets when you die, only knowledge.

Starting point is 00:46:59 Which book, outside of your own, would you bequeath to them? And can you summarize two or three of the main points of the book? I mean, I hope that I'm not doing a cop out here. But I'm Western educated and all of those little things. And I have to say that I just think that a foundational text for us as Westerners is the Bible. And not for – and I'm talking about the Bible as literature, not as a religious text. I just think that – so that I didn't have three reasons, but I had two reasons. And the one is that I think that the overall message that the Bible,

Starting point is 00:47:45 Bible gives is what we as humans do counts on some level. And it's not about whether or not we believe in God or whether you want not you want to be a religious person. But I think that I saw a movie recently Interstellar. And you know, I asked some really important questions about what it means to be human. And we live in a world where increasingly you can start asking ourselves with the rise of machines and software heating the world. What is the role for humans in a certain way?

Starting point is 00:48:17 And I think that this basic idea, which is fundamental to our humanity, that what we do is important on some level, what we do count, is something that I would want my children to live with. And, you know, I was looking at all this. So in a certain way, I think that the scientific quest is it, the only reason why you'd be curious about the natural world is if on some level you came with this perspective that it matters. So for me, that's one lesson that the Bible imparts. Another lesson is that history has meaning. And I think that if you want to live a purposeful life,

Starting point is 00:49:00 there are many philosophies that sort of say, well, history doesn't have meaning. It's just one eternal cycle and we just keep going through it again and again. And I somehow feel like to have children in the world, we feel like, well, their individual lives have meaning, has a meaning. And then the story that we as humanity tell has some meaning that we may not figure out right now, but it has a meaning that's not pointless for me. That may be overly philosophical for your audience, but for this conversation, but when you said one book, I can't say the intelligent investor. I can't say it's got to be something that hits, you know, our lives and all its profundity. And then what I would just tell you, and again, I hope that this is not a cop-out

Starting point is 00:49:45 or it isn't sound like I'm being highfaluting. I have gotten so much out of just two or three Shakespeare plays that really have touched me to the core. And one, I quote at the very beginning of the book, this Hamlet. I think that, you know, that Hamlet is one of the most quoted characters in all of literature in any language in the world. And Hamlet is just this extraordinary figure. And I think that when, just by exposing ourselves to a few Shakespeare plays, I think that I got exposed to just what a broad range of human experience.

Starting point is 00:50:27 And I think that there's somewhere somebody that's a study that showed that. If you read literature, a lot of it before a certain age, you become better at understanding what people's motives are in real life, because you have just a richer-based role form. So the number one for me would be the Bible, but not for religious reasons. The Bible is literature. And the second would be, you know, some or all of the works of Shakespeare, if you allowed me a second bite of that apple. I love the response, and I love the authenticity.

Starting point is 00:51:01 guy and it's it's exactly like your book. As people go out and read this book, they're going to see exactly what we're talking about and what we're referring to throughout the interview. So what I want to do real fast at the very end of the show, we always read one of our questions from our audience. So our question this week comes from Michael Valentini and he writes, hello, Preston and Stig. I personally feel buying solid companies run by a competent management will lead the solid returns over the long term. However, I have very difficult time determining what a good price is and determining the value of the business. Do I use a discount cash flow model? Garbage in, garbage out, he says, do I use relative multiples? Do I use a balance sheet to value the appreciating equity? What makes a stock an obvious value? You know, applying Buffett's rules of buying a wonderful business at a fair price? I understand there's no definite correct answer, but I'm very confused about the whole topic of valuation and would love any insights that you can afford. So I'm going to give two quick answers, then I'm going to open it up to the floor. I think the first thing that really kind of reeks out of security analysis is this idea of

Starting point is 00:52:07 finding a company that's stable. Whenever you find a business that's stable, you're able to see trend lines. You're going to be able to have a little bit more trust into what the future might hold for the business. So that's the first thing I'd highlight as you look at potentially using a discount cash flow model or anything else is find something that's stable. That's going to give you a lot better predictability. The next thing that I'll tell you is that it's not always something.

Starting point is 00:52:31 that you can stick on a intrinsic value calculator, discount cash flow calculator, anything like that. And so I've got a story from the shareholders meeting during this past year where a gentleman stood up and asked Warren Buffett, and for anybody who's never been to the shareholders meeting, what happens is Warren Buffett basically answers questions for hours on end. And he gets some really intriguing questions from different people. And there was this gentleman who stood up and he started asking Buffett about his Burlington, northern investment, which encompasses about 20% of the overall Berkshire Hathaway company when you look at the equity. And this gentleman stood up and he started on this really long question and he

Starting point is 00:53:13 started off. He says, you know, Mr. Buffett, whenever I take the net income and I add in the depreciation and I add in the non-cash items minus the deferred taxes and minus the capital expenditures, the discount of future cash flows only yield about a 3% return. And I can't understand why you continue to own this company and make large capital investments in the business. And after the guy asked this really long question, everyone in the audience, and there was like 30, 40,000 people there at the meeting. Everyone just erupted into laughter. And what was amazing was Buffett's response. So Buffett, you know, his immediate response to this gentleman was, you know, I really like this question.

Starting point is 00:53:55 And you had it going so well right up to the very end there because we really like to immerse ourselves. that equation that you mentioned, which for anybody who studies Buffett a lot, knows that that's his owner's earnings equation. And so what Buffett did is he took the audience and everybody in there was pretty much laughing at this poor gentleman and this question. And he really truly did have a fantastic question. But Buffett, you know, told the gentleman, hey, it's not always about the numbers. You can do all those hard math problems.

Starting point is 00:54:24 But what we see is something that's a little bit more unnoticed by the general public. And what Buffett and Munger were seeing in this Burlington Northern Pick was that the company has the potential to grow and expand throughout the U.S. And this isn't something that you're going to see that's tangible on the balance sheet or the income statement. This is something that the business can just naturally do because of the market size. And so what I'll tell you is it's just not that simple. And I guess that's the answer is you have to immerse yourself. And it goes back to some of the answers that Guy was providing earlier. You've got to do a lot of research.

Starting point is 00:54:57 And if you're investing in individual stock picks opposed to an index, you've got to prepare yourself to do that hard research and truly understand and be able to detect that value that might be going unforeseen by so many other people. And then you have to have the trust and confidence in yourself in order to stand by the pick. So long answer. I apologize that that was so long. But I want to open it up to the floor to see if anybody else has some other comments. I would be interested to know guys answer to this. So funny answering in terms of Warren Buffett, if we just talk about Burlington Northern for a second, I think that what I find so extraordinary about those railways is the rights of way.

Starting point is 00:55:43 So, you know, I owned for a period of time this gas pipeline business. What was extraordinary about that gas pipeline business is that once you own a right of way, and then there's somebody who needs a gas pipeline built. If you own a gas pipeline that's anywhere in the neighborhood of where the connection, the new gas pipeline needs to go, you have an inordinate advantage because it's not so much just owning the assets, it's owning the right of way. And creating a right of way, a place to put your pipeline can be extraordinarily expensive if it goes through any kind of major urban area or anything like that.

Starting point is 00:56:24 And I think that when you look at Brutington Northern and you realize that rights of way that were relatively inexpensive to acquire 100 years ago are now surrounded by real estate. And it's just impossible for anyone else to build that. You kind of have an asset that is potentially infinitely valuable because just nobody else can create that. So, you know, you can't do that by looking at the counting numbers, as Preston said. it's sort of seeing that and saying, oh, my God, this is incredible. And there's only one way it can go is up as the United States becomes more built out. The value of those rights of way it goes up. And I think that those kind of one-way type equations where it only ratchets up, it never ratchets down is a great thing.

Starting point is 00:57:09 But I would tell you that another piece of Warren Buffett's behavior that I just found really telling in terms of this question is when I saw him by Goldman Sachs during the financial crisis. And so you ask yourself, how was Warren Buffett valuing Goldman Sachs? And at that time, there was so many things going on. There was so much unpredictability. It was hard to be able to predict much about what Goldman Sachs' business would look at, look like, let alone, you know, what cash flows. I mean, they were converted into a bank at one point.

Starting point is 00:57:48 I don't remember if that was before, after Warren Buffett made the investment. There was talk about them having to get rid of all of their trading division. And so, you know, I think that, so you look at him and what is this in terms of valuation?

Starting point is 00:58:03 He's saying, Warren Buffett is saying, we're pretty close to maximum pessimism. And all of these things are trading cheaply, including Goldman's acts. And, And so maximum pessimism and I'm buying the business with the best reputation and the best brand name. And so there's a certain amount of holding your finger in the air and feeling the wind, I think, in a lot of these things.

Starting point is 00:58:29 But I think that over time, what's happened to me is that here's the phrase that I think that I want to be most wary of. I tell people that I meet to be most wary of when they hear of an investment idea and then they say, oh, I just need to get comfortable with this. if you need to get comfortable with it, then it's not cheap enough, you know. But I think that there are certain things that just hit you in the face and they hit you in the face over time. So, you know, I'll just give you one example. So you have all these automobile companies and in general, automobile companies seem to trade across the cycle between 50% of revenues and 100% of revenues. And I'm not saying that one should value an automobile company in terms of percent. of revenues. But when

Starting point is 00:59:15 Fiat comes along and it's trading at less than 10% of its revenues, that's sort of eye popping. And you sort of then start drilling down and ask what's going on. And I think this idea that it just has to jump at you. And it's a bit like finding love.

Starting point is 00:59:31 You know, a guy comes to the side of the dance for and he says, well, you know, I want to find love, but I just don't know how I'll know it when I find it. And the answer is, it doesn't happen on the night where you happen to be wanting to look for it, it happens when you least expect it, and when it does,

Starting point is 00:59:47 it will jump at you in the face. And I think that's true for investment opportunities. All right. That's some amazing insight. I love the last example there, Guy. That's awesome. So, hey, this is all we have for today. We cannot thank Guy for coming on the show enough.

Starting point is 01:00:06 I mean, this was just amazing. We are just so thrilled. We've been really anticipating this interview. So, Guy, your time to give us a two-hour interview. We cannot thank you enough. And I know our audience is just eating this up. So really appreciate you coming on the show. I just want you to know that it's such a pleasure to be with you.

Starting point is 01:00:25 But it's not just a pleasure. And in a certain way, just realized that I wasn't just being generous with my time. I want to be generous with my time with people like you. Because I instantly realized when I started talking to you that I was with kindred spirits. And so I learn as much from talking to you as anything that you might think you learn from talking to me. And I would tell you that this very thing where I realize you guys are Berkshire attendees. You love this stuff. You've drunk with Pooleid.

Starting point is 01:00:53 And so by spending time with you, I get to improve my environment. It's in a certain way quite self-interested. So I was so happy to do it. I'm looking forward to meeting you at Berkshire, looking forward to meeting you at other times. and together hopefully will become wealthier and make the world a better place at the same time. Absolutely. You don't get a better win-win than that. So, okay, really appreciate everyone tuning in. We've got the best audience out there.

Starting point is 01:01:20 We've got the smartest audience out there. So keep your questions coming. We can't thank everybody enough for what you're doing to help promote our brand, our podcast. If you're enjoying this, please leave us a review on iTunes because that just helps promote it even more. So go out, get guys book. It's a fantastic read, the education of a value investor, and we'll see you guys next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit

Starting point is 01:01:49 www.w.w.com. Submit your questions or request a guest appearance to The Investors Podcast by going to www.com. If your question is answered during the show, you will receive a free autograph copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must

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We Study Billionaires - The Investor’s Podcast Network - TIP 015 : Guy Spier (Part II) - The Education of a Value Investor (Investing Podcast)

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