We Study Billionaires - The Investor’s Podcast Network - TIP519: The Education of a Value Investor by Guy Spier

Starting point is 00:00:00 You're listening to TIP. Welcome to the Investors podcast. I'm your host, Clay Fink. On today's episode, I'm going to be sharing the insights I learned from reading Guy Spears' book, The Education of a Value Investor. TIP's very own William Green, who is the host of our richer, wise, or happier show, actually helped Guy with writing the book. So it's no surprise that I learned an incredible amount from reading it,

Starting point is 00:00:26 given that Guy and William put so much emphasis on quality. What I really liked about this book is that it talks a lot about how to live a good life rather than simply how to invest wisely. After a certain point, money really doesn't matter as much, so I really enjoy learning from others on the inputs needed to live a happy and fulfilling life. Outside of aspiring for fulfillment and enlightenment, Guy is also a spectacular investor, as he is a renowned hedge fund manager who has beaten the S&P 500 by almost 250 percentage points since launching the Aquamarine Fund in 1997. Guy has been super generous with his time, as he's been a guest on the Investors' podcast on a number of occasions. And incredibly, he was one of the very

Starting point is 00:01:11 first guests on the show back in 2014 on our 14th episode. I personally consider Guy's book a must read, and I know I'll be referring back to it often. In this episode, you'll learn about Guy's story and some of the critical mistakes he made along the way, how studying Tony Robbins and Warren Buffett helped him totally change his life, how writing handwritten letters has helped Guy forge and develop extremely valuable and fulfilling relationships, how Guy came around to having a charity lunch with Warren Buffett, Guy's lessons from experiencing the great financial crisis as a fund manager, as well as why Guy seeks to live a life full of fulfillment rather than making as much money as possible. This has been one of my favorite episodes I've done to date with

Starting point is 00:01:56 TIP, so I really hope you enjoy this episode covering Guy Spears book, The Education of a Value Investor. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Guy Spears starts a story as a graduate of Oxford University, where he studied politics, philosophy, and economics, and graduated at the top of his class. As a student at Harvard Business School, he stumbled upon a job listing at D.H. Blair Investment Banking

Starting point is 00:02:42 Corp in New York City. The firm really pumped up the job to him, and they were selling Guy on the idea of building tremendous wealth and prestige with them. However, Guy was shocked to find some disturbing things in the news about the company and how they weren't treating their customers well. And the company had tried to relieve his concerns by stating that people were just jealous of their success. The job really didn't turn out near what Guy had been told or what he had expected. He was miserable within just six months of this job. Right off the back, Guy experienced the doggy dog nature of Wall Street and how most people were just looking out for themselves and they were not afraid to screw over the other guy.

Starting point is 00:03:23 Guy wasn't going to give up too easily, though, as he cared really deeply about how other people viewed him rather than how he viewed himself. The way for guy to win in this role was to get deals. But the bigger firms like Morgan Stanley would secure all the good deals, whereas he was left with all the poor deals. This put him in a really tough position and really put his integrity at odds because it wasn't likely that a lot of these companies would ever succeed. He realized that the way DH Blair operated was to secure some pie-in-the-sky idea and

Starting point is 00:03:57 then sell it off to those in the public who are too naive to understand how bad of deal it actually is. The company had an enormous conflict of interest. They were much more interested in collecting as much fees as possible on the deal, no matter how bad the deal was, and then having the deal essentially funded by public investors buying into the hype. And even the employees themselves would do their best to get their share from the person next to them, which Guy realized when he worked with someone else on his first deal, and then ended up getting a small portion of the cut he thought he would originally get. Guy eventually left this company because the place was really just driving him crazy and taking him towards a moral cliff. Just a few years later,

Starting point is 00:04:40 the company's retail brokerage business had shut down and had been indicted on 173 counts of stock fraud, as well as stock price manipulation and engagement in illegal sales tactics. The investment bank, which was a separate company, hadn't received any charges, but he was sure that his former boss, Morty Davis, was having plenty of headaches to deal with. Guy was reminded that Morty, his former boss, was actually a pretty nice guy and a good person. He was just put in a place with poor incentives that encouraged him to take advantage of others, many people of which were faceless and people he would never meet. Guy reflected on this experience on Wall Street by stating, quote, in retrospect, I had been dangerously blind about the motives and ethics of my colleagues.

Starting point is 00:05:26 This was powerful proof of just how dumb, even smart, well-educated people can be. It certainly took me far too long to grasp that this business was set up in such a way that if I wanted to win, I would have to lose whatever was left of my moral compass, end quote. He learned that it's extremely easy to get attracted to the wrong environment and just how difficult it is to change your environment. Rather than him changing the environment, the environment changed him. It's incredibly important that you choose the right environment and surround yourself with the right people.

Starting point is 00:06:01 You want to be surrounded by people who are better than you, and surrounded by people you want to be more like yourself. Guy did what he could to turn this negative experience into a positive one by reflecting on it and learning from it. Just like how Buffett didn't let a purchase of a failing textile mill bring him down. He managed to learn from it by transitioning to purchasing quality businesses rather than cigar butts. One of Guy's biggest lessons from working on Mall Street was to never do anything that could

Starting point is 00:06:29 taint your reputation. As Buffett once warned, it takes 20 years to build a reputation in five minutes to ruin it. If you think about that, you'll do things differently. While he was working at this company, Guy discovered the work of Benjamin Graham and Warren Buffett, and it changed everything for him, as he stated, sometimes you know in your bones that something is true. To me, this value-investing philosophy made so much sense that it was a very important. was self-evident. He talks about those moments in life where his gut told him he had to go in a certain

Starting point is 00:07:00 direction. When he was studying law one day during the end of his second year of school, he woke up with the realization that there was absolutely no way he could study law for another day. He says, quote, it felt as if an inexorable force had welled up in me until it wasn't even a debate. These moments of clarity are so rare in life, and even the people closest to us may question whether we should act on such instincts. I believe it's crucial to pay attention to these non-rational convictions that percolate inside us, even if we can't explain them, end quote. This is similar to how George Soros describes how he would tune into his acute back pain as a signal that there was something wrong with his portfolio. Guy didn't think that investing was the right path

Starting point is 00:07:46 for him. He simply knew it. He explained how there were only a handful of moments like this in the course of a lifetime, but it's critical that we have the courage to act on that gut instinct. Guy also reflected and learned that he was living in a bubble in school. School largely taught him theories that were counter to how the real world actually worked. He learned at Oxford that markets were largely efficient, and anyone who managed to outperform the market was just a lucky speculator. So when Warren Buffett spoke during his first semester at Harvard Business School, he immediately dismissed what he had to say. To consider that anyone had beaten the market by exploiting its inefficiencies

Starting point is 00:08:25 was to challenge his own existing beliefs. Having dismissed Buffett during business school, he came around to eventually learn from him when he was ready as he was struggling at DH Blair four years later. He stated, quote, my arrogance had taken such a beating that I was open to Warren's teachings in a way that I would never have been as an MBA student. I had been so humbled and humiliated by my experience at DH Blair that it forced me to re-examine everything I believed. Such are the sweet uses of adversity, end quote. So despite making the poor decision of working for DH Blair, it ended up being a tremendous blessing and gift as it allowed him to open up his mind and teach him lessons that he never would have understood in a classroom. Leaving DH Blair was a really

Starting point is 00:09:13 rough period for Guy, as his resume in a way was tarnished by them. I thought this was a a really interesting point for someone like Guy. I know him as just as a great investor, but he was searching for all of these ways to try and get out of this rut. He knew he had a lot of learning to do and unlearning of some of the things he had learned up to this point in life. He actually ended up attending a Tony Robbins event called Unleashed the Power Within, figuring that he would try to apply Monisha's Dondo framework in that something like this had little downside and potentially a lot of upside. This event, event with Tony Robbins led Guy down a journey of consuming self-improvement material, such as

Starting point is 00:09:54 how to win friends and influence people, and think and grow rich. He took many simple steps to improving himself and his mindset, most of which wasn't taught in schools. He was also consuming a lot of value investing books and doing his best to get a job at a value shop. He got a hold of Berkshire Hathaway's annual reports and couldn't help but notice that it was totally different than the things he saw at his previous job. Rather than showing hockey stick growth charts and predictions that only went up, he stated, quote, Berkshire's report came up with a plain cover and its highlight was a candid, non-promotional, easily understandable letter by Buffett. The report also featured a table showing the annual increases in the company's book value. It was pure information, not an attempt to lie

Starting point is 00:10:40 with statistics, or to sugarcoat truth with pretty pictures printed on glossy paper. I'd never seen a report like this. It was designed to attract shareholders who were genuinely reading it for the right reasons. I'd assume that the business world was all about shouting louder than the next guy so you could get attention. But Buffett was reaching out to people who weren't impressed by noise, end quote. Through the advice of Tony Robbins, Spear would ask himself, what would Buffett do in this situation. Robbins called this modeling our heroes. So in order to be more like your heroes,

Starting point is 00:11:15 you need to start thinking like them and act how they would act in order to achieve the outcomes they've achieved. Imagining that he was Buffett, he started studying the companies that Buffett owned. He read through reports like Coca-Cola, Capital Cities, ABC, American Express, and Gillette. Spear then felt as if he was diving into his second MBA as a company like Capital Cities was swimming in cash, while most companies he analyzed at his previous job were either hemorrhaging cash or grossly overstating their cash-generating ability. Now that Speer was obsessed with value investing, he was determined to get a job as an analyst. Yet out of nowhere, his father gave him a call, suggesting that he managed some of his money for him. This was in 1996. His father had founded

Starting point is 00:12:02 a small company called Aquamarine Chemicals, which traded and distributed products to protect crops. Guy's father invested $1 million with him, and two of his father's business associates invested as well bringing Guy's assets under management to $15 million in the fund started trading on September 15th of 1997. Even with this backing early on, Speer's chances of success were slim, as most hedge funds don't survive longer than 18 months. Speer also reflected on the initial mistakes he made in setting up his fund. Instead of taking Buffett's approach of getting a quarter of the profits above a 6% hurdle rate, he opted for what most advisors pushed him to do, which was the traditional 1% fee plus 20% of

Starting point is 00:12:49 the profits. Although this gave him a more steady income, it misaligned the incentives because he makes money no matter how well the fund performs. The Buffett model would have allowed him to profit with his shareholders rather than profiting off of them. The second mistake was allowing redemptions by investors within the budget. 30 days rather than only allowing them once a year. Adopting the latter approach would have enabled Speer and as shareholders to adopt a long-term approach, rather than constantly worrying about the

Starting point is 00:13:19 day-to-day price movements and wondering if shareholders would be bailing out on him because his fund stocks have dropped in price. The great financial crisis would prove just how big of a mistake this was for him as stock prices of course plummeted. These two mistakes interrupted what was Buffett's secret weapon to wealth, which was compounding. Both of these mistakes ended up interrupting or putting a drag on the fund's compounding effect. These mistakes also reminded Speer just how difficult it is to diverge from the crowd and how the temptations to do what others are doing is very easy to give into. Spear ran his fund out of New York City as he had a lot of connections there to help him out, yet he tried to stay isolated and away from the noise the best he could,

Starting point is 00:14:04 similar to Buffett. He described the early performance of the fund as decent, as he followed Buffett's advice of purchasing companies that are cheap, that have an expanding moat around them and are washed with cash. As other investors fell for the tech bubble frenzy, he didn't get lured in at all. Sticking with the value investors he most looked up to, after five years, his fund significantly outperformed in assets under management crossed $50 million. Very quickly, Speer was flooded with envy, as many were calling him wanting to invest with him, and he was being compared to investors with much more money in assets under management. Being in a place like New York City, there is always someone who is doing better than you.

Starting point is 00:14:49 At the time, doing well didn't feel like enough for Speer. He started to try and market himself, realizing that many of the same tactics he had learned in school started to show up and sound impressive to others. This is also known as living by an outer scorecard rather than living by an inner scorecard. Speer stated, quote, but the truth is that I shouldn't have bothered with this mindless pursuit of growth, which was primarily motivated by my own ego. That time would have been better spend focusing on picking the best stocks and allowing my performance to speak for itself.

Starting point is 00:15:24 Speer said that one decision he made in New York that was one of the most important decisions for him was to have a mastermind group of investors who would become lifelong friends and trusted soundboards for him. He says that it's difficult, if not impossible, to become successful on your own. The group of investors met one morning a week and one of them would pitch a stock that would be debated and dissected by the group. 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. That's what the Oslo

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Starting point is 00:19:57 All right. Back to the show. In chapter 5 titled Meeting a Master, Speer talks about the influence that Charlie Munger had on him. He got a hold of a CD of Charlie Munger's talk at Harvard, covering the 24 standard causes of human misjudgment. And Speer quickly realized the incredible wisdom of Munger. Monish Pabri had told Speer that Munger is the smartest guy he's ever met, even smarter than

Starting point is 00:20:22 Buffett. Munger helped Speer understand all of the complex tricks that our mind can play on us. Additionally, Munger led Speer to the book, Influence by Robert Chaldingy. Munger said that Chaldeenie's book had filled in a lot of holes in his crude system of psychology. Speer read and re-read this book trying to internalize all of the wisdom in it. He was especially taken aback by the story of the car salesman in the book, who would write handwritten personalized letters to his former customers and ended up setting the Guinness Book of World Record for car sales. Chaldini writes, we're phenomenal suckers for flattery.

Starting point is 00:21:01 We tend to believe praise and believe those who provide it. So Speer embraced this idea and went to the extreme end of it. He started the habit of writing 15 handwritten letters per week. 15. He says, I began to thank people for giving a great speech, for sending their investor letter, for providing a great meal in their restaurant, for inviting me to their conference. I would send people cards to wish them a happy birthday. I'd send them research reports or books or articles that I thought would interest them.

Starting point is 00:21:32 I'd send them notes saying how much I'd enjoyed meeting them, end quote. Although the initial goal of this experiment was to improve his own business, he eventually became addicted to the spreading of goodwill, as the more he expressed goodwill and thanklessness, the more he felt it himself. Most of the listeners are aware of the power of compounding money, but this was Speer's way of compounding goodwill through the building of many of these relationships. Speer said that my letter-writing crusade had begun as a way of marketing my fund, but it ended up giving me a richness of life that I could hardly have imagined. Rather than becoming a

Starting point is 00:22:12 good salesperson, I found myself starting to care about the people I was writing to and to think about how I could help them. The paradox is that as I became more authentic and discarded with my agenda, people became more interested in investing in the fund. This was an unintended consequence of becoming less selfish and more honest about who I am. I was listening to Guys Google Talk, where he spoke to Google employees, and he said that over the past nine years, he had probably sent 20 to 30,000 letters from his office. Just to think how many letters that is, is just insane. So I think that if you're looking for a way to really stand out in some way from your peers or looking for a way to improve your relationships or improve your business, I think that guy

Starting point is 00:23:00 is right, that handwritten letters can prove to be immensely helpful. A handwritten letter is actually how Speer got to become such great friends with Monish Pabri. He had attended one of Monish's events, and after the event, he wrote him a simple letter. Guy didn't expect anything in return from writing such a letter, as it was one of dozens he had wrote that week. But Monish later told him that he was the only person that had wrote him after the meeting, and it really stuck out to him because it was unique. Roughly six months later, Monish had reached out to Guy, inviting him to dinner.

Starting point is 00:23:36 And then that's how they met and got to become such great friends. By the way, I did an episode last week on episode TIP 517 all about Monish Pabri. He is just as much of an inspiration as guys, so I think you'd love that episode in case you missed it. In getting to know Monish, Spear discovered that he also wanted to replicate how the greatest investors lived and thought. Monish refers to this as cloning, joking that he's never had an original idea in his life. To him, this is how he would make progress by copying the best ideas of others in making them our own. As they got to know each other and they were out eating together in New York,

Starting point is 00:24:17 Monish had asked Guy if he would be interested in joining forces to bid for the charity lunch to eat with Warren Buffett that was auctioned on eBay each year. The first year, they ended up getting outbid by someone else, but Monish was determined to win it the following year. Since Monash would be bringing his wife and his children to the lunch, he told Guy that he would be willing to put up two thirds of the total, while Guy would put up one third. So that second year, they purchased the lunch for $650,000, so they were set to have lunch with Buffett on June 25 of 2008. In preparing for the meeting, Speer couldn't imagine being the person with the highest fee

Starting point is 00:24:56 structure out of the three. So we ended up offering a fee structure similar to what Buffett did with his partnership. which allowed the current investors to transfer over their shares with lower fees. During the lunch, Speer mentioned to Buffett that he updated his fee structure and also mentioned how hard it had been to convince his fund's lawyers that this unorthodox approach made sense since it was fair to shareholders. Buffett told him that people will always stop you doing the right thing if it's unconventional. During the lunch, Speer was also reminded of the importance of one's environment, as Buffett very carefully created.

Starting point is 00:25:32 created the business he wanted. He stayed far away from Wall Street and typically didn't want to meet with corporate managers. Just six months after this lunch, Speer ended up moving to Zurich in order to get away from the noise of New York City. This allowed him the space to think clear and think for himself. To round out the chapter on the lunch with Buffett, he also mentions how it was clear that Buffett's mind was operating on a level nobody could touch. He stated, seeing him in person that day, I was left with no doubt at all that I can never hope to match him. This could have been dispiriting, but I found it weirdly liberating.

Starting point is 00:26:12 For me, the lesson was clear. Instead of trying to compete with Buffett, I should focus on the real opportunity, which is to become the best version of Guy Speer that I can be. And this is a good reminder for all of us that there is always going to be someone out there that is much smarter, and we should be focused on becoming the best version of ourselves and focus more on our own journey and development as a person and as an investor. Speer then turned to talk about the great financial crisis and how that experience changed him. In March of 2008, Guy read in the Financial Times that Bear Stearns was teetering on the edge

Starting point is 00:26:48 of insolvency. The problem for Guy was that all of the Aquamarine Fund's assets were held with Bear Stearns. so he worried whether those assets were in jeopardy or not. As Guy was watching the financial crisis unfold, in what felt like slow motion, the news reported that J.P. Morgan Chase would be acquiring Bear Stearns. Speer then felt a wave of relief as Jamie Diamond assured the public that they would guarantee any counterparty risk at hand. Guy stated that he's never met Jamie Diamond,

Starting point is 00:27:19 but he had sent him a Christmas card every year ever since. Just when he thought he was safe from any more catastrophes from the the crisis, his father gave him a call in September of 2008. His father asked him if he thought that Lehman Brothers would be going bankrupt. Most of his father's money was invested in the Aquamarine Fund, but it turned out that he had also invested a sizable amount of money into Lehman's bonds, and now it looked like Lehman was in a death spiral. Spears says in his book, I was almost speechless. We had recently escaped disaster with Bear Stearns and now this. I paced around my living room, listening to my father in disbelief.

Starting point is 00:27:59 Lehman Brothers Bonds, you bought Lehman Brothers Bonds. Why? I couldn't imagine how he could have possibly stepped into this minefield. Speer knew that Lehman should be avoided by investors as institutions were fleeing from Lehman, so they managed to sell these bonds to more gullible investors. His father asked if he should get rid of the bonds, which were trading at 34 cents on the dollar, and Speer told him, yes. But his father's sell order never got filled as there was no liquidity to sell it. And just a few days later, on September 15th of 2008, Lehman filed for Chapter 11, making it

Starting point is 00:28:35 one of the biggest bankruptcies in U.S. history. The financial crisis even got the best of some of the smarter investors. At the time, Spirit employed an analyst who he regarded as bright and hardworking. In the fall of 2008, he had stated that he liquidated his own personal account to cash. in order to wait for things to settle down and for the outlook to become clearer. Guy asked if he was out of his mind, as he was disgusted. Speer wrote, Here was a guy who had proudly claimed to be a value investor,

Starting point is 00:29:07 in whom I was paying to be rational. He was supposed to be a like-minded soul, helping me seize these incredible opportunities that the market was gifting us, yet his emotions were so out of control that he was even getting swept up in the panic. He just couldn't take it anymore. This is a measure of how acute the stress can become at a time like this, even for an intelligent and level-headed analyst who had previously come up with some highly profitable investments for the fund."

Starting point is 00:29:36 And I think this is such a good reminder as we may be heading into another big recession that might test our judgment and emotions as investors. It's easy to seek the flight to cash, and it's not easy to continue buying as stocks continue to head lower and lower month after month. In the depths of the financial crisis, Speer's fund was down 46%. And it seemed like there was nowhere to hide in the stock market to avoid this treacherous drawdown. Although the crisis was a scary experience as an investor, Speer knew that he would make it out the other side just fine, as long as he lived within his means or didn't take on any excess debt. He had plenty of

Starting point is 00:30:17 cash set aside as well to live off of during the meantime. He says that, quote, From a societal point of view, debt is a vital economic lubricant. Used in moderation, it's positively healthy. But for an individual investor, debt can be dangerous. Debt can be disastrous, making it even harder to stay in the game, both financially and emotionally, when the market turns against you. The vast majority of the funds investors held firm during the crisis. Spears' father had asked him during the drawdown if he should take some chips off the table, and Guy said that now would be the worst possible time to sell, and that he'd rather live in a shack than take any cash off the table. During my episode covering the money mind of Warren Buffett, episode 513,

Starting point is 00:31:02 I mentioned the link between how Benjamin Graham and philosopher Marcus Aurelius thought. During the crisis, Guy studied Aurelius's work, meditations, which rode of the need to welcome adversity with gratitude as an opportunity to prove one's courage, fortitude, and resilience. Guy double and triple check that his holdings would manage to weather through this storm, one of which was American Express. The stock had dropped from a high of around 65, all the way down to $10. Spear held on during the downturn and watched the stock rise to over $90 by 2014. He purchased many other cheap stocks during the downturn that were almost certainly going to be favorable bets, which would turn out well and eventually pay off. The financial crisis led Guy to do a lot of soul-searching,

Starting point is 00:31:50 as he saw many fun managers having to close shop, and for him it was an investing equivalent of a near-death experience. It forced him to think about how he wanted to live, and what was truly important to him. He thought about how Warren Buffett tap dances to work every morning, and he himself wanted to have that level of enjoyment in his own life. For much of his life, he explained how he took things too seriously, and he needed to lighten up a little bit. Since he saw Buffett having what looked like fun and having this relaxed nature, he wanted to travel more and get away from this desire to constantly be working all the time. For example, in 2009, he took a 10-day trip to India with Monash with no agenda.

Starting point is 00:32:31 Spending more time with Monash allowed him to better understand how he operated and how he reacted and how he reacted to certain things, as well as better understand his philosophies on charity. He also got more interested in sports and games, recognizing the link between games like bridge and how it's a probabilistic game using limited information, similar to investing. For example, in Bridge and in poker, you're always making moves based on limited and imperfect information. And during the financial crisis, it would have been extremely difficult for someone to fully understand the nuances of J.P. Morgan's $2 trillion balance sheet, but Speer could make useful, probabilistic inferences about the bank's balance sheet and their earnings power.

Starting point is 00:33:13 He asked himself, going forward, are these likely to be better or worse than other investors expect? He stated, quote, Meanwhile, I read in the news that Buffett had just made a $5 billion investment in the preferred stock of Bank of America. Based on probabilistic thinking, this suggested to me that he believed that the Fed was committed to ensuring that Money Center banks would be able to rebuild their balance sheets. Buffett's investment helped me understand that the Fed was highly unlikely to, raise interest rates until the banks were once again hugely profitable and healthy. For me, his weighing of these odds was relevatory. As Monash had pointed out, Buffett's involvement

Starting point is 00:33:54 with banking stocks went back as far as 1969, and he'd almost never lost money on a bank bet. Given that nobody is a better investor in banks, Buffett's seal of approval means a lot, end quote. The key point here is that many investments are fundamentally uncertain, but they maybe aren't as risky as they might seem. Since Guy better understood that living a good and happy life was more important than what other people thought of him, he's now fully embodied living by his own inner scorecard Buffett describes. He started spinning his days exactly how he liked. When one business associate told him that he needed to go out and market himself and grow his fund, Spears stated that he simply didn't want to. He wanted to live a happy life and he didn't need to be the largest fund

Starting point is 00:34:40 in order to be happy. This level of peace and contentment allowed Guy to be a better investor as well, as he was able to think more calmly and more clearly with this level-headed approach. He began to see the stock market as a game, and he says that no doubt he improved as an investor by taking this more playful approach, of course, without becoming reckless during the process as well, because it's still quite a serious game for him. I thoroughly enjoyed all of Guy's book, but Chapter 10 in particular, I've found super interesting with knowledge and tips that you can't find in a lot of places.

Starting point is 00:35:16 The chapter is titled Investing Tools, Building a Better Process. Guy explains how when it comes to about anything in life, humans can make a ton of different mistakes, mostly to do with how complex the world is. In order to help prevent any sort of disaster from happening when it comes to investing, guy swears by having a set of guidelines and principles to live by to help limit any mistakes. As he states, if we're looking to make better investment decisions, it helps immeasurably to develop a series of rules and routines that we can apply consistently. He also says that pilots internalize an explicit set of rules and procedures that guide their

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Starting point is 00:39:32 he has continued to add to over the years. He credits Monish for a lot of what he's learned related to investing, and he points out that adding a set of rules is something he cloned from Monish, who is the master cloner. One of the rules he lists is to stop checking stock prices. Many investors are constantly checking stock prices every day, and oftentimes multiple times a day. It's as if they're waiting to see if a new story will come out and sidestwip them while they're watching the stock by the minute. Checking the stock to see if it's fallen can give us a false reassurance that the stock is doing just fine. If you're truly looking to buy and hold companies for at least a few years, then the day-to-day stock quotation and the price

Starting point is 00:40:13 movements are really totally irrelevant to you. As Buffett says, when we're going to be able to When we invest in a business, we should be willing to own it even if the stock market were to close the next day and not reopen for five or 10 years. Checking stock prices diverts energy and attention away from things that really matter, and could lead your brain to performing mental gymnastics and potentially lead you to making emotional or poor decisions. Buffett didn't make a fortune on Coca-Cola and Apple by checking the stock prices every day. He made a fortune by doing the research necessary, buying it at the right price, and simply

Starting point is 00:40:49 waiting as the business fundamentals continue to improve over time. I love the second role that Speer brings up here. If someone tries to sell you something, don't buy it. With Guy being a fund manager, he's always being sold something, whether it be a particular investment and a research tool or countless other products. He began to realize that most of the things he bought from salespeople, he ended up regretting these purchases. The tricky thing is when dealing with gifted salespeople is that they're really good at planning these psychological tricks where they're really good at making you buy what they're selling,

Starting point is 00:41:23 even though you might not necessarily need the product. And I'm currently reading through the book Influence right now, and I'm just kind of blown away by some of the things that they mention in that book. Oftentimes a lot of the decisions we make, we think are conscious, but actually a lot of them are actually unconscious decisions. So what Guy does is he simply tells salespeople, that he is a rule, that he doesn't allow himself to buy anything that's being sold to him. I can imagine that this rule saves guy from a lot of unwanted conversations and headaches. For example, if someone wants to visit his office to pitch an investment, he says that if they were to come in, then he wouldn't be able to buy the investment.

Starting point is 00:42:00 And simply politely asked them to mail him the materials in paper, and he can analyze it himself, without a person trying to persuade him to do something that will, in the end, get some sort of benefit or compensation or kickback. Rather than speaking with salespeople to get investment ideas, he instead utilizes discussions with investors who have no hidden agenda, investors like Monish, Nick Sleep, Bill Ackman, among a number of others. Another rule of his is to gather investment research in the right order. The reason for being careful when you consume information about an investment is because the first idea that enters your brain tends to be the one that sticks. So if you learn about a particular investment from a salesman or from someone who is biased, then that can lead

Starting point is 00:42:46 you to having a distorted view of that company that doesn't really reflect reality. Once he decides that an investment idea is promising enough to research further, he wants to start his research routine with the least biased and most objective sources. These are typically the public filings, including the annual report, 10K, 10Q, and proxy statement. These are heavily reviewed by lawyers and auditors to ensure that all the information in there is accurate, so it has much more strict standards than what you'd read on social media or a blog or in the media in general. Guy calls the corporate filings the meat and vegetables of his research, as it's less enjoyable, but usually the most nutritious. Next on the list would be to turn to earnings announcements,

Starting point is 00:43:31 press releases, and transcripts of conference calls. He's suspicious of consuming any information that comes from Wall Street or any source that may have their own interests in mind. The seventh rule he listed was that if a stock tumbles after you buy it, don't sell it for two years. This is another rule that guy cloned from Monish, and there's a couple of benefits to having this rule. First, it forces you to slow down and really think about the companies you're buying.

Starting point is 00:43:57 If you know that you could sell a company next week after you buy it, then you may be more impulsive in your buy and sell decisions, and maybe you wouldn't be doing as much research as you should be doing. Guy says that this rule helps keep him out of a lot of investments, and he thinks about how he would react if the stock were to fall by 50% immediately after he bought it. If you wouldn't feel good about the stock falling, then it's probably something you should avoid. If you get excited about the idea of the stock going lower, then that's probably a good sign that you know enough about the business to know that any decrease in the price is actually a bargain for you. The last rule he lists in his book is to not

Starting point is 00:44:34 talk about your current investments. And this one really hit home for me as someone who hosts a podcast. When you are public about your investments, psychologically it becomes much more difficult for you to change your mind. If I were to become a total advocate for a particular stock or investment, then I've essentially publicly attached my personality to that investment. And Guy mentioned the mental wiring we have that is brought up in the book, influenced by Robert Chaldeenie. It's this idea that humans prefer to be consistent with their actions once they commit to something. In the book, Influence, they referred to a psychology experiment where they went to a bunch of residence stores and simply asked them if they'd do

Starting point is 00:45:14 something that wouldn't cost them any money but would help their neighborhood. Then a few days later, they were asked to put an ugly sign on their front lawns to stop drivers from speeding. And those who had originally said they would do such a thing found it extraordinarily hard to change their stated position, so they felt obligated to put the signs in their lawns. Similarly, if you tell a child you're going to give them a treat, they're oftentimes going to reply, you promise. These children intuitively understand that you'll find it hard to reverse course after taking your original position.

Starting point is 00:45:47 There is deep conditioning inside our brain and our human DNA that makes it extremely difficult for us to change our original position, and the book influenced as a really good job of diving into a number of great examples of this. Guy actually experienced this with one stock called EVCI, which went up sevenfold in 18 months after he purchased it. And he had done a public interview and talked about the company. He publicly stated that he was invested in the stock, and he knew that the stock was no longer cheap, though. Then shortly after, the stock had been cut in half. And in retrospect, Guy regrets having spoken publicly about the particular company. So this is why Guy has that rule of never talking about your current investments. This chapter in

Starting point is 00:46:30 particular helps me improve my thinking on how I think about my investments and had a ton of useful lessons for me to continue to look back on. Then in chapter 11, he talks about the importance of having an investment checklist and some of the mistakes he made in helping develop the checklist. Having an investment checklist is a really simple way to ensure you don't repeatedly make mistakes such as paying too high of a price for a company, not doing enough due diligence on the company's management. The list really goes on. Monish and Guy reviewed their own mistakes and shared them with each other, as well as did a review of warrants mistakes, as oftentimes the best way to learn for mistakes is to look at the mistakes of others so you don't end up repeating those

Starting point is 00:47:10 mistakes yourself. That doesn't mean you should skip over and avoid analyzing your own mistakes, though. In the book, Guy said he included 70 items in his investment checklist, so you can clearly see how seriously he thinks about these things. One of his mistakes taught him to look for businesses that offer a win-win for all parties involved. And this really reminds me of Nick's sleep and his writings. And he's always looking for win-win situations in the businesses he owns, as three of his primary investments today are Berkshire Hathaway, Costco, and Amazon. In the late 1990s, Gaia looked into a company called the Tupperware Plastics Company. In selling their products, they host what was called Home Parties that played many of these psychological tricks that Chaldeenie

Starting point is 00:47:57 covers in his book influence. For example, the parties applied the reciprocation principle, as the host of these parties were given free Tupperware, to which they would feel indebted and want to be. produce sales for the company. All guests were also given these small gifts as well. At the time, the business seemed to possess many of the qualities of a great business such as high profit margins, high return on equity, and they managed to take $5 worth of plastic and produce a product that they could then sell for $50. A couple of years after buying the stock, Guy would come to realize that the business wasn't as good as he once thought. After he had purchased it, sales stopped growing for the company as they met increased competition.

Starting point is 00:48:37 Guy knew that the management was highly competent and hardworking, so initially he gave them the benefit of the doubt and held on to the stock. But things didn't end up changing in terms of the actual business results. The fundamental problem for this company was that there was too much competition, and their prices were too high and somewhat prevented future growth from coming into fruition. As the competition increased, competitors offered a similar product at a cheaper price, which which made it difficult for them to differentiate themselves on something relatively simple in which customers aren't emotionally attached to it, like some people may be emotionally attached

Starting point is 00:49:15 to a particular clothing brand like Nike. No matter how good the management team was, they couldn't fix a poor business model. Only a couple of years after purchasing, Speer ended up selling out of this position for about what he paid for it. He realized that he became too enamored with the good things about the business, that he overlooked some of the weaknesses. So the lesson he learned from this was to look for businesses that offer win-win scenarios. You want to own a great company that makes a ton of money while also providing a ton of real value to the customers. Originally, Tupperware had done this

Starting point is 00:49:51 by introducing an innovative product, but eventually it no longer became the case. Like I mentioned, I talked about this concept of looking for win-win scenarios on my episode covering Nick's sleep, this is businesses like Walmart, Costco, and Amazon who want to provide the best prices to customers. To do that, they need to minimize their internal cost and get the best deals from suppliers, and it creates this flywheel effect, which in turn builds out their economic moat over time. You'll want to look at the whole value chain and all of the parties involved. Another mistake he expanded on was his purchase of CarMax. CarMax is known for offering a wide variety of cars at low prices due to their operational efficiency of their business.

Starting point is 00:50:35 However, the fatal flaw guy eventually realized with CarMax is that the business was dependent on the ability to access financing. A significant number of cars in the U.S. are leased. So if Carmack somehow wasn't able to access financing, then the entire business model would end up falling apart. And this is what actually happened in 2008. Access to financing dried up, sales plummeted and the stock followed. This investment mistake highlighted the importance of understanding the whole value chain and the business model and what parts of it are outside of the company's control. Speer says he wants to own companies that control their own destiny and avoid companies that have their destiny determined by forces beyond their control. The final chapter of his book,

Starting point is 00:51:20 Guy titled The Quest for Value. He explains how value investing is a hard strategy to be if your goal in life is to get rich. Yet he says that it's not money that matters most after a certain point. It's the less tangible things that are even more valuable, such as the path to becoming the best version of ourselves that we can possibly be. This involves asking ourselves questions such as, what is my wealth for, what gives my life meaning, and how can I use my gifts to help others? Speer wrote that, quote, in my experience, the inner journey is not only more fulfilling, but is also a key to becoming a better investor. If I don't understand my inner landscape, including my fears, insecurities, desires, biases,

Starting point is 00:52:06 and attitude to money, I'm likely to be mugged by reality, end quote. Spears says that he has used countless tools to accelerate this process of inward growth, one of which was psychotherapy and other forms of therapy and also dove in to learn about spirituality and philosophy. A lot of it really comes down to living by your own inner scorecard and what you believe is right rather than constantly seeking the validation and approval of others. For Guy, his experience at DH Blair taught him that living by an outer scorecard is what leads to a life of misery, and life lived by an inner scorecard is more in line with peace and contentment.

Starting point is 00:52:47 Living in this sort of way not only leads you to being happier, but it can also lead you to becoming a better investor as well as you're constantly reevaluating ways you can improve yourself through reflecting on your failures. Guy ends the book by stating that the real reward of this inner transformation is not just enduring investment success, it's the gift of becoming the best person we can be. That surely is the ultimate prize. Then I like how at the end he includes a ton of different books that have helped him in his own journey, ranging from investing, biographies, leadership, psychology, and personal development. I'd also like to touch a little bit on Guy's investment portfolio. His 13F filings only show his U.S. holdings, so we aren't able to

Starting point is 00:53:31 see the entire portfolio, but in his 13F, he shows roughly $164 million in his holdings. And in his book, he mentions that he doesn't try to achieve the highest returns possible. A lot of his fund is invested in Berkshire Hathaway. Given that Berkshire is as massive as it is, He could probably get a higher return elsewhere, but wants to continue to hold it partially because Warren Buffett is in charge, and also because it provides sort of a ballast to the portfolio that is almost indestructible. His next largest U.S. stock holdings are American Express, Bank of America, MasterCard, Ferrari, Micron, and Moody's.

Starting point is 00:54:09 Guy is somewhat known for having a pretty long holding period with his positions, and he isn't super active in this portfolio. According to his 13F, he's only purchased three stocks over the past couple of years. This includes Alibaba, Daily Journal, and Micron, all of which aren't huge positions relative to the rest of his portfolio. So not a ton of action over the years, as he's definitely more of a sit-and-wait kind of investor after he find a business he likes. Even though Guy is widely known for having these long holding periods, he's stated in

Starting point is 00:54:40 the past that his returns would probably be higher, even if he had more of a bias to hold on to things rather than selling them. Another thing I'd like to point out is how well the majority of the companies he owns has held up through this recent bear market. I think that's a testament to the due diligence he does in selecting companies and ensuring that they're continually moving towards a more favorable destination each year. This is what Nick Sleep calls destination analysis. All right, that wraps up today's episode. If you don't already, be sure to click follow on the podcast app you're on so you can get notified of all of all. of our future episodes coming out. Also, if you enjoyed this episode, I would really, really appreciate

Starting point is 00:55:21 it if you shared it with just one person you think would also enjoy it. This will really help us out as we continue to provide these episodes to you for free. Also, if you're interested in checking out Guy's book for yourself, which I highly recommend, we'll be sure to get that linked in the show notes as well. With that, thank you so much for tuning into today's episode, and I hope to see you again next time. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors

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We Study Billionaires - The Investor’s Podcast Network - TIP519: The Education of a Value Investor by Guy Spier

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