Oliver S. Berryhill Blogs: An Interview with Famed Value Investor Guy Spier

I don’t recall when I first heard of Guy Spier. It was probably due to his book, The Education of a Value Investor.

In it he recounts everything from his lunch with Warren Buffett to how he’s beat the market for two decades and counting. Guy is an extremely generous person who does not mind sharing his knowledge with others and occasionally enjoys playing chess competitively or to pass the time.

Guy runs the Aquamarine Fund, which is closely modeled on the Buffett partnerships of the ’50s. He earned his MBA from Harvard Business School and has been a successful investor for the past 25 years.

In his latest annual report, he discusses his decision to pass on investing in Amazon in 2012. I found his analysis fascinating, so reached out to him about an interview. He responded almost immediately, and the result is a 2 hour interview, which I’ve included below.

We talk about everything from Warren Buffett, to Amazon, to competitive chess.

Topics covered in the Interview:

Chess and the area of pattern recognition
Warren Buffett and his confidence with the stock market
Why the “fear” pattern is important when it comes to investments and the economy
Investing in debt and equities
The “insiders game” — who wins and who loses
What is “indexing” and why it matters
“Value Traps”
Buying Amazon stock
What is the biggest danger value investors have?
Bill Ackman vs. First Union Realty
Amazon’s purchase of Whole Foods
Different types of reading to keep up-to-date
Reading physical newspapers vs. obtaining information online from apps, blogs, and social media
How to approach the world of investing intelligently
Where some of the best investing insights come from
Deciding what investors to follow and the reasons why
Recommendations of research tools for individual investors
Using stock screens to research companies
Tony Robbins and the self-help culture
The Aquamarine Fund

Resources Mentioned in the Interview:

Guy Spier Interview Transcript

Guy: I’ll send you this file once it’s done. I know that podcasts are all about the highest quality sound and I know that’s a Hiel PR-40 mic and you have a pop-thing on it and it looks so great. Are you using a USB or is that going into a—

Rob: I use—and by the way, I’m hearing feedback on my end.

Guy: What does that mean?

Rob: I can hear my own voice. I don’t know if that’s getting picked up on the recording or not.

Guy: I have no idea but it’s really hot here and we don’t have air-conditioning so—I don’t know. If I put some— did that feedback go away now?

Rob: Yeah, I think it did. Yes.

Guy: It was feeding out of the microphone and into the speakers. Your sound is feeding out of the microphone and into the speakers basically.

Rob: When I bought this microphone — and I know nothing about this stuff — I just assumed it would have a USB plug on the end of it and I could just plug it into my computer and I was wrong. Then I did some research and ended up buying a Steinberg UR-22 which is just a box and you plug the mic into it and then out the end of it there is another cord that converts it to USB and I just plug it into my computer.

Guy: Right. Anyway, I think what you also have is reflection of the desk so it’s not as high-quality audio but I think what I love about the podcast medium is that there’s an intimacy to it which is just incredible. You’re right up there close with your audience.

Rob: That really took me by surprise. I’ve been blogging for 10 years. I started the podcast almost four years ago and when I was blogging I’d get an email every now and again from someone who had read an article but it wasn’t very frequent. When I started podcasting, I got a flood of email. I’ve gotten to the point now where I read every single email. I tell people that and it’s true, but I don’t give substantive responses because I can’t. I would spend all day responding to email. What I do instead is take a lot of the questions people ask me and answer them on the podcast. I’ve had meet-ups where we’ll meet up at coffee shops here locally in the Washington, DC area. So yeah, there is definitely a connection you make with your listeners that you just don’t with the written word.

Guy: Yeah, it’s quite incredible and I’ve thought about podcasting mainly because of the fun of connecting to people and the incredible closeness you get to them. It’s also very—it’s a medium that’s very—there’s a high longevity. I record a podcast with somebody and two or three hours later somebody is emailing me about it and I’m blown away. I was going to ask you, what fills the bank account if you’re not selling advertisement (which I think is great, by the way)?

Rob: The blog basically drives the business side of it—the website. At times I’ve thought about advertising on the podcast and I came really, really close just a couple of months ago to signing a deal to run ads and it just didn’t seem right. It’s not that I’ll never—the day could come when I decide to advertise on the podcast. I don’t want to say never but part of me just thought, you have to know when you have enough. I have enough so I just view the podcast as something I enjoy doing and a way to give back that’s not motivated by money.

Guy: Yeah. I really enjoy listening to Tim Ferriss’ podcasts. They’re great. There’s an element to which he’s pushing an angle where he’s kind of just pushing some particular thing. And, there I am with whatever it is I’m doing and I suddenly realize I’ve listened to a few minutes worth of him plugging something. There’s something that’s not completely pure about that. At the end of the day people have to put bread on the table so I guess it’s is okay. I don’t know what you think of John Lee Dumas, JLD. He, as well, has just got a wonderful podcast and it’s really inspiring. Again, this applies to the podcast because he’s making money out of them as well. He’s getting affiliate fees.

Rob: The truth is, Guy, I don’t listen to a lot of podcasts which is maybe ironic, I don’t know. I’ve listened to both of theirs and I joined John Lee Dumas’—he had a forum for podcasters when I was first getting started. He publishes his income online and is making six-figures a month. I think he and his girlfriend moved to Puerto Rico not long ago. Maybe for some of the tax advantages there but he’s obviously built up a tremendous business. And Tim Ferris, depending on who his guest is, I think his interviews are some of the best out there.

Guy: Yeah. So you’re based in DC and I’m honored that you wanted me to come onto your show.

Rob: You’re honored? I’m honored that you said yes. I wasn’t sure I would even get a return email when I reached out to you. You emailed me right away and I’m grateful. And look, I’ve got a whole card full of questions. One of the things we want to talk about is Amazon and I’m sure you saw that they just signed a deal to buy Whole Foods which I may ask you about. But yeah, if it’s okay I’ll jump right in?

Guy: Yeah.

Rob: I want to start with what I think has got to be the most important topic we’ll discuss today and that is whether you still play chess?

Guy: You know, I play with my son. He keeps asking me for games so I play him. I have a question mark in my mind though. Every time I play him, I play him as well as I can. I don’t want to shield him from how well I play which is not all that well. I want to go online and play but it’s such a time-sink. The last time I went online which is probably more than a year ago I got so depressed at my rating—I had people at a chess rating of 900 beating me so I don’t know that I can say I regularly play chess anymore.

Rob: When you play online, where do you play?

Guy: The Internet Chess Club is the place I’ve enjoyed playing. They have a great app which is sitting here on my desktop. I could open that up anytime and start playing. I could pull out a game right now. It’s easy with Blitzin. If you like playing we can play each other.

Rob: I’d love to actually but I don’t know if I’m set up with the Internet Chess Club. I play at chess24.com.

Guy: And what’s your rating?

Rob: It’s funny you should ask—

Guy: Did you hear that?

Rob: What?

Guy: I just loaded my Blitzin to see what’s going on there.

Rob: Right now my rating is 2,100 on chess24.

Guy: You’re a very good player. I have never gotten that high. My highest rating ever is about 1,600.

Rob: Well, if you had asked me a couple of days ago my rating on chess24 could very easily been 1,700 or 1,800. I tend to go through spurts where I win a lot and then lose a lot so my rating can fluctuate by 400 points or so, on Chess24.

Guy: Actually, when I playing with people with a 1,500 or 1,600 ratings, something I used to enjoy doing would be to deliberately take my rating down. I’d go and play a bunch of 900 rated guys and play really badly or intentionally lose or make a sacrifice where I had no chance of winning up against and watch my rating go down to about 1,200. Then I’d get all of these guys challenging me to a 1,200 rated game and I’d smash them really good (laughs). So the most satisfying thing for me—and I’m talking to you now, I have enormous respect for you. To play to 2,100—if I’m not mistaken, 2,500 is Grand Master. You ought to be able to beat me at every game we play just based on 2,100 compared to what my rating is. I love open games. I love breaking open anything—no strategy left and just pure tactics. When I was playing a lot I really used to enjoy pawn storms. To get a kings opening and then just figure out a pawn storm and to watch and feel the impending sense of doom the other player feels as his defenses are totally ripped to pieces… I’m sorry I’m just diving deep into it. There’s a player called Bronstein, whose games one can look at. He always played open games and, of course, the open games are always a wild ride because there are always twists and turns of fate that you’d never know how the hell they’re going to go. Just talking about it is kind of fun. What really annoys me is when people play this closed, sort of, trench fighting. I always try to rip those things open. My play is very much in the direction of a duffer in that I find it really, really hard to keep my wits about me and keep a cool and level head as the game gets exciting. When I followed it closely, I just never enjoyed the way Karpov played. I never, ever enjoyed it. And even then, the thing is, the way Kasparov would play is he was a much more dynamic player. Even he realized that in order to win you really have to button it down and that just makes the play less interesting, it seems, to me. But no, I don’t play near as much or enough. There is something about playing on a real board in a real open session. I don’t know if you have anything like this in Washington, but in New York City there are these amazing places where you can go and just pick up games.

Rob: Yeah, in New York City—well, now St. Louis has become more of the chess capital of the US because of the great things they’ve done there at the Chess Club and the Chess Hall of Fame, but New York is probably still the dominant location for Grand Masters. I think I read you were a member of the Marshall Chess Club at one point. I’ve played there. There are great places to play there in the park. DC has some. In fact, I’m playing in a tournament that starts tonight but, no, it’s not like New York City.

Guy: But good for you that you’re playing. I can’t honestly claim that I’m a regular chess player. I wish I could but I can’t. I’ve got Blitzin open right now. But, I’ll just go and lose a bunch of games if I go and play (laughs).

Rob: I was trying to download Blitzin and get it set up so we could play but I don’t think I can do that and talk to you at the same time. I tried and failed.

In your book, The Education of a Value Investor, you talk a little bit about chess and bridge games and their relationship to investing. I wanted to explore that a little bit, if we could. One thing about chess—I’ve really gotten back into the game a lot in the last year and will listen to Grand Masters. Peter Svidler is one of them. He’s ranked 14th in the world. You can watch him on chess24 play speed chess with different players and he’ll talk about the game as he’s playing. Of course, he’s winning virtually every single game. The thing I’ve noticed is you’ll see a position—and in my mind I’m trying to calculate as I’m following the game… “Okay, he can move his knight there and the other side will move their bishop there, and then he can move his rook…” He just instantly sees a three, four, or five move combination and he talks about it. In a blink of an eye he sees it.

At first I wondered, how in the world he could calculate that? I know he’s a Grandmaster but still, how do you calculate that quickly? After watching him for awhile I realized, you don’t. He’s not calculating at all. He just sees the pattern. He recognizes the pattern, thinking fast and slow for example. I’m thinking slow and probably coming out with a bad result. He’s thinking fast because he doesn’t really have to think at all. He just sees the pattern. It made me wonder, are there patterns you see as you’re evaluating companies or industries in selecting investment possibilities? Are there patterns that you’ve recognized over time that can help you identify investing opportunities?

Guy: I don’t think I’m particularly good at it but I think there are patterns of human behavior that I can certainly start to recognize even though I’m not necessarily good at managing myself in those patterns. I get very concerned with situations where there is an enormous amount of controversy. What I really love is situations where there is an enormous amount of fear and that fear is not rationally based. I think people are just not looking there. I haven’t come across those situations too often but I can see that happen very, very clearly now and I know if I’m operating in a place where that’s the case. That’s why I think Warren Buffett is so confident that no matter what direction the market has turned and how overvalued things get and how competitive the investment gain gets, there are always going to be pockets where people are just fearful and don’t want to tread. And, if you’re willing to tread there, then you’ll do fine.

I just remembered, a way to reinforce that pattern for me, was in the height of the financial crisis Warren Buffett bought shares of Goldman Sachs. And, it’s just incredible because all mayhem was breaking loose and he dove straight into the middle of it and bought shares of Goldman Sachs. There was very little certainty about the way things were going to unfold. I think that was an example of him saying, “This is a valuable company. There is a lot of uncertainty around it but these guys are smart and will figure it out. And I’m buying into that uncertainty. And I’m buying into that fear.” Which, by the way, you’re probably going to bring it up later, is exactly what is really hard about companies like Amazon and Netflix and which doesn’t exist. The emotional pattern you need to get in to buy Amazon or Netflix right now is to say, “Yes, those guys are all exuberant about the future of this company but I’m even more exuberant.” And there’s no fear. You’re buying on top of other peoples’ exuberance and that’s a very, very different place to say, buying Goldman Sachs in the middle of the financial crisis.

It’s not an analytical pattern but it’s an emotional pattern. I think that what’s hard when you look at analytical patterns. I wrote my annual report about bundling. Economies are bundling or scaled economies, share. And what’s really frustrating about that is that often other people see those patterns as well, if not better, than I do. So I’m coming late into that game. But the “fear” pattern is a really, really valuable one. I think once you do extraordinarily well without such good analytical abilities— in general, you ought to buy off a fearful buyer. You want to be a buyer when other people are fearful. I think there are some people that would never be able to beat you or me at chess because they’re not analytical thinkers. But, they get a sense of that. They get a sense of where they want to be.

There is a guy I met not so long ago who lives in Geneva of all places, who is a retailer. At the time, he was putting all of his money into Canadian real estate. And actually, it was really clear that commodity prices had come down. The tar sands oil was no longer profitable so Canada was suffering but he was buying real estate in downtown Toronto. He had a sense that that would turn out fine over time. He was shifting his whole real estate portfolio into Toronto real estate. And, he didn’t know that much about Toronto real estate but he knew he was buying into a situation which wasn’t entirely distressed, but there was fear. There was lack of liquidity and people in Canada were very, very unhappy. But he wasn’t buying some speculative— he was buying into real estate where he knew, one way or another, this would work out for him. So he wasn’t being as greedy as he possibly could. He wasn’t buying into tar sands companies that were losing enormous amounts of money and filing for bankruptcy. I think he was buying downtown Toronto real estate. Yeah, I think there are patterns and you get better at it.

Rob: You mentioned the book, The Manual of Ideas, which in some ways I see almost as a book of patterns. The one I use, that I guess is really the fear pattern but is when a company’s stock is beaten down for cyclical reasons. I think of Deere & Company, which Berkshire owns, but with crop prices down and farmers not buying equipment they struggled. But, there’s no way that’s a permanent situation. That’s going to change. You don’t know when. To me that’s kind of like low-hanging fruit. That just seems to me like an easy decision.

Guy: Actually, I’ve not really studied Deere & Company but I think having met somebody who used to work for Sargenta, companies like Deere & Company (and farming companies) are in the business of organizing the farming supply chain. Thus, participating in the earnings of agricultural land and helping agricultural yields improve and helping the returns to farmers improve. They’re kind of surrounding the farm. There are four or five suppliers who surround the farm and make money effectively in partnership with the farmer. The fact that they’re in a position to make and sell equipment to the farmer means they’re in an ongoing financial relationship with the farmer and in a position to propose all sorts of other solutions to their farms. Unless you think that farms are going to disappear (which is not the case) then Deere & Company will have opportunities to make money. But it’s worth saying that you still want to know that they’re not open-leveraged. There are a whole bunch of other things one wants to know. There may be marginal supplies of farms which don’t make it through this cycle. Another pattern—and again, Warren Buffett is the master of it. I was sitting at the Berkshire meeting during the financial crisis and I own shares of Shaw Harley-Davidson and I discovered that Buffett or Berkshire Hathaway had become a lender to Harley-Davidson. I was glad they had become a lender but slightly miffed that he hadn’t bought the shares. He was asked that question at the annual meeting and he just said, “If we don’t have to make a bet on exactly how well Harley-Davidson will do, then we don’t want to have to make that bet and we’re offering perfectly decent returns at a more secure place in the capital structure so we took it.” So this idea of, you don’t want to be on the margins of economic activity—you want to be at the center. You want to be in the things that humanity can’t do without. It was inevitable that Berkshire Hathaway would end up in power generation, for example, because that just drives everything. That’s another pattern—is the decision I’m making taking me closer to the core of economic activity or is it taking me to the edges? Am I buying derivatives and options or am I buying debt ownerships in companies? And he’s constantly moving his portfolio towards the center.

At the time he made his investment in Washington Post, I don’t think any of us ever thought this was— I mean, we talked about one-newspaper towns and this was considered to be at the core of advertising, the core of how you reached consumers and the ability to advertise in a local newspaper was one of the most important ways in which retailers reached potential consumers. That’s just been completely blown apart. You have to have an awareness that on a regular basis the companies you might think are at the center may not be in the future. Actually, when it comes to power distribution, I don’t think it will change. Power used to be generated by a small number of very large power plants and increasingly power is being generated by wind plants and solar plants. Solar installations on people’s roofs, heat exchanges, and so forth. It becomes a far more distributed generating capacity in which, if you own the transmission as a power company you’re probably fine, but if you just own centralized generating capacity you may not be fine. The world is changing all the time.

Rob: And that sort of distribution is happening in industry after industry. I should say too, and I apologize to you and the listeners also— I’ve been fighting a cold for 10 days so I’m trying my best not to cough into the microphone. You mentioned Harley-Davidson. Does your fund invest in debt at all or is it all equities?

Guy: I can invest in anything I like, Rob. My regulators here — or the people who represent the regulators — have a hard time understanding that. I keep on having to pull out my fund documents to show them the investors have agreed and understood that I can invest in anything. Having said that I can invest in anything most of the time, I’m invested in the equities and securities of publicly-created companies because I think that offers the best risk reward. Debt securities are lovely but you’re not going to get a significant reward out of them. You might get a few percentage points better than the bond rate. In equities you can double and triple your money if you’re in the right places. That’s where the risk reward is really, really good. So long as you’re in conservative funded companies, the value of your principal ought never be in doubt. Although, I had my head handed to me a couple years ago when the equity of a company I thought ought not to be in doubt, ended up being worthless. Yes, I invest in equities, securities as I’m sure most of your listeners do which is the right place to be if you’re saving for retirement or saving for the education of your children. That’s where we all ought to be.

Here’s another pattern. This comes from an interview— I did attend the Daily Journal meeting which is where Charley Munger holds court once a year. Somebody was asking him about some investment path (I think was venture capital) and he just looked at him and said, “Look, that’s an insider’s game. I’ll never win at that insider’s game unless I work 20 years to be an insider.” He talked about, if I’m not mistaken, real estate as well. Real estate is a very local insider’s game in the vast majority of cases. In our local neighborhoods we will understand the nuances of the planning commission and what’ going on, on a particular corner. We all understand that there is a retail location, for example, that’s just never worked. And often it’s not easy to understand. I’m thinking of a Chinese restaurant that opened up on a corner not far away from where I live, where just nobody’s been able to make a retail operation work there. I feel bad for the current occupier’s because they haven’t made it work either. So he distinguishes between those kinds of businesses where insiders are winners almost always but outsiders are winners almost never and investment opportunities where the playing field has been leveled so that outsider’s can also win. That’s clearly a question he asks himself very quickly when he’s assessing something. He just doesn’t plan things where insider’s can win against outsiders. He doesn’t feel any sense of remorse or envy over the money venture capitalists are making or that blockbuster movies make or the real estate people make in their local markets. He’s waiting for those opportunities where he can say, “I’m an outsider but I’ll do fine in this.”

If you take the publicly traded equities, and the best example of that is indexing. Indexing is a game where an outsider can win if you just stay put and do dollar-cost averaging. You’re defined to it, not by law, but you’re defined to win. There are plenty of other publicly traded securities where the information that I’m getting is the same as the information everybody else is getting so I have a chance of playing on a level playing field. There are some publicly traded securities where it’s not a level playing field. It ought to be but it isn’t. So that’s a pattern. It doesn’t give a pattern of whether to invest or not but it is a simple pattern that allows us to decide whether we want to proceed down a particular route of analysis to see if we want to make the announcement.

Rob: Turning from patterns to Amazon, just to kind of tee-up this question, I’ve said on this podcast, and I’ve written on Forbes, that I think Amazon is a wonderful company. I have their credit card, I’m a Prime member. I watch their videos. I listen to their music. I buy from Amazon more than I should. And I’ve also said that I think it’s a lousy investment because of the valuation. So, imagine my surprise when I’m reading your annual report — I’m showing Guy throughout the video… I got it. And in it you have — and this is not new. Your approach is a little bit different this year but I think it’s great. You sort of do a case-study or postmortem. In this case it was two stocks that you considered buying and passed on. One was Valiant, and I don’t think we need to spend any time on that unless you want to. But obviously, you dodged a bullet there. But then Amazon—you regret not buying Amazon. I think you were comparing—2012 is when I think you considered buying and someone—I think it was Nick Sleep, was very bullish on Amazon—

Guy: Yeah, it was Nick.

Rob: If you compare the price in 2012 to today, I think any of us would wish we would have purchased it because back then it probably had a market cap of about $88 billion. And today it’s $450 billion or $500 billion. I think anyone would have liked to buy if you just focused on the price but help us understand as a value investor, why you viewed Amazon as a good investment in 2012?

Guy: I think you’ve teed this up in a beautiful way. The answer I’m going to give you is one I will need to listen to myself. The biggest danger we have as value investors is that we fall into value traps. There are plenty of things that are cheap on some metric scales that is actually not going to make this much money. The obvious value trap—and there are many different kinds of value traps. I used to get very excited when I looked at small-cap companies and I’d see that they were trading at some ridiculous multiple of earnings. The value trap there was where the management and the board of directors are using the company kind of as a retirement plan. The company is small enough and they control enough of the shares that they’re sucking an enormous amount of the value that has been created in the company out as direct payments to the management. In theory, the management can be removed and you could release all that value and pay somebody a lot less money to do the same job. In practice, it’s impossible to remove the management. There is value embedded there but you’re never going to be able to get it out. There was this famous case with Bill Ackman and a real estate company. It was called, First Union Realty, I believe. He went and decided to fight the management on the fact that they were doing this and the management turned around and said, “If you want to do this to us, we’ll destroy the value.” By the time he won, he had lost because the value inside the company had been destroyed. We’re buying into outside passive minority investors, but buying into vehicles where we’re unlikely to change the course of event and unlikely to make any significant changes to the way the company is being run so we have to buy into a vehicle that’s capable of becoming more valuable ideally, and sharing that value with all of the other shareholders. That’s a hard thing to find. There are plenty of companies that are just not growing and if you own a company that’s not growing— first of all, the margin of safety has to be greater. If they’re not reinvesting money at a good rate of return— if you buy a dollar bill and in 10 years’ time it’s still a dollar bill, even buying it for 10 cents on the dollar may not be cheap enough given you may have to sell it at a discount. Whereas, if you have a dollar bill that’s growing very rapidly, you might even want to pay a dollar for it if it’s going at 30 percent PR. That is part of the analysis we have to do and it’s dangerous for the growth of one’s wealth to be invested in one or another kind of value trap.

I guess this is all a long way of saying that we have to… Warren Buffet said somewhere that growth and value are joined at the hip. They’re all part of the same thing. All intelligent investing is value investing. There is no great honor in buying a company that just has cheap metrics for the sake of buying cheap metrics and holding out some flag that says, “I’m a true value investor.” You have to be willing—in fact, you’re better off engaging with better businesses and trying to understand how that value is growing and whether we want to own and pay up for that better business. That’s just a very long way of saying that just because you or I consider ourselves value investors doesn’t mean that we throw out of consideration, a company for which we have to pay up. Obviously, then the question is how do much do we pay up for that business? In the case of Amazon, there is a very strong argument for paying up. Going back into the world of value traps, I’m going to take you through, if you allow me for about four or five minutes, the analysis of an investment I had which was kind of a value trap. I figured out that you wanted to buy insurance companies who had low combined ratios were comfortable as underwriters. I discovered this company called, RLI (Replacement Lens Insurance) company that regularly wrote combined ratio of well below 100 which meant that just from the insurance operational side, they were highly profitable and you didn’t even have to worry. The vast majority of insurance companies were unprofitable on the insurance side but they make their money on investments. Researching their annual reports we know that one of the things he talks about regularly is how his insurance operations make money purely on the underwriting side. I owned RLI Insurance for about four or five years and the share prices were going nowhere which, of course, was more than a mind of frustration for me and I kept trying to figure out why. A big part of the reason why was because they just couldn’t grow their sales. They couldn’t grow their insurance underwriting and when I dug deeper into why they couldn’t grow their insurance underwriting it made an enormous amount of sense in that the way they got comfortable underwriting was to find the buyer who had nowhere else to go.

They had an unusual insurance problem to solve that couldn’t be solved by the normal and competitive markets. It needed an entrepreneurial underwriter who was willing to underwrite that unusual risk. So the buyer would pay an enormous amount of money for that insurance but you can be sure as hell that they were very reluctant to pay. And if they could possibly get away from paying it, they would. The company was consistently losing customers. You could have a business that is very, very profitable because they find a way to charge a lot for something but they cannot grow. Warren Buffett understood that and when we see the reason why Warren Buffett likes Geico Insurance so much is that they managed to make an underwriting profit along side of under-pricing of their product relative to their competitors. They under-priced their product, they charged less than their competitors and they make money. That creates the dynamic of continuous growth because Geico has grown every year for the last 20 years I’ve followed it. I’m pretty sure of that. There may have been one or two years where they haven’t grown but they grow expecting that it’s amicable for a commodity product you have to pay less for that people will end up finding their way to Geico. In the case of a company like Amazon, or as in the case of Geico or Netflix or—I’ll give you another example which is not publicly traded. In the case of IKEA, you’re baking in growth of your business through your low costs and the fact that you’re priced lower than your competitors. Now we come along, you and I as analysts, and you say, “How much do you want to pay for that?” We have to be willing to pay more because a business like Geico, or for that case, Amazon, could be worth four or five times more down the road. Or can grow four or five times its size—let’s forget about valuation for a second. Whereas RLI Insurance or your local jeweler they just won’t get there. They will never grow because they’re never creating that kind of customer loyalty and the desire to come over to them because they’re charging less for their product. If you take 25,000 publicly traded companies on the planet, there are probably only 400 or 500 companies where the owners and management really understand this idea of pricing your product in such a way that people keep wanting to come back and that get more and more customers every year. If you find a company that can actually make money while doing that— because many companies that under-price their product just go bankrupt. That’s a pretty special asset. A very, very special asset and Amazon is one of those. Then the question is, how much do you pay for it? There is the debate between me and Nick Sleep in that Nick was so extraordinarily confident of both the cost of Amazon being so low that they could under-price their competitors and that this would continue long enough for them to grow to be many times their size, and that their ability to re-price the product at some point to make money in the future would be such that this was all bankable. He was convinced of that. In my case, what’s really hard is that I just don’t know that I want to take all of that to the bank. And I’ve regretted it ever since. I don’t know if that makes sense. Forgive me, but I dove into what I hope is not a rabbit hole but I guess I wanted to take you and your listeners through the analysis of why paying up for better businesses can and does make sense from a value investment perspective.

Rob: I think that’s something that Warren Buffett has talked about because he was very much, as he described it, the cigar butt analogy, to describe his investing approach years ago. And Charley Munger sort of brought him around to say, “Look, sometimes you’ve got to pay a little more but you’re going to get more in return from a solid company.” I think with Amazon, again, borrowing a Warren Buffett phrase, I put that in the “too difficult” bucket for me. Because, while I certainly assume Amazon is going to continue to grow given everything I know about the company. What becomes too difficult for me—and I’m not a professional analyst so maybe it’s not too difficult for you or others, but for me what’s too difficult is valuing the company. I can accept that you might pay more for an Amazon than you would a Deere & Company (just to go back to a company we mentioned) because of its growth potential but then I’m kind of lost. At that point, the potential range of valuation in my mind grows to a point where I just can’t really — at least with any confidence for me — figure out what the company is worth.

Guy: Yeah. I went through this sort of basic analysis that Nick Sleep took me through. And you’re making some pretty big assumptions and there are plenty of other people willing to do that. It’s a hard place to be. One of the great reasons all of your listeners should attend a Berkshire meeting is that you get to listen to some extraordinary guys, not just Warren and Charley. There’re all these events around. Markel Insurance is run by this extraordinary group of people that includes the Markel family and a guy called, Tom Gayner who runs the investments. He talked about how when you own an investment and it’s a good company but the valuation starts getting up there, the air starts getting thin and it becomes hard to think straight. It’s kind of a disorienting place to be. I’ve been there where I’ve owned companies at very high valuations that ought to last for a very long time but more often than not, in my case, the valuations come crashing down for one reason or another. Then you see Amazon and the people who own it have all the reasons that I used to have for these other high-valued companies I’ve owned in the past, and I’ve been on both sides of that coin so who is crazy? Maybe crazy is too much of a word. Who has got the wrong end of the stick here? If you go back to the pattern recognition, and I think this is what did it for me, is that to dive into something and say, “Yes, I know this is highly-valued but it’s actually still cheap because I’ve made all these adjustments, and the guy’s driven the price up as high as it can be driven,” is effectually what someone buying it is saying. It’s just a pattern you want to avoid. That’s easy enough in some circumstances. What becomes hard in investing is that I have to manage my sense of regret, my sense of remorse, and my sense of being a complete and utter idiot, and my sense that Nick Sleep has been making money hand-over-fist with one simple decision to buy Amazon, whereas I’ve been trying to eke out returns by owning the likes of Deere & Company and others. And that’s just really hard to manage. Again, that’s something where I think Warren Buffett can teach us all a lot because it really doesn’t bother him and it shouldn’t bother us. What I’d also say, Rob, is that the world has changed so dramatically because there used to be very few precipices like Amazon whereas now, there are an extraordinary number. Netflix is one. Facebook is one. Google is one. These are businesses that don’t have to invest much in order to grow. If you own it, it feels great and if you don’t, it feels sickening (laughs).

Rob: Yeah, yeah. I’ve read that some say Apple should buy Netflix. I’m not so sure but, what do you think about Amazon’s purchase of Whole Foods?

Guy: Going back to Amazon for a second before you get into Whole Foods. Who could have predicted or even understood that they would develop a whole new business in the cloud-computing space? And that it would turn out that cloud-computing business would be enormously profitable with enormous switching costs. People that get locked into that were in the right place at the right time. I think that was just a stroke of luck, an enormous stroke of luck, then to have the extraordinary luck—a business genius to see it, understand it, and to have the wherewithal to invest enormous amounts in the early years. There are engineers at Google I know who have talked to me about the enormous challenges of competing with Amazon— and that’s Google! Then we get to Whole Foods. You know, Amazon a few years ago bought this company called Zappos, from Tony Hsieh. If you go to Amazon’s website and you look on a particular page you see all the other sites they own. They’re really good at taking out anyone who’d encroach on the space they seek to dominate. A long time ago I found this web service called, Library Thing, which is just fantastic. It’s basically a recommendation engine, not based on what books you buy, but what books are already in your library. That was a beautiful idea for me. Why should I have Amazon recommend books to me based on what I’ve recently purchased? Why not recommend to me on what I already own? And I found a whole bunch of things that were interesting to me. Then I noticed—and I haven’t followed it that closely, that Amazon had gone and either bought or created a business called, Good Reads. And Good Reads effectively does the Library Thing but they do it better with more capital. I’m sure Good Reads doesn’t make any money but it’s there to protect Amazon’s franchise and I think that’s what they did with Zappos and the Zappos purchase was something like $2 billion or $3 billion which was a lot of money at the time. I remember asking Nick Sleep and he said it was none of that for Amazon. But they sort of saw Zappos as these guys who were doing something extraordinarily well, doing online retail and they didn’t want to fight against them. It just shows that Amazon really intends to own the food space in some way, shape, or form and they’ve decided that Whole Foods is a big enough competitor or an important enough competitor. Exactly what they’ll do with Whole Foods, I have no idea. I guess my initial reaction is that it looks like it might be an acquisition the way Good Greens was or Zappos was which is Amazon saying, “This is a space we want to own. And we want to control the most important player in the space.” Or maybe they’re just buying relationships with customers. One other thought—and maybe you’ve thought about it more than I have, is I imagine it might be a signal of the beginning of the end for something with Amazon because if they’re buying into bricks, they’re actually saying that through their AmazonFresh, they haven’t been able to develop the relationships with the end user. Or they actually don’t have the right configuration of real estate. It’s somewhere between the Whole Foods brand and its relationship with the food buyers and their real estate configuration and/or suppliers that they’ve decided they need that. That’s $13 billion of investment that is real money. And like you said, Amazon’s been too hard for so many different reasons. Who knows exactly why they did it, but we know there are some extraordinary minds behind it.

Rob: I think you hit on something with the real estate, distribution, and location. It’ll be interesting to see what they’ll do with it. The home delivery of groceries has not exactly taken off like people thought it might. But with Whole Foods, it’s going to put them in physical locations that they obviously didn’t have. Who knows what they’ll do. We may see small Amazon stores inside of Whole Foods. It’s an interesting purchase.

Guy: An Amazon warehouse actually has products stored randomly and what they figured out was it doesn’t matter because it’s not random inside the computer. The computer database knows where everything is so in some sense what we get from Whole Foods is a distribution warehouse. There is probably some algorithm behind it which will sort of balance, load, demand, or supply fresh foods across their warehouses plus the locations. It will be interesting to see how the algorithm works with that. That was my thought. You were going to get onto another question.

Rob: I was just going to say I appreciate your time. I know it’s getting late where you are. You’ve been very generous. I have just a handful of rapid-fire questions for you.

Guy: Yes, of course. I have all the time in the world for you. Because I listen to your podcast and I saw how you want to help your listeners do a better job with investing their finances, I thought that was great so I immediately realized you have a pure motive here which I really, really appreciate. And I think what you’re doing is great so don’t feel like you have to shorten my time on this.

Rob: Well, that’s very gracious of you and I appreciate it. So these don’t have to be rapid-fire. I’ll leave it up to you—the rapid-fire part. These are questions I think we can really learn a lot from you—and we already have. But, these will (questions) will take it to the next level. This first one is, what do you read every day? Newspaper, magazines—what’s your daily routine in terms of reading?

Guy: My struggle to read is like meat and potatoes versus junk food. It’s just hard because I would even argue that reading my LinkedIn feed or Facebook feed or my Twitter feed is not pure junk. It’s not pure junk, it’s just not true. I follow a lot of interesting people and I do log into those services to see what’s there and I learn a lot about the world. The problem I have is that it’s very hard to filter the good stuff from the bad stuff on those feeds. In my ideal world, I lock myself away where I sit down each day with at least one 10k or meaty document that relates to a corporation. And that ought to be my meat and potatoes. I think I feel really satisfied when I do that. I do it far less than I want to do it due to distractions. The distractions are not pure distractions. It’s like playing chess. Chess in a certain sense is a pure distraction. For example, going into my Bloomberg monitor where I learn a lot about all sorts of things. I keep a Trello list. I don’t know if you guys know Trello but it actually works quite well for me. The minute I decide to focus on a corporation, it’s in there. Every now and then I’ll re-prioritize the list. It shows what companies I’m looking at. Right now I’m learning about—and I’ve never done it before, I’m learning about renewable power. Renewable power went through a bit of a bust over the last couple of years with the decline in the oil price. I recognized a pattern of fear and a pattern of lack of liquidity. Today I was reading a whole bunch of Howard Booth business school cases so I went onto Home Business School Publishing and a $5 or $8 a pop I bought about 10 cases all relating to solar power. Those kinds of things where the writer has really thought about the topic and has tried to communicate where there’s been a high ratio of human thoughtfulness to the end writing product is, I guess, what it comes down to. But I don’t do nearly enough of it. I have ringing in my ears for the works of—not Ted Wexler but the other guy Warren Buffett hired to run Berkshire’s money, where he’s read 500 pages a day. I’m nowhere near 500 pages a day. I try to do meat and potatoes in an intelligent way.

Rob: Do you read newspapers regularly?

Guy: I still have a physical subscription to two newspapers but they’re piling up the home. I’m reading them less and less. I have all the newspaper apps on my iPhone and I’m reading my iPhone an awful lot as I go to and from work. And I’m aware in doing that it’s this tunnel vision. Even if I’m aware of it and trying to guard against it, all of those kinds of apps and web pages are giving me what I’m looking for. So there is a tunnel vision that develops. When you look at the pages in the newspaper you’re getting what the editors thought was worthwhile. But what I think has also happened is there’s a tunnel vision developing with the newspapers because the newspapers are now competing with all these other places to read. They’re increasingly trying to say, “What does my readership want to see?” I think where I became a little frustrated with the newspapers was particularly when it came to the world of tech. I realized the newspapers just weren’t teaching me. There are genres of people like me who don’t really have their finger on the pulse. Not that I necessarily keep up with it, but I found two web sources. One is a website android newsletter called, Stratechery. It’s a guy who lives in Taiwan. He’s a very thoughtful guy and he makes money—he has people like me paying $300 a year and when you have enough of them doing that, it’s a living. He lives in Taiwan and he teaches me about the tech world. There’s another one that slightly a broader distributed one called, The Information, which to the likes of value investors such as you and I, we’d have never heard of it but my sense is that this is very widely read. This is kind of basic knowledge. And you just not going to get—

Rob: What’s the name of that again?

Guy: That’s called, The Information.

Rob: That’s the name of it?

Guy: Yeah. I don’t know where I found it or how I found it. I think I probably found it through that website, Stratechery. Yeah, it’s at, theinformation.com. I think newspapers are changing so I find that websites like The Wall Street Journal and The New York Times are becoming more inclusive and they’re finding the best content providers and they’re putting them onto their websites. I think I’ve read too many newspapers. And in reading too many newspapers I was self-consciously aping Warren Buffett but at the same time my world was being viewed as being skewed because I was getting into old world genres, basically. It’s not easy. I just have a message for all investors and all of us who want to approach the world of investing intelligently is: we can’t just ape what Warren Buffett and great value investors have done. What they’ve done in the past, what got them here won’t get them there. What will get us to a great place tomorrow is not going to be by reading newspapers the way Warren Buffett reads newspapers. We’ve got to intelligently engage with the changing information environment. Something I would tell you I’ve done is, I’ve started using an aggregator called, Feedly. There is a woman who covers the automobile industry, Maryann Keller, who’s just a phenomenal woman. She’s got very, very decisive insights into the automobile industry. She doesn’t write for major newspapers. You’re not going to see her articles in major newspapers even though they should be there. But Feedly enables me to see her articles when they come up. I also experimented with a subscription to something called, Factiva. What I like about the information is in Stratechery is that those guys are being paid by me, a few hundred dollars a year to write what is important. The problem with just internet sources is that if it’s free, you’re paying for it. You just don’t realize it. You may just be paying it with an obvious ad which would be fine but you may be paying for it with a bias in the way the news source is coming at you which is quite dangerous. I think what I like about paid sources is that the bias is clearly there. They charge you for this. But then, hopefully, there are no other biases behind it. But it’s tough, it’s really tough.

Rob: Those are some great resources.

Guy: The other thing I’m trying to do in response to the unusual change in environment is that I realize that the best insights will actually come from conversations with people so I need to develop my relationships with people who have insight knowledge and who are themselves, well connected. That comes with the development of a whole bunch of skills as well. I’m in a position where I’m prominent enough that if I take something that somebody shares with me and share it with the planet, a lot of people will see if I tweet something out. So, I have to be very careful and thoughtful about what I tweet out, for example. I can’t just take whatever arrives in my inbox because a lot of that may be privileged or something that the owner of that would not be happy for me to do that. If I can develop a reputation of being intelligent and thoughtful about that, sharing what the owner of the information clearly wants me to promote and share it and get exposure for something to where they can feel utterly confident that if they don’t want me to share it, I won’t. Developing that reputation is really very important. I, on the media side, feel overexposed. I’m far too much on podcasts (laughs) like yours where it’s—

Rob: Oops!

Guy: Well, I also want to be honest. There are other reasons to do it. Some of the people I respect the most… You and I have not heard their names and they’re not in the public domain in any way— but they have a strong franchise amongst their social network that’s adding value in a private way. If we imagine people like Collin Powell who is not a very public guy, but I’m certain from his persona that he has some extraordinary relationships and is a guy I would have been so happy to share information with and know that it wouldn’t go anywhere. I would get a lot of value back from that. Behind the Google search bar, there’s a whole bunch of knowledge about the world that is never going to make it to the Google search engine because people have an interest in not having it there. And it’s not necessarily going to make its way to the front pages of any newspapers. It’s a real challenge in a certain way.

Rob: Yeah, it is. Speaking of information, you mentioned in your book that you follow about 20 value investors. You have friendships, obviously, with a lot of value investors. For those listening, who might they want to follow if they’re a value investor? Are there resources online? I use DataRoma, if I’ve got the name right. I think it’s a pretty good resource but maybe you have others where folks could see what other value investors are investing in.

Guy: The choice of who to follow is rather interesting. I’m getting to a place as an investor—and I think it’s partly as a result of size, where I realize it’s really smart for me to look at what other investors are doing. I’ve missed some opportunities and I’ve had my head handed to me in certain circumstances because I was overly respectful of the moods of other value investors. In a certain way the Berkshire meeting this year was quite hard for me because I didn’t own shares of IBM but I had this idea I could put Warren Buffett on such a pedestal where I thought he has got to be right about this. I’m not willing to earn it myself because I don’t really see it. But I know he’s going to prove everyone—all of the doubters, wrong. Then I come to this meeting and discover he’s pretty much sold most of his IBM because he woke up and did make mistakes. He felt like he wasn’t so sure about the future of IBM. I discovered that Warren Buffett is fallible and that’s very, very hard for me. At the same time, I have this sort of idiotic idea that Charley and Warren read newspapers, therefore, I should read newspapers. And that may work for them but I need to work out what works for me and I can’t ignore the fact that I’m a connected guy. I wake up to discover Berkshire Hathaway owns Apple, and that kind of blew apart a whole bunch of attitudes I had towards tech.

I’m capable of independent thought but I haven’t been nearly as independent as I could have been. Follow the investors but don’t ever lose your clasp for independent thought. Actually, that happens as you grow so my fund is of the size that I just have to do that, partly. For choosing investors to follow, something that’s helped me—and it’s a running process over time is to say, “Why am I following this guy?” Is it because his or her investments are well-known and I can read about them in places like DataRoma or elsewhere? And, I know they have far more resources than I do if an investment has passed their filters. A key element to it is what this reveals about the person’s personality and to have a very strong sense about a person’s personality and how it differs from mine. So, Bill Ackman is far more willing to be competitive than I am. But there are other personality aspects. Some people are not willing to take certain kinds of risks. For some people, that’s all they do. So to see them in the full picture of whom they are and see the investments they’ve made in the full picture of who they are. Is this a 20 percent position or a one-percent position? That makes a big difference. Are they people who take flyers or not and to take all of that into account, and while I’m at it, Rob, where they are based. There’s a vortex that happens in New York, a kind of group thing that happens in New York that influences my evaluation and understanding of investments of, let’s say, David Einhorn, because he’s in that New York vortex. There’s a whole group of hedge funds that talk to each other. And, I would just add to this, something else. Just be aware that when you read their 13-Fs, you’re not getting the full picture. I don’t have to report my international position so the world doesn’t know what I own outside of the US because I’m not required to report that. Even if you stay in the US, just because you have to report your share ownership doesn’t mean you have to report what derivative contracts you own and what short positions you have. I think that Carl Icahn’s 13-Fs say nothing about how he’s actually positioned. I don’t know this for certain, but I have a very strong suspicion that he is often using options and other kinds of derivative contracts with financial intermediaries to have a very different position toward what’s publicly displayed.

Rob: That’s a great point.

Guy: Yeah, so he might have gone and had a life just because he wanted to mess with Bill Ackman but he had hedged out all of his exposure one way or another and I think that something he has done is that he’ll establish a position in something, give himself voting rights to influence the management and then he buys and sells—I think it’s called, a corner, in which, as long as the share price moves even if it moves against him, he’s going to make out like a bandit. He’s going to go in there and shake things up as badly as he possibly can or as well as he possibly can. It will either work out, or it won’t. Either way, he just wants to change the status quo. And, in a certain way, if he loses, he wins. So there are lots of dangers in following investors. The basic idea that still holds is to find somebody who is smart, investing their own money and who is not doing any of these other things. You can learn a lot about what they’ve done and why one might want to follow them or not. I still haven’t answered your question as to who and what sources. I sort of pause because I don’t have a set list.

Rob: Okay.

Guy: I don’t have a list sort of like, these are the 20 people. I know about five or six guys who are growing their own investment businesses and the majority of them are about 1/10^th the size of what I am. I realize they may become my best source of investment, inside ideas, and the best thing I can do for them is help them build their businesses. I’m always curious to see what they own in their portfolios because they often own some very interesting small-cap companies that I would not really find my way to that easily. But look, I’m very interested to know what Warren Buffett owns. I’m very interested to know what Tom Gayner owns. I’m very interested to know what David Einhorn owns. I’m very interested to know what Bill Ackman owns. And there are probably about five or six other investors like that. There is a guy based here in Switzerland who, to me, is a kind of a mixed-meat of personalities. He’s done extraordinarily well by owning things that have a similar profile to Amazon. There’s a guy in Miami, Marcelle Lima. I love seeing what he owns when he sends it to me. These aren’t so much 13-Fs as they are letters from investors where they talk through what they own. I could make a list but they’re not coming to my mind as quickly as I thought they would.

Rob: No, that’s terrific. You mentioned Einhorn a couple of times so I just have to ask you, what did you think of his proposal that was voted down on creating two classes of GM stock. I know you are very knowledgeable in the auto industry.

Guy: I don’t know that I was as knowledgeable as I’d like to be. Mary Barra is a phenomenal woman and knows an enormous amount about the automobile industry. David Einhorn is a phenomenal guy who knows an enormous amount about the capital markets. Given the trade-off between financial security and returns sooner, he obviously makes that trade-off differently to let’s say, the management, who only a short while ago were in a bankrupt company that had to be restructured in a way that’s very hard for those of us who are not inside GM to understand the enormous strain, psychological and otherwise, that the company went through. Somewhere those two minds have to meet. So it’s a good proposal or at least an interesting proposal. It doesn’t rattle the cage icon style. One can understand why the management has a very different view of it. It’s not like one is wrong. I would argue that it’s not like one of them is right and one of them is wrong. It’s that David Einhorn places more weight on certain things and Mary Barra places more weight on other things.

Rob: Yeah, I was reminded of a letter, one of Buffett’s letters where he talked about— because he’s often confronted this issue, should Berkshire pay a dividend? My theory has always been, and this theory is unburdened by any knowledge or facts at all (laughs) but my theory has always been that Berkshire will never pay a dividend until Warren Buffett retires—when his time at the helm of that company comes to an end. His point was, look, you shouldn’t care about dividends so long as management’s wisely investing their earnings. So, doing smart things with the earnings then, in fact, you shouldn’t want a dividend because at that point you won’t control the amount, the timing, and you get clobbered with taxes. So, if you need some cash, just sell some shares. In GM’s case, (and this is true of Ford as well) I guess the problem with that at the moment is that some folks aren’t happy with the share price. They want to know why it hasn’t been going up when they look across the aisle and they see Tesla that seems to do no wrong, and some say that’s why the Ford CEO switch occurred—but I don’t know. Then I’m reminded of another thing Buffett said. And actually, this may have been about IBM ironically. He said he would love to see the stock price of his investments languish for years because it just increases the power of the buybacks, the power if you reinvest dividends. I don’t know. I kind of think the whole things about GMs share classes and criticisms of Ford’s price—and I should say I own Ford so I’m perfectly happy for the stock price to just “bump” along as Ford has for the past several years. If I were a Tesla owner I’d be a little concerned. Maybe it’s just backward thinking. But GM strikes me as a tremendous company and if I were going to invest in it and be an ongoing investor I would love its current stock price. I’d hope they could buy back more shares at that price for many quarters to come.

Guy: The only tension is that at some point any institution, any investor wants to convert their investment for cash because they need the cash, even if you’re an endowment. At some point, Warren Buffett’s shares in Berkshire Hathaway will go into the Gates Foundation and at some point Bill Gates won’t be around anymore and the Gates Foundation will have—I don’t know what it is, 10 or 20 years to spend all of it. There is a clause in there that doesn’t allow the foundation to last much longer than the founders. As they spend all of it they want to liquidate their shares and so the share price can’t be languished forever and ever. One of the disadvantages that you and I have relative to the Gates Foundation or Berkshire Hathaway is that Berkshire Hathaway is generating new cash and do want the share price to languish for years, whereas, we would like the share price to languish for awhile but we do actually want to be able to sell them at some point and David Einhorn is coming from that perspective. Now, the truth is the probability a GM or a Ford is going to establish their price language for 10 years—if they repurchase half their shares outstanding or more then you’ll probably get a double out of it. And again, that’s a difference than maybe where you and I have an advantage. An individual investor has an advantage over a guy who runs a fund and I may have an advantage over David Einhorn. He’s in New York and he has impatient investors. And the more patient you can be the more sanguine you can be, and he’s getting a little impatient.

Rob: Yeah, that’s a great point. From my perspective, the shares I own are from different companies. I don’t own a lot of companies but I’m kind of hopeful I never sell them. When the day ends for me I’ll just give them to charity. You’re right though, if you’re running a fund and you’ve got investors to keep happy you don’t necessarily have that luxury. Okay, Capital IQ. I listened to several of your interviews that you gave recently. I know you use Capital IQ to do some stock screens. For an individual investor, it’s a very expensive tool.

Guy: Yes.

Rob: Are there any recommendations for tools that an individual investor might use for similar research—perhaps not as robust as what Capital IQ offers, but ones you think are still pretty good?

Guy: At the time that I started doing stock screens I used some software I got from the Association of Individual Investors. I think they still have that software although I haven’t looked recently. And that is around the order of $200, I believe. That is certainly worth looking at. Value-line also has, I believe, lots of data and the ability to screen. Even though I have a subscription to Value-line, I haven’t looked inside there to see how good their data is and how easily one can screen. The other thing people have talked to me about, although I have not used it is just using Yahoo. Yahoo is a free service and has an enormous amount of data there. I’ll just think the screens shouldn’t be too complicated. You could get hung up on having enormous amounts of data and actually just some very, very simple numbers. The incredible thing is, what you get from Capital IQ is not necessary. For example, just think about companies who have reduced their share count and whose shares have gone up. Something’s going on that’s right there and it might be a good place to look. So just very, very simple cuts of the data may be really, really helpful.

Rob: I go through slowly because when I’m really focused on a company I check all of the numbers by hand whether it’s return on equity—whatever I’m focused on, I get out the 10k and I get a piece of paper and I start going through the numbers myself which probably is a good reason why I don’t have a lot of stocks because it would take me forever. That’s the nice thing about being a focused investor, you don’t have to be right to often—just a couple of times is fine. But those are great resources. I’m familiar with them. Of course, I’ve used Yahoo but I have not used the tools you’ve mentioned so those are worth checking out.

Guy: A question that’s worth asking that I think is likely to be at the core of what I do going forward is to ask a question I can’t believe I haven’t asked myself in the past. It’s simply, does this company, this management team deserve my allocation of capital to them? If you imagine a company that is gouging the customer, the product isn’t really worth it and they’re finding some way to convince the customer to buy it, maybe they don’t deserve your capital. If the company is doing—if the management were thinking about themselves as leaders in society and behaved in such a way that they would want everybody else in society to behave, I think you’d probably avoid a lot of pitfalls by doing that. What’s important about screening is that it’s not necessarily going to easily reveal those companies to you. I just think if I ask myself how many of the companies I’ve actually invested in have ended up being the result of a screen, I don’t think there are numbers that high. It may just be that the screen is just something I enjoy doing, a bit like playing chess. I go through phases. Only this year I was—actually, I should pull it out again. I shared out an email newsletter and I got so many hits to it that I took the link down because I didn’t want so many people— I thought only three or four people would access the spreadsheet and when I realized 300 or 400 people were accessing the spreadsheet I decided that was too many and took the link down. Maybe the screen is a way of seeding a search. Start with the screen. It’s like Warren Buffett starting with the As. Well, if Warren Buffett is starting with the As, maybe you and I should start with companies that offer the lowest ratios, for example.

Rob: I’ve never really used stock screens at all to search for companies but I can see how it would be useful. One of the things I like to do is compare two companies in the same industry and try to figure out… Take two banks, for example. One has—their margins on their interest—one is a little higher than the other. Try to understand why. Why is that? Is it because one bank is taking more risks on their lending portfolio? Or is it because one bank is just able to cut costs and keep costs down better? Whatever the industry is and whatever the companies are, stock screen can maybe help you with that in terms of identifying companies to compare, so that’s why I asked. I think it could be helpful.

Guy: Here’s the next step from that which I think many people don’t realize is even inside the industry or people who work on the professional side of the industry is that the information and the accessibility to it is expanding at a faster rate than the ability to analyze it. If you find an insight, Rob, don’t assume that the professionals have already seen it. That may be a reason to write it up in a short email and send it to someone who might find that information or that little piece of analysis valuable and useful. And this is something else. I don’t know if you enjoyed reading it, but I enjoyed writing it is this idea that just because you’re invested into doing analysis doesn’t mean you should just be sitting in a dark room having these thoughts on your own. When you get an insight—and I’m not saying you should go and post it in the most public place and share it with the world right away, but find some people that might find it valuable and share it with them. See what you get back. And use that to develop a network of relationships that will help looking at new things. The crazy things is, the world is such now that somebody sitting with their own personal portfolios had a career in a particular industry who can send an email to the manager of their local community bank and say, “I was looking at these two banks and I was seeing that…” might result in a very interesting and insightful conversation that may lead to an investment. It may lead to a better relationship with whomever you sent that insight to. It may lead to all sorts of things. So it’s engaging that active dialogue. Don’t be a loner on your own. Share with the world in an intelligent way.

Rob: That’s hard for me because I’m a loner by nature but that’s a good insight.

Guy: I think in some way, value investors are all loners. We all have issues socializing with other people, which is part of why we are so attracted to this value investing idea. The way the world works today is we don’t actually have to meet the people we converse with. It’s like postal chats.

Rob: Right, right. Postal chats, there’s a throwback to the 80s.

Guy: Exactly.

Rob: I can tell you, I have started many postal chess games and I’ve never finished one. Okay. So, I want to make a left turn and then I’ll thank you in appreciation for your time. Tony Robbins. You talked about him in your book. You talked about how you were very resistant to that whole self-help culture, Tony Robbins, but you nevertheless sort of dove into it nevertheless and it turned out to be a very positive thing for you.

Guy: Yeah.

Rob: I am still where you were 20 years ago with Tony Robbins. I just can’t wrap my mind around the whole—to me it’s like a big shtick which I know is grossly unfair. So Tony, if you’re listening to my podcast, my apologies. I know that’s unfair. But I want to learn from you, Guy. How do I learn from that kind of information?

Guy: I don’t know you well enough. We haven’t met in person but I don’t think you should feel bad about that at all. I’m sure Tony would accept your apology wholeheartedly and he doesn’t feel bad about the fact that you say that. I think the first reaction I have is that humanity is infinite. Minds are infinite. The variety of minds, the variety of ways people are constituted is more than anyone of us can imagine. The fact that Tony Robbins worked for me at that point in my life is not medicine for everyone—

Rob: [sneezes]

Guy: Bless you.

Rob: I don’t know how that’s going to sound on the audio.

Guy: So what happened—And I can see Rob on this video conferencing we have. There I’m talking about Tony Robbins and he said how Tony Robbins, he just doesn’t connect with him and I’m trying to explain something and he (Rob) choked on his thoughts (laughs) which is just a really interesting Freudian event in this podcast. If you see it as shtick and if it’s a total turnoff to you, I’m going to honor that. I don’t think you should feel any differently about it. I think that’s totally fine. That’s an indication of something. As long as you understand what it’s an indication of there’s absolutely no problem with that. I was not far away. I was standing in the back of the room and it looked like total shtick to me too but I was also in desperate need of something. I was in desperate, desperate need of something to kick-start me, a change in perspective in my personality that would help me start moving toward my goals. If I had been standing further back or had arrived later or if, for some reason, Tony Robbins had been more of a turnoff, I would have not made it over that barrier. But maybe, within a very short period of time, some completely different life event or life experience would have gotten me onto the same path. Maybe it would have been climbing a mountain or going off on a holiday with friends or transcendental meditation—who knows. I just think it’s really important. You don’t have to get there if Tony Robbins isn’t your type of thing. No problem. Something I tried to express to as many people as I can is, as long as you’re walking somewhere, as long you’re on any path of self-exploration, then that’s the right thing. You need to trust yourself as to what that is and don’t take anybody’s guidance. Don’t listen to Guy Spier gushing about Tony Robbins or anything else. In my case, having looked you in the eye (at least through video-conferencing) I’m pretty confident that the way he turns you off, you should not feel concerned about it.

When we have to face up to our fears and overcome our internal challenges, I think there are a lot of excuses we find not to do that because we all prefer not to do that. When we miss the appointment with the psycho therapist, we miss the opportunities to be challenged. I sense in a lot of people who don’t want to go to Tony Robbins seminar, that they want to dismiss it and what’s really going on is that they’re fearful of what they might learn about themselves or they’re fearful of making changes. What I’d really want to say to them—and I don’t think it’s the case, in your case, is just to say, “Is it that you’re really turned off by Tony Robbins or is it that you’re actually fearful about making changes and facing up to some issue in your life?” If the answer is, in all honesty, that you do have to face up to some things in your life that you’re still utterly turned off by Tony Robbins, then find another way to face up to those issues. I’ll give you one simple idea that is coming up for me. Next year will be the 25^th year of my Harvard Business School class so I will go to my 25^th year reunion. Reunions can be really hard events because they force you to confront—they forced me to confront what my hopes and dreams were then, what I’ve managed to achieve and what I’ve not managed to achieve as well as who have I become and how have I changed. That’s the reason I encourage all of my friends to attend reunions even if they’re not looking forward to it and even if they don’t like the feeling of showing up there. If it feels bad it may help you to make some really important changes you want to make in your life. My 10^th year reunion at business school was a very hard reunion because I actually wanted to be married and I wasn’t. I wanted to be married and I didn’t even have a girlfriend. I showed up to the reunion and there were all these happy classmates of mine with babies and wives and marriage photos and that was painful for me. But, it helped me to realize what compromises I needed to make and what things I needed to do differently in order to find myself in the position where I was able to get married. For your listeners, the guys who don’t like Tony Robbins—no problem, as long as you’re on a path of growth and learning in some way or other. And Rob, that wasn’t a left turn. That was a great question.

Rob: I read his book, Money, which was interesting even though it was long. Maybe I need to read, Awaken the Giant Within. Or maybe I don’t. It’s just that every person I talk to about Tony Robbins—and it’s come up with other business owners, in particular, that I know. They all love him and I’m thinking, “Am I missing out?” Maybe the better question though, for you is, did you really walk over hot coals?

Guy: (Laughs). I did. I’ve done it four or five times.

Rob: Did it hurt?

Guy: It didn’t.

Rob: I don’t get that. How is that possible?

Guy: Well—

Rob: There’s a trick. There’s got to be a trick, right?

Guy: I don’t think it’s as much a trick as it simply—I suspect if you look at the science carefully, you’ll realize that somewhere between the ashes of the hot coals and the limited amount of time you’re spending on them, it’s not that big a deal. You don’t need to get yourself into a peak state or any of those things. The real value of walking over the hot coals is a very powerful metaphor for life. And doing it in that way, having the preparation that Tony Robbins gives you and the celebration afterwards sears into every person who does the fire-walk, the experience of, “I was incredibly fearful. I’ve overcome those fears. I took the steps and here I am celebrating.” There is so much of life that requires you to do exactly that. One of the things that inspired me is—when you’ve got somebody who is stuck in a dead-end job working as a payables accountant at some company and they’re just too fearful to make the change, they come to the Tony Robbins seminar and they make the change. They come out and they know their life is going to be better. Or even more moving for me is when somebody—and you get this at every seminar, somebody who is a spouse in an abusive marriage where the spouse is abusing them. We’ve all read stories in the newspapers about how, when you’re an abused spouse, there are all sorts of reasons why you don’t leave the situation that is utterly horrific. And every sane person should leave. Tony Robbins gives them the power. In many cases, you’re a self-started. You run your own business, you’re a happy guy. You have retirement savings and you’re in a really, really fantastic place, but Tony Robbins helps people who are not in such a fantastic place. In some ways it was ridiculous to me that I was not in a great place given the enormous advantages I had in life. I’m very grateful to Tony for giving me that kick-start but some people show up to those seminars that don’t have any of the advantages I did and come out capable of taking what Tony Robbins would call, massive action.

Rob: There’s no question he’s helped millions of people.

Guy: I think of this—his name’s running out of my head but maybe it’ll come back if I talk about him. The Sea of Sales Force Corporation credits the whole sales group corporation—which the last time I checked had a market valuation of $60 billion, he credits his exposure to Anthony Robbins. I do think that being at a seminar, if you have the time and energy it really is worth showing up to a seminar just to see what it’s like, live, because it’s experiential learning. Reading a book is great but it’s nowhere near—it’s less than one-tenth of the value of being in the seminar. I would say it’s less than 100^th of being in a seminar.

Rob: Well, I will see if he’s coming to the DC area anytime soon and maybe I’ll give it a go. Maybe I’ll learn something. Listen, I can’t thank you enough for your time. So, Aquamarine Fund, before we go—and I’ll include links to it as well as to your book in the show notes so people can find them, you’re still accepting investors? Or is that a closed fund?

Guy: It’s not closed. I think that I’ve naturally put up all these obstacles to people coming in because I want it to feel to me like it’s my family in a club. But yeah, we’re open to investors—to the right kinds of investors.

Rob: What’s the right kind of investor?

Guy: It’s somebody who, first of all, has the cash to invest with cash they don’t need for at least five years if not longer. And, they want to join me in the enterprise of finding and discovering better businesses to own at a good price and becoming a partner with me in doing that. Specifically becoming a partner with Guy Spier where they don’t just want to just be a customer. There are people who have invested with me that I’ve not met but I will meet them at my partnership meeting. There’s kind of a self-selection going on which is just so enormously fun. So that’s why I say, for the right people.

Rob: I got this invitation but I’m not an investor so I assume the partnership meetings are just for the investors?

Guy: No. If somebody’s expressed interest in the fund in the past, or if you’re just a guy that I am interested in—and I’m interested in you, Rob. The partnership meetings become kind of a collection of like-minded people who are either investors in the fund or people who have expressed interest in the fund, or people I’m interested in. It’s certainly not the Berkshire Hathaway meeting but I think there is part of me that’s trying to create a miniature Berkshire Hathaway, if you like, in that I want to collect like-minded people there. Nothing would make me happier than for you— it’s happened, actually. People meet each other and they find investors. I know a couple of guys who now share office space. They do business with each other. I mean, I want all of those things to happen. I think that’s a lovely thing.

Rob: Well, God willing, I’m going to come this year. One of the reasons is so that 20 years from now when your meeting’s at Madison Square Garden because you need a place that big, I’ll be able to say, like the Berkshire folks now who went to his meetings in the ‘80s say, “Oh, I was there when we were at the Columbia University Faculty House.”

Guy: (Laughs) It is a great location by the way. And I just hope I have something useful to say.

Rob: Please, please. What I should ask for the listeners, what’s the minimum investment? Or is there one?

Guy: I’ve railed against this because it really frustrates me. I’d rather have a guy who knows what I’m about, who wants to invest $20,000 than a guy who doesn’t know anything about what I’m about who has $5 million to invest. But, because of all sorts of regulations, I can only accept an investor—we can reduce it from $1 million to $500,000 but we can’t go below that. It was very kind of you to ask though, Rob. I’m always uncomfortable answering because I want this to be adding value to your listeners and not me talking about whatever product I’m touting or something like that.

Rob: I appreciate that. Look, I can tell you right now, the listeners sense your generosity. There’s no question about that. But you’re in the business—you’re an investor. You’ve done extremely well the last two decades.

Guy: Thank you.

Rob: If there are listeners that want to explore that more, I think they should know how to so I’ll include a link to your website so they’ll be able to go and get information there. And I will be sending you back this card. I wish I could come to Zurich but it’ll probably have to be New York.

Guy: Actually, Rob, just a couple of things. I’m having so much fun talking to you. You might split this into two podcasts because there’s got to be somebody on a very long commute to listen to this point (laughs) but I have a small conference I hold every year called, Value X. I’ll send you to that website. By the way, Rob, you’ll love it. You’ll absolutely love it. Do you ski?

Rob: Not well, but I can fall down a mountain as well as anybody.

Guy: It’s skiing and talking about investing. It’s just an incredible group of guys. A friend of mine based here in Zurich—we used to organize a conference together then we had slightly different views and ideas about how to run the conference so we had two different conferences, but my friend John Miljevich in the summertime, has something called the Zurich Project. You could come here and do 20 phenomenal podcast interviews with some extraordinary minds. I won’t give you the name because that would be incredibly embarrassing to him but, I’m sitting with this guy at the Zurich Project and after about 20 minutes of conversation he tells me he’s actually a friend of Mark Zuckerberg so I immediately fall on the floor. I have to pick myself up and he said, “I’m just a friend. I’m not anything else. We’re just buddies.” But this guy had sat with Mark Zuckerberg on a regular basis and he’s just there hanging out at the Zurich Project. And, John Miljevich has this publication of managing ideas and in New York they run something called, The Lattice Work. I think he calls it, The Lattice Work, which is a similar kind of idea just like Investment Minds Meeting Investment Minds. It’s democratic and relatively low cost. My problem is that I don’t want to charge anybody any real amount of money so I always have too many people, more people who want to attend than can attend. John’s is a little bit bigger and slightly more expensive but it’s, I think, easier to become a part of it. I’m not sure. What am I telling you? There are other places. There’s the Berkshire. Have you been to the Berkshire meeting, Rob?

Rob: I’ve been twice. Once I took my wife and daughter and the other time I took our son.

Guy: These are all kind of mini Berkshire meeting type of events. It would be great to have you at my partnership meeting. I’d be so happy to have you there.

Rob: I appreciate it.

Guy: Yeah. I’ll just give you a story. It’s in my book but I was repeating it the other day and it’s such an astounding story… There I am at my first Berkshire Hathaway meeting and I go to the toilets and I’ve just taken a leak—that’s my English expression. And who comes out of the stalls but Warren Buffett. And I’m like, “Oh, my God! That’s Warren Buffett!” He looks at me—and he doesn’t know me from a bar of soap because I’m just one of his many shareholders. And he just smiles at me and says, “I always get a little nervous before these things.” It just put the icing on it for me. It humanized him, for me because he was nervous before his own meeting. And the love he showed for his shareholders—when I think that Rob Berger, who has a 2,100 rating in chess wants to come to my partnership meeting in New York, just wracks my nerves a little bit.

Rob: Buffett has a Grand Master that comes—well at least every year I’ve been, and plays blindfold, speed chess or asimial with, I think it was Patrick Wolfe the last time I was there.

Guy: That’s right.

Rob: Well, listen Guy, you’ve been terrific. This has been a lot of fun. Thank you. I will definitely be there in New York. I’m going to send this in today.

Guy: Thank you. Thank you very much. It’s been great being on your show. I think more importantly, thank you for providing an extraordinary service to your listeners and readers. Again, you emailed me out of the blue. I would not have responded the way I did unless I had heard you on the podcast and thought I could see this is a guy who has got no axe to grind. He’s got no agenda. He just wants to help other investors, which is great. We need more people like you in the world and we should celebrate the people in the world that are like you. So, I’m so happy and honored actually, that you’d want me on your podcast so thank you.

Rob: Thank you, I appreciate it.

Guy: I will send you the recording of this. What I’d like to believe is that—I kind of love playing with technology so if you split the sound track—if it’s possible, then you will be able to get my side of it recorded locally and your side of it recorded locally and you’ll get a high quality for both sides, I hope.

Rob: I hope so too. It would be terrible if you sent it to me and the audio file was blank (laughs). Let’s hope it recorded well. If not, at least you and I will have enjoyed the interview.

Guy: Exactly.

Rob: Okay. I will look for that and I thank you. I’ll email your folks when it’s live but it will be a couple of weeks before we have it up.

Guy: Oh, cool. Yeah. Do you use some kind of editing service?

Rob: Well, I edit my own. I normally don’t edit interviews at all. Even with my hacking and coughing, I may or may not edit it but I have the software to do that if I need to.

Guy: And, is chess24 better than Internet Chess Club?

Rob: I think chess24 is one of the best out there. You can join for free. They do have a premium thing that gives you a few extra features. It’s a great interface, very easy to use. They have an app for the iPhone if you want to play on your phone or iPad.

Guy: I’ll take a look. And, what’s your handle?

Rob: My handle is odd. It’s boogonie. It’s actually a nickname I had in college. It was a play on the word Berger and benoni. Benoni is an opening for black that I used to play so somehow they called it the bergnonie—I don’t know why. But it’s boogonie. I have a little picture of myself, kind of like the kind that is in The Wall Street Journal except that I weighed about 30 pounds more than I do today.

Guy: You’re looking pretty trim, I must say. Good job.

Rob: I look a little chunky on chess24. That’s what a bad back will do for you. I had terrible back problems and if you ever want motivation to work out and get into shape, have a bad back.

Guy: Well, hopefully I’ll find another motivation.

Rob: Right, right. Again, thank you. I’ll look for the audio. It’s been great.

Guy: Have a good rest of the day.

Rob: You too, take care.

Guy: Bye.

Topics: Investing

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Monday, July 10, 2017

An Interview with Famed Value Investor Guy Spier

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