What Guy Spier Can Teach You About Investing
April 10, 2017
Greed is good.
Guy Spier, a South African value investor based in Zurich, used to believe that. In fact, in his early career the current head of Aquamarine Fund used to idolize Gordon Gekko.
That was before he fell in love with the teachings of Warren Buffet, the Oracle of Omaha. Spier is such a fanboy, once he and a friend paid over $500,000 for the chance to have lunch with him.
While he’s drifted away from Buffet slightly these days, he still has immense admiration for the man who he feels has always managed to grow and evolve as an investor.
Spier started his career in the financial sector with Braxton Associates, the firm that go on to become Deloitte Consulting. This, after a robust education at Oxford, followed by an MBA at Harvard Business School. Guy doesn’t mess around.
As Spier earned his finance chops he turned to the wisdom of Warren Buffet as well as Buffet’s mentor, Benjamin Graham. Every year, he would look at the companies Buffet invested in and try to figure out why the investing legend had allocated his capital in such a manner.
In 1997, Spier was inspired to start Aquamarine Fund in New York City after reading Ben Graham’s “The Intelligent Investor”. The fund was an investment partnership, in the mold of the investment partnerships Buffet put together early on in his career. Believing peace of mind to be a big factor in investing success, Spier would eventually move the fund to Zurich. Like Ray Dalio of Bridgewater Capital, Spier believed he needed to get far away from the group-think of his industry peers.
It’s worked out beautifully.
Since the inception of the fund, Spier has nearly doubled the return of the S&P 500.
Source: Old School Value
Guy’s Investment Philosophy
Guy Spier is a brilliant investor. At first he based his philosophy on Benjamin Graham and Warren Buffet. And why not? They’re incredible and genius investors in their own right, but like Bruce Lee, Guy knew he had to take what he liked, discard the rest and add his own special sauce to the mix.
Buffet often invests in big companies, the American Expresses and Heinzes of the world. Spier tends to go after smaller companies. He believes that value investing as a philosophy has exploded in popularity, and therefore it’s becoming harder and harder to find undervalued companies.
That’s what a value investor does. Like a soccer mom on Black Friday, they’re on the hunt for a great bargain. They want to pick up that name-brand flat screen TV for 80% off.
Spier uses the concept of “spin-offs” to illustrate how the market for undervalued stock picks has changed.
Many investors advocate investing in spin-offs, companies created from within a parent company and “spun-off” into its own entity. These orphan stocks can be attractive to investors looking for deep value because the stock prices of these companies tend to be very low.
This is due to a few reasons:
- Perception: if the parent company got rid of this part of their business then it must not be anything special right?
- Data lag: the financials for these spin-offs can take two to three months to come in. The average investor, using automated screens to identify new and exciting opportunities, may not be aware the company exists until the data comes in
- Underselling: the executives at spin-offs aren’t always incentivized to sing their company’s praises. These C-level players receive stock options based on initial trading prices, so the cheaper the price is when those options go live, the better for them in the long-run.
Even so, spin-offs are becoming less lucrative to value investors. There are funds being created whose only job is to dig up profitable spin-offs. Finding and making money off of spin-offs has become an industry onto itself. Keely Asset Management for example, runs several mutual funds that focus on unearthing “companies in transition”.
With that said, Speier still believes there are pockets of inefficiencies that he can find. Here are the keys points of his investing philosophy:
- Use a checklist
Spier is really into checklists.
He was actually featured in The Checklist Manifesto: How to Get Things Right by Atul Gawande. In that book he talks about using a checklist when making investment decisions, as a means of stopping himself from making the same mistakes over and over again.
- Don’t Talk to the Management
Guy has since softened on this one but does believe that an investor must do their due diligence in terms of analyzing the company before speaking with anyone who works there. He would rather his first impressions of a company come from his own analysis.
- Stop Obsessing Over your portfolio
When investing, Spier tries his best not to look at the daily or even weekly movements of stock prices. He advises people set up a system where you check your stocks once a quarter or even yearly. The point of value investing is that you’re not going to see returns for 2-5 years anyways, so why burden yourself with the daily fluctuations of stock prices.
- Don’t buy what someone’s selling you
Spier doesn’t buy anything that’s being sold to him. He doesn’t trust him brain to not get swept up by listening to a brilliant salesperson. Take the time to do your own research rather than have someone else pitch you an idea.
- Look at the company filings
As Speier figures out which companies to invest in, he starts by looking at the 10-K, 10-Q, annual report and proxy statement. Looking at this documents all together and not as separate entities helps to get a clearer picture of the company. Only after that will he look at the more subjective findings such as press releases, earning announcements and so on.
- Do Nothing
Investors get antsy and want to invest for the sake of investing. Guy Spier tells us that often times the answer is to just do nothing. Don’t get swept up chasing money. Value investing is long term investing.
So what’s the secret sauce?
For Guy Spier, the secret is that there is no secret.
He’s a straight-forward value investor who does his homework and finds bargains where others aren’t looking.
Remember how we’d mentioned that Guy Spier is moving away from Warren Buffet’s modus operandi? As it turns out, he’s leaving the church of Buffetology and going back to the arms of Benjamin Graham.
Guy’s fund was hit hard during the recession of 2008. The financial collapse taught him some tough lessons and he concluded that if you focus on big name companies, you leave yourself exposed to big price dips. In 2008, so-called better businesses (think Coca-Cola and IBM) fell in price more rapidly than others, and Guy felt it more than most.
Here’s what he said in an interview:
“I lost more money owning those businesses than I would have if I had owned the right cigar butts…”
Cigar-butt investing is something Benjamin Graham came up with. One invests in less sexy companies that are trading at a discount. Imagine walking down the street and finding a cigar butt on the ground that’s good for one last puff. You probably wouldn’t care too much, given that it’s a filthy cigar butt on the floor but the idea is that these unsexy, or even distressed stocks have one last, free puff left in them.
Ben Graham even left us a way to find those cigar butts.
There’s a technique called Net-net investing, which values a company based on its current assets and liabilities. It was developed by Graham at a time when most financial information wasn’t as readily available as it is today.
What you do is calculate the Net Current Asset Value, NCAV, for a group of companies.
That’s total current assets minus total liabilities, divided by the number of common shares outstanding. Graham would only buy the stocks that had a stock price that was 2/3rds of the NCAV per share. So if Apple is selling for $66 then the NCAV per share needs to be around $100. That way, there’s a nice margin of safety.
We can easily identify possible Cigar Butts using Buycel. With just a few clicks, we can bring in a list of all the companies in the Consumer Durables Sector.
In seconds, I’ve got a list of over 350 companies to analyze. Applying Graham’s formula we can then rank all the companies in the Consumer Durables sector by the ratio of their share price to their NCAV per share.
Working with a subset of those companies, we are able to identify two companies that are trading at 2/3rds their NCAV per share value: China Botanic Pharma and Pacira Pharma.
Ben Graham would be so proud!
That exercise was one of digging for deep value, something Guy Spier is well-acquainted with. He looks for value any place he can find it. From his perch in the middle of the globe, in Switzerland, he can have breakfast with Asia and dinner with the America’s while finding the perfect way to grow his investment portfolio.
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