What would you do if you had $650000 lying around? Buy a new car? A new house? Perhaps a vacation home in the Bahamas? Or would you have paid for a lunch with Warren Buffett?
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| The Education of a Value Investor |
The latter is what a man named Guy Spier choose to do. I hope he received some splendid stock tips to go with that tuna! Ok, to be fair the money went to charity and he shared the cost with Indian investor Mohnish Pabrai but nevertheless, why? Well, Warren Buffett, without knowing it, had changed the course of Guy Spier´s life – functioning as a silent mentor for him.
Mimicking Buffett helped Spier in his investing career and he copied the setup of Buffett´s early investment partnership when creating his Aquamarine Fund – which he still manages today and which has made himself, and his coinventor's, very rich.
Let us dive in and discover what factors Spier thinks were the main ones that helped him on his path on becoming a successful investor so that we too can one day pay some hundred thousand dollars for a lunch.
This is a Top 05 Takeaways summary of The Education of a Value Investor, written by Guy Spier. And this is the Healthy Mind - Think Big, giving you the best tips and tools for reaching financial freedom, through stock market investing.
#01 : GET A MENTOR, DEAD OR ALIVE
Even though Spier had a great education, he still felt lost early in his career. He lacked a guide in his life, a compass. To get a hold of a compass, that tells you in which direction to go, is the major thing that accelerates the process of achieving whatever goals you might have according to Spier.
Spier found out about Value Investing and Warren Buffett some time into his career as an investment banker on Wall Street. This discovery changed the trajectory of Spier´s life– for the better. He read, and re-read Buffett´s annual reports, and studied the companies in his portfolio. He started to think more like Buffett, and often thought to himself: “What would Warren do in my shoes”? The ability to mimic somebody else´s actions is how we humans advance – from childhood and onward. This is a natural and effective instinct, and yet, people tend to stop copying from superiors once one´s parents aren’t idolised anymore. Individuals who keep on reading, learning, and copying skills from persons who are ahead of them will advance much faster than those who have stopped thinking that they’ve learned everything already and the good thing is that these guides or compasses don’t even need to be alive. “Make friends with the eminent dead” - as Charlie Munger calls it. There is a tremendous amount of wisdom buried in the past, and one must only read a few books to get a hold of it.
No matter where you want to go; find a compass that can lead you along your path, someone who´s actions you can mimic, someone who has already discovered the truths that you need to learn! By the way - a great way to learn “What would Warren have done?” is to study his most important investments, and there’s an in-depth blog about that on this website.
#02 : THE ANCHORNAME DEBT
To make a fortune in the stock-market requires you to be rational over a long period of time. To succeed with this, you need a system that helps you in this process. Just as there are routines that pulls you forward – reading, subscribing to this blog website, watching through all of Berkshire´s annual meetings, studying finance, etc. There are also things that can drag you down, and make you less rational.
One of the most damaging ones is debt. Mistakes become much more expensive using debt and what is the number one rule of investing? That’s right – it’s to never lose money. Debt deteriorates your thinking process during times when you need it to be at its best. To succeed with Rothschild´s “Buy when there is blood in the streets”, you and your portfolio cannot already be wiped out when it’s time to start buying. Imagine being Guy Spier, who sat at his desk in Manhattan on the afternoon of September 15, 2008 watching financial history unfold as Lehman Brothers, one of the major investment banks, had just filed for bankruptcy. Potentially almost all of his family’s net worth was at risk, along with the savings of dozens of his friends, relatives, and business associates. Even so, in this moment of crisis he said that he felt strangely calm. He managed to get out of the crisis - accelerating. But what would have happened if he, during this time, had been leveraged to his teeth? Would he have been wiped out? Not continuing to do what he loves? Been ashamed of losing the better part of his family´s and his friends´ money? Don´t use leverage because frankly, to make huge money in the stock markets, you don´t need it.
#03 : CREATE YOUR VERY OWN OMAHA
The financial world is a distracting place. Even though you have set up your strategy and aligned your process you can always compare your results with your neighbor. And you might get tempted to switch strategies after only a short period of under-performance because hey – look at those nice results over there! One of Spier´s most drastic moves is his attempt at creating his very own Omaha and you should do this too! He moved to Switzerland with his family to set up in an office a bit outside Zurich all to avoid the constant wheeling and dealing of Wall Street. Perhaps you don´t need to be all that drastic but the main point is that you need to do what you can to shut the noise out.
Is Twitter actually helping you in your thinking process, or does it simply make you jump in and out of every “soon to be 10-bagger”? If so, delete the app, and don´t return until you are more comfortable with your own process.
Consider Warren Buffett’s own daily routine at the Berkshire Hathaway office in the Kiewit Tower in Omaha. He consumes information from newspapers, annual reports and trade press primarily. Buffett admittedly likes to read a lot, he spends about 80% of his day doing it, but he tries to get first-hand information and not someone else’s opinion on things. This is how you excel All other ways of finding great investment opportunities are oftentimes just distractions.
#04 : THE REWARD GOES TO THE INACTIVE
This is a reoccurring takeaway, but it is always worth repeating. Wall Street and brokerage firms are rewarded for activity, common stock - investors such as you and me are rewarded for inactivity. Charlie Munger calls it “sit on your ass investing”. And Christopher Mayer, author of the book 100-Baggers, said this about keeping superior stocks for a long time: “one who buys right must stand still- in order to run fast”.
The stock market should be viewed as a place you visit every once in a while to do your reallocation. It should be kept at a safe distance in all other circumstances. You are an investor, selectively picking stocks that you believe will outperform the rest of the market. Don´t spend time and brainpower watching the constant ups-and-downs, updating just to see if you are a little bit richer than 3 minutes ago. Focus instead on your process - this is what actually creates value. To help you in staying inactive, Spier has a great rule, which he got from The Dhandho Investor - Mohnish Pabrai. Don´t trade any stocks while the market is open. Instead, wait until trading hours have ended, and only then do your reallocations for the next day. This will keep your emotions at a safe distance, calm your desire to act, and help you to stay rational. Think about it.
Have you ever skipped making an investment because the price for the stock moved up just a little as you were going to buy it? If that’s the case, you aren’t using a large enough margin of safety. Following the market on an hour-to-hour basis is like sailing though a thunderstorm without a compass. Blindfolded. Following the fundamentals of companies you are interested in, only occasionally checking for price discrepancies, is like cruising on a calm summer’s day. With your beautiful spouse sunbathing in the front. Nice …
#05 : DON'T CHIT-CHAT ABOUT YOUR INVESTMENTS
This takeaway is yet another one to help you optimize your process and minimize the risk of circuit breaks. By not talking about your investments, and perhaps even more importantly; about which size of your portfolio specific investments constitute you will have an easier time staying rationale as the story of the companies unfold. This enables you to better re-evaluate and update your thesis.
It is much more psychologically difficult to change your opinion about a stock after you have spoken about it to plenty of other people. This is also something which Charlie Munger agrees on, who said: “What you are shouting out, you are pounding in” He has also said that: “The human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can’t get in”. Robert Cialdini´s findings from his book Influence can help us to understand why it is easier to stay unbiased by not disclosing your portfolio to other people. Two biases that are adjacent and reinforcing are the commitment and consistency tendencies. A bit simplified; humans who were clear about their motives and stayed consistent, historically had a higher survival rate in the hunter-gatherer era. These traits are therefore subconsciously active even today and they can make us quite irrational. Cialdini writes about a 1966 psychology experiment in which people living in Palo Alto were asked if they could do a favour for the community; a favor that would benefit them all– and not cost anything. Some days later, they were asked to put an ugly sign on their front lawns to stop drivers speeding through the neighborhood. Residents who had previously committed to doing something inexpensive to help their neighborhood found it extraordinarily difficult to change their stated position, even though this clearly wasn’t “cost-free” so they typically felt obliged to install these signs.
In order to not fall into the trap of commitment and consistency tendencies try to keep your cards close to your chest.
Now, go copy someone you admire; We all need a compass! If you want to copy Warren Buffett, this is a great post to learn about the most important investments that he has ever made. Perhaps you’ll be able to spot similar situations in today’s markets. Cheers guys! See you soon!