📚The Education of a Value Investor by Guy Spier 📚

It is a good read on Guy Spier’s journey and learnings to become a value investor. To be a serious investor is akin to a professional sports person where the environment, habits and investment procedures must be worked on beyond just technical knowledge and around weaknesses (irrationality). He went on to embrace the values and characters of great investors such as Warren Buffett, Charlies Munger and Mohnish Pabrai to be better investors and better people we can be. The book is not a value investment how-to.

The perils of an elite education

He graduated from Oxford University with a first-class degree and MBA from Harvard Business School. He was book and examination smart that get through the education systems and go on to prestigious schools and universities. Graduating from such prestigious universities with good results made him believe that he is more intelligent, highly analytical and logical than most. It leads to ignoring many things that may be right and true and worse, disbelieving what was taught may not be right such as the efficient market hypothesis. The world is not constructed in a theoretical and logical manner; people can still make foolish and immoral decisions and societies are more complicated.

Being from elite education can also inflate one’s ego and made people to be driven in large part by what Warren Buffett calls “the outer scorecard” — that need for public approval and recognition which can lead us in the wrong direction. This is a dangerous weakness for an investor since the crowd is governed by irrational fear and greed rather than by calm analysis.

Value investors have to be able to go their own way. The entire pursuit of value investing requires us to see where the crowd is wrong so that we can profit from their misconceptions. This requires a shift toward measuring ourselves by an “inner scorecard”. The real goal is not acceptance by others, but acceptance of oneself.

Rather, be open-minded to keep learning and relearning.

Warren is better in his 70s and 80s in many ways than he was when he was younger. If you keep learning all the time, you have a wonderful advantage.

Charlie Munger

The Fire Walk

A step out of his comfort and intellectual zone was attending a seminar by Tony Robbins. He was sceptical but he showed up. He felt that the benefits of the seminar were uncertain but potentially high upside — “Heads, I win. Tails, I don’t lose much”.

Our consciousness changes our reality. Positive statements that Robbins got them to repeat were a powerful tool in reconfiguring his consciousness. Walking on red-hot embers was a transformative experience as Robbins puts it: “Life can change in a heartbeat”. A goal that seems impossible in one instant can become entirely possible in the next if only you are willing to devote every ounce of your mind, body, and soul to reach it. Robbins hammered into his head the idea that, if you want to get somewhere, anywhere and you’re stuck, “Just Do It! Just make a move, Any move!”. This breaks the patterns of negative thought, pushes through the fears and gets moving.

Lunch with Warren, 2008

In 2008, Guy Spier together with Mohnish Pabrai won their bid with $650,000 for a charity lunch with Warren Buffett.

Learnings from Warren Buffett:

  • People will always stop you from doing the right thing if it’s unconventional.
  • It’s very important always to live your life by an inner scorecard, not an outer scorecard.
  • People too often justify their improper or misguided actions by reassuring themselves that everyone else is doing it too.

One of Buffett’s defining characteristics is that he so clearly lives by his own inner scorecard. It isn’t just that he does what’s right, but that he does what is right for him. His strength comes in part from his rock-solid sense of who he really is and how he wants to live. There is no artifice; no need to live according to other people’s standards or opinions.

Guy set his goal: not to be Warren Buffett but to become a more authentic version of himself. The path to true success is through authenticity.

Investing learnings

If you weren’t scared, you weren’t paying attention.

Warren Buffett on financial crisis

Temperament is more important than IQ when it comes to investing. The financial crisis has demonstrated with brutal efficiency just how irrational rational investors can be especially in extreme situations. We are not that rational and we can easily be part of the madness of crowds. Managing the nonrational part of his brain become an integral part of managing his stock portfolio.

It is not just that our brains are highly irrational. It is also that the economic universe operates in ways that are mind-blowingly complicated. The economy is a complex adaptive system. It is helpful to think of the economy as an evolving and infinitely complex biological ecosystem. Models derived from biology may work better. Companies, like ant species, must adopt strategies that enable them to thrive or they will be at risk of extinction. The intelligently elegant and neat economic theories from universities did not come close to describing the true complexities of the economy or the financial markets.

Hence, Guy banished the false assumptions that he thought he is truly capable of rational thought. Instead, he realised that one of his only advantages as an investor is the humble realisation of just how flawed his brain really is. Once he accepted it, he designed an array of practical workarounds based on his awareness of the minefield within his mind.

All of us have mental shortcomings and everyone can be dramatically different from each other. Hence, it is critical to structure our environment so that our brains are not subjected to a barrage of distractions and disturbing forces that can exacerbate our irrationality.

On moving away from New York to create his ideal environment
Reference to Nicholas Taleb’s book The Black Swan: The Impact of the Highly Improbable. Guy describes big cities as “Extremistan”. From various studies, the disparity between our own wealth and our neighbours’ wealth can play a significant role in determining our happiness. He prefers a place where the differences are less extreme; “Mediocristan” where life is more mundane and he chose to move from New York to Zurich.

Playing bridge to hone his skills in life and investing
Warren Buffett, Charlie Munger, Bill Gates and Mohnish Pabrai are bridge fanatics. Guy thinks that bridge is the ultimate game to prepare oneself for investing. For investors, the beauty of bridge lies in the fact that it involves elements of chance, probabilistic thinking and asymmetric information. When the cards are dealt, the only ones you can look at are your own.

In investing, we constantly operate with limited information. It is simply not possible to have a complete understanding of anything. We are never truly going to get to the bottom of what is going on inside a company, so we have to make probabilities inferences. His familiarity with bridge had helped him to become more adept at operating with uncertainty; many investments are acutely uncertain but not as risky as they at first seem (balancing risks, rewards and uncertainty).

His investing rules

  1. Stop checking the stock price
  2. If someone tries to sell you something, don’t buy it
  3. Don’t talk to management
  4. Gather investment research in the right order — his routine is to start with the least biased and most objective sources
  5. Discuss your investment ideas only with people who have no axe to grind
  6. Never buy or sell stocks when the market is open
  7. If a stock tumbles after you buy it, don’t sell it for two years. Before buying any stock, make sure you like it enough to hold on for at least two years, even if the price halves right after you buy it. Hence, he consciously assumes that the price will immediately fall by 50 per cent and he asks himself if he will be able to live through it. He will buy only the amount that he could handle emotionally if this were to happen.
  8. Don’t talk about your current investments. Don’t say anything publicly about his investments that he may live to regret.

Investor’s checklist

The brain is simply not designed to work with meticulous logic through all of the possible outcomes of our investment decisions. The complexity of the business and economic world, combined with our irrationality in the face of money-related issues, guarantees that we will make plenty of dumb mistakes. Besides habits and processes, we need a checklist. Its goal is to avoid obvious and predictable errors; as a pragmatic way to cope with complexity and as a survival tool based on the haunting remembrance of things past. It is a final circuit breaker in his decision-making process.

Reference: The Checklist, The New Yorker, Atul Gawande (December 2007)

Everyone will have their own different checklist as it needs to reflect their own unique experience, knowledge and previous mistakes.

Doing business the Buffett-Pabrai way

The best way to learn is to surround ourselves with the right people. As Watten told Mohnish and Guy at their charity lunch: “Hang out with people better than you and you cannot help but improve“.

There’s no limit to what you can do if you don’t mind who gets the credit.

An old adage that Ronald Reagan loved

Mohnish seemed simply to ask himself: “What can I do for them?”
By acting in this way, he sees that Mohnish created an incredible network of people who wish him well and would love to find ways to help him and thank him for his kindness. This is the extraordinarily powerful effect of compounding goodwill by being a giver, not a taker. The paradox is that you end up receiving infinitely more in life by giving than by taking. A real irony: in focusing on helping others, you end up helping yourself too.

His response to my message.

Warren told a class at Georgia Tech, “When you get to my age, you will really measure your success in life by how many of the people you want to have love you actually love you. I know people who have a lot of money and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them. If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster. That’s the ultimate test of how you have lived your life.”

He continued, “The trouble with love is that you can’t buy it. You can buy sex. You can buy testimonial dinners. You can buy pamphlets that say how wonderful you are. But the only way to get love is to be lovable. It’s very irritating if you have a lot of money. You’d like to think you could write a check: I’ll buy a million dollars worth of love. But it doesn’t work that way. The more you give love away, the more you get.” Of all the lessons that Warren has taught Guy, this is the most important. Anybody who sees Buffett merely as a great stock picker is clearly missing the point.

Think abundance; not a zero-sum game.

Another important point Guy make is how we learn — by watching people who are better than us, modelling their behaviour, and then experiencing for ourselves why their approach is wise and works. Books are a priceless source of wisdom. But the people are the ultimate teachers and there may be lessons that we can only learn from observing them or being in their presence.

Mohnish often quotes a line from Bible, “I am but dust and ashes.” He is a work in progress. Mohnish shows that it is possible to be a servant without losing autonomy, self-respect or ambition.

Through Mohnish and Warren, Guy began to realise to focus more on what others need from him instead of constantly trying to get them to fulfil his own needs. His simple rule was that whenever he met someone, he would try to do something for them. The crazy thing is that when you start to live this way, everything becomes so much more joyful.

The goal is not to be Warren Buffett or Mohnish Pabrai but to learn from them. In big ways and small, he sees Warren and Mohnish as grandmasters in the game of life. To repeat that all-important line from Warren: “Hang out with people better than you and you cannot help but improve”.

The quest for true value

If your goal in life is to get rich, value investing is pretty hard to beat. Irrational exuberance comes and goes. The quest for value endures.

The inner journey is the path to becoming the best version of ourselves that we can be and Guy feels that this is the only true path in life. It involves asking questions such as: What is my wealth for? What gives my life meaning? and how can I use my gifts to help others?

The inner journey is not only more fulfilling but is also a key to becoming a better investor. To understand one’s inner landscape (fears, insecurities, desires, biases and attitude to money), one is likely to be mugged by reality. Embarking on the inner journey makes him more aware and began to see his flaws more clearly and work to overcome them as he acknowledges these flaws.

Intellectually, it is easy enough to master the technical tools of investing (read financial statements and identify undervalued companies) but what good are these skills to investors who are drowning in a sea of fear that utterly overwhelms the rational neocortex?

Taking personal responsibility rather than blaming others is crucial.

Serious investors need to understand the complexities of their relationship with money, given its capacity to wreak havoc. We have to understand what makes us different, and then make investments that we can handle emotionally, based on this self-knowledge.

Adversity is a good tool for internal growth; may be the best teacher of all. Our own mistakes were an acceptable part of the learning process. If we take responsibility for our mistakes and failures, they offer priceless opportunities to learn about ourselves and how we need to improve.

His greatest springboard for the inner journey has been to participate in what Napoleon Hill would call a “mastermind” group. The idea is for a close-knit group of about eight to ten professionals to share their issues confidentially, guided by a peer moderator.

The truth is that it does not matter how you do this inner journey. What matters is that you do it. Whatever route you choose, the goal is to become more self-aware, strip away your facades and listen to the interior. For an investor, the benefits are immeasurable because this self-knowledge helps us to become stronger internally and be better equipped to deal with adversity when it inevitably comes. The stock market has an uncanny way of finding us out, exposing weaknesses as diverse as arrogance, jealousy, fear, anger, self-doubt, greed, dishonesty and the need for social approval. To achieve sustainable success, we need to confront our vulnerabilities, whatever they may be. Otherwise, we are building our success on a fragile structure that is ultimately liable to fall down. But the real reward of this inner transformation is not just enduring investment success. It is the gift of being the best person we can be.

Know yourself. Be yourself and be the best of yourself. Aware of the irrational brain. Beyond you to others.