Highlights from Podcast with Howard Stevenson “Wealth and Families”

Full transcript is available here – https://www.angelinvestboston.com/ep-29/#ep-29-transcript

Howard Stevenson, Founder, Angel & Scholar of Entrepreneurship – “Wealth & Families” Ep. 29

He’s the ST in Baupost Group. While he was president at Baupost they had about 17-18% returns and His four main criteria for investing are (1) Are they Honest? Will they tell you what is happening (2) Are they nice? Will they lookout for people other than themselves? (3)Are they curious? Will they keep trying to understand more and solve the problems? (4) Are they smart?

Stay out of the velvet lined rut.

But, part of the motivation of leaving was that I saw a lot of people in this “Velvet-lined Rut’. That it’s very easy when you’re successful, to keep doing what you’re already doing. But, in fact, the only way you can get from doing the wrong thing to the right thing, is probably doing the right thing poorly. And, so you have to learn, and I watch people who run the top of the little hill, who didn’t want to go down in the valley to try something new.

Favorite question to ask VCs

“Tell me about the sharpest deal you ever did?”

And, it’s amazing what people will tell you. One guy told me how he cheated the IRS. And you say, “Well if they can send you to jail, and I can’t, and you’re still willing to do it, I think I know something about your value system.”

It’s very important to learn from other mistakes and quite cost-effective.

HOWARD STEVENSON: I have a sign in my office at home that says, “It’s great to learn from other people’s mistakes, and you’ve been a real blessing to me.”

SAL DAHER: Yeah. The ability to learn from other people’s experience. It’s a lot cheaper than learning from your own experience.

HOWARD STEVENSON: That’s what you try and do as a teacher is … But, you also have to say there is no one right way. The business plan, no I’ve never had a business plan that worked out the way it was written.

Planning helps you think about things better but might not be that helpful overall.

In your book, I think you quote Eisenhower saying, “Planning is everything. Plans are nothing.”

HOWARD STEVENSON: That was my doctoral dissertation. Had a lot to the defining strengths and weaknesses. Didn’t matter what you wrote down at the end. It was, you were asking the question, “How do we compare to the other people trying to accomplish the same thing we are?”

SAL DAHER: So, going through the process of planning, you develop understanding. Even though things don’t work out as you expect, at least you know a little bit about the lay of the land. So that when things change, you can regroup and do an informed approach.

On hiring Seth Klarman and how Baupost started

HOWARD STEVENSON: I’ll start with a recent search that I was working on for a not for profit. The people said, “We need to hire somebody like, X.” And I said, “No you’re going to be hiring someone like X was 30 years ago.”

SAL DAHER: Yeah.

HOWARD STEVENSON: That was true of Seth. Here you had an extremely bright young man, who loved two things.

 1. He liked stocks.

 2. He liked betting.

SAL DAHER: But what is it that you saw in Seth, that set him apart?

HOWARD STEVENSON: The same things that I talked about earlier. He was honest. He’d worked for honest people.

SAL DAHER: Mm-hmm (affirmative)

HOWARD STEVENSON: I wouldn’t hire somebody from, you can name the firm.

SAL DAHER: Absolutely, yeah.

HOWARD STEVENSON: He doesn’t even need to work there, I don’t want to work for me. He certainly understood the charitable notions that I think the other founders had. I think they were all deeply committed to other people, and that was attractive to him.

SAL DAHER: Mm-hmm (affirmative)

HOWARD STEVENSON: It wasn’t, they were trying to make the most money, and so you saw the niceness come through there. Clearly curious, you don’t work the pink sheets if you’re not curious.

Younger people seem to work less today. I don’t know if this is necessarily true?

Yeah, so they’re highly incented to do that. And, it’s consonant also with your idea of having the children be brought in early on wealth, brought in early on responsibility for money, and so forth. Which unfortunately nowadays, children really don’t have much of a sense of that, of responsibility with money, and so forth. They don’t work, they don’t make their own money. At least in my experience, children in America work a lot less, than they used to 20, 30 years ago.

And a few good quotes to close off the post.

HOWARD STEVENSON: Because, as my grandmother would say, “Your actions speak so loudly, I cannot hear a word you say.”

HOWARD STEVENSON: What I say is, “the first million dollars is really hard, and the second million is a matter of time.”

HOWARD STEVENSON: I’ll probably do quite well over time, because even if you buy something at 10 times earnings, and it’s got 5% growth, you’ve got a 15% yield.

SAL DAHER: Because serving your customer well is what assures continued growth, continued profitability over the long term, and not just the short bursts in the first few years.

HOWARD STEVENSON: He said, “Sometimes the best investment is going to the beach.” As you might know from Baupost’s history. Many times, we have 45% cash. 30% cash. In our case, now we do things that structure deals. I’m not expecting to shoot the moon. We’ve structured some preferred stocks like Warren Buffett does. He just did a deal with an 8% preferred.

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Highlights from Podcast with Howard Stevenson “Wealth and Families”

Peter Thiel Excerpts from Conversation With Tyler Cowen

Peter Thiel on Stagnation, Innovation, and What Not to Call your Company (Ep. 1 — Live at Mason) 

 

View story at Medium.com

Technology related businesses have benefitted from relatively relaxed regulatory scrutiny in the past.

There’s the question of stagnation, which I think has been a story of stagnation in the world of atoms, not bits. I think we’ve had a lot of innovation in computers, information technology, Internet, mobile Internet in the world of bits. Not so much in the world of atoms, supersonic travel, space travel, new forms of energy, new forms of medicine, new medical devices, etc. It’s sort of been this two-track area of innovation.

There are a lot of questions of what has caused it and I think maybe that’s a good part to start in terms of what gets you out of it. On a first cut, I would say that we lived in a world in which bits were unregulated and atoms were regulated.

Mild form of Asperger’s might be just what you need to drive breakthrough innovation today.

Certainly, there probably are some people who are just vaguely oblivious to it, so in Silicon Valley, I point out that many of the more successful entrepreneurs seem to be suffering from a mild form of Asperger’s where it’s like you’re missing the imitation, socialization gene.

It happens to be a plus for innovation, and creating great companies, but I think we always should turn this around as an incredible critique of our society. We need to ask, what is it about our society where those of us who do not suffer from Asperger’s are at some massive disadvantage because we will be talked out of our interesting, original, creative ideas before they are even fully formed?

Japan is underappreciated as one of the least conformist societies in the world and has quite the innovation record in several areas.  

My suggestion is that perhaps at this point, Japan is the least conformist, the least imitative country in the world. There’s actually a lot of interesting aesthetic cultural stuff going on, there still is a lot of very successful types of businesses. There’s innovation in food production, all sorts of interesting areas.

 

But then it’s an indictment of the West, where I think Japan is no longer the Japan of the Meiji Restoration of the 1870s, or the Japan of the cheap plastic imitation toys of the 1950s. It’s a country that no longer thinks it can get that much by copying the West. There’s probably still some narrow interest in IT and software. Outside of that, I think they are copying the US and Western Europe less and less.

People aren’t even learning English that much anymore. They’re speaking less English than they were 15, 20 years ago. The golf courses are all getting shut down and converted to solar farms or something; people don’t even want to play golf anymore. I think we need to take this as a real critique of our society, very seriously, that they’re finding less that’s desirable to imitate in the US or Western Europe.

He thinks that looking back it will become clear that we hit peak finance and globalization in 2007.

What Virginia and New York, or let’s say DC and New York City, have in common is that they’re centers of globalization. Finance is an industry that’s fundamentally leveraged to globalization, and DC is fundamentally leveraged to international geopolitics.

I would bet on globalization slowly being in abeyance. I think with the benefit of hindsight, we will realize that 2007 was not just the peak year of the finance boom, but also the peak year of globalization, like maybe 1913. Happily, it hasn’t resulted in a world war, at least not yet, but I think we are in this period where globalization is steadily pulling back.

TC:… As you may know, before 2007, trade is going up at a rate three times higher than world GDP. Post the crisis, trade and world GDP are going up at about the same rate. I think in rate terms, that has peaked.

When pair trading values in life go long substance short status

All those elements are quite good. I think that it’s always a mistake to be too focused on prestige and status. This is always a great temptation in many areas. Academia is one that’s extremely prone to this.

I would always be long substance, short status. The temptation is to try to get more respectability within an academic setting or within some sort of a broader audience. If you try to get respectability, it will always come at a price of softening the edges, modulating what you say. You want to always put substance over status.

here are a lot of things that people can do, that are strikingly underexplored. There are certainly all these vocational careers where people can do quite well.

 They are somehow considered not cool, not prestigious. The average plumber makes about as much as the average medical doctor. I do think this idea of what’s unfashionable is very important as an initial anchor. There’s no reason that people of average ability are going to be more pushed towards what’s fashionable than people who are very smart.

I think often the smarter people are more prone to trendy, fashionable thinking because they can pick up on things, they can pick up on cues more easily, and so they’re even more trapped by it than people of average ability.

PT makes the case that we aren’t really living in a democracy in most cases.

We’re living in a representative republic, but then that’s modified through a judicial system. Of course, that’s been largely superseded by these very unelected agencies of one sort or another, which really drive most of the decision-making.

I think calling our society a democracy, whatever may be good or bad about democracy, is very, very deeply misleading. We’re not a republic. We’re not a constitutional republic. We are actually a state that’s dominated by these very unelected, technocratic agencies.

How can having so many lawyers in government be the means to efficiently progress as a society?

In terms of investing in science and technology, it seems to me that the minimum criterion for doing it is to have some understanding of these things and some ability to evaluate them properly.

In a government in which two-thirds of the representatives are lawyers and in which . . . Again, just using the House and Senate as a proxy for our government, by a generous count, no more than 35 have degrees in engineering or science or anything like that or any technical field, very generously defined, both the House and Senate.

Perhaps these are not the right people to be driving these investments. I think we, again, should have much more of a focus on substance, much less on the process. I always use the Solyndra bankruptcy as an example in this question of what went wrong.

View story at Medium.com

View story at Medium.com

View story at Medium.com

 

Peter Thiel Excerpts from Conversation With Tyler Cowen

Tim Ferriss Show Transcript #1 Notes

If you’re in San Francisco it is apparently worth checking out Hotel Biron and Zuni Cafe.

“I was actually doing some marketing, doing ad
buys and helping them track the conversions for a little CMGI-funded start-up.
It was an online furniture store and we thought we were going to make billions,
but it turns out people don’t like to pay the shipping for really heavy furniture
on the internet”

  • There are some categories of selling online that haven’t grown as quickly. Heavy Bulky Items like Cement, Furniture and Landscaping Material haven’t really been impacted by stronger online offerings. Some of the problems that Wayfair discusses for online furniture shopping are low confidence from customers, trouble visualizing what a product will look like and a tougher time to display furniture. Shipping Furniture can also result in damages, and due to the higher weight lower value nature of the products, this results in much higher return/warranty costs.

“There’s like 20 spaces on your iPhone in the default screen. What is one of
those icons going to be? Is there going to be something that is that prominent,
that is that important that it will take up some of that default real estate on my
home screen?”

  • Real Estate is still an important factor for digital offerings. If a company ends up on the top search engines for a particular keyword, that can sustainably boost traffic to their products or services. If you could somehow force an app online the millions or billions of phones that are available today that could be a very effective way to get your product into the hands of potential users.

“Of course, the first rule of investing is, “Rule #1, Do not lose money. For Rule
#2, see Rule #1,” according to Buffett, but as an annual thing it’s important.
You need to develop rules. You’re going to miss some winners, but develop
rules so that you can at least avoid losing a large chunk of capital. That’s all I
have to say about that.”

  • It’s sort of strange that a venture capital investor is quoting Buffett, because well in most cases they do lose money on individual investments. While at the portfolio level, it doesn’t really seem like this is a common occurrence. There appears to be a similar theme with other great investors, it’s more about mitigating downside than capturing all the upside.

When asked if he could study from any expert in the world he said. “I would probably pick some type of meditation guru. I know this is totally
doable, but the issue that I have now is that I feel that the computer’s a constant
stimulus. I don’t know about you but it’s extremely blurred, the personal time
versus work time. 

Because of that I feel like my brain is being slowly scrambled. I feel like it’s
always on edge, it’s being fragmented, and I feel like we’re going to realize in
short order here in the next 10-20 years that all this distraction stuff is really
messing with our brains. I feel like I need to find that balance and I haven’t
done that yet. “

  • Elon Musk has talked about in the past, that our phones are becoming sort of an extension of the human brain. It doesn’t seem clear that we’ve figured out a way to optimize using a combination of both. The Human Computer Centaur isn’t working yet. Speaking to people in person more frequently might help with this challenge.

“I think you should be looking for something that consumes you, in a way. I
know that might sound negative to some people, but if you’re not at “Hell yes!”
about what you’re doing, then why are you doing it, or should you be looking
for something else?”

  • I have an awesome job. I wish more people could do what they enjoy but i don’t think this is possible in reality.

“I think if I’ve learned anything in the last 10 years of doing this it’s that there is
no shame in admitting that you don’t understand something, because you can
either fuck it up, and that’s when you act like you understand something and
you actually don’t, or you can admit it one time, learn it, and then move on and
become a better person and just more well-rounded and actually get serious
about building a business.”

  • I have been listening to another podcast lately, OGO Lead. This idea of being humble and saying I don’t know has been a recurring theme among some pretty high profile leaders. Probably something I should get a bit more comfortable saying more often.

https://fhww.files.wordpress.com/2018/07/01-kevin-rose.pdf

Check out tim.blog/podcast for more.

Tim Ferriss Show Transcript #1 Notes

Steve Wynn on Risk

“I think at the end of the day, you can live with the discomfort. But you are also self-critical and I speak for myself and my colleagues we never risk the farm. We never risk the farm. My responsibility to my employees, my stockholders is such that I can’t promise to be right all the time. No one can. You make calls sometimes they are right and sometimes they are wrong. But capital structure allows you to survive the inevitable cycles of business that go up and down. As surely as sunrise and sunset. They allow you to survive your own miscalculation. Capital Structure I learned a long time from Mike Milken. I have always had a capital structure which is bullet-proof”

  • There isn’t really much reason to own very leveraged businesses. Financial leverage is likely to work against you at some point but it’s quite hard to really know when. There are situations where the leverage in a business won’t hurt you as an investor. Mohnish Pabrai has often talked about Frontline, a shipping business where leverage was used at the ship level. Even in the event of default of the interest payments equity holders were insulated from this risk and there was also potential levers management could pull in that they could scrap some ships to generate additional cash flow. There are always additional things to consider. Investing is simple but not easy.

Source: https://youtu.be/fZhH-F5M21w

 

Steve Wynn on Risk

Notes on Brian Gaines of Springhouse Capital Management

Brian Gaines is an investor who runs an investment firm known as Springhouse Capital Management. His background includes experience in distressed debt on the banking side and also on an investment basis. His firm was founded in 2002 with seed capital from Joel Greenblatt who wrote You Can Be a Stock Market Genius and The Little Book That Still Beats the Market. Brian’s initial agreement with Joel Greenblatt allowed him to focus solely on investment research and to outsource all other aspects of the role to Gotham Capital. He has once said his view’s with Gotham Capital are well aligned and that they both look for “great ideas and focus on how you can get hurt.” My reason for writing about Brian is mostly personal interest which was sparked by reading two interviews’ he has completed in the past one was with Manual of Ideas in September 2009 and the other with Value Investor Insight in May 2006.

In short, his investment philosophy focuses on asymmetric investment opportunities where upside needs to be 50% while downside needs to be in the range of 20%. If a stock has 50% upside and 50% downside, why not just flip a coin and save the transaction fees. He has mentioned that he doesn’t believe in limiting himself to value or growth stories as upside can come from many different avenues. Brian likes to avoid situations where stocks are well covered, well known and where the bets you end up making are on whether the business is getting moderately better or staying better for a period of time. He has highlighted that this has generally driven him to invest in small-caps to micro caps but will still invest in large caps if an opportunity presents itself. His mandate seems to be all about being opportunistic, adaptable and flexible. I think he’s doing a lot of things right.

When evaluating a company he’s pursued the usual avenues that are required ie) reading 10-K’s/10-Q’s, speaking with management, reading transcripts and studying competitors. Brian also likes to look for differences between competitors, what each is pursuing and why it could be a good opportunity for the company. Multiples that he likes focus on include enterprise value over EBITDA less capital expenditure. Furthermore, he also likes to see returns on invested capital of at least 20% or ideally in excess of 30%. In a future post I’ll comb through his 13-F filing which updates his holdings each quarter.

Brian adheres to a concentrated portfolio management style where the top 10 positions can often make up 80% of his portfolio. As Howard Marks says “you can’t take the same actions as everyone else and expect to outperform.” To outperform any sort of passive investment portfolio you need to invest in assets that aren’t in that portfolio and you also need to weight them differently. In the manual of ideas interview he says “I know concentrated investing is out of style today as some high profile investors have had tough times, but it seems more appropriate than ever to wait for great situations and take oversized positions.” I think these words are as true as they were when he said them back in September 2009.

The most common theme from I had caught from his interviews was that managing emotions and impacts from market movements is a big challenge. If the market’s perception on an investment changes by +/- 50% it’s uncommon not to feel at least some pleasure or pain. In particular, losses tend to impact our egos more because having something then losing it is painful, especially if it’s not our choice. It’s been commonly quoted that that losses are twice as powerful as equivalent gains. Perhaps there is some logic to his 50% upside and 20% downside requirement for an investment.

His investment philosophy just seems very sound to me. Invests where there is little professional competition. Limit investments to what you can understand. Do the work yourself and be a perpetual student. Bet heavily when an opportunity arises. One that that was absent that some investors have tended to focus on lately is he doesn’t require catalysts to unlock value. Brian mentioned that often if there is a catalyst you have to pay for it. If an event is that clear to you why isn’t it clear to everyone else? Another element I think that was valuable within the interviews was how investors often draw circular conclusions from data or are impacted by halo effects. If a company is “bad” it doesn’t necessarily mean an investment is “bad.”

I’ll close with a brief quote from Brian Gaines he was asked about key lessons from working with Gotham Capital. “Don’t limit yourself in where you look for cheap stocks. Don’t be paralyzed by the fear of making a mistake. Understand the best opportunities usually carry more perceived risks, and distinguish carefully between the risks that matter most and those you can live with.”

Sources:

http://www.valueinvestorinsight.com/May2006Trial.PDF

https://www.manualofideas.com/members/pmr200909.pdf

http://csinvesting.org/wp-content/uploads/2016/02/THE-SEARCH-PROCESS.pdf

Notes on Brian Gaines of Springhouse Capital Management

The Global View With Mohnish Pabrai And Guy Spier

Here are my notes from a recent interview on ET NOW with Mohnish Pabrai and Guy Spier. Link here for people who are looking to watch the full interview.

Discussion in the interview begins with the hosts concerns on how far the market has moved and if that is a concern for either of the guests. Pabrai doesn’t think those are really important data points to follow and that they can be more distracting rather than helpful. He recommends focusing on business fundamentals and limiting your opportunity set to companies you are able to understand well. If the market moves substantially higher or lower it isn’t really going to impact a valuation of individual business. Often the incentives of people discussing broader market movements are not aligned for the reader or viewer. They are often looking to get your attention for advertisement revenue, page views or likes. What people think will happen next quarter or next year on a macro basis just isn’t all that useful in my view.

The host then dug into the duo’s views on Trump. Spier started discussion with highlighting how it’s both difficult interpret political information and to also understand how markets will react. In the United States if you knew what trumps policies were going to be it would still have been difficult to understand all the second and third order impacts it would have on markets. One change to policy has implications in many places where people don’t initially think of but can still be important. Trump had recently tore up the Trans-Pacific Partnership and many people who are pro-trade were very outraged and really concerned about the direction the government was going. It turned out there was a very valuable silver lining because as a result of the USA removing itself as a trade leader of the world it opened an opportunity for others like China and India to lead. So to re-hash, optics were quite bad but resulted in a valuable rebalancing of power among the economic powerhouses of the world.

This followed with the ongoing passive vs active management discussion which appears to re-surface daily. Pabrai highlighted that for most people index funds are a great way to go. He agreed with Buffett’s recent writing on the topic as well. When you pay more in fees either to people who help you allocate the capital or from additional middlemen you will simply earn less of the underlying asset returns. The basic formula to be very wealthy is to save early in your life time, continue saving over a lifetime and continue to dollar cost average.  It’s a shame that some active managers make money off their investors rather than with them. I’m all for high fees where performance justifies it. Perhaps that means only using active managers where the competition is weak or non-existent. You need to play in games where it’s easy to win. Where are the forced sellers in investing?

The host then asks Pabrai and Spier if they focus on looking for 3-4 baggers in today’s environment or do they focus on a margin of safety for each investment. Pabrai says that if Spier tells him an idea that isn’t at least a 5x it would be waste of time. Pabrai uses an analogy from a Miller Beer commercial where the taste is great but the beer is less filling. Ie) good benefits but less cost. In investing you try to find similar situations where the potential is high and that you also have a built in margin of safety. For an investor to be successful at this they should look to limit risks of capital loss and retain high optionality. What this typically looks like for an investor is long period of inaction and studying followed by brief periods of activity when a mispricing occurs.

Next up was the automotive sector in India given Pabrai & Spier has made similar investments outside of the country. Pabrai said he had only purchased Fiat-Chrysler because of its very undemanding valuation at a P/E 1x in 2019 and that he hasn’t been able to find similar opportunities elsewhere. If Pabrai was an investor today in India he would spend all of his time on small publicly listed businesses and keep tearing them apart and trying to understand it all. What about airlines in India? There are some notable similarities and differences about the sector in India. The major difference was that fuel costs represent a higher proportion of total costs compared to the USA. Since oil isn’t very likely to move higher above $50-60/bbl a major component of costs for the sector are going to be relatively capped. Frackers have become the new swing producer in the world. Overall, the airlines in India aren’t as cheap and don’t have a similar opportunity in his view. That said they both discussed how the opportunity set is much larger in India than in developed markets. There are ~4,000 publicly traded businesses and over 90% of them aren’t covered well by sell-side analysts. This results in a wider dispersion of returns. That is what you want if you believe you have good judgement and an edge over your competitors. There is more of a chance for your head to get cut off but also to outperform meaningfully.

How do you evaluate commodity companies? Spier says to always focus on companies with the lowest cost of production as this increases odds that they will survive through the cycle. If this relative advantage is in place then you have an implied margin of safety. P/E’s of 1x are possible to find but only if you believe you can find them. Below a $100 million in market capitalization is a great place to start looking for these opportunities.

Pabrai then begins to talk about how patient Munger really is. He read Barron’s magazine for ~50 years and in most cases each issue had at least about 10 investment recommendations which means he read over ~26,000 recommendations without acting once. Then an opportunity presented itself with an obscure auto parts company which he made a $10 million investment. Based on Pabrai’s twitter account the company is Tenneco. The investment turns into $80-$90 million and Li-Lu turns it into even more. What Pabrai thinks you can learn from this is that you need extreme patience, like really just be able to watch the paint dry and keep looking for anomalies. If you study ~4,000 businesses in India for the next few years and eventually make 3-4 bets you are likely to end up with way more money than you can consume. Spier says there are two types of bears some that chase all the salmon in the stream while others just wait on shore ready to strike at what falls into their lap.

Then discussion about the insurance sector comes up, was there a similar opportunity in India? Spier talked about how he would really want to be comfortable understanding the management teams and their actions for a long period of time before he would invest money in the sector. It would only be clear over a long cycle which teams are taking appropriate risks and are well managed. Pabrai thinks the better question is “Where are the no brainer investments in India?” The insurance sector has grown at a very high rate over the past few years in India and as a result investor focus seems to already be on the sector. Pabrai thinks there could be opportunities looking back over time but they just aren’t that clear to him today. Up next was the technology sector which includes companies like Infosys. Pabrai thinks they could be reasonable investments but they don’t fall into the category of no brainers. He thinks changes to regulations make it too hard to tell where the company will be in 5 or 10 years’ time. There are also some headwinds as Trump is exploring changing the H1 Visa program and in some ways these technology companies are abusing the regulations. He thinks optimal policy in the United States would be to retain the best talent in the country. If the United States wants to be very competitive long term one lever they can pull is to dramatically increase the amount of immigrants they allow into the country from today’s 65-80 thousand cap today and make it up to half a million. If these individuals are well educated, and able to contribute it could do wonders for the economy there. Pabrai thinks the American government should tighten regulations and limit what could be done elsewhere. Other places in the world such as Canada are working on building similar hubs to service US businesses, the example he used was Vancouver, Canada.

The conversation closed with the two guests highlighting again of the world of opportunity in India for investing and that competition in Western Europe and USA is just disproportionately higher.

If you are looking to learn more about Mohnish Pabrai or Guy Spier i’d recommend both of their books. Click here to purchase The Dhandho Investor  and The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment

Hope this helps, let me know if you have any feedback or commentary

The Global View With Mohnish Pabrai And Guy Spier

Notes From Nate Tobik’s interview on Planet Microcap Podcast

Notes From Nate Tobik’s interview on Planet Microcap Podcast

https://planetmicrocap.podbean.com/e/ep-37-banking-sector-and-investing-books-with-nate-tobik-founderceo-completebankdatacom-and-author-oddballstockscom/

I made some brief notes on a recent podcast Nate Tobik had on the Planet Microcap Podcast. Nate runs the “oddballstocks.com” blog which I love to read and he also runs “completebankdata.com”. I’ve enjoyed his writing for some time and hope you find some value in the notes below.

Nate’s background is in computer science but has managed to self-learn the most important things in investing. He highlighted he hasn’t taken formal economics, finance or banking course but from what I may have read elsewhere has completed 1 or 2 levels of the CFA program. He also mentioned that his investing style has evolved over time and at points in time included a focus on spinoffs, net nets and compounders.

Later on he recommended the investment classics. I can’t recall which books if any he recommended but when I think of investment classics I think of Security Analysis, Common Stocks and Uncommon Profits and You Can Be a Stock Market Genius. Books should be re-read in an attempt to absorb what you may not have understood the first read or what may not have initially spoken to you. Shane at Farnam Street also recommends this and is also a big fan of the Feynman Technique. I agree with both of them, the more active of a reader you are the more you have the potential to retain and understand. Without retention or understanding what’s the point of reading anyways. Writing about what have read could be helpful as well.

Then Nate and the host get into his views on banks. This was one of my favorite parts of the interview. To start they discuss how accounting for banks is quite different compared to industrial or brick and mortar businesses. In simple terms banks take deposits and loan proceeds to businesses and individuals at a higher rate. Since US disclosure requirements are very standardized it’s very easy to compare particular details from each bank. One of the unique aspects of a bank is that it can give you specific regional exposure and the exposure that you do obtain is driven by the success of small businesses in the area. Let’s say you are looking for exposure to central Omaha, it just might be possible. Banks are leveraged institutions so it is important that the managers have good skill and/or systems in place to manage risk and lend prudently. The majority of the businesses in the world are private and as a result banks are one of the few ways to obtain indirect exposure to these assets. When evaluating a bank you want Net Interest Margins (NIM) to be positive and relatively low non-interest expenses compared to revenue (Efficiency Ratio). A 1% return on assets is a good anchor to keep in mind when evaluating the quality of a bank’s assets. Take the ROA * Assets / Equity to arrive at an ROE. Return on Equity target of ~10% is reasonable in Nate’s view. If banks have a significant amount of assets from businesses this may be a good sign because commercial deposits usually require little to no interest which results in an attractive funding base. The next higher cost accounts are chequing and then savings accounts for individuals. In today’s low rate environment banks that do not understand how to lend prudently have made very long term loans and results in significant yield curve risk. Overall, Nate recommends that people own a basket of banks rather than just one “perfect” bank.

On screening – He likes it and uses various tools to help him screen. Nate stated that everyone uses a screen of some sort to find ideas whether it’s a news article, podcasts, Wikipedia or Bloomberg machine. Nate likes when people he admires as an investor already own a stock despite the potential risks of confirmation bias and group think. He thinks watch lists are misused by investors at times because only few investors need to be invested at all times. Taking a more patient view and attempting to evaluate how a business has changed is probably more worth the effort in my view.

Nate’s favorite “dead money” stock idea is Hanover Foods. It’s a frozen food supplier to grocers and other businesses. They trade at 0.3x book value and a low single digit multiple of current earnings. Management has paid itself lavishly for a long period of time while there are also some issues with the controlling family. Despite the very high compensation book value is still growing and the business is still profitable. They already own a jet and he doesn’t think compensation can go substantially higher than today. He thinks it’s a reasonably good investment but the enemy of this type of investment is boredom. You just have to wait. No other way to approach it.

To close the conversation ended with Nate saying that when you know the least, is typically when you think you know the most. It’s over time that many people see how little they used to know and they begin to expand their understanding how truly little they understand today. Keep reading, thinking and trying to figure it all out.

 

Notes From Nate Tobik’s interview on Planet Microcap Podcast