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

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Notes on Brian Gaines of Springhouse Capital Management

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