The Education of a Value Investor by Guy Spier

Summary

Spier’s journey from a typical Harvard Business grad turned Wall Street investor to a secluded, calm and life-enjoying value investor. Heavy on self-reflection and one’s inner journey, light on investment advice.

Key Takeaways

• We like to think that we change our environment, but the truth is that it changes us.
• When the student is ready, the teacher will appear.
• The beginning of wisdom is to drop narrow prejudices so that you can begin to learn from everyone.
• Brainwashing: shouting things out often enough really does pound it in, and any idea can be implanted by repeating it over and over.
• 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.
• When stuck, mirror your role model by asking “What would my role model do if he were in my shoes?”
• Simple business wisdom: “Sell cheap, tell the truth, and don’t cheat nobody.”
• Environment trumps intellect.
• Look for investments by studying masters.
• All of us have mental shortcomings. Structure your environment to counter your mental weaknesses, idiosyncrasies and irrational tendencies.
• You cannot outsource your checklist. What works for me might not work for you and vice-versa.
• Self-awareness is vital since you can only design a checklist to address your weaknesses if you know what those weaknesses happen to be.
• The best way to learn is to surround yourself with the right people.
• If I don’t understand my inner landscape – fears, insecurities, desires, biases, and attitude to money – I’m likely to be mugged by reality.
• Adversity may, in fact, be the best teacher of all. The only trouble is that it takes a long time to live through our mistakes and then learn from them, and it’s a painful process.
• Mastermind groups have been the single best accelerator of inner growth.

What I got out of it

An interesting book (memoir) on how Guy Spier went from pursuing wealth, success and external validation – like most of us – to focusing on his inner journey: who am I? How can I be the best version of me? What gives meaning to my life?

He explains the various phases of and inflection points in his career well, making it easy to find overlap and differences between his life and my own.

What stayed with me most:

• Your environment makes or breaks you. Spend effort on creating one in which you can thrive.
• Establish or be a part of different mastermind groups. They accelerate your growth, especially if they’re ‘better’ than you.
• Adhere to values that you know are right. You’ll naturally attract like-minded people. Avoid anyone who is too complicated to understand.
• The more you look outside yourself to see who you can help, the happier life becomes.

Summary Notes

From The Belly Of The Beast To Warren Buffett

We like to think that we change our environment, but the truth is that it changes us. So we must be extraordinarily careful to choose the right environment – to work with, and even socialise with, the right people. Ideally, we should stick close to people that are better than us so that we can become more like them.

The Perils Of An Elite Education

When the student is ready, the teacher will appear.

The Fire Walk

The process to get unstuck and rewire yourself: reeducate yourself. Better said: uneducate yourself.

The beginning of wisdom is to drop narrow prejudices so that you can begin to learn from everyone.

A smart strategy for life: whenever I have the choice of doing something with an uncertain but potentially high upside, I try to do it. The payoffs may be infrequent, but sometimes they’re huge. And the more often I pick up these lottery tickets, the more likely I am to hit the jackpot.

“Heads, I win. Tails, I don’t lose much.”

The power of authenticity – of speaking honestly and from the heart. Robbins’ candid admission of his own self-interest convinced me to give him the benefit of the doubt.

Robbins’ seminars are a form of brainwashing. Shouting things out often enough really does pound it in, and any idea can be implanted by repeating it over and over. There’s a danger to this – one can be exploited by religious fundamentalists and political extremists. 

Our consciousness changes our reality, and I began to see that the positive statements Robbins got us to repeat were a powerful tool in reconfiguring my consciousness.

A transformative experience – walking 20 feet across fire became a metaphor for how I could break through my limitations and build a better reality.

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 my head the idea that, if you want to get somewhere, anywhere, and you’re stuck, “Just Do It! Just make a move. Any move!”

Books became my life instruction manuals. I wasn’t reading them to sound intelligent; I was mining them for useful ideas to implement in my life. 

Simple insights helped me to shift the way I interacted with people.

Valuable life lesson: it’s so important to show kindness and be helpful to people early in their careers, even when they have done nothing to deserve it.

It’s really a question of choosing to have certain people in your life who embody the values you admire. Creating the right environment or network helps to tilt the playing field subtly in the right direction so that you become far more likely to succeed. Advantages are often created imperceptible step by imperceptible step.

Another cornerstone of my reeducation involved studying Buffett’s investment strategy with even greater intensity. There’s no better way to do this than to read Berkshire Hathaway’s annual reports and study the companies in his portfolio.

Spier’s most important secret: ask yourself constantly “What would my role model do if he were in my shoes?” Actively imagine you’re your role model while answering this question. The key is to be as precise as possible, picturing them in as much detail as we can. This is called mirroring.

Mentoring is a big deal if your heroes are accessible. If they’re not, study them relentlessly, and imagine what they would do if they were in your shoes. 

Simple business wisdom: “Sell cheap, tell the truth, and don’t cheat nobody.”

Serendipity: the more you study, do and talk with others about what you do, your effort eventually gets rewarded with unexpected opportunities.

I was grateful for this opportunity – and daunted by the responsibility.

The New York Vortex

Buffett’s pre-Berkshire investment partnerships are the best alignment between an investor and his shareholders. No annual management fee, but take a quarter of the profits above a 6 percent hurdle. Investors can only redeem their money once per year. This helps everyone to stay focused on the long-term.

Our environment is much stronger than our intellect. Remarkably few truly understand this critical point.

What I learned from Buffett:

• Find companies that are cheap
• That have an expanding “moat” around them
• That are awash in cash

Environment trumps intellect.

Buffett and Munger joke that envy is the only one of the seven deadly sins that isn’t any fun. “Envy is crazy,” remarks Munger. “It’s 100 percent destructive…If you get those things out of your life early, life works a lot better.”

“Who is strong? He who masters his own passions.”

Great improvement to anyone’s life: surround yourself with a “mastermind” group of your profession who likely become lifelong friends and trusted sounding boards. It’s difficult, if not impossible, to become successful on your own. The greatest opera stars have singing teachers; Roger Federer has a coach; and Buffett meets regularly with like-minded people.

This mastermind expanded my knowledge beyond anything I could have learned from a textbook or MBA course. We not only learned more about but gained a deeper understanding of each other – about what made us tick, or not tick.

One way that I look for investments is to study the masters and then explore whether I should buy the same stock or a better one with similar characteristics.

Revelation: so often, we focus our analytic efforts in the wrong direction and miss something vital. So it’s crucial to be open to the possibility that we might be mistaken.

Meeting A Master

As I looked for more opportunities to thank people, I found that I truly did become more thankful. And the more I expressed goodwill, the more I began to feel it. There was something magical about this process of getting outside myself and focusing on other people.

This habit of writing letters is an incredibly effective way of compounding goodwill and relationships instead of merely compounding money.

Rather than becoming a good salesperson, I found myself starting to care about the people I was writing to and think about how I could help them. The paradox is that, as I became more authentic and discarded my agenda, people became more interested in investing in the fund. This was an unintended consequence of becoming less selfish and more honest about who I am.

I didn’t understand this at the time, but now I see that every letter I wrote was an invitation for serendipity to strike. To many people, it might seem like a waste of time. But I couldn’t win the lottery without a ticket, and these tickets were almost free. In a sense, this is a value investing approach to life: pick up something cheap that may one day prove to be precious.

It’s always easier to be truthful because you don’t have to remember your lies. This relieves your brain of much unnecessary mental work so that it can focus on something more useful.

Many of the best ideas are already out there for us to see; we just have to clone them.

A key aspect of my real-world education involved learning to take more and more of these intelligent but practical actions on a micro level: writing thank-you notes, picking a great place for breakfast, listening actively to what people told me, or treating them the way I wished to be treated. Over a lifetime, a myriad of simple actions like these can accumulate to create big reputational and relationship advantages. It’s not about luck. It’s about working harder to get these things right so that it becomes more likely that something good will happen.

If you’re going to meet someone better than you, you had better work on yourself first.

Lunch With Warren

If you’re going to do something, it’s best to commit to it with wholehearted gusto.

When you begin to change yourself internally, the world around you responds.

When your consciousness or mental attitude shifts, remarkable things begin to happen. That shift is the ultimate business tool and life tool.

In my early days as a money manager, slick marketers wanted to help me sell the fund to more investors so that it would grow bigger and more profitable. This never really worked, and I was chasing after success in the wrong place. What ended up working best was to look inward, change myself internally and put my shareholders’ interests before my own.

If you encounter someone who has exceptional qualities, it’s worth investing time and energy to travel so that you can be in their force field.

Reverend Williams was a quintessential Buffett manager. He was authentic to the core. There was no facade. He gave his own attention and energy to the people he helped. And he obviously relished his work.

The more I looked outside myself to see who I could help, the happier my life became.

“People will always stop you doing the right thing if it’s unconventional.” – Warren Buffett

Adhere to the values that you know to your core are right rather than being swayed by external forces such as peer pressure. 

“It’s very important to live your life by an inner scorecard, not an outer scorecard. Would you prefer to be considered the best lover in the world and know privately that you’re the worst – or would you prefer to know privately that you’re the best lover in the world, but be considered the worst?” – Warren Buffett

People too often justify their improper or misguided actions by reassuring themselves that everyone else is doing it too.

Buffett’s strength comes in part from his rock-solid sense of who he really is and how he wants to live.

“If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy – if you’re patient.” – Warren Buffett

It’s not that one system is better or worse: it’s that Buffett has chosen a system that suits him perfectly giving him the latitude to think in peace, impervious to the noise. It’s not enough to rely on one’s intellect to filter out this noise: you need the right processes and environment to do so.

The path to true success is through authenticity.

Into The Void

I had worked hard to invest in companies that sold for significantly less than their intrinsic value. All of them had high-quality moats, and they were all prodigious cash generators. None were highly leveraged or needed regular access to capital markets.

From a societal point of view, debt is a vital economic lubricant. Used in moderation, it’s positively healthy. But for an individual investor, debt can be disastrous, making it even harder to stay in the game – both financially and emotionally – when the market turns against you.

It wasn’t easy to remain calm and positive [during the 2008 crisis]. One way that I coped with the stress was to apply a strategy I had learned from Tony Robbins: studying heroes of mine who had successfully handled adversity, then imagining that they were by my side so that I could model their attitudes and behaviour.

Elegant investment ideas: not only were they remarkable cheap, but they each had catalysts that would inevitably emerge. Also, they didn’t just have powerful earnings engines but substantial collateral value. So the odds of success were exceptionally high.

The financial crisis had shown me that investment success isn’t just a matter of identifying great stock ideas. As I had learned through painful experience, I also had to create the best possible environment for myself – physically, intellectually, and emotionally – so that I could operate more effectively and make myself less vulnerable to the sort of negative influences I’d encountered during the financial crisis.

Creating The Ideal Environment

I resolved to spend more time reading about biology. These studies deepened my sense that it’s helpful to think of the economy as an evolving and infinitely complex biological ecosystem. Companies, like ant species, must adopt strategies that enable them to thrive or they will be at risk of extinction.

The point is that the neat economic theories I had learned at university didn’t come close to describing the true complexities of the economy or the financial markets. At the same time, I had also come to see that our brains are hopelessly limited in the face of this overwhelming complexity. This imbalance is a serious problem for investors. Here we are – with our little irrational brains and our overly simplistic economic theories – somehow hoping to make sense of this unbelievable complex world. What chance do we have?

It’s indispensable for any serious investor to know how to read a company’s accounts. This doesn’t mean simply grasping the difference between cash and accrual accounting. It also involves understanding the various ways that accounting rules can be used to skew the headline earnings numbers, not to mention the ability to tell whether the quality of earnings is increasing or decreasing.

It’s critical to banish the false assumption that I am truly capable of rational thought. Instead, I’ve found that one of my only advantages as an investor is the humble realization of just how flawed my brain really is. Once I accepted this, I could design an array of practical workarounds based on my awareness of the minefield within my mind.

All of us have mental shortcomings. Structure your environment to counter your mental weaknesses, idiosyncrasies and irrational tendencies.

It wasn’t just my environment that would change. I would also overhaul my basic habits and investment procedures to work around my irrationality.

It’s important to have hobbies. They clear the mind and strengthen detachment from the mood swings of the market. If I spent that time in my office, single-mindedly analyzing stocks, I’m certain that my decision-making and my investment returns would suffer, along with my health and my family life.

Within the office itself, I was equally careful to construct an environment that would help me to operate rationally and effectively despite my balky wiring. Once again, it helps to know thyself – and to adapt thy setting accordingly.

I have a “busy room” with phone, computer and monitors on one side of the corridor, and a “library” where I go for deep work on the other.

My impression is that mirror neurons help us to model the influential people in our presence. It can be helpful to include images of our role models in our work environment.

As for Warren’s desk, it was so small that there was no room for piles, obliging him to process his reading efficiently. An in-box and an out-box lay on top of his desk, along with a box labelled “Too Hard” – a visual reminder that he should wait patiently until the perfect opportunity arrives.

I also changed the colour scheme on my home screen so that it was dull and muted, thereby minimizing the risk that all those bright, flashing colours might jolt my irrational brain into unnecessary action.

A New Sense Of Playfulness

As part of this reinvention of myself, I was determined to have a lot more fun.

I was increasingly willing to invest large amounts of time and money to travel anywhere to see people who were important to me, and to set up masterminds and annual events that help connect with like-minded individuals who in turn become friends.

As preparation for investing, bridge is truly the ultimate game. If I were putting together a curriculum on value investing, bridge would undoubtedly be a part of it. Its beauty lies in the fact that it involves elements of chance, probabilistic thinking and asymmetric information.

Bridge has helped me to recognize that it’s simply not possible to have a complete understanding of anything. We’re never truly going to get to the bottom of what’s going on inside a company, so we have to make probabilistic inferences.

Bridge wasn’t the only game that captured my imagination or refined my mental habits. Another was chess – a wonderful game of analysis and pattern recognition.

Over the years I’ve come to see that there are real tactical benefits to understanding how such games – chess, bridge – work.

Corporations often manipulate accounting rules to present their numbers in deceptive ways – it’s full of gotcha gambits, like in chess.

Another way in which chess is helpful: I became more disciplined, developing the mental fortitude to remain calm and careful even while my opponent played with wild abandon.

“When you see a good move, look for a better one.” – Edward Lasker

Chess highlights the need to keep searching for a better move even after the brain has latched onto that first idea. Playing chess also strengthens this particular mental muscle.

Buffett treats the investment business as a game and does little that compromises his day-to-day happiness.

“All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” – Blaise Pascal

My real mission is to be a more authentic version of myself.

Investing Tools

To make better investment decisions, simplify everything and have rules and routines you apply consistently.

• Check stock prices as infrequently as possible.
  • Virtually all my investments are in companies where the long-term outcome is all but inexorable: the company is heading in that positive direction, and it’s really just a question of how long it takes.
• If the seller has a self-interest in me buying, I ain’t buying.
• Beware of CEO’s and other top management, no matter how charismatic, persuasive and amiable they may seem.
• Pay attention to the order in which you consume information. And don’t eat your dessert until you’ve finished your meat and vegetables.
  • Public filings first.
  • Earnings announcements, press releases, transcripts of conference calls and books about the company or its founder second.
  • Press coverage at the very end.
• Pool your knowledge with other investors, but stick with people who can keep their egos in check.
• Keep that market at a safe distance. Don’t let it invade your office or your brain.
  • Trade stocks when the market is closed.
• 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.
• Don’t say anything publicly about your investments that you may live to regret.

Ground rules for investment discussions:

1. The conversation must be confidential.
2. Neither person can tell the other what to do.
3. We can’t have any business relationship that could skew the conversation by adding a financial agenda.
4. Mutual trust.
5. Ask open-ended questions, like ‘what needs to happen for them to generate a lot of cash next year?’

Sell once the circumstances have changed.

Survival Strategies From A Surgeon

Checklist – every step is often a no-brainer, yet we often skip them. Checklists help with memory recall, especially with mundane matters that are often overlooked.

You cannot outsource your checklist. What works for me might not work for you and vice-versa.

A checklist is a way of managing your own mind and guarding against your own proclivities, so it needs to be based on this kind of self-awareness. Its real purpose is to serve as a survival tool, based on the haunting remembrance of things past.

I had failed to ask the most obvious question: does this product offer good value for money?

I want to invest only in companies that are a win-win for their entire ecosystem. What’s important is the idea that a great company makes tons of money while adding real value to its customers.

Checklist item: How could this business be affected by changes in other parts of the value chain that lie beyond the company’s control? For example, are its revenues perilously dependent on the credit markets or the price of a particular commodity?

Self-awareness is vital since you can only design a checklist to address your weaknesses if you know what those weaknesses happen to be.

Doing Business The Buffett-Pabrai Way

The best way to learn is to surround yourself with the right people.

Friendships became a wonderful end in themselves, not a means to self-advancement.

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

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.

I needed to become more efficient at eliminating people from my network if I wasn’t sure about them.

My most successful hires have happened not because I advertised the position, but because I observed the person in candid moments like these, when they were simply being themselves.

The best strategy is simply to leave the mysterious obfuscators alone.

The key is to value people as an end in themselves, not as a means to our own ends.

I receive way more by giving than I ever did by taking. So, paradoxically, my attempts at selflessness may actually be pretty selfish.

The Quest For True Value

Value investing is a great means to your self-indulgent ends. Enjoy. As I see it, this is the outer journey of the value investor – the quest for wealth, physical comfort, and success. But it’s important not to get so caught up in this meaningless chase that we forget what matters most – the inner journey toward something less tangible yet more valuable. The inner journey is the path to becoming the best version of ourselves that we can be, and this strikes me as 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?

If I don’t understand my inner landscape – fears, insecurities, desires, biases, and attitude to money – I’m likely to be mugged by reality.

By embarking on the inner journey, I became more self-aware and began to see these flaws more clearly. I could work to overcome them only once I acknowledged them. But these traits were so deep-seated that I also had to find practical ways to navigate around them.

Practical tips for the inner journey:

• Psychotherapy
• Experience of adversity
• Mastermind groups

Adversity may, in fact, be the best teacher of all. The only trouble is that it takes a long time to live through our mistakes and then learn from them, and it’s a painful process.

Mastermind groups: have a close-knit group of 8 to 10 professionals to share their issues confidentially, guided by a peer moderator. Meetings like these have been the single best accelerator of inner growth.