Part 2 of Guy Spier's interview with Tim Melvin about investment ideas.
Tim Melvin - One of the investing concepts you discuss in the book is not to buy what somebody else is selling. Can you elaborate on that a little bit? Most people don’t realize that Wall Street is a huge sales machine.
Guy Spier - I urge your audience to try this.
I remember somebody who’d found me, a very eloquent guy who presented these very apparently nice-looking ideas and if I wanted to act on it, I should trade through his broker’s fund. When I finally figured out this formula I told him, ‘you know, I’m really sorry Mr. X, but you’re selling this idea to me and I don’t want to buy it.’ He’s like, ‘but you haven’t even looked at it.’ ‘I know and I’m not going to look at it or if I look at it I certainly can’t act on it.’ [...]
Charlie Munger (Trades, Portfolio) said, "I only want to know where I’m going to die so I don’t go there." In a certain way, this idea of not buying what Wall Street or anybody else is selling is simply an application. Rather than finding the positive action to take, how about just getting away from all the things that we know are not the right way to go?
Tim Melvin - Another investing idea you discussed in your book is that if a stock tumbles sharply, not to sell it right away. You say two years.
Guy Spier - During the financial crisis, there were experiments done by psychologists that show that the decision to do something is made a significant amount of time, up to seven seconds, before we become aware of that decision.
There’s one experiment where they wired somebody up with electrodes to measure various different signals the brain is giving and they say, ‘We’re going to give you a red card and a blue card and when we ask, we want you to count to 10 and then reach out and touch either the red card or the blue card and tell us when you’ve decided which card you want to touch.’ They could predict, based on the brain signals, up to seven seconds before the person actually told them their choice.
So, in moments of panic and in moments when energy stocks are down, there’s a whole new analysis that our conscious brains will come up with as to why now is the time to sell. And actually, it’s not rational. There’s an emotional environment that has been created that makes our brain want to come up with that conclusion. [...]
I think you need some very, very powerful circuit breakers, or some very clear circuit breakers to prevent that from happening. I think that this sort of rule on selling is really just a circuit breaker. What I have to do is have a rule that overrides what I think is my rational brain because if it’s anything less strong and less simple than that, my brain will rationalize selling the stock at the worst possible moment. More than once, before I had that rule, I ended up selling stocks at the worst possible moment.
The one that comes to my mind is from quite a number of years ago; a company called Laboratory Corporation of America (LH, Financial). It had recently merged -- it was two labs that have merged and it had been a little over-leveraged and they got into trouble. They had to re-write the covenants on their debts. It was sort of a soft default on their debt and as a result, the bank took a chunk of the value of the equity and the stock tumbled from $8 a share to $2 a share. I was beside myself with all sorts of feelings and ultimately I took the decision to sell, which gave me huge relief because I no longer had to show it to anyone in my portfolio and I was sort of done with the situation. That stock ended up compounding from $2 a share all the way to $300, $400 and it was a multi-, multi-, multi-bagger and all I had to do was nothing! As a result of the minor reorganization they did, the risk was reduced because debt has been reduced as a result of the reorg, the changing of the covenants of the debt made things better and I was incapable of seeing that. You just need a hard and fast rule.
Tim Melvin - James Montier did an interview recently where he commented on Winnie the Pooh’s wisdom of never underestimating the value of doing nothing.
Guy Spier - Absolutely… Financial markets are selling machines and they’re also machines designed to generate action. They’re really good at it… there are plenty of people who go to work each day to buy and sell, buy and sell, creating action of all sorts to come home feeling they’ve done a solid day’s work.
The idea that you went in to the office, didn’t take any action on your portfolio and then went home, all you did was think about your various investments is just an anathema. I think it will always be an anathema to the vast majority of market participants because when you’re paid in some way or another because of activity, it’s hard to imagine that inactivity is actually what you ought to be paid for and what really does generate the best returns.
It’s very hard for the general public to take value investors seriously because they are expecting people who are successful to be running around, working hard, doing stuff and being seen taking action. The idea that somebody can be successful by spending the vast majority of their time sitting around and avoiding certain kinds of activities because you know how damaging they can be to long-term returns is just anathema to the majority of the world.
Tim Melvin - Toward the end of your book, you talk about how you define success. You say that it is not about making the most money.
Guy Spier - It’s certainly not the money. As I say, not that want to I give up any of the material comforts that I have, I think the dream of having vast amounts of money is actually the destiny of some very unhappy people who don’t like what they do. The minute you find your way into what you really love to do, then anybody who’s in there actually doesn’t care about the money and is not in danger of becoming an envious person.
My family and I were in South Africa recently, and a friend of our brother is a potter. He makes pottery and he’s very good at it and he loves working with his hands and he’s done it for 30 or 40 years. He’s not envious of somebody who has a bigger business or more money because he’s in the zone when he’s making his pots. I think we hit nirvana, when we’re in that groove for ourselves, whatever that is. That makes Warren Buffett (Trades, Portfolio) doubly extraordinary because it turns out that when Warren Buffett (Trades, Portfolio) is in his groove he ends up making enormous amounts of money. It is a byproduct of him being in his groove and, you know, what we need to use him as a role model for is not the money, it’s that he’s in his groove. [...]
if you don’t have an innate sense of joy, then the money is the substitute, but it’s not a good substitute. Anybody who talks about how much money they make, about how much money they want to make, they’re basically not living a joyful life. What I’ll tell you though, Tim, is that I think that for some people they get true joy from putting together investment banking bills, there are some people who get true joy from being equity sales people and it is right for them to be in those roles and they should be there. But, there are a small minority of the people who are actually doing those jobs.
