Benjamin Graham

Benjamin Graham: I Had
Treasure in My Hands
The year was 1926, and 32-year-old Benjamin Graham was sitting in the dimly
lit reading room of the Interstate Commerce Commission, scrutinizing
documents.
He had taken the train to Washington D.C. from Wall Street, where he had
recently started his own investment management partnership. His reputation
as a savvy securities analyst and investor was growing, but this was eight
years before Graham authored the classic Security Analysis, which along
with The Intelligent Investor published in 1949, would help establish Graham
as The Father of Value Investing.
Surrounded by shelves of folders pertaining to U.S. regulation of railroads,

trucking companies and pipelines, Graham was transfixed on one report in
particular the balance sheet of Northern Pipeline Company. It was an out-
of-favor, thinly-traded stock spun-off from Standard Oil a decade earlier. And
what he found amazed him:
Unknown to anyone on Wall Street, Northern Pipeline had major holdings of

high-grade bonds. By Grahams calculation, the company, then trading at $65
per share, and paying a $6 per share dividend, was holding $95 in liquid bond
assets for each share outstanding. Graham had a realization: Northern
Pipeline could distribute to its stockholders $90 per share in a special dividend
with no impact on the companys operations.
Graham saw that Northern Pipelines actual operations were comparatively

small, with large profit margins, and that the company carried no inventory.
There was no need for Northern Pipeline to hold the bond investments. Even
after paying out a large distribution, Northern Pipeline would remain profitable
and debt-free. This would be a bonanza for shareholders.
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Benjamin Graham - I Had "Treasure in My Hands"

Grahams discovery of Northern Pipelines hidden assets would mark the
beginning of a new era in investing and corporate governance, and earn The
Father of Value Investing another distinction: The First Activist Investor.
Northern Pipeline was one of eight pipeline companies created in 1911 when
the U.S. Supreme Court broke apart John D. Rockefeller Sr.s Standard Oil
monopoly. In the days before SEC mandated financial disclosure, these
pipeline companies supplied only bare bones income statements and balance
sheets to shareholders.
What Graham discovered -- and other investors didnt realize -- was that each
of the pipeline companies also filed a twenty-page annual report to the ICC --
the agency which oversaw the countrys transportation businesses. To
Grahams astonishment, the ICC statements of the pipeline companies
contained detailed breakdowns of millions of dollars of U.S. government
securities and railroad bonds held by the pipelines. And Northern Pipeline held
the most securities relative to its market price of them all.
In The Memoirs of the Dean of Wall Street compiled by Seymour Chatman,

Graham looked back on this defining moment in the history of activist
investing and remembered feeling like an explorer encountering a new world:
Here was I, a stout Cortez-Balboa, discovering a new Pacific with my eagle

eye...I had treasure in my hands.
Graham returned to his Wall Street office and via his investment partnership
began accumulating Northern Pipeline shares. By careful but persistent
buying over weeks, he acquired 2,000 shares out of the companys 40,000
outstanding -- about a 5% ownership position. This made Graham the largest
stockholder of record after the Rockefeller Foundation, which owned about 23
percent of all the spun-off pipeline companies.
After acquiring the sizeable stake, he decided it was time to persuade

Northern Pipeline management to do the right and obvious thing: to return a
good part of the unneeded capital to the owners, the stockholders. Naively,
he thought this would be rather easy to accomplish.
In the months ahead, as Graham tried to persuade and pressure Northern

Pipeline management into giving shareholders their due, the securities analyst
discovered what a thousand activists have confronted in the years
since: Often the management of public companies has objectives other than
maximizing shareholder value. And compelling entrenched, self-serving
management to do the right and obvious thing may require dogged
determination over many months or years. But the returns for shareholders
can be well worth it....
Grahams Northern Pipeline Contest as he described it, is a classic example

of an investor challenging an overcapitalized company to return assets to
shareholders, and one of the earliest examples of modern shareholder
activism.
Benjamin Graham - Persuading Northern Pipeline to do

the right and obvious thing for shareholders took two
years
Now a major shareholder, Benjamin Graham made an appointment at
Northern Pipelines impressive headquarters in the Standard Oil Building at 26
Broadway in Manhattan. He met with the president of the company, D.S.
Bushnell, along with the companys general counsel, who just happened to be
Bushnells brother. Graham related his plan for distributing excess cash to the
company's shareholders, while leaving operations intact.
But, as Graham puts it, the elderly gentlemen proved much more resourceful
in finding reasons to hang on to the stockholders pile of gold than ways to
increase the profits.
They had a series of objections to Grahams plan:
The company didnt have the required surplus for such a distribution.
Graham pointed out they could issue more shares and make a payout as
return of capital.
The company needed the surplus as working capital. Graham noted that a
company doing $300,000 in revenue doesnt need several million dollars in
cash assets.
The Bushnell Brothers asserted the bonds were a depreciation reserve,
needed for future replacement of the pipeline. The value investor suggested
that using $3.6 million to replace a pipeline doing $300,000 of business
would be crazy.
Next, the Bushnells said they might need the cash for expanding the
business. Graham noted the company was a small part of the old Standard
Oil main line and that there was nowhere to expand.
Finally, having run out of arguments, the Bushnells cut to the bottom line. As
Graham relates, the managers told him:
Look, Mr. Graham, we have been very patient with you and given you more
of our time than we could spare. Running a pipeline is a complex and
specialized business, about which you can know very little, but which we have
done for a lifetime. You must give us credit for knowing better than you what is
best for the company and its stockholders. If you dont approve of our policies,
may we suggest that you do what sound investors do under such
circumstances, and sell your shares?
In years to come, Graham continued to buy stakes in public companies

trading well below their true, or intrinsic value, then acted -- by one means or
another -- to close that gap. Its the same game plan carried out by activist
investors in the years since the Northern Pipeline Contest. Invariably Graham
found that management resisted his endeavors, utilizing the same basic
argument as the Bushnells: Management was best qualified to judge what
policies were required to run a company. And if you dont like it, sell your
stock.
Benjamin Graham - A crack-brained Don Quixote tilting

at a giant windmill
As Graham tells it, in the 1920s Wall Street was largely a gentlemens club,
governed by an elaborate set of rules. One of the basic rules was: No
poaching on the other mans preserves. This meant that anyone who was in
-- a member of what we would now call the Establishment -- wouldnt think of
making any move contrary to another gentlemen members best interests.
In 1926 when Benjamin Graham tried to persuade a management to do

something other than what it was doing, Graham said old Wall Street hands
regarded him as a crackbrained Don Quixote tilting at a giant windmill.
However, Graham was to have the last laugh. In the months ahead, he
persisted in his efforts to coerce Northern Pipeline management to distribute
its bond hoard to shareholders. Though it took two years, and considerable
sweat and aggravation, $70 per share was eventually distributed to
shareholders, and the total value of the new Northern Pipeline stock plus the
cash returned ultimately reached a total of more than $110 per old share. The
companys shareholders were nearly 70% richer than when Graham first
discovered Northern Pipelines hidden value in the ICC reading room.
Today, some things have changed since Benjamin Grahams first activist
investor campaign, but many things have not. Due to financial reporting
requirements, and the widespread dissemination of information, activists today
arent likely to discover stocks with massive secret bond holdings. Values like
in Grahams day are rare.
But conflicts of interest between management and shareholders certainly still

exist. While corporate governance standards have improved since the 1920s,
the management of many public companies -- either through self-interest or
ineptitude fail to maximize shareholder value. Today, over nine decades
since Ben Graham discovered Northern Pipelines hidden cash, activist
campaigns are more common than ever.
According to Activist Insight, 758 public companies received demands from

activist investors in 2016 -- a 13% increase on 2015s total of 673.
And if you think todays more efficient markets limit the profit potential of
activist investing, think again. In 2016, ten activist campaigns resulted in gains
of 70% or more in the target company, according to Factset. Its no wonder
the investment public is fascinated with activist investing: If theres hidden
value in a company -- and an activist can access it for shareholders -- its
possible to achieve exceptional returns.
Activist campaigns that ended in 2016. Ranked by target companys

performance three days prior to the announcement date of the campaign to
the end of the campaign.
In the following chapters, Ill explore the most profitable strategies for following
activist investors and their campaigns. Ill investigate the strategies of the
greatest activist investors operating today like Elliott Associates and Third
Point LLC and consider the pros and cons of mimicking their moves.
Obscure and first-time activists are increasing in prevalence; Ill consider ways
to profit from their moves.
Ill discuss the merits of placing funds with activist-focused mutual funds.
Shareholder activism is growing around the world -- Ill cover the opportunities
in other countries. The 13D filing is the catalyst for activist investor analysis
Ill explain how to analyze. What about creating ones own customized activist
strategy based on 13D filings?
Our goal is to discover and follow those activists who with brains, savvy
and hard work are able to like Benjamin Graham 90 years ago pry the
shareholders pile of gold from the hands of corporate management.
23 Questions With Franois Rochon

of Giverny Capital
'Well it is easier to know when you are right than when you are wrong. I
want to be patient but not stubborn'
1. How and why did you get started investing? What is your background?
I graduated as an electrical engineer. I always was interested in the stock market, even quite
young. But the whole field seemed speculative to me so I was more inclined to study science.
When I started to work (and have some savings), I decided to look into the stock market world
further. After reading Peter Lynchs books at the end of 1992 and then Warren
Buffett (Trades, Portfolio)s annual letters, I realized that investing could be done rationally and I
became very passionate about this activity.
I started managing my own money in 1993. Then, I left the engineer profession in 1996 to work
at a big money management firm. Two years later, I decided to start my own firm, Giverny
Capital. Jean-Philippe Bouchard joined me in 2002. And in 2009, we opened an office in the U.S.
We now have around 900 million Canadian dollars in assets under management.
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GOOG 15-Year Financial Data
The intrinsic value of GOOG
Peter Lynch Chart of GOOG
2. Describe your investing strategy and portfolio organization. What valuation methods do you
use? Where do you get your investing ideas from?
When I buy shares, I have the attitude of buying a whole company. So, our portfolio is basically
the equivalent of a holding company that owns 20 or so divisions.
We value stocks based on the (estimated) earnings power in the next five years and what we
believe is a warranted price-earnigns (P/E) ratio. So lets say XYZ earns $1 per share in 2016
and I believe that they can earn $2 in 2021 and that a 20x P/E would be warranted, it would
mean that I think the stock will be worth $40 in five years. If my goal is to earn around 15% on
the investment, I would have to buy the stock today at $20 or less.
I get investing ideas from many places. I try to look at all companies that I can understand and
that seem to have a strong business model. With the Internet and some good publications like
Value Line, you can find lots of ideas quite easily (to be analyzed in depth afterwards).
3. What drew you to that specific strategy? If you only had three valuation metrics what would
they be?
I was very much inspired by Warren Buffett (Trades, Portfolio), Philip Fisher, Peter Lynch and Bill
Ruane. So I would say that my strategy is a synthesis of their ideas, although stocks that I can fit
into my personal frame can be very different from those investors.
I really have only one valuation metrics: what I believe the company will be worth in five years
based on historical data and earnings growth projections. I tend to focus on companies that have
high return on equity (ROE), a solid balance sheet, a strong competitive advantage and a
management team that I believe is outstanding.
4. What books or other investors changed the way you think, inspired you or mentored you?
What is the most important lesson learned from them? What investors do you follow today?
The first two I read were One up on Wall Street by Peter Lynch and The Intelligent Investor by
Benjamin Graham. And then I read Philip Fishers four books, which were very important in the
development of my investment process. Moreover, in my opinion, Warren
Buffett (Trades, Portfolio)s group of annual letters if put into a book is the best teaching
anyone could find in the history of business.
The most important lesson is to be rational and look at stocks as part ownerships of businesses;
nothing else.
I follow Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) of course. I also
admire Todd Combs. I follow David Poppe and the team that manages the Sequoia Fund. I
admire and respect Glenn Greenberg and Lou Simpson (Trades, Portfolio) a lot. I also like to
read Chuck Akre (Trades, Portfolio)s letters and like to follow his new purchases since we tend
to have lots of ideas in common. Finally, I think very highly of Tom Gayner (Trades, Portfolio) at
Markel.
5. How long will you hold a stock and why? How long does it take to know if you are right or
wrong on a stock?
I will hold a stock as long as I believe the reasons I purchased it initially are still present. On
average, I hold a stock for around seven years.
Well it is easier to know when you are right than when you are wrong. I want to be patient but not
stubborn! I like to repeat to myself a rule of Philip Carret, written some 86 years ago: Be quick to
take losses and reluctant to take profits.
6. How has your investing approach changed over the years?
I owned lots of companies in the early years that I have come to realize had business models
that were not as resilient as what I thought they were. Some technology companies I bought
twenty years ago do not really exist anymore (or are much smaller). It makes one think about the
nature of long-term investing. So I am more focussed on the durability of the business model
today.
I always have emphasized on the quality of management. But I have come to learn that it is even
more important than what I previously thought. I would go as far as to say that buying a stock is
to become partner with the top management of the company.
7. Name some of the things that you do or believe that other investors do not.
First, I believe I am very flexible. I like both small companies and large companies. I like to look
everywhere around the Globe (although I end up with mostly North American companies). To
take a hockey analogy: my goal is to win the Stanley Cup. I want to own the 20 best players I
can find; wherever they come from and whatever their size or age (some young and some more
mature).
In addition, I believe that I have a very long-term horizon, longer than most investors. I try to
behave more like a true owner of companies than a typical equity securities manager.
8. What are some of your favorite companies, brands or even CEOs? What do you think are
some of the most well-run companies? How do you judge the quality of the management?
Well I like companies that I believe have a durable moat. So companies

like Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Starbucks (NASDAQ:SBUX), Disn
ey (NYSE:DIS), Coca-Cola (NYSE:KO), Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B),
etc.
I admire Jeff Bezos a lot, although I never (sadly) bought shares of Amazon. I think very highly of
Howard Shultz at Starbucks and Bob Iger at Disney. In fact, I bought shares of Disney in 2005
the very day that Iger was named CEO. I think he did a fabulous job.
It sounds simple but to judge a CEO, you need judgment. And management assessment is
necessarily subjective and there are no written rules really. Experience surely helps.
9. Do you use any stock screeners? What are some efficient methods to find undervalued
businesses apart from screeners?
I rarely use screeners. To find great investment ideas, you have to study lots of companies. My
capitalist antennas are always on! I try to have a look at every company that crosses my path. I
do use simple filters that discard lots of companies quite rapidly (like profitability, clean balance
sheet, understanding the nature of the business, low cyclicality, etc.).
Peter Lynch used to say that looking for great stocks is like looking for pearls: The more oysters
you open, the better the odds of finding one!
10. Name some of the traits that a company must have for you to invest in, such as dividends.
What does a high-quality company look like to you and what does a bad investment look like?
Talk about what the ideal company to invest in would look like, even if it does not exist.
I like to find companies that have unique assets that cannot be easily copied. An example is the
group of Disneys characters. What I like about Mickey Mouse is that he is immortal and he does
not have an agent. Disney own their stars.
Most of my big mistakes were of omissions. But some bad investments were made when I
misjudged the solidity of a business (the moat was thinner that I thought) or the qualities of
management.
In the book Money Masters by John Train, published some 35 years ago, Warren
Buffett (Trades, Portfolio) said that the best business to own is a Royalty on the growth of
others. Today, one example would be in my opinion the credit card companies (like Visa).
When consumers use their cards to spend, Visa (NYSE:V) gets the equivalent of a small royalty
on each dollar spent. Another example could be Google. As the number of Internet users grow,
the number of Google searches increase without Google having to spend more money on
marketing or build more cyber-rails. They have the equivalent of the nearly unique bridge that
consumers that want to enter the Island of the Internet have to cross.
11. What kind of checklist or homework do you utilize when investing? Do you have a specific
approach, structure, process that you use? Or do you have any hard cut rules?
I know many good investors and I would say that we all use basically a similar approach. We
read annual filings and analysts reports. We also talk to all sorts of people related to the studied
business (management, clients, suppliers, etc.).
I believe that it is really qualitative skills that often makes the difference. For example, the
capacity to suffer while your style is out of favor (and not give in to the fad of the day). In an age
of instantness, it is really hard to have an authentic long-term horizon. Those that have the
capacity and the willingness to do so have a great advantage in the long run.
Another quality needed would be humility: the stock market requires lots of it. So in a strange
paradox good investors have to be able to balance humility and self-confidence in just the right
amounts.
12. Before making an investment, what kind of research do you do and where do you go for the
information? Do you talk to management?
I like to read financial statements and CEO letters. I read some analyst reports and also
unbiased reports like the ones from Morningstar and Value Line (although I am sceptical of
ratings in all cases).
I do talk to management of many companies. I like to figure out their human values, the culture
they nurture and their long-term goals.
13. How do you go about valuing a stock and how do you decide how you are going to value a
specific stock? When is cheap not cheap?
Like I wrote before, we try to figure out the earnings power of the company in five years and the
P/E ratio that would then makes sense. Obviously, you can put any number in the level of EPS in
2021 and fool yourself into believing that a stock is undervalued. Also, when you find a cheap
stock, you can easily convince yourself that the long-term prospects of the company are great.
That is why I try not to look at valuation at the beginning of the process.
If your focus is the long-term earnings power, the key question must be How certain are you
about your future estimates of growth? Being able to rightfully assess the solidity of the
business, the durability of its competitive advantages and the capital allocation skills of the CEO
is at the heart of my valuation process.
Cheap is not cheap when you hope for an increase of the P/E ratio in the short-run even though
the long-term economics may be poor.
14. What kind of bargains are you finding in this market? Do you have any favorite sector or
avoid certain areas, and why?
We own three U.S. bank stocks. I believe they have better earnings power going forward. First,
most of the regulation expenses have been dealt with. Secondly, the interest income margins are
at record lows. At some point, interest rates will go up and it will help net interest margins. Their
P/E ratios relative to the S&P 500 seems to me to be too low. I have to add that in November,
many bank stocks rallied and now seem a little less undervalued.
I believe the market underappreciates the residential house revival. We are probably in the third
inning of that cycle. I am not a big fan of buying cyclical stocks but we can find solid companies
that have parts of their revenues related to housing like Mohawk Industries (NYSE:MHK).
15. How do you feel about the market today? Do you see it as overvalued? What concerns you
the most?
I think that the stock market is fairly valued. When you think about it, 20 years ago, 10 year
treasury bonds were yielding around 6% compared to 2.6% today. And the P/E ratio of the S&P
500 was similar to todays. In the last 20 years, earnings for the S&P 500 tripled and so has the
index. If you have reasonable expectations for the S&P 500 (like an annual return of around 8%,
including dividends), I do not think you should consider the index as overvalued.
What concerns me is the level of debt in corporations. I realize that interest rates are low. The
operating income to interest expense ratio is probably at historical levels. But many companies
could not stand an increase of 300 basis points in the interest rates of their debt. So, if interest
rates were to increase rapidly, the bond market would be hurt but so would many corporations.
Hence, I would avoid what I believe could be labelled rate-vulnerable companies.
16. What are some books that you are reading now? What is the most important lesson learned
from your favorite one?
The last one I read was probably Guy Spiers The Education of a Value Investor, which I really
enjoyed.
I sometimes reread older books like So Far, So Good - the First 94 Years, written by Roy
Neuberger in 1997. It always fascinates me how things are basically the same on Wall Street.
Sound principles do not change. And so is human nature towards money and markets.
I also like to read books on all sorts of subjects. I am a big fan of the philosopher Erich Fromm
and I like to read his many books. Since I am a contemporary art collector, I love to read about
the life of other art collectors. Many of them were businessmen (women) that used their wealth to
acquire great works of art. They often had a fascinating life.
Some books I read are about great companies. And it is quite striking to realize how much
companies change over time (some even disappear). It gives humility toward abilities of
identifying superior enterprises for the next decade. It is not an easy task.
17. Any advice to a new value investor? What should they know and what habits should they
develop before they start?
I like to say, A painter aiming at being a master must paint. In the same way, an investor must
invest. I see lots of value investors waiting for a better time to enter the market. So my advice
is simple: start investing today! There are always opportunities out there if you search for them.
A good habit is to know the history of our civilization. It will help in identifying what are probably
fads in the markets. The phrase this too shall pass away applies to many trends in Wall
Street.
Also, understanding human nature in depth is a useful skill that is acquired through reading,
observations and experience.
18. What are some of your favorite value investing resources or tools? Are there any investors
that you piggyback or coattail?
I have deep admiration for many great investors and will certainly take a close look at their
favorite stocks. I would not use the word piggyback, but I would say that, like a painter is
inspired by some art masters, I am indeed inspired by some money managers for whom I have
great respect (like the ones listed above).
19. Describe some of the biggest mistakes you have made value investing. What are your three
worst investments that burned you? What did you learn and how do you avoid those mistakes
today?
The biggest mistakes are by far errors of omission. Stocks that did fit my criteria but I did not
purchase. Companies like Starbucks or TJX Companies (NYSE:TJX).
I did make many mistakes in purchases over the years. The three main losers in terms of
percentage of the portfolio were probably Callaway Golf (NYSE:ELY), Health Management
Associates and WP Stewart.
What I have learned? In the case of omissions, the main error is usually not to pay a higher P/E
ratio that turns out to be warranted by long-term economics. Purchasing mistakes were mostly
misjudging the solidity of the business model of the company.
I have learned to be humble: it is not easy to assess the long-term prospects of businesses. It is
inevitable to make mistakes but if I can learn something from each one, I can improve myself as
an investor. To paraphrase Oscar Wilde: Experience is the sum of all our mistakes.
20. How do you manage the mental aspect of investing when it comes to the ups, downs,
crashes, corrections and fluctuations?
I like to read a lot about financial history. It helps to have realistic expectations toward markets of
all sorts.
Also, I do write a lot about investing through my annual letters (that are 20 pages long every
year). I am sometimes amazed by things I wrote 10 or 15 years ago that can still apply in todays
market.
And when I need comfort in tough times (like in 2008), there are still the wise words of Ben
Graham, John Templeton and Warren Buffett (Trades, Portfolio) that I can reread.
21. How does one avoid blowups in value investing?
Well, I always like to say that companies that are profitable and with low debt levels rarely go out
of business. So, a solid balance sheet and a profitable business model is a good start.
I think that most mistakes in value investing are basically buying a stock that is cheap in the
hope of selling it at a higher price in the short term (a few years). I think if you buy a stock with
the idea of owning it at least five years, you will look at valuations with a different point of view.
But I do not want to badmouth value investing in any way. I think it is an intelligent activity to
acquire undervalued securities however you approach it. Many wealthy investors owe their
fortunes to it!
22. If you are willing to share, what companies do you currently own and why? How have the last
five to 10 years been for you investing wise compared to the indexes?
We own around 20-25 names and our turnover ratio is around 14% so we keep our stocks on
average for seven years. For example, we own Disney, CarMax (KMX), Dollarama (TSX:DOL),
Mohawk, Visa and Alphabet (Google). We bought those six stocks from 2005 to 2011 so they
have been in the portfolio for eight years on average. We also own two other outstanding
Canadian companies (in addition to Dollarama). And we own three solid banks.
My global portfolio has done approximately 5% better than its benchmark on an annual basis
over the last five and 10 years (or 4% better if you would include our management fees). So, it
has been a very good period for our style of investing.
23. Here is a fun one - What stock would Warren Buffett (Trades, Portfolio) or Benjamin Graham
buy today if he were you?
That is an interesting question. For Warren Buffett (Trades, Portfolio), I think one company that
would fit well in Berkshire Hathaway is CarMax. In my opinion, they have a great competitive
advantage in their industry. And they have a long way to grow before maturity. And their financial
division would profit from Berkshires umbrella. If Berkshire did not already own Shaw Industries,
the other main flooring company, Mohawk, would be, in my opinion, a company that could fit well.
I think Jeff Lorberbaum, Mohawks CEO, is an outstanding manager who would be in the same
league as many of the all-star CEOs at Berkshire.
Ben Graham would probably buy some obscure undervalued securities that I have never heard
of! And he would perhaps think that Apple (AAPL) is a financially sound company that looks
quite undervalued at todays price.
15 Questions With Sid Lembirik,
Managing Partner at Lembirik Group
Investments
'You dont need a stratospheric IQ or inside information to invest
successfully'
1) What is the best investment advice you have ever been given?
Benjamin Franklin said "An investment in knowledge pays the most interest." Or in other words
Dont invest in anything you dont fully understand. This sounds like basic common sense or
maybe nave, but people do it all the time; laying down money in exchange for something they
dont know or understand simply because everyone else is doing the same thing (trading in
complex options, buying stocks with no regards to fundamentals, )
Another advise that compliments the first one is Rule #1: dont lose money, rule #2: dont forget
rule No. 1 by Warren Buffett (Trades, Portfolio). In order to be wealthy, you need some discipline
managing your finances, the majority of people dont have that discipline, they lose a lot of
money irresponsibly in my opinion (gambling, living beyond their means, unsound business
deals, ). To sum it up, Dont spend money on non-sense, and only invest in thing you
understand 100%).
SPY 15-Year Financial Data

The intrinsic value of SPY
Peter Lynch Chart of SPY
2) What level of math is needed in order to understand the entirety of finance and investing?
Finance is a vast and evolving field; you dont need to understand the entirety of it to be a good
investor. To calculate a businesss intrinsic value, you only need simple algebra, nothing more.
You dont need a stratospheric IQ or inside information to invest successfully, all you need is to
think for yourself and keep your emotions in check. Investing is not rocket science, if that was the
case, the best investors would be mathematicians.
3) Is "value investing" (Warren Buffett (Trades, Portfolio) & Benjamin Graham approach) a good
investment strategy for long-term goals like investing for retirement?
Definitely yes. And you just look at Graham or Buffett investment record if youre in doubt. Many
researches have been done showing that value stocks outperform the market over long period of
time. Value investing makes sense because we tend to purchase stocks selling below their
intrinsic value, basically looking to buy things at a discount. Buying a dollar for 50 cents will make
you wealthier over time than buying a dollar for 105 cents.
4) What should I know before I start value investing?
Before you start investing, you must first know if you can control your emotions, many people
think they can until the market takes a nose dive and they start panicking. Once you can control
your emotions, you must think long term.
5) How should one invest in a bear market?
One should invest in a bear market the same way as he invests in a bull market, the discipline
should be maintained. Its just easier to find undervalued securities in bear markets than in bull
markets.
6) What are the essentials of due diligence when investing?
An investor must do his research before investing in anything; it can be the stock market, a farm
or a restaurant business. Reading the annual and quarterly reports allows investors to appraise
the business. The best investment decisions are based on facts, not speculation. Value investors
tend to focus on what they do know, not guessing or speculating on what they dont.
The worst thing you can do is invest in companies you know nothing about. Unfortunately,
buying stocks on ignorance is still a popular American pastime. Peter Lynch.
7) What kind of stocks would you rather avoid holding because they are riskier than others?
IPOs, (I wrote an article about how bad an investment they can be, you can read it on
(http://www.lembirikgroup.com/articles/snapchat), other companies I avoid are businesses losing
cash with no plans to reverse that, over-leveraged and overvalued companies. At Lembirik
Group, we avoid those types of stocks. We only hold sound companies that are selling for less
than what theyre worth.
8) What are some investment lessons you learned in 2016?
Being a disciplined investor and ignoring market experts is rewarding. The year 2016 began as
the worst start in record as labeled by newspapers. We witnessed Brexit and the eventful US
elections. Pundits predicting a market crash. However, the S&P500 ended the year up about
10%!
9) What discount rate do you use in your valuation?
We dont have a discount rate to speak. We look to buy things that yield substantially more than
our opportunity cost. We dont use discounted cash flow models, they work in theory but not in
practice: There are too many assumption and variables to consider. If you have 10 assumptions
to make, and youre right 90% on each, youll end up being right only 35% on your model.
Probability to be correct is very low when you deal with many variables.
10) Which is more useful, earnings yield or P/E ratio? Why?
One is the inverse of the other. These formulas use GAAP earnings that dont reflect the true
earning power. P/E ratio or earnings yield are not efficient measures in valuing a company in my
view.
11) With just public information, how can you be confident that your valuation is correct while the
market is wrong?
You have to do your own research and trust in your judgment. Most of the time markets over
react to some macroeconomic event not related to any business fundamentals. Or when they
overestimate the challenges a company is facing. You dont need inside information to have
good investment returns, you only need to think independently and trust in your judgment.
"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than
participate in it." Warren Buffett (Trades, Portfolio)
12) What are the key attributes of a great investor?
Great investors have different skills, invest in different companies yet they share some common
attributes. Among them:
Avid learning
Discipline
Patience
Emotional control
13) What are the best books about special situations investing?
There are many books written about arbitrage or special situation investing, some are more
detailed than others. Margin of Safety by value investor Seth Klarman (Trades, Portfolio) is an
excellent book, another good book is Risk Arbitrage by Keith Moore.
14) What are the best websites to follow for value investing-oriented investment ideas?
At Lembirik Group, we generate ideas from anywhere we can, we read annual reports,
newspapers, magazines we scan through many ideas to find the perfect one. A lot of research
is involved. We do not use a specific website for that.
15) For an individual relatively unsophisticated non-professional investor, what are the most
under-valued asset classes today and what are the best funds or mechanisms to invest in them
with a buy and hold mentality?
A low-cost ETF that tracks the market like Vanguard.
Interview with Sid Lembirik, Managing Partner at Lembirik Group Investments.
25 Questions With Tom Vilord of

Vilord Wealth Advisors
'99% of the people wouldnt follow' a checklist from Warren Buffett for
analyzing a company
I got started in the industry in 2000. I wanted to become a financial adviser because I wanted to
learn how to research stocks like the guys on Wall Street. I wanted to learn what made Warren
Buffett (Trades, Portfolio) so successful while most Americans failed to achieve success
investing in the market. What did he know that the rest of us didnt? After I passed my licensing
exams, the company I was working for sent me to New York for three weeks of training. I thought
this is when I was going to learn everything I needed to know to be a successful investor.
Unfortunately, my first two weeks of training were nothing but sales training classes. The last
week was training on all of the proprietary products. I was taught to be a salesperson. I learned
absolutely nothing about how to invest money. And I was about to invest people's life savings.
After a few years of not having a clue about what I was doing and having clients teach me stuff
about the market, I started to self-teach myself. I bought every book I could read. I started taking
personal one on one coaching courses, etc. I have been an adviser since 2000, but I have been
an investor since 2005.
Warning! GuruFocus has detected 7 Warning Signs with CMI. Click here to check it out.
CMI 15-Year Financial Data
The intrinsic value of CMI
Peter Lynch Chart of CMI
2. Describe your investing strategy and portfolio organization. Which valuation methods
do you use? Where do you get your investing ideas?
My investing strategy is value investing. If its a good strategy for the best investor in the world,
then its a good strategy for me. When I was self-teaching myself, I studied many different
strategies such as momentum investing, trading, turnarounds, etc., but the one that I had the
most interest in and the strategy I thought I could be the most successful at was value investing.
My portfolio organization consists of diversifying into no more than 20 companies at once with
approximately 5% allocation into each. I found that more than 20 is more difficult to track and
manage each company, but less than that is putting too many eggs in one basket. This prevents
me from blowing up my portfolio if my research is incorrect, or if something happens thats out of
my control such as fraudulent account.
I use 13 valuation methods. Some of them look at the rear-view mirror by looking at historical
valuations. Past performance is no indication of future results as we all know, but if we are
looking at stable well-run companies, which is the heart and soul of value investing, we can get a
pretty good indication of what could happen in the future based on historical results. I also use
several calculations that use future earnings, future cash flows, etc. The best results I have
achieved have been from valuing a company based on historical price-earnings (P/E) times TTM
EPS or if the company has a successful track record at predicting earnings, I will use estimated
earnings instead of TTM. This seems to work very well with stable companies. I used this method
with Cummins (NYSE:CMI) and Manpower Group (NYSE:MAN) this year and the stock hit the
price target right on the money.
As far as where I get my ideas from, I am not too proud to say that many of my ideas come from
other investors. I always read Hedge Fund Wisdom when the quarterly report comes out to see
what the biggest hedge funds are buying (or selling), I also follow Dr. Paul Price from GuruFocus
and Real Money Pro religiously. I check the New York Stock Exchange (NYSE) and NASDAQ
daily decliners list daily to see if any companies I am familiar with had a major decline. If so, I try
to figure out why it declined so much and if its a major problem to be aware of or if it just
happened to be an overreaction to a news event. I like using Joel Greenblatt (Trades, Portfolio)s
magic formula. Ill take the companies in there and do my own research to see if it also fits my
criteria. Another place I look for is Morningstars 4 and 5 star rated companies. The rating is
based on a valuation approach, but many of the undervalued companies on there are
undervalued for a reason so you have to do your own research when picking ideas from that list.
As for the 13 valuation methods I use, I rely on just a few of them for my true values, but the
others just give me confirmation that my main ones are accurate.
3. What drew you to that specific strategy? If you only had three valuation metrics, what
would they be?
What drew me to this strategy is that you can put so many odds of a successful investment in
your favor by identifying a great company that has consistent earnings, growing book value,
excellent cash flow, little to no debt, great management, a track record long enough to be able to
put an accurate value on the business, etc., etc. I had clients ask me
about Tesla (NASDAQ:TSLA) awhile ago, and so many people were putting their money into that
stock, because it was a momentum stock, but to me, that is just a risky proposition. If you look at
the financials, they are hemorrhaging money, loaded with debt, no earnings, but people were
investing in it because it was the hot stock at the time. Momentum stocks will lose their
momentum and I would hate to be the person who dumped money into it right before the
momentum stopped.
Tesla worked out for a lot of people, but for me, it was too aggressive. I couldnt even begin to
put a value on it because it didnt have a track record. I wouldnt ever buy anything I can't put a
value on. Thats gambling to me. I live 30 minutes from Atlantic City so I will go there if I want to
gamble, but as for investing I want to be the casino. I want the odds in my favor, therefore the
value strategy is my game.
If I could only have three, I would use the historical P/E x EPS for an expected price based on
historical valuations (thank you, Dr. Price, for teaching me this), discounted cash flow and for
stocks paying a dividend, I would use either the dividend discount model or the historical
dividend yield to current dividend method.
4. Which books or other investors changed the way you think, inspired you or mentored
you? What is the most important lesson learned from them? Which investors do you
follow today?
You can't be a value investor without reading the bible of value investing, "The Intelligent
Investor," especially chapters 8 and 20. The first book that really made things easy for me to
understand was "Rule #1" by Phil Town. I also love "The Little Book That Beats the Market" by
Greenblatt as well as "You Can Be a Stock Market Genius" and "One Up on Wall Street" by
Peter Lynch, "The Dhando Investor" by Mohnish Pabrai and The Essays of Warren Buffett."
I have been lucky enough to be personally mentored by Town and Price. They have taught me
what value investing is, how to value a business and how to identify a great business that I would
want to own forever if I could. Today, I follow Price and Town; other well-known investors are
Greenblatt, David Einhorn (Trades, Portfolio), Pabrai and Seth Klarman (Trades, Portfolio) to
name just a few.
5. How long will you hold a stock and why? How long does it take to know if you are right
or wrong on a stock?
Ideally, I would like to hold on to it forever because it's much easier holding onto a great
company that has already made you money than it is to find the next one, but what makes sense
in theory doesnt always make sense in real life. For example, we bought Target (NYSE:TGT)
shortly after the data breach brought the price down from $67 to almost $50 per share. I waited
about 11 months for that to start moving, but once it did, it went up to $80 (we got out around
$78). I got out because the stock hit a valuation higher than it has been in years. Companies will
eventually revert back to their mean, and that is what happened with Target. As of Dec. 27
Target has only reached our sell price briefly in June 2015 and again in March of this year, but
it hasnt moved past that ceiling.
We sold for two reasons. First, and most importantly, it became too overvalued. There was a
better chance of Target to fall to where it should be priced than for it to continue to trade at an
even more overvalued price. Second, it lost its velocity. When we own something that is moving
up and up and then eventually stalls out, we will take the profits and put the proceeds elsewhere.
Another great example of this is Disney (NYSE:DIS). It's probably my favorite company. This is a
stock I would like to never sell. It has been a wealth creator over time, but if you look at the
valuation in August and November 2015, it traded 40% higher than its five- and 10-year average
P/E (17 and 16 P/E compared to a 24 P/E). It was so overvalued that it had to come down. The
last time it was that expensive was in 2003. I do not want to be the investor who paid more for
those shares than anyone else in a 13-year time frame. If you owned Disney in October 2015, it
was an obvious sign to get out.
Guess what happened? The great stable dividend payer fell from approximately $120 down to
$90. As much as I love Disney, I am not going to keep it at those levels. I will take my profits and
put it elsewhere or wait for it to come down. I bought back in at $95 and again at $90; now it has
started it's climb once again. I usually hold on to a stock for as long as it takes to get to its target
price, and once it gets there I decide if we should keep it or get out. I base that decision on the
news that I read about the company and also based on what the quarterly reports say. The time
it takes to know if I am right or wrong depends. I knew for a fact that Manpower was a great
company which was given to me at a steal of a price because of overreaction to the Brexit. It took
about three months for it to start to move up and once it did, it kept going. I knew Disney was a
good price (not great) at $90 because I knew what historical valuations were and what the stock
did when it reached those levels. However, other companies I bought took up to a year before it
started to pan out.
As for the losers, it only took me a few months to realize that I may have missed something in my
analysis. I write down in my journal what I did wrong, and I try to avoid that mistake like the
plague the next time around. In the Target and Disney examples, I explained why I may sell one
of my holdings. A few other reasons for me to sell would be if the story behind why I bought the
business started to change, then I would sell, and of course if there is a fraudulent event, I would
not want anything to do with the business. Lumber Liquidators (NYSE:LL) crashed from 120 to
its current level at 16 due to fraudulent reporting of formaldehyde in their products. American
Realty Capital crashed because of fraudulent accounting and now their CFO is in prison. The
stock fell from $11.50 the day of the news to $6 during the course of that year. No reason to own
a company you can't trust.
It has become more streamlined. I created a very detailed checklist that I have been using the
last few years and I am constantly making changes to it. As investing evolves, so does the
checklist. There are so many things to look at and without the checklist, it's very easy to miss
something. So I do not make any investment without going through that checklist item by item.
I spend a lot of time on valuations. Many people I know adopt one or two methods that work for
them, but I think that different companies in different sectors call for different valuation methods. I
would value a newer growth company differently than I would a stable blue chip. A simple DCF
model is good but not in every circumstance.
8. What are some of your favorite companies, brands or even CEOs? What do you think
are some of the most well-run companies? How do you judge the quality of the
management?
I really love Under Armour (NYSE:UA)(NYSE:UAA) and Disney. I like Under Armour because
the products are very comfortable, it has a great brand recognition, and I love Kevin Plank, the
founder and CEO. I was reading one of the annual reports and it said that he voluntarily reduced
his salary from $500,000 to $26,000 because that is what he made when he first started Under
Armour. He wants his compensation to be based on stock performance. That is the kind of guy
that I want running a company that I am invested in. His interests are aligned with the
shareholders.
I also love Disney. Its theme parks are always packed, and it goes out of its way to make its
guests feel special. It truly is the happiest place on earth. Their movies are very well done. I have
a 4- and 10-year-old. I have probably seen Disney movies about 10,000 times. It makes great
decisions with its acquisitions such as Lucas Films and Pixar. I like that it is also thinking about
acquiring Marvel but hopefully less than a 29% premium. The Disney experience for me has
always been a great experience. The company is a pretty predictable company, which I like and
it has been a wealth creator over time.
I do use stock screeners. I like the screeners on Morningstar. I use the screeners to give me 4
and 5 star rated stocks. M* uses this star rating based on a potential valuation so 5 stars are the
most undervalued, and 1 stars are the most overvalued. Ill start there. I also use Value Line to
look at the current P/E compared to historical P/E. That always gives me some ideas to dig in to.
It also has a great tool which tracks the industries that are out of favor. An out-of-favor industry
won't stay down forever so you can find some gems in there, such as Cummins when it was at
$85, Now it's over 135. GuruFocus has a lot of excellent screeners as well. If you dont want to
use screeners, then put a few companies on your watchlist, learn as much as you can about
them and follow them. Once you get to know a company very well, it's pretty easy to determine if
it is undervalued, fairly valued or overvalued.
10. Name some of the traits that a company must have for you to invest in, such as
dividends. What does a high quality company look like to you and what does a bad
investment look like? Talk about what the ideal company to invest in would look like, even
if it does not exist.
A great company has predictable earnings, earnings that are constantly growing and not jumping
around up one year down the next, up again, etc. I want to see book value growing, good cash
flows, high net profit margins compared their competitors, little to no debt, I also like to see
sufficient ROA, ROIC, ROE. I want a shareholder-friendly management like Kevin Plank. I like
organic sales growth and not growth just because of acquisitions. Disney had a lot of success
with acquisitions, but I have seen many other companies get blown up because of poor
acquisitions. Ideally, a lot of room for growth. When I first bought Under Armour, it was making a
push into the European market. At that time, only 6% of its sales came from there. To me thats a
ton of opportunity.
Warren Buffett says that a company must have a moat. Does this particular company have a
competitive advantage that will prevent its customers from leaving? Dividends are a bonus, but I
am not buying a company just because it has a dividend. I want a high quality company, and I
want it at a discount. Thats how you achieve success investing. A bad investment in my opinion
has unpredictable earnings and cash flows, tons of debt, maybe a single customer that makes up
a big percentage of its revenue. That burned me once. Incompetent management or worse,
unethical management is a sign of a bad company. If it can't get a decent ROI, ROA, etc., why
not? Is it buying back shares at a discount price or just for the heck of it to temporarily boost
earnings? Is its business going obsolete, and is it doing anything about it i.e., Radio Shack,
which is now a worthless penny stock.
11. What kind of checklist or homework do you utilize when investing? Do you have a
specific approach, structure, process that you use? Or do you have any hard cut rules?
I do use a checklist, and I wouldnt think of investing without it because there are too many
important things that I look for and if I miss one of those when doing my research, it could cost
me. I started my checklist about four years ago, and I still make changes to it frequently to make
it more easy to use. My first step is to identify if a company is worth digging into deeper. It only
takes about three minutes to determine if something is garbage or worth a second look. I use
screeners for this. Once I find something on the screener, I will go onto Value Line and
Morningstar to confirm if it's worth looking at further, and if so, out comes the checklist.
Once I identify a great company and read the company reports, then I will take out my 13
valuation calculations. I'll compare that with some other resources that offer target prices such as
Morningstar, Tip Ranks, GuruFocus, and S&P Capital IQ. If everything looks good, I will open a
position. Otherwise, I will put it on my checklist or maybe sell some puts at a strike price that
represents a good discount if I have to buy the stock.
One of my hard cut rules is never go by what the pros are doing without doing my own research.
I took a shortcut with Horsehead Holding (ZINCQ) because three big-time investors who I follow
were all buying it at the same time. I read their reasoning for the investment, and I jumped
aboard with both feet. However, after looking at the financials, the company was nothing more
than dog sh#*.
I would have never bought this on my own if I ran it through my checklist. I dont think one thing
would have passed. Well, the company went bankrupt, and I lost my entire investment. It was a
hard lesson, but I learned to never rely on anyone else ever again without putting it through my
own research. A few other rules I have is to never invest in China stocks. I know I am missing a
lot of potential winners, but their regulation on accurate accounting is so loose, and I dont want
to base an entire projection on a number that could be false. Lastly, I never had a lot of luck with
financials so I tend to stay away from that sector.
12. Before making an investment, what kind of research do you do and where do you go
for the information? Do you talk to management?
I start off using Morningstar data, Value Line and GuruFocus for my preliminary data and then I
go to the companys most recent reports and go back from there. Buffett says you can't go by
just the numbers alone so I do read the letters to shareholders, articles about the company on
Seeking Alpha as well as other sites. I do as much research as I can on the management team,
specifically the CEO. I have never called management, but I do call investor relations quite often.
13. How do you go about valuing a stock, and how do you decide how you are going to
value a specific stock? When is cheap not cheap? If you can, give some of examples.
When I value a stock, I first look to see how far back of a track record they have, how predictable
are their earnings, and are they a stable company, a growth company, do they pay dividends,
etc., and I will base my valuation methods on that. I have 13 methods for calculation intrinsic
values. Some work better for growth companies while others work better for stable companies
that do pay a dividend. I wouldnt use a dividend discount model on Under Armour since it
doesnt pay a dividend, but that would work for a company like Coca-Cola (NYSE:KO). A great
example of when cheap isnt cheap enough is when my brother-in-law and I were valuing Lumber
Liquidators. The numbers looked great, really great as a matter of fact. However the price wasnt
at the discount we were comfortable with. A week or two later 60 Minutes did a story on the
fraudulent reporting of the amount of formaldehyde that was in its flooring products. It had to
meet California standards, and it did not even though management and the manufacturers knew
it did not meet standards. The following day the stock plummeted from approximately $70 to $35.
However, it's never cheap enough on news like that. A few months later the stock fell to $12.
Another example of cheap not being cheap enough was when Merck (NYSE:MRK) announced
they were pulling Vioxx off the shelves because the medication caused several people to die
from heart attacks while being on the medication as well as others who suffered from heart
disease and strokes as a result of Vioxx. The stock fell from approximately $55 to a low of
$17.80. That was an excellent price; however, there was a huge unknown about how much
Merck would have to pay out in settlements. Because of that reason, Merck was never cheap
enough for me to buy back then. It has fully recovered, but it took several years to get back to
where it once was prior to Vioxx.
14. What kind of bargains are you finding in this market? Do you have any favorite sector
or avoid certain areas and why?
Bargains are still out there, but they are becoming much harder to find. I think the entire market is
overvalued and that makes finding good quality companies at the right price much more difficult.
The Buffett Indicator (market cap to GDP) is 118.7 today. For reference, anything over 115 is
considered very overvalued. The Standard & Poor's 500 has historically traded at a 15.5 P/E.
Today it is 25.98. With the market at that kind of level, it's going to be tougher to find what we are
looking for as value investors. I like to look at sectors I understand so retail is one that I look at
frequently, but if a company looks good and it's not something I understand completely, I will do
my research to try and understand it. If I can't understand it, I won't invest in it. Big Blue is a
mighty powerhouse, and it has made investors a lot of money over time, but when I read
the IBM (NYSE:IBM) annual report, I fell asleep. Needless to say, when a few of my mentors
were buying IBM, I decided not to.
15. How do you feel about the market today? Do you see it as overvalued? What concerns
you the most?
As I mentioned before, I do feel the market is overvalued. It's harder to find what we are looking
for. That being said, I think its a great opportunity to sell puts on companies that we want to own,
but not at its current price. If you have a non-IRA, this strategy is great. In an IRA, you have to
have the cash set aside to buy the stock if it gets put to you. I havent purchased anything since
October and that was an additional buy to an existing position. The last new position I entered
was in September but I have been actively selling puts. What concerns me is how the
government will be spending money come January. The debt is a big issue. I like Donald
Trump's plan to cut taxes and rebuild our infrastructure, etc,. but how much will that cost and
where are we going to make up the revenue once tax rates are cut? He is a businessman, which
I like, so hopefully that knowledge will be put to use to get this economy rolling, but it's too soon
to tell how that will play out so that is my concern right now.
16. What are some books that you are reading now? What is the most important lesson
learned from your favorite one?
I just finished "Mastering the Money Game" by Tony Robbins. I bought the book because the last
few chapters were interviews with Ray Dalio (Trades, Portfolio), John Bogle, Schwab,and Paul
Tudor Jones so it was interesting to hear what they had to say. I am reading 'The Investment
Checklist" right now and after that, I have Bruce Greenwalds book, "Value Investing From
Graham to Buffett and Beyond." The lesson I learned from my favorite book, "Rule #1," was
never pay sticker price for anything. Buy dollar bills for 50 cents. I also learned what to look for
to determine if the company is a Buffett-worthy company.
17. Any advice to new value investors? What should they know and what habits should
they develop before they start?
Dont paper trade because you will get a false sense of skills. When real money is on the table,
emotions will get in the way. Emotions dont exist in paper trading. Start off very small, even if
you can only afford five shares of a few companies. This way, you can learn what it is like from
an emotional standpoint to buy when everyone else is selling. Buying something out of favor isnt
easy, especially the first time doing it. Secondly, develop a checklist Day One. There are a lot of
things to look at when analyzing a company, and you can't miss anything or else it could hurt
you. The research isnt a difficult thing to do so dont be intimidated by the process. There are
just a lot of things to look at, and a checklist makes it so much easier.
18. What are your some of your favorite value investing resources or tools? Are there any
investors that you piggyback or coattail?
I always look at the Value Investors Club for ideas. This is Greenblatts site. I also use his magic
formula site for ideas, too. A few sites that I read often are Old School Value, Greenbackd,
Seeking Alpha, Value Walk and Rule One Blog. Rule One Blog is by Phil Town. Coattailing is a
very smart and easy way to get ideas. Mohnish Pabrai said in an interview that most of his ideas
he got from smarter wealthier investors. I do the same. I signed up for Phil Town Live to get
weekly research and his real time trades as he makes them, I also follow Paul Price every day.
On GuruFocus, I follow Pabrai, Greenblatt, Bill Ackman (Trades, Portfolio), Bill
Nygren (Trades, Portfolio), Charlie Munger (Trades, Portfolio), Buffett, Klarman, Einhorn, etc. I
will see what they are buying and put it through my checklist before I decide to buy.
19. Describe some of the biggest mistakes you have made value investing. What are your
three worst investments that burned you? What did you learn and how do you avoid those
mistakes today?
Two mistakes stick out very clearly in my mind. The first is Geospace Technologies (GEOS).
The numbers looked good but a little choppy, which is to be expected from a small-cap company.
It was growing rapidly, and it was undervalued at the time. I read the report and one thing stood
out in the risk section of the annual report which I decided to ignore: a single customer
represented a big portion of their revenues. I read that and still purchased Geospace at $55. The
customer did leave and as a result, the stock went to $20 real quick. I'll never make that mistake
again.
The second mistake was when I bought Horsehead Holding. I did so because three of the guys I
closely follow bought it at about the same time. I took a shortcut and didnt do my own research.
The company went bankrupt. After going back and looking at the financials of the company, they
were horrible. It wouldnt have passed my initial screener. I thought they knew something that I
didnt, and I took a shot. I won't rely on anyone again without doing my own due diligence.
Coattailing will generate many ideas for you, but you have to do your own research, too. Both of
those mistakes where teachable moments. The one positive thing that comes from a bad
investment is that you learn from it and you dont make that same mistake twice.
Ive been doing this long enough now that I have learned to control my emotions. When the
market goes up we are all happy, but when it goes down, I now salivate because that is when the
real money is made. I never used to be like that. As most people, I would get scared to death of a
crash especially being a financial adviser managing people's life savings. If you truly know
valuations, you can identify times where you should be out of positions or at least take money off
the table. I think that time is now. I look at fluctuations as just a daily part of the game. You can't
let it affect you.
If you are in good quality holdings, you will be OK if the market fluctuates. I look at fluctuations as
a good opportunity for adding to existing positions at better prices. When the market crashes,
that is when you should get excited and start loading up the truck. We shop for sales when we
buy cars, we use coupons at the grocery store, so why not take that same mindset to buying
stocks? A market crash gives us those sales. Imagine 2008 happening all over again knowing
what we know now. Under Armour was just $2 per share. Apple (AAPL) was $85 and then shot
up to $700 before it split. Priceline (PCLN) was $80 and then it went to $1,500. Corrections and
crashes seem terrible at the time, but as value investors, that is where wealth will be made. Be
ready for the next correction/crash and profit from it instead of being scared of it.
Position sizing. I learned this from Price. I dont put more than 5% in any one position.
Sometimes I will buy two companies that are in the same sector, but no more than two. Having
as much as 20 different companies in 10 to 20 industries will give you the diversification you
need to avoid blowing up your portfolio.
22. If you are willing to share, what companies do you currently own and why? How have
the last five to 10 years been for you investingwise compared to the indexes?
I bought Disney this year. It is one of my favorite companies. I went to Disney World this summer
and had an amazing time as I always do when I go there. My son has been watching "Toy Story"
and "Cars" on repeat since that trip. Its a well-run company, great service, great products, etc. I
have wanted to own Disney for awhile, but it wasnt ever cheap. The stock hit a high of 120 in
November 2015 which represented a valuation higher than it has been in 13 years. It fell from
$120 to $88, which now gave me the opportunity I have been waiting for. I didnt get it at the
margin of safety I usually look for, but I felt safe buying in at $95 and again at $90. It has had a
recent run and now it's at $104.
Last year Cummins was in an industry that took a big hit. Early this year the entire market
brought the price down even more. The stock fell from $130 to about $80. I got in at $86 in
February for my clients and myself. Its a nice stable blue chip name. Earnings have been more
unpredictable than I would like, but every time Cummins hit the level it hit when I bought in at
$86, it has always had a substantial rebound. This time was no different. The stock went on a
tear this year. We got out when the valuations were at a 10-year high. The stock was about $128
when we got out. Unfortunately for us, it went to $137. Oh, well. We still made an excellent 48%
return in less than a year.
In June I took advantage of Manpower. Its a great company with no debt and a solid financial
statement; 65% of its revenues came from Europe. When the Brexit occurred, this company fell
from $90 to $57. To me, that was a huge negative overreaction to a news event. Their earnings
were $1.72 in 2010 and closed out 2015 at $5.95. The company is moving in the right direction,
but the stock was offered at the same price as it was six years ago. The historical P/E for
Manpower is 16. It was 9 at the bottom of the Brexit. I got in at a P/E of 11.5. Every year since
2011, Manpower has traded at a 16 P/E or higher. If thats the case, the stock should be $95 (16
x 5.95 TTM EPS). That was my high-end price target. Every year over the last four years
including this year, it has reached $85. I put that as my lower-end target. I used all of my
valuation calculations, and they all fell within a similar range. So $85 $95 was what I was
shooting for when I bought in at $70. Today the stock is at $90. I recently purchased Under
Armour and Enterprise Products (EPD). We will see how that plays out.
23. Here's a fun one What stock would Buffett or Benjamin Graham buy today if he were
you?
Probably not Wells Fargo (WFC) even though hes a huge shareholder. If Buffett or Graham
were me, they would probably be a lot more patient and would be on the sidelines right now.
24. What is the most contrarian investment you've ever made? Why did you make it and
how did it turn out?
Geospace because everyone was running for the hills. I should have been running, too. I hate
costly lessons.
25. If most fundamental investors study the greats (e.g., Buffett, Klarman, etc), surely
value investing is no longer a "contrarian" investment strategy?
I think it will always be a contrarian strategy. If Buffett were to give every American a step-by-
step checklist of what he does on when analyzing a company, I still think 99% of the people
wouldnt follow it. Here's why I believe that: It's an emotional game. If you know what something
is worth it is very easy to buy it on sale and sell it when it gets to its intrinsic value or above its
intrinsic value. However, buying something on sale usually means it's out of favor or the market
as a whole is falling. Most people are too scared to buy when the sky is falling. Once an
investment pans out, it's emotionally hard for the average investor to sell a winner. Emotions are
too hard for the average person to overcome; therefore I still think that this strategy will work. It
hasnt failed since Graham introduced us to it decades ago, and it's going to continue to work for
decades to come.
18 Questions With John Huber of

Saber Capital Management
Goal: 'Make meaningful investments in high-quality businesses at attractive
prices'
Ive always loved investing. My father was an engineer but was very active investing his savings
in the stock market. By extension I became interested in stocks and investing relatively early on.
But I came to the world of investment management unconventionally. I began my career in real
estate, doing a variety of brokerage, investment and management activities in both residential
and commercial real estate, and I established a few small partnerships with family members and
friends to begin buying undervalued income-producing property. We bought residential properties
as well as small multifamily properties.
About 12 years ago, I began studying the work of Warren Buffett (Trades, Portfolio). Like many
value investors, the simple logic of value investing really resonated with me right from the start. I
began studying Buffetts letters and reading the various Buffett biographies. I set a goal early on
to establish a partnership that was similar to the partnership Buffett set up in his early days. After
the better part of a decade, I was able to build up enough capital to support my living expenses
while also seeding my investment firm. Saber Capital Management was established in 2013 as a
way for outside investors to invest alongside me. Saber runs separate managed accounts so
clients get the transparency and liquidity of their own brokerage accounts. Our goal is to
compound capital over the long run by making concentrated investments in well-managed, high
quality businesses at attractive prices.
Warning! GuruFocus has detected 4 Warning Signs with BAC. Click here to check it out.
BAC 15-Year Financial Data
The intrinsic value of BAC
Peter Lynch Chart of BAC
2. Describe your investing strategy and portfolio organization. What valuation methods do
you use? Where do you get your investing ideas?
My investment strategy is very simply to make meaningful investments in high-quality businesses

at attractive prices. My approach is founded on the principle that a stock is a piece of a business
that is owned by you and managed (in most cases) by someone else. I think it is very important
to think about stocks the same way a wealthy family would think about the family business.
Thinking like a business owner as opposed to a stock investor helps me focus more on the
variables that impact the long-term value of the business and less on the variables that impact
the short-term fluctuations in the stock price.
As an owner-minded investor, I prefer to make investments in simple, predictable businesses

with durable earning power. Since I have no ability to predict the economy or the general stock
market, I want a company that has staying power and that can survive a variety of
macroeconomic conditions and the business-cycle headwinds that will inevitably occur from time
to time. I rest easier knowing that companies I own will not just survive but hopefully take market
share during these difficult times. I put an emphasis on consistent profitability and stable free
cash flow. Ideally, I want to own companies that have favorable long-term prospects for
reinvesting its earnings at high returns. Since durable, high-quality businesses dont often
become significantly undervalued, I tend to have a concentrated portfolio of investments.
While buying good businesses at cheap prices is obviously a well-known formula for success,
there are certain character traits and skillsets that are required to implement this approach
successfully. I think one of the greatest advantages an investor can have in his or her toolkit is
the ability to think and act for the long term. The stock market is an incredible place where
market participants on the aggregate assign valuations to each business on a daily basis. Often
these valuations make sense, but occasionally they dont. As Ben Graham talked about, the
market is there to serve us (not to be served by us). So I think the key to implementing this
approach is to have the right psychological makeup and emotional discipline to be able to think
about stocks as pieces of businesses that have real assets that produce cash flow, not as
numbers on a screen that hopefully can be sold later to someone else at a higher price.
In terms of portfolio organization, my investments tend to fall into two broad categories:
Compounders with long runways and durable mature businesses that are significantly
undervalued. Occasionally there will be a special situation that might fall outside of these two
categories, but the vast majority of my ideas can generally be described as one of those two
types of businesses.
My favorite investment is the first-category business that does the work for you and can
compound intrinsic value over time at high rates of return. Owners of these businesses make
their returns through the results of the business and its steadily rising intrinsic value per share.
These great compounders are extremely rare, but finding just a few can make an entire
investment career.
The second category of investments is the high quality, mature businesses that might not have
the reinvestment ability of the compounders but still have durable competitive positions and
attractive economics. These companies might not be compounding intrinsic value at extremely
high rates, but Ive found that the stock market often allows you to buy stock in these businesses
at very attractive prices.
A dollar that is growing at 7% per year will be worth $1.25 in three years. Often this $1 can be
purchased at 70 cents in the stock market. There are usually numerous examples of these types
of investment opportunities each year, even among the largest companies in the market. Apples
intrinsic value isnt $150 billion more now (in December) than it was in May yet the market value
has fluctuated by that much in just seven months. Bank of America (NYSE:BAC) is growing its
book value, earning power and its intrinsic value at around 7% annually, but the market valued
the business around $130 billion in June and around $230 billion five months later in November.
Even the average large cap stock fluctuates by more than 50% in any given year between the
high and low price, and this represents opportunities for the patient investor who can look past
the quarterly noise.
So while I prefer investing in great compounding machines, the majority of opportunities tend to
come from this second category of investments, simply because they present themselves more
frequently.
3. What drew you to that specific strategy?
I became drawn to this approach simply because I love the idea of owning a quality company
that can do the heavy lifting for me. I am a value junkie, and I love finding hidden gems and
bargain basement classic value stocks as much as anyone else, but I believe most of the big
returns come from latching onto high-quality companies when they are undervalued. These
investments work well because returns can come from two main sources: the intrinsic value
growth of the business and the increase in the valuation that the market eventually assigns to the
business.
So while cigar butts and other more traditional value stocks can be great investments, I think
these types of stocks have to be sold more quickly if the underlying business isnt compounding
its intrinsic value. The other issue with these types of stocks is that they are higher maintenance
and require a steady flow of new ideas (cheap stocks that get sold have to be constantly
replaced with new cheap stocks). I much prefer to make fewer investments in better businesses
when they are available cheaply and then patiently own them as they grow their intrinsic value,
knowing that as time goes on these companies are becoming more valuable, meaning that any
initial margin of safety (or gap between price and value) grows wider as time goes on.
4. Which books or other investors changed the way you think, inspired you or mentored
you? What is the most important lesson learned from them? Which investors do you
follow today?
"The Big Short" is probably one of my favorite books, and the financial crisis is one of my favorite
general topics to read about and study. My investment approach was generally in place when
that book was published, but certainly reading about the independent thinking of Michael Burry or
Jamie Mae was very meaningful. Its also a helpful reminder that truly great investment ideas are
very rare, and when they present themselves they should be capitalized on in a big way. The
book also demonstrates a few other key factors that are really crucial for investment managers
such as the importance of being patient and letting investment ideas develop and also from the
view of an investment manager the importance of having like-minded clients who understand
your strategy. Michael Burry was brilliant and had an incredible investment idea but struggled
communicating this to his investor base, which largely became impatient with him and his short-
term poor performance despite the high merit of the investment idea and the incredible results
that were right around the corner.
There are many other books that are great so its hard to list just a few. But obviously Buffett is
someone worth studying intensely, and "Snowball" is by far the best book to study if you want an
honest depiction of his investment approach and his evolution as an investor. The book also
indirectly stresses the importance of thinking independently as evidenced by how Buffett at a
very early age departed from the diversified approach of his mentor Ben Graham. Despite having
one of the greatest teachers one could imagine when it comes to value investing, Buffett still
even in his early 20s had his own unique views on what makes a great investment, and he
managed his own portfolio very differently than did the Graham-Newman partnership where
Buffett worked.
Buffett did special situations, but he understood very early on that there is incredible power of
latching onto the great businesses. By studying his early investments, you will notice a lot of
special situations but also a number of investments in high quality companies like American
Express (NYSE:AXP), Geico and Disney (NYSE:DIS). And one thing I noticed from studying the
"Snowball" book is that Buffett, while certainly a diligent detective when it came to many of his
investments, tended to focus on just a few key variables for some of his largest investments.
For example, there were just two simple variables that were key to convincing Buffett to buy
Geico in the early 1950s: the low-cost distribution model (Geico sold its policies direct to
consumer, cutting out the middleman agent) and the huge addressable market (everyone
needs car insurance, people tend to choose based on price, and Geico had just a tiny portion of
the market). Buffett wrote an investment article on Geico around this time, and whats striking is
that he barely mentions the valuation, giving it just one sentence at the end of the write-up,
almost as an afterthought. It clearly was undervalued, and there is no doubt that the price was a
significant factor, but the emphasis was on the quality of the company and specifically those two
key variables that gave Geico its advantage. The lesson here is that understanding the business
model and keeping the big picture as the primary focal point is very important.
5. How long will you hold a stock and why? How long does it take to know if you are right
or wrong on a stock?
I think the average stock in my portfolio will probably be held for two to three years. As I
mentioned earlier, my ideal investment is one where I might be able to own it for five to 10 years
or longer, but finding compounders is very difficult, the great ones are very rare, and the stock
market tends to provide enough opportunity to locate two or three ideas a year that can be taken
advantage of so I tend to have low turnover, but I do have some turnover, which is sometimes a
necessary aspect of trying to generate above average returns over time.
While I strive for a punch card approach because I am a big believer that there just arent too
many truly great investment ideas, I also believe there are usually at least a few ideas that can
be found in any given year. When it comes to the math of portfolio management, just as asset
turnover is a component in a companys return on assets (ROA), portfolio turnover is a
component in an investors returns over time. A company that has low asset turnover needs to
have high profit margins in order to produce high returns on capital, and a portfolio manager who
has very low turnover has to ensure that he or she has some really big winners in order to
produce high returns as well.
The key is balancing these potential big winners (the high profit margins) with the undervalued
stocks that should be sold at fair value (which tend to be the durable, high-quality mature
companies that might only be growing at 7% to 8% or so but can sometimes be bought very
cheaply). Both investments can represent very attractive risk/reward opportunities, and both
categories can consist of really high-quality companies. The portfolio manager needs to be able
to determine when he or she might have the potential 10-bagger and when it might be wise to
own that company over the very long term (this means understanding that the business is
compounding its intrinsic value at above average rates).
So low-turnover tends to be blanketed with a negative connotation, but it is neither good nor bad
by itself. But generally speaking, I tend to find myself leaning more toward lower turnover simply
because I think great ideas are rare, activity in the investment business tends to be a net
negative, and taxes are generally reduced as turnover is reduced.
When it comes to realizing when Im wrong, there is no set time frame. I have made lots of
mistakes and will make many more in the future. And when I realize Ive made a mistake
(regardless of how long this takes me to realize), I am very willing to change my mind and sell
the stock. As Keynes wisely said: When the facts change, I change my mind. I would add to
Keynes by saying When I realize I was wrong about the facts, I change my mind.
I have really tried to focus more and more on the high-quality businesses. Ive noticed that most
of my past investment mistakes tend to come from investment situations where I was much more
attracted to the security and/or the valuation than I was to the business. So I try to focus first on
evaluating the business and seeking out companies Id like to own and then waiting for the
valuation to enter a range where I believe my returns will be high enough to meet my general
hurdle rate going forward.
Thats a good question. Im not sure if I can speak for other investors, but one thing I believe that
I think many do not is that there is often incredible value even in some of the largest companies
in the market. I look at both large caps and small caps, and I think many individual investors and
many smaller professional investors feel that theyll only have an edge in small caps. I certainly
think that small caps offer more significant gaps between price and value at times, but there can
also be very attractive value in some of the largest stocks in the market. I did a talk and
mentioned this concept in a post recently.
I dont tend to use screens that often. I do find GuruFocus (a plug for you guys) to be a very good
screener. And I also have used Morningstars screen in the past. Some of the more expensive
professional options like Bloomberg and Capital IQ have some really great features, but I dont
tend to use screens for investment ideas. I occasionally look at them for fun or just to see what
groups of stocks are down or occasionally to seek out a list of companies that meet some quality
metric like return on capital or historical free cash flow growth or something along those lines. But
generally, Ive found that screens create a built-in bias where if Im looking at a low (price-
earnings) P/E screen for example, I find myself trying to work hard to justify why the stock should
be bought. Often this creates a hurdle for me to think independently about the business or
sometimes prevents me from properly weighting potential pitfalls that the business has.
9. What kind of checklist or homework do you utilize when investing? Do you have a
specific approach, structure, process that you use? Or do you have any hard cut rules?
I tend not to use checklists as I feel that investing is much more art than science, and I think each
individual business and investment situation is completely unique. There are certainly similarities,
and pattern recognition is a good skill to have, but Ive never found that going through an
extensive checklist is a useful activity for me personally. I understand why some investors use
them, and I certainly dont think its a bad idea for everyone, but I prefer to think independently
about each individual investment without a standardized list of items to think about. I think every
investment is going to have certain items that dont pass an extensive checklist and like the
bias that I feel susceptible to when I am using screens, I feel a similar bias when using
checklists, and I think that certain standardized items on checklists can sometimes take your eye
off the ball on what might really be important for this particular investment (as well as what might
not be important).
If Buffett used a 100-point checklist when he analyzed Geico in 1951, he might have erroneously
decided not to buy it because it may have failed in 20 or 30 different categories. So if one does
use a checklist, I think you have to somehow consciously weight some categories more than
others depending on the type of business youre analyzing. This might be possible, but for me it
creates too much unnecessary noise so I prefer to keep a clean slate and try and focus on which
variables matter most and if the company passes or fails on those few key variables.
10. Before making an investment, what kind of research do you do and where do you go
for the information? Do you talk to management?
I rarely talk to management teams, although I have at times. I do tend to find a lot of value in
what Phil Fisher would call scuttlebutt (talking with other people who know more about the
business than I do these might be customers, former employees, suppliers, etc., or sometimes
visiting the place of business, which is a really valuable way to gain some insight into consumer-
based businesses such as restaurants, retail, brand companies, etc.). Most of my research tends
to be done in my office by reading about companies. I obviously find a lot of value in reading the
annual reports and the SEC filings.
I also read a lot of books, and Ive found that one of the best ways to learn about a business is to
read a book about that particular business (if its available). I always feel that my learning curve
seems to really accelerate when reading books about companies that I might not have studied
previously, and they help provide a solid foundation for other research activities going forward.
There are also countless sources of information on the web when it comes to reading about
businesses. Trade publications are valuable and are often cited as great sources, but Ive also
found that there are lots of great blogs and other similar websites that are freely accessible that
contain great information on businesses (Im not referring to investment blogs, but Im talking
about blogs or sites that are written by people who are discussing the business or the industry,
not necessarily from an investment standpoint).
11. How do you go about valuing a stock and how do you decide how you are going to
value a specific stock? When is cheap not cheap?
The value of any company is simply the present value of all of the cash that youll be able to pull
out of the business over time. So this would imply the DCF valuation model is best. I tend to be
investing in operating businesses as opposed to cigar butts or asset-heavy liquidations so I tend
to think in terms of earning power. I dont use spreadsheets, and I dont really do traditional DCF
calculations, but indirectly thats really how I think about value. I tend to simplify it by thinking
about the current earning power and then trying to think about what the company might be
earning five years or so from now. I then just decide approximately what that would be worth to
me or some other private buyer. Once I have that estimate, I simply try to wait for a large gap
between the stock price and that estimate of value.
The best ideas can be done on the back of an envelope. With Bank of America, if the bank is
earning somewhere around 10% returns on equity and there is around $190 billion of equity and
11 billion shares outstanding, this is around $1.70 per share of earnings. If the bank will grow its
tangible book value per share by 7% or so just through a combination of retained earnings and
share buybacks, then the bank will be earning around $2 per share in three years, even with no
improvement to the current level of modest profitability (10% ROE). A reasonable valuation level
might be somewhere around 10 to 12 times earnings, giving the stock a value of somewhere
between $20 and $24 in three years or so. If the stock was trading at $12, thats a pretty good
value. If the stock is at $22, its much more fairly priced.
Obviously, much more deep thinking about the bank must be done, including the cost and the
stickiness of the deposits, the leverage and the capitalization levels, the credit quality of the loan
book, etc. But assuming the business is determined to be a stable, high-quality firm, then I tend
to stick to really simple, back-of-the-envelope valuation methods that allow me to be off quite a
bit in my precise estimate and still make a nice return. As Joel Greenblatt (Trades, Portfolio)
once said, Were looking for spreads that we can drive a truck through.
In terms of cheap not being cheap, I think that whenever a security is more attractive than the
underlying business, its a red flag. I dont really believe in the term value traps (because a
stock either is undervalued or it isnt, regardless of what the P/E multiple might be), but I think
value traps occur most often when investors get overly focused on some valuation metric and
dont think critically enough about the economics and the competitive position (or lack thereof) of
the business.
Investors also have a tendency to play the greater fool game with bad business, meaning there is
always an idea that the stock of a declining business will be able to be sold to someone else
before the real problems of the business come to fruition.
12. How do you feel about the market today? Do you see it as overvalued? What concerns
you the most?
I dont think the market is overvalued. But nor do I think it is cheap. However, the nice thing about
running a concentrated portfolio is that I dont need to find that many ideas to fill my portfolio, and
there are almost always a few undervalued stocks of good businesses around. There might be
times when the overall stock market is in a bubble, and almost all stocks reach valuation levels
that would be categorized as risky, but this is not one of those times. This doesnt mean the
market cant or wont go down (it certainly can and certainly will at some point enter another bear
market, maybe in the very near future).
I just dont think that overall valuations should scare investors from looking for attractive
opportunities in stocks. I tend not to focus on the general market and simply look for individual
opportunities. There might be pros and cons to this type of mindset, but I have firmly come to the
conclusion that I have absolutely no idea where the stock market or where the economy is going
to go in the next year or two, and so I choose to focus on things I think I can evaluate, which is
trying to locate and value good businesses.
13. What are some books that you are reading now?
Right now Im just finishing a book called "East-Commerce," which is a decent book
"summarizing the online retail market in China. Ive just started "Shoe Dog," which so far is really
a great book about Nike (NYSE:NKE). Im also reading another book on the financial crisis called
"All the Devils Are Here" by Bethany McLean (who wrote the excellent book about Enron called
"The Smartest Guys in the Room"). And in my on-deck circle is "Americas Bank," a book about
the founding of the Federal Reserve.
14. Any advice to new value investors? What should they know and what habits should
they develop before they start?
I think the best advice Ive received is the advice Id probably give which is to really focus on the
companies that you can understand and then really be patient and wait for the rare opportunities
to capitalize on the obvious ideas, which generally dont come around very often.
In terms of habits, I think everyone is probably different when it comes to their own specific
process so thats hard to generalize, but it certainly helps to get into the habit of reading a lot.
Read the papers, read The Economist, read books that you find interesting and then spend time
talking to people who know a lot more about certain businesses than you do. Thats the general
approach I use which I think is a process that can help you get better each day.
I dont use a lot of resources, but I do like Value Line, Morningstar, and GuruFocus 15-year
financials. All of those three sources help provide a nice quick snapshot for what a company has
been doing over the past decade or so. Other than those data sources, I rely on the SEC website
for all the filings, the various newspapers that I read each day and then a few blogs that I like to
read occasionally on the weekends. I dont do a lot of coattailing or 13-F cloning.
I know that is a popular tool now, but for the same reason I try not to rely on screens to give me
investment ideas, I find that 13-Fs have a way of creating a built-in bias (i.e., Seth
Klarman (Trades, Portfolio) bought this stock so I need to figure out why he likes it). I find it hard
to be completely objective if my starting point is that someone who I really respect bought the
stock. So admittedly, I still glance at 13-Fs because it is interesting, but I try not to let it be a
major factor in driving my research process.
16. Describe some of the biggest mistakes you have made value investing.
As I mentioned earlier, I have made (unfortunately) many mistakes, and many more will (even
more unfortunately) be in my future. This is part of the game. The good news is that investing is a
game where many mistakes can be made and the overall long-term result can still be very good.
Peter Lynch once said that if you bat .600 (or get six out of 10 right), youll be in the investing
hall of fame. Im not sure what batting average is ideal, but I know that there will be lots of
mistakes.
The key is making sure that no mistake (or no one single decision) poses an existential risk to
your portfolio or business. Another key is identifying when a mistake has been made and quickly
correcting it (by selling the stock and trying to learn from the mistake). Probably my biggest
mistake of commission would be buying Weight Watchers (NYSE:WTW) after the stock fell a
significant amount and appeared to be very cheap. I liked certain aspects of the companys
business model, including the recurring revenue nature of subscription business, the high returns
on capital and the sizable free cash flow the firm generated over the previous decade. The
economics of the business are very attractive as meetings were held in very low-cost (or
sometimes no-cost) locations that could generate a relatively sizable amount of revenue through
product sales and more importantly, provided rapport, encouragement and feedback for
members who paid monthly fees for access to this club.
So the business required virtually no capital, the revenue was mostly recurring fee-based
revenue, and the free cash flow margins were very high. The problem was that I significantly
underestimated how quickly the membership business could deteriorate. I knew the membership
was declining, but I erroneously got too attracted to the price of the stock relative to the current
free cash flow, which allowed me to convince myself that I had a margin of safety. I compounded
the error by thinking the cost structure was much more variable than it was, meaning that as
membership and revenue declined, free cash flow declined at a faster pace than I anticipated.
The company had a huge amount of debt, and this proved to be very burdensome (and obviously
a very large fixed cost, which became, in percentage terms, a bigger and bigger percentage of
revenue).
Fortunately, I identified my mistake and was able to sell the stock before suffering a big loss, but
that was lucky as the stock now is roughly 50% below the level I originally purchased my shares,
and the business is still in a very difficult position. While Ive had a lot of small losing positions,
this was the mistake I viewed as the biggest because it could have resulted in significant
permanent capital loss. But also, I cite this mistake because I probably learned more from my
experience investing in Weight Watchers than any other investment mistake Ive made.
The biggest learning lesson with this investment is to be very wary of companies with a lot of
debt. In fact, this particular experience really made me want to avoid companies with a lot of debt
in almost all cases. Buffett said that great companies dont need to use much debt, and while I
mentioned I dont use checklists, that is one thing I now keep in the front of my mind when
looking at ideas.
There are lots of small takeaways I learned from this investment, but there are two other broad
takeaways that can be universally applied to other investment ideas. One that I referenced earlier
is that when the valuation (in this case the low price relative to the current free cash flow) is more
attractive than the underlying business, then it is wise to walk away.
The other broad takeaway is that investors shouldnt invest in the rearview mirror. Sometimes the
last 10 years can paint a picture of a very stable, durable and profitable business, but some
simple common sense thinking and evaluation might tell a different story about the business over
the next five years. When I finally woke up and realized that Weight Watchers was having
significant issues that werent going to be easily solved (or maybe not solved at all), I quickly
realized that the business is going to likely be worse off in five years than it is now, which renders
moot what the company did in the past. Gretzky was right when he said Skate to where the puck
is going, not where it has been.
This is a great question. Ive always had a long-term view, and I feel one of my strengths is my
patience. But one thing I didnt realize until I started doing this professionally is that managing
other peoples money adds a significant element of pressure and sometimes stress. Most people
naturally treat other peoples money with more diligence and more care than they would their
own, and this can add certain emotional reactions to the mix that wouldnt be present when
managing just your own capital.
Luckily, I have a great group of investors who collectively think very similar to me when it comes
to how I view market ups and downs, which is to get excited when stock prices are falling. Even
when current portfolio positions are falling, times of panic and fear help create all kinds of
incredible bargain opportunities that can be taken advantage of either with cash that might exist
in the portfolio or by selling a holding that is more fairly valued to buy one of the much more
undervalued ideas that came about as a result of the fear, and so I am always much more
interested when stock prices are falling and people are fearful. I think fear and falling asset prices
form the foundation from which great fortunes can eventually be built so those are the times to
get excited. Other than that, the fluctuations should generally be ignored, and focus should be
placed on thinking about the long-term business results, not the short-term fluctuations in the
stock prices.
I might sound like a broken record, but I think the key is to focus on businesses that are high
quality and have durable characteristics that are likely to be making more money in five years
than they are now. Whenever a stock of a bad business is getting analyzed because of the
apparent attractive valuation, I think there is a higher risk of error. Mistakes will never be
completely avoided, but I think focusing on the better businesses helps reduce a lot of unforced
errors and dramatically reduces the risk of a portfolio blowup.
22 Questions With Value Investor

Jon Forbes
'Keep at it and be patient, trust your analysis so much that the immediate
price is not something that will worry you'
I got started about a year ago this past fall because my goal was to make some money while
learning about different aspects of the markets.
My current strategy is to buy undervalued companies. The majority of my portfolio is in an

offshore drilling company. I read Benjamin Graham's book, "The Intelligent Investor," took notes
and developed an Excel sheet to assist in determining if a certain number of parameters (listed in
Graham's book) are passed as well as calculating the Graham number to get an idea on what
the fair value should be around if all criteria are passed.
3. What drew you to that specific strategy? If you only had three valuation metrics, what would
they be?
Warren Buffett (Trades, Portfolio) drew me to that strategy as well as a slowly developed disgust
for technical analysts. Its also very important to know everything about the company that you are
buying. If I only had three valuation metrics, they would not tell me enough about the company to
buy shares.
SUNEQ 15-Year Financial Data

The intrinsic value of SUNEQ
Peter Lynch Chart of SUNEQ
My whole analysis runs off of things taught from Benjamin Graham's well-known book, "The
Intelligent Investor." Another book I found interesting is Nicolas Darvas' book, "How I Made
$2,000,000 in the Stock Market."
wrong on a stock?
Long enough to reach my predicted price of how much I think the company is worth. I trust my
research enough to not sell, even when my position is down significantly.
Initially, I traded but got tired and started to use what I learned in Benjamin Graham's book.
I believe that a lot of investors these days do not hold onto stock for longer than 12 months, and
most that do probably do not get into fundamental analysis. It is an incredible world that many
people just are not a part of.
Just listening to the conference call can tell you many things about a companies current position
and how well the management is running things.
Finviz is great, it screens for companies with a price-book ratio under one with positive earnings
and looks for steady growth as well as a dividend. Everything else can be calculated using
information on the annual or quarterly report.
A lot of factors come into play, but the first thing I look at is the price-book value as well as the
performance. Then the Graham number is calculated and the companies growth is looked at. If
everything else passes, the last things that are looked at is if the company has an issue with
increasing share count or if it acquires too many companies at once (no more than one or two a
year).
Benjamin Graham's enterprising and defensive stock criteria are looked at primarily while
analyzing a company.
I look at the past performance as well as current numbers through the company's reports.
specific stock? When is cheap not cheap? If you can, give some of examples.
There are a number of criteria that I like to use when evaluating a company, most of which are
listed above.
14. What kind of bargains are you finding in this market? Do you have a favorite sector or avoid
certain areas, and why?
I try to avoid companies in the financial industry because I always had issues with them.
Everything else is not really an issue.
the most?
I do not really have an opinion on the market as a whole. It has been performing well recently, so
bargain stocks are more difficult to find but they are always out there.
Still finishing up Graham's book and writing notes on everything that is important.
Keep at it and be patient, trust your analysis so much that the immediate price is not something
that will worry you.
Finviz and company fillings. I have never really piggybacked on other investors.
today?
The biggest mistake I made value investing was not starting early enough. I lost quite a bit of
money on SunEdison (SUNEQ), then began value investing shortly thereafter.
I tend to rely on my analysis enough so that the current price does not really bother me.
21. If you are willing to share, what companies do you currently own and why? How have the last
five to 10 years been for you investing-wise compared to the indexes?
My portfolio owns a good amount of Atwood Oceanics (NYSE:ATW) shares. I bought in early
2016 and plan on holding it until it comes near the $30 range. I believe it is quite undervalued.
The rest of my portfolio is just cash and SPY shares.
22. If most fundamental investors study the greats (e.g. Buffet, Klarman, etc), then surely value
investing is no longer a 'contrarian' investment strategy?
25 Questions With Chris DeMuth Jr.

of Rangeley Capital
'If it is legal and there is limited liability, I would be delighted to invest in
anything at the right price'
Chris DeMuth Jr. is the founder of Rangeley Capital LLC. Rangeley is an investment firm that
focuses on event-driven, value-oriented investment opportunities. Rangeley Capital and
DeMuth's value investing forum, Sifting the World (StW), search the world for misplaced bets.
Rangeley exploits them for its investors and DeMuth writes about them on StW.
I have invested for my whole life, but professionally I did public policy research in Washington,
District of Columbia for hedge funds interested in antitrust and regulatory affairs before moving
into investing.
We are event-driven value investors. I work on a team of a half dozen people. We look for deep
discounts to intrinsic value. We focus on primary sources for idea generation.
3. What drew you to that specific strategy? If you only had three valuation metrics what would
they be?
I am interested in corporate transactions. I am particularly interested in deep discounts to NAV,

ideally discounts to liquid securities and cash on the balance sheet, and discounts to our view of
expected value during complex corporate transactions.
"You Can Be a Stock Market Genius" by Joel Greenblatt (Trades, Portfolio). This book showed
how the greatest mispricing oven occurs around corporate events. Today, I still follow Greenblatt.
wrong on a stock?
It varies from a few weeks, for example, in some tender offers to over half a decade, for example,
in mutual conversions.
The philosophy has not changed at all. The opportunity set shifts. In 2009, for example, we
accepted softer catalysts when valuation was highly compelling. Heading into 2017, we demand
harder catalysts. But that is just a function of the equity market valuation.
Russia is a great investing environment. Bonds are dangerous today. Risk and volatility are
distinct topics; today they are quite different.
From an operational perspective, AB InBev (NYSE:BUD) has one of my favorite companies,

brands and CEOs. It is one of the most well-run companies in the world. They are careful with
cost and brilliant with hiring. The can buy virtually anything and make it better.
No, we do not use any stock screeners. In fact, many of our favorite investments look just
horrible on traditional screens. In terms of finding undervalued businesses, we first ask where
would value be hidden? before counting up what something is worth, so we frequently look
where no one is looking or everyone is panicking.
I do not really tell a company what traits they must have for me to invest in it; underpaying covers
all sins. If it is legal and there is limited liability, I would be delighted to invest in anything at the
right price.
I like to be as knowledgeable as possible on all public filings. Then I like to speak with everyone
described from the board and management to the major competitors, vendors and customers.
Ideally, proctological. Yes, we talk to management and often write them too.
specific stock? When is cheap not cheap? If you can, give some examples.
We first try to find the true odds of positive and negative outcomes before backing into the
markets expectation and the market-implied probability of potential outcomes based on market
prices. It is cheap when the true odds are materially higher than the markets perception.
14. What kind of bargains are you finding in this market? Do you have any favorite sector or
avoid certain areas, and why?
M&A is shaking loose bargains here and there, especially in small-cap, pharma, energy and
banking. We have no preconceived notions of what sectors are good or bad, but tend to take
a close look at banks and thrifts.
the most?
The equity market is somewhat overvalued; the bond market is extremely overvalued. What
concerns me the most? Everything, but I am a worrier.
I always have a book going on audible and another on Kindle and another on paper. I am reading
"Nemesis: The First Iron Warship and Her World" by Adrian G. Marshall on paper, "Pre-Suasion:
A Revolutionary Way to Influence and Persuade" by Pobert Cialdini on Kindle and "The Undoing
Project: A Friendship That Changed Our Minds" by Michael Lewis on Audible. Cialdinis latest
book, "Pre-suasion," fits in beautifully with his earlier ones in terms of understanding the power of
manipulation. It is hard to be rational without coming under the spell of all sorts of manipulation,
but Cialdinis books make it easier to identify and guard against it for anyone who wants to think
clearly and analytically.
It is far too much work unless you really love the process. Read the canon of value investing and
proceed only if you are ravenously enthusiastic for more.
By far, my favorite value investing resource is Sifting the World, a community of long-term value
investors that I am lucky to host. On StW, there are many investors whose coattails I ride, most
notably Andrew Walker.
today?
Whatever the expected value, in a crisis, the correlations can and do go to one. For example, I
was too big in pharma at the beginning of the year. In terms of sins of omission, I have been
insufficiently curious about securities that are not quantitative bargains. There are a few
securities that are not traditionally cheap that could be worth owning and I never do. Thirdly, net,
it may have been a mistake to write about investing. I enjoy it but it may have made me more
procyclical to hear readers so happy when stuff is up and sad when it is down. Virtually all
reactions are procyclical.
I wrote a blog post on just that topic. Name the emotions, optimize your environment, study
potential manipulators, fire yourself sometimes, make reversible mistakes and finally, collect
comparative advantages.
One does not.
22. If you are willing to share, what companies do you currently own and why?
BNCCorp (BNCC) is one of my investments. It is undervalued as a standalone company and

even more undervalued as a target to a strategic acquirer.
23. How have the last five to 10 years been for you investing wise compared to the indexes?
Delightful (details available only to accredited investors due to regulatory constraints beyond my
control).
24. Here's a fun one - What stock would Warren Buffett (Trades, Portfolio) or Benjamin Graham
buy today if he were you?
Neither would answer that!
25. What is the most contrarian investment you have ever made? Why did you make it and how
did it turn out?
Contrarian within the value investing community, probably bitcoin.

Benjamin Graham

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Benjamin Graham: I Had

Surrounded by shelves of folders pertaining to U.S. regulation of railroads,

Unknown to anyone on Wall Street, Northern Pipeline had major holdings of

Graham saw that Northern Pipelines actual operations were comparatively

Get The Full Walter Schloss Series in PDF

Get the PDF

Benjamin Graham - I Had "Treasure in My Hands"

In The Memoirs of the Dean of Wall Street compiled by Seymour Chatman,

Here was I, a stout Cortez-Balboa, discovering a new Pacific with my eagle

After acquiring the sizeable stake, he decided it was time to persuade

In the months ahead, as Graham tried to persuade and pressure Northern

Grahams Northern Pipeline Contest as he described it, is a classic example

Benjamin Graham - Persuading Northern Pipeline to do

They had a series of objections to Grahams plan:

In years to come, Graham continued to buy stakes in public companies

Benjamin Graham - A crack-brained Don Quixote tilting

In 1926 when Benjamin Graham tried to persuade a management to do

But conflicts of interest between management and shareholders certainly still

According to Activist Insight, 758 public companies received demands from

Activist campaigns that ended in 2016. Ranked by target companys

23 Questions With Franois Rochon

6. How has your investing approach changed over the years?

Well I like companies that I believe have a durable moat. So companies

21. How does one avoid blowups in value investing?

SPY 15-Year Financial Data

5) How should one invest in a bear market?

6) What are the essentials of due diligence when investing?

8) What are some investment lessons you learned in 2016?

9) What discount rate do you use in your valuation?

10) Which is more useful, earnings yield or P/E ratio? Why?

12) What are the key attributes of a great investor?

A low-cost ETF that tracks the market like Vanguard.

Interview with Sid Lembirik, Managing Partner at Lembirik Group Investments.

25 Questions With Tom Vilord of

6. How has your investing approach changed over the years?

21. How does one avoid blowups in value investing?

18 Questions With John Huber of

My investment strategy is very simply to make meaningful investments in high-quality businesses

As an owner-minded investor, I prefer to make investments in simple, predictable businesses

3. What drew you to that specific strategy?

6. How has your investing approach changed over the years?

18. How does one avoid blowups in value investing?

22 Questions With Value Investor

My current strategy is to buy undervalued companies. The majority of my portfolio is in an

SUNEQ 15-Year Financial Data

6. How has your investing approach changed over the years?

25 Questions With Chris DeMuth Jr.

I am interested in corporate transactions. I am particularly interested in deep discounts to NAV,

6. How has your investing approach changed over the years?

From an operational perspective, AB InBev (NYSE:BUD) has one of my favorite companies,

21. How does one avoid blowups in value investing?

One does not.

BNCCorp (BNCC) is one of my investments. It is undervalued as a standalone company and

Neither would answer that!

Contrarian within the value investing community, probably bitcoin.

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