- By PJ Pahygiannis
1. How and why did you get started investing? What is your background?
I got a taste for business and investing from both grandparents. They both ran successful businesses and owned real estate investments. One grandfather in particular encouraged me to pursue learning how to invest in the share-market at age 16 and he mentioned reading about Charlie Munger (Trades, Portfolio). But unfortunately, I didn't at the time seek out information about Charlie Munger (Trades, Portfolio) and it wasn't until I was in my mid-twenties that I got hooked Graham, Dodd, Buffett and Munger.
2. Describe your investing strategy and portfolio organization. What valuation methods do you use? Where do you get your investing ideas from?
My investing strategy is to simply purchase shares in businesses that I understand, which are undervalued based on my evaluation of the businesses fundamental aspects and its earning power.
Valuation is in two steps, the first is determining the true value of the business based on the balance sheet. Looking for hidden red flags and also for hidden assets, for example if a business has subsidiaries, is there value and/or is their earning power reflected in the share price?
The first step is to determine whether there is real value in company, making sure the assets could be sold off in case of liquidation, but if the industry is in decline, the prospect of asset sales will be low and generally they will be sold for cents on the dollar.
The second step is determining the earnings power of the business. This is where all three financial statements help you determine the profitability of the business, and you want to analyse the business over a 10-year period. I can't go into detail as this process is a propriety system I have developed.
3. What drew you to that specific strategy? If you only had three valuation metrics what would they be?
The Graham and Dodd value investing strategy made a lot of sense to me. I believe in the recommendation that you should buy shares as if you are buying the whole business.
Three valuation metrics would be: The reproduction value of the business, return on investment and free cash flow.
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 main books that helped shape my investment strategy were:
"Value Investing: From Graham to Buffett and Beyond" by Bruce Greenwald, Judd Kahn, Paul D. Sonkin and Michael van Biema.
"Value-Able" by Roger Montgomery
"The Essays of Warren Buffett (Trades, Portfolio): Lessons for Corporate America" by Lawrence A. Cunningham
"Poor Charlie's Almanack" by Charles T. Munger
"Mediations" by Marcus Aurelius
"The Discourses of Epictetus" by Arrian.
The important lessons are many, but the main few would be: Be independent in all your thinking, be prepared, be patient and be in control of your emotions.
I don't follow any investors, I'm on my own path.
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?
Depends on the characteristics of the business. If I believe it has long term prospects, I will hold until the business can't maintain its favourable operating metrics against its competitors. But if I think it has value and it's not reflected in the market without any long term prospects, I will sell once its share price has risen to my required return, for example, if the share prices rises 30% within six months, I'll sell.
6. How has your investing approach changed over the years?
Very little
7. Name some of the things that you believe that other investors do not.
Read the notes of the annual report, or reading the annual report at all. Someone once said the first half of the annual report is just marketing material, I think that is broadly right.
8. What are some of your favourite 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 can only speak of businesses in Australia, but I do like Nestle and Amazon (AMZN). In Australia I like Reece and Beacon Lighting.
In assessing management there are two key measures I look for: consistency of ownership and allocation of capital.
You can read past annual reports and follow up to see if they are walking the talk.
9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?
Yes, use two simple measures: Low debt and fallen share price over 52 weeks.
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.
Buffett has laid out the common traits that a high quality company encompasses, and if you want to know what a bad company looks like, just invert the qualities of a high quality business. I encourage new investors and CEOs to read the book " The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success" by William N. Thorndike. That book should be mandatory reading for new CEOs.
11. What kind of checklist or homework do you utilize when investing? Do you have a specific approach, structure or process that you use? Or do you have any hard cut rules?
If I find a compelling business in the screening process, it will then undergo a thorough evaluation using my priority system, which does involve a checklist and I will write out my thoughts as to why I brought or didn't, so I can review months later to help improve my investment experience.
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?
My main source of information is a business's annual report. Yes I'm willing talk to management but rarely do.
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.
I can't go into detail as I have a priority system. If you read the books I've mentioned and follow their process, you will do well.
14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?
I haven't found anything compelling at the moment. I don't have favourite sectors, I'll look any business in all industries.
15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
I'm neutral on the Australian share-market, but I'm concerned about the Australian housing market and the large amount of debt held by Australians.
16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?
The Discourses of Epictetus. The main lesson is that human nature doesn't change. Also, Epictetus lays out a great framework to use when dealing with the vicissitudes of life.
17. Any advice to a new value investor? What should they know and what habits should they develop before they start?
When starting out, it is easy to get overwhelmed very quickly by the vast amounts of information, but start by chunking it down into bite size pieces. For example, just start by reading the most recommended book on value investing by other investors (probably be The Intelligent Investor by Ben Graham), and apply those principles. Then as you build confidence slowly, read more and continually build upon and adjust your investment process. Also keep a diary, write what you buy and why you brought a particular share, so in the future if that share tanks and you lose money, you can go back and review what your thoughts were at the time. It will help you avoid dumb mistakes in the future.
18. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
GuruFocus, Google finance and books.
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?
I only have one really bad investment, and looking back it was an incredibly stupid (dis)investment.
A listed law firm called Slater and Gordon had overpaid for a U.K. law firm and a year or so later, accounting anomalies arose in their financial statements. The share price fell 40% and it caught my interest, and it continued to fall a further 20%. I think due to overconfidence, I thought it had been oversold, and based on the false assumption that it was just oversold and would rebound soon, I bought it. Well that was pretty dumb idea, as I failed to even study the financials and study the U.K. purchase. I lost close to 85% of the investment, which I deserved to lose. It was an easy lesson to learn from.
20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?
By applying a stoic mindset.
21. How does one avoid blowups in value investing?
Take your time analysing a business, and make it thorough, plus avoid debt laden companies. I try to learn from other investors' mistakes. It is also important to be self-aware of what mood you are in. If you are excited about a stock, you will overlook red flags, but whereas if you are pessimistic you may discount the positives aspects in favour of the negatives aspects. Sleep on it before making a buy or sell decision.
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?
I can only speak about the Australian market. Since 2009 there's been plenty of opportunities to invest in and it's been relatively easy to beat the indexes since then.
23. Here's a fun one - What stock would Warren Buffett (Trades, Portfolio) or Benjamin Graham buy today if he were you?
I would guess that Buffett would be interested in one Australian company, that being Reece. Reece is a major public company and Australia's most successful supplier of plumbing and bathroom products.
24. What is the most contrarian investment you've ever made? Why did you make it and how did it turn out?
I don't know, I feel like I'm always making a contrarian investment.
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This article first appeared on GuruFocus.
