14 December 2014

In this episode, Preston and Stig have the renown Guy Spier on the show to talk about his new book, The Education of a Value Investor.

In 2008, Guy and Mohnish Pabrai bid $650,000 to have lunch with Warren Buffett. In our interview, you’ll quickly learn there’s a lot more to guy than investing and expensive lunches.

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  • Who is Guy Spier and what is his book “The Education of a Value Investor” about?
  • Why Guy Spier and Mohnish Pabrai spent $650,000 on a lunch with Warren Buffett
  • How a lunch with Warren Buffett changed Guy’s life


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Preston Pysh  1:23  

Hey, hey, hey, how’s everybody doing today? This is Preston Pysh. And as usual, I’m accompanied by my co-host, Stig Brodersen. And today we’ve got two guests for you. Hari Ramachandra from BitsBusiness is with us and he’s helping us interview our guest who we are just thrilled to have on the show today, and that is Guy Spier. 

So I know I sent out a couple of emails to some of the people in the audience, giving people an idea of who Guy is and that he’s gonna be coming on our show. So let me just open up by saying that Guy is the best-selling author of the book The Education of a Value Investor. 

I can say unequivocally that this book was Stig and I’s favorite read for 2014. In fact, I was talking to one of my close friends *inaudible* on the phone the other night and he told me that he was recently reading Guy’s book, and he said that he finished two thirds of this book in a single day. 

And he quoted something like, “Preston, whenever you’re receiving that much value, it’s really hard to put something down and walk away from it.” 

So I know it might sound like we’re really promoting Guy’s book pretty hard here because we’re literally looking at him and have him on the show. But if that’s how you feel, and you don’t want to put up with our perceived bias on how good Guy’s book is, I encourage you to go to Amazon, pull up the general public’s comments and reviews of his book, and you will see how many five star reviews there are for this book. 

So in one phrase to the audience, this is a must-read book, and we highly recommend that you go out and get it. And if you forget the name or you want to be able to pull it up later on, we’ll have that in our show notes, and you can link to that and check it out. 

So here’s a little background on Guy. Guy graduated the top of his class from Oxford University with a degree in Economics. After graduation, he was awarded the George Webb Medley prize for Best Performance in Economics that year. In fact, his performance was so stellar that during that time, he became a contemporary of David Cameron, who was the Prime Minister of the United Kingdom. 

After he attended economic tutorials with the man in charge of the entire UK, Guy decided to take some time off, so he went to Harvard Business School like Stig. Everyone’s got to slack off from time to time, so that was obviously a really bad joke on my part. But hey, we’ll keep moving here. 

So, and then in 1997, Guy started his own fund. It was the Aquamarine fund, and he started after a Warren Buffett’s 1950 partnership. Guy is well-known for bidding 650K with Mohnish Pabrai for a charity lunch back in 2007. And for all of our dedicated listeners, yes, that’s Mohnish Pabrai, the gentleman we discussed in episode 4 with Hari. 

If you’re wondering, Guy and Mohnish are close friends, and we are of the opinion that both of these gentlemen are the up and rising stars within the value investing community. So without further delay, I extend my warm welcome to Guy Spier. So Guy, what did I miss?

Guy Spier  4:11  

Oh festival, Preston, Stig, and Hari. Such a pleasure to meet you. And thank you so much for having me. And I just want to know, with all those kind words for the book, my publisher, definitely thanks you very much. And who knows, maybe if I get some residuals at the end of the year, even I will thank you. But that’s extremely *inaudible*. 

Now, I think you’ve done quite a bit of work on me. So you’ve done quite a bit of research, and you seem to govern the bio part pretty correct[ly]. So thank you for doing that. I think it’s probably what I ought to expect from a graduate of West Point. It’s totally thorough and not going to miss anything. So thank you for doing that.

Preston Pysh  4:52  

Well, thank you, sir. We are just so thrilled that you came on the show, and that you’re sharing your time with us, and more importantly, our audience, because I know that they’re really going to greatly benefit from your comments. So without further delay, Stig’s got the first question. Stig just fire away.

Stig Brodersen  5:07  

Okay, thank you, Preston. And Guy, we are so thrilled to have you. But I think that Preston probably presented you a lot better than I can. So I think I’ll just get to the first question. One thing that was really amazing about this book, and I discussed this with Preston before the interview. There are so many parallels between our own paths to value investing and the path that you’re describing. 

You had an MBA in Economics, studied at Harvard, and…the way I understood it, you had this idea that you needed to have a career in finance. And that was the one goal with if not what your life then, was really one thing that you were aiming for. And I had the same feeling. 

I spent, hold your horses, exactly 18 months in this high-powered financial sector job. And then, I slowly figured out that this company, and I wouldn’t say, compromised my value, but it was definitely not something that I feel authentic about working for. 

And without speaking too much about myself, sorry for that, a question that I’ve been asking myself over and over again is, “Where would I have been today, not so much financially, but more important[ly], personally, if I had stayed in a job like that?” 

I think that was really parallel to what you experienced at DH Blair. So I’m very curious about, [and] you have a few years on me, what do you think you would [have been] if you had stayed there at least like 5, 10 years?

Preston Pysh  6:38  

And I just want to throw something out there for the audience that maybe haven’t had the opportunity to read your book yet, Guy. And what Stig’s question was referencing. DH Blaire is where Guy originally started out working in Wall Street, and he talks about his experience of working for this company where the company would basically dress up a new company that they were trying to sell to different investors. 

They would highlight the few strengths and just neglect to even mention a lot of the risks associated with the investment. And then, they would have a person like Guy, who has all these incredible credentials from Oxford and Harvard and everywhere else, kind of standing there selling the investment to different people, and it put him in this position that was not him. 

It was not who he really wanted to be as a person, and he talks about this experience in the book. It’s just extremely profound. And so just to add a little context to it in case you aren’t familiar with what we’re talking about.

Guy Spier  7:36  

Yeah, just before getting into the answer to that. I think that what’s interesting is my editor, the Palgrave, Laurie Harting, said time and again, “Don’t tell your audience. Show the audience.” So I worked really hard at sharing my experiences. And it’s just very rewarding for me to see somebody like you say, “Oh, I had a similar experience.” Because I think that it sort of brings the reader and the writer together. 

You mentioned, “Oh, we’re sort of in the same boat.” And on another level, I think it’s rather sad how many of us started off with financial services business with kind of high hopes in the sort of moral hopes, and we gradually discovered, as we unpeel the onion, what lay behind all of the smoke and mirrors, and it’s deeply unpleasant. I think, slightly disconcerting to many of us. 

But then, where would I begin? I mean, obviously, it’s the counterfactual. We don’t know the answer to that. But as I thought about your question, I thought one thing is, that I think I might have become quite depressed. I just would have been not consciously depressed, but just an unhappy person. 

And I think we’ve all come across people who are so unhappy in a certain way that they don’t realize that they’re unhappy, or how to sort of become twisted. And what I mean by twisted is that there’s a good person struggling to get out, but he just couldn’t get out given the environment he was in. 

And if we think of plants, so if we take a plant, and put it in the wrong environment, it will be shriveled. You need to really give it the water, the lights, the fresh air, and the right things to make it blossom. And I think that I would have just in some way been shriveled. That’s the best of it. 

I’d like to believe that I wouldn’t have ended up in prison. But I can tell you how many times I was at home just sort of, in a certain way, looking in the mirror saying, “What’s wrong with you, Guy? Why can’t you figure it out like some of the most successful people in your firm?” And I think that I’m glad and lucky that I didn’t actually act on the kinds of conclusions that I was drawing because I would have acted…that would have been the path to hell, basically.

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Stig Brodersen  9:59  

Wow. That was a really insightful answer. And something that I really thought about, that you would talk a lot about was authenticity. There was something you spoke a lot about and I think this is the thing about the inner and outer scorecard. I don’t know if you have like…if you could just elaborate a bit on that. Why is that so important, especially, when you used to work at DH Blair?

Guy Spier  10:23  

That was about the most inauthentic environment you could have ever been in. And people were saying one thing to one person or another thing to another person in that environment. I think the first time I quit…our mothers always tell us to tell the truth. And we just think it’s something that our mothers are telling us, because that’s what mothers do. And I realized that she was imparting this really profound piece of wisdom. 

But the message of authenticity has now come at me from various, different, really important thinkers. I mean, it started with this dinner that I had with Mohnish Pabrai. And he talked about this book, Power versus Force by David Hawkins, where basically, a big part of the book is about authenticity. And we were speaking earlier about the autobiography of Mahatma Gandhi where even the subtitle, the story of my experimentations with the truth. And he is. Mahatma Gandhi is absolutely truthful in that book. 

But then, when you go to Charlie Munger, and you hear Charlie Munger say it’s better to tell the truth, because you don’t know… then you don’t have to remember what you said to him. So it’s almost like I’ve been getting this message on being honest with the world and being authentic, and having who we are on the inside, the reflection of who we are on the outside from so many different places. 

Interesting enough, all of those places connected up with the Berkshire Hathaway crowd. You know, but I will tell you that at DH Blair, I didn’t have any indications that that was the path to follow. And in some way this idea of seeking to be authentic, there’s almost… or maybe you could argue that it’s the same as about investing. 

But it almost goes far beyond because it’s not just about finance. And I really do just thank my lucky stars that I came across. Well, it was the Intelligent Investor for me that helped me onto that path. And it comes back to the original question. 

Once I started on that path, I got more indications that I needed to become a more authentic version of myself. If I had not started on that path, God knows where I would have been. Certainly that’s happy and that’s helping. 

You know Preston, what I would say is that I think that all of us, something the four of us on this conversation and probably many of you listeners, have been in situations where one person in the room is expecting us to be one way and say one thing, and another person in the room is expecting us to be another way and say something else. We felt that conflict. 

And I don’t think…I realized, I mean, I was extremely conflicted at this investment bank that I worked [in]. And I don’t think I realized at the time, that when you feel like that you’re conflicted in that way, then there’s nothing wrong with you, there’s something wrong with the environment, and you need to start. It’s not something that happens in a heartbeat. 

But you need to start figuring it out, basically. And so I guess, just an additional gloss on this idea of being authentic, if we’re in situations, if your audience or any either of you three are in situations where you don’t feel like you can’t be authentic, then that’s a likely indication that there’s something wrong with the environment. You need to start making changes. 

Preston Pysh  13:46  

And the longer you stay in that kind of environment, the more you become that environment.

Guy Spier  13:50  

And I really do think, I mean, I was very concerned in writing the book because we ended up mentioning the *inaudible* the man who ran the place, who ended up having three, I think, or two out of his four sons-in-law in prison as a result of violations by the age player that were [under] investigation, the report to court by the NASD. 

But I don’t think he liked the rest of us. I don’t think he will enter Wall Street a bad man. He entered Wall Street with a desire to…the same desires that I saw…I think he saw himself in me. I saw myself in him. And it’s just scary because it shows how warping that environment can be. 

And I think that something, a point that I’ve tried to make to a number of journalists is that they like to think of these kind of road traders, and every now and then, somebody paraded off in front of the lights, as being people who are kind of like different to the rest of us. And I think that my point is, no, they’re the same. It’s the environment that warps.

Stig Brodersen  15:01  

Yeah, I completely agree with you. Because it’s not like you’re sitting behind your trading desk or whatever you’re doing and thinking, I should do something illegal. It’s just that, crazy things happen when you’re under a lot of pressure, and you don’t have time to breathe. And I know it may sound like well, 1 month or 18 months, or how long you worked out, but you’re under so much pressure that you just can’t always separate right from wrong. That’s really just to take away. 

I want to give to people because I’ve met the same prejudice about these evil people that just want to hurt us. I don’t think people [who] work on…mostly [they’re] not necessarily evil people. But I think that sometimes they don’t know the difference between right or wrong because they’re under so much pressure and can’t think about anything else but themselves.

Guy Spier  15:46  

Just one one closing thought there is that, I don’t think that where we were, which was like entry level positions and maybe just relatively junior positions in the phone, I do think that the people at the top of these firms need to think and behave differently, and they do bear responsibility. And should work. I think that at the end of the day, businesses have to be prepared to be smaller and less profitable in order to have a more moral environment. And I’d like to believe the people on top of these firms can make a difference.

Preston Pysh  16:23  

Completely agree. Yep. Okay, so let’s go to Hari, with the second question.

Hari Ramachandra  16:28  

Guy, it’s truly a privilege to be talking to you. And thank you so much for taking time and talking to us. One of the contrarian ideas I picked up from your book is the power of giving. In fact, based on your recommendation in the book, I bought the book Give and Take by Adam Grant, and read it. 

And it’s very interesting because most of the time, when we used to, or at least when I used to think of givers, I used to imagine Mahatma Gandhi or Mother Teresa, and I would never aspire to be a giver because it almost sounds impossible to be a Mother Teresa. But your book basically brought out the practical aspect of being a giver. And that was very enlightening.

However, in the book, Give and Take, Adam Grant talks about successful givers and unsuccessful givers. And one of the things that he says successful givers do is that they surround themselves with other givers. And then, also they’re very good at filtering out takers. So my immediate motivation was, “How can I be with those givers?” 

And more importantly, I wanted to know, “Am I a matcher or a giver?” Because it’s easy to identify a taker, and in his book, he does a good job of identifying them. But how do you differentiate, and I wanted to know from you how do you differentiate matchers and givers, and how do you bring in more givers into your circle? 

Guy Spier  18:13  

A few things on that. So first of all, I was not a giver until I read Chelle Denise’s book. And even then I wasn’t a real giver. I was what I think Adam Grant gives as a sort of a fake giver or a guy who seeks to do things to other people into thinking that he’s a giver. And if you’d have asked me at the time, my sort of approach would [likely be]… I used to go and buy boxes of chocolates, small chocolates and hand them out to people as I met them. 

And if you would have given me truth serum, I don’t think I would have admitted this in general. But I would have said, I am doing this in order to manipulate the world into helping me out, basically. So what I really didn’t expect was that, in doing this, and we’re talking about probably over a five-year period, many thousands of times, I actually did change on the inside. And that was really surprising to me. It didn’t happen in one day. It didn’t happen consciously. 

But at some point, I started realizing, I think that there’s something about handwritten notes, literally writing the note, forcing myself to think of the other person. I mean, I think that part of the power of that is not the impact with the handwritten note has on the recipient. It’s the power that writing that note had on me, because it forced me to take a moment, think about that person, and think about what made them special or what special idea or thought I want to convey to them. 

And then suddenly, they become more precious and dear to me. So I think that the question of how to become a giver, I actually think the answer is “Fake it ’til you make it.” And the act of faking it will eventually, and as psychological research that shows if you fake a smile, there are genuine processes inside your mind that believe that you’re feeling better. 

So this is a great example of faking it ’til you make it. But then I think that on how to surround yourself with givers is… so I think that what happened to me earlier on was I would start giving, and then you know, the takers would take and that’s a horrible feeling when the takers were taking. And I’d be like giving stupid, and I’d stop. And it was only because of what I’d read about this Joe Girard guy and the Chill Dini book that I said, “No, I’m going to keep doing it.” 

I think that then you go through a dip. A very difficult dip, because I don’t think you know in many circumstances, I don’t think I would have known if somebody is a giver or a natural taker until I do something for them. So I would argue that the first sort of gesture on my side is it is actually an opportunity to learn how they respond. 

Sadly enough, the vast majority of people respond in a taking kind of way. It’s sort of like, I do something for them and they’re like, “Oh, this is good. I found Father Christmas. What else is this guy going to do for me? Let’s see if I prod him some more, what happens?” 

Also, I think that what I’ve learned there is just to manage my emotions, not to get angry or upset about that. But just to try….and these are often perfectly decent people who have wives and families, and pay their taxes and obey the law. And so, it’s not about getting upset at them. It’s just about becoming a little bit more distant from them. 

Even then, I think that the first thing that happens, this is what makes us so…is you become a giver, [when] you’re surrounded by takers. And that’s no fun at all. You can’t change your network with your relationships overnight, so it’s sort of like a process of hard work to quietly, to slowly [do]…and it comes down to [a] very minor thing. 

I think just answer the other person’s… if somebody’s clearly a taker, just don’t flame them or anything, but just take a little bit more time before you answer them. Maybe drop them from the Christmas part of this. Just let them be a little bit more distant. A little bit farther away. And then over time, now it’s just between the matchers and the givers. 

And I think, actually, the givers are extraordinarily rare. It’s not that hard to identify them because when you do an unexpected act of kindness to them, they immediately respond with something generous back. First thing [they do] is to be generous to you without any requests from you. So that’s often a very, very good sign that they’re givers. 

And then I think over time, surrounding yourself with givers is not something that I think happens in a…you can’t force it to happen. What you have to do is slowly and gently remove the takers from your life. 

And as I remove the takers from my life, there’s more space for givers to enter in. And I think that as I distance myself from some of these takers, I started noticing some of the givers that were around. I just wasn’t paying attention to it.

They’re actually sort of quiet wallflowers in the corner. And I should have just paid attention, because they’re actually wonderful people, who weren’t trying to insinuate themselves in any way. So I guess, there’s a certain wonderful sort of beauty in this. That it’s just not something that you can switch on or off. So you have to work out over a long period of time, basically. And I would say, I’m still working at it.

Preston Pysh  24:03  

It’s not easy. And it’s really counterintuitive to a lot of people. And I think that that’s one of life’s biggest lessons. Whenever you finally reach the point where you realize, if you want to have something or you want to receive something, you’ve got to give it first. It’s as simple as walking in. Ever walk into a building  where there’s two sets of doors that control the air conditioning that goes in and out of the building? 

And whenever you walk up to that first door, and you open it for the person who’s coming behind you, and you let them go through first. What do they do whenever you walk up to the next set of doors that are there? I’d argue most of the time, 90% of the time, that person opens the second set of doors for you, and then you walk in. 

And so, in order to receive the luxury of having somebody open the door for you, you have to open the door for them first. And I think a lot of people try to do that in reverse, where they want the door open for them before they open it for somebody else. And I know that that’s a really generic example. 

But I think in life, that applies to everything you do in different forms. And whenever you start figuring that out, and it’s taken me a long time to figure it out, but I have slowly figured that out, that I’ve got to open the door for the other person before they’re going to ever open it for me. 

And it’s an amazing piece in Guy’s book where he’s talking about the power of giving. Just [an] amazing question, Hari, and a fantastic response guide. I think it’s really something important to highlight to the audience.

Guy Spier  25:28  

But I would also say that I think that we’re living in a world… before the advent of the Internet, before the advent of radical openness, you could fake being a sort of a giver by being a matcher. And that would work because people didn’t find out about you so fast. I think that in a radically open world, this being a giver, is just much more powerful. And it’s in a certain way, it’s the only way to be. Because people just find out about you that much faster, basically.

Preston Pysh  26:02  

I’m going to move on to the third question, which is mine. And we talked about this a little bit in the first question about surrounding yourself with people that you admire. And so it’s just incredibly important. I know this is like one of my biggest things, and that’s probably why it’s my first question. 

It’s if you could go back to the time when you’re 18 years old, Guy, and you could pick only three role models, and you could study them and really kind of understand their essence in the way that they make decisions, who would those three people be?

Guy Spier  26:36  

So, you know, I was looking at this before, and obviously. I think there’s so many people that I would love to pit. But that would end up discarding for one reason or another because, you know, they were, you know… Marcus Aurelius was a military leader. He was a hell of a wise guy. He was a military leader, and I don’t much want to model myself often Roman military leader. 

I am so deeply impressed with Sir Ernest Shackleton for the way he handled his mistakes and the way he brought his men home. But at the end of the day, I’m not an Antarctic explorer. And I think that it’s sort of too narrow, or sort of a slice of his life that I’m taking. I think there’s some aspects of what Sir Ernest Shackleton did that were utterly crazy. 

And if we look at it and talk to Hari for a second about Mahatma Gandhi, again, there’s just no way in hell that I would want to model myself after a guy who almost killed his child. I mean, he describes in the book that…so his son was…I can’t remember what he was ill from. But the doctors came and said that it was really a good idea to give us some beef broth. 

Mahatma Gandhi just couldn’t bring himself to do it even though that *inaudible*. I would not want to model my life after Mahatma Gandhi either. So I think that what we get to is people who are very similar. 

So the three names that I’ve put down very easily: Warren Buffett, Charlie Munger, and Ben Franklin. And I don’t think that that’s particularly surprising to the audience. I think that they have lived such full and complete lives as rich [men]. Each one of them provides a rich scene to mine for ideas and insights about how to live one’s own life. So those are the three. Sorry, Mahatma Gandhi. Sorry Shackleton. Sorry, Marcus Aurelius.

A guy whose life I just don’t know well enough. But I think, funnily enough, it sort of refers back to the previous question is Abraham Lincoln. I think that you were asking, Hari, about how to be a giver in a world of matchers and takers. I know that there are a number of times in his career when he did that. He acted as a giver in a world of matchers and takers. And he was willing to suffer the consequences and only reap the benefits many years down the road, when these people come back to support him, so I think that. But I just don’t know his life well enough.

Stig Brodersen  29:18  

The next question is about investors and great investors. So Preston and I have studied a variety of investors and we surely learned a lot about compounding capital over the years. Then, we stumbled across you, Guy, and someone like Mohnish Pabrai, and suddenly, you started to talk about compounding goodwill which was a completely new concept for me. 

So I was just curious, what was the trigger for you? Was it when you found Dale Carnegie’s How to Win Friends and Influence People, or was it another book? Or was it when you met a certain person that you started to send out these thousands of thousands of thank you notes. I think I saw somewhere on YouTube that you sent out, I think you said 20,000 thank you letters? That was impressive. What’s the trigger for that?

Guy Spier  30:06  

Well, the trigger for sending out those notes was the story of Joe Girard in a children’s book. And literally, I mean, I also had a book that [had] Warren Buffett’s letters at the time. Oh, not Warren Buffett, sorry. Ronald Reagan’s letters at the time. And I’m like, “My God, if this works for him, I vote for Joe Girard and even Ronald Reagan does it in the White House, then I just have to do it.”

That sort of sending out notes, suddenly just came from that, combined with a slightly unbalanced aspect to me, that if anybody is around, knows that. You know, my wife is just socially much more intelligent than I am. I’m capable of doing some things that make me look pretty stupid. 

And so, I went about the smoke writing thing in a pretty unhinged way. And then, this idea of compounding goodwill, I only got to it. And I don’t think I read about it anywhere else. I got to it when I was writing the book. And I just thought about it. And I thought about the way in which the goodwill around me had compounded. And I just realized that, the great thing is, it doesn’t even require capital. 

So it’s compounded at a very, very high rate. I’ve had the opportunity to observe relatively close time to work with the Dakshana foundation. And every Dakshana  scholar, and a number in the hundreds now, of people who, if it was not for the intervention of the Dakshana foundation would not have been able to go to the IITs of India. And they get put onto a path where they now have a very, very improved lifetime earnings expectation. 

And the gratitude that those guys have to the Dakshana foundation and to Mohnish Pabrai, the acceleration of goodwill that Mohnish Pabrai is going to experience through that is just mind boggling because these are the guys who are going to be running Microsoft, Google, Intel in 20, 30 years time and they’re all going to have this soft spot in their heart for Mohnish Pabrai and Dakshana foundation. 

So that is the best example I’ve seen to date of the empowerment of goodwill. But the good news is that you can do it in a very, very small way that could still lead to extraordinary results.

Preston Pysh  32:43  

I absolutely love this part of the book. I mean, this is something that, when you talk about real investing, this is real investing, folks. I don’t even know what to say. I just love this part of the book so much. I’m excited that the audience could potentially benefit from it.

Guy Spier  32:59  

I would tell you what is hard to convey in the book… so what happened to me, part of the desire to write it was that I started seeing these extraordinary results. And one of them I described as, I would never have met Mohnish Pabrai for dinner had I not been writing and the habit of writing these thank you notes. 

But people would seem to see these good things happening in my life. Usually, students or younger people, and they’d say, “Oh, that’s because you go with great education, that’s because you know Mohnish Pabrai.”

I said, “No, no, you don’t get it. It’s because I’ve been writing these thank you notes. And then there’s so many like, now that’s, also *inaudible*. You’re just saying that to sort of push me away. And so, part of the motivation was like, “No, I’m going to write it down. And then maybe when I’ve written a book about it, some of these people will believe me, but I really feel this way.” 

And I think that example of meeting Mohnish Pabrai, and for those who haven’t read the book, I was determined to write 3 notes a day or 15 minutes a week. I was looking for opportunities to write thank you notes. And so if I attended some of these meetings, that was certainly an opportunity to write a thank you note. 

And so, the key is it’s not just that I wrote a thank you note to Mohnish Pabrai after his meeting or going to his annual meeting. I was writing thank you notes to every single speaker at every single conference that I attended. So I’d sit through some presentation on God knows what it might be, and I’d write to that speaker and say thank you so much and find a reason to thank them. 

So even if I thought the speech was boring, I’d find a reason why that was a good thing to do. So what is not conveyed is how you have to do it hundreds of times, if not, perhaps thousands of times before you get one hit. 

And here’s another idea… so you asked the question, “Have you got stories of how thank you notes have actually had an impact?” And I think in many cases, it’s very hard to tell. So imagine and I think it’s happened to me a number of times that somebody has… it’s they’ve got a dinner party for 12 people, and it’s them and their wife. 

So now, there’s 10 people they’ve invited. And they’ve invited 5 couples. And then it turns out, one of the couples can’t make it or just one person can make it. They can invite one person on short notice. 

And there’s any one of a dozen people that they could invite. What’s going to make them pick one person over another one? The minor thing like the fact that Guy Spier sent them a note wishing them a happy birthday or [a] wish sending them a New York card might make the difference between whether they invite Guy Spier or somebody else. 

And that dinner party may be the event at which I meet somebody that has a huge impact on me. So I think that you’re playing with probabilities. And you [are] just improving the probabilities by [a] very slight amount that people are more likely to ask you. 

And so, what I think I can say is that since I started doing it, the good things happen and the good luck happens just that slight bit more frequently. But that slight bit more frequently is just all that you need to have an extraordinary life. And these things, and just to give practical examples of these things compounding.

So people still say, Well, how come you still attend the tech conference, Guy? Well, I wouldn’t have attend the TED conference if I hadn’t met Mohnish Pabrai. I tried to attend the TED conference on my own, and they had no interest in me attending. So we know the story about me [and] Mohnish Pabrai. Then Mohnish Pabrai through the heat created, gets a request, if he’s interested in being a donor to the TED of India, the first TED India that took place, and he invited me to join. 

And I, of course now know the power of giving, and I say, “Oh, sure, I’m happy to sponsor that.” It was not much more than it would have cost to attend the TED conference on its own. And at that conference, I met somebody who… he’s one of the guys at TED. It’s the guy called Bruno Giussani. So, Bruno Giussani, he meets me, but he must have met 6 or 700 people at that conference. But of course, I wrote him a thank you note. Pleasure to meet you. 

And as a result of that, he invited me to co-found TedxZurich. And as a result of being part of TEDxZurich, I met a whole slew of people. And actually, it was through Bruno Giussani that I met somebody who was deeply helpful with the book, somebody called Jesse Gamble. So you know all these. 

I’m sort of probably confusing it a little bit. But there are all these webs where I can see that the *inaudible* putting out goodwill to the world just increases the probability that something good would come back to me. 

But part of the key and I see Preston nodding away is that you can’t expect anything. You just send it out. And, this is an approach to the world that is not like mammalian mating. This is more like a frog swimming over a bunch of eggs and just sending out sperm everywhere and waiting and seeing later to see what develops into a tadpole and what doesn’t. And so, but what I would tell you guys, and this is probably heretical is that I am so addicted to that. 

That if you had asked me to choose between, if you wanted to distinguish between the philosophy of value investing and this goodwill creation strategy, I’d probably choose the goodwill thing, because it’s so predictable in so many more circumstances than value investing. 

For value investing you need to be in developed markets and all sorts of things have to be working for you. Whereas, I’d like to believe that with this goodwill stuff, you could be the guy in China working on the key off-loading boats and still end up very successful. 

Preston Pysh  39:23  

And the great part about it is it only cost the cost of a piece of paper and an envelope. Unlike value investing where you might have to have a couple thousand dollars to put something in the market. 

Guy Spier  39:36  

Absolutely. And here is something that I, because it’s come up….so your audience may be asking you themselves at this point, “Yeah…What am I going to write that’s going to be meaningful to some wealthy, powerful, influential person?” 

Here’s something that’s really important as [it’s[ hard to believe. So what can I write to Warren Buffett, let’s say, that would make him feel impacted by what I’ve written? Because he doesn’t need anything for me. Absolutely nothing. And the answer is that everybody feels better about themselves in their life that they live in if they know that [they] had a positive impact on somebody else. 

So a short note, and it should be short, because I don’t necessarily have a lot of time to read it. So you have had an impact on me. I have now lived, and then now living a different life, because it is something that we can do to the most powerful, and influential, and rich people on the planet, even if we have nothing. So sharing that sentiment is very good. 

I’ll just say one other thought with you. You’ll find [it] funny that, so I write about the power of thank you notes and the importance of doing it in the book. And so after the book was published, I’ve been getting quite a high rate of handwritten notes. 

Preston Pysh  40:55  

Because they’re all coming back to you. You sent them out there, and now they’re all coming back to you.

Guy Spier  40:59  

So here’s my problem. It’s that, now I can’t very well ignore them. I mean, this would not be walking the walk, so I feel obligated. And I do want to respond personally to every single one. And so I spent, when I came back from my US tour, I spent two weeks just writing back to the ones written to me. And so be careful what you wish for, I guess. 

But I think that, and it’s very funny because my assistant in Zurich, she’s like, “I can respond to them.” And my answer is no, I have to respond. And she says, “Why don’t you just give me the formula?” 

My answer to her is, and I don’t know that if she fully internalized this is that I have to write it because if I don’t write it, then I won’t learn. And in the process of writing it as I do, the writing changes you. And I need to read these notes, and then write the answer myself for my own benefit.

Stig Brodersen  42:04  

I can definitely testify to that because I initially reached out to Guy and just have this vague hope that he would come on our podcast. And to my surprise, he actually responded himself. So he doesn’t testify to that. 

But yeah, I don’t know. I think most people if they had the privilege of having an assistant, probably I think most people would let that assistant respond, but I was pretty impressed that you responded, and you did it fast.

Preston Pysh  42:31  

And then Stig forwarded me the message and I’m about to jump through my roof.

Guy Spier  42:36  

Don’t do that. Your children won’t be very happy with me. And Preston, there’s a letter from you at the office with a book that I have not yet opened. It is sitting with a pile that I still need to get to. So my apologies for that. 

Preston Pysh  42:47  

No sweat. Okay, so as you can see, that wraps up our first portion of our interview with Guy Spier and you can see that his wealth of knowledge is just amazing. For right now, what we’re going to do is we’re going to go ahead play our question from the audience. And I’ll go ahead and answer that for you.

Flavio  43:04  

Hey Preston, this is Flavio. I’ve been following your website in value investing lessons for a couple weeks now and decided to give the practical side and tried it through a simulator. By the way, the quality of information is nothing short of amazing. 

After sitting through the various companies, I decided to take a look at the Lockheed Martin system since it’s a company that I deal with on a daily basis. When I was looking at it, I noticed that the EPS is stable and rising. However, the book value is unstable at best. 

I understand that this can be due to the company not being able to manage their equity well, but what sparks my interest is why, when you look at the dividend payout, is it consistently increasing? I would assume that as a company, your priority would be to retain or at least stabilize your equity rather than pay on Western earnings and dividend, but it doesn’t seem to be the case with Lockheed. 

Now I know that a lot of their work is contracted by the government and you can see that the return on equity spike in 2012, which is one of the midlife free fits began. I was stipulating that because of this, the company has a sense of security and that they will always have that guaranteed income from these government contracts. 

And that’s possibly why they may be less careful about incurring liabilities in other companies. This leads me to the second part of my question, since the company has a stable increasing dividend payout and a higher intrinsic value than the current market price, would it be wise to disregard the drastic changes in the book value and knowing that they are protected by this government?

Preston Pysh  44:25  

So Flavio, this is a really good question. And it’s something that I think a lot of people just kind of take for granted. whenever they’re first learning how to value a stock, they’re looking at the book value a lot. That’s a common thing that I see with people. And the thing that I’ll tell you is, if the book value’s increasing, then I’m not going to talk specifically to Lockheed Martin because this is kind of valuation in general. 

If the book values increasing, let’s say, over a 10-year period, and it went from $10 to $20, over that 10-year period, which you’d want to see that would correspond with that, and this is the point that I think a lot of people miss, is you’ve got to see the earnings take a very similar path with that book value in order to value that book value with some of the calculators.

For example, let’s say the book value went from $10 to $20. So let’s just say that the EPS was $1  10 years ago whenever the book value was corresponding at $10. So that would give you you know, about a 10% return on the value of those assets. So what you’d want to see is that trends up to $20 in book value. You’d want to see the earnings or the profit of the company go up to $2.

If you’re not seeing that corresponding increase in the profit that the company produces to the assets that they’re accumulating, that means that they’re not keeping that efficiency level that they had of a call at 10%. So, let’s just say that the book route value went from $10 to $20, but the EPS stayed at $1 and it remained $1 throughout that 10-year period. 

I would make the conclusion that that company is making poor investments with the retained earnings that they’re keeping, and that it’s not producing any more profit or value to the investor. So that’s the part that I think you really got to look at is, is the EPS trending with the book value growth. 

So after you determine that the EPS and the book value are growing in lockstep with each other, then you got to make the conclusion of “Okay, what is this company going to earn into the future and how do I discount that back appropriately?” 

And I think for a company, let’s just say any type of government contractor in the United States during this timeframe, end of 2014 timeframe, I think the biggest concern is that the US government has said that they’re going to continue to have budget cuts. 

They’re going to continue to downsize. And that’s where I would probably have the most concern with a company, a defense company, or something like that. Because that’s what’s really going to truly impact the future cash flows of the business. So I know that’s a really qualitative thing to say. 

But I think that that’s where you’ve really got to have this balance between qualitative and quantitative analysis whenever you’re determining the value of a stock. I know I didn’t speak specifically to the company that you’re addressing, but I’d rather make it more general for people to kind of understand the essence of valuation and security analysis. 

So, fantastic question, we’re going to send you a free signed copy of the Warren Buffett accounting book. And for anybody else out there, if you want to go ahead and submit your question to our show, we’d love to play it on the air. 

Just go ahead and submit that on our website, asktheinvestors.com and you can submit your question there and record it for us. So that wraps up our episode for today. We really enjoyed having you and thank you so much for tuning in. And we’ll see you next week on the second part of our interview with Guy Spier. 

So one of the things that Stig and I are very strict about is not endorsing any kind of service or product that we don’t personally use ourselves. So with that said, we give our full endorsement of our sponsors content realvisiontv.com. Real Vision is a site that Stig and I personally use ourselves and it has had a profound impact on the way that we view the financial markets. 

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Outro  49:41  

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