Robert Leonard (00:02:42):
We’ll talk about how value investing has struggled over the last decade and your temperament and how you’ve had conviction to stick through that strategy. I want to start by asking you a relatively easy question, which I think I know your answer to. I think it’s going to be, “yes.” Otherwise, you wouldn’t be in the line of work that you are, so I’m not interested in whether or not you say “yes” or “no,” but I’m more interested in “why”. Since there are people that believe that the markets can not be beat, they say we’re no better than monkeys throwing darts at a random list of stocks. Do you believe that investors can beat the market? And more importantly, how do investors go about beating the market?

Gary Mishuris (00:03:17):
So actually let’s start with my pinpoints, which is that it’s actually pretty hard. I think we’re all taught that…initially we’re taught that the markets are pretty efficient and it’s impossible to beat them, right? Or near impossible. Then if you’re a follower of value investing, you kind of learn that, “Oh no,” you listened to Warren buffet, you listened to…so efficient market hypothesis doesn’t apply and you can actually beat the market. I think there’s this point in the development of every value investor, where they get a little bit arrogant, a little bit overconfident, meaning that they kind of estimate that it’s a little bit too easy to beat the market relative to what it actually is. And then I think after years of like, decades of actually doing it, you and being humbled many times, you actually learn that it’s actually pretty hard to beat the market.

Gary Mishuris (00:04:03):
Yes, it is possible, but it’s not as easy as it seems. And I think you have to have a few things in place to do it. And that many people actually don’t have those things in place. I think the reason why you can beat the market is because I think that there are pockets out there where an efficiency is pretty intermittent. It’s not that it’s there every single moment, every single day, but it comes there because the big pools of money, the institutional investors that I’ve been… I was part of the world for 15 years.

Gary Mishuris (00:04:32):
I started with one of the biggest institutional investors there is. And I spent 15 years in that world. They just can’t, or they won’t invest in there, right? So there are pockets that if you have a nimble pool of capital, that you can revisit again and again, and occasionally you’ll find efficiencies, but it’s not like if you read a bunch of Graham, Buffet and so forth and you have $30, $40 billion to invest, it’s not like adapting a value investing approach is going to automatically give you a right to beat the market by a wide margin. That is not the case. At least not in the current day and age.

Robert Leonard (00:05:03):
We both talk about this “market”. What exactly is the market? What it this benchmark that we’re trying to beat? Is it the S&P 500? Is it a broad-based index ETF? You know what, in general, do people classify as the market?

Gary Mishuris (00:05:17):
That’s a fair question. I think ultimately, let’s say you’re an individual investor and let’s say, I don’t know, let’s say you have a business and you sell that business and you sell it for $5 million, you have a small business, and now you want to have that money invested for you. You can do it yourself, or you can put in some passive alternative, which is obviously very popular these days. You can give it to an active manager of some variety, right? And so the question is opportunity cost. So when you try and to beat something there, I have real life clients. I have partners in my partnership. I am trying to do better for them, then there’re opportunity costs of similar risks. So now, I perceive that to be a broad set of developed market equities. I don’t invest in frontier markets, Vietnam, Africa. Not because I think they’re bad just because I don’t think I have, that’s not within my circle of competence.

Gary Mishuris (00:06:07):
So I kind of define my purview if you would, as developed markets. And so I try to have two broad benchmarks over a long period of time, over a full market cycle of basically all developed countries equities. And that’s kind of probably the best opportunity costs to someone giving me a hundred dollars because instead of giving me that hundred dollars, they could go and invest that in MSCI world index or the developed world index or something like that. So that’s kind of how I think about it, but to be honest, because most of these indices are market cap weighted. It actually doesn’t matter which benchmark you use, unless you use some various enteric one. As long as you use some very broad benchmark, they’re all very similar over a long periods of time.

Robert Leonard (00:06:51):
How are you tracking your returns? I’ve been trying to find a good tool myself to use, to track my portfolio versus the market, and I’ve had a hard time finding one. I’ve ultimately decided to just use a Google sheet and keep it manual. But I’m curious if you have any great tools that you use to track your portfolio versus the most market.

Gary Mishuris (00:07:09):
You might not like this answer, I know, but I think the best thing is to not track your portfolio versus the market over short periods of time. And the reason is that, the more you focused on how you’re doing versus the market in the short term, this is my hypothesis I don’t have any evidence for this, that’s kind of a robust, but I think the worse you’ll do actually versus the market in the longterm. The market is going to produce some range of absolute returns. My view, and I think I can substantiate that a little bit it’s not certainty, but it’s hyper mobility my view, is that from this starting point, the absolute returns that the market is likely to produce are far below the long-term history. Long-term history of being kind of that 9-10% that all of us have been taught us to think about is what the market gives you.

Gary Mishuris (00:07:54):
So I would say that if we get half of that from the market, if you’re investing in some passive alternative over the next 10, 20, 30 years, that’s a good outcome from the current starting point. So then you kind of know what the market’s going to do in absolute terms. So I think that that your best bet is just to focus on the absolute return. I don’t personally make partnership, I don’t invest intentionally in investment that I think is going to produce less than a 12% annualized rate of return. Now, am I going to get rid of investments that do worse? Of course, like I’m going to make mistakes. This is a batting betting average business, but I don’t intentionally invest. So I’m not going to go and buy a bond that’s yielding 5% or something like that. That’s just not what makes sense to me.

Gary Mishuris (00:08:35):
But you know, I think that if you start focusing and zooming in like, Hey, how am I doing relative to market this week, this month, this year, I think that’s going to start affecting the way you construct the portfolio. And you’re going to start letting some dudes at the S&P 500 or whatever, let help you determine should be in your portfolio. So when the S&P 500 adds Tesla, should that really influence whether you hold Tesla on that, I’m not going to talk about Tesla. It’s not my goal here. The point is whether you own Tesla, that should really not be a function where some person at S&P decides that it should be an index. It’s either is a good investment of you in your view, or it’s not. So I think that, I know it’s not a satisfactory answer to your question, but I would say track your performance less against the market, and instead track your portfolio companies against your thesis for them.

Gary Mishuris (00:09:27):
Meaning is your thesis, which presumably was promising you a high rate of return, which is why you invest in these companies is a tracking, or is there evidence that it’s not tracking, which by the way, our minds are going to try to ignore the evidence that we are wrong and they’re going to amplify the evidence that we are right. So you have to actually go and seek out evidence that you’re wrong. No, with two X, three X, four X, the intensity, because otherwise you’re going to, your mind is going to fool you into thinking that everything is fine when it’s not. So I would say, underwrite your investments to high absolute rate of return, track them make sure your thesis is right and then act accordingly if it’s not. And over the long-term, if you do that and you do it well, you will beat the market by a healthy margin.

Robert Leonard (00:10:11):
We’re talking about beating the market here, but what about everything that they teach you in academia about efficient market hypothesis? I actually got into quite a few different debates with my professors in both undergrad and grad school while I was getting my MBA about this topic of EMH.

Gary Mishuris (00:10:28):
Yeah, no, it’s funny you mentioned. So when I was on MIT I took a number of Investments courses at Sloan and my Sloan’s investments professors actually Ken French. And for those of you who don’t know the Fama and French, are the kind of the godfathers or the founding fathers of the Efficient Market Hypothesis. Eugene Fama is probably the main founder of that hypothesis at the University of Chicago, but Ken French was his co-author on the number of the key papers. And I remember being in professor French’s Investment’s class 20 years ago and he was pretty honest that he was saying, “Look, there is an efficient amount of inefficiency.” And I’m like, “What does that mean? What is that?” I think in practice, what that means is that you have to have a little bit of inefficiency left for people like myself who are managing nimble pools of capital to be motivated to work hard and find those inefficiencies and invest in them, thereby partially closing the gap between price and value.

Gary Mishuris (00:11:24):
Because if you have no inefficiency left, then everybody like me leaves and then the market’s just…the prices are set by some S&P committee. The S&P committee has no idea what the business is worth. It’s not what they do. So I think that the efficient market hypothesis is not wrong. I think it’s really hard to beat the market and dayven, that is plentiful. I mean, I spent 15 years with large firms and how many large firms with tens of billions of assets under management, do we know have beaten the market by a wide margin? It’s not many. And the other aspect of it is I teach Valley Investing seminar, the business school, and a number of my colleagues teach the Efficient Market Hypothesis which is interesting so I was a guest kind of lecture, one of their classes in Security Analysis where the Efficient Market Hypothesis was kind of the default of modern portfolio theory was a default framework.

Gary Mishuris (00:12:16):
And I think a lot of times, so if you were to go to Berkshire, Hathaway’s annual meeting Charlie Munger, who’s obviously far smarter than I am. He would have some very witty statement about how anyone who teaches the Efficient Market Hypothesis an imbecile and they’re terrible or whatever. And I actually think that that’s the wrong way to think about it. And the reason is this. So if you think about the Efficient Market Hypothesis crowd has done the business schools is that they’ve created an orthodoxy. Meaning, I’m not tenure professor I teach a seminar because I like teaching it’s not my main thing. My main thing is investing. It’s basically a way for me to give back to people and mentor them essentially. I don’t know, like if they were to fire me, not that they’re trying to, but I would really not care all that much.

Gary Mishuris (00:13:01):
It wouldn’t really affect me. Right. But if you’re a professor on the tenure track and you’re trying to get tenure in Finance and you come out and say that Efficient Market Hypothesis is flawed or the wrong or whatever, you’re not going to get…you’re not going to succeed. So there’s this narrow tunnel vision of orthodoxy of like what you have to believe to be a professor major business score, right? And that’s wrong because the way I think we get at the truth, isn’t by having one orthodoxy, it’s by having a plethora of views where we can basically have a debate, this team, there’s Eugene Fama or Ken French. Someone who believes that basically what I do is worthless. And then there’s someone like me who maybe thinks what they do is partially flawed or something like that. And then we have a debate and then the students can decide and people can kind of self-select based on what they think the merits are of the arguments.

Gary Mishuris (00:13:52):
So I think rather than having an “either or” view, I think the stronger approach is to have both views or multiple views presented, and then have people decide. But that’s not how it’s taught. Right? You have exams and you have to say, better is this and you know, the official market frontier or whatever. By the way, neither BW is completely correct. There’s not that many people trying to be the next Warren buffet. And then we haven’t had another Warren buffet quite yet. And there are plenty of also examples of when the Efficient Market Hypothesis kind of fails as well. But they’re isolated examples and again, there’s not that many pools of really large pools of capital, which are beating the market by 5, 10% per year. Just not, I’m not going to name it by name, but take a look at the major mutual fund companies and look at their returns.

Gary Mishuris (00:14:37):
Now they’re not that impressive. In the aggregate, although I’m sure they’re very good at marketing the few funds of their hundreds of funds that are doing well in the given year period. That’s a different conversation, but in the aggregate, they could easily be replaced by a passive index fund and they’re being replaced by a passive index fund. So I don’t think either of you is completely right. I think the truth is this, the markets are most efficient, but there’s enough in efficiency left that if you’re managing a small enough pool of capital and by small enough, I don’t mean like you have to manage $10,000. It’s probably in the hundreds of millions, maybe a billion, but probably that’s kind of probably the maximum. You can find pretty glaring inefficiencies. If you’re managing tens of billions, it’s pretty damn hard.

Robert Leonard (00:15:20):
So as a professor in academia, as you mentioned, you’re not constrained to having to teach a certain way because you’re not worried about tenure. How do you approach efficient market hypothesis? How do you explain it to your students if they ask you about it? Or how do you even approach that topic in general, when that comes up in class?

Gary Mishuris (00:15:36):
So, I mean, people do ask me, and I think the way it says, look, I’m not trying to tell you that what’s right and what’s wrong. I’m trying to tell you how I approach investing. And I think no, I’m going to try an analogy. So I have a personal hobby and hopefully this is not in the too much information category, but I like bonsai and bonsai are these little trees in the park that originated in China, then here in Japan is creating miniature trees in a shrink putting them in a pot and creating an illusion of a giant tree. And the reason I’m bringing it up is that it’s apprenticeship thing. It’s a craft, it’s an art form that’s passed from a massive sort of apprentice. So you go, and in Japan, you go and study with a great master and you work for him semi slave labor for like five, six, seven, eight years and eventually if you’re good, you start strike on your own.

Gary Mishuris (00:16:27):
So the way I think about it is that, look, you can kind of choose who you apprentice with. If you want to pursue things in terms of the Efficient Market Hypothesis, I’m not going to waste my energy kind of telling you that you’re wrong. I think that there are spaces like the blue chip mega caps in very large liquid markets, like the U S where the efficient hypothesis is right most of the time. And then there are pockets of the markets, or the’re specific times in the market when prices are very inefficient. And I can demonstrate that with examples. Now, if I were a believer in the official market hypothesis, I would say, “Well Gary, it’s nice to hear these examples of these counter examples where the efficient market hypothesis fails, but hey, that’s not important.”

Gary Mishuris (00:17:10):
What’s important is overall can active investors really as a group beat the market? And so there’s this debate, and my point is, look, I’m not trying to represent all active investors. I’m just worried about like, can I using a value investing philosophy and process for my group, small group of partners where the limited, no, not that limit, but limited pool of capital. Can I do better for them then their alternative, their opportunity costs? As long as the answer is “yes”. And they have both overall evidence and specific examples, I’m fine acknowledging that there’s large swaths of the market where the efficient hypothesis probably fine. So what I tell my students this, yes, learn the efficient hypothesis and learn why that could be right then learn kind of the alternative point of view of why it could be wrong, then decide for yourself. And if you still want to come to class tomorrow, I’ll see you tomorrow. And if you decide not to, I’ll still like you as a human being and that’s fine. So I think I let people self-select and decide who they want to kind of apprentice under is I guess the answer,

Robert Leonard (00:18:11):
Is it safe to assume that the smaller your portfolio is the better chance you have to beat the market?

Gary Mishuris (00:18:19):
When you say smaller, I guess there’s two. I mean, one is, I guess, one way to interpret the question is the more concentrated the other, is this the smaller, the AUM? I think clearly the smaller the Assets Under Management or AUM, the more you can tap into micro cap and small cap spaces where the irrationality of the market is amplified. It’s not that it’s the same irrationality is not present in the large cap space on the mid-cap space. It is, but it’s just, there is occurs for brief periods of time. And the amplitude of that mispricing is probably more muted because there’s more people watching that space and constantly trying to find mispricings because that’s their job when there’s a hundred analysts following GE or Wells Fargo, whatnot. And there might be…I have some companies in the portfolio and I don’t want to get into specifics on the portfolio, but there are companies with no analyst coverage or one analyst.

Gary Mishuris (00:19:09):
One has a higher chance of being mispriced. It’s something that’s not being priced by that many market participants. Now, if you mean your question in terms of concentration, it’s a little bit of a dangerous answer because just statistically speaking, the more concentrated portfolio, I think it’s like Danny Conoman talks about this and it’s like the law, the small samples of something like that. Obviously you’re going to have more winners with concentrated portfolios, but you’re also going to have more losers with concentrated portfolios because they’re just more likely to be in the tales of the outcome. And so I don’t want to say necessarily that concentration is the answer. Concentration is the answer if you’re highly confident in your process in what you’re doing.

Gary Mishuris (00:19:51):
But for example, I kind of understudied under a person, Joel Tillinghast the fidelity who I think of as one of the best investors in the world, in this small group, and he has hundreds close to a thousand investments. Now, some of those because of the size of his fund, but he has beaten the market over a quarter century by something like three to four percent per year on tens of billions of dollars. That’s pretty impressive, especially in the small to mid cap space. And he has again, almost a thousand investments.

Gary Mishuris (00:20:17):
So I don’t want to posit that you need to have a very small number of investments, but I would posit if you take Joel and you were to clone Joel into two people and you will give Joel 30 billion or whatever he manages now, fidelity to manage for Joel number one, and for Joel number two, same fundamental characteristics as a person, same skillset, same experience. You would give them 300 million to manage. Joel, number two will crushed Joel number one. That I have zero doubt about. Just because Joel number two would be able to invest in better ideas, while Joel number one would be forced based on the assets he’s managing to spread his ideas beyond his true portfolio that he would manage if you had the choice into things that are incrementally more and more and more mediocre. They might not be mediocre, but they’re approaching mediocrity, right?

Gary Mishuris (00:21:05):
And so I think that size is the enemy of returns. That is nobody can argue against that. I think that having a nimble pool of capital is a strong, positive, but it’s not sufficient in and of itself if you don’t have the right philosophy and the right process and the right temperament to actually implement that correctly

Robert Leonard (00:21:25):
With nearly a thousand or even more than a thousand positions, why doesn’t Joel’s portfolio just replicate index? Why doesn’t it just offer return similar to an index?

Gary Mishuris (00:21:35):
Fair question. I think in some sense, right, if you had a thousand investments and maybe the market is compared against has a few thousand, essentially he is selecting this is my… I don’t want to speak for Joel, this is my interpretation with his selecting. He has better than average businesses as measured by returning capital and free cashflow generation. He works tirelessly and meets with management teams. So my guess is he has a better than average batting average on avoiding the evil doers among the management teams, the frauds, the people who are just terrible capital locators.

Gary Mishuris (00:22:09):
It’s almost like… I don’t want to describe what he does as an ETF, but it’s not an ETF, but it’s almost like he’s selecting out the money losing businesses, the businesses are bleeding cash, the businesses are run by super promotional people who are trying to just get rid of your expense. And he’s kind of left with the other 1000 stocks. And in theory, over long periods of time, that 1000 stocks that excludes those bad actors and those bad businesses should do better by some amount than the universe as a whole. So that’s why he does better.

Gary Mishuris (00:22:41):
But again, do I think that over the next quarter century, I hope he continues to do this for as long as he lives and I hope he lives a long time. Is he going to beat the market by the same margin as his first? No, because in the beginning he was managing a few hundred million then a billion and a few billion and then tens of billions. And if you look at his margin of victory, so to speak, it has diminished. Now the fact that his is as big as it is, is a testament to the fact that he’s an amazing investor, but the fact that it has diminished is a testament to the fact that it’s just harder to manage tens of billions than it is to manage hundreds of millions and that if anyone wants to come and challenge that premise, I would love to hear the alternative point of view because maybe I’m wrong, but I’ve not heard anyone say that it’s easier to manage 200 million that is to manage 20 billion friends.

Robert Leonard (00:23:27):
This conversation about Joel’s portfolio reminds me of this question that I get from listeners of the show a lot. And I wish I could credit it to a couple of the different people that have asked me this, but why can’t someone just pick the winners out of the S&P 500 and create their portfolio that way? I get a lot of people specifically millennials that listen to the show, newer to the market, they say, “If you have a basket of 500 stocks in the S&P 500, why can’t I just pick the 50,200, 300 out of the 500 that I think are going to be better than and just drop all the companies that I think are going to be not good, are garbage and beat the market. Why can’t I do that? Why does, or doesn’t that strategy work?”

Robert Leonard (00:24:03):
… and beat the market. Why can’t I do that? Why does or doesn’t that strategy work?

Gary Mishuris (00:24:05):
Well, it’s funny. So I spent the first few years at Fidelity and talked to a lot of peers at other very large mutual fund companies. And that’s what a lot of portfolio managers are trying to do, they’re trying to construct their portfolio on a relative basis. They’re saying, “Cool, I’m going to overweight this. I’m going to underweight this. I’m going to overweight that”. And so first of all, we know in the aggregate, there are a few Joel’s out there, there aren’t many, but there’s dozens of people trying to do that. By the way, they all have fancy ties. They look good in a suit. They talk on CNBC and they went to Wharton or some other fancy business school and yet they fail to beat the market analysis doing exactly that strategy and they have near unlimited resources.

Gary Mishuris (00:24:44):
So they’re not resource constrained. They have hundreds of analysts. They are as educated… They’re educated to the tee, to misuse of metaphor, right? And they’re trying to do this approach and they’re losing it. And here’s why. The reason is that the frictional cost is too high. They’re charging their 100 basis points or whatever in fees and maybe there’s another 25 or 50 basis points in trading expenses, whatever it is. And they’re probably a slight winner, gross pre fees. And they’re probably a slight loser or a breakeven after fees because you just don’t know which company is going to do slightly better than another. So if you’re trying to find these small edges, it’s really, really tough to find these small edges where, “I’m going to be sector neutral and within each sector, I’m going to pick the best companies.”

Gary Mishuris (00:25:33):
And that’s what they’re trying to do, but they’re trying to do that because that’s what their incentives are. And that’s a different question because from a marketing point of view, it’s easier to have a hundred funds and have none do too terribly and know if a few do well, you market that and gets Morningstar stars and you run advertisements against that and the flows come in. And then next year, when those funds don’t do as well, they don’t do terribly because you’re close to the index and therefore you don’t lose too much of the assets. That’s a business question, right? That’s not an investment question. But by the way, not a single investor who invests professionally that way that I know of, would invest their personal money that way, if they weren’t a professional manager.

Gary Mishuris (00:26:11):
And the way I invest my client’s money is exactly the way I would invest my money, because most of my money is in the fund. Now, when I was at Fidelity, again, this is not against Fidelity. Fidelity is a good firm. I have nothing against them. Everybody used to talk about PA’s. By the way, PA stands for personal account. Now let’s think about it. Why do you think we have personal accounts? Let’s just pause and think. Presumably, because we think we can do better than the funds, because if you didn’t think that, you would just have your money in the funds. Well, I don’t have a personal account. I have my money in the fund. Why? Because I don’t think there should be a distinction. Distinction is forced by marketing and what’s good for the business.

Gary Mishuris (00:26:46):
And if you think that you should have one set of investments in your personal account, people will come in and say, “Hey, this is a PA stock.” What does that mean? What that means is that it has a high potential for return. Might get you in trouble with your boss, if it doesn’t out, that’s what it means. And so I think when people create this dichotomy between what they think is the best set of investments and what they’re putting in the fund in this relative game of constructing this portfolio, I think that you’re giving up too much of an edge and the market is just too efficient. And that’s coming back to your earlier point.

Gary Mishuris (00:27:18):
That’s the point is that if you were starting with some huge edge of 10% per year, then maybe you could sacrifice 5% per year and do it in a way that’s not optimal and still beat the market by 5% per year. But I think in this large capital efficient space, your edge is small enough that if you sacrifice it, some of it net the fees, net the frictional expenses, there’s just nothing left. And the proof is… Anyone who’s listening to this, go look… Don’t take my word for it, look up these funds and pull up their 15, 20 year performance and pull up Vanguard or whoever index fund performance and compare who’s better.

Robert Leonard (00:27:52):
From our few conversations, my guess is that this probably isn’t your style of TV, but have you seen the TV show Billions?

Gary Mishuris (00:28:00):
Funny you mention that because I did watch the first two seasons because my wife and I, that was the compromise. She wanted to watch TV… So there’s a great Seinfeld episode for those of you who are a little bit older, my age. The compromise is the man doesn’t want to get a cat. The woman wants to get a cat, so they compromise and get a cat. So I didn’t want to watch TV. My wife wanted us to watch TV. So we compromised and we decided for a while before COVID to watch TV every week. So, that was one hour a week. I said, “Fine, Fridays I’ll watch it but I get to pick the show and I picked Billions.” That was a long-winded way of saying, “Yes, I’ve watched some Billions.”

Robert Leonard (00:28:33):
Well in that show, they talk about a PA and having a PA fund. Essentially they have their fund that they have for most of their investors. And they have a separate fund, I forget the name of it, but they have a separate fund for not even everybody in the company, just their high-end executives that are allowed to invest in it. And it’s a fictional example, but that show is based on reality. And so it just shows that even in hedge funds and not even just regular mutual funds in Fidelity that this happens.

Gary Mishuris (00:29:01):
So my theory, and this is obviously a subjective view of one man, but the more products you have beyond one, there’s a continuum, right? There’s the business of investing. And by the way, these firms are amazingly successful, they make billions of money. They’ve made their owners into billionaires, so clearly they’re successful, right? Let’s be clear. And I’m a capitalist. I came from the former Soviet Union, which was a communist country. So I support capitalists. I make no apologies for capitalists. So they’ve been successful in the jungle of capitalism, but let’s think about how that success is achieved, which is you have these clients.

Gary Mishuris (00:29:35):
So I came to this country fairly poor. My father passed away at an early age and came with my mother and my grandmother and my mother got a job fairly soon. We got here when I was 10 and as a teenager, I saw her researching mutual funds. She was making 30, 40 K a year. Single mother, we lived in a one bedroom apartment with three people in Brooklyn, New York. And it was really important to her, to put her meager savings into a mutual fund that could help accelerate her retirement, which she came here when she was 40. If you understand how compounding works, when you come here when you’re 40, you’re not a favorite to retire early, or even on time, because you missed the first 15 years or whatnot, 20 years of compounding. So to her, it really mattered.

Gary Mishuris (00:30:14):
So I grew up watching this example that, “Hey, it actually really matters how the fund does,” Right? And so the question is, “What’s motivating the manager?” Right? So if what’s motivating the manager is making as much money for themselves then of course, they should have two funds, right? Or their PA and the fund or they should have a hundred funds and then their PA. And the hundred funds, they will cynically market whatever is the flavor of the month is or the year and whatever has the most stars right now. And try very hard to make sure the ones that are doing well, aren’t doing so poorly, which by the way, the way you make sure that the losers aren’t big losers is by hugging the index, right?

Gary Mishuris (00:30:54):
So again, that goes back to these small relative bets versus just ignoring the index in the portfolio construction process. So what ends up happening is you have this proliferation of products and I have one product. Why? People say, “Why don’t you launch this?” Or, “ESG is popular, or this is the thing…” Why would you launch a second product? Because presumably, why not put the best of what you can do in the first product? Why create a second product? Well, you can slice it. The reason’s almost always marketing. When you run your own money… If you manage your own money as an investor, you don’t have two products, you have the best portfolio for the best returns, taking into account the risk that you can find.

Gary Mishuris (00:31:34):
And so when you have these products… Whenever you see more than one product, it’s marketing, it’s never investing, ever. And if someone wants to come out and debate me on this, I would love to because even really good firms, firms I respect, they might have a large cap and a small cap product. Why? Why not just have all the best ideas in one? Because they can blow out the large scale product to 10 billion, if they’re successful. And then they can close the small at two and get 12 billion. But if they only have one product, they would have to close the whole thing of two or three billion and they would make less money as a firm. Sorry I have to say that, but that’s just the reason. It’s just maximizing their own net worth.

Gary Mishuris (00:32:10):
So going back to my mother. So when I invest, I’m thinking of people like my mother and I want to do the right thing because ultimately I just don’t get that much satisfaction from getting some luxury cars. I’ll be stuck in the same traffic. I have my Toyota Highlander. One of my peers say, “Hey, you want to get that Tesla S series? If you do this…” And I’m like, “Why would I get a Tesla when I already have a Toyota? It’s comfortable, it’s good for my back. I drop my kids off at school and it’s just fine. No, I don’t want a Tesla, I’m sorry. I’m fine with my Highlander.” It’s a 2014 LE and that’s okay. My wife has a Subaru for our second car and that’s fine too.

Gary Mishuris (00:32:44):
So my point is that if your motivation is to make as much money, so you can be the chairman of some charity board, and have a bow tie at some black tie event and be important and all that, then maybe you’ll have a lot of products and you’ll do all of this stuff. But if you want to practice your craft and do it to the best ability you can and have hopefully a positive impact on some group of people and organizations, then I don’t think you need a lot of products, but that’s my personal view.

Robert Leonard (00:33:09):
How does a fund like yours make money if it doesn’t have multiple products?

Gary Mishuris (00:33:13):
Well, I think that part of it is I restrict capacity and I have a performance-based fee structure with a hurdle rate and a deferral. So I have a hurdle rate, which I think of as an opportunity cost that my investors have. I think the whole hedge fund 2 and 20 or 1 and 20, whatever it is, is atrocious. Because why should someone pay 20% of all returns? Because they can get some of those returns for free, right? So you should only pay for value added. And part of it is a lot of times the hedge fund will do really well in one year and the manager will bank lot of money. And then even if their overall 10 year record is mediocre, the money they’ve collected in the fees over 10 years is pretty big. And they drive whatever, Maserati or whatever the fancy cars are, Ferrari’s I guess.

Gary Mishuris (00:33:58):
And there’s a misalignment between how their investors do and how they do, potentially. That’s not to say there aren’t great investors. There are plenty of, or at least a small group of very good investors where both parties do really well. But there are also a larger group where the investor does really well because of a very unfair fee structure and the manager and their investors don’t do that well, or they don’t do even as well as if they were giving their money to some passive index fund. So I have a hurdle rate and I have half of the performance fees deferred for five years, subject to a clawback, if I don’t exceed that hurdle rate over the five years.

Gary Mishuris (00:34:34):
So I try and make it fair. I try to set it up in a way that encourages long-term thinking. I’m thinking of five-year plus intervals, not five weeks or five months. And I think that ultimately, “Do you make less money if you are less cynical in this business?” Probably. Probably the way to make billions, to your show analogy is probably to do the cynical things, which is… Essentially, when you do the cynical stuff, launching all these products, having an internal fund, that’s your best ideas versus secondary ideas for everyone else. You’re making yourself an adversary to the people who are entrusting you with their capital.

Gary Mishuris (00:35:09):
What I’m trying to do is say, “Look, I’m going to manage the money the way I’m managing my family’s money. If you want to come along, come along. I’m not going to change how I invest. I’m not going to launch a new product. And if I do well, you’re going to get the majority of the value add, I’m going to get the minority. And if I don’t do well, I won’t make much money.” And that’s the way it should be, but that’s not the most proper way to run it. And I guess I have the luxury of having started the firm 15 years into my career, where I have a little bit of a savings cushion, where I don’t need to try to maximize how much I make because that’s not going to impact my lifestyle very much, I guess.

Robert Leonard (00:35:45):
What do you consider a concentrated portfolio? We were talking about that before. Is it five stocks, 10 stocks, 30 stocks? What do you consider to be concentrated?

Gary Mishuris (00:35:55):
So, this might not be the answer you’re looking for, but first of all, too concentrated is when there’s one or two stocks that you’re constantly thinking about or one or two investments that you’re constantly thinking about. So if you find yourself thinking about those investments disproportionately, that means they’re just too big a portion of your portfolio. Presumably if you’re an investor, you should have a good process. The benefit of having a good process is that it shines over time, right? It’s going to have some not so good outcomes and some good outcomes and some great outcomes and that over some large N, it’s going to do well. So you should want your process to shine.

Gary Mishuris (00:36:32):
You don’t want to be dependent on this one decision because any one decision, the best investor in the world can get wrong. Warren Buffet’s made mistakes, right? Not many and far fewer than his successes, but he’s made mistakes. So you don’t want to have a portfolio where you are really dependent on just one decision. So I think that too concentrated is when there’s one or two decisions that are overwhelming the rest of the portfolio. Now what’s concentrated? I think that concentration is partially a function of the opportunity set, meaning if you’re in a market environment where there’s tons and tons of investments, which are deeply undervalued, and by adding the next investment, you’re not adding an investment that’s less undervalued or much less undervalued than your current portfolio, you should be more diversified, subject to your ability to actually assess those investments.

Gary Mishuris (00:37:21):
There is a constraint. Now we might want to hire a hundred analysts, but I’m of the view that ultimately Fidelity has hundreds and hundreds of analysts, but for some reason, most portfolio managers using the same analyst, haven’t beaten the market by as much as Joel or Will or Dan over a couple of other really successful portfolio managers. You have to have access to the same resources. So it’s not the resources, it’s the decision makers. So the decision maker can only assess in a quality way, so many investments. So I think that subject to your ability to assess that if there’s a ton of investments that are really undervalued, by all means have more, however, in most environments, there’s not a ton.

Gary Mishuris (00:38:00):
And so I consider a concentrated portfolio in practice is probably… So I manage a portfolio between 10 and 20 investments and it’s probably close to 10, most of the time, 10, 12, 13, 14, 15, something like that. There’s also position sizes of five to 10% most of the time. Occasionally 15 at cost and that’s plenty concentrated. But now you talk to someone like Charlie Munger and he says, “Well, you find that one Costco and you should put all your money in that.” That’s fine for that style, but that’s not my style. And I’m okay with that. I’m not trying to be Charlie Munger or Warren Buffet or whatnot. I’ve studied all of them. I’ve learned things from all of them, but I’m Gary and I’m different than each of those individuals.

Gary Mishuris (00:38:36):
And when I teach my class, one of the things I tell my students is, “Look, you’re not Warren Buffet. You don’t have his setup. You don’t have his strengths or weaknesses or his experiences. Don’t try to replicate him.” And I know there are very well known investors out there running around, trying to be cloners. I think that that’s not optimal. I think the best way is to learn from the masters and then think about your own strengths and weaknesses and customize a process that’s best suited for you. And for me, I don’t want to have one Costco. That’s not how I invest. I also don’t want to have a hundred investments. So for me about a dozen, 10 to 15 is probably about right, where no one investment is so large that I’m thinking about just that one investment.

Gary Mishuris (00:39:14):
But at the same time, I’m not a Fidelity. When I started as an analyst, I would go to the portfolio manager, I would do all this work and they would say, “Sounds good, Gary. I’ll put a 30 basis point position on it.” I’m like, “30 basis points. Really?” Okay, what does that mean? You don’t believe me? If you don’t believe me, why are you even wasting 30 basis points? Do something different. It just doesn’t make sense to me to expend a lot of energy and to do deep research and all that for a 1% position. But I’m also humble enough in my 20 years of experience that I’ve been wrong many times, I’m going to be wrong many times. I don’t want to have it all dependent on one or two decisions. I want to make sure it’s my process over time that comes through.

Robert Leonard (00:39:52):
You mentioned before that there hasn’t been another Buffet and I would agree with that. But I also, when I sit back and I think about this, not just during this conversation, but also just throughout my day, I think about this sometimes of, “Is there another Buffet out there?” And I wonder to myself, how much of Buffet’s legacy is his marketing or the marketing that the media has done about Buffet? And I’m saying all of this, I am through and through a Warren Buffet believer. I love him. He’s my favorite investor. He’s what got me in investing. So I’m not knocking Buffet at all. But I wonder how much of his statute, if you will, is from marketing from the media versus actual returns?

Robert Leonard (00:40:31):
And the reason I ask that is because if we look at just say as an example, Renaissance technologies, right? They’ve done almost 70%, I think 69% annually since the eighties or something along those lines. It’s been an impeccable return for a very long time with a great track record. So that’s not an individual person, that’s a fund or a firm. So it’s not necessarily a Buffet, but when you have companies that are able to do this and there’s founders that come up with the strategy and the different algorithms that Renaissance is implementing, how are they not in the same conversation as Buffet or maybe are they?

Gary Mishuris (00:41:03):
Nowadays, they are right? I think the… I read the book about Renaissance that the Wall Street Journal reporter wrote, and the premise was that the new best investor in the world. I’m not knowledgeable about Renaissance, but my understanding from the book is that at least the Medallion fund, it was basically closed to outside investors, right? So its capital constraint. I want to stay away from talking about Renaissance because I don’t know… I understand the very high level of what they do, but I understand about as well as you or any of the listeners, so I’m not going to add any value in that. I would say on Buffet, where I would say there definitely is real returns, if you look at the partnership days, he’s done amazingly well. However, and I don’t want to say however, but the markets, I think, were somewhat less efficient back then.

Gary Mishuris (00:41:44):
So I always wonder… This is a counterfactual, so it’s impossible to answer. If you put a 30 year old Buffet in the market today with a hundred million in capital, how well would he do? I think he would do much better than an index or something like that, but I just doubt that he would do as well as the 30 year old Buffet did in the partnership days. That’s my point is that he was amazing. He was really, really good, but he was also in an environment where the markets were less efficient. Now he has said in the record that if he had a really small amount of money, he could compound it 50%, five, zero. But when pressed about what exactly that meant, he meant a million dollars.

Gary Mishuris (00:42:21):
So he said if the amount of money was increased to 10 million, the returns would drop precipitously. So maybe he knows some inefficiencies that nobody else… Starts at a million dollars and it works, but 10 million doesn’t. So I think that it’s definitely not all marketing. However, I think that he’s also… He took public speaking courses. He’s really good at this aw shucks, Midwestern self-deprecating style that is attractive, right? And he’s a good public speaker and there’s definitely a lot of marketing. So I think that all of the biographies I read, if you read The Snowball, that’s my favorite because I feel it’s the most even handed one because it shows or at least attempts to show in my view, both the good and the bad.

Gary Mishuris (00:43:03):
The other biographies are much more fawning, “Oh, this is my idol and now I’m just going to worship him.” Versus I think Alice Schroeder wrote The Snowball at least attempts to say, “Here’s a man like any of us. He is amazingly good at some things and he’s come short in others.” And that’s true of me and many people, right? And she attempts to show the full picture and so forth. So I think the biggest thing about Buffet actually is how he’s evolved. I think I wrote an article for Forbes a while back about the evolution of Buffet’s style. I think if you look where he’s left other value investors in the dust is that he’s evolved from being a student of Ben Graham, statistical cheapness, just pure special situations, dumpster mills, whatever, right?

Gary Mishuris (00:43:47):
Things that are just completely cheap cigar box style investments, to much more franchises and then from franchises to even the growth side of intrinsic value to a degree. Not to a large degree, but to a degree. And at 90 he’s still learning. So I think that’s where he excels. If you look at some of his peers who stay on the ground, they learnt one approach and is stuck with it and they did it really well for decades, but they never really deviated from what they learnt nearly as much as Buffet did. Maybe that was because he met Charlie Munger or maybe it’s because he read Phil Fisher’s Common stocks, uncommon profits. But regardless of why, he was able to evolve his process and still succeed at managing much, much larger pools of capital.

Gary Mishuris (00:44:32):
Whereas if you take the Buffet from the partnership days from 50, 60 years ago and you apply that style to a hundred billion, it just doesn’t work. There’s just no dumpster mills, there’s no 10 billion plus liquidations that I know of, right? So I think what I want, when I teach my students, what I want people to learn from Buffet is not just the specifics of his style today, or at any point in the past. It’s how he has used the feedback mechanism of the market and learning from others to evolve his style, to become better, if that makes any sense.

Robert Leonard (00:45:05):
I generally fall in the same camp as you do. And I just mentioned that I’m a very passionate follower of Buffett, Graham and Fisher. Studying them all is really what got me interested in the stock market. But it seems at least to me that as of late, nearly everyone wants to be a Buffet style, quote, unquote value investor. What does it truly mean to be a value investor and what exactly is value investing?

Gary Mishuris (00:45:30):
Well, first of all, value investing is lonely, even among value investors. Because one thing that I observe when I talk to my value investor friends, is that we’re all value investors, at least in our minds, but we have very different portfolios. We tell each other about our own investments and that many instances of people drastically changing their portfolios to buy my stocks or of me buying the stocks that my friends whom I respect telling me they own. Now why? Because ultimately I think it’s a lonely endeavor. And I think of value investing really as thinking for yourself. I think value investing… Now, there’s a big difference between the factor of value investing, “Okay, it’s cheap on price to local price, to earnings of some other metric that’s quantifiable.”

Gary Mishuris (00:46:11):
And the mental model that you’re going to buy a business at a fraction of what it’s worth because your perception of the cashflow stream was of worth of those assets is different in the market. And that’s what value investing really is. It’s thinking independently, independently valuing the cashflow streams and the assets that you’re offered in the marketplace and making a decision, “Hey, is this attractive enough for me to invest my capital?” Or, “How does that compare to my opportunity costs of other investments?” So I think that there’s… It’s funny, there are funds that are calling themselves value funds, like the Mutual Fund world and they look like the Russell 1000 value. Well, that’s not value investing.

Gary Mishuris (00:46:53):
The mega caps in the Russell 1000 value, that’s just like hugging. It’s just a different benchmark, right? Does Russell really know where the best values are? If they do, why aren’t they the next Warren Buffet? They don’t. They’re just a committee who decides based on some scoring mechanism of A T & T or some other stock should be in the Russell 1000 value and yet another stock should be in the Russell 1000 growth. So I think that thinking for yourself and thinking about the business and what it’s worth to a long-term owner is what value investing is about. And what value investing is not about is just some summary statistic, whatever it is. My portfolio is at a very low PE on average. Does that mean that it has to be for you to be a value investor? No. I know very good value investors who have high PE portfolios, but they invest in earlier stage companies and they have very thoughtful, independent theses on why the investments they hold are very much undervalued. I respect that. That’s not my style and so I’m going to stick to my strengths and do what I think I’m good at. But I think that it doesn’t make them not value investors just because they’re buying investments that are statistically expensive, right? So I think that there’s a danger.

Gary Mishuris (00:48:03):
… assessments that are statistically expensive. So I think that there’s a dangerous slope here where you can justify anything as undervalued if you torture the model, the DCF or whatever model you’re using long enough. Then that’s a judgment call and ultimately over time, the results will show whether you were right or wrong. But I think that in general, I think [value 00:48:21] investors think about the fundamentals, not some statistic. And they think about… They have a vision of the fundamentals that’s very different from what’s implied in the expectations of the securities. And that could be buying a stock as a three times earnings that they think should be worth eight or nine times earnings. So it could be buying a stock as 20 times earnings that they think should be worth 50. But it’s thinking about the long-term trajectory of the fundamentals of the business, the qualitative and quantitative [inaudible 00:48:47] together, marrying the two, coming up with a range of values and finding investments that are priced in that left tail of the probability distribution. If that makes sense?

Robert Leonard (00:48:58):
In what ways do you think people misunderstand value investing?

Gary Mishuris (00:49:02):
Well, I think it’s, again, I think it’s when people are dogmatic and they are looking for some easy formulaic answer, and I think the more rigid you are… So rigidity has a benefit. What’s the benefit of rigidity? It’s that it keeps you disciplined. And one of the characteristics that’s intrinsic to value investing is discipline because value investing train that you don’t want to be just buying stocks because they’re going up or because other people like them, you want them to be disciplined to your views. And that’s good, but there’s difference between being disciplined in terms of sticking to your process and being dogmatic in the sense that defining value very narrowly, like I need to have a the low price to book cores not value.

Gary Mishuris (00:49:44):
So that’s an example of when people miss in the STEM value investing and then also another example is when people are overly focused on the short-term. I’ve seen a lot of value investing mistakes by experienced investors who are buying really bad businesses. They’re clearly structurally at the breaking point, but they’re cheap on last year’s earnings. And so they fit their mold and they’re like, Oh, but there’s seven times earnings or six times earnings. It’s like, okay, but they have fixed costs and their revenues are accelerating downward. So in three years they’ll be at 20 times earnings, but not because the stock is going to go up because the earnings are going to collapse. I’ve seen this, for example, with newspapers.

Gary Mishuris (00:50:22):
Now, 10 plus years ago, when I experienced value investors were copying Buffett saying, Oh, newspapers are great business. They’re local monopoly. And I remember saying, but their revenues are melting. The internet is taking share. I understand they’re cheap, but they’re not the same business that Buffett saw in the seventies or the eighties. So you can’t apply the same mental model because the things have structurally changed and people are just saying, well, okay, I’m going to ignore that. And I’m just going to buy them because they’re cheap. And because the business used to be good. So that’s one mistake, another mistake, and that’s a good segue into driving with the rear view mirror in the sense that…

Gary Mishuris (00:50:55):
So one of the mistakes I’ve made is, so a lot of times there are companies I would love to buy at the right price. And they’re rarely at that price. I wait and I wait and then finally they get to that price. And my example of that is Dell. Dell had a big competitive advantage, Dell computers, they would make computers to order. So they have the working capital advantage. They had the cost advantage. It was great. And that was true for a while. Then various things happened, people partial replicated the model. The total cost of computers came down. So having a 10% cost advantage in absolute dollar terms became a smaller advantage and all of those things.

Gary Mishuris (00:51:29):
And finally, Dell got to a [peer ratio 00:51:34] that was attracted to me. This was a while ago and they finally bought the stock. Mistake because I was basically buying yesterday’s Dell, but that wasn’t tomorrow’s Dell and that costs me some money. So I think that even Graham, I read Security Analysis, which I have a here because I reread it not for show, because the Security Analysis right here, I read it four times and I teach the course and I mentor people. And every time I learned something in there, Graham very clearly says a value investor has to guard against the future. And what that means is that you’re trying to make sure that there aren’t adverse changes that are happening to the business you’re investing in, they’re making them very… Their economics very much worse than their history.

Gary Mishuris (00:52:15):
So I think one example is waiting for these really expensive stocks to finally fall into your price range. But by the time they get there, they’re broken businesses or certainly impaired businesses. So I think that those are a couple of mistakes people make. And I think just coming back to your point of market efficiency. Value investing is really hard. I’ve done this for 20 years and the longer I do it, the more difficult I think it is not because I’m getting worse, hopefully, but because I just realized all the mistakes I was making earlier on, it’s tough. It’s not like you [Hughie Graham 00:52:47] and Buffett and all of a sudden you show up and you make massive excess returns. I think you have to work really, really hard. And then you have an opportunity to add value and generate excess returns, but it’s not easy. That’s for sure.

Robert Leonard (00:53:01):
For those that are watching the video version of this podcast on YouTube, you can see that Gary’s book of Security Analysis have gold pages. What addition is that? Because I have two additions of Security Analysis, two different ones. I don’t have gold pages.

Gary Mishuris (00:53:15):
You called me out on it and it’s fair. So this is the Security Analysis… This is a special edition with the gold pages and a little bookmark. I think when I bought it was like $60 instead of $40. And if I were a statistical cheapest value investor, that would be a purchase, it was $20 wasted. But I figured I’m going to use this book quite a bit. It’s not a book I’m going to read on the beach and throw out, put away forever. So I just felt like I wanted to buy it. And so it was a splurge. It was a $20 spent. Now sometimes these additions were selling for $200, $300. Now, sometimes they’re not, but it’s the same book. It just feels a little nicer on your hands and you have a little bookmark. Did I waste $20? Maybe, but I guess, okay with that.

Robert Leonard (00:53:58):
I like the aesthetics of the gold pages. I’m going to have to see if I can get my hands on a cheap version of that. I don’t want to spend necessarily hundreds on it. Because it’s the same material, but if I can find a decent deal on one…

Gary Mishuris (00:54:08):
Yeah, you don’t want to spend hundreds on it. So one interesting thing about value investing, so in my seminar, one of the early classes, just to illustrate a point, I usually hold this book up and I say, okay, the regular edition costs, whatever, $49. I don’t remember what it is, but something like that. And I asked them to estimate, write on a piece of paper, what they think the special edition is. And then the reason I do it is because a lot of times people… Value investors, especially in the beginning value investors, they think that value should be the very narrow range. Let’s show this and said, look it’s gold it means… There’s not gold nuggets in there or anything like that. This is just the same book. And the funny thing is the range of values I get…

Gary Mishuris (00:54:45):
Now I tell them like, Hey, the regular edition that your business school provided costs $50, let’s say, and they get a range from like $60 to like $400. And I really enjoy the exercise because then we go on eBay or Amazon, we find out what it actually costs. But the point is that you had a range of like eight X or something like that, between the low and the high on something as simple as a book where you already knew what the non-fancy addition costs. So if you ever come up with a situation where you have a 20% to 30% range between your worst and your best case for a business, which is far more complex than a book, you have to know that something is wrong. So that’s all part of what makes real value investing hard is that you don’t know for sure what something is worth.

Gary Mishuris (00:55:33):
It’s just an estimate. And it’s actually in a range of estimates and you’re waiting for extremes and back to the earlier point of value investing and efficiencies and large versus small pools of capital, you have to be very patient, have the right temperament to wait for when you get an extreme price. So, if I get this book offered to me for 30 bucks on eBay, I’m buying all I can buy. All because I know the regular edition cost $50, and this is certainly no worse than the regular edition. It has gold plating, a little bookmark, so I will buy it and I’m going to be able to sell it for at least $50, right? But it’s very rarely… One time I actually bought it for a client for like $40 and it was some charity bookstore that had it in the used, but very lightly used condition.

Gary Mishuris (00:56:15):
So it went to a good cause and it was for a value price and I signed that, which I’m not sure if increase the value or decrease the value in that case, but he enjoyed it. So anyway, the point is that occasionally you can find this book for really cheap, but other times it’s only available for three to $400. Is it worth three to $400? To me it’s not but the point is that it’s hard to know the precise value of something, which is why you need to use a wide range of weight for an extreme price before you swing at it.

Robert Leonard (00:56:43):
While we’re on this topic of books, I’d love to hear your thoughts and opinions on spending the money to buy arguably, one of the most expensive investing books that there is, and that’s Seth Klarman’s book on value investing. Do you think it’s worth spending $700 to a thousand or more on a book specifically Seth’s book?

Gary Mishuris (00:57:04):
Seth has been very kind to me and I don’t want to say anything at all that would be in any way perceived as being disparaging of his wisdom. And by the way, I think I’ve seen some prices of $2000 and $3000 for that book. So maybe $700 is good because you could maybe resell it for $3000, who knows, but that’s not where I’m going with this. I think, look, I borrowed it from friends when I read, I didn’t pirate it online, but nor did I buy it. I thought he gave a very interesting perspective on the high yield market of the eighties. I think to me, the key concept in that book, maybe this is worth $50 or whatever, over the $800 or $1000 or $2000 you’re going to spend, is that the idea that to be an absolute value investor, you need to take into account tomorrow’s opportunities.

Gary Mishuris (00:57:45):
Meaning that when you’re comparing opportunities, if you’re a relative value investor, you’re going to say, look, this is what I can choose from. These are these hundred or 200 or 300 or 5,000 investments and choose the best ones. Seth says, no, no, no, there’s these 5,000 today but then there is the likely opportunities that you’re going to encounter tomorrow. And you need to factor them into your decision as to whether to pursue the current [inaudible 00:58:08] oh wait. And that’s the difference in absolute value investor who sets an absolute bar for insurance, whether it’s 10%, 6%, whatever the number is and the relative value investor says, look, I’m not going to decide what the return should be. I’m just going to pick the best available… What’s available right now. And if everything that’s available right now sucks and it’s only offering 5% returns, let’s say for equities, I’m going to pick the ones that maybe add up to six versus Seth insight is like, well, no, I want more.

Gary Mishuris (00:58:33):
I don’t want to sell it for that. So is it worth it to you? I’m going to let you decide because I have a lot of respect for Seth Klarman and I think he’s both a wonderful individual and also frankly, a wonderful investor. But I learned a few things from the book. Did that book changed my life in some way that I’m a complete different investor? No, I was it added to my process. Yes. So I think it’s a useful book, whether it’s worth two tor $3000 to you, I think it’s a function of how much money you’re managing and where you are in a development. So I’m going to be polite and [inaudible 00:59:03] but I didn’t buy it, but I enjoyed reading it. Borrowing from a friend.

Robert Leonard (00:59:07):
You mentioned it back at the beginning of the episode, that it’s been a little bit of a struggle being a value investor. And I’m going to add that it’s been roughly over the last decade that that’s been difficult because value has underperformed growth for the better part of the last decade. Is value investing dead?

Gary Mishuris (00:59:23):
Yeah. So it’s funny, you mentioned that. So I write to my partners, quarterly. [inaudible 00:59:27] partnership and my largest investor who was very experienced, he was a CEO of a large asset manager in his private business and so, his family office has some of its money invested with the partnership. After a recent letter he said, “Hey, Gary, I think I want to catch up on the performance.” And I’m like, “Oh, is this like one of those conversations where, Hey, Gary, I like you, but I want my money back.” So yes, of course, we set up a call and it prepared my spiel, made my spiel and I listened and he’s like, “Yeah, look. So Gary, do you know that value investing has a style has underperformed for 17 years.” And I didn’t count it that precisely, but knowing him, I know sure he’s right.

Gary Mishuris (01:00:06):
And he, by the way, he was a value investor. He positively predisposed towards value investing. So luckily for me, the conversation ended with, I have his trust and support. But his point is that, look, there are these super cycles. And he was like, “Hey Gary, do your clients really have the patience for some kind of a twenty-five year [Supercycle 01:12:03]?” So I think that there’s two important points. One is, again, if you’re managing a nimble pool of capital, you’re not really beholden to how all the value investing does. And earlier this year here, I was able to buy a company that’s now trading at a very high multiple as a growth company. Because it is a growth company and I was able to buy it, essentially paying nothing for the growth. There were two businesses. I’m not even going to go into the details, but the company was called [Covetrus 01:00:50] [Inaudible 01:00:51] and they had two businesses, a legacy distribution business of drugs to veterinarians and a SAS business.

Gary Mishuris (01:00:58):
I know SAS is basically… When I say SAS, you should immediately pay at least 10 times revenue just so we’re clear. On the current market, right? I’m joking. But they had SAS business that in my view was probably worth at least 10 billion… $10 per share as well. So we had these two businesses that were worth at least $10 a share in the most likely scenario. That was the range obviously. And the staff, you can buy for $5, $6 in March, April. Now, extreme time, but you could also buy a number of times this year for under $10, meaning that you could have bought the stock for the price of the mature business, with all the cash flows and gotten the sexy [inaudible 01:01:33] SAS business for free. And now the stock is much higher. The point is that it’s not either or. If you’re patient, if you’re managing 10 billion, you cannot do this.

Gary Mishuris (01:01:43):
The company had a couple of billion market cap, I had a friend, had a much larger firm who was an analyst. And he said… When I told him, look, you should look into this. This is pretty attractive. He said, “Look, Gary, you’re probably right, but we manage so much money that we need to wait for it to get a little bit bigger.” I’m like,” Huh? You want it to be more expensive before you buy it?” “I know, I know, but my boss won’t go if it’s only a billion and a half market cap.” Whatever the market cap was. So I think it’s a false dichotomy. I think that if you’re paying attention, you can find situations where it’s not either or, but I also think that right now, low interest rates, mathematically favor growth investing. And for those of you who don’t understand, and that’s fine because I didn’t understand till I looked into it, is that for a high growth company, more of the cash flows are further out, which means that as your discount rate drops, you’re discounting them with a low rate.

Gary Mishuris (01:02:30):
So therefore the net present value for a growth company increases at a higher percentage than for a company where most of the cash flows are closer and that’s just the math and you can do it in a spreadsheet and [inaudible 01:02:42] out and you’ll reach the same conclusions. If you don’t email me and I’ll help you out, I’m sure you will figure it out anyway. It’s pretty straight forward. So rates can’t really go any lower. Actually, I take it back, the last time I said that the 10 year treasuries were 2% and here we are. So they could go a little bit lower, but they can’t… I don’t think we can go to like minus 3%. Otherwise we’ll be in a very strange world. So I think that Valley investing isn’t dead. I think that you have to be… I think the spirit of value investing, what we talked about, independent thinking, analyzing the business, intrinsic value approach and the owner’s mentality, long-term time [horizon 01:03:17].

Gary Mishuris (01:03:16):
Those are very much alive. Now, are you going to get the same return to a simple price to earnings strategy or price-to-book strategy as you would have gotten 20 years ago? My guess is you’re going to get lower returns if any excess returns. Just because there’s a lot more computers applying that as part of their repertoire. So I think that you have to add something special. For instance, in the [inaudible 01:03:40] example, I gave earlier you had a business that was a spinoff that merged two businesses together. The financials weren’t quite clean. So if you are a Renaissance, if you’re a quant artist trying to just process data, it might not screen into the in-basket of the hundreds of securities that you’re going to buy.

Gary Mishuris (01:03:58):
But another hand, if you do deep fundamental work, you can pretty quickly recognize that look, there’s a lot more value here on the most… Any scenario and you can buy it. So I think value investing isn’t dead. I think that the returns to a comical naive value investing of just multiples approach to value investing is probably greatly diminished. And I think that business judgment and judgment of management, what they’re going to do with those cash flows, is it going to be more and more important as we go forward.

Robert Leonard (01:04:27):
Most investors jump ship and give up on their strategy if it hasn’t worked for a while, how have you personally managed to stay committed to value investing with its under-performance over the last decade?

Gary Mishuris (01:04:39):
It can be hard. I have a group of friends and then we call each other. It’s like a support group. It’s like, “Hi, my name is Gary and I’m a value investor.” And there was a period earlier this year where my portfolio was at seven times earnings and then it went to six times earnings, to five… In the short term, there’s really no limit of how much cheaper cheap stocks can go. But then the long-term, you have to depend on the market, if you’re a true value investor, you’re dependent on being right on the long-term fundamentals. So I think part of it is having the right partners, right investors. So I’ll give you… One of the things I’m proud of and it’s not of myself, it’s my investors is, not a single person in 2020, or actually since I launched, [inaudible 01:05:20] asked for their money back.

Gary Mishuris (01:05:21):
And when I emailed people in March and said, I’m seeing some amazing opportunities. If you have capital, give it to me because I can deploy it well, I’ve had a number of subscriptions come in. That tells me that I’m partnered with the right people and the right organizations. And so I have a friend, a good friend, I’m not going to name him, but he has one or two investors who keep pestering him and second guessing every decision that he makes, that’s tough. That’s like drip, drip, drip, drip, drip. It’s really tough enough because we’re all competitive. We all want to win. We all want to do well. And when you have some dude emailing you saying, “Hey, this stock here goes up, in your last letter is going down and how come?” That’s just not helpful. I don’t have investors like that.

Gary Mishuris (01:05:59):
And frankly, I started [inaudible 01:06:01] having spent enough time and earing enough money where someone were doing it to me, I would just give them their money back. And I would say, listen, you probably should be with a different manager. I’m not looking for someone who’s in the weekly and monthly basis going to second guess every decision I make. I’m happy to take input. I know I’m going to be wrong. I’m happy to be challenged. But if you’re just constantly monitoring prices of every single thing, you’re probably too short-term in nature for what I’m trying to do. So I think the first part of the answer is I have the right group of people invested in the partnership. Second of all, is I deeply believe in the principal because the principal makes sense. Buying businesses for far less than what they’re potentially be worth rationally when they are the extreme in the market, that should work over the right period of time.

Gary Mishuris (01:06:43):
So if I buy something at five, six, seven times cash… Like I just bought something earlier, two months ago at 3000 free cash flow for business where a lot of it I thought was essentially recurring. It wasn’t quite a recurring. I won’t overstate it. It was close to recurring. And when I mentioned this stuff to some of my friends at larger firms. He said, “Well, but it’s not a tough industry.” But about the terminal value? What terminal value/ It’s at three times free cash flow, which means by year four you have all your money back. And they’re like, “Well, but it’s in a tough industry.” I’m like, “Okay, fine. I don’t want to argue with you. It is what it is.” But the point is that some extreme price, as long as the business is not collapsing and the cashflow is somewhat stable, you will be proven the rights sooner, or you will be proven wrong.

Gary Mishuris (01:07:28):
So if I’m wrong in my business judgment of how stable the cashflow stream is, then shame on me, I was wrong and that’s why I have more than one investment because I am going to be wrong and I’m going to be humble about it. And I’m going to learn, and I’m going to, hopefully you get a little bit better, but the portfolio will survive. I don’t have any do or die bets in the portfolio. So I think that you have situations where you don’t need the market’s validation. You can buy a cashless stream and say if I am right, and in three years or four years, this thing is still producing in the same level of cashflow. I already got my money back. I’m already a winner or maybe by year five because of present value adjustment.

Gary Mishuris (01:08:05):
So I think that there’s that and there’s also… I think that sometimes people start their… Go out on their own too early, meaning they have the analytical tools. Let’s say they were analysts for a few years, three to five years. They haven’t seen the full cycle. Let’s say they read all the Buffet, Graham and they are ready and they can analyze all of their value investors club. And they’re putting up their… These really intricate analysis of things, but they haven’t really seen how emotionally they’re going to handle the periods when they’re not doing well. I think that’s a big part of value investing is temperament. When everything is going well, everyone… Not everyone, but a lot of people can see what the analysis should yield but what about if your portfolio results look terrible here today and you have to report that to clients and can you still execute a strategy? What about next year looks the same?

Gary Mishuris (01:08:52):
That’s the question much more so than, can you analyze a company and can you run a DCF or run a private market analysis or whatever. It’s the temperament when I think that allows you… And also, frankly, I grew up poor. I’m proud of where I came from. I’m proud of what I’ve accomplished. And I also am very humble about there’s a lot more to accomplish and I can learn a lot more. And so I have a dynamic mindset of, okay, I think I’m good at what I do. And I’m trying to get a little bit better every year. I’m not fragile where I make a mistake. I don’t have one investment. I’m not paying the bill with my client’s money. I’m trying to make sure that my clients get the benefit of the process and the temperament, not just making in one decision.

Robert Leonard (01:09:35):
Temperament is actually often coined as one of the most important traits of an investor. It’s often even said that it’s more important than IQ or experience. First, what exactly is temperament and is your ability to stick with value investing a display of strong temperament?

Gary Mishuris (01:09:50):
I used to play poker online when it was legal back in the day. And I read a lot of the poker books and poker has some important similarities to investing. And there was this great book on poker, which actually wasn’t about poker. It was called The Mental Game of Poker. And it was basically by this coach who trained high level poker players, how to keep an even keel. Because in poker, there’s something called tilt. And tilt, essentially what it means is, you deviate from your best game. So let’s say, if you sit back in your armchair, your best game is your A game. And let’s say, when you’re not fully rational, let’s say you lost some money or maybe you won some money or maybe you have an upsetting situation in your person life, whatever. That’s your C game, right. You’re not at you’re A game, you’re deviating.

Gary Mishuris (01:10:35):
So the idea of the book is that, there’s a frequency of how often do you go from your A game to your C game? And then there is, what’s the distance, what’s the magnitude of deviation? So your A game is your best technical game and your C game is deviation from that. Is your C game right here? Or is it right there? How far is it? And the point that booked me… That was eye opening for me is that most people work on their A game, meaning they try to get their technical expertise better. Technical I mean, reading charts or whatever. It’s like, whatever your craft… They’re honing their craft. And the reality is, and this is going to be maybe shocking to some people. I think that a good investor who can stay good most of the time is far better in terms of real market returns than an amazing, great investor.

Gary Mishuris (01:11:21):
Who’s great half the time, but deviates quite a bit the other half the time, or even the substantial majority of the time. Because I’ve had people start in this business, friends or acquaintances and they started value funds and now they’re like running sentiment quant funds. And I’m like, what happened here? I would have never guessed… Or I have another friend I’m not going to mention, but he, in the March, April timeframe, I think he went on tilt. I don’t think he would think of it that way but from my perspective, that’s what it looked like. And I have another friend who runs a value partnership, I think he has balls of steel. He’s having a tough year, a lot of his ideas aren’t working out. Some of his clients have left him and he is taking a hundred percent of his process. You can agree with his process, you can disagree…

Gary Mishuris (01:12:03):
This is taking 100% of his process. He can agree with this process, he can disagree with this process, but hats off to him. I really respect him. I’m thinking of giving him a shout out on my next quarter of the letter because I know people don’t typically do that because technically he’s a competitor, but he’s more of a friendly competitor and it’s like talking to him and feeling his pain and yes he’s still coming out there and doing exactly what he thinks is the right. His portfolios, exactly what he thinks it should be. He is not letting the pain or the frustration or the lack of validation from the stock market determine how he’s going to invest. I just have a ton of respect for that. I told him about it. I’m like, “Hey, you have deep expertise in these couple of niches but what you really should be telling your prospective clients is I have months of temperament.”

Gary Mishuris (01:12:46):
The problem is that if you are a prospective client, it’s really hard for you to tell what my temperament is like. So it’s really hard to sell that. Because the only way to tell what someone’s temperament is like is to observe how they do when things aren’t going well, because everyone has a great temperament when what they’re doing is great. So if you’re some guy whose style is picking out the best SAS company in the world, you’re on top of the world and you’re giving interviews about how amazing you are because you have 30% per year returns. Now, hopefully you know that it’s not sustainable, but it is what it is. That doesn’t mean you’re not good. You could be quite good, but you’re just at the peak of your approach and what it’s likely to yield. Nobody is going to generate 30% of returns in leverage other than the Medallion Fund, which I think is employees only at this point or something like that. So my point is that, having the temperament to whether you do really well or really poorly in the short term to just implement your strategy is so important because your process is worthless if you don’t implement it with accounts and it counts, like if your portfolio doesn’t reflect your process, who cares what your slide deck says? Or who cares what you say in interviews? And so the friend that I’m thinking about right now that I’m not going to name who actually is 100% sticking to this process, whatever you think of this process, that’s what you’re getting. So the other people, who knows what you’re getting? Their slide deck says X, but in reality they’re doing Y.

Gary Mishuris (01:14:04):
And I think the only reason you are going to have that temperament is if doing the right thing for you is just intrinsically more important than money, than anything else. Because ultimately it’s like the old survivor song from the Rocky movies it’s like, “You’re fighting yourself.” It’s not you against the market. It’s not you against, I don’t know. It’s not value investing growth, it’s what growth investing is. You against yourself being the best version of yourself, sticking to your process, at the same time slowly evolving and improving your process if that’s warranted.

Robert Leonard (01:14:36):
There can sometimes be a fine line between a true value investment and a value trap. What exactly is a value trap and how can listeners of this show avoid them?

Gary Mishuris (01:14:48):
I remember, I think it was John Murray of Belarus who said once that, “There’s no such thing as a value trap, a value trap is just when you made a mistake as a value investor.” But I think the one category of value traps is when you a business, let’s say the stock is at 60 and you think the business is 100 and then the value is declining. And the next time you look at business, your assessment of the business value is 80 and the stock is now 50. The next time you look the value is 60 and the stock is at 40. There’s always a gap. So as a value investor, you’re trained not to sell undervalued things. You’re supposed to buy undervalued things. So you never sell it. The value keeps declining and then when you look back when your value is at 60 and the stock is at 40 it’s like, “Gee, I could have sold this at 60 two years ago, but my value came down. I didn’t sell it then because I thought it was worth 100.”

Gary Mishuris (01:15:34):
That’s an example. So how do you guard against that? I think you try to find business companies whose value is increasing over time. So one of the things my mentor Joel at Fidelity taught me is, if you’re going to have a long-term time horizon, it helps if when the price to value gap closes, it closes to a higher value. Well, it’s very dangerous to buy these melting ice cubes where you were really dependent on the value gap closing quickly. Otherwise, you’re just going to have a wet towel in your hand, not the actual ice that you were trying to harvest. And the second company is you really want to have a management team that’s at least not value distractive. So as value investors, you are implicitly or explicitly relying on a dollar of free cashflow being worth a dollar discounted to today.

Gary Mishuris (01:16:17):
So if you have some management team that’s pursuing downward positions or acquisitions that increase their camp but doesn’t increase value, maybe in their hands, the value of a dollar is worth 60 cents or 70 cents. In that case, if you calculate that the businesses is worth 100 but then they’re going to turn the free cashflow into 70% what it’s worth, then it’s really not undervalued that much. So you want to have… I’m not saying you need to restrict yourself to some amazing outsider CEO that’s going to compound capital amazing rates, but at the very least eliminating the value destructive management teams and the businesses that are structurally getting much, much worse. So I think if you eliminate the bad and then have a big margin of safety for the rest, I think it gives you enough combination of margin of safety from quality of sources, as well as the actual price to value gap, to avoid value traps.

Gary Mishuris (01:17:08):
At the very least, if you do lose money, hopefully you’re going to lose a little bit of money, not a lot. And when you make money you make a lot, so you are creating an asymmetry between when you lose and when you win. And so, one of the things I’m proud of, if you think about value investing over the last four years or five years or whatever, that I have been out of my own, there have been plenty of value opportunities. I think of retail malls or something like that. Even pre COVID that have been completed implosions. They were smart value investors who were buying these and these types were down 80, 90% or maybe 70% pre COVID or something like that. I don’t want to be captain hindsight here because obviously in hindsight, everything is very clear, but I don’t have any giant losses. That’s important in a concentrate portfolio.

Gary Mishuris (01:17:48):
We can’t afford to have 10, 15% positions and lose 80, 90%. That’s just too much. So I think that it’s better to… I would say if I’m guilty of something, it’s mistakes of omission. I’ve missed plenty of things and I do try to come back to that, learn from that and improve hopefully, but I’ve missed plenty of things, but the things I did invest in, some did very well, many did okay and many did not that well or a few did not that well, but none did terribly. And having that asymmetry is important because you get value trap into something that’s down 60, 70, 80, 90%, and you concentrate investor. That’s tough. That’s how you end up with a record that you can’t recover from. So I think part of it is being focused on not just the price, but also the quality of what you’re buying, but also having a dynamic mindset about value.

Gary Mishuris (01:18:38):
Because I think one of the things that value investors are guilty of is that they say something’s worth 100, they’re anchored to that. The reason they’re anchored to that is the following. Look, the South analysts, how they are. And most value investors I’ve talked to look down on South analysts because a South analyst decides, what does he want to… Does he want to recommend this or not? Is this an outperform? And that he backs into the price target. The price target is residual. And let’s say he puts out an outperforming stock and the stock goes after the price target, he just raises the price target. And the value investors sneer at that. That’s like, “That’s BS. That’s not how I want to be.”

Gary Mishuris (01:19:11):
So the opposite mistake is saying, “I valued this business as 100, I’m going to stick to that come hell or high water change my assessment as facts and evidence comes into play.” So I think it’s important to be both rigorous in your process but flexible in interpreting evidence. And if there’s evidence that something that you thought was worth 100 is now worth 40, it doesn’t matter what you bought it at. And if the stock is at 60 and now it’s worth 40, that’s painful, but you got to move on. And I think a lot of the value investors are too rigid in their initial assessment of value and they don’t update that flexibly enough based on evidence.

Robert Leonard (01:19:46):
How do we know when we’re wrong and it’s time to cut our losers? At what point do you say, “Okay, this has gone against me long enough or it’s gone against me enough that I need to just accept I’m wrong.” Because as value investors we could argue and sometimes rightly sell, sometimes not. We can just say, “Oh, the market’s not realizing the value that I see in this stock. Maybe I need to hold it a little bit longer.” When is the time to just say, “All right, I’m wrong. Time to sell this position.”

Gary Mishuris (01:20:12):
At the extreme, when your company files for bankruptcy, that’s a good start. That’s obvious you clearly are wrong, but that might be too late. It’s like saying, when the alligator is chewing on your hand, it was a sign that you should have taken the handout earlier. Look, I think that you should look for validation not in the stock price action but in fundamentals. One of the things I do is I have this thesis tracker, that I update quarterly and I color code it. Bright green means that the company in this quarter exceeded my longterm expectations by a lot, light green means exceeded by a little bit, white means that it’s in line, ballpark. Orange means it’s underperformed a little bit and red means it’s really underperformed.

Gary Mishuris (01:20:49):
I don’t give excuses, meaning COVID, no COVID, recession, whatever. Just factually let’s say, I think this business should generate $100 in free cash flow this year, right now it’s not on track for that. That means it’s orange or red, depending on the magnitude. So, the actionable items from that is, for instance, if there’s three oranges in a row, I have to reassess the value from scratch and I cannot buy more until I reassess the value. So that tries to save me from myself because I think value investors are notorious for averaging down in stocks. And again, there’s this old joke of the Fidelity when portfolio manager who lost half his fund in the stock, that was never more than the 5% position because it was 5%, went down 3% then moves it back up to five and so forth and so forth. And eventually, he was just so anchored in such ego was invested in that, that he lost a lot of money in that one position. You don’t want to have that.

Gary Mishuris (01:21:46):
So I have a circuit breaker where if there’s several quarters in a row where they’re underperforming my longterm expectations, I re underwrite. I revalue the business. If there is a single quarter where there’s really absurd deviation to the negative, I re underwrite. Conversely, if there’s positive deviation, I can not sell until I reassess the business because value investors are also guilty of selling too early. The worst caricature value investor is the person who buys bad businesses that are cheap on the surface, but deserve to be cheap buys more when the stocks goes down on the way to bankruptcy and the few winners they have, they take their winnings quickly and don’t update the value estimate as the business becomes much more valuable.

Gary Mishuris (01:22:27):
So I think again, you have to be confident enough in yourself as a value investor to be dynamic in your appraisal, of businesses because if you’re just starting out, it feels a lot like lack of discipline. Like, “Wait, I thought this was worth 100 yesterday and now our reassessment is worth 70. Well, how can this be?” How can this be is things have changed or you were wrong. So there is a quiet confidence you need to have and yourself to make that change to say, “You know what? Yes, Gary, you were wrong. That’s okay.” Ideally you wouldn’t have been wrong, but you were and the best thing to not having been wrong is to acknowledge it, do the right thing today that you should do and then learn from that, move on.

Gary Mishuris (01:23:02):
So I think that the way it works in practice is that you have to be willing to change your mind on things and not just go down with the ship no matter what. And I’m not going to name this person by name they’re well-known value investor, but I’ll give a hint. Joel Greenblatt talked about him in his notes in Columbia 15 years ago. And I was really in these notes from his class and he was saying, “This guy is super smart value investor amazing.” Blah, blah, blah. And he came and pitched to these Columbia Business School students, this stock and he said how strong the business was undervalued. All those positive things and then only 09′ that company went bankrupt. And out of curiosity, I was doing post-mortem. I was trying to learn it from someone else’s mistakes. I said, “You can publicly look up the person holdings and they’re right down into bankruptcy.” Literally they either kept adding or were constant number of shares. Right into bankruptcy.

Gary Mishuris (01:23:58):
You could probably have found a way to get evidence, to update your value and exit somewhere in between. It’s not that the initial mistake was by the way, thinking that some business is so amazing and having file for bankruptcy. That’s a big mistake. I don’t remember Warren Buffett having a lot of bankruptcies, just so we’re clear. He had a preferred or something like that. So it is a big mistake, but then you exacerbate that by going down with the ship and not changing your mind. I think that rigidity is how you really hurt yourself as a value investor and yet we are trained as value investors not to change our mind because then we are flimsy and we just like the sell side, price targets don’t mean anything.

Gary Mishuris (01:24:33):
So finding that inner balance and having the confidence in your own process to constantly say, “I’m going to change my mind for this and this and this and this reason, that’s the right decision now based on what I know now and I’m going to act based on that and maybe that means selling today what I bought yesterday as hard as that is.” It’s hard.

Robert Leonard (01:24:51):
I don’t necessarily know the specific investor or situation that you’re talking about but my guess from us having talked about this before and then today, is that he was just so public about that position that he felt he probably couldn’t change his mind. And he just wasn’t willing to make that change publicly. I guess he just tied himself to it so much and talked about it so much publicly that he just felt like he wasn’t able to change it.

Gary Mishuris (01:25:14):
Maybe. I don’t know if it’s all of it. I think that’s a component of it. I think that increases anchoring. But I think part of it is, just from what I know and I’m very limited in my knowledge of this investment but what I know about them is that it’s a very rigid implementation of the value philosophy. And so there’s this yin and yang of having conviction and yet being flexible. And if you have too much conviction, you go down with a ship and you are on the newspapers and you are the retail malls and you go down to zero and you end up writing letters to your clients about how you stuck to your convictions as you went to bankruptcy. That’s not good. I don’t care what you write in your letters, but that’s just not good.

Gary Mishuris (01:25:56):
Just like the other part is you always flip flop when you change your mind and at the first sign of the market selling the stock down 20%, you’re up. That’s not good either. So to your other question, how do you stick with it if the market disagrees with you? I think you have a view of the fundamental trajectory the business should take and you mark the fundamental progress to that trajectory. And if there isn’t enough counter evidence, you update the trajectory. You don’t use the stock price to basically give you the answer. Although you can use it as a warning indicator. I used to know a guy who was a portfolio manager who had this rule that he would sell any position that went down 15%, wait 31 days and then decide whether to buy it back.

Gary Mishuris (01:26:35):
I understand why he was trying to get rid of the behavioral biases. Probably it was, what if the market went down 15%, 20% or he sold his whole portfolio or he was managing a mutual fund. So he couldn’t. So then he decided to change it to a relative approach like if a stock under-performs by 15%, but then maybe that’s okay if you are buying these mega cap blue chips, but if you’re buying small micro caps, they underperform or outperform by 15 plus percent all the time. They’re less liquid, they move around a lot and that presents great opportunities to someone who’s competent and who has nimble pool of capital who can manage money in that space.

Gary Mishuris (01:27:12):
So if you’re using the market as the arbiter for whether you should sell or not, that’s a tough way to be a value investor. I don’t think you can be frankly, a value investor if you’re using the market as a signal. But I think that you have to be truthful. Whether, “Okay, is the thesis tracking?” And how are you going to track your thesis? And when I mentor analysts, I always say, “Okay, what are the milestones? What are the signs that you would have to observe to tell you your thesis isn’t playing out?” Let’s write that down now, because then we can come back to it and it’s less painful because we said, “Hey, if they don’t hit these metrics in say two years or three years or whatever, it can be along that far out, then we know we were wrong or we know there is a good chance that we’re on and maybe that reflects itself in position size.” Because again, it’s not black and white. It’s not like you either all it or you don’t. You can own…

Gary Mishuris (01:28:01):
So for me, I’m fairly concentrated. So my small positions are 5%, my medium are 10 and my large ones at 15. So something that’s not working out, maybe there are better investments out there that can displace that partially. Maybe I’m not convinced that the thesis is not working out completely, but maybe it should be a 5% position and not a 15 or a 10. Versus the traditional value approaches. Stock is down, I double down. I think that automatic doubling down is a big mistake, process-wise.

Robert Leonard (01:28:32):
I follow your work on LinkedIn and your newsletters that you send out. And one of the pieces that caught my eye recently was this experience that you had with your oldest son and a deck of cards. I think this illustrates a great concept for stock investors. Tell us a bit about the lesson you were teaching your son and how it applies to stock investors.

Gary Mishuris (01:28:51):
I still have the deck right here. I’m not going to show you, but I was actually doing a probability lesson. So I have three kids. My youngest, Jacob is almost four and my twins are seven and a half and they’re in second grade and my oldest son is fairly advanced in math. And I teach both of my twins supplementary math in this day of hybrid school and all that. Public school so they… Anyway, so they can use the help, but in his case, he’s actually fairly advanced. And I was using a deck of cards to just illustrate probabilities and my youngest, Jacob, saw us and he was like, “Hey Papa, can I play too?” And he thought it was a game and I didn’t want to upset him. So I didn’t try it when I finished with Ben. Ben is my oldest son.

Gary Mishuris (01:29:32):
And so I don’t know if you have kids or if people who are listening, if you have kids, but there’s this enthusiasm that only a three or four year old can bring. It’s try to be whatever the French word. There’s joy of life. And the game was… That wasn’t going to teach him probability three and three quarters as he calls himself, he’s not ready for probability. I was just going to play a simple game with him. And the game was this, “Can you guess what suit the next card is?” And so essentially, I kept track of how many points, if you get the suit right, you get a point. And the first game, Jacob kept getting it right much more often than I, he had many more points and he was like, “Yes, Papa, I’m crushing it. And that was kind of smell. You want to say, no, you’re not crushing it. It’s just all random.” You don’t want to upset a four year old. Whatever, three something year old.

Gary Mishuris (01:30:20):
Kid has a big smile on his face. He was so excited and then the next game I was ahead in points and his smile turned upside down and he was upset. He was like, “Ah.” And the truth is it’s all random. And so I think there’s a lot of investors and when they see hedge funds or partners or whatever, they’re calling themselves, send out monthly updates. It’s like, “Come on. Really? Your marketing material is how you did this month?” It’s like, “Who are you trying to attract the guy who cares about how you did this month? Well, okay, fine.”

Gary Mishuris (01:30:50):
And the worst part is not when you’re trying to be cynical and sending out the monthly performance updates, which I don’t and frankly, I don’t think anyone should either. There’s only one reason for them is to cynically try to market short-term performance or at least to remind people about them, yourself in my view the wrong kind of way. But it’s like when you start to get affected where you think you’re crushing it because you had a good streak of four months, or you being crushed by the market and you start your mental game, going back to our other analogy of the A game versus the C game, you start to tilt away from your A game towards the C game because of some random streaker results where Joe and Blow trade certain number of shares of your stocks, mark them to some price and now you’re either very happy or very sad. That’s no more rational than Jacob at his age of not quite four being super happy or super sad about it. Randomly predicting the suits of the cards. It’s just not a good use of your mental energy.

Gary Mishuris (01:31:45):
So I think you have to set yourself up however that works for you not to get impacted by that. And that starts with finding the right clients, communicate them the right way. If I ever see a manager, basically bragging about short-term returns, I’m pretty much not going to read anything that manager ever says. That’s maybe a little bit irrational or harsh, but it basically tells me that they’re completely cynical or they just don’t understand probability at all. And that means that if they don’t understand probability at all, I’m not sure how good an investor they are. And if they’re very cynical, they’re probably all the good managers who are not cynical that I’d rather spend my time reading. So I think that essentially set yourself up to focus on things that are helpful to your longterm process and don’t create this emotional roller coaster. The market loves me, the market loves me not. I’m great. I’m terrible, I’m great. Don’t do that to yourself because you’re just increasing the odds of tilting away from your A game into some version of your C game.

Robert Leonard (01:32:40):
Gary, thanks so much for joining me today. I really enjoy any time I’m able to sit down and chat with someone that is as smart as you about one of my favorite topics and that is value investing. Where can everyone listening go to learn more about you and what you’re working on?

Gary Mishuris (01:32:56):
I have a YouTube channel that you guys can just search for my name. There’s behavioralvalueinvestor.com where I publish probably once a month. I write for Forbes and silverringvaluepartners.com, the name of the firm. You can request a free Owner’s Manual. Most of the people requesting them are actually students. I send out thousands of them, I’m always happy to send them. It’s fine. I enjoy mentoring people. There’s a form. If you submit it, I will send you the Owner’s Manual, which is basically my process, how I invest, which the funny story is when I told my mother that I’m doing it, she’s like, “Why are you sending this? This is your secret sauce.” And I’m like, “No, mom. I don’t think it’s my secret sauce. My secret sauce is actually the judgment it takes to implement it and the temperament it takes to stick to it when they’re going through stuff.” Anyone can write what they will do in theory, it’s much harder to actually do it.

Gary Mishuris (01:33:43):
But hopefully as people are learning, this Owner’s Manual is helpful for them. And it’s the same manual that I sent to my partners when I started Silver Ring Value Partners to basically establish the ground rules. Similar to what Buffett did and his partners they were saying, “Look, this is what I’m going to do. If you like it, I would love to have you on board. If it’s not, I’d rather be transparent with you on day one than have you be disappointed later on.” So those are some of the places. If you want to reach out, LinkedIn is a place I would love to connect and always happy to hear from like-minded long-term investors or people who are interested in learning about it.

Robert Leonard (01:34:16):
I have read through the Owner’s Manual and I can vouch that it is a great document and a great learning resource. So if you guys are interested in learning more about that, definitely take Gary up on that offer to reach out to him, submit the forms so you can get a copy of that. It’s a great reading material. I highly recommend it. I’ll put a link to all of Gary’s resources that he just mentioned in the show notes below in your favorite podcast player. So you can click those links, access any of those resources for free. And if you haven’t heard our last episode together, you can go check that out on episode 42 of this podcast, the Millennial Investing Podcast. Gary, thanks so much for joining me.

Gary Mishuris (01:34:51):
Hey, thank you so much for having me and happy value investing.

Robert Leonard (01:34:55):
All right, guys, that’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro (01:35:01):
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