Clay Finck (02:35):

That’s exactly what Mohnish Pabrai did and it’s worked fabulously for him. Pabrai said to William that everything in life is cloned and he really has no original ideas, which I just find so amusing coming from someone that is just extremely intelligent. From Mohnish’s point of view, there were three core concepts that Buffett followed. One, when you’re buying a stock, you’re purchasing a portion of a real ongoing business with an underlying value, not just a piece of paper for speculators to trade.

Clay Finck (03:06):

Two, the market is a voting machine in the short term and a weighing machine in the long term. Meaning that at times stocks trade well above and below their true underlying value. Three, you should only buy a stock when it is selling for much less than your conservative estimate of what it is worth. The gap between intrinsic value and what the stock is trading at is what Benjamin Graham called your margin of safety.

Clay Finck (03:32):

These are the underlying principles of how Buffett invests, in Pabrai’s eyes at least. But there are other things that underlie this as well, such as being patient and waiting for the right opportunity to come along. Buffett oftentimes uses the analogy of investing like you’re a hitter in a baseball game in which you never get a third strike. You can just let pitch after pitch go by in an investing and you can swing whenever the market gives you that fair price on a great business.

Clay Finck (04:00):

In this world where it seems like a lot of people are constantly trading in and out of their positions, this Buffett approach can remind us to just stay calm, stay rational and level-headed and keep that long-term time horizon in mind. Pabrai mentioned that the number one investment skill is patience, extreme patience. Other key principles that Pabrai learned from Buffett was to say no to almost everything, and to only invest in what you truly understand or is within your circle of competence.

Clay Finck (04:30):

Pabrai sees investing as a game and he simply just pulls the best ideas and principles of investing from the best investors, such as Buffett and Munger. He learned to simply stack the odds in his favor by studying how others played the game and borrow their best moves. I like this idea of cloning because it aligns exactly with how TIP was founded.

Clay Finck (04:51):

The flagship show is literally called We Study Billionaires, and originally started with Preston and Stig studying the world’s greatest investors and figuring out the best ideas they could then apply to their own lives. Warren Buffett and Ray Dalio in particular have had a huge impact on how TIP operates and where the company is today.

Clay Finck (05:12):

The second chapter covered, Sir John Templeton, who I was not familiar with prior to reading this book. Trey Lockerbie actually recently interviewed Lauren Templeton on the We Study Billionaires feed, that’s episode 460 if you’re interested in checking that out. It was just a really good conversation in which they talked a bit about Sir John Templeton as well. Sir John actually passed away back in 2008, but William interviewed him later in his life and I found his lessons to be really profound.

Clay Finck (05:40):

I don’t want to get too much into his personal story, but his fund was founded in 1954 and he achieved an average return of 14.5% over 38 years. This would turn an initial investment of a hundred thousand dollars in his fund to more than 17 million over that time period. The theme of the chapter on Templeton was this willingness to be lonely.

Clay Finck (06:04):

Not lonely in the sense that you shouldn’t ever enjoy anyone’s company, but lonely in the sense that to beat the market, you’re going to have to hold differing opinions than many other investors. He just sees the world differently than others and is willing to blaze a new path for himself. Most people are much more comfortable just sticking with the crowd or just following what all of their friends are doing on Twitter, but you can’t be overly influenced by what other people think.

Clay Finck (06:30):

I think you really have to develop a really strong ability to just think for yourself. When your trades are going against you, everyone is going to be telling you that you’ve made a dire mistake, and you’re going to have to weather through that situation of having a differing opinion from the crowd. This kind of runs counter to what we were saying in the first chapter covering Mohnish, in that you need to stay grounded and really understand what you’re doing and what your investment strategy really is.

Clay Finck (06:58):

William tells this remarkable story about how Templeton invested during World War II. He found 104 American companies that were hurt so badly from the Great Depression that the stocks were trading at less than $1 per share. Templeton called his broker and told him to put a hundred dollars into each of these 104 companies. The broker told him that this was a very unusual order. He put it through except the broker decided not to buy 37 of the companies because they were already in bankruptcy.

Clay Finck (07:30):

Templeton goes, “No, no, no, don’t eliminate those. They may recover.” He put a hundred dollars into each of these 104 companies. Templeton said that if these beaten-down stocks are able to simply survive, they have tremendous upside potential because the sentiment in the stock market was so poor at that time. Then a few years later in 1942, Templeton liquidated those holdings. 100 of the 104 companies ended up turning him a profit.

Clay Finck (08:01):

On average, he had made roughly five times his money. Templeton found a way to be an optimist when the majority of investors were pessimist and it really paid off big for him. Then William outlined the six guiding principles for the non-tribal investor that I think would be really good to share here. One, beware of emotion. Most people get led astray by the emotions in investing. Don’t get led astray by being excessively careless or optimistic when you have big profits and by getting excessively pessimistic and too cautious when you have big losses.

Clay Finck (08:38):

Two, be aware of your own ignorance, which is probably even bigger than emotions. Many people buy something with the tiniest amount of information. They don’t really understand what they are buying. Three, you should diversify broadly to protect yourself from your own fallibility. Four, successful investing requires patience. Five, the best way to find bargains is to study which assets have performed most dismally in the last five years then to assess whether the cause of those woes is temporary or permanent.

Clay Finck (09:11):

Six, one of the most important things as an investor is not to chase fads. These are all just terrific lessons that I thought were worth sharing from the book. Templeton seems to try and be the contrarian in the room. It reminds me of Buffett’s lesson to be greedy when others are fearful and fearful when others are greedy.

Clay Finck (09:32):

Moving along to chapter four, William outlines an investor named Jean-Marie Eveillard. He was a strong advocate of Benjamin Graham’s work of buying companies with a very large margin of safety to ensure he isn’t taking excess risk. He put a huge focus on valuations to ensure he isn’t paying more than what he believes the company is conservatively worth. I think there’s a good lesson to be learned of how Eveillard invested.

Clay Finck (09:59):

Until 1997, he had an 18-year track record of beating the market. That was until the tech frenzy came along and he started to underperform. From January 1997 until March 2000, the tech-heavy NASDAQ rose by 290%. There are many examples, but it was obvious that these valuations of these tech companies were absurd and likely not sustainable. That’s easy to say in hindsight at least.

Clay Finck (10:27):

Eveillard was not falling for the hype though. He completely avoided tech stocks during that time period. William points out that this was actually a very brave decision by him because if he were to be wrong in this approach, it could completely jeopardize his career and legitimacy at managing other people’s money. Many fund managers are afraid to shy away from the crowd in the way that Eveillard did. Many of his colleagues were getting into tech stocks and shifting towards that new trend.

Clay Finck (10:58):

Psychologically, this was a very difficult period for Eveillard as he underperformed the market for a few years, while other fund managers were making enormous short-term profits. One senior executive at the company Eveillard was at, referred to him as half senile for investing as conservatively as he was. To all of his colleagues he was the crazy guy that didn’t understand that the world was entering a totally new era with these technology companies.

Clay Finck (11:25):

This is the craziest part of Eveillard’s story. The executives thought he was so crazy after just three years of underperformance so they ended up selling off Eveillard’s fund to a small investment bank in January 2000, even though he had been with the firm since 1962. Two months later, the tech bubble had burst, his fund then outperformed the NASDAQ by 49% in 2000, 31% in 2001 and 42% in 2002.

Clay Finck (11:56):

It just goes to show the level of Eveillard’s character to stick to his guns and do what he truly believed was right, even though the crowd and his colleagues were absolutely certain that tech had changed everything in just the span of a few years. Part of the difficulty of managing money during that time period is that most of these managers were at the whims of their investors. Many were pressured to invest in these technology companies because that’s what the investors wanted.

Clay Finck (12:24):

They saw their neighbors getting rich, they saw other people getting rich, so they wanted in on the action as well. Investors would pour into these funds that are doing extraordinarily well and then they’d start jumping out after it had crashed. Instead of buying low and selling high, a lot of people ended up just buying high and selling low, just like what we saw with the ARK Funds over the past few years.

Clay Finck (12:47):

Most people were investing in ARK well after it had performed well and outperformed the market substantially. Now most people have bailed on them now that it’s crashed back to where it was two or three years ago. This also ties into the brilliance of how Warren Buffett has structured Berkshire Hathaway.

Clay Finck (13:04):

They operate as a public company and not as an investment fund so they have permanent capital that they can allocate however they want without getting these irrational pressures from outside shareholders or investors emotionally transferring money at the exact wrong time.

Clay Finck (13:19):

At the end of this chapter, William lists five fundamental ideas to being a resilient investor. One, respect uncertainty. Disorder, chaos, volatility, and surprise are features of the system, not bugs. Two, eliminate and avoid debt and leverage and beware of excessive expenses. To add to this point, you want to think about where there might be fragility in your portfolio. Are you concentrated in one particular asset or is all of your money held in one particular company or brokerage?

Clay Finck (13:53):

Three, instead of fixating on short-term gains or beating benchmarks, we should place greater emphasis on becoming shock-resistant, avoiding ruin and staying in the game. Four, be aware of overconfidence and complacency. Five, we should be keenly aware of our exposure to risk and should always require a margin of safety.

Clay Finck (14:15):

Then William points out that there is an important caveat here, “We cannot allow our awareness of risk to make us fearful, pessimistic, or paranoid. The resilient investor has the strength, confidence, and faith in the future to seize opportunities when unresilient investors are reeling. Defense suddenly turns to offense.”

Clay Finck (14:37):

Now, skipping ahead a bit more to chapter six, to my surprise, William got the chance to interview Nik Sleep, who is just a fantastic investor that is now retired and has been very private. It’s really interesting to have the opportunity to dive into the way Nik invests. He wasn’t a promotional person at all. I feel that not very many people know about him and his success.

Clay Finck (15:02):

Nik started the Nomad Investment Trust with Qais Zakaria, who goes by Zak. They started the fund back in 2001 and retired the fund in just 2014, so it didn’t have a really long shelf life. During that time, their fund returned 18.4% after fees. In 2014, they returned to the shareholders their money and hung up the towel as investment managers.

Clay Finck (15:27):

William put it that they treated this venture as a test for how they invest, think and behave in the most high quality way. The way Sleep put it, “Nomad means far more to us than simply managing a fund. Nomad is a rational, metaphysical, almost spiritual journey.” I can’t help but admire Nik and Zak’s focus on quality and producing superb long-term returns with a huge focus on quality and a huge focus on long-term investments.

Clay Finck (15:59):

They even required their investors to sign a document that made them acknowledge that their fund is inappropriate for anyone with a time horizon of less than five years. Instead of focusing on short-term problems, they focused on questions such as, is this company strengthening its relationship with customers by providing superior products, low prices and efficient service? Is the CEO allocating capital in a rational way that will enhance the company’s long-term value?

Clay Finck (16:28):

Is the company underpaying employees, mistreating suppliers, violating its customer’s trusts or engaging in any short-sighted behavior that could jeopardize its eventual greatness? Just really good questions that avoid those short-term, not-so-great businesses. One quality company they ended up running across was Costco in 2002, which is the year they started investing in them. They saw a company with a strong competitive advantage that provided customers the lowest possible prices.

Clay Finck (16:59):

Costco marked up their products by no more than 15% while most other supermarkets marked up their products by 30%. Customers always knew that they were getting a really great deal when they shopped at Costco. Costco was a huge beneficiary of the flywheel effect, which was popularized by Jim Collins. Satisfied customers kept coming back to shop at Costco, leading to more revenues. More revenue allowed Costco to negotiate better deals with suppliers and then lower the prices in their stores.

Clay Finck (17:30):

Lower prices and satisfied customers only attracted more and more customers, which gave Costco more membership fees so they could build out more stores. This attracted more customers and more revenue, which allowed them to get even better contracts and lower prices. The flywheel continued for the decades to come. Since they first purchased Costco in 2002, the company is up almost 10X since then producing about a 12% annualized return per year, excluding any dividends paid during that time period.

Clay Finck (18:00):

I think a big lesson from this Costco investment is the focus on win-win relationships. When you really look at it, everyone wins. Customers get the lowest prices. Costco gets loyal customers and shareholders get a strong business with a sustainable long-term returns on capital. Everyone wins in the long run.

Clay Finck (18:20):

Sleep was also a follower of Amazon in its very early days in 1997. He recognized that like Costco, Amazon was also ruthless about cutting costs. They even went as far to save $20,000 per year by removing the light bulbs from their vending machines in their offices. Bezos was absolutely obsessed with saving money and saving time for his customers.

Clay Finck (18:45):

He continually implemented business ventures that might not bear fruit for five to seven years into the future. The way William put it, Nik and Zak had found their corporate soulmate. While Wall Street was complaining about Amazon’s lack of gap profits, they were appreciating Bezos’ great ability to patiently lay the groundwork for the explosive growth to come in the years ahead.

Clay Finck (19:08):

They first started buying shares of Amazon in 2005 at around $30 per share. They bet 20% of the fund’s assets on Amazon and secured permission from their shareholders to go even beyond that limit. They did question their investment in Amazon during the great financial crisis, but they still held firm on that conviction.

Clay Finck (19:29):

George Soros, publicly shorted one stock during the great financial crisis. That was Amazon, which would maybe make one question their decision in having it as one of their largest holdings in their fund. During the mayhem, they concentrated their holdings in their highest quality investments, Amazon, Costco, ASOS, and Berkshire Hathaway. It really paid off big for them as they held through it all.

Clay Finck (19:54):

After they hung up the towel on managing money, they decided to devote the second half of their lives to support charitable causes. This chapter on Nik and Zak was definitely one of my favorites and I really just admire the way they invest.

Clay Finck (20:09):

That’s all I had for today’s episode. I definitely did not do William’s book as much justice as it deserves. To get all the other timeless lessons in the book, I encourage you to go out and read it for yourself. I promise you that you won’t regret it. I’ll also link the interview I did with William as well as the brilliant podcast that William is now the host of.

Clay Finck (20:28):

If you guys have any questions related to anything I discussed during this episode, feel free to reach out to me. My email is clay@theinvestorspodcast.com. On Twitter, my username is @Clay_Finck. Thanks for tuning in.

Outro (20:42):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.