RWH020: THE DISCIPLINED GROWTH INVESTOR

W/ FRED MARTIN

07 January 2023

William Green speaks with Fred Martin, the lead portfolio manager at Disciplined Growth Investors. He specializes in two niches: small & mid-sized growth stocks. Both strategies have crushed the market since he founded the firm in 1997. Fred is also the co-author of a book, “Benjamin Graham and the Power of Growth Stocks.” Here, at 76, he looks back on half a century as a hugely successful investor & shares hard-earned lessons on how to survive & thrive over the long haul by mitigating risks, understanding the laws of investing, & persevering.

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IN THIS EPISODE, YOU’LL LEARN:

  • What Fred Martin discovered about mitigating risk as a Navy officer in the Vietnam War.
  • What he learned from starting his career during the bubble & crash of 1973-74.
  • How he handles the “discomfort & anxiety” of difficult periods in the stock market.
  • Why he thinks Tesla’s stock is still overvalued & what he thinks it’s really worth.
  • Why it’s critical for investors to be skeptics who never let down their guard.
  • What insights he drew from Ben Graham about the fundamental laws of investing.
  • How Fred applies a consistent three-step process to every stock he analyzes.
  • How to win as an investor by waiting for intrinsic value & the stock price to “true up.”
  • Why he views a famed free soloist climber as one of the greatest risk managers ever.
  • How flying planes has helped Fred to refine his understanding of the margin of safety.
  • Why he’s given three younger colleagues the authority to veto his stock picks.
  • Why he “seals the exit” before buying a stock, assuming that he’ll own it forever.
  • Why fund managers should sacrifice their own interests for the sake of their clients.
  • What advice he’d give to people who are looking to hire an investment adviser.
  • Why he believes that relationships & purpose are the two most important things in life.
  • What he’s done to maintain good health, so that he’s still going strong at age 76.
  • How his religious faith has made him a better investor & a better steward of assets.
  • What he’s learned about how to endure sorrow, setbacks, & tragedy.

TRANSCRIPT

Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] William Green: Hi there. In my book, Richer, Wiser, Happier, I wrote a chapter titled Don’t Be a Fool, which is all about Charlie Munger’s strategy of consciously and systematically reducing what he calls standard stupidities and foolish thinking and idiotic behavior. Charlie who recently celebrated his 99th birthday once said that all you have to do to get ahead in life is to be non idiotic and live a long time.

[00:00:28] William Green: I don’t know if that’s entirely true, but I think there’s great wisdom in this idea that one of the keys to long-term success is simply the ability to avoid making too many dumb mistakes, especially mistakes that have the potential for catastrophic consequences. This subject of avoiding costly or calamitous mistakes is a central theme in today’s episode of the podcast.

[00:00:53] William Green: My guest is Fred Martin, a great investor whom I also wrote about in that same chapter of my book. Fred is the lead portfolio manager at an investment firm called Disciplined Growth Investors. Since he founded the company in 1997, he’s beaten the market by a mile while focusing on two relatively racy sectors, small and mid-sized growth stocks.

[00:01:18] William Green: For me, what’s striking about Fred is not just his long history of superb investment returns, it’s that he also has a remarkable gift for managing risk, is 76 years old and has now been investing successfully for half a century. During that time, he’s encountered countless minefields, including financial crises, periods of soaring inflation, recessions, wars, stock market bubbles, and some pretty brutal bear markets.

[00:01:48] William Green: He survived and prospered through it all. How come? Well, I think the main reason is that he’s an extremely disciplined investor with a fierce focus on simply mitigating risk. For example, he has a strict rule that he’ll never invest more than 3% of his portfolio in a stock at the time of purchase because he doesn’t want to expose himself to the risk of being overly concentrated.

[00:02:16] William Green: He also refuses to overpay for any stock, regardless of how enticing its growth prospects look. He invests in rapidly growing companies, but he approaches them with the skeptical, cautious mindset of a hardened value investor. He makes sure that the stock is cheap enough to give him a big margin of safety.

[00:02:37] William Green: It’s not a coincidence that Fred co-authored a book about Ben Graham, the father of value investing, who wrote that the secret of sound investing could be distilled in just three words, margin of safety. What fascinates me is that Fred applies this fundamental concept of the margin of safety in every area of life. [00:03:00]

[00:03:00] William Green: Not only when he’s buying stocks but when he’s skiing or driving or flying his gulf stream jet. As you’ll hear, his relentless focus on managing risk and avoiding disaster dates back to his early experiences as a young navy officer on a destroyer during the Vietnam War. Another reason why I’m particularly excited to have Fred on the podcast is that he rarely gives interviews because he tends to keep a very low profile. Most of the time he just quietly goes about his business of managing separate accounts for institutions and wealthy families to set up a separate account with him. His clients have to entrust him with a minimum of 15 million dollars. So this is a guy who operates in a pretty exclusive and rarefied realm. In any case, I’m just delighted that we have this opportunity to learn from Fred and I hope you enjoy our conversation.

[00:03:57] William Green: Thanks a lot for joining us.

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