Book Review: The Education of a Value Investor by Guy Spier

Kiran Tiwari

This book is about a hedge fund manager who elaborates his journey as an investor where he analyzes his own flaws, his understanding, and how he went on to become a value investor.

The author goes back to his college life where he narrates his upbringing in the world's best colleges, Oxford and Harvard. He joins a firm without knowing much about the practices it was doing which he regrets later.

His experience tells us that we can start out as a hungry young capitalist, driven mostly by greed and we will find gradually that it leads us to a more enlightened mindset. He realizes that although greed can motivate you to acquire more, it drives you toward that inner journey of spiritual growth and enlightenment.

Following his meeting with Buffet, he went to Zurich where he began to live and carried his fund management from there itself. He tells meeting with him had an extraordinary impact on him and he is sharing those valuable lessons in this journal. He goes on to tell through Buffet's lines, "Try to learn from your mistakes- better yet, learn from the mistakes of others!"

He goes on to write that the fund he created, Aquamarine Fund in 1997 has produced a return of 463 percent since its foundation. More than the game of investing, he is more interested in telling the readers the inner game of life which he values more. He goes on to tell a profound truth that as your wealth grows, we come to realize that money is largely irrelevant. He wants to tell us that whatever the bulk of our wealth, is to give it back to society.

Value investors have to be able to go their own way. The entire pursuit of value investing requires you to see where the crowd is wrong so that you can profit from their misperceptions. This requires a shift toward measuring yourself by an inner scorecard.

The author says the best method for bringing change into our lives is to model our heroes. He says that he began modeling his hero, Buffett in every way he could. He would often engage in a problem and would think about how Buffett would be thinking about this problem and how he would have brought the solution. This is the most powerful way humans can advance.

The author has embraced the fact that inaction and patience are the wisest options for investors in the stock market. Every value investor should be well acquainted with the fact that in order to be rich and abundant, our target should be towards finding companies that are cheap with an expanding moat and are flooded in cash.

Throughout the book, the author emphasizes the wits and wisdom of visionary investors of our time, Buffett, Munger, and Mohnish. Their life learned lessons are a valuable source of inspiration for the author.

“Who is strong? He who masters his own passions”.

In the financial markets, envy is a silent killer: leading people to behave in ways they wouldn’t if they were more honest with themselves. For example, investors see their friends make a huge amount of money in technology stocks of the late '90s that were crazily overvalued, and they plunged in right before the market crashed. It's important to be aware of these emotional forces bubbling inside us since they fundamentally skew our judgment, messing with our ability to make rational decisions. As an ancient saying puts it: “Who is strong? He who masters his own passions”.

Investing has a way of exposing our psychological fault lines- whether it's greed, a lust for power and social status, or any other flaw.

The author describes that it was his envy and greed to be ahead. He wanted to win at the hedge fund game. Rightly or wrongly, he was convinced that he was as smart as his peers, and it made him jealous that he wasn't at the very top of the heap. He felt as though no matter how well he managed his fund, it didn't feel enough. He was consistently trying to prove himself best among his peers.

Later he realizes that his envy led him astray because he wanted people to see that he was managing hundreds of millions, even billions. That time he spent in envy would have been better utilized to pick the best stocks and allow his performance to speak for itself. To prove his worth, he spent lavishly building an office in the heart of the city and enrolling a lot of employees. Now he realizes what a fault he had in not realizing that envy and pride are expensive flaws. As the first rule of investing is don't lose money and the second rule is don't forget rule number one. He began to check his pride, envy, and greed.

He began to surround himself with a mastermind group of investors who would become his lifelong friends. He tells us that it's difficult if not impossible to become successful on your own but with the help and cooperation of trustworthy people, it's possible. The greatest opera stars have singing teachers; Roger Federer has a coach, and Buffet meets regularly with like-minded people.

One of the habits he is proud of himself is the habit of writing letters which is an incredibly effective way of compounding goodwill and relationships instead of merely compounding money. He wrote the letter extending his gratitude for the persons he met in his life and the difference they had brought into his life. Well, it was this habit that led him to become life long friend with Mohnish Pabrai and the new way of life he began to live ahead.

On being honest and truthful in life, Charlie Munger pointed out that it’s always easier to be truthful because you don’t have to remember your lies. This relieves your brain of unnecessary mental work so that it can focus on something more useful.

Thus reclaiming those lessons, he used to say that Charlie and he always knew they would become very wealthy, but they weren't in a hurry. If you’re even a slightly above-average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy- if you’re patient.

People often justify their improper or misguided actions by reassuring themselves that everyone else is doing it too. It wasn’t difficult for Buffett to resist the temptation to invest borrowed money, which could have made him richer but could also have landed him in trouble. Warren often quoted that his friend Guerin was intellectually a great investor. However, in the hope of getting rich faster, he used leverage to juice his returns. When the market crashed in 1973-74, Guerin was hit hard and was forced to sell various holdings, including thousands of shares of Berkshire Hathaway that would now be worth a fortune. Thus reclaiming those lessons, he used to say that Charlie and he always knew they would become very wealthy, but they weren't in a hurry. If you’re even a slightly above-average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy- if you’re patient.

For an individual investor, debt can be disastrous, making it even harder to stay in the game- both financially and emotionally- when the market turns against you. As Warren humorously quotes, "You only find out who is swimming naked when the tide goes out".

"You only find out who is swimming naked when the tide goes out."

Investing tools:

1. Check stock prices as infrequently as possible.

Checking the stock price too frequently uses up the limited willpower since it requires us to expend unnecessary mental energy simply resisting these calls to action. Investors feel the pain of loss twice as acutely as the pleasure of gain. So one needs to protect his brain from the emotional storm that occurs when one sees their stocks or the market are down.

2. If someone tries to sell you something, don't buy it.

3. Don't talk to management.

No matter how their business is performing, they have a gift for making the listener feel optimistic about the company's prospects.

4. Gather investment research in the right order.

Start with the least biased and most objective sources. And don't eat your dessert until you’ve finished your meat and vegetables.

5. Discuss your investment ideas only with people who have no ax to grind.

6. Never buy or sell stocks when the market is open.

One needs to detach oneself from the price action of the market, which can stir up one's emotions, stimulate one's desire to act, and cloud one's judgment. We have to try to make the market our servant, not our master. So keep the market at a safe distance. Don't let it invade your office or your brain.

7. If a stock tumbles after you buy it, don't sell it for two years.

Before buying any stock, make sure you like it enough to hold on for at least two years, even if the price halves right after you buy it.

8. Don't talk about your current investments publicly that you may live to regret.

An investor’s checklist:

Before buying the stocks, the author makes sure that he really knows the details of that company.

1) Are any of the key members of the company's management team going through a difficult personal experience that might radically affect their ability to act for the benefit of their shareholders? Also, has this management team previously done anything self-serving that appears dumb?

2) Is this company providing a win-win for its entire ecosystem?

3) How could this business be affected by changes in other parts of the value chain that lie beyond the company’s control? For example, are its revenues perilously dependent on the credit markets or the price of a particular commodity?

4) Is this stock cheap enough (not just in relative terms)? Am I sure that I'm paying for the business as it is today- not for an excessively rosy expectation of where it might be in the future? Does this investment satisfy me psychologically by meeting some unmet personal need? For example, am I keen to buy it because it makes me feel smart?

He advises us to hang out with people better than us so that we cannot help but improve ourselves. The more you give love away, the more you get. Dealing with people whose real intentions are veiled can be troublesome. So it's good to deal with the ones who are an open book themselves.

Thus as a value investor, the author seems to be in an enlightened state and he has gained a deeper sense of who he really is, instead of a mere investor. This realization has helped him stop worrying about trying to get the best returns. He acknowledges that if we can truly take the responsibility for our mistakes and failures, they surely offer us priceless opportunities to learn about ourselves and how we need to improve. The real reward of this inner transformation is not just enduring investment success. It's the gift of becoming the best person we can be. That's the ultimate prize.

Thus this book is a lifetime of lessons from a successful investor of our times. His lessons on value investing are very important for all novice and learned investors. He focuses on the fact that the real method of success is in building good relationships with people who are better than we and we should try to model our heroes. It's absolutely important also to be patient and check our envy and greed. We should try to become acquainted with adequate knowledge, and not be betrayed with greed and impatience.

Article by Kiran Tiwari