The Making of a Value Investor: The Unexpected Lesson I learned in University, Why I Like Pirates, and a Bit About My Grade 5 Submarine Project
It is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately with people or it doesn't take at all. It's like an inoculation. If it doesn't grab a person right away, I find you can talk to him for years and show him records, and it doesn't make any difference.
- Warren Buffett
I was one of those for whom the idea of value investing resonated right away. I found the concepts provided me with a way of ordering an otherwise chaotic market world.
But my particular approach to business and to investing was shaped by things that started long before I became involved in the financial markets, and long before I discovered the value investing philosophy and mind set.
In Grade 5 I did my first real "project" - on the history of submarines - complete with bristol board illustrations. I found that I liked the rhythm of the "project", the all out and focused effort for a fixed period of time, and then once complete and handed in, the ability to rest and recover waiting for that grade and then ruminating on the success (or failure) of the project at hand.
Now I try to run my business and investing activities according to something developed directly from this experience, something I like to call, The Project Oriented Life. It fits with the natural ebb and flow of energy, and it fits with my personality. It involves complete focus and effort on a project, an investment, a new business initiative, and the seeing of this "project" through to completion, or launch (another version of completion) and then rest (generally away from the office) and rumination on the project just completed, and the gradual recovery of energy and creativity, and the launch of the next "project".
Other lessons came from my enjoyment of reading history, a great place to learn and gather experience from the collective wisdom of many. Pirates* were always mysterious and interesting, and I like the way they conducted their "business". Reflecting on my investing activities, and the different interpretations of value investing, I eventually built an analogy in my mind that differentiated between the "pirate approach" to value investing where one identifies an opportunity or target and attacks it, plundering it for its "value", dividing that "loot" (in a surprisingly democratic way) with ones "crew" and what I'll call the "Roman approach" to value investing where one conquers a city, plunders its gold but is then left with the complexities of governing that city, making sure the sewers work, and that the taxes get collected. I like to buy something that is cheap, have it appreciate to its fair value, and sell it and return to cash. I'll hold any investment that continues to trade below its intrinsic value or where the intrinsic value continues to grow due to the compounding effect of cash flows from a good business, but I don't believe in the permanence of any investment. I believe that everything over time is subject to the risk of decay in a dynamic and changing world. I often have long holding periods in my investing activities, but these are generally where the intrinsic business value of the underlying enterprise is growing.
A final lesson came from the opportunity to hand in one essay to two university courses due to the broad spectrum of topics that could be covered in each classes assignment, a practice which I understand from my son is now frowned upon (apparently called self-plagiarism) but which taught me the value of leverage. Seeing an unexpected opportunity, I spent my entire reading week in the library researching and writing one high quality paper which I handed in to two classes. Not only did I get an excellent mark in each, but having done half the work I freed up a lot of time to hang around while my classmates scrambled to write their two papers. Ever since, I have looked for the operating leverage available in life, and now in business, and in the investments that I consider.
These are some of the important lessons I learned early in my life which in concert with a natural inclination to be contrary allowed me to accept the value investing philosophies immediately, and which have shaped my business and investing life.
*This whole fascination with history and pirates was brought fully to the fore when I had the opportunity to dine in a restaurant in the Bahamas located on the estate of a wealthy and successful pirate from the past.