THE EDUCATION OF A VALUE INVESTOR My Transformative Quest for Wealth, Wisdom, and Enlightenment Guy Spier The author and publisher have provided this e-book to you for your personal use only. You may not make this e-book publicly available in any way. Copyright infringement is against the law. If you believe the copy of this e-book you are reading infringes on the author’s copyright, please notify the publisher at: us.macmillanusa.com/piracy. To my parents, Marilyn and Simon Spier, and to my sister, Tanya. To my children, Eva, Isaac, and Sarah. To my wife, Lory: You are all my reasons. CONTENTS Introduction 1: From the Belly of the Beast to Warren Buffett 2: The Perils of an Elite Education 3: The Fire Walk: My First Steps as a Value Investor 4: The New York Vortex 5: Meeting a Master 6: Lunch with Warren 7: The Financial Crisis: Into the Void 8: My Own Version of Omaha: Creating the Ideal Environment 9: Learning to Tap Dance: A New Sense of Playfulness 10: Investing Tools: Building a Better Process 11: An Investor’s Checklist: Survival Strategies from a Surgeon 12: Doing Business the Buffett-Pabrai Way 13: The Quest for True Value Acknowledgments Bibliography and Guide to Further Reading Index INTRODUCTION My goal in writing this book is to share some of what I’ve learned on my path as an investor. It’s about the education of this investor, not any other investor. This story is not an investment how-to. It’s not a road map. Rather, it’s the story of my journey and of what I’ve learned along the way. With my own flaws and foibles and idiosyncratic abilities—and despite my considerable blind spots. Over the years, I’ve stumbled across some profound insights and powerful tools that I’d like to share with you. In most cases, these are not things that are written about in textbooks. Because it’s a story about how things happen in the real world—and because the real world is messy—the topics are broad in scope. They range from the most insignificant of habits that I’ve developed, like what to read first, to the grandest: whom to choose as heroes and mentors and how their wisdom can change your life. This book traces the arc of a transformation. I started off as a Gordon Gekko wannabe—brash, shortsighted, and entirely out for myself. Then a series of transformations and self-realizations led me on a path from Benjamin Graham’s The Intelligent Investor to Ruane Cunniff to Poor Charlie’s Almanack to Robert Cialdini, then to meeting Mohnish Pabrai and lunch with Warren Buffett. That $650,100 meal had a life-changing impact on me, as you will see. Within one year of my meeting with Buffett, I let two-thirds of my staff in New York go, stashed half of my family’s belongings in storage, and shipped the other half to Zurich, where we went to live. I stopped charging management fees to new investors in my funds. I switched off my Bloomberg monitor. And I renounced my perilous addiction to checking stock prices on a minute-by-minute basis. I’m not necessarily advocating that you should also have lunch with Warren Buffett—especially now that the price tag has soared, hitting a high of $3.46 million in 2012! And I’m not claiming to have a special understanding of him either. What I can tell you is that he has had an extraordinary impact on how I invest and on the way I live my life. My hope is that I can share some of these lessons that I’ve derived from him so that they will benefit you as much as they have benefited me. It took me the best part of two decades to get onto a more enlightened path in life, and I’ve made many missteps and lost much time along the way. Hopefully, this book will help you to reach your enlightened path faster, and with fewer missteps. As Buffett once said, “Try to learn from your mistakes—better yet, learn from the mistakes of others!” I submit to you that if you learn only some of the lessons here, you cannot help but become rich—and perhaps wildly rich. Certainly, the wisdom I’ve gleaned—not just from my heroes, but from my own mistakes and successes— has helped me immeasurably as an investor. As I write this, I’ve had a cumulative return of 463 percent since founding the Aquamarine Fund in 1997, versus 167 percent for the S&P 500 index. In other words, $1 million invested in the fund would now be worth $5.63 million, versus $2.7 million if it had been invested in the S&P 500. But this book is also about the inner game of investing, and by extension, the inner game of life. As I’ve come to discover, investing is about much more than money. So as your wealth grows, I hope you will also come to realize that the money is largely irrelevant. And what you will want to do with the bulk of your wealth is give it back to society. You’re not quite sure about that last part? That’s okay. For much of my life, I wasn’t sure about it myself, and a part of me still doubts it. Like you, I’m a work in progress. We’re told a lot these days about why capitalism has failed us. We’re told that greedy bankers and irresponsible CEOs need to be reined in with more stringent regulations, and that wealth should be more aggressively redistributed. Perhaps. But greed can also be a vehicle to something deeper and more soulful. In my experience, you can start out as a hungry young capitalist, driven almost entirely by greed, and find that it gradually leads you to a more enlightened mind-set. In that case, greed may be good after all—not if it merely motivates you to acquire more, but if it drives you toward that inner journey of spiritual growth and enlightenment. I expand on that lesson at the very end. But first, let’s enter the belly of the beast. 1 FROM THE BELLY OF THE BEAST TO WARREN BUFFETT O that this too too sullied flesh would melt, Thaw and resolve itself into a dew! . . . How weary, stale, flat, and unprofitable, Seem to me all the uses of this world! Fie on’t! ah fie! ’tis an unweeded garden, That grows to seed; things rank and gross in nature Possess it merely. —Hamlet, act 1, scene 2, lines 129–130 and 133–137 Have you ever felt that way? Utter self-loathing. Unlike Hamlet, at least I wasn’t suicidal. But I felt almost as wretched. I was disgusted with investment bankers as a breed, and especially the ones I worked with. I felt the same way about my investment banking firm. Worst of all, though, I was disgusted with myself. Less than two years earlier, I had felt ready to conquer the world. Back then, I was a student at Harvard Business School (HBS). For good measure, I also had a degree from Oxford University, where I’d come top of my class in economics. Everything had seemed possible—until I threw it all away with one recklessly foolish career move. In 1993, a few months before I graduated from Harvard, I stumbled upon a job listing for an assistant to the chairman at D. H. Blair Investment Banking Corp. I’d read a bit about investment banking and fancied myself as one of these budding Masters of the Universe. Brimming with youthful confidence, I headed to New York City to meet with D. H. Blair’s chairman, J. Morton Davis. Morty had started out as a poor Jewish kid from Brooklyn. He graduated from Harvard Business School in 1959 and went on to become the owner and chairman of D. H. Blair, which had been founded in 1904. People told me that he’d made hundreds of millions for himself. I met with him in his wood-paneled corner office at 44 Wall Street. The place hadn’t been renovated in years, and it looked like a traditional investment banking partnership from John Pierpont Morgan’s era. In fact, J. P. Morgan’s headquarters were almost next door. Morty was a consummate salesman, and he did a brilliant job of beguiling me. He talked to me about some of the great deals he’d pulled off in hot areas like biotech, adding, “You’ll be doing deals right away, working directly with me.” He assured me that there was “no limit” to what I could achieve there with him and later gave me a book by Frank Bettger called How I Raised Myself from Failure to Success in Selling. I liked the fact that Morty was an outsider— unconventional, self-made, and highly successful. Shortly afterward, I read a New York Times article that referred to D. H. Blair as an “infamous” brokerage house whose “brokers have been known to refuse to let customers sell when they request that a stock be liquidated.” The article also mentioned that securities regulators in Delaware had “tried to revoke Blair’s license” and that regulators in Hawaii “said Blair was using fraudulent and deceptive sales practices.” When I went back to ask him about the article, Morty told me that people envy success and try to take you down. I was gullible enough to believe whatever he told me. Some of my friends from Harvard raised their eyebrows when they heard that I was going to work for D. H. Blair, but I ignored their warnings. I was arrogant and slightly rebellious, and I was determined not to follow the standard route to establishment firms like Goldman Sachs and J. P. Morgan. I wanted to blaze my