Noted value investor Guy Spier, CEO of Aquamarine Capital, gave a presentation at the Value Investing Seminar in Italy yesterday, entitled Navigating Between Fear & Greed Using Checklists. Our first-hand notes from his speech follow:
Importance of Neurology in Investing
- Human brain has different parts, each leading to different behavioral responses when engaged, eg the neocortex elicits a rational response whereas the "reptilian" part of the brain responds to greed and fear
- Great investors (Soros, Buffett, Klarman etc) are "wired" to engage the necortex while others are susceptible to enaging the reptilian brain when faced with the same situation
- Value investing is the art of using the neocortex
- Studies have shown that when thinking about making money, for most people the same part of the brain responds as when thinking about gambling, drugs, sex
- A lot of very smart investors lose money because they lose discipline and become guided by their reptilian brain (eg Isaac Newton's losses in the South See bubble in early 18th century)
Examples of Companies "Targeting" the Reptilian Brain
Below examples are all about companies/management who have figured out different ways to tap into our reptilian brain ranging from nearly criminal to very subtle.
- Interactive Services Worldwide (delisted): serial promotions and spreading of hype through frequent press releases about partnership deals (eg with Sportingbet) that are not value-creating upon closer evaluation
- EVCI Career Colleges (delisted): Management manipulated enrollments and published information that portrayed the performance of the business better than it actually was
- DeVry (NYSE:DV): Reputable management but was overconfident about operating performance of the business and communicated to investors rosy forecasts for enrollments based on hope, not actual underlying facts
- American Express (NYSE:AXP): Reputable company and management, but again company communication about estimated write-offs in lending business too optimistic
What to Do? Use of Checklists in Investing
- Investors' intellectual understanding of the fallacies of the reptilian brain is not sufficient --> a behavioral change is required!
- Examples of behavioral change from the non-investing world: 1) Losing wallet in NYC taxi: Train yourself to stop and look before exiting taxi; 2) Infections in hospitals: Include regular washing hands after each patient contact as a routine; 3) Airline pilots: Creation of to-do checklist in emergency situations.
- Use checklists in investing to help brake reptilian brain responses to specific situations. For example, ask yourself what type of data you arelooking at: data that can be manipulated by humans (eg loan write-offs) or facts (eg meat consumption in rich versus poor countries)
- Checklists will help in situations susceptible to a response driven by greed and fear (usually stirred up by media).
Investment Idea: London Mining plc
- $146M market cap, $316M cash --> company trades significantly below cash (important: cash position cannot easily be manipulated
- Strong management team with proven track record
- Shareholder value creation to come from developing mines for the global energy and steel industries
About Guy Spier
Since 1995 Guy Spier has been running Aquamarine Capital Management, LLC. Investors include friends and family, high net worth individuals, and private banks investing on behalf of their clients. The fund has market beating returns - and has received mentions by Lipper and Nelson's world's best money managers.The investees can be obscure or they can also be very well known.
The fund has also done well owning the shares of less understood, but very high quality, cash generative businesses. It currently owns several credit rating companies as well as several post secondary education companies.
The ratings business (whether of debt securities, or of individuals, through education) is one of the best businesses that Guy has ever seen, and is consistently underestimated by investors.
Guy is also an Advisory Board Member of the Dakshana Foundation, which is a philanthropic foundation that focuses on providing world-class educational opportunities to gifted but economically and socially disadvantaged children.
Disclosure: No positions.