I’m pleased to announce our first interview. Today, we talk with Joe Ponzio, founder of MBG Funds, F Wall St (blog and book), & The Meridian Business Group. Joe has managed to outperform the market during a period of extreme turmoil and dislocation. Joe’s mission is simple, to prevent the little guy from getting screwed by Wall St. Joe makes no apologies for saying things as he sees them and has successfully practiced value investing for over a decade.
Miguel: Thank you for joining us. We’re delighted to have you.
Joe Ponzio: I am ecstatic to be doing this interview with you. Thanks so much for the opportunity.
Q. Joe, you have a pretty interesting story, when did you first become interested in allocating capital?
A. I stumbled into it at an early age. In college, I changed majors from medicine to a path that would lead me to teaching. Realizing that I would be taking a major cut in pay, I began learning how to save and invest. From when I picked up my first book on investing, I was hooked. I began reading two to three books a week, and I couldn’t get enough of it. After graduating college, I landed my first investment sales job. As unhappy as I was at that firm, I knew that capital allocation would be my passion and future.
Q. What motivated you to start your own business, The Meridian Business Group?
A. I always wanted to help “regular” people with their investments. After spending time at and resigning from two different firms, I realized that I could only pursue that passion and work at my “ideal” firm if I created it. I think that most people have dreams of starting their own businesses. I was young and free enough to take the leap of faith at the time.
You can’t invest the way that we do — finding one or two investment opportunities a quarter — and expect to “make it” as a commissioned broker at a large firm. If you don’t starve to death, they’ll show you the door. I didn’t like that there was no accountability for performance and no drive to protect portfolios; so, I created a firm where our paychecks depended on how well we invested, not on how well we could sell.
Q. Where does F Wall St fit into the picture, why did you start the blog, and who is the intended audience?
A. As we were renovating our offices early in 2007, I was working from home. CNBC was playing in the background, and the reporters were playing down the credit crisis. I remember thinking, “This is going to get bad. A lot of people are going to get hurt, just like when they said that the dot-com boom could go on forever.” I didn’t want my kids to suffer through that nonsense; so, I began writing a “how-to” guide for them. I had a value investing strategy that seemed to work just fine and I wanted to pass it on so that they could invest comfortably and confidently for their futures. (At the time, my daughter was two and my son wasn’t even born yet. Remember: I’m a long-term thinker.)
The title was a no-brainer. I’m a no-nonsense guy, and I wanted the book to appeal to regular people who, in the back of their mind, are thinking, “F Wall Street. This investing stuff is nonsense, the stock market is a casino, and it is not possible to save and invest with confidence anymore.” The book’s title may not land me a spot in high society; but, if I can sway one person to put down a tabloid magazine, pick up F Wall Street because that’s what is on their mind, and begin investing intelligently, it’s worth the laughs when people say, “You called it what?!?!”
Q. If you could change one thing about financial news and education what would it be?
A. It’s not a lack of information. It’s all out there, begging to be taught and waiting to be learned. What’s great about our society is that there are people willing to teach, people willing to learn, and people willing to do nothing. Eventually, the people willing to seek out knowledge will meet those willing to teach, and the people willing to do nothing will continue to run in place.
The only change I would want implemented is actually at the high school level. I think that high school kids should be learning about budgeting, credit cards, checking accounts, car loans, mortgages…real life finances. Otherwise, they leave college with credit card debt; they bring their paycheck to the car dealership and ask what they can buy, not what they can afford; they focus on spending today because they’ll earn more when they’re older and it will all “work itself out.” Let’s teach our kids about money before they can get into trouble.
Q. Buffett often talks about how quickly value investing takes -either you get it in 5 minutes or you don’t. Was it like this for you? What led you to choose the value style?
A. The concept of value investing — buying assets on the cheap — took with me almost immediately, but I didn’t immediately become a value investor. An important part of being a value investor is focusing on buying discounted assets, but equally important is the idea that the market is to be largely ignored unless you’re planning to buy or sell something.
When I first learned about value investing, I didn’t understand how the stock market played into the Buffett and Graham approach; so, I tried charting, technical patterns, market timing, and more in an attempt to minimize volatility and ride the rising tide to profits. It wasn’t losses that caused me to ditch those futile market-timing efforts; rather, I missed out on immense gains over time because the technicals told me to sell when I should have been ignoring the markets and letting time and the ordinary course of business and economics work for me.
I ended up choosing the value style of investing because it was the only thing that made sense. I liken it to poker — you can gamble on bad hands and hope to get lucky, or you can patiently wait for monster hands and bet big when the odds are in your favor. In Texas Hold’em, pocket Aces will lose from time to time, but that doesn’t mean you shouldn’t play them; 10-2 — the “Dolly” with which Doyle Brunson won two world series main events — will win from time to time, but I wouldn’t bet my life savings on it.
I’m not much of a gambler. I find joy in winning, not just in playing; so, the deep value approach made sense for me.
Q. Which investors do you admire? Besides these investors who else has influenced you?
A. I admire anyone willing to teach; I abhor those who pretend like they’re teaching so that they can gloat about their past or potential successes. It’s okay to hold your track record out there to say, “See — this stuff works!” It’s another thing to convince yourself that you’re a guru, plaster yourself in the media as if you’re trying to help, and then tell the “little guy” to beat it because they don’t meet the net worth requirements to invest with you.
Buffett has been a great teacher because his writings — the letters, annual reports, news articles, and interviews — don’t bring him any extra money, but he still feels compelled to get the message out there and help the confused and scared. When Seth Klarman speaks, I like to listen. He offers tips and insights for the “little guy” — people that will never qualify to invest with the Baupost Group. Still, he wants to help.
The investor who influenced me the most was my father. He was a short-term trader — particularly in options. He made a killing in the late 1990s trading stocks and options, but he couldn’t tell me a darn thing about the companies in which he was trading. When the dot-coms crashed, he lost big. As an investor, he traded hope with other gamblers, and it required a lot of effort for mediocre results.
My father and Warren Buffett/Benjamin Graham were polar opposites when it came to investing. Though my father was an amazing and wonderful influence on 99% of my life, Buffett and Graham were the greatest influences on that other 1% — the save and invest portion of my DNA.
Q. How has running a business has helped you identify bargains?
A. Without actual experience running a business, financial statements are little more than numbers on a page — data to be extrapolated into the future. After running a business for a while, you begin to see what numbers and footnotes may be critical, and which ones may be nonsense when it comes to the health of the business. The numbers eventually come to life, and then the business comes to life.
We recently invested in a Ben Graham-style net-net — a company selling below its quick liquidation value. The financial statements say that the business is bleeding money, but from a business standpoint — taking out all of the non-cash and non-recurring items, it’s actually doing quite well. A spreadsheet or stock screener can’t tell you that.
Furthermore, you have to realize that the analysts have no experience running a business. They’re looking at the same spreadsheets and stock screeners as everyone else. They’re not even reading the annual reports. Armed with some business experience, a willingness to read and learn, and the knowledge that the “majority” are not actually thinking, a deep value investor should be able to find some amazing bargains regardless of where the markets are, or are going.
Q. Tells us about your approach to fundamental analysis-what is your specific focus/edge?
A. There are four main types of “value” investors: the GARP-investors (growth at a reasonable price), the modern Buffett investors (great companies at good prices), the Ben Graham investors (net-nets and cigar butts), and the special situation investors (mergers, spin-offs, etc.)
I don’t wake up in the morning and think, “Today I’m going to find a net-net bargain or a special situation.” I take things as they come. My specific focus is on finding assets at a discount. Whether an “asset” is the future earning power of a quasi monopoly or the liquidation value of a somewhat forgettable business, I simply focus on finding value.
With every strategy, the approach to fundamental analysis is the same: read the reports, analyze the financial statements, learn about management, and understand the business and industry. It’s important to remember that you’re buying a business, and you don’t go into that lightly, whether it’s a special situation or a Coca-Cola.
Q. How do you look at risk?
A. The number one risk that I think that people assume is overpayment risk — the risk assumed when you pay too much and receive little to no value. For example, anyone purchasing General Motors’ stock from 2005 through its bankruptcy in 2009 assumed a great degree of overpayment risk. GM was worthless as a company; so, any price paid was too much. Now, Nobel laureates will tell you about the Sharpe ratios, beta, and other measures of “risk;” but, at the end of the day, the company was worthless and it was a matter of time (at least four years) before the stock price followed the value of the company.
A purchaser of GM’s stock over the past four years was not assuming risk because the stock price was volatile or because the economy was faltering. The investor simply paid too much for a worthless company. Some people got out with a profit; some lost a considerable amount. They all paid too much, and their results were either lucky (gains or minimal losses) or predictable (total losses).
Risk in investing can be minimized by demanding a large margin between the price of your positions and their intrinsic values. The greater the margin, the less risk you assume. Calculating that margin is both crucial and difficult; however, doing so allows an investor to see “risk” in a whole new light.
Q. Tell us about the role of fixed income in your portfolio?
A. If your readers have read F Wall Street, they’ll know that I am a big fan of bonds and fixed income investments for most people. The stock market is a place to buy and sell businesses, and most people lack the time or experience to buy and sell businesses.
Most people should stick with bonds because most people view volatility as a risk and get sick when the markets plummet. We don’t hold any bonds at MBG Funds simply because the markets don’t bother me and I don’t find bonds as attractive as certain stocks right now. If I found a bond offering more value, I’d buy it.
Q. I know that you’ve dabbled into commodities- how does this asset class fit into your portfolio?
A. My goal is to invest in opportunities I understand well, that are fairly predictable (in my opinion), and that are trading at a substantial discount to their intrinsic value. I don’t care about sectors, asset classes, or diversification — just value. If I feel that commodities offer a good value and safety, I’m in commodities. If I like stocks, I’m in stocks. So long as I feel that I can predict the outcome with a degree of certainty, I’m looking at it.
Q. We understand that you started your hedge fund last year-what has the financial crisis taught you?
A. I didn’t learn a lot from the crisis, but a lot of what I had previously known became frighteningly more obvious. Turnover rates in mutual fund portfolios soared over the past two years, and it didn’t help their investors nearly as much as it helped the brokerage firms to whom they pay commissions. Hedge funds tanked last year — an expected outcome when an industry throws billions at anyone with a power point presentation. Remember the dot-coms?
Has intelligent investing changed because of the financial crisis? Absolutely not. Then again, that only makes sense if you realize that volatility is not a risk.
Q. Clearly you’ve been through a lot, how have you evolved as an investor?
A. I evolved as I think most people would if they were given the opportunity to study as I have. When I first got turned on to investing in my teens, I was an active gambler looking for quick profits. Why not? The books made it sound so easy!
As I spent time running businesses, studying investing, and experiencing the markets, I naturally evolved into a deep value investor. My life experiences and psychological make-up have taught me (or allow me) to be both confident and patient, two traits that are critical to being a value investor running a concentrated portfolio.
Q. Which books have made you a better businessman, investor, & decision maker?
A. Read everything. I am fortunate in that my hobby is also my profession; so, I don’t mind “cozying up” with an accounting book or commodities index and a cup of coffee. I’ve read books that are downright terrible, but they all add to the knowledge and experience.
So long as you accept that great returns don’t come in 15 minutes a week or by following a simple charting system, you should read everything you can get your hands on. I’ve read books that are 250 pages of nonsense and ten pages of gold. Those ten pages are worth the $20.
Q. The timing for your book has been fantastic; did the financial crisis motivate you to publish?
A. The financial crisis inspired me to write the book in the first half of 2007, but I would have kept the title the same whether the Dow hit 20,000 or 2,000. The book began as a “how-to” for my kids. They were two and not-yet-born at the time. (What can I say? I’m a long-term guy.)
I didn’t plan on publishing it, but figured that it was worth shopping around to see if there was any interest. It just so happens that the publishing industry is slow; so, the timing was one of luck rather than any keen insight into the direction of the market.
Q. Your book is dedicated to the average investor- how are you trying to help the little guy?
A. People are angry, confused, and scared. They’re all thinking, “F Wall Street.” Unfortunately, they are also giving up hope and the desire to invest. The goal of the book is to shatter some preconceived notions about investing, explain why they may have had bad experiences, and ultimately change their perspective on investing.
The “little guy” is ignored by Wall Street and kicked to the curb. Well…F Wall Street. Invest comfortably and confidently like people did in the 1960s, before Jim Cramer, real-time quotes, and “actionable” trading advice.
That’s the message I’m trying to get out there.
Q. You’re confident that the individual investor can beat Wall Street. Give us the basic recipe?
A. Return to a time when investing was more intelligent. Buy quality investments, adjust your expectations, and make smart decisions. You don’t have to be the next Warren Buffett to retire wealthy. You simply need to save regularly, avoid big mistakes (like credit card debt), and stick to your core competency.
Most importantly, don’t take big risks. Your money is too important. Instead, adjust your lifestyle and expectations. If you can’t stomach the markets, don’t invest in the markets. Instead, realize that your returns will be lower because you’re only investing in CDs and bonds, save more on a regular basis, and sleep peacefully at night.
People don’t need to benchmark their performance against an index. When you retire, what you have is what you have, like it or not, regardless of whether or not you beat the S&P 500. Why not focus on safety and making smart decisions?
Q. Whats your favorite part of the book? Why?
A. I like the story of Rose. It’s a simple story that really drives home the point that people should ignore the markets, invest in good companies, and enjoy life.
Q. Given the great feedback, have you thouht about writing another book? What would it be about?
A. I don’t have any plans to write another book, but I won’t rule it out. I’m not an author; I love managing money. That’s how I make my living. I don’t have any plans in the works, and would only write something if I felt that it needed to be said.
Q. What advice do you have for active and passive individual investors? In addition, what advice would you give sophisticated investors?
A. Keep it simple and focus on making smart decisions regardless of the outcome. The fancier you make it or the more you stray from the simple concepts of value investing, the more likely you are to be disappointed in your results.
Also, keep in mind that you’ve never “missed the boat.” Today, everyone is talking about the market’s explosive +50% gains from the March lows. If you were in cash, you “missed it.” Nonsense. For two years, they’ve been parading themselves on TV telling you that stocks are cheap and “now” is the time to buy. Even a broken clock is right twice a day.
Never be in a hurry. So long as you are investing intelligently, you’ll never “miss the boat” because another is right around the corner.
Q. Are there any other projects or ideas you’re working on and would like to tell us about?
A. I have a million ideas to get the word out there. I simply don’t have the time to implement them. I won’t leak anything today as I don’t want people to get disappointed if I can’t follow through.
Q. If you could do anything besides allocating capital, and running a blog - what would you do?
A. I’d probably teach investing. Investing is not only my career, but my passion and hobby too. I can’t help myself. If I couldn’t allocate capital, I’d want to study and talk about it in some fashion, and that would lead me to teaching. Besides, people say that I have a knack for explaining difficult concepts in Plain English; so, that would also push me towards teaching than most other professions.
Q. What does the future hold for you and your website?
A. I’ll continue to manage money. As far as the website, I have to work on a better way to communicate with visitors. With the explosion of visitors (over 4 million hits in 2008), I simply can’t keep up with the articles, comments, and e-mails. I like to talk to everyone individually; so, I need to figure out a better way to communicate. It may be webinars or video; I may utilize twitter more.
Time and technology will tell. Still, I think we have a great community of intelligent investors at F Wall Street, and I’d like to keep it going. It’s certainly more intelligent and refreshing (to me, at least) than some of the financial or stock market forums and discussion boards.
Miguel: Joe thanks again for joining us. We wish you the best!
Note- If you’re interested in following Joe Ponzio please visit the following websites:
