In the near future, I will be writing a a review of Guy Spier’s The Education of a Value Investor, which will be released next week. ?Until then, to whet your appetite, here is an 11 question Q&A that I did with Guy, for which I give him thanks, because his time is valuable.

1. What company have you owned the past that was the most surprising to you? (In prospect or in retrospect)

I think that many have surprised me in one direction or another, but one of the more memorable was Duff and Phelps Credit rating ? which I purchased in the mid-1990?s at a 7 Price to Earnings ratio. The company proceeded to increase in value by seven times over 2-3 years before being purchased by Fimalac, the owner of Fitch. I had expected the stock to double, but I did not understand that I had purchased a super high quality business with a manager who was committed to devoting every cent of free cash, which?was in excess?of reported earnings, to repurchasing shares.

2. Which rule(s) of your checklist would surprise average investors the most, if any?

I actually think that none of them would. They are common sense items that anyone would look over and say, ?yes ? that makes obvious sense?. What is key is not that they are surprising, but that in the wrong state of mind, I might easily skip over a particular factor in evaluating an investment.

3. Would you advise young people to get a CFA charter or an MBA or is there a better way to become an investor?

I don?t think that either is necessary in order to become a good investor. Attending the Berkshire Hathaway meetings, studying Warren Buffett and reading the Berkshire Annual Reports, along with Poor Charlie?s Almanack are an absolute necessity, in my view.

4. Would you ever consider setting up your own holding company like Buffett did? (Permanent capital has its attractions?)

Yes. It?s a no brainer to do it if you have the skills.?I hope that?I have the skills, but I don?t think that the time has been ripe for me. Mohnish Pabrai has recently launched Dhandho Holdings which?I think will be an?extraordinarily successful enterprise over?the years. It?s one to watch.

5. What would you say is the most common mistake that value investors make? Does this matter if the value investor is amateur or professional?

I think that all-too-often, we feel like we are forced to take a decision. Warren Buffett has often said that, unlike baseball, there are no ?called strikes? in investing. That is a truism, but the point is that too many of use act like it is not true. Amateur investors, investing their own money, have a huge advantage in this over the professionals. When you are a professional, there is a whole system of oversight that is constantly saying, ?What have you done for me lately!? or in baseball terminology, ?Swing you fool!?

?Amateur investors who are investing?unlevered?funds that they don?t need any?time soon have no such pressures.

6. Financial companies are usually a big part of the portfolio of value investors, because they seem cheap to industrials and utilities. But every now and then financials wipe out in a credit crisis. Why don’t many value investors pay attention to credit conditions?

Yes, that?s absolutely true. Many value investors love the financial industry: Probably because, in a certain way, we are in it ourselves. And yes, value investors probably pay far too little attention to the credit cycle. In my case, I think that I was utterly convinced that my?stocks were sufficiently cheap, such that I could invest without regard to financial cycles. But I learned my lesson big time in 2008 when I was down a lot.?I now subscribe to Grant?s Interest Rate Observer so as?to help me track the credit cycle.

7. Are your wife and children happier as a result of the changes to your life since becoming a value investor in the style of Warren Buffett?

Absolutely. I spend more time with them. I am simply around more,?although that can come with its own irritations. You might have to ask them.

8. I appreciate your “investing tools,” and I do things mostly like that, but isn’t the main goal of them to be reasoned, dispassionate, independent-minded, etc.? The actual form of the rules is less important than the effect it has on our personalities in making decisions rationally, yes?

Yes ? I 100% agree and thus a different personality might have a very different set of rules to guide them. That?s why the book is about my education as a value investor. It?s personal and idiosyncratic.?I would fully expect someone?else to come up with different rules of behavior. ?I do hope though that it will allow people to see that getting to a reasoned, dispassionate, independent minded state is a struggle for this investor, at least and that thinking about our meta environment and making good decisions about that is just as, if not more important than the actual investment decisions.

9. How do you balance keeping an independent view versus interacting with respected professional friends who have their views?

I try to switch off, or distance myself from people who I think communicate in a way that is not productive for me. The key is to have the kind of discourse that allows other people to come to their own conclusion. Asking open ended questions and not telling someone what to do are important aspects of that. When I come across people who do that, I try to build closer relationships with them. If they don?t I might still keep them in my circle, but I would not allow myself to interact with them too often ? because I don?t want to be swayed.

10. How do you feel about those who use 13F filings to generate ideas?

Mohnish Pabrai taught me to be a cloner. In the academic world, plagiarism is a sin. In business, copying other people?s best ideas is a virtue, and it is no different in investing. I would go further. In the same way that if I wanted to improve my chess, I would study the moves of the grandmasters, if I want to improve my investing, I need to study the moves of the great investors. 13F?s are a great way to do that.

11. How do you feel about quantitative value investors?

I am not sure that I understand the way that you are using the term. If you mean to use statistical methods to uncover value, Ben Graham style, then I?m all for it. That is what I did when I created my Japan basket. That said, I found it hard and monotonous work. Monotonous because, in the case of Japan it did not lead to greater knowledge or wisdom about the world, because there was a limit on the degree to which I could drill down. But that said, I do run screens for value on S&P CapitalIQ from time to time, and then drill down on some of what comes up.

Again, thanks to Guy Spier for taking time to answer some questions for us… his book is being released on September 9th. ?Look for it.

Full disclosure: The Author and some PR flack?asked me if I would like a copy and I said ?yes.?

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

This is a book that starts with a simple premise: buy stocks at a fraction of the per share intrinsic value of the company, conservatively calculated. ?Neat idea, huh, and it is called value investing.

The author starts by giving a preview of where he will end — with Carl Icahn when he was much younger, where he was buying closed-end funds at large discounts, and pressuring managers to liquidate the fund. ?Eventually he started doing the same with overcapitalized companies trading a discount to the net worth of the company.

Then the author takes us on a trip through history, starting with Ben Graham buying the shares of companies at?prices lower than the net liquid assets of the company, net of the debt. ?It was easy money while it lasted, but eventually many of those companies were bought up and liquidated, and many of the rest had the stock price bid up until the value was no longer compelling.

Then we get to travel along with Warren Buffett and Charlie Munger, who note that the easy pickings are gone, and begin investing in companies that are inexpensive relative to their growth prospects. ?This is more complicated, because these companies must have an advantage that will sustain their effort versus their competition.

Then we visit Joel Greenblatt, where he analyzes buying good companies at cheap prices, analyzing them the way an acquirer might do, but also looking for high returns on invested capital. ?Lo, but it works, and furthers the efforts of those trying to obtain excess returns.

Then the book gets gritty, and looks at mean reversion of companies that have done poorly over the last four years. ?Surprise! The worst tend to do quite well on average. ?Also, raw application of simple valuation ratios tend to work on average in stock selection. ?People undervalue the boring crud of the market, and overvalue the glamorous stocks, leaving an investment opportunity.

Then it tells a story that is personal to me, that of Litton Industries. ?Litton Industries was one of two stocks I owned as a boy — gifts from relatives. ?Litton Industries was a company that in the ’50s and ’60s used its highly valued stock to buy up companies that were not highly valued, and made Litton look like its earnings were growing rapidly, which propelled the value of Litton stock still higher. ?So long as Litton could keep acquiring cheap-ish companies, the idea kept working, but eventually that ended, and the stock price crashed. ?When did my relatives buy me shares of Litton? ?Near the end, natch, when everyone know how wonderful it was.

Quite a lesson for an eight year old to see the stock price down by 80% in a year. ?The other stock, Magnavox, did that also, so it is a testimony to my mother’s own clever investing that I ended up in this business… my story aside, the point of the Litton chapter was to point out that not all earnings growth is real, and that it is far better to focus on boring companies than what seems glamorous and successful. ?Untempered optimism tends not to be rewarded.

The book then moves onto investors large enough to effect change outright, buying enough of a company to force change in a management team that is lazy, incompetent, or overly conservative. ?The book goes through the experiences of Ronald Brierly, T. Boone Pickens, and Carl Icahn. ?The art of spotting an undervalued company, and gaining enough influence to buy the company and fix it, or see the company sold to another company that will?fix it, can lead to great gains.

Here the trail ends. ?It started with Ben Graham buying companies that would be good investments regardless, moves to companies that will be good investments if you analyze them more closely, and ends with companies that good be good investments if you could influence a change in corporate behavior. ?The same principles are being applied, but with much more analysis and potentially threat of a takeover.

In closing, the book talks about what can be a way of measuring moats, which is gross profits as percentage of assets. ?It also reviews what factors activist investors look for when they invest, which may give the clever a guide into what stocks to pursue.

Quibbles

I liked the book, and I?recommend it, but in one sense the book is a ?statement of how tough the value investing game has become. ?Ben Graham could sit back and do simple analyses, pursuing artistic endeavors and the good life in his spare time. ?We have to analyze far more closely, and be aware of whether what companies larger activist players may consider. ?Value investing still has punch for amateurs, but there is a lot more work and analysis to do.

Summary

This book?would be good for investors looking to understand value investing better, and how it has changed over the years. ?It would not likely be good for novices. ?If you still want to buy it, you can buy it here:?Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (Wiley Finance).

Full disclosure: The PR flack?asked me if I would like a copy and I said ?yes.?

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.