Forget about bonds, forget real estate, forget venture capital. If Guy Spier were the principal of a €5 billion family office he would invest virtually everything in a handful of substantial – but undervalued – listed companies.
Pretty bold stuff when you consider that the average family office allocates only 25% to equities, but the Swiss-based investor and founder of the Aquamarine Fund says businesses are creators of wealth, and it follows that family offices seeking to grow their wealth should allocate a high proportion of assets to equities. Spier admits his family office manages a lot less than €5 billion, but since 1997 he has quintupled the wealth of his original investors and outperformed the S&P 500 by a substantial margin.
Spier’s philosophy is inspired by what he calls “manna from heaven” – a journey that started when he discovered The Intelligent Investor, by the late economics professor Benjamin Graham. The ‘value’ philosophy argues that stocks represent part ownership in a business, and should be bought when there is a significant margin of safety (in other words, at a bargain). Buy stocks that are worth a lot, but at a low price. Its elegance and simplicity stands in stark contrast to the complex charts used for technical analysis of the markets.
Warren Buffett, now the most famous of value investors with an estimated net worth of $73 billion (€59 billion), had penned the preface for the particular edition Spier picked up. “There is this serendipitous aspect in being in bookshops. Who knows exactly why one book catches our eye, and makes us open it, and draws us in.” But Spier, who is a published author as of this year, says that’s exactly what happened to him in that New York bookshop (which has since closed) on Broadway, “just near Wall St”. A decade later, in 2007, Spier would be the subject of international media attention, when he joined forces with friend and investor Mohnish Pabrai to pay a whopping $650,100 to charity for lunch with the so-called ‘Sage of Omaha’.
Prior to discovering Buffett and Graham in his late twenties, Spier had been following in the footsteps of a much more unsavoury sort of character, popularised in the 1987 feature film Wall Street. “I don’t think anyone consciously follows in the footsteps of Gordon Gekko; it doesn’t end very well. But it summarises many of the things that I was at the time.” Spier had been working at boutique Wall Street investment firm D H Blair, a period of his career he details with great honesty in his book The Education of a Value Investor. The business was set up, he explains, so employees would have to lose their moral compass to succeed.
Until that point, Spier’s resumé had been exemplary. He had topped his economics class at Oxford University and graduated from Harvard Business School with an MBA. His 18 months at D H Blair tarnished that, however, and Spier describes it as his “Berkshire Hathaway textile mill moment” (Buffett’s purchase of the mill, his company’s namesake, is described by many as the investor’s greatest career mistake). In 1998, several years after Spier left, the firm’s brokerage arm was closed down in the wake of charges for manipulating stock prices and illegal sales tactics.
Having left D H Blair, Spier was jobless but bursting with enthusiasm for value investing. Recognising this, his father who had made his wealth in a “small but profitable” business, Aquamarine Chemicals, entrusted him with around $1 million. A little over a year later, his father, and several smaller private investors, increased this allocation to $15 million and Spier launched the Aquamarine Fund. Today it has assets under management of around $180 million and the Spier family remains a substantial investor. “I’m doing the investing and I’m loving it, but in terms of how you plan the legacy and all those type of things, we’re not very sophisticated,” he says.
Education is a key feature of Spier’s book, but he is reluctant to call Buffett a mentor, explaining he doesn’t have a call on his time, as you typically would in a mentorship. “I really do believe Warren Buffett is a profound historical figure, the likes of which we have never seen in the history of capitalism,” Spier says.
Whether Buffett is a mentor or historical figure, behavioural finance expert Greg B Davies, of Barclays Wealth Management, says seeking to understand the billionaire’s investment process could never be described as a bad move. “There are certain abstract features in his way of thinking that epitomise good decision making,” Davies says. These include a large amount of introspection and evaluation of past performance, recognition of the combined roles of luck and skill, and in-depth research into potential investments.
While Davies’ observation is that investment mentors are uncommon, he says it is the most sophisticated investors, “the people you would imagine would need it the least”, who take mentorship the most seriously. He adds Buffett is one of the most popular investment sages, but others include his right-hand man Charlie Munger, as well as George Soros.
New York steakhouse Smith & Wollensky was the setting for Spier’s face-to-face encounter with the man who had so profoundly changed his understanding of investment. Seven seats were available for the lunch; Spier took his wife, Lory (their wedding photographer also attended to document the event), and Pabrai bought his wife and two daughters. (Pabrai had committed two thirds to the hammer price, and Spier the remaining third.) There was one seat left over, which they left open.
There were several months between the auction and the lunch, but in the days immediately preceding the event Spier suffered from an intense case of nerves and a lack of sleep. He worried he hadn’t completely shed the vestiges of the self-serving Wall Street investment banker he had once been, and Buffett would see straight through him. “You have these world famous actors who are convinced that at some point the world is going to see it’s a sham. So they have these terrible moments of stage fright. I think it was one of those moments for me.”
At pains to put his guests at ease, Buffett had the tools to break the ice. Ten minutes into the lunch, Spier prepared to ask a question. “I said ‘Mr Buffett…’. He turns to me and he says, ‘Look, Mohnish’s children are already calling me Warren, and I know by the end of the lunch you will, but why don’t we just cut to the chase and why don’t you start calling me Warren now?’”
The conversation moved quickly in the three hours that followed, says Spier. (For the record, Buffett ordered a medium-rare steak with hash browns and a Cherry Coke – Coca Cola has been one of Berkshire Hathaway’s most lucrative investments.) Topics covered included philanthropy (Buffett recommended charitable giving should start early, although considered himself an exception to this rule knowing his exceptional investment ability would allow him to give so much more at the end of his life) and wealth transfer. Here Buffett recommended parents give their children “enough to do anything, but not so much they end up doing nothing”.
While $650,100 might seem like an expensive lunch, Spier says in the scheme of charitable donations much larger sums have been given. (The annual lunch, which supports anti-poverty charity The Glide Foundation, has since sold for as much as $3.5 million.) “I’ve known people who’ve donated $15 million to Stanford University and they didn’t get lunch with anyone,” Spier says.
One of the most profound characteristics Spier observed in Buffett was his comfort in his own skin. Buffett has previously said it is important to focus on the “inner scorecard”, doing what resonates with you, rather than focusing on approval from others, what he calls the outer scorecard. At the lunch, Spier came to realise Buffet hadn’t set out to build a monument in Berkshire Hathaway, he had just chosen to do something he loves doing – buying into undervalued, but good businesses.
Likewise when critics told Buffett to get with the programme as internet stocks boomed in the late 1990s, the investor held his ground (Buffett has also said that he wouldn’t buy recent market darlings Facebook or Google). “It just didn’t bother him at all, he was utterly unphased,” Spier says. The dotcom bubble burst in 2000, and Buffett was vindicated. One of the fundamental elements of value investing is to exploit market irrationality. Spier says that the tenets of value investing helped to anchor him within the ephemeral and ethereal financial markets “perhaps best exemplified by the Chicago options trading pits, which are just a bunch of aggressive traders buying and selling.” Value investors buy into equities for the long haul, and Spier says he typically holds stock for three to five years, sometimes longer.
“Mr Market is this manic-depressive who sometimes wakes up irrationally exuberant, and he sometimes wakes up hugely depressed,” argues Spier. “But I have a choice, whether to exchange with him or not, and I can choose to buy things off him when he’s extraordinarily depressed, and I can sell things back to him when he’s irrationally exuberant.” Efficient market theorists in contrast would argue that the market accurately represents the current value of any listed business, and therefore price and value should be one and the same thing.
If introspection is an integral part of investing, as Spier argues, it begs the question what role do professionals play in a family office? “All too often you have investment advisers or professional advisers, who have a lot of authority, advising the family on how they should be positioned. It’s really important that that is consistent with the founder, or the founding family.” Buffett doesn’t have a family office, points out Spier, and Berkshire Hathaway has just 24 staff at its head offices. (He does acknowledge Microsoft founder Bill Gates has a large family office, but says sometimes wealth holders can enjoy the luxury of a little inefficiency in their lives.)
Family office investments should also be simplified, Spier says. “Some family offices have a venture capital arm, they have dozens, if not hundreds of investments.” But Spier believes it is not intelligent investing driving this complexity. “The management has an incentive to create complexity, because when you create complexity you can’t get rid of them.” He estimates that in his portfolio, more than 90% of his assets are invested in just 15 stocks. “When I don’t have something good to invest in, cash builds up. So it’s companies and cash, that’s it.”
Stocks represent part ownership in a business, and Spier argues, due to many family offices’ history of entrepreneurship, they should take note. “Family offices that have owned, in the past, or currently own a family business that has made them wealthy, should be especially interested in other wealth generating vehicles,” Spier says. The wealthiest families are those that have been in one business for a long period of time, he argues. Spier is critical of the The Hershey Trust’s former plans to diversify out of the eponymous company from which they’d made their wealth, describing it as “diworsification”. The confectioner’s total return for the preceding decade had been 330%, compared to the S&P’s 165%. “You want to be concentrated in things like that,” he says.
So are family offices interested in value investing? CFA Institute director David Larrabee, a former equity portfolio manager at US multi family office Pitcairn Financial Group, says wealthy clients, who typically seek capital preservation, like the way value investing minimises downside risk through its margin of safety. Ultra-high net worth individuals, adds Charlotte Thorne of UK private multi family office Capital Generation Partners, usually have long-term time horizons and low liquidity requirements that make them well suited to a high conviction, highly concentrated approach to equities.
But value has its challenges, adds Larrabee. As a contrarian strategy (buy when the market is selling, and vice versa), value investors need confidence to stick to their guns. Investors also need to watch out for “value traps”. “Companies can look cheap on a valuation basis but they’re cheap for a reason.” Larrabee says for diversification purposes many families will pursue other strategies in their equity portfolio, such as growth stocks.
For Spier, however, value investing is not a style; it is the only way to invest. Other asset classes may have their place, Spier acknowledges, particularly when you have set financial obligations to your beneficiaries in defined time periods. But he says when it comes to building and creating wealth the only option is equities. And the smartest strategy is value investing.
Spier says it is important to make investment decisions that resonate with who you are as a person, but you can still learn a lot from the decision making of others. It took Spier six months to get to grips with why Buffett bought into railways. “It’s got to do with rising fuel prices, rising congestion and then at some point these railway tracks that were monsters of a bygone era, are suddenly extremely valuable, and in fact are prized real estate.”
The Burlington Coat Factory was Spier’s first investment – he bought the stock after creating a handful of mock portfolios and watching them outperform other securities he had been considering over a period of six months. It seemed cheap and had a long-term financial record that impressed him. Understanding that he was a part owner in the business, he visited its stores in New York and Omaha, before selling it for a small profit several years later.
Spier considers environment and procedure as two very important contributors to good investment decision-making, so much so that he directly mimicked those he admires. As detailed in his book: “I sat down at my desk and actively imagined that I was Buffett. I imagined what the first thing would be that he would do if he were in my shoes, sitting at my desk.”
Spier and Pabrai had their own chance to visit Buffett’s offices, when his assistant, Debbie Bosanek, extended an invitation about a year after their Manhattan lunch. Berkshire Hathaway’s unremarkable headquarters are located in Omaha’s Kiewit Plaza, shared with an infrastructure company that builds roads, bridges and tunnels. Spier was struck by the lack of clutter in Buffett’s office.
On his walls, Buffett had a prominent image of one of his own mentors, his father, Howard. Spier believes having images of role models in your working environment plays an important influence on his subconscious. Spier has images from his lunch with Buffet, and even has a bronze bust of Charlie Munger, as he wants to “activate their presence” in his mind.
Surround yourself with people better than you and you can only improve, is Spier’s mantra – an insight he learned directly from Buffett. This became overwhelmingly clear to Spier when he realised that the Manhattan hedge fund scene was sucking him in. “I rented expensive office space, hired expensive analysts, did a bunch of things to fulfill that vision of myself.” But he realised this was driven by his need for approval and did not reflect what made him happy.
Spier had had his Omaha moment, and even considered moving to the Nebraskan town, but instead decided on Zurich, Switzerland, making the move in 2009 with his wife and three children. At his new home, he can go cycling three times a week, and hit the slopes half an hour away. He explains these activities truly make him happy. “No amount of having offices in New York City is going to change that for me.” People have asked him if he finds it boring, but he says that lack of distraction is exactly what he needs for good investing.
At the New York bookshop, the better part of two decades ago, Spier began a value investing journey, following in the footsteps of Buffett. At his lunch with the Sage, however, Spier realised how good investing can be very personal. “Warren Buffett talks about Berkshire Hathaway being his artist’s canvas.” Spier says his own experiences have made him a conservative investor, while his friend Pabrai, whose life experiences differ, is much more comfortable with risk and volatility. Spier, for example, feels a responsibility to repair the financial injustice suffered seven decades ago by his great-grandparents – wealthy industrialists whose assets were seized by the Nazis. Being aware of this emotional load informs his decision-making.
Likewise Buffett’s own experiences deeply impact the way he invests. His style has been compared to the All-American painter Norman Rockwell, because of the traditional types of companies he buys into. Spier’s portfolio needs to look different, just as Munger’s or any investor’s would be. “I can’t beat Warren Buffett at being Warren Buffett,” Spier says he has come to realise. The humble apprentice now has his own canvas to create.