Estonian Investor Magazine Article

Stock market shark turned into value investor after a bailout

Text by Anu Lill

Just a year or two into his first career at his first job, young investment banker Guy Spier was feeling a bit of frustration. He was disappointed in his colleagues, in the investment banking industry and in himself. His poor job choice threatened to derail his future life. Now he has developed into a successful fund manager whose fund’s long-term performance beats the market index.

There is nothing in the warm and simple nature of Aquamarine Fund’s founder and manager Guy Spier to suggest today that, after graduating from Harvard Business School and Oxford University, he had to take the Colgate road to his first job and put all his energies into transforming himself from a typical self-indulgent stock-market tycoon into an investor with a respect for fundamental values in both people and companies. On the walls of the meeting rooms of his office in Zurich’s old town, in bookshelves large and small, you will find works on the world’s great figures, as well as on politics, economics and investment. Portraits of Warren Buffett and Charlie Munger hang on the walls, suggesting that the legendary US investment tycoon Warren Buffett, who he initially thought was just a speculator who had made a fortune, played a big part in his success as a fund manager. Spier has published his story in the book “The Education of a Value Investor”.

Meeting with Warren Buffett

In his book, Guy Spier talks about how he met Warren Buffett and learned from him the principles of value investing, as well as how to treat the people around him. Prior to the famous $650’000 lunch with Warren Buffett, for which Guy Spier and entrepreneur and investor Mohnish Pabrai paid double, Spier had a chance meeting with Buffett at a Berkshire Hathaway meeting just before the meeting started. They did not manage to speak at the time.

Spier has attended Berkshire Hathaway’s annual shareholder meeting for several decades in a row. Only a few isolated occasions have intervened. A couple of years after an eye-opening meeting with Buffett over an expensive lunch, Spier also managed to visit Buffett’s office at Omaha. “Mohnish Pabrai and I were invited by Buffett’s secretary, Debby, and were given a tour of the house with a pleasant chat with Warren and Debby. In all, I’ve met him in small company about three times. If you want to make friends with Buffett, you have to respect his time, not commit him to anything and get on very well with his assistant.”

However, Spier admits that he cannot call Buffett a friend, but rather a role model. “It’s not like he’s going to come here to Zurich and call me to have lunch. He knows who I am, and he likes me. At the same time, there are thousands of people like that around him. He really knows a lot of interesting people. At the same time, I know that if I have something of value to offer him, he will take my call and look over the information. With people like Buffett, it’s a case of if you have something of real value to offer them, otherwise just leave them alone.”

Spier’s role model Warren Buffett is 92 years old, and the time is inevitably coming when the world will miss him. So, what could happen to Berkshire Hathaway? Spier doesn’t believe that the company will continue in the same way as it is now, and that Buffett’s successor managers will continue to make investment decisions for the company as Buffett has done for decades. Rather, assets would be distributed to shareholders, or Berkshire would become something like a dividend fund, Spier believes. Even in that case, Spier himself would hold on to his Berkshire shares, as the company is one of the great companies in the universe with very good fundamentals.

Even today, bad investments are being imposed on the head

Today, Spier himself is a Buffett-like value investor, but his career started off rather rough. After graduating from two of the world’s top universities, Spier’s first job was at the investment bank D.H.Blair, where he served as vice president. The firm cheated its clients by selling them bad shares, and this led to unpleasant surprises for Spier, who started his career as a vice-president. In D.H. Blair’s brokerage department, salesmanship was as rampant as we have seen in the movie The Wolf of Wall Street. Could this kind of rampant work, brawling, horseplay and drugs be found anywhere in a broker’s office today? Spier laughs enigmatically and suggests that the journalist go to Wall Street to interview someone instead. It would certainly be a fascinating place to hear some fascinating stories.

“My office was on the second floor of Wall Street and the brokers were on the 14th and 15th floors. From time to time, I would see really young, provocatively dressed women walking around who you would think were prostitutes. But nowadays, I think the financial sector is taken more seriously because it is much more regulated. However, it still happens that brokers call clients and tell them about bad investments. Not only in the US, but also in Europe. They used to sell shares, now they sell dodgy funds. It’s human nature and it’s not going away,” believes Spier.

“I would give myself a B+”

After leaving D.H. Blair, Spier had to put up with the bad reputation that came with it. Despite this, in 1997 Spier started to build up his own foundation with money from his father and some friends. The Aquamarine Fund, which he manages, has outperformed the S&P500 index over the long term, although it underperformed the S&P500 in a couple of years. The fund has not yet published a report for last year. The most recent published report for 2021 shows that over the 26 years of the fund’s existence, its assets have grown 10 times, while the value of the S&P500 index has increased 7 times. According to Mr Spier, the fund currently has 16 different equity positions in its managed portfolio, the largest of which is Berkshire Hathaway. Spier did not specify a maximum number of shares. However, he notes: “The fewer shares you have, the higher the risk of blowing up the fund, because you might have missed something important in some companies.” The reassurance, he says, comes from adequate diversification. “I’ve done pretty well and would give myself a B+. At the same time, I would have liked to have earned a higher return over those years. I admit that I am no Warren Buffett,” he says. But the most important thing, he says, is the stable returns and, above all, the fact that he has not blown up the fund.

“Of the funds that were set up at the same time as me, in the late 90s, only 1% are still in existence. Some have closed for good reasons. For example, so much money has been made that fund managers have simply wanted to retire and rest on the beach. But most of these funds have closed because they started out making money but then blew up one way or another,” he explains. Spier has not set himself a specific annual return target, as investor Thomas, for example, has a long-term return target of 12% a year on average.

“This is very dangerous,” he warns. This is because setting a target puts pressure on you to achieve it at any cost, leading to excessive risk-taking. The Aquamarine fund’s historical long-term average annual return is 9.5%. This is a net return, i.e., net of all costs. “You always have to look carefully at the return figures that funds publish. Some funds publish a pre-expense return because it looks better. There is also a gimmick whereby reports highlight the period with the higher return, rather than the full historical return. For example, if a fund has had 5 very good years in the last 5 years,

then the returns of that period are highlighted. However, if you look at the long time series, you would see more embarrassing numbers.” he points out.

How to build a fund?

The hardest part, according to Spier, is finding the seed capital. He started with money from family and friends. He had the educational background and experience, so his family trusted him. What makes it even harder is that you have to make promises, and the business is built on trust, because investors have to let the fund manager make their own decisions when investing their money. The fund manager has to be able to explain to them that the good effects of some decisions will be felt over a long period of time and that it is not worth waiting for a quick result. So, there is a pretty high barrier to starting a fund,” says Spier. Clients have to find their own way to the fund.

“We’re not allowed to advertise the fund because of the regulations alone,” he says. Investors have found them indirectly, “for example, by reading my book, or an article in the media where I’ve spoken to journalists, like now,” he grins. The word gets around and so people come to find out how their money can be invested in the fund. He says that this is an indicator of the strength and quality of the fund and gives an example: “If a doctor goes around inviting new patients to his office saying he is a good doctor, no one will want to go to such a doctor and entrust their health to him. The best way to put your money in someone else’s hands is for people to find your fund on their own and want to join,” he says. The fund currently has around 150 investors.

Investor requirements

While Spier was initially of the opinion that he should not discuss the fund’s investments with his investors, he now believes that he should, as many of his investors are themselves very well versed in investing, being venture capitalists themselves. “I don’t want them to tell me what to do, but I’m interested in their views because they might see things from a different perspective, and that’s useful for me to know.”

As a fund manager, however, he is not swayed by someone’s demands or recommendations, because sometimes the person making the recommendation is afraid to invest in the asset in question and take the risk, but tries to tell the other person not to, just to see what happens.

“Warren Buffet has told his investors that anyone who wants to invest with him must put money in for at least a year without taking it out. That alone actually eliminates the fake investors who would like more liquidity and the ability to withdraw their money at any moment,” he says. The Aquamarine fund has the same requirement, plus a half-million-dollar minimum investor investment requirement. The fund is also keen to ensure that the investor has a clean background, is not a criminal and is not involved in dubious business. The fund also currently has no Russian investors, although not directly because of ethnicity.

Spier himself has visited both Moscow and St Petersburg before the war, and has also met personally with Vladimir Kara-Murza, a member of the team of opposition leader Alexei Navalny, recently jailed for 25 years, whom Putin has tried to poison several times in the past. “I asked him beforehand whether it was worth going to Russia because I was still worried about security. He told me that I should definitely go and suggested that I should also visit the bridge where opposition leader Boris Nemtsov was murdered. I went there.”

He admits that some of the people he met in Russia gave him the feeling that they might be linked to the FSB. However, nothing bad happened to Spier on the trip.

A share in a growth company can also be a value investment

Spier is definitely a value investor, but it does not exclude growth companies from its portfolio. A growth company can also be a value investment. “In fact, there are many examples in life of different things being called by the same word. For example, the name of North Korea contains the word democratic republic, but there is no democracy there. Why am I pointing this out? Different people also call different things value investment. If you buy shares in a fast-growing company for less than its intrinsic value, that is certainly an intelligent investment and therefore a value investment,” explains Spier.

For him, one of the most important criteria when choosing a growth company is that it should already be generating profits, that it should no longer need additional money from the financial markets to grow, and that it should be in a business where it can grow tenfold on the back of reinvesting profits in its own high-value projects. And, of course, it is important to get a share at a price below its real value, which is the essence of value investing. You have to avoid companies that lose money, buying them at high ratios is not value investing.

He compares the energy business with the film business. While in the energy business, the risks are lower because there is the expectation of a steady income from demand, in the film business you can make money by releasing new films as well as older ones. But if a film is successful and the profits are reinvested in the next film, the risk of the next film failing is higher than reinvesting profits in the energy sector.

In addition to energy companies, Spier also looks at the shares of stock exchanges in various countries, shares of credit rating companies such as Moody’s and Standard & Poors, money transfer businesses such as Visa and Mastercard, and specialised banks such as Western Union. These are very interesting and look very good. “At the same time, I’m exploring new ideas from all places. It’s not worth getting too hung up on any old templates, because that way you won’t find new ideas and you can sleep on the success stories of potential businesses.”

The best investment ideas, in his view, are usually the ones that an investor comes up with when looking for a new way. Perhaps, while people usually find ideas by reading business journals, they may find some of the most useful ideas by attending an event. The reality around you needs to be constantly scrutinised with an investor’s eye.

“It is also true that we learn from the best investors about their best practices. When I see that Buffett bought something, I look at his ideas with the eye that maybe it would fit into my portfolio. Anyway, analysing these stocks for myself is worth learning valuable lessons. Some investors even have a strategy of following a stock that Buffett bought and if it falls, they buy.”

Investors started to shake a leg

Last year, Spier was a regular attendee at Berkshire Hathaway’s annual meeting. Warren Buffett was very bullish on the stock market at that year’s meeting in late April, and strongly on the buy side, even though the market was sinking steadily lower. Spier, on the other hand, admitted that he was not on the buy side because there was not much spare cash in the fund.

“Apart from the fact that the fund was already fully invested and there was not enough spare cash to buy anything, I don’t buy shares just because somebody else does anyway. Millions of dollars of new money trickle into Berkshire every month. Sitting on the edge of such a money-bursting trough, buying was perhaps the right thing to do. At the same time, my fund’s investors were getting more and more worried,” he says, describing the mood among his fund’s investors caused by the energy crisis and the war. While investors are required to keep their money in the fund for at least a year, that year comes to an end quite quickly and investors have the right to withdraw their money from the fund if they wish.

“I had to prepare for the fact that some investors would want to exit the fund and I did. I also got some worried calls from some investors asking if there was a risk of their assets falling by 30 percent,” he says, giving examples of the fear in the markets.

According to Mr Spier, one of the weaknesses of fund management is that you have to manage other people’s money and they may want to get that money back prematurely, without the investment strategy that you have devised having had a chance to deliver in terms of returns.

The Twitter saga and Elon Musk

While Spier didn’t buy, he did make one big sale last year. He sold a position in Twitter before the share price crashed. He explains why he bought Twitter in the first place. In February-March 2020, stock markets crashed because of the corona pandemic. People stayed at home, and suddenly the stocks of the tech companies whose services and products people were consuming in their homes boomed. Twitter was one of them and, according to Spier, more influential than another social media giant, Facebook (now Meta). “I felt like I was missing the party,” he says. “Twitter had a market capitalisation of about 30 billion dollars, a turnover of 3-4 billion and a profit of 1.5 billion. So, I bought shares at a turnover multiple of 10. In the past, I would have thought it was ridiculous to buy a stock on a 10 times turnover. But I liked the fact that the CEO, Jack Dorsey, and the other two members of the management team were trying to make the company more profitable and were taking steps to do that.”

Spier believed that, given Twitter’s influence in the world and its advantages over other media channels, the executives could succeed, so he decided to make the purchase even at such a high turnover level. But then something unexpected happened: Elon Musk, the head of Tesla, made a takeover bid for Twitter. “I was shocked that Twitter accepted it so quickly,” he says. Normally, Spier says, Twitter would have said ‘no’ and explored and compared other possible offers. “The fact that Twitter executives were so quick to accept Musk’s offer set off alarm bells for me. Obviously, they knew of problems in the company of which I was not aware, and there were probably no other interested parties who would have wanted to buy Twitter. I asked myself why Microsoft, Amazon, Salesforce or Google wouldn’t want to buy Twitter.”

Elon Musk’s offer per share was $54.20 per share. Spier sold off the shares at $50.20 and the share price ended up close to $30. Elon Musk is a man Spier says he greatly appreciates and respects, as a business genius who has transformed entrepreneurship globally. “But I don’t want to invest in his companies because then I wouldn’t be able to sleep at night because of my investments,” says Spier. That’s why he doesn’t have any shares in Tesla and has no plans to buy any.

Tesla’s stock is insanely overvalued, he says. “You expect them to be able to grow production and sales globally, but how much do they make per car? Not very much. Elon Musk is a very entertaining

person and he’s selling dreams for the distant future. If I were a woman, I wouldn’t go to meet him, but I would want to be his child,” laughs Spier. Every American should be happy that Musk, who has built such powerful and innovative companies for the world on many fronts, is an American, says Spier. He’s a man to be really proud of, and he’s going to achieve a lot in his lifetime, Spier believes.

But as a value investor, Musk’s companies do not appeal to Spier. “I don’t buy into future dreams that may never happen, but that you can’t be sure will happen. If the beautiful picture he paints of the future doesn’t come true, the stock will plummet rapidly by more than 50 percent. That is no fun at all. I live my life better without a position in Tesla,” he says, summing up the main argument for not having Tesla shares in his portfolio.

US electric car stock replaces Chinese electric car stock

At the same time, the electric car business is linked to green energy. What about other electric car manufacturers? Are their shares of interest to value investors? Spier claims that he does own shares in electric cars, namely BYD, a Chinese company also owned by Warren Buffett. “BYD makes better cars at a lower price than Tesla. They also control many aspects of the supply chain, such as battery production, and have mines. However, there are political risks in China,” he warns.

Spier says: “It’s appalling the mistakes that leaders of the major powers make. “Going back to World War II. Hitler first won a victory over the West and then he decided to invade Russia. Putin is now doing the same stupid thing. We can expect similar stupidity from the Chinese leader when he tries to invade Taiwan. That is the biggest risk for me. However, my bet is that he will not make that decision, but we shall see,” muses the fund manager.

Education opens doors, but real wisdom comes from life itself

As an alumnus of Harvard Business School and Oxford, Spier knows that graduating from an elite university does not give you any particular advantage when it comes to investing. This is one of the reasons why he wanted to write a book on the ‘Value Investor’s Education’.

“As human beings, we often see around us that graduates from elite schools are not always more successful in life and in their careers than those from lower-educated and ordinary schools. An elite school leaver may ask themselves, what is wrong with me?” she explains the phenomenon of being trapped in academic education. Many of the most successful people he has met in his own lifetime did not go to Harvard, Oxford or any other elite university. “I’ve had a lot of practical life lessons from people like Warren Buffett, Mohnish Pabrai, Anthony Robbins and others who didn’t go to such elite schools. It’s the life lessons I’ve learned from them and learned myself that have definitely benefited me the most as an investor,” believes Spier.

He says that when things come too easy in life, people don’t appreciate them. He himself found it easy to go through these elite schools, and perhaps this is the current paradox, where he values what he has learned from other investors in life more than his own academic education. Young people should still, in Spier’s view, get the best education that their circumstances and economic background allow. “Although Peter Thiel (renowned venture capitalist and entrepreneur, co-founder of PayPal and Palantir – ed) has said that university is no longer necessary today, I disagree. This is true for a very small number of people, such as Facebook founder Mark Zuckerberg or Bill Gates. But if you’re Guy Spier, go to university,” he suggests. If nothing else, at least a university degree will

open a number of doors at the start of your working life. Not all people are geniuses or born businessmen whose first start-up as a youngster will immediately succeed and make them rich. For most people, a good education is like an insurance policy. At the very least, you’ve got a degree in something, and you can work in it. You can and should always learn more in life, build up your network of contacts and keep your eyes and ears open for opportunities,” says Spier.

D. J. Blair was clearly a bad place to start your career as a young person. How do you know what’s a good company to work for and what’s a bad one? “In fact, I could definitely have gone to a better place, I was just stupid,” says Spier. “There were a lot of signs in the air, but I didn’t listen to them. Blair wasn’t a respectable company even then.”


Empathy with Estonia

Guy Spier comes to Estonia for the first time in his life 7-9. He will be the headliner at the Investment Festival on July 7-7, performing on the main stage on July 8. He will be the keynote speaker at the Festival Spier on the evening of 8 July. Having grown up partly in Israel, Spier has empathy for Estonia as a small country which, both historically and because of the current Ukrainian-Russian war situation, has to be constantly vigilant against possible attacks from its eastern neighbour.

“I have thought a lot about the war in Ukraine. “If the largest country on the planet in terms of territory – Russia – needs more more land, this will not solve any problems. Russia is being called the graveyard of nations because many small nations have been swallowed up by Russia,” Spier is alarmed.

“At a time when evil is trying to spread as aggressively as it is now, claiming that you are neutral is actually choosing the side of evil. Smarter people understand this. In fact, Switzerland has never been neutral, although that can be debated. We have Ukrainian flags up too. The debate is about whether the country should allow arms to Ukraine or allow other countries to pass on arms produced here to Ukraine. He mentions that he too has a Ukrainian flag on his Twitter account, and it will remain there until Russia is out of Ukraine. Spier is suspicious of the Russians. Wherever he comes into contact with them, he tries to find out whether or not they are supporters of Russia’s current violent policy, because he doesn’t want anything to do with supporters. Spier follows what is happening in the Russian-Ukrainian war on a daily basis, and he is very fond of the video blog of a young Estonian, Artur Reh.


Guy Spier’s 8 key investment principles

1. Stop tracking stock prices

Many investors check their share prices on more than just a daily basis. But every minute. Unfortunately, it’s important to keep in mind that for the investor’s brain, stock price movements are an invitation to action. If we invest in a company, we need to be ready to own it even if the stock market closes tomorrow and does not reopen for another five years. If you invest in valuable and undervalued companies, there is no need to watch share prices on a daily basis. Personally, I look at them no more often than once a week.

2. If someone tries to sell you something, don’t buy it.

Not only with shares, but with everything else, the rule is that if someone calls with a sales pitch and wants to sell you something, refuse immediately. In this way, you protect yourself from people who have a personal motive to sell you something because they stand to gain something from it. The rule also applies to events where you are approached by an entrepreneur who wants you to invest in his business. I also stay away from all IPOs because of this rule, because when a new company goes public, it has all the selling power of Wall Street behind it. Of course, from time to time this also means missing out on some upstarts.

3. Don’t talk to management

For much the same reason, I don’t want to talk to the management of listed companies. Namely, company executives are extremely good salespeople when it comes to promoting the good things about their companies. An investor who is easily influenced and aware of this should not talk to the managers of listed companies about their companies but should instead talk to objective analysts to get a different perspective and view on the stock.

4. Collect research material on the investment in the right order.

My routine for researching an investment starts with the least biased and most objective sources. These are the company’s public documents – annual reports, quarterly reports, etc. The auditor’s report is also important. Next, I examine press releases and conference call transcripts. Books written about the company, or its founder also provide useful information. I avoid press information until the reports have been worked through. I never read stock analyses from brokerage firms, nor do I base my investments on them.

5. Discuss investment ideas only with those who don’t have an iron in the fire.

It’s better to talk to someone on the buy side rather than someone you trust to get someone else’s views. Such conversations go best when they are confidential, neither party tells the other what to do and there can be no business relationship between the two. This kind of response is simply to share experiences and gather information.

6. Never trade shares when the stock exchange is open.

Wall Street is perfectly designed to exploit the weaknesses of the human brain and tempt you to trade a wide variety of stocks. Unfortunately, investor interests are the opposite of Wall Street. I only need to invest in a handful of excellent but undervalued companies and hold a position for many years. There is too much irrelevant and tempting information constantly moving around in the stock market, and we are simply unable to cope and ignore the noise of price information.

7. If a stock falls immediately after you buy it, don’t sell it for two years.

This rule acts as a safety net and pulls down the momentum, increasing the likelihood that the investor will make rational decisions. It forces the stock picker to be more careful, otherwise he will have to live with the consequences of his mistakes for two years. I ask myself when I pick a stock, if the price drops 50 per cent after I buy it, will I be able to cope. Only buy shares that you like so much that you are prepared to hold on to them even if the price halves after you buy them.

8. Don’t talk about your current investments

Once something has been said out in the open, it is psychologically difficult to backtrack, even if we have come to regret the position. Therefore, stepping into the trap of making a public statement about a stock is the last thing I want to do, as the situation may change afterwards, and I may discover I was wrong. It’s much easier to be an investor when you don’t have to worry about what others might think of you.