What Value Investor Guy Spier Finds Common Between Cera And CARE Ratings
For value investor Guy Spier, there’s something common between a maker of bathroom fittings and a credit rating agency in India: longevity.
“I try to restrict myself to buying companies that I believe would be around pretty much forever. One example comes to my mind of many great companies in India is a company called CERA Sanitary,” the chief executive officer at Aquamarine Fund told BloombergQuint in an interview. “They make bathroom installations, the kind of business you know would be around for a very long time.”
“Credit rating agencies have been beaten down but I have no doubt in my mind that in a hundred years’ time not only will there be credit rating agencies in India, I happen to believe that one rating agency, CARE Ratings, could potentially go global with its brand,” he said. “I believe it will be a source of Indian soft power in the future.”
And this strategy is at the core of his investing philosophy. Because apart from the risk, he considers for how long he can hold a stock before thinking about a change.
“I assume that anything I buy, will go down by 50 percent and if I am not comfortable with that upfront, I shouldn’t own it. I think about all the reasons why it might go down 50 percent, and would I still be comfortable owning it,” he said. “The next thing I do if I buy it is that I cannot touch it for at least two years after I have bought it, ideally five to 10 years.”
His faith in long-term returns helps him even when he can’t buy at the bottom. “When something is down a lot and I know that there’s that rational voice that says, ‘If it’s down, you could buy more’, but it’s also okay just to do nothing,” Spier said. “I can give plenty of examples of companies where I bought them, prices went down, more than 60 or 70 percent but because I was able to hold the company for six, seven or eight years, it did absolutely fine even though I didn’t act out at the bottom.”
Not surprising then that Spier retains his optimism about India despite volatility in the last year and a half. “India has an extraordinary future. Nobody said that the path would be straight up. I have absolutely no doubt about it that it’s just a matter of time before India, it may take 50 years, but it’s the largest English-speaking economy on the planet and that is a certainty. So, there will be difficult times, but we will get through them.”
And that gives him the confidence to bet on mid caps. “I don’t own any of the Nifty 50 companies. I am not interested in the market darlings but instead I am interested in finding companies that I believe ought to be market darlings, are high-quality businesses but they haven’t yet been recognised but they will, overtime,” he said. “That’s just the strategy that I am applying, and I’ve had some success with it.”
Watch | Guy Spier talks to BloombergQuint on finding value amid uncertainty and fear.
Here are the edited excerpts from the interview...
Last fifteen months that we’ve been through, we’ve been marred by several global and domestic events that have led to heightened risk aversion towards these high beta asset classes. If you take a look at emerging markets, they’ve suffered the most. But you believe that it is these fearful times where the most amount of value emerges, and this is the time to optimise and make those value investments. Can you highlight that theory for us?
Yes, what I would take you to is the philosophy of the Stoics. There’s a Roman General called Marcus Aurelius and he basically says to his commanders, ‘What did you think, this was going to be easy? Did you think you were just going to Waltz through life without any real challenges?’ and the fact that the philosophy of value investing, the idea of buying things that are cheap is easy to look at on paper. There’s no question that in reality, actually acting in difficult times is hard. That’s why, making the big bucks is so rare but that shouldn’t deter people. If people are waking up and saying, ‘oh, I am not enjoying this. This is not fun’— in a certain way, that’s what you signed up for. Or maybe that’s the best way to summarise it is the way Charlie Munger said recently at a Daily Journal meeting. He looked out at an audience of 2,000 people who had come to listen to his words of wisdom and his answer was, ‘this isn’t supposed to be easy. If it was, everybody would be doing it’. What I am trying to tell the viewers is that, it’s not easy for me. Its never easy for me to buy things when they’re down. Its never easy to buy into a market that’s fearful but it’s not supposed to be. I find myself mistrusting of people who’d let’s say, get onto some kind of a T.V. show and sort of ‘act’ as if it were easy. It isn’t.
The mindset of the investor is that how much more downside is there? Because at one point, you are in the midst of turmoil, you are fearful that the markets may go down further and whether or not the investment that you’ve made in the current point in time will lose value even more. So, the timing of it, how does one deal with that?
I’ll just share what I do, and I don’t think that my makeup is the ideal for being a value investor. I mean, there are some investors who truly are emotionless, and they can take a very dispassionate view because I am full of emotion and there are all sorts of things which I do to help myself. One of the first things is, I try to only restrict myself from buying companies that I believe would be around pretty much forever. So, one example comes to my mind of many great companies in India. The last time I was there, there was a company called Cera; they make bathroom installations, the kind of business you know would be around for a very long time. Then, I can tell you that I have at least one company in the Indian part of my portfolio that is down I believe more than 50 percent. But the first thing to say to myself and repeat to myself; that this is going to be around for a very long time. I don’t need to worry about the current price. The next thing is, and this is really important is, you don’t have to act. You can also just do nothing. It often happens to me that when something is down a lot and I know that there’s that rational voice that says, ‘if its down, you could buy more’ but it’s also okay just to do nothing. I can give plenty examples of companies where I bought them, prices went down, more than 60 or 70 percent but because I was willing and able to hold the company for more than 6-7 or 8 years, it did absolutely fine even though I didn’t act at the bottom. Then, the last thing I would say is that, perhaps many people are waking up right now to realise that that’s not the case but it’s so important to size the position right. It feels so different. If you had a 2-percent position that’s now down to below 1-percent position, or if you had a 30-percent position that’s now down to below 15; so these are all tools and techniques that I use to help get myself in the right amount of mindset to succeed over a long period of time. Just to be clear, India has an extraordinary future. Nobody said that the path would be straight up. Its not going to be straight up. I am telling you here and I have absolutely no doubt about it that its just a matter of time before India, it may take fifty years but it’s the largest English-speaking economy on the planet and that is a certainty. So, there will be difficult times, but we will get through them.
How important is the environment that you are in currently? How much does environment matter in taking investment decisions and put it in context to the environment we are in currently?
First of all, when the 2008-09 financial crisis came about, I was living in New York City and I found it very hard to be in New York city and not want to act. If any viewers have read George Soros’ book the environment is reflexive. So, we think we are making independent decisions but the environment is driving us to make different decisions and I remember going up the elevator of the building I was in— in New York city and it was a building full of funds of different kinds and you could just see fear in people’s eyes and they thought they were going to lose their jobs, they thought they were going to lose their life savings. That is not a great environment to be in. By contrast, I have a very different environment in Zurich but I would tell you that I’ve been to offices in Mumbai of people who run money that are an island of calm. So, it’s not so much the physical location but what you build into your environment. It absolutely makes a huge difference but perhaps even more important than the physical environment, in fact, far more important than the physical environment is, who are you surrounded by and what does your balance sheet look like? If your equity portfolio is not funded by debt, if you don’t have any significant obligations coming up and you can just ride out the difficult times, you’re going to do just fine. So those people who are in India or even at Nariman Point, or somewhere and aren’t able to move into my beautiful home of Switzerland, it’s okay. You can still create that environment where you are.
So, it basically boils down to you risk-taking appetite? How much risk you can afford to bear?
Yes and we always discover in hindsight how much risk we are willing to bear and prospectively when we are feeling bullish we tend to want to load out big and if it works out, we feel very smart and if it doesn’t work out, we realise that we’ve blasted through our risk tolerances. So, this is also appeared with people where people learn and update what their risk tolerances are. I am able to ride a period of volatility today much better because I was able to update my risk tolerances in 2008-09 as to what I was comfortable with. So, there are many positions I have which are sized far smaller than they would have been before my experience in 2008. And the Indian market is going through a similar experience but make no mistake, it will come out on the other side- better, stronger and more resilient. I just want to address another point here that I have done; I remember when President Donald Trump was elected in the United States, many people believed that it would be a disaster to the American economy, and they sold all their shares. By contrast, previously when Barrack Obama had been elected president, many people sold all their shares. The world is in a very difficult place, there’s a trade war going on between the U.S. and China, the retentions in Kashmir, the credit problems in India and non-bank financial sector in India. We can go on and on. But what I do is, I separate in my mind, my interest in all of those topics, and love following them, from my investment decisions and none of those things are going to impact the desire for the 100 percent of Indian families to have running water in their toilets. We have a very long way to go so we have to just separate those two things out. One is fun and interesting; one is long term investing.
Since you brought out the topic, the shadow banking space and the issues that we’ve been facing since more than a year now, since the issues of IL&FS. While we would say that now, the risk reward may look slightly favourable because you’ve got a big differentiation between the men and boy within the sector and to bet on the high-quality names, you have to pay a lot more money. You have to pay that premium in terms of valuations, how would your investment approach change with this and how your approach valuations versus whether or not this space itself is looking interesting right now.
It’s a great question and I would tell you that, even though I do own some banks in the U.S., I would find it very hard to get to a position where I felt confident investing in any one; any participant in the final sector whether it’s the big boys as you describe them who have weathered the storm well or whether it’s some of the newer kids around the block who may look good on valuation, but who knows? I think that the beauty of being a portfolio investor is that, I can just put the whole lot into the two hard pile, and I can find are other ways to benefit from the future growth of India. I would tell you that having referenced the sector, I actually don’t have any investments in the sector, and I don’t believe that I have a word. What I would to tell people who do have investments in the sector is that, I would pull out my Marcus Aurelius and remember that life is not supposed to throw up easy choices and it just isn’t supposed to be easy and I believed in the honesty of the management and their desire to get things right. I would stick with the investment. By contrast, if I believed that the management now in the light of new information had not been honest and open players and ethical players, then I perhaps would sell at any price and move on somewhere else. As Warren Buffet has said, ‘it’s often the energy spent trying to fix a leaking boat is better spent getting on a different boat’. It’s very hard for me to opine and just so you know though, it’s not going to help any individual investors but the maturation of the financial sector in India will happen over, I believe, in decades. It’s going to go through a series of crises, there will be an enormous growth and optimism, and something will turn out not to be 100 percent right and India as a collective will go back, take a look and fix the things that were wrong. It’s a part of what happens, if we look at the history of capitalism in the U.S. and the U.K., there were enormous booms and busts. Through each one, the sector matured and there were people who learnt through it, there were new institutional frameworks that were set up. India is going to do that much faster because India has so many different models to learn from. So, we will get there. It’s just a matter of time.
How does one approach stocks that are beaten down? Not for any other reason but for the fact that the sector is witnessing a cyclical slowdown. So, those kinds of stocks; are they a low hanging fruit? Should one disregard them, or should one actually use this option as an opportunity to have back in their portfolio because this is a cyclical slowdown and it’s going to return to normalcy at some point.
Two simple rules that I use and they are enormously helpful to me is that, it took a lot of mental pressure away. The first thing is, I have this joke that god is watching me. So, if I don’t buy the stock and if I just look at it, it will instantly double; only if I buy it because god is watching me, then it will go down by 50 percent. I assume that anything I buy, will go down by 50 percent and if I am not comfortable with that upfront, I shouldn’t own it. So, that’s the first thing. I think about all the reasons why it might go down 50 percent, and would I still be comfortable owning it. Then, the next thing I do is, I say, if I buy it, I cannot touch it for two years after I have bought it. These are the rules I learnt from somebody who is far more famous and better at this than I am; Mohnish Pabrai. He told me these rules when I met him, and they are wonderful rules and it’s kind of like a grandma’s rules. Grandma’s rule says that you cannot eat your dessert before you eat your main course. This kind of grandma’s rule says, if you buy it assume it has gone down by 50 percent and if you buy it and cannot sell it for at least two years, so I would tell somebody who’s looking at something that is beaten down, if it meets those two criteria, if you can handle owning it for at least two years, ideally five or 10, if you’re willing to see it go down by 50 percent or more from its current price, then you should feel free to go ahead and buy but there’s also something that the market is constantly sending signals to us to act. The market makes money. All the brokers, all the middlemen make money when we act. There are all sorts of things driving us to do that. Just because the market is sending us those signals, does not mean that we have to act. It’s fine. It’s absolutely fine to look at something that is down 50 percent and say, I am not ready to act and that’s okay.
Do you find any such spaces in India currently where that could spur some amount of interest because it’s a cyclical slowdown and not a structural slowdown?
First of all, cyclical versus structural, let’s just be clear. India has an economy which is $2.5 trillion. It’s an enormous economy. The last piece of economic data that I checked showed that India’s economy is growing by 6 percent per year. That’s extraordinary. Just extraordinary. I did this exercise on China not long ago and India’s economy is quite a bit smaller than China’s right now but we’re talking about every year. When you take a 6 percent growth, India’s adding about one-third of the whole of the Germany economy every year. There are extraordinary and enormous changes going on. Do not sniff at 6 percent. Where I am coming from, first of all, India is a market especially when you move away from the top 10 firms, you really need to be on the ground, you need to know the names of the auditors, you need to know the reputation of the auditors, you need to be able to do deep due diligence. In a way, that is hard for me to do unless I was to come and make the rest of my life in India which I might be ready to do but my wife and children, who knows? So, I would argue that I have a deep set of restrictions that are imposed on me because I want to invest in India from the outside. I tried to invest in assets the kind of like, infrastructure assets that will be there forever, no matter what. They are a part of the financial infrastructure of the country. If you’re a local, you’d have an enormous home advantage if you can put that into effect. I would tell you I happen to mention it. A series of companies that I would look at quite closely; I haven’t yet and the simple reason for me is that, I’ve watched this turmoil take place in India but there’s also turmoil elsewhere. For now, I have been allocating excess funds outside of India but what I will do with India is, what I’ll be thinking through is; what is my overall exposure to India that makes me comfortable, and then I am deciding from the companies that I can from outside of India understand, how the development will unfold, where would I like to pick my spots and we have talked about the credit ratings space.
Sitting from outside of India and obviously you said it is difficult for you unless you are on the ground to go and audit these companies, see their balance sheets. In light of that, the common consensus is that, you go with the well-known companies, you go with the big names that have given you a steady growth, that have a clean balance sheet, a growing balance sheet, no debt and no corporate governance issues. They have a clean slate, but you pay that extra money for that safety and protection that you want with regards to the uncertainty. Is that an approach that a person like you are sitting outside India constantly thinks about or the fact that we have seen the non-Nifty-50 names. Tremendous value in 2017 since then it has completely collapsed, stocks have gone down 60-70 percent, and must say, there are some which still have value.
The expression that comes to mind is the diamond and the rough. We’re looking for diamonds and we all know that if we go down to the main street and walk into the best respective jewellery store, we’re going to get some great diamonds. That’s effectively the Nifty 50. But I don’t want to pay the full price for the diamonds and so we’re looking around on the side streets, not on the main drag. We’re looking at places that might have great diamonds but have not yet been recognised as being great diamonds or for a while have been thrown out of the bathwater. So, I am not ready, and I don’t own any of the Nifty 50s. It is a valid strategy and many people do extraordinarily well by doing that. It’s not a strategy that I want to pursue for the same reason that I am not interested in buying the market darlings in the United States or in Western Europe. I am interested in finding companies that I believe ought to be market darlings, are high quality businesses but they haven’t yet been recognised but they will, overtime. That’s just the strategy that I am applying, and I’ve had some success with it. I’ve done it in the Philippines once, I’ve done it in Singapore once and I believe I will do it more than once in India. It is going to take time and I am going to have some mistakes as well.
During your visit in 2018, you spoke about the real estate transformation in India going through this extraordinary phase. When you said that, at the same time, you had brokerages like CLSA, betting big in the real estate segment. But you still have a lot of issues within the real estate space. I mean, I know from the unorganised sector to the larger names which have a steady balance sheet that’s where most of the money will start to go in. But is the space still looking promising enough?
Just for your interest, my conclusion there was that—so while I from flying above at 20,000 feet, I look at RERA and I would tell you that I if I was an Indian, I would be so proud of RERA and I would take great delight in explaining the mechanics of RERA as I understand them to Western European and North Americans because it is not a concept, it is not a phenomenon that they are familiar with. It doesn’t exist in Western Europe and North America. I believe it was copied from the UAE. But having said that, for exactly the reason that you said, at the end of the day, the sectors and the transformations are fantastic from a macro standpoint. It’s fantastic to see the transformation of Mumbai’s and other cities’ skylines. It’s fantastic to see how, forgive me, the poverty has reduced to expectations. Why could I have ever thought that Indians would not like living in beautiful, tall buildings, that Indians would not like shopping in air-conditioned malls? Of course, they do. They’re like everybody else but from there to come to specific companies that I would invest in, given the size of my funds, and given the access that I have is extraordinarily difficult. So, I just watch from the sidelines because I have no penalty for not swinging. I can look at that and say, even though there are these extra ordinary transformations taking place, this is not something that I can easily and happily play in. It’s not the right game for me with the fund with my size and my resources. But I can say that if I was a major global real estate group like Brookfield Asset Management or similar, Simon Properties or General Growth, I would be sending a team over to take a close look and take advantage of this. I would be looking closely at the enormous set of risks that still exist when investing in that sector and looking to minimise them in a way that I am not able to do. But, believe me, my experience of India, first time 15 years ago and going last time six to eight months ago, the flow of capital that has been unlocked by RERA and by other improvements in the institutional environment are extraordinary. There’s an awful lot more to go. If we step back and look at the non-bank financial sector, yes there is awful lot of problem with our balance sheets of lenders in the financial sector but don’t forget that an enormous amount of credit flowed to people who needed it and even though the balance sheets may be suffering, the credit that has flowed has enabled a lot more economic activity. That is also driving India’s growth. From a macro standpoint, it’s all extraordinarily positive. Even though in my case and many of the viewers cases we can’t find the exact way to play it. But that’s okay. Charlie Munger says, ‘if you find a handful of ideas in your lifetime that you can act on, then you’re doing great. And if you’re finding trouble with that, don’t feel bad. This is not supposed to be easy. If it was easy, everybody would be doing it, and everybody would be Warren Buffet’.
In your chapter ‘Learning to Tap Dance’ you speak about the importance and the need to make probabilistic inferences. Talk to us more about how this applies in the current scheme of investing when we’ve got a dilly-dally in the trade dispute talks. That changes every second day and how does one make inferences to that to start investing? Because the environment is so volatile.
The analogy that I use in my book is as we know, my friend Mohnish Pabrai is a big bridge player. He loves playing bridge. Warren Buffet, Charlie Munger and Bill Gates are also big bridge players. Just so you know, I am not. But I learnt enough to understand some of the ways in which your mind can be trained in the game of bridge to make these probabilistic inferences and the key point is, even if you don’t play bridge, the point is, when a player who doesn’t show all of their cards plays a card, we look at that card and we can now start asking ourselves; what does that say about what they’re seeing in the hand in front of them and great bridge players can in spilt seconds make inferences. So, to take an example from outside of India, when I saw Warren Buffet give bank of America $5 billion that he said publicly they didn’t need. What inferences could I make about what Warren Buffet understood about the state of their balance sheet? It changed many things for me. So often what we’re looking for is not just straight information. What did the press release about the company say? But given this player whose mind I understand is made, this move, what does that mean about the company? In simplistic terms, if we see that somebody has bought and continues to own through a crisis; shares of a certain company, that can say a lot about what they understand about that company. Those are probabilistic inferences. Those are a past I would not act on. Now, I have learnt that it is absolutely worth acting on those inferences. Not every signal is a signal. Sometimes signals are just noise, but I was blotting out all those signals and sometimes those signals were extraordinarily valuable. When it comes to the noise that is coming, that you reference, I think on a micro scale, I am looking at individual companies, individual moves by executives, leaving executives, executives joining if there is a spin off, where do the key executives go? Those are all extremely important. When it comes to macro, what I would say is, it sort of shocking to me that the west seems to have lost its leadership. I don’t see strong leadership coming out of the west. I do see strong leadership coming out of China for example and to some degree, out of India. But when I see the west, I see to a large extent; if I look at the two great English-speaking democracies, I see a populism and I see an erratic behaviour. So rather than leadership making decisions by a careful calculation of what is in the best interest of the populations that they represent, I see them making moves that was initiated by the Trump administration is productive in any way. Should the U.S. sat down with China and tried to reset trade? Absolutely. But to start with a series of retaliatory tariffs is not that great. Having said that, that is all material that I put into the bucket of political and economic noise. It’s fun to talk about, it’s fun to comment on with you but it doesn’t influence my investment decisions at all, and I don’t think it should. Forgive me but I am going to give another book recommendation. He’s not very popular in the U.S. but he is an extraordinary statesman- Henry Kissinger, he wrote a book called ‘World Order’ and one of the things he demonstrates and describes in the book is how the world is seeking order and the political systems. Its extraordinarily complex but at the end of the day, the big power blocks that we see are seeking an orderly way to resolve their disputes and his view which I very much agree with is that the world will find a way to an orderly system. It’s not going to be a straight path but it will find its way so to start worrying about a trade war and what that implies to my portfolio is, just to remake the point, what does a trade war—Donald Trump versus China— have to do with the desire of all Indians to have running water in their toilets in their homes and the two are so completely different. Our job as investors is not to worry too much about what Donald Trump and others are doing.
Give us a tip or two, for someone who follows you and tracks your investment style very closely in this market environment, taking fresh bets in the equity market, what does one need to keep in mind?
I would just tell you, go for businesses that you know would be around in a 100 years and go for businesses that are funded in a way that you know they would be around in a 100 years. Buying HDFC Finance, then absolutely fine, but there is no point investing if you’re not sleeping well at night and certainly, I joke about times in 2008 when I was throwing up on every purchase that I bought. You know what, it’s not worth it. Buy things that make you comfortable. So, I would say, the certain Nifty 50 companies; if you are comfortable owning them, blast away and own them. There’s nothing in written that says you can’t own both. There’s nothing that says that you can’t have 80 percent of your portfolio and things that make you sleep well at night and that your risk tolerance allows you 20 percent the things that if there were any more, they would not allow you to sleep well at night. In times of specific places where I am focused on is I, as you know really liked the credit rating space. Credit rating agencies have been beaten down, but I have no doubt in my mind that in a hundred years’ time not only will there be credit rating agencies in India, I happen to believe that one rating agency, CARE Ratings could potentially go global with its brand. I believe it will be a source of Indian soft power in the future. So, I really like the credit rating space. The second space that I’ve found super fascinating is the business of the trading energy and it is something that is really important, about 70 percent of energy in Europe is traded over exchanges, its traded significantly in the U.S. and other parts of the world and India the other portion of the market that is traded is very small and is set to grow and it’s a scenario that I’d really like. Your viewers should know that somebody is looking from outside at 20,000 feet who doesn’t have the same level of insight and detail that some Indians have.