Value Investing | Álvaro Guzmán de Lázaro Graduation Speech at OMMA Business School Madrid04/10/2022
No one has ever called me to give a graduation speech before. To address young people recently awarded with an academic degree as demanding as the one you are receiving today, they usually choose outstanding personalities, people whose career is full of professional successes that would suggest a certain wisdom.
I am not wise enough, and although I have various ailments, I am not old enough either. Nor do I think that I have accumulated incredible successes, or at least not like those of the usual star attractions in these events. So I guess they must have made a mistake in choosing me, but I have to confess that I am glad.
And I am glad because what I HAVE done since I was very young, specifically since I was 24 years old, is to speak to even younger students to convey my passion for financial markets and value investing. Specifically, in the last 17 years I have shared my knowledge with 640 students. Some of them I have hired when they finished, others I have recommended for jobs with a competitor, and with all of them I have been delighted and from all of them, I repeat, from all of them, I have learned something.
Today you have reached the end of a very demanding Master’s program. I know this because I have spoken to a student from each class since the very first one and ALL OF THEM, WITHOUT EXCEPTION, assure me that the workload is brutal, that they cannot keep up, that they would have liked to go deeper, but that they had to settle for studying to get a passing grade, because that was all there was time to do. And I say to you: today is the start of that time you missed in the Master.
In my humble opinion, I believe that you have received one of the finest educations in economics available in Europe today. This is because the focus is on the Austrian School, which is the only one capable of (correctly) explaining what is happening, and because your professors have mastered the subject like few others in Europe. You have received a true arsenal of knowledge and, probably, assimilated only a part of it.
If you are looking to use economics as a compass for navigating the world of stock investment, I would invite you to gain deeper insight into a country’s productive structure, into credit in all its dimensions and the functioning of banking; I would also encourage you to familiarise yourself with praxeology as a method for understanding what is happening in the world. This specifically means approaching every event you want to analyse with a question: what are the interests at stake?
Lastly, I would like to conclude by talking about your branch of economics with a warning: while it is indeed the best school of economics (or the only one, depending on how you look at it), studying the Austrian School is no guarantee of success in the financial markets. It does indeed enable you to understand the ultimate causes of events, and it also gives you the keys to anticipating, in a general way, the consequences of political decisions in a country, and it is a great tool in seeking to understand the world around us, which is NECESSARY for those who want to invest well. But although it is a necessary condition, it is not a sufficient one. It must be supplemented with a detailed analysis of companies and of the art of valuation…
And what can I tell you about analysing and valuating companies? Value investing is the endeavour to which I have dedicated the last 20 years of my life. Since I started when I was 21 years old, I have done only one thing in the most basic sense: analysing and valuating one company, and then another, and then another, and then another, and all the way up to the present day.
I thought over what advice I could give you about value investing on this special day for you.
I came up with the following:
To decide whether or not you want to become a professional investor:
1. Do not even try it if you do not really like it. Because it requires long hours, and you will have competitors who DO like it, and who will have no notion of working while reading, researching, or thinking. Those competitors are invincible, because they never stop reading and studying. They live up to the famous phrase: “take a job you love and you will never work another day in your life”.
2. Do not give up because you think this requires supreme intelligence. It does not. What is more, Buffett said that if your IQ is 170 points, give away 20 to someone because you will be a better investor for it. The smartest guys do not settle for simple problems, and the ideal value investing is to buy something when it is so obvious that even a child would understand it.
For those of you who meet these requirements, and therefore want to dedicate yourselves to investing, I would like to start with two very basic, almost “domestic” tips:
1. It would be useful to master accounting, so that you do not get cheated with the accounts. If that happens, you can always blame the referee (auditor, CEO of the company, etc.), but my experience is that you will make little progress this way. Charlie Munger always says that not mastering accounting and pretending to invest well is like “going lame to an ass-kicking contest”.
2. You have to master English. At least at the reading and comprehension level. No need to explain it here: everything interesting is in English.
Here are more tips that have to do with the investment PROCESS, perhaps the most interesting part in my opinion:
1. Think for yourself
Learn to form your own opinions, do not follow the crowd. Start with the key factual data of the business and, from there, seek if you can make the valuation. If you lack that data, go work for another company where you can have better access to it. But never, ever, ever do something because “everyone else is doing it”. That is a recipe for disaster.
This issue of ATTITUDE is another of the ABSOLUTELY CRUCIAL for investing well. Check out this fact I am going to give you: if I think back to the 5 best investments I have ever made in my life, and I remember who I told about them, they all thought it was a good idea, they all saw the angle. Very few, and in some cases none of them were courageous enough to buy, probably because the front pages of the newspapers were warning, at that time, of multiple economic misfortunes to come. What I mean by this is that developing this ATTITUDE may not be as easy as it sounds… That there are many very smart people who are NOT capable of going against the tide, and that you have to be honest with yourself about how tremendously important it is not to fail in this more attitude-related aspect of investing.
2. Do not look at many companies only superficially, and focus instead on looking at just a few, but do it in depth
Challenge yourself to be the one who knows that company better than anyone else in the whole world. Even if you do not succeed, this approach opens horizons that would otherwise be closed off to you.
Be aware that the market will surely test you with drops in the share prices of the companies in your portfolio. That is the time when knowing very well what you have bought helps you to not waiver. Knowing business well is the only way to capitalise on market volatility. There are investors who seek formulas for precisely the opposite goal, that is, to avoid volatility in results, and I understand that, because they are investors who seek to satisfy clients who abhor volatility, especially when it is downward. But you, if you are investors, do the opposite: love volatility, because if you know how much a business is worth, price swings are an opportunity.
Since it is not easy to master the valuation of hundreds of businesses, you should focus at first on a few that either interest you in particular, or whose industry you know a little about for some personal reason.
3. Almost as a corollary to the above, do not make investments that keep you from getting a good night’s sleep
When that happens, our unconscious is telling us that we lack the necessary knowledge to withstand a market test in the form of a sharp drop in the share price.
4. Be patient
To do this, think of a stock as a small piece of a company that you know well and that you think is worth more, having studied it in depth. Do not think of a stock as a number that fluctuates on your smartphone’s stock market app, as many people do.
Just as you will not check the price of the house you buy every day, you should not look too much at stock prices. Of course, you have to look at them from time to time, because the market sometimes does go crazy and offer opportunities. But not several times a day, which is what most people do. This is vital in order to cultivate a pearl, without which value investing does not work: PATIENCE and emphasis on the long term.
5. Flee like the plague from inside information
As Buffett said: “Give me enough inside information and I can go broke in a year”. In the best-case scenario, if the information is good, by the time it reaches you, the market will have already priced it in and you will be buying at a premium; if it is a false rumour, the rise in the share price will certainly be followed by a crash. And if it is a good rumour and it reaches you before anyone else, you are committing a crime. My recommendation: pay no attention to any information that someone wants to sell you as inside information.
6. Avoid short selling
This practice is not illegal, and although it sometimes has a bad reputation, it perfectly fulfils its role of making the market more efficient. However, as a way to invest, I would advise against it: a share can remain expensive or undervalued for a long time, especially if it is backed by someone with a loud voice. However, a share bought at a good price becomes cheaper every year, due to the effect of profit growth and cash flow generation. In this case, time is always on the side of good businesses that are well bought, something that does not happen in the world of short selling. If, however, your natural inclination is towards short selling, focus on the niche of detecting businesses that are frauds, because there perhaps time will play a little more in your favour.
7. Learn from other people’s mistakes
This will keep you from making them. Read stories of business failures, look for mistakes noted by managers. Make, in short, a mental database of “what went wrong” and why. This will help you.
In addition to these general process recommendations, I would like to share with you some ideas, not even advice, but thoughts that arise from the multiplicity of situations to which this world of investment gives rise.
- On your investment journey, you will realise that there are stretches in which a certain intellectual arrogance is needed to go against the market consensus. However, you also need the exact opposite, a certain humility, which means knowing that you could be wrong. It is not easy to be both arrogant and humble, but it is worth trying.
- Likewise, there will be times when it will be good for you to be stubborn, and to double down after a 50% drop. However, this assertiveness will need to coexist with its opposite, a certain flexibility, an ability to react when that 50% drop simply reflects a reality that is worse than you had anticipated for that business. It is not easy to be both stubborn and flexible, but it is worth trying.
- You will need conviction to concentrate your investments on your best ideas, because there are rare times when the market goes completely crazy, and you have to take advantage of them. But you will have to reconcile this conviction with common sense and, in spite of everything, diversify your portfolio a little. It is not easy to combine strong conviction with common sense, but it is worth trying.
- Scepticism is the chastity of the intellect. Healthy scepticism born of independent thought, as I have said, is fundamental. But neither should you be a “blind contrarian” and limit yourself to investing mechanically in something that is outside the consensus, because the consensus is sometimes right. Again, it is not easy to combine natural scepticism with the reality that sometimes the consensus is right, but it is worth trying.
- When judging the environment, we should have a deep respect for the lessons of history, because, although the facts change, history does rhyme, and there are often currents that repeat themselves seemingly inexorably throughout the centuries. However, do not forget that many things also happen that have never happened before. It is not easy to master historical facts while keeping an open mind to things that are totally new, but it is worth trying.
- Investing and making mistakes from time to time are synonymous. Hopefully you will have the integrity to own up to your mistakes, while maintaining enough inner strength so you can risk making even more. It is not easy to take a blow to your confidence from making a bad investment and recover instantly, but it is worth trying.
Lastly, and this is a personal matter for each of you, it is useful to question yourself from time to time to discover, with intellectual honesty, when you were lucky in an investment and when you were skilful. It is not easy, but it is worth trying.
All these tips and warnings, these “it is not easy” might discourage you from embarking on the adventure of becoming an investor. But let me show you, just the same, some of the tremendous attractions:
1. The passionate investor goes to work every day in the most intellectually stimulating place in the world; a place where exciting things happen
They do not happen every day, but you know they will happen with absolute certainty every few years. In 20 years, which is not too long compared to the legends of value investing, I have lived through an Asian crisis, the collapse of Russia, the collapse of LTCM, the bursting of the dotcom bubble and the bursting of the real estate bubble in Spain, the collapse of Lehman Brothers and recently Brexit. Each of these episodes was a chance to buy good businesses at bargain prices for the investor who had done his homework. I can think of a few other professions as exciting as this one, but not too many…
2. The passionate investor does not really work
…because searching, researching and delving into the companies he considers attractive, ends up becoming a hobby, and he enjoys himself because it is not work anymore.
Let me tell you a story from the year 2000. I was in the Banesto offices, where I was an analyst, one summer Saturday afternoon around 2:00 pm, looking at an American oil company that had plummeted 60% in one year. Its executives were buying up as many shares as they could, but the share price kept falling every week. I was trying to understand it so I could valuate it, you understand my excitement. I got a call from someone to meet for a drink. He asked me how long I had till I was finished, and I said a couple of hours, adding an extra one for good measure, and we said let’s meet up at 5:00 pm. When I finished with my company, I looked at the clock. It was 8:30 pm. I swear I thought that two hours had passed, and that I still had some time left over.
You might think I am the only one, but I know other people who have experienced the same thing. I can still think of a few professions where you do not feel like you are working while you are working, but not many.
3. Passionate investors become independent very quickly
In this job, bootlickers don’t get ahead. Even your boss can’t use you beyond a certain amount of time. You work for knowledge, and that knowledge you take with you. You work for yourself. And there’s something even more exciting: the older you get, the better. More mistakes you won’t make again, more business models in your head, more experience, in short. I can think of some other professions where the worker is independent and also better the older he gets, but not many…
4. The passionate investor usually gets quite good returns
The best ones I have met get 20 points more than the stock market, which usually gives 6% per year. If you achieve half that, which is perfectly possible, you will get 16% a year on your money. Look how the eighth wonder of the world, compound capitalisation, works for you at that 16% rate: if you start, for instance, at the age of 28, and you have 10 thousand Euros, when you are 65 you will have turned that 10 thousand into 2.5 M EUR. I can think of some professions where you earn more, but not many…
And if I have to find a profession that is both exciting, so much fun that you have no idea you are working, and that, at the same time, lets you be independent on a daily basis, in which you get better the older you get, and not the other way around, and that also pays well in the long run, then I can only think of one profession: that of being a passionate investor…
Here you have been trained to be one – make the most of it!
Finally, I would like to share with you something very personal, almost intimate. I will say it quietly, just in case.
Do not make value investing a religion…
It should never make you feel superior, no matter how well you end up doing. Because you are not. No one is superior to anyone else. I believe in God, I can sense His unconditional love, and that changes an aspect of my heart in a way that nothing else can achieve: that of feeling unconditionally loved.
But value investing cannot love you. Do not sacrifice everything for it, because at the end of your life you may be missing something (maybe that is why the most legendary value investors are so vocal about not wanting to ever die…).
On the contrary, use it, use value investing, enjoy it as much as you can, and when you are successful, which I am sure you will be, coming from where you come from, think about how you can give back to life the gift it gave you the day you decided to embark on this journey. I hope today will be THAT DAY for many of you.