Guy Spier, Portfolio Manager of the Aquamarine Fund and Author of the Education of a Value Investor

Jonathan Boyar (00:00:06):

Welcome to the world according to Boyar, where we bring top investors, bestselling authors, and business leaders to show you the smartest ways to uncover value in the stock market. I'm your host, Jonathan Boyar. Today's guest is well-known and highly regarded investor, Guy Spier manager of the Zurich based Aquamarine Funds, an investment partnership focused on global equities, utilizing a value-oriented approach that since 1997 has amassed and impressive track record. He's also author of the highly acclaimed book, the Education of a Value Investor, which I thoroughly enjoyed reading for the second time while preparing for this interview. Guy, welcome to the show,

Guy Spier (00:00:48):

Jonathan. It's great to be here and thank you for the wonderful conversation that we've just had, and I'm sure it'll continue to get better now that we're being recorded.

Jonathan Boyar (00:00:57):

Yes, it was. And just before I start, I just want to make a really brief announcement that this interview as well as some of our investment research, is now available on our Substack page. It's my first podcast since launching the Substack venture, and it's something I'm really, really proud of and I would encourage our listeners to visit https://boyarresearch.substack.com/ to learn more. I've always wanted to bring our research to a broader audience and I'm really excited that now I have the platform to do so. So just visit, as I said, Boyar research.substack.com. But now back to Guy and you have a lot to. As I said, I'm super excited to have you on the show. And the first thing I wanted to ask you is you have an interesting background. You moved to Israel when you were three months old and when you were about four you moved to Iran, and then I think when you were 11 you moved to the UK. What was that experience like?

Guy Spier (00:01:52):

Yeah, thanks for asking the question and thanks for getting it so accurate. Most people meeting me or talking to me, don't get it that accurately and you focused on it. And before I get into it, because this is an investing podcast, I should tell you, Jonathan, that I'd sent my bio to Warren Buffett before this famous charity launch and I was kind of hoping that he'd asked me about it. I thought it was unusual and it made me interesting. And when we first met him, Warren goes straight to my wife and wants to talk to her about being born in Salisbury, North Carolina. And I was at once happy that he wanted to meet my wife, but sort of crestfallen that he had no interest in my exotic background. So what was it like? I don't have the comparison to what it would've been like had I grown up in a different way.

(00:02:41):

In my case, my mother and father had met on a boat in Greece. My mother who had been born in South Africa had gone to the UK to teach as a young teacher and she was traveling Europe with some of the money that she'd made. And my father who'd completed the Israeli military was traveling outside of Europe for the first time. And of course Greece was an inexpensive place to get to. And so the Israel and South Africa combination of just, I was born in South Africa, but then my parents decided to move to Israel. What I remember about growing up in Israel before we moved to Iran was that we lived in a part of Tel Aviv called Ma Aviv in a walkup apartment that in any other part of the world would look like low-income housing. But in Tel Aviv it was solidly middle class. And I remember that one of our neighbors drove a bus.

(00:03:28):

He was one of the egged bus drivers. And I have some memories of being in that building and kind of like communal living in a certain way. But my father got an opportunity to go work in Iran. And so in 1970 we moved to Iran. And I guess I have very, very happy memories of growing up in Iran. Iran is a very, very beautiful country with really, really beautiful people. From my perspective, the Czar Asan roots run deep and there are colors in Iran that are very beautiful. There's the color of pomegranate, which is a deep smoldering red, and there's the coloring of glass in some of the royal palaces and other museums and public buildings, which is kind of a deep turquoise blue. And so there's deep rich colors, even though Tehran is not quite the cous mountains, I'm very curious to visit the Caucasian mountains.

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I think it deeply influences the culture of Tehran, but I had an amazing time growing up there. I was an extremely happy child. I was extremely sad to leave Iran and to go to the UK for all sorts of reasons, in part because London was cold and gray and rainy and all of those colors disappeared and I got quite depressed. I probably had seasonal affective disorder. And for my part, I look forward to the day when I can travel back to Iran in safety and visit it hopefully with my children or maybe even my grandchildren. I'm quite confident that at some point the true Iranian spirit will shrug off this kind of gray, veiled covered mass of what the Islamic Republic has done to Iranian culture. And I'm looking forward very much to those days reemerging,

Jonathan Boyar (00:05:08):

Well, hopefully sooner rather than later. But it's very interesting because obviously you don't meet very many people who've spent any considerable amount of time in Iran. I was just curious.

Guy Spier (00:05:20):

I mean to give you more perspective, I learned to ski in Iran and I now ski in the Alps. I can tell you the snow is better in Iran than it is in the Alps because it's higher up. The Rockies have very good snow because again, it's higher up than the European Alps. Iran's mountains are taller. They go to about, I believe, five or 6,000 meters, whereas in Switzerland, most of them top out at around 4,000 meters. You've got a whole call that 3000 feet of elevation. So the skiing is good in wintertime and in times like autumn. I remember the cherries tasted better in Iran than I've ever tasted anywhere else. The pomegranates tasted better. There is a small green fruit called je, I don't even know what it is in what you would call it in English, some kind of sour plum, which I mean all of that food was so delicious.

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I could go on and on. So the taste, the smells, the sounds, I developed a liking for tea in Iran, they drink sort of like Turkish tea, a very dark brew of not milky tea, just sort of black tea and with quite a bit of sugar. And the way an Iranian will drink it will be with a lump of sugar, but an incredibly hard lump of sugar that's a bit more like a rock, so it doesn't crumble when it gets wet, it kind of just drips some sweetness out of it, for example. So all those tastes and sounds that I can't wait to re-experience in reality.

Jonathan Boyar (00:06:43):

It's amazing what you end up remembering. And you obviously have a global experience. I mean going Israel to Iran, to UK and then you went to New York. I'm sure I'm missing a few places, but how has that impacted you as an investor?

Guy Spier (00:07:00):

Yeah, and I think that I'm really glad, really, really glad and grateful that I ended up in the us. And the way I ended up in the US is that after studying undergraduate university in the UK, I ended up in a consulting company, a management consulting firm, a spinoff of Boston Consulting group called Braxton Associates whose headquarters were in Boston. And all of the partners had been educated in the US and so I started looking to the US as a place to go and get a second degree. And I came over to the US for that reason. You would not have liked my attitude to the US in the first year or two because I kind of was there kicking around in Boston, being highly disparaging of Boston saying this is of poor substitute for London because a lot of the buildings look kind of British.

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And I'm quite ashamed of that because I now anyway really love going to Boston. But I'm also extraordinarily grateful because the US is an environment that is unparalleled and incomparable pretty much to anywhere else in the world. You have to look really hard to find places that are comparable for quality of life, for ability to make your life and the ability to make money in investing. And the reason why I say that is that I have invested globally and I've had quite a bit of success even investing globally, but I think that I've had success in a certain way despite the global opportunities, not because of them. And I think the older I grow, the more I see the fraught difficulties and uncertainties of investing in places where capitalism hasn't taken hold in the way that it has in the United States. And what one tends to do is project all of the institutional supports that one has in the US into the country that one's looking at, assuming that those exist, there's only afterwards when your head's handed to in one way or another that you discover that those institutional supports are not there.

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And there's a whole bunch of things that come together in the United States to make capitalism work the way it does. And I would say that most people in the world actually don't understand American capitalism because they think of just the profit motive and they think of Adam Smith's in agents pursuing their own interest, and there's benefits for all, whereas actually it works in an institutional framework that has all sorts of subtleties around telling the truth, paying your taxes, taking care of people who are missed by economic opportunity. And all of that comes together and many of those rules are kind of unwritten or just based in attitudes of people. So I think that my global perspective to try and actually answer your question rather than to blather on Jonathan, is that United States really is an extremely unique place and a very special place and a very lucrative place to live and invest or to be the way I am living in Europe and to invest in the United States. There are opportunities in the rest of the world, but there are fraught with difficulties and with potential pitfalls that are far beyond even what most the experienced investor can understand and fathom.

Jonathan Boyar (00:10:13):

Speaking of difficulties, and it's an understatement to call this a difficulty, a gross understatement, and if you don't want to discuss it, I'm totally fine. But in today's climate, I feel unfortunately it's relevant from what I read, your family essentially fled Germany 1936 and I'm just assuming lost most of what they had in terms of property. I know it's a few generations away, but does that impact you on how you invest and how you think?

Guy Spier (00:10:45):

I think that the first person to really kind of bring that up to me as a topic was William Green. In conversations not dissimilar to this, Jonathan and William's, the author of this book, richer, wiser, happier, and is an incredible observer of investors, not just of me, although he's also a very good observer of me, and I have not studied psychology. If I had an infinite lifetime, one of the subjects I would study is psychology. And within the subject of psychology, what I'd be interested to understand is this intergenerational transmission of wounds and how they get transmitted if they get transmitted to what degree they get transmitted. And I started writing about it subsequent to conversations with William Green about how I could actually start to understand more and more of my decision-making around that intergenerational wound that two generations ago, somewhere between middle class and wealthy I would say.

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And on the one side, my grandfather was a lawyer after having been an academic for a very long time. And on the other side, my family were owners of real estate in Berlin and Germany's largest hat factory in south of Berlin, a place called Look and Valda. And yeah, that was within about a period of a year and a half. They left and some people didn't leave and they're not around to tell the story, I guess. And even my grandfather had a strong interest in moving to Paris. He kind of said, well, we had relatives in Paris. And he said, well, this nastiness is gripping Germany, but it's never going to get to France, the French and the French Revolution, and that's never going to get to France. And we've been equal citizens with the French for a long time. And it was my grandmother who was a Zionist who said, no, we're going to Israel, we're not going to stay.

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And that again saved them. And so I think that underlying many of my investment decisions is a kind of fear of how might that happen again? So I lived in New York and met my wife there and our three children were born there. And I'm looking at the financial crisis in 2008, nine. There are many things that factored into it. This is not the only explanatory factor, but I asked myself to what extent was I just fearful the world was changing at a very rapid pace in ways that I couldn't quite understand and I wanted to go to the safest place I knew on the planet. And from my particular perspective, the safest place on the planet was Switzerland. Maybe another direction would've been to do what the owner of Nebraska Furniture Mart had done, which is go to the place furthest away from Europe, which she could find, which was Oma Nebraska and start a furniture business.

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That would've been a different direction to go. I think New York City for me, I didn't perceive it at least, certainly not after nine 11. That was not necessarily a safe place either. So I think trying to do a short answer to what was just a long answer is I think probably if I look inside myself, those factors have influenced my decision-making deeply. And I think that probably that's true of all of us, and I'm going to make a grand claim here, which somebody could easily dismiss as being psychobabble. But perhaps all of us, if we really want to understand our true motivations for making the big decisions in life, need to understand this intergenerational wound aspect of things. And that doesn't mean that we're imprisoned and bound to what happened in past generations, just that we need to know what our particular mood music is and know whether we want to turn that volume up or tone it down.

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I mean, I think if I'd been more aware at the time that I moved from New York to Switzerland of the mood music, if you like, of a family having to flee for their lives effectively two generations prior, I could have consciously decided to either keep the mood music at the same volume and allow it to motivate me to leave, or maybe I could have come with my rational brain said this mood music is certainly there. I understand why it's there, but it's really not necessarily for me to act just on this particular stimulus. So that's all a long way of saying the more conscious we are of what's going on inside of us, the better we are as decision makers.

Jonathan Boyar (00:14:57):

Thank you for that. And as I mentioned in the startup, I really enjoyed the book and the education of a value investor, and I would encourage anyone who has not read it to buy it. It's really not a how to guy to investing, although there are certain aspects such as using checklists and structuring your work environment that if someone implemented, they certainly would become a better investor. In my opinion. It's really more about your development as a person and how that changed your life both personally and professionally. The book is unbelievably candid, especially for the world of investment management where people feel the need to project this perfect image to both perspective and current investors. And I was curious how you had the courage just to be so honest.

Guy Spier (00:15:46):

Thank you. Before I tell you, and I've told this story before and I'm probably not getting it right, I just want to answer with a short story which will give you a sense. And it really is a sense of how I got the courage to do that, which is that. And so the scene is the king of the kingdom is standing on the balcony of his palace, which overlooks a river, which happens to be alligator infested. And as he's hosting a group of guests and his beautiful marriageable daughter is there, they look over the balcony and they see on the other side of the river a man swimming across the river and fighting off multiple different crocodiles who would be very interested to eat him. And he gets the other side and miraculously and through Herculean efforts, and the king thinks that's the kind of guy that I would like to have my daughter marry. So he sends some of his servants to go pick the guy up and clean him up and bring him into the royal company. And he says, so I offer you my daughter and my kingdom, what a hero you are for having been able to do that. What is your wish? And the man looks at him and he looks at the daughter, looks at the assembled company says Me, I just want to know who pushed me into the river in the first place.

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No hero. So why is that relevant for the candor of the book is that, and I think that at least in my experience, many of the really good things that I've done, they don't happen because I planned it out. I didn't plan out to write an incredibly candid book. I didn't say, this is going to be a great book. I'm going to be candid. What happened to me is that I felt envious of fellows, people, I considered my peers who had written a book and I felt like I could write a book. And so I started staking steps in that direction. I didn't know what my book would be about, but I started writing 500 words a day. I started talking to people about the fact that I was seeking to write a book about something investing maybe because that was my experience. And one thing led to another, and I can tell the story in more detail, but I don't want to take up too much time with it I guess.

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But the next thing I know, I've got a book contract that I've agreed to, and so now I've got 12 to 18 months to deliver a finished manuscript to, in my case, pal Grave McMillan. And that's the moment where I kind of suddenly realized that I've jumped into the river of being pushed into the river and not an academic. I might've taken an academic path in a different version of my life, but there I am and I've overcome the fear. My fear is which do you prefer not to have published a book or to have published a book that might be a bad book, that might be a book that sells very few copies and is kind of more of an embarrassment than something that I'm proud of. And I'd overcome that fear and said to myself, I'd rather have published a bad book than not have published a book at all.

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But now having gotten myself into the hot water, the question was how can I make this book the best possible book it can be and the most useful to the reader? And it's at that point that I realized that the only thing I really was an expert in, the only way that I could really deliver value to the reader was to be uncompromisingly open about myself. That was the only subject that I was really an expert in. And so my desire to be candid was out of the desire to read a book that was worth the reader's while and that would make a difference for the reader. And I knew that if I could be candid enough in a way that most memoirs business biographies are not, then that might well be useful to the reader. So the candor came out of the fear of publishing a bad book and out of the desire to be of the most service to the reader.

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And I think the most important things in our lives, including a successful marriage or a successful relationship with one's children, for example, with a business partner, we kind of have this image that we want it to be harmonious, but the best relationships are not harmonious. The best relationships become great relationships because there's friction and struggle. And so the image that I want to make sure that I leave the listener with and you with is not that I woke up one day, decided to write a candid book, and with a sense of mastery and self composure, I wrote a candid book. I struggled over every detail that I wrote up, and in a certain way I didn't want to give up that detail because it's like one is sensitive and personal. So one chapter of the book, the Belly of the Beast chapter, I know where I was when I wrote it and I don't exactly, well, I know where the motivations were, but I know where I was when I made the decision that I would seek to include this chapter in the book, but in another chapter on the financial crisis, I totally flubbed that chapter.

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And that chapter would be a pretty pathetic chapter if it wasn't for the fact that at this point I now have William Green, who's I've sent him the manuscript and saying, anything you can do to help me make it better, I'll be grateful. And he comes out to Zurich and we're rewriting vast tracks of the book with his help, and we get to the chapter on the financial crisis. First of all, he looks at me, he says, you totally flubbed this. I'm like, what do you mean? I'm like, leave this alone. This is fine. I've kind of skated over it. I don't want to really talk about this. He says, I talked to you in the middle of the financial crisis. Do you know what you said? I really don't want to bring it up. But William and I have developed a sufficiently close relationship that he knows that he's not going to break the friendship by forcing me to be more honest. There are these moments and friendships where you ask yourself, am I going to be candid with my friend and risk losing the friendship, or am I just going to take this thing and just put it aside? And so this was a moment like that for William, and he said, I remember calling you up. This is what you said. You said, Guy, William said to me, how are you doing? And according to William, I said, William, we're bleeding from every orifice.

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And so William says that to me. He says to me at that dining room table here in Zurich, and he says, that's what you said to me. I'm like looked. I said, I do not remember that at all. Which having had experience with discussions with my wife, heated discussions, that means, I don't believe I said that you're putting words into my mouth, but I know that I'm all the losing platform. If I say that, I have no recollection of that. And William's like you did, and that makes it into the book. Literally, that exchange makes it into the book if you look up that chapter. But my point to you is that that candor was a struggle. It was a struggle to get there. It didn't come easily to me, but the motivation was either I write some stupid book that skirts over the real things that were going on and it's just not going to last as a book and it's not going to be valuable to the reader. Or I put myself out there, I rip open the kimono, I tell people what it was really like, and this phrase, I don't know where it comes from, the truth will set you free. So take that risk, be brutally honest with the reader, and yeah, maybe it ends your career as an investor, but you'll be living a more honest life

Jonathan Boyar (00:22:48):

If you are enjoying this podcast. All of the world according to Boyar podcasts, as well as additional articles and research reports can be found at https://boyarresearch.substack.com/. Now back to the show. Well, I'm glad you did it because I think it made the book significantly better and it also I think made it much more valuable. And to me, it's interesting how and shouldn't be, but how being candid and honest really works. The previous guest I had is a guy, Patrick Doyle, I don't know if you know him. He's a guy who turned Domino's Pizza around and now he's the chairman of Restaurant Brands and he's most famous for going on TV on their commercials and talking about how bad their pizza was and how they're going to improve. And it was one of the most successful advertising campaigns of all time. Who would ever think to go in and about how bad something is when trying to sell a product? But it's honesty and candor. I think people really respond assuming it's truly genuine.

Guy Spier (00:23:53):

I believe that. And obviously I've learned at the foot of sitting there at the feet of Warren Buffet who's extraordinarily candid and honest, and Charlie Munger said, if you tell everybody the truth, you're not going to waste any brain cells trying to figure out what you said to whom and trying to keep it all straight. But I was reading, it's a series of books by a professor at Stanford and it's called The Path to Power, or there's another book called Power, and I'm actually just going to look it up because I just added it to my website's, one of the books that I've been reading recently and Power Why Some People Have It and others don't by Jeffrey Peffer. And one of the things that he says is he says something that directly contradicts that. He says that the reason why people disassemble in lie so often in positions of power is that to admit your mistakes is to show weakness, which has powered reign away from you.

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And that's why you see regularly, you see presidents and heads of state in democratic countries make huge mistakes, but they never admit to them and he makes a strong case for that. So I haven't quite figured out in my mind he's obviously onto something. There's some part of what he's saying that is certainly true. And then you have this kind of deep honesty that you learn from Warren Buffet, and I'm not quite sure how those two represent the same reality, but somehow they do. So I'm still trying to figure that out. I'm saying that to you here and putting it out there because maybe one of the listeners will understand and we'll be able to email one of us and explain it.

Jonathan Boyar (00:25:18):

We're doing this interview on November 1st, 2023. The world is full of uncertainty even more than normally. So I mean, it's truly a scary time, which you and I were talking about off air, but with what's occurring in the Middle East, Ukraine, other dangers lurking like China, Taiwan, both of us, but we're different investors, are fundamental investors, and I do my best just to try and pay attention to how my individual companies are doing and try and block out the geopolitical noise. But it does seem like an especially scary period. Is what's going on influencing you in any way in terms of decisions on what you're holding?

Guy Spier (00:26:04):

Look, just to describe what I see in terms of it being a scary time, I think that what really bothers me, and I'm saying this just to make explicit because other things may be bothering other people, is the ways in which the rules based international order is being challenged and it's not being challenged in a direct way. It's being challenged indirectly by Russian invading Ukraine, Iran seeking to try it on with Israel lurking in the background. The US is considered to be the arsenal of democracies, but it seems like perhaps China is the arsenal of autocracies and it's quietly funding helping in some way, or rather Russia in its war with Ukraine and maybe it's been helping Iran in one way or another. And so that challenge to the rules-based international order that has been so good for the whole of the world is deeply, deeply disturbing, no question about it, but is it worse than what we had in World War II in which the world was divided between the axis and the Allied powers?

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I don't think it is. And even as we have fears, I hope it doesn't come true. China tries to make a grab for Taiwan. Would it be worse than what we had at the beginning of World War ii? I think possibly not. And the fact of the matter is plenty of companies that existed before the beginning of World War II existed afterwards. The capital markets continued to exist, the payment systems continued to exist all the way through World War ii. Bankers from all sides of that conflict met in Basel to ensure that global settlements continue to occur, which is quite extraordinary if you stop and think about it. So I try to separate out my concerns as a human, as a person who cares very much about freedom and liberal democracy and that system, which I think has been the best for the whole of humanity or for the majority of humanity, and is the direction in which the planet goes, I care a lot that the planet seems to be tilting towards a different method of government, which I don't think will end very well between that and my task as an investor.

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So I resolutely seek not to let my fears influence me in that way or influence me. Being fearful about the future of humanity doesn't mean that you have to kind of change your investing strategy. I think that something that I have done, which makes sense to me, is that I feel like if I invest in the large blocks, so China, south Asia or India, Europe, US, those large blocks are less likely to be affected than mid-size and perhaps smaller countries that could get crushed quite easily or could have their geopolitical situation change rather drastically. So I feel less confident in the past. I've made investments in countries like the Philippines for example, and I'm not sure that I would be as confident doing that today. Having said that, the kinds of companies that invested in the Philippines would survive any global war as well as Nestle and IBM and various other companies did World War ii.

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So that's a very long way of saying that I don't think that it should affect one's investing. And just to go into it in even just a little bit more depth, if I think of China and the extraordinary rivalry that has emerged between the United States and China and the fear that the Sabres become sharper and get more drawn, and I mean it's extraordinarily scary situation to imagine two superpowers facing off against each other directly, which is kind of where it all might lead. But I strongly believe that if you look at already this kind of fractured trading relationships and ownership of corporations, so what do I mean by that? Many, many successful Chinese corporations are only successful because they've engaged with the planet and they sell to the planet, whether that be BYD and automobiles and buses and batteries and other kinds of electric vehicles, or it be Alibaba, which is a kind of sourcing tool for a whole vast array of things that are produced in China for the planet.

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So the producers in China can't produce if the rest of the planet doesn't buy and the rest of the planet doesn't get those things if they don't buy from the Chinese manufacturers in this case. And that's just on the product side. If you look on the investing side. So owners of Alibaba are spread around the world. Many Chinese owners of Alibaba own Alibaba through offshore instruments. And so ownership is global. And so I don't think that as investors, the rivalry between the superpowers or the rivalry between China, the United States, neither superpowers going to see it in its interest to start trying to kind of carve out non-Chinese investors versus Chinese investors. And similarly in the United States, there are so many other instruments they can use. So it's not fun to see from a human perspective. And it may be that fracturing of ownership and of trading, the fact that it happens across boundaries, across nationalities, across ethnicities is actually what helps keep the world on track to increasing prosperity.

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So the answer is, I'm fearful of it. I don't like it, but I think that people who spend a lot of time sitting in armchair, we all want to be strategic thinkers, but it wouldn't be logical to my mind to take our concern for humanity and interest in the spread of liberal values when they get checked and we get worried about them. And autocracy seem to be on the rise to allow that to influence our investing decisions too deeply, which is all an incredibly long way of saying, Jonathan, it's exactly what Warren Buffet does. And I think that it is perhaps an easier perspective to take when you're living in Omaha, Nebraska. And the closest you can get to one of the US' borders is you've got to take a three hour flight in any direction before you get there, whereas you feel a lot closer to the action when you live somewhere like Switzerland.

Jonathan Boyar (00:32:09):

Thank you for that. It's an interesting perspective. And just a little bit more on how you think about investing in portfolio right now or in general, what do you think about cash as an investment? Do you believe in keeping dry powder, you have a unique structure in that you have just one fund, but if you can disclose what percent cash do you have now?

Guy Spier (00:32:35):

It's somewhere between five and 10% is the cash level, and I don't consciously target the cash level. So there is a change in perspective that happens over time as you compound money. And so I kind of see our investments because my family's been participating the fund all the way along. So the family that controls Schindler Corporation, which makes elevators never understood how one of the world's largest elevator manufacturers is based in Switzerland, and another one is based in Helsinki of all places. But they have made enormous amounts of money through Schindler. And I don't think that they're managing their cash balances. They're not looking at the overall value of their holding of Schindler and saying, well, based on the fact that we have 4 billion in Schindler shares, we need at least X percent of cash the businesses that the fund owns, I own them because I want to participate in those businesses over an extremely long time and I'm not really worried about where the cash balances go, if you like.

(00:33:39):

And so that's a perspective that I can have having, it's just shy of a 10 x on the original investor's money. So I'm kind of seeing it from that perspective. I think it would be different if I was investing all of my cash in the fund today and I sold a business, I was investing all of my cash. And my answer to that for the outside investors is that they shouldn't allocate any more than 5% or 10% maybe of their net worth into my particular vehicle with all of its quirks, and they should be diversified otherwise either by holding cash themselves or by owning other instruments. So I don't manage the cash and I try to buy a lot of something when I really feel like I can understand it well, and I think it's an extraordinary opportunity, but I can tell you that I haven't bought a lot of anything for a very long time, and I'm not sure, and that's why the cash balances are where they are.

(00:34:33):

So now I've been doing this for 25 plus years. I've become far more aware of risks that I wasn't aware of before that make me far more parsimonious in my desire to allocate capital, especially to regions that I realized that I understand far less well. So I think that I was far more willing to be bullish on X Europe, United States, I'd say Europe, United States are home markets, and I used to be far more willing to invest in size outside of those markets. And now I'm far more reluctant to, although the last company that I was buying wasn't India, it wasn't an Indian, a small cap, believe it or not.

Jonathan Boyar (00:35:14):

Speaking of small caps, I'm of the belief, curious to your thoughts that it's, I wouldn't say once in a generational type of thing, but at least in the US it's by far the cheapest area of the market. There's a lot of pine fields, 45% of them are unprofitable if you take to Russell 2000, but they've done nothing essentially for the last five years. They've significantly underperformed for the past 10 or 20 years. Aquamarine is a big fund, but small enough to invest in small caps. Do you see opportunity in small cap shares?

Guy Spier (00:35:50):

So here's what happens. Of course there's opportunity, enormous opportunity, but the risks of the unexpected increase, I mean, I don't want to say exponentially, but they increase at a rapid rate as you get smaller and smaller businesses. So I don't know why, because I don't own in my portfolio and I keep talking about it, maybe I should own it. Costco is a business on a massive scale and one can understand the economics of what is going on. And there was so well explained a long time ago now by Nick Sleep and a famous essay that has been read by many, many people and you know that they have a cookie cutter mechanism for replicating that economics out over time. And they have a highly diversified sourcing strategy and they have stores. And then there's a very, very clear progression by which store doesn't make money in the first 18 months and then really starts coming into its own with its profitability margins after three or four years.

(00:36:48):

And these economics are clearly replicated across stores. So in that business, there are a whole bunch of assumptions that one can confidently make about the economics and about the way it's being run as opposed to you go to the other end of the scale where you have, I mean in my case, I would take my horse head example where the management went and did something that I think they probably regret very, very profoundly and deeply, but it was kind of a random move that seemed good at the time and they didn't have people on the board with the experience to tell 'em it was a really, really bad idea. And their expectations of what the vulture investors would do with them and for them were completely out of the ballpark as to where it would've come out. And so that was a risk that appeared from nowhere.

(00:37:34):

The management made a decision that in retrospect, they regret why? Because it's a small cap company without the strongest board. The managers were really, really good in certain aspects of metall, but they weren't necessarily financial types. And they certainly were putty in the hands of some really smart, sophisticated vulture investors who convinced them that the right thing to do was to run this company into bankruptcy and it would be good on the other side. So that risk emerged from nowhere in this small cap poor side, which is just not going to happen in a company like Costco. Before Horsehead, I was in a situation with a company called EVCI, which owned for-profit colleges. I'd met Bill Ackman a couple of times through Whitney Tilson. I knew he was an activist, and I ran to Bill Ackman and said, look what the management have done. This is egregious.

(00:38:22):

They're so stupid, will you come and help me? And he said to me something that was extremely valuable, he said, look, the management of a company like that are willing to take their reputation and trash it in order to win against you. They'd be willing to scorch the earth and the benefit of investing in companies, like for a certain period, he was invested in Target, I think, and he was kind of like activist in Target, is that those guys, they're unlikely to do something. They're not going to cut off their nose despite their face. So there are all whole bunch of risks that go away. So there are opportunity in small caps, but those opportunities come at the price of all sorts of risks known and unknown. And one really needs to decide whether the potential for those unknown risks is worth the increased growth and lower valuation that you're getting

Jonathan Boyar (00:39:13):

Is a way to mitigate that risk by buying small caps with large insider ownership.

Guy Spier (00:39:20):

I don't think there's any rule. So the benefit of large insider ownership is they might run it really, really well, like it's a hundred percent their own shop or their own business, but they might also run it in such a way that they really don't. I mean, I realized at some point, and we're talking really about micro caps where the outside shareholders don't really own the company. The company is owned and controlled by the management and the board as a retirement vehicle from themselves. And good luck trying to get those guys out. And if you have a company that has five or 10 million in operating profits and the management is siphoning off 30 or 40% of that in their salaries, which as far as they're concerned, that's not that much in the grand scheme of things because the CEO EO of JP Morgan get pays himself 40 million a year or gets paid 40 million a year, the CEO of a mid-sized New York Stock Exchange company gets paid 10 million.

(00:40:11):

So they say we're a good bargain at total cost of the whole management team is 4 million and it's eating up 40% of operating profits. And if you try and get them out, they'll treat like Devil spawn and there's no liquidity in the shares and you're not going to be able to acquire a large number of shares. And even if you did, that would take you a three or four year period. And meanwhile, they've upped their salaries and they found other ways to scorch the earth. So even if there's large inside ownership, that doesn't necessarily save you from those kinds of behaviors. So that's not going to happen at a Costco or at a Target or a McDonald's. But yeah, there's enormous opportunity. You just have to analyze it extremely carefully. And I think to go into specific situations, which is kind of interesting for me and fun, is that when I invested in Ryle, the India's leading credit rating agency, and it's like how on earth can GE spear figure out what's going on in India?

(00:41:06):

My simple analysis or evaluation of the situation was that you had two large shareholders at the time. You had Staed and Poors American Ratings Agency, and then you had a bank called I-C-I-C-I Bank who were both large shareholders. They each owned about 40% of the shares and then 20% of the shares were kind of free float. And my analysis was that if you just had one or the other, they might act in the way that I've just described and just take all the profits for themselves and oppress the outside minority shareholders. And who was I to start figuring out if they could do that under Indian securities laws, but with two outside shareholders watching each other? Stan And Pause wasn't going to take on I-C-I-C-R Bank. I-C-I-C-R Bank wasn't going to take on Stand and pause Phil Ready declaring a dividend for them. Then the smaller investors would get their share as well.

(00:41:55):

So one has to kind of do a political analysis. And interestingly enough, when I invested in this company Alaska Milk in the Philippines, one of the things that I discovered pretty quickly was it was controlled by one family, but that family had grandchildren, spouses, the shares were kind of very well distributed in the hands of their extended network of friends and family. And so the question that one could ask was, are they going to do things that are going to make them thoroughly and utterly unpopular with the people that they care about most deeply? It doesn't rule it out because every now and then people do do that, but it made it far less likely, if you like. So I think that one really needs that kind of ace in the whole type analysis. I know this is extremely unlikely because.dot dots some kind of analysis like that.

Jonathan Boyar (00:42:47):

So just in terms of talking more about the portfolio and you can't argue with success. I'm using your latest annual report for cost basis purposes, but you bought MasterCard, I think your cost basis book value is a million dollars. The stake is the end of last year was worth 22 million. Clearly you made the right call and your only mistake was not buying more. But as a value guy, and I'm asking this because I'm in a similar situation with Microsoft, it's a good situation to be in. How do you get comfortable with a stock trading at 30 times earnings

Guy Spier (00:43:24):

Or 40 or 50, which is also the case in some cases with difficulty is obviously the fun and easy answer, but I don't want to trade down in the quality of my portfolio just because what I own is expensive on a current basis. A nice way to think about it is, and we start off with something that somewhere that either Warren or Charlie, or maybe they both set it together at some meeting or somewhere where they said, if you take any town in the United States and you own the leading office building, the leading downtown shopping mall, the leading gas station, the leading McDonald's franchise, so there's a McDonald's store, it's company owned, which is right on Times Square, very, very close. So the average McDonald's store does revenues of about 1.2, 1.3 million a year. This store around seventh Avenue and 44th Street does seven or 8 million a year.

(00:44:26):

It's just like an extraordinary, obviously it's Times Square and for all of those reasons. So they kind of say, if you own, say the leading gas station, if you own those four kind of properties, you're kind of done in a certain way. And because the value of those properties is high, why would I now go and sell, let's say the leading office building in the downtown area and go and buy some useless warehousing on the edge of town because it looks cheap. And so once you own the economic high ground, once you own these really high quality assets that everybody would give an arm and a leg to own, the royal family in the UK would not sell Buckingham Palace for any amount of money. You come to the royal family and say, well, you could sell Buckingham Palace, you could buy all this inexpensive real estate on the edge of town, wait 20, 30 years and this stuff's going to be so incredibly valuable.

(00:45:16):

You've tripled and quadrupled your net worth. And the Royal family says, yeah, I think we'll just stay in Buckingham Palace type of deal. And so I think that it's that kind of analysis, which is not really financial analysis that says, I want to be in these assets that are at the very, very core of the economic system and of our civilization because those are just good places to be. And I'm kind of like, sorry that I did not spend more time, for example, seeking to understand exchange businesses and that I don't have in my portfolio the London Stock Exchange or Chicago MER on Tile Exchange, which were kind of obvious ones that I just didn't buy. And so that's how I hold onto it. Or if you take one of my larger and more successful positions, which is always fun to talk about because it involves fast sports cars.

(00:46:06):

Ferrari sells not much more than 10,000 cars a year in a business where I think it's 140 million cars sold a year. So it's just such a tiny fraction of the number of cars sold and people are getting rich all over the world. And something about men in their psyche is at certain points in their lives, they have a intense need to own a throbbing red Ferrari as a social signaling mechanism. And that need just keeps arising and arising and Ferrari's at the very center of that. And there's a strange and very unfair thing if you're a competing brand that the more you succeed, the more you succeed and the more you talk about, the more you talked about. And so what's the likelihood that even when the company is selling twice as manys, three times as many cars, the market is still extraordinarily unsaturated. There's huge access demand. Plenty of men need a throbbing red Ferrari to have in their garage. And so I say to myself, that is economic high ground. That's an equivalent of Buckingham Palace. You cannot replace Buckingham Palace, you cannot replace that. It doesn't appear to me that you can replace that. And so now that I own it, I have to think really long and hard about getting rid of it.

Jonathan Boyar (00:47:19):

Two follow-ups on that one. Do you have taxes to consider or that's not a consideration?

Guy Spier (00:47:25):

So the fund that I run is a non-taxable fund primarily. I mean there's a US partnership feeder partner feeder fund, and there's an offshore fund that is not taxable, but the individual investors are taxable in their jurisdiction. So the shares that I own in my personal name are taxable in this jurisdiction. And there's no capital gains tax here in Switzerland. There's no inheritance tax. That's the good news. The bad news is that there is a wealth tax in which they will shave off as much as, depending on your level of wealth, they'll shave off a half a percent or even close to 1% of your wealth every year if your wealth gets high enough. And so it's living in Switzerland's, a bit like being member of a country club. You kind of pay your membership dues every year. And I only realized it recently, but I was explaining this to my father, if you think that you can do a 10 x on your money, and plenty of smart investors who think long-term can and will and have done 10 x on their money.

(00:48:20):

So if I'm paying 1% of my net worth in an annual tax, one shouldn't think about it 1%, it could be 10% if you do a 10 x on the money. So that is a significant drag on the ability to build wealth. And if you plan on owning the shares and the companies that you buy for more than 10 years, it might even be more of a drag than the 20% capital gains tax that one gets in the United States. And the nice thing about the 20% capital gains tax or whatever the tax level is right now is that when you pay it, you get to decide to pay it when you sell, whereas I just have to pay it whether I sell or not.

Jonathan Boyar (00:48:58):

For your sake, I hope they do it at book value, not at market.

Guy Spier (00:49:01):

They don't do it at book value unfortunately.

Jonathan Boyar (00:49:04):

The other follow up question on that is I agree with you on MasterCard because it has an unbelievable mode and it's a great business. I guess two questions. One, if you were starting a portfolio now, would you buy it at the position you have it now, and two ge, it's not analogous, but some people might have made the same comparisons in 2000 on General Electric, and then we all know how that story ended. Is that ever in the back of your mind?

Guy Spier (00:49:40):

One of the things that I regret not doing that I might still do now is that you get these kind of, they're effectively duopoly type market structures. You have that in the credit rating agency business with Moody's and Stone and Pauls, and you have it in credit card networks or payment networks with Visa and MasterCard, and I've owned one but not the other. And there's a strong argument for saying that one should actually own both. You have a certain diversification of risk and you're exposing yourself to an extremely high quality business. And just another point about MasterCard or Visa for that matter, which is just another way of describing the business even you could say was kind of spooked by Pal Patia talking about how these companies were just overpriced and we're going to be intermediate in no time. And with greatest of respect, he's an extremely smart guy, but he probably sounds off on too many things that he doesn't know something about.

(00:50:38):

I hope that that's not insulting to him if you're listening with Greatest of Respect, but don't think he understood the nature of the network when it comes to Visa and MasterCard. I know with MasterCard that there are about 15,000 banks in the network. And when you look at the economics of credit cards, you have the merchant discount, which is the difference between what the merchant receives and what the consumer paid. And in the case of American Express, it can get as high in certain product lines as three or 4%, but even at 1% the thing that the Visa or the MasterCard provides is that discount is available to Visa or MasterCard to pay out to the clients like merchant issuing banks or issuing banks. So even if you're a PayPal or if you're a Stripe, or if you're any kind of payment technology company, at the end of the day, you want to get paid and it's very, very likely that the way you're going to get paid is you're going to want to access that merchant discount is being made available via Visa and MasterCard.

(00:51:42):

And when you take that merchant discount and the average, I don't know off the top of my head, call it 2%, what Visa and MasterCard retain for their own operations and profit is a tiny fraction of that. The vast majority of the merchant discount is being paid back out to the banks and to the card issuers, which is kind of just a really beautiful business model. But when we to come to ge, very well established companies develop a kind of brand with investors. I remember meeting with the father of a friend of mine in Toronto where he said to me that he had all of his savings in at and t, and as far as he was concerned, this was a blue chip company. And I was thinking of all the different ways via cable and via wireless, and the competition was coming five ways till Sunday.

(00:52:27):

And at the time I didn't even see how in mobile phones, there's kind of a certain franchise value that you have because you sign people up for these multi-year contracts and his portfolio got decimated. So these brand companies that appear to be Blue Chip and are not. Another example by the way, is Kodak. What was amazing about Kodak was this company had such a powerful brand and there were people who had struggled within the company to get to the senior management rank. So I remember at one of the annual reports that they published before they filed for bankruptcy, you had endless pages of portraits of senior managers posing, and it was their life mission to get them their face into the annual report, but actually the business was crumbling beneath them. And there were so busy with the politics of getting into the senior management ranks that none of them were paying attention to the business.

(00:53:20):

So in the case of General Electric, I think the company had an extraordinary brand, but obviously the businesses were not quite there. I think that buried within General Electric, there are probably some extraordinary businesses. The medical technology business is a capital intensive business. Not everybody can do that. I think there are many lines in that business where they share the market basically with Siemens and is either Siemens or General Electric, that is the supplier. And I have a sense that in aero engines, there is a similar thing going on, and unfortunately the company got to a place where capital was not allocated very well, but I wouldn't put that company into the same category as a Visa or a MasterCard where underlying Visa and MasterCard, there's an unbelievably simple business idea that is being just executed on replicated time and again.

Jonathan Boyar (00:54:13):

Yeah, and with the GE healthcare, we had researched, I guess in April this year profile that it's an extraordinarily interesting business and it's kind of the classic spinoff of a business that was just ignored. The chairman of Larry Cul is now going to be chairman of GE Healthcare, and yeah, it's great market share. It does seem like something investors should look at. Both of us are shareholders, or at least as of your last annual report of Bank of America, and it's been a good investment for both of us. I imagine we probably bought it around the same time for about the same reasons when investing in these big banks. How do you get comfortable with the unknown unknowns as it's sort of a black box? You talk about investing in glacial type investments and I don't think money center banks in this day and age fit that criteria. What keeps you comfortable?

Guy Spier (00:55:15):

Yeah, so all of the shares I believe that I picked up in Bank of America were top warrants that were then executed at the relevant moment and top warrants were issued at the time, it was the financial crisis, and it was Tom Geitner and Hank Paulson I think, who sat down with the big banks and said, you're going to take money from us. We don't want anybody to question. And many of the bank banks said, we don't need the money. And not only were they forced to take it, but because they were taking money and on the behalf of the government, they wanted to demonstrate to voters effectively that they got their pound of flesh. They forced the companies to issue tar warrants with these kind of long dated call options, which created significant upside for the government, which were ultimately sold. Nobody knew how to price them and people like me and possibly you went and bought them. That was a decade ago. So when you asked the question to get to one of the questions you actually asked, rather than me rambling and telling you a story that you didn't actually ask me the story,

Jonathan Boyar (00:56:13):

I like the rambling and I like the story.

Guy Spier (00:56:16):

So how does one get one's brain around a 2 trillion balance sheet? And I said something really scary to somebody. They said, well, come on, you don't understand the barren sheet. And I kind of said slightly facetiously to the person asked me the question. Yeah, guess what? Brian Moynihan doesn't either or the management don't either. I mean, these are vast barren sheets and there's enormous amounts of if you sit in the head office, can you know everything that's going on in the balance sheet at any particular time. You need to put policies into place that create an environment in which you can have conservative lending and where you are putting the money out at an interest margin that makes sense without taking undue risk. Can everything that's going on? No, you cannot. But the point about these very, very large money center banks I think, is that obviously risks are diversified in a way that a smaller bank is not.

(00:57:08):

Ideally, you don't have concentrations in any particular geographic area or any particular industry so that when the blowups happen and they will happen, they're happening on a scale because you are diversified. That is totally handleable. And then you can go and handle that problem and update your underwriting criteria and update your business diversification criteria and know that because you are so large, the likelihood that that will take you out is so much lower than the likelihood that we'll take out. For example, a Silicon Valley bank, for example. And I do think that money center banking has this glacial aspect to it. So if you look at European banking markets, all the European banking markets are far more concentrated than the United States. So the UK is like four or five high street banks and that's it. Germany has similar, France has similar. And so what's going on there, I believe, is that two large institutions, one the treasury of the various governments in the US Treasury and the Central Bank who have massive, massive operations interacting with, so in the treasury, it's got to do with the United States government's payment of its suppliers as well as the United States government issuance of debt borrowings and which kind of an enormous proportion of the US economy.

(00:58:31):

And then you have the money market operations that are going on with the Federal Reserve, making sure that the money supply is sound, making sure that payment system was work, making sure that banks are solvent. So those two vast institutions cannot do what they do with a fractured array of 10,000 banks. They really need those money center banks in order to interact on the volumes and scales that they do when they conduct money market operations, they need to be able to distribute that through into the markets, and they do that through their interactions with the money center banks. And so I would argue that the money center banks have a very, very special role and they have a privileged role, a role that is in a certain sense unfair. And anybody who doubts this, I urge you to go and look at the federal reserve's and just take a look at how many regulations are coming out and how many directives are coming out and how many interactions are coming out with the banks and the banking system.

(00:59:29):

And so the regulations don't always go in their favor. So when you have the bank for international settlements that comes along and it says, we care about capital ratios and if you're a cfi, if you're a significant financial institution, systemically significant financial institution, we're going to add a capital cost to you. So that is where the regulations go against the large money center banks. But by and large, the large money center banks are then, it's not like they're writing the regulations, but they have a huge influence on how the regulations get written and the regulations tend to get written in a way that naturally favors them. And so there's this kind of slight tipping of the playing field in their favor such that over time the US banking market will continue to consolidate and the large money center banks will continue to have a larger and larger share of the business.

(01:00:19):

But having said that, every now and then things go against them. So what happened recently this year with Silicon Valley Bank and the others and the realization, so when you're a money center bank and you have these vast deposits basis, so that's basically people giving you money to work with and to the extent that it's not paying an interest rate, that's kind of like free money that you can then turn around and use in some way. That's kind of like an asset. And that's certainly an asset that I think about in the case of Bank of America. But to the extent that those deposits have become less sticky, then that again is something that has gone against the banks. And there were worries earlier this year, not just about Silicon Valley Bank. There were worries about Charles Schwab for example, because people could, with the press over the button, take their cash balances and put it into money market fund.

(01:01:08):

Money market fund might be with Charles Schwab, but it might be with somebody else. So there are these things that happen in the midst of the financial crisis. Capital requirements for CFIs went up if that went against the banks, if the value of the deposit base in the light of the ability to switch deposits very easily from a mobile phone or from online, that is reduced the value of the large deposit basis of these large banks. But despite that, the overall trend is in the direction of business and regulations flowing to favor those large money center banks. And so it is in a glacial way, the profit share, and this is kind of, forgive me because I've gone taken you around a long, long set of houses. If you think that banks are facilitating the transmission, they're facilitating payment systems, they're facilitating people's wallets in various different ways, and they're facilitating the transmission of savings into investment.

(01:02:05):

And they co-exist with a whole bunch of financial institutions that do the same thing, including markets, including small payments companies, including cryptocurrencies and what have you. But they claim a share of all of the profits generated by those businesses. And if you ask me today, what share is it that is held by those large money center banks and what will be the share in 20 years time, their profit share will be a far larger proportion of that. And so in a glacial way, they are expanding in that way. Very, very long tour of the houses. I hope you enjoyed it and it's worthwhile for the listener. If not, I apologize.

Jonathan Boyar (01:02:44):

You've been unbelievably generous with your time. I just have one last question I wanted to ask. And there's really more for my own curiosity because I prepare a lot for these interviews. I guess I am in the research business, but I came across an op-ed or letter to the editor you did to the Financial Times about the Hershey Trust, 2001, 2002. And you basically were asking, why the heck are they selling shares in this? And the returns are much better off being in Hershey's stock. Why did you care? I was just curious.

Guy Spier (01:03:19):

There's a part of me that wants to sound off and wants to be a voice that is heard, and that's the voice that is kind of saying all these things on Israel on Twitter. And I came from this sort of a bucket shop investment bank because my first job out of business school, very bad career decision, and I tared my resume in a way that Lady Macbeth, I've been wanting to wash my hands of everything that they touched during that 18 months that I was there ever since. And so when I see people behaving in what I think is a craven way in the self-interested way, it kind of gets my gullet. So yeah, so I went away and wrote that piece and they should have gotten comfortable with their Hershey's position in the same way that I should be comfortable with my appreciated Ferrari position, or you might have to be comfortable with your appreciated Microsoft position. And they could have just sat tight and taken the dividends from Hershey's and done good things with them, but they wanted to have fun hiring and firing investment managers and having cash to move around and having all of that friction happen because probably they were more likely to make money themselves as trustees if they did that. I wanted to call bullshit on it. I guess I did.

Jonathan Boyar (01:04:29):

You were right by the way, I checked yesterday and since you wrote the letter, Hershey stock was up, I think 900%.

Guy Spier (01:04:36):

Oh, that's hilarious. I should follow up on that.

(01:04:40):

So I did a project with an intern last summer where just for fun, we did a study to look at what it would take to sell Ikea, which is like the Costco of furniture. And I hope that Warren Buffett doesn't get upset at me for saying this, or Ted Wexler or whoever's running Berkshire Hathaway, Greg Abel. It's a way better business than Nebraska Furniture Mark. It's an incredible business. So I decided with this in town that we were going to do our very best to convince the boards, there are multiple boards that control charitable boards that control Ikea to do exactly what I told Hershey's not to do, which is to sell that business to Berkshire Hathaway because I think it would be marriage made in heaven, Ikea selling itself, the Ikea trust selling themselves to Berkshire Hathaway. So what I told the Hershey's board not to do, I was working on convincing the IKEA boards to do. Of course, I got nowhere. I and my intern got nowhere on that front, so I was kind of contradicting myself. It would be a beautiful thing if Berkshire Hathaway were to end up buying Ikea, but I don't think it's happening in my lifetime, unfortunately.

Jonathan Boyar (01:05:49):

Well, I just wanted to thank you. It's been an unbelievable privilege to hear what you have to say and to read your books and your writings, and I just want to thank you so much for your time, and I really recommend anyone who has not read it to read the Education of a Value Investor where you can buy on Amazon or wherever books are sold.

Guy Spier (01:06:12):

Yeah. Jonathan, it's such a pleasure to talk to you in this podcast. It was a pleasure to talk to you before the podcast started, and I'm looking forward very much to talking to you again, also offline when I visit in New York or maybe when I'm with my daughter or something like that. And it was really great to connect with you and thank you for your great questions. I hope the listener enjoys them.

Jonathan Boyar (01:06:31):

Thank you. I hope you enjoyed the show. Remember all of the world according to Boyar podcasts, as well as additional articles and research reports can be found at https://boyarresearch.substack.com/. Until next time.