How My Investing Philosophy Has Changed Over Time

by Geoff Gannon


Someone over at GuruFocus asked me about my background:

Hey Geoff, I recently started listening to some of the audio recordings you posted. You are really knowledgeable, what is your background? 

My educational background is that I am a high school dropout. My investing background is that I got interested investing when I bought my first stock at 14. That's when I read Ben Graham's Security Analysis and The Intelligent Investor.

 

My Investing Approach Has Drifted From Graham Toward Buffett

Over time, based on my own investing results, I probably became less of a Graham type investor and more of a Buffett type investor.

I made the most money by far buying and holding companies with strong competitive positions when they were temporarily priced at 6 or 10 or 12 times earnings. I also buy net-nets, net cash bargains, etc. But generally I like a reliable business with almost no history of losses and a market leading position in its niche. That's probably more Buffett than Graham. 

 

Hidden Champions of the 21st Century is My Favorite Book  

My favorite book is: “Hidden Champions of the 21st Century.”

Technically, it’s a business book – not an investing book. But business books are almost always more informative for investors than finance type books.

If I had to hand 3 books to someone who didn’t know anything about what it takes to be an investor – I’d hand him:

  1. You Can Be a Stock Market Genius
  2. The Intelligent Investor (1949)
  3. Hidden Champions of the 21st Century

If you aren’t in love with the idea of the treasure hunt after reading those 3 books – I don’t think you’ll ever become a value investor.

 

All I Really Know – Compounding, Mr. Market, Margin of Safety, Moats

If you know:

  • The Berkshire/Teledyne stories
  • Ben Graham's Mr. Market Metaphor
  • His margin of safety principle
  • And you’ve read “Hidden Champions of the 21st Century

You have everything you need to make money snowball in the stock market.

 

All It Really Takes – Patience, Common Sense, and a Few Sound Principles

My feeling is – and it’s controversial, but it’s right – that if you’ve got those 4 ideas in your head and once a year you buy the very best stock you can and then you forget you own it for at least the next 3 years, you’re gonna do okay in the stock market.

You don’t need to know if you should be 100% in stocks or 100% in bonds – I was 100% in stocks when the dot-com bubble burst – and I’ve made more than 15% a year returns since then. 

 

Most of the Advanced Concepts Are a Distraction – Forget Them

Now, true, I didn’t own any tech in 2000. I owned companies in groceries, snack foods, and video games. But that’s not because I was clairvoyant. It’s because I was a kid. I didn’t know any better. Over time, you learn all these ideas about diversification, and macroeconomics, and market timing – and those tend to make you more likely to be able to justify owning Cisco or something in 2000.

If all you know is that a stock is a piece of a business – which is all a kid knows – there’s no way to justify that level of stupidity. You can’t participate in bubbles like that. Because bubble thinking requires higher math, or emotional intelligence or something – not just doing arithmetic alone with the annual report.

 

I Know Less About the Euro Than You – But I Won’t Be Paralyzed By It

People make excuses for why you need to know if the market is overvalued, if the Euro is going to disintegrate, etc.

Of course I think the Euro is going to break up. But that’s not going to stop me from buying good European companies.

I can’t outguess people on something like the Euro. It would be a waste of time. There are so many things everybody is trying to figure out. And there are so few things that matter to any one specific stock.

 

Graham and Buffett Both Work – But Buffett Requires Fewer Decisions

So, over time, I’ve tended to think the Graham approach is less practical. And it’s not something a human should carry out. It’d be easier carried out by a computer.

The Buffett approach is also hard to carry out. Most humans can’t carry it out. But a few can. I feel like I can. So I’ve tended more in that direction over time.

It’s not that those kinds of stocks do better in back tests or anything – they don’t. It’s just that the Buffett approach is a very reliable way of repeatedly making money in stocks. You don’t get a lot of opportunities to screw it up. You don’t have that many points where you have to make new buy and sell decisions – which is what derails everyone who tries the Graham approach. Of course, they all trade faster than Graham ever did.

 

I’ve Yet to Meet Someone Who Screwed Up By Holding Stocks Too Long

We could all benefit from tripling how long we hold our average stock. This is not something I would’ve believed when I first read Graham. It took a lot of direct experience and hearing from other folks about their actual investment decisions to teach me just how nutty investors really are. How easy it is to screw up a good thing purely through unneeded and emotionally charged activity.

 

Buffett Stocks Don’t Have to Be Blue Chips – Look For Oddball Stocks

Start with the appropriately named blog: "Oddball Stocks". 

Generally, people think I’m more of a Graham investor because I buy smaller stocks. The big cap/small cap distinction is something a lot of people pay attention to. I blame mutual funds. It makes no difference. I’ve seen tiny companies with dominant market positions – like sub $30 million stocks. And I’ve seen $30 billion stocks with dominant positions. I’ve also seen companies of both sizes at real risk of being bankrupt in the next couple years. It’s so silly to define an investor by the size of the companies they invest it.

There’s a tiny Nebraska company called George Risk (RSKIA). I own shares in the company. And its returns on capital over the last 10-15 years have been right in line with what a Warren Buffett type business achieves. It has a $30 million market cap.

The market leader in candied fruits is Paradise (PARF). It’s an awful industry. And Paradise dominates that awful industry with an 80% market share. Paradise has a $9 million market cap.

Now that’s a Hidden Champion.

 

I’m Not Above Buying Something Selling for Less Than Liquidation Value

Now, it’s true that I sometimes buy stocks selling for less than net cash. And that they are almost always illiquid.

It’s hard to pass on a profitable business selling for less than its cash. If you have the Mr. Market metaphor in your head – it’s hard to convince yourself that paying for a cash pile and getting a historically profitable business for free is something you should walk away from.

 

Buffett Has Always Said There’s More Than One Way to Get to Heaven

Maybe that’s more Graham than Buffett. I don’t know. I think Buffett might still buy net cash stocks if he had millions rather than billions to invest.

I’m not really sure there was ever a difference in those respects between Graham and Buffett – it’s just that Buffett grew very big at some point while Graham kept his fund very small.

So, I tend to buy tiny stocks. Because I can. And because those are almost always where the best bargains are.

 

My Most Controversial Investing Belief: Extreme Concentration Works

I buy very few stocks. Again, this comes from personal experience. By far, the worst losses to my portfolio came in years where I held the most stocks. The best performance came from 25% or bigger positions in my portfolio that I chose to hold longer term.

I’ve made a lot of money by:

  • Sticking around for the buyout
  • And having more than 25% of my portfolio in the stock when that buyout came

Today, I would never buy a stock that makes up less than 10% of my portfolio. I prefer not to start a new position unless it is expected to eventually be 25% of my portfolio. I am not interested in owning more than 5 stocks at a time. I've done it - like with Japanese net-nets. I may do it again in similar basket type situations. But I'm a lot less likely to. So, basically I own 4-5 Warren Buffett type stocks (in terms of competitive position) bought at Ben Graham type P/E ratios. 

Right now, I’m looking for a European stock to put 25% of my portfolio into. It won’t be 5 European stocks at 5% each. It’ll be one at 25%.

 

Competition Kills – The Greatest Speculation is Always on the Business

The longer I’ve been an investor the greater my fear of competition has become. I’m not afraid of investing in a frothy market. I’m not afraid of investing in a depressed economy.

I’m afraid of capitalism.

I am afraid of competition. I think at 9 out of 10 companies investors are fooling themselves about just how great a risk they are taking in the business itself.

There is a higher extinction rate in public companies than we are willing to admit.


Investment Grade Isn’t About Market Cap – It’s About Competitive Position

Today, something like Dun & Bradstreet (DNB) or Corticeira Amorim (in Portugal) would be good examples of the kind of things I own. Right now, I own some DNB. No Amorim. But I'd consider buying both at today's prices. And they are very good examples of the kind of stocks I like.

I own a bunch of George Risk. Have for like two years now. It's typical of the kind of thing I like.

 

No Teacher is as Effective as Direct Experience

So, that's how I invest today. And that experience mostly came from learning through actual investing.

It also came a little bit from doing the blogs, podcasts, etc. starting in 2005 and going through today. So, for the last 6 or 7 years, everything about me in terms of investing is stuff you can see online. It's the articles at GuruFocus, the podcast, and the blog.

But mostly it came through direct experience. I wish I had been a little better at learning from other people’s mistakes. It’s been an expensive education.

Talk to Geoff about How His Investing Philosophy Changed Over Time