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We Study Billionaires - The Investor’s Podcast Network
RWH023: Defensive Investing In Dangerous Times W/ Guy Spier
Mar 19, 2023
02:14:05
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Quick takeaways
- Investors should consider whether a company can fund its growth internally to avoid investing in companies with unsustainable business models.
- Being part of a supportive and intellectually stimulating ecosystem, attending events like the Berkshire Hathaway meetings, can help resist the temptations and dangers of speculative investing.
- The cautious approach to investing during the post-bubble period, maintaining a relatively high cash position, reflects a preference for further observation and waiting for more attractive opportunities to emerge.
- Self-awareness and rational decision-making are crucial in navigating the investment landscape, requiring continuous improvement, establishing rules, and managing psychological biases.
- Caution should be exercised in investing due to increasing geopolitical conflicts and the realignment of global supply chains prompted by the COVID-19 pandemic and rivalry between superpowers.
Deep dives
The Danger of VC-Style Funding in Public Companies
One of the main ideas discussed in the podcast is the danger of companies in the public markets relying on venture capital-style funding. This refers to companies that take money from the capital markets and invest it in operating losses, banking on the idea of grabbing market share and believing in a winner-takes-all scenario. The key insight is that investors should consider whether a company can fund its growth and investment from its internally generated resources rather than relying on external funding. This checklist item aims to protect against investing in companies that may be overvalued due to their reliance on continuous funding. By ensuring that a company can fund its growth internally, investors can avoid being caught in the frenzy of market manias and mitigate the risk of investing in companies with unsustainable business models.
Creating a Protective Ecosystem
Another important point in the podcast is the significance of being part of a supportive and intellectually stimulating ecosystem. The guest emphasizes the value of attending events like the Berkshire Hathaway meetings and surrounding oneself with like-minded individuals who share similar investment philosophies. By immersing oneself in this environment, it becomes easier to resist the temptations and dangers of speculative investing. The guest also mentions the importance of setting personal rules and checklists for investing, such as limiting exposure to certain types of investments or avoiding excessive monitoring of stock prices. These measures help to create a protective ecosystem that discourages impulsive decision-making and encourages a long-term, value-oriented approach.
Caution Amidst Post-Bubble Market
During the post-bubble period, the guest takes a cautious approach to investing and maintains a relatively high cash position. Despite the market turmoil and the decrease in valuations, the guest struggles to find compelling investment opportunities. The guest acknowledges feeling somewhat confused and shell-shocked by the recent market volatility, and this uncertainty contributes to the cautious stance. The guest's freeze response to market mayhem enables a more observant and measured approach, allowing for a better understanding of the current market landscape. This caution reflects a reluctance to invest in companies, even after their valuations have come down, suggesting a preference for further observation and waiting for more attractive opportunities to emerge.
The Importance of Self-Awareness and Rational Decision-Making
Throughout the podcast, the guest emphasizes the role of self-awareness and rational decision-making in navigating the investment landscape. The guest acknowledges that even experienced investors, like Warren Buffett, can be susceptible to market moods and irrational behavior. To counteract these tendencies, the guest emphasizes the need for continuous improvement and the cultivation of positive habits. This includes establishing rules and checklists, evaluating one's individual response to market events, and actively seeking to channel behaviors and decisions towards a long-term, value-based approach. By understanding and managing inherent psychological biases, investors can better protect themselves from making impulsive or irrational decisions.
Global superpower conflict
The podcast episode explores the increasing conflict between superpowers, particularly the authoritarian regime of Russia and the liberal democratic system represented by NATO nations. The speaker points out that despite the pretense of not being in a shooting war, the reality is that two superpowers are in conflict, and the outcome is uncertain. The speaker emphasizes caution in this uncertain geopolitical landscape.
Realignments in global supply chains
The podcast discusses how the COVID-19 pandemic and the rivalry between superpowers are leading to a realignment of global supply chains. The focus is shifting from optimizing supply chains for lowest cost to ensuring resilience. This may result in a more expensive supply chain that prioritizes stability over cost-efficiency. The speaker gives examples of semiconductors being produced in Germany and iPhones potentially being produced in the United States instead of China. This realignment prompts the speaker to urge caution in investments.
Managing emotional vulnerability as an investor
The podcast delves into the importance of managing one's emotional vulnerability as an investor. The speaker shares personal experiences and acknowledges the challenges of navigating the emotional rollercoaster of investing. They emphasize the need for self-awareness, cultivating a balanced mental state, and creating processes and structures to guide investment decisions. Additionally, the speaker highlights the role of curiosity and continual refinement in staying open to new ideas while remaining discerning.
Importance of Managing Risk and Reducing Exuberance
One of the key insights from the podcast episode is the importance of managing risk and avoiding excessive exuberance in investing. The speaker shares an anecdote about a CEO who decided to sell shares of a company at a time when the share price had risen significantly. This decision was made to reduce risk on the balance sheet and was supported by Warren Buffett. The podcast emphasizes the discipline needed to sell some positions during moments of exuberance to protect against potential downturns. It also highlights the challenge of holding onto highly appreciated stocks. Overall, the episode underscores the significance of prudent risk management and the need to resist irrational attachment to gains.
The Power of Perseverance in Career Transformation
The podcast episode delves into the personal transformation and career journey of the host, William Green. The episode highlights how Green went through a period of upheaval and reinvention after being laid off during the financial crisis. Through perseverance and flexibility, Green was able to rebuild his career and establish his own platform and brand. The episode emphasizes the importance of adapting to changing circumstances and finding new opportunities, even when faced with setbacks. It also emphasizes the value of continuous learning and self-improvement. Green's story serves as a reminder that success often comes from indomitable persistence and the ability to navigate through challenging times.
William chats with renowned hedge fund manager Guy Spier. Since launching the Aquamarine Fund in 1997, Guy has beaten the S&P 500 by 200 percentage points & the MSCI World index by 364 percentage points. He’s also the author of “The Education of a Value Investor.” In this conversation, Guy speaks candidly about the challenges he’s facing, including his fear that Russia’s war in Ukraine could escalate, creating a systemic risk for investors. He explains how he’s positioning his portfolio to survive & prosper in these perilous times, & he shares practical advice on how to maintain equanimity amid all this uncertainty.
IN THIS EPISODE YOU’LL LEARN:
00:00 - Intro
03:56 - How living in a calm & predictable environment helps Guy Spier to invest better.
12:04 - How he resisted the temptation to buy overvalued tech stocks during the recent bubble.
26:11 - Why we must beware of the psychological effects of rapidly rising or falling stock prices.
30:04 - Why Guy refuses to invest in any business that can’t fund all of its growth internally.
44:18 - How going to Berkshire Hathaway’s annual meeting helps to reinforce rational behavior.
53:57 - What Warren Buffett told Guy Spier & Mohnish Pabrai about the perils of debt.
1:13:04 - Why Guy regards the war in Ukraine as a potentially systemic threat to investors.
1:11:56 - Where he’s investing in order to survive & prosper in these times of heightened risk and why he’s invested heavily in China, despite the political & economic dangers.
1:13:55 - Why he’s avoiding weaker countries, including Indonesia & the Philippines.
1:15:01 - How he wrestles with the tricky question of whether to trim or hold his winners.
1:18:17 - Why he’ll never short another stock.
1:19:31 - How he constructs a portfolio that helps him to maintain his emotional equilibrium.
1:43:35 - Why he diverged from Mohnish on the risks & rewards of investing in Turkey.
1:59:08 - What Guy & Mohnish have learned from the stunning success of their friend Li Lu.
Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences.
BOOKS AND RESOURCES
- Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, and the other community members.
- Listen to William Green’s 2022 interview with Guy Spier on How to Build Enduring Wealth (RWH009) or watch the video.
- Listen to William’s 2022 interview with Guy on High-Performance Habits (RWH010) or watch the video.
- Listen to William’s interview with Ray Dalio on the “Richer, Wiser, Happier” podcast or watch the video.
- Guy Spier’s book, “The Education of a Value Investor” – Read reviews of the book.
- Guy Spier interviews William Green about his book, “Richer, Wiser, Happier.”
- Subscribe to Guy Spier’s Free Newsletter.
- Guy Spier’s podcast and website.
- William Green’s book, “Richer, Wiser, Happier” – read the reviews of this book.
- William Green’s Twitter.
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