Mariusz Skonieczny of Classic Value Investors recently interview me.
He runs Classic Value Investors, LLC, an investment firm based in Schaumburg, IL. He wrote a book called "Why Are Investors So Clueless About The Stock Market," which I plan to review soon for this site. He also has a very good blog over at http://www.classicvalueinvestors.com.
The interview was published on Mariusz's site here.
Here is the interview:
Alex Bossert is a young investor who was recently featured in the book, Of Permanent Value by Andrew Kilpatrick. He writes a blog, Alex Bossert’s Thoughts on Value Investing, which I recently added to my resources page.
Mariusz Skonieczny, Classic Value Investors: I learned about you because Sandesh Trivedi, who is my friend and a subscriber of my blog told me that he likes your website. I checked it out and I agree with him. You became interested in the stock market when you were 10. Did you buy your first investment at that age? If so, you have a one-full year advantage over Warren Buffett who bought his first stock at the age of 11.
Alex Bossert: I began learning about the stock market when I was 10 and I purchased my first stock right after my 11th birthday. My first investment was in shares of Wal Mart. What first got me interested in the stock market was a book touting the money to be made in internet stocks. Luckily, I didn’t take this book too seriously. The second book I read was How To Pick Stocks Like Warren Buffett by Timothy Vick. This is the book that got me hooked on investing and started me down the path of learning everything I can from Warren Buffett. The book started with stories of Buffett’s childhood businesses such as his idea of putting pin ball machines in barber shops. He also paid friends to go retrieve golf balls from local courses and then he would resell them. I got my first money to buy stocks from a similar business idea. So right off the bat I could relate to him.
Warren Buffett’s teachings on investing just plain make sense. Value investing rests on two very simple rules: buy businesses that you understand and only buy when they are trading for less than intrinsic value. It just made so much sense to me to think in this common sense fashion. As Benjamin Graham once said, “Investing makes the most sense when it’s most business like.” But for many reasons, only 5% or so of investors are value investors and the short term mentality of most investors provides a huge opportunity for value investors. I felt that I had discovered the holy grail of investing. Warren Buffett once wrote that the concept of value investing is like an inoculation – it either takes or it doesn’t – and when you explain to somebody what it is and how it works and why it works and show them the returns, either they get it or they don’t.
Mariusz Skonieczny, Classic Value Investors: You tend to look at smaller companies versus big giants. Why?
Alex Bossert: I don’t limit myself to small companies but I do focus my attention there. One of my largest holdings is actually a $23 billion market capitalization Chinese company called BYD. Warren Buffett recently invested in the company and it has been one of my most profitable investments.
I’ve always had a fascination for small companies because oftentimes they are overlooked. Many of these companies get no analyst coverage and the many hedge fund managers are too big to look at them. I focus on where I can find the greatest discrepancy between price and value and that is in small and nano caps. I’ve invested in companies that are smaller than $10 million in market capitalization.
Warren Buffett made his 30%-40% partnership returns investing in micro cap companies and that is what I’m trying to recreate. The Buffett partnership letters are a fascinating read. Particularly Buffett’s investment in Sanborn Maps found in the 1960 letter to partners: http://www.gurufocus.com/news.php?id=7227
One year ago was the time of a lifetime for value investors looking at small caps. In many instances a company would experience no impairment of intrinsic value but the stock might be down 60%. One example is Clear Choice Health Plans. In September of last year this company was trading for $11 per share. The stock declined about 60% in a year because of fears of what health care reform would bring. However, 50% of Clear Choice’s business is Medicaid which is Obama’s platform for covering the uninsured. It was unclear how healthcare reform would affect profit margins but revenue would definitely increase under Obama’s plan. The company was trading for just over 5 times earnings and for 40% of book value. The company had $28 per share of cash and investments, $11 of which could have been distributed to shareholders while still maintaining statutory minimums. Management appeared at the time to be willing to put this money to good use and was buying back a significant amount of stock. Factoring in the cash and investments, the business was being given away for free. In late December of last year the company announced it was being acquired for $26 per share.
Mariusz Skonieczny, Classic Value Investors: You call the management of the companies that you research. Do you also meet with them face-to-face? What do you ask them? How do you evaluate them?
Alex Bossert: I don’t go and meet with management face-to-face but I sometimes call with questions. Evaluating management is extremely important and I think the proxy statement is just as important as the annual report. When I call the management of a company I’m researching, it’s not to evaluate management. Instead I usually have questions about the business, financial statements or the industry.
Meeting with management usually isn’t productive because CEO’s are good salesmen and that’s why they are the CEO. Executives understand their industry better than anyone else and they are always friendly. They are very good at selling their point of view. It’s really hard to come away not feeling really good about what they said and this could cloud my judgment of the company or management.
I have an investing checklist with 70 or so risks to look for in an investment. I have 8 or so things to look for in evaluating management. To evaluate management, I look at what they’ve accomplished. I also listen carefully to what they say on conference calls and in the annual reports. I want honest management with a long term view. I look at how they measure performance and if they freely admit mistakes. One way to judge honesty is to look at how aggressive the accounting is. In addition, I look carefully at how they pay themselves. I want to know if they love the money or love the business. Do they have skin in the game and own a big ownership stake in the company relative to their salary? I favor executives who purchased the shares with their own money rather than with granted options. Are they buying shares or selling? These are the questions I ask myself when evaluating management and they are answered by reading the proxy and annual report, not by talking with management.
Mariusz Skonieczny, Classic Value Investors: Congratulations on being featured in Andy Kilpatrick’s book Of Permanent Value: the Story of Warren Buffett. How did you get to be featured in it?
Alex Bossert: Of Permanent Value is one of the first books I read on Warren Buffett. It is by far the most in depth of all the books written on him. My favorite aspect of the book is that Andy Kilpatrick has chapters on all of Berkshire’s acquisitions and explains Berkshire’s subsidiaries in depth. I’ve researched nearly all of Buffett’s acquisitions and why he invested so this was extremely useful. It’s a big honor that Andy asked me to be included in the book and I highly recommend people read the book.
Mariusz Skonieczny, Classic Value Investors: Where can people read your story from the book? Is the edition in which you are featured published yet?
Alex Bossert: I was published in last year’s edition. I was in chapter 205, pages 1169-70 for those who want to look it up. The 2010 edition is now out on Amazon for pre order and is due to be shipped in late April. The book can be pre ordered here. I’ve posted the chapter on me on my web site. The chapter can be read here: http://alexbossert.blogspot.com/2009/10/blog-post.html
Mariusz Skonieczny, Classic Value Investors: What is it like to be a high school student interested in the stock market? What do your peers think about your passion for investing?
Alex Bossert: I feel that success in investing is based on how much time and effort is put into it. The more investors read and the longer they invest, the greater the chances they will become successful. That’s why many successful investors started young or had a lot of practice before they became successful. I spend a lot of my free time reading about companies and studying the most successful investors. I’m fascinated by and enjoy the whole process. Because I’m so passionate about investing, all my friends respect my interest in the stock market. A few are somewhat interested in what I’m doing but none of them invest on their own. I’ve met a few people my age that are value investors mainly through my site and at the Berkshire Hathaway annual meetings.
Mariusz Skonieczny, Classic Value Investors: Can you tell us about a company that you invested in recently and why you think it was a good investment?
Alex Bossert: My favorite company right now is Nicholas Financial. I have an extremely detailed analysis on my site. Nicholas Financial is a very uniquely managed auto lender. Auto lending is a business that has been given a very bad name recently. Nicholas is a great company trading at a very cheap price. They have very high quality underwriting unlike many of their competitors that focus mainly on the FICO score. They go further in researching the creditworthiness of their customers than their competitors do and employees are paid directly based on the quality of loans they originate. They also hold all of the loans on their books with no securitizations.
In boom times Nicholas is unwilling to make bad loans and pulls back on credit availability. However, when the credit cycle turns down and their competitors suffer or go out of business, Nicholas remains solidly profitable and takes market shares away from competitors. While their competitors were going bankrupt last year, Nicholas’s profits declined from 20% return on equity to 10%. At the same time management was buying a lot of stock. The company also over reserves for losses every year and is constantly accreting unrealized losses back into earnings. The company was incredibly cheap last year and is still a good buy today.
Last year the stock declined from $8 to $2. I’ve read everything I can on Nicholas as well as researched their competitors. Because I understood the business so well, I was buying a lot of stock at less than $5 per share when other investors were selling based on fear. I knew it was extremely unlikely the company would have a margin call unless the economy got significantly worse than it was in March of last year. Currently, book value is $8 a share and I think the company is worth around $15 per share. The company should be able to earn around $2 a share in a few years and earnings are growing 10-15% per year. In the last ten years, shareholders equity has grown from $11 million to $88 million today. Here is a quote from a CEO I’m very happy to partner with: "When yields on loans look temptingly high, we always try to remember that the return of your money is more important than the return on your money."
Mariusz Skonieczny, Classic Value Investors: Thank you very much for the interview and I wish you good luck with your investment endeavors
Alex Bossert: Thanks for the questions.