I came across an interesting interview with Scott Miller of Greenhaven Road Capital a couple of days ago, conducted by Value Walk.
Without replicating the entire interview in full, I thought it would be useful to extract some key points which I found to resonate with me and which led me to reflect on experiences and thoughts. As such, I also typed out in italics some notes to accompany the extracted points.
On your brain being suitably wired for successful investing
As a person who can usually find an angle and has a contrarian streak, investing held great attraction. As for the value discipline, I think it is how my brain is wired. Not only do I have trouble paying retail, I enjoy items bought on sale markedly more than those for which I paid full price. Value is all that makes sense to me.
My notes: Similarly, I try my best to avoid paying full price for items or try to seek cheaper alternatives as much as possible. When I do have to buy clothes, gadgets or books, my first pit stop is always the internet to find the best deals. To save a couple of bucks, people are increasingly doing the same so that habit isn’t much to shout out about.
What I can say could be a little more unique is that when I am out in town after midnight when most normal buses and trains have stopped operations, I think nothing of taking a 10 minutes walk to a bus stop which has a late-night bus service operating, then waiting for another 30 minutes for the bus to arrive so that I can hop on for a 40 minutes long-winding ride back home. If I had hopped on to a cab, it would take much less than half the time to get home but at six times the cost. I find it hard too fish that kind of money out of my pocket, especially if I am not in a rush to get home. That said, I recognise the time cost involved. That is why I almost always bring a physical book or my iPad (loaded up with books) with me when I head out so that I can do some productive reading while travelling on public transport – money saving and good for the mind.
Juggling a day job and managing a fund
There was a ten plus year period where I was working a full-time job building in an operating business and investing on nights and weekends. Given my concentrated portfolio of approximately 15 companies and low turnover, I am only looking for one investment idea a quarter. Most days I don’t buy or sell anything. I am not trading news flow, so my investment style is conducive to investing in off hours.
For the first four years of the fund, I continued investing “on the side” one or two days a week with a near full-time, other job. I honestly think having other non-investing responsibilities did not hurt performance at all.
My notes: I realised that too much idle time available can be a doubled edged sword in investing. A couple of years ago, when I had a fair bit of time on my hand away from my day job, returns in my personal portfolio started going downhill.
With idle time, I turned over more stones and seek out new, undervalued opportunities. On the other hand, it affected my mind, in that I became increasingly worried about my positions and returns. I felt that I needed to safeguard those returns achieved by turning over the portfolio to lock in gains. I also fell prey to the sunk-cost fallacy. Having done research on a number of different opportunities, I felt cornered to put capital to work even though the ideas were not the most compelling ones and checked the stock prices of my portfolio a lot more often than I should. This fed into the loop of being nervous about returns.
That period was one of the formative periods in my investing journey. I am glad that over time, those demons have been suppressed. Through that episode, I learnt that having too much idle time on hand can be very damaging for one’s portfolio if the mind has not been properly disciplined.
Fund structure and choosing aligned investors
Greenhaven Road is modeled after the early Buffett partnerships. I don’t take a management fee. I do earn an incentive fee of 25% on returns above 6% with a high water mark. I like to say that I make money with my investors, not off of them. In a year where I am up less than 6%, not only do I not make money off of my investors, in fact, I incur some costs. I only get compensated if I provide returns to investors.
In August when the world was blowing up, many funds were holding hands of their LP’s convincing them that everything would be alright. My situation was far more positive. The only email I got from an investor was asking if he could nearly triple his investment in the fund. I was able to look for opportunities, not worry about redemptions. So from a structural perspective – small size, terms that are aligned with a long investment horizon, and a like-minded investor base are a great foundation.
My notes: It looks like other than Monish Prabai, Scott Miller is one of those other few managers who has tapped on the original Buffet partnerships to structure their funds. If I do ever set up a fund, it will likely be of a similar structure.
My opinion is that the typical 2/20 structure of funds will end up incentivising most managers to become asset gathers instead of being motivated to generate real after-fees alpha for investors. Even for those well-meaning managers who do have the initial aim of doing good for their investors, I suspect that those structural chains of incentives to move towards asset gathering will eventually be too hard for the managers to break. It is thus important to set up the structure to be aligned right from the start.
In times of market stress, the opportunities are probably the greatest, while existing positions if bought at reasonable valuations should continue to do well over the long-term if there aren’t any permanent impairment to the business. It is precisely during this time that capital should not be pulled out. Having came across a number of horror stories of investors who do not have the right temperament pull out of funds at the worst possible time when a manager should be investing heavily, Scott Miller’s words of being selective of clients and having like-minded clients is an important reminder of what to do and what not to do.
On idea generation
Like most investment managers, I spend a lot of time reading. In particular, I love fund managers’ investor letters. If there is ever a time for a fund manager to put a good foot forward and present their best ideas, it is in their fund letters. Some of my favorites are Jake Rosser at Coho Capital and Eric Gomberg at Dane Capital [interview coming soon]. Voss Capital, Arlington Value, are great as well. The Value Walk daily email is also a very helpful source of letters. I scan it every day. Another place I go every day is Value Investor Club. The discussion and quality is the best I have seen on the internet.
My notes: Other than Arlington Value, I have not heard of the rest of the other funds. Will definitely be checking them out. A few months ago, I set up a bi-weekly calendar reminder on my phone to visit Value Investor Club to read through the high quality investment ideas for 2 reasons. The first is in hope of finding interesting actionable opportunities. The second is to improve my craft by reading and understanding the thought processes of analysis done by investors who are way better than I am.
Evaluating opportunities and being selective
I have a couple of checklists that I run through that date back to my private equity experience. In particular looking closely at the product, market, team, and execution risk – really just getting comfortable with how good a business it is.
This process of making a decision can take a day or a month, but I have a very good sense if a company is a very likely or very unlikely investment in under 30 minutes. Given I only make a few investments a year, I end up with a huge, “too hard” pile – which is for opportunities that could be good – but I just cannot get there.
My notes: A good reminder to walk away from non-compelling opportunities. If the opportunity does not jump off the page, is way outside of my circle of competence and/or has elements that makes me very uncomfortable, such as excessive debt load and/or governance issues, I should dump them into the ‘too hard’ pile. The pain of errors of commission will be greater than errors of ommission.