Value Makeover

http://blogs.wsj.com/moneybeat/2014/05/23/giving-yourself-an-investing-makeover/

This is a wonderful piece. Most of the value lessons are free, but the hard part to walk the walk.

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If you set out deliberately and systematically to remake yourself into a great investor, how would you go about it?

That is what the money manager Guy Spier has spent much of the past 17 years trying to figure out. He believes that most investors pay attention to the wrong things and allow their minds to get hijacked by bad ideas.

So Mr. Spier has set about purifying the environment in which he makes investing decisions — changing his work space, altering the information he uses and, above all, continually trying to counteract his own irrationality. What he calls his “journey” is a transformation any individual investor should be able to emulate — perhaps even better, he says.

That journey accelerated in 2008, after Mr. Spier and his friend, fund manager Mohnish Pabrai, donated $650,100 to a charity and won a private lunch with Warren Buffett. After listening to Mr. Buffett, Mr. Spier says, he realized “I’ve got to hit the reset button and make drastic changes.”

Mr. Spier, 48 years old, is worth listening to. A graduate of Oxford University and Harvard Business School, he runs the Aquamarine Fund, a $180 million partnership specializing in cheap “value” stocks. Since its launch in September 1997, the fund has beaten the S&P 500 by an average of 4.9 percentage points annually, net of fees.

In a book to be published in September by Palgrave Macmillan, “The Education of a Value Investor,” Mr. Spier describes his struggle to improve his decision-making hygiene. (A disclosure: A friend and former editor of mine, William Green, collaborated on the book.)

Seldom has a successful money manager so painfully flagellated himself in public. In the book, Mr. Spier calls himself “blind,” “dumb,” “spectacularly foolish,” “misguided,” “stumbling,” “wrong,” “vulnerable” and, over and over again, “irrational.”

“I’m not living a real life if I’m not naming this stuff,” Mr. Spier told me this past week. “I hope that will help make me a better person, but I’m certain it makes me a better investor.” (He has beaten the S&P 500 by 5.5 points annually since 2008, although there is no way to know how much his reinvention has affected his returns.)

“We think we control our environment, but in fact it’s our environment that controls us,” Mr. Spier told me. “We can’t change the world. The only thing we can change is ourselves, by trying to get a better understanding of our own messed-up wiring.”

For 18 months, Mr. Spier listened to nothing in his car but a lecture on human misjudgment by Charles Munger, Mr. Buffett’s vice chairman at Berkshire Hathaway. Of the two dozen mental mistakes cited by Mr. Munger, “I realized I was guilty of all of them,” Mr. Spier says.

No wonder he has sought, as he says in his book, “to banish the false assumption that I am truly capable of rational thought.” Once he accepted “just how flawed my brain really is,” he writes, “I could design an array of practical work-arounds based on my awareness of the minefield within my mind.”

To escape what he calls “the New York vortex” of bad influences such as envy, greed and hyperactive trading, Mr. Spier moved his fund to Zurich in 2008.

Worried that knowing the prices of his holdings would make him want to trade them, he checks their market values once a week at most and leaves his firm’s only data terminal switched off for weeks at a time. Mr. Spier avoids speaking to brokers; he puts in his trading orders by email, after market hours, so no broker can try swaying his judgment.

Nor does Mr. Spier publicly discuss the holdings in his portfolio—even in his letters to his own investors, where he writes instead about the lessons he has learned from the positions he has sold. He is afraid that talking about a stock will make it harder for him to be objective about it.

Mr. Spier has divided his office into two spaces—a “busy room,” with his phone and computer, and the “library,” a quiet area down the hall where no one, including Mr. Spier, enters with an electronic device. He likes to spend much of the day there, reading and thinking.

When researching a company, Mr. Spier has a strict routine. First he reads its official financial filings—annual and quarterly reports, proxy statements and so on. Next he reads news releases and conference-call transcripts. Only then will he allow himself a peek at online commentary, news coverage or Wall Street research. That way, his first impressions come from primary sources.

Individual investors are constantly being exhorted to try beating Wall Street at its own game of trading like crazy to chase whatever is hot. But why should you bother trying to play a game that even most professional players can’t win?

Instead, take a page from Mr. Spier’s book and play by your own rules. The faster Wall Street runs, the more you should slow down and step back from that madness. Buy and hold an index fund forever, or study a few stocks with all the peace of mind you can muster.

That way, you exploit the true advantages of individual investors that most professionals would kill to have: patience, independence and the ability to ignore the braying of the crowd.