The Editor of this blog when he lived with cannibals in Irian Jaya (West Papua New Guinea).
Radio Interview here, InterviewWithJohnChew with http://classicvalueinvestors.com/i/2013/05/interview-with-john-chew-from-csinvesting-org/
How I became a value investor and my background:
In my peripatetic life I have been a ruby smuggler, commodity trader, securities analyst, investment banker, and entrepreneur. Each role taught me more about value investing.
As a ruby smuggler, I moved product to where demand was greatest. I operated in the world of supply and demand which translates into reversion to the mean for an investor. For example, I would buy rubies for x and sell them for 2x. The market naturally brings in capital until the opportunity vanishes. I learned not to mindlessly extrapolate current results into the future.
Commodity trading taught me that the role of the marginal buyer and seller sets the price: “Mr. Market” at work. When bond traders at the CBOT wade into the soybean pit because that is where the “action” is (high prices and volume), then I saw the most anxious buyer set the highest prices. Prices often diverge widely from value because people just can’t help themselves; they go crazy sometimes.
Later, I found myself at an obscure securities firm writing reports and raising money for companies. Brokers were desperate to sell stories to gullible investors. Action and excitement ruled and incessant activity was the lifeblood of the firm, but where were the customers’ yachts?
I was a pimp with tasseled-loafers when I sold the firm’s over-hyped merchandise to institutional investors who rarely did their own work. In my reports I predicted next quarters’ earnings. A fool’s game. Even if by some miracle my guess was close to actual results, it didn’t matter if the expectations were even higher. Ah, the danger of momentum investing.
If I ran naked onto Cramer’s Mad Money show while waving a shrunken head, ripped the mike from his clenched fist and predicted the direction of the market, my predictions would be just as prescient as his. Predictions are the sound and fury of Wall Street predicting nothing. Experience taught me to focus on business value.
There had to be a better way. I had been reading about this guy in Omaha, but the lessons didn’t really sink in until I left Wall Street in disgust to start several businesses. As a businessman I had to worry about hiring, firing, generating sales and strategy. Buffett’s focus on business, competitive analysis and management started to resonate: the right people are everything, operational efficiency is a constant task, capital allocation is tied into strategy and management incentives matter a lot. Businesses usually don’t fit neatly into spread sheets or our assumptions. Becoming a rational businessman is quite different than gazing at flashing stock prices.
Rationality and knowledge will eventually triumph over fear, euphoria and emotionalism. Try going into your local store and offering the owner half the cash in his till, then tell him to get out because you own the business now. Crazy? Mr. Market offered some Internet companies at half their cash value in 2002/2003. That is what I call a margin of safety!
Once a value investor, you never go back.
I hope to share my reference library of readings, videos, case studies and lectures to help other self-directed, avid investing students. To have access to the Value Vault which has over 40 video lectures–including books and other materials just type in VALUE VAULT in the search box in the upper right hand corner of this blog, then follow links to the Cloud Folders. Please use the materials for your own use.
Becoming a successful, knowledgeable investor is a long arduous journey, but worth the effort. As a former private pilot, the training is applicable to learning how to invest. First, you must understand the theory of flight, weather and navigation, then you practice in a controlled environment–either in a trainer or in good weather with an instructor–before you fly solo.
As a beginner, you will need to understand accounting, corporate finance and business strategy. Then you must practice the application of theory in a controlled environment–think case studies which this blog will introduce. Finally, you must apply your principles, knowledge and personal characteristics to the opportunities in front of you. Be the best you can be not a follower or mimic. Finally, be a skeptic and prove everything for yourself.
Travel safely and enjoy your trip,