Guy Spier of Aquamarine Capital is a noted value investor and speaker on investment management. Guy’s willingness to share his insights with fellow value investors reminds us of Buffett’s penchant for sharing his wisdom with those eager to benefit from it.
Guy Spier is a Zurich-based investor. In June 2007 he made headlines by bidding US$650,100 with Mohnish Pabrai for a charity lunch with Warren Buffett. Since 1997 he has managed Aquamarine Fund, an investment partnership inspired by, and styled after the original 1950′s Buffett partnerships. Prior to starting Aquamarine Fund, Spier worked as an investment banker in New York, and as a management consultant in London and Paris. Mr. Spier completed his MBA at the Harvard Business School, class of 1993, and holds a First Class degree in PPE (Politics, Philosophy and Economics) from Oxford University. Upon graduating, he was co-awarded the George Webb Medley prize for the best performance in that year in Economics. Spier has been running Aquamarine Capital Management since 1995. Investors include friends and family, high net worth individuals, and private banks. The fund has market-beating returns, and has received mentions by Lipper and Nelson’s world’s best money managers.
MOI Global: Your fund has outperformed the market indices by a wide margin since inception, posting a cumulative net return of 115% from September 1997 through June 2009, compared to cumulative returns of 9% for the Dow Jones Industrial Average, 0% for the S&P 500 Index and -13% for the FT 100. Do you use short-selling or leverage in the portfolio and how concentrated is your fund typically?
Guy Spier I do not use short selling. The fund has not shorted a stock since the 2002 to 2003 time frame. At that time I did short three stocks, on which I broke even on two and made money on one of them. The experience taught me that I was not going to be using short selling going forward for a slew of reasons. The first is the straightforward logic of the matter. The trend of the market is up, not down. Shorting stocks puts you against that trend and thus makes it more difficult to make money. Other than a time period like the one we’ve gone through, short selling will tend to be a difficult strategy to make money with.
The trend of the market is up, not down. Shorting stocks puts you against that trend…
Second, the mathematics of shorting – when you short something and it goes down, it becomes a bigger and bigger part of your portfolio, thus creating increasing risk as things go against you, making it an unbalanced and unstable thing to manage. By contrast, when you go long something and it goes against you, it becomes a smaller and smaller proportion of the portfolio, thus reducing its impact on the portfolio. So there is a tendency for long positions to self-stabilize in a certain way – they have a stabilizing effect on the portfolio, whereas short positions have a destabilizing effect on the portfolio.
This results in two things. First, it means that if you are going to short, you have to make each short position a small proportion of the portfolio. Most of the people I respect who do short make their short positions no more than 1% or 2% of the portfolio, which means that in order to derive advantages from it, you need to short a lot of stocks. The other effect is that you have to be super vigilant. When you have shorts in your portfolio, you have to be watching them all the time, looking for indications of something that will cause the stock to go up on you many multiples and thus eat away much of the value in your portfolio.
That is not the way that I want to run money. What I found when I was short the three stocks was that I was doing things, and having to pay attention in ways that I don’t think my brain is wired for. As you know, and many of your readers know, much of investing is finding a way to invest successfully to play the odds which are in tune and in congruence with the way your own nervous system is wired. I think that there are some people out there who have nervous systems that are wired to do shorting very well. I take my hat off to them, but I am not one of those people.
…short selling falls into a category of trade that… has been described as picking up pennies in front of a steamroller.
I would also add that short selling falls into a category of trade that Nassim Taleb has described very well in Fooled by Randomness. It has been described as picking up pennies in front of a steamroller. There are many trades that appear to be profitable on a cash basis, meaning that one can go for years picking up the pennies, showing an income, while pretending to one’s self, or one’s risk managers, or investors that the risk of a loss on that trade is minimal to zero. The practical reality is that one can go for long periods of time on those trades and can do just fine until a big bath happens that eats away all of the previous profits that were gained. I would argue that short selling is one of those kinds of trades and the big bath is exemplified by the experience that people had in the recent Volkswagen/Porsche pair trade. The price of VW went up many, many, many times and resulted in a huge loss for the people who were in that position, potentially wiping out many years of shorting gains.
I see a lot of these kinds of opportunities, and the right thing to do is just to say “no.” I think one of the hard things about these types of trades is that they are extremely attractive. They are dressed up to look extremely sexy for the kinds of people that are thinking about investing in funds like mine. I think that often investment managers consider doing them not because they believe in the trade themselves, but because they know it will be attractive to certain types of investors who perceive the trade as being smart. I think that the best thing to do is walk away from them.
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