We have learned so much from Daniel Gladis over the years, and yet there’s always something new to pick up from his investor letters and interviews. We are pleased to share below a recent exchange with Daniel about his path as an investor and key aspects of his investment philosophy.
Based in the Czech Republic, Daniel has amassed a market-beating track record since starting VLTAVA Fund in 2004. The value-oriented, research-driven investment fund focuses on good companies run by quality management teams. Previously, Daniel was director and chairman of the board of directors of ABN AMRO Asset Management (Czech) from 1999-2004.
Q: Tell us how you first discovered equity investing. Do you remember your first investment and how it turned out?
A: I discovered equities investing in 1992 thanks to the Coupon Privatization. As someone who had grown up under the communist regime, I found the idea simply amazing that through shares I could own stakes in various companies which create value through their businesses. I fell for it right away. I acquired my first shares in 1993, when companies from the first wave of the Coupon Privatization were introduced to the Prague Stock Exchange.
It sounds almost unbelievable today, but back then, in the mid-1990s, we had around 1,500 Czech listed stocks, of which maybe 100 were traded very actively. I really felt like I was in my element.
Concerning my first specific investment, I vaguely recall it was the Radegast brewery and the chocolate producer Čokoládovny. Of course, these were stocks that were part of the first wave of the Coupon Privatization. Those who participated in what was happening back then may remember that at the turn of 1993 and 1994 we saw explosive growth in the prices of Czech stocks. Whatever a person could get one’s hands on soared upwards. Growth of 15–20% per week, week after week, was no exception. In hindsight, I can see we had more luck than understanding. I made my first foreign investment some time in 1994.
Q: When did you first discover value investing? And what was your investment approach before that?
A: It was a long and winding road that led to value investing. In 1993, we established the stock brokerage Atlantik finanční trhy. We were focusing on institutional investors, and very quickly we became the Czech Republic’s largest brokerage firm in this segment.
My responsibility was to take care of foreign clients. Most of them were from the UK and the US. Back then, the Czech equity market was the only larger such market in Eastern Europe, and for a time we were the foreign investors’ favourite. Thanks to this, doors were open to us everywhere.
I made more than 200 visits to our foreign clients and had the unique opportunity to listen to them tell about how they invest. Among my clients there were even such legends as Seth Klarman and Jeremy Grantham. I quickly realized that I wanted to be on the other side of the phone – not to be the broker who makes trades for investors but the one who makes the decisions on investments.
My own investment approach at that time could have been described as amateur even though I didn’t realize that myself. The breakthrough came when I got my hands on Graham’s book The Intelligent Investor. It hit me like a bolt of lightning, and to this day I precisely remember where I read it. That was more than 20 years ago. There and then, I became a proponent and life-long student of value investing.
Q: Can you briefly describe your current investment approach?
A: The whole of my investing is based on two basic ideas. The first one is this: If an investor wants to have high returns over the long term, his or her portfolio must be dominated by stocks. History clearly shows that stocks bring the highest long-term return. Their predominance over the other classes of assets is completely overwhelming. In terms of relative returns, the future will probably look the same.
In addition, stocks bear lower long-term risk than do bonds and cash. This idea is surprising to a lot of people, because they are conditioned to an incorrect definition of risk and to thinking just the opposite. Stocks are also highly liquid, there is literally an inexhaustibly wide range on offer, and they are tax-advantageous for individuals.
The second idea concerns the selection of specific stocks. In my opinion, there is only one rational and reliable method of investing (regardless of the class of assets), and that is to pay a price that is lower than the value we get in return. Our selection of stocks focuses on seeking opportunities where the share price is substantially lower than is the stock’s value. There are relatively many such opportunities on the market because most investors are not willing to expend the effort to seek them out and moreover they have investment horizons that are too short.
History also shows that if there is anything in the stock markets that one can rely on it is the fact that, over the long term, a stock’s price follows the development of its value.
Q: How has your investment philosophy developed over time? Did you, like Warren Buffett, go through a conversion from a deep value investor who buys deeply undervalued companies of average to below-average quality to one focused on high-quality companies at reasonable prices?
A: There were more phases of development in my case. In the very beginnings – and that means during the first half of the 1990s – I knew barely anything about investing. My choice of stocks was, from today’s point of view, entirely amateurish. The interesting thing is that in those years I was achieving my greatest returns by far. Since that time, I haven’t even come close. Today I know that it had been largely a matter of luck. This period was very important, though, because I started to quickly gather experience and, due to my work as a broker, I began to know how markets work and also how large institutional investors think.
I remember the start of the second period exactly to the day, and it relates to when I read The Intelligent Investor. For the next few years, let’s say until 2004, I was almost orthodox in applying Graham’s approach. It was based on quantitative screening of stocks and a broader portfolio. It yielded good results, but, with markets becoming more expensive, the possibility for using this approach was gradually shrinking. There simply was nothing left to buy, and I had to adjust to that.
This was followed by a third period when my picking of stocks was supported by very sophisticated and intricate models involving enormous amounts of work. I believed this would be the right path which would bring the greatest added value. After several years, we evaluated this approach and concluded that, even though the results are good on average, their reliability is low in the individual cases. Some investments worked out great, while others were disappointing.
The lesson we learned from this is that trying to be too sophisticated is not beneficial. Once an investor starts to drown himself or herself in complicated models, he or she loses detachment and objectivity. If it’s necessary to craft a sophisticated model to demonstrate that a stock is cheap, it usually isn’t cheap. The cheapness of a stock must hit one right between the eyes at first view without requiring complex calculations. This was the conclusion we reached during this phase, some 9 years ago. Since then, we’ve been trying to simplify our investment ideas as much as possible, and so far this has been working out very well.
In a letter to shareholders at the end of 2017 I wrote this:
“Over those long nine years, we bought shares in 71 different titles. The portfolio’s turnover was higher during 2009–2011 because it was necessary to respond quickly to rapidly changing equity prices. In the following years, the turnover gradually came down. Out of the 71 stocks acquired, we have already sold 49 and are currently holding 22. Of the 49 stocks sold, we realised gains from 44 stocks and lost money on 5 stocks. Of the 22 stocks we are still holding, we are in positive-returns territory in 20 cases and in negative returns in 2 cases. Our history to date thus shows that we are making money on approximately 9 stocks out of every 10 we buy. We presume this will be similar also in future.”
So far, it seems that simplicity beats complexity. We have a minimum of losing investments and the spread of returns between the best and worst investments is relatively small.
When I look back to the individual phases of my development as an investor, I can see a certain logical progression. I think it can objectively be said that each phase has been a step forward. It is very probable that in a few years I will look back at the current phase very critically, and I believe I will manage progressively to move on and on. What I like about investing is that a person can constantly improve regardless of how much experience one has and in which phase one is presently. I try to learn something new every day and add piece by little piece to my cache of knowledge.
Q: Can you describe for us in a little more detail the sequence of the individual steps within your investment process?
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We thank Petr Cermak and his value investing site for the permission to share the English version of the interview originally published in Czech.