Wednesday, June 03, 2015

Mark Massey and wide moat investing

The Manual of Ideas interview with Mark Massey of AltaRock Fund:

The Manual of Ideas: How did you get interested in investing?

Mark Massey: Like any son, I was greatly influenced by my Dad. Fortunately for me, one of his real passions in life was investing. He always talked about his stocks around the dinner table and as time went by his enthusiasm stoked a curiosity in me to learn more. During high school and college, I got non-paying “jobs” at the local Merrill Lynch office which gave me some important insights into the ecosystem of Wall Street. By the time I graduated from college in 1986, I had decided that I wanted to be on the “buy side of the street.” Thankfully, with a bit of patience and perseverance, I was able to land a dream job as an equity analyst with Fidelity Investments in Boston.

MOI: Why wide-moat investing as opposed to other value approaches?

Massey: We think it’s a very safe way to generate superior returns over the long term. “Wide-moat investing” is just another way of saying that we try to buy, at a rational price, great businesses whose earnings are almost certain to be much higher in ten and twenty years. Great businesses, by definition, stand the test of time and as a consequence they are always compounding in value — like a savings account, but with a much better yield.

To me, deep value “investing” means buying a less than great business or a pile of assets trapped inside of a corporation at a (hopefully) big discount to some estimate of intrinsic worth. My problem with this approach is that no matter how cheaply you buy, time is working against you. In other words, your risk/return equation is highly dependent upon how quickly you can turn around and sell at a profit. With poor companies and cheap assets, the values can melt away while you are waiting for the market to see things your way. Buffett said it well, “Time is the friend of the wonderful business and the enemy of the mediocre.”

MOI: How do you generate wide-moat investment ideas?

Massey: It’s all qualitative stuff. We really don’t do screens. In fact, the only screen that I find useful is one that spits out companies that have been buying back a high percentage of shares. This MAY be indicative of a well-aligned management team that has great conviction in the durability of its competitive moat… but it could be the opposite, too… so you always have to do a lot of work to get to the truth.

I really think the key to our success has to do with our love for the game. We absolutely love coming to work every day. I literally spend almost all of my time reading. And while it, no doubt, makes me a bit of an oddball, my greatest pleasure is to be constantly searching for wonderful businesses that, for whatever reason, are mispriced. Having done this for nearly thirty years, I have built up a lot of knowledge and understanding about many different businesses, moats and business models. The result is a long list of companies that we would like to own at the right price. And we know from experience that if we continue to be patient and disciplined, a few mouth-watering opportunities will eventually come our way.

MOI: You refer to your portfolio as a “Conglomerate.” Please elaborate.

Massey: I realize it sounds kind of funny, but we really do refer to our portfolio in-house and in our letters to partners as “The AltaRock Conglomerate.” The reason we do this is to reinforce what we believe is the correct way of thinking about stocks, which after all are ownership positions in real operating businesses. I think many investors can lose sight of this when all they ever see are ticker symbols and flashing prices on a computer screen. To counter this tendency, we think of, and speak of, each business in our portfolio as a subsidiary that we own outright. And we try to acquire each one at a price that reduces our risk of loss to zero, while also guaranteeing that our rewards from long-term ownership will be bountiful. If we truly ran a conglomerate, we would always be exceedingly careful that we understood exactly what we were buying before making any acquisition. And we would never sell or trade one of our subsidiaries unless we were absolutely convinced that we were getting significantly more than we were giving up.

MOI: Your portfolio is one of the most concentrated we have come across. Do you target a specific number of “subsidiaries?” Could you also tell us how you came to embrace such a focused investment philosophy?

Massey: There is no target, but most of the time we end up owning between five and ten businesses (stocks) at any one time, and we really try to buy for keeps. Right now we own seven “subsidiaries” and I’d say that’s pretty typical.

As for AltaRock’s investment philosophy, I am afraid I can’t take much credit. We really just copied it from Warren (Buffett) and Charlie (Munger). And I think they borrowed it from Phil Fisher and Lord (John Maynard) Keynes. Buffett likes to joke that the wisdom of concentrating in one’s best ideas has been around since 600BC when Aesop uttered, the now famous words, “A bird in hand is worth two in the bush.”

While I had always been drawn to concentrated, wide-moat investing, there was an important crystallization moment for me. Back in January 2002 my wife and I decided to squeeze in a quick vacation before the coming birth of our second child and the April launch of AltaRock. So there I was, sitting on the beach in Jamaica with my wonderful wife and our beautiful three-year-old daughter… and I start reading this book, The Warren Buffett Way, by Robert Hagstrom…and I am literally dumbstruck. Buffett’s words really spoke to my investment soul. I was so excited by what I read… and I wanted more. So when we returned from vacation, I literally spent the next two months reading everything I could get my hands on about Buffett and Munger… every book, every Berkshire Hathaway Annual Report, every yearend Buffett Partnership letter, every speech, etc.

MOI: Taking John Malone as a proxy for great capital allocators/investors…do you think great investors are born or can you become one with hard work? What key attributes are necessary for success?

Massey: I think you can learn a lot of it, but you probably won’t unless it really appeals to you. I think Charlie Munger said that he has never met anyone wise in any field that did not read all the time, and that is certainly true of great investors. They read and read and read, and of course nobody could sustain that kind of reading about anything unless they found it incredibly fascinating. So I think you need to be someone who finds businesses extremely interesting. And you have to have an innate curiosity about everything, wanting to know the truth about how things really work. So I think there needs to be a little scientist inside of you. I think you also need to have a personality that tends toward rationality, particularly in situations where most people’s decision-making becomes polluted by emotion – like when all hell is breaking loose and the market is going down fast, every day.

You also need to really know yourself, meaning that you need to be aware of, and completely okay with, your own limitations. Otherwise you are likely to start doing things outside of your circle of competence. If you are someone who tends to fool yourself into believing that you know more than you really do, you are going to run into trouble in the investment realm.

Also, believe it or not, feeling comfortable doing nothing for a long time is important. This requires a lot of self-conviction, as there are lots of psychological forces, both external and internal, conspiring you toward action when, in fact, much of the time sitting tight is the most sensible thing to do.

I am also reminded of comments by Seth Klarman and George Soros. Seth once said that you need to have a certain arrogance to be an investor, which is true. If you think about it, every time you buy or sell, there is somebody on the other side of the transaction that thinks he’s right. So you have to be somewhat arrogant to think you know more than that other guy all the time. But then George Soros…when an interviewer referred to him as a security analyst, he laughed and said that he felt more like an insecurity analyst. He went on to explain that whenever he bought a new position he was always terrified that he was going to be proven wrong. So before buying anything, he did an incredible amount of work, and after investing he was always checking his facts, and he kept on trying to learn as much as possible about whatever it was – all because of his fear of being exposed as a fool. And so, counter-intuitively, I think both of these concepts are right. You need to be arrogant and insecure at the same time.

MOI: What do you think is the biggest mistake that investors make?

Massey: Several things come to mind as I think about it… making emotional decisions… short-term thinking instead of long… a lack of thoroughness in due diligence… These are all issues, but I think the best answer to the question is a little more subtle… and it’s that most investors fail to properly weigh and adequately take into account that they are players in a pari-mutuel betting game.

So you probably know what I mean by that, but let me elaborate. So most people know how horse betting works, right? So before the race begins, all the bets are tallied up, and based upon all the bets, the odds are calculated… and so what ends up happening is that the top horses – the ones with the best pedigrees, the best jockeys, and the best track records – end up paying out very little profit when they win, which is most of the time. And while the payoff can be great when the worst horses win, the fact is, they rarely do.

Investing is very much the same. Great businesses – the ones that have demonstrated competitive advantages and which have enjoyed long records of success – are almost always priced very expensively, while poor businesses are almost always correctly cheap. Consequently, it is hard to do better than average betting on either. The secret to winning in horses and in securities is the same. You need to study like mad and be really patient. Every now and then you will come across a really great business (or horse) that for one reason or another is mispriced, sometimes severely so, and this is when you invest (make a bet). The rest of the time you just keep working hard and waiting. You only bet when you are convinced that you have a near cinch.

MOI: Are there any books or other investment resources that have helped you become a better wide-moat investor?

Massey: For someone starting out I would submerge myself in as much Munger and Buffett as possible and I would certainly subscribe to The Manual of Ideas. Here are some books, etc. that I have found quite interesting and useful:

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