Value Investing: The Stem Christie of Investing
Last winter we went to the Dolomites in Italy to ski. It was a wonderful vacation. My kids are learning to ski and enrolled in ski school. They learned a beginner skiing technique called “Pizza Pies & French Fries.” It is the same technique I learned when I took lessons <cough, cough, mumble, mumble>… years ago. Except back then, we called it the “Stem Christie.” You make a little wedge with your skis (the pizza), and then as you move through the turn, you move your inside ski parallel to your turning ski (the french fries), and voila, you have successfully turned! It is a three-step process for executing a simple turn. And it is foundational in learning more advanced skiing techniques.
I feel, for me, Value Investing was the Stem Christie of investing. It was a method of fundamental analysis I could follow step by step to reach an investing conclusion that I was comfortable with. The way I practiced it was fairly systematized. Once a promising investment was found:
Analyze the financials to determine basic business soundness and understanding.
Determine the company’s intrinsic value using one of several (flawed) models.
If there was a significant margin of safety in the current price, purchase. If not, wait for a potential opportunity when the price decreases.
As I first practiced it, this framework allowed me to move through analyzing a large number of businesses. But over time, I began to add to the systematic method and bring more nuance into my investment analysis. I don’t think I am alone in this regard. I have seen many contemporaries I know, or follow their writings who have gone through a similar evolution. What started as fairly mechanistic turned into something more organic with many more qualitative considerations than I wouild have imagined. Here is a non-exhaustive list of some of the things I enjoy thinking about when considering the investment merits of a given company:
The overall industry that they operate in. Where does the company sit in the value chain? What are overlaps with other industries and sectors?
The quality of the product. How good is the product? How do the customers that use it feel about it? How replaceable is it?
The quality of the business. Does the cash produced flow evenly, intermittently, or not at all? Does it require lots of capital to run? Is the business changing and adapting? How?
What is the management like? Would I enjoy dinner with them? What would I think if one of them married a friend?
What is it like for employees to work there? Is it a higher calling? Are they fanatics? Do they have a work-life balance (if there is such a thing)? Do they care?
As you can see, the considerations no longer fit a simple three-step process. By the way, I don’t say this to belittle quantitative investing systems. I suspect that I would have made better returns over time if I stuck to the simpler quantitative analysis that I started with. In my defense, broadening my investment criteria and considerations introduced many more areas where I made mistakes. And when you make mistakes investing, it usually costs you money. Or it did in my case.
I enjoy taking a broader view now when I invest. It opened up more areas of research and led to companies that I would not have considered on a purely quantitative basis. And to a degree, it is more fun. Robert Hagstrom wrote a book called Investing: The Last Liberal Art. I think his basic premise is very sound. Thinking broadly and holistically about the world can lead to a more enjoyable, and hopefully profitable, investing experience.