This presentation features a 2017 presentation by Guy Spier, a Zurich-based investor and the author of The Education of a Value Investor, to members of CFA Society Switzerland.
Content from this session includes a summary, video of the presentation, and key takeaways.
Building a Career in Investing the Right Way
By Lauren Foster
Guy Spier, a Zurich-based investor and author of The Education of a Value Investor is,by all accounts, a successful money manager. In 1997, he founded Aquamarine Capital, an investment manager styled after the original 1950s Warren Buffett partnerships, and in ensuing two decades has delivered solid returns for his investors. But it was a private lunch in 2008 that made him realize he needed to “hit the reset button and make drastic changes.”
That year he and his friend, fund manager Mohnish Pabrai, had lunch with the Sage of Omaha after submitting the winning bid ($650,100) for Buffett’s annual Glide charity auction.
It was fitting, then, that Spier began his presentation with the story of Buffett’s legendary bet in 2007 with fund-of-hedge funds firm Protégé Partners. Buffett is a vocal critic of hedge funds' hefty fees and their promise of outperformance and wagered$1 million that an index fund would outperform a collection of hedge funds over the span of a decade.
Fast forward to December 2017.
“Warren Buffett won that bet,” Spier said. “Over and above that, we know that the majority of professional investors do not outperform the indices...It will be possible to prove that we did not add value in the financial services industry in that the cost of our fees, the cost of our living, actually took away from what the investors could have gotten by simply investing in an index. That's a really scary thought or should be a scary thought.”
“Denial,” he reminded the audience, “is an extremely powerful psychological phenomenon. The vast majority of us in the industry live in the world of denial.”
But, he quickly added: “I don't want to live my life in denial.” So how does one change that mindset?
Spier said that, for him, it started with a talk he heard at his Harvard Business School 5th reunion. He couldn’t recall the name of the speaker, but the powerful message still resonated all these years later.
“He said, ‘I'm certain that all of you will make significant amounts of money. You're graduates of Harvard Business School. That's great, but what all of you will fail to do is that you will neglect these other aspects of your balance sheets.’ He kind of said ‘stop thinking of your life just as a financial balance sheet and income statement and start thinking about the non‑tangible aspects of your balance sheet and income statement’.”
Spier calls this “the social balance sheet.”
“If you do an MBA, if you study accounting, if you study [to become a] financial analyst, we all become really, really good at studying the financial aspects of things and we all become really, really bad, really bad at doing the other things,” he said.
This neglect of the social balance sheet is compounded by the industry’s negative image – and perhaps contributes to the image.
“We all underestimate the degree to which we are hated by society, I mean really hated,” said Spier.
As he explained: “I know that not one of us here thinks that we caused the financial crisis. I know that every single one of us here makes a distinction between rapacious investment bankers and quiet buyside people. That's not what the world thinks. As far as the world thinks, we are all one and we are responsible. We're the people who know how to take exams, we’re the people who tended to get good grades, we’re the people who tended to get selected for the better streams at schools, at universities. Then we come back and we sit in these jobs...it's proven that the vast majority do not add value to society.”
He stressed that it is important to do something that changes society in a positive way.
"I don't know if I'll end up having added value to my investors,” he said. “But I'm determined in my own small way to add value to people in my life."
And to do so, one has to invest in the “non‑financial side of the balance sheet.”
For example, his friend Mohnish (who joined him for the lunch with Buffett) founded the Dakshana Foundation to help bright and impoverished students mainly from rural India prepare for the of Indian Institutes of Technology (IIT) and medical entrance exam. (According to one account, Buffett recalls Microsoft founder Bill Gates once telling him he would just hire people from IIT if he were to choose one university.)
How is this relevant to investors? The work Pabrai is doing through the foundation is “creating goodwill on an industrial scale,” Spier said. And this goodwill comes back around.
“Think of the guy who was lifted out of poverty who now works as an engineer at Google,” Spier said. “What Mohnish Pabrai or what Dakshana has done for that guy is similarly priceless. There's nothing that that guy can do that can even start to reciprocate the gratitude that that guy feels. It changed his life.”
He gave another example of how a seemingly small gesture can pay big dividends when it comes to building social capital: He sends a copy of his fund’s annual report to Buffett and one day, he received a short letter back from Buffett complimenting him on the report.
“I looked at this letter and fell to the floor. My heart was palpitating. I couldn't get up for half an hour. I was just blown away. I couldn't believe it,” Spier said. “When you think of what Warren Buffett did for me, and now you expand that out to 50 or 60 people PR, you start seeing how that can compound to something quite extraordinary.”
For Spier, building social capital is deeply personal. “Investing in my social capital…may end up being the only competitive advantage that I have when it comes to generating better investment returns,” he said. “The good news is, even if I failed to generate market beating returns, and I have to shut myself out of the industry and leave, at least I'll have a bunch of people who are grateful that I've existed in the world.”
He concluded the presentation with a call to those in the industry to do better for society, which was fitting for an audience of charterholders as the CFA Institute mission is to promote “the highest standards of ethics, education, and professional excellence for the ultimate benefit of society.”
“I think that if we do that collectively as an industry, maybe we can rehabilitate the industry a little bit in the minds of the general public,” Spier said. “I think that we need to do a much better job of delivering value to the people around us, and perhaps also in the Dakshana mode, delivering value to society.”
1. Most professional investors do not outperform the indices and denial is a very powerful psychological phenomenon.
2. Spier believes it is “profoundly important” to invest in the non-financial side of one’s balance sheet, what he calls “the social balance sheet”, and that doing so builds social capital.
3. Investing in – and building --- social capital may be the only competitive advantage an investor has when it comes to generating better investment returns.