An interview with Whitney Tilson
By Guy Tartakovsky '15
Last week, Booth’s Warren Buffett Group members drove/flew/took the Megabus to the Berkshire Hathaway annual shareholder meeting in Omaha (no, we didn’t meet Buffett in person. This time). One famous attendee in Berkshire’s annual meetings for decades now is the value investor, hedge fund manager, and co-author of a great book: “The Art of Value Investing”, Whitney Tilson. He shared some insights with us in an interview.
Guy Tartakovsky [GT]: What is your day like?
Whitney Tilson [WT]: Having less than one scheduled meeting a day, I focus on reading, and swapping a lot of investment ideas with other smart people who I have built relationships with over the years.
[GT]: What do you read?
[WT]: New York Times and WSJ for the news; Value Investors Club and 2 newsletters for idea generation (The High Tech Strategist and Value Investor Insight).
[GT]: How has your investment strategy evolved over the years?
[WT]: Seems that every young guy has to learn for himself that very cheap crappy businesses are not good investments (Buffett is another example of moving from cigar butts to quality as his style evolved away from the traditional Benjamin Graham value investing to what would be considered by many academics as growth investing - GT). I became much more focused on the quality of the business than on the valuation. Soda Stream and Magic Jack are examples of bad businesses bought at cheap valuations, which consistently became cheaper and cheaper, losing me a lot of money.
[GT]: How do you define a great business?
[WT]: A great business is one that has low capital intensity, that can expand around the world without having lots of factories or inventories, and that has sustainable high margins. Sustainability is the crucial point here. The single best business in the world today is Facebook.
[GT]: (Did I just hear Facebook by the author of “The Art of Value Investing”?)
[WT]: Yes. Facebook, with its huge network effects, can grow to serve every human being on the planet, and it costs them almost nothing. Within 10 years they will be everywhere. The rise of the internet allowed the creation of these business models that are astonishingly profitable and need to reinvest very little. Other examples include Google, LinkedIn, eBay, Uber and AirBnb. These are winner-takes-all types of businesses. Another example is Coca-Cola: it has taken them over 100 years to build a global reach, and it cost them hundreds of billions to do so, something that is very hard to replicate.
[GT]: How do you make sure to not overpay for a great business?
[WT]: Valuation discipline is crucial. Usually, it’s much more than numbers, so a spreadsheet wouldn’t give you the answer. I tend to use general rules of thumb – would buy FB for 20x 2015 P/E (normalized earnings). Maybe pay only 15x for Coke. It is also important to think about the earnings power of the company. If the business under-earns dramatically today, I normalize earnings and think of a fair multiple to apply to the normalized earnings. In general, corporate profit margins today of US businesses are at all-time high, so we need to worry about mean reversion going forward.
[GT]: How do you analyze managements as a young analyst without the relationships needed to get you into one-on-one dinners with CEOs?
[WT]: It is very easy to get fooled by CEOs. They are usually very charismatic and always believe that their stock is cheap. I usually don’t meet managements. What I do instead is analyze their track record, gauge how well she/he understands the industry and decide whether I believe the manager about the business prospects.
[GT]: What investment metrics are deemed important by the market with which you disagree?
[WT]: Wall Street rewards companies for persistent earnings growth. I always take it as a negative signal when a company magically consistently beats analyst estimates by a penny or so. You also almost never see any focus about what really matters - the cash flow statement. How much cash the business generates and what does it do with it?
[GT]: How do you analyze cyclicals?
[WT]: I mostly don’t invest in highly cyclical businesses unless they are in a transition to becoming much less cyclical. One example is the airlines due to the massive consolidation, which resemble the railroads consolidation to oligopoly, leading to a 10x rise in railroad stocks in the last decade.
[GT]: What tips do you have for MBAs looking to get into Investment Management?
[WT]: I see this as a similar process on becoming a good fighter pilot or a surgeon: It’s an apprenticeship business, so you should spend many years learning the business from someone much older. Try to become a learning machine – Go to a top business school (Check), read as much as you can, read good write-ups like the Value Investors Club. Investing is about understanding strategy, marketing, and competition. Buffett always said that he is a better investor because he is a businessman and he is a better businessman because he is an investor. You need to understand industries and companies and make predictions on where they would be in the future. How do you get yourself up that experience curve? Buffett started his learning very early at age 10. Almost 75 years later, he has spent countless hours on understanding businesses and investing. Combine that with a brilliant mind and rationality and you get the world’s greatest investor. Start young, read, visit companies, learn, see as many investment situations as you can and find a job at a place where there’s a great investor you can learn from.
Guy is a second-year Smif PM and Buffett Group co-chair who took Buffett's value investing advice a bit too far by taking the 10 hour Megabus ride to Omaha.