“Good morning, how was your run?”
“It was great, how about you?”
“It was really good to open the morning like that, I just still feel the alcohol from last night”
“Same here. Oh, I’m Ted Weschler, and you?”
“I know who you are. My name is Yaniv…”
I ended my Omaha post with a picture of Ted Weschler and me. The conversation above was how it all got started.
At the day of the Berkshire Hathaway AGM my partners in running Eden and I enrolled for the Q&A session. The way it works is that there are several microphones in designated areas and people who want to ask questions have to enroll and get a lucky number, those numbers are later called during a lucky draw that takes place near the microphone stations. While statistically speaking we had good chances to get to ask at least one question, it didn’t happen and we felt very unlucky that we couldn’t get our question asked, because our question was about one of Weschler’s investments.
Lo and behold, the very next day I find myself in a one-on-one conversation with none other than Ted Weschler–isn’t it amazing how fast things can turn?
When I drove back to the hotel I reflected on this encounter and I thought I could have done much better, but I was so excited to have had the chance to speak to him that the excitement got to my head and I didn’t ask everything that I wanted. However, I did get to ask some questions so without further ado I’ll share it with the selected few, the readers of my blog 🙂
Many value investors, at some point of their careers, get to “see the light” and move away from investing in what’s called “cigar butt investing” (bad business at a great price) to investing in companies that trade at richer valuations but have great underlying businesses (great businesses at a reasonable price). The fortunate few, manage through this transition without a negative impact on performance. I asked Ted about this transition process and how he sees the two approaches. He said that when you try to map the risks that inherent to a “cigar butt” investing you end up with a much longer list than when you carry out the same exercise with a high quality business. Of course, many investors manage to achieve great performance over time with the bad-business-at-a-great-price approach so that is not to say that there is anything wrong with this approach–these are just two different styles. Personally, I’m more drawn to the great-business-at-a-fair-price approach and Ted said that this approach served him better.
He said he inserts some randomness into his daily routine by reading newspapers, preferably local newspapers from various places, kind of bottom-up approach. Other than that, he is reading, a lot. His addiction to reading is well-known and this article has more details about Buffett’s hired guns reading habits.
Decision making process “do things that you understand”
Reading is the underlying foundation for Ted’s decision-making process. He believes that reading a lot is the pre-condition to do things that you understand.” While there is never a recipe for becoming a successful investor, Ted has a process that he shared with me:
- Sorry for the repetition but… read a lot.
- He then builds a 5-year model trying to predict the various variables that impact the valuation.
- Next he makes a list of all the things that could happen and prevent this forecast from holding through and sees if he feels comfortable to move on or whether it’s too risky or too hard.
- Once the model is ready he derives a fair value for the business.
- Next he sets the price he is willing to pay by demanding a 25%-30% discount to what he believes the intrinsic value is.
- If he knows the business really well then he is satisfied with 15% margin of safety. He mentioned DaVita as an example for a business that falls in this category.
- He kept on emphasizing the importance of ready everything you can about the company, the industry, the competitors and so on. Yes, there is a lot of hard work involved.
This was a very short summary of a short meeting that I had with one of the best investors in the world. Good things happen in Omaha!