Miguel Barbosa Interviews Hedge Fund Manger & Author Sham Gad
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Dear readers,
I’m proud to present our latest interview with value investor and author, Sham Gad. Among the topics discussed are his latest book, the financial crisis, how to examine stocks, and how to invest like Warren Buffett. Enjoy!
Attention: Sham has offered readers of SimoleonSense a free chapter and table of contents from his upcoming book. You can download them (Here & Here).
(Copyright 2009 Miguel Barbosa & SimoleonSense.com)
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Click Here To Download This Interview With Sham Gad As A Pdf
Interview Questions
Background:
Q. When did you first become interested in allocating capital?
A. When I was about 12 or 13 I think. I remember reading Lowenstein’s biography on Buffett around that time and I was hooked. The ideas laid forth by Ben Graham really resonated with me.
Q. You leveraged your passion for investing and landed a gig with the Motley Fool. Tell us about this experience?
A. I love to write and I enjoyed writing for TMF very much. Anytime you have a chance to express your idea via the written word, it a great opportunity. I am lucky in that writing about investing comes very naturally to me.
Q. What motivated you to start Gad Capital?
A. I didn’t want to do anything else but invest money, but do it in the most fair and sensible way possible. I thought the Buffett Partnership structure was such a way – you are in it 100% with your partners plus you’re immensely rewarded if you do well, but you do so knowing you have enriched your partners equally.
Q. Where does your upcoming book “The Business of Value Investing” fit into the picture, why did you write it, and who is the intended audience?
A. The book is really an extension of my love of writing about what I believe matters most in investing. I was introduced to some wonderful people at publishing house John Wiley by my friend Vitaliy Katsenelson, who at the time had just published his own book. The folks at Wiley had seen some of my previous writings and said that if I were ever interested in writing a book to send them a proposal. I had no problem writing 800 word articles, but a book was another matter. So I put the idea in the “too hard” pile. Three weeks later it occurred to me that there were six fundamental elements in value investing that the most successful value investors know and practice, but very few others do. These elements are well known, but they are often not applied effectively. It took me less than two hours to put the idea down on paper. Wiley loved it and here we are today.
The book’s audience is everyone, novice and professional alike. To the sophisticated value investor it’s simply another refresher, but the wonderful thing about investing is that it’s a never ending process. The books simplicity is what I hope makes so useful to even the practiced investor. But if you’re new to value investing or want to know what its adherents focus on, then I hope this book does a decent job.
Let’s Talk About Your Recently Released Book:
Q. When is the release date, can we preorder the book on Amazon?
A. The book should be out by October 15. It will be available on Amazon, Borders, and Barnes and Noble websites:
Bn.com
http://search.barnesandnoble.com/The-Business-of-Value-Investing/Sham-Gad/e/9780470444481/?itm=1
borders.com
http://www.borders.com/online/store/TitleDetail?sku=0470444487
Q. What challenges did you face in writing a primer on value investing?
A. Honestly, none. I never try to force myself and write because that will produce sub-par results. I will say that I tried to structure the book somewhat differently, so it’s not just another boring read on concepts already laid forth by Graham, Buffett, and Klarman.
Q. You write about the simplicity of investing? Give us a brief preview on keeping things simple in a field with a tendency for noise and complexity.
A. The ultimate key is focus on the part that really matters: you are buying a piece of a business. Everyone nods their head when you say “invest in the business, buy the stock” but if everyone really understood this they wouldn’t have panicked so much last year. Granted, as passive investors, you don’t exert control over the company’s affairs but still, I’m assuming you’ve done your homework on management.
Q. What’s your favorite part of the book?
A. On a personal level, the acknowledgements section: nothing you do in this world comes without the help of wonderful people. To be able to publicly express my thanks to those individuals really means a lot to me. However, I like the chapter where I examine actual investments that I made. It’s silly to tell someone how to do something if you can’t provide examples.
Q. Unlike most investment books (which tend to be theory based) you share several of your best ideas and use them as case studies. What motivated you to do this?
A. If you can’t back you what you say with examples, then you are really short-changing your audience.
Q. Given the constraints, what additional material would you include if you could write 100 more pages?
A. Nothing…I wrote all I had to say.
Q. Are you considering writing another book?
A. Not at this time.
Investment Questions:
Q. Tells us about your approach to fundamental analysis-what is your focus/edge?
A. I live in Athens, Georgia. No one has heard of me or cares about what I’m doing – that’s an awesome advantage. I like to call Athens the next Omaha J. I could tell a few other things, but I’d rather not at this time. I hope they show up in the long term performance of the Gad Partners Funds.
Q. How do you search for investment ideas? Where do most of these ideas come from?
A. My ideas come from all over. I’ve gotten some great ideas by piggy backing guys like Klarman, Berkowitz, and Pabrai. Other than that I just do a lot of reading and digging around. I read the annual report of a company three years that became an investment a few months ago, so you just always have to keep looking.
Q. What’s your definition of risk?
A. What it really is …losing money permanently.
Q. As you navigate a business’ financial statements, what do you look for?
A. To their detriment, many people place far too much initial emphasis on the income statement. I first like to scrutinize the balance sheet and go from there. The balance sheet provides the first moat and then the income statement provides the second and equally important moat. But the balance sheet is the foundation.
Q. Tell us about your experience with leaps and pair(s) trades.
A. A decent experience with LEAP’s, but nothing I would call spectacular. A much more pleasant experience with pair trades. I believe we made over 100% arbitraging the Mueller Water A/B shares. We are having a very pleasant experience thus far with liquidations and workouts, although most decent ideas have now passed.
Q. You recently wrote an article on the importance of taking macroeconomic perspectives into consideration. How do you incorporate “the macro” in your decision making process?
A. Macro matters in the sense that you need to be aware of the world around you. I read five papers a day: FT, WSJ, NY Times, my local paper, and the Shanghai Daily. For example, when you invest in an oil company, the two most important things are the production level of the company (both adding reserves to the company and selling oil to others) and the price of oil. The price of oil is to a certain extent influenced by macro economic perspectives. I won’t anchor my entire investment thesis on them, but to completely ignore them is not a good idea either.
Q. Are you willing to share any of your macroeconomic perspectives with us?
A. It’s going to be a long time before consumption in this country approaches what it did a few years ago. That alone will have a profound effect on the rate of unemployment, which will affect housing, and on and on. Such a view factors in my investment approach going forward.
Also we have lost so many jobs in this country over the last year – I believe over 700k per month. Who knows how long it will take before 50% of those jobs come back…it could be several years before we even scratch 6% unemployment. Such a scenario does not bode well for many sectors of the economy. I think about this possibility a lot when looking at investments and a result, I can eliminate a lot of ideas very quickly.
Q. What has the financial crisis taught you? How have you evolved as an investor?
A. It has reaffirmed my belief that markets are indeed inefficient, or put another way, you are insane if you think markets are completely efficient.
Personal Questions:
Q. Your book promises to make us better investors. What other resources (books, blogs, etc) would you recommend reading?
A. Graham’s books, of course; Buffett’s partnership letters, Benjamin Graham on Investing (new book); Albert Bartlett’s video “Arithmetic, Population, and Energy is a must, Bad Money by Kevin Phillips, and of course Simoleon Sense. Really, just read books on investing and outside investing by folks you admire.
Q. We understand that you have an MBA. Has your MBA helped you value investment opportunities? If so, how?
A. The MBA did not affect how I approach value investing; the MBA itself was a value investment…I have gotten an astronomical return on my money and time invested over the course of my life in the two years since I left: I met my future wife there, I met Buffett, I met Mason Hawkins, and the list goes on and on. And who knows going forward.
Q. Buffett has bridge, Charlie Munger has fishing, and Dan Loeb is a surfer ….what hobbies do you have outside of value investing?
A. Aside from the partnership and my wife Maggie, I’m really into golf. There are no short cuts to golf – you have to work at it to excel. And by work at it, it means you have to have an extremely patient and disciplined approach…sound familiar? I started playing four years ago. After the first year I was a 24 handicap; after the second year I was 16; after the third year I was a 12, today I play to about an 8 handicap. Like investing the learning curve shoots up in the beginning, but the real effort is required to truly excel and separate from the pack. My goal is to become a scratch golfer and if and when that happens, I will really have my work cut out for me.
Q. In your opinion what separates the best investors from the mediocre?
A. The best are those who continue to fine tune their craft just when everybody else thinks they have reached the pinnacle. Buffett folded his partnership in the mid 1960’s after amassing a record that he could have used to raise tons of money to invest, but he walked away. Tiger Woods decided to go back and change his golf swing after the 2000 season in which he won 3 of 4 major championships. In both instances, most people would characterize that as insane. And look what’s happened to both of them. I believe it was just last week that Forbes magazine anointed Woods as the first billion dollar athlete.
In Closing:
Q. What tips do you have for young investors interested in starting funds/partnerships?
A. Be sure it’s something you really want to do and would do it without any compensation. So many people are enamored with the idea of “having my own value partnership” but don’t realize the extra effort involved. Make sure you would be willing to make it a lifetime commitment because good decent people are entrusting you with their hard earned money. But in the spirit of selflessness, I included a very short end chapter about starting a fund simply because so many wonderful people were very helpful to me in telling me what I needed to do to get started.
Q. You’re in your 20’s, have started a fund, written a book, and contributed numerous times to financial periodicals. How would you like to see your life develop?
A. I hope I am fortunate to grow old with my wife Maggie. Also, I want to use my resources – monetary or otherwise – to help society in some way. As Buffett would say I won the ovarian lottery having had the chance to be in the United States and given the chance to do what I do. The least I can do is somehow enable other to have the same opportunity as I have.
Q. What message/advice would you give to readers of SimoleonSense?
A. Keep reading, it’s a wonderful effort.
Sham thank you taking the time to interview with us.
For more information on Sham Gad please visit the following:
Blog: Sham Gad On Value Investing
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