Miguel Barbosa Interviews Tariq Ali of Street Capitalist Blog

Dear Readers,

I’m very excited to share an interview with Tariq Ali, value investor and founder of The Street Capitalist Blog. Futhermore, Tariq is a graduate of the University of Texas at Austin, where he also operates a non-profit microfinance organization called TEEXAS.org. In his investing, Tariq draws upon the knowledge and experience of the great investors of our time, including Benjamin Graham, Warren Buffett, Joel Greenblatt, Seth Klarman, and George Soros.

Interview is property of Miguel Barbosa & Tariq Ali and Copyright Protected.

Background Questions:

Q. When did you first become interested in allocating capital?

A friend of mine gave me Warren Buffett’s partnership letters and so I began reading through that material. I had some extra money so I also purchased a copy of the Intelligent Investor. From there, I got hooked on investing. I went to the library at my school and checked out stacks of books on accounting, finance, investing, biographies on businessmen, and tried to learn as much as I could.

Q. How did your interest for investing evolve into running the Street Capitalist Blog & starting a nonprofit?

Street Capitalist came about as a way for me to chronicle my investing and learn to think as a writer. Good writing requires clarity, which is also required in investing. Warren Buffett is an excellent writer too, so I use the blog to write and continuously improve in that area.

Q. There are many different approaches to investing. What led you to choose the value style?

Value just made sense to me. I grew up around the time of the dot com bubble and saw how people lost money. Also, I have never been one to really fall into fads or care about what other people think. I am good at thinking for myself. Value caters to those aspects of my personality.

Q. Which investors do you admire? Besides these investors who else has influenced you?

I think that when we study investors, we should look for certain unique qualities that they possess and seek to learn whatever we can from them.

The best investor to study is Warren Buffett. Buffett basically has had two careers, his partnership and his time at Berkshire. The ways he invested differed between those two careers and they are appropriate for running different amounts of capital. So if I were to open a $1M partnership today, I would focus on Buffett’s partnership time, when he was running a similar amount of capital and hunting for microcaps and special situations/workouts.

Then, if I am ever fortunate enough to run a multi-billion dollar company I would study the Warren Buffett of today and try to reverse engineer recent purchases, BNI, his preferred deals, and so on.

The problem I see with most people looking at Buffett is that they forget the partnership days and instead try to emulate the Buffett of today. I do not believe that is the right course of action for most investors.

Q. What’s your opinion of the efficient markets hypothesis and practitioners of technical analysis?

I believe that finance professors enjoy arguing in favor of efficient markets hypothesis because it allows them to dodge stock picking questions at cocktail parties.

Investment Questions:

Q. Tells us about your approach to fundamental analysis-what is your focus/edge?

I like to look at balance sheet events like spinoffs or areas where there is a discrepancy between price and value that may not be reflected in filings. An example would be Fairfax Financial which holds a large number of equities whose change in value may not be translated into the stock price until the company files.

Q. How do you search for your investment ideas? Where do most of these ideas come from?

I read everything. I have alerts set up to e-mail me about certain SEC filings, I pick up on transactions via the newspaper, and I talk to a number of investors whose views I trust.

Q. Describe your evaluation process (both quantitative & qualitative)?

I start out quantitative. I like to start at the balance sheet and find a company that looks simple and not dangerously levered. For most companies I then look at the cash flows and figure out what kind of free cash flow the business is generating. After that I try to look at more qualitative aspects, like how management thinks by reading about them in newspaper articles, letters, transcripts. If you have a business that generates cash but lacks good capital allocation strategies you will often see value wasted.

Q. As a follow up question, how do you determine intrinsic value?

It depends on the company. DCFs, comps, asset reproduction values, it all is very situational and company specific.

Q. Do you invest in foreign companies? If so, do you evaluate foreign companies different than how do you hedge currency exposure(s)?

No real foreign exposure. Fairfax is a Canadian company but I do not count that as very foreign. I would love to really look at value stocks abroad, since thats where more opportunities should be, but often lack the resources to do so.

Q.How many stocks do you typically hold in your portfolio?

Since this is my own money I take an ultra-concentrated approach of as few as two stocks and some cash. I believe that concentration should really depend on how you are investing. If you are running a fund you might need more than 2 stocks because your investors may not be able to stomach to volatility. Concentration wont do much if all your assets walk out the door. At the end of the day though it comes down to good stock picking. So if you experience a loss you have to see if it was the result of some black swan kind of event or poor stock picking on your part.

Q. How long do you hold on to your positions?

Some companies I would buy and hold forever. This is especially true for businesses run by a great jockey. In comparison, an event driven investment is often time specific.

Q. Give us an example of your best and worst investments? What did you learn?

My worst investment was a small position in Mosaic, I definitely took a top down approach with that one, something I will never do again.

Ticketmaster was an investment I really liked. I entered into the position around $3.99 and sold out in the mid $11-range. It was a spinoff that I had watched since the summer when it began trading at $27. I had actually been excited about the business ever since the deal was announced, just because Ticketmaster is such a monopolistic business.

Fairfax financial was purchased at $210 in 2007 and now trades around around $400. Here was a business that has an amazing jockey, Prem Watsa, was bought at about 1/2 book value and had a great portfolio of credit default swaps to hedge against the financial crisis.

Q. How do you judge a company’s management?

I look at stock ownership, their age in relation to retirement, and how they talk in their letters– I like to find guys that are Warren Buffett types, cheapskates that brag about flying commercial, that sort of thing.

Q. What makes you sell an investment?

As it approaches my estimate of IV I try to sell. I also re-evaluate and test the thesis over and over as things go wrong, in order to check if the situation has changed.

Q. How do you look at risk?

I focus on risk in terms of the probability of losing capital.

Q. What’s your take on leverage?

Investing is hard and leverage adds just another variable to the mix. Most people I see lose money using excessive amounts of leverage and I shy away from it.

Q. Given your interest in small cap stocks have you ever worked with an activist investor, would you ever do so?

Shareholder activism is difficult but it can work. Sometimes management teams forget about values like the return on invested capital and end up pursuing catastrophic courses of action that impair companies. A good activist can help set them back on the right path.

Q. We understand that you are very focused on bottom up value investing-what has the financial crisis taught you?

The financial crisis showed the dangers of excessive amounts of leverage. It also showed us that the past is not a predictor of the future. A number of investors piled into financials because they expected things would simply revert to the mean. They were wrong, it did not matter how old your company was, any company can go bankrupt.

Q. Can you tell us about your “circle of competence”.

I try to stick with simple businesses like restaurants, retailers, and certain manufacturers. Lately I have tried to expand that circle of competence by studying small community banks.

Q. How have you evolved as an investor?

I always strive to increase my circle of competence and learn about industries that are foreign to me. I used to be unable to analyze a financial company and now I have gotten pretty decent at it. It is important to be always learning when it comes to investing so that you can adapt to different environments.

Q .Which books have made you a better investor & decision maker?

I have always been fascinated by financial crises. One problem with many investors is that they ignore studying these kinds of disasters. To me, the best investments are often found during crises, so as value investors we should really seek to learn everything we can about them. I would spend a lot of time studying these, not just the Depression but the Asian financial crisis, Argentina, and so on.

Q. What should investors understand before investing?

A good understanding of accounting is a must. I am often dismayed when I encounter an investor incapable of reading a balance sheet.

Closing Questions:

Q. What advice would you give investors interested in event driven investments & small caps?

Go back and reverse engineer investments in this area and seek out case studies. Talk to other investors so that you can learn from how they do things.

Q. What advice do you have for active and passive individual investors? In addition, what advice would you give sophisticated investors?

A. For passive investors, seek out index funds and the John Bogel books. For active investors, read a lot and try to be always learning.

Q. What does the future hold for you and your website? Are you going to do this forever?

A. I’ll run the site as long as I can. I enjoy writing about investing find it helpful to me, especially when thinking about ways to respond to different events. It makes it so that I am not passively consuming news but actively thinking about how Event X will affect Investment Y. I think that this is something more investors should do, so that they can increase their returns on their time spent reading.

Q. What kind of fund & people are you looking to work with after you finish school?

A. I would love to be able to pursue value investing in the microcap/small cap space.

Tariq, Thank you very much for taking the time to answer our questions.

You can follow Tariq at Streetcapitalist.com

Comments on the interview email us at: miguel [at] simoleonsense [dot] com