Simoleon Sense Interviews Joe Ponzio, Hedge Fund Manager & Author of F Wall St (Part 1)

Dear Readers,

I’m pleased to announce our first interview. Today, we talk with Joe Ponzio, founder of MBG Funds, F Wall St (blog and book), & The Meridian Business Group. Joe has managed to outperform the market during a period of extreme turmoil and dislocation. Joe’s mission is simple, to prevent the little guy from getting screwed by Wall St. Joe makes no apologize for saying things as he sees them and has successfully practiced value investing for over a decade.

Best,
Miguel Barbosa

P.S. Due to the length I will release this interview as two separate posts.

Part 1: SimoleonSense Interviews Joe Ponzio, Hedge Fund Manager & Author of F Wall St

(Copyright 2009 Simoleon Sense)

Miguel: Thank you for joining us. We’re delighted to have you.

Joe Ponzio: I am ecstatic to be doing this interview with you. Thanks so much for the opportunity.

Q. Joe, you have a pretty interesting story, when did you first become interested in allocating capital?
A. I stumbled into it at an early age. In college, I changed majors from medicine to a path that would lead me to teaching. Realizing that I would be taking a major cut in pay, I began learning how to save and invest. From when I picked up my first book on investing, I was hooked. I began reading two to three books a week, and I couldn’t get enough of it. After graduating college, I landed my first investment sales job. As unhappy as I was at that firm, I knew that capital allocation would be my passion and future.

Q. What motivated you to start your own business, The Meridian Business Group?
A. I always wanted to help “regular” people with their investments. After spending time at and resigning from two different firms, I realized that I could only pursue that passion and work at my “ideal” firm if I created it. I think that most people have dreams of starting their own businesses. I was young and free enough to take the leap of faith at the time.

You can’t invest the way that we do — finding one or two investment opportunities a quarter — and expect to “make it” as a commissioned broker at a large firm. If you don’t starve to death, they’ll show you the door. I didn’t like that there was no accountability for performance and no drive to protect portfolios; so, I created a firm where our paychecks depended on how well we invested, not on how well we could sell.

Q. Where does F Wall St fit into the picture, why did you start the blog, and who is the intended audience?
A. As we were renovating our offices early in 2007, I was working from home. CNBC was playing in the background, and the reporters were playing down the credit crisis. I remember thinking, “This is going to get bad. A lot of people are going to get hurt, just like when they said that the dot-com boom could go on forever.” I didn’t want my kids to suffer through that nonsense; so, I began writing a “how-to” guide for them. I had a value investing strategy that seemed to work just fine and I wanted to pass it on so that they could invest comfortably and confidently for their futures. (At the time, my daughter was two and my son wasn’t even born yet. Remember: I’m a long-term thinker.)

The title was a no-brainer. I’m a no-nonsense guy, and I wanted the book to appeal to regular people who, in the back of their mind, are thinking, “F Wall Street. This investing stuff is nonsense, the stock market is a casino, and it is not possible to save and invest with confidence anymore.” The book’s title may not land me a spot in high society; but, if I can sway one person to put down a tabloid magazine, pick up F Wall Street because that’s what is on their mind, and begin investing intelligently, it’s worth the laughs when people say, “You called it what?!?!”

Q. If you could change one thing about financial news and education what would it be?
A. It’s not a lack of information. It’s all out there, begging to be taught and waiting to be learned. What’s great about our society is that there are people willing to teach, people willing to learn, and people willing to do nothing. Eventually, the people willing to seek out knowledge will meet those willing to teach, and the people willing to do nothing will continue to run in place.

The only change I would want implemented is actually at the high school level. I think that high school kids should be learning about budgeting, credit cards, checking accounts, car loans, mortgages…real life finances. Otherwise, they leave college with credit card debt; they bring their paycheck to the car dealership and ask what they can buy, not what they can afford; they focus on spending today because they’ll earn more when they’re older and it will all “work itself out.” Let’s teach our kids about money before they can get into trouble.

Q. Buffett often talks about how quickly value investing takes -either you get it in 5 minutes or you don’t. Was it like this for you? What led you to choose the value style?
A. The concept of value investing — buying assets on the cheap — took with me almost immediately, but I didn’t immediately become a value investor. An important part of being a value investor is focusing on buying discounted assets, but equally important is the idea that the market is to be largely ignored unless you’re planning to buy or sell something.

When I first learned about value investing, I didn’t understand how the stock market played into the Buffett and Graham approach; so, I tried charting, technical patterns, market timing, and more in an attempt to minimize volatility and ride the rising tide to profits. It wasn’t losses that caused me to ditch those futile market-timing efforts; rather, I missed out on immense gains over time because the technicals told me to sell when I should have been ignoring the markets and letting time and the ordinary course of business and economics work for me.

I ended up choosing the value style of investing because it was the only thing that made sense. I liken it to poker — you can gamble on bad hands and hope to get lucky, or you can patiently wait for monster hands and bet big when the odds are in your favor. In Texas Hold’em, pocket Aces will lose from time to time, but that doesn’t mean you shouldn’t play them; 10-2 — the “Dolly” with which Doyle Brunson won two world series main events — will win from time to time, but I wouldn’t bet my life savings on it.

I’m not much of a gambler. I find joy in winning, not just in playing; so, the deep value approach made sense for me.

Q. Which investors do you admire? Besides these investors who else has influenced you?
A. I admire anyone willing to teach; I abhor those who pretend like they’re teaching so that they can gloat about their past or potential successes. It’s okay to hold your track record out there to say, “See — this stuff works!” It’s another thing to convince yourself that you’re a guru, plaster yourself in the media as if you’re trying to help, and then tell the “little guy” to beat it because they don’t meet the net worth requirements to invest with you.
Buffett has been a great teacher because his writings — the letters, annual reports, news articles, and interviews — don’t bring him any extra money, but he still feels compelled to get the message out there and help the confused and scared. When Seth Klarman speaks, I like to listen. He offers tips and insights for the “little guy” — people that will never qualify to invest with the Baupost Group. Still, he wants to help.

The investor who influenced me the most was my father. He was a short-term trader — particularly in options. He made a killing in the late 1990s trading stocks and options, but he couldn’t tell me a darn thing about the companies in which he was trading. When the dot-coms crashed, he lost big. As an investor, he traded hope with other gamblers, and it required a lot of effort for mediocre results.

My father and Warren Buffett/Benjamin Graham were polar opposites when it came to investing. Though my father was an amazing and wonderful influence on 99% of my life, Buffett and Graham were the greatest influences on that other 1% — the save and invest portion of my DNA.

Q. How has running a business has helped you identify bargains?

A. Without actual experience running a business, financial statements are little more than numbers on a page — data to be extrapolated into the future. After running a business for a while, you begin to see what numbers and footnotes may be critical, and which ones may be nonsense when it comes to the health of the business. The numbers eventually come to life, and then the business comes to life.

We recently invested in a Ben Graham-style net-net — a company selling below its quick liquidation value. The financial statements say that the business is bleeding money, but from a business standpoint — taking out all of the non-cash and non-recurring items, it’s actually doing quite well. A spreadsheet or stock screener can’t tell you that.

Furthermore, you have to realize that the analysts have no experience running a business. They’re looking at the same spreadsheets and stock screeners as everyone else. They’re not even reading the annual reports. Armed with some business experience, a willingness to read and learn, and the knowledge that the “majority” are not actually thinking, a deep value investor should be able to find some amazing bargains regardless of where the markets are, or are going.

This isthe end of part 1.

In part 2 Joe Ponzio will explain how he finds investments, values businesses, thinks about risk and much more. See you tomorrow.