Simoleon Sense Interviews Joe Ponzio, Hedge Fund Manager & Author of F Wall St (Part 2)
Earlier, we presented the first part of our interview with hedge fund manager & author Joe Ponzio (click here for part1 of the interview). Now, we are pleased to announce the second (and final) part of the interview. Enjoy!
Part 2: SimoleonSense Interviews Joe Ponzio, Hedge Fund Manager & Author of F Wall St
(Copyright 2009 Simoleon Sense)
Q. Tells us about your approach to fundamental analysis-what is your specific focus/edge?
A. There are four main types of “value” investors: the GARP-investors (growth at a reasonable price), the modern Buffett investors (great companies at good prices), the Ben Graham investors (net-nets and cigar butts), and the special situation investors (mergers, spin-offs, etc.)
I don’t wake up in the morning and think, “Today I’m going to find a net-net bargain or a special situation.” I take things as they come. My specific focus is on finding assets at a discount. Whether an “asset” is the future earning power of a quasi monopoly or the liquidation value of a somewhat forgettable business, I simply focus on finding value.
With every strategy, the approach to fundamental analysis is the same: read the reports, analyze the financial statements, learn about management, and understand the business and industry. It’s important to remember that you’re buying a business, and you don’t go into that lightly, whether it’s a special situation or a Coca-Cola.
Q. How do you look at risk?
A. The number one risk that I think that people assume is overpayment risk — the risk assumed when you pay too much and receive little to no value. For example, anyone purchasing General Motors’ stock from 2005 through its bankruptcy in 2009 assumed a great degree of overpayment risk. GM was worthless as a company; so, any price paid was too much. Now, Nobel laureates will tell you about the Sharpe ratios, beta, and other measures of “risk;” but, at the end of the day, the company was worthless and it was a matter of time (at least four years) before the stock price followed the value of the company.
A purchaser of GM’s stock over the past four years was not assuming risk because the stock price was volatile or because the economy was faltering. The investor simply paid too much for a worthless company. Some people got out with a profit; some lost a considerable amount. They all paid too much, and their results were either lucky (gains or minimal losses) or predictable (total losses).
Risk in investing can be minimized by demanding a large margin between the price of your positions and their intrinsic values. The greater the margin, the less risk you assume. Calculating that margin is both crucial and difficult; however, doing so allows an investor to see “risk” in a whole new light.
Q. Tell us about the role of fixed income in your portfolio?
A. If your readers have read F Wall Street, they’ll know that I am a big fan of bonds and fixed income investments for most people. The stock market is a place to buy and sell businesses, and most people lack the time or experience to buy and sell businesses.
Most people should stick with bonds because most people view volatility as a risk and get sick when the markets plummet. We don’t hold any bonds at MBG Funds simply because the markets don’t bother me and I don’t find bonds as attractive as certain stocks right now. If I found a bond offering more value, I’d buy it.
Q. I know that you’ve dabbled into commodities- how does this asset class fit into your portfolio?
A. My goal is to invest in opportunities I understand well, that are fairly predictable (in my opinion), and that are trading at a substantial discount to their intrinsic value. I don’t care about sectors, asset classes, or diversification — just value. If I feel that commodities offer a good value and safety, I’m in commodities. If I like stocks, I’m in stocks. So long as I feel that I can predict the outcome with a degree of certainty, I’m looking at it.
Q. We understand that you started your hedge fund last year-what has the financial crisis taught you?
A. I didn’t learn a lot from the crisis, but a lot of what I had previously known became frighteningly more obvious. Turnover rates in mutual fund portfolios soared over the past two years, and it didn’t help their investors nearly as much as it helped the brokerage firms to whom they pay commissions. Hedge funds tanked last year — an expected outcome when an industry throws billions at anyone with a power point presentation. Remember the dot-coms?
Has intelligent investing changed because of the financial crisis? Absolutely not. Then again, that only makes sense if you realize that volatility is not a risk.
Q. Clearly you’ve been through a lot, how have you evolved as an investor?
A. I evolved as I think most people would if they were given the opportunity to study as I have. When I first got turned on to investing in my teens, I was an active gambler looking for quick profits. Why not? The books made it sound so easy!
As I spent time running businesses, studying investing, and experiencing the markets, I naturally evolved into a deep value investor. My life experiences and psychological make-up have taught me (or allow me) to be both confident and patient, two traits that are critical to being a value investor running a concentrated portfolio.
Q. Which books have made you a better businessman, investor, & decision maker?
A. Read everything. I am fortunate in that my hobby is also my profession; so, I don’t mind “cozying up” with an accounting book or commodities index and a cup of coffee. I’ve read books that are downright terrible, but they all add to the knowledge and experience.
So long as you accept that great returns don’t come in 15 minutes a week or by following a simple charting system, you should read everything you can get your hands on. I’ve read books that are 250 pages of nonsense and ten pages of gold. Those ten pages are worth the $20.
Q. The timing for your book has been fantastic; did the financial crisis motivate you to publish?
A. The financial crisis inspired me to write the book in the first half of 2007, but I would have kept the title the same whether the Dow hit 20,000 or 2,000. The book began as a “how-to” for my kids. They were two and not-yet-born at the time. (What can I say? I’m a long-term guy.)
I didn’t plan on publishing it, but figured that it was worth shopping around to see if there was any interest. It just so happens that the publishing industry is slow; so, the timing was one of luck rather than any keen insight into the direction of the market.
Q. Your book is dedicated to the average investor- how are you trying to help the little guy?
A. People are angry, confused, and scared. They’re all thinking, “F Wall Street.” Unfortunately, they are also giving up hope and the desire to invest. The goal of the book is to shatter some preconceived notions about investing, explain why they may have had bad experiences, and ultimately change their perspective on investing.
The “little guy” is ignored by Wall Street and kicked to the curb. Well…F Wall Street. Invest comfortably and confidently like people did in the 1960s, before Jim Cramer, real-time quotes, and “actionable” trading advice.
That’s the message I’m trying to get out there.
Q. You’re confident that the individual investor can beat Wall Street. Gives us the basic recipe?
A. Return to a time when investing was more intelligent. Buy quality investments, adjust your expectations, and make smart decisions. You don’t have to be the next Warren Buffett to retire wealthy. You simply need to save regularly, avoid big mistakes (like credit card debt), and stick to your core competency.
Most importantly, don’t take big risks. Your money is too important. Instead, adjust your lifestyle and expectations. If you can’t stomach the markets, don’t invest in the markets. Instead, realize that your returns will be lower because you’re only investing in CDs and bonds, save more on a regular basis, and sleep peacefully at night.
People don’t need to benchmark their performance against an index. When you retire, what you have is what you have, like it or not, regardless of whether or not you beat the S&P 500. Why not focus on safety and making smart decisions?
Q. Whats your favorite part of the book? why?
A. I like the story of Rose. It’s a simple story that really drives home the point that people should ignore the markets, invest in good companies, and enjoy life.
Q. Given the great feedback, have you thouht about writing another book? What would it be about?
A. I don’t have any plans to write another book, but I won’t rule it out. I’m not an author; I love managing money. That’s how I make my living. I don’t have any plans in the works, and would only write something if I felt that it needed to be said.
Q. What advice do you have for active and passive individual investors? In addition, what advice would you give sophisticated investors?
A. Keep it simple and focus on making smart decisions regardless of the outcome. The fancier you make it or the more you stray from the simple concepts of value investing, the more likely you are to be disappointed in your results.
Also, keep in mind that you’ve never “missed the boat.” Today, everyone is talking about the market’s explosive +50% gains from the March lows. If you were in cash, you “missed it.” Nonsense. For two years, they’ve been parading themselves on TV telling you that stocks are cheap and “now” is the time to buy. Even a broken clock is right twice a day.
Never be in a hurry. So long as you are investing intelligently, you’ll never “miss the boat” because another is right around the corner.
Q. Are there any other projects or ideas you’re working on and would like to tell us about?
A. I have a million ideas to get the word out there. I simply don’t have the time to implement them. I won’t leak anything today as I don’t want people to get disappointed if I can’t follow through.
Q. If you could do anything besides allocating capital, and running a blog – what would you do?
A. I’d probably teach investing. Investing is not only my career, but my passion and hobby too. I can’t help myself. If I couldn’t allocate capital, I’d want to study and talk about it in some fashion, and that would lead me to teaching. Besides, people say that I have a knack for explaining difficult concepts in Plain English; so, that would also push me towards teaching than most other professions.
Q. What does the future hold for you and your website?
A. I’ll continue to manage money. As far as the website, I have to work on a better way to communicate with visitors. With the explosion of visitors (over 4 million hits in 2008), I simply can’t keep up with the articles, comments, and e-mails. I like to talk to everyone individually; so, I need to figure out a better way to communicate. It may be webinars or video; I may utilize twitter more.
Time and technology will tell. Still, I think we have a great community of intelligent investors at F Wall Street, and I’d like to keep it going. It’s certainly more intelligent and refreshing (to me, at least) than some of the financial or stock market forums and discussion boards.
Miguel: Joe thanks again for joining us. We wish you the best!
Note- If you’re interested in following Joe Ponzio please visit the following websites:
September 1st, 2009 at 4:34 am
Great interview- thanks Miguel and Joe.
Especially liked the reply to question #2 “how do you look at risk?” – that a listed company (e.g. GM) can be worthless, despite it having the legitimised appearance of holding at least some shareholder equity value: it has a full stock market listing, analyst coverage, discussed on CNBC etc.