Here is the transcript of an interview I did with Steven Dotsch, Managing Editor and Founder at and . You can read it at source

I was bound to come across Steven sooner or later because the online investing community is much smaller here in the UK than it is in the US. He does some very sensible work and his website and premium services seem to be attracting interest at quite the rate.

Without further ado….

Interview with a young value investor

March 4, 2012

Today we’re joined by Duncan, a young value investor and investment blogger.

Duncan started on the graduate scheme at a big bank in Autumn 2008, about a fortnight before Lehman collapsed. Needless to say, he had no idea what was going on but he knew it was significant.

Currently, Duncan is employed by a global bank, whilst managing his own money privately. The views expressed in this interview are completely his own and not those of this employer.

Duncan – an introduction

Duncan, how did you get started in investing? What attracted you to value investing? About how old were you?

I had no real desire to become a professional investor and my interest in the subject only arose as a result of doing a 7 month stretch in Singapore on the Global Investment Strategy team of a big bank about a year into my career. I started to really enjoy the intellectual aspects of investing and the challenge of being a decision maker under uncertainty.

I was not attracted to value investing as much as I was attracted to whatever works. Initially, being at least as avaricious as your average young finance professional, I was attracted to the hedge fund legends who have made billions from their endeavours.

I was struck by the contrast between these enormously wealthy fund managers and the vast majority of private clients and investors who have struggled to preserve their capital over the last decade.

I was also intrigued by the fact that some people had seen the financial crisis coming and had managed to avoid the 50% decline in the indexes or perhaps even profit from events. It sounds simple but I basically just started reading the opinions of the people who got it right.

My interest in investing was magnified because I inherited some money/equities a few years ago and therefore I had a pot of capital sitting which I could use immediately. Had I not had any money maybe I wouldn’t have been quite so eager.

Your investment philosophy?

What would you describe as your investment philosophy? How has it developed over time? Are you a long term investor? When do you buy? When do you hold? When do you sell?

I would hope that I am pragmatic rather than dogmatic regarding my discipline. Bruce Springsteen once said that “blind faith in anything will get you killed.”

I am a value investor at heart because that is the only approach that makes sense to me, buying something for considerably less than a conservative appraisal of it’s true value.

Traditional finance theory, your university professor, your private banker and your average CFA would have you believe that as a security declines in price its risk increases; this is because the standard deviation of returns and the volatility of the price movement have increased. I think this is quite clearly codswallop and in fact the risk has decreased because the downside is now lower, presuming the facts have not changed, and the upside in percentage terms has increased!

What would you buy?

I am also particularly attracted to stocks where I see a highly skewed risk/reward dynamic. I like businesses where there are strong balance sheets and “hidden assets” which hopefully can unlock substantial value over time. The strong balance sheet gives me comfort that you will have the time/flexibility to realize that value.

I have a number of what I call “balance sheet investments”, this is based on a pet theory of mine that analysts are overly focused on the income and cash flow statements but omit the balance sheet from rigorous analysis. I suspect this is because of the shorter (1-6 months) horizons of their recommendations, they believe any balance sheet value isn’t likely to be realized in the short term.

Basically, I believe I have a number of companies that are trading at a discount to the value of their assets on their balance sheet or alternatively stocks that look boring on a P/E basis are actually very compelling when you consider the assets you are getting with the business.

There was one thing I noticed when I first migrated from macroeconomic focused research to the writings of investors who buy equities was that the ones who invest in a vacuum.

The “pure stockpickers”, value or growth focused, who believe that timing economic or business cycles is a fool’s errand had one thing in common – they all got killed in 2008.

Even some of the best were down 30-50%. I don’t find that kind of drawdown acceptable, I don’t have the disposition to deal with it and I don’t think most clients do either. The fact is, no matter how rational you are, if you lose 50% of your net worth you are not going to be able to make optimal decisions.

The Global Financial Crisis demonstrated the true value of “Global Macro”. If you think of investing like a boat race then stockpicking is choosing between the boats. Once in every few years a storm comes along with howling winds and high seas which can capsize boats or leave them stranded way off course. Once in every twenty years a tsunami comes and destroys half the boats. To continue the metaphor, these are the kind of times you want to be waiting in the port listening to the weather report.

This is all a very long winded way of me saying that I consider myself a macro aware, value investor with a strict focus on capital preservation. The natural order of things is growth – trees grow, populations grow, people grow, the intrinsic value of investments tend to grow but like you have to make sure you survive the bad times to participate in the growth.

I am still young, only 26 and I have a huge library of books to get through over the next few years – ask me these questions then and I might give you totally different answers. That would be another example of growth being the natural order of things.

When would you sell?

Regarding my time horizon I am agnostic. I hope I hold things for a long time because I hope intrinsic value grows just as fast as the share prices. I know Warren Buffett says you shouldn’t buy something unless you would be happy to hold it for 5 years or the rest of your lifetime, but that’s easy to say when you’re in your 80’s and you are the richest man on the planet!

If your time horizon is long enough this is nonsense. I’m a big believer in capitalism and in creative destruction. Nothing lasts forever. There is no such thing as a permanent competitive advantage.

A book called The Living Company: Growth Learning and Longevity in BusinessInterview With Young Value
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