It is rare for a person who has completed a 5-year medical and research program with a focus on molecular genetics to develop an abiding interest in investing, rarer still for that person to make a highly successful career of it (although Michael Burry might be an exception here).
Yet, Dr. Ken Shubin Stein, Founder and Portfolio Manager of Spencer Capital Management and Chairman of Spencer Capital Holdings, made the transition from medicine to value investing with ease.
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“Something we try to do well is to think about what we are doing, what we are trying to learn, and how we can best learn it,” Dr Stein says in this interview. From lifelong learning it was but a step away to teaching – he is also an Adjunct Professor at Columbia Business School where he teaches the Advanced Investment Research course.
In fact, a background in medical research has proved invaluable in his investing career – helping him understand how to perform research, no matter if it was the financial kind, how to think about a question, the critical factors, collecting the data and analyzing the results.
Ken Shubin Stein as an investor
His teaching position at Columbia has also proved great to Dr Ken Shubin Stein as an investor. “The process of taking what I do and making it explicit, of breaking it down into discrete, teachable steps, and of answering challenging questions from smart students has refined my thinking about every aspect of the investing process,” he says.
Learning from others, such as Charlie Munger, is par for the course. Referring to Munger’s famous list of 25 psychological tendencies of human misjudgement, Dr Ken Shubin Stein unabashedly says, “We went one by one through each cause, rephrasing it in our own words, and tried to figure out how we could apply it to our checklist process to improve our decision-making.”
On learning from mistakes and the difficult experience in 2008 in particular: “After 2008, we did a one-year project looking for mistakes we could learn from…This review has been tremendously helpful to our investment process, it has helped make us better analysts, and it has helped make me a better portfolio manager. While these red flags don’t mean we’ll never repeat mistakes, they are cautionary flags. The red flags slow me down and make me think about a time when I was confident that something similar to the idea in front of me was a great idea, and then I made a mistake and lost money.”
Ken Shubin Stein’s activist investing ideas
Asked to share an activist investing idea, Dr Stein mentioned the case of Osteotech, a company which made a bone matrix product called Grafton, a gold-standard product used in orthopaedic and other kinds of surgery. “Osteotech spent a significant amount of capital on research that was partially productive. They had a dysfunctional sales effort; they had a misaligned management team, and they put much of the money they generated into various things that weren’t productive,” recalls Dr Stein. Osteotech passed Dr Ken Shubin Stein’s “pre-investment checklist for activism” and soon a campaign was launched with a call to replace its entire board. It proved successful, earning shareholders a 100% return within a year.
American International Group Inc (NYSE:AIG) was another successful investment. “What was interesting about AIG when we invested several years ago was that, I think, it was one of the most hated companies in America. When we were making our investment, there were bus tours in Connecticut taking people to the homes of executives who worked at AIG so they could see where the “evil” AIG people lived,” Dr. Ken Shubin Stein said.
Calling this a great example of behavioral bias, Dr. Ken Shubin Stein said his firm was undeterred and concentrated instead on the thesis that American International Group Inc (NYSE:AIG) could likely triple within five years given that “we were investing at half of stated tangible book value, investment income was below normal due to artificially depressed bond yields, and the company was buying back significant amounts of stock.”
How does one go about getting such great investing ideas? Dr. Stein draws inspiration from Charlie Munger again – who said there were three good ways to identify ideas, namely, companies making significant share repurchases, those ripe for spinoffs and lastly, cloning other people’s ideas.
About selling out of an investment, he has this to say: “The way I broadly think about it is, if it’s not a great asset or a great company, then we are going to sell at the low end of our range of what we think it’s worth, and if it is a great asset or company, then we are going to hold on longer.”
Ken Shubin Stein’s thoughts on cash
On cash Dr. Ken Shubin Stein points out that it is an “aggressive strategic asset” and one of the few things that gains in value when the market falls. ”Its value is inversely proportional to how challenging the environment is.”
Finally, Dr. Ken Shubin Stein has a word of advice, actually three, for students interested in a career in investing. “1. Only do it if you really enjoy it. 2. Try to get a job at a firm where you can learn from someone else’s experience. 3. Constantly trying to improve and designing systems for yourself to accomplish goals yields significant rewards over time.”
For those interested, read the full text of the interview below.