Value Investing

Exclusive Interview With Mark Massey Of AltaRock Partners

Exclusive Interview With Mark Massey Of AltaRock Partners by Beyond Proxy

Last year we had the pleasure of interviewing Mark Massey who heads AltaRock Partners. Under Mark’s leadership, the AltaRock Fund has compounded capital at a net annual rate of 12% since inception over twelve years ago, more than 500 basis points ahead of the annual performance of the S&P 500 Index.

Q&A with Mark Massey

The Manual of Ideas: How did you get interested in investing?

Mark Massey: Like any son, I was greatly influenced by my Dad. Fortunately for me, one of his real passions in life was investing. He always talked about his stocks around the dinner table and as time went by his enthusiasm stoked a curiosity in me to learn more. During high school and college, I got non-paying “jobs” at the local Merrill Lynch office which gave me some important insights into the ecosystem of Wall Street. By the time I graduated from college in 1986, I had decided that I wanted to be on the “buy side of the street.” Thankfully, with a bit of patience and perseverance, I was able to land a dream job as an equity analyst with Fidelity Investments in Boston.

MOI: Why wide-moat investing as opposed to other value approaches?

Mark Massey: We think it’s a very safe way to generate superior returns over the long term. “Wide-moat investing” is just another way of saying that we try to buy, at a rational price, great businesses whose earnings are almost certain to be much higher in ten and twenty years. Great businesses, by definition, stand the test of time and as a consequence they are always compounding in value — like a savings account, but with a much better yield.

To me, deep value “investing” means buying a less than great business or a pile of assets trapped inside of a corporation at a (hopefully) big discount to some estimate of intrinsic worth. My problem with this approach is that no matter how cheaply you buy, time is working against you. In other words, your risk/return equation is highly dependent upon how quickly you can turn around and sell at a profit. With poor companies and cheap assets, the values can melt away while you are waiting for the market to see things your way. Buffett said it well, “Time is the friend of the wonderful business and the enemy of the mediocre.”

MOI: Absent general calamities such as in 2008-09, what are your favorite sources of mispricings that lead to wide-moat companies being undervalued? How do you then increase your chances of distinguishing between permanent versus temporary impairments of a company’s moat?

Mark Massey: Every situation is different, but mispricings tend to occur due to some innate disregard (recent spin-off, small market cap, etc), or because of some uncertainty, or fear. So you pointed out one of the best times to find them, which is when there is a general panic in financial markets. Other types of uncertainty and fear can be specific to a sector (housing related businesses following the real-estate bubble), or around various characteristics like high debt levels, legal problems, etc. The best mispricings will generally occur when you have a combination of factors working simultaneously. Imagine a 2008 spin-off of a highly leveraged, housing-related business facing new legal problems that are difficult to estimate. That will be a very cheap stock that may be worth spending time on. As far as knowing when an issue is temporary or permanent, I don’t have any shortcuts or rules-of-thumb. Every situation is different and it always comes down to a matter of hard work, experience and healthy dose of common sense. I will say that our success has come almost exclusively from patiently waiting around for things that are obvious to us than from getting involved with difficult and complicated problems.

MOI: How do you generate wide-moat investment ideas?

Mark Massey: It’s all qualitative stuff. We really don’t do screens. In fact, the only screen that I find useful is one that spits out companies that have been buying back a high percentage of shares. This MAY be indicative of a well-aligned management team that has great conviction in the durability of its competitive moat… but it could be the opposite, too… so you always have to do a lot of work to get to the truth.

I really think the key to our success has to do with our love for the game. We absolutely love coming to work every day. I literally spend almost all of my time reading. And while it, no doubt, makes me a bit of an oddball, my greatest pleasure is to be constantly searching for wonderful businesses that, for whatever reason, are mispriced. Having done this for nearly thirty years, I have built up a lot of knowledge and understanding about many different businesses, moats and business models. The result is a long list of companies that we would like to own at the right price. And we know from experience that if we continue to be patient and disciplined, a few mouth-watering opportunities will eventually come our way.

MOI: You refer to your portfolio as a “Conglomerate.” Please elaborate.

Mark Massey: I realize it sounds kind of funny, but we really do refer to our portfolio in-house and in our letters to partners as “The AltaRock Conglomerate.” The reason we do this is to reinforce what we believe is the correct way of thinking about stocks, which after all are ownership positions in real operating businesses. I think many investors can lose sight of this when all they ever see are ticker symbols and flashing prices on a computer screen. To counter this tendency, we think of, and speak of, each business in our portfolio as a subsidiary that we own outright. And we try to acquire each one at a price that reduces our risk of loss to zero, while also guaranteeing that our rewards from long-term ownership will be bountiful. If we truly ran a conglomerate, we would always be exceedingly careful that we understood exactly what we were buying before making any acquisition. And we would never sell or trade one of our subsidiaries unless we were absolutely convinced that we were getting significantly more than we were giving up. The only exception to this would be if someone offered us an insanely inflated price, in which case we would sell and hold the proceeds in cash until we could find something intelligent to do. Just because we deal in marketable securities does not mean that we should behave any differently than we would if we owned entire businesses, so we don’t.

See the full article here.

Mark Massey – Book Recommendation

Mark Massey: For someone starting out I would submerge myself in as much Munger and Buffett as possible and I would certainly subscribe to The Manual of Ideas. Here are some books, etc. that I have found quite interesting and useful:

Art of Stock Picking, a Charlie Munger speech

Berkshire Hathaway Letters to Shareholders

Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe

Praise for Damn Right!

From the author of the bestselling WARREN BUFFETT SPEAKS. . .

“Charlie Munger, whose reputation is deep and wide, based on an extraordinary record of brilliantly successful business strategies, sees things that others don’t. There is a method to his mastery and, through this book, we get a chance to learn about this rare individual.” -MICHAEL EISNER, Chairman and CEO, The Walt Disney Company.

“Janet Lowe uncovers the iconoclastic genius and subtle charm behind Charlie Munger’s curmudgeonly facade in this richly woven portrait of our era’s heir to Ben Franklin. With a biographer’s detachment, an historian’s thoroughness, and a financial writer’s common sense, Lowe produces a riveting account of the family, personal, and business life of the idiosyncratically complex and endlessly fascinating figure.” -LAWRENCE CUNNINGHAM, Cardozo Law School, Author of The Essays of Warren Buffett: Lessons for Corporate America.

“For years, Berkshire Hathaway shareholders and investors worldwide (me included) have struggled to learn more about Warren Buffett’s cerebral sidekick. Now we can rest and enjoy reading Janet Lowe’s book about this rare intellectual jewel called Charlie Munger.” -ROBERT G. HAGSTROM, Author of The Warren Buffett Way.

“Charlie has lived by the creed that one should live a life that doesn’t need explaining. But his life should be explained. In a city where heroism is too often confused with celebrity, Charlie is a true hero and mentor. He lives the life lessons that he has studiously extracted from other true heroes and mentors, from Ben Franklin to Ben Graham. This book illuminates those life lessons.” -RONALD L. OLSON, Munger, Tolles & Olson LLP.

“Janet Lowe’s unprecedented access to Charlie Munger and Warren Buffett has resulted in a first-class book that investors, academics, and CEOs will find entertaining and highly useful.”-TIMOTHY P. VICK, Money Manager and Author of How to Pick Stocks Like Warren Buffett.

The Warren Buffett Way by Robert G. Hagstrom

Warren Buffett is the most famous investor of all time and one of today’s most admired business leaders. He became a billionaire and investment sage by looking at companies as businesses rather than prices on a stock screen. The first two editions of The Warren Buffett Way gave investors their first in-depth look at the innovative investment and business strategies behind Buffett’s spectacular success. The new edition updates readers on the latest investments by Buffett. And, more importantly, it draws on the new field of behavioral finance to explain how investors can overcome the common obstacles that prevent them from investing like Buffett.

New material includes:

  • How to think like a long-term investor – just like Buffett
  • Why “loss aversion”, the tendency of most investors to overweight the pain of losing money, is one of the biggest obstacles that investors must overcome.
  • Why behaving rationally in the face of the ups and downs of the market has been the key to Buffett’s investing success
  • Analysis of Buffett’s recent acquisition of H.J. Heinz and his investment in IBM stock

The greatest challenge to emulating Buffett is not in the selection of the right stocks, Hagstrom writes, but in having the fortitude to stick with sound investments in the face of economic and market uncertainty. The new edition explains the psychological foundations of Buffett’s approach, thus giving readers the best roadmap yet for mastering both the principles and behaviors that have made Buffett the greatest investor of our generation.

Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger by Peter D. Kaufman, Ed Wexler, Warren E. Buffett, Charles T. Munger

Poor Charlie’s Almanack contains the wit and wisdom of Charlie Munger: his talks, lectures and public commentary. And, it has been written and compiled with both Charlie Munger and Warren Buffett’s encouragement and cooperation. So pull up your favorite reading chair and enjoy the unique humor, wit and insight that Charlie Munger brings to the world of business, investing and life itself. With Charlie himself as your guide, you are about to embark on an extraordinary journey toward better investment, decision making, and thinking about the world and life in general. Charlie’s unique worldview, what he calls a ‘multidisciplinary’ approach, is a self-developed model for clear and simple thinking while being far from simplistic itself.

Throughout the book, Charlie displays his intellect, wit, integrity, and rhetorical flair. Using his encyclopedic knowledge, he cites references from classical orators to eighteenth- and nineteenth-century European literati to pop culture icons of the moment while simultaneously reinforcing the virtues of lifelong learning and intellectual curiosity.

Influence: The Psychology of Persuasion by Robert B. Cialdini

Influence, the classic book on persuasion, explains the psychology of why people say “yes”—and how to apply these understandings. Dr. Robert Cialdini is the seminal expert in the rapidly expanding field of influence and persuasion. His thirty-five years of rigorous, evidence-based research along with a three-year program of study on what moves people to change behavior has resulted in this highly acclaimed book.

You’ll learn the six universal principles, how to use them to become a skilled persuader—and how to defend yourself against them. Perfect for people in all walks of life, the principles of Influence will move you toward profound personal change and act as a driving force for your success.

Seeking Wisdom: From Darwin to Munger by Peter Bevelin

Peter Bevelin begins his fascinating book with Confucius’ great wisdom: “A man who has committed a mistake and doesn’t correct it, is committing another mistake.” Seeking Wisdom is the result of Bevelin’s learning about attaining wisdom. His quest for wisdom originated partly from making mistakes himself and observing those of others but also from the philosophy of super-investor and Berkshire Hathaway Vice Chairman Charles Munger. A man whose simplicity and clarity of thought was unequal to anything Bevelin had seen. In addition to naturalist Charles Darwin and Munger, Bevelin cites an encyclopedic range of thinkers: from first-century BCE Roman poet Publius Terentius to Mark Twain-from Albert Einstein to Richard Feynman-from 16th Century French essayist Michel de Montaigne to Berkshire Hathaway Chairman Warren Buffett. In the book, he describes ideas and research findings from many different fields. This book is for those who love the constant search for knowledge. It is in the spirit of Charles Munger, who says, “All I want to know is where I’m going to die so I’ll never go there.” There are roads that lead to unhappiness. An understanding of how and why we can “die” should help us avoid them. We can’t eliminate mistakes, but we can prevent those that can really hurt us. Using exemplars of clear thinking and attained wisdom, Bevelin focuses on how our thoughts are influenced, why we make misjudgments and tools to improve our thinking. Bevelin tackles such eternal questions as: Why do we behave like we do? What do we want out of life? What interferes with our goals? Read and study this wonderful multidisciplinary exploration of wisdom. It may change the way you think and act in business and in life.

You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits by Joel Greenblatt

A comprehensive and practical guide to the stock market from a successful fund manager—filled with case studies, important background information, and all the tools you’ll need to become a stock market genius.

Fund manager Joel Greenblatt has been beating the Dow (with returns of 50 percent a year) for more than a decade. And now, in this highly accessible guide, he’s going to show you how to do it, too. You’re about to discover investment opportunities that portfolio managers, business-school professors, and top investment experts regularly miss—uncharted areas where the individual investor has a huge advantage over the Wall Street wizards. Here is your personal treasure map to special situations in which big profits are possible, including:

  • Spin-offs
  • Restructurings
  • Merger Securities
  • Rights Offerings
  • Recapitalizations
  • Bankruptcies
  • Risk Arbitrage

Moneyball: The Art of Winning an Unfair Game by Michael Lewis

Moneyball is a quest for the secret of success in baseball. Following the low-budget Oakland Athletics, their larger-than-life general manger, Billy Beane, and the strange brotherhood of amateur baseball enthusiasts, Michael Lewis has written not only “the single most influential baseball book ever” (Rob Neyer, Slate) but also what “may be the best book ever written on business” (Weekly Standard).

“I wrote this book because I fell in love with a story. The story concerned a small group of undervalued professional baseball players and executives, many of whom had been rejected as unfit for the big leagues, who had turned themselves into one of the most successful franchises in Major League Baseball. But the idea for the book came well before I had good reason to write it—before I had a story to fall in love with. It began, really, with an innocent question: how did one of the poorest teams in baseball, the Oakland Athletics, win so many games?”

With these words Michael Lewis launches us into the funniest, smartest, and most contrarian book since, well, since Liar’s Poker. Moneyball is a quest for something as elusive as the Holy Grail, something that money apparently can’t buy: the secret of success in baseball. The logical places to look would be the front offices of major league teams, and the dugouts, perhaps even in the minds of the players themselves. Lewis mines all these possibilities—his intimate and original portraits of big league ballplayers are alone worth the price of admission—but the real jackpot is a cache of numbers—numbers!—collected over the years by a strange brotherhood of amateur baseball enthusiasts: software engineers, statisticians, Wall Street analysts, lawyers and physics professors.

What these geek numbers show—no, prove—is that the traditional yardsticks of success for players and teams are fatally flawed. Even the box score misleads us by ignoring the crucial importance of the humble base-on-balls. This information has been around for years, and nobody inside Major League Baseball paid it any mind. And then came Billy Beane, General Manager of the Oakland Athletics.

Billy paid attention to those numbers —with the second lowest payroll in baseball at his disposal he had to—and this book records his astonishing experiment in finding and fielding a team that nobody else wanted. Moneyball is a roller coaster ride: before the 2002 season opens, Oakland must relinquish its three most prominent (and expensive) players, is written off by just about everyone, and then comes roaring back to challenge the American League record for consecutive wins.

In a narrative full of fabulous characters and brilliant excursions into the unexpected, Michael Lewis shows us how and why the new baseball knowledge works. He also sets up a sly and hilarious morality tale: Big Money, like Goliath, is always supposed to win…how can we not cheer for David?

“One of the best baseball—and management—books out….Deserves a place in the Baseball Hall of Fame.”—Forbes

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William N. Thorndike

“An outstanding book about CEOs who excelled at capital allocation.” — Warren Buffett

#1 on Warren Buffett’s Recommended Reading List, Berkshire Hathaway Annual Shareholder Letter, 2012

Named one of “19 Books Billionaire Charlie Munger Thinks You Should Read” in Business Insider.

“A book that details the extraordinary success of CEOs who took a radically different approach to corporate management.” — Charlie Munger, Vice-Chairman of Berkshire Hathaway Corporation

“Thorndike explores the importance of thoughtful capital allocation through the stories of eight successful CEOs. A good read for any business leader but especially those willing to chart their own course.” — Michael Dell, chairman of the board of directors and chief executive officer of Dell

What makes a successful CEO? Most people call to mind a familiar definition: “a seasoned manager with deep industry expertise.” Others might point to the qualities of today’s so-called celebrity CEOs—charisma, virtuoso communication skills, and a confident management style. But what really matters when you run an organization? What is the hallmark of exceptional CEO performance? Quite simply, it is the returns for the shareholders of that company over the long term.

In this refreshing, counterintuitive book, author Will Thorndike brings to bear the analytical wisdom of a successful career in investing, closely evaluating the performance of companies and their leaders. You will meet eight individualistic CEOs whose firms’ average returns outperformed the S&P 500 by a factor of twenty—in other words, an investment of $10,000 with each of these CEOs, on average, would have been worth over $1.5 million twenty-five years later. You may not know all their names, but you will recognize their companies: General Cinema, Ralston Purina, The Washington Post Company, Berkshire Hathaway, General Dynamics, Capital Cities Broadcasting, TCI, and Teledyne. In The Outsiders, you’ll learn the traits and methods—striking for their consistency and relentless rationality—that helped these unique leaders achieve such exceptional performance.

Humble, unassuming, and often frugal, these “outsiders” shunned Wall Street and the press, and shied away from the hottest new management trends. Instead, they shared specific traits that put them and the companies they led on winning trajectories: a laser-sharp focus on per share value as opposed to earnings or sales growth; an exceptional talent for allocating capital and human resources; and the belief that cash flow, not reported earnings, determines a company’s long-term value.

Drawing on years of research and experience, Thorndike tells eye-opening stories, extracting lessons and revealing a compelling alternative model for anyone interested in leading a company or investing in one—and reaping extraordinary returns.

DREAM BIG: How the Brazilian Trio behind 3G Capital – Jorge Paulo Lemann, Marcel Telles and Beto Sicupira – acquired Anheuser-Busch, Burger King and Heinz by Cristiane Correa

“My friend – and now partner – Jorge Paulo and his team are among the best businessmen in the World. He is a fantastic person and his story should be an inspiration to everybody, as it is for me.” – Warren Buffett

In just 40 years this Brazilian trio built the biggest empire in the history of Brazilian capitalism and launched themselves onto the world stage in an unprecedented way.

The management method they developed, which has been zealously followed by their employees, is based on meritocracy, simplicity and constant cost cutting.

Their culture is as efficient as it is merciless and leaves no room for mediocre performance. On the other hand, those who bring in exceptional results have the chance to become company partners and make a fortune.

DREAM BIG presents a detailed behind-the-scenes portrait of the meteoric rise of these three businessmen, from the founding of Banco Garantia in the 1970s to the present day.

Exclusive Interview With Mark Massey Of AltaRock Partners

Mark Massey’s Book Recommendations – [Photo Credit: Kirrus, Flickr]