February 24, 2016 ~ Guy Spier, Founder and Managing Partner,

Aquamarine Capital
Ben Graham Centre (BG): What are your thoughts on the intermingling of ratings
agencies with big banks? What is your opinion on the reinstatement for the Glass-
Steagall Act?

Guy Spier (GS): Heres the problem that we have: anybody who goes into a period of
market turbulence wishes that they had more cash, because with cash you can put it to
work and it gives you strength and flexibility. But you go into the period of market
turbulence with the cash that you have, not the cash that you wish that you had. So if
you were fully invested, youd just have to ride it out. If you were not fully invested, then
you could put the cash to work that you had which, even though its not as much as you
wanted, you put it to work. But you cant say oh now the market is turbulent, so now Im
going to raise cash because thats the opposite of what you want to do. And I see the
same pattern in bank capital ratios, so the period leading up to the financial crisis had
banks and investment banks too leveraged, but then immediately as you go into the
crisis that is exactly the wrong time to increase their capital ratios. Yes you want to do it,
but you want to wait until the crisis is over so the conversations with banks a year or two
ago, they were saying yeah, on the one hand the central banks us to lend all this
money out and stimulate the economy, on the other hand, were dealing with Basel III
ratios and credit agencies have become a lot more conservative. Its kind of like
slamming the barn door shut after the animals have fled. Its just not easy because I
think that the policy makers would think yes it is the wrong time to be closing the barn
door, but we have to close it now because well never be able to close it any other time.
So yes, we just have to put those capital ratios in now and it will be painful for five
years, but well never do it if we wait five years, which would be the ideal but thats a
whole political lifetime away. Its interesting, the Glass-Steagall act was put in place just
after 1929, and now theyre talking about bringing it back, and the last vestiges of the
Glass-Steagall act I think were removed in the five or six years before the crisis of 2008,
so again that was counter-cyclical, and I would argue that were on the verge of a thirty-
year long expansion of credit from the banking system that will start any time in the next
year or two with Basel III and the reform of the banking system and making the banking
system safe when it has run its course. And then in thirty years time, when all of us are
retired, we will probably have another financial crisis again.

BG: Youve mentioned that the subconscious can influence and cause irrational
behaviour, and youve mentioned you have a checklist to help keep you in place. How
would you go about controlling those subconscious influences when you dont know
theyre seeping into you?

GS: I mentioned in my book that I am not like Warren Buffett, and while that is true, why
did I set up so many aspects of my life to be like Warren Buffett? Its really important,
when we model somebody, to model the right parts of them. For example (and forgive
me for the salacious example), Madonna slept around a lot when she was active as a
pop star, but she also worked damn hard. Now this is a very cartoonish cut out
distinction, but I could choose to model her sexual behaviour, or I can choose to model
how hard she worked, and one will lead me to good results and one wont. So I need to
model Warren Buffett in a way that is consistent that Warren Buffett is very different in
terms of ability and personality to me. I can easily draw the wrong lessons by modelling
the wrong thing, so I think that by his makeup, like his ability to sell Fannie Mae and
Freddie Mac years before the proverbial you-know-what hit the fan, its just something
that I wont know I will ever be capable of. But the checklist is a great idea. Here is
some really important things that are missing, and it blows me away that Mohnish and I
missed it. In flying, you dont just have a pre-take-off checklist, you have an in-flight
checklist as well! But I didnt apply an in-flight checklist during the investment. So if we
talk about my disaster in Horsehead Holding Corp., I did not monitor the buildup of
leverage. If Id have looked at that investment as a new position in my portfolio, it
wouldnt have made it past the leverage screening and the checklist. Because it was
already in the portfolio, I wasnt really asking myself that question seriously. I now have
a member of my team whose role is risk manager, and his role is to run an in-flight
checklist on a regular basis across all the positions to ask what is going on, what
changes have taken place, and if changes have taken place, I need to write up the
reason why its still ok to be in the portfolio. I think in some way, the question you asked
contains within it the seeds of the answer, which is once you identify the subconscious
ways in which things seep in, you can start figuring out how to handle it.

BG: Many would say that the first half of 2009 was the best time to buy in terms of low
valuations. What went through your mind during the first half of 2009? Did you buy
stocks at that time? If you did buy, what gave you the courage to buy?

GS: I was throwing up over every stock that I bought in 2009. It was very hard for me,
but there were a number of stocks that were very cheap, and it was easy to see that
they were cheap. Did I buy as much as I would have liked? No. And I sold some
business which I wish I hadnt sold. In the run-up to the crisis, I sold CRISIL, the Indian
credit rating company, and after the financial crisis I sold Moodys which I really wish I
hadnt sold. I was worried theyd get litigated and their balance sheet would be
destroyed by the litigation, though that turned out not to be the case at all. One of the
stocks that I bought was London Mining. They had about $300 million in cash, and was
trading at a $200 million market capitalization, and it had these projects in Saudi Arabia
and Greenland, etc. They had great projects going on, and there was a strong price of
iron ore, which did not decline by that much then. I did buy some things, but how did I
feel? I was throwing up all over with every purchase that I made. I knew I had to be
buying, and it was really hard for me to do it. If I can improve as an investor, its not
going to be because I buy better, its because I become less exuberant, and identify the
ways in which I can become exuberant, and I can prevent myself from doing that. When
we go through market turmoil like were going through right now, Ive coached my wife
to say did you buy a good stock today when I come home from work. And Ive also
coached her to tell me when theres exuberance to say wow, people are making money
fast, maybe its time to pull in our haunches a little bit.
BG: Even in the present times, if your portfolio did fall by 20%, do you have a group of
friends that will support you through the bad times?

GS: Well my portfolio has dropped by more than 20% in the last year and a half. 20% is
nothing! In 2008 my portfolio dropped by 46%. Certainly, a group of friends is good.
Misery loves company, and it is miserable. Maybe Warren Buffett doesnt feel
miserable, and even if I have cash to invest, its just not a nice feeling to know that the
liquidating value of your portfolio is lower. I think even more important than that is to
have your lifestyle set up in such a way that it really doesnt matter. Speaking to which, I
have a one-track mind, and my one-track mind right now is thinking of cyclical, pro-
cyclical, and counter cyclical. One of the aspects of setting up a fund where you have
outside investors is that it is incredible pro-cyclical, because the only times that you can
raise money is when your fund is going up. Thats not entirely true but its largely true.
When the fund is going down is when people want to redeem which is exactly when you
need funds bad. So in that way, it is structurally not ideal. Even within different kinds of
funds, for example if you have redemption terms with one weeks notice, that makes it
much more likely that people will take money out at the bad times exactly when you
need that cash to invest. In my fund you have annual redemptions. Thats a lot less pro-
cyclical than if my fund allowed weekly or daily redemptions which would be far more
pro-cyclical. Once a year redemption is still, I would argue, slightly pro-cyclical. Its
those kinds of structural aspects that would really help. Friends is nice, but friends is
dangerous because they can come and go, and they may not think the same as you,
and they may lose heart themselves, so I think that you have to go to a far more lonely
personal place. Good investing is just not a social activity. Having said that, I had a nice
conversation with our compatriot Mohnish Pabrai today and it felt good to talk to
somebody else who is taking a beating!

BG: In 2007, there was a lot of talk among the general public to invest, and as you
know, this is a tell-tale sign that the market is going to go bust very soon. From your
experience, are there any other tell-tale signs that one should watch out for?

GS: [During these periods], I feel like some really good investors in my generation are
really uncomfortable, and rattled, and dont understand whats going on. One of the hard
things that Ive had to do is try and calibrate my peer group. I have a bunch of really
smart friends, so they are not necessarily the vast majority of investors. Do I want to be
in sync with them, or out of sync with them? If my friends are really bullish, does that
mean I should be fearful because they represent the average stock market investor, or
should I be bullish along with them because the reset of the market participants are
fearful. So when the barber is talking about what stocks hes buying, thats probably a
good bearish signal, showing that the exuberance has reached that far. As for a bullish
signal example, there was a point in my life when people said you buy stocks? You
never buy stocks, those things never go up. When the Washington Post was trading at
a discount to everything you could measure, and people said well you dont buy the
stock, thats just never going to go up. Were never going to get back to that period.
Calibrating the overall state of whether the average market participant is fearful or
greedy is a fantastic thing to think about. Its just really hard to measure. I would argue
now that you dont have to talk to people, you just have to look at the market action of
many of the stocks out there to know that theres more fear than greed.

BG: You talked about how your investors are naturally very pro-cyclical. Do you do
anything to pre-qualify these investors or to prime them to your philosophy? Do you
sometimes turn away investors who are not right for you?

GS: Heres what Ive learned: In 2008, somebody who had always professed to be a
long term investor suddenly needed to put their hands on cash instantly. Suddenly all
the long term-ism disappeared, and there was a short-term need for cash. There are all
sorts of reasons for that. Part of it was psychology, but part of it is that she was probably
over extended. She either had debts that were coming due, or had a big mortgage, etc.
I think that interviewing somebody, or talking to them or communicating with them is not
the most effective way of picking an investor base that is as counter-cyclical as
possible. I think you need to set up shop in such a way that counter-cyclical investors
are more likely to show up. For me, the transition to the 0% management fee, 1 year
lockup, compensation structure from the slightly more standard 1 and 20 where people
are allowed to take their money out once per quarter -- its not a guarantee --but the
people who show up for those kind of investment terms tend to be more long-term. Its
not in the interviewing of people, because people will say something and genuinely
believe it, but then the crisis hits and all they want to do is get out of your fund. I dont
think interviewing them is the right way to do it. I think that structuring it so that only the
right people show up is. So what I would likely do in the future with Aquamarine Fund, is
to bake in the existing investors, but say any new money is only going to be invested
with me if you invest five years at a time. This effectively says that unless you want to
put your money with me for five years, and after five years you can either take it out or
re-up for another five years, you kind of say I only want long term money, and its baked
into the terms of the contract.

BG: Theres also a lot of pro-cyclicality in the public. Do you see any public policies out
there that are genuinely counter cyclical that one could support?

GS: In a time of economic decline or of low growth in the economy, or a contraction, the
taxation base goes down. The amount of taxation revenues that the government takes
in becomes lower, but much of the government spending remains fixed because there
are commitments to unemployment benefits, and transfer payments of all sorts. That is
a natural stabilizer. The government takes less money out of the economy through
taxation, and borrows more in order to fund spending that continues no matter what.
That is counter-cyclical, and very good. In spite of the political debate with people on the
right talking about the government spending is ridiculous, at the end of the day it
happened, and even if a lot of it was misspent, it happened. So I would argue that there
are some natural stabilizers there. The independence of the central bank is another
one. When there was political interference with central banks, central banks policy was
far more pro-cyclical. Every developed economy has understood that you need an
independent central bank where the person studying monetary policy has got some
clear targets which are not related to the political side, and thats a really good thing.
BG: Youve spoken about how you wanted to get away from the noise of Wall Street,
and have since based your firm in Zurich, could you tell us some of the disadvantages
of not being on Wall Street?

GS: In a certain way, for the first year it was all quiet, and then Wall Street came and
found me in Zurich! Its a part of my personality that attracted that in. Moving to Zurich
helped me for a short time, but it just masked what the real issue was. The real issue
was not where I lived, but rather what parts of my personality attract that stuff into my
life. Id attract them into my life wherever I lived. If I had that knowledge now and had
chosen to stay in New York City look I think New York City is a hard place to develop
a calm, equanimeous attitude to the world, but its an inner struggle. Theres a mis-
projection that its assuming its all the environment when its not. Much more of it is
internal. There are some great investors in New York, but they have a different set of
relationships and theyve managed themselves in a different way than I have. I think
that, similar to how Ive mentioned that my book is stuck with my way of thinking in one
particular point in time. Perhaps a better way of describing that move is where am I the
most grounded? Where is the place where I have the biggest number of people who
know how I used to be, where I can really feel like I am the truest version of myself. Its
not about moving to some place designed to bring out some aspects of our
personalities. I think I travel a lot to the US, and I learn a lot in the US, and Id actually
prefer not to travel as much, and I think that maybe if I was not in Zurich and I was
somewhere in the US, I would travel less. When I moved to Zurich, that was when the
first iPad had come out. I get on my desk every day, and I have up to date news, a
voice over IP telephone that puts me in touch with anyone who I want to be in touch
with on a local line, so I dont think there are that many disadvantages really on a
practical level! I look at the same Capital IQ Bloomberg that everyone else looks at. I
look at the same filings as everyone else does, participate in conference calls the same
way that everybody else can. I dont think thats important. I think the bit thats really
important is where am I most grounded? Go to the place where youre grounded, and
everything else will flow from there. Having said that, feel free to go to New York for a
few years. Its really a lot of fun! It doesnt hurt to go to New York for a few years; even
Warren Buffett did it for a few years. Theres a sort of change that happens in ones
mind that can happen while in New York that can be really valuable to experience.

BG: Youve stated that youre Indian at heart, and follow the teachings of Gandhi, and
contribute to the Dakshana Foundation. How do you feel about investing in Indian
equities?

GS: I just read in the newspaper today that Ikea was having great trouble. Can you
believe that? It just shows the problems that people like Narenda Modi [current prime
minister of India] have to deal with. Theres one of the lowest cost economies on the
planet, and Ikea, who required to source I think about 1/3 of their product locally, and
they cant find product to fill their stores with locally because theyre having real
problems complying with the regulations. The article talks about a flat-packed furniture
sourced in India has a certain kind of formaldehyde which are too high-level for their
corporate standards, and is potentially dangerous. Obviously it will not be like that in
twenty years, but its just an enormously different economy to one like the United States
or Western Europe. If I were really Indian (not just pretend!), and I spoke Hindi, I think
that is a market where it is good to be on the ground, and to do really aggressive
scuttlebutt to go and meet with companies. Its a market where being very close on the
ground would probably yield enormous rewards that is just very hard to figure out from
just reading the documents at a great distance, which is what Id be forced to do. That
said, I really regret selling my investment in CRISIL. I am now set up so that I dont have
to take too many steps to reinvest in them, and probably would at the right moment, but
the great thing about finding an investment like CRISIL is that its almost not like an
Indian investment. Youre investing alongside S&P and get S&Ps management and all
those good things. I think once youve lived in a developed economy like the US,
Canada or Western Europe, its very hard to want to live in an undeveloped economy
because its just so many things. But I think the opportunity is great if youre willing to
live there.

BG: Regarding the circle of competence which Warren Buffett talks about. Value
investors are really independent, so how do you take advice from other peoples circle
of competence?

GS: When markets go down, its when investors realize their circle of competence is
narrower than they really thought it was. When markets go up, our circles of
competence expand and expand! Trying to work out what is your circle of competence,
asking yourself what do I really know? Do I really have an edge or do I not have an
edge? is just not an easy question to answer. Its so easy to say invest in your circle of
competence, but defining what ones circle of competence is, and really knowing what
it is and developing it is something that I would give a lot of thought to. You could
imagine business schools ten years out will have a whole module or maybe even a
whole course just on defining your circle of competence! For example, I invested in this
company called Alaskan Milk in the Philippines. Was that in or out of my circle of
competence? The investment worked out really well, so I think I could make a claim it
was inside, but maybe it was outside and it was just blind luck! I thought I could have a
clear analysis and understanding that the family that was controlling this company was
not corrupt and wanted to make money for everyone, but maybe that was just dumb
luck.

BG: Could you share with us some of your methods or ideologies when you have a big
investment in order to give yourself the confidence to make your next big investment,
especially when your money is yours and other peoples as well.

GS: Its very hard. My father is one of my most important investors, and just a few
weeks ago he said I dont envy you, Guy. You have a really difficult job! I have to
accept and understand, and my investors have to accept and understand that I will
make mistakes, and its kind of inevitable. Its easier to write about than to actually live
through it. Its easy to write about Sir Earnest Shackletons mistakes that he made. He
was trying to save the lives of his men, and he made mistakes that resulted in his ship
sinking in the middle of the Antarctic ice. I dont think theres any answer other than to
say yes it is hard! I did force myself to buy some stocks a couple weeks ago. I think
theyre really good stocks that will do really well, but I think its hard. The worst was
when I wrote this letter to my investors telling them that this is not an easy time, this
may be a bullish signal, and I had suffered some tremendous losses, and Im learning
some lessons. A lot of investors were like Guy, were with you. And then theres one
guy who sent me a flame piece of hate mail, which is shocking to me. I just got up from
my desk and walked away. It was quite upsetting to me to see that. At that moment I
thought to myself if only I had shut down the fund six months ago, then I wouldnt have
had to deal with this! I dont know what the answers are. It was not easy for me in 2008,
and I dont think its easy for me now either, but who said life was supposed to be easy?
This is not an easy moment for me thats for sure. Id like to pretend that its all just fine,
and its not easy to see investors rattled. Its not easy to see losses on the stocks that I
own. I have my analysis to see as to why theyre wrong, but right now the market
agrees with the people who want to sell the stocks that I own! And those are the guys
that rule the day. I think theyre wrong and eventually Ill be proven right, but right now
its not an easy place to be. Part of why I was talking about the cyclicality is that during
an exuberant period, people like Guy Spier become more and more confident about
what theyre doing, and so I became more concentrated than I would have like to be. If
my position sizing had been more conservative, Id be dealing with whats going on in
my portfolio, it certainly would have been a little less hard to deal with.

BG: Do you have any other advice?

GS: Somebody must have said it before me, and Im going to pass this on to you. Your
success in life will be directly proportionate to the amount of uncertainty that youre
willing to tolerate. In a certain way, I will have greater rewards than someone who is not
willing to tolerate the kind of thing that I am going through right now, and I will have
lesser rewards than people who are willing to tolerate a lot more. If you agree with that
statement, which I think is just a true statement, the worst thing to be would be to pick a
safe path when youre actually capable of a lot more uncertainty. You need to realize
that uncertainty is not a bad thing, and anguish is not a bad thing. Its a part of life and if
youre willing to put yourself in a place where you have that, there are enormous
rewards because many humans are just not willing to do that. So I wouldnt necessarily
shy away from it. What I would tell you which is certainly true, and I feel very strongly
about this, is that the biggest asset that every single person has is that you have your
careers ahead of you, and there is a big difference with how rationally you should
behave when you have a lot of years ahead of you to recover from mistakes and
setbacks than when you have a short number of years. When you come out of business
school, you should go for high beta, high uncertainty outcomes in the choices you
make. As long as you dont lose much, as long as you dont get injured or get any
diseases, or do permanent damage to yourself, you want to get into situations where
there is enormous uncertainty and there is enormous upside and leave the safer bets
for later on in life when you dont have as much time to recover from them.
BG: What is the most important thing in life and investing that you learned in the last
twenty years?

GS: Outside of investing and life, the most important lessons Ive learned are from my
wife. Its in the relationship with my wife. I think that we have a good marriage I think!
Think of the enormous amount of humility that you could muster up, and the biggest
amount of forgiveness that you could possibly muster up, and the biggest amount of
acceptance of the things that youd think that youd never want to accept, and multiply
by infinite, and thats what you learn in marriage! Learning how to accept how the
marriage shapes me and learning how to be the person that could make the marriage
successful I think is in a certain way, humiliating because I had to give up so much of
who I thought I was. But of course what I gained is a place in the world, a very real
place in the world because I am a husband and a father and all of those things. It took
me ten years out of business school, I graduated at 27 and got married at 37. If I had
that time over, I wouldve wanted to get married sooner. I think that in a certain way,
maturity only happens once youre married, and its a good to get going on that sooner
rather than later. I also know people who got married at 21, and theres drawbacks to
that but I think I got married too late!

In investing, I think that I have continuously underestimated the need to manage my

own psychology and the realization that its not just managing my own psychology, its
managing my own psychology through a changing landscape. My own psychology
twenty years ago when nobody knows who the hell I am and I can quietly operate out of
the bedroom of my apartment is one thing, and managing my psychology when Ive got
professors of business like George inviting me to speak is another thing! People think
that Im nuts. I pray at the church of Warren Buffett. I really think that Warren Buffett is a
kind of prophet in the same way that if we had lived in Old Testament times, people like
Ezekiel would have been a prophet! I think that Warren Buffett is not just somebody who
just happens to be a successful businessman. He is a guy whos fundamentally
changed our own perception of what it means to be a capitalist. He has taken it many
steps further and I think that the world is a better place, and capitalism is something
better because Warren Buffett has lived the life that hes led. So the lesson that Ive
learned is that theres nothing that I learn that I dont realize after Ive learned it that
Warren Buffett already knew. I think that he deserves enormous and intense study.
There is just so much in that life that can instruct us. In a certain way were all seeking
the same thing. Were all seeking the wisdom of Warren Buffet and Charlie Munger, so
maybe thats the lesson! As you can see, Im a work in progress and theres a lot more
improving that I can do!