Zack Oliva (02:54):
I mean, my mom used to make her own clothes in high school. My dad’s first car, he had to put in a plywood floor because there was no floor, like the Flintstones. And they both worked hard. They went to college, and they saved and invested well. They were both public employees and they provided a great life for us. So it was a great kind of model for what could happen when you’re smart with your money. So really for as long as I could remember, Warren Buffet says this, and Warren Buffet says that has been part of my mental tape in my head.

Zack Oliva (03:27):
For as long as I could remember, whenever the phone would ring after dinner, my mom would say, Paul, your uncle, Roger. And then she would say, all right, boys, they’re going to talk about stocks for the rest of the night. And then I would watch my dad write down these little tickers on a piece of paper and then he and I would look them up in the newspaper. Again, I was so young, but it was a fun thing to do. And I remember, I was thinking about this the other day, there were three big parts in my dad’s investing life. I think it was when Blackberry became a multi-bagger. And I remember his reaction when that happened, which was total disbelief when Berkshire created the B-shares and when he found Fidelity Contrafund.

Zack Oliva (04:07):
And what’s interesting about that is I didn’t realize the significance of this until a few months ago. I was reading an article, I think it might have been in Barons, and they named Fidelity Contrafund as one of the top mutual funds ever. And Contra means contrarian, so the entire mutual fund was, of course, revolved around investing out of favor stocks and out of favor industries. So I was happy when I learned that, that my dad had those great successes.

Zack Oliva (04:37):
And I would say the biggest impact that it had on my career was that it made making money fun. I could talk to people about it. There was a context for it. And it was okay to make a lot of money, and it was an attitude. And you’re from the Midwest, Trey, so there’s that, get up and work hard work ethic. And there was a lot of that in studying Warren Buffet. The guy worked his tail off and still continues to do so. I couldn’t imagine a better mental model to have, especially when you’re young.

Trey Lockerbie (05:15):
When you’re in law school, I imagine you’re just consuming so much information, and Charlie Munger comes to mind, right? You’re reminding me of taking his roadmap where obviously he was an attorney for a long time, turned investor. What are the synergies between that? Obviously, financial documents and just studying documents in general and synthesizing a lot of information at once comes to mind, but are there any other benefits you found for skillsets you’ve taken from one to the other?

Zack Oliva (05:45):
Yeah. You brought up one of the big ones, which is obviously analysis and synthesis. And I think probably analyzing risk is a big one because as a lawyer, you’re training your brain to poke holes in a lot of things, was a difficult learning curve for me investing in Graham style net-nets, because there’s something wrong with a lot of these businesses. Right? But I think another big thing that it taught me was the difference between causation and correlation. I think that was a very be the lesson that those two things, there may be correlations between things, but that doesn’t necessarily mean that they’re a direct cause or approximate cause of that event.

Zack Oliva (06:30):
And so that’s allowed me to really, almost forget about the macro side in a lot of it because there’s a lot of correlations, but I don’t know if there’s a lot of causes. And it seems to me like the economists also can’t get it right at least half the time. So I’m really not in the business of making any of those macro predictions because I’ve just figured out it’s a game that I don’t think I can win.

Trey Lockerbie (06:59):
You brought up net-net, so let’s go there because that’s reminding me of the Buffet partnerships in the early days. In episode 431 with Ian Castle, he did lay out that Buffet started with around $105,000 which at the time, in today’s dollars, would be about a million dollars. And he increased it to around $8 million at the time, which by the time it converted to Berkshire stock. So, that would be about 65 million in today’s dollars. So that’s a huge increase and he was doing a lot of that by doing net-net. So the Graham style of investing that he learned at Columbia and under the tutelage of Graham himself. I’d like to talk a little bit about that playbook and what Buffet was using at the time, and what that looks like in today’s markets, given your experience.

Zack Oliva (07:45):
So first I thought that was a fantastic interview with Ian. He really seems like a smart investor. I don’t know him, but I was really impressed with that interview and the community that he’s built. But it took me a bit to learn about Buffet’s early partnerships and to really have that aha moment. And the question that you asked previously, which was when I talked about how fortunate it was growing up in a house that was, I guess, pro-Buffet, there was a downside to that too. And it took me a while to unravel that.

Zack Oliva (08:14):
When I was introduced to Buffet at that young age, he was really focused on great businesses at fair prices. Right? And why wouldn’t you be? You’re one of the richest people in the world. Your universe is X, right? Not the cigar butts Buffet, and so I really had to work my way backward. So basically I just found out that I wasn’t really getting the returns that I wanted. And so I thought, all right, well, what was he doing when he first got started?

Zack Oliva (08:43):
So if you go back and look at the partnership letters from the fifties, which are a great read, he was mostly focused on generals, which is today what we would call net-nets, Graham style. Basically, he was buying assets at a discount, current assets minus all liabilities, or could he buy below liquidation value? So at the same time, he was looking for workouts, which we would call special situations today. Now, depending on the availability of the generals, he would change up that allocation. So for example, in 1957, he wrote basically, Hey, wrote to his investors, if the market goes down, I’m going to buy as many of these generals as I can. I might even take out loans from the bank to do so.

Zack Oliva (09:29):
And so I think he loved the generals. I think the workouts probably provided him with more maybe intellectual stimulation and also probably provided him with more guaranteed returns, but they would take longer. So with the net nets, it’s like you’re going for those returns and there’s a lot of value there and you strike while the iron’s hot. Whereas with the general, I mean, I think he wrote in his letters that they could take anywhere from five to 10 years, that he could see at that time to work out. So I can analogize it from a business owner’s point of view. I think the generals are probably the bread and butter/keep the lights on style. And maybe the workouts or special situations would be like new business lines or expansion if you were operating a regular business. I don’t think that you need to do both.

Zack Oliva (10:27):
And Benjamin Graham, gave a few interviews right before he died. And he basically said, look, I know this seems too good to be true, that you can generate good, consistent returns using this kind of net-net approach. But I’ve been testing it for 60 years and I haven’t been able to find otherwise. So I think that either in the beginning or the partnerships when Buffet started moving away from the generals into the workout situations, everyone’s different, right? Some people like a lot of control in their investments. Some people want investments where they know the founder and believe in the founder, like in your interview with Ian. And so everyone’s different.

Zack Oliva (11:10):
And so I think maybe he got bored. I know Graham got bored with the net-nets. He would spend a lot of his time translating plays from Latin to Greek, Latin to French, or Buffet wanted more control over his investments. But what’s crazy to me is what an absolute machine he is. There was an interview with Alice Schroeder online after the Snowball Effect came out. And she wrote that even if he would see a general now, he would pick it up for his personal account. And then I listened to a Mohnish Pabrai video. It might have been one of your interviews when he said that he was in Buffet’s office and there was the Japanese company handbook on the desk. And Japan and Asia is usually a pretty good place to find these net-nets. And Pabrai said, look, you don’t even have that handbook unless you’re looking for these Graham-style net-nets. So I think Buffet wasn’t able to kick the habit.

Trey Lockerbie (12:11):
Yeah. You brought up being bored. I almost questioned too if the failed attempts, not that there were failed attempts, actually … If you think about takeovers around Sanborn or Dempster Mills in 1961, he bought 70% of that and actually turned it for a profit. But I think there was that realization of what a bad-cut company ultimately really looks like. Maybe not enough because, he went on to buy Berkshire at the time, but I thought of it as more of a, he felt the pain of a bad company. And a lot of these net-nets, that’s what they are. I mean, they’re net-nets for a reason, right?

Zack Oliva (12:52):
Yeah. It could be true. And I think the question with the net-nets is it as bad as the market thinks it is? So for example, there are some companies that I found where … So the law firm that I’m an owner of is a service business, right? We service oil and gas companies, essentially. There are some companies that I found that are trading below liquidation value. And I look into why and it’s, well, they lost one of their key customers that were 20% of revenue. And I sit there and think, man, I run a service business. If we lost one of our key customers, it would be bad, but it wouldn’t shut us down. You know what I mean?

Zack Oliva (13:37):
So I think it really, with some of these net-nets there’s usually a story. There have been others that I’ve looked at that have had bad management. Right? But they’re trading for so low that they soon get acquired, which is good. I think it’s pretty situational and you definitely got to look into these things obviously. But yeah, he probably did feel a lot of pain from those, especially because he was probably a lot more intimately involved with those folks than I am, for example. Right? I mean, I could sit, you know, on my phone, on my couch at home and by stock in a company anywhere in the world these days.

Trey Lockerbie (14:25):
Well, that’s what I want to talk about right there, because we’re in the information age now, Buffet was not. And he was literally sifting through Moody’s manuals, identifying stocks that the information on that stock would take sometimes a year to realize it being undervalued, et cetera, let’s, let’s just say. So there was [crosstalk 00:14:45] or never, right. There was an arbitrage of opportunity there, right, an information arbitrage opportunity. Whereas today in the information age, everyone can sit on the couch on their phone and read everything about every company’s lives, within minutes of news coming out. So one thing that came up with Ian that was enlightening was that these can still exist in the micro-cap world, especially because they’re just so small that no one’s paying attention or enough attention to them. And so the price can just drift lower and lower. Is that where you tend to shop around or have you found these net-nets in other parts of the market as well?

Zack Oliva (15:22):
I think that because of the way that the market is structured and the major participants in the market, right, some funds have rules where they can’t participate below certain market caps, or it just doesn’t make sense for them to go look into companies below say a hundred million. Right? So you have smaller funds in there that you compete with because you’re always competing with someone on the other side of every transaction. And you have, I don’t know, I like to think of retired dentists maybe being on the other side. But I think generally in the small and micro-cap space, there’s a lot, but there are always exceptions to that.

Zack Oliva (15:59):
I don’t remember the exact year, but in the 2000s, Apple was a net-net. So I don’t know if I really want to be the poster child for like, Hey everyone, go out and buy net-nets because they’re out there because that would be competitive. But I’ve read in books in the last several years with famous investors who got started in Graham-style investing and they’re in print saying, yeah, I used to do these net-net stocks, but they don’t exist anymore. And I’m like, well, yeah, they do. You can find them. And it’s great when you do.

Zack Oliva (16:36):
So yeah, I don’t know if that’s a misconception in the market. I think it also could be the times. If I look at a large group of people, say the folks that attended my wedding, right, then they’re not looking for net-nets, they’re looking to do options trading these days. They’re looking at the FANG stocks. They’re trying to buy Tesla. They’re trying to invest in Bitcoin. It takes a while, I think, as an investor to get to wrap your head around net nets. And it’s a leap of faith, right? It’s a leap of faith in the market and in an investing process. I’m satisfied with the evidence that exists on it and the performance, but other people may not be and that’s their prerogative.

Trey Lockerbie (17:30):
You mentioned the other side of the trade, and one exchange that has been happening as of late that I just find interesting and maybe topical for this discussion is the transfer of shares it would see from Carl Ichan to Warren Buffet with Occidental. I’m curious what you think about that exchange, if you just have any general thoughts on that when you’re thinking about Carl icon being on the other side of the trade, but Buffet’s buying. I just find that dynamic pretty interesting.

Zack Oliva (17:59):
Man, I don’t know. That’s a battle between Titans. Carl Icahn is a legend and the picture also changed, right, from when Buffet bought to when Carl originally got involved in Occi and some of these other oil and gas companies. The market has changed a lot since then, so I guess I don’t have any really big insight besides that it’s kind of funny and it seems like Carl’s always trying to catch up to Warren. This is just another …

Trey Lockerbie (18:43):
It does. All right. So sticking with the partnerships for a little bit longer, one of the more interesting points about the Buffet partnerships is the fee structure. And so walk us through what that fee structure was and how it’s actually inspired you and your own fund and its fee structure.

Zack Oliva (19:00):
So the fee structure in the Buffet partnerships was basically a 25% fee to him, a performance fee, above a 6% high watermark. So in some partnerships, he shared the downside, he didn’t do that very long. And for example, if he only made 5% in a year, he had to make it up in the next year to get his fee. So it didn’t just inspire me. I mean, I copied it and there are a few reasons why. First, I don’t really need the management fee. So I’ve run businesses before, besides the law firm, besides this investment fund. It’s basically a vehicle for me to manage my money, my family’s money in one place, and have partners participate alongside me. So I’m not really worried about the management fee. I don’t need it to pay the rent or for a Bloomberg subscription or anything like that.

Zack Oliva (19:52):
Second, I really wanted an incentive on myself to keep costs low. And I really can’t think of a better incentive than the fact that they come out of my profits. So I don’t have, nor do I desire to have a bunch of analysts, Bloomberg subscription, investors relation person. I have a few website subscriptions, like Net Net Hunter, and I subscribe to Value Line. And outside of that, my costs are pretty low.

Zack Oliva (20:22):
Really, I think the biggest asset that I have is not technology, it’s my brain. And so I just try and really protect that. I’m also an entrepreneur at heart, so I love getting paid for performance. It’s how I’m wired. If I’m not doing my job and getting people’s returns, I don’t see why I should get paid for that. And so the way I look at it, when I’m doing well, my partners are rewarding me handsomely, but they’re getting great returns. So I really think that everyone wins with this structure.

Zack Oliva (20:55):
And fourth, lazily, I just saw that Mohnish Pabrai was doing it, and I heard him talk about it a few times. And then it just became such an obvious, obvious no-brainer to me because of a lot of the reasons that I mentioned. And I just think that obvious decisions are the easiest ones. One thing that’s interesting about this is Guy Spear a few years ago, probably in the early 2000s maybe, he did a blog post where he basically said, Hey, if you have a Buffet part style fee structure in your partnership, please write in. I want to hear from you. And he posted the results of that on his blog.

Zack Oliva (21:33):
And most of the folks who wrote in said, I have a Buffet fee structure, but it’s modified and I charge half a percent for management fee. Or I have a Buffet partnership and I have a 1% management fee. Sometimes people just can’t give up the management fees. And so I found that funny, but I get it. If you’re just starting out and you need to pay the rent or you need to feed yourself, I’m not knocking it. It’s just a situation or rather a structure that I find works the best for how I’m wired and for how I look at performance.

Trey Lockerbie (22:11):
It seems to align the interests of the partnership.

Zack Oliva (22:14):
I actually got negative feedback when I started the fund about the Buffet fee structure, that some folks said, well, in this day and age, because hedge funds are a thing, right, and I live in Houston where it’s private equity funds and investment FANG funds galore, no one’s going to take you seriously if you don’t charge your management fee. I don’t know if that’s true or not. I think that if people do think that way, it means we’re probably not aligned. So it probably does a good job screening folks out that I maybe wouldn’t want to be partnered with anyways. But yeah, it’s an interesting topic.

Trey Lockerbie (22:52):
Sometimes from those skeptics, you often hear that, well, Buffet could do that back then because interest rates were higher. They were in the 6% range or whatever, which actually isn’t true. If you go back to the 1956, ’57 era, when he was getting started, interest rates were below 4%. They were in the threes.

Zack Oliva (23:11):
Yeah.

Trey Lockerbie (23:11):
Right? And they bounced around from there. So they’re not that much higher than they were here. The S&P was performing more, so 6% often seemed a little odd to me in some ways. Right? It almost seems random if you look back at history. I’m curious, is it arbitrary? Does it come from something that you found?

Zack Oliva (23:27):
I think it’s what he decided at the time, based on a very young Buffet and it worked for him and he kept it. I don’t know what the most appropriate thing is to base it on. Do you?

Trey Lockerbie (23:43):
I don’t, but if I’m speculating, it’s almost like he saw this risk-free rate and said, well, I can double that.

Zack Oliva (23:49):
Right.

Trey Lockerbie (23:50):
It almost seems like a confidence thing.

Zack Oliva (23:52):
Right.

Trey Lockerbie (23:53):
I can at least double that and then I’ll collect from there.

Zack Oliva (23:56):
But then does the rate change? Does it float with the risk-free rate?

Trey Lockerbie (24:01):
Good point.

Zack Oliva (24:02):
So then new investors that come in are then paying a different rate if they come in … their high watermark is different three years from now. So I just said, you know what, easy decision. Let’s just stick with the six and let’s just let it roll.

Trey Lockerbie (24:17):
I love 6% also because based on the timeline you’re looking at, you could say that that’s roughly the net return of S&P 500, for example. So it’s like, Hey, I’m competing with the index. You could get your 6% there, but you’re going with me, so I should be rewarded on anything above that. That seems like a fair [crosstalk 00:24:35] return as well.

Trey Lockerbie (24:37):
All right. Let’s shift gears a little bit and talk about the art of investing because you and I have both reached a similar conclusion and that is that you really can’t invest using someone else’s just rigid framework blindly, at least. And when I think about that, I compare it to being a musician. And you can learn how to play guitar like Stevie Ray Vaughan, for example, all day long, but if you wanted to really breakthrough, you’d really have to come up with your own sound, your own approach. And I think investing is really no different. So some of your influences are names that we really haven’t touched on with this show yet. And I’d like to specifically ask about the influence that Walter Schloss and Alan Mecham have had on you. And if you could provide, first of all, just a background on those two investors, specifically.

Zack Oliva (25:26):
Walter, in my opinion, does not get the love that he deserves. I mean, this is a guy, who worked as a teenager for Ben Graham and basically as a runner and didn’t go to college and he outperformed the market for 50 years. If you would’ve invested with him on day one $100,000, that would’ve turned into something over 100 million over those 50 years. If you would’ve invested in an index fund of the S&P or the equivalent, that would’ve returned something like 10 or 11 million dollars. So also Walter is a fantastic case study and just the nature of compound interest, right? And I think his average returns were 16% and the markets during that time were nine or 10. So really just beating the market by a little bit over a long period of time can really be that time as the multiplier there.

Zack Oliva (26:26):
He had simple rules, he avoided debt. He bought mostly what Buffet would consider being generals. And I mean, he worked for Ben Graham, right? So bought generals and stocks trading below book value. He tried to buy at a multiyear low. He never talked to management. A friend of mine thinks that he was a simple guy with a great temperament for investing, and that’s what I love about investing. You don’t have to be Warren Buffet. You don’t have to be Charlie Munger. You don’t have to be Carl Icahn as long as you have the right attitude and the right temperament. And you don’t have to be the smartest guy in town. You don’t even have to be the smartest guy on your block. You just have to have patience, discipline, and the right temperament, and not deviate from those things. And those things will carry most of the weight.

Zack Oliva (27:17):
He had low overhead, which I love. I think his overhead, he was running hundreds of millions, it was 10,000 a year. He worked basically out of a closet at Tweedy, Browne, and his expenses were value-line postage and his phone line. He didn’t have any assistants or analysts. I think eventually his son started working with him later in his life, but … oh, and he worked nine to five. So a friend of mine said that Walter wins for the greatest return on time. And I think what’s lost today is that … Isn’t that what investing is all about, a return on your time? Or is it this hashtag grind, hashtag working 18 hours a day building out these DCF spreadsheets, reading these analyst reports? If you’d like to do that stuff, that’s great, but I’m terrible at Excel. I’m absolutely horrible at Excel.

Zack Oliva (28:23):
So I think what I love about Walter is he was really good at leveraging his time and he used that by having the right attitude and the right temperament and as a business owner, and I’m sure you can appreciate this, the best leverage that you can have is the right strategy, the right decisions, and using your time effectively. That’s what investing should reward. He was also incredibly organized. I mean, he managed over 100 holdings at once, which I actually have to dig into because that would be a lot to manage.

Zack Oliva (28:57):
Alan Mecham, he’s a really interesting guy to study. There was an article that came out in Forbes probably a decade ago that called him the next Warren Buffet. I think he seems like a pretty private guy, and the article was really interesting. He started in high school investing, studying Warren Buffet. And his office was above, I think, a taco shop in Utah, and he was putting out 40% returns. And so he left some breadcrumbs here and there that you try and learn from, but he had a very … You look at some of his investments and they’re so obvious in hindsight, like buying Berkshire with leverage in 2008. Of course, that would work. Berkshire was built for that situation. Right? Of course, that would work. I think he closed down his fund two or three years ago. He is a real, really interesting guy who didn’t do a lot of marketing and didn’t do a lot of PR stuff. He just did a lot of really great returns for his investors.

Trey Lockerbie (30:11):
I love that you brought up the IQ points, for example, because Buffet has joked that if you’ve got 165 IQ, you should sell it off to 125 roughly because you don’t need all that for investing. Buffet’s so good at this, right, disguising a complex style and just making it sound so simple. And I mean complex … not so much complex, I guess, more like hard to execute because it really doesn’t take into account the human bias and emotions that could go into all of it.

Zack Oliva (30:43):
Yeah.

Trey Lockerbie (30:43):
Both of these men, as well as Buffet, had a deceptively simple investing thesis, as you pointed out. What are some of the pitfalls to watch out for when you’re trying to follow such a simple investing framework like that?

Zack Oliva (30:57):
Yeah. There are definitely pitfalls. First, I mean, the whole great business at fair prices thing. Looks great on a bumper sticker, right, but what’s a great business? Is it the founder? What if he dies? Is it the product? Do they have a lot of competitors? So I think what makes a great business is based on your experience over a long period of time. From my experience, I’ve arrived at the conclusion that for me right now, a great business is a monopoly with fat profits, because I’ve seen everything outside of there fail or go away that I didn’t think was going to go. I have yet to find a net-net like this, but if anyone listening to this does, please call me immediately.

Zack Oliva (31:49):
Another pitfall I think is that it can be boring using a simple process. Joel Greenblatt said that the hardest part about investing in the waiting, and I agree. Like you said, sometimes with these net-nets, it could take a year for them to work out. But is that really a long time or does it feel like a long time because you’re checking every day? Why isn’t anyone buying this? Why isn’t anyone recognizing the value of this idea? So a good friend of mine told me that it doesn’t matter what business strategy you pick, pick one with a lot of evidence behind it and then just go execute on it. And it’s probably the best advice that I’ve gotten in the last decade.

Zack Oliva (32:35):
Usually, when I hear of investors who were successful and then not, it seems to be because they got away from that simple style of investing. I can tell when my friends who run investment funds are bored. I usually get a phone call. I think I’m going to start investing in real estate, or there’s this crazy macro situation going on that I really think I can take advantage of. And I just say, go walk your dog, stick with your style. It’s working. The market will keep up, it’s proven. And I think also having a beginner’s mindset and not getting overconfident is important. You don’t need to know everything about everything, nor can you. I think with a simple investing style, it really is important to be questioning that. Right? But also at the same time trust in it, that may be very contradictory.

Trey Lockerbie (33:30):
Yeah. You almost need an accountability partner, right, which seems like what Munger was to Buffet in a lot of ways. And I mean, he was challenging him to find new ideas. Speaking of new ideas, we touched on earlier how it’s probably not wise to simply, blindly follow some rigid framework from someone else’s investment style. But on the other hand, cloning appears to work rather well. For example, Mohnish Pabrai, who’s been a frequent guest on our show, is very outspoken about not having any original ideas. And so if we were to go that route and we were to clone others, where is the best place to start in your opinion?

Zack Oliva (34:08):
Sure. So on the originality, I think that it really helps to clone people and to clone investors in the beginning because it gives you a solid framework. And within that framework, you will your own originality. So if you took maybe the five top Grateful Dead cover bands in the world and you put them all next to each other, there’s going to be a lot of originality within there too. So I would call it maybe structured originality is important, but I think it’s really important to clone people in the beginning. And essentially I’m cloning Benjamin Graham’s approach right now. That’s how you build a circle of confidence. There’s a framework there for building the circle of confidence.

Zack Oliva (34:56):
I don’t know anything more about investing than Benjamin Graham did or Warren Buffet did when he got started. I don’t want to be those guys. I want to be the best investor that I can be. So I don’t wish I had Warren Buffet’s life. I don’t wish I had anyone’s life but my own. So there’s a difference between cloning, I think, and thinking that you’re going to be someone. You’re cloning the approach and the strategy, which has evidence that it works, but you’re just trying to be the best investor that you can be using that strategy.

Trey Lockerbie (35:33):
See, I love that because there’s that distinction between … it’s not an either, or, right? It’s almost chronological. You have to master the basics to create the platform to jump off of and be your own original. That makes a lot of sense and does tie back to music quite frankly, too, because you think of the Beatles, you mentioned the Grateful Dead. All these guys were studying the greats before them, right, [crosstalk 00:35:55] whether it was R&B or whether it was some other genre.

Zack Oliva (35:56):
And then you split off and it’s amazing and you have more confidence and you can bring those styles into it. Right? So yeah, I think it’s an interesting concept.

Trey Lockerbie (36:09):
You brought up an interesting point just there about Mohnish moving to compounders, because there is that element of capital and how much you’re putting to work. And at some point, you might just have too much money to move into a smaller [crosstalk 00:36:19]

Zack Oliva (36:18):
He’s managing a lot more money. Yeah.

Trey Lockerbie (36:20):
Exactly, and that’s what Buffet had to do it as well.

Zack Oliva (36:23):
Also, it’s less work, right? You find that compounder, you don’t have to spend your days looking for these Graham-style investments. I think he’s doing what Nick Sleep and they did where they find two or three amazing businesses and you just let it ride for a while, which is a great idea. But also the Graham-style stuff is fun for me right now.

Trey Lockerbie (36:48):
Yeah. And again, as you said earlier, some of this advice makes for a great bumper sticker, which I love, but when you dig into investing in these great investors, you start to understand that even though it looks simple, it requires nuance. For example, Walter Schloss came from Graham and Doddsville, as Warren Buffet would say, but even having Warren Buffet as a colleague, I mean, Warren has said that he had no influence on Walter Schloss. He very much was an independent thinker doing his own thing. And even if you have Buffet in your ear telling you it’s a good or bad idea, you think that would have some impact on you, but not for him. So you can clone to a certain degree, but you have to pave your own path and have your own creativity. I don’t know if I buy into it being as simple as what Mohnish makes it out to be. So let’s just talk about when you get to the office and what the first thing you do is when you are looking for a new investment or you’re showing up to work, just trying to find an opportunity.

Zack Oliva (37:41):
Well, I make sure I’m nice and relaxed. I make sure I have a checklist to make sure that I didn’t show up to work to buy something, and I’m looking for big obvious opportunities. I’m trying to think of an example of a big obvious … So a big obvious opportunity to me would be a company that’s been in business for 10 years or so, decent profitability, unloved industry, maybe an unloved story behind the company. And they’re trading for less than the amount of cash they have in the bank, to me, on a per-share basis or market cap or whatever. To me, as long as there are other things there, the management’s not diluting shareholders, they have little to no debt obviously, they’re trading at an all-time high, which at that point they wouldn’t be at all, I just look for big obvious opportunities and I just try and keep it simple like that.

Zack Oliva (38:45):
I mean, I’m trying to think of there’s … I don’t use screeners. I use Value Line, a few websites, but mostly on the weekends, I’m looking through just micro-cap, small-cap. I’ll even look in Barons and look for the PE of one company. And I’m just looking for big obvious opportunities. And I still pick pennies up off the ground when I see them on the sidewalk, right? So I’m looking for free, essentially, or discounted money basically.

Trey Lockerbie (39:20):
You mentioned not using screeners. Another frequent guest of ours is Toby Carlisle and he’s very adamant about Deep Value, one of my favorite books actually, Deep Value. Everyone should go read it. But using a purely quantitative approach basically to mitigate the human emotions, and human biases that get in the way, what, if any, quant style tactics or metrics do you tend to look for in an investment?

Zack Oliva (39:45):
That is a fantastic book and everyone should go read it, and Toby’s probably right. I have a few antidotes for this. So first, in the last interview before his death, Ben Graham said, look, the best way to do this is to buy low PE stocks. I know I wrote this book on security analysis and the intelligent investor, et cetera, but really you could do this by buying low PE stocks. And there was a not recent, but a daily journal meeting in the past where Charlie Munger said, look, if you just buy a company that’s trading at two times book and is doing 20% return on capital every year, your life is going to turn out, your investing life is going to turn out really good.

Zack Oliva (40:27):
Lastly, I don’t even know if this is a true story and I cannot find the story anywhere, but in the last few years, I read a story about a guy who lived in the mountains in a cabin. I think it was in Colorado. And once a year he would go down to town, he would get a newspaper, he would buy a few stocks trading at their 52-week lows, call his broker, place the order, and then go back to his cabin for the next year. He did really well. So again, I don’t know if that story is true, but that is how I think about investing.

Zack Oliva (41:03):
The things that I look for, I guess, on a quant style would be I’m looking for low PE ratios. I’m really looking at the current assets and the total liabilities and trying to get a Graham-style discount. I don’t like debt. I don’t like stocks that are being diluted by shareholders or diluting management, so that’s something that I pay attention to. But I’m not putting together these DCF models for the next 10 years, trying to predict our cash flow in these businesses. I mean, they’re just so cheap that you can drive a truck through the valuation. As long as a business doesn’t go out of business and if you’re buying below liquidation value, it almost doesn’t even matter. So those are the things that I look for.

Zack Oliva (41:53):
But I think Toby’s probably right. I mean, I think that fidelity had a study that came out years ago that looked at their top-performing accounts and it was people that were dead and people that forgot their password. And so how hard do we really want to make this? I think as humans, we will like to see patterns in things that sometimes aren’t there. And again, there’s a big difference between correlation and causation, right? So I think, and this also goes back to cloning, how hard do you want to make this?

Trey Lockerbie (42:27):
I think it’s a great point. And actually, that story reminded me of Eddie Elfenbein who we had on the show, episode 413 because he puts out this thing called The Buy List. His fund is one purchase once a year. He re-balances it once a year and then he checks it again. He had this funny quote that someone said, what’s your year-end target? And he said, December 31st. It’s just so [crosstalk 00:42:50]

Zack Oliva (42:49):
Well, it’s true. I mean, I have friends that are analysts at investment funds too. And they’re like, we had to buy this because we had to get that 5% boost to close out the quarter. And so it’s really, how difficult do you want to make things?

Trey Lockerbie (43:05):
Speaking of difficulty, Buffet has said that he’s not looking for seven-foot hurdles, he’s looking for one foot hurdle, which means easy bets. I’m hoping you found one of these because I have yet to really feel like I’m putting money into something where I’m like, oh, this is a one-foot hurdle. This is a slam dunk. This is a layup. But could you give us an example of something you might have found that matched this profile?

Zack Oliva (43:28):
I’ll give you two examples. One large-cap a few years ago, Chipotle had a … it might have been up by you in California. There were some folks that got sick, right, from food poisoning. And the stock, the media frenzy, the stock tanked so much, that it was trading near the value of the real estate that Chipotle owned. You almost got the entire business for free. That was a no-brainer. That was a one-foot hurdle. You had to ignore everything else though, right? This is systemic, there are problems with the supplier. If you looked at the facts, assuming that Chipotle even recovered and lost 50% of their business, you still would’ve done well. So I think that was a 40 or 60% gain in five months.

Zack Oliva (44:20):
Another company called support.com that was a non-current holding a few years ago, it was a service company. And they were an outsource customer service company for AT&T, Comcast, things like that. It had been in business for over 20 years. And this is an example where when I found it, it had just lost its biggest customer, which actually represented half of its revenue. So it was a pretty big loss, right? It was trading for less than a dollar a share. It had $2 a share in cash on the books, no debt. Oh, and it had $9 a share in total assets. And it was on sale for less than a dollar. So I just thought to myself that the market was really pricing this thing as if it had lost all of its customers and that they were immediately going to go out of business.

Zack Oliva (45:13):
And I thought, man, if they just add one new customer, right, or get acquired, then that’s great. And they ended up getting acquired. I think it went up 800%. And then when I sold it, it went up another 1000%, I think. So sometimes stuff like that happens. I guess you can make the argument that one of my best investments actually turned into one of my worst investments based on that. Right?

Trey Lockerbie (45:43):
Yeah.

Zack Oliva (45:43):
If you think about it from a business owner’s mindset, if your buddy has a business, a small business, maybe they do 10 million years in revenue, they lost their biggest customer. But your buddy says, look, the overhead’s low. I got to get this off my hands. We’re only going to do five million a year in revenue now and I’ll sell it to you for five million dollars, but I’ve got 40 million in stock and cash. You would be like, dude, yes. What’s the catch, right? And so the market prices things like this sometimes. And it’s really a matter of just finding them and digging into what the story is. And also, I don’t like buying them one at a time. I like buying them, using a basket approach. Right? But I’m all in [crosstalk 00:46:41]

Trey Lockerbie (46:41):
What do you mean by that, with the basket approach?

Zack Oliva (46:44):
They’re statistically cheap, but you don’t know how long they’re going to be cheap. Right? And so, as you said, sometimes things take a while to work out. It could take a year to work out. So I usually try and buy, and then I set a reminder for two years in the future. And I say, okay, this is one … unless my broker, I get a big blinking notification like something crazy happened. I have been blessed and it is a blessing talking to some of my friends. I rarely check the market and I rarely check my holdings. Whenever something really good or really bad has happened, that information tends to find me one way or another. I’ve never had my stocks on my phone. I don’t log in every day and check to see where things are at. I don’t know why I don’t do that, but I just, I’ve never done that.

Trey Lockerbie (47:40):
Yeah. We should go on record and say, I don’t see a TV in your office right now. I do, however, see a really cool painting of Charlie Munger on your wall. Is there a story behind that?

Zack Oliva (47:49):
Yeah. It makes me work harder and not be stupid, Grandpa Charlie staring at you all the time.

Trey Lockerbie (47:55):
So I have to ask, because I know that you are not typically investing in the oil and gas industry, even though you’re an expert in it and your law practice is highly focused on it. Maybe talk to us about why you might steer away from that industry if you were so inclined.

Zack Oliva (48:12):
Well, I know how the sausage is made. It’s really just a preference. I think there are some amazing operators and entrepreneurs in the oil and gas industry. It gets a bad rap right now, but really I found it to be just full of folks who are very hard working and take a lot of pride in their work. But as a rule, I tend to stay away from natural resource production companies. Service companies, I just feel are much more within the natural resource. Service companies are much more within my circle of competency in running a service business. I can understand what levers should be pulled, or if those levers are pulled, what that would look like for the business. And it’s really just a personal preference. It cuts down on the amount of stocks that I have to look at too, which is always good. I think that area is probably better left to specialists like Young, right? Who was just on your show, who loves investing in the industry, has great relationships with a lot of folks that are really, really bright in the industry. And he’s really a specialist in this field.

Trey Lockerbie (49:25):
That is so interesting to me because I would almost call that an anti-circle of competence, meaning you have such knowledge around a specific industry that it actually makes you avoid it. The only other time I’ve encountered this is when we had Dev Kantesaria on the show and he had decades-long experience. He’s a medical doctor. He had all this huge bio venture background. And yet he has basically sworn off of it, investing in that. So that kind of stuff is so interesting to me, just having such a piece of knowledge and choosing to actually shy away from a certain industry because of that knowledge. I just don’t think you come across that very often.

Zack Oliva (50:02):
Yeah. I don’t know. I don’t know. I love working in the industry, it’s fascinating. And again, there are awesome people and companies that are doing amazing things. I just have never really looked at it as something that I would be interested in investing in, and I can’t tell you why. I have an answer for you, obviously, that I gave, but I don’t know.

Trey Lockerbie (50:28):
You mentioned that your lifestyle suits you very well and it doesn’t involve flying, jet-setting around the country, or meeting with managers. And when you were talking about your quantitative approach, I didn’t really hear managerial metrics in there. For example, something like the return on invested capital. How do you gain the management of a company if you’re not looking at specific metrics like that or meeting them in person? What is your proxy for just establishing if they’re a good management team or not?

Zack Oliva (50:56):
Yeah, so it might be an unpopular answer, but I don’t put a lot of faith in … not faith, that’s not the right word. I don’t put a lot of weight into meeting management or talking to management. I think that there are plenty of data points to look at. Well, I mean, one of them, is a return on capital, whether or not a company is profitable. Are they diluting shareholders? What do the executive compensation and the performance scheme look like? Whether there are shareholder lawsuits against them, those could tell you a lot about management. My dad always told me his motto was, to listen to what people say, but watch what they do because that’s what they’re really like. And so I look at those data points and make a judgment on management. Humans are very impressionable, myself included, right? And CEOs got to where they are partially by being great at sales. And to me, I don’t like that math. There’s not a big enough margin of safety in that math. What’s the first thing that you would look at in a business to see if management was doing their job if all you had was the data?

Trey Lockerbie (52:11):
I would defer to the answer I got from Tom Gayner at one point, which was the company’s debt. He mentioned this … I think it was pirates or this comparison to folks who you can learn a lot by how much they’re using debt to run the business. And I’ve always found that to be an interesting first indicator.

Zack Oliva (52:29):
Yeah. You don’t hear that much.

Trey Lockerbie (52:31):
You really don’t.

Zack Oliva (52:33):
No.

Trey Lockerbie (52:33):
And it’s funny you mentioned that too because as much as Buffet and Munger stress the importance of a great management team, I’ve also heard them say that if it really came down to product or management, who would win out? And it’s a product every time in their opinion. Right? I think Coca-Cola comes to mind [crosstalk 00:52:51]

Zack Oliva (52:53):
You can have a great enough product that you could have monkeys running the business. That’s a great business.

Trey Lockerbie (52:58):
All right, Zack, this has been so much fun. Thank you so much for your time here. And before I let you go, I want to definitely make sure I give you the opportunity to hand off to our audience where they can learn more about you, your fund, and any other resources. You mentioned Value Line. I hadn’t even to that, so you’re full of these awesome resources. If there’s anything else you can share, it’d be awesome.

Zack Oliva (53:17):
Sure. So I appreciate you having me on. This has been a lot of fun. I’ve been a big fan of your show for many years, so this is a really great experience for me. The easiest place to find me is zacknotes.com, that’s Z-A-C-Knotes.com. I write there, I have links to other stuff. It’s a central point to connect, and Value Line is an amazing resource. This is what it looks like. They send you this big binder. It used to be weekly updates that you would get on their universe of stocks. They’re switching to monthly. The next thing I know they’re going to put everything online, which will really be the bane of my existence. I’m very much a paper guy. But yeah, it’s a great resource and everyone should check it out. Anyone interested in Graham-style investing should also check out a website called netnethunter.com. It’s a really good resource.

Zack Oliva (54:10):
One last thing I want to mention is one of the people who … actually, the only person who really got me involved in your show many years ago was a good friend of mine named Sal Ponzi, who was a fantastic entrepreneur from Youngstown, Ohio. He also had a very promising career at Ernst & Young, and we were best friends really since preschool. And he wrote a book called Fit Finance, which is available on Amazon. And it’s a book that he wrote for high school students and college kids on everything from compound interest, to why you need to start your 401k now, to how to get out of debt. Along with things like the psychology behind investing and spending.

Zack Oliva (54:53):
Basically, he took all the lessons that he had learned in his mid-thirties and said, just the kind of guy he was, I wish I would’ve known about this when I was in high school. Our personal finance class in high school was how to balance a checkbook taught by the football coach. So we didn’t learn a whole lot about compound interest there. So sadly, he passed away from cancer, a really heroic battle, about four months ago. So all the proceeds from his book go to scholarships for high school students and everyone should go buy a copy.

Trey Lockerbie (55:30):
Absolutely. We will make sure to put that in the show notes for everyone interested. We’ll have a link to that book. Thank you for sharing that. Zack, this has been such a wonderful conversation. I really enjoyed it. Let’s do it again sometime.

Zack Oliva (55:41):
Yeah, absolutely. Thanks for having me on, Trey.

Trey Lockerbie (55:44):
All right, everybody. That’s all we had for you this week. If you’re loving the show, please don’t forget to follow us on your favorite podcast app. If you’re looking for more resources, you can definitely find them at theinvestorspodcast.com or simply Google the TIP finance tool. And if you’d like to give feedback, you can always find me on Twitter @treylockerbie. And with that, we’ll see you again next time.

Outro (56:03):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by the Investor’s Podcaster Network. Written permission must be granted before syndication or rebroadcasting.