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The (Mis)education of a Value Investor

Steve Hind
Leading value investor Guy Spier talks to The Harbus about how he’s learned from his mistakes at HBS, and how the school and its students can learn and improve.

Guy Spier graduated HBS in 1993 as – in his own words – an arrogant sonofabitch. Guy had come to HBS after topping Economics at Oxford, via a stint as a consultant at Braxton Associates. At HBS he missed the chance to meet Warren Buffett because he was pining after a girl who didn’t return his affections. At the time he didn’t mind, he dismissed Buffett as a lucky speculator. After all, he’d learned at Oxford that the Efficient Markets Hypothesis meant that searching for undervalued stocks was pointless.

Guy graduated HBS to a job as advisor to the Chairman of the now infamous and defunct investment bank D. H. Blair. After 18 months of increasing panic at the dodgy practices at D. H. Blair, Guy quit and suddenly found himself tainted and unemployable.

Today Guy is one of the world’s leading value investors and runs the Aquamarine Fund, styled on Warren Buffett’s early partnerships. Founded in 1997, the fund has a cumulative return of 463% since founding, compared to 167% for the S&P 500. He is a member of the HBS Alumni board. More than that, Guy is a changed man who wants others to learn from his mistakes. ‘Too often,’ he says, ‘people get very successful and then want to hide their pasts.’

As part of that mission, Guy has written The Education of a Value Investor, which will be released soon by Palgrave Macmillan. Guy provided Harbus with an advance copy and spoke over the phone with me last week about his book and his reflections on his time at HBS, his advice for the school and his advice for incoming students.

This interview has been lightly edited for length and clarity.

SH: You say in your book that there was an extent to which Oxford and HBS had failed you: “How is it possible that I could be so well educated and yet not have the common sense or moral courage to get out of D. H. Blair instantly?”

How can business schools avoid failing people in this way?

GS: Plenty of people leaving HBS didn’t have the career problems that I did. So it’s wrong to say HBS is failing people across the board.

There’s no question that I was an arrogant sonofabitch. I was too clever by half. I had an inflated sense of my own abilities.

The case method is so good, but when it came to finance we were busy doing capital asset pricing model and figuring out the weighted cost of capital – it went into this very theoretical stuff. Instead, if you think about the situations I was in at D. H. Blair (pressures to talk up questionable stocks, compromised objectivity in analysis), you can imagine it’s not high falutin finance. It’s not the options pricing model. It’s very practical stuff that I think HBS could have prepared all of us better for.

The people who presided over the financial crisis were primarily educated at business schools. There’s clearly something that class of people are not aware of, or are allowing to creep into the system, that could be addressed more directly by business schools.

I think it comes down to the fact that when you’re in one of these financial positions you have enormous amounts of power over other people’s money and there are incredibly distorting incentives. I was completely unaware of all of that.

We are taught a theory that capital markets work perfectly, but they work terribly in a way. The whole time I was at HBS no one taught me about the Glass Steagall Act, and why that was so important.

It’s not about teaching straight ethics. There’s a unique and mind-bending warping that happens to participants in the financial markets, where the people taking the most irresponsible risks (like securitising mortgages pre-financial crisis) are the ones who bring in the revenues for the firms and earn bonuses. It would be good to have some element of a course that addresses these issues straight on.

It would be good for business schools to recognise these situations because so many of their graduates are going into these jobs that they have some kind of moral obligation to at least try to educate them about that.

If I’d not fallen under the sway of Warren Buffett, who knows, maybe I’d still be working at some skeezy place and if not committing financial fraud, then at least not serving society very well.

HBS has FIELD. That’s wonderful, it heaps to deal with globalisation. It’s got the i-Lab which is a new innovation that deals with the burgeoning growth of the tech sector. But what are we doing differently in finance education? There’s where I think there’s more that could be done.

SH: You’ve talked about poisonous effect of the misalignment of incentives between D. H. Blair and its clients. And you’ve said there are similar problems in the big name investment banks as well.

How should HBS grads think about identifying these sorts of incentive problems in potential employers and what are their obligations to correct these when they’re leaders in the business world?

These are hard questions to answer. Just asking them does a service to people because they are the right questions.

If you look at my story, I was oblivious to some things that I should not have been oblivious to. It took me a bit of time at D. H. Blair to cotton on to what was actually going on there. It would’ve been good to make me aware of that, maybe by teaching a case on a place like D. H. Blair or on the Wolf of Wall Street, so students understand in detail how those schemes work.

Here’s a career scenario. Imagine a HBS grad goes into Lehman Brothers and work for five years in some department. He sees that the guys who are securitizing subprime mortgages are the guys who are making all the money. But the grad is not making a big bonuses. And it’s five years on, they’ve got married, they’ve got a mortgage, they have kids at home and a partner on parental leave and money’s tight.

And the guy who’s securitising mortgages is taking clients out to expensive dinners, and our grad is feeling like a real fool. At some point, they say ‘f___ it, I’m going to join them and do the same thing.’

When you get to that point, when the person decides they want to make the money and advance, it’s really hard. So as an individual we all have to try to plan our careers a little better to make sure we don’t get into these dead ends. We have to know that when you get to that point five years on, it’s going to be very hard to resist, so don’t go anywhere near it.

The people at the very top are the ones who have to be really clear what they’re about. If they see a division making lots of money but taking lots of systemic, unsustainable risks, they have to say ‘we’re going to make less money, but we’re going to do it right.’

That’s why the people at the top are so responsible. It’s the people who don’t need to make any more money that have to take decisions that don’t maximise profits but maximise something else. Charlie Munger has said when bad things happen at the big firms, it’s the people running them that should be indicted, not the ‘rogue traders’.

So you can’t put too much blame on the recent HBS grad in our example who’s five years out. But we do bear some responsibility and have some ability to manage ourselves and our situation. Afterall, it is the HBS (or Wharton, or Stanford, etc) grads who are 25 years out and are the directors of these firms.

SH: When you joined D. H. Blair after HBS, you talk about becoming increasingly distressed at what was going on, but feeling you couldn’t quit because it would signal to your peers and classmates that you’d failed.

How can HBS and its students foster a culture that seeks to prevent people make decisions out of a fear of appearing to have failed?

First, it’s really important to ensure that as many students as possible, if not all students, graduate HBS with no debt. That goal might be 20 years out. You need to free the students up to make choices that are not based on money.

There’s a multi-pronged approach, but one approach is that you have to grow the endowment. You have to convince people to donate to HBS for that reason, so that admissions is completely blind as to the ability to pay. And so that graduates leave uncompromised by the ability to make money.

There are many people at HBS, who if they weren’t compromised by the need to pay off student debt would go off and do some incredible stuff.

Secondly, when we celebrate successful alumni, it’s too easy for HBS to go for the people who’ve been outwardly successful; the guys who’ve started big companies in Silicon Valley. We’re in the United States, so money is the measure of a lot of things. But the alumni teams should work harder to find people who’ve made difficult ethical choices and come out alright, even if they’re not the most financially successful. And they should hold those people up as examples for the rest of the student body to emulate.

But I was a greedy f___ when I was at HBS, so none of that would’ve worked for me.

Thirdly, as students going into HBS, we have to pick the right heroes. The stupid thing for me was there was Warren Buffett visiting campus, and I missed it because I was in love with this girl who wasn’t in love with me.

I used to think that Carl Icahn was a good guy and I now know that he clearly is not. I would’ve had him as a hero when I was at HBS and I don’t anymore. I’m glad not to have him as a hero.

One of the reasons why I wrote this book was that people get successful and then they want to hide their past. They give a very skewed view of their early years. I wanted to say: ‘No, it’s really messy, there are big mistakes.’ There’s stuff that I just didn’t get. If there are more people who were to write very honestly about their major f___ ups early in life, it would be valuable for people to see.

Places like D. H. Blair have now been shut down, but I think that no one reading my book would then go and make such a boneheaded move as I did. If it takes you less than an hour to read that chapter of my book, it’s probably an hour well spent avoiding those mistakes.

SH: Any final advice for the incoming Class of 2016?

In retrospect I didn’t take the academics and case studies as seriously as I could have. I regret that now. It’s really an extraordinary education that we get at HBS.

Maybe if I’d been the kind of guy that took my caseload more seriously, I would’ve also been the kind of guy who would’ve worked a bit harder at understanding what this so-called opportunity I’d blundered my way into at D. H. Blair really was.

There’s a lot to be said for having fun at HBS. And there’s a lot to be said for having an underlying seriousness for what we’re about that I was lacking.

I can take that D. H. Blair mistake and point my finger in so many directions, but ultimately, because so many people graduated from HBS and did not make boneheaded blunders, at the end of the day it’s my responsibility. If I was addressing incoming students I’d say learn from my lessons at D. H. Blair, but also learn from my arrogance and my unwillingness to take classes as seriously as I could, which was part of the problem. You potentially avoid career blunders by being a little bit more serious.


September 8, 2014
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