Geoff Gannon March 12, 2007

20 Questions for Jay Walker of The Confused Capitalist

Jay Walker’s passion for investing was kindled in 1996 when he was given a modest amount to invest, and within a couple of years of studying, had written his own book, “The Brink’s Truck Burst Open on Wall Street! A Holistic Approach to Finding The Easy Money In Common Stocks”. Jay began writing The Confused Capitalist in early 2006. He’s Canadian (as his spelling attests).

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1. Are you a value investor?

Yes. However, I think that almost all investors consider themselves value investors. It seems to be a popular delusion – perhaps I suffer from it too!

2. What is value investing?

Value investing is buying a physical asset or perceived income stream at some level below its true value. Like Warren Buffett, however, I don’t think you can really separate “growth” and “value” investing. They are inextricably entwined.

3. What is your approach to investing?

I try to invest about 50% to 70% of my portfolio in areas that I think are favourable to my strengths (my circle of competence is financially-related companies) and that market is weak at pricing correctly (under-explored areas of the market, like small and micro-caps).

I achieve some level of diversification, however, by using ETFs or ETF style investing for the balance of my portfolio. On that side, I tend to focus on sectors that pay and grow dividends regularly, as the market still hasn’t really priced those correctly. I’m also not afraid to use leverage-type stocks/ETFs on this side of my portfolio.

4. How do you evaluate a stock?

I have a process that I go through that I illustrate on my small/micro cap blog; an example is located here.

I can usually discard most stocks I scan fairly quickly, especially since in the small and micro cap field there’s so many poor quality stocks. However, the better ones have to make it through the aforementioned process. This usually takes at least several hours, once I’ve determined it appears to be a suitable candidate. This process also helps me hold a stock longer, as I can truly consider whether my investment thesis remains intact at various times after the initial investment.

5. Why do you buy a stock?

Because I perceive that the risk/reward is favourably skewed towards buying this stock. Typically, I have to perceive the potential gain over the next year as 20% or better. Using 20% as a benchmark helps me to establish my margin of safety.

6. Why do you sell a stock?

It’s usually because I perceive that another stock holds a better chance of achieving that minimum 20% gain. Then, I usually pick the stock with the weakest future risk/reward ratio to eliminate from my portfolio.

7. What investment decision are you most proud of?

Buying American Oriental Bioengineering (AOB) in the summer of 2005 at under $2/share. It was growing its earnings at better than 50% annually, and the PE was only nine; it more than doubled within a couple of months. However, any dummy could have spotted this beauty – my regret is that I only loaded up to the tune of 12% of my portfolio – I should have upped this to at least 15% to possibly to as high as 20% of my portfolio.

Opportunities like this are rare, and should be taken advantage of to the extreme.

8. What investment decision do you most regret?

Getting caught up in the “spec tech” bubble in 1999/2000. I realized that I was taking tremendous risks with my portfolio and it ended up I couldn’t sleep well at night. I finally cashed out of all the trash I was in; the decline stung me, but fortunately, I left this part of the market before the worst damage happened. On the flip side, this was the genesis of my true conversion as a value investor in my heart, and not just in my mind.

9. Why do you blog?

To learn more and to consolidate the most important parts of that learning by writing it down in a format that makes sense to me. And also to teach others; to help them avoid mistakes and point out how to invest with favourable odds.

10. What’s your best post?

I like ones where I highlight some important, but not often thought about, information. Like you Geoff, I think that stock returns into the future aren’t going to look like the favourable 20th century returns. A paper I highlighted here is probably my favourite in that regard.

11. What’s your worst post?

They’re like my children, I love them all (just differently).

12. What financial publications do you read?

As a Canadian who invests almost solely in the Canadian market (I fear what I see as the inevitable drag on Canadian currency returns, due to what I believe will be fate of the US currency over the next decade: down. Which is why I’m generally avoiding US stocks at this time), I read publications like “Canadian Business”, “Money Sense”, “Canadian Money Saver”. However, I also read “The Economist” and “Fortune” magazines on an irregular basis.

13. What investing blogs do you read?

Of course, I have all the links on the right hand side of my blog – and I follow them up regularly. In the category of providing active market commentary, I enjoy The Big Picture (Barry Ritholtz) and Random Roger (Roger Nusbaum) and James Picerno’s The Capital Spectator.

Research or aggregators I read regularly include Abnormal Returns and CXO Advisory, and for thinking more deeply about particular stocks and specific value issues, I enjoy your blog, Gannon On Investing, Rick Konrad’s Value Discipline and Cheap Stocks.

14. What’s the best investment book you’ve read?

I know it’s not the deepest book ever, but I really enjoyed my first “primer” if you will, “One Up on Wall Street” by Peter Lynch. I’ve re-read the book many, many, times, and it’s still as full of nuggets as ever.

I also enjoy books that get you to think differently about investing. “Warren Buffett Speaks”, by Janet Lowe, provides sayings and homilies from Warren Buffett. These too don’t seem to be deep, yet they continue to work and chip away at the mind, and after a time really help you to become a better investor.

15. What’s the last investment book you’ve read?

“The Only Three Questions That Matter”, by Ken Fisher. I review it on my blog in two parts.

16. When did you start investing?

About 1996. I started with a small amount and an acquaintance of mine at the time was a mining stock promoter. He’d talk about stocks as if he really knew something about them, and this somehow challenged me to go out and learn more.

I was also arrogant enough to believe that I could immediately outperform the market. Unfortunately, as Rick Konrad says, being good at stock picking involves probably the “longest apprenticeship” in the business or work world.

Over the ten year period, I would have been better off in an index fund, although my track record appears to be improving over the past few years.

17. How have you improved as an investor?

I have a better process, better knowledge, and more willingness to completely ignore some types of stocks, whereas previously I dabbled in this, that, and the other thing.

18. How do you need to improve as an investor?

Patience. I need to continue to work on this to become better. Realizing that you’re going to stick with a stock for a longer period of time, forces you to become more discerning and discriminating at the “cash register”, if you will. To decide that many stocks don’t really meet all the buying criteria.

19. Where are the bargains in today’s market?

I think that health care/pharma looks good in terms of historical comparisons. It’s kind of down and beaten up in most investors’ minds, yet this is an area with long-term advantages and favourable long-term trends. However, I wouldn’t even really term that area as a “bargain”, only that it seems relatively cheap given the overall quality and longevity of its’ business advantages.

I also see a lot of investors I respect kicking tires – or more – in the lumber sector. I have to admit I don’t know that much about this area, and generally don’t like investing in capital-intensive industries, although I understand that a wave of industry consolidation is expected here, meaning that – over the short-term anyway, capital expenditures will probably be light, as plants are shuttered.

20. What’s the most interesting company we haven’t heard of?

Private equity and hedge funds seem to be all the rage. One company in this regard that’s produced very good returns is Canada’s Onex Corporation (OCX on the TSX). After a recent period of underperformance earlier this decade, the stock seems to have turned around over the past few years and is doing well. Anyone interested in a public company (at a reasonable price) doing private equity should explore this stock.

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Sites Mentioned

Visit Value Discipline

Visit Cheap Stocks


Previous 20 Questions Posts

20 Questions for Bill Rempel (a.k.a. No DooDahs)

20 Questions for MarketWizWannabe of RVB’s Market Musings

20 Questions for George of Fat Pitch Financials

20 Questions for John Bethel of Controlled Greed

20 Questions for Robert Freedland of Stock Picks Bob’s Advice

20 Questions for Joe Citarrella of Joe Cit – Intelligent Investing


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