Guy Spier: How to Invest in 2024 (During Inflation and High Interest Rates)

In 2024, we're going to be dealing with some of the toughest economic conditions we've seen in a very long time, and that begs the question: how do we approach our own investing for the year ahead? Well, recently, I got to sit down with legendary investor Guy Spier to discuss exactly that. Guy founded the Aquamarine Fund back in 1997, but you might also know him as the author of "The Education of a Value Investor" or as the man that worked with Monus provide to secure the winning bid for Warren Buffett's charity lunch back in 2007. It was honestly a great privilege to talk to Guy once again. In fact, we ended up talking for over two hours.

But just quickly, before I roll the tape, I just wanted to send out a reminder that we are currently looking for people to help review our new and improved investing courses that we've been working on for like the last six months. So if you'd be interested in free early access and you have the capacity to hop on a call with me and give us some feedback sometime across the next few weeks, then please check out the link in the description and the pinned comment.

With that said, let's get to Guy, and the first thing I asked him was quite simply: how should we be looking at the year ahead with things as they are in the stock market? You know, you've got to explore your landscape intelligently. The landscape is different for every single person for a thousand different reasons. First of all, the instruments that they can buy or sell are different because they have access to different markets. The size of their portfolio is different. The access to information that each individual has is different. Don't allow that voice that says, "You idiot! Why are you not doing what Mike Burry is doing? Why are you not doing what Bill Ackman is doing?" Don't let that voice get to you because you have to drive your investment vehicle from the perspective that you are in.

Guy spoke to me at length about this topic. The first key step is to acknowledge your own investing landscape, and this comes back to self-awareness. You, as an investor, need to understand where you are along your investing journey and thus what you should be looking at as an investor. Should you be looking at mining companies in Western Australia or energy providers in India, or should you be starting with a more passive approach?

So the first step is to acknowledge what your own landscape is and what's appropriate for you. What’s appropriate for some investors might not actually be right for you. So let's just ground this a little bit. I'm, you know, imagining I’m opening up my Charles Schwab account. And, first of all, if it's a Charles Schwab account, which is a U.S. online broker, I don't have access to every instrument. So, you know, I'm not going to be able to buy Zimbabwe cement. I'm not going to be able to buy the Chinese drinks company Mao Tai. So already I have a landscape that's not a complete landscape. That's okay; there's plenty of things that I can look at.

But then there’s a dependency on my own personal knowledge. If I'm putting myself in the shoes of somebody like that, and let's say I'm flush with cash—there’s 100 cash in the portfolio—and I've decided that I'm able and willing to allocate X percent to equities, which I know can fluctuate, I think my first step is probably an S&P index. And I think that I would go one step further and say, "Okay, well, I understand that the market cap weighted index doesn't perform as well as a flat weighted index," so I'll take the flat weighted index. And Charles Schwab provides me with access to that, and then I would do that.

Then, I need to pause and reevaluate because now I'm in a new landscape if you like. So the first step is to define what your investing landscape is, be aware of your limitations, and to be comfortable with them. This feeds into a huge topic in the value investing world, which is defining your circle of competence. But before we get to that, one thing I'm definitely not competent in is speaking another language, but that's exactly what I'm trying to do with Babel, the sponsor of today's video.

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Thanks to Babel for sponsoring this video. But as I was saying before, a huge part of investing in the next few years is going to be sticking to your circle of competence, and importantly, not over-complicating it. The circle of competence expands gradually through experiences of existing businesses, and it's okay not to feel like you know everything about everything.

I feel very supremely comfortable with my investment in Berkshire Hathaway, which is a very significantly sized position in my fund and has grown a lot. There are all sorts of people who come and say, "Well, it's trading at a premium to book value. What if maybe they should be split up? What happens when Warren dies? Will that premium to book value disappear?" There are all sorts of concerns. I've thought through those concerns, and I am extremely confident that I don't need to be worried about those.

I could maybe claim that that's within my circle of competence, but somebody else might not feel the same way about Berkshire Hathaway. In which case, maybe the S&P is a far better way for you to start. You start with the S&P, and then you start looking at specific businesses in the S&P, and then at some point, you say, "You know what? I'm comfortable owning," and I’m really just picking a name randomly out of a hat, "United Healthcare," or "I'm confident I've read about this strategy," where you buy the dogs of the Dow, and you buy the dogs of the S&P.

Out of these five businesses that have performed really badly in the S&P, I actually really like this one, or I work in the industry. So that's the nature of this changing landscape, and we have to constantly evaluate where we are in our own personal changing landscape. Particularly in uncertain economic times, we need to ensure we stick to things that we understand well.

But beyond that, I also wanted to quiz Guy on two topics that will be a big part of investing throughout 2024: inflation and interest rates. Now, in the U.S., headline inflation has recently ticked up, so I asked Guy, if we do see ongoing inflation, how can we best protect our portfolios?

"If you start living in the world of businesses and start thinking about them in inflationary environments, there is a broad diversity of businesses. In some cases, we don't really know; we have to kind of think through the dynamics of what will happen. But to take you to the other end of the spectrum and to kind of the end point of where all this was going, a bank receives money in deposits and lends it out. In a rising interest rate environment, their net interest margins—the difference between what their funds cost for them to raise through client deposits primarily and what they get when they loan the money out—rises.

So, an interest rate and a rising interest rate environment tends to be good for banks with those kinds of balance sheets. It tends to be good for any business. The source of the revenue is denominated in nominal terms. So, the beautiful thing about credit card networks is that they take a percentage of nominal amounts spent. They don't have to go and ask for price increases because they take a percentage of what the customer spends in the store. So as people succeed in raising prices, they're baked in on that. Another example would be a stock exchange; the stock exchange is baked in because their revenues tend to be a proportion of the total value, nominal dollar value, of the shares traded.

So they're, in many ways, inflation-protected. There are businesses that find it have a far easier time in an inflationary environment, and you kind of ideally want to be in those businesses for all sorts of reasons."

So here, Guy is essentially telling us that the number one thing you can do to try and safeguard your portfolio from inflation is to make sure the businesses in it have a competitive advantage. Beyond that, his tip is to think about the business models: do they make money in a way that is inflation-proof? Guy talks about credit card companies where they simply take a percentage of money spent; thus, as people spend more because things cost more, a Visa or a MasterCard automatically makes more.

Or even beyond that, are you looking at a business with such a strong moat that they can simply pass on price increases to the end customer? For example, Coca-Cola last year raised their prices as inflation hit hard, but did their sales fall? No, they continued to rise. So that's a really smart idea as to how to protect your portfolio as best you can from inflation.

But with inflation also comes higher interest rates from central banks. So, how should we be thinking about this high interest rate environment? In 2010, for high growth businesses, as interest rates rise, their valuations can come down very, very dramatically. And so there's a question that arises: "Yeah, okay, but if they're fashion protected, what should I do?"

"I would tell you that it's reasonably clear to me that if you have the expectation that interest rates will rise, then there is a very high likelihood, even on non-growth businesses, that their valuations will come down. That's not very pleasant. I think that over time, you make it back because they will be able to raise prices in line with inflation, and their earnings therefore will grow faster. But those two things work against each other.

You can make a very good case for saying, 'We'll wait for interest rates to rise, hold on to your cash, and then buy.' But what I choose to do, because that gets too close to kind of like timing the market—what I choose to do is I just say, 'I want to be in these businesses. I'll try and buy them at a good valuation. I don't want to waste my brain cells thinking about inflation.' So I just decide not to think about it and say, 'Well, if I'm in a good enough business and I've given some of the criteria that I'm using to try and select them, then I should be fine no matter where interest rates are.'"

I found this clip from Guy really insightful. The unfortunate reality is that when interest rates are higher, valuations on most businesses fall. That's the reality of how macroeconomics plays out. But he simultaneously acknowledges that interest rates are one of those things that's just completely unknowable, and to try and time the market by predicting what interest rates will do is a fool's errand.

So I really like his approach. Instead of trying to predict the macro, which is top-down thinking, instead focus on each individual business, which is bottom-up thinking. If you can find businesses that do have those competitive advantages and you can buy them at reasonable valuations, holding those businesses over a long period of time is, in Guy's eyes, the simplest way to get around the pain that is short-term variability in a rising interest rate environment.

So with that said, how does Guy approach his own investing? How's he positioning himself for the year ahead?

"What I do is I do something I would call barbell. So, imagine I’m a caveman, and, you know, on the one hand, there's really, really juicy bison and what are those big elephants—the prehistoric elephants were called, you know, mammoths or something like that—exactly! You know, tasty meat, lots of it; they're out there. The only problem is to go out hunting for that stuff, you know, you need to go out and there may be saber-toothed tigers and all sorts of nasty animals that can kill you. So it's dangerous stuff.

Now, deep back in my cave, I've got a supply of dried fruits, and I've got a supply of maybe some grains I've managed to pick up, and those are like deep there, and they're safe. Where I want to sit is I want to sit at the mouth of the cave. I want to have lots of stores behind me that if storms come in, if lots of nasty tigers are out there, I can stay inside the cave or close to the mouth of the cave totally safe, and I can eat. And every now and then, when the conditions are really good or if a juicy mammoth comes real close, I can go out and try and get it.

What does that mean in the portfolio? Well, the back of the cave are the things that even if the apocalypse comes, will still be able to feed me. And we've got, in my case, I've got things like Nestlé in there as the best example that I'd like to give, but I also have American Express, and I have Bank of America, and I have Berkshire Hathaway. And then, you know, I go outside the cave, so to speak, and I go and hunt for things that could be multi-bagger investments.

So in my case, you know, I go out and I look for Indian Energy Exchange, and I look for Care Ratings, and I look for these situations; Heritage would be another where I could make many multiples of my money but I might not. And so, that's kind of like a sort of like barbelled approach. You've got your safety stuff, and you've got the stuff that could generate huge returns, and that works really, really well for me, and I feel very, very comfortable with that.

But all of my long prelude was to say that's what I do, and you need to see that in the context of who I am and where I am. That doesn't mean that you should do it, Brandon, or a listener should do what I'm doing. Take an example; don't take it as advice."

So, ultimately, that's the approach that works best for Guy given his own investing landscape. But I think there are some good lessons to be learned there for everyone. The first thing is that he follows Buffett's first rule of investing, which is don't lose money, and he does that by having the really solid foundation of super stable long-term businesses in his portfolio that protect him from any potential economic storm.

But then, with that safety in his portfolio, that also enables him to watch for those infrequent opportunities where he could strike gold in a sudden situation. Now, this is certainly not financial advice, and please remember that this might not be right for you. But Guy's approach is very similar to what I do with my own portfolio. For me, my solid foundation is not Nestlé or Berkshire, but it's a simple S&P 500 Index Fund. Then from there, I look for companies like Alibaba or Google or Meta that get beaten down heavily sometimes, and sure, they might struggle, but they also might double or triple my money over time.

So those were my four key takeaways from my chat with Guy Spier going forward in this kind of investing environment. You need to, firstly, understand your own investing landscape and your own circle of competence. Then, to combat inflation, you need to hone in on the business model and ensure the business has a competitive advantage, where it's naturally inflation-resistant or can pass on price rises to customers with little consequences.

Thirdly, don't get sucked into watching interest rates rise; just focus on bottom-up thinking, hone in on a solid valuation, and think long term. And then, lastly, remember Guy's approach to having the grains and fruits in the cave behind you, and then from there, keep an eye out for those big infrequent opportunities to get a mammoth.

With that said, I wanted to say a massive thanks to Guy for once again agreeing to come and join me on the channel. Please leave any comments or messages to Guy in the comments section down below, and I'm sure he'd love to hear them. I'll be sure to pass them on to him.

You can also watch the full unedited version of the conversation over on the Young Investors Podcast feed if you'd like to hear more from my chat with Guy. But with that said, guys, that’s all for today! Leave a like on the video if you did enjoy it; subscribe if you'd like to see more, and I'll see you guys in the next video.

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