Guest Interview: Michael Mitchell

(Edition Number: Sixteen)

Good morning,

Today we are welcoming Michael Mitchell to kick off the sixteenth edition of the guest interview series. Some of you may know him as @IgnoreNarrative, over on Twitter.

“At least a few times in your life something is likely to come across your desk that is just a complete no brainer.  Something so easy to understand where you know, through and through, even if you’re dead wrong you won’t lose much money – but if it works out you could make a fortune.  An asymmetric opportunity where the odds of success are wildly mispriced.  In my view when you see that you just go all in.”


Michael Mitchell

A former hedge fund analyst, a third-generation Oklahoman, a father of three boys, and now a retired private investor. Michael has been sharing pearls of wisdom over at @ignorenarrative on Twitter since 2018.

Michael’s investment approach is one that bears witness to an investor who has the conviction to go all-in on his own ideas, sometimes holding as little as two core positions. There is always much to be learned from those who adopt a style that is foreign to your own.

You can find an excellent discussion with Michael and another great investor and thinker, Bill Brewster, over on the Business Brew Podcast.


The Interview

Investment Talk:

Good morning Michael, appreciate you taking the time to do this today.

So, to kick things off, I usually ask the guest to provide a little flavour on their history. You are currently a private (and retired) investor managing your own capital and raising three sons.

Could you shave sprinkle some insight into what led you to be able to do that? I know you were once in the HF industry, what was the incentive to leave that space?

Michael:

Sure.  I’m a third-generation Oklahoman living for now in White Plains, NY with my wife and three sons.  I grew up in Oklahoma City and always planned to live there forever but in 2002 I met Michael Price at the University of Oklahoma and it changed my life.  Based on that brief 30-minute breakfast with him, I decided to move to NY and pursue a career in investing.  I was lucky enough to get a job with Michael as an intern in 2003 and later he was kind enough to help me find a job as a research analyst at Jefferies in 2004 which kind of launched my career and life in the Northeast.

From there, things kind of snowballed and what started as a two-year plan has now turned into the last 17 years of my life.  Pretty much all of which has been great.

As you mentioned I retired from hedge funds at the start of 2019.  My wife and I had actually planned to leave the NY area and move to CO starting in late 2016 – but we knew it would take several years for both of us to fully separate from work and get out there.  We bought a house in Fort Collins CO in 2018 and plan to move in at the end of this year – so five years after making the decision, it will finally be a reality.

The goal with the move is to create a better life for my family.  We’ve been very fortunate in that we’ve done well enough that we could really live anywhere we wanted – but also fortunate in that my wife is a physician and she can work just about anywhere.  So we put together a list of things we’d like in an ideal home town – after a few hours we settled on Fort Collins and that was that.

To your question about how it was possible to up and leave my career at 39 years of age, there were really three drivers.  First, I was massively overpaid for years.  Second, I always spent way less than I made.  Lastly, my wife does well and has no interest to stop working.  Pretty simple steps to financial independence [full on sarcasm here].

What is bizarre about the first point is that I was one of the lowest-paid people around.  Certainly underpaid relative to peers and the economics of the funds I worked for.  But still, for the world, I was massively overpaid.  People in Oklahoma just don’t make the kind of money I was making.  I was also very fortunate too in that my job and my interests were in learning how to use money to make more money – this compounded my wealth over the last 15 years and now has become more meaningful than my income ever was.

The big question though is why did I leave so early?  I could’ve stayed for a few more years and done pretty well.  The answer is pretty straightforward.  I came to an impasse with my boss in 2018.  I thought we should go in one direction and he decided to go in another.  I was asked to get on board or get out of the way.  I got out of the way.  Best decision I’ve ever made outside of marrying my wife. 

Investment Talk:

How do you find living as a private investor? I imagine the professional stress must be dissolved to some extent. Not answering to anyone’s mandate.

What are some of the benefits and challenges that might not exist in the corporate setting?

Michael:

I’m still new to the private investor game.  Only been at this for two years so it’s likely that my answer will evolve over time.  Right now I feel like the luckiest guy in the world.  I have near-total control over my day – I can do almost anything I want with my time.  That freedom *I think* makes me both a better investor and a better person.

The stress isn’t gone by any stretch.  I need to deliver returns for my family which is a lot of pressure for sure.  But I don’t worry really anymore.  When I was working professionally I felt that every decision and every recommendation that I made had to be right.  I don’t feel that way anymore – I realize that I’m going to be wrong sometimes and I’m perfectly OK with that.  Just allowing myself to be wrong takes enormous pressure off of me day-to-day.

Also, I don’t benchmark to an index.  I would prefer to outperform every index but at the end of the day, I hold myself to a 10% return threshold.  That’s critical for me because it removes the obsession of “the market” and its hourly/daily/ weekly moves.  I have no skill in predicting ST moves in the market – so I just try as best I can to ignore it.  Not comparing myself to it helps tremendously.

The biggest drawback that I’ve seen so far is that I’m fairly lazy by nature – and not having any structure means I work a lot less than I probably should – I don’t know for sure but my guess is I would have better investment returns if I did more work.  

Investment Talk:

Now let us move onto your investment approach. I know that you run a pretty interesting portfolio.

How would you describe your investment style and approach?

Michael:

My approach is pretty straightforward.  I’m long term oriented (3-5 years), focused on fundamentals and people, and am very valuation sensitive.  I prefer event-driven investing when I can find it – but it’s not required.  Put simply, I need to make 10% per year – so I go out and look through things I think I understand that offer >10% returns.  I figure I’m going to be wrong a lot so I need to have lots of margin of safety so that I can get to 10% even with a lot of errors.  If I don’t have any of those opportunities on offer I just do nothing.  And most of the time I do nothing.

I spend a lot of time thinking about the people I’m invested with and how they make decisions – whether they are rational and if our interests are aligned.  I’m looking to find people who think as I do, but hopefully are smarter and work harder.  My view is when you find a money maker you just give them your money, tell them to be reasonable on fees and then get out of the way.

Investment Talk:

You run one of the most concentrated portfolios that I have seen for some time.

What is the reason for that, and how do you balance the trade-offs that exist between greater potential returns versus the lack of diversity?

Michael:

I’ve always preferred concentration though I’m not 100% sure why.  I think it just fits my personality better – that whole “put all your eggs in one basket and watch that basket closely” theory just resonated with me.  I know it doesn’t work for most people.  What I usually tell people is that if you don’t feel comfortable owning five or fewer stocks you’re probably better off just buying a low-cost index and going to the movies.  It’s possible that running a 20 stock portfolio over the next 10 years I’ll do really well, but it’s unlikely that I’d outperform the S&P 500 enough to justify my time and effort.  So I say just save yourself the pain and hit the beach.  Let the index do the work.

On the other hand, at least a few times in your life something is likely to come across your desk that is just a complete no brainer.  Something so easy to understand where you know, through and through, even if you’re dead wrong you won’t lose much money – but if it works out you could make a fortune.  An asymmetric opportunity where the odds of success are wildly mispriced.  In my view when you see that you just go all in.

To me, it just makes more sense to wait for those opportunities to show up rather than own a bunch of stuff I feel just OK about.

Investment Talk:

So we just discussed your current investing style. How has this approach evolved over your career, and what have been some of the factors that influence any of these shifts?

Moreover, I think it would be great if we could possibly hear about some of your most notable “mistakes” and what you learned there.

Michael:

The beginning of my investment career coincided with the end of the dot com boom.  That probably shaped me more than anything.  At the time people were using all kinds of metrics to justify business value (eyeballs, page views, etc).  Right after that blew up I met Michael Price – he made the process of valuing a business seem incredibly simple.  Buy businesses that generate profits and/or have tangible assets that could be sold, and pay a reasonable discount to what someone else should be willing to pay for them.  Seemed pretty easy to me so I just dove in.

The first security I bought was a now-bankrupt utility.  I remember screening based on dividends – I think their yield at the time was like 30% or something (this was 2002).  I (stupidly) assumed utilities were safe bets and that dividends equated to profits so I bought a small amount.  I ended getting one quarterly dividend before they went bankrupt.  Turns out the market was right about that one – there was a reason it was cheap.

My second stock was Carolina Group when it was a Loews tracking stock.  I remember looking at Loews (I think because Michael owned it at the time).  I noticed that the vast majority of the cash flow was generated by their tobacco business and it traded separately so I just bought that.  That one worked out pretty well.

Early on in my career, I was very focused on numbers – making sure I was buying something VERY cheap.  I realized pretty quick that was great but it wasn’t enough.  I had good mentors helping me along the way.  A few years in I began to fully appreciate the concept of a variant perception and, even better, catalysts.  Cheap stocks are a lot more interesting when you have a clear path to them not being cheap anymore.  If you’re waiting on the market to correct a valuation mistake then you need to be certain the market is making a mistake (that’s where the variant perception comes in).

About halfway through my career, I realized how important business quality and a solid balance sheet are to surviving a crisis.  Investing through the Great Recession was brutal.  I had a large position in a mall-based jewellery retailer – was on the inside there as a board advisor.  I saw first hand when a real recession hits and capital markets dry up, average businesses become toxic (and for what it’s worth good businesses become average).  If you plan on owning something forever through environments like that you need to be very picky about the business model and even pickier about the balance sheet.

I spent most of the 2010-2020 period investing with Liberty Media in their various companies. That’s the most recent evolution of thinking I’ve had in my career.  People matter.  And when you find smart people doing smart things you can understand, just give them your money and get out of the way.  At this point in my life, there are very few investments I’d make where I don’t completely trust the people running the show.  Maybe that’s because I’m retired and I don’t want to work now – I spend a lot of time finding people who really do want to work hard on my behalf and try to support them as best I can. 

Investment Talk:

Everyone has a different opinion on selling.

Munger suggests that we should not interrupt compounding unnecessarily.  Fisher suggests the time to sell is almost never if the work has been correctly done. Some sell when valuations become fair or stretched.

What dictates the laws of selling for you, and how do you feel that approach works for you?

Michael:

It always depends on the situation.  Probably my biggest flaw as an investor is I can’t stand owning fairly valued stocks.  It’s hard for me.  Even if I don’t have anything I really want to invest in, sitting with a collection of loved securities just doesn’t sit well with me.  I wish it did – I’d probably have a lot more money.

The way I personally go about it.  When I buy a business I nearly always have a plan to sell it.  That doesn’t mean I will sell it – that just means I have a plan.  The plan is critical because it keeps me focused and limits my mistakes (and of those I have plenty).

I’ll give you two more recent examples:

CBA Florida was a pile of cash I was hoping would liquidate.  I bought it at $0.60 on the dollar in 2018.  They announced a liquidation process nearly 2 years later and have paid out $0.75 on the dollar so far.  I now have a stub in my account that I think could be worth quite a bit.  Can’t sell that because the shares are now non-transferrable, but who cares?  I’ve already gotten all my money out plus a nice profit. 

QRTEA is an operating business Bill Brewster and I bought in some size last year on a clear event I thought would unlock value.  My plan was to get really big in it just before the event and sell it down as it rerated.  If it didn’t rerate, I had a plan to take money off the table based on time / fundamental milestones.  Now I really like that business but clearly, there are risks.  You sell me that business for 2x earnings with an event and a clear path to capital return?  I’ll buy it all day.  If I’m wrong about the capital return or the duration, I’ll sell it.  If I’m right and the market rerates, I’ll take my money off the table.  The stub basically doubled in a few weeks.  I sold down my basis.  Because the shares have done well Its still a massive piece of my book – I have a plan to keep selling it down as it keeps working. 

I’d say it this way.  If I can double my money in six months but I have to pay short term capital gains, that sounds much better to me than compounding tax efficiently at 10%.  I can always come back to the compounder.  I realize that the strategy doesn’t resonate for everyone but for me, it just makes more sense.    

Investment Talk:

I think with many of these self-prescribed rules that investors have, most of the time it boils down to personality.

I prefer to keep my process simple because I still have a great deal to learn. My personality dictates my approach I would say. It helps me remain detached when things are going well or bad.

Do you feel your investing style matches your personality, and if so why? Moreover, do you feel that is important?

Michael:

Oh, 100%.  Psychology is the MOST important thing in investing.  Period full stop.  It’s not what works best for the world, it’s what works best for you personally.  Really what you’re trying to solve for is limiting mistakes.  You want to structure your investments and your life to make the fewest mistakes possible.  If that means you buy SaaS and own forever, great.  If that means you buy liquidations, fine.  In my opinion, it doesn’t matter nearly as much how you go about it – the important thing is that you know yourself and you maximize your opportunities

Investment Talk:

Who has been some of the biggest influences on your investing style?

Michael:

I’m probably 80% Greenblatt and 20% Buffett.  I’m also a pretty big Howard Marks guy.  My challenge is that I’m not a great business/industry analyst.  If I was better at analysing businesses and industries I’d probably go full Buffett.  The challenge is that if you’re going to go the “buy and own forever” route you MUST BE RIGHT.  I’m not sure how much of the investing population really gets that concept.  If you’re wrong in the own forever camp you’re toast.  Buffett is amazing at it because he’s almost always right.  I’m the opposite – I’m wrong more than I’m right.  So I need huge margins of safety – and I like catalysts to give me opportunities to take money off the table in case I end up being wrong.

Basically what I’m telling you is that I’m not very good at this so I spend a lot of time protecting my downside.  If I’m not the smartest guy in the room in a business or industry, I usually just stay away and let the smart people figure it out.

Take CHTR for example.  I spent a ton of time in cable from 2015 to 2018.  Met everybody.  Heard every bull and bear case.  I decided Malone was right and I bought it huge.  At the time, not everyone thought cable would win the HSD battle.  Google was still expanding.  AT&T and VZ were both out talking up fixed wireless.  I’d say if you entered a room of TMT analysts in 2017 / 2018 maybe half of them would say cable was certain to win.  I actually believed cable was certain to win – so I bet big on it.  Turned out to be right. 

Now, look at the setup.  Google is basically out of the business.  VZ out talking up fixed wireless again and TMUS is either already there or not far behind.  And we have a Dem controlled government.  You walk into a room full of TMT analysts I’d bet 99% of them say cable has won and it’s over.  Now, I agree with them, but it’s concerning to me that everyone is certain.  The odds of success may be high, but if they are priced to perfection why is that interesting?  So I’m out.  I’m not even close to the smartest person in a room full of TMT analysts.

Investment Talk:

When assessing a company. What are the must-have factors that must be present in the company before you would even consider allocating one ounce of capital into their business?

Michael:

This is another “it depends”.  How much risk am I taking?  Are you giving me my money back like tomorrow?  If that’s the case then the only thing I need to know is can you pay me.  If you’re telling me I’m going to get my money back in 20 years – now I need to understand exactly how that’s going to happen – and I either need to think there is almost no risk (Treasury like return) or I need to see so much upside that the return becomes totally asymmetric if it ends up working.

Other times I’m just giving a management team my money and I’m leaning on them to figure it out.  That’s where most of my money is now.

If you force ranked a list for me it would be pretty simple

1)     I MUST know / trust / believe in the people running the show

2)     If the duration is more than a few years to get paid I have to understand it

3)     If the duration is short, I just have to like the balance sheet

Investment Talk:

Shifting the pace a little now. I know you are quite active over on Twitter under the handle @IgnoreNarrative.

Firstly, what made you chose that name?

Secondly, Twitter is an incredible place to establish a network, investment ideas, and more importantly genuine friendships. How would you say, if at all, Twitter has added value to your life?

Michael:

I joined Twitter in December 2018 right after I decided to leave Locust Wood.  I didn’t want to have an active account while I was working for someone else.  There wasn’t a policy against it or anything – but I just didn’t want to risk saying something that offended either the firm or their clients.

Once I decided to retire I figured why not.  I remember watching CNBC, I think it was like Christmas Eve – the market was down big that day and for the month/year. 

Whoever was on said, “you have to just ignore the narrative” and when I heard that a lightbulb just went off – that statement fit my investment philosophy perfectly.  I went on Twitter and it turns out it was available, which of course means either I was the first to think of it or it is actually terrible (my guess is the latter but whatever).

A big part of the draw of Twitter for me was that it had the chance of keeping me connected to the investment community despite being retired.  I thought Twitter would be a good outlet and that turned out to be right.  What I honestly didn’t expect was that anyone would actually care about what I had to say.  I’ve been asked now a few times to do podcasts and now a newsletter – still surprises me that people are interested but of course I’m flattered that they are.

In terms of value-added, the answer is unquestionably yes.  I’m significantly wealthier today because of Dan McMurtrie and Bill Brewster.  They put out content, completely for free I might add, that was actionable for me and added a lot to my family’s balance sheet.  The intangible stuff I think is valuable as well – but it’s more nuanced and has costs associated with it.  But I think in aggregate the benefits of being active on Twitter far outweigh the costs. 

Investment Talk:

If you could rewind the clock and visit yourself prior to your professional career, what would you tell yourself?

Michael:

Don’t buy a mall-based jewellery retailer in front of a massive global recession.

Investment Talk:

Lastly, I like to round off this segment with a few quotes.

What is your favourite quote, and why? Feel free to pick a few if you like.

Michael:

The first principle is that you must not fool yourself – and you are the easiest person to fool (Feynman)

There are two kinds of people who lose money; those who know nothing and those who know everything (Kaufman)

Happiness is a positive cash flow (Adler)

Just give them the B share shrug (Malone)

Mike, I can’t fire myself (Errico)


Questions from Twitter:

In this segment, we collected questions from the Twittersphere, and present them to Michael.

@CP2Close: “Are all the assets you plan to use in retirement in the investment portfolio, or is there a separate allocation to more traditional accounts (eg, 30% of your money is in retirement accounts, and you manage the other 70%?”

Michael:

I actively manage about 80% of my assets.  The rest is mostly in retirement accounts that are passive and we have some real estate.  Over the next year few years, I’m going to draw down from the active portion to fund the house and move to CO.  Not exactly sure what the mix will be three years from now but I’d be fine if nearly all of our money was invested in our lives there and not in the market.

@Fiducia_invest: “What is your process for brainstorming investment ideas (aside from lumber)?”

Michael:

There isn’t a process really.  It’s always just a confluence of things I already know combined with new information that leads to a strong (and actionable) conclusion.  Lumber is a good example.  I spent years going to Zelman conferences and lunches (from 2012 to 2018).  When housing crapped out in 2018 I pitched it to the fund and got shot down.  I learned by studying it that we were massively undersupplied on housing because of lower than average historical demand.  I figured at some point that would change – my belief always was that the demand was deferred and not cancelled. 

So Covid hits and in my view pushes people to focus on their homes more than they have in years (maybe a decade).  Also, I think we’ll see more people move to suburbs and buy houses / have kids / etc.  It’s just a guess on my part but I think the demand will be higher for the next 10 years than it was for the last 10.  That’s great news for lumber. 

I wouldn’t have bought a mill – but I ended up owning one at a pretty attractive price and I think that’s going to be a good asset in the near to medium term.  We’ll see. But I wouldn’t have felt as strongly about the demand side of the lumber equation if I hadn’t studied it for years. 

@Fiducia_invest: “What do you look for in analysts in general?”

Michael:

Rationality.  Intelligence is great but what I prefer is deep-seated rationality.  After that, I look for people confident enough to know when they have something good and bet big.  Also, like it when analysts are willing to pass on 99% of the stuff they see – patience is important in my view.  There is just no way that most of the pitches you’re seeing are great.  Knowing the difference between OK, good and great is important in my view.

@Fiducia_invest: “Top three books you’d recommend right now and briefly why in two sentences?”

Michael:

Influence by Cialdini will make you a lot of money.  So will You Can be a Stock Market Genius.  Poor Charlies Almanack is excellent as well. 

@sjoerds78: “How important is the choice of your spouse in your success as an investor?”

Michael:

I wouldn’t be a successful investor without good family life.  I know others are able to segment their career vs the family and be successful regardless of what happens at home but that’s not me.  I know I have a wonderful spouse at home that would support me win lose or draw.  That safety net allows me to take bigger swings than I otherwise would.

People are important.  Your partner is the most important person in my opinion.

@Jmsims2: “As a private investor, how do you manage the family budget, taxes, healthcare, insurance, etc?”

Michael:

I don’t have a budget for the family.  I track our balance sheet every few months just to make sure nothing is totally out of whack.  At the end of the year, I tally our expenses and calculate our burn – again just to make sure we’re not totally off versus expectations.

Taxes are a by-product of my investments – the dream is I owe a lot of taxes because that means I made a lot of money.  That was the case in 2020 – I’ll have a pretty big tax bill coming due soon (roughly 800bps of my performance last year).  I’ll just take a draw against my investment account to pay it.

Healthcare is probably the biggest issue for most people looking to do what I did.  The costs can run up to $50,000 per year for a family – and there doesn’t seem to be any end to the inflation there.  My wife’s job covers ours today thankfully.  Once we move to CO her practice will cover it there as well.  For my friends that don’t work and don’t have those options they just calculate it as part of their burn rate.  Just means you need more to retire.

@sub_vola: “What allowed you to gain confidence that your investment skills were sufficient to make returns that could support your family?”

Michael:

I had been investing in my own account for several years before retiring which helped but in truth you never really know how it will go until you do it.  I figured that worst-case scenario I could always go get another job that covered our burn, and even if that didn’t happen I’d just start cutting our expenses back to the point where the burn went to zero.

Just figured there wasn’t much downside to being wrong.  Fortunately, though it worked out OK.

@Themerman: “How much money do you need to live? Do you think about a percentage of capital you need to withdraw per month or year? Does that change your investment style when you are accumulating instead of withdrawing?”

Michael:

My calculation for how much you need to retire was pretty simple.  Take how much you have, pull out 2 years of burn and put that in a savings account.  After that, assuming you can make a low single-digit return (I used 5%) to cover your expenses without changing your lifestyle.  The more margin of safety you have the better.  My personal return hurdle is 10% - pretty far above that burn calculation.  That’s partly a psychological trick – I know I’ll feel better if my assets are growing over time.  My style hasn’t really changed at all.  I spend more time on small stuff because I don’t have a lot of money so I can buy small market cap things that I think are more interesting, but that’s about it.

@DadInvest: “What’s the amount of discretionary money with lifestyle safeguards that could induce M.M to come back to the pros a la his #45 years?”

Michael:

Depends on the job of course.  But if you wanted me to do something like I was doing before I don’t think I’d entertain it for less than $2 million per year.  Even then I would question whether that was enough.  You give me $5 million for a few years and the answer is surely yes.  The problem of course is that I’m not worth that much (I’d say maybe 0.1% of professional investors are). 

@avgodfather: “How do you view the emergence of retail investors? Is there a paradigm shift in investing, as seen with Gamestop?”

Michael:

Retail investors have always come in and out of the game.  I think the issue historically is that their timing has been unfortunate.  I know this is not going to be a popular statement but so much of investing is timing.  I believe there are good times to invest and bad times to invest.  Right now I think we’re closer to the latter (if not fully in the latter).  We’ll see if that’s right or not.

I doubt we’re seeing a paradigm shift.  I think we’re seeing a logical outcome from trends that have been building since the financial crisis.  I’d bet the party ends at some point.  I just have no idea when that will be.  In the meantime, I’m watching all my eggs really closely.   


Concluding Remarks

Independent thought, an ability to go against the grain (woodwork pun), and the conviction to go all-in on his best ideas. Some may suggest Michael’s approach is unconventional, but what is so great about being conventional?

This was one of my personal favourites, so thank you for taking the time, Michael.

Remember, you can find Michael over on Twitter at @Ignorenarrative.

Stay tuned, as we have more excellent guests coming soon.


You can find previous editions of the guest interview series below:

• Edition One: Bill Brewster

• Edition Two: Kris FromValue

• Edition Three: ValueStockGeek

• Edition Four: AdventuresInFI

• Edition Five: Brian Feroldi

• Edition Six: Brad Freeman

• Edition Seven: Mostly Borrowed Ideas

• Edition Eight: Richard Chu

• Edition Nine: Kermit Capitál

• Edition Ten: Liviam Capital

• Edition Eleven: David Belle

• Edition Twelve: Mark Cooke

• Edition Thirteen: 10-K Diver

• Edition Fourteen: Richard Moglen

• Edition Fifteen: Matthew Cochrane

• Edition Sixteen: Michael Mitchell

• Edition Seventeen: Pythia Capital


Conor,

Lead Analyst at Occasio Capital Ltd