Guest Interview: Mostly Borrowed Ideas

(Edition Number: Seven)

Good morning,

Today, we are bringing you the seventh edition of the Investment Talk Guest Interview series, whereby I bring you some discussion with a selection of my favourite investors in the Fintwit environment.

Today’s guest interview features Abdullah Al-Rezwan, who goes by the alias ‘Mostly Borrowed Ideas’ for his research work.

As a finance major, an MBA, a CFA, a FRM chart-holder, and someone who has worked both in sell-side and buy-side roles, it is an understatement to suggest that we have an experienced analyst here today. In his own words, he holds an alphabet soup of credentials, which goes some way to demonstrating his passion for the subject.

Very humbly, MBI correctly states that “Of course, the market does not care about anyone’s credentials. I could add two more certificates and could still be a terrible investor”.

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Mostly Borrowed Ideas

So, today we have MBI with us. This was one I was really excited to share with you all. After reading MBI’s ‘About Me’ section on his website, and the responses to the question I asked him today, it was clear to me that MBI is a clear self-starter with a real passion for research.

MBI is most known through his superb insights on Twitter, where you can find him under the handle @borrowed_ideas , as well as his work on MBI Deep Dives.

The MBI Deep Dive service is simple. One deep dive every month, on a company of MBI’s choosing, which contains the full spectrum of quantitative and qualitative research, including financial modelling to grasp a better sense of the sensitivity of variables and expectations embedded in the stock price. You can find a range of examples using this link, including Etsy, Uber and Lululemon. The quality is clear in my opinion.

I have huge respect for those who are pushing to generate their own sources of income, as well as writing insightful and quality pieces of work that will inform and educate readers, which ultimately makes them better investors.

My favourite quote from MBI about his research process is the following:

“I literally daydream about what may happen five years down the line and I have convinced myself that I will most certainly be a much better analyst after writing 60 deep dives”

That self awareness is refreshing. I will refrain from discussing the backstory to MBI any further, as this is something we are about to discuss in the interview, so without further adieu, lets get into it.

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The Interview

Investment Talk:

Welcome Abdullah, I would like to start off by saying thank you for agreeing to partake in today’s interview and allocating some time to do so. I am very excited to have you on.

I typically start these things off by asking the guest to share with the readers a little bit of historic backdrop.

So, if you could introduce yourself, and take us through the sequence of events that led to you where you are today, and perhaps some flavour on the kind of work that you are up to now.

MBI:

I am originally from Bangladesh. I was born and bred in a small city named Bogura and I later moved to Dhaka (Capital of Bangladesh) for college. I majored in Finance and following graduation, I started working as a sell-side analyst covering Bangladesh Financials Sector. I did that for three and half years and then came to the US for my MBA at Cornell. After finishing MBA, I worked as a generalist at Madison Investments in their US large cap team. Unfortunately, my work visa was expired last year and could not be renewed.

Whenever I tell people I am from Bangladesh and I have an MBA from Cornell, people just automatically assume I am from a very well-off family in Bangladesh. That is, unfortunately, not the case. I basically financed my entire MBA through student loans. So, I was in quite a mess in terms of figuring out what to do when my work visa was expired.

Thankfully, I also started becoming active on twitter once the lockdown started during this pandemic and to my surprise, I managed to grow a following in a relatively short period of time. So when my work authorisation expired and I had to leave my former role, I thought perhaps I could launch an independent research service on my own. I was receiving a lot of DMs on twitter from PMs, analysts, and other professionals which made me think there is possibly a potential group of interested people who would be willing to pay to read my research. That’s how “MBI Deep Dives” was launched in September 2020.

Even though it was started almost accidentally, I am thoroughly enjoying building it, and while I have received some interest from some managers in potential employment opportunities, I want to give “MBI Deep Dives” a proper shot. I just moved to Canada and I plan on spending my entire time in building “MBI Deep Dives” going forward.

Investment Talk:

Investing, for me, is largely about pairing your investing style with your own personality. Investing is great in that it can show you a great deal about yourself, as well as aid your personal growth over time. So, if you could tell us about your investing personality/style, perhaps your screening process, and what you are hoping to achieve with your investments, that would be great.

MBI:

I have no quantitative screening process whatsoever, but I do have a qualitative screening process. Investing is essentially my lens to understanding the world. Understanding the world itself is a full-time job and it is wonderful that investing has an embedded scorecard, however imperfect, with it so that I can have some understanding how well I really understand how the world works. So my basic criteria for doing deep dives is the companies I am curious about.

Since I am not managing money professionally, I am comfortable in saying that my primary goal is not to find the most undervalued stocks right now. I simply want to study business after business for a long time so that I understand the world a little better. I strongly believe that in that process I will inevitably come across companies that I would love to own. When and if I find them, I will buy them.

I primarily see myself as an analyst, and not as a portfolio manager. I feel that to label myself as portfolio manager, I need to know about a lot more companies than I do now. So hopefully when I will go through 60-70 companies in the next 5-6 years, I will be a lot more comfortable thinking myself as a portfolio manager. I am about to hit 30 in February, so hopefully I have a plenty of time to get there. I constantly tell myself I have signed up for investing for the next 50-60 years. Whenever I think about in such time-frames, it instils a sense of calm in my investing process and root out FOMO as much as possible.

Investment Talk:

I am interested in knowing how you first discovered investing. For me, it was during university during a corporate finance module. A few Benjamin Graham books later, and I found out that this was my passion. I do not follow the Graham-way, but I do follow the mental models he shared.

So, how did you first discover investing, and what about it appealed to you? Moreover, are there any investors that you admire the most?

MBI:

I do not have much family background in investing. I also came to know about investing during my college days. While attending college in Bangladesh, one of the finance courses was taken by this Professor named Shama-e Zaheer who did his MBA from Emory University. He was such an erudite and well-spoken teacher that I was drawn to investing. I then came across Buffett’s letters and a book on Bill Ackman, titled “The Confidence Game”, which detailed his short on MBIA. I kept reading other investing books and started investing myself when I was in senior year in college. Since then, I have been hooked and once I started working in this industry as well, there was no turning back to anything else.

Buffett and Munger are my biggest investing heroes and I am fascinated not just by their return but by the longevity of their track record. Longevity, in my opinion, is the most important thing in the game of investing since as long as you remain alive, you can keep taking your shots.

Investment Talk:

There is an interesting shift taking place amongst mainstream media and reporting. In the current day, a regular human being, covering any topic, can amass a significant following and/or grow a powerful and insightful community simply using social media. Publication is no made a great deal easier through the utilisation of one’s own website, a Substack, or a Gumroad account for instance. Blending writing with social media and being able to create a community is one of the parts I most enjoy about my work with Investment Talk.

Everyone knows about MBI Deep Dives, and the work that you produce. You said something over on your page that I really admired,

“I literally daydream about what may happen five years down the line and I have convinced myself that I will most certainly be a much better analyst after writing 60 deep dives”

Writing every day is powerful and is a great to enact accountability upon your work whilst you “improve by doing”.

I am wondering if you can perhaps talk us through what you have learned so far with your work in MBI Deep Dives, and how you are using that to improve? Feel free to go on a tangent if you wish.

MBI:

One of the great things about being a generalist and promising to write one deep dive every month is your breadth of understanding on the market increases gradually. The depth, however, is incredibly challenging. I am well aware of the fact that when I am writing about a company, there are certainly some subscribers out there who probably have a much better understanding than I do on that particular company. It is of course not easy to just pick up a company every month, start from zero, and then write something that’s worth reading for any investor.

I am incredibly indebted to the fintwit community. Not only ~80% of my subscribers comes from twitter but also many have taken the time to send their thoughts on a deep dive I wrote about or just articles/pieces that they think would help me understand the company better. For example, I am going to cover Copart next month, and one analyst sent me an exceptionally detailed work on Copart. He didn’t send me his valuations/price target or anything like that, but he sent something that’s far more valuable: his notes on Copart which certainly took months (or years) of reading/following the company. These serendipitous interactions are worth much more than the $10 I ask every month from my subscriber. If you have an insightful reader base, it is worth much MUCH more and frankly hard to put a number on that value. As I keep writing more and more, I am convinced more than ever before that I will get incrementally better because I will travel to different parts of the market AND I expect to attract reader base who will help me be better as an analyst.

Investment Talk:

Whilst we are talking about self-reflection, what have been some of your biggest investing mistakes, and how do you feel they have made you a better investor today? 

MBI:  

There are two that comes to my mind. When I first started investing in the US market, I invested in quite a few high dividend yield stocks, often yielding 5-10%. I thought in a ZIRP world, it is difficult to lose money in these stocks. I have changed my mind on that. There is perhaps no dividend yield high enough that can give you protection from a melting ice cube.

The second mistake was Apple. I bought Apple in January 2019 at $152/share (pre-split). I had a very simple thesis. At that time, Apple was trading below the market multiple. I thought Apple, at the very least, had a better business than the broader market. A few months later, I sold Apple at 25-30% gain. I could have made ~4x my money on Apple if I held on, and initially I felt bad for selling too soon. Later I realised I really don’t have the right to feel disappointed. I put in very little work and had an exceptionally simplistic (and potentially naïve) thesis which played its course in just a few months. And once the thesis played its course, it’s hard to blame myself to sell the stock. It also made me realise people who have multiple multibaggers in their portfolio are more likely to be deep thinkers on the businesses they own. Most investing wisdom have been repeated by everyone so many times that it all sounds a little cliché these days but having the mentality of owning businesses rather than just some digital numbers on your screen will always be a huge differentiator because it’s not easy to do and it does require a lot of analysis, thinking, and conviction that’s probably impossible to copy.

Investment Talk:

For those who read these guest interviews often, you will know that I like to throw in a few questions to each guest that are the same. Thus, allowing some comparison or range of perspective.

If you had to choose three books, of any genre, that you found either; changed your outlook dramatically, or were just fun reads, which would you chose and why?

MBI:

Let me start with two non-investing books.

George Orwell’s Animal Farm is one of my all-time favourites. I read the book when I was probably a freshman and it deeply influenced my worldview. Thinking in analogy is a powerful force in illuminating the underlying dynamics in a different setting which may get obfuscated because of the narrative that we have been told. How a pig society operated in this book and all the drama that unfolds helped me better understand the human society than any sociological texts I have read.  

The next one is Sapiens by Harari. My guess is a super-majority of your readers have read both of them. While both of them are very popular books, one thing I noticed is people have wildly different takeaways after reading the same book. This is not surprising and in fact, wildly different inferences are perhaps the basis for fundamental analysis in investing. We all read the same 10ks, listen to the same earnings calls, but some people connect the dots much better. While reading Sapiens, I noticed that although Harari has not introduced any idea that I was already in deep disagreement with, he has helped me finish some of my thoughts. I probably had similar thoughts on humanism, free will, religion even before reading his book, but he took those thoughts to its logical conclusion and helped me complete my thoughts.

In case of investing books, I would mention two books that were deeply influential: Superforecasting by Philip Tetlock and Dan Gardner, and Expectations Investing by Michael Mauboussin and Alfred Rappaport. Both gave me a better framework in approaching investing.

Investment Talk:

Another one I like to ask all guests, as it can be interesting for the reader to gauge different perspectives from a range of intelligent investors around an identical topic. Concentration in high conviction positions is one of the most efficient ways to earn outsides returns. However, it can also be an excellent way to blow up your returns. What is your take on position sizing, or allocation in general?

MBI:

I have a very concentrated portfolio with just 11 stocks, but top 4 is ~70% of total portfolio. I just recently wrote a thread explaining why this level of concentration is probably not out of choice. As they say, “concentration builds wealth, and diversification protects wealth”, it is not unlikely that I may lean to more diversification as I understand more and more companies. With age, it might even be prudent to be more diversified than I am right now.

Investment Talk:

We all search for different things when we are first analysing a company. Some focus on company culture first, some prefer capital allocation, some like to observe management’s track record, some are accounting buffs, and some like narrative.

If you had to choose three things that a company must have before you even consider investing, what are those three things, and why?

MBI:

The first criterion is whether I actually understand how the company makes money. If I don’t understand the economics, there is no point in making an investment no matter how compelling the opportunity may sound. I see a lot of smart people talking about semiconductor space these days, but I have very little knowledge and understanding on semiconductors. So the first criteria is actually less about the company and more about myself.

Then comes management. I think one of the few Buffett quotes that probably haven’t aged well is his quote about buying companies that could be run by ham sandwiches. I believe there will be fewer and fewer successful public companies that can be run by ham sandwiches. We all talk about base rates and how all businesses fall victim to the base rates in the long run, and that is perhaps true for every business in a sufficient long time frame. But one of the few ways you could escape the base rates is by having exceptionally competent and driven people running your company. I prefer the management to be paranoid, and always keen to extend the S-curve instead of resting on its laurels which is what a sandwich may be prone to do.

Finally, while it is somewhat not in vogue these days, I do care about valuation. But I acknowledge that Mr. Market is not a charity and therefore, high quality companies will predictably trade at optically higher multiples. Many investors seem to believe in magic multiple numbers which they can just simply look at and miraculously conclude whether a company is overvalued or not. I do not claim to have such power, and so I hold no opinion on valuation of a company before studying the company no matter what multiples they trade at. But I do want to have some comfort on valuation before investing in a company.

Investment Talk:

Luck. Skill. Mindset. Three very influential components to investing.

My question to you, is how do you view the relationship between these variables in investing, and to what extent would you say each is important over the short and long term?

MBI:

I have come to the sobering conclusion that luck and skill are always going to be excruciatingly difficult to untangle both in life and in investing. In any case, they are far from binary and everyone falls somewhere in the spectrum and where you fall in that spectrum can vary at different stages of life. Personally, I am more interested in having a growth mindset and remaining ambitious. I also deeply care about being resilient. I am a firm believer of the possibility that we may experience war, deflation/hyperinflation, and/or great depression in our lifetime. This is not a prediction, but a humble acknowledgement that we are not any more special than people who were born 100 years ago. If those generations had to go through all sorts of unpleasant experiences, there is no reason to believe otherwise for any current or future generation of investors. If we have to survive all these, I would like to have an all-weather resilient mindset as an individual.

Investment Talk:

For some, part of investing is about ascertaining where the world is heading, and which firms stand to benefit from those tailwinds to the greatest extent. Whilst I acknowledge that humans are futile future-tellers, I am interested to know which spaces/sectors/industries you feel have some of the largest tailwinds coming into the next decade?

MBI:

My knowledge is more limited than I would like in forecasting the next decade, so my answer perhaps will hint more towards my current narrow circle of competence than a careful assessment of the future. Anyways, from what I understand so far, I think e-commerce, cloud, and simulation will enjoy a robust secular tailwind throughout this decade. But since I do not know about many things, I have no opinion on whether they are going to enjoy the largest tailwinds.

Investment Talk:

I firmly believe that investors who wish to invest based on fundamentals should adopt an understanding of basic accounting if they want to have longevity in this field.

As you have proven your ability in financial statement analysis, what do you feel is the most effective method for new investors to learn how to understand how to read financial statements?

MBI:

Since I majored in Finance and then did my MBA and CFA, a lot of the accounting related coursework was just part of my education. I think someone like 10-k Diver would be a better person to ask this same question as he came from a completely non-finance background and basically taught himself finance/investing purely from first principles perspective. If I am pressed to answer, I would suggest anyone to borrow three books: CFA Level 1, 2, and 3’s “Financial Statement Analysis” books. If you are interested in investing, I think CFA’s Financial Statement Analysis book is a good and fairly comprehensive resource.

Investment Talk:

I am fairly sure I know the answer, but why “Mostly Borrowed Ideas”?

MBI:

I explained this in my website: “As a generalist, I do not have a background in any particular sector. I enjoy navigating across industries, businesses, and countries to learn, understand, and connect the dots. In any case, most ideas and innovations are incremental in nature. Very few of us are smart enough to come up with truly original or ground-breaking ideas.”

Matt Ridley had a fascinating response elucidating how even the most revolutionary technologies were simply borrowed and incrementally improved upon. I want to liberally borrow ideas, think for myself to the extent possible, and act on those improved ideas. 

Investment Talk:

Lastly, I like to round-off this segment with my favourite quote, that comes from Graham. The one concerning the short-term voting machine and the long-term weighing machine.

I find it helps me reconcile the irrational price action in the near-term. I do not know who first coined it, but another of my favourite quotes is “If you don’t laugh, you’ll cry”.

 I find this quote helps me appreciate the randomness of life and the lack of control we have over external factors.

What is your favourite quote, and why?

MBI:

One of my favourite quotes, by Liddell Hart who was a military historian, is the following:

“There is no excuse for anyone who is not illiterate if he is less than three thousand years old in mind.”

If you care to go back, history is a treasure trove of most things that are happening right now under the sun. We all can read it, learn the lessons vicariously, and gain wisdom. Niall Ferguson had a similar quote on this point, “The dead outnumber the living fourteen to one, and we ignore the accumulated experience of such a huge majority of mankind at our peril.”

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Questions from Twitter:

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

@fiducia_invest: “Do you believe that valuations are relatively skewed right now, in the sense that (Growth SaaS) looks more expensive than they are, but thanks to growing intellectual property as new "raw material", great NET cash positions, and if they cut back on CaC and R&D the bottom line will look a lot prettier?

Taken from Howard Marks memo, curious as to other people’s position on this. Valuations / SaaS.. Thank you :)”

MBI: I wrote a piece on the mystery of the valuation of SaaS businesses. It IS tricky, and in general, I agree with Howard Marks as well as Michael Mauboussin who made a similar point. Investors who typically use just rule of thumb to determine whether companies are overvalued or not are unlikely to be successful in this environment. Having said that, I am at best lukewarm at the potential of “SaaS Index” generating outsized return going forward as valuation certainly ran up a lot. In terms of how it all shakes out in the broader market level valuation and to what extent the role of intangibles distorts comparability of market valuation level to earlier eras, I simply do not know. 

@clueless_1337: “How do you shortlist companies to research on, given the finite time?”

MBI: I just do one deep dive every month which feels slow at times, but whenever I think I can do deep dives of 60 companies at this rate in 5 years, I don’t feel I need to speed up. So I don’t necessarily have a short list, I rather have a long list of businesses that I want to know more about and one by one, I will get to it.

@clueless_1337: “What are your go-to tools for research?” 

MBI: Reading the public filings (10-K, 10-Q, earnings transcripts, investor day presentation/transcripts), any good book on the company/industry, recent interviews/podcasts, various blogs on the internet, twitter search/DMs, Inpractise etc. There is hardly any special or secret sauce to my process. If you are a long-term investor, you don’t need to have a sophisticated process with millions of dollars of research budget. You just need to be persistent, focused, and deeply passionate. I believe for such investors, investing is simple, but not easy. On the other hand, if you are a short-term investor, you better have some special or secret sauce to compete against the likes of Citadel or Renaissance.

@clueless_1337: “If you have invested all your net worth in one company, which one would it be?”

MBI: Berkshire Hathaway.

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Summary

That wraps up today’s guest newsletter, which marks the seventh edition of this series. I want to thank MBI for taking the time to answer these questions today. It’s clear to me that Deep Dives is going somewhere, and I will enjoy watching it grow in 2021.

Stay tuned, as we have some excellent calibre guests lined up for you in the coming weeks.

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