Jason Rivera is the Chairman, CEO and Founder of Rivera Holdings, an investment holding company. He is a self-taught deep value, contrarian, and special situations investor. He concentrates for the most part on companies under US$ 1 billion in market cap. In this interview, Jason talks about how he started in the field and his evolution and experience over the years.
Safal Niveshak (SN): Could you tell us a little about your background, how you got interested in value investing?
Jason Rivera (JR): My start in value investing was a bit unusual and accidental. I started learning about investing out of necessity 10 years ago, when I was dealing with severe dizziness issues. At the time, I could do nothing but lay around all day because the dizziness was so bad. So, I could not work or do much of anything. But when my wife told me she was pregnant with our first daughter, I knew I had to do something that would allow me to provide for my family at some point when I got healthy.
At the time, I thought about going into three different lines of work. None of which could require going to college because I wouldn’t have been able to due to the dizziness. One was to become a politician but I figured the world didn’t need any more politicians.
The second was becoming a writer but I remember being told in high school by one teacher, “I hope you never want to become a writer because you’re terrible at it.” It was the truth then.
And third was that I remembered learning some basics about investing during my senior year in high school and I remember being interested in it. So, by default, I chose the path of learning about investing because it was the only thing I was even a little interested in. I’m now mostly healthy if I’m not moving a lot or exercising and am a completely self-taught value investor.
I’m a licensed Realtor in the state of Florida, and also the Chairman, CEO and founder of Rivera Holdings LLC, my investment holding company that has just opened and is accepting investors.
SN: Well, that was quite an unusual start. Anyways, how have you evolved as an investor and what’s your broad investment philosophy? Has your investment policy changed much through the years?
JR: When I began investing real money I was terrible. And did everything you’re not supposed to do when investing your money. I did little to no research on companies and would invest in them if they had “good looking” ratios. And often had no idea what the companies even did for business. Terrible, right?
SN: Well, that was truly terrible Jason! Reminds me of so many investors who start their journey exactly like this.
JR: True Vishal! But fortunately, I learned my lesson fast. About a year after I began “investing” real money, the Chinese small cap arena imploded because many companies were found to be fraudulent. And because all I looked at were “good” margins, most of the companies I invested in then were Chinese small caps. Within a matter of months of starting my portfolio was already down 50%. Luckily, I only had $500 in my account so in real terms I only lost $250. But the lesson was huge and forced me to rethink what I was doing.
I sat down and realized I either needed to stop investing or begin learning and evaluating companies on a real basis. This is what set me on the path I’m still on today of being an extremely strict and disciplined value investor.
SN: Listening to this roller-coaster start to your journey reminds me of this quote from George Goodman aka Adam Smith – “If you don’t know who you are, this (the stock market) is an expensive place to find out.” Anyways, so was your start the worst time in your experience as an investor? What about 2008?
JR: Well, I’ve already outlined my worst period as an investor above. During the crash of 2007 and 2008 I was still in the learning phase and hadn’t invested any real money at that point.
Anyways, I sit down to do my yearly performance review and make it public for anyone to read on my blog, for people who subscribe to my investment newsletter and people who invest with me. I do this not only to be transparent and up front but also so that I’m forced to keep track of my progress on a yearly basis to see how I’m doing.
When I finished my 2016 performance review I found out that in the first five years of my career as a true investor – since becoming a true student of the craft of value investing in 2012 – I’ve outperformed Warren Buffett when compared to the first five years of his career.
SN: Wow, that was a quick and great turnaround!
JR: Indeed! In the first five years of my career as a student of value investing, I’ve produced an average (non-compounded) return of 29.7% each year. Or a total cumulative return of 148.3% over this period. In the first five years of his career – Buffett Partnership – Buffett produced an average return of 25.4% each year, or a total cumulative return of 126.9% over that period.
Over the last 10 years, I’ve put in thousands of hours of time studying to become the best value investor I can be. So, when I saw my performance and saw I’m beating Buffett early in my career that made me very happy. And that led me to realize I’m doing at least a few things well.
SN: Jason, what you mentioned in the last part of this answer is so important. Investors need to become better versions of themselves over time, instead of always trying to beat others at this game.
Anyways, let’s talk about your process of stock selection. What are some of the characteristics you look for in high-quality businesses? What are your key checklist points you consider while searching for such businesses?
JR: When I am searching for a high-quality business, some of the things I look for are –
• Does it have a competitive advantage? If it does, is it sustainable over the long term?
• What is the strength of the company’s balance sheet?
• What is the company’s ROIC and ROE over the last five years? How does this compare to competitors? Is it on a rising or declining trend?
• What is its FCF/sales margin over the last five years? Is this growing?
• Where this free cash is being spent?
• What is the company’s unlevered return on net tangible equity?
• How do the above margins compare to competitors?
• Same things with operating margins over the last several years as well. Are the margins higher or lower than competitors?
I then compare all these parameters to the company’s competition to see who has a better business. If a different company has better numbers and profile I will then also begin researching that one.
Analyzing a company against its competition like this helps me assess and learn an industry fast, while also finding the best – if there is one – potential investment among the industry. It also helps me spot any competitive advantages that may lie within the industry faster because I’m looking at several companies at once.
SN: Great! And what about your checklist?
JR: Well, when it comes to a checklist, the only one I write down and don’t have in my head is a preliminary analysis checklist I do which is below.
I use a preliminary investment checklist that shows margins in the trailing twelve months (TTM) period, and over the last five years. I check if book value has fallen or risen over the last five years, if share count has fallen or risen over the last five years, if the cash conversion cycle (CCC) of the company rose or fell over the last five years.
I look to see what the company’s margins are today and how they’ve done over the last five years. What kind of free cash the company produces and is this rising or falling. And what percentage of the company’s balance sheet is in cash versus debt. This helps me evaluate things like cash flow production, balance sheet strength, and management quality fast on a preliminary basis. If enough boxes are checked here I will continue to research the company.
I also have five criteria that must be met before I consider investing in something as well. If these aren’t met I won’t invest in the company no matter how great the opportunity is –
1. Can I trust the management?
2. Is the company undervalued enough for me? Or at least fairly valued if a great business?
3. Is there a high likelihood I’m going to lose money no matter what the upside/undervaluation is?
4. Do I already own a better investment?
5. Will I be happy owning this company for decades if necessary?
The “Can I trust the management?” item is number one for a reason here. If I can’t trust the management, it doesn’t matter how great the undervaluation or opportunity is. I won’t invest in the company. The only way this rule is ever broken is if I have the chance to change management by owning a significant portion of the company.
SN: On that point, how do you assess a company’s management quality? Do some numbers help here or is it more of a qualitative assessment?
JR: Most of it is qualitative which requires a lot of knowledge to judge. Some more tangible things any investor can use to judge management are things like ROE being higher than ROIC. This means the company has debt which you then need to investigate.
The company’s cash conversion cycle (CCC) is another metric I look at here. The CCC measures how fast a company turns inventory into sales, sales into cash, and then that cash back into more inventory. The lower this number is the better and this can even be negative for companies like Wal-Mart.
When it’s negative it essentially means customers are paying the company – in this case Wal-Mart – faster than the company can keep inventory in stock. The CCC is also referred to as inventory turn.
Another way I try to assess management quality is by comparing a company’s margins – operating margin, ROIC, ROE, etc. – to direct competitors to see how it’s doing. And another major thing I look for is in the financials in the “OFF BALANCE SHEET ARRANGEMENTS” section.
Detailed here are any potential conflicts of interest by managers, self-dealing, and sweetheart deals for other company’s they may run or have interests in, etc.
If there are too many things here I don’t like – they don’t even have to be illegal just poor judgement or poor use of shareholder’s capital – I’ll pass on the investment.
Number one rule to me when it comes to evaluating management trust is whether they use shareholder capital – our capital – in ways they should be using it.
SN: A tidy process I must say, Jason. And quite a few insights. Anyways, let’s talk a bit about valuations now. How do you think about this subject? How do you differentiate between ‘paying up’ for quality and ‘overpaying’?
JR: Valuation is everything to me – at least in the beginning. I won’t consider an investment of any kind unless the company is undervalued or at worst fairly valued if it’s a great company with long term sustained competitive advantages.
It doesn’t matter how great the company or asset is. I won’t invest in it unless and until I can buy it at a discount – or again, fair value if a great company – to what I deem its true value to be. I’ve never bought any asset above what I deem to be fair value at this point in my career, regardless of competitive advantages.
I use a range of valuation methods but the ones I use most are as follows, in no particular order –
• 8-11 times EBIT (operating earnings) + cash – short and long term debt. Here, I will also subtract or add things like net operating loss carry-forwards, deferred tax assets, pensions, capitalized operating leases, etc. If a company’s EBIT is fluctuating a lot, I’ll also normalize the same over a 3 or 5 years period and use the average EBIT over this period.
• Net current asset value – current assets minus total liabilities divided by number of shares.
• Shareholder’s equity divided by number of shares. Will subtract goodwill and intangible assets from shareholder’s equity if significant here.
• Book value per share.
And relative valuations:
• EV (Enterprise Value)/EBIT
• EV/Owner’s Earnings
• TEV (Total Enterprise Value) /EBIT
• TEV/Owner’s Earnings
I use more than the ones above, but these are the ones I use most. You’re also likely to notice I don’t use EBITDA (net income) in any of my valuations. And I get the question on a regular basis of why I don’t use it.
This is because it’s more easily manipulated than things like EBIT, FCF, and Owner’s Earnings.
I’m of the school that believes companies can do almost anything to make EBITDA whatever they want. And thus, I view them as “bull shit earnings” like Klarman, Munger, Greenblatt, and Buffett do.
SN: Great! Any example from your investment experience to explain your thoughts on valuation further?
JR: Well, one company I got spot on in terms of valuation was BE Semiconductors (BESIY) which I recommended to paid subscribers of my investment recommendation service Press On Research.
I found the stock significantly undervalued while producing a ton of free cash flow. It had a stellar balance sheet, and produced better margins than bigger competitors. The company operates on huge amounts of float for a non-insurance company. And it had minor competitive advantages. I loved almost everything about the company. And the title of the recommendation issue was “The Next GE Pays You A 10% Dividend Now; While We Earn Another 34.5% In the Next Year.”
Anyways, when I recommended the stock, it had a market cap of around US$ 640 million. And it turns out we’ve earned a lot more than 34.5% owning them since recommendation. As of today – 16 months later – BESIY now has a market cap of US$ 1.3 billion.
SN: Thanks for sharing that, Jason! Now, how do you determine when to exit from a position? Are there some specific rules for selling you have?
JR: That’s a good question, Vishal. Most people focus on the buy side of the equation, and almost no one focuses on when to sell. But to me this is the harder part of the problem.
I have a few sell criteria that if they are met I will sell no matter what.
• If I buy something and its price goes up a lot – above what I deem fair value – in a short time on no news or stated improvement in the company, I sell.
• If I find another better investment opportunity and I have no excess cash to invest, I sell.
• If I find something negative within the company or in the industry that is bad for the company after I buy it, I sell.
• If the management or board begins to do things I don’t think the company should be doing, I sell.
If none of these criteria are met I will generally hold for an indefinite time period.
SN: Have you made any mistake(s) in selling stocks in the past only to regret it later? If yes, please help with a real-life example.
JR: I’m sure I have but I’m honestly not sure. I don’t look any further at companies I’ve sold so I don’t come to regret the decision emotionally.
If I made the decision in a rational manner to sell I don’t want to be swayed by emotion and think “Oh no, XYZ company went up another 300% after I sold. I should have kept it.” And then go look for reasons I should have kept them.
I put up blinders by taking the company off my watchlist and stock tracking apps so I don’t see their share prices or any news about them after I sell them to avoid this. Not sure this is best, but it works for me by keeping emotion out of things.
SN: When you look back at your investment mistakes, were there any common elements of themes?
JR: Lack of due diligence is the common thread in all the investment mistakes I’ve made. Main example here is the Chinese small cap explosion outlined earlier. Luckily, since then I’ve stayed disciplined in not buying something until I’ve done enough research to where I’m comfortable buying it now.
I’m now to the other extreme. Sometimes I miss out on opportunities because I require doing so much due diligence that by the time I finish analyzing something, its share price has already gone beyond my comfortable buying price.
I can live with this error by omission though.
What I can’t live with is rushing to buy something and then making a huge mistake. Especially now that I’m managing funds for others.
SN: That’s a very sane thought, Jason. How I wish more investors could practice that. Anyways, how can an investor improve the quality of his/her decision making?
JR: Read as much as possible – company financials, financial history, industry profiles, build mental models, etc. – about as wide of a range as possible. Then put into practice what you’re learning as you learn it. If you do this, you will learn faster and not waste a ton of time like I did when I first started.
I would just read and read and read and then when I tried to put something into practice I wouldn’t remember how to do it. So, I’d have to go back and read it again, then practice, then I would learn it.
Read and then practice as you’re learning and you won’t have this problem.
SN: How do you think about risk? How do you employ that in your investing?
JR: I’m very risk averse and to me risk is all about how you buy, what you buy, and at what price you buy something.
I want my investments to be as close to 100% guarantees as possible. I never rely on the future and what the company “may” grow into or “if” it does this the company will “skyrocket.” And I never want to rely on hoping that some person dumber than I am will want to pay a higher price for the investment in the future.
I require the investment to be undervalued now and have as little risk as possible. This is one reason I focus heavily on free cash production and the balance sheet.
If I’m not 100% confident in my investment thesis after considering both flaws and positives, I won’t invest in it. No matter what the potential upside is.
SN: What’s you two-minute advice to someone wanting to get into value investing? What are the pitfalls he/she must be aware of?
JR: If you love it, are passionate about it, and see yourself doing it for a career/lifetime, become obsessed about learning the craft of value investing. And spend as much time learning and practicing as you can.
I wrote this article on 110 tips to becoming a world class investment analyst last year, detailing why becoming obsessed is necessary to become great at anything and how obsession will help you learn faster.
Grant Cardone also wrote the great book Be Obsessed Or Be Average detailing this mindset further and how becoming obsessed about what you do or want to do will help you in any aspect of your life. The main pitfall to overcome is the sheer amount of time and determination it will take to be a great investment analyst.
Finance and investment isn’t the field you want to get in to just for the money. If you don’t love it, you’ll burn out fast because you’ll be trying to keep up with people who are working/learning/improving fourteen-plus hours a day seven days a week in many cases and love doing it. The best thing you can do to not think about the amount of time it will take to become great is to just put one foot in front of the other.
Learn as much as you can every day. And continue this over a long period of time. If you do it long enough in a dedicated fashion, you’ll become great at it. As Charlie Munger says, “Knowledge compounds like money does.”
SN: Which unconventional books/resources do you recommend to a budding investor for learning investing and multidisciplinary thinking?
JR: Some nonconventional books/resources I cannot recommend enough are as follows –
- Dream Big – The Story of 3G Capital
- The Psychology of Human Misjudgment
- A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business
- The Brain That Changes Itself
- The Power of Habit
- Willpower: Rediscovering the Greatest Human Strength
- The Obstacle is the Way
- The Art of Learning
- The 10X Rule: The Only Difference Between Success and Failure
- Be Obsessed or Be Average
- Zero to One
SN: Which investor/investment thinker(s) do you hold in high esteem?
JR: There are six and they’re below in no particular order. I try to learn from these people and study them as much as I can. Alongside their names, I’ve mentioned some of the key lessons I’ve taken from each –
1. Warren Buffett – Compounding, float, business evaluation, capital allocation.
2. Benjamin Graham – Importance of value investing and valuation, and how to evaluate cigar butts.
3. Charlie Munger – Mental models and becoming a better thinker.
4. Henry Singleton – Compounding and capital allocation.
5. Shelby Davis – Insurance business and float.
6. Professor Sanjay Bakshi – Mental models, valuation, float, and business evaluation.
SN: Hypothetical question: Let’s say that you knew you were going to lose all your memory the next morning. Briefly, what would you write in a letter to yourself, so that you could begin relearning everything starting the next day?
JR: This is a fantastic question by the way. I love it because it made me think about something I’ve never thought of before. Anyways, I would write down four things.
First would be to become obsessed faster with what I wanted to accomplish. The faster you become obsessed with learning and improving at whatever it is you want to do, and the more time you put into doing this, the faster you’ll be to achieving your goals. Learn, read, watch webinars/seminars, listen to audio books, etc. as much as possible. This is a virtuous cycle of learning and improvement.
The second would be to read, study, and practice evaluating companies as much as I can. Do this by reading, taking notes, analyzing, valuing, and evaluating company financials as much as you can. Like above, the more you do these things the faster you will learn and the better you’ll get. This will also help you learn companies and industries faster.
The third I would remind myself would be to study everything I can about the six individuals I named above. If you were to study only the people above you’d know more about how to evaluate companies, how to value them, what you should learn next, and how to approach learning than by doing anything else. Learn from others’ examples of mistakes and triumphs so you figure out what may work for you faster than trying to do everything yourself.
And the fourth would be to learn what my circle of competence is. And learn how to stay within that circle until I can expand to a new industry. This will save me a ton of pain and mistakes.
SN: What other things do you do apart from investing?
JR: I do a lot of saltwater fishing. For those that may follow me on Facebook or Twitter you’ve likely seen pictures of some of the fish I’ve caught. And, of course, spending time with my wife, two daughters, and friends and family. Other than going fishing once a week I don’t really have any other hobbies anymore. I spend the vast majority of my time learning, looking for businesses to buy in the public and private arena for Rivera Holdings, and looking for investment opportunities in real estate to buy for Rivera Holdings.
I also spend a lot of time looking for new lines of business I can go into to help continue building my company. But they have to be complimentary to investing. For example, I just passed my Florida real estate exam and became a Realtor to make money by helping people buy and sell homes, businesses, land, and property. But I also did this to gain access to new resources and contacts to continue building Rivera Holdings as well.
Like you, I also spend a lot of time teaching others the craft of investing as well.
SN: That was nice, Jason. Thank you so much for sharing your insights with Safal Niveshak readers. I wish you all the best for your work and life.
JR: Thanks a lot for asking and letting me do this Vishal. I hope your readers find this useful in some way.[/show_to] [hide_from accesslevel=’almanack’]
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