Circle of Competence

Value investing gets a pretty narrow rap. While, in essence, value investing should be defined as merely buying any asset for less than its worth, thus defining all intelligent investing, it often is just spoken of as buying equities with low PE ratios, low price to book ratios, and the like.

In reality, value investors come in different flavors, invest in all asset classes, and are all looking for the same thing: assets on the cheap. That asset can be tangible (Ben Graham), intangible (Buffett), a stock, a bond, a commodity (remember when I highlighted Jim Rogers?), or anything else with an intrinsic worth.

In this vein, I recently came across another well known billionaire who, like Jim Rogers, isn’t generally considered a “value investor,” but when I read his words I see value investing principles. That man would be decabillionaire Carlos Slim, who controls most of Mexican telecommunications and a whole host of other assets around the world.

If you don’t read Reflections on Value Investing, I reflected the other day on the Academy of Achievement, an organization that honors high achieving individuals from all walks of life. Their website has an absolutely fantastic gallery of interviews with its inductees, and the one I came across and enjoyed the most was that of Carlos Slim Helu.

Often, as Charlie Munger likes to point out, we can find very useful investing concepts outside of the traditional investing media and academia. I found some terrific nuggets of investing wisdom and history in the words of Carlos Slim, and today I’d like to highlight some of them so my readers can enjoy those words as well.

Mr. Slim has a keen understanding of business dynamics and intelligent investing, and that shines through when talks about his companies, his approach to investing, and some of his past ventures.

On Making Mistakes

“How do you deal with disappointment in business? When things don’t go well, how do you channel that disappointment?

Carlos Slim: I think in business, you need to have flexibility. If you’re not doing well, correct it. Try to have small mistakes, not big mistakes. Sometimes you have big mistakes. Everyone has big mistakes, but try to make mostly small mistakes in life. I think, in business and in personal life, try not to make big mistakes.”

On the Importance of Knowing History

“Is it important for someone in business to understand history?

Carlos Slim: Very important. I think so, in two ways. First, if you’re in business you need to understand the environment. You need to have a vision of the future, and for that you need to know the past. That is very important. But also, on the personal side. A businessman cannot be only business. You need to have more interests. Life offers a lot of interests, many things to know, to learn, to feel, to live.”

On Fundamental Investing Rules

“It’s said that you have this unusual ability to look at a company or a business that is not doing well, to see that it is undervalued, to acquire that company and make it profitable. Is this something that is instinctive? Is it something that you learn from experience? Is it something that you learned as a student? How do you account for this ability?

Carlos Slim: We look at potential development of the company. To buy it at a low price and in bad condition, it makes it easier. But the good thing is the potential of the company. How far it can go. How far you can develop the company. I think more than the instinct, it’s knowledge. Look at the numbers. Like I told you, numbers talk. You look at the numbers, you look at what they’re doing. And we have a philosophy of working that makes these things not very difficult, because when you work with austerity, sobriety and you invest in equipment and you reinvest. There are, I think, some basic rules. Nothing magic.

Only basic rules to find out which are the conditions of the company and help to change them. But what is clear also for me is that you can do it very fast. You can do it very fast and the faster you do that, the best it is for the business, for the company, for the people involved, to make that. No? Well, you need to work in the whole area, not only finance, not to look only at one area. You need to look at labor, your treatment with people. You need to look that the people should be feeling good in the work they are doing, to be motivated to be there, to have the spirit to be in the company. And you look also at sales. You look at production. You look at finance. You need to look at the whole company and arrange the areas where things are doing bad.

Let’s say one example. In some companies, you have a lot of levels of management. Many levels are not working for the operation. They have quarters far from the operation. Corporations, the corporation is outside the operation. We work without corporative people. We focus an operation. We take down as many levels as we can, to make the highest level be near the operation. With practice and experience we make a team that is very efficient, and we do that very fast.

I think it is not instinct. It’s experience that you can learn, because it’s not done only by me. It’s all the team, and the organization is very big. We have nearly 200,000 people working in the group, and we have a lot of young men doing these kinds of jobs. That takes basic rules of management to do that, no? You read a lot of books — how they do, what they do bad, what they do good, the conglomerates of the ’60s, the way they managed. The biographies of some people and what they do, and you can take the good things from them. Not everything, no. And the experience — you can, I think, have experience from the failures of others and your failures, no? And what we do when we are managing business is that we all need to take decisions, but we try to do small mistakes. We are very, very open to small mistakes. A big mistake is very dangerous. A very big mistake is bad, but small mistakes make the people trained, and they learn how to take decisions and move ahead.“

On Value Investing

“When you read about what happened, in the U.S. in the ’30s, it was clear that the country was not finished. We had a big problem (in the 1980s) because the fiscal deficit was very high, but also because the interest rates went above 20. It was 21 or 22 prime rate. The price of the companies was crazy. Not only the values were very low. That was really very, very low. Let’s say three percent of the book value, or five percent of the book value. It was crazy. Very, very low.

There were available businesses (to buy). Because in our country, the companies have a “group of control” regularly, because they’re not such big companies. Also, there is a group, a person or through the bank, that the controller of the companies is there. In these years, the U.S. companies — the foreign companies — want to sell, because to be investing in Mexico was not good, and they sold out these Mexican operations. The banks sold the assets, and many people wanted to sell everything, and we were the only buyers.

That is one of the reasons I got
so complex a group with so many sectors, because these businesses were available, one day after the other. That’s the only reason we were involved in so many things.”

“I learned many things when I was very young, maybe 12 or 13 years old. Then I learned how to understand a balance sheet. I didn’t learn that in school. When you look at a balance sheet, there is a lot of information. Not only a balance sheet, but also an estado de resultados. That is a report, financial statement in general. I think finances — to invest, there are some principles that are very clear, but very easy. You invest with basic conditions. You invest when you have confidence in the management, in the sector — you like the sector — and the value of the prices are not high, or are low, low value. Buying intrinsic values in good companies, in good markets and in good sectors. No? I think these kind of things are basics and are not complicated.

…..

The problem is when you want to buy and sell and buy and sell, and that is when the investor gets into gambling, or speculation. That is not necessary, not something rational.

The training I have, for one thing, and the other — to study financial statements during many years, maybe 10 years or 15 years — and my experience in many areas, and the ability maybe to simplify the variables, take out parameters that are not necessary, or variables that are secondary, and look at the essential issues of the business. I really think that I make things that are not very rational, like I get involved with so many, too many areas, too many sectors, doing so many things, so different things.”

On Being a Long Term Investor

It helps when you understand the numbers and read balance sheets well.

Carlos Slim: That’s important to know the balance sheets, but also it’s clear that some things will change. You know, a country that has a problem with prices — after a devaluation, prices are very down, very low, they need to come back to have investments. There is an overshoot of the currency and some other conditions, and we have done when — we are very clear that we are not speculators or investors in a short term. We are looking for a long-term plan. We don’t worry about what is happening because there is a crisis today, like it was in ‘95 crisis. We invest more. It’s a better moment to invest because you find many things, many opportunities of people that want to get out.

Some very good investors say, “I never buy anything that I wouldn’t want to keep forever.” Do you agree with that?

Carlos Slim: Forever is too long. When you make an investment, it is because you are not thinking in moves from one day to another, except if you’re a gambler or you are playing. When you invest in something, it’s because you can become big with this business, like if it were yours.“

Read the Entire Transcript

These are the words of an Intelligent Value Investor, no?