18 Questions With Todd Massedge

I was fortunate to have the opportunity of interviewing Todd Massedge. He is the founder and CEO of AlphaTree Group, as well as a former buyside analyst. We discuss the college professor that influenced him, how he comes up with his best ideas and why he does not focus on valuation until the end of his process.

How and why did you get started investing? What is your background?

I actually didn’t get into investing until I was a senior in college. I studied Finance & Actuarial Science, and for the longest time I thought investing was all technical analysis related. It wasn’t until I got selected to manage some of UCONN’s money as an undergrad that I learned about value investing. It was a huge breakthrough for me.

After school I worked as a high yield credit analyst for a few years in the healthcare space, then moved over to a value-based fund out in California. Recently, I started the AlphaTree Group, which primarily focuses on teaching professionals and students about investing through our Invest Like the Street program. I also manage some of my family members’ money on the side as well.

I always felt there was a big lack of resources to learn about investing, especially at the college level, and through the Invest Like the Street program, we’ve been able to help people land these great jobs because they’re able to practically apply these investing concepts better than your typical student. It’s one thing to learn investing theory, practically applying it is a totally different beast, and that’s what we try to help our students with.

On the side I’m an avid extreme sports junkie, which doesn’t exactly fit the model of your typical value investor, but hey, we come in all shapes and sizes!

Describe your investing strategy.

I’m a value investor. Buy quality companies at cheap prices. I prefer keeping to the micro/small cap space since there’s a lot more opportunities to find little followed and mispriced stocks. I’m pretty interested in distressed scenarios and special situations as well, but I try and restrain myself sometimes.

What drew you to that specific strategy?

I loved the simplicity of it. For the longest time I thought I was going to be a quant, so I studied as much math as I possibly could. When I got introduced to value investing, I realized how wrong I was. Stocks should be viewed as businesses, not just a bunch of numbers.

What books or other investors influenced, inspired, or mentored you? What investors do you follow today?

My professor, Pat Terrion, in college was a huge influence on me. He works at a value based fund in Hartford and really opened my eyes to the world of value investing. I follow a ton of different investors, but try not to get too biased when someone buys a certain stock. Even geniuses can make mistakes sometimes. My friend, Samir Patel at Askeladden Capital Management, is one of the smartest investors I’ve met. He’s only 22, but I swear can analyze a company and its situation better than most experienced analysts. We recently did some DD over at Fogo De Chao, aka binging on non-stop steak for a few hours. Can’t beat that kind of primary research!

Both Shane Parrish and Jeff Annello over at Farnam Street are two of the most brilliant people I know as well. Jeff is one of my mentors as well (also happens to be a UCONN grad) and also a fantastic investor. Then of course there’s some of the well-known analysts like Howard Marks (Trades, Portfolio), Seth Klarman (Trades, Portfolio), Mohnish Pabrai (Trades, Portfolio), Guy Spier and, of course, Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio). I personally love following some lesser known analysts who find great ideas in the small-cap space. To name a few: Jacob Ma Weaver over at Cable Car Capital, Steven Wood at GreenWood Investors, Scott Miller at Greenhaven Road and much more. There’s a lot of brilliant investors on Twitter as well.

How has your investing changed over the years?

There was this great quote I heard recently that was something like “Investing is a negative art." It’s so true. Investing isn’t about focusing on what companies to invest in and what to look for, it’s about focusing on what NOT to invest in and what red flags to look for. Think about a sales funnel: all your leads go in the top, and at the bottom are the customers that you convert. Investing should be viewed the same way. All ideas go in the top, and after all the crap is filled out and a company passes your red flag test, then you start waiting for a good moment to buy.

Name some of the things that you do or believe that other investors do not.

I don’t invest full time. I can’t because it’s not the best fit for my personality. Investing is a very lonely job. You can sit for weeks and months without buying or selling anything. If you do it full time, it can make a lot of people very antsy and anxious to do SOMETHING. That was one of the biggest things I noticed on the buy side. Since I spend more than 50% of my time teaching through the Invest Like the Street program, I’m a lot more patient and not as likely to pull the trigger on an idea that isn’t completely up to my standards. It’s a nice distraction and has helped with my process a lot.

What are some of your favorite companies? Where do you get your investing ideas from?

There’s lots I admire, but in terms of lesser known ones, I think Jonathan Goodman over at Knight Therapeutics (TSX:GUD, Financial) is going to do something special with that company. One of the most shareholder-aligned management teams I’ve seen. Gotta love a CEO who wants to hold onto his shares and pass them onto his grandkids (literally said that on a quarterly call). I also think Bill Angrick is building an incredible platform over at Liquidity Services (LQDT, Financial). Another idea that’s worked out pretty well, shout out to Samir for that one!

Do you use any stock screeners? What are some methods to find undervalued businesses apart from screeners?

I think stock screeners are a complete waste of time. There are always one-time expenses or gains that will distort a company’s numbers, therefore making the data used in stock screeners almost always unreliable. The best ideas I’ve had have come from other people I’ve talked to or by reading other investor’s quarterly letters. In my opinion, investor letters are the best source of ideas. It allows you to understand the story of a company much quicker than you would from reading a 10-K. After that, you can go due your own DD. VIC is also a pretty good source of ideas every once in awhile.

Name some of the traits that a company must have for you to invest in. What does a high quality company look like to you?

Number one is being able to understand the business. If I can’t understand it, I don’t bother. That’s why I usually don’t look at anything tech or biotech related. High quality companies can come in a lot of shapes and sizes. First off, I look for certain types of business models: mini monopolies, middleman, lowest cost providers, businesses with high switching costs, niche sticky products, etc. Then I’ll ask questions like: Does the business have a strong moat? Is the balance sheet conservative? Are they a compounder? Is management properly aligned with shareholders? The list goes on and on.

What kind of checklist do you use when investing? Do you have a structure or process that you use?

Again, I do things a bit backwards. I try very, very hard to break an idea at first, and don’t focus on valuation until the end. I put it through my ‘idea funnel’ and try and looks for even the smallest red flags that I’ve accumulated over time. How easy is it to break the business model? Is there too much leverage? Is it a bad management team? Is it tied to commodities? If it passes through everything, then usually I buy a small, small portion and stay patient until I find a really good time to add more. Patience is key.

Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?

I’ll usually stick to filings, investor presentations and conference calls. I always like to find one bull and one bear thesis on the company as well. Always really important to see both sides of the argument. I’d rather do channel checks than talk to management. Talking to management can sometimes lead to bias. If I did a good enough job picking out a quality company, then hopefully it’s good enough to pass Buffett’s “ham sandwich” test, aka a good enough business that even a ham sandwich could run.

What kind of bargains are you finding in this market? Do you have any favorite sector?

Not too many right now. I’m not very sector biased as well. I’ll only avoid certain industries I don’t like (commodities) and ones that I don’t understand well enough (tech)

How do you feel about the market today? Do you see it as overvalued? What concerns you the most?

I’m not a macro-guy at all, but I think the markets been a bit rigged for sometime because of low interest rates. Again, I really focus on finding companies that will succeed in any market condition.

What are some books that you are reading now?

I’m a bit all over the place with what I read. I really enjoy reading things on marketing and psychology because I think they are quite complimentary subjects to study alongside investing. For example, I just read “Contagious,” which walks through the science of why things go viral. Very interesting stuff.

Any advice to a new value investor? What should they know and what habits should they develop before they start?

This is something I focus on pretty heavily to help my students in the Invest Like the Street program. Here’s a few.

1. Stop being afraid of failing – The best way to learn is by making mistakes. A lot of people are very afraid of failing though. That’s a mistake, especially for young investors. Get comfortable with failing. Buy small chunks of companies you like. Learn how to deal with the emotional aspect of investing. It’s probably the hardest thing about investing
2. Don’t Get Cocky – When someone first really starts learning about investing, there’s a good chance they’ll get cocky and think they’ve learned how to beat the market. Wrong. There are people much smarter than you doing this for a living. Don’t load up on a stock because its down 50%. Be careful and stay humble.
3. Find Other Value Investors – Find some other people you can talk to about investing. It’s a great way to hash out new ideas and really fine tune your investing abilities.

What are your some of your favorite value investing resources?

I’m a big fan of ValueWalk and Latticework. VIC is great as well, and occasionally Seeking Alpha.

Describe some of the biggest mistakes you have made value investing. What did you learn and how do you avoid those mistakes today?

Too many to count, but I’m glad I made them because they’ve certainly made me a better investor. Buying overlevered companies, underestimating how much a bad management team can damage a company, not understanding a business well enough, getting suckered in by seemingly attractive asset plays, etc. It’s a long list and they’re all on my red flags checklist nowadays.

How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections, and fluctuations?

This is probably one of the toughest things about investing. I just do what I can to distract myself, ignore the stock market TV channels, etc. I’ll head the gym, go wake surfing, snowmobiling, whatever it is to distract myself. If it’s a buy/sell decision, I force myself to sleep on it a few days before committing to anything.

Disclosure: No position in the stock mentioned.

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