Idea Brunch with Zachary Oliva of Oliva Partners

Zachary Oliva on launching a fund, deep value investing, and a lawyer’s perspective on markets

Welcome to Sunday’s Idea Brunch, your weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Zachary Oliva!

Zachary is the Managing Partner of Oliva Partners Management LLC, which manages a recently launched investment fund.  Zachary is also a co-founder and Partner of Kiefaber & Oliva LLP​, a law firm that serves oil and gas companies across the country.

Zachary, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Oliva Partners Management?

Thanks for having me, Edwin.  This is an amazing service that you offer and you’re providing a lot of value to a lot of people. 

I was born and raised in Youngstown, Ohio and my wife and I live in Houston, Texas.  Our first child, a girl, is on the way, and we’ve got a German Shepherd named Piper.

My childhood was great and I couldn’t have asked for better parents as role models.  My mom was a teacher, so I’ve been a voracious reader for as long as I can remember.  My dad was an engineer and loved value investing.  I never saw him pass up a penny on the sidewalk (a practice that I’ve continued), and he taught me about investing and Warren Buffett when I was very young.

I graduated from Ohio State during the recession and then made the decision to become a lawyer.  I moved to Houston right after I passed the bar to work for a large energy-focused law firm, and after about a year of practice, my partner and I decided to start our own law firm.  It’s grown since then to an amazing team of about 30 professionals.

I’ve always been an investor and entrepreneur at heart.  I started my first business when I was around 10 years old.  In the last decade, I’ve co-founded or invested in other businesses in the technology, construction, agriculture, and oil and gas industries.  Also from that young age, I’ve been investing in equities – getting a little wiser each year.  I’ve noticed that my growth as a person has been very much related to my growth as an investor – and how could it be otherwise?  Being a better investor means continually improving your thinking, writing, and self-reflection.

Over the last decade or so, I started leaving the world of Warren Buffett and began studying other investors that I admire: Walter Schloss, Benjamin Graham, Charlie Munger, Mohnish Pabrai, and Allan Mecham.  Learning about these individuals helped me view investing as a creative process unique to each individual, rather than a rigid framework.

I can’t remember a time in my life when I didn’t want to run an investment fund.  My decision to start Oliva Partners Management now came down to one factor.  I simply decided to go all-in on living the most profound life that I could picture for myself.  Part of that vision is to be a great investor and provide an insane amount of value to as many people as I can.  So, I created Oliva Partners Management as a vehicle for partners to invest with me.

I have a “Buffett style” fee structure (no management fees, paid for performance only).  I love being paid for my performance only – it suits me really well.

Zachary, what are some of the first things you do when researching a potential investment? What does that first hour of research look like for you? Do you do anything that few others do?

I spend a lot of time turning over rocks.  I read through Value Line, check Value Investors Club and NetNetHunter.  I also check and see what other investors who have similar strategies and publicly disclose their holdings have recently invested in — I think cloning/coat-tailing is a great strategy for developing ideas.  Overall, it takes quite a lot for a company to make it to the research stage for me.

When I feel that I can drive a truck through the valuation gap and I can easily see that certain checklist items are fulfilled, I’ll print out the 10-K and read through it.  When I’m in the research stage for a company, I try to focus on the facts and don’t seek out opinions on Twitter or Seeking Alpha.  I know that some people have found a lot of success using these tools, but I find that getting bogged down in others’ opinions disrupts my thinking and so I avoid these places.

I really just try to stick to a great filtering process, reading the 10-K and other publicly-filed documents, and a rational decision-making process.  If the idea isn’t obvious to me from reading the 10-K, then it’s probably outside of my circle of competence and I pass.  If I can’t find anything to buy, I just get back to the book that I was reading or go home.  Over the years, my competency has grown.

Ram Dass said “Just relax and trust the process” – that’s my investing mantra.

I don’t build out financial models…I would rate my competency level with Microsoft Excel as “embarrassingly low.”

What works in deep value investing and what doesn’t? What have you found are the necessary ingredients for a successful deep-value investment?

Well, that’s a great question.  I wouldn’t characterize myself as a deep value investor, because I’ve made great investments using other approaches as well.  As Charlie Munger says, “If you want to catch fish, you’ve got to go where the fish are.”  There seems to be this idea out there to paint folks with only one brush – “He’s a microcap guy” or “She’s a growth investor” and I’ve found that what works best for me – and what is the most fun – is being flexible and just doing what makes sense at the time.  Sometimes the market throws out these crazy situations that you’ve got to consider even if they don’t fit your strategy at the time.  A good example of this is a few years ago, Chipotle was trading for less than the value of the real estate on their books because a few folks in California got food poisoning and it was all over the news.  If you invested in Chipotle at that time – which, by the way, was also a great business – you would have doubled your money in 18 months.  And if there is a great business that is compounding at 20% a year and the market puts it on sale, I’d be very interested.

But you’re right, Edwin, that there are some necessary ingredients for a successful deep value investment.  One of the most important ingredients is that you’ve got to be comfortable with this strategy.  I’ve found what works for me and my temperament and psychology and I know the outer limits of what I’m comfortable with.  I would be a horrible day trader, for example.

I prefer to buy deep-value stocks (or cigar butts or net-nets) when the price is low relative to the company’s assets.  Some investors buy when the price is low relative to the company’s earnings.  Both ways work – if you read Tweedy Browne’s “What Has Worked in Investing”, the No. 1 strategy is low price relative to assets, and No. 2 is low price relative to earnings – so neither will put you in bad company.  I look for both but prefer buying assets over earnings.

When it comes to buying a company at a low price relative to its assets, I’m generally looking for a few things right off the bat.  I’m looking at how cheap it is relative to its current assets minus all liabilities.  I prefer companies that have a lot of cash and securities over companies that have most of their assets in inventories or accounts receivable.  I’m also interested in whether the company is historically cheap.  Some of these companies can look cheap on a 3-year basis but if you look at the 5- or 10-year prices relative to asset value, you realize that the stock can really bottom out in an ugly way for you.

And even though I’m looking at the assets, I still like some history of profitability.  I’ve been a business owner and investor for long enough to know that if a company isn’t turning a profit, eventually that’s going to catch up.  It may be unnecessary for other folks, but again, to each his own.  Equally important to me is that the company has been in business for a while – I want to see public financial data for at least 10 years.  I like to see insider management, and I don’t like it when a company is selling shares.

Sometimes I like to see a catalyst in these unloved businesses, but in my experience, that isn’t always necessary.  It may not be necessary at all: in one of the last interviews before his death, Benjamin Graham stated that probably the best way to invest is on a purely quantitative basis. 

In sum, what I’ve found works in deep value investing is having a lot of reasons to say no to an investment along with a belief that the market occasionally gets prices wrong.  Equally important is to realize that these companies all have other reasons to say no to them, but if viewed through the lens of “low price relative to asset value” it really helps you to figure out what is important and what is not so important.  Oh, I almost forgot two necessary virtues – patience and optimism!

What are some interesting ideas on your radar now?

I have a rule to not talk about current investments.  But since the spirit of this newsletter is to share ideas with other investors, I will share one long-term holding and one past holding.