After a brief break, Warren Buffett resumed selling his Bank of America stock, trimming Berkshire’s stake down to 11.9%.

The bank is no longer Berkshire’s second-largest stock holding. That title now belongs to American Express, whose shares are up about 34% this year. The Oracle has owned AmEx since the 1990s.

Today, we're chatting with Edwin Lugo, a member of our Mastermind Community and a professional investor with over 20 years of experience in managing international equities for various clients, including high-net-worth individuals.

All this, and more, in just 6 minutes to read.

— Matthew

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Trivia

Investing Wisdom from Edwin Lugo

As a young boy growing up in Boston, Edwin Lugo often flipped through the newspaper to the business and finance section. While many kids his age might have been drawn to the comics or sports pages, Lugo was captivated by the columns of numbers representing stock prices and their daily fluctuations. 

That early fascination with markets and the language of finance set the stage for a lifelong journey in investment management. Born to immigrant parents from Puerto Rico and Costa Rica, Lugo’s curiosity about money and markets led him from trading rare coins as a teenager to studying finance at Northeastern University, then Columbia Business School. Little did he know that those early days of poring over stock listings would eventually lead him to found EL2 Capital and develop a distinctive investment philosophy focused on quality businesses and long-term compounding.

In this interview, Lugo discusses his formative years at Franklin Templeton and the valuable lessons learned from both successes and setbacks. He shares insights on navigating market cycles, the importance of continuous learning, and finding a balance between work and personal life. Lugo is also a member of our Mastermind Community. 

This interview has been edited lightly for brevity and clarity. 

What did you learn during your time at Franklin Templeton?

You need a process. After graduating from Columbia Business School, I started there in 1996 and focused on fundamental analysis. I covered Israel, Egypt, and Argentina. John Templeton was living in the Bahamas, and I met him a few times. But I learned how to do valuation and how to work with spreadsheets. You had to do a lot of grunt work, which was a great learning experience. At the same time, I was looking at other trading systems and investing methodologies. I also started learning about momentum investing. But I learned how to figure out what a business is worth. 

Do you have a memorable interaction with John Templeton?

He was very good at staying away from the emotional aspects of investing. You got that through osmosis with Templeton: Not being reactive to the market’s swings. You buy a company at a cheap price, and you hold on for five years. That’s the goal. 

Among your investing mantras, you’ve said that buying a “cheap” stock doesn’t necessarily mean the market will recognize the value over time and that quality companies continue to soar despite expensive valuations. 

When I re-joined Franklin Templeton in 2006, our team had about $100 million of assets under management. I decided to focus almost exclusively on high-quality companies trading at attractive prices. In 2008, we had the crash. We bought companies growing 10% or 15% a year for 14 times earnings, which is attractive compared to today. Now, you have to pay 25 to 30 times. 

But because of our quality companies, we did so well vs. the benchmark that we grew the business, which became very successful. But here’s the mistake we made. I said, OK, I only want to buy cheap. I want to buy stocks around 10 or 15 times earnings, roughly. But in 2012, 2013 and 2014, that became much tougher. And then I got out of the high-quality companies I had bought earlier because they continued to go up, and they were now trading at 25 or 30 times. So that was a classic mistake of selling early. 

I believed I would get rid of the expensive stuff and move to the cheap stuff. However, that led to massive underperformance from 2015 to 2020 as the index marched higher. The expensive stocks I sold kept going up, and I underperformed on my other stocks, which led to them letting go of our whole team. There’s a massive lesson there. 

You’ve invested through the dot-com bubble, the global financial crisis, and the March 2020 crash. What stands out to you about these periods?

All very difficult periods. First of all, we will have similar periods in the future: big downdrafts will happen from time to time. Major market events happen usually once every decade or so. And develop a process. I’ve heard Christopher Mayer say it’s important to sit through declines and not get scared out of the stocks you own. He says that you have to own companies where you would actually buy more shares in a decline because they are such good companies with good business models. 

A simple example is Berkshire Hathaway, which fell by about 30% in 2008. What do you want to buy in 2008? That’s a great time to buy Berkshire. Why? It’s a solid business with a strong moat and an amazing manager. You can go down the list. Those selloffs are amazing opportunities to create wealth for yourself and your clients. They are special moments that can be very advantageous. 

The key is not to get scared. Some people get scared and go to cash at exactly the wrong time. 

What do you want to highlight about your investment philosophy at EL2 Capital specifically?

We want to buy companies at reasonable prices. We have a concentrated approach of only 12 companies in each fund. It’s really about buying good companies at reasonable prices. When you have a high-quality business with a strong moat, it covers up many things that can go wrong. Buying companies at reasonable prices is the essence of EL2 Capital, which is all about compounding the net worth of my clients, myself, and my partners over the next 10 years. Because compounding really starts to benefit you after 10-plus years. So we want to hold companies for the long haul. 

This translates into searching for founder/owner companies with exceptional capital allocation skills. Operationally, these managers have “soul in the game.” Companies should have expanding moats and a long growth path.

As for your time horizon, when did you become focused on five-plus years? Was that something you learned fairly early in your career, or did it take time to develop?

Part of it is my personality, where I like to think through ideas - contemplate managers and industries and how they will develop over time. My skill set lies in discipline and staying the course.  I don’t get swayed by volatility. I aim to compound my and my partners’ capital over many years to create wealth for them. Compounding starts to be realized after 10 years. I love this challenge of delivering outsized returns over many years in a less risky manner. I would love to make money in the short term by trading, but I realized long ago that I don’t have that skill or that I am not smart enough for that type of investing.

What do you make of the AI euphoria driving today’s market?

It’s important to understand that AI is here to stay, and it’s not just a fad that value investors ought to ignore. That doesn’t mean you must invest directly in AI, but we need to at least learn about it. When companies like Microsoft and Amazon spend tens of billions on something, it’s worth paying close attention to. 

Where are we in the market cycle? What do you make of the market?

I can’t tell the future, but I would warn investors to be careful. It’s a little like the dot-com boom, with much press and excitement. The whole idea of the internet was fantastic, and companies were going public for billions of dollars with no revenue. It took a while to get where we are. 

In other words, you get excited about things like AI but you need to invest in companies that actually make money. So, it will probably take another 10 years before we know the true winners of AI and who will profit the most. But broadly, people need to be aware of the excitement factor and its risks. 

Would you say any areas of the market are mispriced or undervalued? 

It’s hard to say in general. But there are pockets. Is there cheap stuff out there? Yes. Dole, for example, is a fruit and vegetable business trading around 10 or 11 times right now. So it’s cheap, it’s a great business, and people will always need to eat fruits and vegetables. But is it really worth more? Is it attractive? It becomes a bit more complicated, and it’s hard to say. 

But generally, there’s nothing cheap and outstanding right now, at least for what we try to invest in. Now, if markets collapse, I want to buy more Amazon stock. I’d buy more Berkshire Hathaway. 

What are your biggest holdings? 

We have two funds: the Global Opportunities Fund and the International Small Cap Fund. Berkshire is a 5% position. Amazon is about a 7% position. 

Ferrari stock is on our watch list. I continue to learn more about the stock, but it’s difficult for me. It’s an auto company, but it’s a luxury goods operation. It has special attributes. If the price did fall, I would find it attractive. It’s a great business. 

I focus on valuation, which one should, but it shouldn’t be the only driving force. There have to be other pieces to the equation. People in our Mastermind Community say a stock is too expensive. Yes, that might be true, but expensive in what way? If it’s a wonderful business with a wonderful manager, getting that kind of business at a very cheap price will be hard. People who bought a stock like Amazon have done well, even if they bought it years ago when many said it was expensive. 

Generally, how do you approach risk management in your strategies?

We look at risk management at the security level and the portfolio level. At the security level, our companies have low debt, especially relative to the business that they are involved in.  This reduces the risk of having to raise capital in difficult periods. Management teams have a good operational and capital allocation track record. We prefer management teams to own large stakes in the business.  They tend to be more risk-averse.

At the portfolio level, the 12 companies we have in the portfolio are in various industries and look to avoid concentration in any one industry. We don’t take on leverage to buy securities and to boost returns. We don’t hedge except with cash, and we don’t do derivatives.

What are the biggest changes you have observed in the investment management industry over your career?

Value Died! The biggest change was the disregard for cheap companies, changing the concept of value investing in the face of the massive success of growth and passive investing.

The growing algorithmic trading that affects the market's short-term movements and the shorter and shorter mindset people have also stood out. 

What do you foresee as the major challenges and opportunities for the industry?

The major challenge is that the mutual fund industry will continue to be challenged as fees come down and regulations make it harder for portfolio managers to outperform. People do much better by just owning an inexpensive index. The good thing about passive investing is that it's cheap and available to everyone.

What advice would you give young professionals aspiring to build a career in investment management?

Learn all you can from the great investors by reading their books and listening to podcasts.

Find the way you like to invest - there are many ways to make money in the market. Find one that fits your personality and go with it. Specialize in it with focus and determination. Constantly read and improve - the markets are always changing. No one’s experience is long enough or broad enough to not read.

Also, I constantly read and learn. Invest in yourself. There are so many ways to make money in the market. The market will always be there, too. You don’t have to rush into stocks and feel like you have to take advantage of compounding today. There will always be downturns and opportunities. I wish I had known when I was young that even a 6% or 8% annual return can be wonderful over decades. Start to invest early and start your compounding journey. I also wish I had been more aggressive in saving in my 20s and 30s. 

What are some of your favorite investing-related books, and who are some of the investors from whom you have learned the most?

My favorite investment books include Capital Allocation by David Giroux, Intelligent Fanatics Project by Sean Iddings, Richer, Wiser, Happier by William Green, Education of a Value Investor by Guy Spier, What I Learned About Investing from Darwin by Pulak Prasad, The Magic of Thinking Big by David Schwartz, The Psychology of Money by Morgan Housel, How Do You Know? By Christopher Mayer, Warren Buffett’s Ground Rules by Jeremy Miller, and The Joys of Compounding by Gautam Baid. 

My favorite investors, whom I follow through podcasts and books, are Guy Spier, Mohnish Pabrai, Tom Gayner, Warren Buffett, and Chris Mayer.

You write letters to clients in a unique way that doesn’t just summarize performance. Why? 

I didn’t want a run-of-the-mill institutional letter that stated what we did, how our stocks performed, and how the quarter went. You know, that’s kind of boring. I said, OK if I’m going to write letters, they should be pretty short and cover different ways of thinking about markets and investing. I enjoy the process of writing the letters. It helps organize my thoughts and ideas. Sometimes, I learn about my ideas as I write about them. It’s like writing a story about investing. 

How do you balance the demands of running a firm with your personal life and well-being? 

Running a firm and my personal life are intertwined. All of it is a joy - meeting challenges and reaching goals. For example, my most effective time for gobbling information and reading is between 8:30 am and 11:30 am, then again from 4:00 pm to 7:00 pm. After 11:30 am, I recharge. I concentrate on exercising, then lunch, followed by a rest period — exposure to nature and usually a nap. By 4:00 pm, I am supercharged with the right temperament and focus.

Hobbies are also interwoven. My favorite is exercise and reading. I am constantly improving the body and the mind. Down periods include fishing and music. I love music, so playing the keyboard gives me great pleasure.

Some mornings, I fish at 4 a.m. and watch the sunrise over Westport, Connecticut. It’s just about being outside and having the experience of birds and being in nature. It also helps recharge the batteries and not forget what’s around us, including the importance of nature and taking time away from the office. That enhances your ability to pick stocks and be a good investor, which is all about deep thinking and reflection.

Dive deeper

For more, visit Edwin’s website. You may learn more about our Mastermind community here.

Together With Masterworks

It's no secret that contemporary art prices have outpaced the S&P 500 by 64% over the last 28 years, appreciating at a compound rate of 11.5% per year during that time (‘95-’23). But for Masterworks, an investment platform focused solely on contemporary art, keeping pace isn’t enough.

It wants to beat the market.

How are they attempting this you might ask? By buying works of art in artist markets with positive trends. It’s value investing 101. The Acquisitions and Research team is world-class, with decades of experience in the art and financial markets, powered by a proprietary database that aims to track historical artist market appreciation.

Few, if any, players in this untapped $2.1 trillion market (UHNW art/collectible wealth as of ‘23) have the qualitative and quantitative investing capabilities that Masterworks has.

So far, the Masterworks team has been successful, completing 23 exits out of over 400 offerings, each of them individually profitable. With 3 illustrative sales, Masterworks investors realized net annualized returns of 17.6%, 17.8%, and 21.5%.

_{*Past performance of whole art and Masterworks offerings are not indicative of future returns or artwork not yet sold. See important Regulation A disclosures at Masterworks.com/cd The content is not intended to provide legal, tax, or investment advice. Past performance is not indicative of future performance. Investing involves risk. Art sales price data is comparative only. Each painting is unique and historical data is not a direct proxy for any specific painting or investment. Data represents whole art not an investment into our offerings which includes fees and expenses. Art asset class is based on repeat-sales index of historical art market prices computed based on a value weighted-basis and focused on the Post-War & Contemporary Art category. While Masterworks believes art market comparisons to other asset classes can be useful to help potential investors discern long term trends in these asset classes, there are significant limitations to the utility of such comparative data, particularly over shorter time periods. Potential investors are cautioned not to place undue reliance on such data. “Net Annualized Return” refers to the annualized internal rate of return, or IRR, net of all fees and costs, to holders of Class A shares from the primary offering, calculated from the final closing date of such offering to the date the sale is consummated. A more detailed breakdown of the Net Annualized Return calculation for each issuer can be found in the respective Form 1-U for each exit. The 3 median returns above represent the ones closest in percentage to the median of the 12 exits with holding periods over 1 year.}

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