Speaker 1: M This is mesters in Business with very renaults on
Speaker 1: Bluebird Radio this weekend. On the podcast, I have a
Speaker 1: special and fascinating guest. His name is Steve Romick. He
Speaker 1: is the managing partner at First Specific Advisors, a shop
Speaker 1: in l A that runs about twenty six billion dollars
Speaker 1: in assets. He has also run the Crescent Funds since
Speaker 1: it's about eleven billion dollars UH, and the numbers on
Speaker 1: that fund are really quite astonishing. One of the reasons
Speaker 1: I first wanted to start doing podcasts and interviews of
Speaker 1: asset managers was because of people like Steve Romick. You know,
Speaker 1: he's not on the cover of magazines, you don't see
Speaker 1: him on television all the time. But here's a guy
Speaker 1: running real money, a substantial amount of assets, with a
Speaker 1: fantastic long term track record, and he is not a
Speaker 1: household name. I think the average forget the average investor,
Speaker 1: the average professional probably doesn't know who Steve Romick is.
Speaker 1: And that's too bad because folks like this really allow
Speaker 1: you to learn an important lesson about how to manage risk,
Speaker 1: how to take advantage of opportunities, what you should be
Speaker 1: thinking about as a portfolio manager, as an investor. Really
Speaker 1: just a fascinating guy with a really interesting history. I
Speaker 1: found our conversation to be really intriguing, and I think
Speaker 1: you will also so. With no further ado, First Specific
Speaker 1: Advisors Steve Romick. This is mesters in business with very
Speaker 1: results on Bloomberg Radio. My special guest this week is
Speaker 1: Steve Romick. He is the managing partner of First Specific Advisors,
Speaker 1: a shot that runs over twenty six billion dollars in equity,
Speaker 1: fixed income, and alternative strategies. He was the Morning Star
Speaker 1: US Allocation Fund Manager of the Year. He also manages
Speaker 1: the eleven billion dollar f p A Crescent Fund, which
Speaker 1: he has been running sinceince inception in Steve Romick, Welcome
Speaker 1: to Bloomberg. Thank you, Barry. So let's go back to
Speaker 1: the early days of your career. You began as an
Speaker 1: analyst in tell us what industry you were covering. I
Speaker 1: I started out as a generalist. I I actually started
Speaker 1: as a generalist to who knew nothing about everything. I
Speaker 1: was on my way to law school and I met
Speaker 1: a gentleman through my father, who decided that he wanted
Speaker 1: to bring somebody into his shop who didn't know anything
Speaker 1: because he's he quoted it at the time. He was
Speaker 1: tired of unlearning NBAS and he put me up in
Speaker 1: his office, pushed a desk right up next to his
Speaker 1: and said, you're going to see what we know, how
Speaker 1: this works, and what we do. And he did every
Speaker 1: time we called a company. He had the Manethond with him,
Speaker 1: and I learned, you know, early on. But the industry
Speaker 1: that I focused on to the greatest degree in the
Speaker 1: in my earliest years in the mid eighties, you know,
Speaker 1: where it was the bank and thrift industry, when there
Speaker 1: were you know, almost tripled the number of banks and
Speaker 1: thrifts the United States, and there was a massive assolidation
Speaker 1: trend that that he identified that was likely to occur,
Speaker 1: which of course did occur. And he had me spending
Speaker 1: a lot of time, you know, analyzing these companies and
Speaker 1: inputting you know, hundreds of banks and thrifts into d base,
Speaker 1: something we don't really use today anymore. And spent a
Speaker 1: lot of time analyzing this businesses. And then I just
Speaker 1: took it from there and and continued you need that breath,
Speaker 1: and spent a lot of time looking, you know, at
Speaker 1: different parts of the capital structure as well to stressed
Speaker 1: that and stressed that. In addition, so you mentioned d base,
Speaker 1: how different were the tools that you used in the
Speaker 1: nineteen eighties and the techniques that were mainstays in financial
Speaker 1: analysis then versus today. How radically has the world of
Speaker 1: analytical research changed? Well, I think that the the I
Speaker 1: don't know that the process is any different, but the
Speaker 1: tools that you can use to to get the information
Speaker 1: that one needs to make a robust decision, you know,
Speaker 1: are are better. I mean, it's just it's just easier,
Speaker 1: you know, to get that information, which makes the world,
Speaker 1: you know, candidly more competitive today than it was was
Speaker 1: back then. Not only is there more money slashing around
Speaker 1: the system system, not only are there more people doing it,
Speaker 1: you know, but they can get that information a lot
Speaker 1: more easily. I mean, back then I had to get
Speaker 1: on the phone and call a company and call them
Speaker 1: for local information, to get the the the phone number
Speaker 1: of the headquarters or whatever company's headquarters it was, and
Speaker 1: try and get in contact with investor relations, if there
Speaker 1: even was an invest in relations department. More often than not,
Speaker 1: I was just trying to get in a hold of
Speaker 1: the somebody in the finance department to get them to
Speaker 1: send me an andy report and to to seek information
Speaker 1: on the competition, to seek information as relates to industry data.
Speaker 1: You know, it was just all much much harder to
Speaker 1: come by it. It required a lot more grount work
Speaker 1: just to get information. Now that information is available your
Speaker 1: fingertip fingertips, you know, on the web. And in addition,
Speaker 1: you you have so many great resources that exist today
Speaker 1: for people looking at businesses. The world's become much smaller.
Speaker 1: You have podcasts like this, You've got Value Investors Club,
Speaker 1: vic et cetera. Interesting, So you're working as an analyst
Speaker 1: covering everything generally. How did you decide to become a
Speaker 1: portfolio manager? And what was that transition? Like? I think
Speaker 1: that that's a great question because I think that everybody
Speaker 1: who is reasonably good at this and is confident in
Speaker 1: their capabilities it, at some point they want to to
Speaker 1: reach out and and touch the money themselves. List that,
Speaker 1: I mean, somebody else make that an investment decision. So
Speaker 1: it started out with my my personal account inside of
Speaker 1: the firm and investing that and you know, finding some
Speaker 1: you know failure early to realize you know, my miss
Speaker 1: you know, what not to do. And then as I
Speaker 1: got better over time, I thought that that it was
Speaker 1: might be something that I want to do in terms
Speaker 1: of manage and entire portfolio. As it began to really
Speaker 1: develop a philosophy as to how I'd like to to
Speaker 1: manage money, and I was very fortunate to have a
Speaker 1: mentor who helped pushed me in that direction and became
Speaker 1: one of my my early investors. Really intriguing. So you
Speaker 1: founded Crescent Management. How did you launch this business? How
Speaker 1: did you get it off the ground, Where did you
Speaker 1: find clients? And what did the business look like in
Speaker 1: those early years when we started this, it was I
Speaker 1: had a partner at the time who both of us
Speaker 1: had worked for. Our mentor's name was James Nathan was
Speaker 1: by Jeff Nathan, and he he you know, basically arranged
Speaker 1: marriage where he decided that we'd be better off building
Speaker 1: our own business, and it was an opportunity for us.
Speaker 1: He allowed us to do that while we remained, as
Speaker 1: you know, consultative analysts for once of a better description
Speaker 1: with his firm. So he could you know, have his
Speaker 1: cake and need it too, if you will. So it
Speaker 1: was it was mutually beneficial and early clients really came
Speaker 1: from his relationships. He could put us in business and
Speaker 1: I owed that, you know, all to him. We we
Speaker 1: didn't really have. We didn't have I mean, at that
Speaker 1: point in time, we you know, we launched with maybe
Speaker 1: it was I have to go back and think about
Speaker 1: many millions it was, but maybe it was ten million
Speaker 1: dollars in total between the separate accounts and and and
Speaker 1: the mutual fund. And it gradually grew from there. When
Speaker 1: you launched, was it all equity, was it equity fist
Speaker 1: income or was it unconstrained and you know, including alternatives
Speaker 1: and non publicly traded options, it was it was unconstrained
Speaker 1: within the public security markets. So they did not include
Speaker 1: anything that was in the private sector, whether it be
Speaker 1: private credit or the odd private equity investment that we
Speaker 1: might make today. Uh, and today we would continue to
Speaker 1: be largely public security investors. But philosophically, at that point
Speaker 1: in time, I liked the idea that I was able
Speaker 1: to invest money in a way that could deliver high
Speaker 1: risk ADJI becturies. I believe they could deliver high risk
Speaker 1: just it returns to my client based by investing across
Speaker 1: the capital structure. We had come out of the you know,
Speaker 1: the was coming out of the recession at that point,
Speaker 1: in time and the Drexel Burnham blow up, and there
Speaker 1: was lots of opportunity in junk bond land, and I
Speaker 1: learned that I could get a way to return in
Speaker 1: the debt markets that was as good as the equity
Speaker 1: markets with with with more downside protection, and I could
Speaker 1: use that as a tool in my portfolio. And if
Speaker 1: I could do that, I felt that are my clients
Speaker 1: would would benefit because the portfolio could deliver higher risk
Speaker 1: just to returns. And volatility is a is a measure
Speaker 1: of risk is I think a bit silly, and because
Speaker 1: it's just things can move around a lot, and the
Speaker 1: temperature outside today in Los Angeles does nothing, doesn't reflect
Speaker 1: what the temperature might be tomorrow. It's just gonna it's
Speaker 1: gonna move around. So when it comes to investing, though,
Speaker 1: in the average person, this goes for many professional investors,
Speaker 1: I think of volatility does weigh on on them, and
Speaker 1: it does precipitate action. Stocks to go up a lot,
Speaker 1: they need to get in. They stocks to go down
Speaker 1: a lot, people will panic out. And this is I'm
Speaker 1: not making a universal statement, but it's it's all too
Speaker 1: often true. And I found in dealing with individual clients
Speaker 1: a very It was very much true. And I felt
Speaker 1: that managing a product that could mute that which which
Speaker 1: was not the goal, It was just the byproduct of
Speaker 1: my of my process was was something that that could
Speaker 1: be a reasonable business. And clearly it became a reasonable business.
Speaker 1: When did Crescent become part of f p A and
Speaker 1: what was that transition? Like that was in and the
Speaker 1: transition was was actually a very difficult transition for for
Speaker 1: tragic reasons. I um my partner and I split up.
Speaker 1: He took separate accounts and I took the mut of
Speaker 1: fun and we brought the assets over two for Specific Advisors.
Speaker 1: I realized that I didn't want to deal with the
Speaker 1: back office. I didn't wanted to deal with the marketing.
Speaker 1: I just wanted to focus on investing and all the
Speaker 1: nuts and bolts of the business side of things. I
Speaker 1: wanted to leave to and organization that could have my
Speaker 1: back if you will, and and and provide that peace
Speaker 1: of mind that I can just focus. And so I
Speaker 1: joined for Specific Advisors and I was friends with I
Speaker 1: had there were these this investment group that I was
Speaker 1: part of at the time through my again my mentor
Speaker 1: that were guys who were older guys I mean younger
Speaker 1: than I am now, who would sit down and and
Speaker 1: talk about businesses, investments every every couple of months, and
Speaker 1: they get together for a dinner and you have to
Speaker 1: bring your best idea and you chat about it, and
Speaker 1: they let me come and be a fly on the
Speaker 1: wall because I clearly had nothing to add at that
Speaker 1: one in time. And one of those gentlemen was Bob Rodriguez,
Speaker 1: who was portfolio manager at First Specific Advisors at the time,
Speaker 1: and we became friendly and I sought out, sought him
Speaker 1: out and others regularly to to bounce ideas off of
Speaker 1: and compare notes and different businesses, and and Bob knew
Speaker 1: I was looking to find a home and he was
Speaker 1: kind enough to to allow me in her discussions the
Speaker 1: First Specific Advisors, which was run by George Michlus at
Speaker 1: the time, who was a well known investor and featured
Speaker 1: in John Train's book The Money Masters that volume one.
Speaker 1: And I spent a lot of time with George, who
Speaker 1: I knew perfectly through mutual friends, and it just seemed
Speaker 1: like a very very good fit. And I came into
Speaker 1: ft A and ninety six midn and and the early
Speaker 1: ninety six and ten days after I joined George Michlus
Speaker 1: was scheduled at dinner at my home that night and
Speaker 1: went cycling first and and uh had a bike accident
Speaker 1: and died. That is tragic and really just robbed you
Speaker 1: of the ability to work with him for all those
Speaker 1: future years. So so it really kind of shows you
Speaker 1: just how random life can be. And and it ties
Speaker 1: into the question I was about to ask you, which
Speaker 1: is you've had one of the longest tenures in the
Speaker 1: mutual fund business. You've been running the FPA Cresting Funds
Speaker 1: since its inception. What is the secret to this longevity? Oh,
Speaker 1: I thank you. You have to enjoy what you do
Speaker 1: first and foremost, and and I do. I mean if
Speaker 1: I people ask me when I'm going to retire, and
Speaker 1: I have no plans to do that because I enjoy
Speaker 1: coming to the office every day. I enjoy reading about businesses.
Speaker 1: I enjoy learning. I mean, this is a You're in
Speaker 1: a constant state of learning. The world is so different
Speaker 1: today than it was in the company and industries you
Speaker 1: know have have have evolved, and it forces you to
Speaker 1: to continue to to study and you you never perfect this.
Speaker 1: It's it's a it's a constant process of self improvement.
Speaker 1: And I've as I look around me, and I think
Speaker 1: that's what keeps me young. And so I've really have
Speaker 1: no intention of stopping this in anytime since. So that's
Speaker 1: I think the first, you know, key to that longevity.
Speaker 1: And I think second is just that we happen to
Speaker 1: create a product that that, for better or worse, is
Speaker 1: different than the typical product. I mean, sometimes we will
Speaker 1: look like the typical mutual fund. We will we will
Speaker 1: look very ordinary, you know, for sometimes longer periods of time,
Speaker 1: because there isn't a lot of opportunity and and say
Speaker 1: that in the debt market says there hasn't been over
Speaker 1: the last number of years because we've not been interested
Speaker 1: in and buying high old bond without the without the
Speaker 1: high part of the yield, because there hasn't been much yield.
Speaker 1: So we end up with just more inequities than we
Speaker 1: have have historically. And so but we do have that opportunity,
Speaker 1: that flexibility to to operate with great breath, whether or
Speaker 1: not we we take advantage of it at all points
Speaker 1: in time or not, it's that opportunity does exist. I
Speaker 1: think that makes us a little bit different than than
Speaker 1: the typical one. And it doesn't make us the right
Speaker 1: investment for for everyone, but we we've kind of come
Speaker 1: in each day, myself and my my partners in the
Speaker 1: fund now because one of the things that's also allowed
Speaker 1: me this longevity is to to have terrific partners in
Speaker 1: Brian Selmo and Mark Landecker, who are wonderful partners, and
Speaker 1: wonderful analysts and wonderful portfolio managers and and thoughtful and
Speaker 1: kind people with lots of integrity who make it fun
Speaker 1: to to come in each day. And so having that
Speaker 1: kind of support around you, along with our analyst team
Speaker 1: and support of of of the organization for specific advisors,
Speaker 1: makes it, you know, makes it makes it enjoyable. Let's
Speaker 1: talk a little bit about what it was like managing
Speaker 1: all those assets in the midst of the worst pandemic
Speaker 1: in a century. UM heading into the end of you
Speaker 1: were running more than a third cash in the funds.
Speaker 1: What was the thinking then, Well, we've always managed a
Speaker 1: fair amount of cash in the in the in the portfolio,
Speaker 1: and that takes pretty high it is. It was certainly
Speaker 1: above average, and it wasn't that we we identified the
Speaker 1: a recession is about to come as a result of
Speaker 1: a of a pandemic in the world would would literally
Speaker 1: stop in many in many industries. But it was really
Speaker 1: more a function of you know, cash being a byproduct
Speaker 1: of our investment products process. If we find an investment
Speaker 1: we like, we buy it. If not, cash ens up
Speaker 1: as a residual. And we were more comfortable only more
Speaker 1: cash in the past than we are today because at
Speaker 1: a point in time cash yielded five percent back into
Speaker 1: the early two thousands and mid doos, and we have
Speaker 1: more concerned today being that that inflation might be perspectively
Speaker 1: higher given the amount of depth that's pennisuing, the amount
Speaker 1: of paper money that's been printed and cast would be
Speaker 1: worth a lot less in an inflation or environment. So
Speaker 1: when we came into this recession and in in into
Speaker 1: the pandemic in early two thousand, we had that cash
Speaker 1: game just as a by product of that, and we
Speaker 1: thought we were actually more protected with the cash we were,
Speaker 1: But the investment part of the portfolio, you know, was
Speaker 1: you know, it was kind of lye hit pretty hard
Speaker 1: by the by the pandemic, that right, yeah, the but
Speaker 1: it was it was it was some of the businesses
Speaker 1: that we owned were people you know throughout you know,
Speaker 1: for dead for for a period of time. We owned
Speaker 1: companies like like A I G. That started the year
Speaker 1: at around fifty and at the end of two going
Speaker 1: into twenty, it peaked mid fifties and an intra day
Speaker 1: in the in the third fourth week of March when
Speaker 1: it's twenty, it was trading down at you know, under
Speaker 1: seventeen dollars a share with book value, you know, being up,
Speaker 1: you know, closer to where the price was at the
Speaker 1: beginning of the year, So huge, huge discount, and people
Speaker 1: believed that, you know, the the company was clearly on
Speaker 1: its way out, you know of existence, and you know,
Speaker 1: we didn't believe that, and you know, we had took
Speaker 1: the opportunity to to increase our position. But it was
Speaker 1: still I mean it admittedly discomfiting at that point in time,
Speaker 1: not only for us because who likes to see their
Speaker 1: their stocks dropped up and dropped that much, but um
Speaker 1: it certainly for our for our investor base. But the
Speaker 1: end of the day, we we understood that that many
Speaker 1: of these business we all it was just it was
Speaker 1: just a blip. It was the price at a point
Speaker 1: in time with fear you know hitting you know, hitting
Speaker 1: the market, and it wasn't the that these businesses weren't
Speaker 1: going to do well once we got through to the
Speaker 1: other side, and business is like a I G. You know,
Speaker 1: we're going to be fine, and it's it's it's businesses
Speaker 1: like like Mary I. Businesses truly stopped. And we were
Speaker 1: buying you know, Marriott as as the stock was coming down,
Speaker 1: and you know, you buy a stock at eighty and
Speaker 1: then it goes you know, it goes into the sixties.
Speaker 1: You know, it's not the again, the most comfortable thing
Speaker 1: to watch happen. But we're very confident that as we
Speaker 1: got through the pandemic, people once again would would travel,
Speaker 1: they would get on airplanes, they would go to hotels
Speaker 1: and and a company like Marriott, you know that is
Speaker 1: you know, more asset light than you know, some other
Speaker 1: hotel businesses would would perform, you know, quite well. So,
Speaker 1: you know, buying something at at sixty I'm sorry, at eighty,
Speaker 1: you know, as it as it dropped down, as it
Speaker 1: dropped down, um in another from there. You know, again,
Speaker 1: as I said, it was discomforting. But at the same time,
Speaker 1: you look where it is today, where it's a hundred
Speaker 1: and forty plus. We clearly weren't wrong, but it took
Speaker 1: a market at that point in time, as it took
Speaker 1: a lot of those businesses down down with it. So
Speaker 1: we took advantage of the opportunity it is at that
Speaker 1: point in time and increased our invested exposure by about
Speaker 1: ten percentage points and pulled down some of that cash
Speaker 1: you were referencing. So I don't want listeners to think
Speaker 1: this is hindsight bias or you know, after the fact,
Speaker 1: re reinventing history. March there was an article in the
Speaker 1: New York Times by Jeff Sohmer Uh and remember this
Speaker 1: is deep into the collapse, about a week before the
Speaker 1: market bottomed, and he described getting a note from you
Speaker 1: saying you had begun to start buying stocks and felt
Speaker 1: that if even if markets fell further, you were going
Speaker 1: to continue to buy because you thought things had suddenly
Speaker 1: become very attractive price wise, and that you said you
Speaker 1: were acting rationally and not bravely. Um, and you're looking
Speaker 1: at five to seven years. Tell us a little bit
Speaker 1: about the reaction to that Times column about you buying
Speaker 1: right into the teeth of the collapse. Reaction from whom, Barry,
Speaker 1: from whoever, from investors, from you know, any I found
Speaker 1: any time I see someone go against the dominant trends
Speaker 1: stake out a contrarian point. The general pushback is ranges
Speaker 1: from this guy is an idiot to this guy's crazy.
Speaker 1: Were you getting sort of hey, what are you doing?
Speaker 1: From clients? We got, we got the spectrum, We got
Speaker 1: both right. I mean, but you've been doing this long
Speaker 1: enough and your track record is good enough that one
Speaker 1: would hope longstanding clients would say, I don't know, but
Speaker 1: I'm going to give you the benefit of the doubt
Speaker 1: because you've been right before. What what was the what
Speaker 1: was the pushback? Like the the pushback from some people
Speaker 1: was your your portfolio took a mark We didn't expect
Speaker 1: it to take a mark um like it has, and
Speaker 1: so we're gonna go and, uh, give our money to
Speaker 1: somebody else. That was respect from some On the other hand,
Speaker 1: we had those investors who increase their their capital commitment,
Speaker 1: you know, to us and and decided that what we
Speaker 1: were doing was the right thing because they did by
Speaker 1: into the argument you just made that, Hey, with these
Speaker 1: guys have been doing this a long time. They've lived
Speaker 1: through various cycles. They lived through the Internet bubble, they
Speaker 1: lived through the the you know, junk bond, you know,
Speaker 1: blow ups in in in in the early two thousand's
Speaker 1: when when the world comes were there and we're able
Speaker 1: to take advantage. They lived through the Great Financial Crisis
Speaker 1: and and they these guys know what they're doing. I'd
Speaker 1: rather them do it then then you know, somebody else.
Speaker 1: And so we did have you know, fortunately those people
Speaker 1: as well. On the other hand, there was more of
Speaker 1: the former admitted lay than a lotter. You know, people
Speaker 1: send to vote with their feet. And this goes back
Speaker 1: to that volatility argument that people get, you know, get
Speaker 1: a little panicked at these points in times, and we
Speaker 1: just tried to be thoughtful and act rationally. And the
Speaker 1: end of the day, if we do the right thing,
Speaker 1: the business will take care of itself. Whether it will
Speaker 1: be you know, whether we're smaller or were larger, it's
Speaker 1: not going to change what we do every day when
Speaker 1: we come in here. It's not gonna do and it's
Speaker 1: not going to change our lives. So it's very important
Speaker 1: for us to always be mindful of what the world
Speaker 1: will look like five to seven years, you know, down
Speaker 1: the road, and make sure that we we have analyzed
Speaker 1: the businesses that we own or the assets were buying
Speaker 1: the bonds that were buying you know, well, such that
Speaker 1: we have invested with some kind of margin of safety,
Speaker 1: and we've tried to anticipate you know, downside. I mean downside,
Speaker 1: not just mark to market some might occur, wage are
Speaker 1: far less important. But but really considering what the absolute
Speaker 1: downside is, what is that you know, what could really
Speaker 1: happen that could create a permanent impairment of capital. So
Speaker 1: before we get granular and really dive into what you
Speaker 1: were buying, I want to ask you what made you
Speaker 1: realize that the sell off in was a short term
Speaker 1: sell off and not the start of a more serious,
Speaker 1: longer term bear market. Was it valuation? Was it a
Speaker 1: variety of factors? You obviously had the right answer. What
Speaker 1: was the thinking behind it? Oh? I didn't know. I mean,
Speaker 1: I mean, you know, just full disclosure. We had no
Speaker 1: idea it's gonna be shorter long. I mean, we I
Speaker 1: came to that article you're referencing in the New York Times.
Speaker 1: Was was you know, as you stated, you know, like
Speaker 1: we're thinking about where the world's gonna be down the
Speaker 1: road five to seven years. I didn't know how long
Speaker 1: is it was gonna last? But if I invest trying
Speaker 1: to anticipate what's going to happen in the next you know,
Speaker 1: a few months, six months, year, or whatever the case
Speaker 1: may be. It's just it's gonna take my eye arm,
Speaker 1: you know, my off the ball, our team's eye off
Speaker 1: the ball, and not allow us to to to buy
Speaker 1: things that otherwise might buy we'd always find some reason
Speaker 1: that that it might be a little bit cheaper. So
Speaker 1: so let me get specific, then, Um, since you were
Speaker 1: thinking five to seven years, what did you accumulate at
Speaker 1: the end of that first quarter in the beginning of
Speaker 1: the second quarter, what what specific sectors or stops. You know,
Speaker 1: we bought a number of businesses in the in the
Speaker 1: travel industry and including you know, Bookings, dot Com and Marriott.
Speaker 1: We bought businesses that were impacted you know by you know,
Speaker 1: you know directly, you know, by COVID. We added to
Speaker 1: some of our financial services businesses you know, you know,
Speaker 1: a I G give us an example that we felt
Speaker 1: that would certainly get through you to the other side.
Speaker 1: And we added you know, businesses that that uh, you
Speaker 1: know last year that where where people were capitulating because
Speaker 1: the consumer is gonna be weak. Businesses like like richemonts
Speaker 1: Um you know, for example. And then we we also
Speaker 1: took advantage of other businesses that were less cyclical, uh,
Speaker 1: that that had the the opportunity to to perform well
Speaker 1: regardless of what, you know, what the economy you know,
Speaker 1: was doing. But but we're just we're being negatively impacted,
Speaker 1: you know, by the market when they were throwing the
Speaker 1: baby out with the bathwater as well. So we own
Speaker 1: in the portfolio and their positions is that that you know,
Speaker 1: grew within the portfolio while we were when the market
Speaker 1: was going down, companies like Facebook and Alphabet etcetera. And
Speaker 1: I know you like to run with a little bit
Speaker 1: of cash in the portfolio. Did you ever fully deploy
Speaker 1: that capital? Did you become fully invested? No? We we
Speaker 1: we didn't. We put the cap We we took ten
Speaker 1: points that you know, the capitol and put that to
Speaker 1: work and and the market rallied you know from there,
Speaker 1: and uh, we didn't you know, put it all to work.
Speaker 1: You know, in hindsight, obviously you know you were one
Speaker 1: wishes they had, but you know, we didn't know how
Speaker 1: long that opportunities and exists. We wanted to make sure
Speaker 1: we continue the ability to buy down, no doubt about it.
Speaker 1: What else were you doing to manage the portfolio through
Speaker 1: the course of the pandemic, meaning how are you approaching
Speaker 1: dealing with clients, dealing with buying opportunities, considering risk? How
Speaker 1: did the pandemic affect the way you thought about running
Speaker 1: the funds. We had lots of conversations, you know about
Speaker 1: this and and internally amongst my partners and probably the
Speaker 1: most grounded of the three of us. I would give
Speaker 1: a hat tip to my partner Mark Landecker, who really
Speaker 1: was the most centered of us, because I'm not gonna
Speaker 1: tell you that it wasn't disconcerting watching you know, these
Speaker 1: the stock prices dropped, you know, as I did, even
Speaker 1: after having lived through you know, multiple multiple downturns, and
Speaker 1: we they left, you know, more of the speaking of
Speaker 1: clients to me, which you know I had the history
Speaker 1: with them and allowed them to to do a greater
Speaker 1: degree focus more on on on the portfolio and not
Speaker 1: have the static from from having clients whisper in your ear.
Speaker 1: You know, you're the portfolio is going down. I'm scared.
Speaker 1: You know, what are we going to do? What are
Speaker 1: you going to do? What am I going to do?
Speaker 1: It it insulates them from hearing the this reactions of
Speaker 1: the investors, and so I took more of that on
Speaker 1: on the front line. And because you have to to
Speaker 1: be a good investor, you really do have to have,
Speaker 1: as we discussed, that longer term focus and and find
Speaker 1: ways to to minimize the static in your life. And
Speaker 1: so that's that's how we operated together. You know, the
Speaker 1: three of us really intriguing. So given the big run
Speaker 1: up from from before the drop from February, we're up
Speaker 1: about from the Nader, We're up about se Are you
Speaker 1: still as fully invested as you were last year? How
Speaker 1: are you looking at the markets today after after this recovery. Well,
Speaker 1: there's no question that things have gotten price here. But
Speaker 1: every time you put coupital to work, kept to ask
Speaker 1: yourself or even maintain your exposure. You know, what's like
Speaker 1: could have happen over the next five to seven years
Speaker 1: of these businesses, of these assets that we own and
Speaker 1: are thought process is continues to always be focused on
Speaker 1: on looking out down the road. And if one starts
Speaker 1: with that, yeah we have we we then have to
Speaker 1: end with what is the alternative Today's where are we
Speaker 1: end up? Including what if you bonds don't offer much
Speaker 1: of an alternative, and you're not getting any kind of
Speaker 1: you know, yield there we kind of think about as
Speaker 1: more as return free risk. Uh, the high yield part
Speaker 1: of the market, or the investment grade part of the
Speaker 1: corporate debt market just isn't isn't attractive, and you know,
Speaker 1: we wish it was. We took between a little bit
Speaker 1: of capital work, you know, in the space last year,
Speaker 1: but the opportunity to exists you know, for very long
Speaker 1: and and so much of that corporate debt is not
Speaker 1: only lower yielding, but it's also also um relatively. We
Speaker 1: covenant to to a lot of that debt of debt,
Speaker 1: so more of the leverage tilts towards the to the
Speaker 1: borrower and away from the lender. And so we don't
Speaker 1: we look today in that same situation because yields are
Speaker 1: lower still, and it begs the question, and I think
Speaker 1: that's a fair question, why we would you be as invested,
Speaker 1: were slightly less invested, in fairness, But that's more noise
Speaker 1: in the portfolio, you know, than we were you know,
Speaker 1: last year this time. But why do we stay invested?
Speaker 1: Because again, the alternative isn't great and we think that
Speaker 1: we're going to get good rates of return over the
Speaker 1: next number of years. You know, from this portfolio of
Speaker 1: assets that we own. That doesn't mean that they're not
Speaker 1: going to stocks aren't going to trade down in the interim.
Speaker 1: They very well might. But when we look at the
Speaker 1: way the government has has has printed you know, money,
Speaker 1: governments or sovereigns have printed money, and you know, and
Speaker 1: and as I pointed out earlier, just the amount of
Speaker 1: depth that's been created, we just think that you know,
Speaker 1: you could be you could talk towards an environment where
Speaker 1: it's more inflationary and rates can remain lower for longer
Speaker 1: because the government imperative is to keep them as low
Speaker 1: as as that interest expense as low as it can be,
Speaker 1: which means keeping rates as low as possible. At any
Speaker 1: point in time. You know, the system can you know,
Speaker 1: governments can lose control of it. But we consider what
Speaker 1: the alternatives are. Stocks still make more sense. Now we
Speaker 1: are finding more opportunities outside the United States, and we
Speaker 1: think that there's better opportunity and businesses that are domiciled,
Speaker 1: you know, on for foreign surres. And so our portfolio
Speaker 1: of equities has tilted in the last couple of years
Speaker 1: more overseas than it has been or has ever been
Speaker 1: historically in the position size of about doubled for a
Speaker 1: few years back for for that which we've on outside
Speaker 1: of the US, and and now percent of our portfolio
Speaker 1: is domiciled elsewhere. Let's talk a little bit about that
Speaker 1: Crescent Funds. It has been ranked as the best risk
Speaker 1: adjusted returns of all allocation mutual funds with at least
Speaker 1: a billion dollars in assets under management among those managed
Speaker 1: by the same manager since inception, which I would imagine
Speaker 1: is a fairly exclusive club. Are you familiar all with
Speaker 1: who else is similarly situated to you in terms of
Speaker 1: running a fund since inception and actually running a billion
Speaker 1: or more dollars? I'm not. Actually, I don't really pay
Speaker 1: a lot of attention to to that. So so I
Speaker 1: want to go over the funds objectives, which is to quote,
Speaker 1: generate equity like returns over the long term while taking
Speaker 1: less risk than the market and avoiding permanent impairment of capital. Hey,
Speaker 1: everybody wants to do this. You're one of the few
Speaker 1: who actually have. Tell us how you manage to accomplish that. Well,
Speaker 1: we invest across the capital structure with this goal of
Speaker 1: delivering attractive risk of just returns on stock stress and distress,
Speaker 1: corporate bonds and private credit, occasional preferred stock, etcetera. When
Speaker 1: it comes to stock, X will own both the more
Speaker 1: commercial and the evergreens. That is, they you know, a commercial,
Speaker 1: call them the dollar bills trig into discounts. And those
Speaker 1: companies whose businesses should you know, on the other hand,
Speaker 1: that are more evergreen, that businesses should be solidly better
Speaker 1: at decade from now. It's really a function of price
Speaker 1: and risk reward that will dictate which direction we go
Speaker 1: uh for these evergreens versus these more commercial opportunities. But
Speaker 1: we try every day to try to know the better
Speaker 1: businesses in the world and own them. Should the average
Speaker 1: trade down for one reason or another, we'll be there
Speaker 1: too to pick them up. And what we also own
Speaker 1: these lesser quality but still growing businesses if their stock
Speaker 1: prices offer attractive upside relative to the downside. And then
Speaker 1: you know, we have our dead investments where we all
Speaker 1: we care about is getting our principle backing maturity, but
Speaker 1: you know, also generated in equity return along the way
Speaker 1: that really speaks, you know, to more to our philosophy.
Speaker 1: And then and then our our process is guided by
Speaker 1: by thoughtful research of the underlying opportunity as we as
Speaker 1: we really try to ascertain the value of the business
Speaker 1: or the asset. And that's kind of by a lot
Speaker 1: of reading, many conversations with the management competitors, industry experts
Speaker 1: and so forth. And then you know, we'll go about
Speaker 1: and build our our financial models. And our models don't
Speaker 1: you know, suggest what you know, what might happen in
Speaker 1: the coming quarter or even in two thousand two, but
Speaker 1: over the next few years. We want to have a
Speaker 1: view as to what the business might look like in
Speaker 1: a low base and high case, and we want the
Speaker 1: investment in that business, that equity to to that we're
Speaker 1: gonna be buying in that business to be attractive in
Speaker 1: the base case and have that upside optionality on the
Speaker 1: in the high case and and not you know, get
Speaker 1: too badly in the low case. So we really try
Speaker 1: and create these these these boundaries, these governors as we
Speaker 1: look at each of the individual investments in the portfolio.
Speaker 1: So I'm trying to figure out how to describe your
Speaker 1: style of investing, and it's it's pretty challenging. I'm looking
Speaker 1: and some of the holdings in in your top ten.
Speaker 1: So you have Alphabet and Facebook on the one hand,
Speaker 1: but on the other hand you mentioned a I G
Speaker 1: and City Group. Is this value as this growth. It's
Speaker 1: it's pretty hard to put you into a style box. Yeah,
Speaker 1: I think that there's a problem with style boxes because
Speaker 1: the we don't make a great distinction between growth and value.
Speaker 1: Show me the growth investor that argues what they bought
Speaker 1: is in a value. But but then also you can
Speaker 1: just stick a company that trades it forty times earnings,
Speaker 1: but if it's growing thirty percent a year for the
Speaker 1: next five years and into that five year period, it's
Speaker 1: with trading ten eleven times earnings and there about. So
Speaker 1: to us, value investing is just to invest with an
Speaker 1: appropriate margin of safety, buying a business or an asset
Speaker 1: at a discount. In the past that that margin of
Speaker 1: safety might have meant protection you came from the balance
Speaker 1: sheet and the more in the most traditional Graham and
Speaker 1: Dotty and you know kind of definition you know, buying
Speaker 1: blow book value, blow net networking capital. You know, the
Speaker 1: business might have not earning assets, it could be monetized,
Speaker 1: et cetera. Today it you know, for us more luckly
Speaker 1: means the protection you know that that has to come
Speaker 1: from the quality of the business. You can get sucked
Speaker 1: into what you think is a margin of safety because
Speaker 1: the you've got these you know, what appears to be
Speaker 1: a strong wood bay, You've got you know, hidden assets,
Speaker 1: but the business isn't good at the end of the day,
Speaker 1: the you're you're you're probably gonna have a challenge, I
Speaker 1: mean takes here as an example, there are a lot
Speaker 1: of value investors who owned it believing that management could
Speaker 1: turn the business around, but if not, they were protected
Speaker 1: by lots of great real estate as well some powerful
Speaker 1: brands like ken More Incraftment. However, as we now know,
Speaker 1: management wasn't successful and much of their great asset base
Speaker 1: was mortgage or sold off. With that count what was
Speaker 1: then reinvested back in the business. And then you know
Speaker 1: when it's the time that it came to a point
Speaker 1: in time where people realized ex posts that that they
Speaker 1: were they were burning the timber from the house. So
Speaker 1: to us in a traditional value investments, you know are
Speaker 1: are you know, often mediocostolical businesses that were temporary out
Speaker 1: of favor and offered to message the opportunity to return
Speaker 1: to more normal own earnings. But many of those businesses
Speaker 1: have been disrupted by new technologies and and didn't offer
Speaker 1: the margin of safety they once did. So we're very
Speaker 1: mindful of whatever we own, it really does have to
Speaker 1: be growing, doesn't have to have have go go growth.
Speaker 1: We own a couple of cement companies that are global
Speaker 1: franchises that that we think cements are going to be
Speaker 1: here for a long long time. Now. They're not you know,
Speaker 1: go go growth businesses, certainly, but you know, those are
Speaker 1: businesses that we think that that offered attractive risk of
Speaker 1: just returns over the over the next number of years.
Speaker 1: And you mentioned you know, Google and Facebook, but even
Speaker 1: those investments were initiated at points in time when there
Speaker 1: was bad news surrounding them. Google back in two thousand
Speaker 1: and eleven, when there was feared that they're advertising you know,
Speaker 1: business was going to be impaired, which is bulk of
Speaker 1: the revenues, because we impaired because of a recession as
Speaker 1: the world was beginning to unwine, as as as what
Speaker 1: was happening in Cyprus was infecting you know, Europe, in Greece,
Speaker 1: you know the rest of Europe. Uh and UM the
Speaker 1: stock traded and the stock traded down. Facebook traded down
Speaker 1: a few years back because of the Cambridge analytical scandal
Speaker 1: and people were worried about about it. It's business prospects
Speaker 1: and it's not about it, you know, entry into into
Speaker 1: two very good you know, businesses that we've owned ever since.
Speaker 1: So you mentioned you buy some non public distress debt.
Speaker 1: Are you purchasing anything on the non public side of equities?
Speaker 1: So yes, we do. We do own um some privates
Speaker 1: in the portfolio, but they're very small because we're public
Speaker 1: fund and we're responsible for returning capital to our investors
Speaker 1: when they when they wanted back. But on occasion, we
Speaker 1: make investments in certain private investments opportunities, um you know,
Speaker 1: Epic Games is an example. We also have various private
Speaker 1: credit UH in the positions in the portfolio that we've
Speaker 1: made over the years. In the last decade, we've put
Speaker 1: you know, eight hundred million or so out you know
Speaker 1: in UH in private credit that have delivered returns of
Speaker 1: you know, give or take to the fund. And these
Speaker 1: are secured first lean asset based loans that you know,
Speaker 1: are something different than not a lot of mutual funds.
Speaker 1: Do Again, I don't want to suggest that this is
Speaker 1: that these are the engines in the portfolio. These are
Speaker 1: our investments that that end up on the periphery again
Speaker 1: because of the of their i liquid nature and and
Speaker 1: the fact that we are a public fund. So last
Speaker 1: question about the funds. You're located in Los Angeles. A
Speaker 1: lot of what you're covering seems to originate on the
Speaker 1: East Coast, in New York or in Silicon Valley. How
Speaker 1: does being located in l A affects your worldview? I've
Speaker 1: never really thought about l A affecting my my world
Speaker 1: view until you just ask that question. I do think
Speaker 1: at you know, just in general, the world has gotten
Speaker 1: has gotten smaller because of the information it's available your
Speaker 1: finger and tips, so, you know, across the internet. Uh,
Speaker 1: and that certainly has made it easier. But living in
Speaker 1: Los Angeles, I don't know has affected my my world
Speaker 1: view too to any great degree. I don't know if
Speaker 1: I would think differently if I was, you know, living
Speaker 1: in Chicago or New York. I haven't really thought about
Speaker 1: it bearer to be honest, of how that's my view
Speaker 1: has been impacted by living here. Hey, that's a fair answer.
Speaker 1: I'm just trying to get a sense of your philosophy
Speaker 1: and and how where you're situated might somehow filter into it.
Speaker 1: So we talked a little bit about fixed income and
Speaker 1: especially in the high yield world where you're taking a
Speaker 1: lot of risk for almost no reward. What do you
Speaker 1: think about the state of inflation here that seems to
Speaker 1: have been a giant topic the past couple of months.
Speaker 1: Does this affect the way you invest i noticed you
Speaker 1: guys don't really make much of inflation forecast. What's the
Speaker 1: impact of inflation on your thought process? We think that
Speaker 1: with the way the stewards of of of of capital
Speaker 1: at the sovereign level have been acting in the last
Speaker 1: number of years, really took great degree since the Great
Speaker 1: Financial Crisis, there is there is this financial alchemy that's
Speaker 1: going on that people hope that that that the academics
Speaker 1: that have it all figured out, that they're going to
Speaker 1: get engineer this soft landing and and and be able
Speaker 1: to control the inflation in a way that and drive
Speaker 1: growth at the same time. That is going to all
Speaker 1: end perfectly, And it thinks tend not to be quite
Speaker 1: so perfect out there in the world, and and the
Speaker 1: we've learned to expect the unexpected, and we don't know
Speaker 1: what is going to happen. We don't know whether they'll
Speaker 1: be inflation or how much inflation there might end up being.
Speaker 1: We think that there's reasonable prospects of it, you know, certainly,
Speaker 1: but you might there be a deflationary path to inflation.
Speaker 1: That could be the way we get there. Where the
Speaker 1: where the knee jerk responses to continue to to print more,
Speaker 1: borrow more, and in stimulate, stimulate with a with a
Speaker 1: wanton disregard for for the future ramifications of what it
Speaker 1: might mean to feed our currencies, you know, or or
Speaker 1: or the economies, or or inflation down the road. But
Speaker 1: looking for that near term bump as these policy makers
Speaker 1: and academics are really thinking about what's happening right now,
Speaker 1: is they as they seek to be re elected or reappointed.
Speaker 1: So we don't know what's going to happen, but we
Speaker 1: create a range of outcomes, and we think that as
Speaker 1: we look at them, it's more appropriate to be more
Speaker 1: invested than not if you're looking out where the world's
Speaker 1: going to be, you know, five ten years since. So
Speaker 1: that raises really interesting issue. You refer to the response
Speaker 1: from the fiscal response from governments and the monetary response
Speaker 1: from central banks. Are they in the process of changing
Speaker 1: what bear markets are gonna look like going forward. And
Speaker 1: what I mean by that is, have investors learned to
Speaker 1: anticipate fiscal and monetary stimulus. I think the world is
Speaker 1: certainly trying to do that. We hear at first specific advisors. No,
Speaker 1: we can't anticipate. We just try and create a portfolio
Speaker 1: that's robust to multiple outcomes, that doesn't go too hard
Speaker 1: one direction or another, believing that that we really have
Speaker 1: the capability of identifying what the macro environment will look
Speaker 1: a look like perspectively, there's just way too many moving parts.
Speaker 1: And if you put me in a room with the
Speaker 1: with with John Maynard Keynes, I'm gonna, you know, come
Speaker 1: out of you know Kinsian economists, right, I'm gonna be
Speaker 1: a believer, you know, same with you To put me
Speaker 1: in there with a monitorist the supply side or you
Speaker 1: know who or whatever, it's just there's these guys have
Speaker 1: all the arguments down and and I'm just not, you know,
Speaker 1: well versed enough, and I don't believe that that anybody
Speaker 1: really has that capability. And in fact, if you were
Speaker 1: to go back and and look at at the projections
Speaker 1: made by economists for just the coming year for what
Speaker 1: GDP was going to be. They're they're rarely rights. Somebody
Speaker 1: gets it right, but nobody's right consistently, and sometimes they're
Speaker 1: they're wildly wrong. And you look at at people like
Speaker 1: Alan Greenspan, who didn't think that we were, you know,
Speaker 1: in a recession in the early you know, in the
Speaker 1: early part of the those you know, or or Bernankey this,
Speaker 1: they didn't expect the great financial quss. These things weren't anticipated,
Speaker 1: and so we don't hang our hat on on listening
Speaker 1: to them or trying to anticipate what might be a
Speaker 1: lot of things might be, more things might be than
Speaker 1: will be. And so we just try and put our
Speaker 1: heads down and and believe that that you know what
Speaker 1: down down the road that you know, Google is still
Speaker 1: gonna be a good business. And we're not paying even
Speaker 1: today at current prices that you know, if you adjust
Speaker 1: for the cash you you you adjust for their non
Speaker 1: earning assets, their moonshots, and and the stock is not
Speaker 1: so horribly expensive. It certainly isn't as cheap as it
Speaker 1: was on an adjusted basis. We bought it back in eleven.
Speaker 1: It was in the early early low rather teams multiple
Speaker 1: adjusted earnings, but these are companies where comfortable owning you
Speaker 1: know through this. So that's kind of interesting. What what
Speaker 1: other investment opportunities today are you excited about? You mentioned overseas,
Speaker 1: Is that x US developed? Is that emerging markets? What
Speaker 1: is catching your eye in the present environment? You know,
Speaker 1: we we it it's more it's more developed economies. Of
Speaker 1: there's some emerging markets in and it's not any one
Speaker 1: company or one industry you know specifically, there's just uh,
Speaker 1: there's a host of different you know businesses that we own,
Speaker 1: you know outside the United States. There's some businesses that
Speaker 1: we own you know inside the US that are less
Speaker 1: economically sensitive as well that that that make their way
Speaker 1: into into the portfolio that are again give an example
Speaker 1: of a more commercial opportunity. We've owned for you know
Speaker 1: since last year. Um and it didn't go down because
Speaker 1: of the pandemic. It went down for for idiosyncratic reasons.
Speaker 1: It's a I don't want any time I mentioned idea,
Speaker 1: I don't want it to suggest this is like our
Speaker 1: favorite idea or the only idea. This is just to
Speaker 1: be meant to be emblematic of of of of philosophy
Speaker 1: and process. But we own you know, first Energy which
Speaker 1: is a pure play regulated transmission distribution utility with one
Speaker 1: of the largest networks in the US, I mean six
Speaker 1: million customers across five stay. It's you know, starting Ohio
Speaker 1: and kind of moving east towards the mid Atlantic. Now
Speaker 1: it's core utility business is better than average, which means
Speaker 1: which does you know you can be determined as a
Speaker 1: higher than average you know r OE, it's got um
Speaker 1: more regulated transmission distribution stance is rather than the more
Speaker 1: risky business of non regulated independent power production. And for
Speaker 1: the most part they're in regulatorily friendly states with lower
Speaker 1: than average competition. So we also you know, looking like
Speaker 1: the utility industry just just as an idea, just as
Speaker 1: a as a construct, because we think there should be
Speaker 1: underlying demand for increased transmission and grid modernization over the
Speaker 1: next number of years. So but you know, the utility
Speaker 1: industry is is you know, the index trades about times earning,
Speaker 1: you know thereabouts. But this company, you know, last year,
Speaker 1: you know, they have got some bad news and Q
Speaker 1: you know, First Energy got caught up in a brimary
Speaker 1: scan that alleged you know, illegal campaign contributions following around
Speaker 1: sixty million dollars to the former Ohio Speaker of the House,
Speaker 1: in the hopes of passing a bill that provided some
Speaker 1: you know, subsidies for nuclear business. You know that isn't
Speaker 1: if they don't even own anymore. And as a result,
Speaker 1: you know, you know what, you know, how the government
Speaker 1: might or in the regulators might come at them. It
Speaker 1: causes stock to drop by almost half from the February high,
Speaker 1: and that cleaned off about thirteen billion dollars of market value.
Speaker 1: And if you were to adjust it for the declining
Speaker 1: utility index because that had gone down, you know at
Speaker 1: that point of about eight percent as well along with
Speaker 1: the the um you know, coming down with the pandemic,
Speaker 1: that would just basically means about ten to eleven billion
Speaker 1: dollars of value you know, was taken out adjusted for
Speaker 1: the decline in those utility indicries. And so we are
Speaker 1: workers really centered on two things like one, how good
Speaker 1: is the business and to you know, what what the
Speaker 1: penalties be. And so we the work that we did,
Speaker 1: you know, on the business and common conversations with competitors,
Speaker 1: industry experts and utility unless give us a comfort level
Speaker 1: that the business was advertising as good as we thought
Speaker 1: it was. And that with respect to the the fine
Speaker 1: that was likely to occur, we felt it would end
Speaker 1: up being manageable. So there are federal sentencing guidelines that
Speaker 1: are fairly you know, formula formulaic, and so we used
Speaker 1: history as a precedent and looking at lots of different
Speaker 1: of fines have been paid in the past, and there's
Speaker 1: a base cave fine, and then there is a a
Speaker 1: culpability multiple that gets attached to that. So we did
Speaker 1: as we triangulated these these other fines and and and
Speaker 1: the multiple kind of looked at that maybe they find
Speaker 1: into being someplace a hundred and fifty to four million dollars.
Speaker 1: I remember I just said that the business and declined
Speaker 1: thirteen billion, maybe ten to eleven billion adjusted, you know,
Speaker 1: relative to futility index. So even in a ast case
Speaker 1: scenario of a billion dollars, it's still, you know, just
Speaker 1: one tenth of what the stock price declined that that
Speaker 1: had been been seen by its shareholders. UM are born
Speaker 1: by its shareholders, and so we felt pretty comfortable UM
Speaker 1: that the adjusting for our base case fines and and
Speaker 1: the stock trading back to a market multiple in the
Speaker 1: next couple of years. Again looking down the road that
Speaker 1: buying the business at eleven times earnings with a five
Speaker 1: percent dividing yield was pretty attractive relative to the the
Speaker 1: utility index that was training at nine twenty times earnings
Speaker 1: with with a just a few percent you know, dividing yields.
Speaker 1: And so as you got through the scandal, we thought
Speaker 1: the stock that was trading in the high twenties, you know,
Speaker 1: could end up being you know, trading in some place
Speaker 1: in the you know, in the low forties to low fifties.
Speaker 1: And what's it looked like today? I mean, the same
Speaker 1: story still applies. Is still in the midst of this.
Speaker 1: The stock price has moved up, you know, from the
Speaker 1: high twenties to the higher thirties, and the the opportunity
Speaker 1: still exists for that same upside. Nothing's really changed there
Speaker 1: in the in the process of of working through the
Speaker 1: you know, the whatever's gonna happen regulatorily or with the fines,
Speaker 1: we just don't know where it stands. You know, today
Speaker 1: we're not going to know two we know, but as
Speaker 1: we looked down the road, we it's going to be settled.
Speaker 1: Just like I argued before that people would travel again,
Speaker 1: people would stay in hotels again, and Marriott, you know,
Speaker 1: would not have an occupancy that was was was going
Speaker 1: to be, you know, close to zero for a period
Speaker 1: of time. You're gonna end up with a more normal environment,
Speaker 1: you know, for First Energy you know, you know, and
Speaker 1: and in all its markets in Ohio, Pennsylvania, you know, etcetera.
Speaker 1: That's really intriguing. So marginal safety clearly a key part
Speaker 1: of your investment approach. I'm gonna assume nothing in change
Speaker 1: that philosophy. So that leads me to the question, what
Speaker 1: is your takeaway him your experience during the pandemic? What's
Speaker 1: the lesson that investors should have learned last year? Investors?
Speaker 1: You know, every time you know they should learn this,
Speaker 1: it says, it's the lat same lesson, right is thinking
Speaker 1: what the world looks like down the road, Not what
Speaker 1: dom I look like in the next six months, three months,
Speaker 1: even a year or two, but what's it like down
Speaker 1: the road. I mean, if you're buying a business, you
Speaker 1: should care about it twice the day you buy it
Speaker 1: in the day you sell it. So if you're not
Speaker 1: going to sell that business for five ten years, why
Speaker 1: do you care if the stock is up or down
Speaker 1: in the next couple No doubt about that. Our last
Speaker 1: question of this segment. I want to throw you a
Speaker 1: little bit of a curve ball. I asked you earlier
Speaker 1: about l A. I was kind of surprised to learn
Speaker 1: your surfer. Tell us a little bit about that hobby. Oh,
Speaker 1: I've got lots of hobbies. I'm you know, I'm a
Speaker 1: I'm a I'm a jack of many trades and master
Speaker 1: of none. I'm I. I enjoy it Like I swam
Speaker 1: competitively through college. I've always enjoyed, you know, the water.
Speaker 1: I enjoy swimming in a pool, enjoy him in the ocean.
Speaker 1: And and I never I used to lifeguard the beach.
Speaker 1: There's a summer job when I was in college, and
Speaker 1: and and learn to surf. And as I said, I'm
Speaker 1: not very good. But it's nothing like being out there
Speaker 1: in the water and a dolphins swimming around you. It's pretty.
Speaker 1: It's pretty peaceful. And to you know, pick up a
Speaker 1: wave and and maybe have a dolphin writing it with you,
Speaker 1: which has happened on just one occasion of my life.
Speaker 1: But I keep trying to trying to repeat that is
Speaker 1: is a pretty um you know, beautiful you know, spiritual experience.
Speaker 1: For me, I find it incredibly peaceful, and I spend
Speaker 1: more time now, you know, um surfing behind a boat,
Speaker 1: you know, and on a lake because I don't have
Speaker 1: to compete for waves. And that's been you know, it's
Speaker 1: just a lot of fun. I don't know if you've
Speaker 1: seen the videos of all the young Great Whites that
Speaker 1: like to go surfing with surfers in a very um,
Speaker 1: non aggressive way. Apparently it's different when they're larger or
Speaker 1: and older, but when they're young, they seem to be
Speaker 1: pretty chill. Some of the videos I've seen on YouTube
Speaker 1: taken from drones are just astonishing. Oh yeah, there they
Speaker 1: really are, and there and they are. It's it's disconcerting,
Speaker 1: you know. And if they I'll all compete in in ocean,
Speaker 1: you know, swim races, uh, you know, once or twice
Speaker 1: a year. And I remember once watching one of those
Speaker 1: drone videos of a Great White kind of underneath the
Speaker 1: underneath the crowd of swimmers, you know, kind of off
Speaker 1: the South Bay her most in Manhattan Beach and a race,
Speaker 1: and I'm I just thought to myself, I'm like that,
Speaker 1: I don't know what I would do myself. I just
Speaker 1: try to push that out of my mind. I don't
Speaker 1: care if it's a big great white or a small
Speaker 1: great white. Berry great white is a great white, I'm
Speaker 1: not gonna be real thrilled to see. I'm gonna i'm
Speaker 1: gonna push back against you on that. If if the
Speaker 1: choice is a big great white or a small great white,
Speaker 1: I'm gonna go with the small, younger one. They really
Speaker 1: seem to be so. By the way, if if people
Speaker 1: are still listening at this point, go to YouTube, Google this.
Speaker 1: It's astonishing. They're not like a hundred yards away, They're
Speaker 1: inches away there. It's almost like their dolphins playing with
Speaker 1: the swimmers and surfers. It's really amazing to see. But
Speaker 1: that said, you know, it's a little frightening if you're
Speaker 1: out there on a regular basis. Barry, I'm gonna go
Speaker 1: on record is saying that I'm not going to spend
Speaker 1: a lot of time determining how big that great white is. Okay,
Speaker 1: that's that's fair enough. Let me um, I know I
Speaker 1: only have you for a certain amount of time. Let
Speaker 1: me jump to some of my favorite questions that we
Speaker 1: ask all of our guests that are not surfing related,
Speaker 1: and and start with tell us what you're streaming these days?
Speaker 1: Give us your favorite Netflix or Amazon Prime or or
Speaker 1: even podcast you're listening to. I don't. I don't actually
Speaker 1: listen to a lot of podcasts. They don't do a
Speaker 1: lot of streaming other than what you know, more more
Speaker 1: entertainment related to streaming. I tend to when I'm in
Speaker 1: the gym working out, and you know, on my stationary
Speaker 1: bike could do a lot of cycling, you know. I
Speaker 1: I tend to, you know, throw on a documentary and
Speaker 1: and something that with subtitles and and just kind of
Speaker 1: I watch it and it could be on a host
Speaker 1: of different topics. I love music and and and frequently
Speaker 1: it ends up being something related related to that. I
Speaker 1: spend more time, you know, you know, reading nonfiction um
Speaker 1: and and try and really drive a lot of throughput
Speaker 1: there to the best of my ability, I said, the
Speaker 1: best of my ability. Of some books just end up
Speaker 1: being a little bit a little bit denser than others.
Speaker 1: And I find myself sometimes, you know, struggling through to
Speaker 1: to get onto the next book. So we're gonna come
Speaker 1: back to books in a minute. But now I want
Speaker 1: to ask you tell us about your mentors who helped
Speaker 1: shape your career. Well, the one person really, you know,
Speaker 1: shaped my career, I mentioned earlier is is James Nathan
Speaker 1: goes by Jeff and he was my my first boss,
Speaker 1: and he's the one who entered uced me to a
Speaker 1: lot of people, you know, early on when I was
Speaker 1: just starting out my early twenties, where I was able
Speaker 1: to sit down with you know, his good friend, you know,
Speaker 1: Lee Cooperman and asked him questions and learn from learn
Speaker 1: from him, and and have him, you know, be at
Speaker 1: the Tilodine Annual Meeting, introduced Henry Singleton and have dinner
Speaker 1: with him afterwards, and talked about experience investing in Tilodine
Speaker 1: you know, back in the day, and that that really
Speaker 1: was incredibly educational. And then I remember once he he
Speaker 1: had me, we drove down to Laguna Beach to visit
Speaker 1: a guy who I had never heard of. I just
Speaker 1: couldn't google somebody back then. And and again I hadn't
Speaker 1: been in the business that long at this point in time.
Speaker 1: And I sit down at the lobby bar of the
Speaker 1: ritz Ritz Hotel in down in in Laguna Beach and
Speaker 1: there's a guy who shows up with an ascot and
Speaker 1: it seemed like Paisley pajama bottoms, and it was it
Speaker 1: was I've never seen anybody dressed like that, and it
Speaker 1: was Sir John Templeton, and I was able to have
Speaker 1: tea with you know, Sir John Templeton and listened to
Speaker 1: his life experiences and talking about investing and to be
Speaker 1: thrown into that kind of a world at at a
Speaker 1: at a very young age, is is um made me
Speaker 1: incredibly you know, made me recognize its incredibly fortunate to
Speaker 1: say the very least. I want to circle back to
Speaker 1: something that you mentioned in in my earlier question, which
Speaker 1: is you said you tend to listen to music related
Speaker 1: or watch music related um streaming. You you want to
Speaker 1: give us any examples. I mean, I'll listen. I'm gonna
Speaker 1: listen to like I mean, on a podcast, listen to
Speaker 1: the something called song exploder. So I love I love
Speaker 1: the I love the the etymology of the song I like.
Speaker 1: You know, reading the Wall Street Journal, uh, you know
Speaker 1: column that it really breaks down the forgot what the
Speaker 1: title of that column is. It comes a typically yeah, um,
Speaker 1: if you like if you like songsploder, um, have you
Speaker 1: played with? It's on YouTube something called Polyphonic No, what's that?
Speaker 1: So it's just a guy who puts videos up discussing
Speaker 1: sort of the musicology of specific songs and bands and artists,
Speaker 1: and you might find it kind of fascinating. If you're
Speaker 1: an all intrigued by why John Bonham of Zeppelin instead
Speaker 1: of tracking the bass player tracked the lead guitarist and
Speaker 1: what that did to their music and a whole bunch
Speaker 1: of other crazy stuff like that, then you're gonna then
Speaker 1: I'm also incited to being a frustrating surfer. I'm also
Speaker 1: a frustrated guitarist. Alright, So you're gonna get a You're
Speaker 1: gonna have a huge kick out of this polyphonic on
Speaker 1: you on YouTube. So now let's talk about everybody's favorite question.
Speaker 1: What are your some of your favorite books? What are
Speaker 1: you reading right now? Well, I have I mentioned the
Speaker 1: you know times struggling to get through books and and
Speaker 1: the reason and it says it's fresh in my mind
Speaker 1: because sitting on my night table and I'm about three
Speaker 1: carters away through it is is Walter Rysenson's book Gene
Speaker 1: Editor and Jennifer DOWDNA and it's just it's it's a
Speaker 1: little bit dense because you really try and as I'm
Speaker 1: really trying to understand the Yeah, I have a whole
Speaker 1: list of books that are tied to two healthcare UM
Speaker 1: and health tech medtech and in the history of of biotech,
Speaker 1: and I'm just trying to get up again a better
Speaker 1: understanding of that is an industry. And so I really
Speaker 1: enjoy reading nonfiction to try and inform my view of
Speaker 1: the world. So that's one that I'm reading now. But
Speaker 1: um it's called a Codebreaker. And but I I read
Speaker 1: a lot of these books that that try and inform
Speaker 1: my view, and it include like The Outsiders by William
Speaker 1: Fordbike which is you know, eight you know CEO profiles
Speaker 1: that include you know, John Malone and Henry Singleton, Tom
Speaker 1: Murphy of Caps City has warm off it and it
Speaker 1: really just you know, reading about these people and what
Speaker 1: they what they've what they accomplished historically in their businesses
Speaker 1: and helps some form of view as I speak to
Speaker 1: managements today. I you know, one of my favorite books
Speaker 1: of all time, it really is run Turnout's Book to
Speaker 1: War Brooks, because it's an expansive history of of finance
Speaker 1: and of a couple of world wars and and a
Speaker 1: a Jewish family that uh, you know made its way
Speaker 1: from Germany to England to the United States. And I
Speaker 1: find that you know, incredibly interesting as well. And sometimes
Speaker 1: you you you you you you read the books or
Speaker 1: I read the books and I kind of you know,
Speaker 1: what did I learned? What are my takeaways? And you know,
Speaker 1: like I read Twilight in the Desert twenty years ago
Speaker 1: and they had the belief that from reading Matt Simmons
Speaker 1: book that that that we're going to have a problem
Speaker 1: with uh of providing energy to the world with with
Speaker 1: because fossil fuels were harder to come by as it
Speaker 1: relates to oil specifically, and you know, like clearly that
Speaker 1: didn't come the past. We you know, a couple of
Speaker 1: things of happened since and as you have to you know,
Speaker 1: be willing to to adapt. I mean, we had obviously
Speaker 1: a big increase in renewables, but you also had the
Speaker 1: you know, the oil sands and and tight shelp informations
Speaker 1: that have created a lot more oil out there than
Speaker 1: than people have expected. Meanwhile, you have falso had the
Speaker 1: rise of you that we have the rise of electric
Speaker 1: vehicles and such that that are going to put a
Speaker 1: crimp in future demand. So if you have to adapt
Speaker 1: in you know, um to two changes in the world.
Speaker 1: And spent a lot of time reading about health tech,
Speaker 1: you know, which includes this at medtech and biotech, because
Speaker 1: I believe that some of the great businesses you know,
Speaker 1: unfortunately will be creative the next twenty years. We're going
Speaker 1: to come out of that. We mapped the human genom
Speaker 1: twenty years ago, but it was like identifying the parts
Speaker 1: to a car. For the last couple of decades, we've
Speaker 1: we've trying to figure out how those and how the
Speaker 1: parts of the car work individually and and in integrated fashion.
Speaker 1: And just now we're really beginning to see some of
Speaker 1: the fruits of that, and we're gonna see a lot
Speaker 1: more in the future. Really really interesting. What sort of
Speaker 1: advice would you give to a recent college grad who
Speaker 1: was interested in pursuing a career in asset management. I
Speaker 1: I think that I would say the same thing I've
Speaker 1: I've related earners in terms of having that that longer
Speaker 1: term view and whatever you do, whatever decision you make,
Speaker 1: make sure that you're making the decisions with a kind
Speaker 1: of a five to ten year you know, seven to
Speaker 1: ten you're rolling you know timeframe. It's going to allow
Speaker 1: you to make better decisions today. It's going to you know,
Speaker 1: you're gonna be more willing to absorb some of the
Speaker 1: bumps in the road, you know today, if you understand that,
Speaker 1: you're gonna be better off in the future, in the
Speaker 1: future for it. And I would say in addition, you know,
Speaker 1: do something you enjoy and make sure you're good at
Speaker 1: it and work really hard. Um. The the last thing
Speaker 1: I would probably leave somebody with is is um is
Speaker 1: do well by doing good. If I think that one
Speaker 1: of the things we realize, you know today, in in
Speaker 1: in the world, that it's not an uncomplicated place. There's
Speaker 1: a lot of people who have who have been mistreated,
Speaker 1: you know, over the years, and we can we can
Speaker 1: try and make the world a little bit better. So
Speaker 1: if you can do that while you're investing, you know,
Speaker 1: all the better still. And our final question, what do
Speaker 1: you know about the world of investing today that you
Speaker 1: wish you knew when you were first getting started back
Speaker 1: in the nineties. Yeah, I really wish i'd better anticipated
Speaker 1: the world of disruptive change. The technological innovation that has
Speaker 1: taken places has up beend to the economics of so
Speaker 1: many different industries. And whether it be online retail you know,
Speaker 1: which has changed the economics of brick and mortar retail
Speaker 1: or streaming video content and video and demand destroying video
Speaker 1: rental and forever changing movie theaters. Um or single cell
Speaker 1: genomics that have developed on the back of of having
Speaker 1: mapped the human gentlemen, creating new therapeutics, you know, outmoding
Speaker 1: what's been accepted today, to or renewable energy solutions that
Speaker 1: are gradually displacing fossil fuels. Now we've we've successfully avoided
Speaker 1: most of the disrupted industries. But that's like growing that.
Speaker 1: You know that our boat didn't sink, it's not supposed
Speaker 1: to sink. We would have enhanced our performance. Have we
Speaker 1: been more willing to pay up at least a multiple
Speaker 1: turner two to own some of the better businesses in
Speaker 1: the world whose paradigms are are more winner take all
Speaker 1: our winner take most. So we didn't buy Amazon. We
Speaker 1: we thought we were doing pretty good by by not
Speaker 1: by selling our retail out you know, more than a
Speaker 1: decade ago. But we just didn't buy you know, Amazon,
Speaker 1: even though we looked at it. We just didn't look
Speaker 1: at it closely enough. And that has to solidly go
Speaker 1: into the mistake bucket. So that's what I wish I
Speaker 1: knew thirty years ago. Really quite fascinating. Steve, thank you
Speaker 1: for being so generous with your time. We have been
Speaker 1: speaking with Steve Remick. He is the managing partner of
Speaker 1: First Specific Advisors and asset manager running uh over twenty
Speaker 1: six billion dollars in various assets. If you enjoy this conversation,
Speaker 1: check out any of our prior four hundred such interviews.
Speaker 1: You can find those wherever you feed your podcast fix iTunes, Spotify,
Speaker 1: Google Podcasts, etcetera. We love your comments, feedback and suggestions
Speaker 1: right to us at m IB podcast at Bloomberg dot net.
Speaker 1: You can sign up for my daily reading list at
Speaker 1: Rid Halts dot com. Check out my weekly column at
Speaker 1: Bloomberg dot com slash Opinion. Follow me on Twitter at
Speaker 1: Rid Halts. I would be remiss if I did not
Speaker 1: thank the crack team that helps put these conversations together
Speaker 1: each week. Tim Harrow is my audio engineer, Latika val
Speaker 1: Brond is my project manager. Paris Walt is my producer.
Speaker 1: Michael Batnick is my head of research. I'm Barry Rihlts.
Speaker 1: You've been listening to Master's in Business on Bloomberg Radio.