WEBVTT - Artisan’s Samra Likens Value to Two-for-One Deal 0:00:12.880 --> 0:00:16.040 Welcome to Inside Active, a podcast about active managers that 0:00:16.079 --> 0:00:19.119 goes beyond sound bites and headlines and looks deeper into 0:00:19.160 --> 0:00:24.119 their processes, challenges and philosophies and security selection. I'm David cone, I, 0:00:24.200 --> 0:00:27.840 lead mutual fund and active research at Bloomberg Intelligence. Today 0:00:27.960 --> 0:00:31.440 my co host is Laurent Dulier, senior equity strategist at 0:00:31.440 --> 0:00:34.479 Bloomberg Intelligence. Laurent, thank you for joining me today. 0:00:35.320 --> 0:00:36.559 Thank you for inviting me. 0:00:37.720 --> 0:00:42.080 So you published last week your stock six hundred earnings outlook. 0:00:42.680 --> 0:00:45.600 What can we expect for the rest of twenty twenty 0:00:45.640 --> 0:00:47.240 five based on what you're seeing? 0:00:47.520 --> 0:00:49.760 I mean, I would say overall it's not that great 0:00:50.280 --> 0:00:53.280 because the earning groups of the index has now for 0:00:53.400 --> 0:00:56.320 them to lose single digit for twenty twenty five. At 0:00:56.360 --> 0:00:59.480 the beginning of the year it was around seven percent. 0:00:59.560 --> 0:01:04.760 And two main reason for this downgrade in growth expectations 0:01:04.880 --> 0:01:08.399 are further than certainty on US tariffs given that the 0:01:08.480 --> 0:01:11.720 initial rate and on the by tramp at twenty percent 0:01:12.000 --> 0:01:15.880 was much higher than initially expected. And also we have 0:01:15.959 --> 0:01:19.560 seen significant cuts to the forecast of some of the 0:01:19.600 --> 0:01:24.280 commodity related sectors in Europe, black energy and also the 0:01:24.319 --> 0:01:29.800 mining industry, despite the announcement of the five hundred billion 0:01:29.840 --> 0:01:33.560 euros fiscal stimulus in Germany and also all the rumors 0:01:33.560 --> 0:01:36.480 about the ramp up in defense spending. I think it 0:01:36.520 --> 0:01:39.520 will take some time for all the shovels to be 0:01:39.600 --> 0:01:42.240 put into place and to really have an impact on 0:01:42.480 --> 0:01:46.199 the earnings level. So I think that is more twenty 0:01:46.280 --> 0:01:50.240 twenty six rather than twenty twenty five stories what the 0:01:50.320 --> 0:01:53.040 impact of US stariff are likely to play in the 0:01:53.080 --> 0:01:55.960 second half of the year. So one of the main 0:01:56.000 --> 0:02:01.520 reasons why we have much lower growth expectations. Whoever investors 0:02:01.560 --> 0:02:04.080 are looking through I would say is a short term 0:02:04.400 --> 0:02:08.440 earnings weakness and now are really focusing on the recovery 0:02:08.480 --> 0:02:11.840 potentially in twenty twenty six, and that's the main reason 0:02:11.880 --> 0:02:14.120 why the shop I saw now back to where they 0:02:14.160 --> 0:02:17.320 were before the announcement of Liberation Day. 0:02:18.360 --> 0:02:21.520 Okay, we'll be interesting to watch. I think we should 0:02:21.520 --> 0:02:23.840 hear from our guest on the topic. I'd like to 0:02:23.880 --> 0:02:27.720 welcome David Sama, founding partner of the Artists and Partner's 0:02:27.800 --> 0:02:31.600 International Value Team. Thank you for joining us, David Well. 0:02:31.400 --> 0:02:33.960 Thank you for having me. David and Laurent so. 0:02:34.040 --> 0:02:37.000 I'm sure you're looking at European companies. What are you 0:02:37.080 --> 0:02:39.119 seeing in terms of earnings for the year. 0:02:40.240 --> 0:02:42.840 Well, there are only two large liquidity pools outside the 0:02:42.919 --> 0:02:47.080 United States, both Europe and Japan, and so of course 0:02:47.480 --> 0:02:53.200 our portfolio is heavily invested in Europe. And I think 0:02:53.600 --> 0:03:00.160 what Laurent referred to in terms of earnings growth the 0:03:00.240 --> 0:03:06.160 year backstopped by the stimulus spending by the German government. 0:03:06.880 --> 0:03:10.040 So the headline number was about five hundred billion dollars, 0:03:10.080 --> 0:03:13.040 which is about ten percent of Germany's GDP. But I 0:03:13.080 --> 0:03:16.120 think you've got to think about that in slightly broader 0:03:16.240 --> 0:03:21.079 terms because you're also seeing other European countries stepping up 0:03:21.720 --> 0:03:25.160 with a little bit of stimulus spending. You saw Canada 0:03:25.240 --> 0:03:32.080 come out with some numbers also that will support some 0:03:32.720 --> 0:03:36.760 GDP growth, albeit a lot of that spending in less 0:03:36.800 --> 0:03:42.960 productive parts of the economy, but it is supportive. But 0:03:43.040 --> 0:03:46.000 I think a lot of the growth, you know, interestingly enough, 0:03:46.200 --> 0:03:52.560 is coming from widening spreads at European banks, which has 0:03:52.640 --> 0:03:56.600 little to do with what's going on with deficit spending 0:03:56.720 --> 0:04:00.080 and a lot to do with what's driving the underlying 0:04:00.120 --> 0:04:04.240 equity markets in Europe so far this year. With respect 0:04:04.280 --> 0:04:07.920 to the tariffs. It's it's really sort of interesting as 0:04:07.960 --> 0:04:11.840 you go through the earnings results announced during the first quarter, 0:04:11.920 --> 0:04:17.040 which is sorry post the first quarter, which was in 0:04:17.160 --> 0:04:23.160 the middle of the Liberation Day announcements, what you saw 0:04:23.320 --> 0:04:29.600 from most companies was an itemization of the impact that 0:04:29.760 --> 0:04:33.599 tariffs would have on their twenty twenty five earnings. So 0:04:34.160 --> 0:04:39.480 it's already embedded in whatever estimates the broker dealers or 0:04:39.520 --> 0:04:43.760 the cell side are putting out there as consensus. What 0:04:43.960 --> 0:04:49.400 is not fully baked into the earnings are whatever teriff 0:04:49.480 --> 0:04:58.560 rates are eventually settled between the European Union and other 0:04:58.640 --> 0:05:01.760 parts of the world. The other thing that's not baked 0:05:01.800 --> 0:05:06.560 in there are what are the economic consequences of those tariffs, 0:05:07.040 --> 0:05:11.039 because that's much less of a linear outcome, so it's 0:05:11.040 --> 0:05:14.919 harder to get analysts to bake that into the earnings estimates. 0:05:15.240 --> 0:05:19.960 And I also say that there is a fair amount 0:05:20.240 --> 0:05:28.880 of speculation on the parts of corporates and temporary tactics 0:05:29.360 --> 0:05:32.120 that have been deployed on the part of corporates to 0:05:32.360 --> 0:05:36.320 diminish the impact of the tariffs in twenty twenty five, 0:05:36.400 --> 0:05:41.560 the most common one being the acceleration of purchases of 0:05:41.839 --> 0:05:45.839 certain raw materials or inventories or shipping inventory into the 0:05:45.920 --> 0:05:49.400 United States ahead of the tariffs, and of course you 0:05:49.440 --> 0:05:53.040 know in twenty twenty six, you know that will anniversary 0:05:53.080 --> 0:05:55.480 and will have an impact that none of the companies 0:05:55.520 --> 0:05:57.440 have yet to quantify. 0:05:58.560 --> 0:06:02.000 And is less likely to be embedded in earning. 0:06:02.200 --> 0:06:05.400 So I think just in terms of, you know, what 0:06:05.560 --> 0:06:09.960 is built into consensus From what we can see, it's 0:06:10.040 --> 0:06:11.800 still unfinished business. 0:06:12.960 --> 0:06:16.920 Okay. Is there a process that you go in terms of, 0:06:17.080 --> 0:06:19.719 you know, when you find ideas or you know, for instance, 0:06:19.760 --> 0:06:22.360 can you tell us how an analyst's idea could make 0:06:22.400 --> 0:06:23.640 its way into the portfolio? 0:06:24.920 --> 0:06:28.240 Well, we have so it's very important I think for 0:06:29.680 --> 0:06:35.960 any successful long term active investor to have a certain discipline, 0:06:36.960 --> 0:06:43.479 as implied by the name of our strategy, the Artists 0:06:43.520 --> 0:06:48.039 and International Value Strategy. We are value investors and as 0:06:48.040 --> 0:06:52.760 a result, the price that we pay is a very 0:06:52.880 --> 0:06:56.240 large determinant of our investment outcomes. 0:06:56.880 --> 0:07:00.360 So we look to. 0:07:00.000 --> 0:07:03.800 To find businesses out in the marketplace that are trading 0:07:04.360 --> 0:07:09.360 at a significant discount to what our research is telling 0:07:09.440 --> 0:07:12.480 us that a business is worth. Those are the fundamental 0:07:14.600 --> 0:07:18.840 concepts behind value investing. You know, it's I love two 0:07:18.880 --> 0:07:21.280 for one deals. Value investing is sort of a two 0:07:21.360 --> 0:07:24.559 for one deal because, on one hand, if you're able 0:07:24.600 --> 0:07:26.960 to find an asset worth a dollar and you're paying 0:07:27.040 --> 0:07:31.760 sixty cents for that asset, you get excess return, especially 0:07:31.760 --> 0:07:35.040 if it's a decent business that grows that dollar slowly 0:07:35.080 --> 0:07:39.080 but surely over time. You capture that underlying growth, and 0:07:39.120 --> 0:07:42.800 you capture the unwind of the discount from sixty cents 0:07:42.840 --> 0:07:45.760 all the way up to a dollar. Now, the second 0:07:45.760 --> 0:07:49.240 part of the two for one deal is, let's say 0:07:49.440 --> 0:07:53.280 you make a mistake, or the rules change, the government 0:07:53.440 --> 0:07:59.880 does something like put a stimulus package, or does the opposite, 0:08:00.280 --> 0:08:02.480 and the value of the business ends up being eighty 0:08:02.520 --> 0:08:06.520 cents instead of a dollar. Because you've paid sixty cents, 0:08:06.960 --> 0:08:09.520 you've built an emergin of safety, and you've avoided a 0:08:09.520 --> 0:08:13.480 permanent loss of capital. So value investing, the fundamentals of 0:08:13.560 --> 0:08:16.440 value investing allow you to effectively have that too for 0:08:16.560 --> 0:08:21.160 one deal. Now we take it a step further. We 0:08:21.280 --> 0:08:25.840 take a more thoughtful approach in terms of the types 0:08:25.880 --> 0:08:29.560 of businesses that we want to be involved in. So 0:08:29.800 --> 0:08:34.720 not only do we want to find a business where 0:08:34.720 --> 0:08:38.520 there's a big spread between where it's trading and what 0:08:38.800 --> 0:08:40.720 our research is telling us it's worth. 0:08:41.320 --> 0:08:42.439 But we also want. 0:08:42.240 --> 0:08:46.240 To have good businesses, that business where that dollar is 0:08:46.360 --> 0:08:50.640 growing over time. That's because usually in order to get 0:08:50.640 --> 0:08:53.600 a good deal out in the stock market during let's 0:08:53.640 --> 0:08:58.400 say normal time periods like today, something has to be 0:08:58.480 --> 0:09:02.199 wrong with the business. People don't give away a share 0:09:02.240 --> 0:09:06.920 price at a cheap price when there's nothing wrong with 0:09:06.960 --> 0:09:11.720 the business. When there's something wrong, the stock market generally. 0:09:11.280 --> 0:09:11.920 Doesn't like it. 0:09:11.960 --> 0:09:14.800 People don't like bad news, people shy away from it, 0:09:15.880 --> 0:09:18.760 would prefer to be involved with companies that have good 0:09:18.840 --> 0:09:22.280 news and maybe with share price momentum. As a result, 0:09:22.320 --> 0:09:27.160 it takes time usually before the market is able to 0:09:27.360 --> 0:09:31.920 recognize the fact that the security is significantly undervalued, and 0:09:32.040 --> 0:09:35.120 during that time period, you want the underlying value of 0:09:35.160 --> 0:09:39.080 the business to be growing that way. When you finally 0:09:39.160 --> 0:09:43.280 get that revaluation, inflation which as we all know is 0:09:43.320 --> 0:09:48.720 ever present, doesn't erode your purchasing power. So we not 0:09:48.800 --> 0:09:54.320 only focus on securities that are undervalued, but we focus 0:09:54.360 --> 0:09:58.280 on securities that are undervalued that are attached to very 0:09:58.320 --> 0:10:04.679 good businesses. Now stopped there. We are very particular and 0:10:04.720 --> 0:10:07.600 that we're also looking for companies with strong balance sheets. 0:10:08.679 --> 0:10:09.719 So why do we do that. 0:10:09.840 --> 0:10:12.040 You know, most of the market is focused on companies 0:10:12.080 --> 0:10:16.160 that have an appropriate amount of leverage. We don't think 0:10:16.200 --> 0:10:19.080 there is an appropriate amount of leverage. We actually prefer 0:10:19.640 --> 0:10:24.800 no leverage and companies with very very strong balance sheets. 0:10:25.440 --> 0:10:28.640 That way, if something goes wrong or we have some 0:10:28.760 --> 0:10:32.160 bad luck, or if the company needs to repair a problem, 0:10:32.640 --> 0:10:37.000 that they have the resources available to them to be 0:10:37.040 --> 0:10:40.560 able to fix that problem, invest back in the business, 0:10:41.160 --> 0:10:45.800 create competitive advantages, and grow over the long term. And 0:10:45.840 --> 0:10:48.360 the fourth thing that we look for is a management 0:10:48.400 --> 0:10:53.600 team that has a track record and history of building 0:10:53.920 --> 0:10:59.719 per share per share shareholder value over time. And if 0:10:59.760 --> 0:11:07.560 you think about the combination of an intelligent manager with 0:11:07.679 --> 0:11:11.720 a strong balance sheet that knows how to effectively allocate capital, 0:11:12.360 --> 0:11:18.680 what that can do, if executed well, is actually accelerate value. 0:11:18.760 --> 0:11:20.840 You know, instead of you know, buying company at a 0:11:20.880 --> 0:11:24.000 dollar and it's growing at five percent per year. So 0:11:25.000 --> 0:11:27.040 in normal time periods you go from a dollar to 0:11:27.080 --> 0:11:30.800 a dollar five of underlying value. If you take excess 0:11:30.840 --> 0:11:35.360 capital and you invested, you could accelerate that value creation 0:11:35.480 --> 0:11:38.800 to a dollar ten or a dollar fifteen. And that 0:11:38.920 --> 0:11:41.920 is a very powerful driver of return. So if you 0:11:41.960 --> 0:11:43.720 think about what we're trying to do is we're trying 0:11:43.720 --> 0:11:45.959 to stack the odds in our favor. Right, we want 0:11:46.000 --> 0:11:50.080 an undervalued security, a very good business in the hands 0:11:50.080 --> 0:11:52.480 of a great management team with a strong balance sheet 0:11:52.920 --> 0:11:56.760 to try to maximize the potential for us to. 0:11:56.760 --> 0:12:02.720 Have a very successful investment. And our process is one 0:12:03.040 --> 0:12:05.520 where we focus on. 0:12:07.679 --> 0:12:15.640 Companies that have that characteristic, those characteristics in combination, and 0:12:16.120 --> 0:12:21.319 then take our time to do intensive first hand research. 0:12:21.360 --> 0:12:24.160 So we don't use any sell side research. We don't 0:12:24.240 --> 0:12:27.240 use any databases we build. You know, we're sort of 0:12:27.280 --> 0:12:30.280 like pre ai dinosaurs. We build all of our own 0:12:30.320 --> 0:12:34.360 financial models. We use firsthand data because we need to 0:12:34.440 --> 0:12:38.320 exercise judgment on the underlying economics of this business. We 0:12:38.400 --> 0:12:43.240 can't outsource our judgment to an algorithm or of course 0:12:43.280 --> 0:12:46.920 we use these tools for data gathering. But once we 0:12:47.000 --> 0:12:50.880 get that data, we analyze it firsthand. We talk to 0:12:50.960 --> 0:12:56.640 management teams, we talk to competitors, we talk to customers, 0:12:56.640 --> 0:13:00.240 we talk to former employees, we talk to anybody who 0:13:00.240 --> 0:13:04.160 will help us understand the long term underlying economics of 0:13:04.160 --> 0:13:06.920 that business. And we use all of that information along 0:13:06.920 --> 0:13:10.800 with the data that we gather to create an estimate 0:13:10.840 --> 0:13:15.840 of intrinsic value, and then we look to purchase shares 0:13:15.920 --> 0:13:20.000 only in the case where there is a meaningful discount 0:13:20.040 --> 0:13:23.200 to intrinsic value, and that's our process. We have a 0:13:23.200 --> 0:13:27.280 group of seven very experienced securities analysts on our team. 0:13:28.520 --> 0:13:34.439 We are all generalists with regional responsibilities, and we're all investors. 0:13:34.480 --> 0:13:37.600 We don't really have analysts here. We have investors who 0:13:37.679 --> 0:13:45.760 can allocate capital across multiple industries, across different geographic locations, 0:13:46.240 --> 0:13:50.040 in both develop markets and in emerging markets. So I 0:13:50.080 --> 0:13:53.480 think David and Laurent that gives you a pretty good 0:13:53.559 --> 0:13:55.840 sense for the way that we think about the world 0:13:56.280 --> 0:13:58.480 and how we approach finding securities. 0:14:00.000 --> 0:14:03.240 We talk a little bit about the intrinsic value. You know, 0:14:03.280 --> 0:14:05.679 you mentioned you have a bunch of different information that's 0:14:05.720 --> 0:14:08.360 kind of going into that. Are there metrics that you 0:14:08.480 --> 0:14:10.640 use as well or is it kind of you've got 0:14:10.720 --> 0:14:14.360 like a proprietary system to determine its intrinsic value. 0:14:15.240 --> 0:14:17.839 Well, you know, I don't think there's any magic to 0:14:19.200 --> 0:14:21.000 you know, the value of a business is the present 0:14:21.080 --> 0:14:24.240 value of its future cash flows, and you learn that 0:14:24.600 --> 0:14:28.600 in your first finance class. And we haven't really varied 0:14:29.160 --> 0:14:34.640 from using a very simplified diskind of cash flow model 0:14:34.760 --> 0:14:39.080 to perform our let's say, formal valuation of the business. 0:14:39.120 --> 0:14:40.320 Most of the stuff you could. 0:14:40.160 --> 0:14:43.280 Do on the back of a napkin, you know, and 0:14:43.480 --> 0:14:47.160 when you know, when we think about metrics, there's shorthand 0:14:47.880 --> 0:14:51.600 that comes from the analytical process. 0:14:51.680 --> 0:14:54.400 You know, pe ratio is ev to e bit pre. 0:14:54.360 --> 0:14:58.520 Cash flow multiples, all of those are sort of shorthand 0:14:58.720 --> 0:15:05.600 methods to evaluate the attractiveness of a company. And of 0:15:05.640 --> 0:15:10.240 course everything is relative, right, So if you think about 0:15:10.480 --> 0:15:15.000 the quality of let's say LVMH, which is a large 0:15:15.080 --> 0:15:19.160 luxury goods company, the quality of that business relative to 0:15:19.600 --> 0:15:23.800 let's say BASF, which is a large German chemical conglomerate. 0:15:24.120 --> 0:15:28.800 Of course, those are two different businesses, one with significant 0:15:28.880 --> 0:15:32.320 brand value that results in very high levels of profitability, 0:15:32.640 --> 0:15:37.520 and the other one that operates and commoditize, you know, 0:15:37.920 --> 0:15:45.800 businesses that are tough competitively and they operate with unionized labor, 0:15:46.200 --> 0:15:50.600 which is a much more difficult, capital intensive, lower return business. 0:15:50.840 --> 0:15:52.320 They're not worth the same thing. 0:15:52.440 --> 0:15:55.080 If they were both at eight times earnings, of course 0:15:55.080 --> 0:15:58.600 you'd far prefer to own LVMH. Then you would prefer 0:15:58.680 --> 0:16:02.080 to own BASF. And you know, I don't use those 0:16:02.240 --> 0:16:04.440 two companies to pick on them, but I use them 0:16:04.480 --> 0:16:08.880 to point out that, uh, you know, we we can 0:16:08.960 --> 0:16:17.320 look at shorthand metrics, David, to help us put shorthand 0:16:17.480 --> 0:16:20.800 valuations on companies. But everything has to be taken into 0:16:20.920 --> 0:16:25.080 context based on the type of business that you're looking. 0:16:24.800 --> 0:16:29.880 At, David. I mean in terms of marketing efficiencies, I mean, 0:16:30.520 --> 0:16:33.120 based on your long experience. Where do you think the 0:16:33.280 --> 0:16:36.280 market or the saleside get it wrong. Is it more 0:16:36.560 --> 0:16:42.080 in understanding the underlying value or the interesting value of 0:16:42.160 --> 0:16:45.160 the business, or is it more in how it should 0:16:45.200 --> 0:16:49.920 be valued? How your experience I mean, is making you 0:16:50.640 --> 0:16:54.080 look for more opportunities in one way or the other. 0:16:55.480 --> 0:17:00.000 Well, I would say, broadly speaking, the non US market 0:17:00.320 --> 0:17:05.280 or less efficient than the US market. So first, there's 0:17:05.400 --> 0:17:08.040 a lot less liquidity outside the United States than there 0:17:08.119 --> 0:17:12.320 is in the United States. So that's one. Two, you 0:17:12.480 --> 0:17:18.119 have the complexity associated with you know, various currencies that 0:17:18.160 --> 0:17:23.800 you're dealing with. Three, you have complexity with respect to cultures. 0:17:24.440 --> 0:17:26.000 You know, what does it mean to be invested in 0:17:26.040 --> 0:17:29.880 a French company versus an Indonesian company versus a Japanese company. 0:17:30.440 --> 0:17:33.680 And then you have different corporate governance structures, right, different. 0:17:33.480 --> 0:17:34.520 Rules of the game. 0:17:35.000 --> 0:17:37.439 What does it mean to be a shareholder of a 0:17:37.480 --> 0:17:41.520 South Korean company versus a shareholder of a Swiss company? 0:17:42.040 --> 0:17:44.960 You know, what is the construct of a board of 0:17:45.040 --> 0:17:48.600 directors in Japan versus the construct of a board of 0:17:48.600 --> 0:17:52.240 directors in the United Kingdom. So then you have different 0:17:52.240 --> 0:17:55.919 time zones, you have different languages, you don't really have 0:17:56.080 --> 0:18:01.560 different There's a little bit of accounting differences that exists today, 0:18:01.640 --> 0:18:02.160 but they're not. 0:18:02.359 --> 0:18:04.280 Nearly as as big. 0:18:04.119 --> 0:18:07.920 But they're they're out there, right, and and that level 0:18:07.960 --> 0:18:11.800 of complexity makes it much more difficult for the average 0:18:12.400 --> 0:18:16.760 investor to truly understand what they're getting themselves involved in. 0:18:16.920 --> 0:18:18.640 So that's that's step one. 0:18:19.720 --> 0:18:19.920 Uh. 0:18:20.040 --> 0:18:27.200 Step two UH is with respect to the cell side. 0:18:27.240 --> 0:18:29.720 The cell side, you know, they make their money on 0:18:29.760 --> 0:18:32.760 the corporate clients, right, So their clients are the LVMH's 0:18:32.800 --> 0:18:35.480 of this world, not the David Sammers of this world. 0:18:35.800 --> 0:18:42.359 And uh, and they have over the years realized that 0:18:43.720 --> 0:18:47.320 in terms of brokerage commissions, their their their bread is 0:18:48.240 --> 0:18:52.000 buttered by fast moving hedge funds, and so they love 0:18:52.080 --> 0:18:55.360 to have you know, short term movements based on earnings 0:18:55.480 --> 0:18:58.160 estimates and things like that, and has nothing to do 0:18:58.240 --> 0:19:02.440 with the long term in during intrinsic value of a business. 0:19:03.000 --> 0:19:05.880 And so the cell side tends to be very short 0:19:05.960 --> 0:19:11.160 term oriented, which is an advantage for somebody who's actually investing. Right, 0:19:11.240 --> 0:19:15.880 So let's let's talk about investing to build wealth over time, 0:19:16.359 --> 0:19:19.760 which is a very different concept than just owning a 0:19:19.800 --> 0:19:23.760 security to take advantage of a trend. Now, what else 0:19:23.840 --> 0:19:27.719 is also driving in efficiency is the advent of ETFs. 0:19:27.760 --> 0:19:32.199 ETFs have become you know, have played into the gamification 0:19:32.960 --> 0:19:39.240 of investing. It has sort of dumbed down investing and 0:19:39.480 --> 0:19:44.639 provides things like exposure to financial advisors and broker dealers. 0:19:44.720 --> 0:19:47.360 I think if you, you know, go over to your 0:19:47.400 --> 0:19:52.080 friend's house and ask to see their statement from their advisor, 0:19:53.160 --> 0:19:56.679 you know it's likely to have ten or fifteen ETFs 0:19:56.680 --> 0:20:00.119 in there. And so what do they own, Well, they own, 0:20:00.280 --> 0:20:05.480 they own products, they don't own businesses or investment investments. 0:20:05.520 --> 0:20:09.320 And all of these inputs into the way that the 0:20:09.320 --> 0:20:14.720 equity markets operate today, plus the added inefficiencies of investing 0:20:14.760 --> 0:20:20.280 out the outside the United States, that's what creates opportunities 0:20:20.840 --> 0:20:24.520 for long term investors, and David and Laurent let's use 0:20:25.320 --> 0:20:27.720 you know today is a really good example, because it's 0:20:27.760 --> 0:20:32.960 really interesting to see, you know, the European markets rallying 0:20:33.080 --> 0:20:38.119 so significantly in the first part of this year. And 0:20:39.200 --> 0:20:45.119 it is fantastic that you know, some of the banks 0:20:45.200 --> 0:20:51.199 and the defense contractors and the utilities are likely to 0:20:51.280 --> 0:20:54.960 have growing earnings on the back of what's happening. But 0:20:55.200 --> 0:21:00.760 if you think about the relative quality of those businesses 0:21:01.600 --> 0:21:06.280 compared to you know, other potential long term compounders, those 0:21:06.320 --> 0:21:10.840 aren't fantastic businesses. You know, that's not like Google or Facebook. 0:21:11.400 --> 0:21:13.280 You know, you know, these. 0:21:13.160 --> 0:21:17.040 Long term fantastic compounders rising very rapidly because their earnings 0:21:17.040 --> 0:21:18.959 are growing and they have a very bright future. 0:21:19.560 --> 0:21:21.560 These are pretty. 0:21:21.359 --> 0:21:28.360 Ugly businesses that went from horribly undervalued to now still undervalued. 0:21:30.000 --> 0:21:32.639 But they're not, you know, they're not long term compounders. 0:21:32.640 --> 0:21:37.240 I mean, the banking industry and in Europe is is 0:21:37.280 --> 0:21:41.960 fragmented and it needs to consolidate. And you know, the 0:21:42.440 --> 0:21:46.399 regulatory environment, though less hostile than it has been over. 0:21:46.280 --> 0:21:51.119 The last decade, is still reasonably unhelpful. 0:21:52.400 --> 0:21:56.879 So you know, you're not and and what's being left 0:21:56.920 --> 0:22:02.720 behind during this rally, are uh, you know, some of 0:22:02.720 --> 0:22:05.600 the better businesses that are out there, which creates opportunity 0:22:05.600 --> 0:22:08.280 for long term investors. So that gives you a sense, 0:22:08.880 --> 0:22:13.320 Laurent in real time, you know how stock markets can be, 0:22:14.560 --> 0:22:17.359 you know, incredibly short term oriented and as a result, 0:22:17.480 --> 0:22:19.120 inefficient in our view. 0:22:20.160 --> 0:22:22.520 I just wanted to ask you about you know, you 0:22:22.560 --> 0:22:25.840 were talking about, you know, the fundamental aspects and balance sheets, 0:22:25.880 --> 0:22:28.800 and I guess, in your opinion, what is the best 0:22:28.800 --> 0:22:32.200 indicator of a business's you know, what is their their quality? 0:22:32.240 --> 0:22:37.840 I should say, yeah, well so that's a good question. 0:22:38.400 --> 0:22:42.240 In fact, I along dialogue with somebody yesterday about this. 0:22:44.200 --> 0:22:49.080 You can see in the financial metrics, the historical financial 0:22:49.119 --> 0:22:54.920 metrics of a business whether or not it has historically 0:22:55.000 --> 0:22:58.600 been a high quality business, so it shows up in 0:22:58.720 --> 0:23:01.680 return on capital employe. There are other things to look at, 0:23:02.160 --> 0:23:06.360 you know, if it's a financial would be an ROE 0:23:06.600 --> 0:23:10.560 you have to You can look at operating profitability, you 0:23:10.600 --> 0:23:14.639 can look at in the rate of growth, and so 0:23:14.760 --> 0:23:19.560 you can see it generally speaking in the historical financials. 0:23:19.920 --> 0:23:22.440 But that is just the beginning of the analysis rather 0:23:22.480 --> 0:23:25.440 than the end of the analysis. Of course, you have 0:23:25.560 --> 0:23:29.159 to make because the value of the business is the 0:23:29.160 --> 0:23:31.879 present value of the future cash flows, not the past 0:23:31.960 --> 0:23:36.000 cash flows. It is imperative that you are able to 0:23:36.040 --> 0:23:40.320 make some level of determination as to whether or not 0:23:41.400 --> 0:23:47.520 the conditions that allowed for that fantastic level of profitability 0:23:47.560 --> 0:23:51.879 and returns in the past will continue to exist in 0:23:51.920 --> 0:23:52.480 the future. 0:23:52.960 --> 0:23:54.800 And that's that's what we're here to do. 0:23:55.960 --> 0:24:01.080 You know, that's what separates, at least today, the difference 0:24:01.160 --> 0:24:06.000 between an algorithm and a human being is that, you know, 0:24:06.040 --> 0:24:08.840 we have to take the information that's available to us 0:24:09.440 --> 0:24:15.359 and make some judgments around that information. And that's what 0:24:15.520 --> 0:24:20.600 fundamental research is for. We're looking at the competitive position 0:24:20.760 --> 0:24:25.040 of the company, the quality of the management, the quality 0:24:25.080 --> 0:24:28.600 of their products, who their customers are, whether or not 0:24:28.680 --> 0:24:33.320 their customers will still have the capability and the desire 0:24:33.400 --> 0:24:37.280 to buy their products. What are the raw material inputs, 0:24:38.320 --> 0:24:42.000 what are the substitute products, what is the status of 0:24:42.080 --> 0:24:47.560 their competitors' products and their competitors' strategy. And when you 0:24:47.720 --> 0:24:52.680 bundle in all this analysis, you make some assessment as 0:24:52.680 --> 0:24:56.840 to whether or not this business will still be able 0:24:57.359 --> 0:25:03.399 to grow and create strong levels of profitability without having 0:25:03.400 --> 0:25:06.760 to put so much capital in the business. Where the 0:25:06.800 --> 0:25:09.360 returns of the business might decline over time, in which 0:25:09.400 --> 0:25:12.679 case it's worth far less than you know it was 0:25:12.720 --> 0:25:14.520 worth in the past when it did not have to 0:25:14.560 --> 0:25:18.760 do that. And so it really is that that last step, 0:25:18.800 --> 0:25:23.400 that fundamental analysis step, which we'd call last but certainly 0:25:23.440 --> 0:25:28.960 not least, part of the process that helps us determine 0:25:29.080 --> 0:25:33.880 whether or not this business is actually a quality business. 0:25:34.960 --> 0:25:37.800 One question. I mean, sometimes some of your investment in 0:25:37.920 --> 0:25:42.000 the initial stage may turn out badly, I would say, 0:25:42.359 --> 0:25:44.920 I mean, how do you review I mean for them, 0:25:45.280 --> 0:25:47.840 I mean positions which are not going the way you 0:25:48.040 --> 0:25:51.320 fought it could go. I mean, because of antc in 0:25:51.400 --> 0:25:55.520 as cutting glasses early is one way to avoid disasters. 0:25:55.520 --> 0:25:59.520 So how do you process the review of investment which 0:25:59.640 --> 0:26:02.840 unfort can it be observed stage I'm not going in 0:26:02.960 --> 0:26:03.760 the right direction. 0:26:04.640 --> 0:26:09.000 Yeah, it's a very good question, and it's something that 0:26:09.040 --> 0:26:11.600 we call reinvestment risk, and it's sort of the bane 0:26:11.640 --> 0:26:16.120 of the value investor generally speaking. Is a value investor, 0:26:16.520 --> 0:26:20.560 you're selling securities where the news is very good and 0:26:20.600 --> 0:26:22.919 the share price is going up and everybody's happy and 0:26:22.920 --> 0:26:27.439 people are jumping on the bandwagon, and you're getting involved 0:26:28.000 --> 0:26:30.520 in securities where the news is very bad and people 0:26:30.560 --> 0:26:35.800 are selling. Now, there are a couple components to your question, Laurent, 0:26:35.960 --> 0:26:42.080 and so that you use the word disaster, and we 0:26:42.160 --> 0:26:46.600 try to avoid disasters by some of those fundamental characteristics 0:26:46.600 --> 0:26:49.520 that we spoke about. I mean, generally speaking, if you're 0:26:49.520 --> 0:26:53.040 buying a pretty high quality business with a strong balance sheet, 0:26:53.440 --> 0:26:56.879 very hard, not impossible, but very hard to have a 0:26:56.920 --> 0:27:02.480 disaster associated with the business that looks statistically cheap, that 0:27:02.560 --> 0:27:05.399 has a strong balance sheet and is fundamentally a pretty 0:27:05.440 --> 0:27:09.280 good business. The other thing that to sort of internalize 0:27:09.440 --> 0:27:12.919 about what value investors do is that we're very aware 0:27:12.960 --> 0:27:17.440 of this reinvestment risk. So you make a certain level 0:27:17.440 --> 0:27:22.520 of assumptions around what the trajectory of the business should 0:27:22.600 --> 0:27:26.560 look like, and as long as the business is moving 0:27:26.600 --> 0:27:31.280 in that direction, and we are able to separate the 0:27:31.680 --> 0:27:36.240