Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Our
Speaker 1: next guest, Clay Lowry, is managing director of Irack Creek
Speaker 1: Global Advisors, based in Washington, d C. Mr Lowry previously
Speaker 1: was the Assistant Secretary for International Affairs at the US
Speaker 1: Treasury Department from two thousand and five to two thousand
Speaker 1: and nine. He also chaired the Committee on Foreign Investment
Speaker 1: in the United States. Now. This is the committee that
Speaker 1: takes a look at international mergers and acquisitions that may
Speaker 1: or may not affect national security interest. Clay Lowry, thank
Speaker 1: you very much for being with us. First, tell us
Speaker 1: what you're telling your clients, if you don't mind, because
Speaker 1: you advise multinationals as well as financial institutions and investors,
Speaker 1: what are you telling them about the on again, off again,
Speaker 1: on again trade dispute, trade tariff dispute and confrontation between
Speaker 1: the United States and China. Thanks for having me. And uh,
Speaker 1: the essential thing that we've been telling people is to
Speaker 1: keep your car seats buckled because and you see it
Speaker 1: every day. I mean, there's it's slightly different every day
Speaker 1: about um, how we're how the administration and to that matter,
Speaker 1: the Chinese are retaliating, how each of that is going
Speaker 1: to to work. And so this is actually just increased volatility. Um.
Speaker 1: We've see that in in in the markets, which um
Speaker 1: are not necessarily about the clients I have, but UM,
Speaker 1: but you see that also and just kind of how
Speaker 1: our sales going to be done, how is investment and
Speaker 1: trade flow is going to be affected, and all of
Speaker 1: this right now is there's a lot of uncertainty. And
Speaker 1: so that's all we've just basically been saying is just
Speaker 1: prepare for more uncertainty. And I think that you see
Speaker 1: that with even the rhetoric coming out of the White House.
Speaker 1: It kind of changes a little bit every other day.
Speaker 1: And so that's kind of there's nothing else to prepare
Speaker 1: for outside of uncertainty, because that's what you have, alright, Clay,
Speaker 1: So our s buelts are buckled. We are duly prepared.
Speaker 1: What I would want to know from you. You were
Speaker 1: formerly the Assistant Secretary of for International Affairs at the
Speaker 1: US Treasury Department. I'm wondering, can you offer us any
Speaker 1: insight into the mechanics of imposing tariffs and what that
Speaker 1: would entail so that we can have a better sense
Speaker 1: of what would have to happen for some of the
Speaker 1: proposals to be made a reality. Well to impose tariffs.
Speaker 1: I mean, they basically outlined, the administration, that is, has
Speaker 1: outlined what they would like to do in tariffs. There's
Speaker 1: going to be a public comment period, um. And if
Speaker 1: they decide to go forward with these tariffs, and they
Speaker 1: you know, I assume that they will listen to public comment, um.
Speaker 1: And uh they're obviously they say that they're trying to
Speaker 1: also have negotiations with the Chinese. UM. But if they
Speaker 1: put the tariffs on, then they basically it will be
Speaker 1: at tax I mean on imports from China on specific items. Uh.
Speaker 1: They've outlined items that they would put a tax on.
Speaker 1: And uh, once they do that, when they start coming
Speaker 1: over the border, they will have to put it. They
Speaker 1: have to pay a duty the importer and at least
Speaker 1: economically speaking, the importer would pass that on as it
Speaker 1: goes down the line. Presumably that would either affect businesses
Speaker 1: or consumers UM on those products that actually received that tax.
Speaker 1: Clay Lowry, what about the importation of Chinese investment dollars
Speaker 1: into the United States? Now, thank you for the that UM,
Speaker 1: So that one is a little more uncertain. So they
Speaker 1: UM in the President's memorandum basically outlining this, they said
Speaker 1: that they were going to give the Treasury Department sixty
Speaker 1: days to kind of report back on how they would
Speaker 1: like to do see investment restrictions, UM, and we assume
Speaker 1: their investments restrictions. Actually, the words they use the memorandum
Speaker 1: are concerns about Chinese investments. So these are not national
Speaker 1: security concerns. So national security concerns are handled through a
Speaker 1: different mechanism, which is called Scythius UM. This is about
Speaker 1: um in uh restrictions on specific investments that are outside
Speaker 1: of national security that the Chinese are making. Now that
Speaker 1: the issue here is this is not something the United
Speaker 1: States has really done much of effect. I can't remember
Speaker 1: an example in which we have done it, outside of
Speaker 1: maybe if it's like a kind of a rogue regime
Speaker 1: like Iran or something like that. So Because of that,
Speaker 1: I think it's become uh the Treasure Department and others
Speaker 1: in the administration are working on what a how do
Speaker 1: you do this? What's the AUTHORI do you use? Um? Uh,
Speaker 1: what are the legal implications if you use various authorities?
Speaker 1: This is very different than tariffs, because tariffs we've we've
Speaker 1: done throughout our history. Investment restrictions is a very different mechanism.
Speaker 1: Do you get the sense, based on your conversations with
Speaker 1: people who are in the administration or in the Treasury Department, uh,
Speaker 1: that President Trump has a lot of company in his
Speaker 1: sort of declarations of proposals for the tariffs. Do you
Speaker 1: mean support from from from people who are inside the administration,
Speaker 1: from people who are sort of uh career people and
Speaker 1: see this as possibly helping uh, sort of even the
Speaker 1: playing field. So I do think I think, actually, I
Speaker 1: mean go beyond the administration. I think that if you
Speaker 1: talk to a lot of people on Congress, within the administration,
Speaker 1: even the business community, and uh the kind of academic
Speaker 1: think tank community, I think that a lot of them
Speaker 1: would say that they have a lot of sympathy for
Speaker 1: what President Trump is trying to do. They believe that
Speaker 1: China has been a poor actor in a number of
Speaker 1: areas on trade and investment, and so um, there may
Speaker 1: need to be some there's a desire for some sort
Speaker 1: of uh more dramatic action. That being said, I think
Speaker 1: that you would also hear from a lot of people
Speaker 1: that that there's two major missing elements to what the
Speaker 1: president has tried to do. First is, um, there doesn't
Speaker 1: seem to be a strategy. What is it you want
Speaker 1: to achieve? Is it? Is it? I mean the President
Speaker 1: talks about lowering the trade deficit. That's kind of a
Speaker 1: strange way to look at things. Is the idea to basically,
Speaker 1: we want more market access for China, we want China
Speaker 1: to treat more fairly. What is it exactly they want
Speaker 1: to achieve? I think the Chinese are confused by that,
Speaker 1: but I actually think that by the way, the business
Speaker 1: community is totally confused by that. And then secondly, um,
Speaker 1: is it would have made more sense And in fact,
Speaker 1: you saw Larry Cudlow even saying this this morning, let's
Speaker 1: try to build a coalition around us. There's a number
Speaker 1: of countries around the world who are concerned about how
Speaker 1: China has been interacting on trade and investment. But the administration,
Speaker 1: which was warned about this over and over and over again,
Speaker 1: go out and build a coalition. There are others that
Speaker 1: are with you. What did they do? Instead? They attacked
Speaker 1: those same countries on steel in uh and aluminum tariffs
Speaker 1: which have which are supposed to be about national security,
Speaker 1: and yet they attacked the countries that actually help us
Speaker 1: on national security. And then secondly, they didn't go around
Speaker 1: building a coalition against China so that China got the message.
Speaker 1: It wasn't just the United States that had a problem
Speaker 1: with China, it was actually the international community at large.
Speaker 1: And for whatever reason, the administration decided not to take
Speaker 1: those tactics. But maybe maybe that maybe given what you
Speaker 1: saw from Larry Cudlo, maybe he's deciding that this is
Speaker 1: maybe they need to make a small change and how
Speaker 1: they're d to approach the president strategy. Clay Lowry, thank
Speaker 1: you so much for being with us. Clay Lowry, Managing
Speaker 1: director at Rock Creek Global Advisors, former Assistant Secretary for
Speaker 1: International Affairs at the US Treasury Department. In an era
Speaker 1: when electronic trading is moving into everything from bonds to currencies,
Speaker 1: Goldman Sacks has been steadily trying to chart out a
Speaker 1: new identity for itself and the latest is a move
Speaker 1: into commercial banking. UH, territory frankly dominated by JP Morgan
Speaker 1: and other behemoth banks. Showing us now to talk about
Speaker 1: that is Brian klein Hansel. He's an equity research analystic
Speaker 1: managing director at Keith, Briette and Woods in New York. Brian,
Speaker 1: thank you so much for being with us. So I
Speaker 1: just first want to get a sense of what Goldman
Speaker 1: Sachs is trying to do with commercial banking and what's
Speaker 1: attractive to the bank about this business. Yeah, thanks for
Speaker 1: having me Sea. What Goldman is looking to do is
Speaker 1: really too deepen the relationships that they have with their
Speaker 1: corporate clients already. So the relationship that they have today
Speaker 1: is more from an advisory perspective when you think about
Speaker 1: advising on potential M and A UM, and what they're
Speaker 1: trying to do now is be more of a bank
Speaker 1: to these corporate clients. By that, I mean looking to
Speaker 1: do more lending with these corporate clients UM as well
Speaker 1: as capturing deposits that these corporations may have. So there
Speaker 1: really are trying to build out the bank around this
Speaker 1: existing relationship. So UH, one question is why. I mean,
Speaker 1: the other banks have such a toe hold into this,
Speaker 1: and notoriously, lending is a capital intensive business that kind
Speaker 1: of moves away from the M and A and the
Speaker 1: investment banking that Goldman sax is known for. Yeah, that's
Speaker 1: a good question. We also have as well. I mean,
Speaker 1: really point of time that this what Goldman laid out
Speaker 1: was a strategy to increase revenues. It was one environment
Speaker 1: when revenues were challenged, so this is one way to
Speaker 1: grow revenues. But it is a very competitive UM industry overall.
Speaker 1: In commercial banking. It's an area where Goldman Sachs themselves
Speaker 1: have little history relative to the other big banks that
Speaker 1: kind of dominate the space. So it is an area
Speaker 1: we could potentially see incremental revenues come through. It's just
Speaker 1: it's going to be a very hard, hard fought to
Speaker 1: win those type of revenues. So the other thing it
Speaker 1: does it helps UM act as a ballast relative to
Speaker 1: the trading business. Volatility over the last five years has
Speaker 1: been fairly low UM, so this is an area we
Speaker 1: could see recurring revenues come from with less volatility that
Speaker 1: you do in the trading business. So you can see
Speaker 1: how it could make sense longer term. It's as we
Speaker 1: do questioned their ability and executing the strategy long term.
Speaker 1: Can you speak specifically about David Solomon and what he
Speaker 1: things to this strategy. Well, he does have a background
Speaker 1: in a lot of the areas, so he comes up
Speaker 1: to the advisory side in the investment bank, so he
Speaker 1: does have a lot of relationships with the senior executives
Speaker 1: at these corporations. Um. Where it fails to see there's
Speaker 1: a bridge right now is that a lot of these
Speaker 1: decisions are made by treasurers. So we'll have to see
Speaker 1: if he can bridge that gap between the CEO down
Speaker 1: to the treasurer um. But he does have a background
Speaker 1: within the investment bank and have the relationships with the
Speaker 1: corporations themselves, so that's the positive. And a lot of
Speaker 1: the other new strategies, he does have a foot and
Speaker 1: a lot of those strategies, whether it was the Marcus initiative,
Speaker 1: which is their kind of retail consumer lending platform, so
Speaker 1: he's been more of a key proponent for that platform.
Speaker 1: So a lot of the areas where the bank has
Speaker 1: been trying to grow outside of the traditional trading UM
Speaker 1: channels are areas that he's either helped to develop or
Speaker 1: where he's worked previously, so he does have a good
Speaker 1: background in these businesses. You know, Brian, I'm struck by
Speaker 1: this that Goldman Sachs is expanding into new territories, whether
Speaker 1: it's the markets platform that focuses on consumer lending, or
Speaker 1: whether it's commercial banking. And this sort of is echoed
Speaker 1: by Jamie Diamond over at JP Morgan with the investor
Speaker 1: letter that he put out, which basically says, we're expanding everywhere,
Speaker 1: anywhere you can go, we want to be There is
Speaker 1: there a concern at all on behalf of analysts like
Speaker 1: yourself that some of these banks are perhaps moving outside
Speaker 1: their wheelhouse and getting too diffuse and possibly could increase
Speaker 1: the risks of underperforming more broadly as they expand. Yeah,
Speaker 1: I mean we think there is. I think Goldman is
Speaker 1: a fairly good example of expanding into the consumer business
Speaker 1: at a period where you've had generally what we consider
Speaker 1: benign credit conditions, meaning that you're not taking a lot
Speaker 1: of losses on the loans that you're making in the
Speaker 1: consumer business. Um, but that's been fairly you know, five
Speaker 1: years of low losses. That could change at any point
Speaker 1: in time, and if you don't have a history in
Speaker 1: that business, it could all of a sudden become very
Speaker 1: challenged to matt manage credit managerings being its revenues in
Speaker 1: those businesses. So it does seem to be what we
Speaker 1: would call late cycle growth in the consumer business. It
Speaker 1: does raise yellow flags at this point, not necessarily red
Speaker 1: flags to us and to investors, but it is an
Speaker 1: area where you're trying to grow um and we would
Speaker 1: argue that they're trying to grow aggressively in an area
Speaker 1: where there is little history for the company. So I mean,
Speaker 1: certainly is a yellow flag at this point in time.
Speaker 1: Just a quick point Brian that if we see increase
Speaker 1: in interest rates, won't this help the bond trading business,
Speaker 1: And in a sense Goldman Sachs looking to expand in
Speaker 1: areas that maybe it is a little too late to
Speaker 1: the party and maybe just focus on what it does
Speaker 1: best and wait for the cycle to turn. I mean,
Speaker 1: it certainly could. So. A lot of the revenues are
Speaker 1: generated in the bond trading business are based on the
Speaker 1: steepness of the Yelk curve. So as long as the
Speaker 1: long end keeps moving, us the short term rates and
Speaker 1: that's generally a positive for the trading business. That also
Speaker 1: could mean I think we want from a corporation perspective
Speaker 1: is are they committed to this business? And that's exactly
Speaker 1: to your point. If you see a big pick up
Speaker 1: in trading revenues, are they going to still want to
Speaker 1: maintain these lending relationships in this commercial banking relationship blogger
Speaker 1: term or really simply switch back to being more focused
Speaker 1: on trading. I think at this point in time, the
Speaker 1: fact that they really haven't built out the commercial bank,
Speaker 1: I think it's gonna be a challenge for them to
Speaker 1: grow commercial banking clients as a result. And I think
Speaker 1: that's the risk, and I think all the corporations will
Speaker 1: be asking the same question, is you know how what
Speaker 1: it are you to this business that you want to
Speaker 1: take our um business from us. I want to thank
Speaker 1: you very much for spending time with us. Brian Klein
Speaker 1: Hazel Handel is equity research channelist for Keep Briette and Wood.
Speaker 1: Speaking about Goldman Sachs right now, I want to turn
Speaker 1: our attention to Hugh Son, Bloomberg Finance reporter. He just
Speaker 1: wrote a phenomenal story for Bloomberg Markets Magazine which we're
Speaker 1: gonna get to in a second. But before we go there, Hugh,
Speaker 1: I know you've got a deep knowledge of JP Morgan,
Speaker 1: and given the fact that they just had their annual
Speaker 1: meeting and released their annual letter to shareholders, you know,
Speaker 1: what's your big takeaway for what JP Morgan's goal is
Speaker 1: in the year ahead? And this solidifies UM. Thank you
Speaker 1: for having me. This solidifies UM something that I've been
Speaker 1: that's been sort of coalescing in the back of my
Speaker 1: mind for a little while now, which is UM. You know,
Speaker 1: they're they're the aggressors in this space. UM. So for
Speaker 1: an example, UM, JP Morgan. You know, they gave some
Speaker 1: comments about what they were gonna do with UM online,
Speaker 1: brookeradge and UM. This is on their investor day Febru
Speaker 1: and all of a sudden you see Charles Schwab and
Speaker 1: a few other UM sort of broken stocks UM move
Speaker 1: up by five percent. And that's because the markets interpreted
Speaker 1: that they weren't going to aggressively go into UM. You know,
Speaker 1: UH free online robo advising just one example of you know,
Speaker 1: of their impact in the market. So wherever you look
Speaker 1: in finance, they are the aggressives, whether it's deposits, fixed income,
Speaker 1: credit cards, Trust Advisory. I could go on and on,
Speaker 1: and in my mind what was coalescing is just sort
Speaker 1: of this idea that they are kind of becoming the
Speaker 1: Amazon of of finance. Okay, they want to be the
Speaker 1: Amazon of finance. Can we say that there are a
Speaker 1: variety of competitors who might have a different view about
Speaker 1: the um in the banking space, Well, I mean there
Speaker 1: are City Bank there as well as Fargo. There's a
Speaker 1: Bank of America, Morgan Stanley done very well with their
Speaker 1: wealth management division, which is now trying to get to
Speaker 1: commercial banking. I bring it up only because you know,
Speaker 1: we've heard before about the one stop shop. Absolutely, and
Speaker 1: you should be skeptical. Sure, yeah, And you know, I
Speaker 1: note that one of the quotes from Jamie Diamond is
Speaker 1: talking about bureaucracy, right, and he's not a seemingly not
Speaker 1: a fan of bureaucracy. And I mean, I gotta say
Speaker 1: you ever hear anybody say that they are a fan
Speaker 1: of bureaucracy, that they think it's just wonderful and great
Speaker 1: and it helps me wonderful businesses. Well, how are you
Speaker 1: going to manage all these wonderful new initiatives if you
Speaker 1: don't have a bureaucracy that can actually execute. Yeah, I
Speaker 1: mean so a lot lots of good points. I would
Speaker 1: say there's a reason why, um, other other members, other
Speaker 1: financial players are watching Jamie Morgan and and and it
Speaker 1: stems from a lot of the adventus they have. They
Speaker 1: have the highest r o E, they have most deposits. Um,
Speaker 1: they have Jamie Diamond, who's you know who doesn't He
Speaker 1: doesn't deliberate before entering markets suggressfully at times as much
Speaker 1: as others. Um as an analyst talk to relate to me,
Speaker 1: you know, he says, other other banks are happy to
Speaker 1: let JP Morgan go first in some instances. And so
Speaker 1: you know, um, whether or not you know the other
Speaker 1: the other banks, it's not as that they're going to
Speaker 1: go away. But the JP Morgan, if you look at
Speaker 1: you know, if you if you read the letter, they
Speaker 1: see opportunity everywhere, even in places they're they're already number one.
Speaker 1: What does that tell you? That tells me if they
Speaker 1: want to rally their troops and have some ambition as
Speaker 1: they plow forward and take over the world. I do
Speaker 1: want to I do want to get a sense though
Speaker 1: you know, they have brought ambitions in China or Asia
Speaker 1: Born broadly, they have brought ambitions even in fixed income
Speaker 1: currencies and commodities. UH, in wealth management they want to
Speaker 1: manage money for very rich people. Who doesn't UM, But
Speaker 1: I do want to talk a little bit about some
Speaker 1: more fundamental challenges that JP Morgan faces along with the
Speaker 1: rest of the banks. And this goes to really what
Speaker 1: you wrote about, uh in the Bloomberg Markets article, which
Speaker 1: is the technological infrastructure of these banks is becoming increasingly crucial.
Speaker 1: And in that race, who's winning? So yeah, I mean
Speaker 1: that the story we wrote, UM, you know, sort of
Speaker 1: an epic tail UM and it's online right now about
Speaker 1: the arms technological arms race in you know, arguably the
Speaker 1: most iconic trading market UM in the world, which is
Speaker 1: the stock market. UM. This is another instance in which
Speaker 1: the advantages of scale become greater and greater over time. UH.
Speaker 1: And and one reason why people are concerned about Japan
Speaker 1: Morgan's entry into the space. UM when you have when
Speaker 1: you have a leading you know, so it's sort of
Speaker 1: top The thing that's said is that only people in
Speaker 1: the top three inequities make any money. Why is that?
Speaker 1: That's because if if you're not on the top three
Speaker 1: you're essentially subsidizing the business. And in order to spend
Speaker 1: enough money in enough money on technology to remain current, UM,
Speaker 1: you need to be making a lot of money. And
Speaker 1: if you're not in the top three, you're you're essentially
Speaker 1: not clearing the hurdle to make enough money to invest
Speaker 1: to be relevant tomorrow. And that's what you've seen happen
Speaker 1: to a lot of players. Top players like Credit Sweets,
Speaker 1: who was maybe number two or number one just a
Speaker 1: few years ago, fallen a lot since then. UM. JP
Speaker 1: Morgan is has you know, grown by leaps and bounds,
Speaker 1: UM in this space. You know, Goldman Sacks was number
Speaker 1: one just a few years ago. They had thirteen billion
Speaker 1: in inequities revenue in two thousand and nine, I want
Speaker 1: to say a high water mark. This last year they
Speaker 1: had about half of that. What did Jamie Diamonds non
Speaker 1: JP Morgan chase ambitions? You know, I mean every time
Speaker 1: he he goes, he rattles off on these long, you
Speaker 1: know letters about what the United States should do. UM.
Speaker 1: You know you have to think and ask yourself, as
Speaker 1: this guy eventually want to be president, and UM, you
Speaker 1: know he said on the record, you know, look, I
Speaker 1: I'd love to be President's never gonna happen. I'm not
Speaker 1: gonna run. And so you know, you think he's going
Speaker 1: to be involved in some way in in the public
Speaker 1: discussion because he seems to be and it seems to
Speaker 1: be genuine on some level that he's passionate about these
Speaker 1: big picture problems that that the country faces. So just
Speaker 1: just moving forward with respect of the technological arms race. UM.
Speaker 1: Do you have a sense of who's winning? Yeah, look
Speaker 1: so JP Morgan UM. In many ways, it's it's a
Speaker 1: three way race between JP Morgan, Goldman Sachs, and Morgan Stanley.
Speaker 1: Morgan Stanley has for the past few years been number
Speaker 1: one because they have this lineage UM in essentially the
Speaker 1: type of technology, the type of trading that has become
Speaker 1: in vogue as you know, quants UH quant hedge funds
Speaker 1: are really the only UM asset class taking in tons
Speaker 1: and tons of money in the past few years to
Speaker 1: signal rentech. Those guys have just amazing track records UM
Speaker 1: and so Morgan Stanley was best position for that, and
Speaker 1: JP Morgan came in a few years ago decided to
Speaker 1: make a huge investment. You know, people talk about JP
Speaker 1: Morgan like they're the army. You know, when they want
Speaker 1: to invest, they're going to do so and come in
Speaker 1: guns blazing. And then you know, golden sacks never count
Speaker 1: golden sacks out right. Those guys are you know, or devious.
Speaker 1: And when they decide to um turn around and and
Speaker 1: and and strategically shift, they're going to commit to it.
Speaker 1: And so between those three they're all making huge strides
Speaker 1: right now. It's Morgan Stanley and JP Morgan who you
Speaker 1: are priming with if you are a quantitedge fund. Thanks
Speaker 1: very much for being with us. Hughs On, our finance
Speaker 1: reporter for Bloomberg News. You can follow Hugh on Twitter
Speaker 1: at Hugh Underscore on s o N. Peter Lynch, famed
Speaker 1: investor from Fidelity whose book One Up on Wall Street
Speaker 1: taught investors about something called invest in what you know.
Speaker 1: Sir John Templeton, famed investor, described the maximum point of
Speaker 1: pessimism as something as a psychological ally in his investing thesis.
Speaker 1: Here to help us talk a little bit more about
Speaker 1: these topics and how to apply them to your portfolio
Speaker 1: and to making money or rather not losing money, is
Speaker 1: Cole Smeed. He is managing director and co portfolio manager
Speaker 1: of a SMED Capital Management. They are based in Seattle.
Speaker 1: He helps to manage more than two point two billion
Speaker 1: dollars of customer assets. Cole, thank you very much for
Speaker 1: being with us. Maybe just draw on both of those
Speaker 1: famed investors and their description of how to use what
Speaker 1: some might describe as common sense without common emotion when
Speaker 1: it comes to investing. Well, yeah, I mean and Lynch
Speaker 1: and in Templeton are you well thought of, But there
Speaker 1: are many other investors that have applied, um to your point,
Speaker 1: PIM good psychological discipline in investing. Um, the most common
Speaker 1: thing we would say as a firmer, I would say
Speaker 1: it as as someone that that works in this field. Um,
Speaker 1: you have to be willing to do something different. So
Speaker 1: you know, even if you, as Lynch said, you know,
Speaker 1: you invest in what you know, Um, you want to
Speaker 1: get a good price and that usually has to be
Speaker 1: something different. So um. So it's the beauty of it
Speaker 1: today is in many ways the field is just as
Speaker 1: new as it's ever been because of what most people
Speaker 1: think are the roadblocks to be a successful stock picker,
Speaker 1: as Templeton and Lynch were. Okay, so let's talk about
Speaker 1: why you think it's successful or it's a good time
Speaker 1: to be a stock picker despite some of the roadblocks. Yeah,
Speaker 1: it's a great, great question, Lisa. I'm actually gonna, I'm gonna,
Speaker 1: I'm gonna put a shameless PIM plug in here. I
Speaker 1: was listening to the surveillance. I think this is about
Speaker 1: six seven weeks ago. Pim. You'd recommended a book by
Speaker 1: the title, uh it was called The Heart of the Matter, Okay,
Speaker 1: and talked about kind of the risks the doctors had
Speaker 1: taken in the in the fields and the study of
Speaker 1: the Heart. And I read it and it was a
Speaker 1: great book. I appreciate the recommendation. But one thing that
Speaker 1: I pulled out of it, there's a great picture of today.
Speaker 1: In the eighteenth century, one of one big problem was
Speaker 1: when people get aneurisms, how to deal with those. In
Speaker 1: the eighteenth century up until about seventeen eighty, we dealt
Speaker 1: with those by two ways. We either um one blood
Speaker 1: let or two. If it was aneurism you've got in
Speaker 1: your leg, we just you know, we would effectively cut
Speaker 1: off your leg. We'd amputate it. And that same thing
Speaker 1: as going on in the investing field today. For example,
Speaker 1: we are blood letting blood letting was done to reduce
Speaker 1: pressure and effectively reduced workload. Welcome to passive investing as
Speaker 1: its practice. It doesn't mean it's improving the the underlying
Speaker 1: patient's health, but it's accepted much like blood letting was
Speaker 1: in the eighteenth century. The other thing that we're doing
Speaker 1: today is institutions have cut themselves off from public equities altogether.
Speaker 1: I call it institutional amputation. The question, though, is is
Speaker 1: it helping the underlying investors to meet their needs or
Speaker 1: the institution to meet their goals? And and it doesn't
Speaker 1: spell as though it is. Well Cole all right, First
Speaker 1: of all, thanks thanks for the comment about the book,
Speaker 1: and I'll give you a couple others. The Heart Healers
Speaker 1: is another great book by James Forrester. Uh. The other book,
Speaker 1: The Matter of the Heart, is by Thomas Morris. And
Speaker 1: one of the things that I took take away from
Speaker 1: both of those books is we're talking about people who
Speaker 1: are mavericks and misfits because they are willing to do
Speaker 1: something and to behave in a way that is not conventional,
Speaker 1: because they are willing to take risks that then result
Speaker 1: in some empirical response. In other words, it's tested in
Speaker 1: the real world. And you know, we like to say
Speaker 1: they eat their own you know, cooking. In that case,
Speaker 1: it's meat capital. What are you people doing right now
Speaker 1: perhaps to take advantage of all this volatility and the
Speaker 1: downtrend that we're seeing recently in docks. Sure, So so
Speaker 1: to what I call it, what I cavy out this
Speaker 1: under is I put it under the heading of how
Speaker 1: can we improve the health of the underlying patient, or,
Speaker 1: as John Hunter did with aneurysms, how can we improve
Speaker 1: the quality of life. So, for example, um, if blood
Speaker 1: letting is what some people would do, let's examine blood
Speaker 1: letting today. In effect, blood letting is nothing bigger than
Speaker 1: a big tech bet. Okay, if big tech does not
Speaker 1: do wealth for blood letters, returns will be very poor.
Speaker 1: So there's kind of too risk one that they could
Speaker 1: do poorly in returns. Uh. And in those big cap
Speaker 1: tech stalks that are well liked, well adored, well followed,
Speaker 1: well covered by the street, and something that is not unique,
Speaker 1: as you pointed out, it's not different, um, But the
Speaker 1: flip side would be that you'd have to be asking
Speaker 1: for a greater encore than they've just had, the problem is,
Speaker 1: if you look statistically speaking, Um, you know, they've had
Speaker 1: quite a great run. And the question is how how
Speaker 1: often does that happen? You know, these things are cycles.
Speaker 1: Humans are humans. So I'd say from from that context,
Speaker 1: it just doesn't look like it's improving the underlying health
Speaker 1: of the patient or the quality of life versus. Hey,
Speaker 1: let's go into places like retail in media, which is
Speaker 1: getting excoriated in this environment despite the volatility you mentioned.
Speaker 1: There's merit there, there's there's there's returns that could be had,
Speaker 1: but you have to be willing to not blood let
Speaker 1: in this market environment, which, as we can see, you know,
Speaker 1: the flows are just horridly the opposite way that people
Speaker 1: want to blood let. And the question is how often
Speaker 1: does everybody want to do something does it benefit the
Speaker 1: underlying client? I want to push back a little bit
Speaker 1: because the underlying patient, frankly, has done brilliantly by investing
Speaker 1: in e t f s and passive funds, the track
Speaker 1: equities and risk your debt over the number of years.
Speaker 1: So I'm just trying to figure out, you know, how
Speaker 1: do you convince people that now is different when frankly,
Speaker 1: active managers have been saying that for years. Yeah, well,
Speaker 1: when we you can track. This is Dalbard produces studies
Speaker 1: looking at what does the active investor do versus what
Speaker 1: did the passive investor do over the same time periods
Speaker 1: and the longer the time period. Dal Bar's work shows
Speaker 1: that the active investor one when and that what they're
Speaker 1: tracking is what did the underlying client do, not necessarily
Speaker 1: what the funds did and or if they poured in
Speaker 1: the top they pulled out the low that affects the
Speaker 1: investor return. Um So, so the longer, according to dal
Speaker 1: Bar study, the longer the duration of the investor, the
Speaker 1: more alpha they gained over being a past investor when
Speaker 1: they chose to be active. Okay, so we work in
Speaker 1: long duration time periods. I know no one that is
Speaker 1: trying to invest for the next three years to fulfill
Speaker 1: their needs of their life. We're talking ten you know,
Speaker 1: in my case, god willing fifty plus years. But I
Speaker 1: say that because you know this idea that um you know,
Speaker 1: oh it's for example, dal Bar studies show that it's
Speaker 1: worked better to be a past investor last three years.
Speaker 1: So my question is that that's just a placebo effect.
Speaker 1: The old thing is, do not confuse uh, do not
Speaker 1: confuse brains with a bull market, and I would argue,
Speaker 1: much like you said, it's been great returns. The only
Speaker 1: problem is wearing a bowl market. What does a tough
Speaker 1: market look like? And the question is is the blood
Speaker 1: letting going to be the appropriate thing for people to
Speaker 1: do in a terrible market? Cold Smide, thank you so
Speaker 1: much for being with us. Cole Smide, Managing director and
Speaker 1: co portfolio manager at Smide Capital Management, with two point
Speaker 1: two billion dollars under management, making the case for active investors.
Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
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