Speaker 1: M This is Mesters in Business with Very Renaults on
Speaker 1: Bluebird Radio. This week on the podcast, I have an
Speaker 1: extra special guest. Her name is Samantha McLamore and she
Speaker 1: is a portfolio manager at Miller Value Partners where she
Speaker 1: co manages the Opportunity Trust Fund with famed investor Bill Miller.
Speaker 1: She is taking over the Opportunity Trust Fund from Bill
Speaker 1: over the next couple of months. That's the transition, uh,
Speaker 1: they created. And this is really quite a fascinating conversation.
Speaker 1: If you're at all interested in value investing, stock selection,
Speaker 1: portfolio construction, and what the difference between modern value investing
Speaker 1: and the sort of Ben Graham historical value investing is. Uh,
Speaker 1: You're gonna find this conversation to be absolutely fascinating. The
Speaker 1: fund has put up spectacular numbers and it's not all Bill,
Speaker 1: because she also runs the funds with Patient Capital Management,
Speaker 1: which is the institutional entity she owns and that works
Speaker 1: closely with Miller Value Partners, and her numbers have been
Speaker 1: quite spectacular. I'm just gonna say, with no further ado,
Speaker 1: my conversation with Samantha McLemore. This is Mesters in Business
Speaker 1: with Very Renaults on Bloomberg Radio. My extra special guest
Speaker 1: this week is Samantha McLamore. She is with Miller Value Partners,
Speaker 1: where she co manages the Opportunity Trust Funds with Bill Miller.
Speaker 1: She is also the founder and CEO of Patient Capital Management.
Speaker 1: She was named to Baltimore's forty under forty by the
Speaker 1: Baltimore Business Journal. Samantha McLemore, Welcome to Bloomberg Verry. Thank
Speaker 1: you so much. I'm so excited to be here. I'm
Speaker 1: a big fan of your podcast and I'm honored to
Speaker 1: be a guest. Well, well, it's my pleasure. We've had
Speaker 1: your partner, Bill Bill Miller on twice and he is
Speaker 1: always a fascinating conversation. Let's talk a little bit about
Speaker 1: how you met Bill. Tell us about how you got
Speaker 1: into the financial services industry. I think it's quite an
Speaker 1: interesting story. Yeah, you know, I always like to say
Speaker 1: that I want the job lotteries. So, um, Bill and
Speaker 1: I went to the same undergraduate school, Washington and Lee University. UM.
Speaker 1: I was graduating after the tech bubble birth. I thought
Speaker 1: I was going to go into investment banking. I was
Speaker 1: ready to do those all nighters live in New York City.
Speaker 1: I was really more interested in investment management, and I
Speaker 1: was a member of the investment club at the school.
Speaker 1: And Bill happened to come back the fall of my
Speaker 1: senior year in two thousand one to speak to the
Speaker 1: student body and attend some presentations of the investment club.
Speaker 1: So I met him then and UM I ended up
Speaker 1: asking him if I could send him my resume, UM
Speaker 1: and low and behold. UM. I got a job as
Speaker 1: a junior analysts with Bill straight out of college. I
Speaker 1: thought I was going to be there for a couple
Speaker 1: of years and go get my m b a UM,
Speaker 1: but I've worked with him for for twenty years now.
Speaker 1: How many people in your graduating class are still working
Speaker 1: at the first gig they got right out of scho
Speaker 1: That's a great question that I don't have the answer to,
Speaker 1: but but I know it's not many. It's not got
Speaker 1: to be very few. So so you started in the
Speaker 1: early two thousands, and you had quite a baptism of fire. UM.
Speaker 1: The flagship value trust funds in UM two thousand and
Speaker 1: eight fell about the Opportunity Trust Fund, UH fell even
Speaker 1: worse about tell us about that experience during the Great
Speaker 1: Financial Crisis, and what did you learn from that? Just
Speaker 1: a couple of years of mayhem. Yeah, that was It
Speaker 1: was definitely a you know, a terrible and painful experience,
Speaker 1: but it was it was one of the us learning
Speaker 1: moments and and uh you know, a chance for improvement
Speaker 1: and growth. And I think that often moments of pain,
Speaker 1: you know, create that opportunity for uh, you know, for growth,
Speaker 1: and so lots of lessons came out of that. I mean, certainly,
Speaker 1: if I reflect back on my career, probably living through that,
Speaker 1: you know, with hindsight, it was one of the most
Speaker 1: instructive and helpful uh you know things you know for
Speaker 1: me to do as an investor, and I got to
Speaker 1: do it, uh, you know, in a shielded way with Bill,
Speaker 1: you know, underneath build wing. But um, you know, we
Speaker 1: came out of that with with so many lessons about
Speaker 1: ways we could you know, improve our approach, and um,
Speaker 1: you know, I remember, you know, one of the benefits
Speaker 1: of working beside Bill is is I have all these
Speaker 1: memories of you know, these pivotal moments and these lessons
Speaker 1: from these pivotal moments. And I remember, you know, getting
Speaker 1: at a restaurant in New York with Bill and a
Speaker 1: couple of other fabulous investors in the fall of two
Speaker 1: thousand eight, and they were, you know, discussing how terrible
Speaker 1: the environment was and the risks. And I remember saying,
Speaker 1: you know, as a as a true value investor, and
Speaker 1: prices are down, and I was saying, but isn't this
Speaker 1: one of the great you know, buying opportunities. I remember
Speaker 1: them looking at me wide ied, you know, sort of
Speaker 1: um surprise, and with hindsight over the very long term,
Speaker 1: it was. But I probably didn't appreciate to the appropriate
Speaker 1: extent the nerror term, you know, survival risks, and and
Speaker 1: Bill has talked a lot about, you know, one of
Speaker 1: the keys to success in this business is being able
Speaker 1: to survive over the long term, because that's really difficult
Speaker 1: to do, to survive, you know, in different environments. But
Speaker 1: you know, there were there were so many lessons that
Speaker 1: came out of that. And one of our favorite quotes
Speaker 1: that we talked about a lot is Sir John Templeton's bowl.
Speaker 1: Markets are born on pessimism, grow on skepticism, which are
Speaker 1: on optimism, and die in euphoria. So really this bull
Speaker 1: market that we're still in today, I think, which is
Speaker 1: one of the strongest bull markets, and you know, you've
Speaker 1: compounded it. The SMP has compounded it close almost nineteen
Speaker 1: per years since then, which is nearly two times the
Speaker 1: longer term average. And uh, the amount of pessimism that
Speaker 1: this bull market was born on was you know, probably
Speaker 1: a once in a lifetime extreme and so um and
Speaker 1: it was it was a terrible environment. But we learned
Speaker 1: a lot of lessons about distinguishing between different types of
Speaker 1: crises and when do you play offense and when do
Speaker 1: you play the friends? And uh, you know, how how
Speaker 1: do you recognized risk signals? A lot of people, um,
Speaker 1: you know, use price to tell them about risks. So
Speaker 1: you know, many great investors I know of in the
Speaker 1: financial crisis put in you know, stop losses um into
Speaker 1: their process after that, which means the price is telling
Speaker 1: you about the risk. But um, you know, when we
Speaker 1: did an exhaustive review of our performance, I think what
Speaker 1: came out of that, you know, after that was after
Speaker 1: the financial crisis, after was really using finances or fundamentals
Speaker 1: more as a risk signal. And so to avoid those
Speaker 1: big losers or perennial losers. And so those can be
Speaker 1: the classic value traps where our company looks cheap, but
Speaker 1: it's not because it keeps you know, UM degrading over
Speaker 1: time or you know, in the financial crisis, many of
Speaker 1: those names looked cheap, but also they weren't because you know,
Speaker 1: the pressures you know, built and the what appeared to
Speaker 1: be the earnings power wasn't. There was extremely delayed. And
Speaker 1: so you know, that was you know, a way that
Speaker 1: we changed and adapted coming out of the financial crisis
Speaker 1: to be more sensitive to UM and change our reaction
Speaker 1: function a little bit to uh, you know, sell more
Speaker 1: if the fundamentals keep disappointing us rather than oh that's
Speaker 1: now more than price then and will buy more. Well,
Speaker 1: clearly you learn the lessons because when I look at
Speaker 1: the Opportunity Trust Fund that you co manage with Bill
Speaker 1: over the past five years or so, uh, it's averaged
Speaker 1: about percent a year, and that's outperformed. It's it's peers.
Speaker 1: So that's a that's pretty impressive, especially when you consider,
Speaker 1: you know, it's a nearly three billion dollar fund. This
Speaker 1: is not a microcap fund. It's a decent size. To
Speaker 1: what do you credit uh that run about performance? Yeah,
Speaker 1: and you know, I think that that's a great question.
Speaker 1: I mean, I think one, I fully believe that we
Speaker 1: have a process that's you know, demonstrated results for now,
Speaker 1: you know, for Bill for you know, over forty years,
Speaker 1: and I've worked with him for twenty, so I have
Speaker 1: a lot of confidence in our approach. But I also
Speaker 1: think that, um, you know, the markets go through these
Speaker 1: broad you know cycles, these longer term cycles. So when
Speaker 1: I got into the business, you know, before I got
Speaker 1: into business, when I was in college, we had this
Speaker 1: big text bubble and valuations got extreme. And then that
Speaker 1: first and I I joined Bill in two thousands two
Speaker 1: nearly at the lows of that tech bubble. Then we
Speaker 1: had this big bull market that was driven by global
Speaker 1: cyclicals and the emergence of China, um, you know, and
Speaker 1: the growth there. And then we had the housing bubble
Speaker 1: in the financial crisis, and then we had, you know,
Speaker 1: as I mentioned, this extreme period of you know, pessimism
Speaker 1: and what I think of is post traumatic stress disorder,
Speaker 1: you know, that resulted from the severity of the losses
Speaker 1: in the financial crisis. And in that environment, you know,
Speaker 1: post the financial crisis, you know, investors broadly really valued, um,
Speaker 1: not losing money over making money, so they prioritized minimizing
Speaker 1: volatility over earning returns. So that's the perfect environment earn returns,
Speaker 1: you know, to to behave uh, you know, in the
Speaker 1: opposite way. And and on the other hand, when people
Speaker 1: are chasing for returns and there's a lot of euphoria,
Speaker 1: that's when it makes sense to to you know, to
Speaker 1: really prioritize lower volatility. So I think, you know, coming
Speaker 1: off the financial crisis, I think we have capitalized on
Speaker 1: opportunities when when we believed, uh, there was high perceived risk,
Speaker 1: but actual risk, real risk was much lower. And um,
Speaker 1: I think that that's been a very profitable strategy. And
Speaker 1: a good example of that is you know, home builders
Speaker 1: and banks and so you know, those companies obviously were
Speaker 1: hit the hardest and hurt the most in the financial crisis. Um,
Speaker 1: but they made some of the biggest fundamental changes to
Speaker 1: their balance sheets and how they operate. Coming out of
Speaker 1: the financial crisis, for the fundamental picture was really much different.
Speaker 1: And uh, you know in two thousand oven at the
Speaker 1: end of that year, Um, you know, those names all
Speaker 1: traded down. Uh. You know, there's a lot of fear
Speaker 1: about Europe breaking up and the year Zone debt crisis.
Speaker 1: And at the same time, the fundamentals for the home
Speaker 1: builders were you know, improving for the very first time,
Speaker 1: and so it was a stark, stark disconnect and and
Speaker 1: they've all, you know, outperformed the market nicely over the
Speaker 1: past decade, even though it's been a challenging environment for
Speaker 1: for value stocks or for UM stocks that weren't high growth.
Speaker 1: So I think that that's helped us. And I think
Speaker 1: remaining focused on the long term and the long term opportunities.
Speaker 1: We talk a lot about time arbitrage and UM the
Speaker 1: ability to stay focused on the long term. And you know,
Speaker 1: we tend to hold names at least three to five years,
Speaker 1: but some names will own you know, Amazon we've owned
Speaker 1: for decades. So when when you say time arbitrage, are
Speaker 1: you referring to some people with a shorter time horizon
Speaker 1: giving into volatility and selling and you using the volatilities
Speaker 1: and opportunity to buy the dip. Yes, I think that's
Speaker 1: exactly right. So I think, UM, so again, if we
Speaker 1: if we are focused on, you know, what is the
Speaker 1: business worth and what does it look like in five years,
Speaker 1: then a lot of times the near term, Uh, there's
Speaker 1: a lot of noise in the near terms. That matters
Speaker 1: a lot less. If you can remain focused on that
Speaker 1: and I think at the aggregate market level, you can
Speaker 1: think about that really well. I mean, people react to
Speaker 1: you know, five percent pullbacks are very common. Ten percent
Speaker 1: pullbacks are pretty common. A lot of people sell on
Speaker 1: those moves, which, really, if you can remain long term,
Speaker 1: that doesn't make a lot of sense. I think the
Speaker 1: markets you know, up a little over half of all days,
Speaker 1: it's up seventy five percent a year of years, one
Speaker 1: year period it's up you know, eighty seven and a
Speaker 1: half percent of five year periods, of ten year periods,
Speaker 1: and a percent of twenty year periods. So why would
Speaker 1: you react to these normal market gyrations? Again, if you
Speaker 1: have a long term time horizon and you can remain
Speaker 1: you know, focused on that, your odds of making money,
Speaker 1: you know, and staying in the market are very high.
Speaker 1: So we we try to think about, you know, as
Speaker 1: we think about risk like real impairments to capital, or
Speaker 1: as I think about opportunities. Now, maybe an example is UM,
Speaker 1: you know, I think there's you know, great value and
Speaker 1: a great opportunity and um some of the airlines and
Speaker 1: we own Norwegian Cruise Line, and so when we're thinking
Speaker 1: about what does that business model look like and what's
Speaker 1: this earning power, with this cash generation, with his growth
Speaker 1: potential you know, over five years. Then shorter term moves,
Speaker 1: whether it's Amy Cron popping up and cancelations in the
Speaker 1: near terms, they just matter a lot less unless you
Speaker 1: believe that they're going to be continuing for you know,
Speaker 1: a much longer duration, really really interesting. And you're taking
Speaker 1: over from Bill the full management of the Opportunity Trust fund,
Speaker 1: is that right, That's correct. We just announced a succession
Speaker 1: and transition plans, so nothing is changing in the short term.
Speaker 1: But I will assume responsibility for management of the Opportunity Trust,
Speaker 1: you know, once Bill goes off at the end of
Speaker 1: the year, and you know, I will assume management of
Speaker 1: the team and UM. You know that will be done
Speaker 1: through Patient Capital, which you mentioned that I started in early.
Speaker 1: Bill is a minority UM owner and investor and Patient.
Speaker 1: He's you know, a great mentor of mine, and I
Speaker 1: joke with him that, you know, I've worked with him
Speaker 1: for twenty years now and I intend to work with
Speaker 1: him for twenty more. And so I Bill and I
Speaker 1: will keep I will keep talking to Bill about markets
Speaker 1: and about companies, you know, for as long as I can.
Speaker 1: But the formal responsibilities and structure will change as we
Speaker 1: execute this. And could you explain the relationship between Patient
Speaker 1: Capital and Miller Value. I know Bill owns a piece
Speaker 1: of Patient Capital, and Patient Capital does work for Miller Value,
Speaker 1: but to the outside world it's a little complex and confusing. Yes. So, um, So, first,
Speaker 1: you know, I've worked with Bill and we were at
Speaker 1: leg Mason and then split off from the rest of
Speaker 1: our group and Miller Value Partners became independent, and so
Speaker 1: I'm still an employee and a co manager with Bill
Speaker 1: at Miller Value Partners. Um. I launched Patient in and
Speaker 1: the drivers for that were you know, there were a
Speaker 1: few one Um, when Bill you know, launched Miller Value
Speaker 1: or we split off, he would he would always describe
Speaker 1: it as a family office and he would welcome like
Speaker 1: minded investors. He'd been at leg Mason for many years,
Speaker 1: built a big business, you know, managed a big team.
Speaker 1: He wasn't interested, um in doing that anymore. You know,
Speaker 1: I'm younger. I wanted to prove myself. I was interested
Speaker 1: in in building a business and growing something. I also,
Speaker 1: you know, so we had a retail business primarily. You know,
Speaker 1: all of our assets were in you know, the mutual
Speaker 1: fund and our overseas, uh you know, fun, and we
Speaker 1: didn't really have an institutional business. We did back in
Speaker 1: the leg Mason days, but we we hadn't. And again,
Speaker 1: Bill was an interest in growing a business. So I
Speaker 1: saw an opportunity, um, you know, to build a business.
Speaker 1: And there was also you know demand for women and
Speaker 1: minority um owned uh you know, investment opportunities. So I
Speaker 1: saw that opportunity as well. I was also interested in
Speaker 1: growing the team and um and again you know, to me,
Speaker 1: the mission is extremely important. And I love this idea
Speaker 1: of you know, the partners first and clients first approach.
Speaker 1: And Charlie Ellis talked a lot about you know, per
Speaker 1: distinguishing between the profession versus the business and how you know,
Speaker 1: investment investment managers should operate more as a profession in
Speaker 1: other words, doing what's best for the client, rather than
Speaker 1: as a business doing what's best for the business. So
Speaker 1: the idea of building a business around that. And also
Speaker 1: you know the importance of role models and and um,
Speaker 1: you know, I'd love to help provide more women role
Speaker 1: models for young girls out there. I have two daughters.
Speaker 1: You know, the more people they see like them, uh,
Speaker 1: you know, doing a job I think the more they
Speaker 1: can see themselves doing it, them and others like them.
Speaker 1: And so I set this up, and you know, I
Speaker 1: hired a few employees. We were co operating, We have
Speaker 1: co operated, so really it's the same team at both
Speaker 1: and on the portfolio management side, I view us as
Speaker 1: operating as one team, one philosophy, one process, and so
Speaker 1: we're just doing the work of, um, you know, finding
Speaker 1: investment opportunities that we think are really attractive and then
Speaker 1: um if if if I think they're attractive, they going patient.
Speaker 1: And then Bill and I are having the conversation on
Speaker 1: the opportunity side, and so there's a co decision maker
Speaker 1: making function there. So really it's I see it as
Speaker 1: a streamline process of you know, all the same work,
Speaker 1: you know, and then will distinguish at the decision making
Speaker 1: level between where things go. But this also created a
Speaker 1: structure that allowed the transition to happen quite smoothly, because
Speaker 1: you know, we can just assume again we have to
Speaker 1: go through the process and get the approvals, but we
Speaker 1: can assume and transfer over uh you know, the fun
Speaker 1: contracts and the employees and and really do it in
Speaker 1: a seamless stable way. So let's talk a little bit
Speaker 1: about value investing the way Bill Miller, and I'm going
Speaker 1: to assume you by extension, look at value. Isn't the
Speaker 1: traditional Benjamin Graham classic value? Is that a fair statement?
Speaker 1: And if it is, explain why? Well, I would say,
Speaker 1: we still have a you know, a lot in common
Speaker 1: with uh, you know Ben Graham's classic value model. I mean,
Speaker 1: I had The Intelligent Investor is one of my favorite books.
Speaker 1: I have a doggyeared I have it sitting on my
Speaker 1: bookshelf right next to my desk. I refer to it.
Speaker 1: And so there's many things about that classic approach that
Speaker 1: I think are similar. Um. So, you know, he talks
Speaker 1: a lot about distinguishing between price and value, so prices,
Speaker 1: what you pay, value is what you get, um, making
Speaker 1: that distinction, doing you know, careful company analysis to understand,
Speaker 1: you know, what the value of the businesses. He talked
Speaker 1: a lot about market behavior and how fluctuating prices to
Speaker 1: create opportunities for investors to take advantage of, you know,
Speaker 1: the behavioral extremes of greed and fear that the market, uh,
Speaker 1: you know undergoes. And so there's a lot that's very
Speaker 1: very similar. I would say, you know, really what's different.
Speaker 1: And I would characterize it as an evolution. And it
Speaker 1: didn't really start with us, because you know Warren Buffett,
Speaker 1: who's a student of Ben Graham Um. Again, he used
Speaker 1: to do the cigar but sort of investing, and then
Speaker 1: you know, he really evolved his approach and talks about
Speaker 1: you know, he'd met rather buy a wonderful business at
Speaker 1: a fair price than a fair business at a wonderful price.
Speaker 1: And so the idea of extending out that time horizon
Speaker 1: and compounding again, you know, I think that's directionally the stuff.
Speaker 1: And then maybe Bill certainly was criticized in the late
Speaker 1: nineties early two thousand's, I don't know when it stopped,
Speaker 1: but for not being a true value investor, for investing
Speaker 1: in names like A. O. L. And Dell and Amazon,
Speaker 1: these names that appeared, you know, very high multiple. But
Speaker 1: when I joined Bill, I think one of the things
Speaker 1: that struck me the most because again, when when I
Speaker 1: reviewed UM, we bonded over very classic value. That was
Speaker 1: my natural orientation, and so we shared that. But what
Speaker 1: I didn't appreciate much and and you know I remember
Speaker 1: Bill talking about listen, you know, during this time when
Speaker 1: he was criticized, he was like, no one knows what
Speaker 1: the best values in the market are today. We just
Speaker 1: don't know because it depends on the future, and we
Speaker 1: don't know the future. But we do know, and we
Speaker 1: can look back over a long term, over say ten years,
Speaker 1: and say, what were the best values ten years ago,
Speaker 1: because you can see what has done the best, and
Speaker 1: so we actually know what that is. And when we
Speaker 1: look at that, the best values in the market are
Speaker 1: always you know those names that can you know drive, uh,
Speaker 1: you know, profitable growth and free cash flow growth and
Speaker 1: business value growth the best. So they tend to be
Speaker 1: you know, in the in the short term, they appear
Speaker 1: to be higher you know, multiple businesses because um, you know,
Speaker 1: they're prospects, are you know, the most attractive? And so
Speaker 1: he said, why would you engineer a process that explicitly
Speaker 1: excludes what you know are the best values in the market.
Speaker 1: And that doesn't make a lot of sense to me. Uh,
Speaker 1: That's what he said, and I agree with that wholeheartedly.
Speaker 1: And so what we attempt to do is, um, be
Speaker 1: open minded to looking for what might be the best
Speaker 1: opportunities over you know, truly a long term basis. And
Speaker 1: I think Ben Graham would talk about those as more speculative.
Speaker 1: And again, if if those beginning expectations are higher and
Speaker 1: you're more dependent on truly long term fundamentals UM, you know,
Speaker 1: there was a higher perceiver risk there, and there's probably
Speaker 1: there is a higher real risk there too, I would agree,
Speaker 1: because the percentage of companies that actually can go on
Speaker 1: to execute that UM is low, and the number of
Speaker 1: companies who are priced to you know, achieve those sort
Speaker 1: of outcomes are much higher than the companies that actually do.
Speaker 1: But you know, Will has always been open minded. We
Speaker 1: are open minded about trying to identify and invest, you know,
Speaker 1: over the long term, and opportunities like that really interesting.
Speaker 1: So I want to delve a little more into how
Speaker 1: you guys define value because you mentioned Amazon before. Most
Speaker 1: investors think of Amazon as a growth stock, in part
Speaker 1: because it's grown so much and in part because it's
Speaker 1: got such a technology um aspect to it, although arguably
Speaker 1: the bulk of their revenues come from just being a retailer,
Speaker 1: albeit one that has a rather substantial online presence. How
Speaker 1: do you define Amazon as a value stock over the
Speaker 1: past twenty years? Well, I guess back to the story.
Speaker 1: What we know is Amazon, What was one of the
Speaker 1: best you know, most undervalued stocks twenty years ago, because
Speaker 1: we can look at how it's done since. So it
Speaker 1: didn't appear that way on the near term fundamentals at
Speaker 1: the time. You know, near term I guess metrics, accounting
Speaker 1: metrics at the time, but we know with hindsight that
Speaker 1: it was. And so when we talk about how we
Speaker 1: define value or what we see as value, you know,
Speaker 1: we use the standard textbook definition. So the value of
Speaker 1: any investment is the present value of the future free cashloads.
Speaker 1: And no one really disagrees with it. It's about how
Speaker 1: do you identify or calculate those and we do scenario analysis.
Speaker 1: But you know, I think many times, you know, the
Speaker 1: simplification of dividing the world between growth and value it is,
Speaker 1: you know, it is an oversimplification. And you know, Buffett
Speaker 1: talks about growth being an input in the value equation,
Speaker 1: and that's absolutely entirely true because it is a you know, again,
Speaker 1: if a company can earn above its cost of capital,
Speaker 1: you know, growth will be the most important value driver
Speaker 1: and um and so again we Amazon still may look
Speaker 1: expensive on current metrics, but we're always again we're focused
Speaker 1: on the long term for our companies. We're doing at
Speaker 1: least ten year discount of cash hole models. And Amazon
Speaker 1: has we believe, you know, some of the best, if
Speaker 1: not the best, competitive advantages in the market. It still
Speaker 1: has great growth potential. Uh you know, it has a
Speaker 1: number of different has the retail business, as logistics business,
Speaker 1: has AWS, it's it's investing in new areas like healthcare.
Speaker 1: And so when we look at it, we think, you know,
Speaker 1: if you just even if you just mark to market there,
Speaker 1: you know cloud business, the AWS and their advertising business,
Speaker 1: you're getting the retail business for you know, pretty close
Speaker 1: to free right now. And again, they've just gone through
Speaker 1: an investment cycle. Um and Amazon typically doesn't hasn't historically
Speaker 1: traded well when it's gone through one of those, but
Speaker 1: coming out the other side, it's normally done much better
Speaker 1: and it's about to drive significant pre cash flow. But
Speaker 1: we're always trying to think carefully about the business and uh,
Speaker 1: you know, it's ability to drive that long term pre
Speaker 1: cash flow and how that compares to what's embedded in
Speaker 1: the current stock price. So here's a question I always
Speaker 1: wrestle with and I speak to my c f A buddies,
Speaker 1: and I'm never satisfied with the answers I get when
Speaker 1: you have a company like Amazon enter Jeff Bezos retires,
Speaker 1: or Apple and they lose Steve Jobs, how do you
Speaker 1: figure that into your calculus as to what the company
Speaker 1: looks like going forward. It's pretty clear both of those
Speaker 1: former c e o s were enormously influential on the
Speaker 1: success of the companies. How do you calculate the loss
Speaker 1: of such significant executives. Yeah, no, that's a great question.
Speaker 1: I'll probably disappoint you with my own my answer too. So,
Speaker 1: um so, I think probably the reason you're disappointed is
Speaker 1: I don't think it's easy to calculate, you know, the
Speaker 1: impact of that. Uh, it's not easy to quantify. I
Speaker 1: think in both those cases, you know, Steve Jobs and
Speaker 1: Jeff Bezos, we know that they were critical to driving
Speaker 1: you know, the innovation that those companies produced. Um. Apple
Speaker 1: has gone on to do extraordinarily well, uh, you know
Speaker 1: post Steve Jobs, which was questioned, you know, for a
Speaker 1: long time after the death, despite the fact that many
Speaker 1: would argue they haven't come out with, you know, any new,
Speaker 1: big innovation. They've driven it all on the existing base
Speaker 1: of business. And so again, I think you can also
Speaker 1: think through an Amazon again, I think we like to
Speaker 1: think about and I know you've had Michael Mogison on here,
Speaker 1: and I worked with Michael, and he's wonderful, and you know,
Speaker 1: he talked a lot about and just came out with
Speaker 1: his expectations investing that his new version of the book
Speaker 1: and and our approach, you know, is created from his process.
Speaker 1: And so we think a lot about what is embedded
Speaker 1: in the current stock price. And so sometimes it makes
Speaker 1: it easier to think through issues like that because if
Speaker 1: we believe that Amazon, you're not even paying for the
Speaker 1: retail business at the current crisis, then you're not paying
Speaker 1: for any of the you know, later innovation that maybe
Speaker 1: would be more at risk without Jeff. Again, I know
Speaker 1: that Amazon believes, and Jeff believes, and the folks there
Speaker 1: believe that what makes one of the things that makes
Speaker 1: Amazon special is they've created a machine that can produce
Speaker 1: innovations and upscale and so Jeff really was very explicit
Speaker 1: about creating processes and structures to do that. Now it
Speaker 1: will have to see whether they pull that off, you know,
Speaker 1: if he's less involved, and that's that's no one knows
Speaker 1: the future. We don't know, but we don't think we
Speaker 1: don't think that needs to happen, uh, you know, for
Speaker 1: the stock to still be attractive, given the total addressable
Speaker 1: markets of their proven businesses where they're already you know,
Speaker 1: very far along and um and so again, it is
Speaker 1: a difficult questions to answer. I think I don't necessarily
Speaker 1: think you always need to answer it. So let me
Speaker 1: ask you, um a different question that might be more
Speaker 1: in your sweet spot, which is, you know, it appears
Speaker 1: to someone like me that Bill Miller and yourself have
Speaker 1: a somewhat different approach to value investing that puts a
Speaker 1: heavier weight on future growth prospects. But it also appears
Speaker 1: that lots and lots of quote unquote traditional value investors
Speaker 1: are still approaching that methodology the way it was taught
Speaker 1: in the nineteen fifties. Why do you think so many
Speaker 1: people are stuck with you know, the classic version of this,
Speaker 1: where perhaps they're missing companies like Amazon for you guys,
Speaker 1: or you mentioned Warren Buffett, one of the biggest investors
Speaker 1: in Apple over the past couple of decades. Why have
Speaker 1: p people been so slow to adjust? Yeah, that's a
Speaker 1: great question. I mean, I think that most investors that
Speaker 1: have survived and exist today have evolved and now you
Speaker 1: see in value portfolios a lot of these names like
Speaker 1: Google and Facebook and Amazon. So what you don't see
Speaker 1: and where we might be a little bit different is
Speaker 1: again if you go you know, down the spectrum of
Speaker 1: companies earlier in their life cycle, where it's less proven
Speaker 1: what the business model is or what the you know,
Speaker 1: earnings potential can be. We are willing to look at
Speaker 1: names like that, and I think you know, many value
Speaker 1: investors aren't comfortable with that. UM I think you know
Speaker 1: Warren Buffett for a long time. You know, he talked
Speaker 1: a lot about your circle of competence and making sure
Speaker 1: you define what your circle of competence is, and and
Speaker 1: he didn't believe that he you know, technology was within
Speaker 1: his circle of competence. I think one thing that allowed
Speaker 1: Bill to make investments in there's technology companies in the
Speaker 1: late nineties was his relationship with the Santa Fe Institute,
Speaker 1: which he talks a lot about and they do, um,
Speaker 1: you know, research on complex adoptive systems and you know,
Speaker 1: broad cross sectional research and the work of Brian Arthur
Speaker 1: who has studied complexity economics and he wrote, you know,
Speaker 1: increasing returns and past dependence and you know he wrote
Speaker 1: the book on that, and he allowed Bill to realize,
Speaker 1: you know, early in the nineties that while technologies changed quickly,
Speaker 1: and that was always buffetts concern is these companies can
Speaker 1: earn you know, great returns for a very short term,
Speaker 1: uh for the very short term, but then they're disrupted
Speaker 1: because you know, some new technology comes along. And Brian's
Speaker 1: work showed that while the technologies change um quickly, technology
Speaker 1: market share actually doesn't. And so, you know, the biggest
Speaker 1: monopolies in history have have been based on technology, whether
Speaker 1: it's you know, A T and T or Microsoft. And
Speaker 1: now there's all the um, you know, consternation and hearings
Speaker 1: on the current big technology companies. So there is lock
Speaker 1: in and past dependence that makes uh, you know, the
Speaker 1: stability of those earnings much better than it would appear
Speaker 1: if you're looking at you know, the individual products products,
Speaker 1: and I think the reason you know, people aren't more
Speaker 1: comfortable going you know, for the earlier stage companies um
Speaker 1: and then Graham talks a lot about you know, companies
Speaker 1: that are uh you know, loved or where the valuation
Speaker 1: just depends on uncertain prospects far in the future, them
Speaker 1: being much more speculative and we know that you know,
Speaker 1: growth is growth rate are not linear, so there can
Speaker 1: be higher volatility in those names. And we also know
Speaker 1: that um again, the companies that are able to be
Speaker 1: successful and drive that growth drive the market returns. UM.
Speaker 1: So it's you know, there's some work out of you know,
Speaker 1: the air Arizona State professor UM who showed that the
Speaker 1: entire wealth creation since I think the nineteen twenties has
Speaker 1: depended has been driven by four percent of companies. So
Speaker 1: it's really a very narrow set that creates all of
Speaker 1: the wealth. And what that means is most companies that
Speaker 1: aren't able to do that and um so there are
Speaker 1: many companies that are priced to do that and don't,
Speaker 1: and so there can be higher volatility. Amazon, you know,
Speaker 1: lost of its value after the tech bubble burst, Bill
Speaker 1: bought it all the way down. UM. So even if
Speaker 1: you could identify it, identify an opportunity, having the stomach
Speaker 1: to hold it and to add to it um and
Speaker 1: and and you know, retain it in the portfolio for
Speaker 1: as long as it takes to you know, capture the
Speaker 1: returns is pretty difficult and it's pretty hard to do.
Speaker 1: And so I think that that's why more people don't
Speaker 1: do it huh really quite fast and they So we
Speaker 1: were talking earlier about how you don't really fall neatly
Speaker 1: into any buckets, and the same as true for Bill Miller.
Speaker 1: But when I look at your specific portfolio, some of
Speaker 1: these names are are definitely outside of the traditional value
Speaker 1: universe matterport Capital one, Ali Baba, Gray Scale, Bitcoin Trust.
Speaker 1: I mean that is not your typical free cash flow uh,
Speaker 1: deep value stock. Tell us what it's like to be
Speaker 1: free from the shackles of the morning Star style box.
Speaker 1: I I think it's a huge advantage. UM, So we
Speaker 1: can we can look broadly for what we believe are
Speaker 1: the best opportunities, which I think definitely helps us construct
Speaker 1: portfolios that we think have the most potential. When you
Speaker 1: when you start putting in constraints, um, obviously that hinders
Speaker 1: your ability to optimize because they hurt your flexibility. So
Speaker 1: you know, Bill I mentioned earlier, talks a lot about
Speaker 1: how difficult it is to survive in this business, and
Speaker 1: he outperformed in the late nineties during the tech bubble
Speaker 1: and then also in the early two thousand's, you know,
Speaker 1: when the tech bubble burst, and um, what enabled him
Speaker 1: to do that with his ability to shift between so
Speaker 1: called style boxes. He had tech investments, uh you know
Speaker 1: in the late nineties that helped. They were the only
Speaker 1: thing that outperformed, so you had to have them to outperform.
Speaker 1: But then and I think it's one of the greatest
Speaker 1: calls in the history of the business. He uh you know,
Speaker 1: in early two thousand thought it was game over and
Speaker 1: massively took down his holdings in those sort of names
Speaker 1: and so um you know, took the more classic value
Speaker 1: names up, which is what did well when the tech
Speaker 1: bubble burst. So again having you know, if he if
Speaker 1: he had been constrained in one or the other of
Speaker 1: growth or value, that wouldn't have been possible because it
Speaker 1: was so segmented. What what did well? So I think
Speaker 1: that having that flexibility is critical to you know, generating
Speaker 1: long term returns. It it can hurt your ability to
Speaker 1: grow assets because you know, the institutional marketplace is you know,
Speaker 1: set up and structured in a way, um that you
Speaker 1: can be precluded if if you operate like that. But
Speaker 1: that's okay because you know, I think we'd rather produced
Speaker 1: excellent returns for fewer clients than mediocre returns for many.
Speaker 1: So style boxes matter at least if you're looking for
Speaker 1: institutional clients. Yeah, I mean, I think Warren Buffett. You know,
Speaker 1: he talks about, you know, the keys are what he
Speaker 1: thinks is are the keys to being a great investor,
Speaker 1: and um, he talks about emotional emotional stability, UM, independent thinking,
Speaker 1: and a keen understanding of institutional and individual behavior. So
Speaker 1: i Q doesn't make it up on that list. But
Speaker 1: you know, the reason behavior is is so important is
Speaker 1: because again, uh, you know, there are structures and constraints
Speaker 1: that pop up that create certain opportunities. Again, the markets
Speaker 1: are very efficient and so it's very difficult to outperformed,
Speaker 1: so there has to be some reason, you know, or
Speaker 1: something that's existing that you know creates an opportunity and
Speaker 1: makes the market wrong. And those aren't easy to come by.
Speaker 1: So again, if people are defaulting to a certain behavior
Speaker 1: that might be suboptimal from a return perspective, that uh,
Speaker 1: you know that doing the opposite might be what helps
Speaker 1: you burn returns. So how much do you and build
Speaker 1: together buy into the Peter Lynch philosophy of by what
Speaker 1: you know? It seems like a lot of the companies
Speaker 1: that you're an investor in, you guys have a very
Speaker 1: deep pool of um familiarity with and over and above
Speaker 1: what we traditionally think of as a basic research return.
Speaker 1: Do you buy into the Lynch philosophy? Well, any great
Speaker 1: investor who's done really well and and earned returns. I
Speaker 1: try to learn whatever I can from them, and the
Speaker 1: same It's true a Bill and so certainly I've studied
Speaker 1: Peter and UM. And I think that if you have
Speaker 1: an intimate experience with a product or a company, you
Speaker 1: can understand it, you know, in a you know, in
Speaker 1: a more in depth way. And so uh that might
Speaker 1: you know, when when we bought Peleton, for instance, UM,
Speaker 1: I had that idea because um of my personal experience
Speaker 1: with Peloton, and my husband had asked for a Peloton
Speaker 1: for Christmas, and I said, are you kidding me? I'm
Speaker 1: a value investor. Do you know how much those bike's costs?
Speaker 1: But you know, I was trying to beat such a
Speaker 1: nice life, So I got him the Peloton And this
Speaker 1: is before it came public, and I ended up you know,
Speaker 1: I wasn't a big spin or bike person, but I
Speaker 1: ended up using it so much more than I would
Speaker 1: have ever expected, and they had broader programming and I
Speaker 1: loved it. And I didn't really go to the gym
Speaker 1: anym war and uh so when it came public, you know,
Speaker 1: we wanted to do the work on it and see
Speaker 1: what the valuation was on it. And again I thought
Speaker 1: it was highly misunderstood. Um you know at that time.
Speaker 1: It's you know again, I think people started to understand
Speaker 1: it better in the UM in the financial crisis when
Speaker 1: they were such a huge beneficiary and we exited because
Speaker 1: we thought it became fully priced. But I still think
Speaker 1: it's misunderstood because some of those same old criticisms about
Speaker 1: it being a Scottish hardware company are now you know,
Speaker 1: back in vogue after its decline. But certainly, you know,
Speaker 1: if living in the world and coming across things, um
Speaker 1: I I definitely believe that that can be a source
Speaker 1: of both you know, better understanding and advantage and also
Speaker 1: you know, idea generation. So that raises an interesting question.
Speaker 1: You're both stock pickers at hard but obviously the macro
Speaker 1: landscape makes an impact, as we learned during the pandemic
Speaker 1: and lockdown. How much do you think about what's going
Speaker 1: on in the macro world. Does that affect how you
Speaker 1: construct your portfolio, doesn't affect stock selection or is it
Speaker 1: just one of those things that you have to grit
Speaker 1: your teeth and deal with. Well. I think Bill is
Speaker 1: one of the best macro spinkers that I've ever encountered,
Speaker 1: and so I've been fortunate to learn from him. I
Speaker 1: remember when I joined him and sitting in our first
Speaker 1: research meetings and going home and feeling like I had
Speaker 1: drank from a fire hose because it was such a
Speaker 1: learning curve that I had not really been exposed to.
Speaker 1: So we certainly expend effort trying to understand the environment
Speaker 1: that we're operating in, and you know that that can
Speaker 1: take significant time and trying to think about it. We
Speaker 1: do construct portfolios and selected investments on a bottoms up basis. Uh,
Speaker 1: you know, we do scenario analysis, so we're trying to
Speaker 1: understand the value of businesses in a range of SCE
Speaker 1: areas because we don't know the future. But obviously, you know,
Speaker 1: the environment can interact critically with the fundamentals of businesses,
Speaker 1: so you have to try to understand, you know, the
Speaker 1: environment in which you're operating. So so we definitely do that. Interesting. Um,
Speaker 1: you mentioned how efficient the markets have become. How do
Speaker 1: you look at the shift from active to passive. Is
Speaker 1: that changing markets? Does that affect the way you think about, um,
Speaker 1: how quickly information gets built into price. Yeah, that's a
Speaker 1: great question, and it's definitely uh, you know, a big
Speaker 1: secular trend that we expect to continue. Um so I
Speaker 1: haven't and we haven't seen data or evidence to support
Speaker 1: that it's made the markets less efficient yet, although you know,
Speaker 1: there's a lot of speculation that it will at some point,
Speaker 1: and you would think it would at some point. I know,
Speaker 1: you know, I know some folks at Santa Fe are
Speaker 1: now uh studying whether there's any evidence that you're you know,
Speaker 1: seeing that. Um, you know, I guess we have seen
Speaker 1: certain market structure issues that I think do lead to
Speaker 1: some you know, inefficiencies and whether it's uh we talked
Speaker 1: about time arbitrage, show the market becoming so short term
Speaker 1: focus that it creates some inefficiencies on longer time horizons,
Speaker 1: or you know, with all the ets that have popped
Speaker 1: up and now you know, back in the days when
Speaker 1: Bill built the business, you know, there were financial advisors
Speaker 1: and their number one job what they did was they
Speaker 1: selected stocks and now that's hardly ever the case. They're uh,
Speaker 1: you know, allocators and there you know, allocating capital between
Speaker 1: different opportunities, and they use ets so we can see
Speaker 1: from time to time. Again, just the homogenization where stocks
Speaker 1: will move together as a group in the short term,
Speaker 1: irrespective of fundamentals. I think over the long term the
Speaker 1: market can sort that out, but in the short term
Speaker 1: it may not. You know, there might be some micro structure,
Speaker 1: you know, inefficiencies there. Again, I haven't seen data to
Speaker 1: actually support that. It's it's more just observing, uh, you know,
Speaker 1: the behavior. So people love to talk about stocks, but
Speaker 1: we rarely hear people talk about portfolio management, which is
Speaker 1: a very different skill. How do you figure out how
Speaker 1: to spread your bets out across different sectors and and
Speaker 1: how to size different positions. Yeah, I think it's a
Speaker 1: great question. You're right, people don't focus on it enough
Speaker 1: for a lot um. I again, I feel so fortunate
Speaker 1: to have learned from Bill on this. Uh. You know,
Speaker 1: I'm not sure if you're familiar with Novous, but they
Speaker 1: study managers and actually look at, you know, where their
Speaker 1: edges or where they have a competitive advantage. And when
Speaker 1: they looked at you know, the history of the fun
Speaker 1: and the history of Bill, Uh, they actually identified sizing
Speaker 1: as a strength and you know, an advantage and something
Speaker 1: that uh you know, generated returns. So I've been very
Speaker 1: fortunate to learn from him on this. I think, you know,
Speaker 1: the overall objective is to uh, you know, size positions
Speaker 1: relative to risk adjusted returns and so um you know,
Speaker 1: so our typical starting position size is anywhere from two
Speaker 1: to two and a half percent. But again if it's
Speaker 1: we could have a one percent position if it's higher risk.
Speaker 1: But you know, if it's a binary biotech where you know,
Speaker 1: I might lose all its money or it's going to
Speaker 1: go up a lot. Again, I think you know I've
Speaker 1: occurred Dennis Lynch, you know, talking about you know, there's
Speaker 1: a place in the portfolio for investments like that. You
Speaker 1: just have to size them uh correctly and then you know,
Speaker 1: we can go larger if we have high conviction um
Speaker 1: in in a name and really you know, we might
Speaker 1: start at three. But what we try to do is
Speaker 1: let our winners run and again you know, we'll let
Speaker 1: names get to a large you know, percentage of the
Speaker 1: portfolio again if they work. And one of the behavioral
Speaker 1: uh flaws that people tend to do is you know,
Speaker 1: sell their winners and to their losers. So we explicitly
Speaker 1: try to you know, counteract that and let our winners
Speaker 1: run and so we can have you know, more concentrated
Speaker 1: positions at the at the top of the portfolio, you
Speaker 1: know from that. Yeah, Bill has talked about in the
Speaker 1: past that if you're gonna just hug the benchmark and
Speaker 1: have nothing but one percent positions, you're you're less of
Speaker 1: an active manager than you are a closet indexer, which
Speaker 1: I assume implies that you guys build a little bit
Speaker 1: more of a concentrated portfolio. Yeah, that's exactly right. We um.
Speaker 1: You know, the academics have written about this concept of
Speaker 1: active share. So you know, they've quantified how different does
Speaker 1: your portfolio look from the benchmark and we have very
Speaker 1: high active share. Uh, you know, the academic re search
Speaker 1: suggests that, uh, you know that funds with high active
Speaker 1: share tend to do better. And that's for exactly the
Speaker 1: reason that you just mentioned that Bill talks about, which
Speaker 1: is if you're a closet indexer and your portfolio looks
Speaker 1: a lot like the benchmark, but then you just have
Speaker 1: higher fees, then that's the recipe for very consistent underperformance
Speaker 1: that compounds over time. And so we're very benchmark agnostic,
Speaker 1: and we're constructing portfolios, you know, from the bottoms up,
Speaker 1: and we're finding names and ideas that we think are attractive,
Speaker 1: and we're not paying a lot of attention to, uh,
Speaker 1: you know, whether they're in the benchmark or what their
Speaker 1: weight is in the benchmark. Again, are we have return
Speaker 1: objectives and we're trying to meet our return objectives over
Speaker 1: the long term. And obviously we do think about, you know,
Speaker 1: what kind of returns we think are possible, you know,
Speaker 1: for the market overall, because that's uh, you know, that's
Speaker 1: our bogey, that's what we want to be um. But
Speaker 1: but when we're constructing portfolios, we are concentrated and uh,
Speaker 1: you know, we have we're looking very different from the benchmark.
Speaker 1: So the other port folio construction question is the flip
Speaker 1: side of what to buy, which is how do you
Speaker 1: know when to sell something? Is is there anything in
Speaker 1: particular you look at, Um, it doesn't appear you guys
Speaker 1: use stop losses because both you and Bill and the
Speaker 1: fund have a history of being comfortable buying on the
Speaker 1: way down when a stock gets repriced and you mentioned
Speaker 1: Amazon as an example, how do you know when to
Speaker 1: fish or cut bait. Yeah, that's a great question. And UM,
Speaker 1: and I wish more people would do work on uh,
Speaker 1: you know, sell discipline and and and how to really
Speaker 1: improve that because you know, there's a lot of literature
Speaker 1: and and managers in general are you know, very good
Speaker 1: or much better on the buy side. And I think
Speaker 1: there's just a lot less focus on the sell side.
Speaker 1: And and some of our biggest mistakes again have been
Speaker 1: selling too early, really some of these big winners. And
Speaker 1: we filled Apple. We did quite well an Apple, but
Speaker 1: we filled it way too early. And so UM again,
Speaker 1: I think it's an area where the evidence indicates the
Speaker 1: scenario where UM most managers, all managers can improve. But
Speaker 1: when we sell something, we usually think about selling it
Speaker 1: in three scenarios. One, it reaches our assostsment of what
Speaker 1: the company is worth, so it becomes you know, fairly valued,
Speaker 1: and we don't think that we can earn access or
Speaker 1: turns um too, we conclude that we're wrong. And so again,
Speaker 1: if there's something about our investment case that we come
Speaker 1: to no longer believe, or again we talked about fundamentals
Speaker 1: continuous continuously disappointing us. UM, if we conclude were wrong
Speaker 1: for any reason that would be a reason to sell
Speaker 1: or you know, the third UM scenario is we find
Speaker 1: a better investment opportunity. So you know, we're always doing
Speaker 1: work on new names that if we come across something
Speaker 1: that we think is even more attractive, you know, we'll
Speaker 1: sell a name to fund you know, a new idea,
Speaker 1: really really interesting. So so we keep dancing around UM
Speaker 1: big kept tech. And one of the risk factors for that,
Speaker 1: or at least some people think it's a risk factor,
Speaker 1: is UM regulatory risk and the concept that you know,
Speaker 1: an Amazon on Facebook, of Google and Apple could get
Speaker 1: broken up. What are your thoughts on either regulatory risk
Speaker 1: or forcing what have become technological conglomerates to be broken
Speaker 1: up into their component pieces. Yeah, I think it's a
Speaker 1: great question. I mean, certainly there's a lot of regulatory
Speaker 1: and attention on these names, and so, uh, you know
Speaker 1: that risk exists. I will say, you know, even back
Speaker 1: I remember back at UM in our leg Mason Capital
Speaker 1: Management days in two thousand and eight, our analysts who
Speaker 1: covered Google recommended selling it because of regulatory risks. So
Speaker 1: this because it's not new, it's been around a long time,
Speaker 1: and the reason we haven't seen actual actions is because
Speaker 1: it's very complex and it's not easy to figure out
Speaker 1: what the right regulations should be. So um. So again,
Speaker 1: you know, I would expect, you know, something, but whether
Speaker 1: it's material to these businesses, and it is an entirely
Speaker 1: different story. I would be surprised to see a breakup. Um.
Speaker 1: But if we were to see breakups again, I think
Speaker 1: for the businesses we own, we think, uh, you know,
Speaker 1: that would actually highlight you know, more of the embedded
Speaker 1: value and and it would you know, actually help some
Speaker 1: of the stocks. So we talked earlier about Amazon and
Speaker 1: how we believe, uh, you know, the current market prices
Speaker 1: are uh, you know, basically valuing that retail piece at
Speaker 1: post to zero. And so again, if you were to
Speaker 1: break off aws from the retail business, obviously they you know,
Speaker 1: they benefit each other, so there would be some negative
Speaker 1: impact there. But I think the value realization of breaking
Speaker 1: those businesses apart, uh you know, you could wind up
Speaker 1: actually doing well, at least in the short term, doing better,
Speaker 1: you know, from the stock perspective. Um. But again I think,
Speaker 1: you know, I would be surprised to see breakups. It's
Speaker 1: not at all clear you know, how that would happen.
Speaker 1: And um, again, maybe maybe it could happen at sometime
Speaker 1: in the future, but in the near term, I think
Speaker 1: that's unlikely. Huh. Really kind of interesting. Since we're talking
Speaker 1: about tech, let's talk about the rise of intangibles, things
Speaker 1: like patents, algorithms, copyrights. What do you think this has
Speaker 1: done to the valuations that are out there and how
Speaker 1: does this play into the sort of squishy line that's
Speaker 1: developed between value growth at a reasonable price and pure growth. Yeah,
Speaker 1: I think it's a great question, and you had the
Speaker 1: expert on this, Michael On, on your podcast. But you know,
Speaker 1: what we know is this has definitely been an area
Speaker 1: of growth, and you know, it matters from a value perspective,
Speaker 1: and again, people are getting better at sorting through it.
Speaker 1: But I think we're really early, you know, in that.
Speaker 1: And so again, you know, some trends that we know exists,
Speaker 1: as you know, just broadly, returns on capital of you know,
Speaker 1: US companies have risen over time, and you know, uh,
Speaker 1: you know, lower return pieces of businesses have moved offshore
Speaker 1: and you know what state here is higher return businesses.
Speaker 1: Um So that will impact valuations and a lot of
Speaker 1: people again, you know, don't make adjustments when thinking about
Speaker 1: valuations relatives to history. And certainly, I think what we
Speaker 1: always try to do if we're doing companies specific analysis
Speaker 1: is think very carefully through the economics of the business.
Speaker 1: And so you know, if you're doing if you're a
Speaker 1: quant fund and you're just doing uh you know, accounting metrics, again,
Speaker 1: that's pretty problematic. You're looking at price to book and
Speaker 1: you're not adjusting for that. Um you know, I know that,
Speaker 1: you know, some of the better quants have started doing it,
Speaker 1: and the signals have improved once they make those adjustments.
Speaker 1: Um So, so it's certainly important to understand what that
Speaker 1: looks like. I think when we're looking at some of
Speaker 1: these earlier stage uh you know companies where again you
Speaker 1: can't see from the near term uh you know numbers,
Speaker 1: what the potential is that the business. Again, we try
Speaker 1: to think through carefully, uh you know, what our actual
Speaker 1: costs to support the current business, what our investments because
Speaker 1: again a lot of those investments are running through the
Speaker 1: income statement now and not you know, they're not capital
Speaker 1: investments that are just running through the cash flist statement.
Speaker 1: So again, if you really want to understand the business,
Speaker 1: you have to attempt to you know, break those things
Speaker 1: out and think about them carefully, and it can be
Speaker 1: challenging given disclosures, and we try to do that and
Speaker 1: we try to talk to our companies about what that
Speaker 1: looks like really kind of intrigue. So so you guys
Speaker 1: have done well over the course of the past decade,
Speaker 1: but that decade was very much a challenge for the
Speaker 1: more traditional approach to value. Why do you think this
Speaker 1: is uh? And and are the traditional buckets of value
Speaker 1: no longer no longer worthwhile? Well, I think it's a
Speaker 1: really interesting question. I think that there are two main reasons.
Speaker 1: One is, I think, you know, we observed that these markets,
Speaker 1: that markets go through these long cycles and and we
Speaker 1: talked about that earlier sort of the long cycles that
Speaker 1: we've gone through, and you know, the two thousands, it
Speaker 1: was you know, value lead, and it was global cyclicals,
Speaker 1: and it was material stocks, and it was energy stocks
Speaker 1: on the back of China's growth, So it had this long,
Speaker 1: prolonged period about performance and um again, it drew in
Speaker 1: a lot of capital to those companies, to those investment styles,
Speaker 1: and you know, that's reversed over the course of the
Speaker 1: past decade as again we've sort of had you know,
Speaker 1: the second reason, as you know, so again expectations rose,
Speaker 1: and so that makes a more challenging starting point, and
Speaker 1: so you know it's just natural to see some reversal.
Speaker 1: But then we've had this massive period of disruption, and um,
Speaker 1: you know, it's interesting to think back. I've been so
Speaker 1: fortunate to work with Bill and to uh you know,
Speaker 1: have him as a mentor and to have these moments
Speaker 1: that I remember and I remember. So I joined him
Speaker 1: in two thousand two, and in two thousand three, uh
Speaker 1: you know, he had a big investment conference in Las Vegas,
Speaker 1: and Jeff Bezos came to speak at it, and he
Speaker 1: gave his uh washing machine talk, and he talked about how,
Speaker 1: you know, the Internet at that time in the early
Speaker 1: two thousand's was that uh you know, was He likened
Speaker 1: it to the early days fire to electricity, and he
Speaker 1: talked about the nineteen o a hurly washing machine, and
Speaker 1: he said it was this giant machine that was outside,
Speaker 1: so you had to go outside to use it. They
Speaker 1: didn't have electricity, they didn't have electrical outlets. You had
Speaker 1: to plug it in. You had to unscrew your light
Speaker 1: bulb and plug it in to your light socket. Um,
Speaker 1: it didn't have an on off switch. It was giant.
Speaker 1: It was dangerous because you couldn't turn it off and
Speaker 1: so it had injuries. It was really difficult to use.
Speaker 1: And he likened where we were at the Internet at
Speaker 1: that time, uh, you know, to that, and he said,
Speaker 1: we're so early here and things are difficult to use.
Speaker 1: And he talked about DSL and wireless networks and how
Speaker 1: challenging it was, and um, it was notable at the time,
Speaker 1: but it's even more notable in hindsight now that you've
Speaker 1: seen things like what happened with a WS or with
Speaker 1: iPhones and how much easier you know, the technology has
Speaker 1: uh you know, gotten to use and how embedded it
Speaker 1: is in our daily life. So over the past decade,
Speaker 1: you know, really the infrastructure was fully built out in
Speaker 1: a way and you know AWS and cloud uh you
Speaker 1: know was built out that it allowed this you know,
Speaker 1: massive period of innovation and you know there was a
Speaker 1: lot of capital that was you know, going into to
Speaker 1: venture funds. So you've had this massive you know, innovation
Speaker 1: disruption cycle. And so I think you know a lot
Speaker 1: of value investing depends on you know, current earnings being
Speaker 1: stable because you're you're looking at discounts on on what
Speaker 1: companies are currently doing. So if there's some heightened risk
Speaker 1: of disruption, uh, you know, that makes that approach you know,
Speaker 1: more challenging. And so you know, I think you've had
Speaker 1: you know, some of both of those things going on,
Speaker 1: where it's a natural market cycle that's reversed what we
Speaker 1: saw in the previous decade, and you know there's been
Speaker 1: some you know headwinds I think to uh, you know
Speaker 1: value companies or you know companies that might be you know,
Speaker 1: getting more disrupted by some of these new companies that
Speaker 1: are coming along. Really interesting. So my last two questions
Speaker 1: for you before we get to our favorite questions. The
Speaker 1: first is you've been putting out what more traditional managers
Speaker 1: would call their quarterly fun letter, but but you've kind
Speaker 1: of been doing it online in a blog format. UM
Speaker 1: tell us about that experience. What sort of feedback do
Speaker 1: you get on on those quarterly posts that you've been doing.
Speaker 1: I mean, I think we get you know, I can
Speaker 1: take no credit for this. I would have to you know,
Speaker 1: give credit to you know, our marketing UM lead because
Speaker 1: she was a big proponent of the blog. So we
Speaker 1: all write for the blog and we get I think
Speaker 1: it's a great way to communicate with our shareholders are
Speaker 1: people who are you know, interested in what we're doing.
Speaker 1: And again, I think our our approach is different and differentiated,
Speaker 1: and so, uh, you know, we want people to under
Speaker 1: stand what we're doing. We want them to understand we
Speaker 1: sometimes have volatility. We want people to understand that coming
Speaker 1: in and then when we go through those periods, we
Speaker 1: want them to understand, you know, how we're thinking about
Speaker 1: the opportunities that and those are oftentimes the best best
Speaker 1: times to buy. And so it's important to have that communications.
Speaker 1: So again, I think it's been you know, it's been
Speaker 1: very positive overall to to have that. And and my
Speaker 1: final regular question is a little bit of a curveball.
Speaker 1: Tell us about the vermont In. Uh. Yes, So the
Speaker 1: vermont In is an in that I purchased in twenty eleven. Um.
Speaker 1: I grew up in Vermont and so my family all
Speaker 1: lives there. So uh, you know, at that time, again,
Speaker 1: we were just you know, the first inklings of emergence, uh,
Speaker 1: you know, an improvement in housing and housing overall. We
Speaker 1: had invested in a lot of housing stocks. You know,
Speaker 1: I had had my first child, you know, right before that, UM,
Speaker 1: and you know my I think my father had told
Speaker 1: me about this in that was for sale, and I
Speaker 1: said to my husband, let's let's go to the foreclosure action.
Speaker 1: Sort of a sign of our times. I've always had
Speaker 1: an entrepreneurial interest. I didn't actually expect to, uh, you know,
Speaker 1: purchase the in going in that I did do work
Speaker 1: on what I thought it was worth and um. And
Speaker 1: so we got there and you know, there was someone
Speaker 1: made the first bid, and then I made the second bid,
Speaker 1: and then I was like, I'm not going to do
Speaker 1: that again, but it was sold sold to you and
Speaker 1: so um, so we had to figure out again. I
Speaker 1: think that was in October, and we had to figure
Speaker 1: out how to get the in open again. We wanted
Speaker 1: to get it open because the busy season there and
Speaker 1: Vermont is you know, starts in December, so we wanted
Speaker 1: to get it open by December. And it had some issues.
Speaker 1: Um and so my brother in law actually ran the in.
Speaker 1: I made every mistake you could possibly make as a
Speaker 1: you know, small business owner, Austin tee owner going into
Speaker 1: business with family. I learned from great lessons from that experience.
Speaker 1: We got it turned around and then I sold it
Speaker 1: a few years later, I realized I I will stick
Speaker 1: to the markets where I can you know, sit here
Speaker 1: and read and learn. And uh, you know, Bill likes
Speaker 1: to joke about when he got how he got in
Speaker 1: the business was he was mowing the lawn all day
Speaker 1: and he earned a quarter and he asked that his
Speaker 1: dad what the stock picks were and um, or what
Speaker 1: the stock prices in the newspaper were, and he said
Speaker 1: those are stocks. And he's like, you mean you can
Speaker 1: make money and not do anything. You can just sit
Speaker 1: there and um He's like, that's the job for me.
Speaker 1: And he didn't. He says he didn't learn so much later,
Speaker 1: just how much work you have to do. But the
Speaker 1: kind of work of reading and talking to companies and
Speaker 1: you know, doing finish the model, doing financial modeling that
Speaker 1: suits me much better than running it. In So it
Speaker 1: was it was a great experience. We we did, uh,
Speaker 1: you know, well on it. But I will not own
Speaker 1: any more. And so let's jump to our favorite questions
Speaker 1: that we ask all of our guests, starting with tell
Speaker 1: us what you're streaming these days? Give us your favorite
Speaker 1: Netflix or Amazon, Brime or anything that's been keeping you
Speaker 1: entertained during lockdown. Yeah, so that's a great question. I
Speaker 1: might have the most disappointing answer for you because, uh,
Speaker 1: you know, my third child was born in eighteen and
Speaker 1: then I launched patient in twenty twenty, so I I
Speaker 1: have not you know, had time or focused on streaming
Speaker 1: anything actually until um just the past few weeks. We
Speaker 1: had some sickness to go through our house over the holiday.
Speaker 1: Unfortunately not COVID, but it was a COVID scare. But um,
Speaker 1: so we did we did do some uh you know binging.
Speaker 1: It wasn't anything new. Um My kids are you know,
Speaker 1: really into Survivor. So we watched you know, the most
Speaker 1: recent uh Survivor as a family, and then we watched
Speaker 1: some We also watched some of the old Seinfeld episodes
Speaker 1: and I hadn't watched those in gosh so many years,
Speaker 1: and they were you know, they were just as funny
Speaker 1: and they were great and they were so entertaining, and
Speaker 1: um my kids thought that they were funny. So those
Speaker 1: are the only things I've watched lately. But I, you know,
Speaker 1: both were enjoyable. I'm surprised how well Seinfeld has held
Speaker 1: up over the years. Other other sitcoms, um don't seem
Speaker 1: to have aged as gracefully. So, so my next surprise
Speaker 1: to still find it as entertaining. I didn't think I would,
Speaker 1: but it was funny, it was really funny. It's uh
Speaker 1: and and at the time I thought it was kind
Speaker 1: of an acerbic show until you start watching carb your
Speaker 1: enthusiasm and then you really see what sort of acid
Speaker 1: humor is like. Um. Normally now I ask who your
Speaker 1: mentors are, but I kind of have a sneaking suspicion
Speaker 1: I know the answer to that question. You definitely know
Speaker 1: the top. You know the top mentor. I mean, Dell
Speaker 1: is my number one. I'm so for I have so
Speaker 1: much gratitude to have learned from him, and and just
Speaker 1: he's not just a great mentor, and I've learned the
Speaker 1: craft of investing, but I also learned I think he's
Speaker 1: an intellectual giant and um and I really thought he
Speaker 1: taught me how to take better and and he's also
Speaker 1: a great friend and so um so I just feel
Speaker 1: so fortunate to have shared this journey. And he's been
Speaker 1: so generous with his time with me, and so he's
Speaker 1: he definitely is right up there at the top of
Speaker 1: the list. Quite quite interesting. Tell us about some of
Speaker 1: your favorite books and what are you reading right now? Yes,
Speaker 1: so I am so bad at favorite And when I
Speaker 1: saw this question, I really tried to think. I'm I
Speaker 1: have lots of books I like, but you know what,
Speaker 1: how can you choose just one as a favorite. So
Speaker 1: I guess when I was thinking through, what are some
Speaker 1: of my favorite business type books? Uh, The Psychology of
Speaker 1: Money by Morgan households wonderful and as soon as my
Speaker 1: kids my oldest is time but I finished he's old
Speaker 1: enough to you know, which might be within the next
Speaker 1: year or two, I'm going to have them read that
Speaker 1: book to understand how to think about money. Um, you know,
Speaker 1: Rich or Wise Are Happier by William Green is excellent.
Speaker 1: And I love books that cover, you know, great investors
Speaker 1: and how they think. Um, you know, I think the
Speaker 1: Halo Effect by Phil Rosen'swag is a classic and it
Speaker 1: talks about you know, Bill likes to say that the
Speaker 1: story follows the price and um, and so I think
Speaker 1: that that's true and that happens. He talks about, you know,
Speaker 1: when there's been some uh, you know, company that's done
Speaker 1: really well, people write about all the reasons why. But
Speaker 1: again it's not a very scientific study. Um, you know,
Speaker 1: Annie Dix Thinking and best. You know. Outside of that,
Speaker 1: you know, one book that really struck me and I
Speaker 1: really liked a lot, uh Chema Chendren, who's a Buddhist monk.
Speaker 1: Her book Thanks Fall Apart, All Apart, which I also like, uh,
Speaker 1: you know, the fictional book by Kinna hb By the
Speaker 1: same name, but this is a different one. And that
Speaker 1: book really talks about, uh, you know, moving towards your
Speaker 1: pain and being with your pain. And I think it's
Speaker 1: important from just a life perspective in terms of uh,
Speaker 1: you know, again those are growth opportunities, but from an
Speaker 1: investment perspective, there's a lot of parallels in terms of,
Speaker 1: you know, how do you execute on the process that
Speaker 1: you know delivers the best return when sometimes you know
Speaker 1: it can be emotionally painful, and how do you you know,
Speaker 1: deal with that? And I guess, you know, this is
Speaker 1: a very long winded answer, but what I'm reading now,
Speaker 1: what I just finished, was the Book of Hope by
Speaker 1: Jane Goodall and Douglas Abrahams, which was great and you know,
Speaker 1: there's such rates of you know, depression and anxiety now
Speaker 1: and that book was you know, all about you know,
Speaker 1: hope and why we should be hopeful and the indomitable
Speaker 1: human spirit. So that was really good. I've been reading
Speaker 1: some books on leadership given the transition, so I read
Speaker 1: Cole and Tells autobiography. We just read Principles by Ray Dalio. UM.
Speaker 1: So you know, there's a few others that in reading.
Speaker 1: But that's you know, that's a that's the tasting. That's
Speaker 1: a handful. That is let let me let me ask
Speaker 1: you things fall apart. The novel is by a Shiba,
Speaker 1: Is that right? And the nonfiction is by Pemma Yet
Speaker 1: children got it really interesting? Um, that's a that's quite
Speaker 1: a great list on I'm impressed. Uh at the breath
Speaker 1: of what what you're reading? Um? Our last two questions,
Speaker 1: starting with what sort of advice would you give to
Speaker 1: a recent college grad who was interested either in a
Speaker 1: career in finance or a career as a portfolio manager.
Speaker 1: I think, you know, if you love learning and you
Speaker 1: love competing, there's almost no better skill than investment in finance.
Speaker 1: It's just it's so interesting. You learn new things every day,
Speaker 1: and you can compete, and you need to compete at
Speaker 1: the at the highest levels, and you you her die
Speaker 1: by your result, which is both amazing because you know,
Speaker 1: it's a true meritocracy, but it's also very high pressure
Speaker 1: because it's not easy to be successful. And so if
Speaker 1: people are interested in that and that sounds like a
Speaker 1: fit with you know, their general demeanor and what they like,
Speaker 1: my advice would be, you know, just get your foot
Speaker 1: in the door. However you can. I remember people telling me, um,
Speaker 1: you can never get an investment job, you know, right
Speaker 1: out of college, which I listened to them, and I
Speaker 1: ended up getting really lucky because you know, Bill happened
Speaker 1: to come. But I didn't try other than meet Bill
Speaker 1: and send in my resume. So I think, like, you
Speaker 1: can try, and you know, don't ever tell let people
Speaker 1: tell you you can't accomplish something. We just hired, you know,
Speaker 1: you know, a couple of months ago, a wonderful junior analyst.
Speaker 1: He's extremely passionate, he has the right attitude. I'm willing
Speaker 1: to do whatever it takes. Uh, you know, how can
Speaker 1: I help you? How can I add value if you
Speaker 1: really have that you know sort of attitude and uh,
Speaker 1: you know, survey the landscape broadly and our passionate and
Speaker 1: our self taught. You know, I think you have a
Speaker 1: good shot at you know, finding an opportunity interesting And
Speaker 1: our final question, what do you know about the world
Speaker 1: of investing in portfolio management today? You wish you knew
Speaker 1: twenty or so years ago? Yeah, that's a great question. Um,
Speaker 1: you know, anything I knew about the future would have
Speaker 1: been super helpful. Um, you know, like because you could
Speaker 1: use that to earn repairings where it was housing bubble
Speaker 1: or financial crisis or uh, you know the sick local
Speaker 1: boom innovation boom pandemic. I would I would have loved
Speaker 1: to know anything about it. I mean, I guess if
Speaker 1: we step back and think about when I entered the business,
Speaker 1: what are you know some you know, broader, more timeless
Speaker 1: lessons that I didn't know then that I wish I had,
Speaker 1: you know, So I again, I think I mentioned I
Speaker 1: was very classic value to start. That was my approach. Um,
Speaker 1: I didn't understand you know, the you know, the nuances
Speaker 1: of returns on capital and the importance of those and
Speaker 1: you know how to earn returns. Are you know the
Speaker 1: importance of those to driving returns and the differences between
Speaker 1: buying a you know, fair business that a you know,
Speaker 1: at a wonderful price versus a wonderful business at a
Speaker 1: fair price, you know, and growth. Unfortunately, I started working
Speaker 1: with a great mentors and I was able to learn
Speaker 1: all of that. But those are things, you know, I
Speaker 1: think that are critical as you think about investing. That again,
Speaker 1: I didn't understand well when I first got into the business.
Speaker 1: Thank you Samantha for being so generous with your time.
Speaker 1: We have been speaking with Samantha McLemore, portfolio manager at
Speaker 1: Miller Value Partners. If you enjoy this conversation, well, be
Speaker 1: sure and check out any of our hundreds of prior
Speaker 1: such discussions. You can find those at iTunes, Spotify, Bloomberg,
Speaker 1: wherever you get your podcast from. We love your comments,
Speaker 1: feedback and suggestions. You can write to us using the
Speaker 1: email address m ib podcast at Bloomberg dot net. Sign
Speaker 1: up from my daily reading list at Ridholtz dot com.
Speaker 1: Follow me on Twitter at Rid Halts. I would be
Speaker 1: remiss if I did not thank the crack team that
Speaker 1: helps put these conversations together each week. Marks and Ascalchie
Speaker 1: is my audio engineer. Michael Batnick is my head of research.
Speaker 1: Attica val Broun is our project manager. Harris World is
Speaker 1: our producer. I'm Barryhaltz. You're listening to our ministers in
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