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Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg

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Speaker 1: Radio this weekend on the podcast What Can I Say?

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Speaker 1: Joel Greenblack he is Wall Street Royalty. He's a legend

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Speaker 1: in the hedge fund and mutual fund world. He ran

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Speaker 1: a fund called Gotham Capital ten consecutive years, compounding at

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Speaker 1: fifty percent a year. Those numbers are just off the charts.

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Speaker 1: At the end of the decade, he returned money backed

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Speaker 1: investors and said, I'm gonna just manage my own money

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Speaker 1: for a while. Thanks. Fourteen years later, he opens the

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Speaker 1: mutual funds Gotham Asset Management. His index plus was just

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Speaker 1: rated the number one fund out of large cap mutual funds. Uh.

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Speaker 1: Just astonishing astonishing numbers. That that fund is only three

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Speaker 1: years old. It acts as a hedge fund alternative. You

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Speaker 1: probably know the name Joel Greenblack from his books. He

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Speaker 1: tells the story of why you two can be a

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Speaker 1: stock market Genius was a terrible and accidental title, as

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Speaker 1: well as The Little Book that Beats the Stock Market,

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Speaker 1: The Magic Formula. I'm gonna just shut up and say,

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Speaker 1: with no further ado, A fascinating conversation with Joel Greenblack.

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Speaker 1: I'm Barry Ridholtz. You're listening to Masters in Business on

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Speaker 1: Bloomberg Radio. My extra special guest this week is Joel Greenblatt.

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Speaker 1: He is the managing principal and co chief Investment Officer

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Speaker 1: of Gotham Asset Management, the successor to Gotham Capital in

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Speaker 1: a manner of speaking. He's also an adjunct professor at

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Speaker 1: Columbia Business School, where he teaches value and special situation investing.

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Speaker 1: He is the author of numerous well selling books, best

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Speaker 1: selling books You Can Be a Stock Market Genius, The

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Speaker 1: Little Book that Beats the Market, The Big Secret for

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Speaker 1: the Small Investor. Joel green Black, Welcome to Bloomberg Ranks.

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Speaker 1: So I'm excited to us speak to you. I very

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Speaker 1: vividly remember when You Can Be a Stock Market Genius

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Speaker 1: came out uh in the late nineties and exploded. It

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Speaker 1: was sort of out of left field, at least to me,

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Speaker 1: and just was suddenly a really really big book. But

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Speaker 1: let's let's go back and start um early. So I

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Speaker 1: have to ask the question from you Can Be Stock

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Speaker 1: Market Genius, what did going to the Dog Track teach

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Speaker 1: you about investing? Well? I wrote up in the book

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Speaker 1: that you know, the only place when I was younger,

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Speaker 1: I kind of like gambling, and the only place that

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Speaker 1: would let to sneak in was the dog track when

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Speaker 1: I was on vacation in Florida, and so I used

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Speaker 1: to sneak in with my cousin and we uh got

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Speaker 1: to place bets and have a good time, and you know,

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Speaker 1: half the fun was sneaking in. But uh, we figured

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Speaker 1: we really had the whole dog track thing nailed when

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Speaker 1: we found a dog that had run uh it's last

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Speaker 1: race in thirty two seconds and all the other dogs

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Speaker 1: had run it in forty four seconds. And we thought, wow,

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Speaker 1: you know, we really have a great dog going to

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Speaker 1: bet on this thing. What were the odds? Oh, we had,

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Speaker 1: you know, very high odds. It was close to I think,

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Speaker 1: which I think is as high as they let it go.

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Speaker 1: And so we thought we were going to clean up. Uh,

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Speaker 1: and of course we lost. You know, that dog had

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Speaker 1: been running a shorter race. That's why it only ran

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Speaker 1: thirty two seconds. And so you sort of really have

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Speaker 1: to know something when you're betting, and and the same

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Speaker 1: thing for investing. You know, if you don't know what

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Speaker 1: you're doing, Uh, it's and you know, as they say,

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Speaker 1: an expensive place to find out so the dog track,

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Speaker 1: I think was a nice lesson losing you know, two

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Speaker 1: or four dollars. Uh, it was a very cheap lesson

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Speaker 1: for us. So you go to school at Wharton, both

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Speaker 1: undergrad and graduate. How did you find your way to

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Speaker 1: Wall Street? What was your first job like? Uh, well,

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Speaker 1: I got a summer job on Wall Street first, a

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Speaker 1: kuder people in their research department. And to tell you

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Speaker 1: how long ago it was, uh, we were adjusting financial

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Speaker 1: statements for inflation, which doesn't probably wouldn't be a big

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Speaker 1: seller right now, but for the younger listeners, tell us,

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Speaker 1: what is this inflation you speak of? Well, you know

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Speaker 1: when you hold your dollars and it buys less and

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Speaker 1: less each year, but less and less was like six

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Speaker 1: or eight percent, not uh, you know, half a percent

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Speaker 1: or one percent or what we've become used to in

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Speaker 1: the last ten years or so. And and what led

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Speaker 1: you from research into the art of stock picking? Well,

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Speaker 1: junior year, I read an article actually Informs magazine about

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Speaker 1: Ben Graham's stock picking uh formula, and it was really

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Speaker 1: what they used to call net nets or stock selling

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Speaker 1: below their liquidation value. And it seemed very simple to

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Speaker 1: me because I was at Wardant at the time, and

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Speaker 1: they were learning uh, efficient market theory. Uh, and none

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Speaker 1: of it reson it did with me. I was kind of,

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Speaker 1: like I said, interested in gambling, or at least back

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Speaker 1: speculating or figuring things out and then taking a calculated gamble. Uh.

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Speaker 1: And what they were telling me was don't try. They

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Speaker 1: were saying that no one can beat the market, and

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Speaker 1: the stock prices are efficient and just through simple observation

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Speaker 1: looking at the newspaper and then used to have the

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Speaker 1: fifty two week Hilo prices in the newspaper. It seemed

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Speaker 1: unreasonable that, you know, the fair price was fifty one

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Speaker 1: day and eight months later it was a uh. And

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Speaker 1: that was pretty much every stock had that kind of

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Speaker 1: range every year. And it didn't make sense to me

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Speaker 1: that the fundamentals of the underlying businesses were actually changing

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Speaker 1: that much. And so when I read Ben Graham, sort

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Speaker 1: of a lightbulb went off just this little article. Then

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Speaker 1: I started reading everything I could about what he had written,

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Speaker 1: both Security Analysis and The Intelligent Investor, and eventually led

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Speaker 1: my way to Warren Buffett, and uh, you know, sort

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Speaker 1: of the rest is history. It's a very good age.

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Speaker 1: You know. I was younger than twenty one at the time,

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Speaker 1: you know, junior year of of college, to recognize that

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Speaker 1: this was what I was going to be doing the

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Speaker 1: rest of my life. So let's talk a little about

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Speaker 1: value investing. Since you mentioned Graham and Buffett, value has

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Speaker 1: had a pretty rough go of it the past decade,

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Speaker 1: very reminiscent of a similar period of rough performance in

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Speaker 1: the nineties. For those of us with a value tilt

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Speaker 1: in our portfolios, explain why this is a cyclical phenomena

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Speaker 1: and not the death of value investing. Right. Well, my

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Speaker 1: definition of value is figure out what the business is

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Speaker 1: worth and pay a lot less. It is not low

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Speaker 1: price to book, low price sales investing. Which if you

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Speaker 1: took a look at morning Star, you took a look

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Speaker 1: at Russell and and they analyze what we do. They

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Speaker 1: don't put us in value as value investors. They put

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Speaker 1: us in blend. As Warren Buffett would say, value and

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Speaker 1: growth are tied at the hip. Growth is part of value.

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Speaker 1: So the way that it's traditionally on uh you know

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Speaker 1: now and categorized is not my definition of value. So

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Speaker 1: what traditionally when people characterize these things low price book,

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Speaker 1: low price sales, those are things that have correlated well

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Speaker 1: in the past with higher returns cyclically, but over time

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Speaker 1: it tends to work because let's say low price book uh,

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Speaker 1: you know, something selling it uh close to its book value. Well,

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Speaker 1: that just means people aren't giving a very high value

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Speaker 1: to the business itself. They're just sort of valued pretty

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Speaker 1: close to the cost of the assets that were placed

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Speaker 1: in the business and not giving much of a premium.

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Speaker 1: So you would tend to get more than your fair

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Speaker 1: share of companies that are out of favor, meaning because

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Speaker 1: they're price low. But if you are a private equity

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Speaker 1: firm trying to buy a business, you're not buying it

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Speaker 1: because it's trading close to its book value. You're looking

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Speaker 1: at cash flows and trying to project what they're going

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Speaker 1: to be in the future, and what are you paying

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Speaker 1: relative to that and what's it worth. And that has

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Speaker 1: nothing to do with low price book low low price sales.

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Speaker 1: It really has to do with the cash flow generating

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Speaker 1: part of the business. So you know, it does not

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Speaker 1: bother me that traditional value as defined by morning Star

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Speaker 1: Russell or whoever else defines it with sort of factor

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Speaker 1: like attributes of individual stocks, has or has not worked.

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Speaker 1: I mean, you know, here's the big thing the way

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Speaker 1: I described as Look, momentum has worked well for the

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Speaker 1: last thirty forty years, not just in this country, but

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Speaker 1: across the globe, with one or two exceptions. The reason

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Speaker 1: we don't we're not momentum investors, and there's no argument

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Speaker 1: about it. It has. It's just that if it didn't

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Speaker 1: work for the next two years, it could be that

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Speaker 1: it's just cyclically out of favor, like we're talking about,

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Speaker 1: and all we have to do is be patient and

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Speaker 1: it works over the long term. You just have to

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Speaker 1: be a patient investor. Or. It could be that it's

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Speaker 1: you know, not so hard to figure out. A stock

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Speaker 1: used to be down here and now it's out here,

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Speaker 1: and there's plenty of data and computers and ability to

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Speaker 1: crunch numbers, and plus plenty of research papers that say

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Speaker 1: that momentums worked over a period of thirty forty years.

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Speaker 1: And maybe if it doesn't work over the next two years,

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Speaker 1: the trade has become crowded and it's degraded, and that's

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Speaker 1: why it didn't work over the next two years. And

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Speaker 1: two years from now, I wouldn't know whether it's just

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Speaker 1: cyclically out of favor of the trades degraded so That's

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Speaker 1: why I'm not a a momentum investor. The reason I'm

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Speaker 1: a value investor. According to our definition is stocks are

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Speaker 1: actually ownership shares of businesses that you value and try

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Speaker 1: to buy it a discount. They're not pieces of paper

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Speaker 1: that bounce around that you put sharp ratios and sortino

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Speaker 1: ratios and a use computer simulations to balance your portfolios

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Speaker 1: or whatever. It is. Basically, their ownership shares of businesses

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Speaker 1: that you value and try to buy it a discount.

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Speaker 1: So it's certainly possible that the market does not reward

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Speaker 1: my valuations even if I'm right, over the next two years.

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Speaker 1: But that doesn't mean we're gonna stop doing what we're doing.

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Speaker 1: That's what stocks are ownership shares of businesses, and that's

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Speaker 1: very fundamental to the way we look at everything. And

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Speaker 1: if you actually look at them that way, you can

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Speaker 1: see all of modern portfolio theory and all of the

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Speaker 1: way most academics and many advisors and managers look at

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Speaker 1: the world. It just seems kind of insane when you

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Speaker 1: really boil it down to ownership shares of businesses that

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Speaker 1: you're trying to value, and then you can really sift

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Speaker 1: through all the confusion. Uh that very smart people have

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Speaker 1: tried to uh put a lot of numbers on the

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Speaker 1: investment business that don't make a lot of sense. That

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Speaker 1: that's absolutely fascinated. Let's talk a little bit about Gotham Capital.

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Speaker 1: You start with about seven million dollars, some of it

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Speaker 1: coming from Michael Milkin. How did that relationship begin and

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Speaker 1: why was Milkin interested in investing with you? Well, the

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Speaker 1: simple story is that I had a friend at Wharton

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Speaker 1: who was one of the first people, uh who was

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Speaker 1: in Michael Milkin's group. And I had been working at

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Speaker 1: a hedge fund for about three years after graduating from Wharton,

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Speaker 1: and uh, I had always wanted to go out on

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Speaker 1: my own, and I felt I was ready, and I

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Speaker 1: mentioned it to my friend and I said, Gee, if

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Speaker 1: I could raise you know, X dollars, I'd go out

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Speaker 1: on my own. And UH, my good friend uh gave

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Speaker 1: me a call the next day and said, Mike said fine, Yeah,

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Speaker 1: So it wasn't It wasn't quite as easy as that.

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Speaker 1: You know, I had to negotiate my terms and uh,

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Speaker 1: it was actually kind of a funny story because it

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Speaker 1: was my life and he did, you know, I don't

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Speaker 1: know at the time. Twenty thirty deals a day. I

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Speaker 1: have no idea, but it was my life. And I'm

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Speaker 1: not a very good negotiating at all. But uh, when

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Speaker 1: I was in the room with him, I wanted the

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Speaker 1: terms that I wanted to to run the money because

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Speaker 1: it was going to be my life and I only

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Speaker 1: had one to give and this was one of thirty deals,

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Speaker 1: and so I wouldn't give in. And we sat in

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Speaker 1: there for an hour while he kept Ronald Perman waiting

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Speaker 1: because he was about to buy Revlon. And you know,

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Speaker 1: I was just like a little tiny deal and I

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Speaker 1: wouldn't give in because you know, like I said, I

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Speaker 1: had a bottom line, which is pretty rare. And he

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Speaker 1: didn't let you walk. He negotiated like this was the

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Speaker 1: biggest deal of his life, even though I knew it

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Speaker 1: was just you know, something he did, you know, deserted

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Speaker 1: lunch one day or something, and and uh he left

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Speaker 1: the room and because I wouldn't give in, and he

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Speaker 1: sent his brother in, and uh, you know, after half hour,

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Speaker 1: I got the terms I wanted from his brother. And

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Speaker 1: then when Mike got back, he was not very happy.

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Speaker 1: But that's how I got into business. And uh, he

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Speaker 1: was a good partner for me. That's a great story.

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Speaker 1: So I have to share with our listeners your returns.

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Speaker 1: You you compound from at annually before fees annually be

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Speaker 1: four fees annually after fees five, No, it's fifty. For

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Speaker 1: those ten years it was four fees. That's astounding. That's

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Speaker 1: an incredible run of numbers. So the first question is

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Speaker 1: what's the secret sauce? How you can We all know

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Speaker 1: the eighties and nineties were a boomed time, but it

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Speaker 1: wasn't fifty a year. What was the secret source for

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Speaker 1: that sort of returns? Well, one of the ways to

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Speaker 1: to get those kind of returns is not to run

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Speaker 1: a lot of money. So after five years in business,

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Speaker 1: we returned half our outside capital to investors. Yes they

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Speaker 1: must have been thrilled. They were not thrilled, but after

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Speaker 1: ten years returned all of it. That would make them

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Speaker 1: really not thrilled because and the other way is to

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Speaker 1: be concentrated. So sixty eight ideas were usually eighty plus

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Speaker 1: percent of our portfolio. So that portfolio management theory doesn't

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Speaker 1: like that strategy very much. Not diversified, higher risk, blah

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Speaker 1: blah blah. Al Right, Well, Warren Bufett has a good

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Speaker 1: response to that as well. You know, he says, Listen,

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Speaker 1: let's say you sold out your business and you've got

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Speaker 1: a million dollars and you're living in town, and you

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Speaker 1: want to figure out something smart to do with it.

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Speaker 1: So you analyze all the businesses and towns. Let's say

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Speaker 1: there's hundreds of business and you stick to if you

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Speaker 1: find businesses where the management is really good, the prospects

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Speaker 1: for the business are good, it's run well, they treat

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Speaker 1: older as well. And you divide your million dollars between

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Speaker 1: eight businesses that you've researched well in town. No one

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Speaker 1: would think that's imprudent. They'd actually think that would pretty prudent.

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Speaker 1: But when you get to call them stocks, and you

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Speaker 1: get stock quotes daily on these pieces of paper that

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Speaker 1: bounce around and put people put numbers on it in

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Speaker 1: volatility and all these other things, where really it's not

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Speaker 1: that meaningful, you know. So in one sense, if you're

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Speaker 1: investing in businesses and you did a lot of research

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Speaker 1: and invested in eight different businesses with the proceeds of

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Speaker 1: your sale, people would think you're a pretty prudent guy.

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Speaker 1: All of a sudden. If you invested in stocks and

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Speaker 1: did the same type of work, people think you're insane.

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Speaker 1: And it's just an interesting analogy that I always think

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Speaker 1: of when people make fun of me that I was

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Speaker 1: that concentrated. You know. The flip side of that is,

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Speaker 1: imagine if we got prints minute by minute for the

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Speaker 1: valuation of our homes, people would lose their mind. They

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Speaker 1: wouldn't be able to manage it. So that understood. Imagine

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Speaker 1: if you had a theory of buying homes, I'm going

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Speaker 1: to buy the ones that went up the most less

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Speaker 1: three months or six months. I mean, it's a really

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Speaker 1: good analogy. I usually use the house analogy when people

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Speaker 1: ask me how do we go about and valuing stocks?

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Speaker 1: And uh, people understand it completely when they're buying a house.

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Speaker 1: There's certain things you would do and we don't do

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Speaker 1: any different than owning a business. That makes a whole

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Speaker 1: lot of sense. So now let me tack to what

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Speaker 1: you're doing currently. So whereas you previously returned a bunch

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Speaker 1: of money to investors and hedge funds and saying, hey,

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Speaker 1: we we don't think there's this can scale enough that

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Speaker 1: we can keep generating these returns for you, now you're

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Speaker 1: you're going the opposite direction and saying okay, we're gonna

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Speaker 1: look for something that can scale, So tell us a

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Speaker 1: little bit about the Gotham Index plus portfolio. We were

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Speaker 1: talking earlier offline about passive versus active. This is a

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Speaker 1: little bit of both, right, So we didn't run outside

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Speaker 1: money until again, after we returned it all in ninety four,

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Speaker 1: we ran our interview. Had been lucky enough to keep

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Speaker 1: our staff and run our internal money, but in and

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Speaker 1: and how long did you do that? For fourteen years?

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Speaker 1: And then uh, in two thousand nine we started taking

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Speaker 1: outside money again. Uh. And it was really, you know,

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Speaker 1: really starts really back when I was in business school

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Speaker 1: and I had read that article about Benjamin Graham and

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Speaker 1: actually did a study with a couple of my classmates,

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Speaker 1: Rich Posina, who's a famous money manager now and uh

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Speaker 1: Boost Newberg, who's still a good friend of mine, And

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Speaker 1: we did some work on ben Graham's formulas, and we

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Speaker 1: ended up doing a research paper and having it published

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Speaker 1: in the Journal and Portfolio Management back in about one

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Speaker 1: And I had always been fascinated by that, and over

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Speaker 1: the years we had really evolved more towards the way

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Speaker 1: Warren Buffett invests not just cheap, but cheap and good.

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Speaker 1: And I've been teaching at Columbia for a number of years.

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Speaker 1: I've been doing that twenty two years now, but you know,

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Speaker 1: at that time, in the early two thousand's, Uh, i'd

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Speaker 1: been doing it for a bunch of years, and we

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Speaker 1: had been making money using the same principles Buffett uses,

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Speaker 1: you know, buying cheap good businesses. And I wanted to

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Speaker 1: prove that together with my partner Rob Goldstein, I wanted

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Speaker 1: to prove that what I've been teaching my students, what

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Speaker 1: we had been using to make money worked very well.

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Speaker 1: Just like we had shown that Ben Graham's simple methodology

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Speaker 1: still worked back in the seventies and early eighties, I

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Speaker 1: wanted to show that what we had evolved more into

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Speaker 1: the Warren Buffett way of earning money work too. We

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Speaker 1: wanted to prove it in the same way that we

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Speaker 1: had written that paper about. So we hired a computer

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Speaker 1: analysts that could help us, you know, mind through data,

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Speaker 1: and we came up with some very simple metrics for

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Speaker 1: good you know what, what's a good business? And Uh,

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Speaker 1: if you read through Buffet's letters, he's it's very clear

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Speaker 1: he's looking for businesses that earn high returns on tangible

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Speaker 1: capital um and what that means is every business needs

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Speaker 1: working capital, every business needs fixed assets. How well can

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Speaker 1: it convert that working capital and fixed assets into earnings?

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Speaker 1: And in the book The Little Book that Beats the

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Speaker 1: Market I, which I really wrote for my kids to

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Speaker 1: understand this, I explained it this way. Imagine you're building

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Speaker 1: a store and you have to buy the land, build

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Speaker 1: the store, and set up the displays and stock it

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Speaker 1: with inventory, and all that cost your four hundred thousand dollars.

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Speaker 1: And every year, if the store earns two hundred thousand dollars,

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Speaker 1: that's a fifty return untangible capital. Maybe I'll open some

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Speaker 1: more stores. Then I compared it to another store, and

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Speaker 1: I called that store just broccoli. It wasn't It's not

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Speaker 1: a very good idea just to sell broccoli in your store.

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Speaker 1: But you just have to buy the land, build the store,

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Speaker 1: set of the display stock with inventory, still going to

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Speaker 1: cost you roughly the four hundred thousand dollars. But because

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Speaker 1: it's basically a stupid idea just to sell broccoli, maybe

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Speaker 1: only earned ten thousand dollars. That's a two and a

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Speaker 1: half percent return on tangible capital. And so all we

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Speaker 1: said was all things being equal, much prefer to own

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Speaker 1: the business, that business that can reinvest its money at

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Speaker 1: fifty percent returns, then two and a half percent returns.

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Speaker 1: So that was one metric good. That's what we looked at.

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Speaker 1: If you read through Buffet's letters, that's the first thing

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Speaker 1: he's looking for. Were The other metric we looked at

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Speaker 1: is cheap. You know, in the analogy I would use

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Speaker 1: as a house. You know, it's a million dollar house,

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Speaker 1: and one question you might ask is how much rent

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Speaker 1: could I get for that thing? And if you're trying

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Speaker 1: to figure out whether that's a good deal or not.

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Speaker 1: And if you could get eighty thousand dollars a year

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Speaker 1: in rent, that's an eight percent yield in a two

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Speaker 1: or three percent interest rate environment, that today might look

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Speaker 1: fairly attractive. So we sort of looked at how much

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Speaker 1: cash is the business generating relative to the all in

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Speaker 1: cost of buying the business. Then we looked at whether

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Speaker 1: it's a good business. When they have the money, what

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Speaker 1: do they do with it? Okay, So we came up

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Speaker 1: with two crude metrics for good and cheap. And you know,

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Speaker 1: Ben Graham said, buy a cheap Warren Buffett said, if

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Speaker 1: you could buy a good business cheap, even better we

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Speaker 1: combined those two and uh we used a crude database,

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Speaker 1: you know, simple database that was publicly available, well for

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Speaker 1: a price. It was publicly available, and uh, we went

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Speaker 1: and tested those two simple concepts, good and cheap. It's

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Speaker 1: not like we spun the computer thousands of times. This

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Speaker 1: was the very first test we did and it came

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Speaker 1: out so phenomenally well that I wrote a book about it,

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Speaker 1: called The Little Book that Beats the Market. That was

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Speaker 1: the very first test we did. That's what I wrote up.

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Speaker 1: But my partner, Rob Goldstein and I looked at each

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Speaker 1: other and said, you know, I would call that the

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Speaker 1: not trying very hard method. We actually know how to

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Speaker 1: value businesses. You know, couldn't we It worked so well

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Speaker 1: without trying. Couldn't we even improve on this? And so

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Speaker 1: we built a big research team. You know, there's thirteen

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Speaker 1: of us now we have a seven person tech team.

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Speaker 1: And what we're really trying to do is just take

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Speaker 1: advantage of that initial research and actually valuing businesses. And

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Speaker 1: what we discovered was that and we're really building it

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Speaker 1: for ourselves. You know, hey, can we do something with this.

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Speaker 1: But it turned out that owning hundreds of names and

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Speaker 1: being right on average was actually, Uh, we can make

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Speaker 1: more money because we would have much less volatile returns.

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Speaker 1: We'd have average. We get what we expect more often

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Speaker 1: by owning hundreds and being right on average. And so

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Speaker 1: it was very easy to put it together as a

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Speaker 1: long short portfolio, buying our favorite cheapest stocks, shorting our

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Speaker 1: most expensive and because we're doing hundreds, and because we're

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Speaker 1: very good at valuing businesses on average okay, as opposed

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Speaker 1: to having to be right on every single one when

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Speaker 1: you're own six or eight. We turned out we made

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Speaker 1: more money because we had spent less time getting negative

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Speaker 1: returns with a diversified portfolio. When we discovered that we

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Speaker 1: were willing to take outside money again, and this was

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Speaker 1: back in March O nine. Is that we opened our

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Speaker 1: first fund for institutions in March O nine. We are

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Speaker 1: opened our first mutual fund in two thousand twelve. And

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Speaker 1: we made some decisions back in two thousand nine. Number one,

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Speaker 1: we said that most hedge fund managers, because we were

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Speaker 1: long short investing with leverage, we're charging too much. I

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Speaker 1: had said on Pen's investment board for ten years, us

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Speaker 1: for ten years, and I saw most of the managers

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Speaker 1: out there are not many justify one and a half

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Speaker 1: and twenty or two and twenty. And the other part

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Speaker 1: that's wrong with the hedge fund business is that when

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Speaker 1: people pay those kind of prices, they're not very patient.

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Speaker 1: So it's the worst of all worlds. You know, you're

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Speaker 1: charging too much to your clients and they don't stay

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Speaker 1: very long because they're, uh, they're impatient when they're they're

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Speaker 1: paying so much. So we made two decisions. One is

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Speaker 1: to you, uh, make our fees very reasonable, so we

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Speaker 1: didn't have a performance fee. We just had, depending on

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Speaker 1: the strategy, you know, maybe a two percent management fee

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Speaker 1: with nothing else on a hedge fund as opposed to

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Speaker 1: two and twenty. That was pretty uh novel at the time.

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Speaker 1: And the other was that instead of locking people in

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Speaker 1: for a year or two or three, we said, it's

431
00:22:19,440 --> 00:22:22,240
Speaker 1: monthly liquidity. We don't want to run money for you

432
00:22:22,359 --> 00:22:24,680
Speaker 1: if you don't want to be with us, and uh,

433
00:22:24,800 --> 00:22:28,440
Speaker 1: thirty days is not a big gate these days at all. Right, Well,

434
00:22:28,440 --> 00:22:31,560
Speaker 1: the idea really was is that when you give a

435
00:22:31,600 --> 00:22:35,600
Speaker 1: gate every September October, people have to decide whether they

436
00:22:35,600 --> 00:22:37,760
Speaker 1: want to lock up for another year or two. When

437
00:22:37,800 --> 00:22:39,959
Speaker 1: you have monthly liquidity, you're never forcing them to make

438
00:22:40,000 --> 00:22:41,879
Speaker 1: a decision maybe at a long time they can always

439
00:22:41,880 --> 00:22:44,399
Speaker 1: have their money. And it's not a signaling device to

440
00:22:44,400 --> 00:22:46,520
Speaker 1: say you should have a short time horizon. Actually for

441
00:22:46,600 --> 00:22:48,639
Speaker 1: what we do, you need a long time horizon. But

442
00:22:48,720 --> 00:22:51,600
Speaker 1: what it is is a comfort to know you could

443
00:22:51,600 --> 00:22:54,239
Speaker 1: always have it and actually the money stick here. So

444
00:22:54,400 --> 00:22:56,720
Speaker 1: we thought those were two things wrong with the hedge

445
00:22:56,720 --> 00:22:59,000
Speaker 1: fund business. People took out it all the wrong times.

446
00:22:59,280 --> 00:23:01,760
Speaker 1: They're charging too much, so we would leave our investors

447
00:23:01,760 --> 00:23:05,719
Speaker 1: with more money and ability to have their money anytime.

448
00:23:05,720 --> 00:23:08,119
Speaker 1: It was actually turned into be a very sticky business,

449
00:23:08,200 --> 00:23:10,879
Speaker 1: and that's why three years later we were able to

450
00:23:10,880 --> 00:23:14,040
Speaker 1: get into the mutual fund business not dilute our strategy

451
00:23:14,040 --> 00:23:17,320
Speaker 1: because we were not charging exorbitant rates. We weren't charging

452
00:23:17,359 --> 00:23:20,840
Speaker 1: a performance fee on our hedge funds, and so we

453
00:23:20,840 --> 00:23:25,080
Speaker 1: were able to turn institutional quality hedge funds into mutual

454
00:23:25,160 --> 00:23:28,439
Speaker 1: funds without diluting our strategy. If you're charging two and

455
00:23:28,520 --> 00:23:30,680
Speaker 1: twenty two your or one and a half and twenty

456
00:23:30,680 --> 00:23:33,280
Speaker 1: whatever it is to your investors, you can't move into

457
00:23:33,320 --> 00:23:35,159
Speaker 1: the mutual fund space and just charge one and a

458
00:23:35,200 --> 00:23:39,560
Speaker 1: half or two percent because without diluting your strategy, because

459
00:23:39,720 --> 00:23:43,239
Speaker 1: your institutional investors would get upset. So what ended up

460
00:23:43,240 --> 00:23:45,280
Speaker 1: happening is that we ended up going into the mutual

461
00:23:45,320 --> 00:23:47,919
Speaker 1: fund area because we were charging very reasonable fees that

462
00:23:48,000 --> 00:23:51,000
Speaker 1: would also work in the mutual fund area. But this

463
00:23:51,080 --> 00:23:53,200
Speaker 1: is what we discovered, and this is my long winded

464
00:23:53,240 --> 00:23:55,320
Speaker 1: way of answering your question, your very good question, how

465
00:23:55,359 --> 00:23:58,560
Speaker 1: do we get into the Gotham index plus strategy, which

466
00:23:58,560 --> 00:24:01,359
Speaker 1: is our new strategy. Well, it turns out, and we

467
00:24:01,400 --> 00:24:03,600
Speaker 1: know this, but once we were able to come to

468
00:24:03,680 --> 00:24:07,239
Speaker 1: registered investment advisors who talked to individual investors much more

469
00:24:07,280 --> 00:24:12,840
Speaker 1: closely than institutionals, uh, institutional clients. The problem with active

470
00:24:12,840 --> 00:24:15,480
Speaker 1: management in general is that to beat the market, you

471
00:24:15,520 --> 00:24:18,159
Speaker 1: have to do something different than the market. High active

472
00:24:18,160 --> 00:24:20,560
Speaker 1: share is, in the parlance of the industry, right, to

473
00:24:20,600 --> 00:24:22,600
Speaker 1: beat the market, you have to do something different, but

474
00:24:22,680 --> 00:24:25,399
Speaker 1: your returns as a result zig and zag differently. So

475
00:24:25,440 --> 00:24:28,040
Speaker 1: I wrote a book called The Big Secret in two

476
00:24:28,080 --> 00:24:30,720
Speaker 1: thousand eleven, and I still say it's a big secret

477
00:24:30,760 --> 00:24:33,920
Speaker 1: because no one bought that or read that. Uh. So

478
00:24:34,040 --> 00:24:36,439
Speaker 1: I'll just tell you about it. Uh. In it, I

479
00:24:36,480 --> 00:24:39,359
Speaker 1: wrote up a few studies of remember I wrote in

480
00:24:39,359 --> 00:24:41,600
Speaker 1: two thousand eleven. So I wrote up the decade two

481
00:24:41,680 --> 00:24:44,840
Speaker 1: thousand to two thousand ten. This was a period where

482
00:24:44,840 --> 00:24:47,600
Speaker 1: the market was flat, but the best performing mutual fund

483
00:24:47,640 --> 00:24:49,760
Speaker 1: for that decade was up eighteen percent a year. It's

484
00:24:49,800 --> 00:24:51,720
Speaker 1: just that the average investor in that fund managed to

485
00:24:51,760 --> 00:24:53,840
Speaker 1: lose eleven percent a year on a dollar weighted basis

486
00:24:53,920 --> 00:24:56,000
Speaker 1: by moving in and out at all the wrong times.

487
00:24:56,359 --> 00:24:58,359
Speaker 1: So every time the market went up, people piled into

488
00:24:58,400 --> 00:25:00,520
Speaker 1: that fund. When market went down, they piled out. When

489
00:25:00,520 --> 00:25:02,879
Speaker 1: the fun outperformed, they piled in. When the fun underperformed,

490
00:25:02,880 --> 00:25:05,560
Speaker 1: they piled out. And they took that eight percent annual

491
00:25:05,560 --> 00:25:07,359
Speaker 1: game when the market was flat. So that's great on

492
00:25:07,400 --> 00:25:09,600
Speaker 1: an annualized basis over ten year period to beat the

493
00:25:09,640 --> 00:25:13,600
Speaker 1: market by eighteen points, But for outside investors, they went

494
00:25:13,680 --> 00:25:16,000
Speaker 1: in and out so badly that the average investor on

495
00:25:16,000 --> 00:25:19,280
Speaker 1: a dollar rated basis lost eleven percent a year. UH.

496
00:25:19,320 --> 00:25:24,520
Speaker 1: And it's astonishing and and and it's typical, uh, even

497
00:25:24,520 --> 00:25:27,360
Speaker 1: for institutions. I wrote up a study of institutional managers.

498
00:25:27,400 --> 00:25:29,760
Speaker 1: So I took a look at the you know that study,

499
00:25:29,760 --> 00:25:32,720
Speaker 1: which showed the top performing institutional managers for the same

500
00:25:32,760 --> 00:25:35,520
Speaker 1: decade two thousand and two thousand ten, who ended up

501
00:25:35,520 --> 00:25:37,960
Speaker 1: with the best ten year record quartile and what did

502
00:25:37,960 --> 00:25:39,720
Speaker 1: that who ended up in the top quartel, and what

503
00:25:39,760 --> 00:25:43,320
Speaker 1: did that look like? And that's what the study showed

504
00:25:43,400 --> 00:25:45,800
Speaker 1: was that of those who ended up with the best

505
00:25:45,840 --> 00:25:48,120
Speaker 1: tenure records spent at least three of those ten years

506
00:25:48,280 --> 00:25:51,840
Speaker 1: in the bottom half of performance. Not shocking, but everyone

507
00:25:51,920 --> 00:25:53,880
Speaker 1: because to beat the market you have to do something different.

508
00:25:53,920 --> 00:25:57,520
Speaker 1: You're gonna have periods of outperformed under performance, and everyone did.

509
00:25:58,000 --> 00:26:00,359
Speaker 1: Seventy of those who ended up with the best tenure

510
00:26:00,359 --> 00:26:02,320
Speaker 1: records spent at least three of those ten years, at

511
00:26:02,400 --> 00:26:04,120
Speaker 1: least three of the ten years in the bottom courtile

512
00:26:04,119 --> 00:26:07,640
Speaker 1: of performance. And the one I love is that half

513
00:26:07,680 --> 00:26:09,800
Speaker 1: they ended up with the best tenure record, but they

514
00:26:09,840 --> 00:26:12,680
Speaker 1: spent at least three of those ten years in the

515
00:26:12,680 --> 00:26:15,840
Speaker 1: bottom decile, the bottom performers. So you know, no one

516
00:26:15,880 --> 00:26:18,040
Speaker 1: stayed with them, but that's how you end up with

517
00:26:18,080 --> 00:26:21,440
Speaker 1: the best record. So here's a conundrum. There's a minority

518
00:26:21,600 --> 00:26:24,480
Speaker 1: of active managers who beat the market, and it's best

519
00:26:24,840 --> 00:26:27,119
Speaker 1: over a decade long, yes, and it's very hard to

520
00:26:27,160 --> 00:26:30,000
Speaker 1: find them up front before they beat the market. And

521
00:26:30,040 --> 00:26:32,800
Speaker 1: if you do, it's almost impossible to stick with them

522
00:26:32,840 --> 00:26:35,280
Speaker 1: because to beat the market you have to do something

523
00:26:35,280 --> 00:26:39,040
Speaker 1: different than the market. So, you know, picking active managers

524
00:26:39,040 --> 00:26:42,159
Speaker 1: has been a loser's game for a long time, just

525
00:26:42,720 --> 00:26:45,199
Speaker 1: even if there are some that win, and it's a minority.

526
00:26:45,240 --> 00:26:49,280
Speaker 1: I agree, it's a minority. Uh. And so my partner

527
00:26:49,359 --> 00:26:51,000
Speaker 1: Rob and I took a look at this problem, said,

528
00:26:51,400 --> 00:26:53,200
Speaker 1: how can we solve this because part of the reason

529
00:26:53,240 --> 00:26:55,360
Speaker 1: we're doing this we like making money. But if we're

530
00:26:55,359 --> 00:26:58,600
Speaker 1: not making money for other people, which is uh, there

531
00:26:58,600 --> 00:27:00,600
Speaker 1: really is not a lot of sense. And once we

532
00:27:00,640 --> 00:27:03,200
Speaker 1: got into the mutual fund area, we wanted to help

533
00:27:03,520 --> 00:27:06,320
Speaker 1: individual investors take advantage of the fact that we think

534
00:27:06,320 --> 00:27:08,680
Speaker 1: we know what we're doing. So we developed something called

535
00:27:08,760 --> 00:27:12,080
Speaker 1: Gotham Index Plus. So I was gonna say, West Gray

536
00:27:12,119 --> 00:27:14,560
Speaker 1: of Alpha Architect, I don't know if you're familiar with

537
00:27:14,640 --> 00:27:17,920
Speaker 1: his work, has a piece. I'm sure I'm mangling the

538
00:27:18,080 --> 00:27:22,879
Speaker 1: UM title, but it's something along the lines even God

539
00:27:22,920 --> 00:27:25,760
Speaker 1: would lose clients as an active manager, and I just

540
00:27:25,800 --> 00:27:29,320
Speaker 1: find that hilarious. So what are you doing so differently

541
00:27:29,480 --> 00:27:32,320
Speaker 1: with the index plus compared to what you were doing

542
00:27:32,359 --> 00:27:36,280
Speaker 1: previously UM with special situations? And what did your research

543
00:27:36,320 --> 00:27:40,800
Speaker 1: find about UM? How you could work around this problem

544
00:27:40,840 --> 00:27:45,199
Speaker 1: of individuals under performing their own investments. Yeah, so it

545
00:27:45,240 --> 00:27:48,280
Speaker 1: sounds almost like an impossible puzzle, but I'll tell you

546
00:27:48,359 --> 00:27:52,680
Speaker 1: how we solved it. We said, number one, most people

547
00:27:52,760 --> 00:27:56,160
Speaker 1: judge how they're doing, for better or worse, by seeing

548
00:27:56,160 --> 00:27:59,040
Speaker 1: if they beat the SNP five that's in this country.

549
00:27:59,320 --> 00:28:01,200
Speaker 1: And so we start at it there. We said, most

550
00:28:01,240 --> 00:28:03,320
Speaker 1: people are gonna stick with things if it's beating the

551
00:28:03,400 --> 00:28:06,840
Speaker 1: SNP five hundred, and lose if it's losing by too

552
00:28:06,880 --> 00:28:09,080
Speaker 1: much to the SNP five hundred. So we started with

553
00:28:09,119 --> 00:28:12,119
Speaker 1: that base for Gotham Index plus and we said, you

554
00:28:12,160 --> 00:28:14,880
Speaker 1: give us a dollar, we're gonna buy the underlying stocks

555
00:28:15,520 --> 00:28:17,520
Speaker 1: in the SNP five hundred. We're gonna put a dollar

556
00:28:17,560 --> 00:28:19,800
Speaker 1: into that in the weights of the SNP five hundreds.

557
00:28:19,840 --> 00:28:21,480
Speaker 1: So you give us a dollar. This is in mutual

558
00:28:21,480 --> 00:28:24,159
Speaker 1: fund form. You give us a dollar, we recreate the

559
00:28:24,240 --> 00:28:27,080
Speaker 1: SNP five hundred bottoms up and put a dollar into

560
00:28:27,119 --> 00:28:30,560
Speaker 1: the SNP five hundred. Okay, that doesn't sound so hard

561
00:28:30,600 --> 00:28:33,040
Speaker 1: to do, and don't think of ourselves as charging for

562
00:28:33,080 --> 00:28:35,640
Speaker 1: that portion. That's pretty easy to do. And you're doing

563
00:28:35,680 --> 00:28:38,480
Speaker 1: this not with indices but with actual and yes, we

564
00:28:38,520 --> 00:28:41,360
Speaker 1: buy the individual stocks because as you'll hear in a moment.

565
00:28:41,400 --> 00:28:45,120
Speaker 1: We're very very tax efficient, so it helps us to

566
00:28:45,240 --> 00:28:48,000
Speaker 1: own the individual stocks. Then we go out and we

567
00:28:48,040 --> 00:28:51,240
Speaker 1: buy ninety cents more of our favorite SMP stocks within

568
00:28:51,240 --> 00:28:54,160
Speaker 1: the mutual fund. And how many are that is that

569
00:28:54,320 --> 00:28:57,640
Speaker 1: second the plus part. What happens is we to the

570
00:28:57,680 --> 00:28:59,600
Speaker 1: two D fifty out of the five hundred stocks in

571
00:28:59,640 --> 00:29:01,520
Speaker 1: the sn P, five dred that we like the best.

572
00:29:01,960 --> 00:29:05,680
Speaker 1: We adds more of those in the order in which

573
00:29:05,720 --> 00:29:07,280
Speaker 1: we like them. So the more we like something, the

574
00:29:07,320 --> 00:29:10,600
Speaker 1: more we'll add to it. Uh. And then we'll short

575
00:29:11,360 --> 00:29:15,120
Speaker 1: or we'll sell nine cents worth of the stocks we

576
00:29:15,240 --> 00:29:17,120
Speaker 1: like the least. So we have a ninety long nine

577
00:29:17,320 --> 00:29:19,760
Speaker 1: short long short overlay on top of the dollar in

578
00:29:19,800 --> 00:29:24,000
Speaker 1: the SNP. But we do some things to mitigate because

579
00:29:24,200 --> 00:29:26,920
Speaker 1: obviously if we're gonna zig and zag too much, we

580
00:29:26,960 --> 00:29:30,040
Speaker 1: want to have tracking error but positive tracking. Or people

581
00:29:30,080 --> 00:29:32,200
Speaker 1: don't mind winning all the time, it's the losing part

582
00:29:32,280 --> 00:29:35,200
Speaker 1: that they don't like. So we're trying to mitigate the

583
00:29:35,240 --> 00:29:37,760
Speaker 1: losing parts. So what do we do. We're buying the

584
00:29:37,800 --> 00:29:40,240
Speaker 1: cheapest stocks we can find and putting ninety cents into

585
00:29:40,280 --> 00:29:43,800
Speaker 1: them in addition to the index. The dollar in the

586
00:29:43,800 --> 00:29:46,160
Speaker 1: already in the index, and we're shorting ninety cents of

587
00:29:46,160 --> 00:29:49,200
Speaker 1: our least favorite. But we want to balance that, so

588
00:29:49,200 --> 00:29:52,480
Speaker 1: we have a zero beta on that because we already

589
00:29:52,520 --> 00:29:53,960
Speaker 1: long a dollar in the market. We don't want to

590
00:29:54,000 --> 00:29:56,880
Speaker 1: keep the same beta as the market. Number Two, we

591
00:29:56,880 --> 00:29:59,000
Speaker 1: don't want to drive tracking or so we we don't

592
00:29:59,000 --> 00:30:02,160
Speaker 1: want to small stock to drive returns. So something's let's

593
00:30:02,160 --> 00:30:04,800
Speaker 1: say point one percent of the s and P five hundred.

594
00:30:04,880 --> 00:30:06,880
Speaker 1: We don't want that driving our returns. But we may

595
00:30:06,920 --> 00:30:09,560
Speaker 1: really like that stock. We may think it's really cheap,

596
00:30:09,800 --> 00:30:11,520
Speaker 1: so we will buy more of it, and we may

597
00:30:11,560 --> 00:30:13,720
Speaker 1: even buy five or eight times more of it, but

598
00:30:13,800 --> 00:30:16,280
Speaker 1: that's only point oh five or point oh eight percent,

599
00:30:16,640 --> 00:30:18,920
Speaker 1: not really going to drive returns. Will buy as much

600
00:30:18,920 --> 00:30:22,600
Speaker 1: as we can, uh, subject to the constraints UH that

601
00:30:22,640 --> 00:30:24,760
Speaker 1: we don't want to drive too much tracking error. The

602
00:30:24,840 --> 00:30:28,880
Speaker 1: third thing we do is we balance fundamentals. In other words,

603
00:30:29,120 --> 00:30:31,760
Speaker 1: the stocks were short of stocks trading at forty hundred

604
00:30:31,800 --> 00:30:35,320
Speaker 1: times earnings. These are hope stocks. People really thinking they're

605
00:30:35,320 --> 00:30:37,920
Speaker 1: buying them now, not on current earnings, but two thousand

606
00:30:37,960 --> 00:30:40,880
Speaker 1: twenty two. They think it's gonna be really great, so

607
00:30:40,920 --> 00:30:43,640
Speaker 1: they're buying these these are hope stocks based on the future.

608
00:30:43,960 --> 00:30:47,840
Speaker 1: They're trading at forty fifty hundred UH times earnings, and

609
00:30:47,880 --> 00:30:49,640
Speaker 1: but there are other reasons why people like them. Maybe

610
00:30:49,680 --> 00:30:53,160
Speaker 1: sales are growing really quickly, or other aspects of the

611
00:30:53,240 --> 00:30:56,240
Speaker 1: fundamentals are going well, so we balance those fundamentals. So

612
00:30:56,240 --> 00:30:57,920
Speaker 1: if you took a look at our long portfolio, we

613
00:30:57,960 --> 00:30:59,800
Speaker 1: have just as good sales growth in the cheap stocks

614
00:30:59,800 --> 00:31:02,560
Speaker 1: were buying as the expensive stocks were shorting. So it's

615
00:31:02,800 --> 00:31:05,280
Speaker 1: they're not unbalanced that way. You know the words, We're

616
00:31:05,280 --> 00:31:08,360
Speaker 1: just getting them cheaper. They're cheaper, we're making comport. We're

617
00:31:08,360 --> 00:31:10,160
Speaker 1: buying the cheapest stocks we can find. We're shorting the

618
00:31:10,200 --> 00:31:13,360
Speaker 1: most expensive subject to constraints that keep us in line.

619
00:31:13,640 --> 00:31:16,800
Speaker 1: One is there's a zero beta. Two is that small

620
00:31:16,840 --> 00:31:19,880
Speaker 1: stocks won't drive returns. Three is that we balance fundamental

621
00:31:19,960 --> 00:31:22,480
Speaker 1: So all we're doing is buying companies they are doing

622
00:31:22,520 --> 00:31:25,440
Speaker 1: really well and we're just getting them cheaper. And UH

623
00:31:25,480 --> 00:31:28,400
Speaker 1: as a result, we've been we just passed our three

624
00:31:28,480 --> 00:31:31,680
Speaker 1: year anniversary and this fund UH we got five stars

625
00:31:31,680 --> 00:31:34,000
Speaker 1: from morning Star. But more importantly, we beat all twelve

626
00:31:34,360 --> 00:31:36,440
Speaker 1: funds in our category, which is March Capital and where

627
00:31:36,480 --> 00:31:39,360
Speaker 1: the SNP is, and the most important part is is

628
00:31:39,400 --> 00:31:41,080
Speaker 1: that we didn't do nearly as well as I hope

629
00:31:41,080 --> 00:31:43,840
Speaker 1: to do in the next three years. UH. This was

630
00:31:43,880 --> 00:31:46,200
Speaker 1: a very tough period for us. Even though we did

631
00:31:46,640 --> 00:31:48,920
Speaker 1: very well relative to the other funds, we didn't do

632
00:31:49,080 --> 00:31:52,280
Speaker 1: very well relative to our expectations. And the reason for

633
00:31:52,320 --> 00:31:55,160
Speaker 1: that is because the market with you know, excluding the

634
00:31:55,240 --> 00:31:59,040
Speaker 1: last two months, went straight up during those three years, UH,

635
00:31:59,120 --> 00:32:02,680
Speaker 1: with no correct you have a big leverage short. We're

636
00:32:02,720 --> 00:32:05,640
Speaker 1: short hope stocks the ninety cents. We're short our hope stocks.

637
00:32:05,960 --> 00:32:08,720
Speaker 1: When you take risk in hope stocks and you get paid,

638
00:32:08,960 --> 00:32:10,760
Speaker 1: then you take more risk, and you take more risk

639
00:32:10,760 --> 00:32:13,800
Speaker 1: and there's no correction. So there's a very tough period

640
00:32:13,840 --> 00:32:16,320
Speaker 1: for our short book. Luckily, our long book we're not

641
00:32:16,400 --> 00:32:18,120
Speaker 1: low as I said before, we're not low price to

642
00:32:18,120 --> 00:32:21,000
Speaker 1: book low price sales. Investors were cash flow oriented investors,

643
00:32:21,560 --> 00:32:24,720
Speaker 1: and people get very optimistic about our cash flows and

644
00:32:24,720 --> 00:32:27,280
Speaker 1: our businesses when things are going well. So our longs

645
00:32:27,280 --> 00:32:29,320
Speaker 1: were able to keep pace with our shorts and even

646
00:32:29,360 --> 00:32:32,440
Speaker 1: add three points a year to the UH to that

647
00:32:32,520 --> 00:32:34,760
Speaker 1: and we so the plus long did better than the

648
00:32:34,760 --> 00:32:37,600
Speaker 1: plus short and you still have the underlying SMP correct.

649
00:32:37,680 --> 00:32:41,360
Speaker 1: So it's as index plus. But the great news is

650
00:32:41,360 --> 00:32:45,120
Speaker 1: is that spread, that long short spread actually does better

651
00:32:45,120 --> 00:32:47,280
Speaker 1: in bad markets. Well, that was my next questions with

652
00:32:47,320 --> 00:32:49,680
Speaker 1: the words out of my mouth. If we would exceed,

653
00:32:49,720 --> 00:32:53,760
Speaker 1: forget even another oh two thousand to oh two or

654
00:32:54,200 --> 00:32:58,040
Speaker 1: eight oh nine, But I'm trying to think of a comparable.

655
00:32:58,240 --> 00:33:00,320
Speaker 1: I was gonna say seventy three, seventy four, if that's

656
00:33:00,360 --> 00:33:02,600
Speaker 1: not all that different from eight o nine. But if

657
00:33:02,640 --> 00:33:05,520
Speaker 1: we see a run of the mill twenty correction that

658
00:33:05,640 --> 00:33:09,280
Speaker 1: last eight months, how would you expect this to perform? Well,

659
00:33:09,400 --> 00:33:11,880
Speaker 1: those are our best markets for our spread. So obviously

660
00:33:11,920 --> 00:33:14,360
Speaker 1: the index portion wouldn't do all that well, but you

661
00:33:14,360 --> 00:33:17,000
Speaker 1: would want we viewed as an index and your own protection,

662
00:33:17,320 --> 00:33:19,280
Speaker 1: you know, the words for that portion of your portfolio.

663
00:33:19,360 --> 00:33:22,760
Speaker 1: Want to be sixty net long if that's where your

664
00:33:22,800 --> 00:33:25,560
Speaker 1: risk tolerance is. What's the smartest way to take that

665
00:33:26,440 --> 00:33:29,000
Speaker 1: percent long allocations of the market of that forty or

666
00:33:29,040 --> 00:33:32,000
Speaker 1: fifties sixty and so what we like about index plus

667
00:33:32,040 --> 00:33:35,120
Speaker 1: it's really like owning the index with protection attached. Because

668
00:33:35,760 --> 00:33:38,120
Speaker 1: you take high price cashing companies out our companies selling

669
00:33:38,160 --> 00:33:41,000
Speaker 1: it a hundred times pretext FreeCast flow or fifty times,

670
00:33:41,320 --> 00:33:43,480
Speaker 1: they're gonna take those guys out and shoot them. In

671
00:33:43,520 --> 00:33:47,680
Speaker 1: bad markets, these are hope stocks. Those are gonna get crushed. Tesla,

672
00:33:47,880 --> 00:33:50,480
Speaker 1: Netflix going down the whole, All those guys are gonna

673
00:33:50,680 --> 00:33:54,360
Speaker 1: get crushed. You know. Uh, it turns out, you know,

674
00:33:54,440 --> 00:33:56,960
Speaker 1: through all our research and everybody else, is that buying

675
00:33:56,960 --> 00:33:59,320
Speaker 1: things that a hundred times earnings or things that are

676
00:33:59,360 --> 00:34:03,040
Speaker 1: losing money is pretty much the world's worst strategy over time.

677
00:34:03,760 --> 00:34:06,560
Speaker 1: And so in bad markets even worse than that, Uh,

678
00:34:06,840 --> 00:34:10,520
Speaker 1: those stocks will get crushed. We're buying stocks that are

679
00:34:10,840 --> 00:34:13,839
Speaker 1: have huge cash flows. People have low expectations for them.

680
00:34:13,880 --> 00:34:15,719
Speaker 1: That's why we're getting them so cheap, and so we

681
00:34:15,719 --> 00:34:18,160
Speaker 1: don't pay for high expectations in the long book. So

682
00:34:18,200 --> 00:34:20,200
Speaker 1: when the lower bad news comes in, we didn't pay

683
00:34:20,239 --> 00:34:22,440
Speaker 1: for high expectations. So our long stend to hold up better.

684
00:34:22,520 --> 00:34:25,800
Speaker 1: Our shorts are getting killed. Great spreads and bad markets.

685
00:34:25,800 --> 00:34:27,200
Speaker 1: And and let me just tell you where I think

686
00:34:27,239 --> 00:34:29,879
Speaker 1: the market is. We value We have a big research team,

687
00:34:29,880 --> 00:34:33,000
Speaker 1: and we value all the companies in the SMP five hundred.

688
00:34:33,000 --> 00:34:36,000
Speaker 1: We also value the top roughly three thousand companies. But

689
00:34:36,400 --> 00:34:39,640
Speaker 1: we value the these stocks in the SP five hundred.

690
00:34:39,680 --> 00:34:42,719
Speaker 1: Every day for the last twenty eight years bottoms up,

691
00:34:42,920 --> 00:34:46,080
Speaker 1: so I can contextualize where do we stand today relative

692
00:34:46,120 --> 00:34:48,720
Speaker 1: to those twenty eight years, And right now we stand

693
00:34:48,719 --> 00:34:52,120
Speaker 1: in the sixteenth percentile towards expensive over those twenty eight years,

694
00:34:52,360 --> 00:34:54,680
Speaker 1: meaning the market has been cheaper percent of the time

695
00:34:54,880 --> 00:34:58,200
Speaker 1: for the SNP and cheaper six percent of the time.

696
00:34:58,239 --> 00:35:00,000
Speaker 1: Then I can go back and look at what's happened

697
00:35:00,239 --> 00:35:03,320
Speaker 1: more expensive sixteen percent at the time. It's more expensive

698
00:35:03,320 --> 00:35:06,160
Speaker 1: sixteen percent at the time, cheaper four percent at the time.

699
00:35:06,160 --> 00:35:10,239
Speaker 1: My apologies, So it's expensive, and we can go back

700
00:35:10,239 --> 00:35:12,200
Speaker 1: in time and look at what's happened to the market

701
00:35:12,239 --> 00:35:15,160
Speaker 1: over the next few years from this valuation level in

702
00:35:15,200 --> 00:35:17,799
Speaker 1: the past. It's not a prediction, it's just saying what's

703
00:35:17,800 --> 00:35:20,120
Speaker 1: happened from this valuation level in the past. And the

704
00:35:20,160 --> 00:35:22,799
Speaker 1: answer to that is year forward returns of average three

705
00:35:22,840 --> 00:35:25,480
Speaker 1: to five two year forward's eight to ten not negative

706
00:35:25,520 --> 00:35:28,799
Speaker 1: because the market average nine to ten percent returns during

707
00:35:28,800 --> 00:35:31,840
Speaker 1: those twenty eight years, and that's something we've come to

708
00:35:32,920 --> 00:35:35,880
Speaker 1: get used to. It not necessarily will continue in the future,

709
00:35:35,920 --> 00:35:37,680
Speaker 1: but that's what we've come to get used to. And

710
00:35:37,719 --> 00:35:40,800
Speaker 1: we're more expensive than that. So from the sixteenth percent

711
00:35:40,840 --> 00:35:43,600
Speaker 1: to I'll expected returns about three to five percent eight

712
00:35:43,640 --> 00:35:46,520
Speaker 1: to ten over the next two years. So if we

713
00:35:46,600 --> 00:35:48,600
Speaker 1: get closer to what we're thinking over the next year

714
00:35:48,640 --> 00:35:51,000
Speaker 1: three to five. And when we tested this over the

715
00:35:51,040 --> 00:35:53,480
Speaker 1: seventeen years before we went live, we were able to

716
00:35:53,520 --> 00:35:55,440
Speaker 1: add about seven points to that. So if we can

717
00:35:55,480 --> 00:35:57,319
Speaker 1: add anywhere close to that and the market is only

718
00:35:57,360 --> 00:35:59,560
Speaker 1: earning three to five, people really going to enjoy those

719
00:35:59,600 --> 00:36:03,120
Speaker 1: extra turns at that time. Our best returns are actually

720
00:36:03,120 --> 00:36:05,839
Speaker 1: in not up three to five pc, which is very

721
00:36:05,840 --> 00:36:09,040
Speaker 1: good returns above average returns, but negative returns. We had

722
00:36:09,040 --> 00:36:11,120
Speaker 1: double digit spreads in all the four years that we

723
00:36:11,200 --> 00:36:14,360
Speaker 1: looked at that the market in our tests that the

724
00:36:14,360 --> 00:36:17,680
Speaker 1: market was down, uh, and that will be very precious

725
00:36:17,760 --> 00:36:20,040
Speaker 1: to have not lose money. So you on the index

726
00:36:20,360 --> 00:36:24,840
Speaker 1: plus protection. It's a more painless way to UH be

727
00:36:24,920 --> 00:36:28,640
Speaker 1: long long the market, and we think people will stick

728
00:36:28,680 --> 00:36:33,759
Speaker 1: with us because it's UH. The underperformance periods we'll be

729
00:36:33,840 --> 00:36:35,840
Speaker 1: way mitigated based on the way we're doing it. And

730
00:36:35,880 --> 00:36:37,879
Speaker 1: we're already long a dollar in the market and you're

731
00:36:37,960 --> 00:36:41,240
Speaker 1: only owning companies that are within the SMB five hundreds.

732
00:36:41,239 --> 00:36:45,359
Speaker 1: So my assumption is you can scale this pretty easily right. Well,

733
00:36:45,400 --> 00:36:47,719
Speaker 1: not only that, but we also don't buy big positions

734
00:36:47,719 --> 00:36:50,920
Speaker 1: and small pieces of the SMP five hundreds. So we're

735
00:36:50,920 --> 00:36:54,640
Speaker 1: not worried about capacity here. We're just worried about getting

736
00:36:54,960 --> 00:36:59,840
Speaker 1: high returns for investors. That that is quite fascinating. I

737
00:37:00,239 --> 00:37:05,319
Speaker 1: very vividly remember this book coming out in something like

738
00:37:05,360 --> 00:37:08,919
Speaker 1: that and and exploding like it came out of left field.

739
00:37:09,000 --> 00:37:12,200
Speaker 1: I don't think a lot of the investing public, um

740
00:37:12,239 --> 00:37:17,120
Speaker 1: necessarily knew who you were, and suddenly this book was everywhere. Um,

741
00:37:17,160 --> 00:37:19,880
Speaker 1: what motivated you to write this twenty years ago, twenty

742
00:37:19,880 --> 00:37:22,440
Speaker 1: plus years ago? I can't really explain why, But I

743
00:37:22,480 --> 00:37:25,080
Speaker 1: love investing and I always wanted to write and teach,

744
00:37:25,400 --> 00:37:28,000
Speaker 1: and investing is what I know about. So I teach investing.

745
00:37:28,000 --> 00:37:29,960
Speaker 1: I've been doing that at Columbia for twenty two years

746
00:37:30,000 --> 00:37:33,480
Speaker 1: and always wanted to write about it. And so you

747
00:37:33,520 --> 00:37:35,319
Speaker 1: can be a stock market genius. See. I can't even

748
00:37:35,360 --> 00:37:38,080
Speaker 1: think of the name because it was such a bad name,

749
00:37:38,120 --> 00:37:41,279
Speaker 1: but uh, it was a great marketing name. You may

750
00:37:41,320 --> 00:37:43,920
Speaker 1: not love the name because it doesn't really describe the

751
00:37:43,920 --> 00:37:47,080
Speaker 1: contents of the book that well, but it's certainly caught

752
00:37:47,160 --> 00:37:50,640
Speaker 1: people's attention. Well, it was really supposed to be any

753
00:37:50,640 --> 00:37:53,120
Speaker 1: fool can be a stock market Genius, but only fools

754
00:37:53,160 --> 00:37:56,080
Speaker 1: came out with a book. Uh, and so I had

755
00:37:56,120 --> 00:37:58,160
Speaker 1: about twenty four hours to change the name, and I

756
00:37:58,200 --> 00:38:01,799
Speaker 1: was canvassing my family and my father said something like,

757
00:38:02,760 --> 00:38:04,719
Speaker 1: how about you can be a stock market genius? And

758
00:38:04,760 --> 00:38:07,520
Speaker 1: then in parentheses, even if You're not too smart? And

759
00:38:07,560 --> 00:38:10,520
Speaker 1: I kind of giggled about it, and uh, and we

760
00:38:10,560 --> 00:38:12,160
Speaker 1: put that in it. It turned out to be one

761
00:38:12,200 --> 00:38:15,520
Speaker 1: of the worst titles ever on the that the parentheses

762
00:38:15,800 --> 00:38:18,399
Speaker 1: even if You're not too smart is part of that. Yeah.

763
00:38:18,560 --> 00:38:21,720
Speaker 1: So but I just really it was really a collection

764
00:38:21,760 --> 00:38:24,320
Speaker 1: of war stories from you know, we had talked about

765
00:38:24,360 --> 00:38:26,600
Speaker 1: we had run outside money for ten years or in

766
00:38:26,680 --> 00:38:31,440
Speaker 1: fifty before fees for that period, and uh, how do

767
00:38:31,520 --> 00:38:34,520
Speaker 1: we do that? And you know, how can you do that?

768
00:38:35,000 --> 00:38:37,400
Speaker 1: And what what what are the what's the way you

769
00:38:37,640 --> 00:38:39,800
Speaker 1: go about attacking that? And I just had a fun

770
00:38:40,040 --> 00:38:42,279
Speaker 1: time writing about the war stories and having a good

771
00:38:42,320 --> 00:38:44,160
Speaker 1: time with it. So let's talk a little bit about

772
00:38:44,160 --> 00:38:46,920
Speaker 1: some of those war stories. First, how old does the

773
00:38:46,960 --> 00:38:51,160
Speaker 1: book hold up twenty years later? Well, I have five

774
00:38:51,280 --> 00:38:53,839
Speaker 1: kids and made all my kids read it number one

775
00:38:53,960 --> 00:38:57,200
Speaker 1: and uh, so I still think it's uh, everything in

776
00:38:57,239 --> 00:39:01,280
Speaker 1: there is very valid, you know, any hedge fund managers.

777
00:39:01,320 --> 00:39:03,120
Speaker 1: I did not write it for hedge fund managers. That's

778
00:39:03,160 --> 00:39:06,000
Speaker 1: really who took two with the most, which is had

779
00:39:06,000 --> 00:39:08,960
Speaker 1: to be an interesting surprise. Yeah. I really wrote it

780
00:39:09,000 --> 00:39:11,520
Speaker 1: to be friendly and funny and and you know, just

781
00:39:11,560 --> 00:39:13,640
Speaker 1: have a good time doing it. And I thought I

782
00:39:13,680 --> 00:39:18,560
Speaker 1: was writing to an audience of average people. But you know,

783
00:39:18,880 --> 00:39:21,759
Speaker 1: I hadn't started teaching Columbia yet, and I realized as

784
00:39:21,800 --> 00:39:24,480
Speaker 1: soon as I taught my first class back in that

785
00:39:24,880 --> 00:39:27,960
Speaker 1: I think I really wrote this uh at an NBA level,

786
00:39:28,040 --> 00:39:30,320
Speaker 1: because it was about at their level, and that wasn't

787
00:39:30,360 --> 00:39:35,480
Speaker 1: my uh my goal. But you know, now lots of

788
00:39:35,520 --> 00:39:37,920
Speaker 1: these big catch funds handed out first day when someone

789
00:39:37,960 --> 00:39:40,879
Speaker 1: walks in and says, go read this. So let's talk

790
00:39:40,920 --> 00:39:43,680
Speaker 1: a little bit about spinoffs, which was such an important

791
00:39:43,680 --> 00:39:45,960
Speaker 1: part in the first Let's call a third of the

792
00:39:46,000 --> 00:39:51,080
Speaker 1: book ninety. The twenty years or more that preceded this

793
00:39:51,760 --> 00:39:55,600
Speaker 1: a lot of them and a lot of conglomerates being formed.

794
00:39:55,719 --> 00:39:58,880
Speaker 1: Would make sense that the next year that follows it

795
00:39:58,920 --> 00:40:02,280
Speaker 1: sees a lot of spin offs. Um. But since since

796
00:40:02,320 --> 00:40:05,200
Speaker 1: the book came out, we've seen certainly in the past

797
00:40:05,239 --> 00:40:08,359
Speaker 1: decade or so, less and less spinoffs. Do you think

798
00:40:08,480 --> 00:40:12,880
Speaker 1: that part of the analysis still holds true or is

799
00:40:12,920 --> 00:40:15,839
Speaker 1: this just like everything else? No, No, there are there

800
00:40:15,840 --> 00:40:18,600
Speaker 1: are plenty of spinoffs and it's in here uh now,

801
00:40:18,680 --> 00:40:21,080
Speaker 1: And people have done studies up through last year that

802
00:40:21,120 --> 00:40:23,279
Speaker 1: showed that they did much better than the market as

803
00:40:23,280 --> 00:40:27,400
Speaker 1: a whole, But that wasn't really my point. My point

804
00:40:27,520 --> 00:40:31,000
Speaker 1: is is that the nature of spinoffs is, uh, they're

805
00:40:31,000 --> 00:40:34,080
Speaker 1: not underwritten written securities. They're usually given to people who

806
00:40:34,120 --> 00:40:38,879
Speaker 1: don't want them, right, and uh, there's an interesting behavioral

807
00:40:38,920 --> 00:40:43,239
Speaker 1: element that you describe, and nine is long before behavioral

808
00:40:43,320 --> 00:40:47,439
Speaker 1: finance was everywhere, which is I expect people to get

809
00:40:47,440 --> 00:40:49,960
Speaker 1: this and say, this is not why I bought X

810
00:40:50,120 --> 00:40:52,719
Speaker 1: y Z. I certainly didn't buy it for the ABC spinoff.

811
00:40:53,040 --> 00:40:54,719
Speaker 1: So there's a tendency for a lot of people to

812
00:40:54,800 --> 00:40:57,799
Speaker 1: not even analyze it, sell it. And suddenly there's a

813
00:40:57,840 --> 00:41:00,959
Speaker 1: good cheap property there, right, So it may be cheap,

814
00:41:01,000 --> 00:41:04,640
Speaker 1: it may not be cheap. They're not usually well followed,

815
00:41:04,680 --> 00:41:07,200
Speaker 1: so there I would call it miss price. It's ripe

816
00:41:07,239 --> 00:41:10,120
Speaker 1: for miss pricing. It doesn't really all the studies that

817
00:41:10,160 --> 00:41:13,520
Speaker 1: show the average spinoff does this or outperforms or doesn't outperform,

818
00:41:13,560 --> 00:41:17,480
Speaker 1: doesn't matter. What I was really trying to show people

819
00:41:18,120 --> 00:41:21,080
Speaker 1: is places to look where things may be miss priced.

820
00:41:22,040 --> 00:41:25,000
Speaker 1: And here where people have never followed this company before.

821
00:41:25,040 --> 00:41:27,440
Speaker 1: It's not being sold by an investment firm, given to

822
00:41:27,480 --> 00:41:30,360
Speaker 1: people who don't really want it. It's ripe for miss pricing.

823
00:41:30,360 --> 00:41:32,359
Speaker 1: It could be under priced, could be overpriced, doesn't matter

824
00:41:32,400 --> 00:41:35,160
Speaker 1: which one it's. Uh. You know I I described in

825
00:41:35,200 --> 00:41:37,600
Speaker 1: the book that it's you know, no fun to take

826
00:41:37,600 --> 00:41:39,760
Speaker 1: a shovel and dig holes, but if you're digging, digging

827
00:41:39,760 --> 00:41:43,840
Speaker 1: for buried treasure gets more interesting. And so this is

828
00:41:43,880 --> 00:41:45,920
Speaker 1: an area where has a big red X on it

829
00:41:46,239 --> 00:41:48,440
Speaker 1: where there could be a nice treasure underneath if you

830
00:41:48,480 --> 00:41:51,160
Speaker 1: dig here. So it's worth doing the work uh in

831
00:41:51,239 --> 00:41:54,239
Speaker 1: these areas, so right for miss pricing is what I'd say.

832
00:41:54,280 --> 00:41:57,680
Speaker 1: It doesn't really matter how the average spinoff does. However,

833
00:41:58,080 --> 00:42:00,759
Speaker 1: they have done very well. There are some things, as

834
00:42:00,800 --> 00:42:04,480
Speaker 1: you mentioned, uh, built into the system that make people

835
00:42:04,960 --> 00:42:08,040
Speaker 1: uh get rid of them uh, and and there are

836
00:42:08,080 --> 00:42:09,879
Speaker 1: a lot of other areas in the market that does that.

837
00:42:10,040 --> 00:42:12,520
Speaker 1: But the idea beyond the whole book was sort of

838
00:42:12,560 --> 00:42:15,280
Speaker 1: look where you know, I started off with my in laws.

839
00:42:16,200 --> 00:42:19,040
Speaker 1: The first chapter was about my in laws who uh

840
00:42:19,239 --> 00:42:24,800
Speaker 1: used to shop in Connecticut for antiques and yard sales

841
00:42:24,920 --> 00:42:28,319
Speaker 1: and and and country auctions and and things like that.

842
00:42:28,600 --> 00:42:32,400
Speaker 1: Artwork you mentioned artwork and sculptures and all these things.

843
00:42:33,000 --> 00:42:35,600
Speaker 1: And they're looking off the beaten path. They're not looking

844
00:42:35,600 --> 00:42:38,840
Speaker 1: in Manhattan on Madison Avenue or you know, Fifth Avenue.

845
00:42:38,840 --> 00:42:42,239
Speaker 1: They're they're really looking off the beaten path, trying to

846
00:42:42,239 --> 00:42:45,240
Speaker 1: find things that are undiscovered. But I made the point

847
00:42:45,239 --> 00:42:48,080
Speaker 1: of saying, they're not looking for the next Picasso. They're

848
00:42:48,120 --> 00:42:50,239
Speaker 1: not finding a painting in some yard sales saying, hey,

849
00:42:50,280 --> 00:42:53,279
Speaker 1: this guy is gonna be the next Picasso. Uh, that's

850
00:42:53,280 --> 00:42:55,520
Speaker 1: really hard to do. What they're really looking for is

851
00:42:55,520 --> 00:42:59,879
Speaker 1: a painting that they found the same artist had had

852
00:43:00,000 --> 00:43:03,640
Speaker 1: on a painting that's of the similar idea that just

853
00:43:03,680 --> 00:43:06,040
Speaker 1: went up for auction for three times the price it's

854
00:43:06,080 --> 00:43:09,839
Speaker 1: being offered for over at South BEA's. So they they

855
00:43:09,920 --> 00:43:14,839
Speaker 1: recognize that, uh, right now, a similar painting just went

856
00:43:14,880 --> 00:43:17,440
Speaker 1: for three times as much. That's a lot easier to

857
00:43:17,480 --> 00:43:21,879
Speaker 1: do than to project or predict the next Picasso. And

858
00:43:21,960 --> 00:43:23,799
Speaker 1: so that's what they were doing. That's what you're doing

859
00:43:23,880 --> 00:43:27,280
Speaker 1: the spinoff area. You're looking and plate your your bargain

860
00:43:27,320 --> 00:43:29,439
Speaker 1: comes because you're looking a little harder than other people.

861
00:43:29,480 --> 00:43:31,359
Speaker 1: You're looking at things that are a little harder to do,

862
00:43:31,640 --> 00:43:34,879
Speaker 1: a little harder to find, probably smaller than most people

863
00:43:34,880 --> 00:43:37,560
Speaker 1: are willing to look at. Not the main idea. Usually

864
00:43:37,560 --> 00:43:40,440
Speaker 1: these are discarded things, and these are all things that

865
00:43:40,480 --> 00:43:43,360
Speaker 1: are right for miss pricing makes a lot of sense

866
00:43:43,680 --> 00:43:46,120
Speaker 1: in the book there there's something that correct me up.

867
00:43:46,200 --> 00:43:50,720
Speaker 1: You right, never trust anyone over thirty and never trust

868
00:43:50,760 --> 00:43:55,400
Speaker 1: anyone thirty and under. Essentially, never trust anyone. Tell us

869
00:43:55,440 --> 00:43:58,160
Speaker 1: a little bit about your thought process with that. Well,

870
00:43:58,200 --> 00:44:00,239
Speaker 1: when both of us were growing up, that was a saying,

871
00:44:00,280 --> 00:44:03,799
Speaker 1: never trust anyone over thirty. I think anyone who's younger

872
00:44:03,800 --> 00:44:05,960
Speaker 1: than we are probably doesn't even know that expression. So

873
00:44:06,040 --> 00:44:09,520
Speaker 1: from them, Yeah, back in the sixties when we were

874
00:44:09,560 --> 00:44:12,200
Speaker 1: growing up, that's what you were. You know, don't trust

875
00:44:12,200 --> 00:44:18,520
Speaker 1: the man, you know, anyone over thirty and and Uh,

876
00:44:18,719 --> 00:44:21,480
Speaker 1: that was just my way of saying that you have

877
00:44:21,560 --> 00:44:23,960
Speaker 1: to be your own boss. You have to look out

878
00:44:23,960 --> 00:44:26,360
Speaker 1: for your caveat emp to war. In the investment world,

879
00:44:26,480 --> 00:44:30,200
Speaker 1: like everywhere else, Uh, most people are trying to sell

880
00:44:30,239 --> 00:44:33,239
Speaker 1: you things, they have an angle. It's very hard for

881
00:44:33,239 --> 00:44:36,440
Speaker 1: you to discern who is or who isn't on your

882
00:44:36,440 --> 00:44:38,360
Speaker 1: side unless you do the work yourself and know what

883
00:44:38,400 --> 00:44:42,120
Speaker 1: you're doing. And so it's very important to know that.

884
00:44:42,200 --> 00:44:45,080
Speaker 1: And that's uh. You know. I gave a talk at

885
00:44:45,120 --> 00:44:48,879
Speaker 1: Google number of months back, and I started it this way.

886
00:44:48,920 --> 00:44:53,080
Speaker 1: I said, even Warren Buffett says that most people should

887
00:44:53,160 --> 00:44:55,680
Speaker 1: just index. And I started the talk saying I agree

888
00:44:55,719 --> 00:45:00,200
Speaker 1: with him. Then I left. I didn't actually leave if

889
00:45:00,280 --> 00:45:02,840
Speaker 1: I said, but then again, Warren Buffett doesn't mean index,

890
00:45:02,840 --> 00:45:05,520
Speaker 1: and neither do I. How come? And I explain the

891
00:45:05,560 --> 00:45:08,719
Speaker 1: real opportunity set that's still out there. You know, I

892
00:45:08,760 --> 00:45:11,319
Speaker 1: get um, you know, is this still any good? Does

893
00:45:11,320 --> 00:45:15,080
Speaker 1: this stuff still work? I get a you know, I

894
00:45:15,120 --> 00:45:17,480
Speaker 1: get a hand raised in my classic Columbia every year,

895
00:45:17,520 --> 00:45:19,319
Speaker 1: at least for the last five six years, a student

896
00:45:19,360 --> 00:45:21,800
Speaker 1: will raise their hand and sort of say, hey, Joel,

897
00:45:21,840 --> 00:45:24,760
Speaker 1: congratulations on a nice thirty five or thirty seven year career.

898
00:45:25,600 --> 00:45:28,040
Speaker 1: But isn't the party over for us? There's more computers,

899
00:45:28,040 --> 00:45:31,000
Speaker 1: ability to crunch numbers, hedge fund smart people doing this stuff.

900
00:45:31,400 --> 00:45:34,320
Speaker 1: You know, are we gonna have the same chances that

901
00:45:34,320 --> 00:45:36,359
Speaker 1: that you had and so my students are second year

902
00:45:36,440 --> 00:45:39,400
Speaker 1: NBA is roughly twenty seven years old on average. So

903
00:45:39,440 --> 00:45:41,879
Speaker 1: I tell this is why I answer. I say, I'll

904
00:45:41,880 --> 00:45:43,719
Speaker 1: tell you what. Why don't we just go back to

905
00:45:43,800 --> 00:45:46,000
Speaker 1: when you guys learned how to read. Let's take a

906
00:45:46,040 --> 00:45:48,680
Speaker 1: look at the most followed market in the world. That

907
00:45:48,719 --> 00:45:50,560
Speaker 1: would be the United States. Let's look at the most

908
00:45:50,600 --> 00:45:53,200
Speaker 1: followed stocks within the most followed market in the world.

909
00:45:53,200 --> 00:45:56,120
Speaker 1: Those would be the SNP five hundred stocks. And let's

910
00:45:56,160 --> 00:45:58,719
Speaker 1: take a look at what's happened to the SNP five

911
00:45:58,800 --> 00:46:01,359
Speaker 1: hundred since you guys, you know, learned how to read.

912
00:46:01,400 --> 00:46:03,040
Speaker 1: So I take them back twenty years when they were

913
00:46:03,080 --> 00:46:07,120
Speaker 1: seven years old, and I say from to two thousand

914
00:46:07,120 --> 00:46:10,280
Speaker 1: the S and P five hundred doubled from two thousand

915
00:46:10,280 --> 00:46:13,000
Speaker 1: to two thousand two, halved from two thousand two to

916
00:46:13,040 --> 00:46:15,719
Speaker 1: two thousand seven, it doubled from two thousand seven to

917
00:46:15,760 --> 00:46:17,880
Speaker 1: two thousand nine and a half, and from two thousand

918
00:46:17,960 --> 00:46:20,560
Speaker 1: nine to today it's roughly tripled, which is which is

919
00:46:20,560 --> 00:46:23,480
Speaker 1: my way of telling them that people are still crazy.

920
00:46:23,880 --> 00:46:27,640
Speaker 1: And uh, it's way understating the case. Because the SNP

921
00:46:27,719 --> 00:46:30,160
Speaker 1: five hundreds and average of five hundred companies if you

922
00:46:30,200 --> 00:46:32,399
Speaker 1: lift up the covers and look at the dispersion going

923
00:46:32,440 --> 00:46:36,239
Speaker 1: on between those five hundred companies between which are in

924
00:46:36,320 --> 00:46:38,640
Speaker 1: favor at any particular time, in which are out of favor,

925
00:46:39,000 --> 00:46:43,680
Speaker 1: the price movements are uh much wilder than what the

926
00:46:43,719 --> 00:46:46,560
Speaker 1: average of five hundred companies doubling and having doubling and

927
00:46:46,600 --> 00:46:50,040
Speaker 1: having that doesn't even begin to tell the story. So

928
00:46:50,160 --> 00:46:53,719
Speaker 1: if you drew a horizontal line uh and called that

929
00:46:53,760 --> 00:46:56,800
Speaker 1: fair value, like Ben Graham said, and then you draw

930
00:46:56,840 --> 00:47:00,879
Speaker 1: a wavy line around that horizontal line, uh and call

931
00:47:00,960 --> 00:47:05,279
Speaker 1: that stock prices, the market is pitching us opportunities all

932
00:47:05,320 --> 00:47:08,240
Speaker 1: the time between stocks that are way below fair value

933
00:47:08,239 --> 00:47:11,680
Speaker 1: and way above fair value. The reason investors don't beat

934
00:47:11,719 --> 00:47:13,640
Speaker 1: the market has nothing to do with the market is

935
00:47:13,680 --> 00:47:16,160
Speaker 1: not throwing us pitches, and that it's not still emotional.

936
00:47:16,560 --> 00:47:19,680
Speaker 1: Their behavioral problem, there's agency problems, there's a lot of

937
00:47:19,680 --> 00:47:23,200
Speaker 1: other issues going on, But it's not because we're not

938
00:47:23,239 --> 00:47:26,600
Speaker 1: getting really great pictures all the time. People are still emotional.

939
00:47:26,920 --> 00:47:28,920
Speaker 1: If you're cold and calculating, And go back to what

940
00:47:28,960 --> 00:47:31,400
Speaker 1: we talked about in the beginning, where stocks our ownership

941
00:47:31,440 --> 00:47:34,480
Speaker 1: shares of businesses and you're just cold and calculating, about

942
00:47:34,520 --> 00:47:37,400
Speaker 1: what they're worth. You can really take advantage of the market.

943
00:47:37,440 --> 00:47:40,960
Speaker 1: I actually, uh try to explain this concept. A friend

944
00:47:40,960 --> 00:47:42,879
Speaker 1: of mine who's an orthopedic surgeon, asked me to speak

945
00:47:42,880 --> 00:47:44,920
Speaker 1: to a group of his uh buddies, you know, at

946
00:47:44,960 --> 00:47:46,759
Speaker 1: a at a big dinner that he was hosting for

947
00:47:46,840 --> 00:47:49,640
Speaker 1: orthopedic surgeons. He said, talk about the stock market for

948
00:47:49,640 --> 00:47:51,520
Speaker 1: in half an hour, try to explain it, and then

949
00:47:51,560 --> 00:47:54,080
Speaker 1: take Q and A. So I talked for half an hour.

950
00:47:54,120 --> 00:47:56,520
Speaker 1: I started taking Q and A, and when I was done,

951
00:47:56,560 --> 00:47:58,920
Speaker 1: the questions were something like, hey, oil went up two

952
00:47:58,960 --> 00:48:02,319
Speaker 1: dollars yesterday, should I buy some? Or market was down

953
00:48:02,320 --> 00:48:05,200
Speaker 1: one percent yesterday? Should I get out? And my conclusion

954
00:48:05,200 --> 00:48:06,920
Speaker 1: from that talk was that I had just crashed and

955
00:48:06,960 --> 00:48:11,080
Speaker 1: burned and I had not really uh really gotten through

956
00:48:11,120 --> 00:48:16,080
Speaker 1: to these very learned doctors. And then a notoriously difficult

957
00:48:16,120 --> 00:48:20,640
Speaker 1: group to teach anything about because they believed themselves experts

958
00:48:20,640 --> 00:48:23,120
Speaker 1: and everything. Well, I was asked to teach a much

959
00:48:23,239 --> 00:48:27,879
Speaker 1: easier group. This was a group of ninth graders from Harlem. Uh.

960
00:48:28,000 --> 00:48:30,200
Speaker 1: It was a couple of years ago, and it was

961
00:48:30,239 --> 00:48:32,600
Speaker 1: just for one day a week, for an hour a week,

962
00:48:32,640 --> 00:48:34,680
Speaker 1: come in and teach them about the stock market. And

963
00:48:34,960 --> 00:48:36,880
Speaker 1: this was right after I crashed and burned with the

964
00:48:36,960 --> 00:48:39,759
Speaker 1: very learned, educated doctors, and I didn't want to fail

965
00:48:39,800 --> 00:48:43,600
Speaker 1: with the kids. But as you're saying, I had fresh opportunity,

966
00:48:43,640 --> 00:48:46,160
Speaker 1: blue sky with them, you know anything about the stock market.

967
00:48:46,440 --> 00:48:48,480
Speaker 1: So I really thought long and hard about how is

968
00:48:48,520 --> 00:48:51,600
Speaker 1: it gonna explain the stock market to them? And so

969
00:48:51,640 --> 00:48:53,520
Speaker 1: the first day of class, I brought in a big

970
00:48:53,680 --> 00:48:56,160
Speaker 1: one of those old time jars filled with jelly beans,

971
00:48:56,200 --> 00:48:59,319
Speaker 1: you know, big glass jar filled with jelly beans, and

972
00:48:59,360 --> 00:49:01,880
Speaker 1: I passed out three by five cards and I passed

973
00:49:01,880 --> 00:49:03,960
Speaker 1: the jelly bean jar around and I told them to

974
00:49:04,000 --> 00:49:05,799
Speaker 1: count the rows and do whatever they had to do,

975
00:49:05,840 --> 00:49:07,759
Speaker 1: but write down how many jelly beans they thought were

976
00:49:07,760 --> 00:49:10,840
Speaker 1: in the jar. And I went around the classroom and

977
00:49:10,880 --> 00:49:14,359
Speaker 1: collected the three by five cards. Then I said, I'm

978
00:49:14,400 --> 00:49:15,960
Speaker 1: going to go around the room one more time and

979
00:49:16,000 --> 00:49:18,720
Speaker 1: ask you, in front of everybody else, how many jelly

980
00:49:18,719 --> 00:49:20,160
Speaker 1: beans you think are in the jar. And you can

981
00:49:20,239 --> 00:49:22,160
Speaker 1: keep your guests from your three by five cards. You

982
00:49:22,160 --> 00:49:24,440
Speaker 1: can change your guests, that's completely up to you. And

983
00:49:24,520 --> 00:49:26,759
Speaker 1: one by one I went around the room and I

984
00:49:26,800 --> 00:49:30,560
Speaker 1: asked each uh student how many jelly beans they thought

985
00:49:30,600 --> 00:49:33,000
Speaker 1: were in the jar, and I wrote that answer down.

986
00:49:33,320 --> 00:49:35,239
Speaker 1: So let me tell you the results of the experiment.

987
00:49:35,320 --> 00:49:38,279
Speaker 1: The average for the three by five cards. You know,

988
00:49:38,360 --> 00:49:42,000
Speaker 1: the first guests was one jelly beans. That's what at

989
00:49:42,040 --> 00:49:44,440
Speaker 1: average too, And they were actually seventeen hundred seventy six

990
00:49:44,520 --> 00:49:47,480
Speaker 1: jelly beans in the jar, so that that was pretty good.

991
00:49:47,520 --> 00:49:49,399
Speaker 1: And when I went around the room one by one

992
00:49:49,520 --> 00:49:54,040
Speaker 1: asking couple aged person publicly how many jelly beans they thought,

993
00:49:54,080 --> 00:49:58,319
Speaker 1: that average guests was eight fifty jelly beans. And I

994
00:49:58,360 --> 00:50:01,720
Speaker 1: explained to the kids that the second guest was actually

995
00:50:01,800 --> 00:50:04,719
Speaker 1: the stock market. And what I was going to teach

996
00:50:04,760 --> 00:50:06,960
Speaker 1: them to do is be the first guests, be cold

997
00:50:07,000 --> 00:50:10,080
Speaker 1: and calculating, count the roads, be very disciplined and valuing

998
00:50:10,600 --> 00:50:14,839
Speaker 1: the businesses, not influenced by everyone else around them. When

999
00:50:14,840 --> 00:50:18,120
Speaker 1: the second guess what happened, Well, everyone heard what everyone

1000
00:50:18,120 --> 00:50:20,680
Speaker 1: else was saying. And in the stock market, everyone read

1001
00:50:20,719 --> 00:50:23,520
Speaker 1: the newspapers, they talked to their buddies. They see what

1002
00:50:23,600 --> 00:50:26,600
Speaker 1: everyone's saying and doing and reading and seeing the results

1003
00:50:26,600 --> 00:50:29,160
Speaker 1: in the news every day, and they're influenced by everything

1004
00:50:29,200 --> 00:50:32,520
Speaker 1: around and they're not being cold and calculating and disciplined.

1005
00:50:33,080 --> 00:50:35,400
Speaker 1: And so I was going to teach them how to

1006
00:50:35,440 --> 00:50:37,759
Speaker 1: be cold and disciplined, and that's what we try to

1007
00:50:37,800 --> 00:50:42,000
Speaker 1: do where we have a very discipline process to value businesses.

1008
00:50:42,360 --> 00:50:44,319
Speaker 1: And that's what I was teaching them to do, and

1009
00:50:44,360 --> 00:50:47,000
Speaker 1: that's what stocks our ownership shares of businesses. And all

1010
00:50:47,040 --> 00:50:50,200
Speaker 1: the noise, nine percent of the noise you're reading the

1011
00:50:50,239 --> 00:50:55,040
Speaker 1: paper every day, excluding this podcast, is really noise. And

1012
00:50:55,160 --> 00:50:59,759
Speaker 1: uh so that's you know, that lesson really resonated, I think,

1013
00:50:59,760 --> 00:51:02,000
Speaker 1: and I did much better than the doctors. I would

1014
00:51:02,040 --> 00:51:03,839
Speaker 1: have guessed from the beginning you would have done better

1015
00:51:03,920 --> 00:51:08,520
Speaker 1: with the kids. I'm a big fan of Sturgeon's law,

1016
00:51:09,239 --> 00:51:14,160
Speaker 1: which is everything is junk. And when you talk about

1017
00:51:14,360 --> 00:51:18,399
Speaker 1: filtering out the noise and trying to get to the signal, hey,

1018
00:51:18,480 --> 00:51:21,720
Speaker 1: the same thing is true across all sorts of different

1019
00:51:22,400 --> 00:51:26,560
Speaker 1: um venues. That that noise in the public is just

1020
00:51:26,719 --> 00:51:31,280
Speaker 1: it's astonishing and I'm I'm fascinated by that having people

1021
00:51:31,360 --> 00:51:34,600
Speaker 1: do it publicly and how that leads to such a

1022
00:51:34,640 --> 00:51:38,920
Speaker 1: different result, especially when they came so close on average

1023
00:51:38,920 --> 00:51:41,560
Speaker 1: when they were were private. Let's talk a little bit

1024
00:51:41,520 --> 00:51:45,560
Speaker 1: about one of your later books, The Magic Formula. How

1025
00:51:45,600 --> 00:51:49,200
Speaker 1: did you how did you make this transition from what

1026
00:51:49,480 --> 00:51:55,920
Speaker 1: looks like special situations investing to really quantitative investing. Sure, well,

1027
00:51:55,920 --> 00:51:57,480
Speaker 1: I'm glad you brought it up that way. So I

1028
00:51:57,480 --> 00:51:59,520
Speaker 1: wrote a book called The Little Book that Beats the Market,

1029
00:51:59,760 --> 00:52:05,600
Speaker 1: and we don't think of ourselves as quantitative investors, although

1030
00:52:05,760 --> 00:52:08,680
Speaker 1: in The Little Book that Beats the Market, we use

1031
00:52:08,800 --> 00:52:15,399
Speaker 1: some simple quantitative methods to show people concepts of Ben

1032
00:52:15,440 --> 00:52:18,759
Speaker 1: Graham said buy it cheap. His best students a guy

1033
00:52:18,840 --> 00:52:20,920
Speaker 1: named Warren Buffett, who said, if I can buy a

1034
00:52:20,920 --> 00:52:22,920
Speaker 1: good business cheap, even better, and that made him one

1035
00:52:22,920 --> 00:52:24,840
Speaker 1: of the richest people and the people in the world.

1036
00:52:25,760 --> 00:52:31,480
Speaker 1: And we have used that philosophy. That's what I teach

1037
00:52:31,600 --> 00:52:34,799
Speaker 1: a Columbia. That's what we've used to make money over

1038
00:52:34,840 --> 00:52:38,480
Speaker 1: the last thirty seven years, buying good and cheap businesses.

1039
00:52:38,560 --> 00:52:40,759
Speaker 1: And wanted to share that with everyone else. And so

1040
00:52:40,800 --> 00:52:44,399
Speaker 1: we ran a statistical test just to show that just

1041
00:52:44,800 --> 00:52:48,560
Speaker 1: using crude metrics for cheap and crewd crude metrics for

1042
00:52:48,640 --> 00:52:53,200
Speaker 1: good and crude metrics for and crude database that we

1043
00:52:53,280 --> 00:52:55,720
Speaker 1: could do very well. And so that's what we showed

1044
00:52:55,719 --> 00:52:58,720
Speaker 1: in the Magic Formula. And we said the magic formula

1045
00:52:58,719 --> 00:53:03,040
Speaker 1: only really has two parts. Cheap. Uh, and for cheap.

1046
00:53:04,360 --> 00:53:09,400
Speaker 1: We really rank companies based on a simple metric that

1047
00:53:09,560 --> 00:53:12,960
Speaker 1: was earnings before interest in taxes to enterprise value. And

1048
00:53:13,000 --> 00:53:17,880
Speaker 1: I usually describe that as rent. So in other words, uh,

1049
00:53:18,239 --> 00:53:21,719
Speaker 1: you're buying a house and they're asking a million dollars,

1050
00:53:22,680 --> 00:53:25,319
Speaker 1: and your job is to figure out whether that's a

1051
00:53:25,320 --> 00:53:28,880
Speaker 1: good deal or not. So there are fairly simple questions

1052
00:53:28,920 --> 00:53:31,120
Speaker 1: you'd ask, uh if you're trying to figure that out.

1053
00:53:31,200 --> 00:53:33,400
Speaker 1: One would be if I rented out this house, how

1054
00:53:33,480 --> 00:53:37,920
Speaker 1: much could I get for it after my expenses on capital? No,

1055
00:53:38,120 --> 00:53:40,560
Speaker 1: So return on capital would be how the business invests

1056
00:53:40,560 --> 00:53:44,960
Speaker 1: its own money. It's really as the investor, what price

1057
00:53:45,040 --> 00:53:46,640
Speaker 1: do I have to pay for the house and how

1058
00:53:46,680 --> 00:53:49,240
Speaker 1: much is it gonna earn me? So it's as an investor,

1059
00:53:49,239 --> 00:53:52,239
Speaker 1: it's my return on capital. But I don't want to

1060
00:53:52,280 --> 00:53:55,839
Speaker 1: confuse that with how the business itself invest its money,

1061
00:53:55,880 --> 00:53:57,920
Speaker 1: which is really how I look at return on capital.

1062
00:53:57,960 --> 00:54:01,440
Speaker 1: So there's uh so it's really a return on investment. Okay,

1063
00:54:01,480 --> 00:54:04,200
Speaker 1: I'm laying out a million dollars getting eighty thousand dollars

1064
00:54:04,239 --> 00:54:08,040
Speaker 1: a year in rent. That might be eight percent net

1065
00:54:08,040 --> 00:54:10,439
Speaker 1: of my expenses, and interest rates are two or three

1066
00:54:10,440 --> 00:54:13,320
Speaker 1: percent That may look pretty attractive. There are other questions

1067
00:54:13,320 --> 00:54:15,319
Speaker 1: you'd probably ask, you know, if we were really doing

1068
00:54:15,320 --> 00:54:17,759
Speaker 1: this analysis, you'd probably say, hey, what are the other

1069
00:54:17,800 --> 00:54:19,680
Speaker 1: houses on the block going for, in the block next door,

1070
00:54:19,680 --> 00:54:22,080
Speaker 1: in the town next door? How relatively cheap is this?

1071
00:54:22,160 --> 00:54:24,000
Speaker 1: And we do the same thing. We say, how cheap

1072
00:54:24,080 --> 00:54:27,320
Speaker 1: is this business relative to similar companies? How cheap is

1073
00:54:27,360 --> 00:54:30,760
Speaker 1: it relative to all companies? How cheap is it relative

1074
00:54:30,800 --> 00:54:33,160
Speaker 1: to history? That's what we do at Gotham. But for

1075
00:54:33,200 --> 00:54:35,160
Speaker 1: the purposes of the little book that beats the market,

1076
00:54:35,160 --> 00:54:38,360
Speaker 1: we just did cheap on a free cash flow basis,

1077
00:54:38,400 --> 00:54:41,600
Speaker 1: just like how much rent? But and it's a very

1078
00:54:41,640 --> 00:54:45,200
Speaker 1: simple metric. And then we said, you know, I described

1079
00:54:45,239 --> 00:54:48,040
Speaker 1: this a little bit earlier. We talked about it is

1080
00:54:48,239 --> 00:54:50,040
Speaker 1: I was trying to describe I wrote this book for

1081
00:54:50,080 --> 00:54:53,080
Speaker 1: my kids, and I said, how do you describe how

1082
00:54:53,120 --> 00:54:55,560
Speaker 1: good the business is? And if you read through Buffet's letters,

1083
00:54:55,560 --> 00:54:57,839
Speaker 1: it's very clear that he's looking for businesses that are

1084
00:54:57,840 --> 00:55:01,000
Speaker 1: in high returns on tangible capital. And I described that

1085
00:55:01,160 --> 00:55:05,240
Speaker 1: is every business needs working capital, every business needs fixed assets.

1086
00:55:05,440 --> 00:55:08,120
Speaker 1: How well does it convert its working capital fixed assets

1087
00:55:08,160 --> 00:55:11,360
Speaker 1: into earnings? So I said, if you're building a store.

1088
00:55:11,640 --> 00:55:13,240
Speaker 1: You have to buy the land, you have to build

1089
00:55:13,280 --> 00:55:15,160
Speaker 1: the store, you have to set up the displays, you

1090
00:55:15,160 --> 00:55:16,839
Speaker 1: have to stock it with inventory. And if all that

1091
00:55:16,880 --> 00:55:19,560
Speaker 1: cost your four hundred thousand dollars and the store earns

1092
00:55:19,600 --> 00:55:21,520
Speaker 1: you two hundred thousand dollars a year, that's a fifty

1093
00:55:21,520 --> 00:55:25,000
Speaker 1: percent return untangible capital. And I compared that to a

1094
00:55:25,080 --> 00:55:29,400
Speaker 1: store I called in the book, uh, just broccoli, and

1095
00:55:30,360 --> 00:55:32,120
Speaker 1: which is not going to return a lot, and they're

1096
00:55:32,160 --> 00:55:34,080
Speaker 1: just broccoli. Is selling just broccoli in your store is

1097
00:55:34,120 --> 00:55:35,880
Speaker 1: probably not a good idea. I never tried it, but

1098
00:55:36,160 --> 00:55:38,040
Speaker 1: it's probably not a good idea. But you still have

1099
00:55:38,080 --> 00:55:40,120
Speaker 1: to buy the land, build the store, set of the display,

1100
00:55:40,160 --> 00:55:42,600
Speaker 1: stocked with inventory, still going to cost you roughly the

1101
00:55:42,640 --> 00:55:45,600
Speaker 1: same four hundred thousand dollars. But because it's a dumb idea,

1102
00:55:45,640 --> 00:55:47,640
Speaker 1: maybe it only earns ten thousand dollars a year. That's

1103
00:55:47,680 --> 00:55:49,920
Speaker 1: a two and a half percent return on tangible capital.

1104
00:55:50,160 --> 00:55:52,080
Speaker 1: And all I said in the book was, all things

1105
00:55:52,120 --> 00:55:55,080
Speaker 1: being equal, if I can get the same price, I'd

1106
00:55:55,160 --> 00:55:57,080
Speaker 1: much prefer to own the business that can reinvest its

1107
00:55:57,080 --> 00:55:59,520
Speaker 1: money in fifty percent returns, then two and a half

1108
00:55:59,520 --> 00:56:03,280
Speaker 1: percent turns, and so What I did for the book's

1109
00:56:03,280 --> 00:56:06,279
Speaker 1: purposes is something very crude. I ranked all companies based

1110
00:56:06,280 --> 00:56:08,720
Speaker 1: on how cheap they were, and then I took another

1111
00:56:08,760 --> 00:56:10,880
Speaker 1: ranking of how good they were, what kind of returns

1112
00:56:10,880 --> 00:56:13,319
Speaker 1: on tangible capital they were getting. Then I combined those

1113
00:56:13,360 --> 00:56:16,840
Speaker 1: two ranks and bought the best combination of cheap and good.

1114
00:56:17,280 --> 00:56:19,319
Speaker 1: And I showed how well that works. It worked so

1115
00:56:19,360 --> 00:56:22,799
Speaker 1: well just using these crude metrics that the top ten

1116
00:56:22,840 --> 00:56:26,520
Speaker 1: percent combined score for cheap and good did better than

1117
00:56:26,520 --> 00:56:28,880
Speaker 1: the second ten percent, better than the third ten percent,

1118
00:56:28,960 --> 00:56:31,480
Speaker 1: in order all the way down to the bottom ten percent,

1119
00:56:31,760 --> 00:56:35,480
Speaker 1: just showing you the power of how this cheap and

1120
00:56:35,480 --> 00:56:38,520
Speaker 1: good work so well. And if I'm getting these numbers right,

1121
00:56:38,560 --> 00:56:43,080
Speaker 1: from to two thousand and four, this portfolio would have

1122
00:56:43,120 --> 00:56:46,680
Speaker 1: returned about thirty percent a year. Well, at the same time,

1123
00:56:46,719 --> 00:56:49,000
Speaker 1: the market would have given you a little over twelve percent.

1124
00:56:49,360 --> 00:56:51,880
Speaker 1: Is that about right? Yes, So that was with small

1125
00:56:51,920 --> 00:56:55,800
Speaker 1: cap stocks, which unless you're an individual investor, would be

1126
00:56:55,880 --> 00:57:00,640
Speaker 1: hard to take advantage of um as a instant sational investor.

1127
00:57:00,680 --> 00:57:02,520
Speaker 1: But I also did a similar study for the thousand

1128
00:57:02,640 --> 00:57:06,440
Speaker 1: largest companies, you know, the Russell one thousand companies, and

1129
00:57:06,600 --> 00:57:09,239
Speaker 1: you know which are very similar to the S and

1130
00:57:09,280 --> 00:57:13,239
Speaker 1: P five and that that was versus about twelve still

1131
00:57:13,280 --> 00:57:16,720
Speaker 1: also pretty good. Yeah, I'll take it. Uh, possibly a

1132
00:57:16,760 --> 00:57:22,040
Speaker 1: little more realistic for UM large investors. We have been

1133
00:57:22,040 --> 00:57:24,480
Speaker 1: speaking with Joel Greenblatt. He is the c i O

1134
00:57:24,720 --> 00:57:28,120
Speaker 1: of Gotham Asset Management. Be sure and check out the

1135
00:57:28,160 --> 00:57:31,360
Speaker 1: podcast extras where we keep the tape rolling and continue

1136
00:57:31,840 --> 00:57:36,840
Speaker 1: discussing all things value and index Plus. You can find

1137
00:57:36,840 --> 00:57:41,840
Speaker 1: that at iTunes, Overcast, SoundCloud, Bloomberg, wherever your final podcasts

1138
00:57:41,840 --> 00:57:46,080
Speaker 1: are sold. We love your comments, feedback and suggestions right

1139
00:57:46,160 --> 00:57:49,959
Speaker 1: to us at m IB podcast at Bloomberg dot net.

1140
00:57:50,280 --> 00:57:52,880
Speaker 1: You can check out my daily column on Bloomberg View

1141
00:57:52,920 --> 00:57:56,000
Speaker 1: dot com. Follow me on Twitter at rid Holts. I'm

1142
00:57:56,040 --> 00:57:59,959
Speaker 1: Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio.

1143
00:58:13,000 --> 00:58:15,160
Speaker 1: Welcome to the podcast, Joel. Thank you so much for

1144
00:58:15,200 --> 00:58:17,480
Speaker 1: doing this. I've been looking forward to this for a

1145
00:58:17,560 --> 00:58:19,680
Speaker 1: long time. You and I have never met, never really

1146
00:58:19,680 --> 00:58:23,360
Speaker 1: spoken before, but I've been very much aware of who

1147
00:58:23,400 --> 00:58:26,240
Speaker 1: you are and what you've done over the years, and UM,

1148
00:58:26,280 --> 00:58:28,320
Speaker 1: I have to tell you some of the numbers that

1149
00:58:28,400 --> 00:58:30,920
Speaker 1: you have put up, and I know there's only so

1150
00:58:31,000 --> 00:58:34,400
Speaker 1: much we can talk about them. Um, are just astonishing.

1151
00:58:34,440 --> 00:58:37,840
Speaker 1: We talked about the fifty a year before fees for

1152
00:58:37,960 --> 00:58:43,560
Speaker 1: ten years. That's an amazing run. Like Renaissance technology, that

1153
00:58:43,680 --> 00:58:47,960
Speaker 1: returned capital to investors. I have to imagine people were

1154
00:58:48,040 --> 00:58:51,600
Speaker 1: not especially happy when after ten years of those sort

1155
00:58:51,600 --> 00:58:55,440
Speaker 1: of returns you said, here, I have to give you

1156
00:58:55,480 --> 00:58:59,400
Speaker 1: this back. What was motivating it was its strictly scale

1157
00:58:59,720 --> 00:59:03,880
Speaker 1: or was there were there other factors that said, um,

1158
00:59:03,920 --> 00:59:07,080
Speaker 1: I'm done managing other people's money at that At that

1159
00:59:07,120 --> 00:59:11,240
Speaker 1: point in time, you know, Uh, that's a great question.

1160
00:59:12,160 --> 00:59:15,080
Speaker 1: I thought about that a lot. I love investing. Never

1161
00:59:15,240 --> 00:59:18,200
Speaker 1: was going to quit. We had gotten to a size.

1162
00:59:18,600 --> 00:59:21,120
Speaker 1: I suppose after ten years of having nice returns that

1163
00:59:21,160 --> 00:59:24,520
Speaker 1: we could keep our staff and continue to run our

1164
00:59:24,800 --> 00:59:28,760
Speaker 1: internal money. And for me, it's just fun to do. Uh.

1165
00:59:28,920 --> 00:59:31,720
Speaker 1: Did you think that at that size you couldn't continue

1166
00:59:31,720 --> 00:59:34,840
Speaker 1: generating those sorts of returns? Well? I think, Uh, you

1167
00:59:34,880 --> 00:59:37,320
Speaker 1: know I left out You had asked me how we

1168
00:59:37,440 --> 00:59:39,680
Speaker 1: did fifty percent a year, and you know one was

1169
00:59:39,760 --> 00:59:43,360
Speaker 1: I said we stayed small. Two we were concentrated, and

1170
00:59:43,560 --> 00:59:47,120
Speaker 1: three really we got lucky. Okay, that you have to

1171
00:59:47,160 --> 00:59:49,280
Speaker 1: have some luck to get those kind of returns during

1172
00:59:49,600 --> 00:59:55,320
Speaker 1: uh that period of time, and and so I one

1173
00:59:55,360 --> 00:59:57,480
Speaker 1: of the most fortunate people on the planet. I have

1174
00:59:57,600 --> 01:00:03,640
Speaker 1: a large family with five kids. I love doing this. Uh,

1175
01:00:03,840 --> 01:00:06,480
Speaker 1: I like to do really well. So there's pressure I

1176
01:00:06,520 --> 01:00:08,880
Speaker 1: put in myself when I'm running other people's money. Maybe

1177
01:00:08,920 --> 01:00:10,960
Speaker 1: I have a little less so and I'm not running it.

1178
01:00:11,400 --> 01:00:13,960
Speaker 1: So I don't think it was really a calculated plan

1179
01:00:14,120 --> 01:00:17,120
Speaker 1: other than you know, how can I continue to enjoy

1180
01:00:17,480 --> 01:00:20,280
Speaker 1: what I'm doing in in the best way and still

1181
01:00:20,320 --> 01:00:21,800
Speaker 1: get to do what I like and still work with

1182
01:00:21,840 --> 01:00:23,920
Speaker 1: the people I like to do. And so it seemed

1183
01:00:23,920 --> 01:00:25,400
Speaker 1: like the right thing to do at the time. I

1184
01:00:25,400 --> 01:00:27,840
Speaker 1: guess it's the best way I can. That make sense.

1185
01:00:27,920 --> 01:00:31,560
Speaker 1: And it took almost twenty years before you started. It's

1186
01:00:31,560 --> 01:00:34,800
Speaker 1: really a fourteen years fourteen years before you said it

1187
01:00:34,880 --> 01:00:38,960
Speaker 1: took that long to forget the stress of running other

1188
01:00:38,960 --> 01:00:41,120
Speaker 1: people's money. Well, you know, when you own six or

1189
01:00:41,160 --> 01:00:45,120
Speaker 1: eight names, one of the issues there is that, uh,

1190
01:00:45,280 --> 01:00:49,560
Speaker 1: every two three years, pretty much like clockwork, I'd wake

1191
01:00:49,760 --> 01:00:54,040
Speaker 1: up and um, it was of my net worth in

1192
01:00:54,320 --> 01:00:56,920
Speaker 1: a couple of days because one or two things weren't

1193
01:00:56,920 --> 01:00:59,200
Speaker 1: going our way, either we were wrong or just you know,

1194
01:00:59,240 --> 01:01:00,640
Speaker 1: they went the wrong way for a little while we

1195
01:01:00,680 --> 01:01:02,560
Speaker 1: knew what we owned we were gonna get paid back,

1196
01:01:03,080 --> 01:01:05,160
Speaker 1: and that's a little more stressful. And it had to

1197
01:01:05,200 --> 01:01:07,440
Speaker 1: happen when you're that concentrated. That has to happen a

1198
01:01:07,480 --> 01:01:10,920
Speaker 1: little more stressful with other people's money. Uh, since I

1199
01:01:10,960 --> 01:01:12,720
Speaker 1: know what we owned, and A I'm a big boy,

1200
01:01:12,800 --> 01:01:14,440
Speaker 1: so I want to make a mistake, you know, I

1201
01:01:14,520 --> 01:01:16,920
Speaker 1: just chalk it up to a learning experience and move on.

1202
01:01:17,800 --> 01:01:21,080
Speaker 1: Uh let's just say I think my investors were great,

1203
01:01:21,120 --> 01:01:24,200
Speaker 1: but maybe they wouldn't be so kind when that that

1204
01:01:24,200 --> 01:01:27,120
Speaker 1: that uh happened and it and it did seem to

1205
01:01:27,120 --> 01:01:29,520
Speaker 1: happen every two three years, and I think that's unavoidable.

1206
01:01:29,840 --> 01:01:32,400
Speaker 1: So when we developed the strategy to take advantage of

1207
01:01:32,440 --> 01:01:37,080
Speaker 1: our principles meaning buying good, cheap businesses and shorting expensive

1208
01:01:37,120 --> 01:01:42,040
Speaker 1: ones that uh that we're trading way above what we

1209
01:01:42,080 --> 01:01:44,440
Speaker 1: thought they were worth. When we discovered that we can

1210
01:01:44,480 --> 01:01:47,360
Speaker 1: actually make more money having diversified portfolios, and that our

1211
01:01:47,400 --> 01:01:50,600
Speaker 1: bad days would be twenty or thirty basis points of underperformance,

1212
01:01:50,640 --> 01:01:56,920
Speaker 1: not down. Uh, that was a it wouldn't degrade our

1213
01:01:56,920 --> 01:01:59,120
Speaker 1: own returns taking other money When we had hundreds of

1214
01:01:59,120 --> 01:02:01,640
Speaker 1: stocks on the long and short side, and b it

1215
01:02:01,680 --> 01:02:05,600
Speaker 1: wouldn't hurt our own returns because more diversity helped our returns.

1216
01:02:05,640 --> 01:02:09,480
Speaker 1: Because when you don't get what you expect, mean, you

1217
01:02:09,520 --> 01:02:12,800
Speaker 1: get aberrationally bad returns. Uh. Sometimes that ends up in

1218
01:02:12,840 --> 01:02:15,680
Speaker 1: negative compounding. So when you have hundreds of stocks, more

1219
01:02:15,680 --> 01:02:20,320
Speaker 1: diversity on each side, you get less aberrationally bad returns.

1220
01:02:20,360 --> 01:02:23,640
Speaker 1: It's why insurance companies don't insure five people because even

1221
01:02:23,680 --> 01:02:25,640
Speaker 1: if you do great underwriting of those five people, if

1222
01:02:25,640 --> 01:02:28,440
Speaker 1: someone steps off a curb, you can tell I don't

1223
01:02:28,440 --> 01:02:30,240
Speaker 1: sell insurance. But if some instepts of a curb and

1224
01:02:30,320 --> 01:02:33,360
Speaker 1: ruins all your numbers, you know, Uh, it didn't matter

1225
01:02:33,440 --> 01:02:36,280
Speaker 1: what kind of underwriting you did, that's a life insurance

1226
01:02:36,360 --> 01:02:40,760
Speaker 1: or helping. Yeah. So if you can be right, you know,

1227
01:02:40,800 --> 01:02:43,080
Speaker 1: they want to be right on average, so they're gonna

1228
01:02:43,080 --> 01:02:45,120
Speaker 1: be right over hundreds or thousands of people. And so

1229
01:02:45,200 --> 01:02:47,160
Speaker 1: when we realize that we could make more money being

1230
01:02:47,200 --> 01:02:50,640
Speaker 1: more diversified, when you go long short and put on leverage,

1231
01:02:50,640 --> 01:02:53,320
Speaker 1: you want that. Uh. It didn't hurt us to take

1232
01:02:53,360 --> 01:02:58,320
Speaker 1: outside money because diversity was good for us. Uh. And

1233
01:02:58,400 --> 01:03:00,600
Speaker 1: you know, to to cover so many needs, we need

1234
01:03:00,640 --> 01:03:02,600
Speaker 1: a big research team so we build up our research

1235
01:03:02,640 --> 01:03:05,120
Speaker 1: team and our tech team. They help us trade you know,

1236
01:03:05,200 --> 01:03:08,600
Speaker 1: we're uh, we're you know tech team. One guy we

1237
01:03:08,640 --> 01:03:10,760
Speaker 1: have you know as m I T chess Champ. Another

1238
01:03:10,800 --> 01:03:16,360
Speaker 1: guy was one Google code jam you know at people

1239
01:03:16,360 --> 01:03:19,600
Speaker 1: and other guys you know, as smart than as smarter

1240
01:03:19,600 --> 01:03:22,200
Speaker 1: than nogat those guys. So I get to work with

1241
01:03:22,240 --> 01:03:24,160
Speaker 1: the tech team and they help us trade efficiently. They

1242
01:03:24,240 --> 01:03:28,360
Speaker 1: help us, uh, trade tax efficiently, so we're very very

1243
01:03:28,400 --> 01:03:32,400
Speaker 1: tax efficient, help us put together the systems where our

1244
01:03:32,440 --> 01:03:36,600
Speaker 1: fundamental analysts can cover broad range. So it's been fun

1245
01:03:36,680 --> 01:03:39,080
Speaker 1: building a team to do all these different things. So

1246
01:03:39,080 --> 01:03:43,000
Speaker 1: I'd say we're fundamentally we we fundamentally value businesses, but

1247
01:03:43,080 --> 01:03:46,520
Speaker 1: our tech team helps us put together risk adjusted portfolios

1248
01:03:46,600 --> 01:03:49,040
Speaker 1: very well and trade efficiently and be tax efficient all

1249
01:03:49,040 --> 01:03:52,080
Speaker 1: those things. And just building this whole thing has, you know,

1250
01:03:52,320 --> 01:03:55,000
Speaker 1: doing something with the same principles that we've always used

1251
01:03:55,520 --> 01:03:59,240
Speaker 1: has been really just fun. Tell us the most important

1252
01:03:59,280 --> 01:04:04,600
Speaker 1: thing people don't know about your background? Oh well, I

1253
01:04:04,640 --> 01:04:06,640
Speaker 1: don't know what they don't know. I've written three books,

1254
01:04:06,640 --> 01:04:09,120
Speaker 1: and I always tell personal stories within the books, so

1255
01:04:09,520 --> 01:04:13,280
Speaker 1: I think I've included lots of embarrassing things I, Uh,

1256
01:04:15,240 --> 01:04:17,400
Speaker 1: I don't think I've ever written that I enjoyed playing tennis.

1257
01:04:17,440 --> 01:04:19,320
Speaker 1: I did write that I enjoy sailing and that I'm

1258
01:04:19,360 --> 01:04:21,000
Speaker 1: not very good at it, and I've been in a

1259
01:04:21,040 --> 01:04:24,640
Speaker 1: bunch of close calls with that. But uh, that's probably

1260
01:04:24,680 --> 01:04:27,439
Speaker 1: how I spend most of my leisure time as well

1261
01:04:27,440 --> 01:04:31,080
Speaker 1: as along with my family. So there's nothing really too fascinating.

1262
01:04:31,360 --> 01:04:36,480
Speaker 1: Tell tell us about some of your early mentors. Well,

1263
01:04:37,080 --> 01:04:38,560
Speaker 1: you know, one of the reasons I write books is

1264
01:04:38,600 --> 01:04:41,520
Speaker 1: because my mentors really came from reading people who were

1265
01:04:41,560 --> 01:04:44,680
Speaker 1: kind enough to share with me, uh their wisdom over time.

1266
01:04:44,720 --> 01:04:47,240
Speaker 1: And that's you know, people like Andrew Tobias and uh

1267
01:04:47,800 --> 01:04:52,720
Speaker 1: and Benjamin Graham and even Buffett in his letters and uh,

1268
01:04:52,840 --> 01:04:58,440
Speaker 1: David Dreaming, you know, uh who wrote Contrarian Investment Strategy,

1269
01:04:58,680 --> 01:05:02,040
Speaker 1: and John Train who out the Money Masters, and all

1270
01:05:02,040 --> 01:05:05,880
Speaker 1: these people really were helpful informing and getting me involved

1271
01:05:05,920 --> 01:05:08,280
Speaker 1: in investing. And you know, I wanted to share some

1272
01:05:08,320 --> 01:05:10,200
Speaker 1: of the things that I learned too, because that's how

1273
01:05:10,240 --> 01:05:14,520
Speaker 1: I learned. Dude, really wasn't so much. Uh, you know,

1274
01:05:14,600 --> 01:05:16,320
Speaker 1: some of the people were dead and they were still

1275
01:05:16,320 --> 01:05:18,919
Speaker 1: sharing with me, and and some of the people who

1276
01:05:18,920 --> 01:05:21,840
Speaker 1: just kind to do so, and I, you know, one

1277
01:05:21,880 --> 01:05:23,800
Speaker 1: of my ways, you know, besides the fact that I

1278
01:05:23,880 --> 01:05:26,040
Speaker 1: enjoy writing, it was another way that I felt I

1279
01:05:26,040 --> 01:05:28,480
Speaker 1: could get back. So let's let's talk about some books.

1280
01:05:28,520 --> 01:05:31,440
Speaker 1: What what are some of your favorite books? You've already

1281
01:05:31,480 --> 01:05:35,600
Speaker 1: mentioned the two from Graham Intelligent Investor and Security Analysis.

1282
01:05:36,040 --> 01:05:42,919
Speaker 1: What other books did you find um influential, be they finance, nonfinance,

1283
01:05:42,960 --> 01:05:47,200
Speaker 1: fiction nonfiction? What what really stayed with you? You mentioned

1284
01:05:48,120 --> 01:05:54,480
Speaker 1: David Dremmond on Contrarian Strategies. That's a interesting book. Yeah. Well,

1285
01:05:54,480 --> 01:05:57,200
Speaker 1: there's a book called The Invisible Heart, which explains basic

1286
01:05:57,280 --> 01:06:01,400
Speaker 1: economics to most people, and most people today, you know,

1287
01:06:01,560 --> 01:06:06,560
Speaker 1: especially young people are kind of more socialists, isn't that

1288
01:06:06,760 --> 01:06:10,920
Speaker 1: isn't the old line, um, socialists uh in your youth

1289
01:06:10,960 --> 01:06:14,760
Speaker 1: and capitalists in your older age. I know I'm mangling that. Yes, no,

1290
01:06:14,960 --> 01:06:18,880
Speaker 1: I I know the reference, and that's partially true. It's

1291
01:06:18,920 --> 01:06:23,520
Speaker 1: just discouraging, uh to me that the the understanding basic

1292
01:06:23,600 --> 01:06:26,840
Speaker 1: economics is kind of necessary. And so there's a book

1293
01:06:26,880 --> 01:06:33,160
Speaker 1: that's a fiction book, uh um uh. Russ Roberts wrote

1294
01:06:33,160 --> 01:06:35,480
Speaker 1: it called The Invisible Heart. Not how many people have

1295
01:06:35,560 --> 01:06:38,040
Speaker 1: read it, but it's a very short book that I

1296
01:06:38,040 --> 01:06:40,400
Speaker 1: think most people should read. So I would read that.

1297
01:06:40,440 --> 01:06:43,680
Speaker 1: I've had my kids read that. Um Russ Roberts also

1298
01:06:43,720 --> 01:06:46,440
Speaker 1: maintains a blog. Is it's the same one? Yes? And

1299
01:06:46,480 --> 01:06:51,919
Speaker 1: did he does he do? Um? Actually Econ Talker or

1300
01:06:51,960 --> 01:06:54,440
Speaker 1: something like that. He probably does. Haven't followed that. It

1301
01:06:54,520 --> 01:06:59,000
Speaker 1: is a book about economics. It's a fictionalized book about

1302
01:06:59,000 --> 01:07:02,400
Speaker 1: a high school economics teacher. But it's just a pleasant,

1303
01:07:02,400 --> 01:07:05,720
Speaker 1: short book way to to learn basic principles. Uh. So

1304
01:07:05,760 --> 01:07:07,520
Speaker 1: I'd highly recommend that even if you don't want to

1305
01:07:07,520 --> 01:07:09,160
Speaker 1: be in a you know, no formulas, just you want

1306
01:07:09,200 --> 01:07:11,880
Speaker 1: to be an econ, you want to understand basic economic principles.

1307
01:07:12,200 --> 01:07:13,919
Speaker 1: I think that's one of the best that people haven't seen.

1308
01:07:13,960 --> 01:07:18,040
Speaker 1: I think for investing, Moneyball was one of the great

1309
01:07:18,080 --> 01:07:19,640
Speaker 1: if you live, if you're a sports fan at all,

1310
01:07:20,160 --> 01:07:25,240
Speaker 1: just understanding how to buy undervalued players is is very

1311
01:07:25,280 --> 01:07:29,200
Speaker 1: similar to buying undervalued stocks. Uh And so that's a

1312
01:07:29,280 --> 01:07:33,360
Speaker 1: really helpful book for most people. I just read a

1313
01:07:33,400 --> 01:07:35,960
Speaker 1: book called The Power of Moments, which I really enjoyed,

1314
01:07:36,000 --> 01:07:39,320
Speaker 1: which says that most of your uh seminal moments in

1315
01:07:39,360 --> 01:07:41,600
Speaker 1: your life really come between the ages of fifteen and

1316
01:07:41,640 --> 01:07:45,320
Speaker 1: thirty because you have a lot of first uh. You know,

1317
01:07:45,400 --> 01:07:48,600
Speaker 1: it's the first time you graduate and leave home. Might

1318
01:07:48,640 --> 01:07:52,440
Speaker 1: be your first girlfriend. Uh, you're graduating college, You're getting

1319
01:07:52,480 --> 01:07:54,680
Speaker 1: your first job, you might be getting married, you might

1320
01:07:54,720 --> 01:07:57,960
Speaker 1: have kids. All happens in that kind of compact period

1321
01:07:58,000 --> 01:08:00,520
Speaker 1: for most people, and people think back for the rest

1322
01:08:00,520 --> 01:08:03,360
Speaker 1: of their life about those seminal moments. And it's really

1323
01:08:03,520 --> 01:08:06,360
Speaker 1: about a book about creating your own moments. In other words,

1324
01:08:06,400 --> 01:08:09,360
Speaker 1: those happen because those are natural. First, those those happen

1325
01:08:09,520 --> 01:08:12,280
Speaker 1: naturally because of evolution. But can't you create those kind

1326
01:08:12,320 --> 01:08:14,800
Speaker 1: of important moments in your life? And that really comes

1327
01:08:14,840 --> 01:08:19,000
Speaker 1: down to creating, doing new things, always creating. You have

1328
01:08:19,040 --> 01:08:20,639
Speaker 1: to be a little more creative when you get older

1329
01:08:20,680 --> 01:08:22,599
Speaker 1: to create those new things. But those are the things

1330
01:08:22,600 --> 01:08:27,480
Speaker 1: you think about, uh, which I think are quite important.

1331
01:08:27,720 --> 01:08:29,920
Speaker 1: I'm also reading another book now which I think I'm

1332
01:08:29,960 --> 01:08:33,400
Speaker 1: having a lot of fun with which uh is uh.

1333
01:08:33,479 --> 01:08:35,840
Speaker 1: I think it's called Never Split the Difference, and it's

1334
01:08:35,920 --> 01:08:41,520
Speaker 1: by uh the ex chief hostage negotiator for the FBI,

1335
01:08:41,680 --> 01:08:46,000
Speaker 1: you know, just about negotiating and also thinking of uh,

1336
01:08:46,800 --> 01:08:48,759
Speaker 1: you know, how you can apply some of these concepts

1337
01:08:48,760 --> 01:08:53,519
Speaker 1: to business, you know, to be be effective. So enjoyed that. Uh,

1338
01:08:53,640 --> 01:08:56,160
Speaker 1: you know, everyone has to read news interested in investing,

1339
01:08:56,200 --> 01:08:59,720
Speaker 1: intelligent investor. You know, I think it's chapters eight and

1340
01:08:59,760 --> 01:09:02,320
Speaker 1: twe Buffett always points out, and I agree with that.

1341
01:09:02,439 --> 01:09:05,200
Speaker 1: I think Buffett wrote a bunch of letters that were

1342
01:09:05,240 --> 01:09:10,320
Speaker 1: compiled by Lawrence Cunningham. Uh, that into topics and that

1343
01:09:10,439 --> 01:09:12,360
Speaker 1: was laid out, and I always assigned that in my class,

1344
01:09:12,360 --> 01:09:15,200
Speaker 1: which I just think is a great, great book. And

1345
01:09:15,280 --> 01:09:17,600
Speaker 1: you've mentioned my three books three times, and so you

1346
01:09:17,600 --> 01:09:20,479
Speaker 1: have to read those two tell us about a time

1347
01:09:20,520 --> 01:09:24,639
Speaker 1: you failed and what you learned from the experience. I'll

1348
01:09:24,680 --> 01:09:27,280
Speaker 1: talk about my worst investment, not specifically what it was,

1349
01:09:27,320 --> 01:09:30,679
Speaker 1: but but it was an investment in a trade show

1350
01:09:30,800 --> 01:09:34,679
Speaker 1: company that I bought through It was really I created

1351
01:09:34,720 --> 01:09:36,640
Speaker 1: through a spinoff, and I was shorted one thing and

1352
01:09:36,680 --> 01:09:39,679
Speaker 1: bought another. And I actually paid three dollars for something

1353
01:09:39,720 --> 01:09:42,559
Speaker 1: that I was immediately going to get six dollars for.

1354
01:09:43,520 --> 01:09:45,680
Speaker 1: But I fell in love with the business and it

1355
01:09:45,680 --> 01:09:47,760
Speaker 1: actually ended up did I paid three dollars for to

1356
01:09:47,920 --> 01:09:51,240
Speaker 1: eventually in short order went past way past the six

1357
01:09:51,280 --> 01:09:53,840
Speaker 1: dollars because I loved the business. It went to twelve

1358
01:09:53,920 --> 01:09:56,000
Speaker 1: dollars a share, which was pretty good. But I had

1359
01:09:56,040 --> 01:09:58,960
Speaker 1: a very large position in it at that time. And

1360
01:09:59,000 --> 01:10:00,880
Speaker 1: what I loved about the busines this was they ran

1361
01:10:00,960 --> 01:10:06,240
Speaker 1: a computer trade show called Comdex in UH in Las Vegas.

1362
01:10:06,840 --> 01:10:12,840
Speaker 1: And I love the business because plenty of space in

1363
01:10:12,920 --> 01:10:15,320
Speaker 1: Las Vegas. If they got more clients to display at

1364
01:10:15,320 --> 01:10:17,840
Speaker 1: their trade show, UH, they could just rent more space

1365
01:10:17,880 --> 01:10:20,160
Speaker 1: for two dollars and resell it for sixty two dollars.

1366
01:10:20,439 --> 01:10:21,920
Speaker 1: They didn't have to commit it, so that it was

1367
01:10:21,960 --> 01:10:26,360
Speaker 1: like a sixty dollar contribution for every uh incremental sale

1368
01:10:26,400 --> 01:10:31,439
Speaker 1: they could make. And that's generally called operating leverage. And

1369
01:10:31,520 --> 01:10:33,639
Speaker 1: that's what I loved about the business. And I think

1370
01:10:33,680 --> 01:10:37,000
Speaker 1: people are very familiar with financial leverage. Right if you

1371
01:10:37,000 --> 01:10:39,680
Speaker 1: put up a dollar and buy borrow nine dollars and

1372
01:10:39,720 --> 01:10:42,320
Speaker 1: buy something worth ten dollars, you realize that if that

1373
01:10:42,400 --> 01:10:44,479
Speaker 1: ten dollar thing you bought falls a dollar or two,

1374
01:10:44,880 --> 01:10:49,719
Speaker 1: you're gonna go broke. And everyone understands that that's very straightforward. UH.

1375
01:10:49,760 --> 01:10:53,000
Speaker 1: So this was my lesson in operating leverage. You know. Unfortunately,

1376
01:10:53,000 --> 01:10:56,000
Speaker 1: after nine eleven, right before nine eleven, the trade show

1377
01:10:56,040 --> 01:10:57,840
Speaker 1: bought another trade show. They brought a lot of money

1378
01:10:57,840 --> 01:11:00,599
Speaker 1: to buy it, and then nine eleven happened and people

1379
01:11:00,640 --> 01:11:03,519
Speaker 1: didn't want to travel. And so I learned a lesson

1380
01:11:03,760 --> 01:11:07,519
Speaker 1: in operating leverage, where when you don't get that sixty

1381
01:11:07,520 --> 01:11:10,360
Speaker 1: two dollars in it and it only cost you two dollars, Uh,

1382
01:11:10,400 --> 01:11:13,920
Speaker 1: sixty dollars of less earnings dropped straight to the bottom

1383
01:11:13,960 --> 01:11:17,360
Speaker 1: line as well. Uh. And that's called operating leverage. And

1384
01:11:17,400 --> 01:11:19,559
Speaker 1: I just thought i'd described that to you so that

1385
01:11:19,680 --> 01:11:23,439
Speaker 1: people would realize that on the way up, just like

1386
01:11:23,520 --> 01:11:25,439
Speaker 1: financial leverage, it's a lot of fun, and on the

1387
01:11:25,439 --> 01:11:28,040
Speaker 1: way down, operating leverage on the way down is not

1388
01:11:28,200 --> 01:11:30,280
Speaker 1: very much fun. So I got out of most of

1389
01:11:30,320 --> 01:11:32,360
Speaker 1: my stock at about a dollar, So I'll just leave

1390
01:11:32,400 --> 01:11:35,680
Speaker 1: it at that and say that's a less of my investment.

1391
01:11:35,760 --> 01:11:39,639
Speaker 1: Lesson in operating leverage at least be aware um our

1392
01:11:39,880 --> 01:11:42,800
Speaker 1: last two questions, Uh, what sort of advice would you

1393
01:11:42,800 --> 01:11:46,720
Speaker 1: give a millennial or recent college graduate who told you, Hey,

1394
01:11:46,720 --> 01:11:51,200
Speaker 1: I'm interested in going into financials as a career. Well,

1395
01:11:51,240 --> 01:11:53,400
Speaker 1: you know, I I've taught Columbia, as I mentioned, for

1396
01:11:53,439 --> 01:11:56,639
Speaker 1: the last twenty two years, and so I tell my

1397
01:11:56,720 --> 01:11:59,680
Speaker 1: students that first had class. Actually I tell them that,

1398
01:12:01,040 --> 01:12:02,639
Speaker 1: you know, I don't think there's a lot of social

1399
01:12:02,720 --> 01:12:06,559
Speaker 1: value in being a investment manager. Uh it's not that

1400
01:12:06,600 --> 01:12:10,200
Speaker 1: I don't think, Uh, investors who do work help set

1401
01:12:10,240 --> 01:12:13,280
Speaker 1: prices and allocate capital and all those things. But I

1402
01:12:13,360 --> 01:12:15,439
Speaker 1: just think, ay, they're not very good at it, and

1403
01:12:15,520 --> 01:12:18,400
Speaker 1: be it would all get done without you and smart

1404
01:12:18,479 --> 01:12:21,479
Speaker 1: people doing this too much horsepowered rather than them go

1405
01:12:21,520 --> 01:12:24,559
Speaker 1: into other fields. I have loved being in this field.

1406
01:12:24,600 --> 01:12:27,200
Speaker 1: I enjoy it and there's nothing wrong with it. But

1407
01:12:27,240 --> 01:12:29,800
Speaker 1: what I tell my students is I'm even one step

1408
01:12:29,840 --> 01:12:32,320
Speaker 1: removed from doing something I don't think is that socially

1409
01:12:32,400 --> 01:12:34,720
Speaker 1: valuable because I'm teaching you how to do something this,

1410
01:12:35,360 --> 01:12:37,000
Speaker 1: you know, So what am I doing here? And so

1411
01:12:37,080 --> 01:12:40,200
Speaker 1: what I make my students promise, and I think they

1412
01:12:40,240 --> 01:12:42,439
Speaker 1: take to it well, is that if I do teach

1413
01:12:42,479 --> 01:12:45,160
Speaker 1: them and I am helpful in in in learning how

1414
01:12:45,160 --> 01:12:47,120
Speaker 1: to do this, and they enjoy it, there's nothing wrong

1415
01:12:47,120 --> 01:12:49,400
Speaker 1: with it. It's a great thing. But they should think

1416
01:12:49,439 --> 01:12:53,040
Speaker 1: of a way to give back they you know, we

1417
01:12:53,120 --> 01:12:56,280
Speaker 1: get way overpaid in this businesses we're successful, and if

1418
01:12:56,320 --> 01:12:59,599
Speaker 1: they're successful with what I teach them, and I would

1419
01:12:59,640 --> 01:13:02,479
Speaker 1: say that any young person, if they're successful in this field,

1420
01:13:03,040 --> 01:13:05,720
Speaker 1: I think they should really think of different ways that

1421
01:13:05,880 --> 01:13:10,160
Speaker 1: they're clearly smart people, they're clearly uh driven people, they're

1422
01:13:10,479 --> 01:13:13,840
Speaker 1: they're thoughtful, and so they should be able to think

1423
01:13:13,840 --> 01:13:15,960
Speaker 1: of a way to give back and use those skills

1424
01:13:15,960 --> 01:13:18,920
Speaker 1: for that. And so that that's what I tell young

1425
01:13:18,960 --> 01:13:21,200
Speaker 1: people who want to go into the investment business. And

1426
01:13:21,240 --> 01:13:23,840
Speaker 1: our final question, what is it that you know about

1427
01:13:23,880 --> 01:13:27,320
Speaker 1: investing today that you wish you knew thirty seven years

1428
01:13:27,320 --> 01:13:31,800
Speaker 1: ago when you were first started. I would say probably

1429
01:13:32,840 --> 01:13:36,519
Speaker 1: the secret to being successful is patients. The big secret

1430
01:13:36,560 --> 01:13:38,320
Speaker 1: that no one bought him and as well tell everyone

1431
01:13:38,479 --> 01:13:40,920
Speaker 1: is really just having a longer time horizon than most

1432
01:13:40,920 --> 01:13:45,160
Speaker 1: people and understanding what you're doing, meaning you're buying businesses

1433
01:13:45,200 --> 01:13:47,439
Speaker 1: and if you're good at valuing them. I actually make

1434
01:13:47,479 --> 01:13:50,479
Speaker 1: a promise to my students first day of class every year.

1435
01:13:50,760 --> 01:13:53,320
Speaker 1: I promised them, if they do good valuation work, the

1436
01:13:53,360 --> 01:13:56,080
Speaker 1: market will agree with them. I just never tell them when.

1437
01:13:56,240 --> 01:13:57,760
Speaker 1: It could be a couple of weeks, could be two

1438
01:13:57,840 --> 01:13:59,439
Speaker 1: or three years. But if they do good work, the

1439
01:13:59,479 --> 01:14:01,200
Speaker 1: market will agree with them. And to keep that in

1440
01:14:01,240 --> 01:14:05,720
Speaker 1: mind to continue to do good work and have patience.

1441
01:14:05,840 --> 01:14:07,840
Speaker 1: And you know, since you can check your stock price

1442
01:14:07,880 --> 01:14:10,080
Speaker 1: thirty times a minute, now, I think you know we

1443
01:14:10,160 --> 01:14:12,439
Speaker 1: used to get when I was, you know, coming into

1444
01:14:12,439 --> 01:14:14,280
Speaker 1: the business, used to get a quarterly statement and throw

1445
01:14:14,320 --> 01:14:16,479
Speaker 1: it right in the garbage. You know, you didn't really

1446
01:14:16,479 --> 01:14:18,519
Speaker 1: care that much. Now your minute a minute. You know,

1447
01:14:18,600 --> 01:14:23,000
Speaker 1: even our best investors, you know, billion dollar UH endowments,

1448
01:14:23,360 --> 01:14:26,080
Speaker 1: expect weekly returns from us in our private funds. I

1449
01:14:26,080 --> 01:14:28,920
Speaker 1: have no idea what they do with that information, but

1450
01:14:29,160 --> 01:14:31,920
Speaker 1: that's what they're asking for. And everyone's judged on very

1451
01:14:31,920 --> 01:14:34,880
Speaker 1: short time horizons. So if you can step back and

1452
01:14:34,960 --> 01:14:38,200
Speaker 1: take a longer time horizon, that is the big secret

1453
01:14:38,280 --> 01:14:40,960
Speaker 1: that I could share. And the sooner you learned that,

1454
01:14:41,040 --> 01:14:43,320
Speaker 1: and the sooner I learned that, the better off that

1455
01:14:44,080 --> 01:14:46,639
Speaker 1: they and and I will will be. We have been

1456
01:14:46,680 --> 01:14:50,719
Speaker 1: speaking with Joel Greenblatt, CO c i O of Gotham

1457
01:14:50,840 --> 01:14:54,280
Speaker 1: Asset Management. If you enjoy this conversation, be sure and

1458
01:14:54,360 --> 01:14:57,240
Speaker 1: look up an Inch or down an Inch on Apple iTunes,

1459
01:14:57,360 --> 01:15:00,439
Speaker 1: Bloomberg Overcast, and you could see any of the other

1460
01:15:00,479 --> 01:15:04,719
Speaker 1: two hundred such podcasts we've done previously. We love your comments,

1461
01:15:04,720 --> 01:15:08,759
Speaker 1: feedback and suggestions right to us at m IB podcast

1462
01:15:08,800 --> 01:15:11,519
Speaker 1: at Bloomberg dot net. I would be remiss if I

1463
01:15:11,560 --> 01:15:14,200
Speaker 1: did not thank the Crack staff that helps us put

1464
01:15:14,240 --> 01:15:18,439
Speaker 1: this podcast together each week. Caroline is my engineer today,

1465
01:15:18,479 --> 01:15:22,120
Speaker 1: Medina Parwana is our producer. Taylor Riggs is our booker.

1466
01:15:22,160 --> 01:15:26,320
Speaker 1: Mike Batnick is our head of research. I'm Barry Retolts.

1467
01:15:26,560 --> 01:15:29,960
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.