WEBVTT - Tom Hancock on Quality Stocks and Launching ETFs 0:00:02.040 --> 0:00:06.000 This is Master's in Business with Barry rid Holds on 0:00:06.240 --> 0:00:08.280 Bloomberg Radio. 0:00:10.200 --> 0:00:14.360 This week on the podcast, I have an extra special guest. 0:00:15.240 --> 0:00:19.079 I love finding these people who are just absolute rock 0:00:19.120 --> 0:00:23.680 stars within their space that most of the investing public 0:00:23.960 --> 0:00:27.840 probably is not familiar with, haven't heard about them. Maybe 0:00:27.880 --> 0:00:32.239 they're a little below the radar or institutionally facing, and 0:00:32.320 --> 0:00:35.519 so the average investor is unaware of them. You certainly 0:00:35.560 --> 0:00:40.239 are familiar with GMO. Jeremy Grantham shop with Mayo and 0:00:40.360 --> 0:00:45.240 Ottolou his partners. That shot was founded in nineteen seventy seven. 0:00:45.880 --> 0:00:51.159 The person who heads their focus and quality strategies this 0:00:51.240 --> 0:00:55.280 gentleman named Tom Hancock. He also helps run some of 0:00:55.320 --> 0:00:58.720 their mutual funds and helped put together their first ETF 0:00:59.320 --> 0:01:03.520 and he as really quite an astonishing track record. The 0:01:03.720 --> 0:01:07.840 Quality Fund mutual fund that GMO runs, that symbol gq 0:01:08.000 --> 0:01:11.280 et X, it's just crushed it over the past decade, 0:01:11.600 --> 0:01:15.640 thirteen point six percent a year, way over both its 0:01:15.680 --> 0:01:20.360 index and its benchmark. It's in the top one percent 0:01:20.400 --> 0:01:25.760 of its peers Morning Star, five star, gold rated, just 0:01:25.840 --> 0:01:30.240 really really interesting. And Tom has helped with the introduction 0:01:30.600 --> 0:01:38.360 of GMO's first retail product the Quality ETF stock symbol QLTY. 0:01:38.680 --> 0:01:42.680 GMO has been institutionals since they launched in nineteen seventy seven. 0:01:43.000 --> 0:01:45.920 This is the first time they're putting out a product 0:01:46.200 --> 0:01:52.080 for retail, and Tom explains what goes into quality stock selection, 0:01:52.360 --> 0:01:55.320 why they went to the ETF. You wouldn't be surprised 0:01:55.320 --> 0:01:58.960 to learn the tax consequences of owning a mutual fund 0:01:59.560 --> 0:02:03.520 is a part of it. Really fascinating guy, tremendous track record, 0:02:03.680 --> 0:02:09.000 unusual background comes from computer science and software and pivoted 0:02:09.320 --> 0:02:14.200 into quantitative investing. I found this conversation to be really 0:02:14.400 --> 0:02:18.840 fascinating if you're at all interested in focused portfolios, the 0:02:19.000 --> 0:02:24.880 concept of quality as a sub sector, undervalue, and just 0:02:25.280 --> 0:02:29.839 how you build a portfolio, and a track record that's 0:02:29.919 --> 0:02:33.200 tough to be. I think you'll find this conversation as 0:02:33.240 --> 0:02:37.680 fascinating as I did. With no further ado my discussion 0:02:37.720 --> 0:02:41.440 with GMOs. Tom Hancock, Thanks, Perry, it's great to be here. 0:02:42.000 --> 0:02:45.760 So you have a really interesting and unusual background. Let's 0:02:45.760 --> 0:02:51.720 start there. Computer science bachelors from RPI in eighty five, 0:02:51.960 --> 0:02:55.680 PhD in computer science from Harvard in ninety two. What 0:02:55.840 --> 0:02:56.840 was the career plan? 0:02:57.639 --> 0:03:01.080 Yeah, well it wasn't doing investing quality stocks in the 0:03:01.080 --> 0:03:03.920 early days, that's for sure. I actually come from a 0:03:04.000 --> 0:03:09.360 very academic family. My father was a university professor. My 0:03:09.440 --> 0:03:11.280 mother worked as an editor. Her father had been a 0:03:11.400 --> 0:03:14.600 university professor. You have doctors in the family. I actually 0:03:14.600 --> 0:03:16.560 don't know that anyone in my family actually had a 0:03:16.639 --> 0:03:21.079 job at a private, for profit, traditional company. Ever, I'm 0:03:21.080 --> 0:03:23.880 the first, so I'm kind of the black sheep, So 0:03:24.120 --> 0:03:26.640 that's where I started from. In fact, the fact that 0:03:26.680 --> 0:03:29.320 I actually went into computer science rather the more liberal 0:03:29.440 --> 0:03:32.680 arts discipline, was a little bit non traditional, let's say. 0:03:32.680 --> 0:03:35.080 And I think that was kind of an early wise 0:03:35.160 --> 0:03:37.640 decision that I give myself credit for. Is back in 0:03:37.720 --> 0:03:40.840 high school, I was really interested in history and stuff, 0:03:40.880 --> 0:03:43.160 but I didn't really want to be a historian, So 0:03:43.320 --> 0:03:45.080 it's like, what do I actually like to do as 0:03:45.080 --> 0:03:47.440 opposed to think was interesting? And that's where at the 0:03:47.440 --> 0:03:50.240 time your computer programming was becoming a thing. I really 0:03:50.280 --> 0:03:54.360 loved it. That led me down that track, and really, 0:03:54.840 --> 0:03:56.920 while I had a software engineering job, I was always 0:03:56.960 --> 0:04:00.560 sort of pointing toward a research career. And then at 0:04:00.560 --> 0:04:03.560 some point after my PhD school studies, we could get 0:04:03.560 --> 0:04:05.320 into that if you like, but I kind of decided 0:04:05.360 --> 0:04:07.560 to switch, and finance was kind of what was available 0:04:07.560 --> 0:04:08.240 for me at that point. 0:04:08.360 --> 0:04:12.160 Yeah, let's lead up to that transition. Software engineer at IBM, 0:04:12.280 --> 0:04:16.279 then you get your PhD. Then research at SEMENS, which 0:04:16.279 --> 0:04:19.839 seems to be more of a technological position than a 0:04:19.880 --> 0:04:23.599 finance position. What was your focus within tech? 0:04:24.040 --> 0:04:27.719 I worked the area in which I studied in graduate school, 0:04:27.760 --> 0:04:29.440 and then worked at SEMENS, which, as you say, it's 0:04:29.560 --> 0:04:32.440 a research lab, think like Bell Labs, IBM, Watson, that 0:04:32.480 --> 0:04:36.599 kind of think tank environment. I worked on machine learning, 0:04:36.640 --> 0:04:40.120 which is a sub field of of course, artificial intelligence. 0:04:40.200 --> 0:04:43.359 So the nineties, Yeah, that was a nineties So artificial 0:04:43.400 --> 0:04:45.560 intelligence is a it's an area that's been around for 0:04:45.600 --> 0:04:47.120 a long time. I think the term was coined in 0:04:47.120 --> 0:04:50.800 the nineteen fifties. But I was doing it, at least, 0:04:50.800 --> 0:04:52.920 I should say, working on a small part of it 0:04:53.360 --> 0:04:56.800 back in the nineties in graduate school is at a 0:04:56.800 --> 0:05:01.040 fairly theoretical way. A Semens who was with more applications 0:05:01.120 --> 0:05:01.640 in mind. 0:05:02.120 --> 0:05:05.680 So, so how does the transition to finance take place? It 0:05:05.720 --> 0:05:09.720 seems like maybe you're going to tack into researcher academia. 0:05:10.000 --> 0:05:14.520 How did you find your way to both finance and GMO. 0:05:14.760 --> 0:05:16.480 Yeah, so there's two parts of that. One is just 0:05:16.480 --> 0:05:19.360 sort of why not the academic track, and then by 0:05:19.400 --> 0:05:22.280 the finance part. So the why not the academic track 0:05:22.520 --> 0:05:25.840 was in academia, I was doing very theoretical stuff that 0:05:26.040 --> 0:05:31.000 was very maybe intellectually interesting, but understood by increasingly few 0:05:31.000 --> 0:05:33.360 people in the world. So I just sort of wanted 0:05:33.400 --> 0:05:35.480 to be something that was a little more relevant, and 0:05:35.560 --> 0:05:39.080 I thought maybe the research lab would provide that, and 0:05:39.120 --> 0:05:41.640 for various reasons, it still didn't feel like that. So 0:05:41.680 --> 0:05:44.920 it was I was basically looking for something that was relevant. 0:05:45.040 --> 0:05:46.640 You know, I want to be loved like everyone white, 0:05:46.640 --> 0:05:47.920 So I want to do something that I can talk 0:05:47.920 --> 0:05:49.600 to people about and they don't want to be loved. 0:05:49.640 --> 0:05:51.680 Do you want to go into finance? That's one or 0:05:51.720 --> 0:05:52.039 the other. 0:05:52.320 --> 0:05:54.920 Well, so, at least the other with finance, which wasn't 0:05:56.120 --> 0:05:59.000 certainly an opportunistic element to that, Like what kind of 0:05:59.520 --> 0:06:04.240 industry he hires people that values fancy academic degrees that 0:06:04.320 --> 0:06:08.320 don't have necessary a lot of developed specific skills and finance, 0:06:08.720 --> 0:06:10.760 I said, management consulting is any of the other thing, 0:06:10.760 --> 0:06:13.320 at least at that time, was the other career trajectory. 0:06:13.360 --> 0:06:17.080 Just my personality more of an math oriented introvert. Finance 0:06:17.160 --> 0:06:21.520 was the natural fit for GMO particularly. I got really 0:06:21.600 --> 0:06:24.520 lucky when I was in graduate school, so I was 0:06:24.560 --> 0:06:27.160 at Harvard. Harvard has a smaller computer science department. We 0:06:27.240 --> 0:06:29.080 do a lot down the river at MIT, and I 0:06:29.120 --> 0:06:31.160 went to a research group there. I was headed by 0:06:31.640 --> 0:06:34.520 Ron Revest, who's perhaps known to some as you are 0:06:34.600 --> 0:06:38.240 behind RSA cryptography, but he also worked in machine learning 0:06:38.279 --> 0:06:40.920 in this area. And he ran this research group of 0:06:41.120 --> 0:06:44.360 scruffy grad students and postdocs that I would go to. 0:06:44.440 --> 0:06:46.640 But there was this one guy who came from downtown 0:06:46.720 --> 0:06:48.760 who wore a suit, and no one quite knew who 0:06:48.760 --> 0:06:50.840 he was. I asked, so, who's that guy? You think 0:06:50.880 --> 0:06:54.120 he's a banker, And he was a very smart guy. 0:06:54.440 --> 0:06:57.200 My mental image was that he worked in the back 0:06:57.279 --> 0:07:00.200 of a bank approving mortgage applications. He was really frushtra 0:07:00.279 --> 0:07:02.719 and this was his intellectual outlook. It turns out that 0:07:02.839 --> 0:07:04.320 was not what he was. He was a guy named 0:07:04.360 --> 0:07:07.799 Chris Darnell who was the start of the quantitative research 0:07:07.800 --> 0:07:11.480 effort at GMO. He was Jeremy Grantham's right hand man 0:07:11.560 --> 0:07:14.680 in the early eighties, but he was just he also 0:07:14.760 --> 0:07:17.080 came for an academic family. He had broad interests. He 0:07:17.120 --> 0:07:19.160 came to this group. I'm not even quite sure how 0:07:19.160 --> 0:07:21.720 he found it, honestly, but in any case, when I 0:07:21.760 --> 0:07:25.560 was sort of casting around at places to look, that 0:07:25.600 --> 0:07:28.320 connection was rekindled and that was my entree into GMO. 0:07:28.520 --> 0:07:31.800 Really really interesting. And you joined GMO in nineteen ninety five, 0:07:32.400 --> 0:07:36.280 you've been there ever since. That's kind of unusual these 0:07:36.360 --> 0:07:39.840 days in finance to stay with one firm, for Gee, 0:07:39.840 --> 0:07:44.040 it's almost thirty years. What makes GMO so special? What's 0:07:44.120 --> 0:07:45.840 kept you there for three decades? 0:07:46.280 --> 0:07:48.840 It's been a great place to work, obviously, I've thought so. 0:07:49.000 --> 0:07:52.600 I think GMO felt very familiar to me when I 0:07:52.720 --> 0:07:55.280 joined as a smaller firm I think maybe sixty people 0:07:55.280 --> 0:07:59.720 at the time. It's very much of a intellectual debate, 0:08:00.560 --> 0:08:04.040 academic kind of vibe. It felt very comfortable to me, 0:08:04.440 --> 0:08:06.840 and the firm's grown. I've kind of grown with it. 0:08:06.880 --> 0:08:09.400 I think one of the things that kept me engaged 0:08:09.480 --> 0:08:12.320 is I've actually done different things, so kind of as 0:08:12.320 --> 0:08:14.160 we're alluding to, and as you'd think, my background is 0:08:14.240 --> 0:08:16.800 very much on the quantitative side. Now I do fundamental 0:08:16.880 --> 0:08:20.400 side research portfolio management. 0:08:20.640 --> 0:08:24.040 So you joined GMO, there's sixty people. Thirty years, they've 0:08:24.040 --> 0:08:29.760 grown tremendously. How big is GMO today versus when you joined, 0:08:29.840 --> 0:08:33.440 and what was that process like to experience all that growth? 0:08:33.600 --> 0:08:36.760 Yeah, I think it's about five hundred people today. The 0:08:36.840 --> 0:08:38.760 book are in Boston, which is where I sit, but 0:08:38.760 --> 0:08:44.440 we have investment offices in San Francisco, in London, in 0:08:44.480 --> 0:08:48.440 Singapore and Sydney, Australia, so it's a global firm of 0:08:48.520 --> 0:08:52.000 the One of the things, these are things. When I 0:08:52.040 --> 0:08:56.160 started at GMO, it was really just investment people almost 0:08:56.400 --> 0:09:02.160 and all the sort of compliance, clients, service, legal kind 0:09:02.200 --> 0:09:05.640 of everything was done sort of on the side by 0:09:05.640 --> 0:09:10.319 investment people. And gradually we hired we professionalized. 0:09:10.360 --> 0:09:13.960 Over time, you've become an enterprise. It's ten x what 0:09:14.040 --> 0:09:17.360 it once was in terms of headcount, it's much bigger 0:09:17.360 --> 0:09:21.199 in terms of assets. And I can tell you from 0:09:21.200 --> 0:09:26.679 personal experience US finance people, we're not great at accounting, legal, compliance, 0:09:27.080 --> 0:09:29.920 all the detailer and stuff that keeps a firm running. 0:09:30.160 --> 0:09:32.160 The trick is we're not great, but we think we are. 0:09:32.440 --> 0:09:33.720 So that's where we get into trouble. 0:09:33.840 --> 0:09:37.080 That's that's a lot that's really true. We hear a 0:09:37.080 --> 0:09:41.439 lot about Jeremy grantham thoughts on markets, but much less 0:09:41.559 --> 0:09:46.960 on how the firm is managed, how this growth came about, 0:09:47.520 --> 0:09:50.160 and the culture as a business. Tell us a little 0:09:50.200 --> 0:09:54.960 bit about GMO as a cultural enclave up in Boston. 0:09:55.480 --> 0:09:58.160 Yeah. Well, one thing to start with there is the 0:09:58.240 --> 0:10:00.800 name GM and O and it's three people, and people 0:10:00.840 --> 0:10:03.480 know Jeremy Grantham, I think very well, but that Dick 0:10:03.520 --> 0:10:06.240 Mayo and Ike van Ottolou are the other two. And 0:10:06.280 --> 0:10:08.600 that's relevant to your question because from the very early 0:10:08.679 --> 0:10:11.880 days before I was there, they kind of operated separate 0:10:11.920 --> 0:10:16.520 investment teams. Dick Mayo was a traditional, i'd say, portfolio 0:10:16.600 --> 0:10:20.880 strong portfolio manager focused on US stocks. Ike was similarly 0:10:20.880 --> 0:10:24.120 international stocks, and Jeremy is kind of the go everywhere, 0:10:24.200 --> 0:10:27.000 top down, big ideas guy, and that a bit of 0:10:27.040 --> 0:10:29.360 that culture. Dick and ike An both retire now, but 0:10:29.400 --> 0:10:32.400 a lot of that culture of different investment teams that 0:10:32.480 --> 0:10:34.920 do things a little bit differently is very much part 0:10:35.160 --> 0:10:39.760 of GMO. There is not one central view to the firm. 0:10:40.200 --> 0:10:46.439 Jeremy is a very strong, powerful persona and very deep thinker. 0:10:47.160 --> 0:10:50.600 Jeremy's never really been a portfolio manager, his role has 0:10:50.640 --> 0:10:52.640 always been, in my experience, at least, it has always been 0:10:52.679 --> 0:10:55.320 much more of a gadflaw. He makes you think about things, 0:10:55.360 --> 0:10:58.520 he makes suggestions, he pushes you to come to your 0:10:58.559 --> 0:11:01.280 own conclusion. He leads you to watch. But he's not 0:11:01.400 --> 0:11:04.240 a hands on the portfolio person. 0:11:04.440 --> 0:11:07.800 Huh. Really interesting. We had him down sometime last year, 0:11:07.840 --> 0:11:10.640 came by our offices and spoke, and I very much 0:11:10.720 --> 0:11:14.280 get the sense he has no interest in retiring. He 0:11:14.320 --> 0:11:18.840 loves what he does. He is very plugged into everything 0:11:18.880 --> 0:11:22.440 that's going on. He's gonna do this forever, isn't he? 0:11:23.360 --> 0:11:25.199 That would be my guess. Yeah, I think he probably 0:11:25.200 --> 0:11:28.920 will outlast me in the industry. He is one of 0:11:28.920 --> 0:11:31.880 the smartest people I've ever met and one of the 0:11:31.880 --> 0:11:35.560 most driven people I've ever met. He has a I 0:11:35.600 --> 0:11:38.680 think and hope along professional life span ahead of him. 0:11:38.760 --> 0:11:41.000 I would say he is a little bit less focused 0:11:41.040 --> 0:11:42.720 on what you might call the day to day of 0:11:42.760 --> 0:11:45.559 investing at GMO, and he does a lot of stuff outside. 0:11:45.600 --> 0:11:49.319 He's very involved with the Grantham Foundation, his charitable organization, 0:11:49.720 --> 0:11:52.160 both on their mission but also on the investing side 0:11:52.160 --> 0:11:53.240 of managing their portfolio. 0:11:53.440 --> 0:11:56.160 So that raised a really interesting question. He's a big 0:11:56.200 --> 0:11:59.880 picture guy. He's always looking for what risks and what 0:12:00.240 --> 0:12:03.720 black swans might be coming at us that the investment 0:12:03.720 --> 0:12:07.440 community either hasn't found yet or isn't paying attention to. 0:12:08.280 --> 0:12:11.920 How do you translate that thirty thousand foot view as 0:12:11.920 --> 0:12:15.880 to what's going on in the world to something like 0:12:16.120 --> 0:12:19.520 quality and focused investing or is it really just there 0:12:19.520 --> 0:12:22.520 to sort of help you create a framework for looking 0:12:22.559 --> 0:12:23.280 at the universe. 0:12:23.920 --> 0:12:25.800 Well, when I say he's a big picture guy, don't 0:12:25.800 --> 0:12:29.360 necessarily mean just that he's investing is to make macro calls. 0:12:29.880 --> 0:12:32.640 I mean more than he steps back from the fray 0:12:32.800 --> 0:12:35.520 a bit and thinks about the big ideas and what 0:12:35.640 --> 0:12:40.240 really matters, and that whole idea around quality investing. That's 0:12:40.320 --> 0:12:44.080 kind of Jeremy from the nineteen eighties early eighties and 0:12:44.360 --> 0:12:47.040 saying bangs say, hey, you know, I cut my teeth 0:12:47.040 --> 0:12:51.160 as he and Digmeo did on that traditional deep value investing. 0:12:51.200 --> 0:12:54.080 But we're missing something here with these higher quality companies. 0:12:54.760 --> 0:12:56.520 How should we think about that? How can you invest 0:12:56.559 --> 0:12:58.480 about that? How can we improve our process? So that 0:12:58.559 --> 0:13:03.240 sort of philosopha call outside and around the box thinking 0:13:03.600 --> 0:13:05.559 is kind of what really led to us having a 0:13:05.600 --> 0:13:07.360 quality oriented strategy. 0:13:07.360 --> 0:13:11.720 And quality is really a sub section of value. Is 0:13:11.480 --> 0:13:13.960 that is that what you're suggesting, it's. 0:13:13.840 --> 0:13:17.320 An improvement of value or refinement on the definition of value. 0:13:17.400 --> 0:13:20.040 And people use these terms loosely, of course, and these 0:13:20.040 --> 0:13:24.320 all fall under the rubric of fundamental investing and buying 0:13:24.600 --> 0:13:26.920 companies that are great over long term at great prices. 0:13:27.000 --> 0:13:30.120 But the idea that companies that can compound at high 0:13:30.200 --> 0:13:32.720 rates of return and deserve premium multiples you should be 0:13:32.720 --> 0:13:35.079 willing to pay for them is the root of it. 0:13:35.440 --> 0:13:41.480 The quality funds ticker gq ETX has returned thirteen point 0:13:41.600 --> 0:13:44.880 six percent a year over the past decade, putting it 0:13:44.960 --> 0:13:48.760 in the top one percent of its peers. So let's 0:13:48.800 --> 0:13:51.360 talk a little bit about what goes into that sort 0:13:51.360 --> 0:13:56.880 of performance. What are the core themes at GMO around 0:13:57.559 --> 0:14:00.320 focus and quality? Tell us a little bit about what 0:14:00.440 --> 0:14:05.520 differentiates GMO from the way other value investors invest. 0:14:05.760 --> 0:14:09.360 If you're think about value investors, value investors traditionally are 0:14:09.400 --> 0:14:11.000 people who kind of know the price of everything and 0:14:11.040 --> 0:14:13.559 the value of nothing right. They're much too focused on 0:14:14.040 --> 0:14:18.920 ratios around trailing fundamentals and not on the plus side 0:14:18.960 --> 0:14:22.320 future growth opportunities. On the negative side, maybe competitive threat. 0:14:22.440 --> 0:14:26.680 So bringing the quality idea into that, thinking about what 0:14:26.800 --> 0:14:30.400 companies have a long trajectory to grow and to grow 0:14:30.440 --> 0:14:33.040 at high return on capital, that's the key thing. Also 0:14:33.120 --> 0:14:37.640 differentiating between growth that's just sort of throwing money at 0:14:37.680 --> 0:14:39.480 the wall and seeing a little bit come back to 0:14:39.520 --> 0:14:43.520 you versus very efficient growth. That's the key to quality investing. 0:14:43.840 --> 0:14:46.400 I could maybe flip that around a little bit since 0:14:46.440 --> 0:14:49.480 I think, particular post two thousand and two thousand and nine, 0:14:49.520 --> 0:14:52.080 the quality style of investing has become a lot more popular, 0:14:52.760 --> 0:14:55.920 certainly sending people talk a lot about the difference between 0:14:56.440 --> 0:15:00.200 our approach and a lot of quality managers is they're 0:15:00.200 --> 0:15:03.080 really quality growth managers. So the quality but at a 0:15:03.120 --> 0:15:05.880 reasonable price, or you could interpret that is not just 0:15:06.040 --> 0:15:08.840 chasing the companies everybody knows are high quality, but finding 0:15:08.880 --> 0:15:12.920 a few maybe more neglected names That quality to reasonable 0:15:12.960 --> 0:15:14.960 price is a little bit of a different style than 0:15:15.000 --> 0:15:16.920 I see most people practicing out there. 0:15:17.120 --> 0:15:19.800 So let's get into some of the definitions of this. 0:15:20.240 --> 0:15:23.960 How does GMO define quality? 0:15:24.080 --> 0:15:26.760 Yeah, so we think about quality first off, the ability 0:15:26.840 --> 0:15:29.600 to deliver high returns on investment going forward. Then what 0:15:29.760 --> 0:15:34.359 enables that you have to have some asset ability, capability 0:15:34.400 --> 0:15:38.240 that competitors can't equally duplicate. I mean traditionally could have 0:15:38.240 --> 0:15:40.520 been like a physical asset or brand. Of course, these 0:15:40.600 --> 0:15:43.280 days in an IT world as much more about network 0:15:43.320 --> 0:15:47.000 effects of platform companies and such. But you have to 0:15:47.040 --> 0:15:51.480 have that special sauce that's not reproducible. It has to 0:15:51.560 --> 0:15:53.840 be doing something that's relevant, Like you want to avoid 0:15:53.840 --> 0:15:55.960 the trap of companies that do one thing well and 0:15:56.000 --> 0:15:57.560 that thing's not growing, so they just try to do 0:15:57.600 --> 0:16:01.360 other stuff. And then management does also come into play. 0:16:01.400 --> 0:16:03.960 I do keep a strong balance sheet? Are you prudent? 0:16:04.040 --> 0:16:06.200 Do you invest when you should? Return capital when you should? 0:16:06.240 --> 0:16:09.640 And so as those assets, the relevance and then capital 0:16:09.680 --> 0:16:11.360 discipline are the key components for us. 0:16:11.720 --> 0:16:15.560 Given that definition of quality, has that evolved or changed 0:16:15.560 --> 0:16:18.280 over time or has that been pretty much the definition 0:16:18.720 --> 0:16:20.600 going back to the eighties or nineties. 0:16:20.680 --> 0:16:22.800 That's been pretty much the definition going back to the 0:16:22.800 --> 0:16:24.400 eighties and nineties. And I told you kind of the 0:16:24.440 --> 0:16:27.920 fundamental definition. There's also quantitative metrics that we look at. 0:16:28.520 --> 0:16:32.880 Those have evolved, but always within that capabilit cluster of 0:16:33.240 --> 0:16:36.920 high returns on investment stability across the economic cycle. Or 0:16:36.960 --> 0:16:41.600 consistent and strong balance sheets. What has changed over that period, too, 0:16:42.000 --> 0:16:45.120 is what kinds of companies best meet that threshold. So 0:16:45.160 --> 0:16:47.160 if you go back to the eighties and nineties, we're 0:16:47.200 --> 0:16:49.480 talking about like the Cokes and Procter and Gambles and 0:16:49.560 --> 0:16:53.640 Johnson Johnson, right, and big consumer and healthcare and now 0:16:53.800 --> 0:16:55.920 those are still there, but a lot more of the 0:16:55.920 --> 0:16:59.800 big tech companies, the fang companies, more growth companies. 0:17:00.560 --> 0:17:04.119 So for a long time it looked like Apple was 0:17:04.280 --> 0:17:07.600 a value stock, even as it became big and bigger 0:17:07.680 --> 0:17:10.680 than giants. But when we look at what people call 0:17:10.720 --> 0:17:14.840 the Magnificent seven, are you seeing any real value there? 0:17:15.080 --> 0:17:19.280 Companies like Microsoft and Nvidia and Netflix, I assume are 0:17:19.400 --> 0:17:23.159 quality companies by your definition, but are they quality at 0:17:23.160 --> 0:17:24.240 a reasonable price? 0:17:24.640 --> 0:17:27.359 All the names you mentioned are quality companies, we believe, 0:17:27.880 --> 0:17:30.040 we don't all We don't hold all of them. It's 0:17:29.880 --> 0:17:33.880 the prices vary. If you think about Meta and Alphabet, 0:17:33.920 --> 0:17:35.280 those are kind of the value stocks. 0:17:35.280 --> 0:17:36.800 And the band right there, well they got you laughed 0:17:36.800 --> 0:17:40.199 over the past couple of years before last year's recovery. 0:17:40.320 --> 0:17:45.040 Yeah, and we also hold Microsoft and Apple. Apple is 0:17:45.040 --> 0:17:47.840 actually an interesting case study because we used them as 0:17:47.840 --> 0:17:50.399 an example of our investment at our investment conference fifteen 0:17:50.480 --> 0:17:53.239 years ago about what a high quality company isn't and 0:17:53.240 --> 0:17:55.560 then Steve Jobs turned the round in the iPhone and 0:17:55.600 --> 0:17:58.640 so forth with as the rest is history. The point 0:17:58.800 --> 0:18:00.840 is we were very wrong about them, and we were 0:18:00.920 --> 0:18:03.880 late to the party. But the party had such long 0:18:04.119 --> 0:18:06.040 it's such a long party that it's okay to be 0:18:06.119 --> 0:18:07.400 late to it. You see. We still had a really 0:18:07.400 --> 0:18:09.159 good time with that company, which I think is a 0:18:09.160 --> 0:18:11.800 little bit of a lesson for quality investing. You don't 0:18:11.880 --> 0:18:14.480 have to be the first one in the door. There. 0:18:14.119 --> 0:18:16.560 These themes run for a long time, and if you're 0:18:16.560 --> 0:18:19.280 willing to admit your wrong and change your stripes is 0:18:19.560 --> 0:18:20.400 you can still make money. 0:18:20.520 --> 0:18:23.120 So there were a few come at GMO, Warren Buffett 0:18:23.160 --> 0:18:27.600 were quote unquote late to Apple, but did exceedingly well 0:18:27.640 --> 0:18:29.960 with that. So you don't have to be at the 0:18:29.960 --> 0:18:31.720 there at the IPO, you don't have to be there 0:18:32.080 --> 0:18:35.440 when they crash in the dot com implosion. As long 0:18:35.480 --> 0:18:39.480 as the growth rate is there and the value is reasonable, 0:18:39.760 --> 0:18:41.160 there's an opportunity. 0:18:41.320 --> 0:18:43.760 Yep. And speaking of the dot com employes like Microsoft, 0:18:43.840 --> 0:18:47.040 via a case study where we in previous strategies. We'd 0:18:47.040 --> 0:18:49.200 held Microsoft for a very long time. That's where the 0:18:49.280 --> 0:18:51.600 valuation could help us in the dot com bos So 0:18:51.720 --> 0:18:54.520 Microsoft now is thirty times earn it was over fifty 0:18:54.840 --> 0:18:56.639 in two thousand and I don't think it was a 0:18:56.720 --> 0:18:58.880 much better company than it's a pretty good company now. 0:18:58.960 --> 0:19:02.400 Rh there's great company. You have to at some point 0:19:02.400 --> 0:19:04.840 be willing not to hold the stock. And yes, actually 0:19:04.880 --> 0:19:07.439 Microsoft by this point is outperformed since the peak of 0:19:07.440 --> 0:19:09.520 the cycle, but took a long long time for that 0:19:09.600 --> 0:19:10.040 to happen. 0:19:10.160 --> 0:19:13.680 Well, the Boomer era was not where they really shined. 0:19:14.200 --> 0:19:16.640 New ceo seems to have done a great job over 0:19:16.640 --> 0:19:19.400 the past what is it five years the doll you's 0:19:19.400 --> 0:19:19.800 been there for. 0:19:20.520 --> 0:19:23.439 Yeah, at least that I think at this point we 0:19:23.520 --> 0:19:25.680 held through the but and actually added in the Ballber era, 0:19:25.840 --> 0:19:28.480 So that would be our taking the view that at 0:19:28.560 --> 0:19:30.679 least in this case turned out to be right. That 0:19:30.840 --> 0:19:33.920 is something companies can fix if the core assets there, 0:19:34.040 --> 0:19:37.399 you know, the core network effects of everybody using their products, 0:19:37.440 --> 0:19:41.399 they're being so entrenched in IT systems departments around the world. 0:19:41.600 --> 0:19:44.600 That was still there. The easiest thing almost to fix. 0:19:44.720 --> 0:19:46.959 As a CEO, So if his stock's training at thirteen 0:19:47.000 --> 0:19:50.680 times earnings and has all these great characteristics, and you 0:19:50.720 --> 0:19:52.919 think the CEO can change, that can be a great time. 0:19:52.800 --> 0:19:54.919 To roll the bum out, bring someone else in, and 0:19:54.960 --> 0:19:57.639 the rest is history. So I love this quote of 0:19:57.640 --> 0:20:02.439 yours on the backwardization of risk. Quote. The expectation is 0:20:02.480 --> 0:20:08.639 that achieving higher returns requires taking more risk. But higher 0:20:08.760 --> 0:20:14.360 quality stocks have outperformed lower quality stocks by a considerable 0:20:14.440 --> 0:20:17.040 margin despite being less risky. 0:20:17.440 --> 0:20:22.000 Explain, yeah, and that's that's a point that Jeremy Grantham 0:20:22.080 --> 0:20:25.360 kind of observed very long time ago and is emphasizing 0:20:25.400 --> 0:20:27.760 for a long time. And actually pen Inkers ahead of 0:20:27.760 --> 0:20:30.160 our a s allocation group, just wrote a very interesting 0:20:30.200 --> 0:20:33.160 piece on that too. This idea that at the big 0:20:33.240 --> 0:20:36.560 picture level, stocks versus bonds things kind of behave what 0:20:36.600 --> 0:20:39.080 you'd expect. You get more return, but there's more risk 0:20:39.119 --> 0:20:41.800 associated with it. But if you look within asset classes, 0:20:42.280 --> 0:20:45.879 that hasn't been true just empirically, Like why is it? 0:20:45.880 --> 0:20:50.240 It's perplexing really that high quality companies which have been safer, right, 0:20:50.240 --> 0:20:53.320 they do better in recessions and such have you've not 0:20:53.400 --> 0:20:56.720 had to pay for that with lower return. And that's 0:20:56.920 --> 0:21:00.200 that was really the core of Jeremy's observation about quality 0:21:00.200 --> 0:21:02.440 stocks and why it's not just that quality is this 0:21:02.560 --> 0:21:04.800 silver bullet just beats the market all the time. I'm 0:21:04.800 --> 0:21:08.199 sure we necessarily believe that's true. But it does improve 0:21:08.240 --> 0:21:10.840 your portfolio with lower risk without having to give up return. 0:21:11.040 --> 0:21:15.240 So the obvious answer is value makes a big difference 0:21:15.720 --> 0:21:20.360 within quality stocks. Is that what leads to the lower 0:21:20.760 --> 0:21:25.040 downside in a market dislocation? If you're buying it right, 0:21:25.160 --> 0:21:26.880 there's less room to fall. 0:21:26.640 --> 0:21:30.439 Right in isolation, Quality on average gives you downside protection. 0:21:30.600 --> 0:21:32.880 Certainly did in two thousand and seven eight, for example, 0:21:33.080 --> 0:21:34.960 but then it didn't in when the tech bubble burst. 0:21:35.000 --> 0:21:38.120 It didn't last year in twenty twenty two, right. Then. 0:21:38.119 --> 0:21:39.720 The reason for that is a lot of the quality 0:21:39.720 --> 0:21:42.760 stocks are really expensive. So the trade off, compromise or 0:21:42.760 --> 0:21:45.240 combination of value in quality is what we think gives 0:21:45.240 --> 0:21:48.640 you that best downside protection, but without having to give 0:21:48.720 --> 0:21:50.240