Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lags podcast.
Speaker 3: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 2: Today you're going to be listening to a special episode
Speaker 2: that we did recorded live on the beach in Huntington Beach, California.
Speaker 3: That's right, we are back at the future Proof Festival.
Speaker 3: It is a very special event that gathers a lot
Speaker 3: of investment professionals to talk about markets and how they're
Speaker 3: actually investing through these very interesting times. And one of
Speaker 3: the most interesting investors out there, I think has to
Speaker 3: be our guest for this episode totally.
Speaker 2: So you know, these days, I feel like when you
Speaker 2: talk to investors, we talked to people about the market,
Speaker 2: it's very binary. It's like, what do you think about
Speaker 2: the mag seven, what's your view guy, what's your view
Speaker 2: on KPEX spending, what's your view on the FED, etcetera.
Speaker 2: And you don't really hear many of those fashions, like
Speaker 2: good old fashioned stock picking, security selection.
Speaker 4: And I miss that.
Speaker 2: I think, you know, it's interesting back in the days
Speaker 2: when like you know, there's sort of like Buffett and
Speaker 2: Graham Dodd's style of investing We're like, yeah, here's an
Speaker 2: interesting company. A lot of people don't know about it,
Speaker 2: but I found it. I like this stock, I like
Speaker 2: this company, and I think it going to grow bigger.
Speaker 2: You just don't really get much of that discourse these days.
Speaker 3: This also dovetails with my favorite ever style of analysis,
Speaker 3: which is just when an investor or an analyst just
Speaker 3: goes to one of the like companies or locations of
Speaker 3: the potential investment and just like observes how everything is
Speaker 3: working and talks to potential customers and things like that.
Speaker 3: I love that style of investment. And we are actually
Speaker 3: speaking to one of the most famous stock pickers of
Speaker 3: all time.
Speaker 4: That's right.
Speaker 2: You're going to be hearing our interview with John Rodgers.
Speaker 2: He's the founder and co CEO of Aerial Investment Management,
Speaker 2: and he's very different. It's truly old school. It's all
Speaker 2: mid cap and small cap stocks. He's been running this
Speaker 2: mutual fund for decades now, and he's like this old school,
Speaker 2: classic style stock picker. And you're going to hear our
Speaker 2: conversation about how he goes out and finds companies and
Speaker 2: talks to management and tries to uncover these diamonds in
Speaker 2: the rough shows.
Speaker 3: So take a listen. As a reminder, this was recorded
Speaker 3: live on stage at Huntington Beach as part of the
Speaker 3: future Proof conference. You might hear some background noise. It
Speaker 3: was very windy that day. There was also a drone
Speaker 3: which was an interesting experience, but we hope you enjoy it.
Speaker 3: Here is our conversation with John Rogers.
Speaker 5: It's great to be here. Never been to an event
Speaker 5: like this before.
Speaker 2: I know, it's such an extraordinary event. I don't even
Speaker 2: know what would be like an equivalent thing that anyone
Speaker 2: could have been to before, But very excited to be here.
Speaker 2: So in investing right now, you know, there's a couple
Speaker 2: big themes that come up over and over again. There's
Speaker 2: the rise of passive investing in various flavors of that.
Speaker 2: There's just the incredible dominance over the last several years
Speaker 2: of the MAG seven and big tech and their momentum
Speaker 2: and the sector specific stuff.
Speaker 4: You are a stock picker and you buy us do.
Speaker 2: That you're not just one of these people riding the
Speaker 2: MAG seven wave. And you buy a lot of mid
Speaker 2: cap and small cap stocks that are in fields that
Speaker 2: maybe people don't think about. What's your pitch when you've
Speaker 2: been people look at the rise of the mag seven
Speaker 2: or indexing. What's your pitch for security selection in other
Speaker 2: realms of the market.
Speaker 5: Well, I think it starts with the fact that aerial
Speaker 5: investments is almost forty two years old. So we've been
Speaker 5: through a lot of markets. Of course, we've studied market
Speaker 5: history and read about what happened in all the great
Speaker 5: bubbles that have happened throughout the world, and all the
Speaker 5: great corrections and all the big booms that happen, and
Speaker 5: we have these massive ups and downs in the market,
Speaker 5: but ultimately it is very cyclical. So I was just
Speaker 5: reading Chuck Royce, who's been managing small cap stocks for
Speaker 5: over fifty years, the legendary investors. He's finally retiring, and
Speaker 5: he talks about how these waves come and go, and
Speaker 5: this one in particularly reminds him of the nifty to
Speaker 5: fifty when Polaroid and Xerox and Johnson and Johnson and
Speaker 5: IBM all sold at extraordinary multiples. People thought it was
Speaker 5: going to last forever. They were called one decision stocks.
Speaker 5: You'd buy them and you own them, But of course
Speaker 5: that changed seventy seven to seventy three, seventy four of
Speaker 5: the market's collapsed, and we've all seen the ups and downs.
Speaker 5: So for us, what we tell people is when you
Speaker 5: get these extremes and everyone's buying a stock because it's
Speaker 5: gone up a lot yesterday, it's part of an index.
Speaker 5: You're getting toward the top. And the multiples show that
Speaker 5: the valuation differences between large cab growth and small cap
Speaker 5: value it's one of the largest in history. So we
Speaker 5: feel highly confident it's going to be a better time
Speaker 5: for the smaller undervalued securities.
Speaker 3: You mentioned waves of investments kind of coming and going.
Speaker 3: I feel like I have to ask the obvious question,
Speaker 3: since we're here with one of the most famous stock
Speaker 3: pickers of all time, but is value investing dead?
Speaker 4: You're still here, you're still going. You seem very much alive.
Speaker 1: Why do people think it's dead.
Speaker 5: I think they think it's dead because this period of
Speaker 5: growth stocks outperforming value stocks has lasted so much longer
Speaker 5: than normal history. But again, if you go and read
Speaker 5: the famous book by Burton Alkil or Random Walk down
Speaker 5: Wall Street, he always explains and shows you these bubbles
Speaker 5: and how they burst. And when you, of course you
Speaker 5: study Warren Buffett, and he always reminds you that you
Speaker 5: want to be greedy when others are fearful, and be
Speaker 5: fearful when others are greedy. He's always so consistent about
Speaker 5: that because he realizes things get out of hand when
Speaker 5: everyone chases the hot dot of the moment. Those securities
Speaker 5: get overvalued, and the ones that are left over I
Speaker 5: call them the orphans. They're selling at very, very cheap prices,
Speaker 5: and eventually companies are going to sell at the discounted
Speaker 5: present values of their cash flows, and if you can
Speaker 5: get them at bargain prices, it's a really great, great thing.
Speaker 5: And these cycles always end, and they always end when
Speaker 5: everyone's convinced that they can't end.
Speaker 2: You know, you use the word orphans, and I think
Speaker 2: that actually leads to something that I was thinking about
Speaker 2: as I was preparing for this interview. You know, like
Speaker 2: on a day to day basis, sometimes you'll see like
Speaker 2: small caps outperforming, the russell outperforming.
Speaker 4: And so forth.
Speaker 2: But it seems to me that one of the reasons
Speaker 2: one might go into smaller stocks is not necessarily because
Speaker 2: they're small, but because they are literally orphaned. They don't
Speaker 2: have the analyst coverage. People aren't familiar with the names,
Speaker 2: people aren't familiar with the industries. If someone is interested
Speaker 2: in small caps, does it make sense that, like, it
Speaker 2: really doesn't make sense to do it on an index level,
Speaker 2: but rather do it on a find those orphan stocks
Speaker 2: that nobody knows level well.
Speaker 5: I do believe strongly that the opportunity to take advantage
Speaker 5: of the very rare inefficiencies in the market are in
Speaker 5: the small cap sector because there's less well, well qualified
Speaker 5: and thought where research being done in the smaller socks.
Speaker 5: You know, investment banks can't get paid as much working
Speaker 5: in the small cap sector, and so at my forty
Speaker 5: one years, I've seen the number of small cap analysts
Speaker 5: decline significantly. The ones that are out there are sort
Speaker 5: of following lots and lots of companies sort of a
Speaker 5: mile wide and inch deep. They don't know their company's
Speaker 5: in depth. So it creates this opportunity to these orphans
Speaker 5: to be able to find some inefficiencies in the marketplace
Speaker 5: where the research isn't being very well done, and you
Speaker 5: can just find some magical hidden nuggets out there in
Speaker 5: the marketplace. And these things happen from time to time,
Speaker 5: and I do feel we're in a period now where
Speaker 5: there's a lot of opportunity there.
Speaker 3: How do you come across those types of orphan stocks,
Speaker 3: because as Joe just mentioned, these are often smaller companies
Speaker 3: that don't actually have analysts coverage. There are still a
Speaker 3: lot of them out there, So how do they come
Speaker 3: across your desk?
Speaker 5: I guess well, it's a couple of ways. Of course.
Speaker 5: At AERIL now we have you one hundred and thirty people,
Speaker 5: a lot of people helping us do the research, and
Speaker 5: we have the industries that are in our circle of
Speaker 5: competence that we follow, So we have a lot of
Speaker 5: people looking and searching for ideas and understanding all the
Speaker 5: cheapest stocks in their sector, the most expensive stocks in
Speaker 5: their sector, and becoming true experts over the years in
Speaker 5: their sectors. So I think that's first and foremost. You know,
Speaker 5: we're working to, you know, focus on those areas that
Speaker 5: we know really really well, so we know where the
Speaker 5: bargains are, we know where the expensive stocks are. The
Speaker 5: second thing though, in case we miss something, we use
Speaker 5: the computer and screen for cheap stocks, and we think
Speaker 5: that's really really important. I noticed the morning Star banner here.
Speaker 5: We love to read and study what other small cap
Speaker 5: value managers own, and as the years go on, you
Speaker 5: get to know who are the people you respect, because
Speaker 5: as we touched on earlier, there's not as many active
Speaker 5: small cab value managers left, but those that are out there,
Speaker 5: we just love to see their list of top thirty holdings,
Speaker 5: get their quarterly reports, and get all their holdings and
Speaker 5: see where there are some creative ideas that maybe you
Speaker 5: haven't thought about it or hadn't thought about it in
Speaker 5: a long time. And then finally, of course, just reading extensively,
Speaker 5: you know, reading every publication you can. On the plane here,
Speaker 5: you know you're reading Barons, You're reading Business Week, You're
Speaker 5: reading Bloomberg.
Speaker 3: Thank you for the plug.
Speaker 5: Appreciate that you know you were getting the research reports
Speaker 5: from all the major brokerage firms. Just reading and reading
Speaker 5: and reading and reading, searching for ideas, seeing ideas that
Speaker 5: you might have missed. I think there's no substitute for
Speaker 5: doing that work.
Speaker 3: And what counts as a cheap stock in your book,
Speaker 3: and has that perhaps changed over time? Is a stock
Speaker 3: that was considered cheap in the nineteen eighties perhaps different
Speaker 3: or measured differently to a stock that might be considered
Speaker 3: cheap nowadays.
Speaker 5: I think the basic principles of value investing is still
Speaker 5: the same. You want to buy stocks that are selling
Speaker 5: at low multiples. Now, maybe a generation ago, we talk
Speaker 5: more about price earnings ratios. Now you're looking at price
Speaker 5: to ebadah ratios and understanding whether the stock's undervalued. But
Speaker 5: that's really really important to look for cheap companies. Second
Speaker 5: thing you're looking for is we want to make sure
Speaker 5: the company is selling it a forty percent discount to
Speaker 5: private market value. So we do the discount of cash
Speaker 5: flow analysis that they teach you in business school. You
Speaker 5: get the idea of looking at those future cash flows
Speaker 5: and discounting them back and finding out the true value
Speaker 5: of a business. And that's an inexact science. But we
Speaker 5: want to buy those stocks at a forty percent or
Speaker 5: more discount, and that's the way that we define what
Speaker 5: a bargain is.
Speaker 2: To anyway, I'm a really big span a fan of
Speaker 2: the Sphere. I went there, I saw it earlier.
Speaker 5: That's a good word.
Speaker 4: But it's one of your.
Speaker 2: Bigger holdings of your portfolio. And I don't know if
Speaker 2: a lot of everyone knows that the Sphere in Las Vegas,
Speaker 2: this extraordinary venue is publicly traded. But just because you know,
Speaker 2: I mean, we're interested in the art of stock picking.
Speaker 4: Can you talk to.
Speaker 2: Us a little bit about the thinking of how you
Speaker 2: wind up with you know, a few percent of your
Speaker 2: portfolio in the sphere.
Speaker 5: Yeah, ended up kind of by accident. I have to say, Okay,
Speaker 5: you know we own Madison Square Garden Entertainment, which in
Speaker 5: the old days was one You own the Garden, which
Speaker 5: is an extraordinary event, you know, extraordinary company, extraordinary event place,
Speaker 5: of course, the world's greatest arena. And you know, Warren
Speaker 5: Buffett always says, you want to buy a company that
Speaker 5: where it's hard to replicate it. You know, there's a
Speaker 5: true moat around it. Yeah, there's only one Garden, you know,
Speaker 5: it's something really special. And they own the Knicks and
Speaker 5: they own the Rangers. They owned the Regional Sports Network.
Speaker 5: They had everything under one roof. Over time they all
Speaker 5: split up into separate companies. Sports Company is a separate
Speaker 5: public company. That's the Knicks and the Rangers. The Garden
Speaker 5: is separate. They owned the Beacon Theater and the Chicago
Speaker 5: Theater and Radio City Music Hall. They control and the
Speaker 5: Rockets and the Christmas Show, and then they spun off
Speaker 5: the Sphere. Jim Dolan started the Sphere when it was
Speaker 5: under the umbrella of Madison Square Garden, and so we
Speaker 5: got it and spin off, never dreaming we would have
Speaker 5: assets in one, you know, new business like this. But
Speaker 5: the stock seemed extremely, extremely cheap. It seemed like it
Speaker 5: was being given away. As we did our homework, we
Speaker 5: got quite excited about it. You know. We went out
Speaker 5: and took the hard Hat tour. While the sphere is
Speaker 5: being built. We went to southern California and outside of
Speaker 5: La It went to visit in Burbank. We went to
Speaker 5: see their sort of mini sphere where you could see.
Speaker 4: I didn't know there was a minisphere.
Speaker 5: Yeah, it's a place where they can show you how
Speaker 5: the sound was good, look how the visual was going
Speaker 5: to look. Everything was right there at that mini sphere
Speaker 5: and it was magical. You walked in and said, they
Speaker 5: are transforming the way you're going to be able to
Speaker 5: experience entertainment. And I was talking to the general counsel
Speaker 5: of the garden. He remembered sitting down for dinner once
Speaker 5: with Jim Dolan and Jim Dolan sort writing it on
Speaker 5: a napkin, just drawing the sphere and saying there would
Speaker 5: be nothing like it in the world and he's actually
Speaker 5: accomplished it. You know, it's this huge globe most of
Speaker 5: you know, out right in the middle of Las Vegas,
Speaker 5: not far from the wind Theater, and it seats twenty
Speaker 5: thousand people, and it has it's like virtual reality on steroids,
Speaker 5: on double steroids. You know, everywhere you look, you see
Speaker 5: these magical images whenever you're in the Sphere. And they
Speaker 5: have great video. You know they have right now the
Speaker 5: Postcards from Earth. The rumors are the next big video
Speaker 5: is going to be The Wizard of Oz using that
Speaker 5: content in a magical way. And of course they have
Speaker 5: concerts and you two is opening night. They got the
Speaker 5: Eagles coming, They've had the Dead there and people everybody
Speaker 5: you talk to, anyone who's gone to one of the concerts,
Speaker 5: they just say they've never seen anything like it.
Speaker 4: I can confirm, I can confirm.
Speaker 3: Go into the Sphere earlier this year and wouldn't stop
Speaker 3: talking about it.
Speaker 4: That's right.
Speaker 5: But I guess one thing, I'm sorry, jump in one thing.
Speaker 5: Looking forward, You've got to believe that they're going to
Speaker 5: come up with more interesting and exciting content outside. They'll
Speaker 5: be able to advertise on the outside of what they
Speaker 5: call the Exosphere you have to also believe that eventually
Speaker 5: more countries will want to have their own sphere, you know,
Speaker 5: South Korea, Middle East Asia, wherever you think about it.
Speaker 5: That'll be what is the catalyst that can really create
Speaker 5: a lot of value.
Speaker 3: So one thing I was curious about, and you know
Speaker 3: you kind of touched on this, but one thing about
Speaker 3: the sphere is it is very unusual, right like, there
Speaker 3: hasn't been anything like it before. How do you evaluate
Speaker 3: the compare for that business model? Like, what are the
Speaker 3: comps for a giant sphere in Las Vegas.
Speaker 5: There really is nothing like it in the world, So
Speaker 5: there really are no comps because it's never been done before,
Speaker 5: and it's not typically an aerial stock, you know, because
Speaker 5: we like to find companies that have a long history
Speaker 5: of success where you can have comparables. It's a really
Speaker 5: excellent point. But there's just everything's being done for the
Speaker 5: first time, and kind of the idea is that as
Speaker 5: they experiment, the technology will get better, the sound will
Speaker 5: get better, they'll learn new ways to use the content.
Speaker 5: Right now, they have a movie playing that is a
Speaker 5: concert video of you two playing there. They don't even
Speaker 5: know how to describe it because they've never been anything
Speaker 5: like it, so you've got to believe corporations are using
Speaker 5: it for the first time for big events. Elett Packard
Speaker 5: used it for a strategy session for all their most
Speaker 5: important clients and employees. QVCS used it. But it's all
Speaker 5: it's all new, all fresh. You got to believe in
Speaker 5: Jim Dolan, who is a very controversial person, that they'll
Speaker 5: be able to pull this off in a spectacular way.
Speaker 2: You know, one thing that struck me when you were
Speaker 2: telling this Sphear story there is getting to see it
Speaker 2: with construction and that relationship that you can build with management.
Speaker 2: And I have to imagine that again when we're talking
Speaker 2: about opportunities in smaller name stocks that that can be
Speaker 2: you know, part of the opportunity to find alpha can
Speaker 2: be getting to really know management teams in a way
Speaker 2: that I imagine is not as easy or is more commodified.
Speaker 4: Perhaps with the megacap companies.
Speaker 2: Can you talk a little bit more about your communication
Speaker 2: with companies and getting to really know who's running them
Speaker 2: as part of your investment process.
Speaker 5: I think it's a very important point. I think part
Speaker 5: of the benefit of being around almost forty two years
Speaker 5: now and having a reputation of being a long term
Speaker 5: patient investor. You know, we have a turtle as a logo,
Speaker 5: and then people can see that we buy stocks while
Speaker 5: they're out of favor and hold them for the long run.
Speaker 5: So you can imagine companies love having us as shareholders,
Speaker 5: people who are going to show up when everybody else
Speaker 5: is selling. And the fact that there's a group of
Speaker 5: us grizzly veterans I call us who've been together, most
Speaker 5: of us for more than twenty of the forty two years,
Speaker 5: been through the financial crisis together, the USA downgrade together,
Speaker 5: COVID together. I think the management likes talking to experienced analysts,
Speaker 5: experience portfolio managers, and so we talk to our companies
Speaker 5: every single quarter. We're all on the line together. We
Speaker 5: build those relationships in time, and then we go visit companies.
Speaker 5: We just were down somewhere not far from here. We
Speaker 5: went to visit in Vista, which is a large dental company.
Speaker 5: It's really cheap. They do dental products and helping people
Speaker 5: with implants and alignment and many many other products. They're
Speaker 5: one of three or four major dental products companies in
Speaker 5: the United States. It's a worldwide company also. But you
Speaker 5: know there's a new CEO. He took his time to
Speaker 5: be with us today, and he had his top at
Speaker 5: least a dozen in his top management there to visit
Speaker 5: with us. You know that, I think that happens because
Speaker 5: of the reputation that we've built over time. But we
Speaker 5: like that one on one opportunity to look people in
Speaker 5: the eye and determine whether we believe in them or not.
Speaker 5: You know, a couple of weeks ago, we were in
Speaker 5: Florida to visit ADT, the security company. We just think
Speaker 5: we're going to constantly be in front of these people
Speaker 5: face to face, and of course invite them to Chicago
Speaker 5: or to our New York office and visit with him
Speaker 5: also in those face to face opportunities.
Speaker 3: So you mentioned the long investing time frame that your
Speaker 3: company has or the patient capital idea, And I guess
Speaker 3: one question I always have when it comes to value
Speaker 3: investing is what is the time frame in which an
Speaker 3: investment counts as successful? Because if I was being facetious,
Speaker 3: I could say, well, on a long enough timeline, everyone
Speaker 3: is a successful value investor, But like, when do you decide, okay,
Speaker 3: this has been really successful for us?
Speaker 5: Well for us, if we're buying a stock at a
Speaker 5: forty percent discount private market value and load multiples to
Speaker 5: ebadah and earnings and cash flow. It's when the stock
Speaker 5: no longer sells a discount to private market value, when
Speaker 5: we think the market is recognizing all the underlying fundamentals
Speaker 5: of the business. People understand the story. There's a lot
Speaker 5: of bullish analysts on the company, everyone sort of piling
Speaker 5: into the stock. You start to realize then that maybe
Speaker 5: you don't have an insight that the market doesn't have,
Speaker 5: and it's no longer that undiscovered orphan. It's a company
Speaker 5: that's got lots and lots of friends talking it up
Speaker 5: and enjoying it. That's the time we'll start to lighten
Speaker 5: up under security wins on the good news, and of
Speaker 5: course we have to always work like all of us
Speaker 5: do and getting away from the bad hands. When you've
Speaker 5: made a mistake learning how to sell a company that
Speaker 5: maybe doesn't have the future that you thought it had.
Speaker 5: It's not going to be able to grow the way
Speaker 5: you thought it had. It's hard to get away from
Speaker 5: the stocks, so inevitably they get to be very, very cheap.
Speaker 5: But that's something we're constantly working on with our learning
Speaker 5: about our own behavioral biases, studying behavioral finance, trying to
Speaker 5: make sure that again you don't fall in love on
Speaker 5: the upside and you have the courage to sell and
Speaker 5: get away from the company when it's not going to
Speaker 5: achieve the goals that you originally thought.
Speaker 4: You know, it's something that occurred to me.
Speaker 2: You know, you mentioned a dental company and a security company,
Speaker 2: and I think I was looking at your portfolio earlier
Speaker 2: and there was a manufacturer of equipment for food companies
Speaker 2: in there. If I recall, do companies that are in
Speaker 2: industries that aren't hot have a moat by virtue of
Speaker 2: the fact that they don't have a lot of new
Speaker 2: upstarts attacking that field.
Speaker 5: Yes, that's what we're always looking for, is that moat.
Speaker 5: That is probably the most important question we have with management.
Speaker 5: Is constantly pounding away in every way that we can
Speaker 5: with our questioning to determine whether they have a moat
Speaker 5: that inhibits new competition from coming in and causing problems
Speaker 5: and causing trouble. So you mentioned the restaurant equipment company,
Speaker 5: It'll be they're one of the largest manufacturers of restaurant
Speaker 5: equipment in the world. Really well known brands but they
Speaker 5: bought a company that we used to own years ago
Speaker 5: when it was an independent company called Specialty Equipment, And
Speaker 5: it's a good example of a manufacturer with a moat.
Speaker 5: They make the tailor ice cream machines that you see
Speaker 5: in every McDonald's that make the mcflurries and the millshakes,
Speaker 5: and you see them in many ice cream company or
Speaker 5: stores and restaurants all over the world. But they have
Speaker 5: the pre eminent brand. So anytime the new McDonald's gets built,
Speaker 5: they're gonna have a tailor ice cream machine in there,
Speaker 5: or two or three of them. You're going to have
Speaker 5: a tailor clam shaped grill to cook the hamburgers. And
Speaker 5: whenever they come up with a new model that can
Speaker 5: refresh the restaurant, they have to go and get new
Speaker 5: tailor grills in every restaurant around the world. That's a
Speaker 5: great company with the great moat. Plus they provide the
Speaker 5: service to keep the machines running. You might have read
Speaker 5: that sometimes these ice cream machines break down. I have
Speaker 5: heard that, Yeah, so you got to be in there
Speaker 5: using their service people to fix those machines. You can't
Speaker 5: just go anywhere a lot of times. So those are
Speaker 5: the kind of things that really we think you can
Speaker 5: find motes in some of the strangest places.
Speaker 3: So I take the point about motes for certain companies.
Speaker 3: But a lot of your big investments right now have
Speaker 3: to do with entertainment. So we talked about the sphere,
Speaker 3: we talked or you mentioned Madison Square gardens. A lot
Speaker 3: of those feel to me like they are tied to
Speaker 3: the general consumer outlook, the macro outlook. How are you
Speaker 3: thinking about that at the moment. I know you're not
Speaker 3: a macro person, but you did have a call that
Speaker 3: proved to be correct last year. A lot of people
Speaker 3: were expecting recession in twenty twenty three, you said you
Speaker 3: thought there wasn't going to be a recession, and ultimately
Speaker 3: you proved right. So how are you thinking about the
Speaker 3: connection to the macro environment in terms of your investments.
Speaker 5: Well, currently, I mean, we continue to believe that the
Speaker 5: economy is stronger than most people have anticipated. There there
Speaker 5: are no signs of real recession broadly speaking, and we're
Speaker 5: optimistic that the lower interest rates that are coming well,
Speaker 5: the FED has it about right. We think they will
Speaker 5: keep us in a good place and have a softer landing.
Speaker 5: The thing that where we see most of the problem
Speaker 5: in trouble is in the lower socioeconomic part of our economy,
Speaker 5: where people you know, are struggling with inflation, struggling with
Speaker 5: some of the unemployment, struggling with certain industries have had
Speaker 5: a really difficult, difficult time. So you'll see disappointments in
Speaker 5: companies like Starbucks and McDonald's in the past, where you know,
Speaker 5: people have struggled to be able to afford to spend
Speaker 5: as much money in those restaurants as they could have.
Speaker 5: Where we have found success is really with the higher
Speaker 5: end consumer people who are you who are making a
Speaker 5: good income. So example, a Royal Caribbean the average income
Speaker 5: of someone on one of their ships is roughly one
Speaker 5: hundred and fifty thousand dollars. People who can afford to
Speaker 5: go on a cruise and enjoy the cruise and have
Speaker 5: a get a massage and enjoy the whole experience, we
Speaker 5: think that's important. We talked about the garden. Those are
Speaker 5: expensive seats. You have people who can afford those seats.
Speaker 5: We own Manchester United, the soccer franchise, and again you
Speaker 5: know people have to be wealthier to have season tickets,
Speaker 5: to buy a skybox or what have you to go
Speaker 5: to Radio City, Music Hall and Christmas time. So we
Speaker 5: think that we've been trying to protect ourselves that if
Speaker 5: we're wrong and the economy is weaker than we anticipate,
Speaker 5: it'll hurt the smaller consumer, the less wealthy consumer, much
Speaker 5: more dramatically than the wealthier consumer.
Speaker 3: Joe, I was at the cruise terminal at Long Beach
Speaker 3: on Saturday, not to go on a cruise obviously because
Speaker 3: I'm here now, but just to look at the very
Speaker 3: large ships and containers, and I can confirm there are
Speaker 3: still a lot of demand for cruises.
Speaker 2: More about the cruise business because this was, you know,
Speaker 2: thinking back to four and a half years ago, this
Speaker 2: was ground zero. It was probably the first industry that
Speaker 2: truly just went to zero overnight basically when COVID hit
Speaker 2: and then there were all these questions and then those
Speaker 2: were some of the first stocks that rocketed back. Tell
Speaker 2: us about the state of Royal Caribbean and the cruise
Speaker 2: industry right now, well, that's.
Speaker 5: Really a good example of what Ariel does right now.
Speaker 5: The cruise lines are all doing extraordinarily well. Carnival is
Speaker 5: doing really well. One spa that does the SPA treatments
Speaker 5: people are there not only getting massages and manicures and pedicures,
Speaker 5: some people are going there and getting boattox and other
Speaker 5: types of surgeries. You'd be surprised the amount of money
Speaker 5: being spent on these ships. So they're all doing extremely well.
Speaker 5: All the forecasts and the bookings going looking out are terrific.
Speaker 5: But it also epitomizes aerial though, because we've owned that stock,
Speaker 5: Royal Caribbean probably going on definitely more than fifteen years, wow,
Speaker 5: closer to twenty years. It's a name we've known really,
Speaker 5: really well. Ken Kurt who follows that name for us
Speaker 5: as a true expert in the industry. He goes to
Speaker 5: all the conferences, goes on the cruises to make sure
Speaker 5: that we are understanding what's going on there. But we
Speaker 5: bought more of those stocks during two thousand and eight
Speaker 5: and two thousand and nine in the middle of the
Speaker 5: financial crisis, the cruise stocks got quite quite cheap, and
Speaker 5: then to what you referred to during the COVID crisis.
Speaker 5: You know, we didn't wait for the dustic level. We
Speaker 5: talked to our management teams. We've been talking to them
Speaker 5: every quarter for again between fifteen and twenty years. We
Speaker 5: could feel their confidence start to rebuild as we started
Speaker 5: to figure out that, you know, COVID crisis. The first
Speaker 5: couple of weeks, of course were no man's land, but eventually,
Speaker 5: you know, things started to move in the right direction.
Speaker 5: We could start to feel their confidence build. So we
Speaker 5: added aggressively in our small cap strategies, in our smid
Speaker 5: cap strategies, companies like ones in Royal Caribbean built bigger positions.
Speaker 5: Even though the stocks have been crushed. Everyone hated them.
Speaker 5: It was the worst place to be in the middle
Speaker 5: of a pandemic owning a cruise stock. We said, we
Speaker 5: want to buy more, and of course they've come back
Speaker 5: so remarkably well. They've been our absolute best performers since COVID.
Speaker 3: Do you worry at all about this idea of pent
Speaker 3: up demand? So okay, demand went for cruises went to
Speaker 3: zero during COVID, but then it has come roaring back,
Speaker 3: and a lot of people who were stuck at home
Speaker 3: for a year or so really want to get out
Speaker 3: and do stuff like go to sports games, buy concert tickets,
Speaker 3: go on cruises. Some people argue that, like okay, eventually
Speaker 3: that pent up demand is going to slow down a
Speaker 3: little bit. Is that something on your radar or something
Speaker 3: you're seeing.
Speaker 5: We keep asking the management teams there that over and
Speaker 5: over again, testing them to see if they're seeing any
Speaker 5: signs of that. And so far, you know, the cruise
Speaker 5: lines have been holding up extraordinary. Well, then you never know,
Speaker 5: as we know, this is the most humbling business in
Speaker 5: the world. All of you know that, but we feel
Speaker 5: highly confident there. Interesting are two actually are two of
Speaker 5: our worst stocks. Are stocks that did really well coming
Speaker 5: out of COVID because exactly your reason, everyone was rushing
Speaker 5: toward them, and now they got overconfident thought those cash flows.
Speaker 4: Who are we talking about here?
Speaker 5: Those two? One was in Vista, the dental company. They
Speaker 5: did really well with pent up demand for problems with
Speaker 5: your teeth. You know, it's a real issue, of worldwide issue.
Speaker 5: People can only put it off so long. But they've
Speaker 5: again struggled afterwards, they got their expectations way way ahead.
Speaker 5: The same thing happened with Leslie's Pools. And after this,
Speaker 5: I'm gonna go visit a Leslie's pool store. And there's
Speaker 5: a couple right nearby here, and how many of you
Speaker 5: guys have pools? Several hope you're using Leslie's.
Speaker 2: This is really this is really grinding it out, working
Speaker 2: the pavement, making the sales pitch to the audience there.
Speaker 4: I respect it.
Speaker 5: Yeah, so you know they they compete with Pinch a Penny,
Speaker 5: which is really big in Florida, that's expanding in Texas.
Speaker 5: But what happened again when everyone was staying home during
Speaker 5: COVID New pools are being built. People needed to go
Speaker 5: to Leslie's and get the chemicals to keep their pools
Speaker 5: cleaned for their families, you know, new heater, new whatever.
Speaker 5: And then all of a sudden, their expectations got high,
Speaker 5: they got too much inventory, everyone got too optimistic, ended
Speaker 5: up with a cool, colder summer the summer before the
Speaker 5: colder then anticipated, and all of a sudden their sales
Speaker 5: blew up. So those are our two that have been
Speaker 5: the most susceptible to phenomenon that you rightly identify. But
Speaker 5: we think now the worst is behind them and looking
Speaker 5: forward we're quite optimistic. And in both cases now they
Speaker 5: have a new CEO where we're getting to know and
Speaker 5: doing all our homework and channel checks on the quality
Speaker 5: of the people that have been brought in to get
Speaker 5: those businesses back on track.
Speaker 2: Yeah, you mentioned going to the shops and you're going
Speaker 2: to check about on your while you're out here.
Speaker 4: Is that something you do regularly?
Speaker 2: Like, okay, we talked about meeting with the management, but
Speaker 2: actually just going in to see the consumer facing experience,
Speaker 2: Like do you go to McDonald's and see like, hey,
Speaker 2: are they keeping up there?
Speaker 4: Is the mcflurry machine broken?
Speaker 5: Like?
Speaker 3: Is that?
Speaker 5: How is that?
Speaker 2: Is that part of your consistent process across a lot
Speaker 2: of your companies?
Speaker 5: Yes, yes, I think it it is. I think it's
Speaker 5: a big part of the process is not only going
Speaker 5: yourself and experiencing the product, but then talking to all
Speaker 5: the other all your friends and family and any contexts
Speaker 5: and relationships. You have to understand different perspectives, different points
Speaker 5: of view. So it's just not my perspective or point
Speaker 5: of view. If you want to get as many candid,
Speaker 5: independent voices as possible and encourage all of our teammates
Speaker 5: at Ariel to do that, maintain relationships with experts in
Speaker 5: the field, but also just you know, again getting common
Speaker 5: sense perspectives of whether the sphere is a special experience
Speaker 5: or not. Is the mcflurry really going to work when
Speaker 5: it came out? You know, it's you want to do that,
Speaker 5: And for me that was an easy one because I
Speaker 5: everyone knows I try to go to McDonald's every day.
Speaker 5: I love it there, and I ultimately I loved it
Speaker 5: so much. I talked about it so much. I got
Speaker 5: to serve on the board for twenty years.
Speaker 4: Wow the dream.
Speaker 3: Wait, I have an important question. Do you order in
Speaker 3: store on the app?
Speaker 1: Well?
Speaker 5: I mostly order in in store, but I've learned how
Speaker 5: delivery works now and literally I can call and they
Speaker 5: delivered to my apartment in less than ten minutes.
Speaker 2: Sometimes I think we should do an episode one day
Speaker 2: with you in McDonald's because Tracy and I both are
Speaker 2: big fans of McDonald's as well, and we had a meeting.
Speaker 2: We took a meeting at one several weeks ago. I
Speaker 2: think maybe next year, like, let's do one in McDonald's
Speaker 2: and like you can just sort of we can just
Speaker 2: listen to hear what you observe and what you watch
Speaker 2: and what trends you see.
Speaker 4: I think that'd be fun.
Speaker 5: I would love that it's my home away from home,
Speaker 5: so I'd be happy to be there.
Speaker 4: You know, it occurs to me.
Speaker 2: Experiences even prior to COVID was a big thing people
Speaker 2: talk about the change in consumption from goods to services
Speaker 2: or goods to experiences, and that fits with the sphere
Speaker 2: and uh Yal Caribbean and obviously events like this where
Speaker 2: people are coming from all over the country to hang
Speaker 2: out on a beach and you know, talk about markets
Speaker 2: and finance and investing and stuff. Isn't it a secular
Speaker 2: trend that you expect to see continuing?
Speaker 5: Well, I hope not, because we are over indexed to
Speaker 5: companies that have experience. I just think the experiences are
Speaker 5: getting better and I think Americans are enjoying them as
Speaker 5: a worldwide phenomenon. You know, my daughter and I went
Speaker 5: to the Paris Olympics this summer. You know, she can't
Speaker 5: wait to go back to Los Angeles. Yeah, We've gone
Speaker 5: to the Garden to see Billy Joel. Recently we went
Speaker 5: to Radio City Music Hall to see the Rockets at Christmas.
Speaker 5: We just love those experiences and as part so I
Speaker 5: always say, I'm doing my homework, I'm getting, you know,
Speaker 5: being paid to have these experiences. They're really special.
Speaker 3: So listening to talk about your overall investment philosophy, a
Speaker 3: lot of it seems like identifying market miss pricing, so
Speaker 3: things that are underpriced by other investors, and I guess
Speaker 3: I'm curious over the years, do you think markets have
Speaker 3: gotten more or less sufficient? And one of the reasons
Speaker 3: I ask is because Joe and I have been recording
Speaker 3: a lot of episodes about the rise of multi strategy
Speaker 3: hedge funds pod shops, and a lot of what they
Speaker 3: do seems to be also identifying dislocations in the market
Speaker 3: and then reacting to them very very quickly. Probably not
Speaker 3: in the same way that a value investor does, but
Speaker 3: it seems like the reaction to news has gotten faster
Speaker 3: and faster. So I wonder how you think about that.
Speaker 5: Many some of you know I played basketball to Princeton
Speaker 5: and the stock market was my hobby while I was there.
Speaker 5: I had a broker across the street from campus. I loved, love,
Speaker 5: love the stock market. That inspired me to become a
Speaker 5: financial advisor when I first graduated, and then two and
Speaker 5: a half years later started Aeriel. But you know I
Speaker 5: when I was at Princeton, Bert Malkiel was the head
Speaker 5: of the economics department there and he had just written
Speaker 5: and a Random Walk down Wall Street, you know that
Speaker 5: legendary book that's now over fifty years old. And has
Speaker 5: been reprinted time and time again, and he made such
Speaker 5: a great case literally fifty years ago about how efficient
Speaker 5: the market is. And then I grew up in Chicago
Speaker 5: in Hyde Park as part of the University of Chicago community.
Speaker 5: And I don't know how many people know that. You know,
Speaker 5: University of Chicago has a kindergarten through high school, and
Speaker 5: so I went to the University of Chicago high school
Speaker 5: and a lot of my friends' parents were doing great
Speaker 5: work around efficient markets. Fama's daughter was in high school
Speaker 5: with me, and so I got to study everything that
Speaker 5: was going on at the University of Chicago. Took it very,
Speaker 5: very seriously, and I've been a big believer in efficient
Speaker 5: markets ever since. So I think that it gets more
Speaker 5: and more visibility as the years go on. But I
Speaker 5: would say I don't think there's any big shift in this.
Speaker 5: I think markets have been efficient for a long, long,
Speaker 5: long time, and I think that there are rare opportunities
Speaker 5: when you can find some inefficiencies. Yeah, and I think
Speaker 5: it happens in an industry where the overall markets are
Speaker 5: in crisis or in euphoria one or the other. That's
Speaker 5: when you can do homework and make some market to
Speaker 5: make some individual decisions in an inefficient market, but those
Speaker 5: happen very, very very rarely, and I think it's really
Speaker 5: hard game to play.
Speaker 2: Can you just talk more about this, because I'm fascinated
Speaker 2: by this idea because it does seem like generally markets
Speaker 2: are efficient.
Speaker 4: You wouldn't be.
Speaker 2: In the business of identifying stocks if markets were fully
Speaker 2: efficient or always efficient. Can you talk a little bit
Speaker 2: more about this sort of the situations that you've seen
Speaker 2: that cause efficiency to break down and clear opportunities to emerge.
Speaker 5: Well, I think the best experience in my career. Again,
Speaker 5: I say, you read about some of the craziness in
Speaker 5: the world and say that could never happen again. Yeah,
Speaker 5: And things that have happened over the last several hundred
Speaker 5: years that are just you know, mind boggling, the South
Speaker 5: Seaports and all the other you know, nineteen twenty nine
Speaker 5: and gold and the late seventies and silver. You know,
Speaker 5: I remember the Hunt Brothers begun the cover I mean
Speaker 5: Business Week with all the money they were making, and
Speaker 5: you know, so these things sort of coming gone. And
Speaker 5: I think that I was going to get to through
Speaker 5: looking at those pass bubbles. Is that eight and nine happened.
Speaker 5: And I was around in nineteen eighty seven when the
Speaker 5: stock market went down twenty two percent one day. We
Speaker 5: were calling all our clients, say send us more money
Speaker 5: at the middle of that downdraft in the market, and
Speaker 5: I remember telling everyone on the phone, this is a
Speaker 5: once in a lifetime opportunity. This is never going to
Speaker 5: happen again. And the course oh eight o nine happened,
Speaker 5: which was much much, much worse. And at the height
Speaker 5: of that, you know, you know, stocks that you liked
Speaker 5: at thirty went to fifteen, you know, in the fall
Speaker 5: of eight, and by March of nine those stocks were
Speaker 5: four or five dollars, and all the analysts had given up,
Speaker 5: you know, people who had said by at thirty were
Speaker 5: saying sell it at five. Companies have no future. He said,
Speaker 5: that can't be, you know, it didn't make sense. And
Speaker 5: if you looked out over the horizon three to four
Speaker 5: years down the road, these were companies that had been
Speaker 5: around for generations and things would get back to normal. Someday,
Speaker 5: the sun would come out and the storm clouds would
Speaker 5: go away. But those kind of crazy experiences don't happen
Speaker 5: very often, but that those are just so memorable. Because
Speaker 5: everyone gave up right at the bottom of March nine,
Speaker 5: two thousand and nine, and all the clients that called
Speaker 5: up and fired us, and all the analysts and the
Speaker 5: consultants who gave up right at the time when it
Speaker 5: was a time to buy. The guy who covered us
Speaker 5: a morning star was the one person, Michael, who said,
Speaker 5: these are good companies. I'm looking at the cash flows
Speaker 5: of the companies, looking at their profitability over the next
Speaker 5: three years. They're selling it prices that don't make sense.
Speaker 5: But it's a rare person who could see that and
Speaker 5: feel comfortable recommending by the fund that's out of favor
Speaker 5: at the height of the decline of the bubble.
Speaker 3: What was early August like for you this year the
Speaker 3: most recent sell off, Like, okay, it wasn't as bad
Speaker 3: as two thousand and eight, two thousand and nine obviously,
Speaker 3: or eighty seven, but there was a pretty substantial drawdown
Speaker 3: that happened over the course of a couple of days.
Speaker 3: What happens at aerial investments during a period of that
Speaker 3: type of volatility.
Speaker 5: Well, when you get the kind of volatiley that we've
Speaker 5: experienced a lot lately, and even day to day volatility
Speaker 5: is greater than I've ever seen. You know, you just
Speaker 5: find from the opening to lunchtime to the close. So
Speaker 5: we're talking to each other throughout the day, saying, where's
Speaker 5: the what stocks have declined the most. Let's see if
Speaker 5: there's some opportunities to pick up some of our favorite
Speaker 5: names and bargain prices, because sometimes we'll see U stock
Speaker 5: down ten percent, twelve percent that doesn't make any sense,
Speaker 5: or a company that's had an earnings disappointment after maybe
Speaker 5: a couple of quarters of earnings disappointment, and again everyone
Speaker 5: gives up after that third or fourth disappointment and the
Speaker 5: stocks down fifteen to twenty percent. You do your channel
Speaker 5: checks as rapidly as possible. You talk to all the
Speaker 5: experts you can. You talk to the management, of course,
Speaker 5: you talk to other buyside owners and sell side analysts,
Speaker 5: and then you come together and have emergency meetings ready
Speaker 5: to go in and buy more. Most of the time,
Speaker 5: sometimes you'll find out something's changed, something's different. But most
Speaker 5: of the time, again people panic together after there's been
Speaker 5: a series of disappointments and you're in an uncomfortable environment.
Speaker 5: So we always look at that as opportunity, and that's
Speaker 5: the way that we think about investing as value investors.
Speaker 4: John Rogers, this has been such a treat.
Speaker 2: Really appreciate you joining us and getting the opportunity to
Speaker 2: do this in front of the future Proof conference.
Speaker 4: So thank you so.
Speaker 5: Much, thank you. This has been really fun. Thank you,
Speaker 5: thank you.
Speaker 3: But that was a really fun conversation, Joe.
Speaker 4: I love that.
Speaker 2: I just I love how old school was. I love
Speaker 2: just talking when I first got into investing years and
Speaker 2: years ago. I've mentioned a couple of times I had
Speaker 2: this brief stint at a portfolio management company and that's
Speaker 2: what we did. We like looked through like we looked
Speaker 2: for cheap stocks and it wasn't just about are we
Speaker 2: exposed to a few big names or not. And I
Speaker 2: really do miss that, so to me, that was a
Speaker 2: total blast.
Speaker 3: Also, the mcflurry machine as a viable business mode, that
Speaker 3: was kind of fun.
Speaker 2: Really, we should do that episode with John and McDonald's.
Speaker 3: Yeah, okay, McDonald's here we come.
Speaker 1: Shall we leave it there?
Speaker 2: Let's leave it there.
Speaker 3: This has been another episode of the All Thoughts podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow our producers Carmen Rodriguez at Carman Arman, dash Oll,
Speaker 2: Bennett at dashbot In kel Brooks at Kelbrooks. Thank you
Speaker 2: to our producer Moses Ondam. From our Odd's content. Go
Speaker 2: to Bloomberg dot com slash od lots, where we have transcripts,
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