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Speaker 1: Brought to you by Bank of America Merrill Lynch, committed

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Speaker 1: to bringing higher finance to lower carbon named the most

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Speaker 1: innovative investment bank for climate change and sustainability by the banker.

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Speaker 1: That's the power of Global Connections. Bank of America North

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Speaker 1: America Member f d C. This is Masters in Business

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Speaker 1: with Barry Ridholes on Bloomberg Radio. This week on the podcast,

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Speaker 1: I have an extra special guest. He is Bill miller Um,

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Speaker 1: the legendary mutual fund manager at leg Mason. He most

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Speaker 1: famously beat the SMP five for fifteen consecutive years. The

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Speaker 1: math behind that is just mind boggling. It It's something

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Speaker 1: that couldn't possibly have been a random act. Michael Mobison

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Speaker 1: discusses this in great detail and talks about the skill level.

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Speaker 1: He very famously blew up in the financial crisis, meaning

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Speaker 1: the fun crash and burned along with everything else, and

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Speaker 1: people kind of wrote him off as having Alright, that

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Speaker 1: guy's done, we'll never hear from him again. Um. And

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Speaker 1: over the past five years he's again crushing the market,

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Speaker 1: beating UH the SMP five hundred by four hundred base

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Speaker 1: points a year, UH, consistently being in the top handful

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Speaker 1: of funds every year. He is really a fascinating guy,

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Speaker 1: super intelligent, very thoughtful about things like valuation. He's incredibly

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Speaker 1: circumspect about his experiences during the financial crisis and talks

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Speaker 1: quite with great humility and quite bluntly about what he

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Speaker 1: got wrong during the crisis. I always find that refreshing

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Speaker 1: when someone um has a bad run and instead of saying, oh,

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Speaker 1: it was the FEDS faulter, this person's fault or what

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Speaker 1: have you, basically owns it and says, yeah, I failed

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Speaker 1: to understand the difference between this recession and that recession.

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Speaker 1: Here's what I learned, Here's what I wish I would

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Speaker 1: have learned known during the crisis. It was just an

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Speaker 1: absolutely fascinating conversation if you're at all interested in asset management,

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Speaker 1: running a mutual fund, running a portfolio, how to be

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Speaker 1: a value investor, how to come up with a unique

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Speaker 1: value add that allows you to beat the market, And

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Speaker 1: perhaps more interestingly, Bill Miller's criticism on the failure of

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Speaker 1: active management being that so many managers are are suffering

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Speaker 1: from career risk and so they become closet index ers.

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Speaker 1: He has in great detail described why the move towards

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Speaker 1: passive investing is actually a rational response from the investing community,

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Speaker 1: from the public, Hey, why are you paying a lot

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Speaker 1: of money for an active manager who is essentially a

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Speaker 1: closet index er. He's essentially not only similar to the index,

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Speaker 1: but his portfolio is going to be wholly unable to

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Speaker 1: beat the market because it's essentially a closet index plus

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Speaker 1: a high fee. Get out of that and either go

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Speaker 1: to an active manager who has a chance to beat

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Speaker 1: the market, or just index. And he's pretty blunt. Hey,

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Speaker 1: most people are better off indexing. So I I've just

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Speaker 1: found this to be an absolutely fascinating conversation and I

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Speaker 1: think you will as well. So, with no further ado,

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Speaker 1: my conversation with Bill Miller. This is Masters in Business

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Speaker 1: with Barry Ridholts on Bloomberg Radio. My special guest today

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Speaker 1: is a legend. His name is Bill Miller. He is

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Speaker 1: the former chairman and chief investment officer at leg Mason,

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Speaker 1: where he ran the leg Mason Capital Management Value Trust

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Speaker 1: for many years. He was named by morning Star in

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Speaker 1: the Fund Manager of the Decade. Uh Bill Miller beat

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Speaker 1: the SMP five hundred from through fifteen consecutive years. It's

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Speaker 1: a feat essentially unprecedented in mutual fund management. Since then,

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Speaker 1: he's been running the leg Mason Opportunity Trust and just

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Speaker 1: launched or that's really not the right word for it.

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Speaker 1: LMM is the new fund that a new firm that

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Speaker 1: he's in charge of. The leg Mason Opportunity Trust Fund

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Speaker 1: has beaten of its peers over the last five years

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Speaker 1: and has outpaced the SMP five dred by two percent annually.

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Speaker 1: Bill Miller, Welcome to Bloomberg. Thanks, very nice to be here.

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Speaker 1: So so that's quite an introduction. What you did with

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Speaker 1: the fund is real, the legendary. We're gonna get into

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Speaker 1: the streak in a little bit, But let's talk about

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Speaker 1: your approach. Is it fair to call you both a

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Speaker 1: value investor and a contrarian? I would say yeah, I'd

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Speaker 1: say that that what I am as as a long

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Speaker 1: term oriented value investor with the contrarian overlay. That that's

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Speaker 1: that's a pretty fair description. So let's talk about your process.

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Speaker 1: How do you begin the process? How do you approach

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Speaker 1: selecting stocks? Well, what I'm trying to do, what we're

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Speaker 1: trying to do, the team is trying to do, is

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Speaker 1: find companies that trade a large discounts to what we

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Speaker 1: call intrinsic business value, and intrinsic business value is the

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Speaker 1: present value of the future free cash flows of the business.

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Speaker 1: And then we're also looking for companies where you're starting

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Speaker 1: out with low expectations, where people don't where people don't

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Speaker 1: believe that the future looks very bright, or that there's

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Speaker 1: a lot of controversy. And then with that, the key

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Speaker 1: we use every valuation technique known demand, but the key,

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Speaker 1: the key one that we're always starting with this free

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Speaker 1: cash flow yield. So just under a checkbook, a ounting approach,

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Speaker 1: like you have your own checkbook, we want we want

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Speaker 1: companies that ideally will start out with a ten percent

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Speaker 1: free cash flow yield and that that that's just that's

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Speaker 1: there's there's nothing magic about that. That's just that's just

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Speaker 1: a heuristic that we've developed over the years. It tends

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Speaker 1: to work. But higher is always better as long as

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Speaker 1: if those free cash flows are sustainable. How how does

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Speaker 1: this differ from classic Graham and value investment, Well, the

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Speaker 1: great the classic Graham and Dodd approach was was a

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Speaker 1: um an approach that focused mainly on accounting metrics and

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Speaker 1: so pe price to book, price to cash flow, those

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Speaker 1: kinds of those kinds of things, and towards the end

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Speaker 1: of his life, Ben Graham made a point that those

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Speaker 1: things no longer work because they became replicable and they

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Speaker 1: were they then they then did not They didn't identify

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Speaker 1: companies that were mispriced. They tended to identify companies if

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Speaker 1: the valuation statistics were were superficially attractive. Those are typically

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Speaker 1: companies that had lower returns on capital. And then unless

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Speaker 1: those returns on capital change, those those low accounting metrics

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Speaker 1: didn't give you out performance. How important are are the

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Speaker 1: growth metrics? For a while, GARP was quite the thing

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Speaker 1: in the nineties. Is growth at a reasonable price significant?

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Speaker 1: Do you do you bring growth into your metrics? Yeah? Absolutely,

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Speaker 1: Well it's not so much growth at at a you know,

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Speaker 1: at a reasonable price, so much as it is that

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Speaker 1: growth is an input to the calculation of value. And

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Speaker 1: so companies that grow faster, other things equal, assuming the

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Speaker 1: learning above the cost of capital or more valuable. In

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Speaker 1: companies that grow more slowly, the cash lows will catch

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Speaker 1: loads will compound more quickly. How do you balance the

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Speaker 1: current fundamental picture of a company with what you hope

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Speaker 1: the future prospects are going to be? How how can

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Speaker 1: you judge how the business will will grow and develop? Well,

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Speaker 1: there's a there are many many ways to attack that

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Speaker 1: that issue. One of the things that we try and

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Speaker 1: do if if the economy is is in recession, for example,

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Speaker 1: or the economy is in a boom, we will tend

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Speaker 1: to normalize that. So if if if the economy is

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Speaker 1: growing more rapid than normal when we're looking at a company,

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Speaker 1: we will bring it back to a normal growth rate

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Speaker 1: if the company, we're also looking at the company economics,

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Speaker 1: and those are typically function of the industry economics. So

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Speaker 1: you start out with industry almage, you a company economic quality, assets,

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Speaker 1: quality of the management. All of those kinds of things

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Speaker 1: go into go into trying to figure out what the

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Speaker 1: company is going to going to do. And you know

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Speaker 1: that a company like General Motors, for example, is going

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Speaker 1: to be a company that's a very mature, slow growth

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Speaker 1: company operating an industry that's has global overcapacity and it's

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Speaker 1: under it's under a lot of technological threats, so that

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Speaker 1: that all goes into thinking about a company like that.

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Speaker 1: Amazon is our largest position. That's completely different, completely different

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Speaker 1: exercise because Amazon is a completely dominant company and with

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Speaker 1: an enormous total addressable market and incredible competitive advantages, so

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Speaker 1: it's it's going to have a growth has a growth

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Speaker 1: rate of you know, right now, fuffy thirty percent a year,

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Speaker 1: which is unheard of a company of a hundred billion

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Speaker 1: dollars of revenues. How do you deal with something? And

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Speaker 1: let's stay with Amazon, where there really isn't a whole

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Speaker 1: lot in the way of profits, but they're certainly taking

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Speaker 1: market share and they're certainly growing revenue like wildfire. It

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Speaker 1: comes down to again the issue of of of accounting

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Speaker 1: based metrics versus economic metrics. So with with Amazon, then

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Speaker 1: their natural business is one that has a original return

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Speaker 1: on capital of triple digits. And when people say Amazon

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Speaker 1: doesn't make any money, it doesn't make much money, what

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Speaker 1: were they're really looking, I think at the wrong wrong

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Speaker 1: sort of metrics because everything below the gross profit line

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Speaker 1: at Amazon they consider an investment. So some of those

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Speaker 1: investments to capitalize, some of those investments are expensed. But Amazon,

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Speaker 1: if you if you begin to if you do some

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Speaker 1: a little bit of math on a little bit of statistics,

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Speaker 1: what you'll see is that Amazon share price historically it

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Speaker 1: isn't correlated with profit growth, That isn't correlated with cash

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Speaker 1: flow growth, it's correlated with with the growth of gross

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Speaker 1: profit dollars. And so the faster the growth rate of

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Speaker 1: gross profit dollars, namely what they have to invest, the

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Speaker 1: higher the evaluation that the company has been able to attain.

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Speaker 1: That makes some sense. So let's talk a little bit

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Speaker 1: about size. Your fund started at seven hundred and fifty

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Speaker 1: million dollars back in and it didn't take very long.

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Speaker 1: Fifteen years later it was over twenty billion dollars. How

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Speaker 1: does that change in size affect your ability to to

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Speaker 1: be nimble? It really didn't. And and what's interesting about

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Speaker 1: that is that while the fund got to five billion,

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Speaker 1: I think at the peak we had another fifty billion

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Speaker 1: of institutional assets to go along with it. So the

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Speaker 1: the overall money under management in that one strategy at

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Speaker 1: the peak was around seventy five billion. And what what

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Speaker 1: we what we observed anyway, is so ironically is that

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Speaker 1: as the assets got larger, the performance got better. And

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Speaker 1: that's amazing and uh. And then of course what happens

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Speaker 1: is that that that the assets always peak with the

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Speaker 1: peaking of performance, because if the performance kept up, the

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Speaker 1: assets we keep going up. I'm Barry Ridholts. You're listening

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Speaker 1: to Masters in Business on Bloomberg Radio. My special guest

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Speaker 1: today is Bill Miller. He was with leg Mason for

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Speaker 1: the longest time before Uh he took himself private. Is

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Speaker 1: that a fair way to say it? L l MM

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Speaker 1: is now owned by yourself? It will be yet. It's

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Speaker 1: currently fifty owned by leg Mason and fifty by me.

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Speaker 1: But I have a deal to buy them out, which

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Speaker 1: should close, uh in the spring of two thousand seventeen.

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Speaker 1: So let's talk about your streak. You ran the leg

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Speaker 1: may Sin Value Trust for since from one through two

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Speaker 1: thousand and fifteen. Um, you actually ran it longer than that.

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Speaker 1: But in the middle of that was a fifteen year

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Speaker 1: streak of beating the market every year consecutively. There's never

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Speaker 1: been anything like that before and there probably never will

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Speaker 1: be since. So, um, what's the secret? Uh? Luck, There's

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Speaker 1: a lot of luck into it. Um, hold on, let

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Speaker 1: me write that down. Luck. But in all seriousness, it

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Speaker 1: can't just be luck. It's got to be some combination

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Speaker 1: of some skills, some luck, some right guy, right place

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Speaker 1: sort of thing. I mean. Steve and j Gold wrote

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Speaker 1: wrote a piece on on streaks the late late paleontologist,

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Speaker 1: and he noted that that every street went to all

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Speaker 1: sports streaks and stuff like I was gonna say, paleontologists

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Speaker 1: slash baseball thing, right, yeah, And and he noted that

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Speaker 1: that every streak is a some combination of skill and luck,

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Speaker 1: depending on the length of it and how it's achieved

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Speaker 1: and stuff like that. I'd say that the thing that

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Speaker 1: contributed to it probably the most was a pivot that

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Speaker 1: we made in so five or six years into it

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Speaker 1: um when when technology stocks got very cheap because people

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Speaker 1: were worried about a recession. And you may or may

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Speaker 1: not remember the Jeff Vinnick ran the Magellan Fund at

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Speaker 1: that time, and it raised a lot of cash because

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Speaker 1: the feed had been tightening, there were some issues in

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Speaker 1: the economy. People gott nervous exactly. So what happened then

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Speaker 1: was that you could buy companies like Dell, which is

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Speaker 1: a relatively new company at the time at five times earnings.

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Speaker 1: You could buy Nocchi at six times earnings. And because

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Speaker 1: people were worried and they also mistaken, they didn't they

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Speaker 1: didn't properly analyze those businesses. Dell's growing year trade of

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Speaker 1: five times earnings, so we bought Dell. Then we bought Nokia.

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Speaker 1: We bought America Online, another one that went up fifty

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Speaker 1: times after we bought it. So when what we did

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Speaker 1: was unusual for value investors is we we got into

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Speaker 1: technology at that time, and most value investors following Warren

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Speaker 1: Buffett's kind of dictum that he didn't own technology, he

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Speaker 1: didn't understand it. Um. We threw some work that we've

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Speaker 1: done with the Santa fe and who uh came to

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Speaker 1: understand the economics of technology were different from what people

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Speaker 1: traditionally believed, and it was much more predictable than people believed.

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Speaker 1: So let's let's talk about a O L for a moment,

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Speaker 1: since since you mentioned them, that was a fifty bagger

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Speaker 1: that went up fifty x In the real world, how

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Speaker 1: do you hold onto something that goes up five x

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Speaker 1: ten x? Investors are notorious for for quote unquote ringing

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Speaker 1: the bell too soon. How do you withstand the ups

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Speaker 1: and downs of a stock like that, that that was

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Speaker 1: somewhat volatile and write it till it's a fifty bagger? Yeah,

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Speaker 1: it's interesting. Part of the part of the thing is

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Speaker 1: you have to try and understand the potential of the company.

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Speaker 1: General Motor is not going to be a fifty bagger, right,

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Speaker 1: General Motors a mature company. A O. L was a

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Speaker 1: very new company, a small company in a very a

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Speaker 1: very big new area. So it had it had a

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Speaker 1: lot of potential. We didn't know it was going to

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Speaker 1: go up at all, but but it certainly had the

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Speaker 1: potential to do so. And uh, and so that's really

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Speaker 1: trying to understand what the company's possibilities are with the

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Speaker 1: total addressable market for the businesses and the other The

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Speaker 1: other part of it is that that when you get it,

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Speaker 1: when it becomes a big winner like that, and it

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Speaker 1: it becomes a bigger and bigger part of the portfolio.

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Speaker 1: Part of what happens is that just from a portfolio

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Speaker 1: management technique, it becomes riskier in the sense of it

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Speaker 1: has a greater and greater impact on the portfolio. And

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Speaker 1: that becomes a question how you size the position? Well

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Speaker 1: that that leads to another question, do you ever have

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Speaker 1: an upper capacity? Nothing can be more than ten percent

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Speaker 1: of the portfolio or or some line in the sand,

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Speaker 1: or what do you do with there? There was there

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Speaker 1: was no line in the sand. We we actually part

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Speaker 1: of the reason that that streak went on and because

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Speaker 1: then part of the reason I was manager of the

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Speaker 1: decade was that with A O. L. And with Dell,

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Speaker 1: for example, both were fifty baggers for us. But they

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Speaker 1: got to be as much as of the portfolio, which

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Speaker 1: was which each which had never happened before. Fanny May

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Speaker 1: was fourteen I think at the peak, and then we've

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Speaker 1: were fortunately able to cut them, cut them back and

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Speaker 1: get them actually out of the portfolio. Of that was

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Speaker 1: very unusual. Probably the biggest the biggest we would go

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Speaker 1: we've been since then is I think Amazon got to

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Speaker 1: twelve or so earlier, ear late last year. So you

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Speaker 1: start accumulating A O. L. And Dell mid nineties, it's

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Speaker 1: an incredible five year run for technology. What other than

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Speaker 1: the sheer size in the portfolio, what are you doing

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Speaker 1: in to call those back? Is it just those two

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Speaker 1: because of their outsize um position in the portfolio. Were

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Speaker 1: you looking at the macro environment and you're looking at

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Speaker 1: technology no longer is cheap? What's the thought process like

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Speaker 1: in two thousand when you're when you're selling two giant winners,

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Speaker 1: capital gains and all. We went from thirty eight percent

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Speaker 1: of the portfolio. I think in the in the beginning

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Speaker 1: of two thousand in tech to no percent by the

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Speaker 1: end of the first quarter. And the reason for that

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Speaker 1: was that the market had been going up a year

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Speaker 1: and corporate earnings have been growing very rapidly, and valuations

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Speaker 1: got way out of whack. So back back at that time,

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Speaker 1: as you may recall, you had Microsoft was sixty or

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Speaker 1: seventy times, Cisco was that GE was fifty times, Home

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Speaker 1: Depot was sixty times. So the valuations were just way

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Speaker 1: way way out of whack for mega mega cap and

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Speaker 1: for technology. And part of our thought as we looked

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Speaker 1: at companies like Dell and A. O. L. It wasn't

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Speaker 1: so much that the total market value of those businesses

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Speaker 1: was way out of whack with the potential there. But

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Speaker 1: what we did know was it wasn't going to be linear.

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Speaker 1: There would be some interruption there, and when that interruption came,

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Speaker 1: the companies would get killed. So what and then the

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Speaker 1: FED was tightening at that time, and I think that

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Speaker 1: the real, the real trigger uh for me and that

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Speaker 1: environment that really kind of put paid to the whole

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Speaker 1: thing was there's a two It was two fold. Number

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Speaker 1: one was there was a headline in the New York

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Speaker 1: Times in March of of two thousand about Jillian Robertson.

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Speaker 1: It's called the it's called the end of the game

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Speaker 1: or the end of the end of an era, and

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Speaker 1: it talked about how value investing was dead and about

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Speaker 1: Jillian Robertson had had to close up shop and at

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Speaker 1: buff of course I hadn't had done poorly for several yeah,

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Speaker 1: done done poorly. And then so that was kind of

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Speaker 1: one trigger that everybody had thought that that that that

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Speaker 1: was dead. And the second one made more more important

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Speaker 1: one was it from from the spring of the spring

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Speaker 1: of two thousand, the first quarter of nine, the first

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Speaker 1: quarter two thousand, the Nasdaq was up a hundred percent

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Speaker 1: and the Dow was down. And again that bifurcation was

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Speaker 1: that bifurcation was so large, and the valuation discrepancy was

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Speaker 1: so large. And I'd say that the final part of

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Speaker 1: that whole thing was at the end of the first

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Speaker 1: quarter in in two thousand, uh something like seven or

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Speaker 1: seventy percent of active managers beat the market in that quarter,

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Speaker 1: and which is an extraordinarily high percentage. And and at

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Speaker 1: the same time there were only two sectors of the

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Speaker 1: ten or eleven s and p sectors that beat the market,

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Speaker 1: Utilities and tech. So what that told when nobody was

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Speaker 1: owning utilities right, So what that told me was everybody

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Speaker 1: was crowded in attack that that's they were. Everybody's overweight tech.

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Speaker 1: There's nothing more going that. And then that couple of

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Speaker 1: valuation said it's time to go the other way. That's

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Speaker 1: quite fascinating. I'm Barry rid Hults. You're listening to Masters

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Speaker 1: in Business on Bloomberg Radio. My special guest today is

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Speaker 1: Bill Miller. He is the former chairman and chief investment

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Speaker 1: officer of leg Mason, perhaps best known for really an

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Speaker 1: unproducible streak beating the SMP five fifteen consecutive years. When

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Speaker 1: he was running the leg Mason Value Trust Funds, morning

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Speaker 1: Star named him the Manager of the decade. In let's

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Speaker 1: talk about the new um. For lack of a bit

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Speaker 1: of word, the new shop, LMM, tell us a little

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Speaker 1: bit about the firm and its history. LMM was created

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Speaker 1: in when we started in nine night, we started the

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Speaker 1: leg Mason Opportunity Trust and it was created as a

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Speaker 1: joint venture between myself and Like Mason. It was the

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Speaker 1: only Like Mason subsidiary that wasn't owned by leg Mason

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Speaker 1: at the time, and the idea was that that leg

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Speaker 1: Mason I would be partners in that in that particular fund, uh,

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Speaker 1: whether it whether it did well or not. And so

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Speaker 1: that was run co extensively. Lelaman was run co extensively

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Speaker 1: with leg Mason Capital Management, which I was the chairman of.

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Speaker 1: And then in two thousand and I want to say

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Speaker 1: two thousand and twelve or so, um, leg Mason decided

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Speaker 1: to combine my subsidiary, like Mason Capital Management, with Clearbridge,

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Speaker 1: which is a New York based equity shop. I did

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Speaker 1: not think that was a particularly good idea, and so

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Speaker 1: what I was able to do, but guys, because had

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Speaker 1: operational control of LMM, was to extract that from that

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Speaker 1: transaction and set it up as a separate as a

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Speaker 1: separate entity and a separate business. But I had to

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Speaker 1: go restaff it from the standpoint of trading and reporting

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Speaker 1: and production and compliance and all that, all that kind

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Speaker 1: of stuff that was BA. That was in two thousand twelve.

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Speaker 1: So it's run of the joint venution. Yeah, run as

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Speaker 1: a joint venture for for most of that period. And

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Speaker 1: then in two thousand and I guess, uh, fourteen, we

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Speaker 1: moved out of the moved out of the leg Mace

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Speaker 1: and building into our own into our own space. And

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Speaker 1: and then just just this year, just last I guess, yeah,

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Speaker 1: just this year, we reached a deal like Mason and

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Speaker 1: either where I would buy them out and buy the

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Speaker 1: now two funds that that are advised by LMM, by

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Speaker 1: that advisory firm out. So the two funds are the

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Speaker 1: leg Mason Opportunity Trusts, which you've been running since inceptions,

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Speaker 1: since since getting two. And it had a so so

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Speaker 1: two thousands, however, it's been on fire lately. Fair fair

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Speaker 1: way to describe it. Yeah, yeah, I would say I

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Speaker 1: wouldn't say so so two thousands had a very bad

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Speaker 1: two thousand and uh seven and eight. Um it was.

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Speaker 1: It was one of the best performing funds in two

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Speaker 1: thousand nine. It was the single best performing fund of

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Speaker 1: all funds in two thousand and thirteen, I mean a

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Speaker 1: two thousand and twelve, and then the best performing fund

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Speaker 1: of all funds above fifty million two thousand thirteen. And

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Speaker 1: there's about a billion, billion, billion three in that domestic

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Speaker 1: version of it. And probably probably the most unusual thing

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Speaker 1: about it, which will never happen again, is if you

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Speaker 1: opened the New York Times special section on mutual funds

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Speaker 1: of two weeks ago. You'll see that the Opportunity Trust

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Speaker 1: was the single best performing fund of all domestic funds

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Speaker 1: in the third quarter, and then the single best performing

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Speaker 1: fund of all domestic funds for the last five years,

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Speaker 1: and that will probably never happen again. So here's what.

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Speaker 1: Here the numbers, I'm showing it beat the S and

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Speaker 1: P five hundred by two hundred basis points on average

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Speaker 1: every year for the past five years. Yeah, it's probably right. Yeah,

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Speaker 1: and at least yeah and over I want to say

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Speaker 1: seven years, it beat nine of its piers. And what

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Speaker 1: you're now telling me is for the trailing five years

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Speaker 1: it was the top. It beat all of its pers

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Speaker 1: So and that quarter probably has something to do with that.

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Speaker 1: So tell us about your co managers. Who else runs

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Speaker 1: the funds with you? I do that fund with Samantha McLemore,

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Speaker 1: who has been with us fifteen years. She started out

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Speaker 1: as an analyst and moved up to being an assistant

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Speaker 1: manager and now she's co manager of the Opportunity Fund.

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Speaker 1: And then we have an income fund UH called the

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Speaker 1: Our Income UH Fund and it will it's it's run

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Speaker 1: by my son and I. So we was gonna say

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Speaker 1: something named Bill Miller runs that one all yeah, yeah, yeah, exactly,

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Speaker 1: and and tell us about the Income Opportunity Fund. What

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Speaker 1: is that focus? Yeah, it's that's an really interesting product.

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Speaker 1: We started it. We actually started it internally in tooth

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Speaker 1: in uh what was it, two thousand and nine. We

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Speaker 1: wanted to do it as a joint venture with the

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Speaker 1: leg Mason's Western Asset Management subsidiary, but we couldn't get

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Speaker 1: the product people to approve it because it was it

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Speaker 1: was designed to deliver high income as opposed to being

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Speaker 1: a bond fund or an equity income fund. It just

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Speaker 1: could go anywhere in the world to get high income,

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Speaker 1: and so that it was hard for them to come

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Speaker 1: up with a with a with a benchmark. And finally,

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Speaker 1: after five years of results, they said, okay, the record

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Speaker 1: is good enough that we should launch it anyway, which

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Speaker 1: we did. Uh. So what the objective here is very

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Speaker 1: simply high income giving you income higher than the than

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Speaker 1: the high yield index, with the possibility of also preserving capital.

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Speaker 1: The opportunity for capital gains. So the current yield current

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Speaker 1: yield on it right now was around seven and a

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Speaker 1: half to eight after expenses. I'm Barry Ridholts. You're listening

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Speaker 1: to Masters in Business on Bloomberg Radio. My special guest

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Speaker 1: today is Bill Miller. He is a legend in the

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Speaker 1: world of investing, not only UH for the greatest SMP

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Speaker 1: beating streak of old time, but for his legendary stock picking.

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Speaker 1: Let's talk a little bit about the current um environment

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Speaker 1: and how things are are operating. I want to I

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Speaker 1: want to give a give you a quote of yours,

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Speaker 1: and have you respond to it. You you recently said

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Speaker 1: stocks are stupidly cheap, but bonds are ridiculously overpriced. Discuss well,

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Speaker 1: stocks are stupidly cheap relative to bonds. That's that's my view.

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Speaker 1: I believe that the taking bonds first. You know, we

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00:23:49,119 --> 00:23:51,760
Speaker 1: we hit a level over the summer where where bond

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00:23:51,840 --> 00:23:55,240
Speaker 1: yields globally had never been this low in the five

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Speaker 1: thousand years of history that we have about bond yields,

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Speaker 1: so the most expensive they've ever been in history. Because

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00:24:01,640 --> 00:24:05,159
Speaker 1: of the UH, the aftermath of the financial crisis and

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00:24:05,200 --> 00:24:06,840
Speaker 1: slow growth and all of the stuff that we read

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00:24:06,840 --> 00:24:09,280
Speaker 1: about read about every day, and even if you go

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00:24:09,320 --> 00:24:10,960
Speaker 1: back a year ago, right, so a year ago, the

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00:24:10,960 --> 00:24:13,320
Speaker 1: ten year treasury yielded over two percent to like two

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00:24:13,320 --> 00:24:16,639
Speaker 1: point one, and now it's one seventy five. So again

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00:24:16,760 --> 00:24:19,600
Speaker 1: this year, bonds have beaten have beaten stocks. And so

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Speaker 1: what you have now is a situation where stocks yield

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Speaker 1: more than bonds, and the media and the media and

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00:24:25,240 --> 00:24:27,840
Speaker 1: PE ratio and the SMP five D is about seventeen

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00:24:27,880 --> 00:24:30,720
Speaker 1: and a half, which is above the long term historic median,

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00:24:31,240 --> 00:24:34,520
Speaker 1: but but miles below where it theoretically ought to be

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Speaker 1: if this is the right level of of bond yields.

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Speaker 1: And so I think one of the things that we

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Speaker 1: have a partnership that we're just just getting underway. And

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00:24:41,920 --> 00:24:45,040
Speaker 1: in that thing, i'm long portfolio, the longer portfolio stocks

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00:24:45,040 --> 00:24:47,960
Speaker 1: against a short position in the in the long treasury

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00:24:48,640 --> 00:24:53,040
Speaker 1: longer portfolio stocks against So really you're doing a full

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Speaker 1: on pair trade long long equity. Sure. Yeah, I think

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Speaker 1: that there's a thirty five year bull market in bonds

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Speaker 1: from one till the summer. I think we hit a

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Speaker 1: double bottom in bonds in two thousand and twelve at

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Speaker 1: around one thirty eight, and then around one thirty five.

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Speaker 1: I think this this summer, and rebounded sharply from both

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Speaker 1: of those levels very quickly. And if you look at

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Speaker 1: if you look at the way the way that bonds

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00:25:15,200 --> 00:25:17,119
Speaker 1: have traded away, the safe parts of the market have

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Speaker 1: traded so utilities, telecom, consumer staples since since the summer,

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Speaker 1: they've all begun to wobble. And so all of that

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Speaker 1: tells me that this thirty five year bull market is

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00:25:26,000 --> 00:25:28,720
Speaker 1: probably over. We had a thirty five year bear market

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Speaker 1: from n nineteen eighty one followed by thirty five year

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Speaker 1: bull market, so it's time for the cycle to turn essentially,

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00:25:35,880 --> 00:25:37,920
Speaker 1: And yeah, I think. I think also we're in a

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Speaker 1: secular bull market in stocks that began in March of

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Speaker 1: O nine, and I think that lasts until, like all

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00:25:43,680 --> 00:25:46,359
Speaker 1: secular bull market stocks get too expensive. But they're not

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00:25:46,400 --> 00:25:48,960
Speaker 1: too expensive today. They're not anywhere nears expensive they were

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Speaker 1: in nine, or in nineteen sixty eight, you know, or

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Speaker 1: seven and the summer for that matter. All Right, so

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Speaker 1: you said a number of things that demand a follow

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Speaker 1: up question from me. First mentioned the double bottom in bonds.

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Speaker 1: Do you look at charts and how important are they

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00:26:05,160 --> 00:26:08,240
Speaker 1: to you? Yeah, I think charts. Charts are a way

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00:26:08,280 --> 00:26:11,919
Speaker 1: for me of of visualizing fundamentals, looking at the supply

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00:26:11,960 --> 00:26:15,680
Speaker 1: and demand, you know, expressed graphically. I don't I don't

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00:26:15,720 --> 00:26:18,080
Speaker 1: think that there's any any any special magic to charts.

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00:26:18,119 --> 00:26:20,720
Speaker 1: The academics have studied, studied this in a variety of

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00:26:20,720 --> 00:26:27,320
Speaker 1: ways and haven't found haven't found sustainable, reproducible away algorithmically

495
00:26:27,359 --> 00:26:30,359
Speaker 1: to use to use charts. But nonetheless, nonetheless, what they

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00:26:30,400 --> 00:26:33,080
Speaker 1: can they can help you visualize what's going on and

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00:26:33,080 --> 00:26:36,720
Speaker 1: what has happened. And again they's a supply demand thing mainly.

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Speaker 1: And then the second question is, so the internal debate

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Speaker 1: we've been having about secular bull markets, some people define

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00:26:45,359 --> 00:26:49,200
Speaker 1: a secular bull market as starting from a higher high.

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00:26:49,680 --> 00:26:53,119
Speaker 1: So the argument has been made, if this is a

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00:26:53,160 --> 00:26:57,040
Speaker 1: secular bull market, it might not have begun until when

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00:26:57,080 --> 00:27:00,679
Speaker 1: the SMP and the Dow broke out of that previous

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00:27:00,880 --> 00:27:03,920
Speaker 1: high I guess two thousand and seven high and started

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00:27:03,960 --> 00:27:06,880
Speaker 1: making all new price, all new price. Eyes and other

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00:27:06,960 --> 00:27:08,920
Speaker 1: people are just, well, you could take the trend and

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00:27:09,359 --> 00:27:12,400
Speaker 1: extrapolated four you one do you do you even care

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00:27:12,400 --> 00:27:15,239
Speaker 1: about the definitions or you just looking at hey, this

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00:27:15,359 --> 00:27:18,520
Speaker 1: is something that could last an extended period of time. Yeah,

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00:27:18,520 --> 00:27:21,640
Speaker 1: I think there's all kinds of different ways to kind

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00:27:21,640 --> 00:27:26,399
Speaker 1: of measure measurable market episodes cyclically, secularly, I tend to

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00:27:26,520 --> 00:27:28,600
Speaker 1: I tend to think of a secular bull market as

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00:27:28,680 --> 00:27:32,119
Speaker 1: one that starts at very low valuation and starts with pessimism.

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00:27:32,160 --> 00:27:34,000
Speaker 1: So it starts, you know, the end of one bear

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00:27:34,160 --> 00:27:37,600
Speaker 1: market bottom and then the peak being when when you've

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00:27:37,640 --> 00:27:39,960
Speaker 1: reached a point where if you look out ten more years,

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00:27:40,000 --> 00:27:41,440
Speaker 1: you don't earn any rate to return. You're on a

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00:27:41,520 --> 00:27:43,920
Speaker 1: very low rate of return. So I think that's from

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00:27:43,920 --> 00:27:48,320
Speaker 1: that standpoint, the previous secular bull marketwo summer often two

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00:27:48,720 --> 00:27:51,560
Speaker 1: to the end of nine the spring of two thousand,

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00:27:51,880 --> 00:27:54,080
Speaker 1: where you had roughly seventeen percent a year from the

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00:27:54,160 --> 00:27:56,680
Speaker 1: bottom to the top. And it's important, at least the

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00:27:56,720 --> 00:27:58,760
Speaker 1: way I tend to think about it, to understand that

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00:27:58,800 --> 00:28:01,720
Speaker 1: a secular bull market like that encompassed the crash of

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00:28:02,720 --> 00:28:05,639
Speaker 1: encompassed processions and compassed declines in the market. Just because

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00:28:05,680 --> 00:28:07,640
Speaker 1: the market goes down or you have a recession doesn't

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00:28:07,640 --> 00:28:10,200
Speaker 1: mean that the bull market is is over. The economic

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00:28:10,240 --> 00:28:12,399
Speaker 1: cycle might be changing, but but the bull market is

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00:28:12,480 --> 00:28:14,560
Speaker 1: over when you can no longer earn a decent rate

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00:28:14,600 --> 00:28:18,920
Speaker 1: of return by owning that that owning equities. So two

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00:28:18,960 --> 00:28:22,560
Speaker 1: to two thousand was defined in large part by a

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00:28:22,800 --> 00:28:27,800
Speaker 1: fairly continually expanding pe multiple. It looked like investors were

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00:28:27,840 --> 00:28:31,160
Speaker 1: willing to pay more and more for each dollar of earnings.

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00:28:31,640 --> 00:28:35,960
Speaker 1: Are we seeing anything remotely like that here? And theoretically,

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00:28:36,320 --> 00:28:41,160
Speaker 1: how long and something like that go for it? I again,

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00:28:41,200 --> 00:28:43,440
Speaker 1: different people have different views on this. My view is

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00:28:43,640 --> 00:28:45,840
Speaker 1: is emphatically, no, we are not seeing that. We did.

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00:28:45,960 --> 00:28:48,560
Speaker 1: We had obviously very cheap stocks, and in the spring

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00:28:48,600 --> 00:28:51,240
Speaker 1: of two thousands of the SMP, briefly it felt like

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00:28:51,320 --> 00:28:53,760
Speaker 1: stocks were cheap for ten minutes and then suddenly they

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00:28:53,800 --> 00:28:57,040
Speaker 1: looked expensive again. Well again, because the market leads the economy,

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00:28:57,120 --> 00:28:59,360
Speaker 1: so the stocks went up before the earnings. The earnings

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00:28:59,440 --> 00:29:03,320
Speaker 1: came came through. But right now in the overall marketplace,

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00:29:03,760 --> 00:29:06,920
Speaker 1: if this is the right level for ten year treasuries

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00:29:07,120 --> 00:29:09,800
Speaker 1: one seventy five or something, and and two and a

546
00:29:09,840 --> 00:29:12,520
Speaker 1: half is the right level for thirty year treasuries, then

547
00:29:12,760 --> 00:29:15,680
Speaker 1: the right level for stocks is not seventeen and a half.

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00:29:15,760 --> 00:29:18,640
Speaker 1: It's probably thirty or thirty five times. So I think

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00:29:18,720 --> 00:29:21,520
Speaker 1: I think that the market right now is already discounting

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00:29:22,120 --> 00:29:24,640
Speaker 1: arise in the ten year probably to three or four

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00:29:24,720 --> 00:29:27,360
Speaker 1: percent over the next several years. So putting it differently,

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00:29:27,360 --> 00:29:29,000
Speaker 1: I think you can have the ten year get cut

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00:29:29,080 --> 00:29:30,840
Speaker 1: in half in the sense of double the yield on

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00:29:30,920 --> 00:29:35,160
Speaker 1: it without that harming stocks. So let's let's put that

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00:29:35,240 --> 00:29:39,440
Speaker 1: into a little broader context. We get a December increase

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00:29:39,640 --> 00:29:42,040
Speaker 1: with what does that bring us up to fifty basis points?

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00:29:42,120 --> 00:29:45,320
Speaker 1: Maybe it's kind of hard to say, Wow, that's a

558
00:29:45,440 --> 00:29:49,400
Speaker 1: heck of a tightening. And then theoretically they do a

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00:29:49,560 --> 00:29:54,880
Speaker 1: quarter four times next year and four times in and

560
00:29:55,000 --> 00:29:58,120
Speaker 1: we're still only a two point five percent You're you're

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00:29:58,360 --> 00:30:03,200
Speaker 1: essentially saying that and derail and equity market rally stocks

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00:30:03,280 --> 00:30:06,120
Speaker 1: can continue to grow despite that move. I would be

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00:30:06,280 --> 00:30:09,800
Speaker 1: very surprised if they did four and four. I think

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00:30:09,840 --> 00:30:11,840
Speaker 1: you're looking at I think you're probably looking at two

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00:30:11,960 --> 00:30:14,520
Speaker 1: and two as opposed to four and four. If they

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00:30:14,600 --> 00:30:17,040
Speaker 1: did four and four, it would only be because the

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00:30:17,080 --> 00:30:20,080
Speaker 1: economy was growing rapidly, much more rapidly than they think

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00:30:20,120 --> 00:30:22,480
Speaker 1: it is, in which case earnings would be higher that

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00:30:22,640 --> 00:30:27,000
Speaker 1: you know, so I think that So that's the optimistic.

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00:30:27,120 --> 00:30:29,200
Speaker 1: The great the greater risk is that they is that they,

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00:30:29,280 --> 00:30:32,720
Speaker 1: you know, tighten too soon into a fragile economy. And again,

572
00:30:32,880 --> 00:30:34,640
Speaker 1: I don't see how they do four unless the rest

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00:30:34,720 --> 00:30:36,520
Speaker 1: of the world is also starting to grow as well,

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00:30:36,520 --> 00:30:39,560
Speaker 1: because the dollar would. So let's say let's say a

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00:30:39,640 --> 00:30:42,200
Speaker 1: quarter point in December and then two and seventeen and

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00:30:42,240 --> 00:30:45,000
Speaker 1: two and eighteen and two and nineteen and two and twenty,

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00:30:45,800 --> 00:30:48,520
Speaker 1: which would mean that we would have a low inflation environment,

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00:30:48,640 --> 00:30:52,520
Speaker 1: a g d P two something along those lines, and

579
00:30:52,600 --> 00:30:58,000
Speaker 1: the rest of the world coming along. No nothing that almost.

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00:30:58,320 --> 00:31:01,400
Speaker 1: To quote my friend Larry Cudlow, that a goldly locked scenario,

581
00:31:01,600 --> 00:31:04,360
Speaker 1: isn't it if you have low inflation and low growth

582
00:31:04,400 --> 00:31:07,120
Speaker 1: if you look at it right now. So it's astonishing

583
00:31:07,200 --> 00:31:10,200
Speaker 1: to me that you have this year again, people pulling

584
00:31:10,280 --> 00:31:13,600
Speaker 1: money out of equity funds at the fastest rate since

585
00:31:13,640 --> 00:31:15,800
Speaker 1: two thousand and eight when the world was falling apart,

586
00:31:16,360 --> 00:31:17,960
Speaker 1: and you you have that one. If you were just

587
00:31:18,040 --> 00:31:21,800
Speaker 1: to sit back and abstractly say what's the best environment

588
00:31:21,840 --> 00:31:23,560
Speaker 1: to own stocks, you'd say, Oh, you want to have

589
00:31:23,640 --> 00:31:26,920
Speaker 1: economic growth, but it can't be too fast stoke inflation

590
00:31:27,600 --> 00:31:29,960
Speaker 1: or to cause the Fed to get hostile. Uh. We

591
00:31:30,160 --> 00:31:32,040
Speaker 1: we have to have low inflation, so we were not

592
00:31:32,120 --> 00:31:34,760
Speaker 1: p ratios can be high. We want a good beginning

593
00:31:34,800 --> 00:31:37,280
Speaker 1: dividend yield and a good dividend growth rate. We want

594
00:31:37,360 --> 00:31:39,280
Speaker 1: GDP to be at an all time high, on household

595
00:31:39,320 --> 00:31:40,920
Speaker 1: net worth to be at an all time high, one

596
00:31:40,960 --> 00:31:42,880
Speaker 1: profit margins to be an all time all that's true,

597
00:31:43,280 --> 00:31:45,720
Speaker 1: and yet and yet evaluations right now are are nowhere

598
00:31:45,800 --> 00:31:49,720
Speaker 1: near the historic eise. So it's a political season. We're

599
00:31:49,800 --> 00:31:56,400
Speaker 1: we're having this conversation before the election. Given everything you've

600
00:31:56,520 --> 00:32:01,280
Speaker 1: described sounds so good, why is there so much negativity

601
00:32:01,520 --> 00:32:05,640
Speaker 1: about everything about the country, about our policies, about stocks,

602
00:32:05,680 --> 00:32:09,440
Speaker 1: about bonds. It seems you can't go anywhere without this

603
00:32:09,760 --> 00:32:14,480
Speaker 1: drumbeat of negativity despite what you're describing as things actually

604
00:32:14,600 --> 00:32:17,560
Speaker 1: being pretty good. Yeah, I think I think that the

605
00:32:17,920 --> 00:32:20,400
Speaker 1: two thousand and eight, the financial crisis and the housing

606
00:32:20,520 --> 00:32:24,600
Speaker 1: collapse kind of change the psychological polarity of of of

607
00:32:24,720 --> 00:32:27,719
Speaker 1: people with respect to savings and investment and made them

608
00:32:28,200 --> 00:32:31,400
Speaker 1: i'd say, both risk and volatility phobic. And so they're

609
00:32:31,480 --> 00:32:34,840
Speaker 1: terrified of risk, and especially if they saw their house drop,

610
00:32:35,720 --> 00:32:38,200
Speaker 1: and you know from peak to trough, and that we

611
00:32:38,240 --> 00:32:40,640
Speaker 1: had an unemployment rate that that hit ten at one

612
00:32:40,840 --> 00:32:44,080
Speaker 1: at one point, and then there's just the general anxiety

613
00:32:44,160 --> 00:32:47,440
Speaker 1: and angst that you see whenever Macro pops up. The

614
00:32:47,440 --> 00:32:50,560
Speaker 1: stock market had the worst worst start to its uh

615
00:32:51,000 --> 00:32:53,560
Speaker 1: to a year in history this year, just because people

616
00:32:53,640 --> 00:32:56,360
Speaker 1: got worried about oil, about Russia, about China. So these

617
00:32:56,440 --> 00:32:58,760
Speaker 1: fears flare up, and I think they're they're due to

618
00:32:58,800 --> 00:33:01,080
Speaker 1: the financial crisis, and it's only gonna it's gonna take time.

619
00:33:02,040 --> 00:33:04,960
Speaker 1: We've been speaking with Bill Miller, formally chairman and Chief

620
00:33:05,000 --> 00:33:09,520
Speaker 1: investment Officer at leg Mason Asset Management. If you enjoy

621
00:33:09,640 --> 00:33:12,360
Speaker 1: this conversation, be sure and check out the podcast extras,

622
00:33:12,400 --> 00:33:15,560
Speaker 1: where we keep the tape rolling and continue talking about

623
00:33:15,720 --> 00:33:20,000
Speaker 1: all things value investing. Be sure and check out my

624
00:33:20,240 --> 00:33:23,600
Speaker 1: daily column on Bloomberg View dot com or follow me

625
00:33:23,680 --> 00:33:26,960
Speaker 1: on Twitter at Rich Halts. We love your comments and

626
00:33:27,040 --> 00:33:31,520
Speaker 1: feedback right to us at m IB podcast at Bloomberg

627
00:33:31,600 --> 00:33:35,520
Speaker 1: dot net. I'm Barry Ridhults. You've been listening to Masters

628
00:33:35,560 --> 00:33:39,000
Speaker 1: in Business on Bloomberg Radio, brought to you by Bank

629
00:33:39,040 --> 00:33:42,280
Speaker 1: of America Merrill Lynch seeing what others have seen, but

630
00:33:42,480 --> 00:33:45,840
Speaker 1: uncovering what others may not. Global research that helps you

631
00:33:45,920 --> 00:33:49,720
Speaker 1: harness disruption. Voted top global research firm five years running,

632
00:33:50,000 --> 00:33:53,720
Speaker 1: Merrill Lynch, Pierce, Finner and Smith Incorporated. Welcome to the

633
00:33:53,800 --> 00:33:56,560
Speaker 1: podcast portion, Bill, Thank you so much for doing this

634
00:33:56,720 --> 00:33:59,640
Speaker 1: I'm very pleased to meet you, and I'm really enjoying

635
00:34:00,160 --> 00:34:02,040
Speaker 1: this conversation. Thanks, Barry, and I've been a big fan

636
00:34:02,080 --> 00:34:03,600
Speaker 1: of your writings for a long time, so as great

637
00:34:03,640 --> 00:34:06,120
Speaker 1: to meet you too. UM. I don't even know what

638
00:34:06,240 --> 00:34:09,279
Speaker 1: to say to that. I'm I'm I'm struck done by that. Uh,

639
00:34:09,840 --> 00:34:11,879
Speaker 1: there are there are a few questions I didn't get

640
00:34:11,960 --> 00:34:15,000
Speaker 1: to in the radio portion, and I want to circle

641
00:34:15,080 --> 00:34:19,560
Speaker 1: back before we start doing our um our favorite questions

642
00:34:19,680 --> 00:34:22,120
Speaker 1: and and there's a bunch of different things that I

643
00:34:22,239 --> 00:34:27,399
Speaker 1: know you can sink your teeth into. Um, so let's

644
00:34:27,480 --> 00:34:30,640
Speaker 1: jump into some of these before we come back. God,

645
00:34:30,719 --> 00:34:33,640
Speaker 1: there's so much stuff. So so at the peak, what

646
00:34:33,760 --> 00:34:37,160
Speaker 1: were the total asset that you were running at leg

647
00:34:37,280 --> 00:34:42,480
Speaker 1: Mason Nor is that two thousand or oh seven? That

648
00:34:42,520 --> 00:34:46,920
Speaker 1: would have been oh seven probably, And and basically you're

649
00:34:46,960 --> 00:34:49,920
Speaker 1: buying a little big caps. You didn't feel ever constrained

650
00:34:50,040 --> 00:34:52,840
Speaker 1: by Gee, there's only so much we could do with

651
00:34:53,120 --> 00:34:55,440
Speaker 1: with this money. It's too much money now. In the

652
00:34:55,560 --> 00:34:57,880
Speaker 1: in the early days, we we did all caps. So

653
00:34:58,080 --> 00:35:00,000
Speaker 1: again we had almost no money under man. You started

654
00:35:00,120 --> 00:35:02,680
Speaker 1: zero under management, so we could do anything that two

655
00:35:02,719 --> 00:35:04,840
Speaker 1: when I think, I think the first portfolio that we

656
00:35:04,920 --> 00:35:07,320
Speaker 1: put together in the summer of nine two had a

657
00:35:07,719 --> 00:35:09,719
Speaker 1: seven and a half percent dividend yield and traded at

658
00:35:09,760 --> 00:35:13,040
Speaker 1: four times earnings in a discount to tangible book um.

659
00:35:13,360 --> 00:35:16,479
Speaker 1: At the peak, we were mainly large cap, but again

660
00:35:16,560 --> 00:35:20,960
Speaker 1: because we're contrarian value investors, we were liquidity providers when

661
00:35:21,000 --> 00:35:24,520
Speaker 1: people wanted out of something basis, so the size of

662
00:35:24,640 --> 00:35:26,600
Speaker 1: the of it didn't didn't matter too much and it

663
00:35:26,640 --> 00:35:29,200
Speaker 1: didn't affect us too much. And it's my friend will

664
00:35:29,239 --> 00:35:31,120
Speaker 1: down off. Another guy's beat the market over his entire

665
00:35:31,160 --> 00:35:33,920
Speaker 1: career runs the FILLI Contra Fund. It's the biggest active

666
00:35:34,120 --> 00:35:36,400
Speaker 1: actively managed fund, and he's got a great record with

667
00:35:36,440 --> 00:35:38,719
Speaker 1: a hundred billion dollars an asset. So it's doesn't make

668
00:35:39,160 --> 00:35:42,439
Speaker 1: it doesn't make that much of a difference. So let's

669
00:35:42,480 --> 00:35:45,800
Speaker 1: talk about how you got to um like Mason. What

670
00:35:45,920 --> 00:35:49,080
Speaker 1: were you doing before you were running running the Value

671
00:35:49,120 --> 00:35:51,520
Speaker 1: Opportunity Trust. I was a I was a very young

672
00:35:51,640 --> 00:35:54,840
Speaker 1: treasurer at a privately held company called J. E. Baker,

673
00:35:54,920 --> 00:35:59,160
Speaker 1: which sold refractories to the stealing cement industry. And I

674
00:35:59,200 --> 00:36:01,880
Speaker 1: got to like Mason because my wife was a broker

675
00:36:01,960 --> 00:36:04,279
Speaker 1: at leg Mason, so she had when I when when

676
00:36:04,320 --> 00:36:07,279
Speaker 1: I got married overseas, when I was in the army,

677
00:36:07,840 --> 00:36:09,840
Speaker 1: and then I went back to I went to Baltimore.

678
00:36:09,880 --> 00:36:11,360
Speaker 1: I went back to Baltimore to go to grad school

679
00:36:11,360 --> 00:36:14,080
Speaker 1: at Johns Hopkins. And so when I was in grad school,

680
00:36:14,120 --> 00:36:15,960
Speaker 1: she got a job at like Mason and then, uh,

681
00:36:16,600 --> 00:36:18,680
Speaker 1: that's I got to know the people there and what

682
00:36:18,880 --> 00:36:20,440
Speaker 1: was your first gig there? What were you what were

683
00:36:20,440 --> 00:36:23,360
Speaker 1: you doing? I came. I came in to succeed my

684
00:36:23,640 --> 00:36:26,520
Speaker 1: my now late partner, Ernie Keeney, as director of research.

685
00:36:27,080 --> 00:36:28,560
Speaker 1: So when I was when I was a treasure I

686
00:36:28,600 --> 00:36:31,120
Speaker 1: was doing the normal treasury functions, bank relations and all.

687
00:36:31,440 --> 00:36:34,200
Speaker 1: But the Baker Company had a fairly significant stock portfolio

688
00:36:34,480 --> 00:36:36,719
Speaker 1: that they managed internally, which I which I did as well.

689
00:36:37,239 --> 00:36:39,480
Speaker 1: And it was that that, uh, I think caught the

690
00:36:39,480 --> 00:36:41,800
Speaker 1: attention of the people at Like Mason and some of

691
00:36:41,840 --> 00:36:43,800
Speaker 1: the people that I that she knew there. So this

692
00:36:44,000 --> 00:36:45,920
Speaker 1: is the first time hearing of this. This is interesting.

693
00:36:46,000 --> 00:36:50,480
Speaker 1: So you're working at a company selling refractories to heavy industry,

694
00:36:50,760 --> 00:36:53,760
Speaker 1: but sort of as part of your job, you're managing

695
00:36:53,800 --> 00:36:57,200
Speaker 1: their own internal portfolio. Was that for their pension or

696
00:36:58,000 --> 00:37:00,560
Speaker 1: part part of the pension was managed outside, and so

697
00:37:00,719 --> 00:37:03,759
Speaker 1: we had a pension committee that evaluated managers and then

698
00:37:04,000 --> 00:37:06,560
Speaker 1: part of it was managed internally. What was your what

699
00:37:06,760 --> 00:37:09,800
Speaker 1: was your academic background that you had any sort of

700
00:37:09,840 --> 00:37:12,000
Speaker 1: skill setting that you're in your early thirties. Then at

701
00:37:12,080 --> 00:37:14,400
Speaker 1: that point, right then, I was I want to get

702
00:37:14,440 --> 00:37:16,080
Speaker 1: to like Mason, I was thirty one years old down,

703
00:37:16,280 --> 00:37:19,080
Speaker 1: so you were in your twenties running part of the

704
00:37:19,400 --> 00:37:22,759
Speaker 1: pension funds. What what was your your background? What was

705
00:37:22,800 --> 00:37:26,120
Speaker 1: your schooling? Well, I had an undergraduate degree in economics

706
00:37:26,160 --> 00:37:29,120
Speaker 1: and European intellectual history from Washington and Lee in Virginia,

707
00:37:29,680 --> 00:37:31,920
Speaker 1: and then I went to grad Schoot Hopkins in the

708
00:37:31,960 --> 00:37:34,320
Speaker 1: PhD program in philosophy, and between that I was in

709
00:37:34,400 --> 00:37:38,279
Speaker 1: the military military intelligence overseas. But I've been I've been

710
00:37:38,280 --> 00:37:40,960
Speaker 1: interested in in in stocks since I was since I

711
00:37:41,080 --> 00:37:43,960
Speaker 1: was very young. In fact, it's a it's an amusing

712
00:37:44,080 --> 00:37:47,080
Speaker 1: story that that people have written about so that people said,

713
00:37:47,120 --> 00:37:48,880
Speaker 1: how did you interested in stocks? What when that happened?

714
00:37:49,239 --> 00:37:51,320
Speaker 1: And it happened when I was nine years old, and

715
00:37:51,400 --> 00:37:53,040
Speaker 1: I was living in Miami at the time, and I

716
00:37:53,160 --> 00:37:56,680
Speaker 1: came in from mowing the grass and my dad was

717
00:37:56,760 --> 00:37:59,200
Speaker 1: reading the newspaper and he had turned to the stock pages,

718
00:37:59,239 --> 00:38:01,200
Speaker 1: which of course don't look like the sports section or

719
00:38:01,239 --> 00:38:04,359
Speaker 1: the comics section, right, just numbers and letters. And I said,

720
00:38:04,440 --> 00:38:06,160
Speaker 1: what's that and he said, well, these are stocks. I

721
00:38:06,200 --> 00:38:08,919
Speaker 1: said what are stocks? And he said, well, they're they're

722
00:38:08,960 --> 00:38:10,560
Speaker 1: parts of the business. I said, why why are you

723
00:38:10,760 --> 00:38:13,040
Speaker 1: looking at this and he said, well, he said, you

724
00:38:13,080 --> 00:38:15,560
Speaker 1: know you can. You can make money if you if

725
00:38:15,560 --> 00:38:17,000
Speaker 1: you know how to pick stocks. And I said, what

726
00:38:17,080 --> 00:38:19,200
Speaker 1: do you mean to show me what this means? So

727
00:38:19,280 --> 00:38:21,200
Speaker 1: he takes something I'll just make up with things say

728
00:38:21,239 --> 00:38:24,440
Speaker 1: General Motors. So there's the GM. That's the car company

729
00:38:24,480 --> 00:38:26,240
Speaker 1: that makes Chevy and b Wick and I'm like, okay,

730
00:38:26,719 --> 00:38:28,000
Speaker 1: and he and I said what are those other things?

731
00:38:28,000 --> 00:38:29,920
Speaker 1: But that's the price. There's the opening price of the

732
00:38:30,160 --> 00:38:33,239
Speaker 1: stock in the closing price and and uh and I

733
00:38:33,239 --> 00:38:35,040
Speaker 1: said what's the thing at the end, and it's like

734
00:38:35,120 --> 00:38:37,040
Speaker 1: plus one quarter. He said, well that's the change and

735
00:38:37,080 --> 00:38:38,920
Speaker 1: I said what do you mean? He said, that's that's

736
00:38:38,920 --> 00:38:41,360
Speaker 1: the quarter. That's twenty five cents And he said, so

737
00:38:41,440 --> 00:38:44,160
Speaker 1: if you owned the stock the day before, you made

738
00:38:44,200 --> 00:38:48,080
Speaker 1: twenty five cents, and that I never I said, well,

739
00:38:48,200 --> 00:38:50,600
Speaker 1: what do you have to do to make it make money.

740
00:38:51,360 --> 00:38:53,400
Speaker 1: And he said, what do you mean. I said, what

741
00:38:53,440 --> 00:38:54,480
Speaker 1: do you have to do? How do you make it

742
00:38:54,560 --> 00:38:56,080
Speaker 1: make money for you? He said, well, you don't have

743
00:38:56,120 --> 00:38:58,920
Speaker 1: to do anything. It just does it by itself. And

744
00:38:58,960 --> 00:39:01,080
Speaker 1: I said, wait a minute. There's there's a thing where

745
00:39:01,080 --> 00:39:04,080
Speaker 1: you can make money without doing any work. And he said, yes,

746
00:39:04,520 --> 00:39:05,960
Speaker 1: sort of. And I said, well that's what I want

747
00:39:06,000 --> 00:39:07,600
Speaker 1: to know about, because I don't like to do work,

748
00:39:07,640 --> 00:39:10,080
Speaker 1: but I do want to make money. And so and

749
00:39:10,160 --> 00:39:12,120
Speaker 1: that's how I got interested in in in stocks at that,

750
00:39:12,280 --> 00:39:14,200
Speaker 1: you know, at that point in time, and there was

751
00:39:14,280 --> 00:39:16,080
Speaker 1: a book which is probably still out there that Merrill

752
00:39:16,160 --> 00:39:18,799
Speaker 1: Lynch was giving away called how to Buy Stocks by

753
00:39:18,840 --> 00:39:21,440
Speaker 1: Louis Engel, and it was it was in order to

754
00:39:21,480 --> 00:39:23,879
Speaker 1: familiarize people with the you know, with the stock market,

755
00:39:23,880 --> 00:39:26,200
Speaker 1: and told the story of some little kid that started

756
00:39:26,239 --> 00:39:28,719
Speaker 1: a fishing pole company and that didn't It was sort

757
00:39:28,719 --> 00:39:31,440
Speaker 1: of a parable about stock buying. And since, you know,

758
00:39:31,520 --> 00:39:34,000
Speaker 1: since then, I've always been just interested in stocks. What

759
00:39:34,200 --> 00:39:37,200
Speaker 1: was the first stock you remember buying? The one the

760
00:39:37,239 --> 00:39:39,520
Speaker 1: first I remember buying was R C A H. In

761
00:39:39,600 --> 00:39:43,360
Speaker 1: the nineteen sixties. Then yeah, yeah, I was, I was.

762
00:39:44,200 --> 00:39:46,279
Speaker 1: I bought our cig with the money that I had

763
00:39:46,920 --> 00:39:49,799
Speaker 1: made by having a paper route and umpiring baseball games

764
00:39:49,840 --> 00:39:52,640
Speaker 1: and doing stuff like that, and uh, our c A

765
00:39:52,719 --> 00:39:55,120
Speaker 1: stock doubled and I used that money then to buy

766
00:39:55,200 --> 00:39:57,680
Speaker 1: a car. First car when I was like seventeen years old.

767
00:39:57,719 --> 00:40:02,400
Speaker 1: It's a Triumph TR four. That that that's interesting. So

768
00:40:03,280 --> 00:40:06,920
Speaker 1: there's a tremendous history of interest in the market. But

769
00:40:07,160 --> 00:40:12,359
Speaker 1: still you're you're working for a non financial company. How

770
00:40:12,440 --> 00:40:15,880
Speaker 1: did you start managing their pension fund? That sounds like

771
00:40:15,960 --> 00:40:18,560
Speaker 1: you were twenty eight or six you were running the

772
00:40:18,800 --> 00:40:21,520
Speaker 1: part of their pension fund. Yeah, I mean I initially

773
00:40:21,600 --> 00:40:24,280
Speaker 1: I was. I was. I worked for the CEO directly

774
00:40:24,360 --> 00:40:26,960
Speaker 1: for a couple of years and did a variety of

775
00:40:27,000 --> 00:40:30,160
Speaker 1: different oversaw variety of different things. And then it was

776
00:40:30,200 --> 00:40:33,200
Speaker 1: also the named the assistant treasurer, and the treasurer was

777
00:40:33,320 --> 00:40:36,000
Speaker 1: the one got much older than me. He was, but

778
00:40:36,080 --> 00:40:37,960
Speaker 1: he was one running the running the portfolio. I was

779
00:40:38,000 --> 00:40:40,160
Speaker 1: helping him with that, you know, doing research and doing

780
00:40:40,200 --> 00:40:42,600
Speaker 1: stuff like that. And then he left for for another

781
00:40:42,719 --> 00:40:45,840
Speaker 1: job and the job was vacant, and so again I

782
00:40:45,960 --> 00:40:48,560
Speaker 1: was very young, and they're like, well, you you can

783
00:40:48,600 --> 00:40:51,040
Speaker 1: be the interim treasurer and we'll go find a treasure

784
00:40:51,520 --> 00:40:53,799
Speaker 1: and after after about six months, they didn't find once.

785
00:40:53,840 --> 00:40:56,279
Speaker 1: They just let me do the job. That's amazing. You know.

786
00:40:56,600 --> 00:40:59,120
Speaker 1: The other thing that stands out that you had referenced

787
00:40:59,760 --> 00:41:02,840
Speaker 1: um was military intelligence. We've spoken to a number of

788
00:41:02,960 --> 00:41:08,080
Speaker 1: people who have had military experience. How did that affect

789
00:41:08,520 --> 00:41:11,800
Speaker 1: your approach to invest in the U S. Military is

790
00:41:11,840 --> 00:41:15,920
Speaker 1: a very specific organization with its very own way of

791
00:41:16,040 --> 00:41:20,440
Speaker 1: doing things. Uh, directly on investing, it's it's there's a

792
00:41:20,480 --> 00:41:23,640
Speaker 1: really interesting connection that's probably only because of the military

793
00:41:23,680 --> 00:41:27,719
Speaker 1: intelligence training. And that is, you know, and with the

794
00:41:27,840 --> 00:41:30,160
Speaker 1: SEC no, nobody wants you to have inside information and

795
00:41:30,200 --> 00:41:32,640
Speaker 1: interface other people don't have. But but you can have

796
00:41:32,800 --> 00:41:34,960
Speaker 1: what they call a mosaic approach where you put pieces

797
00:41:35,000 --> 00:41:38,000
Speaker 1: of information together and figure something out. And we had

798
00:41:38,040 --> 00:41:41,839
Speaker 1: extensive training in military intelligence in that exact thing, which

799
00:41:41,920 --> 00:41:45,480
Speaker 1: is taking disparate bits of information and using them to

800
00:41:45,520 --> 00:41:48,520
Speaker 1: create an essence of picture, probabilistic picture of what might

801
00:41:48,560 --> 00:41:50,640
Speaker 1: be going on and what could happen and looking at

802
00:41:50,719 --> 00:41:53,759
Speaker 1: various scenarios. All of that is directly applicable to of

803
00:41:53,840 --> 00:41:55,480
Speaker 1: course to look at at companies and looking at the

804
00:41:55,520 --> 00:41:57,400
Speaker 1: information and trying to get a picture of what's going

805
00:41:57,440 --> 00:41:59,799
Speaker 1: to happen with those businesses in the economy from from

806
00:42:00,080 --> 00:42:03,840
Speaker 1: just apparently unrelated bits and pieces information about the companies,

807
00:42:04,440 --> 00:42:06,359
Speaker 1: and it's it's it's really interesting because you know, there

808
00:42:06,440 --> 00:42:08,960
Speaker 1: was you have these old cliches that they would have

809
00:42:09,040 --> 00:42:11,279
Speaker 1: on the bulletin boards of loose lips, sync ships, you know,

810
00:42:11,360 --> 00:42:13,480
Speaker 1: and stuff like that, and it's it's true because you

811
00:42:13,560 --> 00:42:15,560
Speaker 1: could look at you could look at something that apparently

812
00:42:15,680 --> 00:42:18,320
Speaker 1: was meaningless and have a little bit of information, but

813
00:42:18,400 --> 00:42:20,640
Speaker 1: then there was something over here and something over here.

814
00:42:20,640 --> 00:42:22,960
Speaker 1: There were unrelated on their own, but you could put

815
00:42:23,040 --> 00:42:25,520
Speaker 1: them together and get get the beginning of a picture

816
00:42:25,520 --> 00:42:27,720
Speaker 1: when each individual piece by itself didn't tell you anything.

817
00:42:28,080 --> 00:42:31,280
Speaker 1: And it's the same approach with picking stocks, very similar,

818
00:42:31,600 --> 00:42:35,120
Speaker 1: very similar. Huh. So, I want to throw another quote

819
00:42:35,120 --> 00:42:38,759
Speaker 1: at you from yourself. I often remind and get get

820
00:42:38,800 --> 00:42:41,839
Speaker 1: your feedback on it. You you had said, I often

821
00:42:41,960 --> 00:42:45,360
Speaker 1: remind our analysts that one of the information you have

822
00:42:45,880 --> 00:42:50,040
Speaker 1: about a company represents the past, and a hundred percent

823
00:42:50,080 --> 00:42:54,160
Speaker 1: of the stocks valuation depends on the future. So explain that.

824
00:42:55,160 --> 00:42:57,160
Speaker 1: So this I'll come into two different ways. One of

825
00:42:57,239 --> 00:43:03,040
Speaker 1: them was that one from roughly nineteen eighty well, we

826
00:43:03,120 --> 00:43:05,560
Speaker 1: had two bad years in the Value Trust, and I

827
00:43:05,640 --> 00:43:08,759
Speaker 1: took over at the end of nineteen solely managing the fund.

828
00:43:09,320 --> 00:43:10,680
Speaker 1: And part of what I did then was I went

829
00:43:10,719 --> 00:43:13,120
Speaker 1: back and looked at the history of value investing in

830
00:43:13,160 --> 00:43:18,200
Speaker 1: the academic research on value investing, and uh, and it

831
00:43:18,280 --> 00:43:19,879
Speaker 1: became clear to me that a lot of what people

832
00:43:20,000 --> 00:43:23,920
Speaker 1: thought about value investing wasn't supported by the evidence, and

833
00:43:24,080 --> 00:43:26,600
Speaker 1: that when I looked at our own mistakes, they were

834
00:43:26,760 --> 00:43:30,160
Speaker 1: they were generally speaking, caused by putting too much emphasis

835
00:43:30,239 --> 00:43:34,480
Speaker 1: on past data and past valuation stuff and past growth

836
00:43:34,600 --> 00:43:36,759
Speaker 1: rates and not enough on the future, and not enough

837
00:43:36,800 --> 00:43:40,279
Speaker 1: on what companies could do, and and so uh that

838
00:43:40,480 --> 00:43:42,759
Speaker 1: that that got to that point of where I where

839
00:43:42,760 --> 00:43:46,120
Speaker 1: I came up with that, with that particular that particular quote,

840
00:43:46,120 --> 00:43:48,759
Speaker 1: and we and we changed our approach at that point

841
00:43:48,800 --> 00:43:50,400
Speaker 1: in time to put a lot more emphasis on a

842
00:43:50,440 --> 00:43:52,840
Speaker 1: company's ability to earn above it's cost a capital, to

843
00:43:52,960 --> 00:43:56,080
Speaker 1: generate free cash flow, and to reinvest that on a

844
00:43:56,160 --> 00:43:59,560
Speaker 1: sustainable basis. So how do you go about pivoting You

845
00:43:59,719 --> 00:44:05,520
Speaker 1: you have an approach that's been extremely successful. What makes

846
00:44:05,560 --> 00:44:07,839
Speaker 1: you say we're going to tweak this a little bit

847
00:44:08,080 --> 00:44:11,200
Speaker 1: and and change the way we're doing things despite the

848
00:44:11,280 --> 00:44:15,799
Speaker 1: past track record. You know. I got that actually from

849
00:44:16,320 --> 00:44:19,759
Speaker 1: the late Sir John Templeton, who was asked, you know

850
00:44:19,880 --> 00:44:24,600
Speaker 1: why he followed this value investing approach, and he said, Um,

851
00:44:25,000 --> 00:44:27,880
Speaker 1: we don't follow it out of any any special reverence

852
00:44:28,400 --> 00:44:31,239
Speaker 1: for that approach. We follow it because we keep looking

853
00:44:31,680 --> 00:44:33,839
Speaker 1: at all different ways to do things, looking at ways

854
00:44:33,920 --> 00:44:36,520
Speaker 1: to improve all the time, and it just so happens

855
00:44:36,560 --> 00:44:38,480
Speaker 1: that this is the one that we found most effective.

856
00:44:38,520 --> 00:44:40,479
Speaker 1: And so I think that was that. And I talked

857
00:44:40,480 --> 00:44:42,240
Speaker 1: to him about this, you know, when he was alive,

858
00:44:42,600 --> 00:44:44,440
Speaker 1: and that was one of the things that that stayed

859
00:44:44,480 --> 00:44:46,200
Speaker 1: with me. Is you're always looking to try and improve

860
00:44:46,239 --> 00:44:49,320
Speaker 1: the process. So if it turns out that even for

861
00:44:49,400 --> 00:44:52,680
Speaker 1: a brief period of time, that that that looking at

862
00:44:52,800 --> 00:44:57,359
Speaker 1: charts tends to be correlated with significant stock price moves, fine,

863
00:44:57,440 --> 00:44:59,360
Speaker 1: we'll then add that to the mix until it doesn't

864
00:44:59,400 --> 00:45:01,759
Speaker 1: until it doesn't work anymore. So it's a it's a

865
00:45:01,800 --> 00:45:04,640
Speaker 1: process of really trying to continuously improve. And and again

866
00:45:04,760 --> 00:45:07,800
Speaker 1: I think you had Mike Mobison on here and and

867
00:45:08,120 --> 00:45:10,160
Speaker 1: he was, yeah, he was, yeah, he was a great

868
00:45:10,160 --> 00:45:12,560
Speaker 1: when he was working for us. He's great, Uh, teacher

869
00:45:12,760 --> 00:45:16,160
Speaker 1: of of of secured analysis, to the to the analysts,

870
00:45:16,160 --> 00:45:18,040
Speaker 1: and always looking for ways to improve. Look at the

871
00:45:18,080 --> 00:45:22,000
Speaker 1: academic literature. So so how do you prevent yourselves from

872
00:45:22,400 --> 00:45:26,160
Speaker 1: oversaulting the stew so to speak? It becomes really easy

873
00:45:26,239 --> 00:45:29,719
Speaker 1: to constantly you know, I picture the old soundboards with

874
00:45:29,800 --> 00:45:32,239
Speaker 1: all the knobs and everything, and you have all these

875
00:45:32,280 --> 00:45:35,160
Speaker 1: different inputs. Here his valuation, here's the FED, who's interest rate,

876
00:45:35,239 --> 00:45:39,319
Speaker 1: his inflation. How do you prevent yourselves from playing too much?

877
00:45:40,239 --> 00:45:44,040
Speaker 1: Because you could there's always something to be tweaked. It's

878
00:45:44,080 --> 00:45:47,080
Speaker 1: harder to do less than just doing more seems to

879
00:45:47,160 --> 00:45:50,920
Speaker 1: be easy. How do you prevent that natural tendency to

880
00:45:51,040 --> 00:45:53,440
Speaker 1: want to play him around the edges a little bit?

881
00:45:54,440 --> 00:45:56,520
Speaker 1: It's it's a little bit like the zen like doing

882
00:45:56,600 --> 00:45:58,479
Speaker 1: not doing in the sense of and in the sense

883
00:45:58,560 --> 00:46:01,560
Speaker 1: of what we're trying id to do is always always

884
00:46:01,680 --> 00:46:04,640
Speaker 1: think about how things could be improved. Assesst But we're

885
00:46:04,719 --> 00:46:06,600
Speaker 1: you know, we're long term investors, and that's that's again

886
00:46:06,640 --> 00:46:08,800
Speaker 1: that's rare in this in this market. But you know,

887
00:46:08,880 --> 00:46:11,319
Speaker 1: we owned we owned Fannie May for fifteen years at

888
00:46:11,360 --> 00:46:14,280
Speaker 1: one point. So uh, it's the case that our average

889
00:46:14,320 --> 00:46:17,520
Speaker 1: holding period is three to five years and and then

890
00:46:17,600 --> 00:46:20,359
Speaker 1: so we're we're looking through the stock price fluctuations. We're

891
00:46:20,360 --> 00:46:22,440
Speaker 1: trying to look through the noise, and we're always trying

892
00:46:22,480 --> 00:46:24,840
Speaker 1: to filter out the signal from the noise. But the

893
00:46:24,960 --> 00:46:27,879
Speaker 1: core part of the core part of the process doesn't change,

894
00:46:27,880 --> 00:46:30,480
Speaker 1: which is trying to figure out the intrinsic business value.

895
00:46:30,960 --> 00:46:32,520
Speaker 1: All right, So let's talk a little bit about that,

896
00:46:32,560 --> 00:46:35,719
Speaker 1: because that, I think is really fascinating. How does that

897
00:46:35,960 --> 00:46:40,000
Speaker 1: process begin. How important are analysts bringing ideas to you?

898
00:46:40,680 --> 00:46:45,600
Speaker 1: And how significant is the team approach that you you employ? Um,

899
00:46:46,239 --> 00:46:48,080
Speaker 1: all those things are, all those things are important. We

900
00:46:48,200 --> 00:46:51,080
Speaker 1: we we get. I mean I tend to be a

901
00:46:51,200 --> 00:46:53,560
Speaker 1: be a high output idea generator, not in the sense

902
00:46:53,600 --> 00:46:55,759
Speaker 1: of constantly putting new names in the portfolio, but in

903
00:46:55,800 --> 00:46:58,479
Speaker 1: the sense of constantly looking at names. And after thirty

904
00:46:58,560 --> 00:46:59,880
Speaker 1: five years of doing this, you know, I have a

905
00:47:00,000 --> 00:47:03,279
Speaker 1: fairly good, fairly good, extensive experience with all kinds of

906
00:47:03,320 --> 00:47:06,400
Speaker 1: different companies and industries. And you know, my son has

907
00:47:06,400 --> 00:47:08,080
Speaker 1: been doing this for eight years, and Samantha has been

908
00:47:08,120 --> 00:47:10,239
Speaker 1: doing it for fifteen years. We have a we have

909
00:47:10,320 --> 00:47:12,680
Speaker 1: a new young analyst and a more senior guy that

910
00:47:12,760 --> 00:47:14,919
Speaker 1: we just brought on. So there's a there's a mix

911
00:47:15,040 --> 00:47:17,840
Speaker 1: where people are all looking for for things that we

912
00:47:17,880 --> 00:47:20,480
Speaker 1: think are mispriced on a on a longer term, on

913
00:47:20,560 --> 00:47:25,200
Speaker 1: a longer term basis. All right, and your your co

914
00:47:25,800 --> 00:47:30,000
Speaker 1: um manager at the Opportunity Trust Funds whose name is

915
00:47:30,200 --> 00:47:34,040
Speaker 1: give me one sex, Samantha uh mich Lamore and Maclamo

916
00:47:34,280 --> 00:47:38,279
Speaker 1: mac Lamore. So how do you guys divide responsibilities from

917
00:47:38,320 --> 00:47:42,920
Speaker 1: running that fund? Is having a co manager challenging? Is

918
00:47:42,960 --> 00:47:46,000
Speaker 1: it helpful? Is there a natural split of duties? How

919
00:47:46,080 --> 00:47:49,279
Speaker 1: does that work? Uh? Well, it's it works, It works

920
00:47:49,400 --> 00:47:51,839
Speaker 1: very well. We don't we don't have a formal uh

921
00:47:52,400 --> 00:47:54,879
Speaker 1: uh split of duties. We both are trying to pay

922
00:47:54,880 --> 00:47:58,240
Speaker 1: attention to everything in the portfolio all the time. She's

923
00:47:58,239 --> 00:47:59,879
Speaker 1: in the office a lot more than I am because

924
00:47:59,880 --> 00:48:03,319
Speaker 1: I split my time between Florida and Maryland and New York,

925
00:48:03,840 --> 00:48:06,080
Speaker 1: and so she she will tend to take more meetings

926
00:48:06,160 --> 00:48:09,440
Speaker 1: with with south Side Animals, take more meetings with companies

927
00:48:09,480 --> 00:48:11,560
Speaker 1: than that I would, just because she's in the office

928
00:48:12,080 --> 00:48:14,280
Speaker 1: office more. And then we're you know, we're sure office

929
00:48:14,360 --> 00:48:16,600
Speaker 1: is right next to mine and my sons is right

930
00:48:16,680 --> 00:48:20,040
Speaker 1: next to hers, So it's it's when we're there we're

931
00:48:20,080 --> 00:48:21,680
Speaker 1: we're talking all the time, and we're not there. We're

932
00:48:21,800 --> 00:48:24,640
Speaker 1: emailing back and forth or talking on the phone. So

933
00:48:25,000 --> 00:48:27,640
Speaker 1: let's let's talk about the end of the run, which

934
00:48:27,920 --> 00:48:34,560
Speaker 1: um was uh oh five. What was so different about

935
00:48:34,719 --> 00:48:38,040
Speaker 1: oh seven, o eight, oh nine than than the prior

936
00:48:40,000 --> 00:48:43,239
Speaker 1: sell offs like two thousand or eighty seven. What made

937
00:48:43,440 --> 00:48:47,440
Speaker 1: this collapse different than any previous I mean, the dot

938
00:48:47,520 --> 00:48:51,800
Speaker 1: com crash was pretty um brutal, at least for that second.

939
00:48:52,560 --> 00:48:57,600
Speaker 1: What was qualitatively difference different about the Great Recession? This was,

940
00:48:58,320 --> 00:49:01,719
Speaker 1: up until that point in time, the academic literature did

941
00:49:01,800 --> 00:49:05,320
Speaker 1: not really distinguish between the types of financial crises and

942
00:49:05,360 --> 00:49:08,120
Speaker 1: then how you deal with those crises. And so what

943
00:49:08,280 --> 00:49:09,960
Speaker 1: we got what I got wrong. What we got wrong

944
00:49:10,000 --> 00:49:12,360
Speaker 1: in that was I thought we had a pretty robust

945
00:49:12,600 --> 00:49:16,800
Speaker 1: strategy for dealing with with financial panics and upsets. And

946
00:49:16,840 --> 00:49:19,279
Speaker 1: in fact, we went through an exercise where we said,

947
00:49:19,320 --> 00:49:21,640
Speaker 1: let's let's make sure that we have a strategy for

948
00:49:21,760 --> 00:49:24,040
Speaker 1: dealing with anything that happened in the post war period

949
00:49:24,160 --> 00:49:29,920
Speaker 1: since World War Two, so high inflation, watergate, you know, wars, panics,

950
00:49:30,000 --> 00:49:32,320
Speaker 1: all that kind of the inverted yield curves, and so

951
00:49:32,760 --> 00:49:35,759
Speaker 1: that's and that's why we've did pretty well for for

952
00:49:35,920 --> 00:49:39,880
Speaker 1: many many years. This particular crisis was different because it

953
00:49:40,040 --> 00:49:43,280
Speaker 1: was an asset based crisis and not a liquidity based crisis.

954
00:49:43,360 --> 00:49:47,040
Speaker 1: And most financial crises are liquidity based in that the

955
00:49:47,120 --> 00:49:50,680
Speaker 1: Federal raise interest rates, the discount rate goes up, you know,

956
00:49:50,719 --> 00:49:53,360
Speaker 1: the savings rate goes up, companies cut back, you have

957
00:49:53,440 --> 00:49:55,239
Speaker 1: a recession. Then the Fed comes through the other way.

958
00:49:55,239 --> 00:49:58,920
Speaker 1: Even the crash in same thing, which was that when

959
00:49:59,000 --> 00:50:01,480
Speaker 1: the market crashed interest rates, that got the ten percent

960
00:50:01,520 --> 00:50:03,920
Speaker 1: in October and he had a two percent too and

961
00:50:03,920 --> 00:50:06,200
Speaker 1: a half percent yield on the market, and that just

962
00:50:06,280 --> 00:50:08,120
Speaker 1: sucked all the money right out of the stock market.

963
00:50:08,239 --> 00:50:10,440
Speaker 1: And but when the when it crashed, the Fed cut

964
00:50:10,520 --> 00:50:13,680
Speaker 1: rates dramatically, liquidity went in and the and the market

965
00:50:13,760 --> 00:50:15,919
Speaker 1: came back and the economy came back. In this case,

966
00:50:15,960 --> 00:50:18,840
Speaker 1: it was an asset based crisis. So basically housing housing

967
00:50:18,880 --> 00:50:22,879
Speaker 1: related and housing is the most people's largest asset. It's

968
00:50:22,960 --> 00:50:25,960
Speaker 1: the asset that secures most of the debt, and a

969
00:50:26,040 --> 00:50:29,680
Speaker 1: lot of that debt was was undocumented loans, liars, loans

970
00:50:29,719 --> 00:50:32,439
Speaker 1: and stuff like that. So when that that edifice came down,

971
00:50:33,000 --> 00:50:34,919
Speaker 1: what we thought was when the FED began to really

972
00:50:34,960 --> 00:50:37,680
Speaker 1: inject liquidity. You could go back, you could go back

973
00:50:37,719 --> 00:50:39,920
Speaker 1: in again. And as it turns out, that's correct in

974
00:50:39,960 --> 00:50:42,000
Speaker 1: a liquidity based crisis. It's not correct in an asset

975
00:50:42,040 --> 00:50:44,800
Speaker 1: based crisis. An asset based crisis, some of what we

976
00:50:44,840 --> 00:50:47,239
Speaker 1: saw in Japan and what we saw certainly in the

977
00:50:47,360 --> 00:50:50,560
Speaker 1: US in two thousand and eight is you only go

978
00:50:50,680 --> 00:50:52,719
Speaker 1: in and that when the authorities get together and try

979
00:50:52,760 --> 00:50:55,759
Speaker 1: and stabilize asset prices. So that was TARP. That's what

980
00:50:55,840 --> 00:50:58,160
Speaker 1: TARP up. Until TARP, every time there was a problem,

981
00:50:58,200 --> 00:51:01,280
Speaker 1: the bank failed, the shareholders were white doubt, and Tarpe

982
00:51:01,360 --> 00:51:04,080
Speaker 1: came in and it stabilized the asset values of the

983
00:51:04,600 --> 00:51:07,239
Speaker 1: banks and therefore the banking system. And that was that

984
00:51:07,360 --> 00:51:10,080
Speaker 1: was the bottom. October was the bottom, when most stocks

985
00:51:10,120 --> 00:51:13,280
Speaker 1: made their bottom, when most asset prices made their bottom.

986
00:51:13,360 --> 00:51:15,400
Speaker 1: The final bottom was made in March, but that was

987
00:51:15,440 --> 00:51:18,200
Speaker 1: more technical bottom. You had an October eight bottom and

988
00:51:18,280 --> 00:51:22,200
Speaker 1: then a Marshal uh Oh nine and that was another.

989
00:51:22,400 --> 00:51:23,520
Speaker 1: But there were there were, there were, there were no

990
00:51:23,600 --> 00:51:26,239
Speaker 1: there were no significant failures after TARP, and that was

991
00:51:26,280 --> 00:51:29,000
Speaker 1: when that was what allowed the system to stabilize. As

992
00:51:29,080 --> 00:51:31,839
Speaker 1: late ast January of two thousand nine, people were still

993
00:51:31,880 --> 00:51:35,520
Speaker 1: talking about nationalizing the banks, but nothing ever, nothing ever

994
00:51:35,640 --> 00:51:39,440
Speaker 1: came of it. So you you have your own internal process.

995
00:51:40,040 --> 00:51:43,560
Speaker 1: How do you as a as a fund manager, how

996
00:51:43,680 --> 00:51:46,120
Speaker 1: do you come to the conclusion, Hey, we're on the

997
00:51:46,160 --> 00:51:49,440
Speaker 1: wrong side of the trade here, How do you recognize

998
00:51:49,480 --> 00:51:52,080
Speaker 1: the error and how do you adjust your process to

999
00:51:52,400 --> 00:51:55,000
Speaker 1: to reflect the new information. A lot of people have

1000
00:51:55,160 --> 00:51:59,120
Speaker 1: a real hard time making that that pivot. Oh, I

1001
00:51:59,160 --> 00:52:02,279
Speaker 1: think I think that's a very difficult thing because when

1002
00:52:02,320 --> 00:52:05,399
Speaker 1: you're when you're doing poorly relative to the market, then

1003
00:52:05,560 --> 00:52:08,200
Speaker 1: the question is always is the market wrong or am

1004
00:52:08,239 --> 00:52:11,360
Speaker 1: I wrong? And that's a very difficult thing to answer

1005
00:52:11,480 --> 00:52:14,960
Speaker 1: because the future isn't knowable to anybody, and the market

1006
00:52:15,080 --> 00:52:18,520
Speaker 1: is a sort of a collective intelligence collective intelligence machine.

1007
00:52:18,880 --> 00:52:21,560
Speaker 1: So it's it's easier to do at the individual stock

1008
00:52:21,680 --> 00:52:25,080
Speaker 1: level because and give you a good example, if you

1009
00:52:25,200 --> 00:52:27,480
Speaker 1: take two thousand and eleven, for example, we had a

1010
00:52:27,560 --> 00:52:29,680
Speaker 1: very bad year in two thousand and eleven, and people

1011
00:52:29,719 --> 00:52:31,400
Speaker 1: thought it was gonna be another two thousand eight and

1012
00:52:31,480 --> 00:52:33,200
Speaker 1: the year was the year was going to come apart,

1013
00:52:33,320 --> 00:52:36,120
Speaker 1: which would have been a catastrophe. So it but in

1014
00:52:36,200 --> 00:52:39,320
Speaker 1: two thousand and eight, if we looked at the individual

1015
00:52:39,480 --> 00:52:42,040
Speaker 1: names in our portfolio two thousand seven and two thousand

1016
00:52:42,120 --> 00:52:45,839
Speaker 1: and eight, generally speaking, they were not meeting our expectations

1017
00:52:45,880 --> 00:52:48,399
Speaker 1: in terms of fundamentals. They would miss a quarter here,

1018
00:52:48,480 --> 00:52:50,879
Speaker 1: a quarter there, the stock would sell off. We're like, well, okay,

1019
00:52:50,920 --> 00:52:53,320
Speaker 1: it's marked a market on that. But there was this

1020
00:52:53,360 --> 00:52:56,200
Speaker 1: sort of a continual slippage of what we expected the

1021
00:52:56,239 --> 00:52:58,880
Speaker 1: fundamentals to be. And in two thousand eleven there was

1022
00:52:58,920 --> 00:53:00,719
Speaker 1: no slippage at all. The company it's continued to do

1023
00:53:00,800 --> 00:53:02,920
Speaker 1: really well even if the stocks weren't doing well. So

1024
00:53:03,040 --> 00:53:04,920
Speaker 1: that that that's a that's a that's a big one

1025
00:53:05,000 --> 00:53:07,560
Speaker 1: for us. The second is just when you go in.

1026
00:53:07,640 --> 00:53:09,440
Speaker 1: When we go in on a name, one of the

1027
00:53:09,520 --> 00:53:11,880
Speaker 1: things that we ask ourselves once we've decided to buy

1028
00:53:11,920 --> 00:53:14,560
Speaker 1: it is what will make us wrong? So trying to

1029
00:53:14,560 --> 00:53:17,239
Speaker 1: decide up in advance how strong is the investment case

1030
00:53:17,600 --> 00:53:19,480
Speaker 1: and when will we know that we're wrong? And and

1031
00:53:19,960 --> 00:53:21,960
Speaker 1: one of the things that we have learned over the

1032
00:53:22,040 --> 00:53:23,800
Speaker 1: years is you don't let the stock price tell you

1033
00:53:23,880 --> 00:53:26,319
Speaker 1: if you're wrong. The stock price might tell you something

1034
00:53:26,440 --> 00:53:28,839
Speaker 1: is going to go wrong, but the stock price by

1035
00:53:28,840 --> 00:53:33,320
Speaker 1: itself doesn't doesn't contain any information, especially in this environment

1036
00:53:33,360 --> 00:53:35,680
Speaker 1: where we're seventy percent of the stuff is algorithmic, where

1037
00:53:35,680 --> 00:53:38,759
Speaker 1: prices are being marked against each other every day. So

1038
00:53:38,880 --> 00:53:42,239
Speaker 1: that raises another question, how does how does h f

1039
00:53:42,360 --> 00:53:46,279
Speaker 1: T high frequency trading? How does that impact you when

1040
00:53:46,320 --> 00:53:50,440
Speaker 1: you're either looking at stocks to select or making the

1041
00:53:50,560 --> 00:53:54,239
Speaker 1: decision to hold onto them. Um, it doesn't make much

1042
00:53:54,360 --> 00:53:56,839
Speaker 1: difference to us because we're longer term investors. I think

1043
00:53:56,880 --> 00:53:58,680
Speaker 1: there's a real issue of the front running and the

1044
00:53:58,840 --> 00:54:03,240
Speaker 1: and the stuff can affect shorter term shorter term traders.

1045
00:54:03,520 --> 00:54:08,400
Speaker 1: To us, the market structural change, which is um uh

1046
00:54:08,840 --> 00:54:11,160
Speaker 1: mostly most of us. The reaction to the crisis is

1047
00:54:11,280 --> 00:54:13,640
Speaker 1: the layers of risk management and the way way people

1048
00:54:13,680 --> 00:54:16,239
Speaker 1: manage risk. That's what's making the market I think, much

1049
00:54:16,320 --> 00:54:19,600
Speaker 1: more difficult and problematic. And and the reason for that

1050
00:54:19,960 --> 00:54:22,920
Speaker 1: is that now that everybody is so risk phobic and

1051
00:54:23,080 --> 00:54:26,040
Speaker 1: people are when they see draw downs, they run and

1052
00:54:26,320 --> 00:54:29,319
Speaker 1: run and sell. But what you know, at like Mason,

1053
00:54:29,400 --> 00:54:32,399
Speaker 1: we had since the crisis, three additional layers of risk

1054
00:54:32,440 --> 00:54:36,080
Speaker 1: management that we're added to the overall firm. And what

1055
00:54:36,400 --> 00:54:38,359
Speaker 1: what all risk managers want to know is what's your

1056
00:54:38,440 --> 00:54:41,600
Speaker 1: risk mitigation strategy? And they don't ask what your risk

1057
00:54:41,680 --> 00:54:44,640
Speaker 1: mitigation strategy is if you're outperforming or the or the

1058
00:54:44,680 --> 00:54:46,759
Speaker 1: market's going up. It's only when you're underperforming or the

1059
00:54:46,760 --> 00:54:50,200
Speaker 1: markets going down. So what that does is it bifurcates

1060
00:54:50,239 --> 00:54:52,719
Speaker 1: the notion of risk to only focus on stuff that's

1061
00:54:52,760 --> 00:54:55,600
Speaker 1: going down. And as as I've said many times, I've

1062
00:54:55,640 --> 00:54:58,560
Speaker 1: never read, never met a risk manager anywhere in the

1063
00:54:58,640 --> 00:55:00,560
Speaker 1: world that believes you should own we of an asset

1064
00:55:00,600 --> 00:55:02,920
Speaker 1: that's falling in price. You should be selling an asset

1065
00:55:02,960 --> 00:55:05,240
Speaker 1: that's falling in price because it's risky. But you iterate

1066
00:55:05,320 --> 00:55:08,000
Speaker 1: that across the entire market, and what happens is that

1067
00:55:08,200 --> 00:55:10,239
Speaker 1: stocks get go down a lot more than they would

1068
00:55:10,239 --> 00:55:13,120
Speaker 1: otherwise do so because at each different level there are

1069
00:55:13,120 --> 00:55:14,960
Speaker 1: people who are selling just because it hits a threshold

1070
00:55:15,000 --> 00:55:21,920
Speaker 1: down five percent. The new regulatory um scheme that we

1071
00:55:22,000 --> 00:55:25,040
Speaker 1: see at companies is a modern version of portfolio insurance.

1072
00:55:25,880 --> 00:55:28,440
Speaker 1: That that doesn't make any sense if you I'm not

1073
00:55:28,560 --> 00:55:32,120
Speaker 1: I'm not arguing with you. I'm saying from a are

1074
00:55:32,400 --> 00:55:38,320
Speaker 1: aren't returns generated by recreasonably embracing risk? Isn't is in

1075
00:55:38,480 --> 00:55:42,680
Speaker 1: performance the flip side of assuming some risks? Absolutely, I mean,

1076
00:55:42,800 --> 00:55:45,000
Speaker 1: I think you know when people talk about volatility and

1077
00:55:45,080 --> 00:55:47,520
Speaker 1: and they're worried about risk. Put your money on in

1078
00:55:47,600 --> 00:55:49,120
Speaker 1: cash and just just sit there and look at you

1079
00:55:49,160 --> 00:55:52,480
Speaker 1: won't do anything right. So my colleagues, Samantha is fond

1080
00:55:52,520 --> 00:55:55,000
Speaker 1: of saying that volatility is the price you pay for performance.

1081
00:55:55,040 --> 00:55:57,880
Speaker 1: And I think that's you know, I think that's right.

1082
00:55:58,400 --> 00:56:02,000
Speaker 1: Volatility is the price you pay for performance. So there

1083
00:56:02,040 --> 00:56:05,440
Speaker 1: are lots of giant firms. Now you have Vanguard and

1084
00:56:05,560 --> 00:56:08,840
Speaker 1: black Rock and State Street and firms that are managing

1085
00:56:08,920 --> 00:56:12,000
Speaker 1: in the PIMCO and UH firms that are managing in

1086
00:56:12,080 --> 00:56:16,719
Speaker 1: the in the trillions. Do they all have do you?

1087
00:56:17,040 --> 00:56:19,799
Speaker 1: I guess you. I'm asking if you imagine they all

1088
00:56:19,920 --> 00:56:24,160
Speaker 1: have the same sort of of layer of risk management

1089
00:56:24,280 --> 00:56:26,920
Speaker 1: and and is that going to affect everybody's ability to

1090
00:56:28,360 --> 00:56:34,759
Speaker 1: produce asset management that can rationally embrace risk. Well, I'm

1091
00:56:34,800 --> 00:56:37,000
Speaker 1: not I'm not familiar with the details of all of

1092
00:56:37,120 --> 00:56:39,040
Speaker 1: their strategies. You know, many of those firms that you

1093
00:56:39,120 --> 00:56:41,920
Speaker 1: mentioned are are passive much much of many of their

1094
00:56:41,920 --> 00:56:44,840
Speaker 1: assets passive. Vangard is to four trillion, two thirds of

1095
00:56:44,880 --> 00:56:46,719
Speaker 1: it is passive, and Black Rocks got the E T

1096
00:56:46,840 --> 00:56:49,440
Speaker 1: f s and stuff like that. But but but from

1097
00:56:49,480 --> 00:56:51,360
Speaker 1: the I'll just say from the people that I know

1098
00:56:51,560 --> 00:56:55,040
Speaker 1: in the industry, in the business, at big firms, every

1099
00:56:55,080 --> 00:56:57,560
Speaker 1: one of them tells the same story about about risk

1100
00:56:57,640 --> 00:57:00,239
Speaker 1: and about having to have risk mitigation strategies. And I

1101
00:57:00,280 --> 00:57:02,240
Speaker 1: think that's part of what you're seeing in the overall.

1102
00:57:02,840 --> 00:57:06,200
Speaker 1: You're seeing in the overall market that's quite fascinating. What

1103
00:57:06,440 --> 00:57:08,400
Speaker 1: what else is different? And one of the questions I

1104
00:57:08,440 --> 00:57:13,080
Speaker 1: didn't get to before. I've heard numerous people blame or

1105
00:57:13,160 --> 00:57:16,520
Speaker 1: credit if you want, Um, this rally is all driven

1106
00:57:16,600 --> 00:57:18,800
Speaker 1: by the FED, it's low interest rates. Nothing else is

1107
00:57:19,320 --> 00:57:23,240
Speaker 1: is driving this market. How accurate is that assessment? I

1108
00:57:23,360 --> 00:57:27,320
Speaker 1: think it's reasonably accurate as it relates to bonds globally,

1109
00:57:27,400 --> 00:57:30,120
Speaker 1: and it's not talking equities. Well, I think it's I

1110
00:57:30,200 --> 00:57:33,280
Speaker 1: think it's much less accurate with respect to equities. And

1111
00:57:33,400 --> 00:57:36,600
Speaker 1: so just just for example, UM, if if it were

1112
00:57:36,680 --> 00:57:39,360
Speaker 1: all just low interest rates, that's driving the rally, right,

1113
00:57:39,400 --> 00:57:43,479
Speaker 1: what's the most interest sensitive part of the economy? Housing? House?

1114
00:57:43,520 --> 00:57:47,600
Speaker 1: Housing done? Uh? Well? Housing is housing stocks have been underperforming,

1115
00:57:48,080 --> 00:57:51,480
Speaker 1: and that the housing market itself is half half of

1116
00:57:51,600 --> 00:57:53,680
Speaker 1: what it was in two thousand five in terms of

1117
00:57:53,720 --> 00:57:56,840
Speaker 1: new home deliveries. So that hasn't been. You would expect

1118
00:57:56,920 --> 00:57:58,880
Speaker 1: that would be, you know, blowing the doors off if

1119
00:57:58,880 --> 00:58:01,040
Speaker 1: it was just interest rates. How much how much of

1120
00:58:01,120 --> 00:58:05,520
Speaker 1: interest rates helped Amazon for example, none? Google, none, Facebook none,

1121
00:58:05,800 --> 00:58:07,760
Speaker 1: those are among the largest companies in the overall market.

1122
00:58:08,000 --> 00:58:10,520
Speaker 1: How interest rates helped JP Morgan and Bank America. No,

1123
00:58:10,600 --> 00:58:13,320
Speaker 1: they hurt them. So there's it's a much more complex

1124
00:58:13,360 --> 00:58:16,800
Speaker 1: situation than just the stocks are marked are marked up.

1125
00:58:16,840 --> 00:58:18,800
Speaker 1: And as I said, I believe the markets already discounting

1126
00:58:18,800 --> 00:58:22,080
Speaker 1: three to four ten year rates. I think, I think,

1127
00:58:22,960 --> 00:58:25,520
Speaker 1: and that's five years or so often the future. Yeah.

1128
00:58:25,600 --> 00:58:29,520
Speaker 1: But the thing I think is more interestingly possible is

1129
00:58:29,640 --> 00:58:32,280
Speaker 1: that the only time that we saw money going into

1130
00:58:33,040 --> 00:58:36,440
Speaker 1: stocks was in two thousand and thirteen during the so

1131
00:58:36,560 --> 00:58:40,040
Speaker 1: called taper tantrum when yields went from one to three

1132
00:58:40,120 --> 00:58:42,520
Speaker 1: twenty and four months or five months. And that's the

1133
00:58:42,560 --> 00:58:44,440
Speaker 1: only time that money has gone out of bond funds

1134
00:58:44,640 --> 00:58:46,720
Speaker 1: and in the stocks because people were losing money in

1135
00:58:46,840 --> 00:58:49,720
Speaker 1: bonds for the first time. And now money has gone

1136
00:58:49,760 --> 00:58:51,200
Speaker 1: back into bonds. So what did the market do that

1137
00:58:51,280 --> 00:58:54,960
Speaker 1: years up because money flowed into stocks, not out of stocks.

1138
00:58:55,200 --> 00:58:57,960
Speaker 1: And I think that I think that's a potential that

1139
00:58:58,120 --> 00:59:00,440
Speaker 1: most people aren't focused on, which is if we have

1140
00:59:00,560 --> 00:59:05,320
Speaker 1: a bear market in bonds and doesn't have right and

1141
00:59:05,440 --> 00:59:07,760
Speaker 1: people start losing money and that goes into stocks, stock

1142
00:59:07,800 --> 00:59:13,440
Speaker 1: market could go up easily. That's quite fascinating. Um. I've

1143
00:59:13,480 --> 00:59:17,080
Speaker 1: been hearing stories of cash on the sidelines now for

1144
00:59:17,200 --> 00:59:21,440
Speaker 1: twenty years, and I've always ignored it because how can

1145
00:59:21,480 --> 00:59:23,840
Speaker 1: there be cash on the sidelines. If I'm buying a

1146
00:59:23,880 --> 00:59:26,080
Speaker 1: stock from you, you're giving cash to me, and if

1147
00:59:26,120 --> 00:59:28,480
Speaker 1: I sell a stock to you and vice versa, it's

1148
00:59:28,520 --> 00:59:32,200
Speaker 1: there's always some amount of cash ready to be deployed.

1149
00:59:32,320 --> 00:59:37,600
Speaker 1: That that that's really fascinating the the bond side of things. Um.

1150
00:59:38,720 --> 00:59:42,200
Speaker 1: So you you've owned a lot of financial stocks you

1151
00:59:42,240 --> 00:59:45,320
Speaker 1: mentioned just now, JP Morgan and others affected by the

1152
00:59:46,240 --> 00:59:50,200
Speaker 1: UM by the Federal Reserve. Oh, what was it like

1153
00:59:50,720 --> 00:59:56,000
Speaker 1: handing into the financial crisis sitting in financial stocks? What

1154
00:59:56,360 --> 01:00:01,320
Speaker 1: was the analysis then? Was there a sort of sense, Hey,

1155
01:00:01,480 --> 01:00:03,960
Speaker 1: these are really inexpensive and we want to own more,

1156
01:00:04,280 --> 01:00:07,360
Speaker 1: or was the sense more along the lines of We're

1157
01:00:07,400 --> 01:00:09,680
Speaker 1: not really sure how this plays out. This is sort

1158
01:00:09,720 --> 01:00:14,320
Speaker 1: of uncharted territory. Um. It was it was more the latter,

1159
01:00:14,920 --> 01:00:17,960
Speaker 1: because what what we did as the as the the

1160
01:00:18,040 --> 01:00:21,560
Speaker 1: economy and the market got worse, is we moved up

1161
01:00:21,600 --> 01:00:23,400
Speaker 1: to what we thought we were doing was moving up

1162
01:00:23,440 --> 01:00:28,000
Speaker 1: the quality spectrum and buying the larger and stronger financials

1163
01:00:28,440 --> 01:00:30,760
Speaker 1: um as it turned out, you know, so we bought

1164
01:00:30,800 --> 01:00:32,400
Speaker 1: a I G. Which was at one point a triple

1165
01:00:32,480 --> 01:00:35,120
Speaker 1: A rated company, but then best Insuring the world Ye so,

1166
01:00:35,240 --> 01:00:37,880
Speaker 1: and that and that, you know, effectively disappeared during that

1167
01:00:38,400 --> 01:00:42,000
Speaker 1: during that point in time. Um So, I think from

1168
01:00:42,080 --> 01:00:46,439
Speaker 1: our standpoint, what what we the big the big break

1169
01:00:46,520 --> 01:00:49,600
Speaker 1: for us in that in that financial crisis was when

1170
01:00:49,720 --> 01:00:51,880
Speaker 1: the when the government took over Fannie and Freddie that

1171
01:00:52,000 --> 01:00:57,040
Speaker 1: Sunday in September. And my personal view is that people

1172
01:00:57,080 --> 01:00:59,640
Speaker 1: when people say, well, the letting Lehman Brothers go was

1173
01:00:59,720 --> 01:01:02,840
Speaker 1: the most steak that caused the cascade of you know,

1174
01:01:02,920 --> 01:01:05,760
Speaker 1: then the breaking the buck and the credit markets coming unhinged.

1175
01:01:06,320 --> 01:01:08,720
Speaker 1: And my personal view is the question I asked people

1176
01:01:08,720 --> 01:01:10,560
Speaker 1: to say that is, well, why did Lehman Brothers fail

1177
01:01:10,680 --> 01:01:15,840
Speaker 1: in September? Bear Stearns failed in March, and nothing happened

1178
01:01:15,880 --> 01:01:18,360
Speaker 1: from March till September. Then Lehman failed. And to me

1179
01:01:18,480 --> 01:01:21,960
Speaker 1: the answer is Lehman failed because Fannie and Freddie were

1180
01:01:21,960 --> 01:01:25,040
Speaker 1: seized the week before, and they were seized even though

1181
01:01:25,080 --> 01:01:28,160
Speaker 1: the all their capital requirement met all the statutory capital requirements.

1182
01:01:28,800 --> 01:01:31,320
Speaker 1: They were seized preemptively. And I came in that Monday

1183
01:01:31,400 --> 01:01:33,520
Speaker 1: morning and I said, if the government is going to

1184
01:01:33,640 --> 01:01:37,240
Speaker 1: seize and wipe out the shareholders preemptively, not when the

1185
01:01:37,280 --> 01:01:40,200
Speaker 1: company runs into liquidity trouble like bear Stearns did, then

1186
01:01:40,240 --> 01:01:41,800
Speaker 1: we can't own any financials. We have to get out

1187
01:01:41,840 --> 01:01:44,320
Speaker 1: of every financial which we did. And I think people

1188
01:01:44,320 --> 01:01:46,800
Speaker 1: who had their look the same thing. Who is the

1189
01:01:46,840 --> 01:01:49,600
Speaker 1: most levered next to Fanny and Freddie Lehman, Let's get

1190
01:01:49,680 --> 01:01:51,600
Speaker 1: let's let's get out of that one, and then who's

1191
01:01:51,600 --> 01:01:54,120
Speaker 1: the most levered after that? Mary Lynch, Whamo and so

1192
01:01:54,560 --> 01:01:58,040
Speaker 1: liquidated following the Fannie and Freddie um. That was late

1193
01:01:58,040 --> 01:02:01,720
Speaker 1: August or early September seventh. It was a week before

1194
01:02:02,880 --> 01:02:05,800
Speaker 1: Lehman blew up UM. So that had to save a

1195
01:02:05,880 --> 01:02:08,240
Speaker 1: ton of capital. If you were liquid dating on the eighth,

1196
01:02:08,640 --> 01:02:10,560
Speaker 1: it must have felt bad at that day, but you

1197
01:02:10,640 --> 01:02:13,080
Speaker 1: look what happened a few months later. We actually got

1198
01:02:13,120 --> 01:02:17,400
Speaker 1: We actually got back in after TARP, so we weren't

1199
01:02:17,400 --> 01:02:20,280
Speaker 1: out for that long and we what really what really

1200
01:02:20,320 --> 01:02:24,120
Speaker 1: helped us when the government, the government came in with tarp.

1201
01:02:24,520 --> 01:02:26,360
Speaker 1: And again we shouldn't have gone in as quickly as

1202
01:02:26,440 --> 01:02:29,280
Speaker 1: quickly after that as we did, but in January had

1203
01:02:29,280 --> 01:02:33,120
Speaker 1: a nice bounce after that October November. In January, what

1204
01:02:33,200 --> 01:02:36,760
Speaker 1: happened when they talked about we're talking about nationalizing the banks,

1205
01:02:37,480 --> 01:02:42,080
Speaker 1: that the the preferred stock of City Bank Bank America,

1206
01:02:42,280 --> 01:02:46,160
Speaker 1: Wells Fargo was trading. It was trading it like fifty

1207
01:02:46,400 --> 01:02:48,600
Speaker 1: cents on the dollar when it was PARTI passu with

1208
01:02:48,640 --> 01:02:52,640
Speaker 1: the government's So we bought those prefers at the time.

1209
01:02:52,720 --> 01:02:55,280
Speaker 1: And then what happened was that the government caused those

1210
01:02:55,360 --> 01:02:58,280
Speaker 1: preferred to be converted into common stock at roughly par

1211
01:02:58,840 --> 01:03:00,760
Speaker 1: so we you know, are think our cost on our

1212
01:03:00,760 --> 01:03:03,440
Speaker 1: City Bank was like seventy cents to share and stuff.

1213
01:03:03,480 --> 01:03:05,040
Speaker 1: So we that was part of what we did so

1214
01:03:05,120 --> 01:03:06,760
Speaker 1: well in two thousand and nine was those things took

1215
01:03:06,760 --> 01:03:09,920
Speaker 1: off like a rocket. That's fascinating. You know. My view

1216
01:03:10,040 --> 01:03:13,920
Speaker 1: of Lehman Brothers has always been it was merely the

1217
01:03:14,320 --> 01:03:17,800
Speaker 1: first trailer in the park when the tornado came in,

1218
01:03:18,320 --> 01:03:21,120
Speaker 1: and as long as there was so much financial paper

1219
01:03:21,200 --> 01:03:25,560
Speaker 1: written on based on mortgages and home prices were dropping. Hey,

1220
01:03:25,640 --> 01:03:27,960
Speaker 1: the whole dominoes we're gonna fall, it didn't matter which

1221
01:03:28,000 --> 01:03:30,440
Speaker 1: one was was which I don't know how much of

1222
01:03:30,520 --> 01:03:35,360
Speaker 1: that is, um philosophically appealing, but I've always I've always

1223
01:03:35,400 --> 01:03:38,920
Speaker 1: liked that metaphor. A lot of people blame Lehman on

1224
01:03:39,040 --> 01:03:42,080
Speaker 1: the rest of the crisis, but it looked like everything

1225
01:03:42,200 --> 01:03:43,920
Speaker 1: was going down no matter no matter what it was,

1226
01:03:43,960 --> 01:03:46,000
Speaker 1: as long as home prices were in free f I

1227
01:03:46,000 --> 01:03:48,120
Speaker 1: think that's right. So I know I only have you

1228
01:03:48,240 --> 01:03:52,160
Speaker 1: for a finite amount of time. Let's jump into my

1229
01:03:52,320 --> 01:03:55,200
Speaker 1: favorite questions, the standard questions I'd like to ask all

1230
01:03:55,320 --> 01:03:59,200
Speaker 1: my guests. You had told us about your background and

1231
01:03:59,280 --> 01:04:01,760
Speaker 1: what you did be for, like Mason, tell us about

1232
01:04:01,840 --> 01:04:04,440
Speaker 1: some of your early mentors. Who were the people who

1233
01:04:05,040 --> 01:04:09,640
Speaker 1: influenced your professional development. I would say, because because I

1234
01:04:09,800 --> 01:04:12,880
Speaker 1: got interested in stocks at a fairly a fairly young age,

1235
01:04:13,040 --> 01:04:14,920
Speaker 1: and I read a lot on stocks. But I'd say

1236
01:04:14,960 --> 01:04:18,320
Speaker 1: that the stuff that influenced me the most was probably

1237
01:04:18,360 --> 01:04:21,200
Speaker 1: Adam Smith's The Money Game, which came out in or

1238
01:04:21,240 --> 01:04:26,040
Speaker 1: nineteen sixty nine. Um uh the follow on to that,

1239
01:04:26,480 --> 01:04:29,000
Speaker 1: you know, Super Money where actually he uh he introduced

1240
01:04:29,000 --> 01:04:31,240
Speaker 1: the world to Warren Buffett, so I started reading about

1241
01:04:31,520 --> 01:04:35,880
Speaker 1: reading about Buffett red Ben Graham at the time. Reminiscences

1242
01:04:35,920 --> 01:04:38,400
Speaker 1: of a Stock Operator is something that up until a

1243
01:04:38,400 --> 01:04:39,760
Speaker 1: couple of years ago, I read it. I read it

1244
01:04:39,840 --> 01:04:41,960
Speaker 1: every year because it's such a really it's such a

1245
01:04:42,040 --> 01:04:46,360
Speaker 1: great lesson in psychology and and how psychology works through

1246
01:04:46,360 --> 01:04:49,600
Speaker 1: the market, how markets, how markets behave. So those were

1247
01:04:49,680 --> 01:04:52,000
Speaker 1: those were something more. You know, my my partner, Ernie

1248
01:04:52,040 --> 01:04:53,880
Speaker 1: Kenya died in two thousand ten at the age of

1249
01:04:53,960 --> 01:04:57,360
Speaker 1: ninety two. Was I worked with him, worked with him

1250
01:04:57,400 --> 01:05:01,280
Speaker 1: every day for ever many years that was, uh twenty plus,

1251
01:05:01,360 --> 01:05:03,800
Speaker 1: you know, twenty plus, twenty five plus years. So he

1252
01:05:03,920 --> 01:05:05,960
Speaker 1: was a big influence on me. And the major influence

1253
01:05:06,040 --> 01:05:09,560
Speaker 1: that he had was he was probably the most optimistic person,

1254
01:05:11,000 --> 01:05:13,960
Speaker 1: certainly most officially, I've ever met. And and so no

1255
01:05:14,080 --> 01:05:17,400
Speaker 1: matter what, no matter how terrible things looked, he would say, well,

1256
01:05:17,440 --> 01:05:18,960
Speaker 1: I'll get better things, that things will turn up, you

1257
01:05:18,960 --> 01:05:21,400
Speaker 1: know where everything's gonna be okay. And he was also

1258
01:05:21,600 --> 01:05:25,080
Speaker 1: extremely patient as an investor, um, you know, owning just

1259
01:05:25,160 --> 01:05:28,000
Speaker 1: own stocks for forever and uh and was it was

1260
01:05:28,080 --> 01:05:30,720
Speaker 1: a deep value kind of a guy. And in fact

1261
01:05:30,800 --> 01:05:32,560
Speaker 1: he got to leg Mason. He came to leg Mason

1262
01:05:33,080 --> 01:05:35,240
Speaker 1: and and headed up the research effort there after. He's

1263
01:05:35,240 --> 01:05:38,280
Speaker 1: spent his career at the telephone company, and he the

1264
01:05:38,320 --> 01:05:39,760
Speaker 1: reason he got to leg Mason, which is a very

1265
01:05:39,800 --> 01:05:42,720
Speaker 1: small firm at the time he came in night there

1266
01:05:43,360 --> 01:05:47,000
Speaker 1: was because that his personal account was just was so

1267
01:05:47,960 --> 01:05:49,840
Speaker 1: gone up so much, and the broker that was dealing

1268
01:05:49,880 --> 01:05:52,760
Speaker 1: with him said, you know, this guy, this guy is

1269
01:05:52,800 --> 01:05:56,280
Speaker 1: you know, he's his guy's in his sixties, you know,

1270
01:05:56,360 --> 01:05:58,840
Speaker 1: and he's going to retire from the telephone company and

1271
01:05:58,920 --> 01:06:00,600
Speaker 1: we need to get him here because this guy can

1272
01:06:00,680 --> 01:06:02,720
Speaker 1: really pick stocks. And that's how And he came and

1273
01:06:02,840 --> 01:06:06,160
Speaker 1: joined the firm real yeah, after retiring. That's amazing. Any

1274
01:06:06,240 --> 01:06:08,960
Speaker 1: any other mentors you want to mend mention, Well, certainly,

1275
01:06:08,960 --> 01:06:11,280
Speaker 1: I mean people that you know. I tried to get

1276
01:06:11,320 --> 01:06:13,760
Speaker 1: to know and pay attention to the all the prominent

1277
01:06:13,880 --> 01:06:17,120
Speaker 1: value investors. So certainly, certainly Warren Buffet, John Templeton have

1278
01:06:17,200 --> 01:06:21,160
Speaker 1: been big influences on how I think about things. Um,

1279
01:06:21,240 --> 01:06:24,040
Speaker 1: And you mentioned a few books. You mentioned Money Game

1280
01:06:24,040 --> 01:06:27,280
Speaker 1: and Super Money and Reminiscence of a Stock Operator. What

1281
01:06:27,480 --> 01:06:31,120
Speaker 1: other books, um are some of your favorites? Be it finance,

1282
01:06:31,640 --> 01:06:35,920
Speaker 1: not finance, fiction, nonfiction? What what do? What do you read? Well?

1283
01:06:36,000 --> 01:06:42,880
Speaker 1: I I kind of read. Um. Uh, I read very widely.

1284
01:06:42,960 --> 01:06:45,800
Speaker 1: Let's just say it's okay. And so I'm always reading

1285
01:06:45,800 --> 01:06:48,360
Speaker 1: stuff that that is people are kind of surprised. I

1286
01:06:48,520 --> 01:06:50,920
Speaker 1: just spent to hear about I've just been fifteen minutes

1287
01:06:50,960 --> 01:06:54,680
Speaker 1: talking to Bill McNab about science fiction. So don't be

1288
01:06:54,760 --> 01:06:58,480
Speaker 1: afraid to go outside of you know, reminiscence, what what else? Well?

1289
01:06:58,600 --> 01:07:00,600
Speaker 1: So so I just kind of out a lot of stuff.

1290
01:07:00,600 --> 01:07:03,360
Speaker 1: And so if I stay in the business thing, uh,

1291
01:07:04,040 --> 01:07:06,520
Speaker 1: in the in the in the Marketer business realm Um.

1292
01:07:07,040 --> 01:07:11,040
Speaker 1: Fortune's Formula by Bill Poundstone is a great read because

1293
01:07:11,080 --> 01:07:13,400
Speaker 1: it's what it is it's about. It's about Claude Shannon,

1294
01:07:13,440 --> 01:07:16,680
Speaker 1: the guy who created information theory, and J. L. Kelly,

1295
01:07:16,760 --> 01:07:19,120
Speaker 1: who came up with the Kelly criterion, which is how

1296
01:07:19,280 --> 01:07:21,360
Speaker 1: how you allocate assets and you know, in any type

1297
01:07:21,400 --> 01:07:24,680
Speaker 1: of an environment, and m but but but Shannon made

1298
01:07:24,680 --> 01:07:28,080
Speaker 1: a fortune in the stock market. And that book points

1299
01:07:28,120 --> 01:07:31,280
Speaker 1: out that the differences between standard financial theory and the

1300
01:07:31,400 --> 01:07:34,040
Speaker 1: type of the type of theory and behavior that Kelly

1301
01:07:34,120 --> 01:07:37,160
Speaker 1: and Shannon Shannon used. And it's just a great intellectual,

1302
01:07:37,320 --> 01:07:40,880
Speaker 1: great intellectual read uh the two books that things that

1303
01:07:40,920 --> 01:07:46,280
Speaker 1: have influenced by thinking greatly, UM, William James Pragmatism. I

1304
01:07:46,320 --> 01:07:51,160
Speaker 1: think that's the most important document in American intellectual history, really,

1305
01:07:51,400 --> 01:07:53,560
Speaker 1: I think. And his his other book, one of his

1306
01:07:53,600 --> 01:07:56,520
Speaker 1: other books called The Variety of Religious Experience. Also very interesting,

1307
01:07:57,480 --> 01:08:00,320
Speaker 1: interesting book. Mind and Cosmos as a recent book by

1308
01:08:00,360 --> 01:08:03,880
Speaker 1: Tom Nagle, a philosopher, UM and the in the in

1309
01:08:03,920 --> 01:08:05,840
Speaker 1: the again, I went to grad school and philosophy. So

1310
01:08:06,200 --> 01:08:10,000
Speaker 1: Hume's Treatise of Human Nature is Hume Kant you know,

1311
01:08:10,080 --> 01:08:12,680
Speaker 1: they're They're all I'm I'm reading Schopenhauer right now, the

1312
01:08:12,720 --> 01:08:16,320
Speaker 1: two volumes of the World's Will and Representation, um. Some

1313
01:08:16,400 --> 01:08:18,120
Speaker 1: stuff that i'm reading right now. I'm just about done

1314
01:08:18,160 --> 01:08:20,680
Speaker 1: with the brand new biography of Douglas MacArthur. There's a

1315
01:08:20,720 --> 01:08:25,320
Speaker 1: new one of Ulysses Grant that just came out that uh,

1316
01:08:26,160 --> 01:08:28,200
Speaker 1: it's John a blank on it right now. I'm not

1317
01:08:28,520 --> 01:08:31,479
Speaker 1: h w brand if it's it's it's brand new. It's

1318
01:08:31,520 --> 01:08:35,639
Speaker 1: an it's an eight hundred page, uh eight d page book,

1319
01:08:36,400 --> 01:08:38,240
Speaker 1: and it's good. It's it's very good. I've read I've

1320
01:08:38,280 --> 01:08:41,720
Speaker 1: read Manchester's book on MacArthur. And but this is this

1321
01:08:41,880 --> 01:08:48,200
Speaker 1: is this is good. Um, let's let's see. I've this year,

1322
01:08:48,560 --> 01:08:51,200
Speaker 1: uh trying to you're always trying to read some classics.

1323
01:08:51,280 --> 01:08:57,200
Speaker 1: I read Robinson, Crusoe and Frankenstein. I'm reading the book

1324
01:08:57,280 --> 01:08:59,320
Speaker 1: that came out that a lot of people read. Obamas

1325
01:08:59,320 --> 01:09:04,440
Speaker 1: recommended it, Sapiens by Yuval Harari. Uh, Danny Khneman recommended

1326
01:09:04,520 --> 01:09:06,639
Speaker 1: that book I've had. I've had a number of people

1327
01:09:06,760 --> 01:09:09,680
Speaker 1: come out. I started it not too long ago. Are

1328
01:09:09,720 --> 01:09:12,240
Speaker 1: you enjoying it? Well, I've finished that. But he has

1329
01:09:12,240 --> 01:09:15,720
Speaker 1: a new book out it's not It's called Homodaeus, and

1330
01:09:15,880 --> 01:09:18,439
Speaker 1: I'm about halfway through that and it's really it's great,

1331
01:09:18,520 --> 01:09:24,200
Speaker 1: it's great. Yeah, I'm trying to pull up the I'm

1332
01:09:24,200 --> 01:09:30,040
Speaker 1: trying to pull up the the MacArthur book. But uh,

1333
01:09:30,680 --> 01:09:33,800
Speaker 1: this is look at Amazon. Just looking at Amazon, McArthur. Yeah,

1334
01:09:34,439 --> 01:09:40,360
Speaker 1: watch McColl It is not cooperating. Ah, this is Explorer

1335
01:09:40,479 --> 01:09:45,720
Speaker 1: and it doesn't want to remotely cooperate. I'll dig it up. Yeah.

1336
01:09:45,720 --> 01:09:48,720
Speaker 1: You mentioned you mentioned science fiction, which I don't read

1337
01:09:48,720 --> 01:09:51,680
Speaker 1: a lot of. But I actually have just started all

1338
01:09:51,760 --> 01:09:56,320
Speaker 1: off Stapleton's book Starmaker, which is a famous book in

1339
01:09:56,400 --> 01:10:00,280
Speaker 1: the signs fiction pantheon. He was a philosoph or by

1340
01:10:00,320 --> 01:10:04,720
Speaker 1: training who wrote UM what he didn't even regard as

1341
01:10:04,720 --> 01:10:07,880
Speaker 1: science fiction, just called it, you know, speculative speculative fiction.

1342
01:10:08,800 --> 01:10:12,040
Speaker 1: So that's that. That that's a that's that's a book

1343
01:10:12,080 --> 01:10:16,400
Speaker 1: that's gotten had an exceptional influence on other science fiction writers.

1344
01:10:16,439 --> 01:10:19,000
Speaker 1: And I haven't you know, I haven't read it, So

1345
01:10:19,680 --> 01:10:21,760
Speaker 1: that that's quite a run of books you've gone through.

1346
01:10:21,920 --> 01:10:24,960
Speaker 1: It sounds like you're you're quite the reader. Yeah, that's

1347
01:10:25,080 --> 01:10:26,680
Speaker 1: I spend a lot of time reading. I wish I

1348
01:10:26,720 --> 01:10:28,639
Speaker 1: spent as much time as Mr Buffett does. He says

1349
01:10:28,680 --> 01:10:30,640
Speaker 1: it's all he does all day is read. But I

1350
01:10:30,720 --> 01:10:33,800
Speaker 1: have to have other things to do, to say the least.

1351
01:10:34,160 --> 01:10:37,240
Speaker 1: So what do you we we talked about some changes

1352
01:10:37,280 --> 01:10:39,960
Speaker 1: in the industry. What do you see as the next

1353
01:10:40,640 --> 01:10:44,360
Speaker 1: round of changes? What is the next thing to I

1354
01:10:45,120 --> 01:10:49,280
Speaker 1: think we're about halfway through the secular change in the

1355
01:10:49,400 --> 01:10:54,240
Speaker 1: industry away from active management and away from UM a

1356
01:10:54,320 --> 01:10:59,040
Speaker 1: traditional mutual fund industry which is under great secular pressure

1357
01:10:59,120 --> 01:11:01,960
Speaker 1: both from E t f s as well as from

1358
01:11:02,240 --> 01:11:05,559
Speaker 1: UH from passive, and I think passive is right now

1359
01:11:05,640 --> 01:11:10,200
Speaker 1: about thirty of the of the industry. I think that

1360
01:11:10,240 --> 01:11:13,960
Speaker 1: probably goes to seventy that much over time, and then

1361
01:11:14,160 --> 01:11:15,880
Speaker 1: so and then that's that's I think we're so we're

1362
01:11:15,920 --> 01:11:18,360
Speaker 1: half probably halfway through that. I think we're just at

1363
01:11:18,400 --> 01:11:22,200
Speaker 1: the beginning of a massive hege hedge fund shakeout to

1364
01:11:22,360 --> 01:11:25,519
Speaker 1: where the fee structure and hedge funds is. It just

1365
01:11:25,640 --> 01:11:27,840
Speaker 1: makes no sense whatsoever in a low nominal rate of

1366
01:11:27,880 --> 01:11:30,599
Speaker 1: return world, I mean, having a having a fee structure

1367
01:11:30,640 --> 01:11:34,519
Speaker 1: in a an equity an equity hedge fund of roughly

1368
01:11:34,600 --> 01:11:37,439
Speaker 1: equal to the ten year treasury just makes no sense whatsoever.

1369
01:11:37,520 --> 01:11:39,040
Speaker 1: And if you're going to make five percent a year

1370
01:11:39,640 --> 01:11:42,559
Speaker 1: in stocks, which we think is a reasonable number, than

1371
01:11:42,680 --> 01:11:46,080
Speaker 1: having that level of fees and then taking of any

1372
01:11:46,160 --> 01:11:48,600
Speaker 1: profits takes almost all the profit unless you have a

1373
01:11:48,680 --> 01:11:50,599
Speaker 1: hurdle rate in there and gives it to the manager,

1374
01:11:50,640 --> 01:11:52,920
Speaker 1: which again doesn't make any sense. How much of the

1375
01:11:52,960 --> 01:11:55,840
Speaker 1: move from active to passive is being driven by a

1376
01:11:56,000 --> 01:12:01,400
Speaker 1: similar fee pressure, Well, it's it's it's a lot of performances,

1377
01:12:01,479 --> 01:12:03,840
Speaker 1: it's it's a lot, it's a lot less because the

1378
01:12:03,880 --> 01:12:06,720
Speaker 1: fees are lower compared to hedge funds. But but again

1379
01:12:06,800 --> 01:12:09,040
Speaker 1: people have thought for some reason, rather in a mental

1380
01:12:09,040 --> 01:12:12,640
Speaker 1: accounting mistake that some other hedge funds were magical and

1381
01:12:12,720 --> 01:12:16,000
Speaker 1: they deserve these higher, higher fees. I think the problem

1382
01:12:16,040 --> 01:12:19,280
Speaker 1: and active to passive is twofold number one fees, Jack

1383
01:12:19,280 --> 01:12:21,960
Speaker 1: Bogel has said, And that's that's money directly that doesn't

1384
01:12:21,960 --> 01:12:25,240
Speaker 1: belong to the customer anymore. And but second and more importantly,

1385
01:12:25,520 --> 01:12:29,080
Speaker 1: I think it's it's closet indexing. And closet indexing is

1386
01:12:29,160 --> 01:12:32,320
Speaker 1: driven by, you know, a combination of risk management and

1387
01:12:32,840 --> 01:12:36,920
Speaker 1: also uh fear of tracking error, so you know, people

1388
01:12:37,080 --> 01:12:39,240
Speaker 1: people can take some under performance. I remember having a

1389
01:12:39,320 --> 01:12:41,800
Speaker 1: conversation with John Reid when he was running City Bank.

1390
01:12:41,840 --> 01:12:44,320
Speaker 1: I think it's probably nineteen I want to see late

1391
01:12:44,439 --> 01:12:47,800
Speaker 1: nineteen eighties or something like that, early nine ninies, I

1392
01:12:47,840 --> 01:12:50,000
Speaker 1: guess it was. And and he said to me, and

1393
01:12:50,040 --> 01:12:51,720
Speaker 1: we were an owner of City Bank at the time,

1394
01:12:52,160 --> 01:12:54,960
Speaker 1: and he said to me, you know, he said, you

1395
01:12:55,040 --> 01:12:56,920
Speaker 1: have a very tough job because you have to actually

1396
01:12:57,240 --> 01:12:59,800
Speaker 1: beat the market. Uh. If you don't beat the market

1397
01:12:59,840 --> 01:13:01,760
Speaker 1: for some pire time, people take all your assets away.

1398
01:13:02,400 --> 01:13:04,720
Speaker 1: And he said, on our side and our side of

1399
01:13:04,720 --> 01:13:07,000
Speaker 1: the business, he said, in terms of managing people's money,

1400
01:13:07,320 --> 01:13:09,000
Speaker 1: he said, all we have to do is not look bad.

1401
01:13:09,880 --> 01:13:11,280
Speaker 1: So we don't really have to beat it as long

1402
01:13:11,320 --> 01:13:14,240
Speaker 1: as we don't underperformed by too much. Because he said,

1403
01:13:14,240 --> 01:13:17,000
Speaker 1: it's a different mindset that people different people of mindset

1404
01:13:17,040 --> 01:13:19,400
Speaker 1: have money being run by a bank versus being run

1405
01:13:19,439 --> 01:13:21,880
Speaker 1: by a mutual fund company. But I think that the

1406
01:13:21,920 --> 01:13:25,240
Speaker 1: closet indexing UH an academic told me that by by

1407
01:13:25,320 --> 01:13:29,000
Speaker 1: his account, over sevent of active managers aren't really that active.

1408
01:13:29,040 --> 01:13:31,240
Speaker 1: They're pretty much closet, and so it's all career risk.

1409
01:13:31,280 --> 01:13:34,000
Speaker 1: They're afraid of sticking the neck out, and so they're

1410
01:13:34,080 --> 01:13:37,599
Speaker 1: charging fees but essentially running an index with a few

1411
01:13:37,680 --> 01:13:40,320
Speaker 1: changes around the edges. Yeah, and and that and that

1412
01:13:40,439 --> 01:13:43,400
Speaker 1: can't in the aggree, that can't work. So that's is

1413
01:13:43,520 --> 01:13:46,120
Speaker 1: that the largest source of money that's moving from active

1414
01:13:46,200 --> 01:13:49,000
Speaker 1: to passive. It's moving away from the closet indexers to

1415
01:13:49,120 --> 01:13:51,240
Speaker 1: the true and now it's no, it's it's moving away

1416
01:13:51,280 --> 01:13:54,040
Speaker 1: from I mean, we're we're getting redeemed this year. We're not.

1417
01:13:54,080 --> 01:13:56,360
Speaker 1: We're not having a great year. But after five years

1418
01:13:56,360 --> 01:13:57,639
Speaker 1: of the number one fund, you would think they would

1419
01:13:57,640 --> 01:13:59,800
Speaker 1: be getting a lot of inflows. We're not. Right, My

1420
01:14:00,000 --> 01:14:01,880
Speaker 1: friend Will down Off, who runs the Contra fund, right,

1421
01:14:02,360 --> 01:14:03,840
Speaker 1: he's got a twenty five year record to be the

1422
01:14:03,960 --> 01:14:07,439
Speaker 1: right outflows every day. Chris Davis, same thing, Mason Hawk

1423
01:14:07,479 --> 01:14:09,200
Speaker 1: and the same thing. So I think that I think

1424
01:14:09,240 --> 01:14:12,439
Speaker 1: it's a shift from active just in general. And so

1425
01:14:12,720 --> 01:14:14,920
Speaker 1: it's not so much that people don't know that of

1426
01:14:15,040 --> 01:14:17,200
Speaker 1: all the managers I just mentioned, all of them have

1427
01:14:17,320 --> 01:14:19,479
Speaker 1: a record of beating the market over long periods of time.

1428
01:14:20,080 --> 01:14:22,000
Speaker 1: So it's not that people don't believe that they can't

1429
01:14:22,000 --> 01:14:24,519
Speaker 1: beat the market. It's people don't want the market. They

1430
01:14:24,520 --> 01:14:26,640
Speaker 1: don't want to draw down and the risk that that

1431
01:14:26,760 --> 01:14:30,520
Speaker 1: comes with anybody who's truly an active manager. That's quite fascinating.

1432
01:14:30,600 --> 01:14:34,120
Speaker 1: That's that's very insightful. Um So what do you do

1433
01:14:34,400 --> 01:14:40,919
Speaker 1: to relax outside of the office. Well, reading is relaxing

1434
01:14:41,040 --> 01:14:45,320
Speaker 1: for me. I have I have a bulldog that always

1435
01:14:45,400 --> 01:14:48,680
Speaker 1: said English bulldogs, so he's always a source of amusement.

1436
01:14:48,760 --> 01:14:51,639
Speaker 1: And then you know it's a psychologically you know, patting

1437
01:14:51,680 --> 01:14:56,400
Speaker 1: the dog is relaxing. Uh. But that you know, that's

1438
01:14:56,400 --> 01:14:59,080
Speaker 1: why it's one of those things where I'm lucky that

1439
01:14:59,160 --> 01:15:02,160
Speaker 1: I'm lucky that, uh, that the market is both a

1440
01:15:02,200 --> 01:15:05,400
Speaker 1: hobby and a and a profession. And so I I

1441
01:15:05,479 --> 01:15:08,719
Speaker 1: spent a lot of time just you know, reading about economics, markets,

1442
01:15:08,800 --> 01:15:12,439
Speaker 1: that that sort of thing. Okay, that makes perfect sense. Um.

1443
01:15:13,080 --> 01:15:16,479
Speaker 1: So the last two questions, these these are my favorite too.

1444
01:15:16,560 --> 01:15:19,599
Speaker 1: I asked this of of all of our guests. If

1445
01:15:19,720 --> 01:15:22,599
Speaker 1: if you had a millennial or a recent college graduate

1446
01:15:22,680 --> 01:15:25,400
Speaker 1: come to you and say, Mr Miller, I'm interested in

1447
01:15:25,840 --> 01:15:29,479
Speaker 1: becoming a fund manager, what sort of advice would you

1448
01:15:29,520 --> 01:15:32,320
Speaker 1: give them? Well, the first thing, I started asking some

1449
01:15:32,439 --> 01:15:33,960
Speaker 1: questions like why do you want to be? Uh? What?

1450
01:15:34,160 --> 01:15:36,320
Speaker 1: Why do you want to do this? What's your how

1451
01:15:36,479 --> 01:15:40,120
Speaker 1: is your interest stoked in this? Uh? It's the people

1452
01:15:40,200 --> 01:15:42,280
Speaker 1: that I've found that have been the best at this

1453
01:15:42,960 --> 01:15:45,040
Speaker 1: have tended to be people that have been interested from

1454
01:15:45,080 --> 01:15:48,240
Speaker 1: a young age. Not really not surprisingly. Tiger Woods, you know,

1455
01:15:48,360 --> 01:15:51,400
Speaker 1: started golfing at age two. So the younger you you start,

1456
01:15:51,479 --> 01:15:53,960
Speaker 1: I think, the better off you're likely to be. UM.

1457
01:15:54,640 --> 01:15:57,599
Speaker 1: I I agree mostly with Charlie Manger. I always ask people,

1458
01:15:57,680 --> 01:16:00,160
Speaker 1: you know, what they're reading, whether it be Mark It's

1459
01:16:00,160 --> 01:16:03,280
Speaker 1: related stuff, or Charlie. Charlie says that he's never met

1460
01:16:03,320 --> 01:16:06,200
Speaker 1: a great investor, he wasn't a great reader. Um. I'd

1461
01:16:06,240 --> 01:16:10,240
Speaker 1: say that's that's mostly accurate in in my experience. Then

1462
01:16:10,400 --> 01:16:12,200
Speaker 1: then in terms of what I tell him is that

1463
01:16:12,760 --> 01:16:14,719
Speaker 1: one of things you really want to do is just invest.

1464
01:16:14,840 --> 01:16:16,560
Speaker 1: So do you invest? Right now? What do you what

1465
01:16:16,600 --> 01:16:18,240
Speaker 1: do you do with even have a small amount of money,

1466
01:16:18,680 --> 01:16:20,479
Speaker 1: what do you do with it? I started investing twenty

1467
01:16:20,560 --> 01:16:22,040
Speaker 1: five bucks a month when I was in the Army

1468
01:16:22,439 --> 01:16:25,000
Speaker 1: as a lieutenant in the in the Templeton funds and

1469
01:16:25,040 --> 01:16:27,080
Speaker 1: now you know, read the quarterlies and i'd ask I

1470
01:16:27,120 --> 01:16:28,559
Speaker 1: would also ask me want to be a fund manager?

1471
01:16:28,600 --> 01:16:32,439
Speaker 1: Which fund managers do you admire? And why? UM? Questions

1472
01:16:32,520 --> 01:16:34,920
Speaker 1: like that. So and in terms of advice, it's UM.

1473
01:16:35,479 --> 01:16:37,519
Speaker 1: You know, it's a tough business to get into. UM.

1474
01:16:38,880 --> 01:16:41,400
Speaker 1: Having a having a business school degree from a from

1475
01:16:41,600 --> 01:16:44,200
Speaker 1: a good business school has pluses and minuses. But one

1476
01:16:44,200 --> 01:16:46,160
Speaker 1: of the pluses is you're you're more likely to get

1477
01:16:46,200 --> 01:16:49,400
Speaker 1: a job in in finance with with that. But again

1478
01:16:49,400 --> 01:16:50,720
Speaker 1: I don't have that, and a lot of other a

1479
01:16:50,800 --> 01:16:53,200
Speaker 1: lot of other people that I know don't have that. UM.

1480
01:16:53,320 --> 01:16:57,200
Speaker 1: But just getting into a money management firm, So if

1481
01:16:57,240 --> 01:16:59,519
Speaker 1: you can get a job anywhere at leg Mason or

1482
01:16:59,520 --> 01:17:01,720
Speaker 1: t rope Ice or Fidelity or one of that I

1483
01:17:01,760 --> 01:17:04,719
Speaker 1: think is the key. Once you're inside, then your ability

1484
01:17:04,800 --> 01:17:07,200
Speaker 1: to maneuver and to make friends, and to figure out

1485
01:17:07,200 --> 01:17:08,720
Speaker 1: where you can go as much greater than it is

1486
01:17:09,000 --> 01:17:10,960
Speaker 1: trying to have your your nose pressed against the window.

1487
01:17:11,760 --> 01:17:14,680
Speaker 1: And our final question, what is it that you know

1488
01:17:14,840 --> 01:17:19,240
Speaker 1: about value investing today that you wish you knew thirty

1489
01:17:19,240 --> 01:17:23,559
Speaker 1: plus years ago when you first started, Well, i'd I'd say,

1490
01:17:23,600 --> 01:17:27,040
Speaker 1: I'd bring it a little bit more up to up

1491
01:17:27,080 --> 01:17:29,680
Speaker 1: to the current, and that in two ways, you know,

1492
01:17:29,720 --> 01:17:32,479
Speaker 1: I wish when I had started that I had had

1493
01:17:32,520 --> 01:17:37,640
Speaker 1: a better understanding of how valuate how values created by businesses.

1494
01:17:38,040 --> 01:17:39,760
Speaker 1: I had a good understanding of how people in the

1495
01:17:39,840 --> 01:17:41,920
Speaker 1: stock market have invested and done that kind of stuff,

1496
01:17:41,920 --> 01:17:45,320
Speaker 1: but really understanding i'd say, the economics of various businesses

1497
01:17:45,760 --> 01:17:47,719
Speaker 1: in a way that Buffett seems to have a natural

1498
01:17:48,120 --> 01:17:51,400
Speaker 1: tendency to do. UM. I think I've developed that over

1499
01:17:51,439 --> 01:17:52,600
Speaker 1: the years, but it would have been nice to have

1500
01:17:52,680 --> 01:17:56,439
Speaker 1: it if I was or thirty. Uh. Second thing would

1501
01:17:56,479 --> 01:17:58,920
Speaker 1: be the I mean, the big thing, the big changer

1502
01:17:59,600 --> 01:18:01,960
Speaker 1: uh for me, would have had to understand the difference

1503
01:18:01,960 --> 01:18:05,160
Speaker 1: between asset based crisis and a liquidity based crisis. So

1504
01:18:05,280 --> 01:18:07,479
Speaker 1: if we have, if we have, those are the only

1505
01:18:07,520 --> 01:18:10,160
Speaker 1: two possible kind of crisis. That there are except for

1506
01:18:10,280 --> 01:18:12,280
Speaker 1: you know, world wars and stuff like that. Uh and

1507
01:18:12,439 --> 01:18:15,320
Speaker 1: so uh had I had that understanding that I have

1508
01:18:15,439 --> 01:18:17,560
Speaker 1: today as a result of reading the academic literature in

1509
01:18:17,600 --> 01:18:20,320
Speaker 1: the work of people like John John Acopolis at Yale,

1510
01:18:20,360 --> 01:18:23,400
Speaker 1: for example, or Gary Gordon at Yale. I think I

1511
01:18:23,479 --> 01:18:26,720
Speaker 1: think we have done really well coming through that oh eight.

1512
01:18:27,120 --> 01:18:28,680
Speaker 1: So if we if we, if we have a eight

1513
01:18:28,760 --> 01:18:30,200
Speaker 1: type thing again, which I don't think we're gonna have

1514
01:18:30,200 --> 01:18:32,639
Speaker 1: this bay once in a generation, but I think we'd

1515
01:18:32,640 --> 01:18:33,720
Speaker 1: be able to deal with it, and that would have

1516
01:18:33,720 --> 01:18:37,040
Speaker 1: made a big difference. Thank you so much, Bill Miller

1517
01:18:37,120 --> 01:18:40,240
Speaker 1: for being so generous with your time. We've been speaking

1518
01:18:40,479 --> 01:18:43,080
Speaker 1: with Bill Miller. He is the former c I O

1519
01:18:43,880 --> 01:18:47,640
Speaker 1: and chairman of leg Mason Asset Management, soon to be

1520
01:18:48,400 --> 01:18:51,200
Speaker 1: running l m M and the same funds he's been

1521
01:18:51,320 --> 01:18:54,760
Speaker 1: running so successfully over the past few years. If you

1522
01:18:55,000 --> 01:18:57,760
Speaker 1: enjoy this conversation, be suan looked up an inch or

1523
01:18:57,880 --> 01:19:00,439
Speaker 1: down an inch on Apple iTunes and you could see

1524
01:19:00,479 --> 01:19:04,800
Speaker 1: the other hundred plus of these conversations that we've had.

1525
01:19:05,240 --> 01:19:11,160
Speaker 1: We enjoy your comments and feedbacks. Comments and feedback not plural,

1526
01:19:11,880 --> 01:19:16,000
Speaker 1: right to us at m IB podcast at Bloomberg dot Net.

1527
01:19:16,720 --> 01:19:19,920
Speaker 1: I would be remiss if I if I'm gonna say

1528
01:19:19,960 --> 01:19:22,519
Speaker 1: that again, I would be remiss if I did not

1529
01:19:22,720 --> 01:19:27,040
Speaker 1: think Uh. Taylor Riggs, our producer, Charlie Volmer, our engineer,

1530
01:19:27,200 --> 01:19:30,280
Speaker 1: and Mike pat Nick, our head of research, who helped

1531
01:19:30,320 --> 01:19:34,599
Speaker 1: put together all the questions for today's show. You've been

1532
01:19:34,680 --> 01:19:45,160
Speaker 1: listening to Masters in Business on Bloomberg Radio, brought to

1533
01:19:45,240 --> 01:19:48,320
Speaker 1: you by Bank of America. Merrill Lynch seeing what others

1534
01:19:48,400 --> 01:19:52,120
Speaker 1: have seen, but uncovering what others may not. Global Research

1535
01:19:52,240 --> 01:19:55,599
Speaker 1: that helps you harness disruption. Voted top global research firm

1536
01:19:55,720 --> 01:19:59,600
Speaker 1: five years running. Merrill Lynch, Pierce, S. Fenner and Smith, Incorporated,