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Speaker 1: America Member f d C. This is Masters in Business
Speaker 1: with Barry Ridholes on Bloomberg Radio. This week on the podcast,
Speaker 1: I have an extra special guest. He is Bill miller Um,
Speaker 1: the legendary mutual fund manager at leg Mason. He most
Speaker 1: famously beat the SMP five for fifteen consecutive years. The
Speaker 1: math behind that is just mind boggling. It It's something
Speaker 1: that couldn't possibly have been a random act. Michael Mobison
Speaker 1: discusses this in great detail and talks about the skill level.
Speaker 1: He very famously blew up in the financial crisis, meaning
Speaker 1: the fun crash and burned along with everything else, and
Speaker 1: people kind of wrote him off as having Alright, that
Speaker 1: guy's done, we'll never hear from him again. Um. And
Speaker 1: over the past five years he's again crushing the market,
Speaker 1: beating UH the SMP five hundred by four hundred base
Speaker 1: points a year, UH, consistently being in the top handful
Speaker 1: of funds every year. He is really a fascinating guy,
Speaker 1: super intelligent, very thoughtful about things like valuation. He's incredibly
Speaker 1: circumspect about his experiences during the financial crisis and talks
Speaker 1: quite with great humility and quite bluntly about what he
Speaker 1: got wrong during the crisis. I always find that refreshing
Speaker 1: when someone um has a bad run and instead of saying, oh,
Speaker 1: it was the FEDS faulter, this person's fault or what
Speaker 1: have you, basically owns it and says, yeah, I failed
Speaker 1: to understand the difference between this recession and that recession.
Speaker 1: Here's what I learned, Here's what I wish I would
Speaker 1: have learned known during the crisis. It was just an
Speaker 1: absolutely fascinating conversation if you're at all interested in asset management,
Speaker 1: running a mutual fund, running a portfolio, how to be
Speaker 1: a value investor, how to come up with a unique
Speaker 1: value add that allows you to beat the market, And
Speaker 1: perhaps more interestingly, Bill Miller's criticism on the failure of
Speaker 1: active management being that so many managers are are suffering
Speaker 1: from career risk and so they become closet index ers.
Speaker 1: He has in great detail described why the move towards
Speaker 1: passive investing is actually a rational response from the investing community,
Speaker 1: from the public, Hey, why are you paying a lot
Speaker 1: of money for an active manager who is essentially a
Speaker 1: closet index er. He's essentially not only similar to the index,
Speaker 1: but his portfolio is going to be wholly unable to
Speaker 1: beat the market because it's essentially a closet index plus
Speaker 1: a high fee. Get out of that and either go
Speaker 1: to an active manager who has a chance to beat
Speaker 1: the market, or just index. And he's pretty blunt. Hey,
Speaker 1: most people are better off indexing. So I I've just
Speaker 1: found this to be an absolutely fascinating conversation and I
Speaker 1: think you will as well. So, with no further ado,
Speaker 1: my conversation with Bill Miller. This is Masters in Business
Speaker 1: with Barry Ridholts on Bloomberg Radio. My special guest today
Speaker 1: is a legend. His name is Bill Miller. He is
Speaker 1: the former chairman and chief investment officer at leg Mason,
Speaker 1: where he ran the leg Mason Capital Management Value Trust
Speaker 1: for many years. He was named by morning Star in
Speaker 1: the Fund Manager of the Decade. Uh Bill Miller beat
Speaker 1: the SMP five hundred from through fifteen consecutive years. It's
Speaker 1: a feat essentially unprecedented in mutual fund management. Since then,
Speaker 1: he's been running the leg Mason Opportunity Trust and just
Speaker 1: launched or that's really not the right word for it.
Speaker 1: LMM is the new fund that a new firm that
Speaker 1: he's in charge of. The leg Mason Opportunity Trust Fund
Speaker 1: has beaten of its peers over the last five years
Speaker 1: and has outpaced the SMP five dred by two percent annually.
Speaker 1: Bill Miller, Welcome to Bloomberg. Thanks, very nice to be here.
Speaker 1: So so that's quite an introduction. What you did with
Speaker 1: the fund is real, the legendary. We're gonna get into
Speaker 1: the streak in a little bit, But let's talk about
Speaker 1: your approach. Is it fair to call you both a
Speaker 1: value investor and a contrarian? I would say yeah, I'd
Speaker 1: say that that what I am as as a long
Speaker 1: term oriented value investor with the contrarian overlay. That that's
Speaker 1: that's a pretty fair description. So let's talk about your process.
Speaker 1: How do you begin the process? How do you approach
Speaker 1: selecting stocks? Well, what I'm trying to do, what we're
Speaker 1: trying to do, the team is trying to do, is
Speaker 1: find companies that trade a large discounts to what we
Speaker 1: call intrinsic business value, and intrinsic business value is the
Speaker 1: present value of the future free cash flows of the business.
Speaker 1: And then we're also looking for companies where you're starting
Speaker 1: out with low expectations, where people don't where people don't
Speaker 1: believe that the future looks very bright, or that there's
Speaker 1: a lot of controversy. And then with that, the key
Speaker 1: we use every valuation technique known demand, but the key,
Speaker 1: the key one that we're always starting with this free
Speaker 1: cash flow yield. So just under a checkbook, a ounting approach,
Speaker 1: like you have your own checkbook, we want we want
Speaker 1: companies that ideally will start out with a ten percent
Speaker 1: free cash flow yield and that that that's just that's
Speaker 1: there's there's nothing magic about that. That's just that's just
Speaker 1: a heuristic that we've developed over the years. It tends
Speaker 1: to work. But higher is always better as long as
Speaker 1: if those free cash flows are sustainable. How how does
Speaker 1: this differ from classic Graham and value investment, Well, the
Speaker 1: great the classic Graham and Dodd approach was was a
Speaker 1: um an approach that focused mainly on accounting metrics and
Speaker 1: so pe price to book, price to cash flow, those
Speaker 1: kinds of those kinds of things, and towards the end
Speaker 1: of his life, Ben Graham made a point that those
Speaker 1: things no longer work because they became replicable and they
Speaker 1: were they then they then did not They didn't identify
Speaker 1: companies that were mispriced. They tended to identify companies if
Speaker 1: the valuation statistics were were superficially attractive. Those are typically
Speaker 1: companies that had lower returns on capital. And then unless
Speaker 1: those returns on capital change, those those low accounting metrics
Speaker 1: didn't give you out performance. How important are are the
Speaker 1: growth metrics? For a while, GARP was quite the thing
Speaker 1: in the nineties. Is growth at a reasonable price significant?
Speaker 1: Do you do you bring growth into your metrics? Yeah? Absolutely,
Speaker 1: Well it's not so much growth at at a you know,
Speaker 1: at a reasonable price, so much as it is that
Speaker 1: growth is an input to the calculation of value. And
Speaker 1: so companies that grow faster, other things equal, assuming the
Speaker 1: learning above the cost of capital or more valuable. In
Speaker 1: companies that grow more slowly, the cash lows will catch
Speaker 1: loads will compound more quickly. How do you balance the
Speaker 1: current fundamental picture of a company with what you hope
Speaker 1: the future prospects are going to be? How how can
Speaker 1: you judge how the business will will grow and develop? Well,
Speaker 1: there's a there are many many ways to attack that
Speaker 1: that issue. One of the things that we try and
Speaker 1: do if if the economy is is in recession, for example,
Speaker 1: or the economy is in a boom, we will tend
Speaker 1: to normalize that. So if if if the economy is
Speaker 1: growing more rapid than normal when we're looking at a company,
Speaker 1: we will bring it back to a normal growth rate
Speaker 1: if the company, we're also looking at the company economics,
Speaker 1: and those are typically function of the industry economics. So
Speaker 1: you start out with industry almage, you a company economic quality, assets,
Speaker 1: quality of the management. All of those kinds of things
Speaker 1: go into go into trying to figure out what the
Speaker 1: company is going to going to do. And you know
Speaker 1: that a company like General Motors, for example, is going
Speaker 1: to be a company that's a very mature, slow growth
Speaker 1: company operating an industry that's has global overcapacity and it's
Speaker 1: under it's under a lot of technological threats, so that
Speaker 1: that all goes into thinking about a company like that.
Speaker 1: Amazon is our largest position. That's completely different, completely different
Speaker 1: exercise because Amazon is a completely dominant company and with
Speaker 1: an enormous total addressable market and incredible competitive advantages, so
Speaker 1: it's it's going to have a growth has a growth
Speaker 1: rate of you know, right now, fuffy thirty percent a year,
Speaker 1: which is unheard of a company of a hundred billion
Speaker 1: dollars of revenues. How do you deal with something? And
Speaker 1: let's stay with Amazon, where there really isn't a whole
Speaker 1: lot in the way of profits, but they're certainly taking
Speaker 1: market share and they're certainly growing revenue like wildfire. It
Speaker 1: comes down to again the issue of of of accounting
Speaker 1: based metrics versus economic metrics. So with with Amazon, then
Speaker 1: their natural business is one that has a original return
Speaker 1: on capital of triple digits. And when people say Amazon
Speaker 1: doesn't make any money, it doesn't make much money, what
Speaker 1: were they're really looking, I think at the wrong wrong
Speaker 1: sort of metrics because everything below the gross profit line
Speaker 1: at Amazon they consider an investment. So some of those
Speaker 1: investments to capitalize, some of those investments are expensed. But Amazon,
Speaker 1: if you if you begin to if you do some
Speaker 1: a little bit of math on a little bit of statistics,
Speaker 1: what you'll see is that Amazon share price historically it
Speaker 1: isn't correlated with profit growth, That isn't correlated with cash
Speaker 1: flow growth, it's correlated with with the growth of gross
Speaker 1: profit dollars. And so the faster the growth rate of
Speaker 1: gross profit dollars, namely what they have to invest, the
Speaker 1: higher the evaluation that the company has been able to attain.
Speaker 1: That makes some sense. So let's talk a little bit
Speaker 1: about size. Your fund started at seven hundred and fifty
Speaker 1: million dollars back in and it didn't take very long.
Speaker 1: Fifteen years later it was over twenty billion dollars. How
Speaker 1: does that change in size affect your ability to to
Speaker 1: be nimble? It really didn't. And and what's interesting about
Speaker 1: that is that while the fund got to five billion,
Speaker 1: I think at the peak we had another fifty billion
Speaker 1: of institutional assets to go along with it. So the
Speaker 1: the overall money under management in that one strategy at
Speaker 1: the peak was around seventy five billion. And what what
Speaker 1: we what we observed anyway, is so ironically is that
Speaker 1: as the assets got larger, the performance got better. And
Speaker 1: that's amazing and uh. And then of course what happens
Speaker 1: is that that that the assets always peak with the
Speaker 1: peaking of performance, because if the performance kept up, the
Speaker 1: assets we keep going up. I'm Barry Ridholts. You're listening
Speaker 1: to Masters in Business on Bloomberg Radio. My special guest
Speaker 1: today is Bill Miller. He was with leg Mason for
Speaker 1: the longest time before Uh he took himself private. Is
Speaker 1: that a fair way to say it? L l MM
Speaker 1: is now owned by yourself? It will be yet. It's
Speaker 1: currently fifty owned by leg Mason and fifty by me.
Speaker 1: But I have a deal to buy them out, which
Speaker 1: should close, uh in the spring of two thousand seventeen.
Speaker 1: So let's talk about your streak. You ran the leg
Speaker 1: may Sin Value Trust for since from one through two
Speaker 1: thousand and fifteen. Um, you actually ran it longer than that.
Speaker 1: But in the middle of that was a fifteen year
Speaker 1: streak of beating the market every year consecutively. There's never
Speaker 1: been anything like that before and there probably never will
Speaker 1: be since. So, um, what's the secret? Uh? Luck, There's
Speaker 1: a lot of luck into it. Um, hold on, let
Speaker 1: me write that down. Luck. But in all seriousness, it
Speaker 1: can't just be luck. It's got to be some combination
Speaker 1: of some skills, some luck, some right guy, right place
Speaker 1: sort of thing. I mean. Steve and j Gold wrote
Speaker 1: wrote a piece on on streaks the late late paleontologist,
Speaker 1: and he noted that that every street went to all
Speaker 1: sports streaks and stuff like I was gonna say, paleontologists
Speaker 1: slash baseball thing, right, yeah, And and he noted that
Speaker 1: that every streak is a some combination of skill and luck,
Speaker 1: depending on the length of it and how it's achieved
Speaker 1: and stuff like that. I'd say that the thing that
Speaker 1: contributed to it probably the most was a pivot that
Speaker 1: we made in so five or six years into it
Speaker 1: um when when technology stocks got very cheap because people
Speaker 1: were worried about a recession. And you may or may
Speaker 1: not remember the Jeff Vinnick ran the Magellan Fund at
Speaker 1: that time, and it raised a lot of cash because
Speaker 1: the feed had been tightening, there were some issues in
Speaker 1: the economy. People gott nervous exactly. So what happened then
Speaker 1: was that you could buy companies like Dell, which is
Speaker 1: a relatively new company at the time at five times earnings.
Speaker 1: You could buy Nocchi at six times earnings. And because
Speaker 1: people were worried and they also mistaken, they didn't they
Speaker 1: didn't properly analyze those businesses. Dell's growing year trade of
Speaker 1: five times earnings, so we bought Dell. Then we bought Nokia.
Speaker 1: We bought America Online, another one that went up fifty
Speaker 1: times after we bought it. So when what we did
Speaker 1: was unusual for value investors is we we got into
Speaker 1: technology at that time, and most value investors following Warren
Speaker 1: Buffett's kind of dictum that he didn't own technology, he
Speaker 1: didn't understand it. Um. We threw some work that we've
Speaker 1: done with the Santa fe and who uh came to
Speaker 1: understand the economics of technology were different from what people
Speaker 1: traditionally believed, and it was much more predictable than people believed.
Speaker 1: So let's let's talk about a O L for a moment,
Speaker 1: since since you mentioned them, that was a fifty bagger
Speaker 1: that went up fifty x In the real world, how
Speaker 1: do you hold onto something that goes up five x
Speaker 1: ten x? Investors are notorious for for quote unquote ringing
Speaker 1: the bell too soon. How do you withstand the ups
Speaker 1: and downs of a stock like that, that that was
Speaker 1: somewhat volatile and write it till it's a fifty bagger? Yeah,
Speaker 1: it's interesting. Part of the part of the thing is
Speaker 1: you have to try and understand the potential of the company.
Speaker 1: General Motor is not going to be a fifty bagger, right,
Speaker 1: General Motors a mature company. A O. L was a
Speaker 1: very new company, a small company in a very a
Speaker 1: very big new area. So it had it had a
Speaker 1: lot of potential. We didn't know it was going to
Speaker 1: go up at all, but but it certainly had the
Speaker 1: potential to do so. And uh, and so that's really
Speaker 1: trying to understand what the company's possibilities are with the
Speaker 1: total addressable market for the businesses and the other The
Speaker 1: other part of it is that that when you get it,
Speaker 1: when it becomes a big winner like that, and it
Speaker 1: it becomes a bigger and bigger part of the portfolio.
Speaker 1: Part of what happens is that just from a portfolio
Speaker 1: management technique, it becomes riskier in the sense of it
Speaker 1: has a greater and greater impact on the portfolio. And
Speaker 1: that becomes a question how you size the position? Well
Speaker 1: that that leads to another question, do you ever have
Speaker 1: an upper capacity? Nothing can be more than ten percent
Speaker 1: of the portfolio or or some line in the sand,
Speaker 1: or what do you do with there? There was there
Speaker 1: was no line in the sand. We we actually part
Speaker 1: of the reason that that streak went on and because
Speaker 1: then part of the reason I was manager of the
Speaker 1: decade was that with A O. L. And with Dell,
Speaker 1: for example, both were fifty baggers for us. But they
Speaker 1: got to be as much as of the portfolio, which
Speaker 1: was which each which had never happened before. Fanny May
Speaker 1: was fourteen I think at the peak, and then we've
Speaker 1: were fortunately able to cut them, cut them back and
Speaker 1: get them actually out of the portfolio. Of that was
Speaker 1: very unusual. Probably the biggest the biggest we would go
Speaker 1: we've been since then is I think Amazon got to
Speaker 1: twelve or so earlier, ear late last year. So you
Speaker 1: start accumulating A O. L. And Dell mid nineties, it's
Speaker 1: an incredible five year run for technology. What other than
Speaker 1: the sheer size in the portfolio, what are you doing
Speaker 1: in to call those back? Is it just those two
Speaker 1: because of their outsize um position in the portfolio. Were
Speaker 1: you looking at the macro environment and you're looking at
Speaker 1: technology no longer is cheap? What's the thought process like
Speaker 1: in two thousand when you're when you're selling two giant winners,
Speaker 1: capital gains and all. We went from thirty eight percent
Speaker 1: of the portfolio. I think in the in the beginning
Speaker 1: of two thousand in tech to no percent by the
Speaker 1: end of the first quarter. And the reason for that
Speaker 1: was that the market had been going up a year
Speaker 1: and corporate earnings have been growing very rapidly, and valuations
Speaker 1: got way out of whack. So back back at that time,
Speaker 1: as you may recall, you had Microsoft was sixty or
Speaker 1: seventy times, Cisco was that GE was fifty times, Home
Speaker 1: Depot was sixty times. So the valuations were just way
Speaker 1: way way out of whack for mega mega cap and
Speaker 1: for technology. And part of our thought as we looked
Speaker 1: at companies like Dell and A. O. L. It wasn't
Speaker 1: so much that the total market value of those businesses
Speaker 1: was way out of whack with the potential there. But
Speaker 1: what we did know was it wasn't going to be linear.
Speaker 1: There would be some interruption there, and when that interruption came,
Speaker 1: the companies would get killed. So what and then the
Speaker 1: FED was tightening at that time, and I think that
Speaker 1: the real, the real trigger uh for me and that
Speaker 1: environment that really kind of put paid to the whole
Speaker 1: thing was there's a two It was two fold. Number
Speaker 1: one was there was a headline in the New York
Speaker 1: Times in March of of two thousand about Jillian Robertson.
Speaker 1: It's called the it's called the end of the game
Speaker 1: or the end of the end of an era, and
Speaker 1: it talked about how value investing was dead and about
Speaker 1: Jillian Robertson had had to close up shop and at
Speaker 1: buff of course I hadn't had done poorly for several yeah,
Speaker 1: done done poorly. And then so that was kind of
Speaker 1: one trigger that everybody had thought that that that that
Speaker 1: was dead. And the second one made more more important
Speaker 1: one was it from from the spring of the spring
Speaker 1: of two thousand, the first quarter of nine, the first
Speaker 1: quarter two thousand, the Nasdaq was up a hundred percent
Speaker 1: and the Dow was down. And again that bifurcation was
Speaker 1: that bifurcation was so large, and the valuation discrepancy was
Speaker 1: so large. And I'd say that the final part of
Speaker 1: that whole thing was at the end of the first
Speaker 1: quarter in in two thousand, uh something like seven or
Speaker 1: seventy percent of active managers beat the market in that quarter,
Speaker 1: and which is an extraordinarily high percentage. And and at
Speaker 1: the same time there were only two sectors of the
Speaker 1: ten or eleven s and p sectors that beat the market,
Speaker 1: Utilities and tech. So what that told when nobody was
Speaker 1: owning utilities right, So what that told me was everybody
Speaker 1: was crowded in attack that that's they were. Everybody's overweight tech.
Speaker 1: There's nothing more going that. And then that couple of
Speaker 1: valuation said it's time to go the other way. That's
Speaker 1: quite fascinating. I'm Barry rid Hults. You're listening to Masters
Speaker 1: in Business on Bloomberg Radio. My special guest today is
Speaker 1: Bill Miller. He is the former chairman and chief investment
Speaker 1: officer of leg Mason, perhaps best known for really an
Speaker 1: unproducible streak beating the SMP five fifteen consecutive years. When
Speaker 1: he was running the leg Mason Value Trust Funds, morning
Speaker 1: Star named him the Manager of the decade. In let's
Speaker 1: talk about the new um. For lack of a bit
Speaker 1: of word, the new shop, LMM, tell us a little
Speaker 1: bit about the firm and its history. LMM was created
Speaker 1: in when we started in nine night, we started the
Speaker 1: leg Mason Opportunity Trust and it was created as a
Speaker 1: joint venture between myself and Like Mason. It was the
Speaker 1: only Like Mason subsidiary that wasn't owned by leg Mason
Speaker 1: at the time, and the idea was that that leg
Speaker 1: Mason I would be partners in that in that particular fund, uh,
Speaker 1: whether it whether it did well or not. And so
Speaker 1: that was run co extensively. Lelaman was run co extensively
Speaker 1: with leg Mason Capital Management, which I was the chairman of.
Speaker 1: And then in two thousand and I want to say
Speaker 1: two thousand and twelve or so, um, leg Mason decided
Speaker 1: to combine my subsidiary, like Mason Capital Management, with Clearbridge,
Speaker 1: which is a New York based equity shop. I did
Speaker 1: not think that was a particularly good idea, and so
Speaker 1: what I was able to do, but guys, because had
Speaker 1: operational control of LMM, was to extract that from that
Speaker 1: transaction and set it up as a separate as a
Speaker 1: separate entity and a separate business. But I had to
Speaker 1: go restaff it from the standpoint of trading and reporting
Speaker 1: and production and compliance and all that, all that kind
Speaker 1: of stuff that was BA. That was in two thousand twelve.
Speaker 1: So it's run of the joint venution. Yeah, run as
Speaker 1: a joint venture for for most of that period. And
Speaker 1: then in two thousand and I guess, uh, fourteen, we
Speaker 1: moved out of the moved out of the leg Mace
Speaker 1: and building into our own into our own space. And
Speaker 1: and then just just this year, just last I guess, yeah,
Speaker 1: just this year, we reached a deal like Mason and
Speaker 1: either where I would buy them out and buy the
Speaker 1: now two funds that that are advised by LMM, by
Speaker 1: that advisory firm out. So the two funds are the
Speaker 1: leg Mason Opportunity Trusts, which you've been running since inceptions,
Speaker 1: since since getting two. And it had a so so
Speaker 1: two thousands, however, it's been on fire lately. Fair fair
Speaker 1: way to describe it. Yeah, yeah, I would say I
Speaker 1: wouldn't say so so two thousands had a very bad
Speaker 1: two thousand and uh seven and eight. Um it was.
Speaker 1: It was one of the best performing funds in two
Speaker 1: thousand nine. It was the single best performing fund of
Speaker 1: all funds in two thousand and thirteen, I mean a
Speaker 1: two thousand and twelve, and then the best performing fund
Speaker 1: of all funds above fifty million two thousand thirteen. And
Speaker 1: there's about a billion, billion, billion three in that domestic
Speaker 1: version of it. And probably probably the most unusual thing
Speaker 1: about it, which will never happen again, is if you
Speaker 1: opened the New York Times special section on mutual funds
Speaker 1: of two weeks ago. You'll see that the Opportunity Trust
Speaker 1: was the single best performing fund of all domestic funds
Speaker 1: in the third quarter, and then the single best performing
Speaker 1: fund of all domestic funds for the last five years,
Speaker 1: and that will probably never happen again. So here's what.
Speaker 1: Here the numbers, I'm showing it beat the S and
Speaker 1: P five hundred by two hundred basis points on average
Speaker 1: every year for the past five years. Yeah, it's probably right. Yeah,
Speaker 1: and at least yeah and over I want to say
Speaker 1: seven years, it beat nine of its piers. And what
Speaker 1: you're now telling me is for the trailing five years
Speaker 1: it was the top. It beat all of its pers
Speaker 1: So and that quarter probably has something to do with that.
Speaker 1: So tell us about your co managers. Who else runs
Speaker 1: the funds with you? I do that fund with Samantha McLemore,
Speaker 1: who has been with us fifteen years. She started out
Speaker 1: as an analyst and moved up to being an assistant
Speaker 1: manager and now she's co manager of the Opportunity Fund.
Speaker 1: And then we have an income fund UH called the
Speaker 1: Our Income UH Fund and it will it's it's run
Speaker 1: by my son and I. So we was gonna say
Speaker 1: something named Bill Miller runs that one all yeah, yeah, yeah, exactly,
Speaker 1: and and tell us about the Income Opportunity Fund. What
Speaker 1: is that focus? Yeah, it's that's an really interesting product.
Speaker 1: We started it. We actually started it internally in tooth
Speaker 1: in uh what was it, two thousand and nine. We
Speaker 1: wanted to do it as a joint venture with the
Speaker 1: leg Mason's Western Asset Management subsidiary, but we couldn't get
Speaker 1: the product people to approve it because it was it
Speaker 1: was designed to deliver high income as opposed to being
Speaker 1: a bond fund or an equity income fund. It just
Speaker 1: could go anywhere in the world to get high income,
Speaker 1: and so that it was hard for them to come
Speaker 1: up with a with a with a benchmark. And finally,
Speaker 1: after five years of results, they said, okay, the record
Speaker 1: is good enough that we should launch it anyway, which
Speaker 1: we did. Uh. So what the objective here is very
Speaker 1: simply high income giving you income higher than the than
Speaker 1: the high yield index, with the possibility of also preserving capital.
Speaker 1: The opportunity for capital gains. So the current yield current
Speaker 1: yield on it right now was around seven and a
Speaker 1: half to eight after expenses. I'm Barry Ridholts. You're listening
Speaker 1: to Masters in Business on Bloomberg Radio. My special guest
Speaker 1: today is Bill Miller. He is a legend in the
Speaker 1: world of investing, not only UH for the greatest SMP
Speaker 1: beating streak of old time, but for his legendary stock picking.
Speaker 1: Let's talk a little bit about the current um environment
Speaker 1: and how things are are operating. I want to I
Speaker 1: want to give a give you a quote of yours,
Speaker 1: and have you respond to it. You you recently said
Speaker 1: stocks are stupidly cheap, but bonds are ridiculously overpriced. Discuss well,
Speaker 1: stocks are stupidly cheap relative to bonds. That's that's my view.
Speaker 1: I believe that the taking bonds first. You know, we
Speaker 1: we hit a level over the summer where where bond
Speaker 1: yields globally had never been this low in the five
Speaker 1: thousand years of history that we have about bond yields,
Speaker 1: so the most expensive they've ever been in history. Because
Speaker 1: of the UH, the aftermath of the financial crisis and
Speaker 1: slow growth and all of the stuff that we read
Speaker 1: about read about every day, and even if you go
Speaker 1: back a year ago, right, so a year ago, the
Speaker 1: ten year treasury yielded over two percent to like two
Speaker 1: point one, and now it's one seventy five. So again
Speaker 1: this year, bonds have beaten have beaten stocks. And so
Speaker 1: what you have now is a situation where stocks yield
Speaker 1: more than bonds, and the media and the media and
Speaker 1: PE ratio and the SMP five D is about seventeen
Speaker 1: and a half, which is above the long term historic median,
Speaker 1: but but miles below where it theoretically ought to be
Speaker 1: if this is the right level of of bond yields.
Speaker 1: And so I think one of the things that we
Speaker 1: have a partnership that we're just just getting underway. And
Speaker 1: in that thing, i'm long portfolio, the longer portfolio stocks
Speaker 1: against a short position in the in the long treasury
Speaker 1: longer portfolio stocks against So really you're doing a full
Speaker 1: on pair trade long long equity. Sure. Yeah, I think
Speaker 1: that there's a thirty five year bull market in bonds
Speaker 1: from one till the summer. I think we hit a
Speaker 1: double bottom in bonds in two thousand and twelve at
Speaker 1: around one thirty eight, and then around one thirty five.
Speaker 1: I think this this summer, and rebounded sharply from both
Speaker 1: of those levels very quickly. And if you look at
Speaker 1: if you look at the way the way that bonds
Speaker 1: have traded away, the safe parts of the market have
Speaker 1: traded so utilities, telecom, consumer staples since since the summer,
Speaker 1: they've all begun to wobble. And so all of that
Speaker 1: tells me that this thirty five year bull market is
Speaker 1: probably over. We had a thirty five year bear market
Speaker 1: from n nineteen eighty one followed by thirty five year
Speaker 1: bull market, so it's time for the cycle to turn essentially,
Speaker 1: And yeah, I think. I think also we're in a
Speaker 1: secular bull market in stocks that began in March of
Speaker 1: O nine, and I think that lasts until, like all
Speaker 1: secular bull market stocks get too expensive. But they're not
Speaker 1: too expensive today. They're not anywhere nears expensive they were
Speaker 1: in nine, or in nineteen sixty eight, you know, or
Speaker 1: seven and the summer for that matter. All Right, so
Speaker 1: you said a number of things that demand a follow
Speaker 1: up question from me. First mentioned the double bottom in bonds.
Speaker 1: Do you look at charts and how important are they
Speaker 1: to you? Yeah, I think charts. Charts are a way
Speaker 1: for me of of visualizing fundamentals, looking at the supply
Speaker 1: and demand, you know, expressed graphically. I don't I don't
Speaker 1: think that there's any any any special magic to charts.
Speaker 1: The academics have studied, studied this in a variety of
Speaker 1: ways and haven't found haven't found sustainable, reproducible away algorithmically
Speaker 1: to use to use charts. But nonetheless, nonetheless, what they
Speaker 1: can they can help you visualize what's going on and
Speaker 1: what has happened. And again they's a supply demand thing mainly.
Speaker 1: And then the second question is, so the internal debate
Speaker 1: we've been having about secular bull markets, some people define
Speaker 1: a secular bull market as starting from a higher high.
Speaker 1: So the argument has been made, if this is a
Speaker 1: secular bull market, it might not have begun until when
Speaker 1: the SMP and the Dow broke out of that previous
Speaker 1: high I guess two thousand and seven high and started
Speaker 1: making all new price, all new price. Eyes and other
Speaker 1: people are just, well, you could take the trend and
Speaker 1: extrapolated four you one do you do you even care
Speaker 1: about the definitions or you just looking at hey, this
Speaker 1: is something that could last an extended period of time. Yeah,
Speaker 1: I think there's all kinds of different ways to kind
Speaker 1: of measure measurable market episodes cyclically, secularly, I tend to
Speaker 1: I tend to think of a secular bull market as
Speaker 1: one that starts at very low valuation and starts with pessimism.
Speaker 1: So it starts, you know, the end of one bear
Speaker 1: market bottom and then the peak being when when you've
Speaker 1: reached a point where if you look out ten more years,
Speaker 1: you don't earn any rate to return. You're on a
Speaker 1: very low rate of return. So I think that's from
Speaker 1: that standpoint, the previous secular bull marketwo summer often two
Speaker 1: to the end of nine the spring of two thousand,
Speaker 1: where you had roughly seventeen percent a year from the
Speaker 1: bottom to the top. And it's important, at least the
Speaker 1: way I tend to think about it, to understand that
Speaker 1: a secular bull market like that encompassed the crash of
Speaker 1: encompassed processions and compassed declines in the market. Just because
Speaker 1: the market goes down or you have a recession doesn't
Speaker 1: mean that the bull market is is over. The economic
Speaker 1: cycle might be changing, but but the bull market is
Speaker 1: over when you can no longer earn a decent rate
Speaker 1: of return by owning that that owning equities. So two
Speaker 1: to two thousand was defined in large part by a
Speaker 1: fairly continually expanding pe multiple. It looked like investors were
Speaker 1: willing to pay more and more for each dollar of earnings.
Speaker 1: Are we seeing anything remotely like that here? And theoretically,
Speaker 1: how long and something like that go for it? I again,
Speaker 1: different people have different views on this. My view is
Speaker 1: is emphatically, no, we are not seeing that. We did.
Speaker 1: We had obviously very cheap stocks, and in the spring
Speaker 1: of two thousands of the SMP, briefly it felt like
Speaker 1: stocks were cheap for ten minutes and then suddenly they
Speaker 1: looked expensive again. Well again, because the market leads the economy,
Speaker 1: so the stocks went up before the earnings. The earnings
Speaker 1: came came through. But right now in the overall marketplace,
Speaker 1: if this is the right level for ten year treasuries
Speaker 1: one seventy five or something, and and two and a
Speaker 1: half is the right level for thirty year treasuries, then
Speaker 1: the right level for stocks is not seventeen and a half.
Speaker 1: It's probably thirty or thirty five times. So I think
Speaker 1: I think that the market right now is already discounting
Speaker 1: arise in the ten year probably to three or four
Speaker 1: percent over the next several years. So putting it differently,
Speaker 1: I think you can have the ten year get cut
Speaker 1: in half in the sense of double the yield on
Speaker 1: it without that harming stocks. So let's let's put that
Speaker 1: into a little broader context. We get a December increase
Speaker 1: with what does that bring us up to fifty basis points?
Speaker 1: Maybe it's kind of hard to say, Wow, that's a
Speaker 1: heck of a tightening. And then theoretically they do a
Speaker 1: quarter four times next year and four times in and
Speaker 1: we're still only a two point five percent You're you're
Speaker 1: essentially saying that and derail and equity market rally stocks
Speaker 1: can continue to grow despite that move. I would be
Speaker 1: very surprised if they did four and four. I think
Speaker 1: you're looking at I think you're probably looking at two
Speaker 1: and two as opposed to four and four. If they
Speaker 1: did four and four, it would only be because the
Speaker 1: economy was growing rapidly, much more rapidly than they think
Speaker 1: it is, in which case earnings would be higher that
Speaker 1: you know, so I think that So that's the optimistic.
Speaker 1: The great the greater risk is that they is that they,
Speaker 1: you know, tighten too soon into a fragile economy. And again,
Speaker 1: I don't see how they do four unless the rest
Speaker 1: of the world is also starting to grow as well,
Speaker 1: because the dollar would. So let's say let's say a
Speaker 1: quarter point in December and then two and seventeen and
Speaker 1: two and eighteen and two and nineteen and two and twenty,
Speaker 1: which would mean that we would have a low inflation environment,
Speaker 1: a g d P two something along those lines, and
Speaker 1: the rest of the world coming along. No nothing that almost.
Speaker 1: To quote my friend Larry Cudlow, that a goldly locked scenario,
Speaker 1: isn't it if you have low inflation and low growth
Speaker 1: if you look at it right now. So it's astonishing
Speaker 1: to me that you have this year again, people pulling
Speaker 1: money out of equity funds at the fastest rate since
Speaker 1: two thousand and eight when the world was falling apart,
Speaker 1: and you you have that one. If you were just
Speaker 1: to sit back and abstractly say what's the best environment
Speaker 1: to own stocks, you'd say, Oh, you want to have
Speaker 1: economic growth, but it can't be too fast stoke inflation
Speaker 1: or to cause the Fed to get hostile. Uh. We
Speaker 1: we have to have low inflation, so we were not
Speaker 1: p ratios can be high. We want a good beginning
Speaker 1: dividend yield and a good dividend growth rate. We want
Speaker 1: GDP to be at an all time high, on household
Speaker 1: net worth to be at an all time high, one
Speaker 1: profit margins to be an all time all that's true,
Speaker 1: and yet and yet evaluations right now are are nowhere
Speaker 1: near the historic eise. So it's a political season. We're
Speaker 1: we're having this conversation before the election. Given everything you've
Speaker 1: described sounds so good, why is there so much negativity
Speaker 1: about everything about the country, about our policies, about stocks,
Speaker 1: about bonds. It seems you can't go anywhere without this
Speaker 1: drumbeat of negativity despite what you're describing as things actually
Speaker 1: being pretty good. Yeah, I think I think that the
Speaker 1: two thousand and eight, the financial crisis and the housing
Speaker 1: collapse kind of change the psychological polarity of of of
Speaker 1: people with respect to savings and investment and made them
Speaker 1: i'd say, both risk and volatility phobic. And so they're
Speaker 1: terrified of risk, and especially if they saw their house drop,
Speaker 1: and you know from peak to trough, and that we
Speaker 1: had an unemployment rate that that hit ten at one
Speaker 1: at one point, and then there's just the general anxiety
Speaker 1: and angst that you see whenever Macro pops up. The
Speaker 1: stock market had the worst worst start to its uh
Speaker 1: to a year in history this year, just because people
Speaker 1: got worried about oil, about Russia, about China. So these
Speaker 1: fears flare up, and I think they're they're due to
Speaker 1: the financial crisis, and it's only gonna it's gonna take time.
Speaker 1: We've been speaking with Bill Miller, formally chairman and Chief
Speaker 1: investment Officer at leg Mason Asset Management. If you enjoy
Speaker 1: this conversation, be sure and check out the podcast extras,
Speaker 1: where we keep the tape rolling and continue talking about
Speaker 1: all things value investing. Be sure and check out my
Speaker 1: daily column on Bloomberg View dot com or follow me
Speaker 1: on Twitter at Rich Halts. We love your comments and
Speaker 1: feedback right to us at m IB podcast at Bloomberg
Speaker 1: dot net. I'm Barry Ridhults. You've been listening to Masters
Speaker 1: in Business on Bloomberg Radio, brought to you by Bank
Speaker 1: of America Merrill Lynch seeing what others have seen, but
Speaker 1: uncovering what others may not. Global research that helps you
Speaker 1: harness disruption. Voted top global research firm five years running,
Speaker 1: Merrill Lynch, Pierce, Finner and Smith Incorporated. Welcome to the
Speaker 1: podcast portion, Bill, Thank you so much for doing this
Speaker 1: I'm very pleased to meet you, and I'm really enjoying
Speaker 1: this conversation. Thanks, Barry, and I've been a big fan
Speaker 1: of your writings for a long time, so as great
Speaker 1: to meet you too. UM. I don't even know what
Speaker 1: to say to that. I'm I'm I'm struck done by that. Uh,
Speaker 1: there are there are a few questions I didn't get
Speaker 1: to in the radio portion, and I want to circle
Speaker 1: back before we start doing our um our favorite questions
Speaker 1: and and there's a bunch of different things that I
Speaker 1: know you can sink your teeth into. Um, so let's
Speaker 1: jump into some of these before we come back. God,
Speaker 1: there's so much stuff. So so at the peak, what
Speaker 1: were the total asset that you were running at leg
Speaker 1: Mason Nor is that two thousand or oh seven? That
Speaker 1: would have been oh seven probably, And and basically you're
Speaker 1: buying a little big caps. You didn't feel ever constrained
Speaker 1: by Gee, there's only so much we could do with
Speaker 1: with this money. It's too much money now. In the
Speaker 1: in the early days, we we did all caps. So
Speaker 1: again we had almost no money under man. You started
Speaker 1: zero under management, so we could do anything that two
Speaker 1: when I think, I think the first portfolio that we
Speaker 1: put together in the summer of nine two had a
Speaker 1: seven and a half percent dividend yield and traded at
Speaker 1: four times earnings in a discount to tangible book um.
Speaker 1: At the peak, we were mainly large cap, but again
Speaker 1: because we're contrarian value investors, we were liquidity providers when
Speaker 1: people wanted out of something basis, so the size of
Speaker 1: the of it didn't didn't matter too much and it
Speaker 1: didn't affect us too much. And it's my friend will
Speaker 1: down off. Another guy's beat the market over his entire
Speaker 1: career runs the FILLI Contra Fund. It's the biggest active
Speaker 1: actively managed fund, and he's got a great record with
Speaker 1: a hundred billion dollars an asset. So it's doesn't make
Speaker 1: it doesn't make that much of a difference. So let's
Speaker 1: talk about how you got to um like Mason. What
Speaker 1: were you doing before you were running running the Value
Speaker 1: Opportunity Trust. I was a I was a very young
Speaker 1: treasurer at a privately held company called J. E. Baker,
Speaker 1: which sold refractories to the stealing cement industry. And I
Speaker 1: got to like Mason because my wife was a broker
Speaker 1: at leg Mason, so she had when I when when
Speaker 1: I got married overseas, when I was in the army,
Speaker 1: and then I went back to I went to Baltimore.
Speaker 1: I went back to Baltimore to go to grad school
Speaker 1: at Johns Hopkins. And so when I was in grad school,
Speaker 1: she got a job at like Mason and then, uh,
Speaker 1: that's I got to know the people there and what
Speaker 1: was your first gig there? What were you what were
Speaker 1: you doing? I came. I came in to succeed my
Speaker 1: my now late partner, Ernie Keeney, as director of research.
Speaker 1: So when I was when I was a treasure I
Speaker 1: was doing the normal treasury functions, bank relations and all.
Speaker 1: But the Baker Company had a fairly significant stock portfolio
Speaker 1: that they managed internally, which I which I did as well.
Speaker 1: And it was that that, uh, I think caught the
Speaker 1: attention of the people at Like Mason and some of
Speaker 1: the people that I that she knew there. So this
Speaker 1: is the first time hearing of this. This is interesting.
Speaker 1: So you're working at a company selling refractories to heavy industry,
Speaker 1: but sort of as part of your job, you're managing
Speaker 1: their own internal portfolio. Was that for their pension or
Speaker 1: part part of the pension was managed outside, and so
Speaker 1: we had a pension committee that evaluated managers and then
Speaker 1: part of it was managed internally. What was your what
Speaker 1: was your academic background that you had any sort of
Speaker 1: skill setting that you're in your early thirties. Then at
Speaker 1: that point, right then, I was I want to get
Speaker 1: to like Mason, I was thirty one years old down,
Speaker 1: so you were in your twenties running part of the
Speaker 1: pension funds. What what was your your background? What was
Speaker 1: your schooling? Well, I had an undergraduate degree in economics
Speaker 1: and European intellectual history from Washington and Lee in Virginia,
Speaker 1: and then I went to grad Schoot Hopkins in the
Speaker 1: PhD program in philosophy, and between that I was in
Speaker 1: the military military intelligence overseas. But I've been I've been
Speaker 1: interested in in in stocks since I was since I
Speaker 1: was very young. In fact, it's a it's an amusing
Speaker 1: story that that people have written about so that people said,
Speaker 1: how did you interested in stocks? What when that happened?
Speaker 1: And it happened when I was nine years old, and
Speaker 1: I was living in Miami at the time, and I
Speaker 1: came in from mowing the grass and my dad was
Speaker 1: reading the newspaper and he had turned to the stock pages,
Speaker 1: which of course don't look like the sports section or
Speaker 1: the comics section, right, just numbers and letters. And I said,
Speaker 1: what's that and he said, well, these are stocks. I
Speaker 1: said what are stocks? And he said, well, they're they're
Speaker 1: parts of the business. I said, why why are you
Speaker 1: looking at this and he said, well, he said, you
Speaker 1: know you can. You can make money if you if
Speaker 1: you know how to pick stocks. And I said, what
Speaker 1: do you mean to show me what this means? So
Speaker 1: he takes something I'll just make up with things say
Speaker 1: General Motors. So there's the GM. That's the car company
Speaker 1: that makes Chevy and b Wick and I'm like, okay,
Speaker 1: and he and I said what are those other things?
Speaker 1: But that's the price. There's the opening price of the
Speaker 1: stock in the closing price and and uh and I
Speaker 1: said what's the thing at the end, and it's like
Speaker 1: plus one quarter. He said, well that's the change and
Speaker 1: I said what do you mean? He said, that's that's
Speaker 1: the quarter. That's twenty five cents And he said, so
Speaker 1: if you owned the stock the day before, you made
Speaker 1: twenty five cents, and that I never I said, well,
Speaker 1: what do you have to do to make it make money.
Speaker 1: And he said, what do you mean. I said, what
Speaker 1: do you have to do? How do you make it
Speaker 1: make money for you? He said, well, you don't have
Speaker 1: to do anything. It just does it by itself. And
Speaker 1: I said, wait a minute. There's there's a thing where
Speaker 1: you can make money without doing any work. And he said, yes,
Speaker 1: sort of. And I said, well that's what I want
Speaker 1: to know about, because I don't like to do work,
Speaker 1: but I do want to make money. And so and
Speaker 1: that's how I got interested in in in stocks at that,
Speaker 1: you know, at that point in time, and there was
Speaker 1: a book which is probably still out there that Merrill
Speaker 1: Lynch was giving away called how to Buy Stocks by
Speaker 1: Louis Engel, and it was it was in order to
Speaker 1: familiarize people with the you know, with the stock market,
Speaker 1: and told the story of some little kid that started
Speaker 1: a fishing pole company and that didn't It was sort
Speaker 1: of a parable about stock buying. And since, you know,
Speaker 1: since then, I've always been just interested in stocks. What
Speaker 1: was the first stock you remember buying? The one the
Speaker 1: first I remember buying was R C A H. In
Speaker 1: the nineteen sixties. Then yeah, yeah, I was, I was.
Speaker 1: I bought our cig with the money that I had
Speaker 1: made by having a paper route and umpiring baseball games
Speaker 1: and doing stuff like that, and uh, our c A
Speaker 1: stock doubled and I used that money then to buy
Speaker 1: a car. First car when I was like seventeen years old.
Speaker 1: It's a Triumph TR four. That that that's interesting. So
Speaker 1: there's a tremendous history of interest in the market. But
Speaker 1: still you're you're working for a non financial company. How
Speaker 1: did you start managing their pension fund? That sounds like
Speaker 1: you were twenty eight or six you were running the
Speaker 1: part of their pension fund. Yeah, I mean I initially
Speaker 1: I was. I was. I worked for the CEO directly
Speaker 1: for a couple of years and did a variety of
Speaker 1: different oversaw variety of different things. And then it was
Speaker 1: also the named the assistant treasurer, and the treasurer was
Speaker 1: the one got much older than me. He was, but
Speaker 1: he was one running the running the portfolio. I was
Speaker 1: helping him with that, you know, doing research and doing
Speaker 1: stuff like that. And then he left for for another
Speaker 1: job and the job was vacant, and so again I
Speaker 1: was very young, and they're like, well, you you can
Speaker 1: be the interim treasurer and we'll go find a treasure
Speaker 1: and after after about six months, they didn't find once.
Speaker 1: They just let me do the job. That's amazing. You know.
Speaker 1: The other thing that stands out that you had referenced
Speaker 1: um was military intelligence. We've spoken to a number of
Speaker 1: people who have had military experience. How did that affect
Speaker 1: your approach to invest in the U S. Military is
Speaker 1: a very specific organization with its very own way of
Speaker 1: doing things. Uh, directly on investing, it's it's there's a
Speaker 1: really interesting connection that's probably only because of the military
Speaker 1: intelligence training. And that is, you know, and with the
Speaker 1: SEC no, nobody wants you to have inside information and
Speaker 1: interface other people don't have. But but you can have
Speaker 1: what they call a mosaic approach where you put pieces
Speaker 1: of information together and figure something out. And we had
Speaker 1: extensive training in military intelligence in that exact thing, which
Speaker 1: is taking disparate bits of information and using them to
Speaker 1: create an essence of picture, probabilistic picture of what might
Speaker 1: be going on and what could happen and looking at
Speaker 1: various scenarios. All of that is directly applicable to of
Speaker 1: course to look at at companies and looking at the
Speaker 1: information and trying to get a picture of what's going
Speaker 1: to happen with those businesses in the economy from from
Speaker 1: just apparently unrelated bits and pieces information about the companies,
Speaker 1: and it's it's it's really interesting because you know, there
Speaker 1: was you have these old cliches that they would have
Speaker 1: on the bulletin boards of loose lips, sync ships, you know,
Speaker 1: and stuff like that, and it's it's true because you
Speaker 1: could look at you could look at something that apparently
Speaker 1: was meaningless and have a little bit of information, but
Speaker 1: then there was something over here and something over here.
Speaker 1: There were unrelated on their own, but you could put
Speaker 1: them together and get get the beginning of a picture
Speaker 1: when each individual piece by itself didn't tell you anything.
Speaker 1: And it's the same approach with picking stocks, very similar,
Speaker 1: very similar. Huh. So, I want to throw another quote
Speaker 1: at you from yourself. I often remind and get get
Speaker 1: your feedback on it. You you had said, I often
Speaker 1: remind our analysts that one of the information you have
Speaker 1: about a company represents the past, and a hundred percent
Speaker 1: of the stocks valuation depends on the future. So explain that.
Speaker 1: So this I'll come into two different ways. One of
Speaker 1: them was that one from roughly nineteen eighty well, we
Speaker 1: had two bad years in the Value Trust, and I
Speaker 1: took over at the end of nineteen solely managing the fund.
Speaker 1: And part of what I did then was I went
Speaker 1: back and looked at the history of value investing in
Speaker 1: the academic research on value investing, and uh, and it
Speaker 1: became clear to me that a lot of what people
Speaker 1: thought about value investing wasn't supported by the evidence, and
Speaker 1: that when I looked at our own mistakes, they were
Speaker 1: they were generally speaking, caused by putting too much emphasis
Speaker 1: on past data and past valuation stuff and past growth
Speaker 1: rates and not enough on the future, and not enough
Speaker 1: on what companies could do, and and so uh that
Speaker 1: that that got to that point of where I where
Speaker 1: I came up with that, with that particular that particular quote,
Speaker 1: and we and we changed our approach at that point
Speaker 1: in time to put a lot more emphasis on a
Speaker 1: company's ability to earn above it's cost a capital, to
Speaker 1: generate free cash flow, and to reinvest that on a
Speaker 1: sustainable basis. So how do you go about pivoting You
Speaker 1: you have an approach that's been extremely successful. What makes
Speaker 1: you say we're going to tweak this a little bit
Speaker 1: and and change the way we're doing things despite the
Speaker 1: past track record. You know. I got that actually from
Speaker 1: the late Sir John Templeton, who was asked, you know
Speaker 1: why he followed this value investing approach, and he said, Um,
Speaker 1: we don't follow it out of any any special reverence
Speaker 1: for that approach. We follow it because we keep looking
Speaker 1: at all different ways to do things, looking at ways
Speaker 1: to improve all the time, and it just so happens
Speaker 1: that this is the one that we found most effective.
Speaker 1: And so I think that was that. And I talked
Speaker 1: to him about this, you know, when he was alive,
Speaker 1: and that was one of the things that that stayed
Speaker 1: with me. Is you're always looking to try and improve
Speaker 1: the process. So if it turns out that even for
Speaker 1: a brief period of time, that that that looking at
Speaker 1: charts tends to be correlated with significant stock price moves, fine,
Speaker 1: we'll then add that to the mix until it doesn't
Speaker 1: until it doesn't work anymore. So it's a it's a
Speaker 1: process of really trying to continuously improve. And and again
Speaker 1: I think you had Mike Mobison on here and and
Speaker 1: he was, yeah, he was, yeah, he was a great
Speaker 1: when he was working for us. He's great, Uh, teacher
Speaker 1: of of of secured analysis, to the to the analysts,
Speaker 1: and always looking for ways to improve. Look at the
Speaker 1: academic literature. So so how do you prevent yourselves from
Speaker 1: oversaulting the stew so to speak? It becomes really easy
Speaker 1: to constantly you know, I picture the old soundboards with
Speaker 1: all the knobs and everything, and you have all these
Speaker 1: different inputs. Here his valuation, here's the FED, who's interest rate,
Speaker 1: his inflation. How do you prevent yourselves from playing too much?
Speaker 1: Because you could there's always something to be tweaked. It's
Speaker 1: harder to do less than just doing more seems to
Speaker 1: be easy. How do you prevent that natural tendency to
Speaker 1: want to play him around the edges a little bit?
Speaker 1: It's it's a little bit like the zen like doing
Speaker 1: not doing in the sense of and in the sense
Speaker 1: of what we're trying id to do is always always
Speaker 1: think about how things could be improved. Assesst But we're
Speaker 1: you know, we're long term investors, and that's that's again
Speaker 1: that's rare in this in this market. But you know,
Speaker 1: we owned we owned Fannie May for fifteen years at
Speaker 1: one point. So uh, it's the case that our average
Speaker 1: holding period is three to five years and and then
Speaker 1: so we're we're looking through the stock price fluctuations. We're
Speaker 1: trying to look through the noise, and we're always trying
Speaker 1: to filter out the signal from the noise. But the
Speaker 1: core part of the core part of the process doesn't change,
Speaker 1: which is trying to figure out the intrinsic business value.
Speaker 1: All right, So let's talk a little bit about that,
Speaker 1: because that, I think is really fascinating. How does that
Speaker 1: process begin. How important are analysts bringing ideas to you?
Speaker 1: And how significant is the team approach that you you employ? Um,
Speaker 1: all those things are, all those things are important. We
Speaker 1: we we get. I mean I tend to be a
Speaker 1: be a high output idea generator, not in the sense
Speaker 1: of constantly putting new names in the portfolio, but in
Speaker 1: the sense of constantly looking at names. And after thirty
Speaker 1: five years of doing this, you know, I have a
Speaker 1: fairly good, fairly good, extensive experience with all kinds of
Speaker 1: different companies and industries. And you know, my son has
Speaker 1: been doing this for eight years, and Samantha has been
Speaker 1: doing it for fifteen years. We have a we have
Speaker 1: a new young analyst and a more senior guy that
Speaker 1: we just brought on. So there's a there's a mix
Speaker 1: where people are all looking for for things that we
Speaker 1: think are mispriced on a on a longer term, on
Speaker 1: a longer term basis. All right, and your your co
Speaker 1: um manager at the Opportunity Trust Funds whose name is
Speaker 1: give me one sex, Samantha uh mich Lamore and Maclamo
Speaker 1: mac Lamore. So how do you guys divide responsibilities from
Speaker 1: running that fund? Is having a co manager challenging? Is
Speaker 1: it helpful? Is there a natural split of duties? How
Speaker 1: does that work? Uh? Well, it's it works, It works
Speaker 1: very well. We don't we don't have a formal uh
Speaker 1: uh split of duties. We both are trying to pay
Speaker 1: attention to everything in the portfolio all the time. She's
Speaker 1: in the office a lot more than I am because
Speaker 1: I split my time between Florida and Maryland and New York,
Speaker 1: and so she she will tend to take more meetings
Speaker 1: with with south Side Animals, take more meetings with companies
Speaker 1: than that I would, just because she's in the office
Speaker 1: office more. And then we're you know, we're sure office
Speaker 1: is right next to mine and my sons is right
Speaker 1: next to hers, So it's it's when we're there we're
Speaker 1: we're talking all the time, and we're not there. We're
Speaker 1: emailing back and forth or talking on the phone. So
Speaker 1: let's let's talk about the end of the run, which
Speaker 1: um was uh oh five. What was so different about
Speaker 1: oh seven, o eight, oh nine than than the prior
Speaker 1: sell offs like two thousand or eighty seven. What made
Speaker 1: this collapse different than any previous I mean, the dot
Speaker 1: com crash was pretty um brutal, at least for that second.
Speaker 1: What was qualitatively difference different about the Great Recession? This was,
Speaker 1: up until that point in time, the academic literature did
Speaker 1: not really distinguish between the types of financial crises and
Speaker 1: then how you deal with those crises. And so what
Speaker 1: we got what I got wrong. What we got wrong
Speaker 1: in that was I thought we had a pretty robust
Speaker 1: strategy for dealing with with financial panics and upsets. And
Speaker 1: in fact, we went through an exercise where we said,
Speaker 1: let's let's make sure that we have a strategy for
Speaker 1: dealing with anything that happened in the post war period
Speaker 1: since World War Two, so high inflation, watergate, you know, wars, panics,
Speaker 1: all that kind of the inverted yield curves, and so
Speaker 1: that's and that's why we've did pretty well for for
Speaker 1: many many years. This particular crisis was different because it
Speaker 1: was an asset based crisis and not a liquidity based crisis.
Speaker 1: And most financial crises are liquidity based in that the
Speaker 1: Federal raise interest rates, the discount rate goes up, you know,
Speaker 1: the savings rate goes up, companies cut back, you have
Speaker 1: a recession. Then the Fed comes through the other way.
Speaker 1: Even the crash in same thing, which was that when
Speaker 1: the market crashed interest rates, that got the ten percent
Speaker 1: in October and he had a two percent too and
Speaker 1: a half percent yield on the market, and that just
Speaker 1: sucked all the money right out of the stock market.
Speaker 1: And but when the when it crashed, the Fed cut
Speaker 1: rates dramatically, liquidity went in and the and the market
Speaker 1: came back and the economy came back. In this case,
Speaker 1: it was an asset based crisis. So basically housing housing
Speaker 1: related and housing is the most people's largest asset. It's
Speaker 1: the asset that secures most of the debt, and a
Speaker 1: lot of that debt was was undocumented loans, liars, loans
Speaker 1: and stuff like that. So when that that edifice came down,
Speaker 1: what we thought was when the FED began to really
Speaker 1: inject liquidity. You could go back, you could go back
Speaker 1: in again. And as it turns out, that's correct in
Speaker 1: a liquidity based crisis. It's not correct in an asset
Speaker 1: based crisis. An asset based crisis, some of what we
Speaker 1: saw in Japan and what we saw certainly in the
Speaker 1: US in two thousand and eight is you only go
Speaker 1: in and that when the authorities get together and try
Speaker 1: and stabilize asset prices. So that was TARP. That's what
Speaker 1: TARP up. Until TARP, every time there was a problem,
Speaker 1: the bank failed, the shareholders were white doubt, and Tarpe
Speaker 1: came in and it stabilized the asset values of the
Speaker 1: banks and therefore the banking system. And that was that
Speaker 1: was the bottom. October was the bottom, when most stocks
Speaker 1: made their bottom, when most asset prices made their bottom.
Speaker 1: The final bottom was made in March, but that was
Speaker 1: more technical bottom. You had an October eight bottom and
Speaker 1: then a Marshal uh Oh nine and that was another.
Speaker 1: But there were there were, there were, there were no
Speaker 1: there were no significant failures after TARP, and that was
Speaker 1: when that was what allowed the system to stabilize. As
Speaker 1: late ast January of two thousand nine, people were still
Speaker 1: talking about nationalizing the banks, but nothing ever, nothing ever
Speaker 1: came of it. So you you have your own internal process.
Speaker 1: How do you as a as a fund manager, how
Speaker 1: do you come to the conclusion, Hey, we're on the
Speaker 1: wrong side of the trade here, How do you recognize
Speaker 1: the error and how do you adjust your process to
Speaker 1: to reflect the new information. A lot of people have
Speaker 1: a real hard time making that that pivot. Oh, I
Speaker 1: think I think that's a very difficult thing because when
Speaker 1: you're when you're doing poorly relative to the market, then
Speaker 1: the question is always is the market wrong or am
Speaker 1: I wrong? And that's a very difficult thing to answer
Speaker 1: because the future isn't knowable to anybody, and the market
Speaker 1: is a sort of a collective intelligence collective intelligence machine.
Speaker 1: So it's it's easier to do at the individual stock
Speaker 1: level because and give you a good example, if you
Speaker 1: take two thousand and eleven, for example, we had a
Speaker 1: very bad year in two thousand and eleven, and people
Speaker 1: thought it was gonna be another two thousand eight and
Speaker 1: the year was the year was going to come apart,
Speaker 1: which would have been a catastrophe. So it but in
Speaker 1: two thousand and eight, if we looked at the individual
Speaker 1: names in our portfolio two thousand seven and two thousand
Speaker 1: and eight, generally speaking, they were not meeting our expectations
Speaker 1: in terms of fundamentals. They would miss a quarter here,
Speaker 1: a quarter there, the stock would sell off. We're like, well, okay,
Speaker 1: it's marked a market on that. But there was this
Speaker 1: sort of a continual slippage of what we expected the
Speaker 1: fundamentals to be. And in two thousand eleven there was
Speaker 1: no slippage at all. The company it's continued to do
Speaker 1: really well even if the stocks weren't doing well. So
Speaker 1: that that that's a that's a that's a big one
Speaker 1: for us. The second is just when you go in.
Speaker 1: When we go in on a name, one of the
Speaker 1: things that we ask ourselves once we've decided to buy
Speaker 1: it is what will make us wrong? So trying to
Speaker 1: decide up in advance how strong is the investment case
Speaker 1: and when will we know that we're wrong? And and
Speaker 1: one of the things that we have learned over the
Speaker 1: years is you don't let the stock price tell you
Speaker 1: if you're wrong. The stock price might tell you something
Speaker 1: is going to go wrong, but the stock price by
Speaker 1: itself doesn't doesn't contain any information, especially in this environment
Speaker 1: where we're seventy percent of the stuff is algorithmic, where
Speaker 1: prices are being marked against each other every day. So
Speaker 1: that raises another question, how does how does h f
Speaker 1: T high frequency trading? How does that impact you when
Speaker 1: you're either looking at stocks to select or making the
Speaker 1: decision to hold onto them. Um, it doesn't make much
Speaker 1: difference to us because we're longer term investors. I think
Speaker 1: there's a real issue of the front running and the
Speaker 1: and the stuff can affect shorter term shorter term traders.
Speaker 1: To us, the market structural change, which is um uh
Speaker 1: mostly most of us. The reaction to the crisis is
Speaker 1: the layers of risk management and the way way people
Speaker 1: manage risk. That's what's making the market I think, much
Speaker 1: more difficult and problematic. And and the reason for that
Speaker 1: is that now that everybody is so risk phobic and
Speaker 1: people are when they see draw downs, they run and
Speaker 1: run and sell. But what you know, at like Mason,
Speaker 1: we had since the crisis, three additional layers of risk
Speaker 1: management that we're added to the overall firm. And what
Speaker 1: what all risk managers want to know is what's your
Speaker 1: risk mitigation strategy? And they don't ask what your risk
Speaker 1: mitigation strategy is if you're outperforming or the or the
Speaker 1: market's going up. It's only when you're underperforming or the
Speaker 1: markets going down. So what that does is it bifurcates
Speaker 1: the notion of risk to only focus on stuff that's
Speaker 1: going down. And as as I've said many times, I've
Speaker 1: never read, never met a risk manager anywhere in the
Speaker 1: world that believes you should own we of an asset
Speaker 1: that's falling in price. You should be selling an asset
Speaker 1: that's falling in price because it's risky. But you iterate
Speaker 1: that across the entire market, and what happens is that
Speaker 1: stocks get go down a lot more than they would
Speaker 1: otherwise do so because at each different level there are
Speaker 1: people who are selling just because it hits a threshold
Speaker 1: down five percent. The new regulatory um scheme that we
Speaker 1: see at companies is a modern version of portfolio insurance.
Speaker 1: That that doesn't make any sense if you I'm not
Speaker 1: I'm not arguing with you. I'm saying from a are
Speaker 1: aren't returns generated by recreasonably embracing risk? Isn't is in
Speaker 1: performance the flip side of assuming some risks? Absolutely, I mean,
Speaker 1: I think you know when people talk about volatility and
Speaker 1: and they're worried about risk. Put your money on in
Speaker 1: cash and just just sit there and look at you
Speaker 1: won't do anything right. So my colleagues, Samantha is fond
Speaker 1: of saying that volatility is the price you pay for performance.
Speaker 1: And I think that's you know, I think that's right.
Speaker 1: Volatility is the price you pay for performance. So there
Speaker 1: are lots of giant firms. Now you have Vanguard and
Speaker 1: black Rock and State Street and firms that are managing
Speaker 1: in the PIMCO and UH firms that are managing in
Speaker 1: the in the trillions. Do they all have do you?
Speaker 1: I guess you. I'm asking if you imagine they all
Speaker 1: have the same sort of of layer of risk management
Speaker 1: and and is that going to affect everybody's ability to
Speaker 1: produce asset management that can rationally embrace risk. Well, I'm
Speaker 1: not I'm not familiar with the details of all of
Speaker 1: their strategies. You know, many of those firms that you
Speaker 1: mentioned are are passive much much of many of their
Speaker 1: assets passive. Vangard is to four trillion, two thirds of
Speaker 1: it is passive, and Black Rocks got the E T
Speaker 1: f s and stuff like that. But but but from
Speaker 1: the I'll just say from the people that I know
Speaker 1: in the industry, in the business, at big firms, every
Speaker 1: one of them tells the same story about about risk
Speaker 1: and about having to have risk mitigation strategies. And I
Speaker 1: think that's part of what you're seeing in the overall.
Speaker 1: You're seeing in the overall market that's quite fascinating. What
Speaker 1: what else is different? And one of the questions I
Speaker 1: didn't get to before. I've heard numerous people blame or
Speaker 1: credit if you want, Um, this rally is all driven
Speaker 1: by the FED, it's low interest rates. Nothing else is
Speaker 1: is driving this market. How accurate is that assessment? I
Speaker 1: think it's reasonably accurate as it relates to bonds globally,
Speaker 1: and it's not talking equities. Well, I think it's I
Speaker 1: think it's much less accurate with respect to equities. And
Speaker 1: so just just for example, UM, if if it were
Speaker 1: all just low interest rates, that's driving the rally, right,
Speaker 1: what's the most interest sensitive part of the economy? Housing? House?
Speaker 1: Housing done? Uh? Well? Housing is housing stocks have been underperforming,
Speaker 1: and that the housing market itself is half half of
Speaker 1: what it was in two thousand five in terms of
Speaker 1: new home deliveries. So that hasn't been. You would expect
Speaker 1: that would be, you know, blowing the doors off if
Speaker 1: it was just interest rates. How much how much of
Speaker 1: interest rates helped Amazon for example, none? Google, none, Facebook none,
Speaker 1: those are among the largest companies in the overall market.
Speaker 1: How interest rates helped JP Morgan and Bank America. No,
Speaker 1: they hurt them. So there's it's a much more complex
Speaker 1: situation than just the stocks are marked are marked up.
Speaker 1: And as I said, I believe the markets already discounting
Speaker 1: three to four ten year rates. I think, I think,
Speaker 1: and that's five years or so often the future. Yeah.
Speaker 1: But the thing I think is more interestingly possible is
Speaker 1: that the only time that we saw money going into
Speaker 1: stocks was in two thousand and thirteen during the so
Speaker 1: called taper tantrum when yields went from one to three
Speaker 1: twenty and four months or five months. And that's the
Speaker 1: only time that money has gone out of bond funds
Speaker 1: and in the stocks because people were losing money in
Speaker 1: bonds for the first time. And now money has gone
Speaker 1: back into bonds. So what did the market do that
Speaker 1: years up because money flowed into stocks, not out of stocks.
Speaker 1: And I think that I think that's a potential that
Speaker 1: most people aren't focused on, which is if we have
Speaker 1: a bear market in bonds and doesn't have right and
Speaker 1: people start losing money and that goes into stocks, stock
Speaker 1: market could go up easily. That's quite fascinating. Um. I've
Speaker 1: been hearing stories of cash on the sidelines now for
Speaker 1: twenty years, and I've always ignored it because how can
Speaker 1: there be cash on the sidelines. If I'm buying a
Speaker 1: stock from you, you're giving cash to me, and if
Speaker 1: I sell a stock to you and vice versa, it's
Speaker 1: there's always some amount of cash ready to be deployed.
Speaker 1: That that that's really fascinating the the bond side of things. Um.
Speaker 1: So you you've owned a lot of financial stocks you
Speaker 1: mentioned just now, JP Morgan and others affected by the
Speaker 1: UM by the Federal Reserve. Oh, what was it like
Speaker 1: handing into the financial crisis sitting in financial stocks? What
Speaker 1: was the analysis then? Was there a sort of sense, Hey,
Speaker 1: these are really inexpensive and we want to own more,
Speaker 1: or was the sense more along the lines of We're
Speaker 1: not really sure how this plays out. This is sort
Speaker 1: of uncharted territory. Um. It was it was more the latter,
Speaker 1: because what what we did as the as the the
Speaker 1: economy and the market got worse, is we moved up
Speaker 1: to what we thought we were doing was moving up
Speaker 1: the quality spectrum and buying the larger and stronger financials
Speaker 1: um as it turned out, you know, so we bought
Speaker 1: a I G. Which was at one point a triple
Speaker 1: A rated company, but then best Insuring the world Ye so,
Speaker 1: and that and that, you know, effectively disappeared during that
Speaker 1: during that point in time. Um So, I think from
Speaker 1: our standpoint, what what we the big the big break
Speaker 1: for us in that in that financial crisis was when
Speaker 1: the when the government took over Fannie and Freddie that
Speaker 1: Sunday in September. And my personal view is that people
Speaker 1: when people say, well, the letting Lehman Brothers go was
Speaker 1: the most steak that caused the cascade of you know,
Speaker 1: then the breaking the buck and the credit markets coming unhinged.
Speaker 1: And my personal view is the question I asked people
Speaker 1: to say that is, well, why did Lehman Brothers fail
Speaker 1: in September? Bear Stearns failed in March, and nothing happened
Speaker 1: from March till September. Then Lehman failed. And to me
Speaker 1: the answer is Lehman failed because Fannie and Freddie were
Speaker 1: seized the week before, and they were seized even though
Speaker 1: the all their capital requirement met all the statutory capital requirements.
Speaker 1: They were seized preemptively. And I came in that Monday
Speaker 1: morning and I said, if the government is going to
Speaker 1: seize and wipe out the shareholders preemptively, not when the
Speaker 1: company runs into liquidity trouble like bear Stearns did, then
Speaker 1: we can't own any financials. We have to get out
Speaker 1: of every financial which we did. And I think people
Speaker 1: who had their look the same thing. Who is the
Speaker 1: most levered next to Fanny and Freddie Lehman, Let's get
Speaker 1: let's let's get out of that one, and then who's
Speaker 1: the most levered after that? Mary Lynch, Whamo and so
Speaker 1: liquidated following the Fannie and Freddie um. That was late
Speaker 1: August or early September seventh. It was a week before
Speaker 1: Lehman blew up UM. So that had to save a
Speaker 1: ton of capital. If you were liquid dating on the eighth,
Speaker 1: it must have felt bad at that day, but you
Speaker 1: look what happened a few months later. We actually got
Speaker 1: We actually got back in after TARP, so we weren't
Speaker 1: out for that long and we what really what really
Speaker 1: helped us when the government, the government came in with tarp.
Speaker 1: And again we shouldn't have gone in as quickly as
Speaker 1: quickly after that as we did, but in January had
Speaker 1: a nice bounce after that October November. In January, what
Speaker 1: happened when they talked about we're talking about nationalizing the banks,
Speaker 1: that the the preferred stock of City Bank Bank America,
Speaker 1: Wells Fargo was trading. It was trading it like fifty
Speaker 1: cents on the dollar when it was PARTI passu with
Speaker 1: the government's So we bought those prefers at the time.
Speaker 1: And then what happened was that the government caused those
Speaker 1: preferred to be converted into common stock at roughly par
Speaker 1: so we you know, are think our cost on our
Speaker 1: City Bank was like seventy cents to share and stuff.
Speaker 1: So we that was part of what we did so
Speaker 1: well in two thousand and nine was those things took
Speaker 1: off like a rocket. That's fascinating. You know. My view
Speaker 1: of Lehman Brothers has always been it was merely the
Speaker 1: first trailer in the park when the tornado came in,
Speaker 1: and as long as there was so much financial paper
Speaker 1: written on based on mortgages and home prices were dropping. Hey,
Speaker 1: the whole dominoes we're gonna fall, it didn't matter which
Speaker 1: one was was which I don't know how much of
Speaker 1: that is, um philosophically appealing, but I've always I've always
Speaker 1: liked that metaphor. A lot of people blame Lehman on
Speaker 1: the rest of the crisis, but it looked like everything
Speaker 1: was going down no matter no matter what it was,
Speaker 1: as long as home prices were in free f I
Speaker 1: think that's right. So I know I only have you
Speaker 1: for a finite amount of time. Let's jump into my
Speaker 1: favorite questions, the standard questions I'd like to ask all
Speaker 1: my guests. You had told us about your background and
Speaker 1: what you did be for, like Mason, tell us about
Speaker 1: some of your early mentors. Who were the people who
Speaker 1: influenced your professional development. I would say, because because I
Speaker 1: got interested in stocks at a fairly a fairly young age,
Speaker 1: and I read a lot on stocks. But I'd say
Speaker 1: that the stuff that influenced me the most was probably
Speaker 1: Adam Smith's The Money Game, which came out in or
Speaker 1: nineteen sixty nine. Um uh the follow on to that,
Speaker 1: you know, Super Money where actually he uh he introduced
Speaker 1: the world to Warren Buffett, so I started reading about
Speaker 1: reading about Buffett red Ben Graham at the time. Reminiscences
Speaker 1: of a Stock Operator is something that up until a
Speaker 1: couple of years ago, I read it. I read it
Speaker 1: every year because it's such a really it's such a
Speaker 1: great lesson in psychology and and how psychology works through
Speaker 1: the market, how markets, how markets behave. So those were
Speaker 1: those were something more. You know, my my partner, Ernie
Speaker 1: Kenya died in two thousand ten at the age of
Speaker 1: ninety two. Was I worked with him, worked with him
Speaker 1: every day for ever many years that was, uh twenty plus,
Speaker 1: you know, twenty plus, twenty five plus years. So he
Speaker 1: was a big influence on me. And the major influence
Speaker 1: that he had was he was probably the most optimistic person,
Speaker 1: certainly most officially, I've ever met. And and so no
Speaker 1: matter what, no matter how terrible things looked, he would say, well,
Speaker 1: I'll get better things, that things will turn up, you
Speaker 1: know where everything's gonna be okay. And he was also
Speaker 1: extremely patient as an investor, um, you know, owning just
Speaker 1: own stocks for forever and uh and was it was
Speaker 1: a deep value kind of a guy. And in fact
Speaker 1: he got to leg Mason. He came to leg Mason
Speaker 1: and and headed up the research effort there after. He's
Speaker 1: spent his career at the telephone company, and he the
Speaker 1: reason he got to leg Mason, which is a very
Speaker 1: small firm at the time he came in night there
Speaker 1: was because that his personal account was just was so
Speaker 1: gone up so much, and the broker that was dealing
Speaker 1: with him said, you know, this guy, this guy is
Speaker 1: you know, he's his guy's in his sixties, you know,
Speaker 1: and he's going to retire from the telephone company and
Speaker 1: we need to get him here because this guy can
Speaker 1: really pick stocks. And that's how And he came and
Speaker 1: joined the firm real yeah, after retiring. That's amazing. Any
Speaker 1: any other mentors you want to mend mention, Well, certainly,
Speaker 1: I mean people that you know. I tried to get
Speaker 1: to know and pay attention to the all the prominent
Speaker 1: value investors. So certainly, certainly Warren Buffet, John Templeton have
Speaker 1: been big influences on how I think about things. Um,
Speaker 1: And you mentioned a few books. You mentioned Money Game
Speaker 1: and Super Money and Reminiscence of a Stock Operator. What
Speaker 1: other books, um are some of your favorites? Be it finance,
Speaker 1: not finance, fiction, nonfiction? What what do? What do you read? Well?
Speaker 1: I I kind of read. Um. Uh, I read very widely.
Speaker 1: Let's just say it's okay. And so I'm always reading
Speaker 1: stuff that that is people are kind of surprised. I
Speaker 1: just spent to hear about I've just been fifteen minutes
Speaker 1: talking to Bill McNab about science fiction. So don't be
Speaker 1: afraid to go outside of you know, reminiscence, what what else? Well?
Speaker 1: So so I just kind of out a lot of stuff.
Speaker 1: And so if I stay in the business thing, uh,
Speaker 1: in the in the in the Marketer business realm Um.
Speaker 1: Fortune's Formula by Bill Poundstone is a great read because
Speaker 1: it's what it is it's about. It's about Claude Shannon,
Speaker 1: the guy who created information theory, and J. L. Kelly,
Speaker 1: who came up with the Kelly criterion, which is how
Speaker 1: how you allocate assets and you know, in any type
Speaker 1: of an environment, and m but but but Shannon made
Speaker 1: a fortune in the stock market. And that book points
Speaker 1: out that the differences between standard financial theory and the
Speaker 1: type of the type of theory and behavior that Kelly
Speaker 1: and Shannon Shannon used. And it's just a great intellectual,
Speaker 1: great intellectual read uh the two books that things that
Speaker 1: have influenced by thinking greatly, UM, William James Pragmatism. I
Speaker 1: think that's the most important document in American intellectual history, really,
Speaker 1: I think. And his his other book, one of his
Speaker 1: other books called The Variety of Religious Experience. Also very interesting,
Speaker 1: interesting book. Mind and Cosmos as a recent book by
Speaker 1: Tom Nagle, a philosopher, UM and the in the in
Speaker 1: the again, I went to grad school and philosophy. So
Speaker 1: Hume's Treatise of Human Nature is Hume Kant you know,
Speaker 1: they're They're all I'm I'm reading Schopenhauer right now, the
Speaker 1: two volumes of the World's Will and Representation, um. Some
Speaker 1: stuff that i'm reading right now. I'm just about done
Speaker 1: with the brand new biography of Douglas MacArthur. There's a
Speaker 1: new one of Ulysses Grant that just came out that uh,
Speaker 1: it's John a blank on it right now. I'm not
Speaker 1: h w brand if it's it's it's brand new. It's
Speaker 1: an it's an eight hundred page, uh eight d page book,
Speaker 1: and it's good. It's it's very good. I've read I've
Speaker 1: read Manchester's book on MacArthur. And but this is this
Speaker 1: is this is good. Um, let's let's see. I've this year,
Speaker 1: uh trying to you're always trying to read some classics.
Speaker 1: I read Robinson, Crusoe and Frankenstein. I'm reading the book
Speaker 1: that came out that a lot of people read. Obamas
Speaker 1: recommended it, Sapiens by Yuval Harari. Uh, Danny Khneman recommended
Speaker 1: that book I've had. I've had a number of people
Speaker 1: come out. I started it not too long ago. Are
Speaker 1: you enjoying it? Well, I've finished that. But he has
Speaker 1: a new book out it's not It's called Homodaeus, and
Speaker 1: I'm about halfway through that and it's really it's great,
Speaker 1: it's great. Yeah, I'm trying to pull up the I'm
Speaker 1: trying to pull up the the MacArthur book. But uh,
Speaker 1: this is look at Amazon. Just looking at Amazon, McArthur. Yeah,
Speaker 1: watch McColl It is not cooperating. Ah, this is Explorer
Speaker 1: and it doesn't want to remotely cooperate. I'll dig it up. Yeah.
Speaker 1: You mentioned you mentioned science fiction, which I don't read
Speaker 1: a lot of. But I actually have just started all
Speaker 1: off Stapleton's book Starmaker, which is a famous book in
Speaker 1: the signs fiction pantheon. He was a philosoph or by
Speaker 1: training who wrote UM what he didn't even regard as
Speaker 1: science fiction, just called it, you know, speculative speculative fiction.
Speaker 1: So that's that. That that's a that's that's a book
Speaker 1: that's gotten had an exceptional influence on other science fiction writers.
Speaker 1: And I haven't you know, I haven't read it, So
Speaker 1: that that's quite a run of books you've gone through.
Speaker 1: It sounds like you're you're quite the reader. Yeah, that's
Speaker 1: I spend a lot of time reading. I wish I
Speaker 1: spent as much time as Mr Buffett does. He says
Speaker 1: it's all he does all day is read. But I
Speaker 1: have to have other things to do, to say the least.
Speaker 1: So what do you we we talked about some changes
Speaker 1: in the industry. What do you see as the next
Speaker 1: round of changes? What is the next thing to I
Speaker 1: think we're about halfway through the secular change in the
Speaker 1: industry away from active management and away from UM a
Speaker 1: traditional mutual fund industry which is under great secular pressure
Speaker 1: both from E t f s as well as from
Speaker 1: UH from passive, and I think passive is right now
Speaker 1: about thirty of the of the industry. I think that
Speaker 1: probably goes to seventy that much over time, and then
Speaker 1: so and then that's that's I think we're so we're
Speaker 1: half probably halfway through that. I think we're just at
Speaker 1: the beginning of a massive hege hedge fund shakeout to
Speaker 1: where the fee structure and hedge funds is. It just
Speaker 1: makes no sense whatsoever in a low nominal rate of
Speaker 1: return world, I mean, having a having a fee structure
Speaker 1: in a an equity an equity hedge fund of roughly
Speaker 1: equal to the ten year treasury just makes no sense whatsoever.
Speaker 1: And if you're going to make five percent a year
Speaker 1: in stocks, which we think is a reasonable number, than
Speaker 1: having that level of fees and then taking of any
Speaker 1: profits takes almost all the profit unless you have a
Speaker 1: hurdle rate in there and gives it to the manager,
Speaker 1: which again doesn't make any sense. How much of the
Speaker 1: move from active to passive is being driven by a
Speaker 1: similar fee pressure, Well, it's it's it's a lot of performances,
Speaker 1: it's it's a lot, it's a lot less because the
Speaker 1: fees are lower compared to hedge funds. But but again
Speaker 1: people have thought for some reason, rather in a mental
Speaker 1: accounting mistake that some other hedge funds were magical and
Speaker 1: they deserve these higher, higher fees. I think the problem
Speaker 1: and active to passive is twofold number one fees, Jack
Speaker 1: Bogel has said, And that's that's money directly that doesn't
Speaker 1: belong to the customer anymore. And but second and more importantly,
Speaker 1: I think it's it's closet indexing. And closet indexing is
Speaker 1: driven by, you know, a combination of risk management and
Speaker 1: also uh fear of tracking error, so you know, people
Speaker 1: people can take some under performance. I remember having a
Speaker 1: conversation with John Reid when he was running City Bank.
Speaker 1: I think it's probably nineteen I want to see late
Speaker 1: nineteen eighties or something like that, early nine ninies, I
Speaker 1: guess it was. And and he said to me, and
Speaker 1: we were an owner of City Bank at the time,
Speaker 1: and he said to me, you know, he said, you
Speaker 1: have a very tough job because you have to actually
Speaker 1: beat the market. Uh. If you don't beat the market
Speaker 1: for some pire time, people take all your assets away.
Speaker 1: And he said, on our side and our side of
Speaker 1: the business, he said, in terms of managing people's money,
Speaker 1: he said, all we have to do is not look bad.
Speaker 1: So we don't really have to beat it as long
Speaker 1: as we don't underperformed by too much. Because he said,
Speaker 1: it's a different mindset that people different people of mindset
Speaker 1: have money being run by a bank versus being run
Speaker 1: by a mutual fund company. But I think that the
Speaker 1: closet indexing UH an academic told me that by by
Speaker 1: his account, over sevent of active managers aren't really that active.
Speaker 1: They're pretty much closet, and so it's all career risk.
Speaker 1: They're afraid of sticking the neck out, and so they're
Speaker 1: charging fees but essentially running an index with a few
Speaker 1: changes around the edges. Yeah, and and that and that
Speaker 1: can't in the aggree, that can't work. So that's is
Speaker 1: that the largest source of money that's moving from active
Speaker 1: to passive. It's moving away from the closet indexers to
Speaker 1: the true and now it's no, it's it's moving away
Speaker 1: from I mean, we're we're getting redeemed this year. We're not.
Speaker 1: We're not having a great year. But after five years
Speaker 1: of the number one fund, you would think they would
Speaker 1: be getting a lot of inflows. We're not. Right, My
Speaker 1: friend Will down Off, who runs the Contra fund, right,
Speaker 1: he's got a twenty five year record to be the
Speaker 1: right outflows every day. Chris Davis, same thing, Mason Hawk
Speaker 1: and the same thing. So I think that I think
Speaker 1: it's a shift from active just in general. And so
Speaker 1: it's not so much that people don't know that of
Speaker 1: all the managers I just mentioned, all of them have
Speaker 1: a record of beating the market over long periods of time.
Speaker 1: So it's not that people don't believe that they can't
Speaker 1: beat the market. It's people don't want the market. They
Speaker 1: don't want to draw down and the risk that that
Speaker 1: comes with anybody who's truly an active manager. That's quite fascinating.
Speaker 1: That's that's very insightful. Um So what do you do
Speaker 1: to relax outside of the office. Well, reading is relaxing
Speaker 1: for me. I have I have a bulldog that always
Speaker 1: said English bulldogs, so he's always a source of amusement.
Speaker 1: And then you know it's a psychologically you know, patting
Speaker 1: the dog is relaxing. Uh. But that you know, that's
Speaker 1: why it's one of those things where I'm lucky that
Speaker 1: I'm lucky that, uh, that the market is both a
Speaker 1: hobby and a and a profession. And so I I
Speaker 1: spent a lot of time just you know, reading about economics, markets,
Speaker 1: that that sort of thing. Okay, that makes perfect sense. Um.
Speaker 1: So the last two questions, these these are my favorite too.
Speaker 1: I asked this of of all of our guests. If
Speaker 1: if you had a millennial or a recent college graduate
Speaker 1: come to you and say, Mr Miller, I'm interested in
Speaker 1: becoming a fund manager, what sort of advice would you
Speaker 1: give them? Well, the first thing, I started asking some
Speaker 1: questions like why do you want to be? Uh? What?
Speaker 1: Why do you want to do this? What's your how
Speaker 1: is your interest stoked in this? Uh? It's the people
Speaker 1: that I've found that have been the best at this
Speaker 1: have tended to be people that have been interested from
Speaker 1: a young age. Not really not surprisingly. Tiger Woods, you know,
Speaker 1: started golfing at age two. So the younger you you start,
Speaker 1: I think, the better off you're likely to be. UM.
Speaker 1: I I agree mostly with Charlie Manger. I always ask people,
Speaker 1: you know, what they're reading, whether it be Mark It's
Speaker 1: related stuff, or Charlie. Charlie says that he's never met
Speaker 1: a great investor, he wasn't a great reader. Um. I'd
Speaker 1: say that's that's mostly accurate in in my experience. Then
Speaker 1: then in terms of what I tell him is that
Speaker 1: one of things you really want to do is just invest.
Speaker 1: So do you invest? Right now? What do you what
Speaker 1: do you do with even have a small amount of money,
Speaker 1: what do you do with it? I started investing twenty
Speaker 1: five bucks a month when I was in the Army
Speaker 1: as a lieutenant in the in the Templeton funds and
Speaker 1: now you know, read the quarterlies and i'd ask I
Speaker 1: would also ask me want to be a fund manager?
Speaker 1: Which fund managers do you admire? And why? UM? Questions
Speaker 1: like that. So and in terms of advice, it's UM.
Speaker 1: You know, it's a tough business to get into. UM.
Speaker 1: Having a having a business school degree from a from
Speaker 1: a good business school has pluses and minuses. But one
Speaker 1: of the pluses is you're you're more likely to get
Speaker 1: a job in in finance with with that. But again
Speaker 1: I don't have that, and a lot of other a
Speaker 1: lot of other people that I know don't have that. UM.
Speaker 1: But just getting into a money management firm, So if
Speaker 1: you can get a job anywhere at leg Mason or
Speaker 1: t rope Ice or Fidelity or one of that I
Speaker 1: think is the key. Once you're inside, then your ability
Speaker 1: to maneuver and to make friends, and to figure out
Speaker 1: where you can go as much greater than it is
Speaker 1: trying to have your your nose pressed against the window.
Speaker 1: And our final question, what is it that you know
Speaker 1: about value investing today that you wish you knew thirty
Speaker 1: plus years ago when you first started, Well, i'd I'd say,
Speaker 1: I'd bring it a little bit more up to up
Speaker 1: to the current, and that in two ways, you know,
Speaker 1: I wish when I had started that I had had
Speaker 1: a better understanding of how valuate how values created by businesses.
Speaker 1: I had a good understanding of how people in the
Speaker 1: stock market have invested and done that kind of stuff,
Speaker 1: but really understanding i'd say, the economics of various businesses
Speaker 1: in a way that Buffett seems to have a natural
Speaker 1: tendency to do. UM. I think I've developed that over
Speaker 1: the years, but it would have been nice to have
Speaker 1: it if I was or thirty. Uh. Second thing would
Speaker 1: be the I mean, the big thing, the big changer
Speaker 1: uh for me, would have had to understand the difference
Speaker 1: between asset based crisis and a liquidity based crisis. So
Speaker 1: if we have, if we have, those are the only
Speaker 1: two possible kind of crisis. That there are except for
Speaker 1: you know, world wars and stuff like that. Uh and
Speaker 1: so uh had I had that understanding that I have
Speaker 1: today as a result of reading the academic literature in
Speaker 1: the work of people like John John Acopolis at Yale,
Speaker 1: for example, or Gary Gordon at Yale. I think I
Speaker 1: think we have done really well coming through that oh eight.
Speaker 1: So if we if we, if we have a eight
Speaker 1: type thing again, which I don't think we're gonna have
Speaker 1: this bay once in a generation, but I think we'd
Speaker 1: be able to deal with it, and that would have
Speaker 1: made a big difference. Thank you so much, Bill Miller
Speaker 1: for being so generous with your time. We've been speaking
Speaker 1: with Bill Miller. He is the former c I O
Speaker 1: and chairman of leg Mason Asset Management, soon to be
Speaker 1: running l m M and the same funds he's been
Speaker 1: running so successfully over the past few years. If you
Speaker 1: enjoy this conversation, be suan looked up an inch or
Speaker 1: down an inch on Apple iTunes and you could see
Speaker 1: the other hundred plus of these conversations that we've had.
Speaker 1: We enjoy your comments and feedbacks. Comments and feedback not plural,
Speaker 1: right to us at m IB podcast at Bloomberg dot Net.
Speaker 1: I would be remiss if I if I'm gonna say
Speaker 1: that again, I would be remiss if I did not
Speaker 1: think Uh. Taylor Riggs, our producer, Charlie Volmer, our engineer,
Speaker 1: and Mike pat Nick, our head of research, who helped
Speaker 1: put together all the questions for today's show. You've been
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