WEBVTT - Bill Miller on the Classical Value Portfolio (Podcast) 0:00:02.240 --> 0:00:06.800 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:07.120 --> 0:00:10.360 This week, on the podcast what Can I Say, you 0:00:10.400 --> 0:00:13.960 are in for a treat, Bill Miller spends an hour 0:00:14.280 --> 0:00:20.160 waxing eloquent on everything from why value investing has underperformed 0:00:20.160 --> 0:00:23.279 and what you should do about it, the impact of 0:00:23.280 --> 0:00:29.400 the Federal Reserve, why bitcoin is a fascinating technology as 0:00:29.440 --> 0:00:33.560 well as a potential currency substitute, maybe for the dollar, 0:00:33.640 --> 0:00:38.640 maybe for something else. This was really an unbelievable conversation. 0:00:38.720 --> 0:00:41.840 I don't want to gush too much, but Bill Miller 0:00:41.960 --> 0:00:45.240 is just one of these people who understands the way 0:00:45.479 --> 0:00:50.440 markets work, who understands how to express what's going on 0:00:50.840 --> 0:00:57.080 in an investment posture. Their funds run a one active share, 0:00:57.240 --> 0:01:01.400 meaning there is zero closet index in going on, and 0:01:01.440 --> 0:01:03.760 they have been one of the top performers since the 0:01:03.800 --> 0:01:07.520 market bottomed oh eight oh nine after the financial crisis. 0:01:08.160 --> 0:01:10.200 What can I say? This is just a tour to 0:01:10.280 --> 0:01:15.959 force exposition on investing theory and practice in the real world. 0:01:16.600 --> 0:01:20.880 Just unbelievable. So, with no further ado, my conversation with 0:01:20.959 --> 0:01:26.440 Bill Miller. This is Masters in Business with Barry Ridholts 0:01:26.440 --> 0:01:30.760 On Bloomberg Radio. My extra special guest this week is 0:01:30.800 --> 0:01:35.520 Bill Miller. He formed the Miller Value Partners in as 0:01:35.560 --> 0:01:38.560 both an r I A and an investment manager for 0:01:38.600 --> 0:01:43.240 the Miller Value family of funds running about two billion 0:01:43.280 --> 0:01:47.360 dollars and assets under management. Previously, he ran the leg 0:01:47.480 --> 0:01:53.480 Mason's Capital Management Value Trust. After fees, the funds beat 0:01:53.520 --> 0:01:58.120 the S and P five for fifteen consecutive years from 0:01:59.160 --> 0:02:02.000 through two thousand and five. That is a feat that 0:02:02.160 --> 0:02:06.720 I don't think has ever been matched. Bill Miller, Welcome 0:02:06.840 --> 0:02:09.239 to Masters in Business. Thanks Barry, and it's great to 0:02:09.240 --> 0:02:11.760 be here. I should say, welcome back. Our last conversation 0:02:11.960 --> 0:02:16.040 was in let's talk a little bit about what's going 0:02:16.080 --> 0:02:19.480 on in the world today. Early March, you went on 0:02:19.520 --> 0:02:22.120 TV and said you were looking at one of the 0:02:22.160 --> 0:02:26.560 best buying opportunities of your lifetime. That turned out to 0:02:26.600 --> 0:02:30.000 be quite a prescient call. Tell us what you were 0:02:30.080 --> 0:02:33.480 looking at that led to that conclusion, what was behind 0:02:33.680 --> 0:02:36.640 the thought process. So one of the things that that 0:02:37.040 --> 0:02:39.680 I'm quite confident of having done this for just about 0:02:39.680 --> 0:02:42.600 forty years, is that nobody can predict the market with 0:02:42.600 --> 0:02:45.160 any maybe maybe Jim Simons and Renaissance, but certainly not 0:02:45.680 --> 0:02:48.960 Certland me, and certainly not basically anybody else that I've 0:02:49.000 --> 0:02:52.160 come in contact with any consistent basis. So given that, 0:02:52.240 --> 0:02:53.840 I think, I think one of the things that I 0:02:53.880 --> 0:02:55.639 want to look at is just how the market has 0:02:55.720 --> 0:02:59.360 behaved relative to its history. And in this case, what 0:02:59.440 --> 0:03:02.359 we saw is the fastest decline from all time highs 0:03:02.400 --> 0:03:05.959 to a to a bear market in history. And when 0:03:06.000 --> 0:03:09.720 things happen that have never happened before, that always gets 0:03:09.720 --> 0:03:11.680 my attention. I tend to be in the Howard Marks 0:03:11.720 --> 0:03:16.560 camp that you can probably if you're lucky, recognize extreme points, 0:03:16.560 --> 0:03:18.360 but other than that, you probably have no better than 0:03:18.360 --> 0:03:21.000 a coin toss of trying to uh trying to predict 0:03:21.000 --> 0:03:25.680 your guests regular cyclical turning points. So in this case, 0:03:25.840 --> 0:03:28.320 it just seemed to me that the prices had gotten 0:03:28.400 --> 0:03:32.680 so out of whack with anything other than very very 0:03:32.720 --> 0:03:38.120 short term UH fundamentals, that that the probabilities were great 0:03:38.160 --> 0:03:40.320 that if you had a time horizon longer than a 0:03:40.320 --> 0:03:42.640 few weeks or a few months, that you would do 0:03:42.760 --> 0:03:45.120 very very well. And I think that, you know, it 0:03:45.160 --> 0:03:48.240 reminds me of two thousand and two thousand and eight, 0:03:48.960 --> 0:03:52.600 when Warren Buffett wrote that Op ed and and he said, 0:03:52.600 --> 0:03:55.720 by American stocks, That's what I'm doing. And if I 0:03:55.760 --> 0:03:57.440 was at a meeting with Warren a couple of years 0:03:57.480 --> 0:03:59.240 later and somebody said, Warren, how did you know that 0:03:59.320 --> 0:04:02.520 was the right time him to buy stocks? And he said, 0:04:02.520 --> 0:04:04.320 I don't know time, I know price. He said that 0:04:04.360 --> 0:04:08.480 those prices were completely dislocated from any type of long term, 0:04:08.760 --> 0:04:10.760 long term reality unless you believe that the U. S 0:04:10.800 --> 0:04:13.320 economy is going to be in a permanent depression. And 0:04:13.400 --> 0:04:15.160 so I think that's the same thing that that. My 0:04:15.240 --> 0:04:17.640 view was that those prices were very, very disconnected. And 0:04:17.640 --> 0:04:20.440 if you look today, the markets had a big rally, 0:04:20.480 --> 0:04:23.159 but look at those prices back on Marche and the 0:04:23.160 --> 0:04:25.839 few days Africa. I mean, most things are up, you know, 0:04:27.160 --> 0:04:28.880 from the lows, even if they're not back close to 0:04:28.920 --> 0:04:31.680 their highs. So that was an extreme That was an 0:04:31.680 --> 0:04:34.480 extreme point. So let's talk about both that moved down 0:04:34.520 --> 0:04:38.840 and that move up. Not only fastest bear market, fastest 0:04:39.400 --> 0:04:43.720 drop in history, but since those lows, markets are up 0:04:43.760 --> 0:04:48.960 about in one of the fastest recoveries we've ever seen. 0:04:50.000 --> 0:04:53.800 The common pushback I hear from people is the market 0:04:53.839 --> 0:04:56.520 has gotten ahead of itself. We've gone too far, too fast. 0:04:56.800 --> 0:04:59.440 What do you say to those folks, I'd say I'd 0:04:59.440 --> 0:05:02.800 make one one comment and then one um observation. So 0:05:02.839 --> 0:05:05.279 the comment is that if you go back and look 0:05:05.320 --> 0:05:08.200 at bear markets and look at history, there tends to 0:05:08.200 --> 0:05:11.640 be a rough symmetry between how long it took to 0:05:11.680 --> 0:05:14.640 get to the lows and how long the recovery took. 0:05:15.200 --> 0:05:16.960 So when you've had a very again this is the 0:05:16.960 --> 0:05:20.440 sharpest in history, when you've had a very very dramatic drop, 0:05:20.480 --> 0:05:22.440 you can go back to seven for example, in the 0:05:22.480 --> 0:05:25.120 market crash. So the market, you know, after churning around 0:05:25.160 --> 0:05:26.599 at the bottom for a while, it began a strong 0:05:26.680 --> 0:05:30.960 recovery in nineteen and you know, made it back to 0:05:31.000 --> 0:05:33.120 those highs in the not too in the not too 0:05:33.120 --> 0:05:36.080 distant future. So this is not this is not unusual 0:05:36.640 --> 0:05:38.360 compared to what we've seen before. Just so we don't 0:05:38.360 --> 0:05:40.760 see these kinds of declines very often, and they tend 0:05:40.760 --> 0:05:42.480 to be far enough apart that most people don't go 0:05:42.520 --> 0:05:44.320 back and look at history. They just they just look 0:05:44.360 --> 0:05:47.800 at their own their own reaction. So, um, you know, 0:05:48.320 --> 0:05:51.240 with that said, I would say that, um that that 0:05:51.320 --> 0:05:53.720 comment that which what you mentioned about people thinking the 0:05:53.720 --> 0:05:56.800 market ahead of itself. The market disconnected from reality is 0:05:56.839 --> 0:05:59.839 one of those things that I always puzzle at because 0:06:00.279 --> 0:06:04.159 this is something that's actually pretty easy to analyze. And 0:06:04.240 --> 0:06:06.600 the first part of it, the first part of it 0:06:06.680 --> 0:06:09.919 is that if you before you can say the market 0:06:09.960 --> 0:06:14.919 is disconnected from reality, you have to some belief or 0:06:14.960 --> 0:06:18.120 evidence about what the connection is between the market and 0:06:18.279 --> 0:06:22.040 economic reality. And the answer there is very clear, there 0:06:22.120 --> 0:06:24.640 is no connection whatsoever. If you go back and look 0:06:24.680 --> 0:06:27.320 at all the going back from thirty to like two 0:06:27.320 --> 0:06:30.360 thousand and nineteen, and you look at the the annual 0:06:30.640 --> 0:06:35.839 correlation between the market's return and the economic growth, the 0:06:35.880 --> 0:06:39.719 answer there is I think that, uh that the correlation 0:06:39.760 --> 0:06:44.159 coefficient is point zero nine, meaning it's random. There's zero 0:06:44.240 --> 0:06:46.360 is exact random at there's point zero nine. So there's 0:06:46.400 --> 0:06:49.800 basically no correlation whatsoever. If you look at rolling ten 0:06:49.880 --> 0:06:52.400 year periods, so not just that you know, not just 0:06:52.440 --> 0:06:55.040 that the annual periods, but rolling every rolling ten year 0:06:55.080 --> 0:06:58.480 period from that same thing, the correlation is minus point four, 0:06:58.560 --> 0:07:02.800 meaning there's a negative correlation between the economy and economic growth. 0:07:03.440 --> 0:07:06.640 So the idea that this market is disconnected from reality 0:07:06.720 --> 0:07:09.640 because it's actually gone up and economic growth is you 0:07:09.680 --> 0:07:11.680 know was going down at the same time is very 0:07:11.680 --> 0:07:14.520 consistent with history. And the second thing, and maybe may 0:07:14.520 --> 0:07:18.120 be easier to understand, is that the market is a 0:07:18.120 --> 0:07:22.160 as a forward looking indicator. It reflects people's expectations about 0:07:22.200 --> 0:07:24.280 what's going to happen. It doesn't reflect what has happened 0:07:24.280 --> 0:07:26.840 in the past. And so as I like to say 0:07:26.920 --> 0:07:29.840 the market predicts the economy, the economy does not predict 0:07:29.880 --> 0:07:32.800 the market. So the market bottom way before the economy. 0:07:32.840 --> 0:07:35.520 The economy's bottoming, you know, in the in the second 0:07:35.560 --> 0:07:38.080 quarter will be the you know, the economy's economy's bottom, 0:07:38.240 --> 0:07:41.040 and the market bottom was in the first quarter, and 0:07:41.080 --> 0:07:42.920 so I don't think there's anything out of whack with 0:07:42.920 --> 0:07:45.480 what's going on. The market bought. If the market did 0:07:45.480 --> 0:07:48.280 in fact bottom and the second quarter, as it appears 0:07:48.280 --> 0:07:51.200 it did, then that means that it's getting better. And 0:07:51.240 --> 0:07:53.360 so if it's getting better, then the market should be 0:07:53.400 --> 0:07:55.960 reflecting that it's getting better. And if you look at 0:07:55.960 --> 0:07:58.640 the current consensus, what you'd see is that that if 0:07:58.640 --> 0:08:01.400 the market on an annual spasis in the second quarter 0:08:01.560 --> 0:08:04.840 was down, maybe let's call it, and we don't know 0:08:04.880 --> 0:08:06.400 what it is. Some of those numbers, like the housing 0:08:06.440 --> 0:08:10.040 numbers yesterday, the consumer spending numbers were just way, way 0:08:10.040 --> 0:08:13.239 better than people expected. But even if we're down thirty percent, 0:08:13.400 --> 0:08:15.760 then what you would get would be normally speaking, and 0:08:15.800 --> 0:08:18.120 I'm going out at Hymen's data here, which you have 0:08:19.120 --> 0:08:22.040 third quarter and fourth quarter, and then if you just 0:08:22.040 --> 0:08:24.800 get back to five nominal growth in the first quarter 0:08:24.840 --> 0:08:27.200 of next year, you'd be back at all time highs 0:08:27.240 --> 0:08:30.080 on GDP. So I don't think that the market is 0:08:30.160 --> 0:08:32.319 ahead of itself. The only way the market ahead of 0:08:32.320 --> 0:08:35.760 itself is if we have a very huge reversal in 0:08:35.880 --> 0:08:39.000 what's going on. Namely, we have a we have a 0:08:39.040 --> 0:08:41.559 so called second wave where they shut down the economy again. 0:08:42.040 --> 0:08:44.280 But even though the cases, the case loads aren't looking 0:08:44.320 --> 0:08:47.640 that great, um the death rates still falling, and I 0:08:47.679 --> 0:08:49.200 think that we're not going to see a shutdown of 0:08:49.200 --> 0:08:52.079 the economy. We may see you know, moderate changes in things, 0:08:52.080 --> 0:08:54.199 but to shut down the old economy again the way 0:08:54.240 --> 0:08:56.319 we did in you know, in March and April, I 0:08:56.320 --> 0:08:57.959 don't think it's going to happen. So I would I 0:08:57.960 --> 0:09:00.880 would be shocked if the if the mark retest those 0:09:00.920 --> 0:09:03.520 old loaves. Let's talk a little bit about what's going 0:09:03.559 --> 0:09:07.400 on today. In the world of investing, and you and 0:09:07.440 --> 0:09:10.000 I were both around in the nineties. I have to 0:09:10.040 --> 0:09:14.760 ask you about the rise of these robin Hood day traders. 0:09:14.840 --> 0:09:17.760 What is this just a distraction or is this a 0:09:17.840 --> 0:09:21.680 potential speculative frenzy. It's both. I mean I think that 0:09:21.760 --> 0:09:24.120 there's it's it's a distraction in the sense of these 0:09:24.200 --> 0:09:26.520 The number of people that are actually trading on robin 0:09:26.559 --> 0:09:29.599 Hood is trivial in terms of numbers of people, of 0:09:29.679 --> 0:09:33.120 the volume that they can do, uh, relative to the 0:09:33.120 --> 0:09:35.280 overall market. Maybe they can have an impact on something 0:09:35.320 --> 0:09:38.160 like Hurts and All or some of these smaller names. 0:09:38.240 --> 0:09:40.880 But um, but I think the focus on that is 0:09:41.200 --> 0:09:45.080 is misplaced unless it's just it's just years entered something 0:09:45.200 --> 0:09:48.760 entertaining to entertaining to look at. As you remember, Barry 0:09:48.800 --> 0:09:51.440 back in the back in the late ninety nineties, with 0:09:51.520 --> 0:09:55.600 the you know, with dot com tech telecom bubble, the 0:09:55.720 --> 0:09:58.560 day traders were everywhere, and they were there, weren't robin hoods, 0:09:58.600 --> 0:10:01.280 and that was you know, ridge firms were raising their 0:10:01.360 --> 0:10:04.080 raising their margin requirements, and so there was a there 0:10:04.120 --> 0:10:06.439 was a lot more impact I think on the overall 0:10:06.520 --> 0:10:09.640 markets behavior during that time than there is right now 0:10:09.679 --> 0:10:12.520 the volumes were lower relative to the the number of 0:10:12.520 --> 0:10:14.400 people that were trading and the way in which trading 0:10:14.480 --> 0:10:17.280 was done. And uh, and now the volumes are huge 0:10:17.320 --> 0:10:19.760 compared to what people in Robin Hood are day traders 0:10:20.520 --> 0:10:24.160 are doing. I remember it as sort of a national pastime. 0:10:24.559 --> 0:10:27.520 You couldn't walk into a restaurant a bar without seeing 0:10:27.920 --> 0:10:31.480 the stock market on the TV. It's nothing remotely like 0:10:31.600 --> 0:10:35.160 that today. Last we spoke you, you had a very 0:10:35.200 --> 0:10:38.200 interesting quote that I have to ask your thoughts on. 0:10:38.840 --> 0:10:43.120 Uh In you said, we are only halfway through the 0:10:43.200 --> 0:10:47.720 shift from active to passive. Give us an update. Where 0:10:47.720 --> 0:10:51.400 are we in that process? Do you still think lots 0:10:51.480 --> 0:10:56.880 of fund managers or closet indexers and that this transition 0:10:56.960 --> 0:10:59.080 is going to continue or or how is your thinking 0:10:59.400 --> 0:11:02.600 on this? I think that you know, active management is 0:11:02.600 --> 0:11:06.599 in secular decline. So just like newspapers have been in 0:11:06.679 --> 0:11:09.120 secular decline for a long time, you know, once the 0:11:09.120 --> 0:11:11.480 Internet got going, active management has been in a secular 0:11:11.520 --> 0:11:15.360 decline and that's going to continue because most active managers 0:11:15.840 --> 0:11:19.720 don't add value and most people, especially as the demographics 0:11:19.720 --> 0:11:23.600 get older, people become more risk averse and so they're 0:11:23.600 --> 0:11:25.439 they're happy to have tracking error if you're if you're 0:11:25.480 --> 0:11:28.440 active managers way above the market, but if the managers 0:11:28.600 --> 0:11:30.560 the market is a standard and you're below the market 0:11:30.559 --> 0:11:32.440 for a couple of years and people take their money out. 0:11:32.480 --> 0:11:35.760 In fact, there was a statistic which you probably saw 0:11:35.800 --> 0:11:39.920 that I was surprised at, which was that a fidelity 0:11:40.200 --> 0:11:45.280 UH that basically of failities clients who were sixty five 0:11:45.280 --> 0:11:47.960 and older took one of their money out of equities 0:11:48.200 --> 0:11:50.840 in the first quarter of this year. So that gives 0:11:50.840 --> 0:11:53.199 you a sense of both the risk aversion and how 0:11:53.280 --> 0:11:56.200 fear spreads in the market, and also the fact that 0:11:56.559 --> 0:12:00.440 the passive money still gets still as getting the flows. 0:12:00.559 --> 0:12:02.240 You know, equity e t f s are getting flows, 0:12:02.240 --> 0:12:05.760 but the at the average active manager you know is 0:12:05.800 --> 0:12:08.160 getting consistent outflows. And of course we've seen this year 0:12:08.200 --> 0:12:11.440 that that equity managers broadly defined equity mutual funds have 0:12:11.480 --> 0:12:14.120 that big outflows, and bond funds have continue to get inflows. 0:12:14.200 --> 0:12:16.439 So I think I think we've still got a ways 0:12:16.480 --> 0:12:18.440 to go in that and uh. And so there's going 0:12:18.480 --> 0:12:22.160 to be an uphill climb or swimming against the tide 0:12:22.240 --> 0:12:24.640 or whatever. If you're an active manager, I would say 0:12:24.679 --> 0:12:27.480 it's also that the hedge funds have also dropped into 0:12:27.559 --> 0:12:30.680 that category. They're much earlier in the thing. But you know, 0:12:30.720 --> 0:12:32.679 in a low anomenal rate of return world, where the 0:12:33.080 --> 0:12:36.439 tenure interest rate of sixty basis points, somebody's going to 0:12:36.559 --> 0:12:38.800 charge you know, one or one and a half or 0:12:38.840 --> 0:12:43.480 two and twenty to manage your money and fiftent of 0:12:43.520 --> 0:12:45.880 the profits, no matter how meager those profits are. That's 0:12:45.880 --> 0:12:48.760 a losing proposition. So I think that also is is 0:12:49.040 --> 0:12:51.840 the hedge fund world is probably a net net liquidation 0:12:51.880 --> 0:12:54.960 as well. So you mentioned sixty basis points on the 0:12:55.040 --> 0:12:58.000 ten year what do you make of the bond market 0:12:58.400 --> 0:13:01.400 where it is is a talent us anything about inflation? 0:13:02.000 --> 0:13:07.239 And what sort of support does that provide for equities 0:13:07.280 --> 0:13:11.600 if yield on treasuries is practically nothing? Yeah, it's it's 0:13:11.640 --> 0:13:14.240 really interesting that the current yield on the s n 0:13:14.280 --> 0:13:17.360 P five hundred is about three times the yield on 0:13:17.600 --> 0:13:20.400 the ten year treasury. And so one of those so 0:13:20.480 --> 0:13:23.080 called no brainer trades to me would be, you know, 0:13:23.080 --> 0:13:26.160 if you've got a ten year horizon uh in the market, 0:13:26.240 --> 0:13:28.640 or even a five year horizon for that matter, you know, 0:13:28.840 --> 0:13:31.280 go along the you know, an equity index fund and 0:13:31.280 --> 0:13:33.520 and go short to five year ten year treasury would 0:13:33.520 --> 0:13:36.200 seem to me a you know a thing will be 0:13:36.320 --> 0:13:39.160 very difficult to lose any substantial amount of money. And again, 0:13:39.200 --> 0:13:42.200 if the if the people were worried about inflation or right, 0:13:42.240 --> 0:13:44.360 inflation isn't a problem for the next couple of years 0:13:44.360 --> 0:13:47.400 for sure, but if it becomes a problem in year three, four, five, 0:13:47.480 --> 0:13:50.760 and the yield curve starts shifting up significantly, then that 0:13:50.800 --> 0:13:52.480 would be that would be kind of a home run, 0:13:53.480 --> 0:13:56.400 a home run trade. So I think I think right now, 0:13:56.440 --> 0:13:58.720 I mean, you know, interest rates, as my center runs 0:13:58.720 --> 0:14:02.840 our income fund says, the data shows that interest rates 0:14:02.840 --> 0:14:05.520 have have been falling in real terms for eight hundred years, 0:14:06.040 --> 0:14:07.679 and so you don't want to better interest rates are 0:14:07.679 --> 0:14:09.840 gonna rise. And and my return to that as well, 0:14:09.880 --> 0:14:11.720 if you if you lived a thousand years, that would 0:14:11.720 --> 0:14:14.240 be relevant. But what we see in the bond market 0:14:14.280 --> 0:14:16.000 is that goes to these long cycles where we had 0:14:16.000 --> 0:14:18.080 a thirty five year bear market in bonds, you know, 0:14:18.080 --> 0:14:22.560 almost a full working career from one, and now I've 0:14:22.560 --> 0:14:25.280 got a thirty eight year bolt market in bonds, and 0:14:25.360 --> 0:14:27.680 they rates can't go much lower than where they are 0:14:27.760 --> 0:14:29.440 right now. Maybe they're not going to go up a lot, 0:14:29.480 --> 0:14:32.640 but uh, you're they're negative in real terms, and certainly 0:14:32.680 --> 0:14:36.360 real terms after tax. So I think bonds are as 0:14:36.400 --> 0:14:42.040 unattractive now as stocks were in September of night seven, 0:14:42.080 --> 0:14:47.440 when than thirty year yielded nine percent and the stock 0:14:47.480 --> 0:14:50.880 market yielded up about two point eight percent, and the 0:14:50.880 --> 0:14:53.280 stock market traded at the highest pe since in nineteen 0:14:53.320 --> 0:14:56.240 twenty nine, and so there was no reason to own 0:14:56.280 --> 0:14:59.240 stocks then because the dividend yield on the divident growth 0:14:59.280 --> 0:15:02.280 rate and stocks abou six. So if everything went well, 0:15:02.360 --> 0:15:05.640 you'd get close to nine percent in stocks if valuations 0:15:05.680 --> 0:15:07.560 didn't drop and they stayed at the at the all 0:15:07.600 --> 0:15:10.280 time high. But otherwise, why why did it buy a 0:15:10.320 --> 0:15:12.680 thirty year bonds and go home? And that was the 0:15:12.760 --> 0:15:14.080 right thing to do then, and I think the right 0:15:14.080 --> 0:15:17.040 thing to do now is to forget about bonds, except, 0:15:17.160 --> 0:15:19.560 you know, except in a very rare instance that you 0:15:19.640 --> 0:15:23.000 might think we have a deflationary bust, in which case, okay, 0:15:23.000 --> 0:15:26.720 Ben Graham talked about having no less than of your 0:15:26.800 --> 0:15:30.720 money and bonds, so PU quality corporates or something like that. 0:15:30.800 --> 0:15:34.240 But I don't find bonds at all attractive now. Quite interesting. 0:15:34.560 --> 0:15:37.320 You mentioned earlier some of the tech stocks of the nineties. 0:15:37.920 --> 0:15:40.840 What do you make of the big five big cap 0:15:40.880 --> 0:15:45.400 tech stocks? Amazon, Apple, Facebook, Microsoft, Google? Have they gotten 0:15:45.680 --> 0:15:49.680 too big? And if so, is their risk of government 0:15:50.640 --> 0:15:54.440 reregulation or even any trust enforcement. Yeah, I thought you're 0:15:54.440 --> 0:15:57.040 gonna ask a slightly different question, which is, you know, 0:15:58.120 --> 0:16:00.640 not have they gotten too big, but are they too expensive? 0:16:00.640 --> 0:16:03.239 And what kind of you know, what kind of opportunities 0:16:03.280 --> 0:16:06.400 are there? Well, there's certainly there's certainly cheaper than they 0:16:06.440 --> 0:16:11.080 were in the radically cheaper, radically cheaper, So I'm not 0:16:11.080 --> 0:16:12.920 even I'm not worried about We We own all of 0:16:12.960 --> 0:16:17.560 them except for um, Netflix right now, so at which 0:16:17.560 --> 0:16:19.960 we've owned with a larger show older and Netflix a 0:16:19.960 --> 0:16:22.200 couple of different times, and that's the only one that 0:16:22.240 --> 0:16:25.480 I think is expensive. Although I think if you've got 0:16:25.520 --> 0:16:27.960 a longer term time rise and that will do that 0:16:28.000 --> 0:16:30.000 will do fine as well. But you get back to 0:16:30.000 --> 0:16:32.800 the late I mean, ge traded fifty times earnings and 0:16:32.880 --> 0:16:36.040 home Depot traded at fifty times earnings. So uh, you know, 0:16:36.040 --> 0:16:39.239 these stocks at this level don't look to me particularly 0:16:39.240 --> 0:16:41.560 extended at all, even though they've done very very well 0:16:41.600 --> 0:16:44.440 that they should have done well. Now the different question though, 0:16:44.920 --> 0:16:47.240 where's the risk in them? Well, there's there's always risk 0:16:47.280 --> 0:16:49.640 and and everything, and I think you hit at the 0:16:49.720 --> 0:16:52.760 risk is uh, and I trust a reinterpretation of an 0:16:52.840 --> 0:16:55.520 I trust. I don't think unless there's a Democrats sweep 0:16:56.040 --> 0:16:58.280 that you'll get any significant change in the anti trust 0:16:58.400 --> 0:17:00.640 laws like the Clayton Act of the Sherman Act, but 0:17:00.720 --> 0:17:05.240 nothingtheless deftly changing the laws before courts can interpret things differently, 0:17:05.280 --> 0:17:08.240 regulators can can come after the companies, and so I 0:17:08.240 --> 0:17:11.080 do think the regulatory risk and the government risk is 0:17:11.160 --> 0:17:13.199 high in these companies, but that's what you'd expect for 0:17:13.240 --> 0:17:16.639 companies that are so dominant and so large, and you 0:17:16.680 --> 0:17:21.639 know five of them, the S and P five. So yeah, Now, 0:17:21.640 --> 0:17:23.080 I don't think the risk is so great that it 0:17:23.080 --> 0:17:26.879 will significantly inhibit what you can earn from them. But 0:17:26.920 --> 0:17:29.199 maybe they traded a multiple point or two lower, and 0:17:29.240 --> 0:17:32.240 there'd be headline risk more I think than real risk. Now, 0:17:32.320 --> 0:17:34.840 let's talk a little bit about some of the changes 0:17:34.920 --> 0:17:40.360 we've seen in the industry, including what some people are 0:17:40.400 --> 0:17:43.359 calling the death of value investing, which I have to 0:17:43.440 --> 0:17:47.040 imagine you're gonna snicker at. What Why has value been 0:17:47.080 --> 0:17:50.480 having such a difficult time and what does this mean 0:17:50.640 --> 0:17:54.520 for people's portfolios. Yeah, it's a fascinating question, and there's 0:17:54.520 --> 0:17:57.320 a lot of there's a lot of i'd say different 0:17:57.400 --> 0:18:00.040 views on this. We've got a guy named Dan Is 0:18:00.040 --> 0:18:03.439 said who runs i'll call it a pure value or 0:18:03.440 --> 0:18:06.400 a classical value portfolio, which which is basically a low 0:18:06.480 --> 0:18:09.359 price to tangible book, low pe low price to cash flow. 0:18:10.000 --> 0:18:11.879 And as you might expect, he's been having a very 0:18:11.880 --> 0:18:14.840 difficult time of it and and sends out a never 0:18:15.000 --> 0:18:18.359 ending stream of emails about how extreme this is and 0:18:18.400 --> 0:18:20.240 how it's never happened before and it's got to be 0:18:20.280 --> 0:18:22.639 a snap back at all. And then you might have 0:18:22.680 --> 0:18:25.679 seen Cliff Asness his work on the same thing about 0:18:25.680 --> 0:18:27.760 how extreme this is, and he believes that you're going 0:18:27.800 --> 0:18:29.840 to get a snap back. So where I come out 0:18:29.840 --> 0:18:32.800 on this is I think that the odds are overwhelming 0:18:33.600 --> 0:18:38.239 that that i'd say, value as traditionally understood will do 0:18:38.440 --> 0:18:42.439 very well from roughly now until maybe a year or 0:18:42.440 --> 0:18:45.640 two years from now. It could be longer. But why 0:18:45.680 --> 0:18:48.000 I say that is that the value has led out 0:18:48.000 --> 0:18:50.680 of every recession as far back as the data goes, 0:18:51.600 --> 0:18:54.520 and the reason for that is that when companies, when 0:18:54.520 --> 0:18:57.840 the economy peaks and goes down, value name just tend 0:18:57.880 --> 0:19:00.639 to be more cyclical. They return on cap little drops, 0:19:01.119 --> 0:19:04.800 and so their theoretical valuation just viavation drops and the 0:19:04.840 --> 0:19:08.160 stocks underperform. And then we come out of a recession, 0:19:08.359 --> 0:19:12.160 they're they're returning capital rises because they're more cyclical than 0:19:12.160 --> 0:19:16.639 a Coca Cola or Amazon, and so therefore they outperformed. 0:19:17.240 --> 0:19:19.239 And we've seen that right now. If you look at 0:19:19.240 --> 0:19:21.119 the the over going to repeat that right now, if 0:19:21.160 --> 0:19:23.600 you look at what happened, you know, going to March, 0:19:25.320 --> 0:19:29.600 the tech names, the stay at home names, the secular winners, 0:19:30.160 --> 0:19:32.560 you know, service now and Shopify, those kinds of things, 0:19:33.000 --> 0:19:35.840 they killed the market. And uh, I mean, I'm some 0:19:35.880 --> 0:19:37.320 of the guys that are really good at this, like 0:19:37.359 --> 0:19:41.200 Dennis Lynch at Morgan Stanley or James Anderson at Bailey Gifford. 0:19:41.359 --> 0:19:43.240 You know, the high high growth guys. I mean, they're 0:19:43.320 --> 0:19:46.720 up in the for the year and you know, traditional 0:19:46.760 --> 0:19:48.639 value guys are at the at the bottom of the page. 0:19:48.680 --> 0:19:51.760 But since March, the value people have beaten the growth 0:19:51.840 --> 0:19:54.520 people pretty handily. And uh, and I think that that's 0:19:54.600 --> 0:19:57.880 because the economy, you know has been bottoming and then 0:19:58.000 --> 0:20:00.400 the economy is going to start up. And so what 0:20:00.440 --> 0:20:02.040 you what you see? I mean a day like yesterday, 0:20:02.080 --> 0:20:04.360 the markets up one and a half percent, and most 0:20:04.400 --> 0:20:07.960 of those growth all those growth names underperformed dramatically. So 0:20:08.240 --> 0:20:11.080 I think in the in the relatively short run, meaning 0:20:11.119 --> 0:20:14.800 now until the next year or two, the odds are 0:20:15.160 --> 0:20:19.679 strong that value will outperform growth. But a little more, 0:20:19.720 --> 0:20:22.879 a little more UH nuance here. The reason that value 0:20:22.880 --> 0:20:26.680 has done so badly for ten years is that value 0:20:26.800 --> 0:20:31.359 thrives in a in an environment of reversion to the means. 0:20:31.400 --> 0:20:33.840 So the economy speeds up and then it peaks, then 0:20:33.880 --> 0:20:35.679 it goes down at bottom. So you have this kind 0:20:35.720 --> 0:20:38.760 of cyclicality. And if you look since the since the 0:20:38.760 --> 0:20:41.919 financial crisis, since March of o nine, the economy for 0:20:42.000 --> 0:20:44.240 ten years grew basically between one and a half and 0:20:44.240 --> 0:20:46.960 two and a half percent, averaged about two percent with 0:20:47.080 --> 0:20:51.120 low inflation, with UH, with the low interest rates, and 0:20:51.160 --> 0:20:54.480 not a lot of cyclicality. And therefore that's an environment 0:20:54.480 --> 0:20:58.119 where growth is going to thrive because low nominal growth 0:20:58.560 --> 0:21:00.720 such as we're low real one and a half to 0:21:00.760 --> 0:21:04.880 two basically, then if you grow fast like an Amazon 0:21:05.080 --> 0:21:09.440 or a Google alphabet. Your your theoretical valuation is much 0:21:09.560 --> 0:21:11.720 much greater than it is otherwise. I saw a thing 0:21:11.720 --> 0:21:13.480