1 00:00:02,200 --> 00:00:06,800 Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio. 2 00:00:07,240 --> 00:00:10,039 Speaker 1: This week on the podcast, I have an extra special guest. 3 00:00:10,400 --> 00:00:12,880 Speaker 1: His name is Ben Inker, and he is the head 4 00:00:12,880 --> 00:00:17,920 Speaker 1: of asset allocation at famed hedge fund GMO, located up 5 00:00:17,920 --> 00:00:22,920 Speaker 1: in Boston. They manage about sixty billion dollars. Inker is 6 00:00:23,400 --> 00:00:26,720 Speaker 1: Jeremy Grantham's right hand man, and we had a fascinating 7 00:00:26,920 --> 00:00:32,960 Speaker 1: and nuanced conversation about all things value related. I was 8 00:00:33,520 --> 00:00:39,440 Speaker 1: especially intrigued about his take on why we are measuring 9 00:00:39,680 --> 00:00:45,520 Speaker 1: intangibles from companies and whether that's intellectual property or various 10 00:00:45,640 --> 00:00:50,800 Speaker 1: other assets they hold that make them less capital intensive 11 00:00:50,960 --> 00:00:56,000 Speaker 1: and therefore potentially more valuable. Was intriguing. They they've done 12 00:00:56,040 --> 00:01:00,960 Speaker 1: some fascinating research that really is very interesting. He explains 13 00:01:01,080 --> 00:01:04,959 Speaker 1: how and why value has underperformed what he thinks is 14 00:01:04,959 --> 00:01:07,600 Speaker 1: going to happen going forward. We go over a handful 15 00:01:07,640 --> 00:01:10,920 Speaker 1: of different sectors of the economy of the world and 16 00:01:10,920 --> 00:01:14,720 Speaker 1: and talk about specific stocks. If you are at all 17 00:01:14,880 --> 00:01:19,880 Speaker 1: interested in either value or asset allocation or anything along 18 00:01:19,920 --> 00:01:24,200 Speaker 1: those those um lines, you'll find this to be an 19 00:01:24,240 --> 00:01:28,720 Speaker 1: absolutely fascinating conversation. So, with no further ado, my sit 20 00:01:28,800 --> 00:01:34,480 Speaker 1: down with GMOs. Ben Inker VI is Masters in Business 21 00:01:34,720 --> 00:01:38,920 Speaker 1: with Barry Ridholtz on Boomberg Radio. My special guest this 22 00:01:39,000 --> 00:01:43,720 Speaker 1: week is Ben Inker. He is GMO's head of asset allocation. 23 00:01:44,400 --> 00:01:49,360 Speaker 1: During the dot com implosion, the GMO aggressive long short strategy, 24 00:01:49,840 --> 00:01:54,320 Speaker 1: which was long undervalued stocks and short overvalued stocks, achieved 25 00:01:54,360 --> 00:01:58,440 Speaker 1: an eighty percent cumulative net return for clients. The firm 26 00:01:58,520 --> 00:02:02,800 Speaker 1: is led by Jeremy Grantham, currently manages about sixty billion dollars. 27 00:02:03,320 --> 00:02:07,160 Speaker 1: Then Incher, Welcome to Bloomberg. Well, thanks very much for 28 00:02:07,240 --> 00:02:10,160 Speaker 1: having me. Very so, your current role is head of 29 00:02:10,240 --> 00:02:15,079 Speaker 1: GMO's asset allocation team. How did you arrive at that position? 30 00:02:15,120 --> 00:02:18,079 Speaker 1: Tell us a little bit about your career path. Well, 31 00:02:18,120 --> 00:02:21,440 Speaker 1: I have been at GMO for the entirety of my 32 00:02:21,480 --> 00:02:27,600 Speaker 1: professional career. I joined GMO in I was hired as 33 00:02:27,960 --> 00:02:34,960 Speaker 1: a research analysts working for Jeremy Grantham. Um And since 34 00:02:35,280 --> 00:02:40,799 Speaker 1: Jeremy was the person who was kind of most focused 35 00:02:41,000 --> 00:02:45,520 Speaker 1: on top down acid allocation stuff at GMO, well, I 36 00:02:45,520 --> 00:02:48,040 Speaker 1: did a lot of different kinds of research over the 37 00:02:48,080 --> 00:02:51,000 Speaker 1: first you know, eight or ten years of my career. 38 00:02:51,960 --> 00:02:55,720 Speaker 1: I was the person who had done the most work 39 00:02:55,760 --> 00:03:01,239 Speaker 1: on AFID allocation as our business in Athidelic Asian grew. 40 00:03:01,840 --> 00:03:05,120 Speaker 1: I was, you know, his assistant portfolio manager, and then 41 00:03:05,120 --> 00:03:08,480 Speaker 1: the portfolio manager, and then over time the head of 42 00:03:08,480 --> 00:03:13,680 Speaker 1: the team. That's the short form. Interesting, So you started 43 00:03:13,840 --> 00:03:18,480 Speaker 1: early nineties, which was quite an interesting decade to cut 44 00:03:18,520 --> 00:03:22,560 Speaker 1: your teeth on. How did your early experiences during that 45 00:03:22,680 --> 00:03:27,280 Speaker 1: era shape your views of the market? Yeah, so, I 46 00:03:27,320 --> 00:03:35,720 Speaker 1: mean I came at a time when kind of the 47 00:03:35,720 --> 00:03:41,800 Speaker 1: forces of let's say, mean reversion had shown themselves to 48 00:03:41,960 --> 00:03:45,360 Speaker 1: be powerful. We've seen in the eighties, you know, when 49 00:03:45,400 --> 00:03:49,160 Speaker 1: both bonds and stocks got to ludicrously cheap levels that 50 00:03:49,200 --> 00:03:54,840 Speaker 1: they recovered. We had just experienced a pretty extraordinary bubble 51 00:03:55,200 --> 00:03:58,560 Speaker 1: and the bursting of it in Japan uh in the 52 00:03:58,680 --> 00:04:02,040 Speaker 1: late eighties and into the early nineties. So one of 53 00:04:02,080 --> 00:04:07,120 Speaker 1: the things I got early on was this um kind 54 00:04:07,120 --> 00:04:13,680 Speaker 1: of strong understanding and belief that markets can do crazy things, 55 00:04:14,120 --> 00:04:20,599 Speaker 1: but over time they do eventually come back, whether that's 56 00:04:20,680 --> 00:04:25,359 Speaker 1: because they have gotten absurdly cheap or absurdly expensive. You know. 57 00:04:25,440 --> 00:04:29,200 Speaker 1: I then got to participate in the next great bubble, 58 00:04:29,680 --> 00:04:35,000 Speaker 1: which was quite painful for us as investors. But then 59 00:04:35,240 --> 00:04:40,559 Speaker 1: you got to experience just how crazy, uh, the world 60 00:04:40,600 --> 00:04:45,200 Speaker 1: could get. So it was a a fascinating kind of 61 00:04:45,240 --> 00:04:48,320 Speaker 1: crucible to h to grow up in as an investor. 62 00:04:48,800 --> 00:04:52,200 Speaker 1: So you say that was painful, But in the ends, 63 00:04:52,839 --> 00:04:58,040 Speaker 1: ultimately the firm and Grantham's calls ended up being right. 64 00:04:58,279 --> 00:05:01,560 Speaker 1: It was a big money maker to the downside. Does 65 00:05:01,600 --> 00:05:05,599 Speaker 1: that offset the pain? What do we take away from 66 00:05:05,680 --> 00:05:10,960 Speaker 1: when markets go crazy? But ultimately you know, as always 67 00:05:11,000 --> 00:05:15,000 Speaker 1: that sort of excess ends and tears. Yeah, I think 68 00:05:15,080 --> 00:05:19,920 Speaker 1: you know it is. It is truly the case, um 69 00:05:19,960 --> 00:05:24,440 Speaker 1: that Uh. You know, the the market in the short 70 00:05:24,560 --> 00:05:26,479 Speaker 1: term may be a voting machine, but in the long 71 00:05:26,640 --> 00:05:29,919 Speaker 1: term is a weighing machine. Um. And at the end 72 00:05:30,000 --> 00:05:35,560 Speaker 1: of the day, at least four assets that where valuation 73 00:05:35,960 --> 00:05:39,960 Speaker 1: is relevant. Uh. And it is astonishing that we live 74 00:05:39,960 --> 00:05:43,280 Speaker 1: in a world where there are more assets where valuation 75 00:05:43,400 --> 00:05:46,840 Speaker 1: is is not a relevant thing anymore. But for the 76 00:05:46,920 --> 00:05:53,360 Speaker 1: vast majority of financial assets out there where valuation is relevant, um, 77 00:05:53,560 --> 00:05:57,240 Speaker 1: valuation will eventually out. Um. You know, at the end 78 00:05:57,240 --> 00:05:59,560 Speaker 1: of the day, everything is worth the present value of 79 00:05:59,560 --> 00:06:04,840 Speaker 1: the future cash flows. Um. And what we have seen 80 00:06:04,920 --> 00:06:09,440 Speaker 1: time and time again is the market will forget that. Uh. 81 00:06:09,480 --> 00:06:13,080 Speaker 1: And as the market forgets that, it will do some 82 00:06:14,200 --> 00:06:20,280 Speaker 1: sort of objectively silly things. Uh. But in the end, UM, 83 00:06:20,400 --> 00:06:25,760 Speaker 1: those cash flows or the lack of them, is a 84 00:06:25,800 --> 00:06:32,799 Speaker 1: profound discipline to the market, which will pull things back. UM. Now, 85 00:06:33,040 --> 00:06:35,200 Speaker 1: the time frame that they're going to pull them back 86 00:06:35,279 --> 00:06:40,359 Speaker 1: over is uncertain UM. And one of the things you 87 00:06:40,400 --> 00:06:44,799 Speaker 1: know we we lived in in the late nineties events 88 00:06:45,480 --> 00:06:48,760 Speaker 1: is that while in the end the collapse of that 89 00:06:48,839 --> 00:06:53,880 Speaker 1: bubble was positive for us, it was positive for our 90 00:06:53,920 --> 00:06:55,880 Speaker 1: clients because we did manage to make the money for 91 00:06:56,000 --> 00:07:01,039 Speaker 1: it and helped GMO grow as a business. The reality 92 00:07:01,120 --> 00:07:06,680 Speaker 1: is there were a number of other money managers that 93 00:07:06,920 --> 00:07:09,760 Speaker 1: saw what we saw and did some of the things 94 00:07:09,840 --> 00:07:15,200 Speaker 1: we did, and for whatever reason couldn't hold off either 95 00:07:15,320 --> 00:07:20,200 Speaker 1: the firm, the firms themselves folded, or the people who 96 00:07:20,240 --> 00:07:25,080 Speaker 1: were doing the what I call right thing um were 97 00:07:25,080 --> 00:07:28,960 Speaker 1: eventually told by their bosses, we can't stand this pain anymore. 98 00:07:29,560 --> 00:07:31,520 Speaker 1: Either you change what you are doing, or we are 99 00:07:31,560 --> 00:07:35,040 Speaker 1: going to change the person in charge of uh of 100 00:07:35,120 --> 00:07:39,080 Speaker 1: your area. UM. So yeah, if you have a long 101 00:07:39,200 --> 00:07:42,560 Speaker 1: enough time horizon, you can rely on the market eventually 102 00:07:42,600 --> 00:07:46,520 Speaker 1: becoming sane again. But I don't think anybody should pull 103 00:07:46,560 --> 00:07:53,760 Speaker 1: themselves into thinking taking those bets is easy or is 104 00:07:54,160 --> 00:07:58,480 Speaker 1: guaranteed to work out well for the people who do them. 105 00:07:58,720 --> 00:08:03,720 Speaker 1: So that raises the question here we are It's markets 106 00:08:03,760 --> 00:08:08,560 Speaker 1: have had a fantastic recovery from choose your time frame, 107 00:08:08,960 --> 00:08:13,040 Speaker 1: the lows in OH nine, the breakout in the crash, 108 00:08:13,080 --> 00:08:18,040 Speaker 1: and recovery in Where are we in the market cycle? 109 00:08:18,080 --> 00:08:22,800 Speaker 1: There's obviously a lot of valuation questions, a ton of fraud, 110 00:08:23,480 --> 00:08:27,800 Speaker 1: but also a ton of of fiscal stimulus and very 111 00:08:27,920 --> 00:08:31,200 Speaker 1: very high monetary stimulus. Where are we in the cycle? 112 00:08:32,240 --> 00:08:36,400 Speaker 1: It's it is a more difficult question than I'd love 113 00:08:36,440 --> 00:08:39,880 Speaker 1: for it to be. I think the evidence of the 114 00:08:39,920 --> 00:08:45,800 Speaker 1: fraud is everywhere around us. Um. We are seeing stuff. 115 00:08:46,240 --> 00:08:48,760 Speaker 1: Every bit is crazy and in some ways even more 116 00:08:48,840 --> 00:08:52,160 Speaker 1: inexplicable than some of the stuff we saw in the 117 00:08:52,200 --> 00:08:57,080 Speaker 1: Internet bubble. Um. But if one thinks back to the 118 00:08:57,120 --> 00:09:02,240 Speaker 1: Internet bubble, right, we had all time high valuations for 119 00:09:02,320 --> 00:09:08,520 Speaker 1: the S and P five coexisting with real interest rates 120 00:09:08,559 --> 00:09:12,200 Speaker 1: of four right the inflation index bonds in the US 121 00:09:12,280 --> 00:09:17,520 Speaker 1: the tips yielded over four UM. So the alternative to 122 00:09:17,760 --> 00:09:22,360 Speaker 1: investing inequities that had never traded at such high valuations 123 00:09:22,880 --> 00:09:28,520 Speaker 1: UM was low risk assets that offered really good perspective 124 00:09:28,520 --> 00:09:33,840 Speaker 1: returns today, that is absolutely not the case. We know 125 00:09:34,520 --> 00:09:37,920 Speaker 1: low risk assets, whether it has been engineered by central 126 00:09:37,960 --> 00:09:42,800 Speaker 1: banks or whether it is a more natural um outgrowth 127 00:09:43,240 --> 00:09:47,360 Speaker 1: of the economy, low risk assets are offering extraordinarily low 128 00:09:47,400 --> 00:09:51,480 Speaker 1: returns UM. And what I wish I knew the answer 129 00:09:51,559 --> 00:09:59,920 Speaker 1: to was whether those incredibly low rates are sustainable h 130 00:10:00,120 --> 00:10:05,040 Speaker 1: or not. UM. If they're sustainable, then the difference between 131 00:10:05,040 --> 00:10:09,880 Speaker 1: now and two thousand is that the general level of 132 00:10:10,400 --> 00:10:17,720 Speaker 1: risky assets from a valuation perspective probably makes sense. UM. 133 00:10:17,840 --> 00:10:22,559 Speaker 1: The extraordinary gap between kind of the secular growth names 134 00:10:22,640 --> 00:10:26,760 Speaker 1: versus value names still doesn't make sense. Even if you 135 00:10:26,800 --> 00:10:29,600 Speaker 1: believe that you know the S and P S valuation 136 00:10:29,880 --> 00:10:34,120 Speaker 1: or h M s c I world valuation is sustainable, 137 00:10:34,679 --> 00:10:40,280 Speaker 1: that gap doesn't make sense UM. But it may be 138 00:10:40,480 --> 00:10:47,560 Speaker 1: that the overall market on average makes sense if if 139 00:10:47,800 --> 00:10:55,320 Speaker 1: inflation is truly permanently gone as a meaningful risk in 140 00:10:55,360 --> 00:10:59,280 Speaker 1: the developed world. UM. I don't know the answer to that, 141 00:11:00,120 --> 00:11:02,520 Speaker 1: but I will say one of the things I have 142 00:11:02,679 --> 00:11:06,880 Speaker 1: been surprised by, on average over the last twenty years 143 00:11:07,120 --> 00:11:10,400 Speaker 1: is that even in those times where you would have 144 00:11:10,480 --> 00:11:19,439 Speaker 1: expected inflation to be UM accelerating, it's been pretty tame um. 145 00:11:19,600 --> 00:11:22,920 Speaker 1: So I don't know whether the market has to fall 146 00:11:23,040 --> 00:11:26,600 Speaker 1: from here. I do think even if the market level 147 00:11:27,160 --> 00:11:31,000 Speaker 1: makes sense, we've got a speculative bubble going on, and 148 00:11:31,040 --> 00:11:35,640 Speaker 1: that speculative bubble will have to break. But whether the 149 00:11:35,679 --> 00:11:38,600 Speaker 1: breaking of that speculative bubble is associated with, you know, 150 00:11:38,640 --> 00:11:45,240 Speaker 1: the market falling by as it did in two thousands, 151 00:11:46,040 --> 00:11:50,440 Speaker 1: or whether it's going to be driven by a strong 152 00:11:50,600 --> 00:11:56,880 Speaker 1: outperformance by value stocks which are simply not priced to 153 00:11:57,000 --> 00:12:04,120 Speaker 1: deliver the low return and that are sustainable, if low 154 00:12:04,240 --> 00:12:07,520 Speaker 1: risk assets are going to permanently lose your money after inflation. 155 00:12:08,080 --> 00:12:11,000 Speaker 1: I just don't have the perfect answer. So you write 156 00:12:11,240 --> 00:12:16,480 Speaker 1: very thoughtful quarterly or so letters that that I enjoy, 157 00:12:16,640 --> 00:12:20,160 Speaker 1: And I don't recall if this was December's quarter or 158 00:12:20,280 --> 00:12:23,720 Speaker 1: October quarter, but a couple of quarters ago you had 159 00:12:23,760 --> 00:12:27,319 Speaker 1: explained as some of the tech stocks keep rallying, as 160 00:12:27,320 --> 00:12:30,640 Speaker 1: some of the valuations continue to stretch, no one could 161 00:12:30,640 --> 00:12:34,880 Speaker 1: really guess where this ends. But the most likely ends 162 00:12:35,000 --> 00:12:38,040 Speaker 1: will be when the FED starts to tighten and raise rates. 163 00:12:38,520 --> 00:12:41,480 Speaker 1: First of I am I oversimplifying that or is that 164 00:12:41,920 --> 00:12:44,679 Speaker 1: more or less right? And do you still hold that 165 00:12:44,800 --> 00:12:49,800 Speaker 1: sort of belief? You know it is not. It won't 166 00:12:49,840 --> 00:12:52,400 Speaker 1: surprise you at all to hear that. The most common 167 00:12:52,480 --> 00:12:55,560 Speaker 1: question I am getting from the clients these days is 168 00:12:55,880 --> 00:12:58,040 Speaker 1: what's the catalyst? What's going to be the trigger for 169 00:12:58,080 --> 00:13:02,400 Speaker 1: the turn here? Um? So one thing we have absolutely 170 00:13:02,440 --> 00:13:09,040 Speaker 1: done is gone back and looked at the profound turning 171 00:13:09,080 --> 00:13:12,520 Speaker 1: points and markets and tried to see, Okay, well, what 172 00:13:12,559 --> 00:13:15,360 Speaker 1: was the catalyst in two thousand? What was the catalysts 173 00:13:15,480 --> 00:13:20,520 Speaker 1: in Japan? What was the catalyst in the US? Sometimes 174 00:13:20,520 --> 00:13:24,720 Speaker 1: there is a catalyst, but a surprising amount of the time, 175 00:13:25,600 --> 00:13:31,800 Speaker 1: even in retrospect, there doesn't seem to be one. Right. 176 00:13:31,920 --> 00:13:37,000 Speaker 1: The catalyst for the cracking of the Internet bubble in 177 00:13:37,080 --> 00:13:42,360 Speaker 1: two thousand, I don't know. I mean, I was certainly there, 178 00:13:42,480 --> 00:13:47,200 Speaker 1: I was staring at the market, um, But even twenty 179 00:13:47,240 --> 00:13:49,280 Speaker 1: years later, I can't tell you exactly what it was. 180 00:13:49,840 --> 00:13:52,640 Speaker 1: Let me flow the theory at you on that, because 181 00:13:52,760 --> 00:13:56,520 Speaker 1: I was also there and watching the I l X 182 00:13:56,559 --> 00:13:59,719 Speaker 1: and the Bloomberg terminal all the time. And I have 183 00:13:59,800 --> 00:14:03,760 Speaker 1: a very vivid recollection of the first or second week 184 00:14:03,800 --> 00:14:07,520 Speaker 1: of March two thousand and remember we had that giant 185 00:14:07,760 --> 00:14:11,280 Speaker 1: y two K concern and there was a ton of 186 00:14:11,280 --> 00:14:16,160 Speaker 1: of hardware purchased in anticipation of that, and you very quickly. 187 00:14:16,280 --> 00:14:19,320 Speaker 1: I don't remember if it was Dell that had a 188 00:14:19,440 --> 00:14:24,000 Speaker 1: terrible quarter pre announced or Intel. It might it might 189 00:14:24,000 --> 00:14:27,920 Speaker 1: have been Dell, like the first week of March. I 190 00:14:27,960 --> 00:14:31,160 Speaker 1: think there was their window to announce that their previous 191 00:14:31,200 --> 00:14:33,960 Speaker 1: guidance was gonna be wrong. So it could have been 192 00:14:33,960 --> 00:14:36,720 Speaker 1: like March eighth, two thousand. It's funny how all these 193 00:14:36,760 --> 00:14:40,880 Speaker 1: things have been happening around March oh eight and and 194 00:14:41,040 --> 00:14:44,160 Speaker 1: uh uh was the oh nine was the bottom and 195 00:14:44,280 --> 00:14:46,920 Speaker 1: oh eight was to March two thousand was the top, 196 00:14:46,960 --> 00:14:50,760 Speaker 1: and then again the bottom in But is that the 197 00:14:50,880 --> 00:14:55,120 Speaker 1: sort of thing that is a credible precipitent or is 198 00:14:55,160 --> 00:15:00,680 Speaker 1: it really just the reveal and the collapse would happen otherwise, 199 00:15:01,640 --> 00:15:06,800 Speaker 1: you know, I don't know. Certainly. The basic thing the 200 00:15:06,840 --> 00:15:13,400 Speaker 1: market was getting wrong in two thousand, um was this 201 00:15:13,600 --> 00:15:21,400 Speaker 1: belief in incredibly strong continued growth in corporate profits. Um. 202 00:15:21,440 --> 00:15:23,880 Speaker 1: If you look at what people were saying. Sure, there 203 00:15:23,960 --> 00:15:29,040 Speaker 1: was the Dow six thousand argument that was basically saying 204 00:15:29,160 --> 00:15:32,280 Speaker 1: there should be no equity risk treamum. But if you 205 00:15:32,400 --> 00:15:36,280 Speaker 1: look at what analysts were saying and how analysts were 206 00:15:36,320 --> 00:15:42,560 Speaker 1: assuming decent returns going forward was you know, expected earnings 207 00:15:42,600 --> 00:15:47,400 Speaker 1: growth had never really been higher, so they were expecting 208 00:15:47,440 --> 00:15:52,480 Speaker 1: something like annualized earnings growth. Now they always overpredict earnings growth, 209 00:15:52,520 --> 00:16:00,400 Speaker 1: but that was some of the highest levels ever. Um. 210 00:16:00,400 --> 00:16:05,080 Speaker 1: You know, the the reality of what was going on. 211 00:16:07,240 --> 00:16:13,880 Speaker 1: The funny thing is, in March we had this extraordinary 212 00:16:14,040 --> 00:16:16,600 Speaker 1: day and I'm sure you remember it as vividly as 213 00:16:16,640 --> 00:16:22,160 Speaker 1: I do, where the market in the morning collapsed like 214 00:16:22,680 --> 00:16:26,360 Speaker 1: twelve or four uh, and then in the afternoon made 215 00:16:26,360 --> 00:16:30,280 Speaker 1: this extraordinary recovery to wind up down I don't know 216 00:16:30,360 --> 00:16:33,840 Speaker 1: one or two um. And it was this kind of 217 00:16:34,000 --> 00:16:39,520 Speaker 1: intra day volatility that hadn't been seen well more or 218 00:16:39,600 --> 00:16:46,760 Speaker 1: less ever, um. And that was maybe kind of a 219 00:16:46,800 --> 00:16:49,520 Speaker 1: shot across the bow. If if you look at what 220 00:16:49,800 --> 00:16:57,680 Speaker 1: happened um across two thousand, you know, the first group 221 00:16:57,760 --> 00:17:04,240 Speaker 1: to really crack was the pure internet startups uh. And 222 00:17:04,320 --> 00:17:07,760 Speaker 1: then a little bit later in my memory this was 223 00:17:07,880 --> 00:17:14,480 Speaker 1: really late spring, early summer, was the hardware names uh, 224 00:17:14,560 --> 00:17:20,639 Speaker 1: you know, including Dell. UH. Software guys held out farther 225 00:17:20,840 --> 00:17:27,960 Speaker 1: until the fall um UM. But then they cracked UM. 226 00:17:28,040 --> 00:17:35,840 Speaker 1: And maybe it was as simple as disappointing earning UM, 227 00:17:35,960 --> 00:17:39,320 Speaker 1: but it wasn't obvious at the time that it was 228 00:17:40,000 --> 00:17:43,440 Speaker 1: disappointing earnings numbers, And I certainly don't remember a change 229 00:17:43,640 --> 00:17:50,920 Speaker 1: in the you know, the general tenor of market commentary 230 00:17:51,640 --> 00:17:59,960 Speaker 1: UM as being around this sudden realization that that earnings 231 00:18:00,000 --> 00:18:03,640 Speaker 1: weren't going to be there. Quite interesting. So let's talk 232 00:18:03,680 --> 00:18:06,960 Speaker 1: a little bit about the forecasts that you guys make 233 00:18:07,000 --> 00:18:10,639 Speaker 1: on a regular basis, the seven year forecasts. What are 234 00:18:10,640 --> 00:18:15,800 Speaker 1: the primary inputs into that seven year forecast that let 235 00:18:15,880 --> 00:18:20,240 Speaker 1: you conclude US stocks are likely to deliver negative real 236 00:18:20,320 --> 00:18:25,800 Speaker 1: returns over the next seven years. The basic underlying idea 237 00:18:25,960 --> 00:18:29,280 Speaker 1: behind the forecast UH that goes back to when we 238 00:18:29,520 --> 00:18:36,320 Speaker 1: started publishing them in the mid nineties, is that the market, 239 00:18:36,680 --> 00:18:43,360 Speaker 1: it spends very little time looking normal UM, but UM 240 00:18:43,359 --> 00:18:48,840 Speaker 1: over time goes through normal reasonably often. So in principle, 241 00:18:48,920 --> 00:18:51,560 Speaker 1: what we're really saying is, look, we don't know exactly 242 00:18:51,560 --> 00:18:53,840 Speaker 1: what the future is going to hold, but let's assume 243 00:18:53,880 --> 00:18:57,439 Speaker 1: that it's some uncertain point in the future we'll call 244 00:18:57,520 --> 00:19:00,439 Speaker 1: it seven years from now. Everything looks normal, So the 245 00:19:00,480 --> 00:19:04,159 Speaker 1: p of the market looks normal, profitability looks normal UM, 246 00:19:04,200 --> 00:19:06,639 Speaker 1: and the return we're going to get between now and 247 00:19:06,720 --> 00:19:10,600 Speaker 1: then is going to be driven by whatever earnings growth 248 00:19:10,800 --> 00:19:14,400 Speaker 1: will occur, whatever income we're going to get from that asset, 249 00:19:15,000 --> 00:19:19,120 Speaker 1: and then either a gain or a loss associated with 250 00:19:20,440 --> 00:19:25,560 Speaker 1: these reverting to normal and profitability reverting to normal. Now, 251 00:19:26,080 --> 00:19:30,199 Speaker 1: one thing that has changed about the forecast um is 252 00:19:30,520 --> 00:19:34,440 Speaker 1: we do now have two different scenarios that we are 253 00:19:34,520 --> 00:19:39,679 Speaker 1: explicitly using. One of them is kind of the traditional 254 00:19:39,720 --> 00:19:44,320 Speaker 1: one that we started choosing in, which is that fair 255 00:19:44,440 --> 00:19:48,760 Speaker 1: value is the long term normal, so the stock market 256 00:19:48,800 --> 00:19:53,159 Speaker 1: should be trading around sixteen times normalized earnings, bond yields 257 00:19:53,160 --> 00:19:58,480 Speaker 1: will be somewhere between two percent and three percent above inflation, uh, 258 00:19:58,640 --> 00:20:05,159 Speaker 1: kind of the old aisle assumption of where equilibrium is. 259 00:20:06,200 --> 00:20:10,520 Speaker 1: More recent years, we've built in another scenario, which we 260 00:20:10,600 --> 00:20:14,920 Speaker 1: also consider to be a reasonable one. It's predicated on 261 00:20:16,080 --> 00:20:21,000 Speaker 1: the idea that interest rates have permanently from those levels. 262 00:20:21,720 --> 00:20:25,840 Speaker 1: We used to call that scenario hell um. We now 263 00:20:25,920 --> 00:20:28,720 Speaker 1: call it partial mean reversion. We stopped calling it hell 264 00:20:29,200 --> 00:20:31,520 Speaker 1: maybe because we were offending some people, but mostly because 265 00:20:31,520 --> 00:20:35,520 Speaker 1: we were confusing them because our forecasts in hell are 266 00:20:35,600 --> 00:20:41,840 Speaker 1: generally better than our forecasts otherwise, because the allowable valuation 267 00:20:42,440 --> 00:20:45,800 Speaker 1: in a world where interest rates have permanently fallen is higher. 268 00:20:46,200 --> 00:20:49,760 Speaker 1: So for any given level of the market, if equilibrium 269 00:20:49,840 --> 00:20:55,879 Speaker 1: valuation is higher, the return will be higher UM. Now Today, 270 00:20:55,920 --> 00:21:02,560 Speaker 1: particularly for the US, even in that low interest rate environment, 271 00:21:03,320 --> 00:21:09,280 Speaker 1: today's valuations were stocked in the US really look too high. 272 00:21:09,560 --> 00:21:13,280 Speaker 1: In the rest of the world, that's less true. Uh. 273 00:21:13,320 --> 00:21:16,760 Speaker 1: And if interest rates are truly permanently low, you know, 274 00:21:16,840 --> 00:21:21,280 Speaker 1: the emerging market in general are probably trading at a 275 00:21:21,359 --> 00:21:24,679 Speaker 1: very reasonable valuations. But in the US, even if we 276 00:21:24,760 --> 00:21:28,159 Speaker 1: make that adjustment, we come to the conclusion that the 277 00:21:28,840 --> 00:21:33,560 Speaker 1: that the market is overvalued um. And that's I would 278 00:21:33,600 --> 00:21:37,240 Speaker 1: say the last couple of years we have generally said 279 00:21:37,280 --> 00:21:41,960 Speaker 1: that is more true for large gaps than small caps UM. 280 00:21:42,040 --> 00:21:47,320 Speaker 1: But among the extraordinary things that happened, despite an environment 281 00:21:47,440 --> 00:21:53,040 Speaker 1: that was unquestionably worse for smaller cap companies, the Russell 282 00:21:53,080 --> 00:21:56,560 Speaker 1: two thousands outperformed. And so at this point we think 283 00:21:57,080 --> 00:21:59,600 Speaker 1: even even the small caps in the US are are 284 00:22:00,119 --> 00:22:05,119 Speaker 1: likely to be a significant haven. And then our performance 285 00:22:05,200 --> 00:22:07,320 Speaker 1: really came in the last few months of the year, 286 00:22:07,400 --> 00:22:11,320 Speaker 1: didn't it. Yeah, And in the trigger in terms of 287 00:22:11,320 --> 00:22:14,600 Speaker 1: the catalyst of performance, the obvious catalyst on that performance 288 00:22:15,040 --> 00:22:19,760 Speaker 1: was the vaccine news and that vaccine news was unquestionably 289 00:22:19,800 --> 00:22:25,280 Speaker 1: wonderful news for humanity and wonderful news on a perspective 290 00:22:25,320 --> 00:22:30,560 Speaker 1: basis for the global economy. Um. But wow, it was 291 00:22:30,680 --> 00:22:36,480 Speaker 1: an awfully big move in these stocks, particularly given that 292 00:22:37,640 --> 00:22:40,879 Speaker 1: they weren't all that cheap to begin with. So it 293 00:22:41,960 --> 00:22:46,400 Speaker 1: was a move that directionally made sense, but from our perspective, 294 00:22:46,520 --> 00:22:54,000 Speaker 1: the scale of the move was just inexplicably large. So 295 00:22:54,080 --> 00:22:58,480 Speaker 1: you mentioned emerging markets which have been cheap for quite 296 00:22:58,520 --> 00:23:02,600 Speaker 1: a while. What are your what's on developed x US? 297 00:23:02,760 --> 00:23:05,880 Speaker 1: Is the rest of the developed world as pricey as 298 00:23:05,960 --> 00:23:10,639 Speaker 1: US equities? Uh? No, The valuations are lower in the 299 00:23:10,680 --> 00:23:14,240 Speaker 1: rest of the world. Now, some of that is driven 300 00:23:14,400 --> 00:23:19,000 Speaker 1: by the fact that UM I T is a smaller 301 00:23:19,080 --> 00:23:24,680 Speaker 1: piece of the rest of the world. UM industrial set 302 00:23:24,760 --> 00:23:29,040 Speaker 1: and information technology firms do probably deserve to trade at 303 00:23:29,080 --> 00:23:32,640 Speaker 1: higher valuations than kind of more traditional love But even 304 00:23:32,640 --> 00:23:36,960 Speaker 1: when you adjust for that, UM, we do see a 305 00:23:37,000 --> 00:23:40,320 Speaker 1: big gap between what a company would trade at in 306 00:23:40,359 --> 00:23:44,040 Speaker 1: the US and what that company would trade at if 307 00:23:44,080 --> 00:23:46,919 Speaker 1: it were somewhere else in the world. UM. So we 308 00:23:47,080 --> 00:23:51,919 Speaker 1: see the non US developed markets looking cheaper than the US. 309 00:23:52,800 --> 00:23:58,560 Speaker 1: UM we don't see them looking by any means dirt cheap. 310 00:23:58,680 --> 00:24:02,919 Speaker 1: The place that I think is most intriguing today in 311 00:24:02,920 --> 00:24:08,480 Speaker 1: the developed world UH is actually Japan UM, where the 312 00:24:08,560 --> 00:24:14,680 Speaker 1: valuations are reasonably low UM. And it is a place 313 00:24:14,920 --> 00:24:22,720 Speaker 1: where it is easy to imagine that profitability can improve 314 00:24:23,160 --> 00:24:27,680 Speaker 1: in a sustainable way UM because if you look at 315 00:24:28,040 --> 00:24:30,800 Speaker 1: you know, the return on capital in Japan, it's been 316 00:24:31,720 --> 00:24:33,919 Speaker 1: lower than that of the rest of the world for 317 00:24:33,960 --> 00:24:37,720 Speaker 1: the last forty years. And in principle, there is nothing 318 00:24:37,760 --> 00:24:41,600 Speaker 1: that stopped these companies from doing some of the same 319 00:24:41,640 --> 00:24:44,040 Speaker 1: things that companies in the rest of the world have 320 00:24:44,160 --> 00:24:49,440 Speaker 1: done UM and being able to really improve that UH. 321 00:24:49,440 --> 00:24:51,840 Speaker 1: And so you know, the simple math is if you 322 00:24:51,960 --> 00:24:56,119 Speaker 1: have two stock markets trading at the same pe and 323 00:24:56,320 --> 00:24:59,920 Speaker 1: one of them has significant scope for earnings growth real 324 00:25:00,119 --> 00:25:03,680 Speaker 1: to the other, well that that one is cheaper UM. 325 00:25:03,840 --> 00:25:09,439 Speaker 1: So within the rest of the developed world, UM, we 326 00:25:09,560 --> 00:25:14,480 Speaker 1: are intrigued by Japan today because of the potential for 327 00:25:15,359 --> 00:25:19,920 Speaker 1: kind of significant earnings and profitability growth over the next 328 00:25:19,960 --> 00:25:26,560 Speaker 1: five or ten years UM. But for really cheap markets um. 329 00:25:27,000 --> 00:25:30,960 Speaker 1: UH we think you can find more in the emerging 330 00:25:31,000 --> 00:25:34,080 Speaker 1: world than in the developed world today. Let me stay 331 00:25:34,119 --> 00:25:39,000 Speaker 1: with Japan for a few moments. Historically, not big stock 332 00:25:39,040 --> 00:25:43,879 Speaker 1: by backs, at least not compared to the US, And 333 00:25:44,320 --> 00:25:47,560 Speaker 1: there's always a little bit of currency risk of dollar 334 00:25:47,720 --> 00:25:51,800 Speaker 1: versus yen. How do you incorporate the currency risk into 335 00:25:51,840 --> 00:25:56,520 Speaker 1: your thesis? I mean, there's always currency risk whenever you're 336 00:25:56,520 --> 00:26:00,560 Speaker 1: buying an asset that's denominated in another currency. We find 337 00:26:00,640 --> 00:26:03,879 Speaker 1: is in the longer run, UH, that risk tends to 338 00:26:03,920 --> 00:26:07,560 Speaker 1: dissipate because let's imagine you buy Japanese stocks and the 339 00:26:07,640 --> 00:26:11,760 Speaker 1: yen really fall, so you're taking this this loss in 340 00:26:11,800 --> 00:26:16,200 Speaker 1: the nearer term. The good news once that has happened 341 00:26:16,440 --> 00:26:20,880 Speaker 1: is Japanese companies are now going to be really competitive 342 00:26:21,280 --> 00:26:24,080 Speaker 1: relative to their global peers because of what's happened to 343 00:26:24,119 --> 00:26:27,199 Speaker 1: the end um. So what we what we tend to 344 00:26:27,240 --> 00:26:32,479 Speaker 1: find is as your time horizon lengthens, uh, the extra 345 00:26:32,640 --> 00:26:37,520 Speaker 1: risk associated with the currency tends to fall away. Because 346 00:26:37,880 --> 00:26:42,920 Speaker 1: countries that experience a fall in their currency normally experience 347 00:26:43,520 --> 00:26:46,960 Speaker 1: better than average earning scrowth, and companies that experience a 348 00:26:47,119 --> 00:26:52,560 Speaker 1: rise in their currency experience subpar earning scrow. So it 349 00:26:52,640 --> 00:26:55,120 Speaker 1: kind of comes out in the wash. And that's more 350 00:26:55,240 --> 00:26:57,800 Speaker 1: strongly true in the developed world than it is in 351 00:26:57,840 --> 00:27:02,080 Speaker 1: the emerging world, because the emerging world sometimes you know, 352 00:27:02,160 --> 00:27:07,080 Speaker 1: a following currency can turn into a currency crisis, which 353 00:27:07,160 --> 00:27:10,800 Speaker 1: is more problematic for for the companies. But in the 354 00:27:10,840 --> 00:27:17,159 Speaker 1: developed world, I don't get that worried about UM the currencies. 355 00:27:17,200 --> 00:27:19,640 Speaker 1: Most of the time. I do get nervous if I'm 356 00:27:19,640 --> 00:27:23,159 Speaker 1: buying into a country where the currency is at a 357 00:27:23,160 --> 00:27:27,960 Speaker 1: given point in time substantially overvalued. UM. That doesn't seem 358 00:27:28,000 --> 00:27:31,520 Speaker 1: to be true of Japan today. UM. You know the 359 00:27:31,640 --> 00:27:34,280 Speaker 1: risk in Japan, I would say the primary risk is 360 00:27:35,880 --> 00:27:39,840 Speaker 1: if they don't get that religion, if they don't start 361 00:27:39,920 --> 00:27:44,000 Speaker 1: paying more money out to shareholders, if they don't do 362 00:27:44,280 --> 00:27:50,800 Speaker 1: some rationalization of their capital structures, they're not going to 363 00:27:50,880 --> 00:27:57,879 Speaker 1: improve UM and the returns will be black. UM. But 364 00:27:59,080 --> 00:28:03,640 Speaker 1: we are seeing the evidence that both at the at 365 00:28:03,640 --> 00:28:06,800 Speaker 1: the macro level, the government is trying to push these 366 00:28:06,840 --> 00:28:10,400 Speaker 1: companies to change, and we're seeing on the ground that 367 00:28:10,720 --> 00:28:17,119 Speaker 1: more and more company management is receptive to hearing about 368 00:28:17,200 --> 00:28:23,560 Speaker 1: this and receptive to making moves in the right direction. Interesting. 369 00:28:24,000 --> 00:28:27,719 Speaker 1: You mentioned emerging markets, and we tend to speak of 370 00:28:27,760 --> 00:28:33,159 Speaker 1: them like they're monolithic block, but they're really very very 371 00:28:33,160 --> 00:28:38,600 Speaker 1: specific countries with different risks and different potential upside. What 372 00:28:38,720 --> 00:28:41,840 Speaker 1: do you see in the emerging market space that is 373 00:28:42,720 --> 00:28:47,880 Speaker 1: especially interesting or something that you're less interested in. Yeah, 374 00:28:47,920 --> 00:28:51,840 Speaker 1: you're You're absolutely right. Emerging markets is not this monolithic saying. 375 00:28:52,240 --> 00:28:55,840 Speaker 1: From my perspective, that's really part of its charm. Um. 376 00:28:55,920 --> 00:29:01,520 Speaker 1: These countries all have very significant risks associated with them, 377 00:29:01,600 --> 00:29:06,840 Speaker 1: but in a lot of cases those risks are very idiosyncratic. 378 00:29:07,280 --> 00:29:12,480 Speaker 1: You know, Turkey has problems, Russia has problems, China has problems. 379 00:29:12,680 --> 00:29:16,880 Speaker 1: They do not have the same problems by any stretch 380 00:29:16,880 --> 00:29:20,800 Speaker 1: of the imagination. Uh. And so the kind of thing 381 00:29:20,960 --> 00:29:24,600 Speaker 1: that could prove to be a real challenge for Turkey 382 00:29:24,840 --> 00:29:27,640 Speaker 1: might actually be something that works out pretty well for 383 00:29:28,360 --> 00:29:33,560 Speaker 1: Russia or Korea or Brazil. So what we find is 384 00:29:34,280 --> 00:29:37,840 Speaker 1: when people think about the risks in emerging they tend 385 00:29:37,880 --> 00:29:40,520 Speaker 1: to focus on, oh my god, what if this really 386 00:29:40,560 --> 00:29:43,400 Speaker 1: bad thing happens in this country. And the good news 387 00:29:43,480 --> 00:29:46,600 Speaker 1: is you can invest across you know, thirty odd different 388 00:29:46,640 --> 00:29:52,800 Speaker 1: countries and the same thing is unlikely to blow through 389 00:29:52,880 --> 00:29:56,280 Speaker 1: all of them. But it is still the case that 390 00:29:56,360 --> 00:30:02,920 Speaker 1: the come countries that wind up really cheap. Um, there's 391 00:30:02,960 --> 00:30:06,520 Speaker 1: almost always a pretty good reason for that. Uh. And 392 00:30:06,600 --> 00:30:11,800 Speaker 1: so the diversification of being able to invest in a 393 00:30:11,880 --> 00:30:15,600 Speaker 1: wide array of them is incredibly important. So for example, 394 00:30:15,680 --> 00:30:21,480 Speaker 1: today Russia is very cheap um and that's not just 395 00:30:21,640 --> 00:30:25,680 Speaker 1: because of the energy stocks. In fact um, you know, 396 00:30:25,800 --> 00:30:31,280 Speaker 1: our Emerging markets team really likes Russia today, but there 397 00:30:31,040 --> 00:30:35,320 Speaker 1: their favorite stocks are not really in the energy space. 398 00:30:36,000 --> 00:30:40,239 Speaker 1: The markets cheap. The markets cheap partially because you know, 399 00:30:40,400 --> 00:30:47,360 Speaker 1: on um Russia is a bit of a you know, 400 00:30:48,040 --> 00:30:52,080 Speaker 1: pariah state at this point, given some of their their misbehavior, 401 00:30:52,160 --> 00:30:57,280 Speaker 1: and people don't really like investing there. The levels of 402 00:30:57,400 --> 00:31:02,960 Speaker 1: corporate governance from the standpoint of tection of outside shareholders stinks, 403 00:31:03,720 --> 00:31:06,280 Speaker 1: and their economy isn't in great shape. Okay, those are 404 00:31:06,280 --> 00:31:10,280 Speaker 1: all pretty good reasons for the stocks to be cheap, 405 00:31:11,040 --> 00:31:15,920 Speaker 1: but at the same time they're also avenues for which 406 00:31:16,400 --> 00:31:20,840 Speaker 1: some improvement could lead to quite good returns. So what 407 00:31:20,880 --> 00:31:25,120 Speaker 1: I'm hearing you describe is sort of a corruption discount, 408 00:31:25,880 --> 00:31:32,040 Speaker 1: which raises the question, does that unusually high level of 409 00:31:32,040 --> 00:31:37,240 Speaker 1: corruption within the Russian economy and government does that need 410 00:31:37,320 --> 00:31:44,080 Speaker 1: to improve to see Russian stocks do better? Something probably 411 00:31:44,160 --> 00:31:48,720 Speaker 1: needs to improve, Uh, for Russian stocks to do better, 412 00:31:49,440 --> 00:31:52,400 Speaker 1: an improvement in the kind of the level of corruption 413 00:31:52,520 --> 00:32:00,360 Speaker 1: and the and the level of corporate governance will help UH. 414 00:32:00,400 --> 00:32:04,240 Speaker 1: And while it's not a guarantee by any means, it 415 00:32:04,440 --> 00:32:10,280 Speaker 1: is fascinating that kind of UH. In recent quarters, I 416 00:32:10,360 --> 00:32:18,760 Speaker 1: have been getting UM uh kings, whether it is email 417 00:32:19,080 --> 00:32:28,720 Speaker 1: or voicemails UM from UH, from from consulting companies representing 418 00:32:28,840 --> 00:32:35,200 Speaker 1: some of the big Russian state owned enterprises who are 419 00:32:36,320 --> 00:32:43,440 Speaker 1: UM canvassing UH current and former shareholders to understand what 420 00:32:43,560 --> 00:32:48,120 Speaker 1: kind of governance improvements they would like to see. UM. 421 00:32:48,160 --> 00:32:51,320 Speaker 1: It's not that, you know, gas Prom has suddenly become 422 00:32:51,400 --> 00:32:57,640 Speaker 1: a paragon of corporate governance, but it is fascinating. UM. 423 00:32:57,720 --> 00:33:00,600 Speaker 1: They do care enough to at least want to know 424 00:33:01,360 --> 00:33:04,520 Speaker 1: what either people who have hold them or have held 425 00:33:04,520 --> 00:33:08,920 Speaker 1: them in the past would like to see them do. UM. 426 00:33:09,440 --> 00:33:11,280 Speaker 1: And and again you know, one of the things that 427 00:33:11,760 --> 00:33:16,320 Speaker 1: Argent Davetcha, who has been our head of emerging markets 428 00:33:16,360 --> 00:33:22,000 Speaker 1: going back into the early nineties, the extraordinary returns that 429 00:33:22,040 --> 00:33:26,680 Speaker 1: you can get periodically in emerging do not tend to 430 00:33:26,720 --> 00:33:31,760 Speaker 1: come when things are good and become great. They come 431 00:33:31,800 --> 00:33:36,320 Speaker 1: when things were absolutely horrible and become nearly bad. UM. 432 00:33:36,760 --> 00:33:42,600 Speaker 1: The scope for better corporate governance UM in a place 433 00:33:42,640 --> 00:33:46,200 Speaker 1: like Russia. Man, they don't have to jump over that 434 00:33:46,320 --> 00:33:50,040 Speaker 1: high a hoop for things to get better. UM, and 435 00:33:50,240 --> 00:33:55,360 Speaker 1: given the very substantial discounts that investors are currently demanding 436 00:33:55,480 --> 00:33:59,400 Speaker 1: for these assets, uh, a little bit of improvement would 437 00:33:59,440 --> 00:34:03,719 Speaker 1: go along, right. Quite quite interesting. So you guys are 438 00:34:03,800 --> 00:34:08,560 Speaker 1: known as not only contrarians, but value investing, and we 439 00:34:08,680 --> 00:34:13,720 Speaker 1: see value go through regular periods of under an overperformance. 440 00:34:13,800 --> 00:34:18,480 Speaker 1: It's it's been pretty cyclical. But you described this past 441 00:34:18,560 --> 00:34:23,440 Speaker 1: decade as quote truly a hellish time. What's going on 442 00:34:23,560 --> 00:34:27,440 Speaker 1: with value investing? Yeah, well that is that is a 443 00:34:27,840 --> 00:34:31,000 Speaker 1: question that we have spent an extraordinary amount of time 444 00:34:31,280 --> 00:34:34,239 Speaker 1: trying to analog. One of the things we really like 445 00:34:34,480 --> 00:34:38,839 Speaker 1: to do, UH, when looking at any asset, whether it's 446 00:34:38,880 --> 00:34:42,080 Speaker 1: been doing well or poorly, is not just look at 447 00:34:42,120 --> 00:34:46,680 Speaker 1: what its returns have been, but try to understand where 448 00:34:46,719 --> 00:34:50,920 Speaker 1: those returns have come from. UH. And value at this 449 00:34:51,000 --> 00:34:55,120 Speaker 1: point famously has underperformed as a stock selection technique since 450 00:34:55,160 --> 00:34:58,560 Speaker 1: about two thousand seven. So we've got a thirteen year 451 00:34:58,600 --> 00:35:04,719 Speaker 1: period of value underperforming. UM was particularly spectacular year for 452 00:35:04,800 --> 00:35:08,280 Speaker 1: that it was the worst single year for value relative 453 00:35:08,280 --> 00:35:12,720 Speaker 1: to growth in history UM. But even before that, value 454 00:35:12,719 --> 00:35:16,279 Speaker 1: had been under performing. Now the question is why I 455 00:35:16,320 --> 00:35:22,719 Speaker 1: would say the common the common received wisdom is, well, 456 00:35:22,760 --> 00:35:25,759 Speaker 1: the reason why value has underperformed is because they have 457 00:35:25,880 --> 00:35:30,040 Speaker 1: proved to be value traps. The growth stocks have grown 458 00:35:30,120 --> 00:35:34,040 Speaker 1: in a way that is, uh, you know, qualitatively different 459 00:35:34,080 --> 00:35:36,600 Speaker 1: than what had happened before, and these guys have just 460 00:35:36,680 --> 00:35:40,720 Speaker 1: fundamentally been a disaster. If we look under the surface 461 00:35:40,800 --> 00:35:43,839 Speaker 1: at where the returns have come from, we find that's 462 00:35:43,840 --> 00:35:49,600 Speaker 1: actually not true. Value stocks have certainly undergrown the market. Now, 463 00:35:49,719 --> 00:35:53,080 Speaker 1: they undergrew the market in the period in which value 464 00:35:53,120 --> 00:35:58,280 Speaker 1: one um as well. If we look from two thousand six, 465 00:35:58,320 --> 00:36:01,200 Speaker 1: which was a period when the value outperformed the market 466 00:36:01,239 --> 00:36:02,840 Speaker 1: by about two and a half points a year in 467 00:36:02,880 --> 00:36:06,759 Speaker 1: the US, value stocks still undergrew the market by about 468 00:36:06,760 --> 00:36:09,759 Speaker 1: five points a year. So how can you win if 469 00:36:09,800 --> 00:36:13,640 Speaker 1: you're undergrowing by five points a year. Well, there's a 470 00:36:13,680 --> 00:36:18,000 Speaker 1: couple of ways. Um. One of them is more income. 471 00:36:18,400 --> 00:36:21,239 Speaker 1: One of the reasons why value stocks don't grow as 472 00:36:21,320 --> 00:36:24,680 Speaker 1: much as because those companies pay out more of their 473 00:36:24,680 --> 00:36:28,319 Speaker 1: earnings to shareholders. UM, So you get more income out 474 00:36:28,360 --> 00:36:33,160 Speaker 1: of value. But the other important piece of the return 475 00:36:33,320 --> 00:36:36,560 Speaker 1: to value in the long run comes from the fact 476 00:36:36,600 --> 00:36:40,280 Speaker 1: that value isn't a static strategy. You're not just buying 477 00:36:40,280 --> 00:36:42,720 Speaker 1: a group of stocks and holding them for the next decade. 478 00:36:43,320 --> 00:36:45,200 Speaker 1: You are buying a group of stocks because they look 479 00:36:45,280 --> 00:36:50,400 Speaker 1: cheap today, and you are refreshing that group of stocks 480 00:36:50,440 --> 00:36:55,520 Speaker 1: over time, and that rebalancing, that refreshing of that portfolio 481 00:36:56,239 --> 00:37:00,840 Speaker 1: has been very additive to returns to value you over time. 482 00:37:01,560 --> 00:37:04,920 Speaker 1: That's even been true in this more recent period. So 483 00:37:06,120 --> 00:37:10,480 Speaker 1: the rebalancing effect always accrues in favor of value and 484 00:37:10,600 --> 00:37:13,080 Speaker 1: helps make up for the fact that the value stocks undergrow. 485 00:37:13,760 --> 00:37:18,880 Speaker 1: If we look at the underperformance of value, and since 486 00:37:18,920 --> 00:37:21,680 Speaker 1: two thousand seven, the value half of the market has 487 00:37:21,760 --> 00:37:24,759 Speaker 1: underperformed the overall market by about a point and a 488 00:37:24,760 --> 00:37:29,759 Speaker 1: half a year. As we break that down, the relative 489 00:37:29,960 --> 00:37:35,120 Speaker 1: valuation piece of that return um, which is to say, 490 00:37:35,480 --> 00:37:39,560 Speaker 1: the amount of the return that came from the fact 491 00:37:39,680 --> 00:37:43,600 Speaker 1: that value stocks traded at a different discount to the 492 00:37:43,640 --> 00:37:45,319 Speaker 1: market at the end of the year than they did 493 00:37:45,400 --> 00:37:48,160 Speaker 1: at the beginning of the year, has been has cost 494 00:37:48,200 --> 00:37:52,200 Speaker 1: you two points a year. So more than of the 495 00:37:52,280 --> 00:37:55,800 Speaker 1: underperformance of value has come from the fact that value 496 00:37:55,840 --> 00:37:59,360 Speaker 1: has been getting cheaper. And the thing about that is 497 00:37:59,400 --> 00:38:03,480 Speaker 1: a source of return is it's not a sustainable one, right. 498 00:38:03,560 --> 00:38:07,279 Speaker 1: You can't have a group of stocks have its valuations 499 00:38:07,520 --> 00:38:11,279 Speaker 1: go in the same direction forever, you get kind of 500 00:38:11,320 --> 00:38:18,760 Speaker 1: absurd things eventually, UM. And we do think that because 501 00:38:18,840 --> 00:38:22,160 Speaker 1: that valuation discount has gotten to the point where it's 502 00:38:22,239 --> 00:38:25,600 Speaker 1: some of the widest we have ever seen. UM, we 503 00:38:25,680 --> 00:38:27,719 Speaker 1: have a hard time believing it's going to spend the 504 00:38:27,760 --> 00:38:31,799 Speaker 1: next five or ten years getting still wider. And if 505 00:38:31,800 --> 00:38:35,640 Speaker 1: it were to just stay where it is and the 506 00:38:35,760 --> 00:38:39,640 Speaker 1: other sources of return for value stayed where they are, 507 00:38:40,280 --> 00:38:44,799 Speaker 1: value would win. So we think under the surface, and 508 00:38:44,800 --> 00:38:47,120 Speaker 1: this is the same kind of analysis we did that 509 00:38:47,719 --> 00:38:53,720 Speaker 1: had us confident in value in two thousands, under the surface, 510 00:38:54,280 --> 00:38:59,080 Speaker 1: the value effect is still there, UM, but it's hidden 511 00:38:59,120 --> 00:39:04,400 Speaker 1: by this changing valuation UM. So we think if we 512 00:39:04,440 --> 00:39:09,040 Speaker 1: could get stable valuation gap between value and growth, value 513 00:39:09,080 --> 00:39:13,240 Speaker 1: would win. We also think that the gap between value 514 00:39:13,239 --> 00:39:20,280 Speaker 1: and growth has gotten extraordinarily wide. UM. It is trading 515 00:39:20,440 --> 00:39:27,279 Speaker 1: at kind of seventy wider UM then it has on 516 00:39:27,360 --> 00:39:30,800 Speaker 1: average over the last forty years, Which is to say, 517 00:39:31,080 --> 00:39:34,720 Speaker 1: if value was going to move to the same relative 518 00:39:34,800 --> 00:39:37,960 Speaker 1: valuation versus growth stock that it's traded on average over 519 00:39:38,000 --> 00:39:41,760 Speaker 1: the last forty years, value stock deserved to beat growth 520 00:39:41,800 --> 00:39:45,280 Speaker 1: by seventy percentage points. But we don't need to assume 521 00:39:45,320 --> 00:39:47,799 Speaker 1: that that's going to happen in order for value to 522 00:39:47,880 --> 00:39:54,600 Speaker 1: win going forward. We just need this pattern to stop. 523 00:39:55,400 --> 00:39:57,920 Speaker 1: And frankly, one of the things that gives us confidence 524 00:39:57,960 --> 00:40:01,640 Speaker 1: that this pattern is going to stop is just how 525 00:40:02,080 --> 00:40:07,800 Speaker 1: crazy some of the market action has been in recent months. M. 526 00:40:08,200 --> 00:40:12,920 Speaker 1: Jeremy Grantham, our firm's founder, has written about that and 527 00:40:12,920 --> 00:40:16,840 Speaker 1: and uh and and talked about it in interviews. This 528 00:40:17,120 --> 00:40:21,360 Speaker 1: is what we believe to be a full fledged speculative 529 00:40:21,400 --> 00:40:28,960 Speaker 1: bubble um, and those events have a tendency to end 530 00:40:29,000 --> 00:40:35,080 Speaker 1: themselves in a space of months, usually more than years. 531 00:40:35,680 --> 00:40:38,000 Speaker 1: So let's stick with that idea. I have some other 532 00:40:38,080 --> 00:40:40,239 Speaker 1: value questions for you, but I want to stick with 533 00:40:40,880 --> 00:40:47,000 Speaker 1: the bubble issue. Back in Alan Greenspan made his famous 534 00:40:47,400 --> 00:40:53,120 Speaker 1: irrational Exuberance speech, and lots of people were discussing how 535 00:40:53,360 --> 00:40:57,239 Speaker 1: bubbly and frothy the market had become and how valuations 536 00:40:57,239 --> 00:41:01,040 Speaker 1: had gotten so extended. But the market powered higher another 537 00:41:01,080 --> 00:41:05,960 Speaker 1: four years, So arguably nine wasn't the ninth inning. It was, 538 00:41:06,600 --> 00:41:10,359 Speaker 1: you know, the fifth or sixth inning. Are you suggesting 539 00:41:10,440 --> 00:41:13,799 Speaker 1: we're closer to the ninth inning here? And that this 540 00:41:13,920 --> 00:41:17,399 Speaker 1: is a full throated bubble everywhere or is it more 541 00:41:17,680 --> 00:41:22,560 Speaker 1: pockets of froth and this could still go for years 542 00:41:22,800 --> 00:41:26,080 Speaker 1: and not not weeks or months. Well, I'd say the 543 00:41:26,160 --> 00:41:30,360 Speaker 1: scale of what has been going on in recent months 544 00:41:30,960 --> 00:41:37,279 Speaker 1: is really quite qualitatively different from what we saw in 545 00:41:37,400 --> 00:41:41,960 Speaker 1: ninety six or seven. It does have kind of much 546 00:41:42,000 --> 00:41:46,280 Speaker 1: stronger parallels to what we saw in nine or early 547 00:41:46,320 --> 00:41:53,960 Speaker 1: two Thousand's right, Yes, we saw I think Netscape went public, uh, 548 00:41:54,000 --> 00:41:57,160 Speaker 1: and there was some fascination with that, um, But we 549 00:41:57,239 --> 00:42:04,200 Speaker 1: didn't have a huge swath of internet companies going public. 550 00:42:04,280 --> 00:42:09,440 Speaker 1: We didn't see you know, huge amounts of capital having 551 00:42:09,440 --> 00:42:17,560 Speaker 1: moved into that space or uh kind of being fascinated 552 00:42:17,680 --> 00:42:23,560 Speaker 1: um by h companies that traditional measures didn't didn't look 553 00:42:23,560 --> 00:42:28,280 Speaker 1: all that appeeling. That took quite a while to happen. 554 00:42:28,760 --> 00:42:34,719 Speaker 1: But I'd say about you know, this market is Look, 555 00:42:34,800 --> 00:42:40,640 Speaker 1: we are eleven years into a bowl market here. Uh. 556 00:42:41,239 --> 00:42:47,239 Speaker 1: It's not the case that um that that what's going 557 00:42:47,320 --> 00:42:54,560 Speaker 1: on now is something new from the standpoint of rising valuations. 558 00:42:54,600 --> 00:42:58,400 Speaker 1: What I'd say is new and different and something that 559 00:42:58,480 --> 00:43:04,960 Speaker 1: we weren't seeing and hill certainly in the US, UM 560 00:43:05,560 --> 00:43:13,200 Speaker 1: is we moved kind of away from the fascination with 561 00:43:14,160 --> 00:43:23,799 Speaker 1: the giant Oligopolis and Monopolis to more fascination with companies 562 00:43:24,040 --> 00:43:29,360 Speaker 1: where the proponents of them are telling us, look, what 563 00:43:29,560 --> 00:43:32,760 Speaker 1: you're missing is you are trying to value this company 564 00:43:32,800 --> 00:43:38,160 Speaker 1: on traditional security analysis, and traditional security analysis doesn't matter anymore. 565 00:43:38,880 --> 00:43:42,919 Speaker 1: Um And that's to me, that's a different statement than 566 00:43:43,680 --> 00:43:47,160 Speaker 1: the the accurate statement and people were making about say 567 00:43:47,239 --> 00:43:50,320 Speaker 1: Amazon a few years ago, which was, yeah, Amazon doesn't 568 00:43:50,320 --> 00:43:53,360 Speaker 1: look like it's very profitable, but of course it must 569 00:43:53,400 --> 00:43:56,440 Speaker 1: be profitable. Look at the way it is growing, and 570 00:43:56,480 --> 00:43:59,359 Speaker 1: look at the way it is it is funding that 571 00:43:59,440 --> 00:44:03,200 Speaker 1: growth when out having to raise capital. That must mean 572 00:44:03,600 --> 00:44:08,560 Speaker 1: under the surface they are actually quite a profitable company 573 00:44:08,600 --> 00:44:11,800 Speaker 1: and the accounting is just not keeping up with that. 574 00:44:11,800 --> 00:44:16,680 Speaker 1: That is true, and that helps explain how some of 575 00:44:16,760 --> 00:44:21,479 Speaker 1: these companies have done extraordinary things. But if we talk 576 00:44:21,600 --> 00:44:25,200 Speaker 1: about you know, a tesla, if we talk about a 577 00:44:25,280 --> 00:44:28,520 Speaker 1: door dam, if we talk about you know, a quantum 578 00:44:28,600 --> 00:44:32,840 Speaker 1: scape where the company management was saying, look in we 579 00:44:32,880 --> 00:44:36,279 Speaker 1: think we might be making a billion dollars and it 580 00:44:36,400 --> 00:44:41,680 Speaker 1: was priced at you know, at the peak in December 581 00:44:42,120 --> 00:44:49,000 Speaker 1: something like eighty times those twenty eight company forecast earnings. 582 00:44:49,120 --> 00:44:53,920 Speaker 1: Um Man, That's that's not the same thing as saying 583 00:44:53,960 --> 00:44:58,160 Speaker 1: the accounting is wrong is saying we're in a new 584 00:44:58,160 --> 00:45:02,880 Speaker 1: world where evaluation doesn't matter. UM, and I make the 585 00:45:03,040 --> 00:45:11,120 Speaker 1: argument that that kind of mentality UM leads to a 586 00:45:11,360 --> 00:45:16,520 Speaker 1: level of well, let's stupidity in the pricing of assets 587 00:45:17,320 --> 00:45:24,400 Speaker 1: that will prove to be unsustainable in a finite period 588 00:45:24,400 --> 00:45:30,439 Speaker 1: of time. Quite interesting. Last question on the value thesis. 589 00:45:31,080 --> 00:45:34,280 Speaker 1: You know, when we look at historical ways to measure value, 590 00:45:34,920 --> 00:45:38,279 Speaker 1: price to book is something that's that's really come under 591 00:45:38,320 --> 00:45:41,960 Speaker 1: attack over the past couple of years. What do you 592 00:45:42,040 --> 00:45:46,120 Speaker 1: think the best way to define value and try and 593 00:45:46,200 --> 00:45:53,160 Speaker 1: capture the value premium actually is. Yeah, So it is 594 00:45:53,239 --> 00:46:02,040 Speaker 1: one of the fascinating things about these episodes. UM. There's 595 00:46:02,160 --> 00:46:07,279 Speaker 1: almost invariably a significant amount of truth to the complaints 596 00:46:07,320 --> 00:46:10,719 Speaker 1: that people have with whatever asset it is that has 597 00:46:10,760 --> 00:46:17,360 Speaker 1: been performing poorly. Price the book is a profoundly flawed 598 00:46:17,719 --> 00:46:21,399 Speaker 1: measure at this point. UM. Its laws come from two 599 00:46:21,640 --> 00:46:28,160 Speaker 1: basic issues, UM, that are much more prevalent now than 600 00:46:28,160 --> 00:46:30,960 Speaker 1: they were thirty or forty years ago. The first is 601 00:46:31,040 --> 00:46:35,200 Speaker 1: the changing way that corporations are doing their investment. UM. 602 00:46:35,239 --> 00:46:38,200 Speaker 1: You know, forty years ago, if most corporate investment was 603 00:46:38,280 --> 00:46:42,360 Speaker 1: in the form of building a new factory, UM, you know, 604 00:46:43,120 --> 00:46:47,800 Speaker 1: putting up a new building something like that. That kind 605 00:46:47,840 --> 00:46:54,920 Speaker 1: of investment is recognized as investment under GAP accounting and 606 00:46:55,040 --> 00:47:01,000 Speaker 1: under the foreign version the I s B accounting. UM. 607 00:47:01,040 --> 00:47:05,719 Speaker 1: The investments that corporations are more likely to make today 608 00:47:05,840 --> 00:47:10,680 Speaker 1: in intangible assets through R and D and similar kind 609 00:47:10,719 --> 00:47:17,879 Speaker 1: of UH spending are not properly treated by the accounting standards, 610 00:47:17,880 --> 00:47:20,520 Speaker 1: so they don't show up as assets on corporate balance 611 00:47:20,600 --> 00:47:27,440 Speaker 1: sheets unless a corporation has bought another company whose assets 612 00:47:27,480 --> 00:47:31,600 Speaker 1: were predominantly about intangible and then it shows up as goodwill. 613 00:47:32,160 --> 00:47:36,080 Speaker 1: So we've got this issue that for lots of companies, 614 00:47:36,200 --> 00:47:40,000 Speaker 1: a lot of the investments that they make aren't properly capitalized, 615 00:47:40,120 --> 00:47:42,759 Speaker 1: don't show up on the balance sheet at all. And 616 00:47:42,840 --> 00:47:47,360 Speaker 1: then we've compounded that with the rise of stock buy backs. 617 00:47:48,320 --> 00:47:50,839 Speaker 1: And in the case of a stock buy back, if 618 00:47:50,840 --> 00:47:55,120 Speaker 1: a company buys back it's stock at a price to 619 00:47:55,160 --> 00:47:58,920 Speaker 1: book greater than one UH, it's book value has a 620 00:47:58,920 --> 00:48:03,960 Speaker 1: tendency to implode. So one thing that is increasingly prevalent 621 00:48:04,040 --> 00:48:10,480 Speaker 1: today is you have um perfectly solvent companies with negative 622 00:48:10,520 --> 00:48:14,880 Speaker 1: book values. So today I think, for example, McDonald's has 623 00:48:15,120 --> 00:48:18,799 Speaker 1: negative book value. That does not mean that McDonald's is 624 00:48:18,840 --> 00:48:23,280 Speaker 1: in any danger of going bankrupt anytime soon. It means 625 00:48:23,360 --> 00:48:27,160 Speaker 1: that the price the book has really become flawed. UM. 626 00:48:27,400 --> 00:48:31,880 Speaker 1: So if you're buying UM companies on the basis of 627 00:48:31,920 --> 00:48:35,160 Speaker 1: price to book, you've got a problem. UM. You've got 628 00:48:35,200 --> 00:48:41,759 Speaker 1: a particular problem with the growthier company because those are 629 00:48:41,760 --> 00:48:44,040 Speaker 1: the ones who have been doing the most investment that 630 00:48:44,120 --> 00:48:48,440 Speaker 1: has not been properly capitalized. So you're going to systematically 631 00:48:49,080 --> 00:48:52,879 Speaker 1: underestimate the value of all of them UM, and you're 632 00:48:52,920 --> 00:48:55,640 Speaker 1: also going to get screwed up valuations for anybody who 633 00:48:55,640 --> 00:49:01,080 Speaker 1: has has been buying that stock. UM. We think if 634 00:49:01,080 --> 00:49:04,400 Speaker 1: you're going to be a sensible value investor, you have 635 00:49:04,640 --> 00:49:08,839 Speaker 1: to adjust for that UM. Now, if you're buying your 636 00:49:08,880 --> 00:49:10,960 Speaker 1: stocks when at a time, the right way to do 637 00:49:11,000 --> 00:49:14,439 Speaker 1: it is to build a discount count the cash flow 638 00:49:14,480 --> 00:49:16,640 Speaker 1: model about what the future is going to look like. 639 00:49:17,080 --> 00:49:20,759 Speaker 1: If you're going to be a more traditional a what 640 00:49:20,840 --> 00:49:26,200 Speaker 1: people tend to think of as a quantitative investor, what 641 00:49:26,239 --> 00:49:27,759 Speaker 1: we think you have to do is you have to 642 00:49:27,800 --> 00:49:34,000 Speaker 1: go back through time and reclassify those expenditures which should 643 00:49:34,040 --> 00:49:38,920 Speaker 1: have been understood as investment and start putting them on 644 00:49:38,920 --> 00:49:43,239 Speaker 1: the balance sheet. UM. So what we've done is we've 645 00:49:43,239 --> 00:49:47,600 Speaker 1: gone back over the last fifty years UM, and we 646 00:49:47,719 --> 00:49:51,120 Speaker 1: have rebuilt the income statement and balance sheet for every 647 00:49:51,160 --> 00:49:54,400 Speaker 1: company in our database so that we're at least starting 648 00:49:54,520 --> 00:50:01,920 Speaker 1: from the economically meaningful valuation. UH. Now, from then we 649 00:50:02,040 --> 00:50:05,240 Speaker 1: have gone on to build a discounted cash flow model 650 00:50:06,160 --> 00:50:10,640 Speaker 1: to try to understand the future of these companies. UM. 651 00:50:10,680 --> 00:50:15,520 Speaker 1: But the key as act and the frustrating thing about 652 00:50:16,480 --> 00:50:22,520 Speaker 1: talking about value today. I truly believe value as a 653 00:50:22,640 --> 00:50:27,800 Speaker 1: style really out of favor, that it deserves to outperform. 654 00:50:27,920 --> 00:50:32,960 Speaker 1: I also believe that you know, the be priced the 655 00:50:33,040 --> 00:50:39,800 Speaker 1: book and even PE based style indices are a really 656 00:50:39,920 --> 00:50:44,000 Speaker 1: poor way of getting at that, and they have way 657 00:50:44,040 --> 00:50:49,520 Speaker 1: too many effective data errors showing up as either very 658 00:50:49,560 --> 00:50:53,719 Speaker 1: cheap companies or very expensive companies. UM. So I love 659 00:50:53,840 --> 00:50:59,520 Speaker 1: value today, I'm I'm scared in somewhat skeptical of that 660 00:51:00,080 --> 00:51:04,239 Speaker 1: is represented in the value indusees quite fascinating. So we've 661 00:51:04,239 --> 00:51:08,160 Speaker 1: been discussing intangibles and I want to spend a little 662 00:51:08,200 --> 00:51:12,879 Speaker 1: more time focusing on that. So we've seen the rise 663 00:51:12,960 --> 00:51:22,480 Speaker 1: of asset light companies, lots of intangible assets, R and D, patents, processes, etcetera. 664 00:51:22,680 --> 00:51:26,760 Speaker 1: And these tend to not only generate high profit margins, 665 00:51:26,800 --> 00:51:31,960 Speaker 1: but we've seen multiples rising over time. How can an 666 00:51:31,960 --> 00:51:37,439 Speaker 1: investor take advantage of this gap between the way we 667 00:51:37,600 --> 00:51:42,479 Speaker 1: account for those assets and how they perform in the market. Well, 668 00:51:42,520 --> 00:51:48,600 Speaker 1: that's always one of the kind of challenges of of 669 00:51:48,600 --> 00:51:53,000 Speaker 1: of security analysis. UM. Even if this stuff was accounted 670 00:51:53,040 --> 00:51:58,640 Speaker 1: for properly. UM, there is a difference between the patent 671 00:51:59,400 --> 00:52:03,040 Speaker 1: that accome money has been given that turns out to 672 00:52:03,120 --> 00:52:07,319 Speaker 1: be worth next to nothing uh and those rare patents 673 00:52:07,520 --> 00:52:13,040 Speaker 1: UM that embody intellectual property that is going to be 674 00:52:13,200 --> 00:52:19,400 Speaker 1: absolutely fantastically valuable. So it's not, you know, generically possible 675 00:52:19,480 --> 00:52:23,560 Speaker 1: to get this right all the time. UM. But I 676 00:52:23,640 --> 00:52:29,359 Speaker 1: do think it's really helpful UM to try to get 677 00:52:29,400 --> 00:52:32,040 Speaker 1: as close as you can to the economic truth here 678 00:52:32,520 --> 00:52:38,400 Speaker 1: to answer the question of, well, is this a company 679 00:52:38,440 --> 00:52:42,879 Speaker 1: that is trading at you know whatever what what like 680 00:52:43,000 --> 00:52:47,240 Speaker 1: Amazon looks to be a few years ago four hundred 681 00:52:47,280 --> 00:52:51,200 Speaker 1: times earnings UM? Or is it the case that those 682 00:52:51,280 --> 00:52:55,680 Speaker 1: earnings numbers are really wrong um, and and the valuation 683 00:52:55,840 --> 00:53:01,440 Speaker 1: is more reasonable UM. I think you can get closer 684 00:53:01,600 --> 00:53:05,839 Speaker 1: to that, UM. But I think it's also the case 685 00:53:05,880 --> 00:53:09,120 Speaker 1: that that you you hit upon kind of the key 686 00:53:09,239 --> 00:53:17,600 Speaker 1: distinction between the fairly rare company that turns out to 687 00:53:17,640 --> 00:53:24,200 Speaker 1: be extraordinary, uh, and most of the rest of the 688 00:53:24,239 --> 00:53:29,160 Speaker 1: corporate system, which is, there are some companies that have 689 00:53:29,280 --> 00:53:33,400 Speaker 1: shown an ability to have a return on capital much 690 00:53:33,520 --> 00:53:38,040 Speaker 1: higher than the average company and to maintain that for 691 00:53:38,080 --> 00:53:41,560 Speaker 1: an extended period of time. Let's talk about some of 692 00:53:41,600 --> 00:53:45,160 Speaker 1: those companies. When we look at the SMP five hundred, 693 00:53:45,360 --> 00:53:51,200 Speaker 1: the six largest companies now make up about of that index, 694 00:53:51,920 --> 00:53:56,040 Speaker 1: and they're all big cap tech companies. Can you maintain 695 00:53:56,120 --> 00:53:59,840 Speaker 1: a sort of bearish view on the market without being 696 00:54:00,000 --> 00:54:04,360 Speaker 1: embarish on those companies that at least so far have 697 00:54:04,360 --> 00:54:08,160 Speaker 1: have proven to be absolutely extraordinary, Well, they have proven 698 00:54:08,200 --> 00:54:12,759 Speaker 1: to be absolutely extraordinary. One of the things that it 699 00:54:13,080 --> 00:54:19,960 Speaker 1: is important to keep in mind, um is um you 700 00:54:20,000 --> 00:54:26,000 Speaker 1: can maintain your status as an extraordinary company without maintaining 701 00:54:26,640 --> 00:54:30,719 Speaker 1: extraordinarily high levels of growth. So I'll come up with 702 00:54:30,880 --> 00:54:34,840 Speaker 1: kind of a very simple case. Let's take Google or 703 00:54:35,120 --> 00:54:39,759 Speaker 1: Alphabet a truly extraordinary company. Uh. You know, their monopoly 704 00:54:39,920 --> 00:54:43,319 Speaker 1: on search, although I'm sure they would argue they do 705 00:54:43,360 --> 00:54:46,320 Speaker 1: not have a monopoly on search, but their extraordinary power 706 00:54:46,520 --> 00:54:51,400 Speaker 1: in in search has led them to be able um 707 00:54:51,560 --> 00:54:58,200 Speaker 1: to make uh, wonderful amounts of money and very high 708 00:54:58,239 --> 00:55:02,400 Speaker 1: returns on capital on advertising um. And they have seen 709 00:55:02,480 --> 00:55:07,040 Speaker 1: extraordinary growth over the last ten or fifteen years now. 710 00:55:07,080 --> 00:55:09,160 Speaker 1: But at the end of the day, you called them 711 00:55:09,840 --> 00:55:13,240 Speaker 1: a technology company, and they sort of are. But another 712 00:55:13,239 --> 00:55:16,440 Speaker 1: way of thinking about them is they are a company 713 00:55:16,480 --> 00:55:20,080 Speaker 1: that is funded by advertising revenues. And if we go 714 00:55:20,200 --> 00:55:23,960 Speaker 1: back fifteen years ago when they were a tiny piece 715 00:55:24,600 --> 00:55:28,560 Speaker 1: of global advertising revenue, the fact that advertising revenue doesn't 716 00:55:28,600 --> 00:55:32,560 Speaker 1: grow that fast, it grows approximately in line with GDP 717 00:55:33,320 --> 00:55:36,680 Speaker 1: wasn't a big deal. If you are fifty basis points 718 00:55:36,719 --> 00:55:39,440 Speaker 1: of the market and you believe you can get to 719 00:55:39,520 --> 00:55:44,200 Speaker 1: be you know, of the market, Well, that is a 720 00:55:44,760 --> 00:55:50,719 Speaker 1: twentyfold increase um, and whether that market has grown materially 721 00:55:50,840 --> 00:55:54,320 Speaker 1: or not is irrelevant, because you've grown twentyfold either plus 722 00:55:54,360 --> 00:55:56,520 Speaker 1: a little bit because the market's grown or mine. It's 723 00:55:56,520 --> 00:56:02,200 Speaker 1: a little bit because the markets shrunk. Now, Uh, Google 724 00:56:02,600 --> 00:56:09,879 Speaker 1: and Facebook are pretty material parts of global advertising spend um, 725 00:56:10,040 --> 00:56:15,440 Speaker 1: and their ability to outgrow advertising gets harder and harder. 726 00:56:16,760 --> 00:56:20,000 Speaker 1: Right that It is certainly not the case if you 727 00:56:20,080 --> 00:56:23,120 Speaker 1: have gone from ten percent of that market, well, if 728 00:56:23,120 --> 00:56:25,120 Speaker 1: you've gone from half a percent of that market to 729 00:56:25,280 --> 00:56:27,520 Speaker 1: ten percent of the market, you're not going to be 730 00:56:27,560 --> 00:56:31,160 Speaker 1: able to grow your share twentyfold. Again, the best you 731 00:56:31,200 --> 00:56:35,239 Speaker 1: can do is of that market, and as your share grows, 732 00:56:35,600 --> 00:56:37,680 Speaker 1: it becomes more and more of the case that the 733 00:56:37,800 --> 00:56:41,840 Speaker 1: stuff you don't have is advertising that is spent differently 734 00:56:41,920 --> 00:56:45,359 Speaker 1: for a very good reason. Um So, I'd say with 735 00:56:45,400 --> 00:56:50,399 Speaker 1: all of these companies, they're as their scale grows as 736 00:56:50,400 --> 00:56:56,560 Speaker 1: a percent of the economic activity that they are capitalizing on, 737 00:56:57,120 --> 00:57:03,120 Speaker 1: their ability to achieve extraordinary growth uh deteriorates. Um So 738 00:57:03,320 --> 00:57:06,279 Speaker 1: Google will not grow over the next ten years the 739 00:57:06,320 --> 00:57:09,440 Speaker 1: way it grew over the last ten years. The other 740 00:57:09,520 --> 00:57:13,520 Speaker 1: piece that they are now fighting against is they are 741 00:57:13,600 --> 00:57:17,200 Speaker 1: such big, dominant companies, um that what they do has 742 00:57:17,240 --> 00:57:20,680 Speaker 1: a real impact on the global economy, and some of 743 00:57:20,680 --> 00:57:23,720 Speaker 1: those impacts are not necessarily so positive. So they have 744 00:57:24,720 --> 00:57:31,040 Speaker 1: a regulatory risk um that I don't know exactly how 745 00:57:31,120 --> 00:57:35,320 Speaker 1: much of that is going to materialize in limitations of 746 00:57:35,360 --> 00:57:39,160 Speaker 1: their business model, limitations of their profitability. But man, you've 747 00:57:39,160 --> 00:57:43,560 Speaker 1: got to keep it in mind. Um. Yes, these companies 748 00:57:43,600 --> 00:57:47,120 Speaker 1: have done extraordinarily well, but if we look over the 749 00:57:47,200 --> 00:57:50,360 Speaker 1: last three years or four years or so. You know, 750 00:57:50,440 --> 00:57:54,520 Speaker 1: Apple has done great, Um, but Apple four years ago 751 00:57:54,600 --> 00:57:57,680 Speaker 1: was trading at thirteen times earnings and it's now trading 752 00:57:57,680 --> 00:58:03,200 Speaker 1: in approximately thirty nine times earnings. So three of that 753 00:58:03,320 --> 00:58:08,120 Speaker 1: return comes from a tripling of pe. Now, that's not 754 00:58:08,200 --> 00:58:11,520 Speaker 1: exactly right because economically their p s are a little 755 00:58:11,560 --> 00:58:16,200 Speaker 1: bit different from the stated numbers. UM. But in general, 756 00:58:16,280 --> 00:58:20,440 Speaker 1: what I'd say about the tech giants is they're not 757 00:58:20,480 --> 00:58:24,600 Speaker 1: going to grow the way they've grown historically. UM. They 758 00:58:24,720 --> 00:58:30,680 Speaker 1: might be facing some idiosyncratic risks that had hit them 759 00:58:30,720 --> 00:58:35,960 Speaker 1: and don't hit you know, technology firms as a whole. Um. 760 00:58:36,000 --> 00:58:38,560 Speaker 1: And the bad news is, in general their valuations are 761 00:58:38,600 --> 00:58:42,320 Speaker 1: a lot higher than they were just a few years ago. UM. 762 00:58:42,360 --> 00:58:45,760 Speaker 1: That is not the recipe for wonderful returns out of them. 763 00:58:45,840 --> 00:58:49,680 Speaker 1: But on the other hand, I don't think those are 764 00:58:49,760 --> 00:58:54,760 Speaker 1: the stupidest valued companies out there. Right of the largest 765 00:58:54,800 --> 00:58:59,720 Speaker 1: companies in the US, you know, Apple, Microsoft, they look 766 00:59:00,080 --> 00:59:02,600 Speaker 1: ends is to us. But maybe they're twice fair value. 767 00:59:02,600 --> 00:59:05,600 Speaker 1: Maybe they're one and a half times fair value. That's expensive, 768 00:59:05,640 --> 00:59:11,960 Speaker 1: but that's not stupid. Stocks like Netflix or Zoom are 769 00:59:12,040 --> 00:59:16,360 Speaker 1: Are they in that category? Also? Um? Some of them 770 00:59:16,560 --> 00:59:21,160 Speaker 1: have gotten two levels that we consider to be very 771 00:59:21,240 --> 00:59:27,200 Speaker 1: dangerously expensive. Not all of them, but we can find 772 00:59:27,680 --> 00:59:32,560 Speaker 1: a significant cohort of companies that look to be trading 773 00:59:34,040 --> 00:59:36,960 Speaker 1: five times fair value, ten times fair value, twenty times 774 00:59:36,960 --> 00:59:42,160 Speaker 1: fair value or more. Um. Normally you don't see very 775 00:59:42,160 --> 00:59:46,040 Speaker 1: many of those companies, and today we see quite a 776 00:59:46,600 --> 00:59:50,000 Speaker 1: wide array of them. Um. So we do think that 777 00:59:50,080 --> 00:59:55,280 Speaker 1: there are more crazily valued companies today then we've seen, 778 00:59:55,680 --> 01:00:00,520 Speaker 1: certainly in the US since uh, the Internet bubble. Quite interesting. 779 01:00:00,800 --> 01:00:03,800 Speaker 1: I'm going to shift gears here and I want to 780 01:00:03,840 --> 01:00:09,040 Speaker 1: address your founder, Jeremy Grantham, who has been outspoken about 781 01:00:09,120 --> 01:00:14,720 Speaker 1: climate change. How does GMO approach the idea of either 782 01:00:14,920 --> 01:00:19,920 Speaker 1: E S G investing or or low carbon investing. Yeah, 783 01:00:20,000 --> 01:00:26,840 Speaker 1: it's uh, it's kind of a fascinating challenge for us 784 01:00:26,920 --> 01:00:33,240 Speaker 1: because on the one hand, we absolutely agree with Jeremy that, uh, 785 01:00:33,520 --> 01:00:39,000 Speaker 1: climate is this overwhelming challenge for mankind uh, and that 786 01:00:39,480 --> 01:00:46,400 Speaker 1: as a society we don't seem to generally understand how 787 01:00:46,440 --> 01:00:51,760 Speaker 1: big these impacts will be. So you know, from an 788 01:00:51,760 --> 01:00:55,480 Speaker 1: E S D perspective, the environmental stuff absolutely matters, and 789 01:00:55,560 --> 01:00:58,600 Speaker 1: it is going to matter profoundly as time goes forward. 790 01:00:59,800 --> 01:01:05,320 Speaker 1: But at the same time, as valuations driven investors, UH, 791 01:01:05,480 --> 01:01:11,000 Speaker 1: we believe there's kind of an appropriate price for everything UM. 792 01:01:11,040 --> 01:01:15,560 Speaker 1: And even though you know oil companies are likely to 793 01:01:15,760 --> 01:01:20,560 Speaker 1: face tough times ahead UH and may well be in 794 01:01:20,560 --> 01:01:23,880 Speaker 1: the case in a situation where they're not even going 795 01:01:23,920 --> 01:01:28,200 Speaker 1: to be able to produce all of their current reserves UM, 796 01:01:28,240 --> 01:01:30,120 Speaker 1: there is a price at which they are a decent 797 01:01:30,240 --> 01:01:34,400 Speaker 1: investment anyway. UM. So what we have tried to do 798 01:01:34,560 --> 01:01:41,240 Speaker 1: in our models is make adjustments where we know how 799 01:01:41,320 --> 01:01:50,880 Speaker 1: to quantify UM for those environmental UH metrics that strike 800 01:01:51,040 --> 01:01:55,920 Speaker 1: us as being problematic for the future of a company 801 01:01:55,960 --> 01:01:59,360 Speaker 1: from kind of a risk or future earnings perspective, and 802 01:01:59,440 --> 01:02:05,040 Speaker 1: also understanding particularly on the governance side of things, where 803 01:02:05,520 --> 01:02:15,480 Speaker 1: poor governance UM means worse outcomes for shareholders. UM. Where 804 01:02:15,880 --> 01:02:21,520 Speaker 1: I think we are ramping up our activity is going 805 01:02:21,560 --> 01:02:28,840 Speaker 1: beyond that into uh more corporate engagement, which is tough, 806 01:02:28,960 --> 01:02:34,760 Speaker 1: particularly on the on the quantitative side UM. Quantitative managers 807 01:02:34,800 --> 01:02:41,640 Speaker 1: are used to not really interfacing with company management UM. 808 01:02:41,680 --> 01:02:43,680 Speaker 1: And we vote our proxies, and we try to vote 809 01:02:43,680 --> 01:02:47,240 Speaker 1: our proxies in a sustainable way UM. But the question 810 01:02:47,400 --> 01:02:53,120 Speaker 1: is how can we get these companies to do better 811 01:02:54,560 --> 01:03:00,400 Speaker 1: UM And that's a significant effort in the firm. We 812 01:03:00,520 --> 01:03:07,200 Speaker 1: hired a group into the firm UH, a former independent 813 01:03:07,400 --> 01:03:12,360 Speaker 1: investment firm called the Usonian who they they are fundamental 814 01:03:12,920 --> 01:03:15,880 Speaker 1: UH stock pickers in Japan and one of the things 815 01:03:15,880 --> 01:03:20,240 Speaker 1: that they have specialized in is a form of friendly 816 01:03:20,400 --> 01:03:26,560 Speaker 1: engagement with management. UM. You know, corporate activism in Japan 817 01:03:26,880 --> 01:03:32,560 Speaker 1: can have this very bad taste in the mouths for 818 01:03:32,640 --> 01:03:37,120 Speaker 1: corporate management, where certain foreigners have come in and you know, 819 01:03:37,160 --> 01:03:41,520 Speaker 1: tried to strong arm management into really changing their ways. 820 01:03:42,200 --> 01:03:45,640 Speaker 1: What they have found is that if you can find 821 01:03:45,680 --> 01:03:51,640 Speaker 1: a constructive way to talk to management about things they 822 01:03:51,720 --> 01:04:00,200 Speaker 1: can do two improve um the way the outside eide 823 01:04:00,240 --> 01:04:04,440 Speaker 1: world understand what they're actually doing uh and relatively small 824 01:04:04,520 --> 01:04:10,680 Speaker 1: things they can do to improve their actual uh you know, 825 01:04:11,280 --> 01:04:15,880 Speaker 1: impact on the environment, they can be pretty receptive to it. UM. 826 01:04:15,960 --> 01:04:19,320 Speaker 1: So we're trying to learn from their example UH and 827 01:04:19,400 --> 01:04:23,600 Speaker 1: do that more broadly. But it's it is still a 828 01:04:23,600 --> 01:04:26,880 Speaker 1: work in progress. Quite interesting. I know I only have 829 01:04:27,040 --> 01:04:30,320 Speaker 1: you for a limited amount of time, so let's jump 830 01:04:30,520 --> 01:04:34,360 Speaker 1: to our favorite questions that we ask all of our guests, 831 01:04:34,400 --> 01:04:37,480 Speaker 1: starting with what are you streaming these days? Tell us 832 01:04:37,480 --> 01:04:41,000 Speaker 1: your favorite Netflix or Amazon Prime shows that you might 833 01:04:41,040 --> 01:04:45,160 Speaker 1: be watching. Uh. Well, my my wife and I have 834 01:04:45,320 --> 01:04:49,600 Speaker 1: been really enjoying UH loop in on on Netflix. It's 835 01:04:49,640 --> 01:04:52,640 Speaker 1: not that original, I think it's now one of the 836 01:04:52,680 --> 01:04:57,280 Speaker 1: top the top shows at the momentum, but kind of 837 01:04:57,320 --> 01:05:04,919 Speaker 1: wonderful uh uh, kind of escapist um entertainment. We've also 838 01:05:04,960 --> 01:05:09,720 Speaker 1: been watching spy Craft um, which is about the kind 839 01:05:09,720 --> 01:05:14,120 Speaker 1: of the technologies that uh spies have used over the 840 01:05:14,200 --> 01:05:18,200 Speaker 1: years to get their information. Um. And one thing I 841 01:05:18,560 --> 01:05:24,640 Speaker 1: have definitely uh watched of late that admittedly this wasn't 842 01:05:24,640 --> 01:05:29,640 Speaker 1: on Netflix, but this has been a difficult uh period right. 843 01:05:29,680 --> 01:05:32,760 Speaker 1: I mean, certainly as a value manager, it's no fun 844 01:05:32,800 --> 01:05:35,840 Speaker 1: when your stocks are not participating in uh in the 845 01:05:35,880 --> 01:05:39,560 Speaker 1: bull market, but just in general life has not been 846 01:05:39,600 --> 01:05:42,560 Speaker 1: as much fun as we've been stuck at home. Um. 847 01:05:42,640 --> 01:05:46,080 Speaker 1: And And one show that I particularly appreciated during the 848 01:05:46,160 --> 01:05:48,560 Speaker 1: fall is just a nice way to feel a little 849 01:05:48,560 --> 01:05:53,160 Speaker 1: bit better for half an hour was Ted Lasso on 850 01:05:53,160 --> 01:05:57,880 Speaker 1: on on Apple TV. It was delightful. Yeah, and and 851 01:05:57,960 --> 01:06:04,400 Speaker 1: just filled with in general pleasant people, uh, you know, 852 01:06:04,640 --> 01:06:06,400 Speaker 1: just people you kind of want to have a beer with. 853 01:06:06,960 --> 01:06:09,080 Speaker 1: I'm with you on that I have I have a 854 01:06:09,080 --> 01:06:13,440 Speaker 1: hard time with They're a handful of shows that I 855 01:06:13,480 --> 01:06:16,560 Speaker 1: know people really like, and I've tried them out and 856 01:06:16,880 --> 01:06:19,600 Speaker 1: none of the characters are redeemable. Why why do I 857 01:06:19,600 --> 01:06:22,760 Speaker 1: want to spend an hour with the people I wouldn't 858 01:06:22,760 --> 01:06:25,479 Speaker 1: want to spend five minutes in an elevator with. So 859 01:06:26,040 --> 01:06:29,160 Speaker 1: the next question, I assume I know what the answer 860 01:06:29,200 --> 01:06:31,200 Speaker 1: is going to be, but I'm gonna ask it anyway. 861 01:06:31,680 --> 01:06:36,320 Speaker 1: Who are your mentors who helped to shape your career? Well, 862 01:06:37,080 --> 01:06:41,400 Speaker 1: certainly Jeremy Grantham UH is first and foremost among them. 863 01:06:41,440 --> 01:06:45,000 Speaker 1: I've had the privilege of getting to learn from him 864 01:06:45,080 --> 01:06:48,440 Speaker 1: for close to thirty years. UM. But I would say 865 01:06:48,760 --> 01:06:53,320 Speaker 1: I've I've been extraordinarily blessed on the on the mentor 866 01:06:53,400 --> 01:06:59,400 Speaker 1: side of things, because before I got UH to g 867 01:06:59,640 --> 01:07:07,880 Speaker 1: m O UM, I had some utterly extraordinary teachers who 868 01:07:08,120 --> 01:07:14,040 Speaker 1: really UH taught me lessons on investing UM that absolutely 869 01:07:14,080 --> 01:07:21,440 Speaker 1: resonate to today. UM. Kind of my thesis adviser when 870 01:07:21,480 --> 01:07:27,920 Speaker 1: I was an undergraduate UH was David Swinson, Manager Revealed Endowments. 871 01:07:27,920 --> 01:07:31,520 Speaker 1: And I've had the further blessing of being able to 872 01:07:31,600 --> 01:07:35,760 Speaker 1: be on the investment committee there UH for the last 873 01:07:35,800 --> 01:07:39,200 Speaker 1: decade or so, and so both learned from him early 874 01:07:39,280 --> 01:07:43,080 Speaker 1: on and have learned from him more recently. UM. But 875 01:07:43,320 --> 01:07:51,960 Speaker 1: for kind of my traditional investing in finance underpinnings UM. 876 01:07:52,480 --> 01:07:56,520 Speaker 1: The two other finance professors that I was fortunate enough 877 01:07:56,560 --> 01:08:01,040 Speaker 1: to have we're James Tobin uh and Ob Chiller. So 878 01:08:02,600 --> 01:08:07,280 Speaker 1: I have been extraordinarily blessed uh in terms of being 879 01:08:07,280 --> 01:08:12,880 Speaker 1: able to learn from absolutely brilliant and uh and groundbreaking 880 01:08:13,520 --> 01:08:21,200 Speaker 1: investment thinkers uh all throughout my career Tobin, Schiller, Swanson Grantham. Yeah, 881 01:08:21,280 --> 01:08:24,280 Speaker 1: you could do worse than that. UM. Let's go to 882 01:08:24,320 --> 01:08:28,200 Speaker 1: everybody's favorite question. Tell us what you're reading these days? 883 01:08:28,240 --> 01:08:30,439 Speaker 1: What are some of your favorite books and what are 884 01:08:30,439 --> 01:08:34,479 Speaker 1: you enjoying currently? Yeah. In terms of my uh my, 885 01:08:34,479 --> 01:08:38,080 Speaker 1: my kind of long term favorite books, I would say 886 01:08:38,080 --> 01:08:42,120 Speaker 1: the book that I come back and reread every few 887 01:08:42,200 --> 01:08:47,519 Speaker 1: years and enjoy it every single time. UM is a 888 01:08:47,560 --> 01:08:51,840 Speaker 1: Short History of Nearly Everything by Bill Bright UM. And 889 01:08:51,960 --> 01:08:56,400 Speaker 1: I have loved much of what what Bill has has 890 01:08:56,400 --> 01:08:59,960 Speaker 1: written over the years. UM. But what I particularly love 891 01:09:00,280 --> 01:09:05,960 Speaker 1: about that book is it's an exploration of how we 892 01:09:06,160 --> 01:09:10,240 Speaker 1: came to know the things we know about the world. UH. 893 01:09:10,280 --> 01:09:18,839 Speaker 1: And I find that um and absolutely uh fascinating topic 894 01:09:18,880 --> 01:09:26,200 Speaker 1: and never gets old for me. UM. In terms of 895 01:09:26,680 --> 01:09:30,760 Speaker 1: what I am reading today, I am rather embarrassingly uh 896 01:09:31,479 --> 01:09:40,000 Speaker 1: sort of between between books um. Uh. Most recently I 897 01:09:40,080 --> 01:09:47,040 Speaker 1: was going through UM A a fun book. It's one 898 01:09:47,080 --> 01:09:51,680 Speaker 1: of those uh kind of classics where you don't understand 899 01:09:51,760 --> 01:09:55,639 Speaker 1: how they managed to pack as much in UM as 900 01:09:55,680 --> 01:10:00,320 Speaker 1: they did. But p h Gombris a little story of 901 01:10:00,360 --> 01:10:05,960 Speaker 1: the world UM and again UH, wonderful kind of primer 902 01:10:06,160 --> 01:10:10,120 Speaker 1: on how the world has got to be? Uh. Where 903 01:10:10,160 --> 01:10:13,400 Speaker 1: we are? You mentioned the Brison book. I literally this 904 01:10:13,439 --> 01:10:17,720 Speaker 1: weekend just finished reading his book at home, and like 905 01:10:17,800 --> 01:10:20,960 Speaker 1: all his works, at every page is just a delight. 906 01:10:21,040 --> 01:10:23,840 Speaker 1: I don't know how else to describe it. And our 907 01:10:23,920 --> 01:10:26,960 Speaker 1: last two questions, what sort of advice would you give 908 01:10:27,040 --> 01:10:30,759 Speaker 1: to a recent college grad who was interested in going 909 01:10:30,800 --> 01:10:35,080 Speaker 1: into investing as a career. I guess the first thing 910 01:10:35,120 --> 01:10:38,040 Speaker 1: I would say is, if you're interested in going into 911 01:10:38,080 --> 01:10:43,760 Speaker 1: investing as a career, make sure you actually love the 912 01:10:43,960 --> 01:10:49,040 Speaker 1: act of investing, in the act of doing research. UM. 913 01:10:49,040 --> 01:10:52,800 Speaker 1: Getting into it because you're hoping to make a lot 914 01:10:52,840 --> 01:10:57,040 Speaker 1: of money or because there seems to be some glamour 915 01:10:57,200 --> 01:11:05,960 Speaker 1: in it, UM is allows the reason to do anything. UM. 916 01:11:06,040 --> 01:11:09,680 Speaker 1: For one thing, you never know what the future will hold, UM. 917 01:11:09,720 --> 01:11:14,640 Speaker 1: But I will say the the people who, um I 918 01:11:14,680 --> 01:11:18,839 Speaker 1: think I've had the most satisfying careers and I watched 919 01:11:19,200 --> 01:11:23,599 Speaker 1: UM are the people who are doing the stuff they 920 01:11:23,680 --> 01:11:28,679 Speaker 1: really enjoy. And that is I think more important than anything. Uh. 921 01:11:29,080 --> 01:11:33,920 Speaker 1: Investing can be a ton of fun because you're continually 922 01:11:33,920 --> 01:11:38,600 Speaker 1: trying to solve problems. On the other hand, it's also 923 01:11:38,680 --> 01:11:42,160 Speaker 1: in industry where you are going to be wrong a 924 01:11:42,280 --> 01:11:49,639 Speaker 1: lot um. And if you can't handle that emotionally, if 925 01:11:49,680 --> 01:11:54,200 Speaker 1: those times when you are wrong cause you to start 926 01:11:54,280 --> 01:12:00,639 Speaker 1: doubting your self worth, um, you're going to burn out. UH. 927 01:12:00,720 --> 01:12:06,960 Speaker 1: So you've got to love investing as craft. UM. You've 928 01:12:07,000 --> 01:12:12,879 Speaker 1: also got to have the right kind of emotional mindset um, 929 01:12:13,560 --> 01:12:17,439 Speaker 1: or you'd be better off doing something with kind of 930 01:12:17,520 --> 01:12:24,240 Speaker 1: less uh manic depressive highs. Interesting and our our final question, 931 01:12:24,760 --> 01:12:27,360 Speaker 1: what do you know about the world of value investing 932 01:12:27,400 --> 01:12:30,360 Speaker 1: today that you wish you knew thirty years or so 933 01:12:30,439 --> 01:12:35,400 Speaker 1: ago when you first got started. The thing I wish 934 01:12:35,800 --> 01:12:38,880 Speaker 1: I had known how to do, and it is something 935 01:12:38,880 --> 01:12:45,080 Speaker 1: that I continually have to remind myself to do is 936 01:12:45,840 --> 01:12:50,720 Speaker 1: whenever you are talking to someone who thinks you are 937 01:12:50,960 --> 01:12:56,520 Speaker 1: dead wrong about investing. Make sure to listen very carefully 938 01:12:56,560 --> 01:13:01,040 Speaker 1: to what they have to say, UM, because as there's 939 01:13:01,160 --> 01:13:06,000 Speaker 1: probably some truth to what they are saying. And even 940 01:13:06,040 --> 01:13:08,559 Speaker 1: if you believe in your heart of heart a kind 941 01:13:08,560 --> 01:13:15,240 Speaker 1: of value investing as a philosophical um underpinning is the 942 01:13:15,320 --> 01:13:20,160 Speaker 1: right way to do it, that doesn't mean UM, people 943 01:13:20,240 --> 01:13:26,719 Speaker 1: aren't raising perfectly valid challenges UH to the way you 944 01:13:26,880 --> 01:13:31,519 Speaker 1: and others are expressing. That quite fascinating. Thanks Ben for 945 01:13:31,600 --> 01:13:34,559 Speaker 1: being so generous with your time. We have been speaking 946 01:13:34,600 --> 01:13:37,760 Speaker 1: with Ben Inker. He is the head of asset Allocation 947 01:13:38,400 --> 01:13:42,519 Speaker 1: at GMO. If you enjoy this conversation, well, be sure 948 01:13:42,560 --> 01:13:47,480 Speaker 1: and check out any of our nearly four hundred prior discussions. 949 01:13:47,840 --> 01:13:51,479 Speaker 1: You can find that at iTunes, Spotify, wherever you feed 950 01:13:51,520 --> 01:13:56,000 Speaker 1: your podcast fix. We love your comments, feedback and suggestions 951 01:13:56,600 --> 01:14:00,719 Speaker 1: right to us at m IB podcast at Bloomberg Net. 952 01:14:00,840 --> 01:14:04,719 Speaker 1: Give us a review on Apple iTunes. You can sign 953 01:14:04,800 --> 01:14:08,120 Speaker 1: up for our daily morning reads. You'll find those at 954 01:14:08,200 --> 01:14:11,840 Speaker 1: Rid Halts dot com. Check out my weekly column that's 955 01:14:11,840 --> 01:14:15,400 Speaker 1: at Bloomberg dot com slash Opinion. Follow me on Twitter 956 01:14:16,040 --> 01:14:18,960 Speaker 1: at Rit Halts. I would be remiss if I did 957 01:14:19,000 --> 01:14:21,679 Speaker 1: not thank the crack staff that helps us put these 958 01:14:21,680 --> 01:14:26,280 Speaker 1: conversations together each week. Tim Harrow is my audio engineer. 959 01:14:26,920 --> 01:14:30,080 Speaker 1: Michael Boyle is my producer. A Tick of val Bron 960 01:14:30,200 --> 01:14:34,000 Speaker 1: is our project manager. Michael Batnick is our head of research. 961 01:14:34,720 --> 01:14:38,200 Speaker 1: I'm Barry rid Halts. You've been listening to Master's Business 962 01:14:38,600 --> 01:14:39,759 Speaker 1: on Bloomberg Radio.