WEBVTT - Bank Stock Phobia 0:00:12.960 --> 0:00:16.800 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.040 --> 0:00:19.480 My name is Mike Reagan. I'm a senior editor at 0:00:19.520 --> 0:00:22.079 Bloomberg and this week on the show, Well, one of 0:00:22.120 --> 0:00:25.120 the strongest sectors in the stock market this year has 0:00:25.160 --> 0:00:28.480 been the banks. They're up thirty three as a group 0:00:28.560 --> 0:00:31.000 year to date in the SMP five hundred, and they're 0:00:31.080 --> 0:00:34.320 picking off their earning season. This week, we'll talk about 0:00:34.360 --> 0:00:36.920 that with a veteran fund manager who has especialty in 0:00:36.960 --> 0:00:40.360 banks about what he's looking for to sustain this rally. 0:00:40.760 --> 0:00:46.280 What first, a special announcement from Charlie Pellett. Vill Donna 0:00:46.560 --> 0:00:49.600 is off this week, So this week's mystery co host 0:00:49.760 --> 0:00:54.720 is Police Morons. Felice is an editor for Bloomberg Markets 0:00:54.800 --> 0:00:58.680 Live Blog. She's a native of Newark, New Jersey, a 0:00:58.760 --> 0:01:02.600 graduate of Yale. I'm the founder of Bloomberg News is 0:01:02.720 --> 0:01:06.880 first bureau in Israel in the nineteen nineties. That's back 0:01:06.920 --> 0:01:10.119 when Reagan had hair so long he looked like a 0:01:10.160 --> 0:01:15.520 member of the spin Doctors. Least, that's that is absolutely 0:01:15.560 --> 0:01:17.920 true about my hair. I don't believe you started that 0:01:17.959 --> 0:01:20.319 bureau in the nineties. You must have been a teenager 0:01:20.760 --> 0:01:25.880 back then. Well, thank you, Mike. But what was that 0:01:26.000 --> 0:01:28.280 like starting the bureau in Israel? That was that was 0:01:28.319 --> 0:01:30.400 an exciting time to start a bureau in Israel. That 0:01:30.480 --> 0:01:32.640 tell us a little bit a bit about that. It 0:01:32.680 --> 0:01:36.759 was incredibly exciting. Bloomberg News had very few people, and 0:01:36.959 --> 0:01:40.959 the what was then called the Peace Process was unfolding, 0:01:41.120 --> 0:01:44.199 and Israel was becoming more of a focus both politically 0:01:44.280 --> 0:01:47.800 and for businesses. The high tech boom was yet to come, 0:01:47.840 --> 0:01:51.280 but it was just starting, and Bloomberg really wanted someone 0:01:51.400 --> 0:01:54.440 on the ground in Israel, and I was lucky enough 0:01:54.480 --> 0:01:57.720 to become that person and then to eventually open and 0:01:57.760 --> 0:02:00.560 build the bureau. That's pretty fast s nating. Yeah, what 0:02:00.640 --> 0:02:03.440 a pretty historic time, I guess, uh, to be starting 0:02:03.600 --> 0:02:06.960 a bureau. But least also, I know something that excites 0:02:07.000 --> 0:02:10.160 you as much as those glory days is uh bank 0:02:10.240 --> 0:02:14.079 stocks earnings Week kicking off this week, and Uh, We've 0:02:14.120 --> 0:02:16.040 got a great, great guest to help us break it 0:02:16.080 --> 0:02:18.880 down what to expect, what to look for in bank earnings. 0:02:19.280 --> 0:02:24.200 He is a portfolio manager and chairman of Davis Advisors. 0:02:24.280 --> 0:02:26.960 His name is Chris Davis. Chris, welcome back to the show. 0:02:27.200 --> 0:02:29.800 Thanks so much, Michael. It's good to be here. So 0:02:29.840 --> 0:02:32.400 we're recording this on Wednesday, just so our listeners know 0:02:32.520 --> 0:02:35.000 we won't have all the earnings in our hands to 0:02:35.000 --> 0:02:37.720 to dissect. But we did get JP Morgan's earnings, which 0:02:37.760 --> 0:02:41.120 are usually a pretty good indication of what to expect. 0:02:41.560 --> 0:02:44.040 And I'm curious how you look at it from your perspective, 0:02:44.040 --> 0:02:47.000 because you know, earnings in general can be noisy. The 0:02:47.080 --> 0:02:48.760 last couple of years with all the you know, the 0:02:48.800 --> 0:02:51.639 boom and bust from the pandemic, I feel like financials, 0:02:52.560 --> 0:02:55.840 especially have a lot of noise in the numbers. You know, 0:02:56.000 --> 0:02:59.920 JP Morgan had a huge release of loan loss reaeser 0:03:00.000 --> 0:03:02.959 HERVs UH two point one billion dollars. They had a 0:03:03.000 --> 0:03:06.040 strong m and a quarter really strong I p O quitter. 0:03:06.720 --> 0:03:09.160 It seems like the stock market's a little disappointed, though 0:03:09.200 --> 0:03:11.799 I guess it's it's focusing on the loan growth um. 0:03:12.080 --> 0:03:16.400 But talk put specifically, Uh, you know about banks in general, 0:03:16.639 --> 0:03:18.760 what you sort of look through for when you go 0:03:18.840 --> 0:03:21.679 through these reports? Uh, given sort of you know, you 0:03:21.720 --> 0:03:24.560 can have a booming trading quarter for a bank one 0:03:24.639 --> 0:03:26.920 quarter and then it's back to you know, normal the 0:03:26.960 --> 0:03:29.200 next quitter, What are sort of the underlying things you 0:03:29.280 --> 0:03:32.400 look for as a long term buy and whole type 0:03:32.400 --> 0:03:37.040 of investor. Well, the nature of bank stocks in particular 0:03:37.080 --> 0:03:40.520 and financial stocks in general is that there is so 0:03:40.600 --> 0:03:44.440 much noise in any one quarter that it really doesn't matter. 0:03:44.880 --> 0:03:48.880 And it's part not just uh because of the long 0:03:49.000 --> 0:03:51.600 term nature of the businesses, but it's because so much 0:03:51.760 --> 0:03:56.680 of the earnings reflect estimates. So a nefarious management would 0:03:56.680 --> 0:04:00.000 have lots of flexibility to goose short term earnings or 0:04:00.400 --> 0:04:04.080 or a sandbagged them. You see it in insurance companies 0:04:04.120 --> 0:04:06.280 with reserves, and of course in banks and so on. 0:04:06.680 --> 0:04:10.480 So what really matters over time as a financial stock investor, 0:04:10.560 --> 0:04:13.920 and I started our financial funds more than thirty years ago, 0:04:14.000 --> 0:04:16.800 it's sort of hard to believe. And what's amazing is 0:04:17.080 --> 0:04:20.480 that that that fund is is it's not just outperformed 0:04:20.480 --> 0:04:23.000 the financial index, but it's outperformed the S and P 0:04:23.160 --> 0:04:27.599 five hundred. Because within financial services there's such a range 0:04:27.640 --> 0:04:31.240 of business models and positioning, and what we look for 0:04:31.360 --> 0:04:36.599 in quarterly earnings are signs of culture, signs of culture, 0:04:36.600 --> 0:04:41.280 because financial services is an industry where culture, a conservative 0:04:41.320 --> 0:04:47.760 cultural culture is actually a sustainable competitive advantage. Right when 0:04:47.839 --> 0:04:51.880 companies have made conservative decisions in the past, it gives 0:04:51.920 --> 0:04:55.560 them more flexibility in the present, whereas when companies have 0:04:55.600 --> 0:04:58.359 been aggressive in the past, they end up being really 0:04:58.480 --> 0:05:02.000 strained in the present. So what you saw in JP Morgan, 0:05:02.160 --> 0:05:06.920 for example, was a wonderful sign of a conservative culture. Right. 0:05:07.000 --> 0:05:10.320 It was a company that had overreserved in the past, 0:05:10.400 --> 0:05:14.120 they had been too conservative. That is a hallmark of 0:05:14.240 --> 0:05:17.440 Jamie Diamond that goes back not just you know, one 0:05:17.600 --> 0:05:20.760 quarter or one year, but goes back all the way 0:05:20.839 --> 0:05:24.159 to his first and your report, which people should read 0:05:24.480 --> 0:05:27.720 that he wrote when he became the CEO of Bank one. Uh. 0:05:28.720 --> 0:05:32.120 It's a culture of we'd rather take the hits up front. 0:05:32.240 --> 0:05:34.800 We want to be transparent, we'd be conservative. We don't 0:05:34.800 --> 0:05:37.359 want to be playing catch up. So with all of 0:05:37.400 --> 0:05:41.440 the noise around current quarter earnings, the real story is 0:05:41.480 --> 0:05:45.520 this is that for more than a decade since the 0:05:45.520 --> 0:05:51.040 financial crisis, everybody was terrified that banks are risky, risky businesses, 0:05:51.720 --> 0:05:54.960 and people were unable to recognize that the financial crisis 0:05:55.279 --> 0:05:58.000 wasn't a recession. It was the sort of thing that's 0:05:58.120 --> 0:06:02.760 happened once every fifties, sixty years. It was a one 0:06:02.760 --> 0:06:07.080 time reset and the companies that came through that were safer, 0:06:07.520 --> 0:06:12.520 more regulated, better capitalized, more conservative than any time in 0:06:12.640 --> 0:06:16.120 my career. And yet for the next decade, even though 0:06:16.160 --> 0:06:20.360 these banks built their profits, you know, the bank percentage 0:06:20.360 --> 0:06:23.000 of SMP earnings has grown for a decade, and yet 0:06:23.040 --> 0:06:25.880 the market caps as a percentage of earnings have fallen 0:06:25.920 --> 0:06:30.280 for a decade. Right, So nobody believed it, right that 0:06:30.320 --> 0:06:34.480 nobody believed that they somehow they were stronger, that they 0:06:34.480 --> 0:06:38.440 weren't risky. COVID was the ultimate test, and the banks 0:06:38.640 --> 0:06:41.640 banking sector as a whole past it with flying colors. 0:06:41.680 --> 0:06:44.760 They were part of the solution. They were providing liquidity, 0:06:44.800 --> 0:06:47.000 they were working with customers. They were doing just what 0:06:47.080 --> 0:06:49.120 banks are supposed to do and by the way, have 0:06:49.320 --> 0:06:51.880 done for most of the last hundred years, just not 0:06:52.000 --> 0:06:54.920 during the depression and not during the financial crisis. Those 0:06:54.920 --> 0:06:58.560 were one time huge resets. So I think what we've 0:06:58.600 --> 0:07:03.279 seen here is the beginning of a change in the 0:07:03.440 --> 0:07:07.719 perception investors have towards this sector. So any noise around 0:07:07.760 --> 0:07:10.200 the quarter is just going to be noise. The real 0:07:10.320 --> 0:07:13.760 bottom line is that people are going to recognize these 0:07:13.880 --> 0:07:21.120 are fortress institutions. Enormously resilient, enormously well capitalized, enormously profitable, 0:07:21.360 --> 0:07:28.000 conservative in nature, and therefore dramatically undervalued relative to other 0:07:28.160 --> 0:07:32.840 sectors where investors have that perception, like utilities or consumer 0:07:32.880 --> 0:07:35.440 products or something like that. So I think we're gonna 0:07:35.480 --> 0:07:38.680 have a decade of changing perception and we're only in 0:07:38.720 --> 0:07:42.440 the second inning. I think Jamie Diamond would be really 0:07:42.800 --> 0:07:44.720 happy to hear what you have to say that, Chris, 0:07:45.400 --> 0:07:52.240 that was an excellent case for bank stock rallies, but 0:07:52.480 --> 0:07:55.880 also for culture. And you know, I met Jamie when 0:07:56.000 --> 0:07:58.680 you know, I started my career thirty two years ago. 0:07:59.320 --> 0:08:03.480 I've invested with him all along the way, from commercial 0:08:03.520 --> 0:08:10.040 credit to Primerica, Travelers to Travelers ATNA, Traveler Solomon Smith 0:08:10.080 --> 0:08:13.160 Barney to Travelers Solomon Smith Barney City, you know, uh, 0:08:13.240 --> 0:08:17.160 and then to to bank one. Um. He he really 0:08:17.240 --> 0:08:20.920 embodies what I mean when I talk about culture as 0:08:20.960 --> 0:08:26.320 a competitive advantage, because there's a whole culture in financial 0:08:26.360 --> 0:08:30.880 services that can evolve based on one very simple fact, 0:08:31.120 --> 0:08:33.960 which is you don't know your cost of good sold 0:08:34.040 --> 0:08:37.320 when you sell your product, and therefore it's an estimate. 0:08:37.559 --> 0:08:39.840 And therefore, if people want to make their numbers and 0:08:39.840 --> 0:08:42.079 they want to look good. They can report whatever they can, 0:08:42.120 --> 0:08:45.280 and that filters all the way through an organization. And 0:08:45.320 --> 0:08:48.400 when you have somebody at the top that says we're 0:08:48.400 --> 0:08:51.680 gonna do things the right way. I understand your business. 0:08:51.720 --> 0:08:54.320 I'm getting into the weeds on it, it begins to 0:08:54.440 --> 0:08:57.679 build a culture. You see the same thing at Bertuer Hathaway. 0:08:57.720 --> 0:09:00.240 You see the same thing at places like but a 0:09:00.360 --> 0:09:05.320 One where you have very defined cultures, where the people 0:09:05.360 --> 0:09:08.680 at the top speak the same language as the people 0:09:08.679 --> 0:09:12.040 in the trenches making those estimates, and therefore there's a 0:09:12.080 --> 0:09:16.760 credibility and a thoughtfulness about how they approached the business. 0:09:16.800 --> 0:09:19.840 And there's a deep understanding at the top that the 0:09:19.880 --> 0:09:24.040 CEO must be must be the chief risk officer. Somebody 0:09:24.040 --> 0:09:27.640 else might have that title, but you're in big trouble 0:09:27.760 --> 0:09:31.080 if the CEO of a complex bank is not and 0:09:31.160 --> 0:09:34.200 does not think of him or herself as the chief 0:09:34.320 --> 0:09:38.320 risk officer and really understanding the nuance of risk, whether 0:09:38.360 --> 0:09:41.800 it's in derivatives, whether it's in interest rate curves or 0:09:41.800 --> 0:09:46.400 forward yield curves, or swaps, or or credit concentrations or 0:09:46.440 --> 0:09:49.920 correlated risks. UH. If you don't have a CEO that 0:09:50.080 --> 0:09:52.520 understands that, you're you're going to be in a world 0:09:52.520 --> 0:09:56.240 of pain sooner or later. And so I love the 0:09:56.280 --> 0:09:59.200 financial sector as a whole, but it's not a sector 0:09:59.240 --> 0:10:01.880 I would want to in decks. It's one where you 0:10:02.000 --> 0:10:04.840 really want to be looking for those companies where cultures 0:10:04.880 --> 0:10:07.880 a defining advantage, where they're what we call growth stocks 0:10:07.920 --> 0:10:12.560 in disguise. Lately I would say their utilities in disguise. Uh. 0:10:12.760 --> 0:10:14.640 It used to be an insult to call a company 0:10:14.679 --> 0:10:17.240 or utility, but last night, check the utility indexes at 0:10:17.240 --> 0:10:21.120 twenty times earnings. The banking indexes at like twelve. And 0:10:21.160 --> 0:10:23.480 I would much rather own the banks because for one thing, 0:10:23.520 --> 0:10:27.199 many of them are still under earning based on interest rates. Uh, 0:10:27.200 --> 0:10:30.160 they have huge excess capital, and their dividend payouts instead 0:10:30.160 --> 0:10:34.599 of being sixty seventy fifty six as they are in 0:10:34.640 --> 0:10:36.560 a lot of utilities that diffen in payouts, might be 0:10:36.640 --> 0:10:41.000 thirty five. So it's it's it's a wonderful time to 0:10:41.080 --> 0:10:43.240 be in this sector. But it's again not one that 0:10:43.280 --> 0:10:52.960 you want to throw a dot, you know, Chris, I 0:10:53.080 --> 0:10:56.679 think bank earnings are interesting regardless of what you're invested in, 0:10:56.720 --> 0:10:59.160 just because they give you a good lens into sort 0:10:59.200 --> 0:11:02.160 of a lot of macro trends, you know, and I wonder, 0:11:02.320 --> 0:11:05.000 you know, are there any takeaways. Obviously it's early in 0:11:05.000 --> 0:11:07.400 the season with with only really JP we're gonna look at, 0:11:07.440 --> 0:11:10.400 but are there any takeaways from from you? And specifically 0:11:10.440 --> 0:11:13.520 I wonder, you know, when you think about sort of 0:11:13.559 --> 0:11:17.280 the health of the corporate and the consumer balance sheet 0:11:17.400 --> 0:11:20.440 coming out of this recession, both are really strong. You know, 0:11:21.160 --> 0:11:24.000 a lot of companies raised, you know, money to sort 0:11:24.000 --> 0:11:28.640 of gird against the downturn. Consumer savings rate went through 0:11:28.679 --> 0:11:30.959 the roof, so there's a lot of money just sitting 0:11:31.000 --> 0:11:34.240 on deposit. I mean, does that in a way boat 0:11:34.320 --> 0:11:37.040 ill for for the prospects for loan growth? You know, 0:11:37.080 --> 0:11:40.560 if there's all this cash in people's accounts, is there 0:11:40.640 --> 0:11:42.480 less of a need to borrow? And is that a 0:11:42.600 --> 0:11:45.560 risk at all? In your opinion? Oh? Absolutely, I I 0:11:45.880 --> 0:11:49.640 it's hard to see a lot of evidence of surging 0:11:50.200 --> 0:11:53.720 UH loan demand. And you know, we can say, okay, 0:11:53.760 --> 0:11:56.880 well that's a negative. If somebody is barishly inclined, they're 0:11:56.880 --> 0:11:59.839 gonna beat that drum. And my feeling is, if you 0:12:00.000 --> 0:12:03.320 own a company that's generating ten percent of its market 0:12:03.360 --> 0:12:06.920 cap in distributable capital, every year you're going to get 0:12:06.920 --> 0:12:11.760 a ten percent returned with zero growth. Now, zero growth 0:12:11.840 --> 0:12:15.199 companies don't have zero profit growth simply because they don't 0:12:15.240 --> 0:12:18.800 have loan growth. Right, they could have very slow roan growth, 0:12:19.040 --> 0:12:22.240 and they could have much better profit growth because spreads 0:12:22.280 --> 0:12:26.079 begin to widen after a decade of compression, for example, 0:12:26.520 --> 0:12:29.440 they could have real earnings growth. And I think maybe 0:12:29.480 --> 0:12:32.200 the most important topic we should spend some time on 0:12:32.320 --> 0:12:35.800 is fintech, the risk of fintech to banks, what it 0:12:35.840 --> 0:12:37.960 means for the big banks, where the risks are. But 0:12:38.320 --> 0:12:42.320 what I would say is that my first takeaway is 0:12:42.400 --> 0:12:46.280 that you can have an enormous amount of earnings growth 0:12:46.679 --> 0:12:50.040 from a reduction in the cost structure that comes from 0:12:50.080 --> 0:12:54.400 the intelligent application of technology. Now we could be crass 0:12:54.520 --> 0:12:58.200 and say, oh, it's closing branches and reducing people with 0:12:58.280 --> 0:13:01.600 computers and so on, but it's much more elegant than that. 0:13:01.800 --> 0:13:05.319 You're providing a solution to a client or a customer 0:13:05.640 --> 0:13:08.839 that is more satisfactory to them. It's more flexible and 0:13:09.240 --> 0:13:12.160 cheaper to deliver. So I think you could have long 0:13:12.280 --> 0:13:15.720 term growth from a reduction and a lot of operating expenses, 0:13:15.720 --> 0:13:19.760 so you have interest rate spreads, you have a reduction 0:13:19.800 --> 0:13:23.560 in operating expenses lots of different ways. But when you 0:13:23.559 --> 0:13:26.600 start at a ten percent earnings yield, you don't need 0:13:26.640 --> 0:13:29.079 a lot of growth, And I think that's what people 0:13:29.120 --> 0:13:31.480 are going to begin to internalize. So we'll wait a minute. 0:13:31.480 --> 0:13:33.120 When I own a utility, I don't have a lot 0:13:33.120 --> 0:13:36.720 of growth. A lot of consumer products companies are you know, 0:13:36.960 --> 0:13:40.760 trumpeting if they get four percent growth or three percent growth. 0:13:41.559 --> 0:13:44.080 I mean, I think the banks have done much better 0:13:44.160 --> 0:13:48.240 at half the multiple and a willingness to return that 0:13:48.440 --> 0:13:51.520 capital to sheruld. So your per share growth is going 0:13:51.559 --> 0:13:54.560 to be a lot greater even with no loan growth. 0:13:54.600 --> 0:13:58.040 So you know, with bank investors there's always something to 0:13:58.040 --> 0:14:00.000 worry about. But if you look at the big category 0:14:00.000 --> 0:14:04.960 stories of risk, regulatory risk, liquidity risk, interest rate risk, 0:14:05.360 --> 0:14:09.080 credit risk, regulatory risk, I mean, these are all about 0:14:09.120 --> 0:14:11.800 as low as we've seen in the last decade or two. 0:14:12.559 --> 0:14:16.160 So we have a lower risk profile with a gap 0:14:16.360 --> 0:14:19.320 in the valuation of banks versus the SMP that's just 0:14:19.400 --> 0:14:22.240 about as wide as it's ever been. Uh yeah, the 0:14:22.280 --> 0:14:24.240 bank stocks are up a lot, buts over the earnings 0:14:24.280 --> 0:14:27.440 because the earnings were so depressed last year. Uh, and 0:14:27.520 --> 0:14:30.760 so I think that that, you know, if people want 0:14:30.760 --> 0:14:32.360 to hate on them, they can hate on them, and 0:14:32.400 --> 0:14:36.840 it doesn't matter because there can their valuation is sort 0:14:36.840 --> 0:14:40.680 of with an advantage that gives them control of their 0:14:40.680 --> 0:14:44.120 own destiny. The lower the valuation, the higher the return 0:14:44.160 --> 0:14:47.760 on the share repurchase. For example, so banks are worth 0:14:47.840 --> 0:14:49.840 more at twelve times earnings than they'd be worth it 0:14:49.920 --> 0:14:53.120 fifteen times earnings. I do think that there are a 0:14:53.120 --> 0:14:57.680 lot of very interesting macro takeaways in bank earnings. JP 0:14:57.880 --> 0:15:01.880 Morgan was faced with a bunch of questions, including a 0:15:01.880 --> 0:15:07.840 heated discussion about inflation, supply chain dynamics, and bank regulations 0:15:08.240 --> 0:15:12.960 with the FEDS. Randall quarrels. Stepping down, I wondered if 0:15:13.240 --> 0:15:19.400 you had any particular thoughts about any of those broader issues. Well, Pulice, 0:15:19.480 --> 0:15:24.400 it's it's it's a good question. You certainly inflation in 0:15:24.440 --> 0:15:27.560 the specter of inflation, and whether it's transitory or whether 0:15:27.560 --> 0:15:30.240 it's is going to be an issue that's going to 0:15:30.320 --> 0:15:33.400 occupy all investors for the next twenty four months or so. 0:15:34.360 --> 0:15:38.240 We just will get more data. I I would saying 0:15:38.440 --> 0:15:44.400 I am inherently a warrior that invests because I feel 0:15:44.440 --> 0:15:47.560 that when I manifest all of those worries and I 0:15:47.600 --> 0:15:50.000 think about what do I want to do, the answer 0:15:50.080 --> 0:15:54.560 is not whole own cash or bonds with you know, 0:15:54.840 --> 0:15:58.400 two percent yields and things like that. I want to 0:15:58.440 --> 0:16:01.840 own businesses that have a proven record of resiliency and 0:16:01.880 --> 0:16:06.840 of adapting to different macro economic environments. I would say, 0:16:06.880 --> 0:16:12.280 without getting overly promotional about banks, that I can imagine 0:16:12.400 --> 0:16:16.480 a scenario where investors, short term investors, start saying, wait 0:16:16.520 --> 0:16:20.040 a minute, banks are one of the few sectors where 0:16:20.080 --> 0:16:23.560 we don't have to worry about supply constraints, Like we 0:16:23.600 --> 0:16:25.760 don't have to worry about you know, oh my god, 0:16:25.800 --> 0:16:28.080 they couldn't get parts, so they're gonna have to ship 0:16:28.160 --> 0:16:32.080 fewer cars or fewer iPhones. Uh, they're gonna have to 0:16:32.120 --> 0:16:35.840 cancel flights, or they can't get labor. Right. So I 0:16:35.880 --> 0:16:39.000 actually can imagine a scenario where people say, wait a minute, 0:16:39.000 --> 0:16:42.280 banks are kind of in a suite spot where we 0:16:42.360 --> 0:16:45.720 don't really have to worry about their earnings. The way 0:16:45.760 --> 0:16:49.680 we suddenly have a lot more unpredictability in the earnings 0:16:49.760 --> 0:16:52.600 even of companies that had been viewed as very reliable 0:16:52.960 --> 0:16:57.080 like Apple. Uh, because of some of these supply constraints. 0:16:57.080 --> 0:17:00.280 So I actually think that the macro question that they 0:17:00.320 --> 0:17:03.360 were tussling about, that JP Morgan are going to be 0:17:03.440 --> 0:17:06.600 with us for a long time. Because it's a parlor game. 0:17:06.600 --> 0:17:09.640 It's like predicting who's gonna win the Super Bowl. I'm 0:17:09.640 --> 0:17:13.159 not a sports fan, so I couldn't even name likely contenders. 0:17:13.200 --> 0:17:15.840 But but what I would say is nobody knows, and 0:17:15.920 --> 0:17:17.640 yet a lot of time is going to be spent 0:17:17.720 --> 0:17:21.120 discussing it, and then you know, we'll flip the coin 0:17:21.200 --> 0:17:23.080 in some time down the road. Somebody's gonna say I 0:17:23.119 --> 0:17:26.320 was a genius. I knew all along. Nobody knows, nobody. 0:17:26.400 --> 0:17:29.480 There's no period in history we can look at for 0:17:30.320 --> 0:17:37.440 what will be the outcomes of this incredibly aggressive monetary policies. 0:17:37.840 --> 0:17:41.159 You know, as I say, I'm by nature conservative. I 0:17:41.200 --> 0:17:44.320 don't like people borrowing beyond their means. I don't like 0:17:44.440 --> 0:17:48.080 governments spending our grandchildren's money. I don't think it's a 0:17:48.119 --> 0:17:52.440 sensible idea. It may work out fine, Uh, I don't know. 0:17:52.800 --> 0:17:56.919 But what I know is that no matter what, in 0:17:57.000 --> 0:18:00.679 an uncertain world, I want to own a folio of 0:18:00.800 --> 0:18:05.879 businesses that can adapt our own businesses that adapted to stagflation, 0:18:06.440 --> 0:18:11.719 businesses that adapted to recessions, businesses that adapted to you know, 0:18:11.800 --> 0:18:18.840 the geopolitical chaos of the sixties and seventies. Uh. So, 0:18:19.320 --> 0:18:22.359 resiliency and adaptability is I think what should be at 0:18:22.440 --> 0:18:25.800 top of mind for investors and as they start thinking 0:18:25.800 --> 0:18:29.639 of those characteristics. Of course they're wonderful businesses like applied 0:18:29.680 --> 0:18:34.600 Materials or Intel or uh. But businesses like Raytheon. It's 0:18:34.640 --> 0:18:37.119 hard to imagine a world where Raytheon doesn't have a 0:18:37.119 --> 0:18:39.400 lot of value. I don't I don't care if they're 0:18:39.440 --> 0:18:43.120 if we're buying you know, missile defense systems and seashells 0:18:43.240 --> 0:18:47.440 or bitcoin or uh. There's huge value for what they sell, 0:18:47.880 --> 0:18:51.200 and it is going to be resilient as a business model. 0:18:51.359 --> 0:18:53.439 And I think what people are coming to realize is 0:18:53.600 --> 0:18:56.000 really the same as true of banks. You know, a 0:18:56.040 --> 0:18:58.560 lot of our banks are in their second century, some 0:18:58.680 --> 0:19:02.880 of them are even in their third entry. Uh, basically 0:19:03.320 --> 0:19:07.000 providing the same service, selling the same product, with the 0:19:07.040 --> 0:19:10.000 same business model. You'd be hard pressed to name any 0:19:10.000 --> 0:19:13.440 other companies with that record of longevity, and yet here 0:19:13.480 --> 0:19:15.560 they are is the cheapest sector in the SMP fun 0:19:16.280 --> 0:19:18.400 you know, Chris as far as predicting the Super Bowl, 0:19:18.600 --> 0:19:20.880 I will predict it probably won't be the Jets, I'll 0:19:20.880 --> 0:19:24.760 go that far as tell you. But but I wanted to, 0:19:24.920 --> 0:19:26.960 you know, get back to as you said, Uh, you 0:19:26.960 --> 0:19:30.640 know your funds are actively managed. You you don't believe, uh, 0:19:30.720 --> 0:19:34.600 financials is a space the place to get passive. I 0:19:34.640 --> 0:19:37.879 did notice a Capital One a big holding in both 0:19:37.960 --> 0:19:41.159 the David's Financial Fund and the h and the Davis 0:19:41.160 --> 0:19:43.239 New York Venture Fund, which I believe is your your 0:19:43.240 --> 0:19:46.679 biggest fund right um and I know part of that 0:19:46.800 --> 0:19:50.080 is obviously just because Capital One has been appreciating in value, 0:19:50.160 --> 0:19:53.480 like outperforming everything in the space. You know, on the 0:19:53.480 --> 0:19:56.480 other hand, you're clearly not reducing the steak or removing 0:19:56.480 --> 0:19:58.720 it as your as your top weight. So so what's 0:19:58.720 --> 0:20:02.000 it doing so well for such hot performance and what 0:20:02.280 --> 0:20:05.119 what has you comfortable enough about that company to to 0:20:05.200 --> 0:20:07.240 keep it with a pretty heavy weight in both funds. 0:20:07.280 --> 0:20:09.439 It's funny I spent a day with the co founder 0:20:09.480 --> 0:20:13.200 who has since retired of Capital One just last week. 0:20:13.840 --> 0:20:16.800 Um well, Capital one is one of the only major 0:20:16.840 --> 0:20:19.800 banks in the US that's still run by the founder. 0:20:20.640 --> 0:20:25.000 Now we talked early about culture, but what's really extraordinary 0:20:25.000 --> 0:20:29.080 about Capital One is from its very beginning, Capital one 0:20:29.240 --> 0:20:31.560 was not a bank. It was a data science company. 0:20:32.440 --> 0:20:35.640 It always has been. It had no branches, it had 0:20:35.680 --> 0:20:39.159 no customers, and yet somehow managed to become one of 0:20:39.160 --> 0:20:43.560 the largest credit card companies in the country. No branches, 0:20:43.680 --> 0:20:48.520 no customers. How well they used data, They target marketed, 0:20:48.720 --> 0:20:53.960 They customized offers to consumers based on characteristics that they 0:20:53.960 --> 0:20:58.480 were able to surmise about consumers based on their occupation 0:20:58.720 --> 0:21:00.959 or their zip code. And they would say, you know, 0:21:01.400 --> 0:21:04.320 why on Earth the banks offer one credit card for 0:21:04.359 --> 0:21:07.960 all their customers. Some customers are very interested in revolving, 0:21:08.000 --> 0:21:11.000 some are very interested in points, some are very interested 0:21:11.000 --> 0:21:15.760 in prestige or affinity. People have all different considerations, and 0:21:15.840 --> 0:21:18.640 yet every bank had a one size fits all credit card. 0:21:19.000 --> 0:21:22.199 So Rich Fairbanks and Nigel Morris come along. Uh. They 0:21:22.280 --> 0:21:25.760 launched Capital when I was early in my career. Uh. 0:21:25.800 --> 0:21:28.880 They were a division of another bank. Then they were 0:21:28.920 --> 0:21:33.880 spun out. Uh, and they were still a data science 0:21:33.920 --> 0:21:38.560 company when they started buying buying branches. Uh. Not all 0:21:38.640 --> 0:21:41.280 that long ago relative to their history. And they did 0:21:41.280 --> 0:21:45.400 it because they realized that core funding had a huge advantage. 0:21:45.760 --> 0:21:49.560 They had relied in their historic history on securitizations to 0:21:49.680 --> 0:21:52.840 finance growth. But what they learned in some of the 0:21:52.880 --> 0:21:57.439 securitization crises is that that market can be fickle, so 0:21:57.520 --> 0:22:01.919 they went the other way. They went into branches. So 0:22:02.080 --> 0:22:04.360 we think of Capital One, A lot of consumers think 0:22:04.400 --> 0:22:08.320 of Capital One because they see the the bank branch 0:22:08.400 --> 0:22:12.000 on the corner. But that's an accident of history. It 0:22:12.160 --> 0:22:15.440 is fundamentally a data science company. And the analogy I 0:22:15.480 --> 0:22:19.800 would give you as Progressive in auto insurance, right, Progressive 0:22:19.840 --> 0:22:22.879 sells a commodity product that they have to file for 0:22:22.920 --> 0:22:26.119 the rates in states by and large historically through the 0:22:26.160 --> 0:22:30.640 same distribution channel as many other companies. In fact, I'll 0:22:30.720 --> 0:22:33.080 pick on one which was always a very high quality company, 0:22:33.119 --> 0:22:36.320 Ohio Casualty, because they were headquartered just about in the 0:22:36.359 --> 0:22:38.439 same town, selling a lot of the same products through 0:22:38.480 --> 0:22:41.399 the same distribution channels, and over a twenty year period, 0:22:41.440 --> 0:22:46.520 one compounded at one compounded at six is that possible? Well? 0:22:46.560 --> 0:22:50.680 Culture culture, and it wasn't just a culture of conservatism. 0:22:50.720 --> 0:22:53.520 It was a culture of innovation and using data and 0:22:53.640 --> 0:22:57.000 using science and how can we predict what is the 0:22:57.040 --> 0:22:59.679 likelihood of you having a car accident based on the 0:22:59.720 --> 0:23:02.399 type of car, your occupation, or your credit or all 0:23:02.440 --> 0:23:04.240 sorts of other things, and how can we give you 0:23:04.280 --> 0:23:06.600 a better deal, how can we customize So we're a 0:23:06.680 --> 0:23:10.199 data rich company. First, that's Capital One. So when I 0:23:10.280 --> 0:23:14.120 talked about all of the traditional risks facing banks, liquidity, 0:23:14.480 --> 0:23:21.439 credit regulation, UH, interest rates UH and so on, UH, 0:23:21.520 --> 0:23:23.720 I would say all of those risks are as low 0:23:23.760 --> 0:23:26.439 as I've seen in most of my career, but certainly 0:23:26.480 --> 0:23:29.879 in the last fifteen years. The one risk that is 0:23:29.880 --> 0:23:35.680 the most important risk is disruption. It's technological disruption. So 0:23:35.800 --> 0:23:38.760 as you invest and you think about risk and reward, 0:23:39.600 --> 0:23:42.400 part of Capital ones model is that they are a 0:23:42.520 --> 0:23:47.440 very profitable institution because they are wonderful at generating high 0:23:47.520 --> 0:23:51.240 yielding assets in a way that is difficult for others 0:23:51.280 --> 0:23:54.639 to imitate. And they have low cost core funds, so 0:23:55.000 --> 0:23:57.720 they have a good core business. But then that's the 0:23:57.800 --> 0:24:01.199 opportunity the risk. If banks have the biggest risk is 0:24:01.200 --> 0:24:05.760