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Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.

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Speaker 1: This week on the podcast, I have an extra special guest,

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Speaker 1: the return of Joel Greenblatt. Joel is a former hedge

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Speaker 1: fund manager. He started Gotham Capital in and put up

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Speaker 1: just insane numbers fifty percent a year after all expenses

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Speaker 1: for something like seven eight nine years in Gotham was

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Speaker 1: closed to outside investors. That essentially became a family office,

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Speaker 1: and he ran that through two thousand and nine. He

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Speaker 1: was one of the early investors in Michael Burry's hedge

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Speaker 1: fund Michael Burry, made famous by both the book in

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Speaker 1: the movie The Big Short, and he's now running Gotham

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Speaker 1: Asset Management, which has put together a number of really

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Speaker 1: interesting mutual funds, including a sort of value weighted SMP

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Speaker 1: five index that has beat the index for a couple

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Speaker 1: of year is running. It is not a traditional price

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Speaker 1: to book sort of value based tilt. It's all about

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Speaker 1: future cash flows and moats and relative growth and value.

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Speaker 1: Really the best way to think of it as a

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Speaker 1: relative value tilts to the index. It's done really well.

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Speaker 1: I always find Joel to be a fascinating guy. He

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Speaker 1: understands the world of value investing better than most. His

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Speaker 1: track record is simply outstanding, and he really has nothing

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Speaker 1: to prove, nothing to sell. He's just a fascinating guy

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Speaker 1: who's shot the lights out repeatedly. So, with no further ado,

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Speaker 1: my interview with Gotham Asset Managements Joel Greenblasts. This is

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Speaker 1: Masters in Business with very Ridholts on Bloomberg Radio. My

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Speaker 1: special guest this week is Joel Greenblatt. He is the

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Speaker 1: principal and co founder c i O of Gotham Asset Management.

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Speaker 1: He's been an adjunct professor at Columbia School of Business

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Speaker 1: since He is the author of numerous best selling books,

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Speaker 1: including You Can Be a Stock Market Genius and The

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Speaker 1: Little Book That Beats the Market. His newest book is

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Speaker 1: called Common Sense, The Investor's Guide to Equality, Opportunity, and Growth.

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Speaker 1: Joel Greenblatt, Welcome to Bloomberg, Thanks Perry. So let's start

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Speaker 1: a little bit with the book common Sense. What first

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Speaker 1: of all, what motivated you working in finance to write

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Speaker 1: a book about opportunity, growth and equality? Seems to be

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Speaker 1: a little different than your traditional value investing or is

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Speaker 1: it sure? Well, I'm a capitalist. I'd like it to

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Speaker 1: to work well in investor in general has a certain

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Speaker 1: way of looking at the world. And there are a

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Speaker 1: lot of problems that capitalism has led to or the

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Speaker 1: way at least we implement it. And and so there

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Speaker 1: are certain things that seems fairly reasonable to me to

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Speaker 1: suggest of tweaks we can make to the way the

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Speaker 1: system works now to make things better for everyone. And

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Speaker 1: so you know, most people don't write this book from

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Speaker 1: the perspective of a long term investor, and and so

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Speaker 1: that's what I did here, and I hope it brings

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Speaker 1: another perspective to solving some of these problems, particularly the

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Speaker 1: ones that are very important to people now, including inequality

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Speaker 1: and opportunity. So let's dive right into issues of opportunity.

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Speaker 1: By page count, almost half the book, maybe even more,

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Speaker 1: is about education. So let's start. Let's start there. You

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Speaker 1: you started a not for profit charter school in New

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Speaker 1: York City in two thousand and six. Why did you

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Speaker 1: do that and what did you learn? Well? Sure, well,

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Speaker 1: the reason I did that is if you look at

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Speaker 1: the statistics, if you are black, Hispanic, low income in

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Speaker 1: one of our major urban centers, maybe the top fifty,

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Speaker 1: your odds of graduating college right now are one out

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Speaker 1: of a limit. We know that college graduates earn more

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Speaker 1: than high school graduates. High school graduates earn thirty more

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Speaker 1: than dropouts. But that's that's huge, and it's not from

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Speaker 1: lack of ability, and at least that's part of the

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Speaker 1: reason that I got involved in the charter school space.

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Speaker 1: Everyone has choice if if you have any kind of

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Speaker 1: money in our system and you don't like the school

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Speaker 1: in your neighborhood, you can move to a neighborhood with

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Speaker 1: a good school, or you can send your kids to

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Speaker 1: private school. If you don't have means, you get what

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Speaker 1: you get and you don't have a choice. And the

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Speaker 1: idea behind charter schools, which just to define them, are

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Speaker 1: publicly funded schools run not by the district, meaning run

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Speaker 1: by independent operators. And it turns out that the charter

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Speaker 1: schools in states where they have high standards of who

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Speaker 1: gets to open one and who gets to keep running

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Speaker 1: one or obviously if they're closed if they're not doing well,

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Speaker 1: those tend to be the states like New York, Massachusetts,

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Speaker 1: and California where the charter schools do well. And so

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Speaker 1: the idea was to set up a charter school in

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Speaker 1: New York City and it's always okay or it's been

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Speaker 1: done before. To open one school and put a lot

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Speaker 1: of resources into it and make sure that it works well.

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Speaker 1: And the idea behind this one was to do something

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Speaker 1: replicable and the big hareat Decious goal when we got

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Speaker 1: started was to open not one school, but forty schools.

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Speaker 1: My business partner John Petrie and I hired a woman

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Speaker 1: Eva Moscowitz, who is the CEO UH and founder of

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Speaker 1: the Success Network that I'm involved with, and today we

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Speaker 1: have forty six schools and kids. And last year, according

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Speaker 1: to the state tests in math and English UH, those

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Speaker 1: twenty kids in all low income neighborhoods minority neighborhoods outperformed

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Speaker 1: every wealthy district in the state, including Scarsdale, Great Neck

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Speaker 1: and all the other tops UH just stricts in the state.

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Speaker 1: They would be the number one district. What's the lesson

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Speaker 1: from that? What can we learn from charter schools and

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Speaker 1: bring to public schools that are under performing well. I

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Speaker 1: think the biggest lesson would be that it's not lack

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Speaker 1: of ability that the kids aren't successful. The kids can

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Speaker 1: do it. If you have high expectations, the kids can

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Speaker 1: meet them. They just need the right supports and charters,

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Speaker 1: of course have some advantages over the district schools. They

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Speaker 1: get to select their teachers and keep the ones that

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Speaker 1: they think are doing a good job. They can pivot

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Speaker 1: quickly to to only do what works or to improve

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Speaker 1: things that aren't working, and they can do that very quickly.

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Speaker 1: We spent more time in school at our charter than

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Speaker 1: the district schools, so that's an advantage and big advantages.

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Speaker 1: Parents choose to come, and so it's good to have

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Speaker 1: the support of the parents, and that is an advantage.

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Speaker 1: In your book, Common Sense, you highlight p. S. One

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Speaker 1: seventy two one of the country's best public school. It's

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Speaker 1: run by Jack Spatola. What makes him such a special principle?

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Speaker 1: Why is that public school not a charter school? Why

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Speaker 1: is that succeeding so well versus the average public school

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Speaker 1: in any big city. Right, So, the book, as you suggest,

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Speaker 1: is not just about charters. It's about good schools anywhere,

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Speaker 1: giving good choices. Right, the the kids with the lowest

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Speaker 1: UH family that meets, the families with the lowest means

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Speaker 1: UH don't have a choice. So it's how can we

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Speaker 1: make their district schools better? How can we give them

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Speaker 1: choice of a good, good school choice, and they're certainly

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Speaker 1: good district public schools. One that I highlight, as you suggest,

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Speaker 1: Jack Jack Spatolas, the principal, he just retired for PS

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Speaker 1: one SWO in Brooklyn, had to tell you how good

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Speaker 1: a really good school can be. And this is a

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Speaker 1: district school. Uh. Of the kids, Uh past the math

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Speaker 1: exam and past the English systam and in most other

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Speaker 1: schools is below. But that's not the special thing. The

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Speaker 1: special thing is that that passing math and passing English.

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Speaker 1: What are the statistics for the students with disabilities at

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Speaker 1: that school? Wow? So in other words, kids without disabilities

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Speaker 1: did less than half as well in the in the

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Speaker 1: regular district schools. That tells you how good that school is.

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Speaker 1: The English language learners passed the English exam at his

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Speaker 1: school PS one seventy two in the regular district schools

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Speaker 1: with nine, so ten times better. What can be done

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Speaker 1: with the school, like Spatola is like PS one two

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Speaker 1: that can be ported over to regular public schools. Of

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Speaker 1: course that's the right question. Uh. And if you ask

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Speaker 1: Jack Spatola, the principle, he would say, having high expectations

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Speaker 1: for every child, just keep looking. If something doesn't work

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Speaker 1: for a student, find something else that that doesn't work,

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Speaker 1: find something else, and keep working. But it's high expectations,

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Speaker 1: expecting that each child, including students with disabilities, including impish

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Speaker 1: language learners, can do the job with the right supports.

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Speaker 1: So he would say that, but I would say that

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Speaker 1: only one principle can be the best principle in the state.

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Speaker 1: It's probably Jack. It's very hard. It would be wonderful

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Speaker 1: if the average principle could be this good, and we

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Speaker 1: should strive to get there. But it hasn't happened. Uh.

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Speaker 1: And I just point out that good charter schools, you know,

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Speaker 1: with still you know that where kids poor and minority

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Speaker 1: kids outperform the wealthiest districts, and a school like Jack's,

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Speaker 1: where even the kids with disabilities are crushing it point

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Speaker 1: out that the kids can do it. So the ten

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Speaker 1: out of eleven who are not graduating college, it's not

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Speaker 1: from lack of ability. And so the question I posed

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Speaker 1: in the book is what can we do for them?

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Speaker 1: Because they can do the job. They can do the job,

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Speaker 1: and so that's what I used them for. It's a big,

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Speaker 1: big question you're asking, how do we move this? Uh,

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Speaker 1: you know, Jack's success across the districts, and one of

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Speaker 1: the sad answers is that not everyone can be Jack Spatola,

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Speaker 1: but of course he should be studied, and so a

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Speaker 1: real question should be why isn't what he's done studied

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Speaker 1: even more? And it's not. So that's a little sad.

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Speaker 1: But right now it doesn't look like those ten out

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Speaker 1: of eleven are being serviced. What can we do about that?

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Speaker 1: Is what I read about in the book. Let's talk

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Speaker 1: about one of the solutions. You write about alternative credentials.

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Speaker 1: What are they and how would they work? Uh for

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Speaker 1: for students coming from these disadvantage neighborhoods and schools? Yes,

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Speaker 1: so I I call it alternative certification. So I point

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Speaker 1: out the ten out of eleven that the current system

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Speaker 1: isn't working for, and I write in the book, uh,

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Speaker 1: you know, I once posed this question when Tiger Woods

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Speaker 1: was at the top of his game to my students

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Speaker 1: at Columbia. I said, you know, how do you beat

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Speaker 1: Tiger Woods? And my answer was don't play him at golf?

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Speaker 1: And the idea that I uh suggest in the book

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Speaker 1: is something I called alternative certification. And so I'll give

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Speaker 1: you an example Let's say you want to work in

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Speaker 1: the HR department at Microsoft. What I'm suggesting is Microsoft

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Speaker 1: should simply specify which tests, courses or certificates in lieu

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Speaker 1: of a college degree that they would consider when judging

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Speaker 1: applicants for a high paying job in that particular department.

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Speaker 1: So these these things could include a simple literacy asked,

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Speaker 1: an online course certificate program, or even a game based test.

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Speaker 1: UH Embolists, together with Mackenzie, has created game based tests

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Speaker 1: that measured decision making in critical thinking skills. So it

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Speaker 1: doesn't have to be a standard test. There's a lot

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Speaker 1: of different ways you can test for talent. And so

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Speaker 1: what I suggest in the book is that leading companies

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Speaker 1: like Google, Microsoft, Amazon, JP, Morgan, UH, they wouldn't have

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Speaker 1: to create these tests or courses or administered them. What

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Speaker 1: they would do is merely make public a list of

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Speaker 1: which tests, which courses, which certificates would be considered in

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Speaker 1: lieuisver college degree when selecting candidates for specific jobs. What's

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Speaker 1: the hire for passing these things? That's when the whole

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Speaker 1: ecosystem was developed. Sorry, well I was going to ask,

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Speaker 1: what's the response been like from corporate America? Well, you know,

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Speaker 1: the book just came out. So I'm very hopeful, and

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Speaker 1: one of the reasons I'm talking on your show, Barry,

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Speaker 1: is to get this idea out there. UH. It's already

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Speaker 1: starting in ways, but the idea behind it is once

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Speaker 1: there's a buyer. In other words, all these big, big

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Speaker 1: companies have to do is make the list public what

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Speaker 1: we will consider in lieu of a college degree, and

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Speaker 1: then UH, the whole ecosystem hopefully will develop of supporting

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Speaker 1: online resources and tutoring services UH would develop to help

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Speaker 1: applicants pass these tests and courses and meet the new

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Speaker 1: demand from these top companies. The great thing about this

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Speaker 1: is none of it would require government involvement and the

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Speaker 1: cost would be much much lower than the current systems. Now,

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Speaker 1: you might ask, what do you do for students with

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Speaker 1: disadvantaged backgrounds from disdvan advantaged backgrounds, and I would assume

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Speaker 1: there would also developed as long as there was this

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Speaker 1: demand at the end of the day for passing these courses.

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Speaker 1: Is that there would also be prerequisite courses that would

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Speaker 1: develop as well, whether online or in person, teaching, and

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Speaker 1: supporting resources that would all be rated like Uber drivers

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Speaker 1: and Airbnb rentals. Once again, none of it would require

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Speaker 1: government involvement. They wouldn't be setting standards. Uh, they wouldn't

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Speaker 1: need government funding. Now this is already starting. Google has

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Speaker 1: already created six months certificate courses in a few technical areas,

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Speaker 1: which if you pass, they'll consider your for a job.

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Speaker 1: But I'm suggesting something much simpler, where companies just set

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Speaker 1: standards of which existing tests or new tests that they

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Speaker 1: would look at, our courses or certificates that you could

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Speaker 1: receive that they'll consider. So I think it would really

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Speaker 1: jump start this whole sort of runaround, you know, in

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Speaker 1: other words, don't play him and golf, run around the

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Speaker 1: current system because it's just so unfair. This is what

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Speaker 1: the ten out of eleven could try to pursue without

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Speaker 1: any government assistance. It's not ideal, it's not first choice.

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Speaker 1: Of course, we want great schools and we could keep

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Speaker 1: working at it. But this is something these major corporations

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Speaker 1: can do right now. Set these standards, and then hopefully

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Speaker 1: this whole ecosystem will get going. Quite fascinating. Let's talk

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Speaker 1: a little bit about too big to fail banks. You wrote,

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Speaker 1: quote banks are almost wired to get into trouble unquote. Explain, Well,

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Speaker 1: it's pretty straightforward. You know, money is spongible, So who

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Speaker 1: pays the most of depositors, who lends money to borrowers

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Speaker 1: the cheapest and with the easiest terms is who wins? Uh?

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Speaker 1: The industry is competitive and it's very leveraged, So pretty straightforward.

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Speaker 1: Why thanks are wired to get into trouble? So what

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Speaker 1: can we do to make these banks no longer too

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Speaker 1: big to fail? How do we make them safer for

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Speaker 1: both taxpayers and investors? Well, you know, in two after

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Speaker 1: the two banking crisis, there are plenty of regulations, including

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Speaker 1: dot frank, and it's made the whole system a lot

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Speaker 1: safer than it was. But more regulations have very high costs.

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Speaker 1: There's a lot of repercussions from a lot of regulations.

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Speaker 1: You know, mostly only big banks can handle them. Smaller

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Speaker 1: banks are dropping and closing like flies, and almost no

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Speaker 1: new small bank charters are being applied for because small

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Speaker 1: banks can't afford all these regulations. Also, under the system,

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Speaker 1: banks are penalized for making small business loans. It hits

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Speaker 1: them from the new risk factors. So corporate bank loans

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Speaker 1: under a million dollars dropped by sev two thousand eight,

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Speaker 1: And we know what's happened to new business formation, it's

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Speaker 1: way way down. The other problem is we also have

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Speaker 1: it solved too big to fail. The Mineapolis Feeds still

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Speaker 1: came out with a study saying that it's still two

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Speaker 1: out of three chance there will need another government bail

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Speaker 1: out in the next century. And so we're hurting small

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Speaker 1: businesses and small banks, and we have itself too big

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Speaker 1: to fail with all these regulations. So I write in

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Speaker 1: the book about I tell a story about in the

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Speaker 1: late eighteenth century early nineteenth century, UH, the English used

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Speaker 1: to shift their prisoners to Australia, and in one of

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Speaker 1: the earliest trips about prisoners died along the way, which

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Speaker 1: was horrific. And so how would you solve a problem

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Speaker 1: like that. Well, obviously you could solve it with more

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Speaker 1: regulations covering the medical care for the prisoners and food

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Speaker 1: on board and safety and cleanliness, and put more government

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Speaker 1: monitors on board. There's a lot of things you could do,

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Speaker 1: uh to try to solve that problem. The other thing

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Speaker 1: you could do is to change the incentives from the

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Speaker 1: beginning and say to the ship captains, will pay you

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Speaker 1: for the prisoners to get to Australia alive and well,

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Speaker 1: and will penalize to you for those who don't. Right,

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Speaker 1: So it's setting incentives up from the beginning rather than

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Speaker 1: micromanaging all the regulation. And so I suggest sort of

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Speaker 1: the same thing with banks. You know, and a restaurant fails,

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Speaker 1: the economy doesn't skip a beat. It's not true with banks. Uh,

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Speaker 1: the financial systems too big, it's too intertwined, and and

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Speaker 1: we need to do something right now. We're really the backstop.

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Speaker 1: We do have to bail out the banks if things

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Speaker 1: turn bad, especially the biggest ones. And so one of

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Speaker 1: the clear answers would be, if you know there's less

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Speaker 1: than ten percent equity cushion in the banks. There have

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Speaker 1: been a lot of things in Dot frank that, you know,

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Speaker 1: go to risk controls, types of equity, things of that nature.

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Speaker 1: But I suggest in the book that if we've brought

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Speaker 1: if we set the incentives up correctly up front, so

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Speaker 1: that you have twenty to equity, and what I suggest

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Speaker 1: is a new type of preferred, not not common equity,

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Speaker 1: but to increase that ten percent common equity to twenty

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Speaker 1: or thirty percent using a new type of preferential preferred,

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Speaker 1: where the preferred is deductible for the bank, it's tax

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Speaker 1: free for the holders. So obviously it's helping the banks.

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Speaker 1: But when things go back to the banks, if you

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Speaker 1: now have thirty equity, anything that goes back to the

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Speaker 1: bank's problems is like the restaurant failing. No one really cares.

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Speaker 1: It's an equity holder, and I suggest the incentives are

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Speaker 1: set up that both the board and management are incented

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Speaker 1: by the combined value of the equity, and they preferred

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Speaker 1: as if they're staple together is one security. So we

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Speaker 1: set the incentives up correctly. You still have a leveraged

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Speaker 1: return from the common equity portion, but if there's any problems,

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Speaker 1: it would be covered by the preferred holders. It sounds

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Speaker 1: like we're giving a bonus to the banks to make

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Speaker 1: this deductible for the banks and to make a tax free,

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Speaker 1: But actually we won't have too Big to Fail anymore.

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Speaker 1: Will help plenty of equity, and they'll cover their own.

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Speaker 1: The losses will fall where they should, the incentives will

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Speaker 1: be aligned correctly. From the beginning, it's it's a pretty

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Speaker 1: simple solution to a difficult problem. Right. That would require

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Speaker 1: a little bit of legislation to both create that class

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Speaker 1: have preferred, make it deductible to the bank, and make

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Speaker 1: a tax free to the investors is and essentially you're

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Speaker 1: asking the investing public to step in in place of

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Speaker 1: the taxpayer to make sure banks have a big enough

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Speaker 1: capital cushion. Right, we're already supporting banks for good reason. Right,

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Speaker 1: we already support them so that depositors don't lose their

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Speaker 1: money and we don't have another depression. So this is

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Speaker 1: more up front way of doing it. If we're just

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Speaker 1: a backstop that's going to have to back stup in

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Speaker 1: a crisis, we're there, but it's kind of hidden here.

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Speaker 1: We take care of it up front. Yes, we're giving

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Speaker 1: a benefit just for the preferred but we're very upfront

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Speaker 1: about it. And we then align the incentives exactly how

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Speaker 1: they should be. That share hoopers, whether the preferred to common,

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Speaker 1: will take all the losses, not the government. And this

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Speaker 1: solves too big to fail because even if there's a

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Speaker 1: major crisis and banks um lose their capital, it doesn't

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Speaker 1: wipe them out. If I remember in the book, banks

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Speaker 1: currently a running seven eight of capital reserve? Is that

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Speaker 1: about right? They are? And I go, I go through

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Speaker 1: the map, I mean, you know, with all the different

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Speaker 1: risk controls, and and then there's uh subordinated debt that

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Speaker 1: turns into equity now. But I argue in the book

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Speaker 1: that we're not going to really pull that lever. We're

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Speaker 1: not going to force some big bank to convert its

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Speaker 1: subordinated debt into equity, even though that's one of the

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Speaker 1: options we now have. And and that's because it will

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Speaker 1: cause a crisis of its own. It will cause a cascade.

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Speaker 1: And that's what Neil Cashcarry argues too at the Minneapolis

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Speaker 1: head and I agree with that. So if we make

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Speaker 1: this new type of preferred available, it becomes strictly voluntary

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Speaker 1: for the banks to do it, or are they obligated

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Speaker 1: to change their capital structure to have UM cap it

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Speaker 1: all in reserve with this new type of preferred share class. Right,

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Speaker 1: So if they want to be free of certain regulations

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Speaker 1: that are protective otherwise, they can issue this preferred and

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Speaker 1: therefore take the risk themselves. Otherwise they'd be subject to

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Speaker 1: a lot of restrictions on the type of loans they

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Speaker 1: can make and things of that nature. So, which is

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Speaker 1: stuff we're already doing quite fascinating. Let's talk a little

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Speaker 1: bit about what's going on with young people today investing UM.

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Speaker 1: What do you think of the rise of Robin hood investors.

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Speaker 1: Is this a good thing or is this just board

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Speaker 1: millennials at home without access to sports or socializing. Sorry,

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Speaker 1: I don't think it's a great thing. I think it

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Speaker 1: is good to be exposed to investing for most people,

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Speaker 1: and to be thinking about saving for retirement. But I uh,

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Speaker 1: you know, when we saw on the internet bubble, you know,

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Speaker 1: you know, trade and the other discount brokers, most of

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Speaker 1: those people lost a lot of money. I think you're

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Speaker 1: speculating with out knowing what you're doing is not a

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Speaker 1: great idea. And so you know, I wrote a book

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Speaker 1: called The Big Secret, and I think you've heard me

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Speaker 1: say it's still a big because no one bought that

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Speaker 1: particular book. But it talks about the best performing mutual

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Speaker 1: fund I wrote in two thousand eleven for the decade

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Speaker 1: two thousand or two thousand and ten, and that one

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Speaker 1: was a year when during a decade where the market

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Speaker 1: was flat. Uh, Yet the average investor in that fund

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Speaker 1: managed to lose eleven percent by moving in and out

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Speaker 1: at all the wrong time. And that's because people are emotional.

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Speaker 1: If you don't really understand what you're investing in, you

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Speaker 1: pile in When things are going well, you pile out

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Speaker 1: when they're not going well. When something's working, you put

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Speaker 1: more in. When it's not working, you put less in,

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Speaker 1: and you do you make all the wrong moves, and

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Speaker 1: I think when things turn around for these investors, it'll

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Speaker 1: end up not great. So you've been teaching for a

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Speaker 1: long time, not only lecturing NBA students at Columbia, but

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Speaker 1: you also UH teach a bunch of ninth graders at

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Speaker 1: high school in Harlem. What's the difference between those two

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Speaker 1: students and what do you try and communicate to each group? Sure, well,

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Speaker 1: it's an interesting question. You know. I taught a couple

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Speaker 1: of years of the ninth graders for a semester and

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Speaker 1: I tried to at a very early age, explained to

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Speaker 1: them the concept of compounding, and I actually put on

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Speaker 1: the UH front of their UH little notebooks and a

400
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Speaker 1: compound interest example where if you start saving an age

401
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Speaker 1: nineteen and you put in two thousand dollars a year,

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Speaker 1: and you do that for seven years and you're in

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Speaker 1: ten percent on your money and then you never put

404
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Speaker 1: in another nickel. You just do it for seven years

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Speaker 1: starting at nineteen. The other example is you start at

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Speaker 1: age in say two thousand dollars a year invested at

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Speaker 1: ten percent and save for forty years, meaning put in

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Speaker 1: two thousand dollars a year starting at age for forty years.

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Speaker 1: The the person who started investing at nine teen and

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Speaker 1: only put in seven payments of two thousand ends up

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Speaker 1: earning more money just with seven payments by the time

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Speaker 1: they're sixty five. Then the person who started seven years

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Speaker 1: later in age and put in four meat forty payments.

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Speaker 1: So it just talks about how starting to save and

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Speaker 1: invest early is very important, and so teaching it in

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Speaker 1: ninth grade is important for students to understand that concept.

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Speaker 1: My average NBA students already twenty seven, so of course

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Speaker 1: they had a lot going for them, and so I'm

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Speaker 1: not too worried about them. But it is a huge

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Speaker 1: advantage to start early, and I made that very clear

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Speaker 1: to both sets of students. That's an astonishing data point

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Speaker 1: that a seven year head start beats investing annually for

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Speaker 1: the same amount for thirty years. What do you think

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Speaker 1: of ideas that have been floated by people. The Governor

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Speaker 1: of New Jersey floated the idea of baby bonds that

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Speaker 1: we gift every person born in the United States of

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Speaker 1: five thousand dollars in an account that they can't touch

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Speaker 1: till they're either twenty five or or for college. What

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Speaker 1: are your thoughts on on something like that. Well, I

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Speaker 1: do like, uh that idea. I think it takes advantage

431
00:26:14,760 --> 00:26:17,479
Speaker 1: of compounding. I don't think it's nearly enough. I mean

432
00:26:17,520 --> 00:26:23,080
Speaker 1: the statistics retirement savings UH, for most people are are

433
00:26:23,200 --> 00:26:26,800
Speaker 1: pretty horrific. Nearly half of working age families don't have

434
00:26:26,840 --> 00:26:32,280
Speaker 1: any retirement savings. UH. The median family between ages thirty

435
00:26:32,280 --> 00:26:34,439
Speaker 1: two and sixty one have about five thousand dollars in

436
00:26:34,520 --> 00:26:39,120
Speaker 1: retirement savings. The average working age, low income, Black, Hispanic,

437
00:26:39,200 --> 00:26:43,240
Speaker 1: or non college graduate have no retirement savings. And here's

438
00:26:43,240 --> 00:26:46,520
Speaker 1: the terrible statistics. Nine intent families in the top fifth

439
00:26:46,520 --> 00:26:49,639
Speaker 1: of the income chain have retirement savings. Nine intent in

440
00:26:49,680 --> 00:26:53,520
Speaker 1: the bottom tip do not. So we need to do something.

441
00:26:54,600 --> 00:26:57,320
Speaker 1: And if you earned between seven and thirteen dollars a year,

442
00:26:57,720 --> 00:27:00,280
Speaker 1: or you earned I mean an hour or hand or

443
00:27:00,280 --> 00:27:03,879
Speaker 1: twelve dollars an hour, which is about hourly workers do.

444
00:27:05,640 --> 00:27:09,560
Speaker 1: But so security get you about nine thou dollars a year,

445
00:27:11,400 --> 00:27:15,760
Speaker 1: so you need retirement savings. It's a real, real problem,

446
00:27:15,960 --> 00:27:19,400
Speaker 1: and we don't have a system that really takes care

447
00:27:19,440 --> 00:27:21,919
Speaker 1: of that. So you know, what I suggest in the

448
00:27:21,960 --> 00:27:27,679
Speaker 1: book is that, uh, compound interest is something that we

449
00:27:27,720 --> 00:27:29,719
Speaker 1: can take advantage of that we don't. We're kind of

450
00:27:29,760 --> 00:27:33,119
Speaker 1: blowing it as a country. And so right now, so

451
00:27:33,280 --> 00:27:35,359
Speaker 1: security is really based on what you put in is

452
00:27:35,400 --> 00:27:38,080
Speaker 1: sort of related to what you get out. And so

453
00:27:38,160 --> 00:27:43,000
Speaker 1: what I suggest is really putting into SoC Security gets

454
00:27:43,080 --> 00:27:45,680
Speaker 1: capped at a hundred thirty seven thousand dollars a year,

455
00:27:46,359 --> 00:27:49,520
Speaker 1: So I don't suggest raising taxes, but I do suggest

456
00:27:50,200 --> 00:27:56,760
Speaker 1: that high earners keep contributing to their retirement above a

457
00:27:56,800 --> 00:27:59,600
Speaker 1: hundred thirty seven thousand. They get to keep eight percent

458
00:27:59,680 --> 00:28:02,919
Speaker 1: of it and then get the tax benefits of saving that.

459
00:28:03,000 --> 00:28:05,160
Speaker 1: So it goes into like a four or one K account,

460
00:28:05,640 --> 00:28:09,320
Speaker 1: but the remaining fifteen or that they don't get to keep,

461
00:28:09,320 --> 00:28:12,040
Speaker 1: that gets taken off the top now gets put into

462
00:28:12,040 --> 00:28:15,520
Speaker 1: the count. Uh, the accounts of low earners and people

463
00:28:15,600 --> 00:28:18,159
Speaker 1: just started working so they can take advantage of this

464
00:28:18,240 --> 00:28:20,720
Speaker 1: compound interest at an early age. They don't have any

465
00:28:20,720 --> 00:28:23,960
Speaker 1: savings outside of Social Security, and so I suggest a

466
00:28:24,040 --> 00:28:28,480
Speaker 1: four one K type account for everyone at funded by

467
00:28:28,520 --> 00:28:31,760
Speaker 1: the higher earners. Yet the higher earners really are getting

468
00:28:31,760 --> 00:28:34,800
Speaker 1: the tax benefit of being able to put their amount

469
00:28:34,800 --> 00:28:37,320
Speaker 1: they put in above one thirty seven into their own

470
00:28:37,960 --> 00:28:41,640
Speaker 1: tax advantage savings. So, uh, it's not really raising taxes,

471
00:28:41,720 --> 00:28:44,560
Speaker 1: it's giving them advantage, but it's also helping out those

472
00:28:44,600 --> 00:28:46,560
Speaker 1: who need it the most. So let me make sure

473
00:28:46,600 --> 00:28:49,720
Speaker 1: I understand this, because this is kind of complicated, but

474
00:28:49,840 --> 00:28:54,640
Speaker 1: it's really very intriguing. Right now, your KER contributions, your

475
00:28:54,680 --> 00:28:59,800
Speaker 1: Social Security contributions UM top out at about one thirty

476
00:29:00,000 --> 00:29:02,040
Speaker 1: of any year. That number creeps up a tiny little

477
00:29:02,080 --> 00:29:06,600
Speaker 1: bit each year adjusted for inflation. But effectively, if you're

478
00:29:06,760 --> 00:29:10,800
Speaker 1: Jeff bezoso elon Musk, you top out on January one,

479
00:29:10,920 --> 00:29:14,000
Speaker 1: you're done paying FIKA for the year. What what you're

480
00:29:14,000 --> 00:29:19,200
Speaker 1: suggesting is everything above one thirty seven or some percentage

481
00:29:19,200 --> 00:29:22,240
Speaker 1: above one thirty seven you get to put into a

482
00:29:22,400 --> 00:29:25,880
Speaker 1: four oh one K like funds over and above what

483
00:29:26,040 --> 00:29:29,680
Speaker 1: your current limitations are. Eight percent of what you move

484
00:29:29,760 --> 00:29:32,480
Speaker 1: in goes in as if it's a pre tax investment,

485
00:29:32,600 --> 00:29:34,640
Speaker 1: so when you take it out on the other end,

486
00:29:34,680 --> 00:29:38,360
Speaker 1: you're not paying taxes, and twenty of it gets moved

487
00:29:38,360 --> 00:29:43,640
Speaker 1: into a fund that gets put into individual investors, a

488
00:29:43,760 --> 00:29:48,520
Speaker 1: similar for oh one K like funds that they manage

489
00:29:48,520 --> 00:29:51,200
Speaker 1: and you start doing this for pick a year, twenty

490
00:29:51,240 --> 00:29:54,200
Speaker 1: five year olds and younger. Uh So, in other words,

491
00:29:54,280 --> 00:29:58,960
Speaker 1: you're planning about something to fix the looming retirement crisis

492
00:29:59,160 --> 00:30:03,000
Speaker 1: for year olds. Is that a fair assessment. Yeah, so

493
00:30:03,080 --> 00:30:05,600
Speaker 1: it could start earlier than Whenever you start working and

494
00:30:05,640 --> 00:30:09,000
Speaker 1: start paying in you get a big supplement. Everyone gets

495
00:30:09,000 --> 00:30:12,240
Speaker 1: a four oh one take account, which I think everyone

496
00:30:12,240 --> 00:30:16,400
Speaker 1: should have to take advantage of. Uh compounding, So we

497
00:30:16,600 --> 00:30:20,280
Speaker 1: go to both young people and low orders, go to both.

498
00:30:20,880 --> 00:30:24,320
Speaker 1: That's quite fascinating. Let's talk a little bit about something

499
00:30:24,360 --> 00:30:29,160
Speaker 1: that hasn't gotten much press lately, and that's what we

500
00:30:29,280 --> 00:30:34,160
Speaker 1: do with immigrants in the United States. What advantages does

501
00:30:34,240 --> 00:30:40,160
Speaker 1: the country get from a broader and more open immigration policy. Well,

502
00:30:40,160 --> 00:30:42,880
Speaker 1: that's a great question, and of course immigration is a

503
00:30:42,920 --> 00:30:47,440
Speaker 1: controversial topic. There's one area that's very clear and we're

504
00:30:47,480 --> 00:30:51,240
Speaker 1: completely blowing that and it's skilled immigration. According to the

505
00:30:51,240 --> 00:30:55,560
Speaker 1: Business Roundtable, we come in embarrassingly second to last among

506
00:30:55,640 --> 00:31:00,240
Speaker 1: developed countries welcoming skilled immigrants. The only country where better

507
00:31:00,320 --> 00:31:05,000
Speaker 1: at uh at admitting skilled immigrants is Japan, and Japan

508
00:31:05,720 --> 00:31:10,400
Speaker 1: literally discourages immigration. And not only that, you have to

509
00:31:10,440 --> 00:31:13,080
Speaker 1: speak Japanese pretty much. You know the United States has

510
00:31:13,120 --> 00:31:15,480
Speaker 1: a huge advantage. You know, English is the universal language

511
00:31:15,520 --> 00:31:18,720
Speaker 1: of business and science. Uh, second to last is a

512
00:31:18,760 --> 00:31:22,200
Speaker 1: really bad spot for US for skilled immiguration. And what's

513
00:31:22,240 --> 00:31:25,600
Speaker 1: the big deal about that. Well, you know, I disclosed

514
00:31:25,600 --> 00:31:29,120
Speaker 1: in common sense the book, uh that skilled immigrants are

515
00:31:29,120 --> 00:31:32,080
Speaker 1: actually in natural resources. We make, if you want to

516
00:31:32,080 --> 00:31:34,280
Speaker 1: put it that way, half a million to a million

517
00:31:34,320 --> 00:31:36,840
Speaker 1: dollars on each one of them and today's dollars and

518
00:31:36,960 --> 00:31:39,880
Speaker 1: for everyone we take in. And what that is is

519
00:31:39,920 --> 00:31:43,000
Speaker 1: the math of of those immigrants and their kids. That's

520
00:31:43,080 --> 00:31:47,320
Speaker 1: today's dollars of how much they contribute versus how much

521
00:31:47,320 --> 00:31:49,760
Speaker 1: they get back from the government. So we make a

522
00:31:49,760 --> 00:31:51,800
Speaker 1: half a million to a million dollars for each skilled

523
00:31:51,800 --> 00:31:54,640
Speaker 1: immigrant we take in. We also get close to two

524
00:31:54,760 --> 00:31:58,400
Speaker 1: jobs for people already here. So for every skilled immigrant

525
00:31:58,440 --> 00:32:01,440
Speaker 1: we take in, they create two jobs for people already here.

526
00:32:02,400 --> 00:32:05,320
Speaker 1: So we're not only get a pile of money, we

527
00:32:05,400 --> 00:32:08,480
Speaker 1: also get two jobs. It's a it's a free gold mine.

528
00:32:09,040 --> 00:32:11,920
Speaker 1: And I'll tell you why we should be encouraging it.

529
00:32:12,600 --> 00:32:17,880
Speaker 1: Immigrants have founded of US startups over a billion dollars.

530
00:32:18,440 --> 00:32:21,000
Speaker 1: They're twice as likely to start a business as natives.

531
00:32:21,840 --> 00:32:24,840
Speaker 1: As natives are UH they're responsible for a quarter of

532
00:32:24,840 --> 00:32:28,840
Speaker 1: the productivity growth over the last twenty years, and immigrants

533
00:32:28,880 --> 00:32:34,040
Speaker 1: are their children have founded two six of the fortune companies,

534
00:32:34,760 --> 00:32:37,800
Speaker 1: which is pretty amazing. There was a data point in

535
00:32:37,840 --> 00:32:41,800
Speaker 1: the book that I found astonishing. Microsoft had done an

536
00:32:41,800 --> 00:32:45,960
Speaker 1: internal study and for each H one B one visa

537
00:32:46,280 --> 00:32:49,480
Speaker 1: immigrant that they bring to the US to work for

538
00:32:49,520 --> 00:32:55,880
Speaker 1: them internally at Microsoft, they create four additional jobs. How

539
00:32:55,920 --> 00:32:59,800
Speaker 1: on earth is that possible? That that just sounds astonishing. Well,

540
00:33:00,320 --> 00:33:01,800
Speaker 1: you know, if you can get the best and brightest

541
00:33:01,840 --> 00:33:05,080
Speaker 1: from around the world and hire someone like that, they

542
00:33:05,120 --> 00:33:09,880
Speaker 1: need support and they create value. And so Bill that

543
00:33:09,920 --> 00:33:12,120
Speaker 1: was a quote from Bill Gates that they did a

544
00:33:12,240 --> 00:33:17,000
Speaker 1: study that at Microsoft. I said, across the country, it's

545
00:33:17,040 --> 00:33:19,720
Speaker 1: two jobs for everyone we take in at Microsoft, I

546
00:33:19,760 --> 00:33:22,000
Speaker 1: guess it's such a high level that they're taking and

547
00:33:22,120 --> 00:33:25,479
Speaker 1: they create four jobs. So it's pretty pretty exciting. The

548
00:33:25,480 --> 00:33:29,280
Speaker 1: only problem is we don't encourage them to come. I said,

549
00:33:29,280 --> 00:33:32,360
Speaker 1: we came in second to last. Our H one B program,

550
00:33:32,400 --> 00:33:36,600
Speaker 1: which allows skilled immigrants to come in UH, is broken.

551
00:33:36,680 --> 00:33:39,920
Speaker 1: It's difficult, it takes a long time, it's expensive, it's

552
00:33:40,000 --> 00:33:43,600
Speaker 1: very uncertain whether someone can stay as very limited we

553
00:33:43,680 --> 00:33:47,000
Speaker 1: exceed our cap within about five three times our cap

554
00:33:47,040 --> 00:33:50,480
Speaker 1: apply within the first five days of eligibility every year,

555
00:33:51,040 --> 00:33:53,880
Speaker 1: So we're discouraging them from coming in, and we should

556
00:33:53,920 --> 00:33:58,080
Speaker 1: encourage them. Countries by Canada Australia take anyone who will

557
00:33:58,160 --> 00:34:04,120
Speaker 1: come who meet the government standard uh of skilled a bility,

558
00:34:04,160 --> 00:34:08,000
Speaker 1: you know, education and skill, and we don't. We actually

559
00:34:08,040 --> 00:34:11,320
Speaker 1: actively discourage them, and we actually have a better system

560
00:34:11,320 --> 00:34:15,279
Speaker 1: than they do. In some There was an article in

561
00:34:15,400 --> 00:34:20,600
Speaker 1: Wired over the summer that discusses how Toronto has been

562
00:34:20,800 --> 00:34:25,040
Speaker 1: feasting on tech workers that were frustrated with the U

563
00:34:25,320 --> 00:34:28,840
Speaker 1: s H one B, visa programs and green card programs

564
00:34:28,840 --> 00:34:33,640
Speaker 1: in general immigration programs. Are we letting some of our

565
00:34:33,880 --> 00:34:40,360
Speaker 1: most value creating and productive tech workers escape from America

566
00:34:40,480 --> 00:34:44,600
Speaker 1: when we should really be much more welcoming and giving

567
00:34:44,640 --> 00:34:47,480
Speaker 1: them a path to citizenship here? Yeah, I think that's

568
00:34:47,480 --> 00:34:49,239
Speaker 1: pretty clear. You know, I talked about all the money

569
00:34:49,280 --> 00:34:51,160
Speaker 1: we would you know, I called it a free goal mine.

570
00:34:51,440 --> 00:34:53,799
Speaker 1: It's crazy we're throwing it away. I talked about all

571
00:34:53,800 --> 00:34:55,960
Speaker 1: the money and the jobs we create by taking them in.

572
00:34:56,880 --> 00:34:58,919
Speaker 1: But we actually have a system that should work even

573
00:34:58,960 --> 00:35:02,000
Speaker 1: better than kinda our Astralia. In Canada, Australia. They set

574
00:35:02,000 --> 00:35:04,319
Speaker 1: government standards of who they'll let in, you know what,

575
00:35:04,320 --> 00:35:07,960
Speaker 1: what kind of skilled labor. But that doesn't mean they're

576
00:35:07,960 --> 00:35:10,239
Speaker 1: a good fit for a particular open job, or that

577
00:35:10,280 --> 00:35:12,680
Speaker 1: these people are ambitious. They just are people who meet

578
00:35:12,719 --> 00:35:15,600
Speaker 1: government standards. The way we work with the H one

579
00:35:15,640 --> 00:35:17,919
Speaker 1: B is that there is an employer who actually wants

580
00:35:17,960 --> 00:35:20,600
Speaker 1: to give you a job. So it's very direct. In

581
00:35:20,600 --> 00:35:23,319
Speaker 1: other words, it's a one to one perfect match. And

582
00:35:23,400 --> 00:35:26,200
Speaker 1: so I suggest that we use that system that if

583
00:35:26,200 --> 00:35:29,760
Speaker 1: an employers willing to pay someone sixty or seventy thousand

584
00:35:29,800 --> 00:35:32,920
Speaker 1: dollars a year, uh, we can take as many of

585
00:35:32,920 --> 00:35:36,959
Speaker 1: those as we want, as long as that employers willing

586
00:35:37,000 --> 00:35:41,960
Speaker 1: to pay a tax uh on top of that salary

587
00:35:42,120 --> 00:35:44,279
Speaker 1: in addition to that salary to the government, so you

588
00:35:44,280 --> 00:35:46,800
Speaker 1: can take anyone you want. It ends up being cheaper

589
00:35:46,800 --> 00:35:49,280
Speaker 1: than the current H one B program that's very long.

590
00:35:49,760 --> 00:35:53,000
Speaker 1: It's much more certain. If you pay tax for five years,

591
00:35:53,040 --> 00:35:57,120
Speaker 1: you become eligible for a green card. Uh. You know,

592
00:35:57,760 --> 00:36:01,600
Speaker 1: it's just unbelievable. I mean countries that opportunity and political

593
00:36:01,680 --> 00:36:04,960
Speaker 1: freeman and safety things we have in spades, they have

594
00:36:05,040 --> 00:36:08,320
Speaker 1: what's called a brain drain and we should be a

595
00:36:08,360 --> 00:36:12,320
Speaker 1: brain magnet. We have liberty, we have freedom, we have safety,

596
00:36:12,440 --> 00:36:16,720
Speaker 1: we have opportunity. So you know, the studies have shown

597
00:36:16,840 --> 00:36:21,880
Speaker 1: that if you survey, immigrants were first choice second places Germany,

598
00:36:21,960 --> 00:36:25,600
Speaker 1: and we beat them four to one. So we should

599
00:36:25,600 --> 00:36:28,600
Speaker 1: take every right person, take all that money, take all

600
00:36:28,600 --> 00:36:31,960
Speaker 1: those jobs that these skilled immigrants bring in. I think

601
00:36:31,960 --> 00:36:34,320
Speaker 1: it gets controversial because you know, we have the statue

602
00:36:34,320 --> 00:36:37,879
Speaker 1: of liberty. It's very important. Uh, bring me your tired,

603
00:36:37,920 --> 00:36:40,600
Speaker 1: your report. You know what about those secret refuge or

604
00:36:40,719 --> 00:36:44,360
Speaker 1: better life? So I'm not addressing that with skilled immigrants.

605
00:36:44,400 --> 00:36:46,920
Speaker 1: But what I can say is this, We're gonna make

606
00:36:46,960 --> 00:36:49,279
Speaker 1: so many money, so much money from taking you know,

607
00:36:49,520 --> 00:36:53,920
Speaker 1: a better skilled immigrants program that we can actually afford

608
00:36:53,960 --> 00:36:58,000
Speaker 1: to take in for each skilled immigrant, h one or

609
00:36:58,000 --> 00:37:00,120
Speaker 1: two skilled immigrants, we can take eight or two and

610
00:37:00,440 --> 00:37:03,040
Speaker 1: unskilled immigrants, you know, an afford to take them in.

611
00:37:03,239 --> 00:37:05,719
Speaker 1: Or we can bring eight or ten of kids who

612
00:37:05,760 --> 00:37:09,040
Speaker 1: are already here out of childhood poverty. So we can

613
00:37:09,080 --> 00:37:10,400
Speaker 1: do either one of those things. I don't want to

614
00:37:10,400 --> 00:37:12,120
Speaker 1: get in an argument which is a better thing to

615
00:37:12,160 --> 00:37:15,400
Speaker 1: do bring in more skilled immigrants, to give refuge to

616
00:37:15,400 --> 00:37:17,360
Speaker 1: people who want a better life. Here in our country

617
00:37:17,600 --> 00:37:19,319
Speaker 1: has been very important to our country, and I think

618
00:37:19,320 --> 00:37:22,040
Speaker 1: that's important or to help the people already here. I

619
00:37:22,080 --> 00:37:23,400
Speaker 1: don't want to get into the argument of what we

620
00:37:23,400 --> 00:37:25,080
Speaker 1: should do with all the free money that we get

621
00:37:25,080 --> 00:37:27,840
Speaker 1: by bringing in skilled immigrants. All I argued is we

622
00:37:27,840 --> 00:37:29,759
Speaker 1: should take the free money. What do you do with

623
00:37:29,800 --> 00:37:35,640
Speaker 1: the searcharge over hiring? What where does that pool of

624
00:37:35,719 --> 00:37:39,560
Speaker 1: capital go? Does that help the unskilled immigrants? Does that

625
00:37:39,680 --> 00:37:42,640
Speaker 1: help anytime there's a big pile of cash, people get

626
00:37:42,640 --> 00:37:45,319
Speaker 1: their eyes on it. What do you do with that money? Yeah,

627
00:37:45,360 --> 00:37:47,120
Speaker 1: well I would I would put it into job training

628
00:37:47,160 --> 00:37:50,239
Speaker 1: for the people already here. I would help, Uh, you

629
00:37:50,280 --> 00:37:54,239
Speaker 1: know employees already here. Obviously, with premium that you'd have

630
00:37:54,280 --> 00:37:57,240
Speaker 1: to pay for a skilled immigrant, you would hire someone

631
00:37:57,280 --> 00:38:01,520
Speaker 1: anybody who's here so that you don't have to pay extra.

632
00:38:01,880 --> 00:38:04,239
Speaker 1: So you're really taking in people that you can't get

633
00:38:04,280 --> 00:38:07,839
Speaker 1: here already. But there are people who need more training here.

634
00:38:08,280 --> 00:38:12,759
Speaker 1: That's been a big problem. UH. As we know, UH,

635
00:38:13,080 --> 00:38:16,640
Speaker 1: education is the answer. Job training is the answer to

636
00:38:16,840 --> 00:38:20,879
Speaker 1: people who aren't earning enough here, and we can take

637
00:38:21,880 --> 00:38:24,239
Speaker 1: and put into very good use in that area. That's

638
00:38:24,239 --> 00:38:27,200
Speaker 1: what I would suggest. How do you deal with some

639
00:38:27,320 --> 00:38:32,560
Speaker 1: of the structural racism that's built institutionally into the United

640
00:38:32,600 --> 00:38:37,000
Speaker 1: States that that Wired article I mentioned made reference to

641
00:38:37,040 --> 00:38:41,080
Speaker 1: a number of programmers and other tech people who were

642
00:38:41,080 --> 00:38:45,000
Speaker 1: people of color. And this was in both um the

643
00:38:45,080 --> 00:38:48,160
Speaker 1: Virginia part of the country outside of d C. And

644
00:38:48,360 --> 00:38:53,040
Speaker 1: outside of San Francisco. They felt that they were harassed

645
00:38:53,080 --> 00:38:57,400
Speaker 1: by police because they look different, even though both areas

646
00:38:57,400 --> 00:39:00,680
Speaker 1: are filled with immigrants working in tech. And when the

647
00:39:00,719 --> 00:39:04,319
Speaker 1: opportunity came to go to Toronto, they jumped on it.

648
00:39:04,920 --> 00:39:08,000
Speaker 1: How big an issue is this, right, Well, in Toronto

649
00:39:08,080 --> 00:39:11,160
Speaker 1: they had the chance for citizenship that they didn't have

650
00:39:11,239 --> 00:39:13,839
Speaker 1: here under our current systems. So that's part of it.

651
00:39:14,080 --> 00:39:17,200
Speaker 1: And this has been a problem across the world. You know,

652
00:39:17,239 --> 00:39:20,600
Speaker 1: it's happening in Europe where people who look a little

653
00:39:20,640 --> 00:39:25,759
Speaker 1: different aren't very well absorbed into the local economies. We

654
00:39:25,800 --> 00:39:28,200
Speaker 1: are the still the biggest melting pot in the world.

655
00:39:28,239 --> 00:39:30,959
Speaker 1: So with all our problems, we still have it better

656
00:39:31,000 --> 00:39:35,160
Speaker 1: than everyone else. Uh, And we can provide that opportunity

657
00:39:35,239 --> 00:39:37,680
Speaker 1: to immigrants here. They still want to come here. It's

658
00:39:37,680 --> 00:39:41,959
Speaker 1: still we're still the preference second place. Only a quarter

659
00:39:42,000 --> 00:39:44,000
Speaker 1: of the people want to go to there's a hundred

660
00:39:44,000 --> 00:39:50,439
Speaker 1: forty seven million skilled immigrants who want to come here. So, yes,

661
00:39:50,480 --> 00:39:52,839
Speaker 1: there are problems. I think we have less than many

662
00:39:52,840 --> 00:39:55,960
Speaker 1: other countries, particularly in Europe, and I think we're bigger

663
00:39:55,960 --> 00:39:58,080
Speaker 1: melting pot than any other country in the world. So

664
00:39:59,560 --> 00:40:03,120
Speaker 1: I I acknowledge the issues. I'm not going to argue

665
00:40:03,160 --> 00:40:07,160
Speaker 1: with them. I'm saying we're in comparison, we're still pretty

666
00:40:07,200 --> 00:40:11,240
Speaker 1: good shape. We're we're still welcoming in general. Let's pivot

667
00:40:11,400 --> 00:40:15,719
Speaker 1: to your bread and butter, value investing. You famously gave

668
00:40:15,760 --> 00:40:19,359
Speaker 1: away the magic formula, which has a wonderful long term

669
00:40:19,400 --> 00:40:22,800
Speaker 1: track record. Um, but as we've seen over the past

670
00:40:22,840 --> 00:40:27,680
Speaker 1: five years, value investing has struggled. What's going on in

671
00:40:27,680 --> 00:40:31,720
Speaker 1: in value land? Well, you know, I gave a speech,

672
00:40:31,880 --> 00:40:34,720
Speaker 1: uh you know in the last year called his value

673
00:40:34,719 --> 00:40:37,840
Speaker 1: investing debt and my answer was yes, no, maybe, and

674
00:40:37,880 --> 00:40:40,319
Speaker 1: I don't care. And the reason for that is it

675
00:40:40,400 --> 00:40:44,600
Speaker 1: really depends on how you define value. If you define

676
00:40:44,640 --> 00:40:48,959
Speaker 1: it like Russell or morning Star, where's low price book,

677
00:40:48,960 --> 00:40:51,400
Speaker 1: low price sales investing, it's had a tough time and

678
00:40:51,760 --> 00:40:55,920
Speaker 1: in extraordinary time last five years, growth the way they

679
00:40:55,960 --> 00:40:59,520
Speaker 1: define it at morning Star Russell has outperformed value by

680
00:40:59,560 --> 00:41:02,960
Speaker 1: eleven percent per year the last three years, at seventeen

681
00:41:03,000 --> 00:41:06,000
Speaker 1: percent per year growth outperforming value the last twelve months.

682
00:41:06,040 --> 00:41:10,240
Speaker 1: It's about these are phenomenal numbers. These are numbers bigger

683
00:41:10,520 --> 00:41:13,400
Speaker 1: than during the five years before the top of the

684
00:41:13,440 --> 00:41:18,640
Speaker 1: Internet pool. These are slightly bigger, slightly bigger to discrepancy

685
00:41:18,680 --> 00:41:22,239
Speaker 1: between growth and value. So your question is is very

686
00:41:22,280 --> 00:41:25,799
Speaker 1: good if you're define value like we do, which is

687
00:41:26,120 --> 00:41:28,400
Speaker 1: figure out what a business is worth and pay a

688
00:41:28,440 --> 00:41:32,520
Speaker 1: lot less. That's what I define as value investing. And

689
00:41:32,600 --> 00:41:34,360
Speaker 1: you know Ben Graha would say leave a large margin

690
00:41:34,400 --> 00:41:37,520
Speaker 1: of safety. Uh, then that's never really going to go

691
00:41:37,840 --> 00:41:41,839
Speaker 1: out of style. Uh. We we look at companies like

692
00:41:41,880 --> 00:41:44,360
Speaker 1: we're private equity firm, No private equity firm, vis a

693
00:41:44,440 --> 00:41:46,880
Speaker 1: business because it's a low price book or low price sales.

694
00:41:46,880 --> 00:41:50,360
Speaker 1: They're really looking at cash flows. Okay, So while in

695
00:41:50,400 --> 00:41:54,760
Speaker 1: a period like this where anything that's somewhat out of favor, Uh,

696
00:41:54,800 --> 00:41:56,840
Speaker 1: even though it's not low price book, low price sales,

697
00:41:57,120 --> 00:41:59,359
Speaker 1: they rhyme together. And if people are willing to pay

698
00:41:59,400 --> 00:42:01,719
Speaker 1: growth at a price, then that's not going to be

699
00:42:01,719 --> 00:42:05,239
Speaker 1: a good theory for any style of value investing. But

700
00:42:05,480 --> 00:42:08,319
Speaker 1: if either question is value investing dead or is it

701
00:42:08,360 --> 00:42:11,360
Speaker 1: going to continue? It comes down to how you define it,

702
00:42:11,880 --> 00:42:14,680
Speaker 1: and people will always come back to valuation. It's based

703
00:42:14,680 --> 00:42:16,920
Speaker 1: on cash flows and how much those cash flows are

704
00:42:16,960 --> 00:42:20,560
Speaker 1: gonna grow over time. As Buffet would always say, growth

705
00:42:20,560 --> 00:42:23,239
Speaker 1: and value were tied at the hip. They're part of

706
00:42:23,280 --> 00:42:27,359
Speaker 1: the same equation figuring out value. So once again we're

707
00:42:27,360 --> 00:42:32,080
Speaker 1: talking about definitions. So one of the interesting, um I

708
00:42:32,080 --> 00:42:35,360
Speaker 1: don't want to call it post mortems, but analyzes on

709
00:42:35,480 --> 00:42:38,840
Speaker 1: why growth has been doing so well relative to value

710
00:42:38,880 --> 00:42:42,800
Speaker 1: over the past ten years is that in an era

711
00:42:42,960 --> 00:42:48,080
Speaker 1: of low inflation and very low rates capital intensive industries

712
00:42:48,120 --> 00:42:52,680
Speaker 1: like tech and growth, it's a very inexpensive input to

713
00:42:52,760 --> 00:42:59,680
Speaker 1: them versus high inflation or higher rate regimes, value is

714
00:42:59,680 --> 00:43:03,200
Speaker 1: present entered an opportunity to shine because it apparently needs

715
00:43:03,640 --> 00:43:06,520
Speaker 1: less capital. What what are your thoughts on those sort

716
00:43:06,560 --> 00:43:11,160
Speaker 1: of analyzes of value versus growth these days? Right, Well,

717
00:43:11,200 --> 00:43:13,160
Speaker 1: that's a great question. And so if you're talking about

718
00:43:13,160 --> 00:43:16,120
Speaker 1: low price book investing, of course it's it's very relevant.

719
00:43:16,120 --> 00:43:19,840
Speaker 1: If you're talking about cast flow oriented investing, uh, it

720
00:43:19,920 --> 00:43:24,120
Speaker 1: gets a little bit more nuanced. So let me describe

721
00:43:24,160 --> 00:43:27,640
Speaker 1: it this way. For many many years before the last

722
00:43:27,719 --> 00:43:30,799
Speaker 1: decade or so stoff that were low price book low

723
00:43:30,840 --> 00:43:34,120
Speaker 1: price sales tended to have perform the market for periodittivetly

724
00:43:34,200 --> 00:43:38,680
Speaker 1: forty years. And what that meant is that if you're

725
00:43:38,719 --> 00:43:40,960
Speaker 1: buying a company close to its book value, me you

726
00:43:40,960 --> 00:43:43,440
Speaker 1: aren't giving much of a premium to the value of

727
00:43:43,480 --> 00:43:48,040
Speaker 1: the business underlying that purchase. Then if you want a

728
00:43:48,040 --> 00:43:50,759
Speaker 1: bucket a company selling at low price book, you were

729
00:43:50,800 --> 00:43:53,239
Speaker 1: tending to get more than your fair share of companies

730
00:43:53,480 --> 00:43:56,680
Speaker 1: that were out of favor. So it correlated well with

731
00:43:57,239 --> 00:43:58,920
Speaker 1: more than your fair share of companies that were out

732
00:43:58,920 --> 00:44:00,560
Speaker 1: of favor, and maybe two out of favor, and so

733
00:44:00,600 --> 00:44:03,719
Speaker 1: you could get an access return. Uh same way as

734
00:44:03,800 --> 00:44:06,759
Speaker 1: momentum has worked for thirty forty years, not just in

735
00:44:06,800 --> 00:44:09,239
Speaker 1: this country but across the globe. But let's say it

736
00:44:09,280 --> 00:44:12,759
Speaker 1: didn't work for the next two years. It could be

737
00:44:12,840 --> 00:44:14,839
Speaker 1: that it's just cyclically out of favor. It works over

738
00:44:14,840 --> 00:44:16,440
Speaker 1: the long term, you just have to be patient. Or

739
00:44:16,440 --> 00:44:18,359
Speaker 1: it could be momentum doesn't work over the next two

740
00:44:18,400 --> 00:44:21,640
Speaker 1: years because the trade has become crowded and it's degraded,

741
00:44:22,040 --> 00:44:24,879
Speaker 1: and that's why it didn't work two years from now.

742
00:44:24,920 --> 00:44:27,840
Speaker 1: I wouldn't know the answer if it is momentum just

743
00:44:27,880 --> 00:44:30,080
Speaker 1: cyclically out of favor, or is the trade now because

744
00:44:30,080 --> 00:44:31,600
Speaker 1: it's not so hard to figure out if stock used

745
00:44:31,640 --> 00:44:33,719
Speaker 1: to be down here and now it's up here. Has

746
00:44:33,760 --> 00:44:36,680
Speaker 1: it become crowded and degraded because everyone knows about it

747
00:44:36,840 --> 00:44:39,040
Speaker 1: two years from now, I wouldn't know the answer. So

748
00:44:39,200 --> 00:44:42,560
Speaker 1: the way I'd answer your question is this low price book,

749
00:44:42,560 --> 00:44:45,319
Speaker 1: low price sales, momentum or all things that in the

750
00:44:45,400 --> 00:44:49,640
Speaker 1: past had correlated with good returns. We really look for

751
00:44:49,719 --> 00:44:52,640
Speaker 1: causation and since stocks or ownership shares of business and

752
00:44:52,640 --> 00:44:56,680
Speaker 1: we're valuing them just like a private equity investor would, okay,

753
00:44:56,680 --> 00:44:59,600
Speaker 1: and that's based on past flows, you know, or the

754
00:44:59,600 --> 00:45:02,120
Speaker 1: intention those earning money, they're not in earning money. Those

755
00:45:02,160 --> 00:45:04,960
Speaker 1: are questions that translated to cash flow and how much

756
00:45:05,000 --> 00:45:06,640
Speaker 1: my paying for that cash flow and how much my

757
00:45:06,719 --> 00:45:10,120
Speaker 1: paying for that growth. And so you know, what we're

758
00:45:10,160 --> 00:45:12,919
Speaker 1: looking for is valuation of a business, taking all those

759
00:45:12,960 --> 00:45:15,640
Speaker 1: things into account and trying to buy that at a discount.

760
00:45:16,400 --> 00:45:20,120
Speaker 1: And it's possible the market doesn't recognize that. And you know,

761
00:45:20,160 --> 00:45:22,319
Speaker 1: if you look at the last year, if you bought

762
00:45:22,400 --> 00:45:27,280
Speaker 1: every company that lost money in two thousand two, twenties

763
00:45:27,960 --> 00:45:30,759
Speaker 1: is a little messed up because of COVID in the

764
00:45:30,840 --> 00:45:33,719
Speaker 1: second quarter had weird earning. So let's just look at

765
00:45:33,719 --> 00:45:36,400
Speaker 1: the companies that lost money in two thousand nineteen. If

766
00:45:36,440 --> 00:45:38,920
Speaker 1: you bought every company that lost money in two thousand

767
00:45:39,080 --> 00:45:41,919
Speaker 1: nineteen that had a market cap over a billion dollars

768
00:45:41,960 --> 00:45:43,640
Speaker 1: and so they're about two d and sixty one of those,

769
00:45:43,640 --> 00:45:45,600
Speaker 1: and you bought every single one of those companies, you'd

770
00:45:45,600 --> 00:45:50,520
Speaker 1: be up sixty so far this year. Okay, So you

771
00:45:50,520 --> 00:45:52,960
Speaker 1: know in that kind of market that's kind of fronthy

772
00:45:53,040 --> 00:45:55,200
Speaker 1: at that end where people are going to say, hey,

773
00:45:55,400 --> 00:45:58,040
Speaker 1: this company is gonna be the next Google, Microsoft or Amazon.

774
00:45:59,200 --> 00:46:02,520
Speaker 1: I don't think the office in the Google, Amazon and Amazon.

775
00:46:02,560 --> 00:46:04,799
Speaker 1: Those are some of the best businesses we've ever seen

776
00:46:04,840 --> 00:46:08,279
Speaker 1: in our lifetime. Uh to a large extent. They they

777
00:46:09,000 --> 00:46:11,600
Speaker 1: don't quibble with their valuations. I actually we own a

778
00:46:11,640 --> 00:46:14,759
Speaker 1: big chunk of those companies. We think they're great businesses.

779
00:46:15,080 --> 00:46:18,200
Speaker 1: But there aren't hundreds of companies with that right with them.

780
00:46:18,600 --> 00:46:21,440
Speaker 1: So it's really not looking at indexes or how do

781
00:46:21,480 --> 00:46:23,920
Speaker 1: we classify its value of growth. It's really looking stop

782
00:46:24,000 --> 00:46:27,160
Speaker 1: by stop valuing them, trying to buy a discountant and

783
00:46:27,239 --> 00:46:32,160
Speaker 1: that's causation. And so that causation might not be popular

784
00:46:32,280 --> 00:46:34,200
Speaker 1: in the next year or two, but I'm not going

785
00:46:34,239 --> 00:46:36,800
Speaker 1: to stop doing that. That's what stops on their ownership

786
00:46:36,840 --> 00:46:38,680
Speaker 1: shares of businesses. So that's the best way I can

787
00:46:38,719 --> 00:46:42,239
Speaker 1: answer your question. We're looking for causation, not correlation. We're

788
00:46:42,239 --> 00:46:44,360
Speaker 1: not looking for that low press book, low price sales

789
00:46:44,400 --> 00:46:47,719
Speaker 1: momentum of correlated No private equity firm buys that. If

790
00:46:47,719 --> 00:46:50,200
Speaker 1: I came to you and said, hey, listen, I have

791
00:46:50,320 --> 00:46:52,200
Speaker 1: this real estate strategy. I'm just going to buy all

792
00:46:52,239 --> 00:46:53,959
Speaker 1: the houses that were up the most in the last

793
00:46:53,960 --> 00:46:56,600
Speaker 1: three months, you kind of look at me like I

794
00:46:56,760 --> 00:47:00,440
Speaker 1: was nuts. And so although it's core it with good

795
00:47:00,440 --> 00:47:02,560
Speaker 1: returns in the past, that's not what I would continue

796
00:47:02,600 --> 00:47:05,920
Speaker 1: doing even though it's correlated. I'm looking for causation. That's

797
00:47:05,920 --> 00:47:07,839
Speaker 1: the way I can put it. So let me throw

798
00:47:07,880 --> 00:47:11,520
Speaker 1: a correlation causation curveball at you. I have seen a

799
00:47:11,600 --> 00:47:14,919
Speaker 1: number of studies over the years that point out that

800
00:47:15,200 --> 00:47:19,400
Speaker 1: relative to their peers that don't do big stock buy backs,

801
00:47:19,840 --> 00:47:24,040
Speaker 1: the companies doing share buy backs tend to outperform. Is

802
00:47:24,080 --> 00:47:26,920
Speaker 1: that a correlation issue? Hey, they have all the extra

803
00:47:27,000 --> 00:47:30,000
Speaker 1: cash and therefore they're good companies to begin with, so

804
00:47:30,040 --> 00:47:32,880
Speaker 1: they could do buy backs, or there is some causal

805
00:47:32,960 --> 00:47:37,200
Speaker 1: relationship between reducing the outstanding share account and that make

806
00:47:37,280 --> 00:47:41,319
Speaker 1: sure earnings appear better. What is the advantage or not

807
00:47:42,120 --> 00:47:45,960
Speaker 1: of borrowing cheap money to buy shares back? Right, Well,

808
00:47:46,080 --> 00:47:48,040
Speaker 1: what you're saying is true, and I haven't looked at

809
00:47:48,080 --> 00:47:50,839
Speaker 1: the studies. But if what you're saying is true that

810
00:47:51,320 --> 00:47:54,440
Speaker 1: buy back stock has correlated with good returns in the past,

811
00:47:54,880 --> 00:47:58,480
Speaker 1: I would call that a correlation. Causation has to do

812
00:47:58,560 --> 00:48:02,239
Speaker 1: with smart managements who only buy back stock when it's

813
00:48:02,280 --> 00:48:05,040
Speaker 1: selling it a discount to what they think it's worth,

814
00:48:05,040 --> 00:48:07,600
Speaker 1: and they're right. So in other words, there's nothing inherently

815
00:48:07,640 --> 00:48:11,440
Speaker 1: good or bad with buy backs. Some are smart when

816
00:48:11,440 --> 00:48:14,000
Speaker 1: you're buying it below with the business is worth, and

817
00:48:14,080 --> 00:48:17,560
Speaker 1: some are not so smart when you're let's say, borrowing

818
00:48:17,600 --> 00:48:20,160
Speaker 1: money to overpay for your own stock. And so both

819
00:48:20,200 --> 00:48:21,759
Speaker 1: of those things are true, and I wouldn't want to

820
00:48:21,760 --> 00:48:24,480
Speaker 1: look at anything that's happened in the past and say, oh,

821
00:48:24,560 --> 00:48:26,759
Speaker 1: it's correlated with this or that. I would look at

822
00:48:26,800 --> 00:48:29,480
Speaker 1: stock by stock and see if their buy backs were

823
00:48:29,520 --> 00:48:32,160
Speaker 1: made a good prices relative to my assessment of value

824
00:48:32,360 --> 00:48:34,200
Speaker 1: or where they were made at two high prices with

825
00:48:34,239 --> 00:48:37,000
Speaker 1: borrowed money, and so they're totally different things. So I

826
00:48:37,239 --> 00:48:40,560
Speaker 1: wouldn't put any weight into any study that just looked

827
00:48:40,560 --> 00:48:44,440
Speaker 1: at generically companies that buy stops back. There's nothing inherently

828
00:48:44,480 --> 00:48:46,799
Speaker 1: good or bad about it. It depends what price they pay.

829
00:48:47,360 --> 00:48:50,759
Speaker 1: Quite interesting. We've noticed the tendency amongst some of the

830
00:48:50,800 --> 00:48:56,440
Speaker 1: companies you've referenced, like Google or Microsoft or Amazon or

831
00:48:56,800 --> 00:49:01,640
Speaker 1: what have you, that it's become less of a competitive

832
00:49:01,719 --> 00:49:05,960
Speaker 1: group of firms finding it out for a client's our customer,

833
00:49:06,120 --> 00:49:09,520
Speaker 1: and more of a winner take all situation. What are

834
00:49:09,560 --> 00:49:13,080
Speaker 1: your thoughts on those sort of winners and losers what

835
00:49:13,320 --> 00:49:18,759
Speaker 1: Buffett describes as companies with impenetrable motes. Yeah, I mean

836
00:49:18,760 --> 00:49:22,560
Speaker 1: we own a lot of those businesses, you know. Uh,

837
00:49:22,760 --> 00:49:26,720
Speaker 1: we have a uh fund that looks you know, buys

838
00:49:26,760 --> 00:49:29,040
Speaker 1: the SMP five hundred, all five hundred stocks in the

839
00:49:29,080 --> 00:49:34,239
Speaker 1: SNP five hundred, but overweights companies that we think are

840
00:49:34,320 --> 00:49:37,080
Speaker 1: cheap and underweights those. So it owns all five hundred

841
00:49:37,400 --> 00:49:40,960
Speaker 1: but starts with the SMP index, which is market CAB weighted,

842
00:49:41,200 --> 00:49:44,600
Speaker 1: and then overweights companies that we think are cheap and

843
00:49:44,719 --> 00:49:49,399
Speaker 1: underweights those that we think are expensive by a little bit,

844
00:49:49,480 --> 00:49:52,279
Speaker 1: so that doesn't have too much tracking errors, you know,

845
00:49:52,320 --> 00:49:55,840
Speaker 1: sort of an index tilt. And we have overweighted almost

846
00:49:55,840 --> 00:49:58,719
Speaker 1: all those companies that you're describing. They are some of

847
00:49:58,719 --> 00:50:03,239
Speaker 1: the best business says in the history that we've ever seen.

848
00:50:03,960 --> 00:50:07,560
Speaker 1: We haven't seen anything like this before the power, and

849
00:50:07,600 --> 00:50:11,480
Speaker 1: I think the Internet brings this power to these businesses.

850
00:50:11,480 --> 00:50:14,680
Speaker 1: And these are moats that are very tough to be

851
00:50:14,960 --> 00:50:17,600
Speaker 1: and so what you're suggesting is true. It is true.

852
00:50:17,920 --> 00:50:22,319
Speaker 1: These are great businesses. They are dominating. It's very hard

853
00:50:22,360 --> 00:50:25,840
Speaker 1: to break into them. And so I don't actually have

854
00:50:25,920 --> 00:50:28,120
Speaker 1: a solution for should we break them up? Should we

855
00:50:28,120 --> 00:50:31,160
Speaker 1: not break them up? As an investor, I'm investing in them.

856
00:50:31,680 --> 00:50:33,359
Speaker 1: You want to be on the other side of the moat.

857
00:50:33,440 --> 00:50:36,040
Speaker 1: In other words, Right, if you really look at the

858
00:50:36,080 --> 00:50:39,279
Speaker 1: cash flows and the stability of the cash flows and

859
00:50:39,320 --> 00:50:42,880
Speaker 1: the growth prospects for the cash flows, these businesses are

860
00:50:43,360 --> 00:50:47,879
Speaker 1: priced reasonably or cheaply, depending on which one. So that's

861
00:50:47,880 --> 00:50:50,000
Speaker 1: not where the froth of the market is. The froth

862
00:50:50,080 --> 00:50:52,160
Speaker 1: in the market is in the hundreds of companies that

863
00:50:52,200 --> 00:50:55,000
Speaker 1: I was talking about before. That people will think will

864
00:50:55,160 --> 00:50:58,520
Speaker 1: rhyme with the next Amazon, Google and Microsoft, and they're

865
00:50:58,600 --> 00:51:01,080
Speaker 1: just can't be hundreds of company that do that. So

866
00:51:01,120 --> 00:51:02,880
Speaker 1: I think that's where they come up. It's will be.

867
00:51:03,440 --> 00:51:06,160
Speaker 1: And so when you talked about the difficulty of value investing,

868
00:51:06,440 --> 00:51:09,080
Speaker 1: that's fun that just overweights what we think is cheap

869
00:51:09,400 --> 00:51:12,040
Speaker 1: according to our definition of value, and underweights has beaten

870
00:51:12,080 --> 00:51:15,040
Speaker 1: the market. So even in a very tough period for value,

871
00:51:15,080 --> 00:51:17,960
Speaker 1: it's not like the principles don't work. They do work.

872
00:51:18,280 --> 00:51:20,400
Speaker 1: But when you go long, short and short some of

873
00:51:20,400 --> 00:51:22,720
Speaker 1: these names that are losing money or trading in hundreds

874
00:51:22,760 --> 00:51:24,680
Speaker 1: of times that people think will be the next Amazon

875
00:51:24,719 --> 00:51:27,799
Speaker 1: and Google, those I think are writing at very high

876
00:51:27,840 --> 00:51:29,480
Speaker 1: prices and will have their come up, and so at

877
00:51:29,560 --> 00:51:31,560
Speaker 1: least I hope so. And that's that's where I see

878
00:51:31,600 --> 00:51:34,880
Speaker 1: the problem. So you deal with you manage money professionally,

879
00:51:34,920 --> 00:51:40,120
Speaker 1: you deal with allocators and others. You're defining value in

880
00:51:40,160 --> 00:51:44,680
Speaker 1: a way that's somewhat different than the way many value investors,

881
00:51:45,040 --> 00:51:49,600
Speaker 1: many less successful value investors, have done. So what do

882
00:51:49,680 --> 00:51:51,759
Speaker 1: you say to those people who are ready to throw

883
00:51:51,800 --> 00:51:54,960
Speaker 1: in the towel on value and think now is the

884
00:51:55,080 --> 00:51:58,719
Speaker 1: time to jump into growth? Well, look, I don't buy,

885
00:51:58,760 --> 00:52:03,560
Speaker 1: as I said, the traditional definitions of value and growth.

886
00:52:04,400 --> 00:52:07,440
Speaker 1: The reason that we overlook with value some ofttimes, it's

887
00:52:07,440 --> 00:52:11,000
Speaker 1: because we're certainly not growth at any price, you know,

888
00:52:11,080 --> 00:52:13,759
Speaker 1: throw away the the rule book and just buy growth

889
00:52:13,800 --> 00:52:19,400
Speaker 1: at any price. So sometimes we correlate closely with company

890
00:52:19,480 --> 00:52:22,279
Speaker 1: other companies that are out of favor. Uh. And and

891
00:52:22,440 --> 00:52:24,640
Speaker 1: so those even Rustle and morning Star, will put us

892
00:52:24,640 --> 00:52:29,240
Speaker 1: in the the either the blend category or the value category.

893
00:52:29,320 --> 00:52:31,440
Speaker 1: That's usually where we are. We're certainly not quoth at

894
00:52:31,440 --> 00:52:35,320
Speaker 1: any price. But I do think, uh, if you're asking

895
00:52:35,360 --> 00:52:37,879
Speaker 1: me whether I think the traditional definition of value will

896
00:52:37,880 --> 00:52:40,960
Speaker 1: come back at some point, yes, I do. I think

897
00:52:41,040 --> 00:52:43,480
Speaker 1: I think it's gone to an extreme at this point.

898
00:52:43,480 --> 00:52:45,040
Speaker 1: I think it will come back. I don't really care

899
00:52:45,080 --> 00:52:46,960
Speaker 1: if it does or not, because it's not our definition,

900
00:52:47,000 --> 00:52:49,120
Speaker 1: but I do think it will come back. I think

901
00:52:49,800 --> 00:52:55,920
Speaker 1: you should use a lot of managers allocators view traditional

902
00:52:56,000 --> 00:52:58,799
Speaker 1: value as an asset class, meaning, hey, I should have

903
00:52:58,840 --> 00:53:02,360
Speaker 1: some exposure here. It'sig and acts differently than the market.

904
00:53:02,360 --> 00:53:05,200
Speaker 1: The returns and at some point they'll have their day

905
00:53:05,239 --> 00:53:08,320
Speaker 1: in the sun. And so I think people will continue

906
00:53:08,360 --> 00:53:12,920
Speaker 1: to allocate there, but in a limited a more limited

907
00:53:12,920 --> 00:53:15,640
Speaker 1: way because people chase what works, and it's clearly not

908
00:53:15,719 --> 00:53:20,080
Speaker 1: been working traditional value. So imagine us five or ten

909
00:53:20,200 --> 00:53:23,760
Speaker 1: years off in the future. If I were to ask you, hey,

910
00:53:23,800 --> 00:53:27,720
Speaker 1: what was the one indicator, what was the one data

911
00:53:27,840 --> 00:53:31,880
Speaker 1: point that was a signifier that value had come back?

912
00:53:32,440 --> 00:53:37,319
Speaker 1: What particular data point or variable might that be. That's

913
00:53:37,360 --> 00:53:39,400
Speaker 1: a great question that I don't have a great answer for,

914
00:53:40,360 --> 00:53:43,920
Speaker 1: mostly because of what I said about the definition of value.

915
00:53:44,360 --> 00:53:46,839
Speaker 1: Uh So I guess what I would be looking for

916
00:53:47,040 --> 00:53:51,080
Speaker 1: is companies that borrow a lot of money and lose money,

917
00:53:51,480 --> 00:53:54,640
Speaker 1: don't have and and aren't the next Google in Amazon.

918
00:53:54,680 --> 00:53:56,960
Speaker 1: There'll be some winners in that group, but most of

919
00:53:57,000 --> 00:53:59,960
Speaker 1: them will have their come up. It's where a veg

920
00:54:00,000 --> 00:54:02,960
Speaker 1: full you have to earn money. That's where I think

921
00:54:02,960 --> 00:54:04,640
Speaker 1: if some of those companies have their come up, and

922
00:54:05,080 --> 00:54:08,160
Speaker 1: where as I said the money losers were so far

923
00:54:08,280 --> 00:54:11,720
Speaker 1: this year, if those companies, a bunch of those companies

924
00:54:11,719 --> 00:54:13,319
Speaker 1: have their come up, and so I would say that,

925
00:54:13,960 --> 00:54:18,560
Speaker 1: you know, there's a chance for relative performance on companies

926
00:54:18,560 --> 00:54:23,000
Speaker 1: that aren't like those, But leverage can answer it soon, right,

927
00:54:23,120 --> 00:54:26,839
Speaker 1: So leverage low low profitable companies. Some people would call

928
00:54:26,880 --> 00:54:31,120
Speaker 1: that low quality versus high qualities at a ratio worth considering.

929
00:54:31,880 --> 00:54:35,080
Speaker 1: You know, I hate making generalizations. I'm not trying to

930
00:54:35,120 --> 00:54:38,080
Speaker 1: avoid your questions, but we really know, and I'm I'm

931
00:54:38,080 --> 00:54:41,360
Speaker 1: trying to pin you down with a really general that

932
00:54:41,520 --> 00:54:44,719
Speaker 1: wards looking a future forecast. A lot of people ask

933
00:54:44,760 --> 00:54:47,440
Speaker 1: that question. It's a reasonable question. I just don't have

934
00:54:47,480 --> 00:54:50,120
Speaker 1: a great answer because we're looking at things stock by stock,

935
00:54:50,160 --> 00:54:54,200
Speaker 1: and very hard to make generalizations about that, especially as

936
00:54:54,239 --> 00:54:57,280
Speaker 1: I keep saying, we have different definitions. So for the record,

937
00:54:57,360 --> 00:55:01,120
Speaker 1: let's get your best definition of the sort of value

938
00:55:01,160 --> 00:55:06,200
Speaker 1: companies that you think have the best risk adjusted growth potential.

939
00:55:06,600 --> 00:55:08,840
Speaker 1: What are the data points that you're looking at today,

940
00:55:09,480 --> 00:55:12,800
Speaker 1: Not for a specific name, but you know, I'm giving

941
00:55:12,800 --> 00:55:17,279
Speaker 1: you an opportunity to restate the magic formula. Right, So

942
00:55:17,680 --> 00:55:20,840
Speaker 1: what I would say is, right now, the pre tax

943
00:55:21,320 --> 00:55:24,280
Speaker 1: cash flow yield of the SNP five is about four percent,

944
00:55:25,160 --> 00:55:28,719
Speaker 1: little under four percent. So there are companies that have

945
00:55:28,880 --> 00:55:31,320
Speaker 1: less than a four percent, you know, but much higher

946
00:55:31,360 --> 00:55:34,879
Speaker 1: growth rate than the SMP in general. And there are

947
00:55:35,000 --> 00:55:38,120
Speaker 1: companies that have a much higher yield you know, five

948
00:55:38,200 --> 00:55:41,319
Speaker 1: or six or seven percent, that have at least as good,

949
00:55:41,520 --> 00:55:45,560
Speaker 1: if not better fundamentals and growth rate than the SMP

950
00:55:45,600 --> 00:55:49,279
Speaker 1: five DRED. So both of those are relative values. There

951
00:55:49,320 --> 00:55:51,520
Speaker 1: aren't a lot of companies out there that are super

952
00:55:51,600 --> 00:55:55,000
Speaker 1: cheap right now. If you look historically, things are expensive.

953
00:55:55,280 --> 00:55:58,280
Speaker 1: Obviously that has something to do with interest rates being

954
00:55:58,960 --> 00:56:01,400
Speaker 1: lower than normal. It has something to do with the

955
00:56:01,400 --> 00:56:08,520
Speaker 1: alternatives not being there for diversification and so stocks being

956
00:56:08,560 --> 00:56:11,240
Speaker 1: one of the only games in town. So it certainly

957
00:56:11,239 --> 00:56:13,439
Speaker 1: has something to do with that. And if you told

958
00:56:13,440 --> 00:56:16,080
Speaker 1: me that rates would stay permanently low, which I just

959
00:56:16,200 --> 00:56:20,600
Speaker 1: don't know, then on an absolute basis, we could make

960
00:56:20,600 --> 00:56:24,560
Speaker 1: some nice money from here. Otherwise I'm in the lucky

961
00:56:24,640 --> 00:56:27,920
Speaker 1: position of people give me money and say I want

962
00:56:27,920 --> 00:56:29,960
Speaker 1: to put it in the stock market. What's the smartest

963
00:56:30,000 --> 00:56:32,680
Speaker 1: way to do that? And so what we're sticking to

964
00:56:32,920 --> 00:56:36,319
Speaker 1: our companies that maybe yield a little less than the

965
00:56:36,480 --> 00:56:39,319
Speaker 1: S and T, but have much better growth prospects, much

966
00:56:39,640 --> 00:56:43,880
Speaker 1: more secure earnings, stream great franchises, so we're willing to

967
00:56:43,920 --> 00:56:46,680
Speaker 1: buy those. We're also willing to buy companies that we

968
00:56:46,719 --> 00:56:50,000
Speaker 1: can get it much higher free cash flow yields than

969
00:56:50,800 --> 00:56:53,879
Speaker 1: the market, that have at least as good growth, if

970
00:56:53,880 --> 00:56:58,000
Speaker 1: not better, and better operating fundamentals. So both of those

971
00:56:58,000 --> 00:57:00,160
Speaker 1: are areas that we look at and that's how we

972
00:57:00,200 --> 00:57:03,520
Speaker 1: would define at least relative value right now. And I

973
00:57:03,560 --> 00:57:05,759
Speaker 1: think they could provide good value with great to stay

974
00:57:05,800 --> 00:57:08,560
Speaker 1: the slow sounds good to me. I know we only

975
00:57:08,600 --> 00:57:10,880
Speaker 1: have you for a few more minutes, so let me

976
00:57:11,000 --> 00:57:14,359
Speaker 1: jump to my favorite questions we asked all of our

977
00:57:14,400 --> 00:57:18,000
Speaker 1: guests in our speed round, and let's start with, uh,

978
00:57:18,520 --> 00:57:21,400
Speaker 1: what are you streaming these days? Give us your favorite Netflix,

979
00:57:21,520 --> 00:57:25,840
Speaker 1: Amazon Prime, or or whatever podcast you might be listening to. Well,

980
00:57:25,880 --> 00:57:28,040
Speaker 1: the two I've been watching lately. One is The Mindy

981
00:57:28,120 --> 00:57:31,520
Speaker 1: Project because it's funny and we can all use that now,

982
00:57:31,600 --> 00:57:35,360
Speaker 1: and the other is The Americans because it's just great drama.

983
00:57:36,520 --> 00:57:40,600
Speaker 1: So I guess a lot of people are streaming during COVID,

984
00:57:40,680 --> 00:57:42,520
Speaker 1: and you know it's been a horrible thing for so

985
00:57:42,600 --> 00:57:46,320
Speaker 1: many people. But those are my two suggestions there. I'm

986
00:57:46,320 --> 00:57:48,880
Speaker 1: gonna put those both on my list. Tell us about

987
00:57:48,920 --> 00:57:52,200
Speaker 1: your early mentors, who who guided your career, who affected

988
00:57:52,280 --> 00:57:56,200
Speaker 1: the direction you moved professionally? Well, you know, I have

989
00:57:56,320 --> 00:57:59,200
Speaker 1: to start with my dad. He was a businessman. He

990
00:57:59,240 --> 00:58:02,400
Speaker 1: was a shumanufact actuer, and I learned ethics and actually

991
00:58:02,440 --> 00:58:05,200
Speaker 1: how business works on a day to day basis at

992
00:58:05,240 --> 00:58:07,560
Speaker 1: the dinner table he always shared with us. I got

993
00:58:07,600 --> 00:58:12,120
Speaker 1: to work with him first a couple of summers, and uh,

994
00:58:12,160 --> 00:58:15,600
Speaker 1: you know, someone I truly admire. He's still with us,

995
00:58:15,600 --> 00:58:18,640
Speaker 1: and you know, I love him a lot, a great mentor.

996
00:58:19,080 --> 00:58:22,080
Speaker 1: And then there's of course Graham and Buffett. You know,

997
00:58:22,240 --> 00:58:25,080
Speaker 1: I went to Wharton, I was learning about efficient markets.

998
00:58:25,080 --> 00:58:26,680
Speaker 1: It didn't make much sense to me. I read an

999
00:58:26,720 --> 00:58:29,480
Speaker 1: article about Ben Graham and then started reading everything that

1000
00:58:29,600 --> 00:58:33,080
Speaker 1: he wrote and everything about him. And then of course

1001
00:58:33,120 --> 00:58:36,080
Speaker 1: he mentored Warren Buffett, who made that little twist buying

1002
00:58:36,080 --> 00:58:38,000
Speaker 1: your good business chief that made him one of the

1003
00:58:38,080 --> 00:58:41,520
Speaker 1: richest people in the world. And both of those people

1004
00:58:42,120 --> 00:58:45,800
Speaker 1: shared what they learned with others. And it's one of

1005
00:58:45,840 --> 00:58:47,720
Speaker 1: the reasons I write, and one of the reasons I

1006
00:58:47,800 --> 00:58:51,640
Speaker 1: teach is because of their example. And so they've been

1007
00:58:51,640 --> 00:58:55,120
Speaker 1: great early mentors for me. Let's talk about books. Tell

1008
00:58:55,160 --> 00:58:57,440
Speaker 1: us some of your favorite books and what are you

1009
00:58:57,480 --> 00:59:01,320
Speaker 1: reading currently? Well to most recent books I read, one

1010
00:59:01,400 --> 00:59:04,320
Speaker 1: was called The Splendid and the Vile by Eric Larson.

1011
00:59:05,480 --> 00:59:10,480
Speaker 1: It's about Churchill's first year in the office, which, of course,

1012
00:59:10,520 --> 00:59:13,000
Speaker 1: when things everything was going wrong, they put him in

1013
00:59:13,080 --> 00:59:16,120
Speaker 1: office days before it looked like England was going to fall,

1014
00:59:17,000 --> 00:59:20,680
Speaker 1: So how he handled that was really amazing to read

1015
00:59:20,760 --> 00:59:25,680
Speaker 1: and great, great, great book. I love anything about Benjamin Franklin.

1016
00:59:25,760 --> 00:59:28,520
Speaker 1: So I just read the latest thing from Gordon Wood,

1017
00:59:28,880 --> 00:59:32,400
Speaker 1: the Americanization of Ben Franklin. So I enjoyed that very much.

1018
00:59:32,480 --> 00:59:35,440
Speaker 1: And if you haven't read much about Ben Franklin, that's

1019
00:59:35,800 --> 00:59:38,760
Speaker 1: what I would suggest. And then I read a book

1020
00:59:38,760 --> 00:59:42,880
Speaker 1: called Chasing My Cure by a doctor David Fagenbaum, who

1021
00:59:42,920 --> 00:59:48,040
Speaker 1: actually cured himself of a orphan disease that no one

1022
00:59:48,080 --> 00:59:50,720
Speaker 1: had lived from before. And he was in medical school

1023
00:59:50,720 --> 00:59:53,000
Speaker 1: when he was diagnosed with this disease. They didn't know

1024
00:59:53,040 --> 00:59:54,920
Speaker 1: what was wrong with him, and it was going to

1025
00:59:55,000 --> 00:59:58,520
Speaker 1: be fatal in a few years. And the books called

1026
00:59:58,560 --> 01:00:01,080
Speaker 1: Chasing My Cure, and it show is how he actually

1027
01:00:01,120 --> 01:00:05,120
Speaker 1: cured himself and lots of other people that have this disease,

1028
01:00:05,360 --> 01:00:09,160
Speaker 1: and it was fascinating. And now he's attacking COVID in

1029
01:00:09,200 --> 01:00:12,919
Speaker 1: the same way. He's looking for existing drugs that may

1030
01:00:13,040 --> 01:00:16,720
Speaker 1: act well on something that doesn't have a drug of

1031
01:00:16,760 --> 01:00:19,960
Speaker 1: its own, and and so he's been working on that

1032
01:00:20,080 --> 01:00:22,200
Speaker 1: and there was a very inspiring book. So that's called

1033
01:00:22,240 --> 01:00:25,160
Speaker 1: chasing my cure and believe it or not, it's a

1034
01:00:25,160 --> 01:00:29,120
Speaker 1: page turner. Sounds fascinating. What sort of advice would you

1035
01:00:29,120 --> 01:00:32,720
Speaker 1: give to a recent college graduate who was considering a

1036
01:00:32,880 --> 01:00:37,480
Speaker 1: career in asset management. Well, I don't want to be cliche,

1037
01:00:38,880 --> 01:00:43,880
Speaker 1: but if you're lucky enough to find something that you're

1038
01:00:43,920 --> 01:00:47,120
Speaker 1: passionate about that you can do for a living, that's

1039
01:00:47,120 --> 01:00:51,400
Speaker 1: a gift. Buffett called it dancing to work every day.

1040
01:00:52,400 --> 01:00:55,479
Speaker 1: And the only people I would suggest that go into

1041
01:00:55,520 --> 01:00:58,760
Speaker 1: it are people who feel that way to go in

1042
01:00:58,760 --> 01:01:01,400
Speaker 1: to this business just for the money, you know, and

1043
01:01:02,040 --> 01:01:06,240
Speaker 1: many aspects of it pay pay well. I don't think

1044
01:01:06,280 --> 01:01:09,280
Speaker 1: it's a great choice, but if you really love it,

1045
01:01:09,600 --> 01:01:12,800
Speaker 1: you can help a lot of people with their investing,

1046
01:01:12,880 --> 01:01:15,200
Speaker 1: and you can do good things with the money that

1047
01:01:15,240 --> 01:01:18,080
Speaker 1: you do earn if you're successful at it. So I

1048
01:01:18,200 --> 01:01:20,880
Speaker 1: highly recommend it, but really only if you're passing it

1049
01:01:20,960 --> 01:01:25,320
Speaker 1: you love the work, so that would be my best advice.

1050
01:01:25,640 --> 01:01:28,400
Speaker 1: Pick something else. There's a lot of ways you can

1051
01:01:28,440 --> 01:01:31,880
Speaker 1: contribute to society that don't involve asset management, So if

1052
01:01:31,880 --> 01:01:34,320
Speaker 1: you love it, I'm all for it. If you're doing

1053
01:01:34,320 --> 01:01:37,320
Speaker 1: it for the money, take something else. Our final question,

1054
01:01:37,520 --> 01:01:40,760
Speaker 1: what do you know about the world of investing today

1055
01:01:40,800 --> 01:01:43,640
Speaker 1: that you wish you knew when you started out thirty

1056
01:01:43,800 --> 01:01:47,160
Speaker 1: or so years ago. Sure, well, I got into investing

1057
01:01:47,160 --> 01:01:51,120
Speaker 1: reading Ben Graham and and one of the first articles

1058
01:01:51,120 --> 01:01:54,000
Speaker 1: I read what Warren Buffet would call cigar butt investing,

1059
01:01:54,040 --> 01:01:56,520
Speaker 1: you know, buying net net stocks. And I actually wrote

1060
01:01:56,560 --> 01:01:59,120
Speaker 1: an article with some of my classmates, my master's thesis

1061
01:01:59,760 --> 01:02:02,120
Speaker 1: that was published in the journal Portfolio Management on net

1062
01:02:02,120 --> 01:02:06,200
Speaker 1: nets and they worked pretty well. And you know, as

1063
01:02:06,200 --> 01:02:08,160
Speaker 1: I said, Buffett made that little twist that made him

1064
01:02:08,160 --> 01:02:10,200
Speaker 1: one of the richest people in the world, even though

1065
01:02:10,200 --> 01:02:11,760
Speaker 1: he's a student of Grahams. He said, if I can

1066
01:02:11,760 --> 01:02:15,760
Speaker 1: buy a good business cheap even better, quality matters a lot,

1067
01:02:16,400 --> 01:02:19,840
Speaker 1: even more now than it did thirty years ago. You

1068
01:02:19,960 --> 01:02:22,439
Speaker 1: need to invest in a good business. If you think

1069
01:02:22,440 --> 01:02:28,200
Speaker 1: about investing as not trading, but buying companies you're going

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Speaker 1: to hold for a long time. Of course, you want

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Speaker 1: to be in a good business that has a good

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Speaker 1: franchise and grow for a long period of time. Of course,

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Speaker 1: there's an art to figuring that out. But to the

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Speaker 1: extent that you can concentrate in those areas and also

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Speaker 1: look for bargains, you know a combination of things. You

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01:02:42,960 --> 01:02:44,840
Speaker 1: don't want to overpay for those things, but if you

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Speaker 1: can pay a reasonable or a chieved price for those things,

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Speaker 1: Concentrating on quality is a key that I learned, probably

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01:02:53,280 --> 01:02:56,040
Speaker 1: I started about thirty seven or eight years ago. I

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Speaker 1: probably learned that about thirty years ago, and I and

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Speaker 1: that it's the most important lesson I've learned in that

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Speaker 1: period of time. Quite fascinating. Thank you, Joel Greenblatt for

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Speaker 1: being so generous with your time. That was Joel Greenblatt.

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Speaker 1: He is the author of numerous books, including Common Sense,

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Speaker 1: The Investor's Guide to Equality and Opportunity. He is also

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Speaker 1: the co founder ce IO of Gotham Asset Management. If

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Speaker 1: you enjoyed this conversation, well be sure and check out

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01:03:24,920 --> 01:03:29,200
Speaker 1: any of our previous three hundred and something prior conversations.

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Speaker 1: You can find that at all the usual places iTunes, Spotify, Overcast, Stitcher,

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01:03:35,640 --> 01:03:39,760
Speaker 1: wherever finer podcasts are sold. We love your comments, feedback

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01:03:39,840 --> 01:03:44,040
Speaker 1: and suggestions right to us at m IB podcast at

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01:03:44,080 --> 01:03:47,960
Speaker 1: Bloomberg dot net. Give us a review on Apple iTunes.

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01:03:48,760 --> 01:03:52,040
Speaker 1: You can check out my weekly column on Bloomberg dot

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01:03:52,080 --> 01:03:55,400
Speaker 1: com slash Opinion. Follow me on Twitter at Rid Hults.

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01:03:55,560 --> 01:03:59,200
Speaker 1: Sign up for our daily reads at rid Halts dot com.

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Speaker 1: I would be room is if I did not thank

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Speaker 1: the crack staff that helps put these conversations together each week.

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01:04:05,320 --> 01:04:09,200
Speaker 1: Reggie Bazil is my audio engineer. Atica val Bron is

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Speaker 1: our project manager. Michael Batnick is my head of research.

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Speaker 1: Michael Boyle is my producer. I'm Barry Results. You've been

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01:04:17,960 --> 01:04:21,120
Speaker 1: listening to Masters of Business on Bloomberg Radio