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Speaker 1: This is Masters in Business with Barry Ridholts on Boomberg Radio.

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

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Speaker 1: His name is Chris Davis, and he is chairman, chief

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Speaker 1: investment officer, and one of the longest tenured managers at

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Speaker 1: Davis Advisors. They really are a fascinating company. They run

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Speaker 1: over twenty billion dollars and have been running money for

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Speaker 1: the same families for a long time, and much of

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Speaker 1: the money in those portfolios are their own. They're not

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Speaker 1: quite a family office. They've been a mutual fund shop

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Speaker 1: for over fifty years. But it's always nice to talk

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Speaker 1: to people who eat their own cooking. If you are

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Speaker 1: at all interested in value investing, but value in a

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Speaker 1: way that doesn't eliminate companies like Amazon or Google or Apple,

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Speaker 1: you're gonna find this to be a fascinating conversation. So,

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Speaker 1: with no further ado, my discussion with Chris Davis. This

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Speaker 1: is Masters in Business with Barry Ridholts on Bloomberg Radio.

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Speaker 1: My extra special guest today is Chris Davis. He is

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Speaker 1: the chairman and CEO of Davis Advisors, launched in nineteen

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Speaker 1: sixty nine to manage separately managed accounts, eventually moving into

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Speaker 1: mutual funds and now e T f S. Davis Advisors

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Speaker 1: manages over twenty two billion dollars. Chris is also on

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Speaker 1: the board of directors of Coca Cola and is the

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Speaker 1: co vice chairman of the Museum of Natural History, located

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Speaker 1: here in New York City. Chris Davis, Welcome to Bloomberg.

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Speaker 1: Thanks so much, Barry. It's good to be here. So

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Speaker 1: let's talk about this industry we're both in. What was

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Speaker 1: the business like when you joined Davis Advisors. Was already

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Speaker 1: an existing company, wasn't it. Yeah, I mean I feel

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Speaker 1: in a way I've gone through the full life cycle

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Speaker 1: of the mutual fund industry. I came into it at

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Speaker 1: a time when nobody cared, and then there was a

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Speaker 1: period of time when everybody cared, and now we're back

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Speaker 1: to a period of time when nobody cares. So been

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Speaker 1: a long cycle. When did you start. I started in

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Speaker 1: the business in nine as a accountant at State Street Bank,

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Speaker 1: and then I went to work for a Japanese American firm,

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Speaker 1: Tanaka Capital Management, and then came into Davis Advisors. What

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Speaker 1: was your role? Well, it's funny I have working at Tanaka.

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Speaker 1: What I was really passionate about was sn l's and

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Speaker 1: and the reason I was so interested in san El's

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Speaker 1: is if you remember, we were in the midst of

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Speaker 1: the SNL crisis and I was an analyst, a financial

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Speaker 1: analyst at this by side firm. And what struck me is,

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Speaker 1: I don't know if you remember the movie It's a

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Speaker 1: Wonderful Life. But I kept thinking, in all of these

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Speaker 1: headlines about the SNL crisis, there must be a few

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Speaker 1: Bailey building and loans out there, good companies with good

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Speaker 1: loans that are going to come through this time and

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Speaker 1: be value creators. So in all the headlines with bank

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Speaker 1: and New England failing and all of that, I was

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Speaker 1: passionate about it, and I think in my old firm

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Speaker 1: there wasn't quite as much enthusiasm. And when I spoke

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Speaker 1: to my father and talked about coming over to Davis,

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Speaker 1: one of the things we decided is because the firms

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Speaker 1: called Davis Advisors, there's a risk that the employer of

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Speaker 1: last resort for people with the same last name. And

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Speaker 1: so I said, if I come in, I want my

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Speaker 1: own report card. I'm a bank in financials analyst. How

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Speaker 1: about if we start a financial fund, and so ine

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Speaker 1: we started the Davis Financial Fund. Was that a distressed

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Speaker 1: asset fund or just or a hybrid. I would say

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Speaker 1: we never intended to be distressed investors, but we became

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Speaker 1: distressed investors from time to time. But no, it was

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Speaker 1: a straight mutual fund, but with the idea that we

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Speaker 1: would focus entirely on financial stocks. And my grandfather had

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Speaker 1: a great phrase. He called good financial companies growth stocks

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Speaker 1: in disguise. He said that they can compound for generations,

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Speaker 1: and yet they're often valued as if they have no growth.

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Speaker 1: And so that was the premise of the fund. I've

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Speaker 1: been running it for twenty seven or twenty eight years,

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Speaker 1: but that was the way for me to have my

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Speaker 1: own report card in a sense, independently of all of

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Speaker 1: the other fears of being employer lessons. So for people

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Speaker 1: who might not have been around during the ESML crisis,

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Speaker 1: thousands of of these esnls went belly up, right, A

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Speaker 1: lot of babies were thrown out with a lot of bathwater. Well,

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Speaker 1: you know, one of the great things about starting then

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Speaker 1: is in a way, the financial crisis was sort of

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Speaker 1: a significantly amplified version but had a similar shape. There

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Speaker 1: were crazy government policies, but the ESNL crisis was primarily

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Speaker 1: about commercial real estate, And we might come back later

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Speaker 1: to the fact that often credit cycles have this diurnal

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Speaker 1: or alternating characteristic, which you hurt you the last time

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Speaker 1: is usually not what hurts you the next time. And

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Speaker 1: as it we all know, in the financial crisis, commercial

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Speaker 1: real estate was sort of a safe place to be.

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Speaker 1: But back in the eighties you had looked through office buildings,

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Speaker 1: you had corruptions, you had the key to five, you

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Speaker 1: had government hearings, and you know a lot of reform

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Speaker 1: that came out of that. But you're absolutely right, the

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Speaker 1: fundamental lesson was the business of banking. The business of

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Speaker 1: making a spread on money, making loans, taking deposit is

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Speaker 1: maybe the world's second oldest profession, and that doesn't go obsolete.

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Speaker 1: And in these cycles, what happens is the irrational, irresponsible

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Speaker 1: players get wiped out, the whole industry valuation tanks. But

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Speaker 1: what you realize is at a fundamental level, the survivors

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Speaker 1: are actually advantaged by the crisis because now there's less supply,

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Speaker 1: less competition, more rational environment. Often the regulatory environment has

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Speaker 1: raised moats cheaper stocks. So that was what the layout

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Speaker 1: was when I came in and started our financial fund,

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Speaker 1: and in a way, it's exactly what I see today.

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Speaker 1: It was just the financial crisis was an amplified version.

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Speaker 1: It's taken longer for the sector to regain credibility. But

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Speaker 1: I think we're looking at the same sort of decade

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Speaker 1: ahead that we had in the nineties, where these will

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Speaker 1: really be compounding machines to put a little flesh on

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Speaker 1: those bones. We're recording this on a morning where JP

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Speaker 1: Morgan just reported earnings. They literally reported the best use

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Speaker 1: earnings ever in bank history. Eight billion dollars a quarter.

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Speaker 1: Is real money, you know, And yet what is the perception?

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Speaker 1: You know, the perception is, oh my god. You know

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Speaker 1: the London whale. I mean, you know, this is this

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Speaker 1: whole thing. This could crumble at any site. You know,

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Speaker 1: the London whale was was like six weeks worth of earnings.

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Speaker 1: You know. It's amazing the and and one of the

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Speaker 1: most interesting things about that, and this is really a

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Speaker 1: lesson when all banks, all companies, whatever company you own,

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Speaker 1: if you have a long term time horizon, it's going

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Speaker 1: to go through a crisis. Right. It might be New Coke,

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Speaker 1: it might be the salad oil scandal, it might be

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Speaker 1: you know, Microsoft's hearings, and they're gonna go through a crisis,

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Speaker 1: and one of the things to really look at is

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Speaker 1: what is the management response. So let's get a little

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Speaker 1: more granuur on that. We've seen Fortress Diamond respond to

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Speaker 1: a number of crises, whether it was the purchase of

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Speaker 1: JP Morgan or the London Whale or Libra or any

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Speaker 1: of those things, and they've managed to come out pretty well.

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Speaker 1: On the other side of the street, Wells Fargo, they

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Speaker 1: seemed to be stuck in a rut. One PR nightmare

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Speaker 1: after another. They can't get out ahead of the fourth

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Speaker 1: placed insurance and and the phony accounts. And it's just

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Speaker 1: eleven years after the crisis. They're still fighting, not just

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Speaker 1: the last battle, the last war. How come they can't

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Speaker 1: seem to get ahead of what is just an endless

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Speaker 1: parade of bad PR. Well, you know, Bill Gates famously

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Speaker 1: said success as a lousy teacher, and uh. And of course,

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Speaker 1: if you look back at Wells Fargo, Wells Fargo was

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Speaker 1: certainly maybe the best positioned and manage the financial crisis

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Speaker 1: better than any other institution. It was partly the nature

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Speaker 1: of their business, but it was partly going all the

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Speaker 1: way back to when we first bought the original Wells

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Speaker 1: Fargo when I started my financial fund back in the

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Speaker 1: early nineties. You know, it was a company that had

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Speaker 1: an outstanding credit culture, a rational discipline around costs, and

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Speaker 1: a lot of common sense in the place. And they

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Speaker 1: did the merger with Northwest, which was really the surviving institution,

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Speaker 1: but that culture sort of persisted. And you know the

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Speaker 1: old saying is you're get in more trouble with a

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Speaker 1: good premise than a bad premise. Well, think about Wells

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Speaker 1: Fargo's premise. It was very plausible. Right, people hate walking

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Speaker 1: into a bank, they love walking into a store. Why,

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Speaker 1: well people help them. They helped solve their problems. They're

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Speaker 1: not bureaucratic. And and you know Norwest and then ultimately

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Speaker 1: Wells took this basic idea of viewing their branches as

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Speaker 1: stores with salespeople that are there to help you, that

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Speaker 1: are paid commissions, and they recognize that if customers get

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Speaker 1: multiple products with one brank, the customers are happier and

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Speaker 1: the banks are more profitable, the customers are stickier. It's

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Speaker 1: sort of a win for everybody. So that worked for

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Speaker 1: a long time. It's carried them through the financial crisis.

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Speaker 1: Really without a blemish. Well, of course, over time they

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Speaker 1: push that model too far right, eventually customers have enough products, right,

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Speaker 1: they've got three or four accounts, they don't need a fifth. Well,

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Speaker 1: rather than simply accept this, the salesforce that was down

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Speaker 1: in the trench levels in some of the businesses started

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Speaker 1: to cheat. And I would say it would be the

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Speaker 1: equivalent of going into sacks and the commission salesman there

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Speaker 1: sells you a pair of shoes, but he wants to

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Speaker 1: sell you to you only want one, So when you leave,

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Speaker 1: he takes your credit card, runs a second pair through,

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Speaker 1: but instantly refunds you so there's no cost to you.

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Speaker 1: But what he's done is so deeply wrong, deeply unethical,

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Speaker 1: especially for God's sakes if you're a bank. So this

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Speaker 1: was happening because of a botched incentive system, because it

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Speaker 1: had worked so well. But then, to quote the wonderful

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Speaker 1: legendary d A of our hometown, Bob Morgan thaw, it's

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Speaker 1: not what you do that gets you in trouble, it's

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Speaker 1: what you do to cover up what you do that

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Speaker 1: gets you in trouble. And of course what happened is

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Speaker 1: as news of this perked up, well buried it. The

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Speaker 1: management didn't want to know. They underreacted, and that's put

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Speaker 1: us where we have. But you contrast JP Morgan in Wells,

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Speaker 1: and those are two of our largest holdings. And the

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Speaker 1: reason is right now, JP Morgan can do no wrong,

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Speaker 1: and in a way, it has taken a long time

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Speaker 1: for it to build this credibility. Wells Fargo used to

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Speaker 1: have that credibility. They can do no right. So Wells

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Speaker 1: Fargo is now one of the cheapest of all the banks. Well,

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Speaker 1: look back ten or fifteen years. Who was in the

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Speaker 1: penalty box, right, Well, we know Bank America City, right,

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Speaker 1: Those two were two of the best performing banks last year.

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Speaker 1: So companies, like people, learn from their mistakes. They'll get

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Speaker 1: it right. They've got new management, and sooner or later

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Speaker 1: the cloud will lift and you'll get, ultimately the multiple

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Speaker 1: expansion that comes from people instead of viewing it as

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Speaker 1: a below average bank, as viewing it as average. So

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Speaker 1: we've been buyers of Wells through this. We think their

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Speaker 1: behavior was terrible, the reactions were terrible, but we also

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Speaker 1: know that they'll get better. Quite fascinating. Let's talk a

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Speaker 1: little bit about your portfolio construction process. A lot of

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Speaker 1: people these days use a lot of computer power to

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Speaker 1: start out with screens either be very positive or negative.

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Speaker 1: How do you begin the process of creating a portfolio?

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Speaker 1: You know, I had a meal with Danny Kahneman UH

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Speaker 1: quite a while ago, uh at an investor event, and

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Speaker 1: now he was sitting next to him and we're talking

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Speaker 1: about investing, and he said, well, as far as I

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Speaker 1: can tell, you're in the manufacturing business, right, And I said,

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Speaker 1: we're not. You know, what are you in academic We're

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Speaker 1: not in the manufacturing business. He had not won the

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Speaker 1: Nobel Prize at this point, so uh and uh he said, oh,

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Speaker 1: you're in the manufacturing because I said, well, what do

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Speaker 1: we make? And he said decisions? And he said, if

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Speaker 1: I were you, I would break down the process of

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Speaker 1: making a decision into as many steps and inputs that

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Speaker 1: are measurable as possible, and over time really look at

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Speaker 1: where the value add where the value taken aways. So

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Speaker 1: when we start with thinking about investing, we think about

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Speaker 1: from the point of view of decisions. We break down

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Speaker 1: the process into these big areas. Right, there's the sourcing

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Speaker 1: of ideas. Then there's exactly what you're asking about, the

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Speaker 1: sort of portfolio construction, the investment decisions, and that includes

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Speaker 1: what you sell, what you buy, opportunity cost, relative waitings,

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Speaker 1: and so on. And then there's of course the constant

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Speaker 1: ongoing revaluation of the portfolio in light of changing prices

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Speaker 1: and changing data, right, because you have new inputs every

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Speaker 1: twelve weeks and sometimes more often than that. And so

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Speaker 1: you know, we start with the view that our number

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Speaker 1: one job is to build generational wealth, right. We we

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Speaker 1: really think about you know, the clients that are with us,

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Speaker 1: many of them have been with us for decades, and

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Speaker 1: so we start with the idea that we want to

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Speaker 1: own a business for a long period of time, and

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Speaker 1: therefore the return on the business is not going to

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Speaker 1: be driven by us trying to predict the future p

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Speaker 1: E ratio or you know, what it will be in

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Speaker 1: a takeout or a breakup. What we're really looking at

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Speaker 1: is the earnings that business will generate relative to what

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Speaker 1: we paid for it over time, and those earnings will

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Speaker 1: drive our return. So you're not thinking about it in

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Speaker 1: terms of stock or little pieces of paper relative to

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Speaker 1: the company. You're thinking about the underlying business and what

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Speaker 1: that future cash flow. Yeah, I mean, imagine if you

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Speaker 1: bought an apartment building. Let's say you paid ten million

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Speaker 1: dollars for an apartment building, and that apartment building was

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Speaker 1: generating five thousand dollars of cash flow after reinvesting enough

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Speaker 1: to keep the roof and the furnaces and the tenants

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Speaker 1: all happy and so on, and if you bought it

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Speaker 1: that you'd sort of say, well, I guess I'm starting

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Speaker 1: at sort of a five percent earning syield. Now, if

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Speaker 1: ten years from now that apartment building was generating two

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Speaker 1: million dollars of value, you don't need to go out

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Speaker 1: and get the apartment a praise to figure out that

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Speaker 1: you've done quite well right. You're making a lot of money,

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Speaker 1: not just because you're getting a check for two million

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Speaker 1: dollars a year or twenty percent of what you paid

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Speaker 1: for it, but also should you decide to sell the building,

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Speaker 1: you know that an asset that generates two million dollars

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Speaker 1: a year is way more valuable than one that generates five.

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Speaker 1: People forget because stocks wiggle around and are priced every day,

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Speaker 1: that if they viewed them the way they view that

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Speaker 1: apartment building, they would feel a lot calmer when there's

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Speaker 1: all these gyrations and stock prices going up and down.

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Speaker 1: So we think a lot about earnings yield on cost

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Speaker 1: as sort of the way to build wealth and measure

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Speaker 1: that wealth creation over time. And so when we start

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Speaker 1: the portfolio, we're agnostic about whether we're buying an apartment

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Speaker 1: building or a pizzeria, or a hotel or an office building.

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Speaker 1: We're buying a whole range of different types of businesses,

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Speaker 1: but all with the same mindset. Will the earnings that

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Speaker 1: business produces over time build wealth not over three years

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Speaker 1: or five years, but over ten, twenty thirty years. And

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Speaker 1: that sort of mindset allows us to be open minded

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Speaker 1: whether we're looking at United Technologies or Berkshire Hathaway or

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Speaker 1: Wells Fargo. We can look in a sense at cash

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Speaker 1: across all of those businesses and look at that growth

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Speaker 1: over time as the creator of wealth. And I find

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Speaker 1: it interesting you used an apartment building as a metaphor.

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Speaker 1: I've talked about this in the past. If your house

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Speaker 1: where you live in was priced daily, I think people

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Speaker 1: would lose their mind over the day to day fluctuations.

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Speaker 1: You can ignore it because it's not price daily. It

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Speaker 1: sounds like you approach owning individual equities the same way. Yeah,

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Speaker 1: I mean, if somebody came up to with that you

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Speaker 1: know apartment building. You paid ten million four and it

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Speaker 1: now earning two million, and they said, hey, I'll give

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Speaker 1: you five million dollars for it. You wouldn't be depressed,

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Speaker 1: right you would You just feel like, well that seems

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Speaker 1: a little silly. So I'm not interested. And so in

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Speaker 1: a sense, we start with this mindset of building wealth

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Speaker 1: over the long term. And in this way, we always

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Speaker 1: say we're absolute return investors, right, we view it as

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Speaker 1: if we're buying the entire business. We look for the

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Speaker 1: returns to be driven by the cash the business produces

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Speaker 1: over a long period of time, and that, in a

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Speaker 1: sense quiets things down. And the more clients look at

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Speaker 1: their portfolio and they see these companies even when the

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Speaker 1: prices are gyrating, if they can look through at the

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Speaker 1: underlying business, creates a much greater sense of equanimity in

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Speaker 1: the face of, as you say, gyrating prices. So you

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Speaker 1: begin as an analyst covering finance firms, you're now a

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Speaker 1: portfolio manager. What's the workflow at your office? Like between

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Speaker 1: the analysts that work for Davis Funds and you as

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Speaker 1: a portfolio manager. Well, I mean I learned from the best,

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Speaker 1: because I learned from my father and my father's business

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Speaker 1: card that said analysts and mine would be the same.

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Speaker 1: I mean we have a small team. You know, they're

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Speaker 1: only eight or nine of us. We've been together a

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Speaker 1: long time on average, and what we say is that,

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Speaker 1: you know, the portfolio manager has to be the lead

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Speaker 1: analyst on every company we own. And the reason is

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Speaker 1: I worked at other places, and I worked at places

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Speaker 1: typically had the normal structure. They have junior analysts, senior analysts,

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Speaker 1: they have portfolio managers, they have a strategists, economists, And

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Speaker 1: what I found is the person deciding whether to buy

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Speaker 1: a sell a stock in that structure is often relying

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Speaker 1: on the data provided by the most junior person at

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Speaker 1: the firm. Right the most junior person is doing the

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Speaker 1: leg work. You don't know if they're good or not,

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Speaker 1: and you're making an investment decision on that. So we,

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Speaker 1: in a sense breakdown that distinction. Now on our team,

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Speaker 1: I would say we have people that are traditional analysts.

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Speaker 1: Both to use an unfortunate phrase that goes back to

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Speaker 1: the Cold War, we always say that the portfolio manager

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Speaker 1: has to be a fellow traveler on the research process

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Speaker 1: with the analyst. So we have analysts that do spectacular

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Speaker 1: leg work and are you know, in our sourcing process,

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Speaker 1: we're looking for ideas and they will surface those early

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Speaker 1: and then the portfolio manager along with that analysts work

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Speaker 1: on that idea together and we run concentrated, relatively focused portfolios.

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Speaker 1: So you know, we only buy one out of ten

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Speaker 1: names in the SNP five hundred, right, And I always

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Speaker 1: say like selectivity sort of like like a college or

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Speaker 1: like an employer. If you have the ability to only

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Speaker 1: choose one out of ten of your applicants, you can

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Speaker 1: really look for those sort of extraordinary qualities and you

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Speaker 1: can reject the average or the mediocre or worse. And

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Speaker 1: we think selectivity is a huge advantage in active management,

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Speaker 1: and that's that's something that we really work on. You

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Speaker 1: mentioned opportunity costs and owning a position. How do you

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Speaker 1: decide when to get rid of a position? And is

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Speaker 1: it an owl or nothing to scale out or one

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Speaker 1: something hits a certain target, you sell it and that's

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Speaker 1: the end of the story. Well, you know, I did

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Speaker 1: my master's degree in philosophy actually philosophy and theology, but

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Speaker 1: there was a one that means you just pray for

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Speaker 1: the results. I pray for different things than I used

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Speaker 1: to but but there's still a lot of praying going on.

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Speaker 1: I mean, let's just say Jay Pea Morgan's earnings, you know,

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Speaker 1: for the answer to my prayers. Uh. But the but

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Speaker 1: what I'd say is there is a wonderful uh English

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Speaker 1: philosopher Elizabeth Anscombe and uh, she had this wonderful phrase

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Speaker 1: where she said, the fact of twilight doesn't mean we

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Speaker 1: can't tell day from night. And so when we look

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Speaker 1: and value a business, we don't come out with an

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Speaker 1: estimate that, you know, a company X is worth thirty

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Speaker 1: four dollars a share. That there's just amazing false precision

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Speaker 1: in that you you have an enormous amount of uncertainty

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Speaker 1: that you have to price in. So what we tend

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Speaker 1: to come up with are what we call ranges of

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Speaker 1: fair value. Now we stole this idea from Ben Graham.

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Speaker 1: Ben Graham, in his class at Columbia, did an exercise

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Speaker 1: on a specific company to determine its value. And and

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Speaker 1: I'm doing this from memory, but it's roughly this. He

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Speaker 1: came at the end of the day and he said,

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Speaker 1: this company is worth between twenty and a hundred and

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Speaker 1: twenty dollars a share, and it's quite a range. All

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Speaker 1: the all the students like, oh my god, that's worthless

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Speaker 1: that you know, that's useless. He said, no, no, no, no,

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Speaker 1: it's very, very, very valuable if the stocks below twenty

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Speaker 1: or above. That sort of is our mindset. We recognize

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Speaker 1: we look for a range of fair value for the

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Speaker 1: businesses that we study. All of our portfolio activity happens

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Speaker 1: when companies are below that range or above that range.

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Speaker 1: Within that range, we try not to do so much

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Speaker 1: because turnover has a certain cost and an uncertain benefit,

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Speaker 1: so we don't do a lot of fine tuning. But

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Speaker 1: as things pushed to the high end of that range,

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Speaker 1: they become sources of cash, usually not all at once.

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Speaker 1: Now all at once sale tends to happen because something

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Speaker 1: significant changed. Now what could change is the stock price

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Speaker 1: could go up an enormous amount very suddenly, and that

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Speaker 1: happens once in a while. I remember you probably remember

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Speaker 1: Agilant that was spun out Hewlett Packard. They announced some

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Speaker 1: new product called the Lambda router back into thousand or

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Speaker 1: something like that, and I think the stock went up

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Speaker 1: like a hundred and fifty percent that day. You know,

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Speaker 1: it was some ridiculous It went from thirty to seventy

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Speaker 1: or something like that. That's a good decade in a day. Yeah,

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Speaker 1: and it was. So there could be times when the

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Speaker 1: stock price moves up a lot where it would become

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Speaker 1: a cell very quickly, but that's going to be very rare.

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Speaker 1: What often happens is you get new news that causes

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Speaker 1: you to change your projections of future cash flow. You

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Speaker 1: adjust them down. When you discount them to the present.

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Speaker 1: Even though the stock is the same, or the stock

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Speaker 1: could even have gone down, it may now be above

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Speaker 1: your new range of fair value, so that becomes the sale.

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Speaker 1: So opportunity cost is a key concept. But and so

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Speaker 1: you always have to look at each name relative to

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Speaker 1: the others. You just don't want to imagine that within

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Speaker 1: a tenth of a percent or a Nicola share or

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Speaker 1: even a dollar or share, that you really can have

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Speaker 1: that much precision. Quite interesting. Let's talk a little bit

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Speaker 1: about the changes that have been going on in the industry.

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Speaker 1: What do you make of the shift from active to passive.

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Speaker 1: How has this changed the landscape? Well, I think it's

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Speaker 1: sort of a long term secular shift. Now, of course,

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Speaker 1: passive cannot have a so the debate will really be

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Speaker 1: at what point is passive sort of at the period

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Speaker 1: where there's enough excess return for active management to continue

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Speaker 1: price discovery and so on. Well, that's the theoretical point.

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Speaker 1: I think the practical point is this, people were charging

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Speaker 1: fees for managing a fund that looked a lot like

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Speaker 1: the index, had higher fees, had high turnover, was run

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Speaker 1: by a portfolio manager with no alignment of interest, none

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Speaker 1: of their own skin on the line. You know, high

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Speaker 1: cost look like the index, high turnover, inexperienced no alignment.

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Speaker 1: So part of this is a very healthy evolutionary process, right,

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Speaker 1: there was a lot of mediocrity that needed to be

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Speaker 1: pulled out. Frankly, it's amazing how long so much fat

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Speaker 1: was able to stay in the system. Markets are efficient,

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Speaker 1: just slowly and eventually efficient. Well, you know, a lot

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Speaker 1: of it depends on what the return environment is. You know,

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Speaker 1: when if stocks are compounding at ten twelve percent, nobody

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Speaker 1: much notices a hundred or two hundred basis point fee.

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Speaker 1: If stocks are compounding at six seven, then it becomes

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Speaker 1: much much more material. And so I think part of

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Speaker 1: it is about the normal evolution. You know, if you

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Speaker 1: look in markets like China, uh financial services and markets

431
00:23:31,920 --> 00:23:34,159
Speaker 1: like that, the fees are still very high. You know,

432
00:23:34,440 --> 00:23:36,560
Speaker 1: over time they'll come down. If you even look at

433
00:23:36,600 --> 00:23:40,360
Speaker 1: the traditional mutual fund business back in the fifties, sixties, seventies,

434
00:23:40,359 --> 00:23:41,879
Speaker 1: you know, it is common to have a six or

435
00:23:41,920 --> 00:23:45,760
Speaker 1: seven percent load or commission, you know, and it was

436
00:23:45,840 --> 00:23:48,600
Speaker 1: just part of the backdrop. So the good thing about

437
00:23:48,680 --> 00:23:51,920
Speaker 1: capitalism is over time things tend to become more efficient,

438
00:23:52,400 --> 00:23:55,159
Speaker 1: more transparency, and so I think part of what's happening

439
00:23:55,240 --> 00:23:56,800
Speaker 1: is very healthy. You're getting rid of a lot of

440
00:23:56,840 --> 00:24:01,520
Speaker 1: overpriced mediocrity. I think part of it is also healthy

441
00:24:01,560 --> 00:24:05,480
Speaker 1: because one of the biggest determinants of investor return over

442
00:24:05,560 --> 00:24:09,520
Speaker 1: time is investor behavior. And one of the things that

443
00:24:09,640 --> 00:24:13,280
Speaker 1: people know is that people's brains go to mush when

444
00:24:13,280 --> 00:24:16,080
Speaker 1: it comes to managing money. When prices go up, they

445
00:24:16,080 --> 00:24:19,000
Speaker 1: get more excited and want more. When prices go down,

446
00:24:19,000 --> 00:24:21,720
Speaker 1: they get depressed and want to sell. And so there's

447
00:24:21,760 --> 00:24:26,280
Speaker 1: always been a behavior penalty for investing. But with active management,

448
00:24:26,359 --> 00:24:29,600
Speaker 1: if you are going to be with a successful active manager,

449
00:24:29,880 --> 00:24:32,160
Speaker 1: they are going to look different from the index. By

450
00:24:32,200 --> 00:24:35,399
Speaker 1: and large, they'll have pretty low costs, they will have

451
00:24:35,480 --> 00:24:38,080
Speaker 1: an alignment of interest. Those sorts of things tend to

452
00:24:38,119 --> 00:24:41,800
Speaker 1: really correlate with successful active management. But one of the

453
00:24:41,800 --> 00:24:45,200
Speaker 1: important points to know is over a period of outperformance,

454
00:24:45,240 --> 00:24:48,080
Speaker 1: even if it's a decade, ten twenty years, they will

455
00:24:48,119 --> 00:24:51,200
Speaker 1: go through real periods of underperformance in there. And for

456
00:24:51,280 --> 00:24:55,119
Speaker 1: some investors that's just too much. They can't handle it.

457
00:24:55,320 --> 00:24:58,840
Speaker 1: So for them, for those sorts of investors, passive is

458
00:24:59,040 --> 00:25:01,640
Speaker 1: maybe the right answer because the're gonna underperform a percent

459
00:25:01,680 --> 00:25:03,600
Speaker 1: of the time, but just by a tiny little bit,

460
00:25:04,119 --> 00:25:08,320
Speaker 1: And so it may now there are other investors. At

461
00:25:08,400 --> 00:25:12,359
Speaker 1: lunch with an old friend yesterday, older older lady just

462
00:25:12,400 --> 00:25:15,639
Speaker 1: sort of a wonderful, gracious and we were talking about

463
00:25:15,680 --> 00:25:18,040
Speaker 1: how her adviser had recommended for her to be in

464
00:25:18,080 --> 00:25:21,560
Speaker 1: passive index view. She said, I don't like that because

465
00:25:21,560 --> 00:25:24,400
Speaker 1: I want somebody to be in charge. And for her,

466
00:25:24,600 --> 00:25:28,080
Speaker 1: her behavior was greatly improved by knowing there was a

467
00:25:28,119 --> 00:25:31,400
Speaker 1: portfolio manager, even if the performance was up or down

468
00:25:31,400 --> 00:25:33,919
Speaker 1: in any given period, for her, it was important to

469
00:25:33,920 --> 00:25:36,800
Speaker 1: have that alignment. And so I don't think there's a

470
00:25:36,840 --> 00:25:40,000
Speaker 1: magic answer. It really means looking through at the end client,

471
00:25:40,119 --> 00:25:42,720
Speaker 1: looking at their own behavior. But what I would say

472
00:25:42,760 --> 00:25:45,280
Speaker 1: is the more and more goes passive, the better and

473
00:25:45,320 --> 00:25:48,159
Speaker 1: better it is for those active managers. Like us that

474
00:25:48,240 --> 00:25:50,399
Speaker 1: are going to be in the game not just a

475
00:25:50,480 --> 00:25:52,640
Speaker 1: year from now, but ten years from now, twenty years

476
00:25:52,640 --> 00:25:54,439
Speaker 1: from now. I mean, we run our place like a

477
00:25:54,480 --> 00:25:57,240
Speaker 1: family office because we're the largest investor in the funds

478
00:25:57,240 --> 00:25:59,480
Speaker 1: that we manage. We make a lot more money from

479
00:25:59,480 --> 00:26:03,080
Speaker 1: ten percent better performance than ten percent more assets to manage.

480
00:26:03,080 --> 00:26:07,160
Speaker 1: And the danger of this active passive thing is one

481
00:26:07,600 --> 00:26:11,120
Speaker 1: people are confusing price and value. Right, prices, what you pay,

482
00:26:11,200 --> 00:26:14,600
Speaker 1: values what you get. You know, if you're a fiduciary,

483
00:26:15,280 --> 00:26:20,399
Speaker 1: managing for low costs is definitely part of your duty,

484
00:26:20,440 --> 00:26:23,080
Speaker 1: but it's not your only duty. Right. You could really

485
00:26:23,119 --> 00:26:26,040
Speaker 1: imagine a world where a client could say, wait a minute,

486
00:26:26,080 --> 00:26:28,800
Speaker 1: you just automatically bought the most of whatever had gone

487
00:26:28,880 --> 00:26:31,439
Speaker 1: up the most and whatever was the biggest company that

488
00:26:31,520 --> 00:26:34,600
Speaker 1: was your strategy, and people feeling like, well, that doesn't

489
00:26:34,640 --> 00:26:37,440
Speaker 1: feel like I'm necessarily a fiduciary. So costs are part

490
00:26:37,480 --> 00:26:40,960
Speaker 1: of it, but like risk and volatility, because you can

491
00:26:41,000 --> 00:26:44,439
Speaker 1: measure costs, you can't measure fiduciary duty. They equate the

492
00:26:44,440 --> 00:26:47,879
Speaker 1: two Oh, cost equals fiduciary duty in the same way

493
00:26:48,119 --> 00:26:51,080
Speaker 1: you can't measure risk, which is the possibility of something

494
00:26:51,119 --> 00:26:55,960
Speaker 1: going terribly wrong. But you can measure volatility, so people

495
00:26:56,040 --> 00:26:58,640
Speaker 1: equate the two and they aren't the same. Volatility has

496
00:26:58,640 --> 00:27:00,400
Speaker 1: something to do with risk, but it's not the same

497
00:27:00,440 --> 00:27:03,680
Speaker 1: as risk. How do you guys benchmark yourself if you're

498
00:27:03,760 --> 00:27:09,960
Speaker 1: running such focused portfolios that aren't remotely You mentioned, um,

499
00:27:10,040 --> 00:27:13,560
Speaker 1: the closet indexers, the funds that pretend to be active,

500
00:27:13,560 --> 00:27:16,400
Speaker 1: but I've low active share and really look like the index.

501
00:27:16,760 --> 00:27:19,640
Speaker 1: Your funds don't look at anything like the indexes. Well,

502
00:27:19,720 --> 00:27:22,440
Speaker 1: we we start with a deep truth, which is that

503
00:27:23,000 --> 00:27:26,440
Speaker 1: if you were to ask the average portfolio manager, would

504
00:27:26,480 --> 00:27:29,919
Speaker 1: you rather compound at fourteen percent a year and have

505
00:27:30,000 --> 00:27:33,359
Speaker 1: the market compound at fifteen or would you rather compound

506
00:27:33,480 --> 00:27:36,840
Speaker 1: at four and have the market compound at three? The

507
00:27:36,920 --> 00:27:41,680
Speaker 1: vast majority might take the latter choice because they would say, well,

508
00:27:41,760 --> 00:27:46,280
Speaker 1: my firm will be enormous. We're the opposite. We we

509
00:27:46,320 --> 00:27:49,960
Speaker 1: would choose a all day Job one is to build

510
00:27:49,960 --> 00:27:52,720
Speaker 1: wealth where the largest investor in the funds we manage,

511
00:27:52,840 --> 00:27:56,239
Speaker 1: we would weigh rather compound at fourteen than four, and

512
00:27:56,320 --> 00:27:59,120
Speaker 1: we think every client we have would agree. So that's

513
00:27:59,200 --> 00:28:03,200
Speaker 1: job one. But job too is that we have over

514
00:28:03,280 --> 00:28:06,600
Speaker 1: time in all of our strategies since we started them

515
00:28:06,640 --> 00:28:09,920
Speaker 1: beating the benchmarks. Now we haven't beaten them in all

516
00:28:10,080 --> 00:28:13,199
Speaker 1: periods and so on, but since we started them to today,

517
00:28:13,600 --> 00:28:17,800
Speaker 1: we've outperformed, and we think that over time that's our responsibility.

518
00:28:18,080 --> 00:28:20,639
Speaker 1: We don't know what that pattern will look like. We

519
00:28:20,720 --> 00:28:23,719
Speaker 1: don't know how long periods of underperformance will be or not.

520
00:28:24,320 --> 00:28:28,680
Speaker 1: We would optimize for building wealth first, out performing second,

521
00:28:28,760 --> 00:28:32,000
Speaker 1: but over time those are joint goals for us. And

522
00:28:32,000 --> 00:28:34,800
Speaker 1: what we would say is we in a world where

523
00:28:34,840 --> 00:28:40,760
Speaker 1: indexing continues to gain share. The momentum effects will be large, right,

524
00:28:40,800 --> 00:28:43,000
Speaker 1: so it can go on a long time. But bury

525
00:28:43,040 --> 00:28:47,080
Speaker 1: it's as simple as this. If I tell you that

526
00:28:47,360 --> 00:28:50,480
Speaker 1: there is an investment where paying a higher price would

527
00:28:50,560 --> 00:28:54,040
Speaker 1: increase your future return, you'd say, that doesn't make any sense.

528
00:28:54,640 --> 00:28:57,800
Speaker 1: The price I pay is a determinant of my return, right,

529
00:28:57,920 --> 00:29:00,440
Speaker 1: whatever the return will be. The lower the price I pay,

530
00:29:00,480 --> 00:29:04,959
Speaker 1: the higher my return. Right, it makes sense. Yet momentum

531
00:29:05,160 --> 00:29:08,520
Speaker 1: ignores that. Momentum says the opposite. The more it's gone up,

532
00:29:08,520 --> 00:29:11,280
Speaker 1: the more attractive it is. Our view is we're going

533
00:29:11,360 --> 00:29:14,920
Speaker 1: to choose common sense over whatever effects are fashionable and

534
00:29:15,000 --> 00:29:18,400
Speaker 1: working today, because if the wheels come off that effect.

535
00:29:18,400 --> 00:29:20,600
Speaker 1: It's going to feel pretty silly to say that, well,

536
00:29:20,640 --> 00:29:22,920
Speaker 1: I bought it because it broke the fifty day moving

537
00:29:22,960 --> 00:29:25,400
Speaker 1: average and had gone up a lot, so it became

538
00:29:25,440 --> 00:29:28,760
Speaker 1: more attractive to me. So you know, our view is, look,

539
00:29:28,920 --> 00:29:32,480
Speaker 1: the fundamentals over time will out. We have a strategy

540
00:29:32,520 --> 00:29:35,440
Speaker 1: that we think has added value over the index over time,

541
00:29:35,480 --> 00:29:38,640
Speaker 1: and really all of our strategies, and and that's sort

542
00:29:38,640 --> 00:29:41,200
Speaker 1: of what we come to work to do. But that

543
00:29:41,360 --> 00:29:44,360
Speaker 1: is a byproduct of the primary job, which is we

544
00:29:44,400 --> 00:29:47,280
Speaker 1: want to buy businesses that are compounding machines. We want

545
00:29:47,280 --> 00:29:51,000
Speaker 1: to build wealth for a generation, and and that relative

546
00:29:51,000 --> 00:29:54,280
Speaker 1: performance will essentially wash out from that focus on the

547
00:29:54,320 --> 00:29:59,120
Speaker 1: primary goal. Let's talk about the state of the markets today.

548
00:29:59,720 --> 00:30:03,600
Speaker 1: You're a value investor. This has been a pretty rough

549
00:30:03,720 --> 00:30:08,440
Speaker 1: decade for value. It's been all growth almost straight through

550
00:30:08,600 --> 00:30:12,880
Speaker 1: maybe the fourth quarter of so value reassert itself. Why

551
00:30:13,480 --> 00:30:18,160
Speaker 1: is value such a laggard this go round? Well, of course,

552
00:30:18,200 --> 00:30:22,680
Speaker 1: I'm gonna take umbrage with the classifications. It is a

553
00:30:22,760 --> 00:30:26,640
Speaker 1: really broad classification. What we describe as value, or what

554
00:30:26,800 --> 00:30:30,080
Speaker 1: some people describe as value is using quite a broad

555
00:30:30,240 --> 00:30:33,240
Speaker 1: brush debate with well, and of course, what counts is value,

556
00:30:33,280 --> 00:30:35,920
Speaker 1: and what counts is growth keeps shifting. Growth is a

557
00:30:36,000 --> 00:30:40,680
Speaker 1: component of value, right, Companies that grow profitably are more valuable.

558
00:30:40,680 --> 00:30:44,160
Speaker 1: So when we model the future cash flows of a business,

559
00:30:44,520 --> 00:30:46,640
Speaker 1: if we have a business that we can buy for

560
00:30:46,920 --> 00:30:49,280
Speaker 1: you know, like that apartment building for ten million dollars,

561
00:30:49,280 --> 00:30:52,880
Speaker 1: it's going to produce a million dollar coupon in perpetuity. Well,

562
00:30:52,880 --> 00:30:56,480
Speaker 1: there's no mystery what our return is. It's ten but

563
00:30:57,200 --> 00:31:00,560
Speaker 1: there's no growth. That's okay, returns ten per cent. Now

564
00:31:00,600 --> 00:31:02,720
Speaker 1: we buy another business for ten million, but it only

565
00:31:02,720 --> 00:31:06,280
Speaker 1: earns five hundred thousand. But that five hundred thousand is

566
00:31:06,360 --> 00:31:10,560
Speaker 1: able to be reinvested at incremental return on equity. Well,

567
00:31:10,600 --> 00:31:12,960
Speaker 1: the next year it's six hundred thousand, then it's seven

568
00:31:13,160 --> 00:31:16,440
Speaker 1: twenty thousand, then it's eight fifty. That business will end

569
00:31:16,520 --> 00:31:20,240
Speaker 1: up being a lot more valuable, even though you started

570
00:31:20,240 --> 00:31:22,360
Speaker 1: with a lower earnings yielder. To put it in terms

571
00:31:22,400 --> 00:31:25,640
Speaker 1: of stocks, a high PE stock could be a much

572
00:31:25,640 --> 00:31:28,880
Speaker 1: better value than a low PE stock depending on what

573
00:31:28,920 --> 00:31:31,400
Speaker 1: the earnings will do over time. So I think where

574
00:31:31,480 --> 00:31:35,880
Speaker 1: value investors that category has been a misnomer. Is some

575
00:31:35,960 --> 00:31:39,120
Speaker 1: of the greatest value stocks of the last twenty years

576
00:31:39,280 --> 00:31:43,200
Speaker 1: have been companies like Google. Google came public at I

577
00:31:43,240 --> 00:31:46,400
Speaker 1: think it was eight or nine times what it earned

578
00:31:46,480 --> 00:31:49,400
Speaker 1: three years out. So if Google was trading at eight

579
00:31:49,400 --> 00:31:54,320
Speaker 1: times earnings, you would say it's a great value stock. Right, Well,

580
00:31:54,360 --> 00:31:56,640
Speaker 1: it was trading at eight times earnings three years out,

581
00:31:56,880 --> 00:31:58,880
Speaker 1: so it grew into that and then blew by it.

582
00:31:59,160 --> 00:32:02,320
Speaker 1: So I think one of the problems that value investors

583
00:32:02,440 --> 00:32:05,480
Speaker 1: have had historically and need to get over. And by

584
00:32:05,520 --> 00:32:08,160
Speaker 1: the way, to get over it, they should just follow

585
00:32:08,440 --> 00:32:11,120
Speaker 1: the greatest of all, right, they should follow Warren Buffett,

586
00:32:11,280 --> 00:32:15,479
Speaker 1: the value investors who say I determined value based on

587
00:32:15,520 --> 00:32:20,640
Speaker 1: a predetermined set of business characteristics or industries, and I

588
00:32:20,680 --> 00:32:24,120
Speaker 1: won't look at technology. So you mentioned Google, which is

589
00:32:24,200 --> 00:32:28,960
Speaker 1: just a money machine. The advertising business just throws off

590
00:32:29,000 --> 00:32:32,440
Speaker 1: a ridiculous amount of cash. One buffets investment in Apple.

591
00:32:32,840 --> 00:32:37,280
Speaker 1: Just Apple continues to not only dominate phones, every time

592
00:32:37,320 --> 00:32:40,440
Speaker 1: they introduce a new product. I don't love the air buds,

593
00:32:40,480 --> 00:32:42,840
Speaker 1: but if it was a standalone company, it'd be like

594
00:32:42,880 --> 00:32:45,640
Speaker 1: a six or an eight billion dollar revenue company. Their

595
00:32:45,680 --> 00:32:48,080
Speaker 1: services are blowing up. I could see how you can

596
00:32:48,120 --> 00:32:51,280
Speaker 1: make the argument Google is a value play. Apple's value

597
00:32:51,280 --> 00:32:56,400
Speaker 1: play in your top holdings. Is also Amazon fast growing,

598
00:32:56,720 --> 00:32:59,560
Speaker 1: not a lot of profits. How do you make Amazon

599
00:33:00,120 --> 00:33:02,480
Speaker 1: value plan? Well, of course this is you know my

600
00:33:02,480 --> 00:33:05,240
Speaker 1: my background. As I said, I started as an accountant

601
00:33:05,760 --> 00:33:07,360
Speaker 1: and I was not a c p A. But I

602
00:33:07,440 --> 00:33:09,880
Speaker 1: was a fund accountant. But you know, accounting is the

603
00:33:09,960 --> 00:33:14,160
Speaker 1: language of business, and gap accounting in particular can have

604
00:33:14,280 --> 00:33:18,080
Speaker 1: all sorts of distortions. And we always say what we're

605
00:33:18,120 --> 00:33:21,280
Speaker 1: looking for is not reported earnings. We're not looking at

606
00:33:21,320 --> 00:33:24,800
Speaker 1: statutory earnings. We're looking at owner earnings. In other words,

607
00:33:24,840 --> 00:33:27,680
Speaker 1: if you owned a business, how much would you say

608
00:33:27,720 --> 00:33:29,720
Speaker 1: that business was earnings? And what I mean by that

609
00:33:30,240 --> 00:33:33,240
Speaker 1: is that when a company reports its earnings to the

610
00:33:33,280 --> 00:33:37,840
Speaker 1: tax authorities, it chooses accounting policies that minimize current reportable income,

611
00:33:37,880 --> 00:33:42,520
Speaker 1: accelerate appreciation, expense, things you could capitalize, you know, defer revenue,

612
00:33:42,560 --> 00:33:44,840
Speaker 1: whatever it is. And often when they report their earnings

613
00:33:44,840 --> 00:33:48,000
Speaker 1: to investors, they do the opposite. They choose accounting policies

614
00:33:48,000 --> 00:33:51,520
Speaker 1: that maximize current reportable income. Well, we're trying to get

615
00:33:51,520 --> 00:33:53,800
Speaker 1: it owner earnings, which is often between those two. So

616
00:33:53,880 --> 00:33:57,600
Speaker 1: Amazon maybe the best example, because if you were to

617
00:33:57,680 --> 00:34:00,560
Speaker 1: imagine a company that said, well, we have a very

618
00:34:00,640 --> 00:34:04,760
Speaker 1: very profitable business. In fact, I'll use a familiar name, Geico. Now,

619
00:34:04,920 --> 00:34:08,319
Speaker 1: if Geico says, well, insurance policies that have been on

620
00:34:08,320 --> 00:34:10,640
Speaker 1: our books more than a year or two are very

621
00:34:10,760 --> 00:34:13,080
Speaker 1: very profitable, and they stay with us for a long time.

622
00:34:13,440 --> 00:34:15,840
Speaker 1: So we're willing to spend a lot of money to

623
00:34:15,920 --> 00:34:20,080
Speaker 1: get new policies. Now, if they could grow their policies

624
00:34:20,360 --> 00:34:23,759
Speaker 1: twenty percent a year but earned zero in the first year,

625
00:34:24,040 --> 00:34:25,520
Speaker 1: they would do it. And if they could do it

626
00:34:25,600 --> 00:34:27,600
Speaker 1: a second year, they'd earned zero in the second year,

627
00:34:27,680 --> 00:34:29,799
Speaker 1: and a third year, they'd earned zero in the third year.

628
00:34:30,120 --> 00:34:32,960
Speaker 1: In other words, if they're investing for growth but the

629
00:34:33,040 --> 00:34:36,479
Speaker 1: core business is very profitable, then the accounting can be

630
00:34:36,600 --> 00:34:39,360
Speaker 1: in a sense distorted. Now, I'll give you real numbers

631
00:34:39,400 --> 00:34:42,240
Speaker 1: on Amazon. So when we bought Amazon, we were comparing

632
00:34:42,280 --> 00:34:46,719
Speaker 1: it to Walmart. Now, Walmart grew sales. This is sort

633
00:34:46,719 --> 00:34:49,760
Speaker 1: of an amazing thing to think about. Over a seventeen

634
00:34:49,840 --> 00:34:53,440
Speaker 1: year period, they grew sales from about a billion dollars

635
00:34:54,120 --> 00:34:58,120
Speaker 1: to about seventy billion dollars. This is wal Walmart over seven.

636
00:34:59,440 --> 00:35:02,799
Speaker 1: This would have been nine eighty to like seven or

637
00:35:02,840 --> 00:35:07,560
Speaker 1: somewhere in their right around there. Now, over a seventeen

638
00:35:07,640 --> 00:35:11,279
Speaker 1: year period in its history, Amazon grew sales from a

639
00:35:11,320 --> 00:35:14,839
Speaker 1: billion to about a hundred billion, so roughly the same

640
00:35:14,960 --> 00:35:17,200
Speaker 1: rate of growth, right, those would be roughly the same

641
00:35:17,239 --> 00:35:21,920
Speaker 1: over seventeen years. Now, during the seventeen years that Walmart

642
00:35:21,960 --> 00:35:26,680
Speaker 1: grew from a billion in sales to seventy billion in sales,

643
00:35:27,200 --> 00:35:29,880
Speaker 1: how much free cash flow do you think they generated.

644
00:35:29,880 --> 00:35:32,520
Speaker 1: They reported a lot of earnings, so there's lots of

645
00:35:32,520 --> 00:35:36,640
Speaker 1: net income. But if you owned the business, right at

646
00:35:36,680 --> 00:35:38,839
Speaker 1: the end of the day, how much cash did you have?

647
00:35:39,000 --> 00:35:42,200
Speaker 1: I gotta think a few billion dollars? Right? It was negative,

648
00:35:42,680 --> 00:35:46,920
Speaker 1: really negative free cash flow for seventeen years cumulatively. Well,

649
00:35:46,920 --> 00:35:49,160
Speaker 1: those stores are expensive. You gotta buy the land, you

650
00:35:49,239 --> 00:35:52,960
Speaker 1: gotta buy the facilities, so it's not a zero cost

651
00:35:53,200 --> 00:35:55,799
Speaker 1: of construction, all right, But why do they do that?

652
00:35:55,840 --> 00:35:57,920
Speaker 1: Because they're going to get a good return on the

653
00:35:57,960 --> 00:36:00,759
Speaker 1: money that they spent. Now, the account and treatment for

654
00:36:00,800 --> 00:36:04,560
Speaker 1: that is that you capitalize it, you call it capital spending,

655
00:36:04,719 --> 00:36:07,279
Speaker 1: and you depreciate it over time. So there's lots of

656
00:36:07,320 --> 00:36:09,960
Speaker 1: net income, but if you go to the cash flow statement,

657
00:36:10,120 --> 00:36:12,200
Speaker 1: there's no cash. In fact, there was negative. They had

658
00:36:12,200 --> 00:36:14,799
Speaker 1: to borrow some money during that period of time to

659
00:36:15,000 --> 00:36:18,000
Speaker 1: finance that growth. Now, during the same period of time,

660
00:36:18,040 --> 00:36:21,799
Speaker 1: when Amazon grew sales from a billion to just about

661
00:36:21,840 --> 00:36:25,000
Speaker 1: a hundred billion gross merchandise value, what was their cumulative

662
00:36:25,000 --> 00:36:27,879
Speaker 1: free cash flow? They reported no earnings, no profits at all.

663
00:36:28,040 --> 00:36:30,200
Speaker 1: It's got to be tens of billions of dollars. The

664
00:36:30,400 --> 00:36:33,560
Speaker 1: cash it was about seven billion dollars. I think of cumulators.

665
00:36:33,560 --> 00:36:35,719
Speaker 1: So if you own the business, you had seven billion

666
00:36:35,760 --> 00:36:37,800
Speaker 1: dollars in the bank at the end of seventeen years.

667
00:36:38,080 --> 00:36:40,160
Speaker 1: You grew sales from a billion to a hundred billion,

668
00:36:40,280 --> 00:36:42,960
Speaker 1: but you reported no earnings, which is better. I'll take

669
00:36:43,040 --> 00:36:48,120
Speaker 1: the ladder. Take the ladder. So our view was that's

670
00:36:48,160 --> 00:36:51,799
Speaker 1: but but what was interesting is then you get to valuation,

671
00:36:52,200 --> 00:36:55,240
Speaker 1: and when we bought Amazon, it was trading at about

672
00:36:55,280 --> 00:36:59,600
Speaker 1: one time sales. Walmart in that period of that seventeen

673
00:36:59,680 --> 00:37:02,440
Speaker 1: years growth was trading between one and two time sales

674
00:37:02,600 --> 00:37:05,720
Speaker 1: that whole period. They both have the same gross margin.

675
00:37:05,920 --> 00:37:08,879
Speaker 1: They're both making money selling stuff. It's just the net

676
00:37:08,880 --> 00:37:12,120
Speaker 1: margin wasn't there. So what it required as a value

677
00:37:12,120 --> 00:37:17,560
Speaker 1: investor to buy Amazon was one adjusting the core business

678
00:37:17,560 --> 00:37:21,200
Speaker 1: and saying if they chose not to grow, just like Walmart.

679
00:37:21,239 --> 00:37:26,040
Speaker 1: When Walmart's growth slowed, by the way, it just gushed cash. Oh,

680
00:37:26,120 --> 00:37:30,319
Speaker 1: I mean the cash places to physically store and the

681
00:37:30,440 --> 00:37:34,040
Speaker 1: way the tsunami behind them, of all of this cash,

682
00:37:34,080 --> 00:37:36,839
Speaker 1: of all of those maturing stores just poured in. So

683
00:37:37,040 --> 00:37:40,160
Speaker 1: cash flow at Walmart went through the roof in the

684
00:37:40,200 --> 00:37:42,840
Speaker 1: next fifteen years. So the first thing you have to

685
00:37:42,880 --> 00:37:44,759
Speaker 1: do is you had to look at that second, you

686
00:37:44,760 --> 00:37:47,960
Speaker 1: had to say, okay, for every dollar. Now, we assumed

687
00:37:48,000 --> 00:37:50,520
Speaker 1: that Amazon could have a five percent margin on sales

688
00:37:50,600 --> 00:37:53,360
Speaker 1: about Walmart, and we looked at bundles of goods, and

689
00:37:53,920 --> 00:37:56,280
Speaker 1: but what you would say is, well, for every dollar

690
00:37:56,480 --> 00:37:59,960
Speaker 1: that Amazon is choosing not to report as net income

691
00:38:00,160 --> 00:38:02,640
Speaker 1: that they are reinvesting on our behalf, do we have

692
00:38:02,840 --> 00:38:06,160
Speaker 1: confidence like Walmart that they're earning a decent return. I

693
00:38:06,160 --> 00:38:09,120
Speaker 1: think Walmart got about fifteen percent or fourteen percent or

694
00:38:09,480 --> 00:38:11,680
Speaker 1: maybe as high as seventeen at one point of every

695
00:38:11,680 --> 00:38:14,600
Speaker 1: dollar they retained and reinvested, that was their return on

696
00:38:14,600 --> 00:38:17,840
Speaker 1: that increment. So are we confident that Jeff Bezos and

697
00:38:17,880 --> 00:38:20,440
Speaker 1: Amazon is getting a good return on the money that

698
00:38:20,520 --> 00:38:23,000
Speaker 1: they are not? And you know, the answers look at

699
00:38:23,040 --> 00:38:25,239
Speaker 1: the data and this is when we bought it, you know,

700
00:38:25,440 --> 00:38:28,560
Speaker 1: whether it was pushing into prime, whether it was pushing

701
00:38:28,560 --> 00:38:33,319
Speaker 1: into video, whether it was wonderful creating a WS. They

702
00:38:33,320 --> 00:38:37,040
Speaker 1: have gotten huge returns, huge returns on the dollar. You

703
00:38:37,080 --> 00:38:40,120
Speaker 1: have one of the great capital allocators reinvesting. So split

704
00:38:40,160 --> 00:38:42,839
Speaker 1: the business into those now with a WS, we say,

705
00:38:42,840 --> 00:38:45,799
Speaker 1: really they're three components. You value AWS as if it

706
00:38:45,880 --> 00:38:49,640
Speaker 1: was a standalone business, value the retail business, and then

707
00:38:50,040 --> 00:38:52,680
Speaker 1: estimate what you think would be the return on the

708
00:38:52,719 --> 00:38:56,759
Speaker 1: incremental capital they're spending. And ends up Amazon was a

709
00:38:56,920 --> 00:39:00,319
Speaker 1: terrific value stock. And so we don't use new math,

710
00:39:00,400 --> 00:39:04,120
Speaker 1: we don't use pops, we don't use eyeballs or clicks.

711
00:39:04,480 --> 00:39:06,840
Speaker 1: We really just look at the cash that that business

712
00:39:06,880 --> 00:39:09,520
Speaker 1: will produce. And it's funny because one of the great

713
00:39:09,560 --> 00:39:12,799
Speaker 1: things about looking across industries is the more time you

714
00:39:12,840 --> 00:39:15,720
Speaker 1: spend with Jamie Diamond, the more you see that somebody

715
00:39:15,760 --> 00:39:18,759
Speaker 1: like Jeff Bezos, they speak the same language. You know,

716
00:39:18,880 --> 00:39:21,480
Speaker 1: it doesn't matter that one's in banking and ones in finance.

717
00:39:21,560 --> 00:39:23,719
Speaker 1: It's interesting they almost work together. I think it's been

718
00:39:23,760 --> 00:39:27,320
Speaker 1: reported that Jeff tried to hire Jamie, but when Jamie

719
00:39:27,320 --> 00:39:30,000
Speaker 1: went to Bank one to be his number two at Amazon,

720
00:39:30,640 --> 00:39:33,120
Speaker 1: isn't that amazing, That's quite fascinating. And they did that

721
00:39:33,239 --> 00:39:38,239
Speaker 1: joint project on healthcare with its Amazon, JP Morgan and

722
00:39:38,360 --> 00:39:42,319
Speaker 1: uh Berkshire Hathaway that we still haven't heard anything about that.

723
00:39:42,800 --> 00:39:45,440
Speaker 1: And when you look at Amazon, you have to wonder

724
00:39:45,920 --> 00:39:50,080
Speaker 1: they keep finding these new industries to invest in. What

725
00:39:50,200 --> 00:39:52,879
Speaker 1: would happen if they push into finance, What would happen

726
00:39:52,920 --> 00:39:55,279
Speaker 1: if they push into healthcare? Those are two of the

727
00:39:55,280 --> 00:39:58,880
Speaker 1: biggest industries in the country. I know, I don't want

728
00:39:58,880 --> 00:40:00,879
Speaker 1: to bet against Jeff b so Us if he rolls

729
00:40:00,880 --> 00:40:03,680
Speaker 1: something out like that. Well there, it's a hyper rational

730
00:40:03,800 --> 00:40:07,040
Speaker 1: company that makes decisions for the long term. You know,

731
00:40:07,160 --> 00:40:09,759
Speaker 1: one thing I would recommend every listener does, if they

732
00:40:09,800 --> 00:40:13,040
Speaker 1: haven't done it, they should read Jamie Diamonds and your

733
00:40:13,080 --> 00:40:15,840
Speaker 1: reports every year, and they should read Jeff bezos is

734
00:40:15,880 --> 00:40:17,960
Speaker 1: in your reports every year. Both men write their own

735
00:40:17,960 --> 00:40:21,000
Speaker 1: annual reports, which alone tells you something about the culture

736
00:40:21,040 --> 00:40:24,840
Speaker 1: of the place. For sure, they're both hyperrational, they're modest,

737
00:40:25,000 --> 00:40:29,120
Speaker 1: they're driven, they have smart people around them. And you know,

738
00:40:29,239 --> 00:40:32,680
Speaker 1: in the case of Amazon, you know, Amazon is still

739
00:40:32,719 --> 00:40:36,560
Speaker 1: smaller in retailer than Walmart. Retail is a ten trillion

740
00:40:36,560 --> 00:40:40,640
Speaker 1: dollar business. So there's enormous, enormous room to go in

741
00:40:40,719 --> 00:40:43,600
Speaker 1: terms of what they can do, and AWS is probably

742
00:40:43,600 --> 00:40:45,840
Speaker 1: a bigger business than retail when you look sort of

743
00:40:45,840 --> 00:40:49,239
Speaker 1: globally how that will unfold. So I just would say

744
00:40:49,280 --> 00:40:51,440
Speaker 1: that it is at the higher end of our estimate

745
00:40:51,440 --> 00:40:55,759
Speaker 1: of fair value. But the determination is for how long

746
00:40:55,800 --> 00:40:57,839
Speaker 1: they will be able to invest at these high rates

747
00:40:57,840 --> 00:41:00,799
Speaker 1: of return and and so we have sold some over

748
00:41:00,840 --> 00:41:03,240
Speaker 1: the years, and of course that's been a terrible mistake,

749
00:41:03,320 --> 00:41:06,000
Speaker 1: but we do have a value discipline. So there's a

750
00:41:06,000 --> 00:41:09,560
Speaker 1: price where our math doesn't work with Amazon. It's pushed

751
00:41:09,640 --> 00:41:12,440
Speaker 1: up towards that end, and we've trimmed some. But honest

752
00:41:12,480 --> 00:41:14,560
Speaker 1: to God, if I said to my mother my mother

753
00:41:14,600 --> 00:41:17,760
Speaker 1: owned Amazon, uh, she bought a little because she liked

754
00:41:18,000 --> 00:41:19,960
Speaker 1: this story in the very beginning, and I've told her

755
00:41:19,960 --> 00:41:22,200
Speaker 1: it's a big percentage of your portfolio, I wouldn't lose

756
00:41:22,239 --> 00:41:24,000
Speaker 1: a lot of sleep over it. There you go, Can

757
00:41:24,000 --> 00:41:25,239
Speaker 1: you stick around a little bit? I have a ton

758
00:41:25,360 --> 00:41:28,480
Speaker 1: more questions. Absolutely. We have been speaking with Chris Davis.

759
00:41:28,520 --> 00:41:32,880
Speaker 1: He is the chairman and chief investment officer at Davis Advisors.

760
00:41:33,120 --> 00:41:35,879
Speaker 1: If you enjoy this conversation, be sure and check out

761
00:41:35,920 --> 00:41:38,759
Speaker 1: the podcast extras, where we keep the tape rolling and

762
00:41:38,800 --> 00:41:42,759
Speaker 1: continue discussing all things value investing. You can find that

763
00:41:42,880 --> 00:41:48,160
Speaker 1: at iTunes, Spotify, Google Podcast, wherever your finder podcasts are sold.

764
00:41:48,360 --> 00:41:51,600
Speaker 1: We love your comments, feedback and suggestions right to us

765
00:41:51,680 --> 00:41:54,839
Speaker 1: at m IB podcast at Bloomberg dot net. Give us

766
00:41:54,840 --> 00:41:57,840
Speaker 1: a review on Apple iTunes. You can check out my

767
00:41:57,960 --> 00:42:01,960
Speaker 1: weekly column on Bloomberg dot um slash Opinion. Follow me

768
00:42:02,200 --> 00:42:05,719
Speaker 1: on Twitter at ridlts. I'm Barry Hults. You're listening to

769
00:42:05,840 --> 00:42:11,959
Speaker 1: Masters in Business on Bloomberg Radio. Welcome to the podcast, Chris.

770
00:42:12,000 --> 00:42:14,120
Speaker 1: Thank you so much for doing this. I have been

771
00:42:14,200 --> 00:42:18,280
Speaker 1: chasing you down for a while. We have a uh

772
00:42:18,680 --> 00:42:23,799
Speaker 1: mutual colleague, Tucker Us, who first brought your name up

773
00:42:23,840 --> 00:42:25,920
Speaker 1: to me, I don't know a year ago, and I

774
00:42:25,920 --> 00:42:29,640
Speaker 1: started doing some research and said, hey, these guys really interesting.

775
00:42:29,719 --> 00:42:32,839
Speaker 1: Let's let's get them into the studio and have a conversation.

776
00:42:32,920 --> 00:42:36,399
Speaker 1: So I'm I'm glad we finally hunted you down. You're

777
00:42:36,520 --> 00:42:40,440
Speaker 1: your New York based right, New York born, bread and based,

778
00:42:40,600 --> 00:42:42,839
Speaker 1: so so you're here, so we're not taking you too far,

779
00:42:43,640 --> 00:42:46,000
Speaker 1: um out of your way. There were a couple of

780
00:42:46,280 --> 00:42:50,560
Speaker 1: um things I mentioned in your intro that we skipped

781
00:42:50,600 --> 00:42:52,719
Speaker 1: by on the regular questions. I have to ask you,

782
00:42:53,239 --> 00:42:56,000
Speaker 1: how did you end up on the board of directors

783
00:42:56,000 --> 00:42:59,400
Speaker 1: of Coca Cola. Well, that's a very good question. I

784
00:43:00,160 --> 00:43:01,959
Speaker 1: remember I was once has to be on the board

785
00:43:02,000 --> 00:43:04,680
Speaker 1: of a wonderful think tank in Santa Fe called the

786
00:43:04,719 --> 00:43:08,279
Speaker 1: Santa Fe Institute, And uh, you know is founded by

787
00:43:08,320 --> 00:43:12,600
Speaker 1: Murray Galman, who is a Nobel Prize physicist and wonderful

788
00:43:12,680 --> 00:43:16,440
Speaker 1: scientists and incredible innovative work they do there, and and

789
00:43:16,600 --> 00:43:19,759
Speaker 1: Murray asked me to be on the board and I said, well,

790
00:43:19,800 --> 00:43:21,359
Speaker 1: you know, I'm not going to give you any more

791
00:43:21,400 --> 00:43:23,799
Speaker 1: money than I give you already, and and I love

792
00:43:23,880 --> 00:43:26,160
Speaker 1: the place, but I don't really think I would contribute much.

793
00:43:26,160 --> 00:43:29,320
Speaker 1: He said, no, We've we've studied decision making in complex

794
00:43:29,360 --> 00:43:33,439
Speaker 1: situations and it ends up it's really important to have diversity.

795
00:43:33,760 --> 00:43:36,799
Speaker 1: And I said, well, you know, I'm a white male

796
00:43:36,880 --> 00:43:39,440
Speaker 1: from New York City. I don't know what you mean, like,

797
00:43:39,480 --> 00:43:42,719
Speaker 1: what sort of he said, Oh, I Q diversity. He said,

798
00:43:42,880 --> 00:43:46,319
Speaker 1: we're all geniuses, we need somebody like you to sort

799
00:43:46,320 --> 00:43:48,960
Speaker 1: of round it out. So I don't know if that

800
00:43:49,080 --> 00:43:54,000
Speaker 1: he's serious. He was actually quite serious. We need some dummies,

801
00:43:54,360 --> 00:43:58,680
Speaker 1: we need somebody listen. Six that we looked down on

802
00:43:58,760 --> 00:44:01,200
Speaker 1: that group, you know, in that group, it was it

803
00:44:01,280 --> 00:44:04,799
Speaker 1: was probably not an insult, but but he you know,

804
00:44:04,960 --> 00:44:07,320
Speaker 1: he also of course meant, you know, somebody that wasn't

805
00:44:07,320 --> 00:44:10,040
Speaker 1: of a science background and so on. But but no,

806
00:44:10,400 --> 00:44:13,480
Speaker 1: you know, I think that uh, you know, I would

807
00:44:13,520 --> 00:44:17,680
Speaker 1: say that Coca Cola is maybe the pre eminent international

808
00:44:17,719 --> 00:44:20,799
Speaker 1: global company. And so from my point of view, the

809
00:44:20,800 --> 00:44:25,879
Speaker 1: opportunity uh, to serve sort of that icon, to learn, uh,

810
00:44:25,920 --> 00:44:29,120
Speaker 1: to work with, you know, some of the terrific directors

811
00:44:29,120 --> 00:44:31,239
Speaker 1: that are there, and and at a time that the

812
00:44:31,280 --> 00:44:34,359
Speaker 1: company may face challenges in terms of you know, uh

813
00:44:34,520 --> 00:44:39,520
Speaker 1: perceptions and and reinventing the model and beverages for life,

814
00:44:39,640 --> 00:44:42,399
Speaker 1: it's an exciting time to be in. They clearly have.

815
00:44:43,440 --> 00:44:47,360
Speaker 1: At one point in time, sugar beverages was their whole business.

816
00:44:47,840 --> 00:44:50,480
Speaker 1: It's a really much smaller part of what they do.

817
00:44:51,040 --> 00:44:53,560
Speaker 1: Water and fruit juice and and all sorts of other

818
00:44:53,600 --> 00:44:57,600
Speaker 1: stuff has has really taken over. Yeah, they really are,

819
00:44:57,840 --> 00:45:01,040
Speaker 1: you know, in their heart there beverages company, and sugar

820
00:45:01,200 --> 00:45:03,759
Speaker 1: was part of that. Historically, it doesn't need to be

821
00:45:03,880 --> 00:45:05,520
Speaker 1: and it has not been the same part of it.

822
00:45:05,719 --> 00:45:08,279
Speaker 1: Although although I will tell you, whenever I travel to

823
00:45:08,480 --> 00:45:12,319
Speaker 1: the Caribbean and there's a local bottle of coca cola

824
00:45:12,360 --> 00:45:16,759
Speaker 1: bottling plant, that cane sugar coca cola is not like

825
00:45:16,800 --> 00:45:18,560
Speaker 1: anything you get well, and of course they sell it

826
00:45:18,600 --> 00:45:21,960
Speaker 1: in New York, Mexican coke they call it, and it

827
00:45:22,040 --> 00:45:24,960
Speaker 1: really it reminds you of the romance of the brand

828
00:45:24,960 --> 00:45:27,680
Speaker 1: and boy on your kid. Anyway, a hot day sitting

829
00:45:27,680 --> 00:45:30,600
Speaker 1: on a Caribbean island and somebody brings out that that

830
00:45:30,800 --> 00:45:35,000
Speaker 1: ice cold glass bottle of coke, You're you're absolutely right,

831
00:45:35,040 --> 00:45:37,759
Speaker 1: and now it takes you back. I wouldn't promise that

832
00:45:37,800 --> 00:45:41,239
Speaker 1: I could identify them in a blind taste test, but

833
00:45:41,400 --> 00:45:45,439
Speaker 1: everything around that is just so so unique and special. Um.

834
00:45:45,520 --> 00:45:48,279
Speaker 1: The other thing you're a board member of is the

835
00:45:48,760 --> 00:45:51,640
Speaker 1: Museum of Natural History, one of my favorite places in

836
00:45:51,719 --> 00:45:54,400
Speaker 1: the city. How did how did that come about? Well,

837
00:45:54,680 --> 00:45:57,560
Speaker 1: you know, I think I've always felt a passion about

838
00:45:57,719 --> 00:46:00,160
Speaker 1: understanding more about science. I mentioned the same of a

839
00:46:00,280 --> 00:46:03,359
Speaker 1: institute with that same sort of mindset. You know, it

840
00:46:03,440 --> 00:46:07,200
Speaker 1: is partly because it's my my grandmother, who was sort

841
00:46:07,200 --> 00:46:09,480
Speaker 1: of an icon to me, an amazing woman, and she

842
00:46:09,640 --> 00:46:11,839
Speaker 1: died at a hundred and six. She was kayaking at

843
00:46:11,840 --> 00:46:14,759
Speaker 1: a hundred and five. So she really lived a full life,

844
00:46:14,840 --> 00:46:17,719
Speaker 1: and she had a PhD in international relations. She was

845
00:46:17,840 --> 00:46:21,319
Speaker 1: enormously well read, but she felt very insecure because she

846
00:46:21,400 --> 00:46:25,200
Speaker 1: never studied science. And we talked a lot about it

847
00:46:25,360 --> 00:46:28,200
Speaker 1: late in her life, and she said, you know, I

848
00:46:28,239 --> 00:46:31,560
Speaker 1: realized now that the reason was the name science scared me.

849
00:46:31,600 --> 00:46:34,840
Speaker 1: It took me back to high school biology and feeling

850
00:46:34,920 --> 00:46:37,799
Speaker 1: overwhelmed and not knowing what was going on. She said,

851
00:46:37,840 --> 00:46:41,560
Speaker 1: I wish they would simply call science how things work

852
00:46:41,719 --> 00:46:46,239
Speaker 1: and why things happen, because then everybody's interested in it.

853
00:46:46,320 --> 00:46:48,960
Speaker 1: And I would say the Museum of Natural History is

854
00:46:49,160 --> 00:46:54,000
Speaker 1: maybe the pre eminent institution for delighting people with the

855
00:46:54,040 --> 00:46:57,239
Speaker 1: ideas of science. In other words, it makes them accessible,

856
00:46:57,280 --> 00:47:01,719
Speaker 1: it makes people curious, It estou you. And so I

857
00:47:01,840 --> 00:47:04,920
Speaker 1: felt like, in that sense, thinking of my grandmother, who

858
00:47:05,040 --> 00:47:07,399
Speaker 1: became a supporter of the museum late in her life,

859
00:47:07,600 --> 00:47:12,360
Speaker 1: that idea of sort of recognizing that scientific literacy it

860
00:47:12,680 --> 00:47:16,480
Speaker 1: should be a lifelong pursuit because it's just so fascinating.

861
00:47:16,560 --> 00:47:18,920
Speaker 1: Let alone that it's good for policy, it's good for

862
00:47:18,960 --> 00:47:22,240
Speaker 1: the electorate, it's good for people to understand the basic

863
00:47:22,480 --> 00:47:26,040
Speaker 1: fundamentals of the scientific method and why things happen and

864
00:47:26,120 --> 00:47:30,239
Speaker 1: how things work, And what New York area school kid

865
00:47:30,480 --> 00:47:35,000
Speaker 1: does not have a vivid recollection of the first time

866
00:47:35,560 --> 00:47:40,120
Speaker 1: you see the Torhinosaurus rex or the blue whale hanging

867
00:47:40,160 --> 00:47:42,600
Speaker 1: from the ceiling, or if you get to go to

868
00:47:42,640 --> 00:47:47,439
Speaker 1: the planetarium, and every one of those experiences five six,

869
00:47:47,440 --> 00:47:49,439
Speaker 1: seven years old, that stays with you for the rest

870
00:47:49,440 --> 00:47:52,320
Speaker 1: of your know. Even that Hall of North American Mammals,

871
00:47:52,360 --> 00:47:54,879
Speaker 1: you know, the giant bears standing there, and you can

872
00:47:54,960 --> 00:47:57,960
Speaker 1: almost those dioramas, you almost feel them twitching. You know,

873
00:47:58,440 --> 00:48:02,080
Speaker 1: it is I absolutely agree, and I think for like

874
00:48:02,160 --> 00:48:04,480
Speaker 1: most New York City parents, you know, there are a

875
00:48:04,600 --> 00:48:08,040
Speaker 1: lot of weekends that you spend just wandering down those halls.

876
00:48:08,040 --> 00:48:10,239
Speaker 1: And the best thing about the museum is to go

877
00:48:10,320 --> 00:48:12,799
Speaker 1: with no agenda, to just wander. And you know, they're

878
00:48:12,840 --> 00:48:16,000
Speaker 1: doing this spectacular new edition the Guilder Center, which is

879
00:48:16,120 --> 00:48:18,160
Speaker 1: one of the big changes will be how it will

880
00:48:18,160 --> 00:48:21,239
Speaker 1: affect circulation, and that I you know right now, when

881
00:48:21,239 --> 00:48:22,840
Speaker 1: you wander the museum, you get to a lot of

882
00:48:22,880 --> 00:48:26,799
Speaker 1: dead ends. One of the exciting things about the new

883
00:48:26,840 --> 00:48:29,160
Speaker 1: plan is you really will be able to wander sort

884
00:48:29,160 --> 00:48:32,080
Speaker 1: of almost endlessly. It it'll be delightful and it is

885
00:48:32,440 --> 00:48:35,040
Speaker 1: you know, it is a place that people should just

886
00:48:35,360 --> 00:48:39,759
Speaker 1: go and revisit and revisit because on every topic they

887
00:48:39,800 --> 00:48:45,680
Speaker 1: have a thoughtful, knowledgeable, uh and accessible approach to learning

888
00:48:45,719 --> 00:48:48,200
Speaker 1: about the world that we live in. When does that reopen?

889
00:48:48,200 --> 00:48:50,600
Speaker 1: When does the new edition go live? I think it

890
00:48:50,600 --> 00:48:53,839
Speaker 1: will be twenty one, so coming up quite soon. It's

891
00:48:54,000 --> 00:48:58,120
Speaker 1: uh Gene Gang from Studio Gang is the architects. She's

892
00:48:58,160 --> 00:49:03,600
Speaker 1: a spectacular architect. The that entrance will be on Columbus Avenue,

893
00:49:03,840 --> 00:49:06,759
Speaker 1: so you'll enter from the other side. It's just it'll

894
00:49:06,800 --> 00:49:09,400
Speaker 1: be fantastic. People forget I think the museum has something

895
00:49:09,440 --> 00:49:13,040
Speaker 1: like twenty six buildings. Uh, you don't think of it

896
00:49:13,160 --> 00:49:16,239
Speaker 1: is a giant and it's just I mean it's a

897
00:49:16,280 --> 00:49:19,120
Speaker 1: wonderful place. So you know, I I like going to

898
00:49:19,200 --> 00:49:21,920
Speaker 1: an art museum or the operas, but just the next guy,

899
00:49:21,960 --> 00:49:26,279
Speaker 1: which probably isn't all that much, but but going there

900
00:49:26,440 --> 00:49:29,560
Speaker 1: it's always energizing and you know, it's run. One of

901
00:49:29,600 --> 00:49:31,399
Speaker 1: the amazing things I'll just say as an a side

902
00:49:31,400 --> 00:49:33,360
Speaker 1: about the museum is it's had the same you know,

903
00:49:33,360 --> 00:49:36,680
Speaker 1: when we invest in companies Berry. We love when you

904
00:49:36,719 --> 00:49:39,360
Speaker 1: can have a run with an executive like Jeff Bezos

905
00:49:39,520 --> 00:49:43,640
Speaker 1: or or Larry Page or Jamie Diamond. You know, where

906
00:49:43,719 --> 00:49:46,840
Speaker 1: you can have twenty thirty years of you know, you

907
00:49:46,920 --> 00:49:50,239
Speaker 1: gained conviction early, and then you have the conviction to

908
00:49:50,360 --> 00:49:53,759
Speaker 1: ride through the downturns by more. And in a way,

909
00:49:53,840 --> 00:49:56,879
Speaker 1: the Museum of Natural History embodies that because it's had

910
00:49:56,920 --> 00:50:00,000
Speaker 1: the same executive director. I don't want to make up

911
00:50:00,000 --> 00:50:03,920
Speaker 1: the number, but it's it's a decade, maybe thirty thirty

912
00:50:04,040 --> 00:50:06,880
Speaker 1: or by the end of her career maybe forty years almost,

913
00:50:07,400 --> 00:50:10,920
Speaker 1: and she is just a force of nature, Ellen futter

914
00:50:11,040 --> 00:50:13,719
Speaker 1: And and so it's also excited to be part of

915
00:50:13,719 --> 00:50:16,760
Speaker 1: an institution that has been so shaped by the long

916
00:50:16,880 --> 00:50:19,480
Speaker 1: term vision of a leader, and to be in a

917
00:50:19,520 --> 00:50:22,400
Speaker 1: sense get to spend time with the team that she's built.

918
00:50:22,480 --> 00:50:25,359
Speaker 1: It's one of the best managed institutions. I know. It's

919
00:50:25,400 --> 00:50:28,200
Speaker 1: funny you mentioned the the ability to wander and not

920
00:50:28,360 --> 00:50:32,319
Speaker 1: hit dead ends. My wife is now retired, but she

921
00:50:32,440 --> 00:50:35,400
Speaker 1: taught fashion, illustration and design, and so I've been dragged

922
00:50:35,440 --> 00:50:38,239
Speaker 1: to every museum in the world. We just went to

923
00:50:38,360 --> 00:50:42,680
Speaker 1: the reopened MoMA here in New York and they did

924
00:50:42,680 --> 00:50:46,120
Speaker 1: exactly what you describe there. Really everything is a loop.

925
00:50:46,480 --> 00:50:49,840
Speaker 1: There are no more dead ends. You walk into uhum

926
00:50:51,160 --> 00:50:54,400
Speaker 1: a gallery and there's an exit that takes you to

927
00:50:54,480 --> 00:50:57,080
Speaker 1: the next gallery. It's not like the old days where

928
00:50:57,120 --> 00:51:00,920
Speaker 1: it was a perplexing series of dead end. I do

929
00:51:01,080 --> 00:51:04,120
Speaker 1: wonder if it's almost hardwired in us to be wanderers.

930
00:51:04,480 --> 00:51:07,200
Speaker 1: It is amazing, and it's it's something that I think.

931
00:51:07,760 --> 00:51:09,920
Speaker 1: You know, New York has lots of problems, and I

932
00:51:09,960 --> 00:51:12,120
Speaker 1: travel all over the country and all over the world,

933
00:51:12,200 --> 00:51:14,680
Speaker 1: and I can see the pluses and minuses. But one

934
00:51:14,719 --> 00:51:16,799
Speaker 1: of the wonderful things about New York is that it

935
00:51:16,880 --> 00:51:19,759
Speaker 1: is a walking city. And you really don't have that

936
00:51:19,800 --> 00:51:22,799
Speaker 1: when I visit Los Angeles, and you know, and and

937
00:51:22,920 --> 00:51:28,120
Speaker 1: other cities, small cities Midwestern Akron, Toledo, uh Cleveland. You

938
00:51:28,280 --> 00:51:30,720
Speaker 1: just that that sense of being able to walk to work,

939
00:51:30,840 --> 00:51:33,600
Speaker 1: walk through the park, walk around. But I do think

940
00:51:33,680 --> 00:51:36,279
Speaker 1: there is something in us that that enjoys wandering, and

941
00:51:36,520 --> 00:51:39,520
Speaker 1: it is wonderful when these institutions reconfigure to allow that.

942
00:51:39,600 --> 00:51:43,120
Speaker 1: And and of course, intellectually, like investing, one of the

943
00:51:43,160 --> 00:51:45,919
Speaker 1: great things about investing is it's wonderful to be able

944
00:51:45,920 --> 00:51:48,759
Speaker 1: to intellectually wander. You know, one of the things my

945
00:51:48,840 --> 00:51:51,719
Speaker 1: grandfather was a passionate investor. He called it the best

946
00:51:51,760 --> 00:51:54,720
Speaker 1: game in town. And he said, because everything is relevant

947
00:51:54,719 --> 00:51:57,000
Speaker 1: in the moment you get to an end on a thread,

948
00:51:57,239 --> 00:51:59,719
Speaker 1: you can just move in a different direction. But you

949
00:51:59,760 --> 00:52:02,360
Speaker 1: in a sense, it's not like if you were making

950
00:52:02,440 --> 00:52:04,600
Speaker 1: chairs for a living. You know, you sort of make

951
00:52:04,640 --> 00:52:06,719
Speaker 1: the chair out, it goes, you make another chair out,

952
00:52:06,719 --> 00:52:11,080
Speaker 1: it goes. There's something about this constant learning, constant improvement,

953
00:52:11,160 --> 00:52:15,400
Speaker 1: constant wandering process that's really delightful about it. I totally agree.

954
00:52:15,680 --> 00:52:18,400
Speaker 1: I want to get to some questions that we skipped

955
00:52:18,480 --> 00:52:24,120
Speaker 1: over um during the broadcast portion, and really the first

956
00:52:24,160 --> 00:52:28,239
Speaker 1: thing we have to talk about is Davis Advisors is

957
00:52:28,360 --> 00:52:31,920
Speaker 1: relatively new to the worlds of ETFs. Uh. This is

958
00:52:33,719 --> 00:52:36,640
Speaker 1: something like that, you guys added a couple of ETFs

959
00:52:37,040 --> 00:52:41,560
Speaker 1: which have all accumulated a decent amount of assets under management.

960
00:52:42,719 --> 00:52:45,359
Speaker 1: Given your fifty year history and mutual funds, what made

961
00:52:45,400 --> 00:52:48,320
Speaker 1: you say, hey, let's try these new fangal dtfs on.

962
00:52:48,480 --> 00:52:50,400
Speaker 1: For some it's such a great question, Barre, and you're

963
00:52:50,400 --> 00:52:52,760
Speaker 1: gonna love the answer because it's such an interesting story.

964
00:52:53,120 --> 00:52:55,280
Speaker 1: You know, we didn't start as a mutual fund company.

965
00:52:55,320 --> 00:52:59,759
Speaker 1: We started as an institutional advisor, that pension advisor. You know,

966
00:52:59,800 --> 00:53:04,240
Speaker 1: this was the sort of uh in the early nineteen sixties.

967
00:53:04,280 --> 00:53:07,280
Speaker 1: My father started that business. You know, he managed money

968
00:53:07,360 --> 00:53:09,880
Speaker 1: for people like you know, Allied Signal or you know,

969
00:53:09,960 --> 00:53:15,440
Speaker 1: foundations and so on, and uh, very reputable and uh.

970
00:53:15,480 --> 00:53:18,319
Speaker 1: One of the consultants that had worked with his firm

971
00:53:18,400 --> 00:53:20,400
Speaker 1: came to him and said, you know, would you be

972
00:53:20,440 --> 00:53:24,680
Speaker 1: interested in starting a mutual fund And my father said, well, well,

973
00:53:24,719 --> 00:53:26,800
Speaker 1: don't you need to go to a mutual fund shop

974
00:53:27,120 --> 00:53:31,600
Speaker 1: where an institutional advisor Mutual funds is something else. And

975
00:53:31,680 --> 00:53:34,840
Speaker 1: happily this advisor said, well, I don't think so, because

976
00:53:34,960 --> 00:53:37,640
Speaker 1: I want you for your money management approach, your money

977
00:53:37,640 --> 00:53:41,200
Speaker 1: management philosophy, and I have clients for whom a large,

978
00:53:41,200 --> 00:53:44,160
Speaker 1: separate institutional account is not suitable but a mutual fund

979
00:53:44,160 --> 00:53:47,520
Speaker 1: would be. Well, happily my father saw that fifty years

980
00:53:47,520 --> 00:53:50,680
Speaker 1: ago and started the mutual funds. We started the managing

981
00:53:50,680 --> 00:53:53,640
Speaker 1: the mutual funds. Then, well, the same thing happened Barry

982
00:53:53,719 --> 00:53:56,040
Speaker 1: with et s. So what happened was we had a

983
00:53:56,080 --> 00:53:58,840
Speaker 1: long most of our clients come to us through financial

984
00:53:58,840 --> 00:54:02,040
Speaker 1: advisor sort of trust advisers. They've had a long relationship

985
00:54:02,120 --> 00:54:04,840
Speaker 1: with an advisor that we had done business with for

986
00:54:04,880 --> 00:54:07,239
Speaker 1: twenty or thirty years came and said, you know, I'm

987
00:54:07,239 --> 00:54:10,120
Speaker 1: curious if you could start an E T F and I,

988
00:54:10,160 --> 00:54:12,000
Speaker 1: like my father, said, well, E T S. Don't you

989
00:54:12,040 --> 00:54:13,560
Speaker 1: need to go to an E T F shop? Aren't

990
00:54:13,600 --> 00:54:17,200
Speaker 1: they passive? Aren't they index based? He said, well, lots

991
00:54:17,239 --> 00:54:21,000
Speaker 1: of indexes have higher turnover than you have. UM, so

992
00:54:21,200 --> 00:54:24,319
Speaker 1: you know, there's great tax efficiency, there's ease of transactions.

993
00:54:24,360 --> 00:54:27,080
Speaker 1: They really are suitable for some clients. So we looked

994
00:54:27,120 --> 00:54:30,880
Speaker 1: at it and we launched UH four actively managed ETFs

995
00:54:30,920 --> 00:54:33,440
Speaker 1: based on the four strategies that we thought had the

996
00:54:33,520 --> 00:54:35,880
Speaker 1: most promise in today's market where we see the biggest

997
00:54:36,880 --> 00:54:39,600
Speaker 1: So it's a concentrated U S strategy called d U

998
00:54:39,800 --> 00:54:43,080
Speaker 1: S A Davis Select US. So that is a really

999
00:54:43,560 --> 00:54:47,560
Speaker 1: UH sort of focused U S strategy UH Davis International

1000
00:54:47,680 --> 00:54:52,280
Speaker 1: d I N T and that's non US international again

1001
00:54:52,560 --> 00:54:56,000
Speaker 1: very focused. So it's not you know, the international indexes

1002
00:54:56,040 --> 00:54:58,640
Speaker 1: are just a mess. You know, I think we've outperformed

1003
00:54:58,680 --> 00:55:01,520
Speaker 1: the international indexes and sort of all periods. It's and

1004
00:55:01,600 --> 00:55:03,799
Speaker 1: a lot of active managers have So if you want

1005
00:55:03,840 --> 00:55:06,480
Speaker 1: to invest internationally, being active is usually the way to go,

1006
00:55:06,840 --> 00:55:09,880
Speaker 1: but there weren't some great active ets. So d A

1007
00:55:09,960 --> 00:55:12,759
Speaker 1: global that combines both. I always say, if somebody's coming

1008
00:55:12,800 --> 00:55:15,279
Speaker 1: does with just wants one fund Global is probably the

1009
00:55:15,320 --> 00:55:17,759
Speaker 1: best because it's the least constraint. D w L D

1010
00:55:18,000 --> 00:55:21,840
Speaker 1: Davis Worldwide and then financial where I started my We

1011
00:55:21,960 --> 00:55:24,719
Speaker 1: started d F n L because the financial e t

1012
00:55:24,920 --> 00:55:26,600
Speaker 1: F s. Do you know the financial e t F

1013
00:55:26,719 --> 00:55:32,800
Speaker 1: the largest financial ETF has almost in five stocks. I

1014
00:55:32,840 --> 00:55:37,040
Speaker 1: mean that's a little scary, you know, aping the s. Yeah,

1015
00:55:37,200 --> 00:55:40,440
Speaker 1: and so they have huge concentration risk in a single subsector.

1016
00:55:40,760 --> 00:55:44,680
Speaker 1: So we we launched those. They're actively managed, We run

1017
00:55:44,719 --> 00:55:47,600
Speaker 1: them with the same discipline, the same philosophy, the same team.

1018
00:55:48,040 --> 00:55:50,000
Speaker 1: And I thought, well, this will be the beginning of

1019
00:55:50,080 --> 00:55:52,160
Speaker 1: the wave, like everybody will do it now. But it

1020
00:55:52,280 --> 00:55:55,120
Speaker 1: hasn't happened. And I think the reason is is that

1021
00:55:55,280 --> 00:55:59,480
Speaker 1: are we're large enough to have credibility to be able

1022
00:55:59,520 --> 00:56:02,280
Speaker 1: to offer it, to make the investments and operational excellence

1023
00:56:02,320 --> 00:56:04,480
Speaker 1: to do it, but we're small enough that we don't

1024
00:56:04,520 --> 00:56:07,279
Speaker 1: have to worry about liquidity and front running. And you know,

1025
00:56:07,320 --> 00:56:09,280
Speaker 1: if we're buying Google, I don't have to worry about,

1026
00:56:09,440 --> 00:56:11,319
Speaker 1: you know, somebody trying to jump in front of us

1027
00:56:11,480 --> 00:56:15,120
Speaker 1: or that. Uh. We have a culture of transparency. We're

1028
00:56:15,200 --> 00:56:17,960
Speaker 1: already low cost. You know, all of our actively managed

1029
00:56:18,000 --> 00:56:20,480
Speaker 1: funds have below average fees, and so we didn't have

1030
00:56:20,560 --> 00:56:24,400
Speaker 1: to worry about some fee arbitrage and uh. And so

1031
00:56:24,640 --> 00:56:27,360
Speaker 1: we we sort of set out with fully transparent, you know,

1032
00:56:27,600 --> 00:56:29,960
Speaker 1: true ETFs. We put a lot of our own money

1033
00:56:30,000 --> 00:56:31,960
Speaker 1: in them because there is a lot of tax efficiency

1034
00:56:32,400 --> 00:56:35,120
Speaker 1: uh in them in this environment and and uh and

1035
00:56:35,360 --> 00:56:38,239
Speaker 1: what we found surprisingly very is there a few traditional

1036
00:56:38,360 --> 00:56:40,839
Speaker 1: et F advisors that have come to us and said, hey,

1037
00:56:40,880 --> 00:56:43,640
Speaker 1: I'm mostly passive, but I've looked at the data and

1038
00:56:43,719 --> 00:56:46,080
Speaker 1: there are periods of time where even the average active

1039
00:56:46,120 --> 00:56:49,680
Speaker 1: manager outperforms for five years. Maybe I should reserve a

1040
00:56:49,719 --> 00:56:52,520
Speaker 1: place in my portfolio for real active management. And so

1041
00:56:52,640 --> 00:56:55,279
Speaker 1: we saw at first globally international, but we're even seeing

1042
00:56:55,280 --> 00:56:58,680
Speaker 1: in the US. Now you mentioned the tax efficiency. I

1043
00:56:58,800 --> 00:57:02,160
Speaker 1: know this has been said jokingly, maybe it's only half jokingly,

1044
00:57:02,600 --> 00:57:05,239
Speaker 1: but it's true. If they were introduced as a new

1045
00:57:05,320 --> 00:57:10,080
Speaker 1: product today, mutual funds might have a harder time finding

1046
00:57:10,160 --> 00:57:13,000
Speaker 1: an audience, whereas the e t F s because of

1047
00:57:13,120 --> 00:57:17,560
Speaker 1: the way they're structured. What happens internally doesn't generate a

1048
00:57:17,640 --> 00:57:21,320
Speaker 1: tax bill until you send sell them. Are we seeing

1049
00:57:21,400 --> 00:57:24,240
Speaker 1: that transition from mutual funds to e T F or

1050
00:57:24,400 --> 00:57:27,000
Speaker 1: is it still too much of a niche product and

1051
00:57:27,120 --> 00:57:30,080
Speaker 1: mutual funds are gonna be around for another century of

1052
00:57:30,200 --> 00:57:32,480
Speaker 1: so well, I mean, we started the e T s

1053
00:57:32,600 --> 00:57:35,080
Speaker 1: because we saw the advantages. They are not advantaged in

1054
00:57:35,280 --> 00:57:39,320
Speaker 1: every environment. Right, A traditional mutual fund with steady inflows

1055
00:57:39,600 --> 00:57:43,920
Speaker 1: has enormous advantages because it can in a sense reposition

1056
00:57:44,000 --> 00:57:46,760
Speaker 1: the portfolio without generating any gains and so on. An

1057
00:57:46,800 --> 00:57:50,520
Speaker 1: ETF does not have that advantage. And et F is

1058
00:57:50,640 --> 00:57:52,640
Speaker 1: very much like an s M A right, it's a

1059
00:57:52,720 --> 00:57:57,040
Speaker 1: separately managed to count in essence um. So there are advantages.

1060
00:57:57,440 --> 00:58:00,560
Speaker 1: There are environments where you could imagine the mean, but

1061
00:58:00,720 --> 00:58:03,360
Speaker 1: by and large, I would say, if I had to predict,

1062
00:58:03,440 --> 00:58:05,960
Speaker 1: I could definitely see the It would be hard for

1063
00:58:06,000 --> 00:58:09,000
Speaker 1: me to understand why et F wouldn't continue to gain

1064
00:58:09,480 --> 00:58:13,480
Speaker 1: traction because of the relative ease of transactions and so on,

1065
00:58:13,640 --> 00:58:16,640
Speaker 1: and so I you know, I think in a sense,

1066
00:58:16,840 --> 00:58:19,600
Speaker 1: you know, they have the the some of the advantages

1067
00:58:19,640 --> 00:58:22,760
Speaker 1: of mutual funds in terms of governance and co mingled accounts,

1068
00:58:22,960 --> 00:58:25,919
Speaker 1: but the ease of transaction of individual stocks. You could

1069
00:58:25,920 --> 00:58:27,600
Speaker 1: sort of see how that could have a long way

1070
00:58:27,640 --> 00:58:29,200
Speaker 1: to go, And we certainly wanted to put a marker

1071
00:58:29,240 --> 00:58:32,240
Speaker 1: in the sand and be really the leader in true

1072
00:58:32,320 --> 00:58:37,960
Speaker 1: active management with any everybody focuses on low cost and passive,

1073
00:58:38,520 --> 00:58:42,800
Speaker 1: but the tax benefits are just so spectacular. I'm surprised

1074
00:58:42,880 --> 00:58:46,360
Speaker 1: we haven't seen more mutual funds roll out some for

1075
00:58:46,520 --> 00:58:51,080
Speaker 1: the form of an ETF based version of their active funds. Well,

1076
00:58:51,200 --> 00:58:53,560
Speaker 1: I think that they have a number of barriers that

1077
00:58:53,680 --> 00:58:57,200
Speaker 1: we were comfortable, uh stepping over that stand in their way.

1078
00:58:57,320 --> 00:58:59,880
Speaker 1: Some are too large and they worry about the liquidity

1079
00:58:59,880 --> 00:59:03,280
Speaker 1: of effects. Some have fees that are too high. So

1080
00:59:03,400 --> 00:59:07,160
Speaker 1: if you're charging one percent on a mutual fund, it's

1081
00:59:07,200 --> 00:59:10,800
Speaker 1: hard to offer a low cost e t f uh

1082
00:59:11,520 --> 00:59:14,640
Speaker 1: and without creating the opportunity for fee arbitrage and so on.

1083
00:59:14,920 --> 00:59:18,520
Speaker 1: You mentioned that, meaning I recall when PIMCO first rolled

1084
00:59:18,520 --> 00:59:21,880
Speaker 1: out their ETFs, they had them at a higher price

1085
00:59:22,000 --> 00:59:26,760
Speaker 1: point than their mutual funds. Was that the concern the arbitrage? Well, yes,

1086
00:59:26,960 --> 00:59:29,160
Speaker 1: I think so. I mean I think that you you

1087
00:59:29,320 --> 00:59:33,480
Speaker 1: don't want to create a situation where somebody could buy

1088
00:59:33,560 --> 00:59:37,840
Speaker 1: the underlying stocks, uh and in a sense short the

1089
00:59:37,960 --> 00:59:42,080
Speaker 1: E t F and make a guaranteed return that would

1090
00:59:42,120 --> 00:59:46,320
Speaker 1: be reasonable. Uh So, if that guaranteed return is you know,

1091
00:59:46,920 --> 00:59:50,280
Speaker 1: thirty basis points or sixty basis points, that's gonna be

1092
00:59:50,400 --> 00:59:52,040
Speaker 1: tough to make a lot of money on because you're

1093
00:59:52,080 --> 00:59:55,479
Speaker 1: taking single event risk and things like that, so you'd

1094
00:59:55,480 --> 00:59:57,800
Speaker 1: have deliver it so high. But you know, if you're

1095
00:59:57,880 --> 01:00:00,320
Speaker 1: charging one or one and a half percent, then you

1096
01:00:00,560 --> 01:00:02,880
Speaker 1: somebody could say, well, I'll just buy those stocks short

1097
01:00:02,920 --> 01:00:04,440
Speaker 1: the t F. I make an extra one and a

1098
01:00:04,480 --> 01:00:08,440
Speaker 1: half percent doing that. Um So, you know, it's a

1099
01:00:08,520 --> 01:00:11,320
Speaker 1: little bit like iTunes. I mean, one of the things

1100
01:00:11,400 --> 01:00:14,439
Speaker 1: that I would say is that, you know, music was free,

1101
01:00:14,520 --> 01:00:17,200
Speaker 1: you could rip it off on the internet. And I

1102
01:00:17,320 --> 01:00:20,040
Speaker 1: think Apple's philosophy was if you make it easy for

1103
01:00:20,160 --> 01:00:22,520
Speaker 1: people to do the right thing, they'll do the right thing.

1104
01:00:23,280 --> 01:00:25,960
Speaker 1: And and that's what and I feel that way about

1105
01:00:26,360 --> 01:00:27,920
Speaker 1: the E t f s. You know, if you make

1106
01:00:27,960 --> 01:00:31,160
Speaker 1: it easy for somebody to do the right thing to

1107
01:00:31,280 --> 01:00:34,000
Speaker 1: invest with you at a reasonable fee, uh, then I

1108
01:00:34,080 --> 01:00:36,360
Speaker 1: think they'll do it. You know, could can somebody open

1109
01:00:36,400 --> 01:00:39,080
Speaker 1: a separate account and mimic what you're doing, you know,

1110
01:00:39,520 --> 01:00:42,520
Speaker 1: you know, of course they can. People see the confirms,

1111
01:00:42,600 --> 01:00:44,920
Speaker 1: they can see the trades that you're doing for an account,

1112
01:00:44,960 --> 01:00:47,720
Speaker 1: and they can mimic those for other accounts on which

1113
01:00:47,720 --> 01:00:50,200
Speaker 1: they're not paying you a fee. But I think that

1114
01:00:50,360 --> 01:00:51,920
Speaker 1: if you make it easy for people to do the

1115
01:00:52,040 --> 01:00:54,240
Speaker 1: right thing, they do the right thing. You know, I've

1116
01:00:54,360 --> 01:00:57,680
Speaker 1: I've heard people talk about that. But let's say someone

1117
01:00:57,720 --> 01:00:59,600
Speaker 1: were to open an s m A and then they

1118
01:00:59,640 --> 01:01:03,160
Speaker 1: would shane a different account to that s m A.

1119
01:01:03,640 --> 01:01:07,000
Speaker 1: That that seems like it's far too much work to

1120
01:01:07,160 --> 01:01:10,840
Speaker 1: actually do to save fifty or seventy five basis points,

1121
01:01:11,280 --> 01:01:14,280
Speaker 1: unless it was hundreds of millions of dollars, in which

1122
01:01:14,320 --> 01:01:18,480
Speaker 1: case it would be really easy to identify, um, who

1123
01:01:18,720 --> 01:01:21,720
Speaker 1: is piggybacking on all your trades. There was a wonderful

1124
01:01:22,120 --> 01:01:25,120
Speaker 1: story but real mentor of mine early was a man

1125
01:01:25,200 --> 01:01:28,480
Speaker 1: named Bob Kirby, and he worked at Capital Group, and

1126
01:01:28,560 --> 01:01:31,280
Speaker 1: he was just a legend wonderful, wonderful investor in a

1127
01:01:31,320 --> 01:01:34,960
Speaker 1: wonderful human being. And uh he tells the story about

1128
01:01:35,040 --> 01:01:38,880
Speaker 1: how he was managing an account for an older lady

1129
01:01:39,760 --> 01:01:42,439
Speaker 1: and uh, she came in one day and she said,

1130
01:01:42,480 --> 01:01:44,520
Speaker 1: you know, my husband has died, and would you take

1131
01:01:44,600 --> 01:01:47,480
Speaker 1: on managing his account. He always wanted to do it himself,

1132
01:01:47,960 --> 01:01:50,200
Speaker 1: but now that he's dead, I'd like you to take

1133
01:01:50,280 --> 01:01:53,200
Speaker 1: it on. And Kirby looked at the account and realized

1134
01:01:53,280 --> 01:01:57,800
Speaker 1: that this, uh, this husband had been free riding on

1135
01:01:57,880 --> 01:02:00,920
Speaker 1: all his trades, and every time Bob bought a stock

1136
01:02:01,040 --> 01:02:03,760
Speaker 1: for the wife, the confirm would be sent home. The

1137
01:02:03,880 --> 01:02:06,120
Speaker 1: husband would take a portion of his paycheck at the

1138
01:02:06,200 --> 01:02:08,560
Speaker 1: end of the month and buy the same stock. But

1139
01:02:08,920 --> 01:02:12,520
Speaker 1: here's the punchline. What was amazing is that the husband's

1140
01:02:12,520 --> 01:02:17,680
Speaker 1: account had meaningfully outperformed. Why well, because the husband never

1141
01:02:17,760 --> 01:02:20,960
Speaker 1: sold anything, and because he was buying it out of

1142
01:02:21,040 --> 01:02:24,960
Speaker 1: income every month, whereas Bob, managing this closed account, was

1143
01:02:25,080 --> 01:02:28,480
Speaker 1: constantly selling things and and so what he was doing

1144
01:02:28,560 --> 01:02:31,400
Speaker 1: what we call cutting the flowers and watering the weeds. Right,

1145
01:02:31,480 --> 01:02:34,240
Speaker 1: what I've done with Amazon for a decade, Right, I'm

1146
01:02:34,360 --> 01:02:37,560
Speaker 1: constantly trimming it, uh, you know, to add to something

1147
01:02:37,640 --> 01:02:41,560
Speaker 1: that hasn't gone up. And and over time, any honest investor,

1148
01:02:41,680 --> 01:02:44,800
Speaker 1: and especially any honest value investor, will tell you that

1149
01:02:44,880 --> 01:02:47,760
Speaker 1: their biggest mistakes were what they sold what they bought.

1150
01:02:48,120 --> 01:02:50,840
Speaker 1: Quite quite interesting, I know I only have you here

1151
01:02:50,880 --> 01:02:53,320
Speaker 1: for a finite amount of time. So let me get

1152
01:02:53,440 --> 01:02:58,240
Speaker 1: to my favorite questions that I asked all my guests.

1153
01:02:59,040 --> 01:03:01,520
Speaker 1: Lets These are usually pretty revealing about who you are

1154
01:03:01,560 --> 01:03:05,280
Speaker 1: and what you're about. Let's start with, UM, you mentioned

1155
01:03:05,360 --> 01:03:08,480
Speaker 1: Amazon Prime. What are you streaming these days? Give us

1156
01:03:08,520 --> 01:03:15,040
Speaker 1: your favorite Netflix Amazon Prime podcasts? Uh programs. Well, this

1157
01:03:15,240 --> 01:03:18,800
Speaker 1: is a very disappointing question because I am I. I

1158
01:03:19,280 --> 01:03:22,959
Speaker 1: find that I watched things so infrequently. I I feel

1159
01:03:23,000 --> 01:03:25,440
Speaker 1: there were two decisions I made when I was in

1160
01:03:25,600 --> 01:03:28,360
Speaker 1: my early twenties. As I said, I'm not going to

1161
01:03:28,480 --> 01:03:32,400
Speaker 1: become a sports fan because it's three to five hours

1162
01:03:32,480 --> 01:03:35,800
Speaker 1: a week at least least at least and uh, I

1163
01:03:35,920 --> 01:03:39,640
Speaker 1: don't understand who is home every Sunday watching football for

1164
01:03:39,840 --> 01:03:42,360
Speaker 1: twenty weeks a year. I don't care. And you know,

1165
01:03:42,520 --> 01:03:45,480
Speaker 1: and golf is the same way. It's an enormous commitment

1166
01:03:45,520 --> 01:03:48,200
Speaker 1: of time. And what I felt when Netflix came out

1167
01:03:48,280 --> 01:03:50,720
Speaker 1: and people could binge watch a series, what I said,

1168
01:03:50,760 --> 01:03:53,000
Speaker 1: as well, you know, like May West, I I can

1169
01:03:53,080 --> 01:03:57,000
Speaker 1: resist anything but temptation, So why get on that trolley?

1170
01:03:57,480 --> 01:04:00,240
Speaker 1: So I simply said, I'm not going to subscribe because

1171
01:04:00,240 --> 01:04:01,800
Speaker 1: I don't want to see these. I don't want to

1172
01:04:01,840 --> 01:04:05,240
Speaker 1: get addicted to some series. So I would say, you know,

1173
01:04:05,600 --> 01:04:08,680
Speaker 1: I watched films, I read a lot, uh, but I

1174
01:04:08,800 --> 01:04:10,720
Speaker 1: don't watch a lot of you know, I've I've seen

1175
01:04:10,840 --> 01:04:12,840
Speaker 1: some of the big ones, the Breaking Bad and so on.

1176
01:04:13,000 --> 01:04:15,040
Speaker 1: But but I also find if you don't watch for

1177
01:04:15,080 --> 01:04:16,800
Speaker 1: a long time and then you put it on, you're

1178
01:04:16,880 --> 01:04:20,040
Speaker 1: so shocked by violence and things like that, You're like,

1179
01:04:20,680 --> 01:04:23,120
Speaker 1: this may not be for me. So I'm hopelessly out

1180
01:04:23,160 --> 01:04:25,720
Speaker 1: of sync with pop. We'll get two books in a minute.

1181
01:04:25,760 --> 01:04:28,720
Speaker 1: But that's fascinating. So I was gonna the next question

1182
01:04:28,880 --> 01:04:31,840
Speaker 1: is tell us the most important thing people don't know

1183
01:04:31,960 --> 01:04:34,880
Speaker 1: about you? But but that might be it is there

1184
01:04:35,000 --> 01:04:37,080
Speaker 1: is there something else that I think. I think people

1185
01:04:37,120 --> 01:04:39,360
Speaker 1: that know me assume I'm pretty square, so I think

1186
01:04:39,400 --> 01:04:42,240
Speaker 1: that they wouldn't be surprised by that. I I don't

1187
01:04:42,480 --> 01:04:45,000
Speaker 1: you know. I would say that it in in many

1188
01:04:45,080 --> 01:04:49,040
Speaker 1: ways that I find very reassuring. I'm very very conventional. Um.

1189
01:04:49,720 --> 01:04:53,400
Speaker 1: People may not know. I was in seminary, uh when

1190
01:04:53,480 --> 01:04:56,280
Speaker 1: I did a master's degree in theology, and I went

1191
01:04:56,360 --> 01:04:59,000
Speaker 1: to work for the Episcopal Church, which is really a

1192
01:04:59,080 --> 01:05:07,080
Speaker 1: repository of decency. Within Christianity. It's sort of enormously modest, thoughtful, restrained, uh,

1193
01:05:07,480 --> 01:05:12,120
Speaker 1: sect of the faith. And I'm fairly agnostic, uh, but

1194
01:05:12,320 --> 01:05:15,440
Speaker 1: I my my view was I thought that it did

1195
01:05:15,480 --> 01:05:18,320
Speaker 1: a lot of good in the world. But anyway, going

1196
01:05:18,400 --> 01:05:20,080
Speaker 1: to work for the church for a year convinced me

1197
01:05:20,160 --> 01:05:21,880
Speaker 1: that that wasn't for me. And and so that might

1198
01:05:21,920 --> 01:05:24,000
Speaker 1: be signing people don't know. I have a buddy who's

1199
01:05:24,040 --> 01:05:29,520
Speaker 1: a deacon in the Episcopal Church, and when we've discussed

1200
01:05:30,440 --> 01:05:33,800
Speaker 1: not just faith but religion, and he laid out what

1201
01:05:34,160 --> 01:05:38,680
Speaker 1: the precepts of that faith is. It was really quite

1202
01:05:38,720 --> 01:05:43,000
Speaker 1: fascinating because it's such a different premise in terms of

1203
01:05:43,840 --> 01:05:48,280
Speaker 1: perceiving knowledge and responsibility, and it's very different than what

1204
01:05:48,440 --> 01:05:53,600
Speaker 1: you think of as versus a traditional religious belief. Well,

1205
01:05:53,640 --> 01:05:56,160
Speaker 1: of course, yeah, religion has got a bad rap as

1206
01:05:56,200 --> 01:05:58,080
Speaker 1: a result. But but I will give you something that

1207
01:05:58,160 --> 01:06:01,040
Speaker 1: ties to investing, which is one of my favorite teachers

1208
01:06:01,080 --> 01:06:03,640
Speaker 1: at that time. It was a bishop of Newark, and

1209
01:06:03,920 --> 01:06:06,840
Speaker 1: he episcopal Bishop of Newark. And he once asked me

1210
01:06:06,920 --> 01:06:11,840
Speaker 1: what's the opposite of faith? And I said doubt And

1211
01:06:11,920 --> 01:06:16,720
Speaker 1: he said no certainty. He said, if you doubt and

1212
01:06:16,880 --> 01:06:19,360
Speaker 1: faith are required of you. You need doubt to have

1213
01:06:19,440 --> 01:06:22,880
Speaker 1: faith in the same way you need fear to have courage. Right.

1214
01:06:23,080 --> 01:06:25,680
Speaker 1: If you don't have any fear, you don't have any courage,

1215
01:06:26,080 --> 01:06:28,480
Speaker 1: right You. You may be you may do things that

1216
01:06:28,600 --> 01:06:31,280
Speaker 1: appear to be courageous, but you don't have any courage.

1217
01:06:31,520 --> 01:06:33,480
Speaker 1: You need fear in order to be courageous. You need

1218
01:06:33,520 --> 01:06:35,800
Speaker 1: doubt in order to that faith. Certainty is the opposite

1219
01:06:35,840 --> 01:06:37,880
Speaker 1: of faith. That's so interesting you said that because I

1220
01:06:37,920 --> 01:06:41,040
Speaker 1: have a friend who always asks what's the opposite of love?

1221
01:06:41,520 --> 01:06:44,400
Speaker 1: And the answer is, it's not hate, it's different, and

1222
01:06:44,520 --> 01:06:48,280
Speaker 1: it's the same philosophical Well, in this political time, it's

1223
01:06:48,320 --> 01:06:51,160
Speaker 1: a good phrase to bear in mind because, as I said,

1224
01:06:51,200 --> 01:06:53,720
Speaker 1: I I have time for people whose politics are on

1225
01:06:53,880 --> 01:06:57,080
Speaker 1: either side of this divide, provided they think it's a

1226
01:06:57,120 --> 01:07:01,080
Speaker 1: difficult choice. Well, when somebody thinks that obvious and easy,

1227
01:07:01,200 --> 01:07:03,480
Speaker 1: that's when I get a little nervous for sure, and

1228
01:07:03,720 --> 01:07:06,280
Speaker 1: and it never is. Um. So let's talk about mentors.

1229
01:07:06,320 --> 01:07:09,480
Speaker 1: Who were some of the mentors that guided your career

1230
01:07:09,600 --> 01:07:13,600
Speaker 1: and helped influence the way you think about uh investing. Well,

1231
01:07:13,920 --> 01:07:16,480
Speaker 1: I mean I I grew up with two at at

1232
01:07:16,520 --> 01:07:18,880
Speaker 1: the dining room table, so you know, I had, you

1233
01:07:18,960 --> 01:07:22,480
Speaker 1: know father, that is, my father is a spectacular teacher

1234
01:07:22,520 --> 01:07:26,840
Speaker 1: about investing. It's just he very early. It was about

1235
01:07:26,880 --> 01:07:30,160
Speaker 1: the businesses, not the pieces of paper. It was visiting

1236
01:07:30,240 --> 01:07:32,800
Speaker 1: companies with him, seeing the people, as he would always say,

1237
01:07:32,840 --> 01:07:37,200
Speaker 1: people and ideas. Uh. He would uh we could buy stocks.

1238
01:07:37,240 --> 01:07:40,320
Speaker 1: He would finance them if we wrote a report and

1239
01:07:40,520 --> 01:07:44,200
Speaker 1: called the company. Uh and uh. It was just he

1240
01:07:44,320 --> 01:07:45,720
Speaker 1: made it. So, you know, I used to say, when

1241
01:07:45,720 --> 01:07:48,400
Speaker 1: the train pulled in at night, uh in uh. He

1242
01:07:48,480 --> 01:07:51,640
Speaker 1: lived out in Tuxedo. Uh. And the commuters get off

1243
01:07:51,680 --> 01:07:53,400
Speaker 1: the train and they all looked gray and sort of

1244
01:07:53,520 --> 01:07:56,960
Speaker 1: ashen with their briefcase and you know, their sack suits,

1245
01:07:57,040 --> 01:07:59,040
Speaker 1: and and my dad would get off and he was

1246
01:07:59,200 --> 01:08:01,880
Speaker 1: just exuber you know. He just loved the ideas. And

1247
01:08:02,000 --> 01:08:04,360
Speaker 1: of course he learned from his father, who was the

1248
01:08:04,440 --> 01:08:06,840
Speaker 1: same way. The best game in town. And he only

1249
01:08:06,920 --> 01:08:09,880
Speaker 1: invested in financials. That was his specialty. But he just

1250
01:08:10,120 --> 01:08:13,080
Speaker 1: loved them. So those two. But but outside of them,

1251
01:08:13,800 --> 01:08:15,880
Speaker 1: it would have to be Charlie Munger. I mean, he is,

1252
01:08:16,320 --> 01:08:19,400
Speaker 1: he came into my life at a wonderful stage. I

1253
01:08:19,520 --> 01:08:23,799
Speaker 1: admire him more than almost anybody. I know, his intellect,

1254
01:08:24,000 --> 01:08:28,360
Speaker 1: his character, his wisdom, his thoughtfulness, his decency, and he's

1255
01:08:28,400 --> 01:08:30,479
Speaker 1: just one of the great human beings I've ever know.

1256
01:08:30,600 --> 01:08:33,679
Speaker 1: How did Charlie Munger come into your life? Well, that's

1257
01:08:33,720 --> 01:08:37,240
Speaker 1: a good question. Uh. You know, my grandfather had a

1258
01:08:37,280 --> 01:08:40,040
Speaker 1: long history and my father investing in Berkshire, So we

1259
01:08:40,120 --> 01:08:42,559
Speaker 1: had gone to annual meetings. And you know, for many

1260
01:08:42,680 --> 01:08:45,320
Speaker 1: years my board was actually my father was actually on

1261
01:08:45,360 --> 01:08:48,760
Speaker 1: the board of Geico. Uh, I mean my grandfather was

1262
01:08:48,800 --> 01:08:50,760
Speaker 1: on the board of Geico. So there had been overlaps

1263
01:08:50,880 --> 01:08:54,960
Speaker 1: that way. But I met Charlie through a mutual friend, uh,

1264
01:08:55,200 --> 01:08:58,160
Speaker 1: when I was interested in trying to sell a business

1265
01:08:58,280 --> 01:09:01,160
Speaker 1: that my grandfather had, which was a curities lending business.

1266
01:09:01,200 --> 01:09:03,320
Speaker 1: And I won't bore you with all of the details

1267
01:09:03,360 --> 01:09:07,440
Speaker 1: of that business, but uh it basically as my grandfather.

1268
01:09:07,680 --> 01:09:09,880
Speaker 1: When my grandfather died, he gave a hundred percent of

1269
01:09:10,000 --> 01:09:14,200
Speaker 1: his estate to charity and uh, and so he had

1270
01:09:14,240 --> 01:09:16,479
Speaker 1: asked me to try to wrap up his business while

1271
01:09:16,520 --> 01:09:18,800
Speaker 1: he was still alive, so that when he died, people

1272
01:09:18,800 --> 01:09:20,400
Speaker 1: wouldn't be out on the streets. And so I was

1273
01:09:20,439 --> 01:09:23,519
Speaker 1: looking for a home for this securities lending operation, and

1274
01:09:23,880 --> 01:09:26,040
Speaker 1: and I thought Berkshire could be They had obviously a

1275
01:09:26,080 --> 01:09:28,560
Speaker 1: great balance sheet, they had a big equity portfolio and

1276
01:09:28,880 --> 01:09:31,559
Speaker 1: and maybe they would take this operation. And I arranged

1277
01:09:31,640 --> 01:09:34,559
Speaker 1: this breakfast with Charlie Munger. I pitched it to him

1278
01:09:34,640 --> 01:09:37,640
Speaker 1: between eight and eight oh seven in the morning. At

1279
01:09:37,680 --> 01:09:39,640
Speaker 1: eight oh seven, he said, I have no interest in

1280
01:09:39,680 --> 01:09:43,120
Speaker 1: the business that's you know, uh, you know ten guys

1281
01:09:43,200 --> 01:09:46,400
Speaker 1: named Tony and you know, back office business where we

1282
01:09:46,439 --> 01:09:48,720
Speaker 1: don't understand, you know. But he said, I'm interested in

1283
01:09:48,800 --> 01:09:51,400
Speaker 1: why you picked Berkshire. And so I talked to him

1284
01:09:51,400 --> 01:09:53,120
Speaker 1: about the balance sheet and the security and he said,

1285
01:09:53,160 --> 01:09:55,200
Speaker 1: well that's it. And then we got and we didn't

1286
01:09:55,280 --> 01:09:59,160
Speaker 1: leave the table until lunchtime, and it was you know,

1287
01:09:59,240 --> 01:10:02,200
Speaker 1: I would define it as, you know, the big most

1288
01:10:02,240 --> 01:10:06,400
Speaker 1: significant change, uh in not just my professional but really

1289
01:10:06,720 --> 01:10:09,639
Speaker 1: my professional and personal life in terms of the direction

1290
01:10:09,720 --> 01:10:12,200
Speaker 1: of my life. That breakfast was an enormous change. And

1291
01:10:12,280 --> 01:10:14,280
Speaker 1: I've always been grateful to him, and I try to

1292
01:10:14,320 --> 01:10:18,080
Speaker 1: see him whenever I can and and uh uh he

1293
01:10:18,160 --> 01:10:20,000
Speaker 1: probably wouldn't mind, I say. I. I asked about his

1294
01:10:20,880 --> 01:10:23,960
Speaker 1: birthday what he wanted for his birthday, and he said,

1295
01:10:24,000 --> 01:10:28,920
Speaker 1: a paternity suit. Yeah, that sounds like him. That's hilarious. Um,

1296
01:10:29,080 --> 01:10:33,120
Speaker 1: let's talk about books you mentioned um, uh, you enjoy reading.

1297
01:10:33,200 --> 01:10:36,559
Speaker 1: I know Monger and Buffett do spend half their day reading.

1298
01:10:37,000 --> 01:10:38,800
Speaker 1: What are some of your favorite books? What are you

1299
01:10:38,880 --> 01:10:42,720
Speaker 1: reading these days? Fiction, nonfiction, whatever? Well, you know, it's

1300
01:10:42,760 --> 01:10:44,800
Speaker 1: funny the waves that you go through. I find I

1301
01:10:44,920 --> 01:10:47,080
Speaker 1: find myself in periods of time where I'm reading too

1302
01:10:47,160 --> 01:10:50,120
Speaker 1: much fiction and I need to force back in nonfiction,

1303
01:10:50,439 --> 01:10:52,880
Speaker 1: and then the opposite. I've been in the opposite phase.

1304
01:10:53,320 --> 01:10:56,280
Speaker 1: More recently, it's much more nonfiction. I think it's part

1305
01:10:56,320 --> 01:10:59,560
Speaker 1: of getting older is that you just become more You

1306
01:10:59,760 --> 01:11:03,080
Speaker 1: just you see more wonder in the reality, and you've

1307
01:11:03,120 --> 01:11:05,000
Speaker 1: lived enough that a lot of the stories in fiction

1308
01:11:05,080 --> 01:11:07,439
Speaker 1: begin to feel you know, you know, well we've we've

1309
01:11:07,479 --> 01:11:10,839
Speaker 1: seen that story before. The old joke about um fiction

1310
01:11:11,000 --> 01:11:14,960
Speaker 1: versus nonfiction fiction has to make sense, Yes, exact nonfiction

1311
01:11:15,080 --> 01:11:18,360
Speaker 1: could be completely and perfectly said. So well, I mean,

1312
01:11:18,640 --> 01:11:21,200
Speaker 1: of course, everybody should read the what I call the

1313
01:11:21,280 --> 01:11:24,360
Speaker 1: three scandal books, uh, you know of last year. You know,

1314
01:11:24,520 --> 01:11:31,120
Speaker 1: the Paronos book, uh Blood, Bad Blood, the unbelievable book

1315
01:11:31,200 --> 01:11:35,000
Speaker 1: on one MDB on the Malaysian Front. It's called the

1316
01:11:35,040 --> 01:11:37,840
Speaker 1: Billion Dollar Wail. It's a terrible title, but just a

1317
01:11:37,920 --> 01:11:41,720
Speaker 1: spectacular story. And uh, and then everybody should read Bill

1318
01:11:41,760 --> 01:11:44,880
Speaker 1: Browner read capital you know that is, you know, just

1319
01:11:45,040 --> 01:11:47,639
Speaker 1: the the corruption that went on under Putin in Russia.

1320
01:11:48,040 --> 01:11:51,200
Speaker 1: So that was and is ongoing and is ongoing. Um.

1321
01:11:51,320 --> 01:11:53,320
Speaker 1: But I would say the best book that I read

1322
01:11:53,439 --> 01:11:56,680
Speaker 1: last year, uh was I'm going to mispronounce his name.

1323
01:11:56,720 --> 01:12:00,600
Speaker 1: I'm sad to say it's Boo Trevanissan. I think B

1324
01:12:00,840 --> 01:12:03,720
Speaker 1: h U and then S R and V and a

1325
01:12:03,800 --> 01:12:06,880
Speaker 1: bunch of consonants. Uh. But it was a book called Americana.

1326
01:12:07,400 --> 01:12:09,240
Speaker 1: And you have to be careful because when it was

1327
01:12:09,280 --> 01:12:11,719
Speaker 1: first recommended to me, I went and bought a book

1328
01:12:11,720 --> 01:12:15,720
Speaker 1: called Americana, which was about a Nigerian refugee and hair

1329
01:12:15,840 --> 01:12:18,640
Speaker 1: dressing and a few other things. And I thought, I

1330
01:12:18,760 --> 01:12:21,160
Speaker 1: was very surprised that my friend recommended this. But it

1331
01:12:21,280 --> 01:12:24,559
Speaker 1: was a good novel, but clearly it was the wrong one.

1332
01:12:24,720 --> 01:12:29,639
Speaker 1: Americana is a history of American capitalism, but it's divided

1333
01:12:29,680 --> 01:12:32,960
Speaker 1: into chapters where each chapter stands on its own as

1334
01:12:33,040 --> 01:12:36,519
Speaker 1: the history of a specific industry in this country and

1335
01:12:36,680 --> 01:12:39,960
Speaker 1: not just the people that started it, the ideas how

1336
01:12:40,080 --> 01:12:44,479
Speaker 1: it caught traction, but importantly how it was financed. You know,

1337
01:12:44,560 --> 01:12:49,320
Speaker 1: who financed the Mayflower, Who financed you know, the cotton

1338
01:12:49,400 --> 01:12:53,080
Speaker 1: gin who financed Ford versus General motors, who financed the

1339
01:12:53,160 --> 01:13:00,080
Speaker 1: telegraph or the canals, the microprocessor and resist transistor. You know.

1340
01:13:00,400 --> 01:13:03,560
Speaker 1: So you really have this sweeping account, beginning with the

1341
01:13:03,600 --> 01:13:08,160
Speaker 1: Mayflower and ending with the Internet, of how these industries

1342
01:13:08,240 --> 01:13:11,200
Speaker 1: developed with a real focus on specific companies and people,

1343
01:13:11,520 --> 01:13:14,439
Speaker 1: but also how did the capital flow in? Who owned them,

1344
01:13:14,479 --> 01:13:17,840
Speaker 1: how did they raise the money? Wonderful, wonderful book that

1345
01:13:17,920 --> 01:13:21,080
Speaker 1: sounds fascinating. I'm gonna make a book recommendation to you

1346
01:13:21,520 --> 01:13:27,000
Speaker 1: only because you describe that trilogy of um fraud books.

1347
01:13:27,479 --> 01:13:30,240
Speaker 1: If you haven't read The Spider Network, I think it

1348
01:13:30,320 --> 01:13:35,360
Speaker 1: was by David Enrich. It's about the library manipulation. If

1349
01:13:35,400 --> 01:13:38,880
Speaker 1: you liked the Bad Blood book, this is the same thing.

1350
01:13:38,960 --> 01:13:41,960
Speaker 1: It reads like a thriller straight through. Really quite fascinating.

1351
01:13:42,000 --> 01:13:44,280
Speaker 1: I love. I have to say, I think financial journalists

1352
01:13:44,280 --> 01:13:47,040
Speaker 1: don't get enough credit when they do expose these things.

1353
01:13:47,120 --> 01:13:49,240
Speaker 1: And it's funny, you know, we all know Sarah Nos

1354
01:13:49,640 --> 01:13:52,600
Speaker 1: but tharahs was tiny compared to one m dB, I

1355
01:13:52,640 --> 01:13:56,920
Speaker 1: mean one MDB. Somehow a young man stole nine billion

1356
01:13:57,000 --> 01:14:01,519
Speaker 1: dollars and is still at large and it's almost you know,

1357
01:14:01,720 --> 01:14:05,840
Speaker 1: whatever you say about Elizabeth and Paraos, you know, Uh,

1358
01:14:06,520 --> 01:14:08,280
Speaker 1: she was a believer and went down with the ship.

1359
01:14:08,880 --> 01:14:12,240
Speaker 1: I mean it is so money went in, but billions

1360
01:14:12,360 --> 01:14:16,720
Speaker 1: wasn't lost. You know. Here nine billion dollars just poof. Uh.

1361
01:14:16,920 --> 01:14:21,519
Speaker 1: It's a spectacular story. So I if you're interested in

1362
01:14:21,560 --> 01:14:24,400
Speaker 1: financial it's it's it's a good one. I'm definitely gonna

1363
01:14:24,479 --> 01:14:26,920
Speaker 1: check that out. Um, tell us about a time you

1364
01:14:27,080 --> 01:14:31,400
Speaker 1: failed and what you learned from the experience. Well, you know,

1365
01:14:32,040 --> 01:14:35,519
Speaker 1: I said earlier success as a lousy teacher. Uh. You know,

1366
01:14:36,360 --> 01:14:40,519
Speaker 1: the culture of our firm is so based on trust

1367
01:14:40,800 --> 01:14:44,160
Speaker 1: between the team of us that worked together. And the

1368
01:14:44,280 --> 01:14:47,240
Speaker 1: reason that we feel trust is so important is because

1369
01:14:47,560 --> 01:14:50,559
Speaker 1: admitting and learning from your mistakes is such a critical

1370
01:14:50,640 --> 01:14:53,639
Speaker 1: part of getting better. And so we actually in our

1371
01:14:54,160 --> 01:14:56,360
Speaker 1: the center of our research department, we have a wall

1372
01:14:56,960 --> 01:15:00,280
Speaker 1: with the frame stock certificates of our biggest mistakes and

1373
01:15:00,760 --> 01:15:03,920
Speaker 1: uh that goes back twenty or twenty five years and

1374
01:15:04,720 --> 01:15:08,040
Speaker 1: it keeps growing, unfortunately, my son said, starting to look

1375
01:15:08,080 --> 01:15:11,800
Speaker 1: like a mural and uh. And each certificate has a

1376
01:15:11,840 --> 01:15:15,320
Speaker 1: plaque on the bottom with the transferable lesson learned and

1377
01:15:15,479 --> 01:15:20,960
Speaker 1: some are mistakes like quantification. Some are mistakes of qualification judgment. Uh.

1378
01:15:21,560 --> 01:15:24,840
Speaker 1: Some are mistakes of omission, things that we failed to

1379
01:15:24,880 --> 01:15:26,519
Speaker 1: do that we ought to have done. Some our mistakes

1380
01:15:26,560 --> 01:15:30,760
Speaker 1: of comission. Some companies are on there twice. Uh. And

1381
01:15:30,960 --> 01:15:32,920
Speaker 1: they can be on there twice because you bought them

1382
01:15:32,960 --> 01:15:37,479
Speaker 1: wrong and you sold them wrong. Uh so uh, you

1383
01:15:37,560 --> 01:15:41,960
Speaker 1: know there were Uh. The mistakes of quantification are the

1384
01:15:42,040 --> 01:15:45,840
Speaker 1: easiest to fix because like that manufacturing process earlier when

1385
01:15:45,840 --> 01:15:49,040
Speaker 1: we talked about Danny Kahneman, you know, you constantly feed

1386
01:15:49,080 --> 01:15:51,080
Speaker 1: those back into the process. All Right, we have to

1387
01:15:51,640 --> 01:15:54,599
Speaker 1: reconcile the cash flow from operating section with the cash

1388
01:15:54,640 --> 01:15:56,800
Speaker 1: flow from investing section and make sure those tied to

1389
01:15:56,840 --> 01:16:00,200
Speaker 1: the income statement. Because that's how Enron or Loo sent

1390
01:16:00,320 --> 01:16:04,880
Speaker 1: most dramatically, was manipulating their their cash flow statement, their

1391
01:16:04,880 --> 01:16:09,919
Speaker 1: income statement through their cash flow statements. On mistakes of quantification. Uh, maintenance,

1392
01:16:10,000 --> 01:16:13,599
Speaker 1: capital versus appreciation, those are valuable lessons because you put

1393
01:16:13,640 --> 01:16:15,280
Speaker 1: them back in the system, you don't make them again.

1394
01:16:15,320 --> 01:16:18,040
Speaker 1: The firm gets better judgments a little tougher because each

1395
01:16:18,080 --> 01:16:21,439
Speaker 1: one looks a little different, like Tolstoy's unhappy families. Um.

1396
01:16:21,840 --> 01:16:23,719
Speaker 1: And you don't want to learn so broad a lesson

1397
01:16:24,240 --> 01:16:27,280
Speaker 1: that you miss a real uh, you miss an opportunity.

1398
01:16:27,360 --> 01:16:31,799
Speaker 1: The other way, the mistakes of omission, those are enormously valuable.

1399
01:16:31,840 --> 01:16:34,600
Speaker 1: I mentioned Google earlier Google's on our wall because I

1400
01:16:34,680 --> 01:16:37,400
Speaker 1: did all the work. I met Google five or six

1401
01:16:37,520 --> 01:16:40,280
Speaker 1: times before they came public. You know, we are large

1402
01:16:40,280 --> 01:16:45,000
Speaker 1: shareholders in three newspaper companies. We understood the advertising business,

1403
01:16:45,520 --> 01:16:48,880
Speaker 1: and yet we didn't understand how effective Google ads were.

1404
01:16:48,960 --> 01:16:52,960
Speaker 1: For one simple reason, we never called an advertiser. If

1405
01:16:53,000 --> 01:16:55,080
Speaker 1: we had called Geico or Progressive, who were two of

1406
01:16:55,160 --> 01:16:58,840
Speaker 1: the largest advertisers on Google before they came public, we

1407
01:16:58,920 --> 01:17:02,240
Speaker 1: would have learned that to get a lead through Google

1408
01:17:02,400 --> 01:17:06,240
Speaker 1: was costing them something like two dollars. Their next nearest

1409
01:17:06,360 --> 01:17:10,200
Speaker 1: customer acquisition vehicle, which I think was late night cable television,

1410
01:17:10,360 --> 01:17:14,920
Speaker 1: was thirty dollars. It was so valuable. So anyway, those

1411
01:17:14,960 --> 01:17:17,559
Speaker 1: are mistakes. So I would say, you know, we've been

1412
01:17:17,600 --> 01:17:21,479
Speaker 1: guided by failure, uh and UM. We really try to

1413
01:17:21,560 --> 01:17:24,040
Speaker 1: have a culture of embracing it and learning from it

1414
01:17:24,280 --> 01:17:28,080
Speaker 1: and and earning a subsequent return on the past mistakes

1415
01:17:28,120 --> 01:17:30,719
Speaker 1: we've made. It's interesting you guys do that via wall

1416
01:17:31,080 --> 01:17:34,240
Speaker 1: all of the I shouldn't say all. Many of the

1417
01:17:35,200 --> 01:17:39,840
Speaker 1: prominent venture capitalists hold out there. Some people call it

1418
01:17:39,920 --> 01:17:44,320
Speaker 1: their anti portfolio, either the things they said no to,

1419
01:17:45,040 --> 01:17:48,920
Speaker 1: like Apple or Amazon, or some of the more spectacular

1420
01:17:49,000 --> 01:17:52,240
Speaker 1: failures they've said yes to. And I don't want to

1421
01:17:52,280 --> 01:17:55,559
Speaker 1: call it a badge of honor, but it does reflect

1422
01:17:55,600 --> 01:17:59,240
Speaker 1: a certain degree of humility and willingness to learn from mistakes.

1423
01:17:59,800 --> 01:18:02,760
Speaker 1: You don't see it in many of the companies that

1424
01:18:02,920 --> 01:18:06,080
Speaker 1: manage public funds. So it's interesting to hear that you

1425
01:18:06,200 --> 01:18:09,280
Speaker 1: guys do something similar to what the vcs do. Well,

1426
01:18:09,400 --> 01:18:12,200
Speaker 1: it's my my grandfather's You don't learn from mistakes if

1427
01:18:12,240 --> 01:18:14,920
Speaker 1: you don't admit you make them. And and you know,

1428
01:18:15,040 --> 01:18:18,160
Speaker 1: we're in a dynamic business. What what what helped us

1429
01:18:18,160 --> 01:18:21,280
Speaker 1: succeed in the nineteen seventies was different than the eighties

1430
01:18:21,600 --> 01:18:23,479
Speaker 1: or in the eighties didn't work in the nineties. So

1431
01:18:23,600 --> 01:18:25,880
Speaker 1: this process of evolution. That's why, going back to your

1432
01:18:25,960 --> 01:18:28,240
Speaker 1: very early question about value and growth, that's why I

1433
01:18:28,320 --> 01:18:30,880
Speaker 1: get so mad when people say I won't look at something,

1434
01:18:31,560 --> 01:18:34,400
Speaker 1: because if you won't look at biotech because you're a

1435
01:18:34,520 --> 01:18:40,280
Speaker 1: value investor, you're gonna miss an enormous change in society.

1436
01:18:40,400 --> 01:18:43,479
Speaker 1: In the economy that may or may not unfold, but

1437
01:18:43,560 --> 01:18:46,479
Speaker 1: when it does, it will have real economic consequences. And

1438
01:18:46,560 --> 01:18:48,760
Speaker 1: you might not look at it in order to buy

1439
01:18:48,800 --> 01:18:50,960
Speaker 1: a biotech company, but you might look at it in

1440
01:18:51,080 --> 01:18:53,400
Speaker 1: terms of what it will mean for healthcare costs, or

1441
01:18:53,560 --> 01:18:56,920
Speaker 1: what it which is your in your insurance portfolio, or

1442
01:18:57,280 --> 01:18:59,840
Speaker 1: what it might mean for you know, life expectancy. And

1443
01:18:59,880 --> 01:19:02,960
Speaker 1: so we just we have a curious mindset, but we

1444
01:19:03,040 --> 01:19:05,920
Speaker 1: also think that the idea of not looking at things

1445
01:19:06,120 --> 01:19:08,439
Speaker 1: is very, very dangerous. Why why didn't you invest in

1446
01:19:08,520 --> 01:19:10,960
Speaker 1: the company that cured cancer? Well, they didn't have any

1447
01:19:11,000 --> 01:19:13,920
Speaker 1: earnings the first two quartersactly, just a crazy You know,

1448
01:19:14,040 --> 01:19:16,439
Speaker 1: we made a lot of money investing in Cable, and

1449
01:19:16,800 --> 01:19:19,639
Speaker 1: you know Cable had no earnings for twenty five years.

1450
01:19:20,439 --> 01:19:23,599
Speaker 1: Isn't that really? I think? So, you know, it's all

1451
01:19:23,680 --> 01:19:25,840
Speaker 1: cash flow. I don't think they went to earnings until

1452
01:19:25,880 --> 01:19:29,000
Speaker 1: about fifteen ten or fifteen years ago, and Cable started

1453
01:19:29,040 --> 01:19:31,559
Speaker 1: in the seventies, so I would yeah, I would say

1454
01:19:31,640 --> 01:19:33,880
Speaker 1: it would have been twenty five years with no no

1455
01:19:34,080 --> 01:19:37,720
Speaker 1: reported earnings. But again going back to accounting, lots of

1456
01:19:37,760 --> 01:19:40,280
Speaker 1: cash flow. So what do you do for fun? What

1457
01:19:40,360 --> 01:19:42,479
Speaker 1: do you do when you're not in the office or

1458
01:19:42,600 --> 01:19:47,080
Speaker 1: when you're not reading. Well, Uh, that's a good question.

1459
01:19:47,200 --> 01:19:49,840
Speaker 1: I mean, I you know, we we always say, you know,

1460
01:19:50,000 --> 01:19:54,800
Speaker 1: it's hard to find investors that successful investors that had

1461
01:19:54,840 --> 01:19:58,840
Speaker 1: a history playing team sports. I always say it's sort

1462
01:19:58,880 --> 01:20:02,400
Speaker 1: of the mindset you te to end up with runners, swimmers,

1463
01:20:03,040 --> 01:20:05,800
Speaker 1: case link offers, but you don't get a lot of

1464
01:20:06,160 --> 01:20:09,000
Speaker 1: uh in the type of long term sort of value investing.

1465
01:20:09,080 --> 01:20:14,280
Speaker 1: I think partly it's because I think investing successful investing.

1466
01:20:14,320 --> 01:20:17,759
Speaker 1: Value investing requires you to think differently than the the others,

1467
01:20:18,120 --> 01:20:21,880
Speaker 1: to set yourself apart, and that mindset tends to lend

1468
01:20:21,920 --> 01:20:25,960
Speaker 1: itself more to quiet pursuits, you know, individual things rather

1469
01:20:26,080 --> 01:20:27,960
Speaker 1: than being part of the team. You have to have

1470
01:20:28,080 --> 01:20:31,519
Speaker 1: lower emotional intelligence things like that. Um so I do

1471
01:20:31,880 --> 01:20:34,320
Speaker 1: you know, I enjoy things like running and swimming. Uh.

1472
01:20:34,560 --> 01:20:35,920
Speaker 1: But but I would say the one thing I do

1473
01:20:36,000 --> 01:20:38,800
Speaker 1: that's a little bit unusual is I have I have

1474
01:20:38,920 --> 01:20:41,679
Speaker 1: had for twenty years or so a very very old

1475
01:20:42,080 --> 01:20:48,200
Speaker 1: wooden sail boat feeling and I h it was built

1476
01:20:48,320 --> 01:20:51,400
Speaker 1: fifty two years ago, fifty three years ago, went down

1477
01:20:51,439 --> 01:20:54,599
Speaker 1: the ramp the same month I did. And uh, it's

1478
01:20:54,640 --> 01:20:56,960
Speaker 1: not a fancy boat. And it's uh, but it's a

1479
01:20:57,080 --> 01:20:59,800
Speaker 1: very well built, sort of hearty boat. And and I

1480
01:21:00,080 --> 01:21:02,640
Speaker 1: love sailing that wherever I can. And so we've been

1481
01:21:02,760 --> 01:21:06,320
Speaker 1: up to Scandinavia, or up to Nova Scotia, or down

1482
01:21:06,400 --> 01:21:09,559
Speaker 1: to the Caribbean. And what I love about the metaphor

1483
01:21:09,680 --> 01:21:12,600
Speaker 1: of sailing is that, you know, people say golf is

1484
01:21:12,720 --> 01:21:14,680
Speaker 1: like life. I don't think golfs like life. I mean,

1485
01:21:14,720 --> 01:21:16,439
Speaker 1: people say you play against yourself and so on. But

1486
01:21:16,760 --> 01:21:18,760
Speaker 1: but in golf, the small stuff counts the same as

1487
01:21:18,800 --> 01:21:20,920
Speaker 1: the big stuff, and I don't think that's like life.

1488
01:21:21,200 --> 01:21:23,479
Speaker 1: I don't think the six inch pot counts the same

1489
01:21:23,520 --> 01:21:26,160
Speaker 1: as the hundred yard drive in life, or I guess

1490
01:21:26,200 --> 01:21:28,000
Speaker 1: two hundred yards. I don't know how far people drive

1491
01:21:28,000 --> 01:21:31,760
Speaker 1: a golf ball. But but sailing, I think is very

1492
01:21:31,840 --> 01:21:36,479
Speaker 1: metaphorically powerful, especially for investing, because you can't change the

1493
01:21:36,520 --> 01:21:39,800
Speaker 1: direction of the wind. You have to adapt. But if

1494
01:21:39,840 --> 01:21:43,040
Speaker 1: you want to make progress, you can continue to make progress,

1495
01:21:43,080 --> 01:21:45,720
Speaker 1: but in an indirect way against the way. Yeah. And

1496
01:21:45,760 --> 01:21:48,200
Speaker 1: when we come back to investing, you know what we

1497
01:21:48,240 --> 01:21:49,920
Speaker 1: say is we know we're going to go through periods

1498
01:21:49,960 --> 01:21:52,479
Speaker 1: of bad weather and storms. We want to run our

1499
01:21:52,520 --> 01:21:55,280
Speaker 1: portfolio like a ship to survive all different kinds of

1500
01:21:55,320 --> 01:21:58,320
Speaker 1: weather to continue to make progress. But we don't want to,

1501
01:21:58,520 --> 01:22:00,760
Speaker 1: in a sense expose ourselves to the risk that when

1502
01:22:00,800 --> 01:22:03,600
Speaker 1: the storm comes, will founder. But we also want to

1503
01:22:03,640 --> 01:22:06,360
Speaker 1: make sure that we're making progress, so we have to

1504
01:22:06,439 --> 01:22:11,480
Speaker 1: move forward. So that sort of balance of adaptation, response, thoughtfulness,

1505
01:22:11,840 --> 01:22:14,200
Speaker 1: you know, the inability to predict the short term, you

1506
01:22:14,240 --> 01:22:17,479
Speaker 1: know that those things all matter. So two things. First,

1507
01:22:17,520 --> 01:22:19,479
Speaker 1: I'm gonna have to send you something. I'm gonna make

1508
01:22:19,479 --> 01:22:22,719
Speaker 1: a note to email you something about that exact topic

1509
01:22:22,720 --> 01:22:26,040
Speaker 1: because it's so fascinating. But second, so I have a small,

1510
01:22:26,120 --> 01:22:29,879
Speaker 1: little runabout little power boat, but I got into boating

1511
01:22:30,479 --> 01:22:34,559
Speaker 1: through a friends sailboat, and to me, there is nothing

1512
01:22:35,040 --> 01:22:38,560
Speaker 1: more relaxing than just being out on the water with

1513
01:22:38,800 --> 01:22:42,519
Speaker 1: no engine noise, just the wind and the sails. There's

1514
01:22:42,600 --> 01:22:46,640
Speaker 1: something about it that is unique in the world of

1515
01:22:47,120 --> 01:22:51,200
Speaker 1: um leisure activities. Well, we talked about being wandering and

1516
01:22:51,320 --> 01:22:55,560
Speaker 1: that maybe a genetic predisposition to be wanderers, to be explorers,

1517
01:22:55,640 --> 01:22:58,240
Speaker 1: as having served our species over time, and and I

1518
01:22:58,360 --> 01:23:02,080
Speaker 1: agree that there's something about sailing and the silence, the harmony,

1519
01:23:02,160 --> 01:23:06,040
Speaker 1: the balance. UM. I also particularly love navigating, and so

1520
01:23:06,360 --> 01:23:09,320
Speaker 1: you know, I do a little celestial navigation. I have

1521
01:23:09,439 --> 01:23:13,880
Speaker 1: a GPS as everyone's got to go there. But you know,

1522
01:23:14,000 --> 01:23:17,320
Speaker 1: there's something about being in that moment that I find.

1523
01:23:17,840 --> 01:23:19,400
Speaker 1: And of course it's my favorite way to be with

1524
01:23:19,479 --> 01:23:24,280
Speaker 1: my family because it's there's no TV, there's no cable

1525
01:23:24,400 --> 01:23:27,120
Speaker 1: and and uh, you know, a friend of mine once

1526
01:23:27,200 --> 01:23:30,960
Speaker 1: referred to it as a wasp Winnebago. I didn't love,

1527
01:23:31,040 --> 01:23:33,479
Speaker 1: but but boy it is. It is a beautiful way

1528
01:23:33,520 --> 01:23:38,080
Speaker 1: to to see the world. So, speaking about, um, how

1529
01:23:38,200 --> 01:23:41,120
Speaker 1: we see the world, what are you most optimistic about

1530
01:23:41,840 --> 01:23:43,840
Speaker 1: in the world of investing and what are you most

1531
01:23:43,920 --> 01:23:49,920
Speaker 1: pessimistic about these days? Well, I'm most optimistic about ingenuity.

1532
01:23:50,240 --> 01:23:54,479
Speaker 1: You know, it just uh the you know, we're we're

1533
01:23:54,600 --> 01:23:56,960
Speaker 1: not uh you know, we we aren't sort of a

1534
01:23:57,600 --> 01:24:00,479
Speaker 1: mindless optimists, you know, we don't. But you know the

1535
01:24:00,560 --> 01:24:03,519
Speaker 1: fact that that on average, the world gets better, the

1536
01:24:03,600 --> 01:24:07,000
Speaker 1: world gets safer, the world gets cleaner. Uh. We address

1537
01:24:07,080 --> 01:24:10,800
Speaker 1: problems in part because we worry about them so much. Um,

1538
01:24:11,120 --> 01:24:15,240
Speaker 1: when I look at what's happening in AI, in biotech, uh,

1539
01:24:15,600 --> 01:24:18,240
Speaker 1: you know, the innovation, what's happened in China was just

1540
01:24:18,360 --> 01:24:20,880
Speaker 1: back from China. I mean, you know, look at those people,

1541
01:24:20,960 --> 01:24:23,680
Speaker 1: you know, a billion people who when we were kids, uh,

1542
01:24:24,040 --> 01:24:28,160
Speaker 1: they were starving and uh, you know, it's just the

1543
01:24:28,360 --> 01:24:31,000
Speaker 1: progress of the civilization in the last thirty years is

1544
01:24:31,120 --> 01:24:34,600
Speaker 1: just breath taking. So I would say I am excited

1545
01:24:34,640 --> 01:24:37,680
Speaker 1: and optimistic because when we talk about black swans, we

1546
01:24:37,840 --> 01:24:41,759
Speaker 1: forget we assume that black swans are negative. Right, A large,

1547
01:24:41,920 --> 01:24:47,920
Speaker 1: unexpected event, unpredictable with huge economic consequences. We assume that's negative. No,

1548
01:24:48,479 --> 01:24:50,280
Speaker 1: I mean you end up with a you know, a

1549
01:24:50,320 --> 01:24:55,720
Speaker 1: pharmaceutical or you know, biotech cure for diabetes, Alzheimer's and

1550
01:24:56,040 --> 01:24:59,000
Speaker 1: uh a l S and you know, maybe a couple

1551
01:24:59,040 --> 01:25:02,800
Speaker 1: of others, and you have medical deflation for the next

1552
01:25:02,880 --> 01:25:05,280
Speaker 1: fifty years. Just just look at the recent data on

1553
01:25:05,479 --> 01:25:09,639
Speaker 1: cancer death and it's amazing. So so I love the innovation.

1554
01:25:09,680 --> 01:25:11,160
Speaker 1: It's one of the things I love about my job

1555
01:25:11,240 --> 01:25:12,960
Speaker 1: is meeting in vendors. I meet with a lot of

1556
01:25:13,240 --> 01:25:16,759
Speaker 1: firms that are still private, that are have great ideas,

1557
01:25:16,800 --> 01:25:19,240
Speaker 1: simply because it's energizing. We don't invest in a lot

1558
01:25:19,320 --> 01:25:22,240
Speaker 1: because of the risk reward tradeoff is too great. But

1559
01:25:22,400 --> 01:25:24,560
Speaker 1: we love living in the future. That part of it

1560
01:25:24,680 --> 01:25:27,200
Speaker 1: is great. My grandmother was once asked what's her favorite day?

1561
01:25:27,360 --> 01:25:29,080
Speaker 1: You know, she was five when they were She was

1562
01:25:29,120 --> 01:25:32,920
Speaker 1: asked that, she said tomorrow, And so I love that. Uh,

1563
01:25:33,439 --> 01:25:35,960
Speaker 1: you know, I think the pessimism is the things that

1564
01:25:36,080 --> 01:25:40,120
Speaker 1: can disrupt that. I mean, obviously it's amazing to look

1565
01:25:40,240 --> 01:25:45,120
Speaker 1: at what capitalism has done to build uh wealth in

1566
01:25:45,360 --> 01:25:49,320
Speaker 1: in China and India, how well it works. Um. I

1567
01:25:49,479 --> 01:25:52,639
Speaker 1: lived in in Europe for five years. I went across

1568
01:25:52,720 --> 01:25:56,960
Speaker 1: the Berlin Wall and into Czechoslovakia and the eighties. I mean,

1569
01:25:57,520 --> 01:25:59,240
Speaker 1: you do not want to go back there. So I

1570
01:25:59,360 --> 01:26:03,120
Speaker 1: get a little bit worried about. You know, I would

1571
01:26:03,160 --> 01:26:07,800
Speaker 1: say the promises that people politicians can make that can't

1572
01:26:07,880 --> 01:26:10,960
Speaker 1: be kept without bankrupting the civilization. It's true of our

1573
01:26:11,000 --> 01:26:14,200
Speaker 1: social security, our healthcare promises. So you know, the fact

1574
01:26:14,280 --> 01:26:17,200
Speaker 1: that the policy cycle is longer than the political cycle

1575
01:26:17,920 --> 01:26:21,519
Speaker 1: is a deep systemic problem. Um. I think we'll muddle through.

1576
01:26:21,840 --> 01:26:25,200
Speaker 1: But that that's the one that gives me pause, quite

1577
01:26:25,280 --> 01:26:28,280
Speaker 1: quite intriguing. Um. What sort of advice would you give

1578
01:26:28,360 --> 01:26:31,120
Speaker 1: to a recent college graduate who was thinking about a

1579
01:26:31,200 --> 01:26:35,680
Speaker 1: career in finance. Well, I'd start with the idea that,

1580
01:26:36,280 --> 01:26:38,920
Speaker 1: you know, I think you better do it because there's

1581
01:26:38,960 --> 01:26:41,880
Speaker 1: something about it that you find meaningful rather than because

1582
01:26:41,960 --> 01:26:43,439
Speaker 1: you think you're gonna make a lot of money. I mean,

1583
01:26:43,520 --> 01:26:45,800
Speaker 1: one of the great things about what's happening in the

1584
01:26:45,840 --> 01:26:49,880
Speaker 1: financial services sector generally is that a lot of uh,

1585
01:26:50,760 --> 01:26:54,800
Speaker 1: you know, a lot of excess pay is being squeezed

1586
01:26:54,840 --> 01:26:59,799
Speaker 1: out uh and that's probably a healthy development that count reduction.

1587
01:27:00,080 --> 01:27:03,519
Speaker 1: So yeah, exactly if people are interested in it because

1588
01:27:03,520 --> 01:27:07,160
Speaker 1: of stewardship, if they're interested in it because they're excited

1589
01:27:07,160 --> 01:27:10,040
Speaker 1: about the puzzles. You know, one thing I would say

1590
01:27:10,080 --> 01:27:12,519
Speaker 1: to all this is millennials I have I have. I

1591
01:27:12,640 --> 01:27:15,680
Speaker 1: have four children, and all of who I'm very, very

1592
01:27:15,720 --> 01:27:18,120
Speaker 1: proud of right now what they're doing. But is that

1593
01:27:18,840 --> 01:27:22,880
Speaker 1: don't imagine that just because something doesn't sound interesting that

1594
01:27:23,000 --> 01:27:26,360
Speaker 1: it's not interesting. I think that there's an enormous amount

1595
01:27:26,400 --> 01:27:28,120
Speaker 1: of pressure on kids when they come out of college

1596
01:27:28,160 --> 01:27:30,920
Speaker 1: to do something that sounds cool, that sounds woke, that

1597
01:27:31,040 --> 01:27:34,760
Speaker 1: sounds connected, that sounds and they cheat themselves out of

1598
01:27:34,880 --> 01:27:39,000
Speaker 1: learning about things that might not sound that interesting that

1599
01:27:39,080 --> 01:27:42,280
Speaker 1: are actually fascinating. So choose your boss. You know, It's

1600
01:27:42,320 --> 01:27:45,680
Speaker 1: like in college, don't don't study courses that have cool descriptions.

1601
01:27:46,080 --> 01:27:48,280
Speaker 1: Ask your friends what the best teacher they had was

1602
01:27:48,600 --> 01:27:50,920
Speaker 1: and that it doesn't matter if they're teaching chemistry or

1603
01:27:50,960 --> 01:27:54,160
Speaker 1: they're teaching politics, it'll be a great course. And too

1604
01:27:54,240 --> 01:27:56,800
Speaker 1: many people uh study, you know, are drawn to the

1605
01:27:56,880 --> 01:27:59,799
Speaker 1: description instead of the teacher. It sounds like good advice.

1606
01:28:00,320 --> 01:28:02,720
Speaker 1: And our final question, what do you know about the

1607
01:28:02,800 --> 01:28:06,280
Speaker 1: world of investing today that you wish you knew thirty

1608
01:28:06,400 --> 01:28:11,200
Speaker 1: years ago when you were first getting started. Well, that's

1609
01:28:11,240 --> 01:28:16,160
Speaker 1: a good question, I would say. Um, I am struck

1610
01:28:16,280 --> 01:28:20,759
Speaker 1: by resilience. I'm struck by how my time horizon continues

1611
01:28:20,800 --> 01:28:24,360
Speaker 1: to Lengthen, you know, my my grandfather, uh, you know,

1612
01:28:24,600 --> 01:28:28,000
Speaker 1: there's an apoc a story that was true when I

1613
01:28:28,160 --> 01:28:30,000
Speaker 1: was a kid of trying to borrow a dollar from

1614
01:28:30,080 --> 01:28:32,080
Speaker 1: him to buy a hot dog, and he said that

1615
01:28:32,160 --> 01:28:34,760
Speaker 1: if I invested the dollar and earned his returns and

1616
01:28:34,840 --> 01:28:36,240
Speaker 1: lived as long as he would, it would be worth

1617
01:28:36,280 --> 01:28:38,519
Speaker 1: a thousand dollars by the time I was his age.

1618
01:28:38,520 --> 01:28:40,639
Speaker 1: And he said, it's a hot dog worth a thousand dollars.

1619
01:28:41,360 --> 01:28:45,920
Speaker 1: And you know the power of compounding, the resiliency of

1620
01:28:46,080 --> 01:28:49,160
Speaker 1: the economy and of businesses. You know, if I told

1621
01:28:49,200 --> 01:28:51,479
Speaker 1: you what was going to happen in Italy between nineteen

1622
01:28:51,600 --> 01:28:54,920
Speaker 1: fifty and two thousand and seventeen, you'd have, I don't

1623
01:28:54,960 --> 01:28:58,120
Speaker 1: know what fifty three governments, you'd have the Lira ago

1624
01:28:58,320 --> 01:29:02,240
Speaker 1: from you know, tend to three thousand, you'd have, you know,

1625
01:29:02,439 --> 01:29:06,479
Speaker 1: the euro crisis, you'd have corruption all. You know, you

1626
01:29:06,520 --> 01:29:08,639
Speaker 1: would have been terrified to have a business in Italy,

1627
01:29:08,720 --> 01:29:10,479
Speaker 1: and yet if you own Ferrari, you did pretty well,

1628
01:29:10,680 --> 01:29:14,479
Speaker 1: did pretty well. And so the ability for businesses to adapt,

1629
01:29:14,640 --> 01:29:18,280
Speaker 1: to respond, uh, to change. I wish I had really

1630
01:29:18,400 --> 01:29:20,640
Speaker 1: deeply understood that. And God, I wish there were a

1631
01:29:20,680 --> 01:29:22,479
Speaker 1: lot of businesses I owned along the way that I

1632
01:29:22,520 --> 01:29:26,439
Speaker 1: had just held on too, uh, not been not been

1633
01:29:26,479 --> 01:29:29,600
Speaker 1: so worried about next year's results, but really focused on

1634
01:29:29,680 --> 01:29:33,200
Speaker 1: the next decade. Quite fascinating. Chris Davis, thank you so

1635
01:29:33,320 --> 01:29:35,880
Speaker 1: much for being so generous with your time. We have

1636
01:29:36,080 --> 01:29:39,960
Speaker 1: been speaking with Chris Davis, Chairman, chief investment officer at

1637
01:29:40,200 --> 01:29:44,360
Speaker 1: Davis Advisors. If you enjoy this conversation, well be sure

1638
01:29:44,360 --> 01:29:46,200
Speaker 1: and look up and intro down an inch on Apple

1639
01:29:46,280 --> 01:29:49,160
Speaker 1: iTunes and you could see any of the previous three

1640
01:29:49,240 --> 01:29:52,479
Speaker 1: hundred such conversations we've had over the past five and

1641
01:29:52,479 --> 01:29:56,040
Speaker 1: a half years. Uh. We love your comments, feedback and

1642
01:29:56,280 --> 01:30:00,639
Speaker 1: suggestions right to us at m IB podcast that Bloomberg

1643
01:30:00,680 --> 01:30:04,759
Speaker 1: dot net. Give us a review on Apple iTunes podcast section.

1644
01:30:05,560 --> 01:30:08,639
Speaker 1: You can check out my daily read column on ritalts

1645
01:30:08,680 --> 01:30:12,400
Speaker 1: dot com, follow me on Twitter at Ritalts. See my

1646
01:30:12,560 --> 01:30:15,960
Speaker 1: weekly column on Bloomberg dot com. I would be remiss

1647
01:30:16,000 --> 01:30:18,280
Speaker 1: if I did not thank the crack staff that helps

1648
01:30:18,320 --> 01:30:23,040
Speaker 1: put these conversations together each week. Mark sin Ascuce is

1649
01:30:23,160 --> 01:30:28,400
Speaker 1: my audio engineer. Tracy Walsh is my producer. Michael Batnick

1650
01:30:28,560 --> 01:30:31,559
Speaker 1: is my head of research. I'm Barry Ritolts. You've been

1651
01:30:31,600 --> 01:30:34,559
Speaker 1: listening to Masters in Business on Bloomberg Radio.