December 17, 2024 • 49 mins
The Bloomberg Intelligence Fair Value Model is currently showing a 19.1x multiple on the S&P 500, which is lower than where we currently are, due to the Mag 7 driving a lot of the valuation premium in the index. In this episode of Inside Active, host David Cohne, mutual fund and active management analyst with Bloomberg Intelligence and co-host Michael Casper, US small cap and sector strategist at BI, spoke with Christopher Davis, chairman and portfolio manager at Davis Advisors about the significance of the earnings yield and the selective nature of the Davis investment discipline. They also discuss why management culture is crucial for long-term success and why understanding management’s capital allocation decisions is vital.
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Episode Transcript
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Speaker 1 (00:12):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges and philosophies and security selection. I'm David Cohne,
i lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Michael caspar Us, small cap
and sector strategist at Bloomberg Intelligence. Mike, thank you for
(00:34):
joining me today.
Speaker 2 (00:35):
Thanks David, So, you and.
Speaker 1 (00:36):
Gina recently published a note about the fair value model
you know in the S and P five hundred is
part of your twenty twenty five outlook. Can you give
our listeners a brief overview of the fear value model?
You know how the S and P five hundred is
currently valued, and you know possibly how it's affected by
the mag seven.
Speaker 2 (00:55):
Yeah. So our fair value model just for a bit
of background on two different regressions trained on data between
twenty twenty sixteen. We've been running it out of sample
pretty much since we started here at Bloomberg. The left
hand side of the model, or what I call the
left hand side of the model, is a regression on
estimated year ahead PE. The other side of the model
(01:18):
is for next twelve month EPs growth. And what we
do is we input consensus rate and macro expectations into
the model and see what it spits out. Here at
Bloomberg Intelligence, all of our models are data driven, so
we're happy to use consensus in it, and it's available
for clients on bi stocks Go if you'd like to
download a copy yourself and enter in your own estimates.
(01:39):
But nonetheless, with those macro own rate consensus estimates in there,
you get about a nineteen point one times multiple on
the S and P five hundred. You might be saying, well,
that's well lower where we are today on the whole index,
But what's really going on is the mag seven is
driving a lot of the valuation premium in the S
and P five hundred, And if you were at it instead,
(02:01):
envision what the SMP equal weights multiple is. Back when
we did it, the trailing PE was about twenty point
three earnings and eighteen point four times forward earnings, So
nineteen point one pretty much smack dab in the middle
of those two. On the other side of the model
next twelve month EPs growth, macro rate consensus would only
(02:21):
imply about six percent EPs growth. That's well below what
the bottoms up consensus is for the whole index. But again,
just looking back at what the equal weighted index has
forecast for itself, you're getting pretty close to that instead.
So it's really been an outsized influence of the max
seven on the S and P five hundred, driving the premium,
(02:42):
driving the earnings growth at least of late, and consensus
would expect that gap to narrow over twenty five and
twenty six, driving a lot of the great rotation that
we've seen since June at least. But I will note though,
that we did a bit of a deeper dive into
the economy and downloaded some of the tables from the
BEA and combining pretty much all of the tech and
(03:04):
tech related industries and comparing that to gross output. Those
industries are only about fourteen point six percent of the
whole economy, and this is really what's driving a lot
of that issue or a detachment between our model and
what's going on in the S and P five hundred,
because our model is very macro based. Meanwhile, if you
look at the S and P five hundred, and we
(03:25):
did it on a BIX classification, which is Bloomberg's industry
classification system SMP five hundred tech by itself is thirty
percent of the S and P five hundred, So a
lot of the reason why macro estimates and the rest
is detaching from SMP reality right now.
Speaker 1 (03:42):
Nice interesting, So I think it's a great time to
introduce our guest today. Christopher Davis is chairman and portfolio
manager at Davis Advisors. He is manager of the Davis
Large Cap and Financial portfolios. Welcome Chris, thanks for joining us.
Speaker 3 (03:57):
Thanks you so much, David. Mike, I'm glad to be here.
Speaker 1 (04:00):
So before we get into your background and investment philosophy,
can you add your thoughts to what Mike said? You know,
how are you seeing the S and P five hundred
valued right now?
Speaker 3 (04:09):
Well, I think it surprises me. I think Michael's exactly
right to break out, you know, sort of what is
it like without the mag seven and so on? The
median We sometimes think about the median stock and usually
when you get this sort of very top heavy, concentrated,
huge pe dispersion, that's sort of a signal that the
(04:33):
average stock may be more attractive. But when you couple
that market characteristic with what we would say is a
very trans transformational time in the economy where a lot
of traditional business models may be much more at risk
than they used to be. We think the simple knee
jerk reaction to rotate into value may be a little
(04:56):
short sighted. You're going to have to be very specific
when you look at all of the underlying transformation happening
in the economy and monetary geopolitics, a high technological disruption.
There are a lot of models that have been carved
in stone for fifty or sixty years that are looking
more and more fragile. So it's a very interesting time
(05:16):
to invest, definitely.
Speaker 1 (05:19):
So you know, I'd like to take a step back,
and you know, we'd love to hear your hear about
the beginnings of your investment career.
Speaker 3 (05:27):
Well, I mean I was, you know, born on third base.
I didn't hit a triple. You know, I was lucky
that my grandfather was a spectacular investor. He started in
about nineteen forty eight or forty nine with money that
he had borrowed from his wife's family, So talk about pressure.
And he turned that one hundred thousand dollars into eight
hundred million by the time he died, all of which
(05:51):
went to charity. By the way. He did not believe
it inheritance. So you know when people talk about Warren's
children or something like that, I know the feeling. He said,
he didn't want to rob us of the opportunity of
making an honest living. So and then my father was
also a great investor, and he started at the Bank
(06:11):
of New York and then started the Mutual Fund Company
in the nineteen sixties in the Go go years, a
time of hot tech and telecom, and he had sideburns,
and you know, the seventies was such a humbling time
that in a sense, we put together both of what
I think of as the real sort of heart of
(06:32):
each of their investment philosophies. I would say it was
a similar investment philosophy but applied in two different eras.
And that really has become the heart of what we do.
So I grew up, you know, I used to say,
I grew up at our table with advice like, oh,
never trust a bear market rally on a Friday. So
it's a very narrow family business sort of dynamic. But
(06:54):
of course what really mattered the most, David is is
both of them loved what they did. They just saw
you know, this opportunity to study businesses, to study success,
to look at the business as the people, to be
able to co invest alongside into these great sort of
growth companies, generational wealth builders. Was such an exciting way
(07:16):
to live versus being a creditor, being a lender, being
a banker. And so I just grew up lucky to
have been sort of immersed in this from a young
age by two people that loved what they did for
a living, and that that has made an enormous business,
enormous difference in sort of my own career path.
Speaker 1 (07:36):
That's great, kid. You know, if we talk about the
Davis investment discipline, is I mean that's that's growth stocks.
Speaker 3 (07:44):
Well, it's funny you say that. I think we so
predate this distinction between growth and value that we sort
of rejected. Right. We think of ourselves as value investors.
We never we never bought a business we thought was overvalued, right,
And growth is a component of value. A business that
(08:06):
can grow profitably is more valuable than one that doesn't grow.
But there's no difference in the arithmetic, right, Any business
is simply worth the present value of its future cash flows.
And what we would say is the trouble is often
growth investors are very complacent about the durability of a
(08:27):
growth rate, and we're very skeptical because capitalism is vicious,
and when somebody has high returns and high growth, it
attracts competition. And if you need ten or twenty years
of growth to get your money back, that can happen,
but the probabilities are very low. So in that sense,
we're very skeptical of the momentum style growth investing that
(08:50):
has sort of characterized a lot of aggressive growth type managers.
We think they're complacent about the durability of growth. They
underappreciate the viciousness of competition and dislocations and disruptions. So
in that sense we firmly in the value camp. But
on the other hand, we also recognize that what Warren
(09:12):
Buffett used to call cigar butt investing. You know, finding
a net net something that's got a book value of
one hundred and is selling at eighty and you think
you can't lose money, Well, of course you can if
the company's not liquid eating and if they continue to
reinvest your earnings at three or four percent return on
incremental capital, that's going to be a classic value trap.
(09:34):
So we think that companies that have durability and resiliency
are very valuable if they can grow over time, So
we sort of land between the two. In our hearts,
we think of ourselves as value investors, but I never
bought a company that I thought was going to be
earning a lot less five or ten years from now
(09:54):
than it is today. So in that sense, we end
up back in the growth camp.
Speaker 1 (09:58):
That makes sense. Actually you want to dig even a
little deeper and specifically kind of focus on the Davis
New York Venture Fund and the Davis Select Us Equity ETF.
Tickers are n y vt X in d USA. For
our listeners, can you kind of walk us through you
know what happens when you're you know, in the investment
(10:20):
process when you look for companies.
Speaker 3 (10:22):
Well, really our core strategies, which exactly as you say,
our large cap approach has a certain characteristics that make
sense given that background. We talked about about being in
our heart value investors, but wanting that sort of durable
growth as part of that equation, because what we would
say when we put that all together is there very
(10:43):
few companies that embody both of those characteristics. So we
end up with a portfolio that is highly selective, right
where we may have you know, thirty companies being you know,
eighty percent, forty companies being eighty five percent or so
of ninety percent of the assets of the funds. So
(11:04):
a concentrated approach, because we really, in essence, we are
rejecting sort of nine out of ten companies that we
look at in the S and P. Five hundred and
owning a portfolio of thirty to forty out of the
five hundred. So it's a very selective approach. But the
result of that selectivity is we own a portfolio of
(11:25):
companies that today trades at about thirty five to say
thirty five percent discount to the sorts of averages that
Michael was talking about in the market today, so trading
at fourteen fourteen and a half times earnings versus a
market at let's say nineteen or twenty. And yet and
(11:48):
yet our companies have grown their earnings over the last
five years at a rate that is essentially the same,
maybe even slightly higher than the averages. So we call
that a value investor's dream when you're able to, in
a sense, have both of those and that's what we
see today, and that selectivity is sort of a core
characteristic of what we do, and of course it reflects
(12:11):
the fact that we're the largest investor in our own strategies. Right,
we eat our own cooking, you know. This is we
think of it as trying to build generational wealth. So
we're not interested in some sub index how do we
do versus We're interested in building wealth over time and
so owning a relatively small number of durable businesses with
(12:32):
resilient long term growth, purchased at attractive prices, run by
managers that have sort of equal parts. We think of
integrity and industry and intelligence. That's the sort of formula,
and it's messy putting it into action. But we've been
at it a long time. I guess I became the
manager here in I think nineteen ninety four something like that,
(12:56):
So it's been We've gone through some interesting markets in
that time, and the fund itself having started in nineteen
sixty eight or sixty nine, that's getting to be some
real mileage.
Speaker 2 (13:10):
I got to ask about multiples a little bit, since
large segments of the markets are concerned about it, do
you share that concern? Are you more in the camp
that productivity gains might make up for the.
Speaker 3 (13:20):
Well, no, I'm absolutely just you know, it's so funny
because it's often, you know, the end investor is thinking
about multiples in isolation, and I always think it's better
if you invert the multiple, just turn it upside down
and you get what we call the earnings yield. So
what that means is just to make it easy, if
you're paying twenty times earnings, you're getting a five percent
(13:43):
earnings yield. Now you can buy a bond and get
a five percent yield. So the question is, well, why
the hell would you own inequity, which is riskier. You're
the last call on the cash that the business produces,
below all of the creditors, So why you take a
comparable multiple. Well, the answer is because I think it's
(14:04):
going to grow over time. But remember that five percent.
If it grows ten percent a year, that sounds great,
But you're only up at five and a half percent
the next year. Now, depending what you use for a
discount rate, you may be treading water. Now if you
start in our portfolio at a fourteen or fifteen times
or all of a sudden, you're starting with a seven
(14:25):
or a seven and a half percent yield right now,
that yield growing it. You know, let's say you know, seven, eight, nine,
ten percent. All of a sudden, it's seven, it goes
to seven, seven, it goes to eight and a half,
it goes to nine point four. And you see the
power of compounding over time. Now, because we're very low
(14:45):
turnover investors, we tend to own these businesses a long time.
That earnings yield over time is how we look to
generate our return. We're not predicting changes in the multiple,
but we do think when you start at a high
multiple or a low earnings yield, you need a lot
of growth just to get to the risk free rate.
You started thirty times earnings, had three percent, you got
(15:09):
to double it just to get to six. Right. So
that is the mindset we have is instead of thinking pe,
which is sort of an abstract idea, think about the
earnings yield and then think about how long if you
owned one hundred percent of that business, how long do
you have to own it just to get to a
ten percent return? Right? And then if it's a business
(15:31):
where you're paying fifty sixty times earnings, so you're starting
at one one and a half percent earnings yield, and
you say boy that's got a double two or three
times before I even get to a ten percent return. Well,
that could happen. But once companies are quite large, you
know a lot of people are gunning for them, and
(15:51):
you could get a lot of competition. And you look
at you know, as we look out at this world
of AI, you know, look at all the obvious winners
in the early days of the Internet. Most of them
don't exist anymore. Yahoo, Netscape, I mean, Cisco's a shadow
of what it was. I mean, those those were the
absolute sure thing winners. You know, well into the dawn
(16:16):
of the Internet. It wasn't like they it was still
in a fort you know, you were about eight years, nine,
ten years into the Internet, and those were the obvious
winners to everybody. And of course no price was too high,
and you were essentially, you know, if you had that
portfolio pretty well wiped out. And so we think there's
(16:36):
a lot of danger when people are trying to predict
winners early, paying huge prices with an enormous amount of
success booked in because that one percent errings yield, you know,
to get it up to a ten percent errings yield,
you need a lot to go right over a long
period of time, and capitalism is vicious, so it's not
(16:58):
quite so easy. So as I say that, I think
is when I think about multiples, invert it, think about
earnings yield, and then it starts making sense. When investors
think about their returns going forward, the earnings yield is
the right starting point, and then you've got to think about, well,
why should it be higher a year, two, three, five,
(17:18):
eight years from now. I mean, after all, there are
some wonderful companies that are earning a fraction of what
they earned ten years ago, and that sort of dislocation
and disruption. You know, people underestimate, and you've seen some
consumer stallwarts. I mean, we look at what's going through
wonderful companies like Laughter or Anheuser Busch or or Diagio.
(17:42):
I mean, these are great, durable companies, but you know,
their earnings have been killed and their multiples have come
way down. And so again we don't think the value
side is a safe place in a tumultuous world, and
within growth can be a very complacent place to be,
and so you've got to navigate this tightrope that we
(18:03):
think is what selectivity allows.
Speaker 1 (18:06):
You had mentioned management as one of the things you're
looking at. And so you know you mentioned integrity, but
are there other attributes that you look for in management teams?
Speaker 3 (18:17):
Well, the danger of we tend to lionize. Investors tend
to lionize with the presses help you know, managements after
their businesses have done very well, and there's what we
call a halo effect, you know, where you retroactively say, oh,
it must have been the great management. And so there's
a lot of subjectivity. And what I would say is
(18:40):
we try to create a mosaic to understand and I
would expand the word management to say culture, to really
understand what is the culture. Why is it that you
could have two companies selling the same regulated product, headquartered
almost in the same city, with the same market cap,
(19:02):
where their product has to be filed with regulators so
they can't have a secret sauce, and one of them,
over a course of about twenty years, grew at twenty
one percent a year and one of them grew at six. Now,
the examples that I'm using are Ohio Casualty and Progressive.
They both sell auto insurance. Essentially, they're both headquartered in Ohio,
(19:26):
not far apart. I think one was in Columbus and
one in Cleveland. But yeah, I'm a New Yorker, so
it's close enough. And you know, and of course the
difference was culture. Progressive had a totally different mindset as
a company, a spectacular management, a culture of quantitative excellence,
service excellence, urgency, discipline, creative thinking, I mean, amazing for decades.
(19:51):
So when we try to evaluate management, I said, we want,
you know, integrity, intelligence and intensity in a sense. But
when we build that mosaic, what are we looking for, Well,
we're looking for clues. Of course, we visit almost every
company we own, you know, so we're trying to see
do they keep a good team together. We're looking at
(20:14):
their accounting choices. David Michael, that's an interesting one. You know.
Gap is a very wide measure, and you just say, look,
if somebody ran a private business and you're reporting your
income to the tax authorities, I'm going to assume you're honest.
But if you're honest and you're reporting your income to
the tax authorities, you choose accounting policies that minimize current
(20:38):
reportable income, right, So you expense things aggressively, use short
amortization schedules and short depreciation accelerated depreciation schedules. You may
defer revenue, you'll put up reserves. You know, you'll do
everything you can to make it look like the company
is not earning a lot of money. Now, if the
same company reports its earnings to a perspective buyer, they
(21:01):
may choose the opposite policies, again legal but very aggressive depreciations.
They may start capitalizing a lot of software, R and
D things that they could be expensing. The concept that
we're trying to get at here was one that my
grandfather talked a lot about. It was called owner earnings. Right,
if you own the business, you reinvested enough to protect
(21:25):
the core and maybe grow at the inflation rate. Everything
else you have discretion over. You may choose to expand
your business, but then what's your incremental return on that capital.
You may choose to pay big dividends. You may take
that money and say I'm going to go buy a competitor.
But whatever it is, when we look at the business,
that's the mindset we look at. So the capital allocation decisions,
(21:49):
the accounting choices of the management, the ability to keep
and retain good people, how do they communicate with us?
I mentioned progressive Peter Lewis, the CEO of Progressive, wrote
every in your report himself. You know who else writes
their in your reports? Well, I mean, of course Berkshire
marcl Let's see, Jeff Bezos did not many. You could
(22:11):
probably count on two hands the fortune five hundred CEOs
that take the time to write their own annual report. Well,
that's a signal. That's a signal that they view their
shareholders as a partner, They think of themselves as entrusted
with shareholders' equity, and they're giving an accounting. So they're
all these sorts of tiles that we build around evaluating
(22:32):
a management. The proxy is a great place to look.
You know. Is it an interesting that Exxon has a
compackage as I recall, that vests something like ten years
after retirement. Right, that's a very that tells you a
lot about the culture of that company. There's not another
company I've ever known that's done that. So we're building
(22:55):
a mosaic to try to get a sense of culture,
of the durability of a culture. Uh. You know, and
the press is a terrible way to start that because
the president almost always a halo effect. We're looking for
those outsider type of CEOs. Understand capital allocation, understand excellence,
don't fool themselves, keep the egos in check, keep great people,
(23:17):
you know, value, have a stewardship gene. That's but it
is the most fun part of the job. It is
the most because in a market that's pretty damn efficient,
you have to look for pockets of inefficiency, and one
of them is crowd psychology. Obviously, when you get a
stampede out of an area, sector or a company, you
(23:38):
can get real inefficiency. Think of Meta just a couple
of years ago. I mean, the company didn't change, but
it was down and at a market cap smaller than
home Depot, with two billion customers and the number of
customers growing in every one of their businesses, and not
just what I well, the number of users growing. So
(23:59):
you had grown users on all three platforms and growing
engagement per user on all three platforms. And yet the
stock was down seventy percent because everybody said, oh, you know,
your grandmother looks at Facebook, but you know the kids
are all on TikTok. It was just headlines. But or
Mark Zuckerberg's an idiot because he's spending money on you know,
(24:22):
the new computing platform. Well, there's a good example of
if a CEO is willing to defer earnings, right, so
there's a guy who is not maximizing current reportable income.
We view that as a good sign. Right. So anyway,
those are all examples at management. But it is obviously
one of my favorite parts of the job.
Speaker 2 (24:44):
Yeah. So are there any you know, sector ideas that
are jumping off the page at you any anywhere where
You're seeing a lot of you know, stocks that look
really exciting going into twenty.
Speaker 3 (24:54):
Oh yeah, Well, Michael, I mean this is one that
goes way back in family lure. My grandfather only invested
in financial companies and he called, he said, within this
vast sector, there are growth stocks in disguise, And so
I used the Progressive example. You know, that was an
(25:15):
incredible growth company for thirty years, forty years, but it
was disguised as a property casualty insurance company. Well, we
started our financial sector fund. I think I started it
in nineteen ninety maybe Now that was partly because I
had worked at another firm and when I came to,
you know, work with my father, I said, look, you know,
(25:39):
nepotism is a dangerous thing, and you know, we don't
want to be employer of last resort for people with
the same last name. But that was back in the
late eighties early nineties. So what was happening in the
world then, Well, we had gone through the SNL crisis,
and so banks snls were hated. Right, There's a huge
(26:00):
commercial real estate debacle, and our feeling was there were
enormous opportunities to find durable growth companies in a sector
that was widely out of favor. Now you come up
to today, the memories of the financial crisis are still
so vivid that banks remain even though they've had a
nice move, they remain I think, without question the best
(26:22):
combination of durability and low valuation and so and this
idea that people don't differentiate between banks. Oh I like banks,
I don't like bank. There's huge differences in culture and
business model and valuation. And so that's when I started
our financial fund. I started it because I said, within financials,
(26:45):
we should be able to find companies that have below
average valuations above average growth prospects. And that strategy has
outperformed the S and P five hundred for thirty years,
right only only in financial stocks. Now you can't acial
index underperformed the S and P five hundred, so you
have to be very selective. So that's the theme we
(27:06):
really see in our large cap strategies today. That is
one of the anchor themes. And if you want names,
I mentioned Progressive. So today the analogy I would use
for progressive is Capital One. Capital one is a fintech
company disguised as a bank. It's still run by the founder.
I think it's the sixth largest bank in the country.
The founder started it. I think he was the top
(27:28):
of his class at Stanford Business School. He started a
technology company without a single branch, without a brand, and
built it into one of the largest banks in the
country using data science. Right. They just they basically said,
how do we target and offer to David who has
a different interest in a credit card than you have, Michael,
(27:49):
he's a big spending revolver. You're a prudent points gatherer,
you know, whatever it is. And so and Rich Fairbanks
still runs that company, and by the way, still writes
his own in your report. And so there's a company
at nine or ten times earnings with a return on
equity that I think has been you know, I don't
(28:11):
want to make up them number, but I want to
say that it's been thirteen or fourteen percent for twenty
five years. They will understate earnings when they're growing aggressively
because of the foolish nature of the what bank accounting
has come that forces you to put up all the
reserves you ever expect when you make the loan. Anyway,
(28:33):
some complex accounting there. But so I love that. You know,
we've had a big holding in Wells Fargo for a
long time. It's the cheapest of the big banks relative
to the quality of the franchise. It's been a long,
sluggish turnaround, but it's getting there. I love Markel, you know,
it's just a fabulous boutique insurance company that's got a
(28:54):
lot more going with it. But so financials is sort
of a good example of a theme. And then i'd
give you one quick second theme just to say, you know,
people overvalue that smooth, steady line of earnings. They think
that makes them feel safer. You know, we always say
we prefer a lumpy fifteen percent to a smooth twelve
(29:15):
And so you know, a company like applied materials or
certain types of industrial companies where the earnings are lumpy
in any year or two, but over time they're just
compounding machines. I mean, I've studied applied materials since nineteen
ninety six, and you know there's nobody in a garage
that's going to figure out how to do chemical vapor
(29:36):
deposition better than applied materials. So you know, they're an
arms dealer to a massive growth industry. And you know,
Taiwan Semi cannot build in videos chips without spending a
fortune buying applied materials machines, and we like that that model.
So that's a lumpy company and people undervalue it because
(29:57):
they don't know what it's going to earn six months
or a year from now. But what we do know
is it's going to earn a lot more five and
ten years from now that it earns today.
Speaker 2 (30:05):
Yeah, you've got me nodding along as a strategist that's
had financials at the top of a sector model for Yeah.
Speaker 3 (30:11):
I love that.
Speaker 2 (30:12):
Yeah, and a big follower small cup stocks my entire career.
You know, regional banks or the dog that works the
tail there.
Speaker 3 (30:17):
So it's injure that Michael, though, on one quick aside
on banks is that the whole first half of my
career in financials, we own small cap financials because they
just fed at the carcass of these idiotic large financials
that you know, it was amazing how every time there
was a hiccup in any sector, somehow city lost, you know, billions,
(30:40):
and these small you know, you could have a well
located branch in Iowa, and you could have a lower
cost of funds and better credit quality because you know,
in a bank, the number one biggest cost is interest.
The number two biggest cost is the cost of foolishness
right making loans and not getting paid back, or pricing
(31:00):
insurance policies, and usually those were not correlated to size.
But I will say that I do think something really
has changed in financials. The technology costs have gotten so
high and the compliance costs have gotten so high, and
both of those are scale advantages. So I'm looking at
the gap. I'm looking into some mid size financials. We
(31:22):
did buy some during that crazy First Republic, you know,
Silicon Valley Bank, Mayhem. There were some people that got
thrown out with the bathwater. But boy, it is amazing
the cost of simply regulatory compliance and technology are so
huge that it's not surprising that the biggest banks have
continued to gain share, share of profits as well as
(31:44):
share of deposits.
Speaker 2 (31:45):
Yeah, definitely. So just moving on from that idea, do
you think that there's adorable rotation away from tech stocks underway?
We've kind of seen it since June, but hoping.
Speaker 3 (31:57):
That I now know that you said durable, but I
thought you said adorable. Do you think there's some adorable
tech stocks? You know, tech is like financials. It's sort
of a silly grouping because the models are so different.
Whenever I hear in and you know, I don't know
(32:17):
what you call them. It's not an anacronym or what
is it when you an acronym? When you you know,
like bricks, you know, Brazil, Russia, India, China. I mean
as if those countries have anything to do with each other.
Totally different political systems, different valuations, different currencies, different central bags,
different industrial outlooks, different trade relations, different geopolitics, and yet
(32:40):
somebody called them bricks and said you got to own
the bricks or not own the bricks, right, And then
of course you know we saw it in now the
Magnificent seven. What was it before when it was what
were this group of tech stocks call when you had Netscape.
I mean, oh you know the anyway it was four horsemen.
Speaker 1 (33:02):
Well, no, there were the four horsemen, but it was
it was like an acronym or something like that.
Speaker 3 (33:07):
Yeah. Yeah, it had like fang fang. Look at us.
We've already forgotten fang.
Speaker 1 (33:12):
You know.
Speaker 3 (33:13):
People put group these things together. And of course investing
is the art of the specific, right you just it's
each company stand on its own. And you look at
any grouping of stocks and you fast forward five or
ten years, and there's enormous dispersion, and uh it's usually
just you know, a shorthand for whatever's gone up a
(33:34):
lot in recent times. And uh so, uh so, I
would say tech is too broad a sector. And of course,
the the index folks have done their best to spread
it out so that it doesn't look like, oh, we'll
call you Google, we're going to call that media, and
we're gonna we'll call this one technology, and we'll call
(33:55):
this communications. I mean, but but what I would say
is that certainly momentum has had one hell of a run.
And the funny thing about momentum is that it works
so well that people just go along with it, and
yet it defies common sense right. If you go to
(34:15):
the grocery store and the cost of stak has gone
up every week for six months, you don't want to
buy more, you want to buy less. And of course
the price you pay is a determinant of your return.
If you pay a higher price for the same stream
of cashflow, by definition, you have a lower return going forward.
(34:37):
And yet the theory of momentum investing that the more
it's gone up, the more attractive it becomes. It simply
works until it doesn't. Now, I once had a colleague
that I worked with, and I liked him a lot,
but we had to part ways and we got very
frustrated at one another because he was always looking for
a system. And I have a sign on my wall
(35:01):
it's a Las Vegas pit boss. And the Las Vegas
pit boss said, we said limos for guys with systems.
But he said to me, you know, so he wanted, Oh,
I look at the fifty two week down list, and
then I look from you know, and I find an
algorithm and it worked a lot of his stuff worked,
so I but I wouldn't do it, and he said
(35:21):
he got so frustrated. He said, look, Chris, if I
had a blind monkey in my office, and every day
the monkey pointed at the stock charts, and every day
it pointed to a stock, and that stock went up
every day, day after day, week after week, month after month,
year after year. You get five years of the monkey
never missing once, and you still wouldn't buy that stock.
(35:43):
And I said, of course I wouldn't. It's a blind monkey.
Like we have the savings of life, savings of teachers
and you know, people that have worked their whole life
to save, and the idea that, well, it works, so
I may as well capitulate and go along with it,
even though the math doesn't make any sense to me.
We're just not going to do it. And that means
(36:04):
there are worlds like we've been in a lot of
the last ten years, where we're going to produce good
absolute returns, but we're going to lag on a relative
basis because we're not getting on that wagon. But the
one thing I'll say is, you know, just because everybody
else was doing it really feels stupid in retrospective, it
goes wrong. And I think the blindly indexing because it
(36:25):
has worked so well where you're automatically putting in the
most money into what's already gone up the most. I
think in retrospect, there are a lot of fiduciaries that
may feel foolish that they were saving, you know, twenty
basis points of fees and just outsourcing stock selection to
a momentum strategy. Now, that may be sour grapes, and
(36:45):
the index has certainly been a monster, but there have
been other times that it was hard to beat. There's
a manager I admired, Jim Gibson, who had performed the
index for seventeen years leading up to the year two
thousand and for eighteen years, he was ahead for eighteen years.
You know, you can get some pretty dramatic changes, and
(37:06):
so you know, I'm not predicting that, but we're we're
not changing our approach either.
Speaker 2 (37:11):
I was just going to say that that brings up
an interesting research idea. You know, driving some of those
outliers that we're seeing in the index, right, everybody piling
their money into the SMP index fund all the time,
driving the max seven higher.
Speaker 3 (37:25):
Well, and remember to think about what they're selling to
do that. To the extent they're replacing an active manager,
you're getting idiosyncratic selling into momentum buying. So it's a
feedback loop there too, which will lead it to outperform
even more, which will continue the feedback loop. And you
know the nature of feedback loops is that they're very,
very hard to model, but they always collapse, right, So
(37:48):
you just don't know when.
Speaker 1 (37:50):
So I was going to ask, you know, we've talked
about what you like, and you know what you don't like.
You know, when you have a stock in your portfolio,
is it, you know, reaching its valuations something that would
trigger you to, you know, want to find something new,
or you know kind of you know, sell part of
it or.
Speaker 3 (38:07):
Well, this is where value investors struggle, right, you know
we cut the flowers in water the weeds. Now part
of that is, you know, the prudent man rules. You know,
how how big a position do we want to let
our winners become? Right, If we start with a four
percent position and all of a sudden we've got an
(38:28):
eight or nine percent position, do we let it go
to twelve? Do we let it go to fifteen? Do
we let it go to eighteen? So that's a very
delicate balance. Now I can tell you if I managed
my own money, like my own account, right, I put
my money in the funds. If I manned my own account,
I probably wouldn't sell because I'd say, I, you know,
I don't need to pay the tax. And but you know,
(38:50):
going back to the idea of that teacher that has
life savings, with us, maybe having twenty percent in one
stock is just too risky. So we do have to
ballence that cell discipline. We never have price targets, but
we do have valuation. We have an IRR mindset, and
when an IRR gets down to three percent, four percent,
(39:12):
five percent, you know, you start thinking, well, if we're
going to hold this, we must think there's something wrong
with our IRR model, because otherwise, why are we accepting
that return? And the answer is usually when we've sold
those and been wrong, it's because an IRR model has
(39:33):
a really hard time capturing something that can grow for
twenty five years. Right. It's just I mean, we sold Costco.
We're the largest shareholder of Costco for more than a decade,
and it's a glorious company, but at twenty two twenty
three times earnings, it just felt like that is we're
starting with a four or five percent IRR and you're
(39:55):
getting closer to store saturation. We don't know what store
saturation is, but we just know we're a lot closer
to it. And it's just, you know, the multiple has
expanded another fifty percent, and the sales grew way more
than we thought, and they were more successful internationally, and
so we need to be open to where our IRR
(40:15):
model misses that sort of the durability or the duration
of the growth. As I said, you don't want to
bet on twenty year growth being sustainable, but when it is,
oh my god, you make so much money in that
last five years because you know, those last few doubles
are such a multiple of your initial start. So we
(40:38):
do you know, the ir mindset does force us to
sell evaluation, and certainly for the last fifteen years that's
almost always been a mistake. But over the course of time,
we think it's part of our duty. You know, we're
you know, we feel we haven't owned Nvidia for the
last three years, but we're you know, we're neck and
neck with the market over that last two or three years,
(41:01):
and so I'm proud of what we've owned and how
it's done. And we've just had to have the discipline
to recognize that watching other people, you know, hit extreme
low probability winners. Should you know, as I say that
the number one investment made by anybody this year is
going to be some guy that bought a lottery ticket
and wins one hundred million dollars. Nobody will get a
(41:23):
return like that on any other investment. That will be
the highest IRR and one year I RR. But it
doesn't mean it's a good approach just because somebody did
it and it worked. So we've got to stick with
what has worked for us for fifty years.
Speaker 2 (41:41):
Yeah. I hate answering this question myself, but I got
to ask it. Given how much stocks have gone up
in the last two weeks, have any of your investment
thesis has changed due to the election results?
Speaker 3 (41:55):
Well, you know, I've got a really good schooling in this.
In I can't remember if it was the first or
second Clinton administration when Hillary became the healthcare bizar, and
basically there was a belief that the existing sort of
health insurance industry was going to be gutted. Now, the
(42:18):
same thing happened again with Obamacare. If you were to
look at a list, I have not done this, so
you guys would have to fact check me on this,
But I would bet if you were to look at
sort of the top stocks of the last twenty years,
you know, from Clinton to today, I would bet United
Health is on that list. And you would have bet
(42:41):
there were so many opportunities when you would have said,
oh my god, the changing political tides are going to
destroy that business. And by the way, maybe rightly. So.
You know, it's a strange industry to have employers buying
health insurance for their employees, but it has proven unbelievably resilient.
(43:01):
I mean, if you think about the war on tobacco.
We don't own tobacco, but it is amazing that Philip Morris,
it may have been the best stock for the last
fifty years. So there is a tendency to really overreact
to politics. And it's not that the changes won't be
incredibly important, it's just they'll be likely unpredictable, and so
(43:23):
you know, I would certainly say the likelihood of government
spending coming down seems low, of deficits coming down seems low,
and higher deficits with a low interest rate environment doesn't
make sense to me. I think modern monetary theory is
one of the great idiocies to be foisted onto a
(43:45):
responsible nation. The idea that if you have the reserve currency,
the amount of debt and the amount of currency issue
doesn't matter. Well, that's true until you're not, until doing
so makes you not the reserve currency. So it's a
tautology and it's a very dangerous one. So you know,
I would say I am always well I'll quote my
(44:07):
you know, wonderful friend, Morgan Housel, who said, you know,
it's really good to save like a pessimist, but invest
like an optimist. And that's sort of my mindset. You know,
I don't think anybody on Earth thought there would be
a pharmaceutical cure for diabetes five years ago, and the
implications to the health system of that in twenty thirty
(44:30):
and twenty thirty five are so huge, and it's not
impossible to think of that happening for Alzheimer's or Parkinson's,
and you know, you could end up with medical deflation
and that changes the whole medicaid outlook. And so, you know,
black swans are not always bad. In fact, I would
say black swans are evenly distributed. They're just large. In fact,
(44:53):
they've actually had a positive skew over the course of history.
It's just we remember the bad ones much more. They're
much more vivid that good ones tend to play out
over a longer period of time. But I would say,
you know, I sleep like a baby, waking up every
three hours, crying and scared. But you know, we're substantially
(45:14):
fully invested, and we own many companies that are in
their second century, and many and a number that are
in their third century. Remember Bank of New York was
founded by Alexander Hamilton. It's still in the same business, right.
That's an amazing, amazing thing. So that focus on durability
does matter a lot in an uncertain time. I sure
(45:37):
as hell don't feel safe for owning a piece of
paper that's an iou from a guy with a printing press,
you know, who can just print pay me back with
you know, printing more paper. So I sure like owning businesses.
I think of them as inflation protected bonds where the
coupon is a little volatility, But you know, the durability
of the underlying business is what really matters.
Speaker 1 (45:59):
So we're running out of time. But I actually have
one more question for you. You know, whether this was going
back to the beginning of your career or anything, you know,
recent would have been some of your favorite investment books.
Speaker 3 (46:11):
Oh god, that is well. We have a value investor
library here, so well it it of course, it depends
on the audience. I bribed my children, my god children,
my nieces and nephews hundreds of dollars each if they
would read Morgan Housel's The Psychology of Money. I think
(46:33):
it's a book that is so valuable, and it's it's
a book for for people to understand how, in essence,
saving and investing buys you time and freedom. That's it does.
It's not about ferraris. It's about the ability to do
what you want when you want right that that's what
(46:54):
wealth is. And so helping recast that I think is
hugely valuable. So I'll put that in what I'll call
a psychology type of book. I would say. Boug Shrevanissan
wrote a book called Americana that is a breath taking
sort of history of capitalism in the US, one industry
(47:15):
at a time, starting with the Mayflower Compact and ending,
you know with this semi the internet. I think by
going through railroads and canals, you know, how did these
industries get built, who financed them, who were the drivers?
What about you know, so that's sort of fascinating for
just sort of reminding you of how powerful our model
is and how well it is worked for how long.
(47:37):
So and then I'll give you maybe a last one.
It's got a terrible title, but I think it's especially
good in the world that we live in now, where
fear and anger have been monetized, right, so, you know
the nature if you want engagement, you need the best
way to get people to pay attention is to scare
(47:57):
them or make them angry. That really locks them in.
And you know, we used to have pretty clumsy tools
to do that. Now we have sniper rifles to inject
fear and anger into each person individually. And the result
of that, of course, it's bad for the civilization, but
it's also very bad for investors. And so there's a book.
(48:19):
I can't remember the author, but I can remember the
title because it's a terrible title. It's called The Power
of Bad. But I think it's an incredibly useful defense
against this tendency to be so convinced that things are
getting worse and therefore the world is ending and it's
just And it has some very practical recommendations of how
(48:44):
to adjust your news intake to sort of be more
aware of what is happening that is positive and how
to recognize that that power of bad is being inflicted
on us. So that's a good range of three. But
I could go we could spend the whole podcast talking
about about books and but those would be three off
(49:07):
the top of my head.
Speaker 1 (49:08):
Good Slutch and well, this was a great discussion. Thank
you again, Chris for your time.
Speaker 3 (49:13):
Oh, thank you both. David. Michael is so glad to
be here. I really appreciate your time.
Speaker 1 (49:17):
And thank you Mike for serving as my co host.
Speaker 2 (49:20):
Yeah, thanks both to you. This is great.
Speaker 1 (49:22):
Until our next episode. This is David Cohne with Inside
Active
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges and philosophies and security selection. I'm David Cohne,
i lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Michael caspar Us, small cap
and sector strategist at Bloomberg Intelligence. Mike, thank you for
(00:34):
joining me today.
Speaker 2 (00:35):
Thanks David, So, you and.
Speaker 1 (00:36):
Gina recently published a note about the fair value model
you know in the S and P five hundred is
part of your twenty twenty five outlook. Can you give
our listeners a brief overview of the fear value model?
You know how the S and P five hundred is
currently valued, and you know possibly how it's affected by
the mag seven.
Speaker 2 (00:55):
Yeah. So our fair value model just for a bit
of background on two different regressions trained on data between
twenty twenty sixteen. We've been running it out of sample
pretty much since we started here at Bloomberg. The left
hand side of the model, or what I call the
left hand side of the model, is a regression on
estimated year ahead PE. The other side of the model
(01:18):
is for next twelve month EPs growth. And what we
do is we input consensus rate and macro expectations into
the model and see what it spits out. Here at
Bloomberg Intelligence, all of our models are data driven, so
we're happy to use consensus in it, and it's available
for clients on bi stocks Go if you'd like to
download a copy yourself and enter in your own estimates.
(01:39):
But nonetheless, with those macro own rate consensus estimates in there,
you get about a nineteen point one times multiple on
the S and P five hundred. You might be saying, well,
that's well lower where we are today on the whole index,
But what's really going on is the mag seven is
driving a lot of the valuation premium in the S
and P five hundred, And if you were at it instead,
(02:01):
envision what the SMP equal weights multiple is. Back when
we did it, the trailing PE was about twenty point
three earnings and eighteen point four times forward earnings, So
nineteen point one pretty much smack dab in the middle
of those two. On the other side of the model
next twelve month EPs growth, macro rate consensus would only
(02:21):
imply about six percent EPs growth. That's well below what
the bottoms up consensus is for the whole index. But again,
just looking back at what the equal weighted index has
forecast for itself, you're getting pretty close to that instead.
So it's really been an outsized influence of the max
seven on the S and P five hundred, driving the premium,
(02:42):
driving the earnings growth at least of late, and consensus
would expect that gap to narrow over twenty five and
twenty six, driving a lot of the great rotation that
we've seen since June at least. But I will note though,
that we did a bit of a deeper dive into
the economy and downloaded some of the tables from the
BEA and combining pretty much all of the tech and
(03:04):
tech related industries and comparing that to gross output. Those
industries are only about fourteen point six percent of the
whole economy, and this is really what's driving a lot
of that issue or a detachment between our model and
what's going on in the S and P five hundred,
because our model is very macro based. Meanwhile, if you
look at the S and P five hundred, and we
(03:25):
did it on a BIX classification, which is Bloomberg's industry
classification system SMP five hundred tech by itself is thirty
percent of the S and P five hundred, So a
lot of the reason why macro estimates and the rest
is detaching from SMP reality right now.
Speaker 1 (03:42):
Nice interesting, So I think it's a great time to
introduce our guest today. Christopher Davis is chairman and portfolio
manager at Davis Advisors. He is manager of the Davis
Large Cap and Financial portfolios. Welcome Chris, thanks for joining us.
Speaker 3 (03:57):
Thanks you so much, David. Mike, I'm glad to be here.
Speaker 1 (04:00):
So before we get into your background and investment philosophy,
can you add your thoughts to what Mike said? You know,
how are you seeing the S and P five hundred
valued right now?
Speaker 3 (04:09):
Well, I think it surprises me. I think Michael's exactly
right to break out, you know, sort of what is
it like without the mag seven and so on? The
median We sometimes think about the median stock and usually
when you get this sort of very top heavy, concentrated,
huge pe dispersion, that's sort of a signal that the
(04:33):
average stock may be more attractive. But when you couple
that market characteristic with what we would say is a
very trans transformational time in the economy where a lot
of traditional business models may be much more at risk
than they used to be. We think the simple knee
jerk reaction to rotate into value may be a little
(04:56):
short sighted. You're going to have to be very specific
when you look at all of the underlying transformation happening
in the economy and monetary geopolitics, a high technological disruption.
There are a lot of models that have been carved
in stone for fifty or sixty years that are looking
more and more fragile. So it's a very interesting time
(05:16):
to invest, definitely.
Speaker 1 (05:19):
So you know, I'd like to take a step back,
and you know, we'd love to hear your hear about
the beginnings of your investment career.
Speaker 3 (05:27):
Well, I mean I was, you know, born on third base.
I didn't hit a triple. You know, I was lucky
that my grandfather was a spectacular investor. He started in
about nineteen forty eight or forty nine with money that
he had borrowed from his wife's family, So talk about pressure.
And he turned that one hundred thousand dollars into eight
hundred million by the time he died, all of which
(05:51):
went to charity. By the way. He did not believe
it inheritance. So you know when people talk about Warren's
children or something like that, I know the feeling. He said,
he didn't want to rob us of the opportunity of
making an honest living. So and then my father was
also a great investor, and he started at the Bank
(06:11):
of New York and then started the Mutual Fund Company
in the nineteen sixties in the Go go years, a
time of hot tech and telecom, and he had sideburns,
and you know, the seventies was such a humbling time
that in a sense, we put together both of what
I think of as the real sort of heart of
(06:32):
each of their investment philosophies. I would say it was
a similar investment philosophy but applied in two different eras.
And that really has become the heart of what we do.
So I grew up, you know, I used to say,
I grew up at our table with advice like, oh,
never trust a bear market rally on a Friday. So
it's a very narrow family business sort of dynamic. But
(06:54):
of course what really mattered the most, David is is
both of them loved what they did. They just saw
you know, this opportunity to study businesses, to study success,
to look at the business as the people, to be
able to co invest alongside into these great sort of
growth companies, generational wealth builders. Was such an exciting way
(07:16):
to live versus being a creditor, being a lender, being
a banker. And so I just grew up lucky to
have been sort of immersed in this from a young
age by two people that loved what they did for
a living, and that that has made an enormous business,
enormous difference in sort of my own career path.
Speaker 1 (07:36):
That's great, kid. You know, if we talk about the
Davis investment discipline, is I mean that's that's growth stocks.
Speaker 3 (07:44):
Well, it's funny you say that. I think we so
predate this distinction between growth and value that we sort
of rejected. Right. We think of ourselves as value investors.
We never we never bought a business we thought was overvalued, right,
And growth is a component of value. A business that
(08:06):
can grow profitably is more valuable than one that doesn't grow.
But there's no difference in the arithmetic, right, Any business
is simply worth the present value of its future cash flows.
And what we would say is the trouble is often
growth investors are very complacent about the durability of a
(08:27):
growth rate, and we're very skeptical because capitalism is vicious,
and when somebody has high returns and high growth, it
attracts competition. And if you need ten or twenty years
of growth to get your money back, that can happen,
but the probabilities are very low. So in that sense,
we're very skeptical of the momentum style growth investing that
(08:50):
has sort of characterized a lot of aggressive growth type managers.
We think they're complacent about the durability of growth. They
underappreciate the viciousness of competition and dislocations and disruptions. So
in that sense we firmly in the value camp. But
on the other hand, we also recognize that what Warren
(09:12):
Buffett used to call cigar butt investing. You know, finding
a net net something that's got a book value of
one hundred and is selling at eighty and you think
you can't lose money, Well, of course you can if
the company's not liquid eating and if they continue to
reinvest your earnings at three or four percent return on
incremental capital, that's going to be a classic value trap.
(09:34):
So we think that companies that have durability and resiliency
are very valuable if they can grow over time, So
we sort of land between the two. In our hearts,
we think of ourselves as value investors, but I never
bought a company that I thought was going to be
earning a lot less five or ten years from now
(09:54):
than it is today. So in that sense, we end
up back in the growth camp.
Speaker 1 (09:58):
That makes sense. Actually you want to dig even a
little deeper and specifically kind of focus on the Davis
New York Venture Fund and the Davis Select Us Equity ETF.
Tickers are n y vt X in d USA. For
our listeners, can you kind of walk us through you
know what happens when you're you know, in the investment
(10:20):
process when you look for companies.
Speaker 3 (10:22):
Well, really our core strategies, which exactly as you say,
our large cap approach has a certain characteristics that make
sense given that background. We talked about about being in
our heart value investors, but wanting that sort of durable
growth as part of that equation, because what we would
say when we put that all together is there very
(10:43):
few companies that embody both of those characteristics. So we
end up with a portfolio that is highly selective, right
where we may have you know, thirty companies being you know,
eighty percent, forty companies being eighty five percent or so
of ninety percent of the assets of the funds. So
(11:04):
a concentrated approach, because we really, in essence, we are
rejecting sort of nine out of ten companies that we
look at in the S and P. Five hundred and
owning a portfolio of thirty to forty out of the
five hundred. So it's a very selective approach. But the
result of that selectivity is we own a portfolio of
(11:25):
companies that today trades at about thirty five to say
thirty five percent discount to the sorts of averages that
Michael was talking about in the market today, so trading
at fourteen fourteen and a half times earnings versus a
market at let's say nineteen or twenty. And yet and
(11:48):
yet our companies have grown their earnings over the last
five years at a rate that is essentially the same,
maybe even slightly higher than the averages. So we call
that a value investor's dream when you're able to, in
a sense, have both of those and that's what we
see today, and that selectivity is sort of a core
characteristic of what we do, and of course it reflects
(12:11):
the fact that we're the largest investor in our own strategies. Right,
we eat our own cooking, you know. This is we
think of it as trying to build generational wealth. So
we're not interested in some sub index how do we
do versus We're interested in building wealth over time and
so owning a relatively small number of durable businesses with
(12:32):
resilient long term growth, purchased at attractive prices, run by
managers that have sort of equal parts. We think of
integrity and industry and intelligence. That's the sort of formula,
and it's messy putting it into action. But we've been
at it a long time. I guess I became the
manager here in I think nineteen ninety four something like that,
(12:56):
So it's been We've gone through some interesting markets in
that time, and the fund itself having started in nineteen
sixty eight or sixty nine, that's getting to be some
real mileage.
Speaker 2 (13:10):
I got to ask about multiples a little bit, since
large segments of the markets are concerned about it, do
you share that concern? Are you more in the camp
that productivity gains might make up for the.
Speaker 3 (13:20):
Well, no, I'm absolutely just you know, it's so funny
because it's often, you know, the end investor is thinking
about multiples in isolation, and I always think it's better
if you invert the multiple, just turn it upside down
and you get what we call the earnings yield. So
what that means is just to make it easy, if
you're paying twenty times earnings, you're getting a five percent
(13:43):
earnings yield. Now you can buy a bond and get
a five percent yield. So the question is, well, why
the hell would you own inequity, which is riskier. You're
the last call on the cash that the business produces,
below all of the creditors, So why you take a
comparable multiple. Well, the answer is because I think it's
(14:04):
going to grow over time. But remember that five percent.
If it grows ten percent a year, that sounds great,
But you're only up at five and a half percent
the next year. Now, depending what you use for a
discount rate, you may be treading water. Now if you
start in our portfolio at a fourteen or fifteen times
or all of a sudden, you're starting with a seven
(14:25):
or a seven and a half percent yield right now,
that yield growing it. You know, let's say you know, seven, eight, nine,
ten percent. All of a sudden, it's seven, it goes
to seven, seven, it goes to eight and a half,
it goes to nine point four. And you see the
power of compounding over time. Now, because we're very low
(14:45):
turnover investors, we tend to own these businesses a long time.
That earnings yield over time is how we look to
generate our return. We're not predicting changes in the multiple,
but we do think when you start at a high
multiple or a low earnings yield, you need a lot
of growth just to get to the risk free rate.
You started thirty times earnings, had three percent, you got
(15:09):
to double it just to get to six. Right. So
that is the mindset we have is instead of thinking pe,
which is sort of an abstract idea, think about the
earnings yield and then think about how long if you
owned one hundred percent of that business, how long do
you have to own it just to get to a
ten percent return? Right? And then if it's a business
(15:31):
where you're paying fifty sixty times earnings, so you're starting
at one one and a half percent earnings yield, and
you say boy that's got a double two or three
times before I even get to a ten percent return. Well,
that could happen. But once companies are quite large, you
know a lot of people are gunning for them, and
(15:51):
you could get a lot of competition. And you look
at you know, as we look out at this world
of AI, you know, look at all the obvious winners
in the early days of the Internet. Most of them
don't exist anymore. Yahoo, Netscape, I mean, Cisco's a shadow
of what it was. I mean, those those were the
absolute sure thing winners. You know, well into the dawn
(16:16):
of the Internet. It wasn't like they it was still
in a fort you know, you were about eight years, nine,
ten years into the Internet, and those were the obvious
winners to everybody. And of course no price was too high,
and you were essentially, you know, if you had that
portfolio pretty well wiped out. And so we think there's
(16:36):
a lot of danger when people are trying to predict
winners early, paying huge prices with an enormous amount of
success booked in because that one percent errings yield, you know,
to get it up to a ten percent errings yield,
you need a lot to go right over a long
period of time, and capitalism is vicious, so it's not
(16:58):
quite so easy. So as I say that, I think
is when I think about multiples, invert it, think about
earnings yield, and then it starts making sense. When investors
think about their returns going forward, the earnings yield is
the right starting point, and then you've got to think about, well,
why should it be higher a year, two, three, five,
(17:18):
eight years from now. I mean, after all, there are
some wonderful companies that are earning a fraction of what
they earned ten years ago, and that sort of dislocation
and disruption. You know, people underestimate, and you've seen some
consumer stallwarts. I mean, we look at what's going through
wonderful companies like Laughter or Anheuser Busch or or Diagio.
(17:42):
I mean, these are great, durable companies, but you know,
their earnings have been killed and their multiples have come
way down. And so again we don't think the value
side is a safe place in a tumultuous world, and
within growth can be a very complacent place to be,
and so you've got to navigate this tightrope that we
(18:03):
think is what selectivity allows.
Speaker 1 (18:06):
You had mentioned management as one of the things you're
looking at. And so you know you mentioned integrity, but
are there other attributes that you look for in management teams?
Speaker 3 (18:17):
Well, the danger of we tend to lionize. Investors tend
to lionize with the presses help you know, managements after
their businesses have done very well, and there's what we
call a halo effect, you know, where you retroactively say, oh,
it must have been the great management. And so there's
a lot of subjectivity. And what I would say is
(18:40):
we try to create a mosaic to understand and I
would expand the word management to say culture, to really
understand what is the culture. Why is it that you
could have two companies selling the same regulated product, headquartered
almost in the same city, with the same market cap,
(19:02):
where their product has to be filed with regulators so
they can't have a secret sauce, and one of them,
over a course of about twenty years, grew at twenty
one percent a year and one of them grew at six. Now,
the examples that I'm using are Ohio Casualty and Progressive.
They both sell auto insurance. Essentially, they're both headquartered in Ohio,
(19:26):
not far apart. I think one was in Columbus and
one in Cleveland. But yeah, I'm a New Yorker, so
it's close enough. And you know, and of course the
difference was culture. Progressive had a totally different mindset as
a company, a spectacular management, a culture of quantitative excellence,
service excellence, urgency, discipline, creative thinking, I mean, amazing for decades.
(19:51):
So when we try to evaluate management, I said, we want,
you know, integrity, intelligence and intensity in a sense. But
when we build that mosaic, what are we looking for, Well,
we're looking for clues. Of course, we visit almost every
company we own, you know, so we're trying to see
do they keep a good team together. We're looking at
(20:14):
their accounting choices. David Michael, that's an interesting one. You know.
Gap is a very wide measure, and you just say, look,
if somebody ran a private business and you're reporting your
income to the tax authorities, I'm going to assume you're honest.
But if you're honest and you're reporting your income to
the tax authorities, you choose accounting policies that minimize current
(20:38):
reportable income, right, So you expense things aggressively, use short
amortization schedules and short depreciation accelerated depreciation schedules. You may
defer revenue, you'll put up reserves. You know, you'll do
everything you can to make it look like the company
is not earning a lot of money. Now, if the
same company reports its earnings to a perspective buyer, they
(21:01):
may choose the opposite policies, again legal but very aggressive depreciations.
They may start capitalizing a lot of software, R and
D things that they could be expensing. The concept that
we're trying to get at here was one that my
grandfather talked a lot about. It was called owner earnings. Right,
if you own the business, you reinvested enough to protect
(21:25):
the core and maybe grow at the inflation rate. Everything
else you have discretion over. You may choose to expand
your business, but then what's your incremental return on that capital.
You may choose to pay big dividends. You may take
that money and say I'm going to go buy a competitor.
But whatever it is, when we look at the business,
that's the mindset we look at. So the capital allocation decisions,
(21:49):
the accounting choices of the management, the ability to keep
and retain good people, how do they communicate with us?
I mentioned progressive Peter Lewis, the CEO of Progressive, wrote
every in your report himself. You know who else writes
their in your reports? Well, I mean, of course Berkshire
marcl Let's see, Jeff Bezos did not many. You could
(22:11):
probably count on two hands the fortune five hundred CEOs
that take the time to write their own annual report. Well,
that's a signal. That's a signal that they view their
shareholders as a partner, They think of themselves as entrusted
with shareholders' equity, and they're giving an accounting. So they're
all these sorts of tiles that we build around evaluating
(22:32):
a management. The proxy is a great place to look.
You know. Is it an interesting that Exxon has a
compackage as I recall, that vests something like ten years
after retirement. Right, that's a very that tells you a
lot about the culture of that company. There's not another
company I've ever known that's done that. So we're building
(22:55):
a mosaic to try to get a sense of culture,
of the durability of a culture. Uh. You know, and
the press is a terrible way to start that because
the president almost always a halo effect. We're looking for
those outsider type of CEOs. Understand capital allocation, understand excellence,
don't fool themselves, keep the egos in check, keep great people,
(23:17):
you know, value, have a stewardship gene. That's but it
is the most fun part of the job. It is
the most because in a market that's pretty damn efficient,
you have to look for pockets of inefficiency, and one
of them is crowd psychology. Obviously, when you get a
stampede out of an area, sector or a company, you
(23:38):
can get real inefficiency. Think of Meta just a couple
of years ago. I mean, the company didn't change, but
it was down and at a market cap smaller than
home Depot, with two billion customers and the number of
customers growing in every one of their businesses, and not
just what I well, the number of users growing. So
(23:59):
you had grown users on all three platforms and growing
engagement per user on all three platforms. And yet the
stock was down seventy percent because everybody said, oh, you know,
your grandmother looks at Facebook, but you know the kids
are all on TikTok. It was just headlines. But or
Mark Zuckerberg's an idiot because he's spending money on you know,
(24:22):
the new computing platform. Well, there's a good example of
if a CEO is willing to defer earnings, right, so
there's a guy who is not maximizing current reportable income.
We view that as a good sign. Right. So anyway,
those are all examples at management. But it is obviously
one of my favorite parts of the job.
Speaker 2 (24:44):
Yeah. So are there any you know, sector ideas that
are jumping off the page at you any anywhere where
You're seeing a lot of you know, stocks that look
really exciting going into twenty.
Speaker 3 (24:54):
Oh yeah, Well, Michael, I mean this is one that
goes way back in family lure. My grandfather only invested
in financial companies and he called, he said, within this
vast sector, there are growth stocks in disguise, And so
I used the Progressive example. You know, that was an
(25:15):
incredible growth company for thirty years, forty years, but it
was disguised as a property casualty insurance company. Well, we
started our financial sector fund. I think I started it
in nineteen ninety maybe Now that was partly because I
had worked at another firm and when I came to,
you know, work with my father, I said, look, you know,
(25:39):
nepotism is a dangerous thing, and you know, we don't
want to be employer of last resort for people with
the same last name. But that was back in the
late eighties early nineties. So what was happening in the
world then, Well, we had gone through the SNL crisis,
and so banks snls were hated. Right, There's a huge
(26:00):
commercial real estate debacle, and our feeling was there were
enormous opportunities to find durable growth companies in a sector
that was widely out of favor. Now you come up
to today, the memories of the financial crisis are still
so vivid that banks remain even though they've had a
nice move, they remain I think, without question the best
(26:22):
combination of durability and low valuation and so and this
idea that people don't differentiate between banks. Oh I like banks,
I don't like bank. There's huge differences in culture and
business model and valuation. And so that's when I started
our financial fund. I started it because I said, within financials,
(26:45):
we should be able to find companies that have below
average valuations above average growth prospects. And that strategy has
outperformed the S and P five hundred for thirty years,
right only only in financial stocks. Now you can't acial
index underperformed the S and P five hundred, so you
have to be very selective. So that's the theme we
(27:06):
really see in our large cap strategies today. That is
one of the anchor themes. And if you want names,
I mentioned Progressive. So today the analogy I would use
for progressive is Capital One. Capital one is a fintech
company disguised as a bank. It's still run by the founder.
I think it's the sixth largest bank in the country.
The founder started it. I think he was the top
(27:28):
of his class at Stanford Business School. He started a
technology company without a single branch, without a brand, and
built it into one of the largest banks in the
country using data science. Right. They just they basically said,
how do we target and offer to David who has
a different interest in a credit card than you have, Michael,
(27:49):
he's a big spending revolver. You're a prudent points gatherer,
you know, whatever it is. And so and Rich Fairbanks
still runs that company, and by the way, still writes
his own in your report. And so there's a company
at nine or ten times earnings with a return on
equity that I think has been you know, I don't
(28:11):
want to make up them number, but I want to
say that it's been thirteen or fourteen percent for twenty
five years. They will understate earnings when they're growing aggressively
because of the foolish nature of the what bank accounting
has come that forces you to put up all the
reserves you ever expect when you make the loan. Anyway,
(28:33):
some complex accounting there. But so I love that. You know,
we've had a big holding in Wells Fargo for a
long time. It's the cheapest of the big banks relative
to the quality of the franchise. It's been a long,
sluggish turnaround, but it's getting there. I love Markel, you know,
it's just a fabulous boutique insurance company that's got a
(28:54):
lot more going with it. But so financials is sort
of a good example of a theme. And then i'd
give you one quick second theme just to say, you know,
people overvalue that smooth, steady line of earnings. They think
that makes them feel safer. You know, we always say
we prefer a lumpy fifteen percent to a smooth twelve
(29:15):
And so you know, a company like applied materials or
certain types of industrial companies where the earnings are lumpy
in any year or two, but over time they're just
compounding machines. I mean, I've studied applied materials since nineteen
ninety six, and you know there's nobody in a garage
that's going to figure out how to do chemical vapor
(29:36):
deposition better than applied materials. So you know, they're an
arms dealer to a massive growth industry. And you know,
Taiwan Semi cannot build in videos chips without spending a
fortune buying applied materials machines, and we like that that model.
So that's a lumpy company and people undervalue it because
(29:57):
they don't know what it's going to earn six months
or a year from now. But what we do know
is it's going to earn a lot more five and
ten years from now that it earns today.
Speaker 2 (30:05):
Yeah, you've got me nodding along as a strategist that's
had financials at the top of a sector model for Yeah.
Speaker 3 (30:11):
I love that.
Speaker 2 (30:12):
Yeah, and a big follower small cup stocks my entire career.
You know, regional banks or the dog that works the
tail there.
Speaker 3 (30:17):
So it's injure that Michael, though, on one quick aside
on banks is that the whole first half of my
career in financials, we own small cap financials because they
just fed at the carcass of these idiotic large financials
that you know, it was amazing how every time there
was a hiccup in any sector, somehow city lost, you know, billions,
(30:40):
and these small you know, you could have a well
located branch in Iowa, and you could have a lower
cost of funds and better credit quality because you know,
in a bank, the number one biggest cost is interest.
The number two biggest cost is the cost of foolishness
right making loans and not getting paid back, or pricing
(31:00):
insurance policies, and usually those were not correlated to size.
But I will say that I do think something really
has changed in financials. The technology costs have gotten so
high and the compliance costs have gotten so high, and
both of those are scale advantages. So I'm looking at
the gap. I'm looking into some mid size financials. We
(31:22):
did buy some during that crazy First Republic, you know,
Silicon Valley Bank, Mayhem. There were some people that got
thrown out with the bathwater. But boy, it is amazing
the cost of simply regulatory compliance and technology are so
huge that it's not surprising that the biggest banks have
continued to gain share, share of profits as well as
(31:44):
share of deposits.
Speaker 2 (31:45):
Yeah, definitely. So just moving on from that idea, do
you think that there's adorable rotation away from tech stocks underway?
We've kind of seen it since June, but hoping.
Speaker 3 (31:57):
That I now know that you said durable, but I
thought you said adorable. Do you think there's some adorable
tech stocks? You know, tech is like financials. It's sort
of a silly grouping because the models are so different.
Whenever I hear in and you know, I don't know
(32:17):
what you call them. It's not an anacronym or what
is it when you an acronym? When you you know,
like bricks, you know, Brazil, Russia, India, China. I mean
as if those countries have anything to do with each other.
Totally different political systems, different valuations, different currencies, different central bags,
different industrial outlooks, different trade relations, different geopolitics, and yet
(32:40):
somebody called them bricks and said you got to own
the bricks or not own the bricks, right, And then
of course you know we saw it in now the
Magnificent seven. What was it before when it was what
were this group of tech stocks call when you had Netscape.
I mean, oh you know the anyway it was four horsemen.
Speaker 1 (33:02):
Well, no, there were the four horsemen, but it was
it was like an acronym or something like that.
Speaker 3 (33:07):
Yeah. Yeah, it had like fang fang. Look at us.
We've already forgotten fang.
Speaker 1 (33:12):
You know.
Speaker 3 (33:13):
People put group these things together. And of course investing
is the art of the specific, right you just it's
each company stand on its own. And you look at
any grouping of stocks and you fast forward five or
ten years, and there's enormous dispersion, and uh it's usually
just you know, a shorthand for whatever's gone up a
(33:34):
lot in recent times. And uh so, uh so, I
would say tech is too broad a sector. And of course,
the the index folks have done their best to spread
it out so that it doesn't look like, oh, we'll
call you Google, we're going to call that media, and
we're gonna we'll call this one technology, and we'll call
(33:55):
this communications. I mean, but but what I would say
is that certainly momentum has had one hell of a run.
And the funny thing about momentum is that it works
so well that people just go along with it, and
yet it defies common sense right. If you go to
(34:15):
the grocery store and the cost of stak has gone
up every week for six months, you don't want to
buy more, you want to buy less. And of course
the price you pay is a determinant of your return.
If you pay a higher price for the same stream
of cashflow, by definition, you have a lower return going forward.
(34:37):
And yet the theory of momentum investing that the more
it's gone up, the more attractive it becomes. It simply
works until it doesn't. Now, I once had a colleague
that I worked with, and I liked him a lot,
but we had to part ways and we got very
frustrated at one another because he was always looking for
a system. And I have a sign on my wall
(35:01):
it's a Las Vegas pit boss. And the Las Vegas
pit boss said, we said limos for guys with systems.
But he said to me, you know, so he wanted, Oh,
I look at the fifty two week down list, and
then I look from you know, and I find an
algorithm and it worked a lot of his stuff worked,
so I but I wouldn't do it, and he said
(35:21):
he got so frustrated. He said, look, Chris, if I
had a blind monkey in my office, and every day
the monkey pointed at the stock charts, and every day
it pointed to a stock, and that stock went up
every day, day after day, week after week, month after month,
year after year. You get five years of the monkey
never missing once, and you still wouldn't buy that stock.
(35:43):
And I said, of course I wouldn't. It's a blind monkey.
Like we have the savings of life, savings of teachers
and you know, people that have worked their whole life
to save, and the idea that, well, it works, so
I may as well capitulate and go along with it,
even though the math doesn't make any sense to me.
We're just not going to do it. And that means
(36:04):
there are worlds like we've been in a lot of
the last ten years, where we're going to produce good
absolute returns, but we're going to lag on a relative
basis because we're not getting on that wagon. But the
one thing I'll say is, you know, just because everybody
else was doing it really feels stupid in retrospective, it
goes wrong. And I think the blindly indexing because it
(36:25):
has worked so well where you're automatically putting in the
most money into what's already gone up the most. I
think in retrospect, there are a lot of fiduciaries that
may feel foolish that they were saving, you know, twenty
basis points of fees and just outsourcing stock selection to
a momentum strategy. Now, that may be sour grapes, and
(36:45):
the index has certainly been a monster, but there have
been other times that it was hard to beat. There's
a manager I admired, Jim Gibson, who had performed the
index for seventeen years leading up to the year two
thousand and for eighteen years, he was ahead for eighteen years.
You know, you can get some pretty dramatic changes, and
(37:06):
so you know, I'm not predicting that, but we're we're
not changing our approach either.
Speaker 2 (37:11):
I was just going to say that that brings up
an interesting research idea. You know, driving some of those
outliers that we're seeing in the index, right, everybody piling
their money into the SMP index fund all the time,
driving the max seven higher.
Speaker 3 (37:25):
Well, and remember to think about what they're selling to
do that. To the extent they're replacing an active manager,
you're getting idiosyncratic selling into momentum buying. So it's a
feedback loop there too, which will lead it to outperform
even more, which will continue the feedback loop. And you
know the nature of feedback loops is that they're very,
very hard to model, but they always collapse, right, So
(37:48):
you just don't know when.
Speaker 1 (37:50):
So I was going to ask, you know, we've talked
about what you like, and you know what you don't like.
You know, when you have a stock in your portfolio,
is it, you know, reaching its valuations something that would
trigger you to, you know, want to find something new,
or you know kind of you know, sell part of
it or.
Speaker 3 (38:07):
Well, this is where value investors struggle, right, you know
we cut the flowers in water the weeds. Now part
of that is, you know, the prudent man rules. You know,
how how big a position do we want to let
our winners become? Right, If we start with a four
percent position and all of a sudden we've got an
(38:28):
eight or nine percent position, do we let it go
to twelve? Do we let it go to fifteen? Do
we let it go to eighteen? So that's a very
delicate balance. Now I can tell you if I managed
my own money, like my own account, right, I put
my money in the funds. If I manned my own account,
I probably wouldn't sell because I'd say, I, you know,
I don't need to pay the tax. And but you know,
(38:50):
going back to the idea of that teacher that has
life savings, with us, maybe having twenty percent in one
stock is just too risky. So we do have to
ballence that cell discipline. We never have price targets, but
we do have valuation. We have an IRR mindset, and
when an IRR gets down to three percent, four percent,
(39:12):
five percent, you know, you start thinking, well, if we're
going to hold this, we must think there's something wrong
with our IRR model, because otherwise, why are we accepting
that return? And the answer is usually when we've sold
those and been wrong, it's because an IRR model has
(39:33):
a really hard time capturing something that can grow for
twenty five years. Right. It's just I mean, we sold Costco.
We're the largest shareholder of Costco for more than a decade,
and it's a glorious company, but at twenty two twenty
three times earnings, it just felt like that is we're
starting with a four or five percent IRR and you're
(39:55):
getting closer to store saturation. We don't know what store
saturation is, but we just know we're a lot closer
to it. And it's just, you know, the multiple has
expanded another fifty percent, and the sales grew way more
than we thought, and they were more successful internationally, and
so we need to be open to where our IRR
(40:15):
model misses that sort of the durability or the duration
of the growth. As I said, you don't want to
bet on twenty year growth being sustainable, but when it is,
oh my god, you make so much money in that
last five years because you know, those last few doubles
are such a multiple of your initial start. So we
(40:38):
do you know, the ir mindset does force us to
sell evaluation, and certainly for the last fifteen years that's
almost always been a mistake. But over the course of time,
we think it's part of our duty. You know, we're
you know, we feel we haven't owned Nvidia for the
last three years, but we're you know, we're neck and
neck with the market over that last two or three years,
(41:01):
and so I'm proud of what we've owned and how
it's done. And we've just had to have the discipline
to recognize that watching other people, you know, hit extreme
low probability winners. Should you know, as I say that
the number one investment made by anybody this year is
going to be some guy that bought a lottery ticket
and wins one hundred million dollars. Nobody will get a
(41:23):
return like that on any other investment. That will be
the highest IRR and one year I RR. But it
doesn't mean it's a good approach just because somebody did
it and it worked. So we've got to stick with
what has worked for us for fifty years.
Speaker 2 (41:41):
Yeah. I hate answering this question myself, but I got
to ask it. Given how much stocks have gone up
in the last two weeks, have any of your investment
thesis has changed due to the election results?
Speaker 3 (41:55):
Well, you know, I've got a really good schooling in this.
In I can't remember if it was the first or
second Clinton administration when Hillary became the healthcare bizar, and
basically there was a belief that the existing sort of
health insurance industry was going to be gutted. Now, the
(42:18):
same thing happened again with Obamacare. If you were to
look at a list, I have not done this, so
you guys would have to fact check me on this,
But I would bet if you were to look at
sort of the top stocks of the last twenty years,
you know, from Clinton to today, I would bet United
Health is on that list. And you would have bet
(42:41):
there were so many opportunities when you would have said,
oh my god, the changing political tides are going to
destroy that business. And by the way, maybe rightly. So.
You know, it's a strange industry to have employers buying
health insurance for their employees, but it has proven unbelievably resilient.
(43:01):
I mean, if you think about the war on tobacco.
We don't own tobacco, but it is amazing that Philip Morris,
it may have been the best stock for the last
fifty years. So there is a tendency to really overreact
to politics. And it's not that the changes won't be
incredibly important, it's just they'll be likely unpredictable, and so
(43:23):
you know, I would certainly say the likelihood of government
spending coming down seems low, of deficits coming down seems low,
and higher deficits with a low interest rate environment doesn't
make sense to me. I think modern monetary theory is
one of the great idiocies to be foisted onto a
(43:45):
responsible nation. The idea that if you have the reserve currency,
the amount of debt and the amount of currency issue
doesn't matter. Well, that's true until you're not, until doing
so makes you not the reserve currency. So it's a
tautology and it's a very dangerous one. So you know,
I would say I am always well I'll quote my
(44:07):
you know, wonderful friend, Morgan Housel, who said, you know,
it's really good to save like a pessimist, but invest
like an optimist. And that's sort of my mindset. You know,
I don't think anybody on Earth thought there would be
a pharmaceutical cure for diabetes five years ago, and the
implications to the health system of that in twenty thirty
(44:30):
and twenty thirty five are so huge, and it's not
impossible to think of that happening for Alzheimer's or Parkinson's,
and you know, you could end up with medical deflation
and that changes the whole medicaid outlook. And so, you know,
black swans are not always bad. In fact, I would
say black swans are evenly distributed. They're just large. In fact,
(44:53):
they've actually had a positive skew over the course of history.
It's just we remember the bad ones much more. They're
much more vivid that good ones tend to play out
over a longer period of time. But I would say,
you know, I sleep like a baby, waking up every
three hours, crying and scared. But you know, we're substantially
(45:14):
fully invested, and we own many companies that are in
their second century, and many and a number that are
in their third century. Remember Bank of New York was
founded by Alexander Hamilton. It's still in the same business, right.
That's an amazing, amazing thing. So that focus on durability
does matter a lot in an uncertain time. I sure
(45:37):
as hell don't feel safe for owning a piece of
paper that's an iou from a guy with a printing press,
you know, who can just print pay me back with
you know, printing more paper. So I sure like owning businesses.
I think of them as inflation protected bonds where the
coupon is a little volatility, But you know, the durability
of the underlying business is what really matters.
Speaker 1 (45:59):
So we're running out of time. But I actually have
one more question for you. You know, whether this was going
back to the beginning of your career or anything, you know,
recent would have been some of your favorite investment books.
Speaker 3 (46:11):
Oh god, that is well. We have a value investor
library here, so well it it of course, it depends
on the audience. I bribed my children, my god children,
my nieces and nephews hundreds of dollars each if they
would read Morgan Housel's The Psychology of Money. I think
(46:33):
it's a book that is so valuable, and it's it's
a book for for people to understand how, in essence,
saving and investing buys you time and freedom. That's it does.
It's not about ferraris. It's about the ability to do
what you want when you want right that that's what
(46:54):
wealth is. And so helping recast that I think is
hugely valuable. So I'll put that in what I'll call
a psychology type of book. I would say. Boug Shrevanissan
wrote a book called Americana that is a breath taking
sort of history of capitalism in the US, one industry
(47:15):
at a time, starting with the Mayflower Compact and ending,
you know with this semi the internet. I think by
going through railroads and canals, you know, how did these
industries get built, who financed them, who were the drivers?
What about you know, so that's sort of fascinating for
just sort of reminding you of how powerful our model
is and how well it is worked for how long.
(47:37):
So and then I'll give you maybe a last one.
It's got a terrible title, but I think it's especially
good in the world that we live in now, where
fear and anger have been monetized, right, so, you know
the nature if you want engagement, you need the best
way to get people to pay attention is to scare
(47:57):
them or make them angry. That really locks them in.
And you know, we used to have pretty clumsy tools
to do that. Now we have sniper rifles to inject
fear and anger into each person individually. And the result
of that, of course, it's bad for the civilization, but
it's also very bad for investors. And so there's a book.
(48:19):
I can't remember the author, but I can remember the
title because it's a terrible title. It's called The Power
of Bad. But I think it's an incredibly useful defense
against this tendency to be so convinced that things are
getting worse and therefore the world is ending and it's
just And it has some very practical recommendations of how
(48:44):
to adjust your news intake to sort of be more
aware of what is happening that is positive and how
to recognize that that power of bad is being inflicted
on us. So that's a good range of three. But
I could go we could spend the whole podcast talking
about about books and but those would be three off
(49:07):
the top of my head.
Speaker 1 (49:08):
Good Slutch and well, this was a great discussion. Thank
you again, Chris for your time.
Speaker 3 (49:13):
Oh, thank you both. David. Michael is so glad to
be here. I really appreciate your time.
Speaker 1 (49:17):
And thank you Mike for serving as my co host.
Speaker 2 (49:20):
Yeah, thanks both to you. This is great.
Speaker 1 (49:22):
Until our next episode. This is David Cohne with Inside
Active
Host
Gina Martin Adams
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