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Joel Tillinghast on Fidelity Investments · Masters in Business

• 0:02
  Speaker 1: This is Master's in Business with Barry Ridholds on Bloomberg Radio.
• 0:08
  Speaker 2: This week. On the podcast, not only do I have
• 0:11
  Speaker 2: an extra special guest, but I have a mutual fund legend.
• 0:15
  Speaker 2: Fidelity Low Price Stock Fund manager Joel Tillinghast has been
• 0:20
  Speaker 2: there pretty much since inception in nineteen eighty nine. He
• 0:24
  Speaker 2: has absolutely crushed his benchmark. Over that period. The SMP
• 0:30
  Speaker 2: five hundred has underperformed his fund by three point seven
• 0:34
  Speaker 2: percent a year. Since nineteen eighty nine, He's crushed the
• 0:38
  Speaker 2: Russell two thousand, whatever benchmark you want to talk about.
• 0:43
  Speaker 2: The Low Price Stock Fund now runs about twenty five
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  Speaker 2: billion dollars, so this isn't a small fund. That managed
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  Speaker 2: to eke out a couple of basis points, being three
• 0:53
  Speaker 2: hundred and seventy basis points over the SMB five hundred
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  Speaker 2: with that pile of money is no small feat. Morning
• 1:00
  Speaker 2: Star named him the Domestic Fund Manager of the Year.
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  Speaker 2: Peter Lynch has called him the best stockpicker he's ever known.
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  Speaker 2: He's just a legend, has a fascinating career and a
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  Speaker 2: fascinating approach to managing a fund. I found this conversation
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  Speaker 2: to be one of a kind, and I think you
• 1:17
  Speaker 2: will also with no further ado my interview with Fidelities
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  Speaker 2: Joel Taillinghast. Let's start with your background. You fell in
• 1:27
  Speaker 2: love with investing as an eight year old.
• 1:29
  Speaker 1: Tell us about that, okay, Quen, he was six. My grandfather,
• 1:34
  Speaker 1: who is a bookkeeper accountant at a textile mill, died
• 1:39
  Speaker 1: and my grandmother was a second string filed in at
• 1:44
  Speaker 1: the Provident Symphony Orchestra, which didn't pay well then and
• 1:49
  Speaker 1: he suspect didn't pay well now. So Grandma realized that
• 1:54
  Speaker 1: she would have to live on survivor's benefits and some
• 1:59
  Speaker 1: dividends from stuff grandpa had purchased. He had twenty five
• 2:04
  Speaker 1: or fifty shares, mostly twenty five of twenty year twenty
• 2:09
  Speaker 1: four stocks, and he had done research. He kept the
• 2:16
  Speaker 1: annual reports of the companies in a library, and he
• 2:19
  Speaker 1: also used a thing called value line. So my grandmother,
• 2:26
  Speaker 1: realizing that this was her source of income, wanted to
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  Speaker 1: be sure she had the right stocks, and she got
• 2:34
  Speaker 1: a trial subscription for twenty nine bucks for thirteen weeks
• 2:38
  Speaker 1: of the value line. And I was a math nerd
• 2:42
  Speaker 1: as a kid. It was the kind who thought it's
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  Speaker 1: cool that one to three, four, five sixty seven eight,
• 2:48
  Speaker 1: nine times eight is roughly nine eight seven, six, five
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  Speaker 1: four three two one, And the value line has all
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  Speaker 1: these statistical patterns, and because my mother and grandmother were
• 3:01
  Speaker 1: looking at these trying to figure out what was going on,
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  Speaker 1: it was curious about the sea of numbers.
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  Speaker 2: Also, she brings you in as an eight year old
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  Speaker 2: to help her out.
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  Speaker 1: No, she left the value lines around because she was
• 3:14
  Speaker 1: studying them, and so I wanted to study them. So
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  Speaker 1: the first two stocks that I bought were Beckman Instruments
• 3:24
  Speaker 1: in Central Main Power. Beckman Instruments was founded by a guy,
• 3:30
  Speaker 1: Arnold Beckman, who was sort of a tech genius of
• 3:35
  Speaker 1: the time. He made instruments that simplified lab tests and processing,
• 3:43
  Speaker 1: and my dad, who was a biologist, was very attracted
• 3:47
  Speaker 1: to their chromatography equipment. But they made tests that were
• 3:53
  Speaker 1: not possible possible. So I bought two shares of that
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  Speaker 1: I think when I was ten, and four shares of
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  Speaker 1: Central Main Power and Beckman Instruments acquired by Smith Klein,
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  Speaker 1: which got acquired by Glaxo, but they also did a
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  Speaker 1: spin off of Beckman Instruments again, so it came back
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  Speaker 1: out to the market and it's held on to all
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  Speaker 1: the pieces except Danaher. But the Glaxo shares now have
• 4:24
  Speaker 1: a dividend that's a multiple of the original purchase cost
• 4:29
  Speaker 1: many years ago.
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  Speaker 2: Wait wait, wait, you bought this half a century ago.
• 4:32
  Speaker 2: Don't tell me you're still long.
• 4:34
  Speaker 1: Yep.
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  Speaker 2: Yeah, that's impressive holding period.
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  Speaker 1: Hey, for those set it and forget it. I guess
• 4:43
  Speaker 1: on a compounded rate, it's less impressive that the quarterly
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  Speaker 1: dividends exceed the purchase price, because there's fifty something years
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  Speaker 1: in the interim.
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  Speaker 2: So let's fast forward to nineteen eighty. Your first job
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  Speaker 2: is at Value Line. Tell us a little bit about
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  Speaker 2: that experience.
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  Speaker 1: I had wanted to go to business school, but Harvard
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  Speaker 1: saw no need for me, and so did all of
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  Speaker 1: the others except for Kellogg Northwestern, which would admit me
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  Speaker 1: in a year. I hurriedly sent out resumes all over
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  Speaker 1: the place, dozens of them, and didn't get anything good.
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  Speaker 1: But in the New York Times there was an advertisement
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  Speaker 1: that the Value Line Investment Survey needed analysts, and I thought,
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  Speaker 1: I know this job. I know this company, and if
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  Speaker 1: you ever are looking for a job, I'd say I
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  Speaker 1: know this company. That's a good sign. So I aced
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  Speaker 1: the interview and instead of getting started at thirteen thousand.
• 5:46
  Speaker 1: They started me at fourteen thousand. I think I wrote
• 5:50
  Speaker 1: up Mary K Cosmetics, which was on a tear then
• 5:54
  Speaker 1: because everybody wanted a pink Cadillac. But that lasted for
• 5:59
  Speaker 1: a year and they went on to Kellogg for business school.
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  Speaker 2: You come out of business school, you end up at Drexel,
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  Speaker 2: also in Chicago.
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  Speaker 1: So in the summer I got a job with Drexel
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  Speaker 1: in their institutional financial futures division, headed by a brilliant man,
• 6:18
  Speaker 1: Richard Sandor, who some people call the father of financial futures.
• 6:25
  Speaker 1: He developed the genmy May contract, which at one time
• 6:29
  Speaker 1: was a big thing in treasury bond contract very inventive
• 6:33
  Speaker 1: and creative person. At the end of the summer he said,
• 6:37
  Speaker 1: would you like to stay? And so I did stay,
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  Speaker 1: but I had to take the full time courseload at
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  Speaker 1: Northwestern at night classes and work full time Drexel. The
• 6:50
  Speaker 1: good thing was we had a six forty five morning
• 6:53
  Speaker 1: meeting because we were trying to connect London and Singapore.
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  Speaker 2: That was the only time that worked.
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  Speaker 1: Yeah, and so the sort of early ish start to
• 7:03
  Speaker 1: the day meant that full time kind of meshed well
• 7:06
  Speaker 1: with evening classes. So they finished up business school and
• 7:13
  Speaker 1: started working full time.
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  Speaker 2: So let's talk about how you end up at Fidelity.
• 7:17
  Speaker 2: The urban legend is that you cold cold Peter Lynch.
• 7:22
  Speaker 2: Is this right?
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  Speaker 1: Yeah? So why did I end up at Fidelity? Sandor
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  Speaker 1: was fantastic, really like Michael Milkin, despite having limited exposure,
• 7:35
  Speaker 1: but Sandor did work some with him, and he did
• 7:39
  Speaker 1: go out to Beverly Hills to see them. But by
• 7:43
  Speaker 1: nineteen eighty six they had huge legal problems and Bank
• 7:48
  Speaker 1: of America called me and said, would you like to
• 7:51
  Speaker 1: be director of research and strategy. Yeah, so he took that.
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  Speaker 1: But sort of a week after I started, they and
• 8:00
  Speaker 1: it's quarterly earnings, which is the same day as the
• 8:03
  Speaker 1: Booze Cruise to inaugurate new employees. They announced a six
• 8:08
  Speaker 1: hundred and forty million dollar loss in nineteen eighty six.
• 8:13
  Speaker 1: That was money, real money, and the division that I
• 8:19
  Speaker 1: was in was below plan. And I realized, I want
• 8:25
  Speaker 1: to work with people who are superb like Richard Sandor,
• 8:31
  Speaker 1: but I also want to work for a company that's
• 8:33
  Speaker 1: not going to have some kind of financial or legal
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  Speaker 1: blow up. So he said, unlike my first job hunt,
• 8:42
  Speaker 1: I was going to focus strictly on five people that
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  Speaker 1: I thought were at the top of their game. Peter Lynch,
• 8:49
  Speaker 1: Mario Gabelli, Michael Price, Michael Steinhart, and George Sorows.
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  Speaker 2: That's a hell of a list right there.
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  Speaker 1: Yeah, they have stood up pretty well and have not
• 9:01
  Speaker 1: blown up in any sort of public way. Peter Lynch
• 9:06
  Speaker 1: was famous for the two minute drill, where he'll listen
• 9:09
  Speaker 1: to any idea for two minutes. He'll shut you down
• 9:14
  Speaker 1: at two minutes. But I think what I said in
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  Speaker 1: two minutes was compelling enough that it went on further,
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  Speaker 1: and I did have to come into Boston to get
• 9:27
  Speaker 1: seen by everyone and for them to finalize the offer.
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  Speaker 1: And even though maybe the decision was made at that
• 9:36
  Speaker 1: phone call, I didn't actually know until after the interview
• 9:43
  Speaker 1: that I had done it. But when I went to
• 9:46
  Speaker 1: Peter Lynch's office, they dropped me there at two o'clock
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  Speaker 1: and there was all this busyness, mayhem, people coming into
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  Speaker 1: the office to quickly tell him about what was going on.
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  Speaker 1: I've loved the openness to ideas that Peter had and
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  Speaker 1: willingness to consider alternative possibilities. I pitched him San Francisco,
• 10:11
  Speaker 1: Federal Savings and Chrysler, and I suspect he knows so
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  Speaker 1: much more than I did. But those were two of
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  Speaker 1: my pitches.
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  Speaker 2: Did you get the job because of the stock pitches?
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  Speaker 2: Or did you get the job because of what he
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  Speaker 2: thought about your analytic skill sets and ability to grow?
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  Speaker 1: I think he always wants people who can grow, because
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  Speaker 1: my assumption when I'm in the hiring position is you
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  Speaker 1: don't necessarily have the developed skills. If you've gotten through
• 10:43
  Speaker 1: the initial filters, you're probably really smart, really hard working,
• 10:48
  Speaker 1: and either have a degree from a classy school or
• 10:53
  Speaker 1: you have very high grades less famous school.
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  Speaker 2: But those are just table stakes you to the next level.
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  Speaker 1: And what you want is curiosity. What you want is
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  Speaker 1: open mindedness. I've never met Ray Daio, but I would
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  Speaker 1: submit that Peter Lynch is more open minded than Ray Dallio,
• 11:16
  Speaker 1: although both aim to be I think, completely willing to
• 11:20
  Speaker 1: change their opinion when the facts change.
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  Speaker 2: And really interesting. So let's talk a little bit about
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  Speaker 2: stock picking. I mentioned the Fidelity Low price stock fund
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  Speaker 2: that you've been running. Is that since inception in nineteen
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  Speaker 2: eighty nine. Let's just talk a little bit about the performance.
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  Speaker 2: You beat the S and P by three point seven
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  Speaker 2: percent a year for almost thirty five years. It's I
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  Speaker 2: started eighty nine, so what is this your thirty fourth
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  Speaker 2: You're retiring after thirty four years and you trounce what's
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  Speaker 2: really the more appropriate benchmark? I would assume the Russell
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  Speaker 2: two thousand.
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  Speaker 1: So Andy's ahead of the S and P two.
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  Speaker 2: Well, you two point seven percent and you've beaten the
• 12:02
  Speaker 2: Rustle by almost four point seven percent, much better. So
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  Speaker 2: it leads to the question, what's the secret to this
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  Speaker 2: longstanding outperformance against all benchmarks and all passive measures.
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  Speaker 1: I don't think there are any secrets, but I think
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  Speaker 1: there's probably five things. The first is knowing yourself and
• 12:26
  Speaker 1: knowing what method works for you. What are you doing
• 12:30
  Speaker 1: that can add alpha? And sometimes the answer is nothing.
• 12:35
  Speaker 1: In that case I highly suggest an index fund and
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  Speaker 1: a different career. And for me, that's comparing price with value.
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  Speaker 1: There are three broad categories of process. There is momentum,
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  Speaker 1: where the decision rule is is it getting better right now?
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  Speaker 1: What's the most current data point that may not have
• 12:59
  Speaker 1: filtered into the Then there's growth, where you're trying to
• 13:03
  Speaker 1: look out five years and say can this company grow
• 13:07
  Speaker 1: at an above average rate with above average visibility? And
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  Speaker 1: a third approach is compare price with the present value
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  Speaker 1: of future cash flows from here to eternity. And I
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  Speaker 1: have one and a half processes and a value investor,
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  Speaker 1: But I do look at where do I see the
• 13:30
  Speaker 1: opportunity for above average earnings growth? Where do I see
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  Speaker 1: higher visibility? Because you shouldn't say the present value is
• 13:39
  Speaker 1: the same for everything. If you've got an undifferentiated, crappy
• 13:44
  Speaker 1: retailer and you're saying it's going to have five dollars
• 13:49
  Speaker 1: of free cash flow in five years, and you've got
• 13:53
  Speaker 1: Visa Master Courage most of the Magnificent Seven, and you
• 13:58
  Speaker 1: say that's five dollars, they're not the same. You have
• 14:02
  Speaker 1: so much more certainty because bad things can happen to
• 14:06
  Speaker 1: undifferentiated retailers. There are barriers to entry. There are monopolies
• 14:12
  Speaker 1: for the second set of companies, and so you've got
• 14:16
  Speaker 1: to separate them into those, and so the growth part
• 14:20
  Speaker 1: filters into it. Things get worse at one of the
• 14:24
  Speaker 1: companies that I've invested in, and I look for facts
• 14:29
  Speaker 1: that confirm my bias that it was undervalued second set
• 14:36
  Speaker 1: of things. Sticking to a circle of competence, there are
• 14:40
  Speaker 1: industries that I just can't look out five years and
• 14:44
  Speaker 1: see very well biotech or internet the whole phase one,
• 14:49
  Speaker 1: phase two, phase three commerciality. For me, that's just impossible
• 14:55
  Speaker 1: to handicap. Mercifully, Fidelity has a brilliant lady, Irene Knopless,
• 15:02
  Speaker 1: who can do that. I can't reproduce her thought process.
• 15:08
  Speaker 1: I can say that definitely works, but it doesn't work
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  Speaker 1: for me. And so part of success in investing is
• 15:17
  Speaker 1: to stick to things that work for you and.
• 15:21
  Speaker 2: Stay within your circle of confidence. Yeah, so you know
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  Speaker 2: Peter Lynch hires you, he mentors you. He's known as
• 15:30
  Speaker 2: a growth investor. You've come to be known as a
• 15:34
  Speaker 2: value investor. Was it that same thought process? Hey, I'm
• 15:38
  Speaker 2: comfortable with value. I don't want to dabble in growth.
• 15:42
  Speaker 2: Or did you pick up any of the growth strategies
• 15:46
  Speaker 2: from Lynch?
• 15:47
  Speaker 1: Well, that's what I'm saying about one and a half processes.
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  Speaker 2: Your value with a little bit of Lynch's growth from it.
• 15:55
  Speaker 1: Yeah, saying the present value of future cash flows depends
• 16:00
  Speaker 1: on future growth, and of course you want companies whose
• 16:04
  Speaker 1: future earnings and cash flow are going to surprise on
• 16:07
  Speaker 1: the upside five years out.
• 16:09
  Speaker 2: So it would be wrong to categorize you as a
• 16:12
  Speaker 2: pure value investor.
• 16:14
  Speaker 1: No, the growth is part of the value. I want
• 16:19
  Speaker 1: the lowest multiple on earnings five years out. And one
• 16:24
  Speaker 1: of the ways that I tried to illustrate that was
• 16:28
  Speaker 1: looking at some of Warren Buffett's biggest hits. And from
• 16:33
  Speaker 1: the time he bought Geico and going out five years
• 16:36
  Speaker 1: it was two times earning. He paid two times earnings
• 16:40
  Speaker 1: five years later and stole it. Yeah, and Washington Post
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  Speaker 1: another single digit multiple, and most of his big hits, well, Spargo,
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  Speaker 1: It's like, wow, he got the earnings growing dynamically or
• 16:59
  Speaker 1: at least above average. And it's the pe five years
• 17:03
  Speaker 1: out that I think is more helpful than a spot
• 17:07
  Speaker 1: pe or ev to ebit today really interesting.
• 17:12
  Speaker 2: So you began in eighty nine, I'm curious how your
• 17:16
  Speaker 2: investing philosophy has evolved over the past thirty plus years.
• 17:22
  Speaker 1: I got the black lung assignment as an analyst at Fidelity.
• 17:28
  Speaker 2: Got seaning covering coal.
• 17:30
  Speaker 1: I got assigned the coal industry, and I got assigned
• 17:34
  Speaker 1: the tobacco industry, neither of which anybody was beating that
• 17:39
  Speaker 1: under the door. Coal was suffering then because long wall
• 17:45
  Speaker 1: minds and other productivity improvements had come in in the
• 17:49
  Speaker 1: eighties and so productivity was growing really dynamically, like eight
• 17:55
  Speaker 1: percent a year. The price of coal was falling because
• 18:00
  Speaker 1: who needs eight percent more coal when demand is flat
• 18:05
  Speaker 1: or inching up that we're still installing coal power plants,
• 18:12
  Speaker 1: but not eight percent a year, So the price was falling,
• 18:16
  Speaker 1: whereas the tobacco companies were oligopoly of a possibly addictive
• 18:25
  Speaker 1: and at least habituating product. Both industries made me WinCE,
• 18:30
  Speaker 1: which goes to ESG, but your visibility into the tobacco
• 18:38
  Speaker 1: earnings was so much clearer. So if they were both
• 18:43
  Speaker 1: at ten times earnings, you qualitatively wanted the place where
• 18:46
  Speaker 1: there's no Harvard Business School red is going to say
• 18:51
  Speaker 1: I want to go into the tobacco business. They don't
• 18:54
  Speaker 1: want to go into the coal business either, but that's
• 18:57
  Speaker 1: a barrier tantry. It's in oligopoly. There's light since sure,
• 19:00
  Speaker 1: there's lots of regulations around tobacco, so you have a
• 19:06
  Speaker 1: relatively stable oligopoly, and that's incredibly valuable, which has to
• 19:12
  Speaker 1: be offset by the thought that ever since the Surgeon
• 19:15
  Speaker 1: General's Warning Unit, consumption of cigarettes per capita until the
• 19:21
  Speaker 1: COVID era had pretty much dropped three percent a year
• 19:25
  Speaker 1: forever since nineteen sixty five or whenever. The Surgeon General's
• 19:29
  Speaker 1: warning was, it's been on a downtrend, but the pricing
• 19:33
  Speaker 1: power could more than make up for it.
• 19:35
  Speaker 2: Huh. Really interesting. So let's talk a little bit about
• 19:40
  Speaker 2: how Fidelity thinks about active management and how the low
• 19:44
  Speaker 2: priced stock funds came about. There are lots and lots
• 19:48
  Speaker 2: of small cap funds. What led to a low price
• 19:51
  Speaker 2: stock fund?
• 19:52
  Speaker 1: At the time, there was a standard and Poor's Low
• 19:56
  Speaker 1: Price Stock Index, and it was considered a technical indicator speculation.
• 20:03
  Speaker 1: It's what the much maligned retail investor was doing. Low
• 20:09
  Speaker 1: priced stocks were beating the S and P five hundred.
• 20:13
  Speaker 1: They'd say, it's a crap market. People are buying junk.
• 20:18
  Speaker 1: The meme investor is nothing new or meme trader. Also
• 20:25
  Speaker 1: was seeing that Fidelity had the largest by side research
• 20:30
  Speaker 1: analyst drew and we could cover those smaller stocks and
• 20:36
  Speaker 1: they were mispriced. I also was influenced by a business
• 20:42
  Speaker 1: school professor, Rolf Bonds, who did one of those studies
• 20:47
  Speaker 1: of small cap stocks outperform for the period that he studied.
• 20:53
  Speaker 1: It did, and it's gone intermittently missing for many of
• 21:00
  Speaker 1: the last decades since the studies were published.
• 21:03
  Speaker 2: You guys at Fidelity had lots of analysts that covered this,
• 21:08
  Speaker 2: So you're implying that A there's a market inefficiency. Yeah,
• 21:12
  Speaker 2: and B you had an a an advantage that allowed
• 21:16
  Speaker 2: you to swim in those waters that no one else
• 21:19
  Speaker 2: seemed to do very well.
• 21:20
  Speaker 1: And yeah, at some point you'll beat me up for
• 21:23
  Speaker 1: the number of holdings that I have and.
• 21:27
  Speaker 2: Eight hundred nine hundred I don't think I don't have
• 21:30
  Speaker 2: a problem with that.
• 21:31
  Speaker 1: But you know, it was going to start with. Peter Lynch.
• 21:36
  Speaker 2: Had more the Magellan had more than had.
• 21:40
  Speaker 1: More than that, and the assets under management were smaller,
• 21:44
  Speaker 1: although the market the cap of the market was smaller,
• 21:47
  Speaker 1: but he had more than that, and Peter just it
• 21:53
  Speaker 1: was unforgivable not to have or get a update on
• 22:00
  Speaker 1: stock that Peter was interested in, and so thinking Will
• 22:06
  Speaker 1: Danoff probably intermittently covered over one hundred stock retail stocks
• 22:13
  Speaker 1: when he was an analyst, and I covered not just
• 22:17
  Speaker 1: the tobacco majors in the US, but also the international British,
• 22:23
  Speaker 1: American and Imperial and the Canadian companies and the leaf growers,
• 22:31
  Speaker 1: and so had a full understanding of the international competitive dynamics,
• 22:40
  Speaker 1: but also the supply chain and that was what Peter wanted,
• 22:45
  Speaker 1: and that was what I thought Fidelity had a competitive
• 22:50
  Speaker 1: advantage because we were doing research on those smaller companies.
• 22:54
  Speaker 2: So how does this lead to nearly a thousand holdings
• 22:58
  Speaker 2: in a mutual funds?
• 23:00
  Speaker 1: Eight hundred in my case and over a thousand for Peter.
• 23:06
  Speaker 2: By the way, I'm not going to beat you. You
• 23:08
  Speaker 2: were Peter up over this because whatever people think about, hey,
• 23:12
  Speaker 2: that's way too many stocks, the answer is, well, just
• 23:15
  Speaker 2: look at the performance. It's obviously not too many stocks.
• 23:18
  Speaker 2: Peter one of the greatest managers of all time, your
• 23:21
  Speaker 2: track record one of the greatest of all time. What
• 23:24
  Speaker 2: does having eight hundred stocks do for you? In that fold?
• 23:28
  Speaker 1: So I think Peter felt like, if you think a
• 23:35
  Speaker 1: business is interesting enough that you want to keep in touch,
• 23:39
  Speaker 1: it's bad form to go to zero. And I sort
• 23:42
  Speaker 1: of feel like the same thing. You want to keep
• 23:46
  Speaker 1: in touch with management. And if you don't have huge conviction,
• 23:51
  Speaker 1: you want to have a tiny position. And if you've
• 23:55
  Speaker 1: got a wildly diverse industry like banks or saving some loans.
• 24:05
  Speaker 2: You want to own a few as a benchmark for
• 24:08
  Speaker 2: the sector.
• 24:09
  Speaker 1: But you want to do a preliminary sort and say
• 24:15
  Speaker 1: what would a good looking bank look like? What would
• 24:18
  Speaker 1: a well managed saving some loan look like? And you
• 24:23
  Speaker 1: want to get to a preliminary answer, says, yeah, this
• 24:32
  Speaker 1: twenty five saving some loans look like the best of
• 24:37
  Speaker 1: the bunch. And I see it as taking a business
• 24:41
  Speaker 1: card and trying to keep in touch so that you
• 24:44
  Speaker 1: can develop a relationship with management and can understand what
• 24:49
  Speaker 1: is your strategy. And it's harder to have a differentiated
• 24:52
  Speaker 1: strategy in banks and saving some loans other than are
• 25:00
  Speaker 1: going to go crazy with risk, which is not the
• 25:04
  Speaker 1: strategy that you want.
• 25:06
  Speaker 2: So if you are Peter own a few hundred of
• 25:09
  Speaker 2: a particular sector, I'm assuming these are very tiny pieces
• 25:14
  Speaker 2: your sub one percent holdings, And it's just a way
• 25:17
  Speaker 2: of keeping track of or watching a sector. And if
• 25:21
  Speaker 2: something starts to work out, that's when you begin to
• 25:23
  Speaker 2: pyramit and add to the position.
• 25:25
  Speaker 1: Yeah, and I do that in steps. I don't think
• 25:30
  Speaker 1: I've ever gone from a zero waiting to a fifty
• 25:35
  Speaker 1: basis point waiting on IPOs. Sometimes you have to do
• 25:40
  Speaker 1: it that way, but otherwise it always takes steps where
• 25:45
  Speaker 1: you want to meet with management a few times, see
• 25:49
  Speaker 1: if they're consistent. You want to see if the financial
• 25:52
  Speaker 1: results continue to be consistent and compare and contrast. Are
• 25:58
  Speaker 1: these really the superior banks? Or am I just getting
• 26:03
  Speaker 1: an index of banks?
• 26:05
  Speaker 2: So you mentioned index. When we look at active equity,
• 26:10
  Speaker 2: generally speaking, tends to underperform the index, but active bond
• 26:15
  Speaker 2: managers tend to outperform their index because they eliminate the
• 26:19
  Speaker 2: worst of the whole news. They eliminate the poor credit,
• 26:22
  Speaker 2: the bad risk reward relationships. And it makes me ask
• 26:26
  Speaker 2: a question about your alpha. Is it primarily coming from
• 26:30
  Speaker 2: identifying the winners or are you almost like a bond
• 26:36
  Speaker 2: manager where you're eliminating the worst potential members of your bank?
• 26:41
  Speaker 1: Adding value by subtraction? Do you add value by subtracting
• 26:45
  Speaker 1: the stocks that are going to play against your bad
• 26:50
  Speaker 1: behavioral habits? You add alpha by subtracting the industries that
• 26:56
  Speaker 1: you don't understand as well as the market. You add
• 27:03
  Speaker 1: alpha by avoiding businesses that are run by crooks. You
• 27:10
  Speaker 1: add alpha by avoiding businesses that are run by idiots
• 27:15
  Speaker 1: that have bad capital allocation or no business strategy.
• 27:20
  Speaker 2: So addition through subtraction sounds and you're really getting rid
• 27:24
  Speaker 2: of the worst of the worst.
• 27:25
  Speaker 1: And that's particularly important in the rustle. It's important in
• 27:31
  Speaker 1: junk bonds. I would not want to have a index
• 27:36
  Speaker 1: in junk bonds because the ones with the biggest weight
• 27:40
  Speaker 1: are the most heavily indebted.
• 27:42
  Speaker 2: Right. Wow, market cap waiting does not work on the
• 27:46
  Speaker 2: fixed income side, that exactly.
• 27:49
  Speaker 1: Especially in in high yield. But yeah, I think I
• 27:54
  Speaker 1: think it's problematic in fixed income. And it's also true
• 27:59
  Speaker 1: in russell To. We're forty percent of the companies are unprofitable.
• 28:05
  Speaker 2: And that's an amazing number.
• 28:07
  Speaker 1: And the ones that I will consider are the ones
• 28:11
  Speaker 1: where it's just a temporary visitor to being unprofitable. If
• 28:19
  Speaker 1: it's a cyclical low yeah, may maybe that's a buy.
• 28:25
  Speaker 1: But if if it has a history of not being profitable,
• 28:30
  Speaker 1: you you really want to exclude that.
• 28:34
  Speaker 2: And eventually the historically unprofitable companies will disappoint. Yeah. Like
• 28:40
  Speaker 2: there's only so many years in a row. You could
• 28:42
  Speaker 2: do a one off and call it a non recurring expense. Yeah,
• 28:46
  Speaker 2: it's if it's year after year.
• 28:48
  Speaker 1: Yeah. And the fourth point was to eliminate the companies
• 28:53
  Speaker 1: that are not resilient, which we sort of covered in
• 28:57
  Speaker 1: the last couple of minutes.
• 28:58
  Speaker 2: So let's talk a little bit about your cell discipline.
• 29:02
  Speaker 2: Lots of academic studies have shown stock pickers do much
• 29:06
  Speaker 2: better when it comes to buying than they do when
• 29:09
  Speaker 2: they're selling. Tell us a little bit about your cell discipline.
• 29:13
  Speaker 1: If you go in thinking about it as marriage, as
• 29:18
  Speaker 1: the Pope would have it, you're thinking, I don't intend
• 29:24
  Speaker 1: to trade out of this. You're going to make a
• 29:27
  Speaker 1: much better decision.
• 29:31
  Speaker 2: About that.
• 29:31
  Speaker 1: But facts do change. As Peter Lynch would immediately remind me.
• 29:37
  Speaker 1: If the facts have changed, if the barriers to entry
• 29:42
  Speaker 1: have fallen, if they've made a stupid capital allocation decision,
• 29:49
  Speaker 1: that can be a cell. If they seem more crooked
• 29:56
  Speaker 1: than we realized, or more promotion I guess that's the
• 30:01
  Speaker 1: polite word. That's a sell, But it's always a compare
• 30:06
  Speaker 1: one opportunity against another. Despite having a long tail of
• 30:11
  Speaker 1: tiny holdings, low priced stock has historically had some very
• 30:17
  Speaker 1: large concentrated positions. And those concentrated positions happen because I
• 30:24
  Speaker 1: have high conviction that they're in that group where it's
• 30:30
  Speaker 1: not stupid to think about where earnings will be ten
• 30:33
  Speaker 1: years out. It doesn't help you to trade from visa
• 30:39
  Speaker 1: because the stock is high multiple and you think might
• 30:44
  Speaker 1: be overvalued into that crappy retailer that I mentioned. You
• 30:50
  Speaker 1: want to only limit your sell of that type of
• 30:55
  Speaker 1: company to trade into something of equivalent visibility into the future.
• 31:03
  Speaker 1: But if it's a low barrier to entry, or if
• 31:07
  Speaker 1: it's some point homogeneous, can you get me to sell
• 31:11
  Speaker 1: a bank that's selling for twelve times earnings if you
• 31:14
  Speaker 1: can show me an equivalent bank that's an eightpe, of
• 31:18
  Speaker 1: course you can. They probably are approximately the same, and
• 31:24
  Speaker 1: so I'll be pretty fickle with those.
• 31:29
  Speaker 2: So it sounds like you start out planning on holding
• 31:33
  Speaker 2: to these stocks for a long time. If they disappoint you,
• 31:37
  Speaker 2: or if there is a better opportunity that comes along
• 31:41
  Speaker 2: and you're not necessarily thrilled with the holding, you'll use
• 31:45
  Speaker 2: that as a reason to get out. What about purely
• 31:49
  Speaker 2: on price and value?
• 31:50
  Speaker 1: When you think about selling stock like United Healthcare, which
• 31:55
  Speaker 1: I think has very high visibility and good quot light
• 32:00
  Speaker 1: management and an unbeatable market position in some places, do
• 32:05
  Speaker 1: you have the same confidence in the thing you're moving
• 32:09
  Speaker 1: it to. It's a bad trade if you sell that
• 32:14
  Speaker 1: and say I'm going to move it from United Health
• 32:18
  Speaker 1: to good Rx, where I'll stipulate that they don't have
• 32:22
  Speaker 1: the same confidence in the outlook ten years out.
• 32:28
  Speaker 2: What about one of your biggest winners was Monster Beverage,
• 32:33
  Speaker 2: which was started out relatively tiny, tiny and not wildly overpriced,
• 32:40
  Speaker 2: and the growth rate was astounding, the visibility on earnings.
• 32:44
  Speaker 2: They grew, but they stayed profitable as they grew. What
• 32:49
  Speaker 2: allowed you to stay with that company so long? The
• 32:53
  Speaker 2: typical manager would have taken the three X or the
• 32:56
  Speaker 2: five X or the ten x and left a ton
• 32:59
  Speaker 2: of money on the table.
• 33:01
  Speaker 1: What kept me in there was the price going in
• 33:06
  Speaker 1: was ten or eleven times earnings. It was debt free,
• 33:10
  Speaker 1: it had a differentiated product. I loved the ambition of
• 33:15
  Speaker 1: the management team, who were a couple of South African expatriates.
• 33:24
  Speaker 1: Five years after I bought it, the earnings per share
• 33:27
  Speaker 1: were the same as the purchase price. So wow, if
• 33:30
  Speaker 1: you've done that once, maybe you can do it again,
• 33:34
  Speaker 1: unless you think the market is saturated.
• 33:37
  Speaker 2: So they kept doing it.
• 33:38
  Speaker 1: Doing it and are still doing it at an above
• 33:42
  Speaker 1: average rate for a consumer staple. Having five percent unit
• 33:47
  Speaker 1: growth in consumer staples, that's sustainable, that's amazing.
• 33:54
  Speaker 2: How long did you hold on to Monster Beverage.
• 33:56
  Speaker 1: For the fund still holds it.
• 33:58
  Speaker 2: Still twelve thousand percent. What sort of crazy numbers are It's.
• 34:04
  Speaker 1: Like I'd have to look at it. It's like a
• 34:06
  Speaker 1: three or four cent purchase.
• 34:08
  Speaker 2: Cost thousands of percent gain, Yeah, that's amazing.
• 34:12
  Speaker 1: Couple might be one hundred percent.
• 34:16
  Speaker 2: And and you still have confidence that you haven't seen
• 34:19
  Speaker 2: something that's more interesting in the space you want to
• 34:23
  Speaker 2: replace it with.
• 34:24
  Speaker 1: I don't and that's that's the problem, and eagerly searching
• 34:31
  Speaker 1: the market but not finding it yet. If you got it,
• 34:35
  Speaker 1: please please do tell.
• 34:38
  Speaker 2: I'm not going to be the guy that's going to
• 34:40
  Speaker 2: give you something to swap out for one hundred thousand
• 34:43
  Speaker 2: percent gainer. That that that's just at that point that
• 34:47
  Speaker 2: there's nothing you could do but but uh, I could
• 34:50
  Speaker 2: do but but make it worse. So so all of
• 34:53
  Speaker 2: this leads to the question, how did you come about
• 34:57
  Speaker 2: to the idea. Let's focus on st dox price less
• 35:01
  Speaker 2: than thirty five dollars. What was the thinking Because we're
• 35:05
  Speaker 2: not just talking about market capitalization, because you're you play
• 35:09
  Speaker 2: in different ponds in terms of market gap, but it
• 35:12
  Speaker 2: was the actual price. What other than the Dow there
• 35:16
  Speaker 2: really isn't anything that's a price based index.
• 35:19
  Speaker 1: When they started the fund. There was the Standard and
• 35:22
  Speaker 1: Poor's Low Price Stock Index index, okay, which they got
• 35:26
  Speaker 1: rid of because they were peeved the we and Rice
• 35:31
  Speaker 1: were using it for a mutual fund. We thought it
• 35:35
  Speaker 1: was pre advertising for their index. But I guess they
• 35:37
  Speaker 1: thought that their index was pre advertising for our fund
• 35:41
  Speaker 1: or something. Well, or maybe the retail market changed so
• 35:45
  Speaker 1: low price stocks were no longer a great indicator of
• 35:50
  Speaker 1: speculation or public involvement in the market.
• 35:55
  Speaker 2: Well, it was one of many odd lots went away
• 35:58
  Speaker 2: and put to ratio went away, like a lot of
• 36:02
  Speaker 2: things that people used to look at as a measure
• 36:04
  Speaker 2: of speculation, seems to have fallen out of favor. And
• 36:08
  Speaker 2: yet the low priced stock approach continues to be successful
• 36:13
  Speaker 2: after all these years. But what was the thinking? Was
• 36:16
  Speaker 2: it market and efficiency.
• 36:17
  Speaker 1: Or it was that small cap stocks were covered better
• 36:24
  Speaker 1: by Fidelity, But it was also looking at Peter Lynch
• 36:29
  Speaker 1: some of his big hits, Chrysler and Fannie May which,
• 36:35
  Speaker 1: despite its history in the financial crisis, was a spectacular
• 36:40
  Speaker 1: stock in the late eighties that made bundles of money
• 36:45
  Speaker 1: for Michell and Fund. They saw a lot of those
• 36:50
  Speaker 1: were at the start under ten dollars hundred fifteen dollars,
• 36:56
  Speaker 1: and as the fund grew, the fifteen dollars got raised
• 37:01
  Speaker 1: to twenty five dollars, down to thirty five dollars.
• 37:05
  Speaker 2: And is that where it stopped? Thirty five that's where
• 37:08
  Speaker 2: it stopped? Huh? Really really quite fascinating. So let's let's
• 37:13
  Speaker 2: talk a little bit about the exclusive club that you're
• 37:16
  Speaker 2: a member of, long term successful active managers. There aren't
• 37:22
  Speaker 2: many of you. Why is that such an exclusive club?
• 37:26
  Speaker 1: First, I'd say why did he use one of the
• 37:30
  Speaker 1: and looking at Fidelity, well, Lynch is awesome. But Will Danoff,
• 37:40
  Speaker 1: who actually started within months of when I did, has
• 37:46
  Speaker 1: added more dollars of value than any single fund manager,
• 37:50
  Speaker 1: including hedge fund manager.
• 37:52
  Speaker 2: Amazing track record, just amazing.
• 37:54
  Speaker 1: Yeah, So Fidelity has a strong tradition.
• 37:58
  Speaker 2: Of active managers have delivered alpha, not just occasionally, but
• 38:04
  Speaker 2: for decades at a time. What makes it so hard?
• 38:07
  Speaker 1: It is a very hard game because most people know
• 38:11
  Speaker 1: most things, and do you have proprietary information and are
• 38:17
  Speaker 1: you focusing on that proprietary information? I think Will is
• 38:24
  Speaker 1: thinking very directly about what is the standout winner, the
• 38:31
  Speaker 1: best in class in a growing industry, and those are
• 38:37
  Speaker 1: all he wants. And I've learned from Will. Yeah, if
• 38:44
  Speaker 1: I am excited about artificial intelligence and say what if
• 38:49
  Speaker 1: I got in a small cap, super Micro is not
• 38:53
  Speaker 1: the same bet as Nvidia. Unfortunately, if you think the
• 39:00
  Speaker 1: artificial intelligence will win and I'm unable to make such
• 39:04
  Speaker 1: a decision, then you want to go with Nvidia and
• 39:09
  Speaker 1: not super Micro. It's hard because information travels fast, and
• 39:14
  Speaker 1: I think, at the one hand, can you be faster
• 39:18
  Speaker 1: to react to information? All the bots and automation, I mean,
• 39:24
  Speaker 1: the active managers who are trying to do that have
• 39:27
  Speaker 1: been out competed by Renaissance Technology or Deesha or whoever.
• 39:36
  Speaker 1: Because I talked to an employee one of the quint
• 39:43
  Speaker 1: shops who would have to kill me and the employee
• 39:48
  Speaker 1: if I said where it was. But he said that
• 39:53
  Speaker 1: at one time most of their investments were driven by
• 39:57
  Speaker 1: a thesis where they tried to find data to support it,
• 40:02
  Speaker 1: but they've now gone to just pure data mining where
• 40:06
  Speaker 1: if Sri Lanka butter production correlates with the S and P,
• 40:11
  Speaker 1: then they will buy It.
• 40:13
  Speaker 2: Doesn't matter as long as there.
• 40:14
  Speaker 1: Doesn't mean and key being roughly my age, we're a
• 40:21
  Speaker 1: little younger, doesn't like that. But that's the direction that
• 40:25
  Speaker 1: artificial intelligence is going it's and so I think it's
• 40:29
  Speaker 1: very hard at the fast data. And there's also so
• 40:33
  Speaker 1: much data that people say the amount of data is
• 40:37
  Speaker 1: growing by whatever rapid rate per year, but most of
• 40:43
  Speaker 1: it is until it gets interpreted by something like artificial intelligence.
• 40:48
  Speaker 1: And that's a problem for people who are on the
• 40:51
  Speaker 1: momentumy part of the growth market.
• 40:55
  Speaker 2: So let's stay with that. There's a quote of yours.
• 40:57
  Speaker 2: I like a lot of data, even a lot of
• 41:00
  Speaker 2: the analysis is trivial and ephemeral. Explain what you mean
• 41:05
  Speaker 2: by that. You seem to be saying some of this
• 41:08
  Speaker 2: data isn't really useful.
• 41:11
  Speaker 1: For what I'm doing. It's trivial for the people who've
• 41:16
  Speaker 1: got it. It's got a shorter life than fresh fish unrefrigerated,
• 41:21
  Speaker 1: where it's glorious today, but it's gone tomorrow, and the
• 41:28
  Speaker 1: opportunity is very quick and machines are very quick to
• 41:34
  Speaker 1: reflect those Whatever you're thinking about, I think kind of
• 41:38
  Speaker 1: and said at any particular time is less important than
• 41:42
  Speaker 1: you think it is, but it's got your attention.
• 41:45
  Speaker 2: And that's the nature of that ephemeral data. Yeah, really interesting.
• 41:50
  Speaker 2: So we were talking earlier about active versus passive ironically,
• 41:56
  Speaker 2: Fidelity runs some of the largest passive indexes in the world.
• 42:01
  Speaker 2: What's it like having to compete with your own firm.
• 42:06
  Speaker 1: If we can't beat the indexes, I'd say we're serving
• 42:12
  Speaker 1: our customers better by doing that, And if we consistently lag,
• 42:18
  Speaker 1: we should shut down the funds and move them all
• 42:22
  Speaker 1: to indexes. But it's really more about customer choice. Fidelity
• 42:28
  Speaker 1: strives to be customer driven. We want to offer whatever
• 42:32
  Speaker 1: serves the interests of our customer's best.
• 42:36
  Speaker 2: And you certainly haven't lagged. You've been beating your benchmarks
• 42:41
  Speaker 2: consistently over time. Let's talk a little bit about how
• 42:45
  Speaker 2: you define a value stock. What is it that makes
• 42:49
  Speaker 2: a company undervalued and attractive to you?
• 42:53
  Speaker 1: So value is the present value of future cash flows.
• 42:57
  Speaker 1: Where you're saying the cash flows ten years out are
• 43:02
  Speaker 1: a fantasy. Sometimes they're realistic fantasies. But when I think
• 43:06
  Speaker 1: about the Kathy would universe, I Kathy would make different
• 43:12
  Speaker 1: can't look out for fast changing industries and say, ten
• 43:18
  Speaker 1: years from now, this is what cash flows will be. Approximately,
• 43:23
  Speaker 1: this will be free cash flows in an order of magnitude.
• 43:28
  Speaker 1: So present value of future cash flows where you really
• 43:31
  Speaker 1: believe the cash flows, reliability, and personally, I think most
• 43:37
  Speaker 1: terminal values are bs and that you should discount as
• 43:42
  Speaker 1: far out as you feel comfortable. And the fact that
• 43:45
  Speaker 1: you're trying to bundle it up into a terminal value
• 43:48
  Speaker 1: unless the assets are cash or convert to cash, that's
• 43:52
  Speaker 1: the value that I am looking for.
• 43:54
  Speaker 2: So, since you mentioned ARC, let's talk about overpaying for companies.
• 44:00
  Speaker 2: You said it's so important not to overpay, regardless of
• 44:05
  Speaker 2: how good any business or company might be. Tell us
• 44:08
  Speaker 2: a little bit about that safe margin of safety that
• 44:12
  Speaker 2: not overpaying creates.
• 44:14
  Speaker 1: Kathy would may have her own valuation, so but I
• 44:19
  Speaker 1: can't replicate it myself.
• 44:21
  Speaker 2: Well, it doesn't look like she can either because and
• 44:24
  Speaker 2: this isn't a beat obsession on ARC. But since the inception,
• 44:29
  Speaker 2: she's underperformed the S and P five hundred, including one
• 44:34
  Speaker 2: year I think it was twenty twenty, which she was
• 44:36
  Speaker 2: up something like one hundred and sixty eight percent. If
• 44:39
  Speaker 2: you're up that much in one year and you're.
• 44:41
  Speaker 1: Still going to pay it back, sometimes.
• 44:44
  Speaker 2: It seems that that if you're still underperforming despite that,
• 44:48
  Speaker 2: that may raises a question are you overpaying for those assets?
• 44:52
  Speaker 1: Yeah? So the question of overpaying, Yeah, it's why you
• 44:58
  Speaker 1: have to think about how will I react in a
• 45:02
  Speaker 1: tough situation. And if you're a growth investor and you're
• 45:08
  Speaker 1: in a bear market and you bought a stock that
• 45:12
  Speaker 1: is you think worth one hundred dollars and it's selling
• 45:17
  Speaker 1: for eighty, a value investor would say, yeah, that's an
• 45:20
  Speaker 1: interesting upside. You want to be sure there isn't something
• 45:25
  Speaker 1: greater than that. But you get some bad news and
• 45:29
  Speaker 1: the value drops to ninety, but the stock drops to forty,
• 45:34
  Speaker 1: and there's some growth investors who will say, let's destroy
• 45:38
  Speaker 1: the evidence, let's sell out when it's forty. And if
• 45:42
  Speaker 1: you're one of those investors, know that about yourself. A
• 45:46
  Speaker 1: value investor can feel like I have to deal with
• 45:51
  Speaker 1: all the clients who say, why are you losing me
• 45:54
  Speaker 1: all this money because the stock has gone from eighty
• 45:57
  Speaker 1: to forty. But I feel cheery because from forty dollars
• 46:02
  Speaker 1: to a ninety dollars value that's much better upside. That's
• 46:07
  Speaker 1: a huge upside, whereas from eighty to one hundred that's
• 46:11
  Speaker 1: good upside, but it's not amazing. And it helps me
• 46:16
  Speaker 1: keep an even keel in a situation where I'm feeling
• 46:21
  Speaker 1: the same pain that every other manager is where clients
• 46:23
  Speaker 1: are saying, why did you lose.
• 46:26
  Speaker 2: Me all that money? So let's talk about making mistakes.
• 46:30
  Speaker 2: I love this quote of yours. You've got to be
• 46:33
  Speaker 2: cruel to yourself, so you don't do it again. Tell
• 46:37
  Speaker 2: us about being cruel to yourself.
• 46:39
  Speaker 1: My worst stock in dollars ever was Health South Rehab.
• 46:46
  Speaker 1: I had bought the stock in the teens, and it
• 46:50
  Speaker 1: looked like a cheap stock on adjusted analyst earnings. It
• 46:53
  Speaker 1: had something like about twenty nine of analyst adjusted earnings,
• 46:58
  Speaker 1: but it had twelve sense of gap earnings.
• 47:03
  Speaker 2: And that's a big difference.
• 47:04
  Speaker 1: That is a big difference.
• 47:06
  Speaker 2: That doesn't sound like your type of stock.
• 47:09
  Speaker 1: Not what it's become my type of stock. They had
• 47:12
  Speaker 1: a dispute with the government where the government claimed that
• 47:16
  Speaker 1: they were over billing on some cases. And Richard Scrushy,
• 47:23
  Speaker 1: the CEO, was a very showy sure yeah, and their
• 47:32
  Speaker 1: investor relations guy had been an actor on The Wonder Years,
• 47:35
  Speaker 1: which was a TV show.
• 47:38
  Speaker 2: I think that's a red flag, isn't that it's.
• 47:42
  Speaker 1: Sort of become one. But I paid in the mid
• 47:45
  Speaker 1: teens and sold it out for less than a dollar.
• 47:48
  Speaker 2: Wow, big loss, And that's a big loss.
• 47:51
  Speaker 1: On a percentage, and it was a lot of shares.
• 47:56
  Speaker 1: It had complete wipeouts, but they are mostly those one
• 48:00
  Speaker 1: basis point positions. I didn't do the full research and
• 48:06
  Speaker 1: didn't have much confidence behind it, but I thought it
• 48:10
  Speaker 1: was interesting, So be cruel to yourself. What I didn't
• 48:15
  Speaker 1: do was look at free cash flow. And I think
• 48:18
  Speaker 1: that was part of how my changing it had already
• 48:22
  Speaker 1: realized from the tobacco companies. The magic of their financial
• 48:28
  Speaker 1: model was the huge amount of free cash flow, and
• 48:32
  Speaker 1: that they were producing the gap earnings versus the analyst adjusted.
• 48:39
  Speaker 1: The lack of free cash flow was confirming that gap
• 48:42
  Speaker 1: was probably closer. It turned out that they were cheating
• 48:47
  Speaker 1: the government and that there were some accounting restatements necessary
• 48:52
  Speaker 1: and there weren't really good financials and the assets were
• 48:57
  Speaker 1: growing faster than the sales and.
• 49:00
  Speaker 2: So, which doesn't make any sense. Yeah, so you beat
• 49:03
  Speaker 2: yourself up on this. You're you're cruel to yourself.
• 49:06
  Speaker 1: You're cruel to myself to say, going forward, I'm going
• 49:09
  Speaker 1: to look at free cash flow, you know, and take
• 49:12
  Speaker 1: it seriously. I'm going to be skeptical about interelest adjusted
• 49:16
  Speaker 1: earnings and look to free cash flow. Is it confirming,
• 49:20
  Speaker 1: but I also want to see is it one of
• 49:23
  Speaker 1: those cases where the analyst adjustments are economically realistic or
• 49:28
  Speaker 1: are the excuses?
• 49:30
  Speaker 2: What year was this?
• 49:32
  Speaker 1: I bought it around two thousand and it crashed around
• 49:35
  Speaker 1: two thousand and two two thousand and three.
• 49:38
  Speaker 2: Right in the middle of the dot com crash, so
• 49:42
  Speaker 2: you could definitely bury that. Although a ninety nine percent
• 49:45
  Speaker 2: drop is never fun, how big a position was this?
• 49:49
  Speaker 2: Because it was material and even with eight hundred other stocks.
• 49:55
  Speaker 1: This was one of my medium concentrated U was probably
• 50:01
  Speaker 1: position number thirty.
• 50:03
  Speaker 2: And that's a percent or two, right, That's all that is. Yeah,
• 50:08
  Speaker 2: no one's happening.
• 50:09
  Speaker 1: Ninety nine percent lost on one point one percent could
• 50:14
  Speaker 1: be got percentah, and so meaningful to So it's very meaningful.
• 50:19
  Speaker 1: And I think I had a you know, epiphany about
• 50:24
  Speaker 1: concentration that you don't want to treat all the companies
• 50:28
  Speaker 1: the same. You really only want to concentrate in the
• 50:32
  Speaker 1: very high conviction companies are really superior. And clearly Health
• 50:38
  Speaker 1: South was not clear, and so it was beating myself
• 50:42
  Speaker 1: up on this is how I need to change my
• 50:44
  Speaker 1: analytical method. This is what's wrong with concentrating in the
• 50:49
  Speaker 1: wrong stocks.
• 50:51
  Speaker 2: Not a lot of managers are nimble enough to make
• 50:54
  Speaker 2: those adjustments ten years, twelve years into managing the funds.
• 50:59
  Speaker 2: How did those changes affect your performance over the subsequent
• 51:03
  Speaker 2: twenty plus years.
• 51:04
  Speaker 1: I hope that they were positives.
• 51:07
  Speaker 2: For the better. Whatever happened to Squirreshet, by the way, I.
• 51:11
  Speaker 1: Have stopped watching him, like I stopped watching the Winter Years.
• 51:17
  Speaker 2: That's very funny. So let's talk a little bit about
• 51:22
  Speaker 2: picking international stocks as an asset class. Has done fairly poorly,
• 51:26
  Speaker 2: but it's nearly a third of your portfolio, and you
• 51:29
  Speaker 2: continue to outperform. What do you see in international stocks?
• 51:34
  Speaker 1: Japan has more public companies than the United States.
• 51:39
  Speaker 2: Hard to believe.
• 51:40
  Speaker 1: Yeah, with a fraction of the population. In the US,
• 51:45
  Speaker 1: it's chic to be a private equity or a venture
• 51:48
  Speaker 1: back firm because either ways, Yale is not interested in you.
• 51:57
  Speaker 1: And whereas in Japan it is pristy and to be public,
• 52:03
  Speaker 1: to be public, to be listed on the Tsese. And
• 52:09
  Speaker 1: there are lots of companies that in Japan that are
• 52:14
  Speaker 1: in single digit returns on equity, but you do not
• 52:17
  Speaker 1: need to invest in them. There are lots of brain
• 52:21
  Speaker 1: dead bureaucratic companies, but you don't have to invest in
• 52:25
  Speaker 1: them in Japan or Europe or the United States, and
• 52:31
  Speaker 1: they're the addition by subtraction is particularly important, and it's
• 52:39
  Speaker 1: great that we have on the ground people. And here
• 52:42
  Speaker 1: I highlight Sam Chamowitz, who's taking over along with Morgan
• 52:47
  Speaker 1: Peck from me spent several years in the Tokyo office.
• 52:51
  Speaker 1: And there are smaller entrepreneurial companies that are doing differentiated things.
• 53:00
  Speaker 1: One of those big winners has been Cosmos Pharmaceutical, which
• 53:04
  Speaker 1: is a discount drug store and food store in southern Japan,
• 53:14
  Speaker 1: and their SGNA to sales something like fourteen or fifteen percent. Walmart,
• 53:23
  Speaker 1: which runs a tight ship, has SGNA to sales I
• 53:27
  Speaker 1: think of about twenty percent. So we've got a company
• 53:31
  Speaker 1: that is more efficient than Walmart, which I think is
• 53:35
  Speaker 1: impressive in itsself, and they pass the savings on to
• 53:42
  Speaker 1: the customers, and customers in the South tend to be
• 53:50
  Speaker 1: poorer than the Tokyo metro area or have lower incomes,
• 53:56
  Speaker 1: so they love the prices. It's had double digit returns
• 54:03
  Speaker 1: on equity and good growth, and that's what I look
• 54:07
  Speaker 1: for and what I think Sam and Morgan are looking
• 54:11
  Speaker 1: for going forward.
• 54:12
  Speaker 2: So when we look at international companies. They've been trading
• 54:16
  Speaker 2: generally at a big discount to US and consistently for
• 54:21
  Speaker 2: the past on ten fifteen years. Why is there such
• 54:25
  Speaker 2: a spread between US domestic and overseas companies in terms
• 54:31
  Speaker 2: of your value investor in terms of straight up valuation.
• 54:34
  Speaker 1: Some of it is the industry skew that there are
• 54:40
  Speaker 1: not so many winner take oligopolistic tech companies internationally as
• 54:48
  Speaker 1: there are in the US. China has Ali Baba, but
• 54:53
  Speaker 1: that has a governance constraint where Jackmo is hanging out
• 54:58
  Speaker 1: in Tokyo rather than Kina, and I don't know whether
• 55:03
  Speaker 1: it's because Tokyo is a lovely place to be or
• 55:07
  Speaker 1: because he feared for his physical or financial.
• 55:10
  Speaker 2: Safety not encouraging to.
• 55:13
  Speaker 1: But both of those are good, good reasons. But I
• 55:18
  Speaker 1: don't see any tech leaders that are global in a
• 55:22
  Speaker 1: lot of the parts of the world. There are real
• 55:27
  Speaker 1: governance differences in some of the places, and the industry
• 55:33
  Speaker 1: skew away from tech, you know, maybe slower and more
• 55:38
  Speaker 1: commodity like US anti trust policy has kind of gone missing,
• 55:42
  Speaker 1: excepting weird spaces, and so US companies have a lot
• 55:46
  Speaker 1: more market power that they can.
• 55:49
  Speaker 2: Use really interesting. So so you set to retire as
• 55:53
  Speaker 2: portfolio manager this year. You mentioned your two successors. Is
• 55:58
  Speaker 2: the strategy going to be the same or are they
• 56:01
  Speaker 2: going to put their own spin on the base that
• 56:04
  Speaker 2: you've created over the past thirty four years.
• 56:07
  Speaker 1: They will absolutely put their own spin. Some of the
• 56:12
  Speaker 1: largest holdings have come down in size because what's high
• 56:16
  Speaker 1: conviction for me might not be high conviction for them.
• 56:20
  Speaker 1: And on the bullish side, I think research about the
• 56:25
  Speaker 1: specific companies and coverage is better than it's ever been
• 56:29
  Speaker 1: for low price stock fund because Morgan and Sam are
• 56:34
  Speaker 1: beating the bushes, getting in lists to study companies, call companies,
• 56:39
  Speaker 1: visit companies, and so that information flow is better than
• 56:44
  Speaker 1: it's ever been.
• 56:46
  Speaker 2: You're going to stay honest, seenior advisor. What do you
• 56:48
  Speaker 2: hope to teach the next generation of fidelity fund managers.
• 56:53
  Speaker 1: Maybe I'm just hanging out so that they have an
• 56:56
  Speaker 1: excuse to visit the London office, and because I learned
• 57:01
  Speaker 1: from them, and I worry about my mind going because
• 57:07
  Speaker 1: I'm not talking to them. I'm hoping I have something
• 57:10
  Speaker 1: useful to tell them, But if the long awaited value
• 57:15
  Speaker 1: boom doesn't materialize, they may not want to talk to me.
• 57:19
  Speaker 2: So I want to throw one more quote at you
• 57:23
  Speaker 2: before we get to some of our final questions. You
• 57:26
  Speaker 2: had said, when discussing what you learn from Peter Lynch,
• 57:30
  Speaker 2: be skeptical enough to spot your own mistakes, be flexible
• 57:34
  Speaker 2: enough to fix them quickly. There's no shame in making
• 57:38
  Speaker 2: mistakes as long as you recognize the mistakes and fix them.
• 57:43
  Speaker 2: Tell us a little bit about the process of making
• 57:46
  Speaker 2: mistakes as a fund manager. It sounds like you're saying,
• 57:51
  Speaker 2: this is part of the process. Is no avoiding error,
• 57:54
  Speaker 2: it's how you deal with it.
• 57:55
  Speaker 1: Yeah, and that was what I meant to draw from
• 57:59
  Speaker 1: the health set things sample. I think it did change
• 58:02
  Speaker 1: my process as a result that Why do I emphasize
• 58:07
  Speaker 1: free cash flow more than analyst adjusted earnings? It's because
• 58:13
  Speaker 1: that was so difficult. Why do I emphasize staying away
• 58:18
  Speaker 1: from crooks and idiots because of Helsatham on the others where.
• 58:25
  Speaker 2: They were both crooks andity it seems. Yeah, So let
• 58:29
  Speaker 2: me throw a couple of curveballs at you before we
• 58:31
  Speaker 2: get to our favorite questions. One has to do with
• 58:35
  Speaker 2: what managers describe as eating their own cooking. What are
• 58:39
  Speaker 2: your thoughts on being invested in your own funds?
• 58:42
  Speaker 1: I would ask whether the manager can be invested. I
• 58:47
  Speaker 1: have Canadian funds that I cannot invest in because they
• 58:53
  Speaker 1: are regulated under Canadian securities laws, and so I cannot
• 58:58
  Speaker 1: invest them. I have the highest disclosable bracket of amount
• 59:06
  Speaker 1: invested in both my personal brokerage account and in my
• 59:12
  Speaker 1: retirement account.
• 59:13
  Speaker 2: So you very much eat your own cocaine. Yeah, and
• 59:17
  Speaker 2: our last curve bawl before we get to our favorite questions.
• 59:20
  Speaker 2: You were affected by your experience in an earthquake in Japan.
• 59:25
  Speaker 2: Tell us about that.
• 59:27
  Speaker 1: It was very scary. The conference that I was at
• 59:32
  Speaker 1: went all week, and on Tuesday before the big one,
• 59:37
  Speaker 1: it was in a company meeting and it felt tremor,
• 59:43
  Speaker 1: and the translator sort of perkly said, oh, that was
• 59:47
  Speaker 1: an earthquake. Okay, if you're chill about it, then so
• 59:52
  Speaker 1: am I. And then a couple of days later, on Friday,
• 59:59
  Speaker 1: it was in a meet with a home goods retailer
• 1:00:02
  Speaker 1: at the Fidelity office, and the tremor started, and the
• 1:00:08
  Speaker 1: tea service started to slip around the table, and the
• 1:00:12
  Speaker 1: company manager was CEO was looking more and more uncomfortable.
• 1:00:19
  Speaker 1: Not chill of that, not chill, And so I was thinking, oh,
• 1:00:23
  Speaker 1: it's not just every day for the Japanese. And so
• 1:00:30
  Speaker 1: the meeting that was meant to go till four we abandoned,
• 1:00:36
  Speaker 1: went down the stairway. The coffee shop in the downstairs
• 1:00:42
  Speaker 1: was kindly giving away free coffee, and my car right
• 1:00:46
  Speaker 1: to the hotel wasn't scheduled to arrive until four, but
• 1:00:50
  Speaker 1: it never arrived. Cell phone service had stopped, and so
• 1:00:56
  Speaker 1: I had to walk to the hotel and Dave Jenkins,
• 1:01:01
  Speaker 1: or Fidelity analyst and now portfolio manager, had to walk home,
• 1:01:05
  Speaker 1: which took a few hours. How bad of an earthquake
• 1:01:08
  Speaker 1: was this, This was seven. It was a big one.
• 1:01:15
  Speaker 1: You could see the hotel was near radio tower and
• 1:01:21
  Speaker 1: observatory tower. You could see it bending really and they
• 1:01:25
  Speaker 1: were going to have a finale dinner on the top
• 1:01:30
  Speaker 1: floor of the hotel, but decided to move it to
• 1:01:32
  Speaker 1: the basement. And one of our women analysts was on
• 1:01:39
  Speaker 1: the twenty first floor. I think I was on the
• 1:01:42
  Speaker 1: twenty second floor, and she went down there crying and
• 1:01:47
  Speaker 1: they moved her to the second floor. And if I'm
• 1:01:50
  Speaker 1: ever there again, I'm going to lose my dignity and
• 1:01:54
  Speaker 1: start crying and saying, move me to the second floor.
• 1:01:58
  Speaker 2: It's very orienting to be for those of us.
• 1:02:02
  Speaker 1: And to have subways stop shut down, cell phone service
• 1:02:05
  Speaker 1: shut down, car service shut down all of that stuff,
• 1:02:10
  Speaker 1: and to see, oh my god, the radio tower is tilting.
• 1:02:15
  Speaker 1: I can't My flight was canceled. Flight out was canceled.
• 1:02:18
  Speaker 2: Very very disorienting. All right, let's jump to our favorite
• 1:02:22
  Speaker 2: questions that we asked all of our guests, starting with
• 1:02:26
  Speaker 2: what what have you been watching? What have been streaming?
• 1:02:29
  Speaker 2: What's kept you entertained these days.
• 1:02:32
  Speaker 1: It's a good thing that your podcasts have a shelf life,
• 1:02:35
  Speaker 1: because some of the stuff that I watch has a
• 1:02:38
  Speaker 1: shelf life too. I recently watched The Pelican Brief and thought,
• 1:02:45
  Speaker 1: you know, that was when I really loved Julia Roberts.
• 1:02:49
  Speaker 2: That's a fun movie.
• 1:02:50
  Speaker 1: It's a fun movie, Renfield nick Ka. It's about Count
• 1:02:56
  Speaker 1: Dracula's assistant, so it's lighthearted. Maybe more Halloween type showing,
• 1:03:04
  Speaker 1: but but it's fun. I'd like the Bush series.
• 1:03:08
  Speaker 2: My wife loves that, watches that I like old movies.
• 1:03:12
  Speaker 1: James Bond is maybe popcorn, but I like popcorn, especially
• 1:03:18
  Speaker 1: with the Sean Connery there. There are definitely some Bonds
• 1:03:22
  Speaker 1: that I like better. And I'm not quite ready, but
• 1:03:26
  Speaker 1: you know, hey, this this is the new millennium. And
• 1:03:29
  Speaker 1: so if his personal pronouns become she her, then with that.
• 1:03:36
  Speaker 2: I don't think we're going to see that with bond.
• 1:03:37
  Speaker 2: That seems to be there was a rumor that I'll
• 1:03:41
  Speaker 2: take the other side of that trade. Okay, all right,
• 1:03:44
  Speaker 2: especially I'm cool with it. I just don't see that
• 1:03:47
  Speaker 2: as a bond sort of thing. Let's talk about your mentors.
• 1:03:51
  Speaker 2: Obviously you've talked about Lynch.
• 1:03:53
  Speaker 1: Peter Lynch was amazing. Richard sand Or what a brilliant
• 1:03:59
  Speaker 1: and curious and creative person at Fidelity. Bruce Johnstone doesn't
• 1:04:07
  Speaker 1: get as much press as Peter, but for finding ways
• 1:04:13
  Speaker 1: to make more than a dividend yield out of dividend
• 1:04:19
  Speaker 1: paying stocks, he was fantastic. He's closer to a value
• 1:04:23
  Speaker 1: investor than Peter.
• 1:04:26
  Speaker 2: Those are some pretty good mentors. Let's talk about books.
• 1:04:29
  Speaker 2: What are some of your favorites and what are you
• 1:04:30
  Speaker 2: reading right now?
• 1:04:31
  Speaker 1: Thinking Fast and Thinking Slow is one of my favorites.
• 1:04:37
  Speaker 2: It's a doorstop, so but it's definitely worth.
• 1:04:42
  Speaker 1: It's definitely worth plombing through and took me, i think
• 1:04:46
  Speaker 1: nine months to get through. In that same category, The
• 1:04:50
  Speaker 1: new edition of Securities Analysis.
• 1:04:54
  Speaker 2: Is Benjamin Graham, Yeah.
• 1:04:56
  Speaker 1: But as edited by Seth Klarman, with some new contributions
• 1:05:03
  Speaker 1: on endowment investing, which I am curious about because I'm
• 1:05:08
  Speaker 1: thinking that if Swinson of Yale was around today, he
• 1:05:13
  Speaker 1: might disagree with some of the things that are being
• 1:05:16
  Speaker 1: done in his name. But I wish he was around
• 1:05:20
  Speaker 1: to say I'm wrong. But yeah, so I'm always reading
• 1:05:25
  Speaker 1: like half a dozen books. Friends last night suggested that
• 1:05:30
  Speaker 1: I go back to structure of scientific revolutions, and I'm
• 1:05:35
  Speaker 1: in search of a social history of Jerusalem and the
• 1:05:42
  Speaker 1: country that we now call Israel because it was Palestine
• 1:05:47
  Speaker 1: under the Brits before that, it was the Ottoman Empire.
• 1:05:50
  Speaker 1: Before that, it was an Egyptian empire for three centuries.
• 1:05:53
  Speaker 1: So sort of curious his background to the horrible situation
• 1:06:00
  Speaker 1: in Israel.
• 1:06:01
  Speaker 2: Have you found a book on the topic of the
• 1:06:03
  Speaker 2: closest I.
• 1:06:04
  Speaker 1: Have not dropped that in a podcast if you find one.
• 1:06:08
  Speaker 2: I'm trying to remember was that the Lexus and the
• 1:06:10
  Speaker 2: Olive Tree. Was that about the history of.
• 1:06:13
  Speaker 1: I have read, but that might be what I'm looking for.
• 1:06:16
  Speaker 2: Tom Tom Friedman, if you go way back, could be
• 1:06:18
  Speaker 2: completely wrong about that my recollection is not what it
• 1:06:21
  Speaker 2: once was. So our final two questions, what sort of
• 1:06:25
  Speaker 2: advice would you give to a recent college graduate interested
• 1:06:28
  Speaker 2: in a career in investing or fund management.
• 1:06:32
  Speaker 1: If you're interested in fund management, you should know that
• 1:06:37
  Speaker 1: it works on an apprentice system. You do not start
• 1:06:40
  Speaker 1: as a fund manager. You start as an analyst. I
• 1:06:43
  Speaker 1: think that's a good thing because it helps you develop
• 1:06:46
  Speaker 1: a circle of competence. Peter Lynch always stayed in analyst.
• 1:06:49
  Speaker 1: Will Danoff has stayed and analyst, and even as their
• 1:06:53
  Speaker 1: fund manage, even as their fund managers. The second is
• 1:06:58
  Speaker 1: that it's a demanding job, and I don't think I've
• 1:07:04
  Speaker 1: had two consecutive days in the last thirty something years
• 1:07:10
  Speaker 1: where I didn't check stock prices or check email to
• 1:07:14
  Speaker 1: see what the market was. There have been days when
• 1:07:18
  Speaker 1: my dad passed where.
• 1:07:22
  Speaker 2: You missed it.
• 1:07:23
  Speaker 1: I missed a day, but he didn't miss two days.
• 1:07:26
  Speaker 1: And in retirement, I'm looking forward to that. But if
• 1:07:30
  Speaker 1: you're at the start and you're not ready for that,
• 1:07:33
  Speaker 1: choose another highly paid, glamorous profession.
• 1:07:38
  Speaker 2: Requires a heavy commitment.
• 1:07:39
  Speaker 1: Yes, it requires a heavy commitment, and think about what
• 1:07:44
  Speaker 1: you think you might do. Think about whether you're a
• 1:07:47
  Speaker 1: value or a growth investor, and think about what are
• 1:07:50
  Speaker 1: my behavioral bad habits that are going to hold me
• 1:07:54
  Speaker 1: back from success?
• 1:07:56
  Speaker 2: And our final question, what do you know about the
• 1:07:58
  Speaker 2: world of investing today? You wish you knew forty or
• 1:08:02
  Speaker 2: so years ago when you were first starting out.
• 1:08:05
  Speaker 1: Anything can happen.
• 1:08:07
  Speaker 2: I love that.
• 1:08:08
  Speaker 1: Yeah, anything can happen, sometimes in fantastic Sometimes you'll be
• 1:08:14
  Speaker 1: like me and get lucky and meet Hanson Naturals, which
• 1:08:20
  Speaker 1: became Monster Beverage at a beverage service at a tech conference.
• 1:08:25
  Speaker 1: Then I think of who other than Bill Gates predicted
• 1:08:29
  Speaker 1: the COVID pandemic. Nobody of note was saying We're going
• 1:08:35
  Speaker 1: to have a COVID pandemic, and Bill Gates did not
• 1:08:38
  Speaker 1: predict that. Following that you would have massive fiscal stimulus, and.
• 1:08:46
  Speaker 2: Followed by streets.
• 1:08:49
  Speaker 1: He did not predict that, So he was one hundred
• 1:08:52
  Speaker 1: percent time getting the COVID but he didn't get that.
• 1:08:56
  Speaker 1: And anything can happen. Nobody predicted both of those at
• 1:09:00
  Speaker 1: least a note.
• 1:09:01
  Speaker 2: Huh. Quite fascinating. Joel, thank you for being so generous
• 1:09:05
  Speaker 2: with your time. We have been speaking with Joel Tillinghast,
• 1:09:09
  Speaker 2: manager of the Fidelity Low Price Stock Fund. If you
• 1:09:12
  Speaker 2: enjoy this conversation, check out any of the five hundred
• 1:09:16
  Speaker 2: previous interviews we've done over the past nine years. You
• 1:09:19
  Speaker 2: can find those at Apple Podcasts, Spotify, YouTube, wherever you
• 1:09:24
  Speaker 2: find your favorite podcasts. Sign up for my daily reading
• 1:09:28
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• 1:09:31
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• 1:09:35
  Speaker 2: at podcast and check out our brand new podcast at
• 1:09:40
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• 1:09:43
  Speaker 2: insight with an expert. It's now on Apple Premium Podcasts
• 1:09:48
  Speaker 2: and it's coming everywhere in January twenty twenty four. I
• 1:09:52
  Speaker 2: would be remiss if I did not thank the crack
• 1:09:54
  Speaker 2: team that helps put these conversations together. My audio engineer
• 1:09:58
  Speaker 2: is Kaylie Lepera, My producer is Anna Luke. Attika val
• 1:10:02
  Speaker 2: Bron is our project manager. Joan Russo is my researcher.
• 1:10:06
  Speaker 2: I'm Barry Rudolts. You've been listening to Masters in Business
• 1:10:11
  Speaker 2: on Bloomberg Radio.