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Joel Greenblatt on Relative Value Investing (Podcast) · Masters in Business

0:02
Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
0:07
Speaker 1: This week on the podcast, I have an extra special guest,
0:11
Speaker 1: the return of Joel Greenblatt. Joel is a former hedge
0:15
Speaker 1: fund manager. He started Gotham Capital in and put up
0:21
Speaker 1: just insane numbers fifty percent a year after all expenses
0:26
Speaker 1: for something like seven eight nine years in Gotham was
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Speaker 1: closed to outside investors. That essentially became a family office,
0:35
Speaker 1: and he ran that through two thousand and nine. He
0:37
Speaker 1: was one of the early investors in Michael Burry's hedge
0:41
Speaker 1: fund Michael Burry, made famous by both the book in
0:44
Speaker 1: the movie The Big Short, and he's now running Gotham
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Speaker 1: Asset Management, which has put together a number of really
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Speaker 1: interesting mutual funds, including a sort of value weighted SMP
0:56
Speaker 1: five index that has beat the index for a couple
0:59
Speaker 1: of year is running. It is not a traditional price
1:03
Speaker 1: to book sort of value based tilt. It's all about
1:07
Speaker 1: future cash flows and moats and relative growth and value.
1:12
Speaker 1: Really the best way to think of it as a
1:14
Speaker 1: relative value tilts to the index. It's done really well.
1:19
Speaker 1: I always find Joel to be a fascinating guy. He
1:22
Speaker 1: understands the world of value investing better than most. His
1:26
Speaker 1: track record is simply outstanding, and he really has nothing
1:30
Speaker 1: to prove, nothing to sell. He's just a fascinating guy
1:33
Speaker 1: who's shot the lights out repeatedly. So, with no further ado,
1:38
Speaker 1: my interview with Gotham Asset Managements Joel Greenblasts. This is
1:44
Speaker 1: Masters in Business with very Ridholts on Bloomberg Radio. My
1:49
Speaker 1: special guest this week is Joel Greenblatt. He is the
1:52
Speaker 1: principal and co founder c i O of Gotham Asset Management.
1:57
Speaker 1: He's been an adjunct professor at Columbia School of Business
2:00
Speaker 1: since He is the author of numerous best selling books,
2:05
Speaker 1: including You Can Be a Stock Market Genius and The
2:09
Speaker 1: Little Book That Beats the Market. His newest book is
2:13
Speaker 1: called Common Sense, The Investor's Guide to Equality, Opportunity, and Growth.
2:19
Speaker 1: Joel Greenblatt, Welcome to Bloomberg, Thanks Perry. So let's start
2:24
Speaker 1: a little bit with the book common Sense. What first
2:28
Speaker 1: of all, what motivated you working in finance to write
2:32
Speaker 1: a book about opportunity, growth and equality? Seems to be
2:37
Speaker 1: a little different than your traditional value investing or is
2:41
Speaker 1: it sure? Well, I'm a capitalist. I'd like it to
2:44
Speaker 1: to work well in investor in general has a certain
2:48
Speaker 1: way of looking at the world. And there are a
2:50
Speaker 1: lot of problems that capitalism has led to or the
2:54
Speaker 1: way at least we implement it. And and so there
2:57
Speaker 1: are certain things that seems fairly reasonable to me to
3:00
Speaker 1: suggest of tweaks we can make to the way the
3:03
Speaker 1: system works now to make things better for everyone. And
3:06
Speaker 1: so you know, most people don't write this book from
3:09
Speaker 1: the perspective of a long term investor, and and so
3:12
Speaker 1: that's what I did here, and I hope it brings
3:15
Speaker 1: another perspective to solving some of these problems, particularly the
3:19
Speaker 1: ones that are very important to people now, including inequality
3:22
Speaker 1: and opportunity. So let's dive right into issues of opportunity.
3:26
Speaker 1: By page count, almost half the book, maybe even more,
3:30
Speaker 1: is about education. So let's start. Let's start there. You
3:34
Speaker 1: you started a not for profit charter school in New
3:38
Speaker 1: York City in two thousand and six. Why did you
3:41
Speaker 1: do that and what did you learn? Well? Sure, well,
3:44
Speaker 1: the reason I did that is if you look at
3:46
Speaker 1: the statistics, if you are black, Hispanic, low income in
3:50
Speaker 1: one of our major urban centers, maybe the top fifty,
3:54
Speaker 1: your odds of graduating college right now are one out
3:56
Speaker 1: of a limit. We know that college graduates earn more
4:01
Speaker 1: than high school graduates. High school graduates earn thirty more
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Speaker 1: than dropouts. But that's that's huge, and it's not from
4:11
Speaker 1: lack of ability, and at least that's part of the
4:13
Speaker 1: reason that I got involved in the charter school space.
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Speaker 1: Everyone has choice if if you have any kind of
4:21
Speaker 1: money in our system and you don't like the school
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Speaker 1: in your neighborhood, you can move to a neighborhood with
4:28
Speaker 1: a good school, or you can send your kids to
4:30
Speaker 1: private school. If you don't have means, you get what
4:34
Speaker 1: you get and you don't have a choice. And the
4:37
Speaker 1: idea behind charter schools, which just to define them, are
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Speaker 1: publicly funded schools run not by the district, meaning run
4:46
Speaker 1: by independent operators. And it turns out that the charter
4:51
Speaker 1: schools in states where they have high standards of who
4:54
Speaker 1: gets to open one and who gets to keep running
4:58
Speaker 1: one or obviously if they're closed if they're not doing well,
5:02
Speaker 1: those tend to be the states like New York, Massachusetts,
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Speaker 1: and California where the charter schools do well. And so
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Speaker 1: the idea was to set up a charter school in
5:11
Speaker 1: New York City and it's always okay or it's been
5:14
Speaker 1: done before. To open one school and put a lot
5:17
Speaker 1: of resources into it and make sure that it works well.
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Speaker 1: And the idea behind this one was to do something
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Speaker 1: replicable and the big hareat Decious goal when we got
5:25
Speaker 1: started was to open not one school, but forty schools.
5:30
Speaker 1: My business partner John Petrie and I hired a woman
5:33
Speaker 1: Eva Moscowitz, who is the CEO UH and founder of
5:37
Speaker 1: the Success Network that I'm involved with, and today we
5:40
Speaker 1: have forty six schools and kids. And last year, according
5:45
Speaker 1: to the state tests in math and English UH, those
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Speaker 1: twenty kids in all low income neighborhoods minority neighborhoods outperformed
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Speaker 1: every wealthy district in the state, including Scarsdale, Great Neck
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Speaker 1: and all the other tops UH just stricts in the state.
6:00
Speaker 1: They would be the number one district. What's the lesson
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Speaker 1: from that? What can we learn from charter schools and
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Speaker 1: bring to public schools that are under performing well. I
6:10
Speaker 1: think the biggest lesson would be that it's not lack
6:15
Speaker 1: of ability that the kids aren't successful. The kids can
6:18
Speaker 1: do it. If you have high expectations, the kids can
6:21
Speaker 1: meet them. They just need the right supports and charters,
6:24
Speaker 1: of course have some advantages over the district schools. They
6:29
Speaker 1: get to select their teachers and keep the ones that
6:31
Speaker 1: they think are doing a good job. They can pivot
6:34
Speaker 1: quickly to to only do what works or to improve
6:38
Speaker 1: things that aren't working, and they can do that very quickly.
6:41
Speaker 1: We spent more time in school at our charter than
6:45
Speaker 1: the district schools, so that's an advantage and big advantages.
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Speaker 1: Parents choose to come, and so it's good to have
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Speaker 1: the support of the parents, and that is an advantage.
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Speaker 1: In your book, Common Sense, you highlight p. S. One
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Speaker 1: seventy two one of the country's best public school. It's
7:04
Speaker 1: run by Jack Spatola. What makes him such a special principle?
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Speaker 1: Why is that public school not a charter school? Why
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Speaker 1: is that succeeding so well versus the average public school
7:19
Speaker 1: in any big city. Right, So, the book, as you suggest,
7:23
Speaker 1: is not just about charters. It's about good schools anywhere,
7:26
Speaker 1: giving good choices. Right, the the kids with the lowest
7:32
Speaker 1: UH family that meets, the families with the lowest means
7:36
Speaker 1: UH don't have a choice. So it's how can we
7:39
Speaker 1: make their district schools better? How can we give them
7:42
Speaker 1: choice of a good, good school choice, and they're certainly
7:47
Speaker 1: good district public schools. One that I highlight, as you suggest,
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Speaker 1: Jack Jack Spatolas, the principal, he just retired for PS
7:55
Speaker 1: one SWO in Brooklyn, had to tell you how good
8:00
Speaker 1: a really good school can be. And this is a
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Speaker 1: district school. Uh. Of the kids, Uh past the math
8:09
Speaker 1: exam and past the English systam and in most other
8:13
Speaker 1: schools is below. But that's not the special thing. The
8:18
Speaker 1: special thing is that that passing math and passing English.
8:23
Speaker 1: What are the statistics for the students with disabilities at
8:26
Speaker 1: that school? Wow? So in other words, kids without disabilities
8:31
Speaker 1: did less than half as well in the in the
8:33
Speaker 1: regular district schools. That tells you how good that school is.
8:37
Speaker 1: The English language learners passed the English exam at his
8:42
Speaker 1: school PS one seventy two in the regular district schools
8:46
Speaker 1: with nine, so ten times better. What can be done
8:49
Speaker 1: with the school, like Spatola is like PS one two
8:54
Speaker 1: that can be ported over to regular public schools. Of
8:58
Speaker 1: course that's the right question. Uh. And if you ask
9:01
Speaker 1: Jack Spatola, the principle, he would say, having high expectations
9:05
Speaker 1: for every child, just keep looking. If something doesn't work
9:09
Speaker 1: for a student, find something else that that doesn't work,
9:11
Speaker 1: find something else, and keep working. But it's high expectations,
9:14
Speaker 1: expecting that each child, including students with disabilities, including impish
9:18
Speaker 1: language learners, can do the job with the right supports.
9:22
Speaker 1: So he would say that, but I would say that
9:24
Speaker 1: only one principle can be the best principle in the state.
9:28
Speaker 1: It's probably Jack. It's very hard. It would be wonderful
9:35
Speaker 1: if the average principle could be this good, and we
9:38
Speaker 1: should strive to get there. But it hasn't happened. Uh.
9:43
Speaker 1: And I just point out that good charter schools, you know,
9:47
Speaker 1: with still you know that where kids poor and minority
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Speaker 1: kids outperform the wealthiest districts, and a school like Jack's,
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Speaker 1: where even the kids with disabilities are crushing it point
10:00
Speaker 1: out that the kids can do it. So the ten
10:03
Speaker 1: out of eleven who are not graduating college, it's not
10:08
Speaker 1: from lack of ability. And so the question I posed
10:11
Speaker 1: in the book is what can we do for them?
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Speaker 1: Because they can do the job. They can do the job,
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Speaker 1: and so that's what I used them for. It's a big,
10:19
Speaker 1: big question you're asking, how do we move this? Uh,
10:24
Speaker 1: you know, Jack's success across the districts, and one of
10:27
Speaker 1: the sad answers is that not everyone can be Jack Spatola,
10:31
Speaker 1: but of course he should be studied, and so a
10:33
Speaker 1: real question should be why isn't what he's done studied
10:36
Speaker 1: even more? And it's not. So that's a little sad.
10:40
Speaker 1: But right now it doesn't look like those ten out
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Speaker 1: of eleven are being serviced. What can we do about that?
10:46
Speaker 1: Is what I read about in the book. Let's talk
10:48
Speaker 1: about one of the solutions. You write about alternative credentials.
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Speaker 1: What are they and how would they work? Uh for
10:57
Speaker 1: for students coming from these disadvantage neighborhoods and schools? Yes,
11:02
Speaker 1: so I I call it alternative certification. So I point
11:06
Speaker 1: out the ten out of eleven that the current system
11:10
Speaker 1: isn't working for, and I write in the book, uh,
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Speaker 1: you know, I once posed this question when Tiger Woods
11:16
Speaker 1: was at the top of his game to my students
11:19
Speaker 1: at Columbia. I said, you know, how do you beat
11:21
Speaker 1: Tiger Woods? And my answer was don't play him at golf?
11:25
Speaker 1: And the idea that I uh suggest in the book
11:29
Speaker 1: is something I called alternative certification. And so I'll give
11:33
Speaker 1: you an example Let's say you want to work in
11:36
Speaker 1: the HR department at Microsoft. What I'm suggesting is Microsoft
11:42
Speaker 1: should simply specify which tests, courses or certificates in lieu
11:47
Speaker 1: of a college degree that they would consider when judging
11:51
Speaker 1: applicants for a high paying job in that particular department.
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Speaker 1: So these these things could include a simple literacy asked,
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Speaker 1: an online course certificate program, or even a game based test.
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Speaker 1: UH Embolists, together with Mackenzie, has created game based tests
12:10
Speaker 1: that measured decision making in critical thinking skills. So it
12:13
Speaker 1: doesn't have to be a standard test. There's a lot
12:16
Speaker 1: of different ways you can test for talent. And so
12:19
Speaker 1: what I suggest in the book is that leading companies
12:21
Speaker 1: like Google, Microsoft, Amazon, JP, Morgan, UH, they wouldn't have
12:26
Speaker 1: to create these tests or courses or administered them. What
12:30
Speaker 1: they would do is merely make public a list of
12:33
Speaker 1: which tests, which courses, which certificates would be considered in
12:37
Speaker 1: lieuisver college degree when selecting candidates for specific jobs. What's
12:42
Speaker 1: the hire for passing these things? That's when the whole
12:45
Speaker 1: ecosystem was developed. Sorry, well I was going to ask,
12:48
Speaker 1: what's the response been like from corporate America? Well, you know,
12:51
Speaker 1: the book just came out. So I'm very hopeful, and
12:53
Speaker 1: one of the reasons I'm talking on your show, Barry,
12:55
Speaker 1: is to get this idea out there. UH. It's already
12:59
Speaker 1: starting in ways, but the idea behind it is once
13:02
Speaker 1: there's a buyer. In other words, all these big, big
13:06
Speaker 1: companies have to do is make the list public what
13:09
Speaker 1: we will consider in lieu of a college degree, and
13:12
Speaker 1: then UH, the whole ecosystem hopefully will develop of supporting
13:17
Speaker 1: online resources and tutoring services UH would develop to help
13:21
Speaker 1: applicants pass these tests and courses and meet the new
13:24
Speaker 1: demand from these top companies. The great thing about this
13:28
Speaker 1: is none of it would require government involvement and the
13:31
Speaker 1: cost would be much much lower than the current systems. Now,
13:34
Speaker 1: you might ask, what do you do for students with
13:36
Speaker 1: disadvantaged backgrounds from disdvan advantaged backgrounds, and I would assume
13:42
Speaker 1: there would also developed as long as there was this
13:44
Speaker 1: demand at the end of the day for passing these courses.
13:47
Speaker 1: Is that there would also be prerequisite courses that would
13:49
Speaker 1: develop as well, whether online or in person, teaching, and
13:54
Speaker 1: supporting resources that would all be rated like Uber drivers
13:57
Speaker 1: and Airbnb rentals. Once again, none of it would require
14:01
Speaker 1: government involvement. They wouldn't be setting standards. Uh, they wouldn't
14:05
Speaker 1: need government funding. Now this is already starting. Google has
14:09
Speaker 1: already created six months certificate courses in a few technical areas,
14:13
Speaker 1: which if you pass, they'll consider your for a job.
14:16
Speaker 1: But I'm suggesting something much simpler, where companies just set
14:19
Speaker 1: standards of which existing tests or new tests that they
14:23
Speaker 1: would look at, our courses or certificates that you could
14:25
Speaker 1: receive that they'll consider. So I think it would really
14:28
Speaker 1: jump start this whole sort of runaround, you know, in
14:32
Speaker 1: other words, don't play him and golf, run around the
14:34
Speaker 1: current system because it's just so unfair. This is what
14:37
Speaker 1: the ten out of eleven could try to pursue without
14:40
Speaker 1: any government assistance. It's not ideal, it's not first choice.
14:44
Speaker 1: Of course, we want great schools and we could keep
14:46
Speaker 1: working at it. But this is something these major corporations
14:49
Speaker 1: can do right now. Set these standards, and then hopefully
14:53
Speaker 1: this whole ecosystem will get going. Quite fascinating. Let's talk
14:59
Speaker 1: a little bit about too big to fail banks. You wrote,
15:04
Speaker 1: quote banks are almost wired to get into trouble unquote. Explain, Well,
15:10
Speaker 1: it's pretty straightforward. You know, money is spongible, So who
15:14
Speaker 1: pays the most of depositors, who lends money to borrowers
15:19
Speaker 1: the cheapest and with the easiest terms is who wins? Uh?
15:25
Speaker 1: The industry is competitive and it's very leveraged, So pretty straightforward.
15:30
Speaker 1: Why thanks are wired to get into trouble? So what
15:35
Speaker 1: can we do to make these banks no longer too
15:37
Speaker 1: big to fail? How do we make them safer for
15:41
Speaker 1: both taxpayers and investors? Well, you know, in two after
15:45
Speaker 1: the two banking crisis, there are plenty of regulations, including
15:49
Speaker 1: dot frank, and it's made the whole system a lot
15:52
Speaker 1: safer than it was. But more regulations have very high costs.
15:57
Speaker 1: There's a lot of repercussions from a lot of regulations.
16:00
Speaker 1: You know, mostly only big banks can handle them. Smaller
16:02
Speaker 1: banks are dropping and closing like flies, and almost no
16:06
Speaker 1: new small bank charters are being applied for because small
16:11
Speaker 1: banks can't afford all these regulations. Also, under the system,
16:15
Speaker 1: banks are penalized for making small business loans. It hits
16:18
Speaker 1: them from the new risk factors. So corporate bank loans
16:22
Speaker 1: under a million dollars dropped by sev two thousand eight,
16:26
Speaker 1: And we know what's happened to new business formation, it's
16:28
Speaker 1: way way down. The other problem is we also have
16:31
Speaker 1: it solved too big to fail. The Mineapolis Feeds still
16:36
Speaker 1: came out with a study saying that it's still two
16:38
Speaker 1: out of three chance there will need another government bail
16:40
Speaker 1: out in the next century. And so we're hurting small
16:45
Speaker 1: businesses and small banks, and we have itself too big
16:49
Speaker 1: to fail with all these regulations. So I write in
16:52
Speaker 1: the book about I tell a story about in the
16:56
Speaker 1: late eighteenth century early nineteenth century, UH, the English used
16:59
Speaker 1: to shift their prisoners to Australia, and in one of
17:04
Speaker 1: the earliest trips about prisoners died along the way, which
17:10
Speaker 1: was horrific. And so how would you solve a problem
17:14
Speaker 1: like that. Well, obviously you could solve it with more
17:17
Speaker 1: regulations covering the medical care for the prisoners and food
17:21
Speaker 1: on board and safety and cleanliness, and put more government
17:25
Speaker 1: monitors on board. There's a lot of things you could do,
17:29
Speaker 1: uh to try to solve that problem. The other thing
17:32
Speaker 1: you could do is to change the incentives from the
17:36
Speaker 1: beginning and say to the ship captains, will pay you
17:42
Speaker 1: for the prisoners to get to Australia alive and well,
17:46
Speaker 1: and will penalize to you for those who don't. Right,
17:49
Speaker 1: So it's setting incentives up from the beginning rather than
17:53
Speaker 1: micromanaging all the regulation. And so I suggest sort of
17:57
Speaker 1: the same thing with banks. You know, and a restaurant fails,
18:01
Speaker 1: the economy doesn't skip a beat. It's not true with banks. Uh,
18:05
Speaker 1: the financial systems too big, it's too intertwined, and and
18:10
Speaker 1: we need to do something right now. We're really the backstop.
18:15
Speaker 1: We do have to bail out the banks if things
18:18
Speaker 1: turn bad, especially the biggest ones. And so one of
18:21
Speaker 1: the clear answers would be, if you know there's less
18:24
Speaker 1: than ten percent equity cushion in the banks. There have
18:26
Speaker 1: been a lot of things in Dot frank that, you know,
18:29
Speaker 1: go to risk controls, types of equity, things of that nature.
18:33
Speaker 1: But I suggest in the book that if we've brought
18:37
Speaker 1: if we set the incentives up correctly up front, so
18:40
Speaker 1: that you have twenty to equity, and what I suggest
18:43
Speaker 1: is a new type of preferred, not not common equity,
18:47
Speaker 1: but to increase that ten percent common equity to twenty
18:50
Speaker 1: or thirty percent using a new type of preferential preferred,
18:54
Speaker 1: where the preferred is deductible for the bank, it's tax
18:59
Speaker 1: free for the holders. So obviously it's helping the banks.
19:04
Speaker 1: But when things go back to the banks, if you
19:06
Speaker 1: now have thirty equity, anything that goes back to the
19:08
Speaker 1: bank's problems is like the restaurant failing. No one really cares.
19:12
Speaker 1: It's an equity holder, and I suggest the incentives are
19:14
Speaker 1: set up that both the board and management are incented
19:18
Speaker 1: by the combined value of the equity, and they preferred
19:24
Speaker 1: as if they're staple together is one security. So we
19:27
Speaker 1: set the incentives up correctly. You still have a leveraged
19:30
Speaker 1: return from the common equity portion, but if there's any problems,
19:35
Speaker 1: it would be covered by the preferred holders. It sounds
19:39
Speaker 1: like we're giving a bonus to the banks to make
19:41
Speaker 1: this deductible for the banks and to make a tax free,
19:45
Speaker 1: But actually we won't have too Big to Fail anymore.
19:48
Speaker 1: Will help plenty of equity, and they'll cover their own.
19:50
Speaker 1: The losses will fall where they should, the incentives will
19:53
Speaker 1: be aligned correctly. From the beginning, it's it's a pretty
19:56
Speaker 1: simple solution to a difficult problem. Right. That would require
20:00
Speaker 1: a little bit of legislation to both create that class
20:04
Speaker 1: have preferred, make it deductible to the bank, and make
20:08
Speaker 1: a tax free to the investors is and essentially you're
20:11
Speaker 1: asking the investing public to step in in place of
20:15
Speaker 1: the taxpayer to make sure banks have a big enough
20:18
Speaker 1: capital cushion. Right, we're already supporting banks for good reason. Right,
20:22
Speaker 1: we already support them so that depositors don't lose their
20:25
Speaker 1: money and we don't have another depression. So this is
20:28
Speaker 1: more up front way of doing it. If we're just
20:30
Speaker 1: a backstop that's going to have to back stup in
20:32
Speaker 1: a crisis, we're there, but it's kind of hidden here.
20:37
Speaker 1: We take care of it up front. Yes, we're giving
20:39
Speaker 1: a benefit just for the preferred but we're very upfront
20:42
Speaker 1: about it. And we then align the incentives exactly how
20:46
Speaker 1: they should be. That share hoopers, whether the preferred to common,
20:49
Speaker 1: will take all the losses, not the government. And this
20:51
Speaker 1: solves too big to fail because even if there's a
20:54
Speaker 1: major crisis and banks um lose their capital, it doesn't
21:01
Speaker 1: wipe them out. If I remember in the book, banks
21:04
Speaker 1: currently a running seven eight of capital reserve? Is that
21:08
Speaker 1: about right? They are? And I go, I go through
21:10
Speaker 1: the map, I mean, you know, with all the different
21:13
Speaker 1: risk controls, and and then there's uh subordinated debt that
21:18
Speaker 1: turns into equity now. But I argue in the book
21:21
Speaker 1: that we're not going to really pull that lever. We're
21:23
Speaker 1: not going to force some big bank to convert its
21:27
Speaker 1: subordinated debt into equity, even though that's one of the
21:29
Speaker 1: options we now have. And and that's because it will
21:34
Speaker 1: cause a crisis of its own. It will cause a cascade.
21:36
Speaker 1: And that's what Neil Cashcarry argues too at the Minneapolis
21:41
Speaker 1: head and I agree with that. So if we make
21:44
Speaker 1: this new type of preferred available, it becomes strictly voluntary
21:50
Speaker 1: for the banks to do it, or are they obligated
21:53
Speaker 1: to change their capital structure to have UM cap it
22:00
Speaker 1: all in reserve with this new type of preferred share class. Right,
22:04
Speaker 1: So if they want to be free of certain regulations
22:08
Speaker 1: that are protective otherwise, they can issue this preferred and
22:13
Speaker 1: therefore take the risk themselves. Otherwise they'd be subject to
22:17
Speaker 1: a lot of restrictions on the type of loans they
22:19
Speaker 1: can make and things of that nature. So, which is
22:21
Speaker 1: stuff we're already doing quite fascinating. Let's talk a little
22:24
Speaker 1: bit about what's going on with young people today investing UM.
22:29
Speaker 1: What do you think of the rise of Robin hood investors.
22:32
Speaker 1: Is this a good thing or is this just board
22:35
Speaker 1: millennials at home without access to sports or socializing. Sorry,
22:41
Speaker 1: I don't think it's a great thing. I think it
22:43
Speaker 1: is good to be exposed to investing for most people,
22:46
Speaker 1: and to be thinking about saving for retirement. But I uh,
22:49
Speaker 1: you know, when we saw on the internet bubble, you know,
22:52
Speaker 1: you know, trade and the other discount brokers, most of
22:55
Speaker 1: those people lost a lot of money. I think you're
22:59
Speaker 1: speculating with out knowing what you're doing is not a
23:01
Speaker 1: great idea. And so you know, I wrote a book
23:04
Speaker 1: called The Big Secret, and I think you've heard me
23:06
Speaker 1: say it's still a big because no one bought that
23:08
Speaker 1: particular book. But it talks about the best performing mutual
23:13
Speaker 1: fund I wrote in two thousand eleven for the decade
23:15
Speaker 1: two thousand or two thousand and ten, and that one
23:17
Speaker 1: was a year when during a decade where the market
23:20
Speaker 1: was flat. Uh, Yet the average investor in that fund
23:22
Speaker 1: managed to lose eleven percent by moving in and out
23:25
Speaker 1: at all the wrong time. And that's because people are emotional.
23:29
Speaker 1: If you don't really understand what you're investing in, you
23:32
Speaker 1: pile in When things are going well, you pile out
23:34
Speaker 1: when they're not going well. When something's working, you put
23:37
Speaker 1: more in. When it's not working, you put less in,
23:40
Speaker 1: and you do you make all the wrong moves, and
23:42
Speaker 1: I think when things turn around for these investors, it'll
23:46
Speaker 1: end up not great. So you've been teaching for a
23:49
Speaker 1: long time, not only lecturing NBA students at Columbia, but
23:53
Speaker 1: you also UH teach a bunch of ninth graders at
23:56
Speaker 1: high school in Harlem. What's the difference between those two
24:01
Speaker 1: students and what do you try and communicate to each group? Sure, well,
24:07
Speaker 1: it's an interesting question. You know. I taught a couple
24:10
Speaker 1: of years of the ninth graders for a semester and
24:14
Speaker 1: I tried to at a very early age, explained to
24:18
Speaker 1: them the concept of compounding, and I actually put on
24:21
Speaker 1: the UH front of their UH little notebooks and a
24:26
Speaker 1: compound interest example where if you start saving an age
24:30
Speaker 1: nineteen and you put in two thousand dollars a year,
24:34
Speaker 1: and you do that for seven years and you're in
24:36
Speaker 1: ten percent on your money and then you never put
24:38
Speaker 1: in another nickel. You just do it for seven years
24:40
Speaker 1: starting at nineteen. The other example is you start at
24:44
Speaker 1: age in say two thousand dollars a year invested at
24:48
Speaker 1: ten percent and save for forty years, meaning put in
24:52
Speaker 1: two thousand dollars a year starting at age for forty years.
24:56
Speaker 1: The the person who started investing at nine teen and
25:00
Speaker 1: only put in seven payments of two thousand ends up
25:03
Speaker 1: earning more money just with seven payments by the time
25:06
Speaker 1: they're sixty five. Then the person who started seven years
25:09
Speaker 1: later in age and put in four meat forty payments.
25:13
Speaker 1: So it just talks about how starting to save and
25:16
Speaker 1: invest early is very important, and so teaching it in
25:19
Speaker 1: ninth grade is important for students to understand that concept.
25:23
Speaker 1: My average NBA students already twenty seven, so of course
25:27
Speaker 1: they had a lot going for them, and so I'm
25:29
Speaker 1: not too worried about them. But it is a huge
25:32
Speaker 1: advantage to start early, and I made that very clear
25:35
Speaker 1: to both sets of students. That's an astonishing data point
25:39
Speaker 1: that a seven year head start beats investing annually for
25:45
Speaker 1: the same amount for thirty years. What do you think
25:48
Speaker 1: of ideas that have been floated by people. The Governor
25:52
Speaker 1: of New Jersey floated the idea of baby bonds that
25:55
Speaker 1: we gift every person born in the United States of
26:00
Speaker 1: five thousand dollars in an account that they can't touch
26:02
Speaker 1: till they're either twenty five or or for college. What
26:06
Speaker 1: are your thoughts on on something like that. Well, I
26:11
Speaker 1: do like, uh that idea. I think it takes advantage
26:14
Speaker 1: of compounding. I don't think it's nearly enough. I mean
26:17
Speaker 1: the statistics retirement savings UH, for most people are are
26:23
Speaker 1: pretty horrific. Nearly half of working age families don't have
26:26
Speaker 1: any retirement savings. UH. The median family between ages thirty
26:32
Speaker 1: two and sixty one have about five thousand dollars in
26:34
Speaker 1: retirement savings. The average working age, low income, Black, Hispanic,
26:39
Speaker 1: or non college graduate have no retirement savings. And here's
26:43
Speaker 1: the terrible statistics. Nine intent families in the top fifth
26:46
Speaker 1: of the income chain have retirement savings. Nine intent in
26:49
Speaker 1: the bottom tip do not. So we need to do something.
26:54
Speaker 1: And if you earned between seven and thirteen dollars a year,
26:57
Speaker 1: or you earned I mean an hour or hand or
27:00
Speaker 1: twelve dollars an hour, which is about hourly workers do.
27:05
Speaker 1: But so security get you about nine thou dollars a year,
27:11
Speaker 1: so you need retirement savings. It's a real, real problem,
27:15
Speaker 1: and we don't have a system that really takes care
27:19
Speaker 1: of that. So you know, what I suggest in the
27:21
Speaker 1: book is that, uh, compound interest is something that we
27:27
Speaker 1: can take advantage of that we don't. We're kind of
27:29
Speaker 1: blowing it as a country. And so right now, so
27:33
Speaker 1: security is really based on what you put in is
27:35
Speaker 1: sort of related to what you get out. And so
27:38
Speaker 1: what I suggest is really putting into SoC Security gets
27:43
Speaker 1: capped at a hundred thirty seven thousand dollars a year,
27:46
Speaker 1: So I don't suggest raising taxes, but I do suggest
27:50
Speaker 1: that high earners keep contributing to their retirement above a
27:56
Speaker 1: hundred thirty seven thousand. They get to keep eight percent
27:59
Speaker 1: of it and then get the tax benefits of saving that.
28:03
Speaker 1: So it goes into like a four or one K account,
28:05
Speaker 1: but the remaining fifteen or that they don't get to keep,
28:09
Speaker 1: that gets taken off the top now gets put into
28:12
Speaker 1: the count. Uh, the accounts of low earners and people
28:15
Speaker 1: just started working so they can take advantage of this
28:18
Speaker 1: compound interest at an early age. They don't have any
28:20
Speaker 1: savings outside of Social Security, and so I suggest a
28:24
Speaker 1: four one K type account for everyone at funded by
28:28
Speaker 1: the higher earners. Yet the higher earners really are getting
28:31
Speaker 1: the tax benefit of being able to put their amount
28:34
Speaker 1: they put in above one thirty seven into their own
28:37
Speaker 1: tax advantage savings. So, uh, it's not really raising taxes,
28:41
Speaker 1: it's giving them advantage, but it's also helping out those
28:44
Speaker 1: who need it the most. So let me make sure
28:46
Speaker 1: I understand this, because this is kind of complicated, but
28:49
Speaker 1: it's really very intriguing. Right now, your KER contributions, your
28:54
Speaker 1: Social Security contributions UM top out at about one thirty
29:00
Speaker 1: of any year. That number creeps up a tiny little
29:02
Speaker 1: bit each year adjusted for inflation. But effectively, if you're
29:06
Speaker 1: Jeff bezoso elon Musk, you top out on January one,
29:10
Speaker 1: you're done paying FIKA for the year. What what you're
29:14
Speaker 1: suggesting is everything above one thirty seven or some percentage
29:19
Speaker 1: above one thirty seven you get to put into a
29:22
Speaker 1: four oh one K like funds over and above what
29:26
Speaker 1: your current limitations are. Eight percent of what you move
29:29
Speaker 1: in goes in as if it's a pre tax investment,
29:32
Speaker 1: so when you take it out on the other end,
29:34
Speaker 1: you're not paying taxes, and twenty of it gets moved
29:38
Speaker 1: into a fund that gets put into individual investors, a
29:43
Speaker 1: similar for oh one K like funds that they manage
29:48
Speaker 1: and you start doing this for pick a year, twenty
29:51
Speaker 1: five year olds and younger. Uh So, in other words,
29:54
Speaker 1: you're planning about something to fix the looming retirement crisis
29:59
Speaker 1: for year olds. Is that a fair assessment. Yeah, so
30:03
Speaker 1: it could start earlier than Whenever you start working and
30:05
Speaker 1: start paying in you get a big supplement. Everyone gets
30:09
Speaker 1: a four oh one take account, which I think everyone
30:12
Speaker 1: should have to take advantage of. Uh compounding, So we
30:16
Speaker 1: go to both young people and low orders, go to both.
30:20
Speaker 1: That's quite fascinating. Let's talk a little bit about something
30:24
Speaker 1: that hasn't gotten much press lately, and that's what we
30:29
Speaker 1: do with immigrants in the United States. What advantages does
30:34
Speaker 1: the country get from a broader and more open immigration policy. Well,
30:40
Speaker 1: that's a great question, and of course immigration is a
30:42
Speaker 1: controversial topic. There's one area that's very clear and we're
30:47
Speaker 1: completely blowing that and it's skilled immigration. According to the
30:51
Speaker 1: Business Roundtable, we come in embarrassingly second to last among
30:55
Speaker 1: developed countries welcoming skilled immigrants. The only country where better
31:00
Speaker 1: at uh at admitting skilled immigrants is Japan, and Japan
31:05
Speaker 1: literally discourages immigration. And not only that, you have to
31:10
Speaker 1: speak Japanese pretty much. You know the United States has
31:13
Speaker 1: a huge advantage. You know, English is the universal language
31:15
Speaker 1: of business and science. Uh, second to last is a
31:18
Speaker 1: really bad spot for US for skilled immiguration. And what's
31:22
Speaker 1: the big deal about that. Well, you know, I disclosed
31:25
Speaker 1: in common sense the book, uh that skilled immigrants are
31:29
Speaker 1: actually in natural resources. We make, if you want to
31:32
Speaker 1: put it that way, half a million to a million
31:34
Speaker 1: dollars on each one of them and today's dollars and
31:36
Speaker 1: for everyone we take in. And what that is is
31:39
Speaker 1: the math of of those immigrants and their kids. That's
31:43
Speaker 1: today's dollars of how much they contribute versus how much
31:47
Speaker 1: they get back from the government. So we make a
31:49
Speaker 1: half a million to a million dollars for each skilled
31:51
Speaker 1: immigrant we take in. We also get close to two
31:54
Speaker 1: jobs for people already here. So for every skilled immigrant
31:58
Speaker 1: we take in, they create two jobs for people already here.
32:02
Speaker 1: So we're not only get a pile of money, we
32:05
Speaker 1: also get two jobs. It's a it's a free gold mine.
32:09
Speaker 1: And I'll tell you why we should be encouraging it.
32:12
Speaker 1: Immigrants have founded of US startups over a billion dollars.
32:18
Speaker 1: They're twice as likely to start a business as natives.
32:21
Speaker 1: As natives are UH they're responsible for a quarter of
32:24
Speaker 1: the productivity growth over the last twenty years, and immigrants
32:28
Speaker 1: are their children have founded two six of the fortune companies,
32:34
Speaker 1: which is pretty amazing. There was a data point in
32:37
Speaker 1: the book that I found astonishing. Microsoft had done an
32:41
Speaker 1: internal study and for each H one B one visa
32:46
Speaker 1: immigrant that they bring to the US to work for
32:49
Speaker 1: them internally at Microsoft, they create four additional jobs. How
32:55
Speaker 1: on earth is that possible? That that just sounds astonishing. Well,
33:00
Speaker 1: you know, if you can get the best and brightest
33:01
Speaker 1: from around the world and hire someone like that, they
33:05
Speaker 1: need support and they create value. And so Bill that
33:09
Speaker 1: was a quote from Bill Gates that they did a
33:12
Speaker 1: study that at Microsoft. I said, across the country, it's
33:17
Speaker 1: two jobs for everyone we take in at Microsoft, I
33:19
Speaker 1: guess it's such a high level that they're taking and
33:22
Speaker 1: they create four jobs. So it's pretty pretty exciting. The
33:25
Speaker 1: only problem is we don't encourage them to come. I said,
33:29
Speaker 1: we came in second to last. Our H one B program,
33:32
Speaker 1: which allows skilled immigrants to come in UH, is broken.
33:36
Speaker 1: It's difficult, it takes a long time, it's expensive, it's
33:40
Speaker 1: very uncertain whether someone can stay as very limited we
33:43
Speaker 1: exceed our cap within about five three times our cap
33:47
Speaker 1: apply within the first five days of eligibility every year,
33:51
Speaker 1: So we're discouraging them from coming in, and we should
33:53
Speaker 1: encourage them. Countries by Canada Australia take anyone who will
33:58
Speaker 1: come who meet the government standard uh of skilled a bility,
34:04
Speaker 1: you know, education and skill, and we don't. We actually
34:08
Speaker 1: actively discourage them, and we actually have a better system
34:11
Speaker 1: than they do. In some There was an article in
34:15
Speaker 1: Wired over the summer that discusses how Toronto has been
34:20
Speaker 1: feasting on tech workers that were frustrated with the U
34:25
Speaker 1: s H one B, visa programs and green card programs
34:28
Speaker 1: in general immigration programs. Are we letting some of our
34:33
Speaker 1: most value creating and productive tech workers escape from America
34:40
Speaker 1: when we should really be much more welcoming and giving
34:44
Speaker 1: them a path to citizenship here? Yeah, I think that's
34:47
Speaker 1: pretty clear. You know, I talked about all the money
34:49
Speaker 1: we would you know, I called it a free goal mine.
34:51
Speaker 1: It's crazy we're throwing it away. I talked about all
34:53
Speaker 1: the money and the jobs we create by taking them in.
34:56
Speaker 1: But we actually have a system that should work even
34:58
Speaker 1: better than kinda our Astralia. In Canada, Australia. They set
35:02
Speaker 1: government standards of who they'll let in, you know what,
35:04
Speaker 1: what kind of skilled labor. But that doesn't mean they're
35:07
Speaker 1: a good fit for a particular open job, or that
35:10
Speaker 1: these people are ambitious. They just are people who meet
35:12
Speaker 1: government standards. The way we work with the H one
35:15
Speaker 1: B is that there is an employer who actually wants
35:17
Speaker 1: to give you a job. So it's very direct. In
35:20
Speaker 1: other words, it's a one to one perfect match. And
35:23
Speaker 1: so I suggest that we use that system that if
35:26
Speaker 1: an employers willing to pay someone sixty or seventy thousand
35:29
Speaker 1: dollars a year, uh, we can take as many of
35:32
Speaker 1: those as we want, as long as that employers willing
35:37
Speaker 1: to pay a tax uh on top of that salary
35:42
Speaker 1: in addition to that salary to the government, so you
35:44
Speaker 1: can take anyone you want. It ends up being cheaper
35:46
Speaker 1: than the current H one B program that's very long.
35:49
Speaker 1: It's much more certain. If you pay tax for five years,
35:53
Speaker 1: you become eligible for a green card. Uh. You know,
35:57
Speaker 1: it's just unbelievable. I mean countries that opportunity and political
36:01
Speaker 1: freeman and safety things we have in spades, they have
36:05
Speaker 1: what's called a brain drain and we should be a
36:08
Speaker 1: brain magnet. We have liberty, we have freedom, we have safety,
36:12
Speaker 1: we have opportunity. So you know, the studies have shown
36:16
Speaker 1: that if you survey, immigrants were first choice second places Germany,
36:21
Speaker 1: and we beat them four to one. So we should
36:25
Speaker 1: take every right person, take all that money, take all
36:28
Speaker 1: those jobs that these skilled immigrants bring in. I think
36:31
Speaker 1: it gets controversial because you know, we have the statue
36:34
Speaker 1: of liberty. It's very important. Uh, bring me your tired,
36:37
Speaker 1: your report. You know what about those secret refuge or
36:40
Speaker 1: better life? So I'm not addressing that with skilled immigrants.
36:44
Speaker 1: But what I can say is this, We're gonna make
36:46
Speaker 1: so many money, so much money from taking you know,
36:49
Speaker 1: a better skilled immigrants program that we can actually afford
36:53
Speaker 1: to take in for each skilled immigrant, h one or
36:58
Speaker 1: two skilled immigrants, we can take eight or two and
37:00
Speaker 1: unskilled immigrants, you know, an afford to take them in.
37:03
Speaker 1: Or we can bring eight or ten of kids who
37:05
Speaker 1: are already here out of childhood poverty. So we can
37:09
Speaker 1: do either one of those things. I don't want to
37:10
Speaker 1: get in an argument which is a better thing to
37:12
Speaker 1: do bring in more skilled immigrants, to give refuge to
37:15
Speaker 1: people who want a better life. Here in our country
37:17
Speaker 1: has been very important to our country, and I think
37:19
Speaker 1: that's important or to help the people already here. I
37:22
Speaker 1: don't want to get into the argument of what we
37:23
Speaker 1: should do with all the free money that we get
37:25
Speaker 1: by bringing in skilled immigrants. All I argued is we
37:27
Speaker 1: should take the free money. What do you do with
37:29
Speaker 1: the searcharge over hiring? What where does that pool of
37:35
Speaker 1: capital go? Does that help the unskilled immigrants? Does that
37:39
Speaker 1: help anytime there's a big pile of cash, people get
37:42
Speaker 1: their eyes on it. What do you do with that money? Yeah,
37:45
Speaker 1: well I would I would put it into job training
37:47
Speaker 1: for the people already here. I would help, Uh, you
37:50
Speaker 1: know employees already here. Obviously, with premium that you'd have
37:54
Speaker 1: to pay for a skilled immigrant, you would hire someone
37:57
Speaker 1: anybody who's here so that you don't have to pay extra.
38:01
Speaker 1: So you're really taking in people that you can't get
38:04
Speaker 1: here already. But there are people who need more training here.
38:08
Speaker 1: That's been a big problem. UH. As we know, UH,
38:13
Speaker 1: education is the answer. Job training is the answer to
38:16
Speaker 1: people who aren't earning enough here, and we can take
38:21
Speaker 1: and put into very good use in that area. That's
38:24
Speaker 1: what I would suggest. How do you deal with some
38:27
Speaker 1: of the structural racism that's built institutionally into the United
38:32
Speaker 1: States that that Wired article I mentioned made reference to
38:37
Speaker 1: a number of programmers and other tech people who were
38:41
Speaker 1: people of color. And this was in both um the
38:45
Speaker 1: Virginia part of the country outside of d C. And
38:48
Speaker 1: outside of San Francisco. They felt that they were harassed
38:53
Speaker 1: by police because they look different, even though both areas
38:57
Speaker 1: are filled with immigrants working in tech. And when the
39:00
Speaker 1: opportunity came to go to Toronto, they jumped on it.
39:04
Speaker 1: How big an issue is this, right, Well, in Toronto
39:08
Speaker 1: they had the chance for citizenship that they didn't have
39:11
Speaker 1: here under our current systems. So that's part of it.
39:14
Speaker 1: And this has been a problem across the world. You know,
39:17
Speaker 1: it's happening in Europe where people who look a little
39:20
Speaker 1: different aren't very well absorbed into the local economies. We
39:25
Speaker 1: are the still the biggest melting pot in the world.
39:28
Speaker 1: So with all our problems, we still have it better
39:31
Speaker 1: than everyone else. Uh, And we can provide that opportunity
39:35
Speaker 1: to immigrants here. They still want to come here. It's
39:37
Speaker 1: still we're still the preference second place. Only a quarter
39:42
Speaker 1: of the people want to go to there's a hundred
39:44
Speaker 1: forty seven million skilled immigrants who want to come here. So, yes,
39:50
Speaker 1: there are problems. I think we have less than many
39:52
Speaker 1: other countries, particularly in Europe, and I think we're bigger
39:55
Speaker 1: melting pot than any other country in the world. So
39:59
Speaker 1: I I acknowledge the issues. I'm not going to argue
40:03
Speaker 1: with them. I'm saying we're in comparison, we're still pretty
40:07
Speaker 1: good shape. We're we're still welcoming in general. Let's pivot
40:11
Speaker 1: to your bread and butter, value investing. You famously gave
40:15
Speaker 1: away the magic formula, which has a wonderful long term
40:19
Speaker 1: track record. Um, but as we've seen over the past
40:22
Speaker 1: five years, value investing has struggled. What's going on in
40:27
Speaker 1: in value land? Well, you know, I gave a speech,
40:31
Speaker 1: uh you know in the last year called his value
40:34
Speaker 1: investing debt and my answer was yes, no, maybe, and
40:37
Speaker 1: I don't care. And the reason for that is it
40:40
Speaker 1: really depends on how you define value. If you define
40:44
Speaker 1: it like Russell or morning Star, where's low price book,
40:48
Speaker 1: low price sales investing, it's had a tough time and
40:51
Speaker 1: in extraordinary time last five years, growth the way they
40:55
Speaker 1: define it at morning Star Russell has outperformed value by
40:59
Speaker 1: eleven percent per year the last three years, at seventeen
41:03
Speaker 1: percent per year growth outperforming value the last twelve months.
41:06
Speaker 1: It's about these are phenomenal numbers. These are numbers bigger
41:10
Speaker 1: than during the five years before the top of the
41:13
Speaker 1: Internet pool. These are slightly bigger, slightly bigger to discrepancy
41:18
Speaker 1: between growth and value. So your question is is very
41:22
Speaker 1: good if you're define value like we do, which is
41:26
Speaker 1: figure out what a business is worth and pay a
41:28
Speaker 1: lot less. That's what I define as value investing. And
41:32
Speaker 1: you know Ben Graha would say leave a large margin
41:34
Speaker 1: of safety. Uh, then that's never really going to go
41:37
Speaker 1: out of style. Uh. We we look at companies like
41:41
Speaker 1: we're private equity firm, No private equity firm, vis a
41:44
Speaker 1: business because it's a low price book or low price sales.
41:46
Speaker 1: They're really looking at cash flows. Okay, So while in
41:50
Speaker 1: a period like this where anything that's somewhat out of favor, Uh,
41:54
Speaker 1: even though it's not low price book, low price sales,
41:57
Speaker 1: they rhyme together. And if people are willing to pay
41:59
Speaker 1: growth at a price, then that's not going to be
42:01
Speaker 1: a good theory for any style of value investing. But
42:05
Speaker 1: if either question is value investing dead or is it
42:08
Speaker 1: going to continue? It comes down to how you define it,
42:11
Speaker 1: and people will always come back to valuation. It's based
42:14
Speaker 1: on cash flows and how much those cash flows are
42:16
Speaker 1: gonna grow over time. As Buffet would always say, growth
42:20
Speaker 1: and value were tied at the hip. They're part of
42:23
Speaker 1: the same equation figuring out value. So once again we're
42:27
Speaker 1: talking about definitions. So one of the interesting, um I
42:32
Speaker 1: don't want to call it post mortems, but analyzes on
42:35
Speaker 1: why growth has been doing so well relative to value
42:38
Speaker 1: over the past ten years is that in an era
42:42
Speaker 1: of low inflation and very low rates capital intensive industries
42:48
Speaker 1: like tech and growth, it's a very inexpensive input to
42:52
Speaker 1: them versus high inflation or higher rate regimes, value is
42:59
Speaker 1: present entered an opportunity to shine because it apparently needs
43:03
Speaker 1: less capital. What what are your thoughts on those sort
43:06
Speaker 1: of analyzes of value versus growth these days? Right, Well,
43:11
Speaker 1: that's a great question. And so if you're talking about
43:13
Speaker 1: low price book investing, of course it's it's very relevant.
43:16
Speaker 1: If you're talking about cast flow oriented investing, uh, it
43:19
Speaker 1: gets a little bit more nuanced. So let me describe
43:24
Speaker 1: it this way. For many many years before the last
43:27
Speaker 1: decade or so stoff that were low price book low
43:30
Speaker 1: price sales tended to have perform the market for periodittivetly
43:34
Speaker 1: forty years. And what that meant is that if you're
43:38
Speaker 1: buying a company close to its book value, me you
43:40
Speaker 1: aren't giving much of a premium to the value of
43:43
Speaker 1: the business underlying that purchase. Then if you want a
43:48
Speaker 1: bucket a company selling at low price book, you were
43:50
Speaker 1: tending to get more than your fair share of companies
43:53
Speaker 1: that were out of favor. So it correlated well with
43:57
Speaker 1: more than your fair share of companies that were out
43:58
Speaker 1: of favor, and maybe two out of favor, and so
44:00
Speaker 1: you could get an access return. Uh same way as
44:03
Speaker 1: momentum has worked for thirty forty years, not just in
44:06
Speaker 1: this country but across the globe. But let's say it
44:09
Speaker 1: didn't work for the next two years. It could be
44:12
Speaker 1: that it's just cyclically out of favor. It works over
44:14
Speaker 1: the long term, you just have to be patient. Or
44:16
Speaker 1: it could be momentum doesn't work over the next two
44:18
Speaker 1: years because the trade has become crowded and it's degraded,
44:22
Speaker 1: and that's why it didn't work two years from now.
44:24
Speaker 1: I wouldn't know the answer if it is momentum just
44:27
Speaker 1: cyclically out of favor, or is the trade now because
44:30
Speaker 1: it's not so hard to figure out if stock used
44:31
Speaker 1: to be down here and now it's up here. Has
44:33
Speaker 1: it become crowded and degraded because everyone knows about it
44:36
Speaker 1: two years from now, I wouldn't know the answer. So
44:39
Speaker 1: the way I'd answer your question is this low price book,
44:42
Speaker 1: low price sales, momentum or all things that in the
44:45
Speaker 1: past had correlated with good returns. We really look for
44:49
Speaker 1: causation and since stocks or ownership shares of business and
44:52
Speaker 1: we're valuing them just like a private equity investor would, okay,
44:56
Speaker 1: and that's based on past flows, you know, or the
44:59
Speaker 1: intention those earning money, they're not in earning money. Those
45:02
Speaker 1: are questions that translated to cash flow and how much
45:05
Speaker 1: my paying for that cash flow and how much my
45:06
Speaker 1: paying for that growth. And so you know, what we're
45:10
Speaker 1: looking for is valuation of a business, taking all those
45:12
Speaker 1: things into account and trying to buy that at a discount.
45:16
Speaker 1: And it's possible the market doesn't recognize that. And you know,
45:20
Speaker 1: if you look at the last year, if you bought
45:22
Speaker 1: every company that lost money in two thousand two, twenties
45:27
Speaker 1: is a little messed up because of COVID in the
45:30
Speaker 1: second quarter had weird earning. So let's just look at
45:33
Speaker 1: the companies that lost money in two thousand nineteen. If
45:36
Speaker 1: you bought every company that lost money in two thousand
45:39
Speaker 1: nineteen that had a market cap over a billion dollars
45:41
Speaker 1: and so they're about two d and sixty one of those,
45:43
Speaker 1: and you bought every single one of those companies, you'd
45:45
Speaker 1: be up sixty so far this year. Okay, So you
45:50
Speaker 1: know in that kind of market that's kind of fronthy
45:53
Speaker 1: at that end where people are going to say, hey,
45:55
Speaker 1: this company is gonna be the next Google, Microsoft or Amazon.
45:59
Speaker 1: I don't think the office in the Google, Amazon and Amazon.
46:02
Speaker 1: Those are some of the best businesses we've ever seen
46:04
Speaker 1: in our lifetime. Uh to a large extent. They they
46:09
Speaker 1: don't quibble with their valuations. I actually we own a
46:11
Speaker 1: big chunk of those companies. We think they're great businesses.
46:15
Speaker 1: But there aren't hundreds of companies with that right with them.
46:18
Speaker 1: So it's really not looking at indexes or how do
46:21
Speaker 1: we classify its value of growth. It's really looking stop
46:24
Speaker 1: by stop valuing them, trying to buy a discountant and
46:27
Speaker 1: that's causation. And so that causation might not be popular
46:32
Speaker 1: in the next year or two, but I'm not going
46:34
Speaker 1: to stop doing that. That's what stops on their ownership
46:36
Speaker 1: shares of businesses. So that's the best way I can
46:38
Speaker 1: answer your question. We're looking for causation, not correlation. We're
46:42
Speaker 1: not looking for that low press book, low price sales
46:44
Speaker 1: momentum of correlated No private equity firm buys that. If
46:47
Speaker 1: I came to you and said, hey, listen, I have
46:50
Speaker 1: this real estate strategy. I'm just going to buy all
46:52
Speaker 1: the houses that were up the most in the last
46:53
Speaker 1: three months, you kind of look at me like I
46:56
Speaker 1: was nuts. And so although it's core it with good
47:00
Speaker 1: returns in the past, that's not what I would continue
47:02
Speaker 1: doing even though it's correlated. I'm looking for causation. That's
47:05
Speaker 1: the way I can put it. So let me throw
47:07
Speaker 1: a correlation causation curveball at you. I have seen a
47:11
Speaker 1: number of studies over the years that point out that
47:15
Speaker 1: relative to their peers that don't do big stock buy backs,
47:19
Speaker 1: the companies doing share buy backs tend to outperform. Is
47:24
Speaker 1: that a correlation issue? Hey, they have all the extra
47:27
Speaker 1: cash and therefore they're good companies to begin with, so
47:30
Speaker 1: they could do buy backs, or there is some causal
47:32
Speaker 1: relationship between reducing the outstanding share account and that make
47:37
Speaker 1: sure earnings appear better. What is the advantage or not
47:42
Speaker 1: of borrowing cheap money to buy shares back? Right, Well,
47:46
Speaker 1: what you're saying is true, and I haven't looked at
47:48
Speaker 1: the studies. But if what you're saying is true that
47:51
Speaker 1: buy back stock has correlated with good returns in the past,
47:54
Speaker 1: I would call that a correlation. Causation has to do
47:58
Speaker 1: with smart managements who only buy back stock when it's
48:02
Speaker 1: selling it a discount to what they think it's worth,
48:05
Speaker 1: and they're right. So in other words, there's nothing inherently
48:07
Speaker 1: good or bad with buy backs. Some are smart when
48:11
Speaker 1: you're buying it below with the business is worth, and
48:14
Speaker 1: some are not so smart when you're let's say, borrowing
48:17
Speaker 1: money to overpay for your own stock. And so both
48:20
Speaker 1: of those things are true, and I wouldn't want to
48:21
Speaker 1: look at anything that's happened in the past and say, oh,
48:24
Speaker 1: it's correlated with this or that. I would look at
48:26
Speaker 1: stock by stock and see if their buy backs were
48:29
Speaker 1: made a good prices relative to my assessment of value
48:32
Speaker 1: or where they were made at two high prices with
48:34
Speaker 1: borrowed money, and so they're totally different things. So I
48:37
Speaker 1: wouldn't put any weight into any study that just looked
48:40
Speaker 1: at generically companies that buy stops back. There's nothing inherently
48:44
Speaker 1: good or bad about it. It depends what price they pay.
48:47
Speaker 1: Quite interesting. We've noticed the tendency amongst some of the
48:50
Speaker 1: companies you've referenced, like Google or Microsoft or Amazon or
48:56
Speaker 1: what have you, that it's become less of a competitive
49:01
Speaker 1: group of firms finding it out for a client's our customer,
49:06
Speaker 1: and more of a winner take all situation. What are
49:09
Speaker 1: your thoughts on those sort of winners and losers what
49:13
Speaker 1: Buffett describes as companies with impenetrable motes. Yeah, I mean
49:18
Speaker 1: we own a lot of those businesses, you know. Uh,
49:22
Speaker 1: we have a uh fund that looks you know, buys
49:26
Speaker 1: the SMP five hundred, all five hundred stocks in the
49:29
Speaker 1: SNP five hundred, but overweights companies that we think are
49:34
Speaker 1: cheap and underweights those. So it owns all five hundred
49:37
Speaker 1: but starts with the SMP index, which is market CAB weighted,
49:41
Speaker 1: and then overweights companies that we think are cheap and
49:44
Speaker 1: underweights those that we think are expensive by a little bit,
49:49
Speaker 1: so that doesn't have too much tracking errors, you know,
49:52
Speaker 1: sort of an index tilt. And we have overweighted almost
49:55
Speaker 1: all those companies that you're describing. They are some of
49:58
Speaker 1: the best business says in the history that we've ever seen.
50:03
Speaker 1: We haven't seen anything like this before the power, and
50:07
Speaker 1: I think the Internet brings this power to these businesses.
50:11
Speaker 1: And these are moats that are very tough to be
50:14
Speaker 1: and so what you're suggesting is true. It is true.
50:17
Speaker 1: These are great businesses. They are dominating. It's very hard
50:22
Speaker 1: to break into them. And so I don't actually have
50:25
Speaker 1: a solution for should we break them up? Should we
50:28
Speaker 1: not break them up? As an investor, I'm investing in them.
50:31
Speaker 1: You want to be on the other side of the moat.
50:33
Speaker 1: In other words, Right, if you really look at the
50:36
Speaker 1: cash flows and the stability of the cash flows and
50:39
Speaker 1: the growth prospects for the cash flows, these businesses are
50:43
Speaker 1: priced reasonably or cheaply, depending on which one. So that's
50:47
Speaker 1: not where the froth of the market is. The froth
50:50
Speaker 1: in the market is in the hundreds of companies that
50:52
Speaker 1: I was talking about before. That people will think will
50:55
Speaker 1: rhyme with the next Amazon, Google and Microsoft, and they're
50:58
Speaker 1: just can't be hundreds of company that do that. So
51:01
Speaker 1: I think that's where they come up. It's will be.
51:03
Speaker 1: And so when you talked about the difficulty of value investing,
51:06
Speaker 1: that's fun that just overweights what we think is cheap
51:09
Speaker 1: according to our definition of value, and underweights has beaten
51:12
Speaker 1: the market. So even in a very tough period for value,
51:15
Speaker 1: it's not like the principles don't work. They do work.
51:18
Speaker 1: But when you go long, short and short some of
51:20
Speaker 1: these names that are losing money or trading in hundreds
51:22
Speaker 1: of times that people think will be the next Amazon
51:24
Speaker 1: and Google, those I think are writing at very high
51:27
Speaker 1: prices and will have their come up, and so at
51:29
Speaker 1: least I hope so. And that's that's where I see
51:31
Speaker 1: the problem. So you deal with you manage money professionally,
51:34
Speaker 1: you deal with allocators and others. You're defining value in
51:40
Speaker 1: a way that's somewhat different than the way many value investors,
51:45
Speaker 1: many less successful value investors, have done. So what do
51:49
Speaker 1: you say to those people who are ready to throw
51:51
Speaker 1: in the towel on value and think now is the
51:55
Speaker 1: time to jump into growth? Well, look, I don't buy,
51:58
Speaker 1: as I said, the traditional definitions of value and growth.
52:04
Speaker 1: The reason that we overlook with value some ofttimes, it's
52:07
Speaker 1: because we're certainly not growth at any price, you know,
52:11
Speaker 1: throw away the the rule book and just buy growth
52:13
Speaker 1: at any price. So sometimes we correlate closely with company
52:19
Speaker 1: other companies that are out of favor. Uh. And and
52:22
Speaker 1: so those even Rustle and morning Star, will put us
52:24
Speaker 1: in the the either the blend category or the value category.
52:29
Speaker 1: That's usually where we are. We're certainly not quoth at
52:31
Speaker 1: any price. But I do think, uh, if you're asking
52:35
Speaker 1: me whether I think the traditional definition of value will
52:37
Speaker 1: come back at some point, yes, I do. I think
52:41
Speaker 1: I think it's gone to an extreme at this point.
52:43
Speaker 1: I think it will come back. I don't really care
52:45
Speaker 1: if it does or not, because it's not our definition,
52:47
Speaker 1: but I do think it will come back. I think
52:49
Speaker 1: you should use a lot of managers allocators view traditional
52:56
Speaker 1: value as an asset class, meaning, hey, I should have
52:58
Speaker 1: some exposure here. It'sig and acts differently than the market.
53:02
Speaker 1: The returns and at some point they'll have their day
53:05
Speaker 1: in the sun. And so I think people will continue
53:08
Speaker 1: to allocate there, but in a limited a more limited
53:12
Speaker 1: way because people chase what works, and it's clearly not
53:15
Speaker 1: been working traditional value. So imagine us five or ten
53:20
Speaker 1: years off in the future. If I were to ask you, hey,
53:23
Speaker 1: what was the one indicator, what was the one data
53:27
Speaker 1: point that was a signifier that value had come back?
53:32
Speaker 1: What particular data point or variable might that be. That's
53:37
Speaker 1: a great question that I don't have a great answer for,
53:40
Speaker 1: mostly because of what I said about the definition of value.
53:44
Speaker 1: Uh So I guess what I would be looking for
53:47
Speaker 1: is companies that borrow a lot of money and lose money,
53:51
Speaker 1: don't have and and aren't the next Google in Amazon.
53:54
Speaker 1: There'll be some winners in that group, but most of
53:57
Speaker 1: them will have their come up. It's where a veg
54:00
Speaker 1: full you have to earn money. That's where I think
54:02
Speaker 1: if some of those companies have their come up, and
54:05
Speaker 1: where as I said the money losers were so far
54:08
Speaker 1: this year, if those companies, a bunch of those companies
54:11
Speaker 1: have their come up, and so I would say that,
54:13
Speaker 1: you know, there's a chance for relative performance on companies
54:18
Speaker 1: that aren't like those, But leverage can answer it soon, right,
54:23
Speaker 1: So leverage low low profitable companies. Some people would call
54:26
Speaker 1: that low quality versus high qualities at a ratio worth considering.
54:31
Speaker 1: You know, I hate making generalizations. I'm not trying to
54:35
Speaker 1: avoid your questions, but we really know, and I'm I'm
54:38
Speaker 1: trying to pin you down with a really general that
54:41
Speaker 1: wards looking a future forecast. A lot of people ask
54:44
Speaker 1: that question. It's a reasonable question. I just don't have
54:47
Speaker 1: a great answer because we're looking at things stock by stock,
54:50
Speaker 1: and very hard to make generalizations about that, especially as
54:54
Speaker 1: I keep saying, we have different definitions. So for the record,
54:57
Speaker 1: let's get your best definition of the sort of value
55:01
Speaker 1: companies that you think have the best risk adjusted growth potential.
55:06
Speaker 1: What are the data points that you're looking at today,
55:09
Speaker 1: Not for a specific name, but you know, I'm giving
55:12
Speaker 1: you an opportunity to restate the magic formula. Right, So
55:17
Speaker 1: what I would say is, right now, the pre tax
55:21
Speaker 1: cash flow yield of the SNP five is about four percent,
55:25
Speaker 1: little under four percent. So there are companies that have
55:28
Speaker 1: less than a four percent, you know, but much higher
55:31
Speaker 1: growth rate than the SMP in general. And there are
55:35
Speaker 1: companies that have a much higher yield you know, five
55:38
Speaker 1: or six or seven percent, that have at least as good,
55:41
Speaker 1: if not better fundamentals and growth rate than the SMP
55:45
Speaker 1: five DRED. So both of those are relative values. There
55:49
Speaker 1: aren't a lot of companies out there that are super
55:51
Speaker 1: cheap right now. If you look historically, things are expensive.
55:55
Speaker 1: Obviously that has something to do with interest rates being
55:58
Speaker 1: lower than normal. It has something to do with the
56:01
Speaker 1: alternatives not being there for diversification and so stocks being
56:08
Speaker 1: one of the only games in town. So it certainly
56:11
Speaker 1: has something to do with that. And if you told
56:13
Speaker 1: me that rates would stay permanently low, which I just
56:16
Speaker 1: don't know, then on an absolute basis, we could make
56:20
Speaker 1: some nice money from here. Otherwise I'm in the lucky
56:24
Speaker 1: position of people give me money and say I want
56:27
Speaker 1: to put it in the stock market. What's the smartest
56:30
Speaker 1: way to do that? And so what we're sticking to
56:32
Speaker 1: our companies that maybe yield a little less than the
56:36
Speaker 1: S and T, but have much better growth prospects, much
56:39
Speaker 1: more secure earnings, stream great franchises, so we're willing to
56:43
Speaker 1: buy those. We're also willing to buy companies that we
56:46
Speaker 1: can get it much higher free cash flow yields than
56:50
Speaker 1: the market, that have at least as good growth, if
56:53
Speaker 1: not better, and better operating fundamentals. So both of those
56:58
Speaker 1: are areas that we look at and that's how we
57:00
Speaker 1: would define at least relative value right now. And I
57:03
Speaker 1: think they could provide good value with great to stay
57:05
Speaker 1: the slow sounds good to me. I know we only
57:08
Speaker 1: have you for a few more minutes, so let me
57:11
Speaker 1: jump to my favorite questions we asked all of our
57:14
Speaker 1: guests in our speed round, and let's start with, uh,
57:18
Speaker 1: what are you streaming these days? Give us your favorite Netflix,
57:21
Speaker 1: Amazon Prime, or or whatever podcast you might be listening to. Well,
57:25
Speaker 1: the two I've been watching lately. One is The Mindy
57:28
Speaker 1: Project because it's funny and we can all use that now,
57:31
Speaker 1: and the other is The Americans because it's just great drama.
57:36
Speaker 1: So I guess a lot of people are streaming during COVID,
57:40
Speaker 1: and you know it's been a horrible thing for so
57:42
Speaker 1: many people. But those are my two suggestions there. I'm
57:46
Speaker 1: gonna put those both on my list. Tell us about
57:48
Speaker 1: your early mentors, who who guided your career, who affected
57:52
Speaker 1: the direction you moved professionally? Well, you know, I have
57:56
Speaker 1: to start with my dad. He was a businessman. He
57:59
Speaker 1: was a shumanufact actuer, and I learned ethics and actually
58:02
Speaker 1: how business works on a day to day basis at
58:05
Speaker 1: the dinner table he always shared with us. I got
58:07
Speaker 1: to work with him first a couple of summers, and uh,
58:12
Speaker 1: you know, someone I truly admire. He's still with us,
58:15
Speaker 1: and you know, I love him a lot, a great mentor.
58:19
Speaker 1: And then there's of course Graham and Buffett. You know,
58:22
Speaker 1: I went to Wharton, I was learning about efficient markets.
58:25
Speaker 1: It didn't make much sense to me. I read an
58:26
Speaker 1: article about Ben Graham and then started reading everything that
58:29
Speaker 1: he wrote and everything about him. And then of course
58:33
Speaker 1: he mentored Warren Buffett, who made that little twist buying
58:36
Speaker 1: your good business chief that made him one of the
58:38
Speaker 1: richest people in the world. And both of those people
58:42
Speaker 1: shared what they learned with others. And it's one of
58:45
Speaker 1: the reasons I write, and one of the reasons I
58:47
Speaker 1: teach is because of their example. And so they've been
58:51
Speaker 1: great early mentors for me. Let's talk about books. Tell
58:55
Speaker 1: us some of your favorite books and what are you
58:57
Speaker 1: reading currently? Well to most recent books I read, one
59:01
Speaker 1: was called The Splendid and the Vile by Eric Larson.
59:05
Speaker 1: It's about Churchill's first year in the office, which, of course,
59:10
Speaker 1: when things everything was going wrong, they put him in
59:13
Speaker 1: office days before it looked like England was going to fall,
59:17
Speaker 1: So how he handled that was really amazing to read
59:20
Speaker 1: and great, great, great book. I love anything about Benjamin Franklin.
59:25
Speaker 1: So I just read the latest thing from Gordon Wood,
59:28
Speaker 1: the Americanization of Ben Franklin. So I enjoyed that very much.
59:32
Speaker 1: And if you haven't read much about Ben Franklin, that's
59:35
Speaker 1: what I would suggest. And then I read a book
59:38
Speaker 1: called Chasing My Cure by a doctor David Fagenbaum, who
59:42
Speaker 1: actually cured himself of a orphan disease that no one
59:48
Speaker 1: had lived from before. And he was in medical school
59:50
Speaker 1: when he was diagnosed with this disease. They didn't know
59:53
Speaker 1: what was wrong with him, and it was going to
59:55
Speaker 1: be fatal in a few years. And the books called
59:58
Speaker 1: Chasing My Cure, and it show is how he actually
1:00:01
Speaker 1: cured himself and lots of other people that have this disease,
1:00:05
Speaker 1: and it was fascinating. And now he's attacking COVID in
1:00:09
Speaker 1: the same way. He's looking for existing drugs that may
1:00:13
Speaker 1: act well on something that doesn't have a drug of
1:00:16
Speaker 1: its own, and and so he's been working on that
1:00:20
Speaker 1: and there was a very inspiring book. So that's called
1:00:22
Speaker 1: chasing my cure and believe it or not, it's a
1:00:25
Speaker 1: page turner. Sounds fascinating. What sort of advice would you
1:00:29
Speaker 1: give to a recent college graduate who was considering a
1:00:32
Speaker 1: career in asset management. Well, I don't want to be cliche,
1:00:38
Speaker 1: but if you're lucky enough to find something that you're
1:00:43
Speaker 1: passionate about that you can do for a living, that's
1:00:47
Speaker 1: a gift. Buffett called it dancing to work every day.
1:00:52
Speaker 1: And the only people I would suggest that go into
1:00:55
Speaker 1: it are people who feel that way to go in
1:00:58
Speaker 1: to this business just for the money, you know, and
1:01:02
Speaker 1: many aspects of it pay pay well. I don't think
1:01:06
Speaker 1: it's a great choice, but if you really love it,
1:01:09
Speaker 1: you can help a lot of people with their investing,
1:01:12
Speaker 1: and you can do good things with the money that
1:01:15
Speaker 1: you do earn if you're successful at it. So I
1:01:18
Speaker 1: highly recommend it, but really only if you're passing it
1:01:20
Speaker 1: you love the work, so that would be my best advice.
1:01:25
Speaker 1: Pick something else. There's a lot of ways you can
1:01:28
Speaker 1: contribute to society that don't involve asset management, So if
1:01:31
Speaker 1: you love it, I'm all for it. If you're doing
1:01:34
Speaker 1: it for the money, take something else. Our final question,
1:01:37
Speaker 1: what do you know about the world of investing today
1:01:40
Speaker 1: that you wish you knew when you started out thirty
1:01:43
Speaker 1: or so years ago. Sure, well, I got into investing
1:01:47
Speaker 1: reading Ben Graham and and one of the first articles
1:01:51
Speaker 1: I read what Warren Buffet would call cigar butt investing,
1:01:54
Speaker 1: you know, buying net net stocks. And I actually wrote
1:01:56
Speaker 1: an article with some of my classmates, my master's thesis
1:01:59
Speaker 1: that was published in the journal Portfolio Management on net
1:02:02
Speaker 1: nets and they worked pretty well. And you know, as
1:02:06
Speaker 1: I said, Buffett made that little twist that made him
1:02:08
Speaker 1: one of the richest people in the world, even though
1:02:10
Speaker 1: he's a student of Grahams. He said, if I can
1:02:11
Speaker 1: buy a good business cheap even better, quality matters a lot,
1:02:16
Speaker 1: even more now than it did thirty years ago. You
1:02:19
Speaker 1: need to invest in a good business. If you think
1:02:22
Speaker 1: about investing as not trading, but buying companies you're going
1:02:28
Speaker 1: to hold for a long time. Of course, you want
1:02:29
Speaker 1: to be in a good business that has a good
1:02:31
Speaker 1: franchise and grow for a long period of time. Of course,
1:02:34
Speaker 1: there's an art to figuring that out. But to the
1:02:37
Speaker 1: extent that you can concentrate in those areas and also
1:02:40
Speaker 1: look for bargains, you know a combination of things. You
1:02:42
Speaker 1: don't want to overpay for those things, but if you
1:02:44
Speaker 1: can pay a reasonable or a chieved price for those things,
1:02:48
Speaker 1: Concentrating on quality is a key that I learned, probably
1:02:53
Speaker 1: I started about thirty seven or eight years ago. I
1:02:56
Speaker 1: probably learned that about thirty years ago, and I and
1:02:59
Speaker 1: that it's the most important lesson I've learned in that
1:03:01
Speaker 1: period of time. Quite fascinating. Thank you, Joel Greenblatt for
1:03:05
Speaker 1: being so generous with your time. That was Joel Greenblatt.
1:03:08
Speaker 1: He is the author of numerous books, including Common Sense,
1:03:13
Speaker 1: The Investor's Guide to Equality and Opportunity. He is also
1:03:17
Speaker 1: the co founder ce IO of Gotham Asset Management. If
1:03:22
Speaker 1: you enjoyed this conversation, well be sure and check out
1:03:24
Speaker 1: any of our previous three hundred and something prior conversations.
1:03:29
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1:03:35
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1:03:39
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1:03:48
Speaker 1: You can check out my weekly column on Bloomberg dot
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1:03:59
Speaker 1: I would be room is if I did not thank
1:04:01
Speaker 1: the crack staff that helps put these conversations together each week.
1:04:05
Speaker 1: Reggie Bazil is my audio engineer. Atica val Bron is
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Speaker 1: our project manager. Michael Batnick is my head of research.
1:04:13
Speaker 1: Michael Boyle is my producer. I'm Barry Results. You've been
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Speaker 1: listening to Masters of Business on Bloomberg Radio