My recent conversation with Bill Strong was a goldmine of wisdom from a true value investor.
The excerpt you're about to see somehow didn't make it into the final broadcast but it was
just too good to leave in the cutting room floor.
Don't miss the full conversation with Bill Strong only on Real Vision.
Do you feel that, I have long believed that the point of the cycle where we enter this
industry will shape your career, shape your way of thinking, you came into this industry
at the worst time for the industry, perhaps, but to my mind arguably the best time to come
in to learn to be an investor.
Did you feel that at the time, or, We knew that this wasn't going to last therefore the
valuations that we saw we knew this was a good opportunity to get in and so in that
sense it wasn't a bad time, I didn't really suffer and mean the bond experience was moderately
painful but the stock experience wasn't bad I will give you an example of one of the things
that we were able to do in that period of time.
Going back to business school and this kind of ties into the other things I want to touch
on today, going back to business school we had a case in my last semester there on the
public offering of Drivis Corporation, you know Drivis was a mutual fund management company,
so Drivis, Jack Drivis started the company in the early 60's and had had some success
in marketing it and raising money to put in his mutual fund and the company had grown
and as you may know that investment management businesses may be the very best business anytime
because there is no capital, the returns on capital are huge, that's one of the reasons
why I like to be in this business and so this was a great business in it's self but Jack
Drivis has also had the good sense to own a business that, I don't know the process
by which it came, a business that came by duplicating paper copies of things whole ographic,
a company called Zerox and he bought it in 1962 or something so he had this mutual fund
that had Xerox in it and it was doing really well plus he was one of the first people to
start advertising and so this business did extremely well, I don't know the numbers but
the earnings just went way up.
So by 1967 when we were in this speculative space and last phases of the bull market,
Jack Drivis has the good sense to sell his company, he sold the whole thing took it public
took his cheque and went to the beach.
This was a case we had in business school and I came away from that case with the idea
that one of the things that really can give you really good returns is alignment or layer
or whatever to call it, but when you have compounding good things happening with your
business and get a valuation increase on top of all that, so this is one of the things
we kind of look for to see if we can see if we can get several positive trends together
and then exploit the valuation anomalies in the market.
This was a case, and it made a real impression on me because this had been such a success
and I also was interested in the industry and the business so fast forward to 1979 and
I am sitting at the breakfast table one day and I am looking in the newspaper and I read
an advertisement for a new product from Drivis Corporation and it was a mutual fund of money
marketing instruments, Ok well I didn't even know you could do that, you know they had
banker CV's, treasury bills, bankers exempt.
So em, I am looking at this thing and you know the yield is 20%, this is a mutual fund
that is giving you a guaranteed 20% a year.
Wow that's pretty, so I start doing some work on it and sure enough they just invented this
product not long ago and it's taking off for obvious reasons people had their money in
a savings account or whatever this was a way they could put their money to work at 20%
with no risk.
So this product was just booming, plus on top of that this product even if you didn't
get new money in it was compounding it at 20% all by its self.
So it was reasonably small just to start within Drivis but it was growing like crazy.
So Drivis' earning were growing like crazy and the stock hadn't done anything everybody
thought of it as an equity mutual fund that was in the dump so this was a business that
was inside of that and growing, you could easily project that Drivis earnings were going
to grow at 15-20% for the next few years the stock was at 5x earnings it was like this
is amazing this is a great business in the worst of times this was in the worst of times
for financial assets so I remember I went in and pitched it to Rowayne I think it was
too small but anyway he didn't buy it but I thought this was really a great, 5x earnings
this is great, so I bought some for my father and that's the only money that I ran, I bought
him some stock and in the next year or so the stock doubled this is fantastic what a
genuis.
And my father said this is terrific, so the stock doubled and that fine so I sold it 4
years later they got taken over at 5x what I sold it for.
But among many messages in this the idea that even in the worst of time you can make good
money as a value investor by buying things that are good businesses that low valuations
and in this case I happened to get earnings tailwind from the high interest rates but
the idea that you don't want to own stocks and do a bear market I don't think are necessarily
true in general that true but there are things to be done and this goes to the point I want
to make, we find that being very selective in picking specific stocks is a way to make
extra returns that work really well for us for a long period of time.
The beauty, that strategy is so out of fashion now, nobody want to do research nobody wants
to do any work at all really because there is an easy of getting rich and that’s to
index because the index keeps going up.
The other thing about that what Jack Drivis did which I find interesting is there was
a point where he went 100% cash, at just the right time, that was a really interesting
decision, I never knew him or knew why but he seemed but he didn't sell 10% of it he
sold all of it.
And he took the cash and he said I am stepping out.
And that idea to me I find very interesting because there are time when that is a really
sensible thing to do nad yet since then and I don't know if that seemed unusual or seemed
strange or daring at the time i don't know but today that would seem to not be invested
for a guy, you know I look at Sam Zell who is one of my hero’s, you know there’s
a guy who I mean, his record calling turning points is extraordinary and whenever I see
him on the news talking about, I am selling my property or selling my business, selling
this, my ears go up in the air and he is back doing that now.
He is talking about how no one is showing up when they are trying to sell properties.
Did that feel like an unusual thing for someone to do back then or did it not.
I don't know I was still in high school, the case that I read was one back in the 60's
I read it in the 70's and then I found it....When your reading it in that room, did you think...
Yeah I wanted the same thing because it must have been difficult because everybody... that
was a time when everybody was bullish, and stock prices only went up and you had this...
it's nothing like we've had in the last 10 years but it was certainly a very optimistic
period and we've talked a little a bit about this with Adam Smith book about... and talking
to Ned Johnson at Fidelity.
That period of time people were very optimistic and very bullish and so for him to have done
that I think does show he's very different in the industry he's in, a part of.