John, your fund has really outperformed peers
over the last decade, and I wanted to see
if you could maybe distill that success down to
one specific strategy or behavior that you guys do
better than anyone else.
I think what was really, really important
is that we are long-term investors,
so we are always looking out over the horizon
and making sure that we're not getting caught up
in the short-term noise, short-term emotions
of the market, but to be able to say,
"Hey, three to five years from now,
what will these companies look like?"
So during that financial crisis,
we were able to look out over the horizon,
take a long-term perspective, and try not
to let all the fear stymie us during that tough, tough time.
So I wanted to see what your best call
might be over the last 10 years.
Is there any sector call or specific allocation
that you made that you think really contributed
to your success more than other things?
There are a couple sectors that we worked on,
but the one that really comes to mind
is the real estate services companies.
Jones Lang LaSalle, JLL, and CB Richard Ellis, CBRE.
They are both real estate services companies
known for leasing. They have businesses
that do the capital markets business.
They have outsourcing real estate services.
They really are worldwide companies
in terms of real estate servicing,
and those stocks got crushed during the financial crisis.
The CBRE got under $5 a share,
got to be extraordinarily cheap, everyone hated it,
and now it's bumping up toward $50 a share,
so that was a sector that was really great for us.
Another one was the leisure-oriented companies.
Companies like Royal Caribbean
that do a wonderful job of creating cruises
for American consumers primarily,
but they're also global, they're all over the world.
That stock got under $10, and now it's well over $100.
People were very fearful during the crisis
that people wouldn't cruise again.
But in both cases, we looked out over that horizon
and took that long-term perspective
that we believe that real estate will be here forever
and that people would love being able
to get away on a cruise down the road.
Is there anything in particular
that you think you do differently
that kinda sets you apart?
I know that you're traditional value investors,
but the value has not done so well
over the last decade, but you have.
What wrinkle have you added to the value investing playbook
that's allowed you to continue to succeed
where others have failed?
I think on the one hand, the things that we do
that have worked well for us is to follow
Warren Buffett's playbook, where he always says,
"You wanna be greedy when others are fearful."
And so during the financial crisis
when there was maximum pessimism,
we were buying our favored names.
Same thing happened this last December.
Stocks got crushed as we moved up toward Christmas.
We were in there buying our favored stocks
like Mattel and US Silica right before Christmas Day,
and those stocks are up now over 50%,
just through this period, through the end of February
and early March.
So being able to truly buy when there's
that kind of fear in the marketplace
is something that distinguishes us from our peers.
And then finally, we worked hard
to improve our debt analysis.
We think often value-oriented firms,
and we learned this during the financial crisis,
we didn't spend enough time doing our own independent
work on making sure that our balance sheets
were exceedingly strong, and that's something
that I think we've worked really hard on improving,
and it's helped our performance these last 10 years.
So does that help you avoid these so-called value traps,
where a company's cheap just because it's not
that great of a company and maybe it's saddled with debt?
Does that sort of allow you to avoid
that minefield somewhat and pick the cream of the crop?
Well, I think it helps us that if we make a mistake,
if you don't have an overleveraged balance sheet,
you can live through mistakes,
and you can build a business for the long run.
If you don't have the right type of balance sheet,
when things get tough, that business can go away.
You can have a permanent loss of capital,
which we're trying to really protect our customers from,
and we think that waiting to make sure we have
these bulletproof balance sheets
has helped to protect capital for us
during the ups and downs that are inevitable in the market
and the volatility that's gotten greater and greater
than I've ever seen in my career.
There's been so much volatility.
You mentioned the big uptick
in volatility in recent months.
Is there anything strategy-wise
that you're doing to sort of take advantage of that
or to avoid the downside of that?
Well, we're trying to make sure that we,
we're trying to make volatility our friend,
and when we see stocks that are gapping down
on maybe where there's no fundamental change
in the long-term economic outlook of that business,
well, that creates an opportunity,
and I think that's an important thing.
So volatility should be something that helps you.
On the other hand, when stocks spike higher
and maybe get overpriced, that can be an opportunity
for us to trim, take some profits,
and move into cheaper companies.
So volatility doesn't scare us, and we think
that in this environment where everyone's been
in this flight to safety, more and more investment
communities have gotten more and more conservative,
so they're moving money to the safe parts
of the marketplace.
That means the stocks that are left out
can be truly orphaned and be really cheap.
So we're trying to find those cheap orphans
in this type of environment.
So you mentioned that you're looking more
at company credit profiles.
Is there anything else that you're doing
on a stock selection basis to sort of insulate yourself
from the next downturn?
Any other types of strategies that you're using
to protect yourself?
Well, one of the things that Charlie Bobrinskoy,
our head of our investment group,
has helped us work on is that we are big believers
in behavioral finance,
and we're in Chicago, and the University of Chicago's there.
I'm actually vice chairman of the board.
Professor Dick Thaler just won the Nobel Prize
in behavioral finance. They've had some other great
behavioral finance professors there.
So we've been trying to use that to help us,
and one of the things that we think
that helps protect you against behavioral biases
is to have a devil's advocate.
Someone in your investment group
who challenges the perspectives and points of view
of our various reports that we put together
on the companies and industries we follow.
So I think the devil's advocate's been a big improvement,
it's created better dialog, better discussion
for us to challenge each other
in our weekly portfolio management meetings.
And I know that you like to look way beyond
the short term, so perhaps this is too nearsighted
of a question, but I'm gonna ask it anyway.
What do you think the future holds for the bull market,
how much longer can it go?
It sounds like the way your portfolio is built
that you're insulated from any downturn,
but it's still helpful to get an idea
from expert like yourself how long we have to go
in the current cycle?
Well, as you know, you never know quite where we are
in the cycle, and I always tell people
we invest for this long run
so that in case there is a downturn
that's inevitable, we know that downturn will end,
and the stocks will march back up.
We think that if you get too caught up
in the short-term emotions and try
to predict the short term, it's really, really hard to do
and often doesn't lead to good decision making.
But overall, our perspective is right now,
things are steady as she goes.
Market multiples are reasonable, the S&P,
you know, 17 times next year's earnings is reasonable.
If you look at the kind of interest rate environment
we're in, we're historically low rates.
So you put reasonable valuations with low rates,
we think that means there's a lot of,
stocks are not overpriced.
I think that's really a big deal.
Also, there's so much money in private equity,
so much cash sloshing around out there,
if stocks get beaten up and get cheap,
private equity can come in and bid those companies up
and take advantage of those opportunities.
So we're still quite optimistic.
As we talk to our management teams these days,
people are telling us cash flows are strong,
the economy's reasonably strong, and it gives us confidence
that things are gonna chug along here,
and it's a good environment to invest in common stocks.
And one last one.
A recession, people seem to be thinking
that there could be one coming
by the end of this year, end of next year.
Opinions really vary, but it's on the radar.
What's your take on it?
No one knows when the next recession's gonna come.
And we just believe you just gotta look out
over the horizon, and Warren Buffett always talks about
the fact that last century the Dow started at around 66,
ended at over 11,000.
We had two world wars. We had a Great Depression.
We had all kinds of challenges that faced our country.
Our capitalist democracy is the best system ever invented.
So if we do have a recession, which is inevitable,
we'll recover from it, and it'll bounce right back,
and so I think investors shouldn't try to time
the market to move in and out on a short-term basis.
I don't think that's a successful formula.