November 18, 2024 • 32 mins
After the results of the US election were announced, the Russell 2000 index broke out of its 2024 range and approached all-time highs. On this episode of Inside Active, host David Cohne, mutual fund and active management analyst with Bloomberg Intelligence, along with co-host Michael Casper, BI’s sector and small-cap strategist, spoke with David Green, a principal of Hotchkis & Wiley and a portfolio manager on the Small Cap Value (HWSIX) and Value Opportunities (HWAIX) funds. They discussed the firm’s focus on high quality companies at low valuations and its fundamental risk-rating system. They also spoke on the challenges and opportunities for small caps and why mergers and acquisitions may increase under the new administration.
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Speaker 1 (00:11):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges, and philosophies and security selection. I'm David
cone I, lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Michael Casper, sector and small
cap strategist at Bloomberg Intelligence. Mike, thanks for joining me today.
Speaker 2 (00:34):
Thanks dude.
Speaker 1 (00:35):
So you wrote a note last week talking about small
caps in the election, and so you know, I think
our audience would probably love to hear or how the
election has affected small cap stocks.
Speaker 2 (00:47):
Yeah. So from a technical standpoint, I'll go over that first.
The Russell two thousand has broken out of pretty much
it's twenty twenty four range and is approaching all time
highs pretty much. That's the only resistance that we're seeing
in the chart for the Russell two thousands to the upside.
RSI is still a little bit shy of where it
(01:08):
tops out, typically above a seventy handle. We're currently sitting
at about a sixty seven handle on RSI, and mac
D has crusted over the signal line and positive. So everything,
at least from a technical standpoint looking pretty good. We
did a little bit of analysis though on Trump's first
term and how small caps did. Of course, his initial
(01:29):
election back in twenty sixteen caused some hope for the
Rust of two thousand going into his first term about
tax reform and maybe some protectionist policies that could help
a reshoring effort towards small caps. We really saw that
play out from twenty sixteen into early twenty eighteen, where
(01:52):
small caps had a big cycle of outperformance, but from
then on it was a bit more rocky for the
Russell two thousand. Fundamentally, this definitely did show up in
revenue growth numbers. They exceeded the S and P five
hundreds revenue growth for a pretty good stretch from twenty
seventeen to twenty eighteen. So kind of hoping that some
(02:17):
of that comes back, But again a bit of a
bumpy ride at least from when Terra started getting announced onwards,
and of course there was a lot of monetary policy
and other stuff going on at the same time, so
it can't be all attributed to Trump's trade and fiscal policies.
Speaker 1 (02:37):
It'll be interesting to watch, but I think we'll talk
a little bit more about small caps with our guest today,
and with that, I'd like to welcome David Green. David
is a principle of Hotchison Wiley and a portfolio manager
on the small cap value, value Opportunities and international value portfolios. David,
thanks for joining us today.
Speaker 3 (02:57):
It's my pleasure great to be here.
Speaker 1 (03:00):
I'm sure our listeners would love to hear how you
got your start in the investment business.
Speaker 4 (03:06):
Well, I got my start at a very young age.
My dad was a physicist by trade, but he loved
to invest in the stock market. And I grew up
here in Los Angeles, and the market opens about six thirty.
It opens at six thirty in the morning here, and
he would have me sit in front of the TV.
It wasn't there was no CNBC, there was no Internet.
But when he was getting ready for work and before
(03:28):
I went to school, he would say, can you just
watch these tickers and tell me you know what g
is when it comes by, or what Coca cola is
when it comes by.
Speaker 3 (03:36):
And so before I.
Speaker 4 (03:37):
Knew it, I went from not only following the box
scores of all my Major League of the Major League
Baseball teams, but the stock quotes and the newspapers the
next morning, and I got very interested. I then went
on to college at Berkeley and I studied economics, and
then I went first to Potential Investment Corp, then to
Goldman Sachs, and then to Hotchkison Wiley, were I've been
(04:00):
for twenty seven years now, and all but one year
of that time I've been on the public market side.
So I was able to turn what cultures started as
a as a spark from a hobby that my dad
had into my own passion and make.
Speaker 3 (04:14):
A career out of it.
Speaker 1 (04:16):
Great. Well, you know you mentioned Hodgkisson Wiley, and you
know that's what we're going to be talking about today.
Could you kind of give us a brief overview of
the equity investment philosophy of the firm?
Speaker 3 (04:26):
Sure?
Speaker 2 (04:27):
So.
Speaker 4 (04:27):
Hotkinson Wiley was founded by John Hotchkinson George Wiley in
nineteen eighty and they founded on it on a value philosophy.
And if you go back, you know, well before Hotchkinson
Wiley's founding, we have data that goes back actually to
nineteen twenty six, almost one hundred years now. Value has
been a very powerful force of outperformance in the market.
(04:48):
Notwithstanding sort of the recent past but even if you
include that recent past and you still go back, it's
still significantly outperforms. And the idea is that if you
buy a stock with a at a low price, you've
got a built in margin of safety and it's very
hard to predict the long term future. But when investors
are paying very high prices for growth, oftentimes that growth
(05:12):
does not materialize. And if you're buying something at a
low valuation, you have you know, you have better chance
that your downside is supported. And so that was the
philosophy that originally started with the firm, and it's the
DNA which continues to the firm. In the firm to
this day, forty four years later. I would also say,
as the firm has matured, we have spent an inordan
(05:35):
amount of resources and investment on the research process. Today
I I I. If you think about Hotchkisson, while I
always say there's three things to think about. The first
is value, the second is research, and the third is culture.
And each one of those is integral and important to
sort of who we are as a firm. But the
(05:55):
research on the research side, we have twenty three people
focused exclude on research, and this is a firm with
under seventy people in the total firm, and in addition
to those twenty three people, we also have six research associates,
so we've got twenty nine people. Were almost half the
firm focused exclusively on research, and it's really how we
define ourselves. And when you think about a value stock,
(06:21):
you always want to be careful that just because something
is a low price doesn't necessarily make it a value.
You don't want to end up with newspaper stocks that
have a very bleak future. You don't want to end
up with retail stocks that Walmart could be coming into
their neighborhood. So the research side is very important because
(06:41):
it says just because something is trading at a low
price doesn't necessarily make it a value. So we spend
a lot of time thinking about quality. And then the
third thing is culture, and culture is very important and
culture at our firm, and we have a very collegial firm.
As I said, I've been there twenty seven years and
the average employee ten year is very very long. People
(07:01):
rarely leave Hotchkisson whilely. In fact, when we interview new people,
one of the things they always ask is what do
you do that you keep your people so long, and
I think there's a couple of things. First of all,
we spend a lot of time on the front end
making sure we get the right person. But who is
the right person? It's somebody who is very intellectually curious,
(07:21):
wants to spend a lot of time doing research and
thinking about things, but also is willing to work in
a collegial team environment and understanding that if you have
a long term view and you can keep your emotions
at bay and always be respectful, that will lead to
very good investment decisions over long periods of time.
Speaker 3 (07:42):
That's great.
Speaker 1 (07:42):
So I like to dig a little deeper. I know
you're manager on three funds, but I think for the
purpose of this discussion, we'd kind of want to focus
in on more than domestic strategies. So if you could
kind of give us kind of an idea of what
the investment process is for the value opportunities and small
cap value funds.
Speaker 3 (08:01):
Sure.
Speaker 4 (08:02):
So it's interesting, especially when you include small cap, because
there's literally thousands of stocks out there to choose from,
and so oftentimes when we're trying to find a stock,
it will start with screens and we'll be screening on
valuation things like priced to earnings, price to book. I
would say the most important screen in my mind is
something called enterprise value to operating income. Enterprise value being
(08:23):
the market cap plus the debt minus the cash, because
that will take into account sort of the entire balance sheet,
and so we look at screens. In addition, we have
these analysts who are so well versed in their individual
coverage universe that they're constantly meeting with management teams, they're
talking to suppliers, they're talking to competitors. So there's oftentimes
(08:45):
stocks that will come that for some reason, it falls
through the screens at bad data or whatever, and it
will come in through the analysts will say, this is
actually something that I discovered on my own, and so
that will augment stocks that we add to the process.
Once we've identify certain candidates that we think are interesting,
the analyst will be tasked with putting In the short term,
(09:06):
maybe it's under earning because the cycle is against it,
and we expect that cycle to normalize.
Speaker 3 (09:13):
But over five years.
Speaker 4 (09:14):
Time, we think that we can normalize the earning's power.
And also by looking out five years, it's long enough
that we can normalize the cycle, but short enough that
we have pretty good visibility. After five years, it gets
tougher and tougher to project out, so the analysts will
project that earnings for five years. In addition, we have
built a proprietary scoring system called our Fundamental Risk rating system,
(09:35):
and we look at three different things. In our fundamental
risk rating system, we look at the quality of the business,
we look at the balance sheet, and we look at
the governments. And so the analysts will also be tasked
with scoring according to this fundamental risk grading system. And
there's a huge matrix that goes with each one of
those individual components, and they will bring in that sort
(09:56):
of deliverable to one of our six sector teams depending
on where I it's in. And the six sector teams
we have are capital, goods, consumer, healthcare, Energy, financials, and tech.
So wherever it fits in, they'll bring it in and
that sector team will then review peer review the financial
model and the fundamental risk ratings. And I think what's
(10:17):
unique here is the ANALYSI is not coming in with
the recommendation. They're not saying you should buy X Y
and Z stock. They're coming in they're saying, I think
X Y and Z stock is going to earn you
three dollars a share, and my margine assumption is they're
going to do a ten percent ten percent operating margin
and that will be what the debate is around. And
because of the debate is all around sort of the
(10:37):
financial projections and the matrix according to for the fundamental
risk ratings, it doesn't end up being an emotional you
should buy you should not buy. It ends up being
a very almost like intellectual exercise, if you will, with
some very healthy debate. And so once that is done,
and once the earnings power is established by the sector
(10:58):
team and the fundamental risk ratings have been established, it
will then be up to the portfolio manager to decide
where and how much that stock fits into the portfolio.
Speaker 2 (11:07):
So lots of people right now are worried about multiples,
especially in the S and P five hundred. Do you
share that concern or are you more in the camp
that you know maybe the max seven gets add some
productivity gains to lower that multiple. And kind of a
second part of that is how do you think about valuations?
Are there any specific metrics you like to use? I
know you mentioned pees and price to books, but like
(11:28):
to pick your brain on that one.
Speaker 4 (11:30):
Yeah, So when you look at the Magnificent seven, and
first of all, we group and men I think there
each one has its own individual story on individual.
Speaker 3 (11:39):
You know, opportunities and risk.
Speaker 4 (11:42):
But as a group, they clearly are well above the
valuation both of the rest of the market and well
above the valuation that they have been historically. And I
think the biggest risk to that part of the market.
They're clearly excellent companies. But the biggest risk is part
of the market is you are pricing in a lot
(12:03):
of growth for many, many years to come in order
to justify that valuation, which means essentially that that's a
very very long duration asset. And there's two things that
could significantly upend the prospects for the for the valuation.
Speaker 3 (12:18):
There.
Speaker 4 (12:19):
Number one, the growth may not come come to fruition
as people expect. And it's very hard to project out
very long periods of time. I mean, it's hard to imagine.
But in nineteen ninety nine, General Electric was the largest
market cap, and you know, obviously there's you know, Cisco
was one of the largest market caps. So things change,
(12:40):
so trying to project out for long periods of time
is difficult. In addition, if we do get a rise
in interest rates when you have an asset that is
that long duration, arise in interest rates will have a
severe impact on the present value of that earning string.
And so they'reible, They're susceptible from sort of two elements.
(13:01):
And so I think that as a group, and again
I'm speaking as a group, because each individual stock will
have its own risks and merits. But as a group,
I think I would say there is a lot of
risk that in that part of the market. With regard
to the rest of the market, the rest of the
market in general looks like it's trading at about in
line with its historical averages. So it's not which is
(13:26):
very reasonable. And what is notable is not what the
rest of the market is trading it relative to its
own history. It's what the rest of the market is
trading relative to the Magnificent seven.
Speaker 2 (13:40):
And do you think the election results changed the calculus
at all for for small versus large? I kind of
went to my shpiel before about the whole Trump first term,
but interested to get your thoughts.
Speaker 4 (13:51):
Yeah, you know where I really think it's it's going
to make a difference, is I think with regard to
mergers and actuitions, and what you saw recently under the
current administration was a really strict regulatory environment. Companies were
either not allowed to merge or they saw what was
(14:14):
going on and they chose not even to pursue an
acquisition because they think they didn't think it would get
through the regulatory agencies. So I think the fundamental difference
be with the Trump administration is you're going to have
much less regulation or much less onerous regulation with regard
to companies merging. And for small caps that's important because
(14:35):
when you think about how you can get your performance
from small caps, one of the ways is if you
have a stock that has a low valuation, there's always
the opportunity that it can get bought and that a
larger company can come by and say, you know, this
doesn't make any sense. You know, I'm trading at a
fifteen pe and this small cap stocks at an ape.
I could buy it at a twelve pee and give
(14:57):
fifty percent return to the small cap sharehold, and yet
I can still buy something at a discount to my
own stock price. So I think that's where will be
one of the fundamental sort of opportunities for small caps
that they really have not enjoyed in the recent last
four years.
Speaker 1 (15:17):
I kind of want to go back to your process,
and you know, kind of what you were talking about
kind of sounds bottom up to me, and so I
was kind of wondering, if you know, if you do
consider macro themes as part of your evaluation or portfolio management.
Speaker 3 (15:33):
Yeah, it's interesting.
Speaker 4 (15:34):
So we don't start with the macro, but a lot
of times the macro will drive certain themes within the portfolio.
There was a time I remember when in the top
ten we had three trucking stocks. Again, we weren't trying
to buy trucking stocks, but that was what the macro
was causing that part of the market to be out
(15:54):
of favor. You might have a situation where let's say,
like oil, is oil price as well normal. Let's say
it's a forty or fifty dollars a barrel. It's not
there today, but if it were, and people were investors
were pricing oil as if it was going to stay there,
when we would do our normal, which would be our
normal right now assumption for oil as seventy five dollars
(16:15):
a barrel, so at forty we would expect the price
to come up because at forty people wouldn't invest. Likewise,
if oil was one hundred and twenty dollars, we would
expect it to revert down because people would invest and
bring a lot of supply in. So when it's when
the market is somehow divorced from its normal kind of
where equilibrium, that will lead to situations where multiple stocks
(16:39):
can get interesting. And so you might have if everybody
was pricing in energy stocks at forty for a long
period of time, you might have a situation where that
part of the market would be. Energy stocks in general
will be interesting to us. And it's not again that
we would start with the macro, but it's that we
would be led there by what the market is giving us.
Speaker 2 (16:58):
Are there any sectors right now that you find particularly compelling?
Speaker 3 (17:03):
Yeah, there's a couple. It's interesting.
Speaker 4 (17:05):
So, you know, when I talked about the research team
and what we look for, we're looking for as high
quality of business, we're looking for new things. We're looking
for low valuation and high quality business. And it won't
surprise anyone probably that the highest amongst the highest quality
businesses we found are software businesses. Once you have a client,
(17:28):
if it's if it's the right, software which is hard
to get off of you tend to have very low
schurn and very high gross margins. And interestingly enough, there
are a couple of software companies that we own, Workday
and F five, which we think are really interesting because
people are not appreciating the fact that even though they
(17:50):
have very high gross margins, they're operating margins are understating
where they will be in normal and why is that.
That's because they're spending a lot of money on marketing,
so they're selling their product and they're spending a lot
of money on sales, and they're also spending a lot
of money on research and development. Both of those costs
are going through the income statement. They're not being capitalized.
(18:11):
If it was a chemical plant, you'd put it, it
would be capex and it would be capitalized and it
wouldn't go through the income statement until the plant was
up and running.
Speaker 3 (18:18):
It was being depreciated over time.
Speaker 4 (18:20):
So this sort of quirk of accounting, if you will,
has led us to an interesting part of the market,
and I think that that is not totally understood. And
then I would say the other area that is also
interesting to us is there are certain energy stocks which
right now, given how weak oil has been and how
(18:42):
much the rest of the market has gone up, that
are also interesting to us right now.
Speaker 2 (18:46):
And are there any signposts that you're looking for to
signals shift from tech leadership to broaden to the rest
of the stocks.
Speaker 4 (18:54):
So I think if the economy stays strong general economy,
because tech has the leadership in tech has been a
little bit of its own sort of sub sector, driven
in many cases by AI. But if it brought if
the economy stays strong in general, that will allow sort
(19:17):
of the rest of the market to do well. And
then the other thing I would say is if you
want to look at where it could cause the multiples
to compress relative to each other. Again, if you have
interest rates increase, I think that will put pressure on
the Magnificent seven relative to the rest of the market.
Speaker 1 (19:35):
I think I saw in the perspectives for their funds
it did mention ESG, and so I was curious, you know,
if ESG factors into the research at all.
Speaker 4 (19:46):
Yeah, So, you know, when you think about all of
the risks that we're trying to compile, and we have
our fundamental risk rating system, ESG is embedded in our
fundamental risk rating system in the sense that if you
have environmental consc NS. If a company is polluting, that
is a true cost to the business and a true
risk of the business. If a company in social is
(20:08):
not treating its employees properly, that's true that business will
have a difficult time sustaining itself if a company has
bad governance. In fact, interestingly enough, in our fundamental risk
rating system, governance is one of the three pillars that
we actually it has its own pillar, and that's especially
true when you talk about small caps, because governance is
(20:32):
so varied.
Speaker 3 (20:32):
In small caps.
Speaker 4 (20:33):
You have the founder who started the company and took
it public and he's still working, you know, twelve or
fourteen hour days. He's taking a small salary, and he
owns a lot of stock, and he's doing all the
right things. To the founder who's cashed out, he's at
the golf course, his children are running it and he
may they may or may not be competent. But the
(20:55):
point is you've got and he yet he still controls
the board. And you have to do your due diligence
and find out where each company fits in along that
governance spectrum.
Speaker 3 (21:05):
And so we spend a lot of time doing.
Speaker 1 (21:07):
That, I also do want to ask about another type
of risk. You know, the portfolios don't have you know,
a huge amount of stocks in them, so I guess
I was just wondering how you handle concentration risk.
Speaker 3 (21:20):
Yeah, that's a great question.
Speaker 4 (21:22):
And when we think about concentration risk, so what you
want is when you do find a really compelling idea,
you want to put a lot of capital into it.
But what you don't want if you have a lot
of capital in is you do not want to take
a company specific risk when that exists. So there's really
five things that we look at that we have to
(21:44):
get comfortable with when we want to take a concentrated position.
So the first is are we going in the stock
at a significant discount to intrinsic value? Do we have
good valuation? Because good valuation itself will serve as a
margin of safety. So that's the first thing we look at.
The second thing we look at is does the company
have financial strength? Doesn't have a good balance sheet? I mean,
(22:06):
just in the recent past, we've been through a financial crisis,
we've been through a pandemic. Things can happen, and what
you don't want is you might have a really undervalued stock.
You might have a high quality business, but if it
has a bad balance sheet and it comes into a problem,
you still might get diluted significantly at the bottom, in
which case you're going to lose a lot of money.
(22:26):
So we want to make sure that the company has
financial strength. The third is does the company have a
high quality business model? If we turned off our Bloomberg's
for five or ten years and came back and didn't
look at a quote, what would the business look like?
If we can't really figure that out, if we're like, well,
they've got one or two customers and those customers could
(22:49):
possibly go elsewhere, or they don't have the business they're
competing in has ten competitors and right now they're in
fourth place.
Speaker 3 (22:58):
That could be in sixth place, whatever it is.
Speaker 4 (23:00):
If they don't have a high quality business model, then
we don't want to put a lot of capital into
it because we won't have confidence of where they're going
to be. The fourth thing is is management doing the
right thing with the capital? Are they investing wisely? Are
they thinking about a high cost merger or buying somebody
else that will destroy our undervaluation. Are they investing in
(23:24):
a plant that maybe is very risky, or are they
husbanding their capital buying backstock using their capital with it
they're not using to buy backstock to invest wisely?
Speaker 3 (23:36):
Are they doing the right things?
Speaker 4 (23:37):
And then the fifth thing is is there liquidity in
the underlying security? So as we think about small caps,
the further we go down in the market cap, the
less liquidity we usually have buying and selling that stock.
And so if we're going to have a big position
in something, we want to make sure there's sufficient liquidity
for us to get out of it if we change
our mind, if something changes, So you know, it's more
(24:01):
risky to be a big have a big weight in
a small cap which is less liquid than in a
large cap. So those are the things that we look
at when we think about concentration. But if we do
find a situation that really meets all of our criteria,
then it becomes very interesting, and then you want to
have concentration there because then you've you've looked at the
risks and when it's not it's very difficult to find
(24:23):
the things we're looking for, which is a very high
quality company trading at a very low valuation. When you
do find that, and your risks are somewhat mitigated or
mostly mitigated.
Speaker 3 (24:33):
That's when you want to take a big position.
Speaker 2 (24:36):
So as a as a fundamental strategist myself, you know,
I have some fair value models and basically looking out
and putting in economist estimates, you get the rustle somewhere
around twenty three fifty or so, so a little bit
north of today's price. I'm just interested to get what
your thoughts might be on where small caps might be
(24:56):
going into twenty twenty five.
Speaker 4 (24:59):
Yes, so I think it's funny if you look back again.
We've done this where you look back going back to
nineteen twenty six, and we've broken it into quadrants, which
is the value and growth, small and large by far,
by a long ways, including again up until recently, so
(25:20):
it includes all the growth out performance that you've seen recently.
By far, small cap value is the best performing asset class.
Now it hasn't been recently, but I think again that
valuation discount relative to the large cap market the SMP
is quite large today, quite large relative to history, so
(25:42):
we think it's a very interesting place to be. In addition,
small cap companies tend to be focused more on the
domestic markets and the dollar has been very strong, so
that will benefit them as opposed to a lot of
these large cap multinational companies which are selling into Europe
and selling into Japan, and the dollar has weakened, so
those sales coming back into dollars are going to be
(26:04):
more challenged.
Speaker 1 (26:07):
You know, we've kind of talked about where you think about,
you know, how you invest in a stock. What would
need to happen for a company to become a candidate
to sell.
Speaker 4 (26:18):
Yeah, so's there's a few things. The ideal scenario is
you invested in undervalued security, you had a thesis, the
market wasn't recognizing what you saw. The thesis played out,
the stock reached its value or close to its full value,
and you sold it. So the first thing is does
(26:41):
our discount to intrinsic value fall away? And when it does,
that's a sale. The second time we might sell is
we invested in a stock we had a thesis, and
as time has gone on, we've realized that the thesis
we originally bought it under is not coming to fruition.
And basically, either things changed or we were wrong, and
(27:05):
we no longer have confidence that the thesis will play
out as we originally thought. And the third reason we
might sell a stock is maybe maybe the we bought
the stock at ten and still at ten, and maybe
we think that thesis is still intact, but maybe the
rest of the market got cheaper and all of a
sudden we had other opportunities for our capital, and since
(27:25):
capital is limited, we might we may decide to sell
it because something else got more interesting. So those are
usually the reasons that we would sell a stock.
Speaker 2 (27:35):
And what do you think the biggest risks are for
stocks going forward?
Speaker 3 (27:40):
So I would say there's there's two risks.
Speaker 4 (27:47):
One of them is, you know, the the geopolitical situation
throughout the world is tenuous. There's essentially, you know, two
wars going on, and you know, we have been so
insulated over here, but it's we have to recognize that
(28:07):
there is a difficult geopolitical situation that could spiral at
any time.
Speaker 3 (28:11):
Now it's hard to predict it.
Speaker 4 (28:12):
We don't think it will, but it certainly is a risk.
And the second risk is, you know, the government is
running very large deficits and has a very large debt balance,
and so up until now it really has not had
an issue with funding that and with issuing debt. But
if at some point trying to fund that deficit puts
(28:34):
causes interest rates to go up because the government is
borrowing so much. I think that would be the other
thing that would put a big risk factor into stocks.
Speaker 2 (28:42):
Okay, and do you have any major takeaways from the
third quarter earning season?
Speaker 3 (28:49):
Yeah, it was interesting.
Speaker 4 (28:50):
It was an I would call this one of the
most mixed earning seasons I've seen in a while. It
was so interesting. We had companies report some up ten percent,
depth some down ten percent, and there were I would say,
you know, like we have some chemical companies that were
more challenged, which are really tied to the economy, and
(29:11):
so I would say that that the sort of the
depth of strength of the economy was somewhat challenged. But
then we had other pockets where that was there was
contradictory signals on that. So I would say this was
probably one of the more mixed earning seasons that I've
seen in a long time.
Speaker 1 (29:27):
Well, I actually just have one more question before we
let you go. You know, I think I know I
do it. I'm sure Mike does, and I believe our
audience would love to hear what your favorite investment investment
books are yeah.
Speaker 4 (29:42):
So when I started out in the business, and I
think somebody must have given me this recommendation, but it
was one of the best recommendations I had.
Speaker 3 (29:50):
Again, it was before the internet. They said, go.
Speaker 4 (29:56):
Call up Berkshire Hathaway and see if they'll send you
all of their old annual reports. So I did that
and they mailed all of their old annual reports to me,
and I started reading them and now whenever, and it
was an unbelievable education. I mean, Warren Buffett is, you know,
the best investor there is. He's also in addition to
(30:17):
being a great investor, he's also an incredible teacher, which
you realize as you read these. And he's also a
fantastic writer. So whenever a young person says to me
what should I read, I say, well, now you've got
it easy. You just have to click on a few
links and you could download all these shareholder reports and
read the annual letters. But I would literally start from
(30:38):
the first one and go up till the present day,
and that would be the first thing i'd recommend. The
second thing i'd recommend, which is going in a little
bit of a different direction, And I don't know if
you would consider this an investment book or not, but
it's one of my favorites because it has so many
themes that are similar to investing. Is the book Moneyball
by Michael Lewis, which talks about the Oakland A's and
(31:00):
how they were able to build a very competitive baseball
team and make the playoffs even though they had a
very low payroll, and they did it by taking advantage
of factors that other people weren't valuing properly. And I
think that's so relevant to how we try to invest
in stocks.
Speaker 3 (31:17):
And again, Michael.
Speaker 4 (31:18):
Lewis also is a fantastic writer and a great storyteller.
And then the third thing that I really enjoy is
I really enjoy reading books kind of on business titans
who've created these great businesses. So there's the book on
Warren Buffett called The Snowball. There's the book Steve Jobs
(31:40):
by Walter Isaacson, and then there's Sam Walton's autobiography. So
those three books I've really enjoyed because they give you
insights into three individuals who created enormous companies from scratch
and what their vision was and what their determination was
and how they did it and how they thought differently
(32:02):
and how are they able to do that? So those
were those would be some recommendations I would give.
Speaker 1 (32:06):
Well, it's definitely a great mix. This is a great discussion.
I really appreciate having you on.
Speaker 3 (32:14):
What was my pleasure?
Speaker 1 (32:16):
And Mike, thank you for serving as my.
Speaker 3 (32:18):
Co host today.
Speaker 2 (32:19):
Yeah, thank you both.
Speaker 1 (32:20):
Until our next episode, This is David Cohne with inside
actor
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges, and philosophies and security selection. I'm David
cone I, lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Michael Casper, sector and small
cap strategist at Bloomberg Intelligence. Mike, thanks for joining me today.
Speaker 2 (00:34):
Thanks dude.
Speaker 1 (00:35):
So you wrote a note last week talking about small
caps in the election, and so you know, I think
our audience would probably love to hear or how the
election has affected small cap stocks.
Speaker 2 (00:47):
Yeah. So from a technical standpoint, I'll go over that first.
The Russell two thousand has broken out of pretty much
it's twenty twenty four range and is approaching all time
highs pretty much. That's the only resistance that we're seeing
in the chart for the Russell two thousands to the upside.
RSI is still a little bit shy of where it
(01:08):
tops out, typically above a seventy handle. We're currently sitting
at about a sixty seven handle on RSI, and mac
D has crusted over the signal line and positive. So everything,
at least from a technical standpoint looking pretty good. We
did a little bit of analysis though on Trump's first
term and how small caps did. Of course, his initial
(01:29):
election back in twenty sixteen caused some hope for the
Rust of two thousand going into his first term about
tax reform and maybe some protectionist policies that could help
a reshoring effort towards small caps. We really saw that
play out from twenty sixteen into early twenty eighteen, where
(01:52):
small caps had a big cycle of outperformance, but from
then on it was a bit more rocky for the
Russell two thousand. Fundamentally, this definitely did show up in
revenue growth numbers. They exceeded the S and P five
hundreds revenue growth for a pretty good stretch from twenty
seventeen to twenty eighteen. So kind of hoping that some
(02:17):
of that comes back, But again a bit of a
bumpy ride at least from when Terra started getting announced onwards,
and of course there was a lot of monetary policy
and other stuff going on at the same time, so
it can't be all attributed to Trump's trade and fiscal policies.
Speaker 1 (02:37):
It'll be interesting to watch, but I think we'll talk
a little bit more about small caps with our guest today,
and with that, I'd like to welcome David Green. David
is a principle of Hotchison Wiley and a portfolio manager
on the small cap value, value Opportunities and international value portfolios. David,
thanks for joining us today.
Speaker 3 (02:57):
It's my pleasure great to be here.
Speaker 1 (03:00):
I'm sure our listeners would love to hear how you
got your start in the investment business.
Speaker 4 (03:06):
Well, I got my start at a very young age.
My dad was a physicist by trade, but he loved
to invest in the stock market. And I grew up
here in Los Angeles, and the market opens about six thirty.
It opens at six thirty in the morning here, and
he would have me sit in front of the TV.
It wasn't there was no CNBC, there was no Internet.
But when he was getting ready for work and before
(03:28):
I went to school, he would say, can you just
watch these tickers and tell me you know what g
is when it comes by, or what Coca cola is
when it comes by.
Speaker 3 (03:36):
And so before I.
Speaker 4 (03:37):
Knew it, I went from not only following the box
scores of all my Major League of the Major League
Baseball teams, but the stock quotes and the newspapers the
next morning, and I got very interested. I then went
on to college at Berkeley and I studied economics, and
then I went first to Potential Investment Corp, then to
Goldman Sachs, and then to Hotchkison Wiley, were I've been
(04:00):
for twenty seven years now, and all but one year
of that time I've been on the public market side.
So I was able to turn what cultures started as
a as a spark from a hobby that my dad
had into my own passion and make.
Speaker 3 (04:14):
A career out of it.
Speaker 1 (04:16):
Great. Well, you know you mentioned Hodgkisson Wiley, and you
know that's what we're going to be talking about today.
Could you kind of give us a brief overview of
the equity investment philosophy of the firm?
Speaker 3 (04:26):
Sure?
Speaker 2 (04:27):
So.
Speaker 4 (04:27):
Hotkinson Wiley was founded by John Hotchkinson George Wiley in
nineteen eighty and they founded on it on a value philosophy.
And if you go back, you know, well before Hotchkinson
Wiley's founding, we have data that goes back actually to
nineteen twenty six, almost one hundred years now. Value has
been a very powerful force of outperformance in the market.
(04:48):
Notwithstanding sort of the recent past but even if you
include that recent past and you still go back, it's
still significantly outperforms. And the idea is that if you
buy a stock with a at a low price, you've
got a built in margin of safety and it's very
hard to predict the long term future. But when investors
are paying very high prices for growth, oftentimes that growth
(05:12):
does not materialize. And if you're buying something at a
low valuation, you have you know, you have better chance
that your downside is supported. And so that was the
philosophy that originally started with the firm, and it's the
DNA which continues to the firm. In the firm to
this day, forty four years later. I would also say,
as the firm has matured, we have spent an inordan
(05:35):
amount of resources and investment on the research process. Today
I I I. If you think about Hotchkisson, while I
always say there's three things to think about. The first
is value, the second is research, and the third is culture.
And each one of those is integral and important to
sort of who we are as a firm. But the
(05:55):
research on the research side, we have twenty three people
focused exclude on research, and this is a firm with
under seventy people in the total firm, and in addition
to those twenty three people, we also have six research associates,
so we've got twenty nine people. Were almost half the
firm focused exclusively on research, and it's really how we
define ourselves. And when you think about a value stock,
(06:21):
you always want to be careful that just because something
is a low price doesn't necessarily make it a value.
You don't want to end up with newspaper stocks that
have a very bleak future. You don't want to end
up with retail stocks that Walmart could be coming into
their neighborhood. So the research side is very important because
(06:41):
it says just because something is trading at a low
price doesn't necessarily make it a value. So we spend
a lot of time thinking about quality. And then the
third thing is culture, and culture is very important and
culture at our firm, and we have a very collegial firm.
As I said, I've been there twenty seven years and
the average employee ten year is very very long. People
(07:01):
rarely leave Hotchkisson whilely. In fact, when we interview new people,
one of the things they always ask is what do
you do that you keep your people so long, and
I think there's a couple of things. First of all,
we spend a lot of time on the front end
making sure we get the right person. But who is
the right person? It's somebody who is very intellectually curious,
(07:21):
wants to spend a lot of time doing research and
thinking about things, but also is willing to work in
a collegial team environment and understanding that if you have
a long term view and you can keep your emotions
at bay and always be respectful, that will lead to
very good investment decisions over long periods of time.
Speaker 3 (07:42):
That's great.
Speaker 1 (07:42):
So I like to dig a little deeper. I know
you're manager on three funds, but I think for the
purpose of this discussion, we'd kind of want to focus
in on more than domestic strategies. So if you could
kind of give us kind of an idea of what
the investment process is for the value opportunities and small
cap value funds.
Speaker 3 (08:01):
Sure.
Speaker 4 (08:02):
So it's interesting, especially when you include small cap, because
there's literally thousands of stocks out there to choose from,
and so oftentimes when we're trying to find a stock,
it will start with screens and we'll be screening on
valuation things like priced to earnings, price to book. I
would say the most important screen in my mind is
something called enterprise value to operating income. Enterprise value being
(08:23):
the market cap plus the debt minus the cash, because
that will take into account sort of the entire balance sheet,
and so we look at screens. In addition, we have
these analysts who are so well versed in their individual
coverage universe that they're constantly meeting with management teams, they're
talking to suppliers, they're talking to competitors. So there's oftentimes
(08:45):
stocks that will come that for some reason, it falls
through the screens at bad data or whatever, and it
will come in through the analysts will say, this is
actually something that I discovered on my own, and so
that will augment stocks that we add to the process.
Once we've identify certain candidates that we think are interesting,
the analyst will be tasked with putting In the short term,
(09:06):
maybe it's under earning because the cycle is against it,
and we expect that cycle to normalize.
Speaker 3 (09:13):
But over five years.
Speaker 4 (09:14):
Time, we think that we can normalize the earning's power.
And also by looking out five years, it's long enough
that we can normalize the cycle, but short enough that
we have pretty good visibility. After five years, it gets
tougher and tougher to project out, so the analysts will
project that earnings for five years. In addition, we have
built a proprietary scoring system called our Fundamental Risk rating system,
(09:35):
and we look at three different things. In our fundamental
risk rating system, we look at the quality of the business,
we look at the balance sheet, and we look at
the governments. And so the analysts will also be tasked
with scoring according to this fundamental risk grading system. And
there's a huge matrix that goes with each one of
those individual components, and they will bring in that sort
(09:56):
of deliverable to one of our six sector teams depending
on where I it's in. And the six sector teams
we have are capital, goods, consumer, healthcare, Energy, financials, and tech.
So wherever it fits in, they'll bring it in and
that sector team will then review peer review the financial
model and the fundamental risk ratings. And I think what's
(10:17):
unique here is the ANALYSI is not coming in with
the recommendation. They're not saying you should buy X Y
and Z stock. They're coming in they're saying, I think
X Y and Z stock is going to earn you
three dollars a share, and my margine assumption is they're
going to do a ten percent ten percent operating margin
and that will be what the debate is around. And
because of the debate is all around sort of the
(10:37):
financial projections and the matrix according to for the fundamental
risk ratings, it doesn't end up being an emotional you
should buy you should not buy. It ends up being
a very almost like intellectual exercise, if you will, with
some very healthy debate. And so once that is done,
and once the earnings power is established by the sector
(10:58):
team and the fundamental risk ratings have been established, it
will then be up to the portfolio manager to decide
where and how much that stock fits into the portfolio.
Speaker 2 (11:07):
So lots of people right now are worried about multiples,
especially in the S and P five hundred. Do you
share that concern or are you more in the camp
that you know maybe the max seven gets add some
productivity gains to lower that multiple. And kind of a
second part of that is how do you think about valuations?
Are there any specific metrics you like to use? I
know you mentioned pees and price to books, but like
(11:28):
to pick your brain on that one.
Speaker 4 (11:30):
Yeah, So when you look at the Magnificent seven, and
first of all, we group and men I think there
each one has its own individual story on individual.
Speaker 3 (11:39):
You know, opportunities and risk.
Speaker 4 (11:42):
But as a group, they clearly are well above the
valuation both of the rest of the market and well
above the valuation that they have been historically. And I
think the biggest risk to that part of the market.
They're clearly excellent companies. But the biggest risk is part
of the market is you are pricing in a lot
(12:03):
of growth for many, many years to come in order
to justify that valuation, which means essentially that that's a
very very long duration asset. And there's two things that
could significantly upend the prospects for the for the valuation.
Speaker 3 (12:18):
There.
Speaker 4 (12:19):
Number one, the growth may not come come to fruition
as people expect. And it's very hard to project out
very long periods of time. I mean, it's hard to imagine.
But in nineteen ninety nine, General Electric was the largest
market cap, and you know, obviously there's you know, Cisco
was one of the largest market caps. So things change,
(12:40):
so trying to project out for long periods of time
is difficult. In addition, if we do get a rise
in interest rates when you have an asset that is
that long duration, arise in interest rates will have a
severe impact on the present value of that earning string.
And so they'reible, They're susceptible from sort of two elements.
(13:01):
And so I think that as a group, and again
I'm speaking as a group, because each individual stock will
have its own risks and merits. But as a group,
I think I would say there is a lot of
risk that in that part of the market. With regard
to the rest of the market, the rest of the
market in general looks like it's trading at about in
line with its historical averages. So it's not which is
(13:26):
very reasonable. And what is notable is not what the
rest of the market is trading it relative to its
own history. It's what the rest of the market is
trading relative to the Magnificent seven.
Speaker 2 (13:40):
And do you think the election results changed the calculus
at all for for small versus large? I kind of
went to my shpiel before about the whole Trump first term,
but interested to get your thoughts.
Speaker 4 (13:51):
Yeah, you know where I really think it's it's going
to make a difference, is I think with regard to
mergers and actuitions, and what you saw recently under the
current administration was a really strict regulatory environment. Companies were
either not allowed to merge or they saw what was
(14:14):
going on and they chose not even to pursue an
acquisition because they think they didn't think it would get
through the regulatory agencies. So I think the fundamental difference
be with the Trump administration is you're going to have
much less regulation or much less onerous regulation with regard
to companies merging. And for small caps that's important because
(14:35):
when you think about how you can get your performance
from small caps, one of the ways is if you
have a stock that has a low valuation, there's always
the opportunity that it can get bought and that a
larger company can come by and say, you know, this
doesn't make any sense. You know, I'm trading at a
fifteen pe and this small cap stocks at an ape.
I could buy it at a twelve pee and give
(14:57):
fifty percent return to the small cap sharehold, and yet
I can still buy something at a discount to my
own stock price. So I think that's where will be
one of the fundamental sort of opportunities for small caps
that they really have not enjoyed in the recent last
four years.
Speaker 1 (15:17):
I kind of want to go back to your process,
and you know, kind of what you were talking about
kind of sounds bottom up to me, and so I
was kind of wondering, if you know, if you do
consider macro themes as part of your evaluation or portfolio management.
Speaker 3 (15:33):
Yeah, it's interesting.
Speaker 4 (15:34):
So we don't start with the macro, but a lot
of times the macro will drive certain themes within the portfolio.
There was a time I remember when in the top
ten we had three trucking stocks. Again, we weren't trying
to buy trucking stocks, but that was what the macro
was causing that part of the market to be out
(15:54):
of favor. You might have a situation where let's say,
like oil, is oil price as well normal. Let's say
it's a forty or fifty dollars a barrel. It's not
there today, but if it were, and people were investors
were pricing oil as if it was going to stay there,
when we would do our normal, which would be our
normal right now assumption for oil as seventy five dollars
(16:15):
a barrel, so at forty we would expect the price
to come up because at forty people wouldn't invest. Likewise,
if oil was one hundred and twenty dollars, we would
expect it to revert down because people would invest and
bring a lot of supply in. So when it's when
the market is somehow divorced from its normal kind of
where equilibrium, that will lead to situations where multiple stocks
(16:39):
can get interesting. And so you might have if everybody
was pricing in energy stocks at forty for a long
period of time, you might have a situation where that
part of the market would be. Energy stocks in general
will be interesting to us. And it's not again that
we would start with the macro, but it's that we
would be led there by what the market is giving us.
Speaker 2 (16:58):
Are there any sectors right now that you find particularly compelling?
Speaker 3 (17:03):
Yeah, there's a couple. It's interesting.
Speaker 4 (17:05):
So, you know, when I talked about the research team
and what we look for, we're looking for as high
quality of business, we're looking for new things. We're looking
for low valuation and high quality business. And it won't
surprise anyone probably that the highest amongst the highest quality
businesses we found are software businesses. Once you have a client,
(17:28):
if it's if it's the right, software which is hard
to get off of you tend to have very low
schurn and very high gross margins. And interestingly enough, there
are a couple of software companies that we own, Workday
and F five, which we think are really interesting because
people are not appreciating the fact that even though they
(17:50):
have very high gross margins, they're operating margins are understating
where they will be in normal and why is that.
That's because they're spending a lot of money on marketing,
so they're selling their product and they're spending a lot
of money on sales, and they're also spending a lot
of money on research and development. Both of those costs
are going through the income statement. They're not being capitalized.
(18:11):
If it was a chemical plant, you'd put it, it
would be capex and it would be capitalized and it
wouldn't go through the income statement until the plant was
up and running.
Speaker 3 (18:18):
It was being depreciated over time.
Speaker 4 (18:20):
So this sort of quirk of accounting, if you will,
has led us to an interesting part of the market,
and I think that that is not totally understood. And
then I would say the other area that is also
interesting to us is there are certain energy stocks which
right now, given how weak oil has been and how
(18:42):
much the rest of the market has gone up, that
are also interesting to us right now.
Speaker 2 (18:46):
And are there any signposts that you're looking for to
signals shift from tech leadership to broaden to the rest
of the stocks.
Speaker 4 (18:54):
So I think if the economy stays strong general economy,
because tech has the leadership in tech has been a
little bit of its own sort of sub sector, driven
in many cases by AI. But if it brought if
the economy stays strong in general, that will allow sort
(19:17):
of the rest of the market to do well. And
then the other thing I would say is if you
want to look at where it could cause the multiples
to compress relative to each other. Again, if you have
interest rates increase, I think that will put pressure on
the Magnificent seven relative to the rest of the market.
Speaker 1 (19:35):
I think I saw in the perspectives for their funds
it did mention ESG, and so I was curious, you know,
if ESG factors into the research at all.
Speaker 4 (19:46):
Yeah, So, you know, when you think about all of
the risks that we're trying to compile, and we have
our fundamental risk rating system, ESG is embedded in our
fundamental risk rating system in the sense that if you
have environmental consc NS. If a company is polluting, that
is a true cost to the business and a true
risk of the business. If a company in social is
(20:08):
not treating its employees properly, that's true that business will
have a difficult time sustaining itself if a company has
bad governance. In fact, interestingly enough, in our fundamental risk
rating system, governance is one of the three pillars that
we actually it has its own pillar, and that's especially
true when you talk about small caps, because governance is
(20:32):
so varied.
Speaker 3 (20:32):
In small caps.
Speaker 4 (20:33):
You have the founder who started the company and took
it public and he's still working, you know, twelve or
fourteen hour days. He's taking a small salary, and he
owns a lot of stock, and he's doing all the
right things. To the founder who's cashed out, he's at
the golf course, his children are running it and he
may they may or may not be competent. But the
(20:55):
point is you've got and he yet he still controls
the board. And you have to do your due diligence
and find out where each company fits in along that
governance spectrum.
Speaker 3 (21:05):
And so we spend a lot of time doing.
Speaker 1 (21:07):
That, I also do want to ask about another type
of risk. You know, the portfolios don't have you know,
a huge amount of stocks in them, so I guess
I was just wondering how you handle concentration risk.
Speaker 3 (21:20):
Yeah, that's a great question.
Speaker 4 (21:22):
And when we think about concentration risk, so what you
want is when you do find a really compelling idea,
you want to put a lot of capital into it.
But what you don't want if you have a lot
of capital in is you do not want to take
a company specific risk when that exists. So there's really
five things that we look at that we have to
(21:44):
get comfortable with when we want to take a concentrated position.
So the first is are we going in the stock
at a significant discount to intrinsic value? Do we have
good valuation? Because good valuation itself will serve as a
margin of safety. So that's the first thing we look at.
The second thing we look at is does the company
have financial strength? Doesn't have a good balance sheet? I mean,
(22:06):
just in the recent past, we've been through a financial crisis,
we've been through a pandemic. Things can happen, and what
you don't want is you might have a really undervalued stock.
You might have a high quality business, but if it
has a bad balance sheet and it comes into a problem,
you still might get diluted significantly at the bottom, in
which case you're going to lose a lot of money.
(22:26):
So we want to make sure that the company has
financial strength. The third is does the company have a
high quality business model? If we turned off our Bloomberg's
for five or ten years and came back and didn't
look at a quote, what would the business look like?
If we can't really figure that out, if we're like, well,
they've got one or two customers and those customers could
(22:49):
possibly go elsewhere, or they don't have the business they're
competing in has ten competitors and right now they're in
fourth place.
Speaker 3 (22:58):
That could be in sixth place, whatever it is.
Speaker 4 (23:00):
If they don't have a high quality business model, then
we don't want to put a lot of capital into
it because we won't have confidence of where they're going
to be. The fourth thing is is management doing the
right thing with the capital? Are they investing wisely? Are
they thinking about a high cost merger or buying somebody
else that will destroy our undervaluation. Are they investing in
(23:24):
a plant that maybe is very risky, or are they
husbanding their capital buying backstock using their capital with it
they're not using to buy backstock to invest wisely?
Speaker 3 (23:36):
Are they doing the right things?
Speaker 4 (23:37):
And then the fifth thing is is there liquidity in
the underlying security? So as we think about small caps,
the further we go down in the market cap, the
less liquidity we usually have buying and selling that stock.
And so if we're going to have a big position
in something, we want to make sure there's sufficient liquidity
for us to get out of it if we change
our mind, if something changes, So you know, it's more
(24:01):
risky to be a big have a big weight in
a small cap which is less liquid than in a
large cap. So those are the things that we look
at when we think about concentration. But if we do
find a situation that really meets all of our criteria,
then it becomes very interesting, and then you want to
have concentration there because then you've you've looked at the
risks and when it's not it's very difficult to find
(24:23):
the things we're looking for, which is a very high
quality company trading at a very low valuation. When you
do find that, and your risks are somewhat mitigated or
mostly mitigated.
Speaker 3 (24:33):
That's when you want to take a big position.
Speaker 2 (24:36):
So as a as a fundamental strategist myself, you know,
I have some fair value models and basically looking out
and putting in economist estimates, you get the rustle somewhere
around twenty three fifty or so, so a little bit
north of today's price. I'm just interested to get what
your thoughts might be on where small caps might be
(24:56):
going into twenty twenty five.
Speaker 4 (24:59):
Yes, so I think it's funny if you look back again.
We've done this where you look back going back to
nineteen twenty six, and we've broken it into quadrants, which
is the value and growth, small and large by far,
by a long ways, including again up until recently, so
(25:20):
it includes all the growth out performance that you've seen recently.
By far, small cap value is the best performing asset class.
Now it hasn't been recently, but I think again that
valuation discount relative to the large cap market the SMP
is quite large today, quite large relative to history, so
(25:42):
we think it's a very interesting place to be. In addition,
small cap companies tend to be focused more on the
domestic markets and the dollar has been very strong, so
that will benefit them as opposed to a lot of
these large cap multinational companies which are selling into Europe
and selling into Japan, and the dollar has weakened, so
those sales coming back into dollars are going to be
(26:04):
more challenged.
Speaker 1 (26:07):
You know, we've kind of talked about where you think about,
you know, how you invest in a stock. What would
need to happen for a company to become a candidate
to sell.
Speaker 4 (26:18):
Yeah, so's there's a few things. The ideal scenario is
you invested in undervalued security, you had a thesis, the
market wasn't recognizing what you saw. The thesis played out,
the stock reached its value or close to its full value,
and you sold it. So the first thing is does
(26:41):
our discount to intrinsic value fall away? And when it does,
that's a sale. The second time we might sell is
we invested in a stock we had a thesis, and
as time has gone on, we've realized that the thesis
we originally bought it under is not coming to fruition.
And basically, either things changed or we were wrong, and
(27:05):
we no longer have confidence that the thesis will play
out as we originally thought. And the third reason we
might sell a stock is maybe maybe the we bought
the stock at ten and still at ten, and maybe
we think that thesis is still intact, but maybe the
rest of the market got cheaper and all of a
sudden we had other opportunities for our capital, and since
(27:25):
capital is limited, we might we may decide to sell
it because something else got more interesting. So those are
usually the reasons that we would sell a stock.
Speaker 2 (27:35):
And what do you think the biggest risks are for
stocks going forward?
Speaker 3 (27:40):
So I would say there's there's two risks.
Speaker 4 (27:47):
One of them is, you know, the the geopolitical situation
throughout the world is tenuous. There's essentially, you know, two
wars going on, and you know, we have been so
insulated over here, but it's we have to recognize that
(28:07):
there is a difficult geopolitical situation that could spiral at
any time.
Speaker 3 (28:11):
Now it's hard to predict it.
Speaker 4 (28:12):
We don't think it will, but it certainly is a risk.
And the second risk is, you know, the government is
running very large deficits and has a very large debt balance,
and so up until now it really has not had
an issue with funding that and with issuing debt. But
if at some point trying to fund that deficit puts
(28:34):
causes interest rates to go up because the government is
borrowing so much. I think that would be the other
thing that would put a big risk factor into stocks.
Speaker 2 (28:42):
Okay, and do you have any major takeaways from the
third quarter earning season?
Speaker 3 (28:49):
Yeah, it was interesting.
Speaker 4 (28:50):
It was an I would call this one of the
most mixed earning seasons I've seen in a while. It
was so interesting. We had companies report some up ten percent,
depth some down ten percent, and there were I would say,
you know, like we have some chemical companies that were
more challenged, which are really tied to the economy, and
(29:11):
so I would say that that the sort of the
depth of strength of the economy was somewhat challenged. But
then we had other pockets where that was there was
contradictory signals on that. So I would say this was
probably one of the more mixed earning seasons that I've
seen in a long time.
Speaker 1 (29:27):
Well, I actually just have one more question before we
let you go. You know, I think I know I
do it. I'm sure Mike does, and I believe our
audience would love to hear what your favorite investment investment
books are yeah.
Speaker 4 (29:42):
So when I started out in the business, and I
think somebody must have given me this recommendation, but it
was one of the best recommendations I had.
Speaker 3 (29:50):
Again, it was before the internet. They said, go.
Speaker 4 (29:56):
Call up Berkshire Hathaway and see if they'll send you
all of their old annual reports. So I did that
and they mailed all of their old annual reports to me,
and I started reading them and now whenever, and it
was an unbelievable education. I mean, Warren Buffett is, you know,
the best investor there is. He's also in addition to
(30:17):
being a great investor, he's also an incredible teacher, which
you realize as you read these. And he's also a
fantastic writer. So whenever a young person says to me
what should I read, I say, well, now you've got
it easy. You just have to click on a few
links and you could download all these shareholder reports and
read the annual letters. But I would literally start from
(30:38):
the first one and go up till the present day,
and that would be the first thing i'd recommend. The
second thing i'd recommend, which is going in a little
bit of a different direction, And I don't know if
you would consider this an investment book or not, but
it's one of my favorites because it has so many
themes that are similar to investing. Is the book Moneyball
by Michael Lewis, which talks about the Oakland A's and
(31:00):
how they were able to build a very competitive baseball
team and make the playoffs even though they had a
very low payroll, and they did it by taking advantage
of factors that other people weren't valuing properly. And I
think that's so relevant to how we try to invest
in stocks.
Speaker 3 (31:17):
And again, Michael.
Speaker 4 (31:18):
Lewis also is a fantastic writer and a great storyteller.
And then the third thing that I really enjoy is
I really enjoy reading books kind of on business titans
who've created these great businesses. So there's the book on
Warren Buffett called The Snowball. There's the book Steve Jobs
(31:40):
by Walter Isaacson, and then there's Sam Walton's autobiography. So
those three books I've really enjoyed because they give you
insights into three individuals who created enormous companies from scratch
and what their vision was and what their determination was
and how they did it and how they thought differently
(32:02):
and how are they able to do that? So those
were those would be some recommendations I would give.
Speaker 1 (32:06):
Well, it's definitely a great mix. This is a great discussion.
I really appreciate having you on.
Speaker 3 (32:14):
What was my pleasure?
Speaker 1 (32:16):
And Mike, thank you for serving as my.
Speaker 3 (32:18):
Co host today.
Speaker 2 (32:19):
Yeah, thank you both.
Speaker 1 (32:20):
Until our next episode, This is David Cohne with inside
actor
Host
Gina Martin Adams
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