ALO29: What Every Investor Should Know About Valuations ft. David Giroux

Episode Transcript
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(00:08):
Leveraged loans in combinationwith Treasuries, together, are kind
of the peanut butter and jellysandwich of the fixed income market,
if you will. Because thinkabout this. You know, leveraged loans
do well when rates are rising.The Treasuries do well when rates

(00:33):
are declining. So, they helpoffset each other a little bit there.
So,if you put loans togetherin a portfolio with Treasuries, again,
you get the combination ofthose two things, the peanut butter
and jelly sandwich, generatesreally good risk returns.
Imagine spending an hour withthe world's greatest traders. Imagine
learning from theirexperiences, their successes and

(00:57):
their failures. Imagine nomore. Welcome to Top Traders Unplugged,
the place where you can learnfrom the best hedge fund managers
in the world so you can takeyour manager due diligence or investment

(01:29):
career to the next level.Beforewe begin today's conversation,
remember to keep two things inmind. All the discussion we'll have
about investment performanceis about the past and past performance
does not guarantee or eveninfer anything about future performance.
Also understand that there's asignificant risk of financial loss
with all investment strategiesand you need to request and understand
the specific risks from theinvestment manager about their products
before you make investmentdecisions. Here's your host, veteran
hedge fund manager Niels Kaastrup-Larsen.
Welcome and welcome back toanother conversation in our series
of episodes that focuses onmarkets and investing from a global
macro perspective. This is aseries that I not only find incredibly

(01:50):
interesting as well asintellectually challenging, but also
very important given where weare in the global economy and the
geopolitical cycle. We want todig deep into the minds of some of
the most prominent experts tohelp us better understand what this
new global macro driven worldmay look like. We want to explore

(02:11):
their perspectives on a hostof game changing issues and hopefully
dig out nuances in their workthrough meaningful conversations.
Pleaseenjoy today's episodehosted by Alan Dunne.
Thanks for that introduction,Niels. Today I'm delighted to be

(02:32):
joined by David Giroux. Davidis an award winning Portfolio Manager
at T. Rowe Price. He's asix-time nominee and two-time winner

(02:53):
of Morningstar's Fund Managerof the Year award. Heis the Portfolio
Manager of the CapitalAppreciation Fund and the Capital
Appreciation Equity ETF, andCo-portfolio Manager of the Capital
Appreciation and Income Fundat T. Rowe Price Investment Management.
He's been with the firm 26years. He's head of investment strategy
and also CIO for T. Rowe PriceInvestment Management and he's also
the author of CapitalAllocation. So, David, it's a pleasure
to have you with us. How are you?
Good, good. Thank you, lookingforward to the discussion today.
Good stuff. Well, as Imentioned, you've been with T. Rowe
Price I think for all yourcareer. Buthow did you get interested
in markets and investing inthe first place?

(03:15):
I became a finance major mysophomore year of college and I started

(03:39):
reading a lot of books aboutinvesting. Actually, that's probably
how I got a job at T. RowePrice. IthinkI read like 40 books
on investing by Ben Graham andWarren Buffett, and really just found
my passion in life with regardto investing. And again, I joined
T. Rowe Price in ‘98 andbecame an analyst two years later,

(04:11):
covered autos, industrials.Andthen in ‘06 I was asked to manage
the Cap Appreciation Strategy,or fund, at the time, and have been
doing that ever since. And, asyou mentioned, we've kind of launched
a couple other products alongthe way that are similar in strategy.
Maybe just a little bit ofslight difference in asset mix. And
it's been an exciting 26 years.
Absolutely. It's alwaysinteresting times and markets, but
we've seen some interestingshifts over those 26 years, I'm sure,
which we might get onto in awhile. But maybe just to set the
scene a little bit, youmentioned the different strategies
and funds. Some are, I thinkbonds and equity, some are equity

(04:31):
only. So, maybe if you couldgive us a sense of the strategy and
the kind of the size of theportfolio and any constraints.
Sure. Probably the biggeststrategy is the Cap Appreciation
Strategy, that strategy is of$95 billion in assets. It's a traditional

(05:02):
balance strategy, although theasset allocation is a little bit
different. We tend to have alittle more high quality, high yield,

(05:25):
high quality leveraged loans,you know, to be a little bit less
Treasuries, really not anymortgages on the fixed income side.

(05:49):
And we try to run the equitysleeve a little bit less aggressive
than that of the averagebalance strategy. Youknow, we've
had a very good track recordover time on that strategy and that
kind of led us to launching,in 2023, an equity only strategy
that, you know, a couple morenames, you know, more like a 100
name portfolio, you know, withit with a goal of basically trying
to output the market everyyear. A goal of having a little bit
less risk and having bettertax efficiency than an S&P 500 index

(06:09):
strategy. So,we've beenrunning that strategy. It's a little
bit more than $4 billion inAUM now. And then we launched a Cap
Appreciation Income inpartnership with our quant team and
Farris Shuggi. And thatstrategy is a couple hundred million
dollars in size, but it's kindof the inverse, little more conservatively
run balance strategy. That'sastrategy with more like 40% equities,
55% fixed income, andcurrently about 5% in cash, but a
little bit more conservativerelative to CAF, the mothership,
if you will. But in all, alittle bit around $100 billion in
assets - three main strategies.
Good stuff. And obviously,within the larger Capital Appreciation
Strategy, you have thefacility to be quite dynamic and
responsive to market changes.And in terms of that equity allocation,
how high or low could that getover time?
Yeah, it's a great point. Ithink what we typically are doing

(06:30):
something very, very differentthan most managers. During COVID
we put $9 billion to work whenwe were only about a $50 billion
strategy. We went from 15%cash to 2% cash. We went from 55%
equities to 72% equities,basically in a month in 2009, 2011,
2015, 2016, 2018, 2020, 2022.When risk assets are cheap, we will

(06:53):
buy those risk assetsaggressively. Whether that be equities,
whether it be high yield,these leveraged loans. We're zagging
when the market's zigging, ifyou will. We are adding to risk assets
when risk assets are cheap,and we're pulling back from risk
assets when risk assets are expensive.
Okay. And I read somewherethat a quote, I think was attributed

(07:17):
to you, that you were probablyas negative about the S&P 500 as
you've been in a long time.Without putting words in your mouth,
is that correct?
Yeah, I think that was acomment we made. I think it was coming

(07:44):
from the Barron's roundtablediscussion earlier this year. And
it's simply a function of 2years of 20% market returns at a

(08:12):
time where S&P earnings havenot been nearly 20% a year at all.
I think earnings this yearwill end up… Earnings in 2024 grew

(08:44):
more like 10%, and earningswas less than 10% in the year prior.
So,we just have a lot ofmultiple expansion, a lot of high
expectations in themarketplace. And I think regardless,
wherever you look, there's notreally great value, unfortunately.
Cyclicals were pricing in apretty big recovery. The AI trade
was, you know, in fullthrottle, if you will, very, very,
maybe a little bit extended,if you will. Andthen you had some
kind of Nifty 50 stocks. Thecost, because of the world, that
used to do for 35 times, 57times early. Walmart used to be 25
times earnings. That rate for37 times earnings. And so there was
very, very few pockets ofopportunity in the marketplace. Sonot
only was the market expensiveat 22 times forward, but if you go
cyclicals, retail names, theseNifty 50 stocks, AI, there wasn't
much area of good value in themarketplace outside of maybe healthcare
and some idiosyncratic names.Usually,sometimes when you have
a situation where one area isreally, really in favor, other things
are really, really cheap. Thistime, almost all parts of the market
were kind of a rising tidedriving all stocks higher.
Yeah, interesting. I mean Iwas surprised to hear that. I heard

(09:05):
you mention that on anotherpodcast. And I was kind of surprised
because I think the perceptionamong some investors is for sure,
you know, the high tech, highgrowth stocks are being richly valued,
but maybe that the rest of themarket wasn't that expensive. But
certainly, by the measures youlook at, you're saying that most
of the sectors are valuedhighly relative to their typical
averages. Is that right?

(09:26):
Yeah, I think that's true.Yeah, I think yes. And that's maybe

(09:56):
it's a little bit different ifwe had a conversation in 2023 or

(10:28):
obviously 2022, wherecyclicals were really, really cheap

(10:49):
in 2022. If you think aboutit, if you take a step back, I think

(11:26):
just think about financials,think about banks. Bankshistorically
trade in a range of, let'scall it 8 to 12 times earnings. And
a lot of banks today haveranges that move from 8 to 12 times
earnings to 12 to 16 timesearnings. Goldman Sachs. It wasn't
too long ago we bought GoldmanSachs a little above tangible book
value. And there was anexpectation that could they ever
get to 1.5 times tangible bookvalue. And now they trade for 2 times
tangible book value. Thatusually doesn't last very long. So,
you have financials very, veryhigh valuations. Industrials,until
recent view, that they'd havea big economic recovery. They retrieve
for 23, 24, 25, 26 timesearnings, well above historical averages.
You also had, again, therewas, I almost call the Nifty 20 where
there was just some kind ofcompanies where their algorithm,
their growth rate reallyhasn't changed dramatically, but
the multiple the market waswilling to pay for them expanded
dramatically. Costco isprobably the poster child for that,
a company that used to tradein a range of 28 to 35 times earnings.
All of a sudden went to 57times earnings. Walmart,best case
scenario, Walmart has an 8%EPS growth rate with almost a 2%
dividend yield, a 10%algorithm, and used to trade for
what's called a range of thelow 20s to mid 20s all of a sudden
went to 37 times earnings.Youhad a lot of names in that camp
of good companies that used totrade in a range and the market is
all sudden awarded a much,much higher range than they have
historically for thosecompanies. So, when we think about
that, outside of healthcarewhich has been had some issues, we
did not see really good valueanywhere in the marketplace. Evenutilities,
which has been a favorite forours for a long period of time, has
had a really big upswingbecause of AI and more data center
needs. Power consumption goingfrom 0 to maybe 2% or 3% a year.
That's kind of step functionchange for those kinds. But, again,
they've been good stocks aswell. So, the areas where you see
opportunity in the marketplacereally, really narrow versus history.
And what would you say hasdriven that step change in valuation?

(11:48):
Is that a function of themomentum trade or just generally
bullish sentiment or a bit of both?
I think it's a combination ofmultiple things. I think there's

(12:11):
a, in some cases a stock thatjust works over a period of time,

(12:34):
especially in an area whereother stocks aren't working, success
breeds success, and themultiple goes higher and higher.

(13:05):
And yet again, usually,historically speaking, one of the
ways you can avoidunderperforming is avoid companies

(13:33):
that have high multiples -high multiples versus history. So,I
think you've kind of got thatto extreme in the Costcos of the
world, the Walmarts of theworld, the Cintas of the world, where
again low double digitalgorithms that in some cases now
trade for 40, 50, 60 timesearnings doesn't make a lot of sense
from a long term investor'sperspective. Some of it is just there's
a lot of positive sentimentaround what Trump was going to do
from a policy perspective. Ithinkin many respects what we've
seen that those policy changesare probably more detrimental than
positive. So, as we've seenthis morning and last night, and
bigger and bigger terrorists,and retaliation, and higher inflation,
that's not a good thing. A lotof disruption into scientific community
with some NIH cuts, justprobably more disruption than positivity
on the Trump side. So,it’s acombination of a lot of factors,
momentum, sentiment aroundTrump. But all those things kind
of drove that market valuationhigher. What'sinteresting is if
you look at where S&P 500earnings expectations were in March
of last year, the marketthought 2025 earnings would be like
279. And in reality, I thinkonce earnings settle for this year,
the expectation for 2025 isdown to 269, 268. So again, it's
funny, we had this big marketrebound even though earnings expectation
of ‘25 actually come down alittle bit.
Interesting. So obviously, Imean you're referencing various macro

(13:54):
factors there around Trump, etcetera and the outlook for the economy.
But at the same time, you'replacing a lot of weight on valuations.
And a lot of people will say,well valuations, that's fine, but

(14:14):
they don't determine stockprices over the next one year. So,how
do you blend that kind ofvaluation centered approach with
being cognizant of the macrodevelopments and then taking it all
together to determine how muchrisk to allocate in the market at
any point in time?
Okay, well what I would tellyou is, if you just take a step back,

(14:54):
let's just take a step backfor a second. If you think with the

(15:27):
market returns, let's call it10% over time, you know, 10% of the

(15:57):
time when there's kind ofblood in the streets, when, when

(16:22):
markets are cheap, whensentiment is bad, in that period

(16:45):
of time, the risk of loss in a12 month period of time goes much

(17:19):
lower and expected returns aremuch higher. So obviously we're not

(17:45):
in that period of time rightnow. Valuations aren't cheap, markets

(18:10):
aren't down a lot. Sojust bythat very factor, if you agree with
that sentiment, you would say,if the long term return is 10%. We're
not in that situation. So, ifyou X out those really good periods,
we’re more like at 9% returns.But I think valuation by itself,
to your point, is not that newevil. And there has been a big shift
in the marketplace over thelast, let's call it last 20 years.
In 2006, financials,materials, energy, was 45% of the
S&P 500. And those are lowmultiple sectors. Those are 10% multiple
sectors. Todaythose sectorsnow only represent, let's call it
25% of the ESP earnings, down45%. And what's a lot bigger? Semiconductor,
software, areas that trade forhigher multiples, generally speaking.
So, there is a mixed impactthat drives the valuations of the
market higher. Youcan't lookat the market today versus ‘06. I
completely agree with that miximpact that's driven multiples higher.
But even if you segment themarket, like we do, what you would
find is what I calltraditional growth stocks, let's
call it 44% of the market.They historically trade for about
29 times earnings. They're at32 times earnings today. Ifyou look

at heavy cyclicals (14:28):
insurance companies, financials, banks, some

(14:49):
industrials, machinery, theseare companies that normally trade

(15:11):
about 12 times earnings onaverage, trading at 17 times earnings,

(15:41):
well above where they wouldnormally trade. And then again, we

(16:10):
talk about some of these Nifty50 stocks that collectively would

(16:40):
have traded in a, let's callit, mid to high 20s bucket, now trading

(17:17):
collectively at 40 timesearnings. So, the valuation is not

(17:44):
just a little bit elevated insome of those areas, it's really

(18:17):
elevated. Andso, I think whenyou have a combination of extended
valuation with maybe overlyrosy fundamental outlook, which doesn't
appear to be the case. That'snot a good environment. That's not
a good combination, if youwill. Andagain, what I would tell
your listeners is that we arelonger term investors. I have no
idea what's going to happentoday, tomorrow, next week. It's
not what we're good at,honestly. But what I can tell you
is we model every company inthe market through the next five
years. And I can tell you thatif you look at a reasonable assumption
for earnings power in 2030,maybe a little bit more than $400
of SB 500 earnings, and youput a normalized multiple on that,
which reflects the mix of themarket. You can make an argument
to the market in five yearsand the future should be 7200, 7100.
And that kind of spits out alow fives kind of total return from
where we are today. And again,that's just not that attractive.
Nowwhen I did that sameanalysis in 2022, I was spinning
out the next five years, itwas kind of spinning out a 1213 kind
of return. But that was whenthe sentiment was not great, valuations
were cheap, and a lot'schanged. We're in the opposite position
where fundamentals maybe areplateauing a little bit, at the same
time where rates are stayinghigh, and evaluations are extended
- just not a great setup.
No, I take it. Yeah. Imean,if I was to take the other
side of it and maybe kind ofreflect some of the more bullish
sentiments you hear, it mightbe along the lines of, okay, I hear
what you're saying aboutTrump, but regardless of Trump, we're

(18:41):
in the midst of a productivityboom, the digital revolution, which
is going to underpinproductivity growth more generally
and growth and earnings. Yes,multiples are high, but they might
stay high over that five yearperiod. Andwe're into kind of a
higher nominal GDP typeenvironment than we were maybe in
the last decade. So, all ofthat together might underpin higher
returns for equities. I mean,what would you say to those types
of arguments?
What I would say is what we doreally well, we are individual micro

(19:18):
analyses, and we're doing 500micro analyses to come up with that.
I know I get 99% of what I dois kind of the micro company analysis.

(19:55):
And if you do that at 500company levels, you can kind of build
a bottom up analysis. What Iwould say is, again, I think we are

(20:32):
believers that AI is clearly apositive. Butagain, I think when
you have companies likePalantir that at one point were traded
for 90 times sales, theexpectations are so high. What do
you have to believe to believea Palantir is a good stock from its
highs? Youhave to believethat they're going to compound revenue
at a 25% to 30% rate for next10 years, that their terminal margins
are 40 and you're going to geta 30 multiple on that. It's just
the odds of that are very,very low. And even if that were to
happen, you're going to get avery, very low return over that period
of time. So,what I would sayis that there probably will be some
more productivity from AI. ButI also would say remember the difference
between the next class decadetwo is 10-year average, probably
2.5% last decade. I don'tthink we're going to average 2 1/2%
on the 10-year in the nextdecade. The decade prior to COVID
was a decade where the Fed wasdoing everything in its power to
get inflation to 2% and wasstruggling. Theywere quantitative
easing here and there, keepingrates low and they still struggled
to keep that. Could earningsgrowth be a little bit stronger than
the last decade? Absolutely.But I think REITs are also a little
bit higher. And again, eventhough the market mix is more positive
in the last decade, I don'tthink the market mix supports a 22
multiple.
Yeah, so, and effectively whatyield are you assuming? Or is there
one yield for the 10-year overthe next five years, is that built
into your model?
We assume about a 4% 10-year.

(20:53):
Yeah.
I think it's right aroundthere. I think it's either 3.95%
or 4% applies.
So, by the same token, ifyields prove to be higher, there
would be downside risk to yourforecast on that basis as well. Is
that right?
There would be. Although Iwill say it's a funny dynamic. If

(21:14):
you look at the sense of GreatFinancial Crisis, the correlation
between interest rates and TheS&P 500 multiple is zero. It's literally
zero. There's basically nocorrelation. Now again, part of that

(21:37):
is what we talked aboutbefore. The market mix. Yeah,rates
have gone up, but the marketmix has gone up too. If the market
had been constant and there'dbe a higher relationship, just like
there was a very, very highrelation from 1966 to 1998. There
was a very high correlationbetween interest rates and the ten-year,
and the earnings yield of themarket. Again, the last 27 years
that's kind of gone away.
Yeah, I mean I was curiousabout that point. Obviously,you
know, that is one of thechanges that we've seen over time
since COVID, basically, thatthe bond equity correlation has shifted,

(22:01):
as you say. You know,historically bonds and equities were
positively correlated and thenbecame negatively correlated. Andthen
as we went, you know, 2022, wewere positively correlated again.
Is that something that is akey input into your portfolio construction
when you're looking at the mixbetween equities and fixed income
or not?
I would say it's funny. We'veactually seen it here in the last
week or so as the market'scome under pressure. I think if you

(22:26):
look, ‘22, I feel like, is alittle bit of an aberration. If you
look at the last, I don'tknow, last 30 years of history, it's
very, very rare to have anenvironment where, in a period of
time, equities are comingdown, where Treasuries do not appreciate

(22:49):
in value. I think 22 was justa… We went from sub 2% interest rates
or inflation to 8%. And theidea is how long it was going to
take us to get back to kind ofnormal? And it's probably taking

(23:10):
us longer than everybodythought to get back to normal. And
so, I think, hopefully, thatwas a one-time event that we won't
have to repeat again. That wasa culmination of a lot of things
kind of drove inflation to 8%.Thatwas policy decisions in the
Biden administration that waspolicy decisions, the Federal Reserve,
there was a supply chainchallenge, there was a pandemic.
All those things kind ofhappened all at the same time. That
kind of drove us there. So,Iwould say most of the things that
would cause a market meltdown,a market of all 5%, 10%, 15%, 20%
would probably be accompaniedby a decline in interest rates. Most
of those things, not all, butmost of those things.

(23:33):
You did talk about theinflation going to 8% and we mightn't
see it going up that highagain. But there is that view in
the market that inflationmight be a bit stickier, that we
might see more of these kindof mini flashes of higher inflation.
I mean, given that you'refocused on financials, equities and
bonds, what levers do you haveto kind of pull? If you really were

(23:55):
strongly convicted thatinflation was going to be higher,
would that push you to certainsectors or would you just have to
live with that possiblescenario of bonds and equities falling
at the same time?
Well, we have a lot offlexibility in this strategy. So,

(24:37):
one of the things that we own,about 10% of the portfolio is in

(25:17):
leveraged loans. Leveragedloans are a great product, right?

(25:42):
They are floating rate innature. If rates stay higher for

(26:14):
longer, you get higher yields.So,if you think about in a portfolio
construct, having that highquality leveraged loans be 10% of
the portfolio, that's an assetclass that had positive returns in
2022 when rates were rising.So that helped buffer some of the
negative returns in equities,helped buffer some of the negative
returns in Treasuries.Actually,at the time, we didn't
really own much Treasuries atall. So, having leveraged loans in
the portfolios is an option.Again, we've actually brought that
down a little bit. As therates on Treasuries have risen, the
yields on high yield haverisen, we've raised that exposure.
WhatI would say is we areconstantly making decisions on where
is the best risk reward in themarketplace? So, if I go back to
2022, even though rates wererising and inflation was higher,
the return we could get ininvesting in equities was off the
charts. Like I said, 12% forthe market, which is great. We can
obviously do better than themarket. Andyou were getting kind
of, let's call it 4%treasuries and 6% in loans and high
yield, owning a lot ofequities made a lot of sense. Now
if I think about that analysistoday - getting a little bit more
than 4% on treasuries, youknow, 6% on loans, 6% on high yield.
Butagain, I just talked aboutthe equity returns over the next
five years. We would project,you know, maybe conservatively, but
you know, about 5.2%, youknow, so you're getting higher returns
in fixed income today on aforward projection basis than you're
likely to get in equities. Andso, we are constantly looking at
that analysis. Youknow, is itbetter to own a utility that has
half the beta of the market orbuy a single B bond that has a beta
of 25% of the market? We'reconstantly doing that kind of that
analysis. There are no silos,we all met, we manage the fixing
portion of CAF and CAFEtogether with the combination. So,
we're constantly looking atthose decisions all the time.
Yeah, and at the moment,what's the thinking on that? Like
obviously, as you say, you getfour and a quarter, whatever it is

(26:34):
in Treasuries. Now, obviouslyyou pick up a couple of percent if
you go with levered loans. Butif you get a severe downturn, presumably
there are the sectors that aregoing to get marked down and face
stress. And your Treasuries,you'll get your duration there. So,
how much is that driven by, Isuppose the total return expectation
and how much is it driven bytheir potential characteristics in
an adverse scenario?

(26:55):
It's both. It's actually both.We do a multi scenario model around
that with probabilities ofdownturns, all that kind of stuff.
What I would tell you isagain, you look really good there.

(27:23):
But I think one of the thingsjust to keep in mind is, because
we don't know exactly what thefuture is going to hold, right. So

(27:45):
leveraged loans in combinationwith Treasuries together is kind
of the peanut butter and jellysandwich of the fixed income market,
if you will. Because thinkabout this. You know, leveraged loans

(28:11):
do well when rates are rising.The Treasuries do well when rates
are declining. So, they helpoffset each other a little bit there.
Ifyou had an environment toyour point, you had a big downturn,
the rates might come in, whichis negative for loans, and spreads
might widen, which is negativefor loans. But Treasuries actually
rally. So, if you put loanstogether in a portfolio with Treasuries,
again, you get the combinationof those two things, the peanut butter
and jelly sandwich, reallygenerates really good risk returns.
That helped in 2022, and sofar. Year-to-date, you know, Treasuries
are outperforming loans, butthe combination of those two really
produces really good riskadjusted returns. We try to, you
know, have those exposures, inmost environments, somewhat similar
in size. Andagain, what weown in loans, you know, we own things
that are very, very safe, thehighest quality loans. We're not
speculating in dish. We'reinvesting in really high quality
companies that have very, verylittle limited cyclicality that tended
not declining from a spreadbasis very much even in their downturn.

(28:36):
So obviously you've beenrunning the strategy since ‘06 and
you've been in the markets,you know, 26 years, which spans a
long time. There's a goodchunk of history. I mean, how much

(28:59):
do you go back and look atperiods in the past or not? Imean,people
draw parallels between now andthe late ‘90s. Obviously we're talking
about how the portfolio mightperform in a severe downturn. I mean,
obviously, I guess you mightstress it on the data during the
financial crisis. Are they allinputs into the decision making?
They are, they are. The futureis very difficult to discern it.

(29:33):
Every cycle is a little bitdifferent than every other cycle.

(29:55):
And again, what I would say iswe understand. We studied every market

(30:22):
downturn for basically thelast 50 years. We thought about how

(30:45):
far do markets decline.Wehave factors we look at, which
I can't really go to theproprietary, that would tell us when
is the time to get reallyaggressive with the portfolio, when
is the time to go from 57%equity exposure, today, to 72%. We
know that point. We know atwhat point does the market return
get to double digits. We knowall those points. We have a predetermined
plan put in place that if themarket went to X, we would go, most
likely, from 57% equities to62% equities. Ifthe market went
to X minus 15%, we know wewould probably go from 57% equities,
to 72% equities. But everybodyelse who's really bullish today capitulates
at the bottom, we're going tobe all in on equities in that environment.
And we will probably beselling Treasuries along the way,
during that period of time,and buying high yield, or buying
leveraged loans, just like wedid in other downgrades. So, we know
how spreads expand indownturns. We've looked at how 5-year,
10-year, 3-year Treasurieschange. Yeah, we have a wall of data
that helps us make intelligentinvestment decisions irrespective
of the emotions that mostmarket participants might be going
through in a downturn.
Okay, good stuff. And just tobe clear, are you at 57% equities
now, is that right?
Yeah, just to be clear, we doself-calls on portions of our equities.
So, we look at it like a deltaneutral basis. Okay. So, if you X

(31:07):
out the call, if you includethe calls, our net equity exposure
is at 57% today.
And that's very much on thelow side of the range in the track
record of history.
We've averaged about 61% to62%. So, you know, you were probably
about 500 basis pointsunderweight that exposure. And again,
we would be underexposed tothe Palantirs, the Teslas, the Grog.coms

(31:29):
of the world, some of thecompanies that may be a little… the
Costcos, the Walmarts, some ofthe more speculative or highly valued
stocks in the marketplace too.
Yeah. And so, maybe tell us abit about the process for stock selection.
Presumably as you say, you doit bottom up on all the stocks. So,

(31:54):
it presumably is heavilyvaluation driven. I have heard you,
elsewhere, speaking a lotabout the importance of management
and great management. So,Imean, I guess it's a mixture of qualitative
and quantitative. But in yourown words, how do you balance those
factors and what does greatmanagement look like?
Sure, great questions. So,when we think about the market, we

(33:23):
look at the 500 companies inthe market and where are we going

(34:56):
to spend most of our time?So,we've done a lot of, whether
it be qualitative orquantitative studies on this. What
we've basically found is thereare six reasons companies tend to
underperform the market over afive-year period of time. Six main
reasons we try to avoid thosecompanies. We call it the fatal flaws.
You know, bad management team,poor cap allocation, secular challenge.
Acompanythat doesn't have abusiness model that supports high
single digit EPS plus dividendyields, or a company that could do
that but it's very, very highrisk, and then an extreme valuation.
Again, we mentioned thecompanies today that have what I

(35:21):
call an extreme valuation.So,if you go through company by
company in the marketplace,and you say I want to avoid all these
companies that have one ofthese six fatal flaws. It kind of
leaves you a stock portfolioof you know, a universe of investable
ideas of 115 stocks at the lowend to maybe 140 stocks at the high
end. Ithinktoday is like 122stocks that are kind of investable
for us today. And we're goingto spend all of my team's time, all
my time, focused on those 122stocks. And for the cash equity sleeve,
we're going to select maybethe 60 best of those names. And for
the CAF ETF, we're going toselect the 90 best names of those.
Nowto your question aboutwhat makes a good management team?
It's the right incentives.What is the management team trying
to do? Are they trying tobuild a big empire? How good are
they operationally? How oftendo they come back with excuses about
why they can't get theiralgorithm, why they can't deliver
on what they've promised? Dothey surround themselves with really
good people or do theysurround themselves with weak people
who don't want to challengethem? Agoodmanagement team deploys
capital wisely, whether it bebuying back stock, doing bolt on
acquisitions at high returns.Are they more strategic in my term
means poor returns on capitalfor their deals. So, it's all those
things that are reallyimportant to our process. Oneof
the names I mentioned before,or maybe we haven't mentioned, but
I mentioned the past, is, youknow, GE was a company that we didn't
focus any time on because weknew they had a horrible management
team, had horrible capitalallocation. You know, Jeff Immelt
has probably destroyed moreshareholder value than any other
CEO in the history of mankind.As a CEO, it's kind of crazy. Andagain,
it wasn't our focus, but theday Larry Culp was announced as CEO
at GE back in 2018, Iliterally didn't do anything else
for 14 days but do a deep,deep dive on GE. And as a result
of that, it's like, ah,there's a lot of upside here. We
have a change agent. Capitalallocation is going to be better,
company's not going to gobankrupt. And we made a giant bet
that worked out really wellfor us. Butthat's an example of,
you know, coming with a lot offatal flaws going to a company that
didn't have any fatal flaws. Imean, clearly had challenges at the
time, but we had a high degreeof confidence that the management
team could, and capitalallocation would get a lot better.
And we made a big bet. We wantto invest with management teams that
we trust them. We have a longterm perspective, Capital allocation
is good, yeah, that's reallyimportant to us.
Okay, you mentioned capitalallocation a lot and obviously you've

(35:42):
written a book on the topic. Imean, we have seen, I suppose, I
don't know if it feels like agrowing feature of the markets in
the last 10 years of sharebuybacks and that's been an important
driver. I mean, from yourperspective, do you see that as good
capital allocation? Obviously,I guess it depends on the stock by
stock basis. But generally areyou favorable on that?

(36:03):
It really depends. It reallydepends. I mean, you know, it's funny
the companies who should notbe doing share repurchase are companies

(36:34):
such as companies that aresecular challenged. If your business
is in secular decline, yourgrowth rate's slowing, your margins

(37:01):
are under pressure, yourmargins under pressure, you really
shouldn't be buying back yourstock because you're not getting

(37:26):
good returns. AsteadyEddiecompany that trades for 15, 16 times
earnings, that is growing midsingle digits, with high single digit
kind of EBITA growth, theyshould be buying the stock all day
long. Right. You know, again,Costco should not be buying stock.
Walmart should not be buyingstock because they are low returns.
Anindustrial that trades for25 or 26 times earnings should be
doing both on acquisitions at12 times EBITDA, shouldn't be buying
back their stock at 25 timesearnings. So, I would actually argue,
in the last 10 years, asvaluations in the market have risen
in general, you see a lot ofcompanies that are either in secular
challenge mode or have verycyclical businesses that are buying
back a lot of stock. Andthat's not a recipe for value creation.
It'sreally firm dependent.You should go, where is the best
risk adjusted returns for meto deploy capital? When valuations
for acquisitions are low weshould be doing acquisitions. When
valuations for acquisitionsare expensive you should be buy share
or even building cash on thebalance sheet. It's really firm specific
more than anything else.
Good. And I mean for theaverage investor, what would your
advice be or suggestion be interms of how to think about valuations
and capital allocation,management quality, et cetera? Obviously
most individual investorsdon't have a team like yourselves,

(37:51):
maybe don't have the insightabout the quality of the managements.
And then you read so muchabout valuations, different metrics,
KPE, you know, you do a bottomup IRR of the market. So, it's like
break it down into simplicity.Ifyou were teaching a group of undergrads
or some novice investors howto think about valuation, what are
the key things you have to watch?

(38:14):
You know it's a really goodquestion. I'm going to give you a

(38:35):
really not great answer. Imean the reality is, you know, it's
really hard for an individualinvestor to do the kind of work that

(39:16):
we do. We have the access tomanagement teams, you know, we build

(39:37):
models, you know, at five, sixyears on everything that we invest.
It's really hard to do that inmany respects. I mean I guess that

(40:20):
the best answer would be justto buy the Cap Appreciation Fund.
Then we do that for you.InCAF we can balance risk/rewards
within asset classes and gowhere the value is. What I would
just say though, and thenagain, this is not going to be a
great answer. But, you know,part of our strategy, Allan, is trying
to find the best risk adjustedalgorithm in the marketplace for
the lowest multiple. Costcohas a low double digit algorithm,
their earnings plus theirdividends, low double, maybe 10%,
11%. That's what theyhistorically are, all right. And
they trade for 57 timesearnings. Othercompanies in the
marketplace, Becton, Dickinsonhas the same algorithm, same risk
profile and they trade for 15times range. So, I would argue, over
time, if you have the samerisk profile and the same earnings
growth and same kind ofdividend, over time those two things
converge. The multiple ofmarket awards, back to Dickinson,
should increase, whichincreases your total return over
a period of time. And themultiple in the market should pay
for Costco should decline overtime. AndI think, over time, if
you think about a lot of thevalue creation that we've created
in CAF, over time, it'sfinding that company that the market
doesn't appreciate. BuyingTherma when it's 11 times earnings,
buying Danner at 14 timesearnings, buying Pfiser at 12 times

(40:46):
earnings. Buying Auto Zone ata low double digit multiple and having
these great algorithms, greatcompanies and all of a sudden the
market figures it out, so youget the combination of really good
earnings growth and a lot ofmultiple expansion as well at the
same time. And that is how youproduce low double digit algorithms
can kind of go to high teenstotal return. That's been a really
important part of ourstrategy. So,ignore what's exciting
in the marketplace and justtry to find companies that you think
can generate high yield digitreturns, little digit returns where
their multiple is just too lowfor that relative to other companies
in the marketplace. It’s hardto do for an individual investor,
but that's a lot of what we doat a very, very basic level.
Yeah. And I mean, would youground yourself as traditional value
investors? And I guess thereason I ask is we had Aswath Damodaran
on previously. He seemed quitedownbeat about prospects for traditional

(41:06):
value investing. His point wasthe kind of screens Graham ,Dodd,
Buffett type screens. Anybodycan do it now, you can download a
spreadsheet to do it for you.You're not going to get rewarded
for that type of analysis. Butit sounds like you believe that that

(41:30):
is the case. AndI suppose thesecond question is there is a view
that you can identify thecheap value stocks, but they could
stay undervalued for a lotlonger in the current market than
they might have in the past.
Yeah, let me make a couple ofpoints. One, the challenge with the

(42:07):
value index is you think about,this is going to be a very simplistic

(42:45):
way to think. But 40% of aRussell 1000 index has some degree

(43:21):
of secular challenge. Thebusiness is under pressure. It's

(43:45):
long term. There's no meanreversion characteristics to those

(44:10):
businesses. And if you put $40in those stocks, the odds of underperforming

(44:45):
are pretty high. Now,theother 60% of the market in value
stocks, JP Morgan, Bank ofAmerica, they're not the Nvidias
of the world, but they're nothorrible companies and their cyclicality,
again, if you buy them whenthey trade for 9 times earnings and
sell them when they trade for12 times earnings, you can make a
lot of money doing that. Butthe value universe of stocks will
not grow earnings at the samerate as the rest of the market. We
think about multiples.Wetalked about multiples a lot in
this discussion. The reasonwhy growth stocks have destroyed
value stocks for the last 15years, it's not really multiples.
It's just they've grown somuch faster. They've grown to be
much larger companies relativeto the value universe which has been
left behind. Butgoing back toyour first question with regard to
what kind of investor we are,I don't consider myself a traditional
value investor. I considermyself a GARP investor. Growth At
a Reasonable Price investing.And I would tell you I think that
is the most attractive part ofthe marketplace. Whenwe look at
the GARPI stock, ourproprietary GARP universe, over the
last since 2006 it's after themarket by 400 basis points per year.
Earnings growth has been about40% higher than the market over that
period of time. And indownturns, earnings don't go down
for those companies for themost part, they're not that cyclical.
Andso, a lot of the alphawe've generated, the equity sleeve
of CAF over time has reallybeen a function of this 2000, 3000
basis point overweight tothese GARPI stocks. And I would tell
you that's the mostinefficient part of the market. Whyis
that inefficient? Think aboutthe growth investor. A growth investor
with these GARPI stocks willsay, well, I only want to make companies
that are growing organically10% a year. And so, I'm not going
to own these stocks, or I'mgoing to own too little of these
stocks. A value manager mightsay, hey, I can buy banks at 9, 10,
11 times earnings, maybe nottoday, but normally 9 to 11 times
earnings. I can't pay 18 timesfor this GARP stock. Aretailinvestor
probably hasn't heard ofRevvity or Marsh & McLennan or these
companies. And a hedge fund,he wants high volatility. He wants
to be able to make a call in aquarter that stocks can go up 8%
or down 8% in a quarter. Theseare not the size to do that. So,
there's no natural buyer forthese stocks. Which actually sounds
bad, but in many respects whatit is, is you have these companies
that have these really greatalgorithms that can generate low
double digit returns betweenthe earnings growth and the dividend
with very low volatility. Andthey trade for too low valuations
relative to where they shouldbe. Andas a result of that, you're
able to, in most cases, a lotof these things, they become a little
bit better over time. Theirmultiples expand and even if they
don't expand, you still growearnings 30%, 40% faster than the
market over time. It's just asupply demand imbalance for these
GARB stocks, which createsjust great returns for our shareholders
over time.
Interesting. Well, I mean,what you're talking about there maybe

(45:08):
reflects some of the marketmicrostructure and curious to get
your thoughts on how that haschanged over time. Soobviously we've
had factors like the growth ofindexing, the rise of ETFs, or like
sector ETFs, easy to invest insectors, et cetera, and obviously
growth of hedge fundstrategies, more alternative risk
premia, factor bets, etc., So,putting it all together, it sounds
like that has thrown upopportunities, to your mind, particularly
in GARP stocks. But I mean, ingeneral, have all of those changes

(45:29):
made it easier or moredifficult for you in your job?
It's funny, I'm at atraditional asset manager that is

(46:13):
under pressure, as allregional asset managers, because

(46:43):
of the rise of ETFs and otherpassive forms of investing. So, as

(47:31):
an investor, to your point,that's been a challenge. But at the

(48:16):
same time, as an investor,it's actually really positive, it's

(48:54):
really great. Ifyou thinkabout when I joined in1998, there
was a lot of investors whowere very, very… You know, it's a
large part of the market whowere thinking more than one year
out. We were a lot of peoplewho were thinking, oh, what's your
earnings power three yearsout? What's your earnings power five
years out? Today,a lot ofthose investors have just gone away.
They've lost a lot of assets.You look at the kind of questions
you get asked at conferences.It's so short-term in nature. And
what's interesting is, I thinkwhat's happened is all of the intellectual
firepower investment in theindustry, whether it be hedge funds,
or whether it be short-terminvestors, or passive, everybody's
focused on the really shortterm they're trying to solve what's
the stock going to do nextweek, next month, what's next quarter
going to be. And no one'sasking the longer-term question about
what's the earnings powerthree, four, five years down the
road. So,I would actuallyargue that in the short term the
market's getting much more,much more efficient. Your ability
to have an edge in theshort-term with data points or insights
is really, really limitedtoday. I think that'll even come
more true with AI, all thatkind of stuff. Butthe kind of investing
we do, the three to five yearinvesting that we do, that focus
on our North Star is that fiveyear internal rate of return. That's
become far less efficient. Andagain, you see all these very, very
strange correlations todaywith ETFs. AndI’ll give one example,
it's actually probably, it's alittle bit old, but when Hillary
Clinton was running forPresident in 2016, she tweeted, I
guess it was a tweet backthen. She tweeted about how high
drug prices were and it drovedown everybody in the, what was the
DRG, the pharmaceutical index.Andevery Stock was down like 10%
from the highs. And you know,it could be called Zoetis, which
makes drugs, not for humans,but for horses and pigs and cows
and chickens and goats. It wasdown 10% as well, or 9% as well.
Now, I'm pretty sure she wasnot concerned at the time about the
price of drugs for cows andchickens and goats and sheep and
all that kind of stuff. Butitwas an index and people just shorted
the index and it drove thatdown. Another example, when Donald
Trump was elected for thefirst time, REITs used to be part
of the financials index andrates were rising dramatically. And
so that drove, right after hegot elected, that drove financials
up, but it also drove REITsup, which should have gone down because
REITs were a part of theindex. So, people were just buying
the index and it drove… So,wefind all kinds of situations where
people are making a tacticaldecision based on a sector, or a
thesis, and it drags somethingtoo high on the upside or too high
on the downside for no realreason. And we can take advantage
of that. So, we like passiveas investors, probably not as shareholders
necessarily, but we do like itas investors. Itmakes the market
more inefficient. It makes itfar more inefficient on the long
end of the curve, the long endof what we do. So, we're really excited
about passive. We're reallyexcited about the market becoming
much more short term becauseit just creates more alpha for what
we do.
I mean, the growth of passivehas been relentless. At what percent
of the market being passivedoes it become problematic? As you
say, it's throwing up moreopportunities for you. But is that
something… Does it becomeunstable at some point because of

(49:16):
too much passive flows?
You need someone in themarketplace to act as a (liquidity
provider or whatever)liquidity provider but also if the

(49:40):
market was 100% passive,everybody would just be buying all
the time or selling all thesame time and all the same stocks.
Yousee someone who's tryingto discern where value is or where
non-value is, we do that,whether it be short term with hedge
funds or longer term with us.You do need some. I don't know. That's
a good question. I don't knowwhat the answer to that is. But I
could tell you with every 1%that the market is more passive,
our opportunity to add alphagets better. And so, I hope we will
never see that date. Thatwouldn't be good if passive was 99%
of the market someday in thefuture. It wouldn't be good for a
lot of people. But again, asinvestors it's a really good thing

(50:05):
for us.
You touched on earlier thechange in the composition of the
index, say, versus 2006. Ithink it was 45% in financials, energy,
and staples, back then, andobviously much more towards technology
these days. Is that just acyclical phenomenon or is that, you
know, a structural change thatwe should expect it to see sustained

(50:26):
over time? And you know, whatare the implications of that? I mean
in terms of the cyclicality ofthe market, if anything?
Well, it's interesting if youthink, the 45%, it was energy, it

(51:06):
was financials, and materials.Those are also, that 45% is also

(51:36):
lower margin, but it's alsomore cyclical. So, I would make an

(52:08):
argument the market has becomeless cyclical over time as the most

(52:41):
cyclical components. Ifyoubasically take out energy, materials
and financials, the market,even in the great financial crisis,
peak to trough was down lessthan 10% of earnings. And even if
you go back to the COVIDdownturn, which is a short downturn
but a downturn, XO3 sectors,the market was down like 7% earnings
growth. So,the rest of themarket tends to be less cyclical
than those sectors. So, asthose become a smaller part of the
mix, the market becomes lesscyclical, at least from an earnings
perspective, than it has beenhistoric. Again, the earnings fell
dramatically. I think it mayhave been 40%, 50% in the last downturn.
We went from an expectationwe're going to do $95 to like $60
of SPF under earnings. So, itfell dramatically and last downturn.
So,whatI would tell you isthe market has become less cyclical
and I think this willcontinue, I would think, at least
from an earnings perspective.The big constituents, Apple, Microsoft,
there's probably more debatearound Nvidia, more debate around
what Tesla would be in termsof earnings, but I think a lot of
those big companies willcontinue to grow earnings at a healthy
pace over the next five or 10years. Thechallenge is, whether
it be energy. Energy doesn'treally grow earnings very fast. They
pay a little bit of adividend, production growth is very,
very low, buy back a littlebit but doesn’t grow very fast. Staples,
I've seen a lot of secularchallenges, don't grow very fast.
Regional don't grow very fast.So,and you know, a lot of the things
are under secular challenge,you know, it be a Comcast or Charter,
you know, don't grow veryfast. So, I think, over time, and
we model out to the end of thedecade. You know, the top 100 companies
in the marketplace will gofrom, I think our mass is from 60%
of earnings today to 68% ofearnings in 2030 is the way we're
looking at it.
Yeah, so, is the point thenthat, okay, you can't necessarily
compare the S&P multiple todayversus 2006. But even allowing for
that is high versus what’srecent. Yeah, yeah. Okay.
Once you do the segmentation.Andagain, I would just also say
the one thing, and I don'twant to get too far on tangent here,

(53:06):
but what I would say is youalso can't compare the US market
to like the German stockmarket. It's so different. You know,
autos are a tiny fraction.That's X Tesla bar mark, but they're
a giant part of the GermanDAX. Chemical companies are a very
small part of our money butthey're a large part of the DAX.

(53:30):
Financials are a big part ofthe FTSE 100 or Footsie, the Footsie
index in Europe. So it's, it'sjust. Youcan't compare apples to
orange because the companiesare so different. Growth rates are
so different among the USversus Europe or Japan or Australia.
Does it even make sense tohave these geographically focused
funds, ETFs? I mean theanalysis, yeah, okay, because the

(53:50):
analysis will be like that,oh, the German economy is doing terrible.
Oh, get out of German stocks.Buthey, look at the DAX. It's the
top performer this year. So,you know, why is that? You know,
it seems like that globalsector would make much more sense.
I completely agree. I thinkit's funny, what we found over time
is actually havinginternational stocks in a portfolio,
not only does it reducereturns, it actually increases risk.

(54:13):
Because what happens in aneconomic downturn, the dollar strengthens.
And again, almost all thesecompanies have a giant portion of
the revenue outside the US, oroutside of Germany, if you're a German
company. So, this whole aspectof getting a whole bunch of diversification
benefits from owning a UKcompany or owning a UK index or German

(54:34):
index, it really is just a bigfolly, if you will. People really
shouldn't, you shouldn't thinkabout diversification from that perspective.
Okay. We touched on a littlebit on Nvidia AI, but curious to
get your thoughts on how AI isimpacting the investing world. Obviously,
it's impacting stockvaluations. But in your role, are

(54:55):
you using it, are youranalysts using it or not in terms
of the stock analysis andvaluation, et cetera?
Not really. What I would tellyou is again, AI may help out with

(55:18):
trying to help with veryshort-term data points where it’s
easier to amalgamate data offof websites or web scraping, all

(55:41):
that kind of stuff. I mean,there are things we're doing with
AI that help try to make usmore productive. Istilllisten to
every transcript of everycompany that we invest in, every
company we could invest in,but there's a lot more summarization
analysis you do. You know,there's things we can do with facts,
which is kind of our way. Welook up information. It's a service,
it's easier to search forthings so it can make you a little
more productive. But I don'tthink it… So far, it has not had
a big impact on how we invest.Wehave internal tools we're looking
at in terms of trying tocreate our own little copilots, where
we can ingest all ourinformation, and hopefully all of
our research, and hopefullyfind insights. But I would say it's
really early days, for AI,having a big impact on the investment
process so far, at least forlonger term investors.

(56:03):
And in terms of sectors thatare companies that it is impacting,
I mean if you read some of theresearch people are saying, you know,
the impact on productivitygrowth could be kind of like anywhere
from 0.1% per annum to 1% perannum. So big, big, big variance
in expectations there. What'syour sense?
I think we could be surprisedby the productivity benefits with

(56:37):
AI. Again, it's so early, it'sso fun. We have so many really good
use cases like marketing,legal, programming. We have a lot

(57:11):
of really good use cases thatyou can extrapolate that to a whole
bunch of other sectors and saythis is going to be amazing. But

(57:47):
we just don't know. It's stillso… It'sfunny, we have this giant
industry, with trillion dollarcompanies, and still early. It's
very, very early in theprocess around how much productivity
we're going to get out ofthis. So, it's really hard to make
a definitive conclusion. Ijustgo back to programming. We all
told our children, hopefullymy children ignored me, thankfully.
Go become a programmer. Gobecome a programmer. Because that's
a huge upside. There'sincredible demand for that. Theproblem
is GitHub Copilot costs $19 amonth. If you buy four subscriptions
to GitHub Copilot, you can getrid of your fifth programmer. The
programmer costs over $1,000 ayear. Thesavings from that are off
the charts. Documentation,translation, there are other things,
documentation, management, youknow, where it's just off the charts.
That kind of benefit you.Customer service, huge benefits.
Going through a drive throughat Burger King, having an AI on the
other side instead of a person- huge benefits. There's a tendency
to extrapolate to everythingelse, It's hard for investment management.
It's not as easy withinvestment management as a drive
through Burger King. I hope, Ihope that…
Just conscious of time. Thereare a couple of quick questions I
wanted to get to. One wasobviously you're running the Capital
Appreciation Fund. It's verymuch bond equity. I mean if you were

(58:09):
running a longer-termportfolio, maybe an endowment, unconstrained,
I mean what would assetallocation on that look like, do
you think, on a kind of a fiveto ten year view?
Oh, that's a really goodpoint. Well, I would tell you the
first thing is I wouldn't ownany mortgages because the risk/reward

(58:30):
is not very good. I wouldn'town any international stocks. You
get a lot of great companiesand great diversification buying
the US market. So, if acombination of kind of GARPI, US
stocks, high yield, leverageloans, and the other area that I
would be interested in, I'dprobably have (which I can't) some

(58:52):
private equity there –mid-market private equity as opposed
to large kind of privateequity. Thosewould be the four assets:
GARP stocks, high yield,leverage loans, and mid-market private
equity.
Interesting. Good stuff.Wealways like to wrap up by getting
just some advice for people,maybe coming into the industry, or
people who want to get to bebetter investors. I mean things that
have been influential for youand either books you've read or advice
you've got is there anythingyou would pass on?

(59:15):
You know, one of the bestbooks I read, we have a book club
here that I actually started.A gentleman, Kahneman, Daniel Kahneman,

(59:38):
who just passed away, Ibelieve, recently. He wrote a book
called Thinking Fast and Slow.It's just about how we as human beings

(01:00:01):
make decisions. How you know,there's a tendency to make decisions
based on not really goodinformation. It'sthe idea of kind
of thinking fast is how wetraditionally make decisions. Maybe
more emotion, not a lot ofinputs. Thinkingslow is actually
thinking about all thedifferent ways in which you can make
a decision, all the differentinputs you can use. And actually,
you know, having those inputs,having those samples, if you will,
has helped you make a betterdecision. Andagain, as investors,
I think Thinking Fast and Slowis probably the most important book,
as an investor, I'd read in along period of time. Even though
it wasn't really written forinvestors. It's probably relevant
to life and other things aswell, but just how we make decisions
and try and take the emotionout of it. I think that's a great
book by, again, a great man, aNobel Prize winner, actually.
Thanks very much for comingon, David. It’s been great to get

(01:00:22):
your insights and fascinatingto hear about how you're running
your portfolio, so we verymuch appreciate it. So, stay tuned.
As ever, we'll be back withmore content on Top Traders Unplugged,
so we'll speak to you soon.
Thanks for listening to TopTraders Unplugged. If you feel you
learned something of valuefrom today's episode, the best way

(01:00:44):
to stay updated is to go onover to iTunes and subscribe to the
show so that you'll be sure toget all the new episodes as they're
released. We have some amazingguests lined up for you, and to ensure
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(01:01:05):
on Top Traders Unplugged.

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