The World According To Boyar: Podcast

The Wall Street Journal’s Spencer Jakab on the real winners of GameStop mania, Robinhood’s role in encouraging stock speculation (and how it came very close to bankruptcy), and how Chamath Palihapitiya and Elon Musk fueled the flames of the whole debacle.

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The Interview Discusses: 

  • His fascinating new book, The Revolution That Wasn’t: GameStop, Reddit, and the Fleecing of Small Investors.
  • Robinhood’s unique business model and whether Robinhood has “democratized” finance as it claims.
  • How Robinhood came very close to the brink of insolvency.
  • The role of “influencers” like Chamath Palihapitiya, Elon Musk, and David Portnoy in driving the speculative excess of 2021.
  • His surprising take on Keith Gill, aka “Roaring Kitty.”

About Spencer Jakab:

Spencer Jakab is an award-winning financial journalist and a former top-rated stock analyst at Credit Suisse. He edits the Wall Street Journal’s “Heard on the Street” column and previously wrote the daily investing column “Ahead of the Tape.” Prior to joining the Journal he wrote for the “Lex” and “On Wall Street” columns at Britain’s Financial Times.


Click Here to Read the Interview Transcript

Transcript of the Interview With Spencer Jakab:

[00:00:00] [music]

Jonathan Boyar: Welcome to The World According to Boyar, where we bring top investors, best-selling authors, and business leaders to show you the smartest ways to uncover value in the stock market. I am your host, Jonathan Boyar.

Today’s very special guest, Spencer Jakab, is a well-known name to readers of The Wall Street Journal, as he is editor of the Heard on the Street column. Prior to that, he worked at Financial Times. He was formerly an equity research analyst at Credit Suisse. He’s just released a fascinating new book called The Revolution That Wasn’t: GameStop, Reddit, and the Fleecing of Small Investors.

Spencer, welcome to the show.

Spencer Jakab: Hey, thanks for having me.

Jonathan: No, thanks. I really enjoy your column, and I enjoyed the book. You have a really interesting career. You took an interesting route. You’re now editor of the Heard on the Street column, but you started your career on Wall Street as an equity research analyst. What made you make the switch?

Spencer: I fell into that by accident, to be honest. I didn’t know anybody, growing up, who worked on Wall Street at all, or in journalism, for that matter. My parents immigrated here in the ’20s. Everyone who they knew and who we knew were in the same boat. They’ve obviously wanted me to go to college and do something, earn a bit of money and be able to support myself, but Wall Street was just totally terra incognita, and even among my friends in college.

Then, I got an application by accident to a program at Columbia University that’s a quasi-professional program. Literally, I got it by accident. My undergraduate adviser, she was giving me recommendations for PhD programs in History and stuff like that, and she said, “No. I did that program, and maybe you should consider it. Maybe it’ll give you options and you can still be an academic, if that’s what you want.”

Literally, the first or second day, I met a kid who had been an investment banker, who is four years older than me, and we’re still friends, who had [00:02:00] been in that program. I’d heard the word investment banker. I think maybe I’d just read or that was the year that Liar’s Poker came out. I didn’t really understand what it was, and I asked him to explain it to me. It sounded fun. He hated it, but it sounded fun to me. I said, “Well, how do I get a job like that if I want?” He said, “Take all the finance courses.” We’re at Columbia University, and we could take all the classes that we wanted at Columbia Business School.

I took all the finance coursework that I was allowed to take, and I found it really interesting. I looked for jobs. My parents were immigrants from Eastern Europe. The Iron Curtain was falling, and things were being privatized. I wrote letters to investment banks and financial firms in New York, and did not really answer me or send me a polite decline.

Then, I got on. I don’t know if you remember there used to be these things called courier flights, where you could fly to places really cheaply. I had very little money, but I just got on a courier flight wearing my suit. I went to Helsinki, and then to Budapest, Hungary. I contacted people during a week there and said, “Hey, I’m in town. I’m bilingual. I know about finance. Would you like to hire me?” They all wanted to hire me, and so I just picked the one I liked best.

I spent almost a decade as, first, a country analyst, and then I became head of equity research actually for the entire region, from Russia to South Africa, eventually. I was good at being an equity analyst, and a team move, I guess 24 people at the peak, in those countries. I traveled all over. It was very interesting.

Then, I just got tired of it because I found the subject matter interesting, but I was just managing people and meeting clients all the time. I decided what I’d really like to do is just to talk to people about it and write about it. I’d become friendly that a kid, same background as me, except he’d become a journalist. We were very friendly. We still are friends. He said, “Listen, you can just get a job. You know things, you know useful things, if you want to be a financial journalist.” I literally I just applied [00:04:00] and met someone and got lucky and got my start. It was 19 years ago.

Jonathan: Let’s talk about your fascinating new book, The Revolution That Wasn’t: GameStop, Reddit, and the Fleecing of Small Investors. The title was certainly provocative, to say the least. Can you briefly tell us what the book is about?

Spencer: Sure. The book is not just about this, but it’s the event that inspired it, was GameStop mania, which took place in late January to early February 2021, when the shares of a struggling video game retailer in the US became the most traded security in the world for a few days, and became the center of a political and social firestorm.

Even before that happened, when I saw what was about to happen– I have three boys. One of my sons alerted me to what was going on because a friend of his was involved, and my son is on WallStreetBets on Reddit, which is the social network that was really at the center of inspiring this “revolution”. It took me 10 minutes to know that it was a crazy thing that we had not ever seen before that I had to write about. It only became, let’s say within the next three or four days, even more compelling and something to write about. Here was a story that touched retail investors, because you had this whole new group of investors who could never have been in the market. First of all, they’re young and typically not interested in the market. Second, they had so little money usually, that they would have chewed up their accounts, brokers wouldn’t have bothered with them a generation earlier. They couldn’t really have done what they were doing, and it also was a generation that had a very dim view of Wall Street, which plays into the story.

They took their little brokerage accounts, and they organize on social media, and they weaponize them into an attempted corner, and a very effective short squeeze to punish certain hedge funds that were short stocks like GameStop, but also AMC, BlackBerry, Nokia, Bed Bath & Beyond, the other meme stocks. [00:06:00] They blew multibillion-dollar holes in these hedge funds. This is something, as you know, being in the investment world, you can’t do. You can’t sneak up on somebody and get together in a smoke-filled room and say, “I’m going to buy just below the reporting limit, and you buy just below the reporting limit, and five of us are going to get together, and then we’re going to pounce on this guy who sold the stock short and force it through the roof.” The SEC would be paying you a visit very soon.

What about doing it out in the open? What about discussing it for several weeks on a message board that these guys just don’t happen to take very seriously or to read? I happen to know that some of the people who are victims did see their names. They did see what was being discussed, and they just didn’t take it seriously. It cost them billions of dollars because they didn’t take it seriously. That, in and of itself, was a crazy story. It’s the kind of thing that happened before there was an SEC, back in the days of Vanderbilt, and Jesse Livermore, and what have you, these crazy manipulations, stock watering, and corners and stuff that used to happen.

Then it became more incredible, because then Robinhood, which was the main broker for most of these people, was overwhelmed by the orders and had to stop purchases. A million conspiracy theories were spawned, and then Washington got involved. It became this populist uprising. Remember, this was just weeks after the Capitol riots, but it was something that left and right agreed on and completely misunderstood, or purposely misunderstood. The great crime that happened was that these young people, they’re mainly young people, were not able to keep on buying the meme stocks and pushing them to the roof and keep punishing the hedge funds, and it seemed very conveniently timed.

Now, there are a lot of things that Wall Street gets away with. It’s kind of heads, we win, tails, you lose. This didn’t happen to be one of them, but it seemed very convenient. It turned into congressional hearings, it turned into ongoing conspiracy theories. It’s like a real gift for a writer. I went all out to make sure that this could come out on the anniversary of the events. [00:08:00] Every night, every weekend, every vacation went to researching, and interviewing people and writing this book, so that it could get out at that date, but I never imagined, when I began, that it still would be a thing. That basically there would be groups of people who try to make the same thing happen and make lightning strike the second, third, fourth, fifth, sixth time, and that’s what’s happened. It’s still very much a story.

By the way, I’m reviled. If you look at Amazon reviews for my book, you’ll see kind of normal reviews and you’ll see one star, “This guy is a shill and whatever,” from people who didn’t read the book, because there’s this sense that there’s a conspiracy against them. Anybody who contradicts their version of events is a shill, and is in the pocket of hedge funds.

Every time I have to pay for kids’ braces or something, I wish that I was in the pocket of hedge funds because they probably pay a lot better than the Wall Street Journal, but I’m not. I can’t do that. I don’t even own stocks. Yes, it was a fascinating, crazy story with a lot of moving parts. I explained how it happened, which is a lot of things have to line up for this to happen the way it did.

Jonathan: Absolutely. You said you obviously did a ton of research and interviewed people. One of the ones that I know you interviewed was Jordan Belfort, The Wolf of Wall Street, and most people know about him, I guess, because of the movie, but there’s a lot more to it. What was that like?

Spencer: It was pretty cool. He was a little skeptical. He has minions of PR people. I think I dealt with three before I got to him, but they were skeptical and like, “Oh, you’re not going to ask him about that bit of unpleasantness that landed him in prison?” I said, “No, I think that he’s a person who understands consumer psychology.” He made some very astute comments. I’ll just tell you two of the things that he said. The book is definitely not a– He’s not a major player in the book, but I think his commentary is worthwhile because he understands better than most people, how the seamy underside of the market works, and how people think, and he said this [00:10:00] was a pump without the dump. The other thing that Jordan Belfort said is that, I knew this, but I think he just said it so well, was that you have to understand that Wall Street doesn’t care if it’s going up or down, bull market, bear market. What it cares about is activity, cares about turnover. When there’s no turnover, that’s when Wall Street is not happy.

That’s so true, and especially this latest conduit for retail investors for the stock market, where you charge zero commission, but then you get paid for selling trades to market makers. Your business model, you’re not selling them services, you’re not selling them, you’re not opening an IRA for them, you’re not doing all kinds of cash services and giving them a home mortgage and stuff like that like Schwab might. They have a median of $241 in their account, and you need at least some significant percentage of your customers to trade like crazy, and they did. There are people at Robinhood who traded 11,000 times in a six-month period.

Can you imagine? We don’t have to go back to the 1970s. Let’s go back to 2018, and the cheapest discount broker you could find out there. If you traded at an annualized basis, 22,000 times a year, you would chew through a very large brokerage account completely just in commissions, and now it went to zero. Well, it’s not free because we know that frequency of trading is inversely correlated with your returns, and you are paying, and there’s a bid offer and other things. It makes it possible for you to do that, but it’s giving you enough rope to hang yourself.

Jonathan: It was a fascinating stat in the book that you said on January 27th, Citadel Securities, which is the firm that pays Robinhood essentially for their orders, handled 7.4 billion shares, and that was more retail trading than the entire US stock market saw on a typical day in 2019, before every broker move to zero [00:12:00] commissions. The level of activity is staggering.

Spencer: It was crazy. Then you had, in that December, before the mean stock squeeze, a trillion shares of penny stocks, of pink sheet stocks traded, which also was– I think a lot of the new investors don’t know the distinction between them, and they get lured into trading penny stocks. Some of those went, I don’t know, from 20 cents to 50 cents or whatever. It’s a pretty nice gain on paper, but you’ve got to trade a lot of shares to make a difference.

One stat that just boggles my mind is that, per dollar in their accounts, Robinhood customers trade during this period examined in 2020 by these researchers, 40 times as much as a typical Schwab customer, or zero.

Jonathan: Robinhood says they democratize finance, and anyone who is against Robinhood is against a little guy, is basically the narrative that they’ve spin. Have they democratized finance?

Spencer: No, they haven’t. The technology that made it possible for Robinhood to exist has gone some way towards opening finance up to more people, but it’s also opened up a machine that exploits those people and picks their pockets. I think Wall Street generally picks retail investors’ pockets a bit too much.

Look, if you want to have a nest egg, unless you’re going to start a business or buy houses or do something like that, you’re not going to build a nice nest egg through addition, you have to do it through multiplication. Most people have to engage with the stock market, the stock and bond markets and REITs and stuff like that, over decades to build a nest egg. That’s a responsibility that’s been fostered upon us Americans and people in other countries, because we just don’t have the social safety net that we should.

People are very bad investors. People are just not wired to be good investors. This is a group that was very, very easy to get excited, and there are many things that Robinhood does explicitly that are [00:14:00] not at all in the interest of their investors, and I can’t get intent from them, but I can tell you what they do, which is that they– let’s say two kids are sitting in a dorm room in college and one kid has a Robinhood account and the other doesn’t, and he says, “Hey, you should buy X, Y, Z Electrical Vehicle stock.” He says, “Oh, I don’t have an account.” “Oh, here, you can open one up, and if you open up a Robinhood account, I’ll send you a referral code, and I get a mystery free share of stock for referring you, and you get a free share of stock. That stock could be a $50 stock. It could be a $2 stock, it’s like a lottery ticket. If it’s a $50 stock and you only put $25 in your account, you just paid 200% return on your $25 investments in Robinhood. Not only that, if you or I opened a Schwab or a Fidelity account or whatever, like when I opened my Fidelity account, and I think it’s still the case, they’re like, okay, fill out this paperwork, and here’s more paperwork, and just affirm that you’re not a member–[00:15:00] work for a brokerage firm. Now wire the money, and in a few days, you’ll be able to trade.” Like, “Okay, in a few days, I’ll check back in a few days.” With Robinhood, they would front you the money. They’d be like, “Okay, you transferred the money, you’re good. You’re good, you can trade right now.” It’s a default option to go to a cash account. There’s a Robinhood instant account, which is the default option, and there’s a cash account, which is the “I’ll wait for my money to settle.”

It’s not margin, mind you, margin is something else, which they also do offer to their customers, and maybe shouldn’t offer so freely, but this is just an instant, sort of that you got the idea in your head, your friend in the dorm room told you this thing, to stereotype their customers, but then you go buy that stock. There’s no cooling off period. Because there’s no commission, you cross the Rubicon in terms of what makes sense. Things don’t have to be very carefully thought through. You’re not spending a lot of money probably, you didn’t pay any commission, you don’t see the costs that are behind the transaction, [00:16:00] and they’re de minimis anyway these days.

Did they democratize finance? No, they did not. The technology that has allowed that to happen is democratized finance. The technology that allows you not to pay $100 a trade, that allows you to open a robo-advisor account with $1,000, that allows you to buy SPY at 0.03% expense ratio, that just constantly just owns the index and charges you very little, and you can reinvest the dividends and you can put things on autopilot. That technology is really democratized finance in the sense that it’s brought the costs down to allow people with small sums to invest, and allow them to do it prudently, but it’s a really strong PR defense.

I really find it distasteful how they wrap themselves in mom and apple pie and say, “We’re democratizing finance and anybody–” Including Warren Buffett and Charlie Munger, who have nothing to gain by slamming Robinhood, and both have done so by name specifically. They went against them, they’re just trying to maintain the old ways when it was closed off to people.

Can you explain to me, Jonathan, why would they do that? What benefit would there be to them not having this many minnows to chomp?

Jonathan: They’re both over 90 years old, they’re both worth multiple billions, hundreds of billions of dollars, they have absolutely no axe to grind. I remember being at the annual meeting a few years ago at Berkshire Hathaway, and he had Jack Bogle stand up and said that he made Americans more money than anyone else, so he certainly has no axe to grind.

Spencer: If anything, the contrary. The whole Mr. Market analogy, you actually benefit. If you are very patient, sitting there with permanent capital, you benefit from markets overshooting and undershooting in terms of what things are worth. The more excited amateurs you have, in theory, the more money there is to make as somebody who isn’t swayed [00:18:00] by emotion and by extremes evaluation. So, yes, like you said, there’s nothing. They have nothing to gain. Anybody who comes out and criticizes them, you’re trying to hold people back or democratizing finance. When you’re two funders of billionaires, you’re making a lot of money off these people, and they still refuse to give any performance statistics on how their customers have done. I’ve asked them repeatedly. They were asked during the congressional hearings when they gave an answer that wasn’t an answer.

Jonathan: Another fascinating stat in the book, and it’s curious, your thoughts why, Citadel pays Robinhood 38 cents on an average for a 100-share order of large cap stocks, and they paid Schwab 9 cents for the same order. I’m assuming it’s not because Citadel believes in the original Robinhood mission of stealing from the rich to give to the poor. Why do they do that?

Spencer: Again, these are business secrets, so I can’t get too intent. I have several theories. One is that Robinhood customers are more reckless in a sense. If you look at any give period, the number of orders that are immediately executable are a lot higher for a Robinhood customer than a Schwab customer, and those could be more profitable for a market maker that processes these trades in one of their black boxes, because they are more in a hurry, they put in more market orders, or they put in limit orders that could be executed immediately, whereas a Schwab customer is more disciplined, typically more experienced, and more disciplined on price.

Another thing is that they tend to go more for stocks that have wider spreads, so something like GameStop. GameStop is not in the S&P 500, it’s a little bit farther down, and so there might be a wider spread, and that gives more opportunity for a market maker to make money. Anything that’s more profitable for the market maker– I think Robinhood understands that those orders might be more profitable for the market maker, and they ask for more. The third thing is just, there’s a secret sauce. Every broker [00:20:00] has their own formula for how they dole these things out and how they pay people. It’s always subject to negotiation and renegotiation. I do think that the recklessness of their customers plays a role in it, but I can’t know that. The numbers are there. These are public forums, they have to put out there, and it certainly seems like a very big difference.

Then there’s also the matter of how much is kept, because Schwab not only gets paid less, but Schwab might rebate more of that to its customers, because Schwab has a lot of ways of making money from its customers. In 2020, about 80% of the money that Robinhood made was from selling its trades to– and Citadel securities isn’t the only one, they’re just the biggest one. There’s Susquehanna, there’s Virtu Financial, and these market makers, and that was about 80% of the money it made. That money was very important to it. I suspect, but I don’t know, that they also keep more of what they’re paid rather than rebating it, because it’s a very important revenue source for them.

There are other brokers that don’t sell their orders at all. They send them to a stock exchange and/or they internalize them. They have like a Citadel Securities top operation within their firm because they’re so big.

Jonathan: Does the Robinhood business model work? I realized they don’t do institutional stuff, but our turnover, Boyar Asset Management’s roughly 10% a year. Most days we do work, but we don’t trade. If someone doesn’t actively trade on their platform, can this platform exist?

Spencer: You can feel free to be a terrible customer for a broker and have very little turnover, but if everybody is like that, then there’s no way that the business works. There’s absolutely no way that the economics work at all for Robinhood. They need some subset of their customers to be wild and crazy and very active, just like with credit cards. I’m a pay-off-your-balance-at-the-end-of-every-month guy with credit cards, and then I get miles or [00:22:00] whatever cash rewards. I get the rental car, insurance, and all that other good stuff you get with a credit card, and the convenience, and I don’t pay any interest.

I’m sure they get merchant fees and stuff like that, but, really I don’t think that I’m a great customer for the credit card company, other than the fact that I’m really creditworthy and I’m not going to default. There are other people who, their behavior subsidizes my ability to use that card and get some much good stuff.

Jonathan: On January 28th, 2021, I guess, Robinhood was informed by its clearinghouse that it needed to put up an enormous, it was billions of dollars, of collateral to remain in business. They ended up working something out where they restricted trading in certain securities, as you’d mentioned earlier, and they didn’t have to post the $3 billion or so of collateral that they were asking. This created that huge uproar in Washington. It was probably the only time that the left and the right agreed on pretty much anything except that Robinhood was bad, and this was a disgrace. How close was Robinhood to going out of business?

Spencer: Oh, really close. This book would’ve been about something totally different if they had not been able to draw down their bank lines and make the DTCC agree to take less money if they restricted trading. It was really, really close. I don’t know if it wouldn’t have been like a Lehman-like accident, but it would’ve been a pretty big hiccup, because the clearinghouse is a systemically important financial institution, basically. Other brokers would’ve had to cover Robinhood’s shortfall, trading would’ve been frozen. It would’ve been pretty ugly. It would’ve been a totally different story. I’m glad that that didn’t happen, and I’m glad, just for the dramatic arc of the story, that that didn’t happen. It’s a crazy twist. They went from being hero to villain in a second.

Jonathan: Like any good book, your book has heroes and villains [00:24:00] and a supporting cast of characters in there. If you can, there’s a guy, Keith Gill aka Roaring Kitty, who became somewhat of a folk hero during it. He turned $50,000 into $50 million at one point. Can you tell a little bit about his story?

Spencer: Yes. He’s a fascinating character. I trace the story through him. What’s interesting to note here is that, for 85%, 90% of the book, he’s this marginal figure. He’s ridiculed or ignored. He’s on social media talking about why he likes GameStop shares starting in 2019. He’s very, very different, obviously, from the people on the message boards. He’s the same of the same generation, and has the same sense of humor, and has a great sense of humor actually, but he’s making cerebral rational arguments about why he made this all-or-nothing wild options bet on GameStop shares. Jonathan, I think that he’s somebody that you would get along with very well, and actually have a common mindset because he was incredibly disciplined, took a long-term view. He viewed things probabilistically. He wasn’t sure that GameStop would do well, but he had a pretty good hunch. He made a value argument. Michael Burry came in slightly after him and took a 5% stake in the company.

Joel Tillinghast, the value investor at Fidelity who’s retiring now, wound up owning 13% of it. He was there earlier than some other value icons who bought into this company, but when the prospect of a short squeeze began to rise and the people noticed it on the WallStreetBets Subreddit, then he was discovered, and then he became this folk hero because he had been in so early and he had made a lot of money. By the time he was discovered, he was already a millionaire on paper, and he wasn’t selling, and the fact that he didn’t sell and he held on and held on, and every time he posted a– [00:26:00] People didn’t know who he was. He was a CFA, by the way, and a financial advisor without clients, but every time he posted a screenshot of his E-Trade account, people would be energized by it, and so he became a real mascot of the group, and became extremely influential, and then everybody was just dying to know who he was.

The Wall Street Journal is the only organization that interviewed him. Two of my colleagues tracked him down, and one interviewed him, and we took his photo. That picture that you see of him in front of the screen, that was taken by a photographer who was a stringer for us. That was January 29th that that article appeared, the morning of January 29th, a day after the trading halt. He was there all along and was just this really interesting guy, and now he’s dropped off the radar completely.

Jonathan: Another one, he’s more of a bit player, somewhat controversial, and I apologize in advance for butchering his name, Chamath Paliha–

Spencer: Palihapitiya. He’s a SPAC promoter. He’s a financier, a SPAC promoter, a technology investor, was a Facebook executive at one point. He, Elon Musk, Dave Portnoy, to a lesser extent, were these very wealthy financial influencers who young people turned to for finance cues and advice. They came in and they roiled the waters during the squeeze. The squeeze happened, it looked like it might lose momentum, and then the two of them came in and basically egged the crowd on and drove it the mania to new heights.

They both took positions, Dave Portnoy and Chamath, in the stock. Dave Portnoy managed to lose money. He said he would never sell, that he would take it to the grave, and then he sold three sessions later and lost $700,000. He’s not a very good investor.

Interviewer: I thought he was better than Warren Buffet, he said.

Interviewee: [00:28:00] Yes, he said that. That’s funny. He said, “I’m the captain now. Warren Buffet’s history.” That’s all in there too. He’s spitting into the wind basically. He’s kind of a ridiculous character, and Chamath, to me, is kind of a ridiculous character. He’s obviously is a billionaire, and I’m not, so what do I know?

He personally profited from this mood that existed, because SPACs are mainly purchased or were mainly purchased by retail investors who wanted to buy the shiny new thing, and he was selling shiny new things that didn’t even get the usual amount of Wall Street vetting. When I was working as an analyst, even though it was an emerging market, there were things that I refused to do where the bankers would say, “Listen, we want you to be the lead analyst.” and I said, “Absolutely not. This is fishy. I’m not going to do it. I’m not attaching my name to it.”

You don’t even have that level of scrutiny for a SPAC because that company doesn’t have to be profitable, isn’t seasoned, hasn’t gone through the traditional IPO process. It’s basically bought by a blank check firm, and then the stock of the blank check firm– You guys know how SPACs work. Then they’re disproportionate rewards through warrants to the sponsors of the SPAC. That was his main business, was bringing SPACs to market.

This is very much in the same vein, and this meme stock craze. I think it’s this kind of dodgy cryptocurrencies, SPACs, meme stocks. If you drew a venn diagram of who participated in it, on the retail side, you’re going to have a lot of overlap.

Jonathan: One of the, I think really interesting things, and the title of the book lays it out there, are the winners, or I don’t know if you call them winners inside of it. The winners were the market makers, Citadel Securities, corporate executives who were able to cash out, fund managers who, [00:30:00] with exception of Gabe Plotkin and a few others, who did quite well. Bill Gross, who no one’s holding a charity benefit for him, made a reported $10 million. Who are the losers here, and losers meaning losing money?

Spencer: Well, Wall Street, to some, is not completely, but to some extent, is a zero-sum game. I think people are too simplistic in viewing it that way though because you watch billions or whatever, and then this guy wins and that guy loses, and it’s just this battle of wits and money and bravado, but Wall Street is a really big place. There are parts of Wall Street where you won and they lost or you lost and they won, or let’s say these 10,000 people lost and this guy won, or vice versa. What the crowd thought was a real victory over Wall Street giving a black eye, and the headlines at the time suggested that too. They turn the tables on Wall Street. Will it ever be the same, yada yada?

What you have to understand is Wall Street’s a really big place. When a lot of will get excited and want to play the game, it’s good for Wall Street, reap large. Wall Street is made up mainly of middlemen. It’s like a bunch of card counters going to Las Vegas and going to one casino of 20 on the strip, and taking them for a bunch of money and then crowing about it in the newspaper. You’re going to have, it’s a terrible day or month or whatever for that casino, and it was a great day for those card counters. Some of those card counters are going to go out and gamble the money away on other things where they don’t have an edge, and some will keep the money. The casino will be licking its wounds.

The other 19 casinos are going to love it because a lot more people show up and they have opportunities to make money off of those people who don’t really know how to count cards or aren’t as effective or whatever. All the people who own the hotels or drive the taxis or operate restaurants are going to be very, very happy because so many more people are showing up because they read about the story in the newspaper, Vegas is exciting, and maybe you can beat Vegas, and the suckers are [00:32:00] showing up. Wall Street is like that. I hate to call Wall Street a casino, because it isn’t, but that analogy basically holds.

All the people who are in the business, especially in the non-risk taking parts of the business, did really well. They liked this. They liked all these people showing up. I’m talking not just about the new stock squeeze but the year, year and a half leading up to it, and all the period following it where you just had an explosion in retail trading. The proportion of trading that retailers did went from, let’s say about 10% to, at the peak, probably 35%. It was a big, big, big increase in their activity level, and not just their activity level, but also what they bought. They bought tons and tons of options, and options are the ultimate suckers bet, options premium out the wazoo for the options dealers.

A very poorly thought out strategies, purchasing call options in stocks where the implied volatility was already elevated, so you were just paying a ton per contract. Of course, there are people who are going say, “Oh, I made money and my friend made money.” Yes, of course, you made money. Those card counters made money, but that’s an incomplete picture. Gabe Plotkin losing $6.8 billion for his investors, and a few other people losing a lot of money, is an incomplete picture. It’s a small slice of the picture that was written about a lot, and so that’s what you have in your mind.

It’s just like when they write about a plane crash and all the people who died and whatever and oh my God, plane travel is so scary. Well, plane travel is really safe, but then you don’t have a headline every day saying 3,000 flights take off inland without incident. You have the one flight crashes and 100 people die. People blew out of proportion the victories and the losses and missed the big picture.

Jonathan: The bottom line is, a great many individual investors lost a lot of money. Basically, I think that’s probably correct. You had a great quote in the book from Jim Chanos which was, part of the outrage about all the fraud in the .com era [00:34:00] is that retail investors got killed. You see corporate America as crooked, so I’m going to put my money in real estate. You can basically argue a contributing factor, maybe small to the housing bus, was people not trusting stocks after being burned in 2000, and they put their money in housing, and we know how that ended. What’s the long-term consequence for all the investors who lost money in the meme stock madness?

Spencer: To be clear, some made money, but they made less money than they would have just investing passively. There was a good few years for the stock market. Even if they made money, the tax efficiency of what they did and the gains that they made in comparison to like a buy and hold and strategy. I think that in my mind I would divide them in probably to three groups. It’s a good thing that young people are on the ladder and have a financial account. I think some of them will have a bad experience with this, but then say, “You know what, I’m going to actually read a book instead of going on social media to find out to do this. I’m going to buy an index fund or whatever.” That will stand them in good stead than maybe they wouldn’t have. That’s good for them. I think a small subset, but not that tiny, are embroiled in these conspiracy theories, “Look at that jerk, Spencer Jakab, writing that book saying that Wall Street won, with the squeeze hasn’t happened yet. Let’s go leave a one-star review for his book. Let’s keep holding AMC and GameStop and whatever else, because Wall Street–” it’s kind of like Qanon of finance, really. They believe in this kind of crazy conspiracy theories. I hate to be insulting, but that’s what it is. It’s the best way to describe it. That’s a group of maybe a couple of a hundred people, though.

I think the majority of people, unfortunately, who experienced this will keep trying and whatever, but then they’ll have a negative view, not just of Wall Street, but of investing. They’ll be like, “This just isn’t for me. This did not work out. This was not a smart thing to do. I’m bored of it. Now I’m going to move on to something else,” [00:36:00] and really not invest, which is what all too many people in this country do. It’s share ownership, whether it’s direct or through pension funds, or 401K is skewed very much towards the wealthy, very much towards the wealthy. That wealth inequality contributed to the mood that caused this. It’s corrosive for society. I would love to be wrong.

For some significant percentage of the people who got into investing in the period from 2019 to 2021, the kind of period I cover, to sort of getting on the financial ladder, and take a long term sober view, and compound their wealth over decades, I probably will have some severe bear markets during the next 30 or 40 years, of course, but just more or less stick to it. Slow and steady wins the race.

I hope that it’s not a smaller percentage, as I think, that will draw that conclusion from this. Then there are people who made a lot of money in the beginning of this, and they say success is the worst teacher. I think that there’ll be the card counter analogy where they made a lot of money, but then they’ll go and try to play poker and lose money, or try some game of chance where they don’t have an edge and they wind up losing some of their money. That’s kind of the, I think what will happen.


Jonathan: Spencer, thank you so much for joining us in The World According to Boyar. I really enjoy learning more about your career at the journal and before that, and hearing more about your fascinating book, The Revolution That Wasn’t: GameStop, Reddit, and the Fleecing of Small Investors. Thanks again for your time, and I look forward to reading more of your columns.

Spencer: Thanks so much for having me, Jonathan.

Jonathan: I hope you enjoyed the show. To be sure you never miss another World According to Boyar episode, please follow us on Twitter @boyarvalue. Until next time.


[00:37:54] [END OF AUDIO]


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James Hagedorn, Scotts Miracle-Gro Chief Executive Officer and Chairman of the Board, on the tremendous opportunity in the cannabis space, potentially spinning off the fast-growing Hawthorne division and more…

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The Interview Discusses: 

  • How their cannabis division Hawthorne has grown over 100% over the past two years.
  • Why he decided to enter the cannabis business.
  • His thoughts on the current regulatory environment for cannabis and what he believes needs to change.
  • Where the biggest money will be made in a post cannabis “prohibition” world and where they are investing.
  • The logic of potentially spinning out the Hawthorne business.
  • The demographic shift that is greatly helping their traditional consumer business.
  • A meeting he had with Henry Kravis in ~2007 and what he did in response to that meeting.
  • Why Scotts has been a “pandemic beneficiary.”
  • His thoughts on inflation.
  • How they have changed their marketing to target millennials.
  • Their innovative weather partnership with IBM that could greatly enhance their marketing.
  • Why he believes private label is not a threat to his consumer business.
  • How they incentivized employees during the pandemic.

About James Hagedorn:

Jim became chief executive officer of Scotts Miracle-Gro in 2001 and was named chairman of the Board of Directors in 2003. Prior to this, Jim helped to orchestrate Miracle-Gro’s merger with The Scotts Company in 1995, creating the leading consumer lawn and garden business in the world. He held the role of president from May 2001 to December 2005 and from November 2006 to October 2008. Jim also served in the United States Air Force for seven years, where he was a captain and an accomplished F-16 fighter pilot.

Jim is a graduate of The Harvard Business School Advanced Management Program and holds a degree in aeronautical science from Embry Riddle Aeronautical University, where he is a member of the Board of Trustees.

Please click here to download the Scotts Miracle-Gro report.

Click Here to Read the Interview Transcript

Transcript of the Interview With James Hagedorn:

[00:00:00] [music]

Jonathan: Welcome to The World According to Boyar, where we bring top investors, best-selling authors, and business leaders to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar. Today’s guest is Jim Hagedorn, chairman and CEO of the Scotts Miracle-Gro company. Jim became chief executive officer of Scotts in 2001 and was named chairman of the board of directors in 2003. Prior to this, Jim helped to orchestrate the Miracle-Gro’s merger with Scotts company in 1995, creating the leading consumer lawn and garden business in the world.

Jim also served in the United States Air Force for seven years where he was a captain and accomplished F16 fighter pilot. Jim, welcome to the show.

Jim: Hey, thanks for having me.

Jonathan: I’m super excited to have you on The World According to Boyar. Scotts is a company that Boyar research began following in 2011 when shares were trading around $50 per share. We’ve owned it in certain accounts for almost a decade and one of the characteristics we look for in companies are ones that have great consumer franchises and the Scotts Miracle-Gro with its Coca-Cola-like market share, certainly fits the bill. We also like investing in companies, operated by people with skin in the game, as they make decisions that are in the best interests of long-term shareholders and not simply to meet wall street short-term targets.

You and your family owned about 30% of the company and have in our opinion, done a great job for shareholders utilizing a mix of dividends, buybacks and special dividends. Most importantly, though, you’ve invested in the business. In less than a decade, you created a division called Hawthorne that today is the world’s largest vertically integrated hydroponics company serving primarily the cannabis industry and generates about a billion and a half dollars in sales in fiscal year 2021 and grew revenues almost by 40%.

I first would like to talk about Hawthorne and the traditional [00:02:00] business, but first, you were a fighter pilot until at least the pandemic hit you live primarily on Long Island and actually flew yourself to Ohio each day to go to work. What was that like? I imagine it gave you a lot of time to think.

Jim: I love being in a metal tube by myself. The answer is, if you want to think about stuff, I’m not sure the FAA would want to hear all this, but it’s a great place to read. Yes, prior to COVID, I traveled back and forth on a daily basis from Long Island, Farmingdale to Marysville, Ohio, which is a couple of miles from the office here. They were early days, be home in time for dinner. We had a tragedy, lost a 24-year-old daughter who was killed and our family became unstable enough that coming home at night was important to maintaining the survivor family. Once I did that for a year, I actually liked being able to come home at night. I fly a single engine citation jet single pilot is a really great place to reflect on the business and think and read.

I get to be able to read all the papers, send a lot of emails to my team on that hour and a half each direction, back and forth. Not really from a time-wise much different from commuting into Manhattan. I really liked it. Now since COVID, I get to take that commuting time, mostly spend it on a treadmill running. Lately, I’ve been coming out here once or twice a week, and we’ve been running the business via Google Meeting used to be a Hangout. It’s been a really interesting couple of years. By the way, in regard to Hawthorne, it’s up 100% in two years, not just 40%. It was 60% in 2020 and 40% last year.

Jonathan: The business is on fire. It’s a fantastic business, which I definitely want to talk about. I don’t know if it’s true. I read in my research, 1994, SC Johnson offered your family a [00:04:00] lot of money to buy the company. Instead, you decided to buy Scotts, which was six times the size of Miracle-Gro. It got about half the value, but you took it in equity and warrants. Obviously, things turned out more than fine. Looking back at it, was this a crazy decision?

Jim: I put myself in the slightly, from a personality point of view, unusual. This would’ve been 1994 I think it was. Sam Johnson wants to meet with my dad. I wasn’t invited. Miracle was making about 100 million. Sub S company, we didn’t pay federal tax. It was great because it was Reagan time, where it was 28% federal rate and they were on the pay $400 million for call it 100 million of pre-tax earnings. My father said, “It was great meeting you, we’re not for sale.” My father went on vacation to Europe and people brought me in Scotts the big dog in this space. We had spies, so we had a bunch of people who work for Miracle-Gro who are ex-Scotts people.

We always wanted to see the retail programs where if we could get intel on programs that Scotts was offering, it kind of gives us some insights on how they operate. This is back to early days. This is when CompuServe and AOL. I went on the AOL and checked Scotts stock price. Remember SEJ offered 400 million for Miracle-Gro. Scotts’ market cap at the time, $600 million of sales compared to our $100 million. We make $40 million just so be clear. Made $40 million, they offered us $400 million. Top Line was about $100 million. Scotts’ market cap was $265 million. My father was traveling, my father was the right-hand man with his dad in the Virgin Islands.

I said to myself, “We’re worth more than Scotts is?” We didn’t know anybody. We didn’t know any lawyers or anything in this kind of world. I called my father’s estate lawyer [00:06:00] at Skadden, a guy named Bob Vincent. He was the chairman or something at Barclays. I said, “Hey, Bob, if Miracle-Gro was worth more than Scotts, I wonder if we could just take over Scotts?” There was no real shareholder and that had been a LBO from Clayton Dubilier and when they went public on the Nasdaq, first Boston and Goldman took them back public again out of Clayton Dubilier, [00:06:25] it really had no shareholding.

There was like a bunch of inside ownership because of the LBO and Singapore, completely passive investor only 10%. That was it, there was no concentration of the shareholdings and the company had not performed. When the two or so years that they’ve been public since Clayton Dubilier took them public again, they never made the number, not once. You miss call 10 quarters in a row, people just get discouraged and say, “XXXX this,” and analysts stop covering the stock and that’s where Scotts was. He said, “I think maybe you could take them over.” He said, “What you need is an investment banker.” The guy running First Boston’s Investment Bank is a guy named Allen Wheat.

Bob introduced me to Allen Wheat and he says, “I think it’s definitely possible.” Remember they took Scotts public again out of Clayton Dubilier and he said, “The banker who did that work is a guy named Brian Finn. Now Brian Finn is on our board today. One of the really fabulous strategic bankers I think in the world ever is Brian Finn. We met with Brian and he and I came up with a script. Now, I met my father. He came back on the QE2 or whatever the hell it was back in the day. I picked them up in the hand and said, “Dude, if I told you we could take over Scotts but the currency would be Miracle-Gro.”

He just looked at me and said, “I am in.” That was it, “I’m In.” Our script was [00:08:00] pretty simple. This is to Scotts, “Miracle-Gro is not for sale, if it was for sale, you couldn’t afford it. Good news is we would be willing to merge the companies but it will have to be pooling as opposed to purchase accounting.” Now we didn’t end up doing that because my old man at the last minute, said he wanted to leave and that’s where he set up his charity. If you go back two years and go forward one year, Miracle-Gro people were there in about 42% of the combined equity and it’s pretty consistent over time.

We would make a suggestion, we pull, we get 42% of the equity and we don’t want any cash. We ended up with a little bit different deal because late in the transaction, my old man comes into my office and he says, “I’m out,” and this is how I think about age. My father was probably this most powerful like 75, which makes you wonder why people leave so early but seriously, I’m a student of my dad’s, I would say the most powerful intellectually as a business person at probably 75. At this point, he was probably 79 and he said, “I’m out,” and I said, “What do you mean?” My mother had died of cancer, he remarried this excellent woman who’s also gone now named Amy. He said, “Amy and I are starting a new business.”

Now, I’m thinking to myself, “What the XXXX does my old man know? Does he want to compete with me?” This is all going through my head in a second before he told me the answer. I said, “Oh, what do you mean?” and he said, “Amy and I are going to start a new business, we’re going to be co-CEO’s and it’s going to be giving away every single dollar I have, 100%, everything I’m going to give away. My father was not a usual charitable person. My father would love to give $20,000, $50,000, $100,000, be on the board, participate. It wasn’t a big giant check where he gives all his money away.

It’s lots of bets where [00:10:00] he participates, and Amy participated. At that point, he gave me a number and said, “This is what it’s going to cost.” Now probably I’ll argue with my own man. We didn’t actually pay for business we got. When my mother got cancer, my father wanted to step up the basis of Miracle-Gro so he gave 100% of it to my mother, with the idea you step up the basis to whatever the current value was, but she had to live a year for that to work. She didn’t. He basically renounced my mother’s estate, and it went to the kids. He maintained 20% of the business, 40% of the voting stock.

What you do when your old man says, “This is what it’s going to cost.” I called our lawyers at Skadden, really great guys and women. I told him. I said, first of all, he’s XXXX this whole deal up, we’re going to lose the pooling, and we’re going to go purchase accounting and they just said, “Dude, what are you going to do? It’s your own man, get a grip. He’s given it away.” I was like, “Fine.” We established a preferred equity to pay the dividend and that dividend was used to buy my father out. Prior to the deal, he gave his equity to the New York Community Trust, and then they had a capital stake that we closed out two or three years ago.

A couple of things. My wife during the whole thing, because the company is in Ohio, we live in New York. My wife’s like, “What the hell are you trying to build, Jim?” I said, “I want to create Procter & Gamble’s of Lawn & Garden. She said, “What the hell’s that mean?” I said, “Anything of value I want.” That effectively was the vision. My brother Peter, he was on board. This is my older brother, 12 years older than I am. He’s like, “What’s the plan here?” I said, “Peter, this is the truth. I’m not exaggerating. It’s not going to sound great, maybe to you,” but I said, “Peter, I can take Scotts,” and he said, “You sure it’s the right thing?”

I said, “No, but my urge to hunt here is so high that I feel like I have to take them [00:12:00] and I want to do this.” We made that presentation in Pittsburgh airport because my father was like, “No, we don’t want to do it in Columbus, we don’t want to do it in New York, we’ll go in between.” We agreed we’re going to meet a club in Pittsburgh. The first time we came here, I never been discussed before in Marysville. We drove in the parking lot and Tad Seitz, the chairman of the board is driving the car. My father is in the front seat. My father’s partner, John Kenlon, president of Miracle-Gro is in the backseat and me, the two of us in the back.

We’re driving the parking lot and this is like a 600-acre campus here, manufacturing R&D, office complex built when ITT was in conglomerate phase. I looked at John and said, “This is going to be ours?” The weird thing is, nobody ever said, “No.”

I had this view of noses in, fingers out. I think that’s a terrible idea. For one reason, I am the leader that the board could wake up and say, “Are you kidding me? What did he say and all this XXXX? What’s he up to?” Let’s just say you’re a merchant for Home Depot and you said, “I think you should make this product.” If I say yes, you know what? You’re going to carry the XXXX out of it because it’s your project.

If I let the board engage in management of the business, they’re much more comfortable with what I’m up to. I run the board way different than I used to. We meet more frequently now, six-plus times per year, we do all the nonsense, which is important and a lot of it the committee’s. We do that during the week, but before the board meeting by telephone, or video now. When we show up in person, we’re strictly talking about the business. Now the board, especially my chairman, I’m much more involved in business so there’s not this educational process that has to occur all the time and I have a board that is really functional.

The problem is I got pretty high tenure, Mike and I are getting pretty [00:14:00] old and so there’s change afoot, not because anybody’s threatening to leave or anything like that but both from the board, especially if we say this, another board going to have to happen for Apollo. I got a whole new leadership I got to groom, it’s taken up a lot of time. Our last board meeting– I’m not making this up. I’m usually pretty happy when my board speaks with this foul language as I do, but we had a subject item on this schedule at our meeting where it was like, “If you’re going to do all this XXXX, your five pillars, this was the subject, you would want XXXXing army.”

That’s taking up a lot of our time right now, especially complicated if you say maybe SMG today is two businesses with two boards, two management teams, and do you have the people to do this? We’re in a very expansion-centric mode right now too so it’s a really cool time.

Jonathan: Your traditional consumer business which produces fertilizer, grass seed, et cetera has unbelievable brand recognition, as I said earlier, Coca Cola-like market share, and anyone who gardens know your product. You were a huge pandemic beneficiary, and as your son, Chris, who also works in the business said on a conference call, we joked when all this started, not that it’s a joking matter, but you got to find levity where you can, that what were people going to do when quarantine hit the whole country is they’re going to go sit at home and smoke pot and garden.

I think in all seriousness, there’s a lot of truth in that statement. One of the reasons you were a pandemic beneficiary was millennials moving to the suburbs. How big of a deal has been the exodus from the city to the suburbs been for your business?

Jim: It’s been huge. We had these dark fears, the weirdness about the financial community, the investor community, particularly short-term investors, there was a lot of discussion about work, people are going to move inside the beltway, have condos, no lawns, and that’s what young people wanted. [00:16:00] We weirdly started to believe that, that maybe the growth is done in consumer lawn and garden. I had this conversation with Craig Menear, from Depot, who’s a good friend and a fabulous CEO. Craig said, “Do you think anybody knows homeowners better than we do, Jim? We spent a lot of money on research, and I think you’re completely wrong. If you look at the demographics, there’s a huge bubble of young people who are now having families.”

He said, Jim, “Our research shows that when they have kids, they want a home, a yard, a dog, or a pet. They want all the things that people traditionally wanted.” Even before COVID, we started to become very much believers that if you look at the huge number of our kids, this is my age kids. I’m 66. They’re all buying homes, and even before COVID, buying a home around here in central Ohio, you better do it quick because there’s going to be bidding wars on it, and there’s just a lack of supply here. Homes are just being built and sold. There’s a big article today in the Journal on homeownership and where it’s headed and what the numbers are looking like, but clearly benefited from low-interest rates.

I think generally, a lack of supply and a big group of people who want to be homeowners that are bigger even than people like us that are retiring and downsizing. Even before we were very positive that lawn and garden was a business particularly if we kept up, meaning, innovate market to people the way they want to be marketed to that we could grow that business, at least kind of a GDP. That was where we’re at. Unlike Peloton, who I think is struggling hard right now, that was a big issue for us coming out of COVID, what are people going to do? [00:18:00] We saw a double-digit increase in consumer sales last year, in ’21.

Our fiscal year ends at the end of September, on top of growth 23 or 24%, in ’20. A 33% increase in two years on a business that we viewed is pretty mature. It gets back to the demographics wanting to have a home, a yard, and garden. What happened during COVID was this issue, we didn’t know what was going to happen. This issue of essentiality– remember that whole argument, only essential businesses could be open, you only could go out to do something essential. People early on said gardening is essential, and not every state agreed. There were two states that didn’t. Michigan and Vermont, both said, “Really? Buying plants? That’s essential?”

Consumers argued the point, and both those states had to back up and say, “We agree, lawn and garden is essential.” For us, having a business– and the same was true with the cannabis business. People both from a medical point of view and most states recreationally, it was deemed to be an essential business. That, to me is some kind of confirmation that we’re not on the wrong track, that people say, “Your business is essential.” Last year was not– if you live in New York, it was not a fabulous weather year. Mother’s Day sucked, Father’s Day sucked, Memorial Day sucked, and Fourth of July sucked. Even with no brakes on this sort of Midwest, Northeast weather, we were still up 10%.

We didn’t lose anything coming out of that. I think it’s a real positive for the business. We also got an opportunity to do because when COVID hit, retailers didn’t want to advertise. I think everybody was pretty happy if their store was deemed to be essential. [00:20:00] They didn’t want to advertise and be criticized. You’re bringing people together and you’re going to get people sick. They didn’t promote at all. What happens then? First of all, retails went up by at least 10%. Meaning, everything that would have been promoted wasn’t, so the actual price that the consumers went up double digits and take away was up a quarter call it.

They weren’t afraid of a little bit higher prices, which I think is important right now, but also because they wouldn’t market because the retailers didn’t want to be criticized, we started taking over and doing a lot of work with this guy, Gary Vaynerchuk. I don’t know if you know Gary. Gary’s at VaynerMedia. We basically said, “Look, we’re on our own. We’re going to take the money that we would have given the retailers to market. We’re going to market ourselves.” That really gave us a lot of confidence that we could change how we market. Remember if you say, “To do this, we can’t be the old company we were, we’re going to have to innovate. We’re going to have to sell to that younger group that they do want a garden.”

That’s what the research tells us. They just don’t want to be a slave to it like their parents were. How many people actually watch TV commercials these days on commercial TV, unless it’s sports or news? I think not much. Therefore, we’ve got to figure out how to use social media and influencers. We’ve made a ton of progress on how do we communicate to younger people today. COVID, I think both on the Hawthorne side and then on the consumer side, in spite of the tragedy that I think it was for America, in the world, it was very gratifying to know that this is business that people actually, when this XXXX was happening people said, “I’m going to garden.”

Jonathan: You actually did something that was really interesting. You have something with the weather channel or Watson, you’re able to advertise more when the weather is predicted to be more favorable for gardening, is that something?

Jim: Yes, [00:22:00] this was a criticism. If you look at how marketing happen in lawn and garden pre-COVID, it was falling apart. I’m not sure the retailers agreed with me on this. I thought it was falling apart, that if you looked at, call it, the marketing hit rate, let’s just say you had three or four Black Friday events throughout the lawn and garden season. I’ll bet you, 70% of your marketing and promotional dollars get spent against that. They want to get out early. The retailers want to get out early to get the lawn and garden consumer in, because if they buy certain things on Black Friday events, they tend to buy a bigger basket of stuff. This may be a global environmental change that’s happening, which is we tend to have really good weather up through March.

Then it becomes unstable April, May and then summer hits and you have a decent normal season. We were seeing 80% miss rate on weather. If it’s cold and raining and you go into a Home Depot or Lowe’s when the weather sucks and it’s cold and wet, it’s like crickets in there. This is nobody there. We know the phasing of how people buy stuff. It tends to be because it’s a good promotional item, lawn fertilizer, and grass seed. Then you get into the bug season, pesticides and weed killers. We know the flow of it, but what’s the value of advertising when the weather sucks?

The business we’re in is a t-shirt business. If it’s not going to be t-shirts and people are in a down jacket, don’t expect them to be in a store. Can we pull the advertising either forward up to maybe two weeks or push it back based on weather forecasting? The weather channel data part of it is owned by IBM and it’s a big data deal. I don’t know that they can predict the weather a year in advance, but they can predict the weather two or three weeks in advance pretty well. If [00:24:00] you know you’re going into a weekend, just don’t advertise, push it off or pull it forward.

What we’re learning is if you promote into good weather where you have the promotions, the inventory, the weather, all in your favor, it’s just so much easier to have good business. Yes, we’re pretty careful on the data and learning how to be flexible to move promotions. Now, retailers, it’s harder because the retailers are doing Black Friday events a year out and getting the merchant teams to say, “But you got to be flexible just plus, or minus a week or two. If you’re flexible, then we’ll just promote in a good weather.” It turns out we think weekends are important and they are, but good weather, in season, even if the middle of the week is okay.

We’re trying to run our sales and our advertising, have the weather on our back, not blowing and freezing cold in our face.

Jonathan: One of things I think about in your consumer business– it’s obvious you have a fantastic product but I think about, let’s say the food industry as an example, were over let’s say, a past decade roughly, many of the supermarkets and other places where people purchased food, decided to compete against the established brands with decently high-quality private label brands and they took away market share. I know you do have some private label business, but what gives you the confidence that that’s not going to happen in lawn and garden?

Jim: Well, we start by saying experience. First of all, if you look at dollars spent and units sold, they’re different and you said 50% of the units and 68% of the dollars are the brands, but 50% of the units are private labels. Without private label, it’s going to be very challenging for retailers to make money in lawn and garden. Private label is key to it and we don’t resist that. We try to manage that alongside the retailers. I think that [00:26:00] makes it helpful. Chuck Berger, that was the CEO before me. He’d always tell me, “Don’t tell me what you think. Jim, tell me what you know.”

This is a little bit what I think, I think if you go to store managers and maybe you’ve done that, I know some of our analysts do. I think they’d say, Scotts and maybe Behr paint are the best vendors in the chain. They are some of the very few vendors that a store manager will give his personal cell phone number because they trust us. We’re all about helping them. I think that what you get with Scotts is not only access to very integrated private label programs. By the way, just so headline, we’re not losing share at private label and we haven’t over the last decade, but it’s a very integrated program where we’re delivering everything on the same trucks, which remember, a Depot doesn’t have a lot of bays.

A lot of times you’re just pulling stuff off in a parking lot. When you can reduce the number of trucks arriving by half by integrating private label with this national brand, that is a big benefit to them. We service the product, we counsel on the weekends. Meaning, we have thousands of people in these stores. We own the concrete. I think that the difference between food to some extent and lawn and garden is lawn and garden is a once or twice a season purchase. It’s not something you’re doing every day. Personally, I’m a brand freak. I don’t buy a lot of unbranded food.

I think we’re doing our job to innovate on the branded side especially, offer competitive programs on the private label side, but really try to reserve our big innovation for the branded product, at least initially. I think it’s working out pretty well. I’d start by saying, we are very much believers that a blended program of private label and national brand matters. To the extent we can and be competitive, we want to do both.

Jonathan: [00:28:00] The brand is clearly your biggest competitive advantage but you did spend a lot of money on your supply chain and you have one of the best ones out there. Clearly, for most businesses, they’re experiencing issues, but I can’t help, but wonder is it as bad of a problem as people say it is? Or is this an excuse for companies really just to kind of raise prices?

Jim: I’m going to talk to you the way I talk which is, it’s pretty up out there, seriously. Commodities, we don’t see much easing a little bit, I think right now. I think mostly in plastics and other things, it’s just a really tight supply and there’s no choice. Certain stuff we buy; bags and some containers. We’re a major customer, but they’ll say, “It’s a courtesy call, dude. This is what’s happening with pricing. If you don’t like it, I’m moving down the phone list and I’ll call the next person. Everything’s going to be sold. This is what’s happening with the price.” If you look at our Q3 call, our last third-quarter call, we ate XXXX on that call.

I think it was like for 500 basis points of margin decline in a quarter. I don’t think people were happy with my view on pricing. I think that everybody would’ve been happy if I’d taken 10 but I said 5. It was largely because I was believing this transitory nature of what the Fed was saying. I was hopeful. Now we told retailers, “If it ain’t transitory, we’re coming back,” but I don’t think the street heard that. I think they looked at margins. I think the view of the pot industry as being a little bit oversupplied at the moment and freaked out, but is it bad out there? Yes, I would say it’s pretty bad.

It was The Journal or The Times yesterday, the question is, is there easing happening right now? It’s this whole discussion of, you go from famine to feast. I don’t know if you saw that article yesterday. I think that’s probable, but if you look at right now, that was another thing. We’ve gone from half a billion of free cash flow to 165, I think, we ended last year at– [00:30:00] A couple of things. We had a great year in ’20, so we paid our incentive out at the beginning of ’21. That cost $100 million right there. Inventory is probably up $500 million. That’s us making sure we have the product.

Now, we thought we lost. I think the number we use publicly was $200 million, but I think reality is we think we lost in ’20, business we couldn’t fulfill, $300 million.

Jonathan: Just from not having enough supply?

Jim: Correct. Probably $100 million in Hawthorne, maybe $200 million in the consumer side. We didn’t want that to happen again because people accepted it because it was ’20 and everybody was screwed up then. Going forward, we can’t live like that. It’s not just that, we paid premium pay here during COVID and we didn’t get beaten into this.

We led with this. Meaning, from day one, we said people who have to work in hazardous areas, which we defined as infection rates of more than 45 per 100,000, we’re going to pay a 50% premium. What did we learn a year into it, was that people were tired.

They were working 12-hour shifts, because anybody gets sick, the whole shift goes bananas, and you end up where you have got three shifts, but you never could really feel three shifts. We’re working two shifts, 12 hours, and you do that for months and months, it doesn’t matter people getting paid a lot.

We just couldn’t operate basically on the margin like that. We’re going to burn out the people in our machinery and everything else. We had the investment inventory and then we had a $100 million in cost increases just based on cost of goods. You got $100 million there, $500 million, plus another– it’s about $700 million of investment, called $600 million if you pull out the incentive that was from ’20, that got paid in ’21.

[00:32:00] That’s the way of solving the issue right now is very much a dull instrument of a lot more bullXXXX so that you don’t run out of stock. It is not a super fine way of running a business, but it’s what we did. I think the answer is, I think it gets better over time. I think it starts with something as simple as the entire global supply chain shut down for a month at the beginning of COVID.

You lost 1/12 of the capacity of the world because everybody was shut down. Then when it came out of it, everybody had all this money and the government was stimulating and everybody wanted to buy XXXX. I fundamentally think that solves itself over time, but I am not a major fan of the policy of the United States at the moment, which is that I think stimulating the economy more with build back better, whatever the hell it’s called.

When people can’t get materials and labor right now, I don’t quite understand it other than politically, maybe it makes sense to Democrats. I think this probably continues for a year or two until it’s settles out.

Jonathan: I just want to shift gears just a bit to Hawthorne, which is your hydroponics business and it’s under the leadership, I believe, of your son, Chris. You built this into an almost $1.5 billion business in less than a decade. First, I just want to hear, how did you decided to get into this category in the first place and did he get a lot of pushback?

Jim: It’s a cool story, but the answer is, yes, on the pushback side. It started out where I was in a pizzeria  with two young women reporters for the Wall Street Journal. I think people can always trick me into saying stupid XXXX that gets me in trouble later. I didn’t have any babysitters with me. I got these two young women from the journal who were actually good reporters.

They said, “What do you think about marijuana?” I said, “What do you mean?” They said, “Do you think it’s a business you guys should be in?” I said, “Do I think it’s part of lawn and garden? Yes, it’s growing plants [00:34:00] and we sell XXX to help people grow plants. Why wouldn’t it be included?”

That was probably like a decade ago at this point. I showed up at the next board meeting and my chairman of the audit committee and my lead independent director pulled me aside and said, “Hell, Jim, have we ever said no to you before?” Actually, I have a very supportive board. I love working with them.

I said, “I don’t think so.” They said, “This is the time. The answer is, no. You’re not doing pot.” That lasted for a couple of years until I was making West Coast trips. I’m talking California, Colorado, Washington State, all the West states that are big and marijuana today, but it was all essentially illegal back then.

You’d start to see lawn and garden apartments that were being taken over by these niche brands. You talk to people and they’d say, “Dude, it’s giant. These people are coming in once a month. They’re paying cash. They don’t negotiate. They buy huge quantities and it’s getting to the point or for some of the independence, it was as big as lawn and garden to them. I kept coming back to Ohio and saying, “Yo, this business is happening.”

The crazy thing today, is it still a Schedule I narcotic, which is insane how anyone can defend that. You’d ask people, “What are people growing with this XXXX?” They’d look it right in the eyes and say, “Tomatoes.” That was not that long ago but it was clear that tomato business was getting to be real and Chris said, “Come out of an advertising agency in New York after college.”

We set him up running basically an indoor urban gardening business that was selling stuff where people live in New York city and urban young people, how they garden and it got to the point where we said,” You know what? You should include this hydroponic.” [00:36:00] That’s what people called it, hydroponic but it’s really cannabis supply for cultivators.

Eventually, that business got shed a couple of years ago. The urban, indoor organic gardening business went back into consumer and Hawthorne just kept the cannabis supply business. It’s been tremendous fun and it’s a real vision. It’s a lot of what I wanted to do in consumer lawn and garden, which is consolidate and be the vendor that I told you about like Depot person would say,” No, Scotts is like the best vendor I have.”

I’ve heard this from a lot of people when they’re being edgy with me on the consumer side, it’s like, “Why would they let you get this big, Jim?” They let us get this big because we’ve got the big brands, we advertising bring consumers in this store, we service the product, we do it pretty flawlessly.

We’re kind of the perfect vendor. The question is on the hydroponics side, what businesses would you have to be in? How would you show yourself to be this great partner to marijuana cultivators, where they say, “No, I love doing this with these guys. They bring technical support. They have all the brands I need. They combine it all in one delivery. They give me good pricing,” and we’re probably 70%, 80% of the way where I’ve wanted to do it.

The gratifying part is a compliment to Chris and Mike Lukemire, as a compliment to both of them, I have said to myself over the years, “I’m a crazy XXXXer at work.” I’ve surrounded myself with good technical operators but it gets tiring where you’re the only source of strategy thought in the business because everybody else is very much a technical implementer.

Where Mike has gotten to and Chris is they’re really good strategic partners to me today. That not only makes me [00:38:00] happy as a father to Christopher but very comfortable with Mike Lukemire. Our biggest issue, honestly, is that we’re both in our 60s. We are doing so much cool stuff right now that I just wish I was 20 years younger.

I mean, seriously, it’s one of those things where I don’t have a plan to leave but I also don’t want to be assassinated in my bed by the next generation who wants to take over. It’s not that important to me but I think I’m adding value right now but it’s just– I got a really good team to lead right now.

They’re really up in their game to include strategic game work that they’re definitely on the right track. I’ve always wanted that to be where my leadership team would come to me with ideas that would take my stuff as the beginning and then say, “Yo, not only do we think that’s a cool idea, here’s how we’re thinking we’re going to implement it.”

You say, “Well, that’s even better.” I think we’re getting to that point. I think we’re really seeing it in Hawthorne and this other project we’re calling Apollo, which is a super interesting part. I’m hoping that the investment community tries to understand what we’re up to there.

My end-of-year call, which I think has been good for the equity. I’ve been trying to be much more strategic about trying to help people understand what it is we’re up to because a Q3 call only people want to talk about margin and what’s going on in Q1 in Hawthorne. Seriously, I don’t think it was any questions other than, “What’s going on with your margin rate? Why didn’t you take more pricing? What’s happening in Hawthorne in Q1?”

We never really had a chance to say, “You have any idea how much cool stuff we’re up to?” Apollo was a part of that.

Jonathan: The one, I guess, big headwind I see and it’s obviously outside of your control is the regulatory environment. How is that impacting the growth strategy at Hawthorne?

Jim: [00:40:00] I have a point of view, I’ll tell it to you, but the answer is, I don’t know. If you could deal with safe banking 280E, which is taxation, according to the IRS code, if you’re engaging in a federally illegal business, you cannot deduct your business expenses, which means your taxable income is your revenue and which makes your federal rate nearly 80%. Effectively, anybody who’s gone legal can’t make money.

This issue of what do we consider legalization or major progress, and we’ve defined it because a bunch of deals we’re doing some of which are known, and some of which aren’t, basically said restructuring these as effectively loans that upon certain things happening, convert to equity.

Our lawyers were happy with this. JP Morgan is happy with this. Wells, Deloitte is happy with this, that we’re not stepping on a third rail issue, which has been really important for us as we pioneer a business that, five years ago, people weren’t that cool with it.

Today, I think people are cool with it, but the banks are super sensitive I think both on reputational and compliance issues on pot. We’re saying the right to make these conversions occurs when two things happen. One, you can bank with national banks and I don’t think that’s going to take that long.

Two, is the major stock exchanges in the United States, NASDAQ, and Nyse, except they’ll list companies that are directly touching pot. When those two things occur, we have the right to convert. I’m not really talking about legalization right now.

I have to say, other than a very few states like Oklahoma, most times when politicians touch this, they screw it up for years. I’m not [00:42:00] sure I need the feds to do anything other than don’t enforce, which they’re not enforcing anyway. Then you have banking and taxation, and those would be big steps forward. I don’t know what my expectations are.

Jonathan: If tomorrow you wake up and the taxation and the banking issue were gone, besides switching debt to equity, how does a strategy of Hawthorne change?

Jim: I’ve said from Mike and me, how do we want the business to be managed? We’ve decided there’s these five pillars, but call them business lines, that we want to play in. They’re really all cousins and nephews have two lines. One, is consumer. One, is marijuana, but all plant-based called.

You got our existing consumer legacy franchise. You have live goods, which we think is really important. You have direct to consumer, which we think needs to be a standalone, free-standing business, selling directly to consumers. Within that, managing the retail direct to consumer to where, whether it’s Amazon or does that. That’s three.

Then Hawthorne on the pot side plus Apollo. It’s two businesses, but five different business lines that we want to play in. We think in the world of, if you believe that prohibition on marijuana ends, I think our view is that is nearly certain. Now, this was the conversation. Why is it senators can easily change this when both Republicans, Independents, and Democrats all support this?

How hard is that from a risk point of view as a politician? It shouldn’t be that challenging, but they make it challenging. I think that’s all the dysfunction that occurs in there. Our view is if prohibition ends, where’s the big money going to be earned? [00:44:00] Well, what we know in consumer, consumer brands. Ready to consume consumer brands.

If we knew alcohol prohibition was going to end, houses that own a bunch of distilled liquor brands or beer brands would be where we’d invest. That’s what we see on the consumer side is that if you put a pie chart as the money up there, that ultimately, consumer brands are we think where the biggest money is going to be in a post-prohibition world and that’s where we want to put money.

The part that’s confusing about that is today, these are mostly, particularly in the East Coast, state-by-state limited monopolies permit holders. If you own the permits, especially the early legacy permits in a state like New Jersey or New York, these early medical permits were completely vertical, cultivation all the way to retail. You could argue implicit within that is brands. We’re right now trying to build a portfolio of brands and licenses that allow us particularly east of the Mississippi. My view is, there’s an old-world, a new world of marijuana, the old world is called west of the Mississippi. The new world is east of Mississippi, create a map that we can exploit with brands, cultivation, retail.

I think we’re very far down the road I’m just trying to understand. Now, we’re trying to implement it. It’s not for the faint heart, I’ll tell you that.

Jonathan: To use an analogy, cannabis legalization is like the gold rush. You’re the pick and shovel guy with Hawthorne. The real money, the gold rush was made with the pick and shovels. Mining for the most part for gold really wasn’t that profitable except for some people. Is growing cannabis where you want to be?

Jim: No, I think that the answer is what Hawthorne offers us virtually every [00:46:00] cultivator in the United States is our customer. We know the really great growers out there. I would say, I don’t think it’s an exaggeration to say that’s probably 10% or less of the population of cultivators are highly skillful at what they do. They’re all expendable. They want to participate.

We’ve talked to a lot of these people who own these great businesses but remember, the way at least the United States is organized today, it’s state by state. People who are powerful from California, aren’t powerful from Colorado, but they’re all state by state. When we talk to them and say, “We want to create long-term and equity,” the best equity in history in the space.

If you look at the MSOs, to some extent or the competition here, I got to say, it’s not that they don’t get it, but I think brands, they feel are less important. If you look at the quality of their product, I think we would argue some of these highly specialized people that already buy our stuff that we go in their growth facilities. We know who they are and they want to play with us.

I think cultivation is not crazy important except to say, the quality of the product is pretty important. I think in today’s world, if you’re not cultivating it, it’s pretty hard to get to the quality you want by outsourcing the production. I’m not sure long-term that owning retail and cultivation is important.

I think in the short-term if you look at the map, that’s what I call it, you’re forced into saying, if you want to play in New York, you need a permit. You need a license. You want to play in Jersey, you need a license.

I’ll tell you one of the big losses in election day, Steve Sweeney. Steve Sweeney is the senate leader in Jersey, was probably the most advanced politician I’ve ever talked to about marijuana strategy on a go-forward basis and its importance to the state of New Jersey. [00:48:00] It’s pretty screwed up that he lost to a truck driver who only spent less than $20,000 on his campaign.

Jonathan: That was an insane story, that loss. Going in terms of the regulation, you are the biggest player out there. You’re a publicly-traded company. You have a big target on your back. Does Hawthorne in some ways have a competitive disadvantage because you’re now under a regulatory microscope?

Jim: No, I think it’s an advantage. I’m a big fan of the industry. I’m not sure what I expected 10 years ago. You’d meet people, you’d go to these shows like MJBizCon, and early days like eight years ago, and the people in the industry, they were young, mostly male, mostly white, and still that’s pretty much the case.

I would say they reminded me, I’d come back to Marysville and people say, “What was it like?” I’d say, “It’s like somewhere between a motorcycle gang, and elite special operations. That’s what it feels like.” The people who are really good at it, remember, they suffered through the industry when it was highly outlawed, and suffered from arrests and all kinds of XXXX and harassment.

I’ve told a lot of CEOs, “If you ever want to have faith in young people,” and this is not true of all cultivators, but a lot of these cultivators, they run really good businesses. They didn’t go to business school. They’re self-taught, they’re young, and you know what they do with their money? They buy home next to mom and dad. They invest in your communities.

All of a sudden you say this is a great entrepreneurial business, who the government has been such a pain in the ass. Remember, just think about that. You want to invest in a state like Florida and build-out? It’s going to be at least $50 million to build out your cultivation facility. You can’t borrow from a bank.

You’ve got to borrow from weirdos and listen, it’s a business model. [00:50:00] You can borrow money in New York and Los Angeles. You know what they’re paying? Over 20% per year, with a covenant package that’s really scary when you read it, “You pay, or I get your entire business.”

It’s a real challenge where you don’t have access to normal capital. Then your tax rate basically means you can’t make money. I think that the young people who are running this business in spite of everything being stacked against them are some very, very cool business people. It’s been a lot of fun to partner up with them.

Jonathan: One of the things you mentioned on the last earnings call, someone asked, “Do you ever separate Hawthorne from Scotts?” You said, “You can go on for an hour on why that would make sense.” That was, and I just love to hear why you think that makes sense.

Jim: I’ll give you the reasons why it doesn’t make sense. If you look at the balance, you’ll figure it out. Why it does make sense to be part of SMG is R&D, supply chain, IT, general management, access to capital, and it’s a legal business.

Unlike a lot of the difficult we talked about on the plant-touching side, Hawthorne is completely legal. The banks are comfortable with it. The government’s not trying to enforce against us. We have all the synergies of being involved with the core, where the core has all these things that they can use and Hawthorne gets access to that.

There was a lot of struggle early on where Hawthorne wanted to do everything themselves, but the more we said, “Guys, some of that stuff you’ll never be big enough to be better than Scotts. We can give you that stuff nearly for free,” that’s why it makes sense.

The synergies of being part of it, actually, I know the numbers, and they’re pretty significant. Separating the de-synergies of separating Hawthorne are our material. Lots of reasons to stay part of it. If you believe the bullXXXX I told you about Apollo, [00:52:00] which is where we think the majority of the money is going to be, which again, is consumer brands.

This is not inconsistent with where we are on the SMG side. There are some of these guys from the West Coast that if they sold their business today, they could sell it for $1 billion. We’ve put $150 million at the RIV, we’ve had $200 million. Plus, to say, we got $350 million to play with RIV.

If one of those people said, “We’ll join. We become the minority shareholder, serious minority shareholder,” some of these people are really good, but they’re not going to run a multi-billion dollar business. They don’t think they could. They want to be partners. They want to ride with it. All of a sudden, you say to yourself, “I need poker chips to throw in, or we end up a minority partner.” That’s where Hawthorne.

Hawthorne is the most valuable business in the pot industry in the world. If we aren’t willing to use Hawthorne as a currency, we’re going to be overwhelmed and not be able to maintain control of it. I do think that there probably are investors who say, “Why are you making it so hard for me?” I know that we’ve had interest in some of these sovereign funds from the Mid-East who have basically said, “I’m not investing in a pot business.” I love the Scotts business, but I’m not investing in the pot business.”

I think there’s arguably some, if you separate the business that makes it easier from an investor point of view to say, “I know what I’m buying here. I’m interested in the pot business, or I’m interested in the consumer branded business.” If you listen to our call, it’s not that I’m chasing growth right now, but there are a lot of opportunities that we have visibility to right now.

I wouldn’t be surprised in five years of business, it’s twice the size of this right now. Therefore, even if there are some of de-synergies, if strategically we need Hawthorne to be part of it so that we don’t lose control of it, that’s the argument that I would make.

Jonathan: I think doing something because Wall Street tells you to do something is generally a bad [00:54:00] idea, but why not spin out 20% of it get a value?

Jim: This is not because Wall Street says. This is I love the people we’re talking about partnering with on the Apollo side. Do I want those guys to be the foster and they’re telling us what to do? I just don’t think it would work. I think there’s a lot of disciplines you’d get within Scotts, access to capital markets, the discipline, accounting, all the things that just go with every day being here.

I would be afraid, honestly, if we said we’re going to take a bunch of young guys who are 35 years old, and they’re going to be the majority shareholders. I just think that that’s a business that I’m not sure I’d want to be a part of. This is not because the Street is telling me anything.

This is because I’m a much better manager, I think Chris, as well, where we understand our authority. I think we need authority in Apollo. I think the upside is big enough that I’m making the number up right now but if you said there are $50 million of de-synergies, actually, I don’t think it matters in the big scheme of things. If you could actually create what you’re talking about, which is the finest pot equity, remember, a lot of stuff has to happen so we’re map building right now. If you could do that, does $50 million of de-synergies really matter? I don’t think so.

Jonathan: Not at all. As I said, doing things because Wall Street says to do so is generally a bad idea, but one of the things that they really have a tough time is SMGs top to value for a couple of reasons. One, it’s a two-quarter business, and then you have the weather issue. Is this a business that really needs to be public at this point? Why deal with annoying Wall Street analysts?

Jim: Henry Kravis came to visit with me. This is ’07, I think it was and the stock was probably less than $50 at the time. We can [00:56:00] privatize the business. You’ll make so much goddamn money. I think Doug Braunstein was the CFO over JP Morgan and a great banker.

I said, “You’re going to go borrow a bunch of money from Doug for free because interest rates are jack XXXX and we’ll buy the company. Now, I’m going to have a shareholder with a large appetite for making money, and I’m going to have to report to you guys. Then I’m going to have to go public again to get rid of you.”

Why can’t I just go and do a big dividend to our shareholders and I’ll borrow the money from Doug for nothing and distribute it to shareholders? Which we did and in today’s market, I’m not completely satisfied, but I think at this price, I don’t think the family would want the risk.

I think you’d say to yourself, “Do I like that world where I would have to have financial partners help me out, I think? Do I want to let them in?” I don’t know. If it was your family, would you do it?

Jonathan: I think you got a great business and I’m confident in the long-term aspect of Hawthorne.

Jim: In regard to challenging it and having a calendar that’s subject to not only weather but is effectively a six-month business, I think we’re a pretty consistent earner. I think we have a much more consistent business than it sounds. I think difference between good weather and bad weather is probably a percent or two.

That’s not that huge. I don’t think it’s that hard to value. I think if you look at our debt, we tend to issue debt at investment grade cost when we’re a non-investment grade issuer. What do I think? I think we get a lot of credit for being pretty reasonably run company with pretty consistent earnings.

I would add, we tell the Street what we’re going to do, and we do it, which I view as usually a good thing for the investment community is I think if we tell the Street clearly what we’re up to and we do it, even if the results involve degradation of some of the quality of business metrics in the short-term, [00:58:00] I think the Street buys into that chip and says, “I think this team can solve that problem.”

Hawthorne is a little bit different because the problem with Apollo right now is with 280E called an 80% tax rate on the federal side and then throw state taxes and local taxes and all the burdens that go along with that, you effectively can’t make money legally in the pot industry at the moment. It’s the weirdest thing.

Who makes the most money in pot right now? The federal government. That’s XXXX up. The problem is there’s not visibility to financial returns on that money in the short-term. You have to do it based on what you think the value of the franchises and I think the Street can handle that. I think my family can handle that, but time will tell on that one.

I think that’s a more challenging valuation metric is to say, “Well, wait a minute, how much money are you bringing in? What’s the cash flow?” That’s a harder one because then you got to talk to Chuck Schumer and say, “Solve this problem dude. America is in favor. 75% of America lives in states where this XXXX’s legal. The feds need to get on top of this.”

Jonathan: Jim, I want to thank you for being on The World According to Boyar. I really enjoy learning more about your fascinating story. How the pandemic has provided a significant tailwind for the consumer business and the tremendous opportunities at Hawthorne. I look forward as a shareholder to watching your progress. Thanks for coming on.

Jim: Thanks, guys.

Jonathan: I hope you enjoyed the show. To be sure you never miss another episode of The World According to Boyar, please follow us on Twitter at @BoyarValue. Also, if you would like to receive the Boyar Value group’s latest report on Scotts Miracle-Gro, please email or click the link in the show notes. Until next time.


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Legendary Investor Leon Cooperman on asset allocation, interest rates, Berkshire Hathaway, and where he is currently finding value in the stock market.

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The Interview Discusses: 

  • How his investment strategy has evolved since retiring from managing money professionally.
  • His thoughts on asset allocation.
  • Which areas of the stock market he is currently finding value in.
  • How to invest in a potentially rising interest rate environment.
  • His sell discipline when investing in equities.

About Leon Cooperman:

At the end of 1991, following 25 years of service, Lee retired from his positions as a General Partner of Goldman, Sachs & Co. and as Chairman and Chief Executive Officer of Goldman Sachs Asset Management to organize and launch an investment-management business, Omega Advisors, Inc., which he ran for 27 years before converting it to a family office at the end of 2018.  At its height, Omega Advisors managed more than $10 billion of client funds.

At Goldman Sachs, Lee spent 15 years as a Partner and one year (1990-1991) as of-counsel to the Management Committee.  In 1989, he became Chairman and Chief Executive Officer of Goldman Sachs Asset Management and Chief Investment Officer of the firm’s equity product line, managing the GS Capital Growth Fund, an open-end mutual fund, for one-and-a-half years.  Prior to those appointments, Lee had spent 22 years in the Investment Research Department as Partner-in-charge, Co-Chairman of the Investment Policy Committee and Chairman of the Stock Selection Committee.  For nine consecutive years, he was voted the number- one portfolio strategist in Institutional Investor Magazine’s annual “All-America Research Team survey.

A designated Chartered Financial Analyst, Lee is a senior member and past President of the New York Society of Security Analysts; Chairman Emeritus of the Saint Barnabas Development Foundation; a member of the Board of Overseers of the Columbia University Graduate School of Business; a member of the Board of Directors of the Damon Runyon Cancer Research Foundation; a
member of the Investment Committee of the
New Jersey Performing Arts Center; and Board Chairman of Green Spaces, a committee organized to rebuild 13 parks in Newark, NJ.

Lee received his MBA from Columbia Business School and his undergraduate degree from Hunter College.  He is a recipient of Roger Williams University’s Honorary Doctor of Finance and of Hunter College’s Honorary Doctor of Humane Letters; an inductee into Hunter College’s Hall of Fame; and a recipient of the 2003 American Jewish Committee (AJC) Wall Street Human Relations Award, the 2006 Seton Hall Humanitarian of the Year Award, the 2009 Boys & Girls Clubs of Newark Award for Caring, and the 2009 UJA-Federation of New York’s Wall Street and Financial Services Division Lifetime Achievement Award.  In 2013, Lee was inducted into Alpha Magazine’s Hedge Fund Hall of Fame and was honored by the AJC at their 50th anniversary with the Herbert H. Lehman Award for his professional achievements, philanthropic efforts, and longstanding support for AJC.  In 2014, Columbia Business School awarded Lee its Distinguished Leadership in Business Award, and Bloomberg Markets named him to its fourth annual “50 Most Influential” list (one of only ten money managers globally to be so honored, selected “based on what they’re doing now, rather than past achievements”).  He was inducted into the Horatio Alger Association in April 2015.

Lee and his wife, Toby, have two   sons and three grandchildren.


Click Here to Read the Interview Transcript

Transcript of the Interview With Leon Cooperman:


[00:00:00] Jonathan Boyar:Welcome to the World According to Boyar, where we bring top investors, best-selling authors and business leaders to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar. Today’s guest is Leon Cooperman, one of the most successful money managers in history. If I went through his full professional biography we would run out of time. I’ll just go through the highlights.

Leon started [00:00:30] his investment career at Goldman Sachs, where he eventually became chairman and CEO of Goldman Sachs asset management. Prior to that he ran the firm’s research department. For nine consecutive years, he was voted the number one portfolio strategist in Institutional Investor magazine. At the end of 1991, Leon retired from Goldman to start his own investment management business Omega Advisors which he ran for 27 years before converting it to a family office. At its height Omega managed [00:01:00] more than $10 billion of client funds.

Mr. Cooperman and his family are extremely philanthropic. He and his wife, Toby, are signers of The Giving Pledge and have generously made substantial gifts to both Columbia where Leon received his MBA, and Hunter college where he obtained his undergraduate degree. The Cooperman’s also made the largest donation in St. Barnabas Medical Center history as well as countless other major donations to help those less fortunate. Leon, welcome to the show.

Leon Cooperman: Thank you, [00:01:30] Jonathan. I’m getting so damn old. I’m dealing with the children of people I knew many years ago, but a very good platform.

Jonathan: No. I was speaking to my father Mark and he remember being the same stock US Shoe with you years and years ago. He said it was run by the worst CEO he ever met.

Leon: The highest ratio of talent to brains.

Jonathan: [laughs] In 2018, you converted to a family office. One of the reasons you cited was you did not want to spend the rest of your life trying [00:02:00] to chase the S&P 500. Now that you’re just managing your own money, has your investment process or strategy evolved at all?

Leon: Well, let me give you a little bit longer answer proceeding it. Everybody, myself included, was shocked when I retired. I love the business. I live by the motto, “Do what you love, love what you do. It’s not work. It’s just something you just enjoy doing.” I feel very much like, if you’ve seen Godfather 2, I’ve always seen it 50 times, there’s a scene at the airport where Hyman Roth gets shot. Right before [00:02:30] they shoot him, he says, “I’m a retired executive living on a pension.”

I’m a retired money manager living on investment income. The bad news is I have no active income, meaning I have no income from wages or salaries or from clients. The good news is I live on dividend and interest income and capital gains. Had losses, that’s the bad news. The good news is I have no pressure. I think at age 78 it was a good swap to go from income-oriented to absence of pressure. Particularly my case, you mentioned [00:03:00] it very kindly, my wife and I have committed. We told Warren Buffett this nine years ago, asking for half isn’t asking for enough, we intend to give away all our money. I was working 70-hour work weeks for charity, many people I didn’t know. I’m happy with my decision.

How has my life changed? I told everybody who asked me when I announced my retirement that my change would be as follows. I’m going to sleep an hour later in the morning. When I was in business I got up at 5:10, got in the office at 6:45. I’m going to go to the gym three times [00:03:30] a week to deal with my weight issue which I’ve carried all my life. Both of those I’ve done very religiously.

The third thing I’m going to do, I have not done. That was I was going to learn how to bid in bridge. I have very good card sense and how to play a hand well but I don’t know the bidding conventions. I have been so damn busy in retirement that I’ve not had the chance to take any bridge lessons. You hit on one other thing, I’m going to be more long-term oriented, be tax efficient. The great Warren Buffett, I guess, almost 40 years ago in one of his annual reports went through a hypothetical [00:04:00] example of every year you bought that year’s hot stock, you’ve made 50%, sold it, paid your taxes and reinvest in what was left, the next year’s stock make 15% as opposed to a 15% serial grower. At the end of 40 years you had thousands of times more money left in the long-term investment approach than in the trading approach.

Now, of course, it was a hyperbola example because if you’re trading your hope to get more than 15% when you go into that year’s hot stock but I am more [00:04:30] long-term oriented, more tax conscious and also because I’m very heavily weighed in common stocks, because I think the market is fully valued and more likely to fall and go up a lot, I’m putting more money into non-equity deals or private deals, real estate and other kinds of deals where I know the people, where I have confidence in the people.

Jonathan: That raises an interesting question. Obviously your circumstance is very different than most. The traditional rule has always been 60/40. This is a very vague rule, equities to bonds. [00:05:00] With interest rates where they are in the market- [crosstalk]

Leon: No bonds. I think bonds offer return free risk, return free risk. Basically, if you take the 1.45% treasury, you tax effect it, that the people that are buying treasuries that are taxable probably have a 40% tax rate, so you keeps 60 of the 1.45, which is 84 basis points and the inflation rate is running 2% or more, basically you have a negative return on your capital. There are [00:05:30] many stocks you could buy that have dividend yields higher than the treasury yield and are growing. As much as I’m not overly enthusiastic about equities a class, I would say that they clearly are superior to fixed income and I own very little fixed income.

Jonathan: If you were back your role as a portfolio strategist at Goldman, what would you be advising clients?

Leon: I would say minimal exposure to bonds. Everybody has their own– If I’m dealing with wealthy people [00:06:00] I tell them, “You’re already wealthy. Do what makes you comfortable. If you’re not comfortable don’t do it.” I’m comfortable having no fixed income, so I have stocks and cash. Stocks are infinitely better than bonds and I don’t expect a lot from the stock market.

Jonathan: Even the non FANG type of names, are their value in the smaller type of stuff?

Leon: Yes. I’ve said this before, I’ll repeat it again. We’re really dealing with three stock markets. The first market, which is very well known and discovered is the [00:06:30] FANG market. That’s the Googles, the Facebooks, the Amazons, the Microsofts of the world, and against the 1.4% bond rate they’re not expensive. I went back, if you can give me a second, I went back and looked at the NIFTY 50 1972.

In 1972, JP Morgan US through trust ruled the roost. They had a philosophy, only the right stock at any price. They were impervious to what they paid as long as they bought a world-class growth company. [00:07:00] In ’72 they paid 65 times for Avon, 25 times for DOW, 48 times for Kodak, gone, 26 times for GE, 37 times for IBM, 34 times for Kmart, gone, 90 times for Polaroid, gone, 30 times for Revlon, almost gone, 31 times for Sears Roebuck, gone, 34 times to Kresge, gone. 41 times for Xerox.

In 1972, those valuations were alongside a 10-year government of 6.5%. [00:07:30] The 10-year government at 1.45, it’s hard to come up with the conclusion anything is overvalued, but I believe that the 10-year government is overvalued. I don’t believe in using an overvalued instrument to discount a stream of earnings. That’s the first market. As long as we avoid a recession and interest rates go up very gradually and modestly the FANG stocks are okay.

In fact, in the family office, even though I’m a value investor, my biggest position is Google. I have a 4% position in Microsoft. I have 6% in Google. I got a little bit of [00:08:00] Facebook. I got a 2% position in Amazon. That’s one market. Expensive but not ridiculously so. The second market, which is ridiculous, are the Robinhood market, and that’s a bunch of 30-year-olds that are getting checks in the government that are trading in an environment of zero interest rates, zero commissions.

They’re playing the game. I guess they can’t go to sporting events and so they’re playing the stock market. I think that’s going to end in tears. I’ve said that previously. Unfortunately, the first time I said that on television was on [00:08:30] CNBC, the very next day, somebody committed suicide who lost a lot of money on Robinhood. That’s a very sad outcome.

You look at things. Carl Icahn is about as smart as they come. He sells his mistake in Hertz at 72 cents a share. Two weeks later the Robinhood crowd is trading it at five. GME, I don’t know Gabe Plotkin but I’m sure he’s a very smart guy, but he got squeezed here. For GME to go from 20 to 500, we had a 50 billion market cap, it’s irrational [00:09:00] and the whole market trades in a very crazy way. I think that when it goes down, and it will go down one day, it’s going to go down as fast as it went up.

The third market, the market that I track in that Boyar Research tracks in, and that’s the value market. There are plenty of things you could find to do there. I’m reasonably fully invested. No bonds of any consequence. I recognize, what’s been going on in the last several years is everybody has been pushed out on the risk curve. The person that bought [00:09:30] T-bills 10 years ago said, “I can’t survive in zero. I’ll take duration and inflation risk not buying T-bonds.”

The T-bond buyer says, “I can’t get by 1 to 1.5, I’ll buy industrial bonds.” Industrial bond buyer says, “I can’t get buy on 2% or 3%, I’ll buy high yield.” Now high yield buyer says, “I can’t get by on 4% or 5%, I’m going to buy structured credit, which is an opaque market has a higher yield.” Then your structured credit guy says, “Well, the stock market is hot as can be. I’m going to pay 2,500 into my fixed income fund and [00:10:00]  I’m going to put in equities.” The equity guys put 2% in Bitcoin. That’s what’s happening. Everybody’s moving in the risk curve.

It’s very clear what’s going on. I understand it. I’m not saying it’s wrong, but you should appreciate it. The only man who is wrong is Mr. Powell as the head of the Fed doesn’t acknowledge what’s going on. What’s going on is very simple. Before the COVID virus hit, there were 5.7 million unemployed people in the country. At the peak in March or February, it got up to 23 million, April I should say. [00:10:30] April, 23 million. It’s now down a little bit over 10 million. We’re conducting fiscal monetary policy with the aim of getting the unemployed back down to 5 million.

Just look at what’s going on. If you spoke to 100 economists today, they all would agree the potential for real growth in US economy is about 2%, close to around 2%. How do they get there? They say real growth is a function of productivity growth and labor force growth. Productivity growth is about 1.5% trend, labor force growth grows about 0.5%. [00:11:00] The potential for the economy to grow in real terms is about 2% real. The economy is growing 6% real based upon the forecast yet we have interest rates near zero. That doesn’t make you grow in three times trend yet the fed is keeping interest rates pinned as low as they can possibly be.

On the fiscal side, we’ve injected a trillion dollars more in stimulus into the economy that has been lost in wages. We got the pedal to the metal, whatever you want to say. I think that [00:11:30] one day someone’s going to wake up and look at all the debt that’s being created. This nation was founded 245 years ago, we had no national debt. I think we had in 2019 21 trillion of debt. That went up 3 or 4 trillion this past year. It’s going to go up another 3 trillion this year. There’s a pace of growth in debt far in excess of the growth in the economy, which means more and more of our income is going to have to be devoted debt servicing.

It’s not going to come about through immaculate conception. Most bear markets have [00:12:00] causative factors and the causative factor will be a recession or possibly a change in fed policy. The fed will change if they lose control of the things and inflation starts to accelerate, but you see tremendous inflation and commodity prices, but that’s less relevant because the big cost of business is labor. Once labor starts to go up, then I think you can let the genie out of the bottle, but it is what it is. I would say, unequivocally in my mind, well selected the stocks are the place to be, bonds [00:12:30] are the bubble.

Jonathan: When you graduated from Columbia Business School in the ’60s, the 10-year was around 5% nominal, eventually reached almost 16% in ’81 and rates were choppy for a while in the ’80s. But the long-term trend is basically on a path to almost zero, which is crazy. There are signs that rates may finally be rising, which makes sense, based on what you just said, although people have been saying this for years. However, most equity investors, myself included today, [00:13:00] have not invested through a prolonged rising interest rate environment. What do you think the investment implications for equity investors will be if rates start to rise? How does someone navigate that?

Leon: Well, it’s really a function of the magnitude of the rise and the slope of the rise. I’ll give you some statistics. From 1960 to 2012 the market multiple was 15 times. Now we’re about 23 times, 22 and a half times. In that period [00:13:30] the 10-year government averaged 6.2% currently 1.4% and the fed fund rate was 5% currently in year zero. The stock market is not discounting current interest rates. It’s obviously more risky appraised because of the level of rates, but I would say, the market could accommodate a rise in rates. I would say 2% gradual rise would not be a problem for the market.

I think the bigger question is what the fed is doing. Keep in mind, the most important thing I’m going to say in this podcast [00:14:00] is inflation over time is a friend of common stocks because the inflation in a company’s costs get incorporated in their selling prices, which lifts the nominal level of revenues and earnings. It’s only when the central bank is trying to cover inflation does a market get worried because the market understands curbing inflation is tantamount to curbing growth, but we have Mr. Powell telling you, ‘The stocks are not expensive against interest rates.” What he doesn’t tell you is interest rates are ridiculously low, they make no sense. People are not going to constantly buy [00:14:30] bonds with negative returns, they’re going to gravitate into higher risk assets.

I also would make the point that there is history for a prolonged period of under performance of the major averages. I got my MBA, you mentioned Columbia, on January 31st, 1967. Had a six-month-old child, who’s now 54. I had no money in the bank. I was relatively newly married. I owed money to the government because of national defense student loan that I had [00:15:00] outstanding, and I could not afford a vacation.

I went to work at Goldman Sachs the very next day, February 1st, ’67. The Dow was roughly 1,000, 14 years later it was 1,000 and only commenced that rise in 1982. I made a lot of money picking stocks. That’s what I think we got to do. I don’t expect much from the averages over the next few years but I think you can make some money picking stocks, but you won’t have the tailwind that we’ve had, you’re going to have a headwind of rising rates. I also would say this, if rates belong where they are, [00:15:30] meaning 1.4%, 1.3% and the guy has been very, very right, it’s Van Hoisington in Houston. Basically, he thinks rates going to go lower but if rates prolong at 1% you don’t make double-digit return to the stock market. You make single-digit returns, which is evidence of what to expect in economic growth. I believe in the capital market line.

Jonathan: Columbia Business School, you said you started work the very next day. My former boss, one of your very good friends, Mario Gabelli has told me the same-

Leon: We were classmates [00:16:00] and we’re very friendly to this day. He’s terrific. I know he was on a podcast with you. Mario is a great guy and terrific human being and one of my best friends.

Jonathan: He’s fantastic and one of the articles I was reading said you, him and a guy by the name of Art Samberg of Pequot Capital, one of the world’s largest hedge funds at a time, all carpooled to Columbia together, were in the same class.

Leon: Yes, unfortunately, Art just passed away at roughly age 80 to a bout with cancer, which he succumbed to. He was also [00:16:30] a terrific human being. Yes, we were lucky. The only luckier ones were Columbia. I don’t know the total, I know I’ve given about $40 million at Columbia. Columbia changed the trajectory of my life. If you have some grandparents listening to this podcast., I can tell you, the MBA made a big difference.

Mario and I have a similar philosophy. We both say we like to hire PhDs, poor, hungry and driven. I never could have gotten into Goldman Sachs with a BA from Hunter College. It was the MBA I got from Columbia [00:17:00] that opened the door. Warren Buffett’s says the language of business is accounting. I learned accounting, operations research, statistics, stuff like that. I made a lot of friendships I kept for the rest of my life. Mario and Art were two terrific human beings. I really miss Art. He’s terrific. I speak to Mario every week and he is a great human being.

Mario and I used to jostle with each other. When we were in between classes, we would run to the only phone booth at Columbia. We would be pushing each other, shoving each other to get access to the phone to call our broker. [00:17:30] We had the same broker. I forget the name of his firm. The only thing I know about the firm is Buster Crabbe used to be a salesman at that firm. He was the old Tarzan guy. What I love about Mario is the only thing that’s changed about him in the last 50 years is the color of his hair. He had a redhead when I went with him at Columbia and now he’s got a full head of gray hair, but he’s just a terrific human being.

Jonathan: No, he is, he was a fantastic boss, a great teacher and it’s just amazing when you think about it, that that class produced one of the best investors of a generation. [00:18:00]

Leon: Well, we all started with the Roger Murray, who was a fabulous practitioner. The original publication, the book, Security Analysis is 1934 Written by Graham and Dodd. I think the second or third edition was Graham and Dodd, Cottle and Murray authored one series, one edition and it was amazing. In the original Graham and Dodd, they had a two-page thread of about 20 ratios over 10 years. It’s a way of looking at a company [00:18:30] to study those ratios and the direction.

I did a study contrasting JP Stevens and Burlington Industries. Two textile companies, both not around any longer. Roger Murray, in grading my paper, found the transposition in one of maybe 100 ratios that I put into the report. The guy was amazing, true practitioner, but he really honed my interest in the profession.

Jonathan: One of the things I’d love to ask you about it, and I think it’s [00:19:00] probably the hardest part of investing is when to sell shares. I really think it’s unbelievably difficult. First, when you were running money professionally, how did you decide to trim position that increased in value?

Leon: Well, we did it in a very disciplined fashion but now that I run my own money, and I don’t want to pay taxes, I totally take my highly appreciated stocks, I give it to my foundation and then I give it away to charity. As you kindly mentioned, I’m took The Giving Pledge with Warren Buffett, and I tend to give away all my money.[00:19:30] Whenever I buy a stock, we identify the upside and the downside. When a stock appreciates to my upside objective, I re-examine the thesis, either raise the objective or I sell.

Second reason I sell something is I find another idea. I’m not the Federal Reserve, I can’t print money. I find another idea that has a better risk-reward profile than the one that I have. I’ll sell that and move the money into something else. The third reason I sell [00:20:00] is because I changed my view of the market and I decide to become more defensive and I want to raise cash. Right now I’m of the mode where I’m looking to sell things on strength. I fully believe, but I could be dead wrong, that the market will be, and I say this on a day like today where the market’s up 2%, but I think the market will be lower a year from today than it is today. That’s my modus operandi.

Jonathan: On a specific example, it’s not a huge position for us but at least according to your latest 13 after you owned a company called SunOpta which we own as well. [00:20:30] It’s a stock that’s appreciating in the portfolio in a good way, for us it’s- [crosstalk]

Leon: I had an absolutely terrible start there, let me tell you. I’m known for being very candid. I got a call from a very bright guy who decided to close his fund and basically he was going to set up a SPV for Sunopta. Even though I didn’t know the guy, a guy I respected a lot told me he was a very bright guy. I put in a decent sum of money into his SPV and bought the stock at seven a quarter [00:21:00] and it went straight to two bucks. I then decided to do some of my own research. I bought a boatload of stock at two and a quarter. It’s now I think around 15 or 14.

Jonathan: It closed today around $15. It’s not crazily expensive so how do you- [crosstalk]

Leon: It could be in that area where everybody wants to go. It’s the health foods and oatmeal and  oak milk and I’m still there. I have a pretty decent sized position between what I put in with the fellow that ran the SPV and what I now own directly. It’s a big position. I’m playing a little bit of momentum there. Typically I’ve owned low multiple stocks. Like I gave an example, I have a large position in something called Mr. Cooper, a mortgage finance company. It’s gone from 5 to 30 this year, and guess what? It’s going to earn probably $7 or $8 this year. It’s going to earn five next year. They’ll be buying back a lot of stock. It’s not much different than year in book value even though it’s up five fold. [00:22:00]

You got to do your own work today. Wall Street is really, I hate to say this because I came in out of Wall Street, useless. I have a decent sized position in something called Paramount Resources. For four months the stock traded two bucks. For four months all the analysts on Wall Street had $2 price objectives. The stock is now 10 and a half and everybody’s price objective is 11. At two bucks there was nobody yelling buy. There were very few that I know were yelling buy. I kept on buying because I felt [00:22:30] good about my analysis. I felt the price of what was going to grow up because I believe in economic theory.

Excess returns brings in competition which kills returns and inadequate returns dries out competition and capacity which improves returns over time. The oil industry went from, I don’t know, about 12%, 13%, 14% of the S&P down to a low of 2% or 3%. They were not going to invest in anything but the highest return projects. They all resorted now, the model seems to be [00:23:00] we’re going to pay dividends and not spend a lot in CapEx.

Jonathan: Switching gears just a little bit, you probably went down for a different reason. I know you’re living in Florida now back from high tax New Jersey.

Leon: I came to Florida because I got arthritis all over my body and I wanted a warm climate. I have spinal stenosis in my neck. I love the lifestyle down here.

Andrew Cuomo said, “People are leaving New York because of the weather.” They don’t get it. They talk about everybody paying their fair share. It’s a tax and spend model. New York, New Jersey, Connecticut, California they’re going to lose population because people aren’t stupid. I live in a gated community with lots of security. I enjoy it down here, I ride a bicycle [00:24:00] everyday. I don’t do that in New Jersey. I have entertainment at night, I have a country club I can eat in. I can eat out but I like the lifestyle but I did not come down for taxes. It’s definitely a plus.

I’m telling you, the real estate down here in my club is on fire. I’ll tell you an example. My son and daughter in law asked me to take a visit for one of their friends was looking to buy in St. Andrew’s Country Club where I have a home. They came down two weeks ago. I gave them my view which was very positive. They put a bid in a house. Bid [00:24:30] the guys’ asking price 2.175 million. Three people came in and bid against each other. The has went for $300,000 above the asking price, above asking price. This is my second home in St. Andrews. My first home I bought 25 years ago, I sold it 25 years later for what I paid for it. Now things are on fire. I think it has a lot to do with people coming from New York down here.

A friend of mine lives in Frenchman’s Creek up in Jupiter and he put his house in the market, sold on one day for his asking [00:25:00] price and the next day somebody came in at $100,000 over asking, but he already executed a contract, he’s a very honorable guy. That’s what’s going on. I don’t know if I preempted the question, but there’s no question that New York, New Jersey, Connecticut, California are going to lose population unless they start recognizing they got to get their expenditures under control.

I am a believer in the progressive income tax structure. I believe rich people should pay more in taxes. What we have to do as a nation is coalesce around the question, [00:25:30] what should the max in tax rate be of wealthy people? I called Warren Buffett seven years ago, I have enormous respect for Warren. I asked him that question. His response then, it may be different now was, “If you make $1 million a year, 35% tax rate. If you make over $5 million a year, 40%.” I have no problem with that. I’ve said publicly, “I’m willing to work six months for the government, six months myself, but we’re well pass that.”

I go nuts when I hear about this expression, whether from Phil Murphy or even Joe Biden when they talk about [00:26:00] fair share. What is fair share? What is fair share? It’s nice to talk about what someone else should get of somebody else’s work effort. I’m prepared to give 50% of my work effort to the government. I think that’s reasonable and it’s fair. Beyond that I think it becomes confiscatory. If you ask Bernie Sanders, he’d probably say 90% marginal tax rate. If you ask AOC, God knows what she would say, probably say, “Take it all.”

Elizabeth Warren is 70% plus a wealth tax, which makes no sense. I’ve written her a five-page letter explaining to her why it [00:26:30] makes no sense. Then Paul Krugman writes The Times asked the question, he says, “64%.” I think that’s too high. You take away the incentive. The wealth tax makes no sense. They have such a negative dialogue about wealthy people. Again, I’m not a spokesman for the wealthy. I grew up in the South Bronx and went Morris High school in South Bronx, City University of New York in the West Bronx.

I’m a son of an immigrant, my father came to America from Poland at the age of 13 as a plumber’s apprentice. He died carrying a sink up a four-story tenement [00:27:00] from a heart attack. I’m self-made, I’m giving it all away. That’s the American dream. Why are they crapping on wealthy people? How do you get wealthy in America? You get wealthy because you develop a product or services that somebody needs. Is the world better off or worse off because of Bill Gates, Jeff Bezos, Larry Ellison, Bernie Marcus, Ken Langone? I say infinitely, the world’s better off.

These people made a lot of money, they developed products and services that the world found useful and they then took this money, they recycle it back into society. There’s no reason to criticize them. [00:27:30] Raise the tax rate, don’t damn them. Praise them for what they’ve done but don’t damn them. Sorry for being a soapbox, Jonathan.

Jonathan: I get what you’re saying and I agree with it. Without them- [crosstalk]

Leon: We’re talking to ourselves.

Jonathan: -not only would the world not be better off, there’d be a heck of a lot less hospitals and a heck of a lot less museums. All the people you just mentioned are extremely philanthropic. They’ve helped the world in immense way.

Leon: I would always say to your listeners, many years ago I figured out there’s only four things [00:28:00] you could do with money when you think about it. One of the four things you could do with money, the first thing you could do is you could pleasure yourself. You could buy a plane, you could buy cars, you could buy homes, you could buy art. If you’re an art collector you never have enough money because you can spend $100 million on one canvas.

I don’t collect art and I happen to have a view that material possessions brings with it aggravation. I’m a less is more kind of guy. I’m married 56 years to the same woman and she taught as an educator for 30 years. She was very purposeful. We didn’t collect things. The second [00:28:30] thing you do with money is you give to your children, but if you have a lot of money, giving all your money to your kids is a mistake which will deprive them of self-achievement. I’ve given my kids a reasonable sum of money. One made it all on his own, one needed it because he’s a scientist, didn’t make a lot of money, but I wouldn’t give all my money to my kids, it’s just so damaging.

The third thing you do with money is you give it to the government, but only a fool gives the government money. You don’t have to give, you pay your tax as a taxpaying citizen, but you don’t give them extra. The fourth thing you do with your money is you recycle it back in society and that’s what [00:29:00] I’ve elected to do. You mentioned The Giving Pledge. The fact is in Colombia, the biggest thing I’ve done is called Cooperman College Scholars. I gave $50 million to send 100 plus kids in Essex County, New Jersey to college, I pay their tuition. You’re changing their lives. The average lifetime earnings of a college graduate is well over $1 million more than a non-college graduate. Plus you give them tools to be competitive in the world that we’re in. I enjoy giving it away.

Jonathan: How do you select the scholars?

Leon: We have a board of around 15 people that interview the kids [00:29:30] and we have requirements. Number one, you have to live in Essex County, New Jersey. Number two, you have to be academically qualified. We have a board that interviews the kids. I believe in teaching people how to fish, not giving fish. Third, you have to have a financial need unmet by government. Fourth, you have to enroll in a free three-week pre-college program designed by Franklin & Marshall, which explains to these young kids what to expect when you’re in college because they need mentoring, need direction.

We give them up to $10,000 [00:30:00] a year plus other things. The wonderful thing which I take zero credit for, the only credit I take is putting the money in to enable it to happen, 35% of Newark High School kids go to college. Historically, only 5% manage to graduate. I have Twinkle Morgan running the program, a lady who’s just terrific. My first cohort just graduated college. We started about five years ago and we had a 73% graduation rate which is fabulous.

Jonathan: Do you ever see the kids? [00:30:30]

Leon: I meet with them every year. This year I got to do it virtually but I meet with them every year. I explain that throughout life they’re going to have setbacks but what makes you a success is how you deal with the setbacks.

Jonathan: This weekend Warren Buffet released his annual letter which everyone makes a big deal out of. I don’t know if- [crosstalk]

Leon: -a lot of wisdom.

Jonathan: He’s a very smart guy. Is there anything in the letter that surprised you?

Leon: Nothing about the stock market though.

Jonathan: What I thought was kind of odd, I don’t know if you did, was he didn’t [00:31:00] talk about why he didn’t put any meaningful amount of money to work during March and April. Do you have any idea why he didn’t?

Leon: Yes, my guess is he thinks the market is reasonably fully valued. He’s a very rational guy and very unusual. Not only did he not put a lot of money to work but he sold his airlines and he very rarely sells in the hole. He had a pessimistic assessment of the airline business. He sold at the wrong time but I have enormous respect for him. [00:31:30] I would say that he’s probably having trouble finding cheap stocks which is why he spent 25 billion buying his own stock back. I think that he would probably acknowledge the stock is undervalued but I don’t think he thinks it’s that undervalued.

Jonathan: You’ve always mentioned that Henry Singleton at Teledyne was one of your best investments. You don’t think he would do something like he did, just buy back massive quantities of stock?

Leon: Not really. Let me digress for a moment. It just shows you [00:32:00] the foolishness of Wall Street. In 1982 Businessweek had a picture of Dr. Singleton, the founder of Teledyne, on it’s cover. They pictured him as Icarus, the mythical Greek god, with the wax wings that flew too close to the sun. The wings melted and he crashed and he fell to earth and they were highly critical of his stock repurchase activity. Singleton [retired 90% of his stock, never selling a share of his own stock.

He was born [00:32:30] with humble beginnings in Texas, I think to the son of a cotton farmer. Number one in his class, the Naval Academy, PhD in electrical engineering, brilliant, brilliant guy. He basically bought back, like I said, 90% of his stock before anybody understood stock repurchase. I was going to reach into my case here. I have a couple of letters from Warren Buffett on the subject.

In 2007, November 23rd to be precise, I gave a speech to Value Investing Congress. [00:33:00] I gave it one two subjects. One, stock repurchase which I was highly critical of the way it was being done in 2007. Everybody was buying stock back at a high and Dr. Singleton well explains his approach. Warren wrote me a letter. This is November 23rd of ’07. I’ll take the liberty of reading it to you.

Dear Lee,

I don’t think you could have picked two better subjects. Henry is a manager that all  investors, CEOs, would be CEOs, and MBA students should study. In the end he was 100% rational and there are very [00:33:30] few CEOs about whom I can make that statement. The stock repurchase situation is fascinating to me, that’s because the answer is so simple. You do it when you were buying dollar bills at clear cut and significant discount and only then,

the general observation would say that most companies that repurchase shares 30 years ago, now it’s like 45 years ago, we’re doing it for the right reasons. Most companies doing it now are wrong when doing so. Time after time I see managers who are attempting to be fashionable or perhaps subconsciously hoping to support their stock. [00:34:00] I gave Loews, L-O-E-W-S, the conglomerate, as a good example of a stock repurchase that it did it the right way. Loews is a great example of a company that has always repurchased shares for the right reason. I could give examples of the reverse but I try to follow dictum. I love this praise by name, criticize by category.

Best regards,


I would say that relative to other people’s stocks he feels this stock is cheap, but I don’t think he feels this stock is like terribly undervalued [. Then, I’m looking [00:34:30] for the other letter he sent me. I have to do some memory. In 1982 I sent a letter to Businessweek. When they had Singleton on the cover, I was saying this guy was great and he said this guy was terrible. I felt motivated when I was an analyst at Goldman to respond to Businessweek.

I wrote him a seven-page letter telling them how dumb they were and how wrong they were and Buffett sent me a letter, which by the way in 1982 I framed and to this day is hanging on my wall in my office. He wasn’t famous in 1982. I say that’s my biggest [00:35:00] mistake because I thought so well of whom that I took his letter, I framed it and hung it on my wall but I never bought his stock. That was a big mistake.

When he said, Dear Lee, I always enjoy both the quality of your writing and the quality of your reading. I used to write a monthly report. You’re letting to Businessweek regarding Teledyne was 100% of the mark. Best regards, Warren. He told me offline back in ’82 in the bear market that he tried to buy it and he missed it by about four or five points and it went up around 300 points [00:35:30] afterwards.

Jonathan: I just want to thank you for your time. You’ve been more than generous. You’ve had a wonderful career that I’ve enjoyed following.

Leon: I’m a private citizen but I’m still working because I said I didn’t have any time to take bridge lessons because I’m busy. I got 40 positions in my portfolio. I talk to companies, I believe in doing research and I study the macro environment. They know, I’m a man with an opinion. Could be wrong-

[00:35:58] [END OF AUDIO]


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David Zaslav, CEO of Discovery, Inc. on the future of streaming and Discovery Plus

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The Interview Discusses: 

  • How he helped launch CNBC.
  • What it was like working in the cable industry when it finally started to gain popularity.
  • David’s views on the current media landscape and where he believes there could be consolidation.
  • His thoughts on how content will be bundled in the future.
  • David’s thoughts on the current multiples for content companies and why Netflix and Disney have been able to garner premium multiples.
  • What it was like working with Jack Welch, John Malone, and the Dolan family.
  • And much more…

About David Zaslav:

As President and CEO, David Zaslav sets the strategy and oversees all operations for Discovery’s global suite of brands across pay-TV, free-to-air, direct-to-consumer and other digital platforms. Under his leadership, Discovery began trading as a public company in 2008 and became a Fortune 500 company in 2014. More recently under Zaslav, Discovery acquired Scripps Networks Interactive, in a transaction which closed in 2018. The new Discovery comprises nearly 20% of ad-supported pay-TV viewership in the U.S. and nearly 7 billion monthly video views, making it #1 pay-TV portfolio in the U.S.

Since Zaslav took the helm, Discovery has launched some of the fastest-growing cable networks in the U.S., including Investigation Discovery, a leading network for women in total day delivery; and OWN: Oprah Winfrey Network, a top network for African American women. Under his leadership, Discovery networks have hit numerous milestones, with TLC breaking all cable viewing trends and recording its most-watched year ever in primetime for 2020. Brands including HGTV, Food Network, TLC and ID regularly rank among the most-popular networks for their core demo of female viewers.

The company’s global distribution platform has, under Zaslav’s leadership, expanded to 3 billion cumulative worldwide viewers with a diverse set of brands, creating an unmatched international portfolio for viewers, advertisers and distributors. Zaslav has diversified Discovery’s content offering with investments such as Discovery Kids in Latin America, the leading preschool network across the region. Discovery has further strengthened its presence in key international markets through numerous transactions including the acquisition of Eurosport, which led to the groundbreaking agreement with the International Olympic Committee making Discovery and Eurosport the home of the Olympic Games across Europe through 2024.


Click Here to Read the Interview Transcript

Transcript of the Interview With David Zaslav:


Jonathan Boyar: Welcome to The World According To Boyar, where we bring top investors, best-selling authors and market Newsmakers, to show you the smartest ways to uncover value in the stock market. I’m your host Jonathan Boyar. Our guest today is David Zaslav, president and CEO of Discovery Communications. Prior to joining Discovery, David worked at NBC where he’s credited with launching both CNBC and MSNBC. David is here to talk about his fascinating career, as well as the launch of discovery’s latest initiative Discovery Plus,

The Boyar Value group has been following Discovery since 2006, shortly after it was spun out of Liberty Media. Full disclosure, clients at Boyar Asset Management, as well as myself, are Discovery shareholders. What attract us to Discovery is the power of its brands and global reach. It’s available in 220 countries, 50 languages and delivers 8,000 hours of original programming each year. Best of all, from an investment standpoint, unlike its competition, most of its content translates well internationally. It’s able to spread the cost of its programming over its global subscriber base. David, welcome to the show.

David Zaslav: Thank you, Jonathan.

Jonathan: Thanks for being on. I’m really excited. First I just want to talk about early on in your career, you were a young lawyer in Manhattan in the ’80s, and you were reading a trade publication, and I guess you saw an article discussing how NBC, which at the time was really just a broadcast company, wanted to get into cable and you did something quite unusual. What did you do?

David: I had started out as a corporate lawyer and I was at a great firm and I was busy working away, writing prospectuses, but I knew in my heart that I didn’t love it. I didn’t think I was actually that great at it. I was working real hard at it. A partner transferred into the law firm. He was general counsel at Warner Communications and he represented MTV and CNN and Discovery and Nickelodeon. I started [00:02:00] in my spare time doing extra work in that area. I loved it.

The partner’s name is Richard Berman. He’s a federal court judge now in New York, wonderful guy. I love working with him. I got a sense of the industry. I loved it. I started subscribing and reading everything I could about it. Subscribed to the Hollywood Reporter and Broadcasting and Cable and Multichannel News.

One day on the cover was Jack Welch and Bob Wright. Bob Wright was the chairman of NBC at the time. GE had just bought NBC and NBC really was the center of the universe. Broadcast was all that mattered at the time. Cable was just getting started. In fact, all the cable programs, services at the time were losing money. It was an experiment. It was all in the startup phase. Jack was in the on the cover with Bob saying that he thought cable was part of the future and he wanted to figure out how to get it. He was going to get NBC into the cable business.

I wrote a letter to them saying, “I’ve been doing a lot of work for MTV and Nickelodeon and Discovery. I love the cable business, it is what I want to do with my life. If you’re going to go down this road, I’d love to be on the journey with you.” Jack wrote on the top, “Bring this guy in, let’s take a look at him.” In retrospect, it was a handwritten letter at the time. I just thought this was a way to maybe get a shot. Looking at it now, I think it’s pretty astonishing that they read it and they brought me in.

It was the beginning of a great journey. I got very close to Jack, learned a ton from him, learned a ton from Bob Wright. It was an all-star cast at NBC. I was quite lucky to be involved in NBC at the very beginning when they were starting cable and to be around such a great and smart group of people, because it had a big [00:04:00] influence on me and how I saw the world.

Jonathan: You took a pretty big risk. I mean, you were a corporate lawyer at one of these white shoe firms, and I think you took a pay cut to do this.

David: I took a big pay cut. I knew when I was doing the corporate work that I just didn’t love it. It was hard for me. We all think we’re good at everything, but it was difficult. You had to write these prospectuses, you had to comply with all these different regulations, it would get sent to the SEC and reviewed. I looked around at the partners and I just thought like, “I’m not sure that’s what I want to be.” In many ways I was stuck.

I had an apartment then they’ll pay me a lot of money. My life raft was Richard Garman that I somehow by luck, I got exposed to the cable business and got the bug, but it was a no brainer to me to leave and take a pay cut just because I felt like I want to be doing stuff that I really like. I was passionate about cable. I really believed in it and getting in early stage, in retrospect, there was no experts. There were experts in every area on the broadcast side, there were no experts in cable. I got to do a lot more and I got to expand.

I did take a 50% pay cut and they all thought I was crazy. There were times when I thought I was crazy. There were times– When we launched CNBC, at that time, since all the businesses were losing money, we tried to structure our attack on cable by using partnerships to limit our downside risk. Jack was like, “We got to find a partner.”

We found Chuck Dolan from Cablevision. We partnered with almost everything with Chuck. In the beginning, Chuck owned 50% of CNBC, we’re 50/50 partners and we owned a big piece of Bravo and AMC and what was called Romance Classics, which is now WE. We launched together after a big analysis that we launched News 12 Long Island, the [00:06:00] first regional news network. We did an analysis that said this was the biggest contiguous population that doesn’t have its own news. I wonder if a local news network, cable network could work. We launched News 12 Long Island and each of those, we did as partners together,

During those first few years, I got there in ’88, by ’91, every single one of them was losing money. As ’92 came, we did a very bold experiment with the Olympics, called the pay-per-view. We offered it on pay-per-view also in partnership with Chuck Dolan and they had this big thing at Boca for GE with all the GE leaders, which Jack presided over.

That year, CNBC, all of our investments with Chuck were losing money and the pay-per-view Olympics lost $100 million, which was a huge amount of money at that time. It was a real experiment in will people pay for content, specifically? Everything was losing money. We lost $100 million on that. I remember, I was heading down to Boca, and the whisper from Ohlmeyer, who, great guy, he passed away about a year ago, but a brilliant entertainment executive, he always used to say when we go up and present to GE that, “For the cost of what we’re losing on what’s Zaslav’s doing, I could have done four more pilots.”

At the time, that argument was, “You’re nuts, Jack.” I could have done four more pilots. We could have had two more great Primetime series for what we’re wasting there. We were heading down to Boca and Don was convinced that not only was this going to be my last Boca, but I wasn’t going to come out of there, that everything was losing money. That year, Jack gave an award for innovation. I got the GE Award for innovation and those guys, they were laughingly, we were all friends, cracking up, innovating by losing money on everything [00:08:00] that he is involved in, but Jack was trying to make a point.

This stuff is hard. We were making progress. We were fighting the fight. We went from 20 million subs to 30 to 40. There were only direct response advertisers in. We were fighting to get real advertisers into cable. We were able to stand up a news network with CNBC that we were proud of. We did a local news network with News 12. We tried a lot of things that didn’t work, but we learned from it. He really wanted to drive this idea of risk and innovation.

Now, over dinner about a month later when I was talking to him and we were cracking up that Ohlmeyer thought that I wasn’t going to get out of Boca with my job. He said, “You got a year or two to turn this around or you’re not going to have a job.” It was a double-edged sword always with Jack, we need risk and innovation. It needs to be measured. When things don’t work, let’s talk about what’s not working, let’s figure out what we learned from it and how we can do things differently to succeed, but ultimately, it was a business.

We got very lucky because when it turned and it turned when the number of subs started to scale, at the same time, subscriber fees were growing, subs were growing, and it became– Tom Freston did a great job with MTV and Turner got turned around with Malone’s help on CNN. It became the cool place to hang out. Once MTV really hit its stride and CNN hit its stride, then advertisers wanted to be there. When they wanted to be there, we went from selling Ginsu knives to selling Ford Mustang convertibles. We got the advertising and CPM’s increasing. We got subs increasing and fees increasing. We had a great run for over a decade in the cable business, really just an extraordinary run.

Jonathan: You mentioned Chuck Dolan who is obviously a pioneer in this. He was responsible for

[00:10:00] starting of HBO, et cetera. He was your partner on– Came into CNBC but he left right as you were buying FNN out of bankruptcy.

David: It just shows you how precarious at the time. There were times when we would go up to GE, we didn’t know GE was going to continue to fund CNBC, was losing so much money. What happened was, when we launched CNBC, we actually wanted to launch a news network. In order to launch it, we needed to get the cable operators to support us. They sent me to meet with Malone. I went with Bob Wright, and a guy named Tom Rogers. We met with John Malone. I was the little guy holding all the materials and the presentations.

We talked to John about launching a news network, but John, immediately, he had just bailed out, Turner. He was an investor of Turner and Headline. He said, “We got two news networks that we’re putting a lot of resources against.” FNN at the time was doing a lot of infomercials during the day, so you couldn’t tell the difference between an actual news segment and something that was sponsored as an infomercial by Charles Schwab or by Salomon Brothers at the time.

John, we were in his office, and he pointed to it, he goes, “Do you see that. That’s an infomercial. We need original content in cable. We need to build content that people believe is credible, that they can believe in, they can count on.” That was what he and Ted were trying to do at CNN. He said, “If you’re willing to do a business news network with real investment and integrity, I would support that.” We went there thinking we’re going to launch a news network and we left with a business news network. That’s how we did CNBC.

Then a few years later, we were at 25 million homes, and FNN was at 25 million homes. John had launched us. We had gotten a lot of other operators, not all of them. We were both really struggling. They went into bankruptcy. [00:12:00] We were negotiating against the wall street journal to buy them. We felt that we needed them to survive. We went up to Jack to make a presentation out of what we can do if we put these two together and why we needed this to save CNBC.

We had this big deck with all kinds of detail of return on investment and what we could pay. Jack said, “Put that all away. The real question is, if we can own business news? If we do this deal, we own business news. Is it a business? Is it a real business that we can be proud of? Is it a business that we can make money on? Is it a business?”

At the time, we couldn’t answer that question. We had to comeback to answer that question. He said, “Because if we go at this, we can’t lose.” The GE philosophy at that time was if we were going to get into this auction, we weren’t going to lose. We came back and we talked about it. We really had a strong belief that we could build a real business around it, we could build it globally. We went into the wild west of the bankruptcy court and we bid against the Wall Street Journal, and we ended up getting it.

At that time, they were about to hit the gavel when we called Chuck and Chuck decided he wasn’t with us. It did give us some trepidation because Chuck had created HBO, we were partners on almost everything, he’s super brilliant. He didn’t see it. He didn’t see that business news was a business. We went anyway. We then owned 100% of it. It turns out, it was a good business. Chuck was right about almost everything else over the years that we’ve worked on together, but he actually did that.

We ended up restructuring our whole partnership years later where we took Bravo, and he took the rest of those assets. It was very fruitful. Jim Dolan was involved. It worked very well, the partnership.

Jonathan: Absolutely. Obviously, the Dolans are, I [00:14:00] think, much better operators than people give them credit for. Around the same time, they ended up buying Madison Square Garden for a few hundred million dollars. They did have other good returns at the same time.

David: I think Chuck and Jimmy are underrated. They have a lot of innovation, great operators, and great value creators. We had a chance to trail along with them for a while, which was fun.

Jonathan: You’d mentioned John Malone. You’re fortunate to have him as your largest shareholder, at least in terms of voting rights. When you want to make a deal like buying scripts, how do you use someone like him as a resource I know he’s on your board of directors, but it’s more than that.

David: Look, I’ve been around John now for 15 years. I met him when we did the deal to start CNBC over 30 years ago. He’s got the most brilliant strategic mind, I think, maybe of anybody in business. As I said earlier, I think you’re so defined by who you get to hang out with. Somehow, I got extraordinarily lucky, I got to spend 15 years with Jack Welch and I’ve spent the last 15 with John Malone, you could argue, very different.

Jack may be probably the greatest operating business leader maybe in history. John, the greatest investor, and maybe most brilliant strategic thinker. John has the ability to see how everything comes together. He has conviction in, for instance, he saw way before anyone else that the real value to cable was broadband, not the cable. He together with Mike Frese went and rolled up most of Europe and a lot of Latin America by buying cable systems. He had full conviction that whatever he was paying was really a discount, because the broadband wasn’t being valued and the broadband was the value. He’s been a great mentor to me. It’s a gift that I get to talk to him.


Jonathan: I hope you are enjoying [00:16:00] the interview with David Zaslav. To be sure you never miss another World According To Boyar episodes, please follow us on Twitter @boyarvalue. Now back to the show.

Speaking of value creation, I look at a company like Viacom, who for years basically plowed almost all their free cash flow into share buybacks instead of investing in content. Their current content quality reflects that. What was it like for you when you bought scripts, and Wall Street puts you in the penalty box for a deal that, in the long run, is so much better for the company than simply shrinking your share count? How do you manage through periods like that? It has to be extremely difficult.

David: It’s really not. We have our public shareholders. We have the Newhouse family, who really are long term investors. They’re really driven by quality, investing in quality and long term growth. Malone is the same way. We don’t have any conversations with either of them about what our rating was on Friday, what this quarterly number was. It’s, “What is our long term strategic strategy?” That alignment, I think, has made us really entrepreneurial. It allowed us to move very quickly.

At GE, and GE was very different than operating this company, as a CEO of a public company with two investors that are aligned in long term growth. The deal that we did with Oprah, for GE, that might have been a month and all kinds of analysis. We saw Oprah, we thought we could build a great network around her that she’s a great curator, she was all in. That was one conversation, and boom, we’re converting Discovery Health into the Oprah Winfrey Network. I thought that owning the Olympics and all of Europe on top of Eurosport, and owning it for a decade could create real value. We’re very aligned. That decision was made very quickly.

[00:18:00] What we’ve done in the last five years is we’ve transformed our company from a free to air and cable company, where we were very successful, because we had 10 to 12 channels in every country free to air channels, and content that work well, as you mentioned around the world. We recognized pretty early. John was quick to raise this issue that, we were growing 10% to 15%. Our market share was never higher up, our stock price was never higher. Our free cash flow was growing ,this is about six years ago.

We were talking about how well everything’s going. John said, “How well would we do with our content if people could watch anything? How many would still watch us?” At that point there’s 40 channels in France, we had 10 of them. We had all this beachfront real estate. We had a really unique advantage that a lot of people were watching us, and liked us, but we weren’t necessarily their first choice. Maybe we were their third choice. We had this whole debate about the world is going between DVR and mobile screens, that people are going to be able to choose to watch anything they want.

This strategic advantage of these channels and beachfront real estate was going to be eroded over time. We had to stop looking at ourselves as a cable and free air company that bought content to fill that time. Our question became whenever we did a program deal was, is this content that people would watch before they’d watch anything? That’s why, after that conversation, we went and we bought Eurosport which was investing like 100 million in sports. We took that to three or 400 million a year.

We bought cycling. We bought all the majors in tennis. We invested in local sports in Europe. We started transforming the way we produce content for our channels. We want the fewer bigger better. We need more content that people care about when they could watch

[00:20:00] Anything.

Over the next couple of years, that got really refined as the world got sharper and moved quicker than even we thought. I think we were the earliest mover in this direction. We early on said, we’re going to own all of our IP globally. We’re going to upgrade the IP we have. We’re going to buy content that people want to watch when they could watch anything. Then we had to ask the question, what content do we own that people will pay for before they’ll pay for dinner? It wasn’t good enough that they would choose us over anybody else for free. What do we have that’s so important that they’ll pay for that before they’ll pay for dinner.

Sports in the Olympics we thought was important with that.

That’s why we went so hard against Chip and Jo. That’s why we did the Scripts deal. People saw the Scripts deal as a deal that we were buying a cable channel business that over time was going to decline. What we loved is, we looked and we saw that they owned all their IP. They had no participants. There were really no competitors in the food and home space. They hadn’t taken it international. We were in every country and we had the ability to proliferate that content on existing channels or launch channels. More importantly, we were looking to launch a global platform.

We saw home food, cooking and travel and DIY as a massive IP library that also had huge appeal to families, to women. We looked at it and we thought, and it also was very strong in terms of how well it worked around the world. We viewed the script’s deal as an acquisition of brands, characters, and most importantly IP. When we put our IP together with theirs, that we would be pretty formidable.

For a very long time, we’ve seen the world differently than most media companies, because most of the media has been attracted to this idea of [00:22:00] scripted series and scripted movies, which is a lot of fun and it’s pretty sexy. There’s a lot of big stars, but for me I’m very driven by data and I’m driven by viewership patterns. That’s how we decided to launch ID, a crime channel. We took a look at what people are actually watching. What’s making CBS so successful. What do people love? They love crime. May not be sexy, but we launched it. It was the number one channel for women in America with crime.

Every time we looked at the viewership data and the analytical data, it said to us that more than 50 or 55% of what people watch is not scripted series and scripted movies. That we have a real game here. If we could take the level up of discovery and animal planet and food and HG and TLC and ID and Oprah that this real life entertainment that maybe when you ask somebody, “What did you watch this weekend that you loved?” Maybe they’ll say The Crown, but when you actually look at the data, they spent more time watching 90 day fiance.

When you look at the social data, what are people talking about online, there’s much more social energy against 90 day fiance, or chip and Joanna Gains than there is against The Undoing, which is an unbelievable series on HBO. There was a real fork in the road over the last couple of years where they gold rush effectively of seven great media companies fighting over a scripted series or scripted movies and we may be wrong.

This is where John was completely on board that, let’s just follow the data. If for the last 25 years, people have spent 50% or 55% of that time watching this content that we have in these genres that we love, and 45% to 50% on scripted series and scripted movies. Do we think that over the next 10 years, when there’s a more aggressive transition to acquiring content and consuming content than [00:24:00] paying for content, that they’re only going to consume and pay for the scripted series and scripted movies and behaviorally not still want the stuff that they’re spending half of that time with now.

In essence, that’s been our bet and we’re going to see if we’re right. We just launched Discovery Plus. We did a deal with the BBC to get their entire natural history library with all the great titles, Planet Earth and Frozen Planet and Blue Planet. Most of those we worked on with them. We’re producing a lot of new content with the BBC. That’ll be exclusive globally with us. We did a deal with History and A&E and Lifetime to get some of their best content and with a mission of, let’s see if we can own, let’s see if we could be this broad, compelling entertainment offering in these content genres that are not scripted series or scripted movies.

We think it’s a great companion.

If we’re right, then this will be the companion that if you have Netflix or Disney, then you have Discovery Plus, you have HBO. They’re all great, but they’re not all going to survive. Disney and Netflix now, they’re above the globe. They have real scale and you got to admire what they’ve been able to accomplish. You got six or seven other players trying to compete. I think those that compete in the US only are going to have a very difficult time. I don’t see in the long run, how that really works.

Ultimately being able to offer IP globally and the scale of that and the efficiency of it is so compelling that I think it’s hard to compete otherwise, but those are great companies and they’re fighting that out. If we’re right, not only are we a great companion to each of them, a reaggregating of the bundle, but most of those services don’t have content that by their very nature, it’s not a companion. People get up in the morning and they put on food network or they put on HG, or they put on ID. The same way somebody gets up in the morning and they put on [00:26:00] The Today Show.

Jonathan: You had just said Discovery Plus is complimentary to Disney Plus and Disney and Netflix, is there a chance of ever bundling them together, or does having Discovery plus as a standalone kind of service preclude that?

David: Nothing’s precluded. What consumers are doing is they’re doing their own bundling. In a way, the basic cable bundle worked really well for so many years, because even though it was 250 channels, the average person only watches five or six channels. When you put that clicker in your hand, each person in the family curated differently, each person had their own five or six channels and that worked very well.

What we believe is there’ll be a re-clustering. In the end, there’s not going to be 20 apps and you’re going to be sitting there on Google saying, what’s what? They’ll probably be some consolidation on the scripted series and scripted movie side. We think that there’s going to be times that you want to watch Star Wars, that you want to watch the next season The Crown. There’s going to be times you want to watch Bobby Flay and Guy Fieri, and you want to see Oprah doing a super soul session about what life’s going to be like after the pandemic or Chip and Jo.

We think we’re part of a concentric circle, we’ve just taken our space. I think the consumer themselves will be reaggregating, but I also see that it’s not unlikely that some of us come together and package it. We’re 4.99, somebody else is 6.99, but together you can get us for 7.99. Then you go with that other programmer. We have to figure out what’s the secret sauce of what’s the right basic cable got it. How do we put it all together in one place in charge?

One of the problems is that at least in the US the price just kept going up, and unlike the US every other market doesn’t have sports in basic and so it got very, very expensive. They’ll be a rebundling and it’s not unlikely that a year or two from now, if we get to big scale, [00:28:00] they’ll probably be a lot of players that say to us, “Can we bundle with you? Can we come in with you? We’d love to get access to your millions of subscribers.” Or, “Would we love to be bundled with Disney or Netflix?”

Over time, that could make a lot of sense. It might make a lot of sense for them too. We’re probably the best at what we do. Ultimately, I think either by the consumer doing it, or by us coming together, or by consolidation of those that are too small. Ultimately there’ll be a rebundling that’ll make it more efficient and easier for consumers.

Jonathan: You mentioned consolidation. I was looking back at our reports from 2006 and 2008, and you had the precedent transactions, BET went for 24 times, Bravo 23 times, Comedy Central 29 times. Today you’re seeing really good companies trading at much more modest multiples. What happened to the good old days?

David: What happened was, in those days, the industry was a train track. It went on forever. All we did in those days was try and build the biggest train, or the widest train, or the fastest train. We pay a big multiple for BET. Someone pay a big multiple for Bravo, because the view was, it’s going to make my train faster to go on this track and the track is going to go on forever. The phones that are all TV sets and the cost of cable content, and the appeal of being able to put together your own content of everything you want to watch made it pretty clear that that was not going to go on forever. It went from growing double-digit to slight growth, to flat, to declining.

We think it’s going to decline slower than people think, but that track’s not going to go on forever. There’s a whole demographic that doesn’t get an apartment right now and they, one, have to wait for cable to get hooked up because they got their phone and they have broadband may be more important than cable to a lot of people at this point. The world is changing


in a meaningful way, and the real question on multiple is the multiple compressed because when you look at the terminal value, nobody could really predict how fast will it decline, How much longer are people going to be watching on sets in their TV on a cable based on a cable or free-to-air offering.

Disney has broken out, because Disney has proven because of their IP, their global IP, and offering it on Disney plus, that they are a global IP company. They are not a cable and free to air company. We’re still valued as if we are a global cable, and free to air company. We’re in every country, virtually every country in the world, and every language. Our share is still growing. Last year, we had over 3 billion in free cash flow, domestically and internationally, I think we outperformed everyone really and commercially and from viewership perspective. We’re trading at half the multiple we were trading out a few years ago, and that’s not unfair.

No matter how great of a job we do, if we can outperform every quarter, the fact that subscribers are declining here in the US and they’re declining a little bit outside the US and behaviorally people are watching more content off of the traditional platform. It’s fair to say that when there’s some uncertainty, and that the value should go down. Our whole mission with Discovery Plus is there’s only two global IP companies and that’s Netflix and Disney. We’re the only other global IP company in the world. We’re one of three.

The difference between us is we have different content than them. The advantage we have is we actually have content in every language in the world. We have boots on the ground in every country, we have relationships, we understand culturally each country. If you said, “What company has more local content in every country in the world?” We’d be number one. Our mission is to prove that we’re not a cable and free-to-air company, although we’re proud of that. We’re outperforming in that free cash flow [00:32:00] and that continued good performance, we think is going to be a real engine for us for a long period of time.

If we can scale Discovery Plus above the globe, then if we can prove that people will pay for our content, that 50% it’s not scripted series or scripted movies, then we’ll be a global IP company. Then all of a sudden, we got a train track that goes on forever again, because if we have a relationship with consumers around the world with unique content, unique brands, and unique stories, then it goes on forever. That’s why Netflix its valued is so high because they’re a train on a track that goes on forever.

Our mission is that traditional business is more like a boat now that had a river with a current with it and now the current has moved against it. We’re adding engines and firepower to power through it but ultimately, the current is against us. If we can take all of our global IP and with Discovery Plus build a real global IP business, then the value creation for our shareholders will be enormous.

Jonathan: When you bought scripts a few years ago, how close to what it is now, like with Discovery Plus, did you envision it? Was this all part of a master plan of putting everything together or have you had to pivot along the way?

David: No, it’s been pretty close. One, we thought that together with Scripts, we could be the number one media company in America for women. We thought that it was a very good proposition for the ability to market more broadly to women. We had TLC and we had ID but now we have the top five channels in America for women plus the number one channel for African-American women. We thought that even in the traditional marketplaces could be advantageous. We started producing content almost two years ago for Discovery Plus.

When we launched with 55 original series, we’ve had in mind all along that we need great [00:34:00] original content on Discovery Plus. When we closed on scripts, the first visit I made was to Waco, Texas, to figure out how do you get Chip and Joanna Gaines back with us because there’s just not that many great authentic characters that America loves. Chip and Jo also have an ability to curate content that people love, and that’s the secret sauce of what we are. We’re not just great brands and great stories , we’re the characters that you love. There’s just not that many great, charismatic, authentic characters that people love.

As you look around, whether it’s Martha or Oprah or Chip and Jo or Mike Rowe or Guy Fieri or Bobby Flay, you look around at our portfolio. I think that’s another differentiator for us and I think in the long run, that’s going to help. It also helps people curate. When they come to our platform, some of these streaming services we noticed, people go there and they go, “Okay, what do I do now? What do I watch? It creates some anxiety.

Even in the research, a lot of people said, “I don’t need more content,” because they are going through these platforms where there’s just lists of series, “What the hell do I do?” Iger and Chapek were very clever in the way that they organize Disney Plus. It’s almost very retro, they organize Disney Plus and then they basically put five logos out. Those five logos are the five channels that you love on your cable system.

There’s 250 channels, but what am I getting when I get Discovery Plus. When I get Disney Plus, I’m getting Pixar, I’m getting Star Wars, I’m getting Marvel, I’m getting Disney family movies, I’m getting Nat Geo. It’s a very calming effect, but it also is very inviting from a curation perspective. I’m in the mood to see some Disney family movies, so you go through that portal. I think that’s a big advantage for Disney. Netflix has a different model where they’ve just been able with their algorithm to be very effective about recommending things to you, and they’re so successful [00:36:00] that their friends recommend things to you.

Jonathan: You’ve been more than generous with your time. You had just mentioned Disney, and they have a great business model in that they own great IP, but they’re able to further monetize it with merchandise and theme parks. Have you ever thought of some partnership or joint venture as lots of your content would degrade in that kind of ecosystem or could you do it alone because you are a global IP company, and you should be able to monetize it even further and get that premium multiple?

David: For us, I think we have such an efficient model on the cost of our content, the speed to market, we don’t have any participants, we own all of our content 100%, we have a factory that converts it to 52 languages. The efficiency, we generated over 3 billion in free cash flow last year, our margins remaining very strong. For us, I think Disney is a great merchandising company. They do have theme parks, and hotels, and all this other great stuff.

For us, if three years from now, or four years from now, Discovery Plus is a full-on scale global IP offering, Discovery will be a huge company because on the left side, we have this traditional business that’s a free cash flow machine that’s growing, that has brands and characters people love. If we can prove that we’re a global IP company, I think then will be one of the sustainable winners, and we’ll likely be one of the players that people look to tuck in with.


Jonathan: David, I really want to thank you for your time. I’d love learning more about your career, and especially the exciting things you’re doing with Discovery Plus. Thanks for being on The World According to Boyar.

David: Thank you, Jonathan.



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Caleb Silver, Journalist & Editor in Chief of Investopedia, on how Investopedia is helping individual investors and how to get your website on the first page of Google.

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The interview discusses:

  • The state of financial journalism
  • How Investopedia is helping individual investors
  • IAC’s strategy with Dot Dash
  • How you can potentially profit from Investopedia’s proprietary anxiety index
  • How to get your website on the first page of Google
  • And much more…

About Caleb Silver:

Caleb began his career producing wildlife documentaries in South America and the American southwest. His career in business news began at Bloomberg, where he worked as a senior television producer and was nominated for a 2003 Emmy Award.

Caleb then joined CNN, serving as a Senior Producer for The Situation Room with Wolf Blitzer, as well as the Executive Producer of Caleb and his team at CNNMoney were nominated for an Emmy Award for New Approaches to Business & Financial Reporting. He then returned to CNN as the Director of US business news.

Caleb left CNN in 2014 to form Frog Pond Productions, a digital production and consulting company, and then joined Investopedia in January 2016 as the VP of Content. He also serves as the treasurer of the executive board of the Society for Advancing Business Editing and Writing. 

Caleb is frequently featured as a markets, economic and consumer trends expert on NBC, MSNBC, ABC Radio, Marketplace Radio and Cheddar TV, in addition to markets commentary in his daily newsletters. 

Click Here to Read the Interview Transcript

Transcript Of The Interview With Caleb Silver

Jonathan Boyar: Welcome to the World According to Boyar, where we bring top investors, bestselling authors, and business leaders to show you the smartest ways to uncover value in the stock market. I am your host, Jonathan Boyar. Today’s guest is Caleb Silver, Editor-in-chief of Investopedia, a leading business website with over 19 million monthly unique visitors. Caleb started his business news career at Bloomberg, where he worked as a senior television producer, Caleb then joined CNN and was a senior producer for the Situation Room with Wolf Blitzer. Eventually becoming the director of US Business News at CNN. In 2016, he joined Investopedia. Caleb, welcome to the show.

Caleb Silver: Thanks for having me. It’s a real honor to be here.

Jonathan: Interestingly, you started your career as a documentary producer but pivoted to business journalism. What made you switch?

Caleb: That was an easy pivot. Actually, not at all. I was in journalism school in graduate school at NYU in New York in the mid-’90s but I had started as a documentary producer, and I just been traveling around Central and South America producing Wildlife documentaries but I wanted to go to graduate school. At NYU, they had an internship program with Bloomberg and Bloomberg News and Bloomberg TV was really just starting out. I knew how to shoot I knew how to edit so I had some TV skills. Then I started working for them and interning for Bloomberg, right as the internet bubble started forming in the late ’90s.

As that was happening, I became more and more fascinated with the story of money in the story of business news and was able to translate my production skills into being an actual TV producer. When I got out of graduate school, I did some more documentary work, but then I was eventually hired by

[00:02:00] Bloomberg right as the bubble was forming. I jumped right into the middle of a big frothy internet bubble.

Jonathan: What was it like starting at a time where the market, I guess it was 96, 97 was frothy but if you said to sell the market, you would have been wrong for about five years, or four years, what was like being in the media business then?

Caleb: It was fascinating because it was really the birth of the companies that are some of the giants and today, was just forming. I got to know Jeff Bezos, early on in his days as CEO as a very new public company, got to interview him several times, obviously got to know the companies that rose like rockets and fell like Icarus like the of the world.

I was learning about these internet businesses, learning about e-commerce, learning about this new form of the digital economy while I was covering it, and that was totally fascinating and at that time, there was a lot of giants and billionaires being born out of startup companies, but also some established companies like Berkshire Hathaway I got to interview Warren Buffett several times. I was thrown right into a very busy mix at a very active time. Bloomberg was trying to cover it in a responsible way because it’s a strict business news media organization and it was a great place to learn.

Jonathan: You mentioned you got to meet Bezos at the time. Could you tell that this is a guy who was destined to become one of the greatest entrepreneurs of all time?

Caleb: Absolutely, you can tell. Just by the way, he carried himself and by that raucous laugh that he has. He would just look at you in that funny way and you’d asked him a question. He would just laugh in your face. When are you going to make a profit, Jeff? He would just laugh right in your face and say, “We’re not interested in the average student providing the best customer experience on the planet.

You just knew he was singularly focused but you also knew because of the company he carried and the investors that swam in as pilot fish to his whale, you knew that he was going places. I was there for the ups and downs of the big internet calls when Blodgett calling for $500 a share on Amazon and we interviewed him. All that was happening

[00:04:00] at a time it was moving quickly. In this new business news television network, it was really a fun place to be.

Jonathan: Do you think the media, I’m just saying as a whole, I’m not saying where you were, but just as a whole, has done right by the individual investor during these ups and downs?

Caleb: I think there’s always room to say that the media could have done better or miss something or were cheerleading the bad behavior on the way up and making stars out of some of the folks that didn’t keep folks best interest during the financial crisis. There was a lot of that business journalism suffers from access journalism, which means, you want to talk to the power and the powerful. I mentioned, Warren Buffett, I mentioned Jeff Bezos, that’s cool, there’s celebrities in business news. Sometimes we deify business leaders too much and we don’t dig deep enough when something seems too good to be true.

I think it’s gotten better and I think it continues to get better but there’s always going to be times when you look back and say, “We should have looked a little bit harder.” You can say that about the financial crisis and what was happening in the mortgage industry. You can say it about what’s happening now in terms of the uneven recovery and the money going, the stimulus packages and the rescue packages, you could set it in the internet bubble as well.

We always suffer from that because we get caught up in it like sports, and we don’t get deep enough at times, but at the same time, there’s some incredible business news journalism going on right now that will define our medium for generations.

Jonathan: In terms of educating the public, I know they’re telling you what’s going on, but when I see CNBC, in March on Sunday night, having special reports, America in crisis, et cetera, is that healthy or is that something that is more sensationalism?

Caleb: There’s always going to be sensationalism and CNBC, which I have a lot of respect for, but they also do treat the markets and investing like a sport. They’re programmed that way and they’ve always been that way. When you have these massive drops like we experienced throughout March, it’s a programming opportunity. Why? Because their ratings are

[00:06:00] high, while there’s a lot of market volatility and is no different for Investopedia, we have a lot of traffic. There’s a lot of volatility. People are very concerned about their investments in their finances. We benefit from that as well.

They’re going to take advantage. TV networks, especially are going to take advantage of the fact that they have a lot of eyeballs on them and make the most of it by dropping in specials like markets in turmoil. By keeping up the breaking news bar all day long to make sure people are still glued to the TV, their businesses at the end of the day, their media businesses, but inside those businesses are some very responsible and professional journalists. At CNBC, at Fox Business News, at the Wall Street Journal, wherever you look, there are some really good business journalism happening, but of course, they’re going to take advantage of the volatility to make a big deal out of it.

Jonathan: You were an executive producer at the Situation Room with Wolf Blitzer, and this was a major show. Can you just take us behind the scenes, what would it be like to work there today during a crisis like this? What would a day be like?

Caleb: Today I still think they’re working from home. Everything that we were trying to do in a newsroom are having to do with the challenges of working from home, that’s it. CNN is doing a pretty good job of it. I joined the situation room, right as Hurricane Katrina was forming. In fact, I was down in the Gulf of Mexico the week before doing stories on how to evacuate oil platforms in the event of a hurricane. Katrina hit and right basically when that show started and what that show was, was basically live feeds coming from all over the country. The situation in Wolf Blitzer would present you those live feeds as he was seeing them.

There was almost no delay between what was coming into our newsroom and what was going out on air and we had to react and pivot very quickly as there was real-time developments happening during Katrina. There was evacuations, there was flooding, there was the Superdome, there was oil spills. There was nonstop activity and instead of repackaging, we just gave it to you live. It was a rush and you had to be super nimble and that show is three hours. I think it was actually two hours and then it came back for an hour. We were stuck in our seats

[00:08:00] covering breaking news basically the entire time.

Jonathan: Now you have to talk about your current gig at Investopedia. In full disclosure, I’m a member of the editorial review board at the company and our research service, has profiled your parent company, IAC, on numerous occasions. Investopedia is part of Dotdash, which is owned by IAC. What is Dotdash?

Caleb: Dotdash you’ll know as from internet 1.0. was an enormous reference website, really born in the early days of the internet. That changed hands a few times. Most recently, was with the New York times when IAC bought it years ago, I think 2014 or 2015. Then IAC bought, Google had a big algorithm change as Google likes to do, and basically pushed a lot of results way off at the first page.

It was a lot of competition and Google, of course, runs its own search engine and wanted a lot of its results, but it pushed a lot of’s results back and if you know you’re not on the first page in a Google search result, you’re basically not there. They tried to rescue and instead the CEO, Neil Vogel, and his team realized that the internet was very vertical, people have high intent when they go search for something unless they’re browsing and they’re browsing news or browsing other sites.

What had was that high intent traffic, it’s not people going into and browsing around it’s people searching something very specific, whether it be a recipe, whether it be symptoms for a health matter, whether it be information about their finances or about their investments, had all that content, but it was broadened under this one big umbrella. They broke it into about seven or eight vertical sites. Verywell as the health site, TripSavvy as the travel site, the Balance is the personal finance site. All of these were

They broke it into these sites, rebranded it, relaunched it, and basically rescued these sites from the second or third page of Google traffic started growing again.

[00:10:00] In the meantime, Investopedia was purchased by, IAC, I believe in 2015 in another transaction, we were in a different part of IAC called the publishing unit. After a while, they realized that Investopedia was very similar to the old sites to the new Dotdash sites.

They folded us into that group two years ago. Now we’re a part of a portfolio of about 12 or 13 sites, including, We bought TreeHugger and the Mother Nature Network recently, of course, there’s Verywell Health site, TripSavvy, I mentioned. We’re a part of a big portfolio that reaches about 100 million people monthly across our sites, but it’s all high intent content. It’s stuff you browse, it’s stuff you go to for a reason.

Jonathan: I hope you’ve been enjoying the interview with Caleb. To be sure to never miss another World According to Boyer episode, please follow us on Twitter @boyarvalue.

You’ve mentioned, it’s interesting, if you’re not on the first page of Google, you’re basically not there, which is obviously true. What amazes me about Investopedia is, if I wanted to look up a financial term from Google, let’s say EBITDA, without fail, you’re usually number one or number two, how does that happen?

Caleb: That’s one of the benefits of being 21 years old. Investopedia is 21, in the internet years, Jon, as you know that’s like 210 years. We’ve been around a long time. We’ve been around with a lot of reference content that has what we call backlinks. We show up a lot in the first result or for a second or third result because we have a tremendous amount of content, 30,000 articles on the site, we’ve been around for a long time so we have that credibility. We also have a lot of backlinks from influential sites. It’s great to get sites, especially .gov or .edu sites, sites that people respect in the authority. Referencing Investopedia is part of it, so we have that.

We have loyal users who rely on us a lot, and we spend, Jon, a ton of time working and improving our content. You mentioned you were on

[00:12:00] editorial review board. We have about 50 people or experts across the entire industry of investing in finance, that review every one of our articles and tell us if it’s good or if it needs improvement, we go and improve it, we put it back out and we’re on this constant state of improving and bettering our content for our readers. We want to make sure that we are giving them exactly what they’re looking for and that plus that legacy and a good reputation is what helps you get to that first page of Google.

Jonathan: basically almost failed because of Google’s actions. You’re heavily relying on Google for traffic. They’re basically frenemies. How do you protect yourself to make sure that doesn’t happen again?

Caleb: Well, Google updates its algorithm at least two times a year. In the finance space as you know, there’s two things that are really important to get right on the internet, medical information and financial information. Google has a thing called, Your Money or Your Life, YMYL. They have real human beings who are smart people reviewing content across our vertical, right across the entire finance space. They make an algorithm change and they’re looking for more authority, or they’re looking for more expertise from the sites that are providing the information that we’re providing.

They want to make sure that we have by-lines from real authors that actually know what they’re talking about, that we have a review board of experts like you and others who are actually are professionals in their field and they’re saying, “Yes, this is the answer that is the closest to what people are looking for her.” This is giving them the information that they need.

They have reviewers that look at that content and they say, “Yes, that’s actually what the intent of the searcher of the reader was.” They reward those sites that do better. That’s principally how they work. There’s, of course, sponsored paid advertising you can get on Google and that’s a completely different game and we don’t play that game. We play the, make the content as easy and clear and direct to answer user’s questions as possible and we’ll get that traffic, and people will come back to us and rely

[00:14:00] on us year after year after year.

Jonathan: People go to your site or direct to your site to find that information, pre-COVID. It was a great economy, unemployment was at record lows. What were people looking to learn more about?

Caleb: Pre-COVID, we were at record highs. It was record high after record high, but there was some creeping volatility. We saw a lot of searching interests around volatility about what happens when multiples expand, what’s a market bubble. We also had a lot of people even looking up the other side, what do we do? How do we potentially short the S&P? How do we diversify if we feel like we’re a little heavier right now? It was a lot of the stuff you feel when the market gets a little bit tippy and toppy, we started to get a lot of that search and a lot of that search attempt.

Don’t forget, we had just come out of 19, which was great, but there was still the phase one of the trade deal that was being implemented so eyes were on that. 2020, it’s been a crazy year so far. I believe we had some attacks on oil fields, all kinds of activity happening in the market outside are preloaded.

Jonathan: Starting with say in February or late February, early March when COVID was front-page news, how have those searches evolved? Today it’s May 26, the market is up big at least as of half-hour ago. It’s been a dramatic rise up. How is the evolution changed?

Caleb: Well, we see it in what we call our anxiety index, the Investopedia anxiety index. That measures search volume around fear-based terms around the economy, with the macroeconomy, around financial markets and around personal finance, credit, and debt. There’s about 13 or 14 key terms that we look at, we look at the whole corpus, and we look at where that search volume is increasing.

As we got into this heavy volatile market, in late February, March, it was obviously around volatility, we were having big seed market drops, we were having circuit breakers, trip at the stock exchange. People

[00:16:00] were looking at that, they were looking at what happens in pre-market trading, they were looking at ways to short the market and hide in gold and hide in fixed income, but then we’re also seeing, interest rates, the Federal Reserve and a barrage of monetary policy and taking interest rates down to zero.

They started looking about negative interest rates, they were looking at the Feds impact on the economy, the Feds impact on the stock market, you can see the anxiety rising and it was rising even before market volatility got crazy. The anxiety index and the VIX usually track each other fairly closely, and the anxiety index we found trips a little bit earlier than the VIX because people are saying to themselves what’s going on, let me go learn what’s going on coming to Investopedia and other sites to figure out what is happening in the market dynamics and then going and executing trades. It moves a little bit ahead.

Then what we’ve seen since is this great divergence as the markets rally 28 to 32%, over the last month or so. The markets done great, but people are very concerned about their personal finances and about the economy, which makes total sense when you see what’s happening on unemployment, when you see what’s happening rising bankruptcies when you see what’s happening with these continuing jobless claims. You see there is real great divergence between financial markets doing great, but the economy deteriorating under our feet.

Jonathan: You’re basically crowdsourcing over 90 million users a month on how they’re feeling?

Caleb: Right, and that’s one of the benefits of being as big as we are. We get our finger on the pulse of what investors are feeling. These are mostly individual investors that come to us. There are institutional investors that come to us but they get their research and they know the game like you. This is real investors and they’re active and that we have several newsletters.

I write two a day, one of the morning called the Express and one in the afternoon  We actually pull and survey our readers because these are very active investors all over the world, about what they’re feeling, what they’re doing with their money, stocks that they’re buying, securities or instruments that they’re getting

[00:18:00] in and out just to see what they’re doing. These are very smart engaged investors who have a very particular point of view on the markets.

Jonathan: How far back does the index go?

Caleb: The anxiety index goes back pre-financial crisis, so 12, 13 years. We have data going all the way back that we’ve been gathering year after year after year. The surveys we do, we do them every month now because the markets change so much, and investor behavior has really changed. The animal spirits are out in the wild, as you know, Jon, and it’s fascinating to watch.

Jonathan: I guess your wildlife documentary skills will come in handy.

Caleb: Right, full circle. I’m back to doing what I started doing.

Jonathan: This seems like very valuable data that you have. It seems pretty forward-looking not backward-looking. I’m not a fan of the VIX, I think it’s too complicated. What you’re seeing seems a lot more real. There’s a firm data tracker by Nick Colas, I don’t know if you know him. He measures volatility by the number of days, the S&P 500 has increased or decreased by 1%. Typical year I think it’s 54 times, I think right now we’re on May 26, and it’s already happened roughly 54 times in a year plus or minus 1%, but this seems like a real measure of what true volatility is.

Caleb: I totally agree. I never would have thought of it. Beforehand, I was at CNN Money and I have created the fear on money index which actually looking at money flow through a variety of instruments, and you mentioned your friend with the S&P and moving 1% or more, that measures the put-call ratio, it measures stocks making 52-week highs or lows. It’s got real inputs from the market, but it’s exact, in that, you can actually get those numbers.

The anxiety index is a sentiment index, which is this feeling, “Oh my gosh, what’s happening? Let me go learn about this to make sure I understand it because I need to reallocate rebalance, put money

[00:20:00] somewhere. We see a lot of that and it makes a ton of sense.

I came from the news world as we talked about, the news world is very push. “Extra, extra, read all about it, here’s what’s going on, let me tell you, let me tell you, let me tell you.” The Investopedia world and the dotdash world is really a pull world where we’re pulling information by what people are searching for, it’s a very different set of muscles that you use and a very different way of looking at the market and the way investors are behaving and I find that fascinating.

Jonathan: The anxiety index speaks to investor behavior. I’ve always loved studying individual investor behavior. I always feel whether you’re wealthy, whether you’re just a regular person on the street, I think the individual investor’s worst enemy is usually themselves, their emotions.

Caleb: Absolutely.

Jonathan: What are you doing during a time like this, to stop that, to help an individual, for lack of a better term, from himself or herself?

Caleb: Right, great question. We’ve had to go into a lot of our content, which is written throughout various market cycles. Don’t forget, we’re 21, so a lot of the pieces on our site are old. We’ve got to make sure that we’re speaking to people in the voice of what’s happening today because you always have to make sure you’re talking to your reader where they are right now. We’ve had to update a lot of content, we had a lot of stuff on investing in oil stocks and how to invest in oil stocks.

When oil collapses, the entire energy complex basically collapse under our feet, we had to update a lot of that content and make sure that people realize that this was happening, and a lot of what they were about to read needs to be seen through these lenses right now. There was a lot of that going on. I also mentioned that we have newsletters. I write a newsletter in the morning and one other night, always from the point of view of the individual investor, which I am, who is just looking to make sense of the world and then make the right decisions based on where they are in life.

I don’t pretend to be an expert stock picker, because I’m not, I don’t give investing advice, I give investing

[00:22:00] perspective. I work with experts like you and others to give perspective on what’s happening because the best thing Investopedia can do, is educate people about what’s happening and help them, lead them to making good decisions, and not tell them what to do, but say, “This is the right way to think about these things in order for you to make a call” and then hopefully, people will be reasonable or talk to a financial advisor.

We’re big believers in financial advisors and planners, and then do the right thing, but it starts with education. That’s why we’ve been able to be around 21 years, and now we’re able to do well in times where people are really seeking to make sense of the world.

Jonathan: I could be totally off base, but at least in my opinion, investors in Cannabis Stocks, investors in cryptocurrencies, for the most part, are going to lose their money. It’s probably put you in an uncomfortable position because I imagine that those are pretty high intent-driven folks. How do you explain to the average investor how they should be making decisions with regards to, “some hot topics”? Well, Cannabis was hot about a year ago, crypto is hot and now it’s not, how do you do that?

Caleb: Well, you have to disclose that right away to the reader. We do have a lot of interest in Penny Stocks, Cannabis Stocks, Crypto, you name it, but that’s been going on forever. Even before Tulip Mania, there was some other mania. There’s always going to be people on the fringe and traders, and people that like the actual market. Look at what we’re seeing these days with all the signups on the online brokers and this intense trading activity, even in the options market, because the market’s been hot and bottled that’s brought a lot of new investors in.

We start with education and that is telling people right away, trading Penny Stocks trading and options. Any of these are dangerous instruments, you have to know what you’re doing.

If you haven’t learned the basics of how to invest in pick your security, pick your asset class, read this first. We give them a step by step, we even have online courses they can take

[00:24:00] If they want to go and trade, we’re not going to stop them. We want to make sure that they know the rules of the road first because the road can be very bumpy.

Jonathan: You talk about the uptick in trading. There’s an interesting theory circulating that how day-trading is replacing sports betting right now, there’s no sports to bet on. Are you seeing any of that? Is there any evidence from your searches, et cetera, that that’s actually the case?

Caleb: No, but there is a lot of evidence that there’s a lot of first-time investors coming to the market. We see that through traffic for things like intro to investing, or options basics, or how do I invest with $1,000 or how do I choose an online broker to start investing? We get all of that.

Plus, we do review the online brokers and the Robo-advisors, and now Forex brokers to rank them by our experts, to tell people which is the best platform for them based on their need. We do a lot of that now. We’re getting a ton of traffic there, because people are signing up, good for the industry, but people are also getting into a risky place.

Trading and investing in the stock market’s always been risky, but when you have a dynamic like you have today, where the market has been extremely volatile, when you’ve had these intense swings in both directions now, but you have an economy that’s crumbling and people’s personal finances being upended, it’s super dangerous because what you don’t want is for people to take the money that they need to live or pay their bills, or take care of their family and try to invest it in the stock market to make a quick buck, that is the easiest way to get burned.

Jonathan: You mentioned that you have experts rating the best online brokerage firms, et cetera, which I think is a great service to have, but they’re also some of those are your biggest advertisers. How do you separate church and state there?

Caleb: Great question. They are our biggest advertisers. They’re our biggest advertisers because our readers are interested in investing and usually convert and sign up. They’re our biggest advertisers for a reason. When it comes to product and platform reviews, we are completely editorially-focused on that.

[00:26:00] There is no pay to play. You can’t pay to get more stars from us. We review them with our experts who have been doing this for 25 to 30 years, reviewing online broker platforms, completely objective and separated from advertising.

Our biggest advertisers are not necessarily our best online brokers in terms of our rankings and that’s proof that we don’t favor anybody when it comes to that. We have to be completely objective and that’s what our readers expect from us. The minute we cross that line, Jon, whether it’s in this or anything, giving stock picks or doing things that are disingenuous to the mission of educating investors, is the minute our business falls apart in everything that we’ve built over the last 21 years falls apart and fades away.

Jonathan: It’s rare in someone’s career to work for one media mogul. You’ve had the opportunity to work for two, currently, your sites owned by IAC, which is controlled by Barry Diller and his family. You worked at Bloomberg, which was obviously controlled by Michael Bloomberg. They seem to be very different personalities, but I imagine there’s some similarities too. Is there a way you can compare and contrast them?

Caleb: That’s a good question. Well, I’ll tell you what, I was a very young man in my video production business. When I was 21 or 22, I was at National Association of Broadcasters show. I saw Michael Bloomberg for the first time, never even heard about the man. I’m from New Mexico so I didn’t really know what was happening with the New York finance scene. I saw him speak about the future. This is about 1993.

He was talking about, one day we won’t have newspapers, or we might publish what we’ll really have is some a tablet where we’ll touch things and new pages of the newspaper would come up. He started talking in those types of terms. I said to myself, “I want to go work for that guy. That man sees around corners, I want to get to know what he knows and his view of the world. Funny enough, I ended up working for him several years later and he’s super intense.

When you go to work at Bloomberg, you go into your first day in orientation, everybody had to meet Michael Bloomberg at his desk in the middle of the

[00:28:00] newsroom, in the middle of the TV newsroom, right there with everybody else, no office, sitting out there on the open. You line up the medium in a parade of about 20 people and then it’s your turn, Michael’s working on his Bloomberg or he’s writing something.

He looks up at you and your orientation person says, “Hey Mike, this is Caleb. He’s going to go work as a TV producer for Bloomberg TV. This is his first day.” Mike looks up at you and says, “Don’t F it up,” and looks down and when you moved on, Mike was tough like that. Years later, I was covering business news for CNN and we started reading about Barry Diller and how he had chartered this career from the movie business and from USA networks and into QVC and Expedia and all of these businesses that he created in this whole notion of businesses that are marketplaces and matchmaking places, of course IAC owns match.

I said, “That’s a very fascinating person with a really interesting view of the world, running a company that is building the future on these electronic and digital platforms. I want to work for them someday.” Luckily enough, there was an opening at Investopedia at the right time in my career and I got to do that. I don’t have a lot of exposure to Mr. Diller, but I do have a tremendous amount of respect for him and the team that he’s built.

Jonathan: Caleb, thank you so much for your time. I really learned a lot from the state of business journalism, how to get your website to the top of Google. I really encourage our listeners to visit Investopedia. I truly think it’s a great site to learn more about investing.

Caleb: Jon, thank you. It’s been a pleasure and we appreciate your partnership and your friendship with the site and the work that you do. It’s an honor to be here. I really appreciate you inviting me on to the podcast.

Jonathan: To be sure to never miss another episode of the World According to Boyar, please follow us on Twitter @boyarvalue. Until next time.


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Mellody Hobson, President & CEO of Ariel Investments, on the advantages of a diverse workforce and the changing media landscape.

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The interview discusses:

  • Why having a diverse workforce is a competitive advantage;
  • The changing media landscape;
  • Why the business of content curation will be critical in the future;
  • The reason why movie theatre companies will survive;
  • A behind the scenes look of when Mellody’s husband George Lucas’s company, Lucas Films was sold to Disney;
  • The sale of DreamWorks (Ms. Hobson what Chair of the Board) to Comcast;
  • Characteristics of George Lucas that would surprise most people;
  • How Ms. Hobson was selected to join the board of Starbucks;
  • Why Mellody believes her board service has made her a better investor;
  • And much more…

About Mellody Hobson

As Co-CEO, Mellody is responsible for all firm-wide management, including strategic planning and growth as well as every aspect of Ariel’s business beyond research and portfolio management. Prior to her formal appointment to Co-CEO, Mellody served as Ariel’s President for nearly two decades and functions as chairman of the board of trustees for Ariel Investment Trust.

Ariel Investments is headquartered in Chicago, Illinois, and has offices in New York City and Sydney, Australia.  The firm manages assets of retirement plans, college saving accounts, and personal investment accounts.  With strong ties to the community, Ariel is focused on making investing accessible for everyone.  Individuals are able to invest $1000 in the firm’s mutual funds.

She is Vice Chair of the Board of Starbucks Corporation, and also serves as a director of JPMorgan Chase and Quibi, a short-form video content company. Mellody is former Chair of the Board of DreamWorks Animation.  As a Chicago-native, Mellody is involved in numerous organizations that focus on improving the city.  She serves as Chair of After School Matters, a non-profit that provides Chicago teens with high-quality, out-of-school time programs.  In 2017, Mellody became the first African-American woman to become Chair of the Economic Club of Chicago in its 90-year history, a two-year term which ended in 2019.


Click Here to Read the Interview Transcript

Transcript Of The Interview With Mellody Hobson

Jonathan Boyar: 00:10
Welcome to The World According to Boyar, I am your host Jonathan Boyar. In today’s interview we talk with Mellody Hobson, co-CEO of Ariel Investments. Ever since Mellody gave a Ted talk in 2014 that now has over 3.8 million views, I have followed her career with interest. She’s had a fascinating journey that I wanted to share with you. She was one of six children raised by a single mother in Chicago. As a child, her phone was shut off, her car was repossessed and she was evicted from her home. Despite this, Mellody was able to get into Princeton, secured a job at Ariel investments where she’s now not only co-CEO but also the firms largest shareholder.

Jonathan Boyar: 00:59
As if this was not enough, she’s also on the board of JPMorgan Chase and vice chair of Starbucks. Mellody is also married to Star Wars creator George Lucas. Mellody, welcome to the show.

Mellody Hobson: 01:12
I’m delighted to join you.

Jonathan Boyar: 01:15
Well first, I’m really excited to have you on the show. Your day job is being co-CEO of Ariel investments. Can you briefly describe Ariel to everyone?

Mellody Hobson: 01:25
Sure. Well, we’re a Chicago based investment management firm. We specialize in equities only. We’re a long only equity manager. Yes, we still exist and we focus on value investing, so companies that are undervalued but show a strong potential for growth and we have two real sweet spots. We focus on US stocks that are in the small and mid-size asset classes and then we have a team in New York that focuses on global investing.

Mellody Hobson: 01:57
So global and international stocks around the world, all cap sizes when we do our international and global investing. So across all the cap ranges. And we’ve been doing this since 1983 and one of the areas of distinction for us, our longest running portfolio, our small cap value strategy has had the same portfolio manager since inception, which is almost 37 years. That’s unheard of these days in the investment world and he’s done that and added tremendous value to our clients, outperforming the benchmark by over a couple 100 basis points per annum since inception.

Jonathan Boyar: 02:34
In a previous interviews, you’ve stated the diversity of your firm is really the secret sauce. Can you elaborate a little bit on that?

Mellody Hobson: 02:42
I think that it’s a competitive advantage and it’s one of the things that’s unfortunately lacking in the investment management industry because we have a very very diverse group of people. I think we were able to look at investment decisions and really ponder questions from all sorts of angles that leads to a better outcome and ultimately has driven the results that we have. I often quote Scott Page who wrote the book The Difference. He’s a professor at the University of Michigan and he came up with the first mathematical formula for diversity and in this book he talks about the fact that if you’re trying to solve a really hard problem, hard, you want diverse perspectives, even diverse intellects.

Mellody Hobson: 03:28
And the example that he gives that I think is so great is he talks about the smallpox epidemic and when it was ravaging Europe, all of the greatest scientific minds were stumped and the person who ultimately let them to the breakthrough solution was a dairy farmer who noticed the milkmaids were not getting smallpox. And to this day, the smallpox vaccination is bovine based because of the observations of that dairy farmer. And we really believe in that idea at Ariel when we think about diversity being a competitive advantage, we start to think about when we’re trying to sit around a table and solve the really hard problems that are natural to value investing. Some say value investors catch a falling knife. How do we make sure we catch the right side? It’s all of these diverse perspectives and opinions that allow us to poke holes at an argument and ultimately we think come to a better solution. In fact, we would say if we all agree there’s a problem.

Jonathan Boyar: 04:25
You have a research driven firm. You obviously spend a great amount of time analyzing each investment opportunity. Where in the process do you start to think about the diversity of the company you were thinking of investing in?

Mellody Hobson: 04:39
Early in the process because we want to be invested in 21st century companies and a 21st century company in our mind is diverse. At the top of the organization, throughout the organization and certainly board executives and the like. And that is the only way we believe that you can ultimately understand all the potential customers you may have, be it a business to consumer company or business to business company. We think all of those opinions shed light on the ultimate way that you sell the product or service.

Mellody Hobson: 05:09
And so at the end of the day when we think about owning 21st century companies, we think about diversity and if they don’t have it, we’re certainly going to agitate in that regard. Often because we own large positions, especially for our US stocks and we can really impress upon them the importance of having all of those voices around a table.

Jonathan Boyar: 05:30
Having a variety of viewpoints is critical. I certainly agree. What type of input do you have on the investments Ariel makes?

Mellody Hobson: 05:40
So what I would say is I’m not a person who is second guessing decisions and I’m there cheering them on in terms of what they do and how they do it. Because I recognize just right off the top, stock picking is very very hard and outperforming is even harder and we’ve been able to do that over time. And so it’s not about second guessing someone’s decision. What I do contribute is my Rolodex. And so the team often comes to me with specific requests or general requests and ways that I can help through the relationships that I have. Shed light on a stock or an idea. I’m actually doing that today for John with someone specifically.

Mellody Hobson: 06:19
So it might be this person you know, this person sits on a board with you, this person is a good friend. Can we do a call with them to vet this idea? And we do that a lot. And so, I’m brought into the conversation as a way of enhancing our decision making through relationships that I have. And we’re not trying to get any nonpublic information or anything like that. We’re looking for insights that will allow us to make better decisions.

Jonathan Boyar: 06:47
I’m really interested in your insights on the media landscape. You were chair of Dreamworks. You certainly know the space well. How do you see it changing?

Mellody Hobson: 06:58
Well, I think the world has changed in a major major way. We’ve obviously seen a media consolidation in our lifetime that is probably the most significant happenings in the world of media since the invention of the camera. I think that when you look at the fact that it’s very hard to be a standalone, just let’s talk about film companies. Dreamworks was bought by Comcast. You had Pixar that was bought by Disney. Lucasfilm that was bought by Disney. Even though those businesses and the content that they produced were outstanding. It became harder and harder for those businesses to compete as standalone companies against the media giants.

Mellody Hobson: 07:38
And so we’ve seen those giants consolidate and actually expand their content in such a way that has made them even more formidable in a way that I think actually serves the consumer very well in terms of what they continue to produce. The other thing we’ve seen is the streaming wars, and I think this is a real thing. I see it from the perspective of Quibi and I think our customers and just individuals in general have decided they want to get information when they want it, where they want it, how they want it, and the media companies have absolutely adjusted it to that. And so we’ve seen that take place in a way that I think is fundamentally changed how we take in content. But at the end of the day, I still believe the old idea that content is king and if you have great content, people will watch it, they will find it, they will consume it.

Mellody Hobson: 08:28
The one problem I think we have now is that because there’s so much content and all of it is not good, I think that at some point there will be organizations and my husband is the one who’s really convinced me of this, that we’ll curate that for you so that you can find your way through all of it that exists and so much does it exist today. So I think the future does have some form of curation attached to it. I think the future of streaming real and permanent, and I think we will see it in various iterations like Quibi that are doing short form content or obviously you have others who are coming in and new ways. Disney targeting children with Disney plus or clearly Netflix in terms of how they disrupted the whole industry with streaming to start with.

Jonathan Boyar: 09:15
The curation angle is really really interesting. How do you see that evolving? Is it artificial intelligence? How does this go and who’s the winner overall 10 15 years from now?

Mellody Hobson: 09:26
Well, first of all, I don’t know if there is a company yet doing this and the question is will the existing services, create some form of curation. I think the issue with that is that stays as a closed system and ultimately the question is will there be a curator that will look across all these platforms and help you navigate them? So I’m not sure exactly what form it will take. One would imagine that some form of machine learning or artificial intelligence will be involved and we see that already. Obviously Amazon does that very well. You buy a book and it says if you like this, you probably will like this. We’ve seen it with Apple, with music, so that’s not hard to imagine.

Mellody Hobson: 10:04
I just think that the question is who, what, when, where, we don’t know any of that yet. I don’t think that’s taken any form at all. The one other thing I’ll say about media that I think is important is I do think that there will still be, and again, my husband has really convinced me of this. We will still go to the movies. We will go to theaters because it’s a social event. Certainly at all levels of incomes now people have flat screens, they have big flat screens, but there’s something social about going out.

Mellody Hobson: 10:35
We can listen to a CD in almost perfect form of a song, but nothing competes with a live concert. And so this idea of media only being in your home, certainly we have a lot of opportunity to watch in the way that we wanted our home or on the phone or on an iPad or what have you. But there will still be a world of going to the movies and the question will be, can you uplift the movie experience like we’ve seen in some of the stadium seating and the movies that have the movie theaters that now have food at your table. All of those things, I think we’ll see more of that, more expensive but a better experience.

Jonathan Boyar: 11:15
This interview is about you and your amazing career, but if someone who grew up watching Star Wars, I have to ask at least one or two George Lucas questions. I mean, can you tell us something about him that most people would be surprised to know?

Mellody Hobson: 11:27
Gosh, people know so much about him because he’s been out there for so long. I think for me, the thing that I think was just the most amazing discovery very early on is just he has a really incredible sense of humor and it doesn’t come across, and I joke with him because he never smiles in pictures. And so when you see him in a picture, he has the straight face. And so people don’t really know. He’s just really really funny. Very very clever. And maybe that’s just the nature of being a writer. I don’t know. But that would be my number one thing that I would say that most people would not know about him. But I think the other thing is he literally watches television every day, every single day. I come home and he’s like, I’ve been watching a Fred Astaire marathon. I’m like, what! I mean, he’s a cinephile file. So he television or movies or when he worked on the Clone Wars, he literally watched the Sopranos every season from beginning to end cause he wanted to see how a really strong television show could work.

Mellody Hobson: 12:30
And he literally just sat for weeks and weeks and all he did was hour after hour, watch the Sopranos, he’ll do things like that as a form of research. And last last but not least as he’s learned. So he researched his subjects and he goes very, very deep and it’s something like I never would expect it, he’s like books on tape about string theory and I’m like, “What!” You never know how I might use that one day. And that was something I just had not expected. Super, super, super learned.

Jonathan Boyar: 12:59
Well yeah, I was recently reading Bob Iger’s book, which I highly recommend. And while reading it, I was really excited to see your name mentioned as you were present during some of the negotiations when Lucasfilm was sold to Disney. I guess it was back in 2011 2012 or so. Can you tell us a little bit of behind the scenes of what went on?

Mellody Hobson: 13:20
Well, I would say I wasn’t front and center in those negotiations, but I was on the periphery. I was there for the very first breakfast or lunch. No, it was breakfast that we had at Disney World where the subject was broached. It was funny, we went to the Brown Derby restaurant and it was closed and it was just the three of us and an entire restaurant, which I was like, this is strange, but ultimately Bob Iger brought up the subject of, what are you planning to do with your company? So then, it made sense that no one else was around as we were having this conversation. And then along the way, I was obviously there for everything as it was occurring. I remember when George went to sign the papers in Los Angeles.

Mellody Hobson: 14:01
I was in Chicago that day and I kept saying to him, are you okay? Are you okay? Because I thought, that’s very, very, very hard, and ultimately everything worked out. And Bob was very very kind and thoughtful. Every step along the way. I have a lot of respect for him and not only how he’s run that company and the tremendous success that they’ve had there and the vision that he has, but just how he dealt with George and how he included me in the conversation.

Jonathan Boyar: 14:30
And he kept his word on how the franchise would be treated.

Mellody Hobson: 14:35
Yeah. He’s a pro. He knows what he’s doing and as I said, certainly, they’ve been very fortunate to have him as a leader and we remain a shareholder, a large shareholder of Disney. And a lot of that is because we know that Bob is such an excellent steward for the shareholder.

Jonathan Boyar: 14:58
I hope you’re enjoying the interview with Mellody Hobson. To be sure you never miss another World According to Boyar interview, please follow us on Twitter @boyarvalue.

Jonathan Boyar: 15:06
So I would imagine in many meetings you attend outside of Ariel, you’re both the only woman and the only person of color. Does that add a tremendous amount of pressure on you? Do you feel kind of a weight that you always have to be on your game and great?

Mellody Hobson: 15:30
I’ve always felt that, but it’s not a weight, it just is. So when you’re black and you have a mom like mine, she made it very clear what you’re up against. She made it very clear what I was up against at a very young age and she conditioned me and so I don’t walk in thinking about it. It just is. I have a friend, Holden Lee who used to be the head of HR at Pepsi. He was on the Starbucks board with me, is so smart and Holden once I was talking to him about these issues and he said, “Mellody, how long have you been black? How long have you been a woman?” It was just such a funny comment and it really perfectly crystallized it for me. It just is. So no, do I walk in carrying a weight or something on my shoulders or burden. No.

Mellody Hobson: 16:13
I walk in knowing this is just life and me and situations that I’m in are often very unique and hoping to do a good job so that the next version of Mellody that comes through is received very very well.

Jonathan Boyar: 16:27
Well, your Ted talk, which has been viewed 3.8 million times and counting was certainly received well. The title of the talk was colorblind or color brave. I highly encourage people to watch it and it’s entirety. But if you had to pick one or two takeaways for people to have, what would they be?

Mellody Hobson: 16:48
The number one thing is what the title of the talk was about. And so I said, color blind or color brave. I was really speaking to the countless number of times that people have told me over and over again that they’re colorblind and I really decided I wanted to challenge that because those who often said it to me were the ones who are in the most homogeneous environments. And so I said, you know what, if you actually could, instead of not seeing race, see it. Because if you saw it, you would see that it was missing in your life. And so I am asking people instead of being color blind to actually embrace the idea of race, embrace the idea of speaking about it, noticing it, talking with others about it, and ultimately, as I called it, being color brave.

Jonathan Boyar: 17:29
So in the speech you describe an incident involving yourself and Harold Ford, would you mind retelling it?

Mellody Hobson: 17:35
It’s a funny story, but it’s also sad at the same time. You have to keep a certain sense of humor about these things in life or else you’d be a little bitter. But Harold had called me, he was running for US Senate and he was, a very well known Congressman from Tennessee who came from a family of political leaders and Harold a young, black guy running for US Senate. He called and he said, Mellody, we’re early in our careers and he says, I need help finding and getting some national press. Can you help me at all?” I called a friend that was a big deal at one of the biggest media organizations in the country. And I went to her and I said, is there anything you can do to help? And she said, let’s do an editorial board lunch for him with a bunch of people.

Mellody Hobson: 18:26
She says, but you come to New York with him. So we both fly to New York, we’re in our best suits, we look like shiny new pennies as I described it in my Ted talk. And we get to the building and we’re directed upstairs and we see the receptionist and we said, we’re here for the lunch. The reception has us follow her through this long meandering hallway. And Harold and I are not paying much attention because we’re talking to each other because we haven’t seen each other, and we’re very excited. We’re excited for the whole experience. So we finally ended up in this room and we get to this room and it’s barren. And she turns to us and she says, where are your uniforms? And we look at each other and we’re like, wow.

Mellody Hobson: 19:07
And just as it was happening, my friend runs in recognizing that we’ve been detoured not to the lunch but to the service area and she’s just red in the face. And so I joke with her, I say, this is exactly why we need more than one black person in the US Senate, because at the time we had only had one and I did it in a joking and funny way, but it was just to suggest, the situation underscored who see people, particularly people of color through a certain lens, can’t see us in all the ways that are possible. And so, it was a stark moment but it certainly put a finer point on the reason for the lunch.

Jonathan Boyar: 19:48
So you certainly have an extremely demanding day job, being co-CEO of Ariel. And I guess in your spare time you’re on a bunch of for profit boards. Why did you join a board?

Mellody Hobson: 20:02
Because it’s an area of interest. I feel like I can contribute and learn and those things are exciting to me and they’ve often been companies with leaders who are well known for their excellence and I want to be around excellence.

Jonathan Boyar: 20:20
You were formally chairperson of the board of Dreamworks. You were young when you initially joined the board and other members of the board were David Geffen and Jeffrey Katzenberg. How were you able to get appointed to such a prestigious board so early in your career?

Mellody Hobson: 20:35
Well, it’s a more interesting story that doesn’t start with Dreamworks. It actually starts with Starbucks. And I received a call one day from Bill Bradley who I had worked with very very very closely when he was running for president. And it didn’t work out obviously. And he called me one day and he said, “Mellody, I’m going on the board of Starbucks and I’m taking you with me. And I said, what? And he said, you don’t know this, but there’ve been a number of times you’ve been on the phone with Howard Schultz and I’ve told them how diligent and hardworking and smart you are and that they really should think about you for the board and now he wants to meet you.

Mellody Hobson: 21:15
And so through a series of interviews that took place over a couple of years, I ultimately was selected to join the board. And from there, Howard called me one day and he said, “Mellody, I’m going on the board of Dreamworks and I’m taking you with me”. I was like, “What!” I mean, it was one of those crazy calls and he said, “Dreamworks is going to IPO and Jeffrey Katzenberg is looking for board members and I told them you would be great. And so, it’s interesting, part of it was just doing a good job where I was. So with Bill Bradley when he was running for president, I work so hard on that presidential campaign and I was very very very focused while working at Ariel. And I would split my day into two parts and work six, seven hour days at both organizations for a couple of years, seven days a week.

Mellody Hobson: 22:05
But I’ve worked as if it was a job, it was not a job. And ultimately that commitment and that devotion was the reason that Bill recommended me at Starbucks. And then when being on the Starbucks board, once I was there, I poured my heart into it. And that led Howard to recommend me. So the big takeaway that I tell people all the time is whatever you’re going to do, you want to be a team player and you want to do it very very well. I had no idea that volunteering for Bill Bradley would lead to being on the board of Starbucks and ultimately vice chair of the board. But it was because I just put my head down and did the work and it was all about being a good teammate to Bill. And this idea of being a good teammate was something that John Rogers had always stressed to me. John Rogers is the person who founded Ariel. He had always stressed to me from the very very beginning of working at Ariel. He always said, the more you help your teammates, the more you help yourself. And the way that the Bill Bradley relationship and Dreamworks and Starbucks all played out is a testament to that statement.

Jonathan Boyar: 23:06
And that’s an amazing story. And basically you had two or three full-time jobs at once and did a great job for each of them. I mean, you must have extraordinary time management skills. I mean, how do you organize your day?

Mellody Hobson: 23:22
Well, that’s a really great question because, I spend a lot of time asking people how they organize themselves because I’m always looking for an edge in a way to be better. I can’t quite get to Jeffrey Katzenberg point where he only needs four hours of sleep. He’s one of those like 10% of people on the planet can live on four hours. But he basically jokes, he gets an extra day every week, which he does because I worked with him for a long long time and I know it to be true, but I can’t do that. But what I do spend a lot of time thinking about is how to be efficient. So everything from one of the things I do at Ariel is I have office hours, which I learned in college.

Mellody Hobson: 24:00
I said, why don’t we do this at work where there was a stated time every day that you could go and see a professor without making an appointment. And there’d be a line outside their door, but they were their office hours. I do that at Ariel and we set that time up on my calendar for people to know when they can communicate with me on small issues that … Actually, it’s 15 minutes or less. It’s not a meeting but it’s not a phone call or it could be a phone call if it’s office hours when I’m outside of the office. And so that’s one way to organize your time so that you don’t have people coming at you all day long because we have a very open door policy at our firm. And so we want to be approachable and accessible to all of our teammates. But the downside of that is just being interrupted constantly. So by coalescing everyone around the office hours, that helps make me more efficient as one of many examples.

Jonathan Boyar: 24:55
Just switching topics a bit. You serve on a bunch of corporate boards. What do you think the biggest responsibility of a board member is? Also you were chair when Dreamworks was sold to Comcast. Can you discuss how a sales process like that works?

Mellody Hobson: 25:11
I think the most important role of a board member is to understand the leadership of the company, succession and capital allocation. To me those are top top top of the list. In terms of the sale of Dreamworks, it was a fascinating process. It was a once in a lifetime experience. It was fun and grueling at the same time and it started with a phone call that I got one day from Brian Roberts. He started by calling Jeffrey Katzenberg first and Jeffrey had super voting shares of Dreamworks and for that reason could not in any way negotiate anything related to the company because he had this special class of shares and all shareholders in that kind of transaction must be treated equally.

Mellody Hobson: 25:52
So Jeffrey said, I can’t talk to you but you can call our board chair. So it’s 6:00 AM in the morning on a weekday, it’s actually a Thursday I remember. And the funniest thing about it is that when he called my husband answered the phone, he called the home phone and I had already come back from my workout and I was actually literally taking a bath and my husband made the joke, you want to take a bath with my wife, which was just completely inappropriate, of course. I told you about that sense of humor. And so he hands me the phone and Brian Roberts, whom I met but didn’t know really well, said, we have an interest in the company. And so it just sort of started there. And that immediately went to an in person meeting in Los Angeles that Saturday. And then it just played out over the next couple of weeks. I mean, all day negotiations an back and forth and up in the middle of the night.

Mellody Hobson: 26:47
And during that period my baby was a baby. And so because I was doing calls throughout the night for about a couple of weeks, this went on for about two weeks and we did a deal very fairly quickly because I was doing these calls in the middle of the night. I slept on the sofa in the family room because my guest room was my baby’s room. So I slept on the sofa. And the big joke that I had that the people who worked in my house must’ve thought that I had a bad marriage because every morning they’d come and see this pillow and this blanket. But I slept on the sofa so I didn’t wake everyone in the house up because I was doing these calls all night. So it was crazy and it was very very invigorating.

Jonathan Boyar: 27:30
How did your board service made you a better investor?

Mellody Hobson: 27:35
In every way, every way. A better leader, a better investor. I think a better person. And that’s because I’ve had one jobs since I graduated from college. I’ve only worked at Ariel, this is 28 years now. So that could be a very insulated experience. That could have been a very insulated experience, but it hasn’t been because I’ve had these other outlets and by serving on corporate boards, I can tell you in no uncertain terms that it’s led to Ariel being run better because I get to learn everything from internal audit to a whole host of things that you can bring back to your organization and make you better. But you also have experiences in a board room that are not the same but certainly are suggestive in terms of issues that we confront with companies that we own.

Mellody Hobson: 28:26
You can say, I remember this in one of my own experiences and how it might relate to something that we might see with one of the companies in our portfolio. And then also just understanding board dynamics. That’s very enlightening when you think about the issues that companies confront on a day to day basis. What are they thinking? How are they dealing with this? Who’s in charge? All of these things are really informative. So Warren Buffett is the one that said, being involved on boards made him a better investor and a better leader. And I’m 100% in agreement of that point of view. It’s been a gift.

Jonathan Boyar: 29:03
Well, Mellody, you’ve been more than generous with your time. Thank you so much, and it was delight having you on the show and hearing about your fascinating career.

Mellody Hobson: 29:12
Thank you so much for having me and have a happy holiday.

Jonathan Boyar: 29:19
I hope you enjoyed the show. To be sure you never miss another World According to Boyar interview. Please follow us on Twitter @boyarvalue, until next time.

Disclaimer: This interview does not constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation to buy or an offer to sell any securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Past performance is no guarantee of future results and there is no assurance that any targets or forward-looking statements will be attained. This interview represents the views of Boyar Asset Management as of November 13,th 2019 and may change without notice. Boyar Asset Management may own shares in any of the companies discussed during the interview. 



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Kenneth L. Davis, MD, President & CEO of the Mount Sinai Health System, on how to decrease healthcare costs without sacrificing quality of care and why drug pricing should be a trade issue.

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The interview discusses:

    • How Dr. Davis led one of the greatest financial turnarounds in medical history;
    • The reasons why healthcare keeps becoming more expensive along with solutions on how to decrease costs without sacrificing care;
    • Why drug pricing should be a trade issue;
    • Why the current patent system discourages pharmaceutical innovation;
    • What “value based” medicine is and why insurance companies and hospitals should consider adopting it;
    • Why the National Institutes of Health is so vital to drug discovery;
    • His thoughts on CVS’s strategy of becoming an integrated health care provider;
    • What serious healthcare problem he sees getting worse which he believes has the potential to bankrupt the entire Medicare system;
    • And much more….

About Kenneth L. Davis, MD.

Kenneth L. Davis, MD, President and Chief Executive Officer of the Mount Sinai Health System, is widely recognized as a visionary leader who has guided the institution on a strong and dramatic growth trajectory. In 2013, the Mount Sinai Health System was formed by the combination of The Mount Sinai Medical Center and Continuum Health Partners, becoming one of the largest nonprofit systems in the country with $8 billion in revenue, 42,000 employees, eight hospitals, and more than 410 ambulatory practices throughout the five boroughs of New York City, Westchester, Long Island, and Florida. Prior to becoming CEO, Dr. Davis spent 15 years as Chair of Mount Sinai’s Department of Psychiatry. He was the first Director for many of the institution’s research entities, including Mount Sinai’s National Institutes of Health (NIH)-funded Alzheimer’s Disease Research Center, the Schizophrenia Biological Research Center at the Bronx Veterans Affairs Medical Center, the Silvio Conte Neuroscience Center to study schizophrenia, and the Seaver Autism Center for Research and Treatment. Additionally, he received one of the first and largest program project grants for Alzheimer’s disease research from the NIH.


Click Here to Read the Interview Transcript

Transcript Of The Interview With Kenneth L. Davis, MD. 

Jonathan Boyar: (00:10)

Welcome to the World According to Boyar, I am your host, Jonathan Boyar. Today’s topic is the business of healthcare. Healthcare, by certain measures, is the biggest business in the US. It comprises almost 20% of our GDP and that number seems to be only going in one direction, up. Business owners, both big and small are impacted directly with rising insurance costs. Employees and consumers are seeing increasingly higher deductibles and copay’s. This is one of the major issues of the 2020 U.S. Presidential election where we are seeing some pretty radical ideas being proposed.

Jonathan Boyar (00:50):

So how does an investor profit from this? Is it by purchasing a company like CVS, which Boyar asset management owns, and we have written extensively about in our research service? Are there other ways? I wanted to find an expert to discuss the drivers of healthcare costs. Someone who not only understands the science behind what constitutes delivering quality healthcare at an affordable cost, but also a person who has demonstrated the business savvy of successfully navigating this increasingly complex ecosystem.

Jonathan Boyar (01:21):

To me, the choice was obvious. Dr. Ken Davis is the CEO of the Mount Sinai Healthcare System and led one of the most unbelievable financial turnarounds in medical history. I personally have a special fondness for this institution as my wife completed her residency at Mount Sinai and I have great memories of visiting her at Guggenheim Pavilion. In our wide ranging interview, Dr. Davis discusses why healthcare is so expensive, solutions on how to keep costs down, and countless other valuable insights that will be interesting to not only investors, but people who want more knowledge on this increasingly complex debate. Dr. Davis, welcome to the show.

Dr. Ken Davis (02:03):

Good to be here.

Jonathan Boyar (02:04):

Today Mount Sinai has over 42,000 employees, 8 billion in top line revenue, and an endowment without donor restrictions of around $2 billion. However, when you assumed your current role, the situation was, to put it mildly, dire. I believe you had two weeks of payroll left. Can you explain what you were drafted into?

Dr. Ken Davis (02:22):

Wow. Well, I was the dean and I had been the dean for about two months and the chairman of the board called me into his office and said, “we’re firing the CEO.” They had hired the CEO less than a year earlier, “and we’d like you to do both jobs.” I thought, wow, I’m mostly a scientist. This is not what I was trained to do, but like your wife and perhaps even more so, this institution had meant a great deal to me. When I was seven I came here for emergency surgery on Mother’s Day. I remember it like it was yesterday. Traffic was so heavy, my mother was panicked we wouldn’t get there in time. I was met at the curb by emergency workers who put me on a stretcher and the next thing I knew I was in an OR and they were operating on me.

Dr. Ken Davis (03:11):

I went to medical school here when it was just the second class and there were 40 students in the class. Except for six years that I spent at Stanford, this has been my whole life, I came back after Stanford and for the place to be in such a dire position as it was then and to be entrusted with turning it around seemed to me to be something of which there was really no decision. This is what I was going to do.

Dr. Ken Davis (03:38):

So I’m a scientist, I am data-driven and the first things that I asked was, what are the diagnostic related groups where we have a margin and what are the ones in which we’re losing money? And what I found out, that everybody knows who’s been in this business, is that complex surgeries are where the margin is and pediatrics, psychiatry, basically the inpatient stays that aren’t procedurally related, are where you lose money and that as of today, but it was the same before you lose money on Medicaid, you lose money on Medicare, you’ve got to make that up in commercial insurance. So we had a place that was swarming with consultants and those consultants were telling the management team how we were going to work this out. And their strategy was always expense reduction, expense reduction, expense reduction.

Dr. Ken Davis (04:36):

And they would say things like, “look, you don’t need an A level of cleanliness in the hospital, you could have a B.” And I said, “with the competition in New York, you think we can live with a B level of cleanliness? People will see a floor that looks a little dirty and they’ll say, could you imagine what the ORs look like?” So my conclusion was, no, we were not going to cut our way out of this problem. We had to grow the top line. So I generated a plan and the plan was we had to recruit and we had to recruit those doctors who are doing the complex surgeries that we weren’t doing. We have to recruit major surgeons who have reputations and practices. And I put that plan together and I said, I’ll need to go to the board and get approval to use whatever money is in the endowment that is unrestricted so I could generate the seed packages that would be necessary to attract the doctors and bring them to Mount Sinai.

Dr. Ken Davis (05:43):

And I remember when we had the board meeting, I presented my plan and some members of the board then turned to the consultants and they said, “what do you think of Dr. Davis’s plan?” And they said, as consultants would, they didn’t want to be hypercritical. They said, “well, it’s very interesting we understand it, but frankly we don’t believe in the revenue fairy.” So the board voted and the board voted unanimously to approve my plan and to unlock the money that was unrestricted in the endowment for me to use for recruitment. And as I was leaving, one of the board members turned to me and said, “you better be right because if you’re wrong, you’ll be the last CEO of Mount Sinai.”

Jonathan Boyar (06:33):

You’ve said that being a scientist really was the best preparation of becoming a CEO, what do you mean by that?

Dr. Ken Davis (06:40):

I was a data-driven person. I knew that to solve this problem, I needed facts, I needed data and I immediately went to our group who are in strategic planning, ironically had just been given layoff notices by the consultants and I said, “you’re staying and I need to know the margins on all these DRGs that are common.” And that’s what they gave me. And then we began to look at the data. Where are the expenses, where are the revenues and where are the margins?

Jonathan Boyar (07:12):

Roughly 62% of your patients are Medicare, Medicaid. For each Medicaid patient, you lose about 35 cents on the dollar, for Medicare, I think it’s about 15 cents.

Dr. Ken Davis (07:22):

That’s right.

Jonathan Boyar (07:23):

Clearly this isn’t sustainable, you said that you make some of it up from private insurance, but how did we get here?

Dr. Ken Davis (07:30):

You mean how did healthcare in general get here? No one can afford healthcare. The feds can’t afford their Medicare and their Medicaid, the state can’t afford its Medicaid. The employers can afford their premiums, the employees can’t afford their copays. So everybody wants to shrink what they’re paying to the payers. And when the vast majority of your payers are government, they’re the easiest ones to cut. They get the least push-back and the most voters are, that’s what they’re in favor of. So we have to find ways to survive.

Jonathan Boyar (08:06):

And what’s the biggest driver of costs in the system for you as a hospital? Is it nurses? Is it drugs, litigation?

Dr. Ken Davis (08:13):

It’s labor.

Jonathan Boyar (08:14):

By far and away?

Dr. Ken Davis (08:15):

Sure, labor costs. It’s a labor intensive business. You need the physicians, the specialists are expensive and it’s a very competitive area in New York and the need to staff places where there are very, very sick people, because as care has become more and more ambulatory, the people who come to the hospitals are your sickest people. They need the most staffing. So labor costs are very high.

Jonathan Boyar (08:45):

So now there’s a movement in medicine. If you go to a doctor, you pay for the visit to more of a value based approach and it’s something you’ve been outspoken about. It’s a revolutionary change. How does this get accomplished?

Dr. Ken Davis (08:58):

Well, an insurer or the government says you are taking care of primarily X amount of people and for every X, every one of those people we’re going to give you Y amount of dollars and that’s it. We’re going to give you that ahead of time, that’s what you get for the year. Your job is to manage those patients with that amount of money. So suddenly your incentive is to keep people well instead of fee for service medicine, which your incentive is to do anything you can do because anything you do you get paid for. That just drives up the bill. So this necessitates much more thought about how can I be prudent, how can I keep people well? Of course it has a downside too. And the downside is, you may do too little, but if you do too little, ultimately you pay a price because then they get real sick and you have a much bigger bill. So this changes the way we’re reimbursed, changes the way we conceptualize care and hopefully it can bring savings.

Jonathan Boyar (10:02):

I see how that could work for an insurance company, but for a hospital, how does that model work?

Dr. Ken Davis (10:08):

Well, if we’re paid a fair amount and if we are effective in keeping people out of the hospital or when they need care, doing it in the lowest level that we can and do it well. If we can keep people essentially healthy, we will wind up not having to spend down all that money that we’re given ahead of time.

Jonathan Boyar (10:33):

For this plan to work, basically do all physicians now have to be associated with a hospital?

Dr. Ken Davis (10:40):

No, not for physicians, but the hospital has to be worried about physicians who are not a part of their employee or have some incentive that is aligned with them because if were responsible for say, a particular patient and that patient goes to a doctor who is unaffiliated with us, has no connection to us, can’t read the medical records, they have no incentive to be as efficient as possible nor to find out what has already been done. So you may get redundant medical care, redundant diagnostic tests, unnecessary procedures, or that Dr. may feel he’s still, or she, in a fee for service world. But the difference is that the money that that doctor’s being paid is now coming out of our allotment for care for that patient. So we’re very worried when that patient winds up in an unaffiliated office.

Jonathan Boyar (11:40):

So scale for this must be tremendously important. I mean you’ve merged with hospitals a few times. Do you see more consolidation in this space?

Dr. Ken Davis (11:51):

Well, you’re right, scale critical. Think about this in the context of value based care in Manhattan. Let’s say Mount Sinai, before all its mergers was just this wonderful hospital in the Upper East Side. And one of our patients, who lives South of 34th street gets very ill and winds up in an emergency room of say, and I like them, NYU. Well, they don’t see our records, they don’t know what’s going on and they’re not in our risk pool, so what do they do? They repeat all the tests. They do everything that we’ve already done. They wind up again in fee for service medicine doing procedure after procedure and we couldn’t control it. What we needed was those people had a Mount Sinai facility to go to. So when they get sick with that scale, we lose them. We needed the scale to make sure they stay within our system. And that resulted in some now 400 ambulatory sites and eight big hospitals.

Jonathan Boyar (13:03):

The NIH, there’s a lot of mystery surrounding the organization and you’re an outspoken proponent of the importance of the NIH. Can you just briefly explain why they’re so vital in healthcare?

Dr. Ken Davis (13:15):

Critical. Big pharma has become drug development, not drug discovery houses. So where does the intellectual property come from? Where does the new ideas, the targets for new drug development, understanding fundamental pathophysiology, where does that come from? It comes from the academic medical centers, the large academic medical centers that receive a lot of NIH money. That in turn produces the targets, produces the pathway to new compounds. And at some point, those ideas are then transferred over to the big pharmas who then spend the money to put them in big clinical trials. But big pharma, even if it decided to redirect its money more into drug discovery, doesn’t have the depth of people, the kind of infrastructure of scientists and academics that you need to really come up with the most creative ideas and take the biggest risks.

Jonathan Boyar (14:16):

And the way patent law is, it really incentives big pharma to have is what you’ve called and other people called, me too drugs.

Dr. Ken Davis (14:26):

Absolutely, and here’s why. You would think 20 years is a long time for a patent, but in fact when you figure out how long it takes to develop a truly novel compound for a really bad disease, you suddenly begin to calculate something like this. I want to develop a drug for Alzheimer’s disease. I find a molecule, I patent that molecule, now I’ve got to show that that molecule is working in my laboratory tests, desktop. Working in my animal models, then is not toxic in my animal models, then it’s not toxic in my first group of people. Then I turned to what’s called phase two studies, which is a little proof of concept, but it’s hundreds of patients. Then I moved to my phase three studies, which are the pivotal studies and if it’s for slowing the course of Alzheimer’s disease, then I enroll a lot of people who are potentially high risk for Alzheimer’s disease because of their genetic code, but they don’t have it yet. They’re complaining a little bit about their memory and I wait to see how many convert over into true Alzheimer’s.

Dr. Ken Davis (15:37):

That’s a multi multi year study and I probably don’t want to do though two at the same time because they’re very expensive so I do it sequentially. By the time all that is done and I finally have a drug that may slow the course of Alzheimer’s, I could have easily used 15 years of my 20 years. So then what happens? I’ve got five years left, which is also the amount of market exclusivity that you would get, data exclusivity for my filing with the FDA. So I’ve got five years to get back all that money, all that investment.

Dr. Ken Davis (16:12):

In contrast, let’s say I decide what I really want to do is make another H2 blocker for the stomach. I know where to go, I know the target. I can think very quickly through how I can get this thing into development. I have a good idea it’s going to be safe. So what’s my problem? My problem is I got a market to compete with, so instead of spending my money on R&D, I spend my money on marketing. That encourages me two drugs unless we get some kind of flexibility in patent law around encouraging what is truly innovative and discouraging, what are me too’s, we’ve got a business model that keeps us from really developing the breakthroughs that we need and we really have to take a hard look at that one.

Jonathan Boyar (17:01):

One that’s really fascinating and shows, I guess the importance of the NIH, is I’m assuming they’re involved is ketamine that actually happened at Mount Sinai. As far as I know, there hasn’t been a revolutionary drug for depression since the mid eighties with Prozac, there hasn’t been a new mechanism, I think, of action is the term, but within Mount Sinai you developed trials and I don’t know if it’s come, I believe it’s come to market.

Dr. Ken Davis (17:27):

Oh yes.

Jonathan Boyar (17:28):

Can you explain how that happens?

Dr. Ken Davis (17:30):

Sure. Let me go back. In fact, the mechanism of action for antidepressants is to keep the chemicals, the neurotransmitters between neurons around a little longer or make them more effective. That was accidentally discovered in the 50s and whether you increased norepinephrine, which is one of those neurotransmitters, whether you increase serotonin, which was the other one, these were all essentially the same drugs. So Prozac wasn’t different in the 80s, it’s just a drug we recent more recently remember. Ellivil, way back in the fifties, sixties. So there was an observation by just some very smart clinicians that ketamine, a drug of abuse, was seen to be mood elevating. And the question was how could we validate that in fact it had a sustained effect and that it was safe and that it wasn’t addictive and it wouldn’t be a drug of abuse. That took a lot of very smart, smaller clinical trials that demonstrated that in fact, the effect could be sustained, that the dose wasn’t a dose of abuse and that the mechanism of administration could be safe.

Dr. Ken Davis (18:49):

With that information and a use patent, Mount Sinai and collaborators were able to go to drug companies and say, “do you want to develop this?” And they did, but in that case, what it took was a lot of smart clinicians who were in the field of translational science taking, in this case, compounds that were out there and using them for other indications. More traditionally, drug development is about finding a new target and figuring out what molecule will be on that target to change the pathophysiology going forward.

Jonathan Boyar (19:28):

So for Mount Sinai’s effort of doing this, do they actually get rewarded? Is this something-

Dr. Ken Davis (19:34):

Yes, yes, we get a percent of a sales from Johnson and Johnson on ketamine.

Jonathan Boyar (19:39):

And do the taxpayers get reimbursed?

Dr. Ken Davis (19:41):

You ask a terrific question, which is this, if NIH money is generating the kind of intellectual property that leads to drug discovery, what should be the return on investment for taxpayers who are funding that and is a question that is rarely addressed, but I think should become a part of the discussion around drug pricing and it hasn’t yet entered the issue of drug pricing. I don’t hear a lot of people saying, wait a minute, that drug that you’re now selling for X thousands of dollars, where’d the science come for that? Who paid for that?

Dr. Ken Davis (20:28):

Now you know that there’s the Bayh–Dole law and what Bayh–Dole does is it allows places like Mount Sinai to take inventions that come from NIH funded grants and to patent them and then in fact to license them to big pharma. The government has the right to buy back, to drop in and to say, wait a minute, we’re taking this back or we’re going to sell that patent because of what your pricing it to to a competitor. They’ve rarely, rarely done that, but they have the power to exercise that authority, which could have an impact on how some of these drugs ultimately get priced.

Jonathan Boyar (21:16):

I hope you’ve been enjoying the interview with Dr. Davis. To be sure you never miss another World According to Boyar podcast, please be sure to follow us on Twitter, @boyarvalue. Now, back to the show.

Jonathan Boyar (21:33):

You had briefly mentioned trade issues. They’re in the headlines for a variety of reasons and you’ve discussed, drug pricing should be a trade issue. Can you just further elaborate on that?

Dr. Ken Davis (21:44):

Well, think about this. In single payer systems, governments sit down with big pharma and they say, we’re going to pay X for this drug. This is what we’re going to pay no more, no less. You want to sell it in our country, this is what we’re going to pay you. End of story. Drug companies argue they have no margin when they do that. So they come to the US where we don’t sit down and make that negotiation and they price it how they want.

Jonathan Boyar (22:10):

And sorry to interrupt you, why can’t Medicare do that?

Dr. Ken Davis (22:13):

It’s not legal.

Jonathan Boyar (22:14):

What’s the rationale?

Dr. Ken Davis (22:15):

The rationale is we believe in a free market. We believe in capitalism and we believe in a return on investment for the drug company that should be fair for all they’ve put into it. And I believe that at least decades ago when I was working with big pharma and helping them develop Alzheimer’s drugs, there was a social contract and the social contract went something like this, we want everybody, the drug company would say, we want everybody to be able to afford this drug. And as a consequence, you’re not going to turn around and then negotiate one price for all of Medicare. So we’ll be fair and you’ll be fair and we’ll move on because the rest of the world isn’t.

Dr. Ken Davis (22:58):

Well maybe that social contract’s been broken and maybe there are some people in big pharma who just want to price it where they want to price it and good luck if you can afford it. Maybe that overstates the case, but I think that the circumstance has brought on big pharma it’s own worst enemy, which is the question of well, shouldn’t Medicare have the right to negotiate drug prices with you? And if they got that right and that legislation is before Congress now, it changes everything. So then pharma can come back and say, we don’t have enough money to invest in science and it’s going to cost us in innovation.

Dr. Ken Davis (23:39):

Before we get to that, what I would like to see happen is sit down in trade negotiations and say, “wait a minute, US citizens aren’t going to have to pay for all these drugs, rest of the world, you got to pay too.” And then we have to sit down with the pharmacy CEOs and say, “if you get more money from the rest of the world, decrease what Americans have to pay so that it’s still fair. Don’t just put it in your pocket.” So there’s a long way to go, but I think to at least shine light on the fact that this is unequal around the world and should be a part of our trade negotiations is a good idea.

Jonathan Boyar (24:17):

So when the polio vaccine came out, it was essentially free. The cost of polio at the time to society was enormous, legend has it that Jonas Salk refused to patent the vaccine because he said, “would you patent the sun?” The actual truth to why he didn’t patent it is open to debate and there’s a lot of nuance behind that, but it’s a nice story nonetheless. Today, drug companies base their pricing partially on how much money they save the system and that’s why you see $80,000 price tags for drugs. What’s a good middle ground? How do you do this?

Dr. Ken Davis (24:50):

Well, it’s been suggested that you can do it based on how effective the drug is. I think that’s often hard to determine. I think it might be fair to have transparency to open up the books, to talk about, we’ve had this many failed compounds in this class. This is how much we’ve invested, a fair return would be X. We want that fair return going forward plus inflationary adjustment, but we haven’t had that kind of transparency yet.

Jonathan Boyar (25:20):

Speaking of transparency, PBMs, they’re an easy political target. They’re complex, they hold a lot of power. From your perspective as a provider and a large employer, how do you view the debate and do they have a positive influence? Do they have a reason to even exist?

Dr. Ken Davis (25:36):

You know, I just don’t know enough to really be knowledgeable about that other than to say, every time we have another hand in this line of potential profit, we’re just making it harder and harder for patients to pay for their drug and the most efficient way it would seem to me would be if we could get the best prices from pharma directly to the patient with the insurance company is perhaps the intermediary. I don’t know why we have to, but I’m sure there are good arguments for PBMs, but I just regret the fact that we have so many profit centers in line here that are getting some return on what is essential medications for people’s survival.

Dr. Ken Davis (26:23):

To return to your Salk vaccine, could you imagine if when we all, well, at least when I was, I remember seven years old and lined up to get the Salk vaccine and my parents were rejoicing, because in the summers we were all petrified that we’d wind up with some polio. Could you imagine if at the door you checked in you had to give them a couple thousand dollars? How many people, when I got the shot in 1954, would have said, “we can’t afford this. How can we do this?” Or could you imagine if the people who went to market with it said, as you pointed out, “do you realize how much money we’re going to save the healthcare system?” You know? Well, they’re not saving my mother. It’s not my mother and father’s money. I mean, they couldn’t afford it.

Jonathan Boyar (27:06):

We’re a money management firm and one of the companies we’ve invested in and written up has been CVS. They’ve changed their business model drastically. They’re not only a drugstore, they’re also a PBM. They’re also a major insurer, so they’re now really incentivized to take costs out of the system and they now have a strategy of preventive care, maintenance, chronic disease treatment. They’re going to have centers where people can go in and get seen by nurse practitioners. Do you think this is a good idea? Do you think this will help with the strain on large hospitals like yours and lower costs?

Dr. Ken Davis (27:41):

Time will tell. I don’t know. Certainly in theory you can see how an integrated system like that could save the system money on the other hand and integrate a system like that could also add expense to the system depending on how they wanted to price things. I worry about the kind of people on the front lines who will be in those places, staffing those facilities. How knowledgeable will they be about disease? How well will they be able to pick up some of the subtleties that suggest, by the way, that breathing problem you’re having, it’s a little more serious than you think. We better send you somewhere else. I don’t know if they’re going to afford the kind of quality care that you’d want. This isn’t like going to Walmart and just picking something off the shelf. You really need good people and I don’t know how they’re going to staff it and I don’t know what kind of doctors, if they’re going to get doctors at all, are going to be in the front lines.

Jonathan Boyar (28:35):

You’re an expert in Alzheimer’s disease. You hear a lot about the opioid epidemic, cancer, diabetes, all of these have tremendous cost to society. You hear a lot less about Alzheimer’s. However, the Societal cost is enormous. Can you give us some perspective, especially now with as the baby boomers are aging?

Dr. Ken Davis (28:53):

It’s an accident waiting to happen. I mean this can bankrupt the rest of the Medicare system. The percentages of people over age 85 who are demented is phenomenal and the system just can’t afford it and they don’t have the facilities to handle it so that what we badly need is a drug that can slow the progression of Alzheimer’s. The brain changes that happen in the Alzheimer’s patient happened 25 years, start 25 years before you’re symptomatic and we can identify those changes with tests now. What we need is a drug that we can start to administer 25 years earlier that say, would slow the progression by half, so that instead of average age getting it at 80 or 82 you’re now going to get it at 102 and you’re going to have a lot fewer people with dementia. Unfortunately, a myriad of drugs have failed and we’re still waiting for something that is really going to be efficacious here.

Jonathan Boyar (29:53):

Do you think it’s feasible?

Dr. Ken Davis (29:55):

To find the efficacious agent? I think the science can definitely provide that.

Jonathan Boyar (30:00):

How much are we talking about in terms of costs that have gone into this?

Dr. Ken Davis (30:03):

At this point? Billions and billions of dollars. The question is when we come up with a drug, can you imagine if it’s only marginally efficacious and the cost is $25,000 a year? That would be outrageous and it could be worse. So what we’re looking for is going to have to be a truly efficacious compound, not marginally efficacious, that we’re going to have to take for decades, that’s going to have to be fairly priced so that we don’t bankrupt the Medicare system just by the drug that’s going to slow Alzheimer’s disease rather than Alzheimer’s disease itself.

Jonathan Boyar (30:42):

Dr. Davis, I want to thank you for your time and the insights you gave. Mount Sinai is an organization that relies on donations in order to continue to deliver unbelievable services. If you’re interested in learning more on how you can help this wonderful organization, please visit To be sure you never miss another Boyer podcast, please follow us on Twitter @Boyarvalue. Until next time.

Disclaimer: This interview does not constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation to buy or an offer to sell any securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Past performance is no guarantee of future results and there is no assurance that any targets or forward-looking statements will be attained. This interview represents the views of Boyar Asset Management as of November 13,th 2019 and may change without notice. Boyar Asset Management may own shares in any of the companies discussed during the interview.



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Howard Lorber, CEO of Vector Group, Chairman of Douglas Elliman, Chairman of Nathan’s famous, on the New York real estate business and how he believes technology will impact the real estate brokerage business.

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The interview discusses:

    • How he helped turn Nathan’s Famous from a small restaurant chain into a global licensing business that sells over 480 million hot dogs per year;
    • Characteristics he looks for in companies he looks to acquire;
    • His thoughts on the New York real estate market;
    • What areas within the New York residential real estate market he believes currently offer the greatest values;
    • His views on technology disrupting the real estate business and who is potentially most vulnerable;
    • How he believes tobacco companies will participate in the cannabis market.

About Howard Lorber:

Howard Lorber is the president and CEO of Vector Group Ltd., a holding company. He is also the Chairman of Douglas Elliman, a subsidiary of Vector, which is the largest residential real estate brokerage in New York metropolitan area with 4,000 brokers as of 2014 (and an additional 300 in Florida). Lorber is chairman of fast food chain Nathan’s Famous .


Click Here to Read the Interview Transcript

Transcript Of The Interview With Howard Lorber:

Jonathan Boyar: (00:11):

Welcome to the World According to Boyar, where we bring top investors, bestselling authors, and market news makers to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar. Today’s guest is Howard Lorber, CEO of the Vector Group and Executive Chairman of the Board of Nathan’s Famous. Howard welcome.

Howard Lorber (00:32):

Thank you. Nice to be with you.

Jonathan Boyar (00:34):

You’re probably best known for being Chairman of Douglas Elliman, a real estate brokerage house with almost 27 billion in sales. But long before that you helped engineer a takeover of Nathan’s Famous, the hot dog company. What opportunity did you see at the time?

Howard Lorber (00:49):

Well, Nathan’s is a similar to a few other deals I did had something in common. It had a great brand name in business for many years and not the best management. And I always felt that companies with great brand names almost always survive, no matter how bad the management is at times or how bad the markets are for whatever they do at times. They’re pretty hard to kill. So I saw Nathan’s is fitting that category that with a great management team and plans to grow, that there would be a real winner over a period of time. And having said that, it took longer to really get it going than I thought, which happens a lot. But on the other hand, when you look back now, it was the right deal to do because of the name and because of the expansion we were able to do. And then the shareholders did very well including myself.

Jonathan Boyar (01:42):

Was the plan always really to become… get into the licensing business or did you expect to open more stores? It’s a very interesting evolution.

Howard Lorber (01:53):

Yeah. Well look, we started off when we took a private and started doing some franchising, then we took it public again and we’re plan was to use some of that money to open new stores. And really what happened is we opened a couple of new stores and they really weren’t doing well and we weren’t going to just keep opening stores and go through all the money when we saw that it wasn’t working.

Howard Lorber (02:15):

And one of the issues in thinking about the company and thinking about hot dogs in general, I think most people view hot dogs as a snack, as a snack food, not as a meal. Okay. So how could you make money in a restaurant, especially a large restaurant when people view it as a snack food.

Howard Lorber (02:34):

Then we tried different things. We tried by using other brands in conjunction with Nathan’s in the bigger stores and so forth, but it’s still with the rent you had to pay and the help you needed, it still didn’t really work too well. So we started looking more into the licensing business and we were stuck at the time with a license that for supermarket sales, which was not a great license deal for us. At the time we did it, I think it was when we were first taking it private and we didn’t have much leverage on what we could negotiate for, but years later we were in a much better position than when the first license agreement expired, we were able to make a deal that was multiples better than the first deal we had.

Jonathan Boyar (03:18):

In 93, 94 you join Vector and since the 90s the stock has gone up after dividends, I believe, over 10,000%, which has basically outperformed almost every other publicly traded company, including Berkshire. Can you discuss the evolution of that company?

Howard Lorber (03:34):

Well, thank you for the compliments. Anytime anyone mentions it in the same vein as Berkshire, I’m happy and proud. Look, we believe when you look at the tobacco business there was lots of litigation risks, lots of things going on in those days. And we were well aware of that and we were able to do a couple of things to limit those risks and also to benefit from a settlement with plaintiffs, which at a certain point in time were the state’s suing the tobacco companies for not disclosing the risk of nicotine being addictive. So the days of the lawsuits of cigarette smoking causing cancer were sort of waning because the warnings were on the cigarettes for so many years already by that time, so some smart lawyers came up with the theory of suing under the theory that it was never warned that nicotine is addictive, and maybe if people knew what was addictive, they wouldn’t start.

Howard Lorber (04:25):

So in any event we found a way to settle and get a special deal, and when the industry settled, we had a deal which allowed us to go from a company tobacco company making very little, if anything, to making a substantial amount of money on an ongoing basis. And our belief was still was an industry with problems and with really no big growth, because tobacco has gone through a constant slow decline over the years. So we always felt that the best thing to do was to pay out whatever we could in dividends to the shareholders, and that was a benefit, and that’s why the numbers look so good in returns. So for I think almost 20 years, we paid a dividend and we paid a stock dividend also for maybe most of those same years, and actually that was the plan.

Jonathan Boyar (05:16):

You can’t argue with success, but dividends are obviously not very tax efficient. Why dividends over buybacks?

Howard Lorber (05:25):

We thought about buybacks, but honestly we really did believe that the dividends were really what the shareholders wanted, so we didn’t really concentrate completely on tax efficiency and I think that the dividends ultimately did good for the shareholders, did very well for the shareholders. I’m not so sure the stock buybacks would have been the same, because at certain point you start buying back stock and then the stock goes way up and you have to stop buying back stock. The dividends you can just be paying. If you have the money, you just keep paying. So we felt that dividends were a better strategy.

Jonathan Boyar (05:59):

As I said, you can’t argue with success. I mean, in terms of the tobacco business, do you see tobacco companies the way beverage companies are starting to enter the cannabis industry? Do you see tobacco doing the same thing or is it a completely different business?

Howard Lorber (06:15):

There are some similarities, so you can’t say it’s completely different. But I will say from our point of view, the big difference is the fact that cigarettes are federally licensed and tobacco is federally controlled. Cannabis isn’t. It’s state by state. So a lot of times we’ve had cannabis companies come to us say, “Oh, it’d be great if you could distribute our product.” And we have a big distribution network and selling our cigarettes. But the problem is you can’t. You can’t do it. It’s state by state. So it really doesn’t work for us. And I think the tobacco companies that are going to make money in cannabis are the ones that invested in other companies that are completely remote. There’s really no tie in. They’re not distributing the product with their cigarettes. So it’s just a matter of investment.

Jonathan Boyar (07:04):

Yeah. And it’s obviously very hard to invest when it’s illegal on a federal level. So it’s-

Howard Lorber (07:09):

Exactly. For a public company especially. Yeah, it’s not something that we’d want to be involved in.

Jonathan Boyar (07:14):

So the most well known part of Vector is Douglas Elliman, which you bought in your early 2000s. What attracted you to this business? Was it brands again?

Howard Lorber (07:25):

Same story. Okay, great brand name. In business since 1911. Went through about three sales of the company over a short period of time. Not great on the management side. And as I always say, that if the management is great, how much more can me or my team add to the value? So this was a case where I felt we could add a lot, much as the same way I felt about Nathan’s. And it’s worked out.

Howard Lorber (07:56):

Right now, tougher time in the real estate business. Real estate is cyclical. A lot of real estate companies, in general, have over long periods of time have done well, but I have gone through the ups and downs and it’s a cyclical business. And look, let’s face it, the companies that I’ve done the best stock wise are companies that have consistent earnings growth, okay? Not cyclical. And so if we look, especially at the commercial brokerage companies, boy, they’ve been up and down and up and down and up and down, wide swings. And now you’re seeing that in the residential, because we’ve all grown and now we go into a tougher market, especially in New York and it’s been tough on the stocks.

Jonathan Boyar (08:39):

There’s a lot of talk. I mean the media loves to beat a story to death about disruption in the brokerage business with technology. Are there areas or pockets of the real estate market perhaps in the low end that there might not be a need for a broker in the future? I’m not about Billionaire’s Row.

Howard Lorber (08:56):

The answer is maybe. I think in markets maybe in the middle of the country, the discounters could probably grab some market share much easier than they could do it in major metropolitan areas. I don’t see it happening in New York City or the suburbs around New York. I don’t see it happening in South Florida. I don’t see it happening in California. I don’t see it happening in Boston or Aspen. And these are all the places where we are. I think that is not going to happen in any of those places.

Howard Lorber (09:26):

But yes, there will be companies that come into the market completely different models, whether it’s technology or whether it’s the discounters or where there are companies now who are brokers who now get 100%. All they have to do is pay a monthly fee for their desk. So there’s lots of options that have been around for a while.

Howard Lorber (09:47):

I wouldn’t say the big markets are immune from it, but as much less likely that it will happen. And also on the technology side, the one thing that I’ve learned over the years is you hear something about technology and generally it does happen, but it never happens as fast as anyone thinks. It’s always years and years and years later.

Howard Lorber (10:10):

I had that experience myself once. In some business daily, I ended up with a small chain of video stores. I think it was six or seven video stores, stores like Blockbuster, but smaller. And one night I’m watching television and there’s a business report, and it talks about something new that’s coming out. And that was called pay per view, where you could sit home and use your television remote in order movies. And I said, “Wow.” I didn’t sleep too well at night. I said, “That’s going to be the end of the video store business. Who’s going to go to a video store? Why would you go if you could sit at home and get the videos?” So the next morning I called up someone I knew at Blockbuster and I sold the video stores pretty quickly. And guess what? It eventually did happen, but it was almost 20 years later. So technology doesn’t change markets that quickly.

Howard Lorber (10:59):

And you could look at, even at Amazon. Amazon, everyone thinks it is great, it’s fantastic. When did they start? In 1990 or early 90s. It just doesn’t happen overnight.

Jonathan Boyar (11:09):

Yeah, it’s usually a slow bleed. And as I said, newspapers love to tell us a story. I mean that’s how they sell papers.

Howard Lorber (11:16):

They want to say out a disruptor. There’s disruptors coming into the market, and that’s going to be the end of the market and it may happen someday, but it’s not going to happen fast.

Jonathan Boyar (11:24):

In the areas that you operate, the competition for good brokers is unbelievably intense. You have people like Fredrik Eklund who just have unbelievable production. How do you convince them to stay with you? It’s just seems like the brokers have a very big hand.

Howard Lorber (11:43):

Generally speaking, brokers that leave for other companies, the ones that are doing great don’t leave so quickly, because why disrupt what they’re doing? The ones that tend to leave are brokers in bad markets, that are not doing that well, that just want to change or they’re being offered something where they get a few dollars and they figure well I shouldn’t go because I’m not really making much money now. So I think that’s basically what happens. But also I have a relationship with many and most of, probably all of my really high end, good brokers, but I’ll see anyone. I have eight appointments, seven, eight appointment a day and they’re all pretty much with brokers. Everyone knows they can pick up the phone and call me. So even though we’re a very large company, I still operate it. We try to operate it entrepreneurial and that means that the people, our executive team and myself are always available, whether you’re a big producer or a small producer are always available to help guide you. If you need more money for advertising, come to us. If it makes sense, we’re going to do it.

Howard Lorber (12:49):

We try to treat the people… it’s just simple thinking. And what I learned early on in the business is the buyers and sellers of the real estate are not my customers. Those are the customers of my brokers. So who are my customers? My customers are our salespeople, our brokers, because I’m… so therefore my job is to help them make more money. If I can help them make more money, we make some money. So I think if you think about the business that way is a pretty simple business to operate.

Jonathan Boyar (13:22):

I hope you’ve been enjoying the interview with Howard Lorber. to be sure you never miss another World According to Boyar episode, please follow us on Twitter @Boyarvalue. Now back to the show.

Jonathan Boyar (13:40):

How helpful is shows like Million Dollar Listing, which prominently feature a lot of your brokers or some of your brokers and you’ve made a few cameos, been for the brand?

Howard Lorber (13:50):

I think there was suspicion about how it would work in the beginning, including myself. I wasn’t sure, because we used to say, “Reality TV, there’s no real in reality.” But there is. So I think that looking back it’s been a great experience for the brokers. Million Dollar Listing has done unbelievably great. It is one of the top shows. I forget, the viewership is something like 18, 20 million now.

Jonathan Boyar (14:19):

Yeah, it’s one of Bravo’s best shows.

Howard Lorber (14:20):

It’s Bravo’s best. And I can only tell you my son was on for one year, the first year. I was in London with him a few weeks ago on business. There were people coming up to him saying, a couple of people, not a lot, but I think two different people came up and said, “I remember you, you were on Million Dollar Listing. This is seven years ago. And so the show has had a big effect on the brokerage business. And the companies that were very much against it, now would be thrilled to have someone on the show. I don’t think there’s any company that honestly would say, “Oh, we don’t want our broker to be on the show.”

Jonathan Boyar (14:54):

You couldn’t pay for publicity like that. I mean it’s-

Howard Lorber (14:56):

Exactly, exactly.

Jonathan Boyar (14:58):

On those shows, especially in New York and LA, you see sales numbers $10, $20, $30 million and then it shows the potential commission. I guess they kind of multiply… put a 6% next to it or 3%. How real are those numbers at the real, ultra high end? Are those numbers negotiable on a case by case-

Howard Lorber (15:16):

Commissions are always negotiable at the end to get a deal done. So typically what happens is you try to list in New York between 5 and 6%. That’s basically where it’s at and probably the average is about 5.5%. And then generally there’s two brokers. So if you have a negotiation because the seller’s not getting the full price you wanted, what I always say is, “How do you get the deal done?” It’s pretty simple when you think about it. The seller’s going to have to take a little less, the buyer’s going to have to pay a little more and maybe the broker’s going to have to get a little bit less commission. That’s how you do business.

Jonathan Boyar (15:54):

I mean, you’re certainly the pulse of the New York City real estate market. The press keeps talking about how bad it is. Is it really so bad?

Howard Lorber (16:03):

No, no, it’s bad compared to… we’re a little spoiled, right? We had a bunch of great years after the recession of 08, 09. And I’d say probably 15 was the best and then it started coming down a little bit. And I guess it still remains to be seen how much ultimately the SALT, the loss of the SALT deductions come into play. I’m sure they’re going to come into play to some degree.

Howard Lorber (16:25):

And now also we have the start of the increase in a mansion tax, which goes into effect July 1st and so that’s going to be interesting. The first quarter was pretty close to the same as the first… little down from the first quarter of last year, but we’ll see. I mean the first quarter is not generally a good quarter in the business. The best quarters are the second and third quarter. I have a feeling the second quarter is going to be pretty good and I think there’ll be probably more deals, because I think there are people that are going to rush to get deals done before the increase in the mansion tax takes place.

Jonathan Boyar (16:56):

One of the stocks we own, which we think is substantially undervalued, is a really small company, Trinity Place Holdings. Their major asset is a property on 77 Greenwhich Street to come into market shortly. They have about 90 luxury residential condos between one and four bedrooms, and they’re talking about getting numbers between 23 and 2,700 per square foot. I might be off by a couple of dollars. In this market. Is that realistic or?

Howard Lorber (17:24):

Are they REIT? Are they a REIT?

Jonathan Boyar (17:25):

No, it’s not a REIT. It’s just Syms, the former Syms corpus.

Howard Lorber (17:30):

Yeah, yeah, yeah, yeah, sure, sure, sure. Look, I don’t know the product. I would say it doesn’t seem to be crazy, the pricing. Maybe close to the 23 than 27, but you have to know the product. Look, there’s two things people look at today. They look at price per square foot, but they also look at total unit price. So the question is in the design, how efficient other units, because what you want to do today is you want to downsize square footage wise and that gives you a chance to get a higher price per square foot. So you want to have smaller one bedroom, smaller two bedroom, smaller three bedrooms and then people start… because people shop by price per square foot. But equally, if not more important, is total unit price. There’s only so much that want to pay for one bedroom, so much they want to pay for a two bedroom, and so much they want to pay for a three bedroom.

Jonathan Boyar (18:20):

You were talking about being spoiled. I mean anyone who’s invested in New York real estate since the early 90s who held on for any reasonable length of time has had a very good return.

Howard Lorber (18:30):

That’s for sure.

Jonathan Boyar (18:31):

Could you ever envision a situation where there’s a protracted downturn like we had in the 70s or 80s where they actually are giving property away or is that just never going to happen?

Howard Lorber (18:43):

I don’t think that’s going to happen. I think that those days are far gone. You have a much more stable environment. Even in 08, look, people always call it the real estate crash. It wasn’t a real estate crash. It was the financial markets crash. Right. Just so happens real estate got affected by it, but it wasn’t really a real estate crash. The financial markets crash caused real estate to go down due to lack of liquidity and other reasons.

Howard Lorber (19:08):

But I don’t see that happening. In fact, you can make the case that real estate is really undervalued now again, because traditionally we looked at real estate and it’s followed directly with the market for stocks, for equities. And with the big run up the equities have had in the last two years, the real estate has come down in the last two years, in New York for sure. New York City for sure.

Howard Lorber (19:34):

So the question would be is it going to be a catch up? And it very may well be a catch up and I think maybe the loss of SALT deductions has tempered it a little bit, but I think there’s still a reasonable chance that the real estate market is going to start outperforming again to catch you up with what the stock market has done.

Jonathan Boyar (19:55):

Yeah, that’s something that’s always… I’m a stock guy, but it’s one of the things that’s always perplexed me. Right now you look at the setup. You have ultra low interest rates. The economy is booming, and real estate hasn’t done well outside of the major cities. If you look on long Island, what you get compared to what you get in Manhattan is unbelievable. What’s caused kind of a lid on the real estate market?

Howard Lorber (20:22):

Well if you look at Westchester, Nassau, Fairfield County, the real problem was some overbuilding, that’s more in Fairfield County, but also the fact that the real estate taxes were very high. And now with the loss of the SALT deduction, you can’t deduct them except for $10,000.

Howard Lorber (20:42):

But having said that, I think you picked up on an important point. I think the suburbs around this city have again become compelling for people and for families. So you might see people starting to move back out there. It used to be young people getting married, they stay in an apartment in the city, they have a kid, by the second kid they’d move out to Long Island. And that would be that. Then you went through, now this recent years, you went through a period where they didn’t want to leave the city. Look, certain people, if they’re both, husband and wife are both working, it’s hard for both of them to be commuting and leave the kids every day. So that is difficult.

Howard Lorber (21:24):

But when they were able to leave and go out to Long Island, you look at what they were able to get, and this is the point you bring up. And therefore I think it’s somewhat compelling, Long Island is somewhat compelling again. And even if you were… and Westchester and parts of Fairfield County. So even if you buy a house for $2 million, $2.5 million and you’re paying $50,000 in real estate taxes, if you’re at a place in Long Island or Westchester, what a good school district, as opposed to being in the city and paying to private schools. You know what? It looks very cheap to be on Long Island.

Jonathan Boyar (22:02):

Yeah. And now that… if they ever actually connect Penn Station and Grand Central, if that actually ever happens, that makes Long Island even more valuable.

Howard Lorber (22:11):

Without question. When I bought my first expensive house on Long Island, I remember the broker was an old timer and he comped it to New York City condo price. And I remember how looking at and saying, “Wow.” I think New York City average condo price was $700 and I think the house I was paying 304 and the condo was… it was nice. It was okay building, whatever. But the house was on an acre, 6,000 feet. The condo, you couldn’t find a 6,000 foot condo. It will be a lot more money and I was on the water. And I said, “Geez, this is great when you compared it to the city.” But then again, those are rougher days in this city, when the city wasn’t doing as well and now the city has been doing great. So I think that, but I do think that there will be a trend which will start raising prices in the suburbs, because it’s just out of whack and things that I just out of whack generally something happens and it becomes more normalized. It really is at the point where it doesn’t make sense at this point.

Jonathan Boyar (23:11):

One final topic I just wanted to talk about, one of the things that you recently or I guess about two years ago you were appointed Chairman of the Holocaust Museum by the President. How has that experience changed you?

Howard Lorber (23:23):

Well, it’s been phenomenal. I would say it’s definitely life changing. My interest in it stemmed from my mother’s parents, my grandparents, who we lived with in the Bronx until I was about eight years old. My grandparents were Greek Jews that lived in this area of Greece, Thessaloniki, where half the Jews in Greek… it was about 100,000 Jews in Greece, 50,000 lived in this area, Thessaloniki. My grandmother and grandfather left early. They left around 1912 or 1913. But I remember asking my grandmother when I was about, I guess about five or six years old. My grandfather had passed away and I said, “What happened to grandpa?” And she told me the story that although they were able to get out early when the Nazis went into Greece, in Thessaloniki, they took… 48,000 of them were basically murdered in Auschwitz-Birkenau, and that they lost every friend they knew, relatives and so forth. They were lucky enough to already been here in the United States.

Howard Lorber (24:25):

And I always had that constant thought in my mind, when you think about it to wipe out 90% of the population in a small area because of their religion. It was just sort of inconceivable. And that was sort of my motivating factor into wanting to become more involved, to make sure things like that never happened again and I couldn’t think of a better way than doing it than through the Holocaust Memorial Museum.

Jonathan Boyar (24:54):

Is there more of a sense of urgency now that the last generation of survivors are getting up in age to make sure the stories are getting told?

Howard Lorber (25:04):

Yeah, without question there are, but in addition to that, look what’s going on, I’d say in the world, but let’s look at the country, with the shootings and the murders in the synagogues. I mean the antisemitism is surely on the rise throughout the world. And as time goes on, people tend to forget and that is our job is to never let them forget what has happened in the past. And I think that, thank God there’s other organizations, there’s other people that are trying to do it. There’s a position in the government that’s called the Special Envoy to Combat Antisemitism Throughout the World. It’s sort of an ambassador type position, and someone I know was just appointed to it.

Howard Lorber (25:50):

But this is the thinking now. You really have to be out there and you really have to fight what’s going on and it’s a difficult fight, but we have to do everything possible to make sure people remember so it doesn’t happen again.

Jonathan Boyar (26:04):

Well, Howard, I really want to thank you for your time today. You’ve been unbelievably generous with it and thanks for being on the show.

Howard Lorber (26:11):

Thank you. It was my pleasure, Jon.

Jonathan Boyar (26:18):

I hope you enjoyed the show to be sure you never miss another World According to Boyar episode, please follow us on Twitter @Boyarvalue. Until next time.

Disclaimer: This interview does not constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation to buy or an offer to sell any securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Past performance is no guarantee of future results and there is no assurance that any targets or forward-looking statements will be attained. This interview represents the views of Boyar Asset Management as of May 9th,th 2019 and may change without notice. Boyar Asset Management may own shares in any of the companies discussed during the interview.


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Mario Gabelli, Chairman & CEO of GAMCO Investors, Inc., on portfolio construction and who he believes could be the next John Malone.

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The interview discusses:

  • His decision to start his own firm in the 1970s despite a horrendous economic backdrop;
  • His new book Merger Masters that he wrote with Kate Welling;
  • The rationale behind taking his company public and whether he would do it again;
  • His thoughts on portfolio construction including how many positions should be in a portfolio and how long it takes him to become fully invested for a new account;
  • How he incorporates tax ramifications into his sell decisions;
  • His strategy of what to do when a stock within his portfolio increases or decreases by a significant percentage in a short period of time;
  • Who he believes could be the next John Malone;
  • His thoughts on Discovery Communications, Madison Square Garden and Disney.

About Mario Gabelli:

Mario J. Gabelli is the Chairman and Chief Executive Officer of GAMCO Investors, Inc., the firm he founded in 1977 that currently manages over $40 billion. A 1965 summa cum laude graduate of Fordham University’s College of Business Administration, he also holds an M.B.A. from Columbia University Graduate School of Business. He was Morningstar’s Portfolio Manager of the Year in 1997. He was named Money Manager of the Year by Institutional Investor for 2011 and is member of Barron’s All-Star Century Team.


Click Here to Read the Interview Transcript

Transcript Of The Interview With Mario Gabelli:

Jonathan Boyar (00:10):

Welcome to The World According To Boyar where we bring top investors, bestselling authors, and market news makers to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar.

Jonathan Boyar (00:23):

Today’s special guest, Mario Gabelli is a man who truly needs no introduction. After working at Loeb, Rhoades and William Witter, he formed his own firm, Gabelli & Company in 1976. Today he’s one of Wall Street’s best known investors and his publicly-traded firm GAMCO Investors manages over $40 billion utilizing primarily his private market value with a catalyst strategy. Today’s interview is especially exciting for me as Mario was my first boss after graduating from college. Mario, welcome to the show.

Mario Gabelli (00:56):

Well, terrific to be on the program. Obviously, I’ve known the Boyar family for probably close to 45 years. We used to have lunches in the 70s when there were very few of us around. 1970s, before somebody says 18 or 1670s.

Jonathan Boyar (01:10):

I wasn’t going to make that joke. Mario, you left a high-paying job at a well-respected Loeb, Rhoades, worked briefly at William Witter and then went off on your own. At the time the economy was awful, negotiated rates had ended, you had young children. What were you thinking?

Mario Gabelli (01:27):

What was I thinking? The answer is I thought it was a great time to be buying stocks, Jon. Prior to that for 10 years as a sell-side analyst, I covered a variety of industries. I graduated from local business school here at Columbia and I went to work on a Monday. Mike Steinhardt quit on a Friday. I picked up his industries, which were autos, farm equipment and conglomerates. Then fast forward a year or two later, I was assigned business services and I picked up the entertainment industry.

Mario Gabelli (01:52):

I was able to go through the environment of 1969, ’70, which was somewhat nasty, but quick and came out with some fairly easy stocks. Then I knew that I could select stocks in the ’73, ’74 economic downturn. The question was would I have enough money to be in business? I tried to raise a million dollars. I was only lucky enough to raise 200,000. I set off. I said, “Look, at some point money follows returns. If I could make returns for clients risk-adjusted, we basically hopefully will be okay.”

Mario Gabelli (02:26):

We started as an institutional sell-side firm. I got companies like General Motors and three or four other companies to actually buy my research for cash, which paid for some of the expenses. We had some institutional clients and then within a month or so, I picked up my first money managed account.

Jonathan Boyar (02:45):

I want to talk a little bit about your process. If a client walks in the door today at GAMCO, puts no restrictions, says invest in whatever you think is your best stocks. What would be the ideal number of holdings you would buy for him or her?

Mario Gabelli (02:58):

We would start asking simple questions. Have they been in the market before? Did you go through a period like 1987? Did you go through a period like 2000? Did you go through a period like 2008 or ’09? What happened to you if you were in the market in February of 2009? How long is your time-frame? What percentage of your assets? Depending on those answers, we could generally construct a portfolio that have 10 stocks that would represent a quarter of the portfolio and probably 70 or 80 representing the balance.

Mario Gabelli (03:31):

That doesn’t matter Jon, if they’d give me $1 million or $100 million. We would try to customize. Secondly, if it’s an IRA account, we would want to know that, or a 401k or a defined benefit or a tax free, because we tend to hold things for six, seven or eight years. But occasionally, we look at determining whether it’s not only what you make, it’s what you keep. In an environment where if a client comes in from California or New York City where they’re taking 13% of his earnings, if it’s short-term gains that are nondeductible because the SALT taxes, we want to be extra sensitive to all of that.

Jonathan Boyar (04:10):

That leads a perfect segue to my next question. For us in the 2009 period, we bought companies like MSG, Home Depot for clients. They were great stocks, still are great stocks. But because of capital appreciation, they’re now an outsize part of the portfolio, sometimes 7%, 8%. How do you handle situations like that?

Mario Gabelli (04:31):

Yeah, we have a nosebleed. No matter how good we are, there’s always some dynamic that you don’t know about. For somebody will come down and do something that says, “Okay, whoa.” The stock at 8% of the portfolio we say we want to trim it back. Our basic approach with generally, not for everyone, we would look at something that exceeds 5% or 6% and sell a couple of hundred shares. If you own 2,000 shares of Home Depot and it’s now $200 and you bought it at $15, we apologize, but we’re going to make you pay tax because we don’t want to own that much in the portfolio.

Jonathan Boyar (05:08):

It’s patriotic too.

Mario Gabelli (05:09):

It’s tough. Unfortunately, the real estate lobby has been very good at doing exchanges, Section 1031. But what is more hideous to the system and to the investor and to the owner of American business is the notion that company A buys company B and it’s a taxable transaction and you have no choice and you have to incur a very sizable gain.

Mario Gabelli (05:31):

We had that with Precision Castparts with Warren Buffett. We’re not unhappy with the price. We’re unhappy with the fact that we’re going to pay a toll tax of reinvestment. At some point, there’s financial illiterates that want it mark to market and tax you on mark to market gains. On the other side of the spectrum, you have to incur a tax for taxable accounts. For tax free accounts, Jonathan, the answer is fairly simple. We just sell it.

Jonathan Boyar (05:56):

Sometimes you have stocks that are extremely undervalued, may go down 20%, 30% in a day due to a reason that’s temporary, just a bump in the road. How do you handle that? Do you buy immediately? Do you wait for things to settle down to afford catching a falling knife? How does that work?

Mario Gabelli (06:14):

Well, that’s an interesting question as well. In theory and generally, for most of the stocks we follow, we have, today we have 40 analysts. We didn’t have 40 analysts 45 years ago. We had one, or 50 years ago when we started. They basically, the analysts prepare a spreadsheet. They gathered the data. They rated the data the way we want, in the value side of the house, not necessarily in other parts of our firm. We try to figure out, and this is for about 80% or 90% of what we do, what is the value of the business over time? When Mr. Market, that is the volatility in the market sends it up sharply or sharply down relative to what we think, we go through the positions. For new clients, we would probably start adding some because we’ll never catch Y.

Mario Gabelli (06:59):

Right now a good example, Jon, is the MAX 737. There are vendors to Boeing four months ago they said, “Ramp it up. We’re going up to X-number of planes per day.” Today they ramped it back down to 42 and they’re building up their pipeline. The vendors to Boeing would have an air pocket and that would cause some of them to have a second quarter decline. Can we look through that? Do we anticipate that? Are the street going to say, you know the short term momo and algo investor’s going to handle that when they generally announce an uninspiring quarter. The stocks down at 10%, 15%. Yes, we take a lot of dots into consideration and we look at that.

Mario Gabelli (07:35):

However there are time periods, like the end of the fourth quarter, where you had significant tax selling, you had significant momentum investors that just pounded on stocks that were going down. There’s no uptick rule. The third thing is that they didn’t want to show that they owned it. That gave us a significant buying opportunity, one of which was a stock that had dropped from 18 to four or two, be bold and it’s back to 12 and 13. What we would do is try to anticipate that. In taxable accounts we’d sell, we’d buy it back and we buy it in early November, sell it in early December or vice versa. Sell it in November and then buy it back in December to take advantage of what we knew was an “invariable” classic tax selling and window dressing. This is a daily-focused client-specific passion. Then you’ve got to know the stocks and then you got to know the client.

Jonathan Boyar (08:30):

If someone does come to you and you feel that it’s a good client for you, how long does it take for them to become fully invested?

Mario Gabelli (08:38):

Even if you start with $1 or $100, we probably will take anywhere from 60 to 90 days even though our mantra is to be fully invested in equities. It’s like going to the hospital for special surgery in New York for a knee operation. You go there because you know there’s a lot of issues that can come up independent of the function and you pick a specialist organization. We’re specialists and we just do stocks. We don’t do wealth management for clients. It’s unlikely that they’d be fully invested within 60 or 90 days. At least it would take 60 to 90 days to do it.

Jonathan Boyar (09:11):

In the late 90s you decided to take GAMCO public. Do you regret doing this?

Mario Gabelli (09:20):

Well, let’s go back. I started the firm in 1977 as I indicated to you, I tried to raise $1 million. I was successful in raising $200,000. One chap who went to Columbia with me gave me $25,000. He was also still an investor today. Another chap who was the CEO of a public company gave me X-dollars, but we had a lot of teammates. As people joined us, we gave them stock. We always bought or sold at stock, which was the way the Wall Streets were. Like a partner at Goldman Sachs, you buy a book, sell the book, but you get paid out at different time periods.

Mario Gabelli (09:51):

Fast forward in 1999, or in 1998, several of my colleagues said, “Listen, it’s hard to believe, but they said we want to retire,” which is something strange in my world. But basically they said, “Well, you have a moral obligation.” I agreed so we took it public. But what happened subsequent to that, and we went public at $17.50 through Merrill Lynch and Smith Barney, both of which are now part of other organizations. Our stock dropped to $15.50 and within three weeks we said we’d buy some, which was not consistent with the companies going public.

Mario Gabelli (10:23):

But fast forward, we then had Enron, WorldCom and obviously that resulted in Sarbanes-Oxley section 302, I believe. That has put a significant cost, not only in terms of money, which is maintained at a high cost, but in terms of time. When our board meetings meet, we’re checking boxes as opposed to saying let’s do the following acquisition or let’s do the following new product. We’re doing that, but we don’t divert as much time. It has really has proven to be a challenge in going public for that reason.

Mario Gabelli (10:58):

Clearly, there were benefits. Our teammates got a fair market value at the time, not necessarily full market value. That was the morally right thing to do because they were going to retire. Would I do it today? Probably not, unless the rules changed. With regards to the cost structure of being public.

Jonathan Boyar (11:20):

I hope you’ve been enjoying the interview with Mario Gabelli. To be sure you never miss another episode of The World According to Boyer, please follow us on Twitter @boyarvalue. Now, back to the show.

Jonathan Boyar (11:39):

You’ve done some, I guess, financial engineering. You spun out a few of your businesses, Teton as well as your brokerage business. What were the rationale behind that?

Mario Gabelli (11:49):

Well, Teton was a unique set of circumstances. Back in 1976 when you indicated I was at William D Whitter, Sue Byrne was a portfolio strategist. She took on the responsibility of managing several other companies. She started a group of funds called Westwood. In the early 1990s, she moved to Dallas and sold her company to a firm down in Dallas. They did not want the mutual funds. I said, “Okay, why don’t we take on the responsibility of administrating your funds? You guys manage them, you become subadvisors you will own, 35% of the funds.”

Mario Gabelli (12:20):

Fast forward, she then went public. We owned 18% of her company called Westwood Holdings. She’s done a fabulous job, but they didn’t want to be in the mutual fund business. We created an entity called Teton because we’re in Jackson Hole, Wyoming when we came up with the name. We spun it off to the shareholders. They decided to sell their holdings in Teton. It gave them a liquidity that they made a lot of money on it. It worked well. We sent it to the shareholders and the stock has done reasonably well since then.

Mario Gabelli (12:51):

With regards to the spinoff of Associated Capital, we were in the private equity business in the early 80s. It was Gabelli Rosenfeld, Jimmy Rosenthal, Rosenthal & Rosenthall are well-known factors in New York. We also brought in Needham & Company as a partner at one time. But the period was characterized by companies that would say, “For 10 cents on the dollar in equity, we can borrow the balance of the money through Drexel Burnham and we’ll take you over.” We made a decision to not be into private equity, but in the public markets. When we spun off Associated three and half years ago, we’re going full-fledged back into the private equity market doing it in the fundless equities.

Mario Gabelli (13:33):

Those were all tied together. But beyond that, Jon, beyond the CEO of a public company in the telephone business called Lynch Corp, and I think we’d done 36 acquisitions and about 10 or so spin-offs. Understanding financial engineering is all part of what we do. It’s part of our culture with regards to arbitrage. It’s part of our culture with regards to the owning companies. It’s a way to make money for clients. It’s a way to make money for shareholders. That’s why we do it.

Jonathan Boyar (14:01):

Well speaking of financial engineering, the master of that, besides you of course, is Dr. Malone. You’ve made a lot of money investing alongside of them. Do you see anyone who might be the next Malone?

Mario Gabelli (14:14):

Well, the current Malone is like Tiger Woods. The next Tiger Woods is Tiger Woods. I mean to bring back golf, for example on Sunday, everybody was saying, “Whoa, why is this sport declining? We need another Tiger Woods.” Well, Tiger Woods did it. Within the framework of what Malone is doing every day is a new opportunity. For example, yesterday with Barry Diller, John Malone and Barry Diller cut a deal with Liberty Expedia merging into Expedia and a lot of financial engineering. We don’t like some of the things that occurred. We don’t like the fact that Barry Diller was allowed to get 100% of his stock and equity in voting stock and everybody else didn’t.

Mario Gabelli (14:51):

But on the 90% that takes place, Barry makes a lot of money for shareholders. John Malone has. We look at the Malone empire and it’s significant. Chris Marangi and our team have a mutual fund that just started as a carry onto what we did to invest in the media mogul that we call them. Independent of that, don’t ignore that Warren Buffett still is very good at financial engineering. On the other side of the coin, this guy, Ed Breen, who is running DuPont, who’s in our hall of fame, has done a fantastic job in everything he’s touched whether taking on the Kozlowski empire or doing … and by the way, he put together a lot of very good businesses basically looking at that and then spinning some off, merging some, and now doing it with DuPont and Dow. He would be high on the list. He’s not the only one.

Jonathan Boyar (15:40):

In terms of Malone, one of our holdings, and I believe you own it too, is Discovery Communications. What do you think the endgame is on it? I mean Malone said he’s going to sell it over his dead body. I don’t think it’s going to go that far, but how does this story end?

Mario Gabelli (15:56):

Well, I’m not sure it ends. I think Zaslav has done a very good job of putting together as best as he can, content on a global basis. What works? Sports and news, live entertainment and so the package he’s put together in Europe is very intriguing to us. Clearly you want to go direct to the consumer in the new world. On what product can you entice? What product can you package? The fact that they bought the Scripps Network, putting together those companies both domestically and outside the United States. That’s a start. Is the stock undervalued relative to the numbers? Yeah. It’s show and tell. I mean show and then tell what you’ve done. We’re probably a year away from where even more of the good news will come out, but it’s got to still be proven that he can continue the momentum that he’s created.

Mario Gabelli (16:44):

Now, do I buy content for him? There’s a lot of pluses. You saw the benefit of Disney buying Fox. You saw the benefits of Fox shareholders about having Disney buy it. I mean, this has been a win-win for the Murdoch enterprises, the new Fox is being traded today. What is Zaslav going to do to get more content? How’s he going to do it globally? How does he accelerate going to the consumers? We own the stock. We like what he’s doing. We owned a lot of Scripps Network. Ken Lowe did a terrific job for the family at Scripps. Zaslav will do it for Malone.

Jonathan Boyar (17:16):

Do you see him ever potentially selling to Disney?

Mario Gabelli (17:20):

Look, Iger’s gone in two years. I don’t know who will succeed Iger. The Murdoch family becomes the largest active shareholder. The rest are mindless investors like Blackstone and like Vanguard and like State Street and like Invesco and like DFA. Those don’t think about what they’re doing, but with the Murdoch family owning 100 million shares of the 1.7 billion, they have a very active role. Will Discovery sell to Disney, I just don’t see why Iger would want to distract what he’s focused on at the moment in terms of buying Discovery.

Jonathan Boyar (17:50):

Clearly, he’d have to wait till he integrated Fox. He said he’s going to retire, but he said that a few times already.

Mario Gabelli (17:56):

Yeah, but you know what? He ain’t Rupert. He ain’t Buffett. These guys control the vote. He doesn’t control the vote. From my point of view, I followed Iger since he was a rookie, a broadcaster with Murphey and Burke at Cap Cities. They worked their way from Cap Cities to ABC. Then they sold ABC to Disney and then Eisner bought it. Then Iger got took over and has done a fantastic job.

Mario Gabelli (18:23):

We’ve been watching Disney 50 years now. I actually wrote a report on Cinderella every seven years how it would recycle itself, but I think Disney will do quite well in this environment the next 10 years. But I don’t think they’ll do it with Discovery over the next five. You’ll need another mate, John, for Discovery. They will put something else in the pot, but I don’t know what it is.

Jonathan Boyar (18:45):

A family-controlled company that we own that you, it’s one of your largest holding is-

Mario Gabelli (18:49):

Oh, don’t do that to me.

Jonathan Boyar (18:50):

… is Madison Square Garden.

Mario Gabelli (18:52):

I know where you’re going as soon as you said that.

Jonathan Boyar (18:54):

You know they’re spinning out the team from the entertainment, which I think is a good idea. What does he do with the Knicks and the Rangers?

Mario Gabelli (19:01):

I’m assuming that financial engineering, as you go back to Cablevision, Chuck Dolan and Jimmy were doing it. They tried to go private. For whatever reason, it didn’t work and I think I know the reasons. The second thing that happened is they spun off, I can’t remember the date, AMC networks. That stock has done very well under Josh Sapan. This third thing they did was MSG Networks. AMC is The Walking Dead and so on. Breaking bad, very creative, very important content in the world in which content and the assembly of writers, the assembly of talent and scripts and green-lighting them in a cost-effective way are important. They’ve done a marvelous job. MSG Networks is clearly waiting for whatever happens to the networks that Disney has bought in part through Fox, the regional sports networks, the RSNs they call them. Who’s going to buy them at what price is going to pay and MSGN is controlled by the Dolan family and that question is up for grabs.

Mario Gabelli (20:01):

Then we obviously have Madison Square Garden. We have a bunch of very interesting assets. It sells around $300 a share with around 22 million shares, with 24 million shares and they are spinning off the sports networks. However, they filed a form on a quiet basis, I believe maybe back in October, November. I just have not seen what they’re doing next. What did they do next? The good news is the Knicks are number one. This sports season, they took first place in being last place. They can obviously have a seat at the table on trying to get some talent. We’ll see.

Mario Gabelli (20:35):

But independent of their record, Jon, Forbes Magazine just bumped up again what they thought the valuation was. Live entertainment, of which sports is number one, an ability to own a basketball team and an ability to own a hockey team is kind of intriguing to anyone that wants to own a company. We’ll see what they do and how much debt they put on, if any and when they spin it off.

Jonathan Boyar (20:57):

Legalized sports gambling has to help a lot.

Mario Gabelli (20:59):

Well, if you watch Tiger Woods and you were betting on the last two holes in live real time and unfortunately, the guy on the 12th hole who hit the ball in the water and was an elite until then, there is an element in which the leagues will share in the revenues. There is an element that says this is going to occur. Clearly they go out of their way to talk about this guy that bet $65,000 or whatever the number was, the X-number of odds on Tiger Woods. FanDuel and all of those will come back. We’ll see. I understand the technology of gambling. We have companies that are betting on and have been involved with companies like GVC in London. We own MGM, but there’s an element that can help. We’ll see who gets what though. It’s still an allocation of revenues to the leagues and the teams.

Jonathan Boyar (21:51):

I just have one last question. You’ve accomplished pretty much everything there is to accomplish in the money management business. You don’t need to be doing this. What makes you come to work each day?

Mario Gabelli (22:01):

Come on, this is annual report time. We get 40 annual reports come in. Going through the CEO letters, I can’t read this as many as I used to. By the way, I can’t even carry them anymore. There’s 40 of them. You go through the ones you want and you get an idea. Listen, this is fantastic. The business of looking at how managements look at themselves, how companies pride themselves. Then you’ve opened an annual report of a company I’ve been following and all of a sudden there’s a full-page picture of the CEO. I’m saying to myself, “What?” How does change take place? How do companies evolve? How does management send you signals about what they’re going to do in the next phase of the business career? How do you anticipate in that only the fundamentals of a company, how do they build up the modes? How do they use cash flow? What’s going on in corporate governance?

Mario Gabelli (22:52):

Then every so often you get new things like ESG. This is exciting. I’m lucky to be in this business. I think I can do it for a long time. By the way, remember one thing. Tubby Burnham, John Loeb and I can go on. Carret, and the other legends of the investment business, I went to a meeting one time in New York at the Harmony Club. I was 45 years old. These guys were 75. They lived another 30 years investing. Just think about that. Owning a piece of America, owning a piece of the capitalistic system with all the flaws that we see, it’s a delight. Jonathan, I’m just starting. As somebody would sing, the best is yet to come.

Jonathan Boyar (23:35):

You just wrote along with Kate Welling a great book, Merger Masters.

Mario Gabelli (23:39):

Well, she was my inspiration. I convinced her to do it. She was my editor in Barrons. She can take complicated ideas and put them into simple language for people anywhere in the world to understand. She’s great.

Jonathan Boyar (23:51):

Well Mario, thank you for your time. I look forward to seeing you in Omaha. Hopefully, we can have one of these launches like you did in the 70s.

Mario Gabelli (23:58):

We’d be delighted to do it any time. See you in Omaha. Take care.

Jonathan Boyar (24:03):

Thank you.

Jonathan Boyar (24:07):

I hope you enjoyed the show. To receive a Boyer research report on Discovery Communications and Madison Square Garden, please email Until next time.

Disclaimer: This interview does not constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation to buy or an offer to sell any securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Past performance is no guarantee of future results and there is no assurance that any targets or forward-looking statements will be attained. This interview represents the views of Boyar Asset Management as of April 24th 2019 and may change without notice. Boyar Asset Management may own shares in any of the companies discussed during the interview.


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About The Boyar Family Of Companies

Boyar Asset Management
We have been managing money since 1983 utilizing our proprietary in-house value-oriented equity strategies. We manage money for high net worth individuals and institutions via separately managed accounts. To find out how we can help you with your money management needs please click here

Boyar Research
Since 1975 we have been producing independent research on intrinsically undervalued companies across the market capitalization spectrum and in a wide variety of industries using a business person’s approach to stock market investing. To find out how we can help you with your research needs please click here

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Ken Langone Co-Founder of Home Depot, on how he founded The Home Depot and the importance of risk taking. He also discusses the importance of not being complacent.

The Interview discusses:

• The most important determinants of a successful business
• His fantastic book I Love Capitalism

• The importance of risk taking
• How he was able to convince Ross Perot to let him take his company public
• How Ken was able to co-found The Home Depot
• How he incentives employees and business partners
• Why he turned down an investment with Bernie Madoff
• The importance of not being complacent.

About Ken Langone

Ken Langone is a co-founder of Home Depot and the founder and chairman of Invemed Associates LLC. He received a B.A. from Bucknell University and an M.B.A. from New York University’s Stern School of Business. He serves on the Board of Overseers of the Stern School and on the Board of Trustees of New York University, as well as serving as chairman of the Board of Trustees of New York University Medical Center.

Never miss another podcast click here to subscribe today!

Available wherever you download podcasts

About The Boyar Family of Companies

Boyar Asset Management
We have been managing money since 1983 utilizing our proprietary in-house value-oriented equity strategies. We manage money for high net worth individuals and institutions via separately managed accounts. To find out how we can help you with your money management needs please click here

Boyar Research
Since 1975 we have been producing independent research on intrinsically undervalued companies across the market capitalization spectrum and in a wide variety of industries using a business person’s approach to stock market investing. To find out how we can help you with your research needs please click here

Disclaimer: This interview does not constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation to buy or an offer to sell any securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Past performance is no guarantee of future results and there is no assurance that any targets or forward-looking statements will be attained. This interview represents the views of Boyar Asset Management as of May 15th ,2018 and may change without notice. Boyar Asset Management may own shares in any of the companies discussed during the interview.

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