Transcript of the Interview With Tom Gayner:

[00:00:00] [music

[00:00:05] Jonathan Boyea: 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 Boyer.

Today’s special guest is Tom Gayner, co-CEO and soon-to-be sole CEO of Markel, a Fortune 500 financial holding company with a market capitalization of about $18 billion with offices in over 16 countries. Tom also serves on the board of directors of Markel, as well as Cable ONE. He’s also chairman of the board of the Davis Series of Mutual Funds. Tom, welcome to the show.

[00:00:43] Tom Gayner: Thanks so much for having me. Good to be here.

[00:00:45] Jonathan: I’m really excited to have you on The World According to Boyar. I’ve been following Markel for years and I’ve always admired your business and what you’re trying to build. Boyar Research formally started covering Markel late this summer when shares were trading around $1,200 and our team published an extensive report where we made a case of why we believe it is worth over $2,200 per share.

Markel is really well known in the value investing community and some people have dubbed Markel to be a baby Berkshire. For those at home, less familiar with Markel, do you mind giving us a brief overview of your firm?

[00:01:18] Tom: Certainly. Markel’s first off, a fun place to be. We appreciate you guys checking in on us and following us and I enjoyed the work that you did and the report that you wrote.

We got our start back in 1930 in Norfolk, Virginia when a fellow named Sam Markel, who started the business, started out by providing insurance for the jitney industry, as was called, you’ll might think of it as the Uber of its day. In the early days of the automobile, there were veterans and people who had a car that were offering a nikel a ride sort of thing. They were known as jitneys.

It was a new industry. There was not actuarial data. That was not insurance as you might suspect. Accidents happened and people were looking around for who’s going to be responsible for that. Sam Markel was a member of the Norfolk City Council. He was also in the insurance industry. He very entrepreneurially said he’ll start a company to provide insurance for that.

That’s really where Markel started and it’s our legacy of being a specialty insurance company. We were fortunate in that over the course of the next 30 or 40 years, we had the growth of the automobile, the growth of the interstate highway system, and the long-haul trucking business. All of those were wonderful growth waves that Markel rode for quite some time.

It became a bit more of a commodity and the data became more actuarial. The profitability started to diminish and Markel started to diversify into other things that also coincided somewhat with the generational transfer between Sam Markel and his four sons, they became an agent of Lloyds of London again.

That focus on specialty insurance and things that other people might not do or not a commodity needed some underwriting judgment and artistry. They did that for some period of time. The third generation of Markels came into the business. This would’ve been in the 1970s or so, and they started building out an insurance underwriting operation, moving away from the agency model, really more towards underwriting.

Steve Markel, who was one of the three members of the third generation was the gentleman who led the IPO, helped separate what it meant to be a member of the family versus a member of the management team, brought in outside capital with the IPO, ultimately hired me.

The model was basically what we observed taking place at Berkshire where we had a specialty insurance operation that was willing to take the pennies of underwriting profit that they were making and invest them longer term. That’s where we pleasantly and favorably get that name of Baby Berkshire. Yes, we do indeed follow that model. I joined to be part of that effort of managing the investments and similarly to Buffet where that capital started with the insurance business. It morphed into investments and then into buying, controlling interests in various businesses in all kinds of different industries. We have three engines, we call them these days.

There’s the insurance engine, which is the legacy of the business. There’s the investment engine, which grew out of the insurance company. Every insurance company has an embedded investment operation, and then Markel Ventures, which is our collection of about 19 or 20 different businesses that operate in a variety of industrial and service fields.

[00:04:35] Jonathan: You’ve been in this business for quite a bit and one of your early mentors told you the key to the success in the investment industry is to survive the first 30 years.

In your first 30 years, you saw a lot. You had the savings and loans crisis, long-term capital, the dotcom boom and bust, and the global financial crisis. I’d love to hear how this helped prepare you to navigate through COVID in the last year, which to put it mildly, has been an extremely challenging environment to one, run a company and two, to be an investor.

[00:05:06] Tom: Thanks for reminding me about Mr. Reynolds. The gentleman you referred to as a mentor was a guy named Ned Reynolds and he worked at Davenport and Company in Virginia, which is where I started in the investment business. He was a spectacular mentor to me in so many ways.

That particular comment that he made to me was unsolicited. He just happened to be standing next to me one day and randomly said that. There were so many things that I can remember him saying that really weren’t part of a conversation, just statements, but that is one of the ones that stuck with me a tremendous amount. Now, the reference to 30 years, I think what he meant is generation. One of his other sayings was, “What you want in life is a young doctor and an old broker.” What he meant by that is that the day you graduate from medical school, in many cases, that’s going to be your peak level of technical knowledge of what’s happening in the world of medicine.

Then you’re out practicing and you learn different things, but in terms of staying on top of exactly what’s new, that might have been your peak moment. If you’re a broker, if you’re in the investment business, an investment advisor, counselor, it should be that each day that goes by, you should learn something and you should be a little smarter, a little better, a little wiser that the next time you see it. His point was that 30-year generational time frame. Normally, you’re seeing things for the first time through the first 30 years, and then you’re seeing the same thing the second time around.

You look in today’s market, all the things that happened, I mean, that are still unfurling with the FTX situation. Every financial story like that seems to unfold in roughly similar lines. There’s something that comes along, it’s new, it’s now well understood because it is new. It is described in very sophisticated terms or seductive terms such that money goes in, and at some point somewhere along the line, somebody wants to take a little bit more money out than what’s coming in and things seem to go sideways.

That has happened over and over and over and over again. Once you’ve seen it once or twice or 300 times, you should be a little bit better about not falling for the next time around or handling it better. That’s really the essence of what he was talking about through that story of lasting the first 30 years. I think there’s an epic amount of wisdom in that.

There’ve been some nuances to that. For instance, in the ’08-’09 financial crisis, by that time I’d been in the investment business about 25-ish years. I had told that story several times and good friend of mine reminded me of that. He was roughly the same age as me and he says, “Tom, I was hoping by the time we got to 25 years, we could round up to 30, but I guess we’re going to have to live through it.”

We did and we got through it, and now I’ve been at Markel for 32 years. It was basically year 30 at which time the COVID pandemic hit, and that was new to me. I had read about pandemics, but I had not had any firsthand experience with it. It did feel new. I’m hoping at this point we’ve crossed through the list of things that, at least you have had some familiarity with by the time they had come around.

This is a business where there just, is literally no substitute for experience. You can read about things, you can study things, you can be diligent, you can do your homework, but until you feel the visceral gut punches of what it means to live in a volatile market or not know what the next day will bring, you just don’t have the skills to be, an expert is not exactly the right word, but someone who can calmly deal with the circumstances you face.

The good news is, whether the 30 is a round number, whether we’re rounding or using truncation, I’m at least over 30. I think I’ve seen a good number of the things that one is likely to see and it just, it helps you have perspective about things

[00:09:03] Jonathan: In terms of perspective, what was more difficult investing through 2008-2009, the dotcom melt-up, and then crash or the COVID environment, which hopefully, is on the flip side of, but who knows, which has been harder for you in a professional sense?

[00:09:24] Tom: Frankly, the COVID’s been harder in a professional sense because in the ’08-’09 time, and again, I’ve been through ’98-’99, the dotcom implosion. In ’08-’09, you were looking at a balance sheet problem. Just leverage had been become too prevalent and the system of just too much debt.

I started out life professionally as an accountant. I can look at balance sheets so that I feel pretty comfortable in analyzing what debt is all about and not just the explicit debt that you’re going to see on a balance sheet, but the ways in which debt is hidden in structures. A lot of the derivatives type issues that you would have, a lot of going back to our early accounting days where people used leases and accounting treatments were such that you didn’t have to put the totality of the lease on your balance sheet.

I’ve been through rising interest rates when insurance companies more the life side than the PNC side, would have bonds on their balance sheet, which would help add costs rather than mark to market. Because if you’re in the market that impairs the capital too much. With the last couple of months and interest rates going up, that movie is playing all over again. All of those things, I had seen financial stuff before.

I lived my whole professional life in the financial world. I have not been a medical person so when you saw the pandemic come across and the human death toll that was happening there, I had zero experience, zero frame of reference, zero ways to understand that. That’s a more frightful thing to work your way through and less sense of internal confidence about, “Oh, I’ve seen this before, this is what’s going to happen next.” I did not have that at all. Thank God I made it through, we’re here.

I think and I hope very much on the other side, not just in the pandemic itself, but in understanding what it is that we as citizens, that we as governments should do should we be faced with these kind of circumstances again. I rather suspect people a lot smarter than I am, that say, this is the nature of the world and the idea of pandemics is not something that should be foreign to you. Because with the interrelated nature of travel, commerce, people going all around the globe for all kinds of reasons, we’re connected in ways that we didn’t used to be. That’s a good thing but it does connect to some risk of future pandemics as well.

[00:11:45] Jonathan: As someone who runs an insurance company that incalculable risk is got to be a really scary thing. Obviously, you have actuaries, et cetera, who are taking this into account, but you have some interesting lines of business, event cancellation, other things that almost are impossible to quantify. How do you go about doing that?

[00:12:04] Tom: Event cancellation, funny you should bring that up or not so funny, but I guess I can laugh a little bit at this point, that was probably the largest single source of loss for us in the pandemic. I don’t blame our underwriters or actuaries or anybody who was involved in writing that business from the word go because they were doing exactly what you would think they should do in the form of being disciplined and having a diversified risk.

If you’re insuring a wedding in New Jersey and a folk festival in upstate New York and a music festival in California and a wine festival in Oregon and a tennis tournament in England and a parade in Japan, this worldwide global spread of business. Boy, you think you’re doing a pretty good job of diversifying because what is something that’s going to happen that’s going to affect all of those things? A tornado or a hurricane, a weather event, all those sorts of things, which would normally cause a problem with events. Those geographically tend to be isolated.

The pandemic was something, it touched everything, every concert got canceled, every sporting event got canceled, every parade got canceled, every wedding got canceled. It was just something that we had never seen before. That said, that is not a business right now that we think we can price reasonably well because we’ve seen data that says all the techniques we used to manage risk and price that went through a period where that just didn’t work. We have not yet figured out how to properly price the risk that’s involved with something like that.

[00:13:36] Jonathan: Not that you needed it, but you received the investing world’s equivalent of the Good Housekeeping Seal of Approval when Berkshire bought shares in Markel. How did you find out they took a position?

[00:13:48] Tom: Same way everybody else found out, seeing the 13F filed. It was earlier this year, it was sometime during the first quarter of this year, that they took their position and we found out about it by their publicly disclosure of the 13F.

[00:14:01] Jonathan: Did you make any contact to the folks in Omaha?

[00:14:03] Tom: I’ve been very fortunate in that I started going to Omaha back in 1991. That was the first year I went to the Berkshire annual report. At that particular time, there were probably only about 700 people that attended that meeting. Buffett was not the celebrity then that he is now. You literally could go up to him at the annual meeting and introduce yourself and chat for a little bit. Actually, I did that back in 1991 and that’s good fortune to at least having some social interchange with him since that time.

Now, I was super lucky in that I was asked to serve on the board of the Washington Post company. I think that was back in 2007 or so. At that time Buffett was on the board so we were fellow directors of the Washington Post company for a number of years until he left that board. I got to have something of a professional relationship with him through that time and five board meetings a year and five board dinners and that sort of thing. I’ve studied him, I’ve read everything he’s written. I’ve had the good fortune of being able to chat with him directly. He’s been a spectacular role model and mentor so I was delighted and grateful when they showed up as owners.

[00:15:13] Jonathan: You were on the board of the Washington Post with him and you mentioned you got to read all of his letters, which everyone else who’s in the investing world has the opportunity to do. You got a first-hand view of him in action. There are things that people who haven’t read of all his letters in his interviews would be surprised about him or something that you can tell us about him that you found particularly interesting in terms of how he goes about business and how he prepares et cetera?

[00:15:41] Tom: One is, what you see is what you get. Buffett is almost super human in his dedication to being a great investor, a great leader, a great manager, a great historian, a great student of the game. He has been so good that sometimes people think, oh, there must be a magic trick involved or some freak of nature or some secret formula, whatnot. No, I think that’s what you get when you combine a pretty high IQ with a phenomenal work ethic and phenomenal concentration and surrounding himself with phenomenal people.

Whether that’s Charlie Munger, Ajit Jain, Greg Abel, Ron Olson, all those kinds of people that would be in his–, just on and on and on. If you think about, and he talks about the concept of 20 punches, 20 great ideas. We’ll take his top 20 people that he would’ve spent the most time with over the last 70 years and line them up and think about the collective IQ and talent and wisdom of whatever people he spends time with. Just an undiluted and unfiltered way to be extraordinarily good at this, and he’s done it for a long, long period of time, which is where the compounding really kicks in.

Morgan Housel, who wrote a wonderful book called The Psychology of Money, happens to pleasantly be on the Markel Board. He is a good friend and colleague and helpful counselor to us. I think the statistic, if I remember it, is something that two-thirds of Buffett’s wealth occurred after he became 60 years old. He spent a lot of time just pounding it out, grinding it out year after year after year after year after year of compounding and then he survived to where these compounding mechanics and math just create extraordinary numbers.

One thing I would urge people to do when you’re studying them, don’t overthink it. Don’t think there’s something there that isn’t. Look at what’s obvious and take things for what they are and try doing it for 30 or 40 or 50 years yourself and see how it works out. I suspect that it will work out relatively well. Maybe not as well as it did for him, but I think that would be fundamentally good way of trying to approach the investment business.

[00:17:56] Jonathan: Getting back to the traditional Markel Insurance Company, having a profitable insurance company, the beauty of it is each quarter you essentially get yourself inflows of cash to manage on a consistent basis. For the portion you decide to allocate towards equities, how do you decide to add to existing positions versus making new investment?

[00:18:17] Tom: Let me back up a second there before I answer that question because you said something very, very important and I want to make sure that your listeners get this particular part. Having a insurance business is profitable. Boy, that just rolls off the tongue. It’s easy to say, but very hard to do, and I want to thank the insurance folks on the Markel team because they are the ones who funded so much of what we’ve been able to do on the investment and venture side and it is hard.

There are other people who have tried to use insurance operations as funding mechanisms for investment vehicles, and generally speaking, that hasn’t really worked that well. I do think there’s some cultural reasons why that’s the case. If you think about investment type people, and here we are in New York n the center of some high-end investment-type talent. Investment people tend to be pretty well compensated, they tend to have somewhat pleasant lifestyles and maybe some ego in the game and that sort of thing.

If you’re an investment person, you want to be part of an investment culture that accepts and handles things in that way. If you’re part of an insurance organization, the insurance organizations are typically run by people who have come up through the realm of underwriting or sales or actuary or administration type stuff. It’s a grinding it out. You got to be detail-oriented and you got to just go after it day after day after day in small incremental ways, and you have to avoid catastrophic losses as opposed to make big gains, which is sort of the mindset on the investment side.

I think it’s fairly rare that you find an organization that culturally, a first-rate investment person and a first-rate insurance person would feel comfortable within the insurance side. There would be maybe a little scoffing or under appreciation of the discipline that first rate insurance people bring to the table. The insurance people might not be willing to pay the invest people as much as they think they should get. You look at birth Berkshire. It is the absolute archetypical example of a place where those two sides of the tent have leaned into one another, and you have absolutely first rate investment talent, ie Buffett, and first-rate insurance talent as exemplified by Ajit Jain,

the people at the Geico, National Indemnity and Buffett himself with his understanding of what goes on in insurance. I would posit that Markel, to some degree, has been that. We have a culture that has embraced both the details and the disciplines of insurance and investing at the same time. I’m lucky enough to be the investment guy and come up through the investment side, even though as a be responsible for insurance side as well. How that has practically played out is I’ve now been at Markel for 32 years and 32 years, if I’m doing my math right 12 months a year. That’s 384 months that I’ve been there.

On 379 of those 384 months, money has been deposited into the investment account from the profitable operations, both of the insurance business and now increasingly, Markel Ventures. Markel Ventures have been around since 2005. We’ve been profitable every single year since we started that as well. You use the phrase dollar cost averaging. You’re exactly right in that every month I have positive flows that I’m dealing with and I can choose proactively to make investments because, and I’m not just playing them on paper. I have cash flow to invest almost all the time.

That’s been a wonderful advantage over the years of compiling the investment record that we have, is we’re not dealing with one of the challenges that oftentimes investment people face in that their clients want to take money away from them after they’ve had a bad run. You probably should be giving them money and the clients want to give them money after they’ve had a great run you probably should tap the brakes a little bit.

[00:22:21] Jonathan: It’s 379 months of positive cash flow out of 384?

[00:22:28] Tom: That’s my swag estimate. The 384 is right. The 379 is– It might be 377, it might be 382. I don’t know. It’s the vast, vast, vast majority.

[00:22:37] Jonathan: Unless those four or five, six months were really bad, that’s an amazing record.

[00:22:42] Tom: I can remember why those four or five months took place, 9/11. That’s a month or two where, my goodness gracious, you’re going to get your bearings and make sure that the world is on its axle and the early days of the COVID pandemic. Those really were the only two periods where in a month or two or three where we were finding our footing and making sure we were somewhat cognizant and somewhat aware of what the world really was.

[00:23:08] Jonathan: You have a big portfolio in terms of names, but it’s relatively concentrated in terms of positions and the same. You have some very low-cost basis in companies like Home Depot, Diageo, some other great names. Is it psychologically hard to buy more of those names over time? How do you invest as money is coming through?

[00:23:28] Tom: Fortunately, that’s psychologically, for some reason, it’s not hard for me. Let’s take each of those examples you cited. Home Depot, basically in the ’08-’09 crisis, housing, obviously, was one of the epicenters of where the problems were. I’m not a handy person. My in-laws one time gave me a toolbox and my wife just laughed and laughed and laughed, and I think I gave it to my son. I’ve never used one of them. I’m just not good at that kind of stuff. Now, as a homeowner, there have been times when I’ve gone into either Home Depot or Lowe’s, and by the way, we own both of them.

I know that there’s something I needed to do to keep my house maintained properly, and those are the places that I got it. I never spent money there voluntarily, shall we say. It was my observation that many times when I was spending money at one of those places from my house, I had no choice in the matter. If I went in my house not to fall down or rot or have lights that work or plumbing fixtures or what have you, it had to happen. When I looked at housing stock that exists and just the maintenance load that exists, I thought those were spectacular businesses.

Whatever happened on the financial side and debt side and whatnot, they were better at distributing home maintenance equipment and supplies and everything for the existing stocks, set new construction aside, than anybody else. We started buying it and fortunately bought pretty good-sized positions in both of them from time to time since then. While that was the dramatic big add, I’ve added to it as recently as this year added to those stakes.

I don’t find it uncomfortable to buy more, and in fact, almost just the opposite because you get to know a company and you live with them and you see them do what they said they would do and live up to their promises and you get to know the management a little bit when you see some wobbliness in the price or some short term price action. That is a very comfortable thing for me to step into and buy more of.

Similarly, Diageo, I think we’ve probably owned that for 25-plus years at this point. I can’t recall a single incident when I bought a lot of it. It’s just something that I added to bit by bit over the years and can’t call a single catalyst as to why this year’s batch of Johnny Walker Black Scotch motivated me anymore or less than prior years. I’ve always been comfortable with their business and the way they run things. We’ve added to it over the years.

[00:25:53] Jonathan: Home Depot, in particular, is just such a well-run business. Shameless plug for The World According to Boyar. One of our first big guests was Ken Langone and then Frank Blake who did a fantastic job turning around that company. It’s amazing how they continue to be so profitable and it’ll be, you have any thoughts on, with people probably not buying new houses anytime soon, should the remodel business be strong going forward? What do you think?

[00:26:23] Tom: I think it will and in point of facts, the case that says that new home sales are under pressure and right now when the church rates rising, they are well every single day that goes by that I live in my house, all I know is it needs more maintenance. I grew up in a farmhouse that was 250 years old my parents bought that before I was born and they owned it, their whole lives and it never didn’t need something.

[00:26:51] Jonathan: I hope you’ve been enjoying the show. Boyer Research will be releasing our annual forgotten 40 soon, which contains our 40 best catalyst-driven equity ideas for the year ahead. To learn more about how to purchase this special issue from Boyer Research, please visit boyer research.com/2023. Now back to the show.

[00:27:14] Tom: In terms of your portfolio, I looked at your 13F, you have about 130 stocks, and you have a lot of responsibilities. Soon you’ll be running the whole company. You’re co-CEO now. In January you’ll be the only CEO. You have two other people helping you manage equities. What kind of information do you need to stay on top of the stocks that you own?

[00:27:36] Tom: Well, if I can find the next Berkshire or the next Home Depot, not that much. One or two ideas a year really power the investment returns and we do tend to hold on to things that we own. Berkshire was the very first stock I bought from Markel when I joined in 1990. Home Depot, we just talked about that would date back to 2008, which is now 14 years.

The portfolio turnover, generally speaking, is a single-digit percentage. We certainly try to be reasonably aware of what the current quarters are and the current developments. We’re not trading these like many other operations. Nothing wrong with trading, not right or wrong, it’s just different. We tend to buy and hold things. That also creates some tax efficiency in that the unrealized gain tends to build over time.

That would really be a strong argument against selling because if we have something that’s appreciated dramatically. When we sell that for a dollar, we don’t have a full dollar to reinvest. We have $0.75 or $0.70 or something like that. The amount that your replacement has to go up to replace the real value that you’re receiving upon selling after you pay the taxes is pretty dramatic, which creates a bias.

Some might call it an endowment effect, and some might call it a flaw, but it has worked out. There’s also some pretty nice math to that thing that has gone well and that managements do a good job of and are good business, oftentimes those are pretty persistent. I think there’s the statistic that if you want to make a guess as to which show on Broadway will play the longest, the best answer to that is the one that has already been playing the longest.

What that means is you have crowd-tested data that says this is a good show. Shows can have runs that last years. You might think, that show’s been there three or four years now. Come on, it might be there 15 years after that. Whereas the new thing that just opened and, maybe some people are buzzy about it, talking about it, that might be gone in 30 or 90 days. There’s a lot to be said for the persistency of some of the leading companies that we have and the amount of day-to-day work that’s associated with owning Berkshire and Home Depot. I got to tell you, it’s not that much.

[00:30:01] Jonathan: We’re big believers too in the magic of tax-deferred compounding your investors complain about investment management fees, but the biggest costs, at least in my view, most investors pay by far is taxes. By deferring those gains as long as possible, you don’t have to pay the tax man. At some point, something might get so overvalued, you might want to trim or sell. What would make you want to sell a profitable investment?

[00:30:27] Tom: When I think there’s been a fundamental change in the business. Our turnover is not zero, nor should it be that zero or 10% range. I do look at every single name that we own. We think about it, the [unintelligible 00:30:41] and Tyler Brown who work on the equity team with me. I mean, this is the sort of thing we would talk about and say, is there anything that has fundamentally changed that we probably ought to go ahead and sell? It’s not an act of topic of conversation, and it does get acted upon with some discipline and some regularity.

The other great thing that happens at Markel if you look at our top shareholders, you mentioned Berkshire. I’m not going to put them in this category right now, but somebody like your Chris Davis, folks at Baillie Gifford, who are very large shareholders, the folks at Principal who are very large shareholders, I tend to talk to them. I tend to see them at the Berkshire meeting. I hope that they’ll come to the Markel, maybe, which is on May 17th in Richmond, Virginia this year because the informal gatherings where you get to talk to other investors, frankly, I joke with those people when they own Markel stock.

I say, here’s the thing, you are smarter than I am, but I’m managing money for you. If you see something that I’m doing through the public 13F files, this is not insider conversation at all. If you see a name there that just seems like, why is that there? Let’s talk about that. Similarly, if there’s an idea that you have that’s a great idea, and it’s public, it’s 13F, you’ve bought as much of it. The very first person you ought to talk to about that is me because, in essence, that’s a way of getting more of that holding into your portfolio when it’s owned through Markel.

Conversations that have been long term in nature and with long duration friends, that’s a very productive way to help manage the portfolio of what’s in the Markel portfolio. I joke, while I only have two people working with me on the Markel payroll. I got 20 unpaid volunteer consultants whose interest is for Markel to succeed and for the investment portfolio to be run well. Would put you in that category to some degree in that, you’ve written about Markel, we’re having this conversation.

You’ve been aware of Markel for a long time. If we were both to write names of people we knew in the investment business down, there’d probably be a fair amount of overlap or one degree of separation. There is epic value in the friendliness that exists in this business from time to time to try to help one another in ways that both of you are better off.

[00:32:59] Jonathan: Thank you for putting me in the same conversation as Chris Davis and Davis Funds. That’s a really interesting way of looking at it. You have a really– It’s simple but not easy investment style where there are four pillars and one of the pillars is staying away from companies with high leverage, which makes sense. John Malone is kind of the master using leveraging. I noticed he’s in your 13Fs through I think Liberty Sirius and Liberty Broadband. Why does he make the cut even though they’re highly levered names?

[00:33:31] Tom: I think John Malone and the companies he’s led and the teams that he’s assembled, while they use leverage to build it out of nothing. If you go back and read the Cable Cowboy book, this sort of origin story in the cable business. After a period of time, you just have to tip your hat and say this guy is smart. He knows what he’s doing. I think his team does as well. There is some diffusion of the risks that happened because he’s connected to so many different entities, and some of those entities would have different leverage profiles and different cash flow profiles.

Some of them would be more appropriately leveraged than others. Even within our own business where we are on the low end of leverage in the way that we run things within Markel Ventures. There are some businesses within those 20 companies where we do use some leverage and it’s appropriate because those businesses tend to have a fair amount of fixed assets to them. Real estate type things or fixed assets, tangible assets, it’s appropriate to use leverage for that, especially in the era that we’ve just been in where interest rates have been extraordinarily low. We’re not dogmatic about zero leverage.

There are other businesses where the assets tend to be a little bit more intangible. The old joke about if you have an advertising agency, your assets could go out the elevator every night or in today’s world, log off their computers remotely, wherever they are. The point is, those sorts of businesses should have less leverage. Look at things in more than one dimension. Leverage versus no leverage is not a conversation you can have in isolation. You have to say, what kind of business is this? What kind of people are running it? How good have they proven to have been? Are they new at this? All of those factors go into what comfort level you should have with leverage.

[00:35:24] Jonathan: In also how you structure it. Malone is the master craftsman and structuring some of these things, Warner Bros. Discovery, which, obviously, has been a disappointment thus far. Most of the leverage isn’t due till 2040 and is at 3% or 4% fixed rate. It’s pretty astounding.

[00:35:39] Tom: In fact, I’ll tell you this story, I don’t know if this is going to make it through the editing process or not. This goes back probably 15, 18 years or so. One day I came to work and I opened the Wall Street Journal and there was a story in there about Walt Disney having just sold an issue of 100-year bonds and maybe the interest rate on them was 5.75% or something like that. I saw that and I went into our CFO’s office and I said, “We got to do some of this.”

I’d further joked, I said, “That 100-year bond they just sold,” but they were refinancing a 100-year bond that is 6% coupon that had a 5-year call and that was almost dead on exactly what the circumstances were. Anyway, we called our bankers, and again, this is an 18 or 20-year-old story and our banker said, “Walt Disney, that is a well-known consumer name. Markel, nobody’s ever heard of that. Nobody’s going to give you 100-year money.” I pouted a little.

The very next day there was a circumstance, I was looking at something and I don’t know if you know Eskimo Pie, the dessert Eskimo Pie. Eskimo Pie at one point was actually owned by Reynolds Metals, which is a Richmond-based aluminum company. The way Reynolds Metals came to own Eskimo Pie was there at some point 30, 40, 50 years, whatever, when Eskimo Pie couldn’t pay their bill for the aluminum wrappers that they put Eskimo pies in. Reynolds ended up owning the company. They ended up spinning it out and it was a publicly traded separate entity that had a market value, maybe $20 million, $25 million.

I said to our CFO, I said, “We should buy Eskimo Pie. Then changed the name of Markel to Eskimo Pie.” Then that way we could call people up and say, “You want some Eskimo Pies?” Who could say no to that? Now, needless to say, that was one of those silly ideas that I have that did not get executed. The point is that you’re just making terms and conditions that matter a great, great deal. In the last board meeting we have, I put some documents together for our board talking about that particular point in specific.

I think it was last year during calendar year 2021 that the Austrian government sold some 100-year bonds. Now, the Austrian government, I’m going to say that’s a pretty good credit. It’s not bulletproof, and the range of credit quality, they’re right up there. That’s a credit-worthy thing. I think the coupon on it, if memory serves, was 0.85% for a 100-year bond. Those bonds today are trading at about 48%.

Now, some people call that bond investing safe. If you go down and are buying a 2-year treasury at 3.7% or something like that, whatever the rate is, okay, I get that. That’s pretty safe. I think you’re going to be paid back. The inflation-adjusted and the nominal dollars that you’re going to get are going to be recognizable.

The world probably not going to change in 100 years. That’s insane to put money out for 100 years at a 0.85% interest rate just strikes me as silly. Point is, if at Markel we were offered the opportunity to sell 100-year bonds at 0.85% and put debt on our balance sheet, we are going to do that. I don’t think that offer is probably going to be forthcoming anytime real soon.

[00:38:57] Jonathan: Crazier things have happened over the last 10 years.

[00:39:00] Tom: And they have and here’s the good news, they do. By going to work every day, by just trying to be rational, to be thoughtful, to read the paper, to study what’s going on, to be aware of markets, you’re going to be presented with opportunities from time to time in irregular fashion to do things which will have benefits for years and years and years to come.

Sometimes that’s like Home Depot and Lowe’s in the middle of the housing crisis where I’m having to spend all this money there as a consumer and I didn’t want to. I thought, “That’s a really good business,” and that’s one of our large [unintelligible 00:39:31] these days.

[00:39:32] Jonathan: You’ve been a member of Cable ONE’s board for quite some time. Cable companies like Comcast and Charter have been horrific performers of late due to fears over Fixed Wireless Access. Is this as big of a thread as the market seems to be telling us? Should we read into the fact that Markel has low exposure to cable companies as a percentage of the portfolio, that you’re not bullish in the long-term aspect of that type of business?

[00:40:01] Tom: No, that’d be an overread, and in fact, I personally have been on the Cable ONE board. I’ve personally bought some stock recently in Cable ONE because the price action seems rather dramatic to me, shall we say, we’re also shareholders of Comcast. We do have some investments in the cable business. Cable’s a funny industry and the stocks of Cable ONE, Comcast, Charter– I’ll just talk about those three because I think it’s more fair to talk about those than some of the other ones. I think the stocks are way more volatile than the business itself.

If you go back into Cable ONE, take that as an example, when that first came out as a spin-out of Washington Post, Graham Holdings, I think the first trades were roughly at about $350 a share. It subsequently went up. Cable ONE had a very differentiated strategy. Tom Might, who was the CEO of the company at the time, was very public in the idea of unbundling and he thought carrying the video was really not a profitable activity for the cable companies to do. He really saw the splitting of the broadband connection versus what you were watching ahead of the curve. Cable ONE was criticized for that and then came to be celebrated for it and the stock went up a bunch.

Now, that was added to and magnified by the pandemic when amidst quarantine, amidst working from home, having a broadband connection to your house, that’s oxygen. You would think of that like oxygen, like your water connection, like your electric connection. You just can’t function in the modern world without it. The growth rates went up and Wall Street has a tendency to really love growth and assign pretty high multiples to it.

I don’t know about you, but when we were talking about writing the names on a piece of paper, if I had to have a piece of paper and write names of people who don’t have broadband connection these days, there’s not that many. These include people who live out in the country and rural places. The growth rate of new subscribers has diminished from what it was a couple of years ago. Not just Cable ONE, but Comcast and Charter as well. Those stocks are down a bunch as Wall Street seems to be rerating the fundamental growth rates of new customer acquisition.

Now, while new customer acquisition may be at a slower rate, maybe more population-constrained, I don’t think you’re going to lose customers. Nobody is giving up their broadband connection. I think the dependable recurring nature of the cash flows in that business, and you can also spend a little less on CapEx when you’re not adding customers so much. They seem like pretty good businesses to me, which is why I bought some personally and why Markel has bought some.

The third layer of that, and again as Buffet said, he learned investing from Ben Graham, he learned about managing the business from Andrew Singleton. Look at Singleton’s behavior at Teledyne in response to what happened in stock market volatility. When the market was up, Teledyne would use their shares as currency and raise capital. With Cable ONE, we did too.

When the stock was pleasantly valued, we did raise some capital and I think in some pretty good structures. It’s a matter of public record. You can look at the queues. We’ve been buying stock back in. I think in the face of stock market volatility, Cable ONE has acted rationally and I enjoy being associated with the company because they’re interested and concerned, and motivated by acting rationally, which is all I ask of people. It’s a fun company to be connected to.

[00:43:40] Jonathan: I just want to talk a little bit about Markel Ventures. You started in 2005, but you started thinking about it in 1990. In 2005 you launched it, where you purchased controlling stakes and businesses. That year Ventures had about $2 million in EBITDA. Last year Ventures, I think, had about $400 million or so. Would you be surprised if one day Ventures value is significantly greater than that of the equity portfolio?

[00:44:08] Tom: No, and really the way that that would come about is just trying to be rational. One of the beautiful things at Markel is we really have a 360-degree view of where we can allocate capital. The first choice and the favorite thing that we would do in allocating capital would be to fund businesses we already own. Where things are going well and the people who are running those businesses have the opportunity to deploy capital, earn good returns on it, and they’re already inside the tents, they’re already proven winners. That’s number one on the list. We fund them first.

The second is where there are opportunities to buy a new platform, to buy something different, and add it to the kit bag and let them grow and prove themselves over time. Third is we can buy publicly traded securities, whether those are equities or debt. Fourth, we can buy in our own stock. It’s in that one, two, three, four order, but all four can be taking place at the same time simultaneously, which is our circumstance where we sit right now. We really don’t think about a target as to how big insurance should be or how big ventures should be.

What we think about is on every single day when we come to work, we think what is the logical thing to do with capital? If that answer would point us in a certain direction disproportionately for a certain period of time, that’s going to become bigger and that’s an outcome, not a goal or a target.

[00:45:31] Jonathan: When someone joins the Markel family, you buy their business or controlling stake in their business, how much autonomy will you give them? How much attention are you paying to what they’re doing on a day-to-day basis? How does that relationship work?

[00:45:47] Tom: We try to give them as much autonomy as is humanly possible. We are a public company, we file public company financial statements. We get monthly financial statements from each of the businesses within Markel Ventures. We have quarterly board meetings as a normal process with the Markel Ventures companies. We review the annual budgets for the Markel Ventures companies.

The managers in those companies would have capital expenditure authority limits and decisions that below a certain size, they make completely on their own basis and try to do the best for their company. If something comes up, a merger opportunity, an acquisition, a capital expenditure that’s larger than what is budgeted or intended, that’s the thing we need to talk about off-cycle and middle of the month or between dates in the quarter. We really try to have a fun and business-like mutually reinforcing relationship with the people who run those businesses but make no mistake.

The people who run those businesses are the CEOs of those businesses and we back them and give them as much autonomy as we possibly can. We try to impose as little corporatocracy as we possibly can because we want the people running these businesses to have a sense of ownership and pride that this is their business. This is what they identify with and build it out over a long period of time. Other companies do that in different ways and I’m not going to say it’s right or wrong, it’s just different. Our approach is one that fosters as much autonomy as possible.

[00:47:19] Jonathan: A lot of these people whose business you bought either their family businesses or their entrepreneurs so it’s got to be a huge adjustment for them. How do you incentivize them in terms of either their pay package or whatnot to continue doing what they were doing?

[00:47:35] Tom: I think the word incentives is oftentimes defined and understood solely in the context of money or finances. While that is important, there’s more to it than that. There are cultural incentives. It is a point of pride for some people that oftentimes these family businesses are usually not first-generation family businesses. They’re second or third, or in one case, a fourth-generation family business that we have purchased.

There’s a bit of identity that comes with that heritage of running a family business that the home that Markel offers to somebody like that, they’re wired the right way. They’ve been wired that way since birth to think generationally and make sure that the next generation gets a better business than what the previous generation did so that’s very helpful.

In terms of the financial stuff and the financial stuff is very important. One of the hallmarks and tenets of how we would design incentive systems is multi-year. Generally speaking, we do the very best we can to have as long a time horizon as possible for the way somebody would earn financial incentives. Personally, for me, my incentive compensation is based on a 5-year rolling average. Every year at the end of the year, we’re not just toting up what happened this year, we’re toting up what happened the last 5 years and the next year, the oldest years are going to roll off and the newest year is going to roll in.

In essence, again, I’ve been there 32 years. You get used to thinking in forever terms when that’s the way you do things. The typical timeframe that would often be in place at most of the is 3 years. I would be happy if it was 5, would be happy for 10, I’d be happy if it was 12, but 3 years is already weird enough compared to what most other people do that tends to create that length and in a time horizon that’s different from what most other people do but it’s very helpful to that.

[00:49:34] Jonathan: Now, it’s early December 2022, the capital markets, I wouldn’t say are frozen, but it would be pretty difficult for a leverage deal [chuckles] to get done. Now with Markel Ventures and you have obviously your own financing, are opportunities being shown to you, is that now a competitive advantage that you are a willing cash buyer?

[00:49:55] Tom: It is. Let me answer specifically your comment about the year-end coming. I can pretty much promise you we’re not doing a deal this year. [chuckles] Here it is. We’re December 6 or 7th or whatever it is today, right now, just to do legal postcards back and forth between now and year-end is highly, highly unlikely [unintelligible 00:50:13] financial market side.

Now, if you went back and you read the annual report for the last couple of years or listened to conference calls or anything, I would have said that given the pricing that existed in the private equity world, it would be unlikely for Markel to buy something this year in 2021. We did buy a couple of businesses. 2020, same story. 2019, same story.

They all took me by surprise, and to some degree, they were inbound phone calls.

Now, the amount of spread between what we think things are worth and what they were trading for in the market just kept getting wider and wider, such that, again, I just kept saying, it’s highly unlikely for us to be able to buy anything, but some unique or special circumstances came about that we were able to.

That did not happen in 2022, and I’m pretty sure it won’t. That said, prices are coming back down, interest rates are going up. The leverage transactions that are out there are being re-underwritten. Our phone is ringing more today with inbound calls than what would have been the case six or nine months ago. Will we act on one of those? Probably. Will that be in 2023? I don’t know. We’re having conversations and we’re talking to people, so we’ll see.

Now, that said, even within this year where we didn’t do any new whole businesses, we did do some expansions of some of the businesses we already own where they were able to buy a competitor that they would have known. Those were not massively big deals to Markel very large.

They were big deals to the people who did them. Markel’s ability to be ready, willing, and able to fund and backstop those deals is a very important incentive for the people running those businesses. Again, that’s partially a financial incentive. It’s partially pride. It’s partially just the fun of being part of something that’s growing. All of those things are non-quantitative aspects of what incentives really mean.

[00:52:12] Jonathan: You’re having your annual meeting, I think it’s May 17 down in Virginia. What has been like the last couple of years going to those meetings?

[00:52:21] Jonathan: Thanks for asking. Yes, May 17, 2023. I hope you and anybody who’s listening will be here. Going back a couple of years, I guess this would have been 2021. You got to make plans. It came to be that in January, February, and we’re thinking about the upcoming annual meeting in May that was still in the midst of quarantine, and my bias if possible, I wanted to have the meeting live because I’m a social person, I like people. Again, that building of community and just hanging out with people is a very valuable thing.

We were sitting around the table at lunch and four or five of us, and just spitballing ideas, where could we possibly have the meeting where we could accommodate the world in which we lived but still try to get people together? I came up with the idea that out at the Richmond Raceway, there’s a concert venue out there and it’s a 6000-seat arena and it has a cover on the top for the roof, but the sides are open air.

Rather than have it inside in a theater or something convention center like we did in previous years, we try to meet people halfway so at least it is an open-air venue. We called out there and really for some amazingly low price, and I mean amazingly low price, we were able to book that venue. We did. Thought that would be fun to give that a try and we also wanted to be fun to give people a reason to be there. We decided, after the meeting itself we would have food trucks, we would have beer trucks and we would have a band.

You asked what it was like. I called the band that somebody around the table had recommended and I spoke with the leader of that band and made inquiry about what music they played and whatnot. I said, “How long will you play?” His response was, “How long do you want me to play, man?” He hadn’t had a gig in two years. They were just glad to be there. We had over 500 people come. The people were glad to be there. For so many of them, it was the first time. Being in a social crowd and the hugs, the joy of being together again, it is really quite vivid and very much on display at that.

Then the next year we did the same thing and we went back to the raceway. This year we’re going to go to the grounds of the University of Richmond and we’ll be in the arena where the basketball games are played. It’s called the Robin Center and we’ll have fun and that will give us the opportunity to host a lot of people. First year we did it a couple of years ago we had 500. Last year we had a little over 1,000 people. At that particular rate, we might have 2,000 people and that would be great. We’d love for people to come. It’s a great opportunity to see the business leaders of Markel

[00:55:00] Tom: to mix and mingle with the crowd, to ask questions that you have, but really to get to know one another.

Again, it’s just going back to how incredible the Berkshire experience for me has been over the years, the number of people that I’ve met in and through Omaha over 30 some years of going, it’s changed my life. It’s made for an entirely different trajectory and formed a lot of relationships. People all over the world come there and it’s real crossroads of the world to connect there. We’re hoping Richmond, Virginia turns into a variation on a theme on that particular idea where people from all over come and connect with one another and have a day and a half of fun in Richmond, Virginia.

[00:55:38] Jonathan: Sounds like a fantastic event that everyone should consider going to. Tom, thank you so much for your time. It was great having you as a guest and learning about yourself, about Markel, about how you pick stocks. It really has been fantastic.

[00:55:52] Tom: Thank you. Appreciate it.

[music]

[00:55:55] 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.

[music]

Transcript of the Interview With John Rogers:

[00:00:00] [music

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’m your host Jonathan Boyar. I’m really excited today as our special guest is legendary investor John Rogers, who is co CEO of Ariel investments, a value oriented investment firm that he founded at the age of 24 Ariel, which has roughly $16 billion in assets under management specializes in investing in small and mid-sized companies and is among the most respected institutions in the industry. John’s professional accomplishments extend to the boardroom where he sits on the board of McDonald’s Nike, the New York times company, John, welcome to the show.

John Rogers, Jr. Great to be here.

Jonathan Boyar We have a lot to discuss, and I, I realize your time is valuable. You know, in the introduction I just gave does not really begin to cover all your accomplishments, but, you know, as I was researching you for this interview, one of your achievements really stuck with me, you know, while in, in Silicon valley and maybe commonplace to have a 24 year old founder, it’s really unheard of in the investment management business. Can you take us through how you did it?

John Rogers, Jr. Oh, well thank you for bringing up those days. You know, it was amazing. Now Ariel is the 39 years old, almost 40 years old. And you know, I think the reason I was ready to start the company at a young age was a couple things. One was that my father had started buying stocks for me every birthday and every Christmas after I was 12 years old, instead of toys. And I fell in love with the markets. I had a broker in Chicago and then I had a broker across the street from campus at Princeton. And I spent as much time as I could with those role models and mentors learning about the markets. And I thought, if you loved the stock market, you became a stock broker. And I went to work for William Blair and company when I graduated,  from Princeton. And it was a great place to train a great place to learn.

John Rogers, Jr. Cause as you know, Blair is our, you know, largest regional brokerage firm and you had all aspects of the investment bank there, the money managers, the brokers, the institutional sales people, et cetera. And I pretty quickly realized I was in the wrong business. I shouldn’t have been in the brokerage business. I really was meant to be an investment manager where I could develop a long term approach to investing. As I learned about that, I said, you know, if I can’t do this here at Blair, I’ll go off and start Ariel. And that experience again, was very helpful and giving me the confidence to start my early stocks worked out well. And that gave me confidence. And I also have to say that, you know, there was several African American entrepreneurs in Chicago who had done really well and started their companies at young ages. John Johnson had created Ebony and Jet magazine at an early age.

John Rogers, Jr. And George Johnson had created Afro Sheen a hair care product company at a very early age. So I think those African American role models gave me confidence that I could start Ariel  investments at an early age. And then finally I have to say that, you know, I was lucky. I had friends and family who believed in me and they were willing to help me raise the first couple of hundred thousand dollars to open up the doors and be able to pay the salary of a high school buddy of mine and give us the time to develop a track record and get some interest going around our small company.

Jonathan Boyar Yeah, building that track record, obviously by definition it takes time. Was it hard to convince people, even if you had a good couple of years to give a 24 25, 26 year old, you know, some money to invest?

John Rogers, Jr. Well, I think we did a couple things that helped give people confidence in those, in those early years.  One was, we started this newsletter called the patient investor and every issue I would talk about my views of the market. Talk about my favorite stocks, why I like the stock. And then I kept track of how the stocks performed on the back page. So people could see my thinking about the markets and see whether I was, you know, thinking creatively and had some logical thoughts around the markets. And we made the good decision to have the logo of the patient investor be a tortoise to remind people that old Aesop’s Fable that slow and steady wins the race. So I think that gave prospective investors some kind of confidence that we were gonna be prudent patient investors and not risky investors. And then the final thing was we went to friends and family also and raised about $500,000 and we put it what we called aerial fund. It was run just like a partnership, but it had a, a normal fee structure to it. And so we had a real live track record along with the, uh, paper track record that we had in our newsletter, uh, the patient investor.

Jonathan Boyar And you’d mentioned that in Chicago, there was a lot of very successful, you know, African American entrepreneurs. Did you gain access to any of them? Were any of them particularly helpful?

John Rogers, Jr. Yes, that was another really, you know, helpful part of our story, you know, growing up in the south side of Chicago and my parents had met at the university of Chicago law school and they knew some of these outstanding entrepreneurs and I had a chance to grow up with their children, go to grade school and high school with John Johnson’s daughter and son and George Johnson’s son, et cetera. So I did have great exposure to them whenever I had key questions or concerns as I was starting the business, I would go and see, you know, John Johnson go and see George Johnson. I still go and see George Johnson. Now he’s,, 95, 96 years old and still is sharp as a tack and still full of wisdom. And so, so helpful. So having those legends to lean on was critically important in those early years and giving me confidence to, to keep going.

Jonathan Boyar You probably needed a lot of confidence in, you know, you started in 84, 3 years later, you have the crash of 87 you’re 27, 28 years old. However you were at that time, you know, did you think you were going to fail then? Like that was a day that I can’t even imagine losing 20% or whatever it was in one day.

John Rogers, Jr. Yes. You’re too young to remember that it was a brutal day to lose over 20% in one day. I can actually remember I was at the wedding planner and I was having to keep stepping out of the meeting to get on the phone and see what was latest on the markets. It was a scary time, but in some ways it was a really, uh, defining time for us that Ariel, cause  we kept telling people we’re value investors. We told people, we believed in Warren Buffett fit’s mantra that you want to be greedy when others are fearful or what the legendary John Templeton always talked about buying when there’s maximum pessimism. So this gave us a chance to prove to ourselves that we were true contrarian, that we were gonna be willing to buy when there was an extreme stress. And at the same time, I think it gave our customers confidence when they saw us buying more.

John Rogers, Jr. They heard me on the phone, I’d call up clients and say, send us more money. This is a once in a lifetime opportunity to buy bargains. And the fact that we bought bargains during that crisis of 87, set us up for really good performance coming out of that year and into 1988. And I think our fund was in the top five in the country in 1988 and we got to be co mutual fund manager of the year in a strange way. It really set us up and helped to create our brand that and show people that we really truly work in Tris and really were true value. Investors

Jonathan Boyar Just wanted to shift gears for a second and you sit on numerous corporate boards, Nike McDonald’s, New York times company, your co CEO, Melody Hobson, a former World, According to Boyar guests sits on the Starbucks and JP Morgan board. And, and I want to be very careful on how I phrase this question as I’m not implying in any way, you’re acting on any material non-public information as your reputation is pristine. And I’m sure you don’t own those stocks for clients anyway, but by sitting on these boards, you gain access to so many data points and are able to really have an unbelievable insight into the economy and the US consumer and somewhat in the same way Warren Buffett does by owning a railroad and, and other businesses. Does your board service make you a better investor?

John Rogers, Jr. I think for sure it does. You know, I tell people, you know, I used to be on the bank one board for a number of years and I think I’m a better banking analyst now because of that experience, I was on the Aon board for 18 years and work closely with pat Ryan and watched him build that great business. I think I’m a better professional services analyst, financial services analyst, because of that experience. I chaired the audit committee there. I learned an awful lot about how that works. I was on the McDonald’s board when, uh, stock was like $14 a share and Jim can Lupo came back as CEO and created the plan to win. They got the stock back on track and learning how, how important it is for a management team to have a plan to win during difficult times and executing that plan consistently lessons that are just so important.

John Rogers, Jr. And I’m looking for that plan to win and the research that I do on all the companies that we follow today. The other thing about being on boards is you build great relationships with the other board members who are in many different industries and it’s great to get their insights of what they’re seeing in the economy and what have you. But I would say there’s no particular advantage here at air. I’d love to say that we have some kind of a secret sauce and, and  you know, real competitive advantage in this way. But if you think about it, you touched on Warren Buffett. Of course, he served on many, many boards over the years where you had great insights being on the board of Coca-Cola, et cetera, et cetera. You think of all the private equity firms, the KKRs of the world and the Blackstones and the Carlyles, all those executives serve on all the different boards, the companies that they invest in and get to see all aspects of the economy.

John Rogers, Jr. That’s very, very helpful. And then finally, I would say it’s the same if you’re on the board of a nonprofit, if you’re on the board of a university, like I and vice chairman of the university of Chicago, I learn a lot about how a major hospital is run and what’s happening with healthcare in this country, healthcare reimbursements and all the challenges that major hospitals and major universities face. And then finally, you’re also on the board with other key leaders like currently David Rubenstein’s, the chairman of the board of the university of Chicago to sit and talk with him and get his insights. It’s amazing, but that’s what he does. You know, he serves on literally dozens of boards over the years and that’s what makes David Rubicon, such a brilliant leader and thought leader because he has great relationships and his antenna is everywhere and he can have a sense of what’s happening around the world, literally because of his willingness to serve and help others and volunteer to chair the board at Duke and be involved again at the university of Chicago and other places. It’s the special, unique insights that he gained from those experiences.

Jonathan Boyar One of the things I really like to ask successful people is how they spend and organize their work day. How do you divide your day up in money management? There’s no typical day and, and I get it, but can you take us through that typical non-existent day? <

John Rogers, Jr. Yeah, well, parts are the same pretty much every day. You know, I get up in the morning and, and read five newspapers and that’s an important part of just getting the day started. I try to have a workout, you know, for 45 minutes to an hour every morning. And I started taking piano lessons roughly five years ago. So I try to get a little piano practices in the morning. So those are my three early morning endeavors. And then as I transition, as the morning starts to go, my co-manager of aerial fund, John Miller sends me the early research reports, uh, that have come out that morning from the major brokerage firms and see what you guys are thinking, see what others are thinking. And that’s gonna be a morning activity that John and I share. And then if it’s earning season, then you’re typically gonna, when you get to the office, you’re gonna have a series of calls with management teams.

John Rogers, Jr. Every quarter, we talk to all the management teams of all the companies we invest in our small and midcap value product. And so a good bit of the morning often is one of those calls after another seeing what’s changing this quarter, seeing if they’re executing their plan to win consistently or not from the different management teams. And then, you know, you typically gonna go to lunch at the Chicago club and often, and, you know, network with people. And it could be just could be something you’re doing from a civic standpoint or something you’re doing from a, you know, investment point of view or marketing point of view to build the brand and get the word out. But we think it’s important to get out and have lunch and, and network, you know, throughout the Chicago and business community. And you know, and then throughout the day, whenever you get free moments, you’re gonna be reading the latest magazines and newsletters.

John Rogers, Jr. And this is a job for readers as suggested earlier, you know, we were talking about how important it is to be able to get paid for reading. A good bit of my time is finding that free time to read the latest things that are going on in the market today. We had a conversation that Melanie hobson and created with a thought leader in behavioral finance and making sure that we’re on top of all the latest things that are happening, make sure that we’re keeping our research process fresh. So you’re, you’re trying to find time to make sure you’re thinking through things that you can improve on twice a week, we have a regular meeting with all of our portfolio managers and senior analysts to talk about what’s happening. We have a regular scheduling meeting to make sure that we’re on all the zooms and all the calls. And then typically as you move into the evening, there’s gonna be a dinner to go to or cocktail reception fundraiser around town for a community organization or a civic organization. We do believe it’s important to give back to the city that we love so much as, been so welcome to our small company.

Jonathan Boyar Sounds like an exhausting day, but a good one. One of the things that I read about you, I, I don’t know if it’s still true, but your technologically adverse, obviously, you know how to use it if you wanted to, but you choose not to really use email very much. You choose not to really use a computer. How does that help you

John Rogers, Jr. I was reading something. I think it was an Inc. magazine yesterday that was sent to me by a friend where Warren Buffett talks about, you know, how he spends his time and how important and how valuable time is. One of the suggestions in the article was that you control when you look at email and not allow emails to dominate your life. So I don’t email it all. You know, my assistant gets emailed the people that work at Ariel get emailed. I don’t, I don’t wanna have my time just hijacked by anyone trying to, to reach me. You can read more that way and absorb information better if you don’t have that barrage of, uh, email coming at you. So I think that’s been an important thing that I do to try to use my time more effectively. I often talk about that. I often go to McDonald’s and get away from the office and find quiet time there to read. It’s always sort of been a home away from home where, you know, I can just concentrate on things that are important to get done and think about what I hopefully need to be thinking about. So I am a believer that time being so important, I don’t want to let technology transform my life the way it can.

Jonathan Boyar I completely agree. And I wish I was able to, to do that. You know, email can be an unbelievable time waster and I fully agree it’s during the day. You know, how often are you looking at the market? Are you checking stock prices constantly once a day? You try not to. How does that work?

John Rogers, Jr. Yeah. Yeah. I learned a long time ago. It wasn’t healthy for me to check too often. You know, we’re long term investors, as I said, our logos at turtle, we do believe in patients. So I’m typically checking the markets. Maybe it’s three times a day, get the opening, get a midday update and then see things as the market’s closing. Yeah. Otherwise it’s just becomes a big distraction and your emotions go up and down. And I just think it’s not a healthy thing, at least for me to do. And of course, when I’m home during the COVID time, I’ve got the CNBC on the television all the time you go and glance at you can’t help it. Most of the time, I’m not in the room where the TV is. So I really, uh, don’t wanna be distracted by the volatility of the markets.

Jonathan Boyar Just shifting gears a little to your process, you built a, a terrific long term track record dating back to the mid eighties. I’d love to hear about how you manage your client’s money. Someone came to you with 10 million and wanted to separately manage account or whatever your minimum is. How do you construct a, a portfolio for that client?

John Rogers, Jr. Right now? We have basically three different strategies at Ariel. We were sort of slow to diversify. So the answer is little different because we have our international global team in New York and that’s run by Rupa Bon. And she’s a expert in the, you know, international investing. We have our project black, which is a private equity business in New York city. That me started a year ago. And so it’s been nice to have our connection to the whole private equity world and working to build large minority companies through private equity. But the work that is, you know, near and dear to my heart has been the small and midcap value space that I’ve invested in these last 39 years. And when we started, we were one of the early people in the small and midcap value space. So we’re not many, you know, you had Ralph weer at the acorn funds and a few others that were doing that work, but it was really relatively rare.

John Rogers, Jr. So if you come to me with a million dollars or 10 million, what have you, and then find out whether that’s the money that you want in the stock market or not, or are you diversified outside of Ariel? Cause we are a specialist. We know we can’t handle someone’s entire portfolio. We’ll handle a, a portion that is focused on small and the midcap value if you’re talking with us. So the portion that you’re feel comfortable with, we will typically have that portfolio placed in roughly 35 names. You know, over the years we found that 30 to 40 stocks is kind of our sweet spot and we try to focus in relatively few industries. You know, we believe deeply in Charlie Munger’s point of view that, uh, this shouldn’t be like Noah’s arc where you own two of everything, you know, so we really do want to invest in what we understand and industries we like to read about and study and can get to know really, really well.

John Rogers, Jr. And so of course that means there’s gonna be more volatility relative to benchmark because we are benchmark agnostic. So it’s not only a concentrated portfolio, but it’s going to be concentrated in a relative fewer number of industries, which we think is the best way for us to manage money. Our turnover is gonna be typically 20% a year or on average. So it implies, we own the same stocks for five years, but we have stocks in the portfolio that have been there 10 years, 15 years or more sometimes we’ll trade around the names. Sometimes we’ll own it, that same name for, you know, just the long run without ever, you know, selling out of it completely. But we want people to know that when they invest with Ariel, what’s gonna be with that long term perspective and how we put together their portfolios. And, you know, and then just the final thing I would say is that we really do want to pound away to people that they really do have to look out over the horizon. There’s gonna be times with our approach being concentrated portfolios, you’re gonna underperform and you’re not gonna look smart versus the indexes. And you’ve gotta be comfortable with that and ask, letting customers know that maybe you want to add to your portfolios when we’ve gone through a rough spot in underperformed, our benchmarks,

Jonathan Boyar You’ve had some huge successes along the way. Do you have a percentage that you won’t put in an individual name or sector? Like if it gets too big, is there a cutoff point or will you, if you’re confident in the business kind of let things ride?

John Rogers, Jr. No we’ve learned over the years, you know what our comfort level is on that and with our analysts and our fellow co-portfolio managers, we’ll say that we’ll alone 10% of a specific industry, you know, just make it up carpet manufacturers. We’re not gonna have more than 10% of the portfolio in companies like Mohawk. So for an industry itself, not more than 10% of the portfolio in one industry, individual security, wouldn’t be more than 6% in one individual security. 

Jonathan Boyar Is that at purchase or at accumulation

John Rogers, Jr. At accumulation, we’ll buy up until 5%, but we typically, we wouldn’t be buying at 6%. We’re gonna be again, lightning up at 6%

Jonathan Boyar For your own personal portfolio, where obviously you don’t have to answer anyone except for yourself. Would you feel comfortable making something 10, 15, 20%?

John Rogers, Jr. It only happens by accident. You know, as I mentioned earlier, you mentioned earlier, I’ve been on the McDonald’s board 18 years. And I got on the board at a time when the mark was really out of when stock was really out of favor, uh, maybe a year or so after the headlines and business week hamburger, hell. So as directors, do you get on a board, you buy stock and then you get granted stock every year. And those early years I was adding to my position. Cause I believed in the plan, the win that Jim canal Lupo had played out, I believed in the board and the management stock was really cheap. And so, because of all these years, it’s grown into a substantial asset. For me, it wasn’t intentional that it would become a significant part of my P my portfolio. But now that I’m on the board there for all these years, I’m not gonna sell the stock either.

John Rogers, Jr. That’s not, you know, I still believe in the long term story. I think it’s a great, great company and it’ll be hopefully, uh, I’ll loan it for another 20 years. That’s my idea. So, so individually I’ll end up sometimes with a large holding because it’s, uh, tied to a board that I’m involved in. Mm-hmm, <affirmative> the only two stocks that I own independently from my board service that I bought consciously. This Morningstar, when Joe Monto took the company public, I had so much confidence in Joe and Don Phillips and team that was there. Unfortunately I waited too long, but I did buy shares in Berkshire. And, uh, I wish I had bought it 30 years ago

Jonathan Boyar For a decent number of the names that you own. And looking through your 13 Fs, I could tell which ones are your names and which ones are your international names or global names. You know, a few companies you own more than 10% of the outstanding shares. How do you handle, or how do you think about the lack of liquidity there?

John Rogers, Jr. We’ve never worried much about that. You know, we’re buying companies that have strong cash flows that are real businesses that, you know, we’re confident we’ll be around for a long run where they have strong balance sheets. So we’ve not had trouble moving out of those types of businesses. You have trouble if you’re in a bad business that the, uh, balance sheets gone sideways and you’re in a trouble situation. And whether you’re a 5% or 10% owner, you’re gonna have trouble in that situation where everyone’s trying to get out at once. And there’s a steady amount of selling going on when you’ve made a mistake. That can be, I think, problematic, but we’ve worked really hard to make sure our companies have that kind of margin of safety with them that, uh, you know, you make mistakes. We’ve made our fair share over 39 years, but we rather own a lot of something we know and believe in and understand that’s less risky than having our dollars spread out over names that we don’t know well, or in industries, we don’t have high confidence in, and with management teams, we don’t have high confidence in just like in private equity.

John Rogers, Jr. You know, you wanna own a lot of companies you believe in, and Warren Buffett talks a lot about that. You know, he wants to own more of businesses. He loves and, um, believes in the long run, you know, companies themselves with a discounted present value of their future cash flows and not worry about their short term ups and downs

Jonathan Boyar In terms of how you position things, you know, looking at your, you know, fact sheets, you have a lot of three, 4% positions, and then you have some 1% positions. What makes something a 1% versus a four? Is it the upside? Is it the downside you’re looking at? How do you decide that

John Rogers, Jr. What we do is we have our buckets that all the portfolio managers and analysts work on and we talk about together and the buckets will put our companies together and our largest should be. And the companies we have the largest positions in should be the companies. We have the highest conviction in the story and are also the same time selling at bargain prices. So if it’s cheap and it’s a great business, it’s gonna be in the number one bucket, the lower bucket with those smaller percentages are gonna be companies that are either don’t have quite as much conviction in, and they’re no longer selling the same significant discount they’re getting close to their private market value. So the smaller positions can be typically are companies that, again, either you’re scaling out of, cause you’re losing conviction in the company or you’re scaling out because the stocks become very expensive. That’s where you’re gonna have in your lower tier bucket. In the way that we look at these names,

Jonathan Boyar Mentioning that, you know, things get very expensive. I found buying is really easy. The hardest part is selling. How do you decide when to sell? Is it a purely valuation call because there is, you know, momentum is a real thing. How do you figure that out?

John Rogers, Jr. There’s two reasons we sort of touched on a little bit. One is the question, socks get to be expensive. And typically when they’re getting expensive, they’re also sort of moving into the mid value, large value space. So we’re gonna be selling cuz of valuation. We’re gonna be selling because it no longer fits within our small and mid-cap position. That’s a good story. You know, you’re going well and you’ve gotta lighten up because of, and again, valuation or size when you make a mistake. And of course it inevitably happens in this business is when you have earnings, disappointments, the stocks get hit, they seem too cheap to sell. And then as you’re thinking about it and studying it again, it gets cheaper and cheaper and you think it’s cheaper. You know, it’s more and more of a bargain and it is hard to get away from a bad hand.

John Rogers, Jr. You know, it’s a difficult part of our business. We talk to a lot of behavioral finance experts and others, people from the poker world who tell you how hard that is. And that’s an important discipline to constantly push yourself, to be able to sell things that have not done well and not try to, you know, talk yourself into holding those losers or buying more of those losers. So if we lose confidence in the plan to win to management, if we think that the moat isn’t as strong as we originally thought, if we think that they’re making capital allocation decisions that are not intelligent, all those would be reasons for us to scale out of a position completely and realize that you can be wrong in there too. And the stock will come roaring back, but we do believe that we have to have that discipline to get away from those bad, that are the hardest things to sell.

Jonathan Boyar Since you world changed dramatically, technology has evolved. You famously from Ben Graham type stocks, you know, you know, to now buying kind of very high quality businesses. He’s also has the high, fast problem of only being able to buy really large companies at this point in time. How have you evolved and how has your strategy evolved since you started in, in the early eighties?

John Rogers, Jr. Well, it’s evolved in a number of ways. I mean, we have a, uh, one from the beginning. Now we have a strong, strong team. Primarily we do our recruiting at the university of Chicago and university of Chicago business school. And, uh, several of our analysts, you know, train there started out on summer interns, you know, having a great team of folks. Who’ve been with you through the ups and downs and inevitable crisis in this industry, you learn from each other. So the strength of the team is something that’s evolved over the years. And I would say, you know, Tim FLER and Ken curd and John Miller and Sabrina Carlo, you know, just in critical Charlie Bo Brisco has led all the improvements around our balance sheet work and creating our own proprietary debt ratings. That was something that we thought was really very, very important after the oh eight and oh nine crisis.

John Rogers, Jr. So the way that we analyze the balance sheet of our company has evolved significantly. We do a better job now of keeping track of the popularity of our stocks. And we have a numerical way of looking and seeing, which are the most popular names, which are the ones that are hated most on walls street. And making sure that we are understanding where the contrary bets are versus where the consensus bets are. We think that’s an important improvement in our process. We’ve worked really hard through our behavioral finance work, you know, and being fortunate to have Dick Thaler at the university of Chicago and reading gang of conman’s work and understanding a lot around behavioral finance to work on our behavioral weaknesses, you know, trying to understand do we have, you know, just human nature that you’re gonna have confirmation bias. You know, you’re gonna look for information that confirms who you already think, and you know, it’s just, there’s recency bias.

John Rogers, Jr. You know, you get caught up with what’s the, in the here and now and swept up in the emotions of that moment. You have a hard time, you know, you have the endowment effect where you fall in love with what you already own, you know, instead we could go through, but so working hard at understanding our behavioral biases as a group is a critical improvement in the study and research and have the professors help us understand where our weaknesses are, is something that we’ve worked hard at, improving in our process, and then creating an environment with our, our meetings, with our analysts and portfolio managers to make sure we’ve created a safe environment for people to challenge conventional wisdom challenge each other’s perspective. So we actually have, uh, you know, double’s advocate that we added about a dozen years or so ago to make sure that the contrary voice is always heard in our meetings.

John Rogers, Jr. And we think that is, uh, really, really, uh, really important. And then finally, you know, there’s many things, but the last one I’ll mention is that we started working with BIA associates. I know probably 15 years ago or so. And they’re a group that helps you ask better questions and read the body language of people you’re talking to to see whether they’re being truthful or dishonest or not is, you know, a big part of our jobs, you know, your job. And my job is to talk with analysts, talk with management teams and determine the veracity of what they’re telling us again, are they being truthful? Are they being Eva? So, so having, uh, not only B teach you how to do that, but also coaches along the way, help us prepare the right questions, help determine who’s the best at, you know, doing these interviews. That’s the big improvement for us. The BIA work has been really helpful.

Jonathan Boyar That’s fascinating. I guess that’s kind of probably former CIA spy type people who are doing, I mean, what are the backgrounds of those

John Rogers, Jr. Type? Exactly. A lot of them are former CIA, FBI, uh, government agents who, um, know how to ask the right questions and then determine whether people are being truthful, their body language and the follow up questions you ask. And, you know, it’s interesting. You’ll see, when you ask a tough questions, how people will like move around and they’ll do this anchor shift and start to fiddle with their, their face and hands on their face. Things like little things you’ll notice that you really, I never really noticed before, you know, but once you know what to look for, it’s just been fascinating.

Jonathan Boyar Probably helps with poker too.

John Rogers, Jr. Yeah. I do love to play poker and, uh, I have not used it there cause I’m not questioning anybody.

Jonathan Boyar So I’ve been wanting to ask you about this for a while. I think you probably know where I’m going on this you’re among the, the larger shareholders of Madison square garden sports and the largest shareholders in, in Madison square garden entertainment. I think you own 22% of the company or so, you know, it’s a name we own, we own both, you know, both companies suffer from the so-called stolen discount. Can you take us through your investment thesis for both companies and how you see value being unlocked? And maybe also you mentioned project better at McDonald’s how that might work with the Dollins because things could be better.

John Rogers, Jr. Yeah, well I think it was the simpler one is that man square garden sports is a simple, you know, story. You know, sports teams have become more and more valuable as, you know, the television contracts just go up and up and up, you know, live sports is still popular on all the different medium where you can watch content. And um, so we think if you look at what the KNS are worth and the Forbes valuation and what the ranges are worth and is the stocks are selling it a substantial, substantial dis stock is selling a substantial discount of what we think the private market value is for the Knicks and the Rangers combined. And we think the story’s just getting better and better. Of course the, which you guys have talked a lot about. And we agree with, we think the gaming is a big, big deal.

John Rogers, Jr. I was reading a big story this week in business week around what’s going on in the gaming world. And people love to bet. And these we know, and, and sports betting now and online sports betting and the rest of it, we think it’s gonna be a major initiative. That’ll help the Nixon and Rangers. So we just think that’s a pretty simple, straightforward story. It’s a selling less than what comparable transactions, when you think the company’s really worth magic square garden entertainment of course, is, is more of a conglomerate, I guess you could call it. They have many major businesses. And it’s when we look at the sum of the parts we think the stock is selling it well, you know, maybe, you know, as much as a 60 to 70% discount from its private market value, our one analyst has the value as high as $153.

John Rogers, Jr. One of our analysts. And even if you take a more conservative, you have 137, the stock selling in the high fifties, it is extremely, extremely, we think undervalued. And as you know, the core business, we think owning the garden itself, this iconic building that is, uh, full all the time with not only sports, but of course, entertainment and concerts and the like, and being right in Midtown Manhattan, that it’s just really valuable that the air rights are very, very valuable. There’s gonna be a real benefit from gaming there too. Also, you know, you don’t know exactly how it’s all gonna play out, but maybe it’ll be a sports book in the garden or in Penn station. And so we just, we love the garden. We just think it is a unique facility in the world. You talk about having a mode around the company. I think that’s one, that’s just is a people don’t understand the value.

John Rogers, Jr. Most of the analysts valued it based funds and tax valuation from years ago in New York that does not realistic. And the other key that, of course, they’ve spent 2 billion now on the sphere in Las Vegas, which is a, an arena that’s gonna hold 19 to 20,000 people with the best sound system, best technology, best visuals ever, ever. And we think it’s, uh, it’s, it’s a special, beautiful, new, you know, iconic feature in Las Vegas that will open up next fall. We think that if it works out there, they’ll be able to take it around the world to other major cities of London being the first one and do a capital light type of a model. And the growth there will be substantial from the sphere they’ve already, they haven’t announced publicly yet, but all the rumors are the Bono’s gonna be the opening act at the news sphere and we’ve gone there to visit and seen the construction.

John Rogers, Jr. And it just it’s like no other arena in the world. It’s just nothing close to it. And the advertising possibilities on the outside of the arena, the naming opportunities, you just go on and on about how powerful those spheres going to be. And then they own with wiring in Las Vegas, they own towel. And Hawkathon two of the fastest growing nightclub, restaurant entertainment, places generating an enormous amount of cash, enormous amount of profitability. We think that wall street doesn’t give it a proper multiple for the growth rate that’s there. And I think that’s kind of one of the hidden gems within the structure, which is, you know, they’re going to be spinning these companies into two. My part of my thesis is it’s a way to show off the beauty of what’s going on, uh, with Tao and Hawkathon and, and those types of assets, the area that’s been the most troubled of course, has been the regional sports net that was bought guess a little over, was it 18 months ago or so time flies.

John Rogers, Jr. And we all know that traditional cable is dwindling. And so the kind of fees that cash flow, they were able to count on steadily decreases seemingly six to 7% a quarter. But at the end of the day, we do think, believe that the direct to consumer initiative, they’re gonna come up with that they hope to roll out during this, this year’s basketball hockey season will be a powerful way of sort of turning the tie there, you know, having a more positive story for the regional sports net. And we think that the, again, the gaming will be really helpful there too. The advertising is gonna be on the regional sports net. It’s already there, lots of great ads that come on regularly. And then of course they own the Rockettes and they own the Chicago theater and they have all these other added ancillary businesses that we just think there’s gonna be more visibility after the spin spin. And we have two companies independently trading. I think the value gap will start to close for sure. And once the sphere opens up, it’ll be another catalyst for change. So it’s, uh, we’re quite excited about it. It’s already went on a long time about it, but it’s just, it’s a stock where we keep sitting, sitting here trying to figure out what are we missing? Can’t quite put it together.

Jonathan Boyar We’re in the same camp on that, for sure. And, you know, everyone loves to hate the Dolans, but I think they’re better than people give him credit for. I looked on Bloomberg, you know, cable vision from when it went public to when it was sold to alt you know, significantly outperform the S and P 500, but, you know, wall street has lost faith in the dos. And in some ways it’s, it’s been self inflicted. They’ve done some things, you know, the Madison square garden network transaction, et cetera, that probably were not in everyone’s best interest, but how do we actually make money on it? Because, you know, valuation is not its own catalyst. What’s gonna make people start to believe in the Dolans. Does this thesis on Madison square garden sports? Is that predicated on some sort of sale of the team? Like kind of, how do you think about that?

John Rogers, Jr. I do, you know, I, you never know for sure. And, you know, I’ve spent some time with Jim Dolan had some really good friends. Who’ve worked for Jim Dolan who have a lot of respect for him. Uh, I played basketball in college with Steve mills who was a longtime president of the NS. And, you know, he’s always has spoken very highly of Jim and his leadership. So I do think that the discount is way, way overdone. I think the way that you start to see some progress, you know, the team they put in and charge the Nicks, you know, Leon rose and worldwide west, the new gen, you know, the general manager who was, you know, held on and, uh, bringing in Tom Tito as the coach. I think there’s real hope that they will start to win again. And I do think that if you get them a winner in New York city, the value of that franchise will just go up.

John Rogers, Jr. You know, there’ll be more and more people who will wanna buy the team. And I kind of think that Jim Dolan’s heart of hearts, he’s more of an entertainment person than sports person. I mean, I haven’t, I’m just speculating. And I know you guys have speculated on this too, so it wouldn’t be a shock to me that if he sold the teams at some point and just focused on the entertainment vehicles, cuz he loves it. As you know, he has his own band that he plays in and you know, he has a passion for that. He has great relationships in the industry with all the artists who are out there. So if you had to push me on that, I think eventually they’ll sell the company, use the cash to help strengthen the entertainment side of the business and think it’ll be a win-win for everyone over the long run.

Jonathan Boyar He sold a team, New York sports fans would certainly be very happy. And you know, I, I do think he’s much better than people give him credit for, I haven’t had the chance to meet him, but he has done right by shareholders over the long run. I mean, one of the things I like point out is I I’ve been saying they should sell the team for years and the right thing has been to hold onto them. They’ve just only gone up and up and up in value. But I guess one of the questions I’d have for you is, is I struggle with this sometimes is how do you really value what the kn and the Rangers are worth? Obviously you have Forbes Ando, and, and they’re saying this and you have some precedent transactions, but you know, as a value guy and a fundamental investor, you’re paying a rich multiple, how do you kind of, you know, meld the two?

John Rogers, Jr. Well, I think if you look, if you look at the past history, many of the transactions that have occurred in professional sports have been around the valuations are above the valuations from Forbes. So that gives me confidence. There’s some margins of safety built into the valuation that we have for the mix and the Rangers. I think the other thing that’s changed though, since the earlier years, you know, cause Forbes have been, I dunno how many years they’ve been keeping track of sports teams, but transactions have happened steadily over the years. I think it’s transformative. What’s happening with sports betting and the way they’re gonna make watching sports games more and more interactive, you’re gonna have people just loving the content and interacting with the content in ways that people could never have imagined. And that can only help the ratings go up already. People are talking about the next television contract being way more than the last way, more than the next expectations. And I think it’s, you continue to see, you know, what’s happened with the NIS and the other ways that just the value of things that they control and own the teams. I think you can make a case that relative to the fors value it’s this is selling it even a bigger discount than you would’ve said two years ago before all of this took off.

Jonathan Boyar You’ve been unbelievably generous with your time today. I, um, and you know, I want to thank you, you know, for appearing on the show, I learning about your fascinating career, your views on names that we own, like Madison square, garden, sports and entertainment, and you know, kind of how you manage money is just really insightful. And I really thank you for your time.

John Rogers, Jr. Well, thank you. I enjoyed the conversation and I’ve always enjoyed working with you and, and your team and the quality of research you guys provide. It’s been, uh, really appreciate, uh, thoughtfulness.

Jonathan Boyar Well, thank you for that compliment. That is very much appreciated and we value you as a, as a subscriber. I hope you enjoyed the show to be sure you never miss another world. According to Boyar episode, please follow us on Twitter at @boyarvalue until next time.

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.

[music]

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.

[music]

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

Transcript of the Interview With Ryan Serhant:

[00:00:00]
[silence]

Jonathan Boyar: [00:00:00] 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’m your host, Jonathan Boyar. Ryan Serhant, founder of Serhant is one of the most successful and well-known real estate brokers in the world. Over the course of his career, Ryan has sold over $4 billion in real estate. He is also the author of two best-selling books, and the star of multiple Bravo TV shows, including the two-time Emmy-nominated Million Dollar Listing. Ryan, welcome to the show.

Ryan Serhant: Thank you so much for having me.

Jonathan: Glad you’re able to join us. Normally I use the beginning of the show for disclaimer, as I’m often talking about a particular stock and want to let the audience know I own it. This time I actually disclose two things. One, we’re going to discuss a development called Jolie located on 77 Greenwich. That property is owned by a public company called Trinity Place Holdings, symbol, TPHS, in which my clients and myself own shares in.

The other disclaimer equally important, I’ve watched every single episode, of Million Dollar Listing New York except for the current season as I plan on binge-watching it. I am so excited to have you on. It’s been great following your career and congrats on in February selling the second-highest-priced single-family home in US history at a cool $132 million. Not a bad way to start the year.

Ryan: Thank you.

Jonathan: First, I just wanted to start with the New York City area.

You know the New York City Market pretty much better than anyone. Is it still a buyers’ market?

Ryan: I will tell you, it is very rapidly changing to a sellers’ market. It was a buyers’ market for very much the last four years. If I really think about it, it’s been a buyers’ market since September 2008. There’s been a surplus of inventory, [00:02:00] a significant amount of options, great negotiating room, and buyers have their choices. Now, we had two to three years in 2013, 2014, 2015-ish, where things were selling faster and it was a sellers’ market in certain sections of the city, but definitely not everywhere.

Now, we are seeing inventory be absorbed faster than I’ve ever seen in my entire career. I will tell you, what it really feels like is that this isn’t a pent-up demand from COVID the way you keep hearing about. This is pent-up demand from the Great Recession. This is pent-up demand from people that were going to buy homes or were thinking about buying homes in the future in 2007, who just never did it. Who might have bought because they needed something, “I’m having a baby, I need to move. I’m going to school, I need to move. I’m switching jobs, I need to move.”

We’ve done a lot of need sales and moving over the past 12, 13 years, but we haven’t done any of those want purchases. Pre-2008, people were buying because they needed to and because they wanted to. They were selling because they needed to sell and because, “You know what, I guess I’ll sell. I’ve made a good amount of money on this investment.” Great. You haven’t seen that in the last 12 years. Most of the sellers I deal with the New York City end up losing money until now.

All of that pent-up demand, especially in a city like New York where there’s a lot of money, and there’s a lot of access to money is popping right now. I think it’s going to take a couple more months to get to the inventory we have but I think come September, October, we’re going to be in a full-blown sellers’ market in New York the way the rest of the country has been seeing since last summer.

Jonathan: Speaking of that, is the narrative that besides in New York City area, that everyone is moving to the suburbs permanently. Is that an overblown narrative or is that really factually correct? The press loves to spin a story.

Ryan: No. If you really look at the numbers and at the data, more people actually ended up coming to the city [00:04:00] than leaving the city in the last 14 months, just because there’s so much opportunity. It’s like, “Oh, I can actually move to the city now. There are good deals.” People left, but they left temporarily. I left temporarily, and I think the city counted me as someone who left. I came back April  2020. I was here during the riots. I was here going to the office every day we weren’t supposed to but I was going every single day, walking through the empty streets of Soho. It was pretty nuts.

I was walking up the middle of Broadway at 9:00 AM on a Tuesday. People are definitely still in New York City. You know that if you come to the city now, you can’t move. Everybody who left temporarily, they all came back and they all brought their cars. Now all these people have cars who never had cars before. Plus the restaurants are all still eating indoors 100% but Cuomo hasn’t taken away the outdoors so they’re all sitting in the outside as well.

There’s no place to park, everyone has a car. Everyone came back to the city and its mass chaos and no one has anywhere to live. They’re all looking to buy-sell. It’s insane. I’ve never seen anything like this.

Jonathan: Is it across all price points?

Ryan: Yes, it is across all price points. Now, listen, it doesn’t mean that if you have a million-dollar condo and you price it at $3 million, it’s going to sell. If you have a million-dollar condo and you price it at a million and a quarter, you might get a million and a quarter, or you might at least get somebody to come and make an offer. Which was not happening last year.

Jonathan: Your brokerage firm, I believe is pretty national, or at least in certain areas across the country. If you had to pick a market now to invest in with a super long-term time horizon, where will you be buying now?

Ryan: In New York?

Jonathan: All across the country.

Ryan: Oh, my parents, for example, in the last boom, so 2003. They went to Steamboat Springs, Colorado, they went to Vail and they went to Aspen to look for a second home. They thought, “You know what, it’s going to be great. We’re going to live on a ranch. We’re going to do this new thing.” They sold their house in Massachusetts, and they were going to go out there. They lost out on a couple of bids. [00:06:00] I was younger, but I remember what it was like. Lost on a couple of bids, ended up settling on this house, beautiful ranch, tons of land in Steamboat Springs.

They’ve been trying to sell that house for the last five years, not a single person will come through, no one. Can’t get a single offer, anything because the secondary housing market is a really, really tough market. When it’s hot, it’s all people can think about, it’s buy, buy, buy. It’s like Dogecoin. It’s like, “Oh, my God, this is it. This is it.” When it’s not. It’s out of sight, out of mind. I’m at work, I’m at school, I need my own place. I’ll just go on vacation to Hawaii. Why do I need to take care of a place in Colorado?”

Then they list it again for the fifth year in a row in May of 2020 and they sold it for the asking price in one day. They had people banging down the door, leaving notes, craziness, because it is a moment in time. I don’t necessarily believe the secondary housing market will maintain its current pace because people will eventually go back to work and they’ll go back to the office. It’s great that we have this, but it’s a difficult market because there’s only so many people that can afford to spend millions and millions of dollars on a house that takes you six hours to get to.

I am very, very, very excited about waterfront property and amenitized property. I think that there are great parts of South Florida that are overvalued, but I think there’s great parts of South Florida that have not been touched nearly to the extent that they should be. I’m looking at right now, yes, there’s the Miami’s and the palm beaches of the world and it’s about location, location, location, but what about Tampa? What about the other coast where valuations are so much lower?

You still get to be in the same state, you still have great schools with great opportunity there. I think 77 Greenwich is incredibly undervalued right now. At the prices that we are allowed to sell at, I think people are going to make a significant amount of money. I remember selling in the financial district during the last crisis. [00:08:00] I was selling 99 John streets in the financial district 442 apartments. The World Trade Centre had not been rebuilt yet. You were watching One World Trade get built floor by floor by floor.

Everyone who came in said that the building was so overpriced. “This is so stupid. How could you ever convince us to buy here? Look, there’s a construction site over. This is insane. It was dirty.” Everyone complained, but the people that we finally got to buy in, 5 to 10 years later, most everyone in that building has made at minimum a 30% return, if not doubled their money. It’s just a testament to the value of owning real estate and the value of owning real estate downtown.

I can’t say for a fact that if you go and you pay a good price today on Central Park, that you are going to make a huge return in five to 10 years because you’re paying a premium now, who knows.

Jonathan: In early 2020, right in the middle of the pandemic, you started your own real estate firm, just like you started becoming a real estate agent the day Lehman Brothers collapsed. Why do that? Is it better economics? I’m sure you could probably have negotiated a pretty good deal with pretty much any major broker house or was there something else?

Ryan: Life is short. When I was a little kid, I remember going by a cemetery and my grandfather who was a very unique guy asking me who’s in there, and I said, “Dead people.” He said, “No, in there is a writer you’ll never know. In there is a basketball player you’ll never know. In there is a guitarist you’ll never hear.” I had no idea what he was talking about. I was like, “Yes, of course, we’ll never hear them. They’re dead.”

As I got older, and I really thought about it, and then I remember his personality kind of long after he died, I understood what he meant. In that, there are people who have opportunities who don’t chase them because they’re scary and they die with them. They could have been something much, much bigger had they just tried.  [00:10:00]  I’d rather regret the things I did, than the things I never tried. I’d rather regret having started a firm and maybe it didn’t work out than regretting never having tried it. It’s the whole reason I’m in New York. Everyone told me not to come to New York in 2006 with no money and I wanted to do theater like great, awesome, but you will be destitute and poor.

New York City is a really scary, dangerous city when you don’t have money and that’s exactly what it turned out to be. I needed to figure out how to pay my rent. I did it through hand modeling cell phones and espresso capsules and getting my real estate license, and doing rentals in Korea town, the Harlem, Bronx, deep Brooklyn, Queens, stuff like that. Slowly but surely I became addicted to the business and built it up.

The things that we do now to sell developments, the things that we do now to sell properties are things that I can’t do at other firms and wouldn’t make sense for me to do there because we do them on our own, to the benefit of our clients and it just makes the most sense to really build a new type of real estate brokerage, that people aren’t really thinking about yet. It’s exciting. It’s incredibly insane and totally nuts that we did it last year, but low inventory, who else started a real estate company in New York City in 2020? No one.

Jonathan: It’s good to be different. I think it’s fantastic. The current firm, how many brokers do you have?

Ryan: I think we just passed 60. We started in October.

Jonathan: How do you manage a team like that? That’s got to be really difficult. How do you get people to drink the Kool-Aid to go and join you as opposed to going to Elliman or some other well-known firm?

Ryan: Right now, it’s pretty easy. Every other firm is much, much bigger. You can go anywhere else and you can just be a number, and then you go to a listing pitch. You’re going to have to differentiate why you at this firm are different from everybody else at the same exact firm. You come work with me and I will change your career. We have lead flow that is greater than any other firm out there. There are 4 million people that are subscribed and are followed [00:12:00] to the real estate content that we put out. There are buyers and sellers that come through all day, every day. I ended up turning away more agents than we do actually hiring them. We probably hire one out of every 10 to 15 agents we interview and we also only interview agents that have been in the business for at least five years.

It’s a promise I made to my core team that for our first year in the business, you’re only going to bring in superstars, people who knew what they’re doing who just needed to get to that next level because I can really help people get to that next level. We grow the business through training. Education is a really big deal for us. We have a whole separate education business. We have a very large online sales course. We have 7,000 agents right now in 109 countries and growing every single day.

Then we amplify our brands, our agents, and our properties through media, the same way we were doing at 77 Greenwich, right at Jolie. We created the brand and we amplified it through video content so that we can Gen Z to tell their parents that they want to buy this one. You can’t do that with a regular real estate listing.

Jonathan: No, absolutely. We had Douglas Elliman chairman Howard Lorber on the show. Super smart guy, really successful. I asked him his views on this. I’m curious to hear your thoughts. Are there aspects of the brokerage industry that are going to be disrupted? In a sense, you’re disrupting it right now, but do all homes need to be listed by an agent taking a commission as Jeff Bezos says your margin is my opportunity.

Ryan: Until Jeff Bezos and Elon Musk figure out how to get a house to sell itself to another house, there will be a need for real estate salespeople, because a house is not diapers. It’s not a lost leader  item. A house is not a frying pan. It’s not a house in a box either. It is hundreds and hundreds and hundreds of thousands of dollars, if not multiple millions of dollars. [00:14:00] We have not gotten to the point yet and I don’t know when we will. We’re buying something as significant of a house is as easy as pointing and clicking.

People need recommendations. They need their hands held. There’s a significant amount of costs involved. It’s not just the purchase price. You know what I mean? Closing costs. There are New York City, New York City taxes you for the honor of allowing you to get a loan in New York City.

You want to get a mortgage? You have to pay a New York state mortgage recording tax of almost 2% of your loan amount. You know how fun that conversation is to have with people that are not from New York? They’re like, “What? Wait a minute. I want to buy there.” There are real estate taxes. There’s transfer taxes. There’s the mansion tax, there’s title tax, everything. Now I want to get a loan so I can purchase and spend more money and New York City is going to tax the loan as well? Yes. They’re going to tax my income and raise income taxes? Yes, they will. They’re going to cut the budget on the police and they’re going to cut the budget on sanitation by a hundred million dollars, so there’ll be trash in the streets and people afraid? Yes. All of this makes sense. What I’m saying is all those conversations come into play when deciding whether or not to buy a home in any city or any town.

I think the process will become more streamlined. The amount of documentation, paperwork, things that are needed to make a home sell will become more streamlined. At the same time, it’s not just one company. There’s lots of different departments. You’re dealing with the city. You’re dealing with the town, you’re dealing with a bank, you’re dealing with a seller. You’re dealing with their lender. How do you get all of that on Amazon? You don’t. Will developers be able to sell through a one-stop shop? Possibly. Then how do you differentiate yourself from the rest of the competition, and how impersonal is that?

I don’t need to have a personal conversation when I’m buying a product on Amazon. I just need to show up in a box. I also didn’t know that I needed that before Amazon showed up. Who knows, I’m excited where real state goes from here. I think the process of buying and selling a home is going to be [00:16:00] very, very different in 2030. I am very much looking forward to where are we going to be in nine and a half years? It’s already the middle of 2021, which means it’s going to be 2022 before we know it, which means we’ve got eight years left to get to the next decade, which is mass craziness to me.

With all the technology that gets invented, there comes more confusion. People aren’t really getting smarter. The brains are still there. People are people and they need their hand held. They need to understand what it is they’re spending money on and what that process is like. I think salespeople will become more educated. That’s why we focus so much on education. I think the process in which we go about marketing homes will change and a few other things.

Jonathan: I want  in a second talk about 77 Greenwich, but I just had a couple more questions, just my own personal curiosity clearly being on Million Dollar Listing and the publicity surrounding that helped your career. There’ve been a lot of brokers in the show. Most of them not experienced your level of success. What did you do to leverage the show, to get to where you are now? What do you think separated you from the other brokers who weren’t as nearly as successful?

Ryan: I will squeeze every lemon I can find. I will not leave any stone unturned and I am relentless when it comes to working for my clients. That’s what people will say about me. I’m just relentless and getting deals done, relentless in anything. If I put my mind to it, I’m just going to go after it because why not? It’s like climbing a mountain. You ask people who’ve climbed Everest, why would you do that? And they say, because it’s there, there’s the opportunity. I think there’s two different types of people. There are people who will take initiative and take opportunity, and there are people who will do work, and do what they’re told. It’s a very, very fine line. I think that when I saw that opportunity, we had the show, I waited one day in 2012 for my phone to ring because I thought, “Oh, millions of people are watching me sell real estate boom business card to the world. Let’s go, phone is going to ring off the hook.”

I stared at that phone [00:18:00] for an entire day and no one called. Apparently, people don’t believe pick up the phone and call people that they watch on TV. Like you’re not watching the news and you’re like, “Hey, Anderson Cooper. What’s up, buddy? How do you even get that guy’s phone number?” I said, okay, well, I got to make use of this. What it enabled me to do was open doors that I knocked. If I knock on the door, I can use the show and the publicity from the show to get people to open and have a conversation with me that they otherwise might not have had to be able to take on projects like 77 Greenwich and everything else that we do.

The publicity that I use from the show and the content that we’re able to create helps me open doors that otherwise never would have come to me because I just don’t know those people. I think that I work every single day. I work seven days a week. I’m up at four in the morning. My last appointments are typically sometime between eight and 8:30 PM. If I have a dinner event, I try to get out by 9, 9:30, but sometimes they go to 10, and dinner events are back right now and I miss a good Zoom. I think that our ability need to really, really put things out into the atmosphere to create a brand is then what it’s all about. That’s what we teach our agents.

There’s strategy to creating a brand, which is figuring out what your core identity is, creating consistent content around it, and putting it out there into the world so people know it. Then shouting every single success you have from the mountain top because success begets success. Brand and brand recognition and awareness, which is really what your question is, is reputation. Reputation, If you pull the layer back is then perception that the world has of you.

Then if you pull that back even further, perception is your core. It’s what you believe in yourself. It’s your confidence. If you are confident about being the best real estate agent in the world, and you put that out there to the world and you create content about it, then the world’s perception of you is going to be like, “Okay, they’re the best, look what they’re doing. They’re super successful.” Perception. [00:20:00]  Then that perception is going to turn into what people say about you behind your back which is your reputation. That reputation is your personal brand.

Jonathan: One of the ways you put yourself out in the world is social media you’re a prolific user. You have unbelievable content. One, I guess how many people do you have working for you just solely on social and what are the best mediums of social media to attract business?

Ryan: I would say for us because we’re in a visual medium, Instagram is very important followed by YouTube. YouTube is the second biggest search engine in the world owned by the people that own the first biggest search engine in the world. Search is life. You search for everything, anything you don’t have to search for it, whether it’s outside in the park or it’s on your phone. We want to put out consistent content over and over. Some of it’s terrible though. Some of it is not good. Some of it no one cares about it. They don’t like, whatever, but you got to keep putting it out.

Then we put out content that really works. That’s great. We put out content I think is amazing that no one cares about that’s annoying. Then we put out content that I think is stupid. Whatever. Then everyone loves that. I am like, “I don’t understand people.” More than anything, it’s about being consistent. I think if there’s anything to say about us, is that we are consistent. Consistently consistent.

Jonathan: Trinity Place Holdings, they have a property, 77 Greenwich Street. If you look and you rebranded it to Jolie, if you look at Million Dollar Listing, a whole transaction takes place in about 15 minutes, I’d love to see if you can maybe take me behind the scenes. How did it come to be where you’re now representing this? It’s a relatively large building, this whole building. How did that work?

Ryan: When we started the company, the new company, Serhant, we did exactly what I did when I first got into the business, which is no one’s going to care that I started my own company unless I make them care and I’m going to reach out to everybody and just let them know, “Hey, here’s what I’m doing. Here’s how we’re great. [00:22:00] Would love to know you.” If I don’t already know you. We put a book together and put a package together and had it not been for COVID. I would have done this all in person and dropped it off. It would have been a lot. Due to COVID, everything had to be digital. I sent emails to every single developer that I know and don’t know. One of the developers we reached out to was Matt and the team over at Trinity.

It wasn’t about 77 Greenwich. It was, you guys are developing towers in New York City. I would love to know you. I just started a brand new real estate firm in the middle of a pandemic. I believe in New York City more than anyone. I’m signing a lease for a 15,000 square foot building in Soho. Everyone’s calling me crazy because they think New York is dead. I disagree. I would love to meet you to talk about your future projects.

A lot of people responded. One of them was Miriam and Jeff who worked with Matt and they just want to talk about the future. Then they brought up 77 Greenwich. Then we had those conversations and I’ve known about the building for a long time. I think more people needed to know about the building and those conversations led to meeting with Matt and those conversations led to putting the sales team together, just sending them an agreement, to it being negotiated, to proving to them that we could really, really make a difference in traffic and in deals and in offers and in understanding the story against intense market headwinds, which is what we do.

It’s worked out well so far. It hasn’t been that long. We only just started, we’re cranking deals. There’s 90 units, it’s 42 stories. It’s got amazing amenities. There’s one, two, three, four-bedroom apartments. Amenities are at the top of the building. You’re at the school, you’re at the park. I know the area incredibly well because when I got into the real estate business, I was living at 88 Greenwich directly across the street.

When I got cast on Million Dollar Listing, I was living in 88 Greenwich in a little studio apartment they had there. Apartment 1213, which has like a little alcove. That’s where I put my mattress on the floor. The minute I got cast, I was like, “Shit, I can’t be living in here on this little studio.” I took all the money I really didn’t have and went and rented [00:24:00] a massive two-bedroom at 20 Pine street, which is a couple of blocks away. I was selling 99 John street at the time. I’ve lived in most of the buildings in the financial district. I know the area incredibly, incredibly well. I’m a big, big believer in it. I think it’s awesome. I’m just excited to be a part of their team.

Jonathan: You rebranded it. I’m not sure if they had difficulty or whatnot. It just wasn’t selling as well obviously,that’s why they hired you. How did you come up with a new concept? You have a whole team that does this, is this you personally, how does that?

Ryan: Sorry, I didn’t fully answer one of your last questions about social and the team that handles all of that. We think about social all the time. It’s a big part of the business now because it’s targeted advertising and it’s authentic and it’s organic a little bit of a push, but our business has made up a couple of different departments. We have the studios team. Serhant studios is our in-house film studio and amplification center. That’s 10 people. They create all the content and handle the social, both for me and for the company, and for our project. They don’t just focus on me all day. I wish they would, but they’ve got other things to focus on. They help with all of that.

Coming up with the brand and the story, we have ID-LAB, and they are our marketing and innovation hub. They just sit there all day long and they brainstorm and they think of amazing new ideas. We put in front of them and I said, listen, “77 Greenwich. Here’s the renderings they have right now. Here’s what the building has. Here are the pros. Here are the cons. Come back to me, let me know what your thoughts are, hash it out.” We came up with a lot of different ideas, lots of different names, lots of different stories, but we kept coming back to 77 Greenwich being rooted in a very specific location.

There’s a lot to the financial district that people I think are unaware of. You think office buildings, you think World Trade Center, maybe there’s a couple of other buildings you think about but you don’t think, restaurants, you don’t think atmosphere necessarily. You don’t think park space. You don’t think dogs. Our head of new development [00:26:00] has a dog. We said, what? We really like the name, Jolie. We think the building has been branded previously as masculine big edges, feels like an office building. We don’t want to do that. This is a building that has a lot of three and four bedrooms. It’s amazing for families. It’s great for pets. We want to give it a different identity, make it a little bit softer, make it sexy. People don’t necessarily know where 77 Greenwich is. People are like, “Oh, Greenwich is that Greenwich village? Where is that? Oh, is that battery park? People don’t know. We wanted to give it a name that give it a root in a story. Then we made a video where someone, me, lives at 77 Greenwich and has a dog and runs around and follows the dog through a very French financial district and goes through all the French bistros and coffee shops.

Just has a good time because when you live at this building, you will have a good time because the investment will be great, but also your life will be great. We hashed it out with Trinity and went through all the different ideas and options and they give us pushback where they wanted to. I do give them credit for giving us leeway. They’re the types of developers, who they do what they do, and they do it really well. They expect to hire people who are really good at what they do and give them the runway to do what they do well. They’ve done that for us and it’s been very rewarding and I think they’re happy so far.

Jonathan: What’s success for you on that property?

Ryan: Selling out and beating expectations, our blended price per square foot there is a little bit over $2,000 a foot. When you have a sellout, if we can achieve that and achieve that in the next 12, 18 months, that would be really, really great. It’s 90 apartments, but there are 90 large apartments in a building that is still heavily under construction. Although it’s getting there, we’ll be able to start closing probably some of the smaller units in the next couple of months, closing all the bigger ones by the end of the year.

That’s pretty great. They have an amazing construction team. That’s working very, very, very, very, very fast. They do great, great work. As the building gets more complete, people [00:28:00] will be able to move in. Right now, what we’re seeing a lot of, for all of our projects that we’re selling, is the people who are purchasing now are people who are coming back to New York City and they need a place to live now. They either sold their place last year, or they gave up their rental and now they’re coming back and saying, “Okay, well, can I move in on June 1st?” I am like, “June 1st is next week. That’s impossible.” Like, “All right, well, then I got to do something else.” I am like “Okay.”

Once we’re able to say, you can close in 60 to 90 days, that’ll be a huge, huge difference.

Jonathan: What’s next for you? Obviously. You have a lot on your plate, but you’ve clearly built a great brand. You’re known for real estate, but I imagine that’s going to translate to other things as well. Where do you see yourself? Five, 10 years from now.

Ryan: I’m very focused on 2030

Jonathan: Nine years from now.

Ryan: I say that because it’s like, I just think you remember 2010, 2010 was the year for when I finally said, “Okay, this real estate thing, isn’t just here to pay rent. I’m going to do this. I think I can do this. I don’t know that many people, but I think I can teach myself how to sell real estate, high-end in this crazy city that I’m not from. I think I can figure it out.”

Then I got cast on Million Dollar Listing and I started filming at the end of that year. That doesn’t feel that long ago, 2010. Now it’s 2021. 10 years went by real fast, let alone 11 years. 2030 is going to be here before I know it. I’m very focused on myself in 2030. Where is he? What’s he doing? Because I’m going to be that guy before I know it. We’re all going to be ourselves in 2030. It’s going to be here before we know it. What am I doing today to set up his life so that he’s having the greatest year of his life. My biggest deal? I haven’t even done it yet.

I’ve done big deals, but I haven’t done the biggest one yet because I haven’t even met that guy yet or her yet. That’s exciting for me. I’m hoping to build the greatest and largest real estate firm in the history of the known universe. I’m figuring out how I’m going to [00:30:00] do it. We are seven months in. Touch base with me in a couple of years and our future selves, we’ll see each other in 2030. I hope I was right. Well,

Jonathan: I look forward to doing that in 2030, but hopefully, I can meet you in person before that. I want to thank you for joining me on The World According To Boyar. It was great having you and I look forward to watching the latest season of Million Dollar Listings. Thanks again for your time.

Ryan: Thank you, man. Thanks for [unintelligible 00:30:27].

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

[00:30:44] [END OF AUDIO

Transcript of the Interview With Leon Cooperman:

[music]

[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,

Warren.

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]