How to Earn Stock Market Returns With Half the Risk | TCAF 210

Summary

• Investment Strategy: The podcast discusses a disciplined approach to value investing, emphasizing the importance of risk management and seeking opportunities with good risk-reward profiles.
• Market Insights: The conversation highlights the challenges of navigating market cycles, noting that while some companies may appear overvalued, there are still opportunities in smaller cap stocks and international markets.
• Company Analysis: Specific companies like Microsoft, Google, and Netflix are mentioned as examples of successful investments made during periods of market skepticism, illustrating the importance of understanding long-term business prospects.
• Risk Management: The podcast emphasizes a risk-first approach, focusing on protecting capital and avoiding permanent impairments, while also being mindful of potential upside opportunities.
• Portfolio Strategy: The discussion covers the flexibility of the FPA Crescent Fund to adjust its equity exposure based on market conditions, with a historical focus on maintaining a balanced approach between stocks, bonds, and cash.
• Market Trends: The conversation touches on the impact of AI and technological advancements on various industries, suggesting that while some sectors may face disruption, others could benefit significantly from increased productivity.
• Economic Outlook: The podcast briefly addresses macroeconomic factors such as monetary policy and inflation, with a focus on how these elements might influence investment decisions without dictating them.
• Future Opportunities: The discussion concludes with a hopeful outlook for future investment cycles, emphasizing the potential for active management to capitalize on market inefficiencies created by passive investing trends.

Transcript

So, I was just in uh I was just in LA and I drove for the first time through um >> Thank you. >> drove through Malibu like on the PCH and you know on the way to LAX. So, you got to go through um I was in I was in the I was in like the uh Thousand Oaks area, Westlake Village. So, you had to drive through um the canyon down Malibu and I hadn't seen it yet cuz this happened when? January. Okay. I could not believe the destruction. Like a thousand It seemed like a thousand lots were just empty. >> I I drove it for my first time myself this last weekend. >> Oh, okay. >> Cuz I have such PTSD. >> We might have been on the same road at the same time >> going the other direction. >> Um you know, for a wedding, but it was I went through the Palisades and and I've just not been able to bring myself to to drive through. >> I have never seen anything like this. I I mean >> dozens of of friends have lost their homes. Yeah, it looked it's hard to describe, but like the lots where the homes used to be are separated by like fences or some they used to be. So, it's just lot after lot and it's I think it's thousands of them that were on the beach where these things were burned down to the foundation like you just see like concrete and wreckage and it go it feels like it goes on for 10 miles. I don't know. >> No. Yeah. From Santa Monica all the way up to Malibu. So 10 miles is exactly right. I >> I would guess and I don't know this for sure. That's got to be in dollar value the biggest um destruction of like individual people's properties that we've ever seen. >> 100%. >> Like I know Maui was really bad and I know California's had wildfires. >> I don't know how inflation adjusts Pompei, but >> yeah. No, this this it reminded me of um the Chicago fire. Not that I was around for it, but like the things that you read about it where a quarter of the city burned down. >> That's what this looked like to me. And uh I was just I was just blown away by it. >> Yeah, we were we could not get to our home for well we were told to evacuate. We were out for 10 days. I was able to sneak back in, >> you know, over the first 5 days. Then I wasn't the National Guard came in and I couldn't get back in. But it it's a great advertisement actually for Amazon because I got back and somehow packages were at my front door. >> Oh my god. I mean delivering in an apocalypse. >> Yeah. I don't know how. So my brother lives in um Calabasas and they were evacuated twice from their neighborhood and thank god nothing happened but like twice they just they had to go to the in-laws and just >> you you watch the ring camera and you >> So they were up in the hills in Calabasas. Yeah, it's horrifying. I grew up out there. That's where that's my old stomping ground. >> That's a really cool part of the country that I hadn't spent a lot of time but I was there for a couple days uh this past weekend and somebody told me it's like a coal town. It's like a company town. Like all the wealth originally in that area is from Amgen. Is that true? >> Well, not originally. No. Amjen wasn't I mean like wasn't a thought. But when after am became >> the mansions the the McMansion >> but later later on Amjen was a was not a large enough employer to to to develop Calabasas. >> Okay. >> Steve, you remember when this picture was taken? >> Oh god. The gut photographer promised promised me that he was only going to take that picture with sunglasses cuz I wouldn't do it. And I said, "I'm look like a can I say [ __ ] on this program?" Okay. You know, like I you know, I just I'm I'm 35 years old and and you know, cover of Money Magazine. The last thing I want to do is knowing that, you know, es and flows of the markets and you're not always going to be, you know, on the hit parade and the last thing I want is to have a photograph of myself with sunglasses. But of course, >> wait, are there palm trees, too? >> Yes. It's like the kids. Beverly Hills. >> You look like you look like Aaron Egard in that picture. >> Well, we No, take it down. We'll put it up later in the show. We'll put it up later in the show. >> Can you not? >> No, we're going to put it up. We're going to I want to know I want to know all about the show. I'll be a sponsor. Just so you don't put that up. >> Oh, it's going up. >> It's It's definitely going up. Would you Would you consider me to be a wife guy? >> I don't know what that means. >> A wife guy. >> Anybody here know what that means? >> A wife guy? No. >> Nobody knows what that is. >> Without knowing that what you mean. No. >> Yeah. >> Somebody told me I'm a wife guy. One of my cousins told me this like, "What do you mean?" He's like, "I don't know. Like, you're always doing stuff with your wife." Like, "Well, don't most of us." He's like, "No, you do like guy stuff, but you bring your wife." >> I don't know. Do I >> That's not That's not true. Like I do that. >> That's not true. >> I mean, you have brought sprinkles to stuff, but is it sort of true? >> You're not not a wife guy, but I wouldn't >> like a wife. >> You're looking at me like I have a point of view here. I just met you guys. >> Are you a wife guy? Would you say you're a wife guy? If my wife listens to the podcast, I'm 100% a wife guy. >> No, it doesn't mean if you're not a wife guy, you don't like your wife. It's more like there are guys that will bring their wives to stuff. >> Not me. I'm absolutely not. You're not a wife. Not a wife guy. >> Um, but I am. >> I love my wife, but not in that kind. >> I love her enough not to subject you to the version of yourself when you're with your boys. >> That's exactly right. >> Okay. I always thought that of myself, too. But I guess I'm not. >> No, you are not. >> I am not. >> All right. I'm relieved now. I know. So he's like, "You're kind of a wife guy." I really am. >> That's an interesting thing to say, some buddy. >> Yeah, it's a weird It's a weird thing. So >> making up terms, >> but you have friends that you know for sure are wife guys. >> Hate wife guys. >> All right, >> let's go, John. >> This is called easing into the financial side of the discussion. >> Before I insult any of the wife guys in the audience, we love you. We love your wife. >> We support wives on this show. [Applause] Today's show is sponsored by Public. Public is the investing platform for those who take it seriously. You can build a multiasset portfolio of stocks, bonds, options, crypto, and more. You can also access industryleaning yields like the 3.8% APY you can earn on your cash with no fees or minimums. But what says public apart? AI isn't just a feature. It's woven into the entire experience from portfolio insights to earnings call recaps. Public gives you smarter context at every touch point. Plus, for a limited time, you can earn a 1% match on all IRA deposits, IRA transfers, and 401k rollovers. Fund your account in 5 minutes or less. Find out more at public.com/compound. Paid for by public investing. Full disclosures in podcast description. Oh. Oh, of course. All right. All right. Thank you, John. Ladies and gentlemen, welcome to the Compound and Friends, the best investment podcast in the world. John is here. Nicole Duncan is here. Our friend Steve Schaefer in the house. Steve, you sitting on a lot of these, bro. We should have like a dedicated chair for you. You like being here? You're into it. All right. All right. Thanks, Steve. We have a very special guest. I called him a legend when he walked in today. Um, I've read his stuff over the years. I've heard his name uh over and over again. He is highly specifically uh I would say revered by a certain component of the investment market. My first exposure to your research through Meb Faber. Mebb always shouts your stuff out on the idea farm. Do you know that? Sure. Okay. >> I didn't know we always say that that he's a big fan of yours, too. And and so am I. Steve Romik joined the FBA uh FBA in 1996. He serves on FPA's management committee and as a co-portfolio manager for FBA's flagship global asset allocation fund, FPA Crescent. You started that fund three decades ago, Steve. I don't know if you know that. >> I do know that. >> FBA is a Los Angeles-based institutional money management firm practicing a disciplined approach to value investing with approximately $30 billion across multiple strategies. He is a multi-year award winner in the mutual fund community and uh someone who has earned tons of respect over the last few decades. We're so excited to have you here. Thank you for joining us. >> Thanks for having me. >> Did Steve make you come? >> He did. >> All right. >> I really tried to get out of it. >> He did the right thing. We're going to have so much fun today. I promise. I promise. >> Steve, you were a young man when you had that when you got that responsibility. >> I think he just I think he just called me off. No, it would have been funny. Holy [ __ ] >> Ended the sentence. You were a young man. >> You You were young once. >> I was young once. >> But you had a lot of responsibility as a relatively young man. Like that's impressive. >> I Well, I started working for a hedge fund back in the mid 80s and I realized there was kind of a gap in the market. There wasn't a public fund that really kind of served my interest and so I said, why don't I just create one >> and so I did. >> What was the gap? >> Well, the go anywhere fund. Everybody, you know, a lot of investment part there weren't as many investment partnerships then as there are now and there's fewer now than there were 10 years ago, I would guess. But back then there was, you know, you were you were really siloed. You were a large cap investor, you were a small cap investor, you were US investor international, you were debt or equity. And if you were debt, you were high yield, you were or you were you were uh high grade. And so there really wasn't anybody that that could kind of look across the landscape in the capital structure to to kind of, you know, create that, you know, look at a breath of opportunity. And it's just so why don't I just create that? >> You were 6040 before 6040 was a thing. >> It's a really great point. like a lot of um the most well-known investors or even asset management firms probably not recently but over the long term or throughout the history you became known as a bond shop or a stock shop or these are growth guys these are value guys the ability to do what you thought makes sense in that moment was probably where the big gap was. >> Yeah. I mean, at in moments in time, and at moment time, we will look like other people and we'll own a lot of stocks that other people might own at a point in time because the crowd isn't always wrong, but often it's not always right. And not to be able to have that that that flexibility to do something different is can be problematic. >> What's the hardest part of your job? The stock selection itself or choosing the allocation levels for the different asset classes that can be in your uh in your fund? >> It's the security selection. We're going to broaden it out because it's not stock, whether it's stock or bonds. It's a security selection because the allocation is a byproduct of what we're finding is opportunity. We don't make an allocation decision. Oh, we want to be 30% in cash, 20% in cash. >> If we see things that are attractive, offer good riskrewards where we can protect our capital on the downside and then see good optionality on the upside, we're going to go and put capital regardless of the environment. So, if you see 50 stocks that you just absolutely have to have because you recognize there's an opportunity there, you don't have a problem taking down your bond exposure because you're not up against a a wall of hey, you're supposed to be 20% this many bonds, 20 30% stock. Like, you >> taking out our cash exposure because we don't actually have we don't have much bond exposure at all today. We can dive into that if you'd like in a little bit, but you know, yeah, we it's it's cash. cash becomes a residual byproduct of our of our investment process. So, we'll pull down from that cash repository when we see lots to do and when we don't we uh you know cash builds. >> I want to start by quoting you. Is that okay? >> Sure. Nobody else does. >> All right. Um you said this year earlier this year in the midst of the uh the the the tariff tantrum, I don't know. Do we have a name for what went on in March? >> Tariff. Tariff tantrum. Okay. You said this a decade ago. I gave a speech to the CFA society in Chicago and said, "The one thing you shouldn't be surprised by is surprises. Nothing's ever certain. At the end of the year, more than 40% of investors thought there was less than a 10% probability of a stock market crash. During the depths of COVID in 2020, less than 15% of investors thought there was a less than 10% probability of a stock market crash. Investing like life is eminently unpredictable. I anticipated there would be fires here. There were videos of Richard Nixon in the 1950s hosing down his roof. I had fire hoses on my property, a pump to take water out of the pool, but even the bestlaid plans. So, it sounds like you are end quote. So, it sounds like you are um risk first or or risk management first and then seeking opportunity secondarily. And I guess that explains why you've been able to survive for 30 years basically doing um the you know the same thing that you've been doing. A lot of people haven't had that longevity. Do you think >> it's evolved it's evolved along the way? Yes. I certainly believe that risk first has been paramount for what we do. But the longevity isn't just tied to that. It it's also there's a lot of my my my brethren over the years you know value investors who are no longer in business sadly because they were risk you know protection first downside management but they forgot about the upside >> so we're very mindful of the upside too and making sure that we you know are always seeking the opportunity there's generally something to do and I'll credit my my partner Mark Lander more than anybody else to really pushing me in that direction. I want to put up a chart of the total return of your fund. And I know there are compliance rules, so we're not going to have any forward-looking statements here, but I mean, this is one of the most impressive things that I've seen outside of looking at like just an index fund or something. I mean, you have really done the job for the people that have entrusted you with money and you've done it for a really long time. Do you ever look at this and and um and say to yourself like, "I did it." Like, do you feel that sense of accomplishment by now? You give yourself that at least. >> Uh, generally not. I feel a little bit like a movie producer. You're only as good as your last hit movie. >> I know. But there's a lot of hit movies in here. >> Yeah. I mean, there have been there's been good moments. There's also some some draw downs in there, you see, too. But fortunately, our draw downs have been a lot less than the market. We've had these market draw downs. But no, I don't really we don't you know, we don't rest on our laurels. We're always looking forward. And it's and I think that if I were to sit back and think about Yeah. We've look inarguably we've done a good job historically. But what keeps me getting up every day is knowing that I need to keep doing that. >> Yeah. Um can I show you a picture? >> No. >> John, if you would. So, all right. But let's talk about this. First of all, the timing of this is unbelievable. The the sub this is Money Magazine, the 1998 ultimate guide to mutual funds. So, I'm guessing this came out in early 98, right? or late 97. >> This is your Madden cover. It was >> all downhill from here. >> Well, so so you're on the cover. You're sitting on it. Is that a limousine? What is that? Ben. >> No. No. It's just a used BMW. >> All right. Stop. Used. >> It was. I swear to God. >> Used for the photo shoot. >> No. >> All right. But you are a f You were one of the five fast ranking stars and probably the most handsome one. So, they put you on the cover. This is you at 34 years old. And all right, you've already expressed to us you didn't want to be in the picture. Uh, we understand that, but that's kind of cool when you're in your 30s, like that level of recognition. People said, "This guy knows what's going on. This guy's good at what he does." That I mean, you have to admit that's kind of cool. >> It's Yeah, it was cool at the time, but the sunglass thing really was not cool. >> Okay. Uh, I get it. Well, I think it looks cool today. Um, look at the subheadings, though. >> Beat the year 2000 bug is on the top and then cash in on falling rates. We ba from this point forward, we basically had 24 months to get out, right? Is that the way you'd think about it? >> Yeah. I mean, it's it's like I mean I think more important point is they put me on the cover of Money Magazine only to see my relative performance decline, you know, precipitously. >> Were you in the wrong you were in the wrong stocks for that that two-year period? >> For that two-year period, 100%. I mean, we were behind the market by 40 some odd percentage points, give or take, over the >> back up for people that weren't around then, if you didn't own internet stocks and in '98 that was Amazon, eBay, Yahoo, AOL, uh, Netscape, like if you were not in that trade, you might as well have not existed. >> Sun Microsystems and Sun Micro. >> Look at this. You look like Bergkshire. Yeah, that I was going to say that looks that looks eerily similar to, you know, the Warren Buffett cover. Warren doesn't know what he's doing. Like >> that was Baron. That was that was Baron's in that era. I mean, I really think the reason we had we had any money left in in the fund was because people either a felt sorry for me or b they forgot they had money with me. >> So you lost 85% of your assets. >> Yeah. >> There's a famous quote uh you probably know the guy's name, the French guy that ran First Eagle Global, >> Jean Mariaard. >> Okay. Legend. Another legend, um, Jean Maria Eviard said, "I would rather lose half my clients than half my clients money." Um, and that became sort of a rallying cry for value investors over the years since like, I'm not going to chase this. I don't care if you redeem me. It just I this is not >> it ended up being the right decision because we made money in 2000 when the market was down. In fact, you look over the five years 98 to 2002, if you were to carry that chart further, chart five, >> we actually, you know, earned it all back and and and then some and we ended up well ahead of the market. So here we start off the same place you see in that chart to 98. >> That's you on the hood of the of the used BMW with the sunglasses on it. 10,000. >> Perfect timing. >> You turned that into 14 10,000 into $14,000. >> Did you feel bitter? Like did you call the people that fired you and said, "Ha, >> no, I didn't because that doesn't do any good." Um but um I did I did >> 100% >> I did have one client will remain nameless institutional separately managed account who fired me in that period >> and 12 years later 11 years later they came back and became a client again but it was a committee and I don't think they remember they had money with me 11 years earlier. I didn't remind them of that fact. >> Okay. What so what did you own while All right. So that it's an impossible environment to not lose your head at least temporarily because there literally are stocks like Dell computer that are going up 5% a day every day for 6 months. I was there. I remember it vividly. Thankfully I was managing $10. So nobody cared what I thought. Um and I had no context for what I was witnessing. You were a little bit older than me. So you kind of knew what was going on. What did you own in order to stay out of that fray? And were there people on your in your firm that were like, "Steve, what are you doing? We got to get long. We got to be in the in this trade." >> Well, first let's start with the firm. I'm very fortunate to always have have always had great partners at First Pacific Advisor and you know, at the time >> that's what the FBA stands for. >> Thanks. >> All right. >> Uh Bob Rodriguez was uh leading the charge of the firm then and he was operating similarly. So no push back from the firm at all. Push back from clients. How do you not own Microsoft when when it's growing like it is and both in its earnings and its stock price? I mean, it's a one decision stock. >> Did you never own those names? >> I did. Oh, yeah. We bought Microsoft. To jump forward for a minute, we bought Microsoft in 200910. I guess it was 2010. >> But I mean, in the late 90s, did you didn't own Didn't own one. >> Didn't own one. And so returns are driven not just by what you own, but what you don't own. So you're you're able to avoid some of these big disasters. You can see them coming. I mean, you could see the disaster coming. Didn't know when, but you knew that it didn't make any sense. And so, we were able to avoid all of it just because we felt the right thing to do was to, you know, you know, a protect capital, b these valuations didn't make any sense. C, there were lots of companies offering terrific opportunities at the time. Companies that were, you know, relatively mundane businesses, you know, that where insiders were buying a lot of stock like Pinkertons. Yeah. you know, is which is since got since got sold, the security services firm or IHOP, the the pancake house, >> right? So, you were still sticking to your discipline, looking for lower valuations where there was more potential upside if things went well. And everyone else was thinking the internet is going to change the world in ways that you cannot imagine. And if you're not in these stocks, you're missing out on the greatest opportunity in history. The the that crowd was right. They just owned the wrong stocks and they own them at the the wrong price. Price matters. >> Price matters. That so that's the big takeaway. It's not that Microsoft didn't change the world multiple times. It's that paying 70 times earnings. They could change the world and you could still lose money as an investor. >> And a lot of it was, you know, I would call it being dead right. Yes. Internet was a thing as we well know. It's it it is a thing. And at the time there wasn't the infrastructure around it to support the businesses what you thought they might be able to do in the future. So for example, etos >> etoys market cap to speak after it came public exceeded the entire toy market made sense at the time I mean and yeah but meanwhile there was no ability to deliver these these piece goods these toys and small tickets to people with any kind of economic passion right there wasn't the distribution system that exists you know to the home today you know or the distribution centers to kind of do it and and and and break pack you know these different things and and sell something and deliver for it, you know, at $12 average ticket. >> So, there were two types of disasters looming. One of them was companies that just made absolutely no economic sense for the reason that you just cited. Those are the pets.com and the etoys. And I don't know, were there 500 of themish, something like that? I don't know the number. >> They came public as fast as they could do the paperwork. There was like literally no limit. Web van, peep pod, it's just like this endless list. That's one type of disaster. The other type of disaster is paying 120 times earnings for Cisco. Cisco's fine, still exists, still a dominant company, but you had to wait 20 years to get back to those previous peaks. So like I guess avoiding both types of disasters, it's not equally difficult. >> Yeah. Avoiding the again goes back to that statement price matters. So you're saying both avoid the binary, the companies are going to zero and avoid the companies that are good businesses, but the valuation doesn't justify you know the uh you know its perspective or industry. Going back to the example, you know, of Microsoft, Microsoft's earnings over the next decade, give or take, were up about 18%, you know, compounded between 2000 and 2009. It ended 2009, you know, lower than where it started the decade with growing earnings with 18% earnest growth. >> Yeah, that's how expensive that stock was coming into the decade. And and Balmer lost his job over it. >> No, he didn't lose his job. >> Well, people were like, >> he had it for years after that. And we bought this stock because we bought it at a point in time where where people were really fearful about, you know, form factors and well, people aren't going to people are going to be using this this iPad that sits in front of me and not use PCs. People are going to uh not use um word, Microsoft Word. They're going to use Google Docs. They're not going to going to um use uh uh DOSs. They're only going to use iOS, you know, based products. I mean, lots of that was there. And since then they've obviously, you know, found a way to be, you know, moderately successful. >> People learn um lean a lot on history and prior market cycles. And I think that the dot bubble and bust was very destructive, not just for all of the money that was lost at the time, but a whole generation of investors who thought that history was going to rhyme. So one of the quotes um from that period in retrospect that a lot of people look at is from and you you've highlighted this is from the CEO of Sun Microsystems. So he said at 10 times revenue to give you a 10-year payback I have to pay you 100% of my revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard for 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any footnotes. What were you thinking? And so, we know how that ended. And I think a lot of people have been making the analog for the last 10 years since 2015 when we coined the fang um about that period of time. You guys have somehow managed cuz you lived through it and you made a lot of money through it. But you have somehow managed to more or less keep pace for the last three and five years despite having um a a cash allocation, a bond allocation. It's almost like a miraculous and a value discipline. >> Yeah. Like how how did you survive because nobody else did. >> Well, we were Look, I'm not going to Luck does play a role. Sometimes you just get it right, you know, for periods of time. And certainly that's part of it. Um but you know, look, being thoughtful about what businesses are going to be better businesses in 5 to 10 years are at least as good, if not better. And that is to say those businesses that are going to throw off more cash flow than they throw off today. And what are you paying for that cash flow in the future today? So if you just look at that, think of it like a bond. If you just were to invert every investment you were to make from a from a PE basis and look at on an earnings basis and better yet look at on a pre-taxfree cash flow basis, take the company's cash flow before taxes and before interest expense and look at it on an unlevered basis. you know, that's the numerator and divide that by your denominator, your your uh enterprise value and kind of compare it to a bond and and look and see how much you're going to get for that like a treasury inflation treasury inflation protected note that'll give you some kind of growth in the future. So, what do you want to pay for that growth is what we always come back to and some things just get to be too expensive and so we back away. So, we we bought we we tend to lean into businesses when people don't like them. We still think that there's a few good pus left in those cigars if not more. we make a lot of money if they really end up being something better. So Microsoft's a good example of that. We bought Google in 2011 when people were really really quite fearful of the uh global economic landscape. We bought Cambridge uh Meta which was Facebook at the time during the Cambridge Analytica scandal. People were going to streaming was dead during COVID. So Netflix traded down. So we bought Netflix which we don't own in Crescent anymore. the you know when you can find these business you think are going to be better in five and 10 years and that is and you have a variant view as to that perspective there is you know you know often money to be made. Would you rather own a company that you think the prospects are going to be better um even if it were more expensive versus a company that's already expensive but you agree the business is the business is going to be great and the market is right like what's more important to you the outlook for the company or the valuation? >> It's you they're they're connected because well it also I mean I'm not going to pay a hundred times earnings for a company you know that it doesn't make any sense. I'm asking if I gave you Nvidia's last 12 quarters and I came to you three years ago and I said here's here's the next 12 quarters you have to pay 50 times earnings for this company. You would though, right? >> Sure. If you know the company's going to grow earnings none of us do, >> right? So it's all it's all a function of your conviction what the growth rate in the earnings stream is going to be prospectively. The greater the conviction, the more likely we're willing to pay up for something. I asked you that question because I think unfairly a lot of people think of value investing as this PE is lower than that PE, therefore press the buy button on this one. And I I mean I did see some of that with like Intel versus Nvidia a few years ago. >> AMD definitely. >> Uh yeah. So there there there does exist that mentality, but that's not actual value investing. That's just looking at publicly available numbers and um being as as unthoughtful as possible about it. There's a lot more that goes into figuring out Is this truly a great business and worthy of a premium multiple? >> But you you bring up an important point because value investing historically was really about the protection of the balance sheet as it was historically practiced and written about starting with Graham and Dot. It was about the protection of the balance sheet buying a company below book value better yet buying it below its working capital its net networking capital. Good luck doing that now. >> Yeah. Exactly. Right. But and that's the way we started out and and and you know and really thought about you know protecting capital but then we realized over time that so many of those businesses were businesses that were more likely to be disintermediated and disrupted by technological innovation you know better competition etc. So we really wanted to say we really sat back and said all right we have to really consider what the value of the business of the enterprise is how good is that business and own these better businesses and pay a good price. So the protection is still a beast. It's just not the balance sheet, it's the business. And so there's more volatility that comes with that. I'm valuing a piece of real estate, you know, doesn't move around, you know, as much as valuing a business. If I had a stock that I was very certain was going to deliver a minimum of 20% earnings growth next year and it was currently selling at 16 times earnings because there was some idea out there in the market that it was about to be disrupted by automation. Would that be the type of stock that you would say all right we got to take a second look at this? >> It's going to be disrupted. We wouldn't look at it at all. >> But but you don't know that it's going to be disrupted. the same way. >> Oh, I thought you I thought your premise was that it would be >> I can't tell you that it will. I could tell you the reason it's 16 times earnings in a 22 times earnings market is because that's the concern around >> 100%. That's the kind of business we'll look at. >> So, that's Uber. That's $200 billion market uh $250 billion market cap. Um 23% earnings growth expected for next year. So cheap they're buying back shares, which is not a thing that you would normally see a company like this doing, but how could they resist? And I look at something like that and I say, "Okay, I believe in automation, but then I also believe this company's going to figure out their own automated taxis. How hard could that be? There's going to be millions of automated cars." >> Well, they're going to have to figure out with some by licensing somebody else's technology. >> Yeah, they won't build it. >> Or or they get acquired. Maybe Google ends up acquiring them. >> I mean I mean that's not a call. Let's be really clear. >> Understood. >> I'm just saying that anything's possible. Well, I guess my point is even in this moment with the S&P selling at a high multiple relative to history. There are lots of those types of companies right now, Adobe is another great example, >> Salesforce, >> uh, Salesforce. There there are businesses right now that people are very convinced AI/automation is going to be the end of those companies, franchises. >> In some cases, it'll be true. To your point, in some cases, it won't. So, it's our job to sit back and understand whether or not how likely it is to be true. And by the way, just because it will be true, if a company can generate a ton of cash flow and return, you know, along the way and return that cash flow to its investors, it may not be a bad investment. >> Right. >> You said, so I guess I'm just I'm very impressed. A lot of people that were around back then, especially in their formative years, and maybe it wasn't formative for you, although certainly earlier in your career, they got stuck >> when I was younger as you when you >> before I got old is what you said. But the a lot of these people got stuck and said like I've seen this movie before. We know how this ends. We know that value and small value and whatever will have its day and you have to evolve with the times. These businesses are fundamentally different. The operating margins which was one of the big points in 2015 is like these are unsustainable. Competition comes in. Um, you wrote in 2015, "Buying a company at 20 times earnings, hoping for growth uh in earnings and a future P of 2022 uh 22 times, excuse me, is not a recipe for good riskadjusted returns." >> Kind of is now a little bit like >> I mean, for the time being, yeah. And by the way, >> things change. >> Things change >> and you've evolved obviously. Yeah. >> But is that one of the hardest parts is to throw things away that maybe you believe in, but you recognize that the if the rest of the world doesn't believe in something and never will again, it might not be important anymore. It's one of the things that I've learned. >> Yeah. And and and we're also well buying a business. When we buy something, we want to have a clear view as to what the future looks like. A clear I mean what we want to have a clear view doesn't mean it's going to unfold that way. I guarantee you it won't. It'll unfold differently. And so what we have to we always lay out what our KPIs, our key performance indicators are to watch and monitor that business along the way because we're going to be wrong. We look, one of the biggest mistakes we made was not buying Amazon earlier on, at least in the financial crisis. We didn't buy it. >> Everyone's biggest mistake, >> right? And well, not not everyone's. A lot of people out there made a ton of money, but sadly it was one of ours. And so, you know, I I I read the the Everything Store book and after I read that, I'm like I was so sad, you know, because I didn't I'd spent the time I didn't spend the time really enough on the the web hosting business and what they were doing. And I spent a lot >> AWS. >> Yeah. And I also was less willing back then to pay for, you know, I I'm so concerned about the here and now and what was obvious about the future as opposed to like, oh, they could always change pricing and and and charge more money for X or Y to create greater profitability in the future. I was less willing to do that. But it really depends on the management team and what they're communicating that they're likely to do. >> It makes you feel any better. That was the biggest miss according to Warren and Charlie. That was their biggest miss. They knew it was going to work and they just couldn't bring themselves to do it because it looked so different from every other retailer they had ever invested money in. So >> misery indeed company. Can we um can we talk about the modern market, today's market? >> Yeah. >> Okay. Um dying to get your thoughts on this. Michael, you have a couple of charts that are worth scrolling through just to set the table. So we are in a period of time where not everything a lot of things are working really well and it's the things that you want to see working and there's of course a lot of [ __ ] but like for the most part the market is acting very well. So we've got the NASDAQ 100 has closed above its 50-day moving average for 102 straight days and there have been longer periods of time where it's done this but they're they're few and far between. Uh you've got the NASDAQ 100 as I just mentioned the S&P as well as the Dow and the Russell 2000 all making all-time highs and you're seeing it in the sectors the leadership sectors financials tech communication services uh and then you're seeing it in terms of like the equal weight uh equal weight tech versus equal weight S&P it is it's everywhere and it's not just it's not just in price it is being driven thank god uh by fundamentals So when you're looking at earnings estimates for the S&P, for the NASDAQ, as well as the Dow, all up and to the right, you're seeing everything you want to see. I guess the question that Josh and I were talking about earlier, the equal weight tech really quickly, we did that. We we got that one. >> Is is the market too good right now? Does it feel too easy? >> And do you automatically get concerned when Michael shows you charts, everything at an all-time high, like every major index, or not necessarily? >> No, that's my DNA is to get concerned. But that doesn't mean there aren't opportunities. So when you look back, you you you we look back and let me just start with make it analogous to the internet bubbles. We were talking about the.com you know bust back in 2000. And when you look back then 25% on a capitalization weighted basis, you know, uh 25% of the S&P was trading at greater than 10 times sales. >> Today it's 35%. So yeah, that raises our hackles and we get certainly that doesn't mean there aren't opportunities out there. We, you know, despite, you know, those nice charts you saying upward to the right, there are companies that are less important to those indices, they're smaller cap that are trading less expensively both domestically and abroad. So we have a large component about 40% you know of companies doiciled outside the United States. We also have a number of companies that are more cyclical, you know, and you know, and uh those companies are less interesting to the masses and are and are not hitting hitting new highs. Uh we've got, you know, certain healthcare related companies, not to dive into specific names and healthcare is too broad a term. Um you know, that we're finding, you know, as opportunities, but a lot of these companies along with those small midcap companies are are just, you know, trading below the radar. But but what's interesting is you there's a a there is this uh table I'll send you guys and um that that really shows over the LA from the October 22nd market low how have things done through June 30 and large cap growth has appreciated 108%. Large cap value is only up 51%. But to help make my point small cap growth is up a lot less than large cap growth at just 41%. But it's also up less than large cap value. So there is more opportunity. Now look, again, we're talking at an index level and they're comprised of lots of different types of companies. Doesn't mean every company's cheap. Obviously, >> you need a catalyst, though, when you're buying, let's say, a healthcare company that has sat out this entire rally, let's say it's selling at a huge discount to the overall markets multiple. Is the fact that it's that it's cheap and that the business is a good business, is that enough for you or do you also want to know why it might someday attract the attention of other investors who will buy it higher? If you have the right management team allocating capital, well, you know, good things happen to cheap stocks. >> Okay. So, you believe like it's not important why it will go up. It's just important that this business is throwing off a lot of cash flow. It's defense. It's got a some moat and we think this is going to be a good business for the next few years. Therefore, it's a good investment and someday someone else will agree with us and and buy it higher. >> We do think about what catalyzes it. It's not like we don't think about it. We do. We just don't always have an answer. >> Okay. >> I mean, if you think about our position sizing, this kind of gets into that, you know, the greater conviction you have in the company, this business and its mode and its growth rate and its management team to allocate capital well and understand what how how what the catalyst might be in the future, all of those things, you know, you check the boxes, you know, come back rosy, then then you end up with a larger position. >> I'm sure when you look back over your career, you think about how nonlinear businesses are in terms of the path that they travel, ups and downs. like Netflix has had a million different hiccups along the way. So, how important is getting the industry group right versus getting the winners and the business? Like we're we're talking about fundamentals and value investing and you know ratios, but like these at the end of the day, these are you have to be a business analyst, >> right? 100%. I mean, I'm more partial to the idea of having tailwinds. I don't mean like gale force tailwinds to to push my my America's Cup yacht, you know, you know, across the finish line. I just mean that the fact that the why do I want to buy a business all else equal where it's it's it's deteriorated and will >> fighting a prevailing trend that's and then and then and then sometimes along the way it's like will a company that's fighting that prevailing trend to use your your phraseology you know is some companies will fight as successfully as others won't why was you know why is Walmart been successful and Target so successful but Sears is not >> right so we just you know we're always mindful about what the management teams are doing it's not when you analyze the business. You got to understand the management. >> So, this is a business uh that's in secular decline. A stock that I tried to bottom fish and I I didn't. I sold it. Uh Western Union, for example, if you were to just look at the fundamentals, just like the the strip away the the business, they pay their dividend every year. I don't think they've I don't think they've ever cut or not paid, at least in in a long time. It's a 10% yield. Um it's cheap, but obviously it is being disrupted. It is under a massive amount of pressure. Not specific to that, but a company like that reinventing itself. Is that interesting to you? >> I I I don't know Western Union well enough, but just and this might be way off base, but superficially what I know of Western Union in terms of, you know, delivering money from point A to point B. And, you know, somebody here who's might be a migrant working sending it back to their home, you know, in in a in a province in Mexico, you know, um is is a way, you know, to you know, you know, get money back to them and help their families. You know, you can Venmo. I mean the the digital banking system is there. So I don't see again I don't know what else I don't know what else there is you know out there in their western union business again is I haven't studied it but if it's just that's what it is that's not doesn't hold any interest for me to want to look at. One of the things I wanted to ask you about was just this idea that there are some value investors who will I mean they don't last long their careers don't last long but there are some value investors who will become personally invested almost like a defiance like I'm not wrong the market is wrong you'll see you'll see and I saw people ride Sears to zero and I'm sure you did too and J C J C J C J C J C J C J C J C J C J C P Penny >> um and look number one I'll just stipulate it's really hard to know when doubling down like sometimes you might it might actually work out well and then you have the coal industry where every company in the industry goes to zero the steel industry I think we were left with one and now Japan owns it um like we've seen entire industries disappear so how do you guard against making that type of error where everything you believe might be true and yet that prevailing wind that's in your face just it never goes away until these companies just entirely disappear. >> Well, again, we really want we don't we want we want to sometimes what's inexpensive is there because of you know ephemeral headwinds. So it's our job as analysts, business analysts to your point, you know, to understand what is ephemeral. Is it is that going to change the vision is just a cyclical business or is it or is there something that's secular that's happening negative? Now we might get it wrong and there was an example. We we didn't buy Amazon but we did sell our entire you know portfolio of of of retail stocks. Last one standing was Walmart and then we sold that and then we bought back because we had owned it previously. We bought back PetSmart and for a minute just a starting position and then we ended up selling it quickly because we realized we were wrong. So you have to you have to have the intellectual integrity to question yourself. >> Yeah. >> You know, you just you just can't rest your lows and and and defiance doesn't get you anywhere. One of the problems and one of the one of the uh origins of that defiance is when you go out publicly and you quote defend the stock or you plant your flag or I know you don't do this stuff. You go on Twitter and you say this stock that I just bought at 20 that now is 10. I'll bet my life it's going to make a comeback cuz people don't like to be publicly wrong. Um, so maybe not talking about your biggest positions in such a public way or putting your life on the line for a stock is like a really great way to avoid that that issue. >> And it's also like what your DNA is and how willing are you to admit you're wrong. And you know, and you know, a lot of that's just formed by your DNA and some of it's formed by your environment. I've got I live with five women, my wife and four daughters, and they regularly tell me I'm wrong. >> Guy, I told you I knew it. I was right. I didn't say I was >> just kidding. >> So, okay. So, in in the context of your life, you're somebody that's comfortable being wrong% >> and then not putting yourself in position where you have to like defend something to the death is >> we'll take our mayopas. We'll we'll say we were wrong and why we were wrong. >> That's you know what people get really attracted to high conviction um type of people who come out and say the 10year is going to 6% and you're going to wish you listened to me. That stuff gets a lot of attention in the short term. You can't survive 20 years doing that because you're going to be wrong and you have to have positions that you're comfortable backing off on publicly. So >> yeah, I mean look, the world can change. The world does change. Companies can change as you as you pointed out, you know, I think it was Michael said it, you know, and you have to be on top of that. So if you go out there and speak with great conviction about a certain company, then going to come out and after you've sold it and say, "Okay, here's why we sold it." I mean, it's just it's just too much noise. We don't we don't want to be in that business. We just we want we want the number the first slide that you showed, you know, shows upward to the right. We want that to be our slide over the next, you know, 20 30 years, >> right? We get things right, we get things wrong, but the sum total of all of that effort is this, >> right? And our portfolio moves in and out of different different asset classes and different sectors based upon where that that fear is. And so like our energy exposure was a lot higher, you know, in the early part of the in the early that's that's the that shows our whole >> Okay, so the blue stocks >> the blue is the blueest stocks you see that moves around. The green is is uh bonds and the bonds that we own are not highraded. We buy we we would rather accept credit risk rather than interest risk. We think we can understand that better. Interesting. >> We don't we don't know what direction you know the 10 years is going, you know, over the next 5 years. >> And you're not when you do that. So, like I see these periods of time where you're heavily invested in bonds. You're not just flipping it into HYG. Like you're actually looking at each individual credit. >> Yeah. >> Okay. >> Yeah. Our our high yield exposure today is just 1%. A little less. And that 1% is is you know high yield does not isn't that interesting today. Today we're talking about tighter than average spreads, lower than average yields, and worse than average covenants. >> Yeah. Sounds great. High yield spreads are 300 basis points, you know, over treasuries. is 200 base points less than the 500 basis point you know average over the last you know 20 years the yield is 7.1% which is about a point less than the average over the last 20 years and covenants as I said those four iss so so much and so in favor of the borrower that you don't even have you know the confidence you can get the keys to the kingdom back in the event of a of default now on the positive side I'm looking at the HYG for example I think you know I've read that that the you know I haven't parsed it you know individually myself but I've said, you know, something about it that suggests that the HYG, the high yield index has more IBIDA per on per average company in in there than at any point in time. >> Higher quality than higher quality businesses with less makes sense, >> right? So, yeah, but a lot of that risk is shifted over to the private credit market. >> What is this uh net risk exposure, this red line? >> Well, because we end up with some shorts at periods of time. >> Okay. >> So, like if you go looking into the financial crisis, >> so you'll have short you'll have shorts in the portfolio. Is there a max is there a max limit? No, though. Well, not a max li I think it's I'm not sure if there's actually a maximum in our chart. We've just never approached it. I think the most we've ever had was like 11%. >> I'm seeing some shorts just talk about them. You >> you want to wait for a better pitch. Um you have the ability to go into different areas of the market, drisk, uprisk. Um but the pitches seem to be happening so much faster these days. It's like they're 175 miles an hour. when you finally have a chance to swing, it's like what just happened? And I'm talking about the the >> V. Great point. No, really a great point. You have to be prepared in advance for when it does happen because the world has had a tendency, you know, since the van to rebound very, very quickly. >> Everything's faster now. Why? Like, why wouldn't the market react faster? >> Faster. I'm 62. I'm much slower. >> But every aspect of our life has gotten faster. So why wouldn't we expect stock market reaction? >> There will be a point in time, I would argue, that you things will go down to stay down for a period. I just don't know. 22 it did for 22 for 18 months. >> Yeah. But I don't know when that's going to be or what what next is going to happen that's going to, you know, create that oper that opportunity, you know, but we have to do the work first. You just have to be ready to go and hit those, you know, hit those pitches, you know, because you know they're coming at a point. So for example, I did a ton of work on embarrassingly, you know, given that we have nothing to show for it, you know, on on deer because I said that pitch when that comes because you know I did this about a year and a half ago and I said deer is like is the is the best egg equipment manufacturer in the world. You know, case new allin and egg co pale by comparison and earnings are going to be down because the egg complex is up in value so much. Commodity prices are up so much and you know when egg people are making farmers making more money they buy more equipment and and so business is good. So business is going to be bad again in the future. It's a cyclical business still and so we'll be able to buy it. Stock hit a new high. >> Yeah. >> And so it's like so there was work was for nothing. So again, being prepared and then but this idea >> deer turned the tractors into iPhones that have to update software and everyone's got to pay monthly and they made it they made it the best business in the world. >> Yeah. Well, yeah. It's the technology they they lead in technology by far. It's pretty it's pretty great business. But, you know, across the firm we we have this sensitivity to losing money and trying to be prepared. That's why our fixed income team led by Abby Paraden, you know, is um is done is one of the reasons why it's done as well as it has as well. >> Oh wow. I noticed there's no gold in that allocation, but can you go there if you feel like it? >> Yeah. I mean, I just don't feel that people were paying us to make a gold decision because if you were to go and buy gold, you could have 5% and you'll see people have it or even 10%. If gold were to, you know, double from here. >> Yeah. >> What does that mean about the rest of the market? What have you really done for your portfolio? And it's I just don't know that we're adding the value on our team that offers some kind of variant view to it. doesn't mean that does not suggest for a moment that gold isn't worth well owning. I'm not saying that. >> Well, Evieard did that. So, First Eagle Global famously would combine stocks, bonds, and gold. >> Um, >> but I even then his gold position. How big did it get at its peak? >> Well, probably the gold miner position was the the proxy for gold in in that case maybe. >> Yeah. So, I I just don't I'm including gold miners, you know, junior gold miners, gold ETFs, or evening the bullion, all in the same in the same bucket. >> I want to put up um a couple of your slides. John, can I have chart 13, please? This is from your deck. Fund objective met since inception. So, congrat congratulations. But walk us through these three different um charts and why these are the ones that you want investors to pay attention to when they look at your fund. >> Yeah, we have to show this one from inception because it shows the S&P 500, but the MSEIQ is really has been our our benchmark since 2011. >> And you definitely beat that, right? >> Yeah, we've beaten that. And so as you know international has not done as well as the US which helps explain why our equity like rates of return are are like 40 basis points you know behind you know the S&P 500 in part but we've done that with averaging 30% or so in cash along the way. So a lot less when I look at this I say this is incredible. >> Our goal is to do deliver equity rates of return and avoid permanent impairments of capital. permanent impairment account means losing money monetizing you know you know realizing that loss rather and whereas you know volatility is just you know things are going up and down the and so you can look at the draw down and the draw down's you know half of the markets >> well can I so for the people that aren't watching or listening I want to say this out loud okay um since annualized total return since inception and guys picture every disclaimer you've ever read in your life okay that's what's on the bottom of the slide okay um you guys are are neckand-neck with the S&P at 10% % in change. But then the largest draw down in the S&P 500 since the inception of your fund as we all know is 55 and a4% which I'm guessing that's great financial crisis. >> Yeah. >> Okay. Um and your largest draw down is 27.87%. So that's the objective of the fund. The reason you're going anywhere is because sometimes you don't want to be fully invested in the stock market. >> Right. Okay. And a third less volatility. It's like >> but that's a byproduct. I want to be very clear. a third less volatility, you know, and just speaking, you know, for what the chart shows for those of you who can't see it, we our volatility has been 10.89. The S&P 500's 1496 since our since our inception. But volatility is a byproduct of our process. We don't >> that rolling 30-day. What What is the volatility? Uh or is that just standard deviation? >> Standard deviation. That's it. Standard deviation. But we just don't we don't target it. It just, you know, if you if you're a value investor, if you're thoughtful about the if if you believe price matters, you're thoughtful about the businesses you own, and you know, you're seeking to protect capital, you're inherently going to have lower volatility. >> The mutual fund industry, I mean, there's been a million slides showing index flows up and to the right, mutual fund flows going the exact opposite direction. You and a lot of that is, listen, like even when it's a dual app form, luck versus skill, how do you entangle all of that? This is evidence that this is skill because being able to keep track with the S&P with a third less volatility, that's not luck. You've done this for three decades. So, pat yourself on the back. Pretty good. >> John, can we have chart 15, please? I found this one interesting. This is the FPA Crescent Funds net equity exposure. >> Whoa, whoa, whoa. Why are you so bearish? >> Stop. So, uh, this is you versus the Msei Aqui. Like the What's the right way to explain this? like the percentage of your portfolio that's currently in uh equities on a net basis >> um versus the performance of the index itself, the equity in this case. >> And this this this look, there's a lot of noise, >> but you're but you're just you're trending lower since 2022, >> right? >> That's like if I were to draw a trend line, you are growing increasingly bearish as the market rallies. >> Well, I don't bearish presupposes bearish bearish presupposes a view to the future. We're just not seeing in the present the oper the the the attractive risk rewards. >> So what if I also drew a line that said um forward earnings multiple like it would probably >> that would be a better that would be a better >> chart than this but this just shows your slide. I know I know we have other slides too. You just picked this one. >> Okay. >> We got lots of slides. Um but this just shows you this slide that one can expect that as the markets are rising you know that especially rising quickly but you can see that dip as it rises you know that you you know that we are going to be get more exposed or less exposed less exposed as the market rises and and get more exposed as a decline. So you can see look at the look at Q125. So we had pulled our >> net equity exposure, >> right? The and so and but then liberation day happens. We found out more opportunities, you know, as a result of uh our pres president's actions. Yeah. And so then we started getting more invested, but unfortunately it gave us only a couple days again to your point about the 175 mph fast ball you got to hit. I would assume that you're surprised uh again having read your 2015 letter this morning because I'm surprised that it's that it's been we're 10 years later and at the time it's not like things felt cheap or exciting at the time. Amazon was $200 billion and I remember thinking holy [ __ ] that's a lot of money like a $200 billion market cap. Oh my god. And it's 10 years later and of course there's been pullbacks and corrections and bare markets along the way but these businesses have never been fundamentally stronger. Um, is it conceivable that this is just a sort of I hate >> He wants you He wants you to say it's different this time. >> No, no, no, no, no. Obviously, it was different this time. I mean, clearly it was. >> Yeah. Yeah. >> Well, some companies are going to last longer than others and and you know, and perform better for longer periods. And you you mentioned ear, you know, at the top of the hour you were talking about Cisco. Cisco has far underperformed Microsoft, but did we actually know that was going to be the case in in February of 2000 when the market was speaking? >> So, look, we have a portfolio of stocks. some we're going to be, you know, more right on than others and we're going to be surprised on the upside and the downside for by different companies in our portfolio. >> So, you're very much focused bottom up looking at these securities themselves. How much do you think about the state of the economy and macro stuff like does that enter into the process sort of like working backwards because the companies are talking about these things or do you pay attention to these things from a from a top- down perspective at all? We when we look at companies we build models and there's this false precision to the models. I mean because it you you just you plug in certain assumptions and you end up with this very precise you know earnings per share you know result or precise you know free cash flow result. And the truth of the matter is is that it's just a function of of our assumptions and we're not >> we're not anchored to that type of precision. When we build our models, we don't look to see what is likely to happen over the next, you know, quarter, 6 months, year. We're just we build a low base high looking out over the next, you know, two, three years or longer to try and say, okay, what can happen, you know, if the company you really executes and recognizing that that, you know, they could stumble and maybe not execute. That would be the low case. Maybe the industry goes through um a downturn that could contribute to the low case and in the high case you everything happens you know terrifically you know and so that's how we really think about the macro backdrop you know that's all set against the macro back what could happen in a weaker economy what happens if rates rise if it's a more levered company they have to refinance their debt at a higher at a higher level you know what happens in the event of a recession and unit volume you know you know uh uh gets gets hurt what happens as a result of tariffs where a company has to either raise their prices in order to to maintain margins or do they not maintain their margins because they're going to, you know, basically eat it for their for their customer to make sure the unit volume stays there. Those are all the questions we're always trying to anticipate upfront when we build our models and then we constantly fine-tune them as we gather new information. >> So you so this is on a case-byase basis each investment, not a I think the Fed's going to cut next week, therefore we should own 10% more financial stock. Like that's not the way that you're um thinking about the macro picture. Correct. Okay. >> So, one of the one of the things that traditional value investors that are not bottom up have gotten wrong over the last decade has been things like the cape ratio and margins and their mean reverting nature that they never mean reverted. And a lot of the reason is because the indexes primarily at this point the large tech companies their margins have a much different profile than the than the 493. As you look out with your portfolio, do you expect to see margin expansion as a result of this hopefully productivity wave that we see coming as a result of the AI spend? Do you think that's going to happen? >> No, I think that it depends on the industry. Um, so I don't want to make a too broad a statement, you know, about that. So the a lot of the there's there's a large language models and, you know, the big AI that's out there. how that unfolds and who's the winner from that and what the margins would be. I'm not I just don't have a point of view. The applied AI and how it's used to help your business and whether it's to distill, you know, the the SEC filings and look for certain things and to be able to pull from it using Grammarly for me to help write my shareholder letters so I don't look completely moronic. Um, you know, making, you know, basic, you know, u basic uh grammar mistakes, you know. Then there's also AI that's going to be used in certain businesses that will that will really help these businesses. is and it's not going to get competed away. companies like biotech companies which we don't have any expertise in to be fair but the lab the bench strength in the labs because of AI is up exponentially and that's good that's good for the world you can deliver hopefully over time we expect you know drugs are going to come more frequently new drugs at lower costs and that shouldn't get competed away what could happen of course is regul on a regulatory basis you could end up with less marginal life for these drug companies because there's more marginal in the US than elsewhere so there's other risk to it but some companies that that are benefiting from AI. A lot of it, you know, some companies will have first mover advantage and they'll be able to reduce their cost and then let's just take the, you know, let's look back in the 1970s and some of these vertically integrated apparel manufacturers with retail locations and they moved over moved offshore their manufacturing. So they were able to manufacture at a much much lower price point, bring it, you know, even with despite the long lead time with therefore a higher financing cost, you know, um, as well as they have to pay to ship it to get to the United States, but they were able to bring it back and have this big pricing umbrella because their comp their competitors didn't have that. So they had this excess margin. Well, all the other guys realized it and said, "Oh, I'm gonna go overseas and do that." And that got competed away. So you're going to see some of that happen, too. >> Yeah. I I would I've heard from a lot of people. You ask like, "All right, it's the AI era. Why would you be bullish on small caps? Why would you be bullish on healthcare and all of these areas that are have either nothing to do with the AI boom or are so disconnected that it's almost like we're having two different conversations. But I've always thought um and I've heard this from a lot of people, if the AI boom is not going to turn into a bust, the only way that happens is if all these other companies find a ton of value in using these tools and adopt them and pay for them. Otherwise, AI, in other words, if you don't get an earnings growth benefit in the rest of the stock market, then by definition, all of this capex spending by the mega caps is is going to look wasteful in hindsight. >> Well, you're going to have to Well, first off, some companies are going to be incredibly successful. >> Yeah. >> Some some aren't. Which ones will those be? You know, it's for a different Exactly. and and you know but I mean look there's no question that you know um AI is a real benefit for for for um IT services for you know calling a a tech support line you know or calling for a retailer to you want to return something you could end up with these you know questions for a return that can all be handled by AI so a lot of these phone centers that are located in other parts of the world with that have a very very lowcost uh labor pool you know are going to be disintermediated because of that and everybody's going to going to migrate you know, in that direction, >> right? So, I I sort of feel like the the secondary benefit of the AI boom has not been felt yet and all of a sudden there are a lot of companies that are going to come out and start raising their earnings estimates and the reason why is going to be productivity. I just >> to the extent that isn't competed away, which will be business and industry specific some cases it will be. >> That's a that's a really that's a really great point. I wanted to ask you um with the two or three hours we have remaining, I wanted to ask you a couple couple of other hot button items that are going on in the markets right now uh the independence of the Fed um and just generally what you think of uh monetary policy given the unemployment rate versus inflation push pull. You think that's something that uh is going to be very impactful on the markets or not really or to be determined? Well, I mean, TBD, it's not something I really can opine on. I have no idea. I do. I mean, we we do have a Fed chair that, you know, has come out and said that security prices are rich. So, >> why to do that? >> Well, by the way, I mean, you have you had you had Greenspan 96 who called for rational exuberance. And then when he at the S&P 500 price level, even after the decline, after the in the dotcom bust, it was still higher than when he called it. You had Bernani who who said that you know in 2007 that the subprime crisis would not you know spread to the broader economy you know and Yellen said you know in 21 that the inflation would be transitory. She you know she admitted her you know mistake in that regard. So I mean you just >> okay you don't worry so much about the public pronouncements. >> We we are really good at responding to pitches that are thrown to us. But what you're basically asking is what pitch is going to be thrown to us and we don't have any idea. um quarterly earnings reports versus, I don't know, annual. How important will this be to your process if all of a sudden uh 300 of the S&P 500 decide, oh, this is cool. We'll just we'll talk to you every January. >> Look, I Well, first it they're talking about semiannual and using, you know, the the European law. They'll talk to us twice a year. Um but they'll talk to us along the way. They just won't give us numbers in between. They'll talk to us along the way. actually they might be able to talk to us more because there'll be less quiet periods. So I'm actually I'm completely in favor of it because >> you like it. >> Businesses don't generally change much from quarter to quarter. I already I've already laid out that we are looking longer term anyway. So I'd be fine with annual reporting. Maybe it separates the renters from the owners and and it it looks at the look at these companies. It lowers the reporting cost for these companies. It frees up the management time to focus on on on what's important. Does it does it potentially lead to increased volatility because there's a higher potential for surprises and some of those will be negative? >> I don't know that that's necessarily the case. I don't think if you look at the V of the UK market versus I'd have to go back and look. I Yeah, >> but you're not you're not investing in disruptors. So, >> well, at times we are. We we look we owned some of them. We've owned some of over time. I mean, Netflix was a disruptor, right? is, you know, um, you know, as far as I mean, remember Hollywood Pictures and and, uh, you know, Blockbuster Video and Movie Gallery. We were actually we're short. >> I think I owned I think I owned Blockbuster at one point. >> Yeah, I didn't. I mean, I was short. We were short Hollywood Pictures and Movie Gallery. >> Um, 24/7 stock market trading. >> God, I hope not. >> Well, it's inevitable. So, >> I know. I like to sleep at night. >> I don't like it either. I don't like it because it's like money's on the line that we're ostensively responsible for and we're sleeping. So, I don't I don't love it. >> Yeah. Except for the fact that the news won't be coming out in the middle of the night. So, that's really going to be the bigger driver. >> Um, it'll be >> it's going to be at the end of the day, it's going to be noise, right? I mean, because if you if you if you if your assumptions are correct and you look out into the future and you've got that longer term point of view, yeah, you can have more volatility along the way, but all we care about price. I say this as if I'm, you know, sleep with, you know, sleepo, which I don't. You know, you know, is is the day you buy something, the day you sell something. >> Did you have trouble seeing the entire asset management industry make this really hard pivot into digital assets considering that outside of staking the majority of all of this activity, there's really no cash flow generation. Very difficult to value these things. They're mainly a function of supply demand making them look more like commodities or currencies than they look like stocks. Like did you have trouble watching that? >> Give me an example of what you're talking about. >> Uh Bitcoin, Ethereum. >> Yeah. So, so in terms of the digital Yeah. So, I think look, I think that cryptocurrencies, you know, are real, right? But I just don't we don't own them because well, at least speaking for myself and not my partners, you know, I just don't know how to value them. You know, is Bitcoin worth 112,000? Is it worth 50,000? is worth 20,000. I just don't know how to value it. And if I can't ascribe a value to something and be able to articulate why I believe that's the value, I won't own it. >> What if somebody says the way to figure out the value is the network effect because effectively these are technologies and so the more users the more they highly they should be valued or the more >> that just says that's just direction that's not value. That's just the direction of the value. That's not giving me a a benchmark. >> Okay. Um I wanted >> and and and then then what happens with when when quantum becomes a thing and you you can bust the RSA you know you know algorithms you know ostensibly at at a million cubits. So that happens what happens to your your digital wallet? >> Uh there's going to be so many Lamborghinis for sale on the secondary market the day uh the day somebody comes out and says my quantum computing has just solved all these equations at once. Um, has anybody ever or how many times I should say or how frequently do you get people asking you why you don't have an active ETF version of your extremely popular mutual fund? >> Well, we have an active ETF subset of our fund, right? The son of So, we have u, you know, our FBA global symbols FPAG. >> Okay. >> And that is our larger capitalization companies that um, we're not worried about scaling. So if you can >> that go anywhere or that it's it's just stocks of it's really it's delivered programmatically from our larger companies that we own doesn't own the debt doesn't own the these smaller companies um doesn't own any derivatives >> no liquidity problems >> right so you don't have to worry I mean one of the problems with ETFs is they can become too big so how do you do that with small cap so we want to be always true to our investors so this is something we can look at it with a look at our investors with a straight face and say look if you want a more fully invested version of what we do for the large cap carve out of what we do. Then then then here we hand you FBAG, you know, run by my partners Brian Smo and Mark Lander. >> Are you uh are you just generally speaking, are you hopeful for the investor class over the coming years? Not there won't be a bare market or there won't be a correction, but just generally speaking, you >> I'm actually more I'm actually more hopeful because with these pod shops and Anthony and all this this the trend towards passive, I think it gives people like us, you know, a you know, a greater potential opportunity. So, I'm actually more excited today than I was 10 years ago. >> Valuation notwithstanding in the market at the moment. Those are that's that can just be temporary. >> I love that. Thank you so much. This is the man, right? The man. All right, we're going to break for dinner and then we'll come back and we'll do You good? You think we got it all? All right, dude. >> Can we just eat dinner right here? >> Bring it in. >> This is uh this has been so awesome for us. Uh Michael, I Michael and I are obviously fans of what you do and uh your track record speaks for itself, but also I think anyone that reads any of your stuff learns something every time. So, thank you so much for that. Really appreciate it. Um we always Steve, we always end the show by asking people what they are most looking forward to. What's something they have coming up out on the horizon that they're excited about? >> Why is there a pause? >> We are. That was a preemptive the audience is uh very very active anticipating the fake audience. >> Great fervor. >> Um professionally, I look forward to the next cycle to put capital to work. I mean, I look forward to that that dip, you know, buying, you know, something that's significant. >> It'll be 10 minutes long. Are you going to be ready? >> Well, we'll see. Well, they never Well, we'll tell you after the fact. And then, you know, personally, I just kind of hope I have grandkids one day, but I'll need some sun-in-laws for my daughters first. >> Steve. All right, dude. You're you're the man. Thank you so much for being here. We really appreciate it. I want to I want to uh I want to say to uh all the pounders out there listening, thank you guys so much for uh for watching, leaving us ratings, leaving us reviews. We really appreciate it, guys. Great job this week. We good? Yes. All right. Thanks so much. We'll talk to you soon. [Music] [Applause]