Barry Ritholtz's Masters in Business: Bill Miller Interview

famously beat the SMP five for fifteen consecutive years. The math behind that is just mind boggling. It It's something that couldn't possibly have been a random act. Michael Mobison discusses this in great detail and talks about the skill level. He very famously blew up in the financial crisis, meaning the fun crash and burned along with everything else, and people kind of wrote him off as having Alright, that

guy's done, we'll never hear from him again. Um. And over the past five years he's again crushing the market, beating UH the SMP five hundred by four hundred base points a year, UH, consistently being in the top handful of funds every year. He is really a fascinating guy, super intelligent, very thoughtful about things like valuation. He's incredibly circumspect about his experiences during the financial crisis and talks quite with great humility and quite bluntly about what he

got wrong during the crisis. I always find that refreshing when someone um has a bad run and instead of saying, oh, it was the FEDS faulter, this person's fault or what have you, basically owns it and says, yeah, I failed to understand the difference between this recession and that recession. Here's what I learned, Here's what I wish I would

have learned known during the crisis. It was just an absolutely fascinating conversation if you're at all interested in asset management, running a mutual fund, running a portfolio, how to be a value investor, how to come up with a unique value add that allows you to beat the market, And perhaps more interestingly, Bill Miller's criticism on the failure of active management being that so many managers are are suffering from career risk and so they become closet index ers.

He has in great detail described why the move towards passive investing is actually a rational response from the investing community, from the public, Hey, why are you paying a lot of money for an active manager who is essentially a closet index er. He's essentially not only similar to the index, but his portfolio is going to be wholly unable to beat the market because it's essentially a closet index plus a high fee. Get out of that and either go to an active manager who has a chance to beat

the market, or just index. And he's pretty blunt. Hey, most people are better off indexing. So I I've just found this to be an absolutely fascinating conversation and I think you will as well. So, with no further ado, my conversation with Bill Miller. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special guest today

is a legend. His name is Bill Miller. He is the former chairman and chief investment officer at leg Mason, where he ran the leg Mason Capital Management Value Trust for many years. He was named by morning Star in the Fund Manager of the Decade. Uh Bill Miller beat the SMP five hundred from through fifteen consecutive years. It's

a feat essentially unprecedented in mutual fund management. Since then, he's been running the leg Mason Opportunity Trust and just launched or that's really not the right word for it. LMM is the new fund that a new firm that he's in charge of. The leg Mason Opportunity Trust Fund has beaten of its peers over the last five years and has outpaced the SMP five dred by two percent annually. Bill Miller, Welcome to Bloomberg. Thanks, very nice to be here.

So so that's quite an introduction. What you did with the fund is real, the legendary. We're gonna get into the streak in a little bit, But let's talk about your approach. Is it fair to call you both a value investor and a contrarian? I would say yeah, I'd say that that what I am as as a long term oriented value investor with the contrarian overlay. That that's that's a pretty fair description. So let's talk about your process. How do you begin the process? How do you approach

selecting stocks? Well, what I'm trying to do, what we're trying to do, the team is trying to do, is find companies that trade a large discounts to what we call intrinsic business value, and intrinsic business value is the present value of the future free cash flows of the business. And then we're also looking for companies where you're starting out with low expectations, where people don't where people don't believe that the future looks very bright, or that there's

a lot of controversy. And then with that, the key we use every valuation technique known demand, but the key, the key one that we're always starting with this free cash flow yield. So just under a checkbook, a ounting approach, like you have your own checkbook, we want we want companies that ideally will start out with a ten percent free cash flow yield and that that that's just that's there's there's nothing magic about that. That's just that's just

a heuristic that we've developed over the years. It tends to work. But higher is always better as long as

if those free cash flows are sustainable. How how does this differ from classic Graham and value investment, Well, the great the classic Graham and Dodd approach was was a um an approach that focused mainly on accounting metrics and so pe price to book, price to cash flow, those kinds of those kinds of things, and towards the end of his life, Ben Graham made a point that those things no longer work because they became replicable and they were they then they then did not They didn't identify

companies that were mispriced. They tended to identify companies if the valuation statistics were were superficially attractive. Those are typically companies that had lower returns on capital. And then unless those returns on capital change, those those low accounting metrics didn't give you out performance. How important are are the growth metrics? For a while, GARP was quite the thing in the nineties. Is growth at a reasonable price significant?

Do you do you bring growth into your metrics? Yeah? Absolutely, Well it's not so much growth at at a you know, at a reasonable price, so much as it is that growth is an input to the calculation of value. And so companies that grow faster, other things equal, assuming the learning above the cost of capital or more valuable. In companies that grow more slowly, the cash lows will catch

loads will compound more quickly. How do you balance the current fundamental picture of a company with what you hope the future prospects are going to be? How how can you judge how the business will will grow and develop? Well, there's a there are many many ways to attack that that issue. One of the things that we try and do if if the economy is is in recession, for example, or the economy is in a boom, we will tend

to normalize that. So if if if the economy is growing more rapid than normal when we're looking at a company, we will bring it back to a normal growth rate if the company, we're also looking at the company economics, and those are typically function of the industry economics. So you start out with industry almage, you a company economic quality, assets, quality of the management. All of those kinds of things go into go into trying to figure out what the

company is going to going to do. And you know that a company like General Motors, for example, is going to be a company that's a very mature, slow growth company operating an industry that's has global overcapacity and it's under it's under a lot of technological threats, so that that all goes into thinking about a company like that.

Amazon is our largest position. That's completely different, completely different exercise because Amazon is a completely dominant company and with an enormous total addressable market and incredible competitive advantages, so it's it's going to have a growth has a growth rate of you know, right now, fuffy thirty percent a year, which is unheard of a company of a hundred billion

dollars of revenues. How do you deal with something? And let's stay with Amazon, where there really isn't a whole lot in the way of profits, but they're certainly taking market share and they're certainly growing revenue like wildfire. It comes down to again the issue of of of accounting based metrics versus economic metrics. So with with Amazon, then their natural business is one that has a original return

on capital of triple digits. And when people say Amazon doesn't make any money, it doesn't make much money, what were they're really looking, I think at the wrong wrong sort of metrics because everything below the gross profit line at Amazon they consider an investment. So some of those

investments to capitalize, some of those investments are expensed. But Amazon, if you if you begin to if you do some a little bit of math on a little bit of statistics, what you'll see is that Amazon share price historically it isn't correlated with profit growth, That isn't correlated with cash flow growth, it's correlated with with the growth of gross

profit dollars. And so the faster the growth rate of gross profit dollars, namely what they have to invest, the higher the evaluation that the company has been able to attain. That makes some sense. So let's talk a little bit about size. Your fund started at seven hundred and fifty million dollars back in and it didn't take very long. Fifteen years later it was over twenty billion dollars. How does that change in size affect your ability to to

be nimble? It really didn't. And and what's interesting about that is that while the fund got to five billion, I think at the peak we had another fifty billion of institutional assets to go along with it. So the the overall money under management in that one strategy at the peak was around seventy five billion. And what what we what we observed anyway, is so ironically is that as the assets got larger, the performance got better. And

that's amazing and uh. And then of course what happens is that that that the assets always peak with the peaking of performance, because if the performance kept up, the assets we keep going up. I'm Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Bill Miller. He was with leg Mason for the longest time before Uh he took himself private. Is that a fair way to say it? L l MM

is now owned by yourself? It will be yet. It's currently fifty owned by leg Mason and fifty by me. But I have a deal to buy them out, which should close, uh in the spring of two thousand seventeen. So let's talk about your streak. You ran the leg may Sin Value Trust for since from one through two thousand and fifteen. Um, you actually ran it longer than that. But in the middle of that was a fifteen year

streak of beating the market every year consecutively. There's never been anything like that before and there probably never will be since. So, um, what's the secret? Uh? Luck, There's a lot of luck into it. Um, hold on, let me write that down. Luck. But in all seriousness, it can't just be luck. It's got to be some combination of some skills, some luck, some right guy, right place

sort of thing. I mean. Steve and j Gold wrote wrote a piece on on streaks the late late paleontologist, and he noted that that every street went to all sports streaks and stuff like I was gonna say, paleontologists slash baseball thing, right, yeah, And and he noted that that every streak is a some combination of skill and luck, depending on the length of it and how it's achieved

and stuff like that. I'd say that the thing that contributed to it probably the most was a pivot that we made in so five or six years into it um when when technology stocks got very cheap because people were worried about a recession. And you may or may not remember the Jeff Vinnick ran the Magellan Fund at that time, and it raised a lot of cash because the feed had been tightening, there were some issues in

the economy. People gott nervous exactly. So what happened then was that you could buy companies like Dell, which is a relatively new company at the time at five times earnings. You could buy Nocchi at six times earnings. And because people were worried and they also mistaken, they didn't they didn't properly analyze those businesses. Dell's growing year trade of five times earnings, so we bought Dell. Then we bought Nokia. We bought America Online, another one that went up fifty

times after we bought it. So when what we did was unusual for value investors is we we got into technology at that time, and most value investors following Warren Buffett's kind of dictum that he didn't own technology, he didn't understand it. Um. We threw some work that we've done with the Santa fe and who uh came to understand the economics of technology were different from what people traditionally believed, and it was much more predictable than people believed.

So let's let's talk about a O L for a moment, since since you mentioned them, that was a fifty bagger that went up fifty x In the real world, how do you hold onto something that goes up five x ten x? Investors are notorious for for quote unquote ringing the bell too soon. How do you withstand the ups and downs of a stock like that, that that was somewhat volatile and write it till it's a fifty bagger? Yeah,

it's interesting. Part of the part of the thing is you have to try and understand the potential of the company. General Motor is not going to be a fifty bagger, right, General Motors a mature company. A O. L was a very new company, a small company in a very a very big new area. So it had it had a lot of potential. We didn't know it was going to go up at all, but but it certainly had the

potential to do so. And uh, and so that's really trying to understand what the company's possibilities are with the total addressable market for the businesses and the other The other part of it is that that when you get it, when it becomes a big winner like that, and it it becomes a bigger and bigger part of the portfolio. Part of what happens is that just from a portfolio management technique, it becomes riskier in the sense of it has a greater and greater impact on the portfolio. And

that becomes a question how you size the position? Well that that leads to another question, do you ever have an upper capacity? Nothing can be more than ten percent of the portfolio or or some line in the sand, or what do you do with there? There was there was no line in the sand. We we actually part of the reason that that streak went on and because then part of the reason I was manager of the decade was that with A O. L. And with Dell,

for example, both were fifty baggers for us. But they got to be as much as of the portfolio, which was which each which had never happened before. Fanny May was fourteen I think at the peak, and then we've were fortunately able to cut them, cut them back and get them actually out of the portfolio. Of that was very unusual. Probably the biggest the biggest we would go we've been since then is I think Amazon got to

twelve or so earlier, ear late last year. So you start accumulating A O. L. And Dell mid nineties, it's an incredible five year run for technology. What other than the sheer size in the portfolio, what are you doing in to call those back? Is it just those two because of their outsize um position in the portfolio. Were you looking at the macro environment and you're looking at

technology no longer is cheap? What's the thought process like in two thousand when you're when you're selling two giant winners, capital gains and all. We went from thirty eight percent of the portfolio. I think in the in the beginning of two thousand in tech to no percent by the end of the first quarter. And the reason for that was that the market had been going up a year and corporate earnings have been growing very rapidly, and valuations

got way out of whack. So back back at that time, as you may recall, you had Microsoft was sixty or seventy times, Cisco was that GE was fifty times, Home Depot was sixty times. So the valuations were just way way way out of whack for mega mega cap and for technology. And part of our thought as we looked at companies like Dell and A. O. L. It wasn't so much that the total market value of those businesses

was way out of whack with the potential there. But what we did know was it wasn't going to be linear. There would be some interruption there, and when that interruption came, the companies would get killed. So what and then the FED was tightening at that time, and I think that the real, the real trigger uh for me and that environment that really kind of put paid to the whole

thing was there's a two It was two fold. Number one was there was a headline in the New York Times in March of of two thousand about Jillian Robertson. It's called the it's called the end of the game or the end of the end of an era, and it talked about how value investing was dead and about Jillian Robertson had had to close up shop and at buff of course I hadn't had done poorly for several yeah,

done done poorly. And then so that was kind of one trigger that everybody had thought that that that that was dead. And the second one made more more important one was it from from the spring of the spring of two thousand, the first quarter of nine, the first quarter two thousand, the Nasdaq was up a hundred percent and the Dow was down. And again that bifurcation was that bifurcation was so large, and the valuation discrepancy was

so large. And I'd say that the final part of that whole thing was at the end of the first quarter in in two thousand, uh something like seven or seventy percent of active managers beat the market in that quarter, and which is an extraordinarily high percentage. And and at the same time there were only two sectors of the ten or eleven s and p sectors that beat the market, Utilities and tech. So what that told when nobody was owning utilities right, So what that told me was everybody

was crowded in attack that that's they were. Everybody's overweight tech. There's nothing more going that. And then that couple of valuation said it's time to go the other way. That's quite fascinating. I'm Barry rid Hults. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Bill Miller. He is the former chairman and chief investment officer of leg Mason, perhaps best known for really an

unproducible streak beating the SMP five fifteen consecutive years. When he was running the leg Mason Value Trust Funds, morning Star named him the Manager of the decade. In let's talk about the new um. For lack of a bit of word, the new shop, LMM, tell us a little bit about the firm and its history. LMM was created in when we started in nine night, we started the leg Mason Opportunity Trust and it was created as a

joint venture between myself and Like Mason. It was the only Like Mason subsidiary that wasn't owned by leg Mason at the time, and the idea was that that leg Mason I would be partners in that in that particular fund, uh, whether it whether it did well or not. And so that was run co extensively. Lelaman was run co extensively with leg Mason Capital Management, which I was the chairman of.

And then in two thousand and I want to say two thousand and twelve or so, um, leg Mason decided to combine my subsidiary, like Mason Capital Management, with Clearbridge, which is a New York based equity shop. I did not think that was a particularly good idea, and so what I was able to do, but guys, because had operational control of LMM, was to extract that from that transaction and set it up as a separate as a

separate entity and a separate business. But I had to go restaff it from the standpoint of trading and reporting and production and compliance and all that, all that kind of stuff that was BA. That was in two thousand twelve. So it's run of the joint venution. Yeah, run as a joint venture for for most of that period. And then in two thousand and I guess, uh, fourteen, we moved out of the moved out of the leg Mace

and building into our own into our own space. And and then just just this year, just last I guess, yeah, just this year, we reached a deal like Mason and either where I would buy them out and buy the now two funds that that are advised by LMM, by that advisory firm out. So the two funds are the leg Mason Opportunity Trusts, which you've been running since inceptions, since since getting two. And it had a so so two thousands, however, it's been on fire lately. Fair fair

way to describe it. Yeah, yeah, I would say I wouldn't say so so two thousands had a very bad two thousand and uh seven and eight. Um it was. It was one of the best performing funds in two thousand nine. It was the single best performing fund of all funds in two thousand and thirteen, I mean a two thousand and twelve, and then the best performing fund of all funds above fifty million two thousand thirteen. And there's about a billion, billion, billion three in that domestic

version of it. And probably probably the most unusual thing about it, which will never happen again, is if you opened the New York Times special section on mutual funds of two weeks ago. You'll see that the Opportunity Trust was the single best performing fund of all domestic funds in the third quarter, and then the single best performing fund of all domestic funds for the last five years, and that will probably never happen again. So here's what.

Here the numbers, I'm showing it beat the S and P five hundred by two hundred basis points on average every year for the past five years. Yeah, it's probably right. Yeah, and at least yeah and over I want to say seven years, it beat nine of its piers. And what you're now telling me is for the trailing five years it was the top. It beat all of its pers So and that quarter probably has something to do with that. So tell us about your co managers. Who else runs

the funds with you? I do that fund with Samantha McLemore, who has been with us fifteen years. She started out as an analyst and moved up to being an assistant manager and now she's co manager of the Opportunity Fund. And then we have an income fund UH called the Our Income UH Fund and it will it's it's run by my son and I. So we was gonna say something named Bill Miller runs that one all yeah, yeah, yeah, exactly, and and tell us about the Income Opportunity Fund. What

is that focus? Yeah, it's that's an really interesting product. We started it. We actually started it internally in tooth in uh what was it, two thousand and nine. We wanted to do it as a joint venture with the leg Mason's Western Asset Management subsidiary, but we couldn't get the product people to approve it because it was it was designed to deliver high income as opposed to being

a bond fund or an equity income fund. It just could go anywhere in the world to get high income, and so that it was hard for them to come up with a with a with a benchmark. And finally, after five years of results, they said, okay, the record is good enough that we should launch it anyway, which we did. Uh. So what the objective here is very simply high income giving you income higher than the than the high yield index, with the possibility of also preserving capital.

The opportunity for capital gains. So the current yield current yield on it right now was around seven and a half to eight after expenses. I'm Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Bill Miller. He is a legend in the world of investing, not only UH for the greatest SMP beating streak of old time, but for his legendary stock picking. Let's talk a little bit about the current um environment

and how things are are operating. I want to I want to give a give you a quote of yours, and have you respond to it. You you recently said stocks are stupidly cheap, but bonds are ridiculously overpriced. Discuss well, stocks are stupidly cheap relative to bonds. That's that's my view. I believe that the taking bonds first. You know, we we hit a level over the summer where where bond yields globally had never been this low in the five thousand years of history that we have about bond yields,

so the most expensive they've ever been in history. Because of the UH, the aftermath of the financial crisis and slow growth and all of the stuff that we read about read about every day, and even if you go back a year ago, right, so a year ago, the ten year treasury yielded over two percent to like two point one, and now it's one seventy five. So again

this year, bonds have beaten have beaten stocks. And so what you have now is a situation where stocks yield more than bonds, and the media and the media and PE ratio and the SMP five D is about seventeen and a half, which is above the long term historic median, but but miles below where it theoretically ought to be if this is the right level of of bond yields. And so I think one of the things that we

have a partnership that we're just just getting underway. And in that thing, i'm long portfolio, the longer portfolio stocks against a short position in the in the long treasury longer portfolio stocks against So really you're doing a full on pair trade long long equity. Sure. Yeah, I think that there's a thirty five year bull market in bonds from one till the summer. I think we hit a double bottom in bonds in two thousand and twelve at around one thirty eight, and then around one thirty five.

I think this this summer, and rebounded sharply from both of those levels very quickly. And if you look at if you look at the way the way that bonds have traded away, the safe parts of the market have traded so utilities, telecom, consumer staples since since the summer, they've all begun to wobble. And so all of that tells me that this thirty five year bull market is

probably over. We had a thirty five year bear market from n nineteen eighty one followed by thirty five year bull market, so it's time for the cycle to turn essentially, And yeah, I think. I think also we're in a secular bull market in stocks that began in March of O nine, and I think that lasts until, like all secular bull market stocks get too expensive. But they're not too expensive today. They're not anywhere nears expensive they were in nine, or in nineteen sixty eight, you know, or

seven and the summer for that matter. All Right, so you said a number of things that demand a follow up question from me. First mentioned the double bottom in bonds. Do you look at charts and how important are they to you? Yeah, I think charts. Charts are a way for me of of visualizing fundamentals, looking at the supply and demand, you know, expressed graphically. I don't I don't think that there's any any any special magic to charts.

The academics have studied, studied this in a variety of ways and haven't found haven't found sustainable, reproducible away algorithmically to use to use charts. But nonetheless, nonetheless, what they can they can help you visualize what's going on and what has happened. And again they's a supply demand thing mainly. And then the second question is, so the internal debate we've been having about secular bull markets, some people define a secular bull market as starting from a higher high.

So the argument has been made, if this is a secular bull market, it might not have begun until when the SMP and the Dow broke out of that previous high I guess two thousand and seven high and started making all new price, all new price. Eyes and other people are just, well, you could take the trend and extrapolated four you one do you do you even care about the definitions or you just looking at hey, this

is something that could last an extended period of time. Yeah, I think there's all kinds of different ways to kind of measure measurable market episodes cyclically, secularly, I tend to I tend to think of a secular bull market as one that starts at very low valuation and starts with pessimism. So it starts, you know, the end of one bear market bottom and then the peak being when when you've reached a point where if you look out ten more years, you don't earn any rate to return. You're on a

very low rate of return. So I think that's from that standpoint, the previous secular bull marketwo summer often two to the end of nine the spring of two thousand, where you had roughly seventeen percent a year from the bottom to the top. And it's important, at least the way I tend to think about it, to understand that a secular bull market like that encompassed the crash of

encompassed processions and compassed declines in the market. Just because the market goes down or you have a recession doesn't mean that the bull market is is over. The economic cycle might be changing, but but the bull market is over when you can no longer earn a decent rate of return by owning that that owning equities. So two to two thousand was defined in large part by a

fairly continually expanding pe multiple. It looked like investors were willing to pay more and more for each dollar of earnings. Are we seeing anything remotely like that here? And theoretically, how long and something like that go for it? I again, different people have different views on this. My view is is emphatically, no, we are not seeing that. We did.

We had obviously very cheap stocks, and in the spring of two thousands of the SMP, briefly it felt like stocks were cheap for ten minutes and then suddenly they looked expensive again. Well again, because the market leads the economy, so the stocks went up before the earnings. The earnings

came came through. But right now in the overall marketplace, if this is the right level for ten year treasuries one seventy five or something, and and two and a half is the right level for thirty year treasuries, then the right level for stocks is not seventeen and a half. It's probably thirty or thirty five times. So I think I think that the market right now is already discounting arise in the ten year probably to three or four

percent over the next several years. So putting it differently, I think you can have the ten year get cut in half in the sense of double the yield on it without that harming stocks. So let's let's put that into a little broader context. We get a December increase with what does that bring us up to fifty basis points? Maybe it's kind of hard to say, Wow, that's a

heck of a tightening. And then theoretically they do a quarter four times next year and four times in and we're still only a two point five percent You're you're essentially saying that and derail and equity market rally stocks can continue to grow despite that move. I would be very surprised if they did four and four. I think you're looking at I think you're probably looking at two

and two as opposed to four and four. If they did four and four, it would only be because the economy was growing rapidly, much more rapidly than they think it is, in which case earnings would be higher that you know, so I think that So that's the optimistic. The great the greater risk is that they is that they, you know, tighten too soon into a fragile economy. And again, I don't see how they do four unless the rest of the world is also starting to grow as well,

because the dollar would. So let's say let's say a quarter point in December and then two and seventeen and two and eighteen and two and nineteen and two and twenty, which would mean that we would have a low inflation environment, a g d P two something along those lines, and the rest of the world coming along. No nothing that almost. To quote my friend Larry Cudlow, that a goldly locked scenario, isn't it if you have low inflation and low growth

if you look at it right now. So it's astonishing to me that you have this year again, people pulling money out of equity funds at the fastest rate since two thousand and eight when the world was falling apart, and you you have that one. If you were just to sit back and abstractly say what's the best environment to own stocks, you'd say, Oh, you want to have economic growth, but it can't be too fast stoke inflation

or to cause the Fed to get hostile. Uh. We we have to have low inflation, so we were not p ratios can be high. We want a good beginning dividend yield and a good dividend growth rate. We want GDP to be at an all time high, on household net worth to be at an all time high, one profit margins to be an all time all that's true, and yet and yet evaluations right now are are nowhere near the historic eise. So it's a political season. We're

we're having this conversation before the election. Given everything you've described sounds so good, why is there so much negativity about everything about the country, about our policies, about stocks, about bonds. It seems you can't go anywhere without this drumbeat of negativity despite what you're describing as things actually

being pretty good. Yeah, I think I think that the two thousand and eight, the financial crisis and the housing collapse kind of change the psychological polarity of of of people with respect to savings and investment and made them

i'd say, both risk and volatility phobic. And so they're terrified of risk, and especially if they saw their house drop, and you know from peak to trough, and that we had an unemployment rate that that hit ten at one at one point, and then there's just the general anxiety and angst that you see whenever Macro pops up. The stock market had the worst worst start to its uh to a year in history this year, just because people

got worried about oil, about Russia, about China. So these fears flare up, and I think they're they're due to the financial crisis, and it's only gonna it's gonna take time. We've been speaking with Bill Miller, formally chairman and Chief investment Officer at leg Mason Asset Management. If you enjoy this conversation, be sure and check out the podcast extras, where we keep the tape rolling and continue talking about

all things value investing. Be sure and check out my daily column on Bloomberg View dot com or follow me on Twitter at Rich Halts. We love your comments and feedback right to us at m IB podcast at Bloomberg dot net. I'm Barry Ridhults. You've been listening to Masters in Business on Bloomberg Radio, brought to you by Bank of America Merrill Lynch seeing what others have seen, but uncovering what others may not. Global research that helps you

harness disruption. Voted top global research firm five years running, Merrill Lynch, Pierce, Finner and Smith Incorporated. Welcome to the podcast portion, Bill, Thank you so much for doing this I'm very pleased to meet you, and I'm really enjoying this conversation. Thanks, Barry, and I've been a big fan of your writings for a long time, so as great to meet you too. UM. I don't even know what

to say to that. I'm I'm I'm struck done by that. Uh, there are there are a few questions I didn't get to in the radio portion, and I want to circle back before we start doing our um our favorite questions and and there's a bunch of different things that I know you can sink your teeth into. Um, so let's jump into some of these before we come back. God, there's so much stuff. So so at the peak, what were the total asset that you were running at leg

Mason Nor is that two thousand or oh seven? That would have been oh seven probably, And and basically you're buying a little big caps. You didn't feel ever constrained by Gee, there's only so much we could do with with this money. It's too much money now. In the in the early days, we we did all caps. So

again we had almost no money under man. You started zero under management, so we could do anything that two when I think, I think the first portfolio that we put together in the summer of nine two had a seven and a half percent dividend yield and traded at four times earnings in a discount to tangible book um.

At the peak, we were mainly large cap, but again because we're contrarian value investors, we were liquidity providers when people wanted out of something basis, so the size of the of it didn't didn't matter too much and it didn't affect us too much. And it's my friend will down off. Another guy's beat the market over his entire career runs the FILLI Contra Fund. It's the biggest active actively managed fund, and he's got a great record with

a hundred billion dollars an asset. So it's doesn't make it doesn't make that much of a difference. So let's talk about how you got to um like Mason. What were you doing before you were running running the Value Opportunity Trust. I was a I was a very young treasurer at a privately held company called J. E. Baker,

which sold refractories to the stealing cement industry. And I got to like Mason because my wife was a broker at leg Mason, so she had when I when when I got married overseas, when I was in the army, and then I went back to I went to Baltimore. I went back to Baltimore to go to grad school at Johns Hopkins. And so when I was in grad school, she got a job at like Mason and then, uh, that's I got to know the people there and what was your first gig there? What were you what were

you doing? I came. I came in to succeed my my now late partner, Ernie Keeney, as director of research. So when I was when I was a treasure I was doing the normal treasury functions, bank relations and all. But the Baker Company had a fairly significant stock portfolio that they managed internally, which I which I did as well. And it was that that, uh, I think caught the attention of the people at Like Mason and some of the people that I that she knew there. So this

is the first time hearing of this. This is interesting. So you're working at a company selling refractories to heavy industry, but sort of as part of your job, you're managing their own internal portfolio. Was that for their pension or part part of the pension was managed outside, and so we had a pension committee that evaluated managers and then part of it was managed internally. What was your what was your academic background that you had any sort of

skill setting that you're in your early thirties. Then at that point, right then, I was I want to get to like Mason, I was thirty one years old down, so you were in your twenties running part of the pension funds. What what was your your background? What was your schooling? Well, I had an undergraduate degree in economics and European intellectual history from Washington and Lee in Virginia, and then I went to grad Schoot Hopkins in the PhD program in philosophy, and between that I was in

the military military intelligence overseas. But I've been I've been interested in in in stocks since I was since I was very young. In fact, it's a it's an amusing story that that people have written about so that people said, how did you interested in stocks? What when that happened?

And it happened when I was nine years old, and I was living in Miami at the time, and I came in from mowing the grass and my dad was reading the newspaper and he had turned to the stock pages, which of course don't look like the sports section or the comics section, right, just numbers and letters. And I said, what's that and he said, well, these are stocks. I said what are stocks? And he said, well, they're they're

parts of the business. I said, why why are you looking at this and he said, well, he said, you know you can. You can make money if you if you know how to pick stocks. And I said, what do you mean to show me what this means? So he takes something I'll just make up with things say General Motors. So there's the GM. That's the car company that makes Chevy and b Wick and I'm like, okay, and he and I said what are those other things?

But that's the price. There's the opening price of the stock in the closing price and and uh and I said what's the thing at the end, and it's like plus one quarter. He said, well that's the change and I said what do you mean? He said, that's that's the quarter. That's twenty five cents And he said, so if you owned the stock the day before, you made twenty five cents, and that I never I said, well, what do you have to do to make it make money. And he said, what do you mean. I said, what

do you have to do? How do you make it make money for you? He said, well, you don't have to do anything. It just does it by itself. And I said, wait a minute. There's there's a thing where you can make money without doing any work. And he said, yes, sort of. And I said, well that's what I want to know about, because I don't like to do work,

but I do want to make money. And so and that's how I got interested in in in stocks at that, you know, at that point in time, and there was a book which is probably still out there that Merrill Lynch was giving away called how to Buy Stocks by Louis Engel, and it was it was in order to familiarize people with the you know, with the stock market, and told the story of some little kid that started a fishing pole company and that didn't It was sort

of a parable about stock buying. And since, you know, since then, I've always been just interested in stocks. What was the first stock you remember buying? The one the first I remember buying was R C A H. In the nineteen sixties. Then yeah, yeah, I was, I was. I bought our cig with the money that I had made by having a paper route and umpiring baseball games and doing stuff like that, and uh, our c A stock doubled and I used that money then to buy

a car. First car when I was like seventeen years old. It's a Triumph TR four. That that that's interesting. So there's a tremendous history of interest in the market. But still you're you're working for a non financial company. How did you start managing their pension fund? That sounds like you were twenty eight or six you were running the part of their pension fund. Yeah, I mean I initially I was. I was. I worked for the CEO directly for a couple of years and did a variety of

different oversaw variety of different things. And then it was also the named the assistant treasurer, and the treasurer was the one got much older than me. He was, but he was one running the running the portfolio. I was helping him with that, you know, doing research and doing

stuff like that. And then he left for for another job and the job was vacant, and so again I was very young, and they're like, well, you you can be the interim treasurer and we'll go find a treasure and after after about six months, they didn't find once. They just let me do the job. That's amazing. You know. The other thing that stands out that you had referenced um was military intelligence. We've spoken to a number of

people who have had military experience. How did that affect your approach to invest in the U S. Military is a very specific organization with its very own way of doing things. Uh, directly on investing, it's it's there's a really interesting connection that's probably only because of the military intelligence training. And that is, you know, and with the SEC no, nobody wants you to have inside information and

interface other people don't have. But but you can have what they call a mosaic approach where you put pieces of information together and figure something out. And we had extensive training in military intelligence in that exact thing, which is taking disparate bits of information and using them to create an essence of picture, probabilistic picture of what might be going on and what could happen and looking at

various scenarios. All of that is directly applicable to of course to look at at companies and looking at the information and trying to get a picture of what's going to happen with those businesses in the economy from from just apparently unrelated bits and pieces information about the companies, and it's it's it's really interesting because you know, there was you have these old cliches that they would have on the bulletin boards of loose lips, sync ships, you know,

and stuff like that, and it's it's true because you could look at you could look at something that apparently was meaningless and have a little bit of information, but then there was something over here and something over here. There were unrelated on their own, but you could put them together and get get the beginning of a picture when each individual piece by itself didn't tell you anything. And it's the same approach with picking stocks, very similar,

very similar. Huh. So, I want to throw another quote at you from yourself. I often remind and get get your feedback on it. You you had said, I often remind our analysts that one of the information you have about a company represents the past, and a hundred percent of the stocks valuation depends on the future. So explain that.

So this I'll come into two different ways. One of them was that one from roughly nineteen eighty well, we had two bad years in the Value Trust, and I took over at the end of nineteen solely managing the fund.

And part of what I did then was I went back and looked at the history of value investing in the academic research on value investing, and uh, and it became clear to me that a lot of what people thought about value investing wasn't supported by the evidence, and that when I looked at our own mistakes, they were they were generally speaking, caused by putting too much emphasis on past data and past valuation stuff and past growth rates and not enough on the future, and not enough

on what companies could do, and and so uh that that that got to that point of where I where I came up with that, with that particular that particular quote, and we and we changed our approach at that point in time to put a lot more emphasis on a company's ability to earn above it's cost a capital, to generate free cash flow, and to reinvest that on a sustainable basis. So how do you go about pivoting You

you have an approach that's been extremely successful. What makes you say we're going to tweak this a little bit and and change the way we're doing things despite the past track record. You know. I got that actually from the late Sir John Templeton, who was asked, you know why he followed this value investing approach, and he said, Um, we don't follow it out of any any special reverence

for that approach. We follow it because we keep looking at all different ways to do things, looking at ways to improve all the time, and it just so happens that this is the one that we found most effective. And so I think that was that. And I talked to him about this, you know, when he was alive, and that was one of the things that that stayed with me. Is you're always looking to try and improve

the process. So if it turns out that even for a brief period of time, that that that looking at charts tends to be correlated with significant stock price moves, fine, we'll then add that to the mix until it doesn't until it doesn't work anymore. So it's a it's a process of really trying to continuously improve. And and again I think you had Mike Mobison on here and and he was, yeah, he was, yeah, he was a great

when he was working for us. He's great, Uh, teacher of of of secured analysis, to the to the analysts, and always looking for ways to improve. Look at the academic literature. So so how do you prevent yourselves from oversaulting the stew so to speak? It becomes really easy to constantly you know, I picture the old soundboards with all the knobs and everything, and you have all these different inputs. Here his valuation, here's the FED, who's interest rate,

his inflation. How do you prevent yourselves from playing too much? Because you could there's always something to be tweaked. It's harder to do less than just doing more seems to be easy. How do you prevent that natural tendency to want to play him around the edges a little bit? It's it's a little bit like the zen like doing not doing in the sense of and in the sense of what we're trying id to do is always always

think about how things could be improved. Assesst But we're you know, we're long term investors, and that's that's again that's rare in this in this market. But you know, we owned we owned Fannie May for fifteen years at one point. So uh, it's the case that our average holding period is three to five years and and then so we're we're looking through the stock price fluctuations. We're trying to look through the noise, and we're always trying

to filter out the signal from the noise. But the core part of the core part of the process doesn't change, which is trying to figure out the intrinsic business value. All right, So let's talk a little bit about that, because that, I think is really fascinating. How does that process begin. How important are analysts bringing ideas to you? And how significant is the team approach that you you employ? Um, all those things are, all those things are important. We

we we get. I mean I tend to be a be a high output idea generator, not in the sense of constantly putting new names in the portfolio, but in the sense of constantly looking at names. And after thirty five years of doing this, you know, I have a fairly good, fairly good, extensive experience with all kinds of different companies and industries. And you know, my son has been doing this for eight years, and Samantha has been

doing it for fifteen years. We have a we have a new young analyst and a more senior guy that we just brought on. So there's a there's a mix where people are all looking for for things that we think are mispriced on a on a longer term, on a longer term basis. All right, and your your co um manager at the Opportunity Trust Funds whose name is give me one sex, Samantha uh mich Lamore and Maclamo mac Lamore. So how do you guys divide responsibilities from

running that fund? Is having a co manager challenging? Is it helpful? Is there a natural split of duties? How does that work? Uh? Well, it's it works, It works very well. We don't we don't have a formal uh uh split of duties. We both are trying to pay

attention to everything in the portfolio all the time. She's in the office a lot more than I am because I split my time between Florida and Maryland and New York, and so she she will tend to take more meetings with with south Side Animals, take more meetings with companies than that I would, just because she's in the office office more. And then we're you know, we're sure office is right next to mine and my sons is right next to hers, So it's it's when we're there we're

we're talking all the time, and we're not there. We're emailing back and forth or talking on the phone. So let's let's talk about the end of the run, which um was uh oh five. What was so different about oh seven, o eight, oh nine than than the prior sell offs like two thousand or eighty seven. What made this collapse different than any previous I mean, the dot com crash was pretty um brutal, at least for that second.

What was qualitatively difference different about the Great Recession? This was, up until that point in time, the academic literature did not really distinguish between the types of financial crises and then how you deal with those crises. And so what we got what I got wrong. What we got wrong in that was I thought we had a pretty robust

strategy for dealing with with financial panics and upsets. And in fact, we went through an exercise where we said, let's let's make sure that we have a strategy for dealing with anything that happened in the post war period since World War Two, so high inflation, watergate, you know, wars, panics, all that kind of the inverted yield curves, and so that's and that's why we've did pretty well for for

many many years. This particular crisis was different because it was an asset based crisis and not a liquidity based crisis. And most financial crises are liquidity based in that the Federal raise interest rates, the discount rate goes up, you know, the savings rate goes up, companies cut back, you have a recession. Then the Fed comes through the other way.

Even the crash in same thing, which was that when the market crashed interest rates, that got the ten percent in October and he had a two percent too and a half percent yield on the market, and that just sucked all the money right out of the stock market. And but when the when it crashed, the Fed cut rates dramatically, liquidity went in and the and the market came back and the economy came back. In this case, it was an asset based crisis. So basically housing housing

related and housing is the most people's largest asset. It's the asset that secures most of the debt, and a lot of that debt was was undocumented loans, liars, loans and stuff like that. So when that that edifice came down, what we thought was when the FED began to really inject liquidity. You could go back, you could go back in again. And as it turns out, that's correct in a liquidity based crisis. It's not correct in an asset

based crisis. An asset based crisis, some of what we saw in Japan and what we saw certainly in the US in two thousand and eight is you only go in and that when the authorities get together and try and stabilize asset prices. So that was TARP. That's what TARP up. Until TARP, every time there was a problem, the bank failed, the shareholders were white doubt, and Tarpe came in and it stabilized the asset values of the banks and therefore the banking system. And that was that

was the bottom. October was the bottom, when most stocks made their bottom, when most asset prices made their bottom. The final bottom was made in March, but that was more technical bottom. You had an October eight bottom and then a Marshal uh Oh nine and that was another. But there were there were, there were, there were no there were no significant failures after TARP, and that was

when that was what allowed the system to stabilize. As late ast January of two thousand nine, people were still talking about nationalizing the banks, but nothing ever, nothing ever came of it. So you you have your own internal process. How do you as a as a fund manager, how do you come to the conclusion, Hey, we're on the wrong side of the trade here, How do you recognize the error and how do you adjust your process to to reflect the new information. A lot of people have

a real hard time making that that pivot. Oh, I think I think that's a very difficult thing because when you're when you're doing poorly relative to the market, then the question is always is the market wrong or am I wrong? And that's a very difficult thing to answer because the future isn't knowable to anybody, and the market is a sort of a collective intelligence collective intelligence machine.

So it's it's easier to do at the individual stock level because and give you a good example, if you take two thousand and eleven, for example, we had a very bad year in two thousand and eleven, and people thought it was gonna be another two thousand eight and the year was the year was going to come apart,

which would have been a catastrophe. So it but in two thousand and eight, if we looked at the individual names in our portfolio two thousand seven and two thousand and eight, generally speaking, they were not meeting our expectations in terms of fundamentals. They would miss a quarter here, a quarter there, the stock would sell off. We're like, well, okay, it's marked a market on that. But there was this sort of a continual slippage of what we expected the

fundamentals to be. And in two thousand eleven there was no slippage at all. The company it's continued to do really well even if the stocks weren't doing well. So that that that's a that's a that's a big one for us. The second is just when you go in. When we go in on a name, one of the things that we ask ourselves once we've decided to buy it is what will make us wrong? So trying to decide up in advance how strong is the investment case

and when will we know that we're wrong? And and one of the things that we have learned over the years is you don't let the stock price tell you if you're wrong. The stock price might tell you something is going to go wrong, but the stock price by itself doesn't doesn't contain any information, especially in this environment where we're seventy percent of the stuff is algorithmic, where prices are being marked against each other every day. So that raises another question, how does how does h f

T high frequency trading? How does that impact you when you're either looking at stocks to select or making the decision to hold onto them. Um, it doesn't make much difference to us because we're longer term investors. I think there's a real issue of the front running and the and the stuff can affect shorter term shorter term traders. To us, the market structural change, which is um uh mostly most of us. The reaction to the crisis is the layers of risk management and the way way people

manage risk. That's what's making the market I think, much more difficult and problematic. And and the reason for that is that now that everybody is so risk phobic and people are when they see draw downs, they run and run and sell. But what you know, at like Mason, we had since the crisis, three additional layers of risk management that we're added to the overall firm. And what what all risk managers want to know is what's your

risk mitigation strategy? And they don't ask what your risk mitigation strategy is if you're outperforming or the or the market's going up. It's only when you're underperforming or the markets going down. So what that does is it bifurcates the notion of risk to only focus on stuff that's going down. And as as I've said many times, I've never read, never met a risk manager anywhere in the world that believes you should own we of an asset that's falling in price. You should be selling an asset

that's falling in price because it's risky. But you iterate that across the entire market, and what happens is that stocks get go down a lot more than they would otherwise do so because at each different level there are people who are selling just because it hits a threshold down five percent. The new regulatory um scheme that we see at companies is a modern version of portfolio insurance. That that doesn't make any sense if you I'm not I'm not arguing with you. I'm saying from a are

aren't returns generated by recreasonably embracing risk? Isn't is in performance the flip side of assuming some risks? Absolutely, I mean, I think you know when people talk about volatility and and they're worried about risk. Put your money on in cash and just just sit there and look at you won't do anything right. So my colleagues, Samantha is fond of saying that volatility is the price you pay for performance. And I think that's you know, I think that's right.

Volatility is the price you pay for performance. So there are lots of giant firms. Now you have Vanguard and black Rock and State Street and firms that are managing in the PIMCO and UH firms that are managing in the in the trillions. Do they all have do you? I guess you. I'm asking if you imagine they all have the same sort of of layer of risk management and and is that going to affect everybody's ability to

produce asset management that can rationally embrace risk. Well, I'm not I'm not familiar with the details of all of their strategies. You know, many of those firms that you mentioned are are passive much much of many of their assets passive. Vangard is to four trillion, two thirds of it is passive, and Black Rocks got the E T

f s and stuff like that. But but but from the I'll just say from the people that I know in the industry, in the business, at big firms, every one of them tells the same story about about risk and about having to have risk mitigation strategies. And I think that's part of what you're seeing in the overall. You're seeing in the overall market that's quite fascinating. What what else is different? And one of the questions I

didn't get to before. I've heard numerous people blame or credit if you want, Um, this rally is all driven by the FED, it's low interest rates. Nothing else is is driving this market. How accurate is that assessment? I think it's reasonably accurate as it relates to bonds globally, and it's not talking equities. Well, I think it's I think it's much less accurate with respect to equities. And so just just for example, UM, if if it were all just low interest rates, that's driving the rally, right,

what's the most interest sensitive part of the economy? Housing? House? Housing done? Uh? Well? Housing is housing stocks have been underperforming, and that the housing market itself is half half of what it was in two thousand five in terms of new home deliveries. So that hasn't been. You would expect that would be, you know, blowing the doors off if it was just interest rates. How much how much of

interest rates helped Amazon for example, none? Google, none, Facebook none, those are among the largest companies in the overall market. How interest rates helped JP Morgan and Bank America. No, they hurt them. So there's it's a much more complex situation than just the stocks are marked are marked up. And as I said, I believe the markets already discounting three to four ten year rates. I think, I think, and that's five years or so often the future. Yeah.

But the thing I think is more interestingly possible is that the only time that we saw money going into stocks was in two thousand and thirteen during the so called taper tantrum when yields went from one to three twenty and four months or five months. And that's the only time that money has gone out of bond funds and in the stocks because people were losing money in bonds for the first time. And now money has gone

back into bonds. So what did the market do that years up because money flowed into stocks, not out of stocks. And I think that I think that's a potential that most people aren't focused on, which is if we have a bear market in bonds and doesn't have right and people start losing money and that goes into stocks, stock market could go up easily. That's quite fascinating. Um. I've been hearing stories of cash on the sidelines now for twenty years, and I've always ignored it because how can

there be cash on the sidelines. If I'm buying a stock from you, you're giving cash to me, and if I sell a stock to you and vice versa, it's there's always some amount of cash ready to be deployed. That that that's really fascinating the the bond side of things. Um. So you you've owned a lot of financial stocks you mentioned just now, JP Morgan and others affected by the UM by the Federal Reserve. Oh, what was it like handing into the financial crisis sitting in financial stocks? What

was the analysis then? Was there a sort of sense, Hey, these are really inexpensive and we want to own more, or was the sense more along the lines of We're not really sure how this plays out. This is sort

of uncharted territory. Um. It was it was more the latter, because what what we did as the as the the economy and the market got worse, is we moved up to what we thought we were doing was moving up the quality spectrum and buying the larger and stronger financials um as it turned out, you know, so we bought a I G. Which was at one point a triple A rated company, but then best Insuring the world Ye so, and that and that, you know, effectively disappeared during that

during that point in time. Um So, I think from our standpoint, what what we the big the big break for us in that in that financial crisis was when the when the government took over Fannie and Freddie that Sunday in September. And my personal view is that people when people say, well, the letting Lehman Brothers go was the most steak that caused the cascade of you know, then the breaking the buck and the credit markets coming unhinged.

And my personal view is the question I asked people to say that is, well, why did Lehman Brothers fail in September? Bear Stearns failed in March, and nothing happened from March till September. Then Lehman failed. And to me the answer is Lehman failed because Fannie and Freddie were seized the week before, and they were seized even though the all their capital requirement met all the statutory capital requirements.

They were seized preemptively. And I came in that Monday morning and I said, if the government is going to seize and wipe out the shareholders preemptively, not when the company runs into liquidity trouble like bear Stearns did, then we can't own any financials. We have to get out of every financial which we did. And I think people who had their look the same thing. Who is the most levered next to Fanny and Freddie Lehman, Let's get let's let's get out of that one, and then who's

the most levered after that? Mary Lynch, Whamo and so liquidated following the Fannie and Freddie um. That was late August or early September seventh. It was a week before Lehman blew up UM. So that had to save a ton of capital. If you were liquid dating on the eighth, it must have felt bad at that day, but you

look what happened a few months later. We actually got We actually got back in after TARP, so we weren't out for that long and we what really what really helped us when the government, the government came in with tarp. And again we shouldn't have gone in as quickly as quickly after that as we did, but in January had

a nice bounce after that October November. In January, what happened when they talked about we're talking about nationalizing the banks, that the the preferred stock of City Bank Bank America, Wells Fargo was trading. It was trading it like fifty cents on the dollar when it was PARTI passu with the government's So we bought those prefers at the time.

And then what happened was that the government caused those preferred to be converted into common stock at roughly par so we you know, are think our cost on our City Bank was like seventy cents to share and stuff. So we that was part of what we did so well in two thousand and nine was those things took

off like a rocket. That's fascinating. You know. My view of Lehman Brothers has always been it was merely the first trailer in the park when the tornado came in, and as long as there was so much financial paper written on based on mortgages and home prices were dropping. Hey, the whole dominoes we're gonna fall, it didn't matter which one was was which I don't know how much of that is, um philosophically appealing, but I've always I've always

liked that metaphor. A lot of people blame Lehman on the rest of the crisis, but it looked like everything was going down no matter no matter what it was, as long as home prices were in free f I think that's right. So I know I only have you for a finite amount of time. Let's jump into my favorite questions, the standard questions I'd like to ask all my guests. You had told us about your background and what you did be for, like Mason, tell us about

some of your early mentors. Who were the people who influenced your professional development. I would say, because because I got interested in stocks at a fairly a fairly young age, and I read a lot on stocks. But I'd say that the stuff that influenced me the most was probably Adam Smith's The Money Game, which came out in or nineteen sixty nine. Um uh the follow on to that, you know, Super Money where actually he uh he introduced the world to Warren Buffett, so I started reading about

reading about Buffett red Ben Graham at the time. Reminiscences of a Stock Operator is something that up until a couple of years ago, I read it. I read it every year because it's such a really it's such a great lesson in psychology and and how psychology works through the market, how markets, how markets behave. So those were those were something more. You know, my my partner, Ernie Kenya died in two thousand ten at the age of

ninety two. Was I worked with him, worked with him every day for ever many years that was, uh twenty plus, you know, twenty plus, twenty five plus years. So he was a big influence on me. And the major influence that he had was he was probably the most optimistic person, certainly most officially, I've ever met. And and so no matter what, no matter how terrible things looked, he would say, well, I'll get better things, that things will turn up, you

know where everything's gonna be okay. And he was also extremely patient as an investor, um, you know, owning just own stocks for forever and uh and was it was a deep value kind of a guy. And in fact he got to leg Mason. He came to leg Mason

and and headed up the research effort there after. He's spent his career at the telephone company, and he the reason he got to leg Mason, which is a very small firm at the time he came in night there was because that his personal account was just was so gone up so much, and the broker that was dealing with him said, you know, this guy, this guy is you know, he's his guy's in his sixties, you know, and he's going to retire from the telephone company and

we need to get him here because this guy can really pick stocks. And that's how And he came and joined the firm real yeah, after retiring. That's amazing. Any any other mentors you want to mend mention, Well, certainly, I mean people that you know. I tried to get to know and pay attention to the all the prominent value investors. So certainly, certainly Warren Buffet, John Templeton have been big influences on how I think about things. Um, And you mentioned a few books. You mentioned Money Game

and Super Money and Reminiscence of a Stock Operator. What other books, um are some of your favorites? Be it finance, not finance, fiction, nonfiction? What what do? What do you read? Well? I I kind of read. Um. Uh, I read very widely. Let's just say it's okay. And so I'm always reading stuff that that is people are kind of surprised. I just spent to hear about I've just been fifteen minutes talking to Bill McNab about science fiction. So don't be

afraid to go outside of you know, reminiscence, what what else? Well? So so I just kind of out a lot of stuff. And so if I stay in the business thing, uh, in the in the in the Marketer business realm Um. Fortune's Formula by Bill Poundstone is a great read because

it's what it is it's about. It's about Claude Shannon, the guy who created information theory, and J. L. Kelly, who came up with the Kelly criterion, which is how how you allocate assets and you know, in any type of an environment, and m but but but Shannon made a fortune in the stock market. And that book points out that the differences between standard financial theory and the type of the type of theory and behavior that Kelly

and Shannon Shannon used. And it's just a great intellectual, great intellectual read uh the two books that things that have influenced by thinking greatly, UM, William James Pragmatism. I think that's the most important document in American intellectual history, really, I think. And his his other book, one of his other books called The Variety of Religious Experience. Also very interesting, interesting book. Mind and Cosmos as a recent book by Tom Nagle, a philosopher, UM and the in the in

the again, I went to grad school and philosophy. So Hume's Treatise of Human Nature is Hume Kant you know, they're They're all I'm I'm reading Schopenhauer right now, the two volumes of the World's Will and Representation, um. Some stuff that i'm reading right now. I'm just about done with the brand new biography of Douglas MacArthur. There's a new one of Ulysses Grant that just came out that uh, it's John a blank on it right now. I'm not

h w brand if it's it's it's brand new. It's an it's an eight hundred page, uh eight d page book, and it's good. It's it's very good. I've read I've read Manchester's book on MacArthur. And but this is this is this is good. Um, let's let's see. I've this year, uh trying to you're always trying to read some classics. I read Robinson, Crusoe and Frankenstein. I'm reading the book that came out that a lot of people read. Obamas recommended it, Sapiens by Yuval Harari. Uh, Danny Khneman recommended

that book I've had. I've had a number of people come out. I started it not too long ago. Are you enjoying it? Well, I've finished that. But he has a new book out it's not It's called Homodaeus, and I'm about halfway through that and it's really it's great, it's great. Yeah, I'm trying to pull up the I'm trying to pull up the the MacArthur book. But uh, this is look at Amazon. Just looking at Amazon, McArthur. Yeah, watch McColl It is not cooperating. Ah, this is Explorer

and it doesn't want to remotely cooperate. I'll dig it up. Yeah. You mentioned you mentioned science fiction, which I don't read a lot of. But I actually have just started all off Stapleton's book Starmaker, which is a famous book in the signs fiction pantheon. He was a philosoph or by training who wrote UM what he didn't even regard as science fiction, just called it, you know, speculative speculative fiction.

So that's that. That that's a that's that's a book that's gotten had an exceptional influence on other science fiction writers. And I haven't you know, I haven't read it, So that that's quite a run of books you've gone through. It sounds like you're you're quite the reader. Yeah, that's I spend a lot of time reading. I wish I spent as much time as Mr Buffett does. He says it's all he does all day is read. But I have to have other things to do, to say the least.

So what do you we we talked about some changes in the industry. What do you see as the next round of changes? What is the next thing to I think we're about halfway through the secular change in the industry away from active management and away from UM a traditional mutual fund industry which is under great secular pressure both from E t f s as well as from UH from passive, and I think passive is right now

about thirty of the of the industry. I think that probably goes to seventy that much over time, and then so and then that's that's I think we're so we're half probably halfway through that. I think we're just at the beginning of a massive hege hedge fund shakeout to

where the fee structure and hedge funds is. It just makes no sense whatsoever in a low nominal rate of return world, I mean, having a having a fee structure in a an equity an equity hedge fund of roughly equal to the ten year treasury just makes no sense whatsoever.

And if you're going to make five percent a year in stocks, which we think is a reasonable number, than having that level of fees and then taking of any profits takes almost all the profit unless you have a hurdle rate in there and gives it to the manager, which again doesn't make any sense. How much of the move from active to passive is being driven by a similar fee pressure, Well, it's it's it's a lot of performances, it's it's a lot, it's a lot less because the

fees are lower compared to hedge funds. But but again people have thought for some reason, rather in a mental accounting mistake that some other hedge funds were magical and they deserve these higher, higher fees. I think the problem and active to passive is twofold number one fees, Jack Bogel has said, And that's that's money directly that doesn't belong to the customer anymore. And but second and more importantly,

I think it's it's closet indexing. And closet indexing is driven by, you know, a combination of risk management and also uh fear of tracking error, so you know, people people can take some under performance. I remember having a conversation with John Reid when he was running City Bank. I think it's probably nineteen I want to see late nineteen eighties or something like that, early nine ninies, I

guess it was. And and he said to me, and we were an owner of City Bank at the time, and he said to me, you know, he said, you have a very tough job because you have to actually beat the market. Uh. If you don't beat the market for some pire time, people take all your assets away. And he said, on our side and our side of the business, he said, in terms of managing people's money, he said, all we have to do is not look bad. So we don't really have to beat it as long

as we don't underperformed by too much. Because he said, it's a different mindset that people different people of mindset have money being run by a bank versus being run by a mutual fund company. But I think that the closet indexing UH an academic told me that by by his account, over sevent of active managers aren't really that active. They're pretty much closet, and so it's all career risk.

They're afraid of sticking the neck out, and so they're charging fees but essentially running an index with a few changes around the edges. Yeah, and and that and that can't in the aggree, that can't work. So that's is that the largest source of money that's moving from active to passive. It's moving away from the closet indexers to the true and now it's no, it's it's moving away from I mean, we're we're getting redeemed this year. We're not.

We're not having a great year. But after five years of the number one fund, you would think they would be getting a lot of inflows. We're not. Right, My friend Will down Off, who runs the Contra fund, right, he's got a twenty five year record to be the right outflows every day. Chris Davis, same thing, Mason Hawk and the same thing. So I think that I think

it's a shift from active just in general. And so it's not so much that people don't know that of all the managers I just mentioned, all of them have a record of beating the market over long periods of time. So it's not that people don't believe that they can't beat the market. It's people don't want the market. They don't want to draw down and the risk that that comes with anybody who's truly an active manager. That's quite fascinating. That's that's very insightful. Um So what do you do

to relax outside of the office. Well, reading is relaxing for me. I have I have a bulldog that always said English bulldogs, so he's always a source of amusement. And then you know it's a psychologically you know, patting the dog is relaxing. Uh. But that you know, that's why it's one of those things where I'm lucky that I'm lucky that, uh, that the market is both a hobby and a and a profession. And so I I spent a lot of time just you know, reading about economics, markets,

that that sort of thing. Okay, that makes perfect sense. Um. So the last two questions, these these are my favorite too. I asked this of of all of our guests. If if you had a millennial or a recent college graduate come to you and say, Mr Miller, I'm interested in becoming a fund manager, what sort of advice would you give them? Well, the first thing, I started asking some questions like why do you want to be? Uh? What? Why do you want to do this? What's your how

is your interest stoked in this? Uh? It's the people that I've found that have been the best at this have tended to be people that have been interested from a young age. Not really not surprisingly. Tiger Woods, you know, started golfing at age two. So the younger you you start, I think, the better off you're likely to be. UM. I I agree mostly with Charlie Manger. I always ask people, you know, what they're reading, whether it be Mark It's

related stuff, or Charlie. Charlie says that he's never met a great investor, he wasn't a great reader. Um. I'd say that's that's mostly accurate in in my experience. Then then in terms of what I tell him is that one of things you really want to do is just invest. So do you invest? Right now? What do you what do you do with even have a small amount of money,

what do you do with it? I started investing twenty five bucks a month when I was in the Army as a lieutenant in the in the Templeton funds and now you know, read the quarterlies and i'd ask I would also ask me want to be a fund manager? Which fund managers do you admire? And why? UM? Questions like that. So and in terms of advice, it's UM. You know, it's a tough business to get into. UM. Having a having a business school degree from a from

a good business school has pluses and minuses. But one of the pluses is you're you're more likely to get a job in in finance with with that. But again I don't have that, and a lot of other a lot of other people that I know don't have that. UM. But just getting into a money management firm, So if you can get a job anywhere at leg Mason or t rope Ice or Fidelity or one of that I

think is the key. Once you're inside, then your ability to maneuver and to make friends, and to figure out where you can go as much greater than it is trying to have your your nose pressed against the window.

And our final question, what is it that you know about value investing today that you wish you knew thirty plus years ago when you first started, Well, i'd I'd say, I'd bring it a little bit more up to up to the current, and that in two ways, you know, I wish when I had started that I had had a better understanding of how valuate how values created by businesses.

I had a good understanding of how people in the stock market have invested and done that kind of stuff, but really understanding i'd say, the economics of various businesses in a way that Buffett seems to have a natural tendency to do. UM. I think I've developed that over the years, but it would have been nice to have it if I was or thirty. Uh. Second thing would be the I mean, the big thing, the big changer uh for me, would have had to understand the difference

between asset based crisis and a liquidity based crisis. So if we have, if we have, those are the only two possible kind of crisis. That there are except for you know, world wars and stuff like that. Uh and so uh had I had that understanding that I have today as a result of reading the academic literature in the work of people like John John Acopolis at Yale, for example, or Gary Gordon at Yale. I think I think we have done really well coming through that oh eight.

So if we if we, if we have a eight type thing again, which I don't think we're gonna have this bay once in a generation, but I think we'd be able to deal with it, and that would have made a big difference. Thank you so much, Bill Miller for being so generous with your time. We've been speaking with Bill Miller. He is the former c I O and chairman of leg Mason Asset Management, soon to be running l m M and the same funds he's been

running so successfully over the past few years. If you enjoy this conversation, be suan looked up an inch or down an inch on Apple iTunes and you could see the other hundred plus of these conversations that we've had. We enjoy your comments and feedbacks. Comments and feedback not plural, right to us at m IB podcast at Bloomberg dot Net. I would be remiss if I if I'm gonna say that again, I would be remiss if I did not

think Uh. Taylor Riggs, our producer, Charlie Volmer, our engineer, and Mike pat Nick, our head of research, who helped put together all the questions for today's show. You've been listening to Masters in Business on Bloomberg Radio, brought to you by Bank of America. Merrill Lynch seeing what others have seen, but uncovering what others may not. Global Research that helps you harness disruption. Voted top global research firm

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