This is Master's in Business with Barry Ridholds on Bloomberg Radio.
This week. On the podcast, not only do I have an extra special guest, but I have a mutual fund legend. Fidelity Low Price Stock Fund manager Joel Tillinghast has been there pretty much since inception in nineteen eighty nine. He has absolutely crushed his benchmark. Over that period. The SMP five hundred has underperformed his fund by three point seven percent a year. Since nineteen eighty nine, He's crushed the Russell two thousand, whatever benchmark you want to talk about.
The Low Price Stock Fund now runs about twenty five billion dollars, so this isn't a small fund. That managed to eke out a couple of basis points, being three hundred and seventy basis points over the SMB five hundred with that pile of money is no small feat. Morning Star named him the Domestic Fund Manager of the Year. Peter Lynch has called him the best stockpicker he's ever known. He's just a legend, has a fascinating career and a
fascinating approach to managing a fund. I found this conversation to be one of a kind, and I think you will also with no further ado my interview with Fidelities Joel Taillinghast. Let's start with your background. You fell in love with investing as an eight year old.
Tell us about that, okay, Quen, he was six. My grandfather, who is a bookkeeper accountant at a textile mill, died and my grandmother was a second string filed in at the Provident Symphony Orchestra, which didn't pay well then and he suspect didn't pay well now. So Grandma realized that she would have to live on survivor's benefits and some dividends from stuff grandpa had purchased. He had twenty five or fifty shares, mostly twenty five of twenty year twenty
four stocks, and he had done research. He kept the annual reports of the companies in a library, and he also used a thing called value line. So my grandmother, realizing that this was her source of income, wanted to be sure she had the right stocks, and she got a trial subscription for twenty nine bucks for thirteen weeks of the value line. And I was a math nerd
as a kid. It was the kind who thought it's cool that one to three, four, five sixty seven eight, nine times eight is roughly nine eight seven, six, five four three two one, And the value line has all these statistical patterns, and because my mother and grandmother were looking at these trying to figure out what was going on, it was curious about the sea of numbers.
Also, she brings you in as an eight year old to help her out.
No, she left the value lines around because she was studying them, and so I wanted to study them. So the first two stocks that I bought were Beckman Instruments in Central Main Power. Beckman Instruments was founded by a guy, Arnold Beckman, who was sort of a tech genius of the time. He made instruments that simplified lab tests and processing, and my dad, who was a biologist, was very attracted to their chromatography equipment. But they made tests that were
not possible possible. So I bought two shares of that I think when I was ten, and four shares of Central Main Power and Beckman Instruments acquired by Smith Klein, which got acquired by Glaxo, but they also did a spin off of Beckman Instruments again, so it came back out to the market and it's held on to all the pieces except Danaher. But the Glaxo shares now have a dividend that's a multiple of the original purchase cost many years ago.
Wait wait, wait, you bought this half a century ago. Don't tell me you're still long.
Yep.
Yeah, that's impressive holding period.
Hey, for those set it and forget it. I guess on a compounded rate, it's less impressive that the quarterly dividends exceed the purchase price, because there's fifty something years in the interim.
So let's fast forward to nineteen eighty. Your first job is at Value Line. Tell us a little bit about that experience.
I had wanted to go to business school, but Harvard saw no need for me, and so did all of the others except for Kellogg Northwestern, which would admit me in a year. I hurriedly sent out resumes all over the place, dozens of them, and didn't get anything good. But in the New York Times there was an advertisement that the Value Line Investment Survey needed analysts, and I thought, I know this job. I know this company, and if you ever are looking for a job, I'd say I
know this company. That's a good sign. So I aced the interview and instead of getting started at thirteen thousand. They started me at fourteen thousand. I think I wrote up Mary K Cosmetics, which was on a tear then because everybody wanted a pink Cadillac. But that lasted for a year and they went on to Kellogg for business school.
You come out of business school, you end up at Drexel, also in Chicago.
So in the summer I got a job with Drexel in their institutional financial futures division, headed by a brilliant man, Richard Sandor, who some people call the father of financial futures. He developed the genmy May contract, which at one time was a big thing in treasury bond contract very inventive and creative person. At the end of the summer he said, would you like to stay? And so I did stay, but I had to take the full time courseload at
Northwestern at night classes and work full time Drexel. The good thing was we had a six forty five morning meeting because we were trying to connect London and Singapore.
That was the only time that worked.
Yeah, and so the sort of early ish start to the day meant that full time kind of meshed well with evening classes. So they finished up business school and started working full time.
So let's talk about how you end up at Fidelity. The urban legend is that you cold cold Peter Lynch. Is this right?
Yeah? So why did I end up at Fidelity? Sandor was fantastic, really like Michael Milkin, despite having limited exposure, but Sandor did work some with him, and he did go out to Beverly Hills to see them. But by nineteen eighty six they had huge legal problems and Bank of America called me and said, would you like to be director of research and strategy. Yeah, so he took that. But sort of a week after I started, they and it's quarterly earnings, which is the same day as the
Booze Cruise to inaugurate new employees. They announced a six hundred and forty million dollar loss in nineteen eighty six. That was money, real money, and the division that I was in was below plan. And I realized, I want to work with people who are superb like Richard Sandor, but I also want to work for a company that's not going to have some kind of financial or legal blow up. So he said, unlike my first job hunt, I was going to focus strictly on five people that
I thought were at the top of their game. Peter Lynch, Mario Gabelli, Michael Price, Michael Steinhart, and George Sorows.
That's a hell of a list right there.
Yeah, they have stood up pretty well and have not blown up in any sort of public way. Peter Lynch was famous for the two minute drill, where he'll listen to any idea for two minutes. He'll shut you down at two minutes. But I think what I said in two minutes was compelling enough that it went on further, and I did have to come into Boston to get seen by everyone and for them to finalize the offer.
And even though maybe the decision was made at that phone call, I didn't actually know until after the interview that I had done it. But when I went to Peter Lynch's office, they dropped me there at two o'clock and there was all this busyness, mayhem, people coming into the office to quickly tell him about what was going on. I've loved the openness to ideas that Peter had and
willingness to consider alternative possibilities. I pitched him San Francisco, Federal Savings and Chrysler, and I suspect he knows so much more than I did. But those were two of my pitches.
Did you get the job because of the stock pitches? Or did you get the job because of what he thought about your analytic skill sets and ability to grow?
I think he always wants people who can grow, because my assumption when I'm in the hiring position is you don't necessarily have the developed skills. If you've gotten through the initial filters, you're probably really smart, really hard working, and either have a degree from a classy school or you have very high grades less famous school.
But those are just table stakes you to the next level.
And what you want is curiosity. What you want is open mindedness. I've never met Ray Daio, but I would submit that Peter Lynch is more open minded than Ray Dallio, although both aim to be I think, completely willing to change their opinion when the facts change.
And really interesting. So let's talk a little bit about stock picking. I mentioned the Fidelity Low price stock fund that you've been running. Is that since inception in nineteen eighty nine. Let's just talk a little bit about the performance. You beat the S and P by three point seven percent a year for almost thirty five years. It's I started eighty nine, so what is this your thirty fourth You're retiring after thirty four years and you trounce what's
really the more appropriate benchmark? I would assume the Russell two thousand.
So Andy's ahead of the S and P two.
Well, you two point seven percent and you've beaten the Rustle by almost four point seven percent, much better. So it leads to the question, what's the secret to this longstanding outperformance against all benchmarks and all passive measures.
I don't think there are any secrets, but I think there's probably five things. The first is knowing yourself and knowing what method works for you. What are you doing that can add alpha? And sometimes the answer is nothing. In that case I highly suggest an index fund and a different career. And for me, that's comparing price with value. There are three broad categories of process. There is momentum, where the decision rule is is it getting better right now?
What's the most current data point that may not have filtered into the Then there's growth, where you're trying to look out five years and say can this company grow at an above average rate with above average visibility? And a third approach is compare price with the present value of future cash flows from here to eternity. And I have one and a half processes and a value investor, But I do look at where do I see the opportunity for above average earnings growth? Where do I see
higher visibility? Because you shouldn't say the present value is the same for everything. If you've got an undifferentiated, crappy retailer and you're saying it's going to have five dollars of free cash flow in five years, and you've got Visa Master Courage most of the Magnificent Seven, and you say that's five dollars, they're not the same. You have so much more certainty because bad things can happen to
undifferentiated retailers. There are barriers to entry. There are monopolies for the second set of companies, and so you've got to separate them into those, and so the growth part filters into it. Things get worse at one of the companies that I've invested in, and I look for facts that confirm my bias that it was undervalued second set
of things. Sticking to a circle of competence, there are industries that I just can't look out five years and see very well biotech or internet the whole phase one, phase two, phase three commerciality. For me, that's just impossible to handicap. Mercifully, Fidelity has a brilliant lady, Irene Knopless, who can do that. I can't reproduce her thought process. I can say that definitely works, but it doesn't work
for me. And so part of success in investing is to stick to things that work for you and.
Stay within your circle of confidence. Yeah, so you know Peter Lynch hires you, he mentors you. He's known as a growth investor. You've come to be known as a value investor. Was it that same thought process? Hey, I'm comfortable with value. I don't want to dabble in growth. Or did you pick up any of the growth strategies from Lynch?
Well, that's what I'm saying about one and a half processes.
Your value with a little bit of Lynch's growth from it.
Yeah, saying the present value of future cash flows depends on future growth, and of course you want companies whose future earnings and cash flow are going to surprise on the upside five years out.
So it would be wrong to categorize you as a pure value investor.
No, the growth is part of the value. I want the lowest multiple on earnings five years out. And one of the ways that I tried to illustrate that was looking at some of Warren Buffett's biggest hits. And from the time he bought Geico and going out five years it was two times earning. He paid two times earnings five years later and stole it. Yeah, and Washington Post another single digit multiple, and most of his big hits, well, Spargo, It's like, wow, he got the earnings growing dynamically or
at least above average. And it's the pe five years out that I think is more helpful than a spot pe or ev to ebit today really interesting.
So you began in eighty nine, I'm curious how your investing philosophy has evolved over the past thirty plus years.
I got the black lung assignment as an analyst at Fidelity.
Got seaning covering coal.
I got assigned the coal industry, and I got assigned the tobacco industry, neither of which anybody was beating that under the door. Coal was suffering then because long wall minds and other productivity improvements had come in in the eighties and so productivity was growing really dynamically, like eight
percent a year. The price of coal was falling because who needs eight percent more coal when demand is flat or inching up that we're still installing coal power plants, but not eight percent a year, So the price was falling, whereas the tobacco companies were oligopoly of a possibly addictive and at least habituating product. Both industries made me WinCE, which goes to ESG, but your visibility into the tobacco
earnings was so much clearer. So if they were both at ten times earnings, you qualitatively wanted the place where there's no Harvard Business School red is going to say I want to go into the tobacco business. They don't want to go into the coal business either, but that's
a barrier tantry. It's in oligopoly. There's light since sure, there's lots of regulations around tobacco, so you have a relatively stable oligopoly, and that's incredibly valuable, which has to be offset by the thought that ever since the Surgeon General's Warning Unit, consumption of cigarettes per capita until the COVID era had pretty much dropped three percent a year
forever since nineteen sixty five or whenever. The Surgeon General's warning was, it's been on a downtrend, but the pricing power could more than make up for it.
Huh. Really interesting. So let's talk a little bit about how Fidelity thinks about active management and how the low priced stock funds came about. There are lots and lots of small cap funds. What led to a low price stock fund?
At the time, there was a standard and Poor's Low Price Stock Index, and it was considered a technical indicator speculation. It's what the much maligned retail investor was doing. Low priced stocks were beating the S and P five hundred. They'd say, it's a crap market. People are buying junk. The meme investor is nothing new or meme trader. Also was seeing that Fidelity had the largest by side research analyst drew and we could cover those smaller stocks and
they were mispriced. I also was influenced by a business school professor, Rolf Bonds, who did one of those studies of small cap stocks outperform for the period that he studied. It did, and it's gone intermittently missing for many of the last decades since the studies were published.
You guys at Fidelity had lots of analysts that covered this, So you're implying that A there's a market inefficiency. Yeah, and B you had an a an advantage that allowed you to swim in those waters that no one else seemed to do very well.
And yeah, at some point you'll beat me up for the number of holdings that I have and.
Eight hundred nine hundred I don't think I don't have a problem with that.
But you know, it was going to start with. Peter Lynch.
Had more the Magellan had more than had.
More than that, and the assets under management were smaller, although the market the cap of the market was smaller, but he had more than that, and Peter just it was unforgivable not to have or get a update on stock that Peter was interested in, and so thinking Will Danoff probably intermittently covered over one hundred stock retail stocks when he was an analyst, and I covered not just the tobacco majors in the US, but also the international British,
American and Imperial and the Canadian companies and the leaf growers, and so had a full understanding of the international competitive dynamics, but also the supply chain and that was what Peter wanted, and that was what I thought Fidelity had a competitive advantage because we were doing research on those smaller companies.
So how does this lead to nearly a thousand holdings in a mutual funds?
Eight hundred in my case and over a thousand for Peter.
By the way, I'm not going to beat you. You were Peter up over this because whatever people think about, hey, that's way too many stocks, the answer is, well, just look at the performance. It's obviously not too many stocks. Peter one of the greatest managers of all time, your track record one of the greatest of all time. What does having eight hundred stocks do for you? In that fold?
So I think Peter felt like, if you think a business is interesting enough that you want to keep in touch, it's bad form to go to zero. And I sort of feel like the same thing. You want to keep in touch with management. And if you don't have huge conviction, you want to have a tiny position. And if you've got a wildly diverse industry like banks or saving some loans.
You want to own a few as a benchmark for the sector.
But you want to do a preliminary sort and say what would a good looking bank look like? What would a well managed saving some loan look like? And you want to get to a preliminary answer, says, yeah, this twenty five saving some loans look like the best of the bunch. And I see it as taking a business card and trying to keep in touch so that you can develop a relationship with management and can understand what
is your strategy. And it's harder to have a differentiated strategy in banks and saving some loans other than are going to go crazy with risk, which is not the strategy that you want.
So if you are Peter own a few hundred of a particular sector, I'm assuming these are very tiny pieces your sub one percent holdings, And it's just a way of keeping track of or watching a sector. And if something starts to work out, that's when you begin to pyramit and add to the position.
Yeah, and I do that in steps. I don't think I've ever gone from a zero waiting to a fifty basis point waiting on IPOs. Sometimes you have to do it that way, but otherwise it always takes steps where you want to meet with management a few times, see if they're consistent. You want to see if the financial results continue to be consistent and compare and contrast. Are these really the superior banks? Or am I just getting an index of banks?
So you mentioned index. When we look at active equity, generally speaking, tends to underperform the index, but active bond managers tend to outperform their index because they eliminate the worst of the whole news. They eliminate the poor credit, the bad risk reward relationships. And it makes me ask a question about your alpha. Is it primarily coming from identifying the winners or are you almost like a bond manager where you're eliminating the worst potential members of your bank?
Adding value by subtraction? Do you add value by subtracting the stocks that are going to play against your bad behavioral habits? You add alpha by subtracting the industries that you don't understand as well as the market. You add alpha by avoiding businesses that are run by crooks. You add alpha by avoiding businesses that are run by idiots that have bad capital allocation or no business strategy.
So addition through subtraction sounds and you're really getting rid of the worst of the worst.
And that's particularly important in the rustle. It's important in junk bonds. I would not want to have a index in junk bonds because the ones with the biggest weight are the most heavily indebted.
Right. Wow, market cap waiting does not work on the fixed income side, that exactly.
Especially in in high yield. But yeah, I think I think it's problematic in fixed income. And it's also true in russell To. We're forty percent of the companies are unprofitable.
And that's an amazing number.
And the ones that I will consider are the ones where it's just a temporary visitor to being unprofitable. If it's a cyclical low yeah, may maybe that's a buy. But if if it has a history of not being profitable, you you really want to exclude that.
And eventually the historically unprofitable companies will disappoint. Yeah. Like there's only so many years in a row. You could do a one off and call it a non recurring expense. Yeah, it's if it's year after year.
Yeah. And the fourth point was to eliminate the companies that are not resilient, which we sort of covered in the last couple of minutes.
So let's talk a little bit about your cell discipline. Lots of academic studies have shown stock pickers do much better when it comes to buying than they do when they're selling. Tell us a little bit about your cell discipline.
If you go in thinking about it as marriage, as the Pope would have it, you're thinking, I don't intend to trade out of this. You're going to make a much better decision.
About that.
But facts do change. As Peter Lynch would immediately remind me. If the facts have changed, if the barriers to entry have fallen, if they've made a stupid capital allocation decision, that can be a cell. If they seem more crooked than we realized, or more promotion I guess that's the polite word. That's a sell, But it's always a compare one opportunity against another. Despite having a long tail of tiny holdings, low priced stock has historically had some very
large concentrated positions. And those concentrated positions happen because I have high conviction that they're in that group where it's not stupid to think about where earnings will be ten years out. It doesn't help you to trade from visa because the stock is high multiple and you think might be overvalued into that crappy retailer that I mentioned. You want to only limit your sell of that type of company to trade into something of equivalent visibility into the future.
But if it's a low barrier to entry, or if it's some point homogeneous, can you get me to sell a bank that's selling for twelve times earnings if you can show me an equivalent bank that's an eightpe, of course you can. They probably are approximately the same, and so I'll be pretty fickle with those.
So it sounds like you start out planning on holding to these stocks for a long time. If they disappoint you, or if there is a better opportunity that comes along and you're not necessarily thrilled with the holding, you'll use that as a reason to get out. What about purely on price and value?
When you think about selling stock like United Healthcare, which I think has very high visibility and good quot light management and an unbeatable market position in some places, do you have the same confidence in the thing you're moving it to. It's a bad trade if you sell that and say I'm going to move it from United Health to good Rx, where I'll stipulate that they don't have the same confidence in the outlook ten years out.
What about one of your biggest winners was Monster Beverage, which was started out relatively tiny, tiny and not wildly overpriced, and the growth rate was astounding, the visibility on earnings. They grew, but they stayed profitable as they grew. What allowed you to stay with that company so long? The typical manager would have taken the three X or the five X or the ten x and left a ton of money on the table.
What kept me in there was the price going in was ten or eleven times earnings. It was debt free, it had a differentiated product. I loved the ambition of the management team, who were a couple of South African expatriates. Five years after I bought it, the earnings per share were the same as the purchase price. So wow, if you've done that once, maybe you can do it again, unless you think the market is saturated.
So they kept doing it.
Doing it and are still doing it at an above average rate for a consumer staple. Having five percent unit growth in consumer staples, that's sustainable, that's amazing.
How long did you hold on to Monster Beverage.
For the fund still holds it.
Still twelve thousand percent. What sort of crazy numbers are It's.
Like I'd have to look at it. It's like a three or four cent purchase.
Cost thousands of percent gain, Yeah, that's amazing.
Couple might be one hundred percent.
And and you still have confidence that you haven't seen something that's more interesting in the space you want to replace it with.
I don't and that's that's the problem, and eagerly searching the market but not finding it yet. If you got it, please please do tell.
I'm not going to be the guy that's going to give you something to swap out for one hundred thousand percent gainer. That that that's just at that point that there's nothing you could do but but uh, I could do but but make it worse. So so all of this leads to the question, how did you come about to the idea. Let's focus on st dox price less
than thirty five dollars. What was the thinking Because we're not just talking about market capitalization, because you're you play in different ponds in terms of market gap, but it was the actual price. What other than the Dow there really isn't anything that's a price based index.
When they started the fund. There was the Standard and Poor's Low Price Stock Index index, okay, which they got rid of because they were peeved the we and Rice were using it for a mutual fund. We thought it was pre advertising for their index. But I guess they thought that their index was pre advertising for our fund or something. Well, or maybe the retail market changed so low price stocks were no longer a great indicator of speculation or public involvement in the market.
Well, it was one of many odd lots went away and put to ratio went away, like a lot of things that people used to look at as a measure of speculation, seems to have fallen out of favor. And yet the low priced stock approach continues to be successful after all these years. But what was the thinking? Was it market and efficiency.
Or it was that small cap stocks were covered better by Fidelity, But it was also looking at Peter Lynch some of his big hits, Chrysler and Fannie May which, despite its history in the financial crisis, was a spectacular stock in the late eighties that made bundles of money for Michell and Fund. They saw a lot of those were at the start under ten dollars hundred fifteen dollars, and as the fund grew, the fifteen dollars got raised to twenty five dollars, down to thirty five dollars.
And is that where it stopped? Thirty five that's where it stopped? Huh? Really really quite fascinating. So let's let's talk a little bit about the exclusive club that you're a member of, long term successful active managers. There aren't many of you. Why is that such an exclusive club?
First, I'd say why did he use one of the and looking at Fidelity, well, Lynch is awesome. But Will Danoff, who actually started within months of when I did, has added more dollars of value than any single fund manager, including hedge fund manager.
Amazing track record, just amazing.
Yeah, So Fidelity has a strong tradition.
Of active managers have delivered alpha, not just occasionally, but for decades at a time. What makes it so hard?
It is a very hard game because most people know most things, and do you have proprietary information and are you focusing on that proprietary information? I think Will is thinking very directly about what is the standout winner, the best in class in a growing industry, and those are all he wants. And I've learned from Will. Yeah, if I am excited about artificial intelligence and say what if I got in a small cap, super Micro is not
the same bet as Nvidia. Unfortunately, if you think the artificial intelligence will win and I'm unable to make such a decision, then you want to go with Nvidia and not super Micro. It's hard because information travels fast, and I think, at the one hand, can you be faster to react to information? All the bots and automation, I mean, the active managers who are trying to do that have been out competed by Renaissance Technology or Deesha or whoever.
Because I talked to an employee one of the quint shops who would have to kill me and the employee if I said where it was. But he said that at one time most of their investments were driven by a thesis where they tried to find data to support it, but they've now gone to just pure data mining where if Sri Lanka butter production correlates with the S and P, then they will buy It.
Doesn't matter as long as there.
Doesn't mean and key being roughly my age, we're a little younger, doesn't like that. But that's the direction that artificial intelligence is going it's and so I think it's very hard at the fast data. And there's also so much data that people say the amount of data is growing by whatever rapid rate per year, but most of it is until it gets interpreted by something like artificial intelligence. And that's a problem for people who are on the momentumy part of the growth market.
So let's stay with that. There's a quote of yours. I like a lot of data, even a lot of the analysis is trivial and ephemeral. Explain what you mean by that. You seem to be saying some of this data isn't really useful.
For what I'm doing. It's trivial for the people who've got it. It's got a shorter life than fresh fish unrefrigerated, where it's glorious today, but it's gone tomorrow, and the opportunity is very quick and machines are very quick to reflect those Whatever you're thinking about, I think kind of and said at any particular time is less important than you think it is, but it's got your attention.
And that's the nature of that ephemeral data. Yeah, really interesting. So we were talking earlier about active versus passive ironically, Fidelity runs some of the largest passive indexes in the world. What's it like having to compete with your own firm.
If we can't beat the indexes, I'd say we're serving our customers better by doing that, And if we consistently lag, we should shut down the funds and move them all to indexes. But it's really more about customer choice. Fidelity strives to be customer driven. We want to offer whatever serves the interests of our customer's best.
And you certainly haven't lagged. You've been beating your benchmarks consistently over time. Let's talk a little bit about how you define a value stock. What is it that makes a company undervalued and attractive to you?
So value is the present value of future cash flows. Where you're saying the cash flows ten years out are a fantasy. Sometimes they're realistic fantasies. But when I think about the Kathy would universe, I Kathy would make different can't look out for fast changing industries and say, ten years from now, this is what cash flows will be. Approximately, this will be free cash flows in an order of magnitude.
So present value of future cash flows where you really believe the cash flows, reliability, and personally, I think most terminal values are bs and that you should discount as far out as you feel comfortable. And the fact that you're trying to bundle it up into a terminal value unless the assets are cash or convert to cash, that's the value that I am looking for.
So, since you mentioned ARC, let's talk about overpaying for companies. You said it's so important not to overpay, regardless of how good any business or company might be. Tell us a little bit about that safe margin of safety that not overpaying creates.
Kathy would may have her own valuation, so but I can't replicate it myself.
Well, it doesn't look like she can either because and this isn't a beat obsession on ARC. But since the inception, she's underperformed the S and P five hundred, including one year I think it was twenty twenty, which she was up something like one hundred and sixty eight percent. If you're up that much in one year and you're.
Still going to pay it back, sometimes.
It seems that that if you're still underperforming despite that, that may raises a question are you overpaying for those assets?
Yeah? So the question of overpaying, Yeah, it's why you have to think about how will I react in a tough situation. And if you're a growth investor and you're in a bear market and you bought a stock that is you think worth one hundred dollars and it's selling for eighty, a value investor would say, yeah, that's an interesting upside. You want to be sure there isn't something
greater than that. But you get some bad news and the value drops to ninety, but the stock drops to forty, and there's some growth investors who will say, let's destroy the evidence, let's sell out when it's forty. And if you're one of those investors, know that about yourself. A value investor can feel like I have to deal with all the clients who say, why are you losing me all this money because the stock has gone from eighty to forty. But I feel cheery because from forty dollars
to a ninety dollars value that's much better upside. That's a huge upside, whereas from eighty to one hundred that's good upside, but it's not amazing. And it helps me keep an even keel in a situation where I'm feeling the same pain that every other manager is where clients are saying, why did you lose.
Me all that money? So let's talk about making mistakes. I love this quote of yours. You've got to be cruel to yourself, so you don't do it again. Tell us about being cruel to yourself.
My worst stock in dollars ever was Health South Rehab. I had bought the stock in the teens, and it looked like a cheap stock on adjusted analyst earnings. It had something like about twenty nine of analyst adjusted earnings, but it had twelve sense of gap earnings.
And that's a big difference.
That is a big difference.
That doesn't sound like your type of stock.
Not what it's become my type of stock. They had a dispute with the government where the government claimed that they were over billing on some cases. And Richard Scrushy, the CEO, was a very showy sure yeah, and their investor relations guy had been an actor on The Wonder Years, which was a TV show.
I think that's a red flag, isn't that it's.
Sort of become one. But I paid in the mid teens and sold it out for less than a dollar.
Wow, big loss, And that's a big loss.
On a percentage, and it was a lot of shares. It had complete wipeouts, but they are mostly those one basis point positions. I didn't do the full research and didn't have much confidence behind it, but I thought it was interesting, So be cruel to yourself. What I didn't do was look at free cash flow. And I think that was part of how my changing it had already
realized from the tobacco companies. The magic of their financial model was the huge amount of free cash flow, and that they were producing the gap earnings versus the analyst adjusted. The lack of free cash flow was confirming that gap was probably closer. It turned out that they were cheating the government and that there were some accounting restatements necessary and there weren't really good financials and the assets were growing faster than the sales and.
So, which doesn't make any sense. Yeah, so you beat yourself up on this. You're you're cruel to yourself.
You're cruel to myself to say, going forward, I'm going to look at free cash flow, you know, and take it seriously. I'm going to be skeptical about interelest adjusted earnings and look to free cash flow. Is it confirming, but I also want to see is it one of those cases where the analyst adjustments are economically realistic or are the excuses?
What year was this?
I bought it around two thousand and it crashed around two thousand and two two thousand and three.
Right in the middle of the dot com crash, so you could definitely bury that. Although a ninety nine percent drop is never fun, how big a position was this? Because it was material and even with eight hundred other stocks.
This was one of my medium concentrated U was probably position number thirty.
And that's a percent or two, right, That's all that is. Yeah, no one's happening.
Ninety nine percent lost on one point one percent could be got percentah, and so meaningful to So it's very meaningful. And I think I had a you know, epiphany about concentration that you don't want to treat all the companies the same. You really only want to concentrate in the very high conviction companies are really superior. And clearly Health South was not clear, and so it was beating myself up on this is how I need to change my
analytical method. This is what's wrong with concentrating in the wrong stocks.
Not a lot of managers are nimble enough to make those adjustments ten years, twelve years into managing the funds. How did those changes affect your performance over the subsequent twenty plus years.
I hope that they were positives.
For the better. Whatever happened to Squirreshet, by the way, I.
Have stopped watching him, like I stopped watching the Winter Years.
That's very funny. So let's talk a little bit about picking international stocks as an asset class. Has done fairly poorly, but it's nearly a third of your portfolio, and you continue to outperform. What do you see in international stocks?
Japan has more public companies than the United States.
Hard to believe.
Yeah, with a fraction of the population. In the US, it's chic to be a private equity or a venture back firm because either ways, Yale is not interested in you. And whereas in Japan it is pristy and to be public, to be public, to be listed on the Tsese. And there are lots of companies that in Japan that are in single digit returns on equity, but you do not
need to invest in them. There are lots of brain dead bureaucratic companies, but you don't have to invest in them in Japan or Europe or the United States, and they're the addition by subtraction is particularly important, and it's great that we have on the ground people. And here I highlight Sam Chamowitz, who's taking over along with Morgan Peck from me spent several years in the Tokyo office. And there are smaller entrepreneurial companies that are doing differentiated things.
One of those big winners has been Cosmos Pharmaceutical, which is a discount drug store and food store in southern Japan, and their SGNA to sales something like fourteen or fifteen percent. Walmart, which runs a tight ship, has SGNA to sales I
think of about twenty percent. So we've got a company that is more efficient than Walmart, which I think is impressive in itsself, and they pass the savings on to the customers, and customers in the South tend to be poorer than the Tokyo metro area or have lower incomes, so they love the prices. It's had double digit returns on equity and good growth, and that's what I look for and what I think Sam and Morgan are looking for going forward.
So when we look at international companies. They've been trading generally at a big discount to US and consistently for the past on ten fifteen years. Why is there such a spread between US domestic and overseas companies in terms of your value investor in terms of straight up valuation.
Some of it is the industry skew that there are not so many winner take oligopolistic tech companies internationally as there are in the US. China has Ali Baba, but that has a governance constraint where Jackmo is hanging out in Tokyo rather than Kina, and I don't know whether it's because Tokyo is a lovely place to be or because he feared for his physical or financial.
Safety not encouraging to.
But both of those are good, good reasons. But I don't see any tech leaders that are global in a lot of the parts of the world. There are real governance differences in some of the places, and the industry skew away from tech, you know, maybe slower and more commodity like US anti trust policy has kind of gone missing, excepting weird spaces, and so US companies have a lot more market power that they can.
Use really interesting. So so you set to retire as portfolio manager this year. You mentioned your two successors. Is the strategy going to be the same or are they going to put their own spin on the base that you've created over the past thirty four years.
They will absolutely put their own spin. Some of the largest holdings have come down in size because what's high conviction for me might not be high conviction for them. And on the bullish side, I think research about the specific companies and coverage is better than it's ever been for low price stock fund because Morgan and Sam are beating the bushes, getting in lists to study companies, call companies, visit companies, and so that information flow is better than it's ever been.
You're going to stay honest, seenior advisor. What do you hope to teach the next generation of fidelity fund managers.
Maybe I'm just hanging out so that they have an excuse to visit the London office, and because I learned from them, and I worry about my mind going because I'm not talking to them. I'm hoping I have something useful to tell them, But if the long awaited value boom doesn't materialize, they may not want to talk to me.
So I want to throw one more quote at you before we get to some of our final questions. You had said, when discussing what you learn from Peter Lynch, be skeptical enough to spot your own mistakes, be flexible enough to fix them quickly. There's no shame in making mistakes as long as you recognize the mistakes and fix them. Tell us a little bit about the process of making mistakes as a fund manager. It sounds like you're saying,
this is part of the process. Is no avoiding error, it's how you deal with it.
Yeah, and that was what I meant to draw from the health set things sample. I think it did change my process as a result that Why do I emphasize free cash flow more than analyst adjusted earnings? It's because that was so difficult. Why do I emphasize staying away from crooks and idiots because of Helsatham on the others where.
They were both crooks andity it seems. Yeah, So let me throw a couple of curveballs at you before we get to our favorite questions. One has to do with what managers describe as eating their own cooking. What are your thoughts on being invested in your own funds?
I would ask whether the manager can be invested. I have Canadian funds that I cannot invest in because they are regulated under Canadian securities laws, and so I cannot invest them. I have the highest disclosable bracket of amount invested in both my personal brokerage account and in my retirement account.
So you very much eat your own cocaine. Yeah, and our last curve bawl before we get to our favorite questions. You were affected by your experience in an earthquake in Japan. Tell us about that.
It was very scary. The conference that I was at went all week, and on Tuesday before the big one, it was in a company meeting and it felt tremor, and the translator sort of perkly said, oh, that was
an earthquake. Okay, if you're chill about it, then so am I. And then a couple of days later, on Friday, it was in a meet with a home goods retailer at the Fidelity office, and the tremor started, and the tea service started to slip around the table, and the company manager was CEO was looking more and more uncomfortable. Not chill of that, not chill, And so I was thinking, oh, it's not just every day for the Japanese. And so the meeting that was meant to go till four we abandoned,
went down the stairway. The coffee shop in the downstairs was kindly giving away free coffee, and my car right to the hotel wasn't scheduled to arrive until four, but it never arrived. Cell phone service had stopped, and so I had to walk to the hotel and Dave Jenkins, or Fidelity analyst and now portfolio manager, had to walk home, which took a few hours. How bad of an earthquake was this, This was seven. It was a big one. You could see the hotel was near radio tower and
observatory tower. You could see it bending really and they were going to have a finale dinner on the top floor of the hotel, but decided to move it to the basement. And one of our women analysts was on the twenty first floor. I think I was on the twenty second floor, and she went down there crying and they moved her to the second floor. And if I'm ever there again, I'm going to lose my dignity and start crying and saying, move me to the second floor.
It's very orienting to be for those of us.
And to have subways stop shut down, cell phone service shut down, car service shut down all of that stuff, and to see, oh my god, the radio tower is tilting. I can't My flight was canceled. Flight out was canceled.
Very very disorienting. All right, let's jump to our favorite questions that we asked all of our guests, starting with what what have you been watching? What have been streaming? What's kept you entertained these days.
It's a good thing that your podcasts have a shelf life, because some of the stuff that I watch has a shelf life too. I recently watched The Pelican Brief and thought, you know, that was when I really loved Julia Roberts.
That's a fun movie.
It's a fun movie, Renfield nick Ka. It's about Count Dracula's assistant, so it's lighthearted. Maybe more Halloween type showing, but but it's fun. I'd like the Bush series.
My wife loves that, watches that I like old movies.
James Bond is maybe popcorn, but I like popcorn, especially with the Sean Connery there. There are definitely some Bonds that I like better. And I'm not quite ready, but you know, hey, this this is the new millennium. And so if his personal pronouns become she her, then with that.
I don't think we're going to see that with bond. That seems to be there was a rumor that I'll take the other side of that trade. Okay, all right, especially I'm cool with it. I just don't see that as a bond sort of thing. Let's talk about your mentors. Obviously you've talked about Lynch.
Peter Lynch was amazing. Richard sand Or what a brilliant and curious and creative person at Fidelity. Bruce Johnstone doesn't get as much press as Peter, but for finding ways to make more than a dividend yield out of dividend paying stocks, he was fantastic. He's closer to a value investor than Peter.
Those are some pretty good mentors. Let's talk about books. What are some of your favorites and what are you reading right now?
Thinking Fast and Thinking Slow is one of my favorites.
It's a doorstop, so but it's definitely worth.
It's definitely worth plombing through and took me, i think nine months to get through. In that same category, The new edition of Securities Analysis.
Is Benjamin Graham, Yeah.
But as edited by Seth Klarman, with some new contributions on endowment investing, which I am curious about because I'm thinking that if Swinson of Yale was around today, he might disagree with some of the things that are being done in his name. But I wish he was around to say I'm wrong. But yeah, so I'm always reading
like half a dozen books. Friends last night suggested that I go back to structure of scientific revolutions, and I'm in search of a social history of Jerusalem and the country that we now call Israel because it was Palestine under the Brits before that, it was the Ottoman Empire. Before that, it was an Egyptian empire for three centuries. So sort of curious his background to the horrible situation in Israel.
Have you found a book on the topic of the closest I.
Have not dropped that in a podcast if you find one.
I'm trying to remember was that the Lexus and the Olive Tree. Was that about the history of.
I have read, but that might be what I'm looking for.
Tom Tom Friedman, if you go way back, could be completely wrong about that my recollection is not what it once was. So our final two questions, what sort of advice would you give to a recent college graduate interested in a career in investing or fund management.
If you're interested in fund management, you should know that it works on an apprentice system. You do not start as a fund manager. You start as an analyst. I think that's a good thing because it helps you develop a circle of competence. Peter Lynch always stayed in analyst. Will Danoff has stayed and analyst, and even as their
fund manage, even as their fund managers. The second is that it's a demanding job, and I don't think I've had two consecutive days in the last thirty something years where I didn't check stock prices or check email to see what the market was. There have been days when my dad passed where.
You missed it.
I missed a day, but he didn't miss two days. And in retirement, I'm looking forward to that. But if you're at the start and you're not ready for that, choose another highly paid, glamorous profession.
Requires a heavy commitment.
Yes, it requires a heavy commitment, and think about what you think you might do. Think about whether you're a value or a growth investor, and think about what are my behavioral bad habits that are going to hold me back from success?
And our final question, what do you know about the world of investing today? You wish you knew forty or so years ago when you were first starting out.
Anything can happen.
I love that.
Yeah, anything can happen, sometimes in fantastic Sometimes you'll be like me and get lucky and meet Hanson Naturals, which became Monster Beverage at a beverage service at a tech conference. Then I think of who other than Bill Gates predicted the COVID pandemic. Nobody of note was saying We're going to have a COVID pandemic, and Bill Gates did not predict that. Following that you would have massive fiscal stimulus, and.
Followed by streets.
He did not predict that, So he was one hundred percent time getting the COVID but he didn't get that. And anything can happen. Nobody predicted both of those at least a note.
Huh. Quite fascinating. Joel, thank you for being so generous with your time. We have been speaking with Joel Tillinghast, manager of the Fidelity Low Price Stock Fund. If you enjoy this conversation, check out any of the five hundred previous interviews we've done over the past nine years. You can find those at Apple Podcasts, Spotify, YouTube, wherever you find your favorite podcasts. Sign up for my daily reading
list at ridults dot com. Follow me on Twitter at Ridolts, Follow all of the Bloomberg family of podcasts on Twitter at podcast and check out our brand new podcast at the Money, where each week we share a quick investing insight with an expert. It's now on Apple Premium Podcasts and it's coming everywhere in January twenty twenty four. I would be remiss if I did not thank the crack team that helps put these conversations together. My audio engineer
is Kaylie Lepera, My producer is Anna Luke. Attika val Bron is our project manager. Joan Russo is my researcher. I'm Barry Rudolts. You've been listening to Masters in Business on Bloomberg Radio.