Samantha McLemore on Longevity Risk Management

If you're at all interested in value investing, stock selection, portfolio construction, and what the difference between modern value investing and the sort of Ben Graham historical value investing is. Uh,

You're gonna find this conversation to be absolutely fascinating. The fund has put up spectacular numbers and it's not all Bill, because she also runs the funds with Patient Capital Management, which is the institutional entity she owns and that works closely with Miller Value Partners, and her numbers have been quite spectacular. I'm just gonna say, with no further ado, my conversation with Samantha McLemore. This is Mesters in Business

with Very Renaults on Bloomberg Radio. My extra special guest this week is Samantha McLamore. She is with Miller Value Partners, where she co manages the Opportunity Trust Funds with Bill Miller. She is also the founder and CEO of Patient Capital Management. She was named to Baltimore's forty under forty by the Baltimore Business Journal. Samantha McLemore, Welcome to Bloomberg Verry. Thank you so much. I'm so excited to be here. I'm a big fan of your podcast and I'm honored to

be a guest. Well, well, it's my pleasure. We've had your partner, Bill Bill Miller on twice and he is always a fascinating conversation. Let's talk a little bit about how you met Bill. Tell us about how you got into the financial services industry. I think it's quite an interesting story. Yeah, you know, I always like to say that I want the job lotteries. So, um, Bill and I went to the same undergraduate school, Washington and Lee University. UM.

I was graduating after the tech bubble birth. I thought I was going to go into investment banking. I was ready to do those all nighters live in New York City. I was really more interested in investment management, and I was a member of the investment club at the school. And Bill happened to come back the fall of my senior year in two thousand one to speak to the student body and attend some presentations of the investment club.

So I met him then and UM I ended up asking him if I could send him my resume, UM and low and behold. UM. I got a job as a junior analysts with Bill straight out of college. I thought I was going to be there for a couple of years and go get my m b a UM, but I've worked with him for for twenty years now. How many people in your graduating class are still working at the first gig they got right out of scho That's a great question that I don't have the answer to,

but but I know it's not many. It's not got to be very few. So so you started in the early two thousands, and you had quite a baptism of fire. UM. The flagship value trust funds in UM two thousand and eight fell about the Opportunity Trust Fund, UH fell even worse about tell us about that experience during the Great Financial Crisis, and what did you learn from that? Just

a couple of years of mayhem. Yeah, that was It was definitely a you know, a terrible and painful experience, but it was it was one of the us learning moments and and uh you know, a chance for improvement and growth. And I think that often moments of pain, you know, create that opportunity for uh, you know, for growth,

and so lots of lessons came out of that. I mean, certainly, if I reflect back on my career, probably living through that, you know, with hindsight, it was one of the most instructive and helpful uh you know things you know for me to do as an investor, and I got to do it, uh, you know, in a shielded way with Bill,

you know, underneath build wing. But um, you know, we came out of that with with so many lessons about ways we could you know, improve our approach, and um, you know, I remember, you know, one of the benefits of working beside Bill is is I have all these memories of you know, these pivotal moments and these lessons

from these pivotal moments. And I remember, you know, getting at a restaurant in New York with Bill and a couple of other fabulous investors in the fall of two thousand eight, and they were, you know, discussing how terrible the environment was and the risks. And I remember saying, you know, as a as a true value investor, and prices are down, and I was saying, but isn't this

one of the great you know, buying opportunities. I remember them looking at me wide ied, you know, sort of um surprise, and with hindsight over the very long term, it was. But I probably didn't appreciate to the appropriate extent the nerror term, you know, survival risks, and and Bill has talked a lot about, you know, one of the keys to success in this business is being able to survive over the long term, because that's really difficult

to do, to survive, you know, in different environments. But you know, there were there were so many lessons that came out of that. And one of our favorite quotes that we talked about a lot is Sir John Templeton's bowl. Markets are born on pessimism, grow on skepticism, which are on optimism, and die in euphoria. So really this bull market that we're still in today, I think, which is one of the strongest bull markets, and you know, you've

compounded it. The SMP has compounded it close almost nineteen per years since then, which is nearly two times the longer term average. And uh, the amount of pessimism that this bull market was born on was you know, probably a once in a lifetime extreme and so um and it was it was a terrible environment. But we learned a lot of lessons about distinguishing between different types of crises and when do you play offense and when do you play the friends? And uh, you know, how how

do you recognized risk signals? A lot of people, um, you know, use price to tell them about risks. So you know, many great investors I know of in the financial crisis put in you know, stop losses um into their process after that, which means the price is telling you about the risk. But um, you know, when we did an exhaustive review of our performance, I think what came out of that, you know, after that was after the financial crisis, after was really using finances or fundamentals

more as a risk signal. And so to avoid those big losers or perennial losers. And so those can be the classic value traps where our company looks cheap, but it's not because it keeps you know, UM degrading over time or you know, in the financial crisis, many of those names looked cheap, but also they weren't because you know, the pressures you know, built and the what appeared to

be the earnings power wasn't. There was extremely delayed. And so you know, that was you know, a way that we changed and adapted coming out of the financial crisis to be more sensitive to UM and change our reaction function a little bit to uh, you know, sell more if the fundamentals keep disappointing us rather than oh that's

now more than price then and will buy more. Well, clearly you learn the lessons because when I look at the Opportunity Trust Fund that you co manage with Bill over the past five years or so, uh, it's averaged about percent a year, and that's outperformed. It's it's peers. So that's a that's pretty impressive, especially when you consider, you know, it's a nearly three billion dollar fund. This is not a microcap fund. It's a decent size. To

what do you credit uh that run about performance? Yeah, and you know, I think that that's a great question. I mean, I think one, I fully believe that we have a process that's you know, demonstrated results for now, you know, for Bill for you know, over forty years, and I've worked with him for twenty, so I have a lot of confidence in our approach. But I also think that, um, you know, the markets go through these

broad you know cycles, these longer term cycles. So when I got into the business, you know, before I got into business, when I was in college, we had this big text bubble and valuations got extreme. And then that first and I I joined Bill in two thousands two nearly at the lows of that tech bubble. Then we had this big bull market that was driven by global cyclicals and the emergence of China, um, you know, and

the growth there. And then we had the housing bubble in the financial crisis, and then we had, you know, as I mentioned, this extreme period of you know, pessimism and what I think of is post traumatic stress disorder, you know, that resulted from the severity of the losses in the financial crisis. And in that environment, you know, post the financial crisis, you know, investors broadly really valued, um, not losing money over making money, so they prioritized minimizing

volatility over earning returns. So that's the perfect environment earn returns, you know, to to behave uh, you know, in the opposite way. And and on the other hand, when people are chasing for returns and there's a lot of euphoria, that's when it makes sense to to you know, to really prioritize lower volatility. So I think, you know, coming off the financial crisis, I think we have capitalized on opportunities when when we believed, uh, there was high perceived risk,

but actual risk, real risk was much lower. And um, I think that that's been a very profitable strategy. And a good example of that is you know, home builders and banks and so you know, those companies obviously were hit the hardest and hurt the most in the financial crisis. Um, but they made some of the biggest fundamental changes to their balance sheets and how they operate. Coming out of the financial crisis, for the fundamental picture was really much different.

And uh, you know in two thousand oven at the end of that year, Um, you know, those names all traded down. Uh. You know, there's a lot of fear about Europe breaking up and the year Zone debt crisis.

And at the same time, the fundamentals for the home builders were you know, improving for the very first time, and so it was a stark, stark disconnect and and they've all, you know, outperformed the market nicely over the past decade, even though it's been a challenging environment for for value stocks or for UM stocks that weren't high growth. So I think that that's helped us. And I think remaining focused on the long term and the long term opportunities.

We talk a lot about time arbitrage and UM the ability to stay focused on the long term. And you know, we tend to hold names at least three to five years, but some names will own you know, Amazon we've owned for decades. So when when you say time arbitrage, are you referring to some people with a shorter time horizon giving into volatility and selling and you using the volatilities and opportunity to buy the dip. Yes, I think that's

exactly right. So I think, UM, so again, if we if we are focused on, you know, what is the business worth and what does it look like in five years, then a lot of times the near term, Uh, there's a lot of noise in the near terms. That matters a lot less. If you can remain focused on that and I think at the aggregate market level, you can think about that really well. I mean, people react to you know, five percent pullbacks are very common. Ten percent

pullbacks are pretty common. A lot of people sell on those moves, which, really, if you can remain long term, that doesn't make a lot of sense. I think the markets you know, up a little over half of all days, it's up seventy five percent a year of years, one year period it's up you know, eighty seven and a half percent of five year periods, of ten year periods, and a percent of twenty year periods. So why would

you react to these normal market gyrations? Again, if you have a long term time horizon and you can remain you know, focused on that, your odds of making money, you know, and staying in the market are very high. So we we try to think about, you know, as we think about risk like real impairments to capital, or

as I think about opportunities. Now, maybe an example is UM, you know, I think there's you know, great value and a great opportunity and um some of the airlines and we own Norwegian Cruise Line, and so when we're thinking about what does that business model look like and what's this earning power, with this cash generation, with his growth

potential you know, over five years. Then shorter term moves, whether it's Amy Cron popping up and cancelations in the near terms, they just matter a lot less unless you believe that they're going to be continuing for you know, a much longer duration, really really interesting. And you're taking over from Bill the full management of the Opportunity Trust fund, is that right, That's correct. We just announced a succession and transition plans, so nothing is changing in the short term.

But I will assume responsibility for management of the Opportunity Trust, you know, once Bill goes off at the end of the year, and you know, I will assume management of the team and UM. You know that will be done through Patient Capital, which you mentioned that I started in early. Bill is a minority UM owner and investor and Patient. He's you know, a great mentor of mine, and I joke with him that, you know, I've worked with him for twenty years now and I intend to work with

him for twenty more. And so I Bill and I will keep I will keep talking to Bill about markets and about companies, you know, for as long as I can. But the formal responsibilities and structure will change as we execute this. And could you explain the relationship between Patient Capital and Miller Value. I know Bill owns a piece of Patient Capital, and Patient Capital does work for Miller Value,

but to the outside world it's a little complex and confusing. Yes. So, um, So, first, you know, I've worked with Bill and we were at leg Mason and then split off from the rest of our group and Miller Value Partners became independent, and so I'm still an employee and a co manager with Bill

at Miller Value Partners. Um. I launched Patient in and the drivers for that were you know, there were a few one Um, when Bill you know, launched Miller Value or we split off, he would he would always describe it as a family office and he would welcome like minded investors. He'd been at leg Mason for many years, built a big business, you know, managed a big team. He wasn't interested, um in doing that anymore. You know, I'm younger. I wanted to prove myself. I was interested

in in building a business and growing something. I also, you know, so we had a retail business primarily. You know, all of our assets were in you know, the mutual fund and our overseas, uh you know, fun, and we didn't really have an institutional business. We did back in the leg Mason days, but we we hadn't. And again, Bill was an interest in growing a business. So I saw an opportunity, um, you know, to build a business. And there was also you know demand for women and

minority um owned uh you know, investment opportunities. So I saw that opportunity as well. I was also interested in growing the team and um and again you know, to me, the mission is extremely important. And I love this idea of you know, the partners first and clients first approach.

And Charlie Ellis talked a lot about you know, per distinguishing between the profession versus the business and how you know, investment investment managers should operate more as a profession in other words, doing what's best for the client, rather than as a business doing what's best for the business. So the idea of building a business around that. And also you know the importance of role models and and um, you know, I'd love to help provide more women role

models for young girls out there. I have two daughters. You know, the more people they see like them, uh, you know, doing a job I think the more they can see themselves doing it, them and others like them. And so I set this up, and you know, I

hired a few employees. We were co operating, We have co operated, so really it's the same team at both and on the portfolio management side, I view us as operating as one team, one philosophy, one process, and so we're just doing the work of, um, you know, finding investment opportunities that we think are really attractive and then um if if if I think they're attractive, they going patient.

And then Bill and I are having the conversation on the opportunity side, and so there's a co decision maker making function there. So really it's I see it as a streamline process of you know, all the same work, you know, and then will distinguish at the decision making

level between where things go. But this also created a structure that allowed the transition to happen quite smoothly, because you know, we can just assume again we have to go through the process and get the approvals, but we can assume and transfer over uh you know, the fun contracts and the employees and and really do it in a seamless stable way. So let's talk a little bit about value investing the way Bill Miller, and I'm going to assume you by extension, look at value. Isn't the

traditional Benjamin Graham classic value? Is that a fair statement? And if it is, explain why? Well, I would say, we still have a you know, a lot in common with uh, you know Ben Graham's classic value model. I mean, I had The Intelligent Investor is one of my favorite books. I have a doggyeared I have it sitting on my bookshelf right next to my desk. I refer to it. And so there's many things about that classic approach that

I think are similar. Um. So, you know, he talks a lot about distinguishing between price and value, so prices, what you pay, value is what you get, um, making that distinction, doing you know, careful company analysis to understand, you know, what the value of the businesses. He talked a lot about market behavior and how fluctuating prices to create opportunities for investors to take advantage of, you know, the behavioral extremes of greed and fear that the market, uh,

you know undergoes. And so there's a lot that's very very similar. I would say, you know, really what's different. And I would characterize it as an evolution. And it didn't really start with us, because you know Warren Buffett, who's a student of Ben Graham Um. Again, he used to do the cigar but sort of investing, and then you know, he really evolved his approach and talks about you know, he'd met rather buy a wonderful business at a fair price than a fair business at a wonderful price.

And so the idea of extending out that time horizon and compounding again, you know, I think that's directionally the stuff. And then maybe Bill certainly was criticized in the late nineties early two thousand's, I don't know when it stopped, but for not being a true value investor, for investing in names like A. O. L. And Dell and Amazon, these names that appeared, you know, very high multiple. But when I joined Bill, I think one of the things that struck me the most because again, when when I

reviewed UM, we bonded over very classic value. That was my natural orientation, and so we shared that. But what I didn't appreciate much and and you know I remember Bill talking about listen, you know, during this time when he was criticized, he was like, no one knows what the best values in the market are today. We just don't know because it depends on the future, and we

don't know the future. But we do know, and we can look back over a long term, over say ten years, and say, what were the best values ten years ago, because you can see what has done the best, and so we actually know what that is. And when we look at that, the best values in the market are always you know those names that can you know drive, uh, you know, profitable growth and free cash flow growth and

business value growth the best. So they tend to be you know, in the in the short term, they appear to be higher you know, multiple businesses because um, you know, they're prospects, are you know, the most attractive? And so he said, why would you engineer a process that explicitly excludes what you know are the best values in the market. And that doesn't make a lot of sense to me. Uh, That's what he said, and I agree with that wholeheartedly.

And so what we attempt to do is, um, be open minded to looking for what might be the best opportunities over you know, truly a long term basis. And I think Ben Graham would talk about those as more speculative.

And again, if if those beginning expectations are higher and you're more dependent on truly long term fundamentals UM, you know, there was a higher perceiver risk there, and there's probably there is a higher real risk there too, I would agree, because the percentage of companies that actually can go on to execute that UM is low, and the number of companies who are priced to you know, achieve those sort of outcomes are much higher than the companies that actually do.

But you know, Will has always been open minded. We are open minded about trying to identify and invest, you know, over the long term, and opportunities like that really interesting. So I want to delve a little more into how

you guys define value because you mentioned Amazon before. Most investors think of Amazon as a growth stock, in part because it's grown so much and in part because it's got such a technology um aspect to it, although arguably the bulk of their revenues come from just being a retailer, albeit one that has a rather substantial online presence. How do you define Amazon as a value stock over the past twenty years? Well, I guess back to the story.

What we know is Amazon, What was one of the best you know, most undervalued stocks twenty years ago, because we can look at how it's done since. So it didn't appear that way on the near term fundamentals at the time. You know, near term I guess metrics, accounting metrics at the time, but we know with hindsight that it was. And so when we talk about how we define value or what we see as value, you know,

we use the standard textbook definition. So the value of any investment is the present value of the future free cashloads. And no one really disagrees with it. It's about how do you identify or calculate those and we do scenario analysis. But you know, I think many times, you know, the simplification of dividing the world between growth and value it is,

you know, it is an oversimplification. And you know, Buffett talks about growth being an input in the value equation, and that's absolutely entirely true because it is a you know, again, if a company can earn above its cost of capital, you know, growth will be the most important value driver and um and so again we Amazon still may look expensive on current metrics, but we're always again we're focused on the long term for our companies. We're doing at

least ten year discount of cash hole models. And Amazon has we believe, you know, some of the best, if not the best, competitive advantages in the market. It still has great growth potential. Uh you know, it has a number of different has the retail business, as logistics business, has AWS, it's it's investing in new areas like healthcare.

And so when we look at it, we think, you know, if you just even if you just mark to market there, you know cloud business, the AWS and their advertising business, you're getting the retail business for you know, pretty close to free right now. And again, they've just gone through an investment cycle. Um and Amazon typically doesn't hasn't historically traded well when it's gone through one of those, but coming out the other side, it's normally done much better

and it's about to drive significant pre cash flow. But we're always trying to think carefully about the business and uh, you know, it's ability to drive that long term pre cash flow and how that compares to what's embedded in

the current stock price. So here's a question I always wrestle with and I speak to my c f A buddies, and I'm never satisfied with the answers I get when you have a company like Amazon enter Jeff Bezos retires, or Apple and they lose Steve Jobs, how do you figure that into your calculus as to what the company looks like going forward. It's pretty clear both of those former c e o s were enormously influential on the success of the companies. How do you calculate the loss

of such significant executives. Yeah, no, that's a great question. I'll probably disappoint you with my own my answer too. So, um so, I think probably the reason you're disappointed is I don't think it's easy to calculate, you know, the impact of that. Uh, it's not easy to quantify. I think in both those cases, you know, Steve Jobs and Jeff Bezos, we know that they were critical to driving

you know, the innovation that those companies produced. Um. Apple has gone on to do extraordinarily well, uh, you know post Steve Jobs, which was questioned, you know, for a long time after the death, despite the fact that many would argue they haven't come out with, you know, any new, big innovation. They've driven it all on the existing base

of business. And so again, I think you can also think through an Amazon again, I think we like to think about and I know you've had Michael Mogison on here, and I worked with Michael, and he's wonderful, and you know, he talked a lot about and just came out with his expectations investing that his new version of the book and and our approach, you know, is created from his process. And so we think a lot about what is embedded

in the current stock price. And so sometimes it makes it easier to think through issues like that because if we believe that Amazon, you're not even paying for the retail business at the current crisis, then you're not paying for any of the you know, later innovation that maybe

would be more at risk without Jeff. Again, I know that Amazon believes, and Jeff believes, and the folks there believe that what makes one of the things that makes Amazon special is they've created a machine that can produce innovations and upscale and so Jeff really was very explicit about creating processes and structures to do that. Now it will have to see whether they pull that off, you know, if he's less involved, and that's that's no one knows

the future. We don't know, but we don't think we don't think that needs to happen, uh, you know, for the stock to still be attractive, given the total addressable markets of their proven businesses where they're already you know, very far along and um and so again, it is a difficult questions to answer. I think I don't necessarily

think you always need to answer it. So let me ask you, um a different question that might be more in your sweet spot, which is, you know, it appears to someone like me that Bill Miller and yourself have a somewhat different approach to value investing that puts a heavier weight on future growth prospects. But it also appears that lots and lots of quote unquote traditional value investors are still approaching that methodology the way it was taught

in the nineteen fifties. Why do you think so many people are stuck with you know, the classic version of this, where perhaps they're missing companies like Amazon for you guys, or you mentioned Warren Buffett, one of the biggest investors in Apple over the past couple of decades. Why have p people been so slow to adjust? Yeah, that's a great question. I mean, I think that most investors that have survived and exist today have evolved and now you see in value portfolios a lot of these names like

Google and Facebook and Amazon. So what you don't see and where we might be a little bit different is again if you go you know, down the spectrum of companies earlier in their life cycle, where it's less proven what the business model is or what the you know, earnings potential can be. We are willing to look at names like that, and I think you know, many value investors aren't comfortable with that. UM I think you know

Warren Buffett for a long time. You know, he talked a lot about your circle of competence and making sure you define what your circle of competence is, and and he didn't believe that he you know, technology was within

his circle of competence. I think one thing that allowed Bill to make investments in there's technology companies in the late nineties was his relationship with the Santa Fe Institute, which he talks a lot about and they do, um, you know, research on complex adoptive systems and you know, broad cross sectional research and the work of Brian Arthur who has studied complexity economics and he wrote, you know, increasing returns and past dependence and you know he wrote

the book on that, and he allowed Bill to realize, you know, early in the nineties that while technologies changed quickly, and that was always buffetts concern is these companies can earn you know, great returns for a very short term, uh for the very short term, but then they're disrupted because you know, some new technology comes along. And Brian's work showed that while the technologies change um quickly, technology

market share actually doesn't. And so, you know, the biggest monopolies in history have have been based on technology, whether it's you know, A T and T or Microsoft. And now there's all the um, you know, consternation and hearings

on the current big technology companies. So there is lock in and past dependence that makes uh, you know, the stability of those earnings much better than it would appear if you're looking at you know, the individual products products, and I think the reason you know, people aren't more comfortable going you know, for the earlier stage companies um and then Graham talks a lot about you know, companies that are uh you know, loved or where the valuation

just depends on uncertain prospects far in the future, them being much more speculative and we know that you know, growth is growth rate are not linear, so there can be higher volatility in those names. And we also know that um again, the companies that are able to be

successful and drive that growth drive the market returns. UM. So it's you know, there's some work out of you know, the air Arizona State professor UM who showed that the entire wealth creation since I think the nineteen twenties has depended has been driven by four percent of companies. So it's really a very narrow set that creates all of the wealth. And what that means is most companies that aren't able to do that and um so there are many companies that are priced to do that and don't,

and so there can be higher volatility. Amazon, you know, lost of its value after the tech bubble burst, Bill bought it all the way down. UM. So even if you could identify it, identify an opportunity, having the stomach to hold it and to add to it um and and and you know, retain it in the portfolio for as long as it takes to you know, capture the returns is pretty difficult and it's pretty hard to do.

And so I think that that's why more people don't do it huh really quite fast and they So we were talking earlier about how you don't really fall neatly into any buckets, and the same as true for Bill Miller. But when I look at your specific portfolio, some of these names are are definitely outside of the traditional value universe matterport Capital one, Ali Baba, Gray Scale, Bitcoin Trust. I mean that is not your typical free cash flow uh,

deep value stock. Tell us what it's like to be free from the shackles of the morning Star style box. I I think it's a huge advantage. UM, So we can we can look broadly for what we believe are the best opportunities, which I think definitely helps us construct portfolios that we think have the most potential. When you when you start putting in constraints, um, obviously that hinders

your ability to optimize because they hurt your flexibility. So you know, Bill I mentioned earlier, talks a lot about how difficult it is to survive in this business, and he outperformed in the late nineties during the tech bubble and then also in the early two thousand's, you know, when the tech bubble burst, and um, what enabled him to do that with his ability to shift between so called style boxes. He had tech investments, uh you know

in the late nineties that helped. They were the only thing that outperformed, so you had to have them to outperform. But then and I think it's one of the greatest calls in the history of the business. He uh you know, in early two thousand thought it was game over and massively took down his holdings in those sort of names and so um you know, took the more classic value names up, which is what did well when the tech

bubble burst. So again having you know, if he if he had been constrained in one or the other of growth or value, that wouldn't have been possible because it was so segmented. What what did well? So I think that having that flexibility is critical to you know, generating long term returns. It it can hurt your ability to grow assets because you know, the institutional marketplace is you know, set up and structured in a way, um that you

can be precluded if if you operate like that. But that's okay because you know, I think we'd rather produced excellent returns for fewer clients than mediocre returns for many. So style boxes matter at least if you're looking for institutional clients. Yeah, I mean, I think Warren Buffett. You know, he talks about, you know, the keys are what he thinks is are the keys to being a great investor, and um, he talks about emotional emotional stability, UM, independent thinking,

and a keen understanding of institutional and individual behavior. So i Q doesn't make it up on that list. But you know, the reason behavior is is so important is because again, uh, you know, there are structures and constraints that pop up that create certain opportunities. Again, the markets are very efficient and so it's very difficult to outperformed, so there has to be some reason, you know, or something that's existing that you know creates an opportunity and

makes the market wrong. And those aren't easy to come by. So again, if people are defaulting to a certain behavior that might be suboptimal from a return perspective, that uh, you know that doing the opposite might be what helps you burn returns. So how much do you and build together buy into the Peter Lynch philosophy of by what

you know? It seems like a lot of the companies that you're an investor in, you guys have a very deep pool of um familiarity with and over and above what we traditionally think of as a basic research return. Do you buy into the Lynch philosophy? Well, any great investor who's done really well and and earned returns. I try to learn whatever I can from them, and the same It's true a Bill and so certainly I've studied

Peter and UM. And I think that if you have an intimate experience with a product or a company, you can understand it, you know, in a you know, in a more in depth way. And so uh that might you know, when when we bought Peleton, for instance, UM, I had that idea because um of my personal experience with Peloton, and my husband had asked for a Peloton for Christmas, and I said, are you kidding me? I'm a value investor. Do you know how much those bike's costs?

But you know, I was trying to beat such a nice life, So I got him the Peloton And this is before it came public, and I ended up you know, I wasn't a big spin or bike person, but I ended up using it so much more than I would have ever expected, and they had broader programming and I loved it. And I didn't really go to the gym anym war and uh so when it came public, you know, we wanted to do the work on it and see what the valuation was on it. And again I thought

it was highly misunderstood. Um you know at that time. It's you know again, I think people started to understand it better in the UM in the financial crisis when they were such a huge beneficiary and we exited because we thought it became fully priced. But I still think it's misunderstood because some of those same old criticisms about it being a Scottish hardware company are now you know,

back in vogue after its decline. But certainly, you know, if living in the world and coming across things, um I I definitely believe that that can be a source of both you know, better understanding and advantage and also you know, idea generation. So that raises an interesting question. You're both stock pickers at hard but obviously the macro landscape makes an impact, as we learned during the pandemic and lockdown. How much do you think about what's going

on in the macro world. Does that affect how you construct your portfolio, doesn't affect stock selection or is it just one of those things that you have to grit your teeth and deal with. Well. I think Bill is one of the best macro spinkers that I've ever encountered,

and so I've been fortunate to learn from him. I remember when I joined him and sitting in our first research meetings and going home and feeling like I had drank from a fire hose because it was such a learning curve that I had not really been exposed to. So we certainly expend effort trying to understand the environment that we're operating in, and you know that that can take significant time and trying to think about it. We

do construct portfolios and selected investments on a bottoms up basis. Uh, you know, we do scenario analysis, so we're trying to understand the value of businesses in a range of SCE areas because we don't know the future. But obviously, you know, the environment can interact critically with the fundamentals of businesses, so you have to try to understand, you know, the environment in which you're operating. So so we definitely do that. Interesting. Um,

you mentioned how efficient the markets have become. How do you look at the shift from active to passive. Is that changing markets? Does that affect the way you think about, um, how quickly information gets built into price. Yeah, that's a great question, and it's definitely uh, you know, a big

secular trend that we expect to continue. Um so I haven't and we haven't seen data or evidence to support that it's made the markets less efficient yet, although you know, there's a lot of speculation that it will at some point, and you would think it would at some point. I know, you know, I know some folks at Santa Fe are now uh studying whether there's any evidence that you're you know,

seeing that. Um, you know, I guess we have seen certain market structure issues that I think do lead to some you know, inefficiencies and whether it's uh we talked about time arbitrage, show the market becoming so short term focus that it creates some inefficiencies on longer time horizons, or you know, with all the ets that have popped up and now you know, back in the days when Bill built the business, you know, there were financial advisors and their number one job what they did was they

selected stocks and now that's hardly ever the case. They're uh, you know, allocators and there you know, allocating capital between different opportunities, and they use ets so we can see from time to time. Again, just the homogenization where stocks will move together as a group in the short term, irrespective of fundamentals. I think over the long term the market can sort that out, but in the short term it may not. You know, there might be some micro structure,

you know, inefficiencies there. Again, I haven't seen data to actually support that. It's it's more just observing, uh, you know, the behavior. So people love to talk about stocks, but we rarely hear people talk about portfolio management, which is a very different skill. How do you figure out how to spread your bets out across different sectors and and how to size different positions. Yeah, I think it's a great question. You're right, people don't focus on it enough

for a lot um. I again, I feel so fortunate to have learned from Bill on this. Uh. You know, I'm not sure if you're familiar with Novous, but they study managers and actually look at, you know, where their edges or where they have a competitive advantage. And when they looked at you know, the history of the fun and the history of Bill, Uh, they actually identified sizing as a strength and you know, an advantage and something that uh you know, generated returns. So I've been very

fortunate to learn from him on this. I think, you know, the overall objective is to uh, you know, size positions relative to risk adjusted returns and so um you know, so our typical starting position size is anywhere from two to two and a half percent. But again if it's we could have a one percent position if it's higher risk. But you know, if it's a binary biotech where you know, I might lose all its money or it's going to

go up a lot. Again, I think you know I've occurred Dennis Lynch, you know, talking about you know, there's a place in the portfolio for investments like that. You just have to size them uh correctly and then you know, we can go larger if we have high conviction um in in a name and really you know, we might start at three. But what we try to do is let our winners run and again you know, we'll let names get to a large you know, percentage of the

portfolio again if they work. And one of the behavioral uh flaws that people tend to do is you know, sell their winners and to their losers. So we explicitly try to you know, counteract that and let our winners run and so we can have you know, more concentrated positions at the at the top of the portfolio, you

know from that. Yeah, Bill has talked about in the past that if you're gonna just hug the benchmark and have nothing but one percent positions, you're you're less of an active manager than you are a closet indexer, which I assume implies that you guys build a little bit more of a concentrated portfolio. Yeah, that's exactly right. We um. You know, the academics have written about this concept of

active share. So you know, they've quantified how different does your portfolio look from the benchmark and we have very high active share. Uh, you know, the academic re search suggests that, uh, you know that funds with high active

share tend to do better. And that's for exactly the reason that you just mentioned that Bill talks about, which is if you're a closet indexer and your portfolio looks a lot like the benchmark, but then you just have higher fees, then that's the recipe for very consistent underperformance

that compounds over time. And so we're very benchmark agnostic, and we're constructing portfolios, you know, from the bottoms up, and we're finding names and ideas that we think are attractive, and we're not paying a lot of attention to, uh, you know, whether they're in the benchmark or what their weight is in the benchmark. Again, are we have return objectives and we're trying to meet our return objectives over

the long term. And obviously we do think about, you know, what kind of returns we think are possible, you know, for the market overall, because that's uh, you know, that's our bogey, that's what we want to be um. But but when we're constructing portfolios, we are concentrated and uh, you know, we have we're looking very different from the benchmark. So the other port folio construction question is the flip side of what to buy, which is how do you

know when to sell something? Is is there anything in particular you look at, Um, it doesn't appear you guys use stop losses because both you and Bill and the fund have a history of being comfortable buying on the way down when a stock gets repriced and you mentioned Amazon as an example, how do you know when to

fish or cut bait. Yeah, that's a great question. And UM, and I wish more people would do work on uh, you know, sell discipline and and and how to really improve that because you know, there's a lot of literature and and managers in general are you know, very good or much better on the buy side. And I think there's just a lot less focus on the sell side. And and some of our biggest mistakes again have been selling too early, really some of these big winners. And

we filled Apple. We did quite well an Apple, but we filled it way too early. And so UM again, I think it's an area where the evidence indicates the scenario where UM most managers, all managers can improve. But when we sell something, we usually think about selling it in three scenarios. One, it reaches our assostsment of what the company is worth, so it becomes you know, fairly valued, and we don't think that we can earn access or

turns um too, we conclude that we're wrong. And so again, if there's something about our investment case that we come to no longer believe, or again we talked about fundamentals continuous continuously disappointing us. UM, if we conclude were wrong for any reason that would be a reason to sell or you know, the third UM scenario is we find

a better investment opportunity. So you know, we're always doing work on new names that if we come across something that we think is even more attractive, you know, we'll sell a name to fund you know, a new idea, really really interesting. So so we keep dancing around UM big kept tech. And one of the risk factors for that, or at least some people think it's a risk factor, is UM regulatory risk and the concept that you know, an Amazon on Facebook, of Google and Apple could get

broken up. What are your thoughts on either regulatory risk or forcing what have become technological conglomerates to be broken up into their component pieces. Yeah, I think it's a great question. I mean, certainly there's a lot of regulatory and attention on these names, and so, uh, you know that risk exists. I will say, you know, even back I remember back at UM in our leg Mason Capital Management days in two thousand and eight, our analysts who

covered Google recommended selling it because of regulatory risks. So this because it's not new, it's been around a long time, and the reason we haven't seen actual actions is because it's very complex and it's not easy to figure out what the right regulations should be. So um. So again, you know, I would expect, you know, something, but whether it's material to these businesses, and it is an entirely

different story. I would be surprised to see a breakup. Um. But if we were to see breakups again, I think for the businesses we own, we think, uh, you know, that would actually highlight you know, more of the embedded value and and it would you know, actually help some of the stocks. So we talked earlier about Amazon and how we believe, uh, you know, the current market prices are uh, you know, basically valuing that retail piece at

post to zero. And so again, if you were to break off aws from the retail business, obviously they you know, they benefit each other, so there would be some negative impact there. But I think the value realization of breaking those businesses apart, uh you know, you could wind up actually doing well, at least in the short term, doing better, you know, from the stock perspective. Um. But again I think,

you know, I would be surprised to see breakups. It's not at all clear you know, how that would happen. And um, again, maybe maybe it could happen at sometime in the future, but in the near term, I think that's unlikely. Huh. Really kind of interesting. Since we're talking about tech, let's talk about the rise of intangibles, things like patents, algorithms, copyrights. What do you think this has done to the valuations that are out there and how does this play into the sort of squishy line that's

developed between value growth at a reasonable price and pure growth. Yeah, I think it's a great question, and you had the expert on this, Michael On, on your podcast. But you know, what we know is this has definitely been an area of growth, and you know, it matters from a value perspective, and again, people are getting better at sorting through it. But I think we're really early, you know, in that.

And so again, you know, some trends that we know exists, as you know, just broadly, returns on capital of you know, US companies have risen over time, and you know, uh, you know, lower return pieces of businesses have moved offshore and you know what state here is higher return businesses. Um So that will impact valuations and a lot of people again, you know, don't make adjustments when thinking about

valuations relatives to history. And certainly, I think what we always try to do if we're doing companies specific analysis is think very carefully through the economics of the business. And so you know, if you're doing if you're a quant fund and you're just doing uh you know, accounting metrics, again, that's pretty problematic. You're looking at price to book and

you're not adjusting for that. Um you know, I know that, you know, some of the better quants have started doing it, and the signals have improved once they make those adjustments. Um So, so it's certainly important to understand what that looks like. I think when we're looking at some of these earlier stage uh you know companies where again you can't see from the near term uh you know numbers,

what the potential is that the business. Again, we try to think through carefully, uh you know, what our actual costs to support the current business, what our investments because again a lot of those investments are running through the income statement now and not you know, they're not capital investments that are just running through the cash flist statement.

So again, if you really want to understand the business, you have to attempt to you know, break those things out and think about them carefully, and it can be challenging given disclosures, and we try to do that and we try to talk to our companies about what that looks like really kind of intrigue. So so you guys have done well over the course of the past decade, but that decade was very much a challenge for the more traditional approach to value. Why do you think this

is uh? And and are the traditional buckets of value no longer no longer worthwhile? Well, I think it's a really interesting question. I think that there are two main reasons.

One is, I think, you know, we observed that these markets, that markets go through these long cycles and and we talked about that earlier sort of the long cycles that we've gone through, and you know, the two thousands, it was you know, value lead, and it was global cyclicals, and it was material stocks, and it was energy stocks on the back of China's growth, So it had this long, prolonged period about performance and um again, it drew in

a lot of capital to those companies, to those investment styles, and you know, that's reversed over the course of the past decade as again we've sort of had you know, the second reason, as you know, so again expectations rose, and so that makes a more challenging starting point, and so you know it's just natural to see some reversal. But then we've had this massive period of disruption, and um,

you know, it's interesting to think back. I've been so fortunate to work with Bill and to uh you know, have him as a mentor and to have these moments

that I remember and I remember. So I joined him in two thousand two, and in two thousand three, uh you know, he had a big investment conference in Las Vegas, and Jeff Bezos came to speak at it, and he gave his uh washing machine talk, and he talked about how, you know, the Internet at that time in the early two thousand's was that uh you know, was He likened it to the early days fire to electricity, and he talked about the nineteen o a hurly washing machine, and

he said it was this giant machine that was outside, so you had to go outside to use it. They didn't have electricity, they didn't have electrical outlets. You had to plug it in. You had to unscrew your light bulb and plug it in to your light socket. Um, it didn't have an on off switch. It was giant. It was dangerous because you couldn't turn it off and so it had injuries. It was really difficult to use.

And he likened where we were at the Internet at that time, uh, you know, to that, and he said, we're so early here and things are difficult to use. And he talked about DSL and wireless networks and how challenging it was, and um, it was notable at the time, but it's even more notable in hindsight now that you've seen things like what happened with a WS or with iPhones and how much easier you know, the technology has uh you know, gotten to use and how embedded it

is in our daily life. So over the past decade, you know, really the infrastructure was fully built out in a way and you know AWS and cloud uh you know was built out that it allowed this you know, massive period of innovation and you know there was a lot of capital that was you know, going into to venture funds. So you've had this massive you know, innovation

disruption cycle. And so I think you know a lot of value investing depends on you know, current earnings being stable because you're you're looking at discounts on on what companies are currently doing. So if there's some heightened risk of disruption, uh, you know, that makes that approach you know,

more challenging. And so you know, I think you've had you know, some of both of those things going on, where it's a natural market cycle that's reversed what we saw in the previous decade, and you know there's been some you know headwinds I think to uh, you know value companies or you know companies that might be you know, getting more disrupted by some of these new companies that are coming along. Really interesting. So my last two questions

for you before we get to our favorite questions. The first is you've been putting out what more traditional managers would call their quarterly fun letter, but but you've kind of been doing it online in a blog format. UM tell us about that experience. What sort of feedback do you get on on those quarterly posts that you've been doing. I mean, I think we get you know, I can take no credit for this. I would have to you know, give credit to you know, our marketing UM lead because

she was a big proponent of the blog. So we all write for the blog and we get I think it's a great way to communicate with our shareholders are people who are you know, interested in what we're doing. And again, I think our our approach is different and differentiated, and so, uh, you know, we want people to under stand what we're doing. We want them to understand we

sometimes have volatility. We want people to understand that coming in and then when we go through those periods, we want them to understand, you know, how we're thinking about the opportunities that and those are oftentimes the best best times to buy. And so it's important to have that communications. So again, I think it's been you know, it's been very positive overall to to have that. And and my final regular question is a little bit of a curveball.

Tell us about the vermont In. Uh. Yes, So the vermont In is an in that I purchased in twenty eleven. Um. I grew up in Vermont and so my family all lives there. So uh, you know, at that time, again, we were just you know, the first inklings of emergence, uh, you know, an improvement in housing and housing overall. We

had invested in a lot of housing stocks. You know, I had had my first child, you know, right before that, UM, and you know my I think my father had told me about this in that was for sale, and I said to my husband, let's let's go to the foreclosure action. Sort of a sign of our times. I've always had an entrepreneurial interest. I didn't actually expect to, uh, you know, purchase the in going in that I did do work

on what I thought it was worth and um. And so we got there and you know, there was someone made the first bid, and then I made the second bid, and then I was like, I'm not going to do that again, but it was sold sold to you and so um, so we had to figure out again. I think that was in October, and we had to figure out how to get the in open again. We wanted to get it open because the busy season there and Vermont is you know, starts in December, so we wanted

to get it open by December. And it had some issues. Um and so my brother in law actually ran the in. I made every mistake you could possibly make as a you know, small business owner, Austin tee owner going into business with family. I learned from great lessons from that experience. We got it turned around and then I sold it a few years later, I realized I I will stick to the markets where I can you know, sit here

and read and learn. And uh, you know, Bill likes to joke about when he got how he got in the business was he was mowing the lawn all day and he earned a quarter and he asked that his dad what the stock picks were and um, or what the stock prices in the newspaper were, and he said those are stocks. And he's like, you mean you can make money and not do anything. You can just sit there and um He's like, that's the job for me. And he didn't. He says he didn't learn so much later,

just how much work you have to do. But the kind of work of reading and talking to companies and you know, doing finish the model, doing financial modeling that suits me much better than running it. In So it was it was a great experience. We we did, uh, you know, well on it. But I will not own any more. And so let's jump to our favorite questions that we ask all of our guests, starting with tell

us what you're streaming these days? Give us your favorite Netflix or Amazon, Brime or anything that's been keeping you entertained during lockdown. Yeah, so that's a great question. I might have the most disappointing answer for you because, uh, you know, my third child was born in eighteen and then I launched patient in twenty twenty, so I I have not you know, had time or focused on streaming

anything actually until um just the past few weeks. We had some sickness to go through our house over the holiday. Unfortunately not COVID, but it was a COVID scare. But um, so we did we did do some uh you know binging. It wasn't anything new. Um My kids are you know,

really into Survivor. So we watched you know, the most recent uh Survivor as a family, and then we watched some We also watched some of the old Seinfeld episodes and I hadn't watched those in gosh so many years, and they were you know, they were just as funny and they were great and they were so entertaining, and um my kids thought that they were funny. So those are the only things I've watched lately. But I, you know, both were enjoyable. I'm surprised how well Seinfeld has held

up over the years. Other other sitcoms, um don't seem to have aged as gracefully. So, so my next surprise to still find it as entertaining. I didn't think I would, but it was funny, it was really funny. It's uh and and at the time I thought it was kind of an acerbic show until you start watching carb your enthusiasm and then you really see what sort of acid humor is like. Um. Normally now I ask who your mentors are, but I kind of have a sneaking suspicion

I know the answer to that question. You definitely know the top. You know the top mentor. I mean, Dell is my number one. I'm so for I have so much gratitude to have learned from him, and and just he's not just a great mentor, and I've learned the craft of investing, but I also learned I think he's an intellectual giant and um and I really thought he taught me how to take better and and he's also a great friend and so um so I just feel

so fortunate to have shared this journey. And he's been so generous with his time with me, and so he's he definitely is right up there at the top of the list. Quite quite interesting. Tell us about some of your favorite books and what are you reading right now? Yes, so I am so bad at favorite And when I saw this question, I really tried to think. I'm I have lots of books I like, but you know what, how can you choose just one as a favorite. So I guess when I was thinking through, what are some

of my favorite business type books? Uh, The Psychology of Money by Morgan households wonderful and as soon as my kids my oldest is time but I finished he's old enough to you know, which might be within the next year or two, I'm going to have them read that book to understand how to think about money. Um, you know, Rich or Wise Are Happier by William Green is excellent. And I love books that cover, you know, great investors

and how they think. Um, you know, I think the Halo Effect by Phil Rosen'swag is a classic and it talks about you know, Bill likes to say that the story follows the price and um, and so I think that that's true and that happens. He talks about, you know, when there's been some uh, you know, company that's done really well, people write about all the reasons why. But again it's not a very scientific study. Um, you know,

Annie Dix Thinking and best. You know. Outside of that, you know, one book that really struck me and I really liked a lot, uh Chema Chendren, who's a Buddhist monk. Her book Thanks Fall Apart, All Apart, which I also like, uh, you know, the fictional book by Kinna hb By the same name, but this is a different one. And that book really talks about, uh, you know, moving towards your

pain and being with your pain. And I think it's important from just a life perspective in terms of uh, you know, again those are growth opportunities, but from an investment perspective, there's a lot of parallels in terms of, you know, how do you execute on the process that you know delivers the best return when sometimes you know it can be emotionally painful, and how do you you know,

deal with that? And I guess, you know, this is a very long winded answer, but what I'm reading now, what I just finished, was the Book of Hope by Jane Goodall and Douglas Abrahams, which was great and you know, there's such rates of you know, depression and anxiety now and that book was you know, all about you know, hope and why we should be hopeful and the indomitable human spirit. So that was really good. I've been reading some books on leadership given the transition, so I read

Cole and Tells autobiography. We just read Principles by Ray Dalio. UM. So you know, there's a few others that in reading. But that's you know, that's a that's the tasting. That's a handful. That is let let me let me ask you things fall apart. The novel is by a Shiba, Is that right? And the nonfiction is by Pemma Yet children got it really interesting? Um, that's a that's quite a great list on I'm impressed. Uh at the breath

of what what you're reading? Um? Our last two questions, starting with what sort of advice would you give to a recent college grad who was interested either in a career in finance or a career as a portfolio manager. I think, you know, if you love learning and you love competing, there's almost no better skill than investment in finance.

It's just it's so interesting. You learn new things every day, and you can compete, and you need to compete at the at the highest levels, and you you her die by your result, which is both amazing because you know, it's a true meritocracy, but it's also very high pressure because it's not easy to be successful. And so if people are interested in that and that sounds like a fit with you know, their general demeanor and what they like, my advice would be, you know, just get your foot

in the door. However you can. I remember people telling me, um, you can never get an investment job, you know, right out of college, which I listened to them, and I ended up getting really lucky because you know, Bill happened to come. But I didn't try other than meet Bill and send in my resume. So I think, like, you can try, and you know, don't ever tell let people tell you you can't accomplish something. We just hired, you know, you know, a couple of months ago, a wonderful junior analyst.

He's extremely passionate, he has the right attitude. I'm willing to do whatever it takes. Uh, you know, how can I help you? How can I add value if you really have that you know sort of attitude and uh, you know, survey the landscape broadly and our passionate and our self taught. You know, I think you have a good shot at you know, finding an opportunity interesting And our final question, what do you know about the world of investing in portfolio management today? You wish you knew

twenty or so years ago? Yeah, that's a great question. Um, you know, anything I knew about the future would have been super helpful. Um, you know, like because you could use that to earn repairings where it was housing bubble or financial crisis or uh, you know the sick local boom innovation boom pandemic. I would I would have loved

to know anything about it. I mean, I guess if we step back and think about when I entered the business, what are you know some you know, broader, more timeless lessons that I didn't know then that I wish I had, you know, So I again, I think I mentioned I was very classic value to start. That was my approach. Um, I didn't understand you know, the you know, the nuances of returns on capital and the importance of those and

you know how to earn returns. Are you know the importance of those to driving returns and the differences between buying a you know, fair business that a you know, at a wonderful price versus a wonderful business at a fair price, you know, and growth. Unfortunately, I started working with a great mentors and I was able to learn all of that. But those are things, you know, I

think that are critical as you think about investing. That again, I didn't understand well when I first got into the business. Thank you Samantha for being so generous with your time. We have been speaking with Samantha McLemore, portfolio manager at Miller Value Partners. If you enjoy this conversation, well, be sure and check out any of our hundreds of prior such discussions. You can find those at iTunes, Spotify, Bloomberg, wherever you get your podcast from. We love your comments,

feedback and suggestions. You can write to us using the email address m ib podcast at Bloomberg dot net. Sign up from my daily reading list at Ridholtz dot com. Follow me on Twitter at Rid Halts. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Marks and Ascalchie is my audio engineer. Michael Batnick is my head of research. Attica val Broun is our project manager. Harris World is

our producer. I'm Barryhaltz. You're listening to our ministers in business on Bloomberg Radio