Bruce Berkowitz - Avoiding Disaster And Generating Returns While Doing So

Ladies and gentlemen, welcome to the Business Brew. I'm your host, Bill Brewster. As always, thank you for listening. This episode features Bruce

Berkowitz. If you have followed finance for any amount of time, you will know who Bruce is. If you're relatively new, you may not. You should. I hope that I did a decent job at asking some version of questions to Bruce that hasn't been asked before. If you haven't heard William Green's interview with Bruce, it's a wonderful interview.

I would direct you to that. For some background, I think the short story is Bruce is somebody that I've followed for a really long time and I wanted to ask him the right questions and do a unique interview. And I found talking to him to be very, very interesting. And I feel as though I've gained an appreciation of how he may be looking at the world right now. And I hope that I drew out some insights that may be unique to

this particular interview. I thank Heda Nadler for introducing me to Bruce. I thank Bruce for saying yes to coming on the show. And I hope that you all, as

listeners, enjoy what you hear. As always, none of this is investment advice. Everything in this program is for educational purposes only. Please consult your financial advisor and potentially tax advisor. We talked about an MLP in this episode and I highly encourage you to reach out to the professionals around you and do

your own due diligence. What we say on this program is not necessarily applicable to your individual situation and it is incumbent upon you to figure out whether or not you agree with what is said from an entertainment perspective. So with that out of the way, do your own due diligence and I hope you enjoy the interview that follows. I know I enjoyed talking to Bruce.

Before this music drops, I do want to give a shout out to my editing team at Speech Docs. You can find them on Twitter at Speech and Docs's docs. Dax and his team is are fantastic. I met them, well, I was introduced to them when I was on Value after hours. They've done Toby's work, at least on the transcript side. I don't know about editing the pod because those pods are normally dropped live. However, I moved from the podcast consultant to speech docs and the transition has

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All right, ladies and gentlemen, I am thrilled to be joined by the one and only Bruce Berkowitz today. Bruce, how you doing? I am excellent. And you, I'm. Well, I've been following you since, I don't know, let's call it 2009 or so. And the idea that I get to talk to you is, is something that I didn't think I would. So it's one of those beautiful benefits of having a podcast. So thank you for saying yes.

It's my pleasure. I quite enjoyed your interview with William Green that was very comprehensive. He did his homework. He asked me questions about events I've haven't thought about in decades. I think he treats investigative journalism much in the same way that you treat investigating investments. And it's evident in the product that he puts out. It's it's always a joy to listen to. Yeah, I I enjoyed talking with him.

Good. So I, you know, have thought about what questions would I ask Bruce?

And I think that the one thing that anyone that has followed your career over time knows is you are not afraid to swing and get concentrated in positions that are, are very against the grain. And I, I was hoping if we could maybe rewind the clock a little bit and talk a little bit about your days in the financial crisis. And after I was reading recently an interview that you gave it with about Wells Fargo and you said, I clearly see a path to 200 to $300.00, the stocks trading at 66.

By the way, Buffett just bought it. I mean, what at that time did you see and and how are you able to sort of get rid of the noise for lack of a better term?

I do my best when I stick to counting cash and if you took a look at the the cash coming into Wells Fargo at the time, what I call the earnings power, what I believe most call pre provision net revenues. There was more than enough cash coming in to handle the real estate occupancy issues at the time. And once that hole was filled in, you would really start to see the earnings and it was

really as simple as that. That and one other point being that financial institutions do their best business in tough times. They're underwriting tightens up big time. They have all these mistakes on their books from being a little too loose. They can't afford it to make those mistakes that they're all

in recent memory. So great loans, great insurance, whatever, whatever you want to talk about, great book of business when it's initiated during, whether it's the great financial crisis or Y2K or the TNT bubble or you know, going back to the 80s. So when you say you count the cash and, and Wells just had to, I don't mean to misstate what you said, but had to make it through to fill the real estate

hole that they had. I mean, how, how long are you typically thinking about when you're underwriting and you're thinking out years ahead? How long are you thinking and how much do you worry about like the precision of your timing versus being sort of, I know this is going to happen eventually and things will take care of themselves? I try to be roughly right because I don't think I can do

much better than roughly right. And in the case of Wells Fargo is the old pig going through the Python. So I believe there was going to be a couple of years of indigestion and those issues would take care of themselves and then they would be off. They'd be off with what would eventually be a new, pristine book of business. That makes sense to me. So I, I mean, when you're saying

roughly right. And, and the reason that I'm, I'm asking this question is I'm just curious with a strategy that is as concentrated as what you have historically run and is even more so now. I mean, is, is within two to three years, sort of roughly right? Are you looking for directions and trends? I mean, how do you know once you've sort of like work through a thesis, is is sort of the question? Yeah, two to three years is about right. And I'm going by the existing at that time.

I was going by the existing cash flow of the operation. The money was coming in. It was the gap reserving. It was having to put a number down in one day that represented the potential losses over 5 to 10 years. That freaked out a lot of people. And of course, the headlines were pretty scary. But my thesis is that history Trump's those headlines. And we've seen it. We've seen most of this all before. That doesn't mean it's going to happen. Of course not.

But that that's, that's, that's expose the only thing that we can actually say right is what what did happen, not what's going to happen. And plus with Warren Buffett going into the stock or you, you ended up being sale, so that didn't hurt. With Wells specifically, especially back then, I guess the last last decade or so has tarnished the reputation a bit, but I I don't think anybody would argue that they were not known as aggressive underwriters. So to what extent does culture

like are do you put a lot of emphasis on culture and management or do you put more emphasis on the numbers and sort of what you can clearly see from the filings in the? Past more so on the numbers and then I swung over to very heavy on the manager and culture and ownership and now it's both. I mean, basically you can't do a good deal with a bad person. I mean, you may get lucky, but I've learned that you just should not do a deal with a bad person and whatever bad may

define at the time. So even if it's an obvious pathway to success, ego, envy, whatever the case may be, could can get it get in the way. So it's both it's you really want a good business and a good person, a good people and banking isn't necessarily a good business, especially what's going on today. So I've become more cautious on

banking and financial services, even though there are exceptions and there are good businesses run by good people out there. But I believe they're few and far between. I mean, for example, today most institutions do not have to mock to market their loans. I mean, they have to take into account potential credit losses. But for example, Bank of America doesn't have to mark a 3% home mortgage down because interest rates have gone up to the point where that mortgage is 7% now.

And no one would buy that 3% mortgage at par. But there are in the books at par even more so. The government up until March of this year was willing to lend 100% on that mortgage, which is one of the ways in which all the banks have been recently bailed out by the government. So the government definitely chooses winners and losers. They can. One civil servant can decide the death of a financial institution or the life, especially when you leverage 12:50. So I've had conflicting thoughts

on this. On one hand, I've thought to myself, well, the bigger banks that are too big to fail especially are arguably safe because of the dynamic that you're describing. However, the other side of it is should we go into another financial crisis or something like that? It's possible that those bigger banks could maybe get nationalized or something like that. I mean, is that where your experience of Freddie and Fannie maybe makes you more cautious of

the larger banks? Because I, I do think on one hand they're much safer than all the others and on the other, there's a much bigger sort of, I guess, unique risk that may apply to them. With with Fannie and Freddie, I learned that anything could happen in the name of national security. And that's whether, you know, our financial system is destabilized, the name of national security of company can be taken, gifts can be given.

And I've obviously learned that that's way above my pay grade to determine who wins and who loses by a few individuals. I always thought that it was basically the law matters, but in tough times anything does. Or in perceived tough times, they don't even have to be tough, they can just be colored as a tough time. Yeah.

I mean, just when you're generally looking at the landscape, are you typically US focused or will you look? I mean, I'm not familiar with too many foreign investments that you've made, but I'm kind of curious just for your general thoughts. I think that there's this assumption that there is, I mean there is the rule of law in the US and I don't mean to denigrate that, but there's this assumption that the US has much stronger legal protections.

And I think what you live through may lead you to less of a conclusion. I'm curious to hear how you think our legal protections are versus maybe other jurisdictions. Well, my conclusion is that we may not be perfect we're but we're better than everyone else. And I know the US system better than any other system and I have an ability to only comprehend a certain amount of information.

So my focused on investments is really do about my desire to learn as much as I can about complex organizations. And some may argue I try to learn too much, but I am most comfortable focused on a few three to six positions and trying to fully understand the industry, the competitors, the suppliers, the customers, the strategy, the ownership structure, the takers that needs to the extent they're regulated, taxed federal versus state laws. So I have enough on my plate.

Just trying to understand companies that are domiciled and mostly operating in the United States.

I heard a rumor Once Upon a time that when you were doing research on Sears, you had your your team go to local tax collectors to to see either sales or tax receipts. Is that, is that actually true? And is that indicative as to the depth of research that you do? And if not, is it? Is it directionally sort of correct as a as a urban legend? It's directionally correct and that there's a tremendous amount of data from your local government at work.

I mean, you want to find out how Saint Joe is doing, for example, or any real estate company or Abby, or you can go to each county of the state and for the example Saint Joe, that would be Walton Bay and Gulf counties and you can see all the transactions. Maybe there's a two week lag. You can go and get the maps. You could see the planning maps, you can see the new lots that have been put on that have been, you could see the entitlements, the zoning.

You can get way ahead of the curve with that kind of detailed information. So when I see your portfolio today, I mean it's, it's for all intents and purposes almost I I think it's 80% or 75% last time I looked Saint Joe.

I know that that's because Saint Joe has done well and I realized that you've been selling, but is, is what you're looking for as an investor that kind of clarity before you're making a decision and, and how do you think about known unknowns and your willingness to accept them or, or are you not willing? I'm I'm just kind of curious to hear that.

Well, I have two funds. One fund has zero Saint Joe in it. The other fund which is up to 80% is and I have not bought Saint Joe in over a decade, just the nature of the position, the growth, the shrinking of the fund and I've in fact have sold a few $100 million of Saint Joe. So I do try and understand the most important knowns and I try and determine if there are significant unknowns which I've not been perfect at. Well, no.

No one. Is so I don't think that would be a reasonable standard to hold yourself to. But I was curious as to whether or not you've just evolved in that way, because as I look back at your, at your previous, like let's say if I were to pull up the fair home funds from 22,005 to 2012, it seemed like reasonably diversified. I think maybe like Berkshire would be your biggest position or something at 13 percent or, or whatever was at the time.

And, and there were more positions as I've watched you sort of morph over time. And I'm, I may be wrong, so please correct me if I am, but it seems as though you have have taken more concentrated positions and you've been a much longer holder of positions than I think most investors out there both when things go right and wrong. So is that by strategy or or indecision or is that a function of just kind of how things have played out? Well, there's two aspects to this.

One is I don't believe that I've changed much from day one of the funds. I was non diversified focused investor. I mean there were times when I've only had two positions. I remember there was a time when it was Berkshire Hathaway and Fireman's Fund, which became Fund American Enterprises, which was eventually, well Fireman's Fund was taken over by Allianz and then the there was a stub left called Fund American Enterprises.

I've always been very focused. There may have been a bunch of names, but there's only been a few large positions. Sometimes. If it was banking, maybe I would have a handful of names just to represent the the sector, but the concepts were quite few. I have tried to evolve in two ways and and it's not obvious that it's worked out yet and that I wanted to try and find investments that have the ability to hold over multiple generations.

I mean, it's exhausting to do the work on a position, an investment and then you're done 3-4 years later after you've spent a huge amount of time on it and you got to move on and try and find something else. I was trying to get more economies of scale. I also totally failed in building up a research staff. Your research staff is only as good as they are. I went in tough times, so I I could not find the right people that that would work and get comfortable with the level of analysis.

And if you have the wrong people, you just you just doubling up your workload because you have to. You're doing your work and then you're checking their work. So I did not have that skill. The failure is all mine. It isn't the failure of other people, it's my failure and not finding the right people for Fair Home. Much of my success was based on very few people at fair Home and my making all of the decisions I was not able to delegate.

I have a tremendous amount of respect for people who build large operations and end up finding and retaining successful people. I'm not one of them.

Well, that brings me to one of the questions that I, I had asked you in e-mail before we got on the mic. And I had said after 2010, you could have easily become an asset gatherer, become a little bit more diversified, still arguably been concentrated and had this huge asset management firm. And you did not choose that path, which I find to be very admirable for the record. What, what is it about you that I'm going to say it this way and

I, I think it's the right way. You seem to have continued to try to put up returns for your investors rather than selling out a little bit and and guaranteeing yourself tons of AUM and fees for the long term and fair. Home was never a marketing organization. Success happened. Many people became attracted to to the firm's funds. We never had a marketing department, never really had an investor relations department, never paid for business. I didn't want to do any of that.

I started Fair Home on the basis that I wanted to invest my family's money in a certain way and that I would invest money of clients exactly that way. We'd all be on the same side of the fence. It'd be a level playing field. That's what I was focused on. When Fair Home became quite large. I'd never thought about gaming it. I, I was never focused on the, the revenues that will coming in. Some would say that was quite foolish and I should have thought about that. It became family became a

valuable business, but I didn't. I was more interested in the continuing value creation and eventually getting to a position where I didn't charge. I made enough and I'm frankly, I didn't really want to talk to clients that much. It becomes very repetitive. I'm very loyal to my clients, people who are with me, they can stay with me forever and I'm, I'm not going to say goodbye to them, but I'm not very interested in new clients or building assets under

management. Life is more interesting studying businesses get to, you know, you know, investing, becoming more businesslike, which is not easy with mutual funds. Yeah. Well, I, I think generally in the industry, it's so pro cyclical that it's tough. And you, you had mentioned, you said that it, it was hard to find people when times are tough. And I, and I, I think that it's hard to find investors. It's hard to find people that are willing to stick with an investment firm when times are

tough. It's much easier when times are good to find both. And it's one of the really unique things about the business of finance that I, I think can really obscure a lot of incentives. It's kind of interesting to think about. I'm, I'm in a, in a way, way smaller version of you. But, but my job is to figure out how to manage my family's money. And that's, that's part of why I started this podcast.

It's why I'm, I'm really happy to talk to you today that to get your thoughts on how, what you've learned over time. And I and there's just a lot of different incentives when you're running your own capital versus when you're trying to build a firm and trying to really excel at the business of investment as opposed to investments. One aspect is making it. The other aspect, of course, is keeping it.

And your children are not you. Making money for people who already have money may not be the most productive activity in the world. I think it's probably more productive to be a good school teacher or a good plumber. So I don't expect my children to follow my footsteps. I hope they're happy, healthy and productive. So the last 10 years I've thought about, well, how can I create an ecosystem by which they can be good stewards of the capital? And, but you know, most of my

money is going to be given away. So it matters. But they have the privilege to be able to do whatever they want in this life and, and to help me give it away. So it's all good. But I don't expect my children to be me, or to enjoy the investing process the way I have, or to have to work the kind of hours I did. But it, it sounds to me like you work the hours that you did not

because you love it, right? I mean, if your ultimate goal was to to drive your fees down to zero, it's not as if you were trying to work those hours to build a huge firm. It's that you really enjoy connecting dots and making investments. Well, yes, in the beginning it was about the money because I didn't have any. Once you have money, it could be a lot of but a lot of things. But when you have to pay the monthly bills, it's about the

money. And I remember opening my first brokerage account and after a year or two thinking, I can do this and this guy gets paid even when I lose money. Something's up here. This is an interesting business. And get and gets paid for a while as long as they do it the right way and and maybe lose money alongside everybody else losing money the same way, right?

It is an interesting business. It's a hell of a business with someone who you know you know, probably would be driving a taxi ends up becoming and making a fortune. I like how you said that. What was it like when you were named fund manager of the decade? I guess my real question is, how do you remain rational when everybody's telling you that you were the best of a decade? And do you start to believe some of the hype around yourself, or is that just not how you're wired?

Well, I didn't talk to that many people. I learned about it from AI. Think CNBC watching the show, I was pretty excited. Think I I received a little bobble in the mail and you know, that was about it. I didn't spend a lot of time on it. Of course I was excited and I was also quite grateful because the money started coming in and already was, but the money continued to come in fast and furious.

I mean, I do have to ask I and I don't want to relive the whole thing, but when you got involved in Sears, you clearly saw a lot of real estate value and it coincided or or was shortly thereafter after a lot of the money came in. Do you think that being so focused on the minutiae of the value that was there perhaps blinded you to some of the other risks or did the risks sort of manifest later on? Well, it was a replay in my mind.

We just came off making a ton of money in General Growth Properties who had a liquidity issue. And Sears reminded me the old Alexander and Alexander's or what I guess some would call the cancer surgery model whereby Sears had this huge real estate portfolio, maybe the largest in the United States that with a very low cost basis and then they had this bleeding retail operation.

I mean, it's a very strange and Amazon was succeeding, trying to be the Sears of the Internet. And then Sears was trying to become the Amazon coming, trying to become Amazon. And and it wasn't happening. And it just seemed to me if you just stop the bleeding, got rid of the retail, you would have a hell of a real estate empire. You'd be able to deliver. I mean, it was common sense. I wasn't sure if Sears would be the greatest home run ever, but I thought there were definitely

ways to avoid death. And I tried real hard to convince the board to pursue that strategy and I failed. Success, retail success was always just around the corner. Meanwhile, billions and billions of dollars later, it wasn't. And those billions and billions of dollars were more than enough to have to full that, to have the raw materials, the cash and the real estate for a very successful real estate empire. It's not as if it hasn't been done before.

From the ashes of retail it has come great real estate companies. How many of those board members, to the extent you're comfortable answering this, do you think actually walked into Sears and saw what was going on from a retailer perspective? I don't think they did. I mean, you, you had Eddie Lampert, chairman and CEO at the time, super smart, successful in everything he's ever done on the cover of magazines is the next Warren Buffett.

And the thinking was, with enough time and effort, anything is possible. I was going to say interesting. Those that have studied Buffett would know his history with retailers is sketchy at best. Well, you know, yeah, right. But ESL had very good success with retailers, whether it was AutoNation Auto Parts, other companies, tremendous success. So the thinking was that you. Were saying something about your thinking at the time. It was very simple.

Cut out the retail, stop the losses, take the cash, redeploy it into the real estate. Happy ending. That's it. First you avoid death, financial death by stopping the hemorrhaging. Then you use the cash flows, either sell the real estate, build it up, return the money to shareholders.

I mean, it's, it's, it's not much different than what's happening at Saint Joe today. Exactly the same strategy. Yeah, well, one difference is Saint Joe's is a, is a growing story now, right. I mean that's been quite successful in developing, I'm going to call it a master plan community. I think that's an accurate description. Yes. Well, it's. Yeah. But before, to get to that growth, you first had to stop past behaviors and practices you had many times in life you have

to take a couple of steps back. And in order to take a lot of steps forward, it's a painful process. The optics aren't good. No one wants to see you going backwards, you know. So it, it, it took time, it would have taken time with Sears too, but plenty of time has gone by and would have been done. But we'll never know. And what remains of Sears seems to be that's exactly what

they're doing now. Seems to be yes, take the real estate, go into multi use, build some apartments where needed, condos where needed, you know, refurb some spaces, warehousing the there's a lot of there's a lot of infrastructure on the malls and they happen to you know, and there's still plenty that happened to be at the intersection of lots of

highways. That's not to say there hasn't been dramatic migration shifts, but again, today that's the reason for Saint Joe, the amount of immigration coming into Florida. The interesting thing about Saint Joe is I think about it is, is if there is a scenario where hurricanes make the southeast of Florida less livable, there's a potential that, that that area of Florida that Saint Joe resides in actually get some northern migration in conjunction with the southern migration that the

Sunbelt, oh sorry, generally benefits from.

I I don't have a position in Saint Joe, but I I've watched it for a while and I I admire what you built with it. Well, that, that's right. Most people don't realize that most of Saint Joe's properties are elevated as you, you know, you get, you have the beach and then on the Oceanside you have a bluff. So most of the land is 20 to 80 feet above sea level. I mean, Miami's airport, Fort Lauderdale's airport, they're basically at at sea level.

North ECP Northwest International is at 70 feet above sea level and most of the facilities are brand new, so there's modern day drainage. Building codes makes a

difference. During Hurricane Michael, St. Joe suffered maybe a couple of buckets of water damage on the floor and lost some shrubs and trees. That was it. When it comes to hurricanes, you have to be above the surge and you have to be in a product that you have to be in a modern code, you know, where you consist, where you can survive 140 mile an hour wind gusts. Saint Joe, the Northwest Florida, you know, Saint Joe is fairly new. Its buildings, its

infrastructure is fairly new. So it's a big plus. Companies own the land for decades. What the structures are. Structures are quite new, the homes are new. There's a lot to be said for the building codes. It's pretty much based on Miami-Dade building codes. Well, that Hurricane Andrew changed everything. So is.

Yeah, that was, I remember, I was, I grew up in Florida and I remember Hurricane Andrew and I remember driving supplies down to Miami to help in the aftermath and it was just crazy to see the devastation. So the difference between pre 1995 and post 1995 construction is very very real. You put your finger on it in a way they as painful as the occurrence of the hurricane and the damage. You eventually end up with a much stronger ecosystem.

Well, much like like much of life, right, to your point earlier, sometimes you got to take two steps back to go forward. And I would argue Hurricane Andrew was more than two steps back and, and very, very devastating. But I think Florida has gone forward as a result. So knock on wood.

I, I am curious to the extent that, that your two funds represent how, how you're thinking about the investment landscape right now. It, it seems to me they're, they're obviously different vehicles. So they're, they're weighted differently and what not. But it seems to me that treasuries are something that you're thinking about, midstream energy is something that you're thinking about and then Florida real estate is something that you are thinking about. And I'm curious as to why.

I mean you're a fixed income guy by nature or or by background. Why no risk? Why not so much duration? Like what's going through your head from sort of a macro perspective or from a credit speed perspective?

On the T-bills, you know, started when interest rates went near zero, I just was not willing to take the duration risk knowing what would happen to the market value of bonds and you'd end up making a few extra points and then you'd lose 50% of your capital if you, if you went out long. And you just, you just have to see that now in the value of the bond portfolios of the banks. They were unwilling to take the hit of not making any money and not keeping up their returns.

I was very happy to have T-bills at a zero interest rate. Sometimes I even sold them for at a negative rate because when times get tough, everything's correlated except for cash and T-bills for the only vehicle I could think of where you can instantly turn that piece of paper into cash the same day if need be. And so and I, I didn't have a lot of better alternatives, especially, you know, knowing that that the banks and other financial services firms would

have issues. It would be good, you know, rising interest rates, you know, Oh yeah. So our margins are going to go up and, and there was some thought that depositors don't deserve to make anything on their money and that even when interest rates went up, a lot of banks thought they could keep those deposit rates near zero.

And you know, their, their interest, their net interest margin would expand and their DAP earnings would increase even though their balance sheet may be severely degraded through the reduction in the fair market value of some of the of the assets they were holding. So that was it on the T-bills. And I thought that the eventually interest rates only had one way to go up. And when they do go up, I wanted to be ready. Of course, they stayed low for

much longer than I thought. So do you think much about where they're going from here or was it, was it just a whole lot easier when they were near zero to say there's only one way they can go? I, I, I think a lot about interest rates, but more so in the matching of the duration of assets and liabilities. I mean, it was some of the big problems with commercial real estate today is that you can't match your asset, the duration of your asset to an equal

duration of a liability. At most you can get 10 year money and while people have variable rate debt and I don't know how you match that up with an asset where the rents may be fixed for 10 years and the assets going to last you 30-40 years. You end up getting that kind of mismatch and eventually you don't have any operating income. So I think about it in terms of the funding and think about it in terms of leverage. But interest rates have kind of average now on a historical basis, yeah.

Seems to me that corporate spreads are pretty tight, but I don't know if that's because the market is betting that interest rates are going to go down or if I don't know with that. I don't either. Whether it's a demand supply issue, I I don't. All I know is the spread isn't enough to take on the risk, even if that risk is illiquidity. You would rather accept reinvestment rate risk right now then you would rather accept illiquidity risk, it sounds. Absolutely, yes. Yes, I would.

And it and is that because is that because that the interest rates seem roughly within line of historically where they are, so reinvestment rate risk is probably somewhat mitigated? And if rates were to go much higher, that's a positive for reinvestment rate risk. Is that sort of how your mind is breaking that down? My mind is out is at the

illogical extremes. OK, if interest rates go down, the value of other assets are going to go up and maybe I'll make less money, but I'm not going to die. If interest rates go up dramatically, which no one believes possible, I don't know you could really be her. The real degradation of capital then you see it, you see it the people who went into long term bonds at low rates, you see it in the performance of bond indices.

So I'd rather make less a more focused on the return of the capital as opposed to the return on the capital. Is that focus increasingly less pervasive in society? Because it feels to me like all the emphasis is on return on capital as opposed to return of capital outside of a few organizations. I don't know if that's a function of where we are in a cycle, or if that's a function of how it's always been and I'm just not experienced enough to

know how it's always been. I think it's it's a function of age for me. That is, I would not have the energy to start all over again. So that's one. But I think it's also a function of society.

Let me rephrase this. We have put the significant social welfare Nets underneath us. I There are so many activities taking place there that I just don't understand the amount of spending that takes place, the amount of entertainment, vacations, the lack of savings. We have certain cohorts that do not know what it is to suffer, do not know what it's like to be hungry or to worry about where the next rent payment is going to come from or how the electric

bill is going to be paid. We still have plenty of groups that do have those issues, but as a society we have increased the protections of for people, I believe, and that's good, but it also changes the way people think and how they compete and how they work, what they're willing to do and not do. It also increases the need for return on capital if you're going to make good on the promises that are on the come. Yes, absolutely. And then all of a sudden you

can't, and then what? And that's when you the extreme events start when you're out of time. So in a way, treasuries are actually an expression of having enough duration in your thought to think about what happens when the extreme event occurs and how might I be protected. Even if they're short duration treasuries, they're actually kind of a long duration expression.

I think of it as you never want to put yourself in a corner and you think about a few low, low probability, high severity events that that that can happen and do happen every 10 or 20 years and you wonder, you don't still wonder how you can protect yourself from it. You start to think about how you can benefit from such an event. Now it's not fun protecting most of the time protecting yourself or thinking about how you can improve your position in in such difficult times.

But you get the biggest bang during when you can plant some seeds during very tough times. You just, you just don't know it when you do it. I think the counter to that would be, well, holding cash has been a drag. I mean, really I, I, I don't know when you would have to go back to see cash. Probably the 70s cash was was a good investment, but certainly since 1980s cash has been a poor allocation strategy just from a return perspective.

But what I find interesting about this conversation is a contrarian might argue that that when no one is thinking about what may happen and and I guess that's this is wrong. Cash was good in 2008, 2009, but I don't feel like too many people are worried about, you know, the real severe downturn out but. Yeah. Well, it's a two step process. You have to have the cash and then you have to have the wherewithal to employ the cash during a difficult time when most people have their sort of

head in the dirt. I mean, the great bargains occur when everyone is forced to sell, no matter, no matter the position. You know, fear is rampant. The only way to be greedy when fear is rampant is to have the cash. Yeah, I I like your expression of cash's financial value and helps people stay, stay rational, right. Yeah, right. And the older you get, the more so. I mean, I didn't understand what some of my clients would say to me years ago, you know, Bruce, them heading into my 70s.

Yeah. I don't know if I want that volatility. I'd say, oh, you're fine, but it tends to be true. As you get older, your opportunity window narrows. Yeah. Well, to your point on asset liability mismatches, when you're older, you you need some shorter duration asset should you have healthcare problems or or anything along those lines, you you don't want to have to be paying bills with securities. Right. And of course we're talking about percentages and it just happens to be about the fair

home income fund. I've thought that having AT bills yielding 4% was pretty good compared to most alternatives. And of course the the biggest

position in that fund is Enterprise Products midstream pipeline of a master limited partnership, which is quite an interesting animal And anyone interested in such animals at the take the time to talk with a whole bunch of tax experts and understand the exact workings of an animal MLP. But it happens to work quite well from mutual fund.

So what I'm getting at is you have a company, Enterprise Products that has a 7 1/2 percent distribution and that distribution is considered a return of capital and has been based upon the growth of the company and so on. And I, I expect it will continue to be a return of capital.

And then you hold the position and eventually that return of capital reduces your cost basis and could eventually reduce your cost basis down to 0. And then the money you start, the cash you start to receive after that gets taxed at a capital gains rate. And for an individual, if they hold it until death and they get the step up in basis, Very

interesting. Of course, it's a totally inappropriate for a retirement account based upon some of the rules, but there's only a settling up with the tax man upon the sale of the instrument. And for mutual funds, as long as you keep it under 25 master limited partnerships, partnerships under 25% on a cost basis, you get certain exemptions in terms of, you know, filing with States and how it's treated a bit of an arcane area of when it comes to mutual

funds. But here's a company distributing out seven and a half percent and plus growing where they've averaged about 12% per annum since their start has the potential to earn between 10 and 15% per annum. Excellent adult supervision in terms of the management and ownership base is in an absolute critical area, which is

basically they're a logistics company for energy. They they sort of get energy from A to be energy which is absolutely essential in terms of say natural gas liquids which become ethane or propane, which eventually enter maybe 95 plus percent of all products made with no substitutes. Natural gas is if the world just went from coal to natural gas, it would probably be the the most environmentally positive

process. And in fact, I believe that the US has achieved a cleaner air based just on the switch from coal to natural gas. But I've spent a lot of time trying to understand thermodynamics, chemical engineering, playing with molecules of understanding of the intermittency of wind and solar. It's a Enterprise Products that they make money no matter what the price of oil and gas, they don't matter the price because they're it's a service business and they have an annuity like

stream. So I find that type of company. And by the way, it's a AA minus, sorry, it's an A minus credit. So investment grade, I think the highest investment grade of any type of midstream company. So I find that a perfectly acceptable income idea, and I like matching that with T-bills. I like that you've talked about counting the cash and and if I sort of back of the back of the envelope look at Enterprise Products, I'm not asking you to opine on whether or not my

numbers are correct. I am sort of asking if I'm thinking about this roughly properly in your estimation, you have I guess, 8 billion of cash from operations, 3.6 of CapEx roughly on a TTM basis, figure 22 billion or so or what they've got 800 million to billion of maintenance CapEx. So let let's say 2 1/2 billion is growth CapEx, which is probably a little low if I'm thinking about it.

And I say, OK, I have roughly a 10% yield to equity on the enterprise today and then they're deploying 2 billion that they may be able to make 10% on. I I should roughly get somewhere between a 12 and 14% yield, assuming that that these numbers stick and obviously there's a thousand ways it can go wrong for those that aren't that have intelligence to do your own work. But like, is that roughly how you think about the math? Yes, that's, that's roughly

right. And they have a very long, if they paid a dividend rather than a distribution, they would be a dividend aristocrat and they do it with less leverage than most. It's more conservatism. So I've no, I, I, you have it right. I think about it on a per share basis and they have a distributable cash flow of about $3.50 a share around there. They're paying out a bit over I think $2.00 per share, roughly $2.00 per share.

So you're, you're getting a nice cash distribution that's tax deferred plus they're reinvesting a significant amount of money, which will increase that distribution over time. You're also lowering your duration because when you think of it, it's very interesting to think about the cash distributions as a return of capital. So you're lowering your cost basis and, and over time you got a 0 cost basis with a tremendous distribution. It's not a bad way to get wealthy at slowly.

OK, this makes sense to me in a way. I, I'm, I'm going to say it slightly differently, but if I pay 64 billion for the equity today and they return 4 billion to me, that what that's just like 6 1/2 percent or so that is reducing my duration by that amount is, is sort of how you're thinking about it and when. Yeah, you're getting your cost back. Yeah. And when you balance that against T-bills, sort of the aggregate duration of the portfolio shrinks and the risk

is potentially favorable. I mean certainly if that's how you have the fun position. Yeah, you got a barbell, but one, the T-bills have a duration basically of 30 days. And then you have enterprise with the duration of about 10 years, less than 10 years, eight years. So you're getting high yields with a relatively, you know,

reasonable duration. And the potential for the entity to continue to reinvest, to not extend the duration in the sense of a static duration, but they they can continue to grow the enemy. There are, you know, for a top quality logistics business, I mean, they're, the valuation is quite low. It's, you know, it's when you start to, you know, it's the oil and gas debate which is keeping that valuation low, even though the debate is nonsensical in some ways. Yes, it is.

Yeah, but we can't change with society debates, right? But I I think the facts are you you know, what's interesting to me about that debate is to the extent people want to reduce the world's dependence on oil and gas by shrinking natural gas production, it it is a very in in my estimation.

I'll pull the ladder up behind us answer because I don't think the emerging countries of the world are going to say we don't want the energy usage that the United States has and therefore we're OK not burning coal or not burning. Like the the idea that they're just going to go to a grid that is not dependable and they should just accept what we have determined is, is kind of offensive. Yeah, it's a very, but it's it seems to be the debate that

permeates society. It's a very arrogant viewpoint that others don't deserve what you have and others should not strive for a better quality of life for their families.

But it also gets into crazier issues like how how a an electric line is prevented through Maine that hooks up to Hydro Quebec to get relatively clean energy to Boston, for example, because someone objects to putting a, you know, a 10 foot gash in a forest to, you know, cut down 10 feet wide of the forestry when that Boston may still be bringing in dirty fuel by boat because they can't get the clean electricity.

You're like, California will import that, you know, heavy oils to burn because they refuse to put a natural gas pipeline in. It goes on and on and on. The the craziness of it all. You know, there's a good book out there, How the World Really Works by Smell, who is an energy expert. And I think he's written 30 books on the topic. And he he talks about how the world really works with energy, with hydrocarbons and the process and the conversions and their relative merits.

And he does a good job piercing it all together. He supposedly Bill Gates his favorite author. Yeah, Yeah, he's interesting. The other thing, friend of the show, Bob or Body, I'd like to call him like a true friend.

He has been talking about a company that is in the ammonia industry and he has a little bit of, well, he doesn't have a little bit, but he's involved in sub C7 and tidewater and whatnot and, and as a result has an insight into what those industries are looking into to reduce shipping emissions. And I guess one of the things that they're looking at burning as opposed to fuel is ammonia, which would be yet another

natural gas pipe. Bob's a Bob's a long time great value investor, yes, and and an energy he's been he's been doing energy forever. Yeah, energy's fairly new for

me. A lot of value investors stay away from energy because the cyclicality of it, hence my desire to go into the logistics company was which is not dependent upon the cycle price or mostly not dependent upon the price during the cycle. But yes, that's the that's there's real excitement in green hydrogen, blue hydro, blue hydrogen. Green hydrogen would be through

electrolysis. Blue hydrogen would be through the conversion of natural gas into hydrogen using a carbon capture and underground sequestration. And then the latest is geological hydrogen. I forgot what color they're calling that or natural hydrogen, which supposedly there are reservoirs of, of which based upon, you know, certain elements combining with iron ore and that there's, there, you know, you may be able to just drill for, for hydrogen, but it's there.

There's a lot of money being spent on that. So yes, the technological evolution and all this energy is quite interesting. And the, I mean, carbon capture, I believe is quite real and we're going to continue for decades to need natural gas and oil because I mean, the foins basically forms the building blocks for fertilizers, plastics, heat steel, cement. I mean, world just doesn't work without it. What have you found with the carbon capture and sequestration?

It seems to me that the technology like provably works, but the impediment is the cost. Is that am I correct or am I off base? You have to capture, transport it, but with the most recent tax credits, it's quite doable. Now the government's putting out some serious money to help capture that carbon and putting it back into the ground. I mean people have been using it to fizz up oil wells, gas wells for a long time, being used to sell carbon dioxide needed for

Coca-Cola or whatever. I'm by far not an expert in this area. I'm not either. I do understand the need to get it from A to B. For example, in some places in Texas right now to you have, there are times this year where you've had to pay people to take your natural gas because they just wasn't, there weren't enough facilities, pipelines, logistical systems in order to take it from the gathering systems.

And how can and how can the, how can the price be so different between the, the, you know, the price in Texas versus the price in the the Netherlands or in the price of Japan? It's a logistical. Challenge. Well, it's one of the nice things about being located in the United States. We've got a lot of geographical advantages. Yes, and with a little luck, we'll see a lot of industry come back, especially to the southeast of the United States. Yeah, it'd be good for the

country. One question I do have or not one, but one wrapping up question, you mentioned you run

a mutual fund. Have you ever considered converting to an ETF or is that not really on the I? I just, I think there's some tax advantages that could eventually come out of that. But I I not an expert, I was just curious. No, I haven't. Tell me about the tax advantage. I've looked at it a bit. I can connect you to somebody that that can tell you about it. I know enough to ask the question. Somebody that I know that I trust wrote that question.

And I asked what questions do you have for Bruce and, and he had said has he ever considered converting to an ETF? I'd be happy to make that introduction for you. Yeah, I'd like that. I know there is some tax implications on selling and how it can be done, and I've looked at the closed end funds, but I I didn't want my clients to suffer what could potentially be a discount to net asset value. Yeah, I've always been focused more on how to create permanent

capital via a mutual fund. And my only conclusion is to just make sure I own more of it. That's the only permanent capital your ownership in it. Yeah, that's, that's not wrong. And the partners that have been with you for a very long time and and hopefully one or two new stragglers that are, are truly committed to the strategy, right. Wouldn't hurt. Yeah. I mean, you know why? So I have noticed you've done a

lot of media lately. Are you looking to raise assets? Are you doing media now because you're sort of ready to move on? Like why? Why are you a little bit more public now than then? Maybe I have seen you in the past five years. Well, I feel it's a very efficient way to let to talk to existing shareholders and. That I agree with. And to you know, and, and in an off the cuff way, talk about positions, philosophy, strategy, what I'm planning. So and I haven't done it for a

long time. I've, I've typically have said no to conferences or TV and the only time I really did that was when I had a position to discuss. So I was fighting with a company. There's a part of me that wants to make sure that, you know, people that my clients know, my shareholders know what I'm doing and, and talking to smart people that helps. And then I've been told by others that I should just, you know, why not? It's not clear to me the benefits, but I'm willing to take suggestions.

Well, I appreciate you saying yes to coming on this program and I hope that I have helped you further your goals and I hope that you've enjoyed the conversation. I have quite a bit and I really appreciate being able to ask you the questions and you being open with how you're thinking. So thank you very much. Thank you, I enjoy talking with you all. Right, take care and thanks again for stopping by all. Right, all the best.