#61 - Mr Common Sense - Rich Pzena on how to build an $80bn deep value firm, survive 60% underperformance and buy stocks on under 10x normalised earnings.

Speaker A: Hi, I'm Steve Clapham and welcome to the behind the Balance Sheet podcast where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of successful investors strategies and tactics. I'm, um, delighted to announce my continued sponsorship with AlphaSense, the number one market intelligence and research platform trusted by financial professionals around the world. Officense has been my long term partner and I've seen firsthand how they're revolutionizing investment research. One of the hardest parts of investing is seeing what's shifting before everyone else. For decades, only the largest hedge funds could afford extensive channel research programs to spot those inflection points before earnings and stay ahead of consensus. Meanwhile, smaller funds have been forced to cobble together ad hoc channel intelligence or rely on, um, stale reports from the sell side. But channel checks are no longer a luxury. They're becoming table stakes. The challenge has always been scale, speed and consistency, which is where AlphaSense comes in. AlphaSense is redefining channel research. Instead of static point in Time reports, AlphaSense Channel Checks delivers a, uh, continuously refreshed view of demand, pricing and competitive dynamics. Powered by interviews with real operators, suppliers, distributors and channel partners across the value chain. Thousands of consistent channel conversations every month deliver clean, comparable signals, helping investors spot inflection points weeks before they show up in earnings or consensus estimates. The best part? These proprietary channel checks integrate directly into Alphasen's research platform, trusted by 75% of the world's top hedge funds. With access to over 500 million premium sources, from company filings and broker research to news trade journals and more than 240,000 expert call transcripts. That context turns raw signal into conviction. The first to see wins the rest. Follow check it out for yourself@AlphaSense.com BTBS that's alpha-sense.com BTBS for Behind the Balance Sheet.

Speaker B: Behind the Balance Sheet is an investment training consultancy.

Speaker A: We help professional investors up their game in financial analysis. And we have an online school. Over a thousand students, professional and amateur, have taken our courses. Our flagship analyst academy helped one young analyst land a dream job as a partner of a major London hedge fund. And helped another, a successful entrepreneur, improve his investing confidence.

Speaker B: He made a seven figure sum in year one.

Speaker A: Check out the school on our website behind the balance sheet.com where you can also find the show notes to this podcast. And while you're there, don't forget, sign up for our popular and free weekly substack hit the sign up button on the top right of the homepage. In this episode, I sat down with Rich Pizzina on a recent visit to London. He's the founder of the eponymous 80 billion value investing firm, Pisina Investment Management. We discussed his childhood observations of his father's stock market portfolio gyrations, how he started a value firm just in time to be crushed by the dot com bubble. By February 2000, he was underperforming the S&P by 60% and he was ready to sell the firm. But he explains the extraordinary turnaround which then happened. We dig into what business quality really means, how to distinguish temporary problems from permanent impairment, and why, as a value investor, 40% of your positions can lose money, but you can still deliver a, uh, good performance. We also get into position sizing and holding periods, the discipline of selling at fair value, why pizza rotates, sector coverage for analysts, and how they think about mentoring young analysts and talking to CEOs. I think you'll really enjoy this episode. It's a masterclass in deep value from someone who's lived through some really difficult cycles.

Speaker B: So, Rich, I'm really pleased to be sitting down with you in London. Last time I saw you was in New York.

Speaker A: And we always start with the same question.

Speaker B: Did you always want to be an investor?

Speaker C: Depends how far back you mean by always, I guess.

Speaker B: But half the people on this podcast did a newspaper round and invested the money, and the other half had no idea what they wanted to do and just ended up in it.

Speaker C: Yeah, uh, it's interesting. I never thought of it as a career. So for me, uh, I grew up in a household where I had a father who's an engineer. He had made a decent living, but he wanted to be rich. And so he invested in the stock market. And it was dinner time, table conversation, my whole childhood.

Speaker B: Oh, really?

Speaker C: And it was highly cyclical. Okay. However he did was his mood. So it was either he was happy or he was not happy. Oh, dear. Um, and did you.

Speaker B: What sort of stocks?

Speaker C: You know, at the time, he just told stories about things. I remember we're going back 50 years. And he was talking about fuel cells.

Speaker A: Oh, really?

Speaker C: So it was, he was an engineer. He was way ahead of his time about electric, about cars powered by fuel cells. Oh, wow. And I watched as these things went up, they went down, but they were. I didn't really know what his style was. I couldn't have discerned what his style was. But, but I, I, I listened. And I think there was a time when he Reached a million dollars, which

Speaker B: would mean a lot of money, which

Speaker C: was a lot of money. Started with, I think, $20,000 in the stock market. And he was on margin. And then it was $20,000 again.

Speaker B: Oh, no.

Speaker C: Um, so I was exposed to it. Let me just put it that way. Then I went to school. Ah. And I never thought of it as something that you would do as a career. Um, I wound up going to Wharton, and I got a M. Bachelor's and an MBA I took a finance program. And there was a class called Security Analysis. It was the class I hated the most. Oh, really? Okay. The. The teacher made it rote and quantitative, not discovery and intellectual. And, uh, we were taught about regression analysis and that kind of stuff.

Speaker A: Useful.

Speaker C: It's useful. But it didn't turn you on, right?

Speaker B: No.

Speaker C: Sure. And I didn't think about pursuing a career. And I graduated in 1980. And one of my close friends, um, told me he's taking a job at Fidelity now. At that point you didn't really know what Fidelity was. No, it's quite small. Um, but to be an analyst. And I said, why would you want to do that? I don't really get it. Um, but he did. And he wound up running the Fidelity Contra fund. And he was retired at 36. Something like that. Yes. Um, and then he pursued a different career. Um, so, uh. But that. At that time. I didn't know any of this. At the time, I thought, okay, that sounds. Doesn't sound interesting. And I. Now I'm sure what he said I did. Wouldn't have sounded interesting to him. But I went to work for an oil company. And you have to go back to 1980, because in 1980 we were going to run out of oil. And it was over 30% of the S&P 500 at the time. And so it was kind of an exciting area. And the first day I got to school, uh, got to work. I formed an investment club. And by the way, I forgot one step. While I was at Wharton, they required a advanced study project, they called it. And you did it with, uh, a group. So in my group was a guy named Joel Greenblatt, who I'm sure you know.

Speaker B: Oh, yeah, of course.

Speaker C: And another guy, Bruce Newberg, who wound up going into the, um. Into the invest. Into the trading Wall street trading business. Um, anyway, we chose as our topic redoing the original research that Benjamin Graham did. On buying stocks that sold below their net net working capital. And at the time, this was in the 70s, you remember, we didn't really have computers to do the analysis. Of course we had the standard and poor stock guides that we flipped through. We realized that we couldn't go through the whole. So we picked stocks starting with the letter A or B. That was our universe. And we documented that this was a still effective strategy. And it wound up getting published actually in the Journal of Portfolio management back in 1981. Um, so I went off to the oil industry and I said, I did this great thing. Why don't we pool our money and we'll invest in these kinds of things. So that's how I thought of it, as a hobby. Um, and we did okay. And the oil industry was booming. So I wound up going to uh, Amoco transferred me to New Orleans to work on oil and gas exploration. Um, and then they moved and I was sort of on a accelerated career path. And then I moved back to the corporate headquarters and they put me in charge of the five year plan. And then I reached, uh, the dreadful point of working in a company because the, the management didn't care at all about the five year plan. But they did one. Um, really it's all because this was a, the oil company at the time was people who drilled wells and they love drilling wells. And if you looked at, uh, if you went into board meetings there, when I got a chance to observe, you'd see maps spread out on the, over the table and geologists pointing out where they want to Dr. Drill and these just excitement. What is, what are you going to plan for? You're either going to find oil, you're not going to find oil, um, and the price is going to go up or it's going to go down, you know. Um, so, um, I got called by a headhunter who said, would you like to be an oil analyst? I said no. And they said, well, why? I said, well, I read the, the analysis that came out of Wall street, uh, including reading about what they wrote about Amoco, which is where I worked. And I said it reinforced my idea that I didn't like security analysis. It wasn't that good. So this headhunter said, well, you can make a lot of money. And I said, well, who would pay those people a lot of money?

Speaker B: A question that's still valid today.

Speaker C: And she said to me, um, they do the guy. I think you should meet this guy. He'll come to Chicago. Ah. Which was where I was at Amoco's headquarters and talk to you. So I said, okay. And I wound up meeting the guy who became my boss. We hit it off. I got a Different impression of what this was. And then I was in Wall street in my twenties as a sell side oil analyst. Um, so this is a very long winded answer to your question.

Speaker B: We've got plenty of time.

Speaker C: Um, um, so I, um, started publishing research on big oil companies. Um, have you kept it? I have, I have a lot of it. I have. The first report I ever wrote was uh, actually on the petrochemical industry. Then, um, I did a report on natural gas and then I started doing individual companies. So I do I have some of that. Um, and um, it was, it was good, but I didn't like it. I didn't like being a sell side analyst focused on only one industry. Um, and I wasn't managing money. And I was at Bernstein where they had both a brokerage business and an asset management business. So I kept saying I want to go on to the other side. And eventually they gave me the opportunity. Um, and um, I got the opportunity to start up a new investment strategy. Which is kind of crazy, what they asked me to do because I was following big oil companies and they said, can you start a small cap fund for us? So I said I jumped at that opportunity.

Speaker B: Uh, funny how finance is so badly managed.

Speaker C: Yes.

Speaker B: Um, but you did well.

Speaker C: But I did. We started it at a, at a good time. By the time we were ready to. I mean it was, it was hiring the staff, it was developing the whole strategy. By the time we got our first client, they were ready to move me into another job.

Speaker B: Oh, really?

Speaker C: Um, but I said I wanted to keep this. I'll take both jobs, which I did. I became the research director and for a while I also ran the small cap fund that they had started.

Speaker A: And what made you set up in

Speaker B: your own and what gave you the confidence? Because you're still quite young.

Speaker C: I was still quite young, but I wound up spending 10 years at Bernstein. So I went from my 26 to 36. Um, and I went. Part of that was as an oil analyst. Um, and then part of it was as a research director. And then I became head of US Equity Investments. And, and I had a mentor there, Lou Sanders, who's still in the industry and is still a great investor. And um, I respect him immensely. And I worked with him side by side for five years. Oh, wow. Um, and I built up the confidence at that point in time and they wanted now me to go one step further, they said to me. And uh, they offered me the job of global research because Bernstein was going to move into the non us. Um, and I quit Instead. Right. I don't think that was one of the outcomes that they thought I would have. But Joel Greenblatt, my friend, um, from college, he had wild success by the time he was that age, starting his hedge fund. And he called me and he said, why don't we both quit our jobs and we'll invest our money together? And so I said, that sounds amazing, but there's one problem. I don't have any. You have a lot, and I don't have any, so I don't want to do that. Um, so he offered to actually back me in starting a firm.

Speaker B: Oh, wow.

Speaker C: Um, and, uh, so he gave you his money to invest?

Speaker A: He gave one of the greatest investors.

Speaker C: Correct.

Speaker B: That's a pretty big vote of confidence.

Speaker C: He did. He did. And I left Bernstein. And for me, starting this firm was a lifelong dream. Right.

Speaker B: Oh, really?

Speaker C: Okay. I also, the same father who was an engineer and tried to make it big in the stock market also had this idea that you can't make it big unless you're in your own business. I heard that growing up his whole life. And when you were in an. He was a mechanical instrumentation design engineer in an economy that was highly cyclical. And he was laid off twice during my childhood. And those kind of things have an impact on you. And he said, if you were in your own business, you wouldn't be laid off. And I later learned what it meant to be in your own business when you have cycles.

Speaker B: But, yeah, it's worse than being laid off. When you're laid off, you get some. You get a pay.

Speaker C: Yes, a paycheck. Correct. Correct.

Speaker B: How funny. And because you were backed by Joel, presumably people, it was easier to raise money. It's always difficult to raise money. At start.

Speaker C: It was. It was. Actually, I found it easier to raise money than to hire good staff. Oh, really? Um, the money, we wound up, um, getting early. I mean, I don't know. I presume this is luck and fortune, but, um, it was the Northern Trust who had, uh, an emerging manager program, and they were advising other big institutions on selecting, uh, an, uh, up and coming manager. And they connected me with the state of Oregon, and we got a $30 million account 30 days into starting the business. Um, that's fantastic. And their whole idea was they're going to watch you and see if 30 million didn't matter much to the state. But m. If you were good, then the promise would be that they would expand the relationship over time. Um, and so we had a good first year, um, and a good second year. This uh, is 19, 1996 and 1997. And so by the end of 1997, we were up to a billion dollars and beyond break even. Um, um, and were kind of off to the races.

Speaker B: How many people would you have had?

Speaker C: Roughly, like five.

Speaker A: Right.

Speaker B: So you were well beyond break even. You must be hugely profitable. Five people.

Speaker C: Well, I was spending it on all the five people. I mean, it was, but it was. You know, these startup relationships are also relatively low fee too, so.

Speaker B: Right, yeah. Yeah.

Speaker C: Because you're saying, whatever. Well, I'll take whatever I can get.

Speaker B: Yeah.

Speaker C: Um, and, um, then we ran squarely into the Internet bubble. So you talk about being stressed. But, um, we went 10 straight quarters, underperforming the market by a lot. Right. This was a time when the s and P500 was up around 30% per year. Because of the Internet and our portfolio. We didn't lose money. We were even. We were basically zero in those years. Um, and then in the first quarter of 2000, we had January and February, and it was more of this, and it was very depressing. We started to lose assets. I'll tell you a funny story about one client interaction. Um, a woman walks into my office. She was a client, and she says to me, my grandmother's a better investor than you are. All you have to do is buy Cisco. Everybody in the world has figured this out except for you. So I try to do a rational explanation and say, cisco's the first company to reach half a trillion dollar market cap. If I had to buy the whole company and I wanted to make the 15% returns that you're, uh, hoping to make, they would have to earn $75 billion a year. And they earn $1 billion a year.

Speaker B: They probably don't have sales of that much.

Speaker A: Right.

Speaker C: Don't you think there's something wrong with that? And, um, she said to me, you don't get it, do you? And I agreed with her and she closed her account. Um, that was kind of typical of what was going on at the time. Um, so, um, anyway, fortunately, we actually got an offer from one of the other value managers to acquire the firm. They would have. And Joel did make a little investment, uh, in the management company, and he owned a piece of it, and they would have given him his money back and given us all jobs. And I said to Joel, you should really take this because we're 60 percentage points behind the market. It's not like this is not recoverable.

Speaker B: It's all over at that point. Right.

Speaker C: And Joel said, don't take It, I'll keep funding the company during this tough period because we went back into the red at that point. Um, and he's like the ultimate, um, gentleman and partner that you'd like to have. He didn't ask for an incremental equity in the business. Um, and literally he never even had to put a penny in because that's turned around almost the next day. I mean by the end of 2000 we were ahead of the S and P since our inception. So we gained 60 percentage points on the S&P in nine months.

Speaker B: Which you would have said would be impossible. I mean, I know the story and of course I lived through that time. M, I know what happened. But you, I mean you just, it would have been unimaginable. And how did you manage to cope? I mean, you hadn't had your own business before. It must have been pretty stressful. You'd a young family.

Speaker C: I guess I did, I had, I

Speaker B: mean, what was it like personally? I mean, did you, Joel said, oh, I'll find you, said, no, I'd rather take the job or no, no.

Speaker C: I, you were still, you still up for it? I, I, we turned down the offer. We turned down the offer. And, and, and, but you in your

Speaker B: head, how long did you think it would take you to get back to break even against S and P?

Speaker C: It's funny because I don't think you really think that way. At the time I, uh, thought that the worst I'll be able to get a job. I never doubted that I would be able to get, of course. Okay. I mean I was young. I, I, I, I mean I probably could have gone back to Bernstein. I don't know what they would actually say, but I think I probably could have gone back there. I had a pretty reasonable 10 year run with them, um, and I had that kind of experience. So I think when people think about failure and the people that are going into these kinds of businesses, um, or anybody starting up a company, they get overly worried about failure and that's what hinders everybody. And my view of failure is, well, I just go back to doing what I was doing before and I'd be in the same position. How is that failure? You know, I'd have gained some experience over the few years. Um, so I didn't have that right. I, I said, I told my wife at the time that we would, we're just not going to, we're just going to buy groceries. We don't need to do anything else until, um, so I never, I never felt that, um, I Felt more, more, um, concerned about losing money for the. Or not participate, not making money for our clients.

Speaker B: Um, it's funny because I interviewed Jeremy Grantham a couple of months ago and he said that they lost half their clients in the dot com boom.

Speaker C: Yeah.

Speaker B: And of course, uh, when they came out of it, they were one of the top performing funds. He said not one of the clients came back. Did any of your clients come back?

Speaker C: No, no, same thing. We lost half. About half. Same thing. Um, and so, um. But we got different clients, right?

Speaker B: Yeah. Oh sure. And obviously you're a lot bigger firm today, but you've endured another difficult period, right? I mean value's not been very easy for the last, I don't know, 10, 15 years. I mean.

Speaker C: No, it's not, but it's not been that different from the past. Right. The difference is in the comparison to growth, but the difference in absolute returns is not that big. Right.

Speaker B: And so that was a worse period because you weren't delivering.

Speaker C: We were zero for those two years. And this time we're making almost the same that we were making, um, over our whole entire Life. The last 10 years it's been close to 10% a year.

Speaker B: So you've not been losing clients because they've been going to growth or.

Speaker C: No, we have not. But we have a different business than we did that back then. Back then at your startup, people are saying, okay, I'll give you, you're a smart guy, I'll give you a chance make money for us. Now we're hired for exactly what we do. And we're extremely clear that this is what we do. We're not going to be investing in startup businesses or even trillion dollar startup businesses like anthropic, um, that's for somebody else. Um, and, and so if you want us for this part of your portfolio, we'll do what we say we're going to do. And so it was not right at the time it was mostly individual money. Now it's mostly institutional. And the individual money that we have comes more in a sub advisory relationship with a sophisticated intermediary. Intermediary that's not firing us.

Speaker B: Um, well that's good. And look, your philosophy is to buy good businesses experiencing temporary problems, earnings problems. You focus on normalized earnings and you invest when sentiment is extremely negative. Has that philosophy changed much in the last 30 something years? Is that exactly what you did?

Speaker C: Exactly, exactly. If you looked at our sales pitch from 30 years ago, wouldn't be that much different. It's probably more elegant today. And the Graphics are better, but, but fundamentally that is what we do. And there's an endless supply of those. It's not like you run out.

Speaker B: Um, and are there more now because of the AI disruption?

Speaker C: Well, I mean, I don't know if there are more, but there are plenty is the way I would put it. Um, in fact we define cheap as the cheapest quintile. So the cheapest fifth of the market. So if you're looking at the Russell 1000, there's always 200 stocks to buy. Okay, okay.

Speaker B: All right.

Speaker C: The question is, how cheap are they? Yeah, right. And today if you measure that relative to the market, you can say there's a giant wide gap. If you measure it in the absolute valuation, they're a little better than average of what they've been over the last 30 years. Um, which is nice because there's very little in the world that's a little better than average from a value perspective. And values have declined over the last 10 years for value stocks in the U.S. um, so, uh, um, ah, it's not that hard to find things today. Um, and some of them are companies that you think might be disrupted by AI. Uh, but most are just totally unrelated. They're just businesses that have run into some issue.

Speaker B: And on the AI disruption, it'd be very odd I think, to, for a deep value shop to have a tech analyst. But do you have to have a tech analyst because we need to work this out.

Speaker C: No, no, no, we have tech analysts, um, because of a few things. One, there are tech companies.

Speaker B: Well, there are cheap tech companies.

Speaker C: Right. Microsoft was in our portfolio a decade ago. Yeah, a decade ago. Google was in our portfolio a decade ago. I mean we, uh, you, we bought Microsoft at a single digit PE multiple in the 20s and sold it in the 60s thinking we had done great and it went to 500 or whatever it went to. So we didn't even hear the word the cloud at the time that we invested. But um, when you look at a company like a Microsoft that has a real franchise and their franchise at the time was Windows and Office, um, and those are very sticky businesses. You don't analyze them like a technology stock really. Because I would tell you about Windows. At the time we owned it. Every expert technologist said Windows is the worst operating system on the market and yet it had a nearly 100% market share of the, of the server business. So the tech people all like the things that were more techy. Um, funny, um, that's bizarre. And Microsoft Office had become ubiquitous, um, everywhere in corporate America. But with anybody that's doing any kind of spreadsheets.

Speaker B: It's funny, I was talking about that this morning. We were recalling the great old Days of Loth 123, which was far better than XL. It's better than XL today. Um, you've got three questions, three core questions. Business quality, the problem being temporary, and management having a plan. I wonder if we just talk about those. They're very interesting. I mean business quality. How do you think about what's a good business quality?

Speaker C: The way that I would describe it is that this is a business that should make outsized returns given its characteristics. So those characteristics could be something like a dominant share position, a low cost position, a brand or a franchise that's difficult to disrupt. Um, there's all kinds of reasons that companies make returns in excess of their cost of capital. Um, but it's not doing that now. Right. So, meaning that, um, if the current manager, if the management had a business plan and you listened to the plan and you said, okay, that sounds reasonable, and it failed, you would say it's worth trying again. It's not a business you walk away from because of the characteristics. So either another management team would come in, the board would replace the management, or a buyer would come in and say, I think I can do this better. It's just a kind of thing that is kind of obvious that you wouldn't walk away from, um, even if it's doing poorly today. Um, and so that's what I mean by quality. It's not, it's interesting. Um, and then the problem is temporary versus permanent. Well, you know, it's. You don't know, of course, but when you can specifically point to some bad decision they made that caused something to happen or some industry cyclical condition, um, and you have a history of things going, being good, it's not that hard to figure out if it's temporary or permanent.

Speaker B: Um, but that must be the most tricky decision because value traps are temporary problems that haven't m. Gone away, right?

Speaker C: They are, they are. And part of being a value manager is that you're going to make mistakes. Um, and you're not going to think it's a value trap at the time. I mean, I joke about this sometimes because the whole act of trying to avoid value traps kind of makes it so you can't be a value investor because you have no idea which are going to be the value traps and which are not. I mean, people say they know, I don't know how they know. Um, you know, one of the things you do know are that companies that have weak balance sheets, whether they're value traps or not, they may not have enough time to fix the problem. Companies that are in decline, where the business is in decline. And, and I, I, I, you hear this when a company, they, they don't use these exact words. So this is my paraphrasing with clear liberties taken. Um, we don't like our business so we're going to try another one. We avoid those kinds of things.

Speaker B: Right.

Speaker C: Um, but when they really believe what their competitive strengths are and they can document them and they can tell you this is what we have to do to fix it. Um, and most of the time when you're listening to managements on this, these are not short term fixes. Okay. The um, because if it was obvious that they could turn this around in six months, it just wouldn't be cheap. Yeah. Um, and the odds that we figure it out that it's going to turn around in six months and nobody else does is not a reasonable expectation.

Speaker B: So what are the signals that would make you go yes or no? I mean, is it something the management

Speaker C: says that See, confidence, it's, it's logic. Okay. Okay. Most of the stuff is common sense.

Speaker B: Oh really?

Speaker C: Okay. Um, so I'm gonna, I'm gonna give you what, it will make us sound almost foolish but, and this was even before this was, I was at Sanford Bernstein. So. Ah, it was more than 30 years ago. Sears got cheap. Okay. Now Sears was, now Sears is gone. Right. But at the time, um, Sears had a long, long history of uh, around a 4% margin. Um, and they had some great or perceived great businesses. Craftsman tools, I don't know if you

Speaker B: know these, I'm not very familiar with the brands.

Speaker C: And they had their own brand of, of appliances, Kenmore Appliances. And we went to visit, the margins had eroded from 4 to 1 and the stock price got killed and the management was widely viewed poorly. And we went and visited and the CEO, the basic question is what's going wrong and what are you doing? And he said, we don't know are systems are so bad that I don't know which stores make money and which stores lose money. This is 50 years ago, 40 years ago. Um, I don't know which of our segments are profitable and which are not. Come back in six months and we'll have finished this work and I'll be able to give you a better assessment. That's what the guy said to us.

Speaker A: Wow.

Speaker B: I mean that's pretty honest, right?

Speaker C: We bought the Stock immediately.

Speaker B: Just because.

Speaker C: Because we figured he would figure it out and then fix the problems. Okay. And he came back to us and gave us what I thought was the most shocking set of conclusions. We're getting killed in the tool business because of Home Depot. We're getting killed in the appliance business. Um, we make tons of money in women's apparel. Okay. And this was a discount department store, basically, and total shocks. So here's what we're going to do. We're closing the tool business. We're changing, we're reconfiguring completely from only selling our brand to carrying all the brands and just being a reseller. And we're expanding the size of the women's clothing department. And the margins went back to 4%. Um, uh, now how do you gauge

Speaker B: whether that's going to be successful?

Speaker C: You don't know, right? You don't know. You just have to watch and see. You have to say that that's what so many people can't understand about value investing. Real deep value investing. People think you have to know before you invest. We think you have to know what the range of outcomes is. So if you think that going back to 4% from 1% is going to cause the stock to double, because that would make logical sense. Okay, so your upside is a double. The downside is, well, it's priced as if they're not going to improve anything. So what risk am I really taking by seeing if this works? Um, they're not financially insecure that they're going to go out of business. Um, took 25 more years before they would go out of business. Um, so, um, so the point that, that I'm making is, is you're just making a judgment based on what you know about the business, about the competitors, about the market and environment. They go with combining that with the plan that they have and said, okay, this has a chance of working. And, but, but we want to, we want to underwrite these holdings so that if we're only 50, 50 in our judgment, we'll do okay. And if you can be 50% chance that you double your money and 50% chance that you lose. 25%. If I gave you that bet, you would take it any day of the week.

Speaker B: Sure.

Speaker C: But almost nobody in the stock market will take that bet. Um, because they don't think about what the downside is versus the upside. They just think this is bad. I don't know why you'd want to own this. Um, in fact, I always joked that the most common question I got from our investors. And you also have to put the perspective back 30 and 40 years is, don't you read the newspaper? Everybody knows that Sears is dead and it's mismanaged. Um, so my perspective is, I'll take those every day of the week. And if I can be 60, 40, because I have a bit of an edge by doing all this work, then I'll have a great record over time. M, we've managed to be around 60, 40. But losing on 40% of your investments is not something that people readily admit to. Um, but it's been the reality.

Speaker B: What do you do with the 40%? How do you know when to sell? When did you give up?

Speaker C: You give up? Um, you have to have some sort of a systematic process of knowing what's cheap and what's not. Our process is just comparing the price to what we estimate the normal earnings should be in a recovery. So if you come to the conclusion that you were wrong, that the normal earnings of Sears is not $4 a share, it's $1.50 a share, then you mark it to $1.50 and say, wow, this is no longer cheap, and I exit. That's how we do it. Similarly, if you think it's still, um, $4 and it's still cheap, we would buy more. Um, but when it got to the point where it was fairly priced relative to that $4, then we would exit. So to me, the discipline is the same. You just have to constantly be, um, I'll almost say it, be obsessive about, did you get it right? And you have to be open to not fall in love with these companies and say, and I think that's what a good portfolio manager does. Um, it's more on how you behave when you got things wrong that dictates your success.

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Speaker B: So what, what you do when. So I've, I've just joined and I'm um, new analyst and my first recommendation goes badly wrong.

Speaker C: Well, well. So um, so one of my partners who, who unfortunately passed away from cancer um, young, at a young age, I'm sorry but, and this is a while ago but his first stock, this is a good example, he worked on Agco which was tractors, agricultural, they were kind of the number three player in the world. Um and he did all this analysis on why the cycle should be good and this company should, earnings should grow and the stock fell 50% in the first six months. 5050 and we reviewed it again. He was like suicidal I'll tell you because that's what you think about when that's your first company you worked on

Speaker B: um, can only get better.

Speaker C: But we redid the research and we concluded that he had gotten it right and we doubled our position. Um, and eventually it was like a 4x on the lower price and maybe a 3x on our average price. But it's such an important learning experience for an analyst and he um, focused too much on um, what he thought the long term normal should be and not on the path. Um, and do you worry about the path? Well we try not to buy while a business is deteriorating if you wait till it's obvious you missed out. So that's the trick. I mean it's an art, it's not a science. Um so we do, we worry about mostly businesses don't behave in a V shaped pattern. They, they deteriorate. The management tries to do something about it then it bumbles along the bottom for a while. That's when we're trying to buy. But it could have another leg down, which is what AGCO did. Yeah, but then you reanalyze it stabilizes again and you say I still like the risk, reward, trade off. Um, so, um, but you know, sensitivity to what could happen if you get it wrong is such an important thing for an analyst to learn firsthand. And it's fine. He probably was worried about his career. Um, and he would have been my successor if he hadn't passed away. Um, so uh, it's because he was really smart and he did good research and in the end he did get it right.

Speaker B: Yeah. AGCO is a funny one because it was very sensitive to commodity prices. Because I used to play around in the agricultural space, there's quite a lot of different um, ways of playing it. Plantations to tractors. I thought it was always very interesting. There's quite good data, particularly in the United States on agricultural yields.

Speaker C: Yes, absolutely.

Speaker B: So you could watch the cycle and just occasionally the cycle, the stocks got completely out of sync.

Speaker C: They did.

Speaker B: Yeah, they did.

Speaker C: Funny. And, and, and the interesting part about the agricultural business is that that the tractor, um, installed base is roughly flat. Right. So it's a replacement cycle so that you can do pretty decent long term arithmetic. You, you can't know what the commodity cycle is going to be. Um, so if that goes against you, it goes against you. But, but you know that people have to replace their tractors when they wear out and they have a useful life. So that in and of itself gave you some confidence that this was an okay business.

Speaker B: I was looking on your website, you've got lots of funds and you've got a wide range of number of stocks. So yeah, the US best idea is just 15 to 25. Global best ideas is 20 to 30. Global value is 60 to 95. I wonder, is that because of the preferences of the lead PM or to do with the sector?

Speaker C: It's the client preferences. Oh really? Okay, so not everybody wants your highest octane product. And so the best ideas are highly concentrated, they're more volatile. Um, they take bigger sector bets and bigger individual position size bets. Um, they're also our highest fee products and they have the best records but they're more volatile. Other people would say I don't want to pay that fee or I don't want that kind of volatility. And particularly when you're dealing as a sub advisor to a retail client base, they want um, more diverse. Yes. And so we've been. So it's the same philosophy on all of these on doing the research. But um, and we started as a purist that we're only going to do the best ideas. Um, and then you run into um, we can't take this and you wind up negotiating into a new product is what happens. So we have that range from. We have kind of three levels, best idea focused and then.

Speaker B: And if you've got like a 10 to 15 stock portfolio, do you equally weight it? How do you mental risk?

Speaker C: It's also weighted by conviction, by cheapness.

Speaker B: Um, uh, what would be the maximum you would hold in a single stock or in two or three stocks?

Speaker C: We would hold 10%.

Speaker B: Well if you've got 10.

Speaker C: We don't have 10 anymore. The, the minimum.

Speaker B: The, the 15 to 25. Sorry, so you.

Speaker C: Yeah, so um, it, it's we, we can hold 10% at cost and 15 at market if it goes up.

Speaker B: Um, and that's a sort of hard.

Speaker C: And that's a hardwired saying we have to start trimming it back just for risk exposure. But those are big position sizes for. It's not, they're not for the, the tame at heart.

Speaker B: No, no, no.

Speaker C: Sure.

Speaker B: And um, how long typically does an investment take to work?

Speaker C: Besides some of these, our average holding periods around three and a half years. Um, some of them work fast, some of them drag out. Um, and uh, it's rare that it's within a year because we are looking at, for almost certainly at companies that will take more than a year to fix their problems. Because that's what comes as cheap. Right? That's what screens up.

Speaker B: Because you tend to be early, we

Speaker C: tend to be early. We also tend to have a higher threshold for how cheap it is. Uh, or um, has to have a lower valuation. We're not saying the Russell 1000 value index is a uh, 22 PE portfolio and we want a 19 PE portfolio. No, we want a single digit portfolio. And to get single digit the people have to have given up on this company. The market has to have given up.

Speaker B: Do you have any other ways of assessing uh, whether people have given up rather than the cheapness? I mean I used to, I used to like the conferences. So I used to ask what's the. Are there any stocks where nobody wants to see the management?

Speaker C: No, actually we've never done that. But no, it's all based on valuation. We're doing it based on valuation.

Speaker B: I remember um, one of the first investment conferences I went to CLSA had a big conference in Hong Kong and um, won the stocks. You couldn't get a Seat. I just thought, oh, well, no, well, of course we were long and short, so we could have shorted it and

Speaker A: just talk a little bit about your firm.

Speaker B: Am I right in thinking you went public at one point?

Speaker C: We did. So Joel Greenblatt, who was the founder, um, the funder. Not the founder, the funder. Um, after we had some fairly big success post Internet bubble, um, he had put his shares in trust for his children. And, um, it was now a valuable asset that was concentrated in a sole asset in a trust for children. And he had some pressure to sell. And in our, we barely had a hand shape agreement really. And he had no way to get out of his. Ah. So he asked how can I sell part of my shares? And we started a process in 05, roughly, um, to look at ways that we could raise the money to buy him out, um, or buy half of his stake out, which is what he wanted. And at the time, this was pre financial crisis, so the bank money was scary available. I mean it was, we'll give it to you with a low, low interest rate, long term, no covenants, just like today. And I said, don't you understand? I was, I was saying this to J.P. morgan. Don't you, don't you understand that people can fire us at will? They just send an email and we're fired and we don't have any revenues anymore. There's no guarantee about our future. And they were trying to reassure me. You have a sticky business. I said, I'm not borrowing money. Um, I'm sorry, I'm not going to do it. Um, and uh, then we went to private equity firms and there was a parade of them that came in. And the whole process of this kind of stuff always amazed me because you'd have a one hour meeting and you'd get a term sheet from a private equity firm. Now, they were subject to due diligence and all of that, but the terms were always very similar, which was, it's temporary capital. You know, we're in a fund, after five years, we got to sell it. You got to either help us get out, you got to redeem. And um, and I just figured, do I really want to spend my life finding another partner every five years? It, I don't want to do that. And, uh, so we hired a banker and we tried to find a strategic partner that would take a permanent position. And we did. We actually found a European bank that would do it. But when we got the actual terms in writing, it was clear that they weren't going to leave us Independent. They wanted control over everything, even though they had a very small stake. Um, and the banker said, why don't you go public? Um, you're going to get the best valuation because the markets are a little frothy. Um, wasn't even for me, it was for Joel. Um, and, um, you then will have liquidity for yourselves long term. Um, so we thought that that was, ah, a good idea. Turned, um, out not to be a good idea. But why wasn't it? Because we really didn't have liquidity. And I was not smart enough to figure that out at the time that if I sold one share, the stock price would crater. Um, and I always thought if we're doing really well and we continue to do well, we can sell a little bit at a time. And then over the years the business became profitable. It doesn't require a lot of capital, so we distributed all our earnings. And then I never worried about having to sell it anymore. So I lost that. And the market enthusiasm for traditional asset managers and particularly value asset managers disappeared. The valuation was ridiculously low. And so we went back private again. This time we did borrow the money. Um, but we had a much, much more diversified client base that, uh, had much more stable characteristics than we did 20 years ago.

Speaker B: So you sold it, what, multiple? And bought it back at what multiple?

Speaker A: Half. One.

Speaker B: Half.

Speaker A: Other.

Speaker C: Yeah, we sold it at, ah, around, um, 20 times after tax earnings and bought it back at 11 or something like that.

Speaker B: Funny, isn't it? Uh, and what did you learn from being the CEO of a public company that you never wanted to do that again? Well, there must have been. So it must have been interesting to be on the other side of the table, no?

Speaker C: Yeah, yeah, I mean we were. Nobody paid attention to us, so we were a very small cap company. We only sold at the, at the end we only had like 22% of the company is, was listed. Um, we had shareholders that would, that would talk to us, but it was like a not, it was not distractive at all. Oh, really, it was not. Um, we were very clear that we were running the business the way we would run the business. We retained voting control. Um, and, um, if you want to be on along for the ride, that's great and we'll be happy to talk to you. Um, we had an investor relations person that got questions, but it wasn't, um, a big burden for me. What happened was the costs of being public started really going up with, uh, DNO insurance and fancy accountants. You have to have fancier accountants than you really need. For kind of a simple business of collecting fees and paying salaries. Um, um.

Speaker B: Now come on. When you're buying stocks and they've got. Not the fancy accountant, do not worry.

Speaker C: Yeah, that's why you have to get them. So we had to get them and they charge twice as much as the uh, not fancy accountants. Um, so it was a multimillion dollar bill to be public that we wouldn't have to pay as a private company. And there was no value, there's no liquidity. The valuation was terrible, the costs were high. You say, why are you doing this? So we exited the markets,

Speaker A: the team.

Speaker B: I mean some of your original partners are still with you I think. Is that right?

Speaker C: Three founders, um, are all still there. Um, two of us have given up our day to day responsibility. So I'm no longer running the company. I'm um, just an investment guy and part of the investment team. And my partner Bill Lipsey is not running the business side of it. Um, but he's still getting involved in um, big transactions and big clients and some startup, um, investment products that we have. Uh, but neither of us are in the office five days a week. Um, I'm um, a three day a week guy in the office now.

Speaker B: Can you function like that?

Speaker C: Oh yeah. Because, well, I mean it's not like you're turned off the other days.

Speaker B: No, no, no.

Speaker C: But I don't um. You can. Yes. When you don't have, um, when you're not the person who has deliverables on a daily basis and you're mostly acting as a mentor and a coach and trying to develop the younger analysts into better investors and trying to take the portfolio managers and challenge them. Um, and we're not a very active trading firm. So um, the answer is yes, you can. I can do this for I think as long until they kick me out because I'm not helping.

Speaker B: And talk a little bit about mentoring people and how you train people in the firm.

Speaker C: Well, we tend to hire our investment people at a, ah, not right out of college level. It's people that have had some experience and are maybe more like 30 years old.

Speaker B: Um, why isn't that?

Speaker C: Because they've gained some maturity. We tried the young people and they just had trouble interacting with CEOs. Um, they were intimidated. Um, they, they, they just weren't mature enough. That, that, that's the bottom line. A lot of smart people.

Speaker B: Yeah.

Speaker C: Um, and, and we also wanted people who had um, some kind of business experience more so than investing experience.

Speaker B: Right. Smart.

Speaker C: Yeah. Um,

Speaker B: that's presumably particularly Helpful if you're looking at the path to recovery.

Speaker C: Correct. Correct. We figure the investment part of it is easy. If you get the business right and you know the price and you know what's going to happen, it's not that hard to decide whether to buy it or not. The hard part is, can you really analyze this business properly?

Speaker B: Um, and you rotate sectors.

Speaker C: We do.

Speaker B: This is quite interesting because I was talking to one of my clients of very big hedge fund, and the founder, one of the founders said to me, said, you know, the analysts get too bogged down in their sec. They fall in love with the stocks and their performance. And I said, well, you know, Fidelity rotate the analysis. Like, really? He said, maybe that's what we should do. He hasn't done it yet, but talk about that.

Speaker C: Why did you do that? Well, look, I. When I was still at Bernstein and I was, uh, uh, the oil analyst, they asked me to be a mentor to the retail analysts that were coming in. Bernstein hired two retail analysts and asked me to mentor them. And the process there was they really a lot of experience in retail. Both came out of the industry. They knew way more than I, uh, knew about the retail industry. But we put them in an office for six months while they write their first research report, which is a big, thick black book. That's what Bernstein was famous for.

Speaker B: Yeah. And then still.

Speaker C: Still. And then you would launch them to the clients. So I had one meeting that I'll never forget. Um, we went to this guy, and I can't come up with his name right now, but, um, he said to me, the reason I love Bernstein research reports is because the initial report your analyst writes are the best research on Wall street industry. And, um, uh, that really had an impact on me because I kind of observed that, like, the first year an analyst does work on an industry is the best. Um, they bust their butts, right? They read everything, they build models, they gather data, they go to conferences, they call everybody. And after a year, they kind of think they've got it figured out. Um, so in year two, I think the workload drops 80%. Um, and by year three, and this is being somewhat facetious, they play golf. Um, they go to the conferences, but they're more there to meet people than they are to learn something. So I said, why are we having them continue to follow these companies? And by the way, when you're hiring people and you tell them you only cover an industry for three or four years, and then we rotate you, they love it. Okay? They love that concept because they're not from Wall street generally. And the idea that you're going to get stuck doing one thing for the rest of your life is unappealing. Um, it also develops better portfolio managers. So if you've had a chance to see five or six or seven different industries over the course of your developmental stage, then become a portfolio manager, you're better. Third, it means you have more than one expert in the firm on everything. You're not just one person. And so there's some healthy debate. And there's always the new guy that's taking over for the one that's giving up the coverage. The new one always thinks, oh, I'm going to show this guy up and I'm going to do a better job and find out what he did wrong. So you get a fresh think thought process. And finally, I think you keep analysts longer when you challenge them intellectually. Um, interesting.

Speaker B: The, um. When there's a rotation, I'm. Presumably this will be a firm wide rotation, or is it you?

Speaker C: Yeah, it happens constantly. So it's not like everybody changes places. There's a new person that comes in and they get one of the old ones and you. It's musical chairs.

Speaker B: Musical.

Speaker C: The research director orchestrates this.

Speaker B: Difficult to coordinate, I imagine. But when somebody new takes over, do you ever get that insight, then go, actually, we should get rid of this stock?

Speaker C: Yes, absolutely. Absolutely.

Speaker B: How often does that happen?

Speaker C: Not that often. But, you know, I can think of a few examples where we, we change the whole thought process on us, on an industry, um, because the, the new person had a different perspective. So.

Speaker B: Interesting. You don't fall in love with your stocks, obviously. Pisina.

Speaker C: No, I mean, first of all, we're always doing research on new things and we're always fully invested. So if you want to buy a new thing, you have to sell something. Um, you just have to choose what you're going to sell. So our discipline is when it reaches fair value, which for us is we're ranking stocks from cheapest to most expensive. When it reaches the midpoint, it has to be sold, no questions asked. Even if you don't have something to replace it with. We'll hold cash for some period of time.

Speaker B: Oh, really?

Speaker C: Yes. I mean, and that happens occasionally. Um, there's. Sometimes there's friction because you hadn't finished doing work on something, but more often than not, it's, you want to buy something, you don't have any money. Yeah. Um, so you say, okay, what's close to fair value that we would sell and replace it with something that's very cheap and that's how the process works.

Speaker B: And it's usually one in, one out sort of thing.

Speaker C: Yeah. Mhm.

Speaker B: And you said it's second nature for you to go through a sheet of numbers. Is that sort of pretty much a requirement in your shop? You've got to be pretty value oriented.

Speaker C: No, I would say, no. Um, I would say that different people have different skills. Um, so looking at a page of numbers and getting it is, I have that. Okay.

Speaker B: That's just innate.

Speaker C: It's just innate. My partners who are senior partners don't function that way. Right. They have to really understand and are more verbal. They need the words, they need the dialogue with the company. Um, they still have the same kind of insight, but they arrive at it in a different way. Um, so we're looking for a couple of skills. Pure analytical ability. Second is ability, um, to get information. Right. To talk to, um, a CEO of a company in a way that you get something out of it. Um, so how do you do that? Well, my partner, John Goetz, who is the co chief investment officer with me, that's, he's the best I've ever seen at that. Now he was a CEO, okay. He, he, he was, worked uh, for a chemical company and he ran their Asian operation. So he was a divisional CEO, not a, not a corporate CEO. But when he goes and talks to other CEOs, it's like a natural. You just watch it happen. I, I, I, It's a gift. Okay. It's an innate gift and it's about

Speaker B: making them feel at ease or making

Speaker C: them feel that they're, you're intensely interested in what they have to say. Um, that you're, that it's a two way dialogue. Um, that you're not just looking at your question list and then asking one and going on to the next one that you're, you know,

Speaker B: I can, I feel better, I'll put my question.

Speaker C: Um, no, you're not doing that at all.

Speaker B: But it is an important skill and it's one of these things that you don't really get formally taught.

Speaker C: Correct. And he teaches that. Okay. Uh, but mostly by modeling it, by taking people with him and saying, you sit there and be quiet the first time you come second time, ask one or two questions the third time we'll split it. And the fourth time I'll watch you, you know, something like that. Okay, cool. Okay.

Speaker B: Yeah, yeah, yeah.

Speaker C: Uh, and then I'll give you my feedback. Um, so, um, this must be particularly

Speaker B: important, doing what you do Because a lot of it is about the ability of that CEO to.

Speaker C: Correct.

Speaker B: Implement the plan.

Speaker C: Correct.

Speaker B: So are there lessons that you can share about how you judge management and you judge their ability to deliver?

Speaker C: And yeah, I mean, it's an interesting comment because almost by definition, I used that Sears example before. They have to do something stupid to get cheap. Right. So now it's not always their fault. So I don't want to make sure that that was an exaggeration of the statement. But they're managing an enterprise that is not doing well. And most people judge a, uh, management's capability by the results. They have no other basis for judging them. Right. And we sort of look at this and say, okay, that's, that's true, but everybody is fallible and makes mistakes. We all have made mistakes in our career and sometimes those mistakes can have a big impact on the earnings of a company. So we're more judging it based on the plan.

Speaker B: Um, sometimes it might not be their fault. I mean, something. An exogenous event. But they must be in a very defensive position at this point because their investors hate them, their employees.

Speaker C: Uh, one of the things that's true, the investors definitely hate them. So when we show up and we say we really are thinking about buying the stock, and we have a lot of questions because we are not going to go into this without really understanding, are you willing? Now, when you'd have nobody that wants to talk to you, you're generally very willing.

Speaker B: Well, the only people who want to talk to them are in pod shops that when they're short the stall. Yes.

Speaker C: Right. So we get access mostly by convincing the investor contact that we're worth talking to so that we're asking serious questions. We're not trying to get them to divulge something about the current quarter so we could trade it and make a buck. We're trying to, to understand should, should we be an owner of this business for a long time?

Speaker B: But, uh, you're not going to be there for that long, are you?

Speaker C: Because, you know, and we tell them, all right, we're gonna. Once.

Speaker B: But they're so desperate. Yeah. Any friend is a friend.

Speaker C: Correct. And when, when you're in favor, you're having plenty of shareholders, you know, you'll be happy to see us be gone. Because it's not good for you when you're our shareholder. Yeah. Um, um, and they kind of understand that message and they, and they respond to it. Um, so we have generally good access. I'm sure you do. Yeah.

Speaker B: Uh, that's really fascinating. Really fascinating. And you've been doing this for such a long time. The market structure has changed tremendously. You know, there's passive, there's pod shops, there's fewer active managers around. I mean, David Einhorn famously was complaining that the Fidelity and Capital guys weren't there for him to sell on his positions too. That used to pass the parcel. What's your observations, uh, after all this time in markets, is it a lot more difficult today?

Speaker C: Well, I mean, to some extent it creates better opportunities. So I understand what you're asking. It's more difficult in that if you're beholden to your relative performance against a benchmark, it's very difficult. So we make it clear that we're not. Um, if you want somebody that's going to beat the s and P500 all the time, I don't even know how to tell you I would even try to do that. I don't have a clue. If you want somebody who's going to buy cheap stocks and sell them when they're not cheap, uh, independent of what the market's going to do, okay, we'll hire you. And I know you're going to evaluate us against the market anyway. But there are, um, institutional, um, funds that have, um, explicit, uh, review, uh, processes for managers. And they say if you underperform your M benchmark for four consecutive quarters, you go on the watch list and then two more quarters and you're out. So I say to the people, we'll definitely be on your watch list. So you sure you want to hire us? Because we'll definitely be on your watch list. Because there are going to be times when what we do is not related to the benchmark. Especially the more interesting question is how the benchmarks have changed. So the Russell 1000 value, uh, I don't know if you know how those are constructed, but there's equal market weight in the Russell 1000 growth and the Russell 1000 value. So the Russell 1000 value has 900 stocks in it. 900 of the thousand are uh, in the. So everything is in the Russell 1000 value except for the highest flying growth stocks. Not what I would call our universe. Right.

Speaker A: We would.

Speaker C: Most of the stocks we wouldn't own. So if you're going to evaluate us compared to that, I don't have a better benchmark. I mean, I really don't. I could create one, but it's not a publicly available benchmark. Sure. So, um, if it's important to you that we look like the value index, we're not the Right. People to hire. Um, I believe in the long run we beat the value index because it's not just a dumb construction, it's not value and value works. We're going to beat it in the long term, but there could be long periods where we don't and there's nowhere you won't go.

Speaker B: Is that right? I mean, you own stocks in China or.

Speaker C: We know we own stocks in China. Particularly when somebody says the market is uninvestable, you mean you should just load up. Um, and China is not like when you look at the Chinese market, it's a massively diverse market with pretty much all different kinds of industries. Some of them are not export oriented, some of them, I mean they're all different things that you can have exposure to. So the idea that you're universally make a top down decision like that seems strange.

Speaker B: But you only invest in America, is that right?

Speaker C: Me personally? Uh, yes, my part, we're co chief investment officers. I do the US side. My partner John Goetz is in charge of the.

Speaker B: Is there a reason for that?

Speaker C: Yes, because there's a limit to any human being's capability. And if you want to really understand the stocks that you're in, um, that you can't do everything.

Speaker B: And just to finish off, if you were to go back and advise the young rich five quarters in of the underperformance of five of the 10, what advice would you give them about being a success? You've been an amazing success.

Speaker C: I would say do what you're good at, not what you think somebody else wants. Um, and if they choose not to hire you, just wish them luck. Um, it's not personal. Um, and that's why to me, when I did a succession plan, it was so important for me that it's an investment person that succeeds me, not a business person. Because a business person looks at the market and says, look what's hot. We can do that. Let's have that product. And an investment person says, what are we good at? Let's do that. Um, and they'll come if they want to come. It's a very different mentality in the direction of a firm. And so we've been very religious about doing what we do and not making excuses, telling. I mean, if we make mistakes, we own up to the mistakes. If the mistake is a mistake of omission. Because I didn't buy Nvidia, I would say, okay, well you have a lot of other people that buy Nvidia, so you should have them as your managers that do that. Not Us. Um, and if you want us to make that decision, you hired the wrong people.

Speaker B: You've built, uh, a massive business. You've got your name above the door, but you've built something that endures without you.

Speaker A: Right?

Speaker C: It does, yeah. And particularly given that I never focused on the non U S part side of our business and it's now 75% of our assets.

Speaker B: Oh really?

Speaker C: Yes. So that's where all the growth has been for us. And mostly because we were kind of an early as a pure value practitioner in non US Markets.

Speaker B: I see, so you were just a, you had a lead.

Speaker C: Yeah, yeah.

Speaker B: Um, and there's more competition in the domestic.

Speaker C: Yeah. Now nobody wants to be a value manager anywhere, so.

Speaker B: But, but, but it's going to have its day again.

Speaker C: It is going to have its day again. Yeah. I mean, and, and, and, and really the performance over the last 10 years while it's lagged the market dramatically, it's not that different from what our long term record is. So the real bet for us is that the market can't continue to produce 15% returns among the biggest companies cap weighted based on whoever had the trailing success. I mean the idea that the same companies are going to be the leaders in the next decade in the past doesn't have a lot of historical precedent,

Speaker B: but we're in a different era.

Speaker C: Yeah, I guess it could be different.

Speaker B: This, I'm not saying it is, but it could be.

Speaker C: Of course. Of course.

Speaker B: I don't know if you saw. There was a very good presentation yesterday by the gentleman from Boston Partners about the AI economics. I thought it was fascinating.

Speaker C: Yes. I thought he was very brave to do that kind of an analysis.

Speaker B: And it's really difficult to do because I've tried to do it. I don't have a technical understanding to do the Psalms, but uh, no, I thought it was very interesting. And do you think the SpaceX IPO is kind of like the AOL Time Warner, the Vodafone, Bertelsman? I don't know.

Speaker C: Uh, yes, but I don't have any basis for saying that. I just think that the idea that you have multiple trillion dollar companies that are competing for a technology that isn't resolved yet, um, is just crazy. They can't all be worth a trillion dollars. Um, and so if you bought them all with the idea that you're going to hedge your bets, I think you would have a losing proposition. And if you knew which one was going to win, then pick it. Okay. I don't know how to, I don't Know how to know that you're very

Speaker B: good at saying, I don't know.

Speaker C: I tell you, that's one of my best skills. Yeah. Because I think you should acknowledge when you don't know.

Speaker B: Um, we always finish by asking, ah, our guests to recommend a book. Be a book that you're enjoying, or a book that a young person entering the industry should read.

Speaker C: Or, uh, well, do you have any big recommendations?

Speaker B: Are you a reader?

Speaker C: I'm a reader, yeah. I don't read that many investment books,

Speaker B: so you probably don't need to.

Speaker C: But I read Joel Greenblatt's book. Okay. And that's a must for somebody entering the market. Um, um, it's like, it's even. You can be a stock market genius. That's not the exact title, but it's something like that.

Speaker B: Um, we'll get the title right in the, um, show notes.

Speaker C: And then I read a mixture of fiction and nonfiction. I read a very interesting biography recently, which I guess is. I'm, um, very late to this because it's been around for. But it's called the Power Broker. It's about Robert Moses. I don't even know if you know who that is. I don't know. He is the guy who built all the infrastructure in New York City and the surrounding areas as an architect. Um, now by infrastructure, I mean bridges and parkways and highways and it was a fascinating, fascinating book.

Speaker B: Why is it so interesting?

Speaker C: Just. Well, part of it is being a New Yorker. It makes it more interesting because you know all these places.

Speaker B: Yeah.

Speaker C: And you drive out of New York on Long island and you pass something called Jones Beach. Well, Jones beach was like a dream of providing recreation for the masses. Okay. And it's 100 years old now. Um, and on Long island outside of New York, where all the estates of all the wealthy industrial barons and he was going to build roads right through their properties. Um, and so it talked about. So it was fascinating.

Speaker A: I got.

Speaker B: Okay, I'm going to.

Speaker C: It's actually a Pulitzer Prize winning, um, biography. Oh, wow.

Speaker B: Oh, fantastic. Okay, I'm going to. I'm going to.

Speaker C: It's long. It's like a very thick book.

Speaker B: Oh, no. Okay, so I might get the Kindle version and take it on the holiday. Um, listen, it's been such a pleasure talking to you. I really appreciate your time. Thank you so much.

Speaker C: Thank you. I enjoyed it myself.

Speaker A: That was Rich Pezina. I loved how candid he was about the pain of the late 1990s bubble. Ten consecutive quarters of underperformance, a client telling him their grandmother was a better investor and a sale of the company in prospect. And there was Joel Greenblatt persuading him to hang on, backstopping the losses and not asking for anything in return. What a friend. And how shrewd and rich's equanimity, the idea that failure is rarely as final as we imagine it. Uh, he knew he could just go back to what he was doing before his investing philosophy buy good businesses with temporary earnings problems, focus on normalized earnings and insist on a big valuation gap is deceptively simple, but the discipline around it is what really struck me. I so enjoyed our conversation and I hope you did too, and that it may inspire you to leave a review. And on that hang on for another minute for something quite special. If you enjoy the show, the best way of helping me spread the word is leaving a review or even just a five star rating. It gives the podcast social proof and helps attract new listeners each month. I'm going to read out ah, a couple of recent listener reviews. I love that you're honest with me, even when it stings a bit. First up, a uh, listener calling themselves US Expat1 in the UK store left a three star review titled Good Content Bot. They wrote Steve gets great guess, but his voice and accent are highly irritating. Well, Expat one, that's brutally honest. The guests are great. The host not so much. The bad news for you is the accent is probably here to stay. But the good news is the guests will keep doing the heavy lifting. And to balance that, here's one from the lovely Harold from Berlin in Germany titled One of my favorite Investing podcasts. This is one of my favorite investing podcasts. The host, Stephen Clapham, um, apart from being very pleasant to listen to, knows how to ask the right questions and how to tease out previously unknown aspects about his guests. So between London and Berlin, I go from highly rating to to very pleasant to listen to. That's what I call a range of opinion. If you'd like to add your own verdict, please leave a rating and review wherever you listen. Each month I'm going to pick uh, out two reviews. A winner will get a, uh, behind the balance sheet polo shirt and a runner up will get a baseball cap. Just post the review, then email me with a screenshot. Thanks for listening. Even you US Expat one Behind the

Speaker C: Balance Sheet and affiliates and podcast guests

Speaker A: may own shares or have an economic interest in securities discussed in this podcast, which is aired for your education and entertainment only. Nothing in this podcast should be construed as investment advice or relied upon, uh, for investment decisions. Always do your own research.