Graham & Doddsville An investment newsletter from the students of Columbia Business School

Inside this issue: Issue XVI Fall 2012 Joel Greenblatt P. 1 Joel Greenblatt Loews Loews P. 1 — “Thought Corporation Corporation Process and — Royce & P. 1 Clarity are Key” “Patience is Associates part of our Omaha Dinner P. 3 DNA”

Joe Rosenberg and Jim Tisch Loews Corporation is one of the largest diversified hold- ing companies in the United States. Since its founding in 1959, Loews has been rooted in the principles of value investing as a means of generating wealth for its share- holders. CEO Jim Tisch (one of three members of the company’s Office of the President along with his brother Editors Andrew and cousin Jonathan) and Chief Investment Jay Hedstrom, CFA Joel Greenblatt Strategist Joe Rosenberg shared their thoughts and ex- MBA 2013 periences with G&D. Joel Greenblatt is the (Continued on page 14) Jake Lubel Managing Partner of MBA 2013 Gotham Capital, an in- vestment firm he founded Royce & Associates — Sachee Trivedi in 1985, and a Managing Legendary Small Cap Investors MBA 2013 Principal of Gotham As- set Management. Mr. Richard Hunt Greenblatt is the author MBA 2014 of four investing-related books, including the New Stephen Lieu York Times bestseller The MBA 2014 Little Book that Beats the Market and You Can Be a Stock Market Genius. Mr. Visit us at: Greenblatt is the former www.grahamanddodd.com Chairman of Alliant Tech- systems, a Fortune 500 www0.gsb.columbia.edu/students/ Charlie Dreifus, Chuck Royce, Buzz Zaino, Whitney George organizations/cima/ company and the current Chairman of Success Royce & Associates, investment advisor to The Royce Charter Network, a net- Funds, is one of the industry’s most experienced and work of charter schools in highly respected small-cap investment manag- New York City. He is an ers. Founded in 1972, Royce & Associates has produced Adjunct Professor in Fi- outstanding returns over its 40 year history by main- nance at Columbia Busi- taining its value-oriented discipline regardless of market ness School and a gradu- movements and trends. G&D sat down for a group in- ate of the Wharton MBA terview with portfolio managers Chuck Royce, Charlie program. Dreifus, Whitney George, and Buzz Zaino. (Continued on page 4) (Continued on page 23) Page 2 Welcome to Graham & Doddsville

WeWelcome are pleased back toto anotherpresent yearyou an adjunct member of the Co- nate to be granted a group in- withof Graham Issue XV & Doddsville. of Graham &We lumbia Business School faculty, terview with Chuck Royce, Doddsville,are delighted Columbia to bring Business to you describes his shift from special Whitney George, Charlie School’sthe 16th editionstudent of-led Columbia invest- situations investing to a for- Dreifus, and Buzz Zaino mentBusiness newsletter, School’s costudent-sponsored-led mula-based approach. He de- from Royce & Associates. This byinvestment the Heilbrunn newsletter, Center co for- scribes how the most glaring quartet of legendary small cap Pictured: Bruce Greenwald at Grahamsponsored & Doddby the InvestingHeilbrunn and inefficiencies in the market investors speaks candidly about the Columbia Student Invest- theCenter Columbia for Graham Student & DoddInvest- today are caused by a wide- the similarities and differences of ment Management Conference mentInvesting Management and the Columbia Association. spread focus on very short- their respective investment in February 2012. Student Investment Manage- term performance which isn’t styles – from the importance of The Heilbrunn Center sponsors TOOment Association.ADD likely to abate any time soon. meeting with management to the Applied Value Investing pro- Mr. Greenblatt notes that de- the safety of a clean balance gram, a rigorous academic cur- PleaseNow in feel its freeseventh to contact year, Gra- us if spite the market’s run this sheet. They also detail how riculum for particularly commit- youham have& Doddsville comments is stillor ideas going year, he still believes it is cheap they believe small-cap investing ted students that is taught by aboutstrong. the We newsletter. would like Weto offer based upon the measures that has changed over time, and how some of the industry’s best prac- hopea special you thank enjoy you reading to Anna Graham he follows. it has impacted where they find titioners. &Baghdasaryan Doddsville as and much Joe as Jaspan, we ideas. enjoylast year’s putting editors, it together! for showing Jim Tisch and Joe us the ropes and ensuring that Rosenberg from Loews Cor- This issue also contains pictures -the Editors, product Graham presented & Doddsville to you poration detail some of the from the 2012 “From Graham last year, in three spectacular history behind a few of their to Buffett and Beyond” Dinner, issues, was of the highest qual- best investments. Mr. Tisch which takes place each May in ity. We would also like to expands on the importance Omaha, Nebraska. We thank recognize Graham & permanent capital has had on our featured investors for shar- Doddsville’s founders, Joseph his investment style and the ing their time and insights with Esposito, Abigail Corcoran, and inherent dangers in acquiring our readers. Please feel free to David Kessler. What you are companies. Mr. Rosenberg, contact us if you have comments reading today is a product of who recently celebrated his or ideas about the newsletter as their initiative and inspiration. 50th year on Wall Street, re- we continue to refine this publi- counts how he got started in cation for future editions. We Now on to our distinguished the industry. He also shares hope you enjoy reading this Pictured: Heilbrunn Center and diverse lineup of successful with us his introduction to issue of Graham & Doddsville as Director Louisa Serene Schnei- value investors as well as some Larry Tisch many years ago and much as we have enjoyed put- der at the CSIMA conference in of the interesting topics you what brought him to Loews, ting it together. February 2012. will see them address in the his home since 1973. Louisa skillfully leads the Heil- following pages. Joel Green- - G&Dsville Editors brunn Center, cultivating strong blatt, now in his 17th year as We were also extremely fortu- relationships with some of the world’s most experienced value investors and creating numerous learning opportunities for stu- dents interested in value invest- ing. The classes sponsored by the Heilbrunn Center are among the most heavily demanded and highly rated classes at Columbia Business School.

Alex Porter and Jon Friedland of Porter Panelist of Judges at the Pershing Square Orlin with the first and second place Value Investing and Philanthropy finishers at the Moon Lee Prize Challenge which was held in April 2012 Competition which was held in January at the Center for Jewish History 2012 at Columbia Business School Page 3 2012 “From Graham to Buffett and Beyond” Dinner, Omaha

Panel: Prof. Greenwald, Mario Gabelli, David Winters, Tom Russo Greenwald making a point

Russo explaining Nestle Winters answering a question Russo posing with audience

Gabelli with Columbia students and Louisa Schneider Gabelli in a light moment Page 4

Joel Greenblatt

(Continued from page 1) year as undergraduates. G&D: Professor Green- “… when I was a When we first joined that blatt, what was your intro- program in our senior un- duction to investing and junior, I read an dergraduate year, I had told who were some investors him about some of the read- who directly or indirectly article in Forbes ing I had done regarding influenced you early in your about Ben Graham. Graham’s belief that formu- career? las could be used to deter- The article outlined mine profitable investments. JG: I went to Wharton, We decided to do a mas- and, as they still do today, how he had this ter’s thesis with another they taught the efficient good friend of mine analyz- market theory. This didn’t formula to beat the ing Graham’s approach. At resonate with me all that the time, we didn’t have Joel Greenblatt well. Then, I think when I market, provided an access to a database of was a junior, I read an arti- explanation of his stock market information. cle in Forbes about Ben Standard and Poor’s used to Graham. The article out- thought process, and put out a Stock Guide with lined how he had this for- some balance sheet and mula to beat the market, described “Mr. income statement informa- provided an explanation of tion on about 5,000 compa- his thought process, and Market” a little bit. I nies monthly. The school described “Mr. Market” a library had about 10 years’ little bit. I read that article read that article and worth of these guides. and a light bulb went off – I a light bulb went off – thought: “boy, this finally Not having access to a data- makes some sense to me.” I thought: ‘boy, this base, we actually went to the library. We wanted to I started reading everything finally makes some go back and test Graham’s I could by Benjamin Gra- formulas, so to speak. So ham. I also read a book sense to me.’ ” we went to the library and called Psychology and the manually went through the Stock Market by David Dre- G&D: You spent some S&P stock guides. We man. He was one of the time with Richard Pzena, started with the A’s and B’s, first people to focus on be- who happened to be the which covered about 750 havioral finance and was first interviewee for Graham companies, and analyzed really ahead of his time. I & Doddsville, while at Whar- eight or nine years’ worth started reading about Buf- ton. Do you have any sto- of financial data. It was very fett and his letters. All that ries or anecdotes that you time intensive. Rich was stuff resonated very well could share from your time also very good with com- with me. I would say that together at Wharton? puters. We had a DEC10 I’m self-taught in that sense. computer that was about six I learned the basics, I under- JG: Sure. We were in the times the size of this room. stood how to tear apart same program and were Rich knew how to take the balance sheets, income also the same year at Whar- data that we had all com- statements, and cash flow ton. We were in an under- piled and, with the little statements from school and grad/grad program where punch cards, get the data from growing up in a busi- you earned your MBA and into the computer. So we ness family, but my under- undergraduate degrees in were able to test some sim- standing of the stock market five years. We were in that ple Graham formulas. That really came from my own same cohort. I became work ended up actually get- independent reading. friendly with Rich in our last (Continued on page 5)

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(Continued from page 4) the book in ’95 or ‘96. I is that they make a lot of ting published in the Journal also started teaching at Co- money, and then they get a of Portfolio Management. lumbia in ’96. I hadn’t little too big to invest in taught MBAs yet. So when I some of the smaller situa- G&D: How long did you was writing the book, I did- tions that are out there. In spend on that? n’t realize that I was really the book I wrote that some writing it at an MBA level. I of these opportunities are JG: That was many hours; I had assumed that because I less liquid or smaller, so a really couldn’t tell you. I had been doing it so long, lot of people aren’t looking guess my time was cheaper individuals knew a lot more at them as a result. I think back then! than they actually do. in the book I said something “What happens to

to the effect of: “don’t people who become G&D: What inspired you So I ended up writing a worry about getting too big to write You Can Be a Stock book that most hedge fund for these strategies until you very good at special Market Genius? managers have read, but get to about $250 million. one which was perhaps at a When you get there, give situation investing is JG: The motivation for me little higher level than I had me a ring.” I would bump was the recognition that I intended. I wrote it accessi- that number up to over $1 that they make a had really learned about the bly, so I had fun writing it, billion today. You can’t run business from reading. I but I think it was at more of $10 billion and get ridicu- lot of money, and thought it was pretty cool an MBA level, not just a lous rates of return, most then they get a that these investors had regular investor level. I likely. A few people can, been willing to share with think that was a mistake but they have a large staff, little too big to readers what they knew and that I made because I was or they have concentrated had learned during their looking to educate a much positions. invest in some of careers. I’m not a very more needy bunch than good listener, so I like to MBAs and hedge fund man- There are still many strate- the smaller learn by reading. When I agers. That was really one gies in that book that could was in school, there were of the things that drove me make you a lot of money. I situations that are two things that seemed like to continue writing until I think that these opportuni- out there...people interesting pursuits if I ever could accomplish my origi- ties are out there. Since I became successful: one was nal goal. I am very proud of wrote Stock Market Genius, aren’t looking at to write and one was to that book, but I just think we had an internet bubble teach. it’s written at such a level where people were pricing them as a result.” that you have to be fairly things stupidly, and then we We ran outside capital at sophisticated in financial had 2008, where stocks Gotham Capital for ten analysis, at least, to fully halved and a few years later years and then returned the profit from its advice. they doubled. So to say outside capital in ‘94, though assets were accurately we continued to run our G&D: Given the prolifera- priced all along, or that own money. We had been tion of hedge funds since there were no opportuni- quite successful during that the Stock Market Genius’s ties, or that the market time and so I thought that if release, are the opportuni- doesn’t get very emotional I put together a group of ties in some of those same and throw you opportuni- war stories as examples and types of special situations ties, is kind of silly in my described the principles that similarly available today? mind. That doesn’t make it I had used to make money, easy to tune out all of the it would be very instructive JG: I think they are. I think noise that’s out there, but for people. I wanted to there are always opportuni- there are still ample oppor- write it in a friendly, accessi- ties. What happens to peo- tunities that one can find. ble way so that individual ple who become very good investors could profit from at special situation investing (Continued on page 6) it as I had. I started writing Page 6

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(Continued from page 5) professionals systematically agency problem where the My definition of value in- avoid companies that are people who are allocating vesting is figuring out what perhaps not going to do as the capital are not making something is worth and pay- well in the short term. In the investment decisions. I ing a lot less for it. I make a some ways, there’s actually was talking to a gentleman guarantee the first day of more opportunity in those at one of the top endow- class every year that if areas now than ever before ments, and he said, “I would you’re good at valuing com- due to the greater institu- like to tell you that we have panies, the market will agree tionalization of the market. a long-term horizon, be- with you. I just don’t guar- cause we should. But I’ve antee when. It could be a “I make a True, there are some areas been here 11 years, we’ve couple weeks or it could be that are more followed. For had three chief investment guarantee the first two or three years. And instance, I wrote about spin- officers, and none of them the corollary is simply that, offs in Stock Market Genius. left after a period of positive day of class every in the vast majority of cases, Of course a lot of people performance.” Jeremy two or three years is follow spin-offs, yet if you Grantham spoke at a Gra- year that if you’re enough time for the market look at the studies, they still ham and Dodd Breakfast to recognize the value that seem to outperform the several years ago and one of good at valuing you see, if you’ve done good market after they’re spun his lines that I thought was valuation work. When you companies, the off. Certainly a lot of the funny, and probably very, put together a group of smaller situations are the very accurate, was: “for the market will agree companies, that process can situations where there is a best institutional investors, often happen a lot faster, on huge dichotomy in size or their time horizon is with you. I just average. One argument I popularity between the par- 3.000000 years.” That is make in another one of my ent company and the spin- the horizon for the best. don’t guarantee books (which few have off. These opportunities are For many institutional inves- read), called The Big Secret still there, partly because tors, it’s even shorter. So I when. It could be a for the Small Investor, is that some are too small for most think that’s about all you the world has become couple weeks or it firms to take advantage of. can hope for as an invest- much more institutionalized Other opportunities are the ment manager. could be two or over the years, even more result of volatile emotions in than it was when I wrote the market. Given the insti- I think the reason for this is three years. You Can Be a Stock Market tutionalization of the inves- that your investors – your Genius, and that is a real tor base, the fact that mar- clients – generally just don’t advantage for longer-term kets are emotional, and the know what the investment investors. For institutional fact that there are still lots manager’s logic was for each investors, you can track all of nooks and crannies out investment. What they can money flows by one simple there that even successful view is performance. It’s metric – which managers hedge funds can’t pursue, pretty clear that for mutual did well last year and which I’m not concerned about funds, for instance, the per- did poorly. Managers who the size of the existing op- formance of a given fund did well last year attract all portunity set. over the last 1, 3, 5, and 10 the money and managers years has very little correla- who did poorly lose the G&D: Do you see anything tion with the future per- money. that could lengthen institu- formance for the next 1, 3, tional investors’ time hori- 5, and 10 years. So institu- If you’re an active manager, zons, thereby reducing the tional investors are left with you may have a long-term “time arbitrage” from which predicting who’s going to do horizon but your clients many value investors profit? well in the future, which probably don’t. So, most they attempt to do by look- managers feel that they JG: No, not really. The ing at the manager’s proc- need to make money over reason is that there is an (Continued on page 7) the short term. Therefore, IssueVolume XVI I, Issue 2 Page 7

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(Continued from page 6) So we tested the principles based on quantitative meas- ess. For most clients, the behind what we look at ures indicating that they manager’s process is not when we value companies. were both cheap and good, transparent and the ration- The results were very ro- performed better than ale behind investment deci- bust. My write-up of the those in the second decile, sions is not clear. Clients which performed better tend to make decisions over than those in the third, and “...those companies Pictured: Bill Miller of Legg much shorter time horizons so on in order. It was quite than are necessary to judge Mason Capital Management that were in the top powerful and surprising. It at CSIMA Conference in skill and judgment and other just started us on a long February 2012. things of that nature. So I decile, based on path of research which tried think time horizons are get- to systematize the way we’d ting shorter, not longer. quantitative always valued companies. We’re not in danger of peo- measures indicating We were able to achieve ple expanding their time very robust long/short re- horizons when they’re judg- that they were both turns. We were able to add ing managers. I think time as much value on the short arbitrage will be the “last cheap and good, side as we were on the long man standing,” pretty side. So we were able to clearly. performed better create very diversified long/ short portfolios with rela- G&D: Your career has than those in the tively smooth returns. We really been, from an invest- second decile, which didn’t even know we could ment standpoint, composed do that before seeing the of two parts. Earlier in your performed better results of our research. career, you made more concentrated investments in than those in the There’s absolutely nothing special situations. Now, you wrong with what I wrote in invest in a more diversified third, and so on in You Could Be a Stock Market manner in higher quality Genius – it’s what I did for companies. What drove order. It was quite almost 30 years. But about this shift? powerful and three or four years ago, my partner and I decided that JG: I already talked about surprising. It just conducting really in-depth the research we did on Gra- research on a handful of ham’s strategies. Around started us on a long companies is a full-time job 2003, my partner, Rob if you want to do it well. Goldstein, and I decided to path of research Alternatively, more system- do some research on our atically valuing a large num- own strategies, which had which tried to ber of companies over time evolved to resemble the systematize the way is a huge job itself due to way Buffett looks at the risk management and other world. Graham’s invest- we’d always valued responsibilities. Though ment world view was to they’re a little different, “buy it cheap.” Buffett companies.” both strategies are great added a little twist that and they’re both full-time probably made him one of results of our very first test jobs. I had been doing one the richest people in the formed the basis for The thing for a long time and I world. He essentially said, Little Book That Beats the was fascinated by our re- “well if I can buy a good Market. The upshot was search results of the sys- business cheap, that’s even that those companies that tematic valuation approach. better.” were in the top decile, (Continued on page 8)

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(Continued from page 7) pretty good stock pickers JG: When we buy things, When you are very concen- over history, and we have we like companies that in- “Part of the future trated, you have the chance not been able to improve vest their capital well; they to make 20, 30, 40% annual- our results by picking the generate large amounts of is unknowable but ized returns. Perhaps if I’m things that we clearly don’t cash flow relative to the willing to accept somewhat want. There’s a certain price we’re paying. On the there are some lower returns, say mid- medication on the market short side, we would like to teens, and achieve a that’s made by a small phar- be short, in general, high- instances where you smoother return com- maceutical company. This priced, cash-eating compa- pounded at the same time, can take a company was considered a nies. So it is essentially the then that’s pretty attractive very attractive buy accord- opposite of our long ap- calculated risk/ too. One approach is not ing to one of our screens. proach. You do have to better than the other. But I knew why it looked balance your risk, though. reward bet. One There’s an interesting trade- cheap – its key medication off between how much vola- was coming off of patent the In the original edition of The thing I would say is tility you’re willing to accept next year and the stock was Little Book That Beats the and how much money priced accordingly. My incli- Market, I grouped the that a common you’re potentially going to nation could have possibly “magic formula” stocks as I make. If I were starting all characteristic of been to override the formu- called them – or stocks over again, I’d do exactly laic recommendation be- which were systematically many of the stocks what I did before. And now cause I knew exactly what considered good and cheap that we’re well established, I was going on. It wasn’t like – into deciles. Decile one that we buy is that think the main attraction of it was a big secret. I didn’t was the best combination of the systematic approach is override anything, however, good and cheap. Decile two everyone hates that it’s something a bit new and the company subse- was the second best, and and different, although I quently figured out a way to the tenth decile was com- them. We do that a would reiterate that it’s extend the patent a little posed of companies that really the same thing that lot.” longer which then led to a earn lousy returns on tangi- we’ve always done with just doubling of the stock price ble capital, yet nevertheless a slightly different approach. over the next six months. I were expensive. There was think that’s really been our a big performance spread G&D: We’ve heard other experience. Part of the between decile one and investors who use their future is unknowable but decile ten when we did the own formulaic approach to there are some instances study, and it worked in or- investing say that, from time where you can take a calcu- der as I mentioned earlier. to time, they get an itch to lated risk/reward bet. One Decile one beat two, two change their model or to thing I would say is that a beat three, three beat four, otherwise override it. Have common characteristic of all the way down through you ever had this urge and many of the stocks that we decile ten. Pretty much is it difficult to resist? buy is that everyone hates every student I’ve had, and them. We do that a lot. hundreds of e-mails after JG: The only way Rob and I the book was published, know how to value compa- G&D: You mentioned tak- have said, “Joel, I have this nies is through various ing short positions earlier. great idea for you. Why measures of absolute and Can you be successful in don’t you buy decile one relative value. Of course it this area merely by shorting and short decile ten? You’ll won’t work for every com- the companies in the lowest take out the market risk and pany, but on average it deciles of your screens – you’ll make 15% or 16% a works quite well. There are that is, by systematically year.” I did that experiment some companies that we doing the opposite of your in the afterword of the re- buy that might make you long approach? vised addition of The Little scratch your head. On the (Continued on page 9) other hand, we’ve been IssueVolume XVI I, Issue 2 Page 9

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(Continued from page 8) the 87th percentile towards one I choose works out. It Book, and the results cheap, meaning that the doesn’t matter that I missed showed that you couldn’t market as measured by the out on 11 or 12. Not losing figure out a compounded Russell 1000 on a free cash money is a good way to rate of return because you flow basis has only been ensure that your portfolio lost all of your money. cheaper 13% of the time has a good risk/reward pro- Somewhere around the first over the last 23 years. file. One of the things I said quarter of 2000, the shorts When it has been this in You Can Be a Stock Market went up a lot and the longs cheap, the forward return Genius is if you don’t lose went down such that the for the Russell has been money, most of the alterna- combined loss was so se- about 17% and then about tives are good. Even if you vere you went broke. the mid-30’s two years out. don’t know what the upside That’s not to say that the is – if you just know there’s There were a couple things market’s prospects are bet- upside – you can create a bit unfair about that be- ter or worse going forward scenarios where you have cause we kept the portfolios – they’re probably a little an excellent risk/reward. for a year, and we didn’t re- below average for the for- Positions with limited down- adjust as we lost money. ward period and therefore side are the types of posi- What I was trying to show you could say that perhaps tions that I have loaded up at a high level was that if I you won’t do quite as well on in the past. Not the wrote a book that had a as would be implied by his- positions with the biggest formula and it worked every torical returns. But, even in payoff. I could buy a lot day and every month and the 50th percentile, you knowing that I wouldn’t lose every year, everyone would would expect to make 8% much and that there were use it and it would stop or 9% based on the history good possibilities that it was working. So, the magic for- of the last twenty-something worth a lot more over time. mula, like all value investing, years, so I would just say At the very least, I knew can give you noisy returns that if I had a choice be- that my downside was well- over the short term, but tween being more long or protected and so I could that’s also why it continues more short, I’d be more create an asymmetric risk/ to work. long. It’s a very attractive reward by saying if I don’t time to invest in the market, lose much, there are not G&D: In class, you talked despite the run-ups that many alternatives other than about how you try to assess we’ve seen in the last year. to make money. how cheap or expensive the market is at any point in G&D: Harkening back to Something else that I’ve said time. Can you talk about the first part of your invest- in my class is that if you are your views on the market ing career, you talked about trying to analyze an invest- today and how you look at passing on ideas. How ment and there’s a lot of it? many ideas did you pass on uncertainty regarding a for every idea that you company – whether it’s new JG: Sure. Well we’ve ended up acting upon? technology or new competi- looked bottoms-up at each tors, or something else – or stock in the Russell 1000 JG: It’s a tough one. I the industry in general is Index, the thousand largest would say it obviously de- uncertain such that it’s very stocks in the U.S. by market pends on how selective you hard to predict what’s going cap. We’ve looked at those are. If I looked at 40 or 50 to happen in the future, just over history, meaning the ideas, and, while perhaps 12 skip that one and find one market-cap-weighted free or 13 of them would have you can analyze. If you in- cash flow yield of the Rus- worked out, if I end up only vest in six or eight things sell 1000 on each day over buying one, that’s okay. that you’ve analyzed closely, the last twenty years and That’s fine as long as the (Continued on page 10) right now we’re in about Page 10

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(Continued from page 9) value certain companies way to go. You’re not “If you’re a long- and if you’re pretty good at well. And that’s what I throwing all of your money valuation and you have a would think about doing. into one business, you’re term holder and long time horizon to see picking six or eight busi- your target valuation even- G&D: With respect to nesses that you researched you own a chain of tually play out, then you’re your risk management strat- carefully; have strong man- going to do incredibly well egy, appropriately sizing agement and look like they stores in the even if you’re right on only positions has traditionally have good franchises. That four or five of the ideas. Midwest and been one area of focus for sounds fairly conservative to This is especially true if you you, correct? me. That’s how I look at something bad include a margin of safety so owning a portfolio of stocks. that you’re not losing too JG: Yes, people would say Once again, they’re not happens to Greece, much on the ones where ‘how can you own only six pieces of paper that bounce you’re wrong. or eight companies,’ be- around. there may be some cause during a lot of my What I said in the beginning career, six or eight positions If you’re a long-term holder small impact, but is true: if you’re good at represented 80+% of my and you own a chain of valuing businesses, the mar- you’re not going to portfolio. People thought stores in the Midwest and ket will eventually agree that was crazy because of something bad happens to sell your business with you. But that’s eventu- the volatility and the Sharpe Greece, there may be some ally. It could be in a couple ratio or whatever you might small impact, but you’re not for half of what you weeks or a couple years, want to look at, but the going to sell your business and that’s a big difference. point is that I look at it dif- for half of what you think think it’s worth all The traditional definition of ferently. I look at stocks it’s worth all of a sudden. If arbitrage always went some- not as pieces of paper that I’m a shareowner in busi- of a sudden. If I’m thing like this: buy gold in bounce around. I look at nesses, I need to have a long New York and sell it simul- a shareowner in them as ownership stakes in -term perspective that taneously in London, and businesses. things will work out roughly businesses, I need to you’ll make a dollar. But if I as I expect, otherwise I told you, “well, I guarantee One of the examples that shouldn’t own them. have a long-term you’ll make a dollar, but you Buffett gives is as follows: could lose half of your suppose you sold your busi- G&D: Is there something perspective that money first, and it could ness and you had $1 million. in your background that take three years for you to You walk into a town and made you predisposed to things will work out make that dollar, and it’s you want to invest the having a long-term mindset going to bounce around roughly as I expect, money conservatively. You and a commitment to ensur- randomly in the interim,” might look around and see ing a margin of safety for otherwise I that’s not quite arbitrage in that there are 50 businesses each investment, or is this the traditional sense. It’s in the town but you want to something which you devel- shouldn’t own certainly not riskless arbi- try to pick ones that you oped over time? trage, but it is a type of arbi- think have a nice future that them.” trage – it’s a type of time you could buy at a reason- JG: This is a mindset I de- arbitrage. That’s very hard able price. If you pick six or veloped as early as an un- for people to do. Throw in eight of them, most people dergraduate student. As I the fact that you don’t al- would think that owning a mentioned earlier, I became ways get the valuation right. stake in the barbershop, the interested in this business Yes, if you did good valua- hotel, and whatever other by reading Ben Graham. tion work, the market will businesses you thought had That’s what resonated with agree with you. I would nice repeat customers that me, so what can I say? Mar- submit that most people would continue to grow gin of safety and how to cannot value most compa- over time as the town grew, think about Mr. Market are nies well. If you’re very was a pretty conservative (Continued on page 11) selective, however, you can IssueVolume XVI I, Issue 2 Page 11

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(Continued from page 10) those who fail is perspective and that the thought proc- things that I thought about – the viewpoint of how they ess was clear. Those who “The difference very early in my investing look at the market – which think clearly, stand out. career. Graham’s tenets really just comes back to Some people are good at it; between those who seemed logical and simple – Ben Graham and keeping some people are great at it. are successful and simple enough even for me that long-term horizon and I’ve graded a zillion papers to understand actually! So I understanding how to filter and I’ve talked to many peo- those who fail is started reading and thinking out the noise. People are ple, and I’ve listened to and experiencing. Some bombarded left, right, and many ideas over time. perspective – the things you have to learn by center with information, There is a certain thought doing them wrong, so I en- even more so now; you can process and clarity of viewpoint of how courage people to risk being bury yourself as much as thought that those who are wrong. You can’t be a good you want. Therefore, you great at it have. Or maybe they look at the investor without investing. need a simple filter through they’re going through the market – which As you gain experience you which to look at the world. steps that I would hopefully start to understand risk/ Those who have a baseline go through if I were looking really just comes reward; you start under- from which they can really at the same idea. It doesn’t standing what looks like a contextualize everything mean that what they’re say- back to Ben good opportunity and what they look at are the people ing will always work out, but doesn’t; you recognize who are successful. A lot of it does indicate that they Graham and when you have more things are driven by emo- could have a pretty good knowledge than the market tion. When things get batting average over time. keeping that long- about a given issue and bouncy, as long as I con- It doesn’t mean that there term horizon and when you don’t. So it’s a tinue to believe that my aren’t other ways to make matter of comparing situa- work was good, and my money – those just aren’t understanding how tions to your history of op- thought process was right, I my areas of expertise. In portunities. I’ve also said in have to ride it out. As easy my circle of competence, I to filter out the class that one of the impor- as it sounds, it’s really hard can perhaps recognize other tant things to look at is not to do. people that think similarly, noise.” just what’s available now but who I think do the work, what you think might be G&D: Over the years and that’s really who I’m available in the future, and you’ve seeded some differ- drawn to over time. that perspective comes with ent investors – Robert time. Goldstein, Brian Gaines and G&D: A couple of school some others along the way. related things… Do you Here’s the other thing – Was there some commonal- find it more difficult teaching unfortunately you don’t ity that you saw amongst what you know about in- learn from your successes these investors that gave vesting to MBA students all that much; you learn you the confidence to pro- than actually investing? Are from the things you vide them with capital rela- there parts that are more screwed up. You have to tively early in their careers? difficult or frustrating for screw up a little bit to learn you? what not to do again and to JG: I really just look at remember it as well. But thought process. I found JG: This is my 17th year you have to combine this them before they had a teaching, so I think that the with the right thought proc- track record, right? So you frustrating part was present ess, which I think is the key. want to find people who more so when I first got There are a lot of smart think correctly. When I started. I wasn’t particularly people out there. A lot of listen to an investment pitch good at expressing myself people have financial skills or an investment thesis, I’m and what I was thinking and most of them fail. The looking to see if all of the early on. The great part difference between those right questions were asked (Continued on page 12) who are successful and Page 12

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(Continued from page 11) hadn’t gone up in 13 years, successful with them, that about teaching is that you so it wasn’t a very popular they use that success for really have to boil down to thing to do. There have good. In other words, I ask the basic principles of why been waves. During the my students to figure out a you did certain things and internet bubble, teaching way to give back in some why you didn’t, what has value investing was, let’s just way that’s meaningful to been successful and what say, not appreciated as them. has not. You boil that down much. I would say that the into some principles that growth of the hedge fund G&D: On that note, we Pictured: Ellen Ellison people can learn to use so business and the money know that the Success (Executive Director of that they can do well them- management business over Academy Charter Schools Investments at University selves. Learning to do that the years has caused more organization is something of Miami) at CSIMA Con- has actually been very help- people to be interested in about which you’re particu- ference in February 2012. ful to me – it was helpful in larly passionate. Could you writing, it’s been helpful for “I just ask that if tell us a bit about this or- my own investing. I try to ganization? sit down and figure out they learn the skills what’s the best way to ex- JG: Sure. It really goes plain something that I’m in the class and are back to teaching a man to looking at in a very simple, fish. You want to give back straightforward way. If you successful with in a way that’s leveraged and can’t explain it very simply that allows you to help and straightforwardly, then them, that they use someone have a nice life you probably don’t under- that success for that might not have that stand it all that well your- opportunity otherwise. You self. I’m not a rocket scien- good. In other could do this in such a way tist and none of this is whereby they’re helping rocket science. It is just words, I ask my themselves and doing it with about understanding some the tools that you give very simple, basic principles students to figure them. that for some reason many people can’t stick to. But out a way to give Education to me is one of there are others who can. back in some way the most leverageable ways Columbia MBAs have tools to give back. Typical public to be successful investors that’s meaningful to school systems are soviet- but many won’t be. Some, style systems, where there however, if they have the them.” are no rewards or punish- right mindset and the right ments for good or bad per- work ethic, will be success- this area. formance. The usual excuse ful. I think it’s become a more for the lack of success of popular field and that’s why, kids in need is that there is G&D: As you said, this is on the first day of each se- not enough money or that th your 17 year teaching. mester, I tell my students the parents don’t care or Have you noticed any that I don’t think that that the kids are stupid. change in the students over there’s a great social value Those are usually the rea- the years? from this career. On top of sons given. Rather than that, if I’m teaching it, that’s argue against those points – JG: I think the “money even one more step re- because I’m not very politi- management business” has moved from doing some- cal – what I hoped to do become more popular over thing socially valuable. So, I through the Success Acad- the years than it was when I just ask that if they learn the emy was to be involved in a got started. I took my first skills in the class and are (Continued on page 13) job in 1981 and the market IssueVolume XVI I, Issue 2 Page 13

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(Continued from page 12) to do it with less money or putting facts in black and project where we could use the same money as the state white, we’re able to make a the same or fewer re- and then to replicate it over nice statement. sources compared to the and over, which is the really existing schools and be suc- hard thing to do while keep- G&D: Any other parting cessful with the same kids. ing the culture and achieve- words of wisdom for our We thought about it like a ment levels high. Since we readers? business model – you set up have the same kids as the a prototype and then you regular public schools, all of JG: If you want to get good replicate that and refine that our kids are selected by at investing, read a lot and Pictured: Julian Robertson of Tiger Management and process over and over lottery. If the Success practice a lot. Even if it’s again. My hope was that if Anna Baghdasaryan ‘12 schools can show that it can not a lot of money, it’s real (Co-Editor of G&D). we could replicate such a be done, hopefully they will money. Don’t fool yourself thing 30 or 40 times with help move the system. into thinking that this is all the same kids, with less you need to do to money, then lead a successful life. those old This is fun for me; excuses it’s fascinating. would stop. There’s nothing Well it’s the wrong with this field same kids, we but, as I said before, have less I don’t think there’s money, and much social value in parents do it. You can proba- care and bly say that about a these kids are lot of occupations pretty darn that aren’t saving smart. Even a lives every day, so kid who may you don’t have to have been feel bad about it. considered Pictured: Value Investing Program member Patrick Staub ‘13 But I would just average in discussing current events with Success Academy students. encourage people another pursuing an investing career school can achieve at an The great thing about this who are ultimately success- extremely high level. business is that if we are ful in it, to figure out a way successful, other communi- to give back. Many people We now have 14 schools ties can look at what’s reading this are Columbia and we’re hoping to build working here and can MBAs and pretty much all of 40. We’ll open another six “steal” the intellectual prop- them are, or will be, suc- schools next year while erty of the organization. cessful in some field or an- trying to replicate the suc- The goal is to first demon- other. If you can figure out cess we’ve had to date. So strate that we’ve been suc- a nice way to give back far these kids in high-need cessful with this system and that’s meaningful for you, communities are beating out then share it with as many that’s even more fun than Scarsdale and all the top people as possible who being successful in whatever school districts in New want to learn how to do it you choose to do. Keep York. The problem has too. If it works, hopefully it that in mind. been replication. You can becomes built into the sys- always just throw money at tem. Right now every G&D: It was a pleasure an individual school, turn it school we open is chal- speaking with you, Profes- into a private school, and lenged in one way or an- sor Greenblatt. maybe it’ll be very good. other. Hopefully just by The challenge, however, is Page 14

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(Continued from page 1) family has a very significant fleet had built up signifi- G&D: You were recently stake in Loews, and that we cantly because the amount labeled the “dealmaker who have a history of over 52 of oil coming out of the won’t make a deal” in a years with the company. In Persian Gulf was increasing widely read financial publica- essence it is a follow the dramatically. Then in the tion due to the fact that fortunes type of thing. early 1980s there was the Loews hasn’t done a large Iranian oil embargo and as a deal in over five years de- G&D: We’ve heard about result oil prices shot up and spite its solid cushion of Joe Rosenberg and Jim Tisch the famous ‘Jim Tisch $5 demand for oil went down. investable cash. What’s million test’ that you formu- Since the Persian Gulf is the your reaction to this? “Some would say lated aboard an oil tanker in marginal producer of oil, the 1980s that preceded and since the Iranians had that this pa- Jim Tisch (JT): Some your purchase of six oil shut down, there was no would say that this patience tankers. The test is elegant demand for ships. So all of tience is part of is part of our strategy, but I in its simplicity. Do you a sudden there were three would say it’s more than look for a way like this to times as many ships as there our strategy, but that. I’d say it’s part of our synthesize the thesis behind was demand for them. So DNA. I like to say, “If each investment you make? the oil companies took their I would say it’s there’s nothing to do, do four and five year old ships nothing.” We don’t have to more than that. JT: So, honest to God, the and they laid them up. do deals. We’ve got busi- ‘$5 million test’ originated These ships were such a I’d say it’s part nesses that generate income just the way I said it – when drag on the market that and do very well on their I was standing on the deck they were being scrapped of our DNA. I own. We are constantly of a ship – 30 years so the scrap value of the looking to improve those younger. It was a way of ship was $6 million but it like to say, ‘If businesses. We are also saying “Wow! I can’t believe cost $1 million to get from always on the lookout for how cheap this is!” Then I Europe to the scrap yard in there’s nothing other companies to add to coined this pithy little Taiwan. So we found them our portfolio of businesses to do, do noth- phrase – the ‘$5 million for $5 million. We bought but we don’t feel the need test’. In fact the ships did these ships like you buy ing.’ ” to do it. And we may hear cost $5 million. We bought hamburger meat, but in- in the press that we haven’t two of them. It is just a stead of dollars per pound done something for a while pithy way of saying that of hamburger it was dollars but we tend not to hear it sometimes something is so per ton of steel. The mar- from our shareholders. cheap that it is almost be- ket for the ships had col- You know if you say some- yond belief. It’s like getting lapsed. We thought it could thing long enough people this building we are sitting in be an interesting investment will ultimately realize that now for $20 million. because there wasn’t much you mean it – if you say it downside, as the ships were consistently. One of the G&D: Have you felt that trading for scrap value, and things that we say consis- way in general with every we figured maybe something tently is that we don’t man- deal that you’ve done? good could happen. Once age earnings and we’re not we got into it and found the in a rush to add a new busi- JT: No, not a lot of them. right person, sort of seren- ness. We’ve said this for so But I definitely felt that way dipitously, we really con- long and so consistently that with the ships. structed for ourselves a people who select to buy very credible case for how our stock understand that G&D: What were others the ships can go from scrap it’s part and parcel with missing? value to being worth a lot of ownership of the stock. money – which in fact they These people understand JT: Oh! It’s very simple. In did. The ships cost $50 that I have a very significant the mid-1970s, the VLCC (Continued on page 15) stake in Loews, that the IssueVolume XVI I, Issue 2 Page 15

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(Continued from page 14) market just went up. So we Devanney, and he helped us million to build. So we have bragging rights in ships get into offshore drilling. knew there was a long way but that’s about it, because to go between $5 million we couldn’t put enough Joe Rosenberg (JR): To- and $50 million before money to work doing more day a deep water rig will run somebody else would ever deals like the ones we did. you in the ballpark $635 build another ship. The The best part about the million. other thing we knew is that whole thing was that we ships were being scrapped, were introduced to Jack G&D: Loews owns compa- so they were being taken Devanney. He was instru- nies in their entirety and out of the market forever, mental in helping us get into holds both majority and never to come back again – the offshore drilling business minority stakes in public supply was coming down. where we did go in whole companies. Given the dif- The other thing we saw was hog and were able to make ferent ways you are willing that at some point the de- some real money. Devan- to invest, have you had in- mand for oil from the Per- ney, who was a naval engi- stances where being a ma- sian Gulf was going to in- neering professor at MIT, jority owner of a company crease again. It was just a had worked on nuclear sub- gave you insight that helped classic microeconomic case. marines and was the most you invest capital in public We saw the supply coming academically honest busi- companies, or where devel- down and the potential for ness person. Jack watched opments in the public mar- demand going up. We also over our ships for us and ket alerted you to private understood, because it then one day in 1988 he assets you ultimately pur- takes three years to make a realized that the offshore chased? new ship, that the supply drilling market at that point curve would go vertical at in time was like the tanker JT: You know, I would say some point. When a supply market seven years prior. I to the extent that we own curve goes vertical and you asked Devanney to arrange an insurance company, have a small shift in the de- for us to look at some as- sometimes we’ll invest in mand curve, you get ex- sets to do our diligence. insurance stocks but not traordinary increases in Three weeks later we were that often. Likewise, we rates, which is why there is on the deck of a semisub- don’t invest in offshore drill- such volatility in shipping mersible rig and the ‘$5 ing stocks because we figure markets. The people that million test’ came into play we have enough with Dia- were in the business that again, though the $5 million mond Offshore. So we owned the ships thought price tag was purely coinci- really keep the different the ships were a plague on dental. If the rigs had been buckets separate. the market. They were $7 million we still would focused on the shipping have bought them. Except G&D: Do you look at markets and their own need at this time we remembered things from a valuation basis for the ships. They weren’t to go big. We bought a differently for these differ- thinking like an investor or small company in 1989, ent types of ownership speculator. again serendipitously, called stakes, given that when you Diamond M Drilling. Dia- own a company outright or We bought two ships from mond owned seven rigs and have a majority stake you Shell, three ships from we already owned three have more impact on capital Exxon, and then a few oth- prior to that. In 1992 we allocation decisions? ers. The problem we had went big when we bought a was that the day we decided company called ODECO, JT: We only have control to go into this whole hog it which owned 30 rigs or so. over the cash flows to the was like somebody had a tap So, doing the deal for the extent that either, one, the or bug in the room and was ships introduced us to Jack (Continued on page 16) eavesdropping on us. The Page 16

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(Continued from page 15) good about those busi- moved from someone an- cash is reinvested in that nesses and bid them up in swering questions at the “...Even though we business or two, the com- the marketplace, it will inure information desk to being a pany pays a dividend and we to the benefit of Loews sellside junior analyst. I are the control get the cash up to Loews. shareholders through a started following the airline We can only use it for shareholders, we higher valuation based on industry. There was no Loews once it’s paid out to the sum of the parts valua- senior transportation ana- need to treat the us and to other sharehold- tion for Loews. lyst at Bache, and no one ers in the form of a divi- wanted to cover the indus- minority like they dend. What we do with G&D: Joe, what was your try because they thought it each of these businesses is introduction to investing? was a dead end following are the majority work with the management Do you remember any good airlines. From the beginning and come up with an inter- investment ideas from your of the airlines industry in because the mediate- and long-term early days? the mid-1920s until today, strategic plan for them that valuation of Loews they’ve never made any focuses on the finances and JR: Actually I didn't start money if you took the ag- is driven based also focuses on the capital college until I was 24. Two gregate of the business. But spending. Then we figure weeks after high school, I in 1962, which is when I was upon the value of out what earnings or what went to Israel for three analyzing the sector, I got cash they have in the com- years. I came back to the the sense that there was our subsidiaries. To pany that could be available States, joined the army, and something dramatic going to pay dividends – that’s within a year I was stationed on in the industry in the the extent that the how the dividend policy is in Germany. After return- form of conversions from determined. We like get- minority ing from Germany, I went piston air planes to jet air ting cash back but we also to college at night, I really planes. Most old-line trans- shareholders of our want to make sure that the didn’t know anything about portation analysts covering companies only pay divi- Wall Street. One day a the industry thought only subsidiaries feel dends after we are abso- friend of mine and I were about how expensive it was lutely, positively sure that sitting on the floor of the going to be to make this good about those they aren’t going to need apartment we had, as we transition. What I saw was the cash at the parent. We didn’t have any furniture, that the planes would fly businesses and bid currently have three major- and we were talking about two to three times the ity-owned companies (CNA them up in the an investment idea. He rec- speed with the same num- Financial, Diamond Offshore ommended that since I ber of crew members. It marketplace, it will Drilling, and Boardwalk loved talking about invest- was a reduction in unit la- Pipeline Partners) that are ment ideas so much, I bor cost. This was one of a inure to the benefit public, and we also used to should pursue a career in few times in history when have a tobacco company the field. I tried getting a you could make money with of Loews (Lorillard) that was public job on Wall Street but no airlines and I was in the through Carolina Group. one would hire me, since I right place at the right time. shareholders…” So we are accustomed to was still in college. I didn't I didn't fully understand being a control shareholder. even have a bachelor’s de- what I was doing, which was The thing that we found out gree and at this point I was fortunate because I would over the years is that even 26. have been more fearful. I though we are the control started recommending air- shareholders, we need to Shortly after finishing col- lines and they had a mete- treat the minority like they lege I started working for oric 10-fold rise. are the majority because the Bache & Co. (now part of valuation of Loews is driven Prudential). I really took to After Bache I moved to Em- based upon the value of our it like a duck to water. I pire Trust Company on the subsidiaries. To the extent was very serious about it. buy side and, in the eve- that the minority sharehold- In pretty short order, I (Continued on page 17) ers of our subsidiaries feel IssueVolume XVI I, Issue 2 Page 17

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(Continued from page 16) summer off and joined two fellows who look over nings, took classes at NYU Loews in the fall of 1973. our subsidiaries. One han- for my MBA. I soon be- Three or four years into my dles Boardwalk and High- came head of research at career, Larry walked into Mount and the other han- Empire Trust. Then, in my my office and mumbled that dles Loews Hotels, CNA, final year of business school his son Jimmy was coming and Diamond Offshore. I wrote my thesis on the to Loews, and he was going Then we have a develop- airline industry. What was to be working for me. I ment officer who is charged happening then in the airline asked Larry what he wanted with looking for other busi- industry is the same thing me to do with Jimmy and he nesses for Loews to pursue. that happened to the tanker said, “Why don't you take Our subsidiaries tend to industry some 20 years half an hour and tell him have their own develop- later. Airlines became so everything you ment people who look for profitable that they soon know.” (Laughs) I still re- businesses that they buy. became unprofitable be- member his first assignment. Our development officer cause they began over- I asked him for a spread- has five analysts working for ordering equipment. From sheet on the metals indus- him. This place is an open interviewing airline manage- try. We didn’t use com- door place. All senior execs ment teams, I realized that puters then; we had slide are here together and we each company was increas- rules. Jimmy was a very see each other and talk all ing capacity and at the same good analyst. He was very the time. I have meetings time underestimating the inquisitive and came up with once a week, both infor- capacity that other airlines an idea a minute. mally and formally, with our were adding. I started to top guys to talk about our aggregate what they were all G&D: Jim, can you talk businesses. We have an telling me and realized that about running Loews at the acquisitions meeting once it was nearing the end of the holding company level? every other week and we party. What is your idea genera- have a strategy committee tion process and how many meeting every 3-4 weeks to G&D: What brought you people are scouring for discuss the major issues at to Loews? ideas? Loews and our subsidiaries. So there’s a lot of talk. Peo- JR: In 1971 I was working JT: Let me tell you about ple know to chime in and for Schroders, a British bank the structure here. We state their opinion. It’s a where I ran an internal have an investment depart- very collegial place. I like to hedge fund. At this time in ment in which the vast ma- think it’s also a place with- my career I would some- jority of people deal with out a lot of politics, though I times go to investment fixed income. We manage, may not see that because luncheons. At one of these under a management agree- I’ve been here so long and I luncheons, I met Larry Tisch ment, the roughly $40 bil- appreciate when people who, during our conversa- lion investment assets of suck up! (Laughs) Gener- tion, suggested that I con- CNA Financial. We also ally, when I talk to senior sider joining him at Loews. manage the cash of Loews, executives before they’re I didn’t take him up on the which is about $3.7 billion. hired, I talk to them about offer at the time, but we In addition we also manage the culture and atmosphere. kept in touch, often talking our pension funds. So over- Then six months or a year about investment ideas. all we are managing roughly later I ask them if what I About a year and a half $50 billion. We have a said is true or not and, of later, in 1973, I called Larry Chief Investment Officer, course, they say ‘yes’; but and asked him if his earlier and Joe is our Chief Invest- what can they say? We do offer was just a throwaway ment Strategist. At the not impose our culture on line or a real offer. He said, holding company we have (Continued on page 18) “I meant it.” I took the Page 18

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(Continued from page 17) important is having perma- much as they were in 2007. our subsidiaries. We leave nent capital to your ability The private equity guys have it to each one of those to make investments at the to put up more equity, CEOs to manage their busi- right time? which reduces their lever- nesses on a day-to-day basis, age and returns, making it and we just get involved JT: There is good news and more difficult for them to with them on major strate- bad news that comes with gic and finance issues and permanent capital. We management selection and have permanent capital, but “We couldn’t even succession issues. other investors that we countenance buying compete with for assets can G&D: Over the last few be much more cavalier with a subsidiary think- years a few hedge fund man- their capital than we can agers have started P&C in- afford to be. Private equity ing that at some surance businesses. Given funds are often willing to how well you know the pay much more than we are point it might go space, what are your because we think of invest- thoughts on this? ing like owners of the busi- bankrupt, but for

ness, and they’re thinking of the private equity JT: I think they are crazy! I it as a call option. We haven’t looked at this care- couldn’t even countenance guys that’s their fully at all but the thing I buying a subsidiary thinking know is that they are gener- that at some point it might business. Each of ally going into the reinsur- go bankrupt, but for the ance business. It’s really private equity guys, that’s our investments easy to lose a lot of money their business. Each of our in the reinsurance business. investments stands on its stands on its own. There are a lot of people in own. For us, each invest- For us, each invest- that business who sound ment represents a significant like they are really smart portion of our capital, and I ment represents a and who know a lot about like to sleep at night. Being it. One thing I think these on the cusp financially does significant portion upstarts need to remember not lead to sound sleep. is that it’s not written that From time to time this of our capital, and I your losses can be only makes it difficult to compete 100% of your premiums. with private equity firms. like to sleep at They can go much higher On the other hand they are night.” than that. And I assume also really jealous of us. I that these hedge funds are have a lot of friends in the do deals. getting into this business hedge fund and private eq- because they see it as a uity businesses and they G&D: Speaking of deals, is source of permanent capital, would love to get their it frustrating when you like but the reinsurance business hands on permanent capital. an asset, and do your dili- is not an easy business, as They could quit going out gence, but a more cavalier it’s basically blind risk that on road shows to raise buyer is willing to pay more you are taking. You don’t money. And there are than you? really know what the risk is times, in fact, when we can and it’s easy to lose a lot of be very competitive versus JT: No, I learned from our money. the private equity funds in previous General Counsel buying businesses. Today is to never fall in love with an G&D: Following your com- one of those times because asset. If you get deal fever ments on hedge funds want- banks aren’t lending as (Continued on page 19) ing permanent capital, how IssueVolume XVI I, Issue 2 Page 19

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(Continued from page 18) centric operations. Would were really smart when it you can do really stupid you invest in something that went to $8 and by the time things. So if it’s going to be, has a majority of its opera- it went to $15 within a year “…never fall in love it’ll be. If not, it won’t be. tions outside of the United – we thought “Wow! This is And the thing we always States? really good!” And then with an asset. If focus on is to make sure we boom! The next stop had a are not overpaying. So we JT: We are looking to buy $1 handle on it! I think that you get deal fever tend not to get our heart businesses that are head- we, along with everyone focused on one deal or an- quartered in the United else in the industry, missed you can do really other, and we try to incul- a major trend. Exxon Mobil States and whose primary stupid things. So if cate that in our subsidiaries business is in the United bought XTO Energy for when they are trying to buy States. I have a few things about $40 billion. Even be- it’s going to be, it’ll bolt-on acquisitions. When to say about opportunities yond the big macro issues, if we can buy something at in foreign countries: They you are not working in the be. If not, it won’t the right price, it makes don’t make airplanes that industry, you don’t really sense for us. If not, it was- travel fast enough; they have the same feel for it be. And the thing n’t meant to be. haven’t eliminated time that you do by being in it zones; and I’ll always won- and talking to the people in we always focus on G&D: How many different it. It’s just different. It’s the der why we are buying this is to make sure we deals do you look at for company instead of the local difference between reading each deal you actually do? guy. This is combined with a book and actually experi- are not overpaying, the fact that we feel some- encing something. When JT: We look at lots and what comfortable with the we think about buying sub- so we tend not to lots of stuff – we have five political environment here – sidiaries, we always try to people to keep busy, and it remember that there is a lot get our heart fo- the laws, the rules, and the can be several years be- customs. That’s all com- more about the industry tween purchases. We are pletely different when we go that we don’t know relative cused on one deal happy to look and kick tires to what we do know, and to a foreign country. As a or another and we and learn and only buy general rule we wouldn’t therefore when we think something when we think take on the chore of buying about whether we really try to inculcate that it’s right. a foreign-based company. It want to do a specific deal, doesn’t mean that our sub- we think about whether we in our subsidiaries G&D: How do those five sidiaries can’t expand over- considered the downside people decide where they seas – we are happy for enough. The way we think when they are try- are going to look for attrac- them to do that – but we about it is that there are tive assets? don’t want to start by buy- three things to do with our ing to buy bolt-on cash. First, we can keep it ing a business that is based acquisitions.” JT: We focus on a few spe- overseas. on our balance sheet. Sec- cific industries, which is evi- ond, we can buy in shares. dent in what we own. We G&D: You once said that Third, we can buy a new wouldn’t want to venture buying a company is like business. It’s easy to keep it too far from those indus- walking into a room that is on our balance sheet. tries to, say, focus on the pitch black, with danger When we buy in shares we tech industry. We tend to lurking everywhere. Can know exactly what we are go where you’d think a you give any specific exam- buying. But when we buy a value investor would go. ples of how this is so? new business from some- We try to get knowledge- body else, we are never able in those industries and JT: Yeah! Look what hap- really sure what we are get- see what’s available. pened to us in the E&P busi- ting. It has to be a really ness. We bought High- good value. Over time G&D: Companies in which Mount when gas was $7.50 we’ve gotten better at kick- you have majority or com- per Mcf. We thought we (Continued on page 20) plete ownership have US- Page 20

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(Continued from page 19) been immense skepticism in to read stuff. I spend hours ing the tires, but it doesn’t the stock market and I view over the weekend reading matter. We still recognize this as beneficial for some- different reports and com- that we are not in the indus- one who is bullish, like me. mentaries on the markets, try. A lot of investment fiduciar- as does Joe. ies and the public are liqui- G&D: Joe, are there any dating equities and buying JR: We alert each other to sectors where you are cur- bonds. The amount of sell- things so that sometimes he rently finding value in the ing the public is doing in doesn’t have to read stuff – public market? domestic equity funds is someone has alerted him to it and if they are smart they JR: I’ve publicly spoken “I still view the are reading what they send negatively about the big him carefully so it’s not a banks, but in the last two to market in general waste of Jim’s time. When three months I have you are in this kind of a changed my mind a bit. I as cheap. There position, people alert you to still don't know what the has been immense things. banks own, but given the fact that it has been a few skepticism in the JT: It probably takes four years since the crisis, they to five hours a day just to have had time to clean up stock market and I read stuff and respond to most of their problems. emails before you can even Also, because of the banking view this as think about being produc- crisis in the rest of the tive. It’s just what you need world – particularly in beneficial for to do to stay afloat, not to Europe – there could turn someone who is move forward. out to be a tremendous bonanza for U.S. banks. bullish, like me.” JR: My favorite book to Think about it. If you are a recommend is The True Be- large corporate or individual more than offset by the liever: Thoughts on the Nature depositor or wealthy per- amount of buying that cor- of Mass Movements by Eric son, and you have an option porations are engaging in Hoffer. There is no discus- of putting your money in through share repurchases. sion about investing in the banks that have already That the public is doing the book, but in my opinion it is been through the crisis and wrong thing at the wrong extremely helpful in under- are now in a good shape like time is nothing new in the standing markets. It con- the U.S. banks – let’s say a history of investing, but the veys the nature of human bank like Citi or J.P. Morgan fact that professionals are is behavior in mass – how – or putting your money in what surprises me. people act as a group. One a European bank, what are of his great examples is ex- you going to do? A com- G&D: What do you read plaining why people riot. pany in Mumbai is going to and are there any invest- There is no reason and no go with a U.S. bank because ment books that you would logic. People just get caught they are afraid of what’s recommend? up in it. Riots don’t end all going to happen with the at once, they end person by European banks. This could JT: I tend not to read in- person – that’s markets. become a major benefit to vestment books. I read lots People panic in a group, but these banks, as they aren’t and lots of other stuff they come back to their paying anything for these though, and this contraption senses one by one. That’s deposits today. here (points to iPad) has why stocks move incremen- totally lightened my brief- tally the way they do. I still view the market in case. It makes it really easy (Continued on page 21) general as cheap. There has IssueVolume XVI I, Issue 2 Page 21

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(Continued from page 20) phenomenal delegator and because the law states that he wasn’t a second guesser. he or Vikram Pandit or G&D: What’s the best someone like him should be piece of advice that your JR: He’d never look back. on the board. That’s num- father (Larry Tisch) ever He never said “I told you ber one. Number two – gave to you? so” or anything like that. the board does not get in- He assumed you knew your volved in supervision and it JT: Watch out for the own mistakes and he didn’t does not get involved in downside. Don’t worry have to remind you of them. monetary policy. The board about the upside. He was at his best when is there for two reasons. you were at your worst, First, it oversees the busi- JR: [to Jim] In the early which was very important ness operations of the bank years, I think your father because most people are and second, it gives the also encouraged you a great the opposite of that. Most president of the bank and deal to pursue an idea when people, when you make a other bank officials a view of you had one and to go big- mistake are ready to beat what’s going on in the busi- “Watch out for the ger than you might have up on you. He would en- ness world and with the because you were young courage you. economy. We received no downside. Don’t and cautious. He would say, information, no winks, no “if you like it then why don’t JT: Joe would pile into nods, nothing from the offi- worry about the you do much more?” stocks and they would go cials of the bank as to what down and his response the Fed was doing. It was upside” - Best JT: My father was really an would be, “buy more.” all basically a one-way con- piece of advice investor. I would say that I versation in terms of the am a combination of an in- G&D: Jim, you were re- economy. To the extent Larry Tisch gave to vestor, capital allocator and cently a director of the Fed- they would tell us some- manager. But my father eral Reserve Bank of New thing, I would have already his son, Jim Tisch bought a whole bunch of York. Is there anything that read it a long time ago so businesses and he was a you learned in your time they didn’t enlighten me as phenomenal delegator there that changed the way to the economy or to rather than a control freak. you look at things? monetary policy. Where So he had an enormous there was a lot of color amount of bandwidth be- JT: There’s a massive mis- added was in my meeting cause he didn’t clutter him- understanding about what the personalities; getting to self with day-to-day things. the directors of the Federal see how they worked and Reserve Bank branches do. getting to see the interac- JR: He never wrote a Each of the 12 Federal Re- tions. It was a good experi- memo in all the years that I serve Banks has nine direc- ence. I had to leave after was at Loews with him. I tors – A, B and C directors. two and a half years because defy you to show me one The A Directors are from I had joined the board of memo signed by him. bank companies – one from General Electric, and I a big bank, one from an in- couldn’t be on the board of JT: He also had a very termediate size bank, and the Fed too because there good stock market instinct. one from a small bank. The might have been a percep- He was a CEO but he was B directors are recom- tion of conflict because the also a stock trader, though mended by the banks; I was Fed regulates General Elec- he never had three screens a B director. The C direc- tric. (points to his screens)! tors are independent direc- tors. When people com- G&D: What do you have JR: He was a phenomenal plain about Jamie Dimon to say to young people and delegator. being on the board of the business school students New York Fed, he’s there (Continued on page 22) JT: Two things. He was a Page 22

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(Continued from page 21) be kept up at night worrying who would want to be on G&D: Since you mentioned about our businesses. They the buy side? How should the importance of being able are all well-managed. I have they think about investment to sleep at night, is there learned that when bad news and time horizon? anything today that keeps hits, the thing that you really you up at night related to have to do to is just think JR: Young people today in Loews or to the economy? calmly, sanely and rationally. business are much more Rather than keep it to your- macro-oriented than micro- JT: Nothing keeps me up at self, you should talk to eve- oriented. They spend much night. I like to consider ryone around you. Often more time on what is going myself a realistic optimist. when it looks like there’s no on in Europe or Federal solution and no way out of Reserve policies. They the box, a way develops. It don't focus much on com- “My advice to might be that the combina- pany specifics. Even when young people, if tion of a little change in they do they have a very things here and a little low level of confidence in they really want to change in things there, make what they are doing. It’s a big difference in the prob- very unfortunate. I hate be successful in this lem. By thinking about it that they don’t teach finan- and constantly focusing on cial history in business business, is to learn it, a solution appears or the schools. If it was up to me, problem dissipates. That’s I would make financial his- financial history. the manager in me as op- tory and all history a num- Learn history in posed to the investor in me. ber one requirement for business schools. Under- general and then G&D: Thank you both very standing how a spreadsheet much for your time. works can be learned on dig deeper into the job pretty easily, but understanding the contin- financial history uum of history requires certain intellect. I cannot and you will not be for the life of me under- stand why business schools in such awe of are not teaching financial everything that’s history. going on. My advice to young people, if they really want to be First of all, we maintain a successful in this business, is very conservative financial to learn financial history. structure because I like to Learn history in general and sleep at night and because I then dig deeper into finan- realize that from time to cial history and you will not time, there are three, four, be in such awe of everything five and six-sigma events that’s going on. I see the and times like 2008 and same problem in my office. 2009 when you can’t rely on People just don't know any others to help you out. financial history and they You have to build your pro- think that everything that is verbial house out of bricks happening is unusual. Every- rather than hay or whatever thing else can be learned on else there is. I tend not to the job. IssueVolume XVI I, Issue 2 Page 23

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(Continued from page 1) doing similar things to what bump into Chuck on week- G&D: Whitney, Buzz and you’re doing. In those days day mornings at the front Charlie, what inspired each we were doing something desk of the hotel sending of you to join Royce & As- very radical – screening. telexes to submit trade or- sociates? This was a big deal at the ders. time because there were no Whitney George (WG): personal computers. There On one of the weekends I started off as a broker and were only mainframes at while we were in Australia, worked at several different firms like Merrill Lynch and we visited the Great Barrier firms in the 1980s, eventu- you needed to find some- Reef where 38 out of the 40 “I had the ally conducting value-based one who had programming people from our group research with a couple of experience. In those days, were either snorkeling, opportunity to see colleagues, though we were Chuck and I were separately swimming with the dolphins, not necessarily focusing on conducting the same playing golf or doing some- how he (Chuck small caps. We were intro- screens based on return on thing similar. Meanwhile, I Royce) conducted duced to Chuck in early assets. Independent from was walking two or three 1987 and my two col- one another, and over time, miles to the next town in himself through leagues, who had much we modified our screens to search of some way of more experience keeping up the crash in ’87, than me, were em- with the mar- barrassed by how ket – The Fi- which was quite much more Chuck nancial Times knew about each or something. impressive. Being idea they presented Unbeknownst than they did. My a great contrarian, to me at the partners soon de- time was that he was buying cided that I would Chuck was be the one who doing the very stocks when you solicited Chuck for same thing. Charlie Dreifus, Chuck Royce, Buzz Zaino, Whitney George orders. Once I couldn’t get search based on returns on learned that he was doing I had the opportunity to see invested capital. Chuck also that too, it convinced me anyone else on the how he conducted himself shared the idea of looking that Chuck shared the pas- telephone.” through the crash in ’87, for really great companies sion that I had for this busi- which was quite impressive. or, said another way, busi- ness. We were obviously Being a great contrarian, he nesses that had sizeable friendly competitors over was buying stocks when you moats. the years, but I told myself if couldn’t get anyone else on I were to ever change firms, the telephone. When the The clincher for me, how- I’d see if Chuck would have time came for me to be- ever, occurred in March of me. In 1997, I decided to come serious about my ca- 1987. Chuck and I and leave Lazard and in January reer after my first child was three others were selected of ’98 I was fortunate born, I approached Chuck. to manage a fund of funds in enough to join Royce and After lengthy discussions on Australia and New Zealand. work with Chuck. his porch, I convinced him It was an entourage of to give me a job as a senior about 40 people – four of Chuck Royce (CR): The analyst in 1991. the five managers showed cool thing about this period up and the rest were sales of time was that both Buzz Charlie Dreifus (CD): I people. Remember that this and Charlie joined within first met Chuck in 1974 or was 1987 so cell phones, two months of each other. ’75 through a broker at Op- laptops and computers I had known them both in- penheimer. This broker weren’t available. I would (Continued on page 24) said there’s a guy who’s Page 24

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(Continued from page 23) shape anything. They both last week! It’s perfectly “But even within the dependently – Buzz was at have very different value acceptable and a normal TCW and Charlie was at approaches, but both have business practice. We’re a firm’s core ap- Lazard. I’d known them superb records and both large firm in this space so very well for a long time and continue to do what they’ve it’s expected and completely proach, there will both “raised the flag” at the always done. We’ve cre- okay. same time indicating to me regularly be minor ated the ability to do that that it was a good time to here. We do have a group CD: I’m a classic margin of differences. In fact, I change firms. I had tried, that Whitney leads which safety guy. If it’s really unsuccessfully, to convince represents the core side of cheap by my standards, it just bought a stock Buzz to join the firm in the firm. But Charlie basi- doesn’t need a catalyst. It prior years too. cally runs his own shop, as doesn’t need anything other from Charlie last does Buzz. than the fact that it’s cheap Buzz Zaino (BZ): I joined and I’m comfortable that the week! It’s perfectly the firm from TCW. The WG: Today we have a earnings are not going to atmosphere when I joined acceptable and a large team. While Chuck erode. Most other inves- TCW was very free and invented the discipline, I like tors, including the other normal business easy. The most important to think of myself as the portfolio managers in the thing for a manager is that chief disciplinarian. It’s a room, are willing to pay a practice. We’re a they’re able to do what they straightforward discipline. It little more for the prospect do without internal pres- can be replicated in the of a catalyst. Something large firm in this sures. TCW was very much right environment with the may look fully valued to me, like that initially. The foun- right kind of people. So we based on the lower of trail- space so it’s ex- der, Robert Day, was very have built out a team of ing earnings and forecasted well off at the time so the pected and com- portfolio managers and ana- earnings for the next pe- firm and the investment staff lysts on a variety of prod- riod, but there may be a pletely okay.” were free to spend what ucts that use the core ap- very good reason to pay money they needed on the proach to small-cap invest- something higher for the business while still operating ing that Chuck invented. stock due to some impend- without internal pressures. ing event or some outlook Day continued to spend G&D: Are there instances for the stock. That’s just money to grow the busi- where a couple of you have not my approach. It’s a ness. Then he decided to diametrically opposed views nuance that non-investment sell the company to cash in regarding a company or an professionals don’t neces- on those prior investments. industry? sarily grasp. Think of our He hired a corporate man- different approaches, and ager and then everything CR: Absolutely. the resulting differing opin- changed for employees of ions on specific stocks, as TCW. It was around this WG: All the time. I’ve refinements on the basic time that I decided to join bought stocks that Buzz was definition of value investing. Chuck. selling and sold stocks to Buzz. G&D: Chuck, when you G&D: How have you began looking at the small- shaped each others’ ap- CR: You have to remem- cap space, it was really un- proach to small-cap value ber that Whitney and Buzz charted territory. The same investing, if at all? have completely different can’t be said today. What approaches more often than about this world of the mar- CR: Charlie and Buzz were not. But even within the ket has changed over the both very successful inves- firm’s core approach, there years? tors when they joined the will regularly be minor dif- firm. I felt my role was to ferences. In fact, I just CR: The big change, which be as non-disruptive as pos- bought a stock from Charlie (Continued on page 25) sible and to not really try to IssueVolume XVI I, Issue 2 Page 25

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(Continued from page 24) which I mentioned. These places, so the money move- has affected each of the in- were natural market ineffi- ments are more like tides vestors in the room, is that ciencies that really don’t coming and going rather information is available in- exist anymore. than daily surprises. So you stantly to everybody. All can see trends and start to filings appear simultaneously WG: Now, there are react to those trends, in on our monitors and are other kinds of inefficiencies, both directions, when they available to everybody. such as human nature and happen because they don’t That wasn’t the case until emotion, which are still very jump around on a daily or the early ‘90s. Prior to this much present and haven’t weekly basis. period, you had informa- changed. If anything, inves- Pictured: Bill Ackman of Per- tional advantages that do tor and client investment CD: The other thing that shing Square Capital Manage- not exist today. Of course horizons have shortened. If we’ve done, perhaps more ment at Pershing Square Chal- what you do with the infor- you have a longer term successfully at certain times lenge in April 2012. mation is always the trickier view, you can take advan- than others, is educate our part – discerning noise from tage of the market’s ineffi- investors with respect to what’s important. ciencies that result from appropriate expectations. If other investors’ biases. you frame what your inves- CD: Another change is the tors should reasonably ex- idea discovery process. CR: One thing that I think pect, and you deliver on Early in my career, I’d go we all would say is that we those appropriately set ex- through the pink sheets or arbitrage time horizons. pectations, over time you the Moody’s manuals look- Our time horizon is long build a reasonably stable “Prior to this period, ing for ideas. I’d find com- while for other investors it’s audience that’s investing panies that were trading short. When they are pan- with you for the right rea- you had informa- over-the-counter that peo- icking, we must not panic. sons. What you don’t want ple didn’t even know ex- is a mismatch of client ex- tional advantages isted and then I’d try to G&D: Given the non- pectations relative to what research them. Occasion- permanent nature of the the product can be reasona- that do not exist to- ally, I’d come across $100 capital within the funds the bly expected to do. bills selling for $10. firm manages, how are you day. Of course what

able to maintain a commit- CR: Something else which you do with the in- BZ: It’s also worth noting ment to a long-term invest- we all do in our written and that around the time Char- ment horizon when your web communications is try formation is always lie is referencing, there clients, or potential clients, to lower investor expecta- were public quotes and then are likely to be much less tions, reiterate our long- the trickier part.” there was an “inside” mar- patient? term principle, and remind ket. If you were a member investors that it’s perfectly of the general public and CR: It’s a great question appropriate to be out of wanted to buy 200 shares of and I don’t have a perfect sync with the market or out a pink sheet company, you’d answer for you. Money of sync with the benchmark, pay an extraordinary price. goes in and money goes out which is a defining feature of If you were an institutional within our open-end fund strong long-term perform- investor buying 10,000 products. We have to be ance. Now, we say these shares, it was more of a prepared for it and we have things over and over again negotiated price somewhere to almost program our- to our investors, but it between the high and the selves for that; it’s just a fact doesn’t mean they abso- low offer prices. of life but it’s not as bad as lutely know it. Neverthe- you’d think. less, we spend a great CR: These are examples of amount of time trying to set structural inefficiencies WG: We have a lot of the right expectations. which were additive to the investors in a lot of different (Continued on page 26) informational inefficiencies Page 26

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(Continued from page 25) With Regulation FD, the sell me a bill of goods; let WG: And we try to man- danger these days is associ- me see what you’ve done. age what we have under ated with the managers of management responsibly. smaller companies, who CR: My view of interacting Money always chases per- aren’t trained in exactly with management is mixed. formance, so it tends to what to say by a team of Maybe I enjoy meeting man- mostly show up after you’ve lawyers and who may have agement too much, but I done really well for a long the tendency to talk off the like getting to know the period of time, probably ten top of their heads. An in- people running these firms. minutes before you’re about vestor can run the risk of The real problem in meeting to look really silly. So over freezing himself from trading management is that it’s a time, we’ve been willing to in a name merely because a social experience and you close funds to new investors member of the firm’s man- risk being unduly attracted when we get to the point agement accidentally dis- to the way the executive is where the number of ideas closed material non-public presenting the idea. It can is diminishing relative to the information. That’s one work the other way too if cash flowing into the fund. negative of talking to man- management does a poor That does help when the agement teams. job presenting a good idea. downturn comes because at The real way to get a feel least you didn’t catch the CD: Of the investors here for a company’s strategy is latecomers who would be today, I’m probably the one through discussions with very disappointed and run who travels the least to customers and competitors. for the door immediately. meet with management Customers and competitors teams. The critical question give you the truth. Manage- G&D: Some investors be- to me when I see manage- ment may or may not give lieve that meeting with man- ment teams relates to how you the truth. agement is nearly always a they allocate capital. I want waste of time, as manage- to get into their minds to WG: True. They’ll some- ment teams can be trained see how they might allocate times give you the truth to deceive, while others capital in future periods. about their customers and place more weight on man- competitors. There’s some- agement interactions. The problem with meeting thing to be said about hear- Where do you gentlemen with management is that it is ing what they have to say fall in this spectrum? the classic case of salesman- about their own competi- ship. The executive could tion. Through discussions BZ: There are many indus- be “on” that day and they with management, one tries tries and there’s much to sell you a bill of goods. to understand how their learn about each of those, Over the years, we’ve all business got to be so strong but we’re all experienced developed a sense for who and to see if they plan on investors and we’ve ana- we can trust, is ethical, and continuing to do what made lyzed companies and indus- responsible. Physically see- them successful. It’s also tries many times so we tend ing a person can help you in important to meet with a to understand what’s going this regard. new CEO because he may on. However, management change a lot of things and can provide a useful re- Rather than relying on not necessarily for the bet- fresher on their industry or meetings with management, ter. You might even find a teach us about some of the I instead rely on deep dives new idea through manage- newest developments within into firms’ accounting. If the ment’s discussion of their their industry. They can company’s business hasn’t competitors. One aspect of also educate us on the nuts changed, and management our investment approach is and bolts of how things hasn’t changed, my litmus to look around the work within their organiza- test is the numbers. Don’t (Continued on page 27) tion. IssueVolume XVI I, Issue 2 Page 27

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(Continued from page 26) solute standard and the quantitatively, by taking the “neighborhood” at a given same standard across all opposite of our long ap- firm’s competitors when we industries. Because of this, proach for shorting stocks, find a name we think we there may be whole indus- and it hasn’t been successful. like. This is because very tries that we’re not buying. It’s a whole different disci- often it’s not a company- It’s not a relative value ap- pline that takes a whole lot specific issue that’s bother- proach. of time, so why bother ing the market and creating when your job is to find the value in our eyes – it CD: That’s an important great long-term invest- could be a macro issue, an point. It’s an absolute met- ments. industry issue, or some ric. There are different other reason. variations of it, but it essen- CR: You can’t really do it tially gets down to a cap by shorting all the stocks we G&D: Could you describe rate, and it involves compar- think are overvalued and the firm’s general valuation ing this to a presumed cost going long all the stocks we “The real way to approach and perhaps high- of capital. If you have a think are undervalued. I get a feel for a light some similarities and spread between the two, know that way doesn’t differences in how you each and you’re comfortable that work. company’s strategy conduct valuation? that earnings level is real and has permanency, then CD: I’ve had clients ask me is through discus- CR: In the core part of our you’re likely to pursue the why I can’t just flip my met- business, we try to ap- idea. But the important rics and I’ve screened for sions with custom- proach valuation as if we thing that both Whitney and this, but amazingly you don’t were buying the whole Chuck said is that you’re get many short candidates. ers and competi- company. If we were buying buying absolute value. I It’s not uncommon for peo- tors. Customers the whole company, would think that absolute value will ple to ask that. Also, these we be satisfied with the translate over time to abso- days there are a scarcity of and competitors absolute return that we lute returns, although we’ve short ideas, so everyone could take out in the form never done an official study. ends up chasing the same give you the truth. of dividends and free cash ideas and it becomes expen- flow. Certainly, we want to WG: It’s really about sive to short them. In our Management may understand the engine be- what’s the business worth, earlier days there were the hind the company, which at what price can we buy it, ‘one-decision stocks’ that or may not give basically entails looking at how can we double or triple were overpriced for the you the truth.” returns on capital computed our money over three to longest time, so if you were in a lot of different ways. five years if we get it right, shorting them you would That’s a critical part of the and what’s our risk if we get need great patience. process. But ultimately we it wrong. use a business buyer’s, or G&D: The firm also tends what I call a real estate, ap- G&D: Given the focus on to focus on strong balance proach that focuses on absolute return rather than sheets, and we know based earnings yield. There’s relative returns, have you on your investment history nothing unique about that ever thought about ventur- that you have avoided approach – many, many ing into a long/short prod- banks, which employ a lot of investors use it – but we’ve uct? leverage relative to other used it for a long time and industries. What is the it’s the right way to do it. CR: We have experi- genesis of this conservative We’re not comparing the mented, largely unsuccess- view of leverage? multiple of a company with fully, with long/short strate- the multiple of the Russell gies. CR: There is fragility in 2000, for example. small companies just by the WG: We have tried it (Continued on page 28) WG: Right, we use an ab- Page 28

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(Continued from page 27) that, you could have made a been buying recently? nature of their size. They lot of money in many of are probably only 10 or 15 those banks. There was a WG: We’ve been buying a years old, and they are likely bank that had a $10 per lot of economically sensitive still run by the founder. So share book value which I companies because this is there are a lot of business started buying at $9 and the third year in a row that risks that relate to their size dollar cost averaged down everybody is worried about and maturity that you don’t to $2. It continued to fall to the economy falling off a want to combine with finan- $1 per share and people cliff. Industrial companies cial leverage. Specifically were talking about it going have been fairly hard-hit regarding banks, there is no out of business. Ten because of those expecta- way to determine the value months later the stock was tions. Energy stocks, even of the loans, so by and large taken over at $15 per share though oil prices are very we haven’t done much in- in a stock deal, and three high, have been punished vesting in that space, though years later the position was pretty hard because they’re Buzz has done a little. worth $63 per share. So viewed as early cycle kinds here was this very large gain of stocks. I also like materi- BZ: I don’t necessarily fo- with a balance sheet that als and especially certain cus on strong balance you didn’t really know much mining companies. In fact, I sheets. I have a different about. own several silver mining definition of a good balance companies that are generat- sheet. It takes a little more WG: There’s this saying: ing free cash, paying divi- stomach and a little more “Balance sheets don’t really dends and even buying back analysis. You are trying to matter until the day that stock. project what the balance they do. Then they’re all sheet will look like in the that matters.” Something Where I’m not finding a lot future. A lot of what I do is has to have gone a little of value right now is where looking for companies that wrong with a company for everyone has been running are going to go from nega- us to be interested, and we to, which is to anything with tive cash flow to positive don’t want the balance an above-average yield. cash flow. The price of the sheet to get in the way dur- These defensive stocks are stock usually reflects the ing the time it takes the actually expensive as busi- recent past and not the op- company to improve itself nesses, and some really portunity to improve the or for the market to im- good businesses are inex- balance sheet over time. prove. pensive because people are worried about the business In the instance of banks, I CR: The balance sheet is outlook. Lots of tech, not went through the 1989- the barrier to the long-term social media, not cutting- 1991 timeframe, where arbitrage. We want to have edge tech, is very inexpen- their balance sheets were our investment right even if sive. I’m talking about good terrible. I started buying we have the timing wrong. old analog semiconductor these things in 1989 and manufacturers and equip- every time I bought one of CD: In the current envi- ment makers. Because them I got slapped and they ronment, quality, in terms of we’ve been worrying for would go lower and lower. great balance sheet strength three years about the econ- Finally in 1991, I hired a guy and other attributes, is inex- omy slowing down these and all we did for three pensively priced in the mar- stocks have been beaten up months was travel around ket. to levels that probably al- the country visiting banks. ready reflect a very slow or We realized that these bank G&D: Can you talk about negative global economy. managers didn’t have the some themes around some Everyone is putting their slightest idea what their of the companies you’ve (Continued on page 29) assets were. Having said IssueVolume XVI I, Issue 2 Page 29

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(Continued from page 28) upgrades as a percentage of generally been with busi- money into certain stocks total rating changes has de- nesses that make a little bit for yield, such as these mas- clined. of money over and over ter limited partnerships again, and then the day that (MLPs), where you get a Going back to your ques- they don’t, they lose a lot of pipeline that rusts and then tion about what sectors we money all at once. Engi- it pays out all of its cash are looking at right now, I neering and construction flow to investors. It’s kind think of myself as a junk firms come to my mind. Pictured: Tano Santos speak- of like you giving me $20 dealer. People have dis- We had a recent company ing at the Moon Lee Price and me giving you $1 a year carded whole industries like this in the financial Competition in January 2012. over the next 20 years. right now based on some world – it was this high pro- You’re basically just getting macro outlook. The ques- file company that made your money back slowly tion is has that outlook money every day, domi- with nothing at the end. been more than adequately nated its market, and was That desperation for yield, priced into the market? I not a risk-taking type of as the Fed has been beating agree with what Whitney model. Then one day a up on savers pretty badly, said about there being a lot software program goes hay- “That desperation has led to people buying of real businesses that gen- wire and the company goes things that aren’t great busi- erate tremendous free cash long $7 billion worth of for yield... has led nesses and that cannot sus- flow and have a history of securities and shareholders tain or increase their divi- raising dividends. These end up getting diluted 80%. to people buying dends. We’re looking for ‘dividend aristocrats’ as companies that can grow they’re called are probably a G&D: Given all of the things that aren’t their dividends and have the decent place if you can get companies you’ve looked at cash flow and balance sheet them at the right valuation. over your careers, do you great businesses to back it up. get a lot of your new ideas and that cannot G&D: Can you talk about from just keeping track of G&D: As another example some mistakes that you’ve things you’ve looked at in sustain or increase of that search for yield, made and things you’ve the past? we’ve noticed that the drive learned from them through- their dividends. into high yield fixed income out your career? WG: If we find a really products has been shock- great business, we rarely We’re looking for ingly robust for a number of CR: (Laughs) How much liquidate our entire position companies that can months now. time do you have? (even if it has done every-

thing we had hoped). In- grow their dividends CR: Some firms have CD: I always say that in my stead, we typically maintain closed their high yield funds portfolio there are plenty of a small position in the back and have the cash recently because they can- mistakes, the names of of the portfolio so we con- not invest the inflows they which I don’t know. Come tinue to track it. There are flow and balance are getting. Companies back in a year or two and I’ll a lot of companies that you have been doing whatever be able to tell you. (Laughs) can revisit through different sheet to back it they can to issue as much Generally, my mistakes are parts of the business cycle. up.” debt as possible, but they some misunderstanding Energy companies are cycli- still aren’t doing it fast around the business model cal – as commodity prices enough to keep up with the or underestimating the se- go up, their stock prices go appetite of yield-starved verity of some issue the up, and when commodity investors. company is facing, and as prices go down the stock such, the earnings don’t prices go down. We write CD: This is occurring while sustain themselves at the down where we want to the underlying financial con- level I had expected. buy and sell things and keep dition of a lot of these com- track of that. It’s much eas- panies is deteriorating. Ac- WG: My mistakes have (Continued on page 30) tually the number of rating Page 30

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(Continued from page 29) first job was with RCA career that will be this way “I think of myself as ier to buy companies with Corp. in a financial training for you. Life is much easier, conviction if you’ve had a program, which was really a you’ll be much happier, and a junk dealer. Peo- history with them. We great third year to a MBA you’ll work longer if you are know how management will ple have discarded program because you spent really passionate about what react when things happen six to eight weeks at a vari- you’re doing. Try not to whole industries and we know that they will ety of the different divisions, settle into something you buy back stock when they which included a computer won’t like. If your livelihood right now based on say they will. You can be business, a semiconductor is that thing that you would more aggressive when the division, Hertz, NBC, and do on your own if you some macro out- valuation is right when others. I then went to NBC weren’t getting paid, that’s you’ve seen something for a short period of time the best of all worlds. look. The question through a few cycles. before leaving to work at

is has that outlook Lehman Brothers. CR: I would say the same CD: We’ve all owned thing. A job can’t be a job. been more than stocks that we’ve sold and G&D: Do you have any The world of investment bought back. If you have words of wisdom or advice management to me has eve- adequately priced that accumulated history for business school students rything one could want. and knowledge and know as they think about their You can be creative, it’s into the market?” what to expect of manage- careers and life ahead of changing on a daily basis, ment, as Whitney says, you them? you can be focused on the really do have an edge that macro environment or the you bring to the table. WG: I think making mis- micro environment, you can takes is important, and it’s have social interaction, and G&D: For Columbia Busi- better to make them early you have time to be a deep ness School alumni Chuck in life when they’re likely to thinker. It’s competitive and and Buzz, what did you be smaller. I have two sons you can approach each learn at Columbia that im- in college, one about to situation in multiple ways. pacted your career choice, graduate. I think you can Our big job is looking at investment style or life in look at life like college. The other companies. After general? first 10 years after college seeing what people do at are like your freshman years these companies, many CR: From high school on I of life – you’ll figure out times I walk away apprecia- wanted to go into some- where you may want to live, tive that I don’t do what thing related to the stock who you may want to be they do for a living. To me, market, so it wasn’t Colum- with, find some things that investment management is bia Business School that did are interesting, and find just an inherently more in- that. The school didn’t have some people who are inter- teresting business. the Value Investing Program esting and good role models that it has today, but its and mentors. My first 10 G&D: Thank you for shar- finance department has al- years were very much like ing your time with us. ways had a great reputation. this. Then in your sopho- I loved it there. more years of life you can start to be serious about BZ: What I got out of Co- having a career and you lumbia was a solid under- better be prepared to pick a standing of business and major. accounting. The credentials provided by the Columbia CD: Buffett always talks MBA open the door to about enjoying his job so many different things. I ac- much that he tap-dances his tually didn’t start out in the way to work. Choose the investment business. My

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Graham & Doddsville 2012 / 2013 Editors

Jay Hedstrom is a second-year MBA student and a member of the Heilbrunn Center’s Value Investing Program. During the summer Jay worked for T. Rowe Price as a Fixed Income Analyst. Prior to Columbia Business School, Jay worked in investment grade fixed income research for Fidelity Investments. He can be reached at jhed- [email protected].

Jake Lubel is a second-year MBA student and a member of the Heilbrunn Center’s Value Investing Program. During the summer he interned at GMT Capital, a long-short value fund. Prior to Columbia Business school he worked under Preston Athey on the small-cap value team at T. Rowe Price. He received a BA in Economics from Guilford College. He can be reached at [email protected].

Sachee Trivedi is a second-year MBA student. Over the summer this year, she in- terned at Evercore Partners in their Institutional Equities division as a sell-side research analyst. Prior to Columbia Business School, Sachee worked as a consultant in KPMG’s Risk Advisory business and at Royal Bank of Scotland in London. She can be reached at [email protected].