Graham & Doddsville An investment newsletter from the students of Columbia Business School
Inside this issue: Issue XXXVI Spring 2019 Yen Liow, Aravt Global 2019 CSIMA Conference P. 3 Yen Liow is the Managing Partner at Aravt Global LLC. Mr. Yen Liow P. 5 Liow directs the firm´s research process and actively researches many of the investments in the portfolio. Mr. Students´ Liow was previously a Principal at Ziff Brothers Investments Investment Ideas P. 15 (ZBI) and a Managing Director at ZBI Equities, ZBI´s equity market-neutral fund in New York. Mr. Liow joined ZBI in Bill Stewart P. 24 2001 and ran a team that oversaw ZBI Equities´ investments in the media, telecom, energy, and agriculture sectors. John Hempton P. 33 Prior to ZBI, Mr. Liow was a Consultant at Bain & Company in its San Francisco, Sydney, Singapore, and Beijing offices.
Yen Liow (Continued on page 5)
Editors: Ryder Cleary Bill Stewart, Stewart Asset Management MBA 2019 William P. Stewart is the Executive Chairman and a Gregory Roberson, Esq. founder of Stewart Asset Management, LLC. He MBA 2019 began working on Wall Street in 1955 as an David Zheng employee on the floor of the New York Stock MBA 2019 Exchange. Subsequently he worked for Spingarn, Heine & Co. as an Investment Analyst, before going Frederic Dreyfuss on to Pyne, Kendall & Hollister, later known as Riter, MBA 2020 Pyne, Kendall & Hollister. He became a Research Sophie Song, CFA Director at the firm, then President of the MBA 2020 Bill Stewart investment banking subsidiary, and finally Chief Executive officer. Riter, Pyne grew to become the John Szramiak tenth largest NYSE member firm in the years he was MBA 2020 (Continued on page 24)
John Hempton, Bronte Capital Visit us at: www.grahamanddodd.com Rolf Heitmeyer www.csima.info John Hempton is the Founder and Chief Investment Officer of Bronte Capital. Prior to founding Bronte in 2009, he was the youngest Partner at Platinum Asset Management and Head of the Financials group. He was also previously an Analyst and Executive Assistant to the Chief Executive Officer at ANZ Bank, Chief Analyst of Tax Policies in the New Zealand Treasury, and has also served in various positions at the Australian Treasury. Mr. Hempton earned a B.A. in Economics from Adelaide University. John Hempton (Continued on page 33) Page 24 Bill Stewart, Stewart Asset Management (Continued from page 1) there. The firm was sold have now more than hence I figured I ought to learn in 1973. He joined Ruane doubled their investment. something about this industry. Cunniff and Stires as Vice Chairman. Graham & Doddsville I started going to night school (G&D): Could you tell us in the city instead of attending In 1974 he founded W.P. about your background and the University of Maine. I went Stewart & Company as a how you got into investing? through various floor positions Bill Stewart broker dealer and at the Exchange, started investment advisor, which Bill Stewart (BS): I got into developing a business, and became a publicly traded investment management by became a broker on my 21st company on the New York accident. I initially took a birthday. I learned enough Stock Exchange in 2000. temporary job on the floor of about research to go out and At the time it went public, the New York Stock Exchange start seeing companies, visiting the firm had $12 billion in as a page boy in 1955 while I management, doing assets under management was waiting to start college at spreadsheets, and writing up in separate accounts, as the University of Maine. It reports on stocks I liked. I was well as US and European turned out that I liked what I selling these ideas to dentists, registered mutual funds. saw on the floor and I decided pharmacists and furniture From the firm´s founding that I should learn that dealers. in 1974 to 2013, the year in business. At the time, I was which the firm was planning to be a Forest Ranger The market environment was acquired by and had no interest in relatively quiet. IBM was the AllianceBernstein L.P., investing. But after watching stock of the decade, growing W.P. Stewart & Co. the money being made by at 14% a year and trading at 50 outperformed the S&P 500 smart investors, I decided that times earnings, the average Index by an average of 430 if I played it right, I could buy ratio for good quality growth basis points annually, net my own forest. In time, along at the time. Many companies of fees. with others, I was eventually were growing at 7% per annum able to buy several of them as and trading at around 25 times After the sale of W.P. well as a farm and turn them earnings, much higher than Stewart & Co. to over to conservation groups to today. IBM was at the top of AllianceBernstein in 2013, manage in perpetuity. the list of what we considered Bill formed WPS Advisors high-quality growth companies, Ltd., a Bermuda company. G&D: What was it about your along with National Cash A group of analysts was time as a page that made you Register, American Home assembled to pursue an realize this was the industry Products, Merck, Pfizer, investment philosophy you wanted to be in? Abbott and General Foods. similar to the one that earned Bill´s clients over BS: It was a time you probably This was around the time 16% a year after fees for can´t even imagine. There when Ben Graham said that he the 38-year history of W.P. were no phones on the open would only invest in high- Stewart and Co. The new floor, let alone cell phones, quality growth companies if he business was domesticated because no electronic could, but generally speaking to the US in 2017, as communication was permitted. they were too expensive, and Stewart Asset There were telephones around he´d have to amortize a lot of Management, LLC, an SEC the rim of the floor, but P/E ratio. He took a 7-year Registered Investment nothing in the middle, nothing look, and if he envisioned a Advisor. Over the four and at the posts. If you wanted to market multiple of 17 in the a half years since its do serious trading, you had to terminal year and was paying inception, the new firm has physically be on the floor to 50 times up front, amortizing continued to grow its see your counterparts and deal that was too big a headwind. clients´ portfolios at a rate with them directly. I saw some So, he concentrated on what slightly faster than its smart guys doing things I came to be called value stocks. predecessor did. Initial thought were interesting, while clients of the new firm making a lot of money at it; (Continued on page 25) Page 25
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Graham published a formula phase for a long period of growth per annum, net of fees, with his idea of fair P/E ratios time. since we started Stewart Asset relative to underlying growth Management four-and-a-half rates: 8.5 + twice the future Going back over 50 years, years ago. Our initial clients in growth rate. I began to look we´ve never had a sharp fall in the new firm have already just for companies that were earnings power behind our about doubled their capital. priced below his clients´ portfolios - what recommended levels and tried Buffett calls “look-through” G&D: Was there anything in to work out for myself what earnings. Our portfolio proved particular that convinced you constituted an appropriate P/E to be much less cyclical than that predictable earnings ratio. My Security Analysis the S&P 500, for which the growth was the way you course at the New York annual rate of earnings change, wanted to look at investing? Institute of Finance was taught up or down, can be very by one of Graham´s partners dramatic. The look-through BS: When I first started out, I at Graham-Newman, and he earning power growth behind took lots of courses on was basically teaching Graham our clients´ managed accounts analysis and accounting and & Dodd´s philosophy. I took has averaged about 15% a year thought I could find great his teachings to heart and for over 40 years now and has value. Some things worked but started building out a very never declined. That earnings other things didn´t – and I concentrated portfolio of growth drives performance in really disliked the ones that companies, only eight different the long run. didn´t work. Earnings shortfalls businesses, albeit in different were almost always the reason industries to provide some an investment didn´t work out. diversification. “At the time, I was Everything we do when investing people´s capital is G&D: Is that portfolio planning to be a based on compounding. The construction still what you´re whole reason for being in the Forest Ranger and trying to attain? investment world is to had no interest in compound money. We all BS: Roughly 5-10 years after know that 7% per annum that first portfolio, I realized I investing. But after doubles in about 10 years and needed to have a bigger 15% a year more than doubles investment universe. Having a watching the money in five years. I want that magic portfolio of eight companies is working for me all the time. maybe a little bit too being made by smart concentrated, so we increased The thing that screws up our portfolio size to 15-20 investors, I decided compounding is down years. In companies. In fact, we still have that if I played it order to harness 15-20 stocks in our clients´ compounding, I wanted to portfolios today, consistent right, I could buy my make sure I didn´t have those with what we´ve done for down years in earnings. There more than 40 years. own forest.” are only two variables in this business: future earning power I adopted a value approach, but and future P/E ratio. I believed one that requires highly Our goal has always been to and still believe that we can get predictable earnings growth, double our clients´ money a pretty good handle on future with the goal of having a very every five years, which is earning power in a very limited concentrated portfolio with compounding at a little less number of leading businesses. aggregate earnings that go up than 15% a year and we´ve P/E ratios are considerably every year. That means that if done that since we´ve been in more volatile and tougher to you pay too much, it still gets business. At my old firm, we accurately forecast – though cheaper next year. That´s our ended up with an average of we try. In all 38 years at my hedge. In a cyclical, you never 16.2% appreciation per annum last firm, W. P. Stewart & Co., know when the next cycle will after fees for 38 years. As of we had about 15% to 16% occur, and you can be out of last week, we were at 16.3% compounded growth per (Continued on page 26) Page 26
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annum in underlying earnings should be with the low interest earnings power projection. It power, basically more than rates we have today. If we say comes down to earning power doubling every five years. The a company is going to be per share. after-fee rate of return for our worth a 30% premium, we´ll portfolio was similar. The use a 22x multiple in the We then take a market performance of the portfolio model in the terminal year, and multiple and, because our followed the performance of then discount the resulting companies typically grow twice earnings; to be sure, they value, plus accrued dividends, as fast as the overall market, weren´t the same in every year back to present value. We are market leaders, have great because they can get out of discount at 8% to 10% even if balance sheets, and have whack with each other, but the Treasury market yields less outstanding management over the long run that´s what than 3%. So that´s probably teams, we´ll come up with a it averaged out to. too high a discount rate. But premium multiple. In a few that´s a margin of safety and it cases there might be a This method works, and it´s a goes back to Graham and discount, but generally simple one. First, you find a Dodd. You want a margin of speaking it´s a premium. small group of great companies safety in everything you do. and get to know them very, Mathematically, if a company is very well. Then, you evaluate “Everything we do growing twice as fast as the them. We have a strict market, the near-term P/E appraisal system and we when investing people´s multiple premium amortizes forecast earnings over five very quickly because the capital is based on years. For 99% of the public earnings grow. companies, you can´t do that compounding. The very well because they´re very Typically, we´ve been giving volatile, but a few of them are whole reason for being the growth businesses we pretty predictable. These invest in a 10% to 50% companies typically have a in the investment world premium to the market, commanding position in their depending upon how well we markets and showcase great is to compound think things are going to go for profitability as well as a high that company five years from degree of predictability. They money.” now. I guess the highest also have great management in terminal multiple we have is depth and wonderful balance We then want to buy stocks 26x for Amazon, in five years. sheets. When a business meets well below their fair present It´s currently at about 60x our these criteria, you can start value as a further cushion. This idea of current capitalizable appraising value five years out. is not a science but more of a earning power. guessing game. We try to Once we find a business that make the best guesses we can, G&D: In terms of earnings we like with predictable but you need those cushions. predictability, how do you earnings growth, we´ll then analyze a company like work with the spreadsheets. G&D: Can you go into more Amazon, which five years ago We use all our qualitative detail on what you call the looked much different than work and interviews with appraisal system? When you´re what it does today? management to try to estimate digging into a company, what earnings in five years´ time, as does it look like? BS: Obviously, Amazon Web well as the terminal growth Services is huge and is the rate. We then evaluate a BS: You might start out with most profitable division now. prospective premium or the addressable market, then These situations are dynamic, discount versus the market as get to how many units a so you make the best guess a whole, for which we also company will sell, what the you can and try to be more on forecast a multiple. Right now, value per unit is, and what the the conservative side when it´s an easy 17x, in line with margins are going to be. figuring out what all these the historical average and Ultimately you build a five-year things are likely to be worth, probably a little lower than it model and come up with a final but the lovely part about a (Continued on page 27) Page 27
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model is that it´s not fixed. It BS: Absolutely. For example, in year 5 which, by the way, may be a five-year model, but take the retailing section, isn´t really that high. We have you can change it every day. which is huge, but where the capitalizable earnings per share What you´re really doing is margin is only about 7%. For of a bit more than $140 in the laying out your decision tree marketplace products sold by model´s terminal year, 2024. A and adjusting it. You can come 3rd parties, they don´t take in terminal multiple of 26x gives back saying, I think I got this a the sales price of the products us a price that, discounted little high, or that a little low. sold, but they record their back at 9%, yields a present It´s not fixed. In essence, commission on the sale, which value of $2,250. That´s why we´re always operating with starts out at 100% gross profit. it´s our largest position and the best guess we can make. If That business is booming for has been for a long time. it changes weekly, it changes them. Now they invest a lot of MasterCard is our second weekly. It doesn´t usually it away, but you have to try largest position and, including change weekly, but it could. and make an assumption about at my old firm, we´ve owned Nobody´s got a lock on what´s actual future earnings power. MasterCard since they went right, a model is only a model public. and it´s not fixed in stone. G&D: Before we go into Sometimes, nothing´s changed “Frank [Rooney] was individual positions, can you but you changed your mind. talk more about your analytical That´s good. The purpose of one of the great process and the way you make the process is to bring out our assumptions? Do you have best guesses. Everything we do retailers and I learned analysts by sector in your firm? is guessing. I think we all get a little carried away with the a lot from him. We´d BS: We have 5 investment science of the matter, because drive around the people, excluding me, and we there are lots of formulas, always have a team of two on whereas you´re essentially country, go into the each investment: one does making a guess. primary coverage, and another parking lot of a is the backup, to ensure In essence, we´re looking at continuity. We have a small investment opportunities as a shopping center, and operation, but it works. Each businessman would look at analyst is a generalist and is them. We´re thinking about he could tell me the getting out there asking buying a business today for average annual questions, visiting management, $100 million and figuring out digging around. whether or not we could sell it income of the people for $200 million five years G&D: You ran a firm for 38 later. We make reasonably who shopped there years before this and now you conservative guesses, and as have this new firm, which is I´ve mentioned we have just by the size of the only four and a half years old. succeeded in growing look- Can you talk about what grease spots in the through earnings behind our prompted the change? clients´ portfolios every single parking lot.” year. That´s very important. BS: I had partly retired from We try to have one of the two the old firm in 2001 and then big variables reasonably under Web Services is another big fully retired in 2004. Yet, by control. operation as we discussed, and 2007 the new management they´re also getting into was having some problems and G&D: Coming back to retailing with their own stores, the board asked me to come Amazon, are there certain which may, in effect be mini back. Initially I didn´t want to, assumptions that you and your distribution centers. It´s very but I did come back and stayed team think about in terms of dynamic, which is one reason with them until what the company will look why we still assign Amazon a AllianceBernstein purchased like in five years? relatively high multiple of 26x the company in 2013, which (Continued on page 28) Page 28
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was probably the appropriate You don´t put an extra point management team and it just thing to do. They seem to be on or take a point off, but didn´t work out? happy at AB. management gives you conviction. We always ask BS: Oh, sure. I´m always After the sale, I wanted to go ourselves “Do we want to be telling our guys, success in this back to retirement, which I did in this business?” Coming back business is three steps forward for a few months. Then the to what I already said, when and two steps back. You don´t former CEO of W. P. Stewart you´re investing you have to just keep marching on in a & Co. and I thought we might think as a businessman buying a straight line, although start a new investment business, and then ask yourself thankfully we´ve had far more manager. I love being in the “Do I want to be in this successes than failures. market trying to figure out business with these people? what´s happening next ; but Did they seem like they´ve got G&D: How long do you these very smart young people their heads screwed on right? typically hold an investment at Stewart Asset Management Are they long-term thinkers or for? are doing the heavy lifting now, are they opportunists?” That´s not me. the type of thing you want to BS: My horizon is 10 to 15 know. Then, if the questions years on average, and at least 5 G&D: How important is are answered positively and years. We held major positions management when it comes to you want to be in this business in retailing for the better part looking at a stock? with these people, you end up of 20 years - great growth asking if you want to be in this businesses like Walmart and BS: Ben Graham always said business with these people at Home Depot in their dynamic “don´t count management this price? You apply the whole growth years. My best ever twice”. The projected numbers appraisal process and get to would be Melville Corporation: will reflect the management´s your discounted present value 26 years at 26% per annum. It performance, which means you – what Graham used to call was phenomenal. don´t have to re-evaluate “fair value,” a price that a management. share seems likely to sell at on Melville went from a little shoe the way up or down within a chain headquartered in New That being said, I learned as a reasonable period of time. York to becoming the 10th young analyst that management largest retailer in America. is not a given. It´s dynamic. This process is very different That was a great story. My The management team than the one from the typical interest started when I saw an changes, individuals change, value shop, where you´re article in the Times saying policies and procedures primarily looking at the balance Frank Rooney had been change, unforeseen challenges sheet and underlying earning appointed President of Melville. develop, opportunities occur. I power. They´re often seeking a I knew it was a sleepy shoe think you´ve got to look discount to tangible value, retailer and the only thing it people in the eyes, talk to which is also a very valid way had going for it was its strong them, and get a feel for their to play. Such shops usually balance sheet. I called Frank to personality. To me, investing is have a huge number of stocks congratulate him on his new all about people. Good and use good theory in job but also asked him “What managers doing a great job. I general, so if they´re wrong on is a smart Wharton School want to know that some names it averages out. graduate like you doing at a management is going to We take the opposite point of crummy old shoe company?” achieve its plan, and I need to view. We have a very narrowly He said, “Well come on up make a judgment on that. -focused portfolio where we and I´ll tell you.” They had There are people you end up have to be right more often. their office in Midtown trusting and other people who, Sticking with really fine, Manhattan. I got in a cab and when you walk out of their particularly well-managed went over there, and he offices, the hair on the back of businesses helps us do that. explained to me how shopping your neck is standing up. I centers were pushing Main think good management is G&D: Are there any instances Street off the map and would vital. where you had conviction in a go up all over this country. (Continued on page 29) Page 29
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Frank already knew that Saks, from him. We´d drive around several hours and have lunch. JCPenney, Sears and the likes the country, go into the It might work, I don´t know. would become the anchors in parking lot of a shopping these centers. But nobody center, and he could tell me The CEO has a vision and I dominated the space between the average annual income of wrote a letter to him the the anchors yet. the people who shopped other day. I want to get more there, just by the size of the flavor on his vision. They only So, he figured, if he could grease spots in the parking lot. have a small percentage of the control a shoe company, that market right now so if he´s would be a good place to start, G&D: Do you have an opinion successful, it could be one of because everybody needs to on the future of brick-and- those companies that enables have shoes. Eventually, his goal mortar retailing? you to make a 10x, 20x return was to dominate the space on your money in future between the anchors like BS: Brick-and-mortar retail is decades. nobody else had done, and gradually declining. Yet, I´m through multiple acquisitions, looking for the next thing I also see some things that including chains like CVS and that´s going to happen. On one bother me, such as stock Marshalls, and fast store hand, some shopping center buybacks. RH bought stock growth, he did it. developers are putting medical back at a good price and it has centers in, and other things gone higher, but there´s a lot G&D: At what point did you like that, which I think is of debt. When they were in sell your position in Melville? working well. Some retailers their high-growth phases, are developing stores as mini companies like Walmart, BS: I sold my position in 1972, distribution centers as part of Home Depot, and Walgreens having held it for about 11 or the evolving omni-channel just focused on building their 12 years. It went to 40 times trend. businesses and put all their earnings and I felt it was too cash flow into that. They didn´t expensive. I wrote a report On the other hand, you are try to buy much of their own saying I loved the company but seeing some disrupters, like stock because they needed the price was too rich. And Restoration Hardware. They every penny to build another then it fell down to about 12 are creating stores that attract store, another distribution or 15, during the big crash in you. You want to go there center. Yet Restoration 1974 and it briefly dropped to because, for example, they´ve Hardware borrowed a lot of $5 a share. We bought back a got a restaurant and people to money and seems to be a little lot more stock and then it show you how to decorate bit capital constrained now, went to the hundreds from your home. People go there as despite a huge addressable there. a destination, and they can´t market. get that from Amazon. Best Frank retired at 65, following Buy is becoming another They seem to have a winning the institution of a rule defining destination store. Both are formula, but the debt may be 65 as the mandatory omni-channel operators. constraining growth. They´re retirement age that he only growing sales at 7% or established 20 years earlier. At Restoration Hardware is doing 8%, why not 12% or 15%? It´s that point, we sold all of our well and growing very nicely. still a relatively small company, stock. Frank, by the way, went Our guys here are taking a but I like to spot opportunities on to work for Warren Buffett look at it and are planning at that stage. for the next 18 years or so. I another visit with the company called to congratulate him on next week. It seems they are I think Costco knows just how his 80th birthday and he said, trying to do something to do it. It´s been a major “You know what Warren just different. They´ve opened position of ours for years. A gave me for my birthday? A maybe a couple dozen stores large part of its profits come new 20-year contract.” around the country, which are from the fees that they charge attracting people from a wide for all those membership cards Frank was one of the great area. It´s a destination. You go being renewed every year, retailers and I learned a lot there, drive there, spend which constitutes a recurring (Continued on page 30) Page 30
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revenue stream. That´s a We´re looking for great Nevertheless, we are still beautiful story. Amazon is now management, a great balance looking for faster earnings per following that concept with sheet, and a high degree of share growth, because the Amazon Prime and delivering predictability. Obviously business mix is changing, and an awful lot of stuff for the deciding what´s a high degree they should double their money. of predictability is subjective earnings over the coming five and I don´t want to attach too years. G&D: Do you think there are much scientific methodology to pockets of retail that are still it, but we need to be able to G&D: Do you think there are insulated from Amazon? make a best guess. Like any threats to that business? anything else, it takes open BS: I´m sure there are, eyes and hard work. BS: Maybe no major threats, although I´m not sure what but there are still some minor they are. I´d love to find out. “The average baseball ones, mostly from the four or Williams-Sonoma seems to be five other companies doing it. doing a good job . Drugstore hitter can only hit Also, there are new ways to businesses on the other hand provide these services that are will probably face more about .255 and that´s being introduced by various competition from Amazon. software vendors all the time. been the average...for Yet ADP has a commanding Retail is a big part of the market position and they are economy and it´s constantly years and years. Yet a holding or even increasing changing, which provides couple of guys can hit their market share, even opportunity. I think there´s though they have to fight for it. always going to be opportunity the ball a lot better, in retail. I´m not sure where it The nice thing is it´s a is. I would hope that our young and they make the big relatively small part of analysts shake the trees. I´m anybody´s expense. And once not doing that. I read books bucks. I think our you´ve got their system, taking and magazines and keep my it out to save a few percent on eyes open, looking for ideas, business is similar.” this thing, which is a tiny cost but I´m not shaking the trees anyway, may not be nowadays - though I do attend G&D: You´ve held ADP for a reasonable. The inertia there is virtually every research while. What do you like about a positive, although there are meeting in person or by the position? definitely people shooting at conference call. them. They´re good at BS: ADP is one of our major reinventing themselves and I can tell you that there´s positions – our seventh or coming up with new ways to probably 20 stocks out there eighth largest position. I´ve answer their market´s that are going to double in the owned it for decades. It has demands, or even attack new next year. Big stocks. I don´t recurring revenue and is the ones. know what they are though, largest player in the payroll and which keeps me going. It´s HR services business. It´s very They weren´t doing HR for a such a fascinating business. well managed, with a lot of long time, but they moved into lovely recurring revenue that that field and it´s working well G&D: How do you harmonize increases gently. It´s a very fine for them. It´s a stock you keep. finding an opportunity but also business, but the negative I would´ve said 10 years ago placing a high degree of there is that it´s grown so big they couldn´t pass the test and importance on predictability? that the growth rate is going continue growing at the size to be slower. Revenue growth they´re at now, but they keep BS: You have to have is going to be about 6.5% per finding ways to do it. That´s predictability. We´re not just annum for the next five years, why we still hold a sizeable buying a concept; we´re buying which may be the slowest of position.^ established businesses. We anything in our investment look for leaders in their field. universe. (Continued on page 31) Page 31
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G&D: Could your share your terrific. This is why it looks BS: I think the fundamental view on Disney, which I think attractive to us, even with reason for investing hasn´t is also among your largest relatively modest top-line changed at all: people put holdings? growth. Their margins are money at risk to make a going to be under pressure return. And people haven´t BS: We recently increased over the next two years, changed much. Yet, the size our position in Disney, which maybe three, because of the and scope of this business has looks like it could be a new operations. We have to changed phenomenally. relatively slow grower yet is look through that because if still a very strong company. It we were to wait until they´re My dad used to say that every is dominating in its business. already successful, we´ll miss once in a while, the market has They may be over the top most of the prospective gain. If to shake out the grocery regarding streaming as they´re they mess up, we might lose a clerks. It was grocery clerks putting billions into it now, but little bit, but if they are then, hedge funds now, but within four or five years it successful, we will make a lot. they act the same way and could pay off very handsomely It´s a great global company, panic when the market´s for them. I´m not suggesting one of America´s best, with a down. But instead of selling they´re going to be as big as lot of good properties. That´s when the market´s down, it´s Netflix, but they´re going to be why it´s our fourth largest time to buy things cheaply. a serious competitor in five position. And when the market is up, years, especially given their it´s time to think about selling. very broad base around the G&D: Do you have any Human beings tend to go the world. favorite investing reading other way. That´s why having material? great conviction in what They have their basic growth Graham called a fair “central business with the movies and BS: Philip Fisher´s book value” for each current and parks that generates a lot of Common Stocks & prospective investment is so money, and we think that the Uncommon Profits is obviously important. new streaming business is great. Everyone should read going to have fair growth and MacKay´s Popular Delusions Human emotions are still the will make them a better and the Madness of Crowds to same, but there is just company in five years. Yet they see how crazy markets can get tremendous efficiency today. have a relatively low multiple sometimes. Charles Ellis´ You can now execute orders of 14.7x this year´s earnings, Classics is a very worthwhile in milliseconds or even while we think they´ll be compendium of instructive nanoseconds, and we have lots worth 17x 2024 projected EPS. stories put out by the CFA of trading machines working That gives us a discounted guys. with algorithms nowadays, but present value of about $160. I still think it´s the same game Furthermore, if they do what I read quite a few trade played on a much bigger, they say they can do and magazines to see what´s going broader, and faster scale. actually succeed, it´ll probably on. I also try to read blogs on Looking for great growth like be a 24x multiple by 2023-24. businesses we´re interested in. we saw in Walgreens, But right now, it´s selling at For example, I´ve been trying Walmart, Amazon, Alphabet, 8.9x our 2023 earnings to follow the Boeing 737 issue Apple or Home Depot is the forecast. With the shares at by going through pilots´ blogs reason I am doing this. I´m not around $113, there is a lot of to see what´s happening and here to try beating the next appreciation potential there. what they think is right or buyer down the street by an wrong. eighth of a nanosecond or Disney is a company which is trade a thousand times a day probably a lot better than G&D: What do you think has to make it up. Automated people think it is. We have been the biggest change in trading is fantastic, but it´s a good friends in Hollywood investment management since different business. who really know the industry you first entered the industry? well and they think that Furthermore, there is a huge Disney´s management is move towards passive investing (Continued on page 32) Page 32
Bill Stewart, Stewart Asset Management
because most people can´t I would say it´s business school This is a fun business as far as beat the averages but, cases in real time. The best I´m concerned. I know there honestly, a few people can. part of the business was always are people who are miserable The average baseball hitter can growing with the companies in it, but you´ve got to feel it´s only hit about .255 and that´s that we invested in and visiting the right place for you. I´ve been the average, within a them regularly. Of course, the had a lifetime of fun doing this, couple of points, for years and other side of the coin is that met wonderful people and years. Yet a couple of guys can stocks go up and down, and helped a lot of clients hit the ball a lot better, and always will, which can be both substantially improve their they make the big bucks. I exciting and depressing. prospects in the process. think our business is similar, Personally, I find it exciting and What could be better? and there will still be people interesting. It is never boring - flocking to the investors who frightening sometimes, but G&D: Thank you so much for can do it well. Typically, never boring. your time. though, those individuals stop taking new clients when they So many people are stuck in get to a certain size, because jobs in which they are size can be a restraint. advancing well financially but are not happy. They´re bored I think opportunities to invest yet they stick with it because in good companies still exist. they can´t afford to leave. I True, you can´t really buy made lots of money, thank good businesses dirt cheap God, but I´ve always had anymore, but you can buy challenges and always had fun. them at a reasonable price. I In this business, you have the like to think in terms of opportunity to never get earnings yields and compare it bored. For sure, there are 20 to a 10-year T-Bond, whose big stocks out there that are 2.6% yield is going to be fixed. going to double next year, and Compare that to buying an the challenge is to go out and average S&P 500 stock at 18x find them. I think that challenge current earning power, which is wonderful, and you never is a 5.6% earnings yield today, get all the way there. You can it can double earnings to always improve your provide an 11.2% earnings yield methodology, there´s always in 10 years (or an average room to do a little bit better, earnings yield of about 8.4% to go an extra mile. If you´re over the coming decade). talking to a company that That´s a lot of edge in favor of you´ve really got a good story stocks. from, you want to check with a competitor, talk to customers; G&D: Do you have any advice you can always go deeper and for MBAs going into learn more. The job is never investment management? done.
BS: If you have the right Developing conviction is mindset, it´s a wonderful possibly one of the two or business. It´s constantly three most important things challenging and fascinating. You you can do when you´re are visiting the companies forecasting the future and you you´re investing in and it do that every day. You´re means meeting smart people, never going to be right all the seeing great businesses being time, so when you´re wrong, built by a team or a man or you bite your tongue and then woman who has fresh ideas. go on to the next prospect.