Hi, I'm Steve Clapham and welcome to the Behind the Balance sheet podcast where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of successful investors, strategies and tactics. I'm delighted to announce my continued sponsorship with Officeense, the number one market intelligence research platform trusted by financial professionals around the world. Officeense has been my long-term partner and I've seen firsthand how they're revolutionising investment research. One of the hardest parts of investing is seeing what's shifting before everyone else. For decades, only the largest hedge funds could afford extensive channel research programs to spot those inflection points of before earnings and stay ahead of consensus. 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Check out the school on our website behind the balance sheet.com where you can also find the show notes to this podcast and while you're there, don't forget sign up for our popular and free weekly substack. Hit the sign up button on the top right of the homepage. In this episode, I sat down with Rich Pizina on a recent visit to London. He's the founder of the eponymous 80 billion value investing firm Pizina Investment Management. We discussed his childhood observations of his father's stock market portfolio generations. Now he started a value firm just in time to be crushed by the dot com bubble by February 2000. He was underperforming the S&P by 60%. And he was ready to sell the firm, but he explains the extraordinary turnaround which then happened. We dig into what business quality really means how to distinguish temporary problems from permanent impairment and why as a value investor, 40% of your positions can lose money, but you can still deliver a good performance. We also get into position sizing and holding periods, the discipline of selling at fair of value, why Pizina rotates sector of coverage for analysts and how they think about mentoring young analysts and talking to CEOs. I think you'll really enjoy this episode. It's a masterclass in deep value from someone who has lived through some really difficult cycles. So Rich, I'm really pleased to be sitting down with you in London last time I saw you was in New York and we always start with the same question. Did you always want to be an investor? Depends on how far back you mean by always I guess, but half the people in this podcast did a newspaper round and invested the money and the other half had no idea what they wanted to do and just ended up in it. Yeah, it's interesting. I never thought of it as a career. So for me, I grew up in a household where I had a father who was an engineer. He had made a decent living, but he wanted to be rich. And so I, he invested in the stock market and it was dinner time table conversation, my whole childhood. And it was highly cyclical. Okay. However he did was his mood. So it was either he was happy or he was not happy. And did you know what sort of stocks? You know, at the time, he just told stories about things. I remember we're going back 50 years and he was talking about fuel cells. Oh really? So it was, he was an engineer. He was way ahead of his time about electric, about cars powered by fuel cells. Oh wow. And I watched as these things went up, they went down, but they were, I didn't really know what his style was. I couldn't have discerned what his style was, but I listened. I think there was a time when he reached a million dollars, which was a lot of money started with, I think, $20,000 in the stock market. And he was on margin and then it was $20,000 again. Oh no. So I was exposed to it. Let me just put it that way. Then I went to school and I never thought of it as something that you would do as a career. I wound up going to Wharton and I had, I got an bachelor's and an MBA. I took a finance program and there was a class called security analysis. It was the class I hated the most. Oh really? The teacher made it wrote and quantitative, not discovery and intellectual. And we taught, we were taught about regression analysis and that kind of stuff. You school? It's useful, but it didn't turn you on, right? No, I'm sure. And I didn't think about pursuing a career and this was, I graduated in 1980 and one of my close friends told me he's taking a job at Fidelity. Now at that point you didn't really know what Fidelity was. Yes, quite small. But to be an analyst and I said why would you want to do that? I don't really get it. But he did and he wound up running the Fidelity Contra Fund and he was retired at 36. So no. No. Yes. And then he pursued a different career. So, so, but at that time I didn't know any of this. At the time I thought, okay, that sounds, doesn't sound interesting. And I, now I'm sure what he said I did wouldn't have sounded interesting to him, but I went to work for an oil company doing, and if you have to go back to 1980 because in 1980 we were going to run out of oil. And it was over 30% of the S&P 500 at the time. And so it was kind of an exciting area. And the first day I got to school, I got to work, I formed an investment club. Oh. And by the way, I forgot one step. While I was at Wharton, they required an advanced study project they called it. And you did it with a group. So in my group was a guy named Joel Greenblatt, who I'm sure you know. And another guy Bruce Newberg, who wound up going into the, into the, into the trading, and Wall Street trading business. Anyway, we chose as our topic, redoing the original research that Benjamin Graham did on buying stocks that sold below their net, net working capital. And at the time, this was in the 70s, you remember, we didn't really have computers to do the analysis. We had the SN Standard and Poor Stock Guides that we flipped through. We realized that we couldn't go through the whole. So we picked stock starting with the letter A or B. Now it was our universe. And we documented that this was a still effective strategy. And wound up, wound up getting published actually in the Journal of Portfolio Management back in 1981. But so I went off to the oil industry and I said, I did this great thing. Why don't we pool our money and we'll invest in these kinds of things. So that's how I thought of it as a hobby.
And we did okay. And the oil industry was booming, so I wound up going to Amaco transferred me to New Orleans to work on oil and gas exploration. And then they moved -- and I was sort of on an accelerated career path. And then I moved back to the corporate headquarters and they put me in charge of the five-year plan. And then I reached that dreadful point of working in a company because the management didn't care at all about the five-year plan, but they did one. Really? It's all -- because this was the oil company at the time was people who drilled wells, and they love drilling wells. And if you looked at -- if you went into board meetings there, when I got a chance to observe, you see maps spread out over the table, and geologists pointing out where they want to drill. And these are just excitement. What are you going to plan for? Are they going to find oil? You're not going to find oil. And the price is going to go upwards, going to go down. So I got called by a headhunter who said, "Would you like to be an oil analyst?" I said, "No." And they said, "Well, why?" I said, "Well, I've read the analysis that came out of Wall Street, including reading about what they wrote about Amaco, which is where I worked." And I said, "It reinforced my idea that I didn't like security analysis. It wasn't that good." So this headhunter said, "Well, you can make a lot of money." And I said, "Well, who would pay those people a lot of money?" A question that still valid today. And she said to me, "They do. I think you should meet this guy. He'll come to Chicago, where I was at Amaco's headquarters, and talk to you." So I said, "Okay." And I wound up meeting the guy who became my boss. We hit it off. I got a different impression of what this was. And then I was in Wall Street in my 20s, as a cell-side oil analyst. So this is a very long-winded answer to your question. We're going to be a client. So I started publishing research on big oil companies. Have you kept it? I have. I have a lot of it. The first report I have erode was actually on the petrochemical industry. Then I did a report on natural gas, and then I started doing individual companies. So I do. I have some of that. And it was good, but I didn't like it. I didn't like being a cell-side analyst focused on only one industry. And I wasn't managing money. And I was at Bernstein, where they had both a brokerage business and an asset management business. So I kept saying, "I want to go on to the other side." And eventually they gave me the opportunity. And I became the -- I got the opportunity to start up a new investment strategy, which is kind of crazy what they asked me to do, because I was following big oil companies. And they said, "Can you start a small cap fund for us?" So I said, "I jumped at that opportunity." Funny how finance is so badly managed. But you did well. But I did. We started it at a good time. By the time we were ready -- I mean, it was hiring the staff. It was developing the whole strategy. By the time we got our first client, they were ready to move me into another job. But I said, "I wanted to keep this. I'll take both jobs," which I did. I became the research director. And for a while, I also ran the small cap fund that they had started. And what made you set up in your own -- I'm going to give you the confidence, because you still were quite young. I was still going on, but I wound up spending 10 years at Bernstein. So I ran it from my 26 to 36. And so I went -- part of that was as an oil analyst. And then part of it was as a research director. And then I became head of U.S. equity investments. And I had a mentor there, Lou Sanders, who's still in the industry and is still a great investor. And I respect him immensely. I worked with him side by side for five years. And I built up the confidence at that point in time. And they wanted now me to go one step further. They said to me, and they offered me the job of global research. Because Bernstein was going to move into the non-U.S. And I quit instead. I don't think that was one of the outcomes that they thought I would have. Joel Greenblatt, my friend from college, had -- he had wild success by the time he was that age, starting his hedge fund. And he called me, and he said, "Why don't we both quit our jobs and we'll invest our money together?" So I said, "That sounds amazing, but there's one problem. I don't have any. You have a lot. And I don't have any." So I don't want to do that. So he offered to actually back me in starting a firm. Oh, well. So he gave you his money to invest. He gave you one of the greatest investors. Correct. That's a very big vote of confidence. He did. And I left Bernstein. And for me, starting this firm was a lifelong dream. Oh, really? I also, the same father who was an engineer and tried to make it big in the stock market, also had this idea that you can't make it big unless you're in your own business. I mean, something. I heard that growing up his whole life. And when you were in an engine, he was a mechanical instrumentation design engineer in an economy that was highly cyclical, and he was laid off twice during my childhood. And those kind of things have an impact on you. And he said, "If you're in your own business, you wouldn't be laid off." And I later learned what it meant to be in your own business when you have cycles. But, um, yeah, it's worse than being laid off. Right. At least when you're laid off, you get a paycheck. Correct. Correct. High-funny. And because you were backed by Joel, presumably people, it was easier to raise money. Well, it was difficult to raise money. It was. It was actually, I found it easier to raise money than to hire good staff. Oh, really? Um, the money we wound up, um, getting early. I mean, I don't know. I presume this is luck and fortune. But, um, it was the Northern Trust who had an emerging manager program. And they were advising other big institutions on selecting, uh, uh, uh, up-and-coming manager. And they connected me with the state of Oregon. And we got a $30 million account 30 days into starting the business. That's fantastic. And their whole idea was they're going to watch you and see if 30 million didn't matter much to the state. But, um, if you were good, then the promise would be that they would expand the relationship over time. Um, and so we had a good first year, um, and a good second year. This is 1996 and 1997. Um, and so by the end of 1997, we were up to a billion dollars and beyond break even. Um, um, and we're kind of off to the races. How many people would you have had roughly? Um, like five. So you're well beyond break even. Yeah. You must be hugely profitable. Five people. Well, I was spending it on all the five people. I mean, it was, yeah. But it was, you know, these, these startup relationships are also relatively low fee too. Right. Yeah. Because you're saying whatever, well, take whatever I can get. Yeah. Um, and, and, um, then we ran squarely into the internet bubble. So you talk about being stressed, but, um, that we went 10 straight quarters under performing the market by a lot. Right. This was a time when the S and P 500 was up around 30% per year because of the internet. And our portfolio, we didn't lose money. We were even. We were basically zero in, in those years. Um, and, and then in the first quarter of 2000, we had January and February. And it was more of this and it was very depressing. We started to lose assets. I'll tell you a funny story about one client interaction. A woman walks into my office. She was a client. And she says to me, my grandmother's a better investor than you are. All you have to do is buy.
go, everybody in the world has figured this out except for you. So I tried to say, tried to do a rational explanation and say, you know, this goes the first company to reach half a trillion dollar market cap. If I had to buy the whole company and I wanted to make the 15% returns that you're not hoping to make, they would have to earn $75 billion a year and they earn $1 billion a year. >> They probably don't say it was of them. >> Right. >> Or something wrong with that and she said to me, you don't get it, do you? And I agreed with her and she closed her account. That was kind of typical of what was going on at the time. So anyway, fortunately, we actually got an offer from one of the other value managers to acquire the firm. And Joel did make a little investment in the management company and he owned a piece of it and they would have given him his money back and given us all jobs. And I said to Joel, you should really take this because we're 60 percentage points behind the market. It's not like this is not recoverable. >> That's all over at that point. >> Right. >> And I said, don't take it, I'll keep funding the company during this tough period because we went back into the red at that point. And he's like the ultimate gentleman and partner that you'd like to have. He didn't ask for incremental equity in the business. >> Right. >> And literally, he never even had to put a penny in because that's turned around almost the next day. I mean, by the end of 2000, we were ahead of the S&P since our inception. So we gained 60 percentage points on the S&P in nine months. >> Which you would have said would be impossible. >> I mean, I know the story. And of course, I lived through that time. >> Yeah. >> No, what happened. >> Right. >> But you just would have been unimaginable. And how did you manage to cope? I mean, you hadn't had your own business before. It must be in pretty stressful. You'd a young family, I guess. >> I did, I had not. >> I mean, what was it like personally? >> Well, did you, Joe said, oh, you said no, I'd rather take the job or? >> No, no, you were still. >> I still offer it. >> We turned down the offer. We turned down the offer. >> But in your head, how long did you think it would take you to get back to break even against S&P? >> It's funny because I don't think you really think that way at the time. I thought that the worst, I'll be able to get a job. I never doubted that I would be able to get a job. >> Of course, yeah. >> Okay, I mean, I was young. I, I, I, I mean, I probably could have gone back to Bernstein. I don't know what they would actually say, but I think I probably could have gone back there. I had a pretty reasonable 10 year run with them. And I had that kind of experience. So I, I think when people think about failure and the people that are going into these kinds of businesses or anybody starting up a company, they get overly worried about failure. And that's what hinders everybody. And my view of failure is, well, I just go back to doing what I was doing before and I'd be in the same position. How is that failure? You know, I'd have gained some experience over the few years. So I didn't have that. I said, I told my wife at the time that we would, we're just not going to, we're just going to buy groceries. We don't need to do anything else until, so I never, I never felt that. I felt more, more concerned about losing money for the, or not participate, not making money for our clients. >> It's funny, as I interviewed Jeremy Grantham a couple of months ago and he said that they lost half their clients in the dot com boom. And of course, when they came out of it, they were one of the top performing fans. He said, not one of the clients came back. Did any of your clients come back? >> No, no, same thing. We lost half, about half, the same thing. And so, but we got different clients, right? >> Yeah, I'm sure. >> And obviously you're a lot bigger for him today. You've endured another difficult period, right? I mean, volume's not been very easy for the last, I don't know, 10, 15 years. I mean, no, it's not, it's, but it's been, it's not been that different from the past, right? The differences in the comparison to growth. But the difference in absolute returns is not that big, right? And so, that was a worse period because you weren't delivering. >> We were zero for those two years. This time we're making almost the same that we were making over our whole entire life. The last 10 years, it's been close to 10% a year. >> So, you've not been losing clients because they've been going to growth or? >> No, we have not. But we have a different business than we did that back then. Back then, it yours start up, people are saying, okay, I'll give you, your smart guy, I'll give you a chance, make money for us. Now, we're hired for exactly what we do. And we're extremely clear that this is what we do. We're not going to be investing in startup businesses or even trillion dollar startup businesses like Anthropic. That's for somebody else. And so, if you want us for this part of your portfolio, we'll do what we say we're going to do. And so, it was not, right? At that time, it was mostly individual money. Now, it's mostly institutional. And the individual money that we have comes more in a sub-advisory relationship with a sophisticated intermediary that's not firing us. >> Okay, well, that's good. >> Yes. >> And look, your philosophy is to buy good businesses experiencing temporary problems, earnings problems. You focus on generalized earnings and you invest when sentiment is extremely negative. Is that philosophy changed much in the last 30-something years? >> Exactly, exactly. >> Exactly. >> Exactly. If you looked at our sales pitch from 30 years ago, it wouldn't be that much different. It's probably more elegant today and the graphics are better. But fundamentally, that is what we do. And there is an endless supply of those, right? It's not like you run out. >> And are there more now because of the AI disruption? >> Well, I mean, I don't know if there are more, but there are plenty as the way I would put it. In fact, we define cheap as the cheapest quintile, so the cheapest fifth of the market. So if you're looking at the Russell 1000, there's always 200 stocks to buy. Okay. So the question is, how cheap are they? >> Yeah. >> Right. And today, if you measure that relative to the market, you can say there's a giant wide cap. If you measure it in the absolute valuation, they're a little better than average of what they've been over the last 30 years, which is nice because there's very little in the world that's a little better than average from a value perspective. And values have declined over the last 10 years for value stocks in the US. So it's not that hard to find things today. And some of them are companies that you think might be disrupted by AI, but most are just totally unrelated. They're just businesses that have run into some issue. >> And on the AI disruption, I mean, it would be very odd, I think, for a deep-value shop to have a tech analyst. But do you have to have a tech analyst be able to work this on? >> No, no, no, we have tech analysts because a few things. One, there are tech companies that can take tech companies. Microsoft was in our portfolio a decade ago. >> Yeah, of course. >> A decade ago. Google was in our portfolio a decade ago. I mean, we bought Microsoft at a single-digit PE multiple in the 20s and sold it in the 60s, thinking we had done great and went to 500 or whatever it went to. So we didn't even hear the word the cloud at the time that we had invented and invested. But when you look at a company like a Microsoft that has a real franchise and their franchise at the time was Windows and Office. Those are very sticky businesses. You don't analyze them like a technology stock, really, because I would tell you about Windows at the time we owned it. Every expert technologist said Windows is the worst operating system on the market. And yet it had a nearly 100% market share of the server business. So they all, the tech people all like the things that were more techy. So how funny, that's bizarre. And Microsoft Office had become ubiquitous in the everywhere, in corporate America, but in with anybody that's doing any kind of spreadsheets. >> It was funny, I was talking about that this morning. We were calling the gray old days of Lotus 123, which was far better than Excel. Thanks, Brett, for the next out today. You've got three questions, three core questions, business quality.
the problem being temporary and management having a plan. I wonder if we could just talk about those. They're very interesting. I mean, business quality, how do you think about? Well, the business quality, the way that I would describe it is that this is a business that should make outsized returns given its characteristics. So those characteristics could be something like a dominant chair position, a low-cost position, a brand or a franchise that's difficult to disrupt. There's all kinds of reasons that companies make returns in excess of their cost of capital, but is not doing that now. So, meaning that if the management had a business plan and you listen to the plan and you said, "Okay, that sounds reasonable." And it failed. You would say it's worth trying again. It's not a business you walk away from because of the characteristics. So, either another management team would come in, the board would replace the management, or a buyer would come in and say, "I think I can do this better." It's just a kind of thing that is kind of obvious that you wouldn't walk away from. Even if it's doing poorly today. And so, that's what I mean by quality. It's not interesting. And then the problem is temporary versus permanent. Well, you know, it's. You don't know, of course, but when you can specifically point to some bad decision they made that caused something to happen or some industry cyclical condition and you have a history of things going being good, it's not that hard to figure out if it's temporary or permanent. But that must be the most tricky thing. It is. Because the value traps are temporary problems that I'm going away, right? They are. And part of being a value manager is that you're going to make mistakes. And you're not going to think it's a value trap at the time. I mean, I joke about this sometimes because the whole act of trying to avoid value traps kind of makes it so you can't be a value investor. Because you have no idea what you're going to be the value traps in which you're not. I mean, people say they know. I don't know how they know. One of the things you do know are that companies that have weak balance sheets, whether they're value traps or not, they may not have enough time to fix the problem, companies that are in decline, where the business is in decline. And you hear this when a company. They don't use these exact words. So this is my paraphrasing with clear liberties taken. We don't like our business, so we're going to try another one. Yeah. We avoid those kinds of things. Right. But when they really believe what their competitive strengths are, and they can document them, and they can tell you, this is what we have to do to fix it. And most of the time, when you're listening to management's on this, these are not short-term fixes. Because if it was obvious that they could turn this around in six months, it just wouldn't be cheap. And the odds that we figure it out, that it's going to turn around in six months, and nobody else does, is not a reasonable expectation. So what are the signals that would make you go yes or no? I mean, is it something the management says that confidence. It's logic. Okay. Most of the stuff is common sense. I agree. So I'm going to give you what it will make us sound almost foolish. And this was even before. This was that, that's Sanford Bernstein. So it was more than 30 years ago. Sears got cheap. Now Sears is gone. Right. But at the time, Sears had a long, long history of around a 4% margin. And they had some great or perceived great businesses. Craftsmen tools. I don't know if you know these. I'm not very familiar with brands, but I'm talking about them. And they had their own brand of appliances, Kenmore appliances. And they were. And we went to visit. The margins had eroded from 4 to 1. And the stock price got killed. And the management was widely viewed poorly. And we went and visited in the CEO. But the basic question is what's wrong and wrong. And what are you doing? And he said, "We don't know." Our. Our systems are so bad that I don't know which stores make money and which stores lose money. And this is 50 years ago, 40 years ago. I don't know which of our segments are profitable and which are not. Come back in six months and we'll have finished this work. And I'll be able to give you a better assessment. That's what the guy said to us. Wow. I mean, that's. That's pretty honest, right? Yes. We bought the stock immediately. Just because we figured he would figure it out and then fix the problems. Okay. And he came back to us and gave us what I thought was the most shocking set of conclusions. We're getting killed in the tool business because of Home Depot. We're getting killed in the appliance business. We make tons of money in women's apparel. Okay. And this was a discount department store, basically. And total shocks. Here's what we're going to do. We're closing the tool business. We're changing. We're reconfiguring completely from only selling our brand to carrying all the brands and just being a reseller. And we're expanding the size of the women's clothing department. And the margins went back to 4%. Now, how do you gauge whether that's going to be successful or not? You don't know, right? You don't know. You just have to watch and see. You have to say that that's what so many people can't understand about value investing, real deep value investing. People think you have to know before you invest. We think you have to know what the range of outcomes is. Yeah. So if you think that going back to 4% from 1% is going to cause the stock to double because that would make logical sense. Okay. So your upside is a double. The downside is, well, it's priced as if they're not going to improve anything. So what risk am I really taking by seeing if this works? They're not financially insecure that they're going to go out of business. Took 25 more years before they would go out of business. So the point that I'm making is, is you're just making a judgment based on what you know about the business, about the competitors, about the market and environment they go with. Combining that with the plan that they have and said, okay, this has a chance of working. But we want to, we want to underwrite these holdings so that if we're only 50/50 in our judgment, we'll do okay. And if you can be 50% chance that you double your money and 50% chance that you lose 25%. If I gave you that bet, you would take it any day of the week. Sure. But almost nobody in the stock market will take that bet. Because they don't think about what the downside is versus the upside. They just think, this is bad. I don't know why you'd want to own this. And in fact, I always joked that the most common question I got from our investors, and you also have to put the perspective back 30 and 40 years is, don't you read the newspaper? Everybody knows that Sears is dead and it's mismanaged. So my perspective is, is I'll take those every day of the week. And if I can be 60/40, because I have a bit of an edge by doing all this work, then I'll have a great record over time. And we've managed to be around 60/40. But losing on 40% of your investments is not something that people readily admit to. But it's been the reality. And what'd you do with the 40%? I mean, how did you know when to sell? When did you give up? You give up. You have to have some sort of a systematic process of knowing what's cheap and what's not. Our process is just comparing the price to what we estimate the normal earnings should be in recovery. So if you come to the conclusion that you were wrong, that the normal earnings of Sears is not $4 a share, it's $1.50 a share, then you market to $1.50 and say, wow, this is no longer cheap. And I exit. That's how we do it. Similarly, if you think it's still $4 and it's still cheap, we would buy more.
But when it got to the point where it was fairly priced or relative to that $4, then we would exit. So to me, the discipline is the same. You just have to constantly be, I almost say it'd be obsessive about, did you get it right? And you have to be open to not fall in love with these companies and say, and I think that's what a good portfolio manager does. It's more on how you behave when you got things wrong that that that takes your dictates your success. Are you a professional investor? How many 10Ks and annual reports do you look at in a year? Ever wished you could cut through the noise and process them faster and more effectively? We run a forensic accounting course for larger institutional clients in their offices. For smaller investment funds and individuals, we also do them in person, in London and New York and over Zoom. Email us at
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It runs multi-set, interest-evanlases using alpha cents for proprietary content, including those expert transcripts, and in minutes, surfaces insights that would take multiple interviews and days of digging to uncover. It's like adding 10 analysts to your team, helping you accelerate analysis, deepen understanding and make sharper decisions. See it in action at alpha-highthensens.com/btbs. This is a tool serious investors won't want to work without. So what would you do when. So I've just joined a new analyst and my first recommendation goes badly wrong? Well, so one of my partners who unfortunately passed away from cancer, young, at a young age, sorry, but this is a while ago, but his first dog, this is a good example. He worked on Agco, which was. Yeah, Tractors. Right. Agricultural. They were kind of the number three player in the world. And he did all this analysis on why the cycle should be good, and this company should earnings should grow, and the stock fell 50% in the first six months. 5-0. 5-0. Right. And we reviewed it again. He was like suicidal. I'll tell you, because that's what. You think about when that's your first company you worked on. You're going to get better. But we re-did the research, and we concluded that he had gotten it right, and we doubled our position. And eventually it was like a 4x on the lower price, and maybe a 3x on our average price. But it's such an important learning experience for an analyst. And he focused too much on what he thought the long-term normals should be, and not on the path. And so. And you worry about the path? Well, we try not to buy while the business is deteriorating. Right. If you wait till. It's obvious. You missed out. So that's the trick. I mean, it's an art. It's not a science. So we do. We worry about. Mostly businesses don't behave in a V-shaped pattern. They deteriorate. The management tries to do something about it. Then it bumbles along the bottom for a while. That's when we're trying to buy. But it could have another leg down, which is what Agco did. Yeah. But then you re-analyze it, stabilize it again, and you say, "I still like the risk of war trade off." But sensitivity to what could happen if you get it wrong is such an important thing for an analyst to learn firsthand. And it's fine. He probably was worried about his career. He would have been the my successor if he hadn't passed away. So it's. Because he was really smart and he did good research. And in the end, he did get it right. Yeah. Agco was a funny one, because it was very sensitive to commodity prices. Because I used to play around in the agricultural space. There's quite a lot of different ways of playing in plantations to tractors. And I thought it was very interesting. It was quite good data, particularly in the United States, on agricultural yields. Yes, absolutely. So you could watch the cycle. And just occasionally, the cycle did stocks got completely out of sync. They did. They did. And the interesting part about the agricultural businesses that the tractor installed base is roughly flat. So it's a replacement cycle. So you can do pretty decent long-term arithmetic. You can't know what the commodity cycle is going to be. So if that goes against you, it goes against you. But you know that people have to replace their tractors when they wear out and they have a useful life. So that in and of itself gave you some confidence that this was an okay business. I was looking on your website. You've got lost funds and you've got a wide range of number of stocks. So the US best idea is just 15 to 25. Global best idea is 20 to 30. Global volume is 60 to 95. I wonder is that because of the preferences of the lead PM or to do with the sector? It's the client preferences. Oh really? Okay. So not everybody wants your highest octane product. And so the best ideas are highly concentrated. They're more volatile. They take bigger sector bets and bigger individual position size bets. They're also our highest fee products and they have the best records. But they're even more volatile. Other people say I don't want to pay that fee. So or I don't want that kind of volatility. And particularly when you're dealing as a sub advisor to a retail client base, they want they want more diverse. Yes. And so we've been so it's the same philosophy on all of these on doing the research. But and we started as a as a purist that we're only going to do the best ideas. And then you run into we can't take this one and it winds up you wind up negotiating into a new product is what what what what happens. So we have that range from folks we have kind of three levels best idea focused and then the and if you've got like a 10 to 15 stock portfolio, you equally wait it. How do you know it's also weighted by convection by cheapness. What would be the maximum you would hold in a single stock or in two or three stock. It we would hold 10%. Well, if you've got 10. Well, we don't have 10 anymore. The minimum the 15 to 25. So you yeah, 10. So it's we we can hold 10% at cost and 15% at market if it goes up. And that's a sort of a hard one. And that's a hard hired saying we have to start trimming it back to us for risk exposure. But those are big position sizes for is not for the the tame at heart. No, no, no, sure. And how long typically does an investment take to work? Besides some of these are average holding periods around three and a half years. Some of them work fast some of them drag out. And it's rare that it's within a year because we are looking at for almost certainly at companies that will take more than a year to fix their problems because that's what comes as cheap right that's what screens up because you tend to be
We tend to be early. We also tend to have a higher threshold for how cheap it is. I mean, it has to have a lower valuation. We're not saying the Russell 1000 value index is a 22 PE portfolio. We want a 19 PE portfolio. No, we want a single digit portfolio. And to get single digit, the people have to have given up on this company. The market has to have given up. Do you have any other ways of assessing whether people have given up rather than the cheapness? I mean, I used to like the conferences. So I used to ask, are there any stocks where nobody wants to see the management? No, actually, we've never done that. But no, it's all based on valuation. We're doing it based on valuation. I remember one of the first investment conferences I went to, see how they say, or the big conference in Hong Kong. And one of the stocks, you couldn't get seat. I just thought, oh, no, no, no, no. Well, of course, we were long and short, so we could have shorted it. And just to talk a little bit about your firm, am I right in thinking you went public at one point? We did. So Joel Greenblatt, who was the founder, the founder, not the founder, the founder, after we had some fairly big success post-internet bubble, he had put his shares in trust for his children. It was now a valuable asset that was concentrated in a sole asset in a trust for children. And he had some pressure to sell. And in our, we barely had a handshake agreement, really. And he had no way to get out of his, so he asked, can I sell part of my shares? And we started a process in '05, roughly, to look at ways that we could raise the money to buy him out, or buy half of his stake out, which is what he wanted. And at the time, this was a pre-financial crisis. So the bank money was scary available. I mean, it was, we'll give it to you with a low interest rate, long-term, no covenants. As I said today, and I said, don't you understand? I was saying this to JP Morgan. Don't you understand that people can fire us at will? They just send an email and we're fired. And we don't have any revenues anymore. There's no guarantee about our future. And they were trying to reassure me. You have a sticky business. I said, I'm not borrowing money. I'm sorry, I'm not going to do it. And then we went to private equity firms. And there was a parade of them that came in. And the whole process of this kind of stuff always amazed me because you'd have a one-hour meeting and you'd get a term sheet from a private equity firm. Now they was subject to due diligence and all of that. But the terms were always very similar, which was it's temporary capital. You know, we're in a fund after five years. We got to sell it. You got to either help us get out. You got to redeem. And I just figured, do I really want to spend my life finding another partner every five years? I don't want to do that. So we hired a banker and we tried to find a strategic partner that would take a permanent position. And we did. We actually found a European bank that would do it. But when we got the actual terms in writing, it was clear that they weren't going to leave us independent. They wanted control over everything even though they had a very small stake. And the banker said, why don't you go public? The markets, you're going to get the best valuation because the markets are a little frothy. It wasn't even for me. It was for Joel. And you then will have liquidity for yourselves long term. So we thought that that was a good idea. Turned out not to be a good idea, but why wasn't it? Because we really didn't have liquidity, right? And I was not smart enough to figure that out at the time. If I sold one share, the stock price would crater. And I always thought, if we're doing really well, we continue to do well. We can sell a little bit at a time. And then over the years, the business became profitable. It doesn't require a lot of capital. So we distributed all our earnings. And then I never worried about having to sell it anymore. So I lost that. And the market enthusiasm for traditional asset managers and particularly value asset managers disappeared. The valuation was ridiculously low. And so we went back private again. This time we did borrow the money. But we had a much, much more diversified client base that had much more stable characteristics than we did 20 years ago. So you sold it multiple and bought it back at what multiple half one of the other. Yeah, we sold it at around 20 times after tax earnings and bought it back at 11 or something like that. Funny, isn't it? And what did you learn from being the CEO of a public company that you never wanted to do that again? Well, there must have been, so it must have been interesting to be on the other side of the table, no? Yeah. Yeah. I mean, we were nobody would pay attention to us. So we were a very small cap company. We only sold at the end. We only had like 22% of the company is was listed. We had shareholders that would talk to us. But it was like a knot. It was not destructive at all. Oh, really? It was not. We were very clear that we were running the business the way we would run the business. We retained voting control. And if you want to be on along for the ride, that's great. And we'll be happy to talk to you. We had an investor relations person that got questions, but it wasn't a big, a big burden for me. What happened was the costs of being public started really going up with with D&O insurance and fancy accountants. You have to have fancy accountants. Then you really need for kind of a simple business of collecting fees and paying salaries. No, come on. When you're buying stocks and they've got not the fancy account and you're not worried. Yeah, that's why you have to get them. Yeah. Right. So we had to get them. And they charged twice as much as the not fancy accountants. So you know, it's a multi-million dollar bill to be public that we wouldn't have to pay as a private company. And there was no value. There's no liquidity. The valuation was terrible. The costs were high. You say, why are you doing this? So we exited the markets. The team, I mean, some of your original partners are still with you, I mean, is that right? Three founders are all still there. Two of us have given up our day-to-day responsibility. So I'm no longer running the company. I'm just an investment guy and part of the investment team. And my partner, Bill Lipsy, is not running the business side of it. But he's still getting involved in big transactions and big clients and some startup investment products that we have. And so we're, but neither of us are in the office five days a week. I'm a three-day a week guy in the office now. And can you function like that? Oh, yeah, because, well, I mean, it's not like you're turned off the other days. No, no, no, no, but I don't. I, you can. Yes, when you don't, when you don't have, when you're not the person who has deliverables on a daily basis, and you're mostly acting as a mentor and a coach and trying to develop the younger analysts into better investors and trying to take the portfolio managers and challenge them. And we're not a very active trading firm. So the answer is yes, you can. I can do this for I think as long until they kick me out because I'm not helping. And talk a little bit about mentoring people and how you train people in the firm. Well, we tend to hire our investment people at a not right out of college level. It's people that have had some experience and they're maybe more like 30 years old. Why isn't why isn't that because they've gained some maturity. We tried the young people and they just had trouble interacting with CEOs. They were intimidated. They just weren't mature enough that that's the bottom line. There's a lot of smart people. Yeah. And
And we also wanted people who had some kind of business experience, more so than investing experience. Right. That's presumably, particularly helpful if you're looking at the path to recovery. Correct. Correct. We figure that investment part of it is easy. If you get the business right, you know the price and you know what's going to happen. It's not that hard to decide whether to buy it or not. The hard part is, can you really analyze this business properly? And you rotate sectors. We do. This is quite interesting because I was talking to the one of my clients of very big hedge fund and the founder, one of the founders said to me, he said, you know, the analysts get to bog down in their sector. They fall in love with the stocks and they're performing. And I said, well, you know, fidelity, rotate the analysts. He said, well, really? He said, maybe that's what we should do. He hasn't done it yet. Talk about that. Why did you do that? Well, look, when I was still at Bernstein and I was the oil analyst, they asked me to be a mentor to the retail analyst that were coming in. They were Bernstein hired to retail analysts and asked me to mentor them. And the process there was, they had really a lot of experience in retail. Both came out of the industry. They knew way more than I had knew about the retail industry. Well we put them in an office for six months while they write their first research report. It was a big, thick black book. That's what Bernstein was famous for. And then still, and then you would launch them to the clients. So I had one meeting that I'll never forget. We went to this guy and I can't come up with his name right now, but he said to me, the reason I love Bernstein research reports is because the initial report your analyst writes are the best research on Wall Street. And I, that really had an impact on me because I kind of observed that. Like the first year an analyst does work on an industry is the best. They, they bust their butts, right? They read everything. They build models. They gather data. They go to conferences. They call everybody. And, and after a year, they kind of think they've got it figured out. So in year two, I think the workload drops 80%. Right? They, and by year three, and this is being somewhat facetious, they play golf. You know, they go to the conferences, but they're more there to meet people than they are to learn something. So I said, why, why are we having them continue to follow these companies? And, and by the way, when you're hiring people and you tell them, you only cover an industry for three or four years. And then we rotate you. They love it. Okay. They love that concept because they're not from Wall Street generally. And the idea that you're going to get stuck doing one thing for the rest of your life is unappealing. It also develops better portfolio manager. So if you've had a chance to see five or six or seven different industries over the course of your developmental stage, then become a portfolio manager. You're better. Third, it means you have more than one expert in the firm on everything. You're not just one person. And so there's some healthy debate. And there's always the new guy that's taking over for the one that's giving up the coverage. The new one always thinks, oh, I'm going to show this guy up and I'm going to do a better job and find out what he did wrong. So you get a fresh, think thought process. And finally, I think you keep analysts longer when you challenge them intellectually. Okay. Interesting. When there's a rotation, and this will be a firm wide rotation, or is it you do what you do? No, it happens. Yeah, it happens constantly. So it's not like everybody changes places. There's a new person that comes in and they get one of the old ones and you get the musical chairs. The research will orchestrate this. I know it's a chord. But when somebody new takes over, do you ever get that inside? They can go, actually, we should get rid of this stuff. Yes, absolutely. Absolutely. How often does that happen? Not that often, but I can think of a few examples where we changed the whole thought process on an industry because the new person had a different perspective. So interesting. You don't fall in love with your stocks, obviously, at Pizina. No. But we, first of all, we're always doing research on new things and we're always fully invested. So if you want to buy a new thing, you have to sell something. It just has to choose what you're going to sell. So our discipline is, when it reaches, quote unquote, "fair value," which for us is we're ranking stocks from cheapest to most expensive. When it reaches the midpoint, it has to be sold. No questions asked. But if you don't have something to replace it with, we'll all cash for some period of time. Oh, really? Yes. I mean, and that happens occasionally. There's sometimes there's friction because you didn't finish doing work on something. But more often than that, it's, you want to buy something, you don't have any money. So you say, "Okay, what's close to fair value that we would sell and replace it with something that's very cheap?" And that's how the process works. And it's usually one in one out, I think. Yeah. And you said, "It's second nature for you to go through a sheet of numbers." Is that sort of pretty much a requirement in your shop? You've got to be pretty volume oriented. I know. I would say no. I would say that different people have different skills. So like looking at a page of numbers and getting it is, I have that, okay? It's just innate. It's just innate. Other, my partners who are senior partners don't function that way, right? They have to really understand and are more verbal. They need the words. They need the dialogue with the company. They still have the same kind of insight, but they arrive at it in a different way. So we're looking for a couple of skills, pure analytical ability. And ability to get information, right? To talk to a CEO of a company in a way that you get something out of it. It's an out-to-no. I do know. Well, my partner, John Getz, who is the Co-Chief Investment Officer with me, he's the best I've ever seen at that. Now, he was a CEO, okay? He was a work for a chemical company and he ran their Asian operation. So he was a divisional CEO, not a corporate CEO, but when he goes and talks to other CEOs, it's like a natural, if you just watch it happen, it's a gift, okay? It's an innate gift. I know it's about making them feel at ease or making them feel that they're potentially interested in what they have to say, that it's a two-way dialogue, that you're not just looking at your question list and then asking one and going on to the next one, that you're, you know, I can just. I feel like I'll put my question to you. No, you're not doing that at all. But it's an important skill. And it's one of these things that you don't really get formally talked, correct? And he teaches that, okay? But mostly by modeling it, by taking people with him and saying, "You sit there and be quiet the first time you come." Second time, ask one or two questions. The third time we'll split it and the fourth time I'll watch you, you know, something like that. Okay, cool. And then I'll give you my feedback. So this must be particularly important doing what you do because a lot of it is about the ability of that CEO to correct me and the current. Correct. So are there lessons that you can share about how you judge management and you judge their ability to deliver? Yeah, I mean, it's an interesting comment because almost by definition, I get used that Sears example before they have to do something stupid to get cheap, right? So no, it's not always their fault. So I don't want to make sure that's an exaggeration of the statement. But they're managing an enterprise that is not doing well. And most people judge a management's capability by the results. They have no other basis for judging them. And we sort of look at this and say, okay, that's true. But everybody is fallible and makes mistakes. We all have made mistakes in our career. And sometimes those mistakes can have a big impact on the earnings of a company. So we're more judges.
it based on the plan. Sometimes it might not be there for, I mean, something in the audience's event. But there must be in a very defensive position at this point because their investors hate them, their employees. Yeah. One of the things that's true, the investors definitely hate them. Yeah. So when we show up and we say we really are thinking about buying the stock and we have a lot of questions because we are not going to go into this without really understanding, are you willing? Now, when you'd have nobody that wants to talk to you, you're generally very willing. And the only people who want to talk to them are in pod shops, so when they're short the stock. Yes. Right. So so we get we get access mostly by convincing the investor contact that we're worth talking to. So that we're asking serious questions. We're not trying to get them to divulge something about the current quarter so we could trade it and make a buck. We're trying to understand should should we be an owner of this business for a long time? Well, you're not going to be there for that long. Are you? Because you know, I mean, tell them, all right, we're going to once, but they're so desperate. Yeah. Any friend is a friend. Correct. And when when you're in favor, you're having plenty of shareholders, you know, you'll be happy to see us be gone because it's not good for you when you're our shareholder. Yeah. And they kind of understand that message and they respond to it. So we have generally good access. I'm sure you did. Yeah. That's really fascinating. Really fascinating. And you've been doing this for such a long time. The market structures change tremendously. You know, there's passive, there's pod shops, there's fewer active managers around, I mean, David Einhorn, famous names complaining that, you know, the fidelity and capital guys weren't there for them to sell on his positions too, you know, they used to pass the parcel. And you know, dude, what's your observations after all this time in in markets? Is it a lot more difficult today? Well, I mean, to some extent, it creates better opportunities. So that I understand what you're asking. It's more difficult in that if you're beholden to your relative performance against a benchmark, it's very difficult. So we make it clear that we're not. If you want somebody that's going to beat the S&P 500 all the time, I don't even know how to tell you to, I would even try to do that. I don't have a clue. If you want somebody who's going to buy cheap stocks and sell them when they're not cheap, independent of what the market's going to do. Okay, well, hire you. And I know you're going to evaluate us against the market anyway. But there are, there are institutional funds that have explicit review processes for managers. And they say, if you underperform your benchmark for four consecutive quarters, we go, you go on the watch list and then two more quarters and you're out. So I say to the people, we'll definitely be on your watch list. So you sure you want to hire us because we'll definitely be on your watch list. Because they're going to be times when what we do is not related to the benchmark. Or, you know, especially, you know, the more interesting question is the how the benchmarks have changed. Yeah. Right. So the Russell 1000 value, I don't know if you know how those are constructed, but there's equal market weight in the Russell 1000 growth and the Russell 1000 value. So the Russell 1000 value has 900 stocks in it, 900 of the thousand are in the so everything is in the Russell 1000 value, except for the highest flying growth stocks. Not what I would call our universe. Right. We would, most of the stocks we wouldn't own. So if you're going to evaluate us compared to that, I don't have a better benchmark. I mean, I really don't. I could, I could create one, but it's not a publicly available benchmark. Sure. So if it's important to you that we look like the value index, we're not the right people to hire. I believe in the long run, we beat the value index because it's not just a dumb construction. It's not value and value works. We're going to beat it in the long term, but there could be you know, long periods where we don't. And you, there's nowhere you won't go. Is that right? I mean, you won't know. No one stocks in China or we know we own stocks in China, particularly when everyone's when somebody says that market is uninvestable. I mean, you should, you should just load up. And China is not like when you look at the Chinese market, it's a massively diverse market with pretty much all different kinds of industries. Some of them are not export-oriented. Some of them, I mean, they're all different things. They're not exposure to. So the idea that you're universally make a top-down decision like that seems strange. But you only invest in America, is that right? Me personally. Yeah. Yes, my part, my, I'm the work co-chief investment officers. I use do the US side. My partner, John Gats does that is in charge of the news. And is there a reason for that? I mean, yes, because there's a limit to any human beings capability. And if you want to really understand the stocks that you're in, that you can't do everything. And just to finish off, I mean, if you were to go back and advise the young rich five quarters in of the underperformance of five of the ten, what advice would you give them about being a successful, we've been an amazing success. I would say do what you're good at, not what you think somebody else wants. And, and if they choose not to hire you, just wish them luck. It's not personal. And you know, that's why to me, when I did a succession plan, it was so important for me that it's an investment person that succeeds you, me, not a business person because a business person looks at the market and says, look what's hot, we can do that. Let's have that product. And an investment person says, what are we good at? Let's do that. And they'll come if they want to go, right? It's a very different mentality that in the direction of a firm. And so we've been very religious about doing what we do and not making excuses, telling, I mean, if we do, if we make mistakes, we own up to the mistakes. If the mistake is a mistake of omission, because we're in Biden video, I would say, okay, well, you have a lot of other people that buy in video. So you should have them as your managers that do that, not us. And if you want us to make that decision, you hired the wrong people. You've built a massive business and you've got your name above the door, but you've built something that endures without you, right? It does. And particularly given that I never focused on the non-US part side of our business. And it's now 75% of our assets. Oh, really? Yes. So that's where all the growth has been for us. And mostly because we were kind of an early as a pure value practitioner in non-US markets. So you were just a lead. Yeah. And there's more competition in the domestic. Yeah, there now nobody wants to be a value man, journey where so. But he's going to have his day again. It is going to have its day again. Yeah. I mean, and really the performance over the last 10 years while it's lagged the market dramatically, it's not that different from what our long-term record is. So the real bet for us is that the market can't continue to produce 15% returns among the biggest companies cap weighted based on whoever had the trailing success. I mean, the idea that the same companies are going to be the leaders in the next decade and the past doesn't have a lot of historical precedent. But we're in a different era. Yeah, I guess. I mean, it could be different this. I'm not saying it is, but it could be. Of course. Of course. I don't know if you saw that there was a very good presentation yesterday by the gentleman from Boston Partners about the AI economics. Yes. Those fascinating. Yes. I thought he was very brave to do that kind of an analysis. And it's really difficult to do because I've tried to do it. I'm not. I don't have a technical understanding to do the songs, but no, I thought it was very interesting. And do you think the SpaceX IPOs kind of like the the AOL time Warner, the Vodafone, Berksmann? I don't know. Yes, but I don't have any basis for saying that. I just think that the idea that you have multiple trillion dollar companies that are competing for a technology that isn't resolved yet is just crazy. They can't all be worth the trillion dollars.
And so if you bought them all with the idea that you're going to hedge your bets, I think you wouldn't have a losing proposition. And if you knew which one was going to win, then pick it. Okay, I don't know how to know that. You're very good at saying I don't know. I tell you once one of my best skills, yeah, because I think you should acknowledge one you don't know. We always finish by asking our guests to recommend a book. We a book that you're enjoying or a book that a young person entering the industry should read or. Well, do you have any book recommended? I'm a reader. I'm a reader. Yeah. I don't read that many investment books. So you probably don't need to. But I read toll green blad's book. Okay. And that's a must for somebody entering the market. It's why it's even you can be a stock market genius. It's that's not the exact title, but it's something like that. We'll get the title right in the journals. And then I read a mixture of fiction and nonfiction. I had I read a very interesting biography recently, which I guess is I'm very late to this because it's been around for, but it's called the power broker. It's about Robert Moses. I don't even know if you know who that is. I don't know. He is the guy who built all the infrastructure in New York City and the surrounding areas as an architect. Now, by infrastructure, I mean bridges and parkways and highways and it's a fascinating, fascinating book. Why is this so interesting? Well, part of it is being a New Yorker. It makes it more interesting because you know all these places. Yeah. And you, you know, you drive out out of New York on the island and you pass something called Jones Beach. Well, Jones Beach was like a dream of the how providing recreation for the masses. And it's 100 years old now. And the on Long Island outside of New York were all the states of all the wealthy bar industrial barons. And he was going to build roads right through their properties. And so it talked about so it was fascinating. It's actually a Pulitzer Prize winning biography. So, wow. Okay. I'm going to I'm going to it's a lot. It's like a very thick. Oh, no. Okay. So I might get a Kindle version and take a take on the holiday. Listen, it's been such a pleasure talking to you. I really appreciate your time. Thank you. Thank you. I enjoyed it myself. That was Rich Pizina. I loved how Kennedy was about the pain of the late 1990s bubble. Ten consecutive quarters of underperformance, a client telling them their grandmother was a better investor and a sale of the company and prospect. And there was Joe Greenblatt persuading him to hang on backstopping the losses and not asking for anything in return. What a friend and how shrewd. And Rich's equanimity, the idea that failure is rarely as final as we imagine it. He knew he could just go back to what he was doing before. His investing philosophy by good businesses with temporary earnings problems, focus and normalized earnings and insist on a big valuation gap is deceptively simple. But the discipline around it is what really struck me. I so enjoyed our conversation and I hope you did too. And it may inspire you to leave a review. And on that, hang on for another minute for something quite special. If you enjoy the show, the best way of helping me spread the word is leaving a review or even just a five star rating. It gives the podcast social proof and helps attract new listeners. Each month I'm going to read out a couple of recent listener reviews. I love that you're honest with me, even when it's things a bit. First up, a listener calling themselves USXPAT1 in UK store left a three star review titled Good Content Bot. They wrote, "Stead gets great guests but his voice and accent are highly irritating." Well, XPAT1, that's prusly honest. The guests are great, the host not so much. The bad news for you is the accent is probably here to stay, but the good news is the guests will keep doing the heavy lifting. And to balance that, here's one from the lovely Harold from Berlin in Germany titled "One of my favourite investing podcasts." This is one of my favourite investing podcasts, the host Stephen Clapham, apart from being very pleasant to listen to, knows how to ask the right questions and how to tease out previously unknown aspects about his guests. So between London and Berlin, I go from highly rating to very pleasant to listen to. That's what I call a range of opinion. If you'd like to add your own verdict, please leave a rating and a review wherever you listen. Each month I'm going to pick out two reviews, a winner will get a behind the balance sheet polo shirt, and a runner up will get a baseball cap, just post a review then email me with a screenshot. Thanks for listening, even you USXPAT1. Behind the balance sheet and affiliates and podcast guests, my own shares or have an economic interest in securities discussed in this podcast, which is aired for your education and entertainment only. Nothing in this podcast should be construed as investment advice or relied upon for investment decisions. Always do your own research.
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