Seth Klarman – Timeless Value Investing (EP.328)

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hello I'm Ted sides and this is capital

allocators this show is an open

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behind Capital allocation through

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upon as a basis for investment decisions

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guests May maintain positions and

securities discussed on this podcast

my guest on today's show is Seth Carmen

legendary value investor and president

of the bow post group an investment firm

founded in 1982 that manages 27 billion

dollars

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authored the very out of print margin of

safety and edited the recently released

seventh edition of gram and Dodd's value

investing classic security analysis

our conversation covers Seth's early

experience in business and investing

with Davao post Timeless value investing

principles and those that have changed

over time

we discussed bowel post's application of

value investing across sourcing

diligence portfolio construction and

risk management

we then turn to Seth's thoughts on

illiquidity International investing the

weird current environment positioning

portfolios for it alignment with clients

succession at Outpost and this updated

perspectives on the book's security

analysis and margin of safety

we close discussing Seth's personal

investments in the Boston Red Sox horse

racing and philanthropy

Seth generally stays away from the

public eye so I was particularly

grateful to share this conversation some

25 years after we first met

before we get going we're hosting our

fourth cohort of Capital allocators

University in New York City on September

14th

Capital allocators University or CAU is

a chance to connect and learn with peers

we'll bring together a few dozen

allocators each with around 5 to 15

years of experience to share Frameworks

on interviewing money managers

investment decision making leadership

and management and investing and will

engage with four fantastic Chief

investment officers Jenny Heller from

Brandywine Kim Liu from Columbia on a

Marshall from the Hewlett foundation and

Brian O'Neal recently retired from the

Robert Wood Johnson Foundation you'll

get a chance to meet some great people

and learn a lot in an information filled

day hop on our website at Capital

allocators.com University to apply

please enjoy my conversation with Seth

clarman

Seth thanks so much for joining me it's

great to be with you thanks so much for

having me I'd love to go all the way

back to your first memories of your

interest in business and investing well

it goes way back to Childhood maybe even

early childhood I was always starting

small businesses I was a micro

entrepreneur in the sense of doing Leaf

raking and lawn mowing I had a snow cone

stand and got in trouble with the

Baltimore Health authorities when we

added hot dogs so that's a snow cone

stand because we didn't have a license

and I was having little carnivals in our

yard for kids and built a mini golf

course in my yard although my mom didn't

really appreciate that had a tiny

interest in collecting coins and used to

buy and sell some coins by males a mini

activity as well so I was just doing a

lot mostly just getting my feet wet and

learning a lot my main interest was in

the stock market I was a numbers guy I

loved the baseball statistics I was

always turning the Baltimore Sun papers

to the sports section they would have

every batter in every pitcher in the

American League and all their stats and

I was learning how to calculate those

statistics as well and at some point I

noticed there were a whole bunch of

numbers a few pages after the baseball

statistics and I asked my dad what those

were and found out those were the stock

exchange listings and so it just began

another journey of trying to connect my

interests to figure out what was going

on and what was that all about I read a

bunch

about the market I remember reading a

book about how I made a million dollars

in the stock market I remember reading

how to buy stocks by Lewis Engel so kind

of up and down the spectrum of what was

out there how old were you when you

bought your first stock

I bought a share of Johnson and Johnson

when I was around 10 years old with

money I got from my birthday a few days

later it split three for one which I

didn't know had been announced but it

must have been announced a little bit

before that so I owned three shares of

Johnson and Johnson why'd I buy it I

knew what the company did and you got to

start somewhere my mom found me a very

kind stockbroker named Max Silverman

down in Baltimore and he was happy to

execute an order where he couldn't

possibly make any money and he was my

stockbroker for a number of years but it

was always at a very small scale where

did that take you as you got older you

know went through college so I was

really fortunate my Uncle Paul my

mother's brother lived in New York and

he was a tax attorney and an old old

friend of Max Haina who was a Founder

head of mutual shares my uncle

introduced me to Max when I was Junior

in college and I got a job for the

summer and then ultimately an offer to

come back full-time when I graduated

which was in January of 79 so that's how

I got to Mutual shares and my history

there I continued to hold stocks trade

stocks and read but the key was getting

that job it was a value investing mutual

fund Mike Price had started by then and

was Max's Protege and running a lot of

the activities day to day it was like

being let in on a secret that you could

read about it all you want but when you

actually start doing analysis and you

see individual companies trade at a

discount from what they're pretty

obviously worth it's easy to get excited

that there's some inefficiency here and

you have a chance to really add value

and do well what was your first aha

moment from having picked a bunch of

stocks yourself to now working and

seeing a philosophy behind it the most

clear thing was that picking stocks

yourself you knew what the companies did

I knew that Johnson Johnson made

bandages which I apparently was an

extensive user of when I was a small kid

but I didn't really know how to connect

that to anything tangible about why

would I pay a particular price or what

would make that stock go up or down so

being in the business and watching every

day and seeing some of the peripheral

things like you can't just assume that

just because the stock trades at a price

or a bond trades at a price that you can

actually buy any there because it's a

market and maybe you can buy it and

maybe it's not that liquid or maybe by

the time you get around to deciding what

you want to buy it's moved a lot so

there was just a lot of nuts and bolts

that all went into the entire equation

Mutual shares was a great place to sit

because Max Haina had in his office this

old railroad Bond Trader Hans Jacobson

you hear all these names that they're

bit getting various prices and you

really have no idea what lies behind

that but eventually it became clear that

a number of them were U.S railroad

bankruptcies several connected to the

Penn Central bankruptcy which was

unfolding around that time and which led

to the creation of a bunch of other

Securities it turns out of course that

railroads had been granted building

rights over the tracks and that they had

all kinds of real estate value in

addition to any value they might have as

a railroad and so there were just a

series of Securities that went from

obscurity because you'd never even heard

of them into mainstream at least for

somebody sitting at Mutual shares

because they started to make sense and

you understood why the prices fluctuated

and why they might be really attractive

as an investment I also remember the

first stock I believe Michael price

threw a prospectus on my desk and said

here figure this out which was a typical

Michael price instruction to me a

company called telecore which was an

Electronics distributor was losing their

contract with the Japanese company whose

products they were Distributing and they

were going to get bought out for the

value of networking capital or something

like that telecore also owned a

subsidiary called Electro rent which the

rented and leased the same kind of

electronic equipment so you were going

to get eight dollars or so in cash over

a period of time but not that long and

you're going to receive share of a

lecture and a fraction of a share of

electorate and a lecture rent at that

valuation that you could created for was

trading at under one times earnings and

that was math I could do in my head and

math that made the nature of that

inefficiency seemed so glaring and so

obvious and probably was a great example

for me of complexity can be an

Investor's friend that if a person

wanted to buy electron previously they

couldn't the only way to get it was this

way that most of the time you wouldn't

want to pay eight dollars and change to

create a share of something that is only

worth sense in that most of the money

you were just going to get back from the

liquidation payment end of the licensing

deal with telecore nevertheless it was a

great lesson that there are Arbitrage

opportunities that the complexity leads

sometimes to opportunity that you need

to really soak yourself in the details

that opportunity may not immediately be

apparent it certainly wouldn't be

apparent from reading a financial report

from last year because that's not an

ongoing concern but rather understanding

how the pieces all come together using

your own ideational thinking to

understand what might get in the way is

there an approval needed or are some

payments owed to somebody that you've

got to subtract before you think about

your proceeds or their taxes is due on

the transaction it was really a

broadening example of the kind of things

an Arbitrage investor needs to think

about compared to an investor and a

going concern

so as you're learning early on in your

career it's also around the same time

you had the bill Sharps of the world

writing about efficient markets

hypothesis

and I'm really curious as you started

hearing about that thinking about the

markets and Index Fund investing and

then on the other side you're seeing all

these security level inefficiencies how

did you think about the investing World

more broadly

I read a book after that but quite a

while ago called to conquer the air and

it's about Orville and Wilbur Wright and

they're building a flying machine in the

early 1900s at the same time as they

were trying to build an airplane you had

a guy named Langley at Smithsonian also

trying to build a flying machine and he

was the respected guy he was a academic

and famous and everybody thought he

would succeed and it all made sense in

theory but the Wright brothers went down

to Kitty Hawk where the winds were

strong and where they could experiment

with what the winds might do to any

particular kind of flying craft and how

the wings of a airplane might be the

same or different from the wings of a

bird and how you might maneuver in the

air

Langley's machine eventually was

launched I believe off of a river and it

was all set to launch out over the water

and fly except it plopped in the water

never to be seen again and the Wright

brothers over a couple of Summers

figured it out and I say that because it

seems to me it's the same thing that I

always thought there are these academics

sitting in their institutions writing

out theories and in theory it makes

sense it might be Yogi Berra who said in

theory every Theory works but in

practice a lot of them don't the

academic idea was logical that there are

transaction costs and there are a lot of

competitors and even when there aren't

that many even one competitor can

reprise some mispricing but had they

chosen instead to sit down at the

trading desk of mutual shares they might

have seen what really inefficient

markets look like and realize that

what's true in theory isn't true in

practice in every case the first book

that I read about the efficient market

was malcol and it was about the random

walk on Wall Street I appreciated what

he was trying to say but I also knew

that was just silliness and what's

interesting is it was true in the same

way that they mused in that book

you could try to imagine what it would

be like to ride a horse by sitting on

the fence and observing a bunch of

horses in the field or you can go get on

a horse I think it's as simple as that

that you need to be creative you need to

be curious you need to be not afraid to

fail willing to think outside the box

and maybe you'll come up with something

as you're learning at Mutual shares back

in the day how did you make the decision

to go to business school it was actually

really tough I enjoyed Mutual shares

immensely I loved sitting side by side I

was literally next to Mike Price and

right around the corner of the trading

desk for Max Hina and I was the only

analyst it was literally the three of us

and a bunch of Traders admin people it

was such a wonderful learning experience

and I was soaking it in on the other

hand I had a sense that top business

school would be a good place to go it

would round me out I may have known more

and more about stocks but I didn't know

a lot about business and so to study

business to try to understand what's a

good company what makes a company great

how to think about running a company

upside the challenges was certainly

appealing and I ultimately thought it's

not going to be a negative it's probably

going to have a lot of positive and it

will make me better investor if I decide

to stick to investing I also wanted to

rule out that there was something else

I'd rather do although I kind of

suspected that investing was my thing so

I did investing before took a summer job

at Solomon Brothers just to see what

investment banking was it was very

popular back then and a lot of people

were going in that direction and I

didn't think I'd love it but I figured

I'd try it and actually had a great

experience I enjoyed the young people at

Solomon Brothers and I met some of the

partners who stayed in touch over the

years but I realized that investing was

where my heart was so as soon as I

graduated I had an offer to go back to

Mutual shares but serendipitously had an

opportunity to come in at the ground

floor of bell post being formed and

that's what I chose

how did that come about

I had a professor of real estate and I

took his course at some point he called

me in to talk about a test I'd done in

my exam but what really had happened was

he and some friends had a stake in

Channel 5 in Boston Channel 5 at the

time was being sold to Metro media for a

pretty fancy price at maybe the highest

price for a TV station up to that point

and he had decided that he'd want to

join with a few other friends some from

the TV station one not from from that

background and create an expanded family

office this was the early 80s so it was

an era of bank failures and rapidly

Rising interest rates and inflation and

in some ways a general distrust of the

financial system and where should you

put your money in how could you make

sure the taxes got paid and the coupons

got clipped and all of that so at the

exact same time that I was graduating

this plan was in motion Outpost would

have been formed with me or without me

but my coming along maybe changed the

trajectory and they realized the

original plan was to hand out the

capital to Smart money managers and in

the earliest days of Bao post when I

joined after I graduated in May of 82. I

went to New York a bunch and met with

money managers and thought about well

would this one be good to hire would

that one be good to hire what's the

playing field look like it revealed a

lot but it also ultimately led to the

decision that we would actually be

better off managing the money ourselves

what did it reveal among other things it

revealed a great deal of group think

everybody's favorite stocks were the

same stocks everybody was buying Warner

Brothers back then because they owned

Atari there was a lot of excitement

around video games as there has been

excitement every few years about

something different in the market and

then shockingly to me how few of the

managers of money actually put their own

money in the same product that they were

expecting their clients to be in and how

important that alignment is it's one of

the main reasons valpost didn't invest

with any of those managers would have

realized that people talked a good game

but they didn't put their money where

their mouth is and why eating home

cooking is such a foundational principle

of outpost where still today the the

employees and their families are by far

the largest client on a collective basis

when you went to launch bow post you

were instilled in the early years in

what was called and probably still is

value investing we'd love to hear how

you define value investing

the key definition for Value investing

comes from Graham and Dodd and the idea

of it is that because markets are

inefficient prices deviate from value

and that deviation sometimes they fall

below underlying value and that makes

them a value investment it makes them

attractive other times they get too full

value and maybe even significantly

exceed it at which point you should have

sold and if you were inclined to be a

short seller perhaps shorted it the

principles made sense I was probably too

literal in my earliest understanding of

gram and Dodd which I'm sure I read the

intelligent investor first being the

more accessible of the two books

security analysis came later but I think

what I was applying was not gram and

Dodd value investing but Mutual shares

value investing so I was already looking

at special situations looking at broadly

across the landscape to equities but

also to arbitrages and to credit and in

the case of these railroad bonds

distress credit so I think it gave me a

good analytical grasp rather than being

pigeonholed into one single asset class

to understand that investors can look

broadly across the landscape and if you

can figure out a stock for example why

can't you figure out the value of the

entire private business if you can

understand a bond why can't you

understand a bank loan or convertible

Bond or a municipal bond for that matter

perhaps one backed by a piece of real

estate there was just a lot of learning

there that the broad scope was

attractive and perhaps also valuable for

an investor because the ability to move

Capital into whatever was attractive

maybe sometimes stocks were high but

Bonds were low or sometimes stocks and

bonds were both high but real estate was

low that was also a piece of the

thinking one aspect of what you

originally read of Grandma Dodd did you

stick too closely to I was too enamored

of Book value when you think about Book

value you need to go back to the

founding principles era in which gram

and Dobb were writing so security

analysis came out in 1934 first edition

there's description among other things

of the super investors article that

Warren Buffett wrote in the Columbia

business school magazine in the early

60s and the super investors article

looked at several investors all of whom

were familiar to Buffett and how they'd

all had exceptional performance now I'm

not sure this was a perfect scientific

test because not all of them maybe had

previously been identified nevertheless

they followed General value principles

in their investing and they followed

them very differently one followed

bigger cap companies and another

followed smaller Gap companies and one

was Global not just the United States

and so you saw at least the idea that

this approach might apply in a variety

of places and then Buffett also in that

article makes the observation that value

investing is something not everybody is

comfortable with but that it's like an

inoculation when you get introduced to

the approach either it makes sense and

you get it or you don't and I felt like

that inoculation had taken with me that

it made complete sense that people have

trouble being patient and holding out

for their best opportunities to show up

and not just plunging in Bill Ackman

once said to me that value investing in

a classic senses like watching paint dry

but I bring a hair blower

I I thought well that's a good

definition of activism and certainly I'm

not one to just want to own stocks

forever and sit on them forever there

are times when it actually can be

challenging in effect the hard thing

about investing in general is the market

tells you you're wrong all the time that

the very reason that you can find a

mispricing the very reason that you can

find a market inefficiency that causes

the stock to go to a discount might well

still apply after you own it and it

might go to a bigger discount and that's

not lost on gram and Dodd that's right

there in security analysis but the idea

of that is perhaps there are ways you

can speed it up maybe you can apply Bill

ackman's hair dryer into the process one

of the things that bowel post has done

over the years we follow the basic

principles we're looking for bargains

we're patient we're disciplined we're

willing to say no a lot as Warren

Buffett says we're not afraid to just

leave the bat on our shoulder and not

swing

but at times you do swing and then

you've got to be comfortable with some

of the important elements of value

investing you've got to be comfortable

that a bargain can become an even bigger

bargain and this is what resonated with

me maybe the most if you look to the

market for feedback the market might

regularly say you're an idiot you bought

it now it's down you don't know what

you're doing but the reality is you've

got to see that a little bit differently

you've got to see that as the market is

now offering you a better bargain either

you have confidence in yourself or you

believe in the market as giving you

valuable information and then as Graham

and Buffett say if you look to the

market for the answers you're going to

just be following popular opinion but if

you look to the market as a Mana

counterparty that sometimes sells you

something at a big discount from what

it's worth and other times pays you more

than it's worth now you're talking now

you're going to be able to take

advantage of the erratic Market to

profit as an investor a lot of business

businesses you could buy in the form of

stock or assets you can buy they're not

static values things change over time

and I'd love to hear a bit about from

those early lessons of Graham and Dodd

how you've thought about adapting the

way you apply evaluation to businesses

and assets

Graham and Dodd lived in a world where I

believe there was considerably less

technological innovation there wasn't

none over that period of time we

invented radio and refrigeration and air

conditioning eventually and Automobiles

decades before but a lot of innovation

but there was no Venture Capital

industry these Innovations often took a

while to take hold the rollout was slow

it wasn't like downloading software at a

click with no cost of goods sold when

the economy suffered when a stock became

mispriced in the 1930s it was almost

certainly because we were in a

depression and that there was a cyclical

downturn grandma died knew that they

wrote about it which I give them huge

amount of credit for and they wrote that

it would not be reasonable to assume

that depression will always be the

circumstance and yet they couldn't know

when it would end or if it would get

worse before it got better that also by

the way resonates with me because I

think the idea of financial rating you

can write a newsletter I suppose and try

to be right for the next two weeks or

you can try to write something down and

say to yourself

what is the essence of this that's going

to matter not just months from now but

years and decades and maybe even a

century from now just as Graham and Dodd

are applicable 89 years after it was

written in 1934 what might we say about

what we're writing today that will still

be applicable in 89 years so I at least

think that lens is really important and

that to me is what gives that book

historical significance that nobody's

saying follow their exact formula or go

Page by Page and you'll know what to do

the companies are all gone they've been

merged or liquidated decades ago out of

existence many of the principles that

they talk about are based on laws at the

time around prudent man rule or other

regulations that no longer apply but

what's still applicable is that despite

all the changes the general principles

which are essentially dependent on

humans and their psychological

Tendencies to get overly exuberant and

to get overly depressed and to have

constraints on the humans you must buy a

highly rated Bond you can only own a

stock that pays a dividend you cannot

own a stock below a certain market cap

or below a certain share price and those

kinds of rules and constraints can lead

to inefficiencies and so while the

nature of the exact inefficiencies may

have changed a lot in 89 years the

certainty that there will be those I

think remains high and I actually am

pretty optimistic that they will remain

even if computers are replacing people

as money managers and we're doing all

the trading and that's because the

nature of what causes the inefficiency

it's human but I think the computers

will mimic what the humans would do

because that's what they're trained to

do and so I think that even AI wouldn't

make the markets fully efficient

there is a degree to which

AI as you get closer to general

intelligence tries to replicate how

humans would think where do you think

as computers on the short end say of

trading and then AI maybe over time

replicating thinking will still go wrong

relative to human behavior

a caveat that anything to do with

technology you've got the wrong guess

and that I need to know about it I need

to be up to speed I need to have an

opinion about where it might go but I'm

not an early adapter I don't fool around

with it the way some people do so my

opinion may not be as good as some

people's but when I think about it first

of all my understanding of AI is that it

is trained to look at enormous amounts

of past data I don't fully understand

how that is done because for example up

until 2022 we'd hit the longest bull

market in history and so depending on

what period one looked at one might

think well the absence of a bull market

maybe we're past that is that right or

is it pent up that the absence of a Down

Market the straight up 12 years of bull

market that ended in 21. it's like if

you're waiting for a bus and the buses

as you know from the schedule come every

15 minutes and it's been 45 minutes

so either four or five buses are going

to come right away or the road has

collapsed and no buses are coming which

is it what will the computer tell you

which is it those are hard questions I

don't think humans will always know the

answers I think AI will be amazing at

saying oh well when the Suez Canal gets

closed by an attack of some sort here's

what happens to oil prices or here's

what happens to GDP around the world in

the next quarter

or when there's a war in Europe here's

what happens and computers will figure

that out and humans would have a ton of

work to catch up and maybe computers

will see connections that aren't easily

seen but how will a computer figure out

the next telecore and Electro rent

electron hasn't been public there are no

published financials yet although

they'll be in the proxy eventually I

don't know how they'd know what telecore

shareholders would get or how to think

about the contingencies around those

kind of liquidation distributions and

that's not the most complicated thing

that could come along how will they

think about what a bankrupt or near

bankrupt Bond might get into

restructuring again I just don't know to

somebody who really is sophisticated in

AI maybe that sounds naive but to me I

believe that it's likely that the

artificial intelligence dealing with a

sample size of close to one on a

particular Oddball transaction may not

know what to project so in effect how

does bowel practice value investing I

think that we're set up not on a basis

of let's look at the world like other

people we don't have industry analysts

per se we don't focus on a certain

Equity list of let's know these 200

stocks or let's look at certain kinds of

Industries because we like their growth

prospects we're set up in a much more

opportunistic way we're inefficiencies

right now and where are they likely to

lie and how do we get them to come into

our inbox so we can look at them we're

looking for Supply demand imbalances in

the market now if you told me a stock in

Turkey is going to be delisted from an

exchange I would tell you that while we

don't look at Turkey we might start to

figure out that stock because when it's

off the exchange and out of an index

there might be a lot of people that have

to sell it and there might be a lot of

people that quasi follow that index that

don't hold it anymore and so all of us

sudden you've got a chance that stock

price just falls into some kind of black

hole I think a computer could of course

figure that out it could say de-listing

leads to lower prices and then maybe

make the connection that sometimes

that's overshot in some new Incarnation

the company gets taken over or can come

back into an index but when you multiply

that by all the kinds of things that

lead to these mispricings and imbalances

is it a downgrade is it bankruptcy

filing itself what about with a private

asset that Grandma dot didn't write

about private assets they didn't write

about real estate they didn't write

about privately owned companies yet the

same general principles that cause

stocks to overshoot can cause business

prices to overshoot financing becomes

less available so buyers will need to

Pony up more money as equity and

therefore the price drops somebody needs

to get a loan that's turning sour off

their books by the end of the quarter a

bank or an insurance company or a real

estate fund formed 12 years ago that has

one or two more assets and once the last

assets off the book so they can close

out the fund and maybe now go raise the

next fund or the fund after that

tracking that way sourcing opportunities

that way is so different that again I

don't know what a machine could be

trained to do it's not easy to train

humans to do it maybe it'll be easier to

train machines but I'm not sure because

it really is a lot of sample sizes of

one you see patterns but patterns don't

exactly repeat that is what we're doing

that is what about post has done for 40

years we're looking hunting Broad and

wide I like to say we go miles wide to

look for opportunity and then when we

think we found it then we drill miles

deep maybe the contrast is that other

people are going miles deep first so

they know everything about every

industry they know deeply Pharma and

auto and finance and whatever else but

they're not as focused on why might any

of this be particularly mispriced and in

fact maybe they're actually oriented

towards not going where the missed

pricings are as stocks mispriced because

management has not done a good job

lately that's hard for people to

recommend to their clients or to their

bosses or maybe the company was involved

in something that left them with a

degree of stigma a failed acquisition or

a management misstep and yet those

things can cause prices to really get

out of whack and lead to opportunity so

that's the challenge is to find ways to

find the bargain in a sense you have to

be right about less when you don't have

to be particularly right about what's

the business going to grow into over the

next 10 years maybe right this second

it's 30 or 40 or 50 percent undervalued

now the world has changed more in recent

years so that because of technological

disruption in Graham's day he could look

at a balance sheet and an income

statement and say look I'm buying this

stock at six times earnings and

two-thirds of working capital or

two-thirds of Book value and probably be

right about that and realize that the

tables will turn what's out of favor

will come back into favor which is what

the quote from Horus the poet that's at

the beginning of intelligent investor

but what changes now is a business could

be doing just fine but if somebody's

working on something in their garage

that's going to disrupt that company

five years from now that company May

barely exist or certainly become a lot

less profitable and so an investor has

to be thinking about not just cyclical

change like Graham and Dodd were worried

about in the depression but secular

change as well and the combination of

that I think has made investing harder

and value investing harder that

investors can't just crunch a few

numbers and say this is mispriced they

need to dig a lot deeper than that

there's nothing wrong with hard work and

I think the investors who look will

continue to find mispricing and

opportunity I'd love to dive into how

you apply a lot of this at bow post and

maybe the first part of that investment

process is this idea of sourcing these

opportunistic areas that might be ripe

for some inefficiency how do you

organize your team to look broadly to

try to identify those places where you

may then want to dive in deeply

I think the biggest part of it is

probably pattern recognition that you

notice that patterns from the past have

a way of repeating not exactly but with

some similarity you can find a fund that

is in the process of liquidating its

last asset the pressures on them are you

better get that asset off the books we

don't want to carry it through another

year end and so all of a sudden an asset

that wouldn't normally be sold now needs

to be sold with some degree of urgency

it could be something as simple as

realizing that a bond or a loan is about

to default or narrowing default and

might then trade at a steep enough

discount or that there's a restructuring

opportunity it might be that the market

misperceives litigation and that either

thinks the litigation is unimportant or

thinks it's more important than it

really is so most investors are trained

to analyze cash flow but to guess legal

probabilities I don't think anybody's

probably good at that I'm not sure we're

good at that although we try but I think

there are factors that are just more

important in the business than they've

ever been such as that there are many

many of them that add up and so I think

that the combination of that leads to

some playing fields that probably have

fewer people playing on them that can

lead to mispricings as well as areas

that maybe are more likely to be

mispriced than others so I think by

following our nose by looking for

patterns by pulling on threads of

similarities we end up with a pretty

good portfolio of Investments That

individually likely to be mispriced and

collectively or reasonably Diversified

how do you go about communicating with

your counterparties so that they start

showing you more and more of these

idiosyncratic opportunities

I think that's part of the Intel

insighted bowel post but it's not as

hard as you might think in the historic

days about post 35 almost 40 years ago

we'd get a phone call hey I'm Joe Smith

or Jill Smith and I'm your new coverage

for Merrill Lynch and I'd like to come

by and talk about what we can do for you

and time being scarce and just me you're

a very small group of people we'd say

look you don't need to come by but if

you guys ever see on your desk a bond

that you've never heard of or a stock

you've never heard of or 20 shareholder

in a business that wants to move it

quickly we're your call so don't call us

with IBM insights or your new rating of

Microsoft but when you find that

secondary partnership interest you find

that illiquid stake in a private company

call us with that because we'll have a

bid for you and so I think it's seeing

those patterns and then it's a little

bit like that quote that when you come

to Bao post as a young person either

what we do resonates or it doesn't I

think for the great majority of our

people who tend to be quite long tenured

they come here and it's like they too

have been let in on a little secret and

they realize that looking at what

everybody else is looking at is probably

not that interesting if you're going to

look at what everybody else looks at

look at it in a highly differentiated

way that's fine but you're not going to

make money by outsmarting people on

widely followed stocks with an

undifferentiated opinion but there's a

lot out there right private markets are

arguably as big or bigger than public

markets the real estate market itself is

thought to be around the size of global

stock markets and so there's a lot of

assets and a lot of transactions and a

lot of things that can be bought the

current feedback from the market is you

should own the top seven stocks you

should own the stocks that are obvious

you should move your money into indexes

because index X's tend to outperform

stocks kicked out of an index in the

short run it underperforms there's a lot

of people that have to sell it nobody

that has to buy it but I would argue

that over a longer period of time it's

those stocks that don't make it into the

index that are actually the attractive

ones because if they stay out of it

you're buying the same kind of company

at a discount to the ones in the index

and God willing if it's ever included in

the index now you have significant gain

from the step up as well this is not an

argument to index or not index it's to

say that what tends to be in favor tends

to be very fully priced how it tends to

be out of favor can become even more out

of favor but tends to offer better

investment fundamentals literally if you

and I said look there are two companies

that are identical except ones in the s

p and one's not and the one that's not

trades at a 20 discount which is likely

to be the better long-term investment I

think we'd say on a valuation basis it's

every time it's the one not in the index

maybe there's some benefits to being in

the index a lower cost of capital maybe

it gives the other company some kind of

Advantage but I think a value investor

would generally say give me the one that

virtually the same company but at a much

lower entry price I'm going to have the

higher return over time and of course

looking at returns over a long period of

time measuring them kind of Any Which

Way the better Returns come from paying

a lower multiple of earnings the lower

multiple of book a higher dividend yield

whatever it is so at least that's food

for thought

once you've found one of these

opportunities pattern recognition

canvassing wide what is a fully vetted

process that Bell post look like from

seeing the opportunity to doing the Deep

dive to when you're ready to make an

investment it can be days and it could

be years that depends on the nature of

the opportunity I like to say that a big

enough discount maybe offsets a lack of

the deepest possible knowledge sometimes

there's chaos in the markets and you

want to move quickly on the other hand

anybody that looks at the price and says

wow that stock has fallen 20 in the last

couple of days to think that happened

for no reason would also be incredibly

naive so I think that investors need to

move with the degree of alacrity because

opportunities don't last forever but

they also need to do everything with a

great deal of humility because the

market doesn't just give away free money

there are a lot of smart people sellers

might know as much or more than you they

after all have owned it for a period of

time and you haven't so you ought to

really spend enough time to get

comfortable to at least make sure you're

not the Patsy at the table in in the way

Warren Buffett would describe it we do a

ton of deep work we dig deep into

company financials we look back a number

of years we always ask ourselves about

not just what's the reported number but

what's really going on what's the free

cash flow what are the margins doing

have they gotten better have they gotten

worse is this management doing good job

are there missed opportunities or are

they stretching to put up good numbers

that might go away so we're digging

things that have changed over the course

of my career when I started there were

no expert networks to call you had to

figure out your own and maybe figure out

who might know something about this

business or piece it together talking to

experts on certain part of the business

so I would argue for sure there's way

more information available we all have

more information available at no cost or

low cost at our fingertips than people

in the most serious investment positions

had 20 or 30 years ago but that said

information is only so valuable also

because it's what you do with it it's

having a differentiated view about it we

have then active internal debates the

teams meet less pods which tends to be a

partner and a more senior and a more

Junior analyst all together that's an

approximation but that's what it looks

like when they're ready to make a

recommendation they may run it by

another pod just to say hey does this

sound crazy we have our analysts meet

once a week at lunch anybody who's

around and wants to meet the partners

don't attend that so it's a free space

for analysts to be running things by

each other and not feel like Partners

going to hear them or they might judge

them for being naive or having a silly

idea so I think that's really important

for people's development when the team's

ready to pitch the idea they run it by

me they run it by our president Jim

Mooney as well usually at once in the

same meeting if it's a public idea we

have our traders in the room who can

shed insight into how the thing is

trading or any particular thoughts about

what's going on in the Market at the

moment on that name we reach a decision

often in an hour sometimes we don't

reach a decision and we agree to

reconvene or we agree that it's

interesting but not at the current price

other times we'll meet we'll agree we'll

buy it and then in days we're meeting

again because the prices drop further

and it's now an even better bargain and

do we want to own more part of my nature

is these things thrown in my head so

sometimes I'll wake up after a meeting

the next morning and think I forgot to

ask one question or there's a risk I

hadn't thought about that now I'm

thinking about and so we'll reconvene it

probably drives my people a little crazy

but I always think protecting the

client's capital is more important than

whether I drive somebody a little crazy

so we are constantly reconvening If It

Moves closer to our price Target is this

a good sale when should we get out do we

sell part of it how should we think

about that if it falls should we buy

more how big should it be if something

else gets more interesting should we

keep holding it or is this new thing

even more attractive there are two

things that are limited in investing to

consider rates on every investor one is

capital and the other is time and

they're both really important so if

something you own Falls sometimes you'll

trade out of it even though you don't

like it any less than you did you're

just like something new that came along

more those kinds of conversations I

think are extraordinarily helpful in

optimizing a portfolio

how have you gone about evolving that

decision-making process that post has

grown a number of people over the years

I would tell you I've done it poorly I

continue to have final say in the

portfolio so the way I wield that power

is I have final say but I defer a great

deal to my team so I give the team rope

if it's a senior partner who's produced

a lot of profit for the clients over the

years and they want to do something that

I'm not sure about I tend to give them

room to do that I think that's valuable

and probably career extending for them

it makes them feel appreciated gives

them satisfaction that they're getting

to make decisions but I also in some

sense I'm deciding on investments but

I'm also deciding on people who do I

trust when they say they've done the

work what does that mean have they done

good work and for our best people which

we have a lot of really great people

lung tenured people trusting them has

been exactly the right thing to do for a

very long period of time the finals say

a portfolio manager still needs to sit

on top of the structure and it's because

we slash money into and out of areas so

we might have loaded up on corporate

credit over the last six months but if

Tomorrow there's something better to do

in a private investment or in real

estate we may be reducing positions we'd

like to buy something even better the

organizational key is somehow to have

people that are team oriented enough to

say oh I get it I worked hard on this

idea I'm glad we own it but if we can

own something better that's going to

make more for the clients I trust that's

also in my best interest and we try to

pay people not just on their own bottom

line but on a firm white bottom line for

that exact reason how do you think about

position sizing

sizing has been one of the strengths of

bowel post over its history I've run

into people with unusual views about

sizing so I've come across a number of

funds that have a view that the goal in

investing is to limit how much you can

lose on any idea so the key is to have

200 ideas in your fund none of them more

than half a percent if you don't

understand that if you can establish

that an idea is good versus one that's

bad then why can't you understand that

there might be one that's great rather

than just good and why would that not be

bigger

I also think a portfolio can absorb more

than a tenth or two tenths of one

percent of loss so we prefer to identify

over time through continued work through

price decline that a good idea has now

become a great idea or through an event

through a Company announcement that the

following is going to happen and maybe

you've studied the company long enough

that you understand or can appreciate

right away what that news means where

somebody else might think it's

directionally not the direction to go or

at least not understand the impact of it

so we obviously stay very far away from

any line of inside information but we

want to capitalize on our insights and

patients that are long-term oriented

clients give us we have made our big

dollar profits over the years usually in

ideas that have gone against us at first

and we average down and when they are

catalyzed which means some event is

going to happen that will cause us to

make money we're not just dependent on

somebody waking up tomorrow and liking

it more than they did today but rather

the company will in fact complete a

reorganization plan or will complete a

liquidation plan or a merger will close

with high probability or an asset will

get sold out of their corporate

portfolio and they will buy back stock

with a lot of the proceeds whatever it

might be those are the kinds of

catalysts we look for the presence of a

catalyst makes us comfortable having a

bigger position the hardest thing about

value investing without catalysts is you

can own something that's out of favor

for an incredibly long time and over

five or ten or longer year period

looking being early and being wrong look

exactly the same and you can start to

get confused and your people can start

to get confusing your clients can start

to get confused and so I don't know

anybody other than maybe Warren Buffett

who could underperform for a decade or

more and feel like everybody's just

dandy with that because they have

confidence it's going to work out and of

course every investor should also be

asking themselves those questions that

if you own a stock that just goes down

and down and down might you have been

wrong or at least maybe you could have

figured some things out earlier and not

owned it from the highest price you paid

one of the things about bout post also

because we know we don't know everything

we know we know so little in the scheme

of how much there is to know that we

spend a great deal of time trying to

learn lessons and so we spend time

learning both from our successes and

from our failures because they both

contain valuable learnings those

learnings aren't always available the

first day it may take quite a while to

reflect back I remember reading years

ago in an interview they asked ahead of

a mutual fund tell me about your best

idea over the years and they said well I

found this stock at five dollars and it

went to fifty and when I looked up that

stock guess what it had gone from 5 to

50 but it was back to five so was that a

great idea or was that a lucky trade I

don't know the answer

how do you think about risk management

Bell post was founded on the principle

of protecting the capital first and

foremost of the families that founded it

and so what I would describe us as

having a risk-averse approach we try to

think about downside in every individual

investment we roll that into a portfolio

not in some fancy math formula but

intellectually

where are our correlations do we have

exposure as a portfolio that's as bad as

the individual Investments or might

there be much less exposure because we

have offsetting Investments if this one

does well that one's likely to do less

well or if this one does poorly that

one's likely to be a grand slam home run

are there ways to mitigate risk just

with offsets in the portfolio then you

can also mitigate with catalysts

Catalyst shorten your duration they make

you less dependent on the overall level

of the market in the future and we know

Warren Buffett wrote in the 7374 time

frame and fortune that no one should own

Common Stocks who's not comfortable with

a 50 drop in the market I could tell you

almost nobody's comfortable the 50 drop

of the market yet Americans own more

stocks than ever before and so I think

people have forgotten that kind of

admonition I think that's really

important too so it's why I don't just

want pure beta Equity long diversifying

in other asset classes into credit for

example shorten your duration give you a

senior position and a capital structure

where you're likely to get paid back

even if the equity struggles mightily or

if you don't get all your money back you

get 80 cents on the dollar back a lot of

things diversify away from Full Market

risk it's position diversification it's

hedging at the portfolio level we tend

to Overlay macro Hedges and commodity

type Hedges interest rate Hedges as

appropriate based on each individual

investment and they may be a layer of

portfolio Hedges that look like

essentially puts on the market and the

reason for that is that the average

long-term multiple of the markets about

17 times but you have moments today it's

20 times you have moments it's hit

closer to 30 times and other times it

gets to 10 times at times when the

market is more expensive than historic

averages you are exposed like crazy to

just the multiple coming down to the

long-term returns winning out and you

can lose a lot just from that kind of

mean reversion so we try to protect

against that too I will hold cash in the

absence of immediate opportunity that's

not a terribly big number these days but

the combination of those Hedges those

mitigants do provide a significant

degree of downside protection and when

we do have downside it tends to be quite

limited so about post has only lost

money in five of its 41 years all but um

two of those have been in the mid single

digit range or less so protecting

Capital to that extent over four decades

I think is the name of the game for what

balplus tries to do what value investors

hope to accomplish

when you're investing in private

Securities compared to public Securities

how do you think about pricing in

liquidity I think you have to get paid

for illiquidity I think that there is a

cost to giving up control over getting

in and getting out

but they're offsets and so one of the

offsets is you'd think if you bought a

building it's illiquid but if you own

the whole building you get to decide

when to sell it whereas if you own 100

shares of stock or a million shares of

stock of a company management could do

something extraordinarily dumb that you

wouldn't have done and so there are puts

and takes and so I want to make sure I

get paid for giving up the right to

change my mind but just because an asset

is in liquid form doesn't mean it's

purely a liquid buildings get sold all

the time whole companies get sold all

the time whereas 9.9 percent of the

shares of a 400 million dollar company

might be a very a liquid block and so

liquidity may not be what everybody

seems to think there's been I think a

great misunderstanding in recent years

among some people who run money that

illiquidity itself delivers degree of

return that if you take the liquidity

you automatically get the return I don't

think anything could be be weirder than

that idea that the reason you make money

from illiquidity is when you have people

on the other side of the trade who have

an illiquid asset and they suddenly need

to monetize it they want it off the

books that may cause it to trade at a

discounted price and the discounted

price provides the higher return the

liquidity itself doesn't generally when

clients ask this I say you want to make

several hundred basis points I don't

know if that's 200 or 500 basis points

but giving up the liquidity the right to

change your mind is worth a lot on the

other hand just as a thought experiment

let's take the most liquid of all

instruments and let's say I found a

five-year treasury bonds at a time when

treasuries yield four percent and I had

a way that you could create that at a 10

yield but you couldn't trade it for five

years there's a price on liquidity would

anybody do that well I would argue that

anybody that's going to buy treasury

bonds I would likely keep holding them

for five years

ought to be first in line to do that

trade and that exists I can't describe

all the ways that exist but we are

trading off things like that all the

time maybe the cash is in a liquidating

trust and will only get paid out slowly

maybe there's something cash like or

treasury bill like where the cash is

held and so it's not exactly a treasury

bill but it's like a treasury bill and

yet the yield is way way

disproportionately more than you'd ever

get on a treasury so we're on the

Eternal hunt for things like that and

sometimes we actually find them what

have you found about differential risk

premium and international markets

compared to the US

we invest internationally we have stocks

in Europe we have debt in Europe that we

sometimes buy we own real estate

globally although mostly it's U.S and

Western Europe our mandate is Broad and

flexible which lets us move where the

opportunity is we talk to our clients

not that long ago about a few Chinese

stocks we were finding we had never

owned anything in China for decades it

was in favor everybody was lining up to

go there I knew that they have a pretty

authoritarian system of governance and

didn't want to be on the wrong side of

that we stay away from most markets like

that as a pretty regular rule yet the

stocks were starting to Discount such a

significant degree of China risk that we

felt like for the first time ever that

you're actually getting well paid and we

found a company whose stock was beaten

down 90 percent and thought that was

attractive and so far so good but it's

not a large percentage of our Capital

but it was very Intrepid idea by one of

our analysts I don't have a view about

emergent markets about the frontier

markets we're humble enough and cautious

enough to know that if you don't live in

a country if you don't have people that

are active in that country you're at a

real disadvantage and so I have no idea

what the premium should be for buying

equities in Africa or equities in Asia

but when I find a stock trading at 25

cents on the dollar I know that those

things tend to work out so that's how

we've applied it but the vast majority

of our investments are U.S and Western

Europe and I don't know that Western

Europe needs particularly significant

risk premium over the U.S obviously for

clients who live in the U.S or with

exchange rate risk you may have some

considerations there that wouldn't be a

big discount from our perspective we

just take each individual investment as

it is try to understand what the risks

and opportunities are in it and make our

determination that as the economic

environment's been changing with rates

rising and inflation particularly in the

US over the last year and a half two

years

where is your antenna up in that pattern

recognition for the types of

opportunities do you suspect will come

over the next few years this is to me

one of the weirdest times since I've

been in the investment business for over

40 years that you had a bubble it was

really a credit bubble that became an

everything bubble super low interest

rates at Time Zero rates made Capital

easily available and Incredibly cheap

and that led to Startup manias and specs

and meme stocks and crypto all kinds of

speculative activity I'm not convinced

that we've even begun to sort out that

bubble now that bubble did a pretty good

job of collapsing in 2022 but the market

has rallied back so much this year we're

now in a bull market no longer in a bear

Market by that at least arbitrary

definition of 20 percent I think that

the damage that was done over a 12-year

Bond bubble and of course don't forget

it's been a 35-year bond bull market up

till 2022 that what were financial

institutions supposed to do during that

time frame they couldn't get paid by

taking credit risk it still wasn't much

they couldn't get paid by going out in

duration the yield curve was decently

flat at least part of the time and so

we've seen some financial institutions

do what like Silicon Valley Bank did and

end up with significant mismatches of

assets to deposits but I'm not convinced

we know where all the bodies are buried

I think here and there you read an

article that says this bank has a

hundred billion dollars of bonds below

Market or whatever but I'm just not

convinced I'm not saying there's

anything more I don't know anything but

I'd be nervous because markets cause

behaviors and when people have to put

money to work have to run a matchbook

have to run a large balance sheet

they're going to do something with the

money we haven't seen a lot of bodies

float up I don't know what that means

but I'd be worried I think that we've

become incredibly dependent on the

government rescuing everything the irony

of this moment is that while you had a

Greenspan put in a Bernanke put and a

yell input now Powell is breaking it I

don't know if he can break it and

provide the put right afterwards on the

other hand with svb we did we changed

all the rules around Deposit Insurance

in order to not let some splatter and so

these are really complicated questions I

don't feel like I know the answer for

sure but I think the moral hazard is

very high I think people's memories are

short I think people would be really

wise to pay attention to history to

think back to an Era where everything

didn't get rescued to try to imagine a

bear Market that didn't immediately just

lead to a buying opportunity you'd have

to look that far back people could look

back to 74 5 or 73 4 many many stocks

trading at single-digit earnings

multiples that weren't going out of

business

but people needed to sell stocks to pay

the bills and to meet their commitments

you had a genuine liquidation you really

haven't had much of that for a really

long time you had a lot of hiccups

around between 98 and 01 and then the

great financial crisis was a really ugly

12 months or so I'm just not sure why

you couldn't have more trouble

especially because you had enormous

Capital flows and you had entire build

up of a private credit industry and this

intermediation from Banks maybe that'll

all go smoothly maybe it won't it's not

been tested the nature of most Wall

Street Innovation is it's never stress

tested for a rainy day because that

wouldn't be any fun it's fun to sell a

lot of bonds sell out of stock sell a

lot of Partnerships and rake in the

investment banking fees but when the

rainy day comes mortgage-backed

Securities can blow up and wouldn't

surprise me to see pockets of private

credit blow up private Equity Funds has

been and rescued historically so in the

0809 period I always thought there

should be an asterisk on private Equity

because those guys got rescued by the

FED rushing in cutting rates and

congress's stimulus plans as well which

a lot of private Equity debt was trading

down to 50 cents on the dollar and yet

all those deals ended up working out had

that rescue not happened when it did you

might see very very different numbers

out of private Equity now there might be

an argument that private Equity is

always going to be on the beneficiary

side of that that might be true but it

also might not get rescued in some

further period especially with the

imbalances in our society and with Moms

and Pops wondering why they're rescuing

wealthy Wall Street financiers so

there's just a lot of uncertainty in my

mind about that I just think in general

you know if I had to give one piece of

advice to people I'd just remind them

study Financial history that Jim Grant

likes to say science progresses securely

but Finance addresses cyclically and

that most ideas have been around before

and we repeat the same mistakes and

there's a lot to learn from studying

past periods obviously I didn't live in

the Great Depression but I feel like

even studying that has prepared me for

bad markets it's prepared me to make

really tough decisions it's informed me

of how bad things could get and yet also

emboldened me to understand that if it's

not the Great Depression maybe down 40

or 50 percent is actually a pretty steep

decline so I think the history helps

Center us on what a reasonable range of

outcomes might be while we never lose

sight of what the extremes of History

might dictate when you combine that

study of history and this very uncertain

and in some ways unprecedented time how

does that translate into how you're

positioning the portfolio relative to

how you have in the past

we've been Guild starved like everybody

else for the last 12 years until the

rates started to move up a year ago we

like Credit Credit often is

misunderstood lends itself to

inefficiencies when a bond gets

downgraded below investment grade there

can be a natural constituency of holders

who want to churn out of that and that

can lead to pricing inefficiencies as

well so we like to look at credit we

like distress credit we like bankrupt

debt we're not rooting for it to happen

but it's a playing Ground we can hunt

through when those markets exist when

there's hardly any distressed credit

they'll post has to look elsewhere so in

the 2010 to 2012 to 2021 period we

focused more on some private markets and

private inefficiencies real estate for

one private equity for another but it

doesn't look a lot like other people's

private Equity it looks like more

one-off hairy deals of some sort that

are mispriced for particular reason now

we've rebalanced into credit everything

we do is bottom up it's not top-down

asset allocation but we found enough

debt to make that about 15 percent of

our portfolio and that's been pretty

steadily growing this is not anything

like Peak opportunity but I think could

continue to increase depending on what

happens with inflation and what happens

with the economy you could even have

economy where interest rates go down

inflation gets tamed but that's

accompanied by an economic downturn and

that could lead to more financial

distress a lot of companies have taken

on way more debt than probably would be

that prudent so that's probably the

biggest change in the portfolio we are

pretty well hedged we don't try to hedge

every ounce of risk we never have we're

not a zero beta fund or anything like

that but we're protected meaningfully

against some pretty extreme scenarios it

wouldn't surprise us to encounter those

that we don't really understand the

degree of exuberance in the market there

were certainly individuals stocks were

oversold in the downdraft of 22 but the

overall Market did not really reach

bargain levels maybe it reached fairly

price levels and now is rebounded again

to overpriced levels so I'm not making a

market prediction but I do think there's

vulnerability so while our credit

exposure has gone up or Equity exposure

has gone down somewhat and we're trying

to focus a greater percentage of the

equity book on positions with catalysts

I'd love to take a step back and talk a

little bit about the business of about

post for a long time

in the early years you didn't have any

clients except for the family and then I

guess I don't know 15 20 years ago now

you did bring some institutions but been

very careful about who was an investor

what's your perspective on the

importance of that alignment between

what you're trying to do and who your

investors are we took families By Word

of Mouth in the early years about posts

so maybe we'd add a family or two a year

but even with that our assets were still

in the couple of hundred million dollar

range 10 years in and we took our first

institutions in 98 so we're probably

coming up to our 25th anniversary of

that and they've been great partners

because they're aligned every type of

client has its solidity we love

individuals because we can explain what

we do our Founders were individuals

individuals tend to think about

protecting on the downside at least as

much if not more than institutions who

maybe can take a longer term view who

are in competition with each other in a

way that individuals aren't necessarily

but both types have made fantastic

clients we've been very careful to avoid

hot money type clients short-term

thinking type clients the alignment is

one of the most important success

factors for any investor if you don't

have long-term oriented clients you

can't make long-term Investments and

since I have no idea how to make

short-term Investments that work I don't

know how people without long-term money

can invest so it's very important to

have a courtship period where you meet

with clients literally I've had people

offer US money and I've said I won't

take your money until you read this

annual letter and you read the last five

years and you understand what we do and

you really appreciate

because we don't want to be out of

alignment where we think we had a pretty

darn good year and you don't so let's

talk about what we are trying to achieve

what's attainable and what's not and I

think those kinds of things have served

us a really good stead because it has

led to a much greater overall alignment

I think the endowment World especially

matches well for us the endowment World

following you're in my mentors wisdom

Dave Swenson over a lot of years has

worked hard to form long-term

Partnerships with managers and those

long-term Partnerships are ones of trust

and Trust being concretized through

actions and performance teams getting to

know each other not top person a top

person but deeply enmeshed throughout

organizations and I think from the

institution's perspective the ability to

follow a manager through thick and thin

that you can read a brochure you can

talk to somebody for an hour but you

don't really know how to are going to

handle adversity you don't know

character and so it takes a long time to

see that play out and the same thing

from the manager perspective that it

helps to see how the client behaves and

will they be a good long-term partner

will the capital be there when you need

it the most and so I think that

alignment is perhaps one of the biggest

keys to investment success over a long

period of Time how have you thought

about the legacy of bowel post let's say

you do this another 40 years but at some

point in time you may not be doing this

I'm very cognizant that I can't and

shouldn't be doing this forever I think

Warren Charlie are great exemplars that

you can still be doing this into your

90s but I don't think I should be

running bow post more than another 15 or

so years maybe I'll still be involved in

some capacity people have done a good

job in some cases of stepping back still

playing a role and I'd like to think as

long as I'm sharp that the investment

skill set actually is cumulative

additive thing where you may be not

familiar with the latest change in

technology in the world but you have a

large amount of perspective on what are

good entry points and exit points and

where risks might lie so I'd like to

think about post will succeed past my

tenure the reason I think it is we've

been a great thing for our clients the

clients have made a lot of money with

very little drawdown in the bad years

and the team at Bell post has prospered

and we've got a 250 plus person firm and

a lot of people have made their entire

careers here we're very proud to say we

have people that have been here not just

five or ten years but many people 20 25

30 year anniversaries which we

enthusiastically celebrate a good thing

that serves interest of employees and

clients ought to be around I will need

to pull back I'll need to continue to

delegate like I've been doing and find

more things to delegate and I continue

to do that I continue to push people to

take on more responsibility give people

promotion opportunities and truly I

think right now we not only have a

deeper partner group than we've ever had

and as talented as ever but we also have

a very very deep middle of people that

have joined the firm in the past three

five seven ten years who have tremendous

potential already contributing at a high

level so I'm really excited at what the

future can bring but I know a lot rests

on my willingness to give up

responsibility and my ability to do it

cleverly so that it take hold

so the impetus for you're doing this was

your editing in the seventh edition of

Grandma dot security analysis I'd love

to hear any Reflections you have on

value investing of some of the

contributors that you brought in to the

book to write new chapters on different

or investment disciplines

I was a co-editor of the sixth edition

and we had the idea in that Edition that

none of us were going to take the fifth

edition or an earlier Edition and strip

it down and provide fresh examples it

would have taken five or ten years

nobody is certainly nobody with a day

job like mine could do that so we wrote

covers over each of the important

sections so we wrote about a historical

perspective Jim Grant provided that

Jim's such a brilliant historian Roger

Lowenstein provided a perspective on

what the market had been up to since the

prior Edition and so they both did a

reprise of that for this Edition Jim's

piece is fabulous I didn't think he

could top himself but he wrote again

about what the world was like in

Graham's day and how an investor ought

to think about that today the importance

of financial history as I emphasized and

Roger wrote about the last 15 years and

frankly it was very helpful for me

because living through it still isn't

the same as like a play by play in your

ear but remembering all of the fads and

bubbly aspects of the last 15 years and

how long and painful that's been for

Value investors because money has tended

to flow into growth and out of value

some of which by the way justifiably

because disruption and a lot of

businesses have had their long-term

prospects damaged but nevertheless I

think in many ways a big overshoot as

people have become less patient and less

willing to hold any investment through

thick and thin the most important thing

I think we realized is that Grandma Dodd

wrote about equities they wrote about

credit they did not write about

International and so we have a section

on International investing what's

different about it they didn't write

about private asset classes which are

really important they're really

important about post I think they're

really important in general as a way to

think about where value is the David

Abrams section on the lessons of invest

testing in both public and private

assets and how they hand in hand can

make you better at each which is what

Warren Buffett says that I'm a better

businessman because I'm an investor and

I'm a better investor because I'm a

businessman and then Seth Alexander

who's another wonderful Protege of Dave

Swenson and somebody you and I both know

and appreciate wrote about endowment

management and I wanted that because I

wanted the perspective not just of

somebody who's picking stocks or bonds

but somebody who's actually in the

business of giving out money to money

managers somebody who's thinking about

stewarding a large pile of assets over a

very long-term period and doing it in a

unique way that is differentiated from

what everybody else in the field is

doing and I know I got the best example

of that out of current endowment

management what a great thinker Seth is

and a wonderful guy and he jumped on the

chance to do this which I wasn't sure

I'd be able to get him but truly it's a

broad group of contributor years I mean

we have Todd Combs who is one of the

right-hand men of Warren Buffett he

doesn't talk much in public but he has a

great section about bottom-up

fundamental analysis and how important

that is to him and his approach we have

somebody who's not been heard from that

much Dominique Miel but she wrote a

beautiful book about her investing

called Damsel in distressed she was

focused on distressed debt when she was

at Canyon Partners she's funny and a

wonderful writer Dominique has a great

section Nancy Zimmerman has a really

important section on Arbitrage in

investing in how to think about that in

terms of market inefficiency and value

investing but I could go on and on it's

a really strong group a variety of

different approaches and I think it

holds together really well I didn't say

it but I wrote the preface that was

meant to be as good as I know how what

has changed in the last 15 years and

what has changed in the last 89 years so

when you take Graham and Dodd and you

say this is the Bible this is what they

wrote what part of it still applies

what's the Intel Inside where's the beef

and what has changed and to do both of

those with an attempt to have this be

that if nobody updated this for the next

50 or 100 years there'd still be a lot

of beef here for future readers which I

think we've accomplished but we'll find

out Seth somehow we've gone an hour and

a half without mentioning the phrase

margin of safety so I feel like I have

to ask you about the one book that you

wrote and whether you have any

Reflections on margin of safety that you

wrote 30 years ago now and whether

you're thinking about an update to that

high-priced scarce book only available

on eBay

it truly has gone out of print maybe at

some point I'll bring it back I have an

idea in my head of what might be a

companion Edition that could make sense

of bringing it back in some way when

this project came up I knew that I could

only do one or at least one at a time so

I thought this thing deserved to be

updated a lot of change in the world in

15 years I thought I knew a good group

of contributors and when I called them

to see if they'd be willing and they all

said yes I felt like now I had to go

forward but I got a great team there's

some ample reason that I could redo or

new addition of margin of safety I would

talk more about process I talk about

culture and investment firm I talk about

the flexibility of approach in that you

don't need it to look exactly the same

as it looked last year or five years ago

that the markets evolved the kinds of

Securities that exist about I would talk

much more about private Investments and

the applicability of gram and Dot

principles to private Investments I did

some of that in my preface but I would

greatly elaborate on that and look the

other other thing about margin safety is

it's 30 years old and I think part of it

was meant to be just an intellectual

continuation of intelligent investor and

I think I achieved some of that there

are some things in it I wouldn't write

today some things I think are just wrong

I didn't really do a good job on

understanding the value of intangible

assets for example the world of

distressed debt still applies and is

still really interesting but there'd be

whole new sections on that because the

game has changed and for the worse

probably so there's a lot to be said

there's an old saying somebody told me

after I wrote that book the saying is

it's good to have written a book and it

is good to have written a book it's not

good to be writing a book and especially

when you've got a day job it was hard

enough when I wrote that book that I had

two small kids so my hands are full but

it's not impossible that I would bring

it back in some way I still love that I

stole the title blatantly from

intelligent investor because it's such a

great expression and it really captures

what a value and investor tries to do

you need to leave room because you might

be wrong markets might go against you

but if you're patient you can find a

margin of safety and having one means

you're likely not to be in tears when a

lot of other investors are I'd love to

Circle all the way back to the beginning

with your studying of baseball stats and

I want to ask you about two personal

Investments which may not at all fit

into your value investing framework so

one which you've been involved with for

a long time the Boston Red Sox

how did you think about that as an

investment when your day job is so

focused on the analytics of value

investing

so as a lifelong baseball fan as a

Moneyball fan as a Red Sox fan after I

transplant it up here the story behind

it is somebody had approached me to buy

into the Celtics when that franchise

changed hands something like 20 years

ago and I thought about it I thought

hard but I passed because I felt like my

true love was baseball and I said to the

sports agent who was marketing it look

I'm going to pass but if you ever see a

slice of the Red Sox give me a call and

four or five years later he called he

was a former Patriot actually he was a

wide receiver for the Patriots Randy

vataha and he called and I bought

somebody else's State I didn't know if

it would be a good investment it was

probably 30 times current cash flow what

I thought was it would be fun and I said

to my wife I said this might be crazy

it's not money we absolutely have to

have and it might be a good investment

but it's bound to be fun it turned out

to be a way better investment that I

would have thought as good as any

investment one could have made that was

a fractional interest in a team and

those were trading probably relatively

inexpensive compared to where the team

would have traded and the team has done

a brilliant job under the operational

leadership of Sam Kennedy who's the best

CEO of anything in the whole Sports

World which I think most people would

actually agree with and they've grown

the value of the business enormously

John Henry and Tom Warner have also

built a huge amount of value in their

activities and their leadership so it's

been great and it turned out to be a

value investment I didn't know it was

but the real return has still been the

fun it's just been enormously fun to be

part of it to go to meetings and express

a few thoughts here and there and my

wife and I go more than we ever did and

that also has been fun not only for me

but for her as well so the other one

circling back to Stats and sports and

maybe even Baltimore you've been

involved in horses yep and I think twice

had a horse win the Preakness at filmico

yep we'd love to have you share a little

bit about that experience and horse

handicapping as it relates to investing

so when I was a kid we used to go to the

races after school literally Junior High

School we'd run home throw our books

down head up to the track they'd let you

in free 10 minutes before the eighth

race and you'd bum a program and a

racing form off some old guy who was

leaving and you'd handicap quickly and

put down a few dollars and or sometimes

you get an old guy to bet for you as

well since you were too young legally to

do it then I'd go home and do my

homework so I just love the analytical

experience of handicapping it's not the

same as investing but it has commonality

you take an enormous amounts of

information it's highly disparate you

need to factor in so many different

considerations of the horse and the

trainer and the jockey and the track

condition and the distance and the who

else is in the race and likely Pace

scenario the race you need to factor in

a lot lot and I love that analysis at

some point a friend from childhood said

why don't we buy a horse together which

probably happens a lot and is always a

terrible idea it was a terrible idea in

terms of making money it was a fun idea

and that led me to stay involved and so

I have horses and have been incredibly

fortunate in the last couple of decades

to win the Preakness twice it's a race

that for me it's as good as winning the

Derby it's the middle Jewel of the

Triple Crown well it's not the Kentucky

Derby it's really special and to do it

on my home field three blocks from where

I grew up is very special so that's been

a lot of fun

I know that you don't often do this when

it's not tied to philanthropy so I

wanted to make sure I had a chance to

take the opportunity to get your

thoughts on philanthropy

just to touch on this one thought about

philanthropy relates to this book

because I pledged all the proceeds and

royalties from this book and as well as

a master class I recently did to

increase diversity in the investment

field so I'm giving all of the money to

three organizations SEO something called

lighted Pathways and girls who invest

all of whom are bringing people that are

underrepresented in the investment

business into the business this summer

girls who invest for example has 207

Scholars who are rising College Juniors

who have found out about the program

applied to it it's selective and are

going to be scattered out at different

investment firms and endowment offices

and other related types of Enterprises

and getting exposure they get trained at

Wharton for five or six weeks and then

they do their summer job for the next

six weeks not everybody will love it but

a lot of people have their eyes opened

this summer bow post will have three

girls who invest but about a dozen

interns total spread out across the

organization from I.T and HR and

Communications we have interns pretty

much up and down the organization and we

feel great about it it's good for our

team to be doing that we actually have

long been convinced that having a more

diverse team makes us better as a firm

diversity of thought diversity of

experiences challenging existing

thinking it just has to make us better

and so we want to always be part of that

this was an example of philanthropy to

further an end my wife and I formed a

foundation over 30 years ago when I

first started to make real money we

joined the giving pledge a number of

years ago we've already given away over

half and continue to make that a

priority it's a lot of fun it's a

challenge philanthropy focuses on the

world's problems and they're called

problems for a reason if they had easy

solutions they wouldn't be called

problems we work on some things in

biomedicine and health care we are doing

some really interesting things in Israel

both in medical research but also with

the Arab population trying to bring

people into the 21st century in terms of

diversifying their Workforce and

creating opportunity for kids of all

backgrounds in Israel to get a great

Science Education and then to have

career opportunities and working with

companies to be more welcoming to people

to end up with more diverse workforces

and it's actually taking off it's

actually starting to work and we feel

like that's one of the really important

things we're doing we do a lot in the

local Boston community and Beyond the

Massachusetts Community probably the

single biggest area right now is

democracy funding because you know about

how threatened American democracy is in

terms of what happened in 2020 but also

in terms of kicking people off the voter

rolls and gerrymandering and making

voting harder in general

this is not what a healthy democracy

does and of all the things I want for my

kids obviously I want good health but I

also want them and their kids and their

grandkids to live in a democracy

democracy has been the most important

thing in my life that I can't imagine

what my life would have been like if I

didn't grow up in the United States or

Britain or Canada or somewhere I don't

want that for them and a lot of the

trends are disturbing and we're in a

very difficult fraud time for America I

obviously want the country to come back

together but I especially needed to come

back as a democracy so that's become a

very large area of funding we're focused

on organizations that protect the vote

organizations that defend against

litigation organizations that are

fighting gerrymandering that are

innovating in types of election

structures that might lead to better

outcomes maybe more Centrist candidates

well Seth I don't want to let you go

without asking a couple of fun closing

questions so what's your favorite hobby

or activity outside of work and family

but I'm a Red Sox fan I love going to

the Red Sox I love thinking about their

next move and imagining what the GM job

might be like because it's I think not

that different from a PM job only much

harder what's your biggest pet beef I

think as an individual I don't like

people who take each other for granted I

think that it's easy to get busy it's

easy to go on autopilot but I think it's

really important to stop and ask the

extra question especially care about the

people that you care about and live that

way in investing I get frustrated at the

short-term orientation I think it's so

pernicious it's easy to fall into that

trap and to have investment success you

have to fight that successfully I also

get stuck on the idea that stocks can be

valued to the penny that I believe in

the concept of a range of value that

there's no exact price for a business

when you read Wall Street reports they

see you know our price Target is 52.50

why don't we save between 50 and 60. but

if you buy it at 35 you're okay I think

that would be for the best

what investment mistake have you made

that you'll never make again

this isn't a profound one but it's my

first one and I don't know that anybody

knows about it I've never talked about

it but in the earliest days about post

we had this great idea there was a

closed end publicly traded mutual fund

that had omitted some dividends and it

was in arrears and as you know they have

to clean those up before they can pay

common dividends and this company had

announced that they were going to be

cleaning them up and paying a giant

dividend and the stock went up a lot to

what I thought was full value so I sold

it and then I realized I was two weeks

away from going long term

so giant mistake just from sloppiness

now I have an operations team that would

never let that happen back then I didn't

I knew it but I didn't stop and check so

it just made me realize again I have to

check every detail

which two people have had the biggest

impact on your professional life

I think there are three but they're in

different categories the two are Max

Heinen Michael price for Mutual shares

from Max I learned to be kind to people

and from Mike I learned to never stop

pulling threats but the third is my wife

who's been so supportive that without

her and everything she did to organize

our family and take care of the kids

when I was unavailable writing my book

or working or on a business trip I

couldn't have done it so it would be

those three

what's the best advice you ever received

and what context did it come to you

Max Heine told me that I ought to take a

Dale Carnegie course on public speaking

and I didn't know what was behind that

but when I reflect Back Being able to

communicate your ideas being good public

speaker being comfortable with that are

just so important Max saw in me that was

an area that wasn't as strong as it

could be and so almost 40 years ago I

give him enormous credit I'm glad that I

took his advice it was so spot-on

with teaching from your parents as most

stayed with you philanthropy mom and dad

got divorced when I was young but each

of them wrote checks to their colleges

for checks to various organizations that

were on their near and dear list and I

found that motivational and inspiring

that I realized that it's also important

to me the same way to give back to repay

organizations that have benefited you in

your life all right Steph last one what

life lesson have you learned that you

wish you knew a lot earlier in life

something a famous investor said to me

once which is to never be afraid to bet

on yourself obviously my career path was

a bet on myself but I also probably

would have done even better if I had had

more confidence about the uniqueness of

the kinds of opportunities I was Finding

earlier in my career I never want to

look back I never want to whine and

complain about Coulda Woulda Shoulda

maybe I could have made a few more

dollars but I think the advice that

don't be afraid to bet on yourself is

really important it's advice I give to

young people all the time I don't tell

them to go start a fund but once you're

out there once you feel ready don't sell

your business apply yourself make your

business as good as it can be so that

applies to me too we each bring whatever

qualities we have and whatever dreams we

have to everything we do I was just

fortunate that I had the opportunities I

did and I think part of that advice

essentially is make the most of the

opportunities that are made available

available to you

Seth thanks so much for this rare

opportunity to take so much time and

share your great wisdom and experience

thank you it was a lot of fun as you

predicted thanks for listening to the

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