Sydnee Gatewood: Hello, everyone! Thank you for joining us on the GuruFocus Value Insights podcast! You can subscribe through Spotify or your device's podcast app, so you never miss an episode.
We are pleased to have Robert Robotti, the president and chief investment officer of Robotti & Company, and senior investment associate Theo van der Meer join us today.
Robert has been the president and CIO of Robotti & Co. since its founding in 1983. He is also the portfolio manager for Ravenswood Investment Company, the firm's flagship value fund.
Previously, Bob was a vice president of Gabelli & Company Inc. He holds a BS from Bucknell University and an MBA in accounting from Pace University. He is an inactive CPA.
As an active owner, Bob currently serves on the board of directors of several NYSE-listed companies; and is the board chair of a public company in Canada.
In addition, Bob serves on the boards of many non-profit organizations, including as a trustee and chair of the Endowment and Pension Committee of Pace University. Previously, Bob was a member of the SEC's Advisory Committee on Smaller Public Companies, established to examine the impact of the Sarbanes-Oxley Act and other aspects of the federal securities law.
Theo is a portfolio manager and senior analyst at the firm. He graduated from Vassar College with a BA in physics and a correlate in economics. Theo has a focus on small and mid-cap equities, and has been with Robotti & Company since 2012.
Thank you for joining us today, Bob and Theo!
Theo van der Meer: Thanks for having us.
Robert Robotti: Thank you. Great to be here.
SG: All right, just to dive right in, tell us a bit more about your investment approach. What metrics or factors do you pay the most attention to when analyzing stocks?
RR: Sure. Thanks a lot. Thanks again. So as you pointed out, I started Robotti and Company 40 years ago and I started investing almost 50 years ago. So the approach that we have to investing here at Robotti and Company has been consistent through that entire time. We are bottom-up stock pickers, we are active managers and we believe that the market does have significant inefficiencies at times, and that's what we're looking for. We're doing individual research on companies to identify businesses that we think trade far below what the intrinsic value, which is the earnings potential of the business, is. How frequently we find those opportunities in troubled industries because there's a reason, of course, going through a difficult time, people are concerned and focused on earnings, focuses continue to become shorter term. And therefore, you know, an opportunity with someone who's got a three- to five-year time perspective and the ability to identify companies that are really interesting.
TM: And I would just add that for us at Robotti, and for me specifically, the first thing I look at isn't necessarily any metrics. The first thing is really trying to understand the business fully and by gaining an understanding of how the business really makes its money and where its pain points are, it can help to not get misled by metrics that can sometimes only tell a portion of the story. So there's an Einstein quote I really like, that's if you can't explain it to a six year old, you don't really understand it yourself. And I try and make sure that I can always explain it to a six year old because it really makes sure that you don't get that misleading aspect to it. And then it can also sometimes lead to other investments. So if through that process, I find, you know, that the supply of goods into a company is a big risk for that company, that could actually mean that suppliers in that industry are really where I should be looking and hunting for ideas.
But outside of those kinds of more intangible factors, usually things kind of boil back down to normalized cash flows and in the steady state of the business, how much cash can it generate and then, most importantly, how much am I paying for that cash flow?
RR: So, and a critical part of the firm for 40 years, what we have done is not only identify stocks, we've accumulated like-minded people who, you know, it's, this is not, this is not a business; this is a profession, an avocation. There's 14 people here that we've accumulated over time and, therefore, many of them have decades of experience and have a similar approach. And we've consistently applied it to use this bottom-up stock-picking process. So the 14 of us share ideas and you know, part of it is the collegiality in the group we have. So Theo speaking reminds me, you know, he and other people are like critical for us to work together to really execute well on what we intend to do.
SG: That's great. Yes, teamwork always is more effective I feel in accomplishing a goal. So moving on a little bit, how has the current environment of high inflation and elevated interest rates affected, if at all, your investment approach?
TM: So I think there are probably two parts to that question really. The first is how it's impacted companies specifically and then the other is how it's impacted the markets more broadly.
And so from the company standpoint, it's actually in some ways been kind of good for us. We have a lot of investments in what we call kind of old-world economy companies and they've been, for years, really unable to raise prices in many cases. And a lot of what we're seeing today or over the last few years, I guess, is that prices are coming in line more with what supply-demand indicated they should have moved some time ago. And that specifically can affect things like when interest rates go up. Obviously, housing is very related to that. And so that's led to some weakness in company stock prices. But importantly, it really hasn't led to much weakness in their actual operations for some of the companies that we're invested in. And so these higher interest rates have actually shown how much better these companies are today than they were before the global financial crisis; they've consolidated down they're smarter operators and the results are really showing how far they've come. And you know, these interest rates don't change some of the bigger trends of there's just not enough housing in North America. And so, in many of these cycles, this is just one of those nonlinear parts to it. So it's never going to be a straight A to B, straight up and to the right, there's always going to be these plateaus along the way.
And then from the market perspective of how it's affecting the markets, you know, inflation has been nonexistent for so long that its reemergence is naturally scary. And China has been suppressing it for nearly two decades by being able to take so much cost out of every industry really. And that leads to the market becoming even more manic and that fear and uncertainty often leads to a lot of opportunity. And so one way it's affected our investment approach at Robotti is that we're seeing a ton of opportunities in this market because of that fear and that uncertainty that change can so often bring.
RR: Yeah, there's two concepts. One of them is we talk about the metamorphosis of the old economy, not the revenge of the old economy, because 40 years of being disadvantaged has really substantially changed a lot of these industries. And that's what it is. Inflation isn't a concern to us because the supply-demand fundamentals, they have pricing power. So if anything, they're one of the causes that really did lead to some inflation last year because they had pricing power.
And of course, the other one is how the market thinks about it or doesn't appreciate this. So the market doesn't believe it because we know these businesses, they're cyclical, they're poor businesses. The fact of the matter is they're fundamentally different today and the valuations are extremely discounted. So that's what we say. We think we have, you know, better businesses with barriers to entry, sustainable earnings, really strong balance sheets and yet, so therefore, Buffett better businesses, but at the same time, the prices are Ben Graham cigar butts. These things trade for single-digit P/E multiples with really strong cash flows. So, you know, that's what I say. I'm kind of like a kid in a candy store because the confluence of events has led it to. We're in the right place with the right skills and the right capabilities and we're excited.
SG: That's great. Yes, I think there are a lot of opportunities right now as well in the market. I did like your point, Theo, about how it just shows what companies are, have always been strong and have remained strong, you know, in their fundamental aspect. But I mentioned in my introduction, Bob, that you're involved with several companies' boards, including AMREP (AXR, Financial) and Tidewater (TDW, Financial). Can you expand a bit on what the process of getting into one of these positions involves?
RR: Yeah. So the first thing we'd emphasize is we don't make an investment with the intent of going on the board and being an activist, right? We make investments in companies that we think are extremely attractively valued and, of course, that tends to be a long-dated opportunity. And so therefore, we get to know the managements, we get to know the boards and we have the advantage because these companies are kind of like out of favor. And so therefore, Wall Street doesn't really want to talk to these companies. So they don't have a lot of people calling them up. So it's easy enough to get a call with the people and, of course, to meet them over time because we like to visit companies and go visit facilities. And in spite of the fact that, you know, my nature is up, I mean, my experience as an accountant, like what the hell do I know about manufacturing anything? But the fact of it is you do get a sense of it. So we build relationships. In building those relationships, occasionally it becomes logical that, you know, sometimes we recommend people to the board, but sometimes we ourselves know the people and know the situation and become active in it. So it's not our intent when we invest in it. But it's a natural outcome of our investment. And since we're long-term investors, we build these relationships and there's potentially an opportunity for us to do that.
SG: That's great. Thank you. Kind of piggybacking off that: What is your main priority or goal when you do get to enter one of these board positions, or get that opportunity, and what are the biggest challenges?
RR: Well, the most important thing is when you do enter onto a board is like you're one of 6, 7, 8 board members. And you work with management; you don't run the business, they run the business. So therefore, you know, building positive relationships with all of the other participants, management broadly, including the other board members, is a critical element. So therefore, you know, a cooperative process is one that has the best outcome instead of yelling, instead of having conversations and you know, explaining logic of things. It's more likely that people start to think about things differently and potentially that's better for the process and that's our intent. So therefore, it really is developing a working relationship with those people is a critical element in success in being on a board.
SG: That's great. Thank you for that unique insight. You're the first person I've talked to about this topic, so I appreciate that. According to GuruFocus' portfolio data, energy stocks currently have the largest representation in your equity portfolio. What do you find appealing about the sector currently? Where does the opportunity lie?
TM: So I think that what we've seen really is that there's been a big underinvestment in some of the conventional energy sources for some time now. And when you combine that with a pretty basic fact, which we think is the world's just short energy in every form. And that underinvestment is really showing, starting to show, its cracks materially today. And so, you know, here at Robotti, we think that there is no question about the importance of renewable energy. It's clearly a priority for the world; that's shown in public sentiment, significant capital investment and government policy. But there are also real limitations to how fast that can grow. And with all of that tailwind behind it, you're still seeing, you know, limitations in the supply of goods into those markets, the electrification of the world, the changes of the infrastructure that need to go into that. And so all of those things lead to the fact that there are a lot of opportunities to be had in the conventional energy space while that transition really happens.
RR: So we do think that, so I've been an investor in fossil fuels for almost 50 years. So I think I have a really long-term perspective and I do think that's what's happening is there's a significant amount of underinvestment and yet the world's need for energy continues to grow. And so therefore, those two things have now come together and make opportunities on both sides of the equation.
So our investments in fossil fuels clearly are informing our views as to the world clearly is changing. And therefore, you know, there's a need for renewables. The fact of the matter is the buildout of renewables can't happen fast enough. And as a result, we just can't get off of fossil fuels quick enough as much as people would like to. And yet we've underinvested actually in many ways in all of those pieces of the equation. And so that's what we really do think.
We are bottom-up stock pickers. But what we see, as Theo pointed out, actually, eight years ago, this concept of grassroots macroeconomics and looking at energy, you know, you get an appreciation for a critical element in the world's macroeconomy and understanding those dynamics and drivers really leads us to believe that there's a huge opportunity set on both sides of the question. So whether that's the renewable side, whether that's the conventional side, both of them, all of them have been underinvested and all of them require a huge impact on the environment broadly. So it's not just CO2 right, the buildout of renewables is critical in terms of its need. So the need for all kinds of materials. So renewables, between cement, steel, copper, these are all critical elements that are gonna have already in tight supply today and there's gonna be a growing demand for all these things. And so therefore, the demand for all of those is there's a huge opportunity set for how to do that. And then at the same time, we can't get off of fossil fuels fast enough. So therefore, CO2 production will be part of that byproduct. So therefore, things like carbon sequestration are definitely part of the mitigating factors. And you know, and not only that, there's opportunity sets for other materials and other things such as methanol, ammonia or things in which we're invested in. But suddenly those businesses in addition to their core usage have potentially a significantly increasing role in terms of energy solution. So there's a huge opportunity set of things that are underinvested in that we think we understand extremely well and I have identified many investment opportunities.
SG: All right, thank you. Yes, I do agree that we are still gonna need, you know, obviously the transition has taken longer than people want it to. But you know, in the meantime, there is going to be a continued need for traditional fossil fuel resources. But I am glad that there are opportunities on both sides of that.
RR: So we do think there's the clean energy side of the equation, of course, the market is coming to us, right? Because those things that the stocks are now performing poorly. So therefore, valuations are dramatically changing and yet they're probably continuing to advance. And that's what happens. It's never a straight line advancement. It's a stair-stagger process and opportunities come when you hit these slowdowns, both the businesses themselves and then the market's valuation of them starts to radically change and therefore, allows for an entry point because valuation matters. That's the one thing we really emphasize. In bottom-up stock picking, a critical element is what is a business worth? And the price you pay is a critically important thing, to which I think many cases today, people have lost sight of the fact of valuation as a critical element for determining success in investing.
SG: Thank you. Talking a little bit more about your portfolio, your portfolio appears to be fairly diversified, but are there any areas you tend to stay away from, and why?
RR: So a recurring situation is there are definitely industries in which we have not invested in the past and therefore, you know, don't have an appreciation for. And you know, today, I would say many of those also have valuations that make them more problematic. So you don't have the combination of those two facts. So we do have core competencies and you know, a lot of our investments do come from those. Now, over time, our core competencies do grow and so therefore, homebuilding-related things or something in that, 20 years ago, we didn't have a competency in. And today, I think we have a deep competency in and the opportunity was brought to us because we had a housing crisis and therefore, these stocks imploded and businesses imploded and things went through bankruptcy. So therefore, there was a great entry point. And from that, we've learned a lot.
As we pointed out, you know, the clean energy situation is something that we already know something about. It's a close proximity to what we're invested in and already have some investments in them. And so, you know, we think we'll continue to expand competencies that we have over time and normally that's going to be when the market provides an opportunity because the industry goes through a difficult patch and the stocks react accordingly and discount from what those businesses would really cost to replicate. And the determination is, is it a business you would want to replicate. And renewables, host of those are businesses that not only will we replicate, we will grow. So there's a real opportunity probably that we will continue to be cognizant of and watch for.
TM: Yeah. And then also, you know, there are certain industries that we really do tend to stay away from, like the pharmaceutical companies, for example. And that's really for the basic reason of there are too many people out there that we know way more than we do about that space. And so as investors, it's just as important, well actually, it's probably even more important, to realize the areas where you don't have the ability to add value. And so in every transaction, you're buying and selling from another party. And in the case of something like pharmaceuticals, we just know that we're not gonna be able to come up with a divergent view from the market that we're going to really be able to get comfortable with outside of, you know, some very unique things that probably didn't have to do with the actual product itself.
And so knowing what you don't know is critical and our process usually starts with, like Bob was talking about, that years of research of an industry before we make that first investment. And so like the renewable energy things that we were just talking about, you know, we've been building up that knowledge base through our understanding of the conventional energy space and making some investments in some of the non-direct renewable sources. So, you know, offshore wind farms and engineering and completion or the construction of the blades for wind turbines. And so we've invested in the areas that we understand while laying the groundwork so that when valuations get to a more attractive point, we're better equipped to take advantage of that because, without that base understanding and you know, outside of any kind of special situations, we don't really want to jump into an investment blind.
SG: That definitely fits in with that circle of competence idea presented by Buffett. So shifting gears a little bit, heading into 2024, where do you believe we currently are in the market cycle? What risks do investors face?
RR: We are of the opinion that the investment climate has radically changed two years ago, right, the reemergence and the concept that there really can be inflation. It's something that clearly had significant effects on markets in ‘22. But we don't think that that was a transitory thing. We think that the normal state of events really is inflationary. And so therefore, things have changed, yet we believe that most capital is invested based on the idea that, you know, post the financial crisis, there was an extended 10, 12-year period of time, somewhat similar with a major trend throughout that entire period.
Since 1982, interest rates have gone only one way; they only went down and people got used to that and therefore, that's embedded in how they've invested capital. So we would suggest they almost have a zero-based budgeting for their personal investment. Start afresh, pick up a piece of paper, start looking at things differently because there are gonna be opportunities and there are gonna be winners and the losers. Well, that's what we think the next decade is gonna be a different macroeconomic environment for many different reasons, observable by the companies we look at.
And so, because of that, you need to think about it, and those are two elements that we think from our researching individual companies. Two major trends. One of them is we talk about globalization 2.0, not just China. It's not deglobalizing and it's not just reshoring. Those are short-circuit ways to say something, but they're not fully comprehensive.
The other one is that having been an energy investor for as long as we have, there's a huge economic advantage that North America now has against the entire developed world. And that is an overabundance of energy in pretty much every form of traditional fossil fuels, especially, most importantly, natural gas. And the reason natural gas, that the independence of natural gas, is so critical is because you cannot build infrastructure fast enough to move markets, to therefore adjust the transportation costs because it takes an extreme amount of time and multiple pieces, right? The liquefaction, the transportation, the regasification, all of those pieces need to be built out. And as a result, we think for the next decade easily, North American energy prices are far less than the rest of the developed world, right? We are competitively advantaged in North America against the rest of the world.
So reshoring or, you know, we say globalization 2.0, not just China. Some of the reasons why businesses are coming back to North America is because they're competitively advantaged here because we have certain, and especially energy-intensive businesses, those are not labor intensive, those are material and energy intensive and we have those things. So therefore, we are competitively advantaged as opposed to 40 years of disadvantage. It's, you know, we are advantaged today. And of course, it's not just reshoring because, as much as what's moving here, migrating, just today, right, you have Nippon Steel (TSE:5401, Financial) buying U.S. Steel (X, Financial). So the Japanese are figuring, how do we get here? We talked to a company the other day, there's an industrial parts business, and what they talked about is Hitachi (TSE:6501, Financial). Hitachi says, “Well, we're gonna re-establish our footprint because we've got to be in North America.” Or European companies continue to come here in terms of opportunities. And it's not because we have the Inflation Reduction Act; it's because we have low-cost energy. And so if you're going to build an ammonia plant, you're gonna build it in North America because you have a huge competitive economic advantage because pricing will be set by the rest of the world and costs here will be determined by natural gas. The margin is an excess margin, is excess profitability. If you're North American based, at the same time, the Inflation Reduction Act is the Inflation Accelerant Act, right?
So in addition to the fundamentals being positive, there's going to be government help that will therefore further, and that's taking time. You know, people probably I think are a little bit too quick like, “Oh, you already passed the act. What? Where's the money being spent?” It takes time to get the approvals to do all these things. So therefore, the momentum that is building for many of these industrial businesses, which after 40 years consolidated, many of them have a limited number of players and yet have competitive advantages. And that's why we talk about the metamorphosis of the old economy, right? Because these companies have now barriers to entry to build out those kinds of capabilities. Even here it is complicated; there's a limited number of competitors in that business. So they're rational in terms of how they operate and they have very strong balance sheets. So there's a long list of companies that we're really excited about and all of those macro factors and we're bottom-up stock pickers. But the fact of the matter is the macro environment clearly is, you know, we don't know about it, but it's critical and yet there's enough of the indicators and information we have about the business to have high conviction as to how these things are probably gonna play out over the next decade.
TM: Yeah. And I think I just add that, you know, at Robotti, we try and focus on the company and industry-related risk because we know we have limited ability to guess where interest rates are gonna go, what trade treaties are gonna get signed, where inflation is gonna be. But we can look at how those scenarios will impact our companies. And Bob touched on it earlier, but we have this idea of grassroots macro investing and that boils down to, you know, engaging directly with the industry's fundamental components and looking at their customers and their suppliers and their competitors and through that gain the understanding of what those macro level trends are. So it's a bottom-up way of uncovering some of those bigger top-down macro level trends that Bob was just kind of going through.
SG: Great. Thank you so much. Shifting focus a bit, what would you say is the most important lesson you have learned over the course of your career?
TM: So Bob has been doing this a lot longer than I have. So I'm sure he has a lot more lessons that he's learned than I have. But something that I've learned is just that things can persist a lot longer than you think they will and can quickly start to feel normal. I think interest rates are a really good example of that. So for pretty much my entire professional career, interest rates have been the lowest that they've literally ever been in history. And I saw negative interest rates and that was weird in and of itself, but kind of the weirdest part was how normal it felt at the time and how it seemed logical and no one was really freaking out as much as I thought that they would. And the market gets really comfortable with what's happened over the last few years and is quick to extrapolate that out and say, “Well, this is the way it's going to continue moving forward.”
And, you know, I'm about 35 years old and there are a lot of people who are my age that are now in positions where they also grew up in that same environment. They're making decisions based on their entire professional career. There's been one set of financial factors that they've had to base their decisions on and if they're in a position of power, they were successful over that. And so that worked in their favor. So what I've tried to take away from that is that you need to really be mindful of any rules of thumb or givens when looking at an investment because that's often where both the risks and the opportunities lie.
Famously in the global financial crisis, the rule of thumb that home prices only go up is what led to a lot of the downfall there. And over the last few years here, I think there's been an opportunity because of these lower interest rates and people's assumption of where they'll be. And by just really trying to stay honest in your research and not taking things for granted, it's what I've tried to learn from that environment that I've grown up in professionally.
RR: So it's bigger than that, I guess. Jim Grant is actually known for saying, “In science and engineering, knowledge is cumulative and in finance, it's cyclical.” You've gone through a period of time, as Theo points out, he's not that young, he's 35, and yet the economic environment has been one of consistency over that period of time. So it's not just young people who have experienced that for all their careers of 15 years and they've been successful, so they must know what the hell they're doing. And they did know what they were doing in that environment. But it's also people my age. So there's plenty of value investors that have learned, “Oh, you know, it's OK to pay a higher price for a better business.” But what's a better business? How sustainable is that better business? How much more is it? Are you willing to pay for that business? What's the right discount rate? Because if it's a one or 2% inflationary environment, that's one thing. If it's a three or four or 5% inflationary environment, that's a different multiple that you pay for those earnings.
So I think that not only is it younger people, but even older people have kind of convinced themselves in morph because that's what we see in value investing, right? The people, when I started the firm who, you know, I thought of many of those, many of those firms are gone or much smaller today or continue to lose assets. So therefore, they've really changed and the ones that have been successful have adapted to a different environment and I'd suggest the environment is now changing once again and it's a critical opportunity and the critical thing of that's why you have to. We talk about this.
I don't know if you know, there's a play that was written in the ‘40s by Lerner and Loewe. It's called “Brigadoon.” And two guys are wandering through the Scottish moor and they come across this little town and it's wonderful. It turns out the town only shows up one day every 100 years. So what we talk about is a financial Brigadoon. People have lived in an environment of 15% return on the S&P, 2% inflation, a strong dollar for over a decade; they think that's the norm. You don't get a mid-teens, you know, real rate of return on an investment and that's forever what's going to happen. And yet they think that and when the markets now the last couple of years have started to adjust, they're like, “Oh, no, no, no, I want that.” So it's financial Brigadoon that will come back maybe in 100 years. But that was not the norm and you thought it was the norm and you accepted it as such. That's a dangerous set of facts with all kinds of risks associated with it.
SG: That's great. Thank you for that insight. Kind of on a similar note, what is your key advice for individual investors in the current market environment? I think you touched on that a little bit already.
RR: Well, one of the other things that, one of my other pet peeves is that, you know, if you listen to the news first off, you know, there's so much news and so much information. We live in an information overload and it's kind of like, you know, kind of like what's important, what's relevant? And therefore, it's really not information. It's really the ability to think and especially in an environment where the world is changing and you have to think because it's going to be different potentially. So you have to be open to those ideas.
And so therefore, we think that that's a critical element of kind of where we are today. But the thing I was gonna go on is, you know, people talk about the Fed. You know, we can talk about the Fed; the Fed is gonna raise rates, the Fed's gonna drop rates, the Feds gonna do this. My analogy is the Fed is Powell's in a boat and he's got a paddle and the river is going in one direction. He can't turn to go in the other direction because the river is going this way. With his paddle, he can move to avoid this rock or that rock, but he can't speed it up and he can't slow. And if the flood of water happens behind him, he's, so people talk about the Fed, it's inflation that he responds to. What's inflation going to do? And there's uncertainty and, of course, the way we look at it is with those two macro factors we identified from our research, globalization. 2.0 not just China. As you move away from China, who for 40 years has sucked inflation out of the world, and it becomes a higher-cost place and businesses migrate to other places. Therefore, that building out of infrastructure as they move around the world has an inflationary impact as we build out energy transition. And you build two energy systems like the existing fossil fuel one still needs to be heavily invested in the buildout of renewables is a huge call on all kinds of materials that when you have two systems coexisting, those are inflationary.
We think that there's a whole, you know, huge myriad of inflationary pressures and the idea that inflation goes away is a risky proposition. And yet most investments assume we live in a 2% inflationary world, 3%. That's where we're gonna be. And if that's not the case, then potentially they're really invested in the wrong places.
TM: And then, you know, I think I'm a little biased, but I would say that active management is really poised for some good success going forward. There's been such a drive toward indexation and passive management that the opportunities to find those individual companies with attractive price-to-value characteristics is really big today. And so a seasoned stock picker is in a great position to add a lot of value in the markets that we probably will have for the next few years here.
RR: And that's not something that's practiced widely today is individual stock-picking because money moves based on flows of capital and it's probably passive and index and therefore, they all move together. There's no differentiation. They don't pick out, “Oh, well, this is a better company than that one and this one's got trouble.” So they all move the same. The fact that all securities move the same when the underlying businesses probably have radical different situations or circumstances between them, we absolutely think this is, the next 10 years, it's all about stock picking. It's all about active management even if you're in the Magnificent Seven, right? Because probably what happened, you know, in the Nifty 50, right? It was one-decision stocks. These were wonderful companies, you owned them and that's it. You forgot about it. It always, they'd always go up. And the fact of the matter is that they didn't, a number of those companies disappeared 20 years later and a number of them were still good investments 20 years later. And so I still think if you could invest in the Magnificent Seven, there's a good chance that intuitively some of those are gonna really be good, OK Investments. Maybe, you know, they'll have a little bit of dead space for a period of time, but some of them probably there are risks of valuation you have in the presumption on the persistency of that business. I don't know which one. But I think you gotta be a stock picker even if you own the Magnificent Seven. You gotta own the right ones and don't own the wrong ones. And so that'll be the critically different thing going forward.
SG: All right, I think that's great advice. Thank you. As you know, Charlie Munger (Trades, Portfolio) recently passed away. In your opinion, what was his most meaningful contribution to the investment community?
RR: I think in many ways…so it's maybe misperceived, right? I do think it's independent thought. Right? Because you know, he's a value investor, but yet he did things in value investing, like pay a better price for a better business, you know, See's candies and how he helped Buffett understand those concepts. And so a lot of it has been that he helped break the orthodoxy of value investing, cigar butt thinking, cheap price is always a great thing and therefore, help people expand their thought processes because it is the present value of the future cash flows that determine the business. It doesn't matter what the historical book value of the business is or any of those things in the past because those are the past. What's the future going to hold?
I'd suggest, though, if you apply his independent thought process today, the risk in value investing is the reverse that people have now are. Am I willing to pay a higher price for a better business? But what is a better business? How persistent is that? How high a price is too high a price? Valuation matters, and I think that many value investors having learned the lessons that Charlie helped people think about have gone too far with the specific and not go step back to like the generalization, independent thought, come to your own conclusion. Does that make sense? Am I paying too high a price for that? What risk is there in that as opposed to these other businesses I thought I knew?
And if you look at the cash flows of those businesses, they're different than they were. And those are really inexpensive businesses today and maybe have those attributes of better businesses. So that's what we think the opportunity is; it's applying his independent thought process, but to the reverse to the like, maybe that's too high a price and maybe there's opportunities in places I didn't think there were.
TM: And then also I think it's just his relationship with Warren Buffett (Trades, Portfolio) I think shows the importance of finding the right people to work with and being able to kind of build that partnership. Like Bob said earlier, we have 14 investment professionals here at Robotti and they've been here for an average of 14 years. So we understand that importance of finding those like-minded partners that will push you on your ideas, that'll make the work more enjoyable and hopefully that would lead to better quality of work.
Also Charlie and Warren together, their ability to talk with the investor base that they had and relay that information to them and have a client base that works with them and will stick with them through, they didn't have many tough periods, but through any tough periods that they did have. And so that partnership aspect I think is a really important part of who he was professionally.
RR: One of the…it's interesting how certain lessons don't always work and that's what makes things work because they don't always do. David Caster always says that what makes something work is because it doesn't always work. And so one of the famous quotes from Templeton is to outperform the market, you have to do something different than the market.
Curtis Jensen is one of the people who joined us back in ‘16. Curtis was the chief investment officer at Third Avenue Value for, you know, many years before that and then he joined us. And Curtis was saying that, he said, “Oh, you know, so we invest differently than the market.” I said, “Curtis, you have to realize for the decade post the financial crisis, doing something different than the market meant you got your head handed to you. And the S&P 500 outperforms everything else around the world, and we lose sight of that because we live in America.” So our reference point is, well, that's the market and, of course, it's not. It's a small component of the world's equity markets, public equity markets. And so, when it outperforms for that long period of time, people forget that rule to outperform the market, you have to do something different than the market.
And yet here, for 40 years, we've always done that. And of course, that meant, you know, there was that period of time post the financial crisis where we underperformed. And what did we do? We stayed doing what we did, Curtis joined us, there were opportunities, we built out the people and we built the expertise. And now you've seen that. We've seen the last number of years, our performance is substantially better. And now once again, our long-term performance is far better than what the market's done. So by being consistent to that process, there are periods of time of underperformance, having great partners because you can't be long term and committed without capital that aligns, and we don't have permanent capital like Buffett and Munger do, or potentially is transitory. But of course, you couldn't get better transitory partners than the ones we've had, who in large part stayed and had been believers and believing is that today, something that manifests and is paid off to have stayed consistent to something that got out of favor temporarily, but is the right process for the long term.
SG: All right. Thank you. Those are all really good points. And so we are coming to our final question here. It's a bit of a fun one, in my opinion. It's my favorite one. Please recommend three books and three movies, they don't have to be investing related, for our readers to check out. Please also share why you like them.
TM: Bob spends all of his time reading 10-Ks, so I'm sure he'll just recommend a bunch of those. So I'll try and take the bulk of this one.
I have a book and a movie that are kind of related to each other, but very, very different. And they're both about how the life that you lead is based on the decisions that you've made in your past and how they can kind of branch out from one another.
So the first is a book by Blake Crouch and I'd recommend pretty much everything he's written. I think he's a great writer. The book is called “Dark Matter.” It's a science-fiction book that definitely scratches the physics nerd part of my brain. And it's kind of about multiple realities and how decisions can branch out into kind of infinite possibilities. And then the movie is “Past Lives” and it's a totally different type of movie; it's a more straightforward drama. And it examines how your decisions can kind of reverberate throughout your life and something that you decided on very early on can change your future.
For another movie, “Coherence” is a great kind of Indie science-fiction movie. You can tell I have a preference for a certain genre. It deals with the complex topic of quantum decoherence, but it does it in a very personal, accessible way and it's kind of staged like a play, so I really like that.
And then, I just recently saw the movie “The Holdovers,” which is a story about some young boys that stay at an all-boys school through the Christmas break. And it's the importance of empathy and understanding what's going on in someone else's life.
And then for two more books, I just finished reading “The River of Doubt,” which is actually cogent to what Bob was talking about with going down the river with the paddle that Powell might be doing. But it's about Theodore Roosevelt's trip through the Amazon charting an unmapped river after his failed attempt at a third term for the presidency. It's a really interesting story I'd never heard of before. It's a page turner and it's about perseverance and the importance of preparation. And, you know, no matter how much kind of gumption, in his words, and zeal that you can have, if you're not prepared, it doesn't really matter.
And then my last recommendation is a book called “We Shall Fight On the Beaches.” And that was actually written by my cousin, Jacob Field. It's a collection of history's most powerful speeches and it frames them both in the context of the time they were set and what the consequences were or what kind of happened after the fact. And so it's a nice book to kind of leave on your desk and pick up when you need uh to be roused by some of the greatest orators in history. So, I'd recommend all those.
RR: Theo is correct that I don't really read any books. I read 10-Ks.
The one thing I do outside of business is that I'm very active in a number of not-for-profits. And so, being on a not-for-profit board also has a lot of these, again, being on boards is critically important because what it also does… one of the benefits of being on a board, you know, as Buffett noted, being a businessman makes him a better investor, being an investor makes him a better businessman. And therefore, board roles are critical. And what I find is a lot of the boards that I'm involved with, of course, finances are a critical element of those. They are businesses and thinking about them as a business really helps give insight into how, of course, in an empathetic way, because it is not a business, there is a, you know, end result that also is the intent and the mission of the organization, but how they do that and how they finance that is critical.
And so, from that there's also multiple things. For example, at Pace University where I'm on the board. I've been on the investment and finance pension committee and for the last couple years, I've chaired the committee. So I work with our outsourced CIO and a number of other organizations have come to me recently to say, “Oh, we're doing a search for an outsourced CIO.” So it's interesting to look at that process. And what I would note from that process is that of the six outsourced CIOs recently I helped an organization look through, pretty much everyone gave the same: “This is what the portfolio needs to be like and how you need to invest.”
And every one of those had a critical element. You had to be in private investments because if you wanna outperform, you have to be in those. And I'd suggest that private investments are one of those things, too, that have gone through a life cycle. And it was great to start in that business 40 years ago when interest rates were 15% because you clearly have had huge tailwinds to investments.
Of course, there's also the active managers who drool at the idea of, “Oh, let me mark my own portfolio to market because, you know, it may have a different valuation than what the public may put on it.” And at a time when interest rates are really changing because inflation is changing, therefore, cap rates are different and, therefore, levered investments have a different level of risk to them. And so I'd suggest that the way everyone is telling people to invest is one that has huge latent risks in it and potentially some interesting space. But again, the uniformity and conformity for all these people in terms of how do you do that says something about our belief.
The puck has been at that end of the ice for a long time and everyone's down there looking for the puck and it's moved. And they can't find it because the puck's not there anymore. Underlying economic events, you know, Howard Marks (Trades, Portfolio), I think, has noted it a number of times. Things are fundamentally different in the world's economy today. And because of that, the puck's down here where we are, where we've been all along. We see the puck come and therefore, it's there in front of the goal, but no one's looking here because they're still searching over there. So capital has to catch up with economic reality and it's gonna take a long time for it to do that because there are all these institutional hurdles to that process, whether that's passive investing, whether that's advisors who are gonna tell you to all invest the same way. All of those things are structural facts that are restricting capital looking to where it needs to be as opposed to where it has been and had great success for an extended amount of time. But remember, past performance is not a predictor of future results. And we all know the phraseology, but most capital, including huge institutions, do not apply that because moving capital is extremely complicated and difficult.
SG: All right. Well, thank you both so much for joining us today. It was a pleasure to have you both.
