The Compound and Friends - How to Earn Stock Market Returns With Half the Risk

Episode Date: September 26, 2025

On episode 210 of The Compound and Friends, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Michael Batnick⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Downtown Josh Brown⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ are joined by Steve Romick to discuss: risk management, value investing, surviving the dot-com bubble, the markets moving faster than ever, and much more! This episode is sponsored by Public and Vanguard. Fund your account in five minutes or less by visiting: https://public.com/compound Learn more about Vanguard at: https://www.vanguard.com/audio Sign up for The Compound Newsletter and never miss out: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠thecompoundnews.com/subscribe⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Instagram: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠instagram.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Twitter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠twitter.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ LinkedIn: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠linkedin.com/company/the-compound-media/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TikTok: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠tiktok.com/@thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Public Disclosure: All i‬‭nvesting involves‬‭ the risk of loss, including‬ loss of principal.‬‭ Brokerage services for US-listed,‬‭ registered securities, options and‬ bonds in a self-directed account are offered by Public Investing, Inc., member FINRA &‬ SIPC. Public Investing offers a High-Yield Cash Account where funds from this account‬ are automatically deposited into partner banks where they earn interest and are eligible‬ for FDIC insurance; Public Investing is not a bank. Cryptocurrency trading services are‬ offered by Bakkt Crypto Solutions, LLC (NMLS ID 1890144), which is licensed to‬ engage in virtual currency business activity by the NYSDFS. Cryptocurrency is highly‬ speculative, involves a high degree of risk, and has the potential for loss of the entire‬ amount of an investment. Cryptocurrency holdings are not protected by the FDIC or‬ SIPC.‬‭ Alpha is an experimental AI tool powered by GPT-4. Its output may be inaccurate and is‬‭ not investment advice. Public makes no guarantees about its accuracy or‬ reliability—verify independently before use.‬ *Rate as of 6/24/25. APY is variable and subject to change.‬ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Ritholtz Wealth Management⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/advertising-disclaimers⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/⁠ Learn more about your ad choices. Visit megaphone.fm/adchoices

So I was just in, I was just in LA and I drove for the first time through, I drove through Malibu, like on the PCH and, you know, on the way to LAX. So you got to go through, I was in, I was in like the Thousand Oaks area, Westlake Village. So you had to drive through the canyon down Malibu, and I hadn't seen it yet because this happened when, January. Okay. I could not believe the destruction. Like a thousand, it seemed like a thousand lots were just empty. I drove it for my first time, myself, this last weekend.

Oh, okay. Because I have such PTSD. We might have been on the same road at the same time. Going that was a direction. I was going to, you know, for a wedding. But it was, I went through the palisades, and I've just not been able to bring myself to drive through. I have never seen anything like this.

I mean, dozens of friends have lost their homes. Yeah, it looked, it's hard to describe, but like the lots where the homes are used to be or separated by like fences or something they used to be. So it's just lot after lot. And it's, I think it's thousands of them that were on the beach where these things were burned down to the foundation. You just see like concrete and wreckage. And it feels like it goes on for 10 miles. I don't know. No, yeah, it's from Santa Monica all the way up to Malibu. So 10 miles is exactly right. I would guess, and I don't know this for sure, that's got to be in dollar value, the biggest

destruction of like individual people's properties that we've ever seen. 100%. Like I know Maui was really bad and I know California's had wildfires. I don't know how to inflation and just Pompeii, but

I'm not going to like that for. This, it reminded me of the Chicago fire. Not that I was around for it, but like the things that you read about it were a quarter of the city burned down. That's what this looked like to me. And I was just,

I was just blown away by it. Yeah, we were, we could not get to our home for, well, we were told to evacuate. We were out for 10 days. I was able to sneak back in, you know, over the first five days. Then I wasn't, the National Guard came in and I couldn't get back in. But it's a great advertisement, actually, for Amazon because I got back and some out packages

were at my front door. Oh, my God. They're delivering in an apocalypse. Yeah, I don't know how. So my brother lives in Calabasas, and they were evacuated twice from their neighborhood. And thank God nothing happened. But, like, twice, they just had to go to the in-laws and just. You watch the ring camera.

So they were up in the hills in Calabasas. Yeah, it's horrifying. I grew up out there. That's my old stomping route. That's a really cool part of the country that hadn't spent a lot of time, but I was there for a couple of days this past weekend. And somebody told me it's like a coal town. It's like a company town.

Like all the wealth originally in that area is from Amgen. Is that true? Well, not originally. No, Amgen wasn't a thought. But after Amgen became the mansions, the McMansions. The McMansions. Later on, I'm Jen was not a large enough employer to develop Calabasas. Okay.

Steve, do you remember where this picture was taken? Oh, God. They got photographer promised, promised me that he was only going to take that picture with sunglasses, because I wouldn't do it. And I said, I was I'll look like a, can I say asshole on this program? Yeah, you know, I just, I'm 35 years old and, and, you know, the cover of Money magazine, the last thing I want to do is knowing the ebbs and flows of the markets and You're not always going to be, you know, on the hit parade.

And the last thing I'm going to want is to have a photograph of myself with sunglasses. But of course. Are there palm trees too? Yes. Oh, it's like the kiss of death. Beverly, Beverly is. Beverly else? You look like Aaron Eckhart in that picture.

Well, no, take it down. We'll put it up later in the show. We'll put it up later in the show. Can you not? No, we're going to do it. I want to know, I want to know all about that. I'll be a sponsor just so you don't put that up. Oh, it's going up.

It's definitely going up. Would you consider me, to be a wife guy? I don't know what that means. A wife guy? Anybody here know what that means? A wife guy. No.

Nobody knows what that is. Without knowing what you mean, no. Somebody told me I'm a wife guy. One of my cousins told me this. Like, what do you mean? He's like, I don't know. Like, you're always doing stuff with your wife. Like, well, don't most of us?

He's like, no, you do like guy stuff, but you bring your wife. I don't know. Do I? That's not true. I do that? That's not true. I mean, you have brought sprinkles to stuff. So, like, is it sort of true?

You're not a wife guy, but I wouldn't. Like a wife. You're looking at me like I have a point of view here. I just met you guys. Are you a wife guy? Would you say you're a wife guy? If my wife listens to the podcast, I'm 100% a wife guy. No, it doesn't mean if you're not a wife guy, you don't like your wife.

It's more like there are guys that will bring their wives to stuff. Not me. I am absolutely. You are not a wife. Not a wife guy. But I am? I love my wife, but not in that context. You love her enough not to subject you to the version of yourself when you're with your boys.

That's exactly. right. Okay. I always thought that of myself, too, but I guess I'm not. No, you are. Not. I am not. I am. All right. I'm relieved now. I don't know. So he's like, you're kind of a wife guy. I really am? That's an interesting thing to say somebody. Yeah, it's a weird, it's a weird thing. It's making up terms. But you have friends that you know for sure are wife guys. I hate wife guys. All right. Let's go, John. This is called easing into the financial side of the discussion. Before I insult any of the wife guys in the audience, we love you, we love your wife. You support wives on this show.

Oh, of course. All right. All right. Thank you, John. Whoa, whoa, whoa. Stop the clock. Here's a word from our sponsor. Today's show is sponsored by Public.

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Welcome to The Compoundin Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Riddholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholds wealth management may maintain positions in the securities discussed in this podcast. Ladies and gentlemen, welcome to the Compound and Friends, the Best Investment Podcast, the world. John is here. Nicole, Duncan is here.

Our friend Steve Schaefer in the house. Steve, you sit in on a lot of these, bro. We should have, like, a dedicated chair for you. You like me in here? You're into it? All right. All right, thanks, Steve. We have a very special guest.

I called him a legend when he walked in today. I've read his stuff over the years. I've heard his name over and over again. He is highly specifically, I would say, revered by a certain component. of the investment market. My first exposure to your research is through Meb Faber. Meb always shouts your stuff out

on the idea farm. Do you know that? Sure. I didn't know we always said that. I like that. Yeah, he's a big fan of yours too, and so am I. Steve Rolmec joined the FPA in 1996. He serves on FPA's management committee and as a co-portfolio manager for FPA's

flagship global asset allocation fund, FPA Crescent. You started that fund three decades ago, Steve. I don't know if you know that. No, do you know that. FPA is a Los Angeles-based institutional money management firm practicing a disciplined approach to value investing with approximately $30 billion across multiple strategies.

He is a multi-year award winner in the mutual fund community and someone who has earned tons of respect over the last few decades. We're so excited to have you here. Thank you for joining us. Thanks for having me. Did Steve make you come? He did. All right.

I really tried to get out of it. He did the right thing. We're going to have so much fun today, I promise. I promise. See, if you were a young man when you got that responsibility. No, I think he just called me old. No, it would have been funny. No, I'm saying, holy shit.

Ended the sentence. You were a young man. You were young once. I was young ones. But you had a lot of responsibility as a relatively young man. I did. That's impressive. Well, I started working for a hedge fund back in the mid-80s.

And I realized there was kind of a gap in the market. but there wasn't a public fund that really kind of served my interest. And so I said, why don't I just create one? And so I did. What was the gap? Well, they go anywhere fund. Everybody, you know, with a lot of investment partners, there weren't as many investment partnerships then as there are now.

And there's fewer now than that were 10 years ago, I would guess. But back then, there was, you know, you were really siloed. You were a large cap investor. You were a small cap investor. You were a small-cap investor. You were a national. You were debt or equity. And if you were a debt, you were a high yield.

You were or you were high grade. And so there really wasn't anybody that that could kind of look across the landscape and the capital structure to kind of, you know, create that, you know, look at a breadth of opportunity. And so, so why don't I just create that? You were 6040 before 6040 was a thing. It's a really great point. Like a lot of the most well-known investors or even asset management firms, probably not recently, but over the long term or throughout the history, you became known as a bond shop or a stock shop or these are growth guys, these are value guys, the ability to do what you. you thought makes sense in that moment was probably where the big gap was. Yeah, I mean, in moments in time, in a moment's time, we will look like other people

and will own a lot of stocks that other people might own at a point in time because the crowd isn't always wrong, but often it's not always right. And not to be able to have that flexibility to do something different can be problematic. What's the hardest part of your job, the stock selection itself, or choosing the allocation levels for the different asset classes that can be in your in your fund. It's the security selection. I'm going to broaden it up, because it's not stock, whether it's stock or bonds. It's a security selection because the allocation is a byproduct of what we're finding as opportunity. We don't make an allocation decision. Oh, we want to be 30% in cash, 20% in cash. If we see things that are attractive, offer good risk rewards where we can protect

our capital on the downside and then see good optionality on the upside, we're going to go and put capital regardless of the environment. So if you see 50 stocks that you just absolutely have to have because you recognize there's an opportunity there, you don't have a problem taking down your bond exposure because you're not up against a wall of, hey, you're supposed to be 20% this many bonds, 30% stock, like you have, taking down our cash exposure because we don't actually have,

we don't have much bond exposure at all today. We can dive into that if you like in a little bit. But, you know, yeah, it's cash. Cash becomes a residual byproduct of our investment process. So we'll pull down from that cash repository. when we see lots to do and when we don't we uh you know cash builds i want to start by quoting you is that okay sure nobody else does all right you said this year earlier this year in the midst of the the uh the the the tariff tantrum i don't know do we have a name for what went on in march

tariff tantrum okay you said this a decade ago i gave a speech to the c f a society in chicago and said the one thing you shouldn't be surprised by is surprises nothing's ever certain At the end of the year, more than 40% of investors thought there was less than a 10% probability of a stock market crash. During the depths of COVID in 2020, less than 15% of investors thought there was a less than 10% probability of a stock market crash. Investing like life is eminently unpredictable. I anticipated there would be fires here.

There were videos of Richard Nixon in the 1950s hosing down his roof. I had fire hoses on my property, a pump to take water out of the pool, but even the best laid plans. So it sounds like you are, end quote. So it sounds like you are risk first or risk management first and then seeking opportunity secondarily. And I guess that explains why you've been able to survive for 30 years basically doing the same, you know, the same thing that you've been doing. A lot of people haven't had that longevity. Do you think it's that? It's evolved. It's evolved along the way, yes. I certainly believe that risk first has been paramount for what we do, but the longevity isn't just tied to that. It's also, there's a lot of my brethren over the years,

you know, value investors who are no longer in business, sadly, because they were risk, you know, protection first, downside management, but they forgot about the upside. So we're very mindful of the upside too and making sure that we, you know, are always seeking the opportunity. There's generally something to do. and I'll credit my partner Mark Landekker more than anybody else to really push you me in that direction. I want to put up a chart of the total return of your fund, and I know there are compliance rules, so we're not going to have any forward-looking statements here. But, I mean, this is one of the most impressive things that I've seen outside of looking at, like just an index fund or something.

I mean, you have really done the job for the people that have entrusted you with money, and you've done it for a really long time. Do you ever look at this and say to yourself, like, I did it? Like, do you feel that sense of accomplishment by now? Do you give yourself that at least? Generally not. I feel a little bit like a movie producer. You're only as good as your last hit movie.

I know, but there's a lot of hit movies in here. Yeah, I mean, there's been good, there's been good most. There's also some drawdowns in there you see, too. Of course. But fortunately, our drawdowns have been a lot less than the market. We've had these market drawdowns. But no, I don't really, we don't, you know, we don't rest in our laurels. We're always looking forward.

And I think that if I were to sit back and take about the, yeah, look, inarguably, we've done a good job historically. But what keeps me getting up every day is knowing that I need to keep doing that. Yeah. Can I show you a picture? No. John, if you would. So, all right, but let's talk about this.

First of all, the timing of this is unbelievable. The sub, this is Money Magazine, the 1998 ultimate guide to mutual funds. So I'm guessing this came out in early 98, right, or late 97? This is your Madden cover. It was all downhill from here. Well, so you're on the cover. You're sitting on it. Is that a limousine?

What is that? Benz? No, no. It's just a used BMW. All right, stop. It was. I swear to go on. Used for the photo shoot.

No way. All right. But you were one of the five fast ranking stars and probably the most handsome ones. They put you on the cover. This is you at 34 years old. And all right, you've already expressed to us. You didn't want to be in the picture. We understand that.

But that's kind of cool when you're in your 30s. Like that level of recognition, people said, this guy knows what's going on. This guy's good at what he does. I mean, you have to admit that's kind of cool. Yeah, it was cool at the time, but the sunglass thing really was not cool. Okay. I get it. Well, I think it looks cool today.

Look at the subheadings, though. Beat the year 2000 bug is on the top. And then cash in on falling rates. From this point forward, we basically had 24 months to get out, right? Is that the way you'd think about it? Yeah, I mean, it's. It's like, I mean, I think more important point is they put me in the cover of Money magazine only to see my relative performance decline, you know, precipitously.

Were you in the wrong, you were in the wrong stocks for that two-year period? For that two-year period, 100%. I mean, we were behind the market by 40-some-odd percentage points, give or take, over the two years. So to back up for people that weren't around then, if you didn't own internet stocks, and in 98, that was Amazon, eBay, Yahoo, AOL, Netscape. like if you were not in that trade you might as well have not existed Sun Microsystems and the list goes on

Sun Micro, EMC You look like Berkshire Yeah, I was going to say That looks eerily similar to You know, the Warren Buffett cover, Warren doesn't know what he's doing Like that was that era That was Barron's in that era

I mean, I really think the reason We had any money left in the fund Was because people either A, felt sorry for me Or B, they forgot they had money with me So you lost 85% in your ass There's a famous quote, you probably know the guy's name, the French guy that ran First Eagle Global. Jean-Marie Aviard. Okay, legend, another legend.

Jean-Marie Aveyard said, I would rather lose half my clients than half my client's money. And that became sort of a rallying cry for value investors over the years since, like, I'm not going to chase this. I don't care if you redeem me. It just, this is not the way I invest. It ended up being the right decision because we made money in 2000 when the market was down. In fact, you look over the five years, 98 to 2002. If you were to carry that chart further, we actually, you know, earned it all back and then some. And we ended up well ahead of the market.

So maybe we start off the same place you see in that chart on the left and 98. That's you on the hood of the used BMW with the sunglasses on at 10,000. Perfect timing. You turned that into $10,000 into $14,000. Did you feel bitter? Like, did you call the people that fired you and said, ha? No, I didn't because that doesn't do any good. but Josh what I did I did I did have one client will remain nameless institutional separately managed account

who fired me in that period and 12 years later 11 years later they came back and became a claim again but it was a committee and I don't think they remember they had money with me 11 years earlier I didn't remind them of that fact okay what so what did you own while all right so that it's an impossible environment to not lose your head at least temporarily because they're literally are stocks like Dell computer that are going up 5% a day every day for six months. I was there. I remember it vividly. Thankfully, I was managing $10. So nobody cared but I thought. And I had no context for what I was witnessing. You were a little bit older than me. So you kind of knew what was going on. What did you own in order to stay out of that fray? And were there people in your firm

that were like, Steve, what are you doing? We got to get long. We got to be in the in this trade? Well, first, let's start with the firm. I'm very fortunate to have always had have always had great partners at first Pacific advisor. And, you know, at the time, that's what the FPA stands for. Thanks. All right. Bob Rodriguez was leading the charge of the firm then, and he was operating similarly. So no pushback from the firm at all. Pushback from clients. How do you not own Microsoft when when it's growing like it is and both in its earnings and its stock price? I mean, it's a one-decision stock. Did you never own those names? I did. No, we bought Microsoft to jump forward for a minute. We bought Microsoft in 2009-10. I guess it was

2010. But I mean, in the late 90s, didn't own one. Wow. Didn't own one. And so returns are driven not just by what you own, but what you don't own. So you're able to avoid some of these big disasters. You can see them coming. I mean, you could see the disaster coming. Didn't know when, but you knew that it didn't make any sense. And so we were able to avoid all of it just because we felt the right thing to do was to, you know, a, protect capital, B, these valuations didn't make any sense. C, there were lots of companies offering terrific opportunities at the time. Companies that were relatively mundane businesses, you know, that we're insiders were buying a lot of stock like Pinkertons, you know, which since got sold, the security services firm

or IHOP, the pancake house. Right. So you are still sticking to your discipline, looking for lower valuations where there was more potential upside if things went well. And everyone else was thinking the internet is going to change the world in ways that you cannot imagine. And if you're not in these stocks, you're missing out on the greatest opportunity in history. That crowd was right. They just own the wrong stocks and they own them at the wrong price. Price matters. Price matters. So that's the big takeaway. It's not that Microsoft didn't change the world multiple times. It's that paying 70 times earnings, they could change the world and you could still lose money as

an investor. And a lot of it was, you know, I would call it being dead right. I guess the internet was a thing, as we well know. It's, it is a thing. And at the time, there wasn't the infrastructure around it to support the businesses what you thought they might be able to do in the future. So, for example, E Toys. Yeah. E Toys market cap in a speak after it came public exceeded the entire toy market. Yeah, that made sense at the time. I mean, but meanwhile, there was no ability to deliver these piece goods, these toys and small tickets to people with any kind of economic fashion. Right. There wasn't the distribution system that exists, you know, to the home today, you know, or the distribution centers to kind of do it and break back, you know, these different

things and sell something and deliver it, you know, at $12 average ticket. So there were two types of disasters looming. One of them was companies that just made absolutely no economic sense for the reason that you just cited. Those are the Pets.com and the E-toys. And I don't know, were there 500 of them ish, something like that. They became public as fast as they could do the paperwork. There was like literally no limit. Webvan, P-Pod.

It's just like this endless list. That's one type of disaster. The other type of disaster is paying 120 times earnings for Cisco. Cisco's fine. Still exists. Still a dominant company. But you had to wait 20 years to get back to those previous peaks. So like,

I guess avoiding both types of disasters, it's not equally difficult. Yeah, avoiding the, again, it comes back to that statement, price matters. So you're saying both avoid the binary, the companies are going to zero, and avoid the companies that are good businesses, but the valuation doesn't justify, you know, the, you know, its perspective or an instrument,

going back to the example of Microsoft, Microsoft's earnings over the next decade, give or take, we're up about 18%, you know, compounded between 2000 and 2009. It ended 2009, you know, lower than where it started the decade. With growing earnings. With 18% earned his growth. Yeah, that's how expensive that stock was coming into the decade. And Bomber lost his job over it.

No, he didn't lose it and job. What people were like. He added for years after that. We bought this stock because we bought it at a point in time where people were really fearful about form factors. And well, people are going to be using this iPad that sits in front of me and not use PCs. People are going to not use Microsoft Word. They're going to use Google Docs.

They're not going to use DOS, and we're going to use IOS-based products. I mean, a lot of that was there. And since then, they've obviously found a way to be moderately successful. People learn, lean a lot on history and prior market cycles. And I think that the dot-com bubble and bust was very destructive, not just for all of the money that was lost at the time, but a whole generation of investors who thought that history was going to rhyme. So one of the quotes from that period in retrospect that a lot of people look at is from, and you've highlighted this, is from the CEO of Sun Microsystems. So he said at 10

times revenue to give you a 10 year payback, I have to pay you 100% of my revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard for 39,000 employees. That assumes I pay no taxes, which is very very hard, and that assumes you pay no taxes on your dividends, which is kind of illegal, and that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any

footnotes. What were you thinking? And so we know how that ended. And I think a lot of people have been making the analog for the last 10 years since 2015 when we coined Fang. about that period of time. You guys have somehow managed, because you lived through it and you made a lot of money through it, but you have somehow managed to, more or less,

keep pace for the last three and five years, despite having a cash allocation, a bond allocation, it's almost like a miraculous. And a value discipline. Yeah, like, how did you survive? Because nobody else did. Well, we were, look, I'm not going to,

luck does play a role. Sometimes you just get it right. know for periods of time, and certainly that's part of it. But, you know, look, being thoughtful about what businesses are going to be better businesses in five to 10 years, or at least as good, if not better. And that is to say those businesses that are going to throw off more cash flow than they throw off today. And what are you paying for that cash flow in the future today? So if you just look at that and think about like a bond, if you just were to invert every investment you were to make from a P.E. basis and look at it on an earningsial basis. And better yet,

look at it on a pre-tax-free cash flow basis. Take the company's cash flow before taxes and before interest expense and look at it on an unlevered basis, you know, that's a numerator, and divide that by your denominator, your enterprise value. And kind of compare it to a bond and look and see how much you're going to get for that, like a treasury inflation, treasury inflation protected note that'll give you some kind of growth in the future. So what do you want to pay for that growth is what we always come back to? And some things just get to be too expensive and towards we back away. So we bought, we, we tend to lean into businesses when people don't like them. We still think that there's a few good puffs left in those cigars, if not more. We make a lot of money

if they really end up being something better. So Microsoft's a good example of that. We bought Google in 2011. People were really, really quite fearful of the global economic landscape. We bought Cambridge Meta, which was Facebook at the time during the Cambridge Analytica scandal. People were going to, streaming was dead during COVID. So Netflix traded down. So we bought Netflix, which we don't own in Crescent anymore. but when you can find these businesses you think are going to be better in five and ten years and that is and you have a variant view as to that perspective there is you know often money to be made. Would you rather own a company that you'd think the prospects are going to be better

even if it were more expensive versus a company that's already expensive but you agree the business is going to be great and the market is right? Like what's more important to you the outlook for the company or the valuation? It's, you could, they're there, they're connected. It's a balance. Well, it also, I mean, I'm not going to pay a hundred times earnings for a company, you know, that it doesn't make any sense. I'm asking, if I gave you Nvidia's last 12 quarters and I came to you three years ago and I said, here's, here's the next 12 quarters. You have to pay 50 times earnings for this company.

You would, though, right? Sure. If you know that companies are going to grow earnings at 50 percent. None of us do. Right. So it's all, it's all a function of your conviction what the growth rate is. the earning stream is going to be prospectively. The greater the conviction,

the more likely we're willing to pay up for something. I asked you that question because I think unfairly, a lot of people think of value investing as this P.E. is lower than that P.E. Therefore, press the buy button on this one. And I mean, I did see some of that with like Intel versus Nvidia a few years ago. AMD, definitely. Yeah.

So there does exist that mentality, but that's not actual value investing. That's just looking at publicly available numbers and being as, unthoughtful as possible about it. There's a lot more that goes into figuring out. Is this truly a great business and worthy of a premium multiple? But you bring up an important point because value investing historically was really about the protection of the balance sheet as it was historically practiced and written about, starting

with Graham and Dot. It was about the protection of the balance sheet, buying a company below book value, better yet, buying it below its working capital, it's net network and working capital. Good luck doing that now. Yeah, exactly. Right. And that's the way we started out and, you know, and really thought about, you know, protecting capital. But then we realized over time that so many of those businesses were businesses that were more likely to be disintermediated and disrupted by technological innovation, you know, better competition, et cetera.

So we really wanted to say, we really sat back and said, right, we had to really consider what the value of the business, what the enterprise is, how good is that business and own these better businesses and pay a good price. So the protection is still a B. It's just not the balance sheet. It's the business. And so there's more volatility that comes to that. Valuing a piece of real estate, you know, doesn't move around, you know, as much as valuing a business. If I had a stock that I was very certain was going to deliver a minimum of 20% earnings growth next year,

and it was currently selling at 16 times earnings because there was some idea out there in the market that it was about to be disrupted by automation. Would that be the type of stock that you would say, all right, we've got to take a second look at this? If it's going to be disrupted, we wouldn't look at it at all. But you don't know that it's going to be disrupted. Oh, I thought your premise was that it would be disrupted. I can't tell you that it will. I could tell you the reason it's 16 times earnings in a 22 times earnings market is because that's the concern around it.

100%. That's the kind of business will look at. So that's Uber. That's $200 billion market. $250 billion market cap. 23% earnings growth expected for next year. So cheap, they're buying back shares, which is not a thing that you would normally see a company like this doing, but how could they resist? And I look at something like that and I say, okay, I believe in automation, but then I also believe this company is going to figure out their own automated taxis.

How hard could that be? There's going to be millions of automated cars. Well, they're going to have to figure out by licensing somebody else's technology. Yeah, they won't build it. Or they get acquired. Maybe Google ends up acquiring them. I mean, that's not a call. Let's be really clear.

Understood. I'm just saying that anything's possible. Well, I guess my point is, even in this moment, with the S&P selling at a high multiple relative to history, there are lots of those types of companies right now. Adobe's another great example. Salesforce. Salesforce. There are businesses right now that people are very convinced AI slash automation is going to be the end of those. companies, franchises. In some cases, it'll be true to your point. In some cases, it won't. So it's our

job to sit back and understand whether or not, how likely it is to be true. And by the way, just because it will be true, if a company can generate a ton of cash flow and return, you know, along the way and return that cash flow to its investors, it may not be a bad investment. Right. You said, so I guess I'm just, I'm very impressed. A lot of people that were around back then, especially in their formative years, and maybe it wasn't formative for you. Although, certainly, earlier in your career, they got stuck. When I was younger, as you pointed out. Before I got old, it's what you said.

But a lot of these people got stuck and said, like, I've seen this movie before. We know how this ends. We know that value and small value and whatever will have its day. And you have to evolve with the times. These businesses are fundamentally different. The operating margins, which was one of the big points in 2015, is like, these are unsustainable. Competition comes in. You wrote in 2015, buying a company at 20 times earnings, hoping for growth in earnings

and a future P of 2022, 22 times, excuse me, it's not a recipe for good risk-adjusted returns. Kind of is now a little bit. I mean, for the time being, yeah. And then, by the way, things change. Things change. And you've evolved obviously. Is that one of the hardest parts is to throw things away that maybe you believe in, but you recognize that if the rest of the world doesn't believe in something and never will

again, it might not be important anymore. It's one of the things that I've learned. And we're also, well, buying a business, when we buy something, we want to have a clear view as to what the future looks like. I mean, what we want to have a clear view. It doesn't mean it's going to unfold that way. I guarantee you it won't. It'll unfold differently.

And so, well, we always lay out what our KPIs, our key performance indicators are to watch and monitor that business along the way because we're going to be wrong. We, look, one of the biggest mistakes we made was not buying Amazon really. or at least in the financial crisis we didn't buy it everyone's biggest mistake right and well not not everyone's well a lot of people out there don't have made a ton of money but sadly it was one of ours and so you know i i read the the everything store book and after i read that i'm like i was so sad you know because i didn't i'd spent the time i didn't spend the time really enough on the web hosting business and what they were doing and it's been a awes yeah and i also was

less willing back then to pay for you know i'm so concerned about the here and now and what was obvious about the future as opposed to like, well, they can always change pricing and charge more money for X or Y to create greater profitability in the future. I was less willing to do that. But it really depends on the management team and what they're communicating that they're likely to do. It makes you feel any better. That was the biggest miss, according to Warren and Charlie. That was their biggest miss. They knew it was going to work and they just couldn't bring themselves to do it because it looked so different from every other retailer they had ever invested money in. So misery indeed.

You're a good company. Can we talk about the modern market, today's market? Yeah. Okay. Dying to get your thoughts on this. Michael, you have a couple of charts that are worth scrolling through just to set the table. So we are in a period of time where not everything, a lot of things are working really well. And it's the things that you want to see working.

And there's, of course, a lot of bullshit. But, like, for the most part, the market is acting very well. So we've got the NASDAQ 100 has closed above its 50-day moving average for 102 straight days. and there have been longer periods of time where it's done this, but they're few and far between. You've got the NASDAQ 100, as I just mentioned, the S&P, as well as the Dow and the Russell 2000, all making all-time highs.

And you're seeing it in the sectors, the leadership sectors, financials, tech, communication services. And then you're seeing it in terms of like the equal weight, equal weight tech versus equal weight S&P. It's everywhere, and it's not just, it's not just in price. It is being driven, thank God, by fundamentals. So when you're looking at earnings estimates for the S&P, for the NASDAQ, as well as the Dow, all up until the right, you're seeing everything you want to see. I guess the question that Josh and I were talking about earlier.

Let's put up the Equal weight tech really quickly. We did that. We got that one? Is the market too good right now? Does it feel too easy? And do you automatically get concerned when Michael shows you charts everything? at an all-time high, like every major index, or not necessarily? No, that's my DNA.

It's a concern. But that doesn't mean there aren't opportunities. So when you look back, we look back and let me just start with making analogous to the internet bubbles. We were talking about the dot-com bust back in 2000. And when you look back then, 25% on the capitalization weighted basis, you know, 25% of the S&P was treating it greater than 10-time sales. Today, it's 35%.

So, yeah, that raises our hack holes. And we get, that doesn't mean there aren't opportunities out there. We, you know, despite, you know, those nice charts you say, and upward to the right, there are companies that are less important to those indices. There are smaller cap that are trading less expensively, both domestically and abroad. So we have a large component about 40%, you know, companies domiciled outside the United States. We also have a number of companies that are more cyclical. you know and you know and those companies are less interesting to the masses and are and are not

hitting hitting new highs uh we've got you know certain health care related companies not to dive into specific names and health care is too broad a term um you know that we're finding you know as opportunities but a lot of these companies along with those small midcap companies are are just you know trading below the radar but but what's interesting is you there is a there is this uh table i'll send you guys and um that that really shows over the last from the October 22nd market low. How have things done through June 30? And large cap growth is appreciated 108%.

Large cap value is only at 51%. But to help make my point, small cap growth is up a lot less than large cap growth at just 41%. But it's also up less than large cap value. So there is more opportunity. Now look, again, we're talking at an index level and they're comprised of lots of different types of companies. It doesn't mean every company's cheap, obviously.

Do you need a catalyst, though, when you're buying, let's say, a health care company that has sat out this entire rally, let's say it's selling at a huge discount to the overall markets, multiple, is the fact that it's that it's cheap and that the business is a good business? Is that enough for you? Or do you also want to know why it might someday attract the attention of other investors who will buy it higher? If you have the right management team, allocating capital well, you know, good things happen to cheap stocks. Okay. So you believe, like, it's not important why it will go up. It's just important.

important that this business is throwing off a lot of cash flow. It's defense. It's got some moat. And we think this is going to be a good business for the next few years. Therefore, it's a good investment. And someday, someone else will agree with us and buy it higher. We do think about what catalyzes it. It's not that we don't think about it. We do. We just don't always have an answer. Okay. I mean, if you think about our position sizing, this kind of gets into that, you know, the greater conviction you have in the company this business and its mode and its growth rate and its management team to allocate capital well and understand what how how what the catalyst might be in the future all of those things you know you check the boxes you know come back

rosy then then you end up a larger position i'm sure when you look back over your career you think about how nonlinear businesses are in terms of the path that they travel ups and downs like netflix has had a million different hiccups along the way so how important is getting the industry group right versus getting the winners and the business, like we're talking about fundamentals and value investing in, you know, ratios, but like these, at the end of the day, these are, you have to be a business analyst. Right, 100%. I mean, I'm more partial to the idea of having tailwinds.

I don't mean like, Gail Force tailwinds to, to push my, my America's Cup yacht, you know, you know, across the finish line. I just mean that the fact that the, why do I want to buy a business a la S equal where it's, it's deteriorated. And we'll be fighting a prevailing trend. Yeah. And then, and then sometimes along the way, it's like, will a company that's fighting that prevailing trend to use your phraseology.

You know, some companies will fight it successfully as others won't. Why was, you know, why has Walmart been successful and targets are successful, but Sears not. Yeah. Right. So we just, you know, we're always mindful about what the management teams are doing. It's not, when you analyze the business, you've got to understand the management. So this is a business that's in secular decline, a stock that I tried to bottom fish,

and I didn't. I sold it. Western Union, for example, if you were to just look at the fundamentals, just like the, strip away the business, they pay their dividend. every year. I don't think they've, I don't think they've ever cut or not paid, at least in a long time. It's a 10% yield. It's cheap. But obviously, it is being disrupted. It is under a massive amount of pressure. Not specific to that, but a company like that reinventing itself. Is that interesting to you? I don't know Western Union well enough, but just, and this might be way off base,

but superficially what I know of Western Union in terms of, you know, delivering money from point A to point B, and, you know, somebody here who might be a migrant worker and sending it back to their home, you know, in a province of Mexico, you know, is a way, you know, to, you know, get money back to them and help their families, you know, you can Venmo. I mean, the digital banking system is there. So I don't see. Again, I don't know what else.

I don't know what else there is, you know, out there in their Western Union business. Again, as I haven't studied it. But if it's just, that's what it is, that's not, doesn't hold any interest for me to even want to look at. one of the things I wanted to ask you about was just this idea that there are some value investors who will I mean they don't last long their careers don't last long but there are some value investors who will become personally invested almost like a defiance like I'm not wrong the market is wrong you'll see you'll see and I saw people ride serious to

zero and I'm sure you did too and JCPenny and look number one one, I'll just stipulate. It's really hard to know when doubling down. Like, sometimes you might, it might actually work out well. And then you have the coal industry where every company in the industry goes to zero. The steel industry, I think we were left with one. And now Japan owns it. Like, we've seen entire industries disappear. So how do you guard against making that type of error where everything you believe might be true? And yet that prevailing win that's in your face, just it never goes away until these companies just entirely disappear. Sometimes what's inexpensive is there because of, you know, ephemeral edwints.

So it's our job as analyst, business analyst, to your point, you know, to understand what is ephemeral? Is that going to change? If it's just a cyclical business or is it or is there something that's secular that's happening negative? Now, we might get it wrong. And there was an example. We didn't buy Amazon, but we did sell our entire, you know, portfolio.

of retail stocks. Last one standing was Walmart and then we'd sold that. And then we bought back, because we had owned it previously, we bought back PetSmart. And for a minute, just a starting position,

then we ended up selling it quickly because I realized we were wrong. So you have to have to have the intellectual integrity to question yourself. Yeah. You just can't rest your laws. And defiance doesn't get you anywhere. One of the problems

and one of the origins of that defiance is when you go out publicly and you quote defend the stock or you plant your flag or I know you don't do this stuff you go on Twitter and you say this stock that I just bought a 20 that now is 10

I'll bet my life it's going to make a comeback because people don't like to be publicly wrong so maybe not talking about your biggest positions in such a public way or putting your life on the line for a stock is like a really great way to avoid that issue

and it's also like what your DNA is and how willing are you to admit you're wrong? And, you know, a lot of that's is formed by your DNA and some of it's formed by your environment. I've got, I live with five women, my wife and four daughters, and they regularly tell me I'm wrong. I told you. I knew it.

I was right. I didn't say it was. Just kidding. So, okay, so in the context of your life, you're somebody that's comfortable of being wrong. 100%. And then not putting yourself in position where you have to, like, defend something to the death is...

We'll take our Mayacopa. So, well, let's say we were wrong and why we were. That's, you know what, people get really attracted to high conviction type of people who come out and say the 10 year is going to 6% and you're going to wish you listen to me. That stuff gets a lot of attention in the short term. You can't survive 20 years doing that because you're going to be wrong. And you have to have positions that you're comfortable backing off on publicly. Yeah, I mean, look, the world can change.

The world does change. companies can change, as you pointed out, you know, I think as Michael said it, you know, and you have to be on top of that. So if you go out there and speak with great conviction about a certain company, then I'm going to come out and after you've sold it and say, okay, here's why we sold it. I mean, it's just too much noise. We don't want to be in that business. Yeah, I don't blame you. We want the number there. The first slide that you showed you shows upward to the right. We want that to be our slide over the next, you know, 20, 30 years. Right. We get things right. We get things wrong. But the sum total of all of that

effort is this. Right. And our portfolio moves in and out of different, different asset classes and different sectors based upon where that, that fear is. And so, like, our energy exposure was a lot higher, you know, in the early part of the, in the early, that's the, that shows our whole. Okay, so the blue is stocks. The blue is, the blue is stocks. You see that moves around. The green is, bonds. And the bonds that we own are not high grade. We buy, we, we'd rather accept credit risk, rather than interest risk. We think we can understand that better. Oh, interesting.

We don't know what direction, you know, the tenure is going, you know, over the next five years. And you're not, when you do that, so like I see these periods of time where you're heavily invested in bonds, you're not just flipping it into YG, like you're actually looking at each individual credit. Yeah. Okay. Yeah, our high yield exposure today is just 1%, a little less. And that 1% is, you know, high yield does not, isn't that interesting today.

Today we're talking about tighter than average spreads, lower than average yields, and worse than average covenants. Yeah, sounds great. So high old spreads are 300 basis points, you know, over treasuries. It's 200 base points less than the 500 base point, you know, average of the last, you know, 20 years. The yield of 7.1%, which is about a point less than the average of the last 20 years. And covenants, as I said, those four as they've, as poor as they ever been.

So so much and so in favor of the borrower, you don't even have, you know, the compas you can get the keys to the kingdom back in the event of default. Now, on the positive side, I'm looking at the YG, for example, I think. think, you know, I've read that, that, you know, I haven't parsed it, you know, individually myself that I've read, you know, something about it that suggests that the H-YG, the high-old index has more EBITDA per on per average company in there than at any point in time previously. It's higher quality than a higher quality businesses. So lower sports makes sense. Right. So yeah, but a lot of that risk has shifted over to the

private credit market. Right. What is this net risk exposure, this red line? Well, because we end up with some shorts of periods of time. Okay. So like if you go looking to the financial crisis, So you'll have shorts in the portfolio. Is there a max? Is there a max limit? Well, not a max limit. I think it's, I'm not sure if there's actually a max limit in our charter. We've never approached.

I think most we've ever had was like 11%. I'm seeing some shorts. I'm a little bit. Steve, you can talk about him. You want to wait for a better pitch. You have the ability to go into different areas of the market, de-risk, up-risk. But the pitches seem to be happening so much faster these days. It's like they're 175 miles an hour.

When you finally have a chance to swing, it's like, what just happened? And I'm talking about the V bottoms. No, really a great point. You have to be prepared in advance for when it does happen because the world has had a tendency, you know, since the financials to rebound very, very quickly. Everything's faster now. Like, why wouldn't the market react faster?

I'm 62. I'm much lower. But every aspect of our life has gotten faster. So why wouldn't we expect stock market reactions to be faster? There will be a point in time, I would argue, that things will go down to stay down for a period. I just don't know. 22, it had that different 22 for 18 months. Yeah, but I don't know when that's going to be or what next is going to happen.

That's going to create that opportunity. You know, but we have to do the work first and just have to be ready to go and hit those, you know, hit those pitches, you know, because you know they're coming at a point. So, for example, I did a ton of work on embarrassingly, you know, giving them with nothing to show for it, you know, on deer. Because I said that pitch when that comes because, you know, I did this about a year and a half ago. And I said, dear, it's like, is the best ag equipment manufacturer in the world.

You know, Case New All-in and Agco pale by comparison. And earnings are going to be down because the Ag Complex is up in value so much. Commodity prices are up so much. And, you know, when people are making, farmers are making more money, they buy more equipment. And so business is good. So business is going to be bad again in the future. It's a cyclical business still. And so we'll be able to buy it.

Stock hit a new high. Yeah. And so it's like, so that was work was for nothing. So, again, being prepared. But this idea. Well, dear turn the tractors into iPhones that have to update software and everyone's got to pay monthly. And they made it the best business in the world. Well, yeah, it's the technology.

They lead in technology by far. It's pretty great business. But, you know, across the firm, we have this sensitivity to losing money and trying to be prepared. That's why our fixed income team, led by Obie Part Wadden, you know, is one of the reasons why it's done as well as it has as well. Oh, wow. I noticed there's no gold in that allocation, but can you go? go there if you feel like it? Yeah, I mean, I just don't feel that people were paying us to make a gold decision. Because if you were to go and buy gold, you're going to have 5%, and you'll see people

have it or even 10%. If gold were to, you know, double from here. Yeah. What does that mean about the rest of the market of you? What have you really done for your portfolio? And it's, I just don't know that we're adding the value on our team that offers some kind of variant view to, to it doesn't mean that does not suggest for a moment that gold isn't worthwhile owning. I'm not saying that. Well, Eviar did that. So First Eagle Global famously would combine stocks, bonds, and gold. But even then, is gold position? How big did it get at its peak? Well, probably the gold minor position was the proxy for gold in that case, maybe. Yeah, so I just don't, I'm including gold miners, you know, junior gold miners, gold ETFs, or even just owning the bullying, all in the same

in the same bucket. I want to put up a couple of your slides. John, can I have chart 13, please? This is from your deck. Fund Objective met since inception. So congratulations. Congratulations. But walk us through these three different charts and why these are the ones that you want investors to pay attention to when they look at your fund. Yeah, we have to show this one from inception as it shows the S&P 500, but the MSCI-Aa-Aa-Aa-Aa-Aa-Aa-Aaq is really, has been our benchmark since 2011. Global stops. And you definitely beat that, right?

Yeah, and we've beaten that. And so, as, you know, international is not done as well as the U.S. It helps explain why our equity-like rates of return are like 40 basis points, you know, behind, you know, the S&B 500 in part. But we've done that with averaging 30% or so in cash along the way. It's really incredible. When I look at this, I say this is incredible. Our goal is to deliver equity rates to return and avoid permanent payments of capital.

Permanent impairment account means losing money, monetizing, you know, realizing that loss, rather. And whereas, you know, volatility is just, you know, things are going up and down. And so you can look at the drawdown and the drawdowns, you know, half of the markets. So for the people that aren't watching or listening, I want to say this out loud, okay? since annualized total return since inception and guys picture every disclaimer you've ever read in your life okay that's what's on the bottom of the slide okay um you guys are are neck and neck with the S&P at 10% and change but then the largest drawdown in the S&P 500 since the inception of your fund as we all know is 55 and a quarter percent which I'm guessing that's great financial crisis yeah okay um and your

largest drawdown is 27.87%. So that's the objective of the fund. The reason you're going anywhere is because sometimes you don't want to be fully invested in the stock market. Right. Okay. And a third less volatility. That's a byproduct. I'm going to be very clear. A third less volatility, you know, and just speaking, you know, for what the chart shows, for those of you can't see it, we, our volatility has been 10.89. The S&B 500 is 1496 since our, since our inception. But volatility is a byproduct of our process. We don't target. What is that rolling 30-day? What is the volatility? Or is that just standard deviation?

Okay, fine. That's it. Standard deviation. But we just don't, we don't target it. It's just, you know, if you're a value investor, if you're thoughtful about the, if you believe price matters, you're thoughtful about the businesses you own. And, you know, you're seeking to protect capital. You're inherently going to have lower volatility. The mutual fund industry, I mean, there's been a million slides showing index flows up into the right.

Mutual fund flows going the exact opposite direction. You, and a lot of that is, listen, like, even the ones that do a perform, lock versus skill, how do you entangle all of that? that this is evidence that this is skill. Because being able to keep track with the S&P with a third less volatility, that's not luck. You've done this for three decades. So pat yourself on the back.

Pretty good. John, can we have chart 15, please? I found this one interesting. This is the FPA Crescent Fund's net equity exposure. Whoa, whoa, whoa. Why are you so bearish? Well, stop. So this is you versus the MSCI acquie.

Like, what's the right way to explain this? like the percentage of your portfolio that's currently in equities on a net basis, versus the performance of the index itself, the equity in this case. And this, look, there's a lot of noise. But you're just, you're trending lower since 2022. Right. That's like if I were to draw a trend line, you are growing increasingly bearish as the market rallies. Well, I don't, bearish presupposes a view to the future.

We're just not seeing in the present the tractor of risk rewards. So what if I also drew a line that said forward earnings multiple? Like it would probably, it would trap the market. That would be a better chart than this. Well, this is your slide. I know we have other slides too. You just picked this one. Okay.

We've got lots of slides. Right. But this just shows you this slide. One can expect that as the markets are rising, you know, that especially rising quickly, because you can see that dip as it rises, you know, that you, that you, that you, you know, that we are going to be, get more exposed or less exposed. Less exposed as the market rises and, and get more exposed as a decline. So you can see, look at the, look at Q1.25. So we had pulled our, 506% net equity exposure. Right. And so, and but then liberation day

happens. We found out more opportunities, you know, as a result of our president's actions. Yeah. And so then we started getting more invested. But unfortunately, it gave us only a couple days again, to your point, about the 175 mile an hour fastball you got to hit. I would assume that you're surprised, again, having read your 2015 letter this morning, because I'm surprised, that it's, that it's been, we're 10 years later. And at the time, it's not like things felt cheap or exciting at the time. Amazon was $200 billion. And I remember thinking, holy shit, that's a lot of money, like a $200 billion market. Oh, my God.

And it's 10 years later. And of course, there's been pullbacks and corrections and bear markets along the way. But these businesses have never been fundamentally stronger. is it conceivable that this is just a sort of... He wants you to say it's different this time. No, no, no, no, obviously it was different this time. I mean, clearly it was. Yeah, yeah.

Well, some companies are going to last longer than others and, you know, and perform better for longer periods. And you mentioned, you know, at the top of the hour, you were talking about Cisco. Cisco has far underperformed Microsoft, but did we actually know that was going to be the case? Of course not. And in February of 2000, when the market was speaking.

So, look, we have a portfolio of stock. some we're going to be, you know, more right on than others, and we're going to be surprised on the upside and the downside by different companies in our portfolio. So you're very much focused, bottom up, looking at these securities themselves. How much do you think about the state of the economy and macro stuff? Like, does that enter into the process sort of like working backwards because the companies are talking about these things? Or do you pay attention to these things from a top-down perspective at all?

we when we look at companies we build models and there's this false precision to the models i mean because you you just you plug in certain assumptions and you end up with this very precise earnings per share you know result or precise you know free cash flow result and the truth of the matter is is that it's just a function of of our assumptions and we're not we're not anchored to that type of precision we build our models we don't look to see what is likely to happen over the next you know, quarter, six months, year, we're just, we build a low base high, looking out of the next, you know, two, three years or longer, just trying to say, okay, what can happen, you know, if the company really executes, and recognizing that, that, you know, they could stumble and

maybe not execute, that would be the low case. Maybe the industry goes through a downturn that could contribute to the low case, and in the high case and everything happens, you know, terrifically, you know, and so that's how we really think about. The macro backdrop, you know, that's all set against the macro backdrop, what it could happen. been in a weaker economy. What happens of rates rise? If it's a more levered company, they have to refinance their debt at a higher level. What happens in the event of a recession and unit volume gets hurt? What happens as a result of tariffs where a company has to either raise their prices in order to maintain margins or do they not maintain their margins because they're going to basically

eat it for their customer to make sure the unit volume stays there? Those are all the questions we're always trying to anticipate up front when we build our models. And then we constantly fine-tune them as we gather new information. So this is on a case-by-case basis, each investment, not a, I think the Fed's going to cut next week, therefore we should own 10% more financial stock. Like, that's not the way that you're thinking about the macro picture. Correct. Okay.

So one of the things that traditional value investors that are not bottom up have gotten wrong over the last decade has been things like the Cape ratio and margins and their mean-reverting nature that they never. ever mean reverted. And a lot of the reason is because the index is primarily at this point, the large tech companies, their margins have a much different profile than the 493. As you look out with your portfolio, do you expect to see margin expansion as a result of this hopefully productivity wave that we see coming as a result of the AI spend? Do you think that's going to happen? No, I think that it depends on the industry. So I don't want to make

too broad a statement about that. So the AI, a lot of the, there's, there's, there's the large language models and the, you know, the big AI that's out there, how that unfolds and who's the winner from that and what the margins would be? I'm not, I just don't have a point of view. The applied AI and how it's used to help your business and whether to distill, you know, the SEC filings and look for certain things and to be able to pull from it, using grammarly for me to help write my shareholder letters so I don't look completely moronic, you know, making, you know, basic, you know, basic grammar mistakes. Then there's also AI that's going to be used in certain businesses that will really help these

businesses and it's not going to get competed away. Companies like biotech companies, which we don't have any expertise in, to be fair, but the lab, the bench strength in the labs because of AI is up exponentially. And that's good for the world. You can deliver hopefully over time. We expect, you know, drugs are going to come more frequently, new drugs at lower costs. And that shouldn't get competed away. what could happen, of course, is on a regulatory basis. You could end up with less marginal life for these drug companies because there's more marginal allowed in the U.S. than elsewhere. So there's other risk to it.

But some companies that are benefiting from AI, a lot of it, you know, some companies will have first mover advantage and they'll be able to reduce their cost. And then let's just take the, you know, let's look back in the 1970s and some of these vertically integrated apparel manufacturers with retail locations and they moved offshore their manufacturing. So they were able to manufacture a much, much lower price point,

even despite the long lead time, therefore a higher financing cost, as well as they have to pay to ship it to get to the United States. But they were able to bring it back and have this big pricing umbrella because their competitors didn't have that. So they had this excess margin. Well, all the other guys realized that and said, oh, I'm going to go overseas and do that.

And that got competed away. So you're going to see some of that happen too. Yeah, I've heard from a lot of people, you ask like, all right, it's the AI era, why would you be bullish on small caps? Why would you be bullish on healthcare? And all of these areas that have either nothing to do with the AI boom or are so disconnected that it's almost like we're having two different conversations.

But I've always thought, and I've heard this from a lot of people, if the AI boom is not going to turn into a bust, the only way that happens is if all these other companies find a ton of value in using these tools and adopt them and pay for them. Otherwise, in other words, if you don't get an earnings growth benefit in the rest of the stock market, then by definition, all of this CAP-X spending by the mega-caps is going to look wasteful in hindsight. Well, no, you're going to have to.

Well, first off, some of AIAC companies are going to be incredibly successful. Yeah. Some aren't. Which ones will those be, you know, it's for a different conversation. We'll all find out to get. Yeah, exactly. And, you know, but, I mean, look, there's. no question that, you know, AI is a real benefit for, for, for, for, um, IT services for,

you know, calling a tech support line, you know, or calling for a retailer to, if you want to return something, you could end up with these, you know, questions for a return that can all be handled by AI. So a lot of these phone centers that are located in other parts of the world and with that have a very, very low cost, uh, labor pool, you know, are going to be disintermediated because of that. Yeah. Everybody's going to, going to migrate in, you know, in that direction. Right. So I sort of feel like the secondary benefit of the AI boom has not been felt yet.

And all of a sudden, there are a lot of companies that are going to come out and start raising their earnings estimates. And the reason why is going to be productivity. I just... To the extent that isn't competed away, which would be business and industry specific, some cases it will be. That's a really great point. I wanted to ask you, with the two or three hours we have remaining, I wanted to ask you a couple

of other hot button items that are going on in the market. right now, the independence of the Fed and just generally what you think of monetary policy given the unemployment rate versus inflation push-pull. You think that's something that is going to be very impactful on the markets or not really or to be determined? Well, I mean, TBD, it's not something I really can opine on. I have no idea. I do. I mean, we do have a Fed share that, you know, has come out and said that security prices are rich. So I don't know why he had to do that. Well, by the way, I mean, you had Greenspan, 96, who called for rational exuberance.

And then at the S&P 500 price level, even after the decline, after the dot-com bust, it was still higher than when he called it. You had Bernanke, who said that, you know, in 2007, that the subprime crisis would not, you know, spread to the broader economy. Oops. And Yellen said, you know, in 21 that the inflation would be transitory. she admitted her mistake in that regard. So, I mean, you just, you know.

Okay. You don't worry so much about the public pronouncements. We are really good at responding to pitches that are thrown to us. But what you're basically asking is what pitch is going to be thrown to us? We don't have any idea. Quarterly earnings reports versus, I don't know, annual. How important will this be to your process if all of a sudden 300 of the S&P 500 decide, oh, this is cool.

We'll just, we'll talk to you every year. January? Look, I, well, first, they're talking about semi-annual and using, you know, the European model. So they'll talk to us twice a year. But they'll talk to us along the way. They just won't give us numbers in between. They'll talk us along the way. Actually, they might be able to talk to us more, because they'll be less quiet period. So I'm actually, I'm completely in favor of it because you like it. Businesses don't generally change much from quarter to quarter. I've already laid out that we're looking longer term anyway. So I'd be fine with annual reporting. Maybe it separates the renters from the owners and and it looks at the look at these companies that lowers the reporting cost for these

companies it frees up the management time to focus on on on what's important does it does it potentially lead to increased volatility because there's a higher potential for surprises and some of those will be negative i don't know that that's necessarily the case i don't think if you look at the vol of the uk market versus i'd have to go back and look at yeah but you're not you're not investing in disruptors so well at times we are and we we we we we we we we we we we we we we we we we Look, we've owned some of them. We've owned some over time. I mean, Netflix was a disruptor, right?

Or is, you know, as far as we remember Hollywood pictures and, you know, Blockbuster video and movie gallery. We're actually, we're short. I think I own Blockbuster at one point. Yeah, I didn't. I mean, we were short Hollywood Pictures and Movie Gallery. 24-7 stock market trading. God, I hope not.

Well, it's inevitable, so. I know. I like to sleep at night. I don't like it either. I don't like it because it's like money's on the line that we're ostensibly responsible for and we're sleeping. So I don't love it. Yeah, except for the fact that the news won't be coming out in the middle of the night.

So that's really going to be the bigger driver. It's going to be at the end of the day, it's going to be noise, right? Because if you, if your assumptions are correct and you look out into the future and you've got that longer-term point of view, yeah, you can have more volatility along the way. But all we care about some price, I say this is if I'm, you know, sleep with, you know, sleepwell, which I don't, you know, is the day you buy something, day you sell something. Did you have trouble seeing the entire asset management industry make this really hard

pivot into digital assets, considering that outside of staking, the majority of all of this activity, there's really no cash flow generation, very difficult to value these things. They're mainly a function of supply demand, making them look more like commodities or currencies then they look like stocks. Like, did you have trouble watching that play out? Give me an example of what you're talking about. Bitcoin, Ethereum. Yeah, so in terms of the digital.

Yeah, so I think, look, I think that cryptocurrencies, you know, are real, right? But I just don't, we don't own them because, well, at least speaking for myself and not my partners, you know, I just don't know how to value them. You know, is Bitcoin worth $112,000? It's over $50,000. It's over $20,000.

I just don't know how to value it. And if I can't ascribe a value to something and be able to articulate why I believe that's the value? I won't own it. What if somebody says the way to figure out the value is the network effect because effectively these are technologies? And so the more users, the more highly they should be valued or the more money coming through that. That's just direction. That's not value. That's just the direction of the value. That's not giving me a benchmark. Okay. And then what happens with when quantum becomes a thing and you can bust the RSA, you know, you know, algorithms, you know, ostensibly at a million

in cubits. So that happens. What happens to your digital wallet? There's going to be so many Lamborghinis for sale on the secondary market. The day somebody comes out and says my quantum computing has just solved all these equations at once. Has anybody ever, or how many times I should say, or how frequently do you get people asking you why you don't have an active ETF version of your extremely popular mutual fund? Well, we have an active ETF subset. of our fund, right? The son of. So we have, you know, our FPA global symbols FPAG. Okay. And that is our larger capitalization companies that we're not worried about scaling. So if you have an ETO... Can that go anywhere or that's just the stocks? It's just stocks of our

really, it's delivered programmatically from our larger companies that we own. It doesn't own the debt, doesn't own these smaller companies, doesn't own any derivatives. So no liquidity problems. Right. So you don't have to worry. I mean, one of the problems with ETFs is they can become too big. So how do you do that with? small cap. So we want to be always true to our investors. So this is something we can look at it with a look at our investor in the straight face and say, look, if you want a more fully invested version of what we do for the large cap carve out of what we do, then then here we can hand you FPAG, you know, run by my partners, Brian Salmo and Mark Landecker. Are you just generally

speaking, are you hopeful for the investor class over the coming years? Not there won't be a bear market or there won't be a correction. But just generally speaking, you think it's going to be okay? I'm actually more hopeful because with these pod shops and all this, the trend towards passive, I think it gives people like us, you know, a greater potential opportunity. So I'm actually more excited today than I was 10 years ago. I love that. Valuation notwithstanding in the market in the moment. Those are, that's, that can just be temporary. I love that. Thank you so much. This is the man, right? The man. All right. We're going to break for dinner and then we'll come back and we'll do. You good? You think we got it all?

I'm going to see dinner right here. Let's bring it in. This has been so awesome for us. Michael and I are obviously fans of what you do, and your track record speaks for itself, but also I think anyone that reads any of your stuff learns something every time. So thank you so much for that.

They appreciate it. Steve, we always end the show by asking people what they are most looking forward to. What's something they have coming up out on the horizon that they're excited about? Why is there applause? That was a print of applause. The audience is

are anticipating this with great fervor. Professionally, I look forward to the next cycle to put capital to work. I mean, I look forward to that dip, you know, buying something that's significant. Well, it'll be 10 minutes long. Are you going to be ready? Well, we'll see.

Well, I'll tell you after the fact. And then, you know, personally, I just kind of hope I have grandkids one day, but I'll need some son-in-laws for my daughters first. Steve? All right. Dude, you're the man.

Thank you so much for being here. We really appreciate it. I want to say to all the pounders out there listening, thank you guys so much for watching, leaving us waitings, leaving us reviews. We really appreciate it. Guys, great job this week. We're good?

Yes? All right. Thanks so much. We'll talk to you soon. Heart my name. Is that good? Yeah. It's good.

This is so great, boy. It's funny. It's funny. You know,