We Study Billionaires - The Investor’s Podcast Network - RWH046: A New Golden Age w/ Bob Robotti

Episode Date: June 23, 2024

In this episode, William Green chats with Bob Robotti, a great investor who’s crushed the S&P 500 over the last 40 years. Bob, the President & Chief Investment Officer of Robotti & Co, explains why he believes we’re in a “new golden age” for active, value-oriented investors (not index funds); why he expects persistently high inflation; why he’s betting heavily on the resurgence of Old Economy businesses; & how he’s positioned to profit from “the first truly global energy crisis.” IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 12:18 - How Bob Robotti lucked into the ideal job for an aspiring investor.  33:19 - How working for Mario Gabelli was like a one-on-one MBA. 40:22 - Why Bob thinks we’re in a new golden age for savvy stockpickers.  40:48 - Why he’s betting heavily on a “metamorphosis of the Old Economy.” 46:16 - How globalization is evolving as China loses its edge. 50:49 - Why energy-intensive US companies have a long-term advantage. 57:33 - Why owning the “Magnificent Seven” looks like a risky bet. 58:23 - What an era of persistently high inflation means for investors. 1:03:35 - How value investing has changed. 1:19:01 - How Bob is positioned for “the first truly global energy crisis.” 1:38:06 - How his life has been enriched by helping young people. 1:43:45 - What he learned from his wife and father about facing adversity. Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Bob Robotti’s investment firm, Robotti & Co. Bob Robotti’s writings. Check out MedShadow.org, a health-related site founded by Bob Robotti’s wife, Suzanne. William Green’s podcast with John Spears: Winning the Long Game | YouTube Video. William Green’s book, “Richer, Wiser, Happier” – read the reviews of this book. Follow William Green on X. Check out all the books mentioned and discussed in our podcast episodes here. Enjoy ad-free episodes when you subscribe to our Premium Feed. NEW TO THE SHOW? Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, Kyle, and the other community members. Follow our official social media accounts: X (Twitter) | LinkedIn | | Instagram | Facebook | TikTok. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts.  SPONSORS Support our free podcast by supporting our sponsors: Bluehost Fintool PrizePicks Vanta Onramp SimpleMining Fundrise TurboTax HELP US OUT! Help us reach new listeners by leaving us a rating and review on Apple Podcasts! It takes less than 30 seconds, and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it! Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Hi there, it's great to be back with you on the richer, wise, a happier podcast. Our guest today is a superb investor named Bob Robotti, who's one of the most eminent value investors in the business. Bob is the president and chief investment officer of a firm called Robotian Co, which is based in New York City. He's quietly built an extraordinary long-term record, beating the market by an enormous margin over the last 40 years.

He's such a modest and unassuming person that it's easy to overlook just how successful he's been. It's always worth paying close attention to vastly experienced investors like Bob who've managed to navigate many different cycles in the market over many decades. His investment approach is built on some timeless principles that all of us would do well to understand,

but he also has an unusual ability to adapt when the investment environment changes and requires a different approach. As you'll hear, Bob believes that some dramatic changes are already underway, bringing a new set of risks and opportunities that we need to be aware of. For a start, he thinks we should expect a period of persistently high inflation and should abandon any hope of returning to the good old days of low inflation and depressed interest rates. He also thinks we're now facing a global energy crisis. with massive demand for everything from fossil fuels to renewables.

At the same time, he's seeing a major evolution in the process of globalization, as China loses its edge and the competitive advantage shifts to India and Southeast Asia. What does all of this mean for investors? Well, as Bob sees it, we need to recognize that the strategies that worked best over the last decade are not likely to work so well over the next decade. For example, he thinks that passive investing in index funds and ETFs may turn out to be a path to decidedly mediocre returns. Similarly, we shouldn't expect to make a killing by betting blindly on

dominant US tech stocks like the Magnificent Seven, given the risk posed by their somewhat elevated valuations. As Bob explains, he believes that we've now entered a new golden age for active investors who can identify individual stocks that are undervalued. He argues that many of the most enticing opportunities are in unfashionable areas of the market that had long been ignored or dismissed. For example, old economy businesses in really unsexy industries like chemicals that are used in fertilizer. He's also betting very aggressively on an array of energy-related companies, which is interesting because this is a sector that he's studied very deeply since way back in the 1970s.

This conversation is a reminder that the pendulum inevitably swings back and forth in financial markets, so the most popular investment strategy is eventually get overdone and cease to work, and the most fashionable stocks eventually get overvalued and fall out of favor. Warren Buffett's teacher Ben Graham wrote about this phenomenon in his famous book, security analysis, which begins with a classic quote from the ancient Roman poet, Horace, who said, many shall be restored that now are fallen, and many shall fall that now are in honor. It's important to listen to battle-tested investors like Bob Robotti, who've played this game for decades, because they have this invaluable ability to identify these recurring patterns

and to provide a kind of early warning when the pendulum maybe starting to swing in a different direction. In any case, I hope you enjoy our conversation. Thanks so much for joining us. You're listening to The Richer Wiser, Happier Podcast, where your host, William Green, interviews the world's greatest investors and explores how to win in markets and life. Hi, everyone. It's a great pleasure to be here today with Bob Rueh.

Robbopi. Bob is the president and chief investment officer of Robotian company, and he's beaten the market by an enormous margin over the last 40 years. It's great to see you, Bob. Thanks so much for joining us. Thanks so much for having me here, and it's so good to BC. Great to see you. I wanted to start by chatting with you about your childhood in Queens in New York City. And I know you were born in 1953, and you grew up with two older sisters and a younger brother. and I read somewhere that you lived in an apartment above a dry goods store called Robots department store that your grandmother had operated. And then later, I think when you were about one, your father, Edward, launched a property

and casualty insurance brokerage firm also out of your home. And so I wanted to get a sense of what it was like growing up in that kind of environment where you really were surrounded by business. Well, it's more modest than that. My grandmother's, so my grandfather did own the building. We owned the building and the store was downstairs. We lived upstairs. And the department store didn't do a lot of business because, you know, it had been put out

of business, you know, with people in the neighborhood wanted to go to Macy's. It was easy enough to get in the subway and go. So, you know, back decades before, it really was probably a business that was critical to the community, but really wasn't that. So it was not a thriving business, but it was more an opportunity for me when we played stickball up to block. We lost the Spaldine. I would get the Spaldi from my grandmother's store. So therefore, I was a source for getting things out of my grandmother's store. And then my dad started it, you know, kind of upstairs originally in the living room. He started an insurance

brokerage business. And I guess when he was 17, he had gotten some kind of a disease that actually blinded him. And for most of his life, actually he had significant sight problems. So eventually he'd been probably with my grandparents help start that business. And so before he started that brokerage business in our house. And that I did see kind of grow from the inception. And as a kid, I worked in the business with him and helped some. Not that much. I was not an early kind of like pitching in doing a whole bunch of things. But I do think that it was interesting because it really didn't give me a sense. I would say, joke. I understood the property cash-stead business because my father was a broker, but he did underwriting. So as I say, when the Pagano's across the street

wanted insurance. That's the guys who ran the numbers and got rested every so often for making book. So they came in, they went with this insurance company. But the Veneroses up the block where they came in, they kept the car, didn't go anyplace, you know, was really pristine. He put it with his operated company. So he was effectively underwriting knowing which ones have exposure to loss here, which ones don't. So, you know, how that works and how the insurance business works was, you know, I had a ground floor opportunity to understand a business that's a strange business, property cash from the insurance is its own little industry with its nuance. So it was interesting. And am I right in thinking, your family, at least half of it came from Italy, right?

I think I had read somewhere that your father, who had this wonderful name, which I don't know if I'm pronouncing right, which was Baptiste or Baptist Robotti, actually helped to build the Empire State Building when he came to America. So my grandfather, who is Baptiste, Baptist Robadi, ended up, we lived in Long Island City. There was a stone company down the block called Gilles and Sons. And Gilles and Sons had been in business for many years. And fortunately, his good fortune, the original chief draftman was the son of the owner. And the son in a major building forgot there were four sides to the building.

And he only bid it for three sides to the building. So when they lost an awful lot of money, he lost his job. And my grandfather got promoted. And the company did a lot of work with limestone, and it was a critical change in construction. So the Chrysler building was one of the two buildings that fought with one of each change place for the tallest building. It's the last brick building that was built. It's the tallest brick building in America and the world. And then, of course, when you built the Empire State building, you went to limestone.

So you can put up steel girders. You could slap pieces of limestone on it. So there was an extremely efficient way to do that. And that was the company that my grandfather had worked for. So he was the chief draftsman. And so we have in our conference room, we have a couple of blueprints from, I have it from the 47th floor of the Rockfella Center. Because after they did the Empire State Building, Depression came and Rockfella Center was built. And that's all limestone.

So he did work on that. He worked on St. John Devine. So he was fortunate, happened to be at the right place at the right time, and ended up with a phenomenal job during the Depression. And so therefore really did pretty well and accumulated some money. So we owned some real estate, like that was down the block from the neighborhood we grew up in. And so, therefore, that gave, you know, the family, you know, definitely a good sounding place to start from. And so you went off to quite an old and distinguished Jesuit high school, I think, and then went to Bucknell University. And I remember hearing that you had graduated, you said, with a C as an accounting major and that you didn't apply yourself.

You weren't a good student. Is that right? You just were not hugely driven or ambitious as a youngster? Well, I was driven and ambitious, but not for studies. And so therefore, in high school, I did reasonably well. You know, each progressively, so in grammar school, I was the valet victorian of my class. But then in high school, I did okay. So I was the top third. But, you know, I was busy trying to play football and do other things and, you know, occasionally did some studies. But that's what I did do. I spent my junior senior year figuring where I was going to go from college. Because I knew I was going to goof off. I knew I was going to get a C.

And I figured the better the school I can get into, well, then the better the C from that university. So as it turned out, you know, Bucknell, Lafayette, Lehigh, Colgate, were the companies that schools that I identified that I thought were in the tier that I could get to. And of course, that was also what I applied as a major because by verbal scores 490. So like, I'm a kid from Queens. I can't speak. I can't write English. So, but I did get a 710 math.

So therefore, when I applied to Bucknell, Well, they have a really good engineering school. I'm not going to apply there because it'd be harder to get in, but they have a business school at the time nobody applied to. So it was mathematically oriented, and therefore I could hopefully succeed in when I shouldn't have gotten into the school. And I ended up, I got into Bucknell and I graduated with my C. So exactly what I thought would happen.

I fulfilled my expectations, you know, my disappointment probably in aggregate from that. So yes, that was. And of course, I attribute large part by success. the fact that I got that C. And the fact that, so when I got to Bucknell, the question was, what major do I have? There's a management major and is accounting major. So here I'm in the football team. So talking to all the football players and say, okay, so which is the easier major management

or accounting? And they say, oh, the accounting professors are guts, you know, become an accounting major. So that's how I selected accounting as my major. So I got in through, you know, the business school, which is the easier part of Bucknell at the time. And then I became an accountant because the accounting program was easy. And so when I graduate with a C, Well, I'm not going to get a job with the big eight accounting firms.

So, you know, four, there were not four, but eight of them, but still that was going. And in New York, there were 25 large accounting firms, but, you know, none of them could I get a job with. So therefore, it ended up, the job I did get was my father's childhood friend was a guy, Fred Plegisi, and he had a small accounting for him, plus being up in Puglisi. January, in my last year, he gave me an internship, and I didn't make a fool of myself. So therefore he thought, okay, maybe the guys just didn't apply himself and is smart enough. And so I started working for Posterino Paglisi. And I fell into the right place that therefore opened up all these opportunities that formed in my life.

Yeah. Anthony Posterino turns out to have been an incredibly important figure in your life. And I was reading about him the other day because he also was a professor to Mario Cabelli as well, who will discuss later, who became an important figure in your life. And actually, I think you and Mario ended up endowing the Anthony Posterino distinguished professorship in accounting. So tell us about him and what he did that kind of set you on this extraordinarily fortunate path by directing you to places like Tweedy Brown and Mario Cabela's nascent firm. So that's what happened. So now what I get the job for them, I also realize accounting is a profession that there's a right answer and a wrong answer. It's not like what do you think and give me your views. This is right and wrong. So I did start my MBA at Pace University four days after a graduate Bucknell. And I went four nights a week,

and I went for three hours in evening and spent the weekend studying. And of course, that ended up being like a great experience. So the combination of working for a smaller accounting firm where I spent time in audit, spent time in tax, I moved around to a 25-person firm. So therefore, you're applying during the day. And that's the night you're learning the concepts of accounting and therefore the concepts become easy when you actually apply it. So accounting is a boring major, boring subject for many people, but of course it wasn't. I can see it live and inaction and the information it gave you about companies. And that was it. The business of Posterino had two pieces. One, I would do daycare center audits in the worst neighborhoods in New York. And so this is

1975, right? New York City is about ready to go bankrupt. There's been an urban flight out of New York businesses and individuals. So therefore, it was a tough time. and I would go to very tough neighborhoods. So that was the one part of the practice, but the other part of the practice was there were all these investment advisors that were the clients of Pustradal police, and one of them was Tweety Brown. And so that's what it was.

For four years that I was there, I worked on the audit of Tweety for two, three, four months of the year. And so that was a formative experience at a formative time, because as I mentioned, the timing of that could not have been more opportune for me. It's 1975. So you have 73, 74, the market correction market down 50%. One decision stocks, right, didn't matter what price you paid for them.

You bought them, you owned them because you absolutely always make money at them, potentially arrived to where we are today in certain ways, had come and corrected. And therefore, it was, as I said, the starting gun for value investing. So Tweety became an overnight success after being in business for decades, because what they did and how they did it was something that was at the right place at the right time, they own the right kind of company. So them, and Mike Price mutual shares, Cabelli, Rueh, even Buffett became well known around that time because value investing stocks really substantially outperformed. And so therefore, I happened to walk in. And then at Tweedy, right, who was there?

Well, when Graham Newman closed up, shop next door neighbor was Tweedy Brown. And so Tom Knapp walk next door and then Walter Schloss next door. And they were in the office when I was there. Ed Anderson was recruited from Charlie Munger to come in to run Tweety because Chris was too young to run it at the time. So John Spears had just started working there. So, you know, all these people were at, and they sat around a trading desk and it's an office in someplace. And I knew what Tweety owned, what they bought, why they owned it. And then one of the retired partners was a guy named Joe Riley, who's originally Tweedy Brown and Riley. Riley was in every day. That's where the auditor sat with Tim, and at 630 we talk about investing in. So I saw what Tweety did. I saw what they owned.

Joe worked with me, went through the investment process. So it was a great introduction to investing. And as a result, I never was a finance major. I didn't know the market was efficient. So I didn't understand that nuance. Instead, I thought it was pretty inefficient because you could pick stocks that were substantially under value. And Tweedy Brown for our listeners who don't have a sense of it was such an extraordinary firm. I talked to John Spears about it on the podcast for people who want to go back and listen to that episode. But literally, this is the place where Buffett bought the bulk of his shares in Berkshire Hathaway. He wrote about the company in his famous essay from 1984, Super Investors of Graham and Dodsville. So these guys were

real stars. But this was at a time when no one really wanted to do value investing, right? I mean, they were mainly looking at these tiny stocks on the pink sheets and the like, right? Can you give us a sense of the opportunity that existed where you started to see, oh, if you actually look at small companies and particularly undervalued companies that are sort of off people's radar, there's a tremendous opportunity there. Because it seems like in a way they established a kind of template in certain ways for your career, of looking at very cheap, undervalued stuff that was off everybody else's radar. Well, in the first John Train book, the chapter on Tweedy is called The Porn Brokers because

Tweety's specialty was making markets in all of these Pincheed stocks. And Pinchot stocks at the time, there were a lot of them because what those were were securities that were companies that were created before 33 and 34. So before you had 33 and 34, the registration that came from that, you had companies that had gone public in a way, but therefore weren't subject to the SEC reporting requirements. And so there was a significant number of these companies, and that was originally Tweed differentiator. And they bought networking capital in a time when you could do that because these companies were also a little bit definitely more obscure and then out of favor. And then even the big grays of the market probably somewhat similar today.

It was not a universe that people were looking to invest in. They were looking at the nifty fifth. That's where capital flowed to. That would make sense. That's what we made money. You didn't make money. So they were obscure companies that were neglected. and therefore had valuations that were extremely discounted.

So I'm a CPA, right? So therefore, I can calculate that network in capital, right? So this was not a sophisticated business and it wasn't technology that I had to understand. This was looking at a balance sheet and doing an analysis and finding companies that were trading for far less than what the liquidation value in the business was. And Tweety had grown successful. And therefore, you know, eventually when I started my own firm, we did a lot of pink sheet stocks also because Tweedy couldn't put capital to work into it efficiently.

they were doing a lot less in it. And so therefore it opened up the opportunity. And that was easy work to do was to be able to buy cheap stocks. And that's what we initially did. So there are a couple of things I'd just like to highlight initially as we keep going through this story. Right. So as we start to think, draw lessons that are relevant for our listeners from your early career,

the first of them is you had real skills. I mean, the fact that you had this hard accounting background gave you some kind of competitive advantage. The fact that you were looking in an area where other people weren't looking for the most part was a tremendous advantage. The other thing I think there was key is that sort of older generation that you were seeing of Joe Riley. And I think you mentioned Walter Schloss who kind of camped out in that office just in a corner. And you knew Irving Khan as well, who I wrote about in The Great Minds Investing, who famously lived to 109 and was another of these great old investors, they had kind of internalized these very timeless principles from Ben Graham

that you were indoctrinated with early on. And so I wanted to get a sense from you, when you think of the most important tenets, the principles that you came out of that period of four years at Tweedy Brown, what would they be? I guess the most important things are the foundational emotional things. So markets are inefficient and there is opportunity. And that inefficiency provides huge opportunities. And so I've never thought the market's efficient. I think, and of course today, I think the market is like less efficient, especially in a timeline. If you look at a three or five year basis, there's a whole bunch of mistakes that investors and markets are making today and providing great opportunity. So the other experience

that I had was the very first thing I ever prefer security of a bought was in 1975. I did buy New York City Housing and Dirty Bonds. So the city was going to go bankrupt. And so the housing bonds traded at 33 cents and a dollar. And so I thought, maybe it doesn't go back. And so I buy a dollar for 33 cents. Again, that's a value easy to do the calculation. See, I can see how there's value in that. And as it turned out, of course, the city didn't go bankrupt. Then my housing authority bond paid off at par. And I collected significant interest in the short term. So the very first security I happened to buy was a troubled, financially distressed situation. And the other thing is I, I, uh, I, uh, I have the rule I don't know.

I don't know sell stocks. I tend to like own things forever. And so therefore, and eventually things to fork out and potentially like huge opportunities come from things that have been abandoned, exhausted, and depressed because the valuation only goes down when you disappoint. And so therefore the spread between what the value might be and what the prices in the marketplace gets wider and wider. And the opportunity, therefore, gets greater and greater. There was a very nice quote that I read in one of your shareholder letters that I thought really summed up nicely the core of what you do where you said the price you pay is the most critical element in all investing. No matter what is happening in the world, no matter how crazy it is. The price you pay is the one lever you can always control. Can you talk a little bit more about that? Because it seems like such a fundamental tenet that a lot of people who've got carried away with these kind of the nifty 50 stocks of our own era seem to be forgetting. Well, today's world valuation is particularly important, right? And it's something that,

you know, people have kind of forgotten. And I think it is a critical element. Of course, it frequently is not the real determinants of the value we pay initially, because we frequently find that in the interim, once we buy it, as with many value investors, we buy it too soon. And the value becomes troubled. But as I said, I don't sell. And so therefore, as it becomes more troubled, either the situation and or the price, therefore, discounts more, than I have a recurring pattern of I buy more. And so I do say that the stocks that we made the most amount of money in over time are ones that initially after a purchase disappointed and traded down. So the idea that somebody has a rule of thumb that, you know, down 20 percent, I'm out of the stock and move on, that's not existed in our conversations. And now, of course, the corollary to that is, you know, Buffett's, of course, famous for saying

the first rule of investing is don't lose money. The second rule of the best is don't forget the first rule. Well, we forget that rule all the time. So we will buy things that are troubled and financially stressed and have risks to them, including the solvency of the business. And we've done that. And we've been too soon, and they have gone bankrupt. But the opportunity in that business and that industry persists in a different form.

and therefore we make sure we follow the buyer. So in manufactured housing, when that happened in the early 2000s, when Wheatwood went bankrupt and Palm Harbor went bankrupt, and both of those successively were bought by Kafka, or we bought Kafka. So we continued to do that. Or when Tidewater went bankrupt, I bought Tidewater out of the bankruptcy again and loaded up on it.

So I continue to, the opportunity continues to persist even if the company doesn't, and the opportunity has become substantially greater when that stress is happening and the economic response to stressful situations in poor economics and industries. Before we move on from the Tweedy Brown portion of your career, can you just tell us if there were any particularly memorable moments, for example, in 1987, for example, where you saw the reaction of these old timers, the Joe Riley types or the Irving Kahn's, and you saw how they dealt with extreme volatility?

Well, so in 1987 was particularly interesting time, right? So it wasn't long after I had started the business. I didn't really have much of the business yet. Market corrects, you know, as much as it did. I thought about my grandmother's farm upstate New York, still in the family. I said, well, maybe I'll go farm, my grandparents' farm. But what happened was one of the big investments we had was in a company called Phil Corp.

And Phil Corp was the recapitalization of the old Baldwin United and had been in bankruptcy, had come out of bankruptcy. And Lucadia National, Joe Steinberg, and Ian Cumming had identified it, got acquired control of the company. And so therefore, you know, it was a focal point of what we were doing in 1987. So, you know, stock traded at $5 a share. And one of the things they had was they had a surplus note in an insurance company in New York called Empire Insurance. Now, my dad wrote insurance business for Empire. And so I had met the CEO of the company at, you know, a broker's dinner one night.

And so therefore called them up and met with the CFO to say, gee, you're in the process of demutualizing. And that's what it was. The demutrilysis process was a year and a half in the way, underway. And what was going to happen was the equity was going to be distributed in return for the surplus note. So they were going to own 75% of the company. The company the year before had earned $18 million. So they're going to earn $13 million. There's $13 million.

There's $13 million shares outstanding. So there's a dollar of earnings that will pop up out of nowhere. It's a $5 stock. What Lukadia, Steinberg and company had done through the year that he controlled it where they were selling off assets. And raising cash, eliminating all the debt, accumulating cash. In the meantime, they said, oh, if it was, we sold it a loss that took through the income statement.

So the earnings looked terrible. In the meantime, they said if it was a gain, well, we had intended to sell it. And under quasi reorganization accounting, we're going to book that directly to stockholders' equity. So we're not going to take that through the income statement. So they're putting all these losses through the income statement. They're not reporting the gains, accumulating cash, and this insurance company is going to pop out of nowhere. So I'm like, I'm excited. This is $5 stock's worth two, three, four times that.

And it has a huge NOL and they use it as a thing. the mechanism, then the crash comes. Of course, everything goes down with the stock market crash. So it goes from five to three. And so then what happened was, Lucadia in 1987, 1988, 1988, 1988, created a huge amount of value. Bill Corp, Bray Corp,

the demuturization of Vampire Insurance, they eventually took private at a fraction of what that business was worth. So those things gravitated my interest, and the value was so clear and compelling at that time that it was like, this is a great opportunity. And confirmation that Lucadia knew that because they proposed all these transactions where they would try to buy the whole company, buy the whole thing,

and took advantage of the fact that the market wasn't efficient, and they understood what the values were here, and they were far away from what the intrinsic values were, and were opportunistic. And so it's easy to be opportunistic and invest when somebody that's really smart that really knows the situation much better than you do is investing their own capital and if I could go alongside that, that's a great opportunity. So that was a opportunity based on a fact pattern in a situation that was critical and informative for us.

It seems like one of the major evolutions that you went through in terms of your investing style was that you started to understand the power of aligning yourself with these owner operators like Joe Steinberg at Lucadia or more recently Christian CM-C-7 or the Gottwald family at Ethel Corporation or the Chow family at Westlake. where you could see that there were really smart capital allocators who, so you weren't just buying cheap stocks, something shifted in you. Can you talk about that because it seems like such an important part of your own evolution as an investor? So that's what it is. So we bought cheap stocks originally. And cheap stocks frequently sometimes they deserve to be cheap because they're really not good businesses. But certain times they are controlled by someone who is a great capital allocator who also sees the same opportunity and it's buying in and it's using it as a vehicle.

And so therefore, how they think about that and what they do and how that really changes the opportunity set. And then, of course, that's frequently in businesses that are sickly depressed that are going through difficult times. So therefore, someone who has a longer term vision. So that's what it is over time. That's what we've done is we identify these opportunities that are from aligning with the right people who can be opportunistic, who have the capability and have the ability

to do that from an intellectual point of view. to capture those opportunities to go along with that. So that has been critical. What worked? Who to align with? Who to invest with? And what situations? Because sometimes it's not just the people and it's not just aligning.

It is a business that is substantially discounted and opportune. And so one or two of the building related companies were not based on it was a better management. It was a better business that was in a consolidating industry that was extremely well positioned. So there's a combination of factors. I do say investing is a mosaic. There's a lot of things you look for, and you don't necessarily have to have all of those pieces for it to be a compelling investment opportunity.

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Sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify. dot com slash WSB. All right, back to the show. When you're trying to assess the management and you're looking at the qualities of these people, whether it's a Christian CM or a Bruce Gottwald or a Joe Steinberg or the Chow family or whoever, like what are you looking for that's a good indication that this is someone you want to align with?

And what are you looking for also inversely that makes you think, God, I'm staying away from these people? No, I don't stay away from you. So in 1987, 1988, with Lucadia being opportunistic, we were shareholders in Philcor. Actually, I remember Alan Khan connecting me with Chuck Royston going to visit him and Whitney Telson and saying, you should buy Philcore. And a year later, Whitney Telson calling me up and said, why don't you tell me to buy Shilk? Why don't you tell me to buy Lucadia?

That's where the values is being transferred to. This stock's cheap. And in Lucadia, well, I just saw what they were doing. And I saw the opportune situations and the discounts. and what they were. So I lived through Lucadia. I didn't know Lucadia and have kind of the history of it as opposed to Christians seen when I came across him.

He had already had a record of being successful in acquiring assets and the press business at an opportune time, capitalizing that, converting the company, merging it into someone. So he had already other people as life has gone on, they got walls of people who clearly have a long-term, decade-long record before I came across them to say, these are moneymakers who think about capital allocation because they own a lot of stock themselves. and understand the businesses and not only control it, but understand how do you allocate capital, therefore maximize the opportunity for investing. So it's kind of different in those situations.

Because in 1987, 1988, but Lugadia, I didn't sue them three times. So initially, when I started in business, and you're buying small companies that potentially have a huge disparity between price and value controlled by a really shrewd guy. Well, one of the things that really shrewd people do in situations like that, it's taken advantage of that market disparity. And therefore, they start to do things that they can. And so, therefore, part of that outcome is, gee, you know, as the little minority shareholder, I used to be like, see, that's not fair equitable. And so therefore, I would do, you know, I was the name plaintiff in 25 class action

loss. And three of them were in 87, 88 against Lucadia. So there is risk in it. And, you know, even today, even actually today, I was having a shot with Alan Kahn. And we were talking about CM Industries and Christian Seam and his concern about what's going to happen with seam industries. And I said, I don't know what's going to happen there. And you're at risk that the asset value is different than clearly the trading price in stock. And there may be a movement of value that doesn't get equally dispersed, as I say in these situations.

When there's a guy who controls the company, you know, you deal the deck. One for you, one for you, one for me, two for me, one for you, three for me, one for you, four for me. So that's a risk, but if you buy it a big enough discount, you know, if you end up getting half of what it's worse, then that's probably a really good rate of return. And so, you know, that's part of the equation that you have to do that calculation. And what is this thing worse and what is the opportunity? And therefore, if I don't get full value, do I still make a good, a great annualized rate of return in that investment? I wanted to go back in time a little to, after you graduated from Pace Business School,

in I think 1978. And you got a job also through your professor Pasterino working with Mario Gabelli and you were there from 1980 to

1983 at a time where Mario wasn't well known at all. And I was wondering, you spent three years there and you've said before that you would listen every day,

even though you were the CFO, you would listen to him talking about his favorite investment idea every day. Can you talk about those experiences

and what you learned from Mario, who's very, very, sharp. And I mean, I've interviewed Mario a bunch of times and I, I've told my friends who worked with him that he was not an easy man to work with, but clearly very sharp and full of bombast and a great researcher. What was that experience like for you? Well, of course, we already, we knew who he was. And actually, Alan Ableton had already discovered Mario. And so therefore, his business

didn't in any way match what his persona, personality and reputation were. And of course, when I started working for him in 1980. He started the firm in 77. And so when I started, there were 12 people who worked there. He managed $7 million. The main part of the business was he was originally an institutional analyst on the south side. Before Mayday rates happened, and therefore that was a lucrative business. And that business from 72 to 77 disappeared. And then it ended up, that's what happened, William Whitt, where he was at bought by Drexel Burnham. He spent three weeks to trust in So Burnham and decided this is not what he wanted to do. So he went out and started his own firm.

So his main business at the time that I was there was doing institutional brokerage business. And so that was the economic driver of the business. And only so it was in $7 million is what he managed when I first started to work for him. And so that was only beginning. Now, of course, the amount of capital he had, intelligence he had, the fact that one of the industries that he was very active and was the cable industry and entertainment. and that business was in the process of exploding. So, you know, it was a combination of factors. And he is very quotable, very, you know, has a persona that Alan Abelson then loved,

that therefore broadcast that. So those things all kind of helped Mario lead frog. And so when I left, that's what it was. He only managed an 83, 77 million dollars. So it was still a very modest amount of money. But that's what it. So every day he had his morning meeting because it was this brokerage business to talk to the four salespeople to go out to,

sell the idea he had. And he'd go through his investment thesis. That's what I say. I had an executive MBA program taught to me almost one-on-one by Mario Gablee for three years, where he went through his favorite investment thesis and what it was and what the company was. And he paid me to attend the class. I didn't pay him to do. So it was a phenomenal opportunity. And it was a 12-person birth. And so I was the chief financial officer, chief operating officer. And that was when I first started to work from 1980, we used to clear through Bayesian company. And And that's in 1980s, the Sulfur, the Hunt family, the silver implosion. And the base is going to go out of business.

And so, and we're a broken dealer. So therefore, our money is not protected. So Cabelli is about in the process of potentially losing all its capital. And so therefore, we had to scurry around and go over and, you know, move the business and get that out of the way. So therefore, you know, so things happen that were really interesting. And I work with Mario intensively on a one-on-one basis that entire time. So, you know, he's a great business fan in addition to being a great investor.

So therefore, that experience was, again, couldn't invest for a better opportunity. What stuck with you in terms of how you analyze investments, how you talk about investments, but also how you run your own business? Because he's shrewd. I mean, he's, he's, he's a not, it struck me when I think it was the last time I interviewed him, he said to me, no, I don't read any books. I never read a book. Why would I waste time reading a book? I read all these journals every day. I'm just an information junkie, an information. hound. So he's got a very distinctive personality, this sort of voracious appetite for information, for getting an edge. Was there stuff that just by watching him operate you think

has actually stuck with you or are you very different? Well, personality is very different, you know, because he is, you know, he's fast-basket. He's hard to work for. You know, he's demanding person, has high expectations and doesn't let you know sometimes if you don't meet those expectations. So he's a different person than I am. I think in terms of interesting curiosity, you know, I hate to say it on air, but I don't read books either. I hate that at the end of interviews, but people always say to you, what's your favorite book? What have you read? And I'm like, I feel like an idiot now because you don't read any books.

And that's what it is. I read any reports. I read through, you know, letters, I read journals, I read all these other things. So I have an interest in stuff, but I don't read books. And so there's a similarity, of course, we really do have. between us in that way. So interest in businesses and how they work and how they operate. And I think that it's been a critical thing is understanding the latent earnings of businesses that are not earning something today. So, you know, that's a phrase that comes up a lot.

Of course, when you do value investing and you do asset-based companies, you know, you talk about value traps. And so, you know, I think that value traps are kind of like in what time frame are you talking about? Because recently I hosted a dinner about a month ago. So I had about 10 of us there, and I invited a bunch of people who are still in value investing active management, managing much less money than they used to, including people who don't do it anymore because they convert it to a family office because they've given up and given back the money and don't want to do that anymore. And the nature of my dinner was I called the Restoration of the Fallen, right,

using the line from Horace that Graham has at the beginning of security analysis. And that's what I think. I think the next decade is going to belong to stock picks. And I don't care if that's technology companies, growth companies, industrials, financials, all of those have reasons to pick stocks and not the index. And the indexes will not outperform selecting stocks and the ability to identify, do research, select companies that are well positioned,

and have valuations that are attractive. that is something that can be done today, and there are many fewer people doing that. That is not a productive effort out there today, and therefore that means the competitive landscape is extremely limited, and that's where the differentiation is going to be. It's not going to be an owning index. It's going to be owning stocks. And so that's what I'm saying. It's the restoration of the fall of stock pickers, active managers in the next decade,

I think have a bright future, and I think would be shocked if they don't outperform minutes. Let's unpack this in more detail because it's such an important idea, this idea that we're going to see the revenge of the stock picker. I saw you recently. You said we're entering a new golden age for value investing, stock picking and active management. So as we're trying to understand why that could be, can you explain this totally anomalous, weird period of distortion that we went through after 2008 that in some way has set people up to believe something, to believe certain principles that may not turn out to be permanently true. So two years ago in my letter, I talked about financial brigadune and said, that's, I think,

the world in which we live today. And so Brigadoon, as I'm sure you know, it's the learner and low play from the 40s, and it's about two gentlemen on a trip to Scotland, one, you're across the Moors and coming across a little town, Brigadoon, it's an idyllic little town, everything about it is just lovely. And so they leave and they come back to next day, only to find the town's not there anymore. And they ask someone, what happened? Where's Brighardoon? And the guy says, Brigadoon only shows up one day a year every hundred years. It's gone. And that's what we have today. We have post-a-financial crisis an extremely anomalistic period of time and extended extremely anomalous period of time. And the fact that

it exists for as long as it did, convinces people it was the new norm. And so therefore, the distortions of people's thought process and capital is making the opportunities. And that's what people today, they say, well, gee, these opportunities and they'll say, but they perform poorly. Yes, the performance is what sets the stage for the opportunity. The valuation of the pricing is giving you these opportunities because nobody believes that's the case. So there's a a line from Bernard Baruch, and that is data and information is no substitute for thinking. And so that's a particularly critical thing today because I think the underlying economic environment from a world of very low inflation for an extended amount of time, depressed interest

rates, low, no negative interest rates, people got to believe that that was the norm. And people, it's not, and anybody who graduated and lived in that decade-long period, And that's what it is. A decade long, it's not like two or three years. Then you'd say, oh, no, no, you haven't lived long enough. You don't know. You live the long time. That's the way the world works. And then even people in business, I do think there's been a gravitation that, well, maybe I am wrong. The world has evolved. So I really think that it's not only people with 10, 15 years experiences that early live through one world, think that that's the norm. Everybody else is going to believe that. And that's what everybody believes is. We're going to go back to that environment again. And therefore, that capital stays where it is. Because we going to get back to that. And I'm saying, no, no, no, that was an anomalistic period of time. It's not going to return. And therefore, you have to be prepared and invested on who are the economic beneficiaries in the next decade. And they're going to be very different than who would the beneficiaries of a anomalistic economic environment. You had a very interesting chart that you showed in one of your letters to shareholders that

was called decade winners, where you show how the world's biggest companies by market cap changed from decade to decade. So in the 1970s, these were energy companies driven by very high oil prices. In the 1980s, there were Japanese companies that dominated the global economy. Then you show how in the 2000s Chinese companies came to the fall. Then in the 2010s, companies that benefited from low interest rates and the recovery from the global financial crisis. So when you think about it in terms of these companies, kind of passing of the baton in a way, like these different periods. How does that help to inform your sense that it's really dangerous to have this kind of recency bias where you're like,

oh, well, whatever happened in the last decade is bound to continue because that's what I've seen. Of course, it is recentcy bias, but it's easy to believe it's not recency bias. When it's been 10 years, you think, no, no, no, no. If it was one year, that would be recentcy bias. But I have conviction, it's not recentcy bias because it's happened for 10 years. So I think it's Jim, I'll attribute to Jim Grant, there's a line that says that in science and in engineering knowledge is cumulose and in finance it's cyclical. And given extended cyclical periods, the idea that people think, you know, they forget past performance is not a predictor of future results. And so therefore, what has worked isn't necessarily what's going to work. And there's all the more reason why there are rotations, there are cycles.

And that's the phrase I have now. it's a no, I'm of stealing the phrase from Clinton when he beat Bush for president. It's the economy, stupid. What's the economic environment? Which companies are going to benefit from the economic environment and therefore do extremely well economically? Those are the stocks that are going to perform well. And so to think about what companies, what industries are well positioned today and for a combination of well-position, excellent growth, and evaluations that also are heavily discounted because they haven't performed, and the conviction is they won't perform. Or I know that business, and that business is a cyclical, crappy business.

Businesses change. That's what I talk about, too. I talk about not the revenge of the old economy. I talk about the metamorphosis of the old economy. For industries that have done poorly for a long time are capital deprived, have consolidated. have restructured. And maybe the underlying economic environment is different where they've gone from being disadvantaged, the potentially very advantage today. And I think that there are many examples of that pattern of both the poor performance consolidation, restructuring, and yet the underlying

economic environment totally changing now, and therefore being extremely well positioned. So you're looking at quite unfashionable old economy industries like chemical, and building products and lumber and energy services and the like. Yeah. Why? What are you seeing there? And maybe you could give us a couple of examples. We don't really, we're not that specific about stocks because I'd refer these interviews to be fairly timeless. But if you could explain how these North American companies like LSP industries or Westlake illustrate this kind of theme that you're seeing where these old economy industries that had been largely dismissed by everyone who is excited about Microsoft and Apple and Amazon

and Alphabet of the like, are suddenly actually extremely attractive and maybe where the action is. So again, here we are, bottom up stock pickers and we'll value investors that we've always been. And the fact that matter is in the last two to three, four years, I realized that actually I'm not that. So I'm in many cases of a macro, top-down investor. And I'm not a value investor. I'm really looking for businesses because of cyclical changes and structural changes have a significant

amount of growth in front of them. So I'm really looking for businesses that have significant growth opportunities and yet valuations that are depressed. And why did that happen and how did that happen? The economics 101 really does work. Capital does get pulled out of things and therefore things are different. So the two major themes that we think are structural changes that we think are decade, two decade long kind of opportunities that will dictate who the winners are. I don't care who the losers are, so that I'm not going to short anything, so I'm not going to go through that part, but who the winners are. And so those two things are, one of them is anybody uses the phrase de-globalization really just doesn't understand what's happening.

And what's happening is, of course, it's the evolution of globalization. And therefore, things change. Different countries, companies, industries become advantaged. And that moves over time. And so therefore, and of course, we kind of know that. If you think back long enough in history, post-war War II, there was a period of time where Japan had its recovery and therefore had a significant positive period of time. And then what happened was it got to a cost level where the opportunity migrated to South Korea. And South Korea then had a significant period of time where he grew and had all these advantages. And then over time, that moved to China. Because China had all the advantages, including the scale of the population of the country.

And so therefore, that did really well. And what's happening been happening in China for, so Isaac Schwartz is a young colleague of mine who when he graduated Wharton back in 2005 took a trip to Asians and thought we need to invest in Asia. I said, Isaac, I'm a kid from Queens. I don't speak English. Well, I'm not going to learn a foreign language. How do I invest overseas?

But he took me to Thailand in January of 2007, which is almost 10 years. after the age of financial crisis, which was the Thai bot devaluation was a critical element to that. And these stocks were extremely cheap, strong balance cheap, generating free cash flow, paying dividends, 7% dividends. And so therefore, you know, I didn't have to speak Thai to understand that these businesses are substantially discounted an opportunity. So he got me to invest and think about the world as it is. And so with him, I've traveled throughout Asia. We visited 500 Republic companies over, you know, the number of years. He lived in Asia. And that process, I remember talking to Korean company 15 years ago that no longer made garments in South Korea,

where they started to do it when South Korea had a lower wage rate than North Korea, because it was competitively advantaged over time, of course, it wasn't. So they said, well, let's go make it in China. And they weren't making things in China anymore. They had already gone to Bangladesh in Vietnam. So businesses have been gravitating out of China at some point for a long time. That process, I think, is going to accelerate. So therefore, I think it's the evolution of globalization. And the evolution of globalization is, well, you know, it moves south and it moves west. And so the next places it's going to is Southeast Asia with 650 million people and in the 1.4 billion people. So there's 2 billion people that are in the process of replicating some of what

China did 40 years ago. And so that globalization process in the evolution means huge amount of infrastructure build out, huge amount of changes, huge amount of energy consumption. Because you start that economic ladder, Japan, Korea, China, per capita consumption of energy significantly increases. So you're going to see 2 billion people in the world start to raise their income level. So I think that that's a critical factor. The other fact part of globalization about evolutionists, people say reshoring, which again is a misnomer, not reshoring. It is North America is competitively advantaged in any energy intensive business. So energy fossil fuels is something that I've invested in 50 years.

I think I have a really good understanding as to how those businesses work. Not that I know where the commodity price is going to be in six months. I have no idea that commodity price will be in six months, but how those businesses work. But North America, because it has an abundance of natural gas that you can't export, has an energy cost that's disconnected from the rest of the world. and that is a persistent, long-term advantage. And if you're doing something energy-intensive, doing it in North America is a competitively advantaged place.

So when I got out of college, 50 years ago, we were competitively disadvantaged. Today, we're competitively advantaged in a large portion of the world's economy. And so, therefore, it's European businesses, more than Asian businesses, but also Asian businesses that are coming to North America to take advantage of that long-dated opportunity for excess profits and returns because of the low-cost environment for energy, which will be persistent. So that's, again, a critical thing that I think. And therefore, if you are an industrial business in North America,

frequently there's three of them left, and there's an oligopoly that has the lowest cost, and therefore is competitively advantaged against the rest of the world. Because labor is not a big component. It's the inputs, and the inputs in many cases, to the extent that you make a chemical and you use the raw materials natural gas and your energy is supplied by either natural gas or lower cost of electricity, you're competitively advantaged.

So you've got to make ammonia, fertilizers, chemicals in North America. You're competitively, you're going to make steel in North America because you're in the end market that demands it. You got the iron ore that's domestic. You got the coal that's domestic. You got low-cost energy. And you have an industry that produces steel for substantially less CO2 per ton than the rest of the world does.

So environmentally, we're competitively advantage also. So these things are very different. That's why I say the metamorphosis of the old economy, because these are fundamentally, structurally different businesses than they've ever been. And in a period of time where activity in North America, given things like the Inflation Reduction Act and all of those other advantages, as we build out renewables, mean the demand is growing exponentially,

and therefore you're extremely well positioned for high growth. and yet valuations are extremely modest because, oh, I know that business is the cyclical crappy business. It changed. It isn't what it used to be. It's a butterfly today. It's not a catatoller. So in a way, as you've mentioned before, it's analogous to when Buffett looked at something like the railroad industry and said, actually, this thing that was always a terrible industry is no longer a terrible industry.

That's right. That's what I always do, Joe, because 1975 I got out of college. that's that I say is when I got out of college, there was a great business called the Wall Street Journal because there was no across the street from the Wall Street Journal. And it was a, I interviewed with a railroad company and said, this is a horrible business, capital intensive, costs are too high. You know, the thing just loses money like crazy. Why would you want to be it? The fact of the matter is, railroads are inherently a monopoly business to the extent that you have a rail line that goes from this place to that place. You are the low cost transporter of anything and everything. And no one's going to build a new one of them. So therefore, there's a barrier. to entry and therefore you have that advantage. So structurally, it was a business that has those positive attributes. And of course, today the Wall Street Journal is a vanity thing for people who can't afford to lose a lot of money and can't make any money anymore. So things change, you know, and people don't have the perspective of, oh, there are cycles, there are things that happen. And what is true today is not necessarily true tomorrow. I remember Bill Miller many

years ago, I think when I was following him around back in about 2000 to write a profile, or 2001 to write a profile of him for Fortune said to me, the biggest problem in markets is that things change. And it seems to me such an interesting thing that in the, in the last few years, even among many value investors, it became almost an orthodoxy that you should own higher quality companies. And that even the value investors became kind of almost like nifty 50 kind of investors, right?

Like, like, and I was wondering how you dealt with that issue. because that did become almost the dominant way to win within your community. So there are two types of value investors in my mind, right? There's the value investor like me who owns hard asset kind of businesses. And so maybe that's also Curtis Jensit, who joined this a number of years ago, third avidumner to Marty Whitman's firm, right? Or, you know, there's a lot of examples of firms that, you know, were that. And of course, they had the misfortune of being very successful in raising a lot of money.

And so therefore, you know, back in 06, 07, 08, 09, they had billions and billions of dollars. And so therefore, those businesses then have imploded substantially. The other value investor who did, who was smart enough, who did buy Apple, Microsoft, you name the company when it was a cheap stock. And it was a value stock. And therefore, they had the good fortune not to sell that thing over time, too, right? Because they would have truncated their opportunity for profits. And so those who've grown to be very successful investments that they're kind of stuck in today. So the value of guys who performed well are the guys who held on to those stocks and probably have brought in a little bit more to the idea like, gee, there is maybe better businesses are worthwhile to pay a higher price for.

And again, you know, you hear Warren Buffett say that and therefore you apply that to every situation. Oh, it's a better business that pay a higher price. And you know, when do you start to confuse yourself as to what's a better business? And when do businesses change over time? And it was a better business, but there's a change. And it's continue to have that. So value investors have gone two different ways. They've either imploded because they bought hard assets. And therefore, those things have been out of favor. And we're fortunate because we didn't manage a lot of money. And the money that we have is from people who are really long term and have been with this for a long time that we've made

returns for. And so therefore, I've had, because that's a critical piece. If my capital wasn't aligned with me, then I couldn't do what I have done because they wouldn't have. stayed with me through the lean years, and they were definitely a bunch of lean years to the point where, you know, we've done really well the last number of years, and I think we're extremely well positioned today. So those are the two pieces of value investors and how they've kind of changed over time and the ones that have adapted, have money, but I think also have valuation issues that they have in their portfolios and businesses that have done well and could do well. And again, that's why I say it's a stock picker's decade, because, you know, even Magnificent Seven,

And I heard the Bloomberg, they said the magnificent six. So they've already kind of like, they identified one of, and that's what will happen. It's the same thing that happened within 50-50. Some of these businesses are, they are phenomenal businesses. And the reasons the stocks have gone up is because the economics have been strong. And so it's not like just, it's not what it was in the dot-com era with this valuations or things made no sense in their businesses that weren't worth anything. These are real businesses that have had, you know, significant economic returns in them.

But some of them won't do it out. And I don't know which ones those are. And if you take the right ones, you'll do it. Okay. And if you think the wrong ones, you have clearly valuation risk in those securities. When you look at investors who've brought into the idea of just owning, you know, Microsoft and Apple and Amazon, alphabet and META and Visa and J&J and JPMorgan,

you know, these kind of super successful U.S. companies that benefited from that period of low interest rates and the recovery from the financial crisis. Is there something in particular that they're forgetting that you, you know, not in terms of wagging the finger, but if as someone who's been in this business for 50 years, if you could just give people some sort of sage perspective, because I think often we look back on periods where it seems obvious in retrospect and things were sort of inevitable. And I'm always like, why didn't I listen to Howard Marks at the time? Well, why didn't I listen to Buffett at the time?

Can you put into perspective what it is that people ought to be thinking about as their framing companies like that that have been so successful? But I think a critical thing is valuation. So I regularly quote in the 2011 letter, Buffett made a point of talking about fixed income. And, you know, he referred to Shelby Cole and Davis's famous line that, you know, bonds were a return. free risk. That was in 2011. That was a long time ago. And for that entire time, that didn't come home to roost. But of course, what's my risk-free rate of return? And so therefore, we start a risk-free rate of return. I actually think for, you know, go back two or three years ago, how do you figure a risk-free rate of return? Because if he's figured the 10-year treasury, but the 10-year treasury

was like lower than what the inflation rate was. So the real return in 10-year treasury was negative. So if your risk-free rate of return is negative, and then I got to put the premium on top of that, what's the premium on top of that? And where do I start? So it seemed to me that the foundation was in the wrong place because if nothing else, there was no margin of safety in assuming that that was your risk-free rate of return. And yet in real estate, capitalization rates were all predicated on those low returns. And so therefore, you know, so the real risks in my mind, because I do I think capital today is substantially misallocated. It's been allocated based on an environment of free money and the presumption that that's

the norm. And of course, we talk about public markets, but the other market we haven't specifically references the private market. So private markets, I think there's a huge amount of risk and more capital goes there, and it's allocated to private markets. And private markets, valuations move slowly. and what's the right rate of return? And the right rate of return is the right rate of return is going to be determined by the dog and not the tail.

The tail is the Fed and the dog is inflation. The dog determines interest rates. The tail, the Fed does not determine interest rates. And people think that that's the case. You know, if I hear one more time on the radio, four times on TV, you know, like, what's the Fed going to do next and again? going to raise rates. I'm like, oh, would you get a life and figure something that you is relevant? Because the Fed is going to be forced to respond to what inflation is. And the Fed can't control inflation. And so that's the critical element. And valuations, all real estate, in my mind,

has risks of coming down in valuation because cap rates are going to change. Because where does inflation moderate out at? We'll determine what the right interest rate is. And then we'll fix where capitalization rates are. And the private markets are things that, you know, I recently saw a study Cambridge gave to us, us being one of the things I do is I chair the Pace University endowment. And they said, yeah, the multiples have come down. So they went from 10 to 11 to 12, 12, and now they're down to 11. And I'm like, wait a second. They went from 12 to 11. And interest rates went for one and a half or four and a half, somehow that doesn't seem like the right adjustment. That number is wrong. And so I think private markets, which are levered and real estate, which is levered,

the nature of those assets are you always leverage those assets because they're very leverage them. And if you start to change multiples because inflation is higher and the interest rate is different, your risk-free rate of return is different. And that just takes time because those markets don't reprice quickly. So I think the risk is not necessarily in the public market so much, even with the higher valuation stocks. There are these other markets that mark to a model and therefore, you know, are less volatile. Of course, we all know the answer to that is, no, no, no, I invest in a business, right? That's in the public markets. And the stock price may be volatile, but the risk and the volatility in that business is no different than the one that's

in the profit market. So our risk did largely or they're not that dissimilar. And yet, One goes like this in price and the other one like this in price. And in a period of time when interest rates have changed radically and therefore discount rates should be changing radically and one's not changing. But for people who are not, who are listening rather than watching, there was a vivid movement of a hand going up and in another case of a hand going in a more moderate way. In structural terms, it feels like something has really shifted that I'm sure you're seeing a lot when you're advising. endowments and the like, right? The people who are making asset allocations are thinking very differently than you are about the value of indexing and the importance of private markets and the like. What's happened to value investors given the rise of passive investment, the rise of algorithmic

trading, the importance of short-term information and the like? What's happened there and what opportunity has that created for people who actually do care about valuation? The opportunity, I think, is huge. Right. So in the last, so the 22 was interesting, you know, 2020, right? Because it said, you know, one, two, one thing that happened that year was both bonds and stocks were down more than 10 percent. And everybody says, oh, that never happens. And I'm like, whoa, whoa, whoa, when you have one and a half percent, 10 year treasurer, and if one and a half then goes to three, well, what do you think happens to a bond? What do you think happens to a stock?

How did you say that? Who would have thought that that would happen? You had thought about it. Of course you would think that. And you should have thought about it because that's the margin of safety. There wasn't a margin of safety. That pricing, that assumption set the pricing for both of those markets. And that if you change that basic premise, obviously they would.

So 22 happened and bonds and stocks had terrible performance. Somehow people have forgotten that. They relegated that to like, that was a mistake. And of course, the critical element. that happened. There was inflation happened. And therefore, where did that come from and what caused it? And where of the camp, again, so there's one of my colleagues working with many years, has this concept of grassroots macroeconomics. And so that's why I said we're a macroeconomic investor. We're not a bottom-up stock picker who think we're agnostic on the macros. Because

when you understand a business and you understand the industry and you understand industrials that are a component of the business and industry, you understand, I think the drivers, and we see all these things that are fully inflationary. And so the globalization and the movement of globalization, when you move to the rest of Southeast Asia and you move to India, it cannot be as efficient as where the Chinese economy is today. Yet costs in China are different than where they are today also. So therefore, it's not the same place with the same cost structure it had. So I would submit that China, of course, that's what's really happened, right? Post-finan. Again, I'll come back to this concept.

I think the Fed is at the margin has no ability to influence the really big things in life. And I don't think bulk or cured inflation. I think China cured inflation, right? Because what we did over 40, 50 years was industries disappeared in the rest of the world and they all moved to China because China had all these cost advantages and can do these things and make all these things for much less than we could. And what that did was we bought stuff for the same thing. We paid 20, 30 years early.

So therefore, inflation was sucked out. So it wasn't, as Ross Perot said, the giant sucking sound wasn't Mexico stealing things from North America in the 1992. Giant sucking sound has been going on for 40, 50 years. And therefore, it's moved to China because they could do everything cheap. But the costs in China now have risen because now they become a net importer. So when it comes to making steel, suddenly their risk of being the high cost producer because they have to import iron ore. They have to increase coal. They have to increase energy.

So the critical variable costs, they're high on the cost. plus courage. Labor is a small component of making steel. It's not a labor-intensive business. Who cares you got cheaper labor? And so therefore, and now when they started that process, they had all of those things internally. And they were advantaged. They had an end market that was, you know, had the demand and they could supply everything internally. Now they've got to import all these things. And then the high cost import. So that's a radically different place. So I think China is least done and probably feeds inflation in. And as you move to someplace else, It can't be as efficient given the, you know, when Microsoft or sorry, when Apple thinks about,

okay, we're going to set up a line in India, it's going to be a higher cost than what it is in China. You can't replicate the efficiency that you have and scale that have. And so therefore I think. And then the other thing is energy. So we've been fossil fuel investors from day one. Energy transition is obviously something that's going to continue to accelerate. And energy transition is going to be something that is going to be inflationary. because the build out of the infrastructure that you need,

the call on materials that are already in tight supply, mean all those material inputs are going to cost more money. And so therefore, you're going to have recurring commodity cost pressures as you build out. That method is when you build out renewables, you need steel, cement, and you need all these basic materials

that are in tight supply today. And so therefore, we think inflationary situations, And energy, too, is the same thing. Those are inflationary. And therefore, inflation is going to be more persistent at the higher level. And when financial brigadoon happens, people give up that it's not going back to Brigh doon, and interest rates adjust to the right rate where inflation levels out at it.

It's either going to be at higher or potentially reasonably higher than where we are today, and people will give up and say, it's not going back. And I can't, I can't spec. I can't invest based on the whole that we're going back to a two and a half percent. rate. Because that's a hope. That seems to me to be hard to get the genie back in the model. And therefore, you're not going back to that rate. And therefore, you have to reprice what you owe based on that risk-free rate of return, the risk associated with that investment, especially if there's incremental inflation that's going to affect your business to.

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and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. I wanted to focus a little more on energy because it's obviously a hugely important area for you. And I was looking at, I think it was the April 30th, 2024 statement for Ravenswood investment company, which is a limited partnership that you've run with great success for decades. And if I was really right, you had something like 62% of the portfolio in energy holdings. And so it's a massive area for you. And you've also, as you mentioned, been investing in energy since the 70s. So you're putting your money where your mouth is here when you look at this huge structural trend in energy. Can you explain why there's

such a massive overweighting in energy in your portfolio, but also how companies like Tidewater or Technic FMC or sub-C or whatever other big positions you choose to mention, how they illustrate your way of positioning yourself to take advantage of what you see happening in the world of energy over the coming years. It's individual stock selection. I don't buy, I'm not buying energy broadly, and it's valuation, right? So it's easy, it's simple. It's really not that complicated. So valuation part is in certain parts of the oil and gas industry, the service parts of the business, so the picks and shovels parts of it, right? There's a, what I would say is a true north. The true north is, what's the replacement cost of that asset? And of course, it's predicated on the

concept that, you know, that asset will be one that will be in supplied demand balance or, you know, in tight supply. And therefore, that means the economics will be determined by what it costs to build that asset because you're going to need more assets. And so where is that? And that shows you the earnings potential of the business. And that shows you the value of that business. And what's happened, of course, is the, like the focus of what I do in energy, a lot of it really does tend to be offshore related in service picks and shovels. So that means in 2017, energy had a really good run, but it was all onshore and was all shale. And I did nothing in those years, and I did not participate in it.

So therefore, again, it's stock selection. And in that case, I underperformed because I didn't own the right energy stocks. And of course, what's happened more recently is, oh, no, no, no, no. The onshore has its place. the North Shore has its place. And that place has finally come to what the underlying economics are and what the opportunities that is and with the size and scale opportunity that business is. So it is the realization of something that I've invested in all along and that the market

couldn't care less about four years ago when I went to, I could go through the litany of really smart value investors who do cyclical energy kind of investment. So it is the kind of thing they would invest it. It's not like, oh, I don't invest in that thing. No, this is what I'm saying, no, no, no, I'm going to have no interest in that. And at the meantime, you know, Tidewater, it's boats. That's what I, a year ago, it's at a conference that I said, okay, the stock pickup I'm going to have today is I'm going to talk to you about a real estate company. And the real estate company is one in which the real estate's been converted, shut down, ripped down.

There's no new supply. The demand for that real estate is suddenly coming into tight support. apply, you have 90% utilization and therefore the rental rates going through the roof. And so therefore, as the rental rate goes through the roof, it all falls to the bottom one. And so therefore, and the value that is, well, when you get to the point where you need to buy new real estate, build new real estate, what's the cost of that real estate? And so that's a pretty easy to identify number. And if I can buy something for 10, that costs 50, then I'm buying it for, right, 20% of its replacement cost. Now, when do the economics get it to the point

where it's worth 50? That's the uncertainty that people aren't willing to invest it because I don't believe it. I don't know what's going to happen. In the meantime, we invest in it because I have a strong conviction that it's not that long a time rise. And when I started 10 and I'm going to 50, that's a really good return. So therefore, the time period becomes less significant in it. Now, of course, the company disappoints. I'm holding up my hands. I got one high, got one low. And what happens is, as it disappoints, which inevitably will because the situation is not conducive to the supplied demand, there's only one place for the stock to go. It goes down.

It doesn't matter that you buy in a dollar for 20 cents. It goes to 10 cents. And if it continues to disappoint, it goes to five cents. So the opportunity gets larger and larger and larger. Probably the opportunity gets closer to realization because the timeline is changing because the supply is dwindling. and so therefore the demand returning is an uncertainty. So that's what it is, is we look at these businesses and understand, in certain cases, that disparity and therefore continue to invest is that opportunity potentially gets wider

as it doesn't happen in the short term. And so therefore, as I say, that's where we've made the most money in the short term. It worked against us, and then we invested more money when the opportunity became closer to realization and the valuation further discounted. So you look in a fairly granular way at a company like, that's been a huge investment for you. And you say, okay, so these guys have 200 and something vessels. These are all these crew boats and tugboats and like that are used to service global offshore energy companies that are exploring and producing. And then you're like, how much would

it actually cost to replace these vessels? And then you're looking at it and saying, and who the hell wants to invest in servicing energy exploration and production companies offshore, given the kind of ESG concerns, right? So is that, the sort of analysis you're doing here? It is. And that's what happened was. I was down in New Orleans. We went on a field trip to go see Methanex that owns methanol plants.

They were relocating a methanol plant from Chile to the Geisbe of Louisiana. So it was a field trip to Geisper. And we're in New Orleans. As long as I'm there, I'm in town. Who else to visit with? And I said, ah, hide water. I hate the boat business. It's such a crappy business.

But I had nothing to do so. I went to go see Jeff Platton, CEO, Tidewater, and had looked at it and said, hey, gee, maybe it's different than when I thought. But they've done with the fleet. They've upgraded the fleet. It's newer, but it's still problematic and whatever else. So initially, I didn't even want to invest in it because I've been around the business for 50 years. And so therefore, it's not a business that inherently pulled me in. But of course, it was, wait a second. Now suddenly it's gone through bankruptcy and I have a balance sheet with no net debt. and a position company that's breaking even at the bottom cycle, and I can buy assets for $0.20 a dollar,

this is going to make really good returns. And so therefore, you know, we started to invest. And then the other thing that I've learned from investing in businesses that have no identifiable earning stream, and therefore the assets are hard to value, and therefore you can buy them far less than what it would cost to build those assets would be. As the thesis ends up being right and the supply demand comes in balance

and the thing starts to manifest, when the stock doubles, it's probably a better buy than where it was when it didn't. Because what's happening is the supplied demand has come and right-sided. The economics are now starting to manifest. The earnings will be there. The valuation replacement costs becomes relevant. And the identical timeline suddenly now appears. And so therefore, to put more capital to work, even though it's appreciated,

and that's what we've done in Tidewater over the last couple of years, at various points. I continued to add at higher prices because the price of the value was still substantially discounted. So when it got the 30 cents and a dollar, and I can now identify in the next 203 years, it was going to a dollar. And so therefore, the opportunity now was ripe. And so therefore to put capital to work. And as a result of that, you end up having a really big investment in something that is really, you know, right, I guess Munger has the phrase that, you know, there are very few things in life that really work out.

well. And when you have one of those, you take full advantage of it. So therefore, when these things manifest and the opportunity then comes to fruition, the investment thesis we had now manifests. There's an opportunity to put capital work at a really great risk for an opportunity. So I was looking at Tidewater recently. It looked like you had over $300 million in the company. Is that about right? No, I have a big investment in Tidewater. Yeah. Now, now, Choopey told, right? So therefore, if you do look through my public filing, as you did see in the last month, I have solds in stock.

And so therefore, in spite of the fact that I say, when I come, investing is really more predicated in a price to value patient. It's not necessarily on putting together with portfolio and portfolio risk and sector allocations and all to say, I'm not, I'm not looking to offer you a diversified investment portfolio. I'm looking to identify situations that they price to value are substantially mispriced. And therefore, there's a great opportunity. you have to figure out how to allocate your own capital that, you know, you've got things in different pockets. But I'm not looking to do that. I'm not looking to replicate that. Instead, I'm looking to identify things that I think there's a huge investment opportunity in it and put my own capital and yours alongside me to work in those things.

And we're not really proposing any of the, well, I'm not anyway using this podcast as ways to sort of propose buying individual, particular individual stocks. It's more to illustrate Bob's way of thinking about businesses and about how to invest and where to find opportunities and taking advantage of some of these bigger trends that we're seeing. One of the trends that you've been talking about a lot, you quoted the head of the International Energy Agency saying that we're in the first truly global energy crisis. And as someone who's invested in this area for 50 years, can you give us a sense of what that actually means, what we're seeing? seeing in terms of demand not only for fossil fuels, but for renewables? So, again, having invested in energy is, so the first thing is, you know, I'm still in college in 70s, but in 1974, I went out to New Orleans for Montegro for, for Montyga. And on the way down, we almost didn't make it because there was gasoline rationing odd

in the event. And so, you know, 73 was the first event that happened when oil went in six. once from three to 12. And so, you know, I lived through that experience. And then, of course, that decade. And of course, that's what goes to the Shevdi's the stock set up were energy stocks, oil stocks, because they owned an asset that was in high demand. They had a high profit. Therefore, money follows profits. And so therefore, they didn't buy oil stocks because they wanted to own oil stocks. They own oil stocks because they were making a lot of money. And so therefore, that's where the capital went. Of course, what happened was then in 1970s, the shoppals in Iran. So you've got a second

event. And so oil ends up going to 40, the start at three, the beginning of the decade, it's now at 40. But of course, there was a supply response. And therefore, places like Mexico, North Sea, all these new places were economic. And therefore, new production came online. Supply came online. So the supply demand balance was met. And actually the Shah's fall in 79 exacerbated the problem because the price went even higher, even though the world could, with the production it had could easily supply the demand. The demand was weighing because the price was high. So then you have a period of time in the mid-80s where the world could produce 75 million barrels a day and it consumed 55 million barrels a day, and the 20 million barrel

excess. And over time, of course, where we are today is we now consume 100 billion barrels a day, not 55 million barrels a day. And the excess supply, I don't think it's more than two or three million barrels. And so therefore, never have you had anywhere near that tightness supply down. We've been fortunate the last three, four years, you know, you really haven't seen the impact of the fact that if you lost 5 million barrels of oil, I don't know what we do, because it just isn't there. And again, I emphasize, I thought a year and a half ago, when the Saudis first announced their ramp up in spending, right, they said, we're going to increase spending 60 percent and we're going to hold that for five years. And at the end of five

years, we're going to go from 12 million barrels a day to 13 million barrels a day. Well, how do you not interpret that to be? Saudi Arabia is a place in which it's a mature oil when you spend money that aggressively and you don't move the meter, you're on a treadmill and you're running awful hard. And so therefore, not only is that supply demand really tight, it's not, you know, the rest of the world probably thinks of Saudis can like, oh, they can increase production and huge numbers. They can't.

So we're in a very tight supply demand balance in oil today, which I don't think is recognized at all in pricing. And yet is an important backdrop. The other thing is, of course, still an increasing demand for energy. And of course, there's a concern about the environment. You'd rather not have the case. Natural gas, including the ridge fuel that will facilitate how quickly we can build out renewables to be able to supply enough energy from renewables or battery storage or all of those

things, which will take demand steel and all kinds of materials in copper. And therefore, the build out, that's what I say. The build out of renewables has a really high cost of energy of materials consumption. materials that are already in tight supply. And so, you know, in our mind, I just can't see how 10 years from now the demand for copper is substantially larger than our ability to produce copper. And so that's an inevitability. Now, when that happens and how that happens and how it plays out, you know, I don't, I don't know the answers to that. But if we're electrifying everything and we want to do all these things, we want to have all these renewables and we want to have EDs, you got to have a whole bunch more copper than we produce today.

And you see that, right? Because that's what's going on in the copper markets. The people in the business identify the coming tight supply, short supply, and they're buying each other. So I don't want to start a new mine because the timeline on that is very expensive, uncertain, and the economics today don't necessarily justify it. But I can't turn it on a dime. And so in the meantime, I want to buy the guy who has the copper. So therefore, I supplement it. So, you know, BHB's bid to buy. Anglo was not efficiencies, synergies or anything else. Kind of like, I want to own more copper. How do I do that? I had a big copper producer. So we think the coal on materials is a really interesting opportunity or like long-dated investments today. That's probably not the question you started asking.

You know, I'd down our pants someplace. No, it's an interesting and important point that you make. And just to clarify, I saw in one of your shareholder letters, you said that electric vehicles need four times the amount of copper as gasoline car. And likewise, things like wind turbines consume lots of copper. So part of what we're dealing with here is this tremendous demand for lots of different materials, right, like steel and copper and nickel and lithium and cobalt and all of these things. Part of what we're dealing, so there's sort of increasing demand for all of these scarce natural resources. And then at the same time, there's mounting

pressure to protect the environment. And I wonder if you could put that in a sort of mature, reasonable context because I think there's so much ignorance and dogma about when it comes to these questions of the environment versus fossil fuels and the like. And as someone who's really actually having to position yourself so that you're able to kind of navigate this tension between environmental needs and economic realities, how do you think about this whole question? It's inflationary. So I was last September, I was down in Chile. And so, Finning is the largest caterpillar dealer in the world.

And so they had a field trip. And so, you know, we would spend three days with them going through their facilities. And at the end of it, we actually went to an copper mine when, of course, the scale of these things that will have like no appreciation for it. You know, like you have a copper thing at home. You don't think much of it. So first off, you know, those, I'm sure everyone's seen a picture of one of those large caterpillar dump trucks that holds 100 tons, like the wheels are eight feet high and each one of them costs $250,000.

Truck's just a behemoth. And, you know, you stand next. When you go up, it's 40 feet high, you know, oh, my God. Then you go to the open pit bind and you see 50 of them, like little ants running around the mine. And they get loaded up with rock. And now they have to go up to serpentine hill to get to the top of the mine. And they move at a pace of about two miles an hour,

earning huge amounts of energy diesel to be able to move that rock to get to the point. And then eventually you take that rock and you process it and you come up with 20 or 30 percent copper. And then you ship that to China probably who then refines it to make 99 percent copper, who then ships it to someone else who then incorporates copper. or into their wire or whatever else. So the scale and the interrelationship of this and the role of China in that process is like amazing. At the same time, for the copper mine, when I'm talking to them, they say, yeah, we have this copper mine and we're doing this expansion. And fortunately, we have a water desalination program.

And because you can't use groundwood ready. And desalinated water is 10 times the cost groundwater. And it also means the energy consumption is 33% higher for that operation because of the desalination. And because we have the desalination, there's a guy who has a copper discovery not far from us. And he thinks he's going to develop that copper mine. He's never going to be able to do that because he doesn't have the infrastructure. He doesn't have the desalination capacity. So the fact that we have all those things, but it's going to cost us more money.

And then lithium, which is another big product that comes from Chile, the government of Chile says, any new lithium projects, we're going to own part of the economics in that project. And you're going to do these things. And Indonesia, in report Mac Moran's copper discovery they have in development, they were planning on taking the copper someplace else to have refined. Indonesia said, no, no, no, you're going to build a smeltered here in Indonesia. We're going to capture more value in that process. and therefore you're not just going to take that mineral and run away with it. So we're going to take the second bite at the apple and we're going to build out our economy. So what I think is the demand for incremental new resource,

these countries are in a different position than they were 50 years ago when you came in, you paid them some money, stuff, and you ran away. No, no, no, no, no, no, no. So what's the environmental impact? You're going to have to do things that are going to minimize the environmental impact, which means a lot more money and a lot longer time to develop these materials. that are going to go in. So life is a trade-off.

It's not like you did this thing and it's only good. It's kind of like you do this thing and it's good, but you've got to do this to get that. And so therefore, I think we're ignoring the idea that this, but you've got to do this to get that.

And so therefore, there's an extra process involved. There's an extra burden on the environment and an extra concern about that. And that's going to be mitigated in some way and that's going to cost you more money. So it clearly is. And now, of course,

I'm a Pollyanna. I think everything works. I see how everything works out well. In my mind, it's really good because one of the arguments in the last two, three, four years is the South is short of resources and money. And the North has got all these advantages. Well, the northern part of the hemisphere is going to need all the stuff that's in the southern part of the hemisphere. And the southern part of the hemisphere is going to say, that's fine. But these are the conditions in which you will take that resource from me.

And this is what I want in return. And so I think that's really good because that means that that value and that economics start to float to parts of the world that have had more difficulty. I haven't been able to capture the value what they own and what they own today is in very high demand and increasing demand. And the value capture was going to be significant. And that means in the process, it's going to cost a lot more money to do the things we need to do to build out renewables. You mentioned this trip that you took to Chile, and I think you were away for about a month going to Chile and Norway and Dubai and Turkey and the like. And when you came back, one of the things you wrote about was your increased conviction that the U.S. is structurally advantaged for years to come. Can you talk about that? Because I think for a lot of people who've been thinking for all these years that it's time for the revenge of foreign investments and that finally, finally that will come good. What you're saying, Seems to be, no, actually, you really want to focus pretty heavily on the U.S. Well, I actually think both of those are true.

Because I just went through an example where resources and materials are in the South, and those are emerging markets. And so I do think that emerging markets are going to have an emergence. And so therefore they are the beneficiaries to the continuing movement evolution of globalization out of China. So therefore, I think emerging markets have really good growth in front of them, because they're going to pick up some of that advantage. from the movement out of China. At the same time, the appetite for materials are going to be things that also do well for

them. At the same time, if we're in North America and we have really low-cost energy and we have that huge advantage, that means we're building out all this infrastructure, we're building out all this industrial capacity, and therefore North America will do well in that process too. You know, and, of course, a place that's, I think, substantially, you know, at risk is Europe, because Europe, right, it is more focused also on the environment. And, you know, decarbonization in many ways is deindustrialization. And therefore, the movement of industry from Europe to America is definitely something that will continue to accelerate, I think. And so that creates a headwind.

There's probably other opportunities in Europe, too. I wouldn't be so sanguine about, you know, things look really bad there. So I actually see a world in which, yes, North American markets. And I can't help but think that that also is a whole bunch of positives that end up being for America. Now, at the same time, we have a whole bunch of debt that has not come home to roost, and that continues to grow. And so therefore, you know, there is a cloud out there too. It's not just funny, clear skies ahead.

And again, that's probably more like, do you pick the right industry and you pick the right company, Because in spite of the fact that America may have other structural issues, these industries are going to be competitively advantaged and probably have pricing power and therefore have growth and therefore good economics and start out with low valuations too. So part of what you've been doing, as we mentioned very briefly and passing before, was investing in these chemical products companies like companies like LSB industries that. in ammonia and the like. So these companies that in some way embody the competitive advantage of old-style U.S. industrial businesses, is that fair to say? Well, it is, but I'm, you know, I'm looking for more. I'm greedy. I tell you, I'm greedy. I tell you, I'm greedy. So, so LSD, what they do is they, in large part, they're making fertilizers, a cyclical business depending on, you know, crop prices and all those things.

However, to make that, they make ammonia. So this is part of the energy transition. So energy transition is something that is real, will continue to gain momentum and therefore call on capital and part of that process. That call on resources means that's an interesting dynamic. But ammonia is interesting from the point of view of it has three different roles that logically in the next decade, it could now have huge increase in demand. The first one is as a marine fuel. So shipping is a huge impact at a big carbon output. And therefore, they're trying to figure out how to convert engines to burn something other than something that creates CO2.

And so there are two identifiable options for that. One of them is methanol and the other one is ammonia. So therefore, by burning ammonia, when you burn ammonia, you don't produce any CO2. It would produce other pollutants, but you don't produce CO2. So there's a movement of foot. There's plenty of companies who have identified engine capacity, therefore, to burn ammonia to substitute. There's also in Asia, they're doing test burn now to substitute in with coal ammonia. Because again, when the ammonia is burned, you don't have the CO2. You don't have the other output and noxious things that come out of burning coal. And so therefore, Japan and South Korea are testing that process. And that could be a huge market for incremental ammonia. And then the third use of ammonia is it's really hard to move hydrogen. And hydrogen is kind of one of the holy grails of energy transition if we can get to use hydrogen. But hydrogen is hard to store.

It's hard to transport. But ammonia is not as hard. It's still got its own issues, but not as hard. And therefore, you can transport ammonia and convert it to hydrogen. So therefore, it's a bridge fuel to be able to use hydrogen. So these new uses are there. So that's what I really think over the next three, four, five years. So the end market demand for the intermediate product they make ammonia is going to be substantially higher.

So there's substantial growth with energy transition. So not only does it have the attributes of a positive situation where you're going to make ammonia, you make it here in the U.S., right? Natural gas prices are two to three instead of nine or when they were 60, they were nine here. So you get this huge pricing differential, and that's your raw material input. So therefore, you make it for less year. The pricing is set by the European or Asian producers. So that's the pricing power.

Their cost structure is such that they make a margin on it. The North American producers make a huge margin on that. And that's a sustainable advantage because our energy costs are lower than there. So the fundamental business as is, I think, is one in which there is substantial growth in terms of profitability in the business, because you're in the right place producing with a lower cost structure. You're a cost advantage. But the other thing is there's also in-market demand for the use of the business. product, intermediate product to make that are in new uses that aren't there.

So huge growth opportunities. And as a result further, ammonia becomes part of the equation potentially. So you have seen Exxon, Mobile, Bought, Denberry Energy, and Denberry owns a CO2 pipeline that moves CO2 for carbon sequestration purposes. And so that's why they get into the business. And so they're going to be advancing carbon sequestration because they own the CO2 pipeline. So therefore, Exxon is looking at, okay, so we're not just an oil and gas company, that energy transition is going to put us into CO2 capture, part of the business. Ammonia looks

like it's part of the business too. And so therefore, you know, is there that kind of logic where the integration, ammonia companies become something very different and an opportunity for large oil companies to be part of their portfolio of energy and energy solutions. It seems like a nice example of what you do, where you're looking at a market that's become kind of consolidated and that's transformed and at a stock that's cheap and something that's off most people's radar and something that is aligned with these sort of big macro forces like the US strength in energy, low-cost energy and the like, it feels like it embodies a lot of what you do.

Right. We think there's a lot of ways to win. Right. And there's an entry point of low valuation too. When I ask people on X, formerly known as Twitter, whether they had thoughts about questions I should ask you. One of the questions I liked most was from Joe Costa, who has this terrific aggregation service where he sort of curates lots of the best resources on value investing.

And he wrote to me, one of the things that always strike. me about Bob is how kind he is and how he exemplifies what Adam Grant calls a giver. From what I've seen, this is pretty widespread among both younger professionals and college students who come in contact with him. So I'd love to hear him discuss his views on giving back via his time and knowledge to younger generations and why it seems to be so important to him. And when I looked at the philanthropic stuff that you and your wife Suzanne have done over the years, it's really striking to me how much is related to kids and education and the like. And I wonder if you could just talk a little bit about what your, well, to comment on Joe's observation, that the giving back

is important to you and there seems to be something distinctive about the way that you think about it. Well, first off, full disclosure, I know Joe and I know Joe well. So this is a question from a friendly, friendly person too. So he's giving me an opportunity. He's throwing me the fat softball here. Let's see if I can at least get a ground ball. So I think it's really interesting. And of course, it's fulfilling for me.

My experience, you know, like when Isaac graduated college and said, we should invest in Asia. And so I said, okay, let me go try that. So I would go with him. And I ended up for the next six years doing all these trips to Asia and visiting all these companies. And, you know, the information that you get, you know, As Freeman said, the world's flat. That's why I say it's not de-globalization.

It's just the evolution of globalization. It continues to move places. And so my appreciation for that was colored by the fact that I listened to Isaac and said, okay, let me humor him. Maybe I learned something. And of course, I learned a lot. So therefore, in the process of, you know, talking to people, you do learn a lot because they ask different questions.

They go different ways. They do different things. So therefore, there's a value to that clearly. And it's also a value in terms of, you know, giving someone who's, hardworking and, you know, was looking to figure out how to advance their situations in life, to be able to help them in that process is, you know, because, you know, opportunities are somewhat limited. So the extent that you can give opportunities to people who are anxious to do things to improve those that does something and, you know, clearly there's a value to. It may all go back

a little bit to, so when I was in sixth grade, seventh grade, then went to Catholic school. So the nuns used to raise money for the people in someplace in Central America. And so therefore, there was a competition that they would fit. So therefore, there were 46 kids in our class, right, half girls, half boys. And they said, okay, who's going to give more money to girls and the boys? And so Marie and Napolitano used to always give money, but I used to give money. So there was a competition they set up between us. And at the end of the day, my family came from a modest neighborhood.

We actually had reasonable money. So I described my situation, you know, growing up with the first. family and there's nine of us in the house and there's only one bathroom and live that. And so someone said to me, oh, so that's why you're successful because you're trivet because that was a difficult environment. I said, I love my childhood. It was wonderful. We had bought the most. The idea that I could share that with people. It made me feel really good. Sorry. No, that's, that's lovely. And I saw actually that I think you got a lifetime achievement award from Pace, the college where you went. And they referenced that seventh grade

competition and said that it kind of, they said participating in that contest combined the joy of winning with the joy of giving to those who had greater needs than us. They were quoting you and talking about kids in Central America needing food. Well, I really didn't need that extra pack of baseball cards. It seemed also that one thing that was very powerful for you about giving to pace was the fact that, as you put it, a lot of the people came from these immigrant backgrounds. And so it was more obvious that you were really benefiting people who, I mean, I guess, I guess in some ways not dissimilar to your grandparents story, right, of your grandparents coming from Italy and having to make a life here.

Right. So, and of course, so my college is Bucknell. And so I do give money to Bucknell because Bucknell did give me a loan and some money when I was there. So I owe them. And of course, everybody owes money to schools they go to because the reality of it is, When you get charged for tuition, it's less than what it costs to educate you. So there really is a gap that you've been the beneficiary.

But Bucknell also is a place that has a bigger endowment and educates generally people from a higher socioeconomic background as opposed to Pace is a different input group. And so the people who go to Bucknell probably will do whatever they're going to do in life anyway, you don't change the direction of that too much. The fact of the matter is people who go to Pace and then get a college education, potentially you have impact. And of course, PACE is a place that has harder numbers in terms of, you know, what's the graduation rate and where it is as good as other universities. Of course, you start with a population that's, you know, kind of a bit more disadvantaged.

And so therefore, the likelihood that you're going to come up with the same graduation rate of what Harvard's going to come up with. Of course, you're not going to do that because that group inherently has all these advantages they come in with. That's not the situation with Pace. And so that's why I'm much more active giving money to Pace because it really changes people's lives and it has impact. as opposed to, you know, yeah, now our endowment's bigger than Cole Gates and that's one or whatever else. So, yeah. Another great rabbit hole that I fell down over the last couple of days while I was researching

you was I was studying this amazing not-for-profit that your wife, Suzanne, runs and that you've been very involved in helping to fund, which is called Med Shadow. And it's really kind of important and impressive. And I wondered if you could give us a sense of what, it is and, and, you know, also what motivated her to do it because it's kind of an amazing story of how she turned a very difficult situation into something where she's really had a profound impact. Well, that's what it is.

So she's had personal experiences that, you know, put her in the position to therefore, you know, think about this issue in many different ways. And so therefore, to have the ability to have impact on it and potentially change things is, you know, critical and positive. And that's what we hear for. two good things in the process. That's great. And that's what it is. It's, you know, pharmaceuticals are, I think it's number four, number five in terms of largest causes of death in Americans. And that's not misuse of drug, but those are prescription pharmaceuticals, right?

That's not heroin that you got in the corner that she got an opres and goes and die. So, you know, it is a problem. And therefore, you know, thinking about, because that's what it is, right? We live in a world in which, you know, we're looking for the easy way out. And so that's what, you know, post the financial crisis, the government decided the easy way out was I make interest rate zero and therefore I'll help everybody. Instead, it's effectively the same as my wife's situation is, well, you kept giving them the medicine, get them off the medicine. They need to get up. They need to exercise. They need to diet and exercise are really the solution to many things. But yet, there's times you need medicine. So therefore, you need to do that. But you need to be cognizant

of what's my side effect of those things. And especially as you get older, there's multiple medicines that you're taking and therefore the impact of those and how they interrelate is kind of complicated. So these are, you know, but of course her situation is different. Our mother took a drug that therefore, you know, caused her infatility. So therefore, it's a critical part of her life. And then when our nephew came to live with us when he was 12, he didn't come because you see the ideal child is a rumbugious 12 year old.

Yeah. And we're in buggious 12 year olds in a Catholic school don't necessarily jive. And suddenly like, well, Ridland is the thing for him. So my wife went to go see the doctor and talked about Ridland and said, well, what of the side effects? And they said, oh, there's no side effects. If they were, we would know. And she didn't feel very comfortable with that as an answer.

He's a pre-precent child. We're going to give him a drug. He's going to be honest for an indefinite amount of time that has to have some kind of impact. So he didn't go on the drug. He was fortunate to be able to give him a little money to the school and they said, okay, he doesn't need to go on the drug. So she had that experience, too, with Dan and when he came to live with us.

And so, that's another experience that she said. Then from Mediato, she's done other things too. So she's involved with the FDA. She's actually on advisory committees. And therefore, regularly called down as the drug safety component on hearings with new drug applications in terms of what are the side effects, what in the medicine, should we approve this, how does this work? And so therefore, you know, she has that kind of input and then an additional value that I think

that A, she derives from that process, right? Because all these things we do, we get benefit from it. This is just a give things away. We see things, we hear things, and we have appreciation to things, and we learn stuff. So therefore, there's a lot of learning from that process, and, you know, learning those things are really critical, important, and potentially make us better contributing and making the world not so bad. I listened to her on a podcast yesterday talking about lifestyle choices and the like to deal with diabetes or prediabetes. and she's a very remarkable woman. I mean, I don't need to tell you, but I just wanted to sort of honor her.

I mean, she took this very, very difficult situation where she'd been given, her mother had been given this medicine DES that was kind of, I guess it was like a synthetic estrogen drug that was supposed to help people avoid miscarriages, but ended up having tremendous side effects for millions and millions of Americans. And she's turned it into this amazing thing where, you know, So obviously there's this not-for-profit med shadow which focuses on this idea that medicines have this shadow that follows you around. And so it's just, it's not nihilistic in any way or hokey. It's like saying, no, no, you need to understand the side effects so that you can make mature, sensible decisions.

And so I think it's a really important subject as we look at things like Ozempic and stuff like that, which I will keep thinking, God, should I be one day just giving up on controlling my diet and take a Zempec? And so she's great at highlighting that. And then as you say, she became the lone consumer representative on this FDA advisory committee on drug safety and risk management. And so that's an extraordinarily important role. And so this kind of made me think, you mentioned right at the start of the conversation, you were talking about how your father dealt with loss of eyesight.

and you've seen your wife Suzanne deal incredibly with the challenges she had with infatility and with your nephew and the like. And I'm wondering what perspective that's given you on how to deal with adversity, on how how to deal kind of wisely in the course of a long life with the things that don't go our way. So it's amazing. I always kind of, I realize that I'm not as introspective a person as I really should be.

So, for example, my dad, we never really appreciated the fact that his eyesight was so impaired. Now, my mother was a critical element in making that less transparent to all of us. So we were in many ways almost sheltered while we lived with him that he had these issues. So, you know, we really kind of didn't see it. And then we didn't, in the near, there's my shortcoming. They didn't delve into it and say, dad, you know, what are these things? And how do they really affect your life and everything? And so you always regret that I have today that I didn't have those conversations.

So to a certain extent, the way, and there hasn't been great adversity in our lives, I'd say we've been amazingly fortunate in so many ways. And so therefore, occasionally there's a little bit of wrinkle here and there. So you deal with that. So those are opportunities. And so as I joked when my nephew came to live at us when he was 12, I said, Sue, this is perfect. They said, you know, he's already had some issues here. So like it's a win-win for us either, you know, he's got some issues with and he has, and that's difficult.

And we can say, well, it wasn't us. And if he turns out okay, they'd be credit. That's great. When you look back on your own life and you think about how successful you've been since you got that C in your accounting major, how obvious is it that there were certain qualities that you had that helped you succeed? I remember Mario Cabelli talking about you and using his phrase about PhDs that he always looked for people who were poor, hungry, and I can't know what the D was. Driven.

Driven, exactly. But he changed it in your case from poor to passionate. And you've talked about passion as being the thing that you look for when you're hiring. When you look back, what do you think it is that enabled you to outperform that's kind of clonable for the rest of us? So the successes we've had have been the ability to, you know, the behavioral advantage of being able to tolerate a loss. You know, so that's one of the famous things in value investing, investing psychological is always the concept that losing hurts twice as much as winning or, you know, whatever the two times, three times, I have a differential. And the fact that the matter is the losing money doesn't bother me and hasn't bothered me somehow. And so the opportunity of, being right, which is making money, but it's not necessarily making money. It's really, I think,

more like being right. And so therefore looking at things and kind of getting a differentiated view and supporting that and coming to conclusions that are different than others is a, it's a great puzzle. So it's a personal pursuit that happens to bring along with it a bunch of money if you need to do it right too. So that's the outcome of it, but I don't do it for the money. I do it for like the enjoyment of it and the fun of it. And if I'd lose money in the meantime, of course, I have other people's money that I'm losing too. And then, you know, that is difficult. But, you know, I've been fortunate they stay with me.

So therefore, you know, at the end of the day, it's a market to market. But there's not a loss in it. So it's worked out well. And so I think the ability to tolerate disappointments with the idea like, well, wait a second, what's the idea? Is the concept in the investment thesis still there? and still correct. And if I'm right now, the fact that I was wrong, it's even better. So those psychological things I think have been critical in terms of being able to stay with investments and things that over time have worked out extremely well because we bought them

for a fraction of what those things were. So there's a, as I see it, there's a kind of emotional and psychological fortitude that's been really key to you. But it's also combined with the fact that you got very lucky, very early on and getting these really robust principles from that kind of Graham School of Investing. And you had this really essential thing, which is that you actually had the technical tools from your accounting background that you knew how to value stuff. So when you were losing money on something, you could actually see what it was worth. So you had something to kind of hold on to, which reminds me of Joel Greenblatt saying to me at one point, you know, like most

people just should be indexing or outsourcing to someone else because they just don't actually have the tools to analyze something to know what a business is even worth. But again, good fortune that I happened to fall into that job because I did get to see that I thought I was going to get. The opportunity at the time, it was those things who were kind of like, that was really random and good fortune.

That's all that was. I could have been someplace else. I could have worked hard at Bucknell and got a B or an A and got a job for a big A at accounting firm and be on a very different path today than where I was. Another critical piece of the success has been the fact that when my wife and I married, you know, she had a reasonably good job, but I didn't make money in the business first 10

years at all. And so therefore, we didn't, but we didn't spend money. So therefore, we had a very modest life that we lived in terms of how much we spent. And so therefore, I could, I could work for a year, 10 years and not really make much money yet. Most people don't have that capability, and capacity. And so therefore, there are so many things that have happened in my life that have been good fortune. Do you feel in some way like you've been taken care of or do you feel like it was, I had this discussion with Bill Miller over dinner a few weeks ago and I said, do you feel when you look back and like you wound up, you know, a leg mason with a particularly great mentor and stuff? Do you feel like it was luck or you feel like you were being taken care of in some way by a greater

force? And he sort of thought about it. He said something about, well, you know, according to probability, that has to be a luckiest person and an unluckiest person. And his wife was sort of like, no, I tend to agree with you, William, that maybe there was something more going on. And I wondered how you,

like just your personal sort of temperamental or philosophical or spiritual views, whether you feel in some way like it was all just random or whether you were kind of somehow blessed by this whole process. I've been blessed by knowing people that I've known. Yeah, that's been a huge gift. I look back, I mean,

it was amazing when I looked back on your career. And I thought even, you know, your professor was here, Mr. Posterino, like, like, if you removed one piece of the puzzle, Anthony Pasterino, the professor back at pace and like, if you removed one piece, the path could have been totally different. Well, that's the way life is. Right. All these things, one change would have been a different course in life. And, you know, had, you know, had married a different person. And, you know, one of the things is that we couldn't have children. So the fact that we didn't have children, you know, that's expensive.

So to be able to not make money for 10 years time and to have children, well, that's a very different economic equation. So therefore, my ability to have kind of persisted would have been very difficult, if not impossible. So does each one of those things is a random thing that all comes together that kind of makes the outcome where you end up. And there are other outcomes that probably would have been a good outcome too, but there would have been different. outcomes for sure. Yeah, it's kind of humbling. It fills you with a sense of wonder at just the complexity of it. And yeah, anyway, that's a lovely note on which to end. And I just really enjoyed chatting with you. And I was amazed as I look back on your career at just how remarkable your results have been over a very long period. And so I'm happy to have people pay attention to you

because I feel like, I don't feel people have quite realized how extraordinary it is what you've achieved and you've done it in a quiet, low-key way without any bombast or raggedosha. So it's been a pleasure to get to chat with you. William, it's been great to have a conversation and just chat. It was been a very relaxed environment. Thank you so much. I enjoyed it. And I hope people weren't too bored by the conversation. I know. It's fascinating. And next time we'll do it over a drink in New York City. I hope. I hope to see you again. Sounds great. Thank you. Thanks so much. Stay well. My pleasure. Thank you. Thanks. Thanks so much for listening to this conversation with Barbara Botty.

If you'd like to learn more from Bob, you can find an array of useful resources on his company's website. I'll include a link in the show notes. I'd also really encourage you to check out his wife Suzanne's health website, which is called Med Shadow. It's a really helpful resource if you'd like to get impartial information about the risks and benefits of various medications. Again, I'll include a link in the show notes. I'll be back very soon with some more terrific guests, including a rare in-depth interview with a hugely successful investor for ultra-rich families. This is someone who requires a minimum investment of a hundred million dollars to open an account.

In the meantime, please feel free to follow me on X at William Green 72 or connect with me on LinkedIn. And as always, do let me know how you're liking the podcast. I'm always really happy to hear from you. Finally, I want it just to pause and express my heartfelt gratitude, as always, to the production team in the Philippines that actually makes it possible for me to host this podcast, including Sorrell, Camille, Christine, Noel, Anna, and of course the fabulous Jodidia, who always ensures that the sound quality of the podcast is good, despite my technological challenges.

As always, I've been juggling too many projects, so I have a habit of falling behind and missing my deadlines for the podcast. So I'm deeply grateful for the patience and generosity of spirit that the team in the Philippines always displays toward me. So thank you all. In any case, until next time, take good care and stay well. Thank you for listening to TIP. Make sure to follow richer, wiser, happier on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to the Inver. Investorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional.

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