We Study Billionaires - The Investor’s Podcast Network - TIP453: The Case for Long-Term Value Investing w/ Jim Cullen

Starting point is 00:00:00 You're listening to TIP. On today's episode, we have Jim Cullen. Jim is the CEO and co-portfolio manager of Schaefer Cullen Capital Management, which currently manages over $20 billion. Jim's investing experience spans 50 years, and he's taken that experience and put it into a new book called The Case for Long-Term Value Investing. In this episode, you will learn how Jim is thinking through today's market and what previous era it most reminds him of, a breakdown of his discipline.

Starting point is 00:00:30 value investing approach, why you should care or even reconsider high dividends stocks, why value factor companies are expected to outperform in the near term, what Jim has learned over his 50-year career and his favorite memory to date, and a whole lot more. It's not every day you get a chance to speak with a legend like Jim who has as much experience and wisdom as he does. I thoroughly enjoyed it, and I hope you do as well. So here's my conversation with Jim Cullen. You are listening to The Investors Podcast, where we study the financial. financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast. I'm your host,

Starting point is 00:01:21 Trey Lockerbie, and today we are honored to have on the show, Mr. Jim Cullen. Welcome to the show, Jim. Thank you, Roger. Thank you. I'm very excited to have you on the show. You've written this great new book. It's called The Case for Long-Term Value Investing. And if anyone could write this book, it would be you. You've been at this quite a while and you know a thing or two, I would say, about value investing. First thing I loved about the book is that it kicks off with this concise history of the stock market dating back to the 1920s. And we study folks like Ray Dalio who's been on the show and he says that today's market most resembles the 1930s, but with inflation now climbing higher, some wonder if it's more like the 1970s. If it's the latter, it's important to note how

Starting point is 00:02:07 volatile the market was and how it resulted in a flat return from 64 to 82. I'm just curious, what time frame does today's market most remind you of? Well, let me answer that sort of directly. The way we started, you know, our book was background. And, you know, I was on the aircraft carrier 1961 to 64. The market was going up every year. It looked like it was going to be fun, easy. And I got out of 65. Went to Merrill Lynch. Merrill Lynch was opening offices all over the country, as was everyone. And the markets were booming. And we had mobs of people every day in our office over there. And it got so bad and so crowded every day that we had to put a plexiglass, separate the brokers and the crowds. And people were cheering for stocks and it was mayhem. And so it was great. This is lucky. So the speculation was high.

Starting point is 00:03:00 Two big things in the speculation that they had something called the pink sheets, which were this on a clipboard, elaborate, maybe two-inch thick ream of papers, colored pink, which had all the over-the-counter socks. And people were fighting, brokers were fighting all day that picked stocks out of that and repeat prices to their clients, what have you. And also, a character, and I mentioned in the book called Charlie Plong, we called him Two a Day Charlie. And what he would do is come out with two new issues every single day. And all the investors were strictly clamoring for him. So it was similar to the, I guess some of the things we see today. And actually what happened, Lincoln to the 30s, which Ray Dalio mentioned, the 30s,

Starting point is 00:03:39 what they, what Merrill Lynch did, they had three older experienced vets brokers in our office to give some stability. And these older guys were, you know, buying, you know, names for the 30s. And they had nicknames for the stocks, Betsy and old, you know, steel and all the nicknames. And they all were dividend stocks. And we used to say, well, these guys, they're all like, they all wear resistors and smoke and cigars. And we must have something to do with dividends. What are dividends anyway? And we were millennials, most of us there.

Starting point is 00:04:12 And we were interested in hot moving, fast growing stocks. Airlines were big, Pan American, TWA, world travel is going to expand dramatically. We had color television stocks were hot. And so anyway, we had all these new stocks. Industry was formed called conglomerates, where our, They were highly leveraged companies or billed on debt, and they were just buying up all the kinds of companies around. And they were the most active stocks every day. So it was really a real casino.

Starting point is 00:04:41 And I tell in the book, I says, it's like a British betting parlor. I mean, it was mobbed every day. Then all of a sudden, 1968, the market rolled over. And the market in the next seven years had two major stock market recessions. And by the end of the market, 1975, by the end of 1975, all those brokerage firms were shut down. most of them were gone and most of the brokers are gone. And many of the firms that were also involved were also gone. So that was sort of the initiation of that period of the era of the 70s, which was really

Starting point is 00:05:10 much worse than the tech bubble. And of course, the 30s was even worse than that in a way. So I would say, you know, you wouldn't want a similar kind of experience. But there were two shocking things that came out of that. One, later on, not then, but later on, I went back and checked. What happened between 1965 and 1982 when the market was flat and didn't go through a thousand for that 17-year period of time? And what happened is actually the cheapest stocks on a P.E. basis, the bottom 20% of stocks

Starting point is 00:05:42 on a P.E. basis actually went up 1,000% over that same time period, which was pretty much the same as they went after the bull market between 1982 and 2000. And I found that was shocking after having been through it. And because the market during that period was gone between 700 and 1,000 back and forth, and it just couldn't break through 1,000. But the problem was the market had been overpriced. And that's always the Achilles heel of all these speculative bubbles similar. And well, the other thing that happened, and we mentioned this in the book, every single in the 1930s, 1970s, 2000, and every bubble period, it takes five to 10 years before those stocks basically

Starting point is 00:06:24 correct enough. And even though in every single case, the fundamentals for all those stocks were good all the way through the next 10 year period. But all of them were 10 years later, we're down. I remember in 1982, we bought IBM and Avon products under 10 times earnings with a big yield. And they had been, you know, 10 years before they were at, you know, 60 times earnings and 50 times earnings. And the same way with RCA, and then in the same way we had here in the tech bubble, on Microsoft and so many other big tech stocks, we wound up buying as value stocks back in 10 years after the market top 2000, 10 or 12 years later. I mean, we bought Microsoft, you know, it was like 10 times earnings with a 3 and a half, 4% dividend yield. So that's been the common

Starting point is 00:07:09 thread in these past markets. And what we have now is the sort of period of, let's say you're going to have a hard time avoiding stagnation, I would think. Interest rates are going up. A lot of factors are going to, I think, put a lid on the market growth. So you may go through a period of stackflation. So our answer probably to that would be the answer, which was back in the 70s. You know, if you bought the cheapest stocks on a P.E. basis, that's going to bail you at the long run anyway, no matter what happens. So I think it's irrelevant, which one were most similar to. They all follow each other, are similar and all a bit different. And it's hard to believe that some stocks like Amazon, it's going to take 10 years for it to base out. But I remember

Starting point is 00:07:50 about five years, four or five years ago, a Barry Diller. He was probably as savvy as anybody was talking about Netflix. And he said, you know, they have such a lead on everybody else. He said, that stock is never going to have a problem. Well, you know, three or four years later, that's not the case. As I said, by the end of 75, my experience was that everything was said, people have wiped out, margin accounts are gone. And we hope that we don't get that experience here.

Starting point is 00:08:16 But we do have the, I think, the stagnation risk, which means that as far as an investor goes, You want to be careful, I think, because you don't know how these things play out. On that note, I'm curious with the 60s and 70s with the last time we had stagflation, the market volatility seemed to just be insane. So while everyone's sitting here trying to say, what's going to happen next, you know, interest are going up, the stock market is just going to go down, almost like it's binary. But it seemed to just bounce up and down in this range pretty violently.

Starting point is 00:08:44 Do you remember that? Oh, yeah. Oh, yeah. I mean, every time you thought the market was going down is going to go lower. And then you said, this time is going to go through a thousand. And it didn't do it for, you know, 15 years. So whether you trade like that here or not, it's hard to say, but that's the, the volatility is extreme. We did a chapter in our book on the bull markets, bear markets, pool markets, and recessions and how, and going back over the last

Starting point is 00:09:08 60 years, analyzing every recession and bare market and how that play, you say, because you say as a investor, you say, if I could time that right and I can avoid, and that's what you hear the commentary on TV every day is people trying to figure out, you know, we're going to, you know, going to have a recession or we've got to have a bare market. To our feeling it doesn't make any difference. But if you look at what happens with the bare markets is that first you get the bare market, then usually the recession comes later. You don't know the recession is there because it takes the government a couple months,

Starting point is 00:09:39 six months maybe to figure out where it is. Then you get what looks like is really bounce off the bottom. Studies done have shown that if you took over that 60 period, your period of time, if you took the bounce off the bottom and all those receipts, processionary periods and took that out of the market, you basically wipe out the advantage of any equities over that entire time period, which is extraordinary. So the key thing is, and he said, well, if I get out, I've got to get back in. So you're probably better off not to get out. And the bottoms look like it was, if you look at the long chart, it looks like

Starting point is 00:10:09 that would be easy to sort of figure out where the bottom is. But then if you expand that out, some of those bottoms took a year. I mean, we think of a bottom being made and all of a sudden the market turns around. These things could drag out six months to a year. So that's what you don't know where you're at. So if you're trying to take a shorter term trading positions on the markets, you know, it's a tough game. So that's why I guess our investment strategy to get around that is, you know, by cheap stocks, you know, especially if they're a tough market like this, cheap stocks with dividends and stay invested and don't try to time it. And that's the big, you know, that's what we get around to is a message we're talking about here.

Starting point is 00:10:45 So what you just said a minute ago stood out to me. You said basically to you, this volatility doesn't matter. And that's because you're holding for the long term. And in the book, you lay out this very rigid, disciplined approach, essentially using the framework based on Ben Graham, which is as follows. So look for companies in the bottom 20% of the index when ranked by price to earnings. Look for companies in the bottom 20% of the index when ranked by price to book. Look for companies in the top 20% of the index when ranked by dividend yield and then invest for the long term. So my first question is, can investing really be this simple? And second, how do you keep faith in your system knowing that things change and evolve over time? So, for example, price the book, becoming less relevant for non-cyclical

Starting point is 00:11:31 stocks, that kind of thing. Yeah, well, they're the three disciplines Graham mentioned. And we get the number every year for the S&P 500. The shocking thing to me is we don't reuse price to book much at all. I mean, we look at it on all the companies. And it's appropriate for very cyclical, you know, material companies, but for most companies, healthcare companies, what have you, is immaterial. But the performance of that on a historic basis, even recently, has been pretty good, which is surprising to me. I wouldn't think it would be the case. What we do in most of ours, we start off strictly with the value strategy number one, and then we usually want to take less risk. So we found by adding the dividend portion to that, and then to get growth plus less risk is

Starting point is 00:12:13 dividend growth. So those are the things that we're usually focusing on. And that gives you a lot of downside protection, and if you do well when the market goes down, over time, you're going to do well overall because the market's going up more than it's down. But if you do well on the downside, it's going to be a big bonanza for you. What we know is that over time, earnings double about every 10 years, and that's going back to 1920s consistently. Is that just across the board, small caps, large caps as a rule of thumb? That study was done on the S&P 500, basically. And what we did was, once we did the low P.E. stocks, we said, how about dividends? And what it turned down, out that dividend yield on the S&P 500 was much smoother than earnings on volatility over

Starting point is 00:12:54 the 70-year period of time. So he blew those charts up recession. And what it showed was in every single recession going back to 1960s, the dividends, the thing is gone, by the way. Going back to 1960s, you know, every single period, every single year during every recession, the dividends were increased by the SEP every single time. The only exception was TARP, you know, the most recent, and that was artificial. And the bounce back in dividends after that was one of the biggest bouncebacks ever. So what you have is, and what we found out in the dead decade, 2000, 2010, you had, you know, the peak of the tech stocks, you had 9-11, and then you had the financial crisis, all that

Starting point is 00:13:34 in a 10-year period, probably one of the worst 10-year periods we've had. And so if you look at that, actually the dividend strategy, value plus dividend strategy during that period was actually up almost doubled for a 10-year period. time and the market was down about seven or eight percent per year down that same time period. So if you go back and look at it, well, why did that happen? Well, if you started off in the beginning of the year 2000 and you had 3% dividend yield on the portfolio, but dividend increases as you went through the whole 10 year periods, kept inching up, inching up and inching up.

Starting point is 00:14:04 And so by seven or eight years later, you had about an eight, nine percent dividend yield on the portfolio at cost, which means the stops aren't going to stay there. And they went up, and that's why the market went up. So dividends are very underrated. And so that's going to become a bigger part of probably 80% of our business is in the high dividend strategy, high dividend plus value strategy. So if you look at the history of value versus growth, the reason why value wins over that is because when the market's going up and it's a hot market, value will trail

Starting point is 00:14:34 pretty consistently, but not by much. But when you get a tough market, value dramatically outperforms. And this year and the last year and a half, that's been a case for that. I'm doing a market letter right now, which is going, I like that. So, you know, the market's changed. And you have a situation where you've got all the earmarks for a stag inflationary kind of environment. So you want to be taking less risk. So now it's probably more important to have the dividends than normal.

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Starting point is 00:19:05 All right. Back to the show. There seems to be this sort of tortoise and hair thing between growth and value. So I saw a chart recently, for example, where the Kathy Woods, Arc funds, you know, they just had this incredible rise. And it's now come back down and they overlaid it with Berkshire Hathaway, who's, you know, just been chugging along is very, like, not very volatile at all. And now, you know, the performance of Berkshire is outperforming that of Arc.

Starting point is 00:19:32 And so I think it's just a great archetype for what you're talking about there. So given that a lot of younger investors, You yourself, you know, coming out of the Navy and looking at these high-flying stocks, it's so easy to get seduced and tempted by these high-flying stocks, and they eventually turn into these acronyms, say, Fang or, you know, Nifty-50 back then, while the dividend yielding stocks might be slower to grow, you know, with price appreciation, but may grow more reliably. So do you think the pendulum for dividends specifically is swinging back into favor for the next few years?

Starting point is 00:20:06 Oh, yeah, for sure. As far as the millennials, which I was, right, the real smart thing I should have done is do your trading on one side. Set aside some money for investing and make sure you know the distinction. And as far as you investigate it, you don't try to mark a time and you leave that alarm. We have a chapter in the book on a bunch of doctors. I was at Donaldson Lufkin and Genrat before I started the firm. And I had a bunch of doctors come in and that was working with. And they had these IRA plans.

Starting point is 00:20:34 They put $25,000 a year in the IRA plans, usually four doctors in a group. And they put them away. These guys were making a lot of money in those days, but they didn't touch those IRA plans. And except for the guys got married a couple different times. And they were making all kinds of crazy investments, so on have you. But the one doctor especially tried to preach to them to stick with that, not touch that money. And the ones who listened to them who didn't get divorced, well, now those accounts are like $40 million. And they're up like 7,000, 8,000 percent of them.

Starting point is 00:21:04 of the time period. And it was money that they just set aside and there's no way they would have done that any other way. And we have an accountant down in Florida. And he said, what happened these? Where are these guys come from? He said, I never saw an IRA plan worth, you know, 40 million bucks. And it's because they stuck with the plan that held the temptation that changed. And that's why I wrote the book. He said, you know, the average investor, number one, they get no education in schools or what have you on the stock market. And Jason Zweig actually in the New York Times, of Wall Street Journal, rather, who I know. And he wrote an article recently, and he said,

Starting point is 00:21:36 they are getting some education, but it's the wrong kind. They're having his contest where they say, who has the best performance for the month? And what they do, if you want to get the best performance for the month, you get the most leverage stock and, you know, and leverage it in the put, do it on margin if you can. And that's going to win in that and then that market. And that's sort of the way that a lot of pension funds are on their money also.

Starting point is 00:21:56 You get these one, three, five year presentations. And you look at it and you say, why is that? I tell a story, I think it's in the market. book, but I think the first meeting I went to was a big foundation and we're sitting there and the Merrill Lynch broker was presenting four different mutual funds. And one was just dramatically better than all the others. So one of the people on the board there was saying, why don't how olden that we choose that one? And they did. And it turns out that, you know, two years later

Starting point is 00:22:20 it was a disaster. And it had been the most speculative stocks and leveraged and therefore we got the best performance. And so the one five year, one three five year can really come back and haunt you. And by the name, that's another story. Well, speaking of five years, I mean, when you mentioned these younger people getting, again, tempted to compare their performance month over month, really they should be looking at a longer period, right, to smooth out volatility. So is that the five year? What do you typically go for? Because what Graham said, he says, be a long-term investor and use a strategy. Well, with the average guy says, well, what's that long-term good thing? And so we said that,

Starting point is 00:22:56 or we came to conclusion that using a five-year time rise gave you enough time to smooth the performance. And so we have in the book, we show all the five-year periods going back to 68. And you had maybe three periods where you had a small amount of change over the time period. But then what happened to a five-year period after that was huge. And so the five-year time rises, smooth all the performance. And we have it later on in the book on the recession and bear markets. How can you avoid those things? Well, in every single five-year period, going back to 1968, you take all the five-year periods.

Starting point is 00:23:27 You get double-digit, most of them, double-digit returns on the five-year, using a discipline. Every single five-year period, you have some bare market, some recession, and you can try to drive yourself crazy trying to figure out when to get in and add that. And it smooths it out. And if you take the 10-year, it even smooths it more. And the 10-year, you say, why would anybody? I look at the pension accounts and they have all these different alternatives they use in real estate, what have you. And I think, you know, using a dividend, discipline strategy would seem better than almost all those things. I mean, you get a double-digit return in every single 10-year period. And that's in the book. One of the quotes I loved in the book was from Peter Lynch, who said,

Starting point is 00:24:04 it's amazing to me how many people try to predict the stock market. If you spend 14 minutes on economics, you've wasted 12 minutes. I just thought that was really great. So how can we as investors avoid this? You know, you spell it out a little bit in the book about avoiding these recessions. Is it just by buying and holding over the long term and not, you know, basically turning our phones off and not looking at our screens anymore? Yeah, I watch Bloomberg and CNBC.

Starting point is 00:24:29 every morning for an hour or so. And I'm looking at it, I can go and y'all out the window here and say, oh, no, don't do this. But you're sort of nice to know what's going on. And you're still looking for the best ideas you can get out of the framework. So yeah, but as long as you're focused on not trying to trade that thing or take advantage, as long as you have some investment money on the side away from that, then, yeah, that's a different story. I want to talk a little bit about risk-adjusted performance. So how can retail investors focus more on risk and more specifically actual risk-adjusted returns. Yeah, well, they have risk.

Starting point is 00:25:05 I mean, you can use standard deviation or alpha, beta. You can use that as a guide or whatever. And I still say the best way to evaluate risk is to have a dividend discipline and be a long-term investor. And that takes care of it. And that's my solution to the best way to deal with risk. And if you look at these numbers on the book, you look at these numbers, you say, everybody should be doing this. And with the temptation, I also have the back in the book that says,

Starting point is 00:25:29 What happens when every year you sit down and say, I'm going to make an investment set, but the market's too high, or there's a recession coming on, or we're going to get cyclation, you know, let's wait a year. And I've been going back to 1920. Every year, there's a reason not to get your money in that year. And so you sort of got the market over the same time period as a phenomenal return. So you just got to go with it. Actually, John Templeton did a study over a 20-year period of time. If you bought the market every year, if you're making a contribution every year,

Starting point is 00:25:57 over a 20-year period of time. And you bought the worst possible day every year. And the best possible day. The difference is only 1% over the 20 years. Amazing. So the, you know, the compounding takes care of it. So are you a proponent then of, you know, dollar cost averaging, every paycheck, that kind of thing going to your 401K?

Starting point is 00:26:17 Save it whenever you can do it, you know. And that's one message to the book, you know. At the end I have the 14-year-old paper boy, paper girl, you know, compounded interest and now that's the secret to a bad. really and how if they start when they're 10 years old, when I've put a small amount aside, the compounding. I mean, that's really the key for people to get started. That probably should be the first chapter in the book. Well, you've been running this fund for multiple funds, mutual funds for a long time. And I'm kind of curious, you know, if that's the case and we're

Starting point is 00:26:46 just kind of dollar cost averaging, there are cheap means to do that, you know, with the Vanguard S&P 500, for example, which I saw on your website as a benchmark. I mean, most people look at that at least as some kind of benchmark. I'm curious what the mutual funds bring to the table and your opinion this day and age, you know, how actively manage are they and how do you go about getting alpha when you're primarily buying and holding for a long time? I mean, some index funds can be okay. The tricky thing about some of the index funds, of course, is that the index funds compete with the market. And so they're going to stretch their parameters to take a little bit more risk because we're trying to get performance. So especially the, we have a period in there where we talk about just the S&P 500 index fund.

Starting point is 00:27:29 It gets really overloaded with the top five stocks. And it becomes, once the top five stocks were the highest P modables, once they become like 25% of the company, that's usually when it's getting way overpriced. So therefore, after periods like that, then the index really dramatically underperforms. So you get wider swings in performance with the indexes. And people cheat on, even value, you know, the value indexes. If you look at the value, different S&P 1000 value index, what have you, you'll see they put names in there. You say, well, these aren't value names. But I think they're trying to make that index more attractive or more, they say more representative.

Starting point is 00:28:06 Is the idea of the low PE performing over time, just a reversion to the mean philosophy, if you will, just as a statistic approach? Is that because you got to hang your hat on something, you know, over time? And is it just that you look back at the data and back tests and say, you know, over period of time. This does revert back. It might take years, but eventually it does. Right. That's exactly it. Yeah. That's a summary for it. So you mentioned who you wrote the book for. I'm actually curious about that. It's written in this very approachable way. It's very bite size, I would say almost, some of the sections. Was it for younger people, maybe even in your life, you wanted to pass along, or you mentioned there's a lack

Starting point is 00:28:45 of education. You wanted to just get something in their hands that could help guide them over time. combination two things one i think the thing that really started me is that uh value been out of favor so out of favor like 10 years was unusual and uh so it was a long period and i remember going to a pension consultant who we used to do business with and i said i was when are you going to do a value search for in it for a pension plan is we haven't done a value search in 10 years oh my god so not only was value forgotten i mean not only was not being used but basically been forgotten and so i said we got that's why i changed the name of the book was going to be long-term value investing as we You better make it a case for a long-term value testing because we've got to start building

Starting point is 00:29:23 the block from bottom up. So it started there. And then what I know from the business for 50 years is that we're talking to clients all the time. And they just, in most of them, you're trying to educate them as you go along. But it's hard conversationally to get through to people. And so I figure if you write this thing in a book and then it's something that people can rely on a bit more.

Starting point is 00:29:44 When people read something, then it becomes their idea and not you're telling them something. and I think it has more of an impact. And so then the secondary was really to educate investors, educate young people. So it's a combination of the two things. So then you're using the filters, if you will, so to speak, with the low P.E., high dividend, low price to book. But once you've screened all of that, how do you pick the winners? You know, what are the next steps from there? Well, you know, we had chapter in the book on the research side and use all the parameters, you know, price to book and payout ratio.

Starting point is 00:30:18 and dividend yields and all the various ratios. Then you're looking for, number one, you want to have diversification. Because what you know is the strategy works. So you don't want to get locked into too many drug stocks, too many computer stocks. You want a diversified list of holdings. So we say traditionally, no more than we try not to do any more than 10 or 15% any one industry and be diversified. We know the strategy works.

Starting point is 00:30:40 So we want to stick with, so we participate in the strategy and we don't get overwhelmed with any one group. So we start there. And then we're constantly, we get a portfolio, which is dramatically cheaper in the market right now, say roughly 20 times earnings. Our portfolio is around 13, 14 times earnings. And we're always trying to get new names in the portfolio that are cheaper than what we already own. And it's an ongoing process. And in the book, we have where the ideas come from, they come in wacky places, all kinds of different places. I mean, I took one about a Canadian national. We owned international nickel.

Starting point is 00:31:10 And we were meeting with the analyst after he was visiting them, and he's updating us on international nickel. And he said, at the end of the meeting, we'll leave him. He says, oh, by the way, is you know, the rail companies in Canada are going to be spinning off. They can't make any money in those things, whatever. You're going to spend them off. We just made a lot of money in the U.S. because of revising and revitalizing the U.S. rails. So we heard that. We said, wow, I want to get involved with this. And so we saw it right at that point, and I went to a couple meetings where there were pre meetings when they were spending these things out. And we made about 3,000 percent on our money on Canadian National and Canadian Pacific. So that was, you know,

Starting point is 00:31:44 from them. You never know where the ideas are coming from. So we have research meetings. We have, well, we used to have one every day in my office. And now we have two weeks a week because of the thing, what have you. We haven't got back every day. And now we have twice week. But we're just constantly looking for where the ideas come from. And in the book, we have about eight or nine different places where, you know, things come from. Yeah, I love that part of the book, the by the way chapter. And it reminded me, you know, we were just at the Berkshire Hathaway Show. And Buffett talked about buying Allegheny. And to me, it spoke to this. sort of idea of luck where it's preparation meets opportunity, right? Someone mentions that to you,

Starting point is 00:32:18 but you had clarity on the opportunity. You were able to identify it and take advantage of it. Whereas with Allegheny, it basically happened in a similar way where the new CEO used to work was an old colleague of Buffett. And so basically called him up to catch up. And then that's when the idea came to him. After 40 years of like studying the stock, it was finally like, hey, maybe now's a good time. So yeah, these ideas can really come from anywhere. So now that when I'm looking at the funds, one thing you brought up a minute ago was diversification. And a lot of times with these funds, there's only 30 to 45 stock. So you have to be really rigid to make it fit into the portfolio. So what are some of the other qualifiers for, say you found this rail company versus another rail company? They've got

Starting point is 00:33:01 similar metrics. You know, does it come down to management or what are some of the other factors that? That's a big deal. One thing we sort of missed here, and I have a book I mentioned management and the importance of man of Jamie Diamond, for instance. And one thing about it. an Iger of Disney. The one thing I didn't mention, actually, when you think about it, equally important when a good manager leaves company. You know, I mean, you want a good manager. In the book, we mentioned three or four managers that were the reason why we bought the stock. And, but I actually want somebody leaves, usually more often than not, it's probably a good idea to reevaluate the company because there's an adjustment that goes on. So manager is always

Starting point is 00:33:35 a big part of it. And we have in there called a three point fix. So you get stocks, which are, three point fix is a Navy term. It's, you know, you go in the harbor. You get, a one point fix, you know, as if Harvard's fogged in, you're probably going to be okay. You're going to get it up, the your slip. And you get two points, you get another fix. And that gives you a better chance to get a third fix. You're going to get the hard matter how fog it is. So that's why, so when investing add characteristics, long stocks, cheap, makes sense, whatever, and then you think you have it, you never know whether you have the story or or not, but do you think you have a good story on something? Then if you can catch something,

Starting point is 00:34:07 which periodically will go out of favor and time that, and that's the third point in the fix, getting something that's been out of favor. We went back and looked at the stocks that were the stocks were made over a thousand percent and say over time. It's usually when for some reason you get a stock that makes a lot of sense and we think we have a story. But something happens and the stock gets sold off and becomes a really cheap on a valuation basis, on a price basis. So we're constantly looking for that also. And I think one of the examples of use was Merck when they had box. And I mean, Merck was always selling on 20 times earnings. It came down because of the competition in the industry and then all of a sudden it could stand like 10 times earnings because of iox.

Starting point is 00:34:46 Yeah, it was giving lawsuits, what have you. And if you bought it then, the next thing, it was, you know, up a thousand percent over the next five years. But guess and gain to a certain extent. That's the inexact science, the picking the stocks. Is that what gets you out of bed in the morning? I'm curious because, you know, with this systematic strategy, there is that art piece to the science, as you kind of mentioned.

Starting point is 00:35:09 So, you know, I'm just kind of curious. You've been doing this a long time and a lot of this is buy and hold. What keeps getting you out of bed to go do this every day? Well, that's why you watch the CNBC, what have you in the morning. I get value line. I think Buffett does this also. I get value line every week. And that gives you a lot of coverage of all the stocks.

Starting point is 00:35:27 And that gives you all the financial data on them and who has how much debt, what have you. So you don't give you companies with less debt, usually. But, you know, a combination of all things you put together and you're hoping something jumps out at you. And that makes a fun. This guy does a report, 13D research, and he does very thematic strategies. And we've got a couple good ideas out of him. And there's certain people you rely on that would have been very helpful. Very cool.

Starting point is 00:35:51 So I'm kind of curious, going back to the younger investors who I think this book will really speak to, who are so driven to growth. There's a lot of data in this book that you lay out. What should these younger investors know about growth-oriented stocks based on the data in the book? Well, just the history that you've got to be careful because all of a sudden if you get caught the history, these things. And all this, and every single cycle, the companies that peaked out had great earnings for the next usually five or ten years. The earnings continue fine. It was just the price has got too high.

Starting point is 00:36:24 So that's the danger. Amazon, for instance, here. I mean, Amazon, worst got me, you're starting getting competition in their industries. Companies get so big that they start competing with each other. And then all of a sudden, instead of buying little minnows, they wind up, you know, dealing with the church. So how much of an impact that has on the company, but eventually, you know, they get up. Usually the business continues to be halfway decent, just the growth rate slows because it's got more competition. And then all of a sudden, you wind up, you know, in every single case we wound up there,

Starting point is 00:36:51 you wind up getting these stocks down to other value levels and they can be bought for a value guy. Whether this happens here or not, I mean, you look at, it seems like early in the game, but alphabet looks like it's only 20 times earning, so it looks pretty inexpensive. So I know our guys are doing some work on what stocks are old. The young guys we have all of a sudden, they want us get more of these more interesting stocks early if they can find them. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business.

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Starting point is 00:40:34 This is a paid advertisement. All right. Back to the show. Do you ever find periods where you can have your cake and eat it to, meaning you find a high paying dividend stock that's undervalued? And because there's that cyclical rotation, you're getting that price appreciation along with the high dividend payment? Well, that's what you're looking for. And what you want is dividend growth. I mentioned dividend growth. So these are companies. I mean, we don't look for just dividends. We started the strength. strategy in 91, the only thing that they had the equity income was a category. And equity income was a high-healing stocks, most of them utility stocks, but dividend growth wasn't a factor.

Starting point is 00:41:08 And we started and we said, okay, you know what, you can have a broader diversified list, but look for dividend growth. And that's a key part of the strategy. So we're looking for companies that can grow that dividend. And our average growth has been about 10% a year over the last five years. And that's what we're looking for. Kind of curious to hear on that point, then, you're feeling towards share buybacks. You know, Berkshire, for example, has, I think they issued a dividend once and never again. You know, so what's your opinion on finding stocks that are doing lots of share buybacks if it's seemingly at a good price? It's seemingly at a good price.

Starting point is 00:41:40 I mean, most of these companies that I've seen, their shares back are buying it back at ridiculous P, multiples. And I think having a dividend discipline gives companies a little bit more of a discipline themselves. because it's not like, you know, just buying shares and you may do it or may not do it. Postponed or may not postpone it. Once you establish a dividend policy, they want to stick with it. Unlike global, the Europeans, you know, if the earnings are going to go down 30%, but the dividend by 30%. But in the U.S., as I mentioned earlier, the S&P 500, they've increased dividends every single year

Starting point is 00:42:11 through all the recessions. Back in 1975, when I mentioned that period with Wall Street, went bust them. You had a dividend increase every single period during that whole time period, and it's phenomenal when you look at it. say, meanwhile, you knew earnings were down 50%, stocks are down 50%, they're still increasing in dividends. So you want to make sure you have companies at a low payout ratio. You don't want to buy somebody who's paying at 90% of their earnings and dividend.

Starting point is 00:42:32 You want somebody has a lower payout ratio and where they can grow the company. And that's the question and it's a trade off. The more you can get in dividend growth, more companies, I think it used to be dividends weren't as important for companies. I think a lot of people started to realize the dividend yield is, uh, more important as far as stock price now, but you still have a huge focus on buybacks, which I don't get. Yeah, it's always kind of seemingly controversial, the buyback thing right now.

Starting point is 00:43:00 And if done correctly, it can be a great thing. But I like your take on dividends and that focus. So I'm kind of curious, you've been running this firm for a very long time now. And I'm curious if you, I'm going to get to a couple of points here in a minute. But one I guess is, has there been a time in your career where you felt like you have things were hitting on all cylinders? you were in the sweet spot of your strategy and it was playing out well. And what environment did that look like and what year was it?

Starting point is 00:43:25 When was that kind of time if you could reflect back? This was probably back in after the market peak, you know, in 2000 and rolled over. And we started a mutual fund at that point, 2001, 2002. And actually we did a sub-advisory with Pioneer, which was the Italian advisory firm. And we did a sub-advisory with them. And that was the right time. And we were like in the top one percentile of one year with five. year, three year, you know, was posted in the Wall Street Journal once a month, and we were there

Starting point is 00:43:54 consistently in the top of that. So that's, everything was going right. And we raised about $7 billion in about three years, four years. And so everything was clicking in there. And then all of a sudden you get to period where, you know, values out of favor and you have the struggle. Yeah, exactly. And, you know, certain folks seem to acknowledge the macro. I mean, I imagine when you're watching CNBC in the morning, it's hard to avoid. You know, they're always bringing up macro stuff. It's that importance of awareness, but not necessarily letting it influence your strategy. And that seems like so easy to just say, but so hard to actually play out in practice. So do you have any things in place for you so that you're not touching the dials when, you know, maybe you shouldn't be?

Starting point is 00:44:35 Yeah, I go back and look at the chapter we have in there on recessions of bear markets. And you look at that and you say, the temptation here to try to get this right is almost overwhelming. But then you go back and look and say, okay, let's superimpose. the rolling five-year periods over that with those recessions all flopped in. And so instead of seeing all this jagged down up, what have you, you know, you get this smoothed out of recovery picture with all these recessions in each one of those five-year periods. And that's your religion, I guess. That keeps you in the game. But it's hard. I mean, we have the doctors who did the

Starting point is 00:45:06 kept with the program, but it's pretty hard to keep people in over a long period of time. 2000. And on 99, the year before 2000, we had people calling up with the growth was up, value was down. It's one of those pivotal years. Usually a pivotal year like that, usually at the beginning of a term, which was then. We were getting fired. I'd say to people, only sell half. Only saw half. We're getting fired 10 times, 20 times a day. Yeah, that can't be easy. I mean, those phone calls, you get used to it over time or, you know, how do you manage that? Yeah. You have people who have been with you a long time, probably who trusts in it and you build that trust over time. Right. A lot of belief. If we can get people through a five-year time

Starting point is 00:45:43 eyes. And a lot of them become believers. So that's why we have some business up. So with your approach at the dividend approach, is something that people miss very often is comparing price appreciation to the benchmark, say the S&P 500 rather than the total return based on the price appreciation, but also all the dividend payments that have come in? Yeah. I mean, we always compare it the total return versus our return. And as a guide, we're trying to beat that both all the time. So we'll look at it without, you know, that the dividends. We just look at it, yeah, total return on both. So one thing I found interesting in the book was the part on covered calls. I mean,

Starting point is 00:46:21 they're always kind of around and trendy, but in the last couple of years, they really exploded. I mean, in popularity, I think covered calls are a great means to kind of generate some dividend-like income on an asset you're owning over time if you don't want to sell it. But talk to us about when it's appropriate or when we might not want to incorporate something like a covered call. Yeah, we always had the high dividend strategy. The stage, this was back in, we We started in 2010. We had a couple of accounts that institutional accounts were periodically, we were right on the most expensive stock.

Starting point is 00:46:49 So we wanted to sell. While we're looking for a new name, it's something that's getting overpriced, let's sell the option, write the option, and hopefully we'll lose it. And then we'll be in while we're getting paid while we lose it. And so we started that with a couple of clients. And then all of a sudden the market, the bond market comes down, interest rates come down, broke through 2%. So you're getting down to 1%.

Starting point is 00:47:06 And I'm saying, why wouldn't every single bond guy want to take a sliver of his portfolio? and invest in a strategy like this. Because what you get is you get the high dividend strategy, which had about a 5%, 4.5% dividend yield. You do the options writing on top of that. We had another 4% there. So the average yield, the average return for the average yield was year was about 7%,

Starting point is 00:47:27 7% to 8%. And the risk level was even better than our high dividend strategy by about 10%. So we started for that reason. I mean, this would be ideal for, especially for, because you get commissions on the trading for tax-exempt accounts. And so we started it.

Starting point is 00:47:42 And I said, this again, the idea for pension accounts. And I'm a lousy salesman, so we didn't do that great on the pension accounts. But we have about a billion dollars in a strategy now, finally. But there's been more of an interest. And what we see this year, it's outperformer high dividend strategy by two or three percent in the down market.

Starting point is 00:47:57 So I think when we were down 4%, that was flat and market was down, you know, 10%. So it's an interesting area and developed out of the watch of the market, what can you do? I mean, you mentioned small cap. And we've always had a little bit of small cap stocks may be in a portfolio, the value portfolio. We also had periodically some international names if they were cheaper. And what you see on small caps is anytime you have a really down year in the market, the next year for small caps is phenomenal.

Starting point is 00:48:24 And therefore, because of that, if you look at that small cap over the last 60 years, small cap performance is pretty good, only because you have such a recovery after a bad year. But small cap is probably lining up today, probably pretty good. There's a big difference between small cap value and small cap growth, of course. And the semi-in international, our international portfolios actually have a higher dividend yield. He's just to be more careful of those. We have a little more diversification because you have more risk. But the dividend yield is like 5.5%.

Starting point is 00:48:51 It's a lot higher. P multiples less. And we make sure the debt's less also. So they're all outgrowth of the original strategy. So as we're kind of winding down here, I'm kind of curious. I like to say that I came to investing for the money but stayed for the philosophy. I find all these like kind of nice frameworks for living life and, you know, being patient and, you know, I'm kind of curious for you. Have you found anything while we're even writing this book, perhaps, that you can actually apply to your life and how to live a good life?

Starting point is 00:49:19 I find reading is a good hobby, reading tennis, but you can go to sit on the beach and sometimes with the markets are the way they are. I'd go to sit on the beach with a good book and hide out. That's a really good strategy. I'm going to take that one. Well, Jim, this has been just such a wonderful conversation. I'm so excited to have you on the show, and you've written this amazing book and your market letters are incredible. Everyone should check them out. Before I let you go, tell the people listening where they can find the book, where they can find more about you and your funds and those market letters, exactly.

Starting point is 00:49:50 I guess the Amazon is where the books are. You know, our publisher is in London, but basically we're located in New York City, Olympic Tower, 645 Fifth Avenue. We've been there for 40 years. same building. And so if anybody wants to contact us there, want any information on our market letters or what have you, that's probably the best place to get us. And we're about 100, 500 of us there. We've got a floor there on 51st and 5th. If New York ever really, really opens up again. Gradually, I'm here in the hotel up on the Upper East Side. Place is booming up here. And you go down the offices, people just aren't coming in yet. Even our place, the research guys are coming in.

Starting point is 00:50:28 And we're never more than half full. But everybody's enjoying the openness, because it's all all of a sudden you have all those restaurants outside, which you never had before in New York. So that part is not better. Well, Jim, this has been so great. And the book is called The Case for Long-Term Value Investing, a guide to the data and strategies that drive stock market success. Thank you so much for coming on the show and spending your valuable time with us. And just in general, teaching, using this book, using your letters and sharing the knowledge you've accrued over such a great and amazing career. So, again, we really appreciate the time and I hope to do it again soon.

Starting point is 00:51:02 Thank you very much. And if you get to New York, stop by to see us. All right, everybody, that's all we had for you this week. If you're loving the show, please don't forget to follow us on your favorite podcast app. And we would love it if you would also leave a review. It really helps the show's ratings and awareness. There are so many incredible resources you really need to check out on our website, the investors podcast.com, or you can simply Google TIP Finance. And lastly, you can always reach out to me with feedback or questions on Twitter. My handle is at Trey Lockerby. And with that, we'll see you again next time.

Starting point is 00:51:35 Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before,

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We Study Billionaires - The Investor’s Podcast Network - TIP453: The Case for Long-Term Value Investing w/ Jim Cullen

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