Outlook for Value Investing

Theo van der Meer:

Great.

Robert Robotti:

Of course.

Theo van der Meer:

Nice to be here. Yeah.

Elana Margulies-Snyderman:

So, to kick off the conversation, tell us a little about Robotti & Co. and how you both got to where you are today.

Robert Robotti:

Well, let me start off by saying, I'm afraid everyone's going to tune out because you said, "Oh, value investing." And today investors are like value investing, that's something that's gone. You don't do that anymore. It doesn't really work. And the fact of the matter is we are here to testify to the fact that it absolutely does work. Now, I've been doing this for 50 years, and so it was January of 1975 when I did my first internship with the accounting firm that audited Tweedy, Browne and it was a totally fortuitous event because Tweedy, Browne is one of the classic original value investing firms, close ties to Ben Graham. They were next door offices when Ben Graham retired, went to the south of France, read his classics instead of investing, three people walked into his office. Tom Knapp, Walter Schloss, and actually Ed Anderson came over from California working with Charlie Munger. So, it was a phenomenal place to be, to meet these people who were legends in the business, and I would work with them on a daily basis and learned about investing from people who were extremely talented.

Theo van der Meer:

Mine's not quite as impressive as that. So, I went to school originally to study physics and I minored in econ at first. And then I kind of liked the idea of math explaining the real world, which was both in economics, in physics, quickly realized that my physics classes, the kids were a lot smarter than I was. And then also I did an internship at a bond insurance company in 2010. And this was after obviously the global financial crisis. And this was a company that was in the midst of going bankrupt. And so, most of the staff had been let go and interns actually had some real responsibility. The thing that took the wool off my eyes was realizing they didn't know where the actual insurance claims were, and one of my jobs was to actually find these claims that they thought they would never have to use or never really need.

It made me realize that the world of finance is just a group of people with their own motivations and limitations. And then I was lucky enough to the next summer intern with Bob and the idea of focusing on fundamentals and looking at what a company can earn going forward and really stripping things down to their basics and realizing that just because someone sounds very smart doesn't mean they necessarily know everything. And focusing on the behavioral biases that are a part of all this, it was pretty quick that I was hooked on the type of investing that we do at Robotti & Company.

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Elana Margulies-Snyderman:

You know outlook for it, but I would love to hear your high-level outlook for the space.

Robert Robotti:

At the core, what we do is we look at businesses that understand the economics of those businesses and identify companies that we have a clear view and understanding that the economics are substantially better than the market understands, and therefore we're buying a business for far less than what it's worth. And what it's worth, this intrinsic value is a phrase which is nebulous, but of course, what it really means is the present value, the future of cash flows. And so to find the business that trades at a substantial discount, where we look is in what are things that are traditionally value asset-heavy businesses, which are something where many investors have deserted the space and therefore we think provided a great opportunity for people who aren't looking and the areas in the companies we're looking at. And therefore, the opportunity to spot companies that have tremendous opportunity and low valuation we think is very easy today. And what will happen is the economics of that business will determine the outcome.

Elana Margulies-Snyderman:

And more specifically, what are some of the greatest opportunities you currently see in your space and why?

Robert Robotti:

As you say, we're regularly looking for businesses that are beaten up and out of favor, and that's what it is. A business that's beaten up and out of favor potentially is not making money. If it's not making money, people don't want to own a stock that isn't making money because that means it potentially goes down. And the short-term effect in the world has gotten shorter and shorter and shorter and there's more and more information, gravitates to people to do the behavioral thing that Theo mentioned. And that is nobody likes to lose money, and everybody wants to make money. So, if it's going up, I want to own it. And if it's going down, I don't want to own it. And instead of looking at what the business is underneath it and what its opportunity is over the next three to five years, because that will determine the eventual results that you will have from that investing. So, the world has really moved in a direction that's facilitated what we do.

Elana Margulies-Snyderman:

On the other hand, what are some of the greatest challenges you face in your space and why?

Theo van der Meer:

So, I think historically, one of the biggest challenges for value investing in general can kind of come internally. And it's the difficulty of staying consistent in the process, especially when you're getting market indicators saying, "You're wrong, you don't know what you're doing, you're buying all these bad companies, what are you doing?" And to stay focused on the investment philosophy that you understand that you know can be difficult at times. One of the things that we try and do to abate that is use the North Star evaluation. And so, by focusing on what are the fundamentals of the business, how much is it economically worth? And that can justify a lot more than what the market indications can be. And we think that we're kind of in an interesting point where we're not the only ones who have felt that over the last 10, 15 years, and that's caused a lot of capital outflows from traditional value names and from old world economy names and into more tech and growth and AI.

And that flow of capital and move to indexation has left kind of a really great opportunity for stock pickers because if you have this big trawler that's going through and just indexing things, if you take the time and you have the experience to find those specific companies that are left by the wayside or being caught up into the wrong basket, you can find some really great opportunities. And so, what I think has been a challenge for us over the last few years of capital flows is starting to abate at this point and could potentially start even working towards in our favor as economics start to really play out. And one of the things we like to say is, good things happen to stocks that are cheap. And if you keep identifying those cheap stocks, eventually you'll be proved out. It's just a matter of how long it takes.

Elana Margulies-Snyderman:

To shift gears a bit, I would love to hear both your views on asset allocation and what investors might be missing.

Robert Robotti:

Yeah, that's the huge opportunity because as Theo said, trends move capital and that's what you've had. You've had multiple trends and two main trends where one of them is interest rates for 40 years, so not long after I got out of school, interest rates spiked to 15.5%, and then from there they've gone to zero. And what happens when interest rates go down, that means every cash flow’s worth more money and that trend gets embedded and the belief is that that's the new norm. And Jim Grant is known for saying, "In science and engineering, knowledge is cumulative. In finance, it's cyclical."

And when you've had cycles that long, which convince people and move capital, move things that have worked well in an environment that is potentially changing dramatically means there's a substantial amount of risk associated with owning things that have worked well because valuation matters. A key critical element in performance of any investment is what you pay for that business. And today, we think there are many businesses where people are paying prices that leave no margin of safety. If something's wrong on the growth of that or something's wrong with the interest rate in the cost of capital, the valuation of those businesses leaves real risk embedded in that investment.

Theo van der Meer:

And then also I would just say that asset allocation I think can kind of cause some confusion sometimes where what's technically a growth stock, what's technically a value stock, what's the market cap? A lot of those are somewhat transitory labels. A value stock in many ways is a growth stock because you're buying it at a certain valuation that you're expecting it to grow over time. You're buying an earnings power at a normalized point in the future. And so, by putting these designations on it and doing asset allocation based on that, you can often miss out on some really interesting opportunities. And it works the same with market cap. Most mid and large cap companies were not always mid and large cap companies. They started as smaller companies. And so again, by really being able to kind of be asset agnostic, as long as you're staying within the things that you understand and your areas of expertise, that's where I think you can find some really good opportunities.

Elana Margulies-Snyderman:

We've covered a lot of ground today and wanted to see if you have any final thoughts you would like to share with us.

Robert Robotti:

So, one of the asset classes that have done extremely well over the last 40 years when interest rates go from 15% to 0% is our private investments. And so, we do think that's become an extremely popular and successful class of assets. The leverage part of that has worked well for an awful long time. Of course, the basic nature of private investments is they are marked to a model and not marked to market. So yes, that means there's numerically less volatility, but businesses that are leveraged, they're different. And what I think today is really interesting is the democratization of private equity and private credit and private real estate, all those things.

The democratization is a euphemism for the guy who'd been investing in it forever. He's not looking to put more capital in it today because he's concerned about it. Let me bring it to the retail investor and let me make it available to him. I think the democratization of investments, if you're investing in one of those things and that's what they tell you about it, I'd think about running for the door. That's I think a real sign of there's some... It's long in the tooth that someone's now looking to figure who's the next guy that I can get into this investment? And that's a very popular asset class today with a lot of allocations going to it that have worked well to date.

Elana Margulies-Snyderman:

Well, Bob and Theo, I wanted to thank you so much for sharing your perspective with our listeners.

Theo van der Meer:

Thank you.

Robert Robotti:

Our pleasure.

Elana Margulies-Snyderman:

And thank you for listening to the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.  

Transcribed by Rev.com