GuruFocus Value Insights Podcast: Jay Hill and Robert Wyckoff on the Importance of Price, Overoptimistic Markets and International Opportunities

The Tweedy Browne managers say the firm is finding value in small and mid-cap stocks currently

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Jan 25, 2024
  • The managers also see value in non-U.S. equities.
  • They think the market projections for inflation and interest rates are too optimistic.
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Sydnee Gatewood: Hello, everyone! Thank you for joining us on the GuruFocus Value Insights podcast! You can subscribe through Spotify or your device's podcast app, so you never miss an episode.

We are pleased to have Robert Wyckoff and Jay Hill, two members of Tweedy Browne (Trades, Portfolio)'s investment and management committees, join us today!

Established in 1920, the firm derived its investment approach from the work of the late Benjamin Graham. Tweedy Browne (Trades, Portfolio) seeks long-term growth of capital by investing in companies that have above-average dividend yields, an established history of paying dividends and reasonable valuations.

Bob has been with the firm since 1991 and is a managing director. Prior to joining, he held positions with Bessemer Trust, C.J. Lawrence, J&W Seligman and Stillrock Management. He received a B.A. from Washington & Lee University and a juris doctor from the University of Florida School of Law.

Having been with Tweedy Browne (Trades, Portfolio) since 2003, Jay is also a managing director. He is a holder of the CFA Institute Certificate in ESG Investing. Prior to joining Tweedy Browne (Trades, Portfolio), Jay held positions with Bank of America Securities, Credit Lyonnais Securities and Providence Capital. He received a B.B.A. from Texas Tech University.

Thank you for joining us today, Bob and Jay!

Robert Wyckoff: Thanks, Sydnee.

Jay Hill: Thanks for having us, Sydnee. We appreciate it.

SG: All right, just to dive on in. Tell us a bit more about your investment approach. What factors does the committee pay the most attention to?

RW: Maybe I'll start, Sydnee. At Tweedy, you mentioned we were founded in 1920. So we're in our 103rd year of service to value investors and we've had the incredible good fortune over the years to have been associated with, I think, what we would describe as the originators of this approach, at least here in the United States. We were greatly influenced by someone that is well known to many of your listeners, a fellow named Benjamin Graham, who's often referred to as the father of value investing. He was a writer, wrote books like “Security Analysis” and “The Intelligent Investor.” He taught a course at Columbia for over 30 years on security analysis and he practiced his craft at a firm called Graham Newman. And Tweedy Browne (Trades, Portfolio) started life as a market maker or broker in small, inactively traded, closely held public companies and that attracted the interest of Ben Graham in the 1920s, ‘30s and ‘40s and a brokerage relationship grew up with Tweedy Browne (Trades, Portfolio).

Ben Graham, as many of your listeners will know, had a big idea that still forms the basis of everything we do at Tweedy that there are, in essence, two prices for every share of stock: the price you see on the exchange at any given point and the other price, the price that would accrue to the investor in the event there was an arm's length, negotiated transaction or sale of the entire company between a knowledgeable buyer and a knowledgeable seller. And that price Graham referred to as intrinsic value. And to Graham, the essence of investing was to try to exploit discrepancies between those two values. And that still forms the basis of everything we do at Tweedy Browne (Trades, Portfolio).

JH: Yeah, that's the essence, Sydnee, and I would just tell you our investment process, the goal is to buy companies at 70% or less of a conservative estimate of intrinsic value. With intrinsic value being defined as what would the business be worth if the CFO of the company that we're looking at picked up the phone and put the company up for auction and tried to sell 100% of the business.

So we appraise value by observing M&A multiples paid for similar businesses, looking at multiples like enterprise value-to-Ebita or enterprise value-to-Ebitda or PE.

Sydnee, the best analogy of our investment process that I've ever heard, and it's the analogy that I use when I explain what I do to my parents who don't work in the industry, is that our investment process is very similar to the process that you would undertake if you were looking to buy a house or if you were looking to sell a house. One of the most important things you would want to know is what have similar homes sold for recently, right? You would wanna study comparable transactions. And as an analyst at Tweedy Browne (Trades, Portfolio), I probably spend a quarter of my time just tracking M&A multiples that are paid in various industries in order to build a frame of reference for the purchase price multiples that knowledgeable buyers pay in different industries. And then we screen for stocks in those same industries that are trading at large discounts to those observed M&A multiples.

I also think it's important to note that we have a two-part test at Tweedy Browne (Trades, Portfolio). The first part is, is the stock cheap relative to comparable M&A deals in the industry. That's what I just referred to and that's really looking at relative cheapness.

We also have a second criteria and the second criteria is, is the stock cheap just on a stand-alone, independent basis. And that's looking at absolute cheapness. And the reason that we have that second criteria is that we recognize, look, sometimes buyers overpay sometimes when we study comparable M&A transactions, the observed purchase price multiples seem too high to us and they don't make sense. And so we're unwilling to extrapolate really high purchase price multiples that we think are unsustainable.

I think there's two other points about our investment process that I would like to highlight. First, we insist on balance sheet strength. We're generally really risk-averse or chicken when it comes to debt leverage. And so when we're screening for new ideas, we're typically looking for stocks that have a net debt-to-Ebitda of below 2.50 times. And I think if you study our portfolio, many of the companies that we own actually have net cash balance sheets, so no debt, and the vast majority of the companies that we own are investment-grade rated. So we pay a lot of attention to balance sheet strength.

And then second, we are big believers in the efficacy of insider buying. Look, we just think it makes common sense and it's a common sense, positive signal when the insiders of the company reach into their own wallet and purchase shares in the open market. And we've done our own empirical studies, we've also researched academic empirical studies on the efficacy of insider buying. And it's become very clear to us over time that combining insider buying with quantitative cheapness is a recipe for outperformance. And so not every new name that we purchase a Tweedy has insider buying, but we're putting more and more emphasis on that particular aspect.

RW: I would just add one thing to Jay's description of our investment approach. Ben Graham believed in great diversification, often owned more than 100 securities in his portfolios. And we're a diversified investment manager, we diversified by issue, by industry, by market cap and by country. In investing, a Tweedy portfolio ends up being a mosaic of high-quality businesses, more average growers and sometimes deeply cyclical businesses, all purchased cheaply at significant discounts from intrinsic value.

SG: Thanks so much for that explanation of y'all's approach. I definitely think it's working since you've got such a long history of success. But how has the current environment of high inflation and elevated interest rates affected your investment approach?

JH: Yeah. Well, Sydnee, let me start. And I guess the first thing that I would say is that we're all trained sort of in the first finance class you ever take that all income-producing assets, right, their value is inversely related to interest rates. And so the higher interest rates are, you know, the lower the net present value of the business. And as interest rates have gone up, we are now starting to see an impact on lower purchase price multiples. So we do study the data that comes out of LCD, I think it stands for leverage commentary data, and in the third quarter of 2023, the average all-in interest cost of debt to fund an LPO has increased from 6% to 11%. And as the cost of debt increases, that's ultimately it, it has to result in lower purchase price multiples and we're starting to see that as well. And so the data that LCD is showing that the average large LBO, if you look at the enterprise value-to-Ebitda multiples, they've decreased from around 12 times, let's say, prior to the 2022 interest rate increases. And that's moved down to a multiple of 10 now. So higher interest rates are clearly having an impact, resulting in lower multiples being paid in M&A deals. And so that's clearly something that we pay attention to.

Secondly, or maybe a more positive note, I can tell you that we've uncovered a couple of interesting ideas that were triggered in part by temporary margin squeezes that were caused by elevated cost inflation, particularly during 2022. So some companies, actually many companies, have contractual agreements with their customers that allow them to pass on inflation and input costs, right? So higher input costs are allowed to be passed along in the form of higher selling prices. But typically the selling price increases lag the input cost inflation. So the input cost inflation happens first, the sales price increases happens on a delayed basis and that results in a temporary margin squeeze that can result in missing quarterly earnings. That earnings miss can result in an overreaction in a stock price, a significant stock price decline. And we've had several names, particularly during 2022, where we got the opportunity, the stock sold off substantially for what we thought was a temporary problem due to that lag between the ability of companies to actually increase prices as a result of cost inflation. And two examples of that would be a company called Kemira (OHEL:KEMIRA, Financial) that makes, it's based in Finland, they sell water chemicals. There's another company we're gonna talk about in a minute called Winpak (TSX:WPK, Financial). And the genesis of that idea was also that same pattern.

RW: Well, Sydnee, from a bigger picture perspective and I want to emphasize, we're not macroeconomists at Tweedy. We're stock-by-stock value investors, but certainly, and no one really wants an environment, obviously, of inflation and higher interest rates. But that kind of environment may actually benefit, on a relative basis, value investors like ourselves.

If you think back, if I think back over my investment career, the anomaly of my investment career has been zero to negative interest rates in so many places around the world over the last decade. When I arrived in New York with suitcases in my hand, the prime rate was tipping over 20%. Volcker had just become head of the Federal Reserve. And for the last 40-plus years now, we've been in a bull market for bonds as interest rates have come down from those peaks and, to a certain degree, zero rates, in our view, have led to an untethering by investors from fundamental valuation. And zero interest rates were an environment that, in our view, tended to favor passive investing over active investing, tended to favor growth, longer duration, risk asset investing over value investing and also tended to favor U.S. equities where the bulk of these high-growth, big technology stocks reside.

And certainly the fiscal stimulus and the monetary largesse that was poured into the economy over the last many years eventually resulted in inflation and, of course, was accompanied by a significant rise in interest rates, which I might add even at these levels are not high looking back over the last 40 years, but they certainly feel high today. The whole situation has become flipped and it wouldn't surprise us if the future now is more about active investing more about value, more about perhaps even non-U.S. equities, which really are older economies and are populated more by value-oriented equities than the United States.

We'll just have to have to see, of course, but we think the situation is flipped and the next 10 years may be nothing like the last 10 years. So we're quite optimistic despite the fact we're in an inflationary environment with higher interest rates.

SG: Thank you. That's great. Yeah, I think value investing may indeed make more of a comeback compared to the growth performance we have seen.

RW: Price matters again.

SG: Yes. What are the biggest benefits of having a committee structure for making investment decisions? And are there any disadvantages?

RW: Yeah, maybe I'll start on this one. We've always had a committee structure at Tweedy. It's worked very well for us over the years. Everybody that finds their way to Tweedy is a committed, passionate value investor that accepts the framework in which we work, but each individual also importantly brings diverse viewpoints, different perspectives. And we've always believed at the firm that decisions made by diverse groups are often better than decisions made by homogenous groups or decisions made by single individuals.

When you think about it, you're hopeful that breakthroughs occur in your reasoning, it often occurs when people view things differently. So different languages, different backgrounds, different cultures, different socioeconomic backgrounds all lead, in our view, to better decision-making over the long run, particularly when we come to that decision making with a common framework.

JH: Yeah. And Sydnee, if there is a negative, to me it would be that the decision making with the group, I think, is invariably slower than if a decision is made by one single individual. And so, you know, I think that's just the nature of the beast.

SG: All right. Well thank you for that. I do agree that teamwork and different perspectives can, you know, lend greatly to the process of making a decision. But yes, that is a good point that it slows it down a bit. You touched on this a little bit earlier, but how do you balance growth and value in your portfolio given the prolonged performance of growth strategies?

JH: I would just first say there's a common misperception that value investing is just about identifying quantitatively cheap stocks. We don't believe that. It's not just about quantitative cheapness alone.

RW: So to apply a metaphor to that, it's not about buying a lump of coal at a discount.

JH: Right. So I think quantitative cheapness is a necessary but not sufficient reason to buy a stock. Look, our preference is to purchase a business that is both quantitatively cheap and has the ability to grow value on a per-share basis at an above-average rate, hopefully over a long period of time. I mean to me, the holy grail of value investing, right, is to value a business. Let's say you think the private market value of the business is 100, let's say you pay $70 for that perceived $100 of value. The holy grail is for the undervaluation from 70 to 100 to be realized over time, but also for that $100 business value to grow at an above-average rate. We call that the double dip.

And so we're looking for growth. And, you know, obviously, we study M&A multiples and one of the big drivers of M&A valuations is organic growth prospects, you know, combined with returns on invested capital and stability of earnings over time. But we're clearly looking for businesses that can grow. We want to own businesses that we think over the long term will have the wind at their back.

But Sydnee, the reality is when stocks have the quantitative criteria, the statistical cheapness that gets us really excited, those types of businesses often have problems and really well-known problems and, oftentimes, the short-term outlook is negative and very unclear. Really the goal of the value investor is to really understand, OK, why is the short-term outlook negative? And is that a cyclical phenomenon that's likely to improve with time or is that a more secular phenomenon where it's gonna be a long-term risk? And if we can come to the conclusion that it's more of a cyclical issue, then we're much more likely to buy the stock. But by no means are we not looking for growth. We want to own businesses that can grow.

RW: Yeah, Sydnee, Warren Buffett (Trades, Portfolio) said many, many years ago when thinking about companies that value and growth are joined at the hip. It's simply a question of price. And we certainly agree with that and we love businesses with competitive moats that produce high returns on invested capital.

The problem is you don't often get the chance to buy such businesses at prices that seem attractive to us, but you do get those opportunities on rare occasions, particularly when you have big market breaks like the tech bubble bursting in 2000 or the financial crisis of 2008. And when we get those opportunities, we take advantage of them. And so you will find some of those better businesses that produce high returns on invested capital in our portfolio alongside more average growers and deeply cyclical businesses.

SG: All right. Thank you. Can you talk about a stock that has all the characteristics you look for?

JH: Yes, Sydnee. Great question, I'm glad you asked it. So we currently own a business by the name of Winpak, which in U.S. dollars has about a $2 billion market cap. The company is listed in Canada, but 80% of their sales are actually derived from the United States, so it's more of a U.S. business. And this is a company that produces plastic packaging primarily for the food and beverage industry and they have a particular expertise in providing packaging for meats and cheeses. So as a product example, Sydnee, I assume you like bacon.

SG: Yes.

RW: Who doesn't like bacon?

JH: So Sydnee, when you go to the grocery store and you buy a package of bacon in the United States, there's a 60% chance that that package was produced by Winpak. And if you are ever in Canada and you buy a package of bacon in Canada, there's 100% chance that that packaging was produced by Winpak.

But this is a business that I think has a very favorable fact pattern. At purchase, we paid approximately 6 to 7 times Ebitda when we bought the stock at around 40 Canadian dollars per share. And so we thought it was very cheap on an absolute basis, something that we talked about earlier. It's also cheap on a relative basis compared to comparable M&A transactions. So we studied eight different food packaging M&A transactions where the average target received a purchase price of an enterprise value-to-Ebitda of 11 times. So the average comparable deal happened at 11 and we were buying the stock between 6 and 7 times Ebitda. We believe we paid roughly 70% of a conservative estimate of intrinsic value. So again, our average purchase price for the stock was around CA$40 per share. If you value the business at 10 times Ebitda, which is actually a discount to the average of the eight observed comparable transactions, the business is worth approximately CA$58 Canadian per share. So, big discount between the price we paid and what we think intrinsic value is.

This is also a business that has, over the last 10 years, had above-average organic revenue growth of 6%. That's a really good number over a 10-year average. Their margins, 10-year average Ebitda margin is 21%. If you study this company relative to its peers, other publicly traded packaging companies, its margins are amongst the highest. And this is a business that also has very high returns on invested capital. The10-year average after tax returns on invested capital are 19%.

We talked about strong balance sheet. Winpak has a fortress balance sheet. It has no debt and it has cash that today exceeds over 25% of the market cap. So, extremely strong balance sheet.

And then this was a business that also had insider buying. It's not just Tweedy Browne (Trades, Portfolio) that thinks the stock is cheap. There are 11 different insiders that work at the company that have reached into their own wallet and they've bought $6 million worth of stock using their own money and they've paid an average price of around CA$39 per share. So right about the same price where Tweedy has acquired its shares. So to me, this is a stock that sort of checks all the boxes, has a very favorable fact pattern.

Now, look, we diversify, as Bob mentioned earlier, and so I can't guarantee you that Winpak is going to work. But I would tell you if you had, you know, 50 to 100 stocks like Winpak, the group result is going to be favorable.

SG: All right, thank you. That sounds like a really interesting company. I'll have to check it out. We noticed in your recent commentary that you have added to your positions in small- and mid-cap stocks. Is this where you're finding value mostly right now?

JH: Yeah. I can tell you that post Covid, many of the new stocks that we've purchased have been in the small- and mid-cap variety. I have some data on this. So if you look at our largest fund, it's called the International Value Fund, ticker TBGVX, our weightings in stocks with a market cap of $10 billion or less has increased from, it was 15% in December of 2019 and in December of 2023 it's 41%. So that's a pretty material move in exposure, a mix shift toward more small- and mid-cap stocks. And this is where we found value.

We think this is the area where expectations have been lower. And there's many recent examples, I'll just name a few, but Grafton (LSE:GFTU, Financial), Alberts, Alton, Computacenter (LSE:CCC, Financial), Howdens Joinery (LSE:HWDN, Financial), Johnson Service Group (LSE:JSG, Financial). There's many others, but yeah, we're finding the small- and mid-cap space in particular to be much more attractive than the large-cap space today.

RW: And Sydnee, we're finding more and more of these stocks outside the United States. European stocks, in particular, have rarely been as cheap as they are today relative to their U.S. counterparts. So we're finding significant value outside the United States, particularly in European industrial companies, in small and medium-sized Japanese industrial companies.

You know, it's been tough investing internationally. International stocks have significantly underperformed U.S. stocks, gosh, for a decade plus, maybe going back as much as 13 years. But if you look at rolling 10-year returns for the S&P 500, the EFA index going back into the ‘70s, it has not been exactly a “you pick ‘em,” but approximately 52 or I think approximately 54% of the time the S&P 500 has outperformed in rolling 10-year measurement periods and about 46% of the time non-U.S. equities have outperformed and we've just been through a period of 10-plus years of outperformance by U.S. equities that's been greater than practically any of those other rolling 10-year periods. So non-U.S. equities are due. In our view, the stocks appear cheap.

In Japan, there seems to be real change afoot, but it's hard to know for sure. The Tokyo Stock Exchange is pushing companies that have valuations in the market below book value to take action to improve their profitability, improve their share prices. Japanese companies seem to be getting the message.

The market has also, I think, been encouraged by the fact that Warren Buffett (Trades, Portfolio) several years ago took a position in a handful of Japanese trading companies. He's recently increased those positions. He traveled to Japan back in April, which was certainly, in our view, a vote of confidence for the Japanese market. So that's certainly been an area of interest as well.

SG: All right, great. Thanks for that. Definitely some great areas for our listeners to check out. Your portfolio appears to be fairly diversified, and you've mentioned that, across a number of sectors and areas. But are there any areas you tend to stay away from? And why?

JH: Yeah, there's just a couple. I think, you know, highly regulated industries where the government basically restricts the ability of a company to price in the way that the company would want to. Like utilities is an area where we've been less active. I think since I've been at Tweedy in 2003, I think we've only owned one utility.

I mentioned to you earlier when we screen for new ideas, generally speaking, you know, the highest in terms of leverage that we'll go is net debt-to-Ebitda of 2.50. We do make a few exceptions to that if a business has really predictable revenue and cash flow-generating ability. But we tend to avoid businesses that have high leverage.

And so something like REITs, real estate investment trusts, is an area where I don't think we've owned any REITs over my tenure here at Tweedy Browne (Trades, Portfolio). And then I would tell you that retail, we have made a few retail investments. One or two good ones, probably many more bad ones. Retail is a really tough industry, we have found, to be successful in. Typically the retail stocks that screen cheap have real problems and are turnarounds and it's just enormously difficult for these turnarounds to be successful. And so that's another area where we haven't been very active over time.

RW: Yeah, with respect to investing outside the United States, Sydnee. Chris Brown used to say that we probably ought to stay away from markets or countries we're afraid to visit. And so some of the more pioneer emerging markets are probably not places we're gonna be investing in. But that's about all I have to add to what Jay said.

SG: All right. Well, that's great. Thank you so much. As we kick off 2024, what is the biggest risk investors face with regard to the economy?

RW: Gosh, there's always a lot of risk out there. Certainly the geopolitical risks seem material today. You know, we've got the war in Ukraine. We've got a Middle Eastern conflict brewing that could expand, hopefully won't. We're worried about potential Chinese aggression in Taiwan. There's been saber rattling by Kim in North Korea. So the geopolitical environment is very, very uncertain and could pose economic risks in the year ahead. We'll just have to see.

I think I would mention, I think Jay's gonna expand on it, but there could be too much optimism and complacency around the direction of inflation and interest rates. We don't know of course, but the market could be pricing in, you know, a perfect Goldilocks economic environment. And if inflation proves to be stubbornly persistent, rates remain higher for longer. That could result in some volatility in the market.

You know, I would mention refinancing risks faced by corporations in a higher interest rate environment. We've had a mountain of debt, both private and public, build up over the last decade-plus of easy money. That is a risk. And then when you have an environment like we've had where financial assets have benefited as they have over the last decade-plus, almost an everything rally and risk assets, sometimes you end up with distributions of wealth and income that become a little more distorted. And so, we might face continued fragility, I think, in our political institutions because of what's happened over the last decade. We'll just have to see.

So those are just some of the risks that I think we face in the coming year.

JH: If I was to add anything, Sydnee, it's again just I think we entered the year with really high expectations. There's been a large melt-up in stocks globally in November and December, largely based on this consensus view that inflation has been tamed and that the central banks around the world have engineered a soft landing. And I just think people are too optimistic. I remember reading a few years back, Howard Marks (Trades, Portfolio) talked about this pendulum between greed and fear, and that you should always know where you currently sit in that pendulum. Is it more toward the greed side or more toward the fear side? And I think it's typically, or I think it's definitely pointed more toward greed. And so I think people are probably too optimistic.

I listened to your podcast with Bob Robotti a couple of months ago and he talked about this, you know, about inflation. People seem to believe that inflation is gonna get back to 2 or 3%. And yet you've got all of these other forces like China no longer being deflationary, reshoring of supply chains away from low-cost countries and closer to home in what may be higher-cost countries. That's gonna be more expensive. That's inflationary. The transition from fossil fuels to renewables, that's more expensive. That's gonna be inflationary. There's a green premium that has to be paid.

I feel like every time I pick up the newspaper, there's another example of an industry that's dealing with labor strikes and unions that are negotiating large salary increases. And so I just think for a lot of reasons, it's gonna be really difficult to return to sort of the Fed's goal of 2% inflation. My best guess is that inflation will ultimately end up higher than that. And that could lead to some disappointment, particularly if there are not as many rate cuts as the market is currently expecting.

SG: All right, thanks so much for that insight. And thanks for listening to my past interviews as well. That makes me feel so good. Shifting focus a little bit, what would you say is the most important lesson you've learned over the course of your career?

JH: Yeah. So, I'll start and I think this is a pretty simple one but it's one that I try to… I have two high school kids, a junior and a sophomore. I try to tell this to them all the time. It's not mine. I'm stealing it from Warren Buffett (Trades, Portfolio), but he had this phrase, “Be greedy when others are fearful and fearful when others are greedy.” And I just think that's so important. Look, the best time to buy stocks is during wide market sell-offs that are often triggered by macro events. And people are scared, there's fear, people are selling, nobody even wants to talk about equities. Those are the very best times to put money to work. And so I think just having the emotional ability to be contrarian and to be able to invest more as prices are falling, particularly when you think you have insight and you know more about the stock and know more about the business and more about the valuation than the person selling it to you on the other side. Right? You need to act. So I think that's terribly important, but it's tough to do.

And then I heard Seth Klarman (Trades, Portfolio) mention this once that leverage doesn't make any investment more attractive, it just magnifies outcomes. And so I think avoiding the use of leverage either when investing in trying to find companies that have just a moderate level of leverage makes sense. I also think just personally in life it makes sense to operate with less leverage. I mean, maybe not no debt, but it's easier to sleep at night if you don't have a lot of debt.

RW: To me, Sydnee, thinking about this, I think it's important for… something that always made sense to me was to approach markets and investing with a great sense of humility. It's impossible to see around corners, particularly in the short run. I think Socrates once said years and years ago, “If I am wise, it is only because I know what I do not know.” And I think it's important for investors like ourselves to have what Charlie Munger has often referred to as a too-hard pile. When investing in our investment process when studying companies, if things are murky and too difficult, you don't have to swing the bat. You know, that can go in the too-hard pile.

And then one other lesson is patience. You know, if you are willing to look further out on the horizon for your returns and investing, you often have less competition for the idea because most investors are focused on trying to make returns over the next six months, six to 18 months. If you're willing to look out further than that, you don't have to face a huge crowd often that can take away a pricing opportunity. So the best pricing opportunities I think sometimes evolve around the greatest uncertainty, which often means looking further out for your success. If you're willing to do that, I think you can be a successful value investor.

JH: And just to add to what Bob just said, I also think it's true that you need to be willing to be to look wrong for a while because almost invariably you will look wrong for a while. And just having the right temperament in the contrarian mindset. And then also, you know, if the facts change, your opinion can change.

SG: Definitely good points that I think are relevant for pretty much everyone. That's an important lesson to learn no matter what profession you're in. But kind of piggybacking off my last question, what is your best advice for individual investors in the current market environment?

JH: I think what I would advise individuals is just consider the possibility that what has worked the best over the last decade, which is growth investing, large-cap investing and in the U.S.A., the S&P 500, already has very high expectations built into those valuations. Those are the darling stocks. That's what everybody wants to own. The low-expectation stocks are the value stocks. I think the small- and mid-cap stocks and international stocks and low-expectation stocks are often vulnerable to some good news happening.

And I just think that what has worked over the last 10-plus years has been just own the S&P 500, own the Magnificent Seven, own the very best businesses without necessarily paying a whole lot of attention to the price.I think one of the key tenets of value investing is that there's a distinction between a great business and a great investment, and that distinction is the price that's paid for that. I think over the last 10 years, what has really worked is being valuation indifferent and just buying the very best businesses.

I know that it's impossible for any type of style to outperform for forever because if it did always outperform, that's what everyone would do. And I think it's become consensus opinion to just own the S&P 500 or just own the Nasdaq 100 or just own the Magnificent Seven. I think it's more probable that low-expectation stocks and stocks that aren't in those groups are going to outperform over the next decade.

RW: Yeah, I agree completely with Jay. Don't give up on value investing. This is not the time to throw in the towel if you are a value investor in an environment where inflation is likely to prove stubbornly persistent and interest rates are likely to normalize or settle at levels that are higher than the zero-bound from the last decade. Price matters again, active investment matters again, value matters again and I suspect international investing will matter again. So stay the course if you're a value investor.

SG: Thank you so much. Yes, I agree it's important to stick to, you know, what you believe is right. And obviously also be willing to change as, you know, things change in the world. Shifting focus a bit, though, as you know, Charlie Munger recently passed away. What do you think was his most significant contribution to the investment community over his long career?

JH: Bob touched on this earlier. Munger had this concept, he called it the too-hard pile, and really it was a recognition that not every stock is analyzable or the range of potential outcomes is too wide. And so he would give the advice that, “Look, you don't have to swing at every pitch and that many times the best decision is to do nothing.”

We have a too-hard pile. I mean, there are definitely instances where a stock is cheap, but there are considerable risks and we can't get comfortable that the risks are temporary and likely to fade with time. And so, we have a too-hard pile as well; it's probably a pretty big one. We try to stick to areas where we believe we have a circle of competence, where we believe we have an edge and understanding the business and understanding the private market values in that business. And so, to me, that's the advice that has left an indelible mark in my brain.

RW: Yeah, I would just add, Sydnee, all investors are in debt to Charlie Munger. We learned so much from him. We continue to learn so much from Warren Buffett (Trades, Portfolio).

We were also beneficiaries at Tweedy. In the late 1960s, Ed Anderson, who had been an analyst at Wheeler Munger, Charlie Munger's Private Investment Partnership. Ed came to Tweedy to take Joe Riley's place and became a partner of Tweedy Browne (Trades, Portfolio). So we got a terrific partner from Charlie years and years and years ago. And we're incredibly grateful for that.

I would also mention something that stuck with me over the years. It was Charlie's insistence that we not lose sight of the fact that often some of the most important considerations in decision-making when evaluating investments are the qualitative aspects. I remember him saying one time that if it can be measured, it will be emphasized and that it's often the softer, hard-to-measure stuff that is often the most important in decision-making. And certainly we've not lost sight of that at Tweedy.

SG: That's wonderful. Thank you so much for those insights. Just to kind of wrap up our time together, though, whether they are investing related or not, could you please recommend three books and three movies for our listeners to check out? And could you also share why you like them?

RW: Well, maybe I'll start. I can come up with a lot of books; it's hard to come up with movies.

A book that I recently read over the last year and a half is a book by Ed Chancellor called “The Price of Time,” which is really a history of interest rates going back hundreds if not thousands of years. And it's, you know, real financial investment buffs will love this book. He goes into great detail about the history of interest rates, which is very timely given the debates we're having about the direction of interest rates today. And Chancellor is very keen on pointing out the dangers of excessively low interest rates. So that's a book I would recommend.

Another book that's more of a fun read that I read in the last couple of years was a book called “The Last Days of Night,” written by Graham Moore. And it's really a book about the race between Thomas Edison and George Westinghouse to seize control of the electricity market in the United States and the role that a young lawyer, I think Paul Cravath played in that story. It is a terrific read and a pretty good look at the history around the development of electric power.

And then another book that Jay's read, I've read is a book called “The Outsiders” by William Thorndike. This is a book about some of the great investors, great business people of our time, who had different approaches to running their businesses, were highly skilled and had the courage to make big capital allocation bets when it made the most sense to do so. And these were people who had built extraordinary value in their businesses over long measurement periods. So that's certainly a book that I found to be terrific.

And then one video, it's a documentary that came out recently, a Frontline documentary called “The Age of Easy Money.” Particularly for investors, it's a terrific observation of what's happened since the financial crisis in the global economy and well worth watching.

JH: And then, Sydnee, in terms of books, I'm just gonna add one there. There was a book I read, I know it's probably been 15 years ago, called “The Little Book That Builds Wealth.” The author of that is Pat Dorsey and that book is really about understanding moats, what Warren Buffett (Trades, Portfolio) referred to as as real competitive advantages. And he gives a framework for categorizing moats and he talked about intangible assets, which are things like brands and patents, and businesses that have switching costs, where the cost of switching can outweigh the benefits of switching. He talks about the network effect moat. And then he would also talk about how all three of those moats are really about special advantages that allow companies to price their product higher without necessarily negatively impacting demand, giving companies real pricing power. And then his fourth moat category was the cost advantage, just companies that due to economies of scale or proprietary processes that are low-cost providers. So they can make a higher margin with the same amount of revenue as a competitor because they're just really good at managing costs. And so, to me, that's a terrific book really about qualitative competitive advantages.

And then in terms of movies, there's a recent movie, it was originally a book, but it's out in the movie theaters now, so it's timely, called “The Boys in the Boat.” Maybe you've heard of it, Sydnee. But it's really a story about these kids and really, I guess, underprivileged kids that attended the University of Washington. They were the JV squad, so they weren't even the varsity squad. But they ended up becoming even better than the varsity squad through teamwork. It's really about teamwork and underdogs and everybody acting in unison to make the team better and this group of kids from underprivileged backgrounds in the western part of the country went on to the 1940 Olympics and they won the gold medal. So it's sort of an inspirational book, inspirational movie. I highly recommend it.

SG: All right. Well, thank you for all those recommendations. They sound really interesting and I'll be sure to check them out. And also just thank you again for joining us, Bob and Jay! It was a pleasure to have you both.

RW: Sydnee, thanks so much for the opportunity.

JH: Thank you, Sydnee.

RW: Great to be with you.


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