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CONSUELO MACK: This week on WealthTrack- as investors dump stocks, two great value investors
are loading up. Davis Funds’ Chris Davis and Wintergreen Fund’s David Winters are
sifting through the rubble and finding many high quality gems. Great Investors Chris Davis
and David Winters are next on Consuelo Mack WealthTrack.
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SPONSOR: The company keep is also the company we keep.
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Hello, I'm Consuelo Mack. I want to tell you about a new opportunity to watch Consuelo
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Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Two of the major investment
trends we are monitoring regularly on WealthTrack have become more pronounced. They are related,
and they have the potential to hurt investors over the long term. Our goal on today’s
show is to put them into perspective and help you deal with them with the help of two seasoned
value investors: the Davis Funds’ Chris Davis and Wintergreen Fund’s David Winters.
One is market volatility; the other is how investors are reacting to it.
We all know the story of heightened market volatility. The big swings we’ve experienced
in the stock markets at various times this year- three to four percent moves in a single
trading sessions and double digit swings in matters of weeks and months have rivaled those
during the 1987 crash and the worst of the financial crisis in 2008 and 2009. All very
unsettling to investors. And investors are reacting accordingly. They are fleeing the
stock market in droves. As this chart from independent research firm Bianco Research
illustrates, net new outflows from domestic equity funds- essentially the difference between
investments in and redemptions from the funds- increased dramatically during the financial
crisis of 2008 and 2009, and after a brief pause have accelerated again since last year.
Some analysts believe with two months to go, U.S. stock mutual fund outflows are on track
to surpass the record set in 2008 and the near record outflows of last year.
Why could this stock exodus hurt investors? Our two Great Investor guests believe the
value to be found in high quality, global brand name company stocks has rarely been
better. Chris Davis is a third generation value investor at the Davis Funds, which earns
the highest marks for shareholder stewardship from Morningstar. Chris is co-manager of the
family’s flagship New York Venture Fund among others. New York Venture has an excellent
long-term track record. It’s the only mutual fund to outperform the market in every ten
year period since 1970. But like several other top value-oriented funds has been underperforming
its peers and the market of late.
Such is not the case with David Winters, founder of the five star rated Wintergreen Fund. Winters
is a long time global value investor who launched Wintergreen six years ago as a go anywhere,
invest in anything fund. He has done just that and has beaten the market and competition
by a wide margin during this difficult period, which is why we are delighted to have his
firm Wintergreen Advisers as a sponsor and David as a guest. I began the interview by
asking Davis and Winters why they feel this is the wrong time to flee stocks.
CHRIS DAVIS: I think one of the peculiar things about stocks is it’s about the only thing
on earth where the lower the price goes, the less people want it. So here we are after
a decade of falling prices and rising profits, and now people want to get out of stocks,
and worse, they want to get into what’s already gone up where prices are high, which
is things like bonds, and...
CONSUELO MACK: Treasuries.
CHRIS DAVIS: Treasuries. And so, you know, if you think about a pizzeria that earns $100,000
a year, if you could buy it for $2 million, your return would be 5%. If you could buy
the same business at $1 million, your return would be 10%. So lower prices increase future
returns, it’s as simple as that. So here we have lower prices, higher corporate profits,
and now people want to get out of stocks simply because the prices are down.
CONSUELO MACK: Just because prices are down doesn’t mean they’re going to go up, and
so what kind of returns, number one, do you think we’re going to get from stocks in
the future, or the kinds of stocks that you are buying in the Davis Funds New York Venture,
for instance? And when do you think the market is actually going to pay off, because it hasn’t
paid off, if you bought the S&P 500 certainly for the last ten years.
CHRIS DAVIS: Well, I don't know when in this sense. It’s always unpredictable what the
market will do in the six months, the next year, even the next two years. But if you
focus on the underlying businesses, and you think of your return being based on the earnings
the business generates. So right now you could buy the S&P 500, or a representative portfolio
of really high-grade durable companies, and you would get about an 8% earnings yield,
and about a 3% dividend yield. So when you think about returns, the best place to start
is the returns of the business. Over time, the stock prices can gyrate up and down, but
the returns that you should get as a sort of benchmark starting point should be based
on the earnings yield of the underlying businesses over time.
CONSUELO MACK: All right. So for the defense for stocks- so David Winters, why do you think
it’s a big mistake for individual investors to be fleeing stocks in droves at this particular
moment in time?
DAVID WINTERS: Well, first of all, I agree with everything that Chris has said, and I
think you’re right. But I think what’s also...
CHRIS DAVIS: That makes me feel much better.
DAVID WINTERS: But I think the key thing is that a lot of companies, their underlying
earnings are growing at a rapid clip, and to date, people don’t factor in a bright
future. People basically think the world is going to end, or it’s going to do nothing.
And the tone is so gloomy. So you know, the irony is that people become momentum investors-
when anything goes up, they chase it, and when it goes down, they don’t want to have
anything to do with it. So we’ve had ten years wandering in the wilderness in which
stocks are cheap, and also the world around us keeps getting better. And so I think that,
Consuelo, if we look forward, stock returns will be pretty good, especially compared to
other assets.
CONSUELO MACK: So what’s better about the world? I mean, you know, I’m looking at
kind of, Europe falling apart, I’m looking at gridlock and Washington, I’m looking
at even China, Brazil, India, their growth rates are slowing, they’ve got problems
there. What’s better?
DAVID WINTERS: Well, I think a lot of things have changed. You have a couple billion consumers
who’ve joined the party, and they want everything we have. The access to information has just
changed dramatically. I remember having to go to the library. You know, now I just go
online. And so I think a lot of things are improving, and if you can find these businesses
that are well-positioned to capitalize on this, you know, tectonic global shift in economics,
I think people are going to make a lot of dough.
CHRIS DAVIS: We’re in a world now where there is such fear, there is so much of a
sense of uncertainty that it is in the prices. It’s not that we don’t believe there’s
uncertainty, but more that it’s discounted, and the dangerous time to invest is when people
don’t think there is any risk. That’s when they get killed.
DAVID WINTERS: And the other thing is, if you just look at history; you know, history
is not necessarily a prelude to the future, but the world has worked through all kinds
of crises, and I think the thing where investors are not focused on is inflation, and I think
inflation is really something to be very concerned about. I bought some crackers last weekend.
Well, I thought I bought 8 ounces of crackers, there were really 7 ounces of crackers in
the box, and I think that that is indicative of what’s going on.
CONSUELO MACK: The naysayers have, and they’ve been on WealthTrack, you know, have told me
basically what they’re seeing is a global de-leveraging happening, and that as governments
who are way over their heads in debt, as consumers who have been way over their head in debt,
you know, are de-leveraging and paying off that debt, in fact, that the demand for goods
and services is going to diminish for us a number of years, and you know there is that
economic theory out there. This time it’s different. So, you know, what about that countervailing
force, which is the de-leveraging, which is a deflationary force- doesn’t that impact
your businesses?
DAVID WINTERS: Chris?
CHRIS DAVIS: Well, I mean, let’s start with a company that we both like, Nestle. Now,
do I really think that Nestle is going to sell less product in three years than it sells
today, right? With all of the... do I think Colgate will sell less toothpaste? Do I think
Coca-Cola will sell fewer Cokes? I mean, the U.S. is 5% of the world’s population. You
know, Venezuela is the sixth largest beer market in the world. Heineken makes more money
in Nigeria than in the United States. So we had this view about, oh, what’s happening
in Europe, what’s happening in the U.S., without going through and thinking about the
business. If the three of us together owned all of Nestle, and we were looking at what
was happening in Europe, what was happening in the U.S., I don't think for a moment we
would be worried that our sales five years from now would be lower than they are today.
CONSUELO MACK: But aren’t those still big markets for Nestle, for instance?
CHRIS DAVIS: Yes, but they’re...
CONSUELO MACK: And doesn’t it impact them let’s say for the next three or four years
as we get through this problem in the developed world?
CHRIS DAVIS: I think the question is will these sorts of consumer staples, are people
going to buy less of those? No. Will real estate price in Europe go down, will there
be a financial crisis, are banks in trouble? Who knows. It certainly looks that way, right?
But what that has to do with what Heineken sales will be, or what Nestle sales will be,
I think there, you know, you can look through other periods of turmoil, dislocation, and
as David says, we spend a lot of time talking about deflation and slow down; we don’t
spend a lot of time talking about inflation, and yet over all of our lives, if I just look
at the last 75 years, the value of a dollar is down 92% in purchasing power. So that is
a constant headwind of people losing purchasing power, and yet here they are locking in, they
think the safest place to be is in a bond yielding 1 ½ percent. So I think you think
through to the pricing power, the underlying growth, and I will tell you the growth of
this middle class worldwide so grossly swamps what a slowdown in Europe will do to a lot
of these global multinational companies in terms of their long-term value and growth.
CONSUELO MACK: So this has been a theme of yours, David, and we had a fascinating conversation
the other day about kind of some of the universal truths that can guide, you know, one’s investing.
So what are the universal truths that people all over the world are feeling?
DAVID WINTERS: Well, I think that everybody wants a better future for themselves...
CONSUELO MACK: For their families and...
DAVID WINTERS: ...their families, their friends and their pets.
CONSUELO MACK: Right. Their pets are the important part, too. Speaking of Nestle, yeah.
DAVID WINTERS: And I think that’s very, very important because, you know, people do
want a better tomorrow, and I think everybody wants to look good. I mean, they really do.
I think it’s a real basic motivation, you know, in all my travels around the world,
you know, people may express it differently, but they want to look, whether they’re male,
female, they want to look great.
CONSUELO MACK: So therefore, a company like a Richemont, which owns Cartier or Van Cleef
& Arpels, and yeah.
DAVID WINTERS: Right. And it’s happening everywhere. There’s huge opportunity. And
then the other I think universal truth is that people want to have a good time. And
it’s really, you know, you can only be gloomy so much, and so people want to fun, whether
it’s riding your bicycle or, you know, whatever people do, and...
CONSUELO MACK: And so a company that is in the Wintergreen Fund that exemplifies that
is something like...
DAVID WINTERS: Genting.
CONSUELO MACK: ...Genting. All right. And explain to our viewers what Genting is because
they probably don’t know.
DAVID WINTERS: It was a small Malaysian conglomerate that had a gaming business, still has a gaming
business, in Malaysia, and they diversified, they have a duopoly in Singapore. They now
have Aqueduct here in Queens. And it’s incredible. You know, who would have thunk that, you know,
a little Malaysian company would end up being a huge global success, and they’re great,
they’re great operators.
CONSUELO MACK: Where investors are having a really hard time with what you’re saying
is the fact that we’re seeing this market volatility, just heightened market volatility,
and also market correlation. What’s your perspective, and how do you handle it as a
money manager?
DAVID WINTERS: Well, I think it used to be that assets weren’t correlated, and now
that everything... first of all, you’ve got 24-hour news channels and all this, and
all the electronics...
CONSUELO MACK: And high frequency trading.
DAVID WINTERS: But what I think what we do is we try to take advantage of the volatility,
and a lot of the principle goes back to what Ben Graham wrote about in the 1930s, which
is Mr. or now we call Mr. or Ms. Market, and we’d say that, you know, you take advantage.
So when the market goes down, we have a pretty good sense of what we think a company is worth,
and we buy it on sale. And when the market’s way up, we don’t buy. And we viewed this
as one of the most exciting and productive times certainly in my career, because it’s
like being a kid in the candy store. And so we carefully deploy shareholder’s capital,
and like Chris and his family, you know, we have all our own money up, and that really
changes your behavior as an investor, and an asset manager when your bacon is frying
with everybody else’s bacon.
CONSUELO MACK: So, David, what have you actually been doing, when you say you’re taking advantage
of the kind of market volatility? And I noticed that you said you’ve been upgrading in the
quality. And I always thought that you had really high-quality companies to begin with.
So give us an example of what you’ve been doing.
DAVID WINTERS: Well, you know, what’s so unusual is that the best in sale. Triple A
is on sale now, and usually as a value investor you had to buy a can of dented soup. No longer
soup with a dented can. You know, what have we bee doing? We’ve been adding to, you
know, really high-quality companies around the world. I mean, we’ve bought more Genting,
we’ve bought more Richemont. We’ve added to oil and gas, because we think that, you
know, it’s a diminishing asset, and it’s very hard to get. And then, you know, there
are all these consumer companies that make things that people absolutely have to own,
and so anyway, I’m enthusiastic. I think that this is a wonderful time.
CHRIS DAVIS: You know, Consuelo, when you said people could buy a stock today and lose
a lot of money tomorrow: this is the big disconnect. You see, there’s a difference between price
and value, right? Price is what you pay, value is what you get. Now, if somebody watching
the show owned an apartment building, right, and they paid a million dollars, had a few
units in it, and when they bought it, it generated $70,000 of income after the expenses, and
a few years later it was up to $80- or $90,000- the fact that what somebody might pay for
that building could swing all around, right? It might be one day somebody would offer them
a million and a half, and the next day there is no bid. That doesn’t mean the value of
the building has changed, just because the price has changed. So going back to what you
said- people can lose a lot of money buying stocks today tomorrow, it depends on what
the business is worth. Now, if they’re forced to sell, then you’re absolutely right, stocks
are a very dangerous asset class to be in, if you’re thinking, “I need to raise money
for three months from now, or from one year from now, or two years”, but if you can
get in systematically over time, then lower prices and volatility, just like David said,
is your friend, and if you can think of the underlying businesses and the difference between
price and value, then the market volatility becomes much less unsettling.
CONSUELO MACK: So you’re an advocate of dollar cost averaging essentially in high
quality companies?
CHRIS DAVIS: It’s huge. It’s something that works so well, it’s no wonder that
Ben Graham wrote a chapter about it, that it mattered, and yet somehow people think,
“No, when prices go up, I get more excited, because the world’s safer. I’ll invest
more. When prices are down, I’m panicked, I’ll wait on the sidelines for it to get
better.” That is self-destructive behavior, and investors destroy the returns over time
by getting in after things have gone up, getting out after they’ve gone down. If there’s
one thing they could change, it wouldn't even be to reverse that- that’s too hard. But
if they can simply be disciplined, do the same amount every month, or every quarter,
or every year, average in, rebalance, have that discipline, they’ll get very satisfactory
returns over time.
CONSUELO MACK: So one of your hallmarks, David, as well, is you’ve purchased a lot of internationally-based
companies. So is that still going to be a major theme of yours that it’s, you know,
rather than be a U.S.-centric, or U.S.-based company, that you’re looking even for companies
that are not only doing business overseas, but that are actually based overseas? Why
has that happened the way it has?
DAVID WINTERS: I think the world has just, it’s become smaller, and it used to be that,
you know, the U.S. was sort of economically the center of the world, and we aren’t anymore.
And so, you know, with the market really selling off, we bought more U.S. companies, so...
CONSUELO MACK: So you have been buying more U.S. companies again because the prices are
attractive?
DAVID WINTERS: Correct. You know, like we bought MasterCard.
CONSUELO MACK: I mean, such as- MasterCard, right.
DAVID WINTERS: And we own the Norfolk Southern Railroad. But, you know, what we’ve really
found is that there’s all these great companies based around the world, and that they no longer
have to be based in North America. Who’d have thunk it, but the world has changed,
and that’s what I mean by the world has changed for the better because, you know,
a lot of these folks were educated here, or elsewhere, and have taken the principles and
applied them at home. That’s why I’m excited. I think that there is really an entrepreneurial
bent in the world, and that usually brings prosperity, and better health, and better
lifestyles, and...
CONSUELO MACK: And, you know, you both are self-described value investors, and you both
own Google. So, David Winters, I never thought I would see Google in Wintergreen Fund. Tell
me about that one.
DAVID WINTERS: It was really simple. First of all, it’s a great product, you know,
and I think, you know, the economics of the business are actually getting better, it’s
becoming more global, they keep innovating. But, you know, you could just take the cash,
strip the cash out of the stock price, and you were paying I think at one point eight
times earnings, and you know, the management seems to have, you know, the do no harm ethos,
which really is I think very powerful.
CHRIS DAVIS: And it creates so much value for the advertisers. I mean, the people that
advertise on Google, whether they’re auto insurance companies, or trial lawyers, or
pizza shops, they’ll tell you those are the best dollars they spent in advertising,
better than cable TV, better than newspapers, better than broadcast media, better than magazines.
The best dollars they spent are the dollars they spent on... so it’s hugely valuable.
But I would touch on one thing David said, I actually also have a very high regard for
the management in terms of their fanaticism, focus, culture. The one concern is capital
discipline because one of the things that we’ve seen over and over in technology is
these cash piles build up and build up, and management somehow says, “Well, we’re
rich, we’re entrepreneurs, we have plenty of money, we’ll just keep that for a rainy
day.” Certainly they view share repurchase as somehow an admission of failure, and yet
they don’t look back and say, “What’s been the best-performing tech stock for the
last 70 years, right?” IBM. One of the things that made IBM great was capital discipline,
and I think Microsoft...
CONSUELO MACK: Buying back shares, right.
CHRIS DAVIS: Yeah. I think Microsoft just got that message, I think that you’re seeing
a generation of technology companies, and that’s the one thing I worry about with
Google is this idea that we will spend that money however we want doing whatever we want
versus-- but everything you say about the fanatic culture of management I love. The
capital discipline lurks in my mind as the one long-term concern.
DAVID WINTERS: Are they going to listen to you?
CHRIS DAVIS: I don't think they’ll listen to me.
CONSUELO MACK: All right. So One Investment for long-term diversified portfolio. Speaking
of, you know, great ideas, what’s the one thing we should all own?
DAVID WINTERS: Well, you know, if you want a nice easy one, you could buy something like
the Norfolk Southern Railroad (NSC). You’re going to do well. I mean, you may not do spectacularly,
but you’re going to do fine. I mean, you get a nice dividend yield. You can’t replace
the railroad. And they have coal, and it’s well run. I mean, that would be a U.S. company
that I think is just...
CONSUELO MACK: So no ease of entry there.
DAVID WINTERS: Oh, you can’t.
CONSUELO MACK: Right, right.
DAVID WINTERS: It’s irreplaceable.
CONSUELO MACK: Do you own Norfolk Southern?
CHRIS DAVIS: Well, I would say we own Burlington Northern, and that’s the one that I would
pick, you see is...
CONSUELO MACK: Well, because of Berkshire.
CHRIS DAVIS: Because of Berkshire. So what I say, I always hate picking a stock. I think
there is a Murphy’s Law about it. We have, you know, maybe 40 companies that are 80 or
85% of our assets, and whenever somebody says, “Pick one”, I always think, “well, there’s
a reason we own more than one because there is so much uncertainty.” But there is a
Murphy’s Law that whatever one I pick, then it seems to have a bad headline about a week
later. But I think if somebody is watching, and is thinking about buying one company,
then I think it really has to be Berkshire. I think in Berkshire you get some exposure
to financials, you get some technology now, you get the Burlington Northern Railroad,
you get Geico, you get Wells Fargo, American Express...
CONSUELO MACK: IBM. Right.
CHRIS DAVIS: IBM. And even though, of course, we all know that Warren’s not immortal,
although we’re all hoping, but the valuation of the businesses all together is reasonable,
and it’s a peculiar culture that is really run deeply with a sense of stewardship. So
I think if anybody was going to say, “I’m going to buy one stock, and put it away based
on your recommendation”, I always pick that because in itself it’s diversified, and
it’s run by people that really think of their shareholders as having the vast majority
of their worth in that single enterprise.
CONSUELO MACK: And David, last words to you on Berkshire, because you have been in and
out of that stock over the years.
CHRIS DAVIS: Are you a high frequency trader?
DAVID WINTERS: Actually we own Berkshire.
CONSUELO MACK: You own it, but less, right, than at one point you did?
DAVID WINTERS: A little less. Yeah. And I think, you know, we like it, and I think you
can make money. I think the thing that’s so unusual now is that, you know, again, going
back to the kid-in-the-candy-store analogy, there’s so much to look at, and one of the
big problems for Berkshire is that it’s so big. And so your compound rates of return
from here will probably be fine. But, you know, I think there’s lots of, you know,
40-cent dollar bills, and Swiss francs, and all kinds of other opportunities to be had,
and that’s why, you know, we’re just... I mean, we’re optimistic.
CONSUELO MACK: And so your advice to individual investors would be, David?
DAVID WINTERS: Well, I think individual investors, if they can, you know, find an active manager
that they feel comfortable with, that makes a lot of sense. If they had the ability to
actually do analytical work, you know, there’s companies you know, buy Procter & Gamble,
you’re going to be fine, you know? I mean, you probably own Procter.
CHRIS DAVIS: We own that.
DAVID WINTERS: And, you know, it yields 3 percent, 3 ½ percent, 4 percent. But I think
this is a time where I think you can create a lot of value for yourself if you had the
patience and the fortitude.
CONSUELO MACK: Patience and fortitude. So we’ll leave it there. David Winters from
the Wintergreen Fund, great to have you on WealthTrack, and Chris Davis, it’s lovely
to have the two of you together, from the Davis Funds. Thank you so much for being with
us on WealthTrack.
CHRIS DAVIS: Thank you Consuelo.
CONSUELO MACK: At the conclusion of every WealthTrack we try to give you one piece of
advice to help you build and protect your wealth over the long term. This week’s Action
Point is: avoid what guest Chris Davis calls the “Investor Behavior Penalty”
Now historically, individual investors have failed miserably at trying to time the market
and have been penalized as a result. Over the last twenty years for instance, the average
stock investor has both underperformed the market and stock mutual fund returns by substantial
margins. The reason? They tend to buy when everyone is optimistic and stock prices are
rallying, and sell when pessimism prevails and stock prices are falling, buy high and
sell low. We just heard Davis and David Winters talk about the values they are finding in
the highest quality global brand name companies. It’s a theme we’ve heard repeatedly from
many of our Great Investors. It’s a message worth listening to.
We hope you can join us next week. We have a gift for you for Christmas weekend: two
blue chip financial advisors who are offering top notch financial planning services at very
affordable prices. Sheryl Garrett and Mark Cortazzo will tell us what they are offering
the little guy.
If you want to see any of our programs two days ahead of the regular broadcast, check
out our WealthTrack Premium service on our website. We are also offering exclusive podcasts
with other Great Investors, including my most recent conversation with legendary value investor
David Dreman. Thank you for watching and make the week ahead a profitable and a productive
one. [music]
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SPONSOR: Additional funding provided by: Loomis-Sayles - investors seeking the exceptional
opportunities globally. Research Affiliates - Efficient index foreign inefficient market.
The Wintergreen Fund - your home for global value.
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