Samantha McLemore was recently a guest on the WealthTrack podcast to talk with Consuelo Mack about our long-term, value approach. Here is an excerpt of that interview (note this has been edited for clarity and brevity). For the full interview, visit the WealthTrack website.
Consuelo Mack: Well, it was trial by fire when you became assistant portfolio manager of Opportunity Equity in the midst of the financial crisis in 2008. What was the major lesson you learned from that experience?
Samantha McLemore: You aren't kidding, Consuelo. I became assistant portfolio manager in August of 2008, which was right before things got terrible, especially in September.
Fannie Mae and Freddie Mac were seized in early September and then Lehman Brothers went bust later that month, so it was definitely a great learning experience, not necessarily a fun one, but a great one. There were so many lessons that came out of that experience on so many different levels. We could spend the entire time talking about just that. One of the main lessons that came out of that was just how much behavior matters and how much it changes. I think we see that playing through in the markets overall. Even today. But it was a great way to live it and really experience it. I was an analyst and then an assistant portfolio manager at a value shop, and we were all about value. When prices go down, values get better as long as they're going down faster than the underlying fundamentals. We experienced that in a very real way, although the fundamentals did deteriorate during that time. But it was just so interesting to watch the behavior of groups of people and analysts and see how pessimism really was at its peak at the lowest prices. People were so much more optimistic when prices were so much higher. You got a real sense of why people do what they do when they sell low and buy high, which is exactly the opposite of what we're trying to do.
CM: "Long term" can mean a lot of different things to a lot of people, especially in this very short term oriented world. You say “we own businesses, we’re not owning stocks”. So how long term are you?
SM: We on average hold names between three and five years, but there are some names that we've owned for multiple decades. Amazon is an example - it predates me. It's been almost two decades now that we've owned it. That would be the ideal holding period for us if we could find more names like it, and we think that this is really important in this environment. One of my favorite things Bill has said is that in his almost 40 year investment career, it's never been easier to construct a portfolio that you have conviction will do well over the long term, call it five years, and it's never been harder over the short term, call it three to six months because the end of that time horizon is just so hyper-efficient. This is an important part of our approach, and I think something that helps us deliver the long-term returns we're trying to deliver for our investors.
CM: Do you buy what Bill said, that it's never been easier to construct a long-term portfolio? What's different about today?
SM: I definitely see in the market a lot of talk about this time arbitrage element where people just are so focused on the short term. I think the best example of this is we have sell-side analysts with coverage universes of companies, who come in to meet with us pretty frequently. I will always ask them the same question, which is, “we're long term, we're value-oriented, what's the best idea you have?” They'll invariably give me a name that has 25-30% upside and some catalyst that will make it work over the next three to six months. Then I'll look at their coverage lists and see a name that has a price target twice where the stock is trading, and ask “well, what about this one?” And they'll say, “oh, yes, well, if you can hold it for five years, that one's really attractive. But there's this big uncertainty that's out there now. It's unclear when it's going to resolve. So, you know, it doesn't act that well in the short term.” I think that there's a reason that they don't mention those names, even though they know we’re long term, they know we're value-oriented. It's because the demand is very low, and there's such a huge part of the market that wants low volatility. They want month-to-month assured performance, so that's where people are operating. They're trying to deliver on that, and that leaves this big open space at the longer time horizon for those more tolerant of volatility.
Sometimes that doesn't look pretty in the short term on a month-to-month basis. But if you can invest in that way, I think you have better odds of achieving success over the long term.
CM: One of your guiding principles, which you actually say is the key to performance, is that there is a difference between investment fundamentals and expectations. Explain what you mean about that and why it's so key.
SM: Most of what you hear, if you listen to any of the television shows or the pundits or stock analysts, is almost all about the fundamentals.
But it's important to know, and I think most people do, that you can have a great company that can be a terrible investment if you pay more than what that company is worth. On the other side, you can have a pretty mediocre company become a great investment if expectations are low enough and things turn out better than what's priced in. A lot of people don't make that distinction between what are the fundamentals versus what is the market pricing in. We try to get explicit when we're looking at companies and at businesses about what needs to occur for this stock price to be right. What's the market pricing in? Do we think that's attainable? Do we think it's too optimistic, too pessimistic?
CM: It's an interesting debate - from the Ben Graham approach to value investing to how it's evolved with Warren Buffett. At one point there was a cigar butt theory: you'd buy a stock that was incredibly cheap, it might not be a good company, but you'd buy it to just get that last puff out of the cigar and then sell it. Warren Buffett kind of took that to another level; given the option to buy a good company at a fair price or a fair company at a really low price, he would rather buy the good company. Where do you all come out on that?
SM: That's a really interesting question. People talk about diversification a lot and it can mean a lot of different things. One of the ways that we've talked about it is diversifying between secularly mispriced names, like Amazon, where they can continue to compound value over very long periods of time. Those are difficult to find, but if you can identify those, they can be the very best investments because you can make a lot of money over a very long time horizon. So, diversifying between those secularly mispriced and then cyclically mispriced names, which is more classic value - somethings out of favor in the short term and the price is lower than the value. We look at both types of names, and depending on what opportunities the market is serving up, it will be reflected in our portfolio overall. Having different kinds of investments we think helps the diversification of the portfolio.
CM: There's the flexibility that comes in as well. Considering the backdrop that we're in, it is kind of stunning. You've had some research showing that in the midst of the longest bull market in U.S. history, investors have been pulling money out of the stock market and pouring it into bonds. I think some of the fund flows figures show that $441 billion has gone out of the equity markets in the last decade and $1.7 trillion has gone into bonds.
And, there have been six pullbacks of more than 10% in this decade. What were you doing? Is that the kind of opportunity that you see?
I know one of the things that you say is that volatility can be your friend as well, which a lot of people are very nervous when they consider volatility.
SM: It is one of the stunning things. We talked earlier about the financial crisis and the huge impact that it had on all types of investors. I think that it plays into what we've seen in this post financial crisis period. We've seen over the decade a very strong market return, 17% a year, which is much higher than the average overall. Yet people have been taking money out the entire time - you haven't really seen that before. Usually if you've had returns that strong for that long, people would get more optimistic. But, I think that it speaks to just how bad things were in the financial crisis. I think one of the ways that we've done well in this period of extreme risk aversion and extreme volatility phobia, where people don't want to go anywhere near anything where they might lose money, is we identify a situation where the perceived risk is high, but our assessment of the real risk is lower. Those have been some of the best opportunities to make money, so we've been pretty systematic about investing in those sort of names.
CM: Has there been a time in the last 10 years when you really questioned Bill's approach and his ability to find opportunity basically when blood is running in the streets, as a Rothschild famously said, when you lost your nerve.
SM: For anyone in the markets, there comes a time where you're losing money and you can feel it emotionally and think I'm not sure we should be doing this anymore. There's never been a time, actually, when I question the overall approach. You would think the financial crisis, if anything, would have done that. I remember sitting around the table with Bill and other notable value investors, I think it was in October of 2008, and they were talking about how bad it was, with kind of a disbelief at how bad it had gotten. Even then, I remember thinking this is a great opportunity. I guess I was born in a way where I believe lower prices are better. I've never questioned the approach on a longer term basis, but certainly on a shorter term basis. You know, these generic companies, the pain can be extreme when you buy or you own something that goes down every day. But, I've learned that when I start to feel that way, when I feel like I can't take any more of this, usually that's a signal that we're getting closer to a bottom. Usually I have observed with Bill, and we joke, that when he gets to that point where he is saying, “you know, I just I can't take these price declines anymore”, that is usually, a signal that we're at the lows, too, because we have pain tolerances that I think are higher than most people out there. That's what I'll tell myself in the dark days when it's feeling like that.
CM: Spoken like a true value investor.
For the full interview, visit the WealthTrack website.
Read Samantha's 2Q 2019 letter and learn more about Opportunity Equity.
Investment Risks: All investments are subject to risk, including possible loss of principal.
The views expressed in this report reflect those of Miller Value Partners portfolio manager(s) as of the date of the report. Any views are subject to change at any time based on market or other conditions, and Miller Value Partners disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results.
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