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a lot tougher for him you know Buffett is famous for saying a fat wallet is the enemy of high investment returns and and he's right about that uh but For Better or Worse we don't have as much money to manage as Warren Buffett and so we don't really have quite the challenges that he does only looking at uh you know the few top 50 or 100 companies uh even in the S P 500 there are plenty of opportunities uh you know when you go back my students ask the same question you know it's going to be really hard harder for us but I tell them let's go back 20 years when you guys learned how to read and take a look at the most followed Mark in the world the United States most followed stocks the S P 500 let's take a look at what's happened since you guys learned how to read and I tell them from 97 to 2000 the S P 500 doubled from 2000 to 2002 would have from 2002 to 2008 at Double from 2000 um sorry to 2007 it doubled from 2007 to 2009 it halved and from 2009 today it's roughly tripled so where does it go from today well that was my way of telling them that people are still crazy and very emotional and the S P 500 is an average of 500 names if you look under the covers of the dispersion of those companies plenty of opportunities so the s p today to answer your question we value the s p every day going back uh from 1990 Bottoms Up the individual stocks uh in the s p on a daily basis so we can contextualize where do we stand today on a valuation basis and right now we're in the 20th percentile towards expensive meaning as compared to the last 28 years Market's been cheaper 80 percent of the time more expensive 20 percent of the time and from the 20th percentile in the past it's not a prediction just saying what's happened from this valuation level in the past and it's been up four to six percent over the next year 11 to 13 over the next two so not so bad but subnormal Market average about 10 a year during those 28 years so sub normal but certainly not terrible sounds relatively expensive at least compared to history as a value investor do you find opportunity in this market do you zip this out sure we're not find the index we're buying the cheapest stocks in the index and we're long short investors so we short the most expensive so there's always things that are in favor and always things that are out of favor and so we're trying to buy things that are cheaper than the market and sell things that are more expensive than the market those always exist the thing that's going for us that we haven't had for the last 20 years is uh you know 20 years ago you used to get a quarterly statement and pretty much throw it in the garbage and now you can check your stock price 30 times a second on the internet so time Horizons are shrinking uh and that's really the if you're a long-term investor that creates lots of emotions lots of volatility in the short term but if you if you can keep your cool and and actually value businesses and have a longer term Horizon and even two or three years nowadays there's a long time Horizon there's plenty of opportunities out there always I want to get into some specific opportunities your long Home Depot which made news today reporting earnings that fell short of analyst estimates disappointing guidance are you buying on the dip today are you still along term holder I'm not sure I mean you know stocks Like Home Depot are well Home Depot's a duopoly it's got an above average business uh trading cheaper than the market uh huge Returns on Capital uh relative for the retail business there they only Lowe's is their only main competitor I mean really hard to get a better setup or business than this so you know the market overall is expensive but this is a better business on average than the market and also cheaper so it's a pretty great deal you're also along Walmart and Boeing what attracts you to those two stops well Boeing is also a duopoly I mean there's only air buses their only competitor uh uh it's got a earns Returns on Capital that are quite high for you know Capital intensive business they uh you know like I said only have one competitor air travel is uh you know continues to grow certainly grows over time so once again above average business at below average prices that's that's pretty exciting and Walmart's the same story also a duopoly with well Walmart has more competition they're not a duopoly but they uh are a great business they have uh if you want to talk about economies of scale if you're a retailer that that's the name of their business they can do things cheaper they're buying power is better uh they have loyal customers they are in places where consumers they're convenient for consumers so uh they just built a business over time that does things better and so once again an above average business at a below average price now on the short side Ford Align Technology monster beverage is it strictly valuation or is there something else underlying well those are all well that's a great question they're all uh more expensive than the market a line technology is a fine business they do Invisalign you know for Graces and but they're they're coming off patents soon they're a competition coming in so you know people's Club is other startups that are getting into The Fray you know like any business there's a lot of competition but when you're coming off patent you're a particularly vulnerable so it's a really good business it's a question of what price are you paying and you're paying a very uh high price and monster beverage you know just for instance there they're high priced too Coca-Cola has been a big part of their distribution and Coke is uh you know it's a competitive business Coke's even going into the uh energy drink business so that could hurt them over time and I'm not saying it's not a great business I'm just saying it's very expensive and competition is coming and Ford uh is in a tough business they don't really you know it looks like they're low PE stock but they don't generate any cash so and and they have a lot of capex coming their way uh so we're just not too bullish on Ford and the way we value things is on cash flows not on earnings and from that standpoint uh quite actually expensive now I want to ask you about value investing kind of as a business throughout history more recently we've seen a systematic quantitative approach to Value investing um more people are kind of moving toward that and that traditional concentrated book and stock picking style of investing has become few and farther between how do you see the future of value investing going and do you think it will become easier over time that the cycle will turn in favor of value as we move forward in the cycle sure well it really depends how you define value uh traditionally like places like Russell or Morningstar will Define value as a low price book and low price sales and that's not how we Define it we Define value investing differently we value a business and try to buy at a discount that's our definition of value uh Ben Graham Warren Buffett's teacher would say figure out what something's worth uh pay a lot less leave a large margin of safety between that's our definition of value investing it's not low price book low price sales investing those are things that have traditionally rhymed with value meaning if you're trading in a low price book ratio a low price sales your company's trading close to the historic cost of its assets means it's more likely out of favor and if you buy a bucket of those you know you tend to find more than your fair share of cheap companies but there's no that's a correlation it's the causation or cash flows we value businesses like we're a private Equity Firm and so valuation of the business that never that's what stocks are they're not pieces of paper that bounce around that you put sharp ratios and sortinos on or other fancy ratios their ownership shares of businesses that you value and try to buy at a discount so whether the market rewards us for evaluations in the short term we ignore because that's what stocks are I actually have taught at Columbia for 23 years and I make a promise to my students first day of class I promise them if they do good valuation work the market will agree with them could be two or three years but that that is the secret to to have a steady disciplined process to Value companies and uh to be confident enough to stick with it uh uh you know when it's not working in the short term Market's very emotional in the short term we try to ignore the noise
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