John Rogers, Founder Of $12 Billion Ariel Investments, Breaks Down His Firm’s Market-Beating Returns


John, your fund has
really outperformed peers over the last decade, and I wanted to see if you could maybe distill
that success down to one specific strategy or
behavior that you guys do better than anyone else. I think what was
really, really important is that we are long-term investors, so we are always looking
out over the horizon and making sure that we’re
not getting caught up in the short-term noise,
short-term emotions of the market, but to be able to say, “Hey, three to five years from now, what will these companies look like?” So during that financial crisis, we were able to look out over the horizon, take a long-term perspective, and try not to let all the fear stymie us
during that tough, tough time. So I wanted to see what your best call might be over the last 10 years. Is there any sector call
or specific allocation that you made that you
think really contributed to your success more than other things? There are a couple
sectors that we worked on, but the one that really comes to mind is the real estate services companies. Jones Lang LaSalle, JLL,
and CB Richard Ellis, CBRE. They are both real
estate services companies known for leasing. They have businesses that do the capital markets business. They have outsourcing
real estate services. They really are worldwide companies in terms of real estate servicing, and those stocks got crushed
during the financial crisis. The CBRE got under $5 a share, got to be extraordinarily
cheap, everyone hated it, and now it’s bumping
up toward $50 a share, so that was a sector that
was really great for us. Another one was the
leisure-oriented companies. Companies like Royal Caribbean that do a wonderful
job of creating cruises for American consumers primarily, but they’re also global,
they’re all over the world. That stock got under $10,
and now it’s well over $100. People were very fearful during the crisis that people wouldn’t cruise again. But in both cases, we
looked out over that horizon and took that long-term perspective that we believe that real
estate will be here forever and that people would love being able to get away on a cruise down the road. Is there anything in particular that you think you do differently that kinda sets you apart? I know that you’re
traditional value investors, but the value has not done so well over the last decade, but you have. What wrinkle have you added to
the value investing playbook that’s allowed you to continue to succeed where others have failed? I think on the one hand,
the things that we do that have worked well for us is to follow Warren Buffett’s playbook,
where he always says, “You wanna be greedy
when others are fearful.” And so during the financial crisis when there was maximum pessimism, we were buying our favored names. Same thing happened this last December. Stocks got crushed as we
moved up toward Christmas. We were in there buying our favored stocks like Mattel and US Silica
right before Christmas Day, and those stocks are up now over 50%, just through this period,
through the end of February and early March. So being able to truly buy when there’s that kind of fear in the marketplace is something that distinguishes
us from our peers. And then finally, we worked hard to improve our debt analysis. We think often value-oriented firms, and we learned this during
the financial crisis, we didn’t spend enough time
doing our own independent work on making sure
that our balance sheets were exceedingly strong,
and that’s something that I think we’ve worked
really hard on improving, and it’s helped our performance
these last 10 years. So does that help you avoid
these so-called value traps, where a company’s cheap
just because it’s not that great of a company and
maybe it’s saddled with debt? Does that sort of allow you to avoid that minefield somewhat and
pick the cream of the crop? Well, I think it helps us
that if we make a mistake, if you don’t have an
overleveraged balance sheet, you can live through mistakes, and you can build a
business for the long run. If you don’t have the right
type of balance sheet, when things get tough,
that business can go away. You can have a permanent loss of capital, which we’re trying to really
protect our customers from, and we think that waiting
to make sure we have these bulletproof balance sheets has helped to protect capital for us during the ups and downs that
are inevitable in the market and the volatility that’s
gotten greater and greater than I’ve ever seen in my career. There’s been so much volatility. You mentioned the big uptick in volatility in recent months. Is there anything strategy-wise that you’re doing to sort
of take advantage of that or to avoid the downside of that? Well, we’re trying to make sure that we, we’re trying to make
volatility our friend, and when we see stocks
that are gapping down on maybe where there’s
no fundamental change in the long-term economic
outlook of that business, well, that creates an opportunity, and I think that’s an important thing. So volatility should be
something that helps you. On the other hand, when
stocks spike higher and maybe get overpriced,
that can be an opportunity for us to trim, take some profits, and move into cheaper companies. So volatility doesn’t
scare us, and we think that in this environment
where everyone’s been in this flight to safety,
more and more investment communities have gotten
more and more conservative, so they’re moving money to the safe parts of the marketplace. That means the stocks that are left out can be truly orphaned and be really cheap. So we’re trying to find
those cheap orphans in this type of environment. So you mentioned that
you’re looking more at company credit profiles. Is there anything else that you’re doing on a stock selection basis
to sort of insulate yourself from the next downturn? Any other types of
strategies that you’re using to protect yourself? Well, one of the things
that Charlie Bobrinskoy, our head of our investment group, has helped us work on is
that we are big believers in behavioral finance, and we’re in Chicago, and the
University of Chicago’s there. I’m actually vice chairman of the board. Professor Dick Thaler
just won the Nobel Prize in behavioral finance.
They’ve had some other great behavioral finance professors there. So we’ve been trying
to use that to help us, and one of the things that we think that helps protect you
against behavioral biases is to have a devil’s advocate. Someone in your investment group who challenges the
perspectives and points of view of our various reports
that we put together on the companies and industries we follow. So I think the devil’s advocate’s
been a big improvement, it’s created better
dialog, better discussion for us to challenge each other in our weekly portfolio
management meetings. And I know that you
like to look way beyond the short term, so perhaps
this is too nearsighted of a question, but I’m
gonna ask it anyway. What do you think the future
holds for the bull market, how much longer can it go? It sounds like the way
your portfolio is built that you’re insulated from any downturn, but it’s still helpful to get an idea from expert like yourself
how long we have to go in the current cycle? Well, as you know, you
never know quite where we are in the cycle, and I always tell people we invest for this long run so that in case there is a downturn that’s inevitable, we know
that downturn will end, and the stocks will march back up. We think that if you get too caught up in the short-term emotions and try to predict the short term,
it’s really, really hard to do and often doesn’t lead
to good decision making. But overall, our perspective is right now, things are steady as she goes. Market multiples are reasonable, the S&P, you know, 17 times next
year’s earnings is reasonable. If you look at the kind of
interest rate environment we’re in, we’re historically low rates. So you put reasonable
valuations with low rates, we think that means there’s a lot of, stocks are not overpriced. I think that’s really a big deal. Also, there’s so much
money in private equity, so much cash sloshing around out there, if stocks get beaten up and get cheap, private equity can come in
and bid those companies up and take advantage of those opportunities. So we’re still quite optimistic. As we talk to our
management teams these days, people are telling us
cash flows are strong, the economy’s reasonably strong,
and it gives us confidence that things are gonna chug along here, and it’s a good environment
to invest in common stocks. And one last one. A recession, people seem to be thinking that there could be one coming by the end of this year, end of next year. Opinions really vary,
but it’s on the radar. What’s your take on it? No one knows when the
next recession’s gonna come. And we just believe
you just gotta look out over the horizon, and Warren
Buffett always talks about the fact that last century
the Dow started at around 66, ended at over 11,000. We had two world wars. We
had a Great Depression. We had all kinds of challenges
that faced our country. Our capitalist democracy is
the best system ever invented. So if we do have a recession,
which is inevitable, we’ll recover from it, and
it’ll bounce right back, and so I think investors
shouldn’t try to time the market to move in and
out on a short-term basis. I don’t think that’s a successful formula.

Paul Whisler

21 Comments

  1. Legend back to the post, you can see the angel's wings! Is it you here?

  2. Eloquent, straightforward, and helpful. This guy knows what he’s talking about.

  3. I think he’s running a mega scam. Too good to be true returns = some other sucker’s money till it comes crashing down

  4. Wonder full 2 hear. !! Nice usa folks talk !!!!!"" Very interesting. Man/ person !!! World $$$$$$ tasume,, flowing 2 usa!!!!!!!!!!!

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