Samra's Rules for Value Investing >> Ed Harrison here for Real Vision. Really quick intro for you. I'm about to talk to David Samra, who's a managing director at Artists and Partners. One of the things that we obviously look at here at Real Vision is we look to talk to people who have skin in the game, who run real money. At this particular time when we're talking about growth stocks really taking off in the post-pandemic world, the question is, is what's there to see and value? What's the process that value investors go through and how would they see their way through? David Samra is one of the best people to talk to because his fund has done incredibly well outperformed over a longer period of time. We're going to talk to him about his process. Maybe do a deep dive into specific companies and see what comes out of that. I hope that you enjoy the show and I'm looking forward to the interview very much. Take care. Welcome to Real Vision. I am the host here for this interview, Ed Harrison. I'm talking to David Samra, who is a Managing Director and Portfolio Manager at Artisan and Partners. David, good to talk to you. >> Thanks for having me, Ed. >> David, we chatted, I think, a week ago now and I was saying that one of the reasons I ended up at the business school that I went to, which is the same one that you went to was for actually the same reasons that you went there, which is value investing. While I ended up on the bond side of things, you actually did go into value investing. Right before this interview, I pulled out my directory of entering students for Colombia to take a look at it. The interesting bit is here that they ask you your hometown, your undergraduate graduate school, last book read, favorite movie, and favorite diversion and undermine it says The Warren Buffett Way is the book that was my favorite book at the time. Rollerblading was my favorite, diversion and so talk a little bit about how I was in '90s. I think my movie was Muriel's Wedding, so that's a little throwback. I think this all begins with Warren Buffett, and Graham, and Dodd investing. Can you take me through , how you're thinking about value investing historically and also how you yourself get into it? >> Well, education is the great facilitator. I entered a business school in Waltham, Massachusetts called Bentley College, which is the time that is emerging from- its now called Bentley University. By that time it was emerging from an accounting trade school into a broader business school. What it did is it took mainly people from New England training them to function as accountants. They had a finance program. They also had pretty good IT program and train them to be able to do jobs and they got them a job. It was great program for people like myself who grew up with nothing and education is what pushed me through my career. At Bentley, I took finance classes along with my accounting classes. Accounting is obviously the language of money and required before you can do anything in the money management business. One of the finance classes that I took at the time was financial security analysis. In that class, you had a choice of what type of business to look at. I chose a business that was troubled because the share price had been going down. Not exactly sure why, but it's just who I am. I was looking at a share price that was going down and I thought, "Well, there may be an opportunity here to invest in a company that's having problems and the value of the business is not fully reflected in the share price." I feel much more comfortable with that investing and I do that today. I continue to do that in the way that we invest. Then I feel having to bet on a continuation of some future growing profits stream which may or may not show up so I much rather have an asset that's here today that I can put a value on rather than a hope for earnings stream at some point in the future, which again, may or may not show up. Those characteristics have been president all the way through both my academic teachings and through investing from all I guess, four jobs that I had in the money management industry, including my current one. Columbia Business School was a continuation of that process. I had spent a few years between a business school mainly in accounting roles and when I got to business school, I worked for [inaudible] and proceeded to take finance and accounting classes that would help further my career and my knowledge in the money management business. The class that had the largest impact was taught by a fellow named Joel Stern, who was actually a management consultant. The firm that he worked for was called Stern Stewart and his partner Bennett Stewart wrote a book called Quest for value, which you may be familiar with and they coined the acronym EVA, economic value added is what it stands for. He was an efficient markets guy, Joel's Stern. However, what he did teach me, which I use to this day, is to be able to recognize financially, as expressed in financial statements, the difference between a good business and a bad business. He taught me to recognize, and this is what Warren Buffett talks a lot about, your ability to compound well, in the business that has high returns and has the ability to grow over time. It's this odd mix of wanting to be a value investor and be price disciplined, but on the other hand, recognizing that a good business is far better to own than a bad business and mixing those together is what forms the underlying philosophy that we use here at Artisan and have used since we've started up almost 20 years ago. >> That's a good summation. As you were saying that there are number of things were popping into my head about that. I actually, just from a personal perspective, when I was there, it was Bruce Greenwald and Michael Moebius actually was a guy who I took a class with on behavioral finance that really spurred me along. Later I saw that you did a podcast recently with one of the professors, [inaudible] Santos who came on in 2003, so that was after I had left. But the Heilbroner Center for value investing is still at Columbia, so it's still very active. The second thread that I was thinking about was something that you said in an interview that you had about this in terms of the four main tenets of the company. It's not just that it's a good company that you're looking at, you're looking at achieve stock that's below intrinsic value, which you can define in a little bit. It's a good business. You also said it has to have a strong balance sheet and a good management team. Can you talk to me about those four qualities and where they rank in terms of when you're making a bottoms up selection, which ones are the more important ones for you? >> Yeah, certainly, the principles of value investing demand you buy a business at a significant discount or intrinsic value. That is of the four key characteristics that you mentioned. That is the most important characteristic and the characteristic on which we will not compromise. How do we calculate that? Well, that's the hard part. The value of the business is the present value of its future cash flows, and of course the future is by definition uncertain. But we are fundamental analysts, so we spend most of our time doing fundamental research on businesses outside the United States, where we're trying to understand the future earnings power of that business. It starts with the financial statements, as I mentioned accounting is the language of money and we take all the legal documentation that we can find on the business and put together long-term financial statements. We drill everything down to free cash flow, because even in this day and age accounting standards differ from country to country. We talk to management, competition, customers, former employees, current executives, sometimes other shareholders, we talk to consultants, any customers, anybody who will help us understand that earnings power. We build it all into a very simple discounted cash flow model. Now price helps you in two ways, which is important to understand about value investing. Price not only helps you buy a business at an undervalued price which drives your return, so let's say we buy a business at $50 per share and our research tells us it's worth a $100 per share. Let's say the business is growing at 10 percent a year, so we buy the stock, a year goes by, the value of the business goes from a 100-110 and we get it right, and the share price revalues from 50-110. You can see that we make most of our return from that revaluation, it's not based on the underlying growth in the value of the business. That's where growth stock investor comes, they're relying on that growth where we're just relying on the earnings power of the business. But on the opposite side, let's say something goes wrong and the value of the business ends up being 75 or 60 or even 55, because we've purchased those shares at $50, we've avoided a permanent loss of capital. This is bringing in those Benjamin Graham concepts of value investing, having a big margin of safety in any security that you buy. Having that margin of safety which to us means managing risk, and having a big expected return by buying something at a discount to intrinsic value, are the underlying concepts that are most important in value investing. Now, let's take that last piece which is the underlying growth and the value of the business. If you can buy a business that's growing at 10 percent a year and a meaningful discount to intrinsic value and that growth comes at high returns, you have a very, very powerful combination to drive returns over time. Then that gets into one of the other characteristics that we look for is a good business, a company that has a strong market position and the ability to grow over time. Remember that inflation is ever present, and if you go back to the way Benjamin Graham practiced value investing, he would buy statistically cheap businesses and reversion to the mean would work in his favor over time and he would run a very diversified portfolio. The issue with that investing is that you end up with a cohort of your portfolio that are bad businesses. The underlying value of the business is are growing, oftentimes it's shrinking, and if you get it at a cheaper price, goes the theory that you should be able to get a reversion of the mean and generate a return. The problem with that is that inflation is ever present, these are value traps and it may take years and years and years of ups and downs for that value to be realized, and in the meantime inflation is eroding your purchasing power. The way that we solve for that is by looking at a universe of statistically cheap equities and focusing our time, attention, and capital on the better businesses. A cheap stock, buy it at 50, the value is 100, helps us generate a return and manage risk. If we have a growing business and a year goes by, instead of getting that valuation from 50-100 it goes from 50-110, and we retain our purchasing power while we wait. In the meantime, you don't get situations like this handed to you every day, usually I would say in the vast majority of cases there's a problem with the business. As you know from your market psychology classes that when people see information that's not happy, let say the oil and gas industry today, they react negatively and the emotions of fear and greed drive the stock market. However, the problems are real, and oftentimes companies need financial power in order to address those problems. We want to own businesses that have very strong balance sheets, that way if something goes wrong or the government changes the rules or whatever takes place in the future, we have the financial resources to preserve our equity ownership in the case that something goes wrong. We have a cheap stock, a good business, a strong balance sheet, and then of course we want a management team that's smart, that has a track record in history of adding value over time. Who does it? Those are all fundamental strengths of a company to have a good balance sheet, it's a good business with a strong market position and a good management team, and we'd like to buy them cheap. That's pretty selective, and you can't find these characteristics in combination on a broad spectrum. We have most of the money in a portfolio invested in 20 securities, even though we operate in a vast non-US universe, basically because it's extremely difficult to find businesses that have those characteristics in combination. Now, just to answer the last portion of your question; do we compromise on any of these items? The answer is, of course we do. But if the compromise comes in terms of valuation, some management teams are going to be better than others, some balance sheets are better than others, and some businesses are better than others. However, in order to compromise on these items, you want a cheaper and cheaper valuation to make up for the fact that you might not have the best management running this business. >> I think that is an amazing overview and we can get into the individual stocks perhaps in your portfolio, as examples that we can talk about. I saw something about ABB, I certainly want to talk about that, Compass Group is another company I want to talk about. But let me go into some of the mechanics here behind this because as you were talking about this, I was thinking about the analogy of the cigar, that is, if you smoke a good cigar it could last for a very long time, 45 minutes, two hours even. But some people they're addicted to picking up cigar butts and you can get a good feel out of that for a good five minutes, but the cigar butt is gone. People in the value world think of that as the thing about the good business, so not only is the stock cheap, but it's cheap for a reason because there's an ephemeral quality to it. I think that you answered very specifically about how that seems like the second most important thing behind the cheapness is that the business is a fundamentally good business. My question is; when you talk about the trade-offs that you make, how much of a trade-off do you make in terms of those three? That is, how good the business is, how strong the balance sheet is, and how good the management team is. You mentioned the management team but in a case like we have today with the pandemic where there's excessive amounts of corporate debt, the balance sheet is hugely important. >> We try not to compromise too much at all, however it depends, is the answer to the question. In times the volatility when the stock market is going down, your need to compromise diminishes dramatically. Not necessarily in this downturn but in most downturns all stocks go down and then you can pick and choose, which is a terrific environment for somebody like myself. In this environment, in this latest pandemic, just to bring it up to date, you had a big bifurcation in the marketplace on the sell down where equities in certain industry segments like travel and leisure, oil and gas, industrials. Those equities were hit very hard, which was enough. We found plenty to do but there was this other part of the stock market, mainly, very safe, fast-moving consumer goods, food companies, things like that and also technology stocks that held up very well, that took that component of those industries in the market and made them unavailable to us in this downturn. We did not have to compromise and usually in a downturn you don't. What happens when stocks go up over multiple years is the businesses that you bought during more volatile periods starts to hit fair value or even go above fair value and you sell those off and you want to find new investments and evaluation risk becomes unbearable. There is this gravitational pull that has happened a couple times over my career where all you're finding out in the marketplace or businesses with somewhat lower quality and that's when the environment becomes very, very difficult for a value investor. In this cycle it's been particularly difficult because, one, the bull market has been very long. Two, interest rates have come down to levels where businesses that grow very rapidly over time or at least are expected to grow very rapidly over time, have become much more valuable in present value terms if you want to put math behind it. Part of the reason why growth stocks have done very well or very steady companies have done very well and they all trade at elevated valuation or have traded, still traded at very elevated valuations, and so you get this gravitational pull towards everything else. I think as a group, value investors have not been very good at this, which is causing some reputational damage right now, but as value investors, you have to be very careful during time periods like that to not make the mistake of, let's say, buying a cyclical auto company because the multiple is cheap. Or an oil and gas company when the oil price is at a very high level, but the multiple looks very cheap. Those are common mistakes that are made during time periods like that and that makes it much more difficult to make that choice, "Okay, I got a cheap stock. What's the quality of the business?" You have to be very, very careful during those time periods. >> Right. Yeah, that makes a lot of sense. You mentioned something about the DCF, the discounted cash flow, that I think we talked about when I spoke to you a week ago. That makes a lot of sense for me as well, and a lot of people, they don't understand the mechanics behind this because this is shorthand in terms of enterprise value to EBITDA or price earnings ratio and things of that nature which distort the view of what's actually happening behind it. But the way I was thinking about it when you explained it just now is that when you do a discounted cash flow model, you're going over a certain period of time, a discrete period, say 10 years, and then at the end of that, it's a carry on as usual period, which a lot of people call the terminal value period. In these growth stocks, huge amount of the value of that discounted cash flow is in the terminal value period, and so what happens over the life of the actual DCF or what happens to interest rates is hugely important to the value of that stock to make it go up and down tremendously compared to the stocks that you are investing in. Walk us through how you think about that and then why therefore, you're much more geared towards value than growth as a result of that. >> The mechanics are interesting but can get very confusing as you mentioned. You also have a fundamental problem with the financial mechanics in that looking at anything 10 years from now is purely speculation, and as you know, we're not in a speculation business. Even when we use a discounted cash flow model, we only go out a few years and then we capitalize the earnings power of the business at a multiple. That multiple has some pretty strong fundamentals that underpin our view that have everything to do with what your investment alternative is, what is the risk-free rate? What has it been over the last 30-35 years? We think about that as your alternative and how much of a risk premium that we want to take for investing in the stock market. I think with growth stocks, you do have that volatility that you mentioned and it comes at very high multiples. As you discount things back to today as interest rates decline, and you've seen it, you can see it in the equities that have moved the S&P 500. But I would have one mitigator in this cycle in that if you compare it to the technology bubble that we had back in late '90s, early 2000, there's a major difference. Let's just use two examples. Back in 2000, you had Cisco Systems and it was trading at 60 or 70 times earnings. Cisco was one player, it was the largest market share player in an interest industry hardware that had several competitors in an industry where the product's life was short. You had an opportunity on a continuous basis for others to come in and take market share, yet it traded at 70 or 80 times earnings. That ended up being a permanent loss of capital. Now, let's say fast-forward to today, what you have is a number. This is in the US mainly and to some extent in China, you have a number of, I'm going to call them, platform companies where they have grown to such scale and such dominance in their industry, where if they decide to compete in one vertical or another vertical, they have so much market share ability to reach consumers and they have so much financial power, so much cash flow that you're talking about a dominance that is very different than the type of equities that we saw, and the multiples aren't crazy. >> Yeah. >> They're high, but they're not crazy. There's some differences here that need to be recognized, and believe me, we're not buying them because the multiples are too high for us and the risk is very high. However, we realize that these platforms are very valuable. When we get an opportunity to buy them at multiples that are very cheap, we do. In fact, we own some very dominant companies outside the US, most American observers may not recognize their names. Alibaba would be one that people can recognize and we're able to buy that in the middle of this downturn at a cheap price. Naver is a South Korean company, a name that people probably don't recognize and it is the dominant search engine and becoming the dominant e-commerce company in South Korea. We were able to buy that because of some other issue they were having with a Japanese subsidiary, and we ended up buying it at a very cheap price. Another company that we own is called seaTrip, and this is an online travel agent like Expedia in the United States. We were able to buy that company because of what's happening with the pandemic and people aren't traveling anymore and the share price of that had been hit significantly. We recognize the value of these platforms, the scale of these platforms, and how valuable they are over time, but we will only get involved when we can buy those businesses under circumstances that meet our criteria. Cheap stock, these are all great businesses, strong balance sheets, none of these have any debt, and great management teams that have proven that they can create value over time. >> Why don't we actually go and do a deep dive? I think the term you might have used when we were talking before was root canal into some of your individual companies. The company that I wanted to use was ABB, a Swiss company, because I think it talks about a lot of different things when we're doing a deep dive into a bottoms up perspective. But this is a company that's a conglomerate, it's based in Switzerland, so you have the currency, you're thinking about Europe and how well they're doing with the pandemic, it's industrial, so we can talk about globalization, a lot of different things. Talk to me therefore about why you're investing in ABB, as well as many other Swiss companies I might know because I saw an article that was talking about this, and what the risks are in a company like that from your perspective on those four criteria that you were talking about. >> ABB is actually a Swiss-Swedish industrial conglomerate, market cap is about $55 billion and it generates about $30 billion of revenue per year and that revenue comes from four different segments, and each of those segments are large enough to trade on their own. In fact, the company at the inception of our investment for five years ago had five segments, one of which was just recently sold at a very good valuation. Sometimes you come across a security of a conglomerate, where if you look at the individual pieces of that business and you try to value them, as opposed to using a PE or a straight discounted cash flow, you value them on some of the parts. You'll look at each business and say, "What is the nature of this business? What is it worth on a straight discounted cash flow? What would it be worth to somebody else if they were able to buy it and generate some synergies and pay us the owners of that business a higher value?" ABB was in that category. We looked at the business, we divided it up into its separate pieces, we value them individually and came to the conclusion that if there were some way to pull this apart into its individual pieces and to manage the conglomerate better, because it was earning profitability lower than its peers in each of the individual segments, we saw a lot of value there. We got involved in the change of the management team, and after we got involved, there were other people who recognized the same thing that we did and an activist came in. The company had a very large shareholder as a family, and we engaged with the activist, we engaged with the other large shareholder of the family, and we've been working to help define what needs to be done with this company over time in order to realize the underlying value of business, and several things have taken place since then. The first thing that happened is, one of the businesses went into review, the business was reviewed, the profitability was improved, and then it's been sold off to Japanese company. The second thing that has taken place is the industry segments were reorganize to make more sense and a new strategy was in place to take costs out of this unwieldy structure that exists inside a conglomerate and create focus on each of the individual units. You can see where we're heading with this. We have a number of units inside this conglomerate. They need to operate autonomously and independently, and we think over time you'll be able to split the business up. If you look at the empirical studies going back to your academic days, you will find studies that have looked at conglomerates. What happens when you introduce focus? When you break a conglomerate up into each of its individual businesses, you introduce focus, it generates efficiencies and improves profitability and creates a stronger business that becomes more valuable. That's where we're headed with ABB. The company has spent a fair amount of time trading at a valuation of about $40 billion over the last four or five years. Valuation today is about 55 billion. We think there's probably another 10 or 15 percent left in the stock based on their ability to improve operating profitability, which we expect under new management team that just came in. Earlier in the year, just to put into place how the marking king get myopia and leave valuable companies on the table. This company has no debt, we brought in a new CEO who has a terrific track record, his stated objective is to get the operating profitability up and manage the business using the same strategy that he used to manage another business that he managed successfully. All of the pieces of the puzzle are in place and the market sold that business, the whole company down to a $35 billion valuation. We can get to $65 billion valuation without putting too much emphasis on speculation on what operating profitability they can get out of their individual units. Fear and greed, here we have something where all of the information is publicly available, it's out there for everybody to see. Yet the market gets afraid of businesses that operate in certain industries, even though it doesn't have any debt and has decades and decades of operating history, and just sell it off without paying too much attention to the prize. This is what we do as value investors, focusing on good businesses, right balance sheet, good management team, and taking advantage of periods of time where the market loses its collective mind and just decides to sell a security without paying too much attention to the price. That's somewhat complicated summary of what's happening with ABB. >> That was good. I think the last part gave me a question in terms of what do you do with an investment that you are tracking. It looks good, it continues to look good, maybe even looks better, and the price goes down. Do you therefore buy more, or do you sit on your hands and continued to use the position that you have? >> So I think a little bit more about our strategy will help you understand that. First of all, when we find a number of investments, the way that we construct the portfolio is based on our expected returns. If we have two securities in the portfolio, just as a simple example, one is 50 percent undervalued, one is 30 percent undervalued, we'll allocate more capital to that security that's 50 percent undervalue, that drives the expected return on the portfolio. If we have a business that's 30 percent of value and the share price declines dramatically and there is no change to our estimate of intrinsic value, then we'll go and buy more and increase the position size. In this downturn, of course, almost all businesses, and you saw Google's earnings on Friday and their revenue went backwards. So it tells you that in this downturn, almost all businesses will have a profit decline, which means the time duration over which you'll get to that normalized earnings power is pushed out. But if that time duration is discounted back and we use pretty high discount rates at 10 percent, and the stock price falls by 20 or 25 percent, you're getting a better deal on that stock, then you are getting prior to the decline. What we do is, so our estimate of intrinsic value came down, but the stock fell more than that, so we go out in the marketplace and buy more of that security. There's a somewhat complicated answer to your question, but basically, we'll have to buy stocks when they go down, not when they're going up. >> That makes a lot of sense. What else is the ABB story tells me and you've mentioned this before that your portfolio's dominated by 20 stocks, is the concentration, let's diversify in order to therefore spread our risk, it's that we did the due diligence on these companies and we're going to invest in these. The question therefore is, how much does that required you therefore to be more activist or more active, if you will, in terms of your approach to the individual companies? You were talking about an activist investor at ABB, but how activists were you yourself as a company in terms of dealing with the company versus insurance company or a pension company that might not be very activist. >> That's a great question. Just to be clear, we do on 40 securities in a portfolio, but we do have 20 of them most of the capitalists invested in, and it is a fully diversified portfolio. But to get to your active question, we manage $20 billion and we operated scale. As you mentioned, we're pretty focused in a way that we allocate that capital. When you're investing large sums of money, you become a very large shareholder of the companies that you're invested in. To the extent that you can use your legal rights as a minority shareholder to accelerate the time period over which you can generate your returns, we feel that not in an activist way, we don't go on boards of directors, we generally don't like to run a public campaign. However, we will look out for the best interests of our shareholders and we will enforce our legal rights as a minority shareholder, and on occasion we will communicate with other shareholders and share our views and oftentimes they'll share their views, and try to find like-minded shareholders to see if there's any way that we can accelerate the time period over which value is realized. I wouldn't put this in the category of, if we don't like what's going on we necessarily sell, we will engage in a dialogue with the management team and other constituents of that business to try and ensure that value is being created in the interest of the shareholders. >> Leads for me into Compass Group because as I, I don't know a ton about Compass. You can introduce. This is another company in your portfolio. It has good normalized earnings power, you said. One thing that I have in my notes from our conversation was is that there's a potential activist angle in terms of that company. So maybe you can talk about, first of all, what is that company, why does it have good normalized earnings power, and where is the activist angle if there is one? Maybe my notes were wrong. >> Compass Group is a great business. It's the largest corporate caterer in the world. Corporate catering is a title that can be somewhat misleading. So let me explain a little bit about what they do. The easiest way to understand it is, you go to a sports arena and buy a hot dog and there's an operator, there's a food service operator that provides those services. When you go to a hospital and you're in the bed and you get your meal, that comes from a kitchen. They'll operate those kitchen. Same with nursing homes. When you go to a university, you remember all the bad food at the university. Well, it's much better today than it used to be because parents are paying a lot of money to send their kids to school and they want their kids to eat well. They provide meals to kids in elementary school. So all the meal programs that are paid for by the government and within private schools. Then in business and industry, very good example is the Google campus where they operate, I think a couple of dozen restaurants. I've been there and I've seen them, it's absolutely incredible. But if you go to factories, they have a cafeteria. Artisan Partners in Milwaukee has a cafeteria for the employees that work there. They also run vending programs where they'll set up vending services inside a company, whether that just be a vending machine all the way to you can get sandwiches and sodas and snacks and fruit and vegetables out of the vending service that they provide. So anywhere that there is food needed outside the home, that is not inside a restaurant is the type of catering that they offer. You can imagine this is a good business. It's very recurring. There's hundreds of thousands of contracts they operate all over the globe. Their competitive advantage, since we're talking about root canals here, their competitive advantage comes from buying food at scale. If I'm little Artisan Partners in Milwaukee and I want to operate my own cafeteria and I want to serve macaroni and cheese, I go over to Kraft and I say, how much will you sell me your macaroni and cheese for, and they say go to Costco and buy it. But with Compass Group, who has a revenue stream of £25 billion, roughly $45 billion, goes to Kraft and says, I want to buy macaroni and cheese, they get a very large discount. So then a salesperson from Compass Group shows up at Artisan and says, "Hey, I could serve your employees macaroni and cheese at a much lower cost or I can serve them something far more nutritional at the same cost." So they have a big competitive advantage. They also know how to manage labor. This is a great business. It has a long-term outsourcing trend. As more hospitals, universities, businesses like Artisan, as they outsource more of their food needs, this company and it's competitors grow over time. So it's a nice business. It doesn't have high operating margins, about six or seven percent, but it doesn't require any capitals. So the returns are very high. That all worked very well and is extremely valuable until something unexpected happens, like a virus. All of a sudden all your sports arenas are closed. Sports was about 12 percent of their revenues. All of it gone. All the universities shut down. So that's another roughly 15 educations, about almost 20 percent of their revenues and 65 percent of that business disappeared. Providing catering to offices and factories is about 40 percent of their business and about 65 percent of that disappeared. Now the health stayed steady and they do a lot of remote offshore mining oil and gas and all that stuff is essential, so that kept on going. But about half of their revenue disappeared, of course. The share price got clobbered. Balance sheet is very clean. We have great, very experienced management. We have a business that's the largest in the world and have significant competitive advantages as I laid out. We think eventually the virus goes away and we think people still need to eat and we think people will still go back to sports arenas in universities. We may lose some business if people work remotely, but we think that that's relatively small. We also think Compass Group will pick up a lot of market share over time as smaller catering organizations are going out of business in this pretty fragmented industries. We think that they'll get back to something about two billion pounds of profit. We think that that's worth pretty close to £30 billion of value and the current market gap is about £19 billion. We think it'll take a couple of years. We need either herd immunity or vaccine. One or the other will happen eventually. We'll go back to some normal level of food consumption in these activities and we should see a nice revaluation in the business. But you can see it fits in the same thing as ABB. Great business, strong balance sheet, good management, training, and a deep discount to intrinsic value because there is a problem. We value investors. We get involved when there issues because we can buy the stock at a low price. But I don't have to, and I think this goes back to the very beginning of our conversation, I don't have to make a lot of judgments about what the future will look like. I know people like to eat. I know that they have competitive advantages. Those competitive advantages are unlikely to get eroded given the scale at which they operate. If you think about this as a platform company in the way you think about Google and how big they are in advertising, you think about Compass and how big they are in food purchasing, it is unlikely that you have somebody come in that can replicate what they done. There other companies; Sodexo, is a French company that's in this business, much smaller. Arrow Mart in the US, which some people may recognize that brand. Much smaller, have not been able to operate with the efficiency and the scale that Compass operates. We think that this is a market share gainer over time, and a great business, and it just happens to be having a problem today, which allows us to buy the stock at a cheap price, without having to make too many judgments about what the long-term future will look like. Very different approach the growth stock invest. >> Oh yeah, definitely. The interesting bit for me is this part about not having to make a decision about what the future will look like, which is what you get in growth stocks. It makes me think about how you're thinking about the pandemic. Because a lot of this you were saying is based on the pandemic. How do you think about the pandemic from a financial perspective in terms of accompany like Compass Group. How would you be able to verbalize what this shift is in terms of their discounted cash flow, and what impact that would have on the value of the company? >> Yeah. Well, in a normal time periods, a company has roughly seven percent operating margin, and today they're running at break-even. So there is no cash flow today, which is what the market is reacting to, and this gets back to what I talked about earlier in our conversation, the day that the company is able to earn it's normalized level of operating profits because of the pandemic, is pushed off. The value of the business is the present value of the future cash flow, and you have to discount it back at some discount rate. So the longer it takes to get to that level of earnings power, the lower the value of the business. What happens during time periods like this, is the market overreacts, and pushes the share price down to levels that more than reflect the current problems in the business. So we can find corollaries for the vaccine, we can go back to the 1918 experience, and we can look at what happened there with herd immunity. We can look at Ebola as a corollary on the science community, and how long it took them to get a vaccine. We can look at the corollary on how many companies, and how many clinical trials are done for the average drug, versus how many companies, and how many clinical trials, are being done for this vaccine or for an effective therapeutic which may be just as valuable. We can use that information to come to some conclusion over how long it might take before we get to some level of normalcy, and how much confidence that we have in that. I think the stock market, in the way that valuations look today, have almost no confidence that this will go away. In the way that we see it, travel, leisure, oil and gas, Companies like Compass that have been hit as a result of the pandemic, they suffer at very depressed valuations. Yet growth stocks, they are mainly trading at very high valuations, I guess, based on one very low interest rates, and two, an underlying assumption that we never go back to normal. We can, as I said, use information, can look at the 1918 experience, we can look at historical clinical trials, we can look at historical hard to solve problems like Ebola, and come to some rational conclusion as to whether or not or what the odds are that we have some good outcome, that drives us back to normal with the vaccine, sorry the pandemic. >> I was going to say that you open the Pandora's Box on a macro with that last answer, because there was the semblance of growth versus value in that. You're a bottoms up guy, we already talked about this a week ago, so we're not going to go into great detail on the big picture macro. But I mean, when you think about growth versus value, what's on your mind in regards to that? Because you're a value guy, where's that paradigm headed for you that makes any relevance for you. >> It's a straw man to really talk about this because, growth is part of the equation on what the business is worth. We're agnostic, we don't want to have to speculate too much about how quickly, and how long a business will grow in the assumptions that we're making about the investments that we make in the portfolio, and if we can get them at an undervalued price, we certainly will react, and we talked a little bit about this. We do own Alibaba, we do own Naver, which was the South Korean search engine company. We were able to buy those, but we had some underlying assumptions on what we believe to be, a prudent measure of how fast those businesses could grow. The example that I like to use with in client meetings is if you in a normal economic time period had the ability to choose between General Motors at eight times earnings and Google at eight times earnings, which one would you buy? It's pretty simple. Even if you said General Motors is at eight times earnings, and Google's at 15 times earnings, I would still go for Google. Because it's going to grow, and it dominates its industry, it has very high level of profitability, it generates lot of cash whereas General Motors operates in an industry where there are a number of suppliers, there's excess capacity. Every country has to have its own auto manufacturer, and it's heavily cyclical, it's a capital good as opposed to advertising, and it's just not a very valuable business. But then if you put Google at 35 times earnings and General Motors at six times earnings, then the equation starts to get more difficult. So you can see that things exist along a spectrum, and there are a number of companies that are in the middle of that. So you have to take those characteristics. Is this a good business? How fast does it grow? Is this a good managed team, and a good balance sheet, and then most importantly, what do I have to pay for that? It's all about price, which is what many investors, and individuals forget about. It's not the business, it's the price that you pay for the business, which allows you to invest both in generating a return, and managing your risk. These are both very, very strong principle. So you don't end up like that person who bought Cisco Systems in 2000 who never made their money back. Those are the types of things value investors avoid. >> I think that's a perfect lead into my wrap up question for you, which is about individual investors takeaways. Because the strategy that you're running with, is a strategy that a fan can make. You're running institutional money. What can a individual investor take away from what you're saying? What's the most important lesson that they can take, and replicate the returns that you get? >> Well, it's an interesting question. By the way, we have a mutual fund, the Artisan International Value Fund, and of course, individuals can invest in the mutual fund. We reopened it for the first time since 2011 this year because of what's happened with the market sell-off and there are more opportunities. But putting that aside, I'll just use an anecdote to answer your question. I was at a party one day, and a friend of mine was trying to explain to his adult child what I did for a living, and it's a little bit complicated because I invest outside the US with a value strategy. So he was trying to explain it to his son, and he realized that his explanation was getting too complicated and his son might not understand it, and he giggled at the end of it and said, basically, he does a job that anybody can do on their own. I looked at him, and I said to him, you know what, you're right, you can go ahead and you can open up a Schwab account or a Fidelity account or wherever you want, and you can put your money in that account, and you can go ahead and buy stocks. I said however, whether or not you have generated significant wealth over a long period of time, is a much more difficult question to answer. So my advice to an individual investor who has other things to do with their time that they are very good at, is either buy an index fund, or find a manager that you think can add value over time because index funds are not the answer to everything. You do not want to provide your capital to an unthinking algorithm. There's no thought put behind it, it's just an algorithm. There's nobody looking at that index and saying, oh, that company has too much debt, you don't want to invest in that company. There's nobody who's doing that. So you find some managers, and there are lots of tools that you can use to do that out in the marketplace, that have done a good job over many, many years, where they have their money invested alongside your money, which is what we do at our firm. Let the professionals do their job the same way you wouldn't try to fix your own 8-tracks system or your own car. There are people who are qualified to do that, and I think you should probably hire somebody like that to do it. >> Great answer, and I have to say it's been a great discussion. I hope that you enjoyed it as much as I did. David, thank you very much. >> Thank you very much. It was my pleasure. >> Welcome to the end of the video. We know that on average, 85 percent of you who start a Video on Real Vision finish it. That's extraordinary, on Facebook it would just be four percent. That's because Real Vision creates the most engaging content in the entire media world. 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