The transcript from this week’s MiB: Masters in Business: Samantha McLemore, Patient Capital, is below.
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This is Masters in Business with Barry Ritholtz
This week on the podcast, an extra special Masters in Business Live from the Phillips Collection in Washington DC I sit down with Samantha Macklemore of Patient Capital. She’s known as really the protege of Bill Miller, who she’s worked with for the past 20 years. First at Leg Mason, then at Miller Value she runs Patient Capital and then has taken over the Opportunity Equity Fund from Miller Value. Her firm now runs it. I thought the conversation was fascinating, and I think you will also, with no further ado, my live conversation with Patient Capitals Samantha Macklemore.
Barry Ritholtz: All right, let me look at my notes, which says, I’m the host of Masters in Business, a podcast that’s been on Bloomberg for the past 11 years. The first Bloomberg podcast. Now there are dozens, many, many award-winning podcasts. Forgot to button my shirt after they ran the backup mic. So let’s get that taken care of since we’re on tv. So most of you have some idea who I am. Sam, why don’t you tell people who you are?
Samantha Macklemore: My name is Samantha Macklemore, I’m the founder and CIO of Patient Capital Management. I started my career many, many years ago now, I dunno how it’s been so long as an analyst at Leg Mason working for Bill Miller, who was a, a very well known value manager.
Barry Ritholtz: So I want to talk a little bit about your time with Bill Miller, but before we get to that, let’s start in college. Magna cum laude from Washington and Lee originally chemistry, but eventually changes to accounting and business. What was the original career plan?
Samantha Macklemore: Well, I, I didn’t have so much a plan when I first decided to major in chemistry, I took chemistry in high school and thought I was really good at it. And then I got to, so I was like, I’ll major in this. I I like to be good at things. And I got to college and that first class I quickly realized I was not so good at it. You know, I, I’d never worked so hard for a B and so I was like, you know, and some of my friends were, you know, doing much better. So I was like, no, that’s not, we’re gonna have to reexamine this whole thing. So I wound up in the business school ’cause I was analytical and that was a much better fit.
Barry Ritholtz: Accounting and business, not necessarily finance and investing. When, when did that spark light?
Samantha Macklemore: Well, it was, they didn’t have a finance degree at the business school. So again, I was very good at accounting. It just came naturally. I don’t know what that says about my brain, but, and I got involved with the investment club. I’ve had some investing experience with my dad who tried to get me interested in markets in high school, you know, in the late nineties. It was a roaring tech bull market much like we’re seeing today, although I don’t think we’re peak bubble. And he bought Dell and I had some funds that were for college. So he had invested those and tried to get me engaged. So I’d had a little bit of experience in high school and then I joined the investment club and I just liked that a lot.
Barry Ritholtz: So how did you find your way over to Leg Masons? Was that your first job right outta college?
Samantha Macklemore: That was, and I like to say I won the job lottery because it was the fall of 2001. So now we were in the tech market crash. It wasn’t a great job market, fortunately, you know, there were a lot of investment banks recruiting from my alma mater. So my plan was to go there. I was ready to do the all-nighters in New York. And Bill, who also went to Washington, Lee happened to come back, you know, the fall of my senior year. He did some speaking. He met with the investment club and I got very lucky. I asked him if I could send him my resume and he said sure. So I sent him my resume and, and joined him as a junior, junior analyst right out of college.
Barry Ritholtz: I imagine Bill Miller comes to an investment club at his alma mater and every person is handing him a resume. Is that accurate or were people a little more circumspect?
Samantha Macklemore: No, you would think, I mean, if I have advice to young people, it’s like,
Barry Ritholtz: Give Bill Miller your resume.
Samantha Macklemore: Give anyone your resume. Go after it. Go for the job. Everyone said there’s no way you can get a job in investment management. And so I just think people thought, okay, this isn’t what, you know, I’ll go do banking, I’m not gonna try. So actually I think I was the only, the only one that sent in my resume. Resume. Really? Yeah, that’s a, the only one that asked to do that.
Barry Ritholtz: There’s a lesson in that. So you start as an analyst at Leg Mason. How long did you do that? When did you transition to a portfolio manager? I
Samantha Macklemore: Was an analyst for a few years. So I started in 2002 and became the assistant portfolio manager of the Opportunity Trust, which is the mutual fund that Bill and I worked on for many years together that I now run in 2008. In, in August of 2008. Right. Good Timing.
Barry Ritholtz: Yeah, right before the markets fell apart during the financial crisis,
Samantha Macklemore: The next month was all hell brokers. Yes. We’ll, we’ll talk about that in a bit. But you spend 20 years working pretty much shoulder to shoulder with Bill Miller. What was that like? What did you take away from that experience?
Barry Ritholtz: I mean, it was amazing. I, I can’t express how lucky I was. I was just so lucky. I, you know, I think it’s an apprenticeship business. So I really, my desk was always right beside bill’s and he liked to teach. And so I would go in his office, we would look at the Bloomberg and you know, look at stock charts and I got to attend a lot of meetings with great CEOs. Jeff Bezos spoke at our investment conference in 2003 the year after I joined. And I got to hear his speech and be in some meetings with him. And so I couldn’t have been luckier in terms of what I was exposed to and that learning opportunity.
Barry Ritholtz: It’s kind of interesting you work with a legendary value investor who is, doesn’t really fit the mold of a traditional value investor. How much of his philosophy did you make your own? How similar or different of you to the Bill Miller style of investing?
Samantha Macklemore: Well, we have a lot of similarities. I think that’s one of the reasons we hit it off. And you know, I, I would say at my core, I’m a contrarian value investor. I didn’t grow up with a lot of money. I had to make money go far. I looked at the markets, I like stuff that was down that was generating cash. Bill and I, you know, when I first applied, talked about Eastman Kodak, which ended up being one of our biggest mistakes, both of us. But we kind of bonded over that. And what was much more, you know, transformational to me was Bill’s view. And he was, he was criticized when I joined him as not a true value manager. ’cause he had invested in names like Amazon, you know, in the early two thousands. And people said you can’t possibly be a value manager if you’re investing in these very high multiple stocks.
And you know, Bill used to joke that he liked to hire people young so he could imprint them like the baby bird, that whatever the first thing it sees it, it thinks is its mother. So I was definitely imprinted, but when Bill made the point, listen, we don’t know what the best values in the market are today. ’cause it depends on the future and the future is unknowable so no one knows what they are. But we do know if we look back over long periods of time, what the best values are, ’cause we have hindsight bias and we can look back and say, well, what went up the most clearly that was the most, the best value. And if you look, it’s always names that can grow and compound value over long periods of time. And those types of companies, because their prospects are so promising, they don’t tend to trade at low multiples.
So he said, as a value manager, why would you have a process where you explicitly exclude what you know are the best values in the market? That doesn’t make sense. And I thought, well, yeah, that just doesn’t make sense. Now to a contrarian type investor, you know, it’s not easy to, ’cause it depends on a future that’s unknowable, it always does. And so where can you get that conviction that that can be challenging? But I think that had a, you know, certainly a big impact on me and it’s a core part of our process to look at a mix of different types of opportunities in the portfolio.
Barry Ritholtz: ] You used the word conviction a couple of times. Opportunity Equity has always been a high-conviction fund, somewhat idiosyncratic strategy. Tell us a little bit about the fund’s philosophy and what makes it so unique amongst, I don’t wanna say value funds, but funds that look at reasonable purchase prices for equities.
Samantha Macklemore: I think we are unconventional and we’ve always been unconventional. And Bill started the Opportunity Trust in 1999 at the peak of that tech bubble. And the idea was let’s create a fund with the maximum flexibility possible to go wherever it wants. And again, there’s lots of structures in the business that make that hard. ’cause style boxes don’t like that people allocators wanna put you in a box and so it hurts demand for your fund when you’re like, no, I’m just gonna go wherever the best values are. But the idea is, over time, that should allow you to earn better returns if, if executed properly. So I think the fund has migrated around over time. It has had a different mix of, you know, what we call attractively, valued compounders like Amazon and Alphabet, which we own more classic value names that everyone would recognize as value, like Citigroup or, and General Motors.
And then we, we like to look at companies early in their life ’cause they’re more likely to be misunderstood. There’s a wider range of potential future outcomes. And, you know, a lot of people don’t feel comfortable, especially in the value investing community, where I think it’s, it’s a more risk averse group who wanna see the value today there, what’s today’s value and what’s today’s price. And again, you know, growth people tend to look further out in the future, but we, we like to have a mix and I think that helps the fund do well in different environments.
Barry Ritholtz: And let me put a little flesh on those bones because this morning the first thing I did was, hey, let’s see how opportunity is done year to date. It has beaten its benchmark year to date, one year, three year, and since inception. So it’s not just like this is a theoretical stock-picking approach. It’s done better than average. Is that a fair way to describe it without getting you into trouble with the compliance department? Yeah, you’re
Samantha Macklemore: You’re gonna get me in trouble with compliance, but yet, well,
Barry Ritholtz: I said it, not you…
Samantha Macklemore: We, we have had a good track record, especially relative to value managers, which have recently, you know, struggled in a very, you know, growthy sort of market
Barry Ritholtz: Since, since the financial, so let, since you went there, since the financial crisis value has been a pretty ugly laggard compared to growth. We’ve been in a very strong era for growth, especially since the end of the pandemic. What sort of challenges does that create to someone that’s labeled a value manager?
Samantha Macklemore: Oh, well, I mean I think it creates a lot of value in terms of, some people say, oh, your value only wanna talk to you. So my colleagues here, she had a conversation the other day and they’re like, we just don’t have any demand for value. No one cares. We’re like, but we’ve done really well and we’re beating the market every year since Sam took over. And it’s like, it doesn’t matter. So I think it does, you know, my view is our, our primary job is to deliver for our clients. And so if we do that, everything else will work out. I’ve seen this in this business time and time again. If you deliver results, everything else will work itself out. And so, and I, I I strongly believe value will have its day in the sun again, but it might take a, an ugly market. So I’m not, I’m not hoping for that.
Barry Ritholtz: I’ve always tried to figure out a way to more appropriately describe what you do, what Bill Miller does. Is it growth at a reasonable price? Is it value in growth? Like how do you sum it up in a elevator pitch?
Samantha Macklemore: Again, I think it’s value. ’cause if you look at every name in the portfolio, we think they’re all undervalued. But the value of any business is the present value of the future. Free cash flows and growth is a very, very important input into, you know, that calculation. And so, so we are valuing businesses, but I also think it’s important to have diversification between different types of names in the portfolio. And so, you know, I wouldn’t feel comfortable being fully invested in this market and all the griest stuff that has higher valuations. You know, I like having some cheaper names in there that are likely to perform well in a different sort of environment and there’s really attractive values in the value area that have just just been left for dead. So we’ll be patient waiting for the market to close those gaps.
Barry Ritholtz: Since patience was brought up, let’s talk about Patient Capital. What inspired you to launch the firm and tell us a little bit of the thinking behind the name.
Samantha Macklemore: I’ve always been pretty driven and I’ve always had entrepreneurial interests. And so when I became the co-manager with Bill on the Opportunity fund in 2014, I was also interested in developing my own independent track record. So BI Bill gave me some of his personal money to run independently and be the sole decision maker. So at the end of 2019, that had a, a really good track record. We didn’t have an institutional business at Miller Value Partners we had back in the day at Leg. But Bill was more optimizing for the kind of life he wanted to live. He didn’t wanna grow and build a business. So I said, Hey, let me go after this institutional business. And there was at least stated interest in women and minority led opportunities there. So I said, it looks like there might be interest in the marketplace for this. It was important to me to have, I think it’s a great profession for women. I think I’ve read a lot of research on the importance of role models in the industry. So, you know, that was, you know, part of my decision. So we decided to turn it into a private fund, like a hedge fund structure. And we did, we made the decision in 2019 and then we actually launched it in 2020 right. In COVID, which was not the best time to..
Barry Ritholtz: Not a good time to launch in new fund.
Samantha Macklemore: Whenever I make these big decisions, the market, you know, goes a little wonky. Right.
Barry Ritholtz: Since you’ve become the sole manager of the opportunity equity strategy, is it run the same way it was? How has it changed since Bill has retired from being co-manager that Yeah, so
Samantha Macklemore: The philosophy and process is exactly the same as what we’ve always done. And you know, the, the decision making is different ’cause it used to be a co-decision making structure. When I first became co-manager with Bill, he said, okay, great, you’re co-manager, but I’m not gonna let some 30 something year old tell me what to do on my fund. And I said, I got it. I gotta, you know, I have to convince you. And so over time, you know, it became more equal co and then I, I took it over, obviously when he stepped off at the end of 2022
00:15:05 [Speaker Changed] And Patient Capital has acquired this, it’s now a wholly owned subsidiary. Is that right
00:15:12 [Speaker Changed] Now Patient Capital is, you know, the, the Opportunity trust mutual fund business and the institutional business that I started under patient. And so the, all the team and the structure,
00:15:21 [Speaker Changed] How do they differ aside from a mutual fund has its own rules, regulations, and specific Well that’s
00:15:26 [Speaker Changed] The primary way again for me, I like to think one philosophy, one process, one team. And we’re just looking for the best ideas in the market. And then if it’s appropriate for the strategy, the mutual fund has more restrictions on what it can do, even though it has the widest latitude possible for a mutual fund. So, you know, we owned Bitcoin starting in 2020 in the private fund, but we couldn’t in the mutual fund. Now we own the Bitcoin ETFs, but it would be differences like that.
00:15:52 [Speaker Changed] Coming up we continue our conversation with Samantha Macklemore, chief investment Officer and founder of Patience Capital, talking about the state of the economy today. I’m Barry Ltz. You are listening to Masters in Business on Bloomberg Radio. I am Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. Let’s return to my previously recorded conversation live at the Phillips Collection in Washington DC with patient capitals, Samantha Macklemore. So that one doesn’t think of Bitcoin as a value trade. Tell us what your thinking was there.
00:16:49 [Speaker Changed] Yeah, well my thinking was, I really screwed that one up because Bill got involved in Bitcoin when it was a couple hundred dollars a coin. And I was like, oh, this is another one of those things that’s gonna go to zero. ’cause Bill said, you know, it could go to zero or, but if it goes up, it’s gonna go up a lot. And I was like, I don’t need another thing going to zero. Big, big, big mistake. But, you know, then it had its run, it made it almost to 20,000 in 2018. You know, I again was telling Bill, when it got to 3000 bill, you should, he had a fund. And I was like, it was a huge position. I was like, you should cut it back. You know, this is, you know, has some risk. And it went to 20 and then it did crash, but back to 3000.
00:17:28 So that was another good lesson. But by 2020 again, I thought that there was, you know, potential inflation risk given all the, you know, monetary and fiscal stimulus. And by that time, you know, bill was on the phone every day with institutions and in, and you know, big in individuals that wanted to get up to speed. And there was a bull case early on about it being digital gold. But I thought it was very unlikely because there’s one gold and it has a special psychological space in the investment universe. But by 2020 I thought it was much more likely and it was developing along the path. And usually after you have these crashes, things don’t keep coming back. And so, so I bought it in the fund there on the belief that it was digital gold, which I could actually analyze. And you can look at the market cap of gold and look at, you know, the younger generations are much more inclined to digital assets. So if this is a proxy for the long-term potential here, what’s the upside? And if you do that math today, you know, Bitcoin could be worth 1.3, $1.4 million a share or a coin sometime in the future. And so again, I I still believe that to be the case.
00:18:35 [Speaker Changed] Hmm. I would would not have guessed that that’s a fairly contrarian perspective for a, a so-called value investor. Let, let’s talk about some other fairly contrarian approaches. You were an aspiring innkeeper in Vermont. I I have to ask about that ’cause it’s just so off what I, I know of you Tell us about adventures in inn keeping. Well
00:19:02 [Speaker Changed] I was an innkeeper, I’m not the actual innkeeper, but yes, I like to learn lessons the hard way. That’s, you know, part of my unfortunate law in life and you know, so 2011 we’d gone through the financial crisis, you know, bill was this genius. We’d had a really poor performance. He spent all his time working. I just had my first daughter, which totally rearranged everything in my life and my priorities. And I was like, you know, do I wanna work that hard and do that? Or you know, now I have this daughter and she’s so important to me. So I was considering a whole bunch of things and you know, innkeeper was one of them, as crazy as that sounds ’cause it’s so not my thing. Like, but, and then it was the real estate obviously bubble and crash. And so, you know, I think I had mentioned this to my family, they live in Vermont.
00:19:53 My dad was like, oh the Vermont Inn is going up for auction. And I was like, oh this is very interesting. It’s a sign of our times. Let me go to this auction. So my husband and I went to the auction. You know, we, I did work on what I thought the end was worth before going into that. And you know, there was a first bid for the end and then we bid the second bid and then I’m like, what are you doing? That was crazy. Like don’t do that again. But that was it. It was over. There were no two bids, there were no more bids. And so, you know, we ended up with an inn that was closed down ’cause it had gone through foreclosure. Fortunately my family was all there. So then I made, I compounded the air by getting my brother-in-law and sister involved to run the inn. So got family involved in an absentee business and you know, we also were on a reality show. We won’t go into that. Did you, did
00:20:41 [Speaker Changed] You really
00:20:41 [Speaker Changed] Do a reality show? Yeah, we did a reality show. ’cause I’m not gonna tell you the name ’cause I don’t want you to go watch it, but I needed someone to help me figure out how I was gonna run this in. But we got it open. So the, the auction was in October. I wanted to get it open by the holidays ’cause that’s obviously the big ski season there, which we did
00:21:00 [Speaker Changed] December. You did? We
00:21:01 [Speaker Changed] Did that. Yeah. My dad, my husband’s dad, we got everyone involved in getting the in reopen and we had to figure out how to get people to come and it, so it was, it was not for me. I quickly figured that out. But you know, we kind of got the business running and then sold it. So,
00:21:17 [Speaker Changed] And and what was the lesson? We learned the lesson from don’t scratch your nose at auctions. Yeah,
00:21:22 [Speaker Changed] The lesson was, I like markets. I can sit at my desk and make a lot of money doing very little versus managing a chef who has, you know, a lot of issues on when I tell him the food’s not so good and he thinks he’s an artist and you know, I was like, this is not for me. And the, the maximum amount you could make on it and like that was not that much. So
00:21:42 [Speaker Changed] Not a lot of bad business model.
00:21:44 [Speaker Changed] We, we did make some money so it was okay. But it was a lot of work for, you know, how much you could make. Yes.
00:21:49 [Speaker Changed] And you were working full-time?
00:21:52 [Speaker Changed] I was working, yeah. I was working full-time so you know, I wasn’t on site again. I had people there working
00:21:59 [Speaker Changed] That. That’s an amazing story. Let, let’s talk a little bit about philosophy. You have talked about Buddhism and stoicism as related to finance and investing. Tell us a little bit about that.
00:22:12 [Speaker Changed] Yeah, well I think in investing in Mark and markets, having the right mindset is probably the most important thing. And you know, it’s a mixture of art and science and a lot of people think the scientific part is more important. But I think the art part is more important because, you know, there’s a lot of data on how much more you can make in equity markets over time. And so the reason that you can make more is ’cause you have these periodic losses and it, you know, I liken it to dieting. It’s like people don’t fail at dieting ’cause they don’t know they shouldn’t eat the cookie. Right? Like, you know, you shouldn’t eat the cookie. It’s because it’s too tempting and people know you shouldn’t sell when the markets are down mostly. But it’s hard to do that ’cause you feel like your, you know, your wealth is at risk.
00:23:00 And so I think having tools that help you have the right structure for how you think about things and how you behave are really important. I mean some people are naturally wired that way and different people, you know, have different abilities. But I think having certain tools and mindsets can help anyone be better. And so, you know, staying calm, understanding that there’s only certain things that are within your control and that’s what you can focus on. And then understanding that there will be times when you lose money but over time, if again it’s so sensitive to time horizon, if you have a long time horizon and you can put your money away for a long time, there’s almost nothing safer If you have a 20 or 25 year time horizon, you know, equities have never been down over that time. The US period. Yeah. US equities. Yes. And so I meditate regularly and you know, I keep a journal and I remember during the COVID pandemic, you know, we were all locked away, but I was emailing with Bill and he was reading stoicism and that kind of got me interested and we were, you know, he was sharing quotes. And so I think it can really help you in the moment to make better decisions if you have these tools
00:24:10 [Speaker Changed] Re recognizing what is and is not within your control and a sense of calm, it turns out to be useful in markets. Yeah,
00:24:17 [Speaker Changed] Imagine that. Who,
00:24:19 [Speaker Changed] Who? Whoever would’ve guessed that. And yet most people don’t reach that conclusion. They, they go the other direction. Yes. So, so let’s talk a little bit about where we are in the state of the market today. I’m watching real time transcription, which five years ago would’ve been magic. Mm. There’s been dictation software for decades. It’s always been pretty terrible. It’s amazing how good this is in real time. So let’s talk a little bit about artificial intelligence. What are your thoughts? How does this affect how you’re looking at overall markets and how you’re looking at individual companies?
00:24:58 [Speaker Changed] Yeah, well I think it’s, you know, anyone who knows anything about technology, I have not heard anyone who’s knowledgeable about this space. Not say that it’s completely transformational. And you know, more important, you know, I, I think you know the Capital one CEO, you know, he claims to have the first FinTech at Capital One ’cause they were very into data, but he said it’s bigger than the agricultural revolution, the, you know, invention of fire, the industrial revolution, the digital revolution. And I haven’t really heard anyone dispute that. So there’s lots of questions about how long does it take, what exactly does it do? Are companies overvalued now? But I think, you know, a anyone who knows anything believes that the impact of this is just going to be huge. And so when you’re in that sort of situation in the markets, you obviously need to be aware and try to learn, you know, everything you can.
00:25:51 I think we bought Nvidia in January of 2024. The interesting thing about this is I love markets ’cause they’re so interesting but in they’re complex adaptive systems which make them very, very difficult to outperform. They’re extremely difficult but they adapt. And so what’s interesting to me is that we have this AI bubble, you know, hysteria basically where everyone, it’s all you read all the time. And that makes sense given that we’ve had, you know, the tech bubble, we had the housing bubble, we’ve had some of these bubbles. But I think, and it’s possible that, you know, there will be something negative here, but you’re not seeing valuations at all in line with what we saw in the tech bubble. And the companies that are spending these enormous amounts of money, which they are very large sums of money, they’re basically the best companies that ever existed in the history of the world.
00:26:45 If you look at their returns on capital, their free cash flow margin, you know, their revenue growth rates. And so, so I like that there’s all this AI bubble talk because it keeps a lid on the valuations. I think it actually makes it more sustainable. Not that they’re, you know, I would have concern in some of the companies like OpenAI which you know, had under 4 billion in revenues last year and has committed to $1.4 trillion in spend. So we’re watching that very closely. And I think for me, I have children and I’m thinking what does this mean for the future of employment and is, you know, what can I advise them to go into? Which I think that’s a much tougher question now
00:27:23 [Speaker Changed] Then. So, so I’m glad you went over there ’cause I wanted to ask, you’ve talked about the value of mentorship, about training young people, whether analysts or fund managers, what have you. If you look at the unemployment rate today at 4 3 4 4 and then you look at the college graduate under 30 unemployment, it’s more than double that it’s in the nines. What does AI do for that demographic learning to being mentored, learning a trade, being able to get a job at an entry level when their competition seems to be software?
00:28:02 [Speaker Changed] Yeah, I mean it’s a great question. I’m not sure I have the answer to that. I mean, what we know is you can look at industries adopting AI and those that haven’t and there’s clearly an impact on junior hires. So it is having an impact. And you know, Dario Amede, the CEO of Anthropic has said he believes that the white collar unemployment rate will be, you know, five to 25% in one to five years. So huge impact. And so I think it, you know, that’s why I’m thinking like what do you advise young people to do? I think I asked people at my, you know, college that I went to where I’m on the board, the professors there, they’re trying, you know, they’ve worked hard to set up an AI program and help students be literate and you know, well-versed in this. I think if you can use it as a tool to your advantage, you still need humans to do this work. And so, you know, being capable in that is really important. You know, I was at a Santa Fe Institute meeting a couple weeks ago, you know, that was on AI and they talked about how what the models aren’t good at, which I thought was really interesting is complex problem solving and creativity. So those seem more unique human endeavors. So leaning into areas where, you know, those are critical skills I think are important, but areas like law or you know, obviously customer service coding, some of these areas are getting quite disrupted.
00:29:30 [Speaker Changed] And you’re saying complex problem solving and creativity AI is not great at still,
00:29:35 [Speaker Changed] Still these models cannot do it. Now will they get there? I don’t know. But I think what’s useful is to have a human who is well versed and can think critically about, ’cause these models hallucinate, they’ll make up lies. They’ll tell you incorrect information, they’re getting better at that. But having someone who knows how to check facts, use different models in different situations, you know, that’s gonna be very valuable. I think who can figure stuff out that you haven’t been taught go and solve real problems in the real world, I think is also valuable.
00:30:06 [Speaker Changed] So every time we see a back test that’s based on historical data, it always looks great and built into the back test of the assumption the future is gonna look like the past. How much of what we’re seeing in artificial intelligence is sort of paralleling that, hey, we’re working off the corpus of all these documents that have been previously written. If you wanna do something that’s not gonna get replaced by ai, you have to go in a different direction.
00:30:33 [Speaker Changed] Yeah, no, I think that’s a great point. I mean, what the models do is they look at all of the information that’s out there and they can, you know, do things with it instantaneously. And so I think there’s a belief in the technology community that they will eventually have a breakthrough where they can have novel ideas. I, you know, that’s unclear if and when that’ll happen. I, you know, it hasn’t happened yet. And so, you know, if you can do that, if you can use ideas in an innovative way, if you can, certainly, I think in the investment business for long-term investors, what you’ve seen is machine learning and LA large language models have already been used to optimize short-term trading models. And again, we don’t compete there ’cause I think it’s extremely difficult, you know, to compete. But I think long-term, you know, those models have not been used to think about long-term investments at, you know, we talk about time arbitrage and patience and you know, what do we think the world’s gonna look like in 5, 10, 15 years? The future is uncertain, no one knows. So I don’t see how the models are gonna, you know, get an edge there. I mean, if they become smarter than all humans at some point maybe, but it’ll, it’ll be one of the last things hopefully.
00:31:51 [Speaker Changed] So, so are you using AI in your firm and, and if so, how?
00:31:56 [Speaker Changed] We are and we talk about AI all the time and so I, you know, tell the employees all the time like, you have to be all over this and learn how to use these models because you know they’re gonna displace you if you know, not you specifically, but all of us if we don’t. And so, you know, it’s still so early. So I think a lot of what’s going on now is more experimentation both at big companies and small companies. There was an article in the journal yesterday about how small businesses have had, you know, have been transformed by this ’cause they can do so many things. Like I used one to create a profit sharing plan and I just went back and forth with chat GBT like no, I don’t want this, no I want that. Like what is this model? And it like created it for me, you know, know with the back and forth.
00:32:39 And I sent it to the lawyers and it was good to go. I mean it was good. It needed no changes. And so I’d been, you know, I’ve been wanting to do that for a long time and the team was busy with all sorts of stuff so I finally just did it and it probably took me like an hour to do that. But we try it, we try tools on the investment side, you know, that are both specialized and more generalized. I use chat GPT all the time for, you know, everything in terms of doing research and you know, it’s really, you know, quite amazing. And we have, you know, we have a new tech person that we hired who has played around with automating and using agents to do certain tasks that people did. So I do think it is gonna, you know, replace some work now. I don’t think we’ll have less jobs. People will just be able to do, you know, more higher level work.
00:33:26 [Speaker Changed] Make makes sense. You, you earlier compared this to the dot coms, what are the parallels that are a fair comparison to the late nineties tech and telecom bubble and what do you think is really separating this era from the late 1990s?
00:33:44 [Speaker Changed] Well, I think the clearest, you know, parallel is the market valuation overall is at high levels that we haven’t seen since then. So I think the market’s at 22 times, you know, the next 12 months earnings and it peaked at like 25 times then. So we’re, you know, after the financial crisis we were at very low levels and we’ve spent, you know, the past 16 years, you know, having great markets, some of the best markets we’ve ever had and the valuations have risen. So I, you know, again, as value managers, that makes us, you know, on alert for signs that things might be going awry. But there’s many more, I think more significant differences. So during that there was, you know, I think technology hit 50 times earnings as a sector and a lot of the technology companies were losing a ton of money and there was a lot of, you know, debt financing.
00:34:36 So there’s a lot of unsustainable things, the build out of, you know, the fiber networks they were building for future demand that wasn’t yet there. So that’s very different than today we have this, you know, big infrastructure build out, but you know, there’s still shortages of demand. They can’t meet the demand that already exists. That’s a very different situation. And the companies that are building them, you know, building this infrastructure out for the most part are, you know, extremely, the hyperscalers are extremely well capitalized with great balance sheets, high free cash flow margins. So you know, the risks that sort of risk doesn’t exist. And also at the end of the tech bubble, everyone was piled into, you know, bill recognized the peak and actually got out of those names. And what made him recognize it was that, you know, I think in the first quarter of 2000, you know, the, a very high percent, like 75% of money managers outperformed and only two sectors outperformed tech and telecom.
00:35:34 And so everyone was piled into a, a very narrow area of the market that is not at all, you know, what you’re seeing now. And so I just now, you know, I think the, the bear case would be that for some reason, you know, the demand doesn’t exist and you know, the, the spend rolls over again. I still think it would be a much more modest, you know, pullback be just because of those underlying, you know, fundamental business factors. There are are other areas of the market like quantum computing and nuclear fission that are much more speculative that have already pulled back 50% actually just in this decline. So that also is a good thing. I think it keeps the market healthier longer.
00:36:16 [Speaker Changed] So you don’t explicitly talk about economic cycles, but every now and then I hear you drifting over to unemployment and growth and infrastructure and economist type speaks. How often do you use what’s going on in the broader economy as part of your process? Do you think about that? Are economic cycles significant to your process or is the economy gonna do what it’s gonna do and it doesn’t interfere with your approach? Well we
00:36:47 [Speaker Changed] Definitely try to understand what’s going on in the economy because it can have, you know, big impacts on, you know, investments. You know, there’s a lot of, no one can forecast the economy. You know, there’s a lot of good evidence that no one does that, economists don’t do it, investors don’t do it. So it’s a futile effort. Some, a lot of people claim that they have some view about the future, forecast the world, but
00:37:08 [Speaker Changed] What do we see in a recession forecast by exactly every year for the past three or four years? They’ll get it right eventually, right?
00:37:16 [Speaker Changed] And so, you know, the best strategy is just, you know, if you have a long time horizon to stay invested, but we wanna be aware of risks and the impact. I mean, our whole process is analyzing the fundamentals of businesses and looking at what the intrinsic value looks like and that’s a distribution of outcomes. ’cause the future’s uncertain. So we’re doing different scenarios and then we compare it to market expectations. And so we like a clear gap in those two things and we like, you know, better risk rewards, but we, there’s a lot that goes into both, both of those things. You know, sentiment goes into the market, expectations, you know, where people are positioned and you know, obviously the economic cycle for certain businesses has a big impact. It’s very sensitive to your time horizon, you know, just how much it matters and the longer your time horizon, the less it matters.
00:38:05 [Speaker Changed] Coming up we continue our conversation with Samantha Macklemore, chief investment officer and founder of Patience Capital, talking about the state of the economy today. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. I am Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. Let’s return to my previously recorded conversation live at the Phillips Collection in Washington DC with patient capitals Samantha Macklemore. So you mentioned sentiment, I’m trying to remember a moment in history where collectively the investor class, the pundit class, the media all in real time identified a major market bubble at once. Is it, is it just too glib to say, Hey, everybody’s forecasting a bubble, therefore it can’t be a bubble?
00:39:13 [Speaker Changed] Well I’m a contrarian. So, you know, like that that kind of, you know, thinking appeals to me. I think it is true that usually what, you know, Howard Marks wrote a great memo on the whole tech space at in January and you know, I thought the most important line in that was, you know, a bubble is characterized by psychological extremists and so it is that psychological state. So we’re not, when everyone’s bemoaning a bubble and fearing a bubble and claiming a bubble that makes a bubble much less likely. ’cause people are then not positioned in it. And usually we’re the biggest risks are, are not where you’re focused on. If you know there’s a risk in a certain area, you treat it much differently, you manage it much differently. If everyone’s doing that, you know, Nvidia, you know, so, so the risk would be NVIDIA’s earnings are unsustainable and they’ve had this huge run up and they’re, they’ve captured so far about 90% of the economic profits in ai.
00:40:09 Again, I they’re gonna report tomorrow night if I were a betting man, which I’m not, I’m an investing woman, but you know, I would say they’re gonna beat and then the market might really like that ’cause it’s coming into it, you know, oversold. But I think the risk is there’s something happens to earnings, you know, and, and they have an earning cycle. Again, I don’t see that in the near term, but there’s no, you know, valuation, you know, excesses are just not there. Like these companies, if you look at NVIDIA’s growing, you know, 40 plus percent this year, trading at 28 times next year’s earnings, that is not a bubble at, you know, that’s not bubble valuations at all. It’s not what we saw in the tech bubble. So again, I think it is true that when everyone’s worried about a bubble, it’s likely not a bubble.
00:40:56 [Speaker Changed] So people have been talking about a KS shaped economy that the upper arm is doing great, the lower arm is doing poorly, can you apply the same thing to valuations with the market? If you take the top 10 or 20 stocks, they seem to be much more richly valued than the rest of the whatever you want to use Wilshire 5,000 or s and p 500. How do you think about that bifurcation? Yeah,
00:41:20 [Speaker Changed] Well I think there are certain areas, you know, in the market like quality or like return on capital where those, again, if you have high quality, high return on capital, high free cash flow margins, those companies should be valued at, you know, overall a higher level. But we’ve seen very wide gaps there. So I think I, I have a huge respect for the market though. So because we’re, every day we’re doing the work on okay let’s, this company might be attractive, let’s do the work on that and see what the market’s pricing in and we’ll say what is the market telling us this business can do? And usually the market’s pretty good at like, okay, yeah, that’s the easiest case to make and the market will reflect that. So it’s more anomalous to find areas where that’s wrong. Especially, you know, the market’s had a huge move up.
00:42:05 So the more it moves up, the harder it is. But we’re still finding, you know, opportunities I think we added significantly to healthcare and small caps, you know, earlier this year and healthcare until recently was at a 50 year relative valuation low. And those are good businesses with good returns on capital. And so, you know, the market gets so hyper short-term focused, you know, so many people these days are focused on the next quarter and they wanna outperform every month and every quarter. So again, if you can look out longer, I think you, you do have opportunities, but the reason people don’t is ’cause you sometimes have more downside in the short term if you’re buying into, you know, weakness.
00:42:42 [Speaker Changed] So how do you think overall about valuation and future return expectations when generally the markets had a good run and valuations are, if not bilious, a little more rich than average?
00:42:57 [Speaker Changed] Yeah, I mean my view on valuations is that they’re at the high end of the historical range. So again, that makes me more alert, more cautious. I think if you look, you know, at the underlying fundamentals and just the returns on capital of businesses, the free cash flow margins, the balance sheets, higher valuations are justified, but markets go through these cycles of undervaluation to overvaluation and then back again. And so that’s just part of markets. You know, again, I, I don’t think we’re at, you know, levels that I’m extremely concerned. I still think there are, you know, attractive opportunities in markets, but where we can add ballast to the portfolio defensive areas like healthcare, again, I think that helps position the portfolio for a variety of different sorts of environments. And there’s still plenty of cheap area, you know, cheap, cheap names in the market.
00:43:48 [Speaker Changed] So I have three of my favorite questions I always ask guests, but before I get to that, I wanna throw a little bit of a curve ball at you. What do you think investors are not talking about when, when they’re not thinking about AI bubbles, what are they overlooking? What topics or ideas or strategies are they just not thinking about that perhaps they should be? Yeah,
00:44:12 [Speaker Changed] Well that’s a really hard one ’cause I think, you know, there’s so many investors out there thinking about so many things and now in today’s day and age with great podcasts like yours and Twitter and x and all the research online, you can get access to all of the thinking. So, you know, I’m not sure that there’s things, people aren’t thinking about that much. But I would say, you know, one of my biggest lessons from Bill was the big money are made in the big moves. And so you need to be looking for those and you need to, you know, hold those and, and actually holding them is even harder than looking for them. And so I think people focus. If you, if you have a long time horizon and you’re interested in growing your wealth, which is what we want to do, you know, that’s our number one objective is to make money.
00:44:59 You know, I never saw Bill get upset about a stock that went down or losing money on a certain stock. ’cause you know that, you know, in our business, you know, the best investors are wrong about half the time, like half the stocks go down and that’s just part of the business. So you get really comfortable with being wrong. I never saw him mad. I saw him mad when he identified a stock Qualcomm and an analyst said, no, this is really bad at investment, like, don’t buy it. And then it went up 10 times. ’cause he is like, you just don’t get the opportunity to make money. And most of those type of errors, when something’s not in your portfolio, you don’t see it, you don’t notice it’s not there, but it has a huge impact on, you know, your ability to grow wealth. So I, I think there’s not enough discussion about that.
00:45:42 And you know, if you look at endowment returns, I think for the last decade they’re like 6.8% on average. And so the, the US equity market’s up over 13%. So that’s a huge shortfall that if you do the math on like 30 years of 13 versus 6.8, it’s like you, you either you’re up seven times versus you’re up 30 plus times. I mean that compounding math is, it’s shocking actually, even to me who I’m in this business, I know patients, I’m all about compounding and I do the math and I’m like, oh my goodness, the amount of wealth left on the table.
00:46:18 [Speaker Changed] Alright, so let’s jump to our, our speed round and then afterwards we’ll open it up for questions from the audience. I always like to get book ideas from people. Tell us what you’re reading and what are some of your favorite books?
00:46:32 [Speaker Changed] Well, I’m not rea right now what I’m reading is 1929 by Andrew Ross. So that’s nothing new. Everyone’s reading that, but I think it’s, it’s in the
00:46:39 [Speaker Changed] Probably helpful with all the bubble talk.
00:46:41 [Speaker Changed] Well it’s, you know, you have to be aware and I think studying history is really important. You know, I think, have you read The Comfort Crisis by Michael Easter? No, that’s a really good book. And you know, my kids get sick of me preaching, but it’s all about how, you know, we are in a society where, you know, we’re, it’s all about comfort and, and the benefits of, you know, he has this thing Maa where he goes into nature and does really physically challenging things that are challenging enough that he will, and it’s not his thing, it’s actually a Japanese thing, but that you are most likely to fail, but you, and make it challenging enough f just shy of like maybe dying. So again, I’m not a promo, I’m not a proponent of taking it to that level, but I am a proponent of, you know, if you listen to Jensen Wong at Nvidia and he talks about the value of pain and suffering. And he is like, he talks about being a CEO, he’s like, a lot of people wanna be a CEO. He’s like, but the experience is not power and glory. It’s pain and suffering and like the, all the hardest problems come to you. So I think, you know, exposing yourself to things out of your comfort zone where you have the opportunity to grow and have some pain, I, you know, I think that’s kind of what makes life interesting. And so that would be a book that I would
00:47:57 [Speaker Changed] Recommend. So final two questions. What sort of advice would you give to a recent college grad interested in a career in investing in finance?
00:48:06 [Speaker Changed] Well, I mean, back to my experience, I would say go for it and be persistent. I mean, we have a few job postings now, and so we’re trying to fill those postings and it’s amazing to me, you know, a lot of people will go on LinkedIn and they’ll blast out their resume to everywhere and that they’re putting very little time and little thought into that. And we actually have on our site, you have to email it, and we’re paying attention to who’s actually reading that instruction and emailing it. But very few people follow up. I think we had one candidate who followed up like three times. And it makes a huge difference. And it, you know, it demonstrates interest, it demonstrates, you know, you’re paying attention to it. So I would say in a, in a tough job environment, especially it’s, it’s easier than you think to distinguish yourself if you’re actually interested in something. You know, perseverance, taking the time to learn really what the firm is, the person you’re talking to, who they are, what they’re trying to accomplish with this. It’s amazing to me how little people actually spend doing that.
00:49:07 [Speaker Changed] Hmm. Good, good advice. And our final question, what do you know about the world of investing today would’ve been useful 25 years ago or so when you were first getting started?
00:49:18 [Speaker Changed] Yeah. By Nvidia, I know you told me I couldn’t do this by Amazon, by Bitcoin, apple. Don’t miss, you know, but if there’s a broader point, I mean, part of it is like, you know, again, this kind of will go full circle, but the power of patience and compounding, again, it’s like teach what you need to learn. But Bill used to tell me when I was young, because I’d be like, bill, you know, I need to make more money. I need to find more stocks. You need to gimme more responsibilities. And you’re like, calm down. Like be patient. I’m like, no, I can’t be patient. This is my friend who I graduated with, he’s at Goldman Sachs, he’s making like $10 million a year and he’s like, calm down. And you know, now 20 years, 25 years later, it is amazing just the power of compounding. If you find a name like Amazon or you know, and you invest, and again, you’re gonna have a couple, you know, number of big drawdowns in those, you know, stocks that go up a lot go down a lot. And that’s just part of the journey. But it’s so easy to underestimate, you know, just how powerful that can be.
00:50:15 [Speaker Changed] That was my live conversation with Samantha Macklemore, formerly of Leg Mason and Miller Value. Now with Patient Capital, I have to thank the crack team that helps put these conversations together, especially the live event. Alexis Noriega and Elizabeth Srin have been instrumental in making these sorts of things happen. Sean Russo is my researcher, Anna Luke is my producer. Sage Bauman is the head of podcasts at Bloomberg. I’m Barry Riol. You’ve been listening to a special live edition of Masters in Business on Bloomberg Radio.
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