Podcast Summary
Market shifts, undervalued stocks: Experienced investor Bob Robotti suggests focusing on undervalued individual stocks instead of passive investing or betting on dominant US tech stocks due to changing market conditions including high inflation, global energy crisis, and shifting competitive advantage from China to India and Southeast Asia.
Experienced investor Bob Robotti, who has beaten the market by an enormous margin over the last 40 years, believes that the investment landscape is changing, and strategies that worked in the past may not be effective in the future. He expects persistently high inflation, a global energy crisis, and a shift in the competitive advantage from China to India and Southeast Asia. As a result, he suggests that passive investing in index funds and ETFs may lead to mediocre returns, and betting on dominant US tech stocks could be risky due to their elevated valuations. Instead, he recommends that investors focus on identifying undervalued individual stocks, particularly in unfashionable areas of the market. He also emphasizes the importance of recognizing the recurring patterns in financial markets and listening to experienced investors like himself for early warning signs of shifts in the market.
Right place right time: Leveraging opportunities presented at the right place and right time can significantly impact one's career trajectory, even with underperforming academics.
The interviewee's success in life was significantly influenced by being in the right place at the right time during the Depression, which led him to work on notable projects and eventually attend a reputable university despite underperforming academically. His experience at a small accounting firm, where he worked on audits for companies like Tweety Brown and learned about value investing, further shaped his career path and set him on a fortunate trajectory in the finance industry. The interviewee's lackluster academic performance did not deter him, and instead, he leveraged his experiences and opportunities to build a successful career.
Undervalued companies: Investing in undervalued, neglected companies can lead to significant opportunities. Old-timers like Joe Riley and Walter Schloss taught Gary the importance of looking beyond popular investments and the value of paying the right price.
Identifying and investing in undervalued, neglected companies can lead to significant opportunities. During Gary's time at Tweety Brown in the 1970s, he learned the importance of this principle from experienced investors like Joe Riley and Walter Schloss. They had a hard-earned understanding of the inefficiencies in the market and the value of looking beyond popular investments. This experience instilled in Gary a foundational belief in the power of value investing and the importance of paying the right price. He learned that opportunities often arise in distressed situations and that the price paid is the most critical element in investing. Despite market volatility, such as in 1987, the old-timers he worked with remained steadfast in their approach, providing valuable lessons for Gary as he continued his investing career.
Aligning with smart capital allocators: During market corrections, aligning with smart capital allocators can lead to significant investment opportunities in discounted businesses.
During the market correction in 1987, the investor learned the importance of aligning himself with smart capital allocators like Joe Steinberg and Lucadia National. This shift in investing style moved him from buying cheap stocks to identifying opportunities where he could invest alongside these experts. These situations often involved businesses that were significantly discounted and going through difficult times. By combining the right people with the right business opportunities, the investor was able to capture compelling investment opportunities and create significant value. This realization marked a major evolution in his investing style, as he came to understand that investing is a complex mosaic requiring various pieces to come together for a successful investment.
Investor Personality Traits: Successful investors, like Mario Gabelli, possess a deep understanding of capital allocation and take advantage of market disparities, often accepting risks for potentially high returns. Working with them offers valuable learning experiences.
Successful investors, like Mario Gabelli and the individuals mentioned in the discussion, possess a long-term record of making profitable investments and have a deep understanding of capital allocation. They often take advantage of market disparities and are willing to accept risks for potentially high returns. Working with these investors provides valuable learning experiences, as they have unique approaches to analyzing investments and running businesses. For instance, Mario Gabelli, known for his voracious appetite for information and distinctive personality, significantly influenced the speaker's investment analysis and business acumen. Despite their different personalities, the speaker's experiences with these investors have shaped his investment philosophy and approach to business.
Stock Picking in the New Decade: The next decade could favor stock pickers and active managers due to the changing economic environment, which is shifting away from the recent anomalous conditions. Identifying well-positioned companies with attractive valuations is crucial for success.
We are entering a new decade and the next 10 years could belong to stock pickers and active managers. The recent extended period of low inflation, low interest rates, and anomalous market conditions have created distortions and opportunities. However, many people have grown accustomed to this environment and believe it's the norm. In reality, this period was anomalous and not representative of the long-term economic environment. Therefore, it's crucial to identify companies that are well-positioned and have attractive valuations, as the competitive landscape for stock picking is limited. This idea marks the restoration of the fallen stock pickers and active managers, who are poised for a bright future in the next decade. The economic beneficiaries of the next decade will be vastly different from those of the past, and it's essential to prepare and invest accordingly.
Globalization shift in North America: Old economy industries in North America, such as chemicals, building products, lumber, and energy services, are experiencing a resurgence in attractiveness due to structural changes in globalization, including a shift in manufacturing from China to North America and competitive advantages in energy costs and infrastructure development in regions like Southeast Asia and India.
Old economy industries in North America, such as chemicals, building products, lumber, and energy services, are experiencing a resurgence in attractiveness due to structural changes in globalization. These industries have been dismissed in recent years, but they now offer significant growth opportunities due to their competitive advantages in energy costs and infrastructure development in regions like Southeast Asia and India. Additionally, the evolution of globalization is leading to a shift in manufacturing from China to North America, where energy-intensive businesses can benefit from low-cost energy and a competitive business environment. As a result, industrial businesses in North America, particularly those with a low cost structure and a monopolistic position, are well-positioned for high growth despite modest valuations. This shift represents a metamorphosis of old economy industries and presents opportunities for investors looking beyond the tech sector.
Value Investing Landscape: Success of high-growth companies leading to high valuations and potential risks for value investors, while challenges for those focusing on out-of-favor assets. Consider valuation, long-term potential, economic environment, and inflation when making investment decisions, and ensure solid investment assumptions.
The value investing landscape has evolved significantly over the years, with some value investors focusing on hard asset businesses and others on high-growth companies. The success of the latter group has led to high valuations and potential risks, while the former group has faced challenges due to out-of-favor assets. It's crucial for investors to consider valuation and the long-term potential of businesses, as well as the economic environment and inflation, when making investment decisions. The foundation of investment assumptions, such as the risk-free rate of return, must be solid to ensure a margin of safety. Ultimately, the critical determinant of interest rates and valuations is inflation, not the Federal Reserve.
Private markets vs Public markets: Despite different pricing structures, private markets and public markets share similar underlying risk and volatility. Longer adjustment to interest rates and inflation in private markets due to leverage, but value opportunities exist for investors in the current market environment. Inflation is expected to be more persistent at higher levels, requiring investment adjustments.
The relationship between public market stocks and private markets, particularly real estate, is not as dissimilar as it may seem despite their different pricing structures. The speaker argues that private markets, which are often leveraged, take longer to adjust to changes in interest rates and inflation due to their nature. However, the underlying risk and volatility in both types of investments may not be as different as perceived. The speaker also highlights the opportunity for value investors in the current market environment, where passive investment and algorithmic trading have become more prevalent. Additionally, the speaker believes that inflation, driven by factors such as globalization and energy transition, will be more persistent at higher levels, and investors will need to adjust their investments accordingly.
E-commerce platforms, Energy sector investment: E-commerce platforms like Shopify aid business growth, while energy sector offers investment opportunities with potential price disparities between current costs and replacement costs, requiring careful analysis and a long-term perspective
Successful business growth can be achieved with the help of platforms like Shopify, which powers 10% of all e-commerce in the US and offers tools to help entrepreneurs sell online and offline. Meanwhile, savvy investors like the speaker in this discussion are focusing on undervalued sectors like energy, where they identify disparities between current prices and replacement costs, and companies like Tidewater, with a fleet of 200+ vessels serving offshore energy companies, offering significant investment opportunities. The investor's strategy involves careful analysis of the underlying economics and valuations, as well as a long-term perspective.
Energy crisis investing: Investing in industries with tight supply and demand imbalances, such as energy during a crisis, can lead to significant returns. However, the timeline for addressing these imbalances is uncertain and investing always comes with risk.
Identifying undervalued assets in industries with tight supply and demand imbalances can lead to significant returns in investing. The speaker's experience with investing in energy companies, particularly during global energy crises, illustrates this principle. Currently, we are facing a global energy crisis with increasing demand for energy and a tight supply balance in oil. The build-out of renewable energy sources also presents a challenge due to the high consumption of materials like copper, which is already in short supply. The speaker emphasizes the importance of owning assets in these industries and suggests that the price may not yet reflect the true value of these assets. However, the speaker also acknowledges that the timeline for addressing these supply imbalances is uncertain and that investing always comes with risk.
Resource scarcity and renewable energy: The transition to renewable energy sources presents both opportunities and challenges due to the increasing demand for scarce natural resources and the need to minimize environmental impact, leading to inflationary pressures and complex resource extraction processes.
The increasing demand for scarce natural resources like copper, steel, nickel, lithium, and cobalt for the transition to renewable energy sources presents both opportunities and challenges. The extraction and processing of these resources require significant investment, infrastructure, and energy consumption, leading to inflationary pressures. At the same time, there is growing pressure to minimize the environmental impact, which adds to the cost and complexity of resource extraction. Countries with abundant resources are in a stronger position to capture value and set conditions for accessing these resources. The US, with its low-cost energy and industrial capacity, is structurally advantaged in this context. However, the continued movement of industry from Europe, which is more focused on the environment, creates a headwind. The transition to renewable energy sources will require substantial investment, but it also presents opportunities for value capture and economic growth.
Ammonia industry: Investing in ammonia industry with competitive advantages, such as US production and role in energy transition, can lead to substantial growth and good economics
Investing in industries and companies with competitive advantages, such as chemical products like ammonia producers, can lead to substantial growth and good economics, even in the context of broader structural issues in the economy. Ammonia, in particular, is poised for growth due to its role in the energy transition as a marine fuel and a bridge to hydrogen, offering new uses and increasing market demand. Additionally, the cost advantage of producing ammonia in the US, particularly with lower natural gas prices, adds to the business's fundamental strength. Furthermore, giving back and mentoring younger generations is important to Bob and has been a significant part of his and his wife Suzanne's philanthropic efforts.
Marina Palatano's experiences: Marina's challenging upbringing and education fueled her drive to give back and support organizations that help disadvantaged individuals succeed. Her experiences also emphasized the importance of informed decisions, particularly regarding medication side effects.
Growing up in a challenging environment with limited resources instilled a strong drive and compassion in Marina Palatano, leading her to prioritize giving back to organizations that have a significant impact on people's lives. Her experiences, including a childhood competition and her education at Pace University, shaped her perspective on the importance of supporting institutions that help disadvantaged individuals succeed. Additionally, her wife Suzanne's personal experiences and the creation of the not-for-profit Med Shadow underscored the significance of understanding the side effects of medications and making informed decisions. Overall, Marina's life experiences have inspired her to make a difference in the lives of others and to encourage thoughtful, mature decision-making.
Adversity and Long-Term Perspective: Adversity and a long-term perspective are crucial for success in value investing and life. Emotional and psychological fortitude, introspection, conversation, mentorship, and luck all play a role.
The ability to tolerate adversity and maintain a long-term perspective, combined with the right opportunities and mentorship, can lead to significant success. The speaker shares personal experiences of dealing with adversity in his family and how he learned to appreciate the importance of introspection and conversation. He also emphasizes the importance of emotional and psychological fortitude in value investing and the role of luck and mentorship in his own success. Ultimately, the speaker suggests that life is full of random events that can shape our outcomes, and it's essential to remain adaptable and persistent in the face of challenges.
BobaBotty's career achievements: BobaBotty's humble successes in business are awe-inspiring and listeners can learn more from his company's resources. Suzanne's Med Shadow website is recommended for impartial medication information.
Learning from this conversation with BobaBotty is the awe-inspiring achievements of an extraordinary career, executed in a humble and low-key manner. Bob's quiet successes in business have not gone unnoticed, and listeners are encouraged to learn more from him through his company's resources. Additionally, Suzanne's health website, Med Shadow, is recommended as a helpful resource for impartial medication information. Upcoming episodes will feature an interview with a successful investor for ultra-rich families, and listeners are invited to follow William Green on various social media platforms. A heartfelt gratitude goes out to the production team in the Philippines for their patience and support in hosting the podcast. Until next time, take good care and stay well.