Daniel Needham - Multi Asset Investing
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[The Business Brew theme]
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This episode features Daniel Needham from Morningstar. You can read his official bio in the show notes. Suffice it to say, Daniel's very legit. He was a blast to talk to. I met him at the Future Proof Conference out in LA that we were both at and it was a good time. Thanks to Jake Taylor for making this one happen. I appreciate it. As always, none of this is financial advice. All the information contained in this program is for entertainment purposes only. Please consult your financial advisor before making investment decisions and do your own due diligence. That's all I got for this intro. Shoutout to the Aussies that listen Daniel's from down there. I hope to see you all again sometime. It was a hell of a visit when I had one. Without further ado, enjoy the show.
Excited to be joined by Daniel Needham today. We met at Future Proof. So, you were on the big stage. We being Toby, Jake, and I got-- I like to think of it as the equivalent of the Friday afternoon show at Lollapalooza. We were just filling some space. But I had a great time, man. That was fun.
Daniel: Yeah, a lot of fun. Thanks for having me, Bill. Yeah, it was great to meet in person as well. And so, I've listened to a few of the three of you on podcast together and had a chance to listen to your Business Brew as well. So, it was actually great to meet. A few folks I've admired over the years in person and it was a lot of fun. I think having conferences on Huntington Beach could become a little more popular after that.
Bill: Yeah, that was a nice backdrop, wasn't it? If people want me to broadcast from the beach, I'm happy to do that anytime.
Daniel: Exactly. I can get used to it. [laughs]
Bill: Yeah, that was sweet.
Daniel: Yeah.
Bill: People may not know who you are. Do you want to go through your background a little bit? And obviously, you're sitting in front of the Morningstar background, but that's where you are now, but how did you get where you are?
Daniel: Yeah. I've been at Morningstar since 2009. But as you can tell from my accent, I'm from South Bronx, New York and-
Bill: [laughs]
Daniel: -a little further South. I grew up in Sydney, about 45 minutes out of Sydney and started working in the industry straight out of university, went to Sydney University, and worked for a year and a bit for a European insurance company. And then started as an analyst at an institutional investment advisory firm in Australia called Intech Investment. Yeah, I started as an analyst. Really working with large DB funds and government entities like Treasury corporations, and large insurance funds and-- I just love the research side of things working on capital markets research and working with these large firms on how to allocate their capital to meet their liabilities. So, that's how I got in the industry and moved into the portfolio management area. It must be about 2005 and did that for a while.
But a lot of time on multi-asset and really looking at cross asset classes within asset classes, private markets, things like that. And did that until-- Became CIO in about, I think it was-- I should know this now, 2008 actually, yeah, my mentor and former CIO of the business didn't come back from holidays, retired in beginning of 2008 and handed the keys over. So, I got to oversee an investment team during the global financial crisis.
Bill: Yeah, that's interesting timing, right?
Daniel: That's right. I would have probably not picked that year to start, but-
Bill: [laughs]
Daniel: -they say, "Experience isn't measured in years, it's measured in intensity." I feel I got a decade in that two-year period. And so, yes, I was CIO and I was managing portfolios as well and then Morningstar bought the business in July 2009. And so, it came across--
Bill: Oh, nice.
Daniel: Yeah. And so, joined Morningstar from there. A few points in your life where you get lucky and one of them was meeting my wife. We looked at different places that Intech could land, but Morningstar has been firing away the best option and one of the best outcomes for me and the team, I think so. Yes, it was there 2009, and then spent a couple of years in Australia and looking after the Asian operations for the investment management business, and then moved to London for a couple of years. Moved there in 2013. So, I looked after the investment business there across Europe. And then in 2015, moved to the US, took a role as president of the investment management group and Chief Investment Officer. I hadn't really appreciated how cold the Chicago winters were until--
Bill: Dude, it's a different level.
Daniel: That's right. You think London would set you up, but it just doesn't prepare you. I came--
Bill: I spent 17 years in Chicago.
Daniel: Yeah.
Bill: And for the first three, I didn't see a summer. So, the first two summers, I was actually gone and I was like, "I'm doing this wrong."
Daniel: Yeah, I'm not surprised by that.
Bill: [laughs]
Daniel: I'm just fascinated so many people live here [laughs] during the winters. Yeah, so, that's been great and had great opportunity to work with all the great research teams across Morningstar and build solutions for clients and so build strategies. Yeah, I've always had a hand in portfolios, but the last year I stepped away from the Chief Investment Officer role and took on leadership for Morningstar as Wealth Management Solutions Group, which is a part of Morningstar that provides services to financial advisors, individuals. So, we have a platform, we have investment offerings, we have a portfolio accounting, reporting, software business, we have an aggregation business by all accounts, and we also have the individual business, which is all the morningstar.com all the research subscription business, our public sites. So, that's my job now.
And so, I transitioned out of the investment roles and handed the portfolios over and we've got a great team. So, it was easy to do from that perspective. But as you would know being an avid investor, it's in your blood and in your DNA, so you never really leave it.
Bill: Yeah, I was going to say, do you miss it at all? Obviously, it's a new challenge, but it's totally different.
Daniel: That's right. Yeah, I love to learn new things. It's always in investing, you're always trying to understand different elements of the market, what's changing. And so, the challenge of learning new things-- I'm always struck. Everybody knows a Buffett quote like, "I'm a better investor because I'm a businessman. I'm a better businessman, because I'm an investor." And so, definitely looking spending more time on strategy, competitive analysis, capital allocation, execution.
We always did a bit of that with the investment management business, but when you run a larger team, larger group, and you're in multiple industries and you've got more technology related products, it just becomes really fascinating to see all those choices that you need to make. And while strategy is, obviously, critical execution also, it's just so important. So, that's been really fun to learn. I still manage my portfolio, but it just means I can't talk about the stocks-- [laughs] my own personal stocks anymore. So, whereas when you're running a strategy, it's easy to talk about what you're up to.
Bill: Yeah. I'll tell you, at least on the consumer-focused part of Morningstar, I remember what was it two years ago, there were very, very few, four- and five-star stocks and it's abundant right now. A lot of the fair value uncertainties were deemed higher or whatever, but there's some wide moat cheap stuff out there according to y'all's definition. So, it should theoretically be a better time to be buying assets than it was, right?
Daniel: Yeah. I think if you look at our five-star that's really great, that's one of the things I look at it as a way of assessing the attractiveness of the opportunity. And there's always a little bit of a lead lag where as you mentioned, the uncertainty around the fair value, things change. You've got to adjust your fair value. But even accounting for that, the Morningstar equity research team really seeing way more opportunities, which is constructive. And so, if you're a speculator, probably it's hard to get out of bed in the morning. But if you're a long-term investor, you feel the pain of the portfolio losses, but also a more constructive forward opportunity set.
Our research without getting too promotional. The research subscription gives you access to-- The equity analysts and they're the same analysts that we use when we're building institutional, professional portfolios. And so, it's like 100-person analyst team covering 1,500 stocks. As you know the economic moat research, they're good businesses, generally to get moat rating. So, they're the kind of businesses where you can buy and generally hold them for a long period of time, which is often a better way of investing for most people.
Bill: Yeah, I don't mind promoting Morningstar. I like what y'all do. From what I understand the way that the company was built was very cool. I like that It's a Chicago company. I've used the product for a while. I like it more or less like a hunting ground and idea generation. Sometimes, I think, if I allow myself to shortcut my own thinking when I was a little younger, because somebody else said something, but that's a problem everywhere. That's not unique to any one product, right?
Daniel: That's right.
Bill: You got to think for yourself.
Daniel: Yeah, that's the key to investing, especially when things change.
Bill: Yeah.
Daniel: Yeah.
Bill: You mentioned that you came in 2008 or that you started being an investment officer in 2008. I'm curious-- this has been a market that I think has confused a lot of people. Some of the people that I've spoken to had said that it's the hardest market they've seen since 2008. I'm curious to hear you riff on a little bit what the differences or similarities that you're seeing are and just how you size up where we are as financial or wellbeing in general and then what you see going on, if you don’t mind?
Daniel: Yes, sure. I think this is quite different to 2008. It's easy now to look back at 9th of March 2009 and kick yourself go, "Well, why didn't I buy more there?" Or, from the end of September to really late February, early March, at times they were really rational reasons for why the financial system should collapse.
Bill: Yeah.
Daniel: So, you forget that, you just tend to remember the missed opportunities, why didn't I buy more, why didn't I lend investment grade corporate. It's crazy spreads, but the world was very different, where we went on a path, thanks to really aggressive and unconventional government policy. And so, I view this as quite different. It's possible that there're some hidden risks somewhere that rising interest rates trigger, but the quality of the banking system around the world is just completely different. And the frustrations that Jamie Dimon having to hold so much capital is one of the reasons why collectively, this is a much better cycle.
For me it's quite different, but each of the cycles-- I came into the industry at the end of the tech bubble before the economy in the markets drop. I came into the bear market of that and then had the global financial crisis, and then a few of the other little blips, the European crisis, and the emerging markets crisis, if you call it that. And then COVID and now this. And so, there's been a number of those periods through time. Leading up to 2008, we were looking at different scenario models to build within a multi-asset setting like, what does bad look like.
And I remember, we picked 1993 to 1994, because it was a funny period because that was the last time real rates had been increased really fast. And so, that was our scenario where we felt everything goes bad if that happens. So, we'd always been aware, our team, especially the core of the team that's in different parts of the world now that real rates of the killer. They kill everything. And if you go back and look at the year of 1994, everything lost money.
Looking at sub strategies and asset classes, it was just a really tough period and we're in that kind of period now. I think that's actually probably one of the most similar periods, where interest rates were really aggressively increased. I think they doubled. I think the short rate got to 8% pretty quickly. And that's because you had a central bank that could remember. It was institutional memory of what it was like getting inflation down. And Volcker is a pretty terrifying individual, if you're an investor of bonds and so. I think that's probably the most similar period, but that was coming out of the savings and loans crisis in the late 80s. And so, there was a bit of-- some challenges with some of the balance sheets of the banking sector. And so, there was some innovative tools that the government used to deal with some of the bad debts and sell them off. So, I think that's probably the most similar in a way, but inflation is obviously really accelerated.
I actually think it's a pretty attractive investment environment at the moment relative to where we've been in the last decade. There's been bits and periods of time where there're some attractive points, but to me, this is particularly attractive. It's quite painful and it could get worse. Inflation could be stickier than what people are maybe hoping for and rates may need to go much higher, but quality of companies especially in the US is just really probably as high as it's ever been, central banks and governments probably have a better handle on how to deal with crises than they ever have. Maybe they got a little heavy handed with the medicine this time. [chuckles]
Bill: Yeah.
Daniel: Being a multifaceted investor, you can't help it spend more time on macroeconomics. It's a necessary evil. Once you spend a bit of time on it, you realize it's an incredibly messy area where there isn't really a consensus on anything. Microeconomics has more of a consensus, I think certainly there are elements of macro where maybe there is, let's say, agreed areas. But it was all about inflation. I remember in 2010 it was what hyperinflation is coming.
Bill: Yeah.
Daniel: The US government, S&P, I can't remember that year. S&P downgraded the US Treasury effectively. It was a crazy time. And so, everybody was really worried about inflation coming out and it didn't eventuate. And in fact, we were in this what's dubbed secular stagnation towards the end of the cycle. So, this is quite different in that regard. We've got a period where-- But I remember back then, we're going to have hyperinflation and you know some people were talking about the Weimar Republic and all that kind of thing, and turned out to be completely wrong and almost the opposite of what happened.
Bill: Yeah. It's interesting because I think some of those conversations are still going on and then the dollar is the best asset to own by far this year seems like right now.
Daniel: That's right.
Bill: I guess that's what happens in global slowdowns. But it's certainly an interesting observation when COVID hit and all the spending came out, I think that the idea of buy the dollar would have been one of the last things that crossed my mind. And maybe that's because I'm not a very good macro guy, right?
Daniel: Yeah.
Bill: But I think a lot of people got caught offsides. Yeah.
Daniel: Yeah, that's right. Coming out of the global financial crisis, the US moved the fastest. The developed economies and maybe outside of Australia, but Australia was saved by the terms of trade and exporting a ton of coal and iron to China. They were out of the gates the fastest. They were the most unconventional. They cleaned the balance sheets of the banks up as quickly as they could. They were the most aggressive with monetary easing. So, the US dollar really fell first. You had the short cover-- you had the short squeeze on the dollar because everyone was short dollar debt. And so, this huge deleveraging pushes the dollar up. But then the dollar came down heavily and people were calling the end to the dollar.
And so, what's interesting about the last cycle was the sequence of the policy responses. There wasn't that coordinated response at the same time. The US went first, I think then Japan went. UK, Europe really dragged their heels, but finally did it. You had this uncoordinated devaluing of the currencies. And so, in some ways, the US claimed that their balance sheet up, because they could deal with a depreciating dollar. This time it's way more coordinated, which I think the impact on the globe economy, probably way more material, whereas previously you had uncoordinated easing that staggered. It felt like it lengthened the cycle out quite a bit, whereas this time everyone's tightening or almost everybody's tightening at the same time.
Economies are big and complex and the tools and models that are used generally, equilibrium models which don't really explain how the world works. I think what Charlie Munger would call them Lollapalooza effects. That's what probably keeps me a bit more-- I don't think the financial systems in anywhere near the risk level it was, not even remotely as it was in 2008, but this coordinated rate increases at the same time. Who knows what can happen, so there's always that tail risk out there.
Bill: Something that I've been just thinking about a lot is, Europe looks like it's not exactly set up for a great year of economic activity. China, I noticed the housing headlines. And basically, the thought that I get to is like, how sick can the world get before the US catches a cold as well? And then I look at all the labor numbers, and I look at the tax receipts that are coming from wages, and I throw my hands up, because I say, "I just don't know," right?
Daniel: Yeah.
Bill: It seems for the first time in a long time, labor is actually winning and to me that's probably not the worst-case scenario. May not be great for asset valuations in the short term, but I think if you want a healthy US and you think terminal value should be based on that or whatever, it seems long term, this is not the worst outcome in the world, but I wonder what I'm missing.
Daniel: Yeah, I share that sentiment. I think the dividing up the pie and households, and labor getting a higher share is probably a more sustainable outcome that hurts corporate profits. I'm not sure it's been the wage in the labor market that's really been driving the inflation up. I think there's a lot of other factors as well. But yes, we had the jobless recovery in 2000 after the GFC. And now, we have a job boom recession fear.
Bill: Yeah.
Daniel: Yeah. It leaves me less concerned from a macroeconomic perspective. You know that it wouldn't necessarily change the way I invest. But if I think about how bad this could get, you've got households that are in pretty good shape, not as good as maybe what we thought they were. Banks, pretty good shape and unemployment is low. It operates with a lag and with coordinated responses. Maybe you see it jumped quickly, but you're not going to have that residential property overhang where there's a massive oversupply of houses in the US now.
I think I grew up in Sydney and I know the Australian property market pretty well. And I lived in London, I know the London market pretty well. These are markets where there's an undersupply property. When there's an undersupply property, it just creates different dynamic for owners and so. The property market's way different than 2008, 2009, where you had that really long overhang of lots of houses underwater. Yeah, we're probably in the best shape we've been for this tightening lead recession in the US. And maybe it doesn't turn out to be that as painful as what it might appear given the level of the rate rises.
Bill: Something that I do worry about just from a human perspective is the dollar that's this strong, what does it do to emerging markets and their ability to actually feed themselves, so whatnot and then what tail risks could get created out of that? I don't know. I get to thinking of these thoughts and then I'm like, "Well, my brain naturally goes to the downside pads." And I try to remind myself, there're a lot of pads in a Monte Carlo simulation and they're not all down. So, maybe think of the upside to even as hard as it could be to fathom.
Daniel: I think that's a great mental model to have in your head. I just think-- thinking about range of outcomes that's what the future is. You'll be on one path, but no one knows as well. Maybe even more the person that's got a PhD in economics probably doesn't know. And so, yeah, we're in that period. My sense of the emerging market economies is that they've become more resilient and less dollar dependent than what they were when the taper tantrum. You've got probably maybe a more resilient economic structure in some of those markets. But you're right, I think probably the driving up of the dollar cost of commodities, foods, things like that, that really squeezes the less well-off folks in those societies.
Going into 2008, I don't know if you remember, but it was inflation. People were worried about commodity inflation, particularly food price, corn, and wheat-- That was the main concern, I remember in those quarters going in before Lehman went down was inflation in the emerging world. And I think the Australian Government at one point going into July of 2008, market was expecting Australian rates to get up to 8%. And by the end of the year, they were getting cut heavily. But yeah, we get these periods, I think-- The strong dollar definitely has a lot of negative consequences. But overall, I'm pretty optimistic longer term. I think that we have these recessions. Sometimes, there's a lot of pain involved but coming off a pretty low unemployment rate here, it's probably going to be a manageable outcome for most.
Bill: Yeah, it seems to me business cycles absolutely suck to live through, but I don't know how many people have been proven to be good at dancing in and out of markets when they forecast a business cycle-- it strikes me as a skill that very, very few have, but people like to think maybe they do. I've just completely given up much to my dismay this year. And maybe next time when I can actually feel the greed in my body, I'll have the guts to sell.
I think the thing that's hard about investing is you can say, "Well, wasn't it obvious that some of that bubble stuff had to pop?" And I would say, "What was obvious to me is that on average, the returns would not be good, but I didn't know what the paths looked like to get to bad returns." I guess, the counter is bubbles always pop.
Daniel: Yeah.
Bill: It's just not clear that it wasn't going to just be a period of very bad forward returning.
Daniel: Yeah.
Bill: Now, I'm hopeful that kids that are saving these days are going to have better forward returns and can maybe afford homes and whatnot. This a good thing, I think.
Daniel: Yeah. I think for those that are saving, building wealth longer term, I think it is a good thing but nobody knows. I think life is lived forwards and learned backwards. And things always seem way more obvious after the fact and it's hard. I think it's just the way our minds work. We forget a lot of the important stuff. [laughs]
Bill: Yeah.
Daniel: Yeah. But I agree with you. I think staying invested is generally the best approach. Those that try to time markets and move in and out, I'd be very surprised if people that do that make any money from it. It's just really hard to do. Markets are pretty efficient where they need to be. When you look back through history, especially what you would call a time series analysis versus cross-sectional analysis or going back and looking, you'll see these things like, "Wow, that was a real anomaly." But when you go back and look at the cross-sectional opportunity says, it's not so obvious. Markets are good at pricing in consensus.
Consensus is pretty good most of the time at reflecting the best guess that a bunch of people have. It's not always right. But it's nowhere near as mispriced as it looks when you go back and look at the time series stuff or you remember it, it's a much, much tougher game than it appears in the numbers.
Bill: I think I know what you're saying. But can you explain that to me like I'm five, the cross-sectional analysis that you're saying, what exactly do you mean by that?
Daniel: At the end of the day, investors have a choice. You've got to choose, you got to put your money somewhere. You put in cash bonds, corporate bonds, equities, real estate. And so, when rates are low, it's not people sit around and say, "Well, I'm going to own equities like I think they should be priced like they were when rates were high," right?
Bill: Yeah.
Daniel: Markets equilibrate. They don't price necessarily the way I think that the traditional finance maybe posited a couple of decades ago, but they equilibrate. If cash has given you 1%, then the yield curve is probably going to be priced in a way that reflects some incremental return and it's going to be right expectations, and some premium for inflation uncertainty. But effectively, assets get repriced across the opportunity set. If you just go back and look at equities through time you say, "Well, that looks like an outlier." But you got to look at the cross section like what was available?
Bill: Yeah, that makes sense. If I'm saying, the Cape is super high today, you might want to say, "Okay, well, relative to the opportunity set at the time, what was--"
Daniel: That's right.
Bill: Yeah, that's interesting.
Daniel: And so, go back and say, "Well, was the Cape higher at 22, when rates were near zero versus yeah, Cape was 16, but you're getting paid 8% of money to the government."
Bill: yeah.
Daniel: When you look at the opportunity set at the time, it's never as obvious as it looks when you go back and look at individual pieces of it. People would say, "Well--" The funny thing is, I always love this. Bonds are in a bubble. US Treasuries are a bubble. Well, I don't understand how Treasuries could be in a bubble. If you hold the bond to maturity, you get paid the yield.
Bill: Yeah.
Daniel: What are you really saying? What you're saying is, you think interest rates should be way higher than the conditions. But that's a different mechanism. That's not necessarily mispricing. That's the market's expectation of inflation and what the central bank is going to do. And so, you get these funny periods where I don't think it's possible Treasury bonds are in a bubble, because-- I look at asset classes. This maybe get a little weird, but I'll say it anyway.
Bill: No, I like this. Let's go weird.
Daniel: Yeah. I have this idea that-- it's probably not my idea, but just picked it up. But there're assets that have limited supply and there're assets that have infinite supply. And obviously, nothing really has infinite supply, but for short periods of time it might as well be infinite. US dollar, so, if you're a monetary sovereign like the US government, there's an infinite supply of US dollars if needed. The Swiss government did the same thing with Swiss Franc when they were worried about the Swiss Franc getting above the Euro a few years back.
Anything that's available in financial markets in US dollars, the US government can buy. Treasury instruments like the notes and the bonds are just another form of instrument that the US government could buy infinite amounts of. The US government only has to threaten to buy something that they don't actually have to buy anything. It will influence the price, because you can't beat them. They can just add supplies of dollars, or reserves, or bonds. The supply demand dynamics like buying pressure, and short squeezes, and all those things, it just doesn't apply to those instruments.
Whereas I think where you have private balance sheets that are constrained or you have governments that don't issue their own currency or are tied to another currency, then you have balance sheet constraints, then you have liquidity issues that matter. Government bonds may get illiquid because the inventory levels that are held by the bond traders and things like that. But that's a very technical type of illiquidity. When you're dealing with a corporate bond of a private company in US dollars, it can go bankrupt and there's a limited number of bonds on issue or a company that has a certain number of securities on issue, then you can get these kinds of buying pressure-type stories, liquidity-type stories, that really-- And that's where contrarian investing, I think works the best.
And so, using a contrarian mindset to securities that are issued by a monetary sovereign that can issue and buy as many of them as they want. It's just doesn't really matter, unless you're really short-term technical trader.
Bill: Now, the limitation on that would be, I guess-- So, if you're saying that the government can buy as many notes as are issued, I would say that the limitation is the rates. But if they're the buyer, then they can set that, right.
Daniel: Yeah. I think that-- [crosstalk]
Bill: What is the limitation? There must be some limitation to this thought, right?
Daniel: I think this is where there was a lot of the modern monetary theory school came out. If you go back and read the transcripts or listen to Berkshire Hathaway meetings, Buffett's talked about the US government can't go bankrupt. If you print your own money, it was contrasting the US system versus European crisis. He made all the similar points that the MMT guys are making.
Other than Congress, the US government's is not going to default on their debt. The Treasury just transfers money. When the Treasury and the Fed are working together, it's left pocket, right pocket kind of movement. The world changed in the early 70s, fundamentally changed. Monetary sovereigns like the United States, United Kingdom, Australia, Japan. Japan is a classic example. They just operate differently to the gold standard frameworks that most people will use in their heads.
Bill: Yeah.
Daniel: It's really remarkable. We still hear people talk about it. Now, that doesn't mean that governments can spend an infinite amount of money. At the end of the day, the US government, if it spends, that's $1 of spending in the economy. When you add that with the private sector spending that creates buying pressure that can-- supply doesn't respond, then you're going to get inflation. And so, the real risk for government spending is inflation. It's not their fault. If you're worried about the US government creating too many reserves with the funding, spending for the government, it's going to come through inflation. It's not going to come through default or maybe that comes through the currency movements.
I find that fascinating. I learned that after the global financial crisis after reading a few different papers. I was sitting there thinking, "Why isn't there inflation? Why aren't some of these countries going bankrupt?" And you realize, actually a lot of the conventional wisdom that market participants use isn't actually sound and so a lot of shorthand and a lot of gold standard stuff. But the world fundamentally changed in the 70s. When people moved off the Bretton Woods model and everybody went to seek currencies, it's very different.
Bill: Can you recall off the top of your head like who you would recommend reading to further understand or that helped you understand how this works?
Daniel: Yeah, probably one of the best every-- I feel Hyman Minsky he came up with The Financial Instability Hypothesis and he wrote a book on stabilizing an unstable economy. Minsky wrote a book on Keynes. I think he wrote it in 75, but it had some really important views. Once you start reading about macroeconomics, you've got to step back and go, "Okay, so, economics was a humanities subject. It was political economy and then it morphed into this highly mathematical system."
But when you're reading macroeconomics, you got to recognize it, politics and values, it's like the arteries. They circle each other. And so, it's really hard to separate them. You've got to tread carefully when you read the different schools of thought because often underpinning them is underlying set of economic values and beliefs, which makes it really hard to cut through what Charlie Munger would call the twaddle.
Bill: [laughs] You'd pull on twaddle by the way.
Daniel: Yeah. [laughs]
Bill: I like it.
Daniel: And so, you've got to tread carefully. But I would say that Minsky's book on Keynes in the 70s was good. And Randall Wray, who's one of the MMT guys, he's done some good stuff on Minsky and money. Oh, gosh, there's another book. I'll share with you after-- [crosstalk]
Bill: Okay. Yeah, I'll drop it in the show notes or whatever.
Daniel: Yeah.
Bill: It's interesting because my brain once upon a time, I voted for Ron Paul and I was hard money libertarian type when I was a young kid, went to Auburn, the von Mises Institute is there. It's in the ethos of that school. But I've realized either that school of thought was very, very early or quite wrong. And at the risk of upsetting some people that listen, I would argue, it's probably not correct for reality.
Daniel: That's right.
Bill: I think it [crosstalk] comes in theory, but it's not how the world actually works.
Daniel: Yeah, Yogi Berra has that one. In theory, there's no difference between practice in theory and practice-- [crosstalk]
Bill: That's right.
Daniel: I went through the same thing. I read a lot of Austrian, I read von Mises and Friedrich Hayek. I read a lot. I read across all the different schools. I feel each of them has an element that's useful, but each of them has pretty substantial flaws in them. I think kind of a synthesis of them can be helpful, but it's highly uncertain. You're dealing with an area where it's really hard to be precise. It isn't a hard science where you can do controlled experiments and things like that. But there's a bit in that. I think there's an element of really valuable insight in the MMT school that you can pull out. And so, Randall Wray has a good primer on money, which was useful.
I think they have the best handle of how this financial system and the economy actually work together in the banking system. What does quantitative easing really mean? Well, it doesn't mean that-- There's no money getting printed. Before we move on to that I want to turn it to too much of a-- [crosstalk]
Bill: No, I like this. If you want to talk this, I'll talk this for a while because I'm still trying to get my head around how this stuff works.
Daniel: Yeah. The idea of quantitative easing is, the government effectively buys a bond in the secondary market and gives the participant, the dealer-- Treasury gives them reserves. Treasury bond for reserve. We will get that money printing because effectively what happens is that the Fed can effectively create the reserves. They just type the numbers in. But what matters is the reserves in the system. So, that bond was issued. When it was first issued, the Fed on behalf of the Treasury gave the Treasury bond in the primary market and got reserves. And so quantitative easing says, "Okay, now I'm going to go in the market, I'm going to buy the bond to the market, I'm going to give you the reserves."
Outside of the liquidity spread and repricing the same amount of reserves in the system. There's been no net money printing. That's quantitative easing. All you're doing is influencing the price of the instruments. You're not adding new reserves to the system. New reserves come into the system when the government spends money. The US government spends money into creation. They create reserves when they spend and it gets credited into their bank with the Fed. So, it's actually spending that creates the money and taxes destroys the money. And so, that's where the money creation is happening. But quantitative easing is just buying and selling different instruments. So, it's a way of the government influencing the yield curve. It's not printing money. When people say money printing and quantitative easing, I just don't think that's accurate. The impact of the reserves on the system is not there.
This is a some of the insights I think the MMT guy's good at explaining now. Some of their policy prescriptions, that's a whole other topic, but I'm interested in understanding how the world works, not what somebody's political values are or views. Anyway, but I found that really useful as an investor. But there's one soft currency economics. I can't remember the author now, but he's one of the guys that was one of the early MMT guys and he was a hedge fund manager. He was just trying to make money from the Italian bond market before the Euro was created. He was one of the guys that came up with this idea that-- well, actually, Italy doesn't need help from the IMF because Italy can't default on their bonds. He was quite right.
It really took the financial markets a couple of decades to process the impact of moving off the Bretton Woods system to a feared currency system. It doesn't apply to all countries. You may have your own exchange rate, you need to be borrowing your own currency, you need to be able to set your own interest rates. And so, that's the framework which I found useful as an investor.
Bill: Yeah, well, if it's taken the financial markets a few decades, I can forgive myself for taking a few years to not fully understand that I suppose.
Daniel: Yeah, me too. Again, whether I actually even understand it, I guess it's one of those things where we never really know. [laughs]
Bill: Yeah. You had mentioned earlier your thoughts on inflation. Do you attribute some of that to the additional government spending, or is it a supply side, or a combination of both? I'm curious to hear you. The second thought in my head is, I was just reading this Credit Suisse note on the Inflation Reduction Act and the amount of stimulation that will probably go into energy innovation. It's in the back of my mind making me wonder if we're going to have more persistent inflation than some may--
Daniel: Yeah.
Bill: I don't know that the title of the bill is something that I necessarily buy. I don't know that I disagree with the bill itself. I think it could be good.
Daniel: Yeah, I think it seems there's a lot of good reasons to be looking at alternative energy sources, even though there's folks out there that you may be more skeptical on the climate side of things. But conserving valuable natural resources to be able to use more sustainable resources makes sense to me. That seems pretty logical. It's always hard to know what's driven inflation. To me, it's a combination of things. I think we have to step back and say what happened in 2020 was very unique. I don't know if you remember the late February, early March 2020. I'm sure you do. But it wasn't entirely clear what was going to happen with all these shutdowns. And so, bond markets, like the trading of secondary bonds was drying up and I'd say 23rd of March 2020, the week before that it felt like the credit market doors as Howard Marks would say was slammy shot.
And so, we'd never experienced that kind of coordinated economic shutdown of the economy before, I don't think. That was just huge. The question is I think Bridgewater were throwing this comparison out is like, "Okay, how does an economy respond to a natural disaster versus how does markets and economy respond to global financial crisis?" They're [unintelligible [00:42:55] two extremes. Financial system could end versus bounces back super quickly, really V shaped recovery. We just didn't know, right? But what we did see was the governments are starting to really aggressively act first.
Bill: Yeah.
Daniel: Maybe imperfectly, but very quickly. But the things could have really spun out of hand, not necessarily because of the pandemic, but because of the government's response to the pandemic and the impact on the economy and liquidity in all markets. It got pretty grim that week before the 23rd. But what you had was this huge surge in demand relative to a contracted supply. Effectively, supply shut down significantly, labor supply was hugely constrained transportation, shipping containers, manufacturing, everything just got squeezed.
And whilst the government can respond quickly with stimulus to protect consumers and small business owners, corporations will react by cutting investment spend, pulling things back, reducing employment. Their lead lag effect that's pretty long. Consumer demand can snap back quickly because people had money, they were not fired, they were furloughed, or more people kept their jobs because they could work from home. So, demand held up remarkably well. The recovery in retail sales in the US, I just think I've never seen anything like it.
Bill: Yeah. That was wild.
Daniel: Unbelievable. The supply side is way more slow moving. It's the nature of things. Corporate investment takes time when you reduce your capacity, getting it back up takes time. And so, generally with recessions, demand slows and can maybe accelerates, but it's not that the speed of expansion on demand aligned with the supply contraction. I don't think we've ever seen anything like that. That's going to be inflationary. And so, the demand is supported by the available supply of goods and supply can be expanded, but it just couldn't expand at the rate that the demand was expanded because of the use of the government balance sheet. So that to me is a huge driver of the increase in inflation. It's very abnormal.
But we're in a period of deflation largely in a lot of parts of the consumer market, certainly in the tradable goods sector. That's just going to take time for prices to come down. But I think the government creating incentives for people to not work and that really high levels of income we hadn't seen that before. Maybe I think it was warranted, but whether the last couple of doses were a bit heavy handed, I think history will probably say yes, but a very unique set of circumstances. It's not like it was a hot labor market that's just slowly outstripped supply. It was supply just got crunched and it's just taking time to come back. And so, that's my read on it. I think it probably makes sense for rates to be to slow the economy down on the margin to reduce some of the pressures. But there're some structural reasons that had happened that are not related to the level of interest rates in the economy. I think there's a point where the Fed is going to be able to do something, central banks, but there's some supply driven elements of inflation that just hard to deal with and that's going to take time to abate, I think.
Bill: Yeah. It's been interesting to see too. I guess, the first two companies that I saw say we were way over inventoried was Target, Walmart. Now, you've got Nike has some inventory issues. And I guess, that's a little bit more of a-- I guess, they go through that a little bit more, but it doesn't shock me that they're going through it today. I remember talking to Toby and Jake, when this was going in 2020 and I was like, "We're really going to shut down the economy." How does this play out?
Daniel: Yeah.
Bill: I tell myself this story. I think it's close to reality. In a spreadsheet, it should work out. But then life is really, really messy. And it's really hard when everybody needs to get inventory at the same time and then container ships are sitting off the coast or there's China's doing is no COVID policy. There're so many variables in the system that was running so efficiently that to expect it to go back to efficient homeostasis or whatever status quo quickly is just not a realistic expectation. And then I think as participants, we extrapolate a little bit too much. I don't know I've just told myself just like, "Take a chill pill, read company reports, we'll see in a year whether or not there're moves to make." But I don't think making moves today is the answer for me. Other people can do what they want.
Daniel: I think I spent a lot of time. We talked a lot about the macro side of things. Look, it's an interesting area. What should you do about it? That's the question. And so, there's a few of us on the research. There on the research team here. What we thought we were aware that the tone towards fiscal policy was changing and that some of the elements of the modern monetary theory were wafting their way into different branches of government. And there're some elements of it that are pretty compelling. I think there's elements where the Fed probably knew a lot of that stuff anyway. But we felt we were probably going to see some pretty big stimulus going and that the government was going to be less worried about funding it and that you probably see some largesse. Yes, we weren't sure of it, but we felt probably on balance and maybe that was recency bias because we'd all been spending our time reading into stuff.
And so, to me it's useful in the sense that it helps you think about the range of outcomes, but it's not useful in the sense that it should determine your investment decisions. And so, obviously, the range of outcomes helps you size risk and think about things like that. But ultimately, I think you want to be looking at the fundamentals, you want to be looking at cashflows. Having an appreciation for how bad bad could get-- probably helps you maybe how aggressive maybe more with sizing. But as an investment strategy, where you use the stuff that we've been chatting about to run your strategy, I just don't think that's viable. Keynes went from being macro investor to being a bottom-up concentrated value investor, because he learned the hard way that you can't make money with it. It's maybe Bridgewater and Reverend Howard and firms like that can, but it's really hard to do.
And so, looking at the cashflows of assets, looking at the discount rates and what you think is a reasonable rate of return, trying to be investing where you think you can see the returns, that's way more important than thinking about monetary policy or fiscal policy and things like that if forecasting inflation is impossible.
Bill: Yeah.
Daniel: It's great. It gives you that sense of a range of outcomes. But then thinking about where do I deploy my capital, what's the opportunity set I've got, what's the best use of my capital today not knowing what the opportunity set is going to be.
The range of outcomes is useful because it helps you maybe say, "Well, is this extreme relative to history? Is this actually a really great buying opportunity such that I probably should be willing to increase my position sizes and maybe be fully invested if I wasn't already?" But to try to make money from trading bond markets, and equity markets, and currency markets based off macro views, I think is really hard to do and I certainly don't have any edge in that that I can tell you with certainty.
Bill: Something that we had talked about when we were emailing is, you spend time thinking about market efficiency and inefficiency drivers. And I don't want you to have to retread on parts of the conversation if I didn't pick it up. But I was curious, if you have mental models of what you're looking for to find pockets of inefficiencies.
Daniel: Yeah. Going back a little bit to the point I made a round infinite supply versus fixed supply of assets, I just feel trying to hunt for inefficiencies in government securities and things where the government sets a price, I just think is a waste of time. The properties of Treasury bonds that can't default in your own currency, pretty attractive. Good to have as a ballast in your portfolio maybe you want to be shorter term with bills. So, securities are backed by a public balance sheet. So, public equities, let's say-- I think the thing I look forward is--
I want to call somebody and say, Michael Mauboussin which I know you know actually, I think he's somebody who's written some of the best papers on market efficiency that I've read. Anyone, just read Michael Mauboussin's stuff. But I think he does such a great job of taking academic research, practitioner research, and synthesizing things into new ideas. And so, I think he's actually come up with a bunch of new ideas, not because he's done a lot of the primary work himself, but he's synthesized them in a way that they can be used and help you make decisions. I think my thoughts on efficiency have been heavily influenced by Warren Buffett, and Seth Klarman and people like that, but also Michael Mauboussin's research. The thing I love about his research is, I love his notes section. If I read one of his papers, the next couple of months, I'll probably read a dozen, two dozen academic papers, some of the early papers on Social Security Research Network that [unintelligible [00:53:05] his notes and he's just such a well researcher.]. Dan Callahan, I think it Callahan, Dan Callahan and he do the research.
I think he did a really good job of laying out market efficiency and so I thought his papers really helped understand that-- He's been writing about it since years. Markets generally, they don't operate this equilibrating thing you get taught in business school or a CFA. This idea of there being the efficiency seeking systems where agents are rational and markets are efficient. And if they're not efficient, the errors are random. And if they're not random, arbitrage has just cleaned them up straight away. That's not the case. That's not how markets work. Markets are populated by agents like ourselves, who have their own information and look to buy securities based off that information. And markets are generally efficient. They're hard to beat. But when they become inefficient, it's mainly because of the way the agents are behaving. So, you tend to get this period where they--
The more that market participants start to do the same thing, think the same thing, the more that you see value investors go bankrupt, and shut down, or leave the market, or turn into growth investors, you start to lose that diversity in the market. And so, it's that diversity, the difference between the agents that drives that market efficiency. And so, the diversity-- I know if you've read Scott Page's, The Difference. It's a book. Effectively, it's the math of-- I think he's at Michigan. He does a great job of outlining the mathematics of the wisdom of crowds. And he has his cognitive diversity theory and all that. But effectively, Mauboussin does a good job of using the jellybean jar experiment which actually [crosstalk] trying to do.
Bill: Yeah. That's what I was think about as you're talking.
Daniel: Yeah.
Bill: I was like, "Oh, eliminating value investors is like eliminating the low guesses for the jellybeans-
Daniel: That's right.
Bill: -and then all of a sudden, you're guessing too high."
Daniel: Yeah, if you've got investors that are both long and short, your value investors generally operate a bit like a thermostat, right?
Bill: Yeah.
Daniel: If it gets too hot, it sends them down. They'll show it. If it gets too cold, they'll go long and warm it up and push it back to that temperature. And so, that's how I think about-- There's a group of investors that use heuristics, which are the price falls. I buy, the price goes up by sell or their rebalances, their hedges, there's a bunch of participants that behave like value investors and as a bunch of participants that generally, they're more momentum oriented, they'll push the price away. And so, markets are made up of all these different participants. When there's a good balance between them, price is probably pretty ride. But when you start to get these periods where there's an imbalance, that's when you start to get inefficiencies.
Now, individual stocks, because there's a wide range of variation, I think there's more inefficiencies at the individual stock level, because once you start to aggregate them up, the inefficiencies average out. The period of inefficiencies in individual stock level generally doesn't last as long. In my view, there's not as much space for the stock to blow out. Now, Tesla maybe is an example of South Sea Bubbles and example, but they're very rare exceptions. Maybe GameStop and things like that. But generally, the inefficiencies at the stock level aren't all that long lived. I think that's because arbitrage is easier at the individual stock level. You can find stuff that's similar to go long and short. So, you can take advantage of it in a low-risk way.
But once you start to get into industries, or sectors, or countries, or asset classes, the mechanism of keeping prices roughly where they should be starts to go down, because it's much harder to hedge an industry bet or a country bet. The bigger the asset class gets, the more different it gets everything else, the hotter it is to stand on the other side of it. And that's where I think you get these bigger bubbles. And so, ask Japan from the 60s to the 1989 or whatever it was, it was really hard to get a short Japan. What could you hedge it with? How do you hedge it short, equities are overpriced? You can't apply any leverage to that. So, a lot of leverages, a lot of arbitrages operate with borrowed money and other people's money. And so, their ability to stay in the game is dependent on their ability to keep their funding.
And so, my theory is that that has a big influence on price. It's easy to say German equities are cheap, but how do you hedge it. You could probably do some industry hedges and use some-- You could probably pick a few stocks around the world and go long Germany, but short, a basket of stuff that you think somewhat similar, but you wouldn't want to put too much risk capital against that. You could get taken to the cleaners. I think that has a big impact on market efficiency. At least, that's how I think about it. Some bets maybe look obviously cheap, but they could stay cheap for a long time and you could go bust or under performance. Within public markets, where market participants are playing, generally, they're getting paid to win, but they're also getting paid to play. So, there's a lot of money in the market that if everyone was living off their own excess returns, it just wouldn't be in the market, right?
Bill: Yeah.
Daniel: And so, there's a lot more competition in the market than is justified by the level of excess returns available, probably for those that are trying to compete with it [unintelligible [00:58:36]. There're some papers, the impossibility of if perfect markets. There's been a lot of theory around how inefficient should markets be. They should be inefficient enough that there's an incentive for people to make them efficient, because people want to make money from-- And so, that's the whole theory. There's a lot of models that were built around that. But I think Alfred Rappaport said that "That model would work if people were paid to win, but they get paid to play." So, there's way more money out there chasing stocks and would be justified. So, that makes markets pretty efficient, but it also makes them prone to these episodic periods of inefficiency. What I'm looking for is where the money's moved away.
Bill: Yeah. Interesting.
Daniel: We have a checklist that we use, but there're a bunch of things that I look at like how does the trailing valuation metrics flows, who owns the asset class, what are the consensus forecasts look like, sentiment indicators, bunch of stuff like that? But that's really generally for finding cheap asset classes. But you can use it to find places that you can avoid. And so, generally, that was pretty well, but markets are efficient. They're hard to beat. Generally, it's a tough game whichever way you want to go.
Bill: Interesting. I like how you said, the bigger the market, almost the more prone to inefficiency it could get, because my mind would tell you the smaller, but I understand what you're saying. If it's hard to hedge that much exposure, you can get something that just goes one way and it can't be arbitraged away.
Daniel: That's right.
Bill: Yeah. That's interesting.
Daniel: Yeah. The three keys, market efficiency, which is the traditional school when they were getting attacked by the behavioral guys was-- agents are rational. If they're not rational than the errors of those irrational agents average out and if they don't average out, then arbitrage just come and clean it up. Behavioral finance shows pretty convincingly that investors aren't rational, the averages don't cancel out and that arbitrage is limited. This is what Richard Thaler did a lot of work on which is around-- arbitrage is limited. And you got the whole PalmPilot, those examples everybody's heard of.
Bill: Yeah.
Daniel: And so, you get these periods. And Buffett said in one of his letters. I can't know which one it was, but he said that "Academics were early on the idea that markets are frequently efficient." He was right, but it got taken to the extreme for them to be always efficient. And the difference between these two propositions is night and day. And so, I think this infrequent inefficiency is what drives out inside of fair bit of work into that. But generally, they're frequently efficient. Generally, it's better to assume markets are efficient and then look for opportunities when they're not efficient, but recognize that it's a tough game, and it's hard to win, and you're up against a lot of smart people, and the markets are pretty good at pricing consensus and current conditions. So, if you feel it was obviously cheap instead of questioning consensus, I would question my own logic. [laughs]
Bill: Yeah. Well, that's what I've been looking at more like smaller and medium-sized businesses. And the first thing that I'm starting-- I have on a checklist is, "Why doesn't private equity on this already, if it's like this cheap," right?
Daniel: Yeah.
Bill: I think there's just probably a safer question because then it's like, "Oh, there's some incentives here or whatever that I want to avoid." All right, let's say, I'm a listener, and I'm an RIA, and I'm listening to this, and I'm like, "I really like Daniel." Pardon the ignorance of this question, but we didn't get to talk about it. When we were in LA, what exactly does your group do?
Daniel: Yeah, that's good question. We have a number of business lines in the group that I lead. We have a TAMP, turnkey asset management platform where advisors, RIAs and reps of broker dealers can implement their clients' portfolios on our platform. We have individual equity portfolios, uses equity research as an input, but we have a team of PMs across different equity strategies. We have ETF-managed portfolios, where we're building multi-asset portfolios and we're thinking about some of the things I've been talking about, building diversified portfolios, where we're thinking about long-term opportunities. And then we have some mutual fund portfolios and some fixed income portfolios. But we manage those strategies with evaluation-driven mindset, how do we identify opportunities, how do we manage risk, how do we recognize markets are pretty efficient. And so, that's one proposition.
We also make our strategies available on third party platform. Investment is more of a BD platform, but we're also available on Orion communities. Generally, set of equity portfolios, equity SMAs, and ETF and mutual fund SMAs, they're the two main ways that folks can access the investment strategies that we manage. We leverage Morningstar's research and then the rest of the stuff obviously, on morningstar.com is a place where you can get access to the security level research and fund level research that our research teams do.
Bill: Yeah, that's cool. So, if I was an RIA and I was like, "I want to outsource some of my investment committee things." I'm not saying that you can just forget it, but it sounds I could lean on some of what your group does for ideas, and portfolio construction, whatnot and get a Morningstar would maybe be a little bit more of my investment committee than if I was just on my own.
Daniel: Yeah, you can use our research, you could use some of our strategies on the investment management side, if you're an RIA and you want to do the asset allocation, and you've got some managers you'd like to use, but you want an equity SMA, you could use our equity SMA. We have sub-advisory services where we can plug into your practice and you can use that. And so, generally, we like to build long-term relationships with RIAs and firms we work with. For firms that we work with, yeah, they get access to our insights. They get to meet with our PMs. And so, yeah, generally, the advisors ask great questions and we're able to provide them with insights and stuff above and beyond just the strategies we manage.
Bill: Yeah. It's a neat, business Morningstar is. I apologize for not knowing anything on the RIA side, but I am not one. So, I just don't have that knowledge. But every interview that I've heard and the people that I've interviewed, I mean, Sanjay, Heather Brilliant, this guy, Todd Wenning that I know. Morningstar has got a hell of an alumni class, man. You guys must do something right. And you're in Chicago. So, obviously, I'm biased.
Daniel: Yeah, I'm biased too but I agree with you. [laughs] Yeah, look, I think Morningstar was founded in 1984, Joe Mansueto. Yeah, he was an analyst at Harris Associates, so the Oakmark Funds, Dave Harris, Bill Nygren, that group. He started as an analyst there. And Joseph thinks about business, selling sodas in high school in his dorm room and he's a business guy and started as an analyst. He looked at the information you got as an institutional investor looking at companies and then he saw the information available to a mutual fund investor. He's like, "Wow, there's just not much available." And so, he decided to build a business on collecting data on mutual funds and providing an objective source. So, investors could compare them across these different levels. That's really where Morningstar started is like how do you provide insights, so that people can make better investment decisions?
We've always had this real mindset towards end investors. And so, our mission is to empower investor success. We're all generally, fundamentally oriented investors first. We probably all have secret collections of Berkshire Hathaway letters tucked away somewhere. And so, there's definitely a field there. I should also say, probably, it hasn't come through already. I think that I've learned a huge amount from reading Warren Buffett and Charlie Munger over the years, which I'm sure you have as well and so.
Bill: They're the best.
Daniel: They are the best. Yeah.
Bill: Instead of podcast, although everybody should obviously listen to all my episodes, but I'll just churn through their old annual meetings they have in a podcast form now.
Daniel: I do the same thing. [laughs]
Bill: I'll tell you what's embarrassing about it is, I hear something and even now, I'm like-- I don't know how many times I've listened. Call it five or six. And I'm like, "Ah, I didn't even understand that sentence until now" and then I find myself thinking, "Well, I probably don't even understand it right now. What am I going to think it means next year or whatever?" But-
Daniel: Yeah, me too.
Bill: -they are one of a kind each of them in their own way.
Daniel: That's right. I think they've laid down an example for people to-- They answer honestly, they answer pretty frankly, and they're not there to sell people things. And so, I think they set a bar for folks in our industry, even if they've probably been critical rightfully maybe to folks in our industry. So, I think they're a great example. Whenever there's a new graduate that joins Morningstar, I chat with them like that's one of the top things I recommend, go and read all the annual letters. And now all the year back to 1994, all the Q&As available on Spotify, which is remarkable really, when you think about the wisdom that's packed in there. I'm like you. I was listening to the 2010 one the other week and I'm like, "Wow, these guys knew--" [laughs] What's taking me 20, 25 years to work out, I could have just shortcut and listened to-- As you say, I wouldn't have understood it, but yeah, it's really remarkable.
Bill: Yeah, I think it's really interesting to think about how they built that business too. And in COVID, here's what I would associate as an industrial company. It's obviously conglomerate. But the way that the insurance operation stepped up to give the company cashflow when some of like BNSF maybe had a tough quarter and then how BNSF came back. It's like, "Man, this is just a beautiful, beautiful--" He would call it a painting, right?
Daniel: Yeah.
Bill: What he has assembled is so anti-fragile.
Daniel: That's right.
Bill: Maybe some of the brands are tired. If I was going to knock it, I would say that. But boy, it's incredible to see the end of his life's work.
Daniel: That's right. I think the way that he's adapted to the conditions like recognizing how do you deploy large amounts of capital as you get larger. And so, BNSF and things like that-- Okay, maybe that didn't look good when I looked at the last 20 years, but how would it look if I control the capital allocation of that business and got to redeploy some of that somewhere else and let them invest in it here's where they probably didn't last time, but it's really critical for their franchise. And so, the way that he's learned to adapt, I think that's the key lesson that I've taken from it as well is, you've got to learn and adapt. That's the classic example of how you do it for decades and decades.
The thing as an investor as well, he says it a lot, but I don't know that everyone listens. It's like, he wouldn't do the same thing he's doing now, if he was deploying the capital that you and I have done. I think the challenge sometimes is that people just copy what he does versus how he thinks about things. I think that's going to be as well, he wouldn't be buying large-- I don't know that he'd be putting tons of money in some of the larger banks if he was-- and maybe he would, maybe he loves Bank of America, but he's probably going to be doing something way more niche and looking for that dislocation, maybe what he was doing earlier in his career.
Bill: Yeah, I think something that I've realized as I've grown as an investor is, it's really important. And I don't think it's knowable. But when you look at what an investor does without being able to talk to them about why they're doing it. You look at his Occidental bet. I think it's easy to say, well, he's bullish oil. I don't know that that's actually true. I don't know what he is actually trying to hedge within the portfolio, or if he's even thinking that way, or how it fits within Berkshire Hathaway Energy in the long term? I think it's so easy to look at an individual decision and say he likes this and I no longer do that. I just think-
Daniel: Yeah, hard to workout.
Bill: -it makes sense for him.
Daniel: That's right, and where he's at, and the work he's done. That's a good example. But if you look at the economics of some of those businesses now, the cashflow, they're generating and the supply constraints that are supported by government policy. Can he look out the next five to 10 years and can he have a more informed view on the supply demand dynamics? He probably feels he maybe does now. I don't know. I think it's hard to know as you say. Yeah, that's the fun of being a Berkshire shareholder as well. [laughs]
Bill: Yeah. What did he say at the annual meeting, he said that he got interested when they announced that they basically wouldn't grow and they'd return a lot of the capital to shareholders.
Daniel: That's right. And he said he-- [crosstalk] Yeah.
Bill: That's what he did with Apple too, when they did the big buyback. That's when I think he got like, "Okay, we can pile into this."
Daniel: Yeah, that's right. I think he said he read an investor presentation that [unintelligible [01:12:43], I think that's the name put together. He said it just made a ton of sense and so I started buying. Yeah, the simplicity with which he explains things sometimes I think belies the level of thought that goes in. He's just been doing it for such a long time. Yeah, I have never been to a Berkshire Hathaway meeting, actually.
Bill: You got to come.
Daniel: Yeah, I've thought about it, but I'm not a big fan of crowds.
Bill: Okay.
Daniel: But I've read everything like you would have as well. But maybe I will, but the commute and the big crowds doesn't jump out at me.
Bill: Well, if they do it next year, I'm sure Jake will extend the invite as well. But I will take you around to some of the smaller crowds. I can't guarantee no crowds, because everything is crowded room.
Daniel: [laughs] Yeah.
Bill: But some of the events around the event, I think make the event worth going to. I'm not a huge fan of sitting in the arena. If nothing else it freaks me out. I look at the board of directors and Buffett and I'm like, "I don't know that I want to be in this building-"
Daniel: [laughs]
Bill: -which maybe not like the best thought.
Daniel: Yeah.
Bill: I'm usually not in the building for the meeting. I try to go in, I see the movie, and then I usually end up leaving within-- I have a spot that I sit in that I go tell people about--
Daniel: That's good. I like it.
Bill: Yeah.
Daniel: Yeah.
Bill: Yeah, I don't know. I don't get waking up at 4 to-- I know a lot of people do it. It's not me. [crosstalk] I'd rather go out Friday night and meet people and then do my own thing.
Daniel: Yeah, the dynamics of it doesn't appeal to me, but then when they were showing it on Yahoo, I think first and that was this-- For people like myself, who would rely on the notes from the different folks that would write the notes after the meeting, that's a game changer. Now, I'd be on the red line on my way to work in Chicago, listening to 2011 annual meeting Q&A, it's a game changer. It's just so easy to get the information.
Bill: Yeah. So, you live in the city? I assume you don't have to disclose where but if you're riding the L, you're somewhere close.
Daniel: Yeah, I'm up in Lakeview.
Bill: Oh, nice.
Daniel: Yeah, you can actually-- we've just got an apartment and a condo and we've got a rooftop. We can actually see Wrigley when the lights are on and the scoreboards go. And so, it's a good spot. Nice, close to the lake, great neighborhood up there.
Bill: I lived at a 3660 that New Yorker building. That's the first place that I lived at.
Daniel: Oh, cool.
Bill: Yeah. And then I went around the city, spent some time in Old Town, Lincoln Park.
Daniel: Yeah, it's a great part of the city.
Bill: I miss it man.
Daniel: You got to swing by. Drop me a line when you're in town and you have-- [crosstalk]
Bill: Oh, I will. 100%.
Daniel: Great to catch up. Yeah.
Bill: All right. Cool. This is super fun. Thank you for coming on. I appreciate it.
Daniel: Yeah. Thanks, Bill. I enjoyed it as well. And yeah, it was great to chat a pretty wide range of topics. So, a lot of fun. I really enjoyed it.
Bill: Yeah. Well, if you ever want to come on and plug Morningstar again, just hit me up. You got an open invite.
Daniel: Oh, thanks, Bill.
Bill: So, I appreciate your time.
Daniel: Yeah, likewise. Thanks, mate. Cheers.
Bill: All right. Nice talking to you, Daniel. Take care.
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