Ladies and gentlemen, welcome to the Business Brew.
I'm your host, Bill Brewster. As always, thank you for
listening. This episode features Bruce
Berkowitz. If you have followed finance for
any amount of time, you will know who Bruce is.
If you're relatively new, you may not.
You should. I hope that I did a decent job
at asking some version of questions to Bruce that hasn't
been asked before. If you haven't heard William
Green's interview with Bruce, it's a wonderful interview.
I would direct you to that. For some background, I think the
short story is Bruce is somebody that I've followed for a really
long time and I wanted to ask him the right questions and do a
unique interview. And I found talking to him to be
very, very interesting. And I feel as though I've gained
an appreciation of how he may be looking at the world right now.
And I hope that I drew out some insights that may be unique to
this particular interview. I thank Heda Nadler for
introducing me to Bruce. I thank Bruce for saying yes to
coming on the show. And I hope that you all, as
listeners, enjoy what you hear. As always, none of this is
investment advice. Everything in this program is
for educational purposes only. Please consult your financial
advisor and potentially tax advisor.
We talked about an MLP in this episode and I highly encourage
you to reach out to the professionals around you and do
your own due diligence. What we say on this program is
not necessarily applicable to your individual situation and it
is incumbent upon you to figure out whether or not you agree
with what is said from an entertainment perspective.
So with that out of the way, do your own due diligence and I
hope you enjoy the interview that follows.
I know I enjoyed talking to Bruce.
Before this music drops, I do want to give a shout out to my
editing team at Speech Docs. You can find them on Twitter at
Speech and Docs's docs. Dax and his team is are
fantastic. I met them, well, I was
introduced to them when I was on Value after hours.
They've done Toby's work, at least on the transcript side.
I don't know about editing the pod because those pods are
normally dropped live. However, I moved from the
podcast consultant to speech docs and the transition has
been, I would argue, seamless. I hope that you as listeners
have not noticed a difference. And all I can say is that Dax
and his team offer incredibly good value and they're very
responsive, and I very much appreciate what they do on the
back end of the show. So if you are somebody who is
thinking about starting a podcast, please consider Dax and
his team at Speech Docs. That's SPEECHDOCS.
All right, ladies and gentlemen, I am thrilled to be joined by
the one and only Bruce Berkowitz today.
Bruce, how you doing? I am excellent.
And you, I'm. Well, I've been following you
since, I don't know, let's call it 2009 or so.
And the idea that I get to talk to you is, is something that I
didn't think I would. So it's one of those beautiful
benefits of having a podcast. So thank you for saying yes.
It's my pleasure. I quite enjoyed your interview
with William Green that was very comprehensive.
He did his homework. He asked me questions about
events I've haven't thought about in decades.
I think he treats investigative journalism much in the same way
that you treat investigating investments.
And it's evident in the product that he puts out.
It's it's always a joy to listen to.
Yeah, I I enjoyed talking with him.
Good. So I, you know, have thought
about what questions would I ask Bruce?
And I think that the one thing that anyone that has followed
your career over time knows is you are not afraid to swing and
get concentrated in positions that are, are very against the
grain. And I, I was hoping if we could
maybe rewind the clock a little bit and talk a little bit about
your days in the financial crisis.
And after I was reading recently an interview that you gave it
with about Wells Fargo and you said, I clearly see a path to
200 to $300.00, the stocks trading at 66.
By the way, Buffett just bought it.
I mean, what at that time did you see and and how are you able
to sort of get rid of the noise for lack of a better term?
I do my best when I stick to counting cash and if you took a
look at the the cash coming into Wells Fargo at the time, what I
call the earnings power, what I believe most call pre provision
net revenues. There was more than enough cash
coming in to handle the real estate occupancy issues at the
time. And once that hole was filled
in, you would really start to see the earnings and it was
really as simple as that. That and one other point being
that financial institutions do their best business in tough
times. They're underwriting tightens up
big time. They have all these mistakes on
their books from being a little too loose.
They can't afford it to make those mistakes that they're all
in recent memory. So great loans, great insurance,
whatever, whatever you want to talk about, great book of
business when it's initiated during, whether it's the great
financial crisis or Y2K or the TNT bubble or you know, going
back to the 80s. So when you say you count the
cash and, and Wells just had to, I don't mean to misstate what
you said, but had to make it through to fill the real estate
hole that they had. I mean, how, how long are you
typically thinking about when you're underwriting and you're
thinking out years ahead? How long are you thinking and
how much do you worry about like the precision of your timing
versus being sort of, I know this is going to happen
eventually and things will take care of themselves?
I try to be roughly right because I don't think I can do
much better than roughly right. And in the case of Wells Fargo
is the old pig going through the Python.
So I believe there was going to be a couple of years of
indigestion and those issues would take care of themselves
and then they would be off. They'd be off with what would
eventually be a new, pristine book of business.
That makes sense to me. So I, I mean, when you're saying
roughly right. And, and the reason that I'm,
I'm asking this question is I'm just curious with a strategy
that is as concentrated as what you have historically run and is
even more so now. I mean, is, is within two to
three years, sort of roughly right?
Are you looking for directions and trends?
I mean, how do you know once you've sort of like work through
a thesis, is is sort of the question?
Yeah, two to three years is about right.
And I'm going by the existing at that time.
I was going by the existing cash flow of the operation.
The money was coming in. It was the gap reserving.
It was having to put a number down in one day that represented
the potential losses over 5 to 10 years.
That freaked out a lot of people.
And of course, the headlines were pretty scary.
But my thesis is that history Trump's those headlines.
And we've seen it. We've seen most of this all
before. That doesn't mean it's going to
happen. Of course not.
But that that's, that's, that's expose the only thing that we
can actually say right is what what did happen, not what's
going to happen. And plus with Warren Buffett
going into the stock or you, you ended up being sale, so that
didn't hurt. With Wells specifically,
especially back then, I guess the last last decade or so has
tarnished the reputation a bit, but I I don't think anybody
would argue that they were not known as aggressive
underwriters. So to what extent does culture
like are do you put a lot of emphasis on culture and
management or do you put more emphasis on the numbers and sort
of what you can clearly see from the filings in the?
Past more so on the numbers and then I swung over to very heavy
on the manager and culture and ownership and now it's both.
I mean, basically you can't do a good deal with a bad person.
I mean, you may get lucky, but I've learned that you just
should not do a deal with a bad person and whatever bad may
define at the time. So even if it's an obvious
pathway to success, ego, envy, whatever the case may be, could
can get it get in the way. So it's both it's you really
want a good business and a good person, a good people and
banking isn't necessarily a good business, especially what's
going on today. So I've become more cautious on
banking and financial services, even though there are exceptions
and there are good businesses run by good people out there.
But I believe they're few and far between.
I mean, for example, today most institutions do not have to mock
to market their loans. I mean, they have to take into
account potential credit losses. But for example, Bank of America
doesn't have to mark a 3% home mortgage down because interest
rates have gone up to the point where that mortgage is 7% now.
And no one would buy that 3% mortgage at par.
But there are in the books at par even more so.
The government up until March of this year was willing to lend
100% on that mortgage, which is one of the ways in which all the
banks have been recently bailed out by the government.
So the government definitely chooses winners and losers.
They can. One civil servant can decide the
death of a financial institution or the life, especially when you
leverage 12:50. So I've had conflicting thoughts
on this. On one hand, I've thought to
myself, well, the bigger banks that are too big to fail
especially are arguably safe because of the dynamic that
you're describing. However, the other side of it is
should we go into another financial crisis or something
like that? It's possible that those bigger
banks could maybe get nationalized or something like
that. I mean, is that where your
experience of Freddie and Fannie maybe makes you more cautious of
the larger banks? Because I, I do think on one
hand they're much safer than all the others and on the other,
there's a much bigger sort of, I guess, unique risk that may
apply to them. With with Fannie and Freddie, I
learned that anything could happen in the name of national
security. And that's whether, you know,
our financial system is destabilized, the name of
national security of company can be taken, gifts can be given.
And I've obviously learned that that's way above my pay grade to
determine who wins and who loses by a few individuals.
I always thought that it was basically the law matters, but
in tough times anything does. Or in perceived tough times,
they don't even have to be tough, they can just be colored
as a tough time. Yeah.
I mean, just when you're generally looking at the
landscape, are you typically US focused or will you look?
I mean, I'm not familiar with too many foreign investments
that you've made, but I'm kind of curious just for your general
thoughts. I think that there's this
assumption that there is, I mean there is the rule of law in the
US and I don't mean to denigrate that, but there's this
assumption that the US has much stronger legal protections.
And I think what you live through may lead you to less of
a conclusion. I'm curious to hear how you
think our legal protections are versus maybe other
jurisdictions. Well, my conclusion is that we
may not be perfect we're but we're better than everyone else.
And I know the US system better than any other system and I have
an ability to only comprehend a certain amount of information.
So my focused on investments is really do about my desire to
learn as much as I can about complex organizations.
And some may argue I try to learn too much, but I am most
comfortable focused on a few three to six positions and
trying to fully understand the industry, the competitors, the
suppliers, the customers, the strategy, the ownership
structure, the takers that needs to the extent they're regulated,
taxed federal versus state laws. So I have enough on my plate.
Just trying to understand companies that are domiciled and
mostly operating in the United States.
I heard a rumor Once Upon a time that when you were doing
research on Sears, you had your your team go to local tax
collectors to to see either sales or tax receipts.
Is that, is that actually true? And is that indicative as to the
depth of research that you do? And if not, is it?
Is it directionally sort of correct as a as a urban legend?
It's directionally correct and that there's a tremendous amount
of data from your local government at work.
I mean, you want to find out how Saint Joe is doing, for example,
or any real estate company or Abby, or you can go to each
county of the state and for the example Saint Joe, that would be
Walton Bay and Gulf counties and you can see all the
transactions. Maybe there's a two week lag.
You can go and get the maps. You could see the planning maps,
you can see the new lots that have been put on that have been,
you could see the entitlements, the zoning.
You can get way ahead of the curve with that kind of detailed
information. So when I see your portfolio
today, I mean it's, it's for all intents and purposes almost I I
think it's 80% or 75% last time I looked Saint Joe.
I know that that's because Saint Joe has done well and I realized
that you've been selling, but is, is what you're looking for
as an investor that kind of clarity before you're making a
decision and, and how do you think about known unknowns and
your willingness to accept them or, or are you not willing?
I'm I'm just kind of curious to hear that.
Well, I have two funds. One fund has zero Saint Joe in
it. The other fund which is up to
80% is and I have not bought Saint Joe in over a decade, just
the nature of the position, the growth, the shrinking of the
fund and I've in fact have sold a few $100 million of Saint Joe.
So I do try and understand the most important knowns and I try
and determine if there are significant unknowns which I've
not been perfect at. Well, no.
No one. Is so I don't think that would
be a reasonable standard to hold yourself to.
But I was curious as to whether or not you've just evolved in
that way, because as I look back at your, at your previous, like
let's say if I were to pull up the fair home funds from 22,005
to 2012, it seemed like reasonably diversified.
I think maybe like Berkshire would be your biggest position
or something at 13 percent or, or whatever was at the time.
And, and there were more positions as I've watched you
sort of morph over time. And I'm, I may be wrong, so
please correct me if I am, but it seems as though you have have
taken more concentrated positions and you've been a much
longer holder of positions than I think most investors out there
both when things go right and wrong.
So is that by strategy or or indecision or is that a function
of just kind of how things have played out?
Well, there's two aspects to this.
One is I don't believe that I've changed much from day one of the
funds. I was non diversified focused
investor. I mean there were times when
I've only had two positions. I remember there was a time when
it was Berkshire Hathaway and Fireman's Fund, which became
Fund American Enterprises, which was eventually, well Fireman's
Fund was taken over by Allianz and then the there was a stub
left called Fund American Enterprises.
I've always been very focused. There may have been a bunch of
names, but there's only been a few large positions.
Sometimes. If it was banking, maybe I would
have a handful of names just to represent the the sector, but
the concepts were quite few. I have tried to evolve in two
ways and and it's not obvious that it's worked out yet and
that I wanted to try and find investments that have the
ability to hold over multiple generations.
I mean, it's exhausting to do the work on a position, an
investment and then you're done 3-4 years later after you've
spent a huge amount of time on it and you got to move on and
try and find something else. I was trying to get more
economies of scale. I also totally failed in
building up a research staff. Your research staff is only as
good as they are. I went in tough times, so I I
could not find the right people that that would work and get
comfortable with the level of analysis.
And if you have the wrong people, you just you just
doubling up your workload because you have to.
You're doing your work and then you're checking their work.
So I did not have that skill. The failure is all mine.
It isn't the failure of other people, it's my failure and not
finding the right people for Fair Home.
Much of my success was based on very few people at fair Home and
my making all of the decisions I was not able to delegate.
I have a tremendous amount of respect for people who build
large operations and end up finding and retaining successful
people. I'm not one of them.
Well, that brings me to one of the questions that I, I had
asked you in e-mail before we got on the mic.
And I had said after 2010, you could have easily become an
asset gatherer, become a little bit more diversified, still
arguably been concentrated and had this huge asset management
firm. And you did not choose that
path, which I find to be very admirable for the record.
What, what is it about you that I'm going to say it this way and
I, I think it's the right way. You seem to have continued to
try to put up returns for your investors rather than selling
out a little bit and and guaranteeing yourself tons of
AUM and fees for the long term and fair.
Home was never a marketing organization.
Success happened. Many people became attracted to
to the firm's funds. We never had a marketing
department, never really had an investor relations department,
never paid for business. I didn't want to do any of that.
I started Fair Home on the basis that I wanted to invest my
family's money in a certain way and that I would invest money of
clients exactly that way. We'd all be on the same side of
the fence. It'd be a level playing field.
That's what I was focused on. When Fair Home became quite
large. I'd never thought about gaming
it. I, I was never focused on the,
the revenues that will coming in.
Some would say that was quite foolish and I should have
thought about that. It became family became a
valuable business, but I didn't. I was more interested in the
continuing value creation and eventually getting to a position
where I didn't charge. I made enough and I'm frankly, I
didn't really want to talk to clients that much.
It becomes very repetitive. I'm very loyal to my clients,
people who are with me, they can stay with me forever and I'm,
I'm not going to say goodbye to them, but I'm not very
interested in new clients or building assets under
management. Life is more interesting
studying businesses get to, you know, you know, investing,
becoming more businesslike, which is not easy with mutual
funds. Yeah.
Well, I, I think generally in the industry, it's so pro
cyclical that it's tough. And you, you had mentioned, you
said that it, it was hard to find people when times are
tough. And I, and I, I think that it's
hard to find investors. It's hard to find people that
are willing to stick with an investment firm when times are
tough. It's much easier when times are
good to find both. And it's one of the really
unique things about the business of finance that I, I think can
really obscure a lot of incentives.
It's kind of interesting to think about.
I'm, I'm in a, in a way, way smaller version of you.
But, but my job is to figure out how to manage my family's money.
And that's, that's part of why I started this podcast.
It's why I'm, I'm really happy to talk to you today that to get
your thoughts on how, what you've learned over time.
And I and there's just a lot of different incentives when you're
running your own capital versus when you're trying to build a
firm and trying to really excel at the business of investment as
opposed to investments. One aspect is making it.
The other aspect, of course, is keeping it.
And your children are not you. Making money for people who
already have money may not be the most productive activity in
the world. I think it's probably more
productive to be a good school teacher or a good plumber.
So I don't expect my children to follow my footsteps.
I hope they're happy, healthy and productive.
So the last 10 years I've thought about, well, how can I
create an ecosystem by which they can be good stewards of the
capital? And, but you know, most of my
money is going to be given away. So it matters.
But they have the privilege to be able to do whatever they want
in this life and, and to help me give it away.
So it's all good. But I don't expect my children
to be me, or to enjoy the investing process the way I
have, or to have to work the kind of hours I did.
But it, it sounds to me like you work the hours that you did not
because you love it, right? I mean, if your ultimate goal
was to to drive your fees down to zero, it's not as if you were
trying to work those hours to build a huge firm.
It's that you really enjoy connecting dots and making
investments. Well, yes, in the beginning it
was about the money because I didn't have any.
Once you have money, it could be a lot of but a lot of things.
But when you have to pay the monthly bills, it's about the
money. And I remember opening my first
brokerage account and after a year or two thinking, I can do
this and this guy gets paid even when I lose money.
Something's up here. This is an interesting business.
And get and gets paid for a while as long as they do it the
right way and and maybe lose money alongside everybody else
losing money the same way, right?
It is an interesting business. It's a hell of a business with
someone who you know you know, probably would be driving a taxi
ends up becoming and making a fortune.
I like how you said that. What was it like when you were
named fund manager of the decade?
I guess my real question is, how do you remain rational when
everybody's telling you that you were the best of a decade?
And do you start to believe some of the hype around yourself, or
is that just not how you're wired?
Well, I didn't talk to that many people.
I learned about it from AI. Think CNBC watching the show, I
was pretty excited. Think I I received a little
bobble in the mail and you know, that was about it.
I didn't spend a lot of time on it.
Of course I was excited and I was also quite grateful because
the money started coming in and already was, but the money
continued to come in fast and furious.
I mean, I do have to ask I and I don't want to relive the whole
thing, but when you got involved in Sears, you clearly saw a lot
of real estate value and it coincided or or was shortly
thereafter after a lot of the money came in.
Do you think that being so focused on the minutiae of the
value that was there perhaps blinded you to some of the other
risks or did the risks sort of manifest later on?
Well, it was a replay in my mind.
We just came off making a ton of money in General Growth
Properties who had a liquidity issue.
And Sears reminded me the old Alexander and Alexander's or
what I guess some would call the cancer surgery model whereby
Sears had this huge real estate portfolio, maybe the largest in
the United States that with a very low cost basis and then
they had this bleeding retail operation.
I mean, it's a very strange and Amazon was succeeding, trying to
be the Sears of the Internet. And then Sears was trying to
become the Amazon coming, trying to become Amazon.
And and it wasn't happening. And it just seemed to me if you
just stop the bleeding, got rid of the retail, you would have a
hell of a real estate empire. You'd be able to deliver.
I mean, it was common sense. I wasn't sure if Sears would be
the greatest home run ever, but I thought there were definitely
ways to avoid death. And I tried real hard to
convince the board to pursue that strategy and I failed.
Success, retail success was always just around the corner.
Meanwhile, billions and billions of dollars later, it wasn't.
And those billions and billions of dollars were more than enough
to have to full that, to have the raw materials, the cash and
the real estate for a very successful real estate empire.
It's not as if it hasn't been done before.
From the ashes of retail it has come great real estate
companies. How many of those board members,
to the extent you're comfortable answering this, do you think
actually walked into Sears and saw what was going on from a
retailer perspective? I don't think they did.
I mean, you, you had Eddie Lampert, chairman and CEO at the
time, super smart, successful in everything he's ever done on the
cover of magazines is the next Warren Buffett.
And the thinking was, with enough time and effort, anything
is possible. I was going to say interesting.
Those that have studied Buffett would know his history with
retailers is sketchy at best. Well, you know, yeah, right.
But ESL had very good success with retailers, whether it was
AutoNation Auto Parts, other companies, tremendous success.
So the thinking was that you. Were saying something about your
thinking at the time. It was very simple.
Cut out the retail, stop the losses, take the cash, redeploy
it into the real estate. Happy ending.
That's it. First you avoid death, financial
death by stopping the hemorrhaging.
Then you use the cash flows, either sell the real estate,
build it up, return the money to shareholders.
I mean, it's, it's, it's not much different than what's
happening at Saint Joe today. Exactly the same strategy.
Yeah, well, one difference is Saint Joe's is a, is a growing
story now, right. I mean that's been quite
successful in developing, I'm going to call it a master plan
community. I think that's an accurate
description. Yes.
Well, it's. Yeah.
But before, to get to that growth, you first had to stop
past behaviors and practices you had many times in life you have
to take a couple of steps back. And in order to take a lot of
steps forward, it's a painful process.
The optics aren't good. No one wants to see you going
backwards, you know. So it, it, it took time, it
would have taken time with Sears too, but plenty of time has gone
by and would have been done. But we'll never know.
And what remains of Sears seems to be that's exactly what
they're doing now. Seems to be yes, take the real
estate, go into multi use, build some apartments where needed,
condos where needed, you know, refurb some spaces, warehousing
the there's a lot of there's a lot of infrastructure on the
malls and they happen to you know, and there's still plenty
that happened to be at the intersection of lots of
highways. That's not to say there hasn't
been dramatic migration shifts, but again, today that's the
reason for Saint Joe, the amount of immigration coming into
Florida. The interesting thing about
Saint Joe is I think about it is, is if there is a scenario
where hurricanes make the southeast of Florida less
livable, there's a potential that, that that area of Florida
that Saint Joe resides in actually get some northern
migration in conjunction with the southern migration that the
Sunbelt, oh sorry, generally benefits from.
I I don't have a position in Saint Joe, but I I've watched it
for a while and I I admire what you built with it.
Well, that, that's right. Most people don't realize that
most of Saint Joe's properties are elevated as you, you know,
you get, you have the beach and then on the Oceanside you have a
bluff. So most of the land is 20 to 80
feet above sea level. I mean, Miami's airport, Fort
Lauderdale's airport, they're basically at at sea level.
North ECP Northwest International is at 70 feet
above sea level and most of the facilities are brand new, so
there's modern day drainage. Building codes makes a
difference. During Hurricane Michael, St.
Joe suffered maybe a couple of buckets of water damage on the
floor and lost some shrubs and trees.
That was it. When it comes to hurricanes, you
have to be above the surge and you have to be in a product that
you have to be in a modern code, you know, where you consist,
where you can survive 140 mile an hour wind gusts.
Saint Joe, the Northwest Florida, you know, Saint Joe is
fairly new. Its buildings, its
infrastructure is fairly new. So it's a big plus.
Companies own the land for decades.
What the structures are. Structures are quite new, the
homes are new. There's a lot to be said for the
building codes. It's pretty much based on
Miami-Dade building codes. Well, that Hurricane Andrew
changed everything. So is.
Yeah, that was, I remember, I was, I grew up in Florida and I
remember Hurricane Andrew and I remember driving supplies down
to Miami to help in the aftermath and it was just crazy
to see the devastation. So the difference between pre
1995 and post 1995 construction is very very real.
You put your finger on it in a way they as painful as the
occurrence of the hurricane and the damage.
You eventually end up with a much stronger ecosystem.
Well, much like like much of life, right, to your point
earlier, sometimes you got to take two steps back to go
forward. And I would argue Hurricane
Andrew was more than two steps back and, and very, very
devastating. But I think Florida has gone
forward as a result. So knock on wood.
I, I am curious to the extent that, that your two funds
represent how, how you're thinking about the investment
landscape right now. It, it seems to me they're,
they're obviously different vehicles.
So they're, they're weighted differently and what not.
But it seems to me that treasuries are something that
you're thinking about, midstream energy is something that you're
thinking about and then Florida real estate is something that
you are thinking about. And I'm curious as to why.
I mean you're a fixed income guy by nature or or by background.
Why no risk? Why not so much duration?
Like what's going through your head from sort of a macro
perspective or from a credit speed perspective?
On the T-bills, you know, started when interest rates went
near zero, I just was not willing to take the duration
risk knowing what would happen to the market value of bonds and
you'd end up making a few extra points and then you'd lose 50%
of your capital if you, if you went out long.
And you just, you just have to see that now in the value of the
bond portfolios of the banks. They were unwilling to take the
hit of not making any money and not keeping up their returns.
I was very happy to have T-bills at a zero interest rate.
Sometimes I even sold them for at a negative rate because when
times get tough, everything's correlated except for cash and
T-bills for the only vehicle I could think of where you can
instantly turn that piece of paper into cash the same day if
need be. And so and I, I didn't have a
lot of better alternatives, especially, you know, knowing
that that the banks and other financial services firms would
have issues. It would be good, you know,
rising interest rates, you know, Oh yeah.
So our margins are going to go up and, and there was some
thought that depositors don't deserve to make anything on
their money and that even when interest rates went up, a lot of
banks thought they could keep those deposit rates near zero.
And you know, their, their interest, their net interest
margin would expand and their DAP earnings would increase even
though their balance sheet may be severely degraded through the
reduction in the fair market value of some of the of the
assets they were holding. So that was it on the T-bills.
And I thought that the eventually interest rates only
had one way to go up. And when they do go up, I wanted
to be ready. Of course, they stayed low for
much longer than I thought. So do you think much about where
they're going from here or was it, was it just a whole lot
easier when they were near zero to say there's only one way they
can go? I, I, I think a lot about
interest rates, but more so in the matching of the duration of
assets and liabilities. I mean, it was some of the big
problems with commercial real estate today is that you can't
match your asset, the duration of your asset to an equal
duration of a liability. At most you can get 10 year
money and while people have variable rate debt and I don't
know how you match that up with an asset where the rents may be
fixed for 10 years and the assets going to last you 30-40
years. You end up getting that kind of
mismatch and eventually you don't have any operating income.
So I think about it in terms of the funding and think about it
in terms of leverage. But interest rates have kind of
average now on a historical basis, yeah.
Seems to me that corporate spreads are pretty tight, but I
don't know if that's because the market is betting that interest
rates are going to go down or if I don't know with that.
I don't either. Whether it's a demand supply
issue, I I don't. All I know is the spread isn't
enough to take on the risk, even if that risk is illiquidity.
You would rather accept reinvestment rate risk right now
then you would rather accept illiquidity risk, it sounds.
Absolutely, yes. Yes, I would.
And it and is that because is that because that the interest
rates seem roughly within line of historically where they are,
so reinvestment rate risk is probably somewhat mitigated?
And if rates were to go much higher, that's a positive for
reinvestment rate risk. Is that sort of how your mind is
breaking that down? My mind is out is at the
illogical extremes. OK, if interest rates go down,
the value of other assets are going to go up and maybe I'll
make less money, but I'm not going to die.
If interest rates go up dramatically, which no one
believes possible, I don't know you could really be her.
The real degradation of capital then you see it, you see it the
people who went into long term bonds at low rates, you see it
in the performance of bond indices.
So I'd rather make less a more focused on the return of the
capital as opposed to the return on the capital.
Is that focus increasingly less pervasive in society?
Because it feels to me like all the emphasis is on return on
capital as opposed to return of capital outside of a few
organizations. I don't know if that's a
function of where we are in a cycle, or if that's a function
of how it's always been and I'm just not experienced enough to
know how it's always been. I think it's it's a function of
age for me. That is, I would not have the
energy to start all over again. So that's one.
But I think it's also a function of society.
Let me rephrase this. We have put the significant
social welfare Nets underneath us.
I There are so many activities taking place there that I just
don't understand the amount of spending that takes place, the
amount of entertainment, vacations, the lack of savings.
We have certain cohorts that do not know what it is to suffer,
do not know what it's like to be hungry or to worry about where
the next rent payment is going to come from or how the electric
bill is going to be paid. We still have plenty of groups
that do have those issues, but as a society we have increased
the protections of for people, I believe, and that's good, but it
also changes the way people think and how they compete and
how they work, what they're willing to do and not do.
It also increases the need for return on capital if you're
going to make good on the promises that are on the come.
Yes, absolutely. And then all of a sudden you
can't, and then what? And that's when you the extreme
events start when you're out of time.
So in a way, treasuries are actually an expression of having
enough duration in your thought to think about what happens when
the extreme event occurs and how might I be protected.
Even if they're short duration treasuries, they're actually
kind of a long duration expression.
I think of it as you never want to put yourself in a corner and
you think about a few low, low probability, high severity
events that that that can happen and do happen every 10 or 20
years and you wonder, you don't still wonder how you can protect
yourself from it. You start to think about how you
can benefit from such an event. Now it's not fun protecting most
of the time protecting yourself or thinking about how you can
improve your position in in such difficult times.
But you get the biggest bang during when you can plant some
seeds during very tough times. You just, you just don't know it
when you do it. I think the counter to that
would be, well, holding cash has been a drag.
I mean, really I, I, I don't know when you would have to go
back to see cash. Probably the 70s cash was was a
good investment, but certainly since 1980s cash has been a poor
allocation strategy just from a return perspective.
But what I find interesting about this conversation is a
contrarian might argue that that when no one is thinking about
what may happen and and I guess that's this is wrong.
Cash was good in 2008, 2009, but I don't feel like too many
people are worried about, you know, the real severe downturn
out but. Yeah.
Well, it's a two step process. You have to have the cash and
then you have to have the wherewithal to employ the cash
during a difficult time when most people have their sort of
head in the dirt. I mean, the great bargains occur
when everyone is forced to sell, no matter, no matter the
position. You know, fear is rampant.
The only way to be greedy when fear is rampant is to have the
cash. Yeah, I I like your expression
of cash's financial value and helps people stay, stay
rational, right. Yeah, right.
And the older you get, the more so.
I mean, I didn't understand what some of my clients would say to
me years ago, you know, Bruce, them heading into my 70s.
Yeah. I don't know if I want that
volatility. I'd say, oh, you're fine, but it
tends to be true. As you get older, your
opportunity window narrows. Yeah.
Well, to your point on asset liability mismatches, when
you're older, you you need some shorter duration asset should
you have healthcare problems or or anything along those lines,
you you don't want to have to be paying bills with securities.
Right. And of course we're talking
about percentages and it just happens to be about the fair
home income fund. I've thought that having AT
bills yielding 4% was pretty good compared to most
alternatives. And of course the the biggest
position in that fund is Enterprise Products midstream
pipeline of a master limited partnership, which is quite an
interesting animal And anyone interested in such animals at
the take the time to talk with a whole bunch of tax experts and
understand the exact workings of an animal MLP.
But it happens to work quite well from mutual fund.
So what I'm getting at is you have a company, Enterprise
Products that has a 7 1/2 percent distribution and that
distribution is considered a return of capital and has been
based upon the growth of the company and so on.
And I, I expect it will continue to be a return of capital.
And then you hold the position and eventually that return of
capital reduces your cost basis and could eventually reduce your
cost basis down to 0. And then the money you start,
the cash you start to receive after that gets taxed at a
capital gains rate. And for an individual, if they
hold it until death and they get the step up in basis, Very
interesting. Of course, it's a totally
inappropriate for a retirement account based upon some of the
rules, but there's only a settling up with the tax man
upon the sale of the instrument. And for mutual funds, as long as
you keep it under 25 master limited partnerships,
partnerships under 25% on a cost basis, you get certain
exemptions in terms of, you know, filing with States and how
it's treated a bit of an arcane area of when it comes to mutual
funds. But here's a company
distributing out seven and a half percent and plus growing
where they've averaged about 12% per annum since their start has
the potential to earn between 10 and 15% per annum.
Excellent adult supervision in terms of the management and
ownership base is in an absolute critical area, which is
basically they're a logistics company for energy.
They they sort of get energy from A to be energy which is
absolutely essential in terms of say natural gas liquids which
become ethane or propane, which eventually enter maybe 95 plus
percent of all products made with no substitutes.
Natural gas is if the world just went from coal to natural gas,
it would probably be the the most environmentally positive
process. And in fact, I believe that the
US has achieved a cleaner air based just on the switch from
coal to natural gas. But I've spent a lot of time
trying to understand thermodynamics, chemical
engineering, playing with molecules of understanding of
the intermittency of wind and solar.
It's a Enterprise Products that they make money no matter what
the price of oil and gas, they don't matter the price because
they're it's a service business and they have an annuity like
stream. So I find that type of company.
And by the way, it's a AA minus, sorry, it's an A minus credit.
So investment grade, I think the highest investment grade of any
type of midstream company. So I find that a perfectly
acceptable income idea, and I like matching that with T-bills.
I like that you've talked about counting the cash and and if I
sort of back of the back of the envelope look at Enterprise
Products, I'm not asking you to opine on whether or not my
numbers are correct. I am sort of asking if I'm
thinking about this roughly properly in your estimation, you
have I guess, 8 billion of cash from operations, 3.6 of CapEx
roughly on a TTM basis, figure 22 billion or so or what they've
got 800 million to billion of maintenance CapEx.
So let let's say 2 1/2 billion is growth CapEx, which is
probably a little low if I'm thinking about it.
And I say, OK, I have roughly a 10% yield to equity on the
enterprise today and then they're deploying 2 billion that
they may be able to make 10% on. I I should roughly get somewhere
between a 12 and 14% yield, assuming that that these numbers
stick and obviously there's a thousand ways it can go wrong
for those that aren't that have intelligence to do your own
work. But like, is that roughly how
you think about the math? Yes, that's, that's roughly
right. And they have a very long, if
they paid a dividend rather than a distribution, they would be a
dividend aristocrat and they do it with less leverage than most.
It's more conservatism. So I've no, I, I, you have it
right. I think about it on a per share
basis and they have a distributable cash flow of about
$3.50 a share around there. They're paying out a bit over I
think $2.00 per share, roughly $2.00 per share.
So you're, you're getting a nice cash distribution that's tax
deferred plus they're reinvesting a significant amount
of money, which will increase that distribution over time.
You're also lowering your duration because when you think
of it, it's very interesting to think about the cash
distributions as a return of capital.
So you're lowering your cost basis and, and over time you got
a 0 cost basis with a tremendous distribution.
It's not a bad way to get wealthy at slowly.
OK, this makes sense to me in a way.
I, I'm, I'm going to say it slightly differently, but if I
pay 64 billion for the equity today and they return 4 billion
to me, that what that's just like 6 1/2 percent or so that is
reducing my duration by that amount is, is sort of how you're
thinking about it and when. Yeah, you're getting your cost
back. Yeah.
And when you balance that against T-bills, sort of the
aggregate duration of the portfolio shrinks and the risk
is potentially favorable. I mean certainly if that's how
you have the fun position. Yeah, you got a barbell, but
one, the T-bills have a duration basically of 30 days.
And then you have enterprise with the duration of about 10
years, less than 10 years, eight years.
So you're getting high yields with a relatively, you know,
reasonable duration. And the potential for the entity
to continue to reinvest, to not extend the duration in the sense
of a static duration, but they they can continue to grow the
enemy. There are, you know, for a top
quality logistics business, I mean, they're, the valuation is
quite low. It's, you know, it's when you
start to, you know, it's the oil and gas debate which is keeping
that valuation low, even though the debate is nonsensical in
some ways. Yes, it is.
Yeah, but we can't change with society debates, right?
But I I think the facts are you you know, what's interesting to
me about that debate is to the extent people want to reduce the
world's dependence on oil and gas by shrinking natural gas
production, it it is a very in in my estimation.
I'll pull the ladder up behind us answer because I don't think
the emerging countries of the world are going to say we don't
want the energy usage that the United States has and therefore
we're OK not burning coal or not burning.
Like the the idea that they're just going to go to a grid that
is not dependable and they should just accept what we have
determined is, is kind of offensive.
Yeah, it's a very, but it's it seems to be the debate that
permeates society. It's a very arrogant viewpoint
that others don't deserve what you have and others should not
strive for a better quality of life for their families.
But it also gets into crazier issues like how how a an
electric line is prevented through Maine that hooks up to
Hydro Quebec to get relatively clean energy to Boston, for
example, because someone objects to putting a, you know, a 10
foot gash in a forest to, you know, cut down 10 feet wide of
the forestry when that Boston may still be bringing in dirty
fuel by boat because they can't get the clean electricity.
You're like, California will import that, you know, heavy
oils to burn because they refuse to put a natural gas pipeline
in. It goes on and on and on.
The the craziness of it all. You know, there's a good book
out there, How the World Really Works by Smell, who is an energy
expert. And I think he's written 30
books on the topic. And he he talks about how the
world really works with energy, with hydrocarbons and the
process and the conversions and their relative merits.
And he does a good job piercing it all together.
He supposedly Bill Gates his favorite author.
Yeah, Yeah, he's interesting. The other thing, friend of the
show, Bob or Body, I'd like to call him like a true friend.
He has been talking about a company that is in the ammonia
industry and he has a little bit of, well, he doesn't have a
little bit, but he's involved in sub C7 and tidewater and whatnot
and, and as a result has an insight into what those
industries are looking into to reduce shipping emissions.
And I guess one of the things that they're looking at burning
as opposed to fuel is ammonia, which would be yet another
natural gas pipe. Bob's a Bob's a long time great
value investor, yes, and and an energy he's been he's been doing
energy forever. Yeah, energy's fairly new for
me. A lot of value investors stay
away from energy because the cyclicality of it, hence my
desire to go into the logistics company was which is not
dependent upon the cycle price or mostly not dependent upon the
price during the cycle. But yes, that's the that's
there's real excitement in green hydrogen, blue hydro, blue
hydrogen. Green hydrogen would be through
electrolysis. Blue hydrogen would be through
the conversion of natural gas into hydrogen using a carbon
capture and underground sequestration.
And then the latest is geological hydrogen.
I forgot what color they're calling that or natural
hydrogen, which supposedly there are reservoirs of, of which
based upon, you know, certain elements combining with iron ore
and that there's, there, you know, you may be able to just
drill for, for hydrogen, but it's there.
There's a lot of money being spent on that.
So yes, the technological evolution and all this energy is
quite interesting. And the, I mean, carbon capture,
I believe is quite real and we're going to continue for
decades to need natural gas and oil because I mean, the foins
basically forms the building blocks for fertilizers,
plastics, heat steel, cement. I mean, world just doesn't work
without it. What have you found with the
carbon capture and sequestration?
It seems to me that the technology like provably works,
but the impediment is the cost. Is that am I correct or am I off
base? You have to capture, transport
it, but with the most recent tax credits, it's quite doable.
Now the government's putting out some serious money to help
capture that carbon and putting it back into the ground.
I mean people have been using it to fizz up oil wells, gas wells
for a long time, being used to sell carbon dioxide needed for
Coca-Cola or whatever. I'm by far not an expert in this
area. I'm not either.
I do understand the need to get it from A to B.
For example, in some places in Texas right now to you have,
there are times this year where you've had to pay people to take
your natural gas because they just wasn't, there weren't
enough facilities, pipelines, logistical systems in order to
take it from the gathering systems.
And how can and how can the, how can the price be so different
between the, the, you know, the price in Texas versus the price
in the the Netherlands or in the price of Japan?
It's a logistical. Challenge.
Well, it's one of the nice things about being located in
the United States. We've got a lot of geographical
advantages. Yes, and with a little luck,
we'll see a lot of industry come back, especially to the
southeast of the United States. Yeah, it'd be good for the
country. One question I do have or not
one, but one wrapping up question, you mentioned you run
a mutual fund. Have you ever considered
converting to an ETF or is that not really on the I?
I just, I think there's some tax advantages that could eventually
come out of that. But I I not an expert, I was
just curious. No, I haven't.
Tell me about the tax advantage. I've looked at it a bit.
I can connect you to somebody that that can tell you about it.
I know enough to ask the question.
Somebody that I know that I trust wrote that question.
And I asked what questions do you have for Bruce and, and he
had said has he ever considered converting to an ETF?
I'd be happy to make that introduction for you.
Yeah, I'd like that. I know there is some tax
implications on selling and how it can be done, and I've looked
at the closed end funds, but I I didn't want my clients to suffer
what could potentially be a discount to net asset value.
Yeah, I've always been focused more on how to create permanent
capital via a mutual fund. And my only conclusion is to
just make sure I own more of it. That's the only permanent
capital your ownership in it. Yeah, that's, that's not wrong.
And the partners that have been with you for a very long time
and and hopefully one or two new stragglers that are, are truly
committed to the strategy, right.
Wouldn't hurt. Yeah.
I mean, you know why? So I have noticed you've done a
lot of media lately. Are you looking to raise assets?
Are you doing media now because you're sort of ready to move on?
Like why? Why are you a little bit more
public now than then? Maybe I have seen you in the
past five years. Well, I feel it's a very
efficient way to let to talk to existing shareholders and.
That I agree with. And to you know, and, and in an
off the cuff way, talk about positions, philosophy, strategy,
what I'm planning. So and I haven't done it for a
long time. I've, I've typically have said
no to conferences or TV and the only time I really did that was
when I had a position to discuss.
So I was fighting with a company.
There's a part of me that wants to make sure that, you know,
people that my clients know, my shareholders know what I'm doing
and, and talking to smart people that helps.
And then I've been told by others that I should just, you
know, why not? It's not clear to me the
benefits, but I'm willing to take suggestions.
Well, I appreciate you saying yes to coming on this program
and I hope that I have helped you further your goals and I
hope that you've enjoyed the conversation.
I have quite a bit and I really appreciate being able to ask you
the questions and you being open with how you're thinking.
So thank you very much. Thank you, I enjoy talking with
you all. Right, take care and thanks
again for stopping by all. Right, all the best.