While he says he’s toned down his “knee-jerk” contrarianism, John Rogers’ independent streak remains as important to his investing success as ever.
While in many ways a man in a hurry – he started Ariel Investments in 1983 at age 24, prompting a write-up in People magazine – John Rogers as an investor has always been more tortoise than hare. Ariel’s motto from the outset: “Slow and steady wins the race.” And that it has. Ariel now manages nearly $11 billion and over the past 32 years its flagship small-cap strategy has earned a net annualized 12.4%, versus 9.4% for the Russell 2000 index.
With a penchant for businesses facing secular and/or cyclical challenges, Rogers and his Chicago-based team are currently finding opportunity in such diverse areas as helicopter transport, financial advisory, private equity, cutting tools and local television broadcasting.
Investor Insight: John Rogers
Ariel Investment’s John Rogers, Charles Bobrinskoy, Timothy Fidler, Kenneth Kuhrt and John Miller describe the many virtues of patience in investing, how they navigate secularly challenged businesses, how they’ve added discipline to their sizing of positions, and what they think the market is missing in Bristow Group, Kennametal, KKR, Tegna and Lazard.
Ariel’s motto has long been “slow and steady wins the race.” Why do you believe that’s true?
John Rogers: Being patient is at the cornerstone of everything we do. It shows up in our effort to see past the short-term noise about a company and focus on how the business can develop over three, five or seven years. It shows up in waiting for the perfect pitch that provides enough margin of safety in buying and in our willingness to give companies we own the time to realize their intrinsic value.
With so many investors thinking short-term, share prices can be much more volatile than underlying business values. We believe taking advantage of those shortterm dislocations is what drives long-term outperformance.
To expand on this a bit, 15 years ago I would have been more of a knee-jerk contrarian, trying to prove the market wrong and what an independent thinker I was. But we’ve learned to be more patient in pulling the trigger. Our experience and the research and data show that it’s better to take your time to gain insight into a company. Earnings disappointments are often not one-off events and despite the market’s efficiency, it takes time for Wall Street to go from surprised by bad news, to angry, to finally capitulating and assuming the company will never recover. We obviously don’t always get it right, but we’re trying to engage fully when everyone else seems to have given up.
Timothy Fidler: While we regularly respond to the market turning on a company’s shares, our process focuses first on identifying companies with competitively advantaged positions that should result in predictable cash flows over a multi-year period. As an example, for 10 years we had been watching Progressive [PGR], one of the relatively few insurers with what we consider comparative advantages from its brand, low costs and underwriting discipline. The low-interest-rate environment led to competitors pushing to take share in the agent-sourced business, which makes up 50% of Progressive’s total revenues.
Analysts took down estimates and from the fourth quarter of 2013 through the first half of 2014 the stock was very weak, which finally gave us a chance to buy in based on valuation. The shares were down for reasons we didn’t expect to persist, whereas the underwriting discipline, brand strength and cost advantage we did expect to persist. That’s the type of situation that attracts us.
While we’re patient, we’re not indifferent to timing. We’re looking to buy companies with depressed earnings at depressed multiples, but it has to be a situation where we can identify a path to double-digit earnings growth from our initial purchase over the next three to five years. When things work out, we can benefit from both the earnings growth and the market eventually re-rating the shares. You frequently traffic in names with secular challenges on which you have to make a call. Describe how you think through those types of situations.
John Rogers: It’s true that with many of our companies we’re assessing the challenges coming down the pike, a lot of them stemming from technology-related change. We recently had a lively discussion in our research meeting about how new blood-test technology from Theranos, a high-profile private company, might impact our holdings in LabCorp [LH] and Bio-Rad [BIO]. Will it have a huge impact or is it more of a fad and not that big a deal? For the time being we’ve concluded that the new technology – focused on doing tests with just a pinprick – will not have a transformative effect on the testing industry. But these are the types of questions we must constantly ask ourselves when investing in out-of-favor stocks.
We had a difficult 2008 in large part because several of our holdings – in media in particular – didn’t hold up as well as expected to negative secular trends. One of the lessons learned is that we need to challenge each other more and not just defer when I or another senior person is sticking to our guns on an unpopular idea. Holding firm may be exactly the right thing to do, but we weren’t fostering the free and open discussion we should have. One way we’ve addressed that is to assign to every holding in the portfolio a devil’s advocate, whose job it is to make sure the negative case gets a full airing.
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