Today is a very special episode I have Bob Schmidt. He’s the manager at the Brandes Institute where he oversees project research and analysis, development of publications and presentations and special events for the Brandes Institute. Prior to this he worked as a head financial writer at Nicholas Applegate, he’s a graduate of Duquesne University with a BA in English and a masters from California State University, San Marcos. I’m going to welcome Bob to the show and I want to welcome all our listeners to a very special episode.
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[00:00:58] Female 1: Welcome to Value Talk with Raoul.
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Warren Buffett has never detailed the process he uses to value the businesses he acquires for Berkshire Hathaway. However, over the years, he has provided some limited insight into his methods. Q3 2020 hedge fund letters, conferences and more Based on these comments, it is widely assumed that Buffett uses a discount cash flow model Read More
[00:01:04] Raoul: I just want to welcome all my listeners to a very special episode. I have Bob Schmidt the manger at the Brandes Institute and welcome to the show.
[00:01:12] Bob Schmidt: Thanks, thanks very much Raoul.
[00:01:16] Raoul: Ok and can you tell me about your background and what lead you to finance and investment?
[00:01:22] Bob Schmidt: Yeah my background actually is in English and was an undergrad major there and loved, absolutely loved writing. Worked for a newspaper when I was in college and then always had an interest in the markets and in finance and became a stock broker early in my career which was great in terms of the exposure it gave me to the industry. But as a broker I think that the number one thing I did was make myself broker, I wasn’t very good at it. Luckily I found a job as an RSP writer within the industry and that really launched my career.
[00:02:04] Raoul: Very cool, and what lead you to Brandes Institute and what is your current role there?
[00:02:11] Bob Schmidt: At Brandes right now I’m the manager of the institute which is the internal think tank or thought leadership division. I started at Brandes 18 years ago as a financial writer and again building on what I talked about I think my skills are really in researching, analyzing and communicating and bringing those skills to a really numbers oriented field has been great for me. So starting as a financial writer we formed the institute back in 2002 and the goal at the time and still is, is really to engage investors whether those are clients, prospects, consultants, financial advisors, academics, anybody who’s got an interest in finance and investing we’re trying to bring insightful information to them.
[00:03:11] Raoul: That’s very cool because you don’t see many asset management organisations doing what you guys are doing, that’s very cool.
[00:03:22] Bob Schmidt: Yeah I think it’s gotten more popular over the years. I’m certainly not going to say we were the first, I think we were among the first. But I really think the industry helps itself by offering insights, information, educational pieces that investors aren’t going to get elsewhere and that’s certainly what we’re trying to do.
[00:03:50] Raoul: And it’s really cool that it’s all free, to get high quality information.
[00:03:52] Bob Schmidt: Indeed.
[00:03:56] Raoul: And what are the topics that the institute researches and how do you guys generate ideas for researching topics?
[00:04:06] Bob Schmidt: Over the years we’ve really focused on five areas. We kind of quantify those, made them a little more distinct when we redesigned the website X number of years ago. Those are behavioural finance, risk management, portfolio construction and management, value investing and last fixed income. So just about everything we do is going to fall into one of those five categories.
The research projects that we pursue- I should take a step back and say everything we’ve done since our inception has been done in collaboration. So all the diverse audiences that I’ve mentioned they’ve also been partners in the work that we’ve done, other asset managers, institutional consultants, advisors, academics, we’ve worked with all these people to bring these insights to the marketplace. One aspect of how we’re built which has really been helpful is the really cool creation of an advisory board.
So right now it’s about 20 people, they’re mostly institutional or retired institutional investors and they're scattered in I think 9 different countries, 4 different continents. They will give us ideas to pursue, we’ll also get ideas from those different audiences whether it’s clients or prospects or consultants or advisors and just things that I’m reading, researching, looking at, trying to anticipate what might be of interest to our diverse constituents.
[00:05:48] Raoul: And do the investors share a commonality on things of concern and topics that they want to research further or do they- are there topics of main concern that institutional investors want to find out more about?
[00:06:14] Bob Schmidt: Are you asking about current topics or the evergreens?
[00:06:18] Raoul: Ah yes current and the evergreens.
[00:06:21] Bob Schmidt: Ok, I think one thing that distinguishes us a bit from some of the other thought leadership divisions is that is we really don’t go into current topics in much if any detail. What I mean by current topics would be things like what do you anticipate interest rates being or the unemployment report came out today or political developments and their implications.
So there’s always a lot of top down factors that influence markets in the short term and we really steer clear of those and focus more on those evergreen topics which are again risk management, building wealth over the long term, behavioural finance. So in essence thinking about behavioural finance a lot of what we try to do is get our constituents to be more longer term focused, more rational and integrate a value mindset in their investment approach.
[00:07:28] Raoul: Can you tell me more about the approach that Brandes takes? Because I know you said collaboration and the board. Can you tell me a bit more about the approach, about your research process?
[00:07:43] Bob Schmidt: Yeah so again the ideas for what we pursue are going to come from a variety of different sources. Then we’ll evaluate that with our advisory board, they’ll help prioritise projects and once we’ve got a meaningful plate of work that we can start to attack then we’ll think about how’s the best way to do that. Is that collaborating with colleagues, is that asking an advisory board member to work with and/or lead a certain project? Is it more drawing in an academic who has expertise in a certain field?
So everything that we do starts with research and that’s usually a literature survey so what have other experts written about, talked about in the field and then what could we bring to that conversation that’s new and engaging? So it’s a little different for every project, some of them are more quantitatively driven, some are more qualitatively oriented, some of them are again pieces that a specific advisory board members has a strong interest in and he or she is going to lead the effort. So it’s really kind of adjusting our approach and our resources to the project and what we think is best suited for that project.
[00:09:05] Raoul: Yeah and then when you find those experts and people who want to collaborate with you how do you distinguish the actual experts on that particular topic from someone maybe claiming that they’re an expert?
[00:09:22] Bob Schmidt: Usually it’s what they’ve published in the field, we can get a sense from that. Sometimes I’ll invite people to join us at an advisory board meeting. And with the board members scattered around the globe we’ll tend to meet every 6-8 weeks and we’ll do it using online conferencing software so you can patch in somebody from anywhere. Then as that person is presenting afterward we can, or even during we can evaluate ok is this somebody who’s bringing a meaningful insight into the critical conversation, is this somebody that we want to work with and partner with? We can get a sense of that and then I’ll ask from feedback from the board and yes we want to work with this person or no we don’t want to work with that person, but we’re trying to sift through and get the folks that we want to work with in order to get the most impactful insights.
[00:10:22] Raoul: Yeah and then for the impactful insights that you’re trying to find how do you know when you go through that process do you look at other people researching the same thing and if they haven’t covered it yet you guys are trying to push it further?
[00:10:43] Bob Schmidt: That’s part of the literature review that we’ll do. You reminded me one of the questions that I’ll often ask the board and even look in the mirror and ask myself as we’re looking at projects is so what? What is the practical application for this? The theory is great and is often fun to debate and talk about what might happen or what could happen but really ultimately we’re trying to share some practical concrete tools and insights that again people can put into practice and hopefully help with their investing.
[00:11:29] Raoul: I like that, and then have any investors found any of those- any of your research helpful to their process and how they conduct their investing?
[00:11:42] Bob Schmidt: Very much so and the feedback that I get comes from the different constituents that we work with. So one example we’ve done a lot on behavioural finance and again the thing that I challenge the board and challenged myself with was how do we make this practical for people across the industry? We’ve developed a number of tools that investors can use, that advisors can use with their clients and I’ve gotten so much positive feedback from a variety of advisors who will say this is really helpful or this wheels investor in motion tool that you shared. I shared that with a client and got one third of the way through explaining what it is and the client stopped me and said I get it, I get it, I’m looking too frequently at the statement, I shouldn’t do that I should focus more on the long term. So hearing those stories is really encouraging in terms of we’re putting out this stuff and it’s having the positive impact that we’d like it to have.
[00:12:55] Raoul: That’s very cool and for the behavioural investing are there any topics that you’re very interested in or sitting on learning more about?
[00:13:04] Bob: Very much so, that to me is a really rich area for further research. To me the field has grown by leaps and bounds probably in the last two decades. You look at some of the nobel prize winners, Taylor recently, Connoman some years ago. So I think the field is getting more recognition, it’s getting more attention and again as people work towards applying these theories making them actionable in investing I think that’s super helpful. And again to the degree that we can be a catalyst in that field terrific, the whole training the investor brain module that we came up with it was really institute work.
We branded it as a Brandes Investment Partners piece so my colleagues could go up and talk about it as well. But really some of the key things that we’re focusing on there are the dangers of extrapolation, the dangers in having fear of what’s happening in the short term frightening people out of really good long term investment plans. Then I mentioned Connorman and his whole prospect theory, in essence the losses hurt twice as much, at least twice as much, as comparable gains feel good. So again that ties into a lot of short term behaviour where we see the market going down, we don’t like that, we want to get out but in many cases just sticking to a good long term plan, sticking in the market when it’s emotionally difficult tends to pay good long term benefits.
[00:15:02] Raoul: Yeah I think one part that I really love about the view and investment aspect is that this can just apply to regular decisions that make everyday in our lives.
[00:15:13] Bob Schmidt: Oh yeah, it’s actually a phrase that I’ll often use in presentations when I’m talking about that is I’ll set it up and say to me behavioural science of decision making. So as we talk about decisions to your point these are things that can be applied to almost any decision and all we do with the finance side is try and bend it around and apply it to investment specific decisions.
And a lot of the work that we’ve done- there was a piece that one of our board members Bob Maynard who’s chief investment officer for the public employer retirement system in Idaho. He did this piece several years ago and a couple iterations called ‘conventional investing in a complex world’ and his whole focus was keep it simple. So you don’t need really fancy asset classes to have great long term returns and he was comparing and contrasting his approach in Idaho which was a pretty basic mix of public stocks and bonds and maybe a little real estate with the endowment model. The notion that you’ve got to have hedge funds and infrastructure or commodities and you’ve got to be hedging currency exposures and you’ve got to be hedging this to have great long term returns.
He’s all for keeping it simple and I think there’s a lot of merit in his approach. It kind of mirrors what we do here at Brandes as a firm, we’re long only value managers, we’re convinced that you can find stocks and bonds that are selling for less than what they’re really worth, you buy those things and hold over them in the long term and you should do pretty well. So in some ways it’s like dieting, it’s simple but it’s not necessarily easy and it’s not easy because our emotions often get in the way. So if we contain our emotions theoretically we should be better investors again over the long term.
[00:17:35] Raoul: I think that’s the part that I select the most is being able to learn about how just like in align your life with how you invest.
[00:17:46] Bob Schmidt: Yeah there’s a lot of application, a lot of overlap.
[00:17:53] Raoul: Right and then so there’s your recent white paper is on organisational design and long term investing. There’s a question posed at the beginning what are the characteristics or attributes that are required to enable an investment organisation to successfully pursue long term investment opportunities. Can you tell me about that?
[00:18:13] Bob Schmidt: Yeah, and this is another great example where this is a piece that is co-authored by two of our Asia Pacific advisory board members so David Iverson who is head of asset allocation at the New Zealand Super Fund and Jeff Warren professor at Australian National University. So organisational design piece their four pillars for success are investment beliefs, governance, aligned interests within the organization and making sure everybody is on the same page and then people.
So that piece talks in some detail about the theories, teh principles behind each of those four pillars. They did another kind of a sister piece to that called ‘10 ideas to foster long term investing’. That’s not out yet but it’s coming. The two pieces I think work really well together because the first piece that’s published now again is a little more of the theory, a little more of the principles and then this 10 ideas piece says ok we’ve put forth these principles let’s give you some specific concrete suggestions on what to do, how to do it.
So just a couple examples of that so the investment beliefs first that’s really important to them in terms of how the organization is governed and designed. One of the suggestions that they had was making sure the principles are unambiguous about investment horizons. Really it’s if you’re an organisation, if you’re an individual and you’ve got these long term goals I want to get to and get through to retirement, I want to put my kids through college in 15 or 20 years. That should really be stressed in your investment policy statement and should really dictate the work that you’re doing.
Just a couple of the other oens that I thought were really good in terms of aligned interests is everybody on the same page within the organisation? They suggest rewarding behaviour and not just performance. For good or bad we are in an industry where your performance can be evaluated moment to moment or second to second, is that stock you recommended up or down?
These two authors, these two board members keep coming back to what’s the behaviour that’s driving your performance? In other words what’s the process? I often think of blackjack as a good example where you're sitting at the table, the dealer is showing 4 or 5 and the guy next to you has 18 and he says hit me. The dealer might say ‘are you sure you want a card sir?’, yeah, yeah hit me. Ok hitting 18 and the guy draws a 3 and wins the hand. That is his performance in the hand, the result, the outcome terrific.
His process is terrible, if he plays like that consistently he’s probably not going to do very well. So that’s one example that I often use but it’s really designed to illustrate the importance of do you have a sound process and are you rewarding people within your organisation for following that process? Assuming that it’s sound and that it’s going to deliver good results over the long term.
[00:22:03] Raoul: Yeah, I like that you use that example.
[00:22:06] Bob Schmidt: Yeah and again kind of tying into some of the behavioural stuff sometimes it’s a lot easier to say these things versus doing them which again I think is really helpful with this new piece, again here are specific ideas which you can follow. One other one that I can think of in terms of governance, and when I think of governance I think of processes, procedures, the way the organisation is structured is it built for success? And you also might think of sports teams so looking at the owner and the general manager and having the right philosophy and approach and the right players and then the coaches, the managers are going to lead that team on the field or on the court or on the ice.
But one of the suggestions that they came up with in terms of governance was slowing down the decision cycle. I think again in our industry with the exposure that we have today to information people tend to think ok I’ve got to analyse all this stuff and I’ve got to make a decision quickly, I’ve got to do something. So we’re guilty to a certain degree of action bias. I listened to Warren saying look at your decision cycle, slow it down.
Is this really important, do you really need to do something today based on what the ten year treasury yield is doing? And they add to that include taking no action as choice in every decision. It’s something really simple but I think it’s a great reminder that again for long term investors sometimes the best course of action may be to take no action.
[00:23:58] Raoul: Yeah because I remember I think they said there was a test done where people were given a question and it was written in really small print and just having that slow them down to read through the question more carefully it increased performance.
[00:24:13] Bob Schmidt: Interesting, hadn’t heard of that but that certainly makes sense.
[00:24:18] Raoul: Yeah which is very interesting. Then getting back on the organizational process and yeah you can see there with professional teams like the Patriots they have their process that’s been working for a long time and is super successful. I don’t know about the Browns but I don’t want to offend anybody.
[00:24:41] Bob Schmidt: The trickiest thing, and I teach at the Radi school over hear at at UCSD, I teach master of finance students. It’s tricky because you want to make sure your process is good. The longer than I’m in the investment business the longer my sense of long term gets. So you look at teams or you look at approaches to the market and so much to me of what happens in the short term is noise, it’s random, it could be explained away by luck. Think back to that blackjack example, that’s luck but with a good process you can have bad luck.
So it gets really tricky and I think this is really an area where it’s still nebulus what is a good investment process. Then I would go back and hang that on do you have a really sound philosophy. To me the value approach in its simplest form there is a disconnect between the price for a security and its value or could you get a dollar by spending 80 cents or 70 cents? To me that philosophy is logical, it makes total sense and if you can can actually do these things which I’m very confident you can, then you should be successful over the long haul.
But again in saying having a good process it’s not as easy as it sounds sometimes. To your point some organisations like New England they make it look easy and is their approach, is their philosophy to the game of football better than the Browns? Maybe it is and maybe the Browns just haven’t had enough time to realise their potential.
[00:26:54] Raoul: Yeah because if you see NFL coaches getting fired after one or two years they don’t have enough time to initiate the plan.
[00:27:02] Bob Schmidt: Totally agree and that ties to bringing it back to some institute stuff we started these studies called death taxes and short term underperformance. I think 2007 was the first one we did where we look at mutual funds in an asset class. We’ve looked at US funds, international funds, emerging market funds, fixed income funds. What we’ve found, and we’ve updated these over the years and the pattern stays consistent the best performers over a 10 year period all have periods where they’re underperforming over a quarter, a year, three years. So at the end of 10 years hey these are the best ones but they all have moments where they struggle.
So can you keep a long term perspective when things are tough? And to be fair that ties back to how tough it is to identify those managers ahead of time. So we certainly can look back on the last 10 years and say yeah the Patriots have been more successful than the Browns, the Patriots have been to 8 super bowls, won 5 or something, the Browns have been to zero. But starting now and going forward can the Patriots replicate their success or will be Browns be more successful?
Again that comes back to how do we gauge their philosophy, their process and to your point are we going to give the coach, are we going to give the process, are we going to give the players enough time to really develop and realise the potential that they have? There’s no easy answer, there’s no right or wrong, black or white on this stuff and you tend to only know it in hindsight which makes our industry fascinating and tough.
[00:29:02] Raoul: But the good part is it provides opportunities for others instead of people being dominating and figuring out the formula.
[00:29:12] Bob Schmidt: Yeah and tying it back to the philosophy of having a really good winning philosophy is vital and I certainly think value as a philosophy falls in that camp.
[00:29:26] Raoul: Oh right and can you tell me more about other research that the institute is working on for future topics?
[00:29:34] Bob Schmidt: Yeah there’s one piece where the paper is almost done and the topic is bond active risk. A little back story on this where we look at risk measures in our industry and the one that just jumps to mind is volatility, standard deviation this is what people tend to focus on. Which to us is very obviously performance related and we ask is that the best thing that we should be focusing on, is it the returns as a gauge of how risky a portfolio is or should we be looking at hte holdings?
So we took that notion and applied it to bonds and we were looking for something that was relatively simple and would also be insightful. So we did some research, we looked at about 50 funds between 2002 and 2016 and what we were looking for is their exposure in terms of duration and credit quality. We thought those are two measures that you can use to look at a bond portfolio and say ok is this really risky, forget the returns, what’s it holding?
In our research what we found is after 2008, so the start of the financial crisis, most bond funds took more credit risk and they shortened their duration. So coming back full circle on the title of this thing bond active risk, or BAR, that’s simply the percentage of time a fund was really aggressive in terms of its duration or credit exposure. So if this bond fund has a really long duration relative to its peers, relative to the benchmarks, really aggressive credit exposure, it’s going to have a very BAR score. So the highest would be 100, so 100 percent of the time you’re very aggressively positioned versus not so aggressively positioned or very conservatively positioned if your BAR is zero.
Then we looked at performance for these 48 funds over this period and plotted them in terms of volatility and BAR. So again here’s the tool that everybody is using volatility, here’s this new tool that we’re introducing. In our study we found only one of these top quartile performers had zero BAR. Many of the top performers had low volatility but very high BAR. So to me that says there’s not many funds that are positioned where their duration exposure, their credit exposure is minimal and they’re adding alpha through.
The only other lever there that you can pull is issue selection. There’s a lot of funds out there where their BAR is high and that’s contributing to great returns but in looking that you’ve got to ask can those managers continue to be successful making these aggressive type positions? So that piece again is close to coming out, hopefully it will be out in the next couple of weeks and we hope it gives investors a new simple tool that they can look at bond portfolios and measure what’s truly risky there.
[00:33:34] Raoul: That’s very cool. Would you ever extend that study back further? Does the environment of low interest rates affect that study in any way?
[00:33:52] Bob Schmidt: I think low interest rates- it all depends on how the bond fund managers are going to position themselves. So with rates going up people might be getting a little more conservative in terms of duration. I think we're certainly seen that since 2008 the expectation that rates are going to go up at some point. They’re trying to add returns incriminate through what we’ve seen greater exposure to riskier credits. As that old phrase goes that works right up until it doesn’t.
So just being cognizant of what’s in the portfolio, having a little more insight on how the returns are generated and again looking at the contents and saying ok is this going to continue and is this how we want to position our fixed income holdings? I think those are some of the key questions that we are trying to develop a tool to address.
[00:35:02] Raoul: And when you apply that tool is there any predictive power in finding the funds that would perform well with low risk?
[00:35:14] Bob Schmidt: Great question, have not looked at it. So all the work that we’ve done at this point has been historical, here is how they were positioned but certainly could take it and maybe look forward in terms of how these funds do in the future. Again I think it just comes back to if a fund has been aggressively positioned can these managers continue to make good bets for lack of a better word, consistently and deliver great performance over the long haul? I should take that back, they don’t have to be consistent but they should be positioned to deliver good long term returns, can they do that?
[00:36:06] Raoul: Very, very cool. And would the next one be crypto active at risk? Just kidding.
[00:36:14] Bob Schmidt: I’m not going to touch that one at all. Stick to things that I know which is a pretty small universe as it is.
[00:36:31] Raoul: That whole world is a little wonky right now but very fun to watch.
[00:36:36] Bob Schmidt: Indeed.
[00:36:38] Raoul: And then just on a personal level do you have a particular investment philosophy and how would you characterise your investment approach?
[00:36:45] Bob Schmidt: My investment approach is value based. It really ties to a lot of the work that we’ve done at the institute over the years where we’ve tried to show how value has worked, how it’s worked over the long term and how it works because in part it exploits some of the behavioural biases that we’ve been talking about.
There was one researcher, I forget who it was, he said basically value investing is kind of like time arbitrage. This ties a little bit to a piece that we published a few years ago by a couple professors in Canada it was called ‘redefining risk and return’. These two professors [inaudible 00:37:40] and Mohammed [inaudible 00:37:41] they had 12 propositions for investors regarding risk and return. They’re all very value based but they said just one of these was what is risky in the short run may not be risky in the long run. I think that’s a great way to sum up value, it looks risky now, really you’re going to buy that stock are you kidding me? But in the long run it’s worked out really, really well.
[00:38:22] Raoul: That makes complete sense, I mean it allows you to just be independant and think for yourself because you don’t have to keep listening to the outside noise and it’s difficult to outperform in any way I think just allowing opinions to keep influencing your decision.
[00:38:41] Bob Schmidt: Totally and the importance of being an independent shop of having the ability and flexibility to engage independent thought is vital. And tying that back to Ben Graham, really the father of value investing, and I’d also argue the father of behavioural finance. In one of his books, I think it was ‘The Intelligent Investor’ he said the investors chief enemy is often himself, I’m paraphrasing there. So do you have the conviction to stay independent, do you have the fortitude to stick with something in the short term and over the long term when the markets are moving against you? You really have to trust the value in your analysis and the ability to build good portfolios and again stay with them for the long haul. That is not easy.
[00:39:55] Raoul: That’s very cool and it’s amazing how much of a genius he was, just absolutely revolutionized the field.
[00:40:04] Bob Schmidt: Yes, and it’s interesting as I talk to people the presentations that I do I think some of the younger investors don’t recognise him, don’t know who he is. I often build a bridge and say you know who Warren Buffet is right, oh of course, well Buffet called Graham the greatest investor he knew. They go oh and then the light bulbs start to pop and people who aren’t familiar with him might go back and read some of his works.
But again kind of tying back to the philosophy the value approach has been battle tested over decades. It’s really worked well because again it’s fundamental, it’s logical and it’s again exploiting some of these biases that we see. So of course I’m biased, talking about bias, working for a value shop but I really see the merit in the approach, it makes a lot of sense and it’s done exceptionally well.
[00:41:12] Raoul: Yeah I mean I think at a fundamental you buy something that’s cheap or whatever, cheaper, instead of buying it overpriced you’re bound to get a bargain. Even if it’s crap you’ve barely lost any money because you were able to protect yourself.
[00:41:37] Bob Schmidt: Yeah you just summarised that whole margin of safety concept which is intrinsic, no pun intended, to what we do.
[00:41:52] Raoul: I just wonder if that can carry over to marriage, I’m just kidding. I think you’ve got to figure that one out yourself.
[00:42:03] Bob Schmidt: Take a long term perspective, be patient.
[00:42:06] Raoul: Yeah be very patient. I wonder if anyone has written any pieces trying to compare marriage or life to value based approach.
[00:42:25] Bob Schmidt: Ok I’ll take one small stab at that and this is a terrible joke that I’ll make when I present. Going back to prospect theory, that whole notion of the losses hurt twice as much as the comparable gains to feel good. Then I’ll say if you miss an anniversary or you miss a birthday that’s bad but if you say you’re sorry then you’re even right? Most people just laugh like no, I’ve got to do a lot more than just say I’m sorry to make up for missing an anniversary or missing a birthday.
And my point is it’s one reason why value investing works, it’s one reason why these bargains tend to be created, a fear of short term loss etc. It also speaks to how hard it is to forgive people, you’ve got to do a lot more on the other side when you feel wronged. So ok I said I wasn’t going to talk about it there’s maybe my one marriage counselling tip and take this from a guy who’s never been married practice a little forgiveness that’s probably a healthy thing.
[00:43:45] Raoul: And then how would you define risk?
[00:43:51] Bob Schmidt: We’re talking about this. I don’t think it’s volatility, that’s the easy thing to look at just what prices have done but really risk I think, and I think Graham said the same thing, is the permanent loss of capital. In the short term your investment may go down but obviously in the long term if it’s going up, if you’re making money terrific. It’s what is the likelihood that you’re permanently going to lose capital, that you’re permanently going to lose the money that you’ve invested.
Avoiding that and I think doubling back on your intrinsic value description that’s what you look for those great bargains and just hang onto them. Again I think so much of our industry gets tied up in focusing on some of these shorter term measures of risk like standard deviation and volatility because they’re easy and you can measure those things, it’s a lot harder to measure intrinsic value. But I think there’s a lot of, again no pun intended, a lot of value in doing that work. I keep saying no pun intended and then I keep making these terrible puns.
[00:45:14] Raoul: Yeah I totally agree because it just seems like if you are measuring those measures of risk volatility and all the other stuff it kind of provides a false sense of something that can’t truly be measured. And then you just feel comfortable and just relying on that and you’re subjected to that bais as well that you think it can be measured. Yeah I don’t think it can truly be measured but in that argument sure.
[00:45:51] Bob Schmidt: Yeah and that ties back to I mentioned Bob Maynard the piece he did for us years ago and then he revised that and did something called ‘Illusions of control’, I think that was the title or the subtitle. He talked about that and you’re absolutely right focusing on those things can give us the illusion, this false sense of security that we can measure thus and therefore we can manage it effectively.
I know I mentioned this earlier but some of those things work right up until they don’t and it’s when they’re not working that you really need them. So it’s all really again simple to talk about but it’s not easy and that’s what makes investing that wonderful blend, maddening blend of art and science.
[00:46:50] Raoul: Yeah it seems no matter how rational you try to be it just seems like a very irrational profession in a way.
[00:47:00] Bob Schmidt: Yeah totally because the markets are driven by individuals. I think a lot of us would love if fiance were a hard science like chemistry or physics but hate laws that we have they don't always work because people don’t always behave the way you think they will. I think sometimes investors get a really bad a rap and behavioural finance is exposing some of the biases we have. I’ll preface a lot of my comments about behavioural finance by saying it’s sometimes investors make poor decisions, sometimes they make great decisions. But how do you model that inconsistency? That to me is what makes the art in investment because it’s not as predictable, it’s not as neat and elegant as mathematical formulas might suggest.
[00:48:02] Raoul: Yeah and when you do apply those neat elegant formulas they just never work.
[00:48:08] Bob Schmidt: Well I wouldn’t say never but they’re not consistent and that’s what’s tough, again because people aren’t consistent.
[00:48:21] Raoul: Which is very good that opportunity.
[00:48:27] Bob Schmidt: Yeah and also I’ve given presentations on behavioural finance where at the end people will say I get it you just want me to be like a robot. And I’ll say yes to the degree that you can when it comes to investing but as an individual I don’t want you to be robotic, I want you to be passionate about your spouse or your kids or organisations that you’re involved in whether it’s a school or a hospital or your church or your synagogue or whatever. Be passionate about those things, that’s what makes humans human, it’s just when it comes to investing try and limit your emotional attachment as much as possible.
[00:49:08] Raoul: Oh man very cool, yeah I enjoyed all these lessons so far. What are your favourite books?
[00:49:18] Bob Schmidt: Favourite books well we hit on Graham’s ‘Intelligent Investor’, that’s really up there. Then the behavioural stuff I’m a big fan of James Montier, Mike Morrison and in fact the example that I was giving earlier about process and what is luck and what is skill he’s explored that in great detail. And Kahneman’s book ‘Thinking Fast and Slow’ that was phenomenal not just for the theories that he talked about but as a reference to tons of other studies that are out there. So on the behavioural side yeah Montier, Morrison, Kahneman, Dan Ariely has written some great stuff, Marek Stapman, there’s so many.
[00:50:13] Raoul: And for I guess like reading for leisure do you have any favourite fiction books?
[00:50:26] Bob Schmidt: I read zero fiction, I’ll read non fiction for pleasure, that shows you what a nerd I am.
[00:50:38] Raoul: Yeah I think I’m the same way as well.
[00:50:40] Bob Schmidt: And it’s interesting the analogy you used a little earlier with the Patriots and the Browns I’m a huge sports fan and love to watch sports, read about sports, because there’s so many parallels between investing and even life in sports so it’s always fun.
[00:51:05] Raoul: Very cool and then if people want to find more information on you and your research where can they go?
[00:51:14] Bob Schmidt: Yeah the Brandes Institute the link is at brandes.com, there’s a link to the institute there or you could go right to the brandes.com/institute. You can also follow us on Twitter at BradesInsights and we’ve got a LinkedIn page Brandes Institute and a couple of Youtube videos under the Brandes Institute as well.
[00:51:42] Raoul: Alright and then your closing thoughts?
[00:51:45] Bob Schmidt: Closing thoughts just trying to recap the key things that we talked about I’ll zero in on the benefits, the long term benefits of disciplined value investing and again it works because it takes advantage of behavioural biases. So to the degree that we can be rational in our investing great for us and all the work that value investors do, anybody who is trying to exploit investor behaviour it really only works if you don’t succumb to the very biases you seek to exploit. Again that sounds simple but it’s not easy but if we can do that I think the benefits over the long haul are incredible. What we’re doing at the institute if we can lend a hand with that that’s what we’re trying to do, so that’s it.
[00:52:55] Raoul: Alright and just thank you for coming on the show and really appreciate you taking the time.
[00:53:00] Bob Schmidt: Sure Raoul thank you, thanks very much.
[00:53:08] Raoul: Hello Value Op listeners I want to thank you for your time. If you have any guest recommendations, questions, comments and feedback please email me at [email protected] I would love to hear back from you guys and appreciate your support and thank you very much.
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