David Herro, Harris Associates CIO of International Equities, highlights the importance of patience in investing, especially in periods like last year when certain sectors got highly devalued. He also discusses the merger of Deutsche Bank and Commerzbank and how he expects this to help European banks from a price perspective.
David Herro: Does The Merger Of Deutsche Bank Affect Other European Banks?
Right now we speak with David Herro of Oakmark International. David it's always a joy to speak to you on international investment. It was a brutal year for international and IOM last year. How do you recoup this year.
And I'm sure it was but the fundamentals have a way of asserting themselves and certainly something gets overdone on the negative side. You do have this return equilibrium you do have a return to prices that kind of come closer to valuations and this is exactly what we saw last year as prices fell while earnings were were OK and so you saw certain companies and sectors being highly devalued. You saw valuation compression right.
You just have to wait and be patient because these things come back but you have a three or five year horizon they understand that with a bang up 2017 is well do you find that investors still have the hero patience or is it a struggle with short termism of investors.
You know some do it really kind of depends on the vintage of the investor if the investor entered our real allm and the end of 27 in 2017 early 2018 and then they kind of go into this negative year which is like our fourth in 27 years. They're not going to be so happy and they're not going to be so patient. But if there are investors who have been with us for a while and if they have lived through the various cycles they know what tends to happen when we have these negative outlier periods as rare as they are there's a very strong kind of kickback and they usually stick around to enjoy that. So then over the period of time you get the outperformance which we're known for.
So David everyone has this game plan and they they all agree with you. And then it happens the downdraft comes and they just don't have the discipline to execute the game plan that they believed in. We have had three growth scams in this bull market now. 2011 2012 15 16 and now 20 18 29 scene. How do you get investors to replicate your game plan to maintain the discipline in the moment to get them to execute.
Jonathan that this is a very one of the more challenging aspects of my job and what you have to do is you have to be in front of your clients and your investors and you have to explain and share your thoughts you cannot hide from it. And the worst thing to do as an investment manager would be to sell the things that have got hit in the worse because because you don't want to show that you've owned a stock that dropped 40 percent. That is the worst thing that we can do. And often in our profession people do this. They'd rather sell a losing stock. Than explain it. And I think we get paid a fee to be disciplined and to explain this is exactly what you have to do.
Do you have a one off in that Deutsche Bank clears the market and clears their headaches or troubled Italian banks clear their markets clear the headaches with your banking exposure. Do you have the mother of all Popz coming. I mean do you wake up every day David Herro and say come on Deutsche Bank get the pain over.
I wouldn't sleep so well if we don't do it to. To be honest I just there's just not enough.
We've discussed it. Does Deutsche Bank David Herro affect Credit Suisse, does Deutsche Bank affect BNP Paribas, Deutsche Bank affect Intesa.
It certainly impacts their share price and it has impacted their share price when Deutsche Bank kind of sneezes these other banks seem from a price perspective not from a fundamentals. So to that degree you're right Tom. If this final. Can be careful my wording here is the final outcome of Deutsche Bank is to merge with Commerzbank or to merge or someone else and that kind of settles the survivability question of Deutsche Bank. Invariably that would help the European banking sector from a price perspective. It really won't make the companies more valuable from an intrinsic value perspective but it will help it from a price perspective just from 35000 feet dive 9 code you have course to go a lot closer for a lot of fruit. From our perspective in the United States we always look at this valuation gap between the banks on Wall Street the banks in Europe in fact stocks in Europe and stocks in America and so many people have been burned so many times they now believe that valuation gap is a valuation trap cuts through the cliches fill me in and try and help us understand the situation a whole lot more clearly. The valuation gap technically is my guess is a function of the higher return structure thatU.S. companies generally earn over European and European companies of course have greater returns than Japanese companies. Think of a spectrum of the returns the better the return structure the bit better the higher the price you're willing to pay. So I certainly accept the fact that there should be a valuation gap. However what I would argue is the gap today is too large the gap today is too large because yes especially in the financial sector you know the European banks maybe a couple turns a lower return on equity. That doesn't mean they should be trading at 90 percent discount to US banks. It's just too large and plus the currencies we've been talking about how strong the dollar's been. So just when everyone is going to throw up their arms and punt out of European equities is when the currency picks up and when the valuation gap narrows again. My fear is that they'll do it at the wrong time.
David Herro, can you explain to our global audience the miracle known as the Milwaukee Brewers. I mean what so we're really going to see is they came so close and I think next this year 2019.
Might be the year time that might be the year.
Maybe the year for international stocks.