I began to take on the life of being an interviewer even though i have a day job running a private equity firm. How do you define leadership . What is it that makes somebody tick . So you have been doing Value Investing for 36 years. What is a Value Investor . John somebody looking for bargains. We are trying to find stocks selling at a 40 discount what we think their private market value is. We want to make sure it has a low p e ratio, a strong Balance Sheet and has the ability to really withstand the inevitable storms that happen in the stock market. David is Warren Buffett a Value Investor . John he is the greatest Value Investor of all time. Some people talk about whether Michael Jordan is better than lebron james. There is no question when it comes to investing warren is the best ever. David Value Investing is easier done when the markets are down. When the markets are high, there are not as many bargains. What have you been doing the last 10 years because the markets have been high . John it has been interesting. We were able to buy terrific bargains around march 2009 when the market was bottoming and we got great brands, royal caribbean, cbs. True bargains. As the markets recovered, some sectors have stayed really cheap. In particular, media. We Love Companies like viacom, Madison Square Garden Network, those stocks are really cheap. Financial Service Companies that you know well like lazard or kkr. There are some sectors that seem to be totally neglected even as the markets recovered. David lets talk about the economy. The United States economy was in a recession that ended june of 2009. Now, for about 10 years, we have been in a growth cycle. It is one of the longest in the countrys history. Therefore, there has not been a lot of depressed stock prices for this time, so are you kind of hoping that at some point there is a recession so we can get lower stock prices . You can buy more things at lower value prices . John we like to buy bargains. We like seeing sectors that are cheap, but we dont want to see a recession. All of the turmoil that happens, the impact on our society and our citizens, recession is not great for america. David lets suppose i say i watched you and you are a good Value Investor. I will give you some money. What kind of rate of return can i expect from your products . John over 36 years, we have been able to compound money at roughly 11 per year. That is something we are proud of. Our ariel fund has been around since 1986. It is 33 years old. It is number one in its category going back to that time. But the neat thing is we are one of those rare firms that has the 36year record with the same Portfolio Manager in charge. I have been fishing in the same fishing pond of not only value stocks but small and midsize value stocks the entire timeframe. We have a great team of people who have been with me, some of them close to 30 years, some 20 years, some 15 years, so we are a team of grizzled veterans. We think we can replicate our performance in the future. David what is your best single deal you can talk about . John over time, one of the best companies we have bought was royal caribbean. We were able to buy that at the height of the financial crisis when people thought no one would cruise again. That stock has gone up 15 times. We still think it is an extraordinary bargain today. A favorite of ours, we find and think some of the media stocks that are really cheap, we are sort of optimistic Madison Square Garden Network will do well. When the knicks finally come back and start winning championships again, it will be great for new york city and great for that stock. David lets talk about how you got started. You grew up in chicago. Both of your parents were fairly prominent people. Your father was in the tuskegee air corps. What is the tuskegee air corps, for those who may not know . John that was the group of Fighter Pilots that were part of world war ii, the first group of africanamerican Fighter Pilots that had a chance to really participate fully in the war. Before then, people didnt think African Americans were qualified to fly in major wars. My dad was in that first group in the 99th fighter pursuit squad that went overseas and fought in world war ii. David when your father came back after world war ii, what did he do . John he showed up at the university of Chicago Law School. He wanted to go to the best law school, and he thought the university of chicago was the best. At first, they did not accept him because he had not taken all of the appropriate tests. And there were not many africanamerican students at the law school at the time. He asked if he could take a test. They allowed him to take the test. He showed up in his captains uniform and the two things together, showing what a patriot he was and how good he did, what a great result he had on the tests, he was able to talk his way into the law school. David ok, and your mother . John he met my mother the first day. David she was the first female africanamerican at the university of Chicago Law School . John she was. She graduated in 1946 and my dad in 1948. David he built a law practice and she built a law practice . John they both had their independent law practices because you could not work in a big downtown law practice. My mom worked on divorces and my dad did mostly real estate and bankruptcy. David you were the only child . John i was. David like myself. An only child. The advantage of being an only child is your parents put a lot of time and attention into you. Was that a good thing for you . John it was. They focused everything on me. They got divorced when i was three years old, so i had two different lifestyles. My dad lived in a studio apartment not far from downtown and my mom lived in a large house in hyde park. They were different political persuasions. My mom was republican, my dad was a democrat. I learned to navigate different worlds each and every week. David you went to the university of chicago famous lab school known for its k12 . John it is a k to 12 school. I got there in ninth grade. It is a terrific place. David in addition to academic pursuits, you were a basketball player . John i was. David you went to princeton and played basketball . John i was fortunate to play basketball at princeton for the hall of fame coach pete carrill. He was a legend and somebody that really transformed my life. David you were the captain your senior year . John i did get to be a captain against all odds. David did you think you were going to be an nba player . John coach made it very clear i had no hope to be an nba player. He told me when i was a sophomore and i made the team, i was the last person, the 15th. He said you are legally blind, and i cant teach vision. You cant dribble. But you work so hard, we will keep you around for a few more days. David you graduated in 1980. What did you want to do . John i had two role models that were stockbrokers. One across the street from campus, a guy named mike perkins. He helped showed me at firestone library, where to go in research companies, find newsletters on the stock market. And then i had a broker in chicago named stacey adams, the first africanamerican stockbroker on lasalle street. I would sit with him and watch the tickertape go by. I thought if you loved the stock market like i did, you would become a stockbroker. I was fortunate to be hired by William Blair and company in chicago. The managing partner was a princeton grad who played football at princeton. Very close to don rumsfeld. Ned helped recruit me there, and gave me an opportunity to start. At a great firm. David you stayed there 10 years before you were ready to start Something Else . John i stayed 2. 5 years. David thats enough time to learn the business . John i thought so. I had confidence in my strategy of investing in small and midsized and undervalued securities. There were not many people were doing that. We felt we were kind of pioneers in the small value space. There were a few firms like chuck royces firm, ralph wanger at acorn funds, but not other people focused in that area. David you started your own company at what age . John i was 24. David where did you get the money to capitalize it . John i went to friends and family. I tell people, my mom gave me everything she had that was liquid. My dad gave me what he thought he could afford to lose. After that, i went to former clients, High School Buddies from the lab school, anyone that could give me 10,000. To help start the company. David how much capital did it take to start it . John roughly a little over 200,000. David that was what year . John that was in 1983. David where did you get the name ariel from . John i love the way the name sounded. It was a character on a Favorite Television show of mine. I said if i had a daughter, i would name her ariel. I had the company first. David to keep up with what is going on in the world, do you use computers . John i actually do not use the computer. David do you ever go on the internet . John i do have internet on my phone, but i have never actually had a computer or turned a computer on. David you use emails . John i dont email. David so how do people send messages . Do they send a pigeon . David how much are you managing now . John about 13. 5 billion. David you managed more before the great recession, as was the case with many companies. How much money did you go down to . How low did you go . John we got under 3 billion. David do you think you should fold up shop under 3 billion after having 20 billion . John not at all. One of the lessons i learned from my father, and Melanie Hobson our president agreed completely, we should always keep money saved for a rainy day. Sure enough, we have a hurricane of financial crisis. We saved enough capital to pay salaries and keep key people in place during that tough period. That was an important part of our approach. And then we bought our best stocks at really bargain prices during that period. I think people liked that, that we stuck to our guns and believed in what we were doing. David some people say it is impossible to beat the markets and one should buy index funds. In your case, you dont have index funds. You pick stocks. Why should somebody give money to a stock picker rather than somebody who will reflect whatever the s p 500 is . Whatever the index might be. John the reason to do that is there are talented Money Managers out there who can add value. It has been proven over time there are people who have that gift and creativity and vision to buy securities and outperform the markets. It is hard to find them. They are few and far between. I think it is worth the effort. It is awesome, like sports, you root for your local teams. Even though you know that half of the teams are going to lose and half of the teams are going to win, not everybody can be the World Champion every year, but you still like to be engaged, and involved in the pursuit of trying to find a champion. It is the same with Money Managers. David to keep up with what is going on in the world, do you use computers . John i actually dont use a computer. David do you ever go on the internet . John i have internet on my phone, but i am one of these folks, i have never had a computer, never turned a computer on. David do you use emails . John i dont email. David how do people get messages to you . Do they send a pigeon with a message . How did they get a message to you . John they can just call me. David you are on a number of corporate boards. You are legendarily very loyal to your corporate boards. One of the boards you are on is mcdonalds. It is said, i dont know if it is possibly true, that you eat mcdonalds every day somewhere in the world. Wherever you are, you eat one meal at mcdonalds. Is that true . John just about every day. There are exceptional times when you are traveling and cannot actually get that done, but i love being at mcdonalds. It is my home away from home. David did you do that before you were on the mcdonalds board . John i have been doing that since i got home from college. I just love it there. David do you think it is healthy for you . John it has worked out ok so far. David when you were interviewing to be on the board, i presume you interviewed, did you mention this and did they think this was unusual . John i still remember having breakfast with the nonexecutive chairman of mcdonalds and the ceo, and it went marvelously well. They could tell how much i loved the brand. David you used to play three on three basketball. In chicago, did you ever play basketball with barack obama . John yes, several times. David is he that good a player . John he is a very good player, he knows what he is doing. Hes a little in between size. 62. 5 or so. David he cant dunk the ball. Right . John i dont know. David you think he could dunk . John i think he probably could. He is a little lefthanded. He is a very good player and makes clutch shots all the time under pressure. David there was another player in chicago, maybe better, named Michael Jordan. Did you ever play against Michael Jordan . John i did get to play against michael around chicago a lot. He would be at different clubs, and you get to be on the court with him. David think he was overrated . John no. I think he is the greatest player of all time. David i understand you played against him and beat him. The only person who ever beat him in a oneonone game . John very fortunate circumstance. I used to go to his fantasy camp for people 35 years and older. Every summer of the camp, he would challenge any camper to a short game of oneonone, first of three wins. Since no one had beat him in the first seven years of the camp, i think he was overconfident. He would let people make a basket or two before he would clamp down and shut people down. Also, i had the advantage when i played him, i think he played 15 campers before he got to me, so he was kind of tired. So i snuck up on him and the coach always said even though i was not a good passer, i was a good oneonone player. I had a couple of tricky shots. And the last tricky shot, right as it was about to go in, you can hear michael say on the video, oh, no. That was really fun. David one of the people you were playing basketball against, barack obama, told you he was going to run for president , what did you say . John i told him i thought it was a terrific idea. I remember, he came over to the office to tell me his plans. I know sometimes people wait a little bit more to get more seasoned, but i felt he was ready. I was totally confident in his ability to be the commanderinchief so i encouraged him strongly to run. David did you get involved in the campaign . John i did. I got to be cochairman of the Illinois Finance Committee with a friend of yours, jim crown. We worked for penny pritzker. That was a magical thing to be involved on the ground floor. Once he was elected president , i got to be cochairman of the inauguration. That was special. And what was really special, when he first got elected, we were the temporary transition headquarters at ariel. For three days, he was there helping to form the government. It is something you never forget. David you helped him in his campaign, he is using your offices for the transition. Did he offer you a job and if so, why did you not take it . John we never had that conversation. I love investing and i love our business, and i have a great team, as i mentioned earlier at ariel, so there was never a thought that i would go to washington. David are you worried about a recession in the near future . John i am not worried about a recession. Warren buffett always says last century, the dow started at 66 and ended at over 11,000. We had two world wars, a great depression, president s assassinated, it was an extraordinary 100 years, but the market always marches back. David in the philanthropic area, you are a philanthropic leader in chicago. What are the areas of interest you have in philanthropy . John we have been working hard on how to solve the wealth gap in our country between majority and minority communities. There is all of this data that shows how the wealth gap has gotten larger, particularly between africanamericans and white americans. So we started a Small Public School over 22 years ago to teach Financial Literacy in a public school, to get young people prepared to be able to pick their own stocks and navigate their 401k plan and all the things they need to do. Most recently, we created a program at the university of chicago for minority students to work during the summer in the investment offices of major endowments. David your parents were prominent leaders in the Africanamerican Community in chicago and prominent leaders in the chicago community. When you were growing up or now that you live in chicago, do you feel discrimination or have you been able to bypass that . John i have to say that when people think about supporting minority business, it is around what they call supplier diversity construction, catering, things that are bought through procurement. My mom had this challenge when she was building her law practice, and my dad did, too, that people didnt think about hiring minority lawyers to do their transactions. The same thing when it comes to Money Management. We were the first africanamerican Money Management a Mutual Fund Company in the countrys history. When we went to see people, they had never thought about hiring someone africanamerican to manage their money or have funds in the 401 k plan. David you mentioned melody hobson. She is the president of your company. You are the ceo and she is the president. She is someone who also went to princeton. Do you hire people that didnt go to princeton . John we do. David and melody came from a challenged background, i think you would say. But she has now become a very wellknown person. Tell us about her. John i met melody when she was a prospective princeton student. She was 17 years old. We were trying to make sure all of the local alumni were interviewing all of the prospective students. We had a special event for the admitted students. Melody came and i could tell she was something really special. She sat next to a person, richard lisner, who convinced her not to go to harvard and to go to princeton instead. She became a summer intern with us at ariel and she spent a summer at t. Rowe price in baltimore. She had a great time. She joined us when she graduated. She is the only person from her princeton class with the same phone number 29 years later. She is taking on more and more leadership at the Company Every year. She will be my successor. It is so wonderful to have a partner who is as tough and smart as she is. David you have your finger on the pulse of the economy, since you are looking at stocks all the time that are reflective of the u. S. Economy, are you worried about a recession in the near future . John i am not worried about a recession. We think longterm at ariel. Our logo is a turtle. We believe patience wins. I always remind myself, Warren Buffett always says last century, the dow started at 66 and ended at over 11,000. We had two world wars, a great depression, president s assassinated, it was an extraordinary 100 years, but the market always marches back. David are you not worried u. S. Has 22 trillion of indebtedness and we are adding 1. 3 trillion a year . Is that a concern or not so much . John not so much. Right now, inflation is staying very much under control. Interest rates are staying low, which means stocks are still undervalued in this environment. We think we always have a way of adapting to whatever the challenge the country faces. My confidence is really high that we will get through the problems that are in front of us. David in recent years, the income inequality in the United States has become very evident. Is there anything you think government policymakers can do to diminish the large income inequality we have . John i think that, one, government needs to do a better job making sure we have Financial Literacy in public schools, in particular, public urban schools, where we can get people exposed to the markets and coming out ready to make the right investment choices, being more effective entrepreneurs because they have been exposed to the markets at an early age. That is critical. David what do you think your legacy will be and what would you like it to be . John i think our legacy will be that we were able to build the most diverse Money Management firm in the countrys history. With an extraordinarily talented, diverse board of directors, and delivered excellence and performance at the same time. And to be role models for others to get in to the Financial Services sector. As you know, this is such a lucrative part of our economy, and it has not been a very diverse part of our economy. So we want to show people it can be done, and hopefully it will inspire others who will want to follow in our footsteps and melodys footsteps and be successful in the Financial Services industry. David no regrets about not going into private equity . John it never came up. We think about it from time to time, but yeah, we love picking stocks. David thank you very much for an interesting conversation. Thank you, john. John thank you. Taylor im taylor riggs, in for scarlet fu. This is bloomberg etf iq. Where we focus on the access, risks and rewards offered by Exchange Traded funds. Taylor the big shorts. Michael burry sees a bubble in passive investing. We debate his call. Facebook found in the Renewable Capital etf, tied to an oil tycoon, t. Boone pickens. We asked the founder behind the fund why
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