David i dont consider myself a journalist. And nobody else would consider myself a journalist. 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 a Value Investor is someone who is looking for bargains. Were trying to find stocks that are selling at a 40 discount to 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 now, Warren Buffett , is he a Value Investor . John he is the greatest Value Investor of all time. Sometimes people talk about whether Michael Jordan is better than lebron james . There is no question when it comes to investing that warren is the best ever. David ok, but Value Investing, as i understand it, is easier done when the markets are down. When the markets are high, there are not as many bargains. So what have you been doing the last 10 years, because the markets have been been high . Been very high . John well, it has been interesting. We were able to buy terrific bargains right around march of 2009 when the market was bottoming and we got some great brands, Companies Like cbs and royal caribbean, true bargains. But as the markets recovered, some sectors have stayed really cheap. In particular, media. You know, we love Companies Like viacom, and Madison SquareGarden Network. Those stocks are still really cheap. Financial services companies, some that you know well, like lazard or kkr. There are some sectors of the market that just 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 in june of 2009. And so now, for about 10 years, we have been in a growth cycle. And it is one of the longest in our countrys history. But therefore, there have not been a lot of depressed stock prices for this period of 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 value prices . John we like to buy bargains. We like seeing sectors that are cheap, but we dont want to see a recession. You know all of the turmoil that happens, the impact on our society and our citizens, you know recession is not great for america. David so 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 you know, over the 36 years, we have been able to compound money at roughly 11 a year. And that is something we are really proud of. Our ariel fund has been around since 1986, so it is 33 years old. It is number one in its category, going back to that period of time. But the neat thing is that 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, not only value stocks, but small and midsize value stocks the entire timeframe. We have a great team of people that i work with who have been with me, some have been with me, me 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 that you can talk about . John i think over time, one of our best companies we have ever bought was royal caribbean. We were able to buy that at the height of the financial crisis, when everyone thought that people would never cruise again. And that stock has gone up 15 times itself from the bottom. We still think it is an extraordinary bargain here today. A favorite of ours today, we find and think, as i said earlier, that some of the media stocks that are really cheap, we are sort of optimistic that the Madison SquareGarden Network will do really, really well. When the knicks finally come back and start to win championships again, it will be great for new york city and great for that stock. David lets talk about how you got started. So you grew up in chicago. Both of your parents were fairly prominent people, as i understand it. 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 that African Americans were qualified to fly aircraft in major wars. My dad was in that first group in the 99th fighter pursuit squadron that went overseas and fought in world war ii. David when your father came back after world war ii, what did he do . John well, 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. But he asked them if he could take a test. They allowed him to take the test. He showed up in his captains uniform, and i think those two things together, showing what a patriot he was and how good he did, what a great result he had on those tests, he was able to talk his way into the law school. David ok. And your mother . John he met my mom there the first day. David she was the first female African American at the university of Chicago Law School . John she was. She graduated in 1946 and my dad in 1948. David ok, so he built a law practice, and she built a law practice . John they both had their independent law practices, because back then you could not work in a big, large downtown law practice. My mom worked on divorces, and my dad did mostly real estate and bankruptcies. David you were the only child . John i was. David like myself. An only child. So 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. You know, my dad lived in a studio apartment, not far from downtown, and my mom lived in a large house in hyde park. And they were different political persuasions. My mom was republican, my dad was a democrat. So i learned to sort of navigate two different worlds each and every week. David and you went to the university of chicagos famous lab school, which is 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 your academic pursuits, you were a basketball player . John i was. David you went to princeton, and you played basketball at princeton . John i was very fortunate to play basketball at princeton for the hall of fame coach pete carril. He was a legend and someone who 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 no. Coach carril 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 on the team, the 15th person on the team, he said, johnny, 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 so 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, on nassau street, a guy named mike perkins. He helped showed me at firestone library, where to go and research companies, how to find newsletters on the stock market. And then i had a broker in chicago named stacey adams, the first africanamerican stockbroker on lasalle street. And i would go and 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. And i was fortunate to be hired by William Blair and company in chicago. The managing partner at the time was a princeton grad who played football at princeton. And very close to don rumsfeld. And ned helped recruit me there, and gave me an opportunity to start my career at a great firm. David ok, so you stayed there 10 years before you were ready to start Something Else . John no, i say to at a half 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 undervalued securities. And, as i said earlier, there were not many people were doing that, so 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, a couple of others, but not many people like to focus on that area of the market. David so you started your own company at what age . John i was 24. David and where did you get the money to capitalize it . John i went to Close 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. And after that, i went to former clients, my High School Buddies from the lab school, anyone that could give me 10,000 to help start the company. David so 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 and where did you get the name ariel from . John i love the way the name sounded. It was a character on a favorite tv show of mine. And i always said if i had a daughter, i would name my daughter ariel, but 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 a computer. David do you ever go on the internet . John i do have the internet on my phone, but im one of these folks, i have never actually had a computer. I have never turned a computer on. David do you use emails . John i dont email. David so how do people send messages to you . Do they send a pigeon with a message . [laughter] david how much are you managing now . John about 13. 5 billion. David and you managed more at one point, before the great recession, so it came down, as was the case with many companies. In fact, how much money did you go down to . How low did you go . John we got under 3 billion. David so do you think maybe you should fold up shop under 3 billion after having 20 billion . John no, not at all. I know one of the lessons i learned from my father, and mellody hobson, our president , agreed completely, is we should always keep money saved for a rainy day. And sure enough, we had a hurricane of financial crisis. We had saved enough capital to continue to pay our salaries and keep key people in place during that tough, tough period. And so that was a really, really an important part of our approach. And then we bought our best stocks at really bargain prices during that period. And i think people liked that, that we stuck to our guns and believed in what we were doing. David now, some people say that it is impossible to beat the markets, so therefore one should just buy index funds. In your case, you dont have index funds, necessarily. 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 i think that the reason to do that is there are talented Money Managers out there who can add value. And it has been proven over time that there are people who have that gift and creativity and vision to buy securities and outperform the markets. Now, it is hard to find them. They are few and far between. But i think it is worth the effort. And i think it is kind of awesome, and i say it is 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. Everyone cant be the World Champion every year, but you still like to be engaged and involved in the competitive pursuit of trying to find a championship or support of a champion. I think 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 do have the internet on my phone, but i am one of these folks, i have never actually had a computer. I have 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 . Or how do they get a message to you . [laughter] john they can just call me. David you are on a number of corporate boards. And you are legendarily very loyal to your corporate boards. One of the boards you are on is mcdonalds. And 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 a day at some mcdonalds. Is that true . John it is just about every day. I mean, there are exceptional times when you are traveling when you cant actually get that done, but i love being at mcdonalds. It is sort of 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 and you think it is very healthy for you . John it seems like it has worked out ok so far for me. David so far. So 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 andy mckenna, the nonexecutive chairman of mcdonalds and jim, the ceo, and it went marvelously well. They could tell how much i loved the brand. David you used to play a lot of three on three basketball. John yes. David so in chicago, did you ever play basketball with barack obama . John yes, several times. David and is he that good a player . John he is a very good player. He knows what he is doing. He is a little bit of an in between size. You know, he is sort of 62. 5 or so. David he cant dunk the ball. Right . John i dont know about that. David you think he could dunk the ball . John i think he probably could. He is a little lefthanded. But he is a very good player and makes clutch shots all the time under pressure. David there was another player in chicago, maybe even better than even barack obama, named Michael Jordan. Did you ever play against Michael Jordan . John i did get to play against michael around chicago a lot. You know, he would be at different clubs, and you get to be on the court with him. David do you think he was overrated . John [laughs] no. I think he is the greatest player of all time. David one time i understand you played against him and beat him. The only person who ever beat in beat him in a oneonone game . John yes, it was a very fortunate circumstance. I used to go to his flight school, which is a fantasy camp for people 35 years and older. So every summer at the camp, he would challenge any camper to a short game of oneonone, first to three wins. Since no one had beat him in the first seven years of the camp, i think he was kind of a little overconfident. He would let people make a basket or two before he would sort of 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. And so i snuck up on him, and coach carril always said even though i was not a good passer, i was a good oneonone player. And so 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. Michael oh, no john and 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 of the United States, what did you say . John i told him i thought it was a terrific idea. I do remember, he came over to the office to tell me his plans. And i know sometimes people wait a little bit more to get more seasoned, but i felt that he was really ready. I was totally confident in his ability to be the commanderinchief, and so i encouraged him strongly to run. David ok, and so 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. And that was a magical thing to be able to be involved on the ground floor. And then once he was elected president , i got to be cochairman of the inauguration. And that was special. And what was really special, when he first got elected, we were the temporary transition headquarters at ariel. So for three days, he was there helping to form the government. David ok. John and it is something you never forget. David now, 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 really 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 the a recession. Warren buffett always says that last century, the dow started at 66 and ended at over 11,000. And we had two world wars, a great depression, president s assassinated, it was an extraordinary 100 years, but the market always marches back. Announcer the David Rubenstein show, peertopeer conversations, is sponsored by wells fargo banking. Wells fargo Health Care Banking making a difference where it matters. David now, in the philanthropic area, you are obviously a philanthropic leader in chicago. What are the areas of interest you have in philanthropy . John well, we have been working oflly hard on, david, sort the idea how to solve the wealth gap in our country between the minority communities and the majority communities. And you know, there is all of this data that shows how the wealth gap has gotten larger, particularly between African Americans 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 be able to 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 now, your parents were prominent leaders in the Africanamerican Community in chicago and prominent leaders in the chicago community. So 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 typically around what they call supplier diversity construction, catering, things that are, you know, bought through procurement. And my mom had this challenge when she was building her law practice and my dad did, too, that people just didnt think about hiring a minority lawyer to do their transactions. And the same thing when it comes to Money Management. We were the first africanamerican Money Management and Mutual Fund Company to start in the countrys history. So when we went to see people, they had never thought about hiring someone that was africanamerican to manage their money or to have our mutual funds in their 401 k plan. David you mentioned a few times mellody hobson. She is the president of your company. You are the ceo and she is the president. John yes. David and she is somebody who also went to princeton. Do you hire people that didnt go to princeton . John [laughs] we do. David and mellody came from a challenged background, i think you would say. But she has now become a very well known. Tell us about her a little bit. John i met mellody when she was a prospective princeton student. She was 17 years old. And we were trying to make sure that all of the local alumni were interviewing all of the prospective students. And had a special event for the admitted students. And mellody came and i set her at the head table because we could tell throughout the process that she was something really, 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 then became a summer intern with us at ariel, and then she spent a summer at t. Rowe price in baltimore. She had a great time. And she joined us when she graduated. So she says she is the only person from her princeton class with the same phone number 29 years later. And she is taking on more and more leadership at the Company Every year. She will be my successor. And it is so wonderful to have a partner who is as tough and smart as she is. David now, 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. You know, we think longterm at ariel. As you know, our logo is a turtle. We believe that patience wins. I always remind myself, Warren Buffett always says last century, the dow started at 66 and ended at over 11,000. And 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 that the u. S. Government, for example, 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. You know, right now, as you know, inflation is staying very much under control. Interest rates are staying low, which means stocks are still undervalued in this environment. So we think that we always have a way of adapting to whatever challenges this country faces. In my confidence is really high and 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 that you think governing policymakers can do to diminish the very large income inequality that we now have . John i think that, one, government needs to do a better job of making sure we have Financial Literacy in public schools, in particular, urban public schools, where we can get people exposed to the markets and get people coming out ready to make the right investment choices, be more effective entrepreneurs, because they have been exposed to the markets at an early age. I think that is critical. David so 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 into the Financial Services sector. Because, as you know, this is such a lucrative part of our economy, and it hasnt 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 mellodys footsteps and be successful in the Financial Services industry. David no regrets about not going into private equity . John you know, it never came up, so we think about it from time to time, but really, we love picking stocks. David ok, well thank you very much for an interesting conversation. Thank you, john. John thank you very much. 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