I do not consider myself a journalist. No one else would consider myself a journalist. I began to take on a life of an interviewer even though i have a day job of running a private equity firm. How do you define leadership . What is it that makes somebody tick . Youve 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 ratio, a strong Balance Sheet and has the ability to withstand the inevitable storms that will happen in the stock market. David Warren Buffett, is he a Value Investor . John he is the greatest Value Investor of all time. Sometimes people talk about if Michael Jordan is better than lebron james, but there is no question that warren is the best ever. David 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. What have you been doing the last 10 years because markets are high . John we have been able to buy terrific bargains around march of 2009 when the market was bottoming. We have great brands like cvs, royal caribbean, and true bargains. When the markets recovered, some sectors stayed really, really cheap, media, we Love Companies like viacom and Madison Square Garden Network. Those stocks are still really cheap. Financial services companies, some you know well. Some Companies Like lazard or kkr. There are some sectors that are totally neglected even as the markets recovered. David lets talk about the economy. The United States economy was in a recession that ended june, 2009. 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 has not been a lot of depressed stock prices for this period of time. So are you hoping at some point there is a recession so we can get lower stock prices and buy more things at value prices . John we like to buy bargains, we like seeing sectors that are cheap, but we do not want to see a recession. All of the turmoil that happens, the impact on our society and our citizens. Recessions are not great for america. David so suppose i say i watched you, and you are a good Value Investor, what rate of return can i expect from your products . John 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 and number one in its category going back to that period of time. The neat thing is that we are a rare firm that has a 36 year record with the same Portfolio Manager in charge. I have been fishing in the same fishing pond the entire timeframe. We have a great team of people i work with that have been with me some have been with me close to 30 years, some 20, or 15 years. So we are a team of grizzled veterans. We feel 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 it at the height of the financial crisis when people thought people would never cruise again, and that stock has gone up 15 times itself from the bottom. We think it is a bargain here today. A favorite of ours today, we find, we think, as i said earlier, some of the media stocks are really, really cheap. We are optimistic that the Madison Square Garden Network will do well when the knicks start to win the championship again. It will be great for the city and great for that stock. David let us talk about how you got started. You grew up in chicago and 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 really got to participate fully in the war. Before then, people did not think africanamericans were qualified to fly aircraft in major wars. So my dad was in the first group of 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 he showed up at university of chicago law school. He wanted to go to the best law school and thought the university of chicago was the best. At first they did not accept him because he had not taken 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 the two things together, showing what a patriot he was and showing how good he did and what a great result he did on the test, he was able to talk his way into the law school. David your mother . John he met her on the first day. David she was the first female africanamerican at the chicago law school. John she was. She graduated 1946, and he in 1948. David he built a law practice and she built a law practice . John they both had their own independent law practices, because back then you could not work in a big 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 the advantage is that your parents put a lot of time and attention in on you, is that a good thing . John they focused everything on me. They got divorced when i was three years old. So i had two different lifestyles. My dad loved in a studio apartment not far from downtown. My mom lived in a large house in hyde park. They were different political persuasions. My mom was republican, and my dad was a democrat. So i learned to negotiate two different worlds each and every week. David and you win to chicago lab school, which is known for its k12 . John i got there in ninthgrade. Terrific place. David and in addition to your academic pursuits, you are a basketball player . John i was. David and you went to princeton and you played basketball at princeton . John i was fortunate to play basketball for the hall of fame coach pete carril. He was a legend in someone who transformed my life. David you were a captain your senior year . John i got the chance to be one. Coach carril told me i would not 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 you are legally blind, and i cannot teach vision. You cannot dribble, but you work so hard and 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 who were stockbrokers. One across the street from campus, a guy named mike perkins who helped show me where to go and research companies, how to find newsletters on the stock market. And i had a broker in chicago named stacy adams, and i would sit with him and watch the tickertape go by. So i thought if you loved the stock market like i did, you would become a stockbroker. I was forced to be hired by William Blair and company in chicago. The managing partner was a princeton graduate. He played football at princeton, and very close to don rumsfeld. Ned helped recruit me and gave me a great opportunity to start my career at a great firm. David you stayed there 10 years before you were ready to do Something Else . John i stayed 2. 5 years. David thats enough to learn the business . John i thought so. I had confidence in my strategy in investing in small and midsized undervalued securities, and they said oh, there are not many people doing that. So were kind of pioneers in small by you places. There were a few firms like acorn funds, and a couple of others, but not many people like to focus on that area of the market. David you started your own company at what age . John 24. David where did you get the money to capitalize it. John 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 my former clients, my high school buddies, anyone who could give me 10,000 to help me start the company. David how much capital did it take to start the company . John roughly over 200,000 in 1983. David and where did you get the name ariel from . John i love the way the name sounded, it was a favorite character. I 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 the world, do you use computers . John i actually dont use a computer. David do you go on the internet . John i go to the internet on my phone. David do you use email . John i do not email. David so how do people get messages to you . Do they send the pigeon with a message . David how much are you managing now . John about 13. 5 billion. David you managed more before the great recession. It came down, as was the case with many companies. In fact, how much money did you actually go down to . How low did you go . John under 3 billion. David do you think you should close up shop after you are under 3 billion dollars after having 20 billion or so . John one of the lessons i learned from my father and melanie hobson, our president , agreed completely that we should always keep money saved for a rainy day. Sure enough, we had a hurricane in the financial crisis, but we had saved enough capital in our company to continue to pay salaries and keep key people in place during that tough period. That was really an important part of our approach, and then we bought our best stocks at really bargain prices during that period. I think people like that, that we stuck to our guns and believed in what we were doing. David some people say it is impossible to be markets and you should buy index funds. You do not have index funds necessarily, you pick stocks. Why should somebody give money to a stock picker rather than to somebody who reflects what the s p 500 is or whatever the index might be . John i think the reason to do that is that there are talented Money Managers out there who can add value, and it has been proven that there are people who have that creativity and vision to buy securities and outperform the market. It is hard to find them, but it is worth the effort. And i think it is like sports. You root for your local teams, even though you know half will lose and half will win. Everyone cannot be the World Champion every year, but you still like to be engaged and involved in the competitive pursuit in trying to find a championship or support 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 computers. David do you ever go on the internet . John i have the internet on my phone, but i have never actually had a computer or turned a computer on. David do you use email . John i do not. David so how do people get messages to your . Do they send the pigeon with a message to you . John they just call me. David you are on a number of corporate boards, and you are allegedly very loyal to your corporate boards. One of the boards you are on is mcdonalds. It is said, i do not know if it is true, 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. There are exceptional times when you are traveling where i cannot get that done, that i love being in mcdonalds, it is sort of my home away from home. David did you do that before you were on the board . John i have been doing that since i got home from college. I love it there. David is it healthy for you . John it has worked out ok. David when you were interviewed to be on the board, did you mention this . Did they think this was unusual . John i still remember having breakfast with andy mckenna, who became the executive of mcdonalds, and the ceo, and it went marvelously well. David you used to play a lot of three on three basketball . John yes. David when you were back in chicago, did you ever play basketball with barack obama . John several times. David is he that good of a player . John he is a good player, he knows what he is doing. He is a little bit of an in between size. 62, 65 or so. David he cannot dunk the ball . John i do not know about that. He probably could. He is a little lefthanded, and makes clutch shots all the time under pressure. David there was another player in chicago even better than barack obama named Michael Jordan, did you ever play against Michael Jordan . John i did get to play against michael around chicago a lot. Him he would be at different clubs. David do you think he was overrated . John no. I think he is the greatest player of all time. David i understand at one time you played against him and beat him, the only person who ever beat him in a oneonone game. John it was a very fortunate circumstance. I used to go to a fantasy camp for people 35 years and older. Every summer at the camp, he would challenge any camper to a short game of oneonone, first of three wins. Since no one had beaten him in the first seven years, i think he was overconfident and would let people make a basket or two before he would clamp down and shut people down. I also had the advantage when i played him, he had played 15 campers before he got to me. He was kind of tired. So i snuck up on him, and the coach said even though i was not a good passer, i was a good one on one player. And so i had a couple of tricky shots. In the last tricky shot, right as it was about to go in, you can hear michael say on the video oh no and that is when it went in. David when you were playing basketball, barack obama told you that he would run for president of the United States of the United States, what did you say . John i said it was a terrific idea. He came over to the office to tell me his plans. I know sometimes that people sometimes wait more, i felt he was really ready and i was totally confident in his ability to be the commanderinchief, and so i encouraged him strongly to run. David and did you get involved in the campaign . John i did, i got to be cochairman of the Illinois Finance Committee with a friend. We worked for penny pritzker, and that was a magical thing to to be involved with on the ground floor. Once he was elected president i got to be cochairman of the inauguration, and that was special. And it 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. That i will never forget. David you helped him in his campaign, he is using your offices in the transition. Did he offer you a job and 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 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 that last century the dow started 66 and ended at over 11,000. And we had two world wars, a great depression, and president s assassinated it was an extraordinary 100 years, but the market always marches back. David now, in the philanthropic area you are a philanthropic leader in chicago what are the areas of interest you have . John we have been working hard on the idea of how to solve the wealth gap in our country between minority communities and the majority communities. There is all of this data that shows how the wealth gap has got larger, particularly between africanamericans and white americans. We started a Small Public School over 22 years ago to teach Financial Literacy in the public school. We get young people to be prepared to pick their own stocks and make their own 401 k plan and all the things we need to do. We created a program with the university of chicago for minority students to work 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, and now that you live in chicago, do you feel discrimination or have you bypassed it . John i have to say, when people think about minority business it is typically around what they call supplier diversity. Construction, catering, things that are about procurement. My mom had this challenge when she was building her law practice. My dad did too. People did not think about hiring a minority lawyer to do their transactions. The same thing when it comes to Money Management. We are the first africanamerican Money Management and mutual fund to start in the countrys history. When we went to see people they never thought to hire someone who was africanamerican to manage their money or have our mutual funds in their 401 k plan. David you mentioned melody hobson. You are the ceo of the company, she is the president. John yes. David she also went to princeton, you hire people who do not go to princeton . John we do. Melody came from a challenged background, you would say, but she has become very well known. Tell us about her. John i met her when she was a prospective princeton student, 17 years old. We were trying to make sure that all of the local alumni were interviewing all the prospective students. And we had a special event for all the admitted students, and melody came. I sat her at the head table because we could tell throughout the process she was something really special. She sat next to a person 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 interning in baltimore and had a great time. She joined us when she graduated. She says she is the only person who has the same phone number 29 years later, and she is taking on more and more leadership in 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 have your eye on stocks. 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 that patience wins. I always remind myself, Warren Buffett always says that last century the dow started at 66 and ended at over 11000 and we had two world wars, a great depression, president s assassinated it was an extraordinary 100 years, but the market marches back. David are you not worried, for example, that the u. S. Government has 220 trillion trillion of indebtedness, or not so much . John not so much. Right now, as you know, inflation is staying very much under control. Interest rates are staying low which means that stocks are still undervalued in that environment. So we think that we have a way of adapting to whatever challenge this country faces. My confidence is really high that we will get through the problems in front of us. David in recent years, the income inequality in the United States has become very evident. Is there anything policymakers can do to diminish the 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 markets and coming out ready to make the right investment choices, and be more effective entrepreneurs so because they are exposed to the markets at an early age. I think 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 extraordinary talented and diverse board of directors, and deliver performance at the same time. And, be role models for others to get into the sector. As you know, this is such a lucrative part of our economy, but has not been a diverse part. So we want to show people that it will be done and hopefully it will inspire others who 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. And so we think about it from time to time, but we love picking stocks. David thank you very much for an interesting conversation. Thank you, john. John thank you very much. Erik hi. I am Erik Schatzker and welcome to bloombergs front row. Today, im talking to dinakar singh. For a while, he was one of the worlds Biggest Hedge Fund managers and before that, at goldman sachs, he ran the most Profitable Trading desk on wall street. Today, he will tell you that investing billions and billions of dollars is way more trouble than it is worth. Dinakar we have people all over the place. They do not get any sleep or spend time thinking about what is the best thing, which is investing. Erik dinakar and i covered a lot of ground. This is what we talked about
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