Here is the fourth and final excerpt I will post from the...

Here is the fourth and final excerpt I will post from the interview:

Meb: So, you talk about an approach to investing that you mention a couple times. It’s funny, people characterize you in different ways, depending on the cycle. We once had a fund that I think was in seven different Morningstar categories over the course of its lifetime. So, like, hard to pigeonhole. And this concept of value, I think everyone in their head thinks of the old Graham net-net, like just dirt-cheap sort of stocks, but even Buffett evolved. And you talk a little bit about this, too, is value and growth is really two sides of the same coin.

So, talk to us a little bit about the whole value, growth, and we can expand a little bit into the third pillar that I think you guys focus particularly on, which is the quality side. The floor is yours.

Rajiv: First of all, when you talk quality, it’s about, as I said, the barriers to entry, how high the barriers to entry are. And that might mean a lot of cycles, that might mean a lot of software names or tech or what have you. Technology today is a lot less cyclical than it used to be 20 years ago. The quality is meaningfully different.

Now, once you’re done with that, then the question is, “What’s a sustainable growth rate five years out? And what are we willing to pay for that?” But that’s a function of what the outlook would be beyond five years. Because if the business outlook could change dramatically, the multiples will collapse.

Now, that’s relatively…I wouldn’t say it’s standard or obvious, I think. But it’s not…and I feel this is one of the edges we have, is that, “Are we reacting enough to the changing data points?” Because think of it this was, as, like, driving. When you’re going from New York to Washington, D.C., you kind of know where you’re heading. However, would it take it 3 hours, 5 hours, or 10 hours? You can’t predict that because it depends on the road conditions.

So, in market terms, if inflation goes high and interest rates go creep up, let’s say, to 3%, 3.5% 10-year Treasury, would some of the software names, and we own a bunch of them, would be valued at the same multiples or our experience of the last decade has colored our longer-term view of what the multiples should be? Now, the problem is I’m not here predicting that, because nobody can predict that. The question is, “Are you reacting? And how do you incorporate that?”

So, the first part is let’s get to the quality of businesses at that point, based on recent history, based on projection, and so on and so forth. Once you own them, then the second leg is, “Okay, how would you change your opinion?” And that part, I feel, is where things tend to go wrong. Because we all the work on the buy side before buying. The question is, “What are the data points you would need to see when you sell the name, or what has to happen?” And my view is that…is frankly when people say, “Oh, we sell when funds have deteriorated,” that’s where I dump all my mistakes. That’s basically acknowledgement of the fact that, “Okay, this is where I didn’t really quite understand what was happening.” And so all the “fundamentals” changed.

I personally think the better view is just have a competitive viewpoint of the names. In other words, just like a sports team, you force rank every name every day. So, if you remove it and somehow it has become a bad name, but maybe there’s another name which looks much better. So, to simply say that we buy a name here, it gets to fair value X many years, we sell it and we recycle it, that’s not how the world really does operate. I mean some businesses just stop growing. But at what point do you pull the plug? It’s very hard.

So rather than saying we sell when there’s a fundamental change, my view is just force rank everything almost on a daily basis. And just like a sports team. If you have a bench and you monitor a bunch of names and you see the fundamentals improving in one name more, maybe you sell it and you bought yesterday. That’s perfectly fine, because that allows you to adapt.

So, if you go back to, let’s say, the GFC. the environment post-GFC has been dramatically different. A vast majority of growth shops that we talk about today, including quality growth shops, didn’t really do well pre-GFC. In fact, there’s a whole new breed of growth shops, which are doing well today, a vast majority didn’t survive the dot-com collapse.

Meb: It’s like I don’t see that many old bold traders.

Rajiv: Exactly.

This is an excerpt of an interview conducted between Meb Faber and Rajiv Jain located here: https://mebfaber.com/2021/06/16/e321-rajiv-jain/

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