#19 – The Value Investor

Chris Bloomstran is a value investor, best known for his incredibly detailed analysis of the valuation of Berkshire Hathaway.

SUMMARY

Chris Bloomstran is best known for his incredibly detailed analysis of the valuation of Berkshire Hathaway. He is not only an outstanding value investor, he is a highly accomplished analyst. His Semper Augustus annual letter runs at over 100 pages and in recent years, it has included an evaluation of Berkshire Hathaway – his analysis of the stock is the best I have read.

In this interview, we discuss his start in the business, his investment approach, why college investment funds make a great apprenticeship, why he writes such a detailed letter and an analysis of the long term outlook for markets.

GETTING INTO INVESTING

Chris’ first investment, of his hard earned savings as a college student, was in a Norwegian tanker stock which went bust within 6 months. Having lost all his money, he wrote to the company which sent him its last 3 annual reports in the mail (no email back then) which he dissected – he learned a few lessons about the importance of the financial statements and a conservative balance sheet. He proceeded to immerse himself in reading the 10-Ks and 10-Qs. His only regret is that he never received a share certificate which he could have framed on his wall as a reminder.

HE STARTED HIS OWN FIRM IN HIS TWENTIES 

Opportunity knocked is Chris’ explanation of this brave move. The story of his introduction to his anchor client is told in his 2021 annual letter – it’s fascinating. They shared the belief that in the late 1990s, they were in a stockmarket bubble. The client, Bob Smith, had gone into cash prior to the 1929 crash and then proceeded to take advantage of the ensuing bear market. Chris now followed a similar strategy six decades later.

Chris believed that some of his client’s holdings were significantly overvalued. GE, which he had owned for over 60 years, was a good example. Chris was nervous about the valuation and highly dubious about Jack Welch’s “make the quarter” culture. They liquidated a large proportion of the portfolio, including GE, which was massively overvalued and switched into traditional value plays, including Berkshire. GE has fallen 80% since and meantime, the firm’s portfolios have compounded at 11% pa. Had they not sold down that GE position, each $1m held would have turned into $250k, vs $11m in the portfolio before fees.

WHY CHRIS FOCUSES ON THE FINANCIAL STATEMENTS

Chris advises investors to read the 10-K, read the footnotes, and to read the policy for revenue recognition. Steve did not prime him to say this! He says you must understand what happens to the numbers when accounting rules change (another of Steve’s favourites). Chris goes slowly and pays great attention – he has never been in a hurry to get anything off his desk. He says that it’s very apparent that few people read the annual report beyond the Chairman’s letter.

THE LETTER

The Semper Augustus letter is a work of investment art and with the 2021 edition running to 129 pages, is almost a book. Until 2011, Semper Augustus outperformed massively with an 11% pa return vs a 1% pa return for the S&P 500. Then the portfolio had 4 years of underperfomance with a 10% annual return vs 22% for the S&P. This culminated in 2015 when it lost9%, vs the S&P up 1%. Chris recalls inbound calls that year asking if he was losing it (and with Berkshire down 12.5%, if Buffett was past it).

The stocks had declined but the businesses had performed fine and the portfolio was as cheap as it had ever been. He decided to write up his analysis of Berkshire , his different methods of valuation and the intricacies of the accounting and taxation treatments, which took 50 pages. Joe Koster (who introduced Steve and Chris and who publishes Value Investing World) told Chris it was the best analysis of Berkshire he had ever read (it clearly is) and persuaded him tp publish it.

The letter now serves as a great marketing tool for the firm and by the time they make contact, they understand the investment approach and are a self-selecting group. (In Episode 17, Vitaliy Katsenelson made a similar observation).

THE OUTLOOK

Chris thinks the closest analogy to the present situation is the 1970s and he thinks the Fed will keep going until something breaks. His comments on the show should really be read in conjunction with the valuation section of his newsletter – he believes the multiple could go below 15.5x, that margins of 13.3% could go to 9% or worse, although nominal revenues could continue to grow at a decent clip.

THE LETTER 

In the last letter, Chris explains the change in the S&P by looking at the change in earnings and the change in multiple. He looks at the total return from common stocks as having three components –growth in earnings per share, change in the P/E multiple, and earnings from dividends. Total return is easily calculated by multiplying EPS growth by multiple growth and adding the dividend yield:

Total Return = (EPS Growth x Change in P/E Multiple) + Dividend Yield

In this 2021 letter, he sees the components of drivers of the last decade’s 16.6% index return as extraordinary and impossible to repeat during the coming ten years. A large part of this was driven by the Fab 5 (or FAANGs).

These numbers obviously dwarf the total index, but the drivers are interesting. Sales for the index grew by 3.7% pa (for the big 5 tech, 20%); margins increased from 9.2% to 3.4% (mainly the impact of lower interest and tax) (tech margins fell 2 pp to 21.1%).

But it was valuation which was the real driver of this bull market – the market multiple increased from 13.0x to 23.6x (tech 14.3x to 33.4x!). The share count actually increased for the market but shrank for the tech stocks.

The explanations in the letter are well worth reading.

 

Source: Semper Augustus 2021 Letter

ABOUT Chris

He is the President and Chief Investment Officer of Semper Augustus Investments Group LLC. Chris has three decades of professional investment experience with a disciplined, value-driven approach to fundamental equity and industry research. Semper Augustus manages concentrated equity portfolios of well-run, well-capitalized businesses with share prices trading below conservative appraisals of intrinsic value.

Prior to forming Semper Augustus in 1998 – in the midst of the stock market and technology bubble – Chris was a Vice President and Portfolio Manager at UMB Investment Advisors. Chris has a Bachelor of Science in Finance from the University of Colorado at Boulder, where he also played football. He served as President of the Board of Directors for the CFA Society of St. Louis from 2006-2007 and as a Director on the Board for twenty years, from 2001 to 2021. Chris served as a member of the Bretton Woods Committee in Washington DC, an institution championing and raising awareness of the International Monetary Fund, the World Bank and the World Trade Organization. He has also served on various not-for-profit boards in St. Louis. His family resides in St. Louis. He earned his Chartered Financial Analyst (CFA) designation in 1994.

Chris screenshot

BOOK RECOMMENDATIONS

Chris comes for the Austrian School of Economics and highly recommends America's Great Depression by Murray N. Rothbard.




The Semper Augustus letter is one of the most brilliant letters Steve has read and is a must not miss. You can download a copy of the 2021 letter by clicking on the logo (note: this is from the BTBS library, not from the fund manager).

Bill Browder’s Red Notice is a book which both Steve and Chris thoroughly enjoyed. Part spy novel, part investment book, part biography, it’s a chilling tale which underlines the risks of investing in frontier markets.


HOW STEVE KNOWS THE GUESTS

Steve and Chris were introduced by Joe Koster and they had a fantastic conversation one Saturday afternoon/morning, before Steve started the podcast and Chris was therefore a natural guest to invite.


Chapters

 00:01 – Investing Demystified: Inform, Educate, Entertain

08:31 – Lessons from the Great Depression

16:16 – Spotting Market Inefficiencies

29:05 – Analyzing Berkshire Hathaway and Value

45:25 – Market Cycles and Inflation

01:02:42 – Investing in Russia: Risks and Rewards

 

 Transcript

STEPHEN CLAPHAM: Hi, welcome to the Behind the Balance Sheet podcast where we meet leading investors and commentators and educate ourselves
about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of what makes a successful investment or indeed an unsuccessful one. Our goal is to inform, educate and entertain.

DISCLAIMER: We hope you enjoy this and every episode. Behind the Balance Sheet and affiliates and podcast guests may own shares or have an economic interest in securities discussed in this podcast which is aired for your education and entertainment. Only nothing in this podcast should be construed as investment advice or relied upon for investment decisions, always do your own research.

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Introduction

 STEPHEN CLAPHAM: Chris Bloomstran is best known for his incredibly detailed analysis of Berkshire Hathaway.


STEPHEN CLAPHAM: He’s not only an outstanding value investor, he’s a highly accomplished analyst, his Semper Augustus annual letter runs over 100 pages and in the last few years has included that evaluation of Berkshire.

STEPHEN CLAPHAM: His analysis of that stock is the best I’ve read.

STEPHEN CLAPHAM: In this interview, we discuss his start in the business. His investment approach, why college investment funds make a great apprenticeship for youngsters looking to become analysts. Why he writes such a detailed letter and a discussion and analysis of the Long term outlook for markets.

STEPHEN CLAPHAM: Chris has a simple and straightforward Long term value based approach to investing and he’s just full of wisdom.

STEPHEN CLAPHAM: I really enjoyed our conversation and you will too.

STEPHEN CLAPHAM: Well, Chris, welcome. Thank you so much for coming on the podcast. I’ve been looking forward to this for ages.

CHRIS BLOOMSTRAN: Yeah, Steve, this is terrific. I love the podcast. I love a lot of the work that you’re doing. So it’s a, it’s a thrill to be here.

STEPHEN CLAPHAM: Well, listen, did you always want to be an investor? I mean, I believe your first investment in the Norwegian tanker company was a zero. Why did that not put you off? So why did you want to be an investor? And why did you not get put off?

CHRIS BLOOMSTRAN: Well, lighting all your money on fire, hard earned summer job money, some scholarship money that was left over.

CHRIS BLOOMSTRAN: It’s fairly off putting discouraging and I suppose it’s like sports or falling off a horse when you get knocked off, either you get
back on and go again. Injuries in sports, you know, you kind of fight through them, so, I suppose. Oh, geez. Either this is a really bad hobby and you need to find something that you don’t lose all your money at every time you do it, or you need to figure out what happened. And I thought I knew what I was doing. I was in college and I’d moved from the engineering school to the business school. I fancied the stock market always kind of followed stock prices in the
tables.

CHRIS BLOOMSTRAN: And at that point, I’d kind of fallen in love with it. I hadn’t invested real money yet. That was the zero but was reading all the books and he got into candlestick charting and technical analysis and Bill o’s can slim method, which I think is still a thing with investor bus, investor’s business
daily.

CHRIS BLOOMSTRAN: It’s moment a momentum based strategy and what, what I hadn’t gotten around to was actually reading financial statements, which, you know, I think had I done that and learned how to do that before investing dime one, probably the outcome would have been different. And I wouldn’t have bought the very large crude carrier company in Norway that went to 0 six months after buying it. But I literally then had to write a note.

CHRIS BLOOMSTRAN: I got the headquarters of the firm in Norway wrote over to get the annual reports which I’m sure they thought was interesting
because they had failed. And a couple of weeks later, three weeks later, whatever it was, the financials arrived, I asked for three years and read
through them and, you know, really was still an uninitiated at how to really read and interpret financial statements.

CHRIS BLOOMSTRAN: But, you know, it didn’t take a lot of wizardry to know that, that there was so much leverage and the capital structure was so poor, the assets were so poor that this self liquidating structure where they were going to operate these vessels for a period of time and then scrap them and
distribute all of the proceeds or whatever was left over and nobody was going to get rich, really wouldn’t have worked and it was all from there.

CHRIS BLOOMSTRAN: And so I, you know, learned at an early age, you better pay attention to the financials and, you know, very quickly just immersed myself in reading as many and reports and Ks and Q’s as I could and that has become a repetitive process for life. And I’ve turned over an awful lot of rocks between here and there and learned a in what was retrospect, a very valuable lesson.

CHRIS BLOOMSTRAN: I mean, you know, you don’t want to lose everything, but I think it was pretty grounding. The thing I wish I had done was in addition to ordering and reading the financials, I wish I had gotten the stock certificate and framed it and hung it on the wall as a, as a reminder.

CHRIS BLOOMSTRAN: In any event that’s ship has sailed. 

SPEAKER 2: I’m sure on that one … I bet you somebody will send you a copy of that …share certificate so you can frame it and have it as a reminder, but
turns out you don’t need much reminder. Now, look, you started your own firm before you were 30 years old. What gave you the confidence to do that? I mean, that’s a big bold move.

CHRIS BLOOMSTRAN: Well, opportunity knocked and came along. I was managing money for bank trust company and had been delegated. An awful lot of
responsibility was running a mutual fund. At that point, Kansas City based bank.

CHRIS BLOOMSTRAN: I was operating the Saint Louis and the Denver investment offices for them and wound up and you, you, you can read my letter. I know you’ve written Miller this year. I told the story about our anchor client and how we were introduced and took over his family’s portfolio.

CHRIS BLOOMSTRAN: He, he would not, he wanted me to manage his money and his family’s assets. He was in his mid nineties and but didn’t want to do it at a bank. He had been chief investment officer of a bank trust company, Big Bank here in Saint Louis during his career was the chairman of the board for a bunch of years at this point.

CHRIS BLOOMSTRAN: Long retired but, really did not want to have banks controlling the majority of his capital. There were some irrevocable trusts
where the banks were involved and I think off putting things like having to indemnify the bank when you’re managing your own account for concentrated
positions, things like that.

SPEAKER 2: He must have seen something in you. You’re only 29 years old. I mean, what was it that made him trust you? Is that, I mean, it’s a big step,
but especially when you’re, you’ve made all that money and, and lived through those cycles. And what was it that you, that you sparked in him? What was it you, you saw?

CHRIS BLOOMSTRAN: Well, we had two things. I think, I don’t think I’ve ever been quite asked that question.

CHRIS BLOOMSTRAN: We had a common belief that we were in a stock market bubble where this gentleman born in 19 oh three, got into the family brokerage business after Princeton and liquidated his entire family stock portfolio and any clients that would follow a 25 year old kid to the sidelines.

CHRIS BLOOMSTRAN: It was a year and a half early. The market nearly doubled over the next 18 months and then ultimately peaked in the fall of 1929 and the 89% drop in the dow and the Great Depression and the rest is history. Let those lows. He bought things like G E for less than the cash in the business.

CHRIS BLOOMSTRAN: I mean, genuine Ben Graham Net Nets before Ben Graham wrote about him in security analysis. The 1934 original edition, I mean, Mr Smith Bob was my, my client was, was acting on the bear market capital and not writing about it was a very accomplished investor.

CHRIS BLOOMSTRAN: We, we spent several months getting to know each other before we pulled the trigger and, and chad my business partner and I hung the shingle.

CHRIS BLOOMSTRAN: We’d always wanted to run a money management firm together. Hadn’t anticipated doing it just shy of my 30th birthday. But in getting to know him, I had some, I had quite a bit of fluency in really most of the things that he owned because I had spent time with General Electric and had concluded by that point.

CHRIS BLOOMSTRAN: I mean, this is the end of the Jack Welch era had concluded that the culture of G E was rotten. Two thirds of the business was now finance, consumer finance, business, finance. They had the reinsurance operations and the financials have become so complicated, the culture of making the corner by a penny. It is not suitable for the insurance world in
particular.

CHRIS BLOOMSTRAN: And so, you know, really thought that GE had problems, the leverage in the business, the off balance sheet, special purpose vehicle
liabilities were extraordinary. So, you know, one by one, we kind of spent time in the portfolio and concluded that the most of these companies were really no longer objectively earning their cost of capital. You were late nineties. 


CHRIS BLOOMSTRAN: So prices were sky high. And you know, I grew up having lost all my money on trade one. But in a culture of a value investing oriented trust investment company, you know, I was a price to earnings price to sales price to cash flow dividend yield investor at that point. And it was pretty easy to spot overvaluation throughout many of these blue chips.

CHRIS BLOOMSTRAN: So you overlay a lot of them no longer being great companies with very high prices and they give us the opportunity to then donate a lot of these to a family foundation and some accounts which essentially pay a portion of assets, call it income to the donors for life and then the assets are left to charity.

CHRIS BLOOMSTRAN: We’re able to clean all that up and liquidate a very substantial portion of the portfolio over the course of a year and a half or so
and flip the proceeds into the those those securities that were had gone begging the buy the market bifurcation was extraordinary. At the peak of the
tech bubble.

CHRIS BLOOMSTRAN: You had the very expensive blue chips really got expensive. In 98. Around the time we started the farm late 98 middle 98. That’s when Berkshire bought Jen re using Berkshire shares as currency in that deal. Pepsi traded at 50 times.

CHRIS BLOOMSTRAN: So all these blue chips were so expensive and then that kind of morphed to the tech bubble where, you know, not only your internet T M T companies but legit businesses that I think the world forgets how, how many real businesses traded it at 10 and 20 times sales, tech companies, Microsoft trading at a 620 billion cap on 20 billion of revenues. They were immensely profitable, 38% profit margin.

CHRIS BLOOMSTRAN: So we sold all that stuff, sold 90% of the G E. He had said, well, he, he loved talking about benign neglect. And that essentially I think
is a pretty valuable, was a valuable lesson for me to observe what, how the the family’s portfolio and how it had evolved from the 19 thirties.

CHRIS BLOOMSTRAN: Essentially, it’s the buy the stock, put the security, the certificate in the drawer and forget about it for a lifetime and you’re gonna
wind up with some real winners, but you’re going to avoid all the frictional costs of trading. You’re gonna avoid all the taxes, you’re gonna avoid all the
temptations of thinking you’re too smart and out smarting yourself.

CHRIS BLOOMSTRAN: And sure enough, quite a few of the things that he had picked up as a very good investor over the years were, you know, the proverbial 10 and 50 and 100 baggers. I mean, the basis on, on the G E position which was half the capital was in the pennies per share. The dividend was larger than the cost basis on the security.

CHRIS BLOOMSTRAN: And so, but his philosophy of benign neglect, he said, look, G E has been the best performing position that I’ve had for a lifetime. It’s
treated the family very well, but I wholly endorse what you’re saying. He says, why don’t we sell, I’ll let you sell 90% of it.

CHRIS BLOOMSTRAN: So with that 90% that G E is down 80% from where we sold it. They’ve done a one for seven reverse stock split since and we’ve made about 11% on our equity investments over the 24 a half now, 25 24 I guess, 24 year history of the firm.

CHRIS BLOOMSTRAN: So, you know, we turned a million dollars into 11 kind of, you know, before fees and cash. But that million in G E is $200,000. So the
delta there is quite a bit. 


STEPHEN CLAPHAM: It must have been quite brave. He must have been quite brave guy to sell a stock that had done him that well. And you must have been very persuasive to because I mean G E was one of the five most successful companies in that Henrik Bessembinder study. If I remember it correctly, five companies accounted for 10% of the wealth created in the United States stock market. $35 trillion between 1926 and 2016. And then it was Exxon Apple, GE, IBM I have forgotten what the fifth one was, but, he must have been quite brave to do that, having done nothing for 60 years. But it was just your, the persuasiveness of your analysis.

CHRIS BLOOMSTRAN: That was, and I think, you know, he, he was a student of what you’d now call behavioral economics, but that’s really just common sense and watching how people behave. And, you know, Jack spent an awful lot of time with the street.

CHRIS BLOOMSTRAN: The world knew that, you could see G E when they had to make the quarter taking gains on assets to massage the income number and, and it was just all the abusive things that even in your late twenties, you’d seen other firms do and, you know, I’d already gravitated toward quality management and the, the culture just seemed rotten and it was a pretty easy call with the 
leverage on top of it.


CHRIS BLOOMSTRAN: The finance businesses which, you know, they’re vapor. I mean, you know, when you have banking and, and finance type leasing companies, your liability side, the right side of the balance sheet is crystal clear, very noble.

CHRIS BLOOMSTRAN: The asset side is nebulous. And when you layer in too much leverage and off balance sheet, leverage and you hide that leverage and to fight it, you’ve really got to spend a lot of time in the footnotes and I lived in the footnotes, I still live in the footnotes. I tell students and young
investors all the time, you know, get off of the books and all of the podcasts except for yours and the handful that I’m on, of course.

CHRIS BLOOMSTRAN: But turn over rocks. I mean, you know, build up your, your arsenal of companies that, you know, well, but read every footnote, read, read the business description, read the accounting changes. You read how revenue recognition works in those footnotes and a lot of it’s repetitive and a lot of it’s boiler plate.

CHRIS BLOOMSTRAN: But when things change and you get a new accounting pronouncement, that’s when the light kind of goes on. And you say, oh, well,
this business is gonna treat this accounting convention differently than that business and you wouldn’t know that other than, you know, immersing yourself
and, and taking the time. And so, and, and I’m a slow reader. 


CHRIS BLOOMSTRAN: I’m handicapped by being a very slow reader. So, you know, I couldn’t get through as many businesses as I probably would have liked. But for reading slowly, I think I absorbed an awful lot and still absorb an awful lot when I work on a project and tend to retain a lot of information, weird numbers that, that just kind of have, have been embossed on the brain.

CHRIS BLOOMSTRAN: But it’s, it’s the, it’s the going slow and really paying attention to what you’re working on. I’ve never been in a hurry to get anything
off my desk if it mattered. 

CHRIS BLOOMSTRAN: And, you know, we live in this world of immediacy now where even I find myself distracted by the phone because I’ve got a computer on the phone and I’ve got screens in front of me with data and, and, and, and I, I’ve got, you know, I’ve gotten so accustomed to looking at this ridiculous little Apple phone that I find myself on the Bloomberg app on the phone and not on the Bloomberg, which is insanity because I’m looking at a, looking at a little box.

STEPHEN CLAPHAM : But this point about looking at the footnotes, I mean, I find it quite extraordinary. So I’ve got an exercise, you know, I do this forensic
accounting course for institutional investors. And I have a, a revenue recognition note that I put up on the screen and I say to people look at that last paragraph and tell me what it means and, you know, people scratch their heads and they are really and I’m thinking, and some of these people own this stock. This is, that’s the thing that I find most perturbing.

STEPHEN CLAPHAM: So I did one particular course, the reason I came to the stock was that I do the course in two halfs. So I do the first half is about the theory about how people cheat and how people massage earnings. And the second half is about how you spot all this. And in between, I, I leave a week in between because that helps retention. And it also gives people a week to think about what they, what that I’ve been talking about. And often I come in the following, they’ll say, oh, I was looking at this stock and I found this thing. What do you think? And so sure enough, I got asked to look at this particular company because one of the big bulge bracket banks had put out a note saying its R and D policy was suspect.

And so I come back the following week and I go to put the R and D policy out, I get the wrong page and I turn to the, the revenue recognition not
I say, oh, well, let’s look at this and there were three analysts in this room, all of whom worked on funds that own the stock and not one of them had read the revenue recognition policy. And why is it that people believe you can just take shortcuts? I mean, when we were learning, you know, it was drummed into me. This is, you know, you need to understand how the company recognizes revenue. Why do people not pay attention to that? Is it just because it hasn’t mattered?

CHRIS BLOOMSTRAN: Yeah, when you’re, when you’re young and, and you’re, you’ve immersed yourself and you uncover those kinds of things or you find a business that changes elongates the depreciation schedule of a fixed asset to a now much longer period of time than industry convention.

CHRIS BLOOMSTRAN: And you go to the analyst that you work with that covers the stock to talk about it and they have no idea what you’re talking about.

CHRIS BLOOMSTRAN: It’s then when you realize that everything you were taught in school about efficient markets is insane because if the world knows all
information immediately and acts rationally on it, it was pretty apparent that very few people even read the annual report beyond the CEO S letter or the
chairman’s letter. And how the world can you have efficiency in the market if nobody knows what the hell is going on? So, yeah.

STEPHEN CLAPHAM: Well, I suppose the problem then is it like the David Einhorn issue that, yeah, I’m doing all this work but there’s nobody, there’s nobody to take it. You know, I’ll buy, I’ve done the work. I’ve realized the stop cheap. I’ve bought the stock, but there’s nobody else looking at it. I mean, do you think he’s right about that?

CHRIS BLOOMSTRAN: No, that’s absurd. I, I have a lot of respect for David, but this notion that value investing is dead, you know, price is the great arbiter,
assets that are cheap, don’t stay cheap because those that do appreciate what something is worth aren’t gonna let it stay cheap for Long.

CHRIS BLOOMSTRAN: If businesses get too undervalued, you see them taken private by the board of directors and the management or you see acquisitions, the notion that value loses during the latter stages of a bull market.

CHRIS BLOOMSTRAN: I mean, we’ve seen just insanity and speculation beyond what we saw in the late 19 nineties between profitless businesses trading at 10 and 20 and 30 times revenues between the spat craze even where in a world where we’ve had too much leverage, which has pushed against economic growth.

CHRIS BLOOMSTRAN: We have very little growth in real GDP per capita now. And that’s been the case since 2000, since the tech bubble. And so the places where you have organic growth, the market got that right.

CHRIS BLOOMSTRAN: And valuations accreted accordingly but only, but then to the point where you were over paying and you took the 100 best businesses in the world, most of them in the United States, a lot of them were in the United States and they traded at silly prices here in the last couple of three years.

CHRIS BLOOMSTRAN: You know, even in my portfolio, Costco traded at 50 times earnings, wonderful business. One of the best businesses on the planet, it’s
not worth 50 times earnings and you can go through the roster of blue chips, not just tech, not just the big five, what I call the Fab five, not, it’s not,
not just those, but you had an awful lot of overvaluation similar to, I guess what would have been the nifty 50 in 1972.

CHRIS BLOOMSTRAN: And so if you’re a value guy, you, you’re a value investor and you know, you’re clipping along making 10 11 12 13%.

CHRIS BLOOMSTRAN: But the S And P for the 10 years ended 2021 did 16.6% or the fab five compounded for a decade at 29.8%. Well, were you an idiot? And, you know, were you part of this value world that’s dying and dead because you didn’t keep up with that.

CHRIS BLOOMSTRAN: Well, you know, if you’ve got a process like we do that, we think we understand what we ought to make per year because it’s, it’s a
derivative of what the underlying economics of the companies that we own are and we’re earning those returns, we’re in good shape. Then you get to the
extremes where all of a sudden the world wakes up and realizes, oh jeez price does matter.

CHRIS BLOOMSTRAN: And I guess that that’s when value is always back in vogue, maybe we’re there. I mean, you’ve still got the market down a bunch this year.  We’ve got energy in the portfolio. So, you know, we were, I was in Zurich speaking at a conference, John Moloch’s M O I Global in June.

CHRIS BLOOMSTRAN: And one of the, one of the folks in the audience asked me during my presentation, how are you doing for the year? What are your return? So I said, well, I’m gonna, it’s gonna be the kiss of death here because I’m gonna tell you that we’re up about 10 market’s down a bunch. And sure enough that was, that was our peak. For that period, we were up a little more in April. Berkshire was way up for the year.

CHRIS BLOOMSTRAN: A lot of the stuff that we own.

CHRIS BLOOMSTRAN: And so in literally, in eight days, not eight trading days, but eight days, we went from up 10 to down three, we ended June down six and change. We were down 11 at September. And here we are today up 4% or so for the year.

CHRIS BLOOMSTRAN: And I mean, is that, I mean, it’s so it’s, it’s some trading, picking up some things this year that have advanced since we’ve bought them. But it is, it, is it the reversion of value? Because now you’ve got the most speculative corners of the market that have been obliterated.

CHRIS BLOOMSTRAN: The specs have been obliterated. The 20 multiple, the sales have been obliterated but even the excessive valuations of your Long duration assets, these great blue chips and then certainly these big techs have been hammered down for myriad reasons. Certainly, the rising interest rates are going to push on multiples.

CHRIS BLOOMSTRAN: Inflation is very much pushing on margins. I mean, you’ve got the S And P which had earnings of 208 bucks a year and 21 Wall Street was looking for 2 40 or 2 50. They’re always ebullient with the exception of recessions and there’s always a fade of whatever the aggregate of earnings
expectations are for the year. 

CHRIS BLOOMSTRAN: They always taper off over the course of the year unless they’re, unless they’re depressed, unless you’re sitting there in 2008 and
earnings are nothing and then they, then they under miss, but during a normal market, they always miss high.

CHRIS BLOOMSTRAN: So, but now you’re back to less than two oh eight. So you’ve got, you’ve got an absolute decline in profits, but you’ve got topline sales
growing at eight. So that’s very real margin compression there. And so, no, I think if you look at your value in, into season and I don’t look at indices at
all, but I presume they’re better than the aggregates. 

CHRIS BLOOMSTRAN: I’m quite certain they’d be better than the NASDAQ 100 the NASDAQ probably the S AND P 500. I mean, I do know that the, the S And P 100 is faring far worse than the S AND P 500. So much of this is going to go to value.

CHRIS BLOOMSTRAN: But no, you can’t suspend value. I mean, you know, these, these businesses that we all have a chance to own trade every day at a price and this goes to Graham’s Mr Market. I mean, you’ve, you’ve had a lot of irrationality and the market has been a little O CD here in the last few years,
a little manic.

CHRIS BLOOMSTRAN: And, you know, now you’ve got a little depression setting in and, you know, if price matters to you and business quality matters to you, then that’s the, I guess what will be the, the rise of value. But no, it’s silly to think that that value is, is gone in a dinosaur and dead forever.

STEPHEN CLAPHAM: That’s just, yeah, I’m not I mean, I’m not sure that he thinks that, I mean, I think he thinks that, you know, in the old days he could be a ba ahead of the pack and there would be enough people doing what he did that would spot the things that he’d spotted and, and, and come in and buy them from them. And now he’s relying on private equity bid or them buying shares back because this is not the same attention. There’s not as many people like you as there used to be. And so, and I guess there’s an element of truth in that.

STEPHEN CLAPHAM: If you enjoy this podcast, you’re bound to enjoy our free newsletter on substack. It’s a weekly email on interesting investing topics,
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STEPHEN CLAPHAM: Let’s turn to your letter because you write this amazing 100 page letter. I mean, why do you do this? It is like so much work and it is so brilliantly written. It must take you forever. I mean, is it just a labor of love? Is it giving you some benefits? What was the motivation?

CHRIS BLOOMSTRAN: Well, it is a labor of love. You know, I, I very much want our clients those that are willing to take the time with the letter each year
to really know how we think and how we look at the world and valuation and the businesses that we own.

CHRIS BLOOMSTRAN: The letter was never public We had at the outset of the firm as any good value investor would, when the market declined a bunch in 2000 oh two, we made a lot of money and, and all that was in the first two years of that three year decline.

CHRIS BLOOMSTRAN: I mean, the market was up was down nine or so in 2000 and we were up north of 20 and then the next year, the market was down 11 or 12 and we were up north at 20 and then we fell in line with the market in 2002, but very similar to what a lot of value investors would have experienced in oh eight.

CHRIS BLOOMSTRAN: We were down half of the decline in the market actually beat the market in oh nine despite having lost half on the decline. And by the end of 11, you know, I had this in my letter last year, kind of this notion that, you know how you perceive value and how you perceive performance. So we were up our stocks now.

CHRIS BLOOMSTRAN: Just, just our stocks again, no cash and no fees. We’ve got different cash levels across all of our client portfolios, foundations that
spend 5% a year making grants to charity are always gonna have some cash laying around. You know, because you got 15% going out the door every 24 months. Right.

CHRIS BLOOMSTRAN: But just, just the stocks had averaged about 11 from inception,
through the end of 2011, the S And P at that point because you, you had two
Bear markets and you were recovered from the oh eight oh nine lows, but the S
And P had averaged something like one. And so we’re 10 points out of the market
and, you know, if a tree falls in the forest, right? We weren’t any consultant
databases.

CHRIS BLOOMSTRAN: The letter was not public. We, we had not created our GPS
composites at that point because we never thought institutions would ever want
to hire an investor. That doesn’t he to certain market cap sizes or certain
geographies. We’ve always had global investments. We’ve always had small, mid,
large cap, not by design. We’re simply trying to find great businesses at great
prices.

CHRIS BLOOMSTRAN: But then we had four years in a row where and I and I had
written Long letters. If you go back on our website, we have, I’ve, I’ve got a,
you know, a Long letter that would have been 30 40 pages because that’s all I
had to say.

CHRIS BLOOMSTRAN: And it was important to convey what I was saying in the, the
four year period following 11, 12, 13, 14, during the first three of those four
years, we averaged our stocks averaged about 10, which was no good. Of course,
because the S And P averaged 22% I think it was.

CHRIS BLOOMSTRAN: And then in 2000 and so, you know, some of the, some of the
clients were even those that were so far ahead. Start to finish. We’re starting
to wonder if maybe we were losing it a little bit because, you know, everybody
else was getting richer faster. Well, 2015, that was no fun from a client hand
holding standpoint because we were down 10 or 11, Berkshire.

CHRIS BLOOMSTRAN: Our largest holding was down 12.5% and the Fangs led the
market up 1.5% or 1.4%. So then, you know, really we had, you know, far more of
the natives were restless and, you know, we’re not, now we’re working phones or
the, you know, the phones are, I’ve got inbound calls coming and you know what
the hell’s going on? Are you guys losing it?

CHRIS BLOOMSTRAN: I think Warren Buffett’s gotten too old. He’s probably lost
it too. And you know, what are you guys doing with that? Well, the bad answer
is, look, you know, neither Warren Buffett nor Sapa Augustus can control stock
prices. For four years, you know, best to look through to the underlying
business and what we own.

CHRIS BLOOMSTRAN: And have those businesses gotten more valuable over the last
four years, have the new companies that we’ve bought into the portfolio added
value, added intrinsic value to the overall valuation. And frankly, at the end
of 15, the portfolio was really cheap. It was nearly as cheap as it had been in
firm history, but I, I really wanted to write a good letter.

CHRIS BLOOMSTRAN: And with Berkshire being such a large position and in the
crosshairs of so much doubt, I’d always wanted to write up Berkshire all of the
accounting adjustments that I make to derive what I call kind of economic
earning power, the moving parts of the subsidiaries, how we value each of those
on a sum of the parts basis.

CHRIS BLOOMSTRAN: It’s really all the four or five methods that I would use to
value the company I thought was important to share with our clients.

CHRIS BLOOMSTRAN: And so I spent, I don’t know, 40 or 50 pages of my 60 or 70
page letter 2015 letter on the analysis of Berkshire Hathaway and the
accounting treatments and the tax treatments. We sent it to our clients and 30
or 40 of our friends and our very good mutual friend, Joe Coster called me and
said, Chris. He said, you really have to get this letter out to the public. He
said, Joe.

CHRIS BLOOMSTRAN: Joe thought it was in his mind. He said it was the best
Berkshire write up that he’d seen. And he said, if you want to grow
institutionally, you have to get this letter out into the world. And I said,
you know, Joe, we never put our letters out. Seth Carmen’s letters were always
private. They get taken down and Joe cut me off and said, Chris, how much money
are you managing?

CHRIS BLOOMSTRAN: And how much money is Seth managing to which I nodded and
said, that’s a good point. So I said, but look, I mean, nobody wants to read
about taxes and accounting conventions and accelerated depreciation and
amortization of intangibles. It’s just, it’s too deep in the weeds. And he
said, trust me, he says, if you put it on your website, I’ll link it to his
value investing world.

CHRIS BLOOMSTRAN: What was the blog at the time? Terrific. Still a great
compilation of daily reads. If you’re not a subscriber to a value investing
world, you should be. It’s just a Joe Joe. It’s a really nice daily curation
that hits your inbox every day and links to some great stuff that you probably
haven’t read and figured, you know, found yourself or some you would
have.

CHRIS BLOOMSTRAN: But in any of that, so, you know, maybe 100 people are going
to read this thing and well turned out the, the breadth and, and the, the
degree to which it kind of got out was pretty spectacular. Lots and lots of
downloads, lots and lots of reads.

CHRIS BLOOMSTRAN: So without it really never intentionally being a tool to help
the firm, it would wound up being a great tool because what’s, what’s evolved
is those folks that hire us now, whether they’re family offices or institutions
or business owners or public company executives.

CHRIS BLOOMSTRAN: I’m kind of flat. I’m stunned that so many people read the
letter and read it every year and take the time by the time they get to us and
are interested in being clients.

CHRIS BLOOMSTRAN: It’s just, it’s a highly curated, kind of self selective pool
of people that are really smart and having to, you know, be curious about
investing, whether they’re, and I’ve got a lot of folks that are just kind of
clients that are retired investors that are super investors, but they’re in
their seventies and eighties and they don’t turn over the rocks anymore and
they have kind of decided they want to have us at the helm of their capital,
which is terrific and, but really more so I’ve always been so grateful to the
Warren Buffetts of the world and the Ben Grahams of the world.

CHRIS BLOOMSTRAN: You know, these folks that didn’t have to share how they
think and kind of the secret behind how they think about capital. Warren
Buffett didn’t need to write the chairman’s letter to the degree he did every
year and kind of teach the world about various accounting conventions and stock
options and inflation.

CHRIS BLOOMSTRAN: Ben Graham with the books and the teaching, you know, I’ve,
I’m, I’m so blessed to do this because it’s never been a job. You know, it’s
Warren’s tap dancing to work is, you know, my 80 hour a week hobby that has
never felt like a job.

CHRIS BLOOMSTRAN: And, you know, when you get to do it for clients and work
with people that are just extraordinary people that are curious about what
you’re curious about. It makes the conversations that you have with your
clients fun.

CHRIS BLOOMSTRAN: But I spent a lot of time on college campuses. I’ve been a
big advocate of student run funds and have tried to curate some best practices
in that world. And last two letters have done some of that. We had a survey
that a lot of schools responded to and I think there was some utility there.
But I love being on campus.

CHRIS BLOOMSTRAN: I love working with young investors. I love doing what you’re
doing and kind of teaching about accounting and investing and some of the
things that matter. And so for that, I really write the letter with an eye
toward a wide pool of people that read it.

CHRIS BLOOMSTRAN: But I want there to be utility for young investors and
curious young people that want to do this for a living and kind of pass along
some of the things that I’ve learned to the extent I’ve learned anything for
the same reason that I’ve got such a debt of gratitude to those who have done
it before. I’ve done it that it, it really drives it. It makes it a joy to
write the letter frankly.

SPEAKER 2: And the letter is brilliant. Any student listening to this should
read it immediately. I don’t know, I don’t know how easy it is to
download.

SPEAKER 2: But, it’s interesting because we were, before we came, before we
started recording, I was saying that when I started the podcast, I had the idea
of doing a podcast for young people coming into the industry and, or thinking
about coming into the industry and trying to give them, you know, some
understand, better understanding.

SPEAKER 2: And I think we’ve done a bit of that, but it’s funny how many
professional investors listen, I’m sure that a lot of professional investors
are reading your lecture and wishing they could write as well. I mean, it’s
really amazing just on the student investment funds. I mean, I was quite
intrigued about this because I’ve tried to do as much as I can with
universities here a bit in America, but mainly in the UK and in Europe.

SPEAKER 2: And it’s my theory that students in the UK are lazy and students in
the US are committed and keen. It’s very laughing. I, I am being honestly, I am
being all in all seriousness. So students in America are much, much more
committed.

SPEAKER 2: They’re, you know, if you come to university here, then you know,
the pup is a great attraction. Not as much as it was in my day. I mean, it’s
not, people are more serious today but not a patch on the US.

SPEAKER 2: And I was curious about this, the investment funds because I, I, I,
I sponsor a couple of these funds and try and help them educate themselves and
I go and speak but not as much as, not as much as I would like to. But when
you, you were writing this year, you said the fund size can be as large as $60
million which is really huge.

SPEAKER 2: Average is six million million, two million, half the 10 to 30
stocks, 40% 31 to 50 stocks turn over 10 to 30% to two thirds of funds over
50%. But the great thing about this is it allows students to garner real life
experience of managing money, which I think is fantastic.

SPEAKER 2: I mean, have you sort of got any observations or conclusions from
the work that you’ve done? I mean, obviously you would rather employ somebody
who’d already had experience and the pain of losing money. And for real. Is
there, are there any other benefits do you think?

CHRIS BLOOMSTRAN: Well, yeah, but let, let me, let me elaborate on why I
laughed.

CHRIS BLOOMSTRAN: I mean, I was an academic minimalist in school.

CHRIS BLOOMSTRAN: So, so we, we now have an empty nest at the house. The baby.
Our boy is a freshman in college and he happens to be at the school that
currently is the, has the largest student investment fund. And that’s not
really necessarily why he went to that school.

CHRIS BLOOMSTRAN: I think if you were to pull, having been at parents weekend
this fall and having been to the football tailgate and having been in a college
bar for the first time since I was in college, I’m quite confident that if I
pulled the student body at this university, that they would be a lot more
impressed with the fact, not that they have the largest student run fund in the
country, but they, that they had just moved up six spots on barstool sports,
top 25 party schools in the country to number four in the country.

CHRIS BLOOMSTRAN: That was a big deal when we were there in any event. No, I,
I, I’m kidding. Of course.

CHRIS BLOOMSTRAN: I think through these student funds there, there weren’t that
many of them. Back in the seventies, the big 10 schools had on University Of
Dayton, which does have the biggest student run fund.

CHRIS BLOOMSTRAN: Some of these things are extremely well put together. They
involve, you know, sophomores, even late freshmen up to seniors, they’re run by
the students.

CHRIS BLOOMSTRAN: They’re, you know, o overseen by an administrator, either a
professor or an adjunct or an outside volunteer.

CHRIS BLOOMSTRAN: But if you put them together, I, I, if you, if you structure
the thing properly with the right kind of bumper guards. Right. Kind of
diversification requirements. You really create a heck of a teaching tool. And
what I’ve seen is I’m around the country every year and schools asked me to
come talk is, it’s invariably the student run funds that are having me
speak.

CHRIS BLOOMSTRAN: And it’s that group that, I mean, they know what they want to
do. Generally, they want to be investors. They’re highly motivated and they’re,
they’re getting real hands on experience.

CHRIS BLOOMSTRAN: You know, they’re, they’re reading financial statements,
they’re breaking down business valuation, they’re writing up pitches. You’ve
got to work up business that you want to include in the portfolio and you’ve
got to figure out what’s going to come out. And if you structure that properly,
great teaching tools.

CHRIS BLOOMSTRAN: And I can tell you the, the big firms on Wall Street and in
the mutual fund complex and in the insurance world are making beelines to those
schools that have pedigree in terms of longstanding Long run student run funds,
but there are more than 300 schools that now have them.

CHRIS BLOOMSTRAN: And I’ve never met a group that, that were incredibly highly
motivated and eager to learn. And I’m stunned at how much more they know than I
knew coming out of school. I mean, I was doing it all kind of self practice
because we didn’t have classes that taught you how to break down financial
statements.

CHRIS BLOOMSTRAN: You know, when you took your accounting classes, they were
cost accounting or they were very project specific dance classes. Were you
doing DC F S on whether you should build a building or not or, you know, build
a new plant. It had nothing to do with how to value a company and, you know, I
completely agree with you.

SPEAKER 2: I mean, kids now are much, much more, aware and, you know, I’ve,
I’ve been stunned by the quality of some of the research notes. I mean, they
could have, you know, they could come from a bulge bracket bank except that
they’re probably better, you know, the, the kids really pay a lot of attention
to it.

SPEAKER 2: I mean, I’ve seen some amazing ones and, and, you know, not just in
the UK and in Europe, I mean, I’ve sponsored the Finance Society at the
University Of Vienna, which is a huge university and really remarkable, some of
the, some of the students, but 11 of them has just come to, to do a doctorate
in or a master’s at Oxford.

SPEAKER 2: I saw him, he came to the conference with, you know, the so hedge
fund conference they have in New York, they have one in London.

SPEAKER 2: So he came along with me, but then let’s just go back to your letter
and the, and P 500 valuation because you, you look at that very, very closely.
I, I just wonder what’s the purpose of that? I mean, does that help dictate how
much cash you hold in? Klein’s portfolios or is it just a framework? Why so
much time on that?

CHRIS BLOOMSTRAN: Well, the world’s just acutely aware of what the S AND P 500
does to the extent that we own. Component members of the index are not, we
don’t hear to a benchmark, but you can’t not marvel at the big five tech
companies, Apple Microsoft, Amazon, Google and Facebook Meta, whatever they
call themselves these days, it was the, the 10 year run they had was
extraordinary.

CHRIS BLOOMSTRAN: And again, they weren’t alone. You take mastercard Visa, you
know, some of the other great businesses, you know, had like terrific runs over
a period of time where you had a lot of organic growth, topline revenues, not
acquired, not reinvested capital, but genuine growth, but a lot of multiple
expansion margin expansion in some places, not in others.

CHRIS BLOOMSTRAN: But when you’re doing almost 30% a year for a decade at a
point, they consume so much of the stock market. I mean, that group went from
8% of the market a decade ago to almost 25% 24.9% at year end.

CHRIS BLOOMSTRAN: Yeah.

CHRIS BLOOMSTRAN: And you had to be aware of that and the group was trading at
30 to earnings. It drove the overall profits of the index markedly higher. I
mean, you took those five stocks out of the index. The S And P didn’t do 16.6,
it still did 14.3% which was pretty extraordinary. Oh Did you really go?

SPEAKER 2: That surprises me. It’s that high the way you do this I think is
really brilliant. So you break down the total return into the multiple
expansion and ebs growth and the numbers I I really love the way you do it. So
this is, this is the 10 years to end of 2021.

SPEAKER 2: So the S N B total returned in 16.6%. So the multiple expanded from
12 to 23.6. So 6.1% per annum. So we’ve had a bit of a correction in multiples
but not that much. I mean, where do you think that multiple goes over the next
10 years? But in an inflationary environment, we should see contraction in
multiples. No.

CHRIS BLOOMSTRAN: Yeah. So I I’ll have so Jim Grant was really nice to ask me
to speak at his conference back in October. And I updated the work that I had
on the annual letter to account for the decline in the fab five and the decline
in the S AND P 500 to show what a 30% decline in the tech companies and a 20%
decline in the index had done to the Long run picture.

CHRIS BLOOMSTRAN: I didn’t really present the full bear case which would
involve durable inflation perhaps. But you know, all I did was took the
multiple back to its Long run average of 15.5 as one of the cases and I took
the margin back down to various levels. 13 point 3% I think was
unsustainable.

CHRIS BLOOMSTRAN: 3% points of the gain from nine over the last 25 years has
come from increasing corporate debt on the balance sheet, but at increasingly
low interest rates. So the interest burden is not that high and you got three
full percentage points of the 13.3 that came from a lower interest
burden.

CHRIS BLOOMSTRAN: The tax code change in 2017, the T CJ A that took the rate
from 35% to 21% on the US portion of profits, which were about half of profits
that added almost a percent to the margin.

CHRIS BLOOMSTRAN: Yeah, I think to your point if you were to take the and you
know, Warren Buffett turns out was wrong if you go back to, I think it was
1999. He had a speech that he’d given at the Allen gathering in Sun Valley
Idaho that he then turned into an article that he wrote for Fortune
magazine.

CHRIS BLOOMSTRAN: The premise though was really that margins are mean
reverting. And in his lifetime, he’d seen profit margins kind of range between
3% and 6% and you had broken out of that and by 2000 you took the profit margin
up to 7.5%. So, you know, only at one moment in 1929 was the margin higher. It
was 9.5 or 9.4%.

CHRIS BLOOMSTRAN: But most of the time you were kind of range bound. But again,
think about his investing career to that point, a lot of it involved two
decades of high inflation. And so I’ve actually got some, some work that I’m
doing for this year’s letter that, you know, starting to gather some of the
data.

CHRIS BLOOMSTRAN: But I don’t, I don’t really start in earnest on the letter
until January 2nd. But I know I’m gonna have a section on on what the inflation
of the seventies looked like. Oh, brilliant.

CHRIS BLOOMSTRAN: There’s this conventional belief, I think that inflation was
fairly linear, that it just accelerated and kept growing. And that Paul Volcker
came in as the hero at the end and had the spine to break inflation and take
interest rates to 20%. On the short end, the Long Bond got up to 15 71 or 15
78.

CHRIS BLOOMSTRAN: But it took that willpower of raising rates to break it and
you know, tolerate a really bad recession in 81 82.

CHRIS BLOOMSTRAN: But if you look at the stock market over really the the mid
to late sixties, I mean, in 1966 Warren Buffett stopped taking money into his
partnership and gave the money back in 1969. He called that market top
essentially through the action of saying my skill set here is no good anymore.
I don’t really get this game where prices are this high and he was right. It
was, that was the end of the bull market.

CHRIS BLOOMSTRAN: But you had this series of the market was sideways. I think
people know that the market was sideways for 17 years. The dow was 9 95 in 1966
and it dropped 20% and then it recovered to 1000 and then it dropped 20%
recovered. And by the end of 1972 you had the nifty 50. This thing, you know,
now you’re six years into getting burned, inflation was growing.

CHRIS BLOOMSTRAN: Stocks weren’t doing well. And I think the world decided you
better gravitate toward the best businesses because now you’ve got inflation
and you want companies that have pricing power, you want companies that have
some organic growth and so they bid up the nifty 50.

CHRIS BLOOMSTRAN: I don’t know, 10 of those are, didn’t make it Polaroid and
Kodak. But the prices in that corner of the market were ridiculously high
though, when you’re 30 of the top nifty 50 were so expensive. They were just
destined to do what the big five tech companies have done here this year.

CHRIS BLOOMSTRAN: You weren’t going to be 30 to 35 times earnings, especially
when you run into advertising slowdown. You run into some competition, you run
into some regulation, whatever comes down the pike, you run, you stumble a
little and all of a sudden 35 to earnings becomes a dangerous multiple, but
then you had, of course, back to the 50 50 then you had a 45% bar.

CHRIS BLOOMSTRAN: That was, that was the, that was the big boy of market
declines since the 19 thirties, 45% down. But then recovered to 1000. And you
know, even in 1981 82 when Volcker raised rates, the dow dropped again below
1000 to 7 78. I think it was in August or September of 1982. So you’re
literally 1966 to 82 1000 to 7 78.

CHRIS BLOOMSTRAN: Let’s call it, you’re down almost 25%. You had dividends
during that period. The payout rate at the beginning of that period was a
little higher than it is. Now, you know, a lot of inflation in the meantime,
you lost a lot of money or you lost 75% of purchasing power to inflation total
return, even including dividends, you lost 75% of your money.

CHRIS BLOOMSTRAN: And again, well, maybe, I mean, household ownership of stocks
went from 50% to 10% over that 16, 17, 18 years institutional pension fund
ownership of stocks likewise dropped from the 40 to 50 to 60% down to 10.
Nobody want to own a stock and you could go to the bank and put your money in
and get C DS at 13 14%. So why would you own stocks?

SPEAKER 2: They’re just, they just go down them if the institutions didn’t own
them and the private individuals didn’t own them.

CHRIS BLOOMSTRAN: Well, I’m I’m saying stocks is a percentage of wealth.

CHRIS BLOOMSTRAN: All right. Ok. So there is a percentage of, as a percentage
of allocation, you know, the shares were still the shares and they were still
outstanding, but the market was trading it, margins had dropped because of the
inflation in part. And then I’ve got a chart that I’ve that I’m working
on.

CHRIS BLOOMSTRAN: I’m actually going to give a speech next week in New York at
Lattis work M O I and I’m, I’ve got my, my early series of charts which is why
I work. I mean, I’m not jumping the gun on the letter. I’m doing this for my
talk, which I’m gonna get incorporated into the letter. I’m cheating a little
by getting ahead of it. But, but profit margins were three and the multiple was
eight.

CHRIS BLOOMSTRAN: So he traded at 24 times sales inflation took a hammer, took
a machete to margins over that period. But you, but, but the point there was
you had this series of fits and starts where the market would decline. 20%. The
FED would then toward the end of that decline, loosen monetary policy, lower
interest rates, you drive the market back ups.

CHRIS BLOOMSTRAN: They were always behind the curve, but they were very active
and the movements of FED funds during that period were extraordinary 6% down to
2% up to 7% back to 3% ultimately up to 20 or where wherever they got them at
the very end. But it was a very activist Federal Reserve never quite getting
behind inflation.

CHRIS BLOOMSTRAN: But the TBI investor during most of that period at least got
about as much out of the bills as they got out of the inflation rate. So you
were kind of stasis there, cash would have been a great place to be as debt
level. But debt levels at the outset of the sixties were nowhere near where
debt levels are today.

CHRIS BLOOMSTRAN: You know, almost all the debt in our economy was created
during world war two, we had paid that down and by the end of the eighties or
about by the end of the seventies and into that 81 82 low, the high in interest
rates in 81 then the low in stocks in 82 total credit market debt was 100 and
58% of GDP. You couldn’t have a lot of debt because rates were so high.

CHRIS BLOOMSTRAN: Here we are today at 350% credit market debt to GDP. More
than $90 trillion of debt. More than 30 trillion of that is federal debt.
Corporate debt is at an all time high household debts here in the last two
years has vastly improved until the last couple three months because we gave
money away.

CHRIS BLOOMSTRAN: But the aggregate is over $90 trillion on a 25.5 $26 trillion
economy. And you can’t have a 350% total credit market debt and expect to have
any growth in the economy on an inflation adjusted population adjusted
basis.

CHRIS BLOOMSTRAN: And so to work, if the debt burden is the greatest problem facing
society and certainly facing investors. And I think it is whether the wizards
that run our central bank and the European Central Bank and the bank of
England, the Bank Of Japan, whether they collectively think we’ve got to get
debt levels down, which is what I don’t think.

CHRIS BLOOMSTRAN: They think, I mean, I think they think we need inflation and
then all of a sudden the genie is out of the bottle at oh, we need to get
inflation back under control.

CHRIS BLOOMSTRAN: So they’re not thinking about fixing the debt burden, but we
have to fix the debt burden. We have to take debt somewhere below 350% of GDP.
And so you could do that in, in the extremes of a very bad deflation,
introducing a very bad economy like you had in the 19 thirties.

CHRIS BLOOMSTRAN: That’s on the table. You can let the inflation that we’re
seeing today. Morph into hyper hyper inflation. It would be done globally. Not
locally. You can’t flee the dollar, you can’t flee the Euro, you can’t flee the
pound. Sterling, you can’t flee the Swedish Crown. We’ll do this thing
collectively because we’ve all got the same debt problems. We’ve got encumbered
balance sheets globally.

CHRIS BLOOMSTRAN: That’s on the table. But if you think about the seventies and
I go back to the seventies and think about what would happen if we do what
we’re doing today, the FED has raised rates. They’re gonna raise them again by
50 basis points.

CHRIS BLOOMSTRAN: They might raise them again next year until they break
something, they will break something and whether that’s the stock market now
being down, not 20% on the S And P and 30 on the NASDAQ, but down 40% on the S
And P and 60% on the NASDAQ. Well, that would be a breakage.

CHRIS BLOOMSTRAN: Some of the big European banks might break, pension funds,
might break, some are breaking. But you know, the drug addicted, cocaine
addicted stock market needs Q E and they need zero interest rate policy and
they’re banking on getting there sooner rather than later.

CHRIS BLOOMSTRAN: So now when you’ve got good news on the economic front, stock
market behaves badly and vice versa. So we’ve probably got at least one or two
more cycles where we break something. Stock markets down, the FED lowers
interest rates by a lot abruptly.

CHRIS BLOOMSTRAN: And the Q E lever gets pulled again and we ramp up the
balance sheet, we got it up to nine trillion. We’re running it down again and,
and that running down of the balance sheet is probably more troublesome for the
markets and the economy than simply the raising of the short money rate. And we
can talk about that.

CHRIS BLOOMSTRAN: But you think so if, if we’re gonna have a series of these
bear markets and we’re gonna have a series of interest rate increases and
declines, we know that the tax revenues will fall short during recessionary
periods.

CHRIS BLOOMSTRAN: And we don’t really elect people anymore that tolerate things
like less government spending. So we’ll have larger budget deficits, but we
will work down corporate debt. I mean, we’ll have creditors become the equity
owners of business when interest rates break.

CHRIS BLOOMSTRAN: And there’s so much corporate debt that’s financed at the
short end of the curve and commercial paper and floating rate debt that if you
know, we get two years in of inflation running hot and money rates below
inflation, once you start to refinance more and more of this debt at higher
yields, again, you take a hammer to profit margins, stocks will get hurt and
those of the over levered balance sheets will lose the businesses.

CHRIS BLOOMSTRAN: And that’s just the classic capital cycle. That, that’s what
ought to happen. If you’re an Austrian economist, that’s really what ought to
happen.

CHRIS BLOOMSTRAN: Sure.

CHRIS BLOOMSTRAN: But I can, I can envision taking total credit market debt
from 350% to pick a number 250 to 200 simply by inflation running hotter than
the money rate for 15 or 20 years. But that’s absolutely on the table and
that’s no fun. That then introduces perhaps a flat market where back to your
question on, on the attribution of where earnings come from.

CHRIS BLOOMSTRAN: Then your multiple is likely below 15.5 times, which is the
Long run average, your profit margin of 13 3 is now a pipe dream.

CHRIS BLOOMSTRAN: And you’re back where you were 10 years ago at nine or maybe
you’re eight, maybe you’re seven, maybe you’re six. You get a combination of
margins and multiples coming back.

CHRIS BLOOMSTRAN: You, you might have very high top line growth. I mean, this
year again, you’ve got 8% growth in the economy. You’ve got 8% nominal growth
in sales and margins are under attack, do that for 15 or 20 years and it’s no
fun. People get pretty frustrated and despondent on financial assets at that
point, perhaps on real estate at that point.

CHRIS BLOOMSTRAN: And it’s an ugly period. But you know, who won so step back
and, and ask who won during that period? Certainly the indices did not win
because you went from high margins to low margins. You went from high multiples
in the sixties to very low multiples in the early eighties.

CHRIS BLOOMSTRAN: He got crushed, he lost to inflation massively, but Warren
Buffett won, he had bought National indemnity in 1967 and the opportunity to
then buy things like the Washington Post and Geico. And you know, all the
things that he bought in the seventies with the insurance capital and reserves,
the trader mindset what we do for a living.

CHRIS BLOOMSTRAN: You know, we’re not manic traders, 15% annual turnover. Five
or six of that is generally bringing new companies into the portfolio and
eliminating companies. But there’s trading within the portfolio. We’re all sell
things that are dear buy, things that are cheaper trying to keep the overall
valuation of the portfolio cheap.

CHRIS BLOOMSTRAN: I think if, if we’re gonna have that period and the end game
there is to shrink leverage, absolute systemic leverage, you don’t want to be
in cash, I don’t think because we’re not gonna get rates up to the inflation
rate. We can’t because debt levels are far higher than where they were again
throughout the sixties and seventies.

CHRIS BLOOMSTRAN: I think businesses wind up being a pretty good store of
value. And if you get the extremes of deflation slash depression or
hyperinflation, nobody wins in any of those environments. You know, if you’ve
been in Venezuela, Argentina this year, your stock market’s there up 100 150%.
Turkey’s market is way up, stocks go up during hyper inflation, but you lose
more than up to the decline in the purchasing power of your currency.

SPEAKER 2: I mean, you’re, you’re painting quite a bleak picture. I mean, i
it’s not a picture I disagree with at all. I mean, I, I think, you know, a
period in which we’ve got much more volatile markets in which we’ve got some
margin compression.

SPEAKER 2: I mean, it was interesting, you were saying that the move from 9% to
13% in the 2010 to 2020 2020 11 to 2021 know it being 3% from interest rates,
1% from corporate taxes or both of those are going to reverse and margins,
operating margins are already pretty high and will be eroded by inflation.

SPEAKER 2: So, compression in the multiple, what this means however, is that
we’re probably the last thing you want to do is be an index fund because you’ve
got to be that.

SPEAKER 2: And it’s, it’s, I find people look at me incredulously when I say,
well, you know, I’m a believer in kind of decayed Long cycles. So you get to
the end of a decay and you should probably do something different the next
decade from what you did in the previous decade.

SPEAKER 2: I mean, that’s kind of been, that’s kind of worked. And so ordering
the Fangs was good in the 2010 is unlikely to be good in the 20 twenties. Being
a passive investor was good in the 20 tens. Only reasonable in the 2000. Not
brilliant, but it being passive, I think it’s going to be a disaster. Is that reasonable?

CHRIS BLOOMSTRAN: Well, I think when you racket your time series and you’re a
passive investor, when margins and multiples are both high, you’re destined for
a mediocre, more likely a very poor experience, you’re gonna lose money. You
bought, if you were an index investor in the end of 99 you lost money for a
decade and you had periods during that decade where you were down 50% and then
down 65%.

CHRIS BLOOMSTRAN: Assuming you stayed in, assuming you stayed in. Yeah, I mean,
you stayed in you know, if you were a passive investor and came into the market
in oh eight oh nine at the lows, you had a delightful experience. I, you,
you’re still in an overvalued market by historical yardsticks, inflation is
higher than it’s been. I’m not sure.

CHRIS BLOOMSTRAN: I, I, I believed until more recently that I thought the
endgame here was probably deflation, an absolute decline in the price
level.

CHRIS BLOOMSTRAN: I don’t think we appoint central bankers and we elect people
that will tolerate that. I think they’ll lose it on the inflationary
side.

SPEAKER 2: Well, I think inflation is here and it’s here to say, isn’t it? I
mean, you know, in the UK, we’ve got strikes. No, I mean, there are so many
parallels with the 19 seventies.

SPEAKER 2: Here, I mean, I know the situation is slightly different in the
United States but I, I don’t believe it’s radically different and, you know, I,
I think we’ve got inflation is out there is, is escaped and I don’t think it’s
possible to rein it back in and yeah, I mean, I, I know you could liken some of
the recent excesses to Japan in 1989.

SPEAKER 2: But I’m not sure that we’ve got a Japanese like situation. I think
we’re much more.

SPEAKER 2: But we’ll see. I mean, the interesting thing is of course that none
of us know because we can’t really look back at history and say, oh, it’s like
in the 19 seventies, but as you say, in the 19 seventies, you didn’t have debt
to GDP being so high.

SPEAKER 2: So, I mean, you know, if Paul Walker was appointed tomorrow or is
equivalent, he couldn’t put interest rates up to 15 or 20% because you, you
know, the government couldn’t afford it. I mean, you know, it’s just an
impossibility.

SPEAKER 2: So we’ve got I mean, it’s, it’s interesting, fascinating. Listen. I
mean, it’s been so wonderful of you to give up your time and been fascinating
to talk to you. I did tell you but forgot to remind you before we came on that
I usually finish by asking people to recommend a book or books. Have you got a
book that you would recommend?

CHRIS BLOOMSTRAN: I, I pulled a book off the shelf that I think any young
investor or investors that don’t live in the financial statement should read
and it would be one called the Smart Money Method.

SPEAKER 2: Oh, no, you’re not allowed to do this. No, you’re not allowed to
do.

SPEAKER 2: I really, I’m really impressed that you’ve got my book. Did I send
it to you?

CHRIS BLOOMSTRAN: No, I bought it.

SPEAKER 2: You bought it even better. I look at 1 25 every books up.

CHRIS BLOOMSTRAN: It’s a, it’s a, it’s a wonderful teaching tool. It’s a great
book.

SPEAKER 2: No, but you’re, you’re not allowed to, to recommend my book.

CHRIS BLOOMSTRAN: Well, I did, I just did. You can edit this out if you like
and, and cut it, but then I’ll tweet about it and so you really can’t get rid
of that.

CHRIS BLOOMSTRAN: Two books I recommend America’s Great Depression by Murray
Rothbard all the time. Given the period we’re in, given the leverage that we
have. You got to know about the Depression and you need to know about central
banking and, and the Austrians and the Mises Institute in Auburn Alabama have a
wonderful archive of literature, a wonderful archive of books.

CHRIS BLOOMSTRAN: This is, this is the must read because you have to have a
sense of the macro framework today, given debt levels and given what’s going
on.

CHRIS BLOOMSTRAN: And you need to know that this conventional wisdom where Ben
Bernanke was just given a Nobel Prize because he studied the Great
Depression.

CHRIS BLOOMSTRAN: He, he didn’t study that version of the Great Depression, I
can tell you.

CHRIS BLOOMSTRAN: So the, the I think that’s a must street. And then the other
one, you know, I’m asked all the time about investing abroad and famous
investors that I admire have been in things like Alibaba. And I’ve always said,
look, I’m not going to places where I don’t have the rule of law and I don’t
trust the political infrastructure.

CHRIS BLOOMSTRAN: And so for that, I would never ever, ever directly invest a
dollar in a company headquartered in Russia or in China. I don’t directly
invest in emerging markets. I’d rather get my emerging market growth with
companies that are building plants. Heineken, for example, a lot of capital
spending in, in emerging markets, building plants at 20 points on capital, plenty
of growth that way.

CHRIS BLOOMSTRAN: But instead of me having to explain it in my aversion to
finding myself in inhospitable places. I mean, we have Ken Ross gold in the
portfolio and they had about 12% of the reserves in Russia. They lost them this
year. They sold them in a fire sale. You ought to read this book, Bill
Browder’s Red Notice. It’s been pretty widely talked about, but it was
gripping.

CHRIS BLOOMSTRAN: It’s just, just, just read the book. And if you don’t come
away from that saying, why in the world would you ever invest dime one in a
place like Russia, then you probably ought not be managing other people’s
money. So I’d read that he’s got another one that I haven’t read yet, but it’s
supposed to be just as good.

SPEAKER 2: I, I read his book quite recently and I’ve got his, his latest book
in my reading Pal. I’m going to be reading that to Christmas. It was a
fantastic, a fantastic book. And, yeah, I mean, it’s quite funny because one of
the roles I had at one of the hedge funds, I used to sit next to a former
Russian paratrooper and we used to do quite a lot in Russia.

SPEAKER 2: And I remember having a massive argument with one of the bosses
because he wanted to buy a Russian gold miner. And I said, you know, this
doesn’t make sense because the time that you want to be in gold is exactly the
time that you don’t want to be in Russia.

SPEAKER 2: And there were, we had the, I mean, it was a very amusing argument.
I said, you know, I said, if things go badly wrong and the gold price goes
through the roof, the chances are that owning the gold in Russia won’t be the
best strategy. And it, it seems so obvious to me.

SPEAKER 2: I mean, it wasn’t, I wasn’t, you know, prescient about Putin or
confiscation of assets or, or anything else. But it’s a, it’s certainly, I
mean, it’s a very strange place to invest. So we did it quite a lot there and,
you know, I remember going to a conference in Moscow and it was really quite
scary.

SPEAKER 2: The whole thing was a scary experience coming back to my hotel at,
you know, quite late at night and walking along the street in, you know, the
center of, of school, good area, plenty of bars and, you know, people around
and I got saw by somebody who claimed he was a policeman and wanted to see my
passport and I was within 100 yards of my hotel. But I said to him, no, sure
you can see my passport.

SPEAKER 2: You can come to the hotel and I wouldn’t, you know, I wouldn’t let
him stop me. But, you know, you think you get in the door and he’s got, he’s
evaporated and you just think that’s, you know, that you’re not safe, you know,
that, that brought it home, that brought it home to me. Yeah.

CHRIS BLOOMSTRAN: Russia is a very young ran, I mean, I’m not going to give the
story away but, you know, he ran our British capital and you find yourself and,
you know, the outcome obviously because you know what’s happening in Russia,
but you’d think why in the world are, would you do this in the first
place?

CHRIS BLOOMSTRAN: I mean, obviously it’s risk reward and, you know, I’m, I’d
cotten toward more of the risk management side than the infinite, unlimited
upside of that, that some of these opportunities present. But I was, I, I
wouldn’t be a good cap investor either.

SPEAKER 2: No, I, I, I think you probably would but you, you might not be able
to spend the money quickly enough. I suspect you, you wouldn’t be springing it
around.

CHRIS BLOOMSTRAN: I, I would have a hard time letting it out.

SPEAKER 2: But it’s been so fun talking to you. I can’t wait for you to come to
London. I don’t know when I’m going to be in Saint Louis again. But, hopefully
I, I need to meet before I call where people find you. What should, what should
they know?

CHRIS BLOOMSTRAN: Oh, sorry, I cut you off there. I’m sorry, you had threatened
to come to the Berkshire meeting what you really need to do.

SPEAKER 2: Yeah. I, I probably should come next year.

SPEAKER 2: I don’t know why I’ve never made it there and it’s a big gap in my
education and one of those things that you should always have on your, on your
list and it sounds like a great fun weekend.

SPEAKER 2: So you’ll probably, I will probably see you there and I will buy you
a drink if you can find one that’s £1.25 to pay you back for the book. But, no,
I really look forward to meeting up in person, but just before we finish,
you’re on Twitter.

CHRIS BLOOMSTRAN: I am regrettably on Twitter, I think.

CHRIS BLOOMSTRAN: It’s good fun. I’m having fun with Twitter, but I am at, I
think I’m at Chris Blooms. Stream on Twitter pretty straightforward. The
website is the firm name Semper Augustus dot com. I’m on, I’m on, on Instagram.
I’m on, and I’m not on Facebook.

CHRIS BLOOMSTRAN: I have a Facebook account but I don’t look at it, I don’t
even look at it. It was hacked and I can’t even forgot how to turn it off. It’s
been three years since I was hacked. And so I don’t even, I, I never hit the
link to log it in.

CHRIS BLOOMSTRAN: I’m on, linkedin, but I don’t use the linkedin. So I get, you
get three or four people every day that want to have you that join your
network. But I’ve never used it as a platform.

SPEAKER 2: So really find me on the, the place that people can find you.

SPEAKER 2: Yeah. Yeah, cool. Well, thank you so much.

CHRIS BLOOMSTRAN: Thanks, Steve. This has been great. It’s been a lot of
fun.

STEPHEN CLAPHAM: Claire Barret runs a podcast for the Financial Times with I
think over 100,000 listeners and she told me my podcasts were good but too
Long, especially for a commuter. So I’ve been trying to keep them shorter, but
I could have carried on talking to Chris for another hour quite easily.

STEPHEN CLAPHAM: Although I do like to respect my guests time, I would
encourage listeners to read his Semper Augustus letter which I shall link in
the show notes and I 100% endorse Chris’s comments about the importance of
studying the financial statements.

STEPHEN CLAPHAM: It was funny how he talked about understanding their
accounting policies, especially for those for revenue recognition because
that’s also what I talk about.

STEPHEN CLAPHAM: It’s remarkable in fact how similar our approaches are and for
those of you who want to improve your skills in this area, I’m doing a cohort
based forensic accounting course based on the one I do for institutional
investors. Just a bit simpler. You can find out more on the website or by
emailing info at behind the balance sheet dot com.

STEPHEN CLAPHAM: This podcast is aimed at serious and aspiring equity
investors. I hope you enjoyed it. And if so please leave us a review on Apple
podcasts and please check out our other great content on the website behind the
balance sheet dot com.

STEPHEN CLAPHAM: There, I mentioned the free sub stack. Thanks for listening
and the podcast is now also available on Amazon music.


HOW STEVE KNOWS THE GUESTS

Steve and Chris were introduced by Joe Koster and they had a fantastic conversation one Saturday afternoon/morning, before Steve started the podcast and Chris was therefore a natural guest to invite.


Chapters

 00:01 – Investing Demystified: Inform, Educate, Entertain

08:31 – Lessons from the Great Depression

16:16 – Spotting Market Inefficiencies

29:05 – Analyzing Berkshire Hathaway and Value

45:25 – Market Cycles and Inflation

01:02:42 – Investing in Russia: Risks and Rewards

 

 Transcript

STEPHEN CLAPHAM: Hi, welcome to the Behind the balance Sheet
podcast where we meet leading investors and commentators and educate ourselves
about the world of investing and the world.

STEPHEN CLAPHAM: Our mission is to remove some of the mystique around investing
and improve our understanding of what makes a successful investment or indeed
an unsuccessful one. Our goal is to inform, educate and entertain.

DISCLAIMER: We hope you enjoy this and every episode behind the balance sheet
and affiliates and podcast guests may own shares or have an economic interest
in securities discussed in this podcast which is aired for your education and
entertainment. Only nothing in this podcast should be construed as investment
advice or relied upon for investment decisions, always do your own
research.

Advert: This podcast is sponsored by Stream by Alphasense.

 

STEPHEN CLAPHAM: I’m still getting used to the platform, but so
far I’m impressed with how easy it is to use. Before stream, when I was at the
hedge funds, tapping into expert perspectives was time consuming and costly.
Identifying experts, coordinating schedules, preparing questions, running the
interview and transcribing notes. All this could take hours by not even being
sure of the quality I would receive with stream. There’s a library of over
20,000 expert calls and transcripts. No time spent organizing immediate and
unlimited access, no hassle for institutional analysts. This is a game
changer.
 

I like it because first the platform intuitively understands what
I’m looking for. Stocks are tagged so you can get qualitative insights
directly, not just from company executives and competitors, but also from
suppliers and customers. Second, the calls so far have been high quality
qualified experts and good questions from real analysts. Third, its library is
growing quickly with dozens of new transcripts added every day.

I was surprised that the selections for the first stock I picked, which is just
a midcap stream by office end. Looks like a great addition to any analytical
toolkit visit stream R G dot com forward slash BT BS. For more details, this
podcast is intended to educate and entertain, but we also have a more serious
purpose.
 

Introduction

 STEPHEN CLAPHAM: Chris Bloomstran is best known for his incredibly detailed analysis of Berkshire Hathaway.


STEPHEN CLAPHAM: He’s not only an outstanding value investor, he’s a highly accomplished analyst, his Semper Augustus annual letter runs over 100 pages and in the last few years has included that evaluation of Berkshire.

STEPHEN CLAPHAM: His analysis of that stock is the best I’ve read.

STEPHEN CLAPHAM: In this interview, we discuss his start in the business. His investment approach, why college investment funds make a great apprenticeship for youngsters looking to become analysts. Why he writes such a detailed letter and a discussion and analysis of the Long term outlook for markets.

STEPHEN CLAPHAM: Chris has a simple and straightforward Long term value based approach to investing and he’s just full of wisdom.

STEPHEN CLAPHAM: I really enjoyed our conversation and you will too.

STEPHEN CLAPHAM: Well, Chris, welcome. Thank you so much for coming on the podcast. I’ve been looking forward to this for ages.

CHRIS BLOOMSTRAN: Yeah, Steve, this is terrific. I love the podcast. I love a lot of the work that you’re doing. So it’s a, it’s a thrill to be here.

STEPHEN CLAPHAM: Well, listen, did you always want to be an investor? I mean, I believe your first investment in the Norwegian tanker company was a zero. Why did that not put you off? So why did you want to be an investor? And why did you not get put off?

CHRIS BLOOMSTRAN: Well, lighting all your money on fire, hard earned summer job money, some scholarship money that was left over.

CHRIS BLOOMSTRAN: It’s fairly off putting discouraging and I suppose it’s like sports or falling off a horse when you get knocked off, either you get
back on and go again. Injuries in sports, you know, you kind of fight through them, so, I suppose. Oh, geez. Either this is a really bad hobby and you need to find something that you don’t lose all your money at every time you do it, or you need to figure out what happened. And I thought I knew what I was doing. I was in college and I’d moved from the engineering school to the business school. I fancied the stock market always kind of followed stock prices in the
tables.

CHRIS BLOOMSTRAN: And at that point, I’d kind of fallen in love with it. I hadn’t invested real money yet. That was the zero but was reading all the books and he got into candlestick charting and technical analysis and Bill o’s can slim method, which I think is still a thing with investor bus, investor’s business
daily.

CHRIS BLOOMSTRAN: It’s moment a momentum based strategy and what, what I hadn’t gotten around to was actually reading financial statements, which, you know, I think had I done that and learned how to do that before investing dime one, probably the outcome would have been different. And I wouldn’t have bought the very large crude carrier company in Norway that went to 0 six months after buying it. But I literally then had to write a note.

CHRIS BLOOMSTRAN: I got the headquarters of the firm in Norway wrote over to get the annual reports which I’m sure they thought was interesting
because they had failed. And a couple of weeks later, three weeks later, whatever it was, the financials arrived, I asked for three years and read
through them and, you know, really was still an uninitiated at how to really read and interpret financial statements.

CHRIS BLOOMSTRAN: But, you know, it didn’t take a lot of wizardry to know that, that there was so much leverage and the capital structure was so poor, the assets were so poor that this self liquidating structure where they were going to operate these vessels for a period of time and then scrap them and
distribute all of the proceeds or whatever was left over and nobody was going to get rich, really wouldn’t have worked and it was all from there.

CHRIS BLOOMSTRAN: And so I, you know, learned at an early age, you better pay attention to the financials and, you know, very quickly just immersed myself in reading as many and reports and Ks and Q’s as I could and that has become a repetitive process for life. And I’ve turned over an awful lot of rocks between here and there and learned a in what was retrospect, a very valuable lesson.

CHRIS BLOOMSTRAN: I mean, you know, you don’t want to lose everything, but I think it was pretty grounding. The thing I wish I had done was in addition to ordering and reading the financials, I wish I had gotten the stock certificate and framed it and hung it on the wall as a, as a reminder.

CHRIS BLOOMSTRAN: In any event that’s ship has sailed. 

SPEAKER 2: I’m sure on that one … I bet you somebody will send you a copy of that …share certificate so you can frame it and have it as a reminder, but
turns out you don’t need much reminder. Now, look, you started your own firm before you were 30 years old. What gave you the confidence to do that? I mean, that’s a big bold move.

CHRIS BLOOMSTRAN: Well, opportunity knocked and came along. I was managing money for bank trust company and had been delegated. An awful lot of
responsibility was running a mutual fund. At that point, Kansas City based bank.

CHRIS BLOOMSTRAN: I was operating the Saint Louis and the Denver investment offices for them and wound up and you, you, you can read my letter. I know you’ve written Miller this year. I told the story about our anchor client and how we were introduced and took over his family’s portfolio.

CHRIS BLOOMSTRAN: He, he would not, he wanted me to manage his money and his family’s assets. He was in his mid nineties and but didn’t want to do it at a bank. He had been chief investment officer of a bank trust company, Big Bank here in Saint Louis during his career was the chairman of the board for a bunch of years at this point.

CHRIS BLOOMSTRAN: Long retired but, really did not want to have banks controlling the majority of his capital. There were some irrevocable trusts
where the banks were involved and I think off putting things like having to indemnify the bank when you’re managing your own account for concentrated
positions, things like that.

SPEAKER 2: He must have seen something in you. You’re only 29 years old. I mean, what was it that made him trust you? Is that, I mean, it’s a big step,
but especially when you’re, you’ve made all that money and, and lived through those cycles. And what was it that you, that you sparked in him? What was it you, you saw?

CHRIS BLOOMSTRAN: Well, we had two things. I think, I don’t think I’ve ever been quite asked that question.

CHRIS BLOOMSTRAN: We had a common belief that we were in a stock market bubble where this gentleman born in 19 oh three, got into the family brokerage business after Princeton and liquidated his entire family stock portfolio and any clients that would follow a 25 year old kid to the sidelines.

CHRIS BLOOMSTRAN: It was a year and a half early. The market nearly doubled over the next 18 months and then ultimately peaked in the fall of 1929 and the 89% drop in the dow and the Great Depression and the rest is history. Let those lows. He bought things like G E for less than the cash in the business.

CHRIS BLOOMSTRAN: I mean, genuine Ben Graham Net Nets before Ben Graham wrote about him in security analysis. The 1934 original edition, I mean, Mr Smith Bob was my, my client was, was acting on the bear market capital and not writing about it was a very accomplished investor.

CHRIS BLOOMSTRAN: We, we spent several months getting to know each other before we pulled the trigger and, and chad my business partner and I hung the shingle.

CHRIS BLOOMSTRAN: We’d always wanted to run a money management firm together. Hadn’t anticipated doing it just shy of my 30th birthday. But in getting to know him, I had some, I had quite a bit of fluency in really most of the things that he owned because I had spent time with General Electric and had concluded by that point.

CHRIS BLOOMSTRAN: I mean, this is the end of the Jack Welch era had concluded that the culture of G E was rotten. Two thirds of the business was now finance, consumer finance, business, finance. They had the reinsurance operations and the financials have become so complicated, the culture of making the corner by a penny. It is not suitable for the insurance world in
particular.

CHRIS BLOOMSTRAN: And so, you know, really thought that GE had problems, the leverage in the business, the off balance sheet, special purpose vehicle
liabilities were extraordinary. So, you know, one by one, we kind of spent time in the portfolio and concluded that the most of these companies were really no longer objectively earning their cost of capital. You were late nineties. 


CHRIS BLOOMSTRAN: So prices were sky high. And you know, I grew up having lost all my money on trade one. But in a culture of a value investing oriented trust investment company, you know, I was a price to earnings price to sales price to cash flow dividend yield investor at that point. And it was pretty easy to spot overvaluation throughout many of these blue chips.

CHRIS BLOOMSTRAN: So you overlay a lot of them no longer being great companies with very high prices and they give us the opportunity to then donate a lot of these to a family foundation and some accounts which essentially pay a portion of assets, call it income to the donors for life and then the assets are left to charity.

CHRIS BLOOMSTRAN: We’re able to clean all that up and liquidate a very substantial portion of the portfolio over the course of a year and a half or so
and flip the proceeds into the those those securities that were had gone begging the buy the market bifurcation was extraordinary. At the peak of the
tech bubble.

CHRIS BLOOMSTRAN: You had the very expensive blue chips really got expensive. In 98. Around the time we started the farm late 98 middle 98. That’s when Berkshire bought Jen re using Berkshire shares as currency in that deal. Pepsi traded at 50 times.

CHRIS BLOOMSTRAN: So all these blue chips were so expensive and then that kind of morphed to the tech bubble where, you know, not only your internet T M T companies but legit businesses that I think the world forgets how, how many real businesses traded it at 10 and 20 times sales, tech companies, Microsoft trading at a 620 billion cap on 20 billion of revenues. They were immensely profitable, 38% profit margin.

CHRIS BLOOMSTRAN: So we sold all that stuff, sold 90% of the G E. He had said, well, he, he loved talking about benign neglect. And that essentially I think
is a pretty valuable, was a valuable lesson for me to observe what, how the the family’s portfolio and how it had evolved from the 19 thirties.

CHRIS BLOOMSTRAN: Essentially, it’s the buy the stock, put the security, the certificate in the drawer and forget about it for a lifetime and you’re gonna
wind up with some real winners, but you’re going to avoid all the frictional costs of trading. You’re gonna avoid all the taxes, you’re gonna avoid all the
temptations of thinking you’re too smart and out smarting yourself.

CHRIS BLOOMSTRAN: And sure enough, quite a few of the things that he had picked up as a very good investor over the years were, you know, the proverbial 10 and 50 and 100 baggers. I mean, the basis on, on the G E position which was half the capital was in the pennies per share. The dividend was larger than the cost basis on the security.

CHRIS BLOOMSTRAN: And so, but his philosophy of benign neglect, he said, look, G E has been the best performing position that I’ve had for a lifetime. It’s
treated the family very well, but I wholly endorse what you’re saying. He says, why don’t we sell, I’ll let you sell 90% of it.

CHRIS BLOOMSTRAN: So with that 90% that G E is down 80% from where we sold it. They’ve done a one for seven reverse stock split since and we’ve made about 11% on our equity investments over the 24 a half now, 25 24 I guess, 24 year history of the firm.

CHRIS BLOOMSTRAN: So, you know, we turned a million dollars into 11 kind of, you know, before fees and cash. But that million in G E is $200,000. So the
delta there is quite a bit. 


STEPHEN CLAPHAM: It must have been quite brave. He must have been quite brave guy to sell a stock that had done him that well. And you must have been very persuasive to because I mean G E was one of the five most successful companies in that Henrik Bessembinder study. If I remember it correctly, five companies accounted for 10% of the wealth created in the United States stock market. $35 trillion between 1926 and 2016. And then it was Exxon Apple, GE, IBM I have forgotten what the fifth one was, but, he must have been quite brave to do that, having done nothing for 60 years. But it was just your, the persuasiveness of your analysis.

CHRIS BLOOMSTRAN: That was, and I think, you know, he, he was a student of what you’d now call behavioral economics, but that’s really just common sense and watching how people behave. And, you know, Jack spent an awful lot of time with the street.

CHRIS BLOOMSTRAN: The world knew that, you could see G E when they had to make the quarter taking gains on assets to massage the income number and, and it was just all the abusive things that even in your late twenties, you’d seen other firms do and, you know, I’d already gravitated toward quality management and the, the culture just seemed rotten and it was a pretty easy call with the 
leverage on top of it.


CHRIS BLOOMSTRAN: The finance businesses which, you know, they’re vapor. I mean, you know, when you have banking and, and finance type leasing companies, your liability side, the right side of the balance sheet is crystal clear, very noble.

CHRIS BLOOMSTRAN: The asset side is nebulous. And when you layer in too much leverage and off balance sheet, leverage and you hide that leverage and to fight it, you’ve really got to spend a lot of time in the footnotes and I lived in the footnotes, I still live in the footnotes. I tell students and young
investors all the time, you know, get off of the books and all of the podcasts except for yours and the handful that I’m on, of course.

CHRIS BLOOMSTRAN: But turn over rocks. I mean, you know, build up your, your arsenal of companies that, you know, well, but read every footnote, read, read the business description, read the accounting changes. You read how revenue recognition works in those footnotes and a lot of it’s repetitive and a lot of it’s boiler plate.

CHRIS BLOOMSTRAN: But when things change and you get a new accounting pronouncement, that’s when the light kind of goes on. And you say, oh, well,
this business is gonna treat this accounting convention differently than that business and you wouldn’t know that other than, you know, immersing yourself
and, and taking the time. And so, and, and I’m a slow reader. 


CHRIS BLOOMSTRAN: I’m handicapped by being a very slow reader. So, you know, I couldn’t get through as many businesses as I probably would have liked. But for reading slowly, I think I absorbed an awful lot and still absorb an awful lot when I work on a project and tend to retain a lot of information, weird numbers that, that just kind of have, have been embossed on the brain.

CHRIS BLOOMSTRAN: But it’s, it’s the, it’s the going slow and really paying attention to what you’re working on. I’ve never been in a hurry to get anything
off my desk if it mattered. 

CHRIS BLOOMSTRAN: And, you know, we live in this world of immediacy now where even I find myself distracted by the phone because I’ve got a computer on the phone and I’ve got screens in front of me with data and, and, and, and I, I’ve got, you know, I’ve gotten so accustomed to looking at this ridiculous little Apple phone that I find myself on the Bloomberg app on the phone and not on the Bloomberg, which is insanity because I’m looking at a, looking at a little box.

STEPHEN CLAPHAM : But this point about looking at the footnotes, I mean, I find it quite extraordinary. So I’ve got an exercise, you know, I do this forensic
accounting course for institutional investors. And I have a, a revenue recognition note that I put up on the screen and I say to people look at that last paragraph and tell me what it means and, you know, people scratch their heads and they are really and I’m thinking, and some of these people own this stock. This is, that’s the thing that I find most perturbing.

STEPHEN CLAPHAM: So I did one particular course, the reason I came to the stock was that I do the course in two halfs. So I do the first half is about the theory about how people cheat and how people massage earnings. And the second half is about how you spot all this. And in between, I, I leave a week in between because that helps retention. And it also gives people a week to think about what they, what that I’ve been talking about. And often I come in the following, they’ll say, oh, I was looking at this stock and I found this thing. What do you think? And so sure enough, I got asked to look at this particular company because one of the big bulge bracket banks had put out a note saying its R and D policy was suspect.

And so I come back the following week and I go to put the R and D policy out, I get the wrong page and I turn to the, the revenue recognition not
I say, oh, well, let’s look at this and there were three analysts in this room, all of whom worked on funds that own the stock and not one of them had read the revenue recognition policy. And why is it that people believe you can just take shortcuts? I mean, when we were learning, you know, it was drummed into me. This is, you know, you need to understand how the company recognizes revenue. Why do people not pay attention to that? Is it just because it hasn’t mattered?

CHRIS BLOOMSTRAN: Yeah, when you’re, when you’re young and, and you’re, you’ve immersed yourself and you uncover those kinds of things or you find a business that changes elongates the depreciation schedule of a fixed asset to a now much longer period of time than industry convention.

CHRIS BLOOMSTRAN: And you go to the analyst that you work with that covers the stock to talk about it and they have no idea what you’re talking about.

CHRIS BLOOMSTRAN: It’s then when you realize that everything you were taught in school about efficient markets is insane because if the world knows all
information immediately and acts rationally on it, it was pretty apparent that very few people even read the annual report beyond the CEO S letter or the
chairman’s letter. And how the world can you have efficiency in the market if nobody knows what the hell is going on? So, yeah.

STEPHEN CLAPHAM: Well, I suppose the problem then is it like the David Einhorn issue that, yeah, I’m doing all this work but there’s nobody, there’s nobody to take it. You know, I’ll buy, I’ve done the work. I’ve realized the stop cheap. I’ve bought the stock, but there’s nobody else looking at it. I mean, do you think he’s right about that?

CHRIS BLOOMSTRAN: No, that’s absurd. I, I have a lot of respect for David, but this notion that value investing is dead, you know, price is the great arbiter,
assets that are cheap, don’t stay cheap because those that do appreciate what something is worth aren’t gonna let it stay cheap for Long.

CHRIS BLOOMSTRAN: If businesses get too undervalued, you see them taken private by the board of directors and the management or you see acquisitions, the notion that value loses during the latter stages of a bull market.

CHRIS BLOOMSTRAN: I mean, we’ve seen just insanity and speculation beyond what we saw in the late 19 nineties between profitless businesses trading at 10 and 20 and 30 times revenues between the spat craze even where in a world where we’ve had too much leverage, which has pushed against economic growth.

CHRIS BLOOMSTRAN: We have very little growth in real GDP per capita now. And that’s been the case since 2000, since the tech bubble. And so the places where you have organic growth, the market got that right.

CHRIS BLOOMSTRAN: And valuations accreted accordingly but only, but then to the point where you were over paying and you took the 100 best businesses in the world, most of them in the United States, a lot of them were in the United States and they traded at silly prices here in the last couple of three years.

CHRIS BLOOMSTRAN: You know, even in my portfolio, Costco traded at 50 times earnings, wonderful business. One of the best businesses on the planet, it’s
not worth 50 times earnings and you can go through the roster of blue chips, not just tech, not just the big five, what I call the Fab five, not, it’s not,
not just those, but you had an awful lot of overvaluation similar to, I guess what would have been the nifty 50 in 1972.

CHRIS BLOOMSTRAN: And so if you’re a value guy, you, you’re a value investor and you know, you’re clipping along making 10 11 12 13%.

CHRIS BLOOMSTRAN: But the S And P for the 10 years ended 2021 did 16.6% or the fab five compounded for a decade at 29.8%. Well, were you an idiot? And, you know, were you part of this value world that’s dying and dead because you didn’t keep up with that.

CHRIS BLOOMSTRAN: Well, you know, if you’ve got a process like we do that, we think we understand what we ought to make per year because it’s, it’s a
derivative of what the underlying economics of the companies that we own are and we’re earning those returns, we’re in good shape. Then you get to the
extremes where all of a sudden the world wakes up and realizes, oh jeez price does matter.

CHRIS BLOOMSTRAN: And I guess that that’s when value is always back in vogue, maybe we’re there. I mean, you’ve still got the market down a bunch this year.  We’ve got energy in the portfolio. So, you know, we were, I was in Zurich speaking at a conference, John Moloch’s M O I Global in June.

CHRIS BLOOMSTRAN: And one of the, one of the folks in the audience asked me during my presentation, how are you doing for the year? What are your return? So I said, well, I’m gonna, it’s gonna be the kiss of death here because I’m gonna tell you that we’re up about 10 market’s down a bunch. And sure enough that was, that was our peak. For that period, we were up a little more in April. Berkshire was way up for the year.

CHRIS BLOOMSTRAN: A lot of the stuff that we own.

CHRIS BLOOMSTRAN: And so in literally, in eight days, not eight trading days, but eight days, we went from up 10 to down three, we ended June down six and change. We were down 11 at September. And here we are today up 4% or so for the year.

CHRIS BLOOMSTRAN: And I mean, is that, I mean, it’s so it’s, it’s some trading, picking up some things this year that have advanced since we’ve bought them. But it is, it, is it the reversion of value? Because now you’ve got the most speculative corners of the market that have been obliterated.

CHRIS BLOOMSTRAN: The specs have been obliterated. The 20 multiple, the sales have been obliterated but even the excessive valuations of your Long duration assets, these great blue chips and then certainly these big techs have been hammered down for myriad reasons. Certainly, the rising interest rates are going to push on multiples.

CHRIS BLOOMSTRAN: Inflation is very much pushing on margins. I mean, you’ve got the S And P which had earnings of 208 bucks a year and 21 Wall Street was looking for 2 40 or 2 50. They’re always ebullient with the exception of recessions and there’s always a fade of whatever the aggregate of earnings
expectations are for the year. 

CHRIS BLOOMSTRAN: They always taper off over the course of the year unless they’re, unless they’re depressed, unless you’re sitting there in 2008 and
earnings are nothing and then they, then they under miss, but during a normal market, they always miss high.

CHRIS BLOOMSTRAN: So, but now you’re back to less than two oh eight. So you’ve got, you’ve got an absolute decline in profits, but you’ve got topline sales
growing at eight. So that’s very real margin compression there. And so, no, I think if you look at your value in, into season and I don’t look at indices at
all, but I presume they’re better than the aggregates. 

CHRIS BLOOMSTRAN: I’m quite certain they’d be better than the NASDAQ 100 the NASDAQ probably the S AND P 500. I mean, I do know that the, the S And P 100 is faring far worse than the S AND P 500. So much of this is going to go to value.

CHRIS BLOOMSTRAN: But no, you can’t suspend value. I mean, you know, these, these businesses that we all have a chance to own trade every day at a price and this goes to Graham’s Mr Market. I mean, you’ve, you’ve had a lot of irrationality and the market has been a little O CD here in the last few years,
a little manic.

CHRIS BLOOMSTRAN: And, you know, now you’ve got a little depression setting in and, you know, if price matters to you and business quality matters to you, then that’s the, I guess what will be the, the rise of value. But no, it’s silly to think that that value is, is gone in a dinosaur and dead forever.

STEPHEN CLAPHAM: That’s just, yeah, I’m not I mean, I’m not sure that he thinks that, I mean, I think he thinks that, you know, in the old days he could be a ba ahead of the pack and there would be enough people doing what he did that would spot the things that he’d spotted and, and, and come in and buy them from them. And now he’s relying on private equity bid or them buying shares back because this is not the same attention. There’s not as many people like you as there used to be. And so, and I guess there’s an element of truth in that.

STEPHEN CLAPHAM: If you enjoy this podcast, you’re bound to enjoy our free newsletter on substack. It’s a weekly email on interesting investing topics,
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serious amateurs, email us at info at behind the balance sheet dot com. 

SPEAKER 2: Let’s turn to your letter because you write this amazing 100 page letter.
I mean, why do you do this? It is like so much work and it is so brilliantly
written. It must take you forever. I mean, is it just a labor of love? Is it
giving you some benefits?

SPEAKER 2: Well, why, what was the motivation?

CHRIS BLOOMSTRAN: Well, it is a labor of love. You know, I, I very much want
our clients those that are willing to take the time with the letter each year
to really know how we think and how we look at the world and valuation and the
businesses that we own.

CHRIS BLOOMSTRAN: The letter was never public We had at the outset of the firm
as any good value investor would, when the market declined a bunch in 2000 oh
two, we made a lot of money and, and all that was in the first two years of
that three year decline.

CHRIS BLOOMSTRAN: I mean, the market was up was down nine or so in 2000 and we
were up north of 20 and then the next year, the market was down 11 or 12 and we
were up north at 20 and then we fell in line with the market in 2002, but very
similar to what a lot of value investors would have experienced in oh
eight.

CHRIS BLOOMSTRAN: We were down half of the decline in the market actually beat
the market in oh nine despite having lost half on the decline. And by the end
of 11, you know, I had this in my letter last year, kind of this notion that,
you know how you perceive value and how you perceive performance. So we were up
our stocks now.

CHRIS BLOOMSTRAN: Just, just our stocks again, no cash and no fees. We’ve got
different cash levels across all of our client portfolios, foundations that
spend 5% a year making grants to charity are always gonna have some cash laying
around. You know, because you got 15% going out the door every 24 months.
Right.

CHRIS BLOOMSTRAN: But just, just the stocks had averaged about 11 from inception,
through the end of 2011, the S And P at that point because you, you had two
Bear markets and you were recovered from the oh eight oh nine lows, but the S
And P had averaged something like one. And so we’re 10 points out of the market
and, you know, if a tree falls in the forest, right? We weren’t any consultant
databases.

CHRIS BLOOMSTRAN: The letter was not public. We, we had not created our GPS
composites at that point because we never thought institutions would ever want
to hire an investor. That doesn’t he to certain market cap sizes or certain
geographies. We’ve always had global investments. We’ve always had small, mid,
large cap, not by design. We’re simply trying to find great businesses at great
prices.

CHRIS BLOOMSTRAN: But then we had four years in a row where and I and I had
written Long letters. If you go back on our website, we have, I’ve, I’ve got a,
you know, a Long letter that would have been 30 40 pages because that’s all I
had to say.

CHRIS BLOOMSTRAN: And it was important to convey what I was saying in the, the
four year period following 11, 12, 13, 14, during the first three of those four
years, we averaged our stocks averaged about 10, which was no good. Of course,
because the S And P averaged 22% I think it was.

CHRIS BLOOMSTRAN: And then in 2000 and so, you know, some of the, some of the
clients were even those that were so far ahead. Start to finish. We’re starting
to wonder if maybe we were losing it a little bit because, you know, everybody
else was getting richer faster. Well, 2015, that was no fun from a client hand
holding standpoint because we were down 10 or 11, Berkshire.

CHRIS BLOOMSTRAN: Our largest holding was down 12.5% and the Fangs led the
market up 1.5% or 1.4%. So then, you know, really we had, you know, far more of
the natives were restless and, you know, we’re not, now we’re working phones or
the, you know, the phones are, I’ve got inbound calls coming and you know what
the hell’s going on? Are you guys losing it?

CHRIS BLOOMSTRAN: I think Warren Buffett’s gotten too old. He’s probably lost
it too. And you know, what are you guys doing with that? Well, the bad answer
is, look, you know, neither Warren Buffett nor Sapa Augustus can control stock
prices. For four years, you know, best to look through to the underlying
business and what we own.

CHRIS BLOOMSTRAN: And have those businesses gotten more valuable over the last
four years, have the new companies that we’ve bought into the portfolio added
value, added intrinsic value to the overall valuation. And frankly, at the end
of 15, the portfolio was really cheap. It was nearly as cheap as it had been in
firm history, but I, I really wanted to write a good letter.

CHRIS BLOOMSTRAN: And with Berkshire being such a large position and in the
crosshairs of so much doubt, I’d always wanted to write up Berkshire all of the
accounting adjustments that I make to derive what I call kind of economic
earning power, the moving parts of the subsidiaries, how we value each of those
on a sum of the parts basis.

CHRIS BLOOMSTRAN: It’s really all the four or five methods that I would use to
value the company I thought was important to share with our clients.

CHRIS BLOOMSTRAN: And so I spent, I don’t know, 40 or 50 pages of my 60 or 70
page letter 2015 letter on the analysis of Berkshire Hathaway and the
accounting treatments and the tax treatments. We sent it to our clients and 30
or 40 of our friends and our very good mutual friend, Joe Coster called me and
said, Chris. He said, you really have to get this letter out to the public. He
said, Joe.

CHRIS BLOOMSTRAN: Joe thought it was in his mind. He said it was the best
Berkshire write up that he’d seen. And he said, if you want to grow
institutionally, you have to get this letter out into the world. And I said,
you know, Joe, we never put our letters out. Seth Carmen’s letters were always
private. They get taken down and Joe cut me off and said, Chris, how much money
are you managing?

CHRIS BLOOMSTRAN: And how much money is Seth managing to which I nodded and
said, that’s a good point. So I said, but look, I mean, nobody wants to read
about taxes and accounting conventions and accelerated depreciation and
amortization of intangibles. It’s just, it’s too deep in the weeds. And he
said, trust me, he says, if you put it on your website, I’ll link it to his
value investing world.

CHRIS BLOOMSTRAN: What was the blog at the time? Terrific. Still a great
compilation of daily reads. If you’re not a subscriber to a value investing
world, you should be. It’s just a Joe Joe. It’s a really nice daily curation
that hits your inbox every day and links to some great stuff that you probably
haven’t read and figured, you know, found yourself or some you would
have.

CHRIS BLOOMSTRAN: But in any of that, so, you know, maybe 100 people are going
to read this thing and well turned out the, the breadth and, and the, the
degree to which it kind of got out was pretty spectacular. Lots and lots of
downloads, lots and lots of reads.

CHRIS BLOOMSTRAN: So without it really never intentionally being a tool to help
the firm, it would wound up being a great tool because what’s, what’s evolved
is those folks that hire us now, whether they’re family offices or institutions
or business owners or public company executives.

CHRIS BLOOMSTRAN: I’m kind of flat. I’m stunned that so many people read the
letter and read it every year and take the time by the time they get to us and
are interested in being clients.

CHRIS BLOOMSTRAN: It’s just, it’s a highly curated, kind of self selective pool
of people that are really smart and having to, you know, be curious about
investing, whether they’re, and I’ve got a lot of folks that are just kind of
clients that are retired investors that are super investors, but they’re in
their seventies and eighties and they don’t turn over the rocks anymore and
they have kind of decided they want to have us at the helm of their capital,
which is terrific and, but really more so I’ve always been so grateful to the
Warren Buffetts of the world and the Ben Grahams of the world.

CHRIS BLOOMSTRAN: You know, these folks that didn’t have to share how they
think and kind of the secret behind how they think about capital. Warren
Buffett didn’t need to write the chairman’s letter to the degree he did every
year and kind of teach the world about various accounting conventions and stock
options and inflation.

CHRIS BLOOMSTRAN: Ben Graham with the books and the teaching, you know, I’ve,
I’m, I’m so blessed to do this because it’s never been a job. You know, it’s
Warren’s tap dancing to work is, you know, my 80 hour a week hobby that has
never felt like a job.

CHRIS BLOOMSTRAN: And, you know, when you get to do it for clients and work
with people that are just extraordinary people that are curious about what
you’re curious about. It makes the conversations that you have with your
clients fun.

CHRIS BLOOMSTRAN: But I spent a lot of time on college campuses. I’ve been a
big advocate of student run funds and have tried to curate some best practices
in that world. And last two letters have done some of that. We had a survey
that a lot of schools responded to and I think there was some utility there.
But I love being on campus.

CHRIS BLOOMSTRAN: I love working with young investors. I love doing what you’re
doing and kind of teaching about accounting and investing and some of the
things that matter. And so for that, I really write the letter with an eye
toward a wide pool of people that read it.

CHRIS BLOOMSTRAN: But I want there to be utility for young investors and
curious young people that want to do this for a living and kind of pass along
some of the things that I’ve learned to the extent I’ve learned anything for
the same reason that I’ve got such a debt of gratitude to those who have done
it before. I’ve done it that it, it really drives it. It makes it a joy to
write the letter frankly.

SPEAKER 2: And the letter is brilliant. Any student listening to this should
read it immediately. I don’t know, I don’t know how easy it is to
download.

SPEAKER 2: But, it’s interesting because we were, before we came, before we
started recording, I was saying that when I started the podcast, I had the idea
of doing a podcast for young people coming into the industry and, or thinking
about coming into the industry and trying to give them, you know, some
understand, better understanding.

SPEAKER 2: And I think we’ve done a bit of that, but it’s funny how many
professional investors listen, I’m sure that a lot of professional investors
are reading your lecture and wishing they could write as well. I mean, it’s
really amazing just on the student investment funds. I mean, I was quite
intrigued about this because I’ve tried to do as much as I can with
universities here a bit in America, but mainly in the UK and in Europe.

SPEAKER 2: And it’s my theory that students in the UK are lazy and students in
the US are committed and keen. It’s very laughing. I, I am being honestly, I am
being all in all seriousness. So students in America are much, much more
committed.

SPEAKER 2: They’re, you know, if you come to university here, then you know,
the pup is a great attraction. Not as much as it was in my day. I mean, it’s
not, people are more serious today but not a patch on the US.

SPEAKER 2: And I was curious about this, the investment funds because I, I, I,
I sponsor a couple of these funds and try and help them educate themselves and
I go and speak but not as much as, not as much as I would like to. But when
you, you were writing this year, you said the fund size can be as large as $60
million which is really huge.

SPEAKER 2: Average is six million million, two million, half the 10 to 30
stocks, 40% 31 to 50 stocks turn over 10 to 30% to two thirds of funds over
50%. But the great thing about this is it allows students to garner real life
experience of managing money, which I think is fantastic.

SPEAKER 2: I mean, have you sort of got any observations or conclusions from
the work that you’ve done? I mean, obviously you would rather employ somebody
who’d already had experience and the pain of losing money. And for real. Is
there, are there any other benefits do you think?

CHRIS BLOOMSTRAN: Well, yeah, but let, let me, let me elaborate on why I
laughed.

CHRIS BLOOMSTRAN: I mean, I was an academic minimalist in school.

CHRIS BLOOMSTRAN: So, so we, we now have an empty nest at the house. The baby.
Our boy is a freshman in college and he happens to be at the school that
currently is the, has the largest student investment fund. And that’s not
really necessarily why he went to that school.

CHRIS BLOOMSTRAN: I think if you were to pull, having been at parents weekend
this fall and having been to the football tailgate and having been in a college
bar for the first time since I was in college, I’m quite confident that if I
pulled the student body at this university, that they would be a lot more
impressed with the fact, not that they have the largest student run fund in the
country, but they, that they had just moved up six spots on barstool sports,
top 25 party schools in the country to number four in the country.

CHRIS BLOOMSTRAN: That was a big deal when we were there in any event. No, I,
I, I’m kidding. Of course.

CHRIS BLOOMSTRAN: I think through these student funds there, there weren’t that
many of them. Back in the seventies, the big 10 schools had on University Of
Dayton, which does have the biggest student run fund.

CHRIS BLOOMSTRAN: Some of these things are extremely well put together. They
involve, you know, sophomores, even late freshmen up to seniors, they’re run by
the students.

CHRIS BLOOMSTRAN: They’re, you know, o overseen by an administrator, either a
professor or an adjunct or an outside volunteer.

CHRIS BLOOMSTRAN: But if you put them together, I, I, if you, if you structure
the thing properly with the right kind of bumper guards. Right. Kind of
diversification requirements. You really create a heck of a teaching tool. And
what I’ve seen is I’m around the country every year and schools asked me to
come talk is, it’s invariably the student run funds that are having me
speak.

CHRIS BLOOMSTRAN: And it’s that group that, I mean, they know what they want to
do. Generally, they want to be investors. They’re highly motivated and they’re,
they’re getting real hands on experience.

CHRIS BLOOMSTRAN: You know, they’re, they’re reading financial statements,
they’re breaking down business valuation, they’re writing up pitches. You’ve
got to work up business that you want to include in the portfolio and you’ve
got to figure out what’s going to come out. And if you structure that properly,
great teaching tools.

CHRIS BLOOMSTRAN: And I can tell you the, the big firms on Wall Street and in
the mutual fund complex and in the insurance world are making beelines to those
schools that have pedigree in terms of longstanding Long run student run funds,
but there are more than 300 schools that now have them.

CHRIS BLOOMSTRAN: And I’ve never met a group that, that were incredibly highly
motivated and eager to learn. And I’m stunned at how much more they know than I
knew coming out of school. I mean, I was doing it all kind of self practice
because we didn’t have classes that taught you how to break down financial
statements.

CHRIS BLOOMSTRAN: You know, when you took your accounting classes, they were
cost accounting or they were very project specific dance classes. Were you
doing DC F S on whether you should build a building or not or, you know, build
a new plant. It had nothing to do with how to value a company and, you know, I
completely agree with you.

SPEAKER 2: I mean, kids now are much, much more, aware and, you know, I’ve,
I’ve been stunned by the quality of some of the research notes. I mean, they
could have, you know, they could come from a bulge bracket bank except that
they’re probably better, you know, the, the kids really pay a lot of attention
to it.

SPEAKER 2: I mean, I’ve seen some amazing ones and, and, you know, not just in
the UK and in Europe, I mean, I’ve sponsored the Finance Society at the
University Of Vienna, which is a huge university and really remarkable, some of
the, some of the students, but 11 of them has just come to, to do a doctorate
in or a master’s at Oxford.

SPEAKER 2: I saw him, he came to the conference with, you know, the so hedge
fund conference they have in New York, they have one in London.

SPEAKER 2: So he came along with me, but then let’s just go back to your letter
and the, and P 500 valuation because you, you look at that very, very closely.
I, I just wonder what’s the purpose of that? I mean, does that help dictate how
much cash you hold in? Klein’s portfolios or is it just a framework? Why so
much time on that?

CHRIS BLOOMSTRAN: Well, the world’s just acutely aware of what the S AND P 500
does to the extent that we own. Component members of the index are not, we
don’t hear to a benchmark, but you can’t not marvel at the big five tech
companies, Apple Microsoft, Amazon, Google and Facebook Meta, whatever they
call themselves these days, it was the, the 10 year run they had was
extraordinary.

CHRIS BLOOMSTRAN: And again, they weren’t alone. You take mastercard Visa, you
know, some of the other great businesses, you know, had like terrific runs over
a period of time where you had a lot of organic growth, topline revenues, not
acquired, not reinvested capital, but genuine growth, but a lot of multiple
expansion margin expansion in some places, not in others.

CHRIS BLOOMSTRAN: But when you’re doing almost 30% a year for a decade at a
point, they consume so much of the stock market. I mean, that group went from
8% of the market a decade ago to almost 25% 24.9% at year end.

CHRIS BLOOMSTRAN: Yeah.

CHRIS BLOOMSTRAN: And you had to be aware of that and the group was trading at
30 to earnings. It drove the overall profits of the index markedly higher. I
mean, you took those five stocks out of the index. The S And P didn’t do 16.6,
it still did 14.3% which was pretty extraordinary. Oh Did you really go?

SPEAKER 2: That surprises me. It’s that high the way you do this I think is
really brilliant. So you break down the total return into the multiple
expansion and ebs growth and the numbers I I really love the way you do it. So
this is, this is the 10 years to end of 2021.

SPEAKER 2: So the S N B total returned in 16.6%. So the multiple expanded from
12 to 23.6. So 6.1% per annum. So we’ve had a bit of a correction in multiples
but not that much. I mean, where do you think that multiple goes over the next
10 years? But in an inflationary environment, we should see contraction in
multiples. No.

CHRIS BLOOMSTRAN: Yeah. So I I’ll have so Jim Grant was really nice to ask me
to speak at his conference back in October. And I updated the work that I had
on the annual letter to account for the decline in the fab five and the decline
in the S AND P 500 to show what a 30% decline in the tech companies and a 20%
decline in the index had done to the Long run picture.

CHRIS BLOOMSTRAN: I didn’t really present the full bear case which would
involve durable inflation perhaps. But you know, all I did was took the
multiple back to its Long run average of 15.5 as one of the cases and I took
the margin back down to various levels. 13 point 3% I think was
unsustainable.

CHRIS BLOOMSTRAN: 3% points of the gain from nine over the last 25 years has
come from increasing corporate debt on the balance sheet, but at increasingly
low interest rates. So the interest burden is not that high and you got three
full percentage points of the 13.3 that came from a lower interest
burden.

CHRIS BLOOMSTRAN: The tax code change in 2017, the T CJ A that took the rate
from 35% to 21% on the US portion of profits, which were about half of profits
that added almost a percent to the margin.

CHRIS BLOOMSTRAN: Yeah, I think to your point if you were to take the and you
know, Warren Buffett turns out was wrong if you go back to, I think it was
1999. He had a speech that he’d given at the Allen gathering in Sun Valley
Idaho that he then turned into an article that he wrote for Fortune
magazine.

CHRIS BLOOMSTRAN: The premise though was really that margins are mean
reverting. And in his lifetime, he’d seen profit margins kind of range between
3% and 6% and you had broken out of that and by 2000 you took the profit margin
up to 7.5%. So, you know, only at one moment in 1929 was the margin higher. It
was 9.5 or 9.4%.

CHRIS BLOOMSTRAN: But most of the time you were kind of range bound. But again,
think about his investing career to that point, a lot of it involved two
decades of high inflation. And so I’ve actually got some, some work that I’m
doing for this year’s letter that, you know, starting to gather some of the
data.

CHRIS BLOOMSTRAN: But I don’t, I don’t really start in earnest on the letter
until January 2nd. But I know I’m gonna have a section on on what the inflation
of the seventies looked like. Oh, brilliant.

CHRIS BLOOMSTRAN: There’s this conventional belief, I think that inflation was
fairly linear, that it just accelerated and kept growing. And that Paul Volcker
came in as the hero at the end and had the spine to break inflation and take
interest rates to 20%. On the short end, the Long Bond got up to 15 71 or 15
78.

CHRIS BLOOMSTRAN: But it took that willpower of raising rates to break it and
you know, tolerate a really bad recession in 81 82.

CHRIS BLOOMSTRAN: But if you look at the stock market over really the the mid
to late sixties, I mean, in 1966 Warren Buffett stopped taking money into his
partnership and gave the money back in 1969. He called that market top
essentially through the action of saying my skill set here is no good anymore.
I don’t really get this game where prices are this high and he was right. It
was, that was the end of the bull market.

CHRIS BLOOMSTRAN: But you had this series of the market was sideways. I think
people know that the market was sideways for 17 years. The dow was 9 95 in 1966
and it dropped 20% and then it recovered to 1000 and then it dropped 20%
recovered. And by the end of 1972 you had the nifty 50. This thing, you know,
now you’re six years into getting burned, inflation was growing.

CHRIS BLOOMSTRAN: Stocks weren’t doing well. And I think the world decided you
better gravitate toward the best businesses because now you’ve got inflation
and you want companies that have pricing power, you want companies that have
some organic growth and so they bid up the nifty 50.

CHRIS BLOOMSTRAN: I don’t know, 10 of those are, didn’t make it Polaroid and
Kodak. But the prices in that corner of the market were ridiculously high
though, when you’re 30 of the top nifty 50 were so expensive. They were just
destined to do what the big five tech companies have done here this year.

CHRIS BLOOMSTRAN: You weren’t going to be 30 to 35 times earnings, especially
when you run into advertising slowdown. You run into some competition, you run
into some regulation, whatever comes down the pike, you run, you stumble a
little and all of a sudden 35 to earnings becomes a dangerous multiple, but
then you had, of course, back to the 50 50 then you had a 45% bar.

CHRIS BLOOMSTRAN: That was, that was the, that was the big boy of market
declines since the 19 thirties, 45% down. But then recovered to 1000. And you
know, even in 1981 82 when Volcker raised rates, the dow dropped again below
1000 to 7 78. I think it was in August or September of 1982. So you’re
literally 1966 to 82 1000 to 7 78.

CHRIS BLOOMSTRAN: Let’s call it, you’re down almost 25%. You had dividends
during that period. The payout rate at the beginning of that period was a
little higher than it is. Now, you know, a lot of inflation in the meantime,
you lost a lot of money or you lost 75% of purchasing power to inflation total
return, even including dividends, you lost 75% of your money.

CHRIS BLOOMSTRAN: And again, well, maybe, I mean, household ownership of stocks
went from 50% to 10% over that 16, 17, 18 years institutional pension fund
ownership of stocks likewise dropped from the 40 to 50 to 60% down to 10.
Nobody want to own a stock and you could go to the bank and put your money in
and get C DS at 13 14%. So why would you own stocks?

SPEAKER 2: They’re just, they just go down them if the institutions didn’t own
them and the private individuals didn’t own them.

CHRIS BLOOMSTRAN: Well, I’m I’m saying stocks is a percentage of wealth.

CHRIS BLOOMSTRAN: All right. Ok. So there is a percentage of, as a percentage
of allocation, you know, the shares were still the shares and they were still
outstanding, but the market was trading it, margins had dropped because of the
inflation in part. And then I’ve got a chart that I’ve that I’m working
on.

CHRIS BLOOMSTRAN: I’m actually going to give a speech next week in New York at
Lattis work M O I and I’m, I’ve got my, my early series of charts which is why
I work. I mean, I’m not jumping the gun on the letter. I’m doing this for my
talk, which I’m gonna get incorporated into the letter. I’m cheating a little
by getting ahead of it. But, but profit margins were three and the multiple was
eight.

CHRIS BLOOMSTRAN: So he traded at 24 times sales inflation took a hammer, took
a machete to margins over that period. But you, but, but the point there was
you had this series of fits and starts where the market would decline. 20%. The
FED would then toward the end of that decline, loosen monetary policy, lower
interest rates, you drive the market back ups.

CHRIS BLOOMSTRAN: They were always behind the curve, but they were very active
and the movements of FED funds during that period were extraordinary 6% down to
2% up to 7% back to 3% ultimately up to 20 or where wherever they got them at
the very end. But it was a very activist Federal Reserve never quite getting
behind inflation.

CHRIS BLOOMSTRAN: But the TBI investor during most of that period at least got
about as much out of the bills as they got out of the inflation rate. So you
were kind of stasis there, cash would have been a great place to be as debt
level. But debt levels at the outset of the sixties were nowhere near where
debt levels are today.

CHRIS BLOOMSTRAN: You know, almost all the debt in our economy was created
during world war two, we had paid that down and by the end of the eighties or
about by the end of the seventies and into that 81 82 low, the high in interest
rates in 81 then the low in stocks in 82 total credit market debt was 100 and
58% of GDP. You couldn’t have a lot of debt because rates were so high.

CHRIS BLOOMSTRAN: Here we are today at 350% credit market debt to GDP. More
than $90 trillion of debt. More than 30 trillion of that is federal debt.
Corporate debt is at an all time high household debts here in the last two
years has vastly improved until the last couple three months because we gave
money away.

CHRIS BLOOMSTRAN: But the aggregate is over $90 trillion on a 25.5 $26 trillion
economy. And you can’t have a 350% total credit market debt and expect to have
any growth in the economy on an inflation adjusted population adjusted
basis.

CHRIS BLOOMSTRAN: And so to work, if the debt burden is the greatest problem facing
society and certainly facing investors. And I think it is whether the wizards
that run our central bank and the European Central Bank and the bank of
England, the Bank Of Japan, whether they collectively think we’ve got to get
debt levels down, which is what I don’t think.

CHRIS BLOOMSTRAN: They think, I mean, I think they think we need inflation and
then all of a sudden the genie is out of the bottle at oh, we need to get
inflation back under control.

CHRIS BLOOMSTRAN: So they’re not thinking about fixing the debt burden, but we
have to fix the debt burden. We have to take debt somewhere below 350% of GDP.
And so you could do that in, in the extremes of a very bad deflation,
introducing a very bad economy like you had in the 19 thirties.

CHRIS BLOOMSTRAN: That’s on the table. You can let the inflation that we’re
seeing today. Morph into hyper hyper inflation. It would be done globally. Not
locally. You can’t flee the dollar, you can’t flee the Euro, you can’t flee the
pound. Sterling, you can’t flee the Swedish Crown. We’ll do this thing
collectively because we’ve all got the same debt problems. We’ve got encumbered
balance sheets globally.

CHRIS BLOOMSTRAN: That’s on the table. But if you think about the seventies and
I go back to the seventies and think about what would happen if we do what
we’re doing today, the FED has raised rates. They’re gonna raise them again by
50 basis points.

CHRIS BLOOMSTRAN: They might raise them again next year until they break
something, they will break something and whether that’s the stock market now
being down, not 20% on the S And P and 30 on the NASDAQ, but down 40% on the S
And P and 60% on the NASDAQ. Well, that would be a breakage.

CHRIS BLOOMSTRAN: Some of the big European banks might break, pension funds,
might break, some are breaking. But you know, the drug addicted, cocaine
addicted stock market needs Q E and they need zero interest rate policy and
they’re banking on getting there sooner rather than later.

CHRIS BLOOMSTRAN: So now when you’ve got good news on the economic front, stock
market behaves badly and vice versa. So we’ve probably got at least one or two
more cycles where we break something. Stock markets down, the FED lowers
interest rates by a lot abruptly.

CHRIS BLOOMSTRAN: And the Q E lever gets pulled again and we ramp up the
balance sheet, we got it up to nine trillion. We’re running it down again and,
and that running down of the balance sheet is probably more troublesome for the
markets and the economy than simply the raising of the short money rate. And we
can talk about that.

CHRIS BLOOMSTRAN: But you think so if, if we’re gonna have a series of these
bear markets and we’re gonna have a series of interest rate increases and
declines, we know that the tax revenues will fall short during recessionary
periods.

CHRIS BLOOMSTRAN: And we don’t really elect people anymore that tolerate things
like less government spending. So we’ll have larger budget deficits, but we
will work down corporate debt. I mean, we’ll have creditors become the equity
owners of business when interest rates break.

CHRIS BLOOMSTRAN: And there’s so much corporate debt that’s financed at the
short end of the curve and commercial paper and floating rate debt that if you
know, we get two years in of inflation running hot and money rates below
inflation, once you start to refinance more and more of this debt at higher
yields, again, you take a hammer to profit margins, stocks will get hurt and
those of the over levered balance sheets will lose the businesses.

CHRIS BLOOMSTRAN: And that’s just the classic capital cycle. That, that’s what
ought to happen. If you’re an Austrian economist, that’s really what ought to
happen.

CHRIS BLOOMSTRAN: Sure.

CHRIS BLOOMSTRAN: But I can, I can envision taking total credit market debt
from 350% to pick a number 250 to 200 simply by inflation running hotter than
the money rate for 15 or 20 years. But that’s absolutely on the table and
that’s no fun. That then introduces perhaps a flat market where back to your
question on, on the attribution of where earnings come from.

CHRIS BLOOMSTRAN: Then your multiple is likely below 15.5 times, which is the
Long run average, your profit margin of 13 3 is now a pipe dream.

CHRIS BLOOMSTRAN: And you’re back where you were 10 years ago at nine or maybe
you’re eight, maybe you’re seven, maybe you’re six. You get a combination of
margins and multiples coming back.

CHRIS BLOOMSTRAN: You, you might have very high top line growth. I mean, this
year again, you’ve got 8% growth in the economy. You’ve got 8% nominal growth
in sales and margins are under attack, do that for 15 or 20 years and it’s no
fun. People get pretty frustrated and despondent on financial assets at that
point, perhaps on real estate at that point.

CHRIS BLOOMSTRAN: And it’s an ugly period. But you know, who won so step back
and, and ask who won during that period? Certainly the indices did not win
because you went from high margins to low margins. You went from high multiples
in the sixties to very low multiples in the early eighties.

CHRIS BLOOMSTRAN: He got crushed, he lost to inflation massively, but Warren
Buffett won, he had bought National indemnity in 1967 and the opportunity to
then buy things like the Washington Post and Geico. And you know, all the
things that he bought in the seventies with the insurance capital and reserves,
the trader mindset what we do for a living.

CHRIS BLOOMSTRAN: You know, we’re not manic traders, 15% annual turnover. Five
or six of that is generally bringing new companies into the portfolio and
eliminating companies. But there’s trading within the portfolio. We’re all sell
things that are dear buy, things that are cheaper trying to keep the overall
valuation of the portfolio cheap.

CHRIS BLOOMSTRAN: I think if, if we’re gonna have that period and the end game
there is to shrink leverage, absolute systemic leverage, you don’t want to be
in cash, I don’t think because we’re not gonna get rates up to the inflation
rate. We can’t because debt levels are far higher than where they were again
throughout the sixties and seventies.

CHRIS BLOOMSTRAN: I think businesses wind up being a pretty good store of
value. And if you get the extremes of deflation slash depression or
hyperinflation, nobody wins in any of those environments. You know, if you’ve
been in Venezuela, Argentina this year, your stock market’s there up 100 150%.
Turkey’s market is way up, stocks go up during hyper inflation, but you lose
more than up to the decline in the purchasing power of your currency.

SPEAKER 2: I mean, you’re, you’re painting quite a bleak picture. I mean, i
it’s not a picture I disagree with at all. I mean, I, I think, you know, a
period in which we’ve got much more volatile markets in which we’ve got some
margin compression.

SPEAKER 2: I mean, it was interesting, you were saying that the move from 9% to
13% in the 2010 to 2020 2020 11 to 2021 know it being 3% from interest rates,
1% from corporate taxes or both of those are going to reverse and margins,
operating margins are already pretty high and will be eroded by inflation.

SPEAKER 2: So, compression in the multiple, what this means however, is that
we’re probably the last thing you want to do is be an index fund because you’ve
got to be that.

SPEAKER 2: And it’s, it’s, I find people look at me incredulously when I say,
well, you know, I’m a believer in kind of decayed Long cycles. So you get to
the end of a decay and you should probably do something different the next
decade from what you did in the previous decade.

SPEAKER 2: I mean, that’s kind of been, that’s kind of worked. And so ordering
the Fangs was good in the 2010 is unlikely to be good in the 20 twenties. Being
a passive investor was good in the 20 tens. Only reasonable in the 2000. Not
brilliant, but it being passive, I think it’s going to be a disaster. Is that reasonable?

CHRIS BLOOMSTRAN: Well, I think when you racket your time series and you’re a
passive investor, when margins and multiples are both high, you’re destined for
a mediocre, more likely a very poor experience, you’re gonna lose money. You
bought, if you were an index investor in the end of 99 you lost money for a
decade and you had periods during that decade where you were down 50% and then
down 65%.

CHRIS BLOOMSTRAN: Assuming you stayed in, assuming you stayed in. Yeah, I mean,
you stayed in you know, if you were a passive investor and came into the market
in oh eight oh nine at the lows, you had a delightful experience. I, you,
you’re still in an overvalued market by historical yardsticks, inflation is
higher than it’s been. I’m not sure.

CHRIS BLOOMSTRAN: I, I, I believed until more recently that I thought the
endgame here was probably deflation, an absolute decline in the price
level.

CHRIS BLOOMSTRAN: I don’t think we appoint central bankers and we elect people
that will tolerate that. I think they’ll lose it on the inflationary
side.

SPEAKER 2: Well, I think inflation is here and it’s here to say, isn’t it? I
mean, you know, in the UK, we’ve got strikes. No, I mean, there are so many
parallels with the 19 seventies.

SPEAKER 2: Here, I mean, I know the situation is slightly different in the
United States but I, I don’t believe it’s radically different and, you know, I,
I think we’ve got inflation is out there is, is escaped and I don’t think it’s
possible to rein it back in and yeah, I mean, I, I know you could liken some of
the recent excesses to Japan in 1989.

SPEAKER 2: But I’m not sure that we’ve got a Japanese like situation. I think
we’re much more.

SPEAKER 2: But we’ll see. I mean, the interesting thing is of course that none
of us know because we can’t really look back at history and say, oh, it’s like
in the 19 seventies, but as you say, in the 19 seventies, you didn’t have debt
to GDP being so high.

SPEAKER 2: So, I mean, you know, if Paul Walker was appointed tomorrow or is
equivalent, he couldn’t put interest rates up to 15 or 20% because you, you
know, the government couldn’t afford it. I mean, you know, it’s just an
impossibility.

SPEAKER 2: So we’ve got I mean, it’s, it’s interesting, fascinating. Listen. I
mean, it’s been so wonderful of you to give up your time and been fascinating
to talk to you. I did tell you but forgot to remind you before we came on that
I usually finish by asking people to recommend a book or books. Have you got a
book that you would recommend?

CHRIS BLOOMSTRAN: I, I pulled a book off the shelf that I think any young
investor or investors that don’t live in the financial statement should read
and it would be one called the Smart Money Method.

SPEAKER 2: Oh, no, you’re not allowed to do this. No, you’re not allowed to
do.

SPEAKER 2: I really, I’m really impressed that you’ve got my book. Did I send
it to you?

CHRIS BLOOMSTRAN: No, I bought it.

SPEAKER 2: You bought it even better. I look at 1 25 every books up.

CHRIS BLOOMSTRAN: It’s a, it’s a, it’s a wonderful teaching tool. It’s a great
book.

SPEAKER 2: No, but you’re, you’re not allowed to, to recommend my book.

CHRIS BLOOMSTRAN: Well, I did, I just did. You can edit this out if you like
and, and cut it, but then I’ll tweet about it and so you really can’t get rid
of that.

CHRIS BLOOMSTRAN: Two books I recommend America’s Great Depression by Murray
Rothbard all the time. Given the period we’re in, given the leverage that we
have. You got to know about the Depression and you need to know about central
banking and, and the Austrians and the Mises Institute in Auburn Alabama have a
wonderful archive of literature, a wonderful archive of books.

CHRIS BLOOMSTRAN: This is, this is the must read because you have to have a
sense of the macro framework today, given debt levels and given what’s going
on.

CHRIS BLOOMSTRAN: And you need to know that this conventional wisdom where Ben
Bernanke was just given a Nobel Prize because he studied the Great
Depression.

CHRIS BLOOMSTRAN: He, he didn’t study that version of the Great Depression, I
can tell you.

CHRIS BLOOMSTRAN: So the, the I think that’s a must street. And then the other
one, you know, I’m asked all the time about investing abroad and famous
investors that I admire have been in things like Alibaba. And I’ve always said,
look, I’m not going to places where I don’t have the rule of law and I don’t
trust the political infrastructure.

CHRIS BLOOMSTRAN: And so for that, I would never ever, ever directly invest a
dollar in a company headquartered in Russia or in China. I don’t directly
invest in emerging markets. I’d rather get my emerging market growth with
companies that are building plants. Heineken, for example, a lot of capital
spending in, in emerging markets, building plants at 20 points on capital, plenty
of growth that way.

CHRIS BLOOMSTRAN: But instead of me having to explain it in my aversion to
finding myself in inhospitable places. I mean, we have Ken Ross gold in the
portfolio and they had about 12% of the reserves in Russia. They lost them this
year. They sold them in a fire sale. You ought to read this book, Bill
Browder’s Red Notice. It’s been pretty widely talked about, but it was
gripping.

CHRIS BLOOMSTRAN: It’s just, just, just read the book. And if you don’t come
away from that saying, why in the world would you ever invest dime one in a
place like Russia, then you probably ought not be managing other people’s
money. So I’d read that he’s got another one that I haven’t read yet, but it’s
supposed to be just as good.

SPEAKER 2: I, I read his book quite recently and I’ve got his, his latest book
in my reading Pal. I’m going to be reading that to Christmas. It was a
fantastic, a fantastic book. And, yeah, I mean, it’s quite funny because one of
the roles I had at one of the hedge funds, I used to sit next to a former
Russian paratrooper and we used to do quite a lot in Russia.

SPEAKER 2: And I remember having a massive argument with one of the bosses
because he wanted to buy a Russian gold miner. And I said, you know, this
doesn’t make sense because the time that you want to be in gold is exactly the
time that you don’t want to be in Russia.

SPEAKER 2: And there were, we had the, I mean, it was a very amusing argument.
I said, you know, I said, if things go badly wrong and the gold price goes
through the roof, the chances are that owning the gold in Russia won’t be the
best strategy. And it, it seems so obvious to me.

SPEAKER 2: I mean, it wasn’t, I wasn’t, you know, prescient about Putin or
confiscation of assets or, or anything else. But it’s a, it’s certainly, I
mean, it’s a very strange place to invest. So we did it quite a lot there and,
you know, I remember going to a conference in Moscow and it was really quite
scary.

SPEAKER 2: The whole thing was a scary experience coming back to my hotel at,
you know, quite late at night and walking along the street in, you know, the
center of, of school, good area, plenty of bars and, you know, people around
and I got saw by somebody who claimed he was a policeman and wanted to see my
passport and I was within 100 yards of my hotel. But I said to him, no, sure
you can see my passport.

SPEAKER 2: You can come to the hotel and I wouldn’t, you know, I wouldn’t let
him stop me. But, you know, you think you get in the door and he’s got, he’s
evaporated and you just think that’s, you know, that you’re not safe, you know,
that, that brought it home, that brought it home to me. Yeah.

CHRIS BLOOMSTRAN: Russia is a very young ran, I mean, I’m not going to give the
story away but, you know, he ran our British capital and you find yourself and,
you know, the outcome obviously because you know what’s happening in Russia,
but you’d think why in the world are, would you do this in the first
place?

CHRIS BLOOMSTRAN: I mean, obviously it’s risk reward and, you know, I’m, I’d
cotten toward more of the risk management side than the infinite, unlimited
upside of that, that some of these opportunities present. But I was, I, I
wouldn’t be a good cap investor either.

SPEAKER 2: No, I, I, I think you probably would but you, you might not be able
to spend the money quickly enough. I suspect you, you wouldn’t be springing it
around.

CHRIS BLOOMSTRAN: I, I would have a hard time letting it out.

SPEAKER 2: But it’s been so fun talking to you. I can’t wait for you to come to
London. I don’t know when I’m going to be in Saint Louis again. But, hopefully
I, I need to meet before I call where people find you. What should, what should
they know?

CHRIS BLOOMSTRAN: Oh, sorry, I cut you off there. I’m sorry, you had threatened
to come to the Berkshire meeting what you really need to do.

SPEAKER 2: Yeah. I, I probably should come next year.

SPEAKER 2: I don’t know why I’ve never made it there and it’s a big gap in my
education and one of those things that you should always have on your, on your
list and it sounds like a great fun weekend.

SPEAKER 2: So you’ll probably, I will probably see you there and I will buy you
a drink if you can find one that’s £1.25 to pay you back for the book. But, no,
I really look forward to meeting up in person, but just before we finish,
you’re on Twitter.

CHRIS BLOOMSTRAN: I am regrettably on Twitter, I think.

CHRIS BLOOMSTRAN: It’s good fun. I’m having fun with Twitter, but I am at, I
think I’m at Chris Blooms. Stream on Twitter pretty straightforward. The
website is the firm name Semper Augustus dot com. I’m on, I’m on, on Instagram.
I’m on, and I’m not on Facebook.

CHRIS BLOOMSTRAN: I have a Facebook account but I don’t look at it, I don’t
even look at it. It was hacked and I can’t even forgot how to turn it off. It’s
been three years since I was hacked. And so I don’t even, I, I never hit the
link to log it in.

CHRIS BLOOMSTRAN: I’m on, linkedin, but I don’t use the linkedin. So I get, you
get three or four people every day that want to have you that join your
network. But I’ve never used it as a platform.

SPEAKER 2: So really find me on the, the place that people can find you.

SPEAKER 2: Yeah. Yeah, cool. Well, thank you so much.

CHRIS BLOOMSTRAN: Thanks, Steve. This has been great. It’s been a lot of
fun.

STEPHEN CLAPHAM: Claire Barret runs a podcast for the Financial Times with I
think over 100,000 listeners and she told me my podcasts were good but too
Long, especially for a commuter. So I’ve been trying to keep them shorter, but
I could have carried on talking to Chris for another hour quite easily.

STEPHEN CLAPHAM: Although I do like to respect my guests time, I would
encourage listeners to read his Semper Augustus letter which I shall link in
the show notes and I 100% endorse Chris’s comments about the importance of
studying the financial statements.

STEPHEN CLAPHAM: It was funny how he talked about understanding their
accounting policies, especially for those for revenue recognition because
that’s also what I talk about.

STEPHEN CLAPHAM: It’s remarkable in fact how similar our approaches are and for
those of you who want to improve your skills in this area, I’m doing a cohort
based forensic accounting course based on the one I do for institutional
investors. Just a bit simpler. You can find out more on the website or by
emailing info at behind the balance sheet dot com.

STEPHEN CLAPHAM: This podcast is aimed at serious and aspiring equity
investors. I hope you enjoyed it. And if so please leave us a review on Apple
podcasts and please check out our other great content on the website behind the
balance sheet dot com.

STEPHEN CLAPHAM: There, I mentioned the free sub stack. Thanks for listening
and the podcast is now also available on Amazon music.