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tv   The David Rubenstein Show Peer to Peer Conversations  Bloomberg  August 23, 2019 6:00pm-6:30pm EDT

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david: so you started your own company at what age? john: i was 24. david: where did you get the money to capitalize it? john: my mom gave me everything she had that was liquid. my dad gave what he thought he could afford to lose. david: one of the boards you are on is mcdonald's and it is said you eat mcdonald's every day. is that true? john: just about every day. david: in chicago, did you ever play basketball with barack obama? john: several times. david: is he that good a player? john: he's a very good player. >> would you fix your tie, please? david: people would not
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recognize me. just leave it this way? all right. i don't consider myself a journalist. and nobody else would consider myself a journalist. i began to take on the life of being an interviewer even though i have a day job running a private equity firm. how do you define leadership? what is it that makes somebody tick? so you have been doing value investing for 36 years. what is a value investor? john: somebody looking for bargains. we are trying to find stocks selling at 40% discount, want to make sure it has a low ratio, a strong balance sheet and has the ability to really withstand the inevitable storms that happen in the stock market. david: is warren buffett a value investor? john: he is the greatest value
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investor of all time. some people talk about whether michael jordan is better than lebron james. there is no question warren is the best ever. david: value investing is easier done when the markets are down. when the markets are high, there are not as many bargains. what have you been doing the last 10 years because the market have been high? john: we were able to buy terrific bargains around march 2009 when the market was bottoming and we got great brands, royal caribbean, cbs. true bargains. as the markets recovered, some sectors have stayed really cheap. in particular, media. we love companies like viacom, madison square garden network, those stocks are really cheap. financial service companies that you know well like kkr. there are some sectors that seem to be totally neglected even as the markets recovered. david: the united states economy was in a recession that ended june 2009.
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for 10 years, we have been in a growth cycle. it is one of the longest in the country's history. but there has not been a lot of depressed stock prices for this time, so are you kind of hoping that at some point there is a recession so we can get lower stock prices? you can buy more things at lower value prices? john: we like to buy bargains but we don't want to see a recession. all of the turmoil that happens, the impact on our society and citizens, recession is not great for america. say i let's suppose i watched you and you are a good value investor. i will give you some money. what kind of rate of return can i expect from your products? john: over 36 years, we have been able to compound money at roughly 11% per year. that is something we are proud of. the ariel fund have been around since 1936.
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it is number one in its category. we are one of those rare firms that has the 36-year record with the same portfolio manager in charge. i have been fishing in the same fishing pond of not only value stocks the entire timeframe. we have a great team of people who have been with me, some of them close to 30 years, some 20 years, some 15 years, so we are a team of grizzled veterans. we think we can replicate our performance in the future. david: what is your best single deal? john: over time, one of the best companies we have bought was royal caribbean. we were able to buy that at the height of the financial crisis when people thought no one would cruise again. the stock has gone up 15 times. we still think it is an extraordinary bargain today. a favorite of ours, we find and think the media stocks that are
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really cheap, we are sort of optimistic madison square garden network will do well. when the knicks finally come back and start winning championships again, it will be great for new york city and great for that stock. david: let's talk about how you got started. you grew up in chicago, your parents were prominent people. your father was in the tuskegee air corps. what is that for those who may not know? john: it was the group of fighter pilots that were part of world war ii, the first group of african-american fighter pilots that had a chance to really participate in the war. before then, people didn't think african americans were qualified to fly in major wars. my dad was in the first group that went overseas and fought in world war ii. david: when your father came back after world war ii, what did he do?
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john: he went to university of chicago law school, went to the best and thought it was the best. at first, they did not accept him because he had not taken all of the appropriate tests. and there were not many african-american students at the law school at the time. he asked if he could take a test. they allowed him. he showed up in his captain's uniform and the two things together, showing what a patriot he was and how good he did, what a great result on the tests, he was able to talk his way into the law school. david: and your mother? john: he met my mother the first day. david: she was the first female african-american at the university of chicago law school? john: she was. she graduated in 1946 and my dad in 1948. david: he built a law practice and she did? john: they had their independent ones because you could not work in a big downtown law practice. my mom worked on divorces and my dad did mostly real estate and bankruptcy. david: you were the only child?
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john: i was. david: like myself. the advantage of being an only child is your parents put a lot of time and attention into you. was that a good thing for you? john: it was. they focused everything on me. they got divorced when i was three years old, so i had different lifestyles. my dad lived in a studio apartment not far from downtown and my mom lived in one large house in hyde park. they were different political persuasions. my mom was republican, my dad was a democrat. i learned to navigate different worlds each and every week. david: you went to the university of chicago famous lab school known for its k-12? john: i got there in ninth grade. it is a terrific place. david: in addition to academic pursuits, you were a basketball player. john: i was. david: you went to princeton and played basketball? john: i was fortunate to play for the hall of fame coach pete carrill.
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he was a legend and somebody that really transformed my life. david: you were the captain your senior year. did you think you were going to be an nba player? john: coach made it very clear i had no hope to be an nba player. he told me when i was a sophomore and i made the team, i was the last person, the 15th. he said you are legally blind and i can't teach vision. you can't dribble. but you work so hard, we will keep you around for a few more days. david: you graduated in 1980. what did you want to do? john: i had two role models that were stockbrokers. one across the street from campus, a guy named mike perkins. he helped show me a firestone library to research companies, find newsletters on the stock market. and then i had a broker in chicago named stacey adams, the first african-american stockbroker on lasalle street. i would sit with him and watch
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the tickertape go by. i thought i would become a stockbroker. i was hired by william blair and company in chicago. the managing partner was a princeton grad who played football at princeton. very close to don rumsfeld. he helped recruit me and give you just gave me an opportunity to start. david: you stayed there 10 years before you were ready to start something else? john: i stayed 2.5 years. david: enough time to learn the business? john: i thought so. i had confidence in my strategy of investing in midsize and undervalued securities. not many people were doing that. we were kind of pioneers in the small value space. there were a few firms like chuck royce's firm, ralph wingert, but not other people focused in that area. david: you started your own company at what age? john: i was 24. david: where did you get the money to capitalize it? john: i went to friends and
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family. my mom gave me everything she had that was liquid. my dad gave me what he thought he could afford to lose. after that, i went to former clients, high school buddies from the lab school, anyone that could give me $10,000. david: how much capital did it take to start it? john: $200,000. david: that was what year? john: 1983. david: where did you get the name ariel from? john: i love the way the name sounded. it was a favorite character on tv. i said i would name my daughter ariel. i had the company first. david: to keep up with what is going on in the world, do you use computers? john: i actually don't. david: do you ever go on the internet? john: i do have internet on my phone, but i have never actually had a computer or turned a computer on. david: you use emails? john: i don't. david: so how do people send
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messages? do they send a pigeon? ♪
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david: how much are you managing now? john: $13.5 billion. david: you managed more before the great recession, as was the case with many companies.
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how much money did you go down to? how low did you go? john: we got under $3 billion. david: do you think you should fold up shop under $3 million $20ion after having billion? john: not at all. one thing i learned from my father, we should always keep money saved for a rainy day. sure enough, we have a hurricane of financial crisis. we saved enough capital to pay salaries and keep key people in place during that tough period. it was an important part of our approach. and then we bought our best stocks that really bargain prices during that period. people like that. we stuck to our guns and believe in what we were doing. david: some people say it is impossible to beat the markets and one should buy index funds. you don't have index funds. you pick stocks. why should somebody give money
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to a stock picker rather than somebody who will reflect whatever the s&p 500 is? whatever the index might be. john: the reason to do that is there are talented money managers out there who can add value. it has been proven over time people who have that gift and creativity and vision to buy securities and outperform the markets. it is hard to find them. they are few and far between. i think it is worth the effort. it is awesome, like sports, you root for your local teams. even though you know that half of the teams are going to lose and half of the teams are going to win, not everybody can be the world champion, but you like to be engaged, involved in the competitive pursuit of trying to find a championship or support a champion. it is the same with money managers. david: to keep up with what is going on in the world, do you use computers? john: i actually don't use a computer. david: do you ever go on the internet? john: i have internet on my
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phone but i am one of these folks, i have never had a computer, ever turned one on. david: do you use emails? david: how do people get messages to you? do they send a pigeon? john: they called me. david: you are legendarily very loyal to your corporate boards. one of the boards you are on is mcdonald's. it is said, i don't know if it is possibly true, that you eat mcdonald's every day somewhere in the world. wherever you are, you eat one meal at mcdonald's. john: just about every day. there are exceptional times when you are traveling and cannot actually get that done, but i love eating at mcdonald's. it is my home away from home. david: did you do that before you were on the mcdonald's board? john: i did that as i got home from college. david: do you think it is healthy for you? john: it has worked out ok so far. david: when you were interviewing to be on the board, i presume you interviewed, did
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you mention this and did they think this was unusual? having remember breakfast with the nonexecutive chairman of mcdonald's and the ceo, it went marvelously well. they could tell how much i loved the brand. david: you used to play three on three basketball. in chicago, did you ever play basketball with barack obama? john: several times. david: is he that good a player? john: he is a very good player, he knows what he is doing. he's a little in between size. 6'2.5" or so. david: he can't dunk the ball. john: i don't know. i think he probably good. could. he is a little left-handed. he is a very good player and makes clutch shots under pressure. david: there was another player in chicago, maybe better, named michael jordan. did you ever play against michael jordan? john: i did get to play against michael around chicago a lot.
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he would be at different clubs and i would get to be on the court with him. david: think he was overrated? john: the greatest player of all time. david: i understand you played against him and beat him. the only person who ever beat him on a one-on-one game? john: very fortunate circumstance. i used to go to a fantasy camp for people 35 years and older. every summer of the camp, he would challenge to a game of one-on-one, first to three wins. since no one had beat him in the first seven years of the camp, he was overconfident. he would let people make a basket or two before he would clamp down and shut people down. i had the advantage when i played him, he had played 15 campers before he got to me and he was tired. so i snuck up on him and the coach always said even though i was not a good passer, i was a
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good one-on-one player. i had a couple of tricky shots. you can hear him say on the video, oh no. that was really fun. david: one of the people you were playing basketball against, barack obama, told you he was going to run for president, what did you say? john: i told him i thought it was a terrific idea. he came over to the office to tell me his plans. i know sometimes people wait a little bit more to get more seasoned, but i thought he was ready. i was confident in his ability to be the commander-in-chief so i encouraged him to run. david: did you get involved in the campaign? john: i did. i got to be cochairman of the illinois finance committee with a friend of yours, jim crown. we worked for penny pritzker. it was a magical thing to be involved on the ground floor. once he was elected president, i got to be cochairman of the
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inauguration. that was special. and what was really special, when he first got elected, we had the temporary transition headquarters at ariel. for three days, he was there helping to form the government. i will never forget. david: you helped him in his campaign, he is using your offices for the transition. did he offer you a job and if so, why did you not take it? john: we never had that conversation. i love investing and i love our business and i have a great team, as i mentioned earlier. there was never a thought i would go to washington. david: are you worried about a recession in the near future? john: i am not worried. warren buffett always says last century, the dow started at 66 and ended at over 11,000. we had two world wars, a great depression, presidents assassinated, it was an
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extraordinary 100 years, but the market always marches back. ♪
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david: in the philanthropic area, you are a philanthropic leader in chicago. what are the areas of interest you have? john: we have been working hard on how to solve the wealth gap in our country between majority and minority communities. there is all of this data that shows how the wealth gap has gotten larger, particularly between african-americans and white americans. we started a small public school
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over 22 years ago to teach financial literacy in a public school, to get young people prepared to be able to pick their own stocks and navigate their 401k plan and all the things they need to do. we created a program at the university of chicago for minority students to work during the summer in the investment offices of major endowments. david: your parents were prominent leaders in the african-american community in chicago and in the chicago community. when you were growing up or now you live in chicago, do you feel discrimination or have you been able to bypass that? john: when people think about supporting minority business, it is around what they call supplier diversity, instruction, catering, things that are bought through procurement. my mom had this challenge when she was building her law practice and my dad did, people didn't think about hiring minority lawyers to do their transactions. the same thing when it comes to money management.
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we were the first african-american money management company in the country's history. we get to see people, they had never thought about hiring someone african-american to manage their money or have funds in the 401(k) plan. david: you mentioned melody hobson. she is the president of your company. you are the ceo and she is the president. she is someone who also went to princeton. you hire people that didn't go to princeton? john: we do. david: melanie came from a challenged at ground, you would say, but she has become very well-known. tell us about her. john: i met her when she was a prospective princeton student. she was 17 years old. we were trying to make sure all of the local alumni were interviewing all of the prospective students. we had a special event for the admitted students. melanie came and i could tell she was something really special. she sat next to a person,
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richard lisner, who convinced her not to go to harvard and go to princeton instead. she became a summer intern with us at ariel and she spent a summer at t. rowe price in baltimore. she had a great time. she joined us when she graduated. she is the only person from her princeton class with the same phone number 29 years later. she is taking on more and more leadership at the company every year. she will be my successor. it is so wonderful to have a partner who is as tough and smart as she is. david: you have your finger on the pulse of the economy, looking at stocks that are reflective of the economy. are you worried about a recession in the near future? john: i'm not. we think long-term. our logo is a turtle. we believe patience wins. warren buffett always says last
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century, the dow started at 66 and ended at 11,000. we had two world wars, a great depression, presidents sassinated, and the markets always march back. david: are you not worried u.s. has $22 trillion of indebtedness and we are adding $1.3 trillion a year? is that a concern or not so much? john: not so much. right now, inflation is staying very much under control. interest rates are staying low which means stocks are still undervalued in this environment. we think we always have a way of adapting to whatever the challenge the country faces. my confidence is really high that we will get through the problems that are in front of us. david: in recent years, the income inequality in the united states has become evident. is there anything policymakers can do to diminish the large income inequality we have? john: government needs to do a better job making sure we have financial literacy in public
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schools, urban public schools, where we can get people exposed to the markets and coming out ready to make the right investment choices, being more effective entrepreneurs because they have been exposed to the markets at an early age. that is critical. david: what do you think your legacy will be and what would you like it to be? john: that we were able to build the most diverse money management firm in the country's history. an extraordinarily talented, diverse board of directors and delivered excellence and performance at the same time. to be role models for others to get in to the financial services sector. this is such a lucrative part of the economy and it has not been a very diverse part. we want to show people it can be done and inspire others who will want to follow in our footsteps and melody's footsteps and be successful in the financial services industry. david: no regrets about not going into private equity? john: it never came up.
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we think about it from time to time, but yeah, we love picking stocks. david: thank you for an interesting conversation. thank you, john. john: thank you. ♪ from the couldn't be prouders
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scarlet: i'm scarlet fu. this is bloomberg "etf iq," where we focus on the access, risks and rewards offered by exchange traded funds. ♪ scarlet: rising odds of recession. the etf shows a clear disconnect between what we hear and what investors do. time for risk parity? popularizedropert to an etf near you. and argentina leads cash as


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