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Lila Murphy – Financial Forensics: Digging Deep To Discover True Value

To learn more about McAlvany Wealth Management and their MAPS Strategies Click Here

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  • Paid to wait: Squeezing out income while you wait on capital appreciation

 

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Lila Murphy – Financial Forensics: Digging Deep To Discover True Value
June 19, 2019

“You talk about margin, and you have to apply that to every area of your life, especially with your finances because without financial security – you hear that people say, ‘Well, money is not everything.’ That’s true, but if you don’t leave yourself any margin, well, a lot of bad throughout the other areas of your life can flow. So it’s important.”

– Lila Murphy

Kevin:Today the guest is very special because this guest actually has a long-term working relationship with a good friend of yours, someone who helps us here at the McAlvany family – Doug Noland. Her name is Lila Murphy.

David:Yes. McAlvany Wealth Management was started in 2008 and we managed through a very difficult period of time – 2008, 2009, 2010 – these were periods where traditional asset managers really suffered. We actually had some stellar returns in the years which were toughest for most asset managers. And I think what we see in the wealth management team today is world-class analytics. You think of Doug Noland, you think of Robert Draper, and now the newest addition to the team, Lila Murphy. She is the MAPS industry specialist, and also working as an analyst on tactical short, and quite a background with natural resources.

She sits on the board of Dundee Corp, which is a Toronto stock exchange-listed diversified holding company. I think of it as almost a merchant bank within the natural resources space, looking at real estate and wealth management and agriculture, and a great reputation. If you are in Vancouver or Toronto, the folks at Dundee have a stellar reputation. She was invited to be on their board. Professionally, and in her management experience within portfolios prior to 2018, Lila was working as a portfolio manager on the alternative investment team at Federated Investors.

Kevin:She has also worked with David Tice.

David:Yes, exactly. And in both places she has been responsible for capital allocation, stock selection, portfolio construction for 40-stock hard asset strategies. And you are right, David Tice – she was working with two different hedge funds, the Prudent Global Gold Fund and the Prudent Global Natural Resources.

Kevin:She is used to also managing on teams that are managing in the billions, so these are big decisions. But one of the things you have talked about being so important is to be almost like a private investigator, willing to dig and dig and dig and dig to do what you call forensic accounting, or forensic analysis. We think of that in crime scenes, but actually, forensics goes very deep when you are talking about financial assets and analysis of companies. This is something that Lila is passionate about.

David:She is passionate about it, continuing to pursue a CPA designation on top of her CFA designation, that is, chartered financial analyst. Is it ever enough? Not if you are infinitely curious and interested in the details. So I think that is one of the things that marks Lila uniquely as a contributor to the team. She loves process, she loves discipline, she loves accountability, and in that sense she is a perfect match for the dynamics that Doug is certainly a part of, and the roles that he has played in the past, and the roles that he plays today, both as the Tactical Short portfolio manager and as the MAPS market strategist.

Kevin:As you know, Dave, from 2011 on, when Draghi came out and said, “We’ll do whatever it takes,” actually, investment management became very difficult after that because, in a way, the stupid people started winning the game and the people who were doing the deep digging really weren’t being rewarded for it because we have passive investing, this period of time where passive investing actually seems to work better than analysis. But you and I both know that that never lasts. Howard Onstatt, the last thing that he told me when he was giving me a word of wisdom was, “Kevin, remember, the cycle itself prevails.”

Now, you have to have good management at that time, but while you wait – one of the problems with management is you can buy the right thing and it can go down or go sideways for an awful long time before your analysis is correct. Lila’s philosophy has been, why not get something that will pay you to wait? Now, that makes a lot of sense. If you are needing income, be paid to wait. Be in the right investment, but you don’t necessarily have to sit there stagnant.

David:Who we are and how we operate within the financial sphere is with a focus on hard assets, on real things, and yes, we do prefer real things, hard assets with cash flow. So combining those two things, certainly, our clients are looking for more of an income stream, but they want to know that what they own is real and tangible and not just a figment of someone’s imagination or the product of the current craze within the marketplace fad – good today but gone tomorrow. So we are interested in rolling up our sleeves and literally digging in the dirt. Lila spends a lot of time in the field and talking to management and doing just that.

So what you see today in the MWM offerings is a macro-economic top-down approach, married perfectly with a bottom-up approach which is focused on the micro-fundamentals.

Kevin:Dave, we have both read for decades the Credit Bubble Bulletin and Doug Noland’s writing, and Lila was a high, high recommendation of Doug Noland after working with her for over a decade.

*     *     *

David:Lila, I would love for you to take us on kind of whirlwind tour. NYU was at least a few years ago, but from that to the present tense, I am interested as an investment professional, what about finance, what about investing, continues to hold your interest?

Lila:Well, my former colleague, Doug Noland, used to say every day is a new and exciting adventure, and that is what continues to draw me into investment management. I sit on one public company board today and I have looked at doing some others, but I have sort of held back from that a little bit because investment management continues to call me. And it really is for that reason. Every day is a new and exciting adventure. This capital market environment is very difficult and to have the opportunity to walk with clients through that experience is an enormous privilege, and I still have a huge passion for it.

David:Natural resources is an area where you have an interest. It wasn’t your original area of concentration as an analyst, and then portfolio manager, but in recent years that has been more of a focus. Talk to us about that. Where are the opportunities, as you look at the natural resource as a sector, and where are the risks?

Lila:I started in the business as a generalist. I was working for a local fee-only wealth manager as a generalist. David Tice came in to talk about the new hedge funds that he was launching, his Global Natural Resources Fund and his Global Gold Fund. I had been trying to get buy-in from our investment team on the case for gold and why gold was so important in portfolios and why it is such a great diversifier. This was early 2003, so we hadn’t really seen the market take off. So I called David on the phone and said, “As you raise money for these funds please keep me in mind. I would love to come and work with you.”

And he did, and so I joined that team and worked with Darko Kuzmanovic, who had a lot of technical expertise as he had worked for BHP Billiton. He really got in the weeds and understood natural resources companies and how capital allocation decisions were made and what makes a mine or an energy project a good project versus what are the things that can derail that. So I learned that business from him, and when Federated came to purchase the funds, Darko was based in Sydney and he decided to part ways with David. So I took on the role of managing this hard assets portfolio.

And it really started as more global natural resources and what we came to learn is that broadening that mandate and having hard assets be more of a ballast, and temper commodity price cyclicality, was a way to mitigate downside risk, because as you’ve seen this last ten years has been brutal. Whether it is energy, copper or gold, it has been a tough ten years, and to have ballast that can mitigate that, and mitigate those drawdowns, has been hugely helpful in generating positive returns over a cycle.

David:Well, and the ten years before that it was almost the opposite end of the spectrum where you look at the under-performance of equities and you look at the continued trek down in terms of interest rates, great for the bond-holder, but for the average equity investor, you had a lost decade. But if you had any exposure to commodities it represented this counterweight to under-performance in the S&P 500, or the Dow, or the transports, or what have you. So finding that balance and figuring out how to bring in natural resources into a mix, which you were trying to do back in 2000-2001 with the Investment Advisory, and then you got to practice being that piece within the hedge fund community with David Tice.

Now the question is, where are we in the cycle? I’m curious what you think. We have had the central bank community which has attempted to smooth the business cycle, so on the one hand, control of the business cycle is there, and they have been pretty effective at doing that. Where does that put us in terms of the long-term investment or financial market cycle, the financial markets being distinct, perhaps, from the business cycle, as we typically understand the ebbs and flows of the economy? Let’s start there.

Lila:Well, I think that in formulating any sort of macro-investment philosophy you have to start first with where you think the Fed is going. It is sort of the Fed drives the bus, because in periods of dollar strength we see hard assets under-perform pretty dramatically. Not all hard assets. Particularly commodities. You have seen enormous under-performance for the last several years. And I think we are at an inflection point. I think that Powell’s blink in January – what that told me is that the Fed is increasingly politicized and that any sort of financial market turmoil is going to be met with dovishness.

And whether it is Powell or – you have heard Trump articulate a lot of frustration with Powell – I think that if Powell were to not act or not say what he needed to say to prop up the financial markets, Powell would be replaced by a dove. That is obviously very dangerous for purchasing power. So I really think that we are at an inflection point for the dollar and for commodities, and we have seen this ten-year under-investment cycle. There has been no capital discipline across oil, or gold, or copper. And so not only have you had dollar strength, but you have had companies that have been de-rated because they have not made good capital allocation decisions.

And in fairness, when you are building a mine, and it’s a ten-year investment cycle, you make that decision, say, on day one, well, by year seven you could have a completely different outlook, and you have all this sunk capital. Well, at that point the decision has been made. But I think investors are mobilizing and they are no longer going to accept malinvestment. There is this group that has been formed called the Shareholders’ Gold Council which has been led by John Paulson’s group. They have been very vocal about the level of malinvestment and mismanagement in the gold sector, specifically.

David:I think, when I hear Trump start talking about his dollar, the perfect world of the Trumpian dollar (laughs), it is as weak as it can be without admitting any weakness at all. So he’s kind of talking out of both sides of his mouth. It’s like, “I want a strong dollar, but I mean, come on pal, we don’t want thatkind of a strong dollar.”

Lila:(laughs) Right.

David:So what does he actually want? He really does want a weak dollar, he just doesn’t want the bad press that comes along with an outright call for devaluation.

Lila:Right.

David:There are so many advantages, from being competitive for the tradable goods sector, if we have a declining dollar. It’s just not popular to say, “We’re manipulating our currency to the downside.” He would love to say that, I think that is what he wants, but you’re right, there are ramifications for the commodities if he does, in fact, get what he wants.

Lila:That is an interesting point. I think his frustration with trade stems a lot from the strong dollar. The reason that we are exporting less than we are importing is because the dollar is so strong. Of course people want cars from Germany or whatever.

David:I think of your past experience. I think of where you started, and where you are today. I am curious, both from a personal and a professional standpoint, where you see that past experience. How has it set the stage for your future contribution?

Lila:There are a lot of problems with institutional money management, and there is a lot of incentive to, basically, be a closet indexer. And because passive management has taken so much share from active, active, for the most part, thinks the best way to stave off this threat is to become more like passive, when really, what they should do is become less like passive.

David:What you are talking about with passive versus active is just kind of following an index and not really managing money, but just mirroring, whether it is the Russell 2000, or pick a biotech index or a financial index, whatever it is that you are supposed to be involved in, what your mandate is to find those for you, you are talking about just copying an index and pretending that that is good enough.

Lila:Right, and to get paid for it, because indexing is almost free, where there are mutual funds out there that have fairly significant fees.

David:I think this is a bone of contention in the financial markets. You look at your worst performers over the last 5, 7, 10 years, it is your global macro traders. It is people who are looking for cause and effect, and big surprises, given policy moves and things like this, when in fact, going back to one of your earlier comments, it is kind of the Fed first. Whatever the Fed does, that defines the course. And so your global macro players haven’t really had much to work with because it has all been one theme.

Whether it is the ECB, whether it is the Bank of Japan, whether it is the People’s Bank of China, whether it is the Fed, they have just been printing money, lots of it. Maybe a little bit less in the last year or two if you are talking about the Fed, but certainly the ECB and the BOJ have been very active still. What case can be made for active management when all boats get floated on a sea of liquidity? And everybody is seeing the same benefits because, again, central bank activism. Can you make a case for active management with this kind of central bank activism, what seems to be mooting the best players out there?

Lila:By the way, thank you for sending me your book. I haven’t finished it, but it reminds me of one of the stories you told in the book about the tsunami in Indonesia, and preparing for “tail risk events.” Passive management is basically just chasing the stocks that are performing the best. Apple goes up, more of the S&P is allocated to Apple, and that is not really investing in a stream of cash flow, so actually, there is a case to be made that Apple is now a value stock after having come off its highs pretty significantly, and given its growth rate.

But I will say that I am less of a macro person than I am of rolling up my sleeves and getting into companies and fundamental analysis and really understanding the business case. But that work, increasingly, is not being done within active management shops. They are just chasing what is hot today.

David:Which ends up being almost a mirror for the index.

Lila:Right.

David:So even, as you say, if the active manager is not as active as they used to be, they are not rolling up their sleeves. Maybe that is because in the last decade there really hasn’t been that much reward for rolling up your sleeves and doing the hard work. The reward has been, it is almost as if the stupider you are, the less engaged you are in the process, the better off you have been because of central bank activism. So philosophically, you say to yourself, well then just throw in the towel and run with the bulls because if it is working, why wouldn’t it continue to work indefinitely?

Lila:There is definitely a structural component to passive gaining share from active, there is no question about it. There have been guys out there who have not done a great job for their investors, and you can’t stay Morningstar 3rdand 4thquartile forever. You have to earn your fees, and there is a large part of the investment community that hasn’t done that.

But by the same token, in addition to commodity investing, value investing has also been dead for ten years. It is almost like the more work you do on companies, the worse you do. Sometimes ten years later you look at your own portfolio and what you have been doing and you say, “Well, why am I doing this?” But I said earlier that part of this is definitely structural, and there needs to be a washing out of the traditional fund management community.

But I also think that some of this is cyclical, and we really have not seen any significant market downturn. We had the mini sell-off, I’ll call it, and correction, in December. But it appears to be over for the time being and investors have gone right back to the same stocks, and once again, have chased momentum.

David:So in that sense, you mentioned the tsunami story. My little brother – not so little anymore, tough as nails – in December 2004 was in Indonesia and was one of the first people on the scene there in Banda Aceh to help patch people up. The folks who were vacationing in Banda Aceh, sitting on the beach, enjoying the weather, going out and fishing or scuba diving or snorkeling, they were just assuming that tomorrow would be like yesterday and the day before. And you mentioned tail risk. There are certain things that happen. They don’t happen often, but when they do they have a very significant impact.

And looking for those signals, looking for what may be a trigger, and being aware of what you do in light of that, I think that is one thing you are saying. As you move toward passive investing you are moving almost toward kicking your feet up on the beach and assuming that the waves always stay nice and calm, and you don’t really have to tune in anymore because this is life. It’s always easy, it’s always pleasant, it’s always nice. The temperature is always somewhere between 76 and 85 degrees, and it’s just a beautiful life. And it is, a lot of the time.

Lila:And so why should I pay somebody to manage my money when this is so easy (laughs)? Anyone can do it.

David:And then to your point that we really haven’t seen full cycle here because what was a mini-dip in December, or the 4thquarter of 2018, doesn’t really represent a full cycle. You have markets that move higher as there is more liquidity in them, as there is credit flowing, and then you have markets that move in reverse as liquidity tightens, and you kind of get to see which balance sheets are stable, which cash flows are predictable and helpful, and which companies can survive a downturn.

Lila:And the credit markets barely blinked. If you look at it in the context of a ten-year cycle, the credit markets barely blinked, emerging markets barely blinked. There was a reaction, but we are right back to very easy money and credit. My husband and I also own a car dealership. It’s a great indicator. At Mazda we don’t have captive lending, so we have groups of lenders, one for your riskiest clients. Those clients have not pulled back.

David:At all.

Lila:At all.

David:(laughs)

Lila:It is just as easy to get a loan.

David:The “sub primes” in the auto.

Lila:Sub-500 credit score. Fortunately, we’re not taking that credit risk, but it is available for people.

David:You’ve got a great insight into the credit markets and where the consumer is at through that lens you get to look through.

Lila:Yes. You know, it is interesting, we do see the consumer starting to say, “Wait a second, we’re going to delay that spending decision.” I do think that December did rattle consumer confidence and it is not back yet.

David:Your thoughts on the equity markets at this point. We had the decline in the 4thquarter, we’ve had the roaring back over an 8-9 week period in the 1stquarter. And your job has been primarily as a long-only investment manager. Do you always find something worthy of investing in, or are there times when it either pays to not play, or you should direct some capital toward hedging, or just look at higher cash allocations, or tighten down your risk management controls? What do you do as a long-only investor at this point in a cycle when you say, “It should be turning down, but I need to own something, and maybe I own it and capture a 2%, 3%, 4% dividend yield, or what have you. But how do you change your play as you get toward this point in the cycle?

Lila:I absolutely hate to quote Jim Cramer, but he always says that there is always a bull market somewhere, and he is right about that. There is always a place to turn over rocks. Even if you look at a company and say, okay, this stock has gotten very cheap and maybe it’s not an investment today, but you have to be doing your homework all of the time because fundamentals change, especially when the fortunes of the dollar change so quickly, commodity fundamentals could change on a dime. We could have a trade deal with China tomorrow.

What do you buy? A lot of these stocks have been very badly beaten up on, the possibility that a China deal may be off the table, or it may be delayed, but there are definitely places to find value. And I wouldn’t call myself, necessarily, a traditional value investor because I think that there are a lot of value traps out there. I think that sometimes stocks are “mispriced” because they deserve to be cheap because they either haven’t invested in their business or they have terrible management and terrible corporate governance. Sometimes cheap is cheap for a reason, and I think that the ability to really roll up your sleeves and understand a company and its philosophy, and even culture – professional investors never talk about culture, and I think culture is where all of the cash flows really flow from.

I’ll give you a great example. Agnico Eagle has got one of the best cultures, from top to bottom, from management all the way down to the ranks, and as a direct result of that they have employee tenure and they have the highest returns on capital in their space. I believe that it flows from their culture in their organization. They have the philosophy that they don’t overpay for assets, which so many other of their peers have done and have made terrible capital allocation decisions. As a result of that Agnico Eagle always looks expensive relative to its peers but sometimes you get what you pay for.

David:So really, what you’re talking about is, if there is always a bull market somewhere, that may be a company specific story, not necessarily a market trend, but if you’re willing to roll up your sleeves – I know that over the last ten years our focus has been much more on macro-thematics, and we are interested in companies, but there is a granularity of research which is required. What you are describing in terms of actually going and visiting with management and getting to know them on a personal basis – that goes beyond what many investment managers, including ourselves, have done. Again, you can read through the financials and certainly listen in to conference calls, but you could take it a step further if you’re willing to invest the time in the people.

You know we have been in the gold business for almost 50 years. This is a second-generation family business.

Lila:So you have seen more cycles than I have (laughs).

David:We’ve seen cycles. I’m curious, you know the gold market has seen a shift from central bank selling to accumulation here in recent years. The general public here in the U.S. is still fairly indifferent to the metals even though we are 30+ percent higher than where we were at the market lows December 2015. What is your view of what the next few years hold for gold, in particular, and precious metals in general like the silver and the platinum group metals? Is it tied to some of those global macro things that you were talking about earlier – seeing the dollar trade lower – or do you have any comments, industry specific, the washout that you have seen from a company level, and what that tells you about where we are in that commodity cycle?

Lila:It has been kind of a dual washout, really, because we have had this period of dollar strength that has really, basically, kept gold at pretty close to its marginal cost of production to its all-in sustaining cost. I was telling your engineer just before you walked in the door that I don’t think gold prices can go down much further from here without seeing a significant portion of the world’s gold mines closing.

So you have had this period of dollar strength that has been an enormous headwind for gold. On top of that, for the companies, you have had this ten-year cycle of a great deal of malinvestment. I think, ultimately, that is going to be an opportunity, and I think that the gold stocks ultimately give you better leverage to the gold price. I think we are at an inflection point with the Fed. It is very clear that the Fed has become politicized and frankly, it is not a partisan comment. Whether it is Trump or Beto O’Rourke in 2020, I don’t think it matters. No one wants to see the party end (laughs).

David:Well, you saw the conversion, and this is not religious conversion at all, it is just politics, and it doesn’t matter what party it is, it just happened to be Trump. In 2015 he is looking at the big, fat bubble in the stock market, and in 2016 he owns it, it’s his, he loves it, it’s not a bubble.

Lila:No.

David:This baby’s rockin’ and rollin’ higher because he’s doing the right thing. So what’s the difference between the bubble and the non-bubble? Well, are you in office, or are you not? Your critique is going to be very different.

Lila:And he owns the stock market. He loves to talk about … he looks at the stock market as a voting machine that tells him he is doing the right thing every single day. I don’t want this conversation to go too far into politics, I actually don’t like politicians on either side, but in Trump’s case, specifically, he looks at the stock market as a voting machine and “If the stock market is going up that means I’m doing it right, and if it’s not, I’m doing it wrong.” That’s just a pretty narcissistic view of the world (laughs).

David:This is dangerous because you forget that these things run in cycles regardless of you and your policies.

Lila:Right.

David:And that even the best-intentioned policies and well-executed fiscal policies, maybe even the best-intentioned or well-executed monetary policies, don’t always end the way you want them to. The markets have a mind of their own.

Lila:And the fiscal gun is kind of out of bullets because we have just passed this tax bill and we are two years into that cycle and we saw the bump in GDP.

David:What do you do for an encore?

Lila:What do you do for an encore? And there hasn’t really been much economic follow-through.

David:Right.

Lila:In fact, you are starting to see the leading economic indicators start to roll over. That’s why Trump is nervous, and Powell is nervous.

David:So give me a sense for the disciplines and the rules, the kinds of things that influence the way you manage money. How and when do you do what you do?

Lila:We talked about growth versus value earlier a little bit, and what defines a cheap stock versus a value chop. I think there are all kinds of ways to look at companies. Some people say that earnings multiple are the best ways to look at companies, or even [unclear] multiples are the holy grail. And some other people like book value, which I personally think is a pretty archaic way to look at things because it tends to be extremely backward-looking. Sometimes you will have depreciated an asset on your balance sheet that actually has appreciated in value, for example, like industrial real estate. [Unclear]industrial real estate would be a great example of an asset that, on book value, actually looks like it is getting cheaper, but the reality is it is appreciating in value, and so I don’t particularly care to look at book value.

I think I tend to look at investments the way a strategic investor would, so I’m probably more in the net asset value camp, which is effectively an adjusted book value for what the asset is worth today in the marketplace, whether it is to a strategic buyer or to private equity. And I tend to look at things like recent transactions and replacement cost, of course free cash flow potential, among other things. And I tend toward companies that have low ongoing sustaining capital needs, and, I think, particularly in light of how quickly various industries are being disrupted, you need to be looking at ongoing capital needs, like maybe a company is telling you that they only need 5% of revenue as their ongoing capital spend, but the reality is because there is disruption going on they actually need 10 or 15.

For example, the mining industry – I don’t know if you have ever had the opportunity to listen to the Northern Miner podcast, but they have talked a lot about how technology is disrupting old economy and mining, and there is going to be an investment cycle that requires mining companies to invest in technology, particularly as labor markets get tight. It is particularly important as metals prices continue to hover around all-in sustaining costs.

David:How much latitude do they have to invest?

Lila:Some of them, not a lot. Some of them, not at all. But again, I think that bodes well for our consolidation cycle. I think that there are just too many gold companies out there, quite frankly, and we’re seeing it already. We’re seeing Newmont has bid for Goldcorp, and Barrick actually tried to go hostile on Newmont and they have come to an agreement to joint venture their Nevada operations. There are enormous cost synergies in those two getting together on those particular assets.

But I think we are going to see a lot more of that. I think that, first of all, development pipelines are totally empty, so large gold mining companies’ production profiles are beginning to roll over and supply growth is in decline, so there will have to be an investment cycle, and there haven’t been any 5-million ounce discoveries, I would say, in the last five years. I don’t think I could come up with one.

David:So a race for reserves and resources kind of gobbling up. On the one hand you need resources to give yourself a long-term existence, because you can run out of the stuff and then you’re out of business.

Lila:Right.

David:And then you are also suggesting that, more than investing in more dirt, you have to invest in more tech, and not everybody can do that, which means that some of your smaller players who have decent reserves and resources but not as much access to the capital markets are targets.

Lila:They will be targets. And now the question is, do these managements want to go anywhere, or do they not? They have all been paying themselves quite well, and, once again, Barrick for Newmont is a great example of increasing hostile activity, and I think we’ll see more of it. And companies also need to stay relevant. When you have an environment where so much capital is flowing to index, if people want to express a view, they think gold prices are going up, they will try to chase the GDX or the GDXJ. Well, if you are a company and you are not a member of one of those, you are basically lost in the shuffle, so your cost of capital stays high. You don’t see those capital in-flows. So companies are going to have to get together just to stay relevant within the capital markets and effectively lower their cost of capital.

David:You serve on a couple of different boards in the Dallas area. Imagine you are sitting with someone, well educated, sophisticated, but not necessarily in the world of money and finance. Perhaps they are a lawyer, a doctor, obviously well educated but they don’t know what you know in terms of what is happening in the markets.

Lila:That is always a hard conversation to have because everybody wants to say, “Oh, I just bought this index fund!” (laughs)

David:Right. And that is more and more common. And you say to yourself, well, buying the index gives you access to an overvalued space because you are just kind of buying blind, you’re not choosing value on the basis of an individual company or an individual opportunity. So lots of investors really don’t care about this being an overvalued environment. They see people making money and they feel compelled to get in, that fear of missing out.

Lila:It’s the vacationers on the beach just before the tsunami in Indonesia.

David:“I want what they have, which is happiness, and I want what they have, which is the good life, and I want what they have, which is a nice suntan, not a sunburn.” And everything in your mind that you imagine, that you hope for, is just perfect. How would you advise that investor with the currents that you see swirling around? Because again, you have a long-term relationship with this person, hopefully you are going to be sitting with them for 2, 3, 4, 5, 10 years on the board. You don’t wear a tinfoil hat, you’re not calling for the end of the world. On the other hand, you look and say, “Gosh, you’re kind of oblivious to what is going on.” How do you communicate effectively with a person to say, “Great. Glad you’re interested in the stock market. There’s a better way.”

Lila:Or maybe there’s not a better way, but at least try and plant a seed to get that person to think about what could go wrong, and what could put their financial situation in jeopardy, and think about their margin of safety, and what they require in terms of their lifestyle and their needs. You’ve worked really hard to get to where you are and to the financial situation in which you find yourself. How do you think about protecting that?

David:There is only maybe one other instance in financial market history here in the U.S. where we have had more borrowed money in the market, assuming that everything is going to go well, so well that you can speculate not only with your capital, but with the house’s capital (laughs).

Lila:It’s just arbitrage because if the markets go up forever, well, why not borrow money to participate in that? No problem. But unless you happen to be very early and were very right about it, you have no margin. You talk about margin – if I had not been smart about investing, personally, I would not have had the margin to resign from my investment management job that I was increasingly unhappy with and join a public company board that probably pays me a quarter of what I was making, if that, but I am a lot happier, and I also have the freedom to be here today.

David:Right. And so we are using margin in two different ways, just to be clear on the definition. You and I know, we are kind of bouncing back and forth between stock market borrowing, which is one version, and what we need in terms of a cushion, which would be the other definition.

Lila:Right. And you have to apply that to every area of your life, and especially with your finances because without financial security … you hear that the number one reason that people have divorces is because they did not leave themselves a margin and fell on financial hard times, and, as a result, it flowed into the relationship. So I feel like people say, “Money is not everything.” That’s true, but if you set yourself up in a situation that you don’t leave yourself any margin, well, a lot of bad throughout the other areas of your life could flow. So it’s important.

David:I think of oil going through a transmission. You can do without it, but not for very long. It is something that keeps the gears going, and you need a certain amount of it just to keep the gears going. With none of it, the gears seize (laughs). And having a little bit more is helpful. That is why we routinely change our oil and monitor those levels so that we are not looking at so much friction that you have an engine seizure or a transmission blowout.

Kind of transitioning a little bit, you’ve worked with hedge funds, you’ve worked with mutual funds. Now you contribute as a board member to a publicly traded company. Where do you think you can make the greatest contribution? What would that be? With what skills, with what insights, with what natural talents? Where do you think you can make the greatest contribution?

Lila:I have seen the good and the bad in institutional money management. One of the good things you take away from institutional money management is process and discipline and accountability. Whether it is within a large asset management organization or a family office or a wealth management office, I think that that structure and that discipline of always constantly reviewing your portfolio for risk and for drawdowns. One of the storied investors always said that he used to pull up his portfolio every single day and if there is a stock in the portfolio that he would not buy today he would sell it because he felt that holdwas effectively a decision. And I subscribe to that philosophy. If I would not put new money to work today in that stock, it’s probably time to get rid of it.

David:That’s an interesting point of view.

Lila:So, it’s almost like you recommit to that portfolio every single day, but I think that the structure of having worked at a very large asset management company and having to be able to articulate a process and a discipline, and every quarter – Doug and I used to call it retribution. We would do portfolio attribution where we would talk about…

David:Quarterly retribution meetings?

Lila:Yes (laughs). We would talk about, in front of our Chief Investment Officer, what has gone right in this portfolio, what could we have done better. And I think that is an important process to always be challenging yourself, what could I have done better? And always be looking at the decisions that you have made, even with the successes, but especially with the things that go wrong, first of all, was the analysis necessarily flawed, or were you thinking about this the right way, and then something out of control, whether it is out of the control of the particular company or did something outside of my control or the control of the company go wrong? So I think the imposed discipline of self-reflection is very important in bringing your best to your clients.

David:It sounds like, to some degree, process, discipline and accountability help mitigate ego.

Lila:Mitigate ego and for the client, help to mitigate downside.

David:Right.

Lila:Absolutely. And I have seen a lot of very, very smart investors be derailed by their own ego where they hold the philosophy that “I’m right and the market is wrong.” And I think that can be very, very dangerous and I think it can really impair portfolio returns. I have worked with people like that and it has not been good for their careers. And I don’t think that I’m right and the market is wrong to find value investing per se. I think that you have to be thinking about, “Okay, I thought this was a value stock. Say, I thought it was worth six times EBITDA [earnings before interest, taxes, depreciation, and amortization] and the market thinks it is worth three or two times EBITDA. Where was my thinking flawed? Why is this a two times EBITDA business? I think imposing that discipline on yourself – if you don’t do it you can really hurt your clients and your credibility as an investor.

David:When you finished your degree in economics at New York University, you didn’t go straight to taking the CFA – Certified Financial Analyst designation – but it happened pretty quickly. Would you say that was a pretty formative decision, an important decision in your ability to manage assets and to maintain this critical self-reflection and be open to having a rigorous process and discipline?

Lila:When I finished my Bachelor’s in Economics, I was a research assistant for someone in the asset management business, and I told that person I really wanted to be a trader. It was the best piece of advice I ever got. He just looked at me and said, “You don’t want to be a trader. A trader is a commodity. You want to be someone who can generate good investment ideas and make money for people. You will always have a job and always have a career if you can make money for people.”

I thought about that. And then I thought, “Maybe I’ll go get an MBA.” Well, I didn’t have any money for an MBA. I didn’t grow up with any money, and I bootstrapped myself through NYU so by the time I got through NYU I was totally broke (laughs). So an MBA was totally out of the cards for me, but the CFA is a self-study, and it is extremely rigorous. The pass rates are somewhere around 30%. One in every three people passes each level, so the dropout rate after level one is quite high, so the vast majority of people who start the program don’t ever get the designation of Chartered Financial Analyst.

For me, honestly, it was a resume-builder because I took Finance at NYU but it wasn’t necessarily my concentration and to be an analyst I thought it was important not just to have Finance I, but for the CFA at that time you had to be able to build a free cash flow model yourself. They don’t do that anymore, but that is an important discipline in figuring out how a company should be valued.

I did some other work outside of that. I took a great Financial Modeling class that was given by a group called Wall Street Prep. It was a week-long course that showed you how to build a model from the ground up, which was enormously valuable and something I was able to bring right back to my role at Tice and Associates.

David:I want to come back to some terms because the advice that you were given was, don’t be a trader, generate investment ideas that can make money for people. I think that is reasonable advice. What I have seen with a lot of analysts who are pretty good at generating ideas is that sometimes analysts land on those ideas and can’t be moved off of them. It’s like, “Look, I’ve done the research, this is the thesis, this has to work.” And then it’s like, “Well, but the market is not cooperating.”

Lila:Right.

David:And all of a sudden that’s where it is sort of, “Well, yeah, but the market is wrong. I can’t be.”

Lila:“I’m right and the market’s wrong. I’m right and the market’s wrong.”

David:Right. And I guess I have always thought about there being this difference between being a trader who is willing to say, “Yeah, but if the market says that you’re wrong, you’re wrong. You’re priced to market, you’re marked to market in real time every day when the stock market opens. You’re either right or wrong (laughs) because the market is either moving in your favor or against you.

Lila:Right.

David:And so, nice job with the thesis, nice job with the idea generation, but you still have to be able to take action, putting something in motion, and then correcting that if it doesn’t go your way.

Lila:And also not having particularly high turnover. I don’t think that high turnover is ever in the best interest of your clients. So you don’t go into those investment decisions particularly lightly. You’ve done a significant amount of homework before you allocate capital. But at the same time, if you’ve got a stock that has moved against you, say, by 20%, you have to start to look at that and say, where was my thesis wrong? Because you were wrong about what this company is worth.

David:And on that basis, where the price should go.

Lila:Right.

David:Because you may be right, ultimately, about what the company is worth, but again, in real time it doesn’t matter. In real time the market disagrees. It’s not going where you want it to. So, in your opinion, what are the attributes that make a great portfolio manager?

Lila:Humility (laughs). I would say first and foremost by a mile is humility. I worked with your colleague Doug Noland for a really long time, and one of the things that I like so much about Doug is that he is so smart and so knowledgeable, but he is also extremely humble, and he will never come at you, even though he may hold a different view, and has done significant homework on his view, he will always listen and take that in. And you don’t see that very often in the professional investment community, particularly among the hedge fund community.

David:I wouldn’t put that as one of the top social qualities.

Lila:(laughs) No, I think to become one of the “masters of the universe” it’s almost contrary to having humility. You don’t get to that place by being humble. But ultimately, the best investment decisions are made through the lens of humility because you’re always thinking, “Did I get that wrong?” Even before you buy a stock, you think about, “What blows up this investment thesis? What are the top three risks to this thesis and to this company? What are the potential fatal flaws?” So you have pretty good idea of what could go wrong before you even – and then if any of those things actually happens, well, then you have to move on because you’ve struck a fatal flaw. And I’m not sure that enough investors think about what could go wrong. They lay out their investing case, they buy the stock, and they never think about that moment on the beach in Indonesia.

David:When the wave is surging.

Lila:When the wave is surging.

David:So, you had a great experience working with Doug. I think it overlapped with Tice and Associates and then also with Federated.

Lila:Yes.

David:You got lucky enough to stay in Dallas. I’m very curious, at some point (laughs), maybe in another venue, you can tell me why you didn’t have to move and he had to.

Lila:Well, I did actually move for a year.

David:Okay.

Lila:This is actually kind of a cute story, so if it’s okay I’ll share it briefly. I had been dating a man who (laughs) didn’t really want to get married, and I said, “Okay, I’m going to sign a contract and I’m moving to Pittsburgh.” And two days before the moving van showed up he came to me with a ring and he said, “Will you marry me?” And I said, “Well, yes, I’ll marry you, but I’m still moving to Pittsburgh.” And so, off I went, and I moved to Pittsburgh. We got married and I still lived in Pittsburgh. We were doing this long distance commute, and it was tough.

We got married in Napa. The morning after the wedding, I woke up and one of the founders of Federated was sitting at the deck across from us and looked over – just a total coincidence – and I went over and introduced my husband and said, “Yeah, we just got married.” His wife said, “So wait, you live in Pittsburgh and you live in Dallas?” She looked at her husband and said, “You make sure she gets back to Texas.” And within six months I was back in Texas (laughs).

David:Fantastic.

Lila:And I’m still married. So, I worked with Doug remotely for almost six years.

David:So the team approach, working with a team of investment professionals, you see some synergies there, and you apparently were able to keep those synergies in play even though you weren’t on site.

Lila:Yes. Technology is great. You have Skype calls, phone calls. I had total video access. I do like face-to-face, I think video calls are fantastic and totally easy to do. And Doug has some strengths that I don’t have. Doug is a great communicator. Doug is one of the best, thoughtful macro guys that I have ever met. And I think I have some strengths that he may not have. I’m probably more in the weeds with individual companies and ideas.

David:So build a team. If you could build a perfect team, let’s say you took the best of the macro from Doug, some of the micro from you. Start supplementing. Where are you in the mix, what do you need to perform at an optimal level? Do you have what it takes just – look, I don’t need outside resources, all I need is my Bloomberg machine and I’m off and running – what is the ideal team look like where you have access to some bold resources, as in, you had them before, and then maybe, in a perfect world, what would you have?

Lila:That’s a great question, and that was something I definitely had wanted to chat with you about. And I think it evolves over time. I think that Doug’s macro overlay – Doug is great at technical analysis and risk management. He and I used to have a weekly meeting when we worked together about companies and talk about, okay, here’s what is working in the portfolio, here’s why. Here is maybe what’s working less well, let’s talk about this. Let’s talk about if there is something macro going on that maybe you want to reflect to me, or is there a micro company development that you should be aware of? So I think that’s a great start.

I think that having access to companies and managements and some sell side resources. I think a lot of what goes on on the sell side is a total waste of time, guys who are putting out research reports to rehash companies’ earnings. It’s just noise and junk in my inbox. But I think there is some thoughtful work being done out there on more industry-specific developments. For example, a white paper on electric vehicle metals, for example, is something that you would love to have access. I think MiFID game-changer. MiFID is a regulation where you can sort of pay to play and say, “Okay, I want access to that particular piece of research and I’m willing to pay X dollars for it.” You no longer have to have 25 sell side relationships to get what you really need.

David:A good friend of mine is right in the middle of that, providing research and kind of being a nexus for that – Russell Napier, in Edinburgh, Scotland.

Lila:Interesting.

David:He has created a platform where you get to look and see what is most valuable to you and then shop itàla carte, and you have access to tons of different research houses, but on a document by document basis, what do you need?

Lila:Right.

David:It’s great.

Lila:It’s perfect because, just like the “buy side” the institutional money management business has been somewhat commoditized, the sell side has been totally commoditized. I remember back in the day where you would pay 25 cents a share and they would bring companies through to see you and now you pay fractions of a cent per share in commissions, and the only time you get a “non-deal road show” is when a deal was coming along somewhere down the pike (laughs). So I think that it’s great that research is also being democratized.

I think having access to having access to one industry conference per year per area of coverage is a good thing. I think there are groups out there who do great work in real estate, for example, or they will host a very large conference where you can virtually sit down with the management of any of your portfolio companies and spend a time or two talking with them. But I’m fortunate in that relationships are important to me and I have developed a lot of relationships where at least I can pick up the phone and talk to somebody within a management team of virtually any company I would be interested in investing in. So resource constraints can be worked with.

I love the idea of a research platform where you can get anything à la carte because most of it is really just noise. But if you are coming up to speed on something, just say you want to get up to speed on the cobalt market, for example, what a great way to have access to somebody who has done a really deep dive and went through and looked at a lot of companies and assets and really has imparted that knowledge and you can have access to it is great.

David:So in terms of the team, technology enables quite a bit of it, both in terms of access to research, as well as communication necessary to work cohesively. Trading platforms are fairly flexible in terms of where you can be spatially located.

Lila:Yes.

David:Work with me here on a little thought experiment. Imagine the investment landscape of 2029. So we go out ten years.

Lila:Wow.

David:Obviously we don’t know the future, but we all have sort of educated guesses in terms of the step sequences that may occur, and perhaps the probabilities of those step sequences. We know where we are at this point. There is some guesswork as to where we will be at that point. How do we get there? What do you imagine the investment landscape to be ten years from now, and what seems to be the best risk-adjusted approach to the markets between here and there? This, again, goes back to building a portfolio today, you do it in light of what you see today, but assuming you’re wrong, you may have to correct the course. You may have to have the portfolio reflect the actual investment landscape as opposed to what you expected.

So first of all, there is how you launch the thesis, develop the portfolio, put it in motion, but then ten years from now, that’s a long time.

Lila:That is a long time.

David:It’s a long time. Ten days can be a long time (laughs).

Lila:Well, and the rate at which businesses are being disrupted makes … structuring a portfolio today for ten years out I personally think is an impossible task, but I think that there are some things you can think about that are very definitely secular trends that are investable theses today, and that will probably be investable theses three years from now. For example, 5G is one of those. 5G is coming and there is going to be a huge investment cycle related to that, and who are the beneficiaries of that? There are companies that are very definitely beneficiaries. That is just one example.

Online shopping is not going away, and while you don’t want to own Amazon, per se, because that is a pretty low return on capital, expensive proposition, but are there companies that benefit from that trend that you can buy for lower prices and maybe think about industrial last mile storage is a great example of a great risk-adjusted way where you get the potential for capital appreciation because this company is actually growing and continuing to roll up rents as the rental roll expires. But then you also have yield, so you have a real good total return proposition in something like that.

I love stay-rich stocks. My personal portfolio is full of stay-rich stocks. And I think that there are ways to think about the future today where you can capitalize on those trends without taking tremendous risk. Amazon is a great example. I think there is so much risk in a stock like Amazon.

David:Because you’re paying for like 500 years’ worth of earnings on the front end?

Lila:Yes. And then you’ve got regulators and politicians who are really thinking that Amazon has become too big.

David:Elizabeth Warren, most recently?

Lila:(laughs) Yes. And that’s a real risk. There is a not-insignificant chance that Trump could lose the White House in 2020 and what happens to these effective – maybe Amazon is not a monopoly per se, but there are certainly some signs that they are somewhat anti-competitive.

David:Yes, and I think it comes back to who holds the power. If corporations or Wall Street is ever viewed by the halls of power in D.C. as having gained some sort of an edge, then they will be knocked down to size through some form of legislation. It doesn’t have to be a breakup like the anti-monopoly moves back in…

Lila:With the Bells?

David:Yes. But it could be, “You now have … it lowers the entry cost for new competitors,” something that levels the playing field, yet not a monopoly like, You control the toll bridge type of monopoly, but you challenged our authority and our power, and now we’re just going to kind of mark you down to size a little bit – cut you off at the knees.”

Lila:Right. I know we’re seeing a great example of this play out in the press right now, not corporate related but related to parents who paid to get their kids into Ivy League schools. We’re seeing people very definitely get cut down to size. And there is this trend toward populism. I think that is a trend that is going to continue. And Amazon might start to be viewed as anti-populist. We’ll see. I’m not advocating to be short Amazon, but I certainly don’t think you can buy it with any sort of margin of safety today.

David:Define what you mean by a stay-rich stock.

Lila:A stay-rich stock is a company that has high returns on capital, relatively moaty business, so it’s got a large moat around its business model, that has very low sustaining capital needs, and provides a total of return proposition where maybe you have a secular tailwind, and then you also get paid to wait. And there are some infrastructure companies, real estate companies, that can provide that sort of moat and total return proposition, and great management, and the culture that comes from having a great management team is always an important part of that. I think all of those things are what constitutes a stay-rich stock.

David:So yes, we don’t know what 2029 looks like.

Lila:I wish I did (laughs).

David:I know. The crystal ball.

Lila:I would think that at some point between now and 2029 there is going to be a hiccup in the business cycle. I can’t imagine that we can roll on for another ten years without some sort of hiccup in the credit or the business cycle or both.

David:Then I would think you’re a kid in the candy store. There are a lot of stay-rich stocks which become very intriguing. The fundamental picture of the company may go under-appreciated in a period of time where these is compression in the market overall. And to kind of follow Doug’s thesis of a downturn in equities based on a tightening of credit and other factors, even a stay-rich stock, you don’t have to worry about an existential event. It will be around, but it could still be marked down, which for someone who is managing a portfolio, you know what you’re looking for, you know what you like, and if the price is right, wow, that is kind of all the stars in alignment in terms of the positive long-term rate of return and attractive long-term rate of return.

Lila:Yes, and I think, too, at this point in the business cycle, professional investors hate to hold cash. They can’t do it. It’s like, “I don’t get paid to hold cash. I’m not going to hold cash.” And sometimes holding cash is the most prudent thing you can do. If you look at the average mutual fund, maybe they hold 3% cash, and I just think that’s too low because then you have no margin of safety to take advantage of those downturns. Most mutual funds are experiencing outflows, they hold very low cash levels, so guess what? When you have a market downturn you have no ability to take advantage.

David:Back to that issue of margin.

Lila:Right.

David:You have no cushion. It generates a straightforward liquidation.

Lila:And you have to sell your best ideas at the time you don’t want to, to raise cash, because you’re probably getting redemptions at the same time that you are having this market downturn.

David:I have a friend who is in the money management business. He runs a couple of billion dollar mutual fund in the Midwest. He is a legitimately competitive triathlete in the long course.

Lila:I don’t know how somebody can do both well (laughs). I’m a mediocre triathlete, just for the record (laughs).

David:His boss came in last year – new president of the company – and said, “It’s not your job to allocate to cash. You’re 100% invested or you don’t have a job here.

Lila:I hope he’s not feeding a family, because I would have to resign.

David:The president’s view is, it’s the investor’s job to decide how much cash they want. If they have given money to you, it’s according to a certain mandate. Again, we go back to this issue of passive versus active management. If you are managing, and are marked according to a certain benchmark, and you’re under-performing in the least because you have a 3% or 5% cash allocation, and the index or the benchmark doesn’t have any cash, so you’re trying to play the side of caution in increasing the cash allocation. This is like Jeremy Grantham coming into 1999-2000 and he starts piling up cash and his clients say, “You’re fired. We don’t want you managing our money. We want you in the market 100%.” And he says, “I know what’s coming and I want to get out.” So he loses 60% of his assets by the year 2000, and lo and behold he is proven right. Those clients should have had more cash, they should have listened, and most of those people came back in droves.

Lila:Right.

David:It’s almost like the scratch in the record. The same think happens in 2007-2008. Grantham is increasing cash, there is little toleration for it because of underperformance, and it really is like, “But you go to the country club and so and so is making so much money, and why am I not? And if you’re not keeping up with them, if you’re not beating them, then I’ll go find somebody who will beat them.” It’s as if returns become paramount, risk is neglected.

From a long-term management perspective, you can’t just focus on returns. There has to be some appraisal of risk in where you are in the macro-cycle. I really enjoy my friendship with this guy out in the Midwest, but he is being put in a very awkward position. He has no margin. As a manager, he has no margin. They could see that 2.5 billion dollar fund become a 300 million dollar fund in very short order, between market loss and then redemptions as people opt to go to cash, because you didn’t do it.

Lila:Right. And then you’ve squandered a generational opportunity, basically, as an entity, because you didn’t have license to hold onto cash. You’ve put your franchise at risk.

David:So this is a really tough place, as an asset manager. You see what needs to be done, and a client is either saying take more risk or take less risk. And there is part of you that says, “All right, we’re here to serve the client.” Does the client know best? This is not a trap question or anything, it’s just, it’s almost damned if you do, damned if you don’t. If you do what in your view is the right thing, like Jeremy Grantham managing 60 billion dollars, you may find yourself losing 60% of your assets.

Lila:Right. I think that that conversation around risk should very definitely happen at the beginning of any relationship. It’s sort of like getting married, understanding what that particular person’s appetite for risk is. And then, what do they define risk as? In the investment management business, risk is defined as standard deviation, or a variation of returns around a particular norm. So the traditional definition of risk within that framework, we’re in a very low risk period of time in the market which is, the further away you get from the beginning of a business cycle, the higher the risk. But people don’t necessarily see it that way.

So to have the conversation around risk at the front end, and to understand how that client defines risk. Does that client define risk as loss of purchasing power relative to the currency? Does that person define risk as any drawdowns? Can this particular person tolerate any sort of drawdown whatsoever? So I think that conversation is really important to have on the front end, and then continue to evaluate over time.

David:So part of that is just dealing with the regular communications required for a healthy relationship.

Lila:Yes, that margin that we talked about before. It seems to be a theme in our conversation (laughs). I would say to any person that is working with an asset manager that is not listening to that, that person really needs to think about that relationship, too. It’s a two-way street.

David:I think about some of the qualities that you talked about earlier and Grantham comes to mind as a person who is fairly humble, but he is also fairly – this is a non-generous way of saying it – fairly pig-headed about his views about what is going to happen. He establishes a position and is willing to take his lumps if he is wrong. He is more right than he is wrong, so maybe the market provides him that privilege.

Lila:Yes. And he has earned the right. He has had a long track record of success as an investor and he has certainly earned the right to invest as he sees fit, and maybe his approach isn’t necessarily for everyone and the investor has to decide, “Is this really for me?”

David:Right. Thinking back to structure and what we were talking about earlier, about synergies working with a team, and theoretically building that team. Can you think of a leadership model that resonates with you, that motivates you? That is part one of the question. Part two would be, in a leadership role yourself, how do other people experience you?

Lila:I guess first of all, structurally, I think a team approach is really important because everybody has a different set of experiences to bring to the table. But I also think that too much of that can lead to a bit of group think, so there needs to be a bit of, let everybody do what they are really good at doing, and bring the best of that to the table. I guess in terms of my own leadership ability, I hope that people see me as a good mentor. I certainly try to be. I certainly don’t have all the answers but I’m happy to share what I know. I do enjoy talking to young people – I enjoy talking to young whippersnappers – about the business, and I’ve had the experience of telling somebody that maybe this isn’t the right path for them, for whatever reason, for demeanor, or work ethic, or whatever, because it’s pretty consuming. When you are doing it, you are always thinking about it, and I happen to have married somebody who is also in the business so we talk about it all the time. I don’t think there is ever a moment when we’re not thinking about investments in some way, it seems.

David:So in terms of your role in a leadership position, I guess I’m curious where your competitive edge comes out. Does it complement the team? Does it create an internal sense of accountability, like pull your weight, get to work? I’m just curious of your natural competitiveness, because I’ve garnered that you are a little bit competitive.

Lila:I’m very competitive with myself and I’m probably my own worst critic. Yes, I’m very competitive, and I’m going to run a 21-minute 5k at some point. I don’t know when that point is going to be, but right now I have other things that are my focus. But I think I really shine when left to do what I’m best at, which is really understanding the investment portfolio and evaluating that every single day, and being on the conference calls. Every minute of the day that you don’t spend in that part of the discipline takes away from the ultimate value of the product.

At Federated I had some marketing responsibilities which I was happy to do because it was always a way to hone the narrative, and really even hone my own thoughts on things. But a lot of that could be very detrimental to the actual focus on making a portfolio as good as it could be. So there is definitely a balance there.

David:Disturbances – market disturbances – you’ve seen a few in your ten-year crises where all of a sudden people are asking questions. “What’s going on?” And there can be some confusion, there can be some stress. When you start seeing some of the big houses come under pressure and a few start dropping like flies, there is a whole different feel in the marketplace.

Lila:Yes.

David:That’s market disturbance. There are all kinds of disturbances in life, not just in your professional world, which can be exogenous – from the outside. Are you comfortable talking about where your head is at in the game, in the context of disturbance?

Lila:We live in a society that wants to medicate away disturbance and anxiety, and I think that too much of that takes you away from actually addressing the fundamental problem of whatever is causing the disturbance. So it almost pulls you out of it a little bit. So I got a great piece of advice the other day. In my board related work, I sat down with a guy who is on the board of a Fortune 500, and he told me, “Never, ever run away from criticism and conflict.” He said, “You’ve got to address it straight on, and if there is a problem, never run away.”

And I think it’s great advice. It’s very easy to get out in front of investors when things are going well and say, “Oh, it’s great, and I’m so smart, blah-blah-blah.” But it’s really hard when things are going bad. But that’s the moment that you build the best relationship with that client, and that’s the way that you address the problem. By addressing the problem straight on you gain that client’s confidence in your ability to make good decisions in a time of crisis. That person will realize, “That is the lady that I want with me in the trenches when things are going wrong.”

My instincts are to not run away from problems but to watch this particular board member get very difficult questions about his company in a group setting and to address them straight on, and I went to him after this presentation and I said, “My God, that was great.” He said, “As a new director my one piece of advice to you is, never, ever run away from a problem.” I went home and thought about that and I thought, “Yes, that’s great advice for that situation, and it is fantastic advice for life.” And it is something that I’ve sort of kept on my mind for the last several weeks.

David:Well, Lila, we could go on with our conversation. I want to thank you for joining us for the Commentary.

Lila:I hope it was valuable. Thank you.

*     *     *

Kevin:You know, Dave, so many things in life rely on being good at what you do, but also being very, very humble. Lila has been described by people who have met her and know her to be someone who is smarter than anyone else in the room, but also very, very humble. What a great combination.

David:(laughs) It’s actually a unique combination. She is incredibly intense, very competitive, and yet cool as a cucumber, so there is this odd mixture of humble, cool as a cucumber, very intense at the same time, highly competitive…

Kevin:But willing to admit when they are wrong.

David:And that is, I think, one of the things she mentioned today, is that ego is a problem for investors, and if you don’t know yourself, you are a danger to yourself. As an investor or an asset manager, you have to know where ego factors in, check that at the door, and allow the best decisions to be informed by humility.

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