Lessons From a Legendary Fund Manager with Joel Tillinghast

[00:00:00] Welcome to excess returns where we focus on what works over the long term in the markets.

[00:00:05] Join us as we talk about the strategies and tactics that can help you become a better

[00:00:09] long-term investor. Justin Carboneau and Jack Forehand are principals at the Lydia Capital

[00:00:13] Management. The opinions expressed in this podcast do not necessarily reflect the opinions of

[00:00:17] Lydia Capital. No information on this podcast should be construed as investment advice.

[00:00:21] Securities discussed in the podcast may be holdings of clients of Lydia Capital.

[00:00:24] Hey guys, this is Justin. In this episode So I just hope Jack and I can bring a little justice to everything that you've done in the investing world throughout the discussion

[00:01:42] today. So really, really appreciate you taking the time to speak with us. It's going to be good.

[00:02:44] we could just start there because I think it's a pretty cool story about how you went about getting your job at Fidelity. Yeah, I could work at Dexter's Brand and Lambert in 1986. They were beset by

[00:02:57] a bunch of legal problems. I loved working realized that I wanted to work for people I respected

[00:05:29] except when I called Peter Lynch, his secretary, Paula Sullivan, asked who's calling and put me through. And retrospectively, I think Peter Lynch was who I wanted to work for most of all,

[00:05:38] especially at the same site. He did have to come in and do a formal interview with everyone. And some of the key lessons that you learned from Peter Lynch over the years, what would those be? I've got three. One, consider many possibilities. Cast a white net. In other words, look at a lot of stocks because Peter's formula was you check tens oh, I've missed it. It's too late. Rather than looking forward and saying, it still has exceptional value, or a momentum investor, and since being terrible at momentum, maybe misspeaking, don't look

[00:08:21] at that double and say, well, And so I'm looking for a different thing than a momentum investor. I'm wondering, you just mentioned the different types of investors.

[00:09:41] If you were to describe, for someone who hasn't followed you in your career,

[00:09:44] if you were to describe your approach to picking stocks, your investment strategy,

[00:09:47] how would you describe it?

[00:10:46] And so it's a flexible value investor who tilts towards quality.

[00:10:55] Because the value, the outlook of a mediocre retailer is much less visible than the outlook of Visa and MasterCard until the

[00:11:01] trust busters come in, which I don't think they will.

[00:11:04] Yeah, you know, a couple things that? Think about the, you know, the believability of the inputs into discounted cash flow. Do you believe the earnings 10 years out?

[00:12:22] And sometimes I look at 10 years and say,

[00:12:27] I can't believe that. a lot of bogus assumptions in that terminal value. So, so I try, you don't have a terminal value other than cash. You know, how much of the value can you foresee? Can you get your money back from things that you think you can see? I'm just curious on this idea of projecting on the future. How do

[00:13:41] you think about management of companies? We've had people on

[00:13:44] the podcast who say, you know, they love talking to management,

[00:13:46] they think they get great valuable information from that. How will that affect your business? If you're just asking them, how is the next quarter going to be? Of course, you're going to get happy talk and stuff, but you should ask them, what are you doing to expand the mode? What are you doing to offer something

[00:15:00] exceptional to your customers?

[00:15:02] But yeah, they're would just be exhausting. Do you think when you look back, people will say that, you know, technology has increased a lot over the years. There's more people working in Wall Street.

[00:16:20] There's more competition.

[00:16:22] Do you think stock picking is harder today than it was at the beginning of your career?

[00:16:24] Or do you think there hasn't 30-something years ago and

[00:17:41] when I looked at what are the small cap artificial intelligence plays, career, you've held things like Monster for a really, really long time. And you've been able to do that when a lot of value investors may not have been able to. So is that is that really the key is you just evaluate it as if it were a new investment today, and look at it that way. And don't worry about what the price performance has been. What that is the mental bite out plays to the stock price history, but not the track record of the company. You also

[00:19:01] have to think about you probably know more about a company that with a lot of categories suffering from shrinkage or falling per capita consumption. How would I replace a stock like Monster? There is a price for everything. If that growth is not exciting enough to justify the price, then that would be a sell. Have a separate class for

[00:20:24] extraordinary businesses. It's interesting. We had off a lot of cash. And he was in a senior position, whereas the equity holder was in a riskier position, although that worked too. I'm curious, one of the things I think that's changed in your career is back when you started, there probably wasn't much going on in terms of factor investing.

[00:21:41] I don't think factor investing was really a thing anymore.

[00:21:42] You know, people quantitatively just trying to buy

[00:21:45] a basket of cheap stocks quantitatively

[00:21:46] and using that as a strategy.

[00:21:48] I'm just wondering, do you have any thoughts on that one of those top secret famous coin shops where they would have to tell me if I identified them. And it said that several years ago, probably 60% of what they were doing was, maybe even 80% was data mining with a thesis. And now gets back to what you're talking about, like those types of guys that are maybe operating in the high frequency world, they don't worry about, you know, as a value investor, I worry about like, does my factor make sense? They seem to think that it's better for them if it doesn't make sense, because then more people aren't going to chase it. So it's an interesting contrast. Yes. And that was exactly what my guy, the

[00:24:20] famous hedge fund was trying to say. Do you have quantitative parts of your process? Like,

[00:24:26] do you have like an initial screen you'll run before you dig into companies in depth? Do you That may not be as much of an issue at Fidelity. Yeah, but I think even at Fidelity, there are finite analysts, and it's good for them to start with banks that have a track record of profitability, a good underwriting history to do some sort of screen, but also try to qualitatively create a valuation curve

[00:25:43] and say, or junky stocks, worry about. And this is why I look for managers who try to see around corners and think about what is because I have biases about whether inflation is here to stay but I don't know and you don't either and you want businesses you have to get into real accounting and say, if you've got 4% inflation and your bank is making,

[00:28:23] which holds all nominal assets and liabilities,

[00:28:27] if it's making a 10% return on equity, that fidelity. So just hear me out here, you went through the 1987 crash, the early 1990s, the late 90s, early 2000s, the 2008 financial crisis, and then the COVID crash. So all those bear markets are obviously very different. You were actually investing through all of them. I mean, if you could sort of give an important lesson for investors that go through

[00:29:42] and all investors do, all equity investors, there investors have something that can keep them cheerful when they're getting the same client calls saying,

[00:31:01] why did you lose me all that money?

[00:31:04] Which you will. stock was selling 30% of the value and two times 2019 earnings. I bought the stock but I didn't load the boat. Usually it was more a pro bon. The global financial crisis was

[00:32:20] more of a drip torture where it kept feeling like I was buying bank stocks at a discount and came to an end that the price was stupid at the peak and it's still stupid. It's not the value and you should have stuck to momentum or whatever your process is. But you also have to think about how is around just your overall thoughts on passive investing. And then the second part of that is when a fund like yours underperforms passive, you know, talk to how investors can make it through what's important for investors that are investing in your fund, and any active fund of fidelity, even when Lynch was

[00:35:01] at Magellan, he didn't outperform all the time. It wasn't, you

[00:35:04] know, year over year outperformance, like Bill Miller

[00:35:05] had like 15 years of outperformance over the S&P 500, and You know, not only the port, passive investing for some investors, you know, they'd like to extend it to a certain category of professional investing. You know, if you are going to choose an active fund, you want a manager that is doing something

[00:36:20] different consistently. You don't want someone who is looking a lot like the index. And I know you have co-portfolio managers on the funds that will, you know, as you sort of look to eventually hand over responsibility, they'll take over the lead portfolio. But if you were to give someone walking into your office today, that's going to assume responsibility for management of the funds, what advice would you give to them? Keep learning from your mistakes.

[00:37:42] Study them. different. But what we like to ask our guests is based on your experience in the market, if you could impart one lesson to your average investor, and not your portfolio manager wow, I believe that fiction, but she can. But it's important to know that I am not the one that you want hiding you