‘IN the Office’ with famed value investor Jim Cullen

Transcript:

[Gregg Greenberg] Value investing has repeatedly proved its relative long-term success over and over again.

[Jim Cullen] Well, the reason why we started this is because value is so out of favor with young people. When you mention value they look like you’re crazy, number one, and consultants were saying we haven’t done a value search for an institution in 10 years. So, that said, that’s why we call it the case for rather than just value investing. the case for, nobody’s following value investing at all and value investing is really investing.

[GG] So Warren Buffet has also been a proponent of value investing. He’s done well with it obviously, he has his style, explain your particular style of value investing.

[JC] Our style is more like what his was originally, diversified smaller mid-size companies, cheap on a P/E basis, well he’s gotten so large right now that he’s buying big companies like Coca-cola and big railroads and what have you but originally he was buying the smaller stocks where he could add more value. We’re doing what he used to do.

[GG] In his new book, The case for long-term value investing, Wall Street veteran Jim Cullen gives his views as to why buying cheap stocks wins in the end.

How do you avoid buying a stock that is at a low multiple because it deserves to be at a low multiple?

[JC] Well you never know. You have a portfolio of 35 stocks and you have a great story you think on all of them. some are going to disappoint along the way. But if you have 35 stocks in portfolio, and most of them fit on a P/E price to book dividend yield basis, the odds of you doing well are very good.

[GG] Currently ETFs have become very very popular. Why should an investor go into an individual stock as opposed to buying a basket in the form of an ETF?

[JC] It’s just baskets in general I think, well, I see the trading going all the time and I think it discourages long-term investing. I think you get baskets where people are moving the baskets.

One of the dangers of investing is the volatility, huge volatility, and how do you take that out? If you invest on a five-year time horizon smooths volatility completely. We just sit down with clients and say, over the next five years you’re gonna have a period we’re gonna say why am I in value? and why am I in the stock market? So you have the communications once you start bundling you lose the communications with clients and then they’re in this bundling thing and there’s going to be a lot more trading what have you and you look how volatile the markets are and it’s going to work against them.

[GG] Small cap value stocks have a long history of outperformance. Why do you think that is?

[JC] One of the reasons why is because a lot of the small cap stocks get taken over, but we’ve done in our book a history of small cap and it shows that it’s about the same as value about a 15 per cent return over since 1968. But what you see is that you have bigger swings and the surprise is though that small cap value especially does much better, and does much much better in down markets. And nobody’s done much any work on small cap much recently in the last couple of years. That’s going to pick up I think.

[GG] There’s an old saying on Wall Street, ‘don’t fight the Fed’. Currently the Federal Reserve is raising rates. How will this affect value stocks going forward?

[JC] You know, I’ll like go back to what Peter Lynch said. Peter Lynch said, spending five days, five minutes a day on economics. He says that’s five minutes a day too much and because we go back and look at the history of rates and what have you it’s irrelevant for the market. For the long-term investor we take a five-year time horizon especially.

[GG] What do you think about ESG investing? Is it just a fad or is it here to stay?

[JC] ESG has been around as long as I can remember and it’s always been a problem for execution. It’s hard to implement – who’s doing a good job and who’s not – and so I think the intentions are good but I think executions are tricky.

[GG] And as for the current market, what does Cullen have to say about the present state of the bulls versus the bears? Value versus growth?

[JC] History shows that once the debt of a company or country reaches a very high level, like we’re at right now, it usually means you get slow growth. And so Jamie Dimon was talking about the hurricane. I don’t know about a hurricane. You’re probably going to get a period over the next five years where growth is generally going to be slower for stocks, I would think. Which would be great for value investors.