TMF: Thanks, Mary Chris, you've given us a great overview of your investment process.
Gay: The one thing that I didn't touch on that I think is really important is the investment team itself. Bill, rightfully so, gets a lot of attention in the press. We are very fortunate to have him at the head of our team. Certainly, we believe that he is one of the most influential people in investing today, and he's put together a really great group of individuals that on their own have generated quite respectable returns.
Bill is the architect of the valuation process, but we manage six different pools of assets in our group. That group of assets has done quite well, relative to their benchmarks and relative to the S&P over short and long periods of time. So the average experience level of the investment team -- the average experience of the portfolio managers on the investment team is over 20 years in the industry and over 13 years on the team. The average experience of the analyst level within the industry is over 13 years and about 8 or so on the investment. So it's a fairly seasoned group of individuals with low turnover that have been together for quite a long time, implementing the process.
One of the critical aspects of the team is a high level of diversity. Bill studied philosophy. David Nelson, who is one of the portfolio managers who runs our Leading Companies Fund, is an adjunct professor at Johns Hopkins. Robert Hagstrom, who runs the Growth Trust, wrote six investment books. He also wrote books called The NASCAR Way and a really interesting book called The Detective and the Investor. So he has fairly wide-ranging interests.
We have a gentleman on our team who studied medical genetics at the University of Austria. He has a degree in molecular biology. But other than being a consultant before he came to work for us, and also getting an MBA from Harvard, he didn't have a lot of analytical experience. We have another woman on our team who has a medical degree and a PhD in molecular biology. She also didn't have any experience as an analyst before joining us, and also got an MBA before joining us.
There's another gentleman who has a degree in engineering, Michael Mauboussin, who was the Credit Suisse First Boston U.S. Strategist. He's more of a theoretical strategist. He writes a lot on behavioral finance issues. He certainly didn't come to Legg Mason to tell Bill we need to be overweight tech or underweight technology. He's not that type of a strategist. His office is on the other side of me. Michael spends a lot of his time every day really just surfing academic research and trying to bring those ideas to the group -- surfing is probably not the right characterization. But when we had an investment meeting yesterday, Michael was talking about a lot of the things that he's been reading and working on to help improve the analytical process. And it's really amazing to be part of this team where we have the humility to know that everything that we've produced in the past represents history, but everything we can potentially do in the future will only be great if we can continue to implement this process.
One of the things that I think is really unique about the team is that we take our role very seriously in terms of what we can actually do that might impact people's lives. We have a lot of shareholders. I think we have something like 600,000 accounts. Now they might not all be unique individuals, because an individual might have a retail and an IRA account. But the thing that is so wonderful is that we get letters from shareholders saying, "You helped me send my child to school." And, "You helped me retire early."
By extending the influence of the Value Trust overseas, we can have even more of an impact on individuals where, if we do a good job, people's lives can be impacted. That's a responsibility that we take very seriously. It goes right down to the heart of why Bill even works. And it's wonderful that everyone really understands that's what our mission is -- to do the absolute best no matter what the returns are. Hopefully, if we do a good job and continue to implement the process, it will be reflected in good performance.
TMF: Changing directions, a bit, I talked to Bill Nygren recently, and he said, in this market, it's "very difficult to stock select your way to tremendous performance." He's not holding a lot of cash, but he said he's putting a lot of what he might be putting in cash into high-quality names that he thinks are selling at more average prices while he waits for something more attractive to surface. He gave the example of Home Depot
Gay: It's interesting that he would call Citigroup an average valuation when it's trading at about 8.5 times earnings and the market is trading at twice that level.
TMF: Don't hold me to that one.
Gay: The stock's got a 3.6% yield, and it looks like it's probably one of the best money center banks in the world. We would think that's a pretty attractive value and that there's not a lot of risk in owning a name like that. So I wouldn't put that as a "park it" position.
TMF: I should have said those stocks are selling closer to the market multiple than they were a few years ago....
Gay: Well, that would be a name we think is really, really interesting, really attractive. We've owned it for quite a long time -- 10 or 15 years. But we are fully invested. We have marginal cash. We think there are a lot of values in the market. It is true you have to be very selective, because it's not the case that you can just say, "Overweight everything in the market," and you'll do fine. You can't simply take a blanket view from a valuation standpoint. But from a potential ideas standpoint, we are finding a lot of things that are very interesting that we think are very cheap and are likely going to do really well.
TMF: Let's go move to some final questions. It's clear that you admire greatly Bill Miller and other professionals at Legg Mason. Who else in the investment business do you admire?
Gay: Certainly [Berkshire Hathaway chairman] Warren Buffett, Chris Davis, Mason Hawkins at Southeastern, Marty Whitman at Third Avenue Fund, Jeff Gendell (he's the manager of a hedge fund called Tontine Investments). And Lisa Rapuano -- she's done a great job. I don't know what her returns are since she joined Matador, but she was a great manager here at Legg Mason while she was part of our team. And the other managers in our group. Really, if you compare Robert Hagstrom's returns to any growth manager, he's done a terrific job. Jay Leopold, who runs our all-cap product, who's helping Bill now on Special, has done an amazing job in the mid-cap space. And David Nelson, who's put up really respectable numbers with the portfolio that he runs.
TMF: I don't want to put down the other investment firms out there, because I respect them, too. But I think it's fair to say that Legg Mason could be considered the "thinking man's" investment firm. You have the connection to the Santa Fe Institute, and as we've discussed, there's a lot of out-of-the-box thinking that goes on at your firm. With that said, what books or publications would you recommend?
Gay: We actually have a reading list. One of the things that you probably would find interesting is we've just started an internal book club. The title of it under Michael's area is called "On the Same Page." What we found is there are a lot of things that we just take for granted that people have read. But if you're new to the industry or if you're new to investing, you may have not read the basic Buffett shareholder letter. Or you may not be familiar with the Theory of Investment Value or the work that Stern Stewart did with EVA analysis. So there are a lot of books that we recommend that people read just to get a basis.
But in terms of the out-of-the-normal reading area, well, Expectations Investing, which Michael Mauboussin wrote, is a terrific book, and it's one that we really are incorporating into our investment strategy. There's a book called Creative Destruction that Dick Foster wrote on companies from a long-term sustainable basis -- why companies failed and why companies are successful. Robert Hagstrom, not to push our own author, but he wrote a really terrific book called Latticework, which was re-released called Investing: A Liberal Arts Approach, which is really good. Peter Bernstein wrote Against the Gods. A lot of the reading that we do is trying to understand properly risk. Fooled by Randomness is a really great book written by Nassim Taleb, as well as just reading Irrational Exuberance. That one by Schiller was pretty interesting. The book that I have in my hand is called The Wisdom of Crowds, by Jim Surowiecki.
TMF: Yeah, I just read that one.
Gay: Jim actually came into our office, so he was the first of our internal book club. Bill bought the book for everybody, required all of us to read it, and then we had a discussion. It was really terrific. I don't know whether they've chosen the next book, but that was one where I wrote tons of notes about it, about how we can maybe describe our investment process a little bit different, using a lot of the things that he uncovered in that book.
TMF: I have to point out here, before Surowiecki went to work for the New Yorker, he was writing for The Motley Fool.
Gay: That's right. We have a lot of Motley Fool people here. In fact, we keep hiring more. It's a good mining ground for really smart and talented people.
TMF: While I'd happily end the interview on that note, I have one last question. I played this game with Bill Nygren not long ago: You put all of your money in five stocks, not to be touched for 10 years. What five stocks make your short list?
TMF: Thank you so much for talking to us today.
Gay: Thank you.
Read Matt Logan's complete interview with Mary Chris Gay:
- Lessons From the Value Trust
- Pay Up for Growth
- Beat the S&P 500
- Golden Rule of Investing
- Value in a Diverse Team
Are you on the hunt for value stocks? Join Philip Durell in his search for deeply undervalued companies in Motley Fool Inside Value. Each month his newsletter covers two companies that represent real value for investors. Start yourfree 30-day trialnow.