Jim Cullen (03:18):
There was a character, and I mention in the book, called Charlie Plung. We called him, “Two a day Charlie.” What he would do was come out with two new issues every single day, and all the investors were strictly clamoring for him. It was similar to some of the things we see today. Actually what happened, linking in to the thirties, which Ray Dalio mentioned the thirties, what Merrill Lynch did, they had three older experienced vets, brokers, in our office to give some stability. These older guys were buying names from the thirties, and they had nicknames for the stocks, Betsy and Steel and all the nicknames, and they all were dividend stocks. We used to say, “Well, these guys, they’re all alike. They all wear red suspenders, smoking cigars.” We said, “It must have something to do with dividends. What are dividends anyway?” But we were millennials, most of us there, and we were interested in hot moving, fast growing stocks. Airlines were big, Pan American, TWA, world travel’s going to expand dramatically.

Jim Cullen (04:21):
We had color television stocks were hot. We had all these new stocks. An industry was formed called Conglomerates, where they were highly leveraged companies, or will on debt. And they were just buying up all the companies around. And they were the most active stocks every day. It was really a real casino. And I tell in the book, I said, “It’s like a British betting parlor.” It was mobbed every day, then all of a sudden, 1968, the market rolled over and the market the next seven years had two major stock market recessions.

Jim Cullen (04:53):
At the end of 1975, all those brokerage firms were shut down. Most of them were gone and most of the brokers were gone. And many of the firms that were also involved, were also gone. That was the initiation of that period, the era of the seventies, which was really much worse than the tech bubble. The thirties were even worse than that in a way. I would say you wouldn’t want a similar experience. There were two shocking things that came out of that, one later on, I went back and checked what happened between 1965 and 1982 when the market was flat and didn’t go through a thousand for that 17 year period of time. What happened is actually the cheapest stocks on a P/E basis.

Jim Cullen (05:40):
The bottom 20% of the stocks on a P/E basis went up a thousand percent over that same time period, which was pretty much the same as they went after the bull market between 1982 and 2000. I found that was shocking after having been through it. The market during that period was gone between 700 and a thousand back and forth. I couldn’t break through a thousand, but the problem was the market hadn’t been overpriced. That’s always the Achilles heel of all these speculative bubbles similar. The other thing that happened, and we mentioned this in the book, the 1930s, 1970s, 2000 and every bubble period, it takes five to 10 years before those stocks basically correct enough. And even though in every single case, the fundamentals for all those stocks were good all the way through the next 10 year period.

Jim Cullen (06:33):
But all of them were 10 years later were down. I remember in 1982, we bought IBM and Avon Products under 10 times earnings with a big yield. And they had been 10 years before they were at 60 times earnings, 50 times earnings and the same way with RCA. Then in the same way we had here in the tech bubble of Microsoft and some of the other big tech stocks, we wound up buying as value stocks back in 10 years after the market topped in 2000, 10 or 12 years later. And then we bought Microsoft. It was like 10 times earnings with a three and a half, 4% dividend yield. That’s been the common thread in these past markets. What we have now is the period of, let’s say, you’re going to have a hard time avoiding stagflation I would think.

Jim Cullen (07:18):
Interest rates are going up. A lot of factors are going to put a lid on the market growth. You may go through a period of stagflation. Our answer probably to that would be the answer, which was back in the seventies. If you bought the cheapest stocks on a P/E basis, that’s going to bail you out the long run anyway, no matter what happens. I think it’s irrelevant, which model we’re most similar to. They all follow each other, are similar and all a bit different. It’s hard to believe that some stocks like Amazon, it’s going to take 10 years for it to base out now.

Jim Cullen (07:50):
I remember about four or five years ago, Barry Diller, who’s probably as savvy as anybody, was talking about Netflix. And he said, “They have such a lead on everybody else.” He said, “Stock is never going to have a problem.” Three or four years later, that’s not the case. As I said, by the end of 75, my experience was that everything said had been wiped. People had been wiped out, margin accounts are gone, and we hope that we don’t get that experience here. But we do have the stagflation risk, which means that as far as an investor goes, you want to be careful because you don’t know how these things play out.

Trey Lockerbie (08:27):
On that note, I’m curious with the sixties and seventies, the last time we had stagflation, the market volatility seemed to just be insane. While everyone’s sitting here trying to say, “What’s going to happen next, interest rates are going up, the stock market is going to go down,” almost like it’s binary, but it seemed to bounce up and down in this range pretty violently. Do you remember that?

Jim Cullen (08:46):
Yeah. Every time you thought the market was going down, it’s going to go lower. And then you said “This time it’s going to go through a thousand,” and it didn’t do it for 15 years. Whether you trade like that here or not, it’s hard to say, but that’s the volatility is extreme. We did a chapter in our book on the bull markets, I mean, bear markets, bull markets and recessions and going back over the last 60 years, analyzing every recession and bear market. As an investor, you say, “If I could time that right, and I can avoid.” And that’s why you hear the commentary on TV every day is people trying to figure out are we’re going to have a recession? Are we going to have a bear market?

Jim Cullen (09:24):
Our feeling is doesn’t make any difference. If you look at what happens with the bear markets is that first you get to the bear market. Then usually the recession comes later. You don’t know the recession’s there because it takes the government a couple months, six months maybe to figure out where it is, then you get what looks like is really bounced off the bottom. Studies done have shown that if you took over that 60 year period of time, if you took the bounce off the bottom and all those recessionary periods and took that out of the market, you basically wiped out the advantage of owning equities over that entire time period, which is extraordinary. The key thing is that he said, “If I get out, I got to get back in.” You’re probably better not to get out. If you look at the long chart, looks like that would be easy to figure out where the bottom is.

Jim Cullen (10:11):
Then if you expand that out, some of those bottoms took a year and we think of a bottom being made and all of a sudden market turns around. These things could drag out six months to a year. That’s why you don’t know where you’re at. If you’re trying to take a shorter term trading positions on the markets, it’s a tough game. That’s why it gets to our investment strategy to get around that is, buy cheap stocks. In a tough market like this cheap stocks with dividends stay invested and don’t try to time it. That’s what we get around too, is the message we’re talking about here.

Trey Lockerbie (10:45):
What you said a minute ago, stood out to me, you said to you, “This volatility doesn’t matter.” That’s because you’re holding for the long term. And in the book, you lay out this very rigid, disciplined approach, essentially using the framework based on Ben Graham, which is as follows: look for companies in the bottom 20% of the index, when ranked by price to earnings, look for companies in the bottom 20% of the index when ranked by price to book, look for companies in the top 20% of the index when ranked by dividend yield and then invest for the long term. My first question is can investing really be this simple? Second, how do you keep faith in your system knowing that things change and evolve over time, for example, price of book becoming less relevant for non-cyclical stocks?

Jim Cullen (11:32):
They’re the three disciplines Graham mentioned. We get the number every year for the S&P 500. The shocking thing to me is we don’t reuse price to book much at all. We look at it on all the companies and it’s appropriate for very cyclical, material companies, but for most companies, healthcare companies, what have you, it’s immaterial? The performance of that, on a historic basis even recently, has been pretty good, which is surprising to me. I wouldn’t think it would be the case, what we do in most of ours, we started off strictly with a value strategy, number one, and then we usually want to take less risk. We found by adding the dividend portion to that, and to get growth plus less risk is dividend growth.

Jim Cullen (12:14):
Those are the things that we’re usually focusing on and that gives you a lot of downside protection. And if you do well, when the market goes down, over time you’re going to do well overall, because market’s going up more than it is down. But if you do well in the downside, it’s going to be a big bonanza for you. What we know is that over time earnings double about every 10 years, and that’s going back to 1920s consistently.

Trey Lockerbie (12:35):
Is that across the board, small caps, large caps as a rule of thumb?

Jim Cullen (12:39):
That study was done on the S&P 500 basically. What we did was, once we did the low P/E stocks, we said, “How about dividends?” What it turned out that dividend yield on the S&P 500 was much smoother than earnings on volatility over the 70 year period of time. He blew those charts up recession and what it showed was in every single recession, going back to 1960s, the dividends. The thing is gone by the way. Going back to 1960s, every single period, every single year during every recession, the dividends were increased by the S&P, every single time. The only exception was TARP, the most recent, and that was artificial. The bounce back in dividends after that was one of the biggest bounce backs ever. What you have is, and what we found out in the dead decade, 2000 to 2010, you had the peak, the tech stocks, you had 9-11, and then you had the financial crisis, all that in a 10 year period, probably one of the worst 10 year periods we’ve had.

Jim Cullen (13:38):
If you look at that, the dividend strategy value plus dividend strategy during that period was actually up almost double during a 10 year period of time. And the market was down about seven or 8% per year at the same time period. If you go back and look at it, why did that happen? If you started off in the beginning of the year, 2000, and you had 3% dividend yield on the portfolio, but dividend increases as you went through the whole 10 year period kept inching up, inching up, inching up. By seven or eight years later, you had about an eight, 9% dividend yield on that portfolio at cost, which means the stock market will stay there. They went up. That’s why the market went up. Dividends are very underrated. That’s become a bigger part of probably 80% of our business is in the high dividend strategy.

Jim Cullen (14:21):
High dividend plus value strategy. If you look at the history of value versus growth, the reason why value wins over that is because when the market’s going up and it’s a hot market value will trail pretty consistently, not by much but when you get a tough market value dramatically outperforms. In the last year and a half, that’s been a case of that. I’m doing a market letter right now, which has highlights that. The market’s changed and you have a situation where you’ve got all the earmarks for a stagflation environment. You want to be taking less risk. Now it’s probably more important to have dividends than normal.

Trey Lockerbie (14:59):
There seems to be this tortoise and hare thing between growth and value. I saw a chart recently, for example, where the Cathie Wood’s ARKK funds, they had this incredible rise and it’s now come back down and they overlay it with Berkshire Hathaway, who’s been chugging along is not very volatile at all. The performance of Berkshire is outperforming that of ARKK. I think it’s a great archetype for what you’re talking about there. Given that a lot of younger investors, you yourself coming out of the Navy and looking at these high flying stocks, it’s so easy to get seduced and tempted by these high flying stocks and they eventually turn into these acronyms, say FANG, or NIFTY 50 back then, while the dividend yielding stocks might be slower to grow with price appreciation, but may have grown more reliably. Do you think the pendulum for dividend specifically is swinging back into favor for the next few years?

Jim Cullen (15:56):
For sure. The millennials, which I was, the real smart thing I should have done is do your trading on one side, set aside some money for investing and make sure you know the distinction. As far as the investigator, you don’t try to mark a time and you leave that alone. We have a chapter in the book on a bunch of doctors. I was at Donaldson, Lufkin and Jenrette before I started the firm. I had a bunch of doctors come in, that I was working with. And they had these IRA plans making about $25,000 a year in the IRA plans, usually four doctors in a group. They put them away. These guys were making a lot of money in those days, but they didn’t touch those IRA plans. Except for the guys that got married a couple different times, and they were making crazy investments, what have you?

Jim Cullen (16:40):
But the one doctor especially, tried to preach to them, to not touch that money and the ones who listened to him, who didn’t get divorced while Nell’s canceled like $40 million. They’re up like seven, 8000% of the time period. It was money that they set aside and there’s no way they would’ve done that any other way. We have an accountant down in Florida and he said, “What happened? Where these guys come from?” He said, “I never saw an IRA plan worth 40 million bucks.” It’s because they stuck with the plan and held the temptation that change. And that’s why I wrote the book. The average investor, number one, they get no education and then schools, or what have you, on the stock market. Jason Zweig from The New York Times or Wall Street Journal rather who I know.

Jim Cullen (17:24):
He wrote an article recently and he said, “They are getting some education, but it’s the wrong kind.” They’re having these contests. Who has the best performance for the month and what they do. If you want to get the best performance for the month, they get the most leverage stock and leverage it and do it on margin, if you can, and that’s going to win and not market. That’s the way a lot of pension funds earn their money. You get these one, three, five year presentations and you look at it and you say, “Why is that?” I tell a story. I think it’s in the book.

Jim Cullen (17:53):
The first meeting I went to was a big foundation and we’re sitting there and the Merrill Lynch broker was presenting four different mutual funds. One was dramatically better than all the others. One of the people on the board there was saying, “Why the hell wouldn’t we choose that one?” And they did. It turns out that two years later it was a disaster and that it had been the most speculative stocks and leveraged. Therefore, you got the best performance. The one, three, five year can really come back and haunt you. That’s another story.

Trey Lockerbie (18:23):
Speaking of five years, when you mentioned these younger people getting, again, tempted to compare their performance month over month. They should be looking at a longer period, right. To smooth out volatility. Is that the five year? What do you typically go for?

Jim Cullen (18:38):
What Graham said, he says “You be a long term investor and use the strategy.” The average guy says, “What’s that long term?” We came to conclusion that using a five year time horizon gave you enough time to smooth the performance. We have in the book, we show all the five year periods going back to 68. You had maybe three periods where you had small amount of change over that time period. But then what happened to five year period after that was huge. The five year time horizon smooth all the performance. We have it later on in the book, on the talking recessions and bear markets, how can you avoid those things? In every single five year period, going back to 1968, you take all the five year periods, you get double digit, most of them double digit returns all the five year using the discipline.

Jim Cullen (19:20):
Every single five year period you have some bear market, some recession, and you can try to drive yourself crazy, trying to figure out when to get in and have that. It smooths it out. If you take the 10 year, it even smooths it more. The 10 year you say, “Why would anybody?” I look at the pension accounts and they have all these different alternatives they use in real estate, what have you? And I think using a dividend discipline strategy would seem better than almost all those things. You get a double digit return and every single 10 year period, and that’s in the book.

Trey Lockerbie (19:50):
One of the quotes I loved in the book was from Peter Lynch, who said, “It’s amazing to me, how many people try to predict the stock market? If you spend 14 minutes on economics, you’ve wasted 12 minutes.” I thought that was really great. How can we as investors avoid this? You spell it out a little bit in the book about avoiding these recessions? Is it by buying and holding over the long term and not turning our phones off and not looking at our screens anymore?

Jim Cullen (20:15):
I watch Bloomberg and CNBC every morning for an hour or so and I’m looking at it. I can go out the window here say, “No, don’t do this.” Nice to know what’s going on. You’re still looking for the best ideas you can get out the framework. As long as you’re focused on not trying to trade that thing or take advantage. As long as you have some invest money on the side, away from that, then that’s a different story.

Trey Lockerbie (20:42):
I want to talk a little bit about risk adjusted performance. How can retail investors focus more on risk and more specifically actual risk adjusted returns?

Jim Cullen (20:55):
They have risk. You can use standard deviation or alpha beta. You use that as a guide or what have you. I still say the best way to evaluate risk is to have a dividend discipline and be a long term investor. And that takes care of it. That’s my solution to the best way to deal with risk. If you look at these numbers on the book, you look at these numbers, you say “Everybody should be doing this.” Also, on the back of the book, it says, “What happens when every year you sit down, you say, I’m going to make an investment sale but the market’s too high, or there’s a recession coming on, or we’re going to get stagflation. Let’s wait a year.” I’ve going back to 1920.

Jim Cullen (21:31):
Every year there’s a reason not to get your money in that year. You got out of the market over the same time period as a phenomenal return. You got to go with it. Actually, John Templeton did a study over a 20 year period of time. If you bought the market every year, if you’re making a contribution every year, over a 20 year period of time, and you bought the worst possible day every year and the best possible day, the difference is only 1% over the 20 years. Amazing. The compounding takes care of it.

Trey Lockerbie (22:00):
Are you a proponent then of dollar cost averaging, every paycheck, going to your 401(k).

Jim Cullen (22:07):
Save it whenever you can do it. That’s one message in the book. At the end I have the 14 year old paper, boy, paper girl, compounded interest. That’s the secret to investing really and how they start when they’re 10 years old. When I put a small amount aside, a compounding. That’s really the key for people to get started. That probably should have been the first chapter in the book.

Trey Lockerbie (22:29):
You’ve been running multiple funds, mutual funds, for a long time. I’m curious if that’s the case and we’re dollar cost averaging, there are cheap means to do that with the Vanguard, S&P 500, for example, which I saw on your website as a benchmark. Most people look at that at least as some kind of benchmark. I’m curious what the mutual funds bring to the table and your opinion this day and age how actively managed are they and how do you go about getting alpha when you’re primarily buying and holding for a long time?

Jim Cullen (23:01):
Some index funds can be okay. The tricky thing about some of the index funds of course, is that the index funds compete with the market. They’re going to stretch their parameters to take a little bit more risk because they’re trying to get performance. We have a period in there where we talk about just the S&P 500 index fund, how it gets really overloaded with the top five stocks, once the top five stocks were the highest P/E mobiles. Once they become like 25% of the company, that’s usually when it’s getting way overpriced. Therefore, after periods like that, then the index really dramatically under performs. You get wider swings in performance with the indexes and people cheat on even value, the value indexes. If you look at the value different S&P 1000 value index, what have you, you’ll see they put names in there. You say, “These aren’t value names,” but I think they’re trying to make that index more attractive or they say more representative.

Trey Lockerbie (23:56):
Is the idea of the low P/E performing over time, a reversion to the mean philosophy, if you will, is it a statistic approach? You got to hang your hat on something over time. Is it that you look back at the data and back tests and say “Over a period of time, this does revert back. It might take years, but eventually it does.”

Jim Cullen (24:16):
Right. That’s exactly it. That’s a summary for it.

Trey Lockerbie (24:22):
You mentioned who you wrote the book for I’m actually curious about that. It’s written in this very approachable way. It’s very bite size, I would say almost some of the sections. Was it for younger people, maybe even in your life you wanted to pass along, or you mentioned there’s a lack of education. You wanted to get something in their hands that could help guide them over time?

Jim Cullen (24:41):
Combination of two things. One, I think the thing that really started me is that value been out of favor, so out of favor, like 10 years was unusual. It was a long period. I remember going to a pension consultant who we used to do business with. And I said, “When are you going to do a value search for a pension plan?” He said, “We haven’t done a value search in 10 years.” I said, “Oh my God.” Not only was value forgotten, not being used, but basically been forgotten. That’s why I changed the name of the book, was going to be Long Term Value Investing. I said, “We got to make it a case for long term value investing because we got to start building the blocks from bottom up.” It started there.

Jim Cullen (25:16):
What I know from being in the business for 50 years, is that when you’re talking to clients all the time and most of them, you’re trying to educate them as you go along, but it’s hard conversationally to get through to people. I figure if you write this thing in a book, and then it’s something that people can rely on a bit more. When people read something, then it becomes their idea and not you telling them something. I think it has more of an impact. The secondary was really to educate investors, educate young people. It’s a combination of the two things.

Trey Lockerbie (25:48):
Then you’re using the filters, if you will, so to speak with the low P/E, high dividend, low price the book, but once you’ve screened all of that, how do you pick the winners? What are the next steps from there?

Jim Cullen (26:01):
We had chapter in the book on the research side and use all the parameters, price to book and pay out ratios and dividend yields and all the various ratios. Then you’re looking for, number one, you want to have diversification. What you know is the strategy works. You don’t want to get locked into too many drug stocks, too many computer stocks. You want to diversified list of holdings. We say traditionally, we try not to do any more than 10 or 15% in any one industry and be diversified. We know the strategy works. We want to stick with. We participate in the strategy and we don’t get overwhelmed with any one group. We start there and we get a portfolio, which is dramatically cheaper than the market right now is say roughly 20 times earnings, our portfolios around 13, 14 times earnings.

Jim Cullen (26:45):
And we’re always trying to get new names in the portfolio that are cheaper than what we already own. And it’s an ongoing process. In the book we have where the ideas come from, they come from wacky places, all kinds of different places. I took one about the Canadian national, we owned international nickel and we were meeting with the analyst after he was visiting them and he was updating us on international nickel. And he said, at the end of the meeting, “By the way, you know the rail companies in Canada are going to be spinning off. They can’t make any money in those things. They’re going to spin them off.” We made a lot of money in the US because of revising and revitalizing the US rails. We heard that. We said, “Wow, I want to get involved with this.”

Jim Cullen (27:24):
We saw it right at that point and went to a couple meetings where there were pre-meetings where they’re spinning these things out. And we made about 3000% on our money on Canadian National and Canadian Pacific. You never know where the ideas are coming from. We had research meetings. We used to have one every day in my office and now we have two a week because of the COVID thing. We haven’t got back every day. Now we have twice a week. We constantly look for where the ideas come from. In the book we have about eight or nine different places where things come from.

Trey Lockerbie (27:54):
Yeah. I love that part of the book the ‘By the Way’ chapter, and it reminded me, we were just at the Berkshire Hathaway show and Buffett talked about buying Alleghany. And to me, it spoke to this idea of luck where it’s preparation meets opportunity.

Trey Lockerbie (28:07):
Someone mentions that to you, but you had clarity on the opportunity. You were able to identify it and take advantage of it. Whereas, with Alleghany, it basically happened in a similar way where the new CEO was an old colleague of Buffett and called him up to catch up. That’s when the idea came to him. After 40 years of studying the stock, it was finally like, “Hey, maybe now’s a good time.” These ideas can really come from anywhere. When I’m looking at the funds, one thing you brought up a minute ago was diversification. And a lot of times with these funds, there’s only 30 to 45 stocks. You have to be really rigid to make it fit into the portfolio. What are some of the other qualifiers for, say you found this rail company versus another rail company they’ve got similar metrics, does it come down to management or what are some of the other factors?

Jim Cullen (28:55):
That’s really big deal. One thing we missed here and I have a book on metric management and the importance of Jamie Dimon, for instance, and Iger of Disney. The one thing I didn’t mention is, when you think about it, equally important when a good manager leaves company. You want a good manager. In the book, we mentioned three or four managers that were the reason why you bought the stock. When somebody leaves usually more often than not, it’s probably a good idea to reevaluate the company because there’s an adjustment that goes on. Managers always a big part of it. And we have in there called a three point fix. You get stocks, which are three point fix is a Navy term. You go in the Harbor, you get one point fix, as Harbor’s fogged in, you’re probably going to be okay, you’re going to get in up your slip and you get two points, you get another, the fix.

Jim Cullen (29:41):
And that gives you a better chance to get a third fix. You’re going to in the harbor no matter how foggy it is. In investing, you have characteristics long stocks, cheap makes sense. You never know whether you have a story or not, but you think you have a good story on something. Then if you can catch something, which periodically go out of favor and time that, and that’s the third point, the fix skipping something. That’s not a favor. We went back and looked at the stocks that the stocks we made over a thousand percent in say over time. It’s usually when, for some reason, you get a stock that makes a lot of sense and that we think we have a story, but for some something happens and the stock gets sold off and becomes a really cheap on evaluation basis, on a price basis.

Jim Cullen (30:20):
We’re constantly looking for that also. I think one of the examples we used was Merck when they had Vioxx. Merck was always selling at 20 times earnings. It came down because of the competition in the industry. And then all of a sudden it gets down to like 10 times earnings because of Vioxx was giving lawsuits. If you bought then the next thing it was up a thousand percent over the next five years. Guessing game to a certain extent. That’s inexact science, the picking the stocks.

Trey Lockerbie (30:50):
Is that what gets you out of bed in the morning? I’m curious, because with this systematic strategy, there is that art piece to the science, as you mentioned. I’m curious, you’ve been doing this a long time and you’re a lot of this is buy and hold. What keeps getting you out of bed to go do this every day?

Jim Cullen (31:06):
That’s why I watch the CNBC in the morning. I get value line. Buffett does this also. I get value line every week. That gives you a lot of covers all the stocks. That gives you all the financial data on them and who has how much debt. You don’t go for companies with less debt usually. A combination of all things you put together and you’re hoping something jumps out at you. That makes a pun. There’s a guy that does a report, 13D Research, and he does very thematic strategies. We’ve got a couple good ideas out of him. There’s certain people you rely on that have been very helpful.

Trey Lockerbie (31:40):
Very cool. I’m curious, going back to the younger investors who I think this book will really speak to, who are so driven to growth, there’s a lot of data in this book that you lay out. What should these younger investors know about growth oriented stocks based on the data in the book?

Jim Cullen (31:57):
The history that you got to be careful because all of a sudden, if you get caught the history. In every single cycle, the companies that peaked out had great earnings for the next, usually five or 10 years. The earnings continue fine, prices got too high. That’s the danger, Amazon for instance here, Amazon starting getting competition in their industries. Companies get so big that they start competing with each other and then all of a sudden instead of buying little minnows, they wind up dealing with sharks.

Jim Cullen (32:29):
How much of an impact that has on a company, but eventually the business continues to be halfway decent. The growth rate slows because it’s got more competition and then all of a sudden you wind up in every single case, we round up, you wind up getting these stocks down toward their value levels. They can be bought for a value guy, whether this happens here or not. It seems early in the game, but Alphabet looks like it’s only 20 times earning. It’s looks inexpensive. I know our guys are doing some work on what stocks are over. The young guys we have all of a sudden, they want us get more of these more interesting stocks early, if they can find them.

Trey Lockerbie (33:05):
Do you ever find periods where you can have your cake and eat it too? Meaning you find a high paying dividend stock that’s undervalued and because there’s that cyclical rotation, you’re getting that price appreciation along with the high dividend payment.

Jim Cullen (33:17):
That’s what you’re looking for and what you want is dividend growth. I mentioned dividend growth. These are companies, we don’t look for just dividends. We started the strategy in 91. The only thing that they had, the equity income was a category and equity income was a high yielding stock. Most of them utility stocks, but dividend growth wasn’t a factor. And we still had, we said, “Okay, you know what? You can have a broader diversified list, but look for dividend growth.” And that’s a key part of the strategy. We’re looking for companies that can grow that dividend and our average growth has been about 10% a year over the last five years. That’s what we’re looking for.

Trey Lockerbie (33:51):
Curious to hear on that point, then your feeling towards share buybacks, Berkshire, for example, I think they issued a dividend once and never again. What’s your opinion on finding stocks that are doing lots of share buybacks if it’s seemingly at a good price?

Jim Cullen (34:05):
Seemingly at a good price, most of these companies that I’ve seen their shares back are bought back at ridiculous P multiples. I think having a dividend discipline gives companies a little bit more discipline themselves, because it’s not like buying shares and you may do it or you may not do it, postpone or may not postpone it. Once you establish a dividend policy, they want to stick with it. Unlike global, Europeans the earns are going to go down 30%. They cut the dividend about 30%. But in the US, as I mentioned earlier, the S&P 500, they’ve increased dividends every single year through all the recessions. Back in 1975, when I mentioned that period with wall street went bust, you had dividend increased every single period during that whole time period and it’s phenomenal when you look at it. Meanwhile, you knew earnings were down 50%, stocks are down 50%. They’re still increasing in dividends.

Jim Cullen (34:53):
You want to make sure you have companies have a low payout ratio. You don’t want to buy somebody who’s paying at 90% of their earnings and dividend, even when somebody has a lower payout ratio and where they can grow the company. That’s the question, and it’s a trade off. The more you can get in dividend growth, the more companies. I think it used to be dividend weren’t as important for companies. I think a lot of people started to realize that dividend yield is more important as far as stock price now, but you still have a huge focus on buybacks, which I don’t get.

Trey Lockerbie (35:23):
Yeah. It’s always seemingly controversial to buyback thing right now. And if done correctly, it can be a great thing, but I like your take on dividends and that focus. I’m curious, you’ve been running this firm for a very long time now, and I’m going to get to a couple of points here in a minute, but has there been a time in your career where you felt things were hitting on all cylinders, you were in the sweet spot of your strategy and it was playing out well? And what environment did that look like? And what year was it? When was that time, if you could reflect back?

Jim Cullen (35:55):
This is probably after the market peak in 2000 and rolled over and we started a mutual fund at that point 2001, 2002. We did a sub advisory with Pioneer, which was the Italian advisory firm. We did a sub advisory with them and that was the right time. We were like in the top one percentile, the one year, five year, three year, was posted in the Wall Street Journal once a month. We were there consistently in the top of that. Everything was going right and we raised about $7 billion in about three years, four years. Everything was clicking in there. Then all of a sudden you get to period where your values out of favor and you have to struggle.

Trey Lockerbie (36:34):
Yeah, exactly. Certain folks seem to acknowledge the macro. I imagine when you’re watching CNBC in the morning, it’s hard to avoid. They’re always bringing up macro stuff. It’s that importance of awareness, but not necessarily letting it influence your strategy and that seems so easy to say, but so hard to actually play out in practice. Do you have any things in place for you so that you’re not touching the dials when you know, maybe you shouldn’t be?

Jim Cullen (37:01):
Yeah. I go back and look at the chapter we have in there on recessions of bear markets, and you look at that and you say “The temptation here to try to get this right, is almost overwhelming.” Then you go back and look and say, “Okay, let’s superimpose the rolling to five year periods over that with those recessions will all blocked in.” Instead of seeing all this jagged down up, you get this smoothed recovery picture with all these recessions in each one of those five year periods and that’s your religion. That keeps you in the game. It’s hard. We have the doctors who kept with the program, but it’s pretty hard to keep people in over a long period of time, 2000, no 99, the year before 2000, we had people calling up, the growth was up value was down. It’s one of those pivotal years. Usually a pivotal year like that, usually at the beginning of a term, which was then, but we were getting fired guys. I’d said to people “Only sell half, only sell half.” You’re getting fired 10 times, 20 times a day.

Trey Lockerbie (37:56):
Yeah. That can’t be easy. Those phone calls, you get used to it over time, how do you manage that?

Jim Cullen (38:01):
Yeah.

Trey Lockerbie (38:02):
You have people who have been with you a long time, probably who trust in it. And you build that trust over time.

Jim Cullen (38:08):
If we can get people through a five year time wise, then a lot of them become believers. That’s why we have some business in.

Trey Lockerbie (38:16):
With your approach at the dividend approach, is something that people miss very often is comparing price appreciation to the benchmarks, say the S&P 500, rather than the total return based on the price appreciation, but also all the dividend payments that have come in?

Jim Cullen (38:31):
Yeah. We always compare the total return versus the hard return. As a guide, we’re trying to beat that bogie all the time. We’re look at it without the dividends. We look at total return on both.

Trey Lockerbie (38:44):
One thing I found interesting in the book was the part on covered calls. They’re always around and trendy, but in the last couple years they really exploded, in popularity. I think covered calls are a great means to kind of generate some dividend like income on an asset you’re owning over time. If you don’t want to sell it. Talk to us about when it’s appropriate or when we might not want to incorporate something like a covered call.

Jim Cullen (39:05):
Yeah. We always had the high dividend strategy at this stage. This was back in, we started 2010. We had a couple of accounts that institutional accounts or periodically we would write on the most expensive stock. We wanted to sell. We’re looking for a new name and something. That’s getting over price, let’s sell the option. Write the option. Hopefully we’ll lose it. Meanwhile, we’re getting paid while we lose it. We started that with a couple clients and then all of a sudden the market, the bond market, comes down. Interest rates come down, broke through 2%. You’re getting down to 1% and I’m saying, why wouldn’t every single bond guy want to take a sliver of his portfolio and invest in a strategy like this? What you get is, you get the dividend strategy, which you had about a 5%, four and a half, 5% dividend yield.

Jim Cullen (39:45):
You do the options writing on top of that. We had another 4% there. The return for the average yield year was about 7%, seven, 8%. The risk level was even better than our high dividend strategy by about 10%. We started for that reason and we said, “This would be ideal for, we should get commissions on the trading when for tax exempt accounts.” We started it and I said, “This again, would be ideal for pension accounts” and I’m a lousy salesman. We didn’t do that great on the pension accounts. We have about a billion dollars in the strategy now finally, but there’s been more of an interest in what we see this year. It’s outperforming our high dividend strategy by two or 3% in the down market. I think when we were down 4%, that was flat and MARK was down 10%.

Jim Cullen (40:29):
It’s an interesting area and developed out of watch the market. What can you do? You mentioned small cap and we’ve always had a little bit of small cap stocks, maybe in a portfolio, the value portfolio. We also had periodically some international names if there were cheaper. What you see on small caps is anytime you have a really down year in the market, the next year for small caps is phenomenal. Therefore, if you look at that small cap over the last 60 years, small cap performance is pretty good only because you have such a recovery after a bad year, but small cap is probably lining up today probably pretty good. There’s a big difference between small cap value and small cap growth, of course. Our international portfolios actually have a higher dividend yield. You have to be more careful of those. We have a little more diversification because you have more risk. The dividend yield is five and a half percent. It’s a lot higher. P/E multiples less. We make sure the debts less also. They’re all out growth the original strategy.

Trey Lockerbie (41:25):
As we’re winding down here, I’m curious, I like to say that I came to investing for the money, but stayed for the philosophy. I find all these nice frameworks for living life and being patient. I’m curious for you. Have you found anything while even writing this book, perhaps that you can actually apply to your life and how to live a good life?

Jim Cullen (41:46):
I find reading is a good hobby. Reading and tennis. You can go sit on the beach and sometimes with the markets for the way they are, I can go the beach, with a good book and hide out.

Trey Lockerbie (41:58):
That’s a really good strategy. I’m going to take that one. Jim, this has been just such a wonderful conversation. I’m so excited to have you on the show and you’ve written this amazing book and your market letters are incredible. Everyone should check them out. Before I let you go, tell the people listening, where they can find the book, where they can find more about you and your funds and those market letters exactly.

Jim Cullen (42:18):
Amazon is where the books are. Our publisher is in London, but basically we’re located in New York City, Olympic Tower, 645 Fifth Avenue. We’ve been there for 40 years, same building. If anybody wants to contact us, want any information on our market letters, that’s probably the best place to get us. About a hundred of us there. We got a floor there on 51st and fifth. If New York ever really opens up again. I’m here in the hotel, up on the upper east side, places booming up here and you go down to the offices. People aren’t coming in yet. Even our place, the research guys are coming in and we’re never more than half full, but everybody’s enjoying the openness because all of a sudden you have all these restaurants outside, which you never had before in New York. That part is better.

Trey Lockerbie (43:05):
Jim, this has been so great and the book is called The Case for Long Term Value Investing: A Guide to The Data and Strategies that Drive Stock Market Success. Thank you so much for coming on the show and spending your valuable time with us and in general, teaching, using this book, using your letters and sharing the knowledge you’ve accrued over such a great, amazing career. Again, we really appreciate the time and I hope to do it again soon.

Jim Cullen (43:29):
Thank you very much. If you get to New York, stop by to see us.

Trey Lockerbie (43:34):
All right, everybody, that’s all we had for you this week. If you’re loving the show, please don’t forget to follow us on your favorite podcast app. And we would love it if you would also leave a review, it really helps the show’s ratings and awareness. There are so many incredible resources you really need to check out on our website, theinvestorspodcast.com, or you can simply Google TIP finance. And lastly, you can always reach out to me with feedback or questions on Twitter. My handle is @TreyLockerbie. And with that, we’ll see you again next time.

Outro (44:02):
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