07 January 2023

William Green speaks with Fred Martin, the lead portfolio manager at Disciplined Growth Investors. He specializes in two niches: small & mid-sized growth stocks. Both strategies have crushed the market since he founded the firm in 1997. Fred is also the co-author of a book, “Benjamin Graham and the Power of Growth Stocks.” Here, at 76, he looks back on half a century as a hugely successful investor & shares hard-earned lessons on how to survive & thrive over the long haul by mitigating risks, understanding the laws of investing, & persevering.

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  • What Fred Martin discovered about mitigating risk as a Navy officer in the Vietnam War.
  • What he learned from starting his career during the bubble & crash of 1973-74.
  • How he handles the “discomfort & anxiety” of difficult periods in the stock market.
  • Why he thinks Tesla’s stock is still overvalued & what he thinks it’s really worth.
  • Why it’s critical for investors to be skeptics who never let down their guard.
  • What insights he drew from Ben Graham about the fundamental laws of investing.
  • How Fred applies a consistent three-step process to every stock he analyzes.
  • How to win as an investor by waiting for intrinsic value & the stock price to “true up.”
  • Why he views a famed free soloist climber as one of the greatest risk managers ever.
  • How flying planes has helped Fred to refine his understanding of the margin of safety.
  • Why he’s given three younger colleagues the authority to veto his stock picks.
  • Why he “seals the exit” before buying a stock, assuming that he’ll own it forever.
  • Why fund managers should sacrifice their own interests for the sake of their clients.
  • What advice he’d give to people who are looking to hire an investment adviser.
  • Why he believes that relationships & purpose are the two most important things in life.
  • What he’s done to maintain good health, so that he’s still going strong at age 76.
  • How his religious faith has made him a better investor & a better steward of assets.
  • What he’s learned about how to endure sorrow, setbacks, & tragedy.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] William Green: Hi there. In my book, Richer, Wiser, Happier, I wrote a chapter titled Don’t Be a Fool, which is all about Charlie Munger’s strategy of consciously and systematically reducing what he calls standard stupidities and foolish thinking and idiotic behavior. Charlie who recently celebrated his 99th birthday once said that all you have to do to get ahead in life is to be non idiotic and live a long time.

[00:00:28] William Green: I don’t know if that’s entirely true, but I think there’s great wisdom in this idea that one of the keys to long-term success is simply the ability to avoid making too many dumb mistakes, especially mistakes that have the potential for catastrophic consequences. This subject of avoiding costly or calamitous mistakes is a central theme in today’s episode of the podcast.

[00:00:53] William Green: My guest is Fred Martin, a great investor whom I also wrote about in that same chapter of my book. Fred is the lead portfolio manager at an investment firm called Disciplined Growth Investors. Since he founded the company in 1997, he’s beaten the market by a mile while focusing on two relatively racy sectors, small and mid-sized growth stocks.

[00:01:18] William Green: For me, what’s striking about Fred is not just his long history of superb investment returns, it’s that he also has a remarkable gift for managing risk, is 76 years old and has now been investing successfully for half a century. During that time, he’s encountered countless minefields, including financial crises, periods of soaring inflation, recessions, wars, stock market bubbles, and some pretty brutal bear markets.

[00:01:48] William Green: He survived and prospered through it all. How come? Well, I think the main reason is that he’s an extremely disciplined investor with a fierce focus on simply mitigating risk. For example, he has a strict rule that he’ll never invest more than 3% of his portfolio in a stock at the time of purchase because he doesn’t want to expose himself to the risk of being overly concentrated.

[00:02:16] William Green: He also refuses to overpay for any stock, regardless of how enticing its growth prospects look. He invests in rapidly growing companies, but he approaches them with the skeptical, cautious mindset of a hardened value investor. He makes sure that the stock is cheap enough to give him a big margin of safety.

[00:02:37] William Green: It’s not a coincidence that Fred co-authored a book about Ben Graham, the father of value investing, who wrote that the secret of sound investing could be distilled in just three words, margin of safety. What fascinates me is that Fred applies this fundamental concept of the margin of safety in every area of life. [00:03:00]

[00:03:00] William Green: Not only when he’s buying stocks but when he’s skiing or driving or flying his gulf stream jet. As you’ll hear, his relentless focus on managing risk and avoiding disaster dates back to his early experiences as a young navy officer on a destroyer during the Vietnam War. Another reason why I’m particularly excited to have Fred on the podcast is that he rarely gives interviews because he tends to keep a very low profile. Most of the time he just quietly goes about his business of managing separate accounts for institutions and wealthy families to set up a separate account with him. His clients have to entrust him with a minimum of 15 million dollars. So this is a guy who operates in a pretty exclusive and rarefied realm. In any case, I’m just delighted that we have this opportunity to learn from Fred and I hope you enjoy our conversation.

[00:03:57] William Green: Thanks a lot for joining us.

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[00:04:03] Intro: You are listening to the Richer, Wiser, Happier podcast where your host, William Green, interviews the world’s greatest investors and explores how to win in markets and life.

[00:04:23] William Green: Hi folks. I’m really thrilled to be joined today by Fred Martin, a superb investor who’s built a fabulous [00:04:30] record over half a century, and Fred is joining us from his office in downtown Minneapolis. It’s great to see Fred. Thank you so much for joining us.

[00:04:37] Fred Martin: Thank you, William. Good to be here.

[00:04:40] William Green: When I interviewed you for my book back in 2017, we talked at some length about your father who was a stockbroker for about 60 years. But you also mentioned that your mother was an incredible human being and was really the brains of the family. And then last night I was looking at my notes from our interviews back then and I realized I totally and utterly failed to ask you about her, and she sounds extraordinary, and I know she had a big impact on who you would become.

[00:05:05] William Green: So I wanted to remedy that failure of mine and ask you what made her so extraordinary and how did she influence who you are today?

[00:05:14] Fred Martin: Well, I have five brothers and they’re all wonderful people, which is. All good husbands, good fathers, good people, and it was our mother. And so let me just give you the dichotomy that was a part of her life.

[00:05:26] Fred Martin: So she grew up effectively as an only child, a pampered daughter of a rich banker in northern Michigan and she graduated from college, I think in 1939. You can imagine how many women graduate from college in 1939. She then had three years of postgraduate music education, university of Chicago. So she was a concert level pianist, concert level soprano, a sculptor, a painter.

[00:05:51] Fred Martin: She painted oil portrait of every one of her sons. I still have my painting of me. And not a very large woman. When she got married to [00:06:00] my dad, she was going to have a child for the experience. She had one and something clicked. And so she had a boy and then she started to have more kids, and then she had up to three.

[00:06:13] Fred Martin: I’m the third oldest. Then she wanted a daughter, so then she went to number four, was a boy. She was going to name her daughter Joy, because her mother was named Joy. The fifth was named Jay, another boy, the sixth was named John, another boy on the seventh try. She had a little girl, unbeknownst to her at the time, she had a, I think it was ovarian cancer.

[00:06:37] Fred Martin: And her little girl was born prematurely and died 36 hours after she was born. And six months after that, received a death sentence from three doctors said, get your affairs in order, because that was pre-chemo, was radiation therapy only. And her response, it was absolutely true. She looked at the three of them.

[00:06:59] Fred Martin: She says, I can’t go now because I have three little boys at home. So she lived 25 more years before she got cancer the second time and died at age 67. So with that kind of history, you can imagine she’s an idol to all of us in the family. The other amazing part to her was that if you had met her after cancer, she’s one of these people that never said a negative word about somebody.

[00:07:23] Fred Martin: She was either effusive in their praise or didn’t say anything but this amazing force. You would’ve, you would [00:07:30] never known she had cancer. You would never know about her background. You never know about her accomplishments. She was one of these people that just, you know, walked softly and carried a giant stick in all of my brothers.

[00:07:39] Fred Martin: And I idolized her to this day, and my dad did too.

[00:07:43] William Green: And how do you think growing up with such an extraordinary woman behind you, supporting you, shaped who you are and made possible the extraordinary success that you’ve had in your career?

[00:07:55] Fred Martin: Well, There’s a yin and yang, there’s a good and a bad to it. The good part was that she had an undeniable self-confidence in which got passed on to me and some of my other brothers.

[00:08:06] Fred Martin: So I start something with the ideas. How good am I going to be at this? I don’t start with the idea that it’s not going to work. So I just a really high hell, high self-concept. The negative part was that I remembered this vividly that my, in those days you didn’t have any special schooling. I was one of six boys, very active household.

[00:08:27] Fred Martin: I was the second most creative member of the family. My brother younger and me is actually almost difunctionally creative and amazingly creative guy. It wasn’t until my mid-thirties, because I was working for then Mitchell Hutchins and the head guy from New York came out to see me, maybe late thirties and he said you know, you’re one of the two original thinkers I have in the firm.

[00:08:46] Fred Martin: And I looked at him, I said, I don’t know what you’re talking about. So it took me years to marry up the self-image. And I think my mother could have helped narrow that up. You know, a person that we all have different ways of receiving the world and [00:09:00] it was a struggle for me when I was younger to try to fit the world into what I thought it should be.

[00:09:04] Fred Martin: Okay. So there was a, the high self-concept, she just, she could do anything. She knew it. So I, whenever I start something, I figure, well, let’s see how good I’m going to be at it. So the, just an absolute sense of not so much arrogance as self-confidence.

[00:09:19] William Green: Wow, that’s a powerful gift. And I remember you once saying that being the middle of six boys forces you in some way to fight for what you believe in to stand your ground.

[00:09:29] William Green: Can you talk a bit about that? I thought that was a really interesting.

[00:09:33] Fred Martin: So my life until about 14, I mean, I’m, I have really high energy, but I’m average among my brothers of energy. I mean, they’re, you know, the brother older than me, he’s 79, still rides his bike 6,000 miles a year, his bicycle. Okay. The oldest one’s a killer.

[00:09:46] Fred Martin: He is got MS for 45 years and he’s just a tiger. And so I’ve said my life and does about 14 was trying to keep him getting killed by my two older brothers in exerting total physical dominance and the three younger ones. I mean, it’s just like, you know, it’s chaos. And so the big thing is you get a strong sense of survival, you know, because it was, it’s, it wasn’t that super healthy environment.

[00:10:08] Fred Martin: We had really good parents, but it wasn’t super healthy. But boy, you sure learned how to survive. Trust me.

[00:10:14] William Green: That’s interesting. So, well, survival will be a big theme of our conversation because yes, I mean, you’ve been an immensely successful investor for 50 years now, and so a big part of what I wanted to talk about is actually how you survive over all of these years.

[00:10:28] William Green: So to wind forward a little [00:10:30] bit, you ended up doing your undergraduate degree at Dartmouth and then graduated from the Tuck School of Business at Dartmouth, and then you left, I think in 1969 and it was the middle of the Vietnam War. So you joined the Navy and ended up serving from 1969 to 73, and you were kind of, I remember you saying to me once that you were an incredibly effective naval officer and you were cleared for command at sea at 22, I think, which I think means you were one of the youngest people in US Naval history to be actually cleared for command to be given clearance, to be in charge of these big ships.

[00:11:04] William Green: Can you talk about that experience of being in the Vietnam War for four years and what you learned by having so much responsibility thrust on you at such a young.

[00:11:15] Fred Martin: It’s a funny sort of starting point to that. Is that, so I was going to school to England, right? And I was an N R T C, and so for some reason, and I never, I cannot explain why I had my heart set on being on a destroyer in Pearl Harbor, Hawaii.

[00:11:29] Fred Martin: I mean, I bought a chart of the wine islands. I circled Pearl Harbor and red, but I, it was really stupid because what I didn’t understand was that was the frontline for sending ships to Vietnam. So. Anyway, so, so my reward for that was I had three deployments. I was only in for four years, so I had three seven-month deployments to Vietnam.

[00:11:49] Fred Martin: So I was, you know, home for six, gone for seven, home for six. I mean, you can run the math. So I got three tours in. So I had a tremendous amount of sea time. I recall coming out [00:12:00] of, you know, there was a big anti-war movement in the colleges. I remember. Starting. And for the first year in the service, I wasn’t committed at all.

[00:12:07] Fred Martin: I just remember that vividly. It was kind of half in. And then I, somewhere along line said, well, you got three more years. Let’s put the afterburns on. And then I got really serious about it, and then I started really becoming effective. So what I remember about was, first of all the idea or you go in as a kid, come out as a man.

[00:12:25] Fred Martin: I came out as a very serious man. We fired big guns. That fired bullets a long way. You know, I had all kinds of intensive middle management. My last job, I report directly to captain. I had 65 people working for me. I’ve never worked at hard since ever. It was grueling duty when you’re, you know, in a war zone, you’re standing eight hours, watch a day, plus your regular job.

[00:12:47] Fred Martin: So the other memory is I got out, looked for a job, and I didn’t get a single question about my Navy career. It’s kind of interesting. Because that’s all I knew, you know, but there were a lot of clues in there about my self-concept, my effectiveness, play the tape way forward. And I have this idea, you know, unverified, but we learned stuff in our lifetime, and you put it in the closet and 20 years later it comes out and you have this stuff that’s there.

[00:13:14] Fred Martin: Its knowledge is really wasted. It just, it resides there. So I’m, my management skills as a money manager are way above most money managers who tend to be loaners and, you know, and I got lucky because I had that middle manager experience an early age in a lot of the [00:13:30] functional parts of it I used today in structuring the firm.

[00:13:33] Fred Martin: So he was just like a, an amazing proving ground. The other part was I got these high ratings and yes, I was clear command really early. I never wanted to stay in. I’d go see the captain, he’d say, you’re doing a great job for me. What are you going to do when you get out? I was going to manage money. I was the.

[00:13:48] Fred Martin: Unofficial financial officer to the investment officer to the ship. I remember looking at mutual funds and reviewing it for people and, you know, I was already thinking about investing.

[00:13:57] William Green: And you were getting the Wall Street Journal delivered to you on the ship, right? In batches.

[00:14:01] Fred Martin: Every, in batches.

[00:14:02] Fred Martin: Well, it was third grade posted, so you’d get, you know, 13 in one dump. You know, I mean, we’d get mail delivered by helicopter typically, you know, they’d come and drop a big bag of stuff, so, yeah. And I didn’t, it’s hard to read when you get 13 in a row, because you, you’re losing the pacing of it. But I was still very interested in investing even through the whole time in the Navy.

[00:14:22] William Green: The other thing that seems extremely relevant about your career in the Navy is that you started, I think in June 1969, right after this disaster that I wrote about in my book when I was writing about you in the chapter about Charlie Munger. The s Evans had this catastrophe, which I think made you ultrasensitive to risk and the dangers of human error.

[00:14:44] William Green: Can you talk about what happened to the u s Evans and which was another destroyer? So you were on a 437-foot destroyer, as I remember, right? And that’s size. Yeah. Yeah. And as a young lieutenant, you would be in charge at night and have 240 people’s lives, [00:15:00] basically in your hands when the captain was asleep, because you became the de facto captain.

[00:15:04] William Green: And you’ve basically just seen this disaster with the u s seven. So if you could give us a little bit of color on what happened in the impact that it had on you, that would be great.

[00:15:12] Fred Martin: You know, I can bring that into which reminds me of a book I read years ago by a wonderful house named Jim Weir about the psychology of money.

[00:15:19] Fred Martin: It’s worth reading. It’s quite good. But I didn’t realize at the time, I was already very tuned to risk. Okay. There’s pluses and minuses to that, by the way. So I grew up in a very active family of six boys. Right? Well, if I saw something was risky and exceeded my risk tolerance, a daredevil can block that out and overpower it.

[00:15:41] Fred Martin: I could never block it out enough. So we went to Chicago one time at amusement park. The owner was a friend of my dad’s, and he would put us on the rides and their fastest roller coaster was there and I’m the only one that didn’t ride it. And of course she gets called chicken and my brothers are making fun of me.

[00:15:58] Fred Martin: I eventually wrote it later in the day, only after they tested it. Then I was satisfied that it was going to be okay. I’d done that. Snow skiing. I’ve done a lot of snow skiing. Typically I go to an area, I’ll scout all the runs, ski them the next day. That’s. You know, or if I’m in a pack of people and they’re doing runs that I don’t necessarily want to do the runs, I’ll just split off and ski myself.

[00:16:19] Fred Martin: It’s a, what it is the book Psychology of Money. And Jim Wars a great thinker, by the way, talked about Right. Left brain balance, which is the ability to assess risk and [00:16:30] opportunity simultaneously. And as you grow. And he claims Buffet has that can look at both sides of it. And I think I probably have that.

[00:16:38] Fred Martin: It’s just a, it’s a gift that you’re born with. And I can never look at something and shut out the wrist part of it. Totally. I can never do that. I can’t. Okay. It’s always there. And I can’t shut it out. Well, that’s good. In a way. I could still go after the return, go after the opportunity, but I could never shut it out.

[00:16:55] Fred Martin: So the Evans just crystallized my mind, you know, so I’m starting to think, how do we avoid that? And one

[00:17:02] William Green: of the sympathies, just so that people know what happened, basically at 3:00 AM one night. The captains asleep, and a couple of these lieutenants who are young, very untrained guys are in charge, and they turn the wrong way, and the ship is cut into, and 74 people died and they were caught marshaled.

[00:17:21] William Green: And I remember you saying to me, Fred, you had kind of seared into your mind the image of the ship. What did it look like?

[00:17:28] Fred Martin: It looked like you had taken a welder and he cut off the front half of the ship. I mean, it literally looked like the ship just stopped, just almost where the bridge was. The front half was gone.

[00:17:40] Fred Martin: It literally was right, straight up and down. And it seared in my mind. So you, what you do is you start thinking, okay, I’ll give you an example. When you’re on a bridge, the radios are blaring. You’ve got six or seven people on there. You’ve got the radio, the engine room calling you on something. You’ve got all these distractions, you [00:18:00] have to cut through all that.

[00:18:01] Fred Martin: So I always had the habit of walking out on the bridge wing if we’re turning right. I’d walk out in the starboard wing, and I’d take a peek to see what’s out there. We’re going left before we threw the helm over. I’d go out and take a peek. That was 15 seconds, but I want to make sure there was nothing out there.

[00:18:17] William Green: So it’s really like a simple rule, like very similar to saying when you’re going to change lane in your car, that you’re, you just going to look because you can’t really trust your mirrors in case there’s something in your blind spot. Yeah. You got it. And you said to me also once that basically the Navy was obsessed with the idea of process of following process, honoring process.

[00:18:40] William Green: How did that twin obsession with safety and survival and honoring process affect the way that you’ve approached everything to do with risk in your life?

[00:18:51] Fred Martin: I have to confess to you that many decisions I made over my lifetimes were implicit decisions. Not explicit. I didn’t sit around and say, you know, you got to think about processes, but I walked out of it.

[00:19:00] Fred Martin: Seeing safety in the Navy was paramount. You know, if you read the history of World War ii, one of the reasons that we won is the Japanese thought their pilots were expendable, and we would do everything we could to save a pilot. And it turns out they’re really expensive to train and you only have a certain pool.

[00:19:16] Fred Martin: And so the Navy was obsessed with safety, which I thought was great. The process part had to do with this. You’re on a bridge, so you’ve got multiple people. You’ve got a guy behind the wheel driving, and he takes orders from the conning [00:19:30] officer. You always want to make sure everybody knows who the conning officer is.

[00:19:33] Fred Martin: Okay? The captain’s on the bridge. Anytime he wants, he can say, this is the captain. I have the con. That means the only person that can tell that guy what to do is the captain. The XO could also do the same thing, the executive officer. So just think about that kind of clarity. Of thinking that clarity of process, so, you know, to carry it forward to managing money.

[00:19:55] Fred Martin: Within my company we have every stock, there’s one person responsible for following the stock. And it’s assigned. Everybody knows who it is. Every client we have, there’s one portfolio manager that’s responsible for shepherding that relationship. We don’t move it around much. There’s also one portfolio system that’s responsible for, you know, developing the relationship.

[00:20:14] Fred Martin: So you see that kind of line clarity throughout. Okay. So I think that’s sort of management 1 0 1. The idea of process though, came more slowly. I just, I wish I could give you a, like a moment when I realized that it was right thing to do. It might’ve been when I started D G I, because I was part of a STAR system.

[00:20:35] Fred Martin: I thought, I think a group effort can be superior to one. If you have a group effort, you have to have a process. So that might’ve been the trigger on that. But I don’t know whether the navy itself was so, you know, fired up on process was very fired up on clarity. Clarity of communications, clarity of mission, and all those kinds of things.

[00:20:56] William Green: We’ll come back to this issue of process. Okay. And how you laid [00:21:00] out your process when you started discipline growth investors, because I think it’s a central aspect of your success, but to go back to you leaving the Navy, and as you said, you came out deadly serious. You came out in 1973 and you started your investment career as an analyst.

[00:21:15] William Green: Having not had much luck with your interviews, you started as an analyst for the trust department of the Northwestern National Bank Trust, which is I think a Minneapolis bank that was later acquired by Wells Fargo. And you said to me before that it was one of the greatest gifts that you started your career in 1974.

[00:21:32] William Green: So you got to see. The crazy euphoria of the early seventies and then everything totally going to hell in 1974. And can you talk about that, about what a formative experience it was to go through the boom and bust of 73 and 74?

[00:21:51] Fred Martin: Let me preface that just a little bit by saying that because my dad was a stockbroker and I got fast, I was a saver and I got fascinated with the markets.

[00:21:58] Fred Martin: I think I bought my first stock when I was 10 or 11. Okay. So I had spent 15 years trying to figure this out without really, I was reading books. I was very interested at Tuck school, but Tuck school didn’t really focus on investment management or analyzing companies. So, you know, maybe the table was set.

[00:22:15] Fred Martin: So I, I started Northwestern Bank and I’m a young guy and I opened the learning and I; it looked like price earnings ratios were pretty high. So I go to, to director research. And I said, Stuart looks to me like the market’s pretty expensive. And he patted me on the shoulder and said, [00:22:30] don’t worry about its young man.

[00:22:31] Fred Martin: You’ll learn soon enough. And I watched, I had this weird mind for data points, and I watched the Xerox, our analyst next to me was following Xerox and it was $140 stock and it was going to make $2 and 35 cents. I remember that. So that was about 60 times earnings. They were rent, they were lease copiers on a three-year lease, double decline, balanced depreciation.

[00:22:52] Fred Martin: So the sales were slowing, but earnings were still going up because depreciation was running off. And the stock, I think went from 140 to something like nine. And then there was a mortgage insurance company called M G I C and the star analyst was covering it, not me, and it was a hundred going to make $2. So it’s 50 times earnings.

[00:23:12] Fred Martin: It dropped to 50 and he pulled up string and all the PMs jumped in, and the bottom did six. So I’m watching this. Okay. And then from that point on, I started making a lot of money in stocks. I’ve never stopped, and I think it was, I saw the dichotomy between the company real value and the price of the stock.

[00:23:33] Fred Martin: And it was a, it was compressed in a two-year timeframe from, you know, the end of 73 to the bottom of the market in 74.

[00:23:41] William Green: Yeah. I remember you also telling me an extraordinary story where you had been following, I, I think it was corn and glass. And you went to your boss who I remember you saying was an incredibly smart guy and a really good investor.

[00:23:51] William Green: And he said, look I don’t really see any earnings here. I don’t see any value. And he said, don’t worry about it. It’s a faith stock.

[00:23:57] Fred Martin: Well, he was the head of the trust department. He was a [00:24:00] brilliant guy, loved him. He was a fabulous guy. He said, don’t worry about the All of their earnings were from their unconsolidated subs, you know, and it was an expensive multiple.

[00:24:09] Fred Martin: It was like, so, you know, I just watched, but I thought, wow, okay. Learning. So

[00:24:15] William Green: Fred, when you saw a period like that, having lived through it viscerally and seen the nuttiness of it, how did that prepare you for the experience of say, 99, 2000, or then 2007 or then the period with the fangs before covid?

[00:24:32] William Green: Because you wrote something in March 2020, for example, where you said, this is in one of your, one of your insights on your website. It says 40 years after the nifty, 50 and 20 years after the rise and fall of Cisco, the stock market is once again in the grip of the great company lousy stocks syndrome. The list of extremely overpriced stocks includes many small companies, but also includes the five largest companies in the US by market cap, Microsoft, apple, Google, Amazon, and Facebook.

[00:24:58] William Green: And you were predicting at that time, if you compute the likely return for these five stocks that were about 20% of the s and p’s entire value, you were expecting them to make about minus 3% a year at exactly the time. When everyone was very bullish. So can you talk about how that early experience in a way prepared you for later periods of euphoria?

[00:25:20] William Green: When people would become obsessed with great companies without realizing that a great company can be a lousy investment?

[00:25:28] Fred Martin: There’ve been really [00:25:30] three times in my lifetime where you just hit really extreme overvaluation. And so that’s not a large statistical sample to learn from. So I would tell you that I have, I think quantitatively I learned a lot from it.

[00:25:46] Fred Martin: I’ll explain that in a minute. Emotionally, I don’t know. You know, it’s just, it’s miserable. Okay. Because the backside is always really miserable, like we’re going through Right. So what it prepared me for it, it did something, and I mentioned it, we’re working on a magnum opus on risk because I think the whole Graham always said, manage the risk and the return will take care of itself.

[00:26:08] Fred Martin: And so one of the, you know, not all risks are the same. So overvaluation is a risk. You can’t diversify. If you have 25, a stock, 25 stock portfolio that’s overvalued all the stocks or 50 stocks you’re going to lose money. It, I don’t care. Eventually they’re going to sell back to what they shouldn’t sell for.

[00:26:25] Fred Martin: So you can’t diversify that away. It’s also easy to quantify. It is actually easy to quantify. You can tell when something’s like way overpriced. It’s just really hard to deal with it for a variety of reasons. I didn’t have this happen in 73 because I wasn’t a portfolio manager, but I just observed, and I took advantage of the backside of it by finding stocks that were really cheap and making a lot of money with them.

[00:26:49] Fred Martin: So that was okay. 99, 2000 was the worst period of my career for a variety of reasons. I had just started DGI in 97. I was getting [00:27:00] fired all over the place. There was a money manager in Akron, Ohio named Schlager Oak Associates, which was the Cathie Woods of this cycle. And I had a whole bunch of clients in Akron, and they were firing me and reinvesting it in this guy.

[00:27:14] Fred Martin: And of course he took them down 80 or 90%. I had beautiful portfolios for him.

[00:27:18] William Green: Yeah. And he had an enormous bet on Cisco, for example. [Crosstalk] So Heed, oh, was Cisco heed these incredible companies that were like the, they were like the Fang, or they were like the nifty 50. They were great businesses. But I remember you saying to me, he just emulated his shareholders because they you know, would’ve been fine, maybe for them to have 10% of their portfolio in a racy thing.

[00:27:37] William Green: But they were giving him all that money.

[00:27:39] Fred Martin: He said, I want all your money. Which I thought was, it’s just my opinion, but I That’s, there’s a hubris there that’s pretty extreme. So that was kind of the first time I saw actually managing a business and managing portfolios, the blowback. I had clients sticking stocks in their portfolios.

[00:27:58] Fred Martin: Two or three clients didn’t fire me, but they stayed man at me for at least a decade or longer. One guy fired me, his wife stayed with me, and now he’s a fan again 20 years later. Okay. And another guy did, was just mad at me. Part of it was they were embarrassed that they stuck stocks in there. They got killed, you know, because stocks, they stuck.

[00:28:18] Fred Martin: Yeah. I would let people put one or two in. That was about it. But it was miserable. I hated it.

[00:28:24] William Green: And just to clarify this is because most of your business is managing separate accounts and so a separate [00:28:30] account with you, the starting point, I think the minimum is 15 million. I remember you once telling me that the average account is 30 million.

[00:28:36] William Green: So these are people who are supposedly pretty sophisticated on the whole, but they were still getting caught up in the euphoria and we’re looking at you are making 12, 13, 14%. And we’re like, what are you doing?

[00:28:49] Fred Martin: Actually, just to go way back, because we’ve had customers for a long time. A lot of the people that were arrested, we’d started with a funny story.

[00:28:56] Fred Martin: I think they started with a couple, two or 300,000. They had 45 million now. Okay. They fired me in 99. So they started with 200,000. They probably had 10 million at the time or something like that. They fired me and they’re wonderful people and I called them up and I said, I’m tearing this letter up. I don’t accept this.

[00:29:12] Fred Martin: You, we have too good a working relationship., you can’t fire me. And they said, we’ll talk about it. They talked about overnight and they said, we changed our mind. We’re staying with you. And they’re still customers. So it wasn’t that I had at that time, we raised our minimums after we had more money to run.

[00:29:27] Fred Martin: But you know, we used to have a million-dollar minimum. And one of my, one of the things that spent meant the most to me is I take a lot of people that were hardworking people. I made them a ton of money. And so that was the people that were turning, you know, I went down to see some doctors in northern Iowa, and I lost my temper, which I rarely do at a client.

[00:29:46] Fred Martin: And they were criticizing me, telling me, like you’re saying at the time we were doing 17%, but everybody knew 25% a year was in the bag. And they start criticizing and they said, you don’t really know how to buy growth stocks. And I lost my temper. And I said, look I have a thick skin.

[00:29:59] Fred Martin: [00:30:00] I could take a lot of heat, but you at least have to be accurate in how you’re criticizing me because you don’t know what you’re talking about. The lead doctor in the group, watch this three years later, follow me out after I came down three years later out to the car and thanked me and said, you saved us, and I can’t thank you enough.

[00:30:19] Fred Martin: And so they, they didn’t fire us, but I was just taking a beating. So this time, and I’m going to put oh seven aside for a second because that was, I think the basis of oh seven was the craziness in the financial system. I think the financial system, it wasn’t so much overvaluation, it’s just that the system was this close to collapsing.

[00:30:38] Fred Martin: The one that sticks in my mind is 20 and 21. And I have to say, I think we did a, the best job I’ve ever done in the face of that. Okay. Because the reality is, you know, we go into this, and we have some stocks that are too expensive, and they have huge unrealized gains, and we have a lot of taxable clients.

[00:30:58] Fred Martin: So what do you do? And we sold outright a bunch of them and trimmed a lot of them and de-risked the valuation of the portfolio. So we enter this year and with good investment value above our hurdle rate, if you will. Okay. And the down market just elevated our return, but we don’t have an overpriced portfolio or not.

[00:31:17] Fred Martin: So we’re not worried about that. There are still overpriced stocks around and they’ll eventually sell whatever value they should sell at. So I think we did better this time, but it’s still miserable. I mean, I’m watching the markets and we’re [00:31:30] down. We’re not down, we’re down, I think 18 or 19% from the peak of November of last year.

[00:31:35] Fred Martin: It’s not too bad, but I’m looking at the carnage everywhere. I don’t know if you’re seeing Tesla today, it’s getting just destroyed in the market. So we’re not we don’t have the waterfalls declines that others are experiencing. We’ve had a couple of bad stocks, but. You always do, but it’s still miserable.

[00:31:50] Fred Martin: I hate it.

[00:31:52] William Green: Yeah. But you had warned specifically, you said Tesla was dangerously overvalued when you wrote about this in its 10 in March 2020. So I mean, the quote that I took from what you wrote at the time that I think is a very helpful thing for us to bear in mind when these infrequent periods happen.

[00:32:07] William Green: You said the disciplined investor must honor the financial laws of gravity and reduce or sell those companies with extreme overvaluations, the disciplined investor must ignore the discomfort and anxiety that comes from lagging relative performance, an inevitable outcome from avoiding or selling the stocks that are driving the market.

[00:32:27] William Green: And so I think that kind of, that gets at a really essential truth, right? That this is painful. There’s a lot of anxiety, there’s a lot of dis. but having discipline in a way, it gets back to your idea from your period in Vietnam that it’s the discipline and the process saves your life.

[00:32:43] Fred Martin: It absolutely does.

[00:32:45] Fred Martin: But I think you’re on a really key point, which is it’s still very uncomfortable. You’re still going to experience, so, you know, we get mixed complaints from clients, you know, they would complain about their guy got a cold not too long ago from a client. Oh, you know, I paid [00:33:00] huge gains and our down this year.

[00:33:01] Fred Martin: Right. So, and I got them calmed down. So they blame us a little bit and I have to sort of say to them, you got too big put your big boy pants on because I don’t make the tax laws. So it’s uncomfortable and you kind of have in the idea that the backside of this isn’t going to be pretty, if Tesla goes to, I think it hit four 11 at the peak, or 4 0 7 and it’s 124 today or something like that.

[00:33:22] Fred Martin: And our guess is it’s a guess it was, it may be worth 80, just a rough guess. 70, something like that. So it’s getting close, but it’s not where it was. But it-

[00:33:31] William Green: Don’t worry about it, it’s a faith stock.

[00:33:34] Fred Martin: Well, it’s a, that’s right. It’s a faith stock. And I, you know, and by the way at $80 a share, it’s still one of the great success stories in American history.

[00:33:42] Fred Martin: I mean, it will still be worth 250 billion plus. Yeah. As a startup, which I think is remarkable. But it’s not at its peak, it was the market value of Tesla was greater than the market value of all the other auto companies in the world combined. And so it was and my point in saying it to is valuation is one of the easiest things to compute.

[00:34:01] Fred Martin: You can be pretty accurate. It’s also one of the hardest things to cope with because you have the chasing on the way up. You know, we. Countless meetings explain to clients why we weren’t going up as fast as the Russell Mid Growth Index and showing the overvaluation of the index and all that stuff. And then it, then you get to the backside and now we have a different set of concerns as, you know, how high is the Fed going to raise rates?

[00:34:24] Fred Martin: What’s next year going to be like, you know, and we get carried down whether we like it or not, with the general, [00:34:30] you know, not as bad, but we get carried down, you know, so it’s, I don’t want you to any way, shape or form. I’m not looking for sympathy. This is part of the business. This is what it’s about.

[00:34:42] Fred Martin: And you have to suffer, and you have to be uncomfortable in my opinion. If you’re going to be really good at it, you have to keep questioning yourself thinking, you know, is this time, is it different this time? Are we have the laws of financial gravity inverted this time? Is it different? You know, I just think that the idea that you can never, I call it keeping your sense of balance when you’re investing, if you always say price of what you pay, value is what you get.

[00:35:06] Fred Martin: You’re on balance. If your portfolio is well priced, okay, you have to understand that you’re almost always going to be at some state of discomfort. That’s just life. Yeah. Okay.

[00:35:16] William Green: Yeah.

[00:35:16] Fred Martin: You know, if you want to be comfortable, you shouldn’t be an investment manager.

[00:35:20] William Green: You had another very formative thing happen to you, I guess, where, well, first of all, I think in 1973, the brokerage firm that your father worked for went bankrupt.

[00:35:30] William Green: Yeah. And I think you said to me that your mother basically lost her inheritance, and he lost half a million dollars, which was a huge amount of money in those. And so, so this was very personal, you are seeing the price to pay for folly exuberance, lack of carefulness. because I remember you were incredibly candid when I interviewed you for my book in saying, look, I, my father was just a wonderful man, but a terrible investor.

[00:35:55] William Green: And I was wondering how watching this personal [00:36:00] disaster unfold also informed your focus on survival, on avoiding catastrophe as an investor.

[00:36:08] Fred Martin: I got out of the Navy and my wife, and I were on up on my dad’s boat. He had a boat in Michigan, like Michigan when Nicole came saying the firm and gone under. So it was like, I mean, we’re right there, you know, and he was a tough guy, and he was an optimist, so he weathered it, but it was like, wow. And my mom, to her credit, you know, forgave him for it. But it was, you know, it was a blow. My takeaway was you got to do your homework. You have to be a skeptic. You got to check stuff out.

[00:36:37] Fred Martin: If it doesn’t make sense, don’t do it. Yeah. I’m fascinated right now with, and I don’t know any of these people at Sequoia, but they invested in FTX and FTX didn’t have audited financial statements, at least for the balance sheet. I, it just fascinates me, how could you invest in something without audited financial statements?

[00:36:54] Fred Martin: And I don’t know if you remember Fannie Mae from, you know, when, and it went under an oh eight, but I think from 99 or 2000 to oh five, it didn’t have an audited financial statement. And yet professional investors were buying the stock. And it just seems to me that you have to be a skeptic and you can’t let your guard down.

[00:37:14] Fred Martin: Because, and you can’t buy something because a funny story by this client, he’s still a client and he would always, he got a retirement hole in Florida and the worst thing to just go out and play golf with retired CEOs, because they always have some hot story that they don’t ring about, but they think it’s going to go up a lot.

[00:37:29] Fred Martin: And he was always [00:37:30] telling me about the smart money and I finally had enough, and I said to him, you know, if you look at our track record, we’re the smart money. And he never brought it up again. But how much, taking tips from people, you know, were you here, all the smart guys are buying this, or you know, all these people are in it.

[00:37:45] Fred Martin: Or I think part of what happened with like ftx, you got in the deal flow, you know, and so if you’re Sequoia, you got to buy the deal because you got other deals coming. I just, I don’t think it’s irrational to think that you’re going to sweat every investment in your portfolio. You’re never going to let your guard down on any in.

[00:38:03] Fred Martin: I don’t care how big it’s you’re going to, because you can’t, you just have to be pretty anal about it. It’s a point of view, but I think you’ve got to check everything out. You got to keep asking questions.

[00:38:14] William Green: When you once said to me, Fred the golden rule of risk management is to know what you own. Unlike all great truths, it sounds like a total platitude.

[00:38:23] William Green: But if you think about how much trouble people would’ve avoided by really looking under the hood of ftx, if that was possible, or Fannie Mae or many of these companies or just saying, I can’t look under the hood. I don’t know. It’s not possible. But that simple rule, and this has been a big revelation for me, is just increasingly to think, well, I know a fair amount about the psychology of great investors and their lives and how they think, but I really am not very well equipped to understand the finances of companies.

[00:38:51] William Green: I’m not very interested in it. And even though I worked at Forbes and wrote for Fortune and stuff like that, right? I just don’t really want to sit around reading 10 Ks and stuff like that. It [00:39:00] just doesn’t interest me. And just that recognition that I’m not equipped to analyze and value businesses has been kind of painful and very liberating at the same time.

[00:39:11] Fred Martin: First of all, I one of the things I really enjoyed about your book was your own personal sort of reaction to the people you were interviewing. I thought it was fantastic. God, thanks. And I’m eating that. I think it’s really a great book. Yeah. I mentioned to you that I had such a mixed feeling.

[00:39:25] Fred Martin: You were, you really got us and I like to be a little bit under the radar, which was, you know, a little bit disconcerting, but that short section on me, you got it so accurately that I wanted to find out what you wrote about everybody else. I read the book. I really, it was really, I’ll read it again.

[00:39:41] Fred Martin: One of these probably in the next year or so, I’ll read it again because I think it’s quite valuable. I had an insight. I was

[00:39:46] William Green: going to, well, what I was going to say is, one, one of the great lessons for me of writing about people like you or Charlie Manga, who I wrote about in the same chapter was to realize I’m not you, I’m not well equipped for this game.

[00:39:56] William Green: And so I think you. I mean, you, part of your advantage, right? Is that very early in your career also, it wasn’t just you’re wiring you studied for your C f A, I think you, you got it in the designation in 1978. So you were studying Ben Graham’s book security analysis, and so you, you were kind of learning the rules of the game and internalizing them very early.

[00:40:16] William Green: So I wanted to get a sense of how you came out of studying Ben Graham after the irrational exuberance of 73 and then the crash of 74. Then you’re studying Graham around 77, 78. You must have [00:40:30] come out with this sense of clarity about how the game works, about what the rules of the game are, what the laws of Gravity, financial gravity is.

[00:40:38] William Green: Can you give us a sense of what you came to believe about the fundamental rules of investing having studied Graham in this deep way?

[00:40:48] Fred Martin: Yep. But hold that just, I just want to make to compliment you on,

[00:40:54] William Green: I like any sentence that begins with those words.

[00:40:56] Fred Martin: Well, no, what I that I didn’t tell you. So my time at Tuck school was pretty useless.

[00:41:02] Fred Martin: One, I only remember two things sort of about it. One is that one time they had a guy, a money manager come from Boston, from some Boston firm for, to give a night talk. And I was just enthralled. It was one of the few things I remembered about Tuck school. The other thing was that we had to take a statistics course, and I had a previously high aptitude for statistics.

[00:41:22] Fred Martin: And I remember going to the final exam in my grade, my score going into the final was 20% higher than the next guy in the class. So having a facility for numbers okay, is a huge gift, right? Because., you know, and they’re having a high math aptitude. And this is really strange. I remember when I grew up in a small town in Indiana, I’d be walking home, and cars would go by, and I’d watch the license plates and I would jer the numbers around to add them up and subtract Adam together.

[00:41:48] Fred Martin: And so I could get to zero I mean, who does that? So you’re perceptive in saying and the truth is, when you start off as a money match, you don’t really know if you’re going to be good at it. Right? You’re just a young guy and you’re trying hard and for you to [00:42:00] realize that mostly you don’t have the interest in it.

[00:42:03] Fred Martin: So I just I gave you an example. I have spent until the last month, no time on cryptos. I went to my young guys and said, what is this a currency? Well, let’s not an investment, let’s not worry about it. I’m fascinated now I’m reading everything I can about F T X, because I’m fascinated with the autopsy. I’m fascinated with learning from this as to what happened.

[00:42:23] Fred Martin: What can we learn from it? And so this is just an area of interest for me and for you, it wouldn’t be an area of interest., what is an area of interest for you is being able to very perceptively pull out from money managers, the good ones, what it is that they do. And I mean, it’s a gift and so I think you’re following your gift, you know, but if you try to come into money management ah, and you’re not reading you’re not understanding that there’s a big difference between audited financial statement and an unaudited statement.

[00:42:54] Fred Martin: And that’s like, for me, it’s like a neon sign, you know? Yeah. Whereas I think

[00:42:58] William Green: I would hear the audited statement and my eyes would start to glaze over, whereas, whereas I look at some obscure book on, you know, Tibetan Buddhism or something, and I’m like, oh, cool. That could be something that, yeah. That relates to this, that relates to this and yeah.

[00:43:13] Fred Martin: No, That’s your strength.

[00:43:14] William Green: Yeah. I think you have to somehow be doing what it is that you are naturally obsessed with and good at. Yeah. But you also, I mean, you got lucky in a sense that you studied in the right church, right? So you studied Graham. And you got Yeah, I did that. There were these fundamental laws [00:43:30] of investing and it seems like in some way I mean, I think we should spell out what some of those laws are investing are for our listeners, because in a way they’re the backbone of what you’ve done for 50 years.

[00:43:40] William Green: And the first one I would say is you once said the discount to intrinsic value is the best predictor of future returns. So can you talk a little bit about just the focus on intrinsic value as opposed to market price, which is just, it’s such a fundamental idea.

[00:43:56] Fred Martin: It is. Let me preface that by sort of responding to what reading Ben Graham did for me was say there is a path you can systematically invest in the markets.

[00:44:09] Fred Martin: Without knowing all the pieces of. And Buffet comes along and takes his stuff. He was the one that took Ben’s stuff and put it into practice and articulated it beyond that in a way that makes perfect sense to people who are serious about long-term success. So what they did for me is say, you can do this.

[00:44:27] Fred Martin: There is a path.

[00:44:29] William Green: So yeah, it’s not just random. There are these rules of the game.

[00:44:31] Fred Martin: It’s not random. They’re rules of the game. And so the number one rule is price is what you pay, and value is what you get. Well, okay, so let’s unpack that. Okay. The hard part of that is what’s a company worth? And that sounds like Fred, that’s like investing 1 0 1.

[00:44:49] Fred Martin: But let’s unpack that a little bit more. If you say to yourself, we are going to be focused and we’re going to do one more twist because we’re buying growth companies, we’re going to push out a future value, we’re going to make a [00:45:00] forecast and we’re going to make our decision. Look at the stock price today, but we’re going to see what it’s worth out seven years.

[00:45:06] Fred Martin: We’re going to go past an economic cycle, okay? So we’re going to do a little bit of forecasting, we can talk about that, but we’re going to build this intrinsic value thing in our heads. We think in seven years that come, forget the stock, the company is worth X., Okay? That’s what we’re going to do. One of the things that I’ve learned that’s opened us up to do, because I, you know, you always want to keep back checking yourself, right?

[00:45:27] Fred Martin: Keep challenging yourself. And so we’re a value investor. Ultimately, we’re buying growth companies, but we pay a lot of attention to value. A lot of the value investors have imploded the last 15 years, and here’s our guess, they thought the best measure of a cheap stock is the price earnings ratio. One of my guys, Rob, is a brilliant guy we started thinking about is a P ratio is the only way to think about the value of a franchise.

[00:45:53] Fred Martin: How about free cash flow? How about the fact that America is a much more asset light economy now, and so they don’t have to put as much back in the building. So free cash flow is higher, yada, margins are better, yada, yada, yada. How about companies like Armed Holdings that sell only the royalties to the designs for the smartphones?

[00:46:11] Fred Martin: Right. I mean, so we expanded our notion of value out. We had two companies that shifted from shrink rep software subscription model, Intuit and Autodesk. We held them. The earnings collapsed because you push the revenues out, expenses are still there. So for a year or two, the earnings go way down and then, [00:46:30] but the lifetime value of subscription is higher than shrink rep software.

[00:46:33] Fred Martin: Okay. So I thought we did a great job of saying we’re never going to violate the principle, but we will be open. To thinking about it and broadening our understanding as opposed to debating the principle. And I can’t tell you because all this stuff takes emotional and mental bandwidth, analytical bandwidth.

[00:46:51] Fred Martin: If we’re debating, you know, price is what you pay and value is what you get, but this time is different or whatever. The idea of the price of it is relatively easy. Look at the market value of the company. You know, figure out what the total value of the company is in seven years and if it has a high enough expected return, it’s a can to buy.

[00:47:10] Fred Martin: I mean, that’s the easy part. The hard part is this whole notion of value. And I believe that you can get better at how you figure out value. We use a probability weighted expected return now is that we probabilistically figure out what they’re worth. We’re not trying to be an accurate forecast. We want an achievable forecast.

[00:47:30] Fred Martin: There’s a big difference between those two. And so there’s a lot of things you can do. You can get better at this. And I think we are getting more and more skilled at making forecasts, which means that we’re getting better at the expect chart.

[00:47:44] William Green: And to get back again, Fred, to this idea of adherence to process, one of the reasons why you’ve survived and outperformed I think over so many years is that you very consciously have this consistent investment approach that’s built around three steps.

[00:47:59] William Green: And so [00:48:00] when you founded your firm discipline growth investors, back in I think 97, you wrote this down and I wondered if you could just take us through those three steps, because in a way, it’s a very practical application of these kind of financial laws of gravity. It’ll help us explain how you take advantage of those laws of financial gravity.

[00:48:19] William Green: So the first stage is what?

[00:48:21] Fred Martin: So the first stage is understood what. Again let’s parse this out. Let’s not have around us look at a company and already start thinking about building a forecast, because you’re going to skip the other steps. So what’s executive compensation like? What is, you know, how do they make money?

[00:48:38] Fred Martin: What kind of business do they have? Okay, what are their margins? How good are they? You know, all those kinds of things. And if you can’t figure out how they make money, leave it for somebody else. I mean, there’s a basic humility in saying we the safest with Enron. We looked when Enron hit 10 bucks a share on its way to zero because look like interesting business.

[00:48:58] Fred Martin: We looked at it the financial statement was so complicated. We just threw our hands up and said, we can’t understand this one. We’ll let somebody else have it. So the idea is this isn’t a forecasting effort that comes next. This is an understanding effort. Can we figure out how they do business? Okay, so, so how are we good at what they do, yada, yada.

[00:49:16] William Green: So step one, you’re analyzing the company, researching the business very thoroughly, seeing how it operates, trying to figure out what the competitive advantage is. So you’re starting with the facts. Step two is much more about building a really [00:49:30] detailed financial model. Can you talk to us about that, what you are doing there?

[00:49:34] Fred Martin: Yeah, sure. And that’s where we spend the group time on the mop. And we’ve gotten, you know, it’s not proprietary, but it’s close because we have a model that we can, it’s interactive. So we’ll say, well what if you’ve got them growing at 9%? What if they grow 11? Or what if their margins do this or that? We can play with all kinds of different assumptions there.

[00:49:53] Fred Martin: Right? And it’s a very granular model. We build it up typically product line by product line. And we do a lot of visualization like. You know, how big is their addressable market? What’s the competitive landscape? All those kinds of things. So we’re trying to look at this thing and I would say in our process, we spend in the group meetings, we spend 90% of the time with that.

[00:50:14] Fred Martin: We’re trying to get as clear a picture as we can and as picture what it’s going to look like in seven years. And people said, you guys look like a private equity firm. And I said, yeah, but we charge a lot lower fees. But that’s all, by the way, we lose a lot of companies to private equity firms, and you know, because they’re looking at probably the same data we’re looking at.

[00:50:34] William Green: Okay. So stage two is constructing this detail financial model. We’re basically, you are estimating what the earnings are likely to be in seven years’ time, and then stage three, this is where you are calculating your expected return. Right? Yeah. That’s all. Can you explain what you’re doing and why you have these specific hurdles for small caps and mid-caps, which are the two areas you focus on?

[00:50:55] Fred Martin: Yeah. We use, so, so the last step is you simply look at them. You look at [00:51:00] the price of the market value of the company and you figure out the future market value and you say, okay, working assumption, not unfair, is that over time the stock markets say a weighing machine. Short term it’s a voting machine.

[00:51:11] Fred Martin: So tri-intrinsic value and stock price tend to true up over time. Okay? Maybe not perfectly but tend to true up that way. So the last step is to say, okay, the stocks here, we think you know it’s going to be worth something in the future. In the midst and this is a key point that I’d like to make. We need a 12% higher annual compound return to buy a mid-cap company.

[00:51:35] Fred Martin: 12% or higher. We need 15 or higher for smallest. because it’s riskier. That’s why we put that in there. Now, Y 12, there’s nothing magic about that except here’s a working assumption. If we do 12% for you, you’re probably going to keep us. If we do six, you’re probably going to fire us. We’ve priced our fees off that.

[00:51:51] Fred Martin: By the way, if we do 15 in smalls, we’re going to be a superstar. And in fact, over our history through, I think last month we were, I think about 12 on our minds, almost dead, you know, in 27 years. Which is kind of amazing when you think about publishing that it leaves us vulnerable. If the market’s going to do 15 for three to five years, we’re probably going to, you know, get some heat from customers, step it up if we’re doing 12.

[00:52:15] Fred Martin: But what it does do, it’s very simple, it’s very straightforward. We’ve used the same hurdle rate since we started, no debate about it. So it’s just a judgment call.

[00:52:26] William Green: But this is important for a couple of reasons. One of which is it’s [00:52:30] this repeatable process, right? This consistent adherence to a process where you’re saying, I’m not going to take valuation risk by overpaying for these stocks, because then the expected return just doesn’t justify the amount of risk that we’re taking.

[00:52:44] Fred Martin: That’s correct. Just think about the clarity you have. It’s all against a hurdle rate, right? So we had stocks in 21 that had a negative expected return over the next seven years where those were, you know, largely sold. So it gives you clarity and it also in oh eight where we showed a 25% plus expected return, we said, hey, you got to own them.

[00:53:08] Fred Martin: So you, you build time series in there. So just to play it where it is today, we entered the selloff at the end of last year, we had about a 14% expected return on our midst with the down market. We’re pushing 20, which is not as high as a weight, but really high. You know, we’re all in because it’s just too good a return.

[00:53:29] Fred Martin: So it gives you that clarity. We’re not debating like, oh, interest rates are up. Should we raise the hurdle rate to 15? because rates are up. I don’t think so. Every time you introduce some other variable into a model, you have a whole debate, and everybody gets. Confused. We think 12 is a good number.

[00:53:47] William Green: There’s something else that you mentioned, Fred, in passing there about the truing up process and I think it’s really important to sort of dwell on this for a moment because it’s one of those really profoundly fundamental insights into investing. And you once [00:54:00] said I’ll quote you. You said there are two sources of return for a stock.

[00:54:03] William Green: One is the growth in intrinsic value. The other is the truing up between where the stock is and where the company value is, and the timing on the truing up. The second part of the return is completely random. That has some really profound implications, right? That, so this gets back to the idea of the market being a weighing machine in the long run, but can you also talk about the importance of patience given the fact that you have no idea when that truing up is going to happen?

[00:54:30] Fred Martin: I’m working on a piece right now, William, on navigating bear markets because you know, I’ve been through nine of these two giant ones and a bunch of doozies like this one and you always get laid in it Whenever we are I where we are in this one, you wonder is it ever going to, you know, when does value kick in?

[00:54:46] Fred Martin: And Ben Graham says that’s one of the mysteries in 1955, I think he was testifying to Congress, and they said, what turns bear markets? And he said, that’s one of the mysteries of our business. You know, eventually value takes over and it turns, but there’s never a green light that comes on and says, okay kitty, it’s time to come in the pool.

[00:55:07] Fred Martin: I mean, there’s no free lunch on this stuff. And I think one of the hardest parts about what we do is the fact that we do not have control over when the intrinsic value and the stock price begin to true up. because you can go for several years and have that happen. and it is just so what you try to do is, one of [00:55:30] great things I’ve learned from Buffet is he’s a teacher.

[00:55:32] Fred Martin: He’s always teaching. He’s just incredible at how he can take complex things and make them simple, right? So we spend a lot of time teaching our customers educating exactly what you’re saying. Look, we don’t know when it trues up. It’s going to take patience. If you do it enough times, they start to have confidence because they’ve seen this happen over and over again.

[00:55:51] Fred Martin: You know? And so we have a high credibility motion with our clients, but it, you know, at least one or two or three always get restive. You know, when is it going to happen? When is it going to happen? And I think it’s the reason, it’s one of the reasons why I’m willing to tell people exactly how to do it. Knowing hard it is because you don’t have any control over it.

[00:56:12] Fred Martin: You can control the quality of your work. You can control what you want to pay for something, but you can’t control when intrinsic value and stock price begin to screw up. In either direction, or that’s the wrong word.

[00:56:23] William Green: But knowing these fundamental laws of financial gravity is a pretty good start.

[00:56:28] William Green: But as you say, the execution is excruciatingly difficult because all of the fear, all of the uncertainty, all of the institutional pressures from clients who can leave you and fire you your own emotions. I mean, there are, so, there are so many things that come to play here, but the fact that, you know, these laws of gravity is a really helpful start.

[00:56:46] William Green: And your average holding period for stocks is the best part of 11 years. So, right. So you are also, you are allowing time for this force of gravity to play out.

[00:56:59] Fred Martin: I [00:57:00] try to, every way I can. I try to teach clients like I’m getting called. What do you think about the market next year? I say, I have no idea. I just can’t, I can’t imply that I know what’s going to happen next year.

[00:57:11] Fred Martin: I might have an opinion, but it’s, you know, it’s, I got about a 50 50 chance of being right. But I. I just try to, everything I do and all, everybody here keeps trying to say we don’t know what’s going to happen over the next six to 12 months. We don’t know. We don’t know. You know, we know we have great stuff.

[00:57:28] William Green: So is the key Fred to focus on what is knowable, which is yes, the intrinsic value and what you think it’s going to be in seven years, which is sort of not super knowable, but somewhat, but its full constable.

[00:57:39] Fred Martin: But it’s no, but it’s absolutely knowable to avoid valuation risk. It is absolutely knowable that, you know, I would say to you that just, you know, having said PS are not a super leading edge, but they’re not unimportant.

[00:57:53] Fred Martin: Okay. Or price of sales, you know, you can do back to the envelope. You know, we’re not experts in Tesla, but we did back of the envelope calculations. It’s an auto company, gave them margins and all that stuff. It all looked at the auto business and you can do rough analysis and you can kind of figure out what it’s worth.

[00:58:10] Fred Martin: So you can know how well priced your portfolio is, you can know that. But there are lots of things you cannot know. and I think what you have to do on stuff you don’t know is live your life carefully enough. So if you’re wrong on that, you can survive.

[00:58:25] William Green: That’s a very profoundly important point. And hence it is and it’s, you wrote to me the other [00:58:30] day, I think we may have uncovered the greatest risk manager of all time, the climber, the documentary free solo.

[00:58:36] William Green: And wonder if you could talk a bit about this guy, Alex Honnold, who is a master of I, I don’t know how many of our listeners have watched the movie. There’s a great documentary that called Free Solo that’s about this guy Alex Honnold, who decides to climb, I think it’s El Capitan. So this 3000 or so foot sheer granite, aha.

[00:58:56] William Green: Cliff, I mean, he gave me a heart attack just watching the thing. Can you talk about what you can learn from someone like Hon about dealing with uncertainty, dealing with risk, de mitigating risk in a really intelligent, thoughtful way? Since we don’t know what can happen or what will happen, we can guess what can happen, but we don’t know what will happen.

[00:59:15] William Green: Did you watch the documentary? Yeah. And then yesterday I watched something about the filming of the documentary, which is terrifying in it, its own Right. And you know, one of the things that he, that the cameraman said while making the film is that they had to record part of it with remote cameras because he said he didn’t want them to see him die because they were friends of his.

[00:59:36] William Green: Sure. Okay. So during the most dangerous bit, they actually had to set up remote cameras.

[00:59:39] Fred Martin: Oh my God. Okay. So it’s so funny. So Rob is working on, he’s spearheading the piece on risk. This has been in our hands for years. Right. This idea of trying to get better. And I really believe if you really want to learn something, well teach it, you know?

[00:59:52] Fred Martin: And so the teacher always learns the most. And so he writes this thing on.

[00:59:56] William Green: This is Rob Naski, who’s your right hand write chief investment?

[00:59:59] Fred Martin: He [01:00:00] starts with free solo. And I freak out about it because I’m going, you know, wait, we’re not talking about falling off cliffs here. And then, but as I started thinking about it more and more, and I about a month ago I called Rob up and I said, I think I’m not looking at this right.

[01:00:11] Fred Martin: This guy was one of the greatest risk managers of all time. And we need to look at it. I need to look at it differently and say, my goodness, he took this thing with a binary outcome, and he made it. And there were a thousand little threads to make that. And so this has to do, this is really deep stuff, but what this has to do with is risk and risk mitigation.

[01:00:36] Fred Martin: Okay? And what’s in your control and what’s not in your control. And so what he did is he systematically, he climbed it many times. He was a very stur climber. He was physically fit, and he practiced those moves with a rope over and over again. Right now. He also is part of the thing. One of the things that struck me as so profound in the whole thing is, I don’t know if you remember the movie he was going to climb and he got part we up and said This isn’t right.

[01:01:02] Fred Martin: And he went back down again. I don’t know if you remember that. And I remembered that I’d forgotten that. Yeah. I thought, oh my goodness gracious, this guy, he’s got the risk meter going in his head, he’s not ready, it’s not right. And he knows that this isn’t the right day and just think of the humiliation. He must have fell in the def sense of deflation because he, because you don’t just show up when we, he is having a climate.

[01:01:25] Fred Martin: You build to it; you’re all fired up. You start up there and you part where up and [01:01:30] goes, well not right, comes back down.

[01:01:32] William Green: It’s interesting also, Fred, I saw an extraordinary video of him last night where he was teaching a famous Scandinavian climber to free climb. And he said to the guy, when you get stuck, just be patient and take the time to figure it out.

[01:01:45] William Green: He said, you get in trouble when you’re in a hurry. So when you can’t figure out how to get out of it. Oh goodness. Just pause. Be patient and give yourself time to figure it out. And I, you know, and he’s talked about not letting your emotions spiral out of control when you were stuck. And so there’s a kind of an incredible ability to get his ego under control.

[01:02:05] William Green: That’s astounding.

[01:02:06] Fred Martin: This is you should, by the way, you should try to get him on your podcast.

[01:02:10] William Green: That would be great. Yeah. He’s a fascinating guy.

[01:02:12] Fred Martin: I just, well, just because if you look, he had a binary outcome, but he also had the ability to practice over and over again. Every He climbed it.

[01:02:22] Fred Martin: Right. Anyways, I mean, he stacked a lot of things in his favor. He didn’t guarantee that he didn’t fall, but boy, he sure did a lot of risk mitigation. He also, there is another idea that we’re also, we’re debating, and that is, Buffett said this many times, so it is possible to get the market return.

[01:02:42] Fred Martin: You can buy an index, an s and p 500 index, but anybody can do it when you try to get an excess return. The field gets really narrow and it becomes all about process and implementation, and the ability to take intelligent risk if you’re going to do superior results, because if you try to do superior, you may end up with [01:03:00] inferior results.

[01:03:00] Fred Martin: So this kid had the potential to rise to the top of this, but he had to really do risk mitigation to make it, and it’s true investing. As you move up the food chain, as your performance gets better, you better really manage the risk because it’ll kill you. And so I’m still turning my head over on his comment about be patient.

[01:03:23] Fred Martin: It’s true investing. You know, we have a, I went to fly school years ago, and one of the buzzwords was when one of the things you train for in flight school is you train crews, which is kind of interesting. But you also, you train when the, when stuff goes wrong, a red light on the cockpit starts blinking.

[01:03:37] Fred Martin: You know, first thing you do is look at it right. And. It’s not fun, right? Something’s going wrong. But there’s a saying, wind the clock. Just let it blank. Just wind the clock. Okay. Because you don’t want to overreact. Rarely is it life threatening. The first part you can make it life threatening. One of the extreme examples, and it’s happened in the past, is you’re lifting off in a two-engine plane, right?

[01:03:58] Fred Martin: And just as the plane hits a certain speed, you rotate, you lift off your engine quits. So fly the plane, wind the clock, fly to a safe altitude and deal with it. Even if you have an engine fire, deal with it when you get to altitude. Okay? Why would you do that? because you don’t want the guy in the right seat to reach over and pull the wrong lever and cut the power off to the good engine.

[01:04:21] Fred Martin: I mean, just, that’s happened. So excitement in the cockpit, I call it fast hands. I don’t like to fly with guys with fast hands because they’ll [01:04:30] push the wrong button. That’s a bad idea, flying. So I love his advice when you get in the jam. Slow down. Think about it. You’re safe where you are right now. And it’s true investing.

[01:04:42] Fred Martin: Think about it. Think about it. You don’t ever have to be in a rush to lose money. You really don’t. And you know, it’s if you don’t just, you know, buffs always talk about waiting for the fat pitch to come over the plate. Just, you know, just wait. There’ll be other ones coming. Just slow. Now it’s up.

[01:04:59] Fred Martin: It’s a really good way to think about it. Just slow down.

[01:05:02] William Green: Honnold also used a very interesting phrase where he said he did enough preparation so he could step outside his fear. So that was Wow. Very, yeah. This was in another video of his, and he had trained for, I think, two years weighing whether to attempt this climb that it ends up doing in somewhere like three hours, 57 minutes.

[01:05:22] William Green: So that, I mean, it’s very profound. I think Josh Wades skin often talks about thematic interconnectedness, right? Where you see something in one field that applies in another field and there’s something about his, an AL’S ability to control his emotion. That’s very applicable.

[01:05:38] Fred Martin: I don’t, have you talked about that capacity for you in terms of looking at balance sheets as a right left-brain balance?

[01:05:45] Fred Martin: I don’t have the capacity to put that risk out of my mind enough. It would impede my ability to execute because I would be thinking about falling. I wouldn’t even, first of all, I wouldn’t even try to do that because that risk profile is beyond, he had to be able to [01:06:00] literally dissect every risk on the way up.

[01:06:03] Fred Martin: You know, different handholds, everything else, all the experience he’s had, like you’re saying, massive preparation. It is, but it’s one of the great- it’s one of the greatest athletic feats of all time. But it’s also one of the maybe the greatest risk management exercise of all time. It’s just and so we’re, we started, I started by objecting to have it in there.

[01:06:20] Fred Martin: Because I thought, we don’t want to have people think about falling off the cliff. But then I made a 180 and we’re going to, we’re using the theme from him, and I’m going to take your quote and give it to Rob because we’re going to try to get that in there because I think that. That is, you know, there’s an idea on decisions, and I’ve said this to many people.

[01:06:38] Fred Martin: So let’s say there’s three kinds of decisions. A decisions B, decisions A C, decision A, or great decisions make them C or bad decisions avoid them. Where people spend way too much time is on B decisions. They try to make them before they either turn into an A or a C. So if it’s a B decision, don’t do anything with it.

[01:06:55] Fred Martin: It’s just a B decision. Don’t waste time on it. See what happens. It either migrate to C or migrate to a. That’s just so that, that idea of patience I think is, you know, certainly investing patience, but patience on decisions. Sure. I think it’s a great idea.

[01:07:11] William Green: Yeah. I think on, I talk about this in writing about Ed Sorp in the introduction of, to my book where he talks about part of rationality being, suspending judgment, and then my friend Jillian Zoe Siegel, who wrote about Buffet in her book, getting there, I remember her quoting Warren saying you can always tell.

[01:07:29] William Green: Were to go to [01:07:30] hell tomorrow. I think you used slightly cruder words than that, but you know, again, it’s the ability to just wait not to let Yeah. Not to be pushed into action prematurely.

[01:07:39] Fred Martin: Just wait. There’s real value in that.

[01:07:43] William Green: Couldn’t we talk a bit about flying, because you obviously are very experienced pilot and in the acknowledgements of your book you talk about how Jim Dobe, who’s been the chief pilot for your firm since I think 2003, and who’s an obviously very interesting guy.

[01:07:58] William Green: I think former paratrooper and Ranger and stuff. He is got game, he does. You said, in addition to his superb flying skills, he showed me how to apply the margin of safety to flying. Yeah. And I wondered if we could talk a little bit about how this fundamental idea of the margin of safety, which you obviously apply in climbing solo on a mountain without ropes or anything.

[01:08:20] William Green: Also applies in investing, also applies in flying. How has it helped you in flying this idea of the margin of safety?

[01:08:28] Fred Martin: Oh my goodness. So let me just begin. When you ask these questions, they’re great questions. I always try to flashback just for a second. So let me go back to Band Graham for a second. So, you know, Graham had a searing experience in the early thirties because he lost a lot of money and that’s how he really recovered and began to teach and became a much better investor.

[01:08:50] Fred Martin: And he always said margin of safety was the discount to intrinsic value. And I thought that’s true, but I never, I thought margin of safety was brought. [01:09:00] And I, my definition of margin of safety is its things you do to keep adverse events from becoming catastrophic. So adverse stuff’s going to happen. The question is it catastrophic or, and so when you take that approach, you can start to think about in flying there’s adverse stuff that happens, equipment breaks, you have weather, you have unexpected traffic, you have this, you have that.

[01:09:22] Fred Martin: So how do you handle these adverse events without having a becoming catastrophic? Well, then it gets interesting. So there’s a million ways to build margins of safety. The first thing is you have to acknowledge how important it’s, and you know, I asserted in my book that the pilot community has a much better feel for margin of safety, the investment community, because it’s much more deadly if you keep violating it.

[01:09:44] Fred Martin: Okay? But the first step is to recognize it’s really important. Second is to implement processes and steps that enable you to maintain a sufficient margin of safety. And Jim and I have flow together for 25 years and you know, we still every. Try to build a margin of safety in, and it can be, you know, we went to Denver and back a week ago and terrible weather forecast both directions and we have our alternate plans, and you know, and so that’s how you start to build it.

[01:10:11] Fred Martin: We have plenty of gas. We build a margin of safety in, it’s a whole bunch of different steps. And, but you have to constantly think about margin of safety. You got to always be building that. You once told me it’s true investing.

[01:10:23] William Green: Well, you once told me that you had a, an agreement with Jim that basically both of you could [01:10:30] veto a trip

[01:10:31] Fred Martin: Absolutely. And so, with no argument. With no argument, no, no talking back, I’m not comfortable with this. We’re going to turn around.

[01:10:37] William Green: Why is that so important?

[01:10:39] Fred Martin: Because it keeps you from talking to each other into killing yourselves. Like, I’ll do it if you’ll do it. You know, remember he’s an ex airborne ranger.

[01:10:45] Fred Martin: I’m not exactly a wallflower, you know? Oh, we can do this. So that’s what it prevents. I’ll do it if you’ll do it. That sort of thing. Your gut’s telling you it doesn’t feel right. I’ll do it if you’ll do it. And then the eagle and said, well, I’ll do it if you’ll do it. So now you both have dropped them.

[01:11:00] Fred Martin: So both of us are, we had a funny thing happen. So both of us consider that we are solely responsible for the safety of the flight. We’ve gone a flight school many times over the years. We had one session down at Wichita and it was, it’s three days in a similar three days. First day we were awful, and we have a really good reputation.

[01:11:20] Fred Martin: And the Simmons director’s kind of looking out of the corner of his eyes, like, like I thought you guys were pretty good. And we knew we stuck. So we discussed it ourselves, you know, at dinner that night. And I think Jim, or I said, neither of us acted like a captain. There was no captain in the plane. We’ve, for some reason, both of us decided we weren’t going to be a captain today.

[01:11:38] Fred Martin: He said, you’re right. So we corrected that, you know, aced the course after that. But so I think it’s a way of life when you think margin of safety, it’s taking steps. It’s recognizing there will be adverse things that happen, but you can take steps to make them, to prevent them from becoming catastrophic.

[01:11:55] Fred Martin: That’s the heart of margin of safety. You’re going to have bad stuff happen. The question is, [01:12:00] does it become catastrophic?

[01:12:02] William Green: I thought it was interesting that you also had various processes in place as an investor that were very similar to the processes you had in place that sir, as a pilot, so you, at one point when I had asked you what the parallel was between your approach to flying and your approach to investing, you said, well actually I’ve given two of my right hand men the ability to veto any stock pick that I make.

[01:12:25] William Green: And I thought that was so interesting that parallel between that and your policy with Jim Dobe of each having the ability to veto without question what the other person has. Can you talk about that? That seems like such an interesting and difficult thing for a 70 something year old alpha male to give his younger colleagues who are less experienced the ability to veto his decisions.

[01:12:48] William Green: Why, what were you thinking?

[01:12:50] Fred Martin: I’m actually 76 and so I we’ve expanded that to four now. So it’s me plus three others that have veto power. So I even tightened the noose more. Okay. So what I was thinking was that when you think about margin of safety and you go out to people and you say, okay, you’ve been here long enough, you understand what we’re trying to do.

[01:13:09] Fred Martin: I’m going to trust that you will honor the margin of safety. And by trusting you, we’re just going to expand out the number of people that can be to this. So just think of what we’ve done. We have total buy-in for every decision. Each of us is responsible for the portfolio now because if its stock goes in, they voted, they could have voted not to ever go in. [01:13:30]

[01:13:30] Fred Martin: And so I think it’s a really powerful risk management tool. Really powerful. And I hadn’t thought about that, but, and you’re helping me with this but you’re right. It’s same parallel that Jim and I had, and I took it when Jim and I did it, and I applied it to our group, and I think it works.

[01:13:44] Fred Martin: It’s a really interesting way of doing it. But what you are doing is you are honoring the margin of safety because you’re saying, look, you know, yeah, I’m good at this, but I have my bad times and if you guys can stop me, if you have a, an issue, let’s discuss it.

[01:14:00] William Green: It sounds like an odd parallel, but when I got engaged, I think I was only about 23 or 24.

[01:14:05] William Green: And I thank God I’ve been married to a lovely person, Lauren, for 30 years. But I you know, I was pretty, I was like, what am I doing? Do I do, I have good judgment on this? And it was too important to take reckless risk. So I remember independently calling my father, my mother and my brother and saying, am I missing something here?

[01:14:25] William Green: And they were all like, no, she’s absolutely lovely. Good choice. Well done. And I don’t know, it was a really interesting thing to do, to know even at that age that there are certain things that are so important that you actually want to not trust your own judgment. And I think I probably would’ve done it regardless, but to know that they all thought, no, she’s great.

[01:14:42] William Green: That was a, it was immensely helpful actually.

[01:14:45] Fred Martin: I think that was absolutely brilliant margin of safety application because, and I know you well enough, I don’t know you super well. I know you well enough that you were reading their answers. When you say they all thought she was lovely, [01:15:00] you lost over the fact that you know how your dad was going to respond.

[01:15:04] Fred Martin: You knew how you knew your mom’s range of responses and you gauge those, and I think you were really smart to ask them because, you know, my wife and I were, we’ve been married 12 years now. We’re both married before and we do a divorce care ministry and we tell people look, fall in love with them, but then put the cunning businessperson side on and understand that how they were before you got married is however, they’re going to be after you get married.

[01:15:27] Fred Martin: So just understand that because one of the biggest problems in marriage is people think that they love me so much they’re going to change. They may still love you a lot, but they’re not going to change. And as a funny, postscript, my wife who’s wonderful, I took her down went to a wedding, and four, my brothers were there.

[01:15:43] Fred Martin: And when the weekend was done, my oldest brother called me over and he said it’s been decided. I said, what’s that? He said, don’t let her go. Huh? That’s what my brother said. And so that was a pretty good testimony, but I thought you were, it’s funny the older I get, the more I solicit other opinions, the more respectful I’m of other opinions.

[01:16:01] Fred Martin: It’s honest, dynamic. The more I know, the more I realize that other opinions, you know, are often, you know, I’m, I told you at the outset of this call I’d learn a fair amount from this call. I’m interested, I picked up two or three or four things already from talking to you because you have some unique qualities, and I can learn from that.

[01:16:20] Fred Martin: And I’m interested in your opinion on stuff. Ah, thanks. And you just keep absorbing.

[01:16:26] William Green: I do. One other thing, Fred, that really struck me when we were talking last time about [01:16:30] flying and the way that it relates to other areas of. is, you were talking about how you need to prepare before you take off because Right.

[01:16:38] William Green: You’re coming down either way. Whether you want to or not in the way that you want to or not. And I remember asking you whether, how that applied in other areas of your life. And you said to me, well, look, when we are hiring, for example, you said when you, you said when you were hiring, I think it was Nick Hansen who’s another of the key figures in your firm.

[01:16:57] William Green: You did, I think 22 interviews before you hired him. Can you talk about this notion? Because you, you said to me also, when you’re buying a stock, you said before you buy seal the exit, don’t think about the target price. Right. Right. Because you want to act as if you are really going to own it for 20 years.

[01:17:14] William Green: And again, this seems to relate to what Alex Honnold was doing with his free solo climbing.

[01:17:20] Fred Martin: Yeah. He was all in. He was all in. Well, it has to do with the standard. So if you’re, if you say to yourself, when we hire somebody, we like, regardless of their age, we like this to be the last place that worked., then you’re going to put a lot of upfront work into it because the reward could be a 50-year employee, right?

[01:17:37] Fred Martin: And so it, it becomes worth it. And we’ve actually refined that a lot. As a funny story, we hired, it was 21 or 22 interviews with Nick. We had, we decided to have an analyst about three years ago, so we. We had 70 qualified resumes for one spot. And so we worked it down. They had to; they did two essay questions.

[01:17:56] Fred Martin: I forget what they were, but they were grueling. And we and [01:18:00] multiple interviews worked it down to seven. And we have a very active intern program. So the seven five were, had been interns with us, so they already knew us and we then, it was really nasty. We had them analyzed, the stock we’d owned for 15 years and said, what should we do with it?

[01:18:13] Fred Martin: And it was a difficult company to understand. And then we blind because we, we’d interviewed all of them, but we blinded the essay, so we didn’t know who wrote them. Okay. So we came out with two kids that were, hadn’t shoulders better than everybody else. The two Okay. Hadn’t been two. Okay. Two interns.

[01:18:29] Fred Martin: There’s even funnier stories on that. But we thought about it and one of the people in the firm goes, these guys are really talented. They’re not super expensive. We hired both of them. So we actually made a mid-course shift and added two of them. And they’re both remarkable. Young people. One is an immigrant from Moldova and he’s pre naturally gifted at stocks.

[01:18:48] Fred Martin: And the other is a kid who grew up in a trailer park just east of Fargo, his father’s engine, his mother’s German. They both live in trailer parks, and you know, and he put himself through calories, both of them dead, you know, and they’re just these doers and high integrity. And so I, it’s true in a stock, the idea of, I, it’s so tempting and, you know, the beauty of the markets is then you can exit a position anytime you want it at very low cost.

[01:19:12] Fred Martin: That’s the good news. The bad news is you can exit a thing anytime you want. So you don’t have to be committed at all. You know, when you got married, you, you didn’t get married and say, well, you know, we’ll see, I’ll try this for a little while. You know, our pastor at church says, when you get married, throw away the key.

[01:19:28] Fred Martin: Say, divorce is not an option. We’re just not [01:19:30] going there. So, boy that, you know, that really changes the equation. And when you think about a stock, why not, at least in your head say, we’re not buying this with the idea of selling it. We’re buying it and we’ll do all the work because it’s so tempting. So the stock runs way up and all of a sudden, you’re, you know, and, but it’s not overpriced, but it’s up a lot.

[01:19:49] Fred Martin: You think, oh, let’s, you know, you never go grow taking a profit. So I think the idea of conceptually sealing the exit, I think is really powerful.

[01:19:58] William Green: I remember you saying to me once that you were taking someone out on the 20th anniversary of him being at the company and you said, you talked about how the first time you had met him, I think you said, if I gave you only five bullets this year, you know, to buy and sell something, what would you use them for?

[01:20:15] William Green: And I thought that was such an interesting question. It’s a very related to Buffett’s idea of the 20 punch cards where you can only make 20 decisions in your entire investment career. And so this, I think

[01:20:25] Fred Martin: it’s, just think about. The concept of analytical bandwidth, it’s not infinite. This is one of the conceits of being a human.

[01:20:33] Fred Martin: You think you have infinite; I’m still struck by your self-awareness to say, I don’t want to read balance sheets. It doesn’t mean much to me. What you’re saying is I have some really great strengths. I’m going to work on those, but I don’t have unlimited bandwidth. I don’t have unlimited strengths and I’m not going to try to be all things to all people.

[01:20:51] Fred Martin: And what I said to that young guy was, I want you to conserve your decisions. We have that right now just to think about how you manage a, how you [01:21:00] run an investment team. So we spent three hard years. We have a beautiful looking portfolio. We generate a lot of capital gains in 20 and 21. We did some tax selling this year.

[01:21:09] Fred Martin: So we don’t have gainings this year. I don’t think there’s much we need to do for the next seven years. That’s how, what a good-looking portfolio we have. What do our young analysts do? You know, people thrive on new ideas and stuff like that. So one of the things that we’re going to them and saying, you know, look, we may not be adding a lot of new names.

[01:21:27] Fred Martin: We’ll see. But what you can do is deepen our understanding of our existing holdings. And it’s amazing to watch it pick up. We have a missile going on right now. It’s a company that it’s just lit off like a candle, okay? And we’re now trying to put flesh around that. How sustainable is it? How big is their addressful market?

[01:21:45] Fred Martin: And this, the new young, one of the new young guys is digging on that. And it’s just wonderful to watch. So, Buffett’s, right? You know, the, you don’t have an unlimited number of, and I don’t know how firm that, you know, most money managers have 50 to a hundred percent turnover a year, which means they’re always looking for new ideas and there, you know, it would be exhausting.

[01:22:04] Fred Martin: I don’t know. How could you, I just can’t quite understand how you could do that because nobody has a kind of analytical bandwidth.

[01:22:10] William Green: You know, one of the things I wrote about in my book that I, it’s kind of again, like most great truths, it sounds kind of mundane, but I just realized. You want to be subtracting stuff, not adding stuff from your life.

[01:22:23] William Green: Absolutely. So you’re constantly thinking, what can I remove? What game should I play? What game shouldn’t I play? Yeah. And so [01:22:30] I see that a lot with the greatest investors. I think of someone like Bill Miller, who’s just stripped back so much of his life. So just focusing on what he is really good at and loves.

[01:22:40] Fred Martin: What’s he doing now? I studied him after oh eight. I was fascinated with eight-

[01:22:45] William Green: Oh, he’s had the most amazing comeback over the last decade. But I was emailing with him earlier in the week and he, you know, he’s not having the best time at the moment because obviously he had an enormous bet on Bitcoin where Oh, he did.

[01:22:57] William Green: He, yeah. And he’d been buying since it was $200 a coin, and his average price was like 500. So he’d made an absolute fortune. And then he was the biggest individual shareholder of. Whose name wasn’t Bezo. So he had this unbelievable climb back. I should, I’ll send you a, an earlier episode of the podcast where I interviewed him based.

[01:23:16] Fred Martin: Oh, I’d love to, you know, He was one of my, I mean this in a very respectful way. I the oh 7 0 8 was fascinating to me. I mean, they’re always fascinating, but if you predate that I think it was oh 4 0 5, I wrote this piece and I said don’t understand this. I call it the golden Age treasury bills, but part of the piece said if its s rates are in half, how could the financial, no lenders keep reporting to the same returns out invested capital and something’s wrong here.

[01:23:40] Fred Martin: I didn’t go into; I didn’t do a lot of digging. I’m not a short seller, but it just struck me. And you know, he loaded up with dividend paying brand name financial service companies in, oh, in oh seven, in oh six, in oh eight, they got killed. and I thought to myself, I don’t know if there was a way to figure out what they were worth.

[01:23:57] Fred Martin: I mean, I just, I conceptually it looked like the [01:24:00] right thing to do. Brand names pays a dividend, worried about the markets, but I’m not sure that, you know, he really knew what he owned, and it was, you know, really hard on him. But I always thought that he was a very similar to us, that he had a growth mentality, and he was very value conscious.

[01:24:16] Fred Martin: And I believe that’s true. I think that’s,

[01:24:18] William Green: Yeah. And a brilliant mind., he’s, oh yeah. He’s got one of the most thrilling minds of any, so is

[01:24:24] Fred Martin: he does he still run money professional or is it just?

[01:24:26] William Green: Yeah, but he’s coming up to retirement. He’s handing over the reins shortly.

[01:24:30] Fred Martin: Oh, he is? Did he start his own firm or is he still?

[01:24:32] William Green: Yeah. No, he started his own firm and so, and it’s had an incredible decade. I mean, I think his funds were, you know, top 1%. Oh, really? Yeah. So, no, he had an incredible rebound. He’s, you know, he’s irrepressible Bill. He’s got his-

[01:24:44] Fred Martin: Did you ever talk to Peter Lynch? Did you ever get a chance?

[01:24:48] William Green: Yeah, I interviewed him. Sorry. I interviewed him more than 20 years ago. Okay. And I haven’t managed to interview him since I should again. But one thing that fascinated me about Lynch all those years ago is that I had asked him about books that had influenced him, and he was like, nah, you shouldn’t read books.

[01:25:04] William Green: He’s like, BAS basically, it’s much more helpful to play games like poker and bridge that teach you about probabilities. And so at the time I thought, God, he’s so unintellectual and uninteresting. And then I looked back at my notes a few years ago and I was like, oh, that’s really interesting. It was a really interesting insight.

[01:25:19] Fred Martin: I always thought he was one of the I stood next to him one time at a conference, and he struck, he was a humble guy I didn’t talk to at all, but I thought, and I think he was loyal to a folk. I think. Fidelity [01:25:30] gave him too much money to run, you know, and it, I think he just burned him out. But he was bill Miller was up there.

[01:25:36] Fred Martin: Peter Lynch would, they’re, they wrote some of these guys that just are, you know, the idea of investing of these guys that are, they’re like US sports a sports figure that can walk on there and just be so talented with some special gifts.

[01:25:48] William Green: Yeah, it’s a rare breed. This issue that you just raised about taking on too much money is a very interesting one.

[01:25:54] William Green: And you, I mean, there’s a very interesting thing going on with your firm, which is that you’ve done these things that are so not in your own interest but are in the interests of your clients. And one of the most striking, I think, is you, for people who don’t know the firm well, you have these two strategies.

[01:26:11] William Green: One is a small cap growth strategy, and one is a mid-cap growth strategy. And the small cap growth strategy, you basically closed to new investors when it hit about 400 million in assets about 15 years ago. And I remember you taking me through the numbers and saying, look, it would be really easy to have an extra 2 billion in assets.

[01:26:29] William Green: Sure. And I’d make an extra 18 million a year. And so I was thinking, okay, so an extra 18 million a year over the last 15 years. That’s pretty nice. And can you talk about this idea of the importance of being willing to sacrifice your own interests for the sake of a client? Which I’m not saying just to flatter you.

[01:26:47] William Green: I’m saying it because actually, I think it’s vitally important for our listeners to understand this issue of the alignment of interest between them and the person who’s managing their money.

[01:26:59] Fred Martin: You know, we’ve had [01:27:00] a lot of questions about E S G and, you know, what does it mean? All that stuff. And our response was a positive response, which is the gold standard of our business is a fiduciary obligation to clients.

[01:27:09] Fred Martin: And if E S G can help, we’re interested in it. In fact, gee governance has been a key risk factor for us. But the other stuff we’ve been polite in saying it doesn’t really help us. But when you unpack the fiduciary obligation, I think it, it’s a very deep obligation. It’s been around for hundreds of years, and you can’t simply say, we put our client’s interest first.

[01:27:29] Fred Martin: You have to live it. And so you have to run your business carefully. You have to keep your expenses down and you have to run your personal life in a way so that you can always be in a position to represent your clients. And so I live on a tiny fraction of my income. I do have one luxury. I own a jet partly because I love to fly.

[01:27:45] William Green: But even that you bought on the cheap, I remember you bought it for sound like five, five and a quarter million instead of 15 or something. Yeah, I did. I

[01:27:52] Fred Martin: waited six years to buy it. Yeah. I was dropping a million a year. So it’s a great airplane, by the way. But I think, you know what I mentioned to you in the email sent is that all we’ve ever done is midcap and small cap.

[01:28:05] Fred Martin: So you sort of begin to understand what kind of what size you can, you know, what’s the right size, where you can still perform. And I get this from my dad by, he was not a great investor, but he was a customer’s man and they loved him. And he used to tell me, you know, he worked for the brokerage. He used to tell me he had the most secure job in America because his customers were oil and I never forgot that.

[01:28:25] Fred Martin: And it’s the customers that pay us. And here’s the trade-off. We’d probably [01:28:30] once a month get a thank you note, bill. I get teased by a little bit. They’re often really old, you know, 40-year customers, women that are 95 write me in Freddy and say, Freddy, because of what you’ve done for us, here’s what I’m able to do for my life.

[01:28:42] Fred Martin: You know, or for my grandkids and all that stuff. That’s priceless stuff. I don’t know what dollar amount it put on that. But for me that’s priceless. And so I just want you to, you know, we have 40-year customers, and you know, I’d like to think that. New people coming in get another, at least 20 good years of run out of here.

[01:29:00] Fred Martin: So you got to think about people coming in, do they have the same chance for a great return as the, you know, people have been here a long time. And look, I’m, I have a great life, you know, I do pretty much what I want to do, and I work with great people here and we have great clients. Boy that’s not a bad place to be.

[01:29:17] Fred Martin: And it’s, but to get that, you got to give up something. And, you know, my plane would fit in the baggage compartment of some of the, you know, mega jets owned by the hedge fund guys. But you know what? I got something they don’t have. So I just think I’m not, obviously I’m intensely competitive, but I just think this was a higher reason.

[01:29:34] Fred Martin: But I just think it over, you know, and the art form is, can we deliver really great results in the context of, you know, for people where we want all their money, and shepherd them through the tough times and can we, you know, there’s an art form to that and so I, I’ve had pretty good life. If I had more money I, and less client appreciation I don’t think my life would be as good.

[01:29:56] William Green: I remember you once saying to me that you were interested [01:30:00] in, I think you had set up an investment conference pre Covid where this back in about 2017, I think, where you were talking to me about how you wanted to empower individual investors to ask the right questions. And because I think you had seen so many of your clients and other people’s clients sort of fall off the straight and narrow.

[01:30:18] William Green: We, I remember you telling me you had one client or prospective client who went off and got ripped off by Madoff, for example. I mean Oh yeah. You know, the people who got emulated in the s schlager funds. I mean, there were all sorts of disasters along the way, and I was wondering if you could give a piece of advice to our listeners who were thinking about hiring a money manager or investing in a fund.

[01:30:38] William Green: If you wanted to ask the right question to get a sense of whether that person has integrity and whether their interests are aligned with yours as a client, how do you do it? What should you be asking?

[01:30:49] Fred Martin: We started off, but by the way I just finished putting it into a wonderful course, which I’ll send you a link to.

[01:30:55] Fred Martin: So I mechanized it. I paid a lot of money. It’s a fabulous course. I think it’s online and instructor led on what I migrated to is originally I thought their trust in our industry’s really low. So if we worked and the relationship between client advisor, that would work. But the feedback I got from advisors is, your questions are going to cause our fees that go down, so I’m not interested.

[01:31:16] Fred Martin: Okay. So I switched gears and I’m going to, full man a revolution. My goal is 20 million Americans become empowered to ask the right questions, and I took 99% of what I know and simplified it. [01:31:30] A few things like. Killer mistakes and how to avoid them. You know, what are three things you have to know?

[01:31:34] Fred Martin: You have to know what compound interest is. You have to know what an investment asset is, and you have to know about margin of safety. Okay, so we’re rolling that out. And so I switched course. So there are three things that if you want to start a discussion with, if you’re going to go hire somebody, okay, here’s the three things that you start with, not even references, like or how have you done?

[01:31:57] Fred Martin: If you want to winnow it down, you ask them three questions. Will you figure out for me every year how I did last year? I want to know what my profits were last year. I want to, what I started with, how much I put in or took out, and what to end up with. And I want to know if my net profits, and then I’ll figure out what percent that is.

[01:32:11] Fred Martin: Can you do that for me? Okay, sure. Two, can you tell me how much it costs me in total to do business with you? And I don’t mean just your fees. I want a total look at what is costing me. Can you do that for me? And I want an annual report and I want the dollar amount and I want the percentage of my assets.

[01:32:30] William Green: So that’s including the middlemen who are putting you into the fund. Everybody. Everybody. Your financial advisor who might be costing you a couple of percentage points a year.

[01:32:38] Fred Martin: Yeah. But then there’s other fees.

[01:32:40] William Green: 12 fees for marketing. Whenever front-end loads, all this stuff.

[01:32:44] Fred Martin: You’re the pro. I want you to tell me what it’s costing.

[01:32:47] Fred Martin: Okay? The third thing is can you tell me each year, report to me what my mix of assets is and the most important determinant of your annual volatility or your risk profile? Quite the same, but we’ll leave it at that. [01:33:00] And your return expectations, your mix of assets between stocks and bonds. So can you give me those three things?

[01:33:06] Fred Martin: Will you give that to me every year? And if you started with that discussion, you’re going to win a while. All but a few of them. But those are the three key questions you should always know. How am I doing? What’s it costing me, and how am I invested? The fourth thing might be that the catchall question, and that is some really experienced guy told me.

[01:33:30] Fred Martin: Price is what you pay and values what you get. Can you tell me, do you agree with that? And can you tell me how you honor that in what you’re going to be telling me? And just listen. But the first three will get rid of, I’ll bet you won’t get, you’ll get, why do you want that? Nobody ever asks that. You know that sort of stuff.

[01:33:49] Fred Martin: But now you’ve put the questions on your ground, not on their ground, because they want to talk to you about annuities or variable annuities, or this product or that product, or this product or that product. This special thing. That special thing. And that’s all nice, but you want to know those three things.

[01:34:06] Fred Martin: So that’s what I would tell people. Those three questions.

[01:34:09] William Green: So Fred, a few years ago, you said to me, when you get older you realize it’s all about two things. It’s all just about relationships and purpose., and clearly there’s a deep sense of purpose for you in managing money for people. I mean, it’s not brain surgery, but on the other hand, helping people to have their, you know, to build wealth so that they have [01:34:30] opportunities to you know, retire, give money to charity, do more interesting things, pay for their kids’ college.

[01:34:35] William Green: That, that seems pretty admirable and important to me. Can you talk about this revelation as you get older of all importance of purpose and relationships? Yeah. How are you now, William? I’m 54, so I’m waiting for the wisdom to kick in any day now.

[01:34:53] Fred Martin: Well, well, no, but you’re kind of in that transition period.

[01:34:56] Fred Martin: So, you know, when you’re young, you’re as a guy, you’re trying to prove yourself and you know, you’re probably harder nose than you want to be, and you’re driving harder. You’re, you know, and you’re not super relational. You know, it takes a lot of time and effort and you get older and you begin, you know, you have kids and grandkids and you get these deep relationship with clients and friends and associates and it’s just so rewarding and they care about you and that means you like to get up in the morning and go see them and interact with them.

[01:35:25] Fred Martin: So that’s a big deal. Okay. The other one is purpose. And I have this gift it’s an eight. I know how to manage money and I love to be able to keep doing that because I can, and I’ve created, you know, I don’t do as much here as I used to because we’ve got great people around me, but I still get to invest, deal with customers and go out and get some new business.

[01:35:47] Fred Martin: I mean, that’s the thrill for me. That’s the juice. And so, and I don’t have any trouble getting them in the morning, coming to. I mean, it’s just it’s a hoot. And most of my friends retire that there’s a, not a tension there, but there’s a, [01:36:00] one of my close, I two 70-year friends, one’s retired, the other passed away last year, longtime clients really tragedy.

[01:36:06] Fred Martin: But I what do you do if your health is good, which is a gift, and you’re, you can really do this stuff and you get to help other people, and you get to have a lot of fun doing it. Not of fun, like giddy, but like a deep sense of satisfaction. Man, that’s priceless stuff. I mean, I feel like I’m lucky.

[01:36:22] Fred Martin: I tell people, you say, why don’t you retire? I said, man, this is way too much fun. I love to do this. And I, so, I mean, you know, everybody has their own way of doing it, but., and I’ve seen men really like my other friend who’s retired, he’s just grabbed retirement. He’s just happened to who, so he’s all in on that, you know, it’s great, you know, that’s not me.

[01:36:41] Fred Martin: I mean, I like doing this.

[01:36:42] William Green: So I remember, so John Templeton saying to me something about how the world is full of useless people who have retired. And he was so venomous about it. Like, it really it,

[01:36:51] Fred Martin: well, yeah, I’m not sure I’m, I know about you. I’m not quite there but it’s, but for me, you know, as a funny story, we, when about four or five years, we have an annual dinner for the firm, and there was a planted question.

[01:37:03] Fred Martin: Somebody said, so Fred, what are you planning on to do it to phase down? And before I could answer, my wife said, can I say something? And they said, sure. She said, he is not coming home. So I said, well, you just got your answer. But I think it’s a highly individualistic, you know, my hope for you is when you’re 70, you’re still vigorous and you’re learning and you’re trying to do stuff.

[01:37:24] Fred Martin: And you have gifts and you’re trying to keep passing those gifts on, and you will infect people around [01:37:30] you. I should tell you though, that if your health stays good, you know, the problem I have now is I’m still really fit. And so you don’t, like I play tennis, but I don’t play with guys quite as old.

[01:37:39] Fred Martin: Some of the guys are 50, so, you know, so I’m still struggling to win. It’s just against younger guys now. So it’s not a whole lot more satisfying but at least you’re, you know, doing stuff.

[01:37:48] William Green: So when you think about risk mitigation in terms of your health and stuff, when you look back and you think what you got right, that you can share with people like me who are younger and need to make better choices what’s worked in terms of what did you get right in terms of keeping your health good?

[01:38:04] William Green: Some of it obviously is just genetic and good luck but some of it was good choices, presumably.

[01:38:08] Fred Martin: A very high proportion is genetic. Good luck. Right? I mean, you know, my, my oldest brother has taken phenomenal care of himself. He’s the one with MS, but he’s taken phenomenal care of himself. I haven’t taken that, you know, that kind of care.

[01:38:22] Fred Martin: I just, I’ve been really lucky. That’s so let’s not discount that, I think, but I would share this, I think never smoked moderate drinker, never did drugs. And I, the other thing, I watched my dad was at 6 1 8, 1 55. He was moving all the time. And I don’t know how fidgety you are, but I’m fidgety and I’m always doing stuff, so I, you know, without even trying to, I have a garment watch.

[01:38:45] Fred Martin: We own the stock and have a watch and it measures my steps every day. And I average about six miles walking a day. Just a normal activity because I’m doing stuff. And so I. If you stay active, that’s one of the best things you can do. I [01:39:00] do exercise regularly. I’m particularly, I don’t like the, I was on a treadmill this morning.

[01:39:04] Fred Martin: I have to turn the TV on. It bosses it, but I love playing sports, so, you know, I, but I have to tell you, I think 80 plus percent is genetics. Huh? I do. And 10 percent’s lock and 10% is what you do. I think as you get older, purpose in relationships is going to lead you to better health. For what it’s worth.

[01:39:24] William Green: It seems like you also had a major shift in, in your life when you hit your fifties, right?

[01:39:29] William Green: And you became pretty I did Devout Christian, and I did. Was wondering, before I let you go in a couple of minutes, like how did that change everything? Because I mean, that must inform your sense of purpose and your sense of being a custodian of wealth, rather than it all being about maximizing the pocketbook of you know, you and your colleagues.

[01:39:46] William Green: Like did that change everything for you?

[01:39:49] Fred Martin: So the context was, I hadn’t been to church since I was 17, so my marriage failed, my first marriage and I was a central part of the failure. If you’re a standup person at all, your marriage fails. You can’t, you know, you can’t blame the other person.

[01:40:01] Fred Martin: You’re a central player. I liked some parts of where I was going, but I realized that I needed some sort of an overarching framework to, to go forward. And I read the fork gospels, I read the Story of Christ, and I read it. I mean, there were some things that had happened. Like I was talking to a counselor who I didn’t even know he is a Christian, and he says, you have no spiritual basis to your life.

[01:40:22] Fred Martin: And I said, you’re right. So I started and I got invited to a bible study group by a friend of mine who quit. I went on for 12 [01:40:30] years. But I read the four Gospels, and if you read that, not what happens to all of us is, I remember first time I won this Bible study thing, I look all around like we were all these strange people.

[01:40:39] Fred Martin: Man, I’m, this is. This is strange stuff. These are a bunch of holy rollers. But when I read the four Gospels, and if you actually read that and you actually take the time to read what Christ actually says in there, there is, you can almost pick up a section and get three or four things that are just literally knock you as senseless to radical concepts on how to live, how to think about things, how he answers questions.

[01:41:04] Fred Martin: The stony of the woman who was a prostitute let, he was who you know is without sin cast the first stone. I mean, this is just like ridiculous stuff. And I thought to myself, Because I’m a skeptic. I thought there’s no way he wasn’t like the son of God because nobody could, you can’t make this up.

[01:41:20] Fred Martin: And who in their right mind allows himself if he had any chance to save himself and he had the power to do it, why’d he let himself be humiliated and killed on the hope that we would all follow? I mean there was no contract like saying I’m going to do this and you’re all going to do that. I mean it’s just like, anyway.

[01:41:36] Fred Martin: And of course all of us worry about our legacies, you know? And he didn’t have kids, he didn’t have any money and you know, talk about a legacy. I mean this is like the legacy to and land all legacy. So, so anyway, that’s part of it. The other part, cause I’m not stupid, I’m thinking to myself, if I do this Christian stuff, is it, am I going to lose my competitive edge?

[01:41:54] Fred Martin: I mean, you’re successful a certain way. And what happened is actually may be a little better as investor because I [01:42:00] got less afraid of losing money than the next guy. I got it in a right perspective. Okay. I did something else. We’ve talked about this idea of, you know, running the right amount of money.

[01:42:10] Fred Martin: How about changing your paradigm with respect to assets? So how about saying that it’s not how much assets you collect over your lifetime. It’s working a steward of those assets you are. Now, I’ve changed the paradigm, so it’s not about how much you collect, and I’ve become a much better steward.

[01:42:28] Fred Martin: I’ve given a lot of money away, but only the places that really helped them. Wide variety of places that, you know, help all kinds of people that need help, but they’re effective. Okay. And it transformed my relationships. It made me a better, I was always a natural leader and a terrible follower. And now because I became a follower, I’m a better leader.

[01:42:49] Fred Martin: I know that sounds goofy, but how do you lead if you’re not a bad follower? Somebody said to me, well, you’re so successful. How do you control Arrogancy? And I said, well, as soon as I feel a little bit full of myself, I compare myself to Christ and I’m right back in the dump. Okay? So I don’t have any problem.

[01:43:05] Fred Martin: So my relationships got better, but I became a better investor, which I didn’t know. It was one of those things. It was a, and I didn’t, I would also tell you that I didn’t like no light bulbs. I didn’t like to wake up one morning like, you know, the sun is shining. I had a lot to unlearn. This was a long, but I’m still at it.

[01:43:25] Fred Martin: But it’s a long journey.

[01:43:27] William Green: Why did it make you less fearful, [01:43:30] Fred, of losing money? Why would it have that impact?

[01:43:32] Fred Martin: Because I put it in a proper perspective. I went from not how much you collect what kind of steward you are. It just changed. It was a paradigm shift. So, you know, it, my charitable giving, I’d tell them when I’d given hope for a bull market could, gives you more.

[01:43:44] Fred Martin: So I don’t give in bear markets. I’ve given bull markets because I’m investing for the future, and I expect them to. But yeah, maybe it just, I just got less. I changed the paradigm. It how you, we’ve talked a lot about this today about. You know, sort of issue framing, you know, and, you know, like margin of safety and process.

[01:44:01] Fred Martin: And so it reframed my view of the world. And, you know, I didn’t even share this with you, but you know, it’s been a rough three years. I we got sued by a former employee. That was tough. My middle son was killed in a bike accident last summer. He was the most wonderful young man with two kids, I’m so sorry expert bike racer.

[01:44:19] Fred Martin: And then six weeks after that, one of my long run beloved Business Associates was hit by a train and killed. So this all happened last summer and in 21. And so one of the things that helped me with my middle cell was the most like me. So it makes it even, you know, it’s just a wonderful young, me as an architect, just fabulous.

[01:44:37] Fred Martin: And so, and I thought long and hard about it. And so one of the things that I concluded was we go through life, and we have roles like. You know your husband? I do You have kids?

[01:44:48] William Green: I assume you do. Yeah. Yeah. I have two. A son and a daughter. Yeah. Thank God.

[01:44:52] Fred Martin: Okay, so you’re a father? Yeah, a brother, son. Okay.

[01:44:56] Fred Martin: Husband. Those are all roles. You play an author, those are [01:45:00] roles you play, but what is your identity? And so I’ve had multiple roles and my identity is I’m a child of God and that is what drives me. So that’s how I can cope with losses and not dissolve in a, you know, and by the way, my wife has been diagnosed with Alzheimer’s in March.

[01:45:16] Fred Martin: Okay. I’m so sorry. So we’re dealing with that, but I tell you that not to elicit sympathy, I tell you that having the, my faith and having my identity be as a child of God helps me weather these. I mean, it’s, it just, the loss is incomprehensible. I, to this, you know, each morning I read a, reading a Bible has little stories of mourning, and, you know, I’m still processing my son’s death.

[01:45:38] Fred Martin: It’s been over a year, and I’m still trying to process it. It’s a real hard one to come to grips with.

[01:45:44] William Green: Yeah, that’s unthinkable. I’m so sorry. Yeah. If there’s something that you could share with other people who are listening, who are wrestling with their own grief or pain or suffering, what’s helped you massively to deal with these sorts of things?

[01:45:57] William Green: Like, like when you were saying that it’s helped you to think of yourself as a child of God, like there, what can we borrow from you that’s been helpful?

[01:46:06] Fred Martin: I think the thing that I would say is this, so the other thing I really concentrate on is if something good happens, enjoy it. You know, when you, when depressed person goes, well, today things are going pretty well, but tomorrow’s going to stink.

[01:46:19] Fred Martin: A healthy person goes, hey, this was a great moment. Deal with my wife of Alzheimer’s. She’s a wonderful person. We don’t have as many wonderful moments as we used to have, [01:46:30] but we do have some wonderful moments. So I take those and I, I try to say, this is a wonderful moment and I’m going to remember that when, you know, she can’t remember something or, you know, her temper gets out of control or something.

[01:46:41] Fred Martin: So I would say you can practice that. You can, you know, again, I’m a child of God, so that’s my prime identity, but if something good happens, I’m going to, I’m going to accept it. I’m going to, I’m going to say, this was good. This was a good moment. There’ll be bad moments coming. I get that. But this was a good moment.

[01:47:00] Fred Martin: What you do is you recharge your batteries. You know, there is, you, there’s always a risk of being a, you know, Pollyanna. But we’ve had throughout this process extraordinary acts of kindness. You know, I the way we’ve worked with our associates, widow has. The whole firm rallied around her. We had a, he was a big soccer fan for the local m l s franchise, and we had a rented a big box.

[01:47:24] Fred Martin: We had a day in celebration of him. And I mean, so yeah, I think there has been a lot of miraculous things. There are miracles all the time. You just have to see him right in front of you. You know? I have so enjoyed the process of your book, at least as it relates to me. It’s just a, just, it’s been just a, it’s been a joy.

[01:47:41] Fred Martin: I mean, I was rare, I had written back to you and said, our paths will cross again. I just knew they would. And they have. Okay. Yeah. And but yeah, I think that’s when people, you know, by the way, last year, my 70-year friend died. He had a, he was a fabulous guy. He had a, almost a version of a brain disease that closed his throat and after a while he [01:48:00] couldn’t eat, couldn’t swallow.

[01:48:01] Fred Martin: And finally he, you know, was so weak. They took him off food and he died. I mean, so. Stuff happens as you get older, William stuff happens. Yeah. You know? Yeah. And you, I think you do, you have to understand stuff happens.

[01:48:13] William Green: But the ability to relish it sounds like, to relish saver, appreciate that’s kind of been huge for you, it sounds like, to relish the good things.

[01:48:22] Fred Martin: This interview is a, it’s a great thing. I mean, it’s, that could either, it’s a chance to have my voice heard, chance to connect with you. It, this is a labor of love and so how can I be, you know, how can I, it, the other issues. Do you, I mean, I had the example, my dad, my mom died at 67. My dad lived till he was 91.

[01:48:42] Fred Martin: He soldiered on; it was just a crushing loss for him. She was just, he was crazy about her, and she died at 67, you know, and he just soldiered on. So, but I think you got to just, you know, if he, if it’s a good thing that happens, treasure it because it’ll be bad stuff. Yeah. And just, but soldier on. And I don’t think we have the, I want to.

[01:49:01] Fred Martin: Say this carefully, but I don’t think we have the right to roll our tent up because bad stuff happens. I just don’t, I mean, nowhere does it say, you know, you can choose to do that, but I don’t think I, I don’t think you need to. I’ve been so lucky health wise and, you know, and quick story, you know, my, he, this is a miracle to my wonderful son’s widow you know, was really considering suing a wrongful death suit against the kid that got tangled with my son.

[01:49:26] Fred Martin: They were riding bikes and well, I was really against it, and she [01:49:30] decided on her own not to do it. And that’s, that was a miracle. That’s why I look at it, you know, so stuff happens sometimes good, sometimes bad, and you have a choice. You got to roll your tent up and you know, or are you going to soldier on and your soldier on?

[01:49:44] William Green: I think in the epilogue of my book, at one point I wrote something where I said, there’s great honor in the simple virtue of perseverance. And I didn’t say it in a kind of facile way. I really meant it like, like, yeah, the. The power to persevere when life sucks, when everything is going against you.

[01:50:00] William Green: That is, there’s something incredibly noble and inspiring about that simple dogged refusal to roll up your tent.

[01:50:08] Fred Martin: I totally agree. And you might have, that may have been a thread that you, I’m going to, I’m even more interested now rereading the book, because I think I’ll get more out of it next time. Ah, this is a fun journey, William. Really.

[01:50:20] William Green: Oh, thanks. So I was looking back at my notes from our conversations over the last couple of days from our conversations back in 2017, and you said to me at the end that these will be the first of many conversations and I think both of us feel that it’s just, it’s a real pleasure learning from you and chatting with you.

[01:50:36] William Green: And I’m really grateful that you come on and shared these ideas. They’re very helpful and enlightening. And so I hope we’ll keep talking.

[01:50:42] Fred Martin: Well, also I hope so. I was mostly nervous that I would not be helpful enough because that’s, you know, but I love teaching. Yeah, and you’re a good interviewer, so, well, good.

[01:50:53] William Green: Well, thank you so much and I’m finally going to let you go, but it’s been a real delight. Thank you, Fred.

[01:50:58] Fred Martin: And I too William. Thank you.

[01:50:59] William Green: And [01:51:00] I’m sorry it’s been a tough year and I’m hoping that the coming one will be much brighter and happier for you.

[01:51:05] Fred Martin: It’ll be what it is, and I will persevere. I think that’s the right term, so thank you.

[01:51:10] William Green: Great. Thank you.

[01:51:11] Fred Martin: Thanks. Yeah.

[01:51:13] William Green: All right folks. Thanks so much for listening to this conversation with Fred Martin. I hope you can see why I admire him so much. But for me, he’s not just a great investor, but an extraordinary human being. If you’d like to learn more from Fred, you may want to check out his book, which is titled Benjamin Graham and The Power of Growth Stocks.

[01:51:33] William Green: I’ve included the details in the show notes of this episode along with links to various other resources that you might find helpful. You can also read more about Fred in my book, Richer, Wiser, Happier. Where he talks in some depth about how to succeed over the long term by avoiding disaster. As Fred once told me, we are bound to make mistakes, but the key is to make sure that those mistakes don’t kill us.

[01:51:58] William Green: That’s an important lesson, whether you are buying stocks or flying a plane or climbing a mountain. Speaking of which, I strongly encourage you to watch the documentary that Fred and I discussed about the legendary climber, Alex Honnold. It’s called Free Solo and it’s both scary and absolutely spellbinding.

[01:52:19] William Green: I’ll be back again soon with some fascinating investors including Ray Dalio, Guy Spier and Tom Gayner. In the meantime, feel free to follow me on Twitter [01:52:30] @WilliamGreen72, and as always, do let me know how you are liking the podcast. I’m always really happy to hear from you. Thanks again for listening and in the spirit of today’s episode, take good care of yourself and stay safe.

[01:52:44] Outro: Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to

[01:53:05] Outro: This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.


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