In this episode, William Green chats with Chris Bloomstran, President and Chief Investment Officer of Semper Augustus. This conversation is so rich that it’s been divided into two episodes. Here, in Part 1, Chris explains how to achieve long-term success by seeking a “dual margin of safety” that comes from owning high-quality businesses at attractive prices. He also warns about the perennial dangers of irrational exuberance, which he now sees in hot stocks like Tesla & Nvidia.
IN THIS EPISODE, YOU’LL LEARN:
What Chris Bloomstran learned from his brilliant mentor, Robert Smith.
How Chris & Robert skillfully sidestepped the dotcom bubble & crash.
Why Chris named his investment firm after a crazily overvalued tulip.
What Sir John Templeton saw as the best antidote to financial insanity.
What lessons Chris drew from an early investment that fell to zero.
How to succeed in stocks by seeking a “dual margin of safety.”
How his definition of a quality business has evolved.
Why he’s skeptical about Cathie Wood’s ARK portfolio.
Why hot tech stocks like Nvidia are likely to disappoint for many years.
Why he’s wary of hype & “puffery” about Tesla’s glorious future.
Why he’s trimmed great but pricey holdings like Costco & Nike.
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.
[00:00:03] William Green: Hi there. I’m really excited about today’s episode of the podcast. Our guest is Chris Bloomstran, who’s a superb investor. He’s the President and Chief Investment Officer of a firm in St. Louis called Semper Augustus, and this conversation is really so rich and so packed with practical lessons about investing and business and life that I didn’t want to cut it short. So, for the second time in the history of the podcast, I’ve turned this interview into two episodes. In part one, which you’re about to hear, Chris shares what he’s learned over the last three decades about how to navigate the madness of financial markets so that you can survive and thrive through thick and thin.
[00:00:47] William Green: So we talk about how Chris and his mentor, a brilliant but unknown investor who had previously survived the crash of 1929, managed to sidestep the dot com bubble that burst back in 2001. We talk about how to protect yourself from these crazy outbreaks of irrational exuberance, which go back at least as far as 17th century Holland, where investors were prepared to pay almost anything to own the rarest tulips.
[00:01:15] William Green: And it’s not a coincidence as you’ll hear that Chris actually named his investment firm after the most coveted of all tulips, which was called the Semper Augustus, and that’s really an ironic reminder that investors can be dangerously irrational. Some of the lessons in this conversation are timeless and foundational, but Chris also warns very specifically about the perils of betting now on hot tech stocks like Tesla and Nvidia.
[00:01:44] William Green: Why is he so wary of them? Well, it’s an age-old story, really, about excessive expectations, lots of hype about their supposedly limitlessly rosy future, and also a failure to remember the most fundamental principle of investing, which is that valuations matter, that you can never afford to ignore the price you pay for any stock, regardless of how attractive the business might be.
[00:02:11] William Green: If you want to outperform over the long term as a stock picker, I think Chris is an excellent person to study because he shows what it takes to win this game of beating the market and truly just how hard it is. As I think you’ll hear in this conversation. He’s ferociously intelligent, but he also has a lot of other qualities.
[00:02:31] William Green: He’s got a calm temperament. He has this intense drive. He’s got a very independent mind. He also has a relentless passion for analyzing businesses and solving the investment puzzle, which really is not just about wanting to get rich but about just being fascinated intellectually by companies and business models.
[00:02:53] William Green: Equally important, he’s a profoundly skeptical investor. He doesn’t really take anything on trust. He questions everything, and he doesn’t let down his guard. The word that came to mind to me when I was thinking of him earlier today was vigilant and when I think about all of these qualities that you need to be a successful long-term stock picker, It helps me realize that I would much prefer to hire Chris or someone like him to manage my money rather than actually compete with him.
[00:03:24] William Green: And I think that self-awareness is important because one of the great lessons I learned while writing my book Richer, Wiser, Happier is that it’s smart to stick with games that actually equipped to win. In any case, I hope you enjoy our conversation, and I also hope that after listening to this episode, you’ll then listen to part two, where Chris talks in depth about what he’s learned from Warren Buffett and Berkshire Hathaway, which he studied as deeply as any investor I know. Thanks so much for joining us.
[00:04:00] Intro: You’re 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.
[00:04:20] William Green: Hi folks, I’m absolutely delighted to welcome today’s guest, Christopher Bloomstran. Chris, it’s lovely to see you. Thank you so much for joining us.
[00:04:28] Chris Bloomstran: Well It’s great to be here. I mean, as much as I loved your book, I’ve in the last few weeks, knowing I was coming on your podcast, I’ve been listening to probably through a third of them and they’re just phenomenal conversations about not only investing, but life and kind of true to the spirit of the book. So it’s a real privilege to be with you today. Thanks.
[00:04:46] William Green: Thank you. It’s a real delight to have you on. One of the reasons why I wanted to get you on actually is that Guy Spier said to me months ago. You need to get this guy on. He said, Chris is brilliant and he has a really interesting mind and he’s really unusual.
[00:04:59] William Green: And so, I had read your letters over the years. I think I’d read your letter for the last three years, which is an amazing thing as we’ll talk about. I mean, it’s a huge thing, but it’s lovely to meet you finally in person, at least virtually remotely. And I wanted to start really by chatting with you in some depth about an extraordinary, but largely unknown character who played really a transformative role in your life.
[00:05:23] William Green: This man called Robert Brookings Smith. And in your 2021 letter to your clients, you wrote, If the world knows Benjamin Graham as the father of value investing, I hold Robert Brookings Smith as its godfather. I contend he is the only investor to have nailed 1929, 1932, and 2000 spectacularly well and he’s also just a really fascinating character personally as well.
[00:05:48] William Green: So, can you tell us who Mr. Smith was and how he came to be client number one at your investment firm Semper Augustus? And then let’s get to what you learned from him.
[00:05:58] Chris Bloomstran: Wow, sure. So, had I not included that section in the letter, which really was, it dawned on me, I should do it with an interview I’d done with Jim Grant.
[00:06:08] Chris Bloomstran: And we touched on kind of our first client and who he was. And I told a little bit of his story. Jim called me after he published it and said he thought it was his favorite interview. Well, he called me right before he published and said, you know, the one thing you didn’t do was mention And I said, well, you know, a, he was very private, but you know, we’re very guarded with our clients.
[00:06:30] Chris Bloomstran: And I said, I wrote just not in a position to tell you who he was other than he was Semper’s first client and that bit of background. And so I, so his piece turned out so well, I thought, gosh, I mean, his story really deserved to be told. He was a remarkable man. So I called his daughter and told her what I was thinking about, what I was working on for the letter, and she loved the idea, encouraged me to do it, and so I set out to tell a little bit of his story as an investor and a human being through what I view as the main secular peaks and troughs over the past century, and kind of linked it with what Warren Buffett had likewise done at various peaks and troughs, and so I set out to succinctly try to tell the story of this great guy that was born in 1903 to a fairly wealthy family here in St. Louis. They had a brokerage business that was started in the 1800s that still exists by name today, never got acquired. In any event, he went off to Princeton and to study and was in the choir, but he rode. crew. He was on the football team and came back from school and joined the brokerage business in his mid 20s, early 20s, I guess.
[00:07:40] Chris Bloomstran: And by 1925 or so, his father had passed away and he had moved up the ranks. a little bit as a youngster, but in early 1928, he would have been about 25 years old. And he believed there was a bubble in the stock market and in the economy. And so he took all of his family’s substantial at the time capital out of the market and invested in bills and gilts and some railroad bonds and any clients that would follow the heat of a young broker.
[00:08:10] Chris Bloomstran: Likewise did the same. And if you know your stock market history, You’ll know that the stock market peaked in the fall of 1929. And so if you go back in time and look at kind of when he sold the portfolio down, the Dow Jones would have been about 200. Well, it didn’t peak. Until hitting 381, I believe it was some, you know, year and three quarters later, which would have been brutal.
[00:08:32] Chris Bloomstran: I mean, it would have been like getting out of the stock market in 1997 or 1998, thinking there was a bubble and just watching things continue to skyrocket higher, especially for the outside clients. And so obviously vindicated in the end in the [Inaudible] of 89%.
[00:08:49] Chris Bloomstran: We wind up in a depression and he waited until the bitter end. And he waited until 1932 to put the capital back to work and reasoned at the time that you could buy businesses like General Electric for less than the cash in the business and the kind of a genuine net of working capital. So where Ben Graham was riding security analysis, having lost an awful lot of money in the 1930s, Bob Smith was picking up just gems of assets.
[00:09:17] Chris Bloomstran: It would have been hard to do because, you know, most investors and most people in the stock market had lost so much that, you know, even if you had the wherewithal to not panic and sell on the way down, you needed to live, if you need to live off your portfolio and you had, there are a couple of great books out, but they were, you know, the doctor class.
[00:09:36] Chris Bloomstran: The lawyer class professionals had clients, but the clients didn’t have any money, so nobody was getting paid. And so you had to liquidate your stock portfolio. Well, if you had capital and weighed back in at, you know, very incredible discounts, that’s what he did. And then [Crosstalk]
[00:09:52] William Green: Yeah, I think you said that he bought GE at the equivalent of 12 cents per share in 1932.
[00:10:00] Chris Bloomstran: Yeah, by the time I got involved in the late nineties the dividend was multiples of the cost basis. Even the quarterly dividend was multiples of the cost basis, which is kind of incredible. But that’s what happens with what GE wound up ultimately not being a great business when we figured that out, but [Crosstalk]
[00:10:16] William Green: But that’s the astounding thing, if you think about it, even the fact that he not only did this extraordinary thing that you mentioned in, in 1928, where he saw that there was trouble coming, then he gets back in 1932, but then equally astounding is that he holds something like GE for the best part of 60 years.
[00:10:35] William Green: And I think you’ve said, maybe it was in that 2021 letter, which was terrific, You talked about how he picked up various other great stocks along the way. I mean, he bought, I think Merck and Dow Chemical and at and t in the, maybe the thirties and then later things like Walmart and then Microsoft and Sun Microsystems.
[00:10:53] William Green: Can you talk about how he was able to hold these things for so long? ’cause it’s not just, it’s not just the timing it’s the extraordinary patience of the man that’s remarkable.
[00:11:05] Chris Bloomstran: Well, he was a little like Warren Buffett in the regard that I don’t think he favored sending money to Washington, D. C., so to the extent you had capital gains taxes, He was averse to that and adopted what he called for years and years of investment philosophy of benign neglect, which essentially it’s a little like the coffee can approach where, you know, some of your winners really. Wind up dominating the portfolio.
[00:11:28] Chris Bloomstran: I mean, by the end, by 1998, when I got involved, GE was half the business, but I also think over the course of his life, he observed some things. You know, you had kind of a, somewhat of another secular peak in 37, but that was the point where Germany was on the rise. He was actually in Germany doing some work and had a lot of friends in Washington.
[00:11:48] Chris Bloomstran: The family was very well connected and he had very early, so he had some very early intelligence. He and a friend of his, Ned Pottsall. who wound up being an attorney in St. Louis who wound up running the OSS, which was the intelligence arm of the military during the war. But, you know, Mr. Smith had some, he had a fair amount of intelligence that Germany was mobilizing and, you know, he didn’t trust the communications.
[00:12:11] Chris Bloomstran: So he got on a ship, came back to the States, met with the Pentagon, and. Let there admit the war department, I guest the Pentagon at the time of let the folks know what was happening, and then by the time The war actually broke out in Japanese Invaded Pearl Harbor. He called his friends in the war department.
[00:12:25] Chris Bloomstran: He was in his late thirties now at this point or mid thirties, late thirties, and he couldn’t bear to not be in the fight. And they said, you Don’t Bob, we’re not gonna put you in the fight. You’re too old. I mean, this is, no, I gotta be in the fight. And so They put him in charge of a training vessel on Lake Michigan at what’s still the Navy’s big training facility.
[00:12:42] Chris Bloomstran: And ultimately, I guess he called him back and said, yeah, this is not really the fight. This is not what I signed up for. So he wound up ultimately second in command on a light carrier, the White Plains. and found himself deep in it and was in the battle of the Philippines when I met him for the first time and throughout his time when he was in the office and he had pictures in his office of the battle of Leite Gulf, which was the major battle, the turning point of the battle where we decimated the Japanese fleet and cut off their oil lines and supplies and reverse the fleet couldn’t get back for munitions by not having the stranglehold of the Philippines.
[00:13:21] Chris Bloomstran: And he was in it and he was part of the battle and he would tell me these stories and he told me at a point in life, he said, Chris, you know, it’s when you get to my age it’s a bittersweet, sad thing. He says, I’m so fortunate and blessed for the relationship with you. We’d gotten to be very good friends in his last four or five years, but he said, my friends are all dead.
[00:13:38] Chris Bloomstran: And so he’d confide in me a lot of things. And he said, you know, he would have nightmares throughout his lifetime about that battle in particular. They were, it was the first time the Japanese had used a kamikaze strategy and, you know, he told me the stories about the kamikazes. Dive bombing his ship, you know, one exploded just a few feet from the ship and damaged the whole of the ship.
[00:14:02] Chris Bloomstran: They wound up having to take the ship back to San Diego after the battle, but another adjacent carrier was destroyed by kamikazes may have been, it may have been a, it may have been a destroyer, but you know, he had pictures of the boat sinking and, you know, the sailors in the water. Just a harrowing thing.
[00:14:20] Chris Bloomstran: And so, you know, I think scarred by that. So here he is at war and the stock market by 1942 was really had just been decimated again from the 1937 recovery high. You were back to, I think, 90 on the Dow. You got down to 41 in 1932, but back up to almost 200 then. So here he is, And surely at some level, you know, you’re in the Pacific theater, but you’re paying attention to the stock portfolio because you come from a family of money and you’re in the money business.
[00:14:47] Chris Bloomstran: And so I think at the point, even Warren has talked about this, it’s, you know, if things looked as grim in 1942 and America wound up being what it was, and you could survive that onslaught, you just let things go. And so I think, you know, he probably came to this philosophy of not selling things because he obviously sold things in 1928, but then wound up not selling things.
[00:15:08] Chris Bloomstran: But he came back and wound up leading the effort to start shrinking the Reconstruction Finance Corporation. You know, businesses had been, couldn’t get loans and couldn’t get insurance contracts. The RFC had to run off. He was told, he told stories about having, they were selling off military planes and ships, some for scrapping, but they had to shrink that enterprise.
[00:15:31] Chris Bloomstran: And he led that effort, then eventually got into the banking world and joined mercantile trust here in town, ran the investment operation, eventually became vice chairman of the bank. And so didn’t go back into the brokerage business but ran substantial institutional trust pools of capital. And by 1998, we were introduced by mutual acquaintance who, a gentleman had heard me give a speech and told Bob, you need to meet Chris and Chris, you need to meet Bob.
[00:16:00] Chris Bloomstran: And so we got together, he and his nephew and talked for a couple months and he told me at a point, he’d love to have me take over the family portfolio. And I said, well, I’d be delighted to, they weren’t a client of the bank. Of the bank I worked for, I was running money for a bank trust company at the time and ran a mutual fund and was working with, you know, trust accounts and some public pension systems.
[00:16:21] Chris Bloomstran: Ultimately running the St. Louis operation for what was a Kansas City based bank. And so, you know, we met in his office in Kansas City area in St. Louis, rather. And so, he said, you know, but you can do it on one condition. You can’t be working for a bank because even though I ran a bank and I was vice chairman of a bank, I hate banks.
[00:16:37] Chris Bloomstran: He says, they don’t manage money the way I think it ought to be managed. And my concentrated positions, I’d be loathsome. It really bothers me to no end to be signing letters of indemnification. for my concentrated positions. I’ve managed the portfolio. I’m comfortable with these positions. And so, you know, after a month or a month and a half of talking, we launched Semper and he asked me to come set up shop in his family office in St. Louis and so over the course of his last years, he made it to almost a hundred years old. This was late 98 when we got together and his Jim put it in his interview. We joined forces, which I love the term. He’d come to the office every day and didn’t tell about his last year. Then I’d go see him at the house, but you know, we’d carve out an hour.
[00:17:19] Chris Bloomstran: Hour and a half every day. He wanted to spend time with me and I really enjoyed spending time with him and his friends, like Ned Putzel, who ran the O S was on, found the foundation board that we had. And in terms of the portfolio, I believe there was a bubble. He believed there was a bubble, which was the impetus for our getting together, and so worked up a plan. Start throwing assets into a foundation, his foundation, and set up some credit accounts, which charitable remainder trust accounts that would feed he and Nancy, his wife income during their lifetimes, which would eventually wind up in the foundation, which then would give and make grants via, you know, his family overseeing the grant making process.
[00:18:00] Chris Bloomstran: But the beauty of doing what we did in the late nineties is you had a bubble in blue chip stocks in 98, you know, Coke. Within the Berkshire portfolio, Mr. Smith had some coke. I was trading at 50 plus times earnings. The GE position was over half the capital. And at that point, more than two thirds of the business was finance.
[00:18:19] Chris Bloomstran: Jack Welch had run it for a bunch of years. There’s a great book out by Bill Cohen on the history of GE, which is I think a must read for anybody, but I thought GE was really a house of cards at that point. The leverage was off the charts. The off balance sheet debt was crazy and they ran the business on a, you got to make the quarterly number approach and Jack spent a lot of time with the sell side on wall street and said, you can’t have these reinsurance businesses and these insurance operations inside of holding company and run them on a short term basis, you’re going to wind up with problems.
[00:18:51] Chris Bloomstran: And so he said, I’m back to benign neglect. He says, I get it said, gee, was so valuable for the family that why don’t we sell 90 percent of it? And so I was able to sell 90 percent and that was. Before the one for eight stock split between 50 and 60 bucks a share of the stock still down 75 percent or thereabouts 80 percent from where we sold it.
[00:19:12] Chris Bloomstran: And the interesting pivot at that point was in concurrence that there was a bubble and his belief that it looked an awful lot like 1929. had discussions about whether it made sense to just sit in cash and the market, as you know, William was so bifurcated that he wound up with the tech bubble by early 2000.
[00:19:33] Chris Bloomstran: Well, anything value related under the surface was being given away. If you were a small cap value fund manager, you were getting redemptions in the last couple of years daily because people wanted to chase the NASDAQ bubble. The NASDAQ was up something like 84 percent in 1999. And, you know, the world just had lost.
[00:19:52] Chris Bloomstran: confidence in real businesses. And so mid caps, small caps, real businesses just got crushed. We were able to build a portfolio of real businesses trading for six, seven, eight, nine, 10, 12 times earnings. And so pivoted into a very undervalued corner of the market, which wound up wouldn’t have expected it.
[00:20:10] Chris Bloomstran: But when the S and P 500 did fall almost 50 percent and the NASDAQ fell 80%, we wound up making 30, 35 percent during that 2000 to 2002 bear market. And so [Crosstalk]
[00:20:21] William Green: And I think you said that the stocks that you bought him are up over 10 times since then, so you were saying that the delta is actually 50x because The stuff like GE would’ve been so killed. Is that right?
[00:20:33] Chris Bloomstran: Well, Against the GE position. Yeah. You think GEs down was done 80% and we were up over 10 x and so, you know, the performance record doesn’t give you that delta, but you take a million dollars to $200,000, or you take a million dollars to $10 million, or 10 more than $10 million today.
[00:20:52] Chris Bloomstran: You know, the Delta’s a 50 and just. It was very fortunate. It was very fortunate that we got together and it was a highlight of my life because in addition to being a great investor, he was one of the most kind human beings that I’d ever met. We developed such a great friendship. He was brutally honest.
[00:21:11] Chris Bloomstran: I had episode, well, I grew up in a household with a kid with an individual that I really couldn’t tolerate. My mother remarried when I was seven. She left my father. And I grew up seeing a lot of lack of ethics and lack of morals and zero kindness and zero treatment of human beings well. I mean, the way women were treated was abhorrent.
[00:21:38] Chris Bloomstran: And so Mr. Smith was anything but that. He was the exact opposite. And he was just a great human being. He was philanthropic. He was modest for his whole life. He’d given a lot of his money away charitably and then ultimately started doing it through the foundation, but it was always anonymous. And certainly the big beneficiaries, and St. Louis of his benevolence knew who he was and they’d come visit the house. And it was fun for me to get to know the directors of museums and the garden and the zoo and things like that. But he was just, he just, he was very modest and which is why I thought it was so important to tell his story.
[00:22:14] Chris Bloomstran: And so I wound up. When we published the letter, I sent it down to his daughter, and she had just lost her husband, and I didn’t hear back from her for two or three weeks, and I thought, oh, hell, this has gone badly. I don’t think she liked what I wrote, because she would have gotten back to me sooner, and she called me three or four weeks after I’d sent it to her and said, yeah, Chris, this was the most wonderful thing.
[00:22:35] Chris Bloomstran: I got very emotional. I cried. It stirred up so many memories. of dad and you know, anybody that knew him loved him and to be a friend of his and to be a mentee of his really, and to be able to spend the regret I have is I didn’t, we didn’t do video recordings like we’re doing now with all of our conversations.
[00:22:52] Chris Bloomstran: I mean, there was so much we should have, there, there should be a movie there. There should be a book.
[00:22:57] William Green: There’s a beautiful thing in your letter where you talk about what a giant of a man he was and you say shunning the spotlight in the extreme. A model of living not within but under one’s means, humble, brilliant, hilarious, and charitable, kind to a fault, and you talk about how he would give money to charity, but it would always be anonymous, and you talk about how he was playing tennis to the very end albeit doubles in the end, but was this [Crosstalk]
[00:23:20] Chris Bloomstran: He said he couldn’t quite cover the court the way he used to, and so he had to resort to the doubles game.
[00:23:24] William Green: Yeah, and then you say also, please take from the story the importance of saving, thrift, and living well within one’s means. And so it seems like there are a lot of lessons from him as an investor, but also personally in terms of his courage, his sense of service during the war his modesty humility, lack of display and ostentatiousness and arrogance and stuff.
[00:23:49] William Green: Is that fair to say?
[00:23:51] Chris Bloomstran: If I had to pick a man I tried to pick a human being to model one’s behavior and life after he’d be it. And I know my little segment of my letter didn’t do justice to the giant of man that he was, but I hope it was a nice tribute and it really felt great and it meant a lot to me to be able to tell the story, at least in brief, the way I was able to do it in the letter.
[00:24:12] Chris Bloomstran: And I’m really thankful to his daughter for. Blessing the project because I was, you know, so always so impressed with how private he was and how modest he was despite the wealth. I mean, he didn’t flaunt it and. You know, he was, and he was such a curious guy. I mean, even after retirement from chairing the bank, he had all these great projects going on and he was a voracious reader.
[00:24:36] Chris Bloomstran: He’d probably, he would have been a lot like Charlie Munger in that regard. He was incredibly well read, but he had these venture projects going on all the time. He had a smart card technology business. And at the very end, he thought we were going to trend toward needing to have digitization of health records.
[00:24:54] Chris Bloomstran: And he had a medical card that had a smart chip embedded in it, where you’d be able to store your medical records. So he was working with Washington University here in town about some things that have come to pass and in other corners. But He was curious to the end. He was always trying to figure out what was going to happen next.
[00:25:13] Chris Bloomstran: And I think, you know, for somebody that would have loved seeing how the next hundred years would have evolved, it would have been, it would have been Bob Smath. He was, truly was a giant of a man.
[00:25:24] William Green: Yeah, and it’s interesting, he I read a couple of obituaries of him the other day, and there isn’t much out there.
[00:25:30] William Green: I mean, there’s something I think in a Princeton alumni publication, in a local publication from the place where he lived. And he died at 99 in 2002, and here we are 121 years after he was born, 120 years after he was born. And we’re still chatting about him. It’s an amazing thing, right?
[00:25:50] William Green: It shows that when you meet someone who really is remarkable it leaves this kind of enduring mark. So, I’m glad to have a chance to talk about him. I wanted to get a sense of what you think he saw in you, because in some ways, you were a kind of unlikely person for him to pick up in that way and to entrust with his family’s fortune after all of those years, because You must’ve been about 30, right?
[00:26:12] William Green: And you’d studied finance at the University of Colorado in Boulder, and you’d worked at this bank trust company, and you’d managed money for a few years there, and you’d managed a balanced mutual fund there, so you were clearly smart and driven and talented but I’m wondering if there was other stuff, like if the fact that your father was a Marine and he had served in the Navy, or if it was the fact that he played football at Princeton, you played football very seriously at the University of Colorado, so whether there was something that he saw in you that just resonated really deeply with him.
[00:26:41] Chris Bloomstran: I don’t know. We immediately hit it off. On the one I, on the day we met, I was in my office and received a call early afternoon from his nephew who said, look, I’m sitting here. I’m with my, I’m with my uncle. He said, my name is Bob Smith. And I’m with my uncle, Bob Smith. And A friend of ours said we should get together and could we get together?
[00:27:04] Chris Bloomstran: I reached for my calendar to set a date and I said, sure. I’d love to. He says, no, I actually mean like right now today. I wound up driving out and we sat around for, Oh, the afternoon and wound up going to dinner that night. And so probably spent 9 or 10 hours talking in. You know, he had the, I mean, he loved the stock market and he loved businesses and I hadn’t seen the portfolio, but you know, he would be bringing up all of the companies that he owned.
[00:27:28] Chris Bloomstran: And I suppose it might’ve been just my ability to talk about just about everything he owned in depth with just the work that I’d done just for the few years that I’d been an investor. I was 29 years old. We started the firm. We started Semper just slightly before my 30th birthday. But as I say, we spent over a month and a half talking pretty regularly and strategizing a bit.
[00:27:52] Chris Bloomstran: Just getting to know him as a human being. And yeah, I’m not sure we got into much of my life story at the time, but from a personality standpoint and from a temperament standpoint, I think we hit it off. I loved his story about what he had done in 1928. I loved how he’d go about finding other businesses.
[00:28:11] Chris Bloomstran: The notion of minimizing the tax burden all resonated with me and you know, what I had learned to that point. And at that point I was, In the Berkshire world when, you know, when I finally too late discovered Berkshire Hathaway, but I didn’t follow Berkshire until 1996 when they issued the B shares and found the stock too expensive.
[00:28:31] Chris Bloomstran: I was stunned at the front page of the offering document when they did the B shares, they, you know, wrote the chairman of the vice, neither the vice chairman or the chairman find the shares sufficiently, you know, reasonably valued or undervalued to we are, we wouldn’t recommend it for purchase to our families and thought, well, who in the world does this?
[00:28:49] Chris Bloomstran: I was getting my mind around Berkshire and at that point had read probably all the chairman’s letters back to 1977 and so that resonated with me and I’d already developed my own thoughts on executive compensation and stock options and the way accounting was abused and that was very much a Warren Buffett thing and that was very much a Bob Smith thing.
[00:29:13] Chris Bloomstran: So I think it was just our, I think it was our interest in businesses. I mean, I find myself today, my whole friend group are folks that just love to sit around and talk about stocks. And if we’re not talking about stocks, we kind of get bored. And he and I love to talk about the markets and stocks. And it was later as we were working together that the friendship really evolved.
[00:29:33] Chris Bloomstran: And I got to really understand who he was as a man and, you know, anybody that’s off to war and is in battle and sees death. and experience his friends dying. We usually don’t talk about it. And he had said he rarely in his lifetime had talked about the war, but for whatever reason, he was very candid and very open about that chapter in his past.
[00:29:55] Chris Bloomstran: And, you know, I’d love war history, World War II history, Revolutionary War history. So I was fascinated with that. It was just his, it was his temperance. It was his even keel approach. You know, he wasn’t concerned that he was missing out on the tech bubble. He said, I’ve seen this picture show before and it’s getting in badly.
[00:30:14] Chris Bloomstran: And it was just a lot of commonality to the way we thought and looked at the world. probably beyond the stock market and the economy, but so it was a good fit from a personality standpoint. It was good, but I think had we been in the same generation and known each other, I think we would have been best friends.
[00:30:32] William Green: So you started the Semper Augustus investment group. It was sort of late 1998, early 1999, you got launched. So really, this is about when I was starting very seriously as a financial journalist. And so I remember living through this stuff and writing for magazines like Forbes and Fortune and Money. And there was always this kind of credulousness in some of these magazines where they’d be writing about these crap companies that, you know, someone had just made five million dollars off their tiny investment.
[00:31:01] William Green: And it was very intoxicating. And sort of head spinning. And at the same time, I was kind of a born contrarian outsider. And so I said, I never owned any tech. And I looked at it like, this is just moronic. And I ended up investing with Marty Whitman at the time. And so I, for me, it all sort of seemed nuts, but it was very intoxicating.
[00:31:22] William Green: And I was struck by the name that you chose for your firm, because it was a sort of Ironic nod to the fact that this was clearly a bubble, that there was a parallel not only with 1929, but also with the 17th century. Can you talk about why you call the firm Semper Augustus, what the what the historic connotations of this beautiful name actually are?
[00:31:47] Chris Bloomstran: Well, it really was a contrarian bias. And I don’t know if that’s innate, if it’s born, if it’s learned, if it develops based on your life history. But I found myself very contrarian, very skeptical from the get go. The first stock I bought shortly went bankrupt. And that makes you fairly jaundiced right out of the gate.
[00:32:10] Chris Bloomstran: And so I’ve always been fairly skeptical of everything I’ve read, but I love finance, financial history. Even in college, I was reading everything I could trying to figure out the investing game and eventually got to Kindleberger, Mania’s Panics and Crashes, and the Extraordinary Popular Delusions and Madness of Crowd, and all the Austrian School, and during what was the first real mania in Vertula Bulbs in Holland in the 1630s, The Semper Augustus was the most inflated of the bulbs, and there are great stories about that episode, and there are debates as to whether it really was a bubble, but it didn’t, there was a bubble in real estate, and there was a bubble in the economy, and there was a bubble in trade, and the extension of that was probably this group of collectors that liked tulips, and The Dutch have always liked flowers.
[00:33:02] Chris Bloomstran: In any event, the Semper Augustus was the most highly valued of all the tulip bulbs at the peak in 1637. In today’s dollars, I don’t know what would have gone for three or four million dollars. They say you could have bought a flat on the river. and Amsterdam for the price of one bulb. And interestingly the bulb itself was genetically flawed.
[00:33:24] Chris Bloomstran: It couldn’t reproduce, which was what produced the, if you know, the, what the picture of the flower, the red and white brilliant streaking in the bulb. But yeah I thought the, and part of the reason we got together, Mr. Smith and I was this sense that there was a bubble and the bubble was again, first in blue chips, the bubble was not the tech bubble yet.
[00:33:42] Chris Bloomstran: The tech bubble developed. But those big blue chips, the GEs and the Kochs rolled over in 1998 about the time we were starting the firm. So we couldn’t have sold the portfolio. We couldn’t have done that at any better time. And then in that last period is when all the small caps really got cheap and the mid caps really got cheap and some Japanese companies really got cheap and Berkshire itself really got cheap after they bought in January.
[00:34:05] Chris Bloomstran: Berkshire got cut in half and it was only after the stock dropped by half. that from three times book, we paid 1. 05 times book for it. But the tech bubble by the end of 98 was raging and believing it was a bubble and what a fool to start a business in the middle of a bubble. So the use of December, which I always kind of thought I’d start a firm at a point and harbored that name.
[00:34:29] Chris Bloomstran: I thought, Oh my God, somebody is going to beat me too. And I wish they did. I was praying every day that Nobody would beat me to the name of Semper Augustus.
[00:34:37] William Green: I actually, I dug out Extraordinary Popular Delusions and the Madness of Crowds, which is the book where I think you first read about the tulip mania bubble back in the 1630s.
[00:34:46] William Green: And there’s this beautiful passage in it that I, where it’s talking about how crazily overvalued the Semper Augustus was and how It says, so anxious were the speculators to obtain them, the one person offered the fee simple of 12 acres of building ground for this particular tulip, the Harlem tulip, and then another guy bought one for a new carriage, two gray horses, and a complete set of harness.
[00:35:12] William Green: Then there’s an amazing story that’s worth telling just because it’s so ridiculous, which I’m sure is untrue, but I think it’s too good to fact check, where some guy basically comes, I think, to deliver something to this laborer. Yeah, it’s a sailor. It says the sailor, simple soul. And he sees what he thinks is an onion and he takes it with him and he’s sitting on a bunch of ropes and he’s eating the onion and doesn’t realize that actually he’s eating this unbelievably precious Semper Augustus tulip.
[00:35:44] William Green: And so he ends up getting arrested for felony against this merchant. But then there’s this really beautiful passage that I just wanted to refer to because. It all bursts, and it’s so reminiscent, this account from 1637, of what’s happened in March 2000, when that bubble burst, or with the nifty fifty, or with, more recently when tech stocks started to blow up, or certain cryptocurrencies blew up, and it talks about how suddenly the confidence starts to go out of this thing, and people start to default, and people are suddenly left with these these valueless things that nobody will take, and it says, The cry of distress resounded everywhere, and each man accused his neighbor, the few who had contrived to enrich themselves, hid their wealth from the knowledge of their fellow citizens, and invested it in the English or other funds, many who for a brief season Had emerged from the humbler walks of life were cast back into their original obscurity.
[00:36:42] William Green: Substantial merchants were reduced almost to bey. And many, a representative of a noble line saw the fortunes of his house ruined beyond redemption. And so there’s something just so wonderfully resonant about it, right? Like there’s, this is just sort of a part of human nature. And it just kind of repeats itself again and again, and it’s done it for certainly the last four centuries and obviously much further back than that.
[00:37:08] Chris Bloomstran: I thought we’d never see what transpired in late 99, early 2000 again, the [Inaudible] of the world capturing half of all of the flows into the mutual fund complex and owning the same 20 stocks that all traded at what wound up being Cathie Wood, you know, circa 2021 type valuations. The excesses in accounting, the excesses in compensation.
[00:37:33] Chris Bloomstran: And, you know, here we are, we did the same thing. We’ve done the same thing in the last cycle. And this last period here in the last year and a half feels an awful lot like what happened in the late nineties. And even throughout 2000, you had the big break in March of 2000. And But you had a recovery.
[00:37:47] Chris Bloomstran: There’s always a recovery bounce. It was 1929, the market fell from 381 to 41, but it recovered to 190 and changed by 1937. Then, of course, it sell off again, but that was World War II. But, I mean, you had a recovery in 2000 from March. You had a big sell off. And I don’t think the S& P 500 hit its eventual high until September of that year, despite a big sell off in the interim period.
[00:38:10] Chris Bloomstran: And so, you know, you had the big sell off last year in the NASDAQ. Over 30 percent than the NASDAQ 100, S&P was down 18 and change on a total return basis. And here you are, these indices are all closing in on their 2021 closing prices. You’ve had this recovery rally and valuations in some of the real businesses were starting to get reasonable.
[00:38:32] Chris Bloomstran: I think a lot of the stuff that was so speculative is still somewhat washed out. All of a sudden you’ve got recoveries and businesses that really shouldn’t exist that are at 100, percent this year. And you know, they’re not near back to where they were. So the generals the big five or seven companies have recovered.
[00:38:47] Chris Bloomstran: But that same thing happened when Microsoft first broke and Sun Microsystems first broke, and Oracle first broke during 2000. They all had a big recovery back September, and then it just ground down over the next two years, 2000 and or 2001 and 2002. So it was three years of pain, but nobody believed it.
[00:39:06] Chris Bloomstran: You didn’t believe the first selloff. And I think there’s this bulence today. There’s this bullishness that’s returned among the tech crowd in particular that believes that, you know, we’re backing off to the races and as Bob Smith said of the 1920s, you know, I’ve seen the show before and history repeats and we’re repeating it again and that’s the Extraordinary Powerful Delusions and the Madness of Crowds by Charles MacKay, and it’s a wonderful read my first read of it, and I read it many times, turns out to be the abridged version, turns out there’s a giant version, which I’ve now bought three copies of.
[00:39:44] Chris Bloomstran: Which I haven’t read yet, but it’s gonna be like reading War and Peace or the Bible. It’s a pretty weighty tone.
[00:39:50] William Green: Yeah. It’s really fun. You don’t know entirely whether it’s f factually accurate, but as Tom Gayner might say, it’s directionally correct and it’s precisely, it’s elegantly done.
[00:40:00] William Green: And one of the things that’s very interesting actually, is that I think I write about this briefly in my book, that Sir John Templeton loved the book so much that he republished it. through his Templeton Foundation back in the 1980s. And he wrote a forward. And so I was saying in my book that his forward basically offered a rational antidote to financial insanity.
[00:40:20] William Green: And so what Templeton said in his forward is he said, the best way for an investor to avoid popular delusions is to focus not on outlook, but on value. And so he talked about the importance of grounding yourself in very specific valuation measures, and in a critical analysis of a company’s fundamental value, and that very much meshes with what you’ve done through your career, I mean, you’re almost a maniac in your annual letter to clients where you tear apart the financial statements of Berkshire in unbelievable detail, And you’re going into the footnotes and the like and really explaining what the economic value of these businesses is.
[00:41:02] William Green: Can you talk about that? The importance of, in a way, this whole other system of investing, right? On the one side, we have the casino where it’s full of these charlatans. Like you you’ve talked about charlatan promotion, right? Whether it’s the SPACs or. Crypto trading, or meme stocks and the like, all these things where people are somewhat unscrupulously making hundreds of millions of dollars from heavily promoting their SPACs, or luring you into massively overpriced funds and the like.
[00:41:31] William Green: And in a sense, your early life was a kind of introduction to the casino element of it, right? I mean, back when you were a college, the stock that you lost money on, where you lost, I think, something like 7, 000, was something where you’d read about it and heard on the street, in the Wall Street Journal, and kind of rolled the dice and then realized, Oh God, I knew nothing about this.
[00:41:48] William Green: So, in a way, I see your career, as a kind of renunciation of the casino element of investing and a shift towards what Templeton is talking about, which is, no, ground yourself, anchor yourself in fundamental valuation, and that’s what’s going to keep you safe. And this strikes me as such an important thing to explore for our listeners, because this is how they’re going to protect themselves from charlatans and unscrupulous promoters and bubbles. Sorry, it’s a long winded question, but the stage is yours.
[00:42:23] Chris Bloomstran: Well, I, no, I think in retrospect, probably the best thing that could have happened to me was having I was reading everything. I mean, I’d fallen in love with investing when I had moved from the engineering school to the business school at Colorado, there were no investing courses.
[00:42:39] Chris Bloomstran: We didn’t have a student run fund. This was not the Columbia MBA program. This was academic finance via the Booth school. efficient market hypothesis, finance was taught in a corporate setting. So if you were running DCFs, it was on a project basis and not on how to value a business. But I was reading everything in the library and the fit and the business school library.
[00:43:02] Chris Bloomstran: I always found myself at the tattered covered bookstore, downtown Denver buying and reading all of the investing books that I could find. I was doing a lot of technical analysis, candlestick charting. I’d gravitated toward Will O’Neill’s CANSLIM method, which was it’s still a thing. It’s an acronym.
[00:43:21] Chris Bloomstran: It’s essentially a momentum based strategy of when earnings are breaking out and a stock price is breaking out. That, that’s when you put your money to work. And so that, that’s all I knew when I thought I knew enough, but I’d read this heard on the street column on this Norwegian, very large crude carrier company.
[00:43:37] Chris Bloomstran: And I don’t know, well, why not? This makes total sense to me. But, and so I convinced this retail broker walked into the office with all of my money, my 7, 000, which was some leftover scholarship money and everything I’d saved from my summer jobs in college and in high school. And plunked it all down. And the broker even bought a little bit and he said, you know, prudently, you should probably diversify if this is all of your money.
[00:44:01] Chris Bloomstran: I said, this is such a sure thing. But I had no idea what I was doing. I had never read a balance sheet or an income statement. I hadn’t been exposed to financial statement analysis in the least. And so, you know, when you lose all your money, you realize, good Lord, I either need to get a way different hobby or I better figure out what the heck happened.
[00:44:22] Chris Bloomstran: And so I had to write a letter over to Norway to get the financial statements. And as I learned by reading them, and I’m not sure I would, I had no expertise, but I realized this thing was so levered, the structure of the business, which was a liquidating structure, they had these four ships, they were old, they were going to run them around for a while, and and seldom scrap for a profit.
[00:44:46] Chris Bloomstran: And everybody was going to make a bunch of money, but there was so much leverage. They were such bad assets. I learned two things. I learned this was the bad business. It was a bad capital structure. And I also learned price, you have to be, you have to pay a reason. So had it been a, had it been a reasonable business, but overpaid, you could have lost a whole bunch of your money.
[00:45:05] Chris Bloomstran: And so I’m just very quickly. You know, as I learned, realize the only way to protect yourself is with the business quality and the price you pay for that business quality. And so I became really a price zealot. And when I found myself in a professional setting in the trust company, in the old United Missouri Bank, it was a value shop and it was a bank.
[00:45:26] Chris Bloomstran: So, you know, hundreds of stocks in a portfolio and. The chairman of the bank, who was not an investor, mandated 25 percent cash reserves. But there was fundamental analysis going on. There were, you know, analysis of PEs and price to books and price to sales and price to cash flows and dividend yields.
[00:45:43] Chris Bloomstran: I’m not sure there was that much going on in terms of a genuine understanding of what makes a great business and the differentiation between a great business and a cyclical business, which can be a great business at the right price, but a terrible business at the wrong price. I came to that all over the years, but I got grounded very quickly.
[00:46:01] Chris Bloomstran: And then the business itself, trying to figure out how it works, whether it’s a good one, and then ultimately the price you pay for it. And the lesson that so many people learned in 99 and 2000 that they learned a couple of years ago is Even if you’ve got a great business at the wrong prices, it’s fashionable to say, you know, the great business at the wrong price is a terrible investment.
[00:46:22] William Green: I was struck by two things that you said. I spent a ridiculous amount of time over the last few days reading through old writings of yours, listening to lots of interviews and transcripts of your interviews. And I was very struck by a couple of things that I think are really worth our listeners internalizing because that’s so important.
[00:46:39] William Green: And so fundamental, and one is that you said price is the paramount driver of what we do, and the other is that something you alluded to a moment ago that I think it’s worth pausing and dwelling on, which is that you, you have a dual margin of safety, and the dual margin of safety is A, the price you pay, and B, the business quality.
[00:47:01] William Green: And I don’t really see a lot of people talking about both of those things in terms of margin of safety, that it’s not just the price you pay, but also the quality of the business. Can you talk about that a little? Cause it seems to me a very important insight. And I remember you saying to Jim Grant, we’re very disciplined on business quality and management quality.
[00:47:22] William Green: So, and likewise, later you talked with with Peter Kaufman at Glenair and he talked to you about, His checklist of six agencies that you have to satisfy in order really to have a high quality business. So this whole issue of quality is really critical it seems.
[00:47:38] Chris Bloomstran: Well, It’s paramount to everything. A lot of it can only be learned over time through repetition, through making mistakes, but very easy to start with a balance sheet and simply discern leverage levels and within footnotes, try to find off balance sheet liabilities. You know, places where a culture is not run for the benefit of the owner, the shareholder, but it’s run for management.
[00:48:03] Chris Bloomstran: And so you spend your time in the proxy statements, they’re figuring out what really drives managers and how they’re compensated. You’re trying to find the classic value investor moat, the thing that makes a business durable. You wind up loving oligopolies, you know, places that are impenetrable. But at the same time, at least in my world, in our world, you’ve got to have the flexibility to, I think, more broadly define business quality.
[00:48:31] Chris Bloomstran: Again, we own a fair number of cyclical businesses today, but we’ve identified places. Where you’ve got some changing economics, where you’ve gone from hyper competition to more of an oligopoly structure in the case of a commodity chemical business, Olin here in St. Louis, which we’ve made an awful lot of money on, you know, half the investing world hadn’t heard of it.
[00:48:53] Chris Bloomstran: And it’s been public company for a century. They’ve been a dividend aristocrat since the 1930s. But it’s a business that is in the chlor alkali world. They take salt and a slurry of salt, electrify it and make chlorine and caustic soda. On either side of the molecule, they’ve got vinyls and an epoxy business through it.
[00:49:12] Chris Bloomstran: And I saw this industry consolidate when Dow merged with DuPont. You saw Olin pick up a bunch of assets for antitrust reasons, which at this point, then five, six years ago, made Olin the low cost player in this chlor alkali world. I’m vertically integrated as well by picking up the vinyls business and the epoxy business.
[00:49:34] Chris Bloomstran: And what I realized was you’re going to go through a period of a decade where nobody’s going to build any supply. And if we have population growth and industrial production growth. Olin being the low cost producer in the world, you know, China is not going to be in a position to export product onto the market.
[00:49:50] Chris Bloomstran: They don’t have low cost feedstock, natural gas, the way an Olin would with its plants on the Gulf Coast with natural gas feedstock sitting right next to the plant. In any event, That scarcity that was developing became a margin of safety and I was able to look through what was a fairly encumbered balance sheet with the debt they had to take on.
[00:50:15] Chris Bloomstran: You got to the pandemic and the business, the stock got really cheap. We were buying it in the mid to high teens. The stock got down to 10 bucks a share on 165 million shares. Market cap gotten down to 1. 6 billion. Our basis in it was about 2 billion and on a normalized. On a cashflow basis, the business went in a kind of a mid cycle level to two and a half billion in cashflow.
[00:50:37] Chris Bloomstran: So we paid less than one, one times cashflow for it. But in the pandemic things, the income, the end markets for so many of their product in the epoxy world, the auto industry slowed and closed plants, you know, Boeing and Airbus closed. So the paints and coatings businesses slowed. End use for vinyls, vinyl siding, housing market.
[00:51:00] Chris Bloomstran: Housing construction slowed a bit and so you know the most optimal thing to do with capital would’ve been the stock, buy the stock back when it was that cheap, but they had too much debt on the balance sheet, whereas as the economy and the business recovered, they’ve paid down the debt for over 4 billion to $2.7 billion.
[00:51:19] Chris Bloomstran: But knowing that you had this coming supply demand imbalance, allowed you to look through what was probably a more levered balance sheet than we ever would’ve done to where it’s now a pristine balance sheet. On a mid cycle basis, debt’s now one times cashflow. The stock is up five X from where we bought it.
[00:51:35] Chris Bloomstran: And here’s a business where again, if you’re not going to add capacity. At all. And in fact, they’ve taken out a lot of their lowest margin capacity, which has made the business even better than it was when I first started analyzing it. They’re buying the stock back. They’ve gone in the last year and a half, two years from 165 million shares out to 127 million and the stock at 7 billion cap up from our cost of 2 billion is still trading at kind of a mid single digit to what I’d call free cash.
[00:52:04] Chris Bloomstran: And so here’s a place where you want these, this management team buying the stock back at as low of a price as they can get it. And so the margin of safety 20 years ago, 10 years ago, even I wouldn’t have defined margin of safety. in that setting, but you really understand how this thing was going to evolve.
[00:52:21] Chris Bloomstran: And as long as we were confident you’d make it through the pandemic, we were comfortable making it a big size position. And so it’s not just, it’s not just the, these lists of 50 companies that get put together with all the great businesses that we all know are great businesses, the visas, the MasterCards, the Costco’s you’ve at least in my world, you’ve got to be able to look beyond the refiners, which I was able to buy for almost free.
[00:52:46] Chris Bloomstran: In 2000, when the energy component of the S& P got down to one and a half percent from what had been double digits just a few years prior you know, European majors. We’re shedding assets, institutions, endowments, sovereign wealth funds, we’re shedding their energy investments. And the whole thing aligned to where we were building, developing real shortages of capacity in various corners of the world.
[00:53:12] Chris Bloomstran: We have too little refining capacity. We’ve cut the number of Refiners in this country in half, starting five years ago, we started shrinking actual right refining capacity. And so a business that was so cyclical that never would have been attractive to us became very attractive because you started to say, okay, well, business quality can be defined through something like a developing scarcity.
[00:53:34] Chris Bloomstran: That’s going to give you a lot of protection in the coming, what would be cycle when you start to remove a bit of the cycle out of the cycle. And so it’s my definition of business quality has evolved over time. We’re still looking for the best businesses, the ones that, that if you take our overall portfolio.
[00:53:52] Chris Bloomstran: And put it together as though it’s a company, you know, we essentially run no net debt on the collective balance sheet. You know, we’ve got about 10 percent net debt on the balance sheet versus more than 50 percent for the S& P 500. A lot of our companies have net cash. They don’t have debt on the balance sheet.
[00:54:08] Chris Bloomstran: The intangibles of, you know, how ethical and how moral and how honest your management teams are, how aggressive or not aggressive they are with their accounting. That becomes a huge component of margin of safety when you’re defining business quality. And when you put it all together, really the last thing that you’d want to focus on is price.
[00:54:27] Chris Bloomstran: But then you only want to buy these assets and these great businesses or these cyclical assets. Are these one off special situations at a price that allows you to be okay if you’re wrong on your thesis. And if the business doesn’t exhibit the same quality, or if the scarcities you think that are coming in a cyclical world don’t develop as you think they’re developing.
[00:54:52] Chris Bloomstran: And so price becomes really important and it gets lost on the investing herd. At secular peaks, it’s completely lost on the tech crowd today. This big recovery in the big five and the big seven or eight companies has seen the, what I call the fab five shrink from what was almost 25 percent of the S& P 500 at the end of 21, they got crushed down 36 or 37 percent in 2022.
[00:55:20] Chris Bloomstran: They’re almost back to their highs. I mean, Microsoft is back to an all time high. Apple’s back to an all time high. And they’re back to almost 25%. You throw in NVIDIA and Tesla, in addition to the big five, and they’re 30 percent of the index, and they’re back to trading collectively at more than 30 times earnings.
[00:55:36] Chris Bloomstran: And these are bigger businesses today than they were 10 years ago, 12 years ago. They’re not going to slow, but price matters. I mean, You may have seen the letter that I wrote that I think was interesting to Jim Grant that I put out in January 2000. So we had just started the firm and we were in this bubble and I was so uncomfortable with what had developed in this tech world, the market cap of the NASDAQ.
[00:56:00] Chris Bloomstran: When I looked at this number, I used to track, I had a spiral binder and then I had multiple spiral binders. I’d go to the Barron’s Business Week section, which used to be really thick. It used to be thicker than what is now the entirety of Barron’s and they’ve removed a lot of that data, but it was just by pencil, just tracking, you know, hundreds of data points per week.
[00:56:17] Chris Bloomstran: You know, you took note of the fact that the market cap of the NASDAQ, which was published in Barron’s. I do infer that actually they were giving you the market cap of the New York Stock Exchange, but the market cap of the NASDAQ, when you look through to Microsoft’s percentage, you can back into how big the NASDAQ was.
[00:56:31] Chris Bloomstran: This is how I did it. The market cap of the NASDAQ was going to pass the market cap of the New York Stock Exchange in March, 2000, even though 80 percent of the profits. We’re on the side of the New York Stock Exchange businesses. And so I penned this fun letter at the end of 1999 on January 1, 2000, we published it with a series of predictions.
[00:56:55] Chris Bloomstran: It was the millennium and people were worried about clocks on computers and the meltdown of the world that was coming. But I’d put out 12 or 13 predictions for the next 15 years thinking, well, you know, you’re going to get held to task for being wrong for 15 years if you make a 15 year prediction. But I said, the first prediction was.
[00:57:11] Chris Bloomstran: Microsoft shareholders will lose money for the next 15 years from today’s price. And it had nothing to do with Microsoft being a bad business. It was a wonderful business. It still is a wonderful business. It was simply the price on 20 billion in sales and a 38 percent profit margin. So seven and a half billion dollars in net income, the market cap was 620 billion, 31 times sales and 80 times earnings on a business that’s not going to grow as fast as it had from its IPO 15 or 14 years prior.
[00:57:43] Chris Bloomstran: You went through an extrapolation of, well, what if the market cap were to grow at the same rate? Well, you’d be in the quadrillions of dollars. And what if sales would keep growing at 45%? Then, you know, the business would essentially at a point consume the entire economy. And so I was right. And 15 years later, you had a negative total return, even to today, start to finish.
[00:58:06] Chris Bloomstran: You’ve made a single digit return on Microsoft, which is now back to the perch of number two largest company. It’s you know back to 37 times earnings. Its profit margin has recovered back to where it was in 2000, but paying that price, you know, At best, a mediocre return, and for 15 years, it delivered a loss, and so.
[00:58:26] William Green: So, so, Chris, applying that kind of lens to the current crop of fab companies, you know, the Microsofts, the Googles, the Apples, the Amazons, and the like, if you were to make a similar prediction over the next 10 years, 15 years of places to avoid being, places where. If you’re really anchored in valuation in the way that, that you’ve had to be your entire career, what do you avoid?
[00:58:50] William Green: What would you advise our listeners to say? Yeah, this might be an amazing company. It might be a great business and it could continue to rise, but the odds are against you. Be very careful here. What would be a list of companies that trip off the tip of your tongue that our listeners ought to be careful of?
[00:59:10] Chris Bloomstran: Well, I’d be very careful of the businesses that, that some of your software companies and a lot of what’s in, in the ARK portfolios where you don’t have profits and you may not have profits where almost everything has to go right, yet you’re paying ridiculous multiples to sales. I’d be always be careful of paying big multiples to sales for profitless businesses.
[00:59:33] Chris Bloomstran: But NVIDIA reminds me today so much of Microsoft. Low 23 years ago. You know, here you are with a transformational AI on a business that has been a very good business with their graphics chips, but on what’s trailing 25 billion in sales, that’s clearly gonna grow Very quickly over the next few years, you had a market cap that hit $1.2 trillion.
[00:59:58] Chris Bloomstran: Now we’ve got a short position on this thing, but you go through the same math on trailing 25 billion in revenues. If you grow those revenues at 20% a year, let’s say. You wind up. You wind up in a decade at 400 billion in revenues, and then you take today’s 20% profit margin and you could look at it growing to 30%.
[01:00:18] Chris Bloomstran: Look at it, growing to 40%, and in any of those scenarios, if you grow the top line at 20, which is very difficult to do for any business for a sustained period of time and grow the margins to a very healthy level, far above what a semiconductor business. is normally gonna earn it. But if you allow them a 30 or 40 percent margin and then you apply a 30 or a 40 multiple to earnings, only then can you make a 10 plus percent return.
[01:00:44] Chris Bloomstran: I mean, you have to grow the margin to 40%, double it from where it is today. Now there are Wall Street analysts that in the next five years, think the profit margins are gonna get 50 percent and that the business is going to grow by 40 percent a year, maybe it does. But when you start talking about 10 and 15 year periods of time.
[01:00:59] Chris Bloomstran: And you start talking about paying a trillion two for a business that’s doing 25 billion in sales on a 20 percent profit margin, even if you get this immediate surge in top line growth and an immediate surge in profitability, you have to presume a lack of competition. I mean, AMD, there are other players In the chip world, there’s so much that can go wrong, but only in the case where everything goes right, when you extrapolate everything out, can you get to a mid to high single digit return.
[01:01:29] Chris Bloomstran: So I would say Nvidia, you’d pay Nvidia at today’s price, I’d say the same thing that I did. about Microsoft. Today’s investor in NVIDIA will lose money over the next 15 years.
[01:01:42] William Green: What about things like Tesla or any of the other big names? Are there things that just seem kind of strikingly obvious if you’re anchored in intrinsic value and the like rather than in momentum and hype and the like?
[01:01:56] William Green: I’m not saying this about Tesla in particular. I’m just wondering if there are other big names that leap out at you like that.
[01:02:02] Chris Bloomstran: So, I’ve got a very short, I’m only short in one account. I’m not a good short seller. I should never do it, but we’ve actually made money on our Tesla short, we have a very small Tesla short, we’ve got a very small Nvidia short.
[01:02:11] Chris Bloomstran: It’s just we just recently put on. It’s Tesla and what’s approaching a trillion dollar market cap again. And they’re now at 100 billion revenue run rate. Everything has to go right and bothers me to no end. And evidently Elon was out this morning singing the praises of ARK’s analysts, I mean, one of whom is a CFA.
[01:02:33] Chris Bloomstran: And when they are, they being ARK, put out their first research report on Tesla a couple of years ago, you had these wild assumptions about RoboTaxi and wild assumptions about the number of EV that Tesla would sell on their market share. And even things like, they assumed within a five year period, Tesla was going to sell its own auto insurance.
[01:02:53] Chris Bloomstran: And they’d be writing as much business as Geico and Progressive. numbers. two and three in the field and only slide behind State Farm, having done this now for 90 years each. In their latest report, Ark presumes in five years time, four and a half years time now, that in their base case, Tesla is going to grow to a 7 trillion market cap, which is about the same market cap that the fab big five sported just a month and a half ago.
[01:03:21] Chris Bloomstran: In their bull case, you get to 9 trillion. Elon said today, you think he’s going to, he thinks the business becomes a 9 trillion business and he supports the robo taxi concept. I don’t get it. I mean, if you’re going to be in the, I mean, so you’re an auto manufacturer and you’re grounded by conventional manufacturer margins and capital needs when you’re building cars, if they’re really going to grow to, to our base case in five years time, 10 million vehicles, you’re going to need a hell of a lot more capacity than you have today.
[01:03:51] Chris Bloomstran: That requires capital. The beautiful thing that Elon did was talk the stock price up so much that they had several funding rounds. They went into these at the market transactions. When the cap got up to close to a trillion dollars, and they got Goldman and others to sell 5 billion here, 5 billion there, at what was then 200, 300 times earnings, you know, 20 times sales, it was almost free capital, and it provided the money to build out Germany and to build out Texas.
[01:04:18] Chris Bloomstran: The full self driving, you know, Tesla says you’re going to be in production this year. There’s no way. I mean, you’re so far from getting regulatory approval from this stuff being safe. And then you think about the economics. So if Tesla is the car manufacturer and we’re going to sell cars at these wonderful margins that nobody in the auto industry has ever been able to do, but we’re going to have software.
[01:04:39] Chris Bloomstran: And so our consumer is going to pay. A way higher price than sticker because every upgrade, our car is going to get better and better. So it’s not a 30, 000 to 15, 000 car, but it’s going to be a 50, 000 car, but it’ll be a better car four years from now than it is today because of the software. Not sure I’d buy that, and I really don’t buy the concept of Tesla, the full self driving Tesla, buying cars from Tesla, the manufacturing side making wonderful margins.
[01:05:04] Chris Bloomstran: Now this car side, which is the akin to running a yellow cab business, or what’s now an Uber, well, Uber killed the yellow cab medallions in New York City. The Uber business does Make any money. And the drivers, if you look through to your actual overhead of insurance and depreciation and fuel costs and the opportunity cost of you’re driving an Uber versus going out and having another job, the Uber driver doesn’t make any money.
[01:05:29] Chris Bloomstran: So, but all of a sudden now we’re gonna go to a full self-drive because it’s gonna be safer and everybody’s gonna adopt this and nobody’s gonna drive their own car. And we’re going to have wonderful margins on the FSD side as well that supports what’s now a 9 trillion market cap. That’s the number that these folks at ARK and now Elon’s talking about.
[01:05:46] Chris Bloomstran: The total market cap of the S& P 500 is 38 trillion today. But we’re going to grow to nine. You’re going to be, you’re going to be bigger than the 30 percent market cap today. Tesla included that the big seven stocks make up of the S& P and we’re going to get there in ARK’s prediction, four and a half years.
[01:06:05] Chris Bloomstran: And Tesla says you ought not listen to anybody but ARK because their analysis is really good. Well, that’s dangerous. And that’s puffery. And, you know, you start to measure the integrity of management and the promises that are made, you know, I’d steer as far away from a megalomaniac at the helm of the business.
[01:06:23] Chris Bloomstran: And that’s just not, that’s just not, it’s not setting the expectation bar with any level of reality, but it now starts to border on hype. And when the retail investor is the one that gets harmed by the puffery, that, that gets my dander up a little bit. It’s some of the behavior that we’ve seen in the SPAC world with some of these charlatans that have really just been in business of enriching themselves and abusing the retail investor.
[01:06:50] Chris Bloomstran: Look, if you’re running a hedge fund, And you want to drink the Kool Aid and play the game fine. So be it. But you know, it’s the retail buyer of stock that is the one that really bears the brunt of the pain. I mean, the institutions, plenty of them got wrapped up and there were a lot of really great investors that drank the tech Kool Aid in 99 that blew themselves up.
[01:07:11] Chris Bloomstran: And you know, they were down the full 80 percent with the NASDAQ and price. was not a thing with them. You know, it was all about, well, business quality. When this latest iteration, everybody’s going to be the next Amazon because you should get a hall pass for making money for an indefinite period of time because this technology is going to be so wonderful.
[01:07:29] Chris Bloomstran: I mean, everybody ought to go read Robert Gordon’s book on the the economic history of the United. It’s the, I forget the title of the book. I’ve recommended in my letter. It’s a really long book. He’s a Princeton professor.
[01:07:42] William Green: This is the one that took you two years to read.
[01:07:44] Chris Bloomstran: Yeah. I mean, forever. But it’s a wonderful history and it essentially goes back to the great technologies post the industrial revolution and they were so transformative.
[01:07:54] Chris Bloomstran: The, all this AI and SAS software and even the internet is more incremental to real GDP growth per capita than some of those transformative changes were and you’ve got to put it all in perspective.
[01:08:09] William Green: I wanted to ask you a related thing. You this whole issue of these great compounders, these great businesses that truly are high quality businesses, right?
[01:08:18] William Green: And you’ve owned a bunch of them over the years, whether it was starting with something like Ross Stores around 2000, or then Costco around 2004, Starbucks, Nike, these really truly great long term outstanding businesses. And there seems to be a kind of tension in your own investment career over how long to keep them and what to do when you’re truly anchored in this notion of intrinsic value, what to do when a great business starts to get really pricey.
[01:08:48] William Green: And and you’ve told the story a lot of the early mistake that you made in Ross Stores where you bought it in 2000 for about 10 times earnings and then sold it in 2002 after making 150 percent and then watched it go up 25 fold and so this is something you’ve wrestled with a lot and I’m just wondering how you deal with it because it’s kind of become almost an orthodoxy that there are certain businesses that are great enough that you shouldn’t sell, and yet, over the years, I’ve seen you cut back things like Costco and Nike, almost like you can’t bear to hold them because they just get too expensive.
[01:09:22] William Green: How do you how do you wrestle with this kind of eternal dilemma?
[01:09:26] Chris Bloomstran: No, it’s, I can’t bear to, I can’t bear to hold them, at least in size. That’s well put when they get that expensive, but what I’ve learned is don’t eliminate a company you want to own forever from your portfolio in its entirety because it becomes that much more difficult to bring it back into the portfolio.
[01:09:46] Chris Bloomstran: We only bring in one, two, three new names a year and to bring something new in. You know, I’ve generally got to have something that’s going out on the other end. It’s not a perfect, I’m going to sell something entirely and bring something in. It’s just, you find so many new things that you want to bring in because you’ve got to, because you like what you own, but price doesn’t matter now having trimmed the Costco position back and we still own a bunch of it in taxable accounts.
[01:10:08] Chris Bloomstran: I’m not going to sell my 19 cost basis Costco where we’ve made 19 in special dividends, another 20 in regular dividends on the stock at 550. You know, if you’ve got a taxable, if you have a taxable investor where you’re probably going to get a, unless we change the tax code, a basis step up at death, I can’t afford to pay the tax.
[01:10:28] Chris Bloomstran: I mean, I’m a buyer of the stock on a 25 or a 30 percent decline from current prices. But I mean, Costco has traded as high as 50 times earnings. It’s trading at over 40 times today. I can’t buy Costco. But I can sure eliminate it out of a non taxable account. Nike, which had gotten to be a, we’ve made a lot of money in Nike.
[01:10:46] Chris Bloomstran: It’s a one half of 1 percent position and I’m chomping at the bit to bring it back in. Lou Simpson, turns out, who ran GEICO’s portfolio, of course, had adopted this theory at a point in life, I’ve recently learned, that he never wanted to get rid of his great businesses. So I’ve got a handful of companies in the portfolio that I’m, and it’s also part of our process, William, my turnover has averaged 20, let’s call it 15 percent a year over the last quarter century.
[01:11:13] Chris Bloomstran: If I’m bringing in one, I brought in one new company all of last year. Maybe a third of our turnover is the elimination of a company from a portfolio. And the cyclicals are all gonna have to go at some point. Olin’s gonna have to go at some point. I can’t own a business that’s not gonna grow at all for 30 years.
[01:11:30] Chris Bloomstran: But I can trade the heck out of it in the interim and eventually it’s gotta go. Most of my activity is trimming the most expensive portion of the portfolio and buying the things That are the cheapest. You can see what I’ve done with a Dollar General over all the years. We bought it back in 16 or 17 at, I don’t know, high sixties, maybe 70 bucks a share was trading in the mid-teens.
[01:11:53] Chris Bloomstran: The world thought Amazon was gonna come along and the internet was gonna come along and kill all retailers. Well, dollar General has a whale of a moat around it given their rural footprint, given the economics of. the median household that is their customer. It, I don’t think that at that price point, And what they sell, you can be displaced by the internet.
[01:12:16] Chris Bloomstran: And so we found them out in a business that went bagging. They’d been taken private in 2007 and came back out with a bunch of debt in 09. And that debt had to get worked down, but it was a wonderful business and all through it was a wonderful business. And so we bought a bunch of it and made a bunch of money.
[01:12:29] Chris Bloomstran: And they were a clear beneficiary when the pandemic hit. I think at its low in March, the stock was down 12 or 13%, and then it wound up being up a whole bunch for the year. So. You know, where I’m, I tend to now stay once I’m fully invested on a portfolio, I tend to not raise cash. I like to be fully invested when I’m buying Valero and I’m buying what was Holly Frontier, now HF Sinclair, and I’ve got to raise money.
[01:12:57] Chris Bloomstran: I’ll go to a dollar general that was then valuation. And take it from a 4 percent position to a 1 percent position to free up 3 percent of the capital I needed to buy the refiners. And so here you are, fast forward. Well, you’ve got some operational issues today with Dollar General. The tax repays are not what they are.
[01:13:21] Chris Bloomstran: Another customer at that business is essentially half of U. S. household median income. The business tends to do absolute worst right before a recession and a recession, the use of SNAP, which is the food stamp program escalates and so Dollar General winds up being a better business when the economy is at its worst.
[01:13:40] Chris Bloomstran: Well, the economy was at its worst in the pandemic. And so, you know, Dollar General wound up doing way more revenues per store and way more profit per store than they had done. And so some of that’s now on the backside of that working off the states are one by one pulling back out of the surplus SNAP benefits.
[01:13:57] Chris Bloomstran: The federal government through the state’s ways, and so that’s all going away. And so you’ve got some, you’ve got some things going on, but the stock is now kind of back to where it was when I was selling it a couple years ago. The business is bigger. They’ve added a thousand stores per year, so you’re pushing 20,000 stores today.
[01:14:15] Chris Bloomstran: But I’m making, I’ve just made Dollar General a very big position here in the last month and a half, because it’s now among the cheapest companies in the portfolio versus what was one of the most fully valued companies in the portfolio two years ago. Under the hood, you don’t necessarily see it if you simply look at a list of Semper Augustus holdings, but it’s the value that’s added by trimming the deer and buying the cheap at the margin that I think delivers an enormous amount of value over time.
[01:14:43] Chris Bloomstran: And that’s. very much predicated on price. I mean, this has nothing to do with, and I believe the issues that Dollar General is grappling with now operationally and on the regulatory front and on a little bit of changing distribution as they’ve changed the footprint of the stores and they’re making their base store model.
[01:15:00] Chris Bloomstran: A thousand square foot bigger, 1, 100 square foot bigger than the typical 7, 400. I think this management team is so good. Their board is so good. Mike Culbert, the chairman, I’ve got to know, he’s phenomenal. These are very good retailers. They’ll fix the current issues. And again, some of these issues are simply the flip side of the business being pulled forward, being too good for a year and a half period of time.
[01:15:24] Chris Bloomstran: Now you’re kind of back to where you were in 2019 on a margin basis. It’ll fix itself. But opportunity costs. I would throw, if we’re talking about business quality price, that all meshes to where when you’re a portfolio manager and moving money around and you’re trying to put money to work, it all boils down to opportunity cost.
[01:15:43] Chris Bloomstran: And it’s not so much any hard and fast multiple to earnings or to cash flow or to book or whatever, but it’s dollar generals. One of the best names right now, front and center in front of me and their corners of the portfolio that have got a little more fully valued. So when I’m buying DG, I’m trimming other things in the portfolio.
[01:16:00] Chris Bloomstran: I think that’s how you wind up keeping the overall portfolio in a reasonable valuation at most of time.
[01:16:07] William Green: Alright folks, thanks a lot for listening to the first half of my conversation with Chris Bloomstran. As I mentioned at the start, there’s much more to come, so I ended up dividing this conversation into two episodes.
[01:16:20] William Green: If you liked part one as much as I did, I hope you’ll also listen to part two, which is titled, Lessons from Buffett and Berkshire. Chris is one of the world’s leading experts on Berkshire Hathaway, and he’s extremely thoughtful in that conversation about the many unconventional things that the company does right, including treating its shareholders honorably and fairly as true partners.
[01:16:46] William Green: We also talk in that episode about what Chris thinks of Buffett’s enormous investment in Apple, how Chris manages his time, and how he overcame a painfully difficult childhood to become a highly successful investor. I’m deeply biased, of course, but I really don’t want you to miss that second part of the conversation.
[01:17:08] William Green: Because it’s just so full of valuable insights about investing and life and Chris is very candid and open and thoughtful. In the meantime, as always, please feel free to follow me on Twitter @WilliamGreen72 and do let me know how you’re enjoying the podcast. It’s really always a great pleasure to hear from you. Until next time, take good care of yourself and stay well.
[01:17:33] 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 theinvestorspodcast.com.
[01:17:54] 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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