Transcripts For BLOOMBERG The David Rubenstein Show Peer To

John its just about every day. David did you ever play basketball with barack obama . John yeah, several times. David and is he a good player . John hes a very good player. Could you fix your tie, please . David well, people wouldnt recognize me if my tie was fixed, but ok. Just leave it. Alright. I dont consider myself a journalist. And nobody else would consider myself a journalist. I began to take on a life of an of being an interviewer even though i have a day job of running a private equity firm. How do you define leadership . What is it that makes somebody tick . So, youve have been doing Value Investing for 36 years. What is a Value Investor . John a Value Investor is someone who is looking for bargains. Were trying to find stocks that are selling at a 40 discount to what we think their private market value is. We want to make sure its got a low p ratio, a strong balance sheet, and has the ability to withstand the inevitable storms that will happen in the stock market. David now, Warren Buffett, is he a Value Investor . John he is the greatest Value Investor of all time. Sometimes people talk about if Michael Jordan is better than lebron james, but there is no question that warren is the best ever. David but Value Investing, as i understand it, is easier done when the markets are down. When the markets are high, there arent as many bargains. So, what have you been doing the last 10 years because markets are very high . John its interesting. Weve been able to buy terrific bargains around march of 2009 when the market was bottoming. Weve got some great brands like cvs, royal caribbean, and true bargains. When the markets recovered, some sectors stayed really, really cheap, media, we Love Companies like viacom and Madison Square Garden Network. Those stocks are still really cheap. Financial services companies, some that you know well, Companies Like lazard or kkr. There are some sectors that are totally neglected even as the markets recovered. David lets talk about the economy. The United States economy was in a recession that ended in june, 2009. And so now, for about 10 years, weve been in a growth cycle, and its one of the longest in our countrys history. But therefore, there hasnt been a lot of depressed stock prices for this period of time. So are you hoping at some point theres a recession so we can get lower stock prices and buy more things at value prices . John we like to buy bargains, we like seeing sectors that are cheap, but we dont want to see a recession. You know, all the turmoil that happens, the impact on our society and our citizens, you know, recessions arent great for america. David so suppose i say i watched you, and youre a good Value Investor, what rate of return can i expect from your products . John well, you know, over the 36 years, we have been able to compound money at roughly 11 a year. And thats something were really proud of. Our ariel fund has been around since 1986, so its 33 years old and its actually number one in its category going back to that period of time. But the really neat thing is that were a rare firm that has a 36 year record with the same Portfolio Manager in charge. Ive been fishing in the same fishing pond of midsize value stocks the entire timeframe. We have a great team of people i work with that have been with me some have been with me close to 30 years, some 20, or 15 years. So, were a team of grizzled veterans. We feel we can replicate our performance in the future. David what is your best single deal that you can talk about . John i think over time, one of our best companies weve ever bought was royal caribbean. We were able to buy it at the height of the financial crisis when people thought people would never cruise again, and that stock has gone up 15 times itself from the bottom. We still think its an extraordinary bargain here today. A favorite of ours today, we find, we think, as i said earlier, some of the media stocks are really, really cheap. Were still optimistic that the Madison Square Garden Network will do really, really well when the knicks start to win the championship again. It will be great for the city and great for that stock. David let us talk about how you got started. You grew up in chicago and both of your parents were fairly prominent people, as i understand it. Your father was in the tuskegee air corps. What is the tuskegee air corps, for those who may not know . John that was the group of Fighter Pilots that were part of world war ii, the first group of africanamerican Fighter Pilots that had a chance to really participate fully in the war. Before then, people didnt think africanamericans were qualified to fly aircraft in major wars. And so my dad was in the first group of the 99th fighter pursuit squadron that went overseas and fought in world war ii. David when your father came back after world war ii, what did he do . John well, he showed up at university of chicago law school. He wanted to go to the best law school and he thought that the university of chicago was the best. At first they didnt accept him because he hadnt taken the appropriate tests, and there were not many africanamerican students at the law school at the time. But he asked them if he could take a test. They allowed him to take the test. And he showed up in his captains uniform. And i think the two things together, showing what a patriot he was and showing how good he did and what a great result he did on the test, he was able to talk his way into the law school. David and your mother . John he met her on the first day. David she was the first female africanamerican at the university of chicago law school. John she was. She graduated 1946, and my dad graduated in 1948. David he built a law practice and she built a law practice . John they both had their own independent law practices, because back then, you couldnt work in a big downtown law practice. My mom worked on divorces, and my dad did mostly real estate and bankruptcies. David you were the only child . John i was. David the advantage is that your parents put a lot of time and attention in on you, is that a good thing for you . John it was. They focused everything on me. They got divorced when i was three years old, so i had two different lifestyles. My dad loved in a studio apartment not far from downtown. My mom lived in a large house in hyde park. They were different political persuasions. My mom was republican, my dad was a democrat. So, i learned to negotiate two different worlds each and every week. David and you went to chicago lab school, which is known for its k12 . John its a k12 school i got there in ninthgrade. Terrific place. David and in addition to your academic pursuits, youre a basketball player . John i was. David and you went to princeton and you played basketball at princeton . John i was very fortunate to play basketball at princeton for the hall of fame coach, pete carril. He was a legend in someone who transformed my life. David you were a captain your senior year . John i got the chance to be one. David did you think it would be an nba player . No, coach carril told me i would not be an nba player. He told me when i was a sophomore and i made the team i was the last person on the team, the 15th person on the team, he said youre legally blind, and i cant teach vision. You cant dribble, but you work so hard and well keep you around for a few more days. David you graduated in 1980 . What did you want to do . John i had two role models who were stockbrokers. One across the street from campus, a guy named mike perkins who helped show me where to go and research companies, how to find newsletters on the stock market. And i had a broker in chicago named stacy adams, and i would sit with him and watch the tickertape go by. So, i thought if you loved the stock market like i did, you would become a stockbroker. And i was forced to be hired by William Blair and company in chicago. The managing partner at the time was a princeton graduate, played football at princeton, and very close to don rumsfeld. Ned helped recruit me and gave me a great opportunity to start my career at a great firm. David ok, so you stayed there 10 years before you were ready to do Something Else . John no, i stayed there 2. 5 years. David thats enough to learn the business . John i thought so. I had confidence in my strategy in investing in small and midsized undervalued securities, and as i said earlier, there were not many people doing that. So were kind of pioneers in small by you places. There were a few firms like acorn funds, a couple of others, but not many people like to focus on that area of the market. David so, you started your own company at what age . John i was 24. David and where did you get the money to capitalize it . John friends and family. I tell people my mom gave me everything she had that was liquid. My dad gave me what he thought he could afford to lose. After that i went to my former clients, my high school buddies, anyone who could give me 10,000 to help me start the company. David how much capital did it take to start it . John roughly over 200,000 in 1983. David and where did you get the name ariel from . John i love the way the name sounded. It was a character on a favorite tv show of mine. I said if i had a daughter i would name my daughter ariel. But i had the company first. David to keep up with whats going on the world, do you use computers . John i actually dont use a computer. David do you ever go on the internet . John i go to the internet on my phone. David do you use email . John i dont email. David so how do people get messages to you . Do they send the pigeon with a message . David how much are you managing now . John about 13. 5 billion. David and you managed more at one point before the great recession. It came down, as was the case with many companies. In fact, how much money did you actually go down to . How low did you go . John under 3 billion. David do you think you should close up shop after youre under 3 billion after having 20 billion or so . John no, not at all. One of the lessons i learned from my father and melanie hobson, our president , agreed completely that we should always keep money saved for a rainy day. And sure enough, we had a hurricane, the financial crisis, so we had saved enough capital in our company to continue to pay salaries and keep key people in place during that tough period. So, that was really an important part of our approach, and then we bought our best stocks at really bargain prices during that period. And i think people like that, that we stuck to our guns and believed in what we were doing. David now, some people say its impossible to beat the markets and so you should buy index funds. You dont have index funds necessarily, you pick stocks. Why should somebody give money to a stock picker rather than to somebody whos just going to reflect whatever the s p 500 is or whatever the index might be . John i think the reason to do that is there are talented Money Managers out there who can add value, and its been proven that there are people who have that creativity and vision to buy securities and outperform the markets. Now, its hard to find them, but find them. They are few and far between. But its worth the effort. And i think its like sports. You root for your local teams, even though you know half will lose and have the teams are going to win. Everyone cant be the World Champion every year, but you still like to be engaged and involved in the competitive pursuit in trying to find a championship or support a champion. I think its the same with Money Managers. David to keep up with whats going on in the world, do you use computers . John i actually dont use a computer. David do you ever go on the internet . John i do have the internet on my phone, but im one of those folks, ive never actually had a computer or turned a computer on. David do you use email . John i dont. David so how do people get messages to you . Do they send the pigeon with a message to you . John they just call me. David so, youre on a number of corporate boards, and youre allegedly very loyal to your corporate boards. One of the boards youre on is mcdonalds. Dont know if, i its possibly true, but you eat mcdonalds every day somewhere in the world, wherever you are, you eat one meal a day at some mcdonalds. Is that true . John its just about every day. There are exceptional times when youre traveling where i cant get that done, that i love being in mcdonalds, its sort of my home away from home. David did you do that before you were on the board . John ive been doing that since i got home from college. I love it there. David and is it healthy for you . John its worked out ok. David when you were interviewed to be on the board, did you mention this . Did they think this was unusual . John i still remember having breakfast with andy mckenna, who became the executive of mcdonalds, and the ceo, and it went marvelously well. They could tell how much i loved the brand. David so, you used to play a lot of three on three basketball . John yes. David so, when you were back in chicago, did you ever play basketball with barack obama . John several times. David is he that good of a player . John hes a very good player, he knows what hes doing. Hes a little bit of an in between size, 62, 65 or so. David he cant dunk the ball . John i dont know about that. He probably could. Hes a little lefthanded, and makes clutch shots all the time under pressure. David there was another player in chicago even better than barack obama named Michael Jordan. Did you ever play against Michael Jordan . John i did get to play against michael around chicago a lot. He was at the different clubs and you could be on the court with him. David do you think hes overrated . John no. I think hes the greatest player of all time. David i understand at one time you played against him and beat him, the only person who ever beat him in a oneonone game. John it was a very fortunate circumstance. I used to go to a senior fantasy camp for people 35 years and older. And every summer at the camp, he would challenge any camper to a short game of oneonone, first of three wins. And since no one had beat him in the first seven years of camp, i think he was overconfident and would let people make a basket or two before he would clamp down and shut people down. I also had the advantage when i played him, he had played 15 campers before he got to me. He was kind of tired. And so i was snuck up on him, and the coach said even though i wasnt a good passer, i was a good one on one player. And so i had a couple of tricky shots. And the last tricky shot, right as it was about to go in, you can hear michael say on the video oh no, and that was really fun. David when you were playing basketball, barack obama told you that he would run for president of the United States of the United States, what did you say . John i said it was a terrific idea. He came over to the office to tell me his plans. And i know sometimes that people sometimes wait a little bit more to get a little more seasoned. But i felt he was really ready and i was totally confident in his ability to be the commanderinchief, and so i encouraged him strongly to run. David and did you get involved in the campaign . John i did. I got to be cochairman of the Illinois Finance Committee with a friend. We worked for penny pritzker, and that was a magical thing to to be involved with on the ground floor. And once he was elected president , i got to be cochairman of the inauguration, and that was special. And what was really special when he first got elected, we were the temporary transition headquarters at ariel. So for three days, he was there helping to form the government. Something i will never forget. David you helped him in his campaign. Hes using your offices in the transition. Did he offer you a job and why so, why did you not take it . John we never really had that conversation. I love investing, and i love our business and i have a great team, as i mentioned earlier, at ariel, so there was never a thought i would go to washington. David are you worried about a recession in the near future . John im not worried about a recession. Warren buffett, you know, always says that last century the dow started 66 and ended at over 11,000. And we had two world wars, a great depression, president s assassinated it was an extraordinary 100 years, but the market always marches back. David now, in the philanthropic area youre obviously a philanthropic leader in chicago what are the areas of interest you have in philanthropy . John weve been working hard on the idea of how to solve the wealth gap in our country between minority communities and the majority communities. Theres all this data that shows how the wealth gap has got larger, particularly between africanamericans and white americans. So, we started a Small Public School over 22 years ago to teach Financial Literacy in the public school, to get young people to be prepared to pick their own stocks and be able to navigate their own 401 k plan and all the things we need to do. We created a program with the university of chicago for minority students to work in the investment offices of major endowments. David now, your parents were prominent leaders in the Africanamerican Community in chicago and prominent leaders in the chicago community. So, when you were growing up, or now that youre living in chicago, do you feel discrimination or have you bypassed it . John i have to say, when people think about minority business its typically around what they call supplier diversity. Construction, catering, things that are about procurement. And my mom had this challenge when she was building her law practice, and my dad did too, that people didnt think about hiring a minority lawyer to do their transactions. The same thing when it comes to Money Management. We were the first africanamerican Money Management and mutual fund to start in the coun