Welcome to Finance Roundtable, the podcast dedicated to demystifying money. In this episode, Professor Jacob Gold, Michael Cochell, and Kelvin Gold dive deep into the world of finance, bringing you insights, expert opinions, and valuable discussions. Get ready for an enlightening conversation as the hosts are joined by special guest David Giroux, a seasoned investor and renowned figure in the financial world.
In this episode:
Whether you're a seasoned investor or just starting your financial journey, this episode offers a wealth of knowledge and practical insights. Tune in to the Finance Roundtable and join the conversation that transcends market trends, providing you with the tools to navigate the ever-evolving world of finance.
Don't miss out on this enlightening episode! Sit back, relax, and enjoy the Finance Roundtable podcast. Remember, the best investments are the ones you understand.
Welcome to Finance Roundtable, the podcast dedicated to demystifying money. In this episode, Professor Jacob Gold, Michael Cochell, and Kelvin Gold dive deep into the world of finance, bringing you insights, expert opinions, and valuable discussions. Get ready for an enlightening conversation as the hosts are joined by special guest David Giroux, a seasoned investor and renowned figure in the financial world.
In this episode:
Whether you're a seasoned investor or just starting your financial journey, this episode offers a wealth of knowledge and practical insights. Tune in to the Finance Roundtable and join the conversation that transcends market trends, providing you with the tools to navigate the ever-evolving world of finance.
Don't miss out on this enlightening episode! Sit back, relax, and enjoy the Finance Roundtable podcast. Remember, the best investments are the ones you understand.
You are listening to Finance Roundtable, a podcast focused on demystifying money. The hosts, professor Jacob Gold, michael Koschel and Kelvin Gold, will educate and entertain you in all areas related to money. Sit back, relax and enjoy the show.
Speaker 2:Hello everyone, thank you for joining us. This is the Finance Roundtable podcast. I'm Professor Jacob Gold and I'm Michael Cushell.
Speaker 3:And I'm Kelvin Gold.
Speaker 2:And over the last year we've had a lot of fantastic guests, from New York Times bestselling authors to active NFL players to finance professors, but today's guest is perhaps what I would consider the GOAT the greatest of all time. We are so excited to have David Giroux here on the Finance Roundtable podcast and really interested to hear his thoughts on the markets, things going forward, volatility in the short term and just getting to know a little bit more of behind the scenes of the T Rowe Price Capital Appreciation Fund. I had the great honor of meeting David probably some 20 years ago when we attended a Morningstar Investment Conference. We both were newbies at the time, or at least new-ish and we hit it off and since then we've been in loose contact and fortunately he was gracious enough.
Speaker 2:Back in 2008, during the Great Recession, when investors were concerned about the market and long-term prospects for growth, david came out to Scottsdale. We hosted a client event and he spoke to our clients for a couple of hours about the markets, how to keep their nerves nice and calm and to not focus on the present but focus long term. I still have clients talk about that event and we are still so very grateful for him to have hosted that and speak at that event. But without further ado, david, welcome to the podcast. Thank you so very much for being willing to be interviewed.
Speaker 4:Oh no, it's my pleasure. Again, thank you for the kind words and again looking forward to the conversation today.
Speaker 2:Thank you, I appreciate that. Well, you know a little backstory or a little bit of information about David. David has been a Morningstar Mutual Fund Manager of the Year twice in his career. He's also a part of Barron's Roundtable. I have two issues here. Right here is a picture of David, as well as on this cover of Barron's. There's David right there and I can't wait to hear from David on this Barron's Roundtable panel who's sitting at the table with him, as well as kind of the process. So, david, would you mind maybe starting off and I'm so intrigued by this roundtable I get up every Saturday morning eager to read Barron's and at the beginning of the year they always have the roundtable panel for two, three weeks and I see your picture and it just brought joy to me. You were already booked for the podcast and so I just was like jumping up and down so excited to hear your commentary. So tell us a little bit about the roundtable and if it's something that you enjoy, how you got started with it and what the process looks like.
Speaker 4:Sure, I've been doing the round table for now, for now two years and it's, it's. It's basically it's a long day. We, we are, we all arrive at 8am. We usually have dinner starting about 8pm, so it's basically it's about a 12-hour day. The first two to three hours are mostly on macro issues interest rates, foreign exchange, big views of the market, market up, market down, that kind of stuff. The second let's call it the last five, six, seven hours are more, each of us with our stock picks or our mutual fund picks, if you will, I sit by. Henry Ellenbogen, who used to be a portfolio manager here at TR Price, now has his own firm.
Speaker 4:He's on my right, scott Black, who's been on that panel for a very long period of time. He's on my left and you know it's fun. It is a lot of work because you have a lot of very, very talented investors in that room, as well as reporters, and so when you pitch a stock, you need to make sure you know all the details, have all those at your fingertips so that you can respond in real time.
Speaker 4:So it's a long day, but it's a good day. I enjoy working with those people on the panel. I enjoy working with the people at Barron's and it's really an honor to be on the panel.
Speaker 2:Oh, absolutely it is, and I'm sure you're exactly right. You've got to be loaded for bear going into that meeting because you have to defend your thesis. For bear going into that meeting because you have to defend your thesis. And some of the all-star panelists they're not afraid to say well, I disagree with that and these are the reasons why. So it seems like it's a healthy, friendly debate at times.
Speaker 4:Oh, yes, yeah, it's always friendly, but I feel like I'm the young guy on the panel, so I get to ask me a little more questions than Mario gets sometimes, I think.
Speaker 2:Yeah, for sure. Oh, that's great. Well, I did notice that in your commentary a lot of panelists were saying that for 2024, they're kind of assuming a range of negative five to positive five, and it sounded like your five-year prospect was maybe around six and a half percent a year. Does that kind of still hold up, based on recent upside swings in the market?
Speaker 4:Oh yeah, I think that's right Again. I think predicting the next one year is always a very, very difficult.
Speaker 4:It's something that a lot of people ask us for, but I think the range of outcomes in any one year is quite wide. In all honesty, I always tell people our North Star is kind of the. What we really focus on is on an investment perspective. It's really not what the market's going to return in the next five years, but how. Because we don't invest in the market. We own 50, 60 really amazing companies that we think can compound wealth at 400 to 500 basis points a year faster than the market, and so that's really what we're focused on.
Speaker 4:So, yes, I think because we've had very elevated returns here recently because the market multiples expanded pretty dramatically and because, honestly, probably rates will probably be higher than they were pre-pandemic, the market multiple probably should come down a little bit over time. And if that's the case and you kind of think about long-term 7% EPS growth with a 1% dividend yield, if you think of the long-term total return on the market being 8.5%, you kind of reduce that for a little bit of market compression. That kind of gets you that 6.5% kind of return that I talked about the next five years Again.
Speaker 4:I think, that's interesting for someone who's investing in an S&P 500 index strategy. But again, the great thing about what we're doing is you know there's so many bad companies in the S&P 500 that we're avoiding and you know we think over time we've added over 400 bps a year of equity alpha in our equity sleeve of CAF. So we think we can do a lot better than that six and a half over time on our equity sleeve, and then we can generate very high returns in fixed income over time as well.
Speaker 2:I love how you say we're not investing in the markets, we're investing in companies, Because I think a lot of times there is that disconnect and in reality you are buying a company and assuming there's internal growth of the company and that is quite independent of what the broad marketplace actually does in a very short period of time. So thank you for saying that. I think sometimes people lose sight of that.
Speaker 4:I think that's right. I mean, in a lot of the companies we own, it's not that they won't be impacted what happens in the overall market, but the idea is their earnings are a little less volatile than the economy is. We tend to favor more Garpy stocks, things that are a little bit more healthcare, a little more utilities, a little more waste companies. Whether the economy is good or the economy is bad, we still need electricity, we still need to throw away our trash, we still need to go to the doctor, those kind of things that are a little bit less cyclical, which makes modeling out those companies on a five-year basis a lot easier.
Speaker 2:Absolutely. I think that that's really great, with all the uncertainty from the conflict in Ukraine, the Middle East, the presidential election, to really focus on those companies that have a consistent glide path based on the needs of everyday individuals. I think there's a lot of value there and your returns have shown that, so that's really fantastic. Thank you Absolutely. To kind of shift gears a little bit, I know that a buzz topic that a lot of people like to discuss is AI and based on, once again, some of my readings of your commentary is is you feel like we're kind of in the early days of AI and and you you have some forecasts of how AI may benefit productivity? Could you share a little bit of that with us?
Speaker 4:Sure, I really do believe, if you, we see a lot of kind of survey work from Fortune 500 companies and they ask in these surveys, companies, where are you in rolling out AI to benefit your firm? And I think 90% of the companies are saying we are early stage for beta testing. Even probably Microsoft today, which is probably the furthest ahead of anybody on the AI journey. On software, even Microsoft is basically going to add one to two points to revenue growth this year from AI and they're probably farther ahead than a lot of their competitors. So very early days with regard to AI, but I think the opportunity is pretty compelling on a long-term basis.
Speaker 4:And, Jacob, you mentioned productivity is an important thing, and so I tell people we have one case we can all point to, right, we can all point to. There's this thing called GitHub Copilot. It costs about $19 a month and today GitHub Copilot what it is used is used for software programmers or developers or software engineers to essentially make them more productive in how they write code, and today, depending on who you talk to, it's somewhere between 25% and 50% more productive, and the average programmer costs today about $100,000 a year a little more than $100,000 a year. So if you had a firm with 100 programmers $10 million a year of expense you have the software that costs $19 a month. That could literally probably replace 25% of their programmers. Save $2.5 million at a cost of about $17,000 a year for the rest of the other 75 people who don't lose their jobs. So it's one data point, but the return on investment from doing that is so amazing.
Speaker 4:Again, I'm not saying everything we're going to see is that kind of IR. But when you think about things like computer programming, you think about customer service, you think about accounting, you think about personalized marketing, journalism there's so many things that we think anything that touches, you know touches. You know anything that is involved with gathering information and then giving that information to someone else. You know a lot of that is going to be replaced, if you will, and that's I think that will structurally you know, unfortunately, will probably structurally increase the unemployment rate in this country, especially among white-collar workers.
Speaker 4:Again, I'm not saying we're going to go to 10%, but for the last decade we've been below five and I think, if you think the next five or six years, I think that unemployment rate will go up steadily because of AI and we're just going to have to deal with the consequences of that over time. But I think that is one of the reasons why, you know, one of the reasons why we're also a little bit more positive in fixed income and I'm sure we'll talk about that a little bit later. But I think AI will help drive inflation closer to 2% over time, if not lower. Over time. It probably makes fixed income look more attractive than it is otherwise.
Speaker 4:So I think that's interesting to us. I think the other thing I think when we think about AI is actually everybody right now, including myself, is very, very focused on NVIDIA. Nvidia is the clearest near-term beneficiary of AI and they're going to have an incredible year. They're going to have an incredible quarter, I'm sure. But the question is really what goes beyond 2024? But the question is really what goes beyond 2024? And there's a lot more custom silicon coming down from Azure, from AWS, microsoft, google, and the question is right now NVIDIA has almost a virtual lock on the market for GPUs, which basically are the kind of computer chips that allow you to do all this great AI analysis. But if you can do it on a lower cost chip custom silicon, maybe from a competitor, I think in five or 10 years I'm not convinced NVIDIA is going to have 90% market share anymore.
Speaker 4:And it may be a much bigger market but they might have half the market or 30% of the market or 40% of the market and if that's the case, that's not going to be a great stock from here. So I tell people, the best way to play AI from my perspective is through software companies. Because really, what this is, jacob, this is really a situation where you're talking about labor for software, arbitrage right, that's really what GitHub, copilot, it's a software product and I think over time you're going to have more software products by salesforce. Intuit, um, roper, ford, of other companies have big software businesses that can drive higher productivity for their end clients in return for a little bit higher revenue from them, and I think in in that scenario, I think the software companies will see their revenue growth expand a little bit and they're not pricing that yet because it's not happening right now. It's more of a 25, 26, 27 event where you see that revenue acceleration, but you're also not, there's not a lot of risk associated with that relative, maybe in NVIDIA, where the range of outcomes is really really wide. So I think we like the software companies.
Speaker 4:I'd also say we like the um semiconductor capital equipment companies. Uh, they'd be like a lamb research, a kla. We like those companies because whether nvidia wins, a custom silicon guy wins, amd wins, you still need to make chips and I think the reality is we need a lot more chips over time to be made and that that really benefits those guys who basically the arms dealers, the, the, the semiconductor capital equipment guys uh, you know they should be the, they should be beneficiaries regardless of whoever wins. So, from a risk adjusted return perspective, software and kind of the semiconductor capital equipment guys are the best risk adjust returns. Nvidia probably has the widest range of outcomes. If they can maintain their market share and the market goes very, very big, it's still going to be a really good stock. But again, if custom silicon has more inroads than people think which I'm kind of buying into that view today NVIDIA has a lot of downside too.
Speaker 2:Wow, amazing, fascinating. David, that insight is a topic that is so popular, but the depth that you just went to is something that I haven't heard much of, and that's talking about all the possible outcomes, because people tend to look at historical return and they just put all their bets on one company, based on recency bias, and I think it's really important that the landscape of competition is constantly changing and you've got to look at all the possibilities.
Speaker 4:Yes, I appreciate the comment. It is, there's a tremendous amount of recency bias in the markets. What's worked in the last year will work in the future. That's just not the way it always plays out, unfortunately.
Speaker 2:It's true, it's true. Well, I've been hogging the mic this whole time as the host. I want to turn it over to Michael and Kelvin. I know that they have some questions as well. Mike, do you want to go first?
Speaker 5:Yeah, first, thanks for the comments on the AI and you know what it reminded me of how remarkable this opportunity is and the idea how infrastructure is still in its infancy, on how companies will lean on AI as well as where we're headed. And the other thing that sparked attention was the reminder of companies. Originally, you had mentioned that the idea of not investing in markets but companies, and some of what you alluded to is really staying focused to that. Even though AI is kind of I don't know it's out in the air and how it may function we don't know but there still needs to be attention to the companies that makes this possible. So thanks for that insight. I haven't heard that perspective either, but it reminded me of the attention towards the companies that make all this happen, not just the markets and what we see in thin air about what AI can be. So thanks for that, and I actually I do have a quick question.
Speaker 5:A couple of days ago I thought about it. I'm like this is perfect, since we're going to have this podcast, at a perfect time to ask this and, as Jacob mentioned earlier, we really appreciate your time here. So here's my question. The media tends to draw so much focus on topics and areas that tend to be skewed many times in whether it's fear or greed or all the commotion during that year. For the average investor, the individual who is saving for retirement or future needs, what might be your feelings if there is a topic or area to stay focused on and just read about, pay attention to in the next maybe 12 to 18 months? Is there something that stands out to you for the average investor to pay attention to, rather than what the media might do on a short term basis?
Speaker 4:You know it's a really good question and I hope I get to the heart of your question here. What I always tell people and it's one of the hardest things to do in the marketplace is that when things feel good, your forward returns are actually below normal and your risk of loss is actually elevated. And when things feel bad, when markets are down, when VIX is high, when we have celebrity CEOs and celebrity economists calling for recessions, it's actually a really good time to invest. I think investors, you think about your clients, people wanting to retire on a launch race, my mother, you need to invest kind of counter cyclically, right, you need to. When there's negative sentiment in the air, good time in recessions, and people are scared and valuations are attractive for really good companies, that's the time to actually add to risk assets, not pull out risk assets off the table. Right, and in a period of time where things feel good, like things feel good today. But I know from history that when things feel good, the forward 12-month return is a little below average not horrible, but it's below average and your risk of loss is elevated Not dramatically, but it's higher risk of loss. So this I always tell people, if they can kind of institutionalize that in their brain and that that is the way the world works. That's what history would tell you is.
Speaker 4:The next time the market falls 10%, you shouldn't think about equities being more risky. You should actually think this is a great opportunity to be buying more. Market down 20%. You should be buying more right as opposed to, oh, the market's down 20%. I got to de-risk. Well, market's down 20%, you're too late in the process. Market's up 20% doesn't mean the market is going to continue to go up 20%. It just means the forward returns going forward for individual investors.
Speaker 4:Adding to risk assets when things feel bad is a great time. Reducing risk assets when things feel good it's kind of counterintuitive, but it's actually a way to create a lot of value over time, and so we've done it. With CAF whether Jacob mentioned what we did, we added risk assets in 2008 and 2009. We added risk assets, obviously, during the COVID downturn and we added the risk assets pretty aggressively in September and fall of 2020, not because we knew that the market was going to go straight up from those events, but basically because we looked at over a three to four-year period, three to five-year period of time, and we knew that the risk returns from here were compelling right.
Speaker 4:The risk returns from here in the equity market today are not compelling. They were compelling in those, some of those periods when you've had some weakness. So hopefully that gets to the heart of your question, michael. I, I think, but I think people with that one con, that one concept, yes, it does.
Speaker 5:and what sticks to me is when you mention institutional mindset and, and it kind of takes away the emotional aspect of making decisions. And if investors can remind themselves that think of it that way, then I think it separates that emotional aspect of decision. So, yeah, no, that was perfect. So thanks, I appreciate it. Oh good.
Speaker 3:Good yeah, david, I've got a question for you. I just want to start out by saying you might be the smartest person I've ever met. That's definitely not true. That's definitely not true. That's definitely true. I've been listening to your past two responses and I am just like amazed by the information you're throwing out. And Michael and my dad have talked very, very highly of you and I understand why they love you so much. But you know a little bit different from market talk. I just want to know, um, what did you do to get into the marketing management position? What did that look like getting in there? You know, for me it's a little bit different to understand what that's like getting there. Uh, how was it for you? What?
Speaker 4:that's like getting there. How was it for you? Okay, it's a, it's a, it's a good question. So, um, you know when, when I was probably uh, actually almost I know you're a junior this year Uh, when I was about a junior, I decided that I wanted to do, uh, to do this, and so the way I I I originally tried to teach myself about investing.
Speaker 4:I just basically read every book I possibly could about investing. I think over a course of a year or two, I probably read 40 or 50 books on investing, things about the intelligent investor security analysis, one and two analysis of financial statements by Ben Graham and everything Warren Buffett has ever written as well, and a variety of other books on investment, some that were good, some that were less good, but that really helped. It didn't teach me how to model. It didn't teach me how to, you know, to do the day-to-day interviewing of a management team, but what it did do is give me the kind of mindset of the idea of margin of safety, trying to find situations where the where the risk reward is really on your side. So when I walked into T Rowe Price, I was not great at Excel, wasn't great at modeling, wasn't great at interviewing management teams. But I did have that mindset, the right mindset, and I think that having that mindset, having read those books that I read, it really was a it helped get me in the door to T Riro back in 1998 when I joined the organization.
Speaker 4:And then, over covering industrials for six years, what I really learned about a lot at that time is the importance of capital allocation and how can we support capital. And when I covered industrials for six years as an analyst, the organic growth rate for all my industrials I covered about 40 companies and the organic growth was very, very similar for those companies. But Danaher Roper Amatek were five baggers or four baggers in that period of time, and GE fell by 50%. So even though they have the same organic growth rate, because some companies like Danaher Roper Amatek made really intelligent use of their capital deployment they bought companies, they improved companies, they improved the multiple that they were trading for, they improved their free cash conversion and GE on the other hand did really bad, really expensive acquisitions that typically failed.
Speaker 4:They would divest them and they were a bad result of that really bad capital allocation them and they were a bad result of that really bad capital allocation. So that was a really good learning experience for me. And just talking about how important good capital allocation is, because if you look at the ropers of the world, the danners of the world, the antics of the world, the auto zones of the world, these were companies for 20 years that basically grew revenue organically 3, 4, 5 times a year and and yet they were in some cases 10 to 15 baggers because of how intelligent they were about capital allocation. So that was an important learning experience for me, being an industrial analyst and then being applied that not to just industrials as a portfolio manager, but to all other sectors. We found companies like Pfizer, thermo Fisher, rivety, today Lindy, that have those same very, very good capital allocation instincts.
Speaker 4:And I think the last thing I would say you know from my learning or my education was making sure that we understood the value of quantitative research as a complement not a substitute, but a complement for good, fundamental research. So you know, I spent a lot of time with our quantitative team led by Farah Shugie here at the Tier Price Investment Management at the firm I'm at and you know that helps us understand the kind of characteristics we're looking for in companies, right, companies that have. You know, jacob and I talked earlier. But companies that have a little less volatility in their earnings stream low EPS volatility comes. They tend to outperform with lower risk GARB stocks. We know they tend to outperform with lower risk GARB stocks. Outperform value in growth over time with lower risk. High yield bonds, the double B part of the market, leveraged loans, very high risk-based returns, if you will.
Speaker 4:So you know working with quant helps us identify those areas in the market where there's inefficiency, where there's really good risk of returns. So the combination of all those things good fundamental analysis, understanding capital education, looking for margin of safety, uh, and understanding how quant can be something it can be, uh, complementary to good fundamental analysis it's always all really, really helpful in my journey as an investor. And I think the other last thing I would just say is you know, I think we aim, I think you know we aim to get better every year. We learn every year I make mistakes, every year I make a lot of mistakes I shouldn't make, but the key is trying to reduce those mistakes every year. Get better, learn from your mistakes and be better every year as an investor. Right, so you're not going to be day one as an investor, you know an A plus investor, but every year, learn from your mistakes, get better, have a differentiated process, and I think that's, I guess that's, I hope that maybe that's a little more than you were asking for.
Speaker 3:No, that's perfect. That's perfect, absorbing everything, all the information you've been given, just absorbing it and then, you know, regurgitating it right back. It's perfect. Thank you very much, thank you.
Speaker 4:Good.
Speaker 2:Guys, any last questions?
Speaker 3:No, I think I'm good.
Speaker 5:Yeah, no, thank you again, David addressing all those questions. It's nice because I can learn some things from what Calvin asked, some of what Jacob asked and then some of the insight. It's kind of nice doing the podcast, so we have three different perspectives and questions from time to time. So thank you.
Speaker 2:My pleasure, yeah, and as always, david, I mean you leave us speechless.
Speaker 2:It's amazing.
Speaker 2:I think that the three of us, as well as our listeners, are just going to be like digesting all that you have said today.
Speaker 2:And there's a lot of wisdom in what you said, and it's all about looking at things long term, recognizing that there's risk in the short term and diversifying and putting a lot of eggs in a lot of different baskets, but looking at the underlining company and their forecast, and so thank you so much. I think, in this environment, having that type of wisdom is paramount and Kelly knows this as well as Mike, that I'm a huge fan of Warren Buffett, as I know you are as well, and his wisdom is something that can really allow us to not only maximize our long-term potential but, I think to what you alluded to is allows us to be better individuals by learning from our mistakes and always just moving forward in a positive direction. So, from the bottom of our heart, thank you so very much for joining us today and we wish you all the success in the world and we hope that you continue to manage T Rowe Price Capital Appreciation for many, many more years to come, because we all benefit from your talent and your expertise.
Speaker 4:Thank you for the very kind words. I really enjoyed the conversation, as always, so always happy to happy to do this and, uh, again, really enjoyed it.
Speaker 2:thank you, my friend okay, well, that that is all that we have today for the finance roundtable podcast. Thank you for listening and, uh, stay tuned for next month's episode.
Speaker 1:Thank you thank you for listening to Finance Roundtable. Make sure to check out our episodes at wwwfinanceroundtablepodcastcom. We also encourage you to explore wwwjacobgoldcom to find articles, research videos and more from Jacob Gold and Associates Inc. If you have a question for the show, please email Jacob at jacob at jacobgoldcom.
Speaker 2:Jacob Gold and Michael Koschel are financial advisors offering securities and advisory services through Cetera Advisor Networks LLC, doing insurance business in California, as I'll see you next time 55425. Michael's California Insurance License 0K90130. The views depicted in this material are for information purpose only and are not necessarily those of Cetera Advisor Network. They should not be considered specific advice or recommendations for any individual. Neither Cetera Advisor Networks nor any of its representative may give legal or tax advice. Kelvin Gold is a marketing associate. Registered address is 14850 North Scottsdale Road, suite 255, scottsdale, arizona, 85254.