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- [00:03]
Cole Smead
You're listening to A Book With Legs, a podcast presented by Smead Capital Management. At Smead Capital Management, we advise investors who fear stock market failure.
- [00:13]
Bill Smead
You can learn more@smeadcap.com or by calling your financial advisor. Welcome to A Book with Legs podcast. I'm Cole Smead, CEO and Portfolio Manager here at Smead Capital Management. At our firm, we are readers and we believe in the power of books to help shaped informed investors. In this podcast we speak to great authors about their writings. The late, great Charlie Munger prescribed using multiple mental models and analysis. We analyze the work through the lens of business markets and people. Joining me to host this episode with me is our Chairman and Chief Investment Officer, my dad, Bill Smead. Thanks for joining me.
- [00:51]
Cole Smead
Great to be here. Thrilled to be here.
- [00:52]
Bill Smead
Yeah, this will be a lot of fun. So life is a journey and I consider it an honor to talk about this man's path through his relationships, his business and his political beliefs. Joining us for this episode is Wilbur Ross to discuss his recently published book, Risks and Creating Success in Business and Life. He needs no introduction, but for those of you that might not be fully aware of Wilbur, I'll briefly give you some background. Wilbur Ross was the 39th U.S. secretary of Commerce from 2017 to 2021. Prior to his appointment, he was the Chairman and Chief executive officer of W.L. ross & Co. From 2000 to 2017. He for many years ran the bankruptcy restructuring work at MTH Rothschild in York. He received an MBA from Harvard and a Bachelor's degree from Yale. Wilbur, thanks for joining us today.
- [01:39]
Wilbur Ross
Well, thank you for having me on.
- [01:41]
Bill Smead
Yeah, so we like asking this question just because it gives us a sense of the why and the writing. But let's just start out by asking what compelled you to write this story?
- [01:51]
Wilbur Ross
Well, having left government in 2021, I was thinking about what I should do next. And way back when I was at Yale, I had wanted to be a writer, but Yale had a very tough course called Daily Themes to which you had to submit thousand words of fiction every day by 10 o'clock and by the end of the second week I was out of material so I went to Wall street instead. But now, some 60 odd years later, I have lots of material and it's factual material. So it seemed like there was a lot of stuff there and it might make sense to try to do something with it that could actually be useful to other people. So what I've tried to do in the book is take anecdotes that are amusing and draw conclusions from Them that might have impact on other people's career. So that's the purpose of the book.
- [03:05]
Bill Smead
Yeah. And I think you do a wonderful job in the book where you're looking back at parts of your life, but then you're also connecting up those parts with very current events and outcomes of today and either comparing the similarities or contrasting the differences. And I think that's a real forte your book.
- [03:22]
Cole Smead
And I'm a poster child for what he's talking about because as I read the book, I mean, just waves of waves of memories and business situations and people that I'm very familiar with. You know, in your book, celebrities that I was very familiar with, business people, government people. I'm a poster child for what you were trying to accomplish.
- [03:43]
Bill Smead
So one of the first things you talk about in the book is you write about, quote, the ardent jubilation of VE and VJ Day, end quote. And you said, quote, the further I get from that moment, I wonder if the United States will ever display that level of patriotism again. End quote. As I watch my fellow cohort of Americans, Wilbur, or people younger than me, complain about our country, frankly, I can understand that. I can understand your sentiment. But I'd like to explain in your eyes how you see that, because you got to see that firsthand, that patriotism versus maybe the only time I've ever seen something like that would be after 9, 11.
- [04:21]
Wilbur Ross
Well, I think the whole woke thing is distorting the attitudes, particularly of young people. It's making them question whether they should even be proud to be an American, let alone run the risk of laying out their life at risk at a war. So I think that there are some fundamental things going on that are bad, but a second one is our educational system is not really equipping people for the world as it is and the world as it will become, namely, more technological world. Many high schools, they're not even teaching high school math, high school physics, high school chemistry anymore. So the kids are not being prepared for how the way they need to be. And I think that's creating in them a sense of disillusion. They don't feel that they're equipped to deal with today's challenges. And they're breeding very, very fragile personalities. And it's just scary to me that the old American spirit, work hard, take a risk once in a while, do better, do better. Each time that seems to be getting lost with people worrying about hiding in safe rooms. And should I work five days a week or three days a week, Can I get by with a Bare minimum, rather than try to put their best effort forward. So I think all of that wraps to me into a question about fundamental patriotism.
- [06:20]
Bill Smead
And we'll come back to some of that on the academic side.
- [06:23]
Cole Smead
So take us back to your youth. You had some very funny stories from your youth. One stuck out to us. Share how you wrote your first certified check.
- [06:33]
Wilbur Ross
Well, the first job that I had, if that's what you're referring to, was a very odd exposure to corporate mentality. I had just gotten my driver's license in New Jersey at age 17, then became a car parker at Monmouth Park Jockey Club. First morning that the 20 kids, including me, who were set to be parkers, were brought together in the lot by Louis, the lot boss. And Louie said, let me tell you kids how this is going to work. It's inevitable that there will be a lot of accidents, particularly at the end of the day when there's a mad rush to UN park everybody's car. And we know that. But here's the drill. If the patron notices the damage before leaving the track, then the track has to pay and you'll lose a week's pay. But there's a solution to that. If you've damaged the guy's car, you must distract him. And the way you'll distract him is this. If it's a convertible, you'll put the top up as you're bringing the car to him, and the patron will scream at you and say, you idiot, why are you doing that? But he won't notice that the right front headlight is out.
- [08:04]
Bill Smead
Yeah, I love it.
- [08:07]
Wilbur Ross
If it's not a convertible, turn on the radio really loud and turn on the windshield wipers. And again he'll say, what are you doing? It's not raining. Why are you turning on the windshield wipers? And he won't notice that the left rear tail light is out. So here was a member of management in my first job, teaching us how to fleece the customers that were supporting the business.
- [08:37]
Cole Smead
Yeah.
- [08:38]
Bill Smead
When I think. Because I think you told a story on the certified check. You told a story of you and some buddies had gone out drinking one night, and you got caught in a doctor's front yard and. Yeah. You were at another school, I believe, at the time, weren't you?
- [08:52]
Wilbur Ross
Yes. What happened? My roommate at Yale was from a town just outside of Pittsburgh, and so he had a lot of friends at Penn State. We went out for a football weekend, and it got very late and there were lots and lots of beer drunk, and we ended up the campus Police apprehended us about 2 o'clock in the morning for playing soccer on some doctor's lawn. Well, the Penn State kids all had their Penn State IDs, so he took those so that their authorities could deal with them. But Yale didn't have college IDs, so he said to us, well, you're going to have to pay a fine and I'll remit that on Monday to the property owner. And that'll be your punishment for having upset his lawn. Buddy added, it has to be in cash or a certified check. Well, as a 19 year old kid, you don't walk around with certified checks. So my roommate came up with the brilliant solution. He had me write out the check for the $100 and at the bottom of it he put personally certified. And then he wrote his name and he had me do the same on his check and we gave it to the campus policeman. Now, his gamble was that the fellow probably had never seen a certified check, though he probably accepted. Well, he did and the checks cleared. So it wasn't a fraud or anything, but it was my first experience with personally certifying a check.
- [10:41]
Cole Smead
Yeah. So now compare the tomfoolery of college kids which you're helping describe. That used to happen on college campuses. Right.
- [10:51]
Bill Smead
And still does.
- [10:52]
Cole Smead
And still does versus the Israel protest and the fairly consistent vitriol. Vitriol associated with what is supposed to be higher moral ground at these major wonderful educational institutions, but now becoming this battleground for some reason for the mind.
- [11:17]
Wilbur Ross
When I was at Yale, the main riot that we had was in support of the Good Humor man. The Good Humor man had always had a truck right outside the Yale post office and for some reason the Dean banned him from that. I think it was too much congestion or something Anyhow, so we started staging protests, hang banners from the dormitories and all that. Bring the Good Humor man back. So that was the level of discord that we had at the time. It seems like baby stuff compared with what they're doing today. And today the thing that shocked me the most was how, first of all, how antisemitic these activities were, including at the professorial level, a lot of whom were actually Jewish people themselves. So I had trouble sorting through how that all came to be and frankly I conclude that it's due to a lack of information on the part of a lot of the students. For example, a Midwestern university each year does a survey of people 18 to 25 and they ask a whole wide range of questions. And in one of the surveys One of the questions was, who was Andrew Jackson? Now you know he was a controversial president.
- [13:00]
Bill Smead
Sure.
- [13:00]
Wilbur Ross
You know what the most popular answer was? Michael's brother.
- [13:07]
Bill Smead
I love it.
- [13:11]
Wilbur Ross
So there was another question less amusing that said, where was slavery invented? And the most popular answer was in the United States. Now, it's not only thousands of years inaccurate, but it's also thousands of miles inaccurate. But when you have a student body that can't identify prior presidents, doesn't have any idea of the history of as important and as repulsive a phenomenon as slavery, you got real troubles because they don't have a knowledge base on which to come to conclusions. And I think that plus recruitment by Bahamas, Hezbollah, that whole bunch is what led to these riots. I think the kids just didn't know any better.
- [14:10]
Bill Smead
Yeah. When it comes to security markets, Wilbur, that would be wonderful because in a securities market, you want a bunch of idiots to be present and you just to do a few good things. Right. Buffett said a long time ago, the secret to life is weak competition. The problem is in a populace where many cases things are decided by popular votes in congressional districts and other places like that, that's a problem.
- [14:34]
Cole Smead
These are the educated kids, the highly educated kids that you're talking about at these premier schools, and I would add that they probably have never read the Old Testament of the Bible. They don't know the first thing about being a Hebrew. Right. So therefore probably true.
- [14:54]
Bill Smead
Let's pivot. Because you had a Pete Buckner seemed like he had a very formative impression on your life as a young man. Parts of him reminded me of our firm. I mean, when you were talking about, he came in every day and he'd read a. You'd read a Bible verse and then it was like they'd begin talking about, we do a Monday morning open door devotional at our firm. And so we're currently going through Metaxas book on Bonhoeffer, a la you know, in the season of anti Semitism and also reading Proverbs. So Buckner seemed like he had this devoutness to his spirituality and his religion. And at the same time you said he was a very shrewd investor. Did you run into that often or was that very unique to Peter Buckner in your career?
- [15:35]
Wilbur Ross
Well, that was a summer job I had while I was at Yale. And it was very interesting in that since my preceding one was as a car Parker. The whole moral framework, the whole conceptual framework could not have been more different. And so it provided an interesting contrast. And then there was yet another contrast when after graduating from Yale and before going to Harvard Business School, I was a summer trainee at the old J.P. morgan, and that was quite a different experience. There was no Bible reading or anything, but there was a whole lot of emphasis on tradition and on continuity to the extent that of even trivial things. The officers all had roll top mahogany desks with a brass spittoon by the side. Well, very few people then and now really smoke cigars and spit into a spittoon. Yeah, but it was the symbol that their standards, their ideas were simpatico with the way that Morgan was. And that led to one of the funny anecdotes, which was this. At Morgan, all the secretaries were graduates of the seven sister schools, the sister schools to the Ivy League, and they all wore cashmere sweaters and had little strands of white pearls around the neck and they carried a Wall Street Journal under their arm so they didn't look like what you'd normally think of as clerical help. And when Morgan and Guarantee Trust merged, first morning going up in the trust department at the old Guarantee building, there was a Morgan secretary with me and someone who was a guaranteed counterpart could obviously pick her out and said, well, tell me dear, how do you think you'll like it working up here at one forty Broadway? And the Morgan girl, without missing a beat, said, well, how would you feel if you were working at Tiffany's and you were transferred to Boulevard's? Silence in the elevator.
- [18:28]
Bill Smead
Hi, I'm Cole Smead, CEO and Portfolio Manager here at Smead Capital Management and host of this podcast. If you enjoy this podcast, I'd like to invite you to check out smeadcap.com at our firm. We are stock market investors. We advise investors who fear stock market failure with a discipline that has proven success over long periods of time. Learn more about our funds@smeadcap.com past performance is not indicative of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges and expenses. Read and consider it carefully before investing. Smead Funds distributed by UMB Distribution Services LLC not affiliated what was it like.
- [19:12]
Cole Smead
Working at McDonnell & Company in the go go 60s? Do you feel or experienced any parallels to the last five years, the current environment? Doesn't it parallel to the go go 60s?
- [19:26]
Wilbur Ross
Yes, quite a bit. For one thing, that was a period of a lot of technological change. Just as we are experiencing now. The actual items of change are obviously very, very different. But that was the first time that you got to where investors were looking at how Many eyeballs had a company been able to capture with its offering as opposed to more mundane things like revenues and earnings and cash flow. It was the first time that physical attributes of a corporation's activities were being translated big time into stock prices. So McDonnell built a big business. They had a fellow called Sam Steadman, I don't know if you remember him, but he was one of the early people with a theoretical framework for how you evaluate a growth stock. And what it basically involved was doing discounted present values of what he felt would be the long term operating results of the company and bringing that back down to today's value. So you had companies, a lot of which in those days were telecoms, with very little revenue, usually no positive cash flow, but huge amounts of market value. And his formulation would help you differentiate between one that was going to grow at extremely fast rate, trading at maybe 20 times revenues versus one at an even faster rate that might be at 40 times revenues. So he provided a kind of conceptual framework to help investors justify both their absolute decisions and their relative ones. And it's not far from that now. I think AI is a wonderful phenomenon. I think it will be transformative. Whether it will be as rapidly transformative in an as dramatic a way as some of the security prices are betting I think is a very different question. But as to the validity of AI, I don't remember if I put it in the book or not, but I did an experiment myself with AI we were going to one of Henry Kissinger's hundredth birthday parties and Henry had just put out a book on AI a very well written book, along with Eric Schmidt and another co author. So I thought I'd go on AI and ask it to do a poem for Henry's 100th birthday. I figured AI probably wasn't set up to do poetry, so I wanted to see how it would react. And here's what happened. In answer to my first request, it came back out. I'm not very good at poetry. And it wrote a few lines of doggerel five minutes later because I wanted to see if it could evolve and learn. I sent the same question in. This time it came with 10 lines that weren't really poetry, but at least the last words sort of rhyme. So I waited another five minutes this time and I asked the exact same question. This time it came out with 30 lines of iambic pentameter. So in a space of 15 minutes the phenomenon had taught itself to go from probably not having any idea what a poem even was to something that you wouldn't be that embarrassed using.
- [23:41]
Bill Smead
Sure, yeah.
- [23:42]
Cole Smead
Charlie Munger calls it a legitimate development, but he says that whenever a legitimate development happens in a financial euphoria episode, it's like mixing raisins with turds and you end up with turds.
- [23:56]
Wilbur Ross
Well, yeah, I think that's very colorful, but I think there will be a lot of raisins that will also come out of AI. I think the questions are a couple. One is how quickly will it be transformative?
- [24:13]
Bill Smead
Yeah.
- [24:14]
Wilbur Ross
What will be the nature of the transformation and what will be its impact on society? And my one biggest worry about AI is that people barely think about anything anymore. And think about it. Do you know how to get to your friend's house? No. You go on GPS to find out. So I'm worried that when AI is deemed to have the answer to everything, people will just become using it as a crutch and it will answer all their questions.
- [24:53]
Bill Smead
I'm worried I'll forget how to write with my hand. I know that sounds very weird to say, but I type so often that I often tell myself I need to use my hand to write because I could forget how to write, which is a bizarre thing to think about. But to your point, that's effectively the societal problem that we'd beg on. We forget how to do things because we don't do them at all.
- [25:16]
Wilbur Ross
Right. And so I worry about that. My other worry is particularly with the present administration. They want to control everything. And I think the last thing we need is for the US government to take control of AI. God knows where we'll come out with that. God knows what abuses will result from it. So that's the other kind of danger. Maybe at the opposite end of the spectrum.
- [25:51]
Bill Smead
Yeah, yeah.
- [25:52]
Cole Smead
You discussed in the book our lack of a draft and how that has weakened our country. Have you theorized what value a system like Singapore or Israel executes would be to us?
- [26:07]
Wilbur Ross
Well, I was subject to universal military training when I was a youth because back then we did have the draft. And by and large, except during the Vietnam fighting, by and large, people honored the draft. But nowadays when you have people who aren't even sure they like America, they aren't sure they even like being Americans. I wonder what percentage would find it acceptable to be drafted.
- [26:46]
Bill Smead
Sure.
- [26:46]
Wilbur Ross
My other worry is that something approaching 40% of draft age people are not physically qualified for military service because of obesity, because of diabetes, because of all sorts of problems like that, psychological problems. So I wonder a bit about that. My wonder is ameliorated a bit because I don't think boots on the ground are going to be nearly as important in the next big conflict. If heaven help us, there really is another world war. I think we've learned from the Ukrainian and Israeli situations much more likely to be drones and missiles and something that hasn't been used in those two, but probably would be in a big war, and that's outer space. So I think that boots on the ground maybe are less important. But if we neither have a lot of boots on the ground nor have technologically equipped population, then it's unclear to me how we could fight either kind of a war.
- [28:12]
Bill Smead
Sure, I think a lot about. Because we had another question on There's 7 million American men who are not in the labor force for one reason or another. There could be mental, there could be, you know, drugs and alcohol related, as many people would say. But I often think about, you know, without a purpose, why is there hope? And on a marginal basis, I was just in Singapore. They have to do two years of service as a young man. Man in Singapore. And therefore I often ask the question is the fact that we don't have a common experience a real danger? In other words, if the plumber and I have both served for a year or two years in bas military service, we have far more in common as a society at that point than I would by going to college and him going to a trade school.
- [28:59]
Wilbur Ross
Well, remember, in the old days, it was often the case that if someone was a juvenile offender, the judge would give them an alternative of some sort of prison term or service in the military. And it straightened out quite a few kids because of the extreme discipline in military versus civilian life. So I think there is some utility to serving in the military, but there are probably other ways that people could serve their country as well.
- [29:38]
Bill Smead
Sure. And we'll come, we'll come back to that idea because you have a brilliant theory. I love your theory that we're going to come back to on service and compensation. But can you, can you explain how important George Dariet was to your experience at Harvard? Just so you know, Wilbur, I loved your storytelling around him. I went out and through your Harvard stories, I wondered what does an Hermes briefcase cost? Because you kept bringing this up and the answer is $11,000 on their website. Or you can buy a used one for, I think $2,800 right now. So I, I was studying your book very intently. But teach us the kind of things that George taught you about people that you experienced and also settings that were very unique that he drew you into.
- [30:20]
Wilbur Ross
Yeah, well, the Hermes briefcase where that came in was. I went to the business school directly from Yale. And in those days, just as is true now, many people spent some years in working before going to graduate school. So the fellow standing on line in front of me literally had an Hermes briefcase with his initials on it in little gold letters. And he was wearing a three piece suit. I was a typical college kid wearing chinos, penny loafers and a Shetland sweater. And at first I was a little terrified. I thought, gee, if this is what the competition here is going to be like, this is going to be a little bit tough. But then a better thought entered my mind, which was, surely I can learn more from a classmate like him who has had some experience, than one like myself who had only had summer jobs and only a couple of which amounted to anything substantive.
- [31:36]
Cole Smead
He described my first interview at E.F. hutton in 1980. I showed up looking like a college kid, not like a business person.
- [31:45]
Bill Smead
Yeah.
- [31:46]
Wilbur Ross
So Durio, who was a remarkable man, he had been a private in the French army in World War I and became a general in the American army in World War II. Then along the way he became a very well known professor at Harvard Business School and helped found one of the major European business schools as well. And he was a real mentor to me in many, many, many ways. And he had a whole bunch of philosophical ideas ranging from fairly trivial things like your shoes should always be shined to more substantive ones. Such as he hated the idea of people reading speeches. And he especially hated the idea of people posting on the wall behind them what they were going to be talking about word by word. His view was, if you know your material, you ought to be able to discuss it at most with a few little notes, certainly not with a prepared speech or a big document behind you. And he, I think, was right in many regards on that subject. But he had some more substantive things even in that one was when you're doing due diligence on a company, there's only one stupid question. And that's the question you forgot to ask. Because that's the topic that could very well come and bite you after you make the investment.
- [33:41]
Bill Smead
Sure.
- [33:42]
Cole Smead
Yeah.
- [33:42]
Wilbur Ross
The idea of having a really inquisitive state of mind and verifying everything. Because his other thing was don't take anything for granted, don't make any assumptions. Verify, verify, verify.
- [33:59]
Bill Smead
Sure.
- [34:00]
Wilbur Ross
And that's good advice. It was sound advice, and it's something I've tried to follow throughout life.
- [34:10]
Bill Smead
Sure.
- [34:10]
Cole Smead
Wilbur, you've lived in some interesting places I trained in New York in 1980. They put us up at the Barbizon Plaza, next to the Plaza, because the Brussels D. Lambert bank owned 20% of the hotel. And so here's this kid that's never been in New York City before. You lived at the Dakota apartment building on 72nd in Central Park West. Who are your fellow residents there?
- [34:35]
Wilbur Ross
Well, there were mostly show business people or other celebrities. Mona Faisal, the Arab princess, was one, and John Lennon was one. He and Yoko lived there for quite a while until he was horribly assassinated. Leonard Bernstein was there. Nureyev was there. Gilderotner was there. There were amazing collection of mostly creative people. Loren Bacall was there. I was about the only Wall street person there at the time and had the misfortune of being the board president the night when Lennon was shot. And that was obviously a horrible experience. He had been a wonderful neighbor. And the Dakota, unlike most big, fancy apartment buildings, really had a spirit, as though you were living in a small town in some remote area. For example, the first Wednesday of every October, we had. In the big courtyard, we had what amounted to a country fair. Each family would bring their favorite preparation of food. The Lennons naturally, brought macrobiotic food, but people had everything. Apple pie and hot dogs and some more elaborate things as well. And the Lenin and Yoko participated in that. They participated in another Dakota tradition, which was we always had the Brooklyn Children's Choir come and sing Christmas carols in each of our entryways and then go up to Bernstein's apartment and they would do some more caroling while accompanied by him personally on the piano. So it was quite a thrill for these kids, most of whom were pretty poor and amazing talents, but people that had never expected to see the likes of a Leonard Bernstein or a building like the Dakota.
- [37:02]
Bill Smead
Sure, I was just in New York in June with my kids, and we went to Strawberry Fields there at Central park, which is obviously, I think that's the most popular tourist attraction in the park, is going to Strawberry Fields, where they have the memorial to John.
- [37:15]
Wilbur Ross
Well, that's right. And the way that came about after the assassination, the crowd started to form outside the building. So the police put up big barriers and they made the building issue photo IDs to the residents. Nobody was allowed in except a resident. You couldn't have anybody renovating an apartment. You couldn't have anybody making a food delivery, anything like that. But the crowds kept building. Then by the second day, since the TV was always there, you had people picketing who had nothing to do with Lenin. They were the Save the Whale People. Killed the Whale People.
- [38:04]
Bill Smead
The special interest group. Yeah, yeah.
- [38:06]
Wilbur Ross
And so we concluded that some sort of cathartic event was needed to signal to the people, many of whom hadn't even been born when Lenin made his last record, but they adored him. So one of the fellows on the board knew David Geffen, and Geffen was a very good friend of Yoko Ono's. So they got Dick Geffen to talk to her. And even though she was totally grief stricken, he explained that we really needed some sort of an event to signal that the morning should go away. And he was the one who came up with Strawberry Fields because he knew that John and Yoko spent a lot of time there and had it as a real quality time place. And it worked. Once there was the ceremony in Strawberry Field, the crowds dissipated. Now they do come back every year on his birthday, and they do come back every year on the anniversary of the slaying. But at least they're not there 24 7.
- [39:26]
Bill Smead
We hope you're enjoying the podcast. You know, we work hard putting together this show, but we work even harder for our investors at Smead Capital Management. At smead, we believe in disciplined investing, which is why the SMEAD funds have a proven track record of long term outperformance. If you're an investor who fears stock market failure like I do and want to invest in wonderful companies to build wealth, we invite you to visit smeadcap.com Past performance is not indicated of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges and expenses. Read and consider it carefully before investing. SMEAD funds distributed by UMB Distribution Services llc. Not affiliated.
- [40:10]
Cole Smead
Fred Joseph was in your class at Harvard Business School. Yes, and I've got a quick story on Fred Joseph at our major incentive trip at Carlsbad.
- [40:22]
Bill Smead
What year was this?
- [40:23]
Cole Smead
This was the year that they. 89. They announced they were going to get out of the stock brokerage business. So we're at this event, he comes up and tells everybody that Drexel Burnham will never get out of the retail brokerage business. And about 15 minutes later, we had a 5.3 earthquake. The room literally shook. And three weeks later, Fred Joseph announced that they were getting out of the retail brokerage business. In other words, God like, told God, God knew he was lying and shook the room. And I just poured all my energy in trying to keep our office alive and keep up camaraderie for many people that were with me. And that was My first job, I spent nine years there. How do you look at Drexel now or think about it now and talk about your work with the creditors? I was in that bankruptcy line with a $203,000 subordinated note. So I appreciate whatever you got out of that for me.
- [41:27]
Wilbur Ross
Well, it was a unique bankruptcy in that generally what you can do in a bankruptcy is convert some debt to equity, fix the balance sheet, and then let the company, on a reorganized, restructured basis, reemerge and hopefully go on to a successful life. But it was clear that that was not really feasible with Drexel because its balance sheet, as you remember, was largely high yield bonds. And that market had collapsed. And in many of the issues that it owned, Drexel was the main market maker. So their bids collapsed. And what few bids there were not at realistic levels. So what was needed was not to try to rehabilitate Drexel and recreate it. Because remember, a year and a half before that, Drexel was the most profitable firm on Wall Street. It had earned over $500 million after taxes. But when it imploded because of the collapse of the junk bond market, the balance sheet was extremely negative and was extremely complex because of the range of credit instruments that Drexel itself had issued. So it became clear what we had to do was set up some sort of parallel entity with new disassociated top management to take the assets out of the bankruptcy, let them mature over the next few years and hopefully evolve back into a fair recovery for the unsecured creditors. And that's exactly what happened.
- [43:40]
Cole Smead
I've been paid back, Wilbur, many times over for the experience of that. Seemed like a huge amount of money to me at the time. But the risk averse nature of our investment discipline and our discipline was helped form by sitting in the back of that line. That was a great experience for a young man to know that you don't want to sit in those lines. You might want to be Wilbur and run a company that sorts those kind of things out profitably, but you don't want to be the person that's in the back of that line.
- [44:15]
Bill Smead
Yeah, especially when you paid equity prices for debentures.
- [44:18]
Cole Smead
Well, book value, Bob Linton. Let's see. Before they bought Kidder Peabody, Jack Welch offered to buy Drexel at three times book right before he bought Kidder Peabody.
- [44:31]
Wilbur Ross
Wow.
- [44:32]
Bill Smead
Speaking of bankruptcy, Wilbur, that also ended up becoming your first interaction with Donald Trump from a business perspective with the Taj Mahal bankruptcy. Reading how you wrote about the story. I always Think a lot about incentive structures. Your incentive structures in that bankruptcy aligned around that you needed Donald and Donald needed you. Is that a fair way of looking at that?
- [44:55]
Wilbur Ross
That's true. Because as I reported, there was a tremendous affection that his customers, his gaming customers had for him. He was like a symbol to them. And even though the bonds that he issued, which I was representing, never made the first interest payment before defaulting, so the bond holders were very determined to get rid of him right in the early stages. But I concluded, and Carl Icahn concluded, Carl, after the bond's collapse, became the biggest holder. We both concluded that it was worth more with the Persona of Donald Trump in place and the name in place than it would have been otherwise. And so we spent a lot of time convincing the bondholders that even though they were naturally quite upset and even though I had had, as you remember, a very big public fight with him over the recoveries for the holders, nonetheless, both Carl and I concluded that underneath all the bravado and all the showmanship, that there was some really good substance to him. And that's why both Carl and I were very early endorsers of Trump in the 2016 campaign. Because when you go toe to toe with someone under those stressful circumstances, you get to know what they're made of. We concluded he was, underneath everything made of pretty good stuff.
- [46:55]
Bill Smead
Sure. I was going to pivot. How strange is it to look into Putin's eyes? When you talked about this, it remind me there's a famous clip out there of George Bush talking about his first time meeting with Putin. And you have a very similar account to what George Bush said about looking into his eyes. So I wanted you to have the chance to mention that. But also, is he the quickest way to lose a Super bowl ring, too?
- [47:21]
Wilbur Ross
Right. Well, the Putin I met because Bill Clinton, when he was president, appointed me to the board of the U.S. russia Investment Fund, which was helping Russian companies privatize, giving them some capital and some advice. And at that time, Putin was the deputy mayor of St. Petersburg. So I was at a reception, met him, and the only reason the recollection of the deputy mayor of St. Petersburg struck with me is that he was the single most terrifying appearance of anybody I have ever met. I had the feeling, even though, as I say, it was just a cocktail party, I had the feeling he was looking right through your head. He could be. He came on like the villain in any James Bond movie. And when I met him later in life, in connection with Donald Trump and bilateral negotiations and such, as that, it didn't change my mind. I found him quite frightening. And I think that he was, in a weird way, the most successful leader of a country. And what I mean is this. Russia is by no rational means a world power. Its economy is barely the size of Italy, and it's not quite as big as the state of California. So you wouldn't normally think of Italy as a world power, but what Putin has been able to do is to convince everybody that it really is a world power and it's treated as such. And the story about the ring was a very contemporary one. Bob Kraft, as you know, owns the football team in Boston, and he was on a trade mission to Moscow, and the State Department seated him next to Putin. And Bob was wearing his world championship ring, as he always does. And it's quite an impressive ring, very heavy ring. Putin admired the ring and asked Bob if he could try it on. So Bob took the ring off, gave it to Putin. Turned out it was a perfect fit. So Putin then took the ring and put it in his pocket and kept it. So Bob was horrified that he had lost his championship ring, but when he protested to the State Department, they said, look, you can afford it. It's probably a $30,000 ring. We're not going to have a big ketuffle with Putin over your championship ring.
- [50:39]
Bill Smead
Sure.
- [50:40]
Wilbur Ross
So it was a sample of that old saying, power corrupts and absolute power corrupts absolutely.
- [50:49]
Bill Smead
Yeah. It's so funny.
- [50:50]
Cole Smead
Yeah. Explain what you saw in new regulations with the consumer, the cfpb, when you bought Bank United.
- [51:00]
Wilbur Ross
Yes. Bank United was a Florida bank that failed during the subprime financial crisis. So we formed a syndicate. It was ourselves, Blackstone, Carlisle and Centerbridge. And we bid and won in the competitive auction held by the fdic. The bank had made the worst kind of loans, which were very high. 95% loan to value loans, non recourse to non resident Latin Americans buying a second home or just a place to go to. So it was the worst kind of lending practice, and it failed. But we brought a new CEO, put in a lot of new capital, and 18 months later, it went public in the largest bank IPO in the history of the country. So we were very proud of it. But right around that time, in came the Consumer Protection Bureau, Elizabeth Warren's gift to the financial community. And they showed up to have their first meeting with us. And it was about eight of them, of whom half announced themselves as being enforcement people, the other half being analysts. We said, well, why are there enforcement people on the very first visit you've ever made to the institution. One of the enforcement guys said, well, you banks have gotten away with murder. It's over. You better get used to a lot of enforcement people coming around.
- [52:58]
Bill Smead
Sounds more like the mafia than it does government regulations.
- [53:01]
Wilbur Ross
Very threatening. So then they asked for, where is your complaint book? All banks quite properly are required to keep a written complaint book. So we brought ours out, they looked at it and one of them said, well, where are your credit card complaints? We said, we're not a big enough bank to be a self issuer of credit cards, so we don't issue credit cards, therefore we have no complaints. One of them screamed out, you mean you're denying your clients the use of credit cards?
- [53:43]
Bill Smead
That's so funny. I love that story. It's like no matter what you said, it was damned heads, damned tails.
- [53:50]
Cole Smead
Wilbur, someday when the tech stocks go in the tank, we are completely convinced she's going to form a group called Occupy Palo Alto. That's going to be the next thing. Right. When their stocks go in the tank.
- [54:00]
Bill Smead
Yeah. So really quickly, because you tell the story of Trump and your discussions with Merkel around things like tariffs tied to the trade, the unfair trade that we give Europe into our markets and we don't get access to theirs. By the way, again, why your book is so good is it's the same issue that's happening in this political season and being talked about. We watched Trump's interview on Bloomberg the other day and he directly talked about how they could sell to us, but we can't sell to them. But also, the other thing you brought up in the book was the inequity of how we fund NATO and how they don't ultimately fund NATO. And she said, well, it's not very popular in this current political season. You have to wait till it was done and then you tell a story that you guys came back to them after that and said, okay, great, you won the election, let's get funding for NATO. And they said, well, what about 2030 is the European bet that Americans are just so distracted and ultimately the government isn't very, to your point, accountable for what they choose to do, that it'll ultimately never get dealt with. Is that their kind of ultimate gamble, for quote, unquote, our allies? You know what I mean?
- [55:17]
Wilbur Ross
Well, even now with what's going on in Ukraine and elsewhere in the world, not all of European nations are paying even their 2%.
- [55:29]
Bill Smead
Sure.
- [55:29]
Wilbur Ross
So even in the face of what could be a very serious threat, because I think if Putin got Ukraine, he would probably then take Moldovia and start marching all the way across Europe. So it's shocking that even now wealthy countries in Europe are not making even the 2%. We're way above 2% of our budget on defense. Then we should be, but so should they. And it's an abuse just as the world trade. I wrote an editorial on the Hill publication a couple of days ago about the World Trade Organization, and that's the source of a lot of abuses. If you're a World Trade Organization member and there are 166 of them, the main objective of 165 of them is to sell more to the United States.
- [56:36]
Bill Smead
Sure. It's what the organization was kind of built for. And by the way, Wilbur, we came from Seattle. That's where we were located for many years up until 2020. And so I'll never forget as a kid when WTO had their big event there in Seattle in the late 1990s. They shut down the city for days.
- [56:52]
Cole Smead
The anarchists attacked me when I was trying to get out of my building when they were there.
- [56:56]
Bill Smead
Yeah.
- [56:56]
Cole Smead
And.
- [56:56]
Bill Smead
But the funny thing is the anarchists in some cases were right in that we were giving access up to our markets without asking for anything in return.
- [57:05]
Wilbur Ross
Well, it's true. And part of the reason is that the World Trade, like most multinational organizations, is one country, one vote.
- [57:17]
Bill Smead
Sure.
- [57:18]
Wilbur Ross
So it's stacked 165 to 1 against us. And that shows itself in many ways. We are the only country against which the World Trade Organization has ultimately ruled that a rule made by that country or regulation was a violation of the WTO. And in our case, we constitute 25% of all the charges against companies. Namely, we're the target of the charges. And in 90% of the cases WTO has ruled against us.
- [58:03]
Bill Smead
Sure.
- [58:03]
Wilbur Ross
And they don't even follow their own rules. Their own rules say that the appellate decisions for dispute resolution must be handed down within 90 days. Well, they frequently take multiple years. The dispute between Boeing and Airbus lasted 17 years. But what kind of an adjudication system is that when it takes 17 years? I mean, most of the people involved in the original offense aren't even working anymore.
- [58:41]
Bill Smead
Agree. And I remember the Softwood lumber dispute that we obviously have with Canada is an ongoing issue. When you wrote about that in the book. Just so you know, Wilbur, we've. We own West Fraser, the lumber company in our international. And so I'll never forget that happening because as soon as that was announced, their stock starts getting hit. And what happened was lumber prices. You know, in like in physics, for every action there's an equal and an opposite reaction. So the stocks got hit and the lumber price took off. And I like lumber disputes. We can make a lot of money in lumber disputes in public equity markets. So I'm very thankful for that happening. Did you want to ask.
- [59:21]
Cole Smead
Yeah, so. So I've worked on the west coast in the investment business my whole career. And so it's early to bed, early to rise on the West Coast. What was it like going to Washington D.C. does Washington D.C. start about 9:00 in the morning?
- [59:38]
Wilbur Ross
No. Commerce for me was about an 18 or 19 hour a day job because it frequently started as early as 6:30 in the morning. President Trump doesn't need very much sleep at all. And if there was something on Maria Bartiromo or some other early morning TV that he didn't like, we would usually get a call at 6:30 and I was supposed to fix it. So that was usually the start of the day. And then at the end of the day most days of the week you had to appear at some other ceremony, give a speech or a toast or what have you. So it was a very, very long day. But that was only. That was perhaps the most negative part. The most positive part is that the pomp and ceremony is highly infectious and it's hard to get it out of your system.
- [60:51]
Bill Smead
Sure.
- [60:51]
Wilbur Ross
So that's sort of the plus side. But it's a peculiar place in that nobody makes any money and so titles are the currency instead of money.
- [61:06]
Bill Smead
Right, right. And the shorter your title is, the more powerful you are.
- [61:10]
Wilbur Ross
Yes. President, Very short title. Third assistant to the fourth Deputy to the Under Secretary of State. Very long title. Yeah, not much power, but it's the lifeblood of the person who holds it because that's what determines does he get invited to a dinner party and if so, where does he sit and all that. So heaven help you if you get the title wrong.
- [61:41]
Bill Smead
Hey, I want to give a big shout out to everyone who's been working so hard on the show. You know, we recently hit the top 10 investing podcasts on Apple Podcasts and even number one in the business category in several countries. As you may know, this show is brought to you by Smead Capital Management. Smead Capital Management understands how frustrating and illogical the stock market can be. If you are searching for funds with a proven track record, give the Smead funds a look. Or better yet, reach out@smeadcap.com and don't forget to mention that you're fan of the podcast. Past performance is not indicative of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges and expenses. Read and consider it carefully before investing. SMEAD funds distributed by UMB Distribution Services, llc. Not affiliated. You touched on one of my favorite theories, and I'm glad you're saying this because I firmly believe it. Okay. And I think this is really the problem of national politics or politics in general. Okay. And I'll use it. I'll use an anecdotal example. I have a friend, Wilbur, that ran in the primary. Okay. Makes very good money on Wall street, but lives here in Arizona after working for years in New York. And so he decides to run. I turned to his wife and I said, listen, this is economic suicide that your husband's committing. And she said, you really think so? I said, yeah, this is absolutely crazy. Well, because we effectively pay so low for high ranking offices, I would argue that we attract perverse incentives. We attract under quality a low quality candidate to politics because all the really successful, dynamic people end up in business and only late in their careers do they ever end up in politics. Maybe when they don't have the same enthusiasm and energy like we're watching with Junkin, for example, in Virginia later in his career.
- [63:40]
Cole Smead
Yeah, and I argue that difference in incentives. The talented people in my age, I'm 66, the people between 60 and 70 right now, talented people did not go into government service or politics because we're all making so damn much money the last four years.
- [63:57]
Bill Smead
Do you think the compensation is one of the bigger issues ultimately?
- [64:02]
Wilbur Ross
Well, it is and it results in you can recruit older people and you can recruit people in their 20s because for the young people it's a resume builder. But try to recruit people 45 or 50 years old when they're more or less at the peak of their probable earnings cycle, it's very hard. They don't want to give up a good job for what might be a very temporary role in government and disrupt their whole career. But the pay structure leads also in a strange way to the partisanship that is so evident in Washington there in the old days, congressional members used to bring their families to Washington. The kids went to school there. They were there seven days a week. And so there was a lot of inter party fraternalization. Now the families stay in the district. The congresspeople are only there a couple days a week. There's no socializing. So that's one problem. But the Bigger one is so many districts have been gerrymandered that there are very few that aren't either safe Republican or safe Democrat. And that means that it's only the swing districts where a moderate could possibly be nominated because the Republican Party runs to the right in its primaries and the Democrat Party runs to the left. So you don't have moderates in the general election in most parts of the country. And that inevitably breeds this terrible partisanship that beflicks us.
- [66:04]
Bill Smead
Well, yeah. And you point out that the real election is the primary. And I'm using my friend, I got to say that up close, where I thought he was a shoe in to win his primary. And the answer is no. You got to appeal to a very select group of people, very close primary people, and then you got to nearly tie. Yeah, you got it. You got to flip around what you're saying to get to a more independent audience. So really quick take, Wilbur, because we're short. We're short on our time. Really quick take would be, do you believe inflation's at bay? For example, we talk a lot about government spending. It's massive relative on a budget basis and monetized. I think you've heard about, you've talked about that. But this kind of reminds me of the Nifty 50 in 1972 where inflation ebbed and then took off again later in the 70s. Do you have any thoughts on that or a quick take on where you think we're at in inflation, for example?
- [66:56]
Wilbur Ross
Yeah, I think the only way that we're going to get out of inflation is by changing both the amount of deficit, hopefully reducing it some, but more importantly, deploying it to productive use. Sure, the social welfare programs are very well intended and undoubtedly do some good, but they put the money into the hands of people with a very high propensity to consume, so it gets spent well. When you create more demand and you've done nothing about creating more supply, only one thing comes out, and that's inflation. So I think the direction of government spending is really important. The other thing about that is when you put more and more regulations in place, they're inherently inflationary because they raise the cost of doing business. When Trump came to office, he put a rule, we had to cancel two regulations or rules for each new one we wanted to put in. And we actually, in our case, canceled eight for one. But when we were coming toward the end of our administration, the major thing that business people congratulated us for wasn't even the tax reduction in some cases was the Tariffs, but universally was reduction in overregulation. And unfortunately, this administration, every day you pick up the paper, there's some new rules, some new regulation, some new executive order. Well, it all costs money. And that in and of itself contributes to the inflation.
- [69:08]
Bill Smead
Sure. Where can our listeners follow you going forward? You mentioned you're still, you know, obviously out there writing. You mentioned your article on the Hill. You know, where do you. Where do you attend to traffic in the most that people can follow beyond your book?
- [69:22]
Wilbur Ross
Well, we're traveling all around the country on the book tour and it's been a fascinating thing to do that because not since the 2016 campaign have I been that directly involved with Q and A with people all over the country. But it's been therefore a very interesting experience to encounter that. It's also been interesting in that the book has been pretty well received. For the first three weeks it was on the USA Today and on the Publishers Weekly bestseller list. But it never got put on the New York Times list. Even though the first week my book was out, the three books that they put on their list for the first time, no one of them sold a third as many copies. This book just that they don't like the ideology.
- [70:28]
Bill Smead
Yeah. No, that makes sense. Yeah. Wilbur, this has been tons of fun. We really appreciate your time.
- [70:35]
Cole Smead
We cannot thank you enough.
- [70:36]
Bill Smead
There's a lot that we didn't talk about just so our audience. And you know, Wilbur as well, there's great stuff. Your run in with Harold Ham's ex wife on the apartment that you sold to her. You know, we had a run in with Ham. We were his large minority investor before he bought out Continental. And so we, we got a chance to end up in his book, which I felt honored for reasons that he wanted to complain about us. So there was just so many parallels between Drexel and. And that situation that I really, really enjoyed.
- [71:02]
Cole Smead
So I highly recommend this book, too.
- [71:04]
Bill Smead
Do you have any thought? I was going to say general thoughts.
- [71:06]
Cole Smead
Just whether it's from. If you're an economic history buff, if you just like history. If you've always wondered how New York works and how the investment industry works, I just think on like four or five different levels. Wilbur's book is truly a masterpiece, in my opinion.
- [71:26]
Bill Smead
Yeah. And Wilbur, your book makes me think a lot of the opportunities that come in a career and come from an unknown future. I mean, you're writing this looking back, but as a young man, you know, at J.P. morgan, at 1 point, you could not have gone to someone and predicted what you've got to do in your life and the people you've got to interact with, the businesses you've got to work with and conduct what you've done. It doesn't seem like a kid from North Bergen would have known that is kind of what I'm getting at. Our listeners should go out and buy a copy of Risks in Return today to think about all that life brings with it in all the spheres that we each interact with. If you enjoy this podcast, go to Apple, Spotify, YouTube or wherever you listen to A Book with Legs, give us review, tell others about the books and great authors like Wilbur Ross that we have the opportunity to understand and study the world with and through for our tribe. If you have a great book you'd like to Recommend email podcast meadcap.com that's podcast meadcap.com you can also send us your suggestions on X, our handle ismeadcap. Thank you for joining us for A Book with Legs podcast. We look forward to the next episode.
- [72:30]
Cole Smead
Thank you for listening to A Book with Legs, a podcast brought to you by Smead Capital Management. The material provided in this podcast is for informational use only and should not be construed as investment advice. You can learn more about Smead Capital Management and its products@smeadcap.com or by calling your financial advisor.