← Value Investing with Legends
Value Investing with Legends
Matthew Fine - Buying Gray Clouds and Building Resilient Portfolios
00:59:16
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- [00:02]
A
Welcome to a new episode of the Value Investing with Lanes podcast. My name is Stano Santos. I'm the Robert Hellbrun professor of Asset Management and Finance at Columbia Business School and the faculty director at the Hellbrun center for Graham and Dodd Investing. I'm here with my co host, Michael Mabusan, an adjunct professor at Columbia Business School and also a faculty member at the Hellbrunn Center. Michael, how are you?
- [00:25]
B
I'm doing great, Tano. We're recording this toward the end of our semester, which is always a bittersweet sensation, but at least for our group, it's been a terrific semester. Great students, wonderful guests, so lots of fun. So it's again, bittersweet as usual.
- [00:40]
A
I know that your students are now submitting their stock pitches, and I know because they send them to me. There's some good stuff. So I just got one on Spotify that looks to me like a lot of fun by my ta, Roberto, who's a great guy. So, yeah, no, we're getting to the end and my students are working on their stock pictures for the 5x5x5 that's on Rousseau student portfolio. So it should be a lot of fun to spend a weekend reading their cases. And that's it for the academic year. Amazing how fast these things go by. But it was a good year.
- [01:14]
C
No, Michael, great year.
- [01:15]
B
Fabulous year.
- [01:17]
A
So we have a great episode today. I had the opportunity to interview our guest in the past SEMA Conference, which is the Columbia Student Investment Management association conference that we organize every year, someday in February. And it was a wonderful conversation. A bit short, so we wanted to have that conversation in the podcast. It was wonderful for many reasons, but in particular because it indulged my curiosity regarding investing in Europe, in Japan, in emerging markets, in particular, in European banks, no less. I was very keen on understanding European banking during the Eurozone banking crisis. And it was rewarding to hear our guest speak so eloquently and so clearly about them. In addition, he comes from one of those legendary names in value investing, so it is always fun to connect with those great names and reflect a little bit in the great history behind value investing. So, Matthew Fine of Third Avenue Management, welcome to the Value Investing with the Legends podcast.
- [02:21]
C
Thank you, Michael. Thank you for having me. This is great.
- [02:23]
A
We're delighted to have you here. So Michael, as I was saying, is the portfolio manager of the 3rd Avenue Valley Strategy portfolios, including the 3rd Avenue Value Fund and related separately managed accounts. He also leads the 3rd Avenue international value Strategy. He's a principal of the firm and serves as a member of the Third Avenue's management committee. He joined Third Avenue in 2000 and began working with international team to identify investment opportunities in the wake of the argentine crisis in 2001. I cannot think of anything more fun than that. I'm already jealous thinking about that part of our conversation. He was promoted to Senior research analyst in 2008, became the PM of the International Value Fund in 2014, and assume responsibilities for the Third Avenue Value Fund in 2017. So a remarkable level of experience. He holds a BA in economics from Hamilton College and is a member of the Economic Club of New York. So a lot of fun conversations. I'm sure he's been a witness to there. So welcome Matt to the Value Investing Reliance podcast.
- [03:24]
C
Thank you, Tyo.
- [03:26]
A
So we always start a little bit with the beginning of your career. So why don't you tell us about your early life, where do you grow up, whether there's any investment background in your family and a little bit what took you to this life in investment management?
- [03:39]
C
Yeah, so I grew up in Hartford, Connecticut and I had no connection whatsoever, nor did my family to financial markets or investing. I would say that I was an entrepreneurial kid. I always had some kind of entrepreneurial scheme going on and I came from an entrepreneurial family, but not at all related to investing. And I really got into economics in high school and decided that I wanted to pursue an economics degree and I did do that, as you mentioned at Hamilton College. But I realized in the process that it wasn't so much economics that I was interested in as much as investing. And keep in mind or be aware that I graduated from Hamilton in 1999, which meant that I was in the late 1990s in the middle of a rip roaring bull market in US stocks, which of course helped pique my interest in investing. I just wanted to become an investor, although I had no idea what that meant. I had no idea what kind of investor I wanted to be or how to go about it. But it was the peak of the dot com bubble. So in needing a job and wanting to become an investor, I started interviewing and I weaseled my way into an interview at 3rd Avenue. It was even then very difficult to get a buy side job for a recent undergraduate. And after going to the interview at 3rd Avenue, I went uptown to the apartment I was staying in at the time, my friend's apartment, his parents apartment, and his father became aware of where I had been that day at the interview, his father being a very seasoned investor, experienced investor in his own right, pulled me aside and said, if those people, Marty Whitman's firm is gracious enough to offer you a job, you'd be an idiot not to take it.
- [05:18]
A
But wait, did you know. I didn't ask you this the last time. Matt, do you know about 3rd Avenue? Do you know about the great name or. Nothing. You just bump into it without knowing.
- [05:27]
C
Only in preparation for the interview.
- [05:29]
A
I see.
- [05:30]
C
And I had done some reading so that I wouldn't be completely a blank slate walking into the interview, but very, very little. I mean, it's hard to overstate how unsophisticated I was about investing at the time. I just wanted to be an investor, whatever that meant to me. I can't even remember what that meant to me, to be honest with you.
- [05:45]
B
So, Matt, you're now associated with the Value Investing School, but can you tell us about the first stock you actually bought and what happened to that stock?
- [05:55]
C
The best questions are the ones with embarrassing answers. I would say. I don't remember which was first, but I remember Cisco and JDS Uniface. I bought them because they were involved in building the Internet. I bought them because the stocks had gone up a lot and because the people on CNBC were super excited about them. And, you know, I bought them and they continued to go up, actually. And I was fortunate in the sense that I did get that job at 3rd Avenue, which meant that I needed to move to New York. I needed furniture for my first apartment. I had to sell my stocks to get the furniture. And it turned out the couch was probably a better store of value than the stocks would have been. So I was lucky to take an exit there.
- [06:35]
A
People forget how special those years in the late 90s were. I was a young assistant professor at the University of Chicago. And the faculty. You're going to be jealous about these, Michael. The faculty lounge conversations where big fights between Gene Fama and Richard Thaler about whether what we were going through was or not a bubble. Imagine two giants of that magnitude talking about that. So let's talk then, Matt, a little bit about 3rd Avenue. And I think it's appropriate to start by paying a little bit of homage to that great name, Marty Wiman, and his deep value approach. Why don't you tell us a little bit about him and 3rd Avenue and the 3rd Avenue that you encounter when you got that job, which you eventually got. So why don't you tell us a little bit about that.
- [07:25]
C
Marty was from a school of value investing when value investors used to be called things like vulture investors and Grave Dancers. And I would put people like Sam Zell, Michael Price, a young Seth Klarman into that school of value investing. And Marty's formative years of his professional career were in the distressed investing and restructuring world. In the 60s and 70s, when we were faced with rapidly rising inflation, rapidly rising interest rates, capital would become incredibly scarce intermittently. And he developed a couple of very keen appreciations, one of which was the importance of financial wherewithal of the businesses in which you invest. And the other is the gains that can be reaped by investors who are willing to invest in situations where other people are scared. Capital is fleeing. The near term outlook is challenging. So while we don't do credit investing anymore, we're not in the distress business. Our equity strategy comes directly from that lineage, which is that we today describe it as buying gray clouds and selling sunshine. We deliberately seek out areas where other investors have become pessimistic and valuations are reflective of that pessimism.
- [08:43]
A
You used that line in our first conversation and I used it in my classes. I told you I would, that I'm very good at stealing great lines. I really like it. Can I go back a little bit to this issue of credit? You know, because I think I told you when we were preparing either this interview or the previous one, that we developed the credit track here at the Helgrund Center. I think one of the reasons is because I always thought that the credit mindset is kind of an appropriate mindset for the value investor. Do you agree with that? Basically approach companies when you look at them thinking about that worst case scenario that is really going to impair your capital, how do you approach that?
- [09:21]
C
Yeah, definitely think that applies to the type of investing we do. And I think it's very important in the sense that credit investors have a habit of thinking about the downside first, for obvious reasons, because credit investing is a different kind of asymmetry than the negative kind. So thinking about the downside first, thinking about the protection, the asset protection in a business relative to your. The credit instrument that you've bought, thinking about the permanent potential for permanent impairment of your capital. Those are much more creditor mentalities than they are common equity investing mentalities, but they're very important in equity investing also.
- [09:57]
A
Yeah, exactly. I couldn't agree more.
- [09:59]
B
So, Matt, you as an organization say you're generally benchmark agnostic with relatively high concentration and high active share, which is a measure of difference from the benchmark. How hard is that to do in these days, especially with clients who tend to want to people in boxes.
- [10:15]
C
The investment management industry is difficult. I just think whoever invented the word tracking error did the world a bit of a disservice because it clearly has a negative connotation and an implicit deference to the composition of an index. And tracking error can be a fantastic thing. We make no representations about tracking indices, and tracking error can be a great thing. So in 2022, when very expensive US equity markets had a very tough year, down high teens and dragged down global indices all over the world, we had a materially positive year that was good in absolute terms, but it was the best relative performance year in the history of the Third Avenue Value Fund, explicitly because the tracking error was so high. So, look, we have what I consider to be great clients. I think they, in the main, really understand well what we do, and we work very hard to communicate with them what we think we can accomplish and what we can't deliver.
- [11:12]
A
I want to keep on the investment philosophy, but I want to bring you back one second to your biography. I'm incredibly curious, and I don't think we talked about this the last time we spoke about that experience you had early on with international markets and emerging markets in particular in 2001 about the Argentinian crisis. Can you tell us a little bit what is that you did in that. What is it that put you to work on right away? And what is that, the lesson that you got out of that experience? By the way, our listeners cannot see it, but you burst into laughter when I asked you about this. So now I'm doubly curious about why you're reacting the way you are. Matt.
- [11:46]
C
I just think it's fun to reflect upon how green I was at the time and just how empty of a vessel my head was. And I came into this experience. I've already confessed that I knew nothing about investing when I started at 3rd Avenue, and I was raised in the Northeast, as I just explained, I had no experience whatsoever with sovereign defaults, with currency crises, with currency pegs, with riots in the streets, all of which were the makings of what happened in Argentina. And there was a currency fag of one to one and it needed to be broken when it couldn't be defended any longer, and eventually represented the largest. It was probably the 25th or 30th, I don't know, sovereign default in Argentine history. That happens actually quite often. But this was a particularly large one, and four presidents, I think, in two weeks, and people were throwing garbage cans through the windows of bank branches trying to get their money out. And what real panic looked like. And I had no experience with that, but I was working at the time with a very experienced international investor, a very intrepid one. And we went into Argentina and bought securities that were effectively IOUs issued by the government to the citizenry. And we also bought agricultural company which was effectively US dollar denominated because of the agricultural exports that were priced in US dollars. So there were things to do and in general they were very successful investments. So there's just a combination of incredibly steep learning curve. Lots of learning mixed with investment success will really make for some fond memories, I would say.
- [13:24]
A
So. And then you basically then specialize on international value investor International. I mean, it's that you ended up six years later if the details of your biography, as in the Third Avenue International Value Fund. So you were all the time focused on essentially international investing.
- [13:40]
C
So early on I did a bit of everything. We were all working together as a broad team and everybody in the room, from Marty to the entire team that supported him and all of the strategies combined, met twice a week, as we do now every Tuesday and Thursday morning for research partner meetings. So we were doing a bit of everything early on. But after the first few years, then, yes, I did specialize in non US investing. And then I came to run the non US investment strategy until I took over the global strategy, which today is about 70% non us.
- [14:13]
B
Matt, before we get into more details on investment process, I do want to ask one more organizational question. So this conversation leads up to it. There's an ongoing debate in the value investing community, including on the campus of Columbia Business School, about generalists versus specialists. Man, you've emphasized building a team of generalists versus specialists, but how do you come down on that topic of the advantages or disadvantages generalist versus specialists?
- [14:36]
C
I don't know that there's a rule that I would prescribe for any and all investment firms. I would say that given what we do, which is purely opportunistic, the generalist approach is a necessity for us. Marty used to have a saying, which we still use sometimes, that we don't find investment ideas, they find us. We don't know where our next meal is coming from. So the way we have structured our team is to have a very experienced pool of senior research analysts here who we can deploy into any perceived opportunity and people who are capable of understanding how many different types of businesses create value, evaluating the people involved, control parties, business managers, their incentives, regulatory environments, financial positions. But I think it's very important in the context of what we do opportunistically that we remain generalists and are able to. And by the way, you probably gathered this already, but the vast majority of securities in the world at any given time are just of no interest to us whatsoever. In sectors, industry geographies, what have you priced about right or overpriced, fairly priced? That's of no interest to us whatsoever. So it would be really a waste of resources to follow them religiously, just as a matter of form.
- [15:50]
A
And can I dig a little bit on this, a little bit more? Building on Michael's question. So as he was very well saying, I mean, our students ask us this all the time. How should they present themselves to potential employers as someone who knows something very well, who can have the flexibility to cross different domains, different industries? How do you organize your learning process when you are a journalist? So you see a good opportunity, looks like a good opportunity, but you place in a particular sector, a particular country perhaps where you don't have a lot of experience, you develop mental models that allow you to transfer knowledge easily across previous experiences to the current ones. How do you get acquainted? Is it a slow process? You put someone to work for months at the risk of missing out on that opportunity? How do you approach that process?
- [16:38]
C
It's all of the above. And there are no two situations that are identical to one another. And every investment is a living, breathing organism that is idiosyncratic. And there are some investments where we know the country, the regulatory environment, maybe even the people involved really well, because I've been doing this for 26 years, and the guy who's sitting outside of my office right now, they've been doing it for 20 and 18 respectively, and there are a lot of reps there, and that certainly does come in handy. But I will confess that with regard to your students question about whether they want to be specialists and be very, very narrow but very deep as compared to very wide but shallower in their knowledge. I would rather be the 10th or 20th most knowledgeable person in the world about a great investment than I would be the most knowledgeable person in the world about a not very good investment. And you can stick with something and become expert forever and do the world's greatest analysis on an investment that will not make it a great investment. Being incredibly sophisticated about it and knowing every detail isn't going to change whether it's a good investment or not. So I would rather redeploy resources and move to where the opportunities are and in some cases act even with a little bit less information than you would like to have because your sense is that it's a terrific opportunity, then I would stay with something and go incredibly deep into something that's not a particularly great investment.
- [18:08]
B
So, Matt, you've spoken about a couple of themes in the opportunities you look for that I'd love to explore. First is you say that financial strength is non negotiable. You also talk about Marty Whitman's idea of this concept of resource conversion, basically corporate activity that surfaces value. So can you just expound a little bit on those two things, the importance of financial strength, and then how do you identify those opportunities where resource conversion can work in your favor?
- [18:34]
C
Right. So the first and foremost thing, I think I've already maybe touched on it a little bit, which the balance sheet strength. If we're deliberately seeking out areas where something has gone wrong, where other people have become pessimistic, the first criteria that we need to make non negotiable is financial durability. You have to be able to make it from the gray clouds to the blue sky. And it would take a special kind of hubris really to think that you can predict the timing of recovery and all kinds of incredibly unexpected things happen and fine lines get stretched out, Covid happens and you've got a two year extension and a very difficult operating period. So the first criteria is to accommodate the unexpected and for timeline stretching out. But the concept of quality and balance sheet strength and the ability to create value at the resource conversion are directly and intimately linked in the sense that the balance sheet quality creates the dry powder and creates the makings for resource conversion. If you're levered and you don't have a lot of financial resources, your ability to buy back shares happens only when you're able, not when you want to, but when you're able, which is typically when your business is doing well, which is probably at the worst time to buy back shares. Similarly, if you're going to grow through acquisition, you're probably only able to do that at the best of times. But if you have a great balance sheet and you can do those types of things countercyclically when others do not have that kind of liquidity, and you can buy stressed and distressed assets from competing firms, or invest in your business countercyclically when others cannot, or buy shares back when they're deeply depressed because operating conditions are challenged, that's a great way to create a lot of value. So in the context of our approach, it's not just buy things when times are tough and wait around until times are better. The idea is that you buy things at deeply discounted prices with entrepreneurial people involved with great financial resources with which they can create value during the difficult times and come out of the crisis a much more valuable business than you went into it.
- [20:38]
A
So I want to discuss a little bit some of the big events that you've been a witness of throughout your career. Nine, 11, of course, you are two years into your job at Third Avenue. Obviously, the global financial crisis, COVID 19, the global tariff war, all these big events that have led to massive distortions in the market. And the current situation, of course, in the Middle east being the latest iteration of these. And I want to talk a little bit of the issue of risk management. How do you guys think about it? How you construct your portfolio? How do you make sure that portfolio has that resilience? Given the huge events we have seen over the last three decades in stock markets? On the upside and the downside, how do you think about that problem of portfolio construction and resilience?
- [21:28]
C
Yeah, this word may get old for your listeners, but the balance sheet is the first answer to your question in that we have a built portfolio of really well financed businesses because that list of peoples that you have mentioned is long and we could make it longer if we tried. And unexpected exogenous shocks happen all the time. So you just be prepared for them all the time. But you can proceed if you have a portfolio of really well financed companies. Ideally, the companies own assets that are not at risk of obsolescence, that are critical to the world, that will be needed for a very long period of time. And the combination of those two things will limit or greatly reduce your probabilities of permanent impairment of your capital. I'm actually sitting in a window here that I can look up right up 3rd Avenue to the office I was in on September 11th. I can see the window I was sitting in when the cars were coming uptown covered in rubble on September 11th. And I remember like it was yesterday when Marty called everybody into the office on September 12 and explained to us that we have a very profound responsibility in managing other people's money. And this is a trauma to us personally because we all knew people who were involved. But we have a job to do and we're going to get out there and we're going to find terrific investments in every single crisis because it's our job and our responsibility. And we did do that. And I've carried that memory with me for a long time. And when you remember that kind of trauma, it becomes, I would say, relatively easier to act proactively and subsequent crises, whether it's the global financial crisis or Covid or whatever this is, and blockage in the Hormuz. But I focus personally on the impact on the underlying businesses. Don't forget, I'm not worried at all about variations in the stock prices in the short term. I'm thinking about over the next three to five years, what are the lasting implications of what's going on relative to the businesses that we own, relative to the financial positions of the businesses that we own. And I proceed as though I'm buying the entire business. I'm going to own it with no liquidity for the next three, five or ten years.
- [23:39]
A
So just a quick follow up on this. You mentioned this Buy Gray Clouds and Sell Sunshine, which I love as a line, as I told you before. But one of the challenges when we look at a company in general and we see some thing that we think is an undervaluation, and you have to understand to what extent what you're seeing is purely temporary or a permanent impermanent of the business operations of the firm. So that's the first challenge in a way that you are being called to understand to what extent what you're seeing is a temporary or permanent shock on the quality of those business operations. And then because you may have a variant view relative to the market, you have to understand where the other side of the transaction is coming from. Why does the market disagree with you? Walk us a little bit how you think about that personally, Matt, how do you think about how deep you go in understanding the other side of the transaction, which is, you know, and I have a little anecdote to talk about this that I think it may be appropriate. I think I told you that when I joined the Help Run Center. Bruce took me to meet Marty at Third Avenue offices. And I remember this is what he talked about, how important was to understand where the other side of the transaction comes from, Which I thought it was an incredible lesson. So how do you see it, how you think about it? How do you get to know and comfortable with the other side?
- [24:55]
C
Yeah, I don't want to oversimplify, but I do want to make an overriding point that we went and looked years ago here at 3rd Avenue a couple of years ago, and what the average turnover is for an actively managed public equity fund in the United States, and it's about 70% was the number that we calculated. And that means that your average turnover, once about every six quarters, you turn over the entire portfolio. That's the mountain of the average investor in the United States, which means for the listeners, that's an incredibly short term time horizon. And if your investment horizon is 4/4 or 6/4, you're going to be focused on, you're probably rational, in my view, to be focused on a very specific set of fundamentals. Meaning what is the earnings per share going to be? What is the growth of earnings per share going to be? Is it going to beat expectations over the near term? And those are the types of return drivers that you're probably fixated on. And again, contrast that to the type of investing that we're gaining. Where things had gone really badly, macroeconomic level, industry levels, something specific to the company has gone really badly and the company needs to be fixed, the industry needs to recover from the cyclical depression, or there are levers that management needs to pull in order to fix the company. Those are not things that generally happen over the next four to six quarters. And the resource conversion transactions that are a huge part of the value creation that we strive to benefit from are certainly not things that happen over the short term. So the level set on average, we're looking at completely different things and completely different sources of return drivers for the businesses over different time horizons than the average investor. That said, I am a pretty voracious reader of sell side research and I do care what other people think the problem with the business is. And I read a lot of sell side research to try to understand what the source of people's negative view is so that I can have a better understanding of what needs to change in order for them to have a different perception of the business and whether we are in a position to form an informed contrarian view. So there's a lot to that question, Tano, but you're asking about permanent impairment and value traps. And I do want to explain a little bit about some of the forms of investing that we do. I don't have a better name for it, I don't like the name, but good enough as is. This is one type of investing. There are businesses that are chugging along with significant headwinds. 4234 headwinds. Bank of Ireland, for example, and it's true of many European banks in 2018 and 2019 is when we bought bank of Ireland. But you had 10 years of regulatory creep, increasing regulatory capital requirements on the business. You had unprecedentedly low interest rate environment that was compressing returns on assets. And all of these things were conspiring against the business at that time. And it was earning a very low return of 5% return on equity, which is terrible and everybody was very pessimistic about the business. But if you can buy a 5% return on equity for 40% of book value in something like a 12% owner's yield to you, assuming that the actual earnings are real economic earnings, which in this case they were but a 12% going in yield based on your purchase price, with all of those dramatic headwinds including unprecedented low interest rate environment, then it becomes an exercise engaging the probabilities of the direction of travel. What is the probabilistic direction of travel from unprecedentedly low interest rates? We gauged it to be higher rather than lower, although we weren't saying how much higher and we weren't saying over exactly what time frame. And of course it could go lower and did. In fact, during COVID interest rates went negative 50 basis points at the policy level. So what I was saying is that even though we are making contrarian investments and even though we are the other side of the trade for the conventional wisdom, in many cases the investments even going in are producing what are reasonable, reasonably adequate economic yields to us. So that is a recipe, in my opinion, for reducing the probability of a permanent impairment of your capital.
- [29:11]
A
I like very much something you said that you are a voracious reader of sell side reports. There are some wonderful equity analysts on the sell side. Of course, I think it's very important to do so and to keep a distance from that at the same time and not to be easily soyed and maintain a critical attitude towards those sell side reports. It's the only way of being a value investor. But you have to read them to know where the other side of the transaction is coming from. And there's some wonderful analysis out there that is worth following.
- [29:38]
C
That's right. It's useful reading. As long as you understand that those reports are not written for people like us.
- [29:45]
A
Absolutely.
- [29:46]
B
So Matt, we've seen at least three big trends in the last call, 20, 25 years. One is fund flows into index and rules based strategies, which is probably most pronounced in the United States, but is a global phenomenon. Second, as you pointed out correctly, the money that remains active is definitely migrating towards shorter term strategies. You documented just the mutual funds, but if you add in for ex example the multi strats and so forth, the time horizon is even shorter. And third, we see these pockets of story stocks, these meme stocks, things that seem to be very disconnected from anything related to fundamentals. Have these trends changed the nature of markets? And at the end of the day, does it make your job easier or does it make your job harder?
- [30:27]
C
So I would acknowledge before answering your question directly that whether people have gone index and passive or whether they've gone shorter term, we've gone from zero data expiry options to one hour expiry options now and whatever it is. So your point is very well taken. But almost everyone has been successful doing almost everything short of degenerate gambling in the last 10 years. And I mean, I don't want to go on a rant about the parallels to the Roaring twenties, but whether you're an equity investor, credit investor, a art collector, a car collector, a crypto, whatever, you've probably been successful in the last 10 years because you've had asset your home, certainly you've had asset inflation in almost everything. So everybody's been successful. But so I wear two hats. I run the fund, Third Avenue Value Fund, but I'm also a management committee member of Third Avenue Management. I think it makes it harder to run an investment management business when everybody can turn their brain off and throw a dart at the dartboard and do reasonably well and succeed doing almost anything. You really don't probably don't feel much of a need to hire professional investors. So it has created a challenge attracting new capital to fundamental value strategies. Although that is changing too, by the way. I mean, there are many people who are starting to come around that the world is changing and need to do something different that they've done in the last 10 years. But I would say, conversely, it has been easier to run the fund and there has been less competing capital. And it's not just the things that you mentioned, it's that the end of the asset management industry has consolidated significantly and we are a specialist in fundamental value strategy. And it's not particularly scalable. I mean, I think we could get much bigger than we are today, but it would still be a pittance relative to what is an average size asset management firm on Wall street these days. And it's not going to be a firm making strategy for a big asset management company. So the lack of scalability helps keep this space to us and helps keep capital out of the space. And in that regard, I do think it's gotten running the fund and generating returns has been easier for all of those reasons.
- [32:46]
B
On a related theme, obviously what everyone's talking about is artificial intelligence. How do you think AIs can affect the future of a job as an analyst or as a portfolio manager? Are there things you guys are doing at 3rd Avenue to try to weave these tools into your Practice, sort of. What are the possibilities and limitations as you see them?
- [33:03]
C
Yeah, I simply don't know. I will tell you that we have multiple subscriptions for every member of our firm. We have every single person in this firm across all of our departments, experimenting of different tools to understand capabilities. We've got training programs going on through again firm wide for every single employee of the firm. But I do think it's just too early to know. I will tell you that today AI is not integrated in any real way into the core processes of this firm. And we're in experimenting and learning mode today and I can't tell you where it will go.
- [33:37]
A
So, Matt, I want to start talking a little bit about your portfolio and how you guys have positioned yourself and I want to discuss some of the big themes you touch upon European banks. So why don't we start there a little bit and frame it and see whether it is your framing. European banks have been in the very distressed valuation for a long time after the Eurozone banking crisis. And there was a process of regulatory oversight, there was a process of consolidation as well, of making those balance sheets healthy again. And you guys actually went there. So to speak with bank of Ireland. Walk us a little bit about how you guys monitor, follow that situation, how you get comfortable with what you were seeing, what are the prospects, how you think the European banking scene is shaping up these days? There's been a remarkable recovery of some of those valuations. And what do you think is behind that recovery? Can you walk us a little bit through that and how you approach that?
- [34:38]
C
Yeah, if you're asking me about European banks en masse, a huge part of the valuation increase has been from some degree of normalization of the interest rate environment that's producing higher returns on assets, higher net interest margin and therefore higher returns on equity. And that's been incredibly important to the returns of most European banks. In the case of bank of Ireland and Deutsche bank, for the record, is the other one that we have owned. But in the case of bank of Ireland, I laid out the starting point, which was a 5 depressed 5% return on equity purchased at something like 40% percent of book value after 10 years of regulatory creep. The European sovereign crisis, different countries came out of that in different ways and Ireland was probably the poster child of having taken their medicine and gone through the pain of deleveraging at the sovereign level, deleveraging at the consumer level. Incredibly strict regulatory environment in Ireland developed out of that around the underwriting standards of mortgages. And you basically had. And the banks have been fully recapitalized over those years too. So you had deleveraging and recapitalization at essentially every single level of the Irish banking system, from the sovereign to the banks to the customers. It looked completely different than it did 10 years prior. So that was very exciting. And secondly, Ireland is a pretty dynamic macroeconomic environment in the context of Europe growing at the macro level at something like 5% GDP growth. So it didn't really look anything like the rest of Europe. One interesting thing did happen I've mentioned. So we went through Covid interest rates, it got worse or it got better, valuations fell. It was dramatic. But because of the really depressed returns on capital in the Irish banking market, it's true in other parts of Europe too, but in Ireland specifically, for many years, two of the five largest banks threw in the towel in the last several years exiting the market and their banking businesses. The assets and liabilities of KBC Ireland and Ulster bank, both consumed by bank of Ireland and Allied Irish. So because of the depressed returns, you have capital fleeing and then you're able to absorb those banking businesses and create scale, cost efficiency, high returns on equity. And they also, because the companies, both bank of Ireland and AIB now Allied Irish, were so well financed that they were both able to absorb purchase securities and asset management businesses called Goodbody and JNE Dady. So they completely changed the complexion and scale of their businesses in the downturn because they were so well financed. Which is exactly the buy great cloud, sell sunshine story that I've been talking about, the resource conversion. And they came out completely structurally different banks and a different banking market and we've gone from 5% ROE to a mid to high teens number today in the case of bank of Ireland.
- [37:37]
A
Yeah. So we've had many conversations throughout the podcast over the last few years where I've been asking this question because I always joke with my students that Europe always manages to disappoint even though there's been some great value there. It looked like a massive continental value trap at some point, but of late there's been a recovery of some of the valuations. I joke with my students that the top performing market I believe last year in the OECD was my country of origin in Spain. That performed remarkably well. What do you think is behind that? Do you think it's just simply a portfolio relocation and treasurers and CFOs all around the world trading away from the dollar and diversifying a little bit more? Do you think there's really a recovery somehow of investment opportunities is something about a state led intervention and say armament production in Europe having spillovers over several sectors. What do you think is behind that recovery? You have a view. And by the way, feel free to add any recommendations of what you think is interesting in that space. Don't be shy, Matt.
- [38:42]
C
No, I think I would only add an important point from my perspective, which is that the starting point several years ago was a lot of cheapness, meaning a lot of very, very inexpensive equity valuations in Europe because people thought Europe was stagnant and moribund and whatever other scorotic, whatever other word you want to use, but you've had some incremental changes still not the most dynamic place in the world, at least in some countries, but you had some changes that arguably make it slightly less bad. And you've had spending debt caps lifted in Germany and you've had some sense across Europe that dependencies upon NATO might not be quite as reliable as they had previously thought. And spending has picked up in a lot of different areas and for that there's some enthusiasm. But but I would also include the US Equity market has been such an incredible recipient of capital flows over the last 10 years and because of the flows, at least in part because of the flows, has outperformed almost everything in the world for a decade and many portfolios and it's true of indices too, by the way, like the msci, world has never been more heavily weighted to the United States, but it's true of many asset allocators. Portfolios too are dramatically tilted in their exposures to US Equities. So when people wake up, theoretically, but when they wake up and want to do something about that and rebalance portfolios, the scale of the thing that needs to be rebalanced away from this becomes so large that these small incremental reductions in that piece of the portfolio represent very large capital flows into essentially everywhere else, whether it's Europe or emerging markets or what have you, and commodities, whatever it is, you can have huge kind of violent movements in the other thing as capital flows into the so Matt,
- [40:31]
B
I'd love to talk about CK Hutchinson, which is involved in ports and telecom and infrastructure you've mentioned. That's a good case study for the importance of resource conversion. Can you just walk through what's happened with that company and what's happened with that stock?
- [40:43]
C
Yeah, so the stock has done well and had not done well for a very long time. But more recently, meaning in the last year, say over the last year or so, the stock has really done well, but it's a family controlled company by one of the most famous businessmen, Li Ka Shun who built a business out of Hong Kong. It's now run by his son Victor Lee. But they're in the business of buying, building and eventually disposing of businesses over a 10 to 20 year something like that. Time horizon is not explicit but 10 to 20 year time horizon and the record of value creation over a long period of time is exceptional. And they do that in a corporate structure that is well financed and not particularly leveraged which gives them all kinds of time and flexibility to make the right decisions. But so they have several large pieces of the portfolio generalized. There's a large portfolio of European telecom businesses. There's a large, in fact one of the world's largest health and beauty retail in Asia and in Europe. And there's a ports business as you mentioned which is one of if not the largest container terminal portfolios in the world. And then there's a series of infrastructure and energy assets as well as did just recently transact about a month ago in one of the in a UK utility called UK Power Networks being sold to NG for $10 billion. But what's interesting, it's become very interesting is lately there's a significant transaction being contemplated for every one of the company's largest businesses today. And the health and beauty retail business may become a public company this year. I think that is their intention. The European telecom business may well be either sold or itself taken public at some point in the not too distant future. Pieces of that have been sold off in recent years which have created a lot of value. The most high profile by far is the ports business. They created an agreement or agreed to sell 43 global container terminals to a consortium of BlackRock and MSC. That obviously set off an incredible political firestorm because two of the 43 are the two terminals sitting at either end of the Panama Canal. And CK Hutchinson in spite of the company being built out of Hong Kong by people who live in Hong Kong, the company's domicile, the new Caymans 80 something percent of the business exposure is outside of Asia but in the eyes of the US Federal government they are Chinese. And the ownership of the Panama Canal container terminals is obviously very off putting and politically objectionable in D.C. so that has held up that transaction. The Panamanian Supreme Court in its complete pliancy to the US government has now stripped CK Hutchinson of its concessions on the two Panamanian terminals. They have filed an arbitration claim for $2 billion. But ironically I do think that probably eases the path to transact around the remaining 41 terminals for which there are very clearly buyers and the complexion of the consortium, the potential buyer pool has changed, become more Chinese. We May split the 41 into different parts, Chinese sphere and a Western sphere, but they're working very, very hard to create quite a bit of value through some very large transactions around the bulk of their businesses right now.
- [44:07]
A
So I want to talk about Japan because I know that you have also some views about it. But before that, if I remember correctly in your letter, must have been the one you sent me for Q4, 2025. You talk about CO and how much it contributed to the performance of the fund. I wanted to ask you about the thesis of the particular exposure that you guys have inside the fund. So copper is one of the key commodities in today's world. The way I think about those positions, obviously you can look at the marginal cost, the marginal cost of the different producers in that space and be savvy and tactical about it, but you effectively also having a view on that commodity overall. So I want you to walk us through a little bit how you think about exposure to commodities in general in a value investing portfolio. And I'm sure you guys have benefited enormously from kind of the data center explosion associated with the AI revolution and how copper is going to be a key ingredient in that mix and how you're thinking about that fees. Is it a macro bet? Walk us a little bit to that, Matt.
- [45:15]
C
Yeah, so without going into each one, obviously my description would vary from commodity to commodity, how I would approach it. And commodities ironically are incredibly heterogeneous in my personal view. I don't understand gold, for example, I'm not an investor who has invested in gold. I don't understand it, I don't know how to price it. So I don't have a view. So we have not participated in gold in any way. Oil and gas, we are very active, but the vast majority of our exposure has been on the certicide. Again, I don't have a particular view about the long term price of oil and gas. So I've been less inclined to be directly exposed to companies that are directly exposed to oil and gas prices. But what I do have a view is that more spending needs to occur in order to perpetuate oil and gas supply at these current levels because I don't perceive demand to be declining. So spending on the service side needs to rise. That is my view for copper. Specifically copper I view as a special kind of commodity in two different ways. One is that on the demand side, the sources of demand, the drivers of demand are incredibly diverse. For copper, it's very different than iron ore, for example, where the one purpose is making steel or metallurgical coal, where the one purpose is making primary steel. Copper is very, very widely used. Basically anything that you run an electrical current through, which means that almost any form of economic development in almost any country requires more copper, which is why copper demand has been growing very steadily at something like 2 and a half or 3% for more than 100 years, way before Chinese economic liberalization. On the supply side, economically viable grain field copper mine is incredibly large, incredibly expensive, and takes something like on average 15 years to prove a permit, build and get into production. Which means that you can see the supply side of the equation coming from miles and miles away, which differentiates it from other things that, you know, might have gotten a bid during the bev craze, like lithium or cobalt, where you cannot see the supply side coming. And there's all kinds of incremental sources of those two other commodities. That's not true for copper. So copper demand, I want to say, fell by something like 1 1/2% in the global financial crisis in 2009. Demand sides are incredibly reliable. So you're getting this quite clearly that we're going to be short of something that the world absolutely needs, cannot live without. You raised the AI infrastructure build out as a demand driver, and that's valid. But what's interesting is that over our ownership period, the narrative has shifted from Chinese fixed asset investment and Chinese spending to BEV and renewable as the incremental source of drivers. All of that is incredibly copper intensive. And now it's shifted towards AI, which itself is incredibly copper intensive. And for me that's actually the point is that the sources of demand are constantly evolving, but it's indispensable in every form of modern development. Yeah.
- [48:24]
A
This is fascinating about copper, that the story changes, as you very well put it, every five years almost. It's remarkable to see this aspect and being exposed to it seems an incredibly smart play. Let me bring you back to these regional stories and the other one that has been very much in the news and very much in the mind of many value investors is you have positions there. If I remember correctly, you used a very funny line in your letter, which is very I recommended to everyone. It's wonderfully written, it's very deadpan, which I like a lot, Matt, if you allow me to say it, and you say there was something of a mixed bag when you Came with that remarkable directness that you always have. Tell me a little bit about Japan, your own positions, the thing that has been a strong and not so strong contributors, if you would be willing to share that with us. And also whether you think, think Japan still represents an interesting space for the value investor after their evaluation of the last few years. So tell us about 3rd Avenue and then about Japan itself.
- [49:28]
C
Yeah, so we own a number of Japanese stocks and it had, I would say is a better expression at the time. I wrote that letter for the fourth quarter of 2025. So during 2025 the experience was fairly mixed bag. We own Subaru, an auto producer. We own two semiconductor capital equipment companies. J ol, a company called Toriba. We own a consumer products distribution business called Paltack. We own a cement company whose largest asset is actually in the west coast of the U.S. the California cement production portfolio. That company is called Taiheo Cement. And most recently in a more recent quarterly letter than the one you're referring to, we disclosed the position in a titanium sponge manufacturer called Osaka Titanium. But it has been an interesting and frustrating experience. But obviously you can hear by the number of investments that we have in the exposure within the fund, we are excited and think that Japan offers some very unusual value. We're an opportunistic fund who can go anywhere and do anything. And we have a lot of our capital in Japan. Part of that is Japan is home to some extremely well run businesses. Operationally extremely well run. Some very unusually well positioned businesses. Like J ol, for example is a company that few people would have heard of, but it's one of two companies in the world. The other is Japanese also, by the way, that make a thing called a multi beam mask writer, which is a writing mask for the lithography process. And you need a multi beam mask writer to create masks for extreme ultraviolet lithography, which is what makes the most modern cutting edge chips. That's ASML's machine, the EUV machine requires masks to be written by one of two Japanese companies. Joel is one and New Flare is the other. So really unusually well positioned companies, really well run. But the old story where capital allocation is very poor, inefficient, and all of those things remains true today, although it's changing on the margin. And it's very clear that there's been a massive increase in buybacks, there's been a massive increase in dividend payout ratios. There has been a huge wave of shareholder proposed resolutions at AGMs and EGMs. So the shareholders have gotten involved the shareholders being involved is not entirely new, that we've gone through waves of that in the past. What's different about this time around is that the source is internal to Japan. It's not. Not by Westerners trying to impose a Western capital allocation framework on Japanese. It's industry bodies like Medi, it's the Tokyo Stock Exchange, it's the bank of Japan, it's Japanese pension system, it's homegrown.
- [52:18]
A
So you think it's a structural in nature, which is what is giving you the tailwind in a way.
- [52:22]
C
I don't think you can put the genie back in the bottle in Japan and there's really no hiding anymore. And the fact that the Japanese are willing to name and shame other Japanese executives has really moved the meter. Although I just want to be clear though, the meter has not moved as far as I would personally move it were I in control of a number of Japanese companies. So it's still slow going. The Japanese, by the way, since the Strait of Hormuz blockage, the Japanese yen has performed very poorly, which for some Japanese companies is actually a boon in some ways. But the Japanese equity market has not performed particularly well. Overlay. I think that there is a lot of opportunity there. It's incredibly granular, very deep market, a lot of very poorly followed companies, a lot of well run, well capitalized companies. There's a lot to do.
- [53:10]
B
So, Matt, you joined 3rd Avenue more than a quarter century ago. This business is always hard. It may be even harder today than it was back then. What advice would you give to our students who are starting out in the investment management industry?
- [53:23]
C
One thing I think about that people should be aware of, which I'll turn them to a little bit of advice, is that the feedback loop in public equity markets stinks. And you have a lot of very bright, very successful students who are used to a pretty strong relationship between what they put into the process and what they get in terms of feedback. They know what the syllabus looks like, they know what they're being asked to produce. And you had a good sense what the outcome is going to be if you're willing to do the work. It does not work that way in public equity markets. And I would just say you should imagine yourself where you have about 60% of the syllabus and the other 40% you kind of have to intuit and you're not really sure and you may not even know who it is that's going to be grading your test. And you might have to take the final before you get the midterm back so you're really feeling your way around in the dark. But there is a feedback loop in there and the input does relate to the output. It's just very indirect and it happens over time and on average. Which brings me to the advice that that this can be very psychologically challenging business for that reason and others. And I would advise anybody who wants to do this as a career to have other important aspects of their life, whether it's your family, your friends, not for profits, whatever it is, hobbies, other ways that you're valuable and other things that are fulfilling to you because there will be times when this is not going well for you. And if this is your entire identity, it can be hard to handle, to say the least.
- [54:56]
A
So we are approaching the end of our wonderful conversation with Matthew Fine of 3rd Avenue, and we always Matt, finish this conversation by asking our guests two questions. I will go with mine first, which is what worries you about the future? What keeps you up at night with excitement? What is that your mind wanders to when you have that free minute? What is that you feel, think is that thing that we should be thinking more about because it's either worrisome or exciting.
- [55:28]
C
I'm a simple creature and I'm worried about the elephant in the room. And US equities are such a dominant force in global capital markets today. And the statistical base rates of what somebody should expect from valuations like these are very, very poor. And I'm fearful that there will be a lot of disappointment. And I personally grapple with how to create distance from the blast zone because largely a long only fund and there will be collateral damage and there are correlations across all equity markets. And think about how to avoid the fallout from a significant decline in U.S. equity markets. But there was a point in there about being excited too. And one thing I'm very genuinely excited about is that I've spent, in fact, our entire firm, firm has spent its entire life the last 40 years roughly in a declining interest rate environment, which is the antithesis of the environment in which the investment philosophy was constructed, of rising interest rates and rising inflation and capital becoming scarce. We spent the whole life of the firm in declining interest rates and free capital and increasing liquidity where all kinds of all manner of leverage strategies outperformed many things. So our conservatism on the financial position and our awareness of a lack of access to capital has maybe not been as helpful as it should be. So I'm excited, excited to run this strategy in a higher interest rate environment.
- [56:52]
B
Matt, what are you reading or listening to these days? And is there a book or a few books perhaps that you would recommend to our listeners?
- [57:00]
C
Yeah, definitely. I just finished a book. It was pretty fun, actually. It was called the Sugar King of Havana, and I got on this string of books about Cuban history and that one was a lot of fun. But I would recommend very much, though, in recent years, some of the best books I've read. I really liked a book by Vaclav Smeal called How the World really Works. And I do think there is still today an acute underappreciation of the physical world, where our physical materials come from, what the constraints are, what the processes that bring them to market are in the very fore understanding those aspects of the world. So that's a great book, Mike. Pardon me, but probably the best investment book, in my view that I maybe have ever read is David Swensen's Pioneering Portfolio Management, I still think is just this incredibly poignant and observant. What a terrific book. And maybe one more to throw into the mix is an oddball book, funny name called 10 Global Trends Every Smart Person Should Know About. And it's a book I'm forgetting the other author's name, but by a guy named Marion Tupi. That's basically a chart book, but I mentioned that one because it's almost impossible to read it and not come away feeling incredibly fortunate to live in this time that we are living in today. These, by any historical measurement, are the absolute halcyon days, life expectancy, your quality of life, your wealth, everything that you would measure the quality of your life by today looks nothing like it would have 50 years ago, let alone 100 or 200 years ago. So we're all incredibly fortunate and it's hard to read that book and not come away with that feeling.
- [58:36]
A
I think it's a wonderful positive note in which to end this wonderful conversation. Matthew Fine of Third Avenue Management, thank you so much for coming to the Value Investing with Lanes podcast.
- [58:48]
C
Great to see you guys. Thank you so much for having me
- [58:50]
A
and to all of you, we'll see you in our next episode.
- [58:54]
C
Thank you for listening to this episode of the Value Investing with Legends podcast. To subscribe to the show or learn more about the Halbron center for Graham and Dodd Investing at Columbia Business School, please visit Graham and Dodd.
- [59:07]
B
Com.
- [59:08]
C
Thank you.