Podcast Title: We Study Billionaires - The Investor’s Podcast Network
Episode: RWH053: Trouble Ahead w/ Bill Priest
Release Date: January 12, 2025
Host: William Green
Guest: Bill Priest, Executive Chairman and Co-Chief Investment Officer at TD Epoch

Introduction

In episode RWH053 of We Study Billionaires, host William Green engages in an in-depth conversation with Bill Priest, a seasoned investor with over six decades of experience on Wall Street. Bill’s impressive career spans the founding of investment firms managing assets exceeding $100 billion and includes his pivotal role at TD Epoch. This episode delves into Bill’s investment philosophies, experiences navigating market turbulences, and insights on building resilient financial strategies in an increasingly uncertain global landscape.

Early Life and Education

Bill Priest begins by sharing his humble beginnings in Pittsburgh and upbringing in Steubenville, Ohio. Born to parents with contrasting backgrounds—his father, an orphan with minimal education, worked in a steel mill, while his mother was a college-educated schoolteacher—Bill developed a strong work ethic early on. Reflecting on his youth, Bill notes:

“[...] your incredibly warm response to the book has also made all of the work that I put into writing it feel huge. Hugely worthwhile.”
[00:00] William Greene

His early chores, such as mowing lawns and trimming hedges to earn his allowance, instilled in him the value of hard work and financial prudence. Excited by a high school book on stock market investing, Bill made his first foray into securities analysis, albeit with initial setbacks:

“[...] I lost almost half my money on it. It was recommended in the book how to Get Rich in the Stock Market.”
[07:12] Bill Priest

Bill pursued higher education at Duke University and later at Wharton, where he excelled academically, obtaining his CPA while still in college—a rare achievement at the time.

Early Career and Mentorship

Bill’s professional journey began at the Commonwealth Group of Mutual Funds in San Francisco, a modest starting point given his high-caliber academic credentials. Despite low initial compensation, he remained steadfast in his goal to become a securities analyst. His mentor, Al Zeziger, played a crucial role in his early career, guiding him through challenging situations:

“[...] we borrowed some money. He hauled me across the street. [...] that was the beginning.”
[12:38] Bill Priest

In 1972, Bill co-founded BA Associates (Basic Economic Appraisals Associates), navigating the firm from a modest $150 million to an impressive $10 billion in assets. This period was marked by significant financial reforms, including the passage of ERISA, which transformed pension fund management and created vast opportunities for professional money managers.

Investing Philosophy: Free Cash Flow and Shareholder Yield

A cornerstone of Bill’s investment strategy revolves around the concepts of free cash flow and shareholder yield. He emphasizes that true value lies in a company’s ability to generate free cash flow—cash available for distribution to shareholders after all obligations are met. This perspective prioritizes cash flow over traditional accounting measures like earnings or price-to-earnings ratios.

“The bedrock of our philosophy is the belief that the best predictors of long-term shareholder return are growth in free cash flow and management skill in allocating that cash.”
[39:51] Bill Priest

Bill outlines the five primary uses of free cash flow:

1. Dividends
2. Share Buybacks
3. Debt Paydowns
4. Acquisitions
5. Reinvestment in the Business

He further explains the importance of Return on Invested Capital (ROIC) relative to the Weighted Average Cost of Capital (WACC):

“You want to look at the spread between the ROIC and the WACC. [...] if that spread persists, you can do very well owning a company that can send you year in and year out, reinvest over and above their cost of capital.”
[43:41] Bill Priest

Investment Strategies and Company Analysis

Bill illustrates his investment approach by examining companies like Meta and JP Morgan Chase. He assesses their total addressable market (TAM), penetration rates, unit demand, pricing stability, and management’s ability to allocate capital effectively. For instance, in the pharmaceutical sector:

“[...] you have to earn your cost of capital by internal investments or acquisitions, we're giving it back to the shareholders.”
[44:59] Bill Priest

By analyzing these factors, Bill identifies companies with sustainable competitive advantages and robust free cash flow generation, ensuring long-term shareholder value.

Current Investment Environment and Risks

Bill expresses concerns about the current global landscape, highlighting multiple risks that could impact investments:

• Geopolitical Tensions: Particularly with China’s internal issues and potential military actions.
• Rise of Nationalism and Illiberalism: Shifting global dynamics and the potential end of globalization.
• Economic Fragility: Onshoring production could lead to inflation and stagflation, affecting market valuations.

He warns against complacency and underscores the necessity for prudent, diversified investment strategies:

“If you're dealing with something that's unknowable, diversify. And you need to start saving when you're really, really young.”
[63:18] Bill Priest

Diversification and Personal Finance Resilience

Bill advocates for diversification as a fundamental strategy to navigate an unpredictable future. He emphasizes the importance of having a strong personal balance sheet and financial reserves to weather unforeseen challenges:

“Having a balance sheet matters. [...] On a personal basis, you don't want to be too stretched out.”
[80:20] Bill Priest

He advises individuals to adopt a balanced portfolio, such as a 60/40 equity-to-bond allocation, and to commence saving early to ensure financial stability.

Technology, AI, and Productivity

Discussing the transformative impact of technology and artificial intelligence, Bill underscores their inevitability and potential to boost productivity. He compares technological advancements to historical shifts, like the Industrial Revolution, emphasizing that AI will continue to reshape industries by substituting technology for labor and physical assets:

“There's tremendous pressure to substitute technology for labor and physical assets. It's just, it's everywhere.”
[67:26] Bill Priest

Bill acknowledges the challenges posed by AI but remains optimistic about its role in enhancing productivity and economic growth.

Leadership and Culture in Investment Firms

Bill delves into the significance of leadership and organizational culture in building successful investment firms. He outlines three essential traits of effective leaders:

1. Empathy
2. Tactical Decision-Making
3. Inspiration

Using anecdotes from his career, Bill illustrates how fostering a collaborative and respectful work environment promotes the free exchange of ideas and prevents the dominance of a single viewpoint:

“A good leader has to be able to inspire people. [...] You’ve got to see this is the strategy that's going to work.”
[89:46] Bill Priest

He also shares insights on avoiding toxic leadership behaviors, stressing the importance of decency over sheer intelligence in team dynamics.

Legacy and Balancing Success with Personal Life

Reflecting on his long and successful career, Bill emphasizes the paramount importance of relationships and personal well-being alongside professional achievements. He shares personal stories about his family, mentorship, and the challenges of maintaining work-life balance:

“The most important thing in life is relationships. Nothing else really matters. Everything else is secondary.”
[126:47] Bill Priest

Bill advocates for investing in meaningful relationships and ensuring that personal connections remain strong despite professional obligations.

Conclusion

Throughout this episode, Bill Priest offers a wealth of knowledge drawn from decades of navigating financial markets and building resilient investment strategies. His emphasis on free cash flow, prudent capital allocation, diversification, and strong organizational culture provides actionable insights for both individual investors and financial professionals. Additionally, his reflections on leadership and personal legacy offer valuable lessons on balancing professional success with personal fulfillment.

As the global economy faces mounting uncertainties, Bill’s battle-tested wisdom serves as a guiding beacon for investors aiming to safeguard their portfolios and thrive in volatile times.

Notable Quotes:

• William Greene [00:00]: “I have a W2 since I was 16 years old.”
• Bill Priest [07:12]: “But that also taught me, don’t start spending money in areas you don’t know anything about.”
• Bill Priest [39:51]: “The best predictors of long-term shareholder return are growth in free cash flow and management skill in allocating that cash.”
• Bill Priest [63:18]: “If you’re dealing with something that’s unknowable, diversify.”
• Bill Priest [80:20]: “Having a balance sheet matters.”
• Bill Priest [89:46]: “A good leader has to be able to inspire people.”
• Bill Priest [126:47]: “The most important thing in life is relationships. Nothing else really matters.”

Additional Resources:

To delve deeper into Bill Priest’s investment strategies and philosophies, explore his co-authored books, including Winning at Active Management, and his white papers available in the show notes of this episode.

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