Market News with Rodney Lake
"Market News with Rodney Lake" is a show offering insightful discussions on market trends and key investing principles. This program is hosted by Rodney Lake, the Director of the George Washington University Investment Institute.
Market News with Rodney Lake
Episode 18 | Ramsey Asset Management CEO, Russ Ramsey Interview
In Episode 18 of "Market News with Rodney Lake," Rodney Lake, Director of the GW Investment Institute, welcomes Russ Ramsey, the CEO of Ramsey Asset Management, for a wide-ranging discussion. The conversation spans from Russ’ time as a student-athlete at George Washington University (GW) to the founding of the investment bank Friedman, Billings, Ramsey (FBR) and the inception of the GW Investment Institute. The discussion then takes a deep dive into the evolving landscape of artificial intelligence (AI) and its implications for investment. Russ draws fascinating parallels between the early days of the internet and the rapid advancements in AI, mainly through platforms like ChatGPT, enlightening the audience about the evolution of technology. He emphasizes the potential of AI in various sectors, from medical research to corporate infrastructure, and discusses the pivotal role of tech giants like Amazon and Microsoft in shaping this future with an eye on power supply challenges and the burgeoning utility sector. Tune in to discover how AI is reshaping the market!
Rodney Lake
Thank you for joining Market News with Rodney Lake. This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started. Welcome back to Market News with Rodney Lake. I'm your host, Rodney Lake. Welcome from the Innovation Studios at the Rick and Don Duquès Innovation Studios right here in Duquès Hall.
Rodney Lake
Today we have a monumental special guest. Today, our special guest is Russ Ramsey. Russ Ramsey, welcome to Market News of Rodney Lake. Thank you so much for being on the show. I'm going to say just a second about you. And please add some more to the intro here. But you have been a foundational member, the founding member really for the GW Investment Institute, which obviously I serve as the director of currently.
Rodney Lake
And you have a rich history at GW. You're a GW alum. Which we'll get into here a little bit. We're very delighted. I'm very grateful that you willing to spend some time on the podcast today. But you started here at GW. You went on to do many things, including founding your own business. FBR, starting your own asset management company, Ramsey Asset Management.
Rodney Lake
You were the put the seed money in you, and I'm up for the GW Investment Institute, which has become $10 million today. And we will talk a little bit about that. You've done a lot, in the world of philanthropic gifts, and other activities. And you're a busy person, and you're doing lots of really cool things.
Rodney Lake
So we're very excited that you're here. So number one, so we know you're a GW alum, but maybe let's dive in a little bit to the origin story. How did you get to GW.
Russ Ramsey
Rodney, thank you. I'm very excited to be here today. I am just incredibly impressed in your commitment to the university and your creativity and what you have done to, you know, take our little vision 19 years ago and turn it into. Really? There's nothing like in the United States of America, as best I can tell.
Russ Ramsey
Or for that matter, the world. So I'm really delighted to be here. Thank you. And you know, George Washington University is a very special place for me. I think he's, you know, I was the first of my family to go to college. Yes. A wonderful man named Mike Toomey, offered me a scholarship, and it really changed my life.
Russ Ramsey
Even though I had been basically born and went to high school in suburban Maryland, you know, coming down to the Foggy Bottom, being exposed to the dynamic, even then, very dynamic, energy around campus, the diverse nature of the place. And, you know, we were playing Division one baseball and experiencing the challenges of playing on what I lovingly call the worst baseball field in America, which is the ellipse, I think.
Rodney Lake
Which many people know that, by the way, that you guys actually played on the ellipse. I think when we say that to people now, they think it's a joke.
Russ Ramsey
Correct. But it was it was real time. And, you know, and in some respects, when you first go down there, you're just in awe because you're looking around and there's the White House and the monument. And, on any given day, there could be, you know, presidential older people coming in and everything stops and they make you sort of side.
Russ Ramsey
But then when Penn State kind of rolls in and you've got a doubleheader, that is kind of the key to maybe you go to the postseason and all of a sudden you realize that you've got no fences, no foul poles, no dugouts, no bathrooms. But other than that, you have everything you need in order to compete, and no and no field crew.
Russ Ramsey
But, but it was listen, it was a it was a wonderful experience. And, as I was sharing with you before, we just we just had the awesome experience of the university's Hall of Fame inducting our entire 79 team into the Hall of Fame. Because we it wasn't quite a couple outs from one of the College World Series, but we lost Arkansas in a 1211 thriller, and they ended up going into the final game undefeated.
Russ Ramsey
And, you know, we were in the what's equivalent the day of the Super Regionals, right? Which had teams that we just didn't ever imagine we'd be on the same field with that were there Florida, Florida State, Arkansas, you know, Seton Hall, it was it was quite a it was it was quite a memorable thing. And it goes back to the theme that you are so incredible with your students, which is, you know, really urging them to stay connected, like right from the beginning.
Russ Ramsey
Yes. And staying on and, you know, in our case, bringing that group together after a long time. Yeah, was was quite something quite special. So, this place is very special to me. And my my degree here really was, and a very important sort of first step in me, given me the the ability to find some success.
Rodney Lake
And you study business just for everybody who didn't know what you study. So obviously, you've been in the business school is apropos here. So you studied here at GW first one in your family, as you mentioned, to come to college. What do you do next? So you leave GW you have a fancy degree now. You had a really good time playing baseball.
Rodney Lake
Really outstanding times for the team. And great that they got inducted. That's a wonderful story. And bringing, you know, being back on campus after decades is a really wonderful set up. And as you mentioned, as I encourage all my students to stay connected, we just did an event for our Ramsey Scholars, which we'll talk about a little bit.
Rodney Lake
Now. What's next? You leave 1981, which is a great vintage for everybody out there at GW history. 1981 grad. What's next?
Russ Ramsey
So, my story is my story. And I could sugarcoat it, but the reality was I wasn't a particularly attentive or good student. You know, I was here because I wanted to be Pete Rose. I wore 14, I dove headfirst.
Rodney Lake
Nice.
Russ Ramsey
I didn't gamble, and still don't, but he personified what hard work and hustle was all about. I'd run full speed to my position. If I walked, I would run full speed down to first base. People would sort of roll their eyes, make fun of me. But I would look in for any kind of an edge, right, to try to get up on the competition.
Russ Ramsey
And so I always knew the value of hard work. And while big league baseball wasn't in my future, when I graduated in May of 81, I realized that I really didn't know how to do anything. But I did know the value of hard work, and I had actually turned around my very bleak academic record my last two years and finished with a decent GPA and set out to pay off the student loans, which my scholarship didn't cover.
Russ Ramsey
And so the reality is, I didn't know how to do anything, but I knew how to work hard. And I ended up getting a job in sales and spent the first four years of my career literally going door to door, selling office equipment, postage meters and copiers and ended up with a great company, a company called Pitney Bowes, which was, you know, really quite well thought of company at that point in time.
Russ Ramsey
And they were very good about taking hard working people, giving them a little bit an opportunity. And that was another key important break for me.
Rodney Lake
And when you were there, you're doing sales, which is your front line. You're talking to people directly. Yeah. What are some of the takeaways that maybe you could share with everyone that lessons learned from that time period and that were helpful later, in your business career?
Russ Ramsey
Well, sure. And even someone that was perhaps more attentive academically than I was, regardless of sort of how you went about it, I selfishly believe everyone should start in sales. And if you have a very specific degree, you're an engineer or you're an accountant or you, you know, you want to go into academia or you know, you want to go into, perhaps, philanthropy.
Russ Ramsey
But away from that, I encourage everyone to start in sales. Why? Because that's how you figure out who you are. That's where the rubber meets the road. It's where the customer interacts with the product or service. It's where that front line individual who's responsible for getting the order, getting the insulation, making the customer happy, you, then you, then you find out like what it's all about and what you're passionate about.
Russ Ramsey
In my case, I love commission sales. I love being, you know, basically being able to chart my own destiny. And I loved I love that, you know, every aspect of that. And I think it's probably why I basically ended up as an entrepreneur. That was really the last job I really had. And, and, but at the same time, I think it's also where I think people can then find out what their passion is.
Russ Ramsey
You know, they want to, focus on all the financial aspects. They want to be in supply chain. They want to be part of manufacturing and research and building new things and creating new products. They want to run it. They want to be part of H.R. They want to be the CEO. I never wanted to be the CEO of a big company.
Russ Ramsey
Yeah, because, well, because of the way the compensation worked. I didn't want to take a pay cut, but, but but but it's it allows you to kind of know who you are, right? And then just to keep the Segway going, this gives down to the value of relationships is, you know, I went in there, you know, wet behind the ears, didn't really know anything.
Russ Ramsey
And, you know, met the group in the team. And Pitney Bowes was very smart about how they incentivized and their brand. They had a brand system. And as I was coming in, the sort of top producer and someone really looked up to was Eric Billings. Yeah. Who was, you know, in the future, one of my partners at Randy Billings Ramsey and,
Rodney Lake
And so the origin story for FBR, which we can get into.
Russ Ramsey
Sure, sure. So Eric was kind of it finished what he was doing and was on his way to, you know, like Mason and Bill Miller and a whole nother sort of journey before, you know, we all came back together and, but it's a value relationships and, and, and and seeking out mentors and, and people who are willing to share, how they do and what they do.
Rodney Lake
So now let's fast forward a little bit. So, so your first job out of school was sales. Learn a lot in that. I also agree that when you're that front line piece, you learn a lot of great lessons and you you definitely learned what it takes to build a business and grow it because every business needs revenue at some point.
Rodney Lake
Yes. And so that's a key trait, a key skill for especially a leader of an organization, which you go on to do, has to have. So if you want to add anything else, please do here. But then let's start talking about the, the formation of FBR. How did that come about?
Russ Ramsey
Sure. So, so I mentioned, Eric and and our friendship and, and that has endured, you know, forever and, you know, we were friends. I was always interested in the stock market. You know, 1981 was not a great time to seek employment. Right? The truth was, I really couldn't spell Wall Street. It wasn't like that was really something that I spent my life, thinking about, thinking about.
Russ Ramsey
But, but, you know, I started getting interested in, in the markets, starting getting interested in equities. Eric had been, very, innovative in successful and, had gone to Legg Mason, which at the time was really a regional sort of brokerage firm, but had this, you know, teeny little mutual fund called the Value Trust.
Russ Ramsey
Which a guy named Ernie Keeney had started. And Bill Miller, who was the then director of research, and Eric used to call on accounts, you know, throughout, Boston, in New York and, do the same thing we basically started fbar with, which was to try to, you know, sort of get money, you know, get paid for your for your stock research.
Russ Ramsey
Right. And, and Eric had become quite interested in, the kind of savings and loan industry and the kind of mutual savings and loan to public ownership, which is a whole nother story about one of the great places to have asymmetric sort of risk reward, investments. She's really doesn't exist anymore. And, and Eric had become, very successful in getting to know Peter Lynch at Fidelity.
Russ Ramsey
And, Peter, if you go back to the, heyday of fidelity, Magellan, you know, Peter, love these savings and loans because they traded at prices you never see. Today they become public. They traded 50% of book value. They were, you know, riskless investments. And he was even then Magellan was was was big enough that he couldn't buy one.
Rodney Lake
Right.
Russ Ramsey
Oh, and so we became starting to become interested in those. And, I kind of got the, you know, bit my mouth, so to speak, with the market. And, and that was kind of the beginnings of, big beginnings of kind of, you know, our, our business.
Rodney Lake
Nice. And so very curious, maybe dive in just a little bit more. So, any what were the initial spark? So you went from not paying attention to Wall Street to obviously leading a firm, an investment banking firm. How did you know what was the maybe the spark, if you can remember, was there any one thing or was it the influence of Mr. Billings or what was the what was the spark that really got that ignited?
Russ Ramsey
Sure. Well, there was one stop in between, which was, in between starting FBR the, the sort of the three of us came together at a, very storied, a Washington based, investment firm called Johnston Limited Company. And Johnston Lemon, when we came together, what had had to be evolved into a retail firm, but they had had a number of innovative, leaders, Jim Johnston, Jim Lemmon, and then, you know, in the 50s, had come up with this kind of, crazy idea to start a mutual fund, which ended up being Washington Mutual investors, which at one point was the one of the five biggest mutual funds in the
Russ Ramsey
world.
Rodney Lake
Wow.
Russ Ramsey
And, also were very wise about their sort of core competence and, sort of outsource the investment management function to cap research in the West Coast. Okay. Yep. Some, you know, business, and other, you know, sort of residual, fees that came in over time. And so, you know, we were part of an institutional group there, which is how Manny Friedman sort of entered the okay case because we became kind of the institutional, research boutique part of Johnson Lemon.
Russ Ramsey
And that's how we kind of came together and started thinking about where we could, you know, have a stock picking business, felt institutional investors and, be creative and innovative.
Rodney Lake
Excellent. So now, what was the sort of the genesis, the first day or the first couple of weeks? The first couple months of FBR what did that look like, and how did you ultimately decide? The trio would say, like, look, I think we have enough. We know what we're doing here. Let's get out on our own.
Russ Ramsey
So we had a wonderful experience at Johnson Lemon. And Jim Lemon was it was a terrific, leader and, and was really, pleased to have us, you know, growing sort of institutional business. And, and that is evolved, you know, we were what you would refer to today as sort of generalist stock pickers. So we you had a group of very intelligent analysts that would, you know, look for what we thought were mispriced securities.
Russ Ramsey
We would write research reports and then we, you know, in the old fashioned way, mail them out. And then we would try to, you know, get, get paid commissions from the, from the from the mutual funds and investment counselors and others. But we then also got smart enough to smart about like, maybe you also should sort of specialize.
Russ Ramsey
And so we ended up having a real edge in these savings and loans in the thrifts. And then that's right. When Drexel was blowing up Drexel, who invented the high yield bond market or what was called the junk market? Right. You know, had sort of abandoned, you know, whole sector of bank and savings and loan and, and, and, and high yield preferred and bonds and so, you know, we started to develop a sort of a trading capability, not just in equities and over-the-counter securities, but in fixed income and, and all of that, all of that was sort of blowing up at the same time.
Russ Ramsey
And, so we really specialize in essentials. And we realized in order for us to really grow, we needed more capital. And it was, it was there was a risk component to that, that, in hindsight, I if I was Jim Lemon, I wouldn't have been comfortable with that either. Okay. So, you know, those kind of entrepreneurial sort of, you know, sort of spirit was, was driving in all of us and we felt like we needed more capital and probably needed to take more risk.
Russ Ramsey
But there was a, you know, real business
Russ Ramsey
And so as an entrepreneur, I've been fortunate to be around a number of different businesses. But when you sort of are charged with governance of a couple of hundred year old institution, that will almost certainly be here a couple hundred years from now, you sort of think a little differently about lots of things. And so prior to that, you know, I, I think I'd come on as a, as a board member in 97 or 98.
Russ Ramsey
And so as part of that, you take on different responsibilities. And so I learned to help, you know, a lot about how the whole university worked. And then when you and I first met, was, you know, we were we were kind of iterating, going through, bringing the management of the, endowment in-house. Because we had a relatively small endowment.
Russ Ramsey
It was managed, by, third party managers. And it was advised by, you know, one advisor. And I think we felt like we could probably do a better job bringing in in-house, you know, having a single point of accountability with a chief investment officer and sort of building out, you know, intelligently sort of that for, for the purposes of, of trying to maximize performance.
Russ Ramsey
And so, I had the privilege of, of trying to set up that investment office and, made the first hire of, Don Lindsay, who deserves great credit in, in being willing to actually put his reputation on the line for this class.
Rodney Lake
Yes.
Russ Ramsey
On Barry, when we first started it. And so, you know, when you iterate through, you know, a multiple years of, of, of an investment endowment, which an endowment, it by definition, is permanent capital, right? It has a payout to support operations. So the capital, preservation is very important. But the enemies, to that endowment are obviously, inflation and, and payout.
Russ Ramsey
And so just to stay even, you know how how are you look at and think about it. Pay on a dime. You know, you've got to be making seven, eight, 9% a year. And so in order to do that, you have to be very thoughtful about both asset allocation. And also about, you know, sort of net returns.
Russ Ramsey
Right. And so it was a particular, pet peeve of dons that, we had at that at the time in most endowments today. Well, not most, but many do still have the largest allocation to, you know, some type of a liquid strategy or an equity strategy. And, and that we were not getting we weren't keeping pace with the S&P 500.
Russ Ramsey
You know, you know, SBI has been a big star this last seven, eight years. But even throughout the, you know, even then, right, the S&P 500 was kind of the bogey that that you had to really kind of use as a, as a bogey. And so it was just like, what? Why can't these highly paid managers outperform the S&P 500?
Russ Ramsey
And so we literally sat around brainstorming and said, why don't we set up a class and give the students, the basic outlines, mirror Buffett and Munger, right. And, and keep the textbooks very straightforward and, and let's see how it goes.
Rodney Lake
Well, I'll touch on to the investment office a little bit because I work there. And, that's how I first met you, as as chair of the board and having the investment committee and building this function internally at GW, which I am grateful for, too. So, and I'll mention Dan Lindsay as well. And so I try to keep up with Dan.
Rodney Lake
I haven't talked to him. So recently, but not not that long ago. And just to let him know, I'm grateful for for the opportunities he gave me, but I think it was a fantastic set up, sort of, you know, to do a little bit of nostalgia. And when I was there, I sort of when we were about 550 million and I left to come over to the business school, where about a billion and a half.
Rodney Lake
So I think your idea worked there as well. And so I think that was a fabulous set up. And I think that that structure that you put in place is super important. And I think that's one of the things that is, for any institution, having someone who knows the market, someone who knows that world, I think it's really important for someone like that to be the champion, to do something like that in that activity, because, as you mentioned, it is a hundreds of years old institution.
Rodney Lake
You got to bring that special knowledge to bear. I think to do something like that, to give you a lot of credit, which you deserve when you set that up. And obviously I benefited that, directly. And I had a great time in my time at the investment office over seven years, I was a generalist. We covered everything.
Rodney Lake
That's how Dan set it up. So I think it was a fabulous run. Had a wonderful time. Certainly helped the university make hundreds of millions of dollars. We won't take credit for the real estate, but outside of the real estate, we we absolutely performed well and did really interesting and fun things. That benefited, I think, the university.
Rodney Lake
So to the class, I served as the first teaching assistant, as you probably remember, and Ethan McCarthy at the time was the director of research, was.
Russ Ramsey
Another key person in this because he had got the bit in his mouth where he went, undergrad at Virginia Tech. Yeah. So Virginia Tech deserves a little shout out here. Yeah, absolutely. Because they, he had, had gone through their program and it was what got him his first job at Rowe Price, which is where he was prior to that, he was the first internet analyst at Timber Price and and was an is a very, differentiated thinker and, and, and a clearly talented, very talented professional and had a lot of passion to come in and teach the students.
Rodney Lake
Absolutely. So I'm grateful to Ethan McAfee and and grateful, for you and Don. And that was sort of the last person on that ship. As to but I was working for the investment office, but I think that was a, you know, foundationally, I think we were designed for success at that point. And I think we talked about, well, there's limitations, certainly if you say, okay, well, we're going to see this class, you enormous said we're going to, you know, after these discussions that you and Don had and Ethan, we're going to see this class, Don and company are going to run this class, Don and Ethan and company.
Rodney Lake
I was the in company at that point. I going to run this class. And, you know, we're going to have a pretty straightforward set up. As you mentioned, it's going to be single security analysis. So we're going to teach students really how to pick stocks. And we talked about that a little bit at the summit. It's less about portfolio management at this point because you know you're dealing with new analysts.
Rodney Lake
Step one is look we're going to have to train you on how to understand a business. And then what are the tools to do that. And as you mentioned we use Buffett. So it's we talk about the business. We talk about the management. We talk about the evaluation of the company. And we talk about the balance sheet and the balance sheets, the piece that we added that Buffett doesn't explicitly write about in 1993, in your letters, where we stole it from.
Rodney Lake
And so, you know, really, those are the teachings. But, you know, what are your ideas about, you know, you know, so far. And we can fast forward if you like. But certainly the thing grew and evolved over time. You know what? How do you think, this thing has worked and what were your initial goals? And do you think that those goals have been achieved?
Russ Ramsey
So there's a few things there. So I'll sort of try to take them one at a time. Sure. So in terms of looking back 19, 19 years ago, I would say I had very modest expectations. And while we made the gift and we set things up, I, I'm not sure I had any, I'm not sure I had any terrific projection of, like, how things would go.
Russ Ramsey
Okay.
Rodney Lake
And which is probably appropriate at that point. Yeah.
Russ Ramsey
Having said that, I, I firmly believed that the impediments that we eliminated, which are a, a detriment to our performance, were real and have proven themselves out, which is, over trading.
Rodney Lake
Right?
Russ Ramsey
Short term reaction to news. Pressure to keep up with indexes and peers on monthly and quarterly reporting. Right, right of redemptions, which comes from sort of underperformance or, you know, bad performance. And and then just the idea that, we're here for the long term, I just those alone, I felt like we probably had a good shot of, of at least not blowing up the capital.
Rodney Lake
Which is a good initial goal.
Russ Ramsey
Yes. Good initial goal. I think what has emerged, and I think there's some things that are even more amazing when you look at the performance and, you know, you can actually educate the, our listeners on the performance of the fund, as well. But I think we need an an even more amazing outcome is to your point, the class is designed to teach stock pickers, right?
Russ Ramsey
Not to, be portfolio managers. And so just the contract of the fund, it's even more amazing in the sense that the big out performers Apple, Nvidia, Microsoft, these right. They've all outperformed without additional capital going in. Correct. Okay. Which is even more amazing. So you don't go from 0 to 8%. You go to a very small percentage.
Russ Ramsey
And that is just by leaving it there, letting your winners run, not having the constraints of oh no, it's no no longer. Now a mid-cap because I got to sell it because I have a mid-cap mandate. Oh. It's now, too big. Oh, it's more than 10%. So I got to sell it because of its mandate. So without those constraints, now the sword can go both ways.
Russ Ramsey
And we we know that. Yes. But but I think it just it goes to the, to the art of getting the individual security selections right. And to some degree, the, the value of the peer review. Right.
Rodney Lake
So, absolutely.
Russ Ramsey
We can maybe educate, our listeners on how how the actual stock picking process works. Sure.
Rodney Lake
So and I think this gets to this point is that there's a little bit of the wisdom of crowd happening here. So we have classes, you know, 20 to 25 students who pick these undergrad and grad, and now, just the everybody that the investment suits over 10 million. If you go on to our web page, just Google GW investment so you can get our quarterly reports where we publish our returns.
Rodney Lake
So it's very transparent, good and bad days, and our top positions. And, we'll talk some about those. So you mentioned a couple already here. And so the students go through this semester and this is a 15 week course, the standard course, as any other university as a three credit class, just for those who are interested in that.
Rodney Lake
And, and there's it's a rigorous class. So it's a lot of work. So it we're part of this is it simulates having an internship basically on a Wall Street type of investment research desk where the expectations are that, okay, you're going to do a first. You're going to do a sector presentation with your team. So you got to work within the contracts of a team.
Rodney Lake
We collapse a couple, you know, sectors down. So we have six. And so you're going to be on track or you're going to be in health care or you're going to be a consumer as examples. Yeah. You make that pitch, you come up with a sector thesis and that kind of sets the table of like where would you like to take the portfolio and then make sure you understand the current positions that we have.
Rodney Lake
We have about 50 positions. So we're about a 10th of the S&P. But we're highly concentrated within that which, which we can talk about but 50 positions overall. And I think the students do an excellent job at that point. But it helps them get sorted. They do a very rigorous weekly analysis. We have access to Bloomberg, FactSet now.
Rodney Lake
And also our students are using thanks to ask a Polito shout out a Latin, which is their risk and analytics system that Blackrock uses. And so we have these tools that students use. And then okay, we get into you're going to make one recommendation. And this gets into the over trading piece. Students only make one recommendation per semester so everyone can see us coming at the end of the semester.
Rodney Lake
We're doing trading. No one's picked up on. I don't think anyone's really front running us yet, but, I don't think we're quite big enough for that. But maybe Jane Street and others are, Who knows? So it really all of that work that 15 weeks and this was the at the inception, we want to maximize the amount of intelligence that you put into one idea, for, for one semester and, you know, make it the best possible.
Rodney Lake
And then the peer review, as you mentioned, is that they have to garner 80% of their, of their, peers to get that into the portfolio. And some say, well, why 80%? That is, you know, for an investment committee, which we tell students like and I ask them, like, what do you think the percent is for an investment committee to agree for something to go into the portfolio and they usually rightly get 100% and like, yeah, you don't have an investment committee where there's a lot of dissension.
Rodney Lake
It's like, well, that's not the point, right? It's like we have to uncover these things. If there's dissension, let's let's tackle why we make it 80 is because within the construct of this class, in 15 weeks, maybe somebody doesn't like somebody's outfit that day or whatever. The reason is we allow we cut that, you know, 20% out to allow for sort of outlier, you know, you know, disagreements or lack of understanding.
Rodney Lake
Maybe it was too quick or whatever it happens to be. And so we try to accommodate for that piece, but otherwise you have to get the vast majority of your peers, which was functioning just like a regular investment committee. And that's what they serve as the collective. So there is some portfolio management happening at the collective level, but not at the individual level.
Rodney Lake
And so that's tough because we've definitely had bad ideas coming in and out of that sort of pitch days. But most of them actually get voted out. They just do not ever make it into the portfolio or they never make it in. Rather, they don't get voted in. We only have one zero in the life, 19 years.
Rodney Lake
We've there's only been one zero. You. It was that. That's Freddie Mac. Okay, we're still waiting. Maybe, but there's only been 110, to speak of. And not that we can't have a zero from here. Yeah. As you mentioned, the market humbles you, and you learn every day. But so far, the performance has been good.
Rodney Lake
And so what that has led to. And again, people can find our performance online, but we're compounding you know, ten years at over 13%, 20 years or 20% for, for the last, few years. And so these are exceptional numbers for when you consider who the analysts are. So most of our students have no experience, at all in this world.
Rodney Lake
They're taking this class to learn, and that's the primary objective. And that's what we're there for. The performance is definitely, I think, a surprise a little bit for all of us to be at this level. But it goes to, to the point of, well, when you start solving some of these problems, well, maybe that's the key to outperformance.
Rodney Lake
Number one, we know that we have to have some process, and we developed that process from day one to say, okay, look, we're going to train the students to look at the companies in this same format. We're going to rate these, and you're going to pitch it to those, and we're going to be looking for high quality business.
Russ Ramsey
And how do you screen head of the student screen? When they for for names.
Rodney Lake
Yeah. So that's where, you know, you're using Bloomberg, you're using a FactSet. And what we're telling students to do is look for a high quality opportunity. So what we're looking for, is the classic, some of the classic, maybe more modern day Buffett now, certainly Peter Lynch. And in this type of a company where we want a high quality business, with a, business that, you know, has high returns on equity, ideally capital, light, you know, so not very capital intensive, but we across all sectors.
Rodney Lake
So if you're in industrials, that's not always the case. But if you're in consumer, you know, how do you find a consumer business. That's capital light. You try to go out there and you find that, you know, you think about Costco, which we own a large position as an example in the the way that they manage their inventory.
Rodney Lake
And so we're trying to train students, look for those outstanding businesses. And then on the management side, this comes from Buffett. Do you believe. And with this management says do you think that they're good stewards of this? Do they have a good track record? And looking at their capital allocation, we use an acronym for that good capital. But it's really about how do they allocate capital.
Rodney Lake
Have they been efficient, have they been effective or have they just done, you know, you know, ten acquisitions and and paid in stock and really sort of depressed the whole cap table for everybody. And and that gets into the balance sheet and it's like okay. You know yes the company's bigger, but it's less profitable. You know, returns to shareholders have been mediocre.
Rodney Lake
Maybe at best. Maybe this is an empire builder management team and they're not, you know, really focused on the shareholders. And that's where we get into, okay, go look at the proxy statements. How is management compensated and making sure that we're aligned as minority shareholders? Because generally speaking, Tim Cook doesn't take our calls even though. Right. It's it's a big position.
Rodney Lake
Right. And Jensen Huang doesn't either right now. But we have to think. Okay, well, without talking to this management team, you know, how can we be assured, right. We can't always be a fully assured. But how can we best understand? Well, if the alignment is there and their interest is aligned with ours, well, then that's probably at least a good start.
Rodney Lake
Down that path. And on the valuation, this is probably one of the most challenging things. Where, you know, we started, I would say, leaning more towards Buffett. So a lot of our earlier, companies. But Apple is one of the first companies we bought, which is over 100 bagger, just for everybody. And that we bought it in 2005.
Rodney Lake
And and did the Charlie Munger sat on our hands. We did trim that once. And it's been over 100 bagger so that that's been great. And Tim Cook has, has been a cash machine for, for that business. So that part is challenging because all the metrics and we've talked about this a little bit before, all the metrics.
Rodney Lake
And I'd love to hear your thoughts on this. All the metrics that you use for valuation from, you know, early, early days, let's say Buffett when he was working at Graham Newman and you're looking at these net nets and you're looking at PS and you're saying like, let's find stuff that's cheap. You know, in the classic sense, the cigar butts.
Rodney Lake
Well, hasn't really worked on the types of companies that have really succeeded. Now, Amazon is is given as an example that many people use where, you know, since IPO, and you had some periods where they sold off, but at, at a lot of different points. Amazon was cheap, right? If you bought it and you would have done well, you know, you know, obviously you make more depending on where you go, but you would have still done very well.
Rodney Lake
Yeah, almost all along the way. So I'm, I'm curious, on this valuation piece in particular, and we'll mention the analogy, but how do we, you know, think about that moving forward and for, for people out there who are, you know, maybe trying to learn how to invest, or how to follow companies, you know, how do you think about valuation nowadays versus, you know, sort of the classic, you know, let's find a cheap PE.
Russ Ramsey
Well, the the art of valuation, in my judgment, is, is indeed that it's the art evaluation. And so, so I in the types of businesses that we like to invest in, which are similar to how you've set up the investment fund.
Rodney Lake
Yeah.
Russ Ramsey
You know, we try to dumb it down and keep it pretty simple as well, which is we like to look at the core returns in the business. Right. And that's unlevered returns cash on. Cash returns, as, so return on assets as well as return on equity. Yes. And then what we, you know, really want to spend time looking at is, you know, how does management think about those, those free cash flows and, and the reinvestment rates of those free cash flows.
Russ Ramsey
And what you like is to have a business that has a natural sort of, reinvestment rate. And so one of our biggest positions is a company called NBR, which is one of the best performing investments, ever. Yes. But a company that was bankrupt in 92 that went with a chapter 11 restructured and came out, and the dollar price of the stock now is just under $10,000 a share.
Rodney Lake
Nice.
Russ Ramsey
And it was, you know, $0.50. Excellent. Return. Yes. Share. But this is a a business. That was a very, over levered and low margin and cyclical homebuilder.
Rodney Lake
Yeah.
Russ Ramsey
Who now is, you know, I think the eighth or ninth largest homebuilder in America, it's a $30 billion market cap. And they have stayed to a very straightforward model, which is they learned, which had got them into into bankruptcy. And what they've learned subsequent to that is that they don't need to inventory and own their assets.
Russ Ramsey
They can option their raw material, which is primarily land. Right. And if they take a and it's viewed as a commodity business, right, it still has 50% return on equities. Just that debt free. And they can simply build faster and more efficiently than their competitors. And more importantly, in a, in a, in a country. And they've had tailwinds now for the last ten years because we you know, now for a decade haven't been making enough homes, right.
Russ Ramsey
To just keep up with the, inventory depleting and just the natural growth of, demographic growth. So, so as they have, and they've never had an unprofitable year. So the last 25 years, they've never had an unprofitable year. So so they weigh the cyclicality by, by, by being the biggest sort of builder in any one of their markets.
Russ Ramsey
So having the most market share and then just moving and adjusting with the market. So if the average price of the home moves up, they sort of follow behind you. You know, we go through tougher times like we went you know like it did, you know pre-COVID and even in Covid. You right. You know you come down and and the point is you know, businesses, even if it's a so-called commodity business, if, if, if the management which the, the management has, that goes, you know, down almost to the administrative level in terms of how they compensate everyone in stock.
Russ Ramsey
Okay. And so everyone is very focused on the sort of the cash returns in the business, the reinvestment rate, and in the in the case of, of NBR, you know, when, when business gets slower and we have the cyclical economic downturn, they just, slow the business down, they pay off their debt and they use all their excess cash to buy back stock.
Russ Ramsey
And it's a very simple model. And I think that's an example of, to me, the types of businesses that, you'll, you'll, you'll never be disappointed in owning those kinds of things. Right.
Rodney Lake
So in the valuation side you pay up at some points. Yes. And that's the. Yeah. But but those are the things. And I think, you know, that's something that we say is like the valuation is a part of it.
Russ Ramsey
That is a part of it. And but but you have to be you have to go beyond traditional metrics because, you know, traditional measures say, oh my gosh, never pay more than one and a half times book for a home builder. It's going to be capped at ten. Be I mean, you know, NVR has consistently traded at, you know, 4 to 5 times book value.
Russ Ramsey
And you know this P is going to be, you know, in the, in the high high teens low low 20s. But it's a, it's a great business. And the biggest mistake that I've ever made is selling a single share.
Rodney Lake
No. Well that happens. Yeah. And and maybe, maybe just a follow up question is, you know, what's your favorite holding period for for a company like this.
Russ Ramsey
Well it's, it's not been forever but it's been for 20 you know plus years and, and that's that, that's a you know at this point in the cycle I think it's a very interesting very interesting question because it's, it's not I think people make a mistake and say what it's not. What is my holding holding period.
Russ Ramsey
That should be the question. It's like, what is the reinvestment option? Right after tax? And how is that going to be superior to the capital allocated in the in a bigger company. Yeah. But so, so for for for the thoughtful stock picker I think there's two types of researchers primary research, which is how you kind of do, you know, everything you're doing to try to get to the point of of pulling a trigger and owning something.
Russ Ramsey
Yeah. And then there's maintenance research. And so I think with maintenance research, you always have to be gauging, what's different. Has succession plans been put in place. And will the next generation be as you know, cold blooded, inattentive as the, as the previous, you know, is the moat widening or narrowing? And and I mean, is it is that edge is that edge still there.
Russ Ramsey
You know, and and it's going to show up in the, it's going to generally is going to show up in the returns. Right. And it's going to show up in the, in, and is the communication style that comes from, that management, if you use NBER as an example, for example, they don't do quarterly calls, they don't do projections, they don't talk to Wall Street.
Russ Ramsey
They they put out a quarterly release, they put it on an annual report. And, so a.
Rodney Lake
Little bit like Berkshire Hathaway, it's not.
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Russ Ramsey
Very similar. Yeah. They don't have a big annual meeting, but they have an annual meeting. Yeah. And, but it's keep it simple, stupid. And don't and don't, don't detract from, from, from what they call crimes. But I think you. Yeah, but you have to pay attention to the industry. Yeah. And, and on the margin, and I can't think of a great example right now, but, but there's many examples of companies that had great businesses, in the world changed.
Russ Ramsey
Yeah. And all of a sudden their great businesses became not great businesses.
Rodney Lake
Oh. Research emotion. You know, you're an example.
Russ Ramsey
That's a very good example.
Rodney Lake
BlackBerry which yeah. Everyone if you looked back, you know, when in their heyday we'd be like, oh well they, they own the world. And right now who's going to Disintermediate this? And even when the iPhone came out, it was like, yeah, sure, that's a personal device. It's not your business is not going to that. And so.
Russ Ramsey
Tupperware, I mean, one of the great brands of in America and, you know, bankrupt.
Rodney Lake
And so, so you do have to be, rigorous in your analysis, in the maintenance research, as you mentioned. And so I want to just rap on the Institute for, for one moment, cause I want to go back to AI and but to tie those two things together, a is around this artificial intelligence, and we, mentioned that a little bit earlier.
Rodney Lake
And so our largest position for the investments, see right now is, is Nvidia. And and that as you mentioned, is, is the result of an investment that happened.
Russ Ramsey
Give us a quick history on Nvidia. When did it go in the portfolio 2019. And why to go in.
Rodney Lake
So the analyst pitched it and and the grad fund it's both in undergrad and grad. But this is the thesis you go back and look is very similar. One of the things that I think when you have fresh eyes, look at these things. The analyst both saw this idea that I could be a play, a big role.
Rodney Lake
Now, to be clear, I don't think they predicted, you know, ChatGPT that that's not certainly what I'm saying here. But I think when they saw that, they saw that that is a big growth market. Crypto was still something back then as far as like the number of, GPUs that they were selling into that market. But I think what they saw was a company that was run really well.
Rodney Lake
Jensen Wang If you really look at the management and how they're running, it's a very unique way that they run the company. And so when we go through the framework and you talk about the business, now the gross margins now are, you know, 70%, but they were not 70% then. They were good, but not not where they are now.
Rodney Lake
Jensen Huang founder CEO so that was highly rated then as it would be now. And a lot of confidence there. And they had done some interesting things, to address the gaming market, to address the crypto market. And we're getting involved. I think earlier days in the, you know, server market. And I think that that was part of that.
Rodney Lake
So but they had the foresight to see like, okay, there's lots of different shots on goals that Nvidia could have. And again, they didn't predict. ChatGPT. So like you said, better luck even. Good. I think that was partly luck. And of course the they have, rocks, you know, solid balance sheets that fit our equation to, talking about unlevered, you know, returns, you know, we are always looking on the balance sheet to make sure that clean as possible.
Rodney Lake
You know, we're equity investors. We don't want to be too concerned about the, the the opportunity to go bankrupt.
Russ Ramsey
So it went in in 2019.
Rodney Lake
2019.
Russ Ramsey
And and one by.
Rodney Lake
One by
Russ Ramsey
And went in at what percent of the portfolio.
Rodney Lake
Probably like a 1 or 2%.
Russ Ramsey
Okay. Today it's what.
Rodney Lake
25.
Russ Ramsey
Percent. Okay. Got it. So and so there's not you haven't sold a share.
Rodney Lake
We haven't sold a share. And so that's something that we monitor as you mentioned sort of the maintenance research we monitor every day.
Russ Ramsey
It's what would cause you to sell. Well what do you think would cause the for either to be reduced or to would it come out entirely of the portfolio?
Rodney Lake
No, I don't think we would do that. Somebody could recommend that. I think I would be reluctant to, to to have that happen. So far no one has, has proposed that as far as the student side from the risk management side, which we're also in charge of, is sort of the administrators for the fund. I think to do something, outside of that is the to be worried about a specific part of their business, or to see a real change in the margins.
Rodney Lake
Again, the 70% margins were not always the case. And I think that that's a real if you talk about the bull case, in the bear case that people like the to do on any company, but specifically within Nvidia, you can definitely see where, you know, maybe this, this type of margin doesn't last. The what would also changes.
Rodney Lake
Do you see a real threat coming into the business. So is, Amazon building enough substitute chips that's pulling off some of their business? Is is Google doing enough? Is Apple, you know, going to take a bite out of this apple to speak? So to speak, pun intended, when you have 70% gross margins and 50, you know, plus percent net margins, it's going to attract attention.
Rodney Lake
And at this scale. So that's something that absolutely watching closely and, and and that would cause I think us to share and that and certainly we've had analysts to do research even off cycle in the summers to really look at this because, that I think that's a real concern, because when you have those margins jump up, it just know, like any other business that attracts a lot of attention.
Rodney Lake
So when you get 70% gross margins, other people say, hey, we have smart people, maybe we can do this. Yeah. The challenge, I think, sort of the, the bull case then is the the environment that they've built has been years in the making. So this is not an overnight success that they have this company and Jensen Huang would talk about and he's on another podcast called acquired as an example.
Rodney Lake
But he's, he's, you know, on sort of a lot of media right now. But, you know, he talks about the company as a platform company. And if you hear those, you know, talk about it, that's how they'll mention it. And they built this software system, Cuda. It's sort of development tools and, and many other things. And that's a whole rabbit hole we can go down.
Rodney Lake
But they've built an environment that looks a little bit like the environment that maybe Apple has built. Yeah. And so that's very defensible. And for Apple has been very defensible for a very long period of time. And so it's I think it's a big challenge for us and our students to really think about, you know, it's become a very big position.
Rodney Lake
We certainly don't want to rest on our laurels and think like, oh, it's going to, you know, everything's great and it's going to continue to grow. But at the same time, we also don't want to sell shares unnecessarily. If we think that that this moat is going to widen in the next couple of years, so you know, what's the right number?
Rodney Lake
I don't know, these are things that we have to think about. It's definitely going to invite competition. I think that's inevitable. And I think you're already seeing some people trying to chip away at their lead because of the platform that they build. And all the developers that they have on this system, again, looks a little bit more analogous to it to an Apple ecosystem that they built for the people.
Rodney Lake
But it's a instead of a business, the consumer, it's a business, the business type of operation. Those things tend to be sticky, you know, to switch out to some of the open source features is, I think tougher for businesses where building these big data centers. So I think if we saw one of those things change, I think we would have to really think about, you know, people really migrating to another system started using some of the more open source opportunities, real, substitutes for, the GPUs.
Rodney Lake
But it's an arms race, it seems, at the moment. And so we talked a little bit about this, but the question back to you is where do you think this arms race is going? You know, maybe this is a lot of unproven spend, and that's another part of the thesis is right now their customers are the so-called hyperscalers.
Rodney Lake
Those companies are full of money. And right now, you know, they're just raising the price. But I think part of the thesis to say that, that's going to continue, at least for the for the next 12, 18, maybe 24 months, is none of these companies want to fall behind?
Russ Ramsey
Russ Ramsey
Yeah, well, I don't have a crystal ball. I do think that there's some similar analogies to what I described before about the 94, 95, 96, 97 timeframe, in the beginning days of the internet. And what we're seeing, with the really the beginning days of, of open AI and artificial intelligence and much like Netscape opened up the world to, with its browser, opened up the internet to the world.
Russ Ramsey
Yeah. You know, I think open AI with ChatGPT, of which now there's 5 or 6 other ones, but that was the first one that literally like that, you know, went to 100 million users. And that's only been a couple of years now. Right. So that's sort of, you know, sort of step number one. So, you know, this sort of the potential, you know, every day is magnified, right, about what, what the potential for, for, for, you know, this, this tool for all of society is so that's sort of number one.
Russ Ramsey
Number two, this, this massive amount of infrastructure build is just trying to keep up with the investments, building more language models, building more capabilities, and getting and getting even more trained, what they call large language models. You know, for the benefit of businesses and corporations, right? But the list is almost unlimited as to what this potential power is.
Russ Ramsey
That that could emerge in, medical research, in cancer diagnostics, and in anything that requires massive amounts of data, right, to be computed and iterated on. You know, there's I mean, it's going to be playing out in front of our eyes. So, you know, I think the way that you try as both as an investor and just as a member of society is you, you know, you pay real attention to the, to the big four, and there's a couple there's a couple more, but it's it's obviously, you know, Amazon, Google, meta.
Russ Ramsey
And and how I play in Microsoft that are responsible for, you know, 80, 90% of the investments and there's no stopping. Yeah. There are impediments, which is I think, something else to sort of pay attention to that are have investment implications, which is, you know, power is a real issue. And Microsoft, I think it's less extraordinary that Microsoft, cut a deal with the owner of Three Mile Island to restart it.
Russ Ramsey
I think the stunning piece of that is they paid twice the going commercial rate. Well, it, you know, way out into the future, which just, you know, to me, demonstrates the, the challenges of getting power. Yeah. In that case, I think your sole source power for just Microsoft. So I think he had to pay attention to, and utilities.
Russ Ramsey
There's been more. There's been more information on the table, the utilities in the last four weeks than I have ever in 40 years. And now all of a sudden they're growth stocks, but their stocks are rerating the commercial ones because you know, they're they've got they've got growth drivers they've never had before. Yeah. But I think you got to pay attention to that.
Russ Ramsey
And then I think you know I think you got to pay attention to where the power comes from, which, is going to be very, it's going to be very controversial, but it's going to have to come from restarting natural gas. Yeah. And so, you know, I think there's probably some interesting, pockets of opportunity within that whole sort of you know, that whole chain, that, that, that exists there.
Russ Ramsey
And, and in terms of, you know, what's next? I think, you know, I think you just have to pay that. You don't have to really pay attention to models that are working and models that aren't. And, and we'll, I think we'll, we'll, we'll all have to be very flexible.
Rodney Lake
Thank you. Now we're going to move to wrap here. So thanks to we had a really wide ranging conversation, and certainly inviting you back already. We can do a couple of sub episodes, if you don't mind, at some point. But to wrap up here, to start with is, you know, what do you think we'll do some worldly wisdom after this.
Rodney Lake
But just to wrap on the GW Investment Institute, again, thank you for the vision that you've had. You and Norma long ago, along with Dan Lindsay and Ethan McAfee, I think, you know, an all star crew who started this. And I think we've developed something that has benefited many students. And now we have 1400 students out there, working in the world.
Rodney Lake
And we had some of them back on campus, the Ramsey scholars. And just to mention that to everybody, we we have $50,000 every year set aside that comes out of the Ramsey suit investment fund managed by students. That goes back to students. And now we've awarded over $600,000 back to students directly for their hard work in one of our classes, the leadership that they demonstrate.
Rodney Lake
And again, we had some of them back on campus for alumni and family weekends here at GW, which I'm super proud of. And I know you're proud of, and it's been a real sort of passion project, I think, to build this, institute and certainly to connect with our students and, and now alarms and who are succeeding and building their own, you know, careers and lives, and we're super proud to be part of, of their journey.
Rodney Lake
So now maybe talk about what do you think is the future for the institute. So we've we've done the, the 1 to 10, that so-called ten, which the market could give, you know, take back from us today. But, you know, we, we did it, for the start, you know, what's the vision? Where should we go from here?
Russ Ramsey
Well, I think we just keep reinvesting in our winners. I think we have a model that works. I think we just need to keep, Improving it on the margin.
Russ Ramsey
And I think we need to, make sure everybody knows what we're doing. So that we can invite, both skeptics and supporters and, and others who, who want to be part of we still call it an experiment, but it's 19 years in the making. And I believe we just need to keep doing what we're doing, executing, keeping an eye on the ball.
Rodney Lake
Well, that's hustling, keep hustling. Which Oscar Pulido, one of our keynote speaker this weekend, mentioned, shout out to Oscar and the bid, his podcast. Yeah. So thanks for that. And I know again, I'm grateful all of our students are currently parents who are grateful. And the alumni who benefited from taking one of these classes, is grateful.
Rodney Lake
Now, maybe to wrap any just worldly wisdom things we should think about not just as investors, as people, but could be just as an investor, you know, things that we should be considering thinking about. To to close this.
Russ Ramsey
Well, Rodney, I think the best thing I can do is just thank you for your commitment, and what you have done to build this place, not just as a place of, intellectual, curiosity and, an execution, but a place really filled with, smiles and, and, and happiness and a zest for the future.
Russ Ramsey
And I would, it is a model, that, that I talk to my children about and, and, and anyone who's interested. So I would just say my, my best wisdom is, to keep, keep doing what you're doing.
Rodney Lake
Thanks. Well, that means a lot. Thank you. That's so nice of you to say. I'm. I feel very fortunate and honored to be in charge of the investment institute. I think it is a special magic that we've created from all the hard work we've put in and all these great people, including yourself and others, that really commit time, energy, effort, money into this.
Rodney Lake
And our advisory board for the Investment Institute as well. And so I'm honored to be running it. And thank you for for saying that. It means a lot. So thank you, Russ. Thanks for being a guest on Market news at Rodney Lake. And now to wrap, thank you for this episode of Market News with Rodney Lake. Just a reminder, this is not investment advice.
Rodney Lake
This is for educational and entertainment purposes only. Thank you very much and see you on the next episode.
Rodney Lake
Disclaimer the content shared. GW Investment Institute podcast is for informational and educational purposes only, and should not be considered investment advice. The opinions expressed in this podcast are those of the host and guest, and do not necessarily reflect the views of the GW Investment Institute or the George Washington University. Listeners should not act upon the information provided without seeking professional advice from a qualified financial advisor.
Rodney Lake
Investing involves risks including the loss of principal. The GW Investment Institute. The George Washington University. And the podcast hosts. Do not assume any responsibility for any investment decisions made based on the content of this podcast. Always conduct your own research and consult with a financial advisor before making any investment decisions.
