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Transcript: MiB with Ed Mendel of Ned Davis Research

 

The transcript from this week’s MiB podcast with Ed Mendel is below.

You can stream/download the full conversation, including the podcast extras, on BloombergiTunesOvercast, and Soundcloud.  Our earlier podcasts can all be found on iTunesSoundcloudOvercast and Bloomberg.

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This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, BLOOMBERG COLUMNIST:  This week on the podcast, I have an extra special guest; his name is Ed Mendel.  What can I say about Eddie?  He is the co-founder of Ned Davis Research which is an enormously successful institutional research shop, sold to Euromoney about six or seven years ago for a price tag that is Googleable but I could tell you it’s in the hundreds of millions of dollars.

He very successfully took the genius that was Ned Davis and wrapped an entire business model around it.  And while Ed himself is very humble and credits Ned’s genius for the success of the firm, really he is one of these underappreciated people in finance who took a great idea and found a way to turn it into a very, very successful business.  I don’t think there would have been a Ned Davis Research without Ed Mendel’s contributions.

He is also very actively involved in philanthropy.  He is one of the minority owners of the Atlanta Falcons and just an all-around inspirational guy.  I’ve relied on his insights over the years not just for helping to put together the forerunner of Masters in Business; we discuss a little bit about how his contributions actually helped lead to the show, but also his insights about running a business and managing people and managing capital and assets and being able to think about the various ways that business is done properly, intelligently, ethically and just being smart about how to run a shop.

And so, I have a tremendous amount of gratitude to him personally for sharing his insights with me over the years.  He mentors a lot of people.  And he’s just one of these people who aren’t a household name but have had an enormous influence on finance and business.  And even though you may not have heard of him, you probably should have.

So, with no further ado, here is my conversation with Eddie Mendel.

My special guest today is Ed Mendel.  He is co-founder of Ned Davis Research as well as the brokerage firm Davis, Mendel & Regenstein which were both founded in 1980; collectively they’re known as the Ned Davis Research Group.

Ed helped to build one of the largest stock and bond research followings on Street working closely with Ned Davis since 1971.  Their research is best characterized as an objective, disciplined approach to investing, focusing on risk management, primary trends and avoiding major financial disasters.

Ed has been associated philanthropically with numerous national and Atlanta charities.  He is also a minority owner of the NFL football team, the Atlanta Falcons.

Ed Mendel, welcome to Bloomberg.

ED MENDEL, CO-FOUNDER, NED DAVIS RESEARCH:  Thank you.

RITHOLTZ:  So, I’ve been looking forward to this for a while.  I think I know you for more than a decade, maybe close to two decades because of your work at Ned Davis Research and being a partner to Ned.

Let’s ask the first question.  You guys began in the middle of a bear market in the 1970s, in your work in markets, how did that impact your psychology the rest of your career?

MENDEL:  It got us focused, and we really became an institutional research firm and we were very fortunate that when we started, it was 95 percent retail and it ended up being 95 percent institutional.  And so, it wasn’t a matter of anything but being at the right place at the right time with the right product.  And I just knew that Ned was a genius and that we would somehow be successful.

RITHOLTZ:  The ’70s, you guys were at a brokerage firm; how did you and Ned hook up?  How did you guys find each other?

MENDEL:  I started at J.C. Bradford in Nashville and Ned came home from Harvard and started working for J.C. Bradford, I went in and introduced myself to Ned and we struck a friendship and eight years later we left to start our own firm.

RITHOLTZ:  You mentioned being, launching your career in the 1970s and Ned Davis Research in 1980, you started mostly at retail but it eventually morphed to institutional.  Was that because the retail investor was not a participant?  Was it the psychology?  How did you shift to such a heavily-weighted institutional practice?

MENDEL:  Bradford I don’t think really understood what they had on their hands with Ned.  So, I was one of the first people to go out and market Ned in Texas, in the State of Texas and in Houston.  And going backwards, I was a retail broker and my career really got helped tremendously by May Day, May 1, 1975.

RITHOLTZ:  When all the commission structures changed.

MENDEL:  Yes.  So, I became really one of the first discount brokers.  And so, it was $0.82 to sell 100 shares of IBM but Merrill Lynch and Kidder and PaineWebber would not let you discount, so I went around to all the wealthy people I could find in Atlanta and offered them a 40 percent discount.

RITHOLTZ:  Wow.

MENDEL:  So, I became the biggest producer at Bradford.  But then, I started asking Ned to leave and we were going to leave in ’78 and we ended up leaving in 1980 which is another story which I’ll get to later.

RITHOLTZ:  OK.  Well, let’s get to it right now.  You started in 1980; why did you wait until that year?

MENDEL:  We were going to leave in ’78 and Ned was going to move to Sarasota, Venice, Florida and we were going to start the firm.  But Bradford came to Ned and made him a partner and he stayed.  But then in 1979, he went to Jimmy Bradford and told Jimmy that he wanted a computer and Jimmy told him I’ve seen computers and you’re doing fine just the way it is.

And so, Ned went out on his own and spent $35,000 on a Hewlett-Packard computer that did graphics.  And within six months you could buy a chip that made it 10 times faster and within a year you could buy the computer with the chip in it that was 10 times faster for a total of $7,000.

RITHOLTZ:  Wow.

MENDEL:  And…

RITHOLTZ:  And I recall Ned saying that he had pitched Bradford on technology and computerization and the ability to crunch a lot of numbers, and the response was sort of hey, what you’re doing is working fine.

MENDEL:  Yes.  Jimmy said he’s working just fine.  But Ned was such genius and among many other things, it was clean data.  We cleaned data for Ibbotson and S&P and we were known for our charts and our data among many other things.

But the other great story that came out of that is Ned told me I think the fourth biggest lie ever told, and he told me when we started that we were going to need a programmer but just for a year.  And I think when we sold the company we had 14 programmers.

RITHOLTZ:  So, the fourth biggest lie is we’re going to get a programmer but just for a year.

MENDEL:  Just for a year.

RITHOLTZ:  Let’s talk a little bit about you guys hanging your shingle in 1980, really the final innings of a 16-year bear market; how did you guys have the nerve to launch into that environment and how did you get clients?

MENDEL:  We started and Ned thought that within four months we would have the products that he had in his head up and running, but it was two years later.

RITHOLTZ:  Right.

MENDEL:  So, we never took any money out of the business for two years and put it back into the business completely and totally.

RITHOLTZ:  Wow.

MENDEL:  And I had a big retail business and so, the retail helped carry us until we got up and running with the institutional business.

RITHOLTZ:  And that eventually morphed to almost all purely institutional.

MENDEL:  Totally, which was a blessing.

RITHOLTZ:  Why do you say that?

MENDEL:  Retail is where’s my check, where’s my dividend, I’m going to sue you.  It’s just a…

RITHOLTZ:  It’s a tough gig.  It really is.

MENDEL:  Yes.  And so, if you’re going to do it, you might as well get paid big.  And we were blessed that as far as the right time and the right place, we got paid in soft dollars, in commissions.

RITHOLTZ:  So, explain soft dollars because a lot of listeners may not be familiar with it.

MENDEL:  Well, we would go to the State of Texas and tell them we wanted $25,000.  And if I went to you and said I have this service and you’ll like it but you had to write a check personally for $25,000, you go I really like it, it’s a lot of money.

RITHOLTZ:  That’s a lot of money.

MENDEL:  But the State of Texas was going to buy a million shares of Boeing through one of our clearing firms, PaineWebber, Goldman Sachs or especially Bear Stearns and so, they buy a million shares and it’s $0.10 a share back then or $0.15 and give us $10,000 or $15,000.

RITHOLTZ:  So, in other words, you guys set up the broker dealer in order to allow, hey we’re going to spend the money on the commission anyway, it might as well pay for the research.

MENDEL:  Right.  It was other people’s money.  And so, that’s what made the business very successful.

RITHOLTZ:  Were you ever actively involved in trading yourself or were you mostly doing institutional sales?

MENDEL:  Mostly institutional sales.

RITHOLTZ:  And so, the business was sold in 2010.  Do you still have any involvement? Because I know Ned still does.

MENDEL:  No.

RITHOLTZ:  So, you are free and clear for seven years now, right?

MENDEL:  That’s right.  The Falcons and grandchildren…

RITHOLTZ:  Is what’s keeping you busy.  So, when you guys launched in 1980, who were your competitors?  Who was out there selling the sort of quantitative technical research that you guys were doing?

MENDEL:  Again, we were just at the right place at the right time with the right product.  And one of the products though ended up by accident was the chart service.  We did the charts for Ned and…

RITHOLTZ:  As long as you’re doing it for him, you might as well make it available for everybody.

MENDEL:  Yes.  And we really didn’t have an idea that that would be such a huge hit for client presentations, for marketing and meetings and brochures.  And so, we had a huge publishing complex by sending out these huge chart books that were three or four inches thick and then we got into customized research.

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MiB: Ed Mendel of Ned Davis Research

This week, we sit down for a conversation with Ed Mendel, co-founder of Ned Davis Research Group;  Mendel was one of the very first people to create a business around technical analysis services. He helped to create one of the largest stock and bond research followings among the institutional investors.. He is also part owner of the Atlanta Falcons.

He tells the story of how his partner (Ned Davis) wanted to explore analyzing the markets using a new technology called “computers” but the firm where they were at was not interested. They launched their own firm in 1980, creating a computer-based, data-driven set of analytical tools, and offering quantitative, technical research as well as, somewhat uniquely, an updated and clean database.

Mendel says they were in the right place at the right time with the right product, and they just got a little lucky, but most observers believe it was much more than that.

Some of his favorite books are referenced here; transcript is here.

You can stream/download the full conversation, including the podcast extras, on BloombergiTunesOvercast, and Soundcloud. Our earlier podcasts can all be found on iTunesSoundcloudOvercast and Bloomberg.

Next week, we speak with Cornell Psychology Professor Tom Gilovich, author of “How We Know What Isn’t So: The Fallibility of Human Reason in Everyday Life,” and author of numerous innovations and discoveries in the field of human biases and heuristics.

 

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Ned Davis: 9 Rules of Research

I posted my write up of my podcast with Ned Davis yesterday (hear it on iTunes, Soundcloud, Overcast, and Bloomberg).

I reviewed some of my notes prepared for the interview, and almost forgot about this set of rules from him: Its smart, straight-forward, advice.

 

Ned Davis’ 9 Rules of Research

1. Don’t Fight the Tape – the trend is your friend, go with Mo (Momentum that is)

2. Don’t Fight the Fed – Fed policy influences interest rates and liquidity – money moves markets.

3. Beware of the Crowd at Extremes – psychology and liquidity are linked, relative relationships revert, valuation = long-term extremes in psychology, general crowd psychology impacts the markets

4. Rely on Objective Indicators – indicators are not perfect but objectively give you consistency, use observable evidence not theoretical

5. Be Disciplined – anchor exposure to facts not gut reaction

6. Practice Risk Management – being right is very difficult…thus, making money needs risk management

7. Remain Flexible – adapt to changes in data, the environment, and the markets

8. Money Management Rules – be humble and flexible – be able to turn emotions upside down, let profits run and cut losses short, think in terms of risk including opportunity risk of missing a bull market, buy the rumor and sell the news

9. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes

Source: NDR

 

Good stuff . . .

 

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MIB: Dana Telsey’s Retail Research

This week, I speak with Dana Telsey, of the Telsey Advisory Group (TAG), a research firm specializing in the study and analysis of retailers, REITs, and restaurants.

She began her career as an assistant to Ron Baron of Baron Funds ($26 billion in assets under management). Baron taught her how to assess corporate management, a skill that serves her well when analyzing individual retailers.

Telsey got her MBA at night, while working her way the corporate ladder to research analyst. She moved to Bear Stearns, where she spent 12 years covering retailers, and was a top-rated Institutional Investor for 13 straight years. Leaving Bear in 2006, she launched Telsey Advisory Group (TAG), covering retail stocks for a global institutional client base. In 2015, Ms. Telsey also formed Telsey Consumer Fund Management LP, a long/short hedge fund investing in consumer-based companies.

Telsey emphasizes the paramount importance of actually getting into stores, meeting customers, interacting with staff, looking at merchandising, store traffic, and seeing customer reactions in real time. She notes that in every city she travels to for work or pleasure, she spends time looking at regional and national stores as well as malls. What some people call shopping to Telsey is pure economic research.

We discuss the impact of online, what innovations retailers are implementing to compete, and how the landscape is constantly being altered new technology. Cashier-less stores, “Buy online/pick up in stores, new parking innovations(!) are all helping retailers in this very competitive environment.

We also discuss Amazon, the 800 pound gorilla in online retail.

You can hear the full interview, including our podcast extras below, as well as at iTunesSoundcloud, and Bloomberg. All of our earlier podcasts can be found iTunesSoundcloud, and Bloomberg.

 

 

 

 

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With its extreme conditions and geological oddities, Chile is a prime spot for major tech projects.

Source: Bloomberg

Jack Rivkin, Wall Street Research Giant

He was a warm and witty observer of the investment business, and was best-known for his work running Shearson Lehman Brothers’ research department. He also served as chief investment officer of Neuberger Berman, headed research for Smith Barney, was a partner at Idealabs, and most recently, chief investment officer at Altegris. Matt Osborne, the company’s co-founder, said: “We are honored to have had the opportunity to work with Jack. He will be greatly missed.”

In 1986, Rivkin was recruited by Herb Friedman, the head of capital markets at Shearson Lehman, to help the company’s perennially underperforming research department. At the time, the firm was ranked 15th — a humiliating dead last — in the Institutional Investor annual survey. Rivkin accepted the job as director of global research. In three years, the department was ranked No. 1 by Institutional Investor.

In rebuilding the department, he changed not only Shearson Lehman’s approach to research, but all of Wall Street’s. This achievement is described in a 2006 Harvard Business School case study, “Lehman Brothers: Rise of the Equity Research Department.”

Many of Rivkin’s innovations were new and untried at the time, but are now considered standard procedure. He introduced a series of metrics to measure everything related to investment banking research. His philosophy: Any and every thing that could be measured should be measured:

We counted everything: how many calls they made, how many pages they published, how their recommendations panned out. Then we made subjective judgments on analyst performance against the backdrop of objective data. By and large the analysts felt that the process was fair, as opposed to our just saying, “You get this much bonus. Why? Because that’s what I think you’re worth.” If anybody wanted to argue about compensation they had to argue against the data.

Rivkin’s quantitative metrics included tracking analysts’ rankings, client calls (minimum 125 per month), research reports, client inquiries, number of calls, trading commissions, written reports, client visits and how much business each analyst generated.

Transparency was important for reasons of both fairness and motivation. All the data were posted for all to see, and the numbers served as both a motivator and a form of accountability.

Wall Street research was a mostly male-dominated profession. Rivkin found a “Moneyball”-like opportunity, hiring highly talented but overlooked female and minority analysts. He also implemented a formal training program for all analysts, which hadn’t been standard on Wall Street.

Lehman was primarily known as a bond shop, with equities and equity research the smaller revenue producer. After three years, Rivkin was appointed co-head of the worldwide equity division. Eventually, after a power struggle between the fixed-income and equities departments, Rivkin was fired by Dick Fuld.

He described his approach in an interview in Forbes:

The secret to managing a successful business is to monitor performance by the numbers, many numbers. Use objective not subjective criteria. Measuring something affects behavior. Humans respond to report cards. They will try to outperform their peers if goals are clear and ranked. Make it an interactive process and improve over time.

Rivkin co-authored “Risk & Reward—Venture Capital and the Making of America’s Great Industries.”

Rivkin, who had begun his investment career as an analyst at Mitchell Hutchins, later became director of research there. He subsequently became chief financial officer at PaineWebber (now UBS). He was also a director of Dale Carnegie and Associates Inc., a member of the Economic Club of New York, and most importantly, the Anglers’ Club.

Innovators like Rivkin come along infrequently. His insights and ability to change the way we do business will be missed.

 

Originally:  Remembering Jack Rivkin, Wall Street Research Giant   

 

MiB: Martin Barnes, BCA Research

This week on Masters in Business I sit down with an old fishing buddy — Martin Barnes, Chief Economists of BCA Research. He cut his teeth as an economist with British Petroleum in London from 1973 to 1977; Barnes then spent 10 years as chief international economist with Wood Mackenzie, one of the top U.K. brokerage firms. He joined Montreal based Bank Credit Analyst (BCA) 30 years ago, and now lives in Victoria BC, an island near Vancouver.

Barnes discusses how a global institutional client base of sovereign wealth fund, hedge funds, state pension funds and central banks demands more than economic data. They want actionable intelligence, regardless of whether they are hedge funds looking for a trade that afternoon, or sovereign wealth funds deploying capital with time horizons measured in decades.

Barnes has been a student of and a confidante to central banks around the world. He has been visiting the Federal Reserve and its staff since 1979. He has a long history of speaking with Fed governors, researchers, and chairmen. While he defends what the Fed did in the midst of the crisis, he has been a critic of the excessive accommodation and “financial repression” that has followed the first Quantitative Easing.

We discuss how poor the Fed’s forecasting track record is, and how it levels the playing field for all economic analysts (though admits its scary realizing that they know no more than anyone else about the future). He tells us about pricing, and the inflation ”in things we buy everyday and the deflation in the things we buy only occasionally.”

Forecasts aside, Barnes explains why the Fed’s models, indeed, ALL econometric models based upon the past, can lead us astray. He also notes that their change in transparency has swung too far in their efforts to communicate, saying “the Fed should act more and talk less.”

You can hear the full interview, including our podcast extras, at iTunes, Soundcloud and Bloomberg. All of our earlier podcasts can be found at iTunesSoundcloud and Bloomberg. (Please send your suggestions for future topics to MIBPodcast at Bloomberg dot net).

All of Barnes recommended books discussed can be found after the jump.

Next week, we speak with Arun Sundararajan, professor at NYU’s Stern School of Business, and author of The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism.

 

 

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MiB: Martin Barnes, BCA Research

This week on Masters in Business I sit down with an old fishing buddy — Martin Barnes, Chief Economists of BCA Research.From 1973 to 1977 he was an economist with British Petroleum in London; Mr. Barnes spent 10 years as chief international economist with Wood Mackenzie, one of the top U.K. brokerage firms. He has been with Montreal based BCA for 30 years (he lives on Victoria BC, an island near Vancouver).

We discuss their global institutional client base of sovereign wealth fund, hedge funds, state pension funds and central banks. He tells us about the inflation”in things we buy everyday and the deflation in the things we buy only occasionally.”

Barnes has been a student of and a confidante to central banks around the world. He has been visiting the Federal Reserve and its staff since 1979. He has a long history of speaking with Fed governors, researchers, and chairmen. While he defends what the Fed did in the midst of the crisis, he has been a critic of the excessive accommodation we have seen following the first one (maybe even the second) QE. He also discusses how poor the Fed’s forecasting track record is, and how it levels the playing field for all economic analysts (though admits its scary realizing that they know no more than anyone else about the future).

Forecasts aside, we discuss the Fed’s views of here and now, and why the Fed’s model, indeed, ALL econometric models based upon the past, lead us astray.

The Fed’s changes in transparency may has swung too far, the dot plots are wrong, they talk too much, and in their efforts to communicate, they have gone too far.Barnes says “the Fed should act more and talk less.” We also discuss the subject of debt and financial repression.

You can hear the full interview, including our podcast extras, at iTunes, Soundcloud and Bloomberg. All of our earlier podcasts can be found at iTunesSoundcloud and Bloomberg. (Please send your suggestions for future topics to MIBPodcast at Bloomberg dot net).

All of the recommended books discussed can be found after the jump.

Next week, we speak with Arun Sundararajan, professor at NYU’s Stern School of Business, and author of The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism.

 

 

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