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 Bloomberg, iTunes, Overcast, and Soundcloud. Our earlier podcasts can all be found on iTunes, Soundcloud, Overcast and Bloomberg.
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.
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: 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.
MENDEL: So, we never took any money out of the business for two years and put it back into the business completely and totally.
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.
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.