The transcript from this week’s MIB, MIB: Jay Bowen, Bowen, Hanes & Co, is below.
You can stream/download the full conversation, including the podcast extras on Apple iTunes, Overcast, Spotify, Google Podcasts, Bloomberg, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.
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VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: This week on the podcast I have an extra special guest. Jay Bowen is the Manager of, amongst other things, the Tampa Firefighters’ and Police Pension Fund. His firm has been managing that for over 45 years. Their performance numbers are — are quite spectacular. They approach this in an absolutely unique way, in fact, so unique it’s become known as the “Tampa model,” no consultants, no third parties, no alternatives, just stocks and bonds managed by a single firm at a very low cost. They run about a dozen other pension firms in around — in and around Southern Florida as well as elsewhere.
This is really a master class on how to manage a pension fund, how to keep your costs in line, how to avoid the usual expensive consultants and third party managers. It’s really quite fascinating. It’s always interesting when you speak with someone who’s a unique contrarian and approaches the world in a different way and has been very successful using that model. If you are remotely interested in long-term investing foundations and pensions or just hearing someone who has a unique approach, I believe you’re going to find this conversation fascinating.
So with no further ado, my conversation with Bowen Hanes, Jay Bowen.
VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My special guest today is Jay Bowen. He is the CEO and chief investment officer of Bowen, Hanes & Company. The firm has managed the Tampa Firefighters’ and Police Officers’ Pension Funds for over 45 years, performing consistently in the top quartile versus its peers. It is one of the few pension funds in the United States that is effectively fully funded.
The total return on the portfolio since its inception has been nearly 14,000 percent. The annual return is — of the stock portion is 14.6 percent, handily outperforming the benchmark. The total return has been 11.9 percent annualized that beats the S&P 500, quite impressive for a stock and bond portfolio.
Jay Bowen, welcome to Bloomberg.
BOWEN: Thank you very much. Great to be here.
RITHOLTZ: Am I getting your name right, Bowen?
BOWEN: That’s it.
RITHOLTZ: All right.
BOWEN: That’s it.
RITHOLTZ: So you have – really this is a fascinating story that I don’t know if many people are familiar with. Your father founded Bowen, Hanes & Company in 1972 eventually becoming the person running the Tampa Firefighters and — and Police Officers’ Pension Fund. You took the fund over in the early 200’s. Is that right?
BOWEN: I assumed day-to-day responsibility in 2000, right.
RITHOLTZ: Right. Were you working for the firm before that?
BOWEN: Yes. I came on board in — actually in 1987.
RITHOLTZ: So what was your career path? First of all, did you know you always want to go into finance with a father running a pension fund?
BOWEN: I did not, but I grew up with my father taking monthly trips to Tampa, and I knew he was going somewhere on business.
RITHOLTZ: Right.
BOWEN: And when he would come home, he would go down every month …
RITHOLTZ: Right.
BOWEN: … in the — in the 70’s, and he would take me down when I had a vacation or had a few days off from grammar school and I became kind of enamored with the — with the Tampa Bay area. I did — did not know that I was going to eventually be involved in the business. I was very — I was an English major, very liberal arts oriented, but became fascinated and drawn. Really I wasn’t a numbers person, wasn’t a math person. I was fascinated and drawn to the policy debate, economic policy debate. I really became focused on that. And with the top-down approach that the firm took, I kind of entered it that way.
RITHOLTZ: What was your — what was your first job right out of college?
BOWEN: I was in sales, marketing-oriented, very, very interested in (inaudible) …
RITHOLTZ: So you didn’t jump right into the family business so to speak?
BOWEN: I didn’t jump right in. But what happened was, in 1986, I went up to a Washington conference — policy conference, and I was just so drawn. And so — and I’d always been that way really throughout my life, very focused on policies and politics, and what was going on, and what it meant and what it might mean to the financial markets. And so I really — after that conference, it just really became inevitable that I wanted to — to get involved.
RITHOLTZ: Was your father interested in the sort of macroeconomic analysis as applied to investing or was that something that he thought wasn’t necessarily relevant?
BOWEN: He was interested in it and thought, you know — as you know, there are all different ways to do this business.
RITHOLTZ: Sure.
BOWEN: There’s bottom-up, there’s top-down, there’s — there’s a mob (ph) blackboxes, computerized models. There are — and — and phenomenally successful ways. We just always go in about it from a top-down perspective, and he was top-down primarily I’ll tell you why because when he started the firm in the early 70’s, I mean …
RITHOLTZ: Sure.
BOWEN: … there is a great time to focus on inflationary expectations …
RITHOLTZ: Sure.
BOWEN: … and what that might mean to financial markets.
RITHOLTZ: So multiple recessions, big pullbacks in the markets, ’73, ‘74 was …
BOWEN: Right.
RITHOLTZ: … about a 57 percent drop. Real — real bond yields were effectively zero with inflation at 10, 12 percent.
BOWEN: Yeah, yeah, there’s an amazing — when you look at it over long periods, I mean, there was a period from 1968 to 1982 when the market had a negative real return. Stocks had a negative real return, and that was — in my view, the way we view the world, that was because of really anti-growth policies and a very counterproductive Federal Reserve in terms of — from an — and then the — the — the — the Fed basically funding the — the — gratifying the inflation during the 70’s.
RITHOLTZ: In the 60’s and 70’s, what are your thoughts on someone like Paul Volcker who comes in and says, “Oh, well, let’s do this and — and basically takes the Fed funds rate up to double-digit?
BOWEN: Right, that was a really important turning point in terms of how we — of course, how it went on board and this was 80 — actually, Volcker came in in ’79, but there was a triple — triple threat that happened in the late 70’s and early 80’s. It really set the stage for a arguably the biggest bull market ever, and that was Paul Volcker coming in to break the back of inflation, which is so key to financial assets, price stability, but not inflationary expectations.
And then there was a deregulation effort that started in — with Afrikan (ph) at the — at the — at the airline and trucking deregulation, airline deregulation, ’79, ’80. And then Reagan came in with the tax reform in terms of lower tax rates, higher after-tax returns, increasing incentives for work, risk-taking investment, capital — I mean, all those three things together …
RITHOLTZ: Boom.
BOWEN: … and, of course, the — the Dow was in its 750, 800 with no real return going all the way back to 1968 and I remember — and this is — I was still focused on policy even though I was in college. I remember in ’82 the tax cuts didn’t take effect and there was a — they delayed the tax cuts. They passed the legislation in ’80. The tax cuts didn’t take effect until August of ’82 just when the bull market started.
RITHOLTZ: August ’82.
BOWEN: August ’82.
RITHOLTZ: Let’s talk a little bit about the Tampa model. Your firm has managed the Tampa Firefighters’ and Police Officers’ Pension Funds for over 45 years. That’s pretty unique in the world, isn’t it?
BOWEN: It’s very unique. My father forged the relationship in 1974. We’re now in the midst of our 45th year as you — as you noted. We’ve managed every penny the entire period. It’s growing from $12 million to over $two billion, and they’ve taken over one billion out.
RITHOLTZ: So that’s $3 billion total …
BOWEN: Capital appreciation had come over $3 billion, right, right.
RITHOLTZ: From $12 million.
BOWEN: From $12 million.
RITHOLTZ: And, obviously, there have been some contributions along the way.
BOWEN: Yeah, but the net — net outflows, which is what you want.
RITHOLTZ: Right.
BOWEN: That’s what it’s for.
RITHOLTZ: That’s what the pension fund does.
BOWEN: You want to provide, right, retirements for these incredibly dedicated public safety employees, so it’s — it’s doing its job, right?
RITHOLTZ: See, I would imagine that you’re completely thicket-proof (ph) in Florida then anybody pulls you over, it’s like, “I’m the guy who manages your retirement account,” and then, oh, of course, have a nice day, Mr. Bowen.
BOWEN: Yeah. Tampa — Tampa, I think, my father was pretty safe within the city limits and …
RITHOLTZ: Right.
BOWEN: … I hope I am.
RITHOLTZ: So you go from $12 million to over $3 billion including outflows. To what do you credit this performance?
BOWEN: Yeah, it’s a — it’s a confluence of events. And by the way, my father forged — actually, he was involved with this fund in 19 — in the late 60’s when he was with another institution before he started his firm. He helped kind of set the fund up and helped with the investment policy statement back then. And then when he started his own they were dissatisfied and came to him in ’74, so that’s — and hired him when it was at $12 million.
And it’s really — I’ll tell you what, I think — and it’s funny the pension attorney down there coined this term and I love it. He said, “You know what you’ve got here,” and he — he — he sees pension — public pension funds all over the country. He’s involved almost in every state, very prominent pension — public pension fund attorney. He said, you know, you — in Tampa, he told the board, “You all have a perfect rainbow.” And he said, “perfect rainbow because you’ve got a great city,” you know, they’re all kind of moving parts that (inaudible) …
RITHOLTZ: Sure …
BOWEN: … help of a pension fund. We’re just one component. We’re an important one, but they’re all kind of moving parts. I mean, you got — you said you got a really competent, strong municipal city government.
RITHOLTZ: Well-managed.
BOWEN: Well, it’s — if Tampa were a stock, I’ll be buying it.
RITHOLTZ: Can I tell you? I’ve visited Tampa repeatedly over the past few decades. Tampa is a booming city. Twenty, thirty years ago …
BOWEN: Yeah.
RITHOLTZ: … that — it was kind of a mess.
BOWEN: You know who see have seen that is Jeff Vinik.
RITHOLTZ: Oh, really?
BOWEN: Jeff Vinik is — he is …
RITHOLTZ: Fidelity.
BOWEN: Fidelity. He is Mr. Tampa now.
RITHOLTZ: Oh, (inaudible).
BOWEN: He went down there. He — he purchased the hockey team and he’s involved in a massive development effort on the waterfront. So he saw the value there a few years ago, and he’s very involved in Tampa. And as I say, if Tampa were a stock, I would be buying it.
But a competent city government — and here’s the important line — that funds the pension fund. They fund it.
RITHOLTZ: Right.
BOWEN: They put the money in. A lot of these municipalities that are in such trouble don’t, so Tampa actually, it’s — it’s — I think it’s the best run major city in America, I really do.
RITHOLTZ: Huh, that’s quite interesting.
BOWEN: That’s — that’s one component. Number two, they have a board, a nine-member board that is extremely responsible on the benefit side. You know, they’re not reckless in terms of a lot of the Dallas fire and police in terms of …
RITHOLTZ: Right.
BOWEN: … promising all these — these — it’s a very, very responsible dedicated board. And then number three, the third part of the perfect rainbow is we’ve had good investment returns.
RITHOLTZ: It’s so easy to make promises that come due decades in the future and not to fund it because by the time people are pointing fingers, the people responsible are long gone.
BOWEN: Right.
RITHOLTZ: So — so how — to what do you attribute Tampa avoiding what is a typical fate of local governments and municipalities, which is to just kick the can down the road as far as they can? And we’ve seen in the pension space with very high expected returns for expensive hedge funds, and that ends up being matched with very low actual returns. What’s the — what’s the secret to good city government?
BOWEN: Yeah. I — I just think it’s — they had the board. Of course, it’s run by the board. There are three firemen, three policemen and three people appointed by the city. And they’ve just been — it’s — it’s — it’s an extraordinary situation over the last 45 years. It’s an extremely dedicated board.
And I think here’s one thing that I think is missed in this whole debate and — and pick your number, $4 trillion, $5 trillion unfunded — underfunded crisis. Average municipal fund, I think, the funding ratio is 35 percent.
RITHOLTZ: And you’re in the 90’s, right?
BOWEN: Yes, ’98. It’s — you know, it’s fully — it’s fully funded. But I think what they’ve done down there is they’ve realized what the — they’ve never lost sight of what the core mission of this fund is. It’s not to generate fees for layers and layers and layers of people. It’s not to allocate assets to every asset class under the sun. It’s to provide a good stable retirement for these public safety employees. And to do that, they’ve — and with their focus firmly on that, they’ve avoided a lot of the conflicts of interest. When you look at a lot of these funds, there’s just enormous conflicts.
And just to — I can give you one small antidote to give you an example of — of how they’ve stayed out of trouble. Back in — I wasn’t on board, but my father used to love to tell the story of the mayor down there in the — the mayor of Tampa in the mid-70’s. After he was mayor, he became chairman of a major insurance company. And he made a presentation to the board to put quite a large percentage of the fund in — on insurance products …
RITHOLTZ: Right.
BOWEN: … guaranteed investment contracts, annuities, that kind of thing. And he thought he had it in the bank. He — he was the mayor. He knew some of the city trustees, oh, and so the …
RITHOLTZ: The old boy network, full effects, right?
BOWEN: … the — the — the sales crew from New York came down in their fancy suits and they gave the presentation. And the board voted him down, and it was just a stunner. Nobody could believe that the board vote — what? Do you mean this never happens? I mean, usually funds like that are real with these kind of conflicts.
RITHOLTZ: Right.
BOWEN: And they have always — I mean, I dare exceptions every now and then, the board — but, for the most part, it’s extremely dedicated board that they’ve — they’ve avoided the pitfalls and the conflicts of interest.
RITHOLTZ: You know, earlier we were discussing some of the pushback to your model of not using consultants, not using third parties who might add fees, no alternatives like hedge funds or — or private equity. How unusual is that set-up in the world of pension funds?
BOWEN: It’s unprecedented, exceedingly unusual. In fact, when the trustees go to these conferences, I mean, I cringe a little bit. They go to these investor conferences. They’re sponsored by consultants and everybody else and they — they’re always at these conferences, national conferences. And they’re swarmed, of course, by various service providers.
And what — you can’t have one manager. That’s fiduciarily — but you can’t, it is reckless as you (inaudible). And then my — the — the former chairman of the board, policeman, I used to love it, he would carry around the compounded annual return in his back pocket and he would just show it.
RITHOLTZ: Here’s my returns. How are you doing?
BOWEN: And — and they would just go, “Oh, okay, we’ll see (inaudible). Yeah, so …
RITHOLTZ: Hey, can you keep up with this? If you can’t, always start to — I recall some time ago there was an article in the “Wall Street Journal” about — I want to say it was in Nevada. Somebody is managing a small pension fund and, effectively, he comes into the office each day with his crossword puzzle.
BOWEN: I kind of remember that.
RITHOLTZ: Everything is in indexes. He doesn’t do …
BOWEN: Yeah.
RITHOLTZ: … anything and their cost structure is — is — that’s the only other example I’m familiar with of somebody approaching single manager, no consultant, no third parties.
BOWEN: I remember that article.
RITHOLTZ: But — so now that’s two. Are there anybody else who remotely even at least is thinking or looking at this sort of model?
BOWEN: You know, it’s funny because you would think — I mean, we have received a lot of national claim over the years because of the uniqueness in the performance. But the industry — there’s the model, the consult-driven multi-manager model, they have got such a stranglehold on the industry that there really — there is — they’ve — they’re going halfway towards indexing.
RITHOLTZ: Right.
BOWEN: But in terms of a core …
RITHOLTZ: That’s like a soft — that’s like here’s a little bit of indexing and now let us …
BOWEN: So we are seeing a move towards that within the municipal arena. But a move towards a core — one core unconstrained manager for the Barclay assets, no, it doesn’t matter. The evidence can be so overwhelming and so powerful in terms of the potential benefits from a return standpoint, from a fee standpoint, but it’s — it’s never accepted within that arena.
And one question I always have, not that we’re in this league, is that everybody says it’s — it’s reckless and irresponsible, and how can you do it? There’s one — and I’m always thinking in the back of my mind, well, you know, Warren Buffett and Charlie Munger, there are two of them and they manage but 50 — not that we’re in that league, they manage $50 billion or $60 billion and they’re just two of them.
RITHOLTZ: I think it’s even more than that these days.
BOWEN: And yet you don’t hear the — you don’t hear though, you know, we got to — we got to break it up. We got a break it up, we got to put some of that. We got a (inaudible).
RITHOLTZ: There — there have been people who have suggested that over time. You know, you — you unleash a lot of value if we break up Berkshire Hathaway. That sort of — any time there’s a big pool of money, people are going to look at it as an opportunity to — to capture some of it.
BOWEN: Right.
RITHOLTZ: And if we break up Berkshire Hathaway, my firm is ready to stand to garner a whole bunch of …
BOWEN: Right.
RITHOLTZ: … investment banking fees …
BOWEN: Yeah.
RITHOLTZ: … from the process. It’s never coming out of academia. Objectively speaking, here — here’s why Berkshire Hathaway should be broken up.
BOWEN: Right.
RITHOLTZ: So — but you bring up a really valid point, which is the pushback has been pretty outrageous. There were accusations about — they wouldn’t go so far as to say fraud, but accounting issues and …
BOWEN: Yeah.
RITHOLTZ: … why did they change accountants so often? I read about this.
BOWEN: Right.
RITHOLTZ: It’s a — you — you’d — I’ll let you defend it.
BOWEN: Yeah.
RITHOLTZ: But some of the pushback to this has been pretty …
BOWEN: It’s — it’s incredible. You know, in the — in the — we do have a First Amendment and I love it, and we got — in the digital age and, you know, the — the free flow of — the flow of information. Anybody, particularly in the blogosphere and online, you know, you can say anything …
RITHOLTZ: Right
BOWEN: … and it’s out there. And it’s funny, it — it — there’s just — we are the enemy …
RITHOLTZ: Apparently.
BOWEN: … to the — to the standard conventional model. I think we’re a threat, I think we’re a threat. And some of these active …
RITHOLTZ: To their fee structure or to the overall model itself?
BOWEN: The model — our model, I think, is a threat to the multi-manager consultant-driven model, and so there’s been a concerted effort. And this — listen, we’ve heard this, my dad heard it throughout the 70’s and 80’s, I mean, he — he’d — listen, he laid the groundwork. I mean, I’m the beneficiary of what he did. He — he’s the one that had to get bloody back in the 70’s and 80’s when, man, they were coming after that fund even though one is big, they were coming after like you wouldn’t believe.
But what happened was the results were so good that all of a sudden the city started being on our side …
RITHOLTZ: Right.
BOWEN: … because the city — it’s great for the city when the municipal fund …
RITHOLTZ: I mean, the full fund — pension fund, yeah …
BOWEN: They were — they were able to cut taxes …
RITHOLTZ: But they …
BOWEN: … so they became allies.
RITHOLTZ: Let’s talk a little bit about your investing style and — and where we are in the market cycle. You described yourself as a top-down thematic investor. What — what does that mean?
BOWEN: Yeah. And one of the important thing to note with this relationship, which is pretty extraordinary, being top-down and thematic, we’re able to really — and the board allows us to focus on the real long-term and I mean, real long-term. They actually — and I can say this with a straight face and they would tell you with a straight face — they take a 20-year investment approach. They really do.
RITHOLTZ: Which makes sense for a pension fund just most …
BOWEN: It does.
RITHOLTZ: … most don’t.
BOWEN: The — yeah, and the actuaries (inaudible) the 20 years because it — that’s the kind of the average snapshot of a career of a public safety employee, but the reason we take a 20-year is that we found that there hadn’t been a 20-year period that has not cleared the bull market and a bear market …
RITHOLTZ: Right.
BOWEN: … in a recession and a specular bubble in a war. I mean …
RITHOLTZ: Okay.
BOWEN: … throughout the financial history, we love — I think that’s a great time frame to measure the competency of a manager in all time periods. And we can show now every — every October when I go down there to review the fiscal year, which is they’re on a September fiscal – we show another 20-year rolling set of performance data. And right now we can show 25 sets of 20-year rolling performance, and you can show really good outperformance for each of the 20-year segments.
So they’ve allowed us to take a 20-year approach, and it ties into the top-down thematic. And just to give you a couple of example, when I say thematic and top-down, we’re looking — we’re trying to look at a variety of — particularly on the policy front, tax policy, trade policy , fiscal policy, regulatory policy, international policy, even foreign policy. What does that mean to financial assets? What does it mean to stocks? What does it mean to bonds?
it’s funny, as I said earlier, there are all kind of different ways to do this. I remember Peter Lynch who I just thought was great. I remember him saying, “You know, if I spend five seconds on economics, it’s five second too much.”
RITHOLTZ: Right.
BOWEN: He was bottom-up and he was famous.
RITHOLTZ: Right.
BOWEN: You know, there are people all kind of successful ways to do this. We just always focused on the — on the top-down. I mean, just to give you some examples, in the early 80’s, it was really important to focus on the monetary and — and the tax in terms of what that might mean for inflationary expectations, for interest rates, for various industry — of sector and industry categories.
For instance, my father determined after Volcker came in that we’re going to — that he was going to break the back of inflation. And I can remember him showing me some charts. Coca-Cola, Campbell Soup flat-lined. They had flat lined for 10, 15, 20 years just because of the — the ravages of inflation had really hurt.
RITHOLTZ: Heavily commodity-dependent …
BOWEN: Yeah, but …
RITHOLTZ: … but just tied to …
BOWEN: … raw material cost.
RITHOLTZ: … the dollar and inflation. Yeah.
BOWEN: They had done nothing. And it was his view that this was the time to really start shifting our emphasis to the staples area, to household product companies and the food companies, like Coca-Cola and Campbell Soup, Procter & Gamble, those kind of companies. And so that flowed from the top-down view point on inflation. And then the other side of it, what we talked about deregulation, but what was going on on a tax front in terms of you had tax — the Tax Reform Act of 1980 and then you had the second round at — in 1986, which brought the top marginal rate down to 28 percent, believe it or not, and, you know, broadened the base, did away with a lot of deduction to credit made for a much more efficient productive system that raised real growth.
We thought with the top-down analysis that we did that we were — we were in for a period of much faster real economic growth because of an increase of — of incentives for work and risk-taking and investment, capital formation. And so number one, we thought the emphasis that you could really start focusing on stocks — common stocks again. As I said, from 6/8/82, the real return on stocks was negative, so it was a matter from a top-down standpoint, okay, we like common stocks and then within the common stock arena, which sectors, which industries, which sectors are going to benefit from these trends?
As we moved into the 90’s, the — our top-down were indicated that, okay, here we go, this is really an integrated, interrelated global economy, so let’s focus on these companies that have a strong strategic international business plan. I can remember 1989 seeing the cover of Fortune Magazine. Jack Welch was on the cover in 1989. That ended up being one of our — and I remember reading that article and thinking, “Wow, this guy really has a great business plan.” Management was really important to us. And I think the stock rose 4,000 percent during his tenure.
RITHOLTZ: Eighty-two to 2000, the timing was perfect.
BOWEN: So Welch on the industrial side, we’ve been marked on the consumer side. Colgate — Colgate, late 80’s, early 90’s, just to — they were better known overseas than they were in this country. They were a bigger player in Asia than they were in the U.S. So that ended up being one of our biggest consumer holdings. G.E. ended up being one of our biggest industrial holdings. And that flowed from the top-down work we did in terms of — during the 90’s — this move towards the integrated, interrelated global economy.
Late — mid to late 90’s, it turned more into a lot of high-tech innovation and risk-taking entrepreneurship. Who is going to benefit from that? But I’ll tell you what was really important from a top-down standpoint during the 90’s and — is — was — I remember Greenspan giving Humphrey-Hawkins testimony, saying that we have reached a point of price stability and we think the economy can grow at above trend at price stability, which was a dagger through the Phillips curvers (ph).
RITHOLTZ: Right. And — and the Phillips curve has reflected that ever since.
BOWEN: That was so important. That was a great moment that he would let it run, and he did let it run. That was from a top-down perspective, that was very important.
RITHOLTZ: Let — let me throw some of your own quotes that you and — and have you respond or explain some of them because a few of these are quite fascinating. Quote, “We could be in the early stages of a move by business away from an obsession with financial engineering and bottom line earnings growth towards business investment and top-line growth. Explain what you mean by that and are we seeing any evidence of that yet?
BOWEN: Yeah. I think we’d — I think we’re in the early stages of seeing some evidence. You know, during much of the 2000’s, particularly post financial crisis, you had a very sluggish economic growth situation way below trend from a real growth standpoint. And you just had — there was this obsession, I mean, a daily obsession with — corporate America was streamlining, with downsizing, with stock buybacks, just ringing, ringing, ringing the cost — it’s all on the cost side.
RITHOLTZ: Right.
BOWEN: To generate that EPS, forget the top line. You know, we’re not going to worry about the top line right now.
RITHOLTZ: Well, but we’re still seeing a ton of stock buybacks …
BOWEN: Yeah.
RITHOLTZ: … today. You’re still seeing a lot of that.
BOWEN: But my view is that we’re on the verge of a pick-up in — in business investment, in capital spending, in business fixed investment where the focus is going to be more on growing the top line because the — you have another area here where we’re moving into — there’s a lot of deregulation going on. We’ve got tax reform that’s happened on the corporate, not so much on the individual side, on — on the corporate side …
RITHOLTZ: But a big cut on the corporate side, sure.
BOWEN: … big cut on the corporate side. And I think we need to give it time. I think people are being premature to say, oh, yeah that and let me — we just had results. And yeah, I think you’re just starting to see inklings, particularly the capital spending. And — and here’s the — the — the kicker. We could be in for another burst of productivity growth. You know, we’ve been — it’s been woefully under-trend …
RITHOLTZ: Yes, for a long time. And — and how much of that is a management issue and how much of that is genuine lack of gains in productivity?
BOWEN: There’s probably a little bit of both, but — I mean, just to give you an example, business fixed investment during the last decade or so has been about half of the norm and it — would you — you know, you’re just starting to see some pickup now.
RITHOLTZ: Say that again, business fixed investment.
BOWEN: Kind of capital spending plan …
RITHOLTZ: Right.
BOWEN: … well, intellectual properties …
RITHOLTZ: So CapEx is half of normal.
BOWEN: The …
RITHOLTZ: Wow.
BOWEN: — it’s been — the growth has been about …
RITHOLTZ: The growth, okay.
BOWEN: It’s been about half of normal. But you’re just starting to see — and productivity has been woefully inadequate, I mean, under one percent where the post World War II average is closer to two. We had that burst in the late 90’s that was 2.5, 2.8.
First quarter year-on-year productivity growth was 2.4.
RITHOLTZ: This year.
BOWEN: That’s about a 10-year high, yes. So I think it’s too early to — I mean, I just — we’re starting to see some early (inaudible) …
RITHOLTZ: You want to see a trend there.
BOWEN: … that — and — and that — let me tell you, that is the silver bullet, productivity growth. That’s the silver bullet for …
RITHOLTZ: Wage?
BOWEN: … real wage growth, for employment growth, for corporate earnings and — I mean, it’s — it’s so important. It ties into one of our themes, top-down themes currently, which is the fourth industrial revolution that …
RITHOLTZ: So that was literally the next question I was going to ask you. What is the fourth industrial revolution? How do — what does it mean and — and how would we position ourselves for that?
BOWEN: Well, yeah, as I say, I mean, I think it really could have an impact on economic growth and on productivity growth. And — and really, I guess, you could say kind of an extension of the third industrial revolution, which was more focused on information technology, computers.
The burst or personal productivity growth in the 90’s was more computer hardware and software-oriented. I mean, you — you might remember the four horsemen: Microsoft and Cisco, and Dell, and Intel. That was kind of the — the — the core there.
Now, what we’re seeing is some fairly important fascinating new industries that could have a big impact on economic growth, productivity growth.
RITHOLTZ: Give us — give us a few examples.
BOWEN: Artificial intelligence, robotics, information, automation — high-tech automation, information technology, quantum computing, 3D printing. You got a whole array — 5G. The 5G area, where is the fifth generation of — of wireless networks coming; industrial automation. So they’re just some areas that we’re really focusing on companies that are involved in these areas because we think some of them — some of it has already started, but some of it there’s probably a few years away in terms of coming to fruition. But we think that we’re poised when you — when you — when you mix these potential new technologies with the backdrop from deregulation and tax standpoint where we’ve increased incentives for capital formation and for new business development. I think when those two intersect, we could be in for a — a good burst of productivity growth.
RITHOLTZ: We have been speaking with Jay Bowen of Bowen, Hanes & Company. If you enjoy this conversation, well, be sure and come back and check out the podcast extras where we keep the tape rolling and continue discussing all things, pension, investing-relating. You can find that at iTunes, Overcast, bloomberg.com, Stitcher, Spotify, wherever finer podcasts are sold.
We love your comments, feedback and suggestions. Write to us at mibpodcast@bloomberg.net. Check out my weekly column on bloomberg.com. Follow me on Twitter @ritholtz.
I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.
Welcome to the podcast. Jay, thank you so much for doing this. I was quite fascinated by your background and the whole story just — I am clearly confirming my priors because you land right in the sweet spot of my preexisting beliefs. Most stuff is too expensive, consultants don’t add any value, most pension funds would be better off doing a simpler stock and bond portfolio as opposed owning hecta (ph) acres of — of forest land in Canada and — and private equity.
But that said …
BOWEN: But those wine vineyards in California, those are good though.
RITHOLTZ: Well, you get to go on vacation …
BOWEN: Yeah.
RITHOLTZ: … swing by, hey, I’m one of the owners. You get the VIP treatment on the backs of whoever the …
BOWEN: Yeah. We — we say that we are …
RITHOLTZ: … the investors.
BOWEN: … unconventionally conventional. That’s what our …
RITHOLTZ: I like that expression, the unconventionally conventional pension fund. And you’re not in Tampa, you’re located in …
BOWEN: Right.
RITHOLTZ: … Atlanta. You’ve been there most of your whole life. Is that right?
BOWEN: Pretty much. We — the firm was actually started — my father started the firm in North — North Carolina in 1972.
RITHOLTZ: Is that where you grew up?
BOWEN: Born in Atlanta, moved to North Carolina, then moved back to Atlanta, relocated the firm in Atlanta in the late 70’s so.
RITHOLTZ: So I’ve been to Atlanta a number of times, and I have to tell you very surprisingly impressive barbecue. But I know there’s like a little bit of a barbecue controversy going on in Atlanta now. What’s happening there?
BOWEN: Well, of course, the real controversy is North Carolina. I mean …
RITHOLTZ: Yeah.
BOWEN: … that’s the core, that’s the core raging debate that even gets physical.
RITHOLTZ: Right.
BOWEN: I mean, you know, you got the three regions: central, western and eastern. The — the eastern is …
RITHOLTZ: And what is the debate?
BOWEN: And it’s the sauce. Do you want vinegar?
RITHOLTZ: Dry, wet or vinegar, is that a …
BOWEN: Yeah, you want vinegar-based which is the eastern? Do you want …
RITHOLTZ: Molasses …
BOWEN: … the — the — the …
RITHOLTZ: … the sweet molasses.
BOWEN: … mustard kind of base …
RITHOLTZ: Oh, no.
BOWEN: … which is the central …
RITHOLTZ: That’s worth fighting over.
BOWEN: … or do you want the more traditional tomato-based?
RITHOLTZ: That molasses tomato-based …
BOWEN: Yeah.
RITHOLTZ: … that sweet caramelized over a …
BOWEN: But you’re right about Atlanta. They’ve got all of them. They’ve got all three and so …
RITHOLTZ: Right.
BOWEN: … you can make — you can take your choice.
RITHOLTZ: So I didn’t realize this issue, this controversy erupted in North Carolina.
BOWEN: I think that’s kind of the core, yeah.
RITHOLTZ: And — and people have come to blows over this?
BOWEN: Particularly eastern versus the — the central, you know.
RITHOLTZ: So, yeah, I’ll get into a fight over someone over the mustard — your mustard …
BOWEN: The vinegar-based …
RITHOLTZ: Yeah.
BOWEN: … those people can get violent.
The vinegar-based, my mother was born in Rocky Mount, North Carolina and she …
RITHOLTZ: Right.
BOWEN: … she would even get violent with me if I didn’t want the eastern. I mean, you know …
RITHOLTZ: Oh, really?
BOWEN: Yeah, you got to be.
RITHOLTZ: And this is — this is a real thing, this is not — this is going on …
BOWEN: Yeah, it’s …
RITHOLTZ: … still to this day.
BOWEN: It’s all fun and games until somebody loses an eye, right?
RITHOLTZ: It’s all fun and games until the vinegar sauce comes out. Then there’s real — there’s real trouble.
Amazingly, New York actually now has decent barbecue, but mostly when people transplant here from — from Texas or Tennessee or somewhere …
BOWEN: Right.
RITHOLTZ: … and will open up a — not a New York City barbecue but a barbecue joint in New York City.
BOWEN: Right.
RITHOLTZ: And there are a few smokers here also. In Long Island City, there’s this big — you walk three blocks away you can smell …
BOWEN: Oh, man.
RITHOLTZ: … brisket smoking.
BOWEN: Oh, gosh.
RITHOLTZ: It’s really, really good. So your back and forth to — to Tampa, you’re managing a number of other Florida pension funds. Where else in the world are you managing money for either pension funds or other clients?
BOWEN: We’re small, we’re streamlined. We got about $3 billion under management, about 120 relationships, we — foundations, endowment funds, profit-sharing plans, pension plans, municipal funds and family groups.
We’re not marketing-oriented. We’re not an asset gatherer who allocates the assets to other managers …
RITHOLTZ: Right.
BOWEN: … to pool funds. We actually manage each account individually and pick the stocks or stocks and bonds if it’s a balanced account. And the business comes through referrals, and we — my father decided a long time ago, you know, instead of having an aggressive marketing effort, maybe we could have done a lot bigger.
We were just focused on the investment side and were allowing referrals for new business. And those are very satisfied relation — very satisfying relationships.
RITHOLTZ: I could imagine.
BOWEN: And long — our average client has been with us 20, 25 years. We got some 30, 35 — I mean …
RITHOLTZ: Wow.
BOWEN: … so when somebody comes on board with us it’s from a very high level, it’s from a referral. And typically they’re going to be with us for …
RITHOLTZ: Decades.
BOWEN: Yeah. So …
RITHOLTZ: Do all the portfolios look alike when you’re buying individual stocks? Do you run into an issue where I remember running into a trouble with Visa when we were buying it at 60, 70, 80, and two years later it was 200. Can you just — do you — does every portfolio look alike or do you have to take into an account, hey, we can’t buy stock XYZ for this account because it’s so much pricier than it was when we were buying it for that account?
BOWEN: Yeah. I mean, we did try to justify our holdings all the time. We’re constantly trying to justify. And what my favorite thing to do particularly when you’re taking a 20-year approach — we’ve done this in Tampa on numerous occasions — is — is to take the cost out of the stock, you know, say we bought Visa and our cost — and it was $10 million and now it’s worth $40 million.
RITHOLTZ: Right.
BOWEN: I love taking the profits and taking the cost out and reducing (inaudible) …
RITHOLTZ: So in other words, you pulled $10 million and let the $30 million run and …
BOWEN: Yeah. If it still fits into our top-down approach …
RITHOLTZ: Right.
BOWEN: … and if the number still look good. Most of our portfolios — I mean, they’re individually managed so they’re going to look a little different because just — just — as you say from a timing standpoint …
RITHOLTZ: Right.
BOWEN: … Visa might look good one day and not five years later from a valuation standpoint. But the vast majority of our clients are very philosophically compatible, high-quality, long-term-oriented. Some of them may be a little more income-oriented, some of them are balanced. They want a balanced approach. They’re going to look a little different, but the typical institutional portfolio is going to look very similar.
RITHOLTZ: So we mentioned spending — you spend a lot of time thinking about Fed policy as part of the — the top-down approach. We’re recording this literally on the day that there’s a Fed meeting. What — what do you think about this pressure on the Fed to lower rates? Should the Fed really be a fully independent entity or should they, you know, respond to the political pressures both from Congress and the White House?
BOWEN: They should certainly be independent. What would keep me up at night would be if congressional committee chairs were deciding Fed policy.
RITHOLTZ: Right.
BOWEN: That would not be a good — a good model. I do think the Fed really needs to be shaked — shaken up. We need …
RITHOLTZ: Why is that?
BOWEN: I just think the models are flawed. If you go back to 1913, I think that their august reputation belies their record.
RITHOLTZ: Okay. Well, their forecast on is especially good.
BOWEN: It’s not — it ain’t pretty. I mean …
RITHOLTZ: Right.
BOWEN: … go back to 1913, they — they presided over double — doubling of price during World War I. If you believe in Friedman and Schwartz monetary theory, which I do, the definitive history, they were the most responsible for the Great Depression. They presided over the doubling of prices during World War II. They are the financing place of the 70’s.
I just — I — I think they need some new models, some new thinking. And I’m very encouraged that they’re on it. They are on it. They’re looking at — you got particularly Williams and — and Powell (ph) also. I think that Powell have said more than once that he is convinced that the Phillips curve is dead.
RITHOLTZ: Right.
BOWEN: He gave a very important speech in Jackson Hole last year, last August where he addressed that issue.
You’re — you’re — you have — and I mean, you got Williams with the flexible inflation, flexible targeting. You’ve got — there’s talk about price rule. There’s talk about a nominal GDP growth targets. I just think it’s time to shake it up.
Now what I’d like to see him do — and which is why I think they should lower rates — I really would like them to focus on price stability and — and a stable dollar, stabilizing the dollar. And if you look at these forward-looking price signals — and I’m talking about the yield curve and I’m talking about commodity prices, and I’m talking about the foreign exchange guy, the dollar, they’re all saying the Fed is too tight.
RITHOLTZ: Right. The yield curve — if you look at the five-year and the three-month, it’s been inverted for a full quarter and the 10-year briefly inverted and — and more or less it’s not especially steep. And I don’t know if by the time people are listening to this, the 10-year versus the three-month is inverted, but it’s certainly sending warning signals.
BOWEN: It is. And listen, I know that’s not a secret that’s pretty well-publicizing for the yield curve, but it’s only given one false signaling in post-World War II …
RITHOLTZ: Right.
BOWEN: … the post-World War II era. And the — the thing is that the — the — the lags can be very long and variable in terms of — in terms of what it means, but we’re focused on that.
I think that they can engineer a soft landing, I do. The question right now is is this going to look like 1995 where they raised rates? They almost inverted the curve. They raised rates. In fact, we’re going to cut rates in July, I believe. The — the curve was about to invert. And then we were off to the races. They did not invert the curve.
Is it going to look like that or is it going to look like 2007 where they just sat idly by when the curve was inverted? They waited …
RITHOLTZ: Right.
BOWEN: … waited, waited, or worse than that ‘74 where you had inverted yield curve and they kept raising rates, yeah. I don’t think we’re in for that because inflationary expectations are so benign.
I do think they need to cut. I — I think they will. It would be my preference again for them to focus on forward-looking price signals, stable dollar. I would prefer them to be aggressive on the frontend so they can be hawkish on the backend. I would like to see mid 50 at this next meeting …
RITHOLTZ: Really?
BOWEN: … because I think if they don’t, if they go too slow they’re going to still be behind the curve. I mean, if you look at the — the — the natural — it’s — it’s almost like the natural rate, what — you know, you hear about the Wicksellian natural rate …
RITHOLTZ: Right.
BOWEN: … is — is moving down, it’s trending down faster than the policy rate is trending down. So for them to catch up, they need to get — get ahead of that.
RITHOLTZ: How do you reconcile the different signals from the stock market, which keeps making new all-time highs, and the bond market, which is saying, hey, an economic slowing is coming?
BOWEN: Yeah, yeah. I think the stock market is discounting a soft landing. No question. I mean, earnings — earnings have been flat this year and the market is up 20 percent. I mean …
RITHOLTZ: Surprising, right?
BOWEN: It’s — and then the bond market is complete, as you know, I mean, it’s completely rolled over. I think nominal growth expectations have really trended down, real rates have trended down. It’s just signaling a — a — a reduction in the Wicksellian natural rate of interest, a reduction in nominal growth expectations. There’s just — it’s just a — no question. There’s been a slowing and the Fed needs to acknowledge that and get out ahead of this thing.
RITHOLTZ: Is this a global slowing that’s affecting United States, trade war or whatever or is this just a natural deceleration of the U.S. economy following the expansion since 2010?
BOWEN: Well, you know what, I think the Fed made a mistake in 20 — particularly in 2018. They were just too tight. You’ve had nine rate increases. You’ve had — they took — with quantitative tightening, they took about $700 billion out of the system. It just — it was just the liquidity.
RITHOLTZ: That combination because you can’t — we can’t say rates are too — are very high now.
BOWEN: They’re not. And — but you know what? A lot of people look at it just from an absolute standpoint and think, oh, well, rates are still — but, you know, it’s always relative, it’s all relative. It’s where they came from …
RITHOLTZ: Right.
BOWEN: … just think they move too — too fast. But I’ll have to say I think that’s the main reason. Then you’ve got this — this trade dispute is a big overhang that needs to be sorted out from a global economic growth standpoint.
I’ve got to get Pelly (ph) a lot of credit though. This has been overshadowed by the policy rate debate. He acknowledged back in May that the Q.T. that was too much and they’re going to — they’re really ratcheting that back now, the Q.T. So the liquidity situation is just starting to improve.
If you look at the numbers I saw on M2 growth, on real M1 growth, the — the aggregates, the monetary aggregates are starting to stabilize and even trend up now. So I think …
RITHOLTZ: Because people haven’t really a lot of policy wonks are focusing on the rates, they’re not focusing on quantitative tightening.
BOWEN: Exactly, exactly. And that — that’s …
RITHOLTZ: And you — you think that’s as significant as the rates?
BOWEN: I do, I do. And I think Powell deserves credit. I think Powell is kind of an unsung hero in a way. I mean, number one, that speech you gave at Jackson Hole last August where he basically said the — that those curves it’s done, it’s done. I think that’s a huge drive from the Fed.
RITHOLTZ: That’s a big admission for the Fed anyway.
BOWEN: Yeah. And then the — you know, Powell is pragmatic, he’s pragmatic. You know, he’s — he’s a business — he’s — he’s — and this — on the Q.T., I think that’s important that they’re doing that. I think the Fed has some great innovative thinkers now and I’m encouraged that they’re looking at these new models, that they’re open to that, that the — I — I think they realized that some of these models are backward-looking and not particularly …
RITHOLTZ: Right.
BOWEN: … effective. So I’m encouraged that it’s on the table, and I hope they’ll move to more of a rules-based approach, either a price rule which is what we had. We kind of added the factor price rule back in the 80’s, Wayne Angell and …
RITHOLTZ: Right.
BOWEN: … Manley Johnson. It was kind of a commodity price rule and — with Greenspan who was very good on the Phillips curve.
I — I’ve warmed (ph) to a nominal GDP growth target maybe, that kind of thing. But the — the important thing is they’re open, and they’re looking, and they’re examining, and they’re exploring maybe some new models. I think that’s important.
RITHOLTZ: I’m curious as to your thoughts about something. I was — given President Trump’s desire for low interest rates and he said this repeatedly at least since he’s been elected. Previously, he was against low interest rates. But once he took the office, hey, everybody likes low interest rates. I was very surprised that both Powell and Clarida were two well-known inflation hawks were appointed as chair and vice chair. What — what are your thoughts on that, and how have they adopted to — adapted to the current situation?
BOWEN: Yeah. I’ve — you know what, I’ve got — I’ve got a lot of faith in both those guys. I mean, Clarida is a — he’s got a great background …
RITHOLTZ: For sure.
BOWEN: … business side and on the academic side.
RITHOLTZ: Yup.
BOWEN: He’s just not an academic …
RITHOLTZ: No, he’s a rock star …
BOWEN: … real-world — real-world deal.
RITHOLTZ: No doubt about it.
BOWEN: And Powell is very pragmatic, too. So I — you know, I don’t know who’s pulling the strings on these Fed appointments exactly, but I like the idea of shaking it up, shaking the institution up. I know the Steve Moore-Herman Cain didn’t work out and those were the …
RITHOLTZ: Well, those were kind of real outlier …
BOWEN: Yeah.
RITHOLTZ: … nominees.
BOWEN: But the Judy Shelton and the St. Louis nominee …
RITHOLTZ: Isn’t she a hard money — isn’t she a gold bug?
BOWEN: Traditionally has been.
RITHOLTZ: Right.
BOWEN: But if you — but if you listen to her recent interviews in testimony — and I’ll be looking forward to the testimony. I mean, I think she’s on it in terms of these — these price signals and what they — I just like the idea of shaking the institution up. I really do.
RITHOLTZ: Even with the gold bug.
BOWEN: And — and by the way — by the way, when it’s all said and done, Trump will have appointed six out of seven.
RITHOLTZ: Yeah. Right, that’s — it’s his Fed.
BOWEN: Yeah, I mean …
RITHOLTZ: There’s no — for better or worse …
BOWEN: Right.
RITHOLTZ: … there’s no getting away from that.
BOWEN: Right.
RITHOLTZ: I’m — like you, I’m impressed with Powell. I’m very impressed with Clarida. The leadership is — is important, and I think they may be his two best appointees …
BOWEN: Yeah, I agree.
RITHOLTZ: … across — across the board.
deployed progress crossed across the board. So I have two specific portfolio questions. I don’t want to — before we get to our favorite questions in our speed around, I don’t want to pass these two by. The first is given your — your focus on stocks and bonds, how do you think about position sizing? How significant is that? How concentrated are you? Typically, how many holdings do you have? And — and when you add a position or add to a position, how big or small does that usually get?
BOWEN: Yeah. In — the Tampa model, typically — typically, will have about 50 to 60 …
RITHOLTZ: Okay.
BOWEN: … common stocks with the balance in bonds. And importantly on the bond side of the portfolio, we haven’t talked about it, but it’s strictly there for income instability. It’s a timing strategy based on interest rate anticipation …
RITHOLTZ: Right.
BOWEN: … where it’s a very conservative bond portfolio. They have to be — securities have to be rated A or better, which keeps them out of a lot of trouble.
RITHOLTZ: So treasury, corporates and not a whole lot more.
BOWEN: This is a very plain, boring …
RITHOLTZ: High-quality, yeah.
BOWEN: … high-quality, pure interest rate anticipation strategy, buy and hold. We’re not trading.
A lot of people in the business, I see that they don’t realize how much money can be lost on the bond side. I mean, they can be very, very risky. So the bonds, we’re taking enough risk on the stock side …
RITHOLTZ: Right.
BOWEN: … which we don’t need to do anything on the bond side (inaudible) very, very boring and quality-oriented. The stocks side, typically, 50 to 60, nobody will accuse of being a closet indexer.
RITHOLTZ: Right.
BOWEN: In our smaller accounts, usually 30 common stocks. And Tampa is bigger, so it’s really more 50 to 60 common stocks.
RITHOLTZ: How big can any one position get?
BOWEN: And typically, we’ll let them run and love to take the cost out. Certainly, if it gets to a point where it’s representing — get a three, four, five percent of the total equity portfolio, it really alerts us to thinking that we need to scale back.
RITHOLTZ: Take a little long.
BOWEN: But as long as the — as long as the fundamentals remain in place and we’re enthusiastic about the long-term value, then we had — we never just sell it just because it’s doubled …
RITHOLTZ: Right.
BOWEN: … or tripled, you know? It’s always — hopefully, it’s in perpetuity. That’s what — and there’s still some remnants in that portfolio from 1974 (inaudible) that.
RITHOLTZ: But your — you have holdings that your dad purchased …
BOWEN: Yeah.
RITHOLTZ: … you still haven’t sold.
BOWEN: They’re — I mean, they’re not a lot, but there’s — there’s some.
RITHOLTZ: Coca-Cola, let me guess, and Procter & Gamble, things like that.
BOWEN: Procter & Gamble, you know, Gillette was a big holding …
RITHOLTZ: Right.
BOWEN: … and Procter bought Gillette. I mean, my father always — he always joked again not that we’re in this league, but he said, “You know, we were on Coca-Cola and Gillette four or five years before Warren Buffett was.” I mean …
RITHOLTZ: Well, you could thank him for help driving the …
BOWEN: Yeah.
RITHOLTZ: … the appreciation up.
And — and my last of these questions, so the past decade is seeing huge inflows to passive indexing. How do you think about this impacting what you do? Does it help you process? Does it hurt it? Does it create more opportunities? How do you look at the passive index trend?
BOWEN: You know, with a 20-year approach, that gives us time to reestablish an equilibrium. I think over short-term, it concerns me in terms of the increased volatility in the — I think that over — I saw some data, it was amazing. High-frequency trading now accounts for over half the volume on the New York …
RITHOLTZ: Right.
BOWEN: … Stock Exchange. I mean, you’ve — I think there’s some unintended consequences that are going to occur when we have the next bear market. I mean, there’s a potential toxic …
RITHOLTZ: And — and when does that start? You know, and that’s been a market. Can you give me a (inaudible)?
BOWEN: You know, the Fed can engineer that soft landing. I think we’re mid-cycle.
RITHOLTZ: So — so in other words, this could be really extended economic …
BOWEN: Yeah.
RITHOLTZ: … cycle of 12, 14, 16 years.
BOWEN: You know, I told you about that Washington seminar I went to in 1986. One of the speakers was Beryl Sprinkel, and he was Reagan’s Chairman of the Council of Economic Advisors. He said something that I’ve never forgotten, and you hear it a lot now, but back then it was the first time I had heard it. He said, “You know, economic expansions don’t die of old age. They die and not the policies.” And typically, it’s emanating from the Fed.
So just because we’re …
RITHOLTZ: Inflation over tightening and on the market side excess investor enthusiasm.
BOWEN: (Inaudible). Classic since World War II when the curve was inverted, 85 percent of the time we have a recession at bear market. I mean …
RITHOLTZ: Right.
BOWEN: … that’s just the deal, you know, stop-start, stop-start.
But it’s not age and we’re — we just started the eleventh year of this expansion. There’s no reason we can’t be mid-cycle if we handle the policy side correctly. So …
RITHOLTZ: What did Australia go, 25 years …
BOWEN: That’s just right.
RITHOLTZ: … and counting?
BOWEN: That’s right. But the — the — the — the passive, it — it concerns me that so much now is computerized and technical. And somebody said, to — to harness the wisdom of crowds you actually need a crowd, you know.
The price discovery, the — the — the fundamental valuation analysis is just — it’s not — it’s — so much of it is automatic, the combination of the passive investing, the ETFs, the index funds. If the algorithms have a predisposed notion to buy, they can also — it can also be on the sell side.
RITHOLTZ: Sure.
BOWEN: And so when you have — you could really have some outside — outside sized moves on the upside and the downside. I just suspect there are going to be some unintended consequences of this massive move in the passive and the algorithms that, I think, during the next bear market could really be somewhat disconcerting.
Now , over the long-term, I don’t think it matters because there’ll be a equilibrium where you established and it’ll — it’ll sort itself out.
RITHOLTZ: It’ll go too high, it’ll go too low, but eventually will settle.
BOWEN: Yeah. And — but I tell you, I really feel for the individual investor, and I think it’s one of the reasons individual investors under-invested. This volatility politics is just can keep you up at night. I mean, it’s just incredible in terms of what it means just psychologically to watch this volatility that can — and a lot of it is because of passive. I mean, you — you can see it on the tape when — when — when, okay, we’re going to sell it, bang. You know, it just depends on the — so …
RITHOLTZ: And it comes out of nowhere. The fourth quarter of 2018 really was a wakeup call for a lot of people.
BOWEN: Right, right. There’s one interesting point I’ll make is that I did a piece for Behrens (ph) on the 20-year investment operation. Somebody answered online and said, you know, their Fidelity Berger (ph) said the best account he ever had was (inaudible) forgot he had the account.
RITHOLTZ: Right, right.
BOWEN: That’s a …
RITHOLTZ: I’ve heard — I’ve heard jokes like that …
BOWEN: So …
RITHOLTZ: … and it’s — it’s absolutely true.
BOWEN: Yeah.
RITHOLTZ: So let me jump to my favorite questions in our — our speed round. We ask all our guests this and we always get some pretty interesting answers. What was the first car you ever owned, year, make and model?
BOWEN: First car was a 1969 Sable Brown Oldsmobile Delta 88, two-door with a Rocket 455 engine.
RITHOLTZ: That was a land yacht, wasn’t that? That was a giant …
BOWEN: It’s — yeah.
RITHOLTZ: I remember the 88.
BOWEN: Very heavy, but a strong engine.
RITHOLTZ: Tell us …
BOWEN: It had a — it had a — it had a vinyl top. And on one road trip, the wind got up under the top and flew off.
RITHOLTZ: The whole thing?
BOWEN: Yeah.
RITHOLTZ: Another find General Motors product. Tell us the most important thing we don’t know about Jay Bowen.
BOWEN: Gosh, I would say that my very first job was selling vibrating pillows. I don’t know how many people know …
RITHOLTZ: Excuse me?
BOWEN: … I don’t know how many people know that but …
RITHOLTZ: Vibrating pillows.
BOWEN: Vibrating pillows.
RITHOLTZ: What — what is the purpose of a vibrating pillow?
BOWEN: College summer job, it was a size of a throw pillow with batteries in the back, and it relieved — people put it behind their back, they put their feet on it, they put their neck on it. It was a tension reliever. And I answered an ad that said $200 a week guaranteed, and then in small print it said, “If you sell four a day, I answered the ad …
RITHOLTZ: Did you sell four a day?
BOWEN: … I answered the ad and I became the top salesman nationwide.
RITHOLTZ: Really?
BOWEN: Yeah, so that was — that was my first job.
RITHOLTZ: Vibrating pillows. Well, who are some of your early mentors? And I have to assume your father is going to loom large in that — that list.
BOWEN: Yeah, on the investment side, there’s just no question. I mean, when you work with somebody for 32 years day in and day out, shoulder-to-shoulder on the investment side, I mean, it just — and for most of the day you talk about investments in the stock market. I mean, you know, you — you — not exclusively, but it’s just was so just the intensity on financial markets just day in and day out. I mean, that is just — yeah, it’s not — not even close.
On the — on the economic side, Arthur Laffer is somebody I met in the mid-80’s who had a big influence. He would have the — particularly when I really started to focus on monetary policy, trade policy, fiscal policy, tax policy, he would have these very high profile Washington conferences where you are able to meet very high-level people in the Treasury, at OMB, Council of Economic Advisers, the Fed.
Cato Institute, I interned there …
RITHOLTZ: Oh, really? Interesting.
BOWEN: … in 1990, spent and was able to spend time with just some extraordinary people on the policy side. I mean, you had people like Milton Friedman and — and Vernon Smith, and James Buchanan and F.A. Hayek, I mean, Nobel laureates who — who were around. You had conferences, particularly the annual monetary conference. They got a very high-profile annual monetary conference that Jim Dorn runs where it was really able to start focusing on the — on — on these issues. And — and — and — and just being in that environment allowed me to really focus on from a top-down standpoint some of these key policy issues.
RITHOLTZ: Very interesting. I — I’ve done a number of shows with the Art Laffer over the years. And my take-away from him is always he’s a really nice guy.
BOWEN: Yeah.
RITHOLTZ: And I don’t know how much people always arguing with him on a policy …
BOWEN: Right.
RITHOLTZ: … base. Hold the policy side, he just happens to be a …
BOWEN: Yeah.
RITHOLTZ: … genuinely nice person.
BOWEN: Just the best of the best, yeah. He — he’s really, really great.
RITHOLTZ: So what investors influenced your approach to looking at the market and looking at stocks?
BOWEN: Again my father — it’s just so overwhelming, I mean, it’s so overwhelming in terms of — of being molded, in terms of taking a long-term approach, taking a high-quality approach and the investment decision-making process, you know, being top-down from a mathematics standpoint but then being bottom-up when you get this — when you get the candidates — the candidates.
I remember him coming in during the late 80’s and saying, “okay, we’ve got mid/late 80’s. I want you to look at Colgate, and Gillette, and Campbell Soup and Procter & Gamble, and tell me what looks the best from a free cash flow standpoint, free cash flow yield, the dividend history, the management, the sales per share, the balance sheet. You know, would you really help me kind of formalize the process in terms of deciding not only top-down work, but then selecting the individual security?
RITHOLTZ: Quite interesting. Tell us about some of your favorite books, be they fiction, nonfiction, investing-related or others. What — what do you like to read?
BOWEN: Yeah. You know, outside I — I read so much finance and economics …
RITHOLTZ: Right.
BOWEN: … during the day. I tried to get away from that. I really like biographies, I really like historical biographies.
RITHOLTZ: Give us a few examples.
BOWEN: Well, there’s — there’s a couple now that — that I’m reading. One, “Hero,” by Michael Korda, “Life and Times of Lawrence of Arabia,” just a — just a fascinating historical figure. You know, he led the Arab revolt against the Turks in World War I. I mean, you know, the famous movie in the early 60’s.
RITHOLTZ: Sure.
BOWEN: Peter O’Toole. But just a scholar, a writer, a warrior, a journalist, just a fascinating individual, I mean, I just found that very interesting.
Another recent historical would be Andrew Roberts’ new book on Churchill, which is a one-volume biography, which is hard to do.
RITHOLTZ: Right.
BOWEN: But I would say it’s probably going to — in retrospect — end up being the best one-volume …
RITHOLTZ: Really?
BOWEN: … biography. Andrew Roberts is just tremendous. He wrote the “Storms of War” on World War II, just a great, great biography.
On the finance side, another book that’s fascinating is the “Lords of Finance” …
RITHOLTZ: Oh, with …
BOWEN: … (inaudible).
RITHOLTZ: … (inaudible).
BOWEN: Yeah.
RITHOLTZ: That’s a — I think that won the Pulitzer.
BOWEN: It did.
RITHOLTZ: That was a really interesting book.
BOWEN: It did. I think ’09 or ’10 it won. It did win.
RITHOLTZ: I did not — until I read that book, I had no idea how much monetary policy …
BOWEN: Oh, man.
RITHOLTZ: … led to World War II.
BOWEN: Yeah, it’s just amazing.
RITHOLTZ: Right?
BOWEN: I mean, I love it, the focus on the four central banks of the world back then in the 20’s, and what — just the — just how it all went down.
RITHOLTZ: Right, and it’s so beautifully written, too.
BOWEN: Oh, it’s just tremendous, so that’s a great one. I’m — I’m a big fan of the American novel, the classic American novel, you know, Hemingway. I just …
RITHOLTZ: I just read “The Old Man and the Sea” on a flight.
BOWEN: … it just …
RITHOLTZ: So delightful.
BOWEN: … they never get old. And the thing about those books, particularly great guys bureau (ph) J.D. Salinger.
RITHOLTZ: “Catcher in the Rye.”
BOWEN: You can read them — yeah, you can read them in one or two sittings.
RITHOLTZ: Right.
BOWEN: And — and you can reread them. Ten, 20 years later you can re-read them. On the modern side, it would be more Walker Percy, “The Moviegoer” or “The Last Gentleman.” He’s just great fiction novelist, and then Tom Wolfe, of course is …
RITHOLTZ: I — I want to say Hemingway’s “Old Man and the Sea” is like 100 pages, like you could sit down and — that’s a short flight. You can …
BOWEN: Right.
RITHOLTZ: … you could go through that whole — quite, quite interesting.
BOWEN: Right.
RITHOLTZ: So tell us about a time you failed and what you learned from the experience.
BOWEN: Yeah, that’s a great one, great question, just thinking about that and it would — one that really stands out is we started a mutual fund in the early 2000’s and it was just a mistake. I mean, we decided to — we — we would have these inquiries in terms of we would really love to invest with you, we don’t meet your minimum, so we had these visions. All right, we’ll just start a mutual fund. That’s no big deal. Oh, my gosh.
RITHOLTZ: Lots of marketing.
BOWEN: Just the time and the money, and then the realization, the light bulb comes on, wait a second, these things are sold over now, they’re just sold …
RITHOLTZ: Right.
BOWEN: … we didn’t have the ability to do that. And plus we were — had to rely on somebody else for a lot of stuff. We — I just didn’t.
It taught me that we need to focus on our core discipline in terms of the investment side with current clients and just rely on referrals. It didn’t work. It was expensive, it was time-consuming, it was just a mistake that venture.
RITHOLTZ: What do you — what do you do for fun out of the office?
BOWEN: Gosh, it would be dominated by triathlon racing.
RITHOLTZ: Oh, really?
BOWEN: Yeah.
RITHOLTZ: Quite …
BOWEN: Triathlon, yeah.
RITHOLTZ: … quite interesting. Tell us what you’re most optimistic and most pessimistic about today.
BOWEN: Gosh, I — I would say I’m most optimistic about just the — the continuation of the entrepreneurial and innovative zeal that this company — excuse me — country possesses. It’s just incredible. I think the energy and the drive, the American spirit that’s still there and with new company startups and the vision, I just think that’s so exciting. And I guess that ties into what I’m most — I guess what I would be concerned with is that we — somehow we lose that and we fall into more of the European lethargic state where we’re growing but, you know, you have demographic issues.
RITHOLTZ: Low trends, yeah.
BOWEN: You just got this financial repression environment where you have abnormally low interest rates, low growth rates, demographic issues, a lot of disincentives for capital formation and new business startups. I would hate to see us fall into that model that you’re seeing in — somewhat in Japan and Europe. I want to keep …
RITHOLTZ: Right.
BOWEN: … our zeal going here.
RITHOLTZ: Our last two questions, if a millennial or a recent college grad came and said they were thinking about a career in asset management, what sort of advice would you give?
BOWEN: I would say that there’s more than one way to do this. Don’t necessarily take the conventional route. You don’t have to have a finance degree. You don’t have to major in finance. There are all kind of different ways to be successful in this business. And no job is too small.
After you learned something, I don’t care what you’re doing. If you’re in the door at any institution, man, I mean, just take advantage of it and get in the door and — and work within that environment to see where you’re — where you’re comfortable and where you can flourish.
RITHOLTZ: And our final question, what do you know about the world of investing today that you wish you knew when you began almost 40 years ago?
BOWEN: Right. You know, the one that stands out is that I wish I’d put the entire portfolio and 30-year treasury bonds in 1982 (inaudible) …
RITHOLTZ: Sure.
BOWEN: … and everybody’s.
RITHOLTZ: There — there were long stretches when they were beating stocks, weren’t they?
BOWEN: Yeah, yeah. It’s — it’s something. But really, you know, I would say that you don’t always have to be right, you know, you don’t always have to be right. I could really beat myself up initially for being wrong every now and then. And you’re going to be wrong, the other side. You’re going to be wrong and you need to learn how to absorb it, to process it, to accept it and to take the loss and move on.
RITHOLTZ: Great advice. We have been speaking with Jay Bowen of Bowen, Hanes & Company. If you enjoy this conversation, well, be sure and look up an inch or down an inch on Apple iTunes, Overcast, Stitcher, Spotify, wherever your finer podcasts are found. And you can see any of the previous 250 such conversations we’ve had over the past five years.
We love your comments, feedback and suggestions. Write to us at midpodcast@bloomberg.net.
I would be remiss if I do not thank the crack staff that helps put together this conversation each week. Michael Batnick is my Head of Research. Michael Boyle is our Producer/Booker. Charlie Vollmer is our Chief Engineer.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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