Transcript: Andrew Slimmon, Morgan Stanley Investment Management




The transcript from this week’s MiB: Andrew Slimmon, Morgan Stanley Investment Management, is below.

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

00:00:09 [Barry Ritholtz] This week on the podcast, I have another extra special guest. Andrew Lemons has pretty much done everything on the wealth management side of the business, starting at Brown Brothers Harriman before going on to Morgan Stanley, where he started out as a client facing wealth manager before moving into Portfolio Manager and eventually creating the Applied equity advisors team that uses a combination of quantitative and fundamental and behavioral thinking to create portfolios and funds that are sturdy and can survive any sort of change in investor sentiment. They look at geography, they look at cap size, they look at style, and they look at sector and try and keep a portfolio leaning towards what’s working best. These tend to be concentrated portfolios. The US versions are 30 to 60 holdings where the overseas versions are just 20 holdings. I, I found this conversation to be fascinating. There are a few people in asset management that have seen the world of investing from both the client’s perspective and a client facing advisor side to a PM and then a broader asset manager than Andrew has. He really comes with a wealth of knowledge, and he’s been with Morgan Stanley since 1991. That sort of tenure at a single firm is increasingly rare, rare these days. I, I found this discussion to be absolutely fascinating and I think you will also, with no further ado, Morgan Stanley’s, Andrew Slim.

00:02:01 [Andrew Slimmon] Thank you. It’s an honor to be here.
00:02:02 [Barry Ritholtz] Well, it’s a pleasure to have you. So let’s start at the beginning with your background. You get a BA from the University of Pennsylvania and an MBA from University of Chicago. Was finance always the plan?

00:02:15 [Andrew Slimmon] I think being in a competitive industry was all the plan. I played tennis competitively in juniors and went on and played in college and, and I always liked the, you know, you either won or lost and what I always liked about this industry, it was all about, you know, did you win or lose? There wasn’t a lot of gray area, and I think that’s what I do love about the stock market and investing in general, because there’s a scorecard and you can’t, there’s no room on the scorecard for the editorials.

00:02:41 [Barry Ritholtz]] No, no points for style or form. Exactly, exactly. It’s just did you win or lose? Exactly. So, so where did you begin? What was your first role within the industry?

00:02:48 [Andrew Slimmon] Sure. So, well, my first role was opening the, the mail at a brokerage firm in Hartford, Connecticut. But I started my career at Brown Brothers Herriman right here in, in New York, in a training program, which was great because they had commercial banking, they had capital markets, and they had the investment management side of the business. And that’s what getting exposure, all those led me to believe, gee, I really am interested in the stock market and how it works and investing in general.

00:03:16 [Barry Ritholtz] So what led you to Morgan Stanley? How’d you find your way to right to

00:03:21 [Andrew Slimmon] Ms? So I, yeah, I was a research analyst at, at Brown Brothers, and I was covering, you know, in healthcare stocks. I, I realized that there must be something more to investing than just what was going at the company level, because I noticed that the things that were moving my stocks on a day-to-day basis, weren’t just what was going at the company level. And University of Chicago where I went, got my MBA was obviously very focused on more the quantitative areas of investing. And I took Fama and French and so forth and Miller and all those that, that taught me that what drives a stock price is more than just the, you know, the company level. And so that’s, that was really how it, it rounded my knowledge of kind of investing the first steps and then coming out of, of business school. It was 91 and it was a recession. And I, I, I had met my wife in business school and she got a job at Kid or Peabody, if you remember that, investment banking in Chicago. And I couldn’t find kind of a buy side opportunity. And Morgan Stanley had a department called Prior Wealth Management that covered wealthy individuals and small institutions in Chicago. And I needed a job and I had a lot of student debt. So I said, Hey, as opposed to going the traditional buy side route, I’ll start in this area covering clients and investing for them.

00:04:49 [Speaker Changed] So 91, kind of a mild recession, mild and really halfway through what was a rampaging bull market. What was it like in the 1990s in New York in finance?

00:05:04 [Speaker Changed] Well, I mean, the thing that was amazing is we would have clients in the late nineties, they would come to us and they’d say, Andrew, I’m not greedy. I just want 15, 20% returns a year.

00:05:15 [Speaker Changed] Right.

00:05:15 [Speaker Changed] And no risk with,

00:05:16 [Speaker Changed] With limited risk risk, limited risk. Right. I knew you’re gonna go there.

00:05:19 [Speaker Changed] And, and that is what was so fascinating about today Yeah. Is today people say to me, Andrew, why would I invest in equities when I can get 5% in the money market? And what a difference in a mindset, which tells you where we are. In the late nineties, we had just gone through a roaring bull market optimism was just so rampant. And the worst year in the business I can remember was 1999, because as an investor covering clients, I was caught between doing the right thing for them, which was avoid these ridiculously priced stocks. Right. Or get on the train because the money is pouring through. And then it all came to an end in 2000, 2001. And I took a step back and said, thank God I never, you know, I I I just didn’t buy in the way some people did, and therefore save people a lot of money. It was a tremendously good learning experience for me to stay true to your values of investing. Ultimately, they work out. You,
00:06:16 [Speaker Changed] You are identifying something that I, I’m so fascinated by. The problem we run into with surveys or even the risk tolerance questionnaires is all you find out is, Hey, what has the market done for the past six months? If the market’s been good, Hey, every I, of course I want more risk. I’m, I’m, I’m more than comfortable with it. And if the market got shellacked, no, no, no. I, I can’t, I can’t suffer any more drawdowns. It’s just pure psychology.
00:06:42 [Speaker Changed] And, and I would go one step further. You know this, you’re in the business, but when you first meet someone, you never know the ones that are going to be truly risk averse or truly can withstand the volatility. And ones that can, some people say, don’t worry, I’m not worried about the drawdowns. And the minute it happens, they’re on the phone to you. And some people, I told you I wasn’t worried and I didn’t call you. Right. And you can never know. Just the first time you meet people who that’s going to be it, it’s

00:07:08 [Speaker Changed] A challenge figuring out who people really are. Not, not easy. So you started Morgan Stanley in 1991. You’re in that, that’s a long time ago. Yeah. You start on the private wealth side. What led you to becoming a portfolio manager with Morgan Stanley Wealth strategy?
00:07:24 [Speaker Changed] So if you think about my career, I learned to be a fundamental analyst. I went to University of Chicago and learned that, oh, there’s quantitative factors that drive a stock price beyond kind of what’s going on at the company level. The third part of my experience was being in prior wealth management, clients wanna believe they all buy low and sell high, but bear, you know, that doesn’t, isn’t the case.
00:07:45 [Speaker Changed] Somebody does accidentally someone randomly top ticks and bottom ticks to market. But nobody does that consistently.
00:07:51 [Speaker Changed] Exactly. And here’s a great example of what, I mean, if you think about the years 2020, in 2021, growth stocks took off. Right? But in 2022 they got crushed. Do you think more money went into growth managers and funds in 2021 or the end of 2022 after they got crushed?
00:08:10 [Speaker Changed] The flows are always a year behind where the market is. Exactly 00:08:13 [Speaker Changed] Right. So, so what I People
00:08:15 [Speaker Changed] Are backwards looking.
00:08:16 [Speaker Changed] What? Well, and that’s because there’s something called the tear sheet. If you were my client, I went to you and said, Barry, I think you should invest in emerging markets because look how terribly it’s done in the last five years. And I can you the tear sheet, you’re gonna go away.
00:08:28 [Speaker Changed] Everybody hates it,
00:08:29 [Speaker Changed] Right? Hate it. So the problem with this business is a stock price does not care what happened in the past. It only cares about what’s happened in the future. But as humans, we all suffer from recency buys. So what I observed in the nineties, it’s a long-winded answer. Your question is no, it’s
00:08:45 [Speaker Changed] An
00:08:46 [Speaker Changed] Interesting, what I observed in the nineties as a coverage offer, you can’t get clients to actually buy what’s out of favor. Right. And the flaw in the whole growth value us international is people frame, oh, maybe I should buy more growth because it’s working well, except it gets too expensive. So the reason I left being in wealth management, I was convinced that I could start strategies using more quantitative, but give us flexibility. So if we could start core strategies so that if growth got too expensive, we could tilt away from growth, or if Europe wasn’t working, we could tilt away from Europe. That gave us more flexibility as an active manager versus saying, I’m only a growth manager. And then I’m always trying to justify why you should buy growth. Or if I’m a value manager, all always justifying why I buy value. Remember, by 1999, a half of value managers had gone outta business in the last three years that just before they took off. That’s
00:09:48 [Speaker Changed] Unbelievable. I, I know folks who run short hedge funds and they say they could always tell when we’re due for a major correction. ’cause that’s when all of their redemptions and outflows it, it’s hit, hit a crescendo.

00:10:01 [Speaker Changed] And so that’s the problem with the dedicated style is you’re always fighting human behavior just at the juncture with which you should be investing. They’re selling, they’re selling their stocks. So,
00:10:14 [Speaker Changed] So let me ask you the flip side of the question. If you can’t get people, or if it’s really challenging to make people comfortable with buying outta favor styles or companies, can you get them to sell the companies that are in favor and have had, you know, an exorbitant runup and are really pricey? Or, or is that just the other side of the same coin? It’s
00:10:36 [Speaker Changed] The other side of the same coin, but, but I think what complicates, is it taxes? Sure. Because people don’t want to sell for taxes. And General Electric was a very important experience in my life in a, you know, back in the nineties, which was, it became the number one stock. Everyone loved it. And, and then, you know, it went through a can’t grow as quickly anymore. So the issue that I see in the industry is stocks never survive as the the number one company. And so eventually they, they decline and people don’t want to take money off the table when they’re the number one or tops because they have big gains. And then ultimately people sold a lot of General Electric with a lot less of a gain. So the trick is, is to reduce the exposures over time. So with, if I’m a core manager and I know that growth is expensive relative to its history versus value, we’ll tilt the portfolio. But we won’t go all into value, all into growth because timing these things is very, very tricky.
00:11:42 [Speaker Changed] So you’ve been with Morgan Stanley since 19 91, 3 decades with the same firm. Pretty rare these days. What makes the firm so special? What’s kept you there for all this time?
00:11:54 [Speaker Changed] Well, you have to remember that when I started in 9 19 91, wealth management was a, was a relatively small part of the, of the firm. And I give James Gorman tremendous credit. He really grew that area because of the stability of the cash flow. I ge I’m a pretty stable cash flow. And then when I progressed to and Morgan Stanley investment management, it was the same concept, which was we value the multiple on stable cash flows is higher than on capital market flows. And so that’s, I’ve kind of followed the progression of how Morgan Stanley’s changed and that’s been a great opportunity. And then I look and say, well, I was able to go from wealth management into the asset management because the firm grew in that era. So it’s a, it’s been a tremendously great firm to be with, but I’ve, you know, my career has changed over time as a firm’s changed over time. Sure.
00:12:47 [Speaker Changed] I, I had John Mack on about a year ago and he described that exact same thing, the appeal of, of wealth management. And part of the reason, what was it, Dean Witter, the big acquisition that was done was, hey, this allows us to suffer the ups and downs in the other side of the business, which has potential for great rewards but no stability. Right. Versus ready, steady, moderate gains from From the wealth management
00:13:12 [Speaker Changed] Side. Exactly. We bought Smith Barney, so on the wealth manage, that was another big one. Right. So then over the asset management side, there’s Eaton Vance E-Trade Wealth Management and with Eaton Vance came Parametric and Calvert. So the firm has grown in the areas that I’ve grown personally. So it’s been a great, great marriage for a long time.
00:13:30 [Speaker Changed] So your experience with General Electric? I had a similar experience with EMC and with Cisco late nineties trying to get people to recognize, hey, this has been a fantastic run, but

the growth engine isn’t there. The trend has been broken. Don’t be afraid to ring the bell. And I’m not an active trader. Yeah. I’m a long-term holder. Getting people to sell their winners is not easy
00:13:54 [Speaker Changed] To do, is very, very hard. But, but also when stocks get very, very big, companies get very, very big. It just gets tougher to grow. In my experience, and this has nothing to do, GE just in general is when companies get big, usually the government starts looking into their business ’cause they might dominate too much. And so it’s a combination of why over time, and I know this is hard to believe given the last couple years, why the equal weighted s and p does actually outperform the cap weighted s and p because companies, mid-cap companies that are moving up, it’s easier to grow. That
00:14:30 [Speaker Changed] Hasn’t, what has it been 25 years since the Microsoft antitrust 00:14:34 [Speaker Changed] Boy? And that’s, that’s
00:14:35 [Speaker Changed] That’s that’s amazing. How often are equal weight s and p outperforming cap
00:14:40 [Speaker Changed] Weighted? It outperforms about half the time. It certainly had, I mean think about last year and through October, the cap weighted had outperformed the equated by 1100 base points.
00:14:50 [Speaker Changed] Wow. That’s a lot.
00:14:51 [Speaker Changed] But the thing that’s fascinating about this, Barry, and, and again, you know this is that it’s always the first year off of bear market, low investors sell. So retail flows were negative from the low of October 22 until for a year. And that’s until
00:15:06 [Speaker Changed] November 23. Exactly.
00:15:08 [Speaker Changed] But if you go back to 2020, March of 2020 flows were negative until February of 21. So it always takes about a year,
00:15:17 [Speaker Changed] February of 20. That’s amazing. ’cause from the lows in March percent, it was a huge set
00:15:22 [Speaker Changed] Of gains and net flows from mutual funds. ETFs were net they’re always negative the first year because of that rear view mirror recency bias. The reason why that’s relevant, Barry, is because when investors finally said, I can’t, I shouldn’t sell anymore, I should buy, they’re not gonna buy what’s already worked. They’re looking for other things. And that’s when the equated really started out before. Huh,
00:15:42 [Speaker Changed] Really interesting. So let’s talk a little bit about your concept of applied investing. What does that mean? What, what does applied investing involve?
00:15:53 [Speaker Changed] Okay, so there’s the theoretical story about it and then there’s the practical story. And I’m sure you’ll get a kick out of the practical, but the theoretical is that I don’t believe that a stock price return comes purely from what’s going on. Fundamentally, you have to decide should I own growth value, large cap, mid cap us versus non-US any stocks return about two thirds of return in any one year can be defined by those. So we have to get that right first. And that’s the quantitative size. So

we use factor models to say, Hey, should we own growth stocks or value stocks? And so we tilt our portfolios quantitatively based on which of those factors are sending a signal that they’ll work in the future.
00:16:36 [Speaker Changed] So, so let me just make sure I understand this. Geography size, sector and style style are the four metrics exactly you’re looking at and trying to tilt accordingly into what you expect to be working and away from.
00:16:50 [Speaker Changed] Exactly. And the goal of that is to keep people in the game flip side is, you know, things are out of favor. They can stay out of favor. The problem in this business is styles and investing can stay out of favor longer than the client’s patient’s duration.
00:17:06 [Speaker Changed] Ju just look at value in the 2010s, right? I mean if you were not leaning into growth, you were left way behind.
00:17:13 [Speaker Changed] Exactly. And what I observed from my time being advisor is at the end of the day, clients don’t really care whether they own growth or value. They don’t care whether they own European US, they want to make money and they don’t want ’em go backwards. And if all you keep saying is yes, but you know, my value manager has outperformed the value index. And they’re like, yeah, but the s and p is going through the roof. Right? So you have to have some flexibility in your approach. So I wanted to start a group that at the core would use those quantitative metrics, but pure quantitative takes out kind of the fundamentals of investing because a certain portion of a stock’s return comes from what’s going at the company level. And the other thing is, if all I did was focus on the quantitative, you’d end up owning 300 securities. So
00:18:01 [Speaker Changed] Let’s, let’s
00:18:02 [Speaker Changed] Talk about SA and an SMA can’t do that or you don’t drive enough active share.
00:18:07 [Speaker Changed] MA is separately managed, managed, managed account account. Let, let’s talk about active share because your portfolios are fairly concentrated. The US core portfolio is 30 to 60 companies. That’s considered a modest holding, a concentrated holding. Tell us about the thinking behind that concentration.
00:18:28 [Speaker Changed] So it’s funny, going back to that first job at Brown Brothers, you know, at, in the time in the eighties, no one knew about passive investing. But I observed that, you know, they’d have these portfolios and they’d have kind of two or three stocks in every sector. So you’d end up with, you know, a hundred or 150 stocks and you know, they, it, not that they did poorly, but they never really, you know, it was really hard to drive a lot of active, you know, performance.
00:18:51 [Speaker Changed] Everything is one 2%.
00:18:52 [Speaker Changed] And at the time it wasn’t really, there wasn’t really passive investing. But then as, as time progressed, all these studies came out and said, well actually the most excess return in active management comes from managers that are very, very active. Right? And if you own a hundred, 150 stocks and you’re the benchmark is the s and p, you’re not active. So it was clear to me that we needed very concentrated portfolios but control the risk. And so that’s why we run these limited portfolios. The applied term is, so it gave some quantitative approach to what we do. But here’s the

practical Barry, which is when the firm came to me and said, okay, you’re gonna become an asset management arm, you gotta come up with a name for your team. I knew that these firms show asset management companies alphabetically.
00:19:44 [Speaker Changed] So applied investing right
00:19:45 [Speaker Changed] There, I wasn’t gonna be Z applied. 00:19:48 [Speaker Changed] Right.
00:19:49 [Speaker Changed] I wanted to be at the top of
00:19:50 [Speaker Changed] The list. That’s very, that’s AAA exterminator always the first one. Exactly. To pull in the phone book. So let’s talk about two things you just mentioned. One is active share, but really what you’re implying are that a lot of these other funds with 200, 300 or more holdings, they’re all high fee closet indexers. What’s the value
00:20:10 [Speaker Changed] There? Right. And that’s why as an active manager, I have nothing against ETFs. I think it’s done great for the industry because shame on funds that own lots and lots of securities. You’re not doing a service to your investing. But at the end of the day, if I marginally underperform, not me, but in general, you know, it will take time to lose your assets. You know what’s right for the money management firm is not always what’s right for the, so the right thing is choose passive strategies, but there’s a place for active image, but it’s gotta be active
00:20:42 [Speaker Changed] Core and satellite. Exactly. You have a core of a passive index, but you’re surrounding it bingo with something that gives you a little opportunity for more upside. Exactly. Huh. Really, really interesting. So if the US holdings are 30 to 60 companies, the global portfolio is even more concentrated about 20 companies?
00:21:00 [Speaker Changed] Yeah, I mean, so, so taking a step back again, one of the, you know, remember I run mutual funds, but I start in the separate managed account business. So what it, what means is they would wealth manage would implement our portfolio for individuals by buying stock. And one of the things that I observed is that clients pull from the market faster than they pull from stocks. So in other words, when you’re worried about the market, if it’s about the market, some macro story, well do you wanna sell your Microsoft? Oh no, I like Microsoft, but I’m worried about the market. Okay, well owning individual securities is really powerful because it actually keeps people invested.
00:21:46 [Speaker Changed] There’s a brand name there that they relate to a
00:21:49 [Speaker Changed] Brand. Exactly. So people are more likely to pull from the market. So I believe in owning stocks, but the problem is, again, it goes back to, but if you own 200 stocks and they don’t have any wedded, so could we start a strategy? We started this oh eight where all the securities would be on one page.
00:22:04 [Speaker Changed] That’s amazing. So your global portfolio also has some international US companies. So in addition to things like LVMH and some other international stocks, you have Microsoft, you have Costco. Correct. What’s the thinking of putting those giant US companies in a global portfolio?
00:22:21 [Speaker Changed] It goes back to Barry, that concept, which is clients don’t care really where they make their money. And the problem with the, the benefit of global, a global strategies, I can own

some US stocks and an international only I can’t own. And what happens if the US just so happens to do better than the rest of the world, then international doesn’t work as well. So it just gives us more flex. It’s that flexible flexibility to go where the opportunity set is.
00:22:51 [Speaker Changed] And to that point, your fund, the Morgan Stanley institutional global concentrated fund, which does have US stock trounce, the, the MSEI exactly X us, because the US has been outperforming international. That’s another style for 15. Since the financial crisis, the US has been crushing absolutely everyone else.
00:23:14 [Speaker Changed] But think about this way also, if I can own 20 stocks, okay, but they’re not all correlated to each other, right? So they’re, they have a lot of different themes. Like I really like this, the, the, the infrastructure stocks right now. But I also think there’s a place, as you said, Microsoft, but luxury brands only a few stocks, but have a different theme. Then I can control the risk in the portfolio. You,
00:23:38 [Speaker Changed] You’re diversified high act to share, but concentrated 00:23:41 [Speaker Changed] High act to share, but lower kind of risk.
00:23:44 [Speaker Changed] So when I look at the Morgan Stanley institutional US core, the description is we seek to outperform the benchmark regardless of which investment style, value, or growth is currently in favor. So your style agnostic, you want to just stay with what’s working.
00:24:02 [Speaker Changed] Exactly. And Philip Kim is the other portfolio manager. We’ve worked together 14 years. I started these quantitative models and then he really took it to the next level. And this was what has the likelihood of outperforming for the next 12 to 18 months from a style standpoint. That’s how we bias the portfolio. Things could get just too expensive, things get too cheap, but we need to see some migration in the opposite direction and then we buy us accordingly. We want to stay in the game.
00:24:29 [Speaker Changed] What about the Russell 3000 strategy? That’s not, it’s obviously more concentrated than the Russell, but it’s still a few hundred stocks. Tell us what goes into that thing. Well
00:24:39 [Speaker Changed] We noticed that our, just our quantitative factor model alone was doing well right beyond just adding the stock to buy. So we wanted to start a strategy that would add a little bit of excess return versus just buying an ETF that was just focused on that factor models. But we would diversify away the stock risk.
00:25:01 [Speaker Changed] Really intriguing. So let’s talk a little bit about Slimmons take, which is not only widely read at Morgan Stanley, it’s also pretty widely distributed on the street itself. Towards the end of 2023, you put out a piece, a few lessons from the year, and I I thought some of these were really fascinating. Starting with the s and p 500 has produced a positive return in 67 of the past 93 years, the market produced two consecutive down years, only 11 times. That’s amazing. I had no idea.
00:25:35 [Speaker Changed] Well, I mean, think about it. The, the, the likelihood over time in any one year, the market’s going to go up and if it, if it doesn’t go up, that’s irregular. But then to have another year in a row is very, very irregular. So that’s, that’s why I began 2023 saying, Hey, it’s, it’s highly likely it’s gonna be a good year just purely based on, based on the odds. And then you layer in that whole recency bias rear view mirror and people were way too negative.

00:26:02 [Speaker Changed] Yeah. At the end of 2022, the s and p peak to Trth was down about 25%. You point out there were only eight instances since 1960 where you had that level of drawdown and the average one year return was 22% following that.
00:26:21 [Speaker Changed] So I’ve put out a piece in September of 2022 saying, market’s down 20%, you should add money down 20%. And of course I felt like an idiot, you know, a month later because, and then the market was down 25%. And I produce a piece saying the average return is just over 20% if you buy into down 25%, which doesn’t necessarily mean it stops going down. Right? But what’s amazing about that is, you know what, the return off that October 22nd low of 2022 was
00:26:49 [Speaker Changed] 30 something. 00:26:50 [Speaker Changed] No, 21%. Oh 00:26:52 [Speaker Changed] Really? Dead on
00:26:53 [Speaker Changed] Right. Dead on in line. It’s uncanny how these things repeat itself. And that’s Barry again, it goes back to, you know, your experience, my experience is the macro changes, but behaviors don’t. Right. That’s the consistency of this business and that’s what I’m fascinated
00:27:08 [Speaker Changed] With. Human nature is perpetual. It’s, it’s, it’s Right. No, no doubt about it.
00:27:11 [Speaker Changed] And that’s what gave me confident that the fun flows would turn positive at some point in the fourth quarter because it was a year off the low.
00:27:18 [Speaker Changed] I really like that. Be dubious when a stock is declared expensive or cheap based on a singular valuation methodology like pe this is a pet peeve of mine. The e is an estimate at someone’s opinion. How can you rely on something, especially from someone who doesn’t have a great track record of making
00:27:39 [Speaker Changed] This forecast. It’s the, I think that’s the biggest error investors make over time is, well this stock is, you know, as you said, this stock is cheap or this market, think about Europe. Mar Europe has looked cheaper than the US for a number of years. The flaw in that is the e is a forward estimate. And it’s turned out that the E for Europe hasn’t been as good as what’s expected. And the E for the US especially the Nasdaq, has been a lot higher than was expected. So the denominator has come up in the us which makes a PE lower and the denominator come down you, which made it look more expensive.
00:28:18 [Speaker Changed] So that, that’s always amazing is if the estimates are are wrong to the downside, well then expensive stocks aren’t that expensive and vice versa. Exactly. If the estimates are too high, cheap stocks really ain’t cheap. Right.
00:28:31 [Speaker Changed] I watched that. But we also watched revisions and I’ve learned, learned also from being, you know, cynically in this business. Companies don’t always come clean right away and say, oh, our business really bad. It’s the, they drip out the news, right? Usually one bad quota follows another bad quote. I mean it’s very rare. So be careful that, and analysts are slow to adjust their numbers. Anytime someone says, I’m cutting my estimates, cutting my price target. But I think it’s bottomed,
00:29:00 [Speaker Changed] Right?

00:29:00 [Speaker Changed] Yeah. Be careful.
00:29:02 [Speaker Changed] Yeah. To that’s always, always amusing. I thought this was really very perceptive. Over 37 years in the investment business, I have become convinced that the most money is made when perceptions move from very bad to less bad. I love that because if you’ve lived through implosion or the financial crisis or even the first quarter of 2020, you know how true that is.
00:29:26 [Speaker Changed] Think about last year, you know, it’s the old saying by Sir John Templeton bull markets are born on pessimism. They grow in skepticism, they mature on optimism and they die on euphoric. Well, we had a bear market bottom in October of 2022. And so we came into last year, 2023 with, it’s gonna be a hard landing, it’s gonna be bad. And so there’s high levels of pessimism. And now as you advance into the fourth quarter fund flows turned positive as people realize, well maybe it wasn’t gonna be so bad. We’ve moved into the skepticism phase. So that’s why the biggest return year is always the first year off the low because that’s the biggest pivot and it has the least volatility. We didn’t have a lot of volatility last year
00:30:16 [Speaker Changed] And, and we saw that in oh 8, 0 9 and we saw that in 2020. 2020. It was really, it was really quite amazing. The flip side of this is also true, which is most money is lost when things move from great to just good.
00:30:33 [Speaker Changed] Well, again, if I go back to kind of growth investing, it got expensive and the growth rates of companies wasn’t quite as good and you know, in 2022 and the Fed started raising rates and that was problematic. It was no different. It reminded me a little bit of bubble. What brought down bubble is that companies just couldn’t report the earnings that were expected. And you had plenty of time to get out. But the problem is, what I saw in bubble, people wanted to kept buying these stocks as they’re going lower because they were, you know, rear view mirror investing. They were the previous the the loves. And what’s amazing is think about, I said before half the value managers went outta business in 99 by the year 2008. Do you know what the biggest sector of the s and p was? Financials they grew from nothing to 30% of the SP. So value worked all through the first period until we know what happened in great financial crisis. It
00:31:27 [Speaker Changed] It, it’s amazing that muscle memory when you’re rewarded for buying the dip for a decade, it’s a tough habit to break. Exactly. Exactly. So, so here’s another really interesting observation of yours. Whatever the hot product is rarely works the next 12 months.
00:31:43 [Speaker Changed] It’s because a hot product invariably pushes oftentimes valuations to extreme. And one of the things that we got very right in 2023 was in 2022 Bear Market, what did people buy into the lows of Bear Market? They bought defensive stocks, dividend oriented, low volatility type strategies became very popular in 2022 during a bear market. And so we could see that the defensive factor, safety became very expensive. So as we came out of this bear market, what lagged consumer staples, healthcare, utilities, all the safe things. So hot products pushes things to extreme and that usually, you know, unwinds itself badly
00:32:34 [Speaker Changed] Historically, once the fed stops hiking rates, equity rallies last longer and go higher than anyone expects. Explain the thinking
00:32:43 [Speaker Changed] Then. So I think it’s good news for this year, but also worries me about this year is if you look at the history of the period of time when the Fed said we’re done hiking till we’re

going to cut that period does very, very well for equities. And we are kind of at a, a juncture where it, we’ve done pretty well. But if they’re not gonna cut rates until the summer, I think there’s more room to run for stocks. Now the flip side is, I hear a lot of people talk about when the Fed cuts the perception that that’s gonna be good for equities. I’m not so sure about that because if you look back in history, when the Fed cuts markets tend to go down initially not up. And you could argue yes, but Andrew, that’s because usually when they’re raising rates it’s an economic cycle, right? And therefore if they’re cutting, there’s a problem. And this time it was all about inflation. But what worries me is when the Fed does announce they’ll cut will people say, oh, they know something you don’t know. There’s a problem out there. And I think there’s an that will increase the anxiety. And so I think that’s, we’re in a good period right now, but it worries me when they do cut, will it be people start to worry about, there’s some, there’s a problem in the economy.
00:33:59 [Speaker Changed] See I I I’m a student of federal reserve history and I I could say with a high degree of confidence, they don’t know anything that you don’t know. They, they look at the same data, they’re populated by humans, none of whom have demonstrated any particular sort of prescient. And if we watched the past decade, they were late to get off their emergency footing. They were late to recognize inflation, they were late to recognize inflation peaked. And now it feels like they’re late to recognize, hey, you guys won, you beat inflation. Exactly. Take a victory lap. Right? They, they seem to always be talk about backwards looking. They always seem to be behind the curve. Right.
00:34:38 [Speaker Changed] But I just think the stock market is an emotional beast. Sure. And you know, and I look last year and the Bears people were too pessimistic every time they pop their head out of the den, they got stampeded. And so they’ll have a better year this year and I think it will scare investors and cynically, I can’t help but think, well people missed most, a lot of people missed last year and now they’re starting to get back in and after a very low volatility year, there’s always more volatility the next year. And so it’s inevitable it’s gonna be more, it doesn’t mean it’ll be a bad year for equities, it just will have more gut wrenching periods.
00:35:10 [Speaker Changed] I love this data point since 1940, markets have always gone up in the year when an incumbent president runs for reelection 17 for 17. Now if we break that down, what you’re really saying is, hey, if an incumbent isn’t running, the economy really has to be in the stinker roo and the stock market is following. But anytime an incumbent is running typically means we’re we’re doing pretty okay. Well
00:35:37 [Speaker Changed] And remember I said didn’t get reelected, just ran for reelection. Right. And so what happens, and I see it this year, is when presidents run for reelection, they want to juice the economy, they want the economy going well, right? And we have, Joe Biden has in his pocket the Infrastructure Act, the CHIPS Act and the Inflation Reduction Act. We own, the reason why we own industrial stocks is because they are telling us that the money is just starting to come in from the government. And these projects are getting just getting off way. We’ve seen this with the chips act, the money is just started poor. Right. That’s why the market tends to do well because the economy stays afloat during a reelection year. And
00:36:20 [Speaker Changed] And the really interesting thing about all this, you know, it’s funny, the 2020s is the decade of fiscal stimulus, whereas the 2010s were monetary stimulus, the first three cares acts. That was a, just a boatload of money that hit the market, hit the economy all at once. Each of the

legislation packages you mentioned, that’s spending over a decade, that could be a pretty decent tailwind for a while.
00:36:43 [Speaker Changed] Very interesting between listen to Wall Street and what you listen to companies. And so I’m a company guy. I listen to companies and I’ll give you a great example. Right now people think the consumer is getting tapped out, but on the Costco call the other day, they say they see big ticket purchase items. Reaccelerating, well wait a minute, I thought the consumer well, which is it? Which is it? Right. And you know, and so the the point of this is, is that I go back to listen to what companies say. And I suspect as food inflation starts to come down and people have jobs, they actually could start to go buy, you know, higher ticket purchases. So,
00:37:15 [Speaker Changed] And we’ve seen some uptick in credit card use, but it nothing problematic with the ability to service that debt still seems to be very much intact. Correct.
00:37:24 [Speaker Changed] And that goes back to last year, one of the reasons I, the other reason I was optimistic is I kept hearing our companies say to me, I’m being told the recessions around the corner, but our business seems to be doing well. We don’t see it. Right. We
00:37:34 [Speaker Changed] Don’t see it. That’s really amazing. So, so let’s talk a little bit about who your clients are. You obviously are working with all the advisors at Morgan Stanley, but you’re managing mutual funds. Who, who are the buyers of, of those funds? Are they in-house? Are they the rest of the investing community? Who, who, who are your clients?
00:37:53 [Speaker Changed] Yeah, I mean, so that’s when, when I left being advisor in 2004, I started this group within Morgan Stanley. Wealth management with the products were only available to financial advisors at Morgan Ceiling. But when I left to go into Morgan Ceiling investment management in 2014, the purpose of that was to make my products available beyond Morgan Ceiling wealth management because I was getting calls from consultants and institutional investors saying, how do we get access to these funds? And I’d have to say, well you have to go through an advisor. So, so that, I wanted to broaden out the reach beyond. So I would say we’re on a number of platforms, you can buy our funds through the self-directed route. And so we’re broadening out the, the distribution. And you mentioned the slim and take before. That is a, a methodology that we use to reach out to our investor base.
00:38:49 Obviously I’d love to talk to each of every one of ’em, but I can’t. But I’ve learned in this business, if you communicate in a way that they can understand, and I don’t mean understand in, you know, in, in a bad way. Like, but writing a six page diatribe about why my stocks are so great and why the rest of the market stinks. No one’s gonna read that. They put it aside and say, I’ll read it tonight, then they don’t. But if you can provide short bullets of what’s going on in the market, why people should be bullish or bearish, you provide them with talking points. And that’s what we really try to do within the firm, but beyond the firm as well.
00:39:24 [Speaker Changed] Yeah. I I, one of the reasons I like lemon’s take is you really boil things down to brass tack. You’re not afraid to use third parties in some of your competitors research. You, you cite other people on the street when they have an interesting data point or, or, and and I very much appreciate that. ’cause a lot of people sort of take the, if it wasn’t invented here, it doesn’t exist to us.

00:39:51 [Speaker Changed] Yeah. I mean look, I’m, I’m, I want to grow the assets. I want to perform well, but I value the responses from the those who sit on the front lines dealing with clients every day because they’re the ones that feel kind of the emotional side of the business. Sure. If you sit back in, you know, my office and all, I’m looking at a company and just evaluating whether it’s PE is appropriate and earnings, you’re missing a huge part of this business. It’s a behavioral business. And so having access to advisors and listening to their feedback is so important.
00:40:27 [Speaker Changed] So you serve on Morgan Stanley’s Wealth Management’s Global Investment Committee. What is that experience like? I would imagine that’s a huge amount of capital and a tremendous responsibility. It
00:40:39 [Speaker Changed] Is a huge amount of capital and it drives kind of asset out suggested asset allocation for advisors. They don’t necessarily have to pursue it that way. My input is obviously on the equity side, but they have people in the, on the re the fixed income, high yield alternatives. And they all provide inputs into framing and overview. So I’m really, I sit in Morgan Stanley investment management, but I do provide that context and I think they like to have me on ’cause I actually have skin in the game and I run money for a, a living and I’m not always there saying you gotta buy growth or you gotta buy value. So I’m of agnostic. I’m just trying to figure out where the kind of the ball’s going. Do.
00:41:20 [Speaker Changed] So in the old days you used to speak with retail investors all the time, a as a pm Do you miss that back and forth because there is some signal in all of that noise, whether it’s fear or greed or Sure. Emotion. How, how do you, how do you operate being arm’s length away from that?
00:41:41 [Speaker Changed] I, that is a big concern I have is losing that access. So I still, I’m going to, I’m speaking in an event tonight with a, you know, a room full of advisors. So, and then, you know, we’re, we’ll, we’ll get together afterwards and I’ll listen to what they have to say. So I’m always interested in feedback that I get from advisors. Obviously I can’t spend all day talking on the phone. That’s the big reason why I left being an advisor was I recognize, hey, being an advisor, you gotta talk to your clients so forth. You can’t manage money and worry about both quarter can both. You can’t do both. And anyone that thinks you can, I, you know, it’s, it’s crazy and I really wanna develop these models, but I I, so, so all these communication ways, like slim and Take is a way to be in touch with advisors, encourage them, Hey, you think you, you disagree, send me an email. You know, I’m happy to, happy to hear from you because I think that’s very important. Huh. Really,
00:42:35 [Speaker Changed] Really
00:42:36 [Speaker Changed] Interesting. I really, behavioral finance, you know, the, the longer I’ve been in this business, I’ve been in this business a long time. It’s the behavioral finance that’s the consistency of this business. Geopolitics changes, right? But how people react is, is not, doesn’t
00:42:52 [Speaker Changed] Really change. Right. You, you, you can’t ch control what country is invading what other country. But you can manage your own behavior. Exactly. And people have a hard time with that. Exactly. It’s really interesting. I, I know only have you for another five minutes, so let me jump to my favorite questions. I ask all of my guests starting with what have you been screaming these days? Tell us what’s been either audio or video, what’s been keeping you entertained?
00:43:15 [Speaker Changed] Yeah, I, so if I think about my career, no one took me aside and said, this is how you manage money, right? Like, think about it. I learned about fundamental research, I learn about

quantitative, I learn about the practicality of being in wealth management. And so I’ve always researched and watch and what does that got to do with your question is I’ve learned my way to being successful portfolio managers. So I’m obsessed with kind of always learning along the way. So I, you know, when I watch podcasts it’s always about, whoa. Or, or, or listen to podcasts or watch, you know, things. It’s, it’s always how to advance my knowledge base. Now I did play tennis, you know, in college and so I love all those, you know, break point, first tee, you know, the Formula one. I love all those things. But, but you know, as my wife gets frustrated with me, ’cause I’m probably gonna not gonna sit down and watch a three hour mindless movie because it’s kind of like not, not advancing.
00:44:13 [Speaker Changed] Huh. Really, really interesting. Tell, tell us about your mentors who helped to shape your career.
00:44:19 [Speaker Changed] So I mean, again, I look at points along the way were invaluable When I got to Morgan Stanley, Byron Ween, who, you know, I barely knew, but he was the first person that I recognized had this very good touch of fundamentals, but also the psychology, right? And so he was a great mentor even though he never really knew me, but listening and reading and understanding him was really important. But then I had a guy who ran our department named Glenn Regan, who had come from studying money management organizations and I didn’t know how to start a money management organization ’cause it was a team within and how do you grow and diversify. So there’s been different people along the way that have really shaped me. I came outta University of Chicago, gene Fama told me buy cheap stocks, but then William O’Neill said, yeah, but that doesn’t work and you need to have some momentum to, you know, like, he didn’t tell me that you
00:45:14 [Speaker Changed] Need a little can slim in that you
00:45:15 [Speaker Changed] Need to, you know, you had a little can so you need to cancel. Exactly. So there’s been people along the way that have been great influences on me that have mentioned me at the right time in my career.
00:45:26 [Speaker Changed] What are some of your favorite books and and what are you reading right now?
00:45:29 [Speaker Changed] I just finished same as Ever by Morgan Housel. Again, this concept of behavioral. I will eat up, you put a behavioral, anything about behaviors in front of me, I read it so like, you know, Richard Thaler mis misbehaving or you know, think fast, think slow, all those boats of books. Daniel Crosby is another one. All those books I just, but I just finished that and I just love it because again, all he spends the whole book is about these things. They just don’t change over time.
00:45:56 [Speaker Changed] Human nature, human perpetual, 00:45:58 [Speaker Changed] Human nature. Huh.
00:45:59 [Speaker Changed] Really interesting. I’ll tell you
00:46:00 [Speaker Changed] The last story. So, or I was tell a story. I was, I was on the floor of the New York stock change the day that Russian invaded Crimea. And one of my stocks was down ni my biggest position was down 8% that day. And I said, they don’t have any stores in Crimea. Why is the stock down? Well, because it was geopolitics. Well, you know, and within three days the stock came ro back. So I, it

it’s, all it points to is sometimes fundamentals dislodged from, you know, the, the stock prices. And you have to understand that there’s a hu behavioral element.
00:46:32 [Speaker Changed] My favorite version of that story was, are you familiar with Cuba? Yeah, sure. So Obama announces we’re gonna normalize or start the process of normalizing relationships with Cuba. There’s a stock that trades under the symbol CUBA having nothing whatsoever. And it runs up 20% on just on the announcement. Correct. Because some algorithm picked up Cuba and bought it. And off, off we go. Correct. Amazing. All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in either investment management or finance?
00:47:07 [Speaker Changed] Yeah, so it’s interesting. I have four kids that are, you know, in the process of or have just come outta college or in the process of, and one of the dangers I see today is kids come outta school and they think they know exactly what, what they wanna do. You know, and then, and I’ll say, you don’t know your, what your capabilities are when you’re 22 years old. I mean, I was an introvert when I was 22. I’ve, I’ve realized in the early thirties I knew how to communicate. So I’m, I always say get into, if you can get into a firm that has a lot of opportunities, you know, today there’s less training programs, but those types of things with lots of opportunities. ’cause you don’t know what you’re gonna be good at and what you’re good at. Always follow what you think you’re interested in as long as it makes money, because that’s ultimately, but you don’t know initially. So I always encourage people initially don’t come out and say, I want to do this the rest of my life. You don’t know, that’s too narrow. Try to go to something broad. That’s the first advice. And, and I see today where people too narrow in their focus.
00:48:08 [Speaker Changed] I think that’s great advice. People, most of the folks I work with who are very successful, they’re not doing what they did right outta school. And to imagine that that’s gonna be your career. Very much misleading. And, and our final question, what do you know about the world of investing today that you wish you knew 30 plus years ago when you were first getting started?
00:48:29 [Speaker Changed] Well, I think, you know, 30 years ago I thought it was all about just what’s going at the company level. And then I realized, oh wait, that doesn’t really, you know, drive most of the stocks return. So you have to understand more about the broader implications of companies. I think 30 years ago there was less dissemination of fundamental news. Broadly today it’s much, you know, it’s much broader. So having information access fundamentally is more, more difficult. So I think the, the business has changed. But again, I go back to, I think the, the biggest change in my, how I think about it is behaviorally I’ve come to the real, that being an advisor sitting on the front line, I view that as a very key part of what’s shaped my career. Understanding that, you know, again, it doesn’t matter that the company didn’t have any stores in Crimea.
00:49:22 It went down for, you know, quite a bit. Or your Cuba story. I mean that, there’s just a behavioral element to this in investing, investing business. And look, you know, again, I go a, a great example which I mentioned before, which is it didn’t matter what growth stocks you own in 2022, they all went down, right? And so was it all the companies did poorly, no growth got too overbought. And so it had a correction. They all came back last year. You know, so understanding kind of those behaviors. I love that Warren Buffet quote investors frame their view looking solidly in the rear view mirror. Understanding that and having the ability to tack against that. That’s really what’s what’s worked for me over time.

00:50:03 [Speaker Changed] Hmm. Fa fa really fascinating stuff. Thank you Andrew for being so generous with your time. We have been speaking with Andrew Schleman. He’s managing director at Morgan Stanley Investment Management, where he is also lead portfolio manager for the long equity strategies for the Applied Equity Advisors team. If you enjoy this conversation, be sure and check out any of the 500 previous discussions we’ve done over the past nine and a half years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast. Sign up for my daily reading Follow me on Twitter at ritholtz. Follow all of the Bloomberg family of podcasts on, on Twitter at podcast, and be sure to check out my new podcast at the Money short. 10 Minute conversations with Experts about the most important topics affecting you and your money at the money can be found at the Masters in Business podcast feed. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Meredith Frank is my audio engineer. Atika Val Brown is my project manager. Shorten Russo is my head of research. Anna Luke is my producer. I’m Barry Ltz. You’ve been listening to Masters in Business on Bloomberg Radio.




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