The Ariel Investments founder and chairman shares his views on diversity, equity, and inclusion, value’s resurgence, stock-picking, and more.
Our guest this week is John Rogers, Jr. John is chairman, co-CEO, and chief investment officer of Ariel Investments, the firm he founded in 1983. John is the lead portfolio manager of the Ariel Fund and also comanages other Ariel strategies, including Ariel Small Cap Value, Small/Mid Cap Value, Mid Cap Value as well as Ariel Appreciation. John sits on several corporate boards, including the board of directors of McDonald's, Nike, and The New York Times and serves as vice chair of the University of Chicago's board of trustees. In 2008, John was given Princeton University's highest honor, the Woodrow Wilson Award, for his work in civic and philanthropic circles. John received his bachelor's degree from Princeton.
“White House Advisor on Importance of Financial Education,” CNBC.com, April 14, 2014.
Ariel Community Academy
“Empowering the Next Generation of Investors Through Rapunzl,” Nasdaq.com, Nov. 12, 2020.
The University of Chicago Laboratory Schools’ Diversity, Equity, and Inclusion
Ariel-Schwab Black Investor Survey 2020
"Chicago-Based Ariel Investments Launches 'Project Black' to Grow Minority-Owned Businesses With $200 Million From JPMorgan Chase," by Robert Channick, chicagotribune.com, Feb. 27, 2021.
"Ariel Investments’ John Rogers Jr. Pushes Corporate Boards to Have Their Own 'Jackie Robinson Moment'," by Andrew Keshner, marketwatch.com, Dec. 2, 2020.
" 'This Is the Shareholders’ Money': Billionaire Warren Buffett Argues That Companies Should Stop Making Decisions Based on Their Social Beliefs," by Ben Winck, businessinsider.com, Jan. 2, 2020.
Ariel Investments ESG Policy
Nike Sustainability Initiatives
McDonald’s Sustainability Initiatives
Market Outlook and Value Investing
“Warren Buffett Watcher Echoes Warning on Bitcoin: 'We’re Probably Near the Top of a Bubble'," by Berkeley Lovelace Jr., cnbc.com, Jan. 11, 2018.
“Martijn Cremers Unveils ActiveShare.info Fund Website 2.0,” by Martijn Cremers, prnewswire.com, Sept. 15, 2020.
“Bill Bernstein: We’re Starting to See All the Signs of the Bubble,” The Long View Podcast with Christine Benz and Jeffrey Ptak, Morningstar.com, March 10, 2021.
“These 7 Value Stocks Will Benefit From an Economic Recovery,” by Reshma Kapadia, barrons.com, Feb. 28, 2021.
“Ariel Investments’ John Rogers: Taking a Contrarian View to Beat Markets and Prejudice,” financialtimes.com, April 3, 2021.
“A Wall Street Investment Chief Reveals How He Found Stocks at ‘Extraordinary Bargains’ at the Depths of Pandemic Crash--and Reaped Huge Returns,” by Emily Graffeo, businessinsider.com, Nov. 19, 2020.
“ViacomCBS Shares Slide 18% After Company Prices Roughly $3 Billion Offering of Equity Securities,” by Ciara Linnane, marketwatch.com, March 24, 2021.
Leadership at Ariel
Mellody Hobson Biography
“At Ariel Investments, Mellody Hobson Gets Promoted to Co-CEO and Becomes Largest Shareholder,” by Mary Ellen Podmolik, chicagotribune.com, July 11, 2019.
“Starbucks’s Mellody Hobson, the Only Black Chairwoman in S&P 500, Says ‘Civil Rights 3.0’ Is Brewing,” by Heather Haddon, wsj.com, March 13, 2021.
Hi everyone. Quick heads up that later in this episode we ask our guest John Rogers a question about the stock of Viacom Corporation. Subsequent to recording the episode, Viacom’s stock got pulled down in connection with the implosion of the Archegos hedge fund. That explains why Viacom’s sharp recent pullback isn’t mentioned--it hadn’t happened at the time we interviewed John. Hope you enjoy the episode.
Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance for Morningstar.
Jeff Ptak: And I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.
Benz: Our guest this week is John Rogers, Jr. John is chairman, co-CEO, and chief investment officer of Ariel Investments, the firm he founded in 1983. John is the lead portfolio manager of the Ariel Fund and also co-manages other Ariel strategies, including Ariel Small Cap Value, Small/Mid Cap Value, Mid Cap Value as well as Ariel Appreciation. John sits on several corporate boards, including the board of directors of McDonald's, Nike, and The New York Times and serves as vice chair of the University of Chicago's board of trustees. In 2008, John was given Princeton University's highest honor, the Woodrow Wilson Award, for his work in civic and philanthropic circles. John received his bachelor's degree from Princeton.
John, welcome to The Long View.
John Rogers, Jr.: It's great to be here. It's, I think, a great name for this.
Benz: Well, thank you. We try to go in depth with our guests. We wanted to start by talking about diversity, equity, and inclusion. We've seen a huge move toward DEI issues by fund companies. When they ask you, as a pioneer in this area, what they should do to promote best practices around DEI, what do you say?
Rogers, Jr.: Well, I tell them that there are several things they can do, but the number one thing is you have to have a senior diverse talent within your organization if you really want to move the needle. I've seen this throughout my corporate life. If you have one or two or three people at the top of the organization that are African American, Latino, dynamic women, they become Pied Pipers for talent because people see them as role models, people want to go and work in an organization where there are senior diverse people in these leadership roles and that makes all the difference.
And then when you have people in senior roles, they are there to be mentors and role models for the next generation of employees and can actually help keep talent in place, because as you know, a lot of financial institutions, they hire their first diverse folks, people come and they leave. But when you have those senior people, they can be there to answer tough questions, help people guide them through whatever the culture is of the organization they're involved in. So, first and foremost, you need to have the top of the house diverse and also that top person or two should also be someone who is well-respected within the diversity community, someone who has shown that they've been willing to fight for economic justice and fairness, really be willing to talk about these uncomfortable issues and have credibility within the minority community, that is so helpful also.
Ptak: Black Americans are still underrepresented in the fund business. When other leaders ask for your advice on what steps they should take to change that and make their firms a more diverse and inclusive place, what do you tell them is most important to do and most important to avoid doing? I know that you just gave an example: Diverse leadership is an important thing for them to do. Maybe there's another example of something that they should affirmatively do and then maybe an example of something they should avoid?
Rogers, Jr.: I think a couple of things that they should do… I had the good fortune during the Obama administration to chair his financial council on financial capability for young Americans. It was basically about financial literacy. Chuck Schwab had chaired the similar committee during the Bush administration. And it was a great opportunity for me to be able to see all the different people thinking about financial literacy in different types of ways.
So, one of the things that I start with is what we've tried to do at Ariel. We created a small public school 25 years ago when Arne Duncan, former secretary of education, worked at Ariel and was overseeing all of our philanthropy. And at the Ariel Community Academy we teach kids about the stock market, we give them real money to invest in real stocks. And the cool thing is not only the kids become more adept at investing and understanding how to do research on companies, but many of them have chosen to get started in financial-services careers. It's really quite fun to see that. And actually, one young man, Myles Gage, he's being featured in the Nasdaq commercial about his digital app on helping educate young people about investing and it's called Rapunzl. So, it's sort of nice to see these young people grow up and start financial-services careers because they got exposed to it while they were actually in grade school.
So, my number one suggestion is, all financial-services companies should partner with urban public schools within their local communities to get young people exposed to the markets. I just think that can build a next generation of great investors. I know Joe Mansueto has actually visited the Ariel Community Academy and was kind enough to talk to the kids in the investment class one morning. I'll never forget that when he drove up and jumped out and came and talked with our young people. So, that's one thing I think that's important.
The second thing we've done is we've worked really hard to build relationships with our local universities, and particularly, the University of Chicago. I was fortunate to go to the University of Chicago Lab School. We've created a program there for minority students to get paid internships to work in the investment offices of major endowments. And just in the last four years, we had over 64 kids go through the program. And again, a lot of the kids, when you work in an investment office of an endowment, you learn all about private equity and hedge funds and all the different asset classes. And it's starting to get people thinking about careers that they never could have dreamed of before they got involved in the program.
So, I think that's important. Work with your local university to build relationships with them and let the local universities in your community know that you're intentional about hiring young, dynamic people and diverse talent. And then they will start to send you people. Once they know there's a local institution that cares, they will start to send talent your way. That's what's happened to us and it's just worked out very well. And many of those kids finally have joined our internship program. And we've had superstars come through our internship program. Mellody Hobson started out as a summer intern at Ariel. And the two top African Americans at Northern Trust Bank, Shundrawn Thomas and Jason Tyler, got their career started at Ariel as summer interns. So, I think internship programs are very, very important also.
Benz: For all the positive change that's taking place, the reality is that some of it is artifice. So, given this, what should investors do to try to tell who is really mobilizing around DEI and who is simply going through the motions?
Rogers, Jr.: Well, I think you have to look at the leadership role. You'll see who is really hiring people that are change agents, that are out there in the community, talking about these important issues and making a difference. So, I think that's one way you'll see whether these leaders are joining their local urban leagues or NAACP's, local organizations that care about economic justice and fairness. That's one way to see it.
The other way to see it: Does the institution work with minority-owned businesses? I think all the time, that if you really are about building a pipeline of talent and diverse talent, part of it is making sure you're supporting minority-owned companies at the same time. Now, that might be self-serving for us to say that. I mentioned several people at our firm who have been superstars in the industry. But there are many, many more that I haven't mentioned, who started at Ariel as full-time employees or interns that are now running their own private equity firms, their own long-only firms, they are working as financial advisors or investment bankers throughout the nation. And if we didn't exist and weren't there as role models, a lot of these young people would have never thought about financial-services careers.
So, I think if you really care and you want to show you care about this, working with minority-owned businesses, working with minority-owned financial-services companies, having minority-owned funds in your 401(k) plan is a very visible symbol that you get it, and you're working to make a difference.
Ptak: You mentioned Chuck Schwab earlier. It looks like Ariel and Schwab had been partnering on surveying that you do, the results of the 2020 Ariel-Schwab Black Investor Survey were recently released. It found that while there has been notable progress in stock market participation by younger Black Americans, that doesn't hold for previous generations, which lagged their white counterparts on a bunch of different measures, including stock ownership, retirement plan participation, savings, inherited wealth, and more. My question is, what can be done to close these gaps and achieve parity?
Rogers, Jr.: Oh there's a lot that has to be done. I start with this idea, again, that we've got to get financial institutions to partner with urban public schools to teach kids about the investing, teach them about compound interest, expose them to Warren Buffett and the great entrepreneurs who have built wonderful businesses around the stock market and help people understand how wealth can grow that way. The reason I start with that and continue to pound that point home is, as we know, African American communities, we don't have the wealth. And so, therefore, we haven't been as exposed to the financial markets. You need to learn about financial advice when you have something to invest. But because the way that we came to this country in the historic discrimination, African American families haven't had a chance to create that kind of multi-generational wealth where you're going to need a financial advisor. And we don't often have aunts and uncles and grandparents teaching us about the stock market at the dinner table. Because of the discrimination they faced a generation or two ago, they didn't have a chance to learn about the markets and get exposed to it. So, I just keep coming back to: We got to get our public schools to do their work, but they're going to need help from local financial institutions if we really want to move the needle in this area.
I also think that as you're thinking about this, I've already talked about the programs that are so critically vital--the internship programs--but I do think that you've got to make sure that within your own organization that you're bringing in people and helping them be successful. So, what I mean by that is, often financial advisors, the way you're successful, you have to be able to generate customers, right? I was a financial advisor at William Blair when I started my career. And I realized back then that I didn't have the network and the access to wealthy families to be able to grow my business. And it was part of the reason I left to go into the money management business where I didn't have to worry as much about that. But I think that what I ask people to do is to be part of a positive ecosystem, whatever you're hiring--whether you're hiring a law firm, or an accounting firm, or investment bank--whatever professional service firm you're hiring, make sure they have diverse talent on your relationship. And if everyone does that, there will be more opportunities for minorities and professional services to generate wealth, because customers are demanding diverse teams on their relationships.
Benz: We want to switch over to talk about ESG, environmental, social, governance investing. One of your strongest influences, Warren Buffett, has been a proponent of keeping non-financial goals separate from financial objectives. For instance, while Buffett is committed to philanthropy, personally, Berkshire itself doesn't engage in it, reflecting his view that the two ought to be separate and distinct. Yet we've seen a big push to combine the two, ESG being the banner under which it's increasingly done. Why not keep the two separate, like Buffett advises?
Rogers, Jr.: Well, we think it's not in the shareholders’ best interest to keep these things separated. As we've talked to our mutual fund board about how we've been more intentional around ESG and have built up our ESG team, we have made it clear to them that we think by embracing ESG, we're ultimately going to have more profitable portfolios and more profitable companies within our Ariel fund family that will enhance the performance of our Ariel funds. And the reason that's the case is because if you think about it, in this modern day, as ESG has become more and more important, companies that are going to grow in the 21st century realize that customers care deeply about ESG. I'm on the board of Nike. And they understand that next-generation customers want to make sure that they are thinking about how those products are being manufactured and are all of the things being done in a way that supports the environment throughout the world. It's really important to customers.
It's also really important to the up-and-coming employees. At McDonald's, where I'm fortunate to be on the board, they know that if they're not taking ESG seriously, they will lose credibility with their young employee base, and you won't be able to attract the most dynamic talent. And then, finally, of course, shareholders care more about this than ever, and government leaders care more about this. So, you can actually, we think, pretty clearly enhance the brand reputation of your company as a 21st-century company if you embrace ESG. You'll be able to, again, please your customers, please your employees, the regulators and political leaders that oversee you, and your shareholders will all be happier with you and therefore, your brand will be stronger, your cash flows will be stronger, and profitability of those companies will be stronger.
Ptak: Wanted to shift gears, widen out a bit and talk about the market outlook. We recently spoke to a noted author and advisor William Bernstein. Like you, he is a value investor. We asked him if he thought the stock market looks like a bubble. And he basically said, he thought it did. Does this market remind you of the tech bubble like it reminds him? And if so, what's different about your approach in the current environment versus another in which valuations aren't as lofty?
Rogers, Jr.: This is reminding us of the Internet bubble, crazy time that we all lived through. There are so many companies selling for valuations that just don't make any sense. And there's no way that it could end up well for these hot tech companies, these new companies coming public with no profits. Those always end badly. The thing that's so important as a value investor is to stick to your discipline, not get sucked into buying those really expensive high-flying stocks that have helped to goose the S&P 500 and the Nasdaq and the Russell Indexes, and stay true to your true character. And so, we've been doing the same, going back to the same playbook, buying the undervalued securities that are still selling at significant discounts to private-market value, low multiples to EBITDA and low P/E ratios, looking for true bargains and they're still out there. And we think the disconnect is going to happen just like what happened with the Internet bubble--as the tech and the S&P does very, very poorly, the value indexes will have a really great period here of outperformance because we've suffered for a long 12 years. But the valuations really still make sense for value securities and we think they're poised to continue to outperform as we move throughout 2021.
Benz: You've argued that rising interest rates should boost value investing. Perhaps, we're seeing a little bit of that right now. To start with, can you explain why?
Rogers, Jr.: Well, higher interest rates will help a value manager for a couple of reasons. Higher interest rates will be caused by a very, very strong economy. We think we're coming into a Roaring ‘20s-type of economy, where a lot of the traditional manufacturers are going to be booming--the auto manufacturers, the metal-building companies that are often in the Midwest--they're going to again have a really great, great period, a real tailwind behind them. And those are the kinds of companies that have been relatively cheap relative to historic basis. And so, that fast-growing cash flows over the next three to four years, even if interest rates go up, these stocks are going to do really, really well, because they've been left for dead for so long.
On the other hand, the hot growth stocks that have been selling at these extraordinary multiples-- sometimes 30 or 40 times revenues, companies selling at 100 times earnings--the only way you can justify that is that if interest rates are really, really low and you do your discounted cash flow analysis and you really look at those future earnings and discount it back to today with rates extraordinarily low, you can make a case that these stocks deserve to be at high, high multiples. But as interest rates go higher, and you discount those future cash flows, it's going to have an enormous impact on the underlying value of the companies and the true value and net worth of those businesses. So, it's something that we really think is so important when you do that basic analysis and just look at the cash flows expected for the future, and then you discount it back based upon interest rates, higher rates are going to have a much more negative impact on growth stocks at high multiples than traditional value stocks at low multiples.
Ptak: Theoretically that makes sense. My question is, does history bear this out? Value investing has really only become truly more popular and widespread in the last 30 years or so during which time we've seen rates steadily fall. So, the question is, has the relationship truly been tested, in your opinion, based on your examination of market history?
Rogers, Jr.: You're right, in this period, it hasn't been tested. I came of age, like a lot of investors during the period, where we had such extraordinarily high interest rates in the ‘80s. And you could have never imagined that you would have this complete, steady downturn. But it gives me confidence, as I've talked to some of the respected people that I've gotten to know in the industry. I've been very fortunate when I was at Princeton, Burt Malkiel was the head of the economics department. And he just written A Random Walk Down Wall Street. And we had to read that for corporate finance. And I've stayed in touch with Professor Malkiel. And he talks about how this is going to impact the stock market, these higher rates. I've had a couple of conversations with him and his fears. Similarly, Robert Aliber, one of the world-class international economists from the University of Chicago, has a similar opinion that this environment is going to be highly inflationary, it's going to cause higher rates. And we think those academic leaders really make sense with their arguments.
And then finally, on the board of Ariel Investments we have two top academic leaders, Martijn Cremers, who is the head of the Notre Dame business school and helped create the term “active share,” and Heather Tookes, who is an outstanding economist at Yale's business school. They've also helped reinforce this view and this perspective from an academic standpoint. This is just common sense that high rates are going to be very, very negatively impactful for high-priced growth stocks. It's just the way the math works. And you just can't be emotional about it. It's just the way the math works.
Benz: What has the multi-year slump in small cap and value taught you that you didn't know entering this period?
Rogers, Jr.: I don't think that it's actually taught me anything that I didn't know already. Thirty-eight years at Ariel has taught me that you have to be a long-term investor, number one. You have to not get swept up in the short term, and that market psychology can just take hold for a while and last much longer than you could ever possibly imagine. But eventually, things get back to normal, if you're just patient. And so, these things happen. People are going to chase what worked yesterday. People get enthusiastic about what worked yesterday. They just follow the crowd. It can make it uncomfortable for a long time when stock prices disconnect from reality and real cash flows, but eventually things come back. Businesses are only going to be worth the discounted present value their future cash flows, and it's going to get back to normal. And this disconnect was the largest gap between value and growth we've ever seen. So, that just meant that when it came back, it was going to come back with a vengeance. And that's what we've been seeing the last six months or so.
Ptak: I'm curious, you mentioned inflation earlier, I think that you were citing one of the experts that advises you. And that person seemed to indicate that they were expecting inflation to return with a vengeance. Just curious whether you concur with that view. And to the extent that you do agree, how that's expressing itself in the portfolios that you manage?
Rogers, Jr.: Well, first, I think that there's no free lunch. As we all know, there's been enormous amount of stimulus put into the economy over the last two financial crises. We know that just recently we had another huge stimulus package. And again, you just cannot keep printing money and feel there's no negative consequences. The world doesn't work that way. And all the logic is, if you print more and more money, it's not going to be worth as much. And you have all this extraordinary supply. So, we think that inflation is just the natural follow through from all the overspending--I shouldn't say overspending--it was necessary spending during the pandemic. We needed to prop up the economy. We had to get people the dollars they needed to live on; it was the right thing to do. But down the road, we have to pay the piper, and that's going to come from higher inflation.
Benz: Can you talk about how the competitive dynamics have changed for investors like you who favor the stocks of inexpensive small companies that boast at least some competitive advantage? The question is, are these firms as plentiful as they were before given that firms are staying private longer amid a glut of liquidity in private markets?
Rogers, Jr.: I think you're right, in theory. Over the 38 years that Ariel, the universe has shrunk. And no doubt about it. So many mergers, companies trying to bulk up to be competitive, to keep their competitive advantage and keep their moat. And so, many of the industries we invested in where you had six or seven companies, now you're down to two or three companies in those sectors that you kind of know really, really well. And then, the challenges that happened in the economy, and all the private equity money that's out there, and people can stay private longer. All those things have had an impact. But I do think that's starting to shift some now. I do think that with more and more IPOs coming out as the markets have been so strong, the explosion of SPACs, I think you're going to see a larger universe of companies over the intermediate term for people like us to invest in. So, in general, you're right, it is a smaller universe. But I think that universe will be getting larger and larger over the intermediate term.
But we also feel like because small value has been out of favor for so long, the publicly traded companies that are out there are relatively cheap. And just watching the disconnect between the Nasdaq and the Russell 2000 Growth Index, and then the small-value indexes, it's just been so dramatic, that there are still bargains, even though the universe might be smaller. It just means you have to have the courage of your convictions to buy things that are being neglected, misunderstood, that have been left out of the indexes, are not major parts of the indexes. Stocks are not always trading based on fundamentals these days.
Ptak: Maybe if we could talk about business quality itself. Do you think business quality is as lasting as it used to be? On the one hand, we can find examples of dominant firms that have gotten even stronger given things like network effects and lighter-touch approach to regulation? On the other hand, we've seen technology upend a number of business models once thought to be durable. So, if moats don't last as long, has that impacted the way you run money?
Rogers, Jr.: I think your question is right on. We spend an inordinate amount of our time--we have two meetings a week with our portfolio management team and with our analysts. And a good bit of that time is trying to figure out how sustainable the moat is. Those are all of our questions--I shouldn't say all of our questions--but a good majority of the questions are trying to test the hypothesis over and over again. To your point, are there changes in this technological revolution that's going to impact our moats? Is it because of all the M&A out there, the companies that are left that are smaller are not going to be able to maintain their moats? Just certain industries are changing and evolving just in general where their products are not as relevant anymore and new competitors have been able to figure out ways to come in and make a difference? So, the job is harder, and the pain is greater if you're wrong. If you're wrong on guessing and doing your research and looking into the future about the strength of the moat--we talk about this all the time: It can catch up to you so fast that what you thought you had some time to figure out, whether the new world was going to really impact your moat, it just boom, it happens so rapidly, the moat disappears overnight and then your company is all of a sudden half of the price it was before.
So, it just means the rigor of your research is more important than ever. The relationship with management teams is more important than ever. Having experienced analysts and portfolio managers who know where to focus is key. Because otherwise, you're exactly right, the damage that can be done to your portfolio is so dramatic these days if you get it wrong.
Benz: You are the rare fund manager who owns the shares of other publicly traded asset and wealth managers, Janus Henderson, AMG, Northern Trust, and Lazard are all examples. Some of these are longtime holdings that you've stuck with. What's the outlook for the money management industry, in your view?
Rogers, Jr.: I think the outlook for the money management industry is actually looking up. We've been adding over the last six months to all of those positions. Some got particularly cheap, really out of Lazard and AMG, for example, just got crushed during the pandemic period, and the stock prices just didn't make sense. So, for us, we think that because this has been a hated group, there are bargains within this industry. You're starting to see some smart investors moving in, people looking at ways to figure out through M&A and other strategic things that can be done to make sure that companies can be successful in this next part of the economy.
And the other part that I think is really critically important is that we think that as the S&P struggles in this new environment, that active management is going to become popular again, and people start to realize that if you just buy the S&P 500 that owns all the big FAANG stocks and Microsoft, Tesla, etc., it's like a handful of stocks are going to have so much impact on the S&P 500 and those stocks are so extraordinarily expensive and overvalued, it's inevitable that the S&P is going to suffer when those stocks correct. So, I think a lot of smart advisors are realizing it's time to look to active managers that don't have their portfolios chock-a-block with those stocks that boomed over the last five years. They're going to have a much tougher time over the next five years. So, that will be a great tailwind for active managers.
Ptak: Wanted to shift gears and talk stocks, specifically selling and buying for a few minutes, starting with Viacom, which is a name you've owned in Ariel Fund, if I'm not mistaken, for some time. It's soared since last spring, rising nearly 700% off its early April lows, which seems to reflect a brightening add in content-licensing outlook. Now, it looks more expensive. Can you reflect on what lessons situations like these, a story that's worked out, a nice business but pricey, have taught you through the years about how and when to sell?
Rogers, Jr.: Well, let's start with the beginning though, like when to buy, because in the 38 years at Ariel, we're really, really proud of the long-term performance as well as the one year, three year, five years and 10 years. I think that not many funds that have the same portfolio manager--Ariel Fund is actually now 35 years old this year. And so, one of the things we've learned that our outperformance, a lot of it has been tied to our ability to buy our favorite stocks during times of panic, times of dislocation, uncomfortable times. And where we've lived, Warren Buffett's mantra to be greedy when others are fearful; Sir John Templeton's view, you want to buy when there's maximum pessimism. So, sometimes you'll have a favorite stock, it's getting crushed in a really bad market, it completely collapses as the markets collapse. And many people give up, sell at the bottom or many people sit on their hands and wait till the dust settles. What we do is, we double down on our favorite names where we know them well, they're in our circle of competence. And you can buy a wonderful company at an extraordinary discount to its underlying value. So, that's what's happened with ViacomCBS. It never should have sold at $11 a share. And it was just really inexpensive.
Now, the stock closed today around 96, 97. It's been an extraordinary home run this last year. And we have been steadily lightening up the position. Because we have to be true to our value criteria. If you're going to load up when things are really bargain priced, as they get relatively expensive, it's time for us to be lightening up. The business is doing really, really well, but also the reason why it's doing really terrifically well is they are making the move into streaming, very effective with their Paramount+ brand and the ability to have news like 60 Minutes and nightly news and morning news along with all the content of Paramount and at the same time, have live sports and all the great entertainment things from the Emmys to the Oscars, etc.--they really have one of the best packages. So, the stock is really selling now instead of on traditional multiples, it's really more on the streaming multiples--people look to the future and value those companies that have great content that can be streamed, sell at much, much higher multiples. So, we still like it. We think Bob Bakish has done a great job as CEO, but we wouldn't be doing our job as value managers if we weren't significantly lightening up consistently during this environment.
Benz: You touched on this briefly in your last answer. But I'd like to talk about the flip side--names where you've seen the fundamentals deteriorate and the price fall. That played out most vividly last spring with some of your holdings losing half of their value in just a few weeks. What are the progressions that you will go through with an analyst in assessing whether the thesis behind a stock is bent but not broken? Maybe you can talk about that in the context of a specific holding or two.
Rogers, Jr.: If you're looking at a brand-new name or an existing holding… But you're right, some of our favorite stocks in the portfolio really cratered during the period. And we mentioned by ViacomCBS being one that was one of our most gut-wrenching experiences. There are actually several ones to pick from that for us just did not make sense at all. So, a couple of them were relatively long-term holdings that I like to talk about. Mattel was one that really got hurt badly. Another one was Nielsen, again, extraordinary brand, got crushed.
And what we do with our analytical team is we always think if the stock is getting hit like that, if first, if they announce earnings disappointments, we take a deep breath. We've learned through behavioral finance work that we do that often analysts are anchored in old numbers and take a long time to get reality calibrated with their earnings estimates. So, we're going to just take a breath, be patient. Twenty years ago, we would have been buying more of the stock the first day it cratered on bad earnings. Now, we're patient in taking this time to relook at our entire thesis, get on the phone with management teams. We think we get great access to management because we have our reputation of being long-term contrarian investors. People like having us as shareholders. So, we get on the phone with management teams as you would expect. All of us senior portfolio managers are on the calls together, all the senior guys, and Sabrina and our team have been together through the last financial crisis. So, we don't like to just have the analysts doing the work. We, as the older teammates, want to get involved and engaged in doing the research, too. And evaluating the management team under pressure, seeing how they respond to questions, seeing how honest and direct that they are. We think you need to be grizzled veterans to be on that team.
Also, at the same time, we're going to, of course, be talking to competitors, talking to board members, talking to former employees and equally important, talking to other value managers who you respect who have either been buying a favored name like Mattel or finding a reason to sell it. We're looking at someone who owns Nielsen. For example, our friends at Southeastern Management, we actually doubled up on a couple of names--they were big owners of Mattel. They were big owners in AMG that also got crushed. And it's good to talk to Staley Cates and see how they're dealing with it. Folks in the Capital Group who own some of our favorite names. You talk to them. But that's just many. You talk to Mario Gabelli, you talk to Tom Russo, you talk to retired veterans like Ralph Wanger at the Acorn Fund. You want to get as many perspectives on a troubled company and a troubled industry as possible. And as I say, our own analysts are just part of the mosaic of that homework. You just can't depend on your own internal people. You've got to reach out. And of course, you're going to talk to sell-side analysts and the ones you think that know the industry the best that surround that company.
As we're doing all that homework, sometimes we learn something that we maybe should have known before and decide to sell or scale out of the position. But more often than not, as time passes and you get a little bit away from that earnings disappointment, we will start to rebuild the position and take advantage of the bargain prices to buy for the long run. I was talking to Sir John Templeton's niece the other day, who is a terrific investor, and she was talking about how her uncle always talked about the fact that the bargains he was snapping up in the crash of 1987 were going to give him years of good performance as he moved into the end of that decade and into the early ‘90s and that happened with us. It happened with us in '87; it happened with us in 2008-09 and it's happened again this time. These are these chances that are painful to go through but it's so exciting to buy wonderful companies at these bargain prices and then to find new fresh ideas that you didn't own that are all of a sudden quite cheap.
Ptak: Wanted to shift gears and talk about how you manage the firm. You made Mellody Hobson, as you mentioned earlier, your co-CEO about two years ago, if I'm not mistaken. Mellody's abundant talents aside, can you talk about what prompted that move from a broader organizational perspective and update us on how the sharing of duties has worked out in practice?
Rogers, Jr.: I'll start with that. It's beaten all expectations. We've both been very, very excited about this and Mellody says she's part of now building Ariel 2.0 and just making sure that she's taking the best of what we've built over 38 years and then looking for ways to make improvements. She's just so energized, it's just been exciting. So, it's gone extraordinarily well. Our board of directors is thrilled. Internally, we're all thrilled. It's just been a really good decision.
A couple of things led up to the decision. I think that there was a sense that I'm 62, I hope to do this at least till Ariel Fund is 50 years old. And so, I have hopefully a long runway. But we thought it was important for people to know that we had a firm succession plan in place and that was crystal clear. The second thing we wanted to clear up was that Mellody has been in effect operating as co-CEO the last several years. She had been taking on more and more responsibility, leading me to just focus on investing, picking stocks, researching companies, visiting companies. And so, we wanted there to be real truth and labeling where people really understood that outside of the stock-picking Mellody was making all the other decisions and we thought that was important for everyone internally to know that and equally importantly, all of our customers and external constituencies to understand where the real decision-making was and this ability to focus just on investing has been a real blessing of our partnership that's developed over the last 30 years that Mellody has been at Ariel, and it's just been more and more crystallized.
And then, the final thing is, a lot of people know Mellody has been such a history maker and such a leader. Just yesterday, she officially took over as the chairman of Starbucks, the only African American woman in the country and chair of a major fortune 500 company. It's an amazing accomplishment. I think there are some people out there maybe with sexist attitudes who felt that Mellody has been so successful, she's not going to want to work at Ariel for the long term. So, by her becoming co-CEO was a very visible way to say that this was her baby, too, and that she was going to build her career and continue to build her career at Ariel. And we really worked with her on having her become major shareholder in the company and with me as a number two shareholder which also signaled to everyone that Mellody was going to be around for the long term to build Ariel into this Ariel 2.0 as she calls it. So, all those are the reasons we did this, and it's just worked out beautifully.
Benz: You mentioned that you and Mellody divide and conquer in many ways. How about the chief investment officer responsibilities that are now yours? What is the succession plan there?
Rogers, Jr.: The succession plan there is we have a couple of up-and-coming leaders that have both been with us quite a long time. Tim Fidler, our director of research, has been with the firm now over 20 years. And if I got hit by the proverbial bus today, he would take over as the chief investment officer. We also, this last year, promoted Ken Kuhrt, who has been with the firm roughly 17 years, a terrific younger portfolio manager and analyst. He's been trained by Tim beautifully. He understands our contrarian investment strategy. He's the kind of guy who comes in during the financial crisis saying we need to buy One Spa that does the spa services on cruise ships. Who comes in and wants to buy spa services on cruise ships in the middle of a pandemic? But it's been a great stock. And so, his leadership has been extraordinary. So, Tim and Ken are the folks that are the heir apparents to take over leadership as the chief investment officer for the company. And that's been great.
And then, Charlie Bobrinskoy continues to be vice chairman and key of all of our thought leadership at the firm, which we think is critically important. He leads all of our behavioral finance work. He took us through a whole survey today with our research team on Adam Grant's new book, Think Again, which is a really great book for analysts, because it teaches you how to get new information and think about it in a new way. So, Charlie provides enormous amount of leadership and we'll continue to do that if I get hit by that bus.
Ptak: You serve--and you alluded to this earlier--you serve on a number of corporate boards. What does that experience taught you about collaboration and group decision-making? And how have you applied that at Ariel?
Rogers, Jr.: Well, I would say, every situation has been different. And this is hard to say a simple answer, because it's been so much of an important part of, I think, what is one of our distinguishing characteristics at Ariel. So, I would just say, first, on the part of your question, like, I was on the Bank One board when Jamie Dimon came in and became the CEO. And to watch him come in and replace, I think, it was literally 15 out of the top 16 officers, fixate on technology, and how he could get all of the legacy banks to talk with each other and be 21st century companies. It was just interesting to see how his team played, how he surrounded himself with these damn dynamic, strong, independent, free-thinking executives, people that have gone on to run large companies like Charlie Scharf and I could go on and on of people who have left Jamie's leadership to be CEOs of major companies. So, I watched the way he built management teams, worked with those management teams, led those management teams. I learned a lot about leadership watching Jamie do that.
I was on the Aon board for 18 years, and I watched Pat Ryan surround himself with the strongest board members he could possibly find. He got people who were real outspoken leaders, people who've been CEOs of major companies from McDonald's to Standard Oil, just people who were going to help make him better, press him to be better, push him to be the best. So, it's something I've learned there that I want to make sure that not only do we have a strong management team that's strong and independent, but you want a strong, independent board of directors. And we would argue our mutual fund board is the most strongest, most independent mutual fund board in the country and as part of Pat Ryan's legacy.
Other thing I learned from Pat, and Andy McKenna, who's the lead director there, they do a great job of keeping all their directors in the loop on all the important issues they need to know and what's coming down the pike and preparing them for the next board meetings. I think that's vitally important from a leadership and governance standpoint. It helps me with my ESG work when it gets to the governance aspect.
And then, the final thing I would say is that I think I'm a better professional services analyst because of my 18 years at Aon. I can look at real estate services as well as insurance brokerage and other companies that are commission-based and have a better feel for them because of the experience I had on the inside of a place like Aon that was built into a worldwide brand in professional services. I know I'm a better banking analyst because of my years on the Bank One board and the First Chicago NBD board and the American National Bank board, that they all spud into each other. But learning how those banks worked, the challenges that they faced helps me when I'm evaluating a bank today, even though I've been off the board for, I don't know, 10 years. It makes you a better analyst because you are there.
And then, finally, I should say, whether it's being on a corporate board or being on a board like the University of Chicago, you're around really smart people who have done amazing things in their career, and to be able to pick their brains on how they have become successful, what they're seeing in the economy. I always believe you learn a lot when you surround yourself with really smart, thoughtful people who can push your game up, because you feel competitive, you got to be up to speed and be on top of things and then be able to, again, call them on the phone during tough times in the economy and say what are you thinking, what are you seeing, what is going on in your industry? It makes you better.
Benz: Looks like in a few of your board responsibilities and certainly in your equity holdings you've had to oversee the transition from one leader to the next with some of those changes involving an iconic CEO or members of a founding family. What lessons has that imparted that you've used or plan to use in ensuring that Ariel succeeds well into the future?
Rogers, Jr.: I think that whether it's Andy McKenna, who is now 91 years old and is Chairman Emeritus at McDonald's, he always said with all those years ago when I was first on a board with him, the most important thing that a board does is to do the succession plan. And God forbid, you don't want a crisis to happen, but you have to be ready for it. And at McDonald's, we had the heartbreaking situation where we lost two CEOs within a year of each other, one from a heart attack, I think, and the other one from cancer. It was just absolutely brutal. But we were prepared because Andy taught us how important that was to think through who could be next up if something did happen tragically. So, that's what we've tried to do at Ariel, again really focus. That's why we've had this plan with Mellody. I've had Mellody in mind to be my successor for quite a long time, to have a deep team of people who are ready to take over, create a climate where people know they can make their own decisions, they're not coming to me for decisions. I think that's something critical too. Because people often ask, “How do you get so much done in a week?” Most of the reason is because I have great, great teammates who I trust to make decisions and lead us where we need to go. And I know you've been blessed by that with Joe Mansueto and the kind of leadership you've had at Morningstar where you've had someone who trusts his teammates. Those are the things that you have to do if you're going to build the kind of folks that can take over in a crisis and be prepared when the inevitable succession happens.
Benz: Well, John, this has been such a great conversation. We really appreciate you taking the time to share your insights.
Rogers, Jr.: Well, any time. This is so fun. And I have so much great respect for Morningstar and the work that you've done, and your firm is just around the same timeline as ours, roughly 38 years and so, it's just wonderful to see the extraordinary success of Morningstar and the difference it's made in the lives of so many investors.
Ptak: Well, thank you so much and thanks for spending time with us today. We really appreciate it.
Rogers, Jr.: You're welcome.
Benz: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.
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