Live on Bloomberg TV

00:00What a joy it is here to be the Bloomberg Investor Summit.Myself Caroline Hyde Bloomberg Television joined by a man who really needs no introduction. You know him. John Rogers ofcourse a man who is a legendary investor but notably a value investor having loved growth stocks for only a couple of years.I mean when he was busy on the basketball courts of Princeton and going across the campus to go and put on stock trades hemoved from growth into value very swiftly and has now well been managing up to 16 billion dollars in that global assetmanagement firm that is Ariel Investments which he set up at the age of 24.Extraordinary John. It is wonderful to be joined by you now on what is almost thethirty fifth anniversary of your of your main fund flagship fund Ariel Investment Fund and as one of the only length of tenureout there for mid-cap value funds at this juncture. How do you feel.How do you feel about the market about valuations about volatility.If the market is in sort of two different places I think that the S & P 500 that is so dominated by large growth stocks is veryvery expensive on a historic basis. I'm not surprised to see this most recent retreat and correction that we've been goingthrough with the small and mid-cap value sector is still I think significantly undervalued their value. There's a lot of bargainsout there a lot of orphans that have been kind of left for dead. No one cares about. So it really is a tale of two markets. Thelarge growth stocks are expensive but the small and mid-sized undervalued securities are real opportunities there.Just give us first and foremost your distinction of what a value stock is right now. John can you hear me.Oh we're just having a pause a slight technical issue. We'll wait for him to come back online. As a man who can help describeexactly what a body start winning means there's much debate. And of course many know that to certain extent the S & P 500 at themoment we're seeing growth and body stocks basically at parity. We're seeing body start up about 15 16 percent growth. Stocks upto a similar degree. I remember of course it was value stocks that are actually outperforming at the start of the year. Ithink we've got him back on. Right John. Great to be with you. I just wanted to know what you thought of body stock was at thismoment. Define what we'll always look to is we know very very we've been very very influenced by the world's greatest investorWarren Buffett. We're always looking for stocks that are statistically cheap selling at low price to even dumb multipleslow price earnings multiples on a historic basis. And ultimately in the end of the day we want to find companies that are atleast selling at a 40 percent discount to the private market value.OK so when you then are focusing in on small and mid-cap is size a distinguishing factor when it comes to value from yourperspective is just feel that that's the area of opportunity where people are overlooking because it's you have to get morenitty gritty. Well I think that there is more opportunity in the smallerstocks for sure. You know when I started in this career 38 years ago there were so many analysts following the small stocks andpeople talked about blue. You know the blue chip stocks kind of being blue chips because they weren't going to be able to growas fast. They were going to have you know just a lack of opportunity because they're more efficiently priced. But todayyou know so many people just fall in love with growth. Stocks fall in love with chasing the hot stocks. The day the memestocks the fast growing companies they just leaving these small undervalued securities just totally neglected. You know I callthem orphans. And so there's just this real opportunity that I've really never seen before where you've seen such a dichotomybetween different sectors of the marketplace. It's so dramatic. Now I do feel that the higher interest rates that are startingto come in are really going to impact large cap growth stocks significantly because they've been able to make a case thatthey're undervalued. If interest rates stay incredibly low. Is it interest rates that are the risk here or is it inflation.We're seeing notes put out by Citigroup chief global equity strategist today saying look get into financials. That's whereyou can protect yourself. We're not talking about absolute growth but we're talking about a level of protection againstinflation. Is is that an area that you're worried about as interest rates that really you need to be honing in on.I think interest rates are the thing you have to be honing in on. But of course they're tied directly to inflation. If wecontinue to have this really steady increase in inflation going to see a steady increase interest rates and then when you do thediscounted cash flow analysis and future earnings those companies that are on earnings coming five 10 years into thefuture they're going to be fine. Their stock price is squeezed because these higher interest rates. But we have tried toconcentrate more in areas that we think would benefit from inflation and real estate related companies or financialservices companies as you suggest. We think there are some real bargains there that will benefit from higher rates. Probably ourfavorite is in the banking industry is a northern trust. You know this is an iconic brand here in Chicago. Great managementteam. And as interest rates go higher they will be able to really be a prime beneficiary of that movement.I won't go back to what you're just saying and you're saying about Chicago and I think back to you growing up and a man whowas ahead of you at a very young age were into stock picking your father and help bring that to bad gifting at certainbirthdays and Christmas. But you fell in love with guy stocks to begin with. And you say now people are falling in love with themtoo much. Now is there an element that that's the gateway to falling in love with the stock market in general. Should peoplebe excited about the bright new thing initially. And then as you become more experienced and understand that actually you need tobe a little bit contrarian to an out in this market therefore you then start to look at other opportunities. It's interesting.Interesting question. I think for me fortunately I when I was at Princeton Bert Malkin Molecular just written a random walk downWall Street and he did a great job in that book not only talking about efficient markets and how hard it was to outperform but heshowed you some of the great bubbles that occurred and the dangers and falling in love with the hottest new theme of themoment. And we know whether it's a tulip bulb fantasy or what happened in the roaring 20s et cetera et cetera. So I think onething that I think is unfortunate is that if you don't learn early enough to maybe get away from chasing the hot new thingwhen you get burned you will be reluctant to get back into the markets. So that's what I worry about. So many people who gotswept up in the Internet bubble you know basically swore off investing in stocks for a long long time. And so I hate to seeyoung investors new investors getting into these meme stocks. You're chasing quick profits on Robinhood. I worry that theymight scar them and discourage them from participating in the market for the long run.And particularly when I know you're a man who has so focused on diversity from the very off. That's how you met your partner incrime. Of course the person that's helped build Shery Ahn investments was through trying to bring more diverse people ofcolor diverse backgrounds into the University of Princeton. And it's something you followed through throughout your career. Areyou are you hopeful by new. New opportunities to invest whether it be Robin Hood whether itbe sort of the fact we have to pay no fees to trade stocks that we are able to build wealth among a greater proportion ofpeople. Are you excited that people are getting into the market. But hopefully we need more. Is it financial literacy to ensurethat they're not getting in and getting burned. I think financial literacy is key. It is really reallyimportant. As you know 25 years ago or so former Secretary of Education Arne Duncan and his sister and I created a smallpublic school called the Ariel Community Academy. And the idea was that every first grade class would get a twenty thousanddollar class gift. Watch us manage it through our fund for the first six years. And along with John Bean and then a sixthseventh and eighth grade the kids who start to pick real stocks with real money and benefit from their own stock selection andlearn about financial services careers by visiting with our analysts and talking to our analysts about how to do research onindividual companies. So when I had a chance to chair counsel for President Obama on financial literacy the recommendation wegave the president was how it was to encourage all financial services companies to partner with urban public schools and getyoung people women people of color exposed the markets at an early age and get them comfortable. So when they get out ofcollege they've had a chance to have experience real life investing. And so we think that's so important. We've got to getthat get our public schools focused on financial education learning about the stock market the magic of compound interest.And that was one of the beauties of our program is that kids got to see money grow over eight years and see that real benefit ofhow time helps you as all inevitable ups and downs occur. But the market's trend higher over time.And to that end therefore you're looking at financial literacy your understanding of standing a way of trying to build upmomentum and hopefully that being brought to bear. Actually the partnership that we see. But are you worried about us being in abubble right here right now which might burn and others you talk about sort of the worries of off to the Internet bubble. Are wein a bubble now. John. I think parts of the marketplace are in a bubble. I do. I knowand I've said you know it's not only that the meme stocks and the hot growth stocks that have done well but of course it's thecrypto currencies you know. Everywhere I go whether some in an Uber car or whether I'm in a lift or something not even my my myfavorite pizza place. The delivery guy wants to talk about crypto currencies. And that's a sign when everybody who's not anexpert in a field is like I want to get in here. And all my friends told me how I can get rich quick in this. You know thatis a real sign that you're out on top of a bubble. And so there's certain sectors that are very very worth. SoI mean it's at this exact moment just as you are putting that thoughts to bear an audience question came in saying does Arielitself have exposure to crypto currencies. I mean Ben Miller another value investor he's saying you know Bitcoin are youexposed or is this just not a game for you. It's not. It's not a game for us at all. Saw initially BillMiller as a great friend and we gave a lot of respect for each other. We share stock ideas and talk to each other regularly.But this is just an area where we have to agree to disagree. And I'm very cautious. You know I know Charlie Munger of course hasbeen very vocal about this. And and people like Jamie Diamond others have been pretty cautious. So I think it's a time to becautious. Why. What is it that puts you off.You know is war enough and says you know commodities like you if you buy gold it doesn't produce anything. You know he's jokesaround. You can go and shine it and you can look at it. You can study it but it doesn't. It's not like a farm that produces youknow corn or or whatever it happens to be or some other manufacturing plant that produces all kinds of goods andservices that can benefit mankind. So that's the same thing. I think that when we think about something like crypto currenciesthere's no real. Economic benefit comes from it that we can see it's just anothercommodity. It's such a volatile commodity that we can't quite figure out how do you would use it to buy and sell things whenyou could have this currency moving in such dramatic ways. And I think our financial systems worked very well for you know over100 years. I don't think it's time for us to try to have a brand new one.OK. It's not a question of regulation I'm not going to stick with crypto too much. But those audience questions coming inthick and fast on it. But is it would defy more of interest because they approach schools that are growing somethingdifferent or is it. Or was it an element of regulation that would ever take you there already. It's just the element thatthis isn't this isn't your contrarian idea. This isn't value investing. Well certainly not a contrarian idea.That's for sure. So would be very hard for us to get interested as an investor. I watched Ken Griffin who's one of ouroutstanding industrials here in Illinois nationally. You know founder of Citadel. And he was talking about this for EconomicClub conference this week and just saying the regulation would help.Because then they would be able to trade it and be it looks like being able to do that effectively. So I think regulation isimportant because can't be the wild wild west out there with current season. You know you've seen China has been very verynegative on it. So I know Gary Gensler is focused on this. You know he's now standing FCC chairman. So I'm confident he'll comeup with some program that will help and maybe that will lessen the volatility and maybe it won't be as easy to trade. But itwill be something he should have more certainty around it once you have the regulations in place as our own Erik Schatzkerwho's in conversation with Ken Griffin at the Chicago economic discussion that. And I'm interested in it.Eric was discussing yesterday what was coming out of the Bloomberg and Best Global Summit was this view that actually nowis the right time to sell. We were hearing it from authorities ever. Blackstone voices that came from Brookfield AssetManagement is now the right time to also take profit to liquidate amid a liquid market or is now the time really to buyand keep on buying any dips that we see. I think you can buy the dips in the parts of the marketplacewhere there are bargains you know and I do feel as we've talked about our small and mid-sized favorite companies like MadisonSquare Garden. Entertainment is one of our favorites that they own the Madison Square Garden and now out of New York City. Youknow we we love Lazard. Ken Griffin is a terrific CEO there and all the deals happening around the world. The czar is in themidst of many of them being a global franchise and investment banking and also in the money management international sector.So that's another you know another financial services company. We believe in KKR has been a holding for us for a long longtime. And so we think private equity is going to continue to grow and thrive. And Lenny Kravitz is still in the saddle andhelping drive that company. So there are opportunities. And one other area beside the garden itself the sports related teams wethink a lot of sports teams that are cheap. When you start to think about how you can use those assetsthe personalities the players the brands the teams globally. So Manchester United has been very weak lately. We think there'sbargains there. It's the international soccer brand and you know really true global enterprise. Madison Square Garden sportssomething that we think it's great that they own the Knicks and the Rangers and the and sports teams are going to be able toagain be more and more global be able to use their brands and their extraordinary athletes generate more and more revenue. Andpeople want to watch these games throughout the world. So there's real real opportunity of course with all the moneycoming from the gambling side. You know with fan duel etc. that makes these sports franchises worth much much more. And theyseem to be very cheap here. Johnny you were a pretty good athlete pretty strong on thebasketball court. I mean what are you interested in sports teams. I know that you have a lot of focus on females basketballplaying in Chicago. Is it something that you want to grow as an asset class for you.Well it you know know Warren says he always invest your circle of competence. And I did get a chance to play for Hall of Famecoach Pete Carroll at Princeton. He spent 29 years there and 15 years an assistant coach of the Sacramento Kings. He was agenius. You know he's gone. He's in the Hall of Fame. And it was great when I got there. I wanted to be a basketball coach butthen I got there. He made it clear that my basketball knowledge was not what it needed to be. And I realized I wasn't as smartas he was. So I understood a career in basketball was not possible.He kept me around the whole for years because I played really hard and I got to be captain. We had got a chance to play for awhile but it was an extraordinary experience. So it gives me a sense thatI do love basketball. I'm on the board of Nike which I'm really proud of and it's been great to get to be with Phil Knight andthe late John Thompson was on the board. But finally as you said the women's team is our fun. You knowbeing involved. The Chicago sky has been a real blessing and to support these dynamic women. And we're finally I think startingto build real momentum. The ratings are up 80 percent year over year and the playoffs this year is going to be a realopportunity. And people see these women that says it's going to grow into a extraordinary success. So I'm really excited aboutthat. And we'll excited about our hometown Sky team hopefully making it to the finals.And even though I'm not a Chicago fan I will be for you and particularly about those women. But John well you okay so youdidn't have therefore quote unquote the vision on the basketball team to become a coach. But what do you think made you distinctin terms of having the vision to become such a legendary and I don't use that lightly value investment to be able to build up a16 billion in terms of assets like what was it. How have you been able to see things differently to have the longer termvision as to what wins out. Because we're saying well almost 35 years and you'll fund and you always beat the benchmark. You'renot always beat the benchmark. We're proud of the 35 years ahead of the benchmark and also the last one year ten years. It's beena really great period for us. But essentially you bring up that term vision. Coach Curl said that I was legally blind when itcame to basketball and he couldn't teach vision. One thing he couldn't teach. So I think I've been blessed that I didn't dothink I've had a vision that Ariel to once identify great talent people you know early on like a melody cops who I met when shewas 17 and you know other talented people the CFO at Northern Trust Jason Taylor I met when he was 17 and knew he was going tobe a superstar. So it had a vision around people. We have a great research group of Ariel that's very strong dynamic. A lotof University Chicago Booth grads there that work for it with us. And then I've had people have a little vision I think onwhich industries are going to succeed and thrive. Looking out over the long run as you know we are long term investors withthe turtle logo and being able to not get swept up in the emotions of the moment and the drama of the moment. But beingable to see a little out beyond the horizon and being able to buy in the midst of financial panics like 2008 and 2009 or beable to buy last a year and a half ago at the height of the cold the crisis being able to see over that arise and having thatvision is something that I help. It's helped our performance in the long run. A lot of our performances come in those periodswhen there's been dynamic change and dynamic volatility. And you talked about volatility being almost upon us. We've gotone minute but there was an interesting audience question that came in beforehand towards you and as David from Greensburg whois saying that for you a bull bear on the overall stock market out to like 20 23. Do you think we're set for a downwardtrajectory or will we generally go higher. Looking out toward 2023 I think it's gonna be a really toughtime for the S & P 500 and the NASDAQ to be successful but it's gonna be a real wonderful time for small and mid-sizedundervalued securities sticking to those industries that have underperformed over the last 10 years or so. It's been brutalbut it's only fair that turnaround is fair play. And if you're a contrarian these ideas will do well over the next and over thenext three to four years. And last one for you John. You just talked about listen to the CAC Griffin earlier about Chicago.You still think it's a good place to build a business. I do. We love our city and a melody and I we we we love Chicago. We'recommitted to Chicago. It's the greatest greatest city in the world. And the way the business community works together withthe community. And it's something special here.

No schedule data available.

Ariel Investment’s John Rogers, Jr. on Investing Outlook

John Rogers, Jr., Chairman and Co-CEO, Ariel Investments speaks with Bloomberg’s Caroline Hyde at the Bloomberg Invest Global Summit about what he sees around the corner for the global recovery. (Source: Bloomberg)