Some of the more brilliant responses from Rodriquez:
...........So I started thinking differently about what the norm is, and then how can you turn that to your competitive advantage? So it's always been that way. I would say when I was in graduate school or just going into graduate school, I discovered Graham and Dodd during the summer before I was coming back to graduate school. And it really struck home, and I had the good fortune of meeting Charlie Munger in our investment course there.
CONSUELO MACK: Warren Buffett's kind of unknown partner.
ROBERT RODRIGUEZ: As Warren Buffett says, he's the smart one. And after the class I asked him, I said what can I do to make myself a better investor, beyond just what I'm doing here and researching, et cetera? And he said, read history. Read history. Read history. And if people had read history about the economic crises of before, not only the depression but even before then, they would have said this is an old friend, and so that helped. It's come from a number of different parts, but I think really not being afraid to fail and be different. That's what it took in order to differentiate in this business.
CONSUELO MACK: Warren Buffett's kind of unknown partner.
ROBERT RODRIGUEZ: As Warren Buffett says, he's the smart one. And after the class I asked him, I said what can I do to make myself a better investor, beyond just what I'm doing here and researching, et cetera? And he said, read history. Read history. Read history. And if people had read history about the economic crises of before, not only the depression but even before then, they would have said this is an old friend, and so that helped. It's come from a number of different parts, but I think really not being afraid to fail and be different. That's what it took in order to differentiate in this business.
I had a friend of mine who was a growth stock manager who got just before the debacle of 2000, we were having lunch together in January of 2000 and he was buying all this dot com, and I said why are you buying this crap? And he says, because you have to, he says yes, if I don't buy it we won't be competitive. I said, but don't you realize, you are at the epicenter of a debacle that's going to occur? And when you get destroyed, you know, you could either have cash or you can buy these things. If you have cash, you get fired. If you buy the dot-com and it blows up, you get fired. So in both cases you're fired. What's the difference? Over here the one with the cash, where you held your investment discipline, you can rebuild your business. Over here, you've destroyed your credibility, you can never rebuild.
CONSUELO MACK: Bob, you saw the credit crisis coming about five, at least five years ago. And at that time you predicted that there was a new financial system that was going to be created and a new era. So what's this new financial system that we can look forward to?
ROBERT RODRIGUEZ: I think, first of all, about four years ago we started talking about the breakdown in underwriting standards, et cetera. With the demise of Bear Stearns in March of last year, and what the response was by the federal government and the Fed, that's when we wrote "Crossing the Rubicon," that we had crossed over into a new financial era, a new system. And little did we know how far that was going to occur, within six months.
ROBERT RODRIGUEZ: I think, first of all, about four years ago we started talking about the breakdown in underwriting standards, et cetera. With the demise of Bear Stearns in March of last year, and what the response was by the federal government and the Fed, that's when we wrote "Crossing the Rubicon," that we had crossed over into a new financial era, a new system. And little did we know how far that was going to occur, within six months.
So we're still in this process of defining what this new system is. As a result, it is very difficult to define what appropriate valuation levels are going to be, because the goal posts keep getting moved. Look at Chrysler- we were extremely vehement against Chrysler and what happened there, where senior secured creditors were treated in such a shabby manner, it really ran over, you know, the sanctity of contract. So we're in a new system. That means the government is a larger percentage of GDP. The larger the percentage of GDP, the more likely GDP will grow at a substandard rate for an elongated period of time.
We're in the group, and I'm in the group, where the new world order that you were referring to, that I've referred to, is that the U.S. is going to have to change its economic system; that our foreign counterparts that have basically grown on the backs of U.S. consumer have got to turn inwardly for their growth. As a result, as they turn inwardly for their growth, such as China, the U.S. has to expand its exports. I don't see anything like that coming out of the administration or the incentives or anything else. As a result, the more the government takes a larger share of the economy, the likelihood we will be in a substandard period of growth and profit margins will also be substandard.
CONSUELO MACK: So what are you seeing now that other people aren't seeing?
ROBERT RODRIGUEZ: I think the difference is many of us see the buildup of federal liabilities. But there's this feeling, well, it'll be okay, we'll get through it. Well, that was the same not too long ago when the house prices were going through and people would raise the question, what happens if housing prices get hit? Don't worry about it, we'll get through it. There's always that element. So I think the question is, as you have to place the odds, what are the odds that we'll get through this with the least amount of pain? I think that's where the difference comes.
ROBERT RODRIGUEZ: I think the difference is many of us see the buildup of federal liabilities. But there's this feeling, well, it'll be okay, we'll get through it. Well, that was the same not too long ago when the house prices were going through and people would raise the question, what happens if housing prices get hit? Don't worry about it, we'll get through it. There's always that element. So I think the question is, as you have to place the odds, what are the odds that we'll get through this with the least amount of pain? I think that's where the difference comes.
If you want to be on the optimistic side and say we'll get through it and you're wrong, your shareholders pay for it and your clients pay for it. If we're right and we've done our job correctly, we protect capital in the negative side, and if we're wrong, we just don't earn as much as our competition. I think that's a better combination than destroying your clients and saying, well, we'll go out and get some more new clients out there. I don't like that one.
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