The Big Interview – Staying Disciplined, China, and What 2022 Could Hold
Cambiar President recently joined the Chuck Jaffe Show to discuss current market conditions, China, and his 2022 outlook.
Click here to listen.
It’s time for the big interview on today’s show and I am very happy that I get to chat right now with Brian Barish. He is president and Chief Investment Officer at Cambiar Investors. Cambiar, cambiar.com. He’s also portfolio manager for the Cambiar Opportunity Fund, and he basically oversees all aspects of the investments at Cambiar, though, he runs a domestic fund. We’re going to go in a lot of different directions, but to do that, we have to bring him in. Brian Barish, thanks for coming back to Money Life.
Thanks for having me on.
Brian joins us on the Gainbridge hotline. With a simple built in calculator, the Gainbridge technology illustrates what your investment amount will return long before you make a commitment. Gain access, gain control, gainbridge.life.
Brian, we’ve got the market having gone on for a long time without much of a setback. We’ve got sentiment having kind of changed. I mean, it wasn’t that long ago where everybody was super nervous, now everybody’s like, “Market’s going to keep steaming forward.” There’s still a lot of things to be concerned about. Are you worried that people don’t seem worried right now?
Well, that would be a good thing to be worried about, the absence of worry. Yeah, it does concern me a bit. We do have very generous financial conditions. If you look at the Goldman Sachs financial conditions index, as of the fourth quarter of 2021 it’s had the most generous reading in the history of this particular indicator. So it can kind of only go one way from here in terms of financial conditions becoming less easy, and that tends not to be a real great formula for equity returns.
It’s not a great formula for equity returns, it’s not the same as, “Hey, we’re going down. We’re going to see negatives.” Is it? I mean, are we at a spot where we can temper back our expectations? We can be disappointed that we’re not getting the kinds of stuff we’ve seen this year, or are we going all the way to, “Yeah, coming forward, we’re going to have to have some sort of significant setback.”?
I don’t know exactly what’ll happen next year, but I do think it’s time for investors to start maybe making some adjustments to what they’re looking at and maybe take some profits on some things that have worked out.
I heard a different interview not that that long ago from Leon Cooperman, so I’ll credit the source, that what we really have are three stock markets. You have the regular stock market of industrials, and retailers, and consumer product companies, and that kind of stuff. You have the FAANGs, which is its own multi-trillion dollar parallel universe. And then you have the Robinhood stocks, which is really a very speculative class of stocks.
So, if you are a bit concerned, as I am, that the financial climate’s going to be less generous, less accommodative in 2022, which I think is a pretty safe bet, the Robinhood grouping, that would be the most vulnerable one. We don’t really play there so I’m not so concerned about it, but there is always the spillover effect of collateral damage, people get wrecked on certain investments and then they choose to sell others along alongside those.
So that’s a concern. I just don’t know how the actual pin action will go, but after two years in a row of 20% plus returns through what’s been a calamative period, just from a societal point of view, it’s hard to imagine you’re not going to get a little bit of retracement next year.
That’s talking big picture. I should point out for anybody in my audience who’s not familiar with you, and again Cambiar Opportunity, CAMOX, if you want to look up the ticker symbol and follow along at home, but you are value investors. Value, well, it’s had different results based on how they define value. But one of my other guests, I’ll credit the source here, was Chris Davis from the Davis Funds who recently said that value these days should be you’re looking not for the classic value, but you’re looking for undervalued growth companies, and then value companies that have the potential to grow. Has value, or what you’re defining as value, has it changed, or has it had to change in order to keep working?
It has needed to change, but a little bit of the need to change is not been a function of value, not working, it’s been a function of how value is classified by the indexing overlords. If you look at how indexes divide stocks into value stocks versus growth stocks, they’re a value stock if they trade at low multiples of earnings and book value, and they’re a growth stock if they are growing very rapidly in terms of top and bottom line.
But let me ask you, if I was to present you a stock trading at 15 times earnings, but growing at 500% a year, that would be the greatest value of all time, right? But it’s not. According to the way these indexes are calculated, that stock is not particularly cheap on a multiples basis, it’s okay, but not particularly cheap, but it’s growing very fast. So that would belong the growth bucket, not in the value bucket. And that’s just stupid, frankly. So that’s one of the basic problems.
I think the other really basic problem that value investing has faced is that it skews heavily towards companies that are physical asset heavy businesses and away from companies whose primary business assets are more intangible assets. So this is brands, patents, various know-how, or interesting market structures as a consequence of that. And that’s really been where more of the value creation has been over the last 30 years if you just look at how the market is stratified in terms of market cap and what component that market cap comes from intangible assets.
So, I agree with the general premise that you don’t want to have an overly textbook approach to value investing, you want to look for companies that are generating good returns on capital, that have good margin structures, but happen to not embed particularly high expectations of forward earnings or growth because of that. So that can mean some very cheap stocks that are just too cheap or alternatively stocks that have good growth potential, but aren’t trading like it, which I think is similar to what you were asking me.
Well, in fact, in our past discussions, there’s three things that have always stood out to me when I’m hearing you talk which is you’re focused on quality, price, and discipline. In these market conditions where things are changing, how easy is it to hold to the discipline?
It requires some self-restraint, quite candidly. There are a lot of things happening in the market right now where you could kind of lunge at returns, but I think you would be ill served to do so. So I’ve always been kind of a car junkie, I just like cars, that doesn’t mean the business of owning car manufacturers has been a particularly good business, it’s been a very challenging place to be as a shareholder over the years.
And car company right now, not just the Teslas of the world, but even the Fords and the General Motors are breaking out to multiyear, and in some cases, multi decade highs. And it sure looks like, if you look at the multiples of earnings, they still don’t look very demanding. But if you look kind of under the hood, pun intended, what’s happening is you’re seeing really very fat profit margins from what is the final product cycle for internal combustion engine cars, it has more to do with industry shortages owing to lack of availability of chips and other parts that is not something that any of these companies manage to construct on their own from an industry point of view. And it looks to us like this is just not going to be likely to be sustained.
Just going further on the discipline front, what we mean by quality, price, discipline, when we think about our approach to investing is we want to be very, very cautious about companies that have too much financial leverage or have grown aggressively through M&A, making long term comparability of results difficult. There’s been a lot of growth through M&A and growth through the balance sheet, not through necessarily innovation by all kinds of businesses, and we’re just trying to stay away from those companies that have a lot of balance sheet leverage, and where if business conditions do turn south, if margins do turn south, they’re not likely to see very positive price action in their stocks.
Interesting. We’ve had guests on who have made almost the exact opposite case on the automakers and talked about, well, the opportunities that are there as they give up internal combustion engines, and go to hybrids, and what they’re expecting to see. So I can see how keeping the discipline is tough.
I want to switch this a little bit because while your fund is a domestic fund, as I said, you oversee all the investment functions at the firm. And we’re talking about the changes as they happen with value, and what’s happening with quality, and broader in the market. There’s been a lot going on around the world and there’s a lot of fear right now, not just about things like inflation and interest rates, but also about what’s happening in China, and what’s happening with globalization.
And I know you have some pretty strong feelings about what the future holds with that. Explain what you’re seeing and then how you factor it into what you’re doing when it comes to investing.
Sure. Well, I’ll answer the what I’m seeing part first, maybe give a longer answer. What we’re seeing is that China is becoming increasingly nationalistic and increasingly dominated by communist party dogma in terms of how it’s approaching various industrial issues that the country is facing. And we don’t see either of those events as being very positive.
It so happens, Chuck, I started my career at the beginning of the 1990s, just as the Cold War was ending, and the Berlin Wall fell, and Soviet Union was disgraced, and the state led model of economic development and socialist led models of economic development, those were all held in poor repute at that time, with American free market capitalism as being the clear winner. And China too followed some version of that in order to advance their development from what was really almost medieval type of living conditions for Chinese people just 40 years ago.
And under a current Chinese leader for life, Xi Jinping, they are going the opposite way, which is shocking to me. But basically they are using the wealth, using the technology of their development up to now to become more of a police state, to really dominate their people’s lives, and enforce really total ideological conformity with respect to communist party dogma.
And you could probably tell by my tone, no, I don’t see this ending particularly well and I don’t know exactly where it’s going to go in terms of geopolitical stuff. I do think there’s a couple basic inferences. One is that China’s growth rate will be a good deal lower than it’s been because these prescriptives will not accelerate growth very much. And secondly, it’s probably a decent idea to keep some capital in the military-industrial complex. We may have a new kind of Cold War, or a new kind of geopolitical standoff that necessitates more military spending. So it’s not a real positive result, no.
And does that mean that you’ve dramatically reduced what you’re doing there with your international funds? Does it change how you’re investing? You only want to be in A-shares to get exposure there? What has it done to, and what do you think it should do to people’s portfolios?
Well, what you have is a basic governance problem with respect to Chinese corporates. China became very interventionist starting late last year, initially accelerated throughout 2021 where they have basically commandeered some of their larger companies to become less profitable, to throw money at various initiatives because the state says so. The U.S. and the U.S. SEC have become, I think, very circumspect about what’s going on and called for more disclosure, for more aggressive auditing of Chinese company results, and that sort of thing.
It seems to me that the Chinese government would like to see the liquidity in some of the ADRs of their biggest companies like Alibaba or Meituan, which are both big internet companies, move back to Hong Kong or Shanghai and away from the New York Stock Exchange, which may happen if the SEC is not satisfied that auditing standards are better. So provides China a very easy outlet to basically force this shift of venue.
And that doesn’t change the value of businesses, but it does show a hostility, basically the concept of a global market and the value of global shareholders, which I don’t think you should dismiss very lightly. So we have taken the posture that we’re just not going to own stocks that are in the crosshairs of this. So we don’t own any more Chinese VIE businesses. So this is kind of how you’ve gotten around some of the Chinese legal standards for ownership. We just think it’s too dangerous to do that.
Look, there’s ways of profiting from the growth and prosperity of the Chinese economy in general, the industrial technology via Western brands that sell well in China, you don’t have to go and take the direct approach to investing there. Look, I’ve probably sounded very dark talking about this, frankly, there’s a darker version than what I’m describing which is that China becomes just completely inward and you start seeing Western brands chased out of China altogether. I don’t see that happening right now, but it’s certainly a possibility. So it’s just something that we’re paying attention to. We’ll see how this resolves.
And is everybody missing this story because they’re focused on inflation and they’re focused on China relations without thinking about the broader future?
Chinese stock market has been a bad one in 2021. If you’ve owned equities there you’ve probably lost money, it’s just a question of how much. So I do think people are aware of it. I don’t think there’s a lack of awareness. I think there’s a component of disbelief by people on Wall Street, like, “Are these guys serious? They’re really going to go hard communist and that’s their approach to how they’re contending with certain economic growth challenges? They’re not serious, are they?” I mean, that’s kind of the discourse that I see happening out there.
And we had a little bit of that discussion internally as well, but we’ve concluded, “No, I think they are serious about this.” It’s too bad, it really is too bad because the Chinese people, ironically, are some of the best capitalists in the world, they’re really good business people. They like to work hard, they like to make money, and they’re just hamstrung by a government that is possessed an ideology that is just antithetical to all of this.
Brian, I wish I had more time. I have many more questions, but we’ve used up our time so we’ll just have to have you back. Let’s do that next year. Let’s not let it go so long between our conversations. I look forward to the next one already.
Sounds great, Chuck.
That’s Brian Barish, he’s the president and Chief Investment Officer at Cambiar Investors. Cambiar.com, the website. On Twitter @cambiarinvestor, that’s singular, and it’s the Cambiar Opportunity Fund, CAMOX, for more information on his fund.
We’ll come back, let you know what’s coming for the rest of the week. There’s an interesting takeaway from this interview too, we’ll talk about that before we cross the finish line next.
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