2016 Speaker Series: P.J. O’Rourke
September 29, 2016
The 2016 MPMG Speaker Series event, held on August 11, began with Portfolio Manager Rob Britton providing a detailed explanation for Minneapolis Portfolio Management Group’s (“MPMG”) unwavering commitment to its value-based investment methodology.
A key benefit of value investing – protection against downside risk
MPMG stated its belief that creating and protecting wealth over the long term is more about avoiding large losses than it is about chasing gains. Value investors typically endeavor not to chase stocks that become overpriced. In this way, they seek to avoid large losses that can diminish wealth over time. MPMG emphasized its belief that there is no such thing as a pre-ordained safe asset class, no matter how popular a sector or segment of the market may become. This has been demonstrated throughout the history of the market. MPMG noted that the Dow Jones Industrial Average, after peaking in the late 1960s during the “Nifty Fifty” craze in the market, declined over time and then took nearly 17 years to return to record levels. Propelled by the dotcom craze of the 1990s, the S&P 500 and NASDAQ Composite Indexes hit new highs in 2000, and then dropped dramatically. It would take the S&P 500 about 13 years to recover its losses, and the NASDAQ nearly 15 years to do so. The MPMG ACV portfolio is not immune to periodic declines as well. But in contrast to the broader market, the longest period of time it has taken for it to recover from a year-over-year loss was about 18 months, and this was after the once in a generation financial crisis of 20081. This demonstrates the importance of paying the right price for stocks as a strategy to limit downside risk.
A performance update1
MPMG believes that its performance validates its approach to investing Since its inception more than 21 years ago, the MPMG All Cap Value Composite (“ACV”) portfolio’s return has outpaced those of the Russell 3000 Value Index by more than 31%1,2. MPMG’s relative out-performance is more impressive given that value stocks have proven, over time, to be leaders in the market. Since Russell started tracking the performance of value and growth indices in 1979, value stocks have outperformed both growth stocks and the broader market as a whole.
Despite its long-term record of success, MPMG noted that value stocks have generally been out-of-favor compared to the broader market since 2008. Among other factors, MPMG credits a tsunami of cheap money created by central banks worldwide for a relatively indiscriminate environment that rewards stocks regardless of risk. Similar trends have occurred in the past, but historically, value stocks have returned to a leadership role. It is believed that such a rotation in the markets may be underway today. MPMG’s ACV has outpaced the broader stock market through July even as the stock market as a whole has enjoyed a year of solid returns.
Where MPMG is headed from here
MPMG’s perspective was followed by a video presentation with additional views about the market and highlighting specific stocks that are illustrative of the firm’s value approach. Among the stocks highlighted in the presentation were:
• Teva Pharmaceuticals (TEVA) – the largest generic drug manufacturer in the world
• Canadian Pacific Railway (CP) – a transport powerhouse with large net profit margins
• Chevron (CVX) – well positioned in a broad range of energy markets with a worldwide customer base
• Nintendo (NTDOY) – considered the most innovative company in the gaming industry with large cash reserves and no debt
• Stericycle (SRCL) – a large medical waste removal firm that is now also in the document shredding business
• Las Vegas Sands (LVS) – building potentially profitable projects in Asia.
Although the stock market is at all-time highs, a key message of the video is that there is still time to get in on great opportunities – when you focus on price. MPMG intends to continue to drive “on the right side of the road,” identifying quality companies available at good values to position clients for long-term capital appreciation. You can view the video online at: https://mpmgllc.com/blog/july-2016-market-and-portfolio-update/
P.J. O’Rourke – An unusual (and not so serious) perspective on an unusual political year
Best-selling author and noted political satirist P.J. O’Rourke entertained the audience as the keynote speaker at the 2016 Speaker Series event. O’Rourke made his mark in the 1970s as an early contributor to The National Lampoon magazine, where he became editor-in-chief and co-creator of the legendary 1964 High School Yearbook parody. After a stint as a foreign correspondent in the 1980s, O’Rourke returned to his roots as a humorist. As a result, he has more citations in The Penguin Dictionary of Humorous Quotations than any living writer. He’s written 15 books, including his latest, Thrown Under the Omnibus. O’Rourke’s byline has appeared in such diverse publications as The Wall Street Journal, Car and Driver, Forbes, House and Garden and Rolling Stone. Both TIME and The Wall Street Journal label him “the funniest writer in America.”
O’Rourke shared his views on the current political environment and some of the key issues of the day, combining his sensible Midwest values (he was born in Ohio) with the perspective of a worldly sophisticate who has a grasp of how the game is played in the circles of power. His comments combined his satirical spin (à la a modern-day Will Rogers) with serious observations about the geopolitical environment.
Highlights of P.J. O’Rourke’s presentation
The special perspective of Midwesterners
O’Rourke expressed his admiration for his native Midwest. He believes that those on the east and west coasts fail to appreciate the innovativeness and industriousness of Midwesterners. He notes that Minnesota alone is home to manufacturing, mining, agriculture, forestry, and water skiing on 10,000 lakes. O’Rourke believes the rest of the country overlooks the best and the brightest that come from places like Minnesota, with prime examples being Target, 3M, General Mills, Land O’Lakes and the Mall of America.
The importance of investors
O’Rourke took a moment to thank those in the room for being investors. “Investment defines humanity,” he said. “Barbarians don’t raise money with debt and equity, but by stealing.” O’Rourke credits investors with making possible all of the inventors, innovators, manufacturers and businesspeople who brought decent standards of living to the four corners of the earth.
The state of Presidential politics in 2016
Much of O’Rourke’s focus was on the upcoming Presidential contest, where he believes that Americans have settled for a less than impressive group of candidates. “The electorate narrowed it down to five ‘idiots’ – Cruz, Clinton, Kasich, Sanders and Trump. It’s not a list of candidates, but the worst law firm in the world.”
The two remaining major party candidates, Hillary Clinton and Donald Trump, do not capture the imagination of O’Rourke. Of Clinton, O’Rourke says she “carries more baggage than the Boeing she flew as Secretary of State visiting every country that blew up in her face.” Although he credits Clinton for her familiarity with the White House, he notes that her personal issues present a significant barrier.
For all of the problems with the Democratic candidate, he says it pales to what is wrong with the Republican party. “Trump’s chief domestic policy as president is to be on TV,” says P.J. “Trump will grow the American economy as he grew his own, with bad debt.”
O’Rourke says he is so frustrated with this election that he is willing to settle for a candidate who “is not out of their mind.” He is supporting Clinton, though he disagrees with her on a number of her positions. His concern with Trump is that he is such a volatile candidate. “Presidents have a tremendous amount of unilateral power to do things like mess up trade agreements,” says O’Rourke. “Trump is a 3-year old. He has his moments of charm, and then comes the tantrum.”
He believes that the chances of a Trump victory in November are fading. “People are beginning to see that there’s a human being that occupies this thing called Trump.” O’Rourke suggests that many voters in the Republican primaries were choosing the person they got to know on TV through Trump’s star turn on his reality TV show, The Apprentice. “People were voting for the TV character like they were voting for Archie Bunker.” Since securing the nomination, Trump has made a number of surprising statements that seem to have contributed to declining poll numbers. “The ‘Trump slump’ isn’t about his gaffes,” says O’Rourke, “but about what his gaffes expose…the shallow, infantile, narcissistic person behind the TV character.”
Better choices for President
Among other alternatives, the conservative O’Rourke mentioned Kasich, Rand Paul or Paul Ryan as more favorable choices. He said of Kasich “He’s a social conservative which I am not, but he doesn’t go about trying to change the law about it.” He likes Paul’s strong libertarian tendencies, but says Paul tends to “give you the whole answer,” and needs to cut back on his wordiness. O’Rourke credits Ryan with having serious ideas about dealing with some of the government’s big challenges such as overwhelming debt. Another rumored candidate who interested O’Rourke was former New York mayor Michael Bloomberg, who declined to run as a third party candidate. O’Rourke says that Bloomberg likely “did the math,” and did not see a path to victory, and determined he would likely do more damage to Hillary Clinton, the candidate Bloomberg ultimately endorsed.
On the lack of bipartisanship
O’Rourke disagrees with those who are concerned about partisan political bickering. He believes bickering works to the benefit of taxpayers. O’Rourke contends that America is not polarized (“in 1861, we were polarized”), just split on some issues. “Bipartisan consensus happens all the time – all politicians from both parties want government to cure all of the world’s problems.” But he believes government has proven it is not capable of solving most problems.
O’Rourke notes that 40% of the nation’s GDP is represented by federal, state and local government spending. He questions whether government is actually doing 40% of the work in our lives.
The scourge of political corruption
O’Rourke cites the 2014 federal farm bill as a prime example of political corruption at work. He notes that the agricultural portion of the bill (not counting the food stamp program) will cost $191.2 billion over five years. This includes crop insurance subsidies and agricultural price supports. “Agriculture has been up to their bib overalls in politics since the Pilgrims,” says O’Rourke.
But it doesn’t stop with farmers asking government to solve their problems. O’Rourke says we all get confused about the role that politics should play in economics. He says the economic system sends the message that we need to work hard and make more money than other people. Politics sends the message that some people make more money than other people, so we better close the income inequality gap. O’Rourke says unfairness is part of the system. If we have more income, it may mean a bigger gap, but it also means a bigger pie for all. He says using politics to create economic fairness, or fairness in any other form, “is a sin.”
On a more serious note, O’Rourke expresses frustration with the current backlash against free trade, now being expressed by both major party presidential candidates. “You have to understand how huge the Trans Pacific Partnership (TPP) looms in the minds of those in the Asian sphere of influence,” says O’Rourke. He says it is about more than trade, but about building a body of communities to offset the increasing threat of China in the region. “If we don’t go through with it (TPP), we’ll be poorer and losing a tremendous amount of influence” in a region where he believes the U.S. needs to maintain influence to offset the growing economic strength of China in global markets. O’Rourke says a trend toward American isolationism is not a positive for our country.
The country’s economic challenges
O’Rourke has concerns with a key issue in the U.S. economy. “If you believe in the free market system and capitalism that has created so much wealth in this world, we have to figure out a way to talk to people who are suffering from economic dislocation, whether it is temporary or permanent.” A notable development that is not getting much focus in the current presidential campaign is the technological revolution that he says is more significant than the industrial revolution that began in the 19th century. “This revolution is moving faster than the industrial revolution and in a less linear way.” Advances in technology, combined with the trend toward globalization, are factors that O’Rourke thinks generally benefit society as a whole. He notes, however, that specific pockets of workers are hurt by these trends. These are challenges that he believes need to be tackled by policymakers. “We have to figure out how to address those people and how to make sure they share in these benefits without creating a monstrous welfare state that burdens Europe. Anybody in favor of the free market, regardless of party, needs to think about it.”
MPMG’s11th annual Speaker Series Event was among the best attended and well received events yet. The entire team at MPMG sincerely thanks its valued clients and looks forward to continuing to serve them in the years to come. For more information on MPMG, please visit our website at www.MPMGLLC.com or call us at (612) 334-2000.
1Past performance is no guarantee of future results. Please see last page for full performance disclaimers.
2Through July 2016.
Notes to Performance
Firm: Minneapolis Portfolio Management Group, LLC (“MPMG”) is an independent investment adviser registered with the United States Securities and Exchange Commission that invests in both domestic and international small-, mid-, and large-cap equity securities. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.
The All Cap Value Composite (“ACV Composite”) was created on January 1, 1995. Data from January of 1995 through March of 2000 on the chart on the previous page represents the performance of accounts managed by MPMG while associated with Salomon Smith Barney, Inc. Data from April of 2000 through March of 2004 on the same chart represents accounts managed by MPMG while associated with Wachovia Securities, LLC. The performance data shown represents the performance of accounts for which MPMG was responsible while operating as a distinct business-unit of the foregoing companies using the trade name “Minneapolis Portfolio Management Group.” Please note, however, that MPMG was formed as an independent legal entity in April 2004. These results reflect the performance of all accounts under management for at least one calendar quarter that MPMG has managed on a discretionary basis, using the same strategy.
Calculation Methodology: Returns for periods longer than one year are annualized. Results are size and time-weighted and net of expenses, excluding the effect of all income taxes, and unless otherwise noted, reflect reinvestment of interest, income, and/or realized capital gains. All realized and unrealized capital gains, losses, dividends and interest from investments and cash balances are included. The composite is asset-weighted, using end of quarter market value. Dispersion is presented as the standard deviation of the individual component portfolio returns around the aggregate composite return on an asset weighted basis. The results are expressed in U.S. Dollars. Because MPMG’s accounts are individually managed and clients may impose restrictions on management, account performance may vary.
Standard Deviation: The three-year annualized standard deviation measures the variability of the composite and the benchmark returns over the preceding 36-month period. Monthly composite and benchmark returns were not required for periods prior to 2011.
Verification: MPMG claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. MPMG has been independently verified for the periods of January 1, 1995 through December 31, 2015. Verification assesses whether (1) the firm has complied with all GIPS composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The verification and performance examination reports are available upon request.
Benchmark: A benchmark of 100% of the S&P 500 Index has been calculated. The S&P 500 Index contains 500 U.S. industrial, transportation, utility and financial companies. It is capitalization-weighted calculated on a total return basis with dividends reinvested. The NYSE Composite Index (Symbol: NYA) is a measure of the changes in aggregate market value of approximately 2,000 NYSE-listed U.S. and non-U.S. stocks, adjusted to eliminate the effects of capitalization changes, new listings and delistings. It is weighted using free-float market capitalization, and calculated on both price and total return basis. The Value Line Geometric Index is an equally weighted price index of all stocks covered in The Value Line Investment Survey. Arithmetic refers to the averaging technique used to compute the average.
Selection Criteria: The ACV Composite includes all discretionary accounts with no client-imposed restrictions that are managed in accordance with the ACV Composite strategy. Performance data for all accounts has been calculated from each account’s first full quarter of management through the date of this report or the last full quarter of management prior to cessation of the account.
Composites: Additional information regarding MPMG’s policies for calculating performance results, including a complete list and description of all MPMG composites and performance results, is available upon request.
Fees: The performance results are shown net of actual fees from 3Q 2004 – present, a 2% model fee for 2Q 2000-3Q 2004, and a 2.2% model fee for 1995-1Q 2000. These model fees represent the highest fee charged to any account managed by MPMG while associated with Salomon Smith Barney and, subsequently, Wachovia Securities, LLC. Actual fees charged to MPMG’s clients may vary depending on, among other things, portfolio size and the level of service required by the client. The fees charged for wrap programs typically include investment management fees, trading costs and, in some cases, custody fees.
Holdings: The securities listed were the top ten holdings as of 6/30/16 in accounts managed by MPMG. The current list of top ten holdings may differ from those listed above and are subject to change.
Since no one investment program is suitable for all types of investors, this information is provided for informational purposes only. Past performance is not a guarantee of future results. You should review your investment objectives, risk tolerance and liquidity needs before selecting a suitable investment program.