Michael Schaffer: Long-Term Investing in a Short-Term World

This podcast is brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.

Hello and welcome to Barron's The Way Forward. I'm Greg Bartellis, and my guest today is Michael Shafer, Senior Financial Advisor, Managing Director Investments at the Shafer Private Wealth Group. Today, he will explain how investors can invest for the long-term in a short-term world. Welcome to the podcast.

Thank you. Thank you for having me again.

Ah, my pleasure. This is a really interesting topic. Because people are just glued to their phones. They're glued to the news headlines. Fear and greed are changing rapidly day to day, and people will have conviction in one thing, and literally a day or two later, price drops and they're like, forget it, I'm out. So short-termism seems very much part of the landscape, and I don't see that anything changing anytime soon. But tell me a little how you approach this and what, what, what your thoughts are. Take it from there.

Yeah, I'm not sure it's a lot different than years past. I think that, you know, with it being an election year, obviously all the geopolitical going on in the world right now, there's a lot of chatter, you know, new trends with AI, the weight loss drugs, what the Fed's going to do, cash. And all these are very important and they're very impactful. But what ends up happening during times like this is so many people get focused on these specifics. That a lot of other great companies get left behind, and that usually creates opportunities. And right now, so much is focused on, you know, the Fabulous Seven, AI, weight loss drug, like I said, the Fed moves. And these are gonna create opportunities. And I think AI is gonna create opportunities, and I think the weight loss drugs are gonna create opportunities. But it's really, there's 3 things driving the market right now. And, you know, we're in a period right now where there's a lot of optimism and it's, Most of that's geared toward AI, which, and we talked about this on that last podcast, that, I mean, the next 5 years of AI is gonna be incredible. And the speed of it is just picking up and it's very quick and it's gonna create a change in entertainment. It's gonna create a change in the arms race. It'll change education. It's gonna, coding might be a thing of the past and who would've thought that? And it's also gonna have a big effect on healthcare. And I think we're seeing some of that right now with what's going on with the weight loss drugs. And so, I mean, creative destruction is not slowing down. It's being disrupted and many industries will be disrupted and some of them will be enhanced. So I just don't think that— I'm not sure that this year is that much different. It's just more focused. And when it's that focused, people lose sight of, you know, investing principles. And some of those principles never change. It's just the money right now is so focused on those 7 companies.

So when you mentioned AI and weight loss drugs and companies that own them that could create opportunities, now those have done exceptionally well so far. I mean, certainly the AI companies. Do you mean that longer term that we're still in the early innings and those are still good opportunities? Or do you mean that there are going to be other companies and industries that are adjacent that should reap the rewards and benefit?

Yeah, I mean, I think there's going to be companies that will benefit from this, and I think there's going to be other companies that will be hurt by it. And I think there's going to be industries that are both helped by it and industries that are going to be hurt by it. But there's also, when you've got this much money so focused, you know, a lot of really good companies out there are being passed over because, you know, some of this has to do with an indexing phenomenon, but there's so many companies out there that are getting most of the money. And when you have a situation like that, you have speculative markets and I have no idea what inning we're in, but we're in a process right now of dividing that out. But there will be a lot of companies that are not being talked about that have great criteria, which we can talk about if you want, but great criteria that you would want to have for the long term. And the problem with technology and healthcare is a lot of them they'll get a lot of money and a lot of money will pour into them, but they don't stick around that long because a new technology comes out and changes that. But the one thing is investor behavior really never changes. And what we can learn from history is that people don't learn from history. All this creates a lot of short-term thinking in the markets. Markets become focused on what is in the news and money drives toward these companies and industries. And it's during this time that investment principles are forgotten. The longer the news cycle is, this is what creates this period of euphoria and investors miss out on some of these other companies that are out there that just have a long, durable competitive advantage. Historically, investors love to invest in miracles and they lose track of what they're losing for and speculation is the most dangerous when it looks the easiest. I think Howard Marks said this, that the worst loans are done in the best of times. And a lot of investing, it's the same principle that happens is people get caught up in the moment and their compass comes off of what they should really be looking for in the long term.

Right, I mean, it makes me think about the Nifty 50. And the thing, what was really interesting is, I mean, they were admittedly very strong companies. So I think that gave people the, there was an illusion of sorts. Well, price seemed almost abstract because look at these companies, how could they be, right? So there was this belief. So tell me what's the thinking, the long-term framework then? So there's, you know, what's that working hypothesis through which you filter all these investment decisions? If we're talking about the long-term, you know, is it like you need sustained earnings growth? You want earnings growth, top management, dividends? Like, what are the inputs, your operating assumptions here?

Well, I mean, you want all that, and we can talk about that, but I think one of the keys to investing is not assessing how much the industry is going to affect society or how much it will grow, but rather determining the competitive advantage of any given company and above all the durability of that advantage. A lot of healthcare companies and technology companies create a lot of short-term change, but a lot of them do not have a long-term durable competitive advantage. And this creates an opportunity for the long-term investor because when money is going into one side of the market, the other side doesn't get the funds. And so that creates other opportunities for companies that aren't trading at multiples that get crazy. And so the price you pay for something is really gonna determine what that rate of return will be over the long term.

And are there industries or—

Well, the industry, I mean, AI is gonna definitely be a great— I mean, there's gonna be great companies to invest in it. The lawyers don't want me talking about specifics, so we won't. But there's a lot of companies out there that are gonna benefit from AI. There's a lot of companies out there that are gonna benefit from the productivity that it provides. And So, you know, I can't sit here and say that AI is not gonna be a good place to invest. Right now, there's just not that many places to put the money for AI. And that's why some of these companies, some of the larger companies are getting all the funds, which is also creating this. But I think that, you know, if you wanna be a successful investor, you gotta have a good temperament. You need a temperament that neither drives, you know, drives great pleasure from being with the crowd or against the crowd. Just look at the data and assess how that affects the business. And price is very important. Relation for what you pay for an asset. If you pay too much, odds of good returns go down.

We talked last time about the role of media and news and how people perceive the world, and the world seems ever more fraught, dangerous, etc., but it's not clear entirely how much the world really is different. It's refracted through the lens of a 24/7 media cycle and people glued to their phones and whatnot. To what extent does that play a role with the behavioral dimension and maybe it's just a short-term blip and over the long-term it's like, as Warren Buffett said, I think it's like a, not a voting, but a waiting mechanism.

In the short-term it's a voting machine and in the long-term it's a waiting machine. Yeah. I mean, I think the temperament is so important for investors and you're always going to have optimism and pessimism and generally You can get too much optimism in a sector which creates pessimism in another sector. And I think that's the opportunity that's here. And sometimes that can be pervasive, sometimes specific to a company or industry. These are generally a great time to invest in that kind of environment. And it's not like all pessimism is good or bad, but a lot of pessimism creates prices for companies that make sense. Optimism is the enemy of the rational smart investor because a lot of the optimism gets priced in. Most investors get interested in companies and get really focused on them because they are so afraid of missing out. Unfortunately, during times, it drags a lot of investors in and you can't buy popular and do well.

Tell me now for advisors listening, what's some advice you might have for them? Because they're going to get calls from clients when something is taking off. The higher it goes, you're going to get more inbound interest. Like, hey, and I don't know. And what can you say on that point?

I mean, we're all— I mean, it's the fear of missing out. And I don't think it's as bad as what it was in the '90s, at least as of yet. But it's— I think the most important thing is, is you got to have a plan and you got to stick to a plan. And that's such a— that term is so thrown around out there, but it really does. It's the best risk management tool I think you can have. And also have a checklist. And so have a checklist on what you're buying and the reasons why. And just like a pilot that goes through bad weather, you need a checklist. And so do surgeons. I mean, they both have them. And that's why planes land safely. And that's why surgeons don't leave sponges in people. And so I think you got to have a really good checklist and a really good plan. And for us, when we're talking with our partners, we tell them, look, even when we're not doing anything, this is our plan. This is what we're going to do. And this is why we're sticking to it. The checklist comes into play mostly when we're looking at businesses because we want to stay in the businesses that really have 5 criteria. I think we talked about this on the last podcast. That is, we want a moat. We want a long-term, durable competitive advantage. We want a high barrier of entry. We want actual operating earnings. The power of those earnings and the financial strength they provide. Then we want management that acts like a partner and thoughtful on capital allocation. For us, we focus mostly on individual businesses, not that we don't index or use mutual funds, but our focus for our practice is more for individual companies. There are times when those companies on a calendar basis do not perform as well as some of the 7 stocks that we're talking about right now. Or we spoke about earlier. But over time, when you have a company that can raise prices, that has a moat, which is a strong brand, long-term durable competitive advantage, which means high switching costs, enables them to raise prices. I mean, these are companies that will continue to do very well over time. And they generally do outperform just because you can hold on to them for longer periods of time than the companies that are just growing really, really fast for a short period of time.

Do your clients generally adhere to the plan? I mean, to what extent do you have to twist their arm sometimes?

Yeah, I mean, there's always gonna be people that get caught up in the moment, and it's hard not to. I mean, investors are looking at the data that's coming out. I mean, the returns last year were staggering for a lot of companies. And there's a lot of talk about, well, this is different than the late '90s, and it is. I mean, these companies have real earnings. In the late '90s, they did not have earnings, and they were trading at multiples that just didn't make any sense. It's like history rhymes. And so there's a lot of speculation right now, especially in some asset classes. And it's hard to get your arms around that these companies are going to be able to grow into these multiples.

For any investor now, when you identified some of the attributes, including a wide moat, operating earnings, strong management, et cetera, Is there any that you put at the top of the list that would be the most important, or do you give each of these roughly equal weighting?

You mean the characteristics?

Yeah, yeah.

I mean, I think they all make a lot of sense, but you can look at companies that have strong brands and you can look at them and these companies, a lot of these companies have been around a long, long time, and so you can look at them and you can say, what's the goodwill? What's the price of that goodwill that they're carrying on the books for the brand? And that brand generally trades at a discount to what other tech companies' multiples are trading at with no goodwill. And in somebody's mind, that brand is very powerful and they will pay up for it so they can raise prices. If you look at some automobile companies in Europe or some high-end fashion in Paris, and you look at those companies, I mean, they raise prices, they never go on sale, they control production. And the interesting thing about price is, I mean, have you ever been on an airline where you paid a cheap price and you had an enjoyable flight? And the answer is probably no. But if you look at an automobile company where you, very hard to get that car. That car is, you know, it's in your mind that it's worth everything you're paying for it. And, you know, you can't negotiate with them and you end up paying the price and you feel great about it when you leave. And you don't feel great about it if you're flying a really bad airline and you get off the airline and it's been a terrible trip. So I think price is such a great mechanism of value. A lot of companies that have higher-priced assets that they're selling generally do very well over time.

You mentioned again these attributes, brand management, et cetera. I recognize you might be loath to mention individual stocks, but do they tend to fall into certain sectors? Where do they tend to pop up?

I think that— I mean, they don't specifically. I mean, a lot of these companies sell to wealthy people. So there's that segment. You have another segment. And so, you know, nothing really affects that. I mean, inflation doesn't affect wealthy people as much. Recessions don't affect wealthy people as much. And so they, you know, these are assets that they want to buy and they're willing to pay a price for them and they continue to do so. And history has just shown that most of these companies have been around for a long, long time. But then you'll have other companies where, I mean, we can talk about this because it's no longer around, but Wrigley Gum was a great business and it ended up being bought, I believe, by Mars in '07-'08. But if you go to the store and Wrigley Gum is there and then you have some off-brand gum, most of the time, even if Wrigley Gum is trading at 10% more than what the other gum is, people will pay that price. And that's a moat. I mean, that's a great business. You can continue to raise prices and people will continue to pay it.

Right. And that's at a price point where hardly anyone's stretching out. It might be a little bit analogous to Starbucks, for example. You pay the extra dollar or what have you for that cup and it's like, it's petty indulgence. But what else can you tell me about just for any investors listening, like what they should do for the long term?

I think that if you really, and we all have, you know, there's a, I was thinking about it when I was flying here from Chicago. There's a popcorn company in Chicago that makes popcorn. Okay, I mean, who doesn't make popcorn? And this company has a line on Michigan Avenue every day that company opens. And the reason it has that is because people love the popcorn, which I'm not sure it's much different than anything else, but they love it. And when there's a line there, people want to be a part of the line. They stand in line and they buy the popcorn. The same thing, they have one of them at O'Hare also. So it's When you can find a wonderful company, time is the friend of that company. And by holding onto those assets for long periods of time, not paying taxes, not paying capital gains, not having the friction cost of in and out, you're just in that business. Those are great businesses to have for your family, great businesses to have for your retirement because by and large, most of these pay dividends. They raise their dividend every year. By holding onto those assets for long periods of time, you're going to be able to enjoy the productivity that comes out of a really good operating business. They're boring companies, a lot of these too, by the way. It's not something you're going to talk about at a cocktail party, but these are just really good assets to hold onto for long periods of time and the compounding mechanism of not paying taxes. Is just really, really strong. And if— where people get caught up is they get caught up in the moment, they get caught up in what's going on in the world right now, they get caught up in what's going on in the news right now, what the media is talking about. And, you know, a lot of people are working from home, so they've got the TV on. And, you know, if you, if you watch any of the financial news networks, I mean, there's not that much news every day, so they just keep talking about the same thing over and over and over again. And people They hear that and they stick with it and then it becomes real to them and all their investing principles and history has just gone to the wayside.

Yeah. You know, getting back to Wrigley for a moment, it's interesting when you talk about, let's just put them into quotes, boring companies like that. They often do well precisely because they are boring. They will, because they are boring, they will not attract the hot money and the traders.

Well, they're consistent.

Yeah, they're consistent. And people will just say, I want to be able to make 10% in a day. You know, Wrigley had a very decent dividend, if I remember back in the day. And, you know, it was a slow incremental grower, but it moved ever higher over time. So you're kind of, you're not going to attract froth and that shareholder base will likely be stickier than one that's—

Absolutely.

Yeah, yeah.

Yeah, and you don't have, you know, they don't trade at multiples that get crazy either. So you're not going to get huge overvalue in a gum business. And so you can stick with it.

No pun intended.

Right. But if— and they're not— by and large, they don't do a lot of acquisitions. So there's not a lot of goodwill on the books. They stick in their circle of competence and they stay with it. A lot of these have been acquired. So, I mean, a lot of companies— there's other companies out there that kind of fit in that same mold. They're great and they're— There's a chemical company out in the West Coast that— small chemical company, great brand. You're going to pay more if you go to Home Depot to buy this for a squeak than you would a Home Depot brand. The returns on capital have been phenomenal. They're not doing it— they're just making the same chemical in the same can and people are spraying it so their doors don't squeak. The returns have been phenomenal. Nobody talks about it.

Exactly.

$3 billion company. I mean, it's just great business.

$3 billion.

$3 billion.

Yeah. Yeah. Any other final thoughts before we wrap it up?

I don't know what inning we're in of this, but I mean, you're starting to see some of the late '90s behavior. And I think that if you look at What saved a lot of people coming out of the '90s was they stuck with their financial plan, they stuck with a checklist, they stayed disciplined, stayed principled. And I think that especially advisors, I mean, you can recover from something like that where when you had a lot of companies in the '90s, now granted, this is a little different because a lot of these companies didn't have earnings, but there's a lot of companies out there right now that don't have earnings either that are trading at giant multiples that are tagging along with the AI theme. Those things generally don't end well.

Yeah. Yeah.

They don't.

Timing is just obviously hard to figure out, but that's—

Timing is hard to figure out, but I don't think they're really good investments. The other thing is I think you got to separate between what do you want to rent and what do you want to own? You can rent anything because you can get in and out of it. What you want to own though is really important. And the price you pay for that is really important because you can hold onto those assets for long, long periods of time. And the compounding mechanism is You can run the numbers and I mean, the numbers are staggering on what they do over time. And there's a lot of bumps in the road. I mean, we talked last time about railroads. I mean, railroads, boring business, not high CapEx, not the greatest business in the world, but it's pretty much a non-disruptible business.

And I think you mentioned bourbon as well.

Bourbon's kind of the same way. Bourbon might be a little affected by these weight loss drugs because it affects how people eat and drink. Bourbon has a lot of those same attributes, but if you look at bourbon or you look at high-end retail brands, railroads over time, and you just hold onto these, I think if you look up the returns, people would be absolutely shocked by what a boring railroad has done over the last 30 years.

I'd imagine that's the case. Well, thank you so much for joining us.

My pleasure. Thanks for having me again.

Thank you.

Thanks, Craig.

You got it.

Thank you.

My guest has been Michael Schaefer. For more podcasts and the latest wealth management news, visit barons.com/advisor. For The Way Forward, I'm Greg Bartellis.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.