Survival of the Lipp-est
Every now and again we get the opportunity for a more a personal chat with one of the portfolio managers here. The opportunity recently arose again, this time with Bill Lippman: a Bronx native, tennis fanatic, and, by the way, CIO for the US Value, Franklin Equity Group. With 60-odd years in the business the always charismatic Mr. Lippman certainly can share some memorable stories. Read on…
On How He Got Into Asset Management
As a young man out of college, I was running a sales organization. It had nothing to do with the financial services industry, although I did graduate with an MBA that focused on finance. These were tough times back then, and one of our best salesman made an incredible commission that year – this was amazing – $30,000. Can you imagine such a huge amount!
He quit that year, and I called him back in and I said: “I’m just curious. You made $30,000 here this year, which was outstanding. Everyone else made $15,000 if they were lucky. Where are you going?” He said, “I’m going to work for a mutual fund organization.” I said, “You really think you’re going to make more money there than here?” He said, “Yes!”
So I looked into it. I knew about mutual funds. I had studied investments in my MBA courses. I knew that this was one smart, successful guy, and I bet he was on to one of the waves of the future…so I wound up leaving my organization and joining the same mutual fund distribution company that he did.
On His Path to Franklin Templeton Investments
My first work in this industry was for a mutual fund distributor. We didn’t manage funds; we sold them to individuals. My first boss was a guy by the name of H.L. (Jamie) Jamieson. The name is likely familiar as we have an auditorium that bears his name in our San Mateo headquarters, and his son Ed runs the growth arm of Franklin Equity Group.
I did that job for five years, got to know how it all works, felt comfortable with it, and went into Jamie’s office one day and said, “Jamie, I have to tell you that I’m leaving. I’m going to set up my own sales organization in the mutual fund industry.”
I remember his words vividly. He said to me, “That’s the dumbest thing I ever heard of, but you’ll be successful at it.” Exact words! So in a way I suppose it was a compliment. I said, “Thank you for your confidence.” And I set up my own distribution business.
So now I had my own mutual fund distribution company, and one day in walked Charlie Johnson. So he called on me! How do you like that?
After years of building up a successful distribution company, it occurred to me: Why don’t I start my own fund? So I formed a fund company called the Pilgrim Group and after about 20 years we sold the company.
I then went on to start a line of funds for a brokerage company called L.F. Rothschild. After about a year L.F. Rothschild declared bankruptcy for reasons unrelated to the mutual fund business, and I was asked to try and sell the mutual funds. We had started four small funds for them, each with about $25 million in assets.
And then one day, after all those years, in walked my good friend Charlie Johnson who said, “What are you going to do with the funds here? Why don’t you bring them into Franklin?”
Franklin at the time was managing around $42 billion, so these small new funds were just a drop in the bucket. When I inquired as to why he’d be interested in them, he said the magic words: “I want you.” So after I picked myself up off the floor, I said “You got me!” That was in early 1988, and the rest is history.
On the Definition of “Value”
I’ll keep it short and simple: quality companies at a bargain. Generally speaking, that means out-of-favor, where they’re selling at a very low price-to-earnings or a very low price-to-book value. We look for good companies that are temporarily – we hope temporarily – out of favor.
On Managing Volatility
Over the course of the last decade, there’s been much more volatility. As you know, in a way that’s terrible, and in another way it’s wonderful. It’s all how you look at it. The same volatility which can hurt your short-term performance can open up superb bargains at the same time.
So I’m not anti-volatility, as a matter of fact. It can be scary at times for investors, but it often enables us to buy quality companies at a bargain. What will happen is, for example, we own a company that posts quarterly earnings that are $0.03 less than everybody expected. In the market we’ve been in the last three years, barely missing expectations would knock the stock down 15%. That’s happened many times. It’s unreasonable, but it happens.
So now, there are two ways to react to that: One is that you can cry because your investment is now worth 85% of what it was yesterday. You lost 15% on paper. You can feel terrible about that happening to you. On the other hand, in our office, we jump up and clap our hands and say, “Let’s get some more! Let’s buy it at 15% below yesterday!” So it’s all a matter of perspective.
On Sticking to Your Guns
There are things about the way we manage money that I don’t think will ever change. For starters, our stance on value and what it means to buy quality companies hasn’t changed. We also tend to buy and hold. When we select a stock to add to a portfolio, we reason that we’ll probably be holding this stock five years from today or longer. It doesn’t always work that way, but that’s the goal.
In many cases, we’ve owned the same stock for 10 and 15 consecutive years in a portfolio. “Buy and hold” is one of those things that won’t change if you don’t let it change.
On Removing Emotions from Investment Decisions
You’ve got to be very careful or you can be swept up emotionally. But we have a list of specific requirements that we want in a company that we’ll consider buying and the emotion doesn’t show up in that at all. It’s all very clinical, actually.
It’s really not difficult to keep emotions out of it, because our team has been doing this for so long. For example, 2008 and early 2009 was a terrible market for stocks, but we saw it as a historic buying opportunity. I walked around the office saying to people, “You know they’re giving them [stocks] away today!”
For the first four-months of 2009 we did a lot of buying because we felt stocks were extremely cheap. We didn’t know how long it would take for the markets to come back, but we felt quite comfortable that they would eventually.
On the “Tech Bubble”
Well, at that time, who wanted a value stock selling at a low price to book value? That was the most ridiculous thing people could think of. Many argued that you should buy a tech stock that doesn’t make any money, just because someday you think it will.
I’d get calls from techies saying, “I have this wonderful company for you! It’s selling at a relatively low rate of revenue.” And I’d say, “Low price-to-revenues? Interesting… what’s the price-to-earnings?” “Well it’s not earning any money yet, but wait, you’ll see something.”
So I’d say “Not for me.” And then I would hear from people, “You just don’t get it.” and I’d say “You’re absolutely right, I don’t get it.” Of course in 2000, it all disappeared.