With John Rogers, Founder of Ariel Investments, the largest minority-run mutual fund firm
John Rogers may not be a name many of you recognize, but he stands among the world’s most successful investors. He’s listed in the distinguished book by Magnus Angenfelt, The World’s 99 Greatest Investors: The Secret of Success, along with other legendary investing giants such as Warren Buffet, Sir John Templeton, and Benjamin Graham. John is Chairman, CEO, and Chief Investment Officer of Ariel Investments, and the lead portfolio manager of the Ariel Fund, the first, and now the largest, minority-managed mutual fund, which he founded in 1983.
Stocks Instead Of Toys
When John was 12-years-old, his father started buying stocks for his Christmas and birthday presents. He said that at first he was disappointed because he would have preferred toys, but eventually, he came to fall in love with the stock market and with investing and even loved reading company annual reports. And thus was born his lifelong passion for investing.
Early Mentors And Learning About Investment Styles
After majoring in economics at Princeton University, John went to work as a stockbroker at William Blair and Company. He cites Mr. Blair along with Warren Buffett and Peter lynch as early mentors who introduced him to the idea that you could be successful as an investor by investing differently than everyone else. These investing gurus were out there with their own distinctive investment approaches, and they were outperforming their peers. John said he recalls thinking, “I really want to try and do that, too. I want to start a mutual fund and compete against everyone else in the market, with my own unique approach to investing.”
Beginnings Of The Ariel Fund
Of course, becoming the first African-American mutual fund manager wasn’t the easiest thing in the world—basically because it was just uncharted territory, no one had done it before. John told Steve he will always be grateful for the people who were willing to take a chance with him as their investor at the beginning of his career.
Using Behavior As An Investing Thesis
From very early on, John understood that psychology was a significant factor in stock market investing. David Dreman, who wrote, Contrarian Investment Strategy: The Psychology of Stock Market Success, was talking about market psychology back in the early 1980s. But John said it was really only in the last 10 or 15 years that behavioral finance had become a really serious endeavor in the academic world.
All winning traders share certain psychological characteristics, one being not having an aversion to risk. If you’re going to be a successful investor, you have to be willing to accept risk, says John. Exceptional investors see risk as opportunity—they not only accept it, they embrace it, they consciously seek it out.
It’s hard to beat an efficient market, hard to beat those index funds. Maybe the one way you can do it is if you have the ability to not succumb to a lot of the normal human behavioral tendencies that we all have within us.
Behavioral Biases In The Market – Anchoring
John goes on to explain the behavioral biases that affect our ability to rationally evaluate investments. One of these biases is the “anchoring bias”. An anchor is previous knowledge or judgments that we tend to hang onto even when new, more important information has come to light. Let’s say an earnings report comes out and it’s significantly below expectations. And maybe the CEO of the company even comes out publicly and says the company had some real problems the previous quarter, problems that they seriously need to address. But what happens is this: a market analyst will still cling to their prior, more optimistic evaluation of the company—they’re still “anchored” to that. And so maybe they’ll only lower their projection for the stock’s price going forward from $30 down to $25, when a purely rational analysis of the stock would peg it closer to $20 a share. That’s anchoring bias at work.
Another bias we tend to fall prey to according to John is “recency bias.” It’s sort of the opposite of anchoring bias. With “recency bias,” we tend to put too much emphasis on recent, short-term news. An example of this would be cruise ship passengers becoming ill while on board causing the stock in that cruise company to plummet. If that one incident caused you to either sell some cruise stock at a loss or avoid buying it, then you may have been a victim of “recency bias.” Now, if you didn’t fall prone to that bias, then you might have been sharp enough to pick up some cruise line stock at a bargain price when the stocks were temporarily down. And that’s a good example of contrarian investing.
The third harmful-to-investors behavioral tendency John talks about is taking mental shortcuts. This happens when, instead of basing our evaluation of a company on just the facts, we base it on some mental association we have. For example, a company might remind you of a company that you invested in and earned a great return on. But the only similarity between the companies is that their logos look similar, which is no logical reason to buy the stock. Instead of practicing due diligence in researching and evaluating the company, we go with this positive “gut feeling” we have because of the similar logos.
It’s really easy to fall prey to taking mental shortcuts because it’s just so tempting to take a shortcut rather than wading through all the data, financial metrics, etc. What it comes down to in the end is the willingness to do the work of careful research and analysis. You’re still not going to be right all the time, but you’ll be right a lot more often than you will if you let biases rule your investment decisions.
Giving Back: Financial Literacy And The Ariel Community Academy
Founded over 20 years ago through a unique partnership between Ariel Investments and the Chicago public school system, the Ariel Community Academy offers classes from pre-K through 8th grade with a special focus on financial literacy.
The students at the Academy are taught classes in saving, investing, and the stock market and are actually given real money to invest. After the students graduate from eighth grade, they get to keep a portion of the profits that they’ve been able to create with their investments.
John is particularly proud of his involvement in this rewarding venture since he remembers how important financial mentors were in his early life.
To learn more about John Rogers and Ariel Investments, go to www.arielinvestments.com.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz Narrates: As the 2019 Berkshire Hathaway Annual Meeting cycles around once more, I have gone back into the archives to pull out a terrific interview with one of the world’s most successful investors. Let’s see how much of his philosophy still rings true today. Enjoy.
Steve Pomeranz: John Rogers, Junior might not be a name many of you recognize, but he stands alongside the world’s most successful investors. He’s listed in the distinguished book, The World’s 99 Greatest Investors, along with others like Warren Buffet. Sir John Templeton, and Benjamin Graham. John is Chairman, CEO, and Chief Investment Officer and lead portfolio manager of the Ariel Fund, which he founded in 1983. I’ve asked him to join me today to help us get our arms around this complicated thing called investing. John Rogers, Jr, hey, John, thanks for taking the time to talk with us today.
John Rogers: Sure, glad to do it.
Steve Pomeranz: So what age did you start getting interested in investing?
John Rogers: Well, I was very fortunate. My father started buying stocks for me when I was 12 years old. At first, it wasn’t fun because he would give me stocks for Christmas instead of toys and stocks for birthday presents instead of toys. But eventually, I just came to fall in love with the stock market. And fall in love with investing. I loved getting the dividend checks in the mail and I loved reading the annual reports about the various companies that he was investing his money in for me. And it just became a passion for me.
Steve Pomeranz: Just kind of a little nerdy thing you had going on there, I guess, right?
John Rogers: I guess it was. Not many of my friends had a shared experience. But eventually, I found some friends who love the markets too and had a chance to have dialogue with them as I was growing older.
Steve Pomeranz: So when you grew older and you began seriously in the investment field, who were your heroes and mentors?
John Rogers: Well, in the beginning, I had a stockbroker across the street from the campus at Princeton. And I had my father’s stock broker in Chicago who actually was the first African American stock broker on LaSalle Street in Chicago and those are my two early mentors and two early role models. And then I went to work in William Blair and Company here in Chicago when I graduated from Princeton and I became a stockbroker there. And so I had a couple of role models there. Mr. Blair was still alive who founded William Blair. And the managing partner of William Blair was a terrific mentor and really helped get me established in the investment world. But then, of course, as I was starting to think about leaving Blair after two and a half years and starting Ariel, I learned about people like John Simpleton and Warren Buffet, Peter Lynch, and they were sort of early role models. And people, geez, they were out there with their own distinctive investment approach and they were outperforming their peers, and I said I really want to try and do that too. I want to start a mutual fund and compete against everyone and with my own unique approach to investing.
Steve Pomeranz: Yeah, so they were individuals that went against the crowd or they lived in their own world and did what they wanted to do, mostly unaffected by the crowd. Was that something that particularly attracted you?
John Rogers: It really was. I remember reading about John Templeton and Warren Buffet in John Train’s book The Money Masters.
Steve Pomeranz: Yeah.
John Rogers: And I was just attracted by this independent thinking that they had and this ability to stand alone and not care what the crowd thought. And maybe because I grew up in Hyde Park, part of the University of Chicago community, where I think it’s always been known for a lot of independent thinkers. So they just sort of resonated with me when I found out you can be successful as an investor by investing differently than everyone else.
Steve Pomeranz: So how hard was it for an African-American to start a mutual fund? You were located in Chicago, right?
John Rogers: I was. It was great to be here in Chicago. That was helpful because my family was here and there was a history of successful African-American entrepreneurs. George Johnson who created Johnson Products and John Johnson who created Ebony and Jet magazine. And so there was a history of people starting early and doing something unique as entrepreneurs here in Chicago from the African-American perspective. But it was a challenge because, since there’d never been an African American money manager or mutual fund in its countries history, it was difficult getting people to think about you as a serious investor. And getting people to trust their endowment dollars, their pension dollars, their 401k dollars with you. And that was a real challenge just because there was no role models out there doing what I was trying to do back in 1983.
Steve Pomeranz: Well, let’s take a look at your investing style a little bit. By the way, I’m speaking with John Rogers Junior. He is the chairman, CEO, Chief Investment Officer, lead portfolio manager of the Ariel fund, that’s A-r-i-e-l the Ariel fund, which he founded in 1983. You stated that the stocks you like best are weighed down by behavioral biases. And in your Forbes article last year, you wrote about three of the most common behavioral quirks you try to exploit. But get into this idea of using behavior as a thesis for investing successfully.
John Rogers: Well, you know, it’s interesting that from the very beginning when I started, I understood that psychology was a part of the stock market. And David Dremen, who wrote the Contrarian Investment Strategy, talks about psychology back in the early 80s and it just became kind of an academic field, I would say in the last 15 years, where it’s become a very serious endeavor in the academic world. Kahneman won the Nobel Prize when he was at Princeton for behavioral finance issues. There’s people like Dick Thaler and Toby Moskowitz at the University of Chicago who are doing extraordinary work in this field. So there’s a lot more interest in behavioral finance and how it can impact and maybe find a way to outperform the stock market in a very efficient market. We know it’s a hard game to play. It’s hard to beat those indexes and maybe the one way you can do it is if you have you have the ability to not succumb to normal human behaviors that we all have as a part of us.
Steve Pomeranz: Well, Chicago was really the epicenter of the efficient market theory ideology, you know, the idea that markets were efficient, that you really couldn’t find irregularities or inefficiencies in the market, in other words, in order to beat the market. But it’s funny, you come from those schools and yet you didn’t adhere to that
John Rogers: Well, it’s really interesting you know. I went to the University of Chicago’s high school and I’m a trustee there and I’ve gotten to know a lot about some of the great professors there that are so well known for their theories on efficient markets. People like Eugene Fama, who just recently won the Nobel Prize, is fiercely a believer in this. But, and of course, when I was at Princeton, I got a chance to know Burton Malkiel, who wrote A Random Walk Down Wall Street, and another great leader of the efficient market hypothesis. But I think, at the same time, there’s this ongoing debate. And it’s interesting, in Chicago, you have these professors who’ve really been so innovative from the behavioral standpoint. And they’re having an ongoing debate and argument with people like Fama around whether you can really make a goal of this and outperform consistently over time. If you can really capture the essence of understanding how these behaviors can impact your decision-making in a negative way.
Steve Pomeranz: Let’s examine, John, some of these behavioral biases or quirks. The first one is anchoring; what is anchoring and what do you do with it once you recognize it?
John Rogers: I think it’s a probably for us, it’s the most important one. And a good example of anchoring is often a company will have an earnings disappointment. It’ll come out and say, we’re just not going to meet our earnings estimates for this year and next year, here are the reasons why. And immediately the analyst will start to take their earnings estimates down. But inevitably, because they’re anchored in the old earnings world, they’ll be slow to truly have new earnings estimates that properly reflect the new bad news and the new bad world. They’re sort of hanging on by a thread to their old estimates. So maybe they should have moved the estimates down, say from $3 to $2. They move them down to 2.50, and they’re slow to get it to where it needs to be. So that means for us, if we own a stock that has earnings disappointment, we’re not going to go in and buy more tomorrow when the stock is down 20% because we feel like eventually all the bad news hasn’t been reflected, but eventually, it will be and then the stock will inevitably be lower as the market realizes this new bad news and the damage that’s truly been done to its earning power And if we’re patient and can wait, we’ll be able to pick up that stock at a much lower price.
Steve Pomeranz: Yeah, that’s very interesting because that is a phenomenon you see all the time. Even when companies start to do better and earn more, analysts are less willing to increase their earning estimates as well, so they anchor on that. I’m speaking With John Rogers, Junior. He is listed in the distinguished book, The World’s 99 Greatest Investors, along with others like Warren Buffett or John Templeton and Benjamin Graham. Let’s get to the second one which is recentcy bias. What is recentcy bias?
John Rogers: That often is when people will get swept up of what’s the recent news and it will play way too much of a dramatic effect on the ability to properly analyze the business or a company. So, an example, we own some of the cruise line companies and some time ago the Carnival was hurt by one of their ships, the Corsica ship had an accident that was terrible, that was a great human tragedy. And of course, all the cruise stocks went down immediately because everyone was afraid that, oh, people will be dying on cruise ships. And so once you got beyond that, you realized over time that it’s very rare that anyone dies on a cruise ship. Much less than driving a car down the street. It eventually gets back to normal. People realize that the brand hasn’t been permanently damaged, and all that current information really shouldn’t have impacted the price of the stock that much.
Steve Pomeranz: All right, the third one is mental shortcuts. What’s a good example of using a mental shortcut, and how it can hurt or help you?
John Rogers: Well, I think one of the things Charlie, our Vice-Chairman, often talks about is we all use our gut too much and the data is what matters. So the mental shortcuts are, you’ll say that this company that I’m looking at reminds me of another company that I used to own that went up a lot.
Steve Pomeranz: [LAUGH]
John Rogers: And so I go into this with sort of this bias that this is going to be a great investment for me. And I don’t take the time to really analyze that company in depth and get all the data about the profit margins and the growth rate and the quality of the people and the moat around the industry. And you’re too quick to jump into something because it appears to be good and maybe reminds you of something that you’ve owned in the past that was successful.
Steve Pomeranz: Do people use mental shortcuts because it’s just so hard to wade through all of the data that’s hitting us? We’re just trying to figure out some couple of easy metrics to make a decision, so we create these shortcuts.
John Rogers: Exactly, and we all do it in life. You take shortcuts and it’s just better to be prudent and take the time to take the time. If you want to be a successful investor, there are no shortcuts to this. You’ve got to know that company really, really, really well. And as Warren Buffett often says, stay within your circle of competence, so you know that company, that industry, better than everyone else. You’ll make better decisions because of it. But it takes effort, it takes work, it means getting up early and staying up late and working on weekends and drilling in You know, in the world of basketball, you know, the great players, the players that took that time to work on their left hand and work on the right hand and come to practice early and shoots hours a day. There’s no shortcut to excellence.
Steve Pomeranz: Yeah, if you go to a golf tournament, you see these great players. I mean, they’re on the driving range as soon as possible. They’re always putting even though their game is over or whatever. They’re still at it still trying to perfect. You know, as an investment advisor myself, I talked to a number of people who do their own investing and they may buy and hold or they may trade actively. And some say they aren’t successful, many are not, but I think for the most part, this idea of investing seems relatively easy because it’s so easy to buy and sell a stock. Everything is so liquid, and if you can buy a stock and it can go up, it just seems like a good gamble. What do you say to that?
John Rogers: Well, we were just talking to our interns last night, our new class of eight interns, and I was saying that it’s hard to really get to know a company really really well. And it makes more sense to work with an advisor that you trust, that you’ve done your homework on, who you know is really really terrific, than to go out and try to do all this on your own. And I really do believe that. And the rules have gotten so much more complicated, there’s so many more companies, so many challenges. So unless you really really love it, a professional is going to help you through this economic maze we all have to live through.
Steve Pomeranz Narrates: Next, I ask John to tell us if the stock market (in 2014) is in a bubble and if stock prices were too high and therefore too risky. Was his prediction right? Here is his classic response.
Steve Pomeranz: I’m speaking with John Rogers Jr. He is chairman and CEO and Chief Investment Officer and Lead Portfolio Manager at the Ariel Fund. He’s also in the book, The World’s 99 Greatest Investors. So let’s talk about the market today. Now there was a time in the 1970s when Warren Buffet exclaimed that he felt like an oversexed guy in a harem because there were so many attractive choices for him to invest in. He couldn’t figure out what to decide to buy because there was so much. But five years earlier than that, he actually closed his partnership, returned investors’ money because he couldn’t find anything to buy. So the common question I get today is number one, are we in a bubble? And number two, aren’t we expecting some kind of a terrible crash? What do you think about today’s stocks? Are you able to find anything reasonably priced?
John Rogers: Yeah, there’s a lot there. Let me start with your last part of your question. First, I think that it’s harder to find new ideas for sure. It’s not like it was six years ago. Every year it gets tougher and tougher and there’s fewer and fewer sectors that are cheap and out of favor, and you have to really look at something that’s really under a cloud to find anything that appears to be bargain priced. So, definitely harder to find ideas. But I don’t think this is anywhere close to a bubble.
And you don’t see the kind of insanity that we saw with the internet bubble at its height. I think we’re maybe over-valued but not nearly bubble territory. And as Warren talked about it at the annual meeting last month, as long as we can keep the interest rates low, you know stock prices are reasonably valued. Now, I don’t think he’s going to be out there like he did and hide the financial crisis thing, it’s time to buy American companies. He realized that eventually as interest rates go higher P/E ratios will compress and inevitably we’ll have a correction. So at the end of day, I think it’s a time to be cautious but don’t be fearful that we’re going to come in to any kind of 2008-2009 crisis or any kind of collapse like we had when the internet bubble collapsed.
Steve Pomeranz: I mean, I don’t have it on any authority at all, but when you look at what Warren is really buying. He’s buying more of what he already owns, but he’s taking private companies and he’s folding them into Berkshire Hathaway. I don’t really see him going out there whole hog and buying a whole lot of publicly traded stocks at these levels. I don’t know if you see the same thing.
John Rogers: I agree, and I think he’s being cautious. You kind of read between the lines because he said he thinks interest rates ultimately will go higher and so, therefore, ultimately, he’s just saying that the market has some downside to it in this environment.
Steve Pomeranz: Yeah. Let’s talk finally about one of your efforts to help with financial literacy. The Ariel Community Academy is where students are challenged with opportunities that are real-world based and you help them manage portfolios. We got about a minute left. What is that and where can we find some information about that?
John Rogers: You know we started the Ariel community academy almost 20 years ago when Arne Duncan worked at Ariel, well before he got to be the cabinet secretary and head of the Education Department. And we believe that if you’re going to have a small public school that a financial service company’s involved in, it would make sense for us to teach the kids about the stock market and investing and saving. And we ultimately do give the kids real money to invest and let them make real choices and work with our analysts on how to do research on companies.
And when they graduate from eighth grade, they get to keep the portion of the profits that they’ve been able to create with their own money. And we tried to expose them to as much as possible over the years. We take them to the McDonald’s annual meeting, or I’m on the board directors and we bring in financial services executives to come and talk to the kids to be role models for those young people. We’re really fully immersed in this. And the final thing I would say, I think because of the success of it, President Obama asked me to chair his Council on Financial Capability for Young Americans. And so we’ve been really trying to take the Ariel model and talk about it throughout the country and hopefully inspire other financial services companies to partner with urban schools the way that we have.
Steve Pomeranz: For more information about Ariel, go to www.arielinvestments.com. Hey, John, that was a great interview. Thank you so much for joining us today, really appreciate it.
John Rogers: Thank you, it was fun.