“In the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.”
— Benjamin Graham
This quote from the father of value investing came to mind as I listened to CNBC’s Mary Thompson interview Mellody Hobson at the 65th CFA Institute Annual Conference in Chicago last week. In an hour-long discussion, Hobson, president of Ariel Investments, explained how her firm’s investment philosophy, corporate culture, and concern for society enabled the firm not only to survive the economic turbulence of the past few years but also to flourish.
Ariel Investments calls its semiannual newsletter the Patient Investor because the organization holds to the philosophy that value investing requires patience and a long-term view. These core beliefs have been the foundation of the firm’s investment thesis since its founding in 1983. As a result, Ariel’s clients have a clear understanding of what they are investing in and why.
Hobson believes that patience requires an understanding of history, because it enables you to put current events into their proper perspective. For example, although the 2008 financial crisis was unique, she believes that every generation experiences an upheaval in the financial markets that investors have never seen before. In 1929, it was the stock market crash and subsequent Depression; in 1987, it was the stock market crash; and in 2001, it was the bursting of the dot-com bubble. This is why she continues to view equities positively and does not believe that an entire generation of stock market investors has been lost as a result of the 2008 crisis.
After examining the behavior of investors following significant market dislocations, she finds that it takes them approximately five to seven years to return to the stock market. She said she expects this same phenomenon to occur with the current crisis. Because of Ariel’s long-term perspective, Hobson is neither worried about nor distracted by the short-term economic statistics that dominate the headlines and create market volatility. Although this volatility has caused many investors to sit on the sidelines, waiting for the economy to be “perfect,” she views the lack of trading volume and lack of individual investors as a bullish indicator.
Ariel’s current investment focus is on sports and sports-related companies, because these companies are profitable in both good and bad economic times. Hobson pointed to the fact that such sports venues as stadiums and arenas continued to remain full during the recession, and TV viewership of sporting events actually rose. As a result, Ariel is investing in sports-related media, technology, and real estate companies, such as Madison Square Garden and International Speedway. Following the philosophy of Warren Buffett and Charlie Munger, Hobson believes companies such as these have large and deep moats around them. (The term “moat” was first coined by Buffett to describe any type of competitive advantage a business may have that keeps its competitors at bay.)
Hobson also said that she believes the mutual fund industry has served investors well but that there is still room for improvement. She argued that mutual fund literature, in particular, needs to be more meaningful, informative, and useful to investors.
Firm Culture and Diversity
Hobson believes that her firm’s culture has been, and is, the key driver of its success — a self-correcting mechanism that “spits out” people that don’t fit in. To identify its core values, Hobson asked employees, “If you were at a cocktail party, how would you like Ariel to be described?” The firm then created a committee that is responsible for defining its culture, and designing and implementing a strategy to achieve it as well as protect it. Hobson said she is careful, however, to make sure that the culture doesn’t inhibit the creativity and development of its employees.
When asked about the lack of women and people of color in the investment industry, Hobson suggested that the audience read The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies by Scott E. Page. Hobson agrees with the book’s central tenet that teams with diverse intellects and backgrounds outperform teams with like-minded individuals. In her 29 years in the investment business, Hobson said she has seen diversity yield superior outcomes from both an investment and a corporate perspective. As a result, Ariel shies away from investing in companies that lack diversity in management or in the boardroom (say, for example, that social media giant that is about to go public).
Financial Literacy and Savings
Hobson is concerned that many baby boomers (those born between 1946 and 1964) will not have enough retirement savings to maintain their lifestyle, given that the average Social Security check is only $1,100 per month. She attributes this lack of retirement savings to the sea change that has occurred in retirement plans over the past 26 years. Since 1986, defined contribution plans, such as 401(k)s and 403(b)s, have been the fastest-growing type of retirement plan in the United States, and it has taken baby boomers a while to adjust to the fact that they — and not their employers — are now responsible for their future retirement income.
Hobson is also concerned about the racial disparity in investing. Ariel has conducted a number of studies on race and investing, and has found that African-Americans and Hispanics underutilize their 401(k)s. Because they participate less, they save less. Both groups also tend to take on more loans, make early withdrawals, and invest less in equity mutual funds. To address these issues, Hobson wants employers to make 401(k) loans more portable, increase automatic enrollment, and incorporate more target funds in their investment choices. In addition, she thinks the grace period for loan paybacks should be extended to at least six months after an employee leaves his or her company.
Hobson believes that addressing financial literacy at an early age will prevent some of the savings and investing issues that are currently affecting adults. In 1996, the city of Chicago awarded Ariel a corporate sponsorship of a public school. Ariel Community Academy offers classes from kindergarten through eighth grade, and serves 518 students and their families. At the very least, Hobson believes, finance should be added to high school curricula. After all, most high schools offer classes in shop, home economics, and automotive care. Why shouldn’t they offer a finance class? All students, regardless of occupation, will need to know about saving, budgeting, and investing once they graduate.