Episode 407: Don't Underestimate the Power of 'Hidden Compounders'
On this week's Stansberry Investor Hour, Dan and Corey are joined by John Barr. John is a managing director at Needham Funds, where he has served as co-portfolio manager of the Needham Growth Fund and portfolio manager of the Needham Aggressive Growth Fund for 15 years.
John kicks things off by discussing his investment philosophy, what Needham Funds does, and the power of compounding. He says he tries to find companies that are hidden compounders that will eventually turn into quality compounders. This leads John to share the four criteria he looks for when trying to find hidden compounders. He names two such companies that fit the criteria, breaking down the thought process for Needham's investing in each one. Speaking about one of them, LeMaitre Vascular, he comments...
This is a 20-bagger for us. And it has been run by the son of the founder... They have just done an incredible job of getting strong returns, expanding margins, and growing the top line... So this is clearly a quality compounder. It's no longer hidden. The new investments have paid off.
Next, John explains why he's such a fan of family-run businesses and names a power-conversion company he likes that's still being led by its founder. He then discusses what sets Needham apart from other funds, including its preference to hold on to quality companies for a long time – even through 50% drawdowns. And John details how he decides when to actually sell a company, although he notes that he made a mistake with Dick's Sporting Goods...
We had bought it well in 2009 and then got concerned that Amazon was going to take over the sporting-goods category, even though we liked Dick's approach to e-commerce. And so the stock had pulled back, but then it rallied from $25 to $30, and we got a good sale at $30, and then it may have fallen after that. Well, take a look at Dick's right now [trading at around $200], and you will realize that the risk-reward was just completely off.
Finally, John reminds investors to know and play to their strengths. And he urges them to ignore all the noise in the news, as being successful in the markets requires a fair amount of optimism about the future. Talking broadly, John says that Needham has been investing in infrastructure for the past decade-plus and more recently has been looking at defense companies. He names military shipbuilder Huntington Ingalls Industries as a solid pick today. Plus, he names a couple skilled-labor-school stocks he likes, as skilled labor is set to remain in high demand...
They do welding and HVAC and automotive. We have a huge deficit in skilled labor as the workforce retires. And we need them for shipbuilding. We need them for everything. And there's strong demand for these graduates who come out with great-paying jobs. And I think these companies can be a lot larger.
Click here or on the image below to watch the video interview with John right now. For the full audio episode, click here.
(Additional past episodes are located here.)
The transcript is coming soon.
This Week's Guest
John Barr has been the co-portfolio manager of the Needham Growth Fund and portfolio manager of the Needham Aggressive Growth Fund since 2010. He first spent 14 years in the electronic design automation industry. Then, switching to finance, he started on Wall Street in 1995 at Needham as a sell-side analyst following technical software companies. After that, John served as a senior analyst at wealth-management firm Robertson Stephens, as a portfolio manager and analyst at Buckingham Capital Management, and as a member of semiconductor-software company Coventor's board of directors. He is a graduate of Colgate University and Harvard Business School.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of The Stansberry Daily Digest. Today, we talk with John Barr of Needham Funds.
Dan Ferris: John is a long-term, bottom-up investor looking for great, high-quality companies before they become high-quality companies. It's something I know you'll be very interested to hear about. Let's talk with John Barr. Let's do it right now.
[Music]
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The last time the U.S. economy looked like this, stocks didn't move for 16 years, and many investors lost 80% of their wealth. Learn the steps you can take right away to protect and potentially grow your holdings many times over at www.americandarkday.com.
[Music]
Dan Ferris: John, welcome to the show. Thanks for being here.
John Barr: Dan, great to be back with you.
Dan Ferris: All right. I was looking through the archives, and you seem to be a new guest to the show. I like to start off in a certain way with new guests, and especially someone in your business at Needham. So the basic question, then, John, is if you and I were sitting at a bar and ran into each other and the subject of investing came up, and I said, "Oh, what kind of an investor are you?" What would be your answer to that?
John Barr: A patient, long-term investor who looks to take advantage of compounding. And I term my investment process from hidden to quality compounders.
Dan Ferris: Oh, I see.
John Barr: So it's really – it's really defined by the hidden to quality compounders.
Dan Ferris: I see. Hidden to quality. So you find them when they're hidden, and hopefully, they become quality. Is that correct?
John Barr: Exactly right. Find them when they're hidden, hold them through the transition, and then hold them longer when they become quality.
Dan Ferris: All right. Now I talked with someone from Needham many, many years ago. Would you say that your perspective is different from the rest of the folks at Needham, or are you kind of all generally in the bucket that you've described for yourself?
John Barr: Well, at Needham Funds, we are part of the Needham Group. And Needham Funds, we have three mutual funds that invest in small- and mid-cap growth equities. And Needham Group, the other side of the firm, is investment banking, research, institutional sales, and trading and investment banking for small- and mid-cap companies, and growth companies.
The firm was started in 1985 and we launched the first mutual fund in 1996, so we've been around for a long time doing this. And on our side, the mutual-fund side, we're a small team. There are two portfolio managers, and as I said, there are three funds. And I manage the Needham Aggressive Growth Fund, which is categorized as small-cap growth by Morningstar and Lipper.
Dan Ferris: Aggressive growth. That sounds interesting to me because the last several years, growth has been on everyone's mind. That's what people wanted to go after, from the up-and-coming growers, all the way up to the solid mega-cap growers. When did the aggressive growth fund start?
John Barr: Great question. And I see the curiosity in this line of questioning − 2001. So the fund was launched in 2001, so you can imagine that an aggressive growth fund in 2001 was quite appropriate.
Dan Ferris: Yeah. Yeah.
John Barr: But as a firm and as fund managers, we're quite conservative. And so – as any partnership that's been around for almost 40 years, you would expect. When we talk about the criteria that I look for, margin of safety is a key part of that. So valuation sensitivity is important.
So I guess in the old days you would have called it growth at a reasonable price, but I think it's more nuanced than that now.
Dan Ferris: Yeah, it's been quite a while, hasn't it, since the terms growth and value kind of identified two totally separate buckets, right? It used to be value was what we would now call cigar butt kind of bucket, and then growth was growing companies. But it's not – I mean, even like, Warren Buffet, among other people, I suppose, has probably done more to just sort of disabuse us of that notion, and growth and value, they're kind of – they're joined at the hip in most folks' mind, aren't they?
John Barr: Right. And in my case, I'm looking for companies that are reasonably valued today, but with very low turnover. And last quarter, we were 7% annualized, so looking at a 14-year holding period, we really are looking for businesses that are going to become the quality compounders, that are great, and you can't do that just looking in the value bucket.
You also certainly can't do it going for high-value growth companies. So we're growth investors, but with a different angle on it.
Corey McLaughlin: Yeah, and John, that's one of the things – I read one of your recent research reports, and you highlighted your "Super Seven" in growth. Now that is not the Magnificent Seven, right? That is – we're talking about complete – not complete opposite, but you can describe how your approach is not that. When a casual person thinks growth or high growth or whatever, that's not what you're –
John Barr: Yeah, I was thinking I would call them – Corey, I was thinking I'd call them the "Needham Aggressive Growth Mag Seven," but then we thought, we don't want any association with that.
Corey McLaughlin: Yeah.
John Barr: So we call them the Super Seven. And yeah, so these are – so let me just step back a little bit. So our mission is to create wealth for long-term investors. And as of January 1, this is the 15th anniversary of my managing the fund. So now we've got a –
Dan Ferris: Oh, congrats. Nice.
John Barr: – 15-year track record. And over that time frame, we've compounded it over 14% a year, and the Russell 2000 growth has compounded at around 10%. That 4% per year compounded, if you put $10,000 with us into the fund, the Needham Aggressive Growth Fund, at the beginning, you'd have approximately $75,000 today. And if you had put it into the Russell 2000 growth, you'd have about $45,000. So that just shows the power of compounding at slightly higher rates.
Dan Ferris: Mhm.
John Barr: If you had been in in 15-year Treasurys, and reinvested every year at the same rate, 3.7%, you would have less than half of what you [would have] had if you just invested in the index. So appropriate investing and being able to beat the market really can create wealth over the long term.
So that's our mission. And I've found, and in that research paper, which we called "The Power of Long-Term Leadership: The Needham Aggressive Growth Fund's Super Seven," there's seven companies that we invested in over this time horizon that contributed over half of our alpha.
And the thing that I was looking for here − in a hidden compounder, there are four criteria that we look for. The first is that the company has an established business but is investing in something new that the market doesn't yet understand. So we're looking for small caps that have a stable business that are investing in something new.
That also helps us protect on the downside because it has that established or legacy business. And if the new thing doesn't pan out, we have downside protection. But in these cases, these Super Seven, and about ten others, the new thing really did pan out.
So that new business is criteria one. Criteria two is great management. And everybody says they invest in great managers. And to me, I did the shortcut of founders, family, or long-tenured, and then this growth-factor paper that I wrote highlighted seven of those that are in those three categories. And they're great stock stories to tell.
And then the third criteria is margin of safety valuation. And the fourth is they're in a big market − they're addressing a potentially big market, because if we're going to invest for 10 to 15 years, a company needs to get a lot bigger to produce a market-beating return.
Dan Ferris: Would you care to share one of those names with us and tell our listeners just sort of how it evolved, and the new thing they did, and the stable business, and so forth?
John Barr: Yes. Well, why don't we start with two of the family run businesses? No. 1 is LeMaitre Vascular, and the symbol is LMAT. We bought it in 2008, so my predecessor actually bought it. And it was an IPO a year or two before. The company makes vascular devices, and sell to vascular surgeons. And they are [experts] in developing and acquiring niche products that they can put through their sales force.
When we bought it, it was a sub-$100 million market cap, and it was down from its IPO. Stock was at $3 or $4, and closed the year at $90 or so. So this is 20-bagger for us. And it has been run by the son of the founder, George LeMaitre Sr., doctor. And they have just done an incredible job of getting strong returns, expanding margins, and growing the top line over this 16 years that we've owned the company.
So this is clearly a quality compounder. It's no longer hidden. The new investments have paid off, and it has been a great returner. So as CEO, George has generated 3,200% return, or 32X, since the day we bought, versus about a tenth of that for the market. So it shows the power of being right, and great management. A second one – and had no research coverage at the beginning. Now it has some.
Oil-Dri Corporation of America is the second one I'll highlight. We bought this in 2012. It is currently about a $700 million market cap, and it was a couple hundred when we bought it, run by the third generation. So Dan Jaffee is grandson of the founder. And it adds value to absorbent material, so specialty clays. And it started as clay absorbents around a factory, in World War II. And then today, they have expanded into cat litter, including lightweight cat litter, where they are one of the leaders, and then there's also some very interesting specialty materials applications in broader industry.
And the management doesn't meet with the Street. There's no coverage. They do a quarterly conference call, and that's about it. He was told long ago by one of his board members that, put up the results and the stock will take care of itself. And it has also significantly outperformed, and I think still is very attractively valued at around 12 times earnings.
Dan Ferris: Is that forward earnings?
John Barr: Yes. Yeah.
Dan Ferris: Wow. I mean –
John Barr: And that's – those are my projections. So there are no Street projections.
Dan Ferris: Right.
John Barr: And I could very well be wrong.
Dan Ferris: But it even – the sort of headline P/E, if you just look at Yahoo! Finance or something, is like 14.5 trailing.
John Barr: Yeah. Trailing, right?
Dan Ferris: Which is not – I mean, at this moment, for a high-quality company, is not expensive at all. You know?
John Barr: Right.
Dan Ferris: For quality right now, you could easily pay double that. Easily. Right?
John Barr: Right.
Dan Ferris: So that's pretty neat. You've put something on my radar screen here. That's pretty cool. In the second case, Oil-Dri, we had that clay business, and then you told us the new stuff. I'm sorry. Can you take me back and just remind me what was the established thing and the new thing at LeMaitre?
John Barr: Oh, the established thing were the first products that they launched, the first one being called a Valvulotome, which Dr. LeMaitre invented. And it was for reversing blood flow in vascular surgery in the legs, so getting better blood flow down to the peripheries, the feet.
And then they have done a series, probably introduced another 20 products, 30 products, and there is a distribution. Some of them work quite well. Some of them don't. But in aggregate, they produce those strong results.
Dan Ferris: All right. I noticed – I just was reading blurbs as soon as you identified which companies you were talking about, and they were talking about these cryo human-tissue grafts, which sounds to me like a highly, highly technical thing that – I mean, you tell me. It doesn't sound like something that's really easy to imitate.
John Barr: Right. I think the competitive advantage comes from just more the niche that these are, rather than the technology that is going into them.
Dan Ferris: OK. Right.
John Barr: And they are from $15 [million] to $60 million businesses, so they're big enough that they can take advantage of their international distribution and regulation. And regulation in Europe in particular is a really big deal for medical devices. And it's a barrier to entry for small companies. And then the big companies, these niche products are too small to worry about. So they really have a unique niche.
Corey McLaughlin: Yeah. That's one of the things that strikes me from all these businesses − and we could talk about a lot of different things with this approach, but I assume that the vascular company, they were pioneering, right, at the time… And I assume they didn't really have a lot of – you could tell me. Did they have a lot of competition at the beginning? Or were they just the first in? And then with that, how do you end up spotting these companies? Because there's a lot of companies out there, and like you said, I think a lot of them were trading at like single digit – in dollars when you guys bought them. So how do you end up finding these companies, and that process, too?
John Barr: Well, you're right about the lack of competition at the beginning. He was the first. Dr. LeMaitre started in 1992 and then the son took over to commercialize the business about five years later. So it was really a science project at the beginning, and then the son took over and really put the commercial aspects around it.
Where do we find it? So being part of Needham − Needham is focused on growth companies. Needham hosts a conference every year, the Needham Growth Conference, which kicks off in January, and there are about 400 companies that present there − and we're a buy side, just like anyone else is. But I will see ten companies a day, as will my colleagues. So we'll see a number of companies that are new. We'll see a number of companies that we own. And I also like to see private companies, because that gives us a good sense for what's coming in the public markets later and also gives you a good sense of trends.
And then just having been at this for so long, we generally know of just about everything. And when something comes on the radar screen that we haven't seen, that seems to fit the criteria, we're able to do a pretty quick deep dive.
Corey McLaughlin: Makes sense. And one of those criteria you talk about, the family-owned, family-run businesses. If you could explain to people, why do you like that type of management so much? What benefits does it have? I think in the case of the Oil-Dri one, that's the third generation, right? So we're going – just why do you like that structure so much?
John Barr: Yeah. They tend to think longer term. And they are also able to make investments that may not pay off in the short term. And I'll cite – well, Oil-Dri made significant investments in animal health. So, using these specialty clays for gut health in swine and poultry, with the objective of replacing antibiotics in the food system. And they invested for – since we owned it, so ten years in this, and it's just started to pay off in the last couple of years, as family run and controlled. So family controls the shareholder vote here. They are able to look beyond short-term shareholder pressures.
And I might cite another of the companies that we own, which is Vicor, which is a power-conversion company, and the symbol is VICR. And this is in the founder bucket in our Super Seven. And their established business was power-conversion devices that were used broadly in industry. And for 20 years, they invested in a modular trunk version of it and only started to get payoffs after about 15 years of those investments. And again, it's a controlled vote, dual class share structure, with the founder still as CEO. So another long-term-thinking CEO.
Dan Ferris: I have a question that's – it's not completely off topic, but I'm curious. Why doesn't Needham – it sounds like Needham doesn't have the typical institutional prohibition against buying stocks under $10 a share… which never made any sense to me, but it is what it is. It's pretty widespread. Why don't you guys have that?
John Barr: I mean, to look at where we came from − so we launched these funds in '96, and we launched my fund in '01, and then our third fund in '02. And they're predominantly friends, family, and employees of Needham and company. And our mission is to create wealth for long-term investors.
So the funds currently have a little over $1 billion in assets in the three funds, so we're out to create wealth. We're not out to – we're not part of the big fund complex. It's a different business model.
Dan Ferris: That's a good answer. I thought it was going to be as simple as, "Well, you can't do this without buying a single digit – right? You can't find those $100 million bets." You know?
John Barr: It's true. A lot of these Super Seven – and then I added appendix A, the Super Seven Plus Ten. So these are the 17 that contributed over 80%. And just eyeballing it, half of them were under $5 to start.
Dan Ferris: Right. So 17 out of how many would – I realize it's over a long period of time. You cut a lot of losers, whatever. Seventeen out of how many? I'm just curious, if you have a ballpark.
John Barr: I can just describe that pipeline. So about half of the hidden compounders make it to the transition, and then less half of those, maybe 25%, make it to quality. And then we come up with 17 at the end. It's less than 10% of the total. So with our low turnover, there are probably a couple hundred companies that have been in the portfolio over the 15 years.
Dan Ferris: It's so interesting, isn't it, that that phenomenon of a few names getting all the return, it goes through every strategy. VC, venture capital – a friend of ours runs a large portfolio of maybe 100, at any given time, 100 small-cap or nano-cap – tiny, exploration mining − stocks. You know, what you're doing is completely different from either of those. It's very, very interesting how you're really – it is – and it is kind of a mining operation, isn't it? We move a large quantity of Earth, many names in the pipeline, and then you get 17 grams of gold in the end of it. It's pretty neat.
And Warren Buffett has said the same thing about his portfolio. Most of the result came from – I think it was 14 or 15 names over decades and decades.
John Barr: Yeah, so the inspiration – the insight to me, having been around this business for a long time, was really to hold on to them when they're in that quality stage.
Dan Ferris: Yes. Yes.
John Barr: We start very small, so 30 to 50 basis points, so if they go wrong, our downside loss is limited. And then we add when they start to show the progress in the late hidden through the transition. And then once they're quality, as I say, even the quants can find them.
Dan Ferris: Yeah.
John Barr: But the particular insight was hold on. And this is something else that's a little different than you'd find at a bigger, more institutional money manager, is that we're a small-cap fund, and that's important, but some of these companies grow to be into the mid-cap or even large-cap range with the success over time. And I'm not forced to sell, so I can hold on –
[Crosstalk]
Dan Ferris: You know, this is really – I'm sorry. This is really interesting to me. I'll tell you why. Because mostly, successful investors, they really do one thing, right? They do one thing. They don't do ten different strategies. They have their one thing, and they're great at it.
You're really good at a couple of things here, aren't you? You find the up and comers, right, when they're very small, and maybe they have their established business, but an established business with making some investments in a new thing. That's not necessarily, as you've pointed out, going to turn into quality.
And then you have to hold them. Then you become a quality investor, somewhere, hopefully, right, fingers crossed, along the way. That's pretty impressive. That is – yeah.
John Barr: You've broken it into the pieces. There are a couple of things that we have to do, and one is –
[Crosstalk]
Dan Ferris: You need two big skills there.
John Barr: And then you – then you've got to become a larger cap, hold-on investor, too.
Dan Ferris: How do you do that? Do you have separate teams or something? So you're the quality guys, OK? These names have made it into quality. We're going to go back to searching for the smaller stuff that we hope will turn into that.
John Barr: Well, our team is – there are two of us as portfolio managers, and then the rest of the team is four people, and that includes everything. So you're pretty well looking at the team. But no, the other – we are a great team, but we are a small team.
Dan Ferris: Wow.
John Barr: But no, a lot of the effort goes into finding the new, and then lots of effort going into deciding which of the hidden compounders are going to get the new capital, and where are we investing to really grow those from the 50 basis points up to the 200 basis points?
Once they hit quality, we don't add more to those positions. We will trim when they hit 10% of the portfolio, rarely on valuation. And so we're not the best seller. We're not picking that top.
This leads to another study that I did, which was kind of interesting, that all of these had over 50% drawdowns or sell-offs in the periods that we owned them, every single one of them. And the better course of action was to hold on. And, of course, our thesis has to be on track, but every stock sold off a lot.
Dan Ferris: You know –
John Barr: And then turned into a winner.
Dan Ferris: That's interesting to me, because in our business, if you hold too many stocks that are down 50%, our readers will crucify us. They will absolutely not tolerate it. And I am not a much bigger deal in our industry because I have occasionally held them, you know? And the extent to which I didn't was a mistake. I just – I wanted to underscore for our readers, back when you were talking about holding, and now you're talking about holding again, and not worrying about being a great seller, I can't underscore that enough for our listener. The two biggest mistakes I've made in about 30 years here are buying not-so-great – I would say buying garbage, but let's just saying buying not-so-great companies, and hanging on way too long, even if it's just a year or two, and then buying really high-quality companies that were doing just fine, and selling them because the stock price was down a bit. Big mistakes, you know. If a company is still a great company, there's no reason to do anything. Let the market do what it's going to do, and it'll reward the quality over time, which you've managed to deliver that service over quite an extensive period of time, which is pretty impressive.
And the dual job is going to be – you know, long after we hit stop with this recording, I'm going to be thinking about this, and I'm going to be wanting to learn even more about Needham than we did before we talked to you, because that is so unusual. People talk about this, don't they, John? A lot of people talk about doing this. They say, "We want to find the great compounders before they're great compounders." But you have a track record of doing it, and I don't think there are a lot of people who can demonstrate that. It's hard.
John Barr: I think looking in the small-cap bucket gives us an advantage. And I think being able to hold them gives us another advantage. And it all goes back to our mission, which is to create wealth for long-term investors.
Dan Ferris: Right. Let me ask you a question real quick. How many names – as I look at the top ten of the aggressive growth, Yahoo says it's 32% for the top ten names. So how many names total are in that right now?
John Barr: There are a little over 80.
Dan Ferris: Eighty? That's –
John Barr: Eighty, which is a high number for me right now. We have typically been more in the 60 to 70 range.
Dan Ferris: Still a goodly number, and something that I think an individual would have quite a bit of time keeping up with.
John Barr: Yes.
Dan Ferris: You need a team of six for that. So I think that's important, too, because we talked about the big pipeline, and then 17 super stocks that made it. And so at any given time, you're holding 60, 70, 80 names. I just want to give the listener an idea of what's required here, because a lot – I've known small-cap managers who were focused. "Well, we run a concentrated portfolio." And I'm like – and they'd want to compound over time, and I just think, you know – my examples of VC plus the mining guy plus what you do, it's all – there's a thread running through here. You've got to hold a lot of names, because you can never be 100% sure which one of them is going to be one of those 17, right? You don't know that ahead of time, right?
John Barr: Right. And as I look back on my writings or interviews and companies I've featured, a lot of them didn't work. They were in that 50% that were not the ones. So you just don't know which of them, which is why we like to put the capital to work once they've started to show that they're entering the transition or entering the quality phases.
Dan Ferris: Right.
Corey McLaughlin: A lot of lessons here in portfolio management.
Dan Ferris: That's a key – yeah. Yeah.
Corey McLaughlin: Like just portfolio management in general for people. How do you know when – we're talking about obviously you want to hold long-term winners. How do you know the opposite? When you're getting rid of something? What do you think through to that point? And how much do you have to see before you do that?
John Barr: So look at the opposite of the criteria. So, a big one is management change. If you've had either family – well, any time there's a CEO change, we look at it quite carefully, and we're not keen on the hired gun who's got great experience. We really like somebody who's grown up inside the company, or a founder or family. So management change is one.
And then second is just realizing that the new thing is not going to play out, and then we'll figure what we think it's worth and look to exit. But they're small caps, and in many cases, we are the top active manager that holds these. So on the cap table, we're pretty far up there, so we're patient sellers as well.
Corey McLaughlin: Got you.
Dan Ferris: Patience.
John Barr: Patient buyers, patient holders, and patient sellers.
Dan Ferris: Patience. It's so hard. People just – you just want to mess with it. You know, people just want to do something. They want action in their portfolio. And the funny thing is, the action tends to – one of Charlie Munger's great quotes is, "The best thing that you can do is not interrupt the compounding unnecessarily," right? That's the key. And everybody wants to interrupt it. You know, you sell out of these names because you're bored with them, and you've just pissed away ten years of wealth creation. But you don't see it, because it's not there yet. It's in the future. It's hard. It's emotionally very hard to do what you do.
John Barr: On that score, I did a write-up about a year ago on our growth factor, and featured some companies that have worked, but then an example of exactly what you've just described, Dan, was Dick's Sporting Goods. We had bought it well in 2009, and then got concerned that Amazon was going to take over the sporting-goods category even though we liked Dick's approach to e-commerce.
Dan Ferris: Yeah.
John Barr: And so the stock had pulled back, but then it rallied from $25 to $30, and, oh, we've got a good sale at $30, and then it may have fallen after that. Well, take a look at Dick's right now.
Dan Ferris: Yeah.
John Barr: And you'll realize that the risk/reward was just completely off –
Dan Ferris: Two hundred seven.
John Barr: There you go.
Dan Ferris: The quote.
John Barr: So my sale at $30 in 2017 or so, not so good.
Dan Ferris: Right. It's the exact mistake we just talked about. I've made it a million times.
John Barr: Exactly.
Dan Ferris: Even you guys make it, and you're good at this. So it's really hard. We covered Dick's in our newsletter, Extreme Value.
John Barr: Ah.
Dan Ferris: Really good quality company.
John Barr: Yeah.
Dan Ferris: And the thing was, like just bricks and mortar in general retail is like – I think people consider that really, really difficult now, which it's not wrong. But it doesn't mean everything should be avoided.
John Barr: Yeah. And they just did a great job of combining the e-commerce with the bricks and mortar.
Dan Ferris: And the bricks and mortar is beautiful when you go in there. I mean, it's gorgeous, you know. The rock wall, and just the whole place is beautiful. And the little shoe area is really cool. The whole thing is really well done. And you're right. Yeah. E-commerce, you know. You just go online and drive right up to the front door, and away you go.
John Barr: So those were – Dick's is a good example –
Dan Ferris: That'll happen.
John Barr: – of leaving it on the table, and not having patience, although we had great reasons. I mean, it seemed like Amazon was really going to come for that business.
Dan Ferris: Yeah. Who could fault anybody for being afraid of Amazon? You know? Not being afraid of Amazon was a mistake far more often than being afraid of Amazon.
John Barr: That's right.
Dan Ferris: So, you know? We can let that one slide, for sure. But overall, the result you guys generated is so good, right? And it's incredible, too. You can get a fantastic result making errors that take away ten years of great compounding. It's all about – and we always get to this point with the long-term, sort of bottom-up fundamental people. You've just got to keep working that process, don't you? Like you can't doubt the process when you know it works.
John Barr: Right. And I've found it's also keep looking to understand yourself and your strengths. And that's another Munger quote about staying in your lane, and just – only do what you know. And if you have to ask the question, you don't know.
Dan Ferris: That's well said. Yeah. Do what you know. If you have to ask, you don't know. It reminds me of something – I heard an anecdote about Mozart once, where someone was talking about how he started writing symphonies at some ridiculous age, like 7 years old or something like that, and – I don't know the exact age, but it was something like that. And they said, "Wow, that is so incredible." And at the time, it was a conversation, as I recall, between a teacher and a student – this is many years ago, so forgive me for the vagueness of it. But it was between a teacher and a student, and ultimately, the teacher wound up saying to the student − who was asking them about how to write symphonies − and the teacher in the end said – it was in a master class, I remember. And the teacher said, "Well, Mozart didn't ask a teacher how to write – he wasn't asking anybody how to do it, right? He found his lane and he stepped on the gas pedal and stayed in it, and that was that."
And you guys are – it's about finding your lane, and if you have to ask, you don't know. Mozart didn't have to ask. You're not asking. You're just doing it.
And that gets into a topic – I'm glad you sort of broached this. You have to know yourself and learn yourself. We've written about this. I've written about it a few times, that investing is such a personal thing. People want to ask people like us, "What should I do?" And so much depends on them, their risk tolerance and their goals and just their income and their assets and where they are and what they want to do. It's a very personal thing. And their personality. Can you really hold on for 15 years?
Now most people – a friend of mine says they can't hold over a long weekend. So you've got to know yourself, don't you? And you've found a team of people who kind of do that well. This is – all this stuff is very rare. People think the stock market is easy, but it's not about the market. It's about being a good investor, and it's very rare, isn't it? It's a rare combination of traits.
John Barr: Right. And it's important, yeah, to know yourself, and to – and then figure out how that can apply in these crazy markets to produce wealth. And anything that's short term, good luck. It may work, may not work. But the market does give you opportunities if you take advantage of time arbitrage to outperform and create wealth.
Dan Ferris: So I'm glad you said –
[Crosstalk]
Dan Ferris: I'm glad you said the words "these crazy markets," because it's a typical thing – yet another mistake I've made – to take a change of – in the White House, whether it's from Democrat to Republican, or just this president to that new president, for whatever reason. And you often hear people say things like, "If so-and-so gets elected, I'm selling and I'm moving out of the country," etc., etc.
And it's been a consistent error, if you just look back over the last 20 years. You should have just held. You shouldn't have worried about it at all. And it always seems urgent at the time. It seems urgent to many people right now to be careful. What is Trump doing? What's the implication of tariff policy, is a big one, etc. What's the implication of trying to make the government more efficient? What are all the implications of that?
But to be a bottom-up compounder over a long period of time, you largely have to ignore all this allegedly important macro stuff, do you not?
John Barr: Oh, boy. Right on, Dan. I'll go to Peter Lynch in 1993, "You can find good reasons to scuttle your equities in every morning paper and on every broadcast of the nightly news." Now the morning paper and the nightly news are no longer a thing, but you can still find even more reasons to –
Corey McLaughlin: Twenty-four hours a day.
John Barr: – scuttle your equities.
Dan Ferris: Yeah.
John Barr: On X and on the Internet, every day. As I think back over the last 15 years, just on this fund, there was always something that seemed like it was just the most pressing geopolitical matter, and then you think back, even to like a year or two ago, and you hardly remember what they were.
I think there are a couple of things that are important. No. 1, you do have to be an optimist to do this. You have to think that things are going to work out, and this is not the one that's the end of the United States or civilization. So you've got to be an optimist.
And I think you have to look out X-number of years and say, "Things are going to be OK, no matter what happens in the next three, six, nine, 12 months." If you take those views, if you're an optimist, and you look out a period of time… And then you overlay what you think your specific companies are doing and can do in that time frame, that's been the secret for me.
Dan Ferris: Right.
Corey McLaughlin: I would think that the companies you're focused on, too, are – like they're thinking the same way, right? They don't want to be succumb to whatever geopolitical pressures that may come up, too. So they're trying to – I mean, they would –
John Barr: Right.
Corey McLaughlin: They want to be immune to that, too, at some level, right?
John Barr: Right. We have smart-actor CEOs who are going to figure out how to navigate their way through whatever the geopolitical situation is.
Dan Ferris: Right. And when the situation changes –
John Barr: To create value for their –
Dan Ferris: When the situation changes, it tends to be, "OK, now here's a new regime, and the change is done," and businesses do what? They dynamically figure it out –
John Barr: They adapt.
Dan Ferris: – and change and innovate and they figure it out and continue to operate. So it pays to be an optimist, which is –
John Barr: Now we also have had tailwinds forever of monetary inflation, and with a lot of debt, and unfunded liabilities, it is kind of the only way forward. So that's kind of my shortcut for macro. And we don't know what may happen in the short term, but –
Dan Ferris: Right. That is a good shortcut, isn't it? Because in the end, throughout all history, from the very first government ever, we know that they're going to sacrifice the currency to save the banks and the bond markets, right? That's just the way –
John Barr: Exactly.
Dan Ferris: That's the way it's going to be. And if you own a productive asset that's getting 20%, 30%, 50% on capital or something, these huge, high numbers that some of these businesses can do, you're not going to suffer. You're going to do just fine.
John Barr: Right.
Dan Ferris: You know?
John Barr: So monetary debasement is – currency debasement has been time immemorial.
Dan Ferris: Yeah.
John Barr: And these companies can adapt and produce returns to at least preserve value. And if you can outperform, you can stay ahead of the curve, with equities. You can't do it with bonds.
Dan Ferris: No. Which is – not to say that owning bonds is a bad thing, whatever. People get to different points in their lives, when they want to preserve more than they want to grow, and so forth. But if you want to grow –
John Barr: Absolutely right.
Dan Ferris: – big numbers over long periods of time, the folks within the sound of our voice are not going to do it by taking fliers on options or futures or any kind of crazy, risky, highly difficult thing like that. It's so much simpler for them to just buy good-quality companies and hold them for as long as possible. That's the most direct sort of – in my mind, simple but not easy path to really much greater wealth than most folks are going to find any other way. But it's really hard.
John Barr: To go to another Peter Lynch one up on Wall Street, which was, "Invest in things that you know."
Dan Ferris: Yeah.
John Barr: And you can have an edge on the market.
Dan Ferris: Right.
John Barr: And at its essence, that's what we try to do at Needham Funds.
Dan Ferris: Yeah. Circle of competence. It doesn't matter how big your circle of competence is, but man, you've got to respect the boundaries, right? You don't have to know a lot, but you'd better not – you'd better not go outside that circle. And, of course, you can work to expand the circle over time, can't you? You must – you guys must have had to do that, right?
John Barr: Right. And always looking into new areas. So I described our process, but tactically, where have we invested? It's been in the picks and shovels of infrastructure, broadly defined, and that does include some concrete and engineering and construction, but it also includes technology infrastructure, and that's data centers and semiconductor manufacturing.
And we've been on this for 15 years. And then came AI, which exploded the interest in these areas. But infrastructure broadly defined is really where we've been focused. And we then [expanded] our knowledge and looked into new areas. And in the last few areas, one of those new areas has been defense, so looking at defense as a critical part of infrastructure. So just an example.
Dan Ferris: Did you buy any of the zippy European defense stocks? I looked at a couple of those. Rhine Metal has had quite a hell of an incredible run.
John Barr: Boy, it just has. It sure has. But no, we're focused on North American equities, for the most part, like 95%.
Dan Ferris: Oh. Mhm.
John Barr: So we did invest in Huntington Ingalls, which has Newport News [Shipbuilding]. They are the sole maker of the nuclear carriers, and have a duopoly in nuclear subs. And then they also have the Pascagoula shipyards, which does other naval vessels. And as shipbuilding is a major problem/opportunity for the country – China has 230 times the shipbuilding capacity of the United States, and this needs to be addressed, both from a commercial maritime, but also military. And Huntington Ingalls is one of the premiere shipbuilders in the U.S. So just an example of what you pointed out. This is a new area for us in the last few years.
Dan Ferris: Two hundred thirty times is the number that will stick in my head from that bit of conversation. Wow. I did not know it was like that. I knew it was a lot more, but I hadn't heard that number. That's a lot of ships. And it's a lot of – but it's a lot of difference, right? It's a lot of potential investment. And if that's made, wow.
John Barr: Right.
Dan Ferris: If anything approaching that investment is made, that's an enormous amount of money. We're not talking about starting a software company here. I mean, the facilities are massive. The equipment is massive. You know, the capital investment –
John Barr: But we had it 40 years ago and just gave it away.
So where have we put money more recently? And it is along the lines of this theme. And it is in the skilled labor side. And we have invested last year – three of the new companies were Universal Technical Institute (UTI), and Lincoln Educational, Lincoln Tech. The symbol is LINC. And these are the two leading skilled labor schools. And it's just a drop in the bucket. So they do welding and HVAC and automotive, and they – and we have a huge deficit in skilled labor, as the workforce retires, and we need them for shipbuilding, we need them for everything. And there's strong demand for these graduates who come out with great-paying jobs. And I think these companies can be a lot larger.
Dan Ferris: Yeah.
John Barr: And our third in that is Blackline Safety, which makes hazardous-gas-detection systems. And this one does trade in Canada, and the symbol is BLN. And they have a great networked service that they offer, along with these hazardous-gas-detection systems. So it's worker safety.
So these are three of the new investments that we added last year that are supporting our theme of the infrastructure broadly defined.
Dan Ferris: Wow, what –
John Barr: Again, a new area for us.
Dan Ferris: That's cool. The one year return on Lincoln is like 50%.
John Barr: Yeah. They invest and open new campuses, and then once the campus is open, you can imagine the incremental return is quite high, from adding new students into the campus.
Dan Ferris: Right. Yeah.
John Barr: And adding new programs, which fill up the campuses.
Dan Ferris: Right. And a campus is a good facility, but it's not a shipyard, so that's –
John Barr: That is true. That is correct.
Dan Ferris: That's another good thing.
John Barr: Boy, the shipyards need their graduates.
Dan Ferris: Yeah. All right. So it's time for our final question, John, and this has been a wonderful conversation. I've really enjoyed it. It's the same question for every guest, no matter what the topic, even if it's non-financial. If you've already said the answer, feel free to repeat it. But it's a simple question, and it's for the benefit of our listener. If you could just leave them with one thought today, one final takeaway, what would you like it to be?
John Barr: Yeah. I'm going to answer this with a couple of parts, but it's the same answer. The first is relating to what we discussed, in knowing yourself as an investor. So part of that is taking care of yourself. And a great book that recently came out, Peter Attia wrote a book called Outlive, and it goes through the four chronic horsemen of disease, which are cardiovascular, Type 2 diabetes, Alzheimer's and dementia, and cancer, and the things that can be done through lifestyle, nutrition, and exercise, to take care of oneself to ward them off.
And so taking care of yourself and knowing yourself as an investor puts you in the best frame then to be a patient long-term investor and invest in things you know. So I would say, take care of yourself, and in doing so, you're at the top of your game to be able to know what you own and research, and then be patient.
Dan Ferris: Excellent. I hope everyone listening to this does that. Thank you, John, for being here. It's really been a fun, exciting conversation, full of lots of ideas and insights and names that you've thrown out and explained to us. I really appreciate you being here.
John Barr: Great. Dan, thank you, Corey, thank you. A real pleasure.
[Music]
Dan Ferris: That was another wonderful conversation with John Barr. He was actually here in 2021. And it's just interesting, isn't it, how it can be a lot of fun to talk with somebody about hanging on to stocks for 20 years, just letting them sit in your account? It's sort of an interesting thing that that could be fun. You know, it sounds boring.
Corey McLaughlin: Yeah, but if you're actually into real long-term investing, that is what you want to do, right? I want to do what he's doing.
Dan Ferris: Yeah.
Corey McLaughlin: At least, I would want to be doing what he's doing.
Dan Ferris: Right.
Corey McLaughlin: You know, finding these small-cap companies that are – it's amazing, when I was looking at what they – you know, the big winners. They're all – you're talking about like $2, $3, $4 stocks that are now up 20 times. And it's like, these are the things that people say they want, but nobody – few people – or most people don't behave that way. You know? The way we've all just talked about with him.
But this is the exciting stuff. I mean, we had so many stock stories there. And then – they were all interesting, and then with a book recommendation that I'm going to download here in a little bit. So that was nice.
Dan Ferris: Yeah, it was. And we can't say it enough, that holding quality companies for the long term is your very best bet for building real wealth in the stock market and really building real wealth outside of building your own business, I think. You're probably not going to speculate your way to a fortune. That is extremely difficult. But investing in great businesses and hanging on to them for the long term, you can see a direct path to building real wealth.
The other thing, the speculating is sketchy. You might get there. You might not. You probably won't. But you will definitely get there with holding quality over a few decades.
So I always feel the need to repeat that, because it's so important, and it's the core of what we do at Stansberry. So it's always worth reminding you of that. It can't be said often enough, given the human proclivity to just be way too active, and sell, and speculate.
All right. Well, that's another really, really fun interview for us, and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it every bit as much as we did. We do provide a transcript for every episode. Just go to www.InvestorHour.com, click on the episode you want, scroll all the way down, click on the word transcript, and enjoy.
If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com, please. And also, do me a favor. Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts, and while you're there, help us grow with a rate and a review. Follow us on Facebook or Instagram. Our handle is @InvestorHour. On Twitter, our handle is @Investor_Hour.
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