So Shad, I thought maybe we could begin with how you got started on the investing journey? FREDERICK "SHAD" ROWE: Well, my father was in the advertising business for most of his life, and he recommended to me that I buy some Central Airlineswith some money I made in the summer on a construction job.
Less than the frame value? FREDERICK "SHAD" ROWE: Less than the frame value, because I was a value investor.And so people would say, well, did you make money doing it?
Wow. Shad, I think somewhere in the mid '70s, you also started a banking or a brokerage operation, right? FREDERICK "SHAD" ROWE: Well, I worked for this firm called Schneider, Bernet & Hickman.And I was a Syndicate Manager.
Were you short selling stocks or real estate? FREDERICK "SHAD" ROWE: Well, stocks-- bank stocks, real estate stocks, real estate-related stocks.What was the thesis, there?
What was the thesis, there? FREDERICK "SHAD" ROWE: The thesis was it was terribly overbuilt, and everyone was going go broke, which I was absolutely right on.And they did. And so I wouldn't say that was fun, but it was good to be right.
Do you think getting the timing right was important with the short selling? FREDERICK "SHAD" ROWE: Of course it was, sure.And you know, you know what I found out was that-- if you buy stock, and it goes down, the most you can lose
Could you explain that a little bit, Shad, for us? FREDERICK "SHAD" ROWE: Sure.You know, if you're shorting versus the box of stock, you would borrow the shares that you had bought and deliver them against your short position
So you were getting paid to borrow, the taxes were favorable, and the market was not fairly valued according to that. FREDERICK "SHAD" ROWE: No, and there was a lot more retail investing then than there was the last few years.So not as smart.
So why did you give up short selling? FREDERICK "SHAD" ROWE: Well, it becomes all-consuming.You know, you'd think you'd feel better about it as you get older, but it hurts worse.
Can you talk to us a little bit about that? FREDERICK "SHAD" ROWE: Well, actually, in the time between Central Airlines-- I also owned small companies, I owned Southwest Airlines when they had three and then four airplanes--so I knew something about the airline business, and I knew something about advertising business a little bit, because of my father.
So when did you buy your first shares of Southwest Airlines? FREDERICK "SHAD" ROWE: About 1974.1974? FREDERICK "SHAD" ROWE: That's about-- I still have some.
Wow. Would you know how much the revenues have compounded by or the stock price has compounded by since you bought it? FREDERICK "SHAD" ROWE: Oh, it was probably 27%.It was huge. 20% over 30+ years.
It was huge. 20% over 30+ years. FREDERICK "SHAD" ROWE: Yes.It's amazing what it did.
What was it about how Southwest that got your attention? FREDERICK "SHAD" ROWE: Well, Lamar Muse.He's the same guy that was the head of Central Airlines.
do things faster, better, cheaper for the customers. FREDERICK "SHAD" ROWE: Yeah.How did this change happen, and maybe, give us some examples?
How did this change happen, and maybe, give us some examples? FREDERICK "SHAD" ROWE: Well, it was part of an odd man out kind of thing.You know, if you own stock in a company, you're kind of second rate compared to the management.
but to actually succeed. FREDERICK "SHAD" ROWE: Right.So can you talk to us a little bit about that?
And maybe give us an example of a company that you think has efficiency going for it? FREDERICK "SHAD" ROWE: We can't talk about Google, can we?Uh. FREDERICK "SHAD" ROWE: I'm teasing.
And you say that Costco is not just efficient, but elegant. FREDERICK "SHAD" ROWE: Oh yeah, it's great.It's fun to be there, fun to shop there.
It's great stuff. The Kirkland? FREDERICK "SHAD" ROWE: Kirkland.Well, I'm losing my mind, here, but yeah.
Can you give us examples of each stage? FREDERICK "SHAD" ROWE: Well, any little company that takes off.Southwest Airlines has been kind of stage one the whole career it's had.
So how do you detect this change between stage two and stage three, Shad? FREDERICK "SHAD" ROWE: Well, I'm a customer, just like you are.It's obvious, isn't it?
Like, these stage two, stage one kind of business-- what are the hallmarks? FREDERICK "SHAD" ROWE: Well, I would love to find a business that was doing something better, faster, cheaper on a scale that could be taken globally,that I'd seen it work in the United States, that had great management.
Do you do you focus on capital intensivity at all, when you look at a great company? FREDERICK "SHAD" ROWE: Capital intensiv-- capital what?Capital intensiveness-- how they use their balance sheet.
Are those things you look at? FREDERICK "SHAD" ROWE: Well, I look at it.But I presume they know more than I do, so I'm not too judgmental about it.
So what are some things you want to avoid in a business? FREDERICK "SHAD" ROWE: Well, If you were still short, I'd want the same thing.You know, if it's not doing better, faster, cheaper, it's doing something worse.
Are there industries or sectors that you would avoid? FREDERICK "SHAD" ROWE: Well, I don't think that way.I think of the ones that I would be attracted to.
If it can continue on another Charlie Munger-ism-- we learn more from our mistakes than our successes. FREDERICK "SHAD" ROWE: I oughta know a lot, then.So after short selling, you know, once you moved to being a long and being a consumer focused investor, what are one or two mistakes you've made
that you want to talk about? FREDERICK "SHAD" ROWE: One of those, I don't want to talk about.And the smaller companies-- there was a company in Dallas called Employers Casualty Insurance Company that did workers compensation.
So you probably picked up a lot of trading techniques as a short seller, looking at price, volume, maybe margin calls, technicals. FREDERICK "SHAD" ROWE: No.I didn't learn anything.
So do you look at anything other than the customer experience and fundamentals when you invest in a business? FREDERICK "SHAD" ROWE: Well, it's nice if the stock is off for the wrong reason.That's always a good one.
How do you arrive at that? FREDERICK "SHAD" ROWE: Well, I'd just want to see how you can pay 10 times what you thought it was eventually going to earn.That would be OK with me, if you had a pretty high degree of confidence in it.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Right.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Sure.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Well, I've done a little bit of that.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: If you'll think of yourself as a stock, I think it helps.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Yeah.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Well, he's a good money manager.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: I was just saying that short sellers really think that they're the smartest people on Earth, that they're much
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: And then the value investors I've already talked about.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Yeah.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Yeah.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Well, Michael J. Fox, I'm on his board.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Fun being here.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: All right, yeah.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: I don't have any of those.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Well, let's see-- McDonald's.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Sure.
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Compared to T. Rowe?
So the companies have a chance to earn a lot more. FREDERICK "SHAD" ROWE: Well, I think that right now T. Rowe Price probably does better, because they're focused on growth companies.