Ariel Investments' John Rogers on How You Can Still Win With Value Investing

Direct lending is thriving as a key funding source for corporate borrowers and financial sponsors, reflecting the shifting dynamics in investment strategies. Among these strategies, traditional stock picking is still relevant, as highlighted by investor John Rogers. He emphasizes the importance of market cycles and the significant valuation gaps between large-cap growth stocks and undervalued small-cap stocks. Rogers believes that when everyone rushes into big stocks, it often signals a peak in prices. His approach focuses on uncovering hidden gems in the smaller stock category, suggesting that value investing, while challenged in recent years, remains a viable and potentially rewarding strategy.

Investing in small-cap stocks can be very rewarding, especially when focusing on those that don’t have much analyst coverage, known as orphan stocks. These stocks often sell for lower prices because many investors overlook them. By carefully researching these undervalued companies, using both personal expertise and tools like stock screening, investors can find hidden gems that could significantly appreciate in value. Value investing principles remain steady over time; seeking stocks that are cheap relative to their cash flow or private market value is essential. Today, there are unique opportunities in smaller companies where traditional research has dwindled, allowing investors to potentially uncover fantastic bargains that others may have missed. This approach requires diligence, continuous learning, and a commitment to understanding the market's inefficiencies.

Investing in the Sphere in Las Vegas was a surprising but exciting decision for the investor. Originally, they owned shares of Madison Square Garden Entertainment, which included the Sphere as a newly spun-off entity. After exploring the innovative venue while it was still being built, they recognized its unique potential to revolutionize entertainment. With its striking design and advanced technology, including immersive visuals and sound, the Sphere stands apart from anything else in the world. The investor believes that, with the right creative content and management, the Sphere could attract more international interest and investment, significantly enhancing its value. They emphasize the importance of understanding the company's management and building long-term relationships, especially for smaller or innovative businesses, which can offer exclusive investment opportunities.

Building strong relationships with companies over time is crucial for successful investing. Experienced portfolio managers visit companies regularly to assess their potential and understand their management teams better. A company's long-term value isn't just about its financials; it’s also about its competitive advantage, or 'moat,' against new rivals. Recognizing when a stock reaches its fair market value helps in deciding when to sell. This requires a disciplined approach to avoid emotional decisions based on past performance. Investing in industries with fewer competitors can provide stability, as they may face less disruption. Despite investing in diverse sectors, including entertainment, macroeconomic factors always influence performance, leading to a continuous evaluation of investments.

Investors are optimistic about the economy, as signs of recession are minimal and high-income consumers are thriving despite inflation. Companies like Royal Caribbean are seeing strong demand as people are eager to spend on experiences like cruises. However, there are concerns about potential drops in demand as the initial post-COVID enthusiasm fades. Some industries, such as dental care and pool services, have faced struggles now that the immediate demand from the pandemic has lessened. Continuous communication with management teams is key to adapting investment strategies and understanding market trends, emphasizing the importance of being cautious yet opportunistic with investments, especially in a humbling industry like cruising.

Businesses often face fluctuations based on consumer trends, weather, and management. Observing these changes firsthand and understanding customer experiences is crucial for investors. While markets are becoming more efficient, there are still moments of mispricing that can be identified, especially during extreme market conditions. Continuous learning through experiences, like attending events or visiting popular brands, helps maintain a fresh perspective. Investors should engage with various viewpoints and check on companies regularly to navigate market uncertainties. This approach not only aids in investment decisions but can also be enjoyable, reflecting a balance between work and personal experiences.

Market inefficiencies can create great investment opportunities, often seen during times of panic when stock prices drop significantly, even for solid companies. Historical events, like the 2008 crash, illustrate how investors sometimes lose faith, causing stocks to be undervalued. Value investing involves recognizing these moments, researching, and acting decisively to buy when others are panicking. Conversations within investment teams during volatile times emphasize collaboration, quick decision-making, and thorough analysis to identify worthwhile stocks at bargain prices. Even when faced with disappointing earnings, understanding a company's fundamentals can shape smart investment choices. This mindset celebrates finding value in fear, turning potential losses into significant long-term gains. Therefore, maintaining perspective and being ready to buy undervalued stocks during market dips is crucial for success in investing.