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Holly LaFon
Holly LaFon
Articles (9485)  | Author's Website |

John Rogers' Ariel Investments October Commentary

Interview with John Rogers

November 06, 2018 | About:
35 Years and Counting…

Many know the story of John Rogers (Trades, Portfolio)’ early exposure to the market and how that initiation led to the founding of Ariel. In place of toys, his father, Judge John W. Rogers, Sr., gave him stocks every birthday and Christmas beginning at age 12. That childhood hobby became an obsession that ultimately drove John to found our firm, Ariel Investments in 1983. Lightning struck again on August 1, 1991 when another unique and dynamic leader, Mellody Hobson joined the company. Her complementary skill set and relentless work ethic quickly earned the respect of her teammates, the role of John’s trusted partner and soon thereafter, the title of President, with oversight of all Ariel’s operations outside of research and portfolio management.

As such, to commemorate Ariel Investments’ 35th anniversary, we thought it would be unique to have our Founder, CEO and Chief Investment Officer, John W. Rogers, Jr., and our President, Mellody Hobson offer their perspective on building a firm with a commitment to generating sustainable returns through patience, focus, independent thinking and teamwork. What follows are excerpts from a recent conversation about the valuable lessons they have learned.

Why is patience the foundation of Ariel’s long-term investment strategy?

JR: I started Ariel when I was 24 years old and I felt that I wanted to give potential investors confidence that I was a prudent, patient investor with a long-term investment horizon. I did not want people to think I was a young gunslinger who would take undue risks with their capital. And so, I started to think about how I could reinforce this idea of patience with a memorable logo: T. Rowe Price had a ram, Merrill Lynch had a bull.

I put the two ideas together that patience would be a recognition of that famous Aesop Fable where the tortoise beats the hare.

The tagline was “slow and steady wins the race.” I thought that would be a memorable tagline for Ariel, a way of creating a brand.

And it’s worked out very well these 35 years to have the tortoise, as a symbol of patience, as our logo.

Patience is the anchor of everything that we do here at Ariel. When we think about taking a long-term view on the domestic equity side of our portfolio, we seek to invest in small and medium sized companies that are out of favor but show a strong potential for growth. The company may be misunderstood, ignored or under followed for some reason. However, we have a reason to believe we see something that other people don’t see. We want to buy a company that is worth a dollar, but we only want to pay sixty cents. So we take our time to research a potential holding and then wait for the margin of safety1 we seek. By having a three to five-year investment horizon, we are able to look past short-term noise and be opportunistic when price dislocations arise. That is how we think about it and if we are right, we can make multiples on our money.

Over the last 35 years we have consistently applied one approach to investing. One approach. And sometimes the portfolio may behave in one way or another, but what we are doing every single day is extraordinarily disciplined, grounded in deep research and ultimately borne out by patience.

What do you think sets the team at Ariel apart?

MH: This is the melting pot of money management. We have people from all walks of life, from all stations of life, from all educational backgrounds, race, ethnicity, sexual orientation, etc. We really are like a Petri dish of diversity. And it’s that diversity that allows us to solve problems in unique and different ways. It’s that diversity that allows us to be contrarian in how we look at investing in the world.

I also cannot overstate our focus. I just can’t. We are laser focused every single day on driving results for our clients. Results in terms of the returns that we generate for them and the service that they get from us. We aspire every single day to be world class and that is a tall order. I think people sometimes may not understand how driven and committed we are to that goal and how that works in terms of our lives. For some it would probably be too all encompassing, but for us it feels normal. We love the work.

JR: I also am very excited about the tenure of our team. We have people who are truly grizzled veterans from the tough ups and downs of this business that we are in, but most importantly, there are many of us that went through the worst financial downturn since the Great Depression together. You learn a lot about each other when you go through a trial by fire. You learn who are the true contrarians, who are the true independent thinkers, who are the ones that are willing to look beyond the crisis of the moment and see that there will be a better day.

We have been able to create a culture where all of these terrifically strong independent thinkers have been willing to stay here for 15 years, 20 years, 25 years and grow together, learn together, strengthen each other and make each other better. And I think when you have been battle -tested you come out stronger. You are better together because you have lived through the storm, and come out on the other side as winners.

The financial crisis of 2008 was a challenging time for the firm, how did you get through it?

MH: I mean '08, '09 was a come to Jesus time for us. It was horrible. It was the worst time in my career. There was a crisis of confidence in Ariel by some of our clients. And what we did was we went for reinforcements. We went to smart people that we knew in the investment business to talk to them and ask advice.

We re-read all of the great investors because we said, “This time is not different." And so we re-read all of the great works: David Dreman (Trades, Portfolio), Sir John Templeton, books about Warren Buffett (Trades, Portfolio), Graham and Dodd. We went back to the basics. We also were deeply contemplative about what we did that did not work, what could we learn and how we could be better as an organization as opposed to believing there was nothing to learn.

There was a lot to learn, and we wanted to take those learnings in and we wanted to really institutionalize them so that we could be better on a go forward basis. And that's why we've generated these outstanding returns since the bottom of the market, where our flagship Ariel Fund is number one in its Lipper category2. So I think all of that was internalized and all of the pain was channeled in a way that I think made us a better firm.

We are better today than we were then, but at the same time, because we're a learning culture, I always say we will be better five years from now than we are today. The great thing John always says about the investment business, is that it is a business where you can get better. Most things in life degrade. You degrade as a runner, you degrade as an athlete, you degrade in so many ways, even memory can degrade. But investing is something where every single day, every data point adds new information that makes you better in the next decision.

And so the accumulated knowledge that we all had through that period has made us formidable, and I say that with a tremendous amount of humility. I know we got through one of the worst periods ever. I know I could do it again. I don't ever want to do it again, but I actually know how to do it. And I think the one thing that our clients saw during that period was that we were relentless. We did not give up. There was no throwing in the towel. We did not hide. We were available. We were on the phone with people and we were trying to explain to them why they should stick with us. And some clients who terminated us during that period came back, which was a great testament to their belief in Ariel and the relationships that we established with them.

With the benefit of hindsight, what is your proudest moment?

JR: We have had to make lots and lots of decisions over the last 35 years. And I'm really proud of the tough decisions we made when the stock market dropped over 22% in 1987 and those that we made during the financial crisis of 2008, because our choices were consistent with our values. We could either apply our values and buy stocks at bargain prices or we could sit on our hands and wait until the dust settled. Both times when the markets were really under pressure, we lived our values, made decisions based upon the core tenets of our investment philosophy and bought our favorite names at bargain prices.

How do you measure success?

MH: We are in a business where every single day there is a score. Investing is similar to sports. We know if we have won or lost every day. So because of that, when we look at the score, the totality of our track record, we can see we have succeeded, but we also must work hard to do so tomorrow and the day after and so on.

JR: Many people really don't understand the longevity of our performance. Academic research shows the longer the track record the more you can make a case that it's skill versus luck. We are one of those rare firms that has a 35-year track record that is, after fees, at the top of the charts in what we do. Number one in our category since the March of 2009, market bottom. It’s a little hard to talk about yourself but that is the scoreboard.

Long tenures like these are indeed rare in the investment industry, what does 35 years mean to you?

MH: Well, you know, there's that saying age is just a number, but these were some hard fought years. I mean, that's how I think about it. We frequently express our gratitude to our clients. They allow us to do our life’s work. They could pick lots of different firms out there, but they pick us, and that is not something any of us takes for granted. I think 35 is a remarkable accomplishment. I've never doubted we'd be here. I don't doubt we'll be at 50, 75, 100. But I would say that I also understand you cannot take anything for granted. You have to fight every single day to maintain and deliver excellence.

In 35 years we've been able to hone all those skills. So at 35, I actually feel the company is more equipped than it ever was before, that it's more formidable, that it's more able to do even greater work. Because we've got all that history tucked in and lessons and stubbing our toes and learning collectively, because we have been together for so long, so many of us, that we can speak in shorthand and we know what we went through. I feel pleased but not satisfied, you know, that's that famous saying. We are closing in on a finish line that we can't ever even get to, but we're closing in.

JR: I think we're just scratching the surface of our potential. We want to be a role model for how you can deliver excellence by creating a culture that accepts people from all different walks of life and be able to prove that if you create that right kind of culture where you can attract the best diverse talent you will be able to deliver the best performance over time and build a business that is built to last. If we surround ourselves with really strong dynamic people who have vision, who think independently, and care about their teammates, we believe that we can continue to achieve amazing results. So I think Mellody and I both want to prove that. I think that is why we are so inspired to work so hard every day, harder than ever, because we want to show the world this is the way to win.

  1. Attempting to purchase with a margin of safety on price cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations on our part, declining fundamentals or external forces.
  2. Past performance does not guarantee future results. The ranking quoted above reflects the market low (03/09/09) ranking for Ariel Fund (Investor Class), which was ranked number 1 out of 206 funds within Lipper’s Mid-Cap Core universe. Lipper, Inc. is a nationally recognized organization that reports performance and calculates rankings for mutual funds based on total returns. Ariel Fund (Investor Class) ranked 54 out of 419, 52 out of 301, and 19 out of 199, respectively, within the Mid-Cap Core universe for the one-, five- and ten-year periods ending 09/30/18.

About the author:

Holly LaFon
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website

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