John’s emphasis on the necessity of data-driven decision making made me feel especially validated when we sat down to talk about business lessons and insights for 2024. As you’ll see, there’s always room for one more piece of information, especially if you want to be a financially savvy investor.
From opportunities for growth this year, to changing the language of leadership to cultivate business diversity and inspire the next generation of leaders, John’s timeless insights prove fitting for the year ahead.
The overall tone seems to be one of pessimism, but as you look at the business landscape, what do you believe are the two or three things that will really provide businesses a tailwind in the next 12 to 18 months?
There’s so much uncertainty, so much tension, and many businesses are starting to struggle. We think this is an opportunity to take advantage of some real, true bargains, especially relative to the large-cap growth stocks that have had a phenomenal year and left so many other stocks behind.
Regarding the economic backdrop, what I’m optimistic about is that I think the Fed is now making all the right moves to ensure that we control the money supply and keep inflation under control, which will cause significantly lower interest rates next year. Those lower rates will be the catalyst to rebuild confidence in our American economy and get things going in the right direction.
You led Ariel Investments during the 2008 financial crisis. What are the lessons you learned then that would apply to today’s environment?
I think one lesson was learned and one was relearned. One thing we worked hard on was the idea that our balance sheet work on each of the companies we invest in gave us all the safety margins we needed. We thought we were conservative. We thought we were cautious. We kept a close eye on what Moody’s S&P was saying about our companies. However, we came to the realization that we required much more in-depth work and our own proprietary debt ratings. The lesson that was relearned, though, is from Warren Buffett: he reminds us every year at the annual meeting that last century the Dow started at 66 and it ended at over 11,000. We had two world wars, the war in Vietnam, the Great Depression, many recessions, many, many extraordinarily difficult challenges that our country faced. But our capitalist democracy is the best system ever invented. So that was a lesson just to be reminded of, to make sure you take advantage of difficult, difficult markets and not be afraid to wade in during those tough times.
You’ve done a great job of managing uncertainty and risk. What principles influenced your decision-making during those times? Something so important to successful investing is not getting outside of your comfort zone, trying to own a little bit of everything, or buying what worked yesterday. When you know your companies and industries better than anyone else, you’ll have to be brave enough to stand by your convictions because once you have that deep knowledge, it becomes ingrained in your research process. The second thing to do is to find one more reference, check one more reference, make one more phone call, and talk to more experts in the industry. Constantly search for information that will help you make better decisions during the most difficult times.
Last but not least, never lose sight of the fact that the best companies to invest in are those that have strong cash flows, high profit margins, and real moats around them. You also want to buy those companies when they are on sale. As I understand it, you’re still very hands-on with and manage very granular investment decisions. You have maintained your position as chief investment officer even though you have been a very successful CEO for a number of years.
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How have you thought about this just from a leadership standpoint?
I was extremely fortunate to meet Mellody Hobson more than 35 years ago when she was a Princeton student. We are pleased that we were able to hire a talented individual like Mellody. She’s not only become my successor but she’s also the co-CEO. She manages the company’s day-to-day operations, including technology, marketing, legal, and financial matters. This enables me to concentrate on the stock market, investing, and thinking about individual stocks within my area of expertise. You’ve talked many times about the importance of closing the racial wealth gap in this country. Focusing on Black Americans in particular, what are the biggest challenges that they face today when it comes to economic mobility and wealth creation?
There are many challenges to African Americans participating in our capitalist democracy fully. There’s data from the Federal Reserve of St. Louis that between 1992 and 2016, college-educated Blacks saw their wealth decline 10 percent while college-educated Whites saw their wealth increase over 95 percent.
I tell people that we should ditch the antiquated term “supplier diversity” in favor of the University of Chicago-invented term “business diversity,” which signals to everyone who does business with the University of Chicago that they are willing to collaborate with minority and African American businesses on everything they spend, but most importantly, in the areas of the economy where wealth is currently being built: professional services, financial services, technology, and all those other areas where wealth is being built that you are so familiar with. Excellent data from a McKinsey study revealed that, not surprisingly, professional and business services account for the majority of our economy’s expenditures with the highest margins. If you want to build wealth in minority communities, you must focus on that. As you think about business diversity, what role do you think the private sector plays to help address this issue and close some of the wealth gaps that we’ve been seeing historically?
I think our progressive companies and folks who care about this wealth gap and challenges have to be willing to look forward and not backward. It’s a change in thinking. Many, many people are starting to think about it that way.
I’ve been fortunate to be on some great boards, like McDonald’s and Nike, that are focused on business diversity. There is a program where people can come to the University of Chicago for a one-day symposium and learn how the university has created this business diversity initiative.
President John Palfrey from the [John D. and Catherine T.] MacArthur Foundation was very supportive of the university’s initiatives because they thought that would inspire other universities, hospitals, and anchor institutions to do the right thing, including museums here in Chicago.
As you think about the next generation, how would you counsel them to develop their financial acumen as individuals?
At Ariel, we’ve been focused on trying to inspire the next generation of financially savvy leaders. We established the Ariel Community Academy, a small public school, and each first-grade class receives a $20,000 class gift, which was recently increased to $40,000 in honor of our 40th anniversary. For the first six years, the kids watch us invest the money in mutual funds, talk to our analysts about how to choose stocks, and do research. In sixth, seventh, and eighth grade, the kids start choosing real stocks with real money. When they graduate, they leave with a significant check to help them toward their college funding.
We also have a program at the University of Chicago where minority students receive paid summer internships to work in investment offices of major endowments. They can learn about finance, make a good living, and give back to an institution they love and care about if they work in an endowment office. We’ve had over 150 students go through this program at the University of Chicago, and we’re going to expand the program and, hopefully, make it better and better as the years go on. I hope it serves as a model for other universities to get people of color involved in the management of their endowments and help shape careers in ways that maybe young people hadn’t considered before going to college.