Charles de Vaulx is chief investment Officer at International Value Advisers. I recently sat down with Charles to discuss his changing feelings about banks, Japan and Apple. Part II of our conversation follows in a video and transcript.
(Click here for the first half of my interview with Charles de Vaulx.)
Forbes: Now in a May newsletter, you said, "Markets are being manipulated very heavily these days," when talking about the global scene. What did you mean by that?
de Vaulx: The policymakers who we believe were, you know, more than responsible for what led to the financial crisis you know, I own no bank stock from '04 to '08, which was basically a way for me to say that we were in the middle of a credit bubble of epic proportion, in the US, but in many other places
Forbes: Explain quickly why you stayed away from banks when on paper, including Fannie and Freddie, they looked cheap? You mentioned leverage.
de Vaulx: Well, because the banks themselves became more and more levered, but we also could tell that they were making worse and worse loans. I mean, securitization basically allowed banks to lower their standards in terms of lending, because they knew that once they would originate the loan, they would repackage it and sell it.
There were so many signs of a credit bubble of historical proportion. And also there were some sober minds out there. I mean, anyone who, you know, read your publication or Grant's Interest Rate Observer, anyway who read the annual reports from the bank for international settlements realized that there was something amazing going on.
Forbes: Do you buy banks today?
de Vaulx: No. I mean, we bought a few after the crisis: UBS, Goldman Sachs, Bangkok Bank in Thailand. Recently, the Brazilian stock market has been weak, along with many other BRICs, so we've started buying into Itau Bank. It's a pretty well-managed bank in Brazil. So, yes, at the right price, we will buy a bank if we think that the underlying culture of the bank is good enough.
I think Warren Buffett several years ago said, "The problem is that there are many more banks than bankers." It's a levered business and there are very few people that have the right mind to properly manage those banks, and I think that Buffett was spot-on. He's still spot-on. So whenever we pick banks, we try to find those that have a pretty good culture, and a pretty good understanding of risk. In the case of UBS, the fact that they are moving more and more into private wealthy management at the expense of lending is something that we've been welcoming.
Forbes: Now, you don't have very much, you mentioned, yet of Brazilian stock, but you stay away from what we call "emerging markets"?
de Vaulx: Yes, because there is a paradox, which is that high economic growth does not always translate to good stock market performance.
Forbes: You see that in China.
de Vaulx: There are many reasons for that within China, but Steve, we have seen this even in the United States. I think of the United States, in the middle to late 19th century, as the ultimate emerging economy. America was so successful that by World War I, it became the leading economic superpower. Yet my history books somehow suggest that stocks did okay but not that great. The big stocks were those big capital intensive businesses.
Forbes: Railroads
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