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[ 00:00] Everyone's talking about the 10 year anniversary of the bull market, but there's another anniversary that you should also be paying attention to. And that is the recession. Charlie, how did Ariel investments fair in the recession?

[ 00:11] It was the toughest year in the history of the firm. 2008 was a very tough year. Uh, what happened was it started with the troubles at Bear Stearns, which was in 2007. We thought that was an opportunity to buy stocks, but things just got worse and worse throughout 2008. So, like a lot of value investors, we were early. We thought there was a great opportunity in spring of '08 to buy some great companies that cheap prices and then they got a lot cheaper. So it was a very tough time.

[ 00:40] You two guys took advantage of fear in the market. I'm wondering from an average investor standpoint, how can they take advantage of fear?

[ 00:47] Yeah, this is, this is hard, but the takeaway is that you have to be greedy when others are fearful and you have to be fearful when others are greedy. You want to buy what others are selling and sell what others are buying. And that is very hard to do when you're in a cocktail party and everybody is saying to buy apple or buy Amazon. That's probably not a good sign. When everybody is saying CBS has done as a company, that probably means there's an opportunity.

[ 01:15] What about behavioral finance research? This is something that you guys use and I'm wondering, can you give me an explainer of what that is?

[ 01:21] Sure. In the 1980s, there were two people who won the Nobel prize Kahneman & Tversky in psychology proving that human beings have certain mistakes that we all make, that our evolutionary. They're in our genes. A guy named Richard Thaler did who just won the Nobel prize two years ago was to bring that to finance. And what he proved was that these human mistakes are actually made by the entire stock market. And the trick is to stop making them yourself and take advantage of them. So there are certain things like people are risk averse and they are loss averse. People hate to take losses. They put much higher weight on losses than they do on games. And you have to try and take advantage of that because when stocks go down, that means people are slow to sell because they don't want to take a loss. So that means they can keep going down. People have confirmation bias if they own a stock, they look for evidence that confirms what they thought before. And you have to really fight that tendency. You have to look for information that doesn't confirm what you already think. And then people tend to anchor. They tend to, if they believe a company is going to make $2 and there's new evidence that says it's only going to make a dollar 50, they may be go to a dollar 90 a dollar 85 the anchor in their old estimate. And they're too slow to incorporate new information.

[ 02:45] It's easy to say that people should just change these habits, but in reality, changing habits is really hard. So I'm wondering, do you have any actual advice for how people can change?

[ 02:54] Yeah, no, we do. The thing that we did at area was we put in place a devil's advocate on every name we own. A lot of these behavioral finance tendencies come from the tendency to overvalue what you own. This is called the endowment effect. And what we did was put in place a devil's advocate on every stock whose job it is to push back on the thesis to push back on the valuation. That's very helpful because in any organization, it's always hard for me to tell you why I think you're wrong. That produces a lot of tension. But if it's my job to push back on your thesis, then we have a much better conversation. And some of this confirmation bias can be managed.

[ 03:39] I'm a millennial and when I have conversations with my friends, a lot of them are like, oh, I've got an Apple phone, an Apple computer, so I'm going to buy Apple. And that's not always the smart move to make. Can you explain why an investor should pause before they get into a stock that they liked it just because they liked the brand?

[ 03:57] Yes ,the classic explanation for that is in that case, your sample size is one and is one, it's your opinion, what you want to have is the biggest sample size possible, including people outside the United States. Apple is doing very well with your generation, with your demographic. They're not doing so well in China and in the emerging markets. And so the key is to not think that you and your personal beliefs are representative of the target of the marketplace. And that's why expanding your database is critical.

[ 04:32] You guys have some stocks that you're watching. And I'm wondering, can you break down what the stocks are and why?

[ 04:38] Yeah, so we're always looking for what's out of favor, what other people don't love. And right now people do love technology. They love social media stocks. They love the Fang stocks. What they don't love is a certain classes docksin surprisingly they don't like alternative asset managers. Names like Blackstone and Kkr, which you would think are highly respected companies. People you would think would love them as stocks, but they don't. And the reason is that a lot of people are nervous that the bull market is going to come to an end. We're going to have a recession. And these are companies that run leveraged portfolio. So the portfolio could have a bumpy time if we do have a downturn. But the fact is these are great businesses. Their fee structures of two and 20 are, we would love to have those fees at Ariel investments.

[ 05:25] I think most people would. When the stocks are just very cheap relative to their earnings power, they're growing more pudding. People are putting money into alternative assets. And so we love, the businesses and we love the stocks which are trading at 10, 11, 12 times earnings.

[ 05:41] So you suggest buying stocks that are out of favor. And I'm wondering if those longterm holds or short term holds.

[ 05:47] So if you're going to buy stocks that are out of favor right now, you have to be patient. You have to be a longterm investor because in the short term, the market does look the short term problems. So the key to being a good longterm investor is having the patience to get through the short term noise and focus on the longterm opportunity. And that's why a slow and steady wins the race is our motto at Ariel.

[ 06:11] I want to circle back for one moment just to ask you, during the financial recession, how did leadership help your team?

[ 06:19] Yeah, there's, there is no substitute for experience. John Rogers, who's our chief investment officer, has been doing this leading the Ariel Fund since 1986 and so he had seen a lot of problems. 87 crash, downturns that we had in the.com bubble bursting. He had seen a lot of downturns. And so that does help you stick to your guns. If it's the first time you've seen a significant downturn, I think there really is a tendency to panic and to worry about whether you're going to be able to make payroll. John knew we had frankly put a lot of money in the bank up until then, and so we knew we would get through it. And that experience was very helpful.

Have no fear, a market expert is here.

Charlie Bobrinskoy, vice chairman and portfolio manager at Ariel Investments, sat down with TheStreet to discuss the anniversary of the recession and how investors can take control of market fear, instead of letting the markets control them.

"...The takeaway is that you have to be greedy when others are fearful and you have to be fearful when others are greedy. You want to buy what others are selling and sell what others are buying. And that is very hard to do when you're in a cocktail party and everybody is saying to buy apple or buy Amazon. That's probably not a good sign. When everybody is saying CBS (CBS - Get Report) has done as a company, that probably means there's an opportunity," he said. 

But, there's more than fear to be aware of. Investors need to understand their bad investing habits and how those can harm them.

"The thing that we did at Ariel was to put in place a devil's advocate on every name we own. A lot of these behavioral finance tendencies come from the tendency to overvalue what you own. This is called the endowment effect. And what we did was put in place a devil's advocate on every stock whose job it is to push back on the thesis to push back on the valuation," he said. That's very helpful because in any organization, it's always hard for me to tell you why I think you're wrong. That produces a lot of tension. But if it's my job to push back on your thesis, then we have a much better conversation. And some of this confirmation bias can be managed."

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