The Strategy That Can Win When Stocks Crash

SPEAKER_1 (0:01)

Welcome to the Money Tree Investing Podcast. Stock market, wealth, personal finance, value stocks. Invest in your life.

Kirk Chisholm (0:11)

Hello, the Smart Money Tree Podcast listeners. Welcome to this week's show. My name is Kirk Chisholm, and I'll be your host. Today, I'm joined with David Miller. How you doing today, David?

David Miller (0:19)

I'm doing great, thank you.

Kirk Chisholm (0:20)

Maybe you can tell the listeners a little bit about your background.

David Miller (0:22)

I've always been passionate about investing. Since I was a little kid, my mom gave me this book about the stock market, and frankly, I got a little obsessed with it, and the concept of investing and owning part of a business really fascinated me. They had this concept in third grade where you had to write down what you're going to do for a living.

I thought, okay, here's it. I got to write down what I'm going to do for a living. I wrote down, I'm going to work in stocks, and I'm going to go to the University of Michigan, and I'm going to get an MBA in finance from Wharton.

Nobody ever told me that I had the ability to change that up. As I got older, so that was what I did. I ended up working in investments. I did in opposite order. I did my undergrad at Wharton School, University of Pennsylvania, then did an MBA at University of Michigan. Started working in finance as soon as I graduated Penn, and got a job on equity derivatives trading desk at UBS, which had the world's largest trading desk at the time, was the size of a couple football fields up in Stanford, Connecticut. So that's an exciting start to my career. But I was also always very entrepreneurial, and I had started a couple of businesses in college, and had done very well from that, and I always wanted to work in finance, but I had this online advertising business that I had going when I was in college, and it was frankly making a lot more than I was getting paid as a starting junior trader at UBS. So I figured, okay, I'll try to do both. That didn't result in me having enough time to sleep adequately, so I tried to do both, but he cut corners too much. I didn't have the time and effort to do a great job at UBS, so after a while of that, I realized, okay, I can't do both. I ended up leaving UBS, started this investment newsletter called Investment Catalyst that would have particular stock ideas, bottom-up fundamental analysis, and also realized it's kind of hard selling newsletters, but realized the performance of these picks is going pretty well. How about I transition and try to actually do investment management instead of selling newsletters? I went out and I tried to find some firms that would be willing to partner up with me, even though I only had five months at UBS, found it was a little tough getting a job, given I'd been working in online advertising and wanted to transition into finance, so I figured, okay, I'll try to launch my own fund, but partner with a firm to do that, so I made some cold calls. One of those turned out to be my now partner and CEO of Catalyst Mutual Funds, Jerry Szilagyi, and he was working at another mutual fund company called Integrity Mutual Funds. It was based out of North Dakota. He was doing business development for them out of Long Island, and I pitched him this idea for a mutual fund based on this book I had read by a famous investor named Joel Greenblatt, who'd wrote this book called The Little Book That Beats the Market. That book was a national best seller on the New York Times list. Was explaining that if you invested in companies that had a higher free cash flow yield combined with a higher return on capital than their peer group, you'd historically get some pretty significant outperformance. Joel had done exceptionally well with this and his Gotham Capital Hedge Fund, he'd had one of the best all-time track records, it was like 40 percent annualized.

After I read that book, this seems like it'd be a pretty good idea, but there weren't any funds based on the time that you can invest in that would implement it. So I figured, how about launch a fund to capitalize on that concept. So instead of people having to run all these screens, could just invest in a fund that would do that. That was my pitch to Jerry at the time. He took that to the board at Integrity Funds. They said no, they weren't up for working with a 25-year-old who had no experience ever managing a mutual fund before launching something with a few hundred grand, which turned out to be great for myself and Jerry, because they did say that he could go on and do it himself if he wanted. So we did, and we launched Catalyst Mutual Funds back in July of 2006 So coming up on our 20-year anniversary, and now we've grown to about 30 funds, about 15 billion in AUM across our fund groups and a whole variety of investment strategies.