Ben Inker – Value Investing at GMO (First Meeting, EP.17)

Episode Summary

Executive Summary: Ben Inker traces his investing philosophy to Yale teachers Schiller, Tobin, and Swenson, emphasizing price, replacement cost, and asking why/how. He argues value’s long underperformance stems more from starting valuations, concentration, low dividends, and shifting takeover dynamics than from a broken style. He remains constructive on value, especially outside the U.S., and warns allocators against lazy assumptions about illiquidity premiums and manager skill.

Main Topics: Early investing education and formative teachers (Priority: 5/5): Inker explains how Schiller, Tobin, and Swenson shaped his thinking by teaching simple but powerful ideas: price matters, replacement cost matters, and investors should ask fundamental questions about why markets misprice assets. Joining GMO and learning how to add value (Priority: 4/5): He recounts his unusual path to GMO, starting as an undergraduate hire who initially had little to do, and how his role evolved into probing analysts with 'why' and 'how' questions rather than doing all direct research himself. Value investing: what changed and what did not (Priority: 5/5): Inker argues value’s recent struggles are less about a permanent failure of the factor and more about starting valuations, lower dividends, and market structure changes. He says value’s undergrowth has not been dramatically worse than history. Dominant companies, concentration, and antitrust (Priority: 4/5): He discusses how large U.S. companies have benefited from scale, permissive regulation, and concentration, but believes policy and legal shifts may slowly reverse some of that advantage over the next 20 years. Interest rates, duration, and technology (Priority: 4/5): Inker examines how low rates should affect equity valuation, especially growth stocks, but cautions that lower discount rates may also signal lower future returns on capital. He also says accounting must adapt to intangible assets and tech-driven economics. Allocator mistakes and false illiquidity premiums (Priority: 5/5): He criticizes investors for relying on backward-looking returns and assuming illiquidity is always rewarded. He argues allocators should focus on their real edge, risk capacity, and whether a premium is economically justified. Current market shock and long-term opportunity (Priority: 4/5): In response to the market turmoil around the pandemic, Inker says long-term fair value may not have changed much, but emotional panic creates opportunities, especially in cheap, diversified value and non-U.S. equities.

Key Arguments: Good investing requires a clear theory of what you are being paid for, and a disciplined sense of which questions matter and which do not. Schiller, Tobin, and Swenson each taught foundational investing ideas that still guide his process: price, replacement cost, and the need to understand the future-vs-past problem in valuation. Value’s poor recent performance is not mainly because its businesses fundamentally deteriorated more than usual; undergrowth has been roughly normal, while starting valuation discounts were unusually wide or narrow at different times. The market has rewarded dominant companies because concentration and scale have been extremely favorable, especially in the U.S., but that advantage may be partly reversible as antitrust and policy evolve. Low interest rates do not mechanically favor growth stocks; the effect depends on whether lower rates reflect a lower discount rate or lower expected future returns on capital. Accounting data need to be updated for intellectual property, intangible assets, and scale economics if investors want to assess value correctly in modern industries. Allocator performance often suffers because people chase past returns instead of asking how those returns were generated and whether they are repeatable. Illiquidity is not automatically a source of premium; investors should only expect to be paid for illiquidity when it enables real economic advantages such as control, leverage, or operational improvement. For a disciplined long-term investor, market dislocations should raise expected returns, not trigger abandonment of risk taking. Outside the U.S., value spreads and income yields can be more attractive, making cheap, profitable, lightly levered portfolios particularly compelling.

Data Points: GMO assets under management: $60 billion - Inker describes GMO as a major asset manager with a long value-oriented tradition. Career length at GMO: nearly 30 years / 28 years - He joined GMO straight out of college and has worked there ever since. Schiller's estimate of stock market fair-value volatility: about 1% a year - He cites Schiller’s analysis contrasting underlying fair value volatility with market volatility. Stock market volatility: 17 - Used to illustrate how much more volatile market prices are than underlying fair value. Value discount historically: 25% discount - He says value companies historically traded around a 25% discount to the market. Value discount in the problematic 2007 period: 17% discount - He argues value lost not because businesses changed dramatically, but because the starting discount was too small. Recent value spread: 35% to 37% discount - He says current value spreads are much wider than normal. Emerging portfolio valuation: 9 times earnings - He gives this as an example of an attractive cheap, diversified portfolio outside the U.S. Emerging portfolio dividend yield: 5% - He notes the income benefit of owning cheaper non-U.S. stocks. Value undergrowth in historical framework: 3% per year - He uses this as part of a simple historical return decomposition for value stocks. Expected outperformance from that framework: about 1 percentage point per year - He explains how discount plus undergrowth can translate into modest excess returns. U.S. value manager performance anecdote: 2019 was a lousy year for value stock selection but still acceptable relative to value peers - He recounts client satisfaction with relative-to-value performance. Money manager/undergraduate trial period: 1 year - He was hired by GMO on a one-year trial basis as an undergraduate. Potential active manager skill self-assessment at conference: 18% said they were not better than average - He uses this to highlight overconfidence among allocators.

Pivotal Quotes: "you can't be investing, you can't be thinking about investing until you have answered the question, What is the price that I'm paying for something?" — Ben Inker quoting Robert Shiller: Discussing the most important lesson from Schiller’s finance class. "I think one of the benefits you can have, I truly do believe this, is time horizon." — Ben Inker: Explaining what long-term investors can exploit that short-term investors cannot. "The thing I find endlessly frustrating... people are trying to show how smart they are by misusing words." — Ben Inker: His pet peeve about sloppy communication and imprecise language in investing.

Implications: Listeners should focus on first principles, not narratives: price, future cash flows, and the source of returns. The episode suggests value may be poised for recovery, especially globally, but only investors who question assumptions and tolerate discomfort are likely to benefit.