Active Patience: What It's Like to Run an Investment Firm (with Mellody Hobson)

LIZ ANN SONDERS: I'm Liz Ann Sonders.

KATHY JONES: And I'm Kathy Jones. 

LIZ ANN: And this is On Investing, an original podcast from Charles Schwab. Each week we analyze what's happening in the markets and discuss how it might affect your investments.

So Kathy, short week. There's nothing better than short weeks. Wouldn't it be nice if the stock exchange could just close one day a week, even if we all work longer hours than normal business hours anyway? I'd love to be condensed into four days each week. And now it is starting to feel like summer, but it's not quiet in the markets. And for bond investors, they saw yields spike early in the week. What do you attribute that to? Is it some of the recent economic data, Fed speakers? All the above? None of the above?

KATHY: Yeah, there are a combination of things going on as usual. One is it's very thin market. People don't often come back ready to roll after Memorial Day. A lot of us are still a little sleepy. But there's also kind of a gap in terms of the economic data. We don't get stuff until the end of this week and then next week. And so that gap has been filled by Fed speakers talking about how they just have no interest in cutting rates anytime soon. And I think that has gotten into the market. Plus, we had a Treasury auction. It wasn't particularly well bid, but that's obviously because there's hardly anybody around, and we're waiting for the big data. So all that combined to kind of put a little bit of a chill into the market. But overall, it's still just a lot of back and forth in the bond market.

What about you, Liz Ann? I know you just published a new report about the housing market. Thought that was really interesting. Any signs of life out there?

LIZ ANN: Kathy, actually, before I get to housing, I wanted to toss it back to you. You mentioned Treasury auctions, which are very much in focus, but I'm not sure we have touched on it on this podcast. So maybe just a quick primer on Treasury auctions in general, not just specific to what happened in the past week.

KATHY: Sure, the way the government funds the debt is the Treasury issues securities. T-bills, Treasury notes, Treasury bonds, and all of those are issued to fund our current activities. So T-bills are auctioned on a regular basis, but they're so short-term, we don't usually focus on those too much.

The big ones that we focus on are the, what we call the coupon auctions, meaning the ones that the intermediate-to-longer-term bonds that have coupon issuance, pay regular interest on a regular basis. So that'll include two-year, three-year, five-year, seven-year, 10-year, and even sometimes 30-year bonds. And the ones quarterly we get the refunding, meaning sometimes they buy back old debt and issue new debt. Those are the ones that we really focus on. But these days there's so much worry about the increased supply of Treasuries due to the rising deficit that the market is maybe a little more jittery absent any other news on days when we have some of these auctions.

LIZ ANN: Perfect, thanks for that. So with regard to the housing report that we wrote, kudos to our colleague Kevin Gordon, who was the primary writer on that. We also have, as you know, Kathy, a piece coming out soon, we hope, on debt and deficit. So Kevin and I divided and conquered, and I focused on the debt piece, and he focused on the housing piece. But it's a comprehensive look. I'll just touch on some of the most important and salient points. You know, housing is an example of one of those areas in the economy that, you know, had a lot of misfires in terms of what the data has suggested about the health of the economy, risk of recession, and we can point to lots of areas in the economy where there have been just unique data points and a lot of bifurcations and information that doesn't seem to square with what we've seen in history. 

But in this cycle what clearly has been a defining characteristic is the dearth of home supply, especially existing homes. You know, it is the case that what was a significant affordability crisis may be easing but we're certainly not to anything resembling affordable or healthy. You've also got an index that we track called the HMI. It's the housing market index from the National Association of Home Builders, and that tends to peak well in advance of recession. And that is giving a firm warning sign that a slowdown is coming, maybe not necessarily recession, but a slowdown is coming. But we've also had a lot of conflict in terms of home sales that had recession-like declines. And this was part of our rolling recession thesis, where you did go into a housing recession based on sales but you didn't quite see it in terms of prices and that reflects the supply-demand imbalance in particular with regard to existing homes in large part because the effective mortgage rate is so much lower than the stated mortgage rate, and that has constrained the supply in terms of existing homes, which do account for about 80% of the housing market. 

You sort of have had lots of homeowners essentially feel locked into their fairly low mortgage rates, and that's constrained supply. We are seeing some move back up in prices, and price growth has been faster, and the recovery in sales has been slower for the existing home market, again, mostly because of that depressed supply. We are seeing also a rise in the home ownership rate over the past few years, and that's in general a positive, but it's added to the pressure on home availability and affordability.

The one thing I'd say is, again, we've had this view, Kathy, as you know, of hopefully what were rolling recessions in areas like housing into rolling recoveries, possibly with housing. And we are optimistic that we might continue to see sort of a slow grind of improvement. And the good news is, in particular, is that this housing cycle has not been marked by speculative practices or low-quality lending, which is why even at the worst part of the downturn, we were not of the view that this represented some, you know, Lehman-esque collapse in either housing broadly or the financial system.

KATHY: Great, well that is a great report on housing. Really enjoyed reading it, so I really suggest people take a look at it, because it's such a big part of the economy and such a big part of the conversation these days. Speaking of conversation, tell us about this week's guest. I know it's someone we both met, someone who's partnered with Schwab several times over the years.

LIZ ANN: Yeah, she's great. So Mellody Hobson is the co-CEO of Ariel Investments alongside the company's founder, John Rogers, who I've also known for many, many years. Before being named co-CEO in 2019, Mellody spent nearly two decades as president of Ariel. She has been a director of Starbucks Corporation since 2005 and now serves as its board chair. She served as a director of the Estee Lauder Companies from 2005 to 2018 and as a director of DreamWorks Animation, SKG, from 2004 to 2016. Mellody is also co-chair of the Lucas Museum of Narrative Art and a board member of the George Lucas Educational Foundation and Bloomberg Philanthropies. She also serves on the board of trustees of the Center for Strategic and International Studies and the Los Angeles County Museum of Art. Mellody is a member of the American Academy of Arts and Sciences, the Rockefeller Foundation Board of Trustees, and is also a former chair of the Economic Club of Chicago. And maybe no surprise, in 2015, Time magazine named her one of the 100 most influential people in the world.

So Mellody, I remember many, many years ago when you and I first met, and I believe it might have been in a conversation, you shared some of your early story—how you got started at Ariel, where you've been, gosh, what is it, 38 years or …? 

MELLODY HOBSON: 33.

LIZ ANN: How you got your start—it was an internship when you were at Princeton, is that right?

MELLODY: Yes.

LIZ ANN: I remember loving that story, so how did that come about? And I love how you met and shadowed basically your co-CEO, John Rogers.

MELLODY: It's such an amazing story in hindsight because I was just a kid. I was 19 years old when I first met John Rogers, who had started Ariel. He's 11 years older than me. And he had done something that just hadn't been done before—first minority-owned investment firm to start—and just came out of the gate so strong. He was considered this stock-picking wunderkind. And I got to meet him when I was leaving to go to Princeton. And I got up the nerve at one point to say, "Do you ever take interns?" And so between my sophomore and junior year, I was an intern at Ariel. And I literally discovered the world of investing.

I had not grown up in a home where the stock market was discussed. In fact, we didn't have much money and had somewhat of a challenging childhood growing up with getting evicted and getting my lights turned off and cars repossessed and things like that. So this world of money was just such a big change. But I knew that because of the way I grew up, I was desperate to understand money. And I say understand, it wasn't even about how much I would make. It was just, I needed to know how it works so that I could be financially secure.

So I went and worked at Ariel, and the rest is really history. I've had one job since I graduated from college, and I am supposedly the only person in my graduating class out of 1,100 people who's had the same work phone number since I graduated from college.

LIZ ANN: Do you still use the work landline?

MELLODY: I do. I use the work landline, not as much as I use my cell phone. I think COVID changed everything in that regard.

LIZ ANN: So talk about the current structure at Ariel with your co-CEO relationship with John. There's always a lot of debate as to the merits and value of that. I watched an interview that you did not all that long ago where you talked about "everybody has their genius." So what did you mean by that, and how do you describe yours relative to John's, and why does that co-structure work in your world?

MELLODY: I have to tell you, I am amazed more people are not co's. I did a speech on this recently, and I said, "I know most high performing executives don't grow up saying, 'I want to be a co-CEO,' but there are so many benefits that come with it that I really think it's an underutilized model." And we do talk about it at Ariel, humbly. We had a coach that said, "Live in your genius, where you are at your best and highest use for your organization, and if you're at your best and highest use, you'll actually be happiest." And so we ask ourselves, "What do you do that no one else can do as well?" And we try to have you just do that as much as possible.

So for John Rogers, as founder of Ariel and the person who is the father of our investment philosophy, it's stock picking. So we don't want his time or brain cluttered with things that are unrelated to stock picking. We want him to be able to deliver excellent performance to our clients, and therefore we want him to focus. For me, so my genius is problem solving, communications, I write really well; and as a result, we want me to live in those areas. And actually, the benefit of being co—which there are many benefits—in that way we divide and conquer. I don't pick stocks, and he doesn't run the firm. I run the firm on a day-to-day basis and all that that entails. And he manages the investment portfolio. So the way I described it is he's producing the product, but I'm running the factory floor. That would be the way that you would think about it.

The benefits are, not only the divide and conquer the way I've suggested so we can get more done. But secondly, I do believe two heads are better than one. I call it "the buddy system" as well, where you have a shoulder to lean on. You know, someone once said to me, "What makes you all effective as co's?" And I said, "What makes us effective as co-CEOs is we both basically agree we can't be hysterical at the same time." When one of us is hysterical, the other is calm, and vice versa. Like any good marriage, you don't want to both be hysterical at the same time.

And so I think that, you know, it allows us to work very effectively together. And also, we can cover a lot of ground. So I have been surprised that more people don't do this because it has worked so well for us, and we see no reason to change it.

LIZ ANN: You know, I've known you for a while, and I've had the occasion to meet John several times. Unfortunately, I was supposed to actually, you might remember this, interview John at Schwab's IMPACT conference last fall. And three hours before IMPACT started, and I was doing the opening keynote, I tested positive for COVID.

MELLODY: I remember that.

LIZ ANN: So someone had to step in and interview John. So I was so disappointed to miss that because both of you I would put on my list of sort of investing heroes or gurus. And I know you often talk about folks like Warren Buffett or Jamie Dimon, but who else? Who are your—and I'm going to assume John Rogers is one of your investing heroes—but who are some of your investing heroes as you think back?

MELLODY: Well, I'll start off with John as the one who opened my eyes to all of this. And so I can't say enough good things about him. I mean, I genuinely love John. And he's given me such an opportunity at Ariel to grow and to learn and to also be me. We are very different in how we present in our demeanor. He's extra introverted. I'm extroverted. All sorts of things. But we're complementary. And to have someone that you work with who just recognizes the you in you and lets you be that person is something that I can't even ever properly articulate my great appreciation for that. But also, the person who just opened my eyes to this idea of value investing and how to invest and investing with the courage of your convictions and being different, having those gut-check moments in tough environments where you lean into the difficulty when everyone's running away. I learned all of that from John.

And then just reading the great investors. So when you talk about great investors, yes, living today, Warren Buffett, the greatest of all time in our opinion and mine, and someone who we literally constantly quote, constantly read, constantly revisit what he says because there's so many kernels of wisdom that are there. But I also think of people who are no longer here. I read so much about Sir John Templeton, and how he bought stocks after the war, every stock that was under a dollar, and became an investing great. An interesting thing about John Templeton no one ever really writes is that he was probably the first ESG investor, because he had these religious views that affected areas that he did not invest in, and ultimately, clearly did extremely well for his clients.

I also think about people that are alive today, like Mario Gabelli. Mario Gabelli, I have such a great Mario Gabelli story, and I'm going to just take a quick minute and tell it.

LIZ ANN: I love him.

MELLODY: This is such a good story. So it's '08, and we're having the worst year in the history of Ariel, literally. And we're never too proud to learn from others. So John tells me, "Let's go and see Mario Gabelli. Set it up." And I call his office. We fly to New York to go and see him. And he walks into the room, and he looks at both of us. And we're, you know, a little shell shocked. It's been hard. And he looks at us and he says, "I looked at your performance before you came here, and you guys are going to do so well." So John and I were just kind of looking at him and he said, "You're going to do so well." He's like, "I know, I've looked at it." He's like, "I've lived through this. I lived through the seventies." He goes through his whole history, which is what we know and why we're there to get that shoring up and that advice and counsel.

So I write him a thank-you note after the meeting, saying you were terrific to us, etc., etc. A year later, this box arrives, and it's like a little crate, wooden crate. And so it's addressed to John and me, and we open up the box. You know, I'm like, "John, I have no idea." Like, we needed a screwdriver, that kind of thing. We open up the box, and it is our thank-you note framed. And he wrote across the thank you note, "I told you so."

LIZ ANN: That is so fabulous.

MELLODY: And because we'd had this, you know, up 69 that next year. And all he wrote was, "I told you so."

LIZ ANN: I love that you mentioned the late, great Sir John Templeton. I had the pleasure of meeting him, obviously many years ago. He was a guest on Wall Street Week with Louis Rukeyser when I was a panelist, and I happened to be a panelist that evening, and he was in his early 90s at that point. And I think the best thing ever said about a full market cycle is what he is probably most famous for. You know, "Bull markets are born on pessimism, grow on skepticism, mature on optimism, die on euphoria." I think there's not a better description of a full market cycle than that. And what I love about it as a sentiment watcher is there's—it's only emotional terms in there.

But I want to ask you about 2008. That was a tough year for everybody. And that was actually the time where, I believe, you and I met for the first time. You and I used to do Good Morning America quite a bit either at different times, sometimes we were on together with Diane Sawyer—so lovely—and it was a fun experience to do that so often. Obviously it wasn't a fun time for investors, and you mentioned that that was a tough year for you. So talk about going through a crisis like that, managing a crisis from the perspective of running an investment firm and how you sort of pull yourself up by your bootstraps and carry through. And what did that crisis teach you?

MELLODY: A lot. You know, it was a classic example of something that is horrible and so hard that later becomes so important to you in terms of making you stronger and better. So the first thing I'll say is that I'll tell this story about waking up one morning. I get up really, really early, and the futures were just getting crushed. I could see how bad a day it was going to be. My then boyfriend, now husband, lived in California. So he's two hours earlier. I call him and I'm like, "It's going to be the worst day." It's five in the morning his time. "It's going to be terrible." And I'm going on and on about it. And he's like, "Mellody, what do you know that most people don't know?" And I said, "I have no idea what you're talking about." And he said, "You're from Chicago. What do you know being from Chicago?" And I'm like, "I seriously have no time for these games. What is it you're trying to tell me?"

LIZ ANN: Haha. Get to the point.

MELLODY: And he's like, "When you're from Chicago, you know a lot about blizzards." And he's like, "What do you know when you're in a blizzard? Never look up at the storm. If you look up at the storm, you're going to fall. The only thing you do is watch your feet." And he's like, "If you watch your feet, you get from one place to the next. But if you look up at the storm, you are going to fall."

And so it was one of those moments of great reflection. I ran to the office. It was brutal time, brutal. We were really underperforming. We were losing clients. We knew the portfolios were really cheap, and they were well poised to outperform, but you had to convince people to hang on. And I remember getting to the office and saying to everyone, "We're just going to watch our feet." And I said, "All we have to do," it was spring of that '08 period. I said, "All we have to do is get to November." And they're like, "Well, what happens in November?" I said, "If it's not better, we just pick a new date." So that was my version of watching my feet.

But running the firm, I had to make some really tough decisions, and it was the one and only time we laid off people. We went first. A lot of firms came after us during that period, and that was traumatizing. And I called very good friends during that period, and I said, "This is what's going to happen. What would you do if you were me?" And I remember George Roche, I called him, and he said, "Hold on a minute. I'm on a moped in Bermuda," and he was the CEO of T. Rowe Price where we own the stock. And he said, "I can tell from your voice, something's wrong." So I told him what I was doing, and he said something that I just never expected. He said, "You must shield John from all of this." And I said, "What are you talking about?" And he says, "Value managers are by their nature optimistic. Do not mess around with his optimism. As a stock picker, you have to believe tomorrow will be better. And if you wallow him in difficulty and pain, he may not believe that. So you're going to take every bullet."

LIZ ANN: I love that. It reminds me of something that our founder, Chuck Schwab himself, has always said, which is, "Investing by its nature is an act of optimism." I think that has to be part and parcel of success. And I know another word you often use is "patience," and Ariel's logo is a, is a …

MELLODY: A turtle.

LIZ ANN: I like the idea of patience being an active process. And I remember listening to some comments you made about that. So share what your thoughts are on how that's an active process, being patient, because I think it's an important lesson for investors of every variety.

MELLODY: So we've always called ourselves the patient investors. I love that you're asking me this question. Since inception, we've had a tortoise as a logo, and our motto has been "Slow and steady wins the race," from Aesop's fable. And I have to tell you, in recent years, we were thinking about what we stand for and the market environment that we've been in. And we modified the patient investor to talk about being actively patient. Because we felt that some people took patience to mean stasis, and it's not at all. It's extraordinarily hard to be patient.

The example that I give people is the marshmallow test that they give to kids where they say, you know, "We're going to walk away for five minutes, and if you leave the marshmallow there and don't eat it, you get two marshmallows." And it's very, very hard for some kids to not eat the marshmallow. And they're like three years old, I think, when they take this test. It's supposed to be suggestive of what, you know, how they're going to behave in life. The interesting thing about it is, I use that point to show you have to really steel yourself when you're being patient. It takes an act of being active. And we love the double entendre of this idea of "active patience" because in our world, as a patient investor, you're waiting and waiting and waiting for what Buffett calls the perfect pitch. We often have researched lots of stocks that we want to own. They're too expensive for us to own them. And we're just waiting for dislocations to buy them. So we're just ready to pounce, but you have to be doing the research all the time to be ready for that moment when you can actually take advantage of the dislocation and the opportunity.

At the same time, we wanted to underscore this idea of active patience as a nod to active investing. When the world has become so convinced that there's only one way, that's when we as natural contrarians say, "This is where opportunity gets created." So so many people have talked about and really piled on to the idea of passive investing. And this is not a knock on passive investing. It's just to suggest when everyone goes one way, you start orphaning lots of stocks in the process. And that creates this great opportunity for us. And so passive can be something that works very effectively at a low price for lots of reasons, but it doesn't mean it's the only way. And if you look at active investing is specifically in inefficient parts of the market, like the small- and mid-cap areas where we work in the U.S., or international and global over emerging markets—all where we have portfolios—you can see active has outperformed passive over time.

LIZ ANN: I love that. You know, another thing that you have said has been—I guess in general, not just in your life—is often a key to success as an investor, is being in the boardroom. And I know you have and still do sit on a number of large corporate boards. So talk about that connectivity from what happens in the boardroom, what you learn, and how that can make people who have that as part of their active daily life, how it has made them better investors.

MELLODY: John Rogers and I both sit on corporate boards, and we have for many years. Currently John is on the board of Nike and The New York Times. He was on the board of McDonald's for a couple decades. I've been on the board of Starbucks for a couple decades where I'm chair, and also I'm on the board of JP Morgan. In the past I've been chairman of DreamWorks Animation, and I've been on the board of Estee Lauder for long tenures.

And we here again, we go back to Buffett who said he was a better investor and businessman because he was a board member. It's this unbelievable opportunity to have a front row seat to another company, the inside of it. And in these situations, global icons that we've been able to sit inside of these companies to not only, in real time, see what is happening at a JP Morgan with banking, with credit cards, with auto loans, mortgages, all of those things. But also, there you're understanding the economy in real time. But you also, at a large consumer products company, you're understanding consumer behavior. You're understanding the global marketplace, other countries. Starbucks, we have almost 39,000 stores in 82 markets. So you get that perspective that informs—not any kind of insider trading way, I don't want to suggest that at all—but it informs how you think about businesses, the problems that they confront, how best practices exist and why. And you can bring some of those best practices back to your own company like Ariel, or you can posture what the issue is that you're seeing up close and overlay that to companies in the portfolio. And so there are so many benefits beside these great leaders.

You know, we've had the opportunity to sit in the boardroom with the most accomplished executives of modern day—Howard Schultz, Jamie Dimon, Phil Knight, or John. We could go on and on. And so as a result of that, he used to be in the boardroom with Fred Turner, who was a key part of the McDonald's growth story, not to mention the CEOs that run the businesses. And so this is one of those opportunities that some people see it as a distraction. I say you can't imagine how it enhances our knowledge and expertise, the quality of our work, our ability to lead, our ability to be bold, our ability to understand nuance perhaps in ways that you can't even if you are the most fastidious reader or someone who really wants to learn. The amount that you can learn in a boardroom and even from your fellow board members who are running organizations where they can add insight and thoughts. There's just so much there that is really, really helpful.

LIZ ANN: Let's stay in the proverbial boardroom for a second. Our audience is largely investors. So what are some global trends that investors should be watching that your and/or John's boardrooms are particularly focused on right now?

MELLODY: I never speak about specific boardroom issues, but just macro what we're seeing with the companies we own, with the conversation with business leaders around the world—I think we're still, believe it or not, in this BC/AC, I call it, "before COVID, after COVID" world. And you would think years later that would have regressed in the conversation, but even when you talk about comparisons, anchoring, a lot of things are—this is, you know, more than traffic in 2019, or, you know, there's so many ways in which we're still anchoring to that environment, those economies around the world, as well as "How did people come out of those periods?"

So for example, the emerging markets have been much slower to recover from COVID, as we know all too well. That is a conversation. As well as the resilience of the developed markets' economies like the U.S., where you're seeing the Dow at an all-time high in this environment, and the market sort of continues to defy gravity as a result of the pent-up demand that occurred from that lockdown. When you look at where people are spending their money, the experiences they want to have, the need that still exists to be in and of the world, you see it play out in the sectors that have done well and the like.

So change in workforce, hybrid—what does that mean? Is that forever? Is it for now? Expectations of people that work in your organization, the flexibility that may be demanded where you have no choice—people are still getting their sea legs on this one. And I'm not sure how much longer it's going to take, but we're certainly—I don't think we're set. I mean, I drive to work in San Francisco and in Chicago, and I have to tell you, the traffic still isn't the same. I know when it's going to be busier than when it's not. Monday and Friday is not the same. All of those things. And that has that ripple effect on business centers and the like. So those trends still exist. I don't think as much in Europe as they do in America. I believe that might still be the case in parts of Asia and the like.

LIZ ANN: Well, an added nugget for that is that I think one of the changes that came about as a result of the hybrid structure—and I agree, everybody is still figuring out how that works for their own company and their industry—but I think that flexibility that hybrid offers is part of the reason why the female labor force has grown the way it has in the last few years, and I hope we don't lose sight of that.

MELLODY: Yes, I think that's true. I think also at the same time, I still have pangs of worry about how we ensure the career trajectory and all of the things that we need to have for everyone in those scenarios. And so I think this has taken hold, and I think this is the way society will work. I don't think we'll go back to what was, and I think we need to make sure we continue to evolve everything as a result of that.

LIZ ANN: So what are you—on a day-to-day basis, what are you hearing most from your clients? What's top of mind for the clients of Ariel and the value style? 

MELLODY: You know, it's interesting. There's just a lot of conversation about private markets and the interest, even for the individual investor. You know, this change in public company versus private company, the sea change that we've seen that there are less public companies. I don't know that I believe that's forever. We've certainly, post-COVID, have been in environments where the public markets have been cheaper than the private markets because the private markets didn't take their markdowns in the way that one would have imagined.

I think there's a lot of conversation about an exasperation, I would use that word, about value investing and growth-stock dominance and the narrow stock leadership that has occurred in recent years and the narrowing of that leadership. You know, we talked about Mario Gabelli at the beginning of this conversation. And you know, he lived through that period of the Nifty Fifty in the '70s where you had the leadership confined to fifty stocks, and they were considered stocks that could never go down. And of course, they ended up having a difficult time. But the idea that you've gone from 50 to seven with the Magnificent Seven—and now potentially four with the Fab Four—you know, this is nosebleed territory around some of these subjects and also the concentration and the prevalence of those industries inside of the indices, the weightings of technology and the like. It just feels like a pendulum that has swung really, really far.

So some clients, I have to tell you, they're like—they capitulate it. They say, "You know, I'm just giving up. If you can't beat them, join them." And you see this self-fulfilling prophecy continue because they decide they've got to be in those big growth stocks. And so those stocks can continue to get, you know, run up. But at the same time, I think that that makes value even more of, as they call it, "a coiled spring," just waiting to break open because there's so much value in value at this point. So even though you feel left behind, at the same time, you can see so much opportunity that is out there with these stocks that have been overlooked. And so that gives us great confidence.

We also—we just become students of history. We read and read and read. And we don't think any time is ever fundamentally different. And this is reminiscent of other times that we've lived through. Around the dot-com bubble with different businesses, probably certainly more substantial cash flows are different and the like. But I do believe that those who are holding on and staying true to their convictions, I think they will be rewarded over time. And I don't think that trees grow to the sky. You know, you can't have stocks go up forever uninterrupted. It just doesn't work like that.

LIZ ANN: I also agree 100% with what you just touched on there, but you mentioned it earlier in our conversation, that I think the playing field is becoming more level for active relative to passive. There really wasn't a level playing field for a long time. And now I think in part, due to the return of the risk-free rate and price discovery back again and fundamentals reconnecting to prices, I think the platform is there for the combination of active and value.

MELLODY: I'm 100% with you. And I think the more the conversation becomes excessive, the greater the opportunity is. And we certainly feel that way when we look at the values that are embedded in our portfolios. We see great opportunity.

The other thing I was going to tell you is there's just been this constant macroeconomic conversation amongst clients. Recession watch, higher for longer in terms of interest rates, the macro discussion, the geopolitical fears—they've dominated the conversation, and they've overwhelmed the fundamentals of the investment opportunity. Very few people are talking about individual stocks outside of what I call the celebrity stocks. And it's more a conversation about, you know, these economic forces. And we are not macroeconomic prognosticators. We're bottom-up stock pickers. And so again, we see when you sort of look at that swirl and that discussion, the market climbs that wall of worry, you know, and it creates again this great opportunity for all of us if you can manage to just sort of tune out all of this noise.

There will be a recession one day because recessions follow, you know, great periods of economic expansion. We've gone longer than is normal. But it shouldn't be that that is crippling to our society. And the great number that we're living with—I remember getting out of college and mortgages were … my mortgage was 8%, you know, in those early years of … so I know against free money, it looks excessive, but I talked to someone the other day, they said, "I remember when mine was 10." It doesn't mean that it feels good, but we do adjust as people to these situations.

LIZ ANN: So in the brief time that we have left—and you've been so generous with your time—tell us about, and I love the name, Project Black. I have to wonder, oftentimes when there's a deal that's being worked on behind the scenes in the investment banking world, there's a code name. That's what that sounds like. Is that what it was initially? 

MELLODY: Yes.

LIZ ANN: So tell us a little bit about Project Black.

MELLODY: So Project Black is Ariel's first foray into private equity. And we've done it in a very unique and different way, different than anyone has done it. We've been told that by lots of private equity practitioners. So I don't think I'm overstating anything.

The idea came from a call that I received from Jamie Dimon one day during the summer of 2020, when we were not only locked down, but the world was reeling from the horrific murder of George Floyd. And he said, "Mellody, a lot of people want to help black businesses." And he started to talk about an opportunity to engage with asset managers that were black and brown and what we might do together. And he started to name firms. And I said, "Jamie, that firm went out of business. That guy died," etc. And the mere fact of how I reacted with how many firms weren't still around made the point, right?

So I said, "I think I have an idea." And I went away, and I wrote a memo over the weekend. And in the spirit of investment banking, I named it Project Black. And the idea was to scale sustainable minority businesses that could serve as tier-one suppliers to Fortune 500 companies. The reason this was a compelling idea is that many companies at that point, the big Fortune 500 companies, were making pronouncements about their desire to diversify their supply chain, both figuratively and literally. They've had the COVID issues with the choke in the supply chain, but they also recognize they didn't have diverse suppliers in terms of everyone getting an opportunity. 

The problem was that we have a scale challenge. Ninety-five percent of black and brown businesses in the United States have less than $5 million in revenues. So if you're a giant company, you don't want to write a hundred separate $2 million purchase orders. You want to write a $200 million purchase order, but we don't have companies of the scale to do that. In fact, there are only five black businesses in the United States with over a billion dollars in revenue. Five. That's it in the entire country. So I said, "What if we could buy medium-sized businesses that may not necessarily be minority-owned—through our ownership at Ariel, minoritize them, and then ultimately install a more diverse board, majority minority—C-suite executive, at least a minority executive at the CEO, CFO, or COO-level, share ownership throughout the company, create the opportunity for advancement in different ways, and ultimately scale sustainable minority businesses?" 

And I took that idea to Jamie, and he said it's a good idea. Ultimately, JP Morgan became a co-investor with us, and we launched this private equity fund, which became one of the largest first-time funds in history with a $1.5 billion initial close. And we've bought three companies since then. And it's been a very, very exciting new endeavor inside of Ariel led by Les Brun, who is the CEO. He started at Hamilton Lane. And our head of investments, Yue Bonnet, who came out of the Carlisle Group. So we've got a stellar team that works in New York at Ariel Alternatives. And it's been a real labor of love to think about what we could do to change the narrative around what it means to be a minority business in the United States in the future.

LIZ ANN: Wow, well done you. Wrapping things up—again, I am so thrilled that you agreed to, I guess literally, not that anybody is seeing it, sit down. I wish it was in person. I haven't seen you in a long time, but I hope there's an opportunity to see you soon. But I know you recently did a master class, and it's always been—I think of you as in a master class teaching me over the years—and it's been a pleasure to have this opportunity. So thank you for joining our relatively new podcast. We really appreciate it, Mellody.

MELLODY: Well, first of all, Liz Ann, before I go, just say you've been a hero of mine. We can call it a mutual admiration society. I remember meeting you and being thrilled to meet you. I've always followed you. I read what you write and say, and you're always so smart and thoughtful, and I root for you.

LIZ ANN: Thank you, right back at you. Thank you so much.

MELLODY: Thank you.

KATHY: Well, yeah, Mellody is fantastic. It was a great interview. I've been on panels with her, as have you. And she always has so much interesting to say and such wide perspective given the reach of all of her activities. 

LIZ ANN: Absolutely.

KATHY: So Liz Ann, what are you watching next week as we head into June?

LIZ ANN: Yeah, so we're, I'm sure, both going to talk about the jobs report at the end of the week, but there is a decent amount of data in advance of that. And the ISM, both services and manufacturing, comes out next week. And I think that's always important, but in particular, either will confirm what we saw with another version of what they call PMIs, purchasing manager's indexes. There's another version of these, both for services and manufacturing, that SP Global puts out. And those actually showed a surprising pickup in activity across both manufacturing and services. So we'll have to see whether the maybe more widely watched ISM corroborates that or not. We've got JOLTS, job openings, and quits rate comes out. We know that's something that the Fed keeps an eye on. Also, Challenger layoff announcements, that's increasingly in focus. We get the data on productivity and unit labor costs and also data on net worth and consumer credit. So what about you? What's on your radar aside from the obvious jobs report that should be on everybody's radar?

KATHY: Yeah, I would say it's jobs, jobs, jobs. I don't know that there's anything else to focus on for the bond market in the near-term anyway. We have seen that moderation in the growth rate in jobs. We're seeing the demand for workers slow down. You see that in the JOLTS report and other places. So we'll be looking at this report to see if it corroborates some of that moderation in the job market or not. I think that's going to be really critical for the Fed when they focus on the next policy meeting. 

So as always, thanks for listening. That's it for us this week, but you can always keep up with us in real time on social media. I'm @KathyJones, that's Kathy with a K on X and LinkedIn.

LIZ ANN: And I'm @LizAnnSonders on X and LinkedIn. And a reminder, public service announcement here. I am not active on Facebook nor on Instagram. I won't ever ask you to join a private stock-picking club. I've had a rash of imposters, some to the tune of 150 to 200 per day that pop up. That is not me, I promise you. You can follow this show, by the way, which is real, and we're not imposters, our show On Investing for free in your favorite podcast app. And if you've enjoyed this episode, tell a friend about the show or leave us a rating or review on Apple Podcasts.

KATHY: Next week we'll be assessing the state of the markets as we approach mid-year. And we'll start off with a look at municipal bonds and corporate bonds with my colleagues Collin Martin and Cooper Howard.

LIZ ANN: For important disclosures, see the show notes or visit schwab.com/OnInvesting, where you can also find the transcript.