There are three things that I’ve tried to do my whole career. One, embrace controversy. Usually with research, there's got to be some investment controversy where people are either evenly divided or adamantly fighting about some issue. Two, find a research edge that you can actually cultivate. You've got to be able to say, I'm finding out something that the rest of the market doesn't know.
Well, Gary, thanks for joining us today. You and I go back a long, long time, 30 years I think, and like a lot of people involved with the Future Fund our roots go back to the Sanford Bernstein days. My recollection, you really burst on the scene. You come into the company, which is known for its great analytical, independent resources that we have, and you're assigned the tobacco and beverage industry. One of the big companies, of course, was Philip Morris. So you come in and in a sense, stir up a little controversy. So can you talk about those analytical times so we can better understand what makes you tick, how you think about doing the research?
So I was a rookie on Wall Street, and I was trying to figure out what my edge was going to be. And as you point out, everybody loved Philip Morris. Everybody had a buy on a stock. It was one of our larger positions at the firm. And what I did is start my research process by contacting all the big tobacco distributors. What I got back consistently from the distributors is, “hey, do you realize that what Philip Morris does every quarter at the end of every quarter is they stuff the channel used to call that trade loading and then they buy back if we have too much the beginning of each next quarter?” I said, that just sounds kind of weird. I don't think people are aware of that. And at the time, everybody loved Philip Morris. So I went out and started visiting some of these distributors that had sent me back the taxes and found out that sure enough, that was what Philip Morris was doing.
They would load up the trade at the end of the quarter to make their numbers, and then if people wanted to return them the first to the next quarter, they could do it. That was at the same time that Liggett Myers, they started launching generic cigarettes, because one of the reasons Philip Morris had been such a great performer is they could take pricing every year and raise their prices six, seven, eight percent a year, and they could get away with it because people were addicted. After all, and you could just build it into the price of a pack of cigarettes that people would pay it. And Liggett and Myers decided they were going to offer literally half price cigarettes and they were gaining share.
So you had two kind of confluence events that I noticed as a rookie analyst. One Philip Morriss stuffing the channel at the end of each quarter. And at the same time, you see discount cigarettes taking a lot of share. So I came out with a report, I think it was December of ‘92 that said, look, this can't continue. Philip Morris is stuffing the channel and there's a lot of pricing pressure. On April 2nd, Philip Morris called us all into a room. I remember this vividly, and they decided that they were going to cut prices by, it was about 25%. Philip Morris, which was a big cap stock at the time, fell by 26% that day on April 2nd. And that became known as Marlboro Friday. And that was what started my career. And I went from being a rookie to all of a sudden everybody wanted to talk to me.
And you became first team All American, a position you held six years straight. So it was a huge accolade. But what fascinated me the most, and when I started to really spend time with you, there was another issue emerged, and that was all the litigation. Everyone was suing because of the cost of healthcare. And I thought you did something that was incredibly unique.
My view, at least a priority, was that juries were not going to give money to plaintiffs suing the tobacco companies. So what I did is I conducted what we called mock trials. I would hire 10 people, put them in a room, pay them $25, and try to present arguments to them and present evidence to documents and see if they would be willing to give money to the tobacco plaintiffs. And what we found is that most people wouldn't because most people said, wait, there've been warning labels on the packs of cigarettes, so why should we give money to these people who've been warned? And so our very strong conclusion was that juries were not prone to giving big multi-billion dollar awards out to tobacco plaintiffs. So one of the things that we thought would happen, and we spent a lot of time talking to the tobacco industry about this, was that they would settle.
And because with most litigation where it's a harmful product, think about asbestos, the product gets taken off the market. With tobacco, you couldn't take it off the market. People were addicted. So one of the things you could do is you could just price it into a pack of cigarettes. So for instance, if you had a settlement where the industry was going to pay, say $20 billion a year, and the tobacco companies were selling 40 billion packs of cigarettes a year, all you had to do was add 50 cents to the cost of a price of cigarettes. And people would still buy them because they were addicted. So we felt that the industry, the stocks were being penalized unfairly. And our view is that people should be buying the stocks when they were depressed.
So just before we leave the analytical part of your career, what may be the one or two key insights you either learned or were taught that kind of makes a great analyst versus maybe an average analyst?
Well, I think there's three things that, and I've tried to do my whole career. One, embrace controversy. You got to have a fight in order to make money. Usually with research, there's got to be some investment controversy where people are either evenly divided or adamantly fighting about some issue. So we try to find an investment controversy. Two, find a research edge that you can actually cultivate. You've got to be able to say, I'm finding out something that the rest of the market doesn't know. And we always are trying to look for a research edge. And if you can't get it from the company, which usually you can't because they're not going to tell you everything. You’ve got to go out and do your own work, talk to distributors, do mock juries, talk to customers, talk to competitors, and then figure out the one or two drivers of a stock. And with Philip Morris and RJR, first it was pricing, but then it evolved and it became litigation and then just really research that relentlessly.
We used to call it the key drivers, right? In any company, what's the key driver?
But a lot of analysts get, they want to build these elaborate models. Not that I'm against elaborate models, I've got my own elaborate models. But what you find is if you can get those one or two key variables, you can get the stock right. And I've kept that through my career.
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