While John is taking time away with family, following his father’s passing, I wanted to share one of my most favorite interviews Maxfield has done. With Mark Lynch in March of this year. The video interview and transcript are provided.
John Maxfield: I personally consider Mark Lynch to be, I hope this doesn't embarrass you, but I consider him to be the kind of the number one kind of intellect in the industry in terms of like the well roundedness of his knowledge. And it's also quite actionable, because he does a lot of investing, obviously. And I've gotten to know Mark over the past year, and it's just been, I mean, what I knew before engaging with Mark and what I know now, I mean, what he's accomplished. It's just been a tremendous journey for me. And he's just generously given the knowledge. He's a great voice to the ecosystem. So. So welcome, Mark. Thank you. So I'm going to ask you, can you give me a couple of topics, but I'm going to ask a different topic first. It's not about Bulgaria. So you have a large library of banking books. And that's what first got us to talking. When did you start reading banking books? And how has that influenced your career? I mean, you've been such an access successful investor.
Mark Lynch: Well, I mean, I've always gone through used bookstores, when I'm in a town, they've got a good used bookstore, which used to be trial and error. And you can look online and see if they have a used bookstore, you go in and see what they had. And, you know, go to the financial section and see if they had any histories of banks. And sometimes you'd stumble across the history of a local bank, and it would give you tremendous insight into why how they got where they were, what characteristics they prized over the years. He didn't say it. I mean, you got to read between the lines. And really, what Ville what weaknesses they had consistently had over the decades. And it was, it was remarkable how you could get a book that was written on like the 100th anniversary, the bank published in 1984, and you'd read it in 2006. And the character was still evident, they were still good at the same things, they were still bad at the same things, they were still pigheaded about the same things. So it really gave you a tremendous insight into how hard it was to change the culture that the the numbers would change. And I spent a lot of time looking at the numbers, of course, but the underlying bones of the bank changed very slowly.
JM: So Mick Blodnick is a mutual friend of ours. And Mick, you know, when I first started getting to know his aspect of the market, and he said, Mark always came prepared, always came prepared. He's never loafing and he always would ask like these pinpointed questions. Most random questions. Talk about that whole thing, like your philosophy and your approach to engaging with bank CEOs?
ML: Well, part of it is how could you not come prepared, that would be pretty shameful on a professional level. And if any of you haven't come prepared, feel shamed. So I think, you know, you've got to, I mean, this is your one shot, or not, this is your big shot of getting an insight. And so to just, you know, ask your way through it, based on a quick read of 10Q and an analyst report that's pretty lame when you couldn't even you've got all this detail that comes out in the in the shareholder filings. So I mean, there are legitimate questions you can ask about, you know, investment portfolio duration, or why the heck do you have this LPO, you know, 1000 miles from your headquarters. That's suspiciously close to good hunting areas, and things like that. And so that's, you know, actually important questions, but then you'd ask nitpicking questions related to gauge competence. So, you know, how do you feel? What sort of risks are you taking in your auto lease portfolio? And if you're going down the track of talking about the FICO scores, you realize that they're probably taking a big residual risks that they haven't even thought about? No, that's not a good sign. Or with the smaller banks, sometimes I'll, I'll look at the branch data, and look at a branch that's clearly underperforming. And I'll say, Well, what about the Farnsworth branch? Why is that still open and see if they actually know about the Farnsworth branch and the fact that it sucks. And then if they have an actual reason why it's still open, other than lethargy, and that gives an idea of how well they're managing the company, and are they getting the information they need to have to run the company properly?
JM: So just spending all that time like, I like to joke that like, I don't have a job and like, I just sit around clowning around with my life and I think you'd probably want to talk about that. I feel like you would agree with all those things. Maybe told me those things. But, but I love reading history and I like putting the pieces together but like, I haven't gone out and acted with, like the type of capital you have obviously. Why do you do it? Is it just hobby? Or does it actually helpful?
ML: It's both. I mean, I think, you know, if you deal with numbers as much as analysts do, you tend to be kind of animal compulsive. So you want to work towards completion. And I have, you know, I've probably got about 300 histories of financial institutions. And there's probably another 500 to go, so I'm not going to get to completion. But you know, some of them look interesting. So it is helpful. I mean, it is helpful in terms of getting the culture of these companies as I said, and it's also helpful in ways that the history repeats and you get, you know, cycles of liquidity. And in contraction, you get cycles of banker enthusiasm and fear of missing out. You get cycles, where people overcorrect and risk staking is overly de emphasized and a bank with the proper risk attitude can gain a lot of share. So, you know, you, you got to remember that, you know, as amazing as are the people before us were pretty amazing, too. And just because they didn't have the technology didn't mean they were any dumber. So they went through the same things we went through with just less electricity and less gadgets.
JM: When you say there is an easy way to acquire experience, expensive way to acquire experience and a cheap way to acquire experience, right? And like, learning from others, especially as a cliche, right, that's the cheapest way to learn from experience. Like, have you ever acted upon? Like, we've talked about this? I know you and I know you have, I mean, like in the lead up to the financial crisis, you were, you had noticed some things that were going on you started repositioning things. Talk about that experience, and how learning and continuously learning because one of the things that Mick says is that like, you know, if I asked him one time, you know, what, what's the history of successful people and not successful people? And he said, well, you know, the thing about successful people is that they're always constantly constantly learning. And coming from Mick, I consider him a pretty credible source to just talk about, like, connecting those dots between the money making and the reading in a tangible story.
ML: Could you make that a shorter question,
JM: This is what I get to get with Mark. This is a story of our relationship. Tell us a concrete story about a time that you made an investment decision that turned out well or bad. I suppose we'll get the former. But that was based upon the extensive reading that you've done.
ML: Well. I, it's not gonna exactly answer your question about the global financial crisis. I mean, we had been nervous about the billions in real estate markets in 2004 and 2005. And I think where the reading came in, was having read, even then, over 100 books on financial history, I knew that things get really bad occasionally, that the Fed has very seldom done a really good job of managing those things particularly well. We'll say the Fed ran for later. So I knew that, essentially, the range of outcomes people thought in a downturn was way too narrow, and things get a lot worse. And so we were when we looked for problems, we didn't assume that they would necessarily be confined to one company. So the the the biggest insight, in terms of what to do for a global financial crisis was visiting National City bank offices, the Cleveland bank, their San Jose, California subprime operation, which was quite large, unfortunately. And the guy said, you know, five years ago, there used to be five indicators of financial distress that we looked at. And if a client had only one of them, we'd make the subprime loan. Now, if a guy has only four of them, we'll make the subprime loan and we're losing share. So that was like, Oh gee, that was our Oh Geez moment. We went back, dramatically reduced the National City position, but also unfortunately, not completely. But we also thought you know, this means that the system as a whole is completely screwed. And so we took the hedge fund we managed down to zero position, which became net gain. Then in 2007 we bought puts on Fannie and Freddie because we saw that they were implicated, and you shouldn't necessarily assume they were going to survive, so on and so forth, and generally adopted a very negative positioning, because the reading, it told me, you know, just because we haven't had a problem with home loans in, at that point, 70 years, it can get worse.
JM: How do you, it's gonna be a hard question. Mr. Lynch, how do you conceptualize or think about the banking system as a system? Like, how does it work?