One could easily have assumed Mitch Kovitz had mastered the game when he was hired by Arthur Andersen & Co. and started his career in an office eight floors below his father, an executive at Rothschild Investment Corp. The younger Kovitz would regularly trek up the elevator to visit his father and his associates in that Chicago office building. The younger Kovitz had time on his hands because it was 1989 and there was a recession in progress, triggered by the savings and loan crisis and infamous bad actors such as Charles Keating and excesses including a million-dollar chandelier. Working in the real estate division of Arthur Andersen had slowed to a crawl for the young Kovitz.
“When I visited my dad and his colleagues we would talk about investing and then, after a while, I said, ‘Dad, investing is what I like. What am I doing in public accounting?’” he recalls. “He actually wouldn’t let me come aboard originally. It was only after I said, ‘dad, I am turning in my resignation tomorrow and going to become assistant controller at Van Kampen Merritt Investments. Then he changed his tune, ‘You might as well come work with me,’” he said.
Kovitz agreed to take a pay cut to join his father at Rothschild and was given a tiny desk wedged into his father’s office. The two men worked together for several years, the elder Kovitz as an adviser and portfolio manager, the junior Kovitz as an assistant portfolio manager to his father.
CROWDED HOUSE
Kovitz was founded in 2003 by Mitch Kovitz and three other partners who were a self-contained group at Rothschild Investment Corp. They had been managing money together since 1997 and their group had expanded to 11 people while most of the groups within Rothschild numbered only two or three people. Kovitz’s group also began using many different investment vehicles — among them, private equity and hedge funds, while other Rothschild advisers limited themselves to stocks and bonds.
“Rothschild is an umbrella organization that houses many different investment advisers that do their own thing,” Kovitz explains. “It is a great place for entrepreneurs, they don’t place a lot of limitations on you, and you are in charge of your own business in every way — talking to clients, reporting to clients, managing the money, all that.”
As his group swelled in number, Kovitz says he began to think about branching out on his own. He went to CEO Richard Karger, also a personal friend, and discussed his ambition to split off his group as a standalone firm independent from Rothschild.
“While he hated to see us go, he understood why, and they have done nicely since we left,” he says. “We have such a good relationship that we still talk regularly, and we actually rented space from them in that same office for six months post-separation.”
Today he serves as CEO and co-CIO for the firm he co-founded.
JUMPING THROUGH HOOPS
Kovitz was born and raised in Highland Park, about 20 miles north of Chicago. He played for the high school basketball team and says to this day he could have been happy with a career as a basketball coach. He and a friend became Chicago Bulls season ticketholders the year before Michael Jordan was drafted and joined the team. The Bulls glory years ensued as Jordan, Scottie Pippen and coach Phil Jackson teamed up to create a historic run of six NBA championships.
“I gave up my season tickets about four years ago; I couldn’t take it anymore,” he says, referring to the Bulls post-Jordan descent into mediocrity — at best.
Kovitz enrolled at the University of Illinois, from which he graduated with a master’s degree in accounting and an emphasis on taxation. After graduation he initiated his brief stint at Arthur Andersen & Co.
“Once I started working for Arthur Andersen, I realized I didn’t want to work in accounting for the rest of my life.”
Kovitz’s term at Arthur Andersen wasn’t the best experience, except for the many relationships he formed while there. Kovitz laments the federal government’s decision to forcibly disband the giant accounting and consulting firm in 2002 after it was found guilty of crimes in its auditing of Enron, an energy company that became one of the most spectacular corporate failures in U.S. history was over penalizing. (It should be noted that in 2005 the U.S. Supreme Court unanimously reversed Arthur Andersen’s conviction based on serious errors in the trial judge’s instructions to the jury.)
“It put a lot of good people out of work, and a lot of my friends who had just become partners lost a lot of money because they bought into the firm with debt and the company went belly up,” he says. “It was just terrible.”
READING, LISTENING, THINKING
Kovitz rises between 4:30 a.m. and 5:30 a.m. and reads The Wall Street Journal, The New York Times and The Financial Times to stay current on developing business news. He regularly meets or has calls with his investment teams, each of which has three to six members. The equity, private equity and hedged equity teams are actually located in the firm’s suburban Highland Park office in order to foster a quiet and thoughtful atmosphere. The Highland Park office does not receive clients. Client meetings and other activities are conducted in the firm’s downtown office on LaSalle Street.
Kovitz schedules just five things per week on his work calendar to leave copious time for reading, listening and thinking, and being prepared to act quickly when opportunities arise.
“If you looked at my calendar there are very few things on there,” he says. “I try to delegate as much as I can to the people who run the various businesses or advise clients, so I have time to think about the next opportunities, think about how we are going to better communicate to our clients, invest better for our clients and what new strategy or vehicle we will make available.”
His best thinking is done while taking regular five-mile walks. One of the fruits borne of that deep contemplation time was the launching of the firm’s family office practice about eight months ago, a practice Kovitz is personally heading — for now — to ensure the new enterprise gets off to a successful start. Once set on a proper course, Kovitz says he will “fall back into the weeds” and begin working on his next initiative.
In the meantime, Kovitz believes the new family office practice is going to be the firm’s growth driver, at least during the near term, in part because of the organization’s in-house resources.
“We have investment people in-house and when you have that you are never subject to allocation limitations by another entity. If we see industrial real estate is cheap, we can apply $200 million to industrial real estate and invest in it directly,” he says. “This type of investment capability, paired with our deep team of 20-plus financial planners, are some of the features that distinguish our family office services division.”
But when a family or individual client signs on with Kovitz Investment Group, they give full control of the money, within certain parameters, to the Kovitz team.
“We don’t take business where we have to call the client to get permission for a particular stock, bond or other investment,” he says. “The second thing is you have to be okay with — and I laugh at this because it is a benefit — we do everything in-house. We are not going to allocate money to company A for private equity and company B for real estate; we are going to do the investing ourselves. The reason is because it gives us more control over the dynamic allocation and ultimately the end result. That way, if we want to get out, we can get out, whereas if you allocate money to an outside real estate fund, you get the money back when they want to exit and not necessarily the most opportune time to exit. If they aren’t ready to sell yet, even if the opportunity no longer is good, they could potentially drag out the holding period to collect additional fees. Since these third-party real estate firms collect management fees on the assets under management, it is not uncommon for there to be a conflict between the best interest of the client and the financial interest of the investment firm.”
A strategy that has the opportunity to be a very lucrative one going forward, according to Kovitz, is small- to medium-size private equity investments in companies worth between $15 million and $50 million.
“Because these businesses are generally cheaper in most market environments and possibly even less expensive in a post-COVID-19 environment, nice returns can be generated for clients in this asset class over the long-term, somewhere in the high teens or low 20s, without betting the ranch,” he explains.
TEE TIME
When he isn’t contemplating the future, Kovitz is likely to be golfing. What does an avid golfer in Chicago do about the city’s long, brutal winters? One is to make trips with one of his golfing daughters to Phoenix, a golfer’s mecca, especially during the winter months. Another is to buy a golf simulator so the sport can be played year-round. Like most electronic devices, golf simulators have gotten far more sophisticated and life-like. Kovitz calls the simulator easily the best purchase he has ever made, other than his home.
Purchase of that scale — or any scale — don’t come easily for Kovitz, who has bought used cars for many years and labels himself a “saver,” though simply out of disinterest in most things rather than frugality.
“I am one of those people who, before buying, asks myself, ‘am I really going to use this? Am I really going to enjoy it?’ There are a couple of things in my life I have purchased and enjoyed, but 80 to 90 percent of the time I don’t make the purchase because I realize the cost-benefit isn’t favorable.”
THE ORACLE OF OMAHA
Early in his investing career, Kovitz stumbled across a magazine article containing some of Warren Buffett’s thinking, advising that people should do for a living what they did for fun from the ages of 13 to 17, as your interests in those years of life will be the things you’re most interested in for the rest of your life.
“That is so true,” says Kovitz. “When I was growing up, I loved math, I loved probability weighted wagering and I was ultra-competitive; and that is what my current job is — a combination of all of those things.”
Buffett is one of two mentors to whom he attributes the better part of his professional learning, the other being his father. Though he has never met Buffett, Kovitz has been an inveterate reader of nearly everything the so-called Oracle of Omaha has written, including every annual report since the time Buffett was 25 years old and managing money in a small partnership. Through those writings, Kovitz says, he learned how to invest.
His father mentored him in how to operate a business, how to train and treat colleagues, and how to properly care for clients.
“Sometimes that means giving them advice they don’t want to hear,” says Kovitz.
IN THIS TOGETHER
One of the principles Kovitz has adhered to over the years is to invest in tandem with its clients.
“We have about 23 partners now and when you add up all the partners’ personal capital, about 90 percent of partner liquid dollars are invested in the exact same securities and private investments that we make available to our clients, so we eat our own cooking. For example, we own a roughly 6 percent position of Google in client accounts, and I have that same allocation across my personal accounts.”
“You walk into a major bank and you ask how much they have invested alongside their clients, and you are likely going to get a very different answer. Sometimes these companies don’t even allow you to invest in the same things because they consider it a conflict of interest. We say, how in the world could there be a conflict if we are investing in the same thing? Wouldn’t you, as a client, want to know that if you are going to lose money, your adviser is going to lose money right along with you? People think funny in the investment business.”
Asked why the firm, with an investment bias guided by value, has such a large position in Google, Kovitz replies at length: “Google is a great business. They have got their main business, obviously search, which is a virtual monopoly, and YouTube, which is a huge beneficiary of media’s shift to digital content. When you add up all the various parts of their business in a sum-of-the-parts analysis, that value is way more than what the stock price is trading at, somewhere around 30 percent or 40 percent more. Google is investing a lot in money-losing operations. It has a number of other businesses and projects, like Waymo — the company’s autonomous vehicle division — which is eating cash and losing money, so when the market values Alphabet, [Google’s holding company], they’re accounting for those losses. We say that is ridiculous, value them separately. Waymo may be losing money right now, but you can’t tell me Waymo is worth nothing or is actually a negative to Google. Waymo is arguably well ahead of any other competitor in autonomous driving. One day, when autonomous driving is here, Waymo is going to make a lot of money. If Google put Waymo up for sale right now, or said they were going to bring 50 percent of it public, Waymo would probably be valued in a range of $30 billion to $40 billion. So, to say that Google is worse off for having Waymo reducing their earnings is a little silly when we know Waymo is worth billions of dollars. That is why we like Google. When you value Google’s businesses separately, it is worth way more than the current stock price.”
MEANWHILE, BACK ON THE FAIRWAY
Golf is a game you never master, according to Kovitz, and that is part of its appeal. While it often frustrates, once a player conquers that frustration there is elation. He likens the sport to investing and bridge because they are both an imperfect science.
“In golf, it’s all about avoiding bad shots that cost you a two-shot penalty; in investing it’s about keeping your losses to a minimum and having enough successes to outweigh the mistakes,” he says.
By way of contrast, Kovitz recalls that he exceled at bowling during his teen years to the point where the sport ceased to be the challenge it once was.
For Kovitz, mastery begets boredom. Fortunately, he can be assured that will never happen in the investment profession.
Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.