Speaker 1: This is Master's in Business with Barry rid Holds on
Speaker 1: Bloomberg Radio.
Speaker 2: This week on the podcast, I have an extra special guest,
Speaker 2: Graham Foster is PM at Orbis Investment Management. The fund
Speaker 2: runs about thirty four billion dollars. I've been intrigued by
Speaker 2: Orbis for quite a while. They have a truly unique
Speaker 2: approach to investing. They're also owned by a foundation, something
Speaker 2: that's rather rare in the finance industry, and they also
Speaker 2: have a unique approach to fees. When they're generating alpha,
Speaker 2: when they're outperforming their benchmark, they take a performance fee,
Speaker 2: and when they're not generating alpha, when they're underperforming, they
Speaker 2: actually return fees. I don't think anybody else in the
Speaker 2: entire industry does anything like that. Fortunately for them, they've
Speaker 2: been outperforming for decades, so it isn't very often they
Speaker 2: have to return fees. This is one of those really models.
Speaker 2: I've written about them before, I've interviewed other partners at
Speaker 2: Orbis before. They're really an intriguing firm. I found this
Speaker 2: conversation to be absolutely fascinating, and I think you will too.
Speaker 2: With no further ado, my discussion with Graham Foster, PM
Speaker 2: and partner at Orbis holdings. So you have a fascinating background.
Speaker 2: I want to get into that before we start talking
Speaker 2: about asset management. A degree in mathematics from Oxford, a
Speaker 2: doctorate in mathematical epidemiology and economics from Cambridge. What is
Speaker 2: that mathematical epidemiology. I'm assuming that's probability and statistics of
Speaker 2: viral disease.
Speaker 1: Exactly grow, That's exactly right. So that I did a
Speaker 1: math degreat Oxford, which is more pure math, and then
Speaker 1: I was looking for something more applied. You know, pure
Speaker 1: math can be very theoretical and detached from the real world,
Speaker 1: and it's getting worse. It gets further and further away
Speaker 1: the DEEPU go, and so I wanted to move into
Speaker 1: something useful. Mathematical epidemiology is a study of disease spread
Speaker 1: through modeling. You know, how do you understanding the spread,
Speaker 1: how do you treat the spread, When do you treat
Speaker 1: the spread? You know, things that the vaccination programs, and
Speaker 1: it's all the mathematics around that. So it was very
Speaker 1: relevant then and even more relevant recently with all of
Speaker 1: the you know, the infectious diseases seeing.
Speaker 2: So let's talk test your theoretical mathematics. So I was
Speaker 2: for something wholly unrelated. I'm diving into some set theory
Speaker 2: and I come across a paper that makes the claim
Speaker 2: that some infinities are larger than other infinities. Now, my
Speaker 2: naive assumption was infinite men infinite? But is that the
Speaker 2: sort of stuff you were studying undergraduate?
Speaker 1: That was a number that was number theory, pure number theory,
Speaker 1: and that was one course I did not take. But
Speaker 1: that is a fascinating field, that's for sure. There's many
Speaker 1: different types of infinities.
Speaker 2: Apparently it's I just assumed if it's infinite, it's infinite.
Speaker 2: And whether it's all numbers or even numbers.
Speaker 1: Yeah, that is an incredibly complex area of mathematics, to
Speaker 1: the point where you spend weeks and weeks proving that
Speaker 1: one isn't equal to zero. Right, that's how fundamental. You
Speaker 1: get it right back to the axioms and you do
Speaker 1: a lot of work with infinity.
Speaker 2: And then economics, which is a little bit squishier. What
Speaker 2: made you add economics to your to your graduate degree?
Speaker 1: Well that was really an add on. But you know,
Speaker 1: if you're thinking about the spread and control of disease,
Speaker 1: given this is academia, you know the big focus is
Speaker 1: on how do you do it? It's not really on
Speaker 1: what does it cost?
Speaker 2: Right? Right, which some people actually care about.
Speaker 1: Some people do right, that is, that's quite a relevant question.
Speaker 1: So a big part of the thesis, which we sort
Speaker 1: of started, you know, around one year in after getting
Speaker 1: the kind of the basis right, was how do you
Speaker 1: treat this?
Speaker 2: Was?
Speaker 1: This was in agricultural system? So how do you treat disease?
Speaker 1: When do you treat and how much is it going
Speaker 1: to cost? And it's basically an optimization problem.
Speaker 2: Well, we'll talk a little bit more about fees and
Speaker 2: costs later, So let's talk about your first jobs out
Speaker 2: of school. I'm assuming mathematical epidemiology wasn't the career you followed.
Speaker 2: What did you do after Cambridge?
Speaker 1: Yeah? I mean academia should be meritocratic, should be should
Speaker 1: be right.
Speaker 2: It's a little more political than that. It's very very political.
Speaker 1: And you know, the deeper you go within a field,
Speaker 1: the less the people who are funding the research understand
Speaker 1: about the research. So it gets very bureaucratic and you
Speaker 1: spend a lot of your time, in my view, try
Speaker 1: to build your funding to do your next project. And
Speaker 1: so you know, one reason for looking for an exit,
Speaker 1: if you like, from academia, which has its positive elements.
Speaker 1: Right in academia you get the feeling the fulfillment of
Speaker 1: doing something that's good for the world.
Speaker 2: In theory theoretically.
Speaker 1: So, but one that that sort of looking for something
Speaker 1: meritocratic was one reason for look. And I started during
Speaker 1: my PhD getting into game theory and decision making under
Speaker 1: uncertainty and all these interesting areas which were a bit tangential.
Speaker 2: Although maybe not so tangential. I read something you had mentioned,
Speaker 2: Schlansky's book, The Theory of Poker. A professional poker player teaches
Speaker 2: you how to think like one. Obviously, decision making under
Speaker 2: uncertainty with probabilistic odds and an inherently unknowable future. Is
Speaker 2: that poker? Is that investing?
Speaker 1: Sounds like, Well, it's the same thing, right, It's the
Speaker 1: same skill set. And so during my PhD I started
Speaker 1: playing a lot of cards. It was Omaha and poker
Speaker 1: and gin and then backgam and all these games interesting
Speaker 1: from the sense that luck or uncertainty play a big role,
Speaker 1: and that's interesting. I thought that was that's an interesting
Speaker 1: element of those games. And one of the things that
Speaker 1: drew me into that wasn't just the intellectual side of it.
Speaker 1: How do you make decisions under uncertainty? It's the uncertainty
Speaker 1: itself and what that does. And you know, if you
Speaker 1: if you're a chess player, it's almost pure skill. If
Speaker 1: you're a poker player, I think it's you know, maybe
Speaker 1: forty percent skills, sixty percent luck over short periods. And
Speaker 1: what that does is it draws in a lot of
Speaker 1: people to the game. But maybe you know, don't appreciate
Speaker 1: that that kind of the rigor goes into the decision making.
Speaker 1: It's like people who play the lottery. Why do people
Speaker 1: play the lottery? They know it's a negative expected value game,
Speaker 1: do they Maybe they do, maybe they don't, But they
Speaker 1: see the potential to win the big jackpot, right, And
Speaker 1: they also, you know, they get little wins here and
Speaker 1: there through the lottery, right, it gives them a buzz.
Speaker 1: It's why do people go to the casino. They gamble.
Speaker 1: So game playing with large elements of uncertainty draw people
Speaker 1: in who aren't necessarily suited to the rigor of the activity.
Speaker 1: And if you think about what's similar to poker in
Speaker 1: that regard, it's investing very very similar, massive levels of uncertainty,
Speaker 1: in fact, more uncertainty in the investment world in the
Speaker 1: poker world, because you're making these long term decisions and
Speaker 1: getting very little feedback from your actions until years and
Speaker 1: years down the road. So it draws people in. So
Speaker 1: they'll have big wins, you know, they'll buy a stock,
Speaker 1: it'll go up. I can do this, and they keep going,
Speaker 1: and they keep playing, and they keep going. And so
Speaker 1: it is a game that a game. It's a field
Speaker 1: that drives a lot of inefficiency, and I think that
Speaker 1: inefficiency is sustainable. And so that's you know, one of
Speaker 1: the reasons that drew me, And the other reason that
Speaker 1: drewman was, you know, I think the relationship we, you
Speaker 1: and I, everybody has with money is heavily dictated by
Speaker 1: their upbringing coure. And so if you have spent you know,
Speaker 1: your childhood, making compromises because you're always bumping up against
Speaker 1: the barrier of not having enough money, it changes the
Speaker 1: way you look at money. And so I didn't want
Speaker 1: to spend my life in academia, where you know, the
Speaker 1: money is not bad depending on what you do, but
Speaker 1: I would always be in that situation of sort of
Speaker 1: bumping up against that barrier. It limits your choices in
Speaker 1: life if you don't if you have that constraint.
Speaker 2: No doubt about that. So I love where you've taken this,
Speaker 2: and I want to I want to stay with the
Speaker 2: idea of poker and casino and uncertainty. Some people look
Speaker 2: at a casino as entertainment and hey, we're going to
Speaker 2: spend X dollars picking up for five hundred, two thousand
Speaker 2: and whatever it is, and that's you know, that's what
Speaker 2: a night out at a Broadway play would cost. Here's
Speaker 2: what I'm going to spend that night. I think that's
Speaker 2: a small percentage of people and other people. It's not
Speaker 2: a coincidence that the One Armed bandits those machines that
Speaker 2: pay out the most with the lights and the bells
Speaker 2: are right by the entrances there to capture people a
Speaker 2: lot of was kind of fascinating because I always thought
Speaker 2: you paid two dollars and were coming up on nine
Speaker 2: hundred million as we speak. Is the current lottery nine
Speaker 2: hundred million? Yeah, they changed the lottery a couple of
Speaker 2: years ago, so there are some blank numbers in it
Speaker 2: in order to create these billion dollar payouts, and they
Speaker 2: go on longer and longer and obviously more profitable for
Speaker 2: the states that run the lottery. But to me, it's
Speaker 2: like you paid two dollars and you get to fantasize
Speaker 2: about what you would do with a couple of hundred
Speaker 2: million dollars. That's the two dollars that the lottery is
Speaker 2: worth for me. I don't think the average person who's
Speaker 2: plucking down twenty or one hundred bucks every week thinks
Speaker 2: of it the same way. I think they're just junkies
Speaker 2: at this point, and very addictive manipulation of dopamine for people.
Speaker 1: I think that's absolutely right, And I mean it's two
Speaker 1: sides of the same coin, really, because you know, you're
Speaker 1: paying your two dollars and you're dreaming of the big jackpot.
Speaker 1: Is there's an element of that in your in your
Speaker 1: you know, pulling the lever. I used to go to
Speaker 1: casinos when I was in college and I would see
Speaker 1: people they were almost They would have these cards and
Speaker 1: it would be the membership card for the casino, and
Speaker 1: it would be attached to their belt and it would
Speaker 1: be plugged into the slot machine and it would look
Speaker 1: like they were one and the same, Right, they were
Speaker 1: connected by connective yeah, right, And they would sit there
Speaker 1: all day zombiefide. That's an addiction, that's absolutely addiction. But
Speaker 1: it's the same mentality of that little buzz you get
Speaker 1: when you win something, or the dreaming of the big payout. Right,
Speaker 1: And I think the lottery is fascinating, because I'm sure
Speaker 1: we'll talk about this, But we did a study recently
Speaker 1: where we took a thousand investors, hypothetical investors, and we said, okay,
Speaker 1: if you've got a fifty year time horizon in terms
Speaker 1: of their investment time horizon, and you're simulating a return
Speaker 1: profile from let's say the S and P five hundred's
Speaker 1: bell curve of returns over the last hundred years. So
Speaker 1: you're sampling your returns each year for these one thousand
Speaker 1: investors over the next fifty years, and you see a
Speaker 1: wealth path for each of those investors, and what you
Speaker 1: get at the end is a very very uneven distribution
Speaker 1: of wealth. That's a function of returns, that's a function
Speaker 1: of the capitalism, it's a function of log normal returns
Speaker 1: that we see in stock markets, and it's exactly the same.
Speaker 1: You see exactly the same nonlinear wealth distribution in real life.
Speaker 1: It's a very uneven outcome, right, very very wealthy people
Speaker 1: and a lot of you know own there was point
Speaker 1: one of the world earn fifty percent of the wealth
Speaker 1: or something, just some crazy number. That is a function
Speaker 1: of capitalism. It's not a it's not a bug. It's
Speaker 1: part of the system. And I think it's an essential
Speaker 1: part of the system in a little bit like the
Speaker 1: way the lottery you see these big, big payouts right
Speaker 1: at the top. You need to see them or you
Speaker 1: won't play. And you need to It needs to be
Speaker 1: the nine hundred million, and you need to see the winner,
Speaker 1: and you need to see them change their life and
Speaker 1: all of the joy and inverted comments they get from that.
Speaker 1: That's why you play, because you see that big payout.
Speaker 1: And we see Elon Musk and we see Warren Buffett,
Speaker 1: and we see these people at the top of the
Speaker 1: capitalist pyramid, and we think, huh, play the game because
Speaker 1: we can see them. They're very visible. And I think
Speaker 1: capitalism is a big function of capitalism is having those
Speaker 1: big winners and then everyone you know wants to take part.
Speaker 2: And that so correct my bias, because when I look
Speaker 2: at lottery players, your odds are more likely that you'll
Speaker 2: be hit by lightning than winning the lottery, and I
Speaker 2: see that same fat head long tail distribution in capitalism.
Speaker 2: Maybe my bias is just because I've been lucky in
Speaker 2: my career, but it seems like winning in capitalism is
Speaker 2: easier than winning in the lottery. And I don't mean
Speaker 2: being a billionaire run down the list. Must gates are
Speaker 2: not go through all the people LVMH. Bernard, go down
Speaker 2: everybody who's a billionaire. Yeah, that's a little bit of
Speaker 2: marketing for capitalism. But go to school, do well in
Speaker 2: a profession. You can have a fairly comfortable life without
Speaker 2: a whole lot of risk, assuming you have just a
Speaker 2: modicum of skills and diligence.
Speaker 1: One hundred percent. So on the lottery side is pure randomness,
Speaker 1: and there's a negative ev game. Right, every time you
Speaker 1: play you lose a bit of money in probability space
Speaker 1: you are if you're playing cards, you're playing poker. There's
Speaker 1: more skill and if you're very good at it, you
Speaker 1: can eke out when positive EV outcome and grow your
Speaker 1: wealth in a very lumpy fashion. In capitalism it's the same, Right,
Speaker 1: there's a lot of skill, there's a lot of luck,
Speaker 1: and if you work hard and you do everything, you
Speaker 1: can possibly do. You probably climb the ladder and you
Speaker 1: can push yourself a little bit to the right in
Speaker 1: that distribution of wealth over time.
Speaker 2: Second quartile is not unattainable.
Speaker 1: Absolutely not No, that's right. But I mean, and it's
Speaker 1: the pie grows as well. The more people work, the
Speaker 1: more productive they are. There's the other element to it.
Speaker 2: Really quite interesting. So you mentioned the fifty year study.
Speaker 2: I'm kind of intrigued by your thoughts on investor longevity.
Speaker 2: And this quote I pulled of yours is delivering excess
Speaker 2: returns over long periods of time in order to achieve
Speaker 2: extraordinary results as an investor. Is your folk? All right?
Speaker 2: How does one do? That? Sounds easy? Just market over
Speaker 2: decades and you're a winner.
Speaker 1: It sounds incredibly easy. And if you if you write
Speaker 1: it down on paper, you can run the numbers. It's there,
Speaker 1: it exists. It's clear. Three things that matter. Number one longevity.
Speaker 1: I talk about that study that was a study of
Speaker 1: randomly selecting returns from the S and P. Five hundred
Speaker 1: and that group of one thousand investors gives you that
Speaker 1: very nonlinear outcome in terms of wealth. What that tells
Speaker 1: you is, if you change your inputs a little bit,
Speaker 1: Like you said, around, if you work hard, et cetera,
Speaker 1: et cetera, you can push yourself a little bit to
Speaker 1: the right on that wealth distribution. If you do that,
Speaker 1: because it's non linear, you can get you can get big,
Speaker 1: big improvements in your end wealth, massive improvements. So there
Speaker 1: are really three key inputs to that. One is longevity, right,
Speaker 1: just sticking with it, Warren Buffett, what's the statistic? Ninety
Speaker 1: five percent of wealth has generated after the age of
Speaker 1: sixty five? Impressive, Impressive because he's stuck at it, right,
Speaker 1: and he's pretty smart as well.
Speaker 2: He never tapped into his capital to go get on
Speaker 2: the hit on and treadmill. He's been just let.
Speaker 1: It, just let it compound over time, you know, watches
Speaker 1: his pending and just stays in the game. Another good
Speaker 1: if if the best example of this is endowments here
Speaker 1: in the US phenomenal institutions, and they're set up to
Speaker 1: be perpetually around. They stick around. So if you take
Speaker 1: the Met Museum. I'm sure you've been to the Met
Speaker 1: Museum here in New York. Their endowment I think is
Speaker 1: around five to six billion, phenomenally large number for a
Speaker 1: single institution in Central Park and you know, I'm sure
Speaker 1: they're a very intelligent and diligent investment committee, but the
Speaker 1: Keith at the Keith thing for them has been longevity.
Speaker 1: One hundred and thirty years of compounding has got them
Speaker 1: to where they are today. Stick around is the big is,
Speaker 1: you know, that's the key.
Speaker 2: The rule to be tax exempt in the US is
Speaker 2: you have to disperse five percent of the foundation and
Speaker 2: if you look at long term returns for stocks and bonds,
Speaker 2: that's not a tough target to make. You give out
Speaker 2: five percent. You don't have to pay any tax and
Speaker 2: just let the rest ride exactly that great, that's not bad.
Speaker 2: I think The Guardian also has a foundation that owns
Speaker 2: it that has a few billion dollars and Rolax a
Speaker 2: lot of people don't realize is owned by a private foundation.
Speaker 2: The founder gifted everything to the foundation, and same sort
Speaker 2: of situation. Those have compounded over the centuries and have
Speaker 2: managed to amass a huge amount of capital.
Speaker 1: I mean, there's no it's just simple. It's just math.
Speaker 1: Stick to it of a long period of time, and
Speaker 1: it's much harder in practice because you have to put
Speaker 1: that longevity into your process. The second is excess returns.
Speaker 1: If you can just increase your excess returns a little
Speaker 1: bit each year, massive difference. It makes a massive difference
Speaker 1: of a fifty sixty, seventy years, even just a percent.
Speaker 1: So you know, our sister company is South Africa. Africa
Speaker 1: have done eight percent above the benchmark for fifty years.
Speaker 2: That's insane.
Speaker 1: So that's a three hundred to four hundred time time
Speaker 1: sort of out improvement in your end wealth. Phenomenal amount
Speaker 1: of compounding over a long period of time. And the third,
Speaker 1: the one that nobody talks about is risk management risk management,
Speaker 1: and so that's not just we talk about risk management
Speaker 1: in terms of buying at a big discounter intrinsic value and
Speaker 1: then that gives you that capital sort of buffer. You know,
Speaker 1: the last thing you want to do is buy above
Speaker 1: intrinsic value because then you know, that's where you get
Speaker 1: capital impairment. But a big you know, the thing, the
Speaker 1: risk thing that we don't talk about that people should
Speaker 1: talk about is just variance. Volatility. It's people say, oh, volatility,
Speaker 1: you can just it just goes up and down. That's fine,
Speaker 1: but it makes a big, big difference to your long
Speaker 1: term outcomes if you can just avoid those big losses.
Speaker 2: Especially if you have to put money to work on
Speaker 2: a regular basis, especially exactly, then the volatility and the
Speaker 2: valuation makes an enormous differ.
Speaker 1: It makes an enormous difference. And so when you run
Speaker 1: that simulation of and you get that distribution of wealth,
Speaker 1: what you notice about the people at the top end
Speaker 1: is they avoid those big negatives. Is if you lose
Speaker 1: fifty percent, then you've got a double to get back
Speaker 1: to where you were. And if you're comparing at seven
Speaker 1: percent a year, which is what markets have done, it
Speaker 1: takes you about ten years to get back to where
Speaker 1: you were. It's a long time. And so watching your
Speaker 1: downside is very important. So those two things, longevity, a
Speaker 1: little bit of excess return and risk management to be
Speaker 1: the key.
Speaker 2: So let's talk a little bit about Orbis and what
Speaker 2: makes it so special. You joined in two thousand and seven,
Speaker 2: what led you there? So?
Speaker 1: I mean it was interesting because the background I had
Speaker 1: in mathematics, I really had a decision to make do
Speaker 1: you go quantitative root or fundamental route? And it might,
Speaker 1: you know, surprise you to imagine that I thought the
Speaker 1: future was more not on the fundamental side. And I
Speaker 1: came to that conclusion because If you think about what
Speaker 1: the quant side does and what the fundamental side does,
Speaker 1: they're both trying to find the signal in the noise,
Speaker 1: signal in the noise. There's all this noise, all this noise,
Speaker 1: all this noise. What's the signal? What's the core signal? Right,
Speaker 1: that's absolutely what the quant teams are doing around the world.
Speaker 1: What the quant funds are doing is they're analyzing tons
Speaker 1: and tons of data. They're looking for the little signal
Speaker 1: that drives price moves, and hence that's how they generate
Speaker 1: their returns. As I thought about, you know, what is
Speaker 1: going to sustain over the long term? What is the
Speaker 1: ultimate signal in markets? What is the ultimate signal? And
Speaker 1: for me, what is a stock? Is a what is
Speaker 1: an equity? It's a piece of a business. You own
Speaker 1: a piece of a business, right, and so the ultimate
Speaker 1: signal in terms of determining where a price goes over
Speaker 1: the long term is the value of that business. That's
Speaker 1: the signal, right, that's the signal that won't go away
Speaker 1: because it's the base of the whole you know, efficient
Speaker 1: allocation of capital, it's the base of the whole market.
Speaker 1: It's not the little signals that you're trying to pick
Speaker 1: up day to day to figure out where a price
Speaker 1: is going to go. That's the thing that should sustain.
Speaker 1: So that's what drew me to the fundamental side, thinking
Speaker 1: the fundamental side will sustain over a long periods of time.
Speaker 1: Now the fundamental side can adapt, it can bring in
Speaker 1: more and more technology to help it to assess that
Speaker 1: core variable, which is intrinsic value, which is the true
Speaker 1: underlying value of the business. And I think that's what
Speaker 1: will happen. I don't it's interesting as to why the
Speaker 1: quant side doesn't try to figure out what intrinsic value is.
Speaker 1: And I think the problem with it is the prices
Speaker 1: move much much faster than the intrinsic value of the business.
Speaker 1: In order to figure out what the value of the businesses,
Speaker 1: you have to see it evolve. You have to see
Speaker 1: his cash flow come through over years and years and years.
Speaker 1: Is a data on a quarterly basis exactly? And if
Speaker 1: you're in a quand fund and your clients say, you know,
Speaker 1: you've underperform for the last three quarters and I don't
Speaker 1: quite understand the black box, how do you retain how
Speaker 1: you drive that alignment between the client and the business
Speaker 1: and so you need shorter term returns, you need less
Speaker 1: volatility so that you can't sustain. So I think that's
Speaker 1: why the QUIN side doesn't focus on that fundamental side too.
Speaker 1: So that's you know, why did I choose orbis Is
Speaker 1: Because if I looked at when I looked at Orbis,
Speaker 1: when I looked at this sister company, Alan Gray, which
Speaker 1: goes back to nineteen seventy three, you know, they'd sustained
Speaker 1: this long, very long period of excess performance six seven
Speaker 1: eight percent excess return over the market of very long
Speaker 1: periods of time, and they've done that. You know, at
Speaker 1: Alan Gray they'd done it for thirty four thirty five
Speaker 1: years and obviously've done it for sixteen seventeen years when
Speaker 1: I joined, And very few companies can sustain performance over
Speaker 1: that length of time with it being a pure fluke.
Speaker 1: So the fascinating part was what, you know, what drove that?
Speaker 1: And that sort drew me in. And you know, when
Speaker 1: I went to interview at Orbis versus other firms, they're
Speaker 1: just so different in the way that they interviewed. It
Speaker 1: wasn't you know they were trying to pull out not
Speaker 1: just IQ. I got a ton of IQ questions. Right,
Speaker 1: you got to interviews. It's like, can you answer this puzzle?
Speaker 1: Tell me about this mathematical thing. It's all IQ, but
Speaker 1: investing is I don't know, twenty percent IQ.
Speaker 2: IQ is table stakes the table absolutely right, it's a
Speaker 2: lot more than just as much more intelligence.
Speaker 1: And you look at what Warren Buffett say. You give
Speaker 1: away IQ points so you can get some of these
Speaker 1: other things because the other things are even more important.
Speaker 1: You think about two people are going to look at
Speaker 1: the same data and come to very different conclusions. And
Speaker 1: that's rationality, that's judgment. How do you assess judgment? That's
Speaker 1: a different thing than IQ. That's you know, unbiased assessment
Speaker 1: of data is a different thing, right, So that's your
Speaker 1: decision making and that's so we try to pull that
Speaker 1: out at interviews. What about emotional intelligence? The biggest returns
Speaker 1: you can make are at the most extreme points. In markets,
Speaker 1: It's like sitting down at a poker table. There's one
Speaker 1: hand a night that really matters. You need to make
Speaker 1: the right decision in that hand, and that to take
Speaker 1: dictates whether you go home happy or you go home sad.
Speaker 1: And it's exactly the same in markets, and you need
Speaker 1: a very level, unemotional you know, way of going about things,
Speaker 1: and to be able to make good decisions at those
Speaker 1: extreme moments. It's absolutely critical those three variables iq rq
Speaker 1: EQ intelligence, rationality and emotional intelligence. And so that's what
Speaker 1: August was trying to draw out. You can't draw it
Speaker 1: out or interview. So that's where you have the systems
Speaker 1: we have in place to assess people at a time,
Speaker 1: what they're good at, what they're not good at. But
Speaker 1: that's really what drew me to the firm.
Speaker 2: Huh, really really quite intriguing. So your fee structure is
Speaker 2: very different. When you outperform the market, you take a
Speaker 2: performance fee based on that outperformance above beta. What happens
Speaker 2: when you underperform the market.
Speaker 1: We refund the fee. So what happens is, let's say
Speaker 1: you outperform by five percent in the first six months
Speaker 1: of the year. That fee on the performance that we
Speaker 1: generate for our clients. A proportion of that our performance
Speaker 1: goes into a bucket or an escrow account if you like.
Speaker 1: And then if we subsequently underperform by five percent let's
Speaker 1: say over the next six months, so you're flat on
Speaker 1: the year, the client shouldn't have paid a fee right,
Speaker 1: and that is the case. So we refund the feedback
Speaker 1: from the bucket and goes back to the count.
Speaker 2: And this isn't a theoretical construct. This is literally the
Speaker 2: cash is pulled aside, held in es grow on the
Speaker 2: client's behalf. And you guys have been doing this just
Speaker 2: about twenty years, just about twenty years.
Speaker 1: Yeah, So it leads to much stronger alignment with the client,
Speaker 1: has a lot of positive outcomes. And number one is
Speaker 1: it reduced the volatility a bit. We talked about the
Speaker 1: importance of risk management and volatility. When we're underperforming, we're
Speaker 1: refunding the fees. That reduces the volatility to an extent.
Speaker 1: It also aligns clients and improves client behavior because one
Speaker 1: of the key things. Another problem with the industry is
Speaker 1: it's all very well saying you can outperform the market,
Speaker 1: but what you have to be able to do is
Speaker 1: outperform on a dollar weighted basis. So that's a combination
Speaker 1: of you doing good things and generating returns, but also
Speaker 1: the client acting in a way that's not pro cyclical,
Speaker 1: not investing more money after good performance and pulling out
Speaker 1: after bad performance. And it's chronic in the industry to
Speaker 1: see the dollar weighted return for clients be much below
Speaker 1: the actual return of the funds that they invested it.
Speaker 2: There was a Wall Street Journal article a couple of
Speaker 2: years ago about John Paulson, whose funds had just crushed
Speaker 2: it during the financial crisis. There were short mortgages, there
Speaker 2: were short derivatives. They put up outrageous returns when they
Speaker 2: were a relatively small funds, and then all this cash
Speaker 2: flows in, and now they're running forty billion dollars buying gold,
Speaker 2: and not only are they not outperforming, they're pretty substantially underperforming.
Speaker 2: Assuming I'm remembering this article right, it might not even
Speaker 2: been there. It might have been Barrens. I don't remember
Speaker 2: where I read it. But the net take was exactly
Speaker 2: what you're saying. On a dollar weighted average net net
Speaker 2: his fund was a money loser over its even though
Speaker 2: it put astonishing numbers up in the beginning of its life,
Speaker 2: when it was, you know, a billion or two, not
Speaker 2: twenty thirty forty. I apologize if I'm getting the precise
Speaker 2: source wrong, but it was pretty substantial.
Speaker 1: That's a common, very common story, really really common, and it's.
Speaker 2: How do we avoid that?
Speaker 1: How do we avoid that? You build alignment into the
Speaker 1: into everything you do, you try to build alignment. So
Speaker 1: you're trying to find clients that really understand you, number one,
Speaker 1: so that they know the type of volatility that they're
Speaker 1: going to get. They're not going to make, you know,
Speaker 1: when we get to we get to those inevitable tough periods.
Speaker 1: They understand that, they recognize it, and you know, we're
Speaker 1: always communicating with them to sort of help them through
Speaker 1: those periods. And the second is the feest. You know,
Speaker 1: if you're refunding fees two clients in this periods of
Speaker 1: tough performance, that really does align you. They say, Okay,
Speaker 1: you're suffering, we're suffering. That's okay, everyone's suffering, and and
Speaker 1: you get a much stronger result in terms of clients
Speaker 1: sticking with you through those cycles.
Speaker 2: How substantial are the fee refunds is it? Is it
Speaker 2: a meaningful amount of money? How how big a difference
Speaker 2: does it make to clients who are who are happy
Speaker 2: that they've outperformed for a few quarters and now they're
Speaker 2: looking at a few quarters of underperformance.
Speaker 1: I mean, it's to the extent to the extent that well,
Speaker 1: it really depends on the extent to.
Speaker 2: Which we've outperformed.
Speaker 1: Because we've outperformed a lot by a lot, there's a
Speaker 1: point where the firm itself needs to take some cash
Speaker 1: to give the lights on. But you know, in regular cycles,
Speaker 1: a little bit of out performance, a little bit of underperformance,
Speaker 1: you're just refunding that fee.
Speaker 2: Huh. Really really interesting. So this should be taking the
Speaker 2: industry by storm. Everybody else should be stealing your idea.
Speaker 2: How how widely dispersed is the concept of fund managers
Speaker 2: returning a percentage of the fees when they underperform.
Speaker 1: When we put this in place, we thought this was it.
Speaker 1: The floodgates were open, right, everyone was going to follow.
Speaker 1: And the reason why we follow is it's such a
Speaker 1: tough thing for a manager to do, and so the
Speaker 1: client you know you should. We should get a lot
Speaker 1: of clients sort of saying okay, finally an aligned fee,
Speaker 1: and it would be so popular with clients that it
Speaker 1: would be very difficult, difficult for other managers not to follow.
Speaker 1: And we've not seen that, which is interesting, And I
Speaker 1: think one of the reasons is it's very difficult for
Speaker 1: the manager to sustain that type of fee because you're
Speaker 1: transferring the volatility from the client to the manager right,
Speaker 1: So it means the manager has to do things like reserve.
Speaker 1: There has to be a stronger balance sheet, and therefore
Speaker 1: you're not paying out dividends to partners, so you have
Speaker 1: to make that decision to reserve, and you know, you're
Speaker 1: just taking on more volatility as a business.
Speaker 2: I've also been kind of astonished at seeing some pretty
Speaker 2: famous fund managers go on TV and refuse to admit error,
Speaker 2: this is a draw down, we were a little early,
Speaker 2: or whatever it is. No one comes out and says, oh,
Speaker 2: we were wrong about this. How significant is that a
Speaker 2: factor in getting a fund management company to say, hey,
Speaker 2: we stunk to join up and hear your feesback for
Speaker 2: this quarter.
Speaker 1: I mean, it's enormous. You know. One of the key
Speaker 1: things as an investment firm is you have to recognize
Speaker 1: your errors and you have to learn from them, and
Speaker 1: you have to have a robust system internally to make
Speaker 1: sure that you know there's biases those errors you're making
Speaker 1: are picked up and addressed so you can do better
Speaker 1: in the future. And I think, if anything, we are
Speaker 1: on the other side, so we're too explicit about the
Speaker 1: errors we make. And I mean, but it is endemic
Speaker 1: in the industry because the industry is incentive ized to
Speaker 1: grow assets and hence admitting errors is not something that
Speaker 1: you want to do on TV.
Speaker 2: Let's talk a little bit about some of your strategies.
Speaker 2: You have three separate strategies. I'm familiar with Global Equity,
Speaker 2: Global with Exclusions, and Global Balance. Tell us a little
Speaker 2: bit about the approach, Am I am I summing them
Speaker 2: up correctly more or less.
Speaker 1: So we're really focused in terms of what we do
Speaker 1: with equity investors typically so a company analyst, we look
Speaker 1: for intrinsic value of businesses looked to buy it a
Speaker 1: significant discount. Our main product, our flagship, is Global that's
Speaker 1: been running since nineteen nineteen. We actually have a market
Speaker 1: neutral hedge fund associated with that, which is really a
Speaker 1: bitter neutral.
Speaker 2: Market neutral meaning long short.
Speaker 1: Or long the stocks we like in short market industry.
Speaker 1: It's a very very simple way to extract the alpha
Speaker 1: plus the cash rate from the strategy. Now, so those
Speaker 1: are the two of the longest stunning strategies, and we
Speaker 1: launch the Japan strategy, which you know, there's very interesting
Speaker 1: things happening in Japan now in nineteen ninety eight, we've
Speaker 1: got an em strategy. We've got an international strategy we've
Speaker 1: t we launched in two thousand nine, which is non
Speaker 1: US Those would be the main ones. We do have
Speaker 1: multi asset strategy called Balanced which we launched in twenty fourteen.
Speaker 1: Fifty stocks and bonds or bonds, stocks and bonds and
Speaker 1: others where you can hold commodities and currencies and things in.
Speaker 2: This Speaking of commodities, they seem to be doing pretty
Speaker 2: well here we are about to start the fourth quarter
Speaker 2: of twenty twenty three. What do you how do you
Speaker 2: approach commodities if your bottom up fundamental equity investors, Commodities
Speaker 2: is a totally different beast.
Speaker 1: Yeah, commodity is a tricky right, But what you can
Speaker 1: do in terms of as an equity investor, you can say,
Speaker 1: what is a normal sort of commodity price deck for
Speaker 1: your business and then say how much free cash flow
Speaker 1: can that business generate on that typical price of oil
Speaker 1: or gas or whatever it is you're looking at. So
Speaker 1: that's one of the things we're looking at, is what
Speaker 1: is a normalized pricing, what sort of free cash flow
Speaker 1: can you generate? And how can you grow from that base?
Speaker 1: And that gives you a rough value for the business
Speaker 1: of the industry is very fruitful because it's so volatile.
Speaker 1: So you get massive swings in the price of the shares,
Speaker 1: you get massive swings in the market capital companies, and
Speaker 1: you don't get that much swing in the true underlying
Speaker 1: value in the businesses. So that's been an area that
Speaker 1: we've been investing in for a long period.
Speaker 2: Let's talk a little bit about unpopular or ignored stocks.
Speaker 2: How do you define those and how do you go
Speaker 2: about finding them?
Speaker 1: So that this word contrarian is interesting, right because we
Speaker 1: talk about contrarian investing and everyone wants to be a contrarian.
Speaker 2: I love that line.
Speaker 1: Everyone wants to be looking in areas that nobody else
Speaker 1: is looking and buying into fear, selling into greed. And
Speaker 1: you know, a better way I think to describe what
Speaker 1: we do is just differentiated thinking. So not necessarily looking
Speaker 1: for things that are bombed out, although that can be
Speaker 1: very fruitful in terms of, you know, thinking about which
Speaker 1: areas are potentially over sold or you know there's too
Speaker 1: much fear around them. You know, a more fruitful way
Speaker 1: is looking for apathy, people are just lost interest, or
Speaker 1: just a differentiated view on a business. That's how I
Speaker 1: describe our style is just assessment of intrinsic value. So
Speaker 1: that's deep company work.
Speaker 2: So if you're looking at intrinsic value, does that make
Speaker 2: it easier to determine Hey, this stock is inexpansive for
Speaker 2: a good reason, and this stock is inexpansive of course
Speaker 2: people are failing to see the value there, Meaning some
Speaker 2: stocks are cheap for a reason and others are cheap
Speaker 2: because people seem to be missing the underlying value.
Speaker 1: Well that's I mean, our job is to figure out
Speaker 1: the difference between those two.
Speaker 2: So how do you do that.
Speaker 1: One of the key things, one of the differentiators potentially
Speaker 1: of the firm is that all of our analysts run
Speaker 1: paper portfolios. So all of our lists are working in
Speaker 1: niches the computer pan analysts or UK analysts or financials analysts,
Speaker 1: and their job is really did into the companies well
Speaker 1: teared under pieces, build them back up again, figure out
Speaker 1: what they're worth, and through that process they determine which
Speaker 1: stocks are potentially mispriced and then then they recommend a
Speaker 1: list of those into a paper portfolio and you track
Speaker 1: the performance of that over time. And it's quite a
Speaker 1: useful mechanism to have that for the analysts themselves because
Speaker 1: they it's a learning mechanism as a recommendation mechanism for
Speaker 1: portfolio managers and thinking about how to allocate capital. And
Speaker 1: what we find over time is, you know, the top
Speaker 1: three or four ideas coming from key analysts who are
Speaker 1: really deep in the weeds, generate a lot of our performance.
Speaker 1: And that's the key. It's just been close to your business,
Speaker 1: really tearing it to pieces, understanding what it's worth, and
Speaker 1: buying it a good price. And that's really the lifeblood
Speaker 1: of the firm.
Speaker 2: So let's talk about again another quote, the great misallocations
Speaker 2: in the market that skilled active managers can take advantage of.
Speaker 2: How often do these misallocations come along and how easy
Speaker 2: or difficult is it to identify them in real time?
Speaker 1: I think a lot of people forget that. As an investor,
Speaker 1: you're a price taker. You're just waiting. You're just waiting
Speaker 1: for prices to give you the opportunity to buy the
Speaker 1: discount to the true worth of the business. And so
Speaker 1: the critical component in terms of managing a portfolio or
Speaker 1: finding great ideas is flexibility because you are you know,
Speaker 1: you're not dictating what the market does, you're just waiting.
Speaker 1: So having the ability for capital to move to the
Speaker 1: most dislocated ideas is absolutely essential. So if you go
Speaker 1: back and look at the history of our funds, sometimes
Speaker 1: we're very, very heavily invested in one country. Sometimes we
Speaker 1: have zero. That's exactly how it should be because inefficiencies
Speaker 1: don't static, They move right and they evolve.
Speaker 2: So flexibility in order to be opportunistic to take advantage
Speaker 2: our investors and clients patient enough for you to, you know,
Speaker 2: one Buffett famously said, the nice thing about investing is
Speaker 2: there are no cold strikes. You can sit there with
Speaker 2: the bat on your shoulder and just wait for your pitch.
Speaker 2: I don't know how familiar you are with us baseball,
Speaker 2: but that that normally it's a game of cold balls
Speaker 2: and strikes. Buffett says, you could watch one hundred pitches,
Speaker 2: go buying until the one you like. Is there are
Speaker 2: clients patient enough to say, hey, why are you sitting
Speaker 2: around in cash? There aren't there opportunities? How does that work?
Speaker 1: So really, the tough part of what we do is
Speaker 1: we have to run a portfolio of equities for our clients.
Speaker 1: And what we're trying to do is just find the
Speaker 1: best ones. And there's always the best ones, right ther
Speaker 1: market's very rarely narrow, so narrow that everything is efficiently
Speaker 1: priced and there's no opportunity. And if that is the case,
Speaker 1: then that's okay. You can just hold something that gives
Speaker 1: you seven percent a year of a time and that's fine. Yeah,
Speaker 1: but there's always opportunity and it's just question of finding it.
Speaker 1: And you need a lot of depth that comes from
Speaker 1: the analyst looking in the different niches and need a
Speaker 1: lot of breath. You need to just turn over a
Speaker 1: lot of stones and cover a lot of ground.
Speaker 2: So let's talk about that, because over the past, you know,
Speaker 2: either one or multiple years, it's been pretty much you know,
Speaker 2: it started out as fang. Now some people are using
Speaker 2: the phrase magnificent seven. The seven largest tech stocks have
Speaker 2: been driving about twenty five percent market Kappa, the S
Speaker 2: and P five hundred, driving a lot of value creation.
Speaker 2: Can you look outside of those seven or is it
Speaker 2: that seems to be the only game in town here.
Speaker 1: I'm not even sure what's in the seven? Can you
Speaker 1: tell me what's in the seventh?
Speaker 2: Amazon, Apple, Tesla, and Vidia, maybe Facebook, maybe Microsoft, something
Speaker 2: like that. I don't really pay much, to be honest,
Speaker 2: I don't pay much attention to them, Oh did I
Speaker 2: leave out Google? And I'm sure there's something else I'm forgetting.
Speaker 2: That's not how I want to invest. However, if you're
Speaker 2: looking for opportunities and those seem to be driving so
Speaker 2: much of the index returns, how challenging is this environment?
Speaker 2: Or do you just pile into those seven.
Speaker 1: I mean a lot of people have right now, that's
Speaker 1: the challenge. So two points, I'd make one fang to
Speaker 1: magnificent seven. It changes, right, the basket changes, and it's
Speaker 1: just the next big thing two or three years ago,
Speaker 1: as NFTs and all this sort and now it's AI
Speaker 1: and large language models. It's always something comes up, bust
Speaker 1: and then it sort of emerges from the ashes and
Speaker 1: they're all relevant new technologies. But you just don't want
Speaker 1: to get caught up too much enough.
Speaker 2: You figure out the metaverse between NFTs and AI was
Speaker 2: the metaversese, and I know that created a lot of value, right.
Speaker 1: That's right, I'll give it time. Who knows. So there's
Speaker 1: three thy five hundred investible stocks or more in the
Speaker 1: world for us. We treat them on a unit basis. Right,
Speaker 1: in any one of those threey five hundred stocks, you
Speaker 1: could see a big, big miss pricing, and so the
Speaker 1: chances that we end up in the biggest seven stocks
Speaker 1: in the world are quite slim on that basis, because
Speaker 1: what's the chance you're going to have the most inefficiency
Speaker 1: in the biggest seven.
Speaker 2: Story those are probably the most efficient.
Speaker 1: Probably the most efficient. Now the two the problem, as
Speaker 1: you say, you have to deal with is if they
Speaker 1: go through a long period of performing very well, then
Speaker 1: you you know, you have to stack up against that, right,
Speaker 1: And that's the issue we've had in terms of if
Speaker 1: we look at the world on an equally weighted basis,
Speaker 1: we've added a lot of value for clients over the
Speaker 1: last ten years. If we look for us a cap
Speaker 1: weighted basis, it's been much harder, much harder, either because
Speaker 1: we missed those opportunities. Either were fundamentally mispriced and we
Speaker 1: missed them and I think there's a little bit of
Speaker 1: that in there, or they just did well right their
Speaker 1: randomness and you know they hit had a few hits also,
Speaker 1: or all the valuation went up right to fairly extreme levels.
Speaker 1: So one of a combination of those two things have
Speaker 1: happened over periods of time. The last five years have
Speaker 1: been a good example of that. The late nineties good
Speaker 1: example of that. You go back to the late sixties,
Speaker 1: you saw exactly the same dynamic. So you go through
Speaker 1: these periods and you just have to be patient as
Speaker 1: long as you're generating a good absolute return for your clients.
Speaker 1: I think, you know, our clients are happy and they
Speaker 1: recognize you go through these big cycles.
Speaker 2: So you've talked about finding your edge, what makes your
Speaker 2: approach unique to you and the advantage you have? How
Speaker 2: do you find your edge? What can investors do to
Speaker 2: identify their own strategic or tactical advantage?
Speaker 1: So, I mean edge is a tricky one, right, and
Speaker 1: everyone tries to define their edge. Everyone's trying to look
Speaker 1: for their edge. And I think it if it was
Speaker 1: so simple as to say, hey, do this and then
Speaker 1: you've got an edge, then everyone would do it and
Speaker 1: it wouldn't be an edge. So it has to be
Speaker 1: a number of things, and you have to balance, you know,
Speaker 1: across a number of different variables. I would point to
Speaker 1: a few things. One we talked about how and this
Speaker 1: links to the you know the second part of the question,
Speaker 1: how does that you know, an every day investor develop
Speaker 1: an edge and how should they think about investing? It's
Speaker 1: those three things. It's the three key variables. Number one
Speaker 1: longevity and that really comes down to ownership structure. You know,
Speaker 1: the really tough part of this business is succession. You
Speaker 1: build an asset manager, you build Bloomberg, you build any organization.
Speaker 1: How do you handle succession? And in asset managers it's
Speaker 1: really difficult because you usually have a founder. Founder builds
Speaker 1: the business up. If they're successful, then what then what
Speaker 1: next generation? Generation? But how do they take the you know,
Speaker 1: take the ownership from the founder? Do they have to
Speaker 1: borrow money to buy them out? Who are out? Do
Speaker 1: they need to go public? You know, sell to and
Speaker 1: then that leads to other discussions. It could be there's
Speaker 1: a lot of different ways, but very few of them
Speaker 1: are sustainable perpetual solutions because you're going to you know,
Speaker 1: if you're selling to the next people, they need to
Speaker 1: they have the same problem, et cetera, et cetera. So
Speaker 1: the one thing you need to build into your organization
Speaker 1: is longevity. And so that's one thing we've done through
Speaker 1: the ownership, through the charitable foundation which owns the business
Speaker 1: into perpetuity, giving you that stability and enabling the business
Speaker 1: to embed that long term philosophy.
Speaker 2: Also I mentioned Orbis's fee structures unique having then investment
Speaker 2: manager owned by a charitable foundation fairly unique. I don't
Speaker 2: know many other companies that operate. The closest thing is
Speaker 2: Vanguard is a mutual theoretically owned by their shareholders. But
Speaker 2: this is even more specific. This foundation owns the asset
Speaker 2: manager in perpetuity exactly.
Speaker 1: Yeah, and it's mutually beneficial. One, you get that very
Speaker 1: long term time horizon from an owner very stable, which
Speaker 1: is essential when you're making long term investment decisions. Two,
Speaker 1: the foundation gets the cash flow from the business to
Speaker 1: a degree to facilitate its philanthropic work. So you get
Speaker 1: that nice symbiotic relation ship. And the incentive of the
Speaker 1: foundation is to make sure that underlying investment business is
Speaker 1: healthy and sustains of a very long period of time,
Speaker 1: so that it's very much embedded in that the trustees
Speaker 1: of the foundation that we need healthy underlying investment businesses
Speaker 1: because that's what drives the dividends, that drives the philanthropic
Speaker 1: activity over time. So long term ownership is key. The
Speaker 1: other is excess returns. I've talked about the paper portfolio
Speaker 1: system is quite unique to what we do. Every analyst
Speaker 1: having that ability to express themselves from very early on
Speaker 1: in their career and learn and we can learn about
Speaker 1: them and all their foibles and all their biases over time,
Speaker 1: which is quite a big deal because then you get
Speaker 1: to sort of draw out what is a person's superpower.
Speaker 1: How can they contribute in the best way to the firm? Okay,
Speaker 1: so that would be on the on the return side
Speaker 1: and then on the risk side. The fees really help
Speaker 1: with that, as we talked about, because they make the
Speaker 1: return series for the end client to mother right, and
Speaker 1: having less variants of return is important, you know. One
Speaker 1: of those three critical variables. The fourth one, of course
Speaker 1: is client alpha or dollar weighted alpha, and that's alignment
Speaker 1: as well. The fees help with them.
Speaker 2: So let's talk about what's going on in the world.
Speaker 2: We've been in deep into this rate rising environment and
Speaker 2: this inflationary environment. How does that affect your ability to
Speaker 2: do your job? What do you need to do to
Speaker 2: adjust when the era of low rates and free capital
Speaker 2: suddenly goes away?
Speaker 1: Well, I mean that's the key you just hit on it.
Speaker 1: It's been free capital and so we've seen a giant
Speaker 1: capital misallocation on the basis of rates being too low
Speaker 1: long yields being too low, and there's been a raging
Speaker 1: debate even in that period our rates too low? Aren't
Speaker 1: we inherently deflationary environment?
Speaker 2: Right?
Speaker 1: Aren't we? Demographics and technology and et cetera, et cetera.
Speaker 2: Just just because we're in a deflationary environment doesn't mean
Speaker 2: that rates have to be on an emergency footing on zero.
Speaker 2: You can have two or three percent fed funds rates
Speaker 2: and still have technologically induced inflation. Why are they mutually exclusive?
Speaker 1: One hundred percent agree. And the other element is you
Speaker 1: can there's a specific variable you can look at that
Speaker 1: tells you that it was a giant inefficiency, and that
Speaker 1: is the term premium, right, which is now getting into
Speaker 1: the media a bit more. You see more and more
Speaker 1: about the term premium. So the term premium is embedded
Speaker 1: in the long bond, in the ten year yield of
Speaker 1: a JGB or a treasury or a bund, and it
Speaker 1: is the extra return you should get for taking on
Speaker 1: time risk effectively, because that long bond should embed the
Speaker 1: expected inflation rate, the expected path of short term real rates,
Speaker 1: and something else. And that's something else should compensate you
Speaker 1: for the uncertainty and all those other variables because you
Speaker 1: don't know what inflation is going to do, you don't
Speaker 1: know what real rates are going to do, so you
Speaker 1: need an extra bit of compensation. And that's back that's
Speaker 1: backed out. It's like a risk pre like an equity
Speaker 1: risk premium. You can back that out. And that term
Speaker 1: premium has been negative. Never before in history of tracking
Speaker 1: this this variable has that gone negative. In the sixties,
Speaker 1: it was very low. In the nineties, it was very low.
Speaker 1: It's gone negative of the last five years, absolutely incredible,
Speaker 1: and that tells you there's a huge mispricing in duration,
Speaker 1: a huge mispricing on the long end of the curve.
Speaker 2: So meaning are you saying the long end of the
Speaker 2: curve is now attractive and cheap, I would know you're
Speaker 2: taking me up.
Speaker 1: I'm saying the opposite. And the reason is because that
Speaker 1: term premium has been very negative of the last five
Speaker 1: years and still isn't positive. It's risen from very very
Speaker 1: negative levels, but it's still not positive. But that has
Speaker 1: to be in my opinion positive. People disagree on this point.
Speaker 1: It has to be positive because it has to compensate
Speaker 1: you for taking time risk. That's the real time risk.
Speaker 1: Is the term premium and I think it's fascinating it
Speaker 1: if you go back to the sixties and you look
Speaker 1: at when it was very low through the late sixties,
Speaker 1: and you go back to the late nineties, also very low,
Speaker 1: you see the same dynamic that we've seen over the
Speaker 1: last five years. That is, all the long duration stuff
Speaker 1: goes up up up. In the early seventies, you had
Speaker 1: the nifty fifty right, in the late nineties, you had
Speaker 1: the tech mania, right, and then we've had all sorts
Speaker 1: of you know, a bubble to in extreme proportions, especially
Speaker 1: on the long duration end, especially on the long duration end.
Speaker 1: So that's led to this huge displication within asset markets.
Speaker 1: With the long duration businesses I've been trading at extraordinary multiples,
Speaker 1: and the short duration businesses, which are typically the very
Speaker 1: cash flow generative, low growth ones, have been extremely depressed.
Speaker 1: And you could see that dynamic in the late sixties,
Speaker 1: see in the nineties, and it led to a very
Speaker 1: interesting thing, which was the companies whose share prices were
Speaker 1: very low stopped investing, like the energy companies in the
Speaker 1: late sixties and the late nineties, they just stopped. They
Speaker 1: reduced capex enormously because the share prices were telling them,
Speaker 1: don't go out and grow, just pay out your cash
Speaker 1: flow to us, because we're not giving you any kind
Speaker 1: of rating. And it was the opposite for the high
Speaker 1: growth businesses, those very high ratings were saying, Okay, go
Speaker 1: and raise more capital your cost the capital's very low,
Speaker 1: go and grow.
Speaker 2: So we've had this distortion caused by free capital and
Speaker 2: low rates. Where is the biggest misallocation in allocations? A
Speaker 2: year ago summer of twenty twenty two, we saw people
Speaker 2: piling into private credit and private debt and private equity.
Speaker 2: It felt like a crowded trade, a little bubblicious, and
Speaker 2: a year later nothing's blown up, but clearly not not
Speaker 2: as attractive of a sector as it was. How does
Speaker 2: this impact public equities?
Speaker 1: So what we've seen is the top of that dynamic
Speaker 1: has happened. So in twenty twenty one was the equivalent
Speaker 1: of March two thousand.
Speaker 2: Right the top of the dot com dot.
Speaker 1: Com and the early seventies the top of the nifty
Speaker 1: to fifty I think. So we've passed that point. So
Speaker 1: we're just in a gradual corrective process. We've seen it before.
Speaker 1: We saw it through the seventies, we saw it through
Speaker 1: the two thousands, and we're just in that moment. And
Speaker 1: if you look at that gap between the evaluations in
Speaker 1: the long short duration end is closed, but it's not
Speaker 1: closed by very much. I think you know, listen to
Speaker 1: Cliff as s Aqr. He say, Okay, it was it
Speaker 1: the ninety ninth percentile. Now it's at the seventieth or
Speaker 1: the eighty fifth or some such.
Speaker 2: Right, we make cheaper, but not outright cheap.
Speaker 1: This is the relative attractiveness of the shorter end, the
Speaker 1: shorter duration end of the equity space. So this isn't
Speaker 1: more like the real economy, slow growth businesses. They are
Speaker 1: on a relative basis cheap, very very cheap versus where
Speaker 1: they had normally not cheap versus twenty twenty one. That
Speaker 1: was the most extreme point. So that leaves us sort
Speaker 1: of in a place where I think you just see
Speaker 1: this dynamic continuing to play out. I would be concerned
Speaker 1: about duration still.
Speaker 2: Now you could buy a one year bond and you're
Speaker 2: practically getting the same yield, but you're taking risk there. Hey,
Speaker 2: maybe rates go lower if there's a recession next year.
Speaker 2: How do you operate around that uncertainty?
Speaker 1: So that's the cycle, and that's the you know, your
Speaker 1: short term versus your long term view, and a long
Speaker 1: term view, you've got to embed the term premium into
Speaker 1: that long gyield on a short term view. If you're smart,
Speaker 1: I'm not smart enough to do this. You can sort
Speaker 1: of try to play around recessions and slow downs and
Speaker 1: rate cuts and there you'll you know, you might make
Speaker 1: a bit of money on the duration end like that.
Speaker 1: But I still see that as the big dislocation within
Speaker 1: the equity market.
Speaker 2: So let's talk about equities. So value over growth is it?
Speaker 2: For a while, value had come back with a with
Speaker 2: a vengeance that seemed to have stopped for a while,
Speaker 2: and since the lows in October twenty twenty two, growth
Speaker 2: has done really well. How do you look at those
Speaker 2: two spaces? You sound more like a value investor than
Speaker 2: a growth investor. So let's start with that and then
Speaker 2: we'll look around the world. So what do you look at?
Speaker 2: What do you think of in terms of how value
Speaker 2: stocks appear versus growth stock?
Speaker 1: So I would have value stocks are synonymous with short duration,
Speaker 1: and I still think they love very cheap. So your
Speaker 1: value stocks are attractive, and getting back to that AQR measure,
Speaker 1: they're pretty the dispersions are still very wide. I think
Speaker 1: this is a cycle which is reflexive. Once you get
Speaker 1: to the top, it starts to roll. And you know
Speaker 1: what the reason for that is getting back to those
Speaker 1: short duration old economy businesses, the lower growth ones, the
Speaker 1: value stocks, if you like, because they've had such low
Speaker 1: valuations through this cycle, they haven't invested. That drives not
Speaker 1: enough stuff into the real economy because you're not producing
Speaker 1: enough and it's not enough primary energy and et cetera,
Speaker 1: et cetera, And that drives this kind of inflation impulse
Speaker 1: through and we saw that in the seventies, and we
Speaker 1: saw that in the two thousands. The two thousands it
Speaker 1: wasn't quite a strong because you had a big labor
Speaker 1: a charge with China, but the underlying inflation was reasonable.
Speaker 1: And what that does is it pushes up the term premium.
Speaker 1: And as the term premiums going up, then this normalization
Speaker 1: of the relative valuation gap between the value stocks and
Speaker 1: the growth stock starts to close. And you get that
Speaker 1: at the same time as these businesses are generating very
Speaker 1: very healthy margins as well, because pricing's good. Pricing's good,
Speaker 1: and they're using that free cash flow not to reinvest
Speaker 1: in the business because they're still worried about all those
Speaker 1: share prices. They're just paying it all out, so it's
Speaker 1: all going to the bottom of line. It's all it's
Speaker 1: all coming back to shareholders. That's where we're getting a
Speaker 1: lot of yield in the portfolio.
Speaker 2: Huh interesting. What about geographically? Where are you looking around
Speaker 2: the world that's attractive.
Speaker 1: I don't think there are any big geographical inefficiencies today.
Speaker 1: Japan's very interesting because they're going through a big corporate
Speaker 1: governance change, which is getting in the news right.
Speaker 2: It's also look over the past couple of years, the
Speaker 2: Japanese stocks have seemed to really come alive since the pandemic.
Speaker 2: What's driving Is it this corporate governance or is it
Speaker 2: just they've been underperforming since nineteen eighty nine. That's a
Speaker 2: long time to run a pretty poor basis. They're still
Speaker 2: below their bubble peak, which is kind of hard to
Speaker 2: imagine thirty years later. Imagine I think it took us
Speaker 2: thirteen years to recover the Nasdaq dot com collapse down
Speaker 2: to about eleven hundred from five thousand and we passed that.
Speaker 2: The nick is still way below where it was. What's
Speaker 2: happening in Japan.
Speaker 1: So, I mean, the reason why you were still way
Speaker 1: below that thirty year ago peak is because it was
Speaker 1: just absolutely extraordinary. There's never been a bubble like it.
Speaker 2: Four x the dot com or five x the dot.
Speaker 1: Com, something like that. Some multiple crazy, absolutely crazy, and
Speaker 1: it was, you know, the lower quality businesses, there were
Speaker 1: the ones that were getting the most expensive. It was
Speaker 1: the one It was a balance sheet bubble, almost based
Speaker 1: on the price of land. And so that was one
Speaker 1: reason why we talk about. Another reason is the corporate
Speaker 1: governance in Japan has been awful. Too much cash on
Speaker 1: balance sheets, unproductive cash, too many cross shareholders, they all
Speaker 1: hold bits of each other.
Speaker 2: No activist shareholders in Japan.
Speaker 1: No, it's very difficult to be an activist shareholder in
Speaker 1: Japan because it's a very consensus society and you know,
Speaker 1: foreign shareholders coming in and doing the evil deeds aren't
Speaker 1: particularly welcome. What do you have to do in Japan
Speaker 1: is you have to build a relationship with management over
Speaker 1: a long period of time. So we've been investing in
Speaker 1: Japan since the early nineties. We meet with management twice
Speaker 1: a year, a lot of different management teams across the economy.
Speaker 1: We talked to them. We understand them, We try to
Speaker 1: figure out, you know, try to help them with their business.
Speaker 1: We try to understand, you know, the reasons for why
Speaker 1: they're doing what they're doing. We gradually try to help
Speaker 1: them on the capital allocation side, nudge them to Okay,
Speaker 1: is it sensible to hold shares in all these other
Speaker 1: businesses because you know, as an investor like us number one,
Speaker 1: we're just we're not just owning you, we're owning everything.
Speaker 1: I go to an index, and in terms of capital efficiency,
Speaker 1: it's horribly capital inefficient because you know, as soon as
Speaker 1: they start selling those cross shareholdings, that money starts coming
Speaker 1: out two shareholders. This gets reallocated to businesses on the
Speaker 1: basis of the growth potential, and so it's really positive
Speaker 1: for the economy to unwind all of these and to
Speaker 1: use all this idle cash. Ebonomics was the start of that.
Speaker 1: That was what twenty fifteen something like that, a decade ago. Yeah,
Speaker 1: so that was the start, and that was really good start.
Speaker 1: But recently we've seen some meaningful change.
Speaker 2: So let's let's stay with Japan a little bit. When
Speaker 2: you look at activists in the US, you have companies
Speaker 2: like Apple doing dividends and share buybacks, even Berkshire Hathaway
Speaker 2: doing the share buy back. I kind of always felt
Speaker 2: that it wasn't so much the activists that drove those
Speaker 2: as the threat of an activist that's missing in Japan
Speaker 2: other than abonomics. Would would this have happened? Or would
Speaker 2: they just have continued to all cross on each other
Speaker 2: and very unproductively sit with these assets on the balance sheet.
Speaker 1: I don't think this is activist driven. I don't think
Speaker 1: it's a threat of activists or the presence of activists
Speaker 1: that are driving this change. I think it's very internal. Yeah,
Speaker 1: and it had to be internal. It had to come
Speaker 1: from the institutions within Japan.
Speaker 2: This is a generational change, isn't it.
Speaker 1: I think so. Yeah, you're seeing people that took your
Speaker 1: stock exchange have come out and told businesses that they
Speaker 1: really need to trade above book value. Why do you
Speaker 1: trade below book value? It's extraordinary, you know you're not.
Speaker 1: That implies that the market thinks you don't create any
Speaker 1: value as a firm.
Speaker 2: Treading negative value, creating negative value, right, the replacement the
Speaker 2: what is that que? The replacement value of the company
Speaker 2: is less than what they're actually trading at that that
Speaker 2: that seems sort.
Speaker 1: Of the extraordinary, and some of these book values are understated,
Speaker 1: so I mean it's remarkable the evaluation. So it's coming
Speaker 1: from the internal pressure, it's coming from the regulator, it's
Speaker 1: coming from the government, it's coming from the stock Turkish
Speaker 1: shockage stock exchange. And when that starts to bite for
Speaker 1: one or two companies, you start to see it proliferate.
Speaker 1: Because business in Japan is all about not sticking out
Speaker 1: too much. It's about consensus. It's about doing the right thing,
Speaker 1: you know, societally as well as for your business r
Speaker 1: and so once you start seeing it start to roll,
Speaker 1: then it's snowballs. And I think we're just at the
Speaker 1: front end of that.
Speaker 2: Now, how long will that take to play out? Is
Speaker 2: this a decade?
Speaker 1: Yeah, it's a decade because it takes a long time
Speaker 1: to unwind cross shareholdings. It takes a long time to
Speaker 1: you know, move the narrative and for that to continue
Speaker 1: to go. But what we've seen is because we've been
Speaker 1: meeting with these management teams for decades now, we can
Speaker 1: kind of like benchmark it. What does the change look
Speaker 1: like now versus five years ago? Which is five years
Speaker 1: because it's been gradually improving at a time. This is
Speaker 1: a step change. This is when we go and meet
Speaker 1: with management teams. Now it's a meaningfully different conversation. It's
Speaker 1: a different tone. Now the activists are jumping in there.
Speaker 1: I don't think that's particularly helpful because it's happening by itself, right,
Speaker 1: And if you know you're you're coming as an activist,
Speaker 1: waving your flag, you'ing in the newspaper, you're almost sort
Speaker 1: of like you risk this delicate situation, right, breaking what
Speaker 1: is quite a nice trend.
Speaker 2: How significant is the currency offset with you know, yen
Speaker 2: versus the dollar has been a tough trade. How important
Speaker 2: is a currency hedge on a Japanese investment if you're
Speaker 2: not a local in Japan?
Speaker 1: So the currency hedge is very helpful. So you look,
Speaker 1: we're own a business called Impax, which is one of
Speaker 1: the biggest energy companies in Japan. They're now paying out
Speaker 1: much more of their earnings than they used to, so
Speaker 1: that's nice. You've got a four percent of it a
Speaker 1: yield and a five percent by back year, so it's
Speaker 1: a nine percent total yield in yen, and they're still
Speaker 1: paying out about half the amount that a shell or
Speaker 1: or BP does impacts impacts, Yeah, so it stands for
Speaker 1: International Petroleum Exploration or something like impact. It's been around
Speaker 1: for a long time and they're mostly energy and they
Speaker 1: have these big energy fills off the coast of Australia
Speaker 1: supplying all of Asia with liquefied natural gas. So what's
Speaker 1: interesting there is you get that nine percent yield, but
Speaker 1: it's in yen. If you hedge to dollars, of course,
Speaker 1: because you've got that big, big interest rates spread today,
Speaker 1: you know that nine goes to thirteen.
Speaker 2: Wow.
Speaker 1: And so that's cash yield, real cash hyield. Now there's
Speaker 1: some you know, nuance there in the sense it's kind
Speaker 1: of a dollar business as well, so if it changes
Speaker 1: in the end, will impact the underlying business. But that
Speaker 1: is a good, solid yield that you're getting in your hand.
Speaker 1: What's the return of market's been of the long term
Speaker 1: seven percent, and that's seven percents come from growth and yield,
Speaker 1: a little bit of yield, a little bit of growth.
Speaker 1: That's where your return comes from. If you can get
Speaker 1: a thirteen percent pure cash yield with an inflation protector,
Speaker 1: which is inflation protected, is.
Speaker 2: Real because of the price and natural gas will rise
Speaker 2: and fall inflation exactly.
Speaker 1: That is phenomenal, right, So why you know that's where
Speaker 1: it comes back to AI. Do you need to make
Speaker 1: a decision on Nvidia's future here at this valuation or
Speaker 1: can you go out there and find these types of opportunities.
Speaker 1: So the risk, of course is the magnificent seven keep
Speaker 1: rising and the market that's twenty and you're doing thirteen.
Speaker 1: But thirteen is it's.
Speaker 2: That's a low. That's a pretty sounds like a lower
Speaker 2: risk sort of trade, even if it's not matching what
Speaker 2: the biggest AI funds are doing. What about the rest
Speaker 2: of the world, Let's talk a little bit about emerging markets,
Speaker 2: what's appealing there.
Speaker 1: Emerging markets are dominated by China. That's the problem you have.
Speaker 1: That's emerging marketing.
Speaker 2: But there are actually specific indexes and funds that are
Speaker 2: EM x China, just the way there are Developed World
Speaker 2: x US. So if you don't want to be the US,
Speaker 2: developed dominates Developed World, China dominates the EM arguably. Are
Speaker 2: they even really still an EM that's a whole nother discussion.
Speaker 2: But outside of China, well, let's start with China. Is
Speaker 2: China investible or are they attractive?
Speaker 1: China's investible, I think, and it's a question of risk premium.
Speaker 1: What risk premium do you get for investing in China?
Speaker 2: You know.
Speaker 1: The big issue you have is think about think about
Speaker 1: Ali Baba today. It's come down a long way, looks
Speaker 1: quite interesting, it looks very cheap a standalone basis. If
Speaker 1: it traded in the US, I think everyone will be
Speaker 1: all over it this evaluation. The problem is, you know,
Speaker 1: if you think about if you had to spare two
Speaker 1: hundred billion lying around, okay, would you go and spend
Speaker 1: that on buying the business outright as a long term investment,
Speaker 1: buying Ali Baba for the next thirty years? And right
Speaker 1: there's a long term investor. You have to think that
Speaker 1: way because you're buying a piece of a business, right,
Speaker 1: that's your you know, that's how you have to think.
Speaker 1: And so when I think about it in those terms,
Speaker 1: it's okay, you need to be a lot with the
Speaker 1: overall system. And that's the problem you have when investing
Speaker 1: in China is it's just that there's a lot of
Speaker 1: uncertainty around as we know, the geopolitics and the friction
Speaker 1: in terms of the different ideologies of that.
Speaker 2: I mean, their CEO disappeared for eight nine months because
Speaker 2: he seemed to have gotten into a little bit of
Speaker 2: a disagreement with g and to me, I don't know
Speaker 2: how you put capital at risk in a country where
Speaker 2: the government can say we're not happy with your operations,
Speaker 2: and so we're gonna throttle you for the next four
Speaker 2: quarters and then we'll see how you behave after.
Speaker 1: I agree, you have to be very very careful if
Speaker 1: you're looking broadly at emerging markets. Korea is very interesting.
Speaker 2: Ah.
Speaker 1: Obviously it's right next to China, but if you look
Speaker 1: at Korea historically, they've often been a japan fast follower.
Speaker 1: You think about the export markets that Japan built in
Speaker 1: the sixties and the seventies. Autostronics career, I really just
Speaker 1: followed that model and did it wonderfully well. And so
Speaker 1: the noises we're getting out of career are very similar
Speaker 1: to the noises we've been hearing out of Japan over
Speaker 1: the last five to six years. Corporate governance, reform, a
Speaker 1: balance sheet efficiency, capital allocation. All the things that put
Speaker 1: this big discount on Korea and put the big discount
Speaker 1: on Japan prior to the last few years exist, and
Speaker 1: so careers, I think Japan a few years ago, and
Speaker 1: you've got more upside there.
Speaker 2: We've been hearing a lot of noise about India lately,
Speaker 2: any thoughts on the subcontinent. There another billion people waiting
Speaker 2: to move to the middle classes. What's happening there.
Speaker 1: India is an really interesting area in terms of the geopolitics,
Speaker 1: in terms of the population story, in terms of the
Speaker 1: you know, the per capital wealth growth potential. But it's
Speaker 1: also a pricey market. Those businesses are not priced cheaply,
Speaker 1: and so you pay up for the promise, and that
Speaker 1: makes it less interesting in my mind. Whereas if you
Speaker 1: go to in Indonesia, which is similarly low per capital wealth,
Speaker 1: similar growth rates, similar productivity.
Speaker 2: Growth, and lots and lots of people, lots and lots of.
Speaker 1: People, you pay you five six times earnings. Some of
Speaker 1: these businesses getting sort of ten eleven percent given yells
Speaker 1: out with sort of low teen growth rates. If you
Speaker 1: go back to two thousand and five when I joined August,
Speaker 1: the bricks was all the rage, right, bricks, bricks, bricks
Speaker 1: was that was the ai of the time. Bricks.
Speaker 2: So Brazil, Russia, India, China, none of them have done
Speaker 2: especially well since then.
Speaker 1: They haven't in terms of their stock market in terms
Speaker 1: of their economies. Their economies have grown recently well in
Speaker 1: Russia aside, and South Africa is in there as well
Speaker 1: right now.
Speaker 2: And Russia was actually seeing some growth until they decided
Speaker 2: to invade Ukraine came up Parah.
Speaker 1: So the story around emerging markets in two thousand and
Speaker 1: five was absolutely right. You had growth rate in population
Speaker 1: come true, you had productivity growth. That's come true. What
Speaker 1: hasn't come true investment returns. Why has that not come true?
Speaker 1: Because everybody wanted a piece of them. Everybody wanted a
Speaker 1: piece of them. So whilst the earnings growth has been
Speaker 1: good for the economy overall, the per share earnings growth
Speaker 1: has been absolutely awful because the number of shares has
Speaker 1: gone up and up and up issued capital. For all
Speaker 1: this capital coming in, what have you got today? You've
Speaker 1: got apathy. Nobody wants to invest in Indonesia, which is
Speaker 1: great on two sides. You get cheap evaluation, but you
Speaker 1: also get the businesses that are in Indonesia and dominant.
Speaker 1: They don't have any capital to compete with, so their
Speaker 1: growth rate on a per share basis is actually higher
Speaker 1: than it was when everyone was excited twenty years ago.
Speaker 1: So I think that you know, there are really good opportunities.
Speaker 1: Brazil is another example in emerging markets. You're seeing cheap
Speaker 1: assets and you know, reasonably good backdrop.
Speaker 2: Really interesting. Before I get to my favorite questions, let
Speaker 2: me just throw a modest curveball. Since we've and talking
Speaker 2: so internationally. You're based in Bermuda. How does that affect
Speaker 2: your outlook? Does it affect your outlook? If so, how
Speaker 2: is that a location an advantage or a disadvantage? I
Speaker 2: would be afraid. It's beautiful and sonny every day. I
Speaker 2: would just throw money at the market all the time
Speaker 2: and not worry about anything.
Speaker 1: Yeah, that out looks very nice because we've got this
Speaker 1: lovely view from the of the bay. The decision to
Speaker 1: set up in Bermuda was the founder's original decision, based
Speaker 1: not on tax everyone as seems tax. It's based on
Speaker 1: the fact that it was well.
Speaker 2: Developed and big financial hub.
Speaker 1: Big financial hub and extremely convenient. So where where do
Speaker 1: you get to combine those two things? Convenient in the
Speaker 1: sense that what are the frictions in Bermuda? Very little.
Speaker 1: You can live right next to the office, You're right
Speaker 1: live right next to the kids' schools, right next to
Speaker 1: the dentist right next to the Is there anything you
Speaker 1: need to do right? There's there's very little friction in
Speaker 1: your life if you live in Bermuda and so but
Speaker 1: if you want that, typically you can't combine that with
Speaker 1: international business of the highest quality. But Bermuda is one
Speaker 1: of the few places.
Speaker 2: Well they've been a giant financial hub for decades insurance
Speaker 2: and I know Cayman's a really thought of more as
Speaker 2: the hedge fund venture capital space, but Bermuda has been
Speaker 2: a huge financial hub for a long time. And what
Speaker 2: are you two hours to New York and forty five
Speaker 2: minutes to Miami exactly?
Speaker 1: Yeah, two hours to most of those sort of East
Speaker 1: coast cities in the US and only six hours to
Speaker 1: London as well.
Speaker 2: Not to share at all. So let's jump to my
Speaker 2: favorite questions that we ask all of our guests, starting
Speaker 2: with tell us what you're streaming? What have you been
Speaker 2: watching or listening to these days? Ah?
Speaker 1: So we my wife and I just started watching After Party.
Speaker 1: Have you heard of that?
Speaker 2: I saw the first season?
Speaker 1: Oh it's okay, so it's not brand new then all right,
Speaker 1: I have no idea when these things come out. But
Speaker 1: that was good. Yeah, fu, yeah, it's fun, it's very
Speaker 1: well written. It's a little bit of music, great script,
Speaker 1: Ted Lasso. We enjoyed Succession, you know, all the all
Speaker 1: the big ones, the ones that I think maybe you
Speaker 1: wouldn't have heard of because I'm British and I like
Speaker 1: the sort of niche comedy series After Life with Ricky Gervai.
Speaker 1: Love it okay, by the way, that was a huge hit.
Speaker 1: And is that right?
Speaker 2: Well he's had the Office and then he's had a
Speaker 2: few on HBO and After Life very touching, very well done.
Speaker 1: He's delfl Yes, really great comedian, really great writer. Another one,
Speaker 1: I T Crowd? Have you ever heard of that? Now?
Speaker 1: This is about a geeky comedy.
Speaker 2: Let's go it.
Speaker 1: I T Crowd. It's about an IT department in the
Speaker 1: basement of a business in some London suburb. You have
Speaker 1: to you have to, you know, be very geeky to
Speaker 1: enjoy that one.
Speaker 2: If you if you this sounds a little bit like
Speaker 2: Silicon Valley. Did you did you see that?
Speaker 1: I never saw that one.
Speaker 2: So that was on HBO and it's geeky and tech
Speaker 2: and if you like Silicon Valley, I've been recommending to
Speaker 2: people on Apple TV. Mythic Quest, which is about a
Speaker 2: game developer. Same sort of geeky, quirky characters, lots of cursing,
Speaker 2: lots of fun sounds good.
Speaker 1: I did sound good and Red Dwarf was the other.
Speaker 1: Redwolf is a very very old British sci fi comedy.
Speaker 1: It's been one of my favorites. If you watch it
Speaker 1: for the first time, you'll think, wow, this is dated, right,
Speaker 1: because you know when you see the spaceships you can
Speaker 1: see the string attached to it, right. But the one
Speaker 1: liners are just great. There's a lot of those.
Speaker 2: So when I first moved out of the city, I
Speaker 2: used to get BBC Television and it wasn't available on cable.
Speaker 2: I had to get satellite, partly because I was a
Speaker 2: junkie for a Doctor Who. And there were a couple
Speaker 2: of other sitcoms like Coupling was hilarious, absolutely hilarious. Remember
Speaker 2: you watch Friends afterwards and you realize how milk toast
Speaker 2: it is compared to how nasty and funny and raunchy
Speaker 2: Coupling was. But Doctor Who is now going through another
Speaker 2: big set of changes. So I'm no spoilers, but I'm
Speaker 2: I got most of the season teed up and I'm
Speaker 2: just going to plow through it over the holidays.
Speaker 1: I didn't realize that was so popular over here.
Speaker 2: I don't know how popular it is amongst a certain
Speaker 2: group of sci fi geeks. It's required viewing, but it's
Speaker 2: been really interesting and they've continued to keep it fresh
Speaker 2: and intriguing. So let's go to our second question. Tell
Speaker 2: us who your early mentors were, who helped shape your career.
Speaker 1: I struggle with this one. You know, for knowledge, I
Speaker 1: always my philosophy has always been to go to people
Speaker 1: who really know about the specific thing you want to
Speaker 1: understand better. That's papers, and it's books, and it's just
Speaker 1: finding experts. But I think the key so I had
Speaker 1: to look up what is mentor? I think what is
Speaker 1: a mentor? And I think the key thing there is
Speaker 1: trusted is trusted counselor that you go to because you
Speaker 1: know they have your best interests at heart, right, And
Speaker 1: that for me is very much close friend's family, it's
Speaker 1: my brother, it's my close colleagues, it's you know, the
Speaker 1: Gray family and Orbits, Adam Carr, et cetera. People who
Speaker 1: you know have your back basically got it.
Speaker 2: Uh, Let's talk about some books. What are some of
Speaker 2: your favorites and what are you reading right now?
Speaker 1: Uh, Well, I went through I go through phases, so
Speaker 1: I mean I went through a long phase of factual books,
Speaker 1: learning books of Bernstein's books He's a financial historian, against
Speaker 1: the Gods, against the Gods, and Power of Gold and
Speaker 1: all those good ones. TALEB was when I picked up earlier,
Speaker 1: which is you know, Understanding the Role of Chance in
Speaker 1: Life and Alchemy of Finance by George Soros. You know,
Speaker 1: all the classics, Jim Rodgers books, and then fun business
Speaker 1: books like Rogue Trader is such a good book written
Speaker 1: by Nick Leeson, brought down bearings back. Fascinating story of
Speaker 1: how you can slip into those types of situations, right,
Speaker 1: not starting out as somebody who in any way wants
Speaker 1: to cause harm or a bad person. You just end
Speaker 1: up taking a little bit too much risk and then
Speaker 1: you step into some gray area, and then you step
Speaker 1: a little bit further to try to get that lost
Speaker 1: back and it snowballs. Fascinating story that's wrote. And then
Speaker 1: there's a whole bunch of stuff like Bad Blood and
Speaker 1: all those sort.
Speaker 2: Of those are really fascint You know, we talked earlier
Speaker 2: about the theory of poker, did you ever read any
Speaker 2: Duke's thinking in Bets?
Speaker 1: Yes, I mean that's that is exactly aligned with how
Speaker 1: I think everybody should think about investing and poker. You know,
Speaker 1: it's it's all about thinking about the process rather than
Speaker 1: the outcome. And that's what poker teaches you because it
Speaker 1: drums that into over and over and over and over again,
Speaker 1: that it's the process not the outcome, because the outcome
Speaker 1: is so different.
Speaker 2: The outcome is semi random. Michael Mobison talked about the
Speaker 2: impact of luck and skill in investing in sports and business,
Speaker 2: and it turns out, at a professional level, the skill
Speaker 2: it's very counterintuitive. When the skill level is that high.
Speaker 2: Sometimes a random bounce, a little bit of luck has
Speaker 2: an outside impact because everybody's playing at such a high level.
Speaker 1: Exactly, yeah, exactly, Yeah, that's dead.
Speaker 2: Right, really really quite interesting. And our final two questions,
Speaker 2: what sort of advice would you give to a recent
Speaker 2: college grad interested in a career in investment, fund management,
Speaker 2: et cetera.
Speaker 1: I found this. I find all your questions hard, but
Speaker 1: this one I found hard as well, in the sense
Speaker 1: that the more I you know, have interact with people
Speaker 1: I work with and other people, more you recognize that
Speaker 1: everyone is so different, everyone has such different characters, such
Speaker 1: different traits, and advice to one person who is completely
Speaker 1: useless when applied to another person you have to tailor
Speaker 1: it so much.
Speaker 2: So.
Speaker 1: The one thing I came up with which I think
Speaker 1: is universal, is not things like folly your passion, which
Speaker 1: you know is powerful for some but not others. It's
Speaker 1: act with integrity. It's that old adage of you know,
Speaker 1: trust is hard earned but easily lost, right, that's the
Speaker 1: And if you act with integrity through your career, through
Speaker 1: your life, when interacting with everybody around you, then I.
Speaker 2: Think you can't go far wrong. And our final question,
Speaker 2: what do you know about the world of investing today?
Speaker 2: You wish you knew back in the early nineties when
Speaker 2: you were first getting stuff guarded? And this can't be
Speaker 2: by Apple, Well it's not, you know, by Apple. In
Speaker 2: this universe. If you if we get to put you,
Speaker 2: if I put you on a time machine and send
Speaker 2: you back to nineteen ninety, how you don't know if
Speaker 2: it's the same exactly.
Speaker 1: You know that's true. Oh no, it's a multiple.
Speaker 2: That's the problem with time travel is you know, the
Speaker 2: butterfly effect and everything else so not simply by the way,
Speaker 2: if you would have bought Apple, I think from nineteen
Speaker 2: ninety to two thousand and four you were flat. That's
Speaker 2: absolutely right, which is which is kind of crazy.
Speaker 1: That's absolutely and the little things that went right there
Speaker 1: that led them on this path to your to your
Speaker 1: parallel universe point. So I struggle with this again. I
Speaker 1: think maybe this is a cop out. I wouldn't tell myself,
Speaker 1: you know, if I was had a time machine, I'd
Speaker 1: tell myself absolutely nothing. And I think the the values
Speaker 1: in the struggle basically you internalize lessons if you learn
Speaker 1: them yourself, right, even if it's you the path not
Speaker 1: the destination exactly right. So I think I would just say, look,
Speaker 1: you know, make the best decision you can at the
Speaker 1: time with all the information you have, and have no regrets. Right.
Speaker 2: I like that. Graham, thank you so much for being
Speaker 2: so generous with your time. We have been speaking with
Speaker 2: Graham Foster. He is portfolio manager at Orbis Holdings. If
Speaker 2: you enjoy this conversation, well, be sure and check out
Speaker 2: any of the previous five hundred or so we've done
Speaker 2: over the past nine years. You can find those at iTunes, Spotify, YouTube,
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Speaker 2: would be remiss if I did not thank the crew
Speaker 2: team that helps put these conversations together each week. My
Speaker 2: audio engineer is Rich Subnani. My director of research is
Speaker 2: Sean Russo. A Teak of al Broun is our project manager.
Speaker 2: Anna Luke is my producer. I'm Barry Hittolts. You've been
Speaker 2: listening to Masters in Business on Bloomberg Radio