Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: their processes, challenges, and philosophies and security selection. I'm David cone, I,
Speaker 1: lead mutual fund and active research at Bloomberg Intelligence. So
Speaker 1: active equity funds can take many forms, some concentrated, some
Speaker 1: highly diversed, some momentum, and some with a contrarian strategy.
Speaker 1: In today's episode, we'll be speaking with a portfolio manager
Speaker 1: whose strategy adheres to the latter. I'd like to welcome
Speaker 1: Murray Style to the podcast. Murray is chief executive officer,
Speaker 1: chief investment officer, and co founder of Horizon Kinetics and
Speaker 1: a portfolio manager for the Paradigm fund ticker WWNPX, which
Speaker 1: we will discuss in a little bit. Murray, thanks for
Speaker 1: joining me today.
Speaker 2: Thanks for having me.
Speaker 1: So let's start with your investment philosophy. Your long term
Speaker 1: contraying value philosophy is central to Horizon Kinetics. Can you
Speaker 1: describe how this philosophy originated and how it's evolved over
Speaker 1: your career.
Speaker 2: Well, the firm is called Horizon for a simple reason
Speaker 2: that it was my observation that people in the professional
Speaker 2: cadre of investors are really intent on finding investment opportunities
Speaker 2: within a less than a one year time horison. But
Speaker 2: a simple reason that the year or the calendar year
Speaker 2: if you like, is the grading period. So the utility
Speaker 2: of some return beyond the momentary grading period is much
Speaker 2: less than the utility return within the grading period, So
Speaker 2: things get overvalued in the short run and there are
Speaker 2: limited utility therefore undervalued in the long run.
Speaker 1: The equity yield curve is mentioned as part of your
Speaker 1: firm's investment philosophy, is a way of understanding return expectations
Speaker 1: over time and why certain opportunities are overlooked. Can you
Speaker 1: walk us through how you think about the equity yield
Speaker 1: curve and practice and how it influences your investment decisions.
Speaker 2: Sure? Well, the equa yell curve, if you could draw it,
Speaker 2: would look no different than the bond yield curve, with
Speaker 2: the salient exception that the equityal curve is very very
Speaker 2: steeped unlike the bond yield curve, and the reason that
Speaker 2: relates to long term horizon investing. So let's say you're
Speaker 2: not a professional investor, you had your own company. It's
Speaker 2: a private company, and let's make believe it was in
Speaker 2: the field of biotechnology and you made some incredible discovery.
Speaker 2: It's going to benefit greatly mankind. And for a variety
Speaker 2: of reasons, you can't make the announcement of your discovery
Speaker 2: on December sixteenth, because if you had planned a vacation
Speaker 2: with your family, so you decide you're going to make
Speaker 2: the great announcement on January sixth. Well, if you own
Speaker 2: a company and it's a private company and you happen
Speaker 2: to profit immenseally on January sixth, it's a little concern
Speaker 2: to you. However, if you're in the world of public equity,
Speaker 2: there's a very big difference between any event that happens
Speaker 2: on December sixteenth, one year and January sixth of the
Speaker 2: following year, because not only your bonus is paid and
Speaker 2: the evaluations are made on the one year grading period
Speaker 2: is also a very small matter of the performance fees
Speaker 2: that people get. So of course, if you don't achieve
Speaker 2: it in the calendar year, you may or may not
Speaker 2: achieve it in the following year, and that, I would
Speaker 2: argue strongly motivates people's behavior.
Speaker 1: Interesting. Now, you also emphasize fundamental research on can we
Speaker 1: say like less trafficked opportunities. What criteria makes a company
Speaker 1: compelling to you even when it's misunderstood or always say
Speaker 1: out of favor.
Speaker 2: Well, it's I wouldn't say necessarily that they're always misunderstood.
Speaker 2: It's that people don't take the time to understand them.
Speaker 2: So let's say it's under scrutinized. And you could see
Speaker 2: why if you just think about the world of liquidity.
Speaker 2: So the idea is people want to manage huge amounts
Speaker 2: of money because they charge a fiant So in order
Speaker 2: to manage huge amounts of money, you have to have securities,
Speaker 2: to have a liquidity characteristic that would accommodate that kind
Speaker 2: of management. If you have less sums of money, or
Speaker 2: you're longer term oriented and you don't trade a lot,
Speaker 2: you can accommodate the company that's underscrutinized that might have
Speaker 2: a lot of liquidity attached to it. In other words,
Speaker 2: you can wait and be patient. So it's a question
Speaker 2: of what you'd like to do as an investor. I
Speaker 2: would like to be more patient and traffic in the
Speaker 2: world less scrutinized. So that's how it characterize it.
Speaker 1: Okay, And if we kind of zero in on the
Speaker 1: Paradigm Fund, which kind of looks at these type of companies,
Speaker 1: you know, long product cycles, high barriers to entry. How
Speaker 1: does that play out in day to day portfolio construction
Speaker 1: with the fund.
Speaker 2: Well, it's very hard to find companies that have a
Speaker 2: long product life cycle. So I'll just mentioned text specific
Speaker 2: since you would have mentioned it anyway. It has the
Speaker 2: virtue that it's the Texas specific land company. There's only
Speaker 2: so much land on this planet, and the character land
Speaker 2: is not changing. You're not going to make land technologically
Speaker 2: obsolete by whatever scientific developments you have. Matter of fact. Conversely,
Speaker 2: you can make the land much more valuable, but not
Speaker 2: less valuable, by scientific bands and those are things that
Speaker 2: are happening to that company right now. So land under
Speaker 2: the American Accounting Convention is not marked to market anywhere
Speaker 2: else in the world. IFRS accounting, it is marked to market.
Speaker 2: So something that's not marked to market, it's not going
Speaker 2: to be well understood. Each portion of land, whatever is
Speaker 2: located in the United States, is unique. So land is
Speaker 2: that type of asset class where the individual the individual
Speaker 2: plot matters a lot, and it's not studied as an
Speaker 2: asset class. Even though there's a lot of wealth globally
Speaker 2: tied up in land, and you won't find an ETF
Speaker 2: or a fund dedicated to land because generally speaking, it's
Speaker 2: not marked to market and it's not traded heavily. It's
Speaker 2: a perfect investment for the fund.
Speaker 1: So if we kind of dig a little deeper and
Speaker 1: just talk about positioning, has the funds positioning sizing kind
Speaker 1: of or your philosophy about it changed over time, or
Speaker 1: you know, do you increase position as conviction grows or
Speaker 1: kind of try to spread it more broadly?
Speaker 2: No, I, when I start, I take a relatively small position,
Speaker 2: meaning in my parlance, less than five percent. Of course
Speaker 2: you'll observe VI positions greater than five percent. So what happens.
Speaker 2: Let's create a hypothetical portfolio. I will buy twenty names
Speaker 2: and let's make believe purchase this discussion that they were
Speaker 2: twenty names equally weighed or twenty five percent positions. What's
Speaker 2: going to happen over time if you're long term investor is,
Speaker 2: even if they're all successful, the returns are going to
Speaker 2: be normally distributed to Galssian log normal. Something is going
Speaker 2: to be your best investment, even th they're all wonderful investment,
Speaker 2: somethings to be your highest rate of return. What you'd
Speaker 2: like to have happened is you would like your highest
Speaker 2: turn to be your biggest position. The only way to
Speaker 2: achieve it is to leave it alone. If you leave
Speaker 2: it alone, because you can't know perspectively what is going
Speaker 2: to be your most successful investment. You can only know
Speaker 2: that retrospectively. So if you wish your best investment to
Speaker 2: be your biggest investment, need to leave it alone. And
Speaker 2: leaving it alone, it will become, in the fluence of time,
Speaker 2: a disportionately large position your portfolio. And that's how it happens.
Speaker 1: So if we kind of even go a little deeper,
Speaker 1: and so if you have a one position or even
Speaker 1: two positions that are very heavy concentrated in the portfolio,
Speaker 1: how do you wait, I guess concentration risk in terms
Speaker 1: of you know, versus diversification. Is that something that clients
Speaker 1: ask you about.
Speaker 2: Oh, they're asking me about all the time. And the
Speaker 2: conventional of you, of course is you shouldn't let anything
Speaker 2: be concentrated. And the reason is because if it becomes
Speaker 2: a disproportioned large position, what if it has to draw
Speaker 2: down and if it has a draw down, it will have,
Speaker 2: of course, a disproportionate impact on the portfolio. That's the
Speaker 2: conmensial logic, and it's very hard to argue with the
Speaker 2: logic except for one small item, which I'll bring to
Speaker 2: your attention at the moment. The funds are designed for
Speaker 2: taxable people. So in preventing a company or a position
Speaker 2: becoming disproportionate in size because there might be a draw down,
Speaker 2: you need to sell down some or maybe all of it,
Speaker 2: and when you do, you expose your client base to taxation.
Speaker 2: So in the effort to protect the portfolio against the
Speaker 2: draw down, you exchange that circumstance for the certainty of
Speaker 2: having a large draw down with regard to taxes, because
Speaker 2: if you live in the state of New York, as
Speaker 2: I do, you're going to pay the federal rate and
Speaker 2: New York rate, and that's going to be a prop
Speaker 2: roximately in round numbers, one third of your profits. And
Speaker 2: of course we'll leave aside whatever it taxes the City
Speaker 2: of New York might impose upon one.
Speaker 1: Okay, And if you get to a situation where you
Speaker 1: do want to sell, I mean your portfolio is very
Speaker 1: or I should say even ultra low turnover ratios in
Speaker 1: comparison to a lot of other funds I look at.
Speaker 1: So when it's how do you decide when it's time
Speaker 1: to sell the specific catalysts you look for.
Speaker 2: Well, there are two circumstances for selling. One circumstances just
Speaker 2: found something better to invest in it, which case will
Speaker 2: sell some of the security which is inferior and perspective return,
Speaker 2: and buy some security which is presumably superior. That's an
Speaker 2: obvious circumstance. Another circumstance, which is equally obvious, is sometimes
Speaker 2: your big position it just doesn't have the appreciation potential
Speaker 2: in once heead it's not the same thing negative about
Speaker 2: the company. But no company is an extraordinary company forever,
Speaker 2: and you may wish to gradually sell some and fund
Speaker 2: some other investments. Of course, you don't wish to sell
Speaker 2: the investment until you found something new. Or in our
Speaker 2: horizon parlance, we don't through out dirty water until we
Speaker 2: have clean water.
Speaker 1: That makes sense, good analogy. Another thing I wanted to
Speaker 1: ask you about the portfolio, because this is something I'm
Speaker 1: seeing starting to pop up quite a bit in equity
Speaker 1: mutual funds, is your exposure to bitcoin via ETFs, and
Speaker 1: you know it's a meaningful exposure. What was the original
Speaker 1: rationale for adding bitcoin to the fund and has that
Speaker 1: rationale kind of changed?
Speaker 2: Okay, so first tell you before I answer that question,
Speaker 2: is we only put a twenty five basis point position
Speaker 2: in bitcoin because at the time, this was more than
Speaker 2: a decade ago. Its prospects were, let us say, not
Speaker 2: as certain as at traditional equity would be because it's
Speaker 2: not traditional equity. However, the upside potential was enormous, so
Speaker 2: that was the rationale. We can go into what the
Speaker 2: upside potential is. It's still fairly large, so I felt
Speaker 2: the portfolio should have some Bitcoin, and there was the
Speaker 2: possibility that it would have returned that's outlandish relative to
Speaker 2: anything else in portfolio, which proved be true, and therefore
Speaker 2: it provides covariance to portfolio. The worst thing that possibly
Speaker 2: happened is it becomes bankrupt or worthless or nearly worthless,
Speaker 2: and it becomes worthless or nearly worthless, and only starting
Speaker 2: at twenty five basis points, so the damage to the
Speaker 2: portfolio would be rather limited.
Speaker 1: How do you communicate that to some of your investors
Speaker 1: that might be skeptical or you know, kind of only
Speaker 1: want to look at fundamentals.
Speaker 2: Well, bitcoin, believe it or not, has fundamentals, so everyone
Speaker 2: thinks it has no fundamentals. So this could be I'm
Speaker 2: going to cut it short because inches of time, but
Speaker 2: if you want to explore this, I'll explore it as
Speaker 2: long as you want. So Bitcoin is created by a
Speaker 2: process unfortunately known as mining. The reason I say unfortunately
Speaker 2: known as mining is it's really a bad term. We're
Speaker 2: stuck with it. Mining is just a process of validating
Speaker 2: the transactions on the blockchain. That's good. Mining is so
Speaker 2: in exchange for millions of servers, literally millions of servers
Speaker 2: validating the transactions, and if you post it on the blockchain,
Speaker 2: you get every ten minutes something called the block reward,
Speaker 2: and that block reward is issued in the chords to
Speaker 2: protocol that in theory, will give a reward every ten minutes,
Speaker 2: meaning a block should be written to the blockchain every
Speaker 2: ten minutes. Doesn't happen exactly every ten minutes, but a
Speaker 2: protocol is designed to equilibrate the process, so on average
Speaker 2: it happens every ten minutes. Okay, So the protocol is
Speaker 2: designed to raise, in the fullest of time, the cost
Speaker 2: of validating a transaction, so the cost of creating a bitcoin,
Speaker 2: if you like, because that's the process by which you
Speaker 2: create a bitcoin, you validate transactions. The cost is rising
Speaker 2: now if you consider a bitcoin to be a commodity
Speaker 2: and the protocol determines that the cost of creating the commodity.
Speaker 2: In other words, bitcoin is going to rise every four years.
Speaker 2: I'll explain why it rises in a minute, but for
Speaker 2: a moment, it's going to rise every four years. You
Speaker 2: can now forecast an extraordinarily robust return. Why is going
Speaker 2: to rise every four years because the block reward is
Speaker 2: reduced by half every four years, in an event called
Speaker 2: a having. They called it a having because the luck
Speaker 2: of ward's been cut in half, and every four years.
Speaker 2: This happens. Next having occurs on or about April eighteenth,
Speaker 2: twenty twenty eight. So if you want to be if
Speaker 2: you're doing the same amount of work and you want
Speaker 2: the same number of bitcoin to be issued, it's not
Speaker 2: going to happen. So if you want the same number
Speaker 2: of bitcoin to be issued, you have to do twice
Speaker 2: as much work, meaning you have to have twice as
Speaker 2: many servers baldaying transactions, thereby drawing more electric power. So
Speaker 2: it costs more So now if there were a protocol
Speaker 2: that said, every four years, the cost of creating an
Speaker 2: ounce of gold is going to double, what would happen
Speaker 2: to gold prices? If there were a protocol it's said
Speaker 2: every four years, the cost of creating a barrel of
Speaker 2: oil or a million bitter to you of natural gas,
Speaker 2: or a bushel of wheat or what have you, we're
Speaker 2: going to double every four years, what would happen to
Speaker 2: that commodity? That was the logic a bitcoin. So when
Speaker 2: I read the protocol, and once I understood that, I
Speaker 2: realized it was well worth doing that. Now, in point
Speaker 2: of fact, the return was even higher than which could
Speaker 2: happen and did happen in accordance with the protocol. It
Speaker 2: was even higher than that. So it was an extraordinary investment.
Speaker 2: But I had a logic to it, and that was
Speaker 2: the logic. It was based on mathematics.
Speaker 1: Okay, so obviously different than what a lot of folks
Speaker 1: on Twitter that I think everything belongs in bitcoin. So
Speaker 1: I'm definitely here, you know, happy to hear the logic
Speaker 1: behind it. So if we move in a slightly different direction,
Speaker 1: you know, I read your Q four commentary and it
Speaker 1: kind of it drew a contrast between strategic resource owners
Speaker 1: and shall we say, traditional IT companies. How do you
Speaker 1: think mainstream investors are kind of misgauging the long term
Speaker 1: potential for these different groups.
Speaker 2: Oh, that's easy to answer. So historically, as long as
Speaker 2: we had investments through the bulk of recorded economic history,
Speaker 2: hard assets were the bulk of people's wealth. Last quarter century,
Speaker 2: and I personally we dated not the quarter century. I
Speaker 2: personally we dated from June of two thousand and seven,
Speaker 2: So it's not quite a quarter century. Why June of
Speaker 2: two thousand and seven, Because June of two thousand and
Speaker 2: seven was creation of the iPhone, Although we might not
Speaker 2: have realized it at the time. Now there are clearly
Speaker 2: well in excess of five billion users of smartphones, all
Speaker 2: having access to the Internet and all that goes with that.
Speaker 2: That was enormous investment opportunity, And unlike what we all
Speaker 2: believed in two thousand and seven, even prior to two
Speaker 2: thousand and seven, with the advent of the Internet, we
Speaker 2: didn't nobody realized that the business was being custraed in
Speaker 2: a handful of companies, and those companies had extraordinary cash
Speaker 2: flow characteristics. Why extraordinary because the Internet runs essentially on
Speaker 2: the landline telephone system. So what people refer to as
Speaker 2: the magnetics in seven, or sometimes they refer to it
Speaker 2: at some other number of magnifs in eight. But those
Speaker 2: companies were using the existing telecommunications infrastructure, and therefore they
Speaker 2: had unbelievably great cash flow characteristics. In other words, for
Speaker 2: me to do one incremental search on Google and me
Speaker 2: to click on the right thing, and Google gets paid
Speaker 2: based on my response to an ad, there's no incremental
Speaker 2: capital spend or maybe even no incremental actual SGNA spend
Speaker 2: for me to do that. It had just enormous positive
Speaker 2: cash flow characteristics, enormous operating leverage, positive operating leverage characteristics.
Speaker 2: Nothing like that had ever been seen. However, it just
Speaker 2: can't continue forever. So now we're moving into the world
Speaker 2: of as most people say, artificial intelligence, which I say,
Speaker 2: it's high performance computing. Why is it high performance computing
Speaker 2: because the amount of data that's needed to be manipulated
Speaker 2: in order to serve the modern function. As a trivial example,
Speaker 2: that you and I could be watching the same YouTube video,
Speaker 2: but our interests are different and databases nowhere. Interests are different,
Speaker 2: and we will see different advertising. Can you imagine multiplied
Speaker 2: by now it's almost six billion people on Internet, how
Speaker 2: much data you really need? Well, that involves enormous capital expenditure.
Speaker 2: As you you can see from the most recent earnings
Speaker 2: releases and capital spending forecasts of Amazon, Alphabet, Meta platforms
Speaker 2: and all. You've seen the earnings, you've seen what the
Speaker 2: capital spending forecasts are. They're unbelievable, and they should be
Speaker 2: believable because when you think about if you were looking
Speaker 2: at a company like Nvidia and more power to them,
Speaker 2: have nothing against them, so you can calculate how many
Speaker 2: servers they're going to sell, multiplied by how much power
Speaker 2: is drawn by each server. It's enormous man electric power.
Speaker 2: We're going to have those a nation engaged in capital
Speaker 2: spending and build the electric generation infrastructure in order for
Speaker 2: that to happen. So we enjoyed almost unique in history,
Speaker 2: but not entirely unique, a period of time when a
Speaker 2: handful of companies had enormous cash flow positive cash flow
Speaker 2: characteristics that simply can can't continue because capital expenditures are
Speaker 2: going to be required, and it's there for everyone to see.
Speaker 2: It's not a secret. That's the change that we have
Speaker 2: to accommody ourselves to So, to make a long story short,
Speaker 2: we're returning, as we inevitably were going to, to the
Speaker 2: world of hard or tangible if you like assets.
Speaker 1: So do you think that will change you know, the
Speaker 1: you know, one of the things I look at is,
Speaker 1: you know, you've got as you mentioned, the mag seven,
Speaker 1: maggate or whatever. You know, they're calling these these companies
Speaker 1: these days. Do you think they're going to be less
Speaker 1: dominant in market indexes, you know, giving active managers more
Speaker 1: of a you know, chance to compete.
Speaker 2: Well, they're going to have to be for a simple
Speaker 2: reason that you work for Bloomberg and you know you're
Speaker 2: coming out shortly with the Bloomberg five hundred index, and
Speaker 2: so the the inclusion criteria for s TOB five hundred
Speaker 2: is different than the Bloomberg Index. So let's take an example.
Speaker 2: Let's say open ai to people borrows chat GPT. Let's
Speaker 2: say they were going to the IPO. Well, in the
Speaker 2: case of Bloomberg, open ai is probably going to be
Speaker 2: in the top five hundred mare capitalizations on day one,
Speaker 2: and therefore it will very quickly find its way into
Speaker 2: Bloomberg Index. There may be a day or two of transition,
Speaker 2: but it's going to be not immediately but almost immediately
Speaker 2: go into the Bloomberg five hundred index. The S and
Speaker 2: P five hundred index has different criteria the SID. First
Speaker 2: of all, there's trading criteria, which it might not meet
Speaker 2: in the beginning. But secondly, there's a seasoning requirement, so
Speaker 2: that has to be publicly traded for a certain period
Speaker 2: of time. So if SpaceX and open Ai, an Anthropic
Speaker 2: and other companies that were all familiar with, if they
Speaker 2: were to come public in a given period of time,
Speaker 2: which would happen because says an appetite for one, there'll
Speaker 2: be an appetite for others. You're going to have two
Speaker 2: large capitalization indexes. You're going to have a Bloomberg five
Speaker 2: hundred index, you have an S and P five hundred index,
Speaker 2: and they're going to look very very different in the
Speaker 2: largest capitalization portion of the index. And also interestingly, in
Speaker 2: a fundamental sense, Anthropic, open Ai and others are going
Speaker 2: to compete without that. So now outbed is going to
Speaker 2: go from a circumstance where it is a quasi monopoly
Speaker 2: to being challenged. Doesn't mean it's going to be defeated
Speaker 2: by the challengers. Of course, but it's going to be challenged,
Speaker 2: and it's going to be challenged. Usually when a company
Speaker 2: is challenged and has a lot of capitalist spending requirement
Speaker 2: to maintain its dominance, which means your free cash flow,
Speaker 2: not necessarily your cash flow, but your free cash flow
Speaker 2: is going to diminish. Generally speaking, the market would award it,
Speaker 2: we would reward it, so to speak, or price earning
Speaker 2: is multiple because there's higher risk because you may not
Speaker 2: be where this company may not be the dominant company.
Speaker 1: So it actually brings me to a different topic. You know,
Speaker 1: I'm glad you mentioned open Ai and you know some
Speaker 1: of these other private companies that we're looking at. Private
Speaker 1: companies is kind of like it's a thing we're really
Speaker 1: focusing on our team, and so, you know, you had
Speaker 1: also mentioned in your recent Founder's letter in January, you know,
Speaker 1: you defended private investments as kind of a natural extension
Speaker 1: of your investment philosophy. How do you think privates are
Speaker 1: private companies complement or contrast with, you know, more of
Speaker 1: the public stocks that are in the paradigm.
Speaker 2: Fund Well, for us, it's a natural extension for a
Speaker 2: simple reason that the the growth and eventually the dominance
Speaker 2: of indexation basically meant that for the last quarter century,
Speaker 2: the IPO market has been so to speak, there's been
Speaker 2: historical standards, not a lot of activity. And for private
Speaker 2: equity funds and for private companies in general, it's been
Speaker 2: very hard to attract equity capital. And for owners of
Speaker 2: private equity funds who require liquidity, there are a lot
Speaker 2: of people who can get liquidity and must have it,
Speaker 2: and therefore opportunities for people who wish to offer liquidity.
Speaker 2: There are opportunities that wouldn't otherwise exist. So in the
Speaker 2: historical context would never have seen this. Now we're able
Speaker 2: to buy pieces of private companies for valuations that would
Speaker 2: never have been possible historically, and it's only thanks I
Speaker 2: would argue to the dominance of indexation. Of course, the
Speaker 2: index fund could not have a private company and involved
Speaker 2: in it. So if you're going to be the non
Speaker 2: index and the index won't do private companies and they
Speaker 2: meet your criterion valuation hurdles, makes sense to buy some
Speaker 2: private companies. And we bought some private companies.
Speaker 1: Does your evaluation models Is it similar when you have
Speaker 1: the privates in the publics?
Speaker 2: It's not always similar, And the reason is always sober,
Speaker 2: because sometimes you can buy a private with failure orbus
Speaker 2: cash flow. Sometimes you'll buy a private it has no
Speaker 2: cash flow, so you're buying an emerging company and justification
Speaker 2: camp in cash flow justification has to be they either
Speaker 2: have an opportunity with no competition or a very limited competition,
Speaker 2: and that's one possibility. Or they may really have developed
Speaker 2: something proprietary and they have a long lead time on
Speaker 2: a potential competition, and you have an opportunity to actually
Speaker 2: buy something that you wouldn't encounter in the public markets.
Speaker 2: Those are a rationale. So we don't buy very many
Speaker 2: private companies because not in their many companies will fill
Speaker 2: those characteristics. Occasionally you find a few, Yeah, and we
Speaker 2: found a few.
Speaker 1: Makes sense, you know, if we take just a little
Speaker 1: bit of a step back. I didn't want to ask again.
Speaker 1: You know, with you mentioned country and value investing, you
Speaker 1: know you're holding it a long term, so you may
Speaker 1: see periods of underperformance for certain companies. How do you
Speaker 1: keep that conviction during those phases when the markets aren't
Speaker 1: rewarding those type of companies.
Speaker 2: Well, if the company continues to do what they're supposed
Speaker 2: to do, meaning they have a business plan they're executing.
Speaker 2: The fact that the market has moved on to something
Speaker 2: else is not something that concerns me very much, just
Speaker 2: makes it a better opportunity. So there are periods of
Speaker 2: time when marketing one move on, or put more quantitatively,
Speaker 2: you're never going to find the stock that's on a
Speaker 2: new high list every day. It's just not going to happen.
Speaker 2: So people decide what they're going to do is if
Speaker 2: it's going to fall off new high list or it's
Speaker 2: in danger of falling off new highlist, they can change
Speaker 2: it for another company. And the math, this is math,
Speaker 2: is against that. So prim mid me, I'll give you
Speaker 2: very simplified math that everybody can understand. You have a
Speaker 2: security that we're going to call security A, and you'd
Speaker 2: like to change it for something it's better for security B.
Speaker 2: So it's two transactions. You're selling security A because you
Speaker 2: need the money to buy security B on the assumption
Speaker 2: you're fully invested. So now no one in the world
Speaker 2: of equities is going to say they're right one hundred
Speaker 2: percent of the time. So let's say that this not I,
Speaker 2: but this high pathetical the portfolio manager is right seventy
Speaker 2: percent at a time, I don't know if you would
Speaker 2: even find anyone that would be boastful enough to say
Speaker 2: they're right seventy percent of time. But let's say they are.
Speaker 2: So you sell security A, you have a seventy percent
Speaker 2: chance of being right, use the money and buy security B,
Speaker 2: for which you have a seventy percent probably of being right,
Speaker 2: but you're probably a successful investment. Is the joint probability
Speaker 2: of A and B point seven times point seven or
Speaker 2: point seven squared, which is point four to nine, exactly
Speaker 2: the odds you have if you're going to invest colors
Speaker 2: in the Roulette wheel black versus red. There's no advantage whatsoever.
Speaker 2: That's the simplified math of it. So I've made that
Speaker 2: analogy in my career probably several thousand times. I don't
Speaker 2: think be honest with you, and I want to be honest.
Speaker 2: I don't think I've ever convinced anybody that is the math.
Speaker 1: I do like the analogy, but I got one more question,
Speaker 1: a little forward looking. You know, even when I do
Speaker 1: research on funds ETFs, you know, the way that data
Speaker 1: is kind of evolving is making my job a lot easier.
Speaker 1: And so how do you see the role of you know,
Speaker 1: independent firms, you know, like Horizon evolving as data becomes
Speaker 1: more commoditized, and you know AI really changes the research landscape.
Speaker 2: Well, AI is not going to change the research landscape.
Speaker 2: I mean, in a very small way. It makes things easier.
Speaker 2: So let's not forget in the I'm old enough to
Speaker 2: remember it wasn't that long ago. If I wanted to
Speaker 2: read the ten Cuba Company, I couldn't get in on
Speaker 2: a computer. I had to write a letter to the
Speaker 2: company and they'd send it to me. I had to
Speaker 2: wait sometimes a couple of weeks. Today it comes up
Speaker 2: in seconds. But just because the data is available doesn't
Speaker 2: mean the people know how to interpret it. So it's
Speaker 2: really a question of interpretation, and it's really a question
Speaker 2: of focus. And a lot of things that you would
Speaker 2: think are straightforward are not straight forward at all. And
Speaker 2: you can see that I have this hobby, and if
Speaker 2: you practice my hobby, you can see that here's my hobby.
Speaker 2: I go to a library and I read newspapers of
Speaker 2: fifty sixty seventy one hundred years ago, and they're interpreting
Speaker 2: the events of the age. And I tell you, when
Speaker 2: you read it, it's like reading science fiction. So they
Speaker 2: say where historians say the history is the art of surprises,
Speaker 2: and the reason is that the people were living that era,
Speaker 2: they had the information, they just didn't understand the consequences
Speaker 2: of the data. So, for example, within our memory, we
Speaker 2: had data. We knew that the communist world or their
Speaker 2: economies were not succeeding. And who could have or who
Speaker 2: would have predicted the full Berlin War. Who would have
Speaker 2: predicted that they would come that you could walk into
Speaker 2: in the city of Shanghai and buy a big mac.
Speaker 2: There was a time not that long ago if you
Speaker 2: had said that to someone, they would have thought you
Speaker 2: had lost your mind, And yet it happened. Matter of fact,
Speaker 2: if you go back a little further, you can go
Speaker 2: back to let's say nineteen seventy, the consensus wisdom in
Speaker 2: the political action in the United States of America is
Speaker 2: universal agreement. Have you let what they then called Red
Speaker 2: China or Communist China into the United Nations, it will
Speaker 2: destroy the United Nations. Wasn't very long before the American
Speaker 2: ping pong team is playing in China, and the President
Speaker 2: and the National Security Advisor go to China, and next
Speaker 2: thing you know, we have diplomatic relations with China. We
Speaker 2: knew about the cleavage between the Civil Union and China,
Speaker 2: we could have drawn the right conclusions, but no one
Speaker 2: drew to us conclusions because to draw a conclusion that
Speaker 2: outside of your historical frame of reference is extraordinary difficult.
Speaker 2: And I would argue, with all data we have, it's
Speaker 2: more difficult today than it was in the nineteenth century
Speaker 2: when they had no computers. And I'll explain why a
Speaker 2: nineteenth century investor, a well educated investor, a nineteenth century
Speaker 2: investor would have read Varatus and Thucinities and Plutarch, and
Speaker 2: their historical frame of reference would have been several thousand years.
Speaker 2: Our historical frame of reference, because we have so much data,
Speaker 2: is really maybe a few decades. There are very very
Speaker 2: few people in the world investing that have a historical retrospective.
Speaker 2: So if I said something about the if I mentioned
Speaker 2: the Punic Wars or the Peloponnesian Wars, I would say
Speaker 2: most educated people, even those with advanced degrees, wouldn't have
Speaker 2: the slightest idea of what I'm talking about. So how
Speaker 2: can we expect those people to look at the then
Speaker 2: Soviet Union in a way different than what we had
Speaker 2: experienced in the last couple of decades, and yet that's
Speaker 2: what was needed. So I don't think artificial intelligence and
Speaker 2: the ready access of data is going to do very much.
Speaker 2: I think it's three to reverse. I think this overwhelming
Speaker 2: flood of data that people have their fingertips, they've lost,
Speaker 2: and I think we'll continue to lose historical context. Let's
Speaker 2: not forget we talk about China. China is a culture
Speaker 2: and a civilization. It's five thousand years old. So if
Speaker 2: you were to take the typical act investor, and China's
Speaker 2: a very big part of world economy and ask them,
Speaker 2: could you give me a precie of what happened in
Speaker 2: China the last five thousand years, how many people would
Speaker 2: be able to speak intelligent on that subject. I don't
Speaker 2: think the answer is very many.
Speaker 1: Oh, it's definitely interesting and thought provoking. I thank you,
Speaker 1: but this is great. I thank you again for joining me.
Speaker 2: Okay, my pleasure anytime.
Speaker 1: And I also want to thank our listeners. If you
Speaker 1: liked the episode, please share it, subscribe and leave a review.
Speaker 1: And if you'd like to see more of our recent
Speaker 1: search on the terminal, go to b I fund Go
Speaker 1: for fund and Active Research until our next episode. This
Speaker 1: is David Cohne with Inside Active