Hi, welcome to the behind-the-balance sheet podcast where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of what makes a successful investment, or indeed an unsuccessful one. Our goal is to inform, educate and entertain. We hope you enjoy this and every episode. Behind-the-balance sheet and affiliates and podcast guests may own shares or have an economic interest in securities discussed in this podcast, which is aired for your education and entertainment only. Nothing in this podcast should be construed as investment advice or relied upon for investment decisions. Always do your own research. This episode is brought to you by AlphaSense, the number one rated financial research solution by G2. I've started using the platform and now I can access all the company documents, their earnings call transcripts and the expert network call transcripts in one place. With generative AI-powered summarisation and chat features, AlphaSense livers instant accurate insights into what's driving your investment universe. I was talking to the manager of one in UK's biggest tech funds and he loves AlphaSense. He uses it when seeing a new company to check what the key issues are, he uses the AlphaSense summary of the earnings call Q&A's and he can instantly identify the market's current key concerns. Visit alpha-sense.com/alpsa-sense.com to enhance your financial research today. Most of my listeners are fundamental investors and one thing I've learned about them is they take real pride in their research. Great investors use significant discipline and process to get to the truth. But many investors don't apply the same level of discipline to position sizing as they do in their research process. They may know that their best idea is their biggest, but they can struggle to answer what's my sixth best idea or my 16th. Have you ever wondered how the best fundamental managers size their positions? A lot of them use a tool called Alpha Theory. Alpha Theory helps fundamental investors size positions in a systematic way. It's the link between their countless hours spent researching and ultimately sizing the stocks in the portfolio. The firm has worked with more than 300 managers over the past 20 years, including some I know in respect. I think they can help anyone improve their position sizing process. If you'd like to see how Alpha Theory can help you, go to alpha-thewy.com/btbs. So that's alpha-alph-p-h-a-theory-o-one-word.com/btbs for behind the balance sheet. Hi, we are live from New York because I want to thank John for having told me pretty much everything I know about finance. Now not many firms survive 30 years, and the fact that Edgerton has gone through 30 years of uninterrupted success is just a huge achievement. Now, I managed 15 years in my company, John has done twice that amount. I don't think anybody understands what it takes in terms of day in, day out, hard work. All the stress you see through, it's a huge achievement. A big congratulations, John. You are really a triple A. That was Nikolai Tangan, CEO of Norgesbank Investment Management, the largest single owner of equities in the world. Before starting his hedge fund, A.K.O. Capital, Nikolai started his buy side career, working with this month's guest. Now, I've interviewed several brilliant people in this podcast, and it really has been a privilege to sit down with them for an hour. In this episode, I interviewed John Armitage for a second time, a first for this podcast three years in. Armitage has beaten the index by 7% per annum over 30 years, and that with an average cash balance of 12%. If you'd invested $10,000 with them at the start of his first fund, you would have over $3.5 million at the end of May 2024, versus just over $400,000 in the index. Quite an amazing record. And in this conversation, John explains how he started with $10 million, and why you couldn't do that today. He touches on his portfolio, but more importantly talks about his approach to investing. He explains why he requires his analysts to follow more than one sector, and why he doesn't employ data scientists. He also reveals that he thinks his performance would suffer if he had permanent capital. He doesn't say it explicitly, but it's clear that the performance matters more to him than the wealth he would personally accrue. John is one of the best people at summarising a stock that I have ever met. He's also someone who focuses on company financials, and that's an underrated skill these days. I felt privileged to sit down with him, and I learned a lot. It's funny really, because he doesn't tell you exactly how he does it. It's like it's almost natural to him. But he came out with some gems, like, you just have to focus on what's important. I know that's blindingly obvious in a way. Thinking about our conversation in the walk-on, I realised that I could gain a lot more time by following that advice. I know you're going to enjoy my conversation with John Armour's age of Edgerton Capital. Well, John, you were my first podcast guest, along with Brent Hoberman. I'm delighted that you're now the first returning guest. And the reason not that we need an excuse is the impending 30th anniversary of Edgerton Capital, which started 30 years ago, and first started investing money when this podcast will be published. So look, hedge funds fairly young, phenomenon. Not many have lasted 30 years, and not many long-only funds have lasted 30 years. At that, when you started out, you would imagine that you would be looking back like this. But if you were doing this today, would you do this any differently, or what advice would you give to someone who was setting out on the journey that you set out on 30 years ago? First of all, of course, there's no way I could have possibly imagined that my career would turn out as I have been lucky enough to have it turned out. And secondly, it's not a question of what I would want to do, but what I would have to do. Because when we started, you needed much less dollars to have critical mass. We were thrilled when we got to $150 million on the management after about a year. We were absolutely thrilled. And on day one, when we opened our business, I think we had $10 million on the management. And we started with, I think there were three other people in the firm, and now you need much, much, much, much, much more infrastructure. And the markets are much, harder for different reasons. So I would have to do it a bit differently, and I'm not luckily. I don't have to think about that's not a decision I have to take. But I would have to do it differently, and it would be a lot more difficult. I'm investing a lot more difficult than it was back then, because there's been all sorts of structural changes in markets. Well, I mean, what's more difficult? I mean, you've got lots of different drivers, haven't you, you've got growth of passive, all of the algorithmic trading, you've got all the pod shops. How are these things affecting markets, and how did they affect the way you manage the portfolio? Well, I mean, the first markets are a lot more difficult. And I think there are style based reasons, and then more profound reasons where they're more difficult. And the most profound reason why stock markets are more difficult about performing is that if you take any industry, which is very profitable and has very low barriers to entry by the standards of manufacturing or banking or business services, that's going to attract, and as I say, has the potential to yield great profits, clearly it's going to attract a mass of talent. And the capital employed of the investment management industry is, in fact, people. And we've been through a period where all the most talented, where many talented people went into investment management. And the more time you have talent, the more talent competes for an edge. The harder it is to have that edge, it's just as simple as that. Look, local language models, LLMs are now becoming a commodity. What is the edge in each LLM? And there's only one LLM or only two LLMs or only three LLMs. They have an edge, but when there are lots of them, that edge is harder to define. So for the very simple reason that the investment management industry has attracted a ton of talent, it's harder. It has to be harder. If it weren't, something would be wrong about the way industries work. I think all the stuff about pods and passives, that's more relevant in sort of particular phases in the market. What is different from when I was young is that, is that when I think about it, every year in I've been investing, in years where we've done really badly and in years where we've done really well, there's always been companies who share business have done much better than us. And there's, I'm sure every year I've been investing, there's been a stock which has been up 100% or 150% or 200%. But it didn't really, and it would have been nice to have court delays. But actually, what counted was what you bought yourself. We're now in a different era, which is reinforced by the rise of passive investing, where you have these very large, very profitable, very dominant companies with tremendous scale and tremendous barriers to entry, where the market is sort of structurally underweight them. Most investors are underweight them. And they begin to have a powerful impact on the overall index. And video was a small company, it would have had no impact on our performance this year. But as it is not, not owning Nvidia, cost us, I think, 350 or 400 basis points of relative performance. And this is new in the last 30 years. So this slightly reminds me of investing in Japan in the late, of the Japanese market in the late 1980s. And luckily, luckily, I never did that. The Japanese banks went through the roof. They were a major component of the index. They were very, very, very expensive. And they caused tremendous underperformance by people who'd invested very successfully in Japan. And of course, afterwards, it was a massive bubble which unwanned. And I'm not suggesting Nvidia is not a bubble. It's an incredibly strong company, which has done very well. But the fact is that the performance of active managers is now affected by what they don't turn in a way in which it never used to be. By single shares which they don't turn in a way in which it never used to be. And what's the solution to that? I don't know. I don't know. Get them right, I suppose. But that's incredibly difficult when you've got such heavy weightings in the index. Well, it's difficult if you don't get them right. But let's not feel too sorry for ourselves. We're paid to get trying to get things right. No, absolutely. But even if you owned Nvidia, would you own it to the degree that it's represented in an index? Yes, you would. But when a large company goes up 150%, if you don't own it, it causes you to. Of course. It's a massive performance drag. And what do you do in that sort of situation? I mean, you just sit down and think, "Oh my goodness, I need to own it." Or do you think a lot maybe. Well, very sadly, we must do that. Very sadly, what I haven't done is owned it. But I think what you have to do is try to be true to yourself and avoid being pushed around because my own experience has been that when I've been pushed around and done something which I was reluctant to do, more times than not, it's been the wrong thing to have done. Yeah. No, so you just take to your process. I think you have to be true to yourself. Absolutely. To that in itself be true. And how many positions would you normally have? Well, at the moment we have about 35 to 40 long positions. And what would you have a big waiting in the top position? We are more concentrated than we used to be. And I vary a lot about thinking about concentration. On the one hand, I think that if you concentrate a lot and watch what you're concentrated in like a hawk, that is a good thing to do. And our biggest stocks tend to produce our best returns. On the other hand, if you run assets of more of a certain size, you do take a liquidity risk if you run a very concentrated portfolio. And secondly, the good thing about owning good companies for a long period of time is that they compound incredibly effectively in your favour. Gosh, I guess it's a very nice way to live. The bad thing is that they can change subtly, you don't notice it. And then one day you realise you've under-performed for a year. And gosh, you're just beginning to know why. And the analogy I use, you know, we all know, if we're unlucky enough to be up in the night when it's getting light, we all know that there's a moment in the night when it's perpetually dark, then it's slowly a bit lighter and it's slowly a bit lighter and suddenly it's daytime. That's like realising why what you've owned for a long time has been a massive under-performer. And that can happen. That kind of familiarity is a danger which goes with concentration. Excessive familiarity and then complacency is a danger which goes with concentration. And very few people are good at being sufficiently detached or remarking themselves intellectually every day. But how do they do that? Well it's difficult and he does that. Well he's a genius, he's a genius but you know, but Warren Buffett says he never sells stocks. But actually it hasn't been a particularly good experience to have had a large position in Coca-Cola over the last 25 years. Absolutely. And that's the danger. How do you mark yourself every day? With difficulty because it is difficult because human I generally believe that human beings in all kinds of ways patterns are important in human beings. Patterns are important in relationships, patterns are important. Different relationships have different patterns and patterns are important in the way you think. And the difficulty with knowing a position really well is you just get too comfortable with it. That's the difference. So I like to have more positions so I can see, I like the analogy I like to use is you can plant a seed so that see if it germinates. Because maybe that's going to be really attractive. I mean we've been lucky enough to have had some quite big holdings in re-insurance stocks over the last year and that's a sector I really, really like. But actually they started off with one small position in Munich re and then we did a lot of work on other things. So I kind of believe that I couldn't run a permanent ten-stop portfolio. It just wouldn't work for me, it works for Chris because he's a genius but it wouldn't work for me. But how do you think he manages that process? How does he get out? Well I think you ought to ask him, he's got a tremendously robust intelligent mind. This thing about getting too close to the companies, I mean how do you keep the distance? It's not too close to the companies. It's getting to, it's being insufficiently detached to see when things are changing and why. And to understand how they might go on to change. It's complacency, it's not about closeness, it's complacency. And that's intellectual complacency. Intellectual complacency, that can happen. That's a trap. What would be the trigger then that would make you sell one of these stocks that you'd own for a while and like? Well the best reason to sell, well first of all there's an easy reason to sell something and that's when it disappoints. The next best reason, and another good reason to sell something is when you can find something better. And then you can sell things when the price is too high. But of course it's easy to make mistakes about prices. And good companies tend to get better over time and, you know, gosh, we first bought Microsoft when it was on 10 times earnings. We didn't sadly ain't it throughout that period. And I wouldn't have guessed it would have ever traded at 35 times that things, but it did because things changed. And so you have to be aware of what can happen. Is it very difficult to go back to something that you've sold or are you quite flexible? I find it more difficult to go into things which have gone parabolic than going to what I've sold. If you sold something and things have changed and you're, are you able to buy it back higher up? Yeah, I don't mind doing that. Nearly every good company, nearly every company you're ever going to buy has gone up a lot. No, of course. You've got to accept that. And what's the longest you've owned something for? I honestly couldn't say, I'm terribly sorry. I wouldn't know. You wouldn't know. A few years. I don't know. Five years. I couldn't really tell you. You manage not to fall in love with socks. That's the key. I don't always manage it. But I think one has to guard against. And I generally believe, look, I'm very lucky with my wife. I think it's a good thing being in love. But it's a good thing being in love with the right person or the right stock. And the trouble is, people's judgment. I like to think my judgment with regard to my wife has been infallible because she's marvellous. But my judgment with regard to stocks is not always infallible. Of course, a big mistake. Now, for it can be a big mistake full in love with a stock. But you're quite flexible, aren't you? I mean, I'm more flexible than I could be and I'm less flexible than I should be. Dressing. So when we first recorded, which is about three years ago, we were nearer the peak of the tech bubble. And SPACs were involved, loss making, tech stocks were trading over ten time sales and were a commonplace. And you said, I can't understand these valuations. You said SPACs were in a bubble and you were absolutely right. And we also talked about Tesla, if you remember, and Tesla at the time you were talking about it's going to be more competition in EVs, you said autonomous was a long way off. Everything you said has come true and Tesla is still about the same price, which we agreed was extremely high. Well, it has done over three years, and earnings forecast have gone down. And the thing about Tesla is, look, what have you got? It's a very retail-end company. The retail investors love Elon Musk. He's a tremendously aggressive bloke. He's someone who is clearly a compelling genius, and he clearly talks a story. And he first talked the story about autonomous driving, I think it was in 2016, 2017. And the story now is that Tesla is going to become an AI company, and it's going to become a robots company. And I'm hearing that the story that he's telling is that, look, his cars and the neural network involved in their compute power and the GPUs that he's been buying from Nvidia, that they are filming humans on the sidewalk and are learning all about human behavior, and that's going to have tremendous implications for his robotics business. That's what I heard this morning from an analyst. But he is a guy who is a genius and a massive change agent, and he gets belief. And I think that's what it boils down to. And now the story is, the bulls-on Tesla argue that the car business actually isn't that valuable for the company. And it's all going to be about the AV fleet. And the AV fleet, Strait Robotaxes, robots, AI, Kathy Woods, Kathy Woods, I think I can't remember what US GDP is, but I'm pretty certain that Kathy Woods' latest valuation of Tesla was in 2030, maybe I'm wrong, was it 25% of US GDP or something like that? Why is that? Because she's a believer that AI will do something for them. If you read Tesla's AGM stuff, you will see what Elon Musk says about the robots business. And look, there's no arguing with that. You either believe it or you don't. And within that share price, there's a big component of a big component of belief about what Tesla will mutate into away from cars. No, of course. But I mean, Kathy Woods, I've written about her research in the past, which it's laughable. But she's managed to convince all these retail investors. What I'm curious about is what we've had. Kathy Woods thinks that in 2029, Tesla will be worth $8 trillion. So US GDP in 2022 was $25 trillion. I mean, I just don't believe it will be worth 25% anyway. But why do you think that is it just retail? I mean, I'd expected that we had a big hike and interest rates, and that a dose of reality would have been injected into the system. But it hasn't deflated GameStop, hasn't deflated Bitcoin, hasn't deflated Kathy Woods. I mean, the arc shares are done a lot. Yeah. But she's still shouting from the rooftops. I don't know, well, that's what believers do. That's what believers do. Yeah. More generally, I mean, the GameStop phenomenon, Bitcoin, they're all manifestations of a zero interest rate for the carmen, and I would expect a reality to hit them like a car running into a brick wall, but it seems to be taking quite a long time. Well, life is a funny thing. Is it just that we underestimate the time lives and systems? I remember when I started, I think these things change gradually. I think these things change gradually, but look, if you look in the last year, the S&P, which is generally composed of better companies, and less speculative companies, has the last year, two years, has massively outformed the Russell. So quality stocks have underperformed high quality stocks, so I think it is happening. But should it have happened quicker, well, you or I would think so. Yeah. So AI, we touched on it earlier, and it's the topic of the usual topic of the year. I went to the WPP investor day, and I was sitting next to a pile of mines, got, you know, Senior Fund Manager, quite a big fund, and within 15 seconds, the CEO had mentioned AI, and we laughed, and we turned around to each other, and we laughed. But actually, later on, the executive, one of the agencies, was saying that they'd guaranteed a 25% improvement in conversion and product pages, and I was really surprised. None of the analysts asked about this. Afterwards, I talked to the tech people there, and they were saying, actually, we're experiencing a 40% improvement. Now, I know this is one of these things you said you referred to earlier, and all these things get competed away, because everybody else will be doing some of the things. And you just talk a little bit about how you perceive this whole area, and how do you handle it as an investor? I mean, how do you think about it? Because I was quite enthusiastic about, you know, the WPP commentary, but it's quite difficult to understand what their competitors are doing today, or what their competitors will be doing tomorrow, and the relative rate of change. How do you think about that? Well, when we talk about AI, I think what you really mean is generative AI, because AI has been around a hell of a long time. Yeah, not sure. And AI powers Amazon, and it's Powered Meta, and it's Powers Google, and it powers banks, and it powers revenue, giving you a fraud notice. I mean, AI has been around for a very long time, and that's going to continue. Generative AI is the least sort of iteration of that. The biggest application of generative AI, or the nearest real-world, large application of generative AI, it seems to me, is going to be an online advertising. When you think about half SMEs advertised in the past, well, they've bought stuff in local papers. Now they can go to Google, and now they can go to Meta. But actually, what does generative AI give them? Well, if you read Mark Zuckerberg's blogs on what Tesla has been doing. Generative AI and ad copy, and the ability to create lots and lots of different versions of ad copy. The ability to make images from words, the ability to change backgrounds, then generative AI and the ability to do A/B testing at scale instantly, AI and the ability to test audiences. These things are all phenomenal, and clearly it's going to come to many industries, and an obvious one will be business services, because we all know we go online for business services. We don't like hanging on to a phone, and better chatbots, chatbots, which can really answer questions, clearly, absolutely marvelous. It's going to be a very, very big thing. I guess it will definitely create losers as well as winners, and I have to think that, well, I have to think Google and Meta are very attractive stocks. You're not concerned that search loses out in this, because I think it's a terrible risk. I know that deep minds are very advanced in all this, and we don't really know the relative position of deep mind and open AI and other participants. There is a risk that search loses out. There is a risk that incrementally individual apps and chatbots cannibalize general search. General search, Google does have massive distribution at scale. It's been investing in this for longer, and it's filed far more patents and papers about AI than anyone else. It's got immense compute. It's got, you know, how often does the internet, does Google's internet go down hardy ever? And we're quite habituated to search, and, well, that's what I think will sustain it. But look clearly, it's less certain than it was. It hasn't been reflecting the share price, interestingly. No, it hasn't. But clearly, it's less certain than it was. Google's position is less certain. It has to be. It's been a number. Look, if you can go to booking.com and say, find me a trip, make me a trip to Paris, and watch I see, if booking.com can do that as well as Google, that's a risk to Google. It's interesting. It doesn't seem to be a lot of talk about it, and I have been puzzled as the way people haven't been more worried. Have you done anything on sort of applying AI internally within the firm, are you a believer in that? I mean, no, we haven't yet. And is that something that you think will be important to investors? Well, I don't know whether it's important to investors, the question is whether it'll be important to us. And the answer is I don't know. The answer is I don't know. Does it, where are you? I mean, something that you. Well, I'm in the happy stage where I'm not starting my career now. Clearly, all these things are going to make markets more efficient and we'll all have to find a different way to get ahead. I think, and look, data scrapers make markets more efficient. So maybe you've got to invest in things where short term data is less important. Maybe you've got to have a longer term perspective and be right about that. Maybe you've got to exploit drawdowns caused by people who sell things because the latest contemporaneous data is a negative. But does that not mean that you need to have the data scientists and the infrastructure in order to understand that's why they're selling it? You know, I'd rather not invest in a company where I feel I've got to do a data science check every two minutes to work out whether it's doing well. I mean, I'd like to have data about terms and conditions on re-insurance contracts and how they've changed. Unfortunately, that's private. I'd like to have data about Amazon's cloud backlog, but I'm not going to get that from using data science. And there is stuff which is more important than what data science can give you. I guess the thing is. And I think it would be awfully difficult to follow a company like Tesla and, you know, there are these people who every month write about the number of planes Abbas or Boeing has produced in a month and then they write about test flights. And that's all very interesting. But is the important thing how many planes Abbas produced in May when there are like four different holidays in Europe? Well, is the important thing what they'll produce in 2027? Well, I think it's the latter. Sure. So what do you do with something like Ryanair, which is a reporting monthly traffic figure is creating a lot of noise? Do you just not worry about it and just watch the share price? Yes, I do worry about it. And we've been caught off guard by their weak pricing. I do worry about it, but I also think, you know, you can't invest for monthly data. No. And so you have to find a way around that. And a way around that is thinking about whether something's a good business and what are its medium term prospects, not what it's done last month. Ryanair is a slightly different sort of beast because its earnings are the result of kind of its pricing changes in real time. So it's a sort of different kind of beast to other businesses in which you might invest where pricing and demand has sort of longer term cycles and changes gradually. Well, I just use the Ryanair example because there's an example one where you could scrape the data every day, or a hundred times a day, or I don't know how often people do it. But you know, you can scrape the data and come up with your own algorithm as to what is the yield. And I mean, it would be an awful lot of effort and I'm not sure that it would give you a huge amount of reward. But I was just curious as to… It probably is one way you could probably do that, you know. No, I'm sure there are people doing it. I don't know. Having been an airline analyst when I was on the cell side and constantly being asked what was the next monthly traffic figure likely to be, having no clue about it. There was hardly enough trying to work out what the quarterly earnings were going to be. I find that pretty, pretty, pretty difficult. One thing I wanted to ask you about was private equity. And I don't know. Do you keep an eye on what's happening in private equity markets? Is there something that you feel resistant to? I mean, I don't keep an eye on it. We sometimes, we have invested in private equity firms. I mean, I think the thing to keep an eye on is monetisation rates and the extent to which companies are going to make money out of the more recent ventures. And that looks troubling? I don't know what it looks like. I mean, it will be interesting to see. Are you invested in KKR anymore? We don't own KKR. I wish we did. Or I wish we had. Well, I'm not sure whether you will. Going forward. And were you surprised when we were meeting on Friday and June when Revolute is supposed to be looking for a 40 billion valuation, which is probably whether European banks have done reasonably well this year, but it is a pretty big for a bank. Have you been surprised by some of the valuations and VCs being their aspirations continuing to be so high? Well, look, the awful thing is I don't know a lot about VC investing. And I don't really know much about these valuations, but yeah, I mean, I think at times it is very surprising. If you enjoy this podcast, you're bound to enjoy our free newsletter on Substack. It's a weekly email on interesting investing topics. Visit behindaballachee.com and hit the sign up button. Well, you're there. You might want to check out our brilliant online investor training school. Hundreds of students have taken our flagship analyst academy course, which teaches you everything you need to become a serious equity investor. And if you're a professional investor, we run a forensic accounting course for institutional clients. And soon a cohort based course for serious amateurs email us at
[email protected]. I have started using the platform myself and now I can access all the company documents that earnings calls and the expert network call transcripts in one place. With generous of AI-powered summarization and chat features, AlphaSense delivers instant accurate insights into what's driving your investment universe. I was talking to the manager of one of the UK's biggest tech funds and I asked them, how do you use AI? And he told me he'd listen to the Salesforce earnings call the previous night and he was concerned about the growth in its marketing cloud business. He couldn't remember the size of the revenues and he simply asked AlphaSense for the answer rather than trolling through the 10K. Enhanced your financial research today, visit alphaSense.com that's alpha-alphahythensense.com. So one thing that has puzzled me is you believe in having weekly valuations and you're a pretty liquid fund. I mean you've got different classes obviously but I was curious if you had ever thought about raising permanent capital and having an investment trust or vehicle of that nature which would allow you to take longer time. I mean I think the danger with longer term locked out money is that you sort of say to yourself, well I'm underperforming but you know guess what I've got a longer term perspective, it's all fine. I can think on a two year basis because the money isn't going to go and then you realise that you're underperforming for a reason and that this long term capital to lull you into a sense of self, into a sense, into the wrong sense of security, into a false sense of security. It's a danger and I mean I happen to like liquidity. I think it's a good thing to be able to get your money out and when I was at Morgan Grundfly around a fund with daily liquidity and I actually think that's quite a good discipline. So you like the insecurity of the. I don't like it but I think it's healthy and it's healthy for our investors. And do you think it makes you a better investor? I don't know. But I ask this because I was quite bemused by the actmen raising a billion dollars or a ten billion dollar valuation for his business which is sort of 65% of his present AUM which is mainly the listed vehicle which is listed in London and apparently he's going to raise 20%. Well obviously it's based on the fund he's going to raise but what I would say is it probably puts a lot of money on the people, probably it values the investment decision makers and the business pretty highly. He's 58, right. Well you know he's obviously worth five billion dollars to the business. At least. Which is a lot. So it was a huge amount of money and I was just puzzled as to how one might manage three publicly listed companies if you presumably, if you list the permanent capital vehicle in the United States, it's going to be very difficult for him to create two vehicles with exactly the same investment profile. Well I mean the answer is I don't really know, I haven't studied it but I would guess he's either going to have to make the same investments in much bigger size or else have a lot of different investments. It's, I've been scratching my head about it, it's quite really pretty difficult. Now last time we spoke you said your hobby was reading annual reports and one of your colleagues which was slightly tongue-in-cheek. Well one of your colleagues told me that when you get on an airplane you take a pile of 10Ks around your reports and you manage to get through them very quickly. Well now I take an iPad. So but you can, you get through them quite quickly. I like reading things. Yeah. Do you have a process for doing it? I mean how can you do it so efficiently? Well I don't know that I do do it efficiently but I think you know you have to be aware of what you're looking at for and you have to be able to sort out the wheat from the chef. And is this something you find easier with companies that you've followed for a long time? Well I think it is easier but of course yeah because you know them better so you know what to look out for. So do you approach it differently if you're looking at a new company? Well it's more of a mountain to climb. Getting to know something new. What would your process be if you picked up a new stock? I mean ordinarily your analyst will have given you an idea of it. Well I mean it's the same as, I mean it's fairly sort of standard you know. You want to read what the disclosures are. You want to find out what the management is saying. We like reading transcripts, we like reading filings, we make a model, we talk to the company, we talk to the cell side. And it's a sort of iterative process involving question and answers and each time you learn something a new question is raised in your mind. And you said you had 35 positions, would you have like a watch list of stuff that you're involved with beyond that? We do. We do have a watch list. Not very formal and we're always trying to find new ideas. So we're always looking at, yeah we're always looking out for new ideas, yeah. And what are you interested in at the moment? You mentioned re-insurance so I was at the Berkshire Hathaway meeting and Ajit Jane was talking about climate change and I hadn't really thought about this before I just tend to say well away from the financials because having worked in a financials hedge fund I realized how difficult and how much of a black box some of these things are. But he basically said climate change is pretty good for our business because it makes boards much more. I mean I think boards, this is an era where boards are more focused on risk. So I think there is more awareness of that and I therefore I think there is more demand for insurance. And I think that at a boardroom level re-insurers are aware that they've got to start making return, that they have to make returns. And I think that's what the 2023 reset was all about. And so I do think that's a good thing because I think it's a cycle which will last for a bit and I think it will take time for the earnings to come through. Sure. But yes because. Because insurance is an unusual business where the results you report at the end of any year are really an estimate because you only actually know what you've lost from a contract after a period of time and it could be anything from two to 20 years if it's a casualty contract. So companies have to make an estimate. The nature of human beings is that when things are bad they're too pessimistic and when things. and it takes them time to swing round. And if you come through a very bad period I think you're going to be very cautious about recognizing that it's good. That's just a behavioural thing and terms and conditions are radically reset in favour of re-insurers which is positive. So this is a year where in the US severe confect where there have been more severe conjective storms than any time in the last ten years. And we're in a storm season at the moment and up till a couple of weeks ago the damage from storms and sort of minor catastrophes is over the average, it's over the median or last ten years and that means premiums have to go up and more premiums equals good for insurers. Well it's a capital cycle approach. Is that a big part in your thinking? To what extent are you top-down driven? Well I think no one can be an investor without having some sort of top-down perspective. But ours is quite loose. Look I don't think we're going to go back to a zero cost capital world. That's as far as I would go. I think inflation will probably take time for inflation to drop. And I think politics is something to be geopolitics is something to be guarded about. But of course geopolitics if it's bad will be unimportant for markets right up until the day it happens. Geopolitics is irrelevant until you get hit. Does that mean you don't worry about it? Yeah I do worry about it to my cost because it's meant that we didn't invest in TSMC. Are there any other sectors that you're interested in now that you think are – that the reinsurance is really interesting? Well I like some of the world's very cheap banks because I think there's been a big behavioural change in the banking sector and they all have lots of capital and are very conservatively struck asset portfolios and high provisioning and they're going to return a lot of money and I like aerospace a lot. That's engines and AEMs and I really like a company called Flutter which is the leading online gaming business in the States online sports band because it's being liberalised and it's booming and they have 55% of net gaming revenues in America. And online sports betting is like many online things an area where the winner takes all all most of it and the more money you – the more the more bettas you have and the more compute power the better you can assess the price on the odds. You can offer better prices and if you if you work them out right you can get a high win ratio therefore a trek more people therefore find out more about them and in today's world if you're an online sports betting person on the Flutter platform they can do an individual promotion to you and they're also able to assess whether you or I let's take its football team a you or I good at betting on corners are we good at it individually so they can price odds individually so I think it's a very very very very well on company. Are you a betting man no it doesn't it doesn't surprise me come on. Your team is it mainly analysts or do people have PM responsibility as well? Well we're all kind of analysts you know I think the only way is to analyse companies. We arrive at convictions on stocks through you know several people co-operating and I have to love something for it to be a big position. How does the team work work I mean do you have people with different skills co-operating one of one of my I don't say different skills but different knowledge sets different areas of focus and I like people who who I like people who know about different and contrasting I like having people who know about different and contrasting sectors so that they know there's a world outside their own speciality. So people will have a specialism but they will also look at something outside. Yeah multi-specialists multi-sector specialism that's what I like. And why do you think that that works because most most firms are? Because the danger is that you know you get you don't want to have someone who covers banks and will only recommend will only think about the best bank in the world because the best bank in the world might be less interesting than the best software company. And in the same way and that goes the other way around. But the problem with doing that and I completely agree with you the problem with doing that is they can't spend all their time the banks massive sector and really difficult and could absorb you know a whole team's time. So they're unable to go as deep as they might otherwise do if they're looking at more than one area. Is that not? But it depends how focused people are because you know investment firms they don't have to know about everything. They have to know about what's important. Sure. The question is finding out what's important and then focusing on that. But I like people who know that you know it's if the only space to be in is in enterprise software. It's great to know what the best enterprise software companies are. But if that's all you know about and that isn't the right space that's a bad thing. And if that's all you know about and by the way it's a lot to know about. And if that's what you know about but you know a home builder is more attractive. It helps to have a broader perspective and I think people with a broader perspective as well as a sort of detailed focus. I think that's more valuable. How about geographically? I mean do people have a geographic band? Some people do more in America than others. Do you try and have somebody that knows about each country or? No, no, we don't because I tend to feel sector is more global. They're not always but I tend to feel it's more global. And how do you cope with something like what's happening in Japan right now? I mean do you have a Japanese expert? Well I find Japan quite difficult because first of all there are a lot of secular changes going on in Japan initiated by the Japanese stock exchange and by government authorities or government related authorities and by activism. That's a tremendous tick. At the same time I wonder how the US stock market or the European stock market would have done if its currency had fallen by a third and the answer is it would have done a lot better than it has. And there is part of me which wonders is Japan a macro trade. So that's one thing which sort of holds me back but the second thing which holds me back in Japan is you know we've had meetings with Japanese companies lots of them and basically the meetings tend to be in Japanese through an interpreter. We have one hour and let's face it. You don't know how your question was translated. You don't know what the company said and in any case half the meetings wasted. No that is difficult. I mean have you noticed any change in attitude though because there is clearly a change in attitude initiated by the GAC but it's not universal. I just wondered if you were feeling whether the corporate sector is really embraced it or whether they started. I think a lot of it has but some of it hasn't, we own a food company in Japan. Which makes instant noodles in America, big business in America, big business in Mexico, food business in Japan, they got a vast amount of net cash. It was proposed to them that they pay a special dividend, their dividend payout is absurd, it was proposed to them they pay a special dividend and they stop investing in areas which aren't a perform and it met with the resigning thumbs down from the board. John you're normally very low profile and but you've been quite spoken on two occasions and I think one was the Brexit vote and the other was talking about you know the attitudes after the tragic events in Israel on the corporate seven class year. Why would those two issues important to you? Well I never really spoke out of Brexit but I think I did give some money to the remain campaign and I I half feel that if we hadn't left it would have left this massively divided society still divided so I don't, so societally I don't know whether it would have been the wrong thing to have stayed or not but I thought economically it was wrong. Look on the mass thing first of all I feel that the only solution and I'm not an expert and what do I know but I feel clearly the only solution in the Middle East is a two state solution. Israel's never going to make that happen and nor now is Hamas. Secondly you know what sickened me was that there were these massacres, they were massacres you can't get away from it and not a single person who's talked about the war not a single one of these protesters has ever ever as far as I can tell mentioned the massacres. I think it's completely despicable, nor have any of these protesters ever protested when Islamic people are murdering each other which they have done in Iran which they have done in Syria. I have never noticed protesters then and I really despise that I think it's the most tremendous double standard and I think in this country we have a major issue with and I have to be careful with my words here with militant Islamism and I say militant and extreme Islamism and I wouldn't want the words to be separated because clearly there are many different sorts of Islam but for some reason it seems to me we in our country have a situation where there's no condemnation of massacres where it and it's very easy for highly anti-democratic, highly unpleasant forces to take control of Muslim communities. I'm flabbergasted that it's not an electionist issue, that there is still a teacher in hiding. I know why it's not an electionist issue because the Conservatives would get accused of Islamophobia and Labour's got 8 million Muslim voters so there's no way they can say it's a bad thing but the fact is that the Muslim there are what 8 million Muslim pop in our 8 million Muslim people in our country and there are 75 to 80% of all the threats I might have to investigate. But it's not a problem we're addressing. I also sort of think this would have ended long ago if I massacred done one thing which none of these protest marches tell them to do and it's very simple, they could have just released the hostess. No, absolutely. Listen, I really appreciate you taking this time and thank you for sharing your thoughts on that. I wanted to just leave an finish on a sort of looking to the future note and just to tap into your long experience and just some advice for young people. So what would you say to somebody who's thinking about what university degree to do or what career to pursue, so a young person who's sort of entering the workforce or thinking about entering the workforce? You've seen just in the last 30 years, you've seen an enormous change and what seems quite likely is that we even faster change of anything over the next 30 years. How should people think about preparing themselves for that and how should they think about using a career when lots of jobs are going to be very, very different and how can you protect it? Well, I mean, look, the first thing to say about experience, yes, I mean experience is useful but it's not always useful and sometimes experience frankly is a bad thing to have and I sometimes think today I'd be a much better investor if I was younger and naive. But you know what would I suggest, well look, I've been very lucky to have my career probably the best time, I was talking about this to a friend actually, maybe the bit and we sort of realised we sort of thought 1865 would have been a comparably good period to have had a 30-year career or 40-year career relative to when I had it. That's what we thought. You've had it on the real ways then. Yes, but you know that was a great time to be an investor. And I had my career at a great time for the markets and to be an investor. I'm not sure it's going to be the same. I think today look where is the future? You know what are the relevant skills today that are clearly to do with technology? So I think everything should be, everyone should be familiar with that. But I also think we've got to go to you, people should go to university to be educated as well as to learn a trade. You're going to have the whole of your life to work. So I think, you know, people should go to universities to study human society in the nature of what it is to be human. And whether that's studying history or whether that's studying English literature or foreign literature or philosophy, I don't know, but we have to be educated at university. People who are not educated can be easily manipulated. We can see it today. Why was Germany manipulated in the 1930s? Because people used the myth of the civilian stab in the back. Why is our past being reinvented today to suit the convictions of the present? And I think it's very important that when people grow up, they should learn about the highly complex nature of human societies, of our past. And what it means and what it meant to be human. And a particular being my bonnet today is this tendency to judge human being the past by the standards of today. Yes, I mean, we laugh, but that's what happens. And I think people need to be educated in the past, and I think they need to be educated in society. And I think you get more of that through arts related subjects than you drew through subjects which teach you a trade. I agree. And it's a great training to be an investor. I think it's a good training to be an investor here. John, I'm a teacher. Thank you very much. It's been a time pleasure. Well, John's humility is astonishing. He must be one of the best investors in the world that he's never satisfied with his own performance. And perhaps it's that relentless focus which is the secret of his success. John has an ability to summarize concepts and to explain why he own stocks, distilling it down to the absolute essence. My biggest takeaway was that this must be the most important skill to cultivate, work out what's important and focus on that. I'm afraid it's easier said than done. As I said at the start, it really has been a privilege to sit down with brilliant people for this podcast and learn from them. Amazingly, this is my 40th show, and I'm grateful not only to my fantastic guests, but to you, the listeners. As ever, if you enjoyed the episode, those five star ratings really help spread the word. Thanks for your support. (gentle music)
PodcastTranscript AI