John Armitage - Navigating Macroeconomic Shifts

Welcome to a new episode of the Van Invest in the Linz podcast. My name is Tanos Santos, the Robert Halberund Professor of Asset Management and Finance at Columbia Business School and the Faculty Director at the Halberund Center. I'm here with my co-host, Michael Mapposing, and again, Professor at Columbia Business School and also a faculty member at the Halberund Center. So Michael, we're recording this right after the Thanksgiving weekend, so how was your Thanksgiving weekend? Thanks, Jimmy, with Fabulous Tano, and I hope yours was well, and I just have to say that as usual, these semesters fly by. I know, and you and I are going into the classroom in this spring semester, right? That is the plan, and I'm in the throes of doing my logistics now to make sure that it comes off well. Yeah, same here, same here. So we have a wonderful guest today. I'm speaking of John Armitage, the co-founder and chief investment officer of Agaton Capital, which he founded almost 30 years ago, now has over more than $15 billion of assets and the management. Since inception, he has built one of those stellar records that is the stuff of legend, outperforming the market consistently. He analyzed for a turn of his long-only, funny, his net of fees and in travel 16%, well over the 9% of the MSDI well index. John founded Agaton with William Bollinger, formerly of Tiger in 1994. Mr. Bollinger retired in 2005, and he has been John running the show ever since. John's style is career at Morgan Grafton asset management before it was acquired by Deutsche. And before that, we'll talk about this in this podcast, we studied modern history at Pembroke College in Cambridge. So John, thank you so much for being here. Well, thank you and I'm very honored. So John, everybody knows about you, but when we start describing Agaton a little bit for our audience and how you guys do things there, and then we will explore some episodes of your career. So tell us a little bit about Agaton capital. Well, we've had different evolutions. I started as an investor looking at continental Europe in the days when the UK was considered separate from Europe, which is now again, then I morphed into looking at the UK when we set up Edgerton, and then when in the early part of the first decade of the century, it became very evident that the growth companies, the companies that in Europe that were doing well, were doing well not because of Europe, but because of their emerging market exposure. And clearly, if you own a European company with emerging market exposure, you own an emerging market asset as well as a European asset. So we obviously had to look at that. We started sort of step by step. I think the first really emerging market we went to was Brazil because we owned in Bev when it bought Ambev. We then looked at, I think it was a company in Europe which owned a stake in one of the Russian cellular providers, the less good one. We bought that. We started doing work on it. We realized that Vimplecom was a much better investment than, I think it was MTS. So we bought Vimplecom instead, actually that was a huge position in the fund at one stage for us and a really terrific investment, thanks to my partner, Leyla Govy. So we started going to Russia. We also owned a wonderful gas company in Russia called Nova Tech. And that was all great. The GFC comes, post GFC, two things, post GFC, I bought one US investment which I thought looked cheap without really realizing that it should have been cheap, but it looked cheap and it went out. We did that. And then we sort of thought to ourselves, well, we did the usual kind of mosaic based progress where you go to meet the company, you meet some companies, some other companies in your trip around the sector, you do it again, you meet some different companies. And gradually you sort of build up coverage in selected areas, a coverage and an understanding of what's going on. And it sort of became clear to me that, first of all, the US had dealt with its financial crisis much better than Europe, because the channel of the Federal Reserve and whoever else was involved, maybe it was Mr. Paulson, got all the banks into a room and said, look, you're going to provide and you're going to take the capital. You may not like it, but this is happening and you're not leaving till you have. And so the banks were all good to go. And it was also clear that there are so many more growth companies in the US that growth businesses with visible earnings, visible revenue growth, were available. They were available much more cheaply than in Europe, where there's a tremendous scarcity of those companies. And so I sort of felt, well, we're buying higher top line revenues for a lower price in the US. So our central gravity really shifted. And after a bit, we called ourselves a global fund, although realistically at the moment we're a transatlantic based fund, laterally, like everyone, we graduated to and owned some of the Japanese stocks, like some of the internet platforms. And also in the later stages of that, some of the one-of-the-by-you companies called Vulyangi, but one of the things which also dawned on me in the last decade was that the BRICS, so-called the EM companies, the key EM markets. They wasted the opportunity they had. And they wasted that opportunity because they had a decade of prosperity led by a commodity cycle, not just a commodity cycle, but that was important, at a time when, perhaps, the value-added lane sheet labor. And they hadn't reformed governance. They hadn't reformed shareholder practices. And when I say governance, I mean both corporate governance. And I mean societal governance. They hadn't sort of made progress. And I think you can see that today that they had this golden opportunity of prosperity. And they didn't actually take a step forward. If you look at China, there are some incredibly innovative, interesting, fascinating companies in China. But the reality is there are a lot which aren't. If you look at the responses of these dictatorial or totalitarian or charismatic leadership countries, no one told the truth to power. No one told Putin that they needed to evolve the economy away from natural resources. And no one told Xi Jinping that his vaccines were no fucking good. And so you can see their weaknesses. I mean, once Russia had Vimplecom, and that was amazing, and it had Yandex, and that's very sophisticated, Russia should have a series of world-beating businesses. Because if you think about the Russian tradition in mathematics and chess and music, and their high education standards, they should have world-beating, but why have so many people left Russia? Well, the answer is obvious. And if you look at China, in some ways it's immense is sophisticated, and in other ways it isn't. I have again to think that once the era of super growth was over, they were just not interesting, and I still think that. And so we sort of passed on those things. We moved on from those things some time ago. So that's the evolution of how we invested. Then in the evolution of our business, we started as a long-short business. I think one of the interesting things about long-short is that if you look, post the era of unconventional monetary policies, being harder to add value in long-short, I don't know why that should be, but it just has been. And I felt post the GFC, the risk was, I was shaken up by the GFC, I felt post the GFC, the risk was that we would never have enough exposure to do our clients good, therefore we should explain to them that we had a good long-only product, and therefore we should suggest to them that if they wanted to get the best out of us, they should have long only, as well as, or instead, of long-short. And so our business sort of morphed into being a long-only driven business with a long-short product alongside. I mean, we take both equally seriously, but that's the reality of what happened. So John, I'd love to get a little bit more on you. Go from that higher level to narrowing it down to actual specific investment ideas. You drop some hints. You suggested that your ideas sort of follow this trail. You suggested sort of the mosaic approach. You suggested these things that are important to you, including quality and growth and governance. But how do you go from those broader ideas to specific investment opportunities? And related to that, within your firm, how important is specialization, or is there specialization? How important do you think that is in terms of finding good investment opportunities? I'll ask the second one first. I think what's important is knowledge and insight, and continuously thinking about and around what can go right or wrong with a particular investment idea. The downside of specialization is that of course, you tend to specialize in what's working. And then that can turn into what has worked, and then you ignore what might work. What might work. And the other danger with specialization is that you end up making all these micro comparisons. And what is useful for us is deciding whether a meta or first citizen's bank shares, both of which we ain't and really like, might be better investments than a unit re or runner, both of which we ain't or really like, because those are what are on offer in the stock market. It's not whether a runner is a better investment than whizz, or British airways, or lift handser, which is interesting in itself, but our clients, the stock market does not just offer you a sectoral approach. It offers you a wide range of highly different companies, and is HSBC a better long than Sinovus, and that's more relevant. And the danger with specialization and a decent size team is that you end up only knowing about your area. And actually, you need to know about a lot more things than that. And the other danger is that it can be a bit backward looking. So I like the concept of multi-sector specialization, where people know about sectors and investment ideas, which are highly contrasting. In terms of how do we generate investment ideas, Goli, we have access to the same pool as everyone else. There's a range of listed companies. They report, they talk at conferences. The sell side, a lot of which produces, there's a lot of very good research, as well as very bad research, is incentivized to get you to trade, so they write notes. You look at what's on offer, and then something, whether it's a sort of formal discipline or a kind of informal search engine in your mind, should try and identify what stands out by virtue of price or growth or price growth, longevity, durability, and then you should zero in on it. I think you need to have the flexibility to look at lots and lots of different companies and ideas, because the market's changed over time. But also, and this is difficult in an age of information overlaid, you need to have focus. And look, in my time, I've invested in anything from Alibaba to Vimplecom, to HSBC, to Neuril's Nickel, to, I don't know, a Norwegian mid cap B2B product distributor, to Ryanair. And a lot of these things were things I'd never heard of, and if anyone had told me that our biggest position might have been Alibaba 30 years ago, I'd have looked at them like they were mad. If anyone had told me that I'd been lucky enough to invest in a company which was located in a forbidden zone in Russia, which was Neuril's Nickel, I would have also looked at them like I'd been mad at 30 years ago, but the world changes and investors have to change with it, without compromising their basic principles. And that means you have to be flexible and open to the choices that are available. So I want to then talk a little bit, I mean, this thing of change. It seems to me that you guys have been very methodical about this thing of extending the geographic areas where you guys were investing, by simply reflecting on what was going on in the different markets and where the opportunities were. Now at the same time, when you start looking at the breaks you were talking about them before you were talking about the United States or China or whoever, you know, how do you actually structure the research process in your team? So you say, we think there are great opportunities in emerging markets or we think there are great opportunities in the United States, had you structure that process of research of learning, but potentially something entirely new in a completely new sector, in a completely new geography, how do you risk manage that process? How were you able to change over time? Well, risk management is about calibrating the size of a position against the return, the perspective return and the extent which the position can go wrong. Plus liquidity, because you've got to be able to get out of things as well as into them. Who likes lost spot investments, structuring the research process, what's that about? That's about trying to isolate, trying to work out what you need to know, work out what you don't know, and with as many people involved as necessary and that's generally two to three, keep on iterating the sort of questions on the process so that in the process of discovering about a company, you learn what you don't know, you ask more questions, you learn what the issues are, you try to think through them and just keeping going, the way we do it and it's different from the way other people do it, I'm afraid we know the most about a company tends to be when we set it, because investing in a business, investing in the stock market, you don't always have the time to behave like you've got what's the word, an exclusivity on a business which is being sold. I imagine that if you're a private equity buyer and you have exclusivity on a business that's being sold, you've got a lot of time to go into data rooms to pull all over it in the stock market you did. So there's a point where you have to make a judgment as well. In our case, that judgment will have been made after meeting companies, talking to them, doing a pretty good model, several other brains attached to it, several brains focused on it, discussion, and then we make an investment if we like what we learn as we go on learning and the price doesn't act too terribly, because I'm a believer that you have to know what the market's telling you, you have to work out what the market's telling you, then the investment proceeds and we may buy more or not, but that's how we do it. Yeah, can I just follow up on these? You just mentioned at the end of your answer, this issue of understanding what the market is telling you. So how much do you guys ask yourself, where's the other side of the transaction coming from, where is that diverging thesis that is giving you an opening to buy a particular name? I was brought up to do this by one of my partners, Ralph Kahnzer, when in the days when he was running money very, very successfully in the 1970s and 80s. If a price went down consistently, it was generally because an insider was selling it. And now he once gave me this sort of graphic lesson, he said, "Well, fine, you don't think that price action is important, suppose a price goes down every day for a month, what do you think?" and I suddenly sort of realized what he was talking about. I've always worked on the basis that if I'm buying a company and the price goes down, someone is selling it and that is someone with a brain and they're doing it deliberately, it's not an accident. So why might they be selling it? And you have to work out. And you have to wonder, what is the market telling me that I don't know, I don't understand or am ignoring? So I always try to sort of spend my time thinking about that and I spend a lot of time wondering in our longs or shorts, what can go wrong? What do I not understand? Now at the same time, the world is changed from when I was young and there are lots and lots and lots of ways of implementing strategies which don't involve single shares, baskets, etc. And I would also say there's this vast pool of money in the stock markets chasing ideas and the stock market that you see, the index that you see is a lot less volatile than the, as it were, intra-index sectoral shifts. And you get these big sectoral shifts. For reasons you don't always understand, our best investment this year has been a company called First Citizens and we bought that in 2021 and it went down a lot during the time of the regional banking crisis. It's a very, very good company, run by some very, very good people associated with a family who are professional managers, I mean, they've really run it superbly over time and they've really kind of done well. What I will tell you is that we aimed it this year and during the time of the regional banking crisis, it had a high in January of sort of 822. It blossomed on the 17th of March at 497. What was the regional banking crisis about? It was about real estate. Well, you could look at what their real estate exposure was. It was about a deposit flight. Well, you could look at what's the nature of their deposits, how are they doing? What percentage of them were insured? It was about asset quality. You knew the asset quality was going to get worse, but the reality is, it had just been almost perfect. So I mean, it bottom, it went from a high of 820 or on the 17th of January to 494 and I was tearing my bloody hair out. And then it rallied a bit and it was $589 on the close of the weekend before they bought Silicon Valley Bank. And I remember and I looked at my Bloomberg every three hours through that weekend wondering if they had managed to buy it or not. But what was the decline from 800 and did anyone know something about the business? I didn't think they did. Why did it go down so much? It was probably in some damn basket. Oh, let's sell the regional banks. Let's just do a basket, the liquid securely, let's just do a basket. And I think you get a lot of that these days. You have to be careful about that kind of thing because sometimes the market's right and sometimes it's wrong. But I think the distorting effects of you get these firms which use leverage, they need to get out, they have drawdowns, a 5 or 10% of the fard, all that kind of stuff. In a world in which investment banks don't make markets in the way that they're used to, I just think you have to be careful and be aware of the other influences on share prices. And as I say, sometimes share prices go down for reasons which are totally justified and sometimes they go down for reasons which aren't justified. So John, I'd love to now turn a little bit to how you build your portfolio and I've got a couple of questions just for you to address. Maybe one is do you have a single decision maker? You mentioned having a few people try to turn ideas around a bit, but at the end of days if a single decision maker, are there a number of stocks that say the long only portfolio, a number of stocks or companies that you think is sort of the ideal range for you? I do want to know for the listeners that not only have you guys had a great record in terms of annualized return, but your sharp ratio is roughly three times out of the market. So you've done it with extraordinarily low relative risk, measured classically. And then the last thing is you did talk about upside and downside and constraints in terms of sizing positions. Is there sort of a maximum size that you would think after which you'd be uncomfortable? Okay. Well, let me answer them because I'm going to forget the question. Single decision maker. Everyone has to love. Two people have to love a position for it to be in the portfolio. That's me and one of my partners. And I guess if I hated it, it's not going to be in there. I mean, it might be in there in a small size for a bit, but the reality is if I hate something and it goes down two percent, I'll probably sell it. And that's just a waste of time. So two people have got to really like it. And I like to think I can be persuaded to like things. And I like to think my mind is not a closed book, but two people have got to really like something. Secondly, maximum size. Look, we're not a five or six or seven stop portfolio firm, we're just not. I mean, I think 30 to 40 stocks, if you do it right, can give you the benefit of diversification without the sort of risk which goes with too much concentration. And there are people who are extraordinarily good at concentration. And my friend Chris Han who I think is one of the best investors of his, just one of the all-time best investors, I mean, he is extraordinarily good at that. I would find it really difficult to run a five or six or seven or eight stop portfolio because I'd find it hard to get out of positions which weren't working because the concept of knowledge, trending to familiarity, trending to an inability to see the wood from the trees, trending to complacency about an investment. I would find it difficult to get new ideas in. I'd find it difficult to replace. If I was running a ten-top portfolio, I'd find it difficult to get new ideas in, I think, I like more positions. In terms of shot ratios, et cetera, I'm not quite sure our shot ratio is that good. But anyway, that's great if it is. I've never tried to build a portfolio for shot ratios. I've never looked at. I can understand what the concept of tracking error is, but I personally never looked at it. And actually, the first time I've ever thought about index weightings is right now because most managers have a large embedded bet, either in favor of or against technology, because you're in this unusual situation where technology is a huge part of the equity market. And it's a bigger part of the equity market than is the most asset managers portfolios. Therefore, they have a bet against it. As technology outperforms, that bet is worse and worse for them. So if that is something I focus on, but it is something I'm aware of, I don't make portfolio changes because of that. So what do I feel about shot ratios? I suppose it's about diversification. It's about diversification so that in different markets, different names work for you. I don't ever want to have a portfolio where it's any one theme. So, John, one thing I want to ask you relates to that is the importance of your clients. How important are your clients and do you feel that they understand what you're doing or you're in step with them at all times? Just talk about clients in general. Well, first of all, I mean, our clients are incredibly important because without them we wouldn't have a business. So they're incredibly important. I'm sure I'm not in step with them all the time because they're a period and we did when I've done badly and we didn't really badly in 2021 and 2022. Do they understand me? I like to think that we are reasonably transparent and put it all in the shop window. I like to think we are more focused on the bad news for our clients than the good news in the sense that I write about the bad news. I never really write about the good news. So I hope they are and I hope they respect that. But I just basically wear my heart on my sleeve and sometimes I think that I've seen other managers' letters where there isn't often a trace of regret if their performance is bad or if there is, it's almost like a football case writing. But I hope our clients feel I'm in sync with them. I can't be always in sync because we do badly sometimes but I do like to think they'd understand what they have and I do like to think they sort of feel what you see is what you get. Can I ask you a follow-up to that, John? I know that liquidity is important to you and to give your clients a liquidity and I'm curious about how do you manage that, how do you manage that liquidity and how does it bias your portfolio construction and what do you do it? I mean is it because you think it's a competitive advantage in the market to give your clients that liquidity, use derivatives in order to manage that liquidity, how do you handle the entire thing? Well, I mean, I think why do we do it? Well, the first thing is I was brought up running a mutual fund at Morgan Grenfell where the liquidity was daily and I feel that I don't want to run a fund which is not subject to the discipline of having to perform short term as well as long term because I think the danger with, but it doesn't match up, I've got a three-year lock-up. The nightmare is you underperform, it doesn't matter, I've got a three-year lock-up and then you realize it did matter because your investments were wrong. Lock-ups are good for managers, fine, I understand that and there are certain people who can have lock-ups just like if you want to buy a beautiful dress, Crata will charge you more than TJ Maxx and that's fine, but I feel like lock-ups are good for investment managers, less than for clients, I invest with managers which have long notice periods, but our notice period is a short time in our long-any fund, I think it's one week. Does that mean sometimes we're used to this in ATM, yeah, I'm sure it probably does? I think it's in the client's interests. Then it closed the section on risk management by talking about short and how you guys go and how that's your process differs when it comes to short and how you manage the risk of short, the fact that they become a bigger chunk of your portfolio. The risk is, we manage the risk with a huge amount of difficulty because the best moments to short are after you've just lost generally, they're often after you've just lost fortune in short and that is extraordinarily difficult, EG, I think it was January 2022 and I remember we were short, I think it was Warner and it hit $90, doubled really quickly. It's very, very difficult. This whole thing about shorting because somehow, you know, once you've lost something, once you've lost a lot of money from a short, it's hard to get back to it even when it's cracked. And I always sort of say, look, we've got to have a list of names which have cracked because once they were good shorts originally, now they're cracking, we can go back in, but it's just very, very difficult. It feels unnatural to lose money in shorts first as long as, somehow it feels more natural to lose money in longs and how do we handle it? Well, we try to be quite diversified and we have more positions which are smaller and is it the mirror image? Yes, it is in a way because you're looking for really bad companies and if you're used to looking for good companies, it's harder to look for bad companies. It sort of slips through the net. One time our shorts have under-formed our longs by a reasonable amount actually and they've certainly come good in down markets. So, John, I want to shift gears a bit to talk a bit about your career. The first question is, how does one go from studying modern history, Cambridge, to research and fund management in Morgan-Grenfeld, to starting Edgeerton, and do you chalk that up mostly to academic training or partially academic training or disposition in terms of your success? A hell of a lot of luck being in the right place at the right time. And look, I wasn't one of these people. In my day when I was young, I didn't do a summer job and I guess if I'd written to Morgan-Grenfeld I was going to be an intern and they'd have looked, is this person mad, you know? I mean, I was at Cambridge. It was the end of the 70s or beginning of the 80s, merchant banks were recruiting. I did terribly in all the interview rounds and an absolutely amazing, charming, wonderful dawn at my college. It helped me chew on me into my first job and why I wasn't far enough to two years, I got no idea, but anyway, luckily I wasn't because they must have thought that, you know, at least I worked hard. I worked hard and was anxious even if I wasn't competent. Anyway, I was just incredibly lucky. So how did that happen? Well, I think the thing about history is, you know, you have to be an analytical and sort through arguments. I'd say perhaps history is more useful than some other art space discipline. I don't really know about that. I was in the right place at the right time. I worked for a very good person who subsequently ran Morgan-Grenfeld, who was and is a friend, quite frightening at the time, but incredibly valuable experience. He was very, very sharp and sharp in me up. That was very good for me and I owe him a lot. I had a big break and I obviously was doing okay. I think after a few years, I sort of began to realise what one had to do and obviously started being seen as someone of sort of promise, I guess, because when Morgan-Grenfeld went into the retail business, I got given a retail fund to run. One of their full funds that they launched, and that was incredibly big break for me. And so really, I was just in the right place at the right time, at a time when the financial business was expanding like mad, when international investing was expanding like mad. In a good firm, and I worked for someone super, who called Michael Dodson, and he was just great. That's what you ran, Morgan-Grenfeld, and then was on the board of Deutsche Bank and then Ran Schroeder's, and I was very lucky to work for him, did a lot for me. That thing of mentorship, we always emphasise these two students that it's absolutely key to have a good mentor, Leon, in your career that can put you in the right tracks of the speed. And if it's not someone who you ask to be a mentor, it's just someone who you can observe and learn from directly or indirectly. So can I go back a little bit to the history side of it in the following sense, which is, if you just mentioned that you go into the asset management business precisely when the financial service industry is floating, there's growth in international investing, you found equity in 1994, we're about to get into this incredible cycle in the United States. Later on, we're going to start having this massive financial crisis, the Asian crisis, LTCM, the Russian default, tech bubble burst, we have to go for financial crisis. What do you think, first of all, as an investor, how do you manage this volatility in this market, in this crisis, how do you manage your portfolio? You get more concentrated during crisis, how do you think about portfolio turnover on those type of situations? And second, brother topic, if we can get into it, what do you think is behind this kind of increase in the frequency of this financial crisis? Well, I think you have to distinguish what have I seen, the emerging markets crisis. I mean, the consequences of that I would have thought were precisely nothing actually. If we're talking about 1990, was it 1997 or 1998? The financial, the Asian crisis was 97 LTCM and Russian, I did. So there were no consequences for that, of that really. It was a market event, it turned out. The dot-com bubble, that was the easiest bear market, well, I mean, it wasn't that easy, but it was a relatively easy bear market because there were so many speculative stocks and they peaked out when lots of good investments were available at very low prices. So it didn't feel it at the time, but with hindsight, it was fairly kind of, it wasn't a difficult time. The more significant crisis, the GFC, I mean, that was totally invisible to me because I wasn't a bank analyst and I wasn't in the US and when people talked about how home prices were excessive and they'd been rising 7% around them, I thought, well, God, that's a hell of a lot less than the UK and I probably didn't even realize the difference in nature and mortgages where in the UK they're attached to an individual as you can't just hand in your keys if you do you go bankrupt. The Russian default, well, that was the 90s, wasn't it? And then the more recent one, that was very unusual since when, well, has there ever been a period when the economy has been stopped? I don't think there ever has been, actually, because wars were stimulus if to the economy. That was pretty unusual and who would have foreseen the degree of stimulus. Why do these things happen so much? I mean, why markets say volatile? I mean, it's a sort of common phrase, but people talk about the financialization of things. I just think there's a lot more money concentrated in securities than there ever used to be and it's volatile and it responds violently to shifts in the perception of risk. So you think that's what's behind it, it's like a change in the attitude towards risk. It's not really about changes in expectation about future cash flows, but it's really just about sometimes people freak out or investors freak out. Obviously, it's about more than just the change in the perception of risk. Obviously, it's about future cash flows as well, but I mean, if you take a company like, say, Safran, which in 2020 went from 147 at its high to 51, did the market really think seriously that the perpetual value of its cash flows was going to be done two-thirds? That's saying a lot. So I think you have to remember that equities are the very volatile end of what's sort of going on. How does Ergerton react in the presence of these big crisis? Very difficult because the danger is you freeze. And if you're a stock picker, stock pickers are slaves of grass macro turning points because in their minds, they're always thinking about what the company told them last week or two weeks ago or three weeks ago. And for most stock pickers, quote unquote, what the company told me, what I heard, you hear it from someone who's like you, who's telling you what he or she sees right now, what company see is always a bit backward looking, in some case it, well, not always. And you talked to a company three weeks ago, they tell you X, and you think to yourself, surely it's not changed that much in three weeks. If you're a pure stock picker, that somehow has a greater weight of reality than if you're a macro person. So John, you've already sprinkled some names of companies that you like. I wonder if you could share a stock or two of a company that you own in the portfolio today and like and sort of capture many of the things we've been chatting about today. There are lots of things. I mean, we like reinsurance space. It's a small space, not covered by that many analysts, really. And we like that because there's been a big change in rates and a big change in terms of conditions. We think that companies are booking earnings quite cautiously. They want to discourage lots of new capital coming into the industry because this is a cyclical commodity. This is a cyclical business, depending on the capital. We think companies like Renry and Arch have a reasonable amount of runaway to earn quite a lot of money over the next few years. And Munichree, Ryanair has been a big holding for us. And we think they're in poor position in Europe. They make an average of sort of 82, 83 years of passenger on average, which is very, very low cost. They've got very low cost operations, far lower cost than their peers. They're Boeing's biggest customer, probably worldwide, which means that they can buy planes very advantageously. They're run by someone brilliant who's got some outstanding people around him. They've got a strong balance sheet. They can pay back debt from cash. They're going to generate a lot of cash. They're on about nine times earnings, and I think their earnings forecast are really low. I mean, we like reinsurance travel. We really like meta. There's nothing particularly original in that, but I think if you read Mark Zuckerberg's blogs from last year, and the way he's approaching costs and seeing costs not just as about costs, but also as about business simplification and reprioritization and shorter lines of communication and speed and urgency. And then you think about the potential of generative AI, it sounds pretty exciting. So, so, Jeremy Circleback, let's just pick Ryanair as an instance. Many things you ticked off, their profitability, excellent management, their leadership position, those are pretty well-known things, and think about who's on the other side of these trades. Why is it trade at nine times earnings if those facts balance sheets good? Those facts seem to be reasonably well-known. Well, I mean, it trades at nine times earnings. You can make realistic estimates which are a lot higher, which the market probably doesn't want to do. I mean, it is a reasonable amount this year. Every other airline has had to raise money. Sometimes you get a visclerua reaction and people don't want to rate stocks more highly. Why does HSBC trade on six times earnings? Oh, well, it's a European bank. Sometimes companies are anchored by the valuations of what people compare them to. I mean, all I can say is we think we could see a path to much higher earnings. Six times earnings is 10 euros a passenger. The company thinks they might be able to earn 15 euros a passenger at some stage. How do you connect, in general, John, the competitive position of the company in the industry in which it operates to your framework, to your valuation analysis? How much do you think about the barriers to entry? How do you integrate that into your framework of when making a decision? I tell you why I ask you this, if I think about airline industry, it seems to me fairly competitive industry. It's been a wave of consolidation in particular in the United States. But we see entry in this particular industry from time to time. And I understand these guys have a terrific cost of structure. The answer is we think about it. I mean, there's no formulaic way to do it. The background to the European airline sector is that they've been over the last 25 years. They've been a lot of new entrants. Some of those have gone to the wall, like in Norwegian. These sectors consolidated massively. TAPs up for sale. Lufthansa's about, probably has always about, by Alitalia, which is just withered away to nothing. SAS has just gone bust. So there have been insolvencies. In an industry where you're basically selling seats, and one seat is kind of the same as everyone. One seat is the same. From one airline is kind of the same as others as another airline's seat. Would you invest in a company like that if it wasn't? If it didn't have the best economics, no, obviously you wouldn't. In the case of Ryanair, that's integral to its investment case. Now, it also happens that European capacity, airline capacity, X Ryanair is probably down on 2019 levels. The very least it's unchanged and demand for seats is up. So there's a cyclical aspect to it. But clearly, there's no way we'd invest in a highly competitive industry where you're basically offering the same product as other people if there wasn't that cost advantage. Now there are other types of, and you know that with reinsurance, the money is important because this is a wholesale industry, and if you can accumulate a team and money, you can write some business. But in the case of reinsurance, it does seem that there is a bit of a cyclical turn away from the relaxed terms and conditions that were in place before. How do you quantify the impact of Microsoft's competitive position? The fact that it's got to lock or SAP's competitive position, the fact that they've got to lock on most corporates around the world. How do you quantify that? How do you tie that into a multiple? Very hard to tie it into a multiple. You just know that once people are on windows, they don't really want to get off. You know that if you're on SAP, changing away from SAP, is like having a heart and lung transplant while you're running a marathon. So you can't really quantify it, but you just know that that's what it is. John, before we turn to our closing segment, I wanted to ask you a little bit about how you see the future of stock picking or value investing in general, in particular in the context of the growth of passive investing over the last two decades. So how do you see the future of the asset management industry and whether there's room to add additional strategies to the portfolio of strategies of our investors such as activism and other tools that can be brought to bear? How do you see that future? Well, I didn't really think a lot about the future of the asset management industry to be perfectly honest, because I'm really more focused on portfolio and it's more difficult. Passive is about introducing distortions, which sometimes are temporary. Index plays can't levitate share prices forever. Index is going into an index, aka the price goes up, but what makes it stay up is fundamentals. And we're in this situation in technology because there's probably a bit of a sugar rush in technology, but at the same time, we're in a technological revolution. But if Google and Facebook and Microsoft's profits were going down, or Apple's profits were going down, it wouldn't be quite the index effect. The passive effect could be much less significant. I think that investing is much more difficult than it used to be because frankly, any time in industry, which is profitable for a sustained period of time and very profitable, it attracts capital. In the context of the investment business, that capital is people. And that's what it's directed. And there's a lot more talent in the investment industry than when I was young, and that's just the fact that a lot more people around the world listening to what companies are saying, reading their displeasure, et cetera, et cetera. That's just a massive change on many years ago. How could it not be more difficult? So turning then to our last segment. Let me ask you the question that we ask all our guests, which you know, which is what worries what excites John Armitage these days, what keeps you up at night with worrying with excitement about the future. And it doesn't need to be something about financial markets, it gets to be about our economy at large. Our society is what is worrying you or exciting you these days. Luckily I've been able to sleep well most of my life. When I do wake up early and worry, it's normally about performance rather than anything else. Because I have a lovely happy married life and doing poorly for our customers is really what upsets me. But I do think in some ways the world is in a bad place at the moment. There are sort of four or five things which really preoccupy by me about politics today, or politics, society, the dialogues we have today. I would say the first of these is that unlike in previous generations, today I feel that with a few honorable exceptions, there are a few politicians around who will say what they think without regard for opinion polls. And I think most politicians are trimmers and go with the flow and go with what they think their electorate wants to hear. And the result of that is that sometimes difficult things which are important for society and will be important for society are just never said. The second thing which upsets me at the moment and it's a more recent thing. And I'm giving these lists of concerns in no particular order. The second thing is today the moral sinkhole into which people have descended who condemn the state of Israel, which they're perfectly entitled to do, without in any way admitting that Hamas is an organization of barbarians who committed vial atrocities which can never be justified. And how I see it is that if a group of white terrorist thugs had committed these kind of atrocities on some poor community of people of colour, this would be resonating around the developed world now and for decades to come and would meet unequivocal condemnation. And you've only got to see the reaction of, in my country, some members of parliament and perhaps politicians in the US and perhaps university leaders in the US to know that there's a great task double standard being applied at the moment. And that depresses me enormously. I guess the third thing which really worries me about the life we live in the West is that we face threats from what I would describe as totalitarian in the form of China or ideological in the form of Russia, states or groupings terrorist organisations. And these organisations think that they are war with us. And the Russian economy, for example, is being transformed on the way war footing. Unless, wants to destroy Jews. So these people are all with us, but we don't think we're at war with them. And I think this leaves us unprepared for a fight. And I worry deeply that if you live in a Western democratic society which is used to being a peace, you will not be able to respond adequately to people who want to destroy or undermine you. And I guess finally one of the best quotes from 1984 by George Orwell is something along the lines of he who controls the past, controls the future. And if you create a false narrative of the past, it's easy to control the present. And my guess is that false narrative is true about many subjects in many places. And I deeply just like the capture of the past today. It does sound John though, you are excited about or looking forward to what we see from the AI revolution, whatever you want to call that, on a brighter note. Yeah, exactly. That's the thing. Thank you for that, Michael, to give it a brighter spin. Well, I mean, it's very exciting what might be done. I'd be a bit upset if AI was to come out. I think it would be a bit sad if AI took place a human creativity and I don't think it will. So John, we know that you're an avid reader with a very curious mind. So is there anything you're reading these days or listening to these days that you would recommend to our listeners or any other books or other items that have been influential for your own thought process over time? I like reading history books and I like reading, I like reading novels, what's really stuck in my mind. More recently, three fiction writers, Pierre Lemich, LEM, AITRE, John Banville and Colin Toibin, T-O-I, B-O-N, have written some, I think, marvelous novels which I've really enjoyed. Catherine Rundle, who's a children's writer, but also wrote The Golden Mole and a fantastic biography of John Dunn, I read a marvelous book on the last 24 hours of Robespierre before the death of Robespierre by Colin Jones last year, which is really a sort of eye-wings can't, an eyewitness account from different parts of Paris and different parts of the revolutionary and urban activities which were going on in the 24 hours before Robespierre's death, which I just found quite gripping. And the Mitrokin Archive, which is this absolutely fascinating two volumes of an archive of KGB activities in the West, and the first volume is really about Europe and the US. It was exfiltrated from the Soviet Union by Vasily Mitrokin, who was a KGB Archivist. He was exfiltrated to the UK and Christopher Andrew wrote these two books, and they're absolutely fascinating. And they're horrifying because I believe that we in the West face enemies which feel like they are and see everything through the prism of war and conflict with our society and what we stand for. And unless we engage with that, we're going to lose out. And I'm not entirely sure that we in the West do bully engage with the fact that we have enemies. Look, you've seen it recently, there was just a tiny little incident the other day. With Vladimir Putin, the Russians encouraging illegal immigration from, God, was it North Africa or was it into Finland? Finland's just closed all their borders with Russia bar one. Why? Because Putin is busing up illegal immigrants, probably as a way of getting terrorists into the UK. And just simply to disrupt Finland. And that's the way people like Putin behave. I don't think the Chinese do because they're less rash and they are more rational and they take a long term view. But the fact is, you've only got to read the matrician archive to realize that the Russians were just paranoid and evil and they probably still are. Are your takeaways or inspirations from either your fiction reading or nonfiction reading? Do they spill over to your investment thinking? Is there some way that it animates your investment thinking? I know that I should be able to say yes, but I'm afraid the answer is no. I haven't made any connections. And I think on that note, I think it's a good point to stop this wonderful conversation, there's much more to talk about about all these things. John Armitage of Egoritan Capital, thank you so much for coming to the value investing with Latins podcast. It's been a pleasure. Well, thank you. It's been a real honor. Thank you very much. Good night. Good night and to all of you, we'll see you in our next podcast on the value investing with Latins podcast. Thank you again. Thank you. For listening to this episode of the Value Investing with Legends podcast, to subscribe to the show or learn more about the Halbrun Center for Graham and Dodd Investing at Columbia Business School, please visit Grahamand Dodd.com. Thank you.