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Simon Hallett on Investing and Soccer (Podcast) · Masters in Business

0:02
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg
0:06
Speaker 1: Radio this weekend. On the podcast, I have an extra
0:09
Speaker 1: special guest. His name is Simon Howett and he is
0:12
Speaker 1: the co chief investment officer at Harding Lovener, which is
0:16
Speaker 1: a firm that's been around for about forty years and
0:19
Speaker 1: manages about seventy three billion dollars. He also is the
0:24
Speaker 1: majority owner of Plymouth Argyle of football club in the
0:28
Speaker 1: uk UH. He has a fascinating background and has been
0:32
Speaker 1: running money on an international basis for many decades. He
0:38
Speaker 1: is uniquely insightful to discuss how to pick stocks, what
0:43
Speaker 1: the difference between growth and value is, and how to
0:46
Speaker 1: use both in order to identify companies most likely to
0:51
Speaker 1: perform the market. The track record of Harding Lovener's international
0:56
Speaker 1: funds has just trounced the ms c I innchmarked by
1:00
Speaker 1: two hundred and fifty basis points annually over decades. So
1:06
Speaker 1: this isn't somebody speaking theoretically. They have actually put processes
1:11
Speaker 1: to work that have allowed them to dramatically outperform with
1:15
Speaker 1: no further ado. My conversation with Simon Howett, this is
1:20
Speaker 1: Master's in Business with Barry Ridholts on Bloomberg Radio. My
1:25
Speaker 1: special guest this week is Simon Howett. He is the
1:28
Speaker 1: co chief investment officer at Harding Lovener, a firm that
1:32
Speaker 1: manages about seventy three billion dollars in assets. He is
1:36
Speaker 1: also the majority owner of Plymouth Argyle of football club,
1:41
Speaker 1: located in the UK. Simon Hallett, Welcome to Masters in Business.
1:46
Speaker 1: Thank you for having me. Very so, let's talk a
1:48
Speaker 1: little bit about your background. You earn your b A
1:51
Speaker 1: at Oxford and then you begin working in the financial
1:55
Speaker 1: services industry in London in the early nineteen eighties. Tell
1:59
Speaker 1: us about that era. It was actually the late seventies.
2:02
Speaker 1: I graduated in nineteen seventy seven and went to work
2:06
Speaker 1: for the Midland Bank, which was then one of the
2:09
Speaker 1: big four clearing banks in England. UM in the early
2:11
Speaker 1: eighties I moved to investment management financially investing, let's say
2:17
Speaker 1: in Hong Kong. In London, that was an era of
2:21
Speaker 1: high interest rates. We were just coming off to financial
2:23
Speaker 1: crisis and the mid seventies, and when I moved to
2:26
Speaker 1: Hong Kong, we were just beginning in a property collapse.
2:31
Speaker 1: I moved there in nine one and the property market
2:33
Speaker 1: collapsed in ninety. In some of that year, um the
2:37
Speaker 1: oil price was thirty two. It was about to go
2:40
Speaker 1: fall in half as well, So it was an era
2:43
Speaker 1: really of continuous crisis as far as far as I
2:47
Speaker 1: was concerned. Hong Kong in the nineteen eighties, that had
2:50
Speaker 1: to be a house a fire though, because Hong Kong
2:53
Speaker 1: was really ramping up there with a gateway to Asia,
2:57
Speaker 1: not just Japan, but China and a lot of the
3:00
Speaker 1: rest of it. What was your experiences like in Hong Kong. Well,
3:04
Speaker 1: it was the first time I've traveled anywhere other than
3:06
Speaker 1: to France, so everything about it was tremendously exciting. As
3:10
Speaker 1: you say, it was a great time to be in
3:12
Speaker 1: Hong Kong. It was a few years before the reservation
3:15
Speaker 1: began to open up, but Hong Kong itself had just
3:18
Speaker 1: had a massive expansion in population as a result of
3:21
Speaker 1: immigration from China after the misery of England in the
3:25
Speaker 1: nineteen seventies. It was just amazing to be surrounded by
3:28
Speaker 1: people who often lived in great poverty, having just arrived
3:32
Speaker 1: from China, but being left to their own devices to
3:34
Speaker 1: better their lives, almost always successfully. So you know, all
3:38
Speaker 1: the cliches about Hong Kong about it's you know that
3:41
Speaker 1: it's a culture of independence, it's a culture of trying
3:44
Speaker 1: hard to personal success were true, and I just found
3:49
Speaker 1: it tremendously exciting. So what do you make of what's
3:52
Speaker 1: been going on with Hong Kong the past few years,
3:56
Speaker 1: not only since the handover from UK, but increasingly aggressive
4:02
Speaker 1: Beijing policy towards Tanka. I find it horrifying. You know,
4:06
Speaker 1: Hong Kong was very much left to its own devices.
4:08
Speaker 1: I thought that the sign a British Joint Declaration in
4:12
Speaker 1: the mid was going to be a treaty that guaranteed
4:15
Speaker 1: the independence of Hong Kong. Clearly that's being overcome, and
4:18
Speaker 1: I think it's not going to be good for Hong
4:20
Speaker 1: Kong is a place, and I worry about the future
4:23
Speaker 1: of the people that I know who are still there
4:25
Speaker 1: and the rest of the population. I don't think it's
4:27
Speaker 1: going to be healthy for for Hong Kong. Quite interesting,
4:30
Speaker 1: So let's talk a little bit about your investing style.
4:33
Speaker 1: You're essentially your bottoms up fundamental stock picker. Since we're
4:38
Speaker 1: talking about the macro landscape, do you ignore what's going
4:42
Speaker 1: on in the background, Does it not enter the calculus
4:45
Speaker 1: or does that force you to modify the sectors and
4:50
Speaker 1: companies you're considering. No, we try very hard to ignore it.
4:55
Speaker 1: We're investment people, so you know, we're kind of curious
4:57
Speaker 1: about the world, and we're opinionates, so we have opinions
5:01
Speaker 1: about the macroeconomic environment, but we tried very hard not
5:04
Speaker 1: to let it influence our portfolios. I actually like to
5:09
Speaker 1: quite something that you wrote four or five years ago,
5:12
Speaker 1: when you're asked about the economy and what you think
5:16
Speaker 1: you know, I think you your basic answer is, you know,
5:19
Speaker 1: why would you ask me, why do you think that
5:21
Speaker 1: my forecasts have any value? And why do you think
5:24
Speaker 1: forecasts themselves have any value? And that's pretty much the
5:28
Speaker 1: view that we take. You know, the academic studies suggest
5:31
Speaker 1: there's very little correlation between let's say GDP and stock
5:35
Speaker 1: market returns. I think it's interesting to discuss, you know,
5:39
Speaker 1: why there's little covariance between GDP growth and stock market returns,
5:45
Speaker 1: but in fact this there's not um Secondly, you can't
5:48
Speaker 1: forecast GDP, so it distresses me that the financial services
5:53
Speaker 1: industry devote so many resources to try and make forecast
5:57
Speaker 1: that it inaccurate and have no bearing upon as cust
6:01
Speaker 1: customers returns. So you know, I look upon macro economic
6:04
Speaker 1: forecasting as damaging too good investment returns. So no, we don't,
6:10
Speaker 1: we don't, We don't bother with them at all. Having
6:13
Speaker 1: said that, we do think about them a little bit
6:16
Speaker 1: and thinking about expectations for how we should expect our
6:20
Speaker 1: portfolios to perform. So, you know, a good example what
6:24
Speaker 1: would be after the financial crisis, where you know, our
6:28
Speaker 1: expectations to the economy, such as they were, were that
6:31
Speaker 1: it was based upon Reinhardt and Rogoff. We thought it
6:34
Speaker 1: would be a long, hard slog to recover fully from
6:37
Speaker 1: the financial crisis. We thought that, knowing a bit about
6:41
Speaker 1: people's psychology, that they'd start the year optimistic, they end
6:44
Speaker 1: the year pessimistic, and that that would lead to more
6:47
Speaker 1: market volatility. But we thought it would be a good
6:50
Speaker 1: environment for our kind of investing in high quality, long
6:54
Speaker 1: duration growth companies, and we were We were right about that. Interestingly,
6:59
Speaker 1: we were comply wrong with our forecast of stock market volatility,
7:03
Speaker 1: and we're actually right with relying on the Reinhardt Rockoff
7:06
Speaker 1: forecast of the macro economy. So it's quite ironic that
7:10
Speaker 1: the thing that you know, we think we can't forecast
7:12
Speaker 1: at tour was the one we actually got right. I recall,
7:16
Speaker 1: I want to say it was December of oh seven
7:19
Speaker 1: that ran Hardt and Rogu came out with a short
7:21
Speaker 1: white paper that looked at five previous financial crises. Now,
7:26
Speaker 1: remember the market peaked in oh seven. To come out
7:30
Speaker 1: with something like that in two thousand and seven was
7:33
Speaker 1: um was way way ahead of its time, and that
7:36
Speaker 1: white paper not only was prescient, it became the basis
7:40
Speaker 1: of eight hundred years of this time. It's different. They
7:44
Speaker 1: really had a handle on what financial crises due to
7:48
Speaker 1: stocks and economies. Did their research really influence how you
7:53
Speaker 1: look at at the recovery from a financial crisis like
7:57
Speaker 1: OH eight or nine? Absolutely, I mean that view, but
7:59
Speaker 1: it would be a long, hard slog. Was entirely based
8:01
Speaker 1: upon their work, and I have to say that this
8:05
Speaker 1: is something that I look upon as typical of my
8:07
Speaker 1: entire career. I've been very open about things. We have
8:11
Speaker 1: relied very heavily on other people's work, on other people's
8:15
Speaker 1: academic work informing our own views. Um. You know, I
8:19
Speaker 1: always say that I haven't had an original sort in
8:22
Speaker 1: my entire career, but I've been very very good at
8:25
Speaker 1: identifying useful thoughts from other people and implementing them in investing.
8:32
Speaker 1: Rein hot Rogoff was was a classic case. You know,
8:35
Speaker 1: we read the book, book became popular, it was available
8:37
Speaker 1: for fifteen bucks on Amazon, and it helped us with
8:41
Speaker 1: our expectations and our client communications for a decade. People
8:45
Speaker 1: underestimate the power of the written word. I think it
8:48
Speaker 1: depend is mightier than the swords, and it's certainly true
8:51
Speaker 1: in the world of finance. And I think there's this
8:53
Speaker 1: relentless pursuit of originality. We all feel the pressure to
8:58
Speaker 1: be original, to be original thinkers, and I don't think
9:00
Speaker 1: it's necessary. I think, you know, there's so much good
9:03
Speaker 1: advice about how to behave how to invest out there,
9:07
Speaker 1: and what's what's the key to success in investing is
9:09
Speaker 1: taking that advice and are using it for the benefit
9:12
Speaker 1: of your clients. I couldn't possibly agree more. Let's talk
9:16
Speaker 1: a little bit about the track record that Hardy Lovener
9:20
Speaker 1: has put together. The Global Equity portfolio since inception has
9:25
Speaker 1: outperformed ms CI by two d and fifty basis points annually.
9:31
Speaker 1: That's pretty interesting. Is this still the same methodology or
9:35
Speaker 1: philosophy that was used when you joined the firm back
9:38
Speaker 1: in what was um. The philosophy has not changed, but
9:45
Speaker 1: the methods of the investment process has a lot. Our
9:48
Speaker 1: investment process today is much more structured, it's much more disciplined.
9:51
Speaker 1: We're much more objective about how we define the characteristics
9:55
Speaker 1: of the companies we followed, and the result has been
9:58
Speaker 1: a gradual shrinking of the freedom that portfolio manager has.
10:02
Speaker 1: I think that's one of the interesting things about the
10:04
Speaker 1: lessons from behavioral finance. What we've learned is that people
10:08
Speaker 1: need to control their behavior, but they find it difficult
10:10
Speaker 1: to do so. So one of my roles as co
10:14
Speaker 1: chief investment Officer and previously chief equity officer has been
10:18
Speaker 1: that I've had to set out the rules and then
10:20
Speaker 1: make sure we stick to them. Of course, that's going
10:23
Speaker 1: against the financial services culture that a portfolio manager is
10:27
Speaker 1: the top dog in an investment process, and people don't
10:30
Speaker 1: like having their freedom restricted. So the methodology has changed,
10:35
Speaker 1: and it's been a methodology that has been disciplined, it's
10:38
Speaker 1: been objective, and it's been reducing the autonomy of individuals.
10:42
Speaker 1: But the philosophy has been constant that we will focus
10:46
Speaker 1: exclusively on long duration, growth growth companies, and pay attention
10:52
Speaker 1: to the price at which there stops trade. So so
10:56
Speaker 1: let's talk a little bit about the methodology. Your firm
11:01
Speaker 1: references four qualities for a company to be a potential
11:06
Speaker 1: portfolio holding, competitive advantage, quality management, financial strength, and sustainable growth.
11:15
Speaker 1: How do you quantify these? Some of them are kind
11:18
Speaker 1: of squishy, like like quality management. How do you determine
11:23
Speaker 1: who's a quality manager or not? And is that a subjective,
11:26
Speaker 1: squishy rating or do you come up with a way
11:29
Speaker 1: to make it much more quantifiable. Yeah, the the squishi
11:34
Speaker 1: is that these four criteria isn't doubtedly the one that
11:37
Speaker 1: assess his management. And again, you know, thinking about how
11:40
Speaker 1: the process has changed over the last thirty years, we
11:43
Speaker 1: used to think we knew quality management when we saw it,
11:46
Speaker 1: and often that simply meant meant that we've met them
11:49
Speaker 1: and we like them. And you know, there's very little
11:51
Speaker 1: correlation between whether we like people and whether they're good
11:54
Speaker 1: managers of corporations on behalf of their shareholders. So you know,
11:58
Speaker 1: we are today much more active in how we assess management.
12:02
Speaker 1: And just to give a little bit of detail on
12:04
Speaker 1: that particular one, we quite early on started using cash
12:09
Speaker 1: flow return on investment based on the work of people
12:12
Speaker 1: like Michael Mobson, not just to value companies, but to
12:16
Speaker 1: assess assess the abilities of management, not just to generate
12:21
Speaker 1: free cash flow, about how they allocate it. We actually
12:23
Speaker 1: used to hold valuation system with some adjustments for our
12:27
Speaker 1: own beliefs, but we can use that to look at,
12:30
Speaker 1: for example, how management allocates capital, and for us that
12:34
Speaker 1: that's a very very important way of looking objectively at
12:38
Speaker 1: their track record. I think when you're investing for the
12:40
Speaker 1: long term in quality growth companies, obviously a lot of
12:44
Speaker 1: the value is in the future cash flows, but the
12:48
Speaker 1: past has to be some guide. You have to believe
12:51
Speaker 1: that the past is some guide to the future. So
12:53
Speaker 1: a good track record is something that we like to
12:56
Speaker 1: see and we will use that to assess management. The
12:59
Speaker 1: other aspect of high quality management for US is corporate governance,
13:04
Speaker 1: which is essentially how those high returns on capital end
13:07
Speaker 1: up with shareholders. Are they retained in the company, are
13:11
Speaker 1: they paid out as dividends, are they distributed via buybacks,
13:16
Speaker 1: or are they used to further the interests of other stakeholders,
13:20
Speaker 1: most noticeably, of course, the executives of the company. So
13:24
Speaker 1: corporate governance for us again is more than just a
13:27
Speaker 1: matter of sticking a finger in the air making a judgment.
13:30
Speaker 1: It's we have a series of checklists which have identified
13:34
Speaker 1: the factors that we think we are important in assessing
13:38
Speaker 1: overall levels of corporate governance. And I'm not going to
13:40
Speaker 1: pretend that all the companies in which we invest are perfect.
13:44
Speaker 1: One of the checklists, for example, asked questions about um
13:48
Speaker 1: record of integrity, and they will be exclusionary. So if
13:52
Speaker 1: companies don't need a minimum standards, we won't. We won't,
13:56
Speaker 1: we won't follow them. So we have got more disciplined,
13:59
Speaker 1: we have got more structures, and I think when it
14:01
Speaker 1: comes to allocating capital, we've got much more objective. But
14:04
Speaker 1: I will say that when it comes to assessing management,
14:07
Speaker 1: we also have an element of assessing their strategic vision,
14:11
Speaker 1: and that really would be from analysts making judgments, from
14:15
Speaker 1: reading transcripts, from interviewing managers and so on and so on.
14:19
Speaker 1: So the ark at Harding Lavena really has been from
14:23
Speaker 1: qualitative judgment towards objective judgment, and that that applies to
14:28
Speaker 1: the four criteria that we use as well. So so
14:31
Speaker 1: I can certainly see financial strength being totally quantifiable and
14:35
Speaker 1: even sustainable growth. You can track that over time. What
14:40
Speaker 1: about competitive advantage? That's one of those sort of Warren
14:44
Speaker 1: Buffet Mote type things that also sounds a little subjective.
14:48
Speaker 1: How do you make that less squishy? We make it
14:53
Speaker 1: less squishy by again being structured and disciplined. So we
14:56
Speaker 1: rely very heavily, not just on analyzes of competitive advantage,
15:01
Speaker 1: which is really an answer to the question what is
15:02
Speaker 1: it in this company does well that gives it an
15:05
Speaker 1: advantage in the industry in which which it competes, But
15:08
Speaker 1: we also look at the Michael Porter four forces structure
15:12
Speaker 1: of an industry to make sure that the company is
15:14
Speaker 1: operating in an industry where high margins can be protected.
15:19
Speaker 1: So it's not always objective and quantitative, but it is
15:22
Speaker 1: structured and consistent across across the various sectors and geographies
15:27
Speaker 1: in which we invest, and you know, ultimately competitive advantage
15:32
Speaker 1: is seen in high margins and strong Peschelor return on investment,
15:37
Speaker 1: which are sustainable over long periods of time. So again
15:41
Speaker 1: it's a mixture of trying to be disciplined and structured
15:44
Speaker 1: about where you're making judgments and trying to be objective
15:48
Speaker 1: about where you don't make judgments, and I think you
15:51
Speaker 1: know in some ways this is a feature of all research.
15:54
Speaker 1: We We are not ashamed that a lot of the
15:56
Speaker 1: inputs we use are backward looking, but backward the inputs
16:00
Speaker 1: are the ones that are facts subjects cause to an
16:06
Speaker 1: opinion about the value of accounting rules. I think that
16:09
Speaker 1: people have described them as opinions, not facts. But at
16:12
Speaker 1: least they're more objective than forecasts, which of course the
16:15
Speaker 1: subject to buy it, So they're doing research. Trying to
16:18
Speaker 1: value companies for us is a mixture of looking backwards
16:22
Speaker 1: for objective facts and looking forward making forecasts, but recognizing
16:27
Speaker 1: that those forecasts are subjects very heavily to buy at
16:30
Speaker 1: these quite quite interesting. So Simon, you're the majority owner
16:35
Speaker 1: of the Plymouth Argyle football club. This raises a question,
16:39
Speaker 1: why buy a soccer team? Is this an investment or
16:42
Speaker 1: a labor of love? It's certainly not an investment barrier,
16:45
Speaker 1: or if it is, it's the worst one I've ever made.
16:48
Speaker 1: It's the labor of clubs. It's not just any football club.
16:51
Speaker 1: This is the football club that I supported as a kid.
16:54
Speaker 1: I first stood on the terraces in six when I
16:58
Speaker 1: my family moved to Plymouth. So this is the team
17:01
Speaker 1: that I've been a fan of for most of my life,
17:04
Speaker 1: for fifty four years. So it's a labor of love
17:08
Speaker 1: and it's really a little bit of giving back to
17:12
Speaker 1: the community in Plymouth. The role of the football club
17:16
Speaker 1: in local communities is probably greater than sports teams in America.
17:24
Speaker 1: They're deeply embedded, they have a long history. We have
17:26
Speaker 1: a community trust which is very active doing good works.
17:30
Speaker 1: And it's important to me that Plymouth Argyle be a
17:34
Speaker 1: vehicle for me to give back to the community in
17:36
Speaker 1: which I was raised and frankly that the community that
17:40
Speaker 1: paids my education. You know, I've turned my education into
17:44
Speaker 1: you know, it's successful business that I've read the rewards
17:48
Speaker 1: off and the rate payers of Plymouth paid to my
17:51
Speaker 1: high school education and for my university education. So it's
17:54
Speaker 1: a way of giving back. And I should say that
17:58
Speaker 1: I don't like the idea that subs so entrepreneurs who
18:00
Speaker 1: make a fortune should get back. There's usually done it
18:03
Speaker 1: by selling bos and services the prices that people want
18:06
Speaker 1: to pay. It seems crazy to me that people say
18:08
Speaker 1: that Bill Gates should get back when you think of
18:10
Speaker 1: all the good that his product has done in the world,
18:13
Speaker 1: so it should be a voluntary act. But for me,
18:15
Speaker 1: you know, I generated a return on the investment that
18:20
Speaker 1: the ratepayers, the taxpayers of Plymouth pay made, and I
18:25
Speaker 1: think some payback is appropriate. But it's also so it's
18:28
Speaker 1: a happy coincidence that it's also my boyhood club. So
18:31
Speaker 1: it's been great fun. So I understand, I'm a World
18:35
Speaker 1: Cup fan. I understand generally how U K soccer clubs
18:41
Speaker 1: move up and down the different leagues. But for US
18:45
Speaker 1: ugly Americans who may not really understand first year, second yer,
18:49
Speaker 1: third year, can you give a little explanation. Lay In
18:53
Speaker 1: the US we have professional football teams, and we have
18:57
Speaker 1: college teams, we have Major League Baseball teams, and there
18:59
Speaker 1: are minor league teams and nary the twain shall meet.
19:04
Speaker 1: But UK cycer clubs they can move up and down
19:07
Speaker 1: from from league to league. Can you give that a
19:10
Speaker 1: little explanation? Sure, So leagues here are closed systems, and
19:15
Speaker 1: the divisions within a league the mostly closed systems. You know,
19:17
Speaker 1: it's very unusual for a team to move from the
19:20
Speaker 1: American League East to the American League West, so obviously
19:23
Speaker 1: has happened in the past, but so they're closed systems.
19:27
Speaker 1: Leagues in professional sports throughout the world, not just in
19:31
Speaker 1: soccer and not just in England, are much more open.
19:34
Speaker 1: So let's say that let's talk about the four divisions
19:38
Speaker 1: of English football. They're actually about a hundred divisions, but
19:40
Speaker 1: let's just talk about the top four divisions. If you
19:44
Speaker 1: think about divisions in the league being horizontal with no
19:47
Speaker 1: movements between central and western, in English football the leagues
19:51
Speaker 1: are hierarchical, so there's a progression from let's say the
19:55
Speaker 1: fourth tier up to the first tier, which is the
19:58
Speaker 1: English Premier League that people have prom really heard of.
20:01
Speaker 1: So at the end of every season, teams in the
20:03
Speaker 1: division are ranked by their results and the best show
20:06
Speaker 1: go up to the next division and the bottom shoes
20:09
Speaker 1: go down. So it's terrified. So you know, the pip
20:14
Speaker 1: in football is not just about winning the division. It's
20:17
Speaker 1: about being in the top top few, so you get
20:20
Speaker 1: promoted and avoiding being in the bottom shows so you
20:23
Speaker 1: get relegated. And getting relegated has a massive emotional impact
20:29
Speaker 1: as well as a financial impact. And you know, as
20:32
Speaker 1: as we know, losses, losses count more than gains, so
20:36
Speaker 1: in some ways the fear of relegation is greater than
20:38
Speaker 1: being glory associated with getting promoted. But it's a terrifying system.
20:43
Speaker 1: But the impact is that it makes almost every game meaningful.
20:47
Speaker 1: Loss of version applies not just to investors but the
20:50
Speaker 1: football clubs. That's that's quite fascinating. So in the US
20:54
Speaker 1: there were complaints that you know, the perennial favorites for
20:57
Speaker 1: a long time, the Dallas Cowboy Ways in football, the
21:01
Speaker 1: New York Yankees in baseball. It was the teams that
21:04
Speaker 1: spent the most money. And even with the salary cap,
21:09
Speaker 1: the big market teams had an advantage because they could
21:13
Speaker 1: attract players that potentially would earn all these marketing um
21:18
Speaker 1: and advertising endorsements. You're more likely to get that in
21:22
Speaker 1: New York or l A than you are and let's
21:24
Speaker 1: say Cleveland. How important is finances to the success of
21:30
Speaker 1: a team and is there any limitation on what the
21:32
Speaker 1: teams can spend other than how much their owners are
21:35
Speaker 1: willing to write checks for. There are limitations, but they
21:39
Speaker 1: can be got around by owners willing to write checks.
21:42
Speaker 1: So we have financial fair play rules, but they're not
21:45
Speaker 1: terribly effectively enforced, and financial fragility of clubs in the
21:50
Speaker 1: lower divisions is quite a feature of the last twenty years,
21:53
Speaker 1: many have gone bankrupts, including my own eleven years ago,
21:56
Speaker 1: almost went went out of business. So it's a very
22:00
Speaker 1: interesting question about the role of money in success though,
22:03
Speaker 1: And here's where it's like investing. You know, I mentioned
22:06
Speaker 1: that there's a lot of behavioral finance that's relevant to
22:09
Speaker 1: managing a football club, in particular when it comes to
22:13
Speaker 1: getting players. So what's clear And this sounds obvious, but
22:17
Speaker 1: it's not immediately obvious because football is a game like investing,
22:22
Speaker 1: where short term outcomes results for combination of luck and skill.
22:26
Speaker 1: But it's pretty clear that over a long long period,
22:31
Speaker 1: skill dominates luck and the most skillful players generate the
22:35
Speaker 1: best results. Also, it's a reasonably efficient market, and the
22:39
Speaker 1: most skillful players tend to cost the most, but it's
22:44
Speaker 1: not at the edge it's a completely inefficient market. And
22:48
Speaker 1: there are all sorts of things that you'd recognize from
22:51
Speaker 1: the field of behavioral finance, where people make errors in
22:55
Speaker 1: over over paying for players. So people associate good players.
23:00
Speaker 1: There's repleentative touristic people associated good players with good clubs.
23:04
Speaker 1: They assume that he's good players, he's played for a
23:07
Speaker 1: successful team, and they assume that he's a bad player
23:10
Speaker 1: if he's played for an unsuccessful team. So a player
23:16
Speaker 1: of equal ability who played for a top team will
23:20
Speaker 1: be more expensive than one who pays plays for a
23:24
Speaker 1: bottom team. So similarly, people will extrapolate it's astonishing how
23:29
Speaker 1: often a guy will come out and score an unusual
23:33
Speaker 1: number of goals for for his long term record, and
23:36
Speaker 1: then we'll get traded following, which he means reverts and
23:40
Speaker 1: that you know, the price that was paid looks to
23:42
Speaker 1: be irrelevant. So when we're thinking about managing Plymouth Harker,
23:46
Speaker 1: we're thinking very very hard about these inefficiencies in the
23:48
Speaker 1: market and how we can best use our resources. So
23:52
Speaker 1: I think that there is a role for thinking about
23:55
Speaker 1: market inefficiencies, thinking about how those inefficiencies are created by
23:59
Speaker 1: youth and behavior, and then exploiting them so that you
24:02
Speaker 1: can outperform essentially your financial resources. So is there any
24:07
Speaker 1: sort of moneyball for football yet? For for soccer? Have
24:11
Speaker 1: people come up with different ways to quantify the performance
24:16
Speaker 1: of players that perhaps are non standard and provide an
24:21
Speaker 1: edge until everyone else figures it out? To me, the
24:24
Speaker 1: moneyball for soccer is moneyball. You know, the lessons in
24:27
Speaker 1: moneyball are applicable, not just too investing. It was a
24:30
Speaker 1: book that we sent to our clients. But also also
24:34
Speaker 1: in football, and there's been a progression in the use
24:37
Speaker 1: of data analytics from baseball to basketball, where they said
24:41
Speaker 1: it could never happen, it's now kind of beginning to
24:43
Speaker 1: creep into hockey and American football the NFL. So it's
24:48
Speaker 1: it's at the very beginning stages of being used in
24:52
Speaker 1: um in soccer. And it's very very interesting to me
24:57
Speaker 1: that the two clubs that are most associated in England
25:00
Speaker 1: anyway with the use of data analytics are one very small,
25:05
Speaker 1: low budget club called Brentford, which actually in a couple
25:09
Speaker 1: of hours will know whether it's been promoted from the
25:13
Speaker 1: second tier to the Premier League, which is owned by
25:17
Speaker 1: a hedge fund manager who made his money out of
25:19
Speaker 1: sports betting, and he basically gathered data on soccer matches
25:24
Speaker 1: throughout the world and was able to assess the odds
25:28
Speaker 1: of team may beating Team B and best on it. Accordingly,
25:31
Speaker 1: so he bought Brentford and has used data analytics essentially
25:36
Speaker 1: for recruiting in the way that I was describing previously,
25:39
Speaker 1: very very effectively. At the other end of the scale,
25:42
Speaker 1: Liverpool Football Club, who at the moment are as they
25:44
Speaker 1: like to say, Champions of Everything are owned by John
25:48
Speaker 1: Henry from New England Sports Group, which is also the
25:50
Speaker 1: owner of the And there's the link straight back to
25:57
Speaker 1: Moneyball with c O Stein, you know, being Billy beings
26:03
Speaker 1: number two at the Oakland Days. So the moneyball effect,
26:06
Speaker 1: I mean people refer to the moneyball effect on football.
26:09
Speaker 1: But again what's fascinating is that it's just like as
26:12
Speaker 1: described in Moneyball, and just as I described in the
26:17
Speaker 1: changes in our investment process Harding Lubna. The use of
26:21
Speaker 1: data analytics is a way of becoming more objective in
26:24
Speaker 1: assessing players and overcoming biases in the same way that
26:29
Speaker 1: the use of objective data is a way of assessing
26:32
Speaker 1: let's saying, corporate management and overcoming your biases. But the people,
26:36
Speaker 1: the practitioners resisted, And just as Billy being described with
26:41
Speaker 1: the scouts, I've experienced with my colleagues Harding Luvna, and
26:46
Speaker 1: I'm now experiencing with football people at FORMATAGA. We don't
26:52
Speaker 1: know about these things, but actually turning them into process
26:55
Speaker 1: and applying them. Richard Sailor Michael Momson was telling me
26:59
Speaker 1: that Richards say Learn was observing at a Sports Analytic
27:02
Speaker 1: Conference recently that that everybody knew that three points is
27:08
Speaker 1: more than two points in basketball, and everybody can calculate
27:12
Speaker 1: your success rate. Yet it took the Golden State Warriors,
27:16
Speaker 1: i'd believe, to start shooting three points. You know, Larry
27:19
Speaker 1: Bird would concentrate on two points, whereas he could have
27:23
Speaker 1: increased the results for the Boston Celtics if you take
27:26
Speaker 1: a more more three point shots. So turning what we
27:30
Speaker 1: know into practice is your key competitive advantage, in my view,
27:35
Speaker 1: is not the knowledge itself. And again at our go
27:38
Speaker 1: as I'd like to say, one of the things that
27:40
Speaker 1: I think it will help us is that we have
27:43
Speaker 1: a football management team that's young, it's fairly in experience,
27:47
Speaker 1: it's very very willing to learn, so they are fully
27:50
Speaker 1: prepared to embrace data analytics in helping them recruit players.
27:55
Speaker 1: I have one last soccer question for you, and it's
27:59
Speaker 1: about Theater of the Greens, the park where the Argyles play,
28:04
Speaker 1: destroyed in World War Two by German bombers during the Blitz.
28:10
Speaker 1: How closely located is the current stadium to where the
28:15
Speaker 1: original I think it was late nineteenth century stadium was erected.
28:21
Speaker 1: It's on the same site we're we've been at home
28:25
Speaker 1: park Um since nineteen Actually, Plymouth is a naval port
28:31
Speaker 1: and Plymouth and Portsmouth are the two big naval ports
28:34
Speaker 1: on the south coast of Britain. So Plymouth was completely
28:37
Speaker 1: destroyed during the war. You know, it's very heavily bombed.
28:40
Speaker 1: And the the Argur Stadium is only a couple of
28:43
Speaker 1: miles from the city center. In fact, it's on a
28:45
Speaker 1: hill in the park and if you look out you
28:47
Speaker 1: can see the what's called Plymouth Sound, which is where
28:51
Speaker 1: the ships live. So actually it's quite funny in a
28:54
Speaker 1: not particularly funny way. We've just completely refurbished our very
28:59
Speaker 1: his or at Grandstand, which dated from the early fifties
29:03
Speaker 1: and was getting very dilapidated. And when we were doing that,
29:06
Speaker 1: one of our warriors was that we would do unexploded bombs.
29:10
Speaker 1: Luckily we didn't. Wow, that's quite amazing. Let's talk a
29:14
Speaker 1: little bit about your process. I read in an interview
29:18
Speaker 1: you did some years ago, I think it was with
29:20
Speaker 1: Kate Welling that you were quote relentlessly bottoms up. What
29:25
Speaker 1: does that mean? Relentlessly bottom up? And is that a
29:29
Speaker 1: way for investors to get better than market returns? Well,
29:34
Speaker 1: we think. So by relentlessly bottoms up, I mean that
29:37
Speaker 1: we don't allow beliefs and our forecasts or other people's
29:41
Speaker 1: forecasts about the macro economic environment to effect stop selection
29:45
Speaker 1: or portfolio construction. So, as I said before, we do
29:49
Speaker 1: let it. We do think about the macro economic environment
29:52
Speaker 1: and how we should expect our portfolios to behave in
29:56
Speaker 1: certain regimes. But our core belief is that I focusing
30:00
Speaker 1: on high quality companies that can grow their own ins
30:03
Speaker 1: over long periods of time, and paying attention to the
30:06
Speaker 1: price you pay for them, you're going to generate reasonable
30:09
Speaker 1: returns that have a good probability of being in a
30:11
Speaker 1: set of the market if you can control poor investing behavior.
30:16
Speaker 1: We believe that there's a difference between price and value,
30:19
Speaker 1: and that price converges on value over time, but that
30:22
Speaker 1: that convergence is at an unpredictable pace. We also believe
30:27
Speaker 1: that it's important to assess value, but that it's very,
30:31
Speaker 1: very difficult. We all know that the value of security
30:35
Speaker 1: is the discounting present value of the cashalists associated, where
30:39
Speaker 1: the appropriate rate for discounting as some combination of risk
30:43
Speaker 1: free rate and equity wrist premium. But we don't really
30:46
Speaker 1: know what the proper rest free rate is, or what
30:48
Speaker 1: the proper equity risk premium is. Let alone can we
30:52
Speaker 1: accurately forecast cash flows. So assessing value is very, very difficult,
30:57
Speaker 1: but we think we have to do it. Always reminds
31:00
Speaker 1: me of that line from ken Arrow about his weather
31:02
Speaker 1: forecast during World War Two when he told the general
31:05
Speaker 1: his weather forecasts were useless and he should ignore them,
31:09
Speaker 1: and the general staff told ken Arrow that the general
31:13
Speaker 1: knew that his forecasts were useless, but he needed them
31:16
Speaker 1: for planning purposes. So, you know, we recognize that our
31:20
Speaker 1: valuations are inaccurate, but we need them. And our essential
31:24
Speaker 1: belief is that if you get the valuation wrong and
31:26
Speaker 1: therefore the price you pay for a company is too high,
31:30
Speaker 1: that growth will fail you out and give you a
31:32
Speaker 1: return over a long holding period. So that that's why
31:35
Speaker 1: we want growth, That's why that's how we think about value.
31:39
Speaker 1: And then quality for us is partly a function of
31:42
Speaker 1: our personalities. We tend to be rather conservative risk reverse people,
31:48
Speaker 1: and you know, we recognize that if a return is
31:51
Speaker 1: minus a d percent in any series, then your long
31:54
Speaker 1: term return is going to be zero. So for us,
31:57
Speaker 1: high quality means you know something about high margins. It
32:01
Speaker 1: also means about ability to send those margins. It means
32:04
Speaker 1: something about management and corporate governance, as we've discussed, But essentially,
32:09
Speaker 1: it means that the riskiness in a company is relatively
32:12
Speaker 1: low and we're not going to get scared out of
32:15
Speaker 1: setting it at the wrong time. What we didn't recognize
32:19
Speaker 1: thirty years ago when the firm started was that quality
32:22
Speaker 1: was a factor that was going to be recognized by
32:25
Speaker 1: the academics as a permanent or allegedly permanent source of return.
32:29
Speaker 1: We just thought it was something that appealed to us
32:31
Speaker 1: and would help us generate the returns that we needed
32:34
Speaker 1: for our clients. So you guys were farmer French before
32:37
Speaker 1: farmer French discovered quality. That's that's kind of interesting. Let's
32:41
Speaker 1: stick with the topic of growth. How do you define
32:45
Speaker 1: sustainable growth and how can you identify that in advance.
32:49
Speaker 1: It's easy to say, you look at how much Amazon
32:52
Speaker 1: and Google have grown their earnings for the past twenty years,
32:56
Speaker 1: but how do you do that in two thousand and
32:58
Speaker 1: two or two thousand and ten looking out a couple
33:02
Speaker 1: of decades. Well, we didn't, you know. Now, we we
33:06
Speaker 1: invest on the kind of spectrum from value to growth.
33:11
Speaker 1: And at one end of the spectrum, deep value is
33:14
Speaker 1: buying companies, you know, the kind of Ben Graham security
33:17
Speaker 1: analysis way where you're getting you know, you're paying pennies
33:20
Speaker 1: in the pound or cents in the dollar for assets.
33:24
Speaker 1: And at the other end, high growth is where a
33:26
Speaker 1: company goes public with just a great idea. For us,
33:31
Speaker 1: growth is the mixture of quality and growth is neither
33:34
Speaker 1: at the extreme of one end nor at the extreme
33:37
Speaker 1: of the growth end. So we do own the companies
33:40
Speaker 1: such as Amazon which don't have earnings, but they have
33:42
Speaker 1: massive cash flows, but we haven't earned it for twenty years.
33:45
Speaker 1: I think we've earned it for several years, but not
33:48
Speaker 1: not several decades. So no, if companies just have a
33:51
Speaker 1: bright idea, we're not going to be able to forecast
33:54
Speaker 1: and we're going to say they're not going to meet
33:55
Speaker 1: our financial strength criterion, where financial strength doesn't just mean
34:00
Speaker 1: low leverage, but it means having access to capital in
34:04
Speaker 1: a way that sustained. And we look upon bank capital
34:07
Speaker 1: as being rather volatile. Let's say, you know, there's the
34:10
Speaker 1: old story about a bank, bank or something who lends you,
34:13
Speaker 1: lends you an umbrella when the sunshine takes it away
34:15
Speaker 1: when it starts to rain. I think there's an element
34:17
Speaker 1: of truth in there. So we like companies that are
34:21
Speaker 1: relatively that have financial strength of generating their own cash flow,
34:26
Speaker 1: or at least have sufficient reserves to tide them over
34:29
Speaker 1: the time when they're going to be generating cash flows.
34:31
Speaker 1: But look, this is we So we tend not to
34:34
Speaker 1: try to identify the massively fast growing companies, but to
34:39
Speaker 1: generate high returns, and to generate the type of returns
34:42
Speaker 1: we've we've generated over three decades. You don't need to
34:47
Speaker 1: have port photos that are exclusively in those kinds of
34:50
Speaker 1: companies that they've been very fashionable over the last two
34:53
Speaker 1: years and particularly over the last three or four months.
34:57
Speaker 1: But the classic company for us is I always say
35:01
Speaker 1: in Nest Late. We've owned nest Late for thirty years.
35:04
Speaker 1: It never um very rarely grows earnings in more than
35:10
Speaker 1: fifteen He usually grows earnings at seven or eight percent um.
35:15
Speaker 1: It reinvests its cash flows in the thirty years. Annual
35:19
Speaker 1: thirty years, the annualized returns on Nest Late are about,
35:23
Speaker 1: you know, massively more than our portfolios, by the way,
35:27
Speaker 1: and much more than the market. So it's that ability
35:31
Speaker 1: to compound reasonable growth over long periods of time that
35:36
Speaker 1: never gets dramatically over priced in the market. And it's
35:40
Speaker 1: really where the core of our returns have been. And
35:43
Speaker 1: again it comes back to behavior behavioral issues. One of
35:47
Speaker 1: our clients asked one of my colleagues once why we
35:51
Speaker 1: should pay us an investment teed for thirty years to
35:54
Speaker 1: just sit on nest late and my my colleagues answer
35:57
Speaker 1: was what you wouldn't have done. And I think that
36:00
Speaker 1: restraint in behavior whenever he's yelling at you to trade,
36:04
Speaker 1: trade trade has been a key to our success. Our
36:07
Speaker 1: holding period is over five years and that's consistent across
36:11
Speaker 1: all our strategies. You know. So for us, successful investing
36:15
Speaker 1: is Charlie Mander said, it is a matter of finding
36:18
Speaker 1: a bunch of good companies and sitting on your behind
36:22
Speaker 1: trouble as most people can't sit on there behind for
36:24
Speaker 1: so long. Yeah, to say the very least. So let's
36:27
Speaker 1: talk a little bit about the current macro environments, which
36:30
Speaker 1: is somewhat unique in in at least the past centuries
36:35
Speaker 1: investing history. I guess you have to go back to
36:38
Speaker 1: to find something similar. How do you look at the
36:42
Speaker 1: pandemic the lockdown, how well certain countries like South Korea
36:48
Speaker 1: or Japan or Germany have managed it, and how poorly
36:52
Speaker 1: certain countries like the US or Brazil have been managing it.
36:56
Speaker 1: Does that impact where you think about putting capital or
37:00
Speaker 1: the type of companies you might want to investment in
37:04
Speaker 1: m in the short term. When the pandemic hit and
37:06
Speaker 1: it looked like we were possibly going to be tasting
37:08
Speaker 1: our depression, we did do a kind of relook at
37:12
Speaker 1: all the companies in our portfolio to make sure that
37:15
Speaker 1: they had the financial strength, just to double check that
37:17
Speaker 1: they had the financial strength to withstand a period of
37:21
Speaker 1: let's say two years of zero positive cashlows, so that
37:26
Speaker 1: that was one immediate impact. In the longer term, I
37:30
Speaker 1: guess for us, the issue is about valuation and how
37:34
Speaker 1: we should think about interest rates approaching the zero bound.
37:38
Speaker 1: You know, as I mentioned, we do care about price,
37:40
Speaker 1: We do calculate value, and interest rates that are closed
37:44
Speaker 1: to zero do very strange things for value, particularly, do
37:47
Speaker 1: strange things for the value of growth of growth stops.
37:51
Speaker 1: And I think that part of the justification for what
37:54
Speaker 1: we've seen happened in market since the pandemic really took
37:58
Speaker 1: hold has been about you know, the revaluation of cash
38:01
Speaker 1: flows that many many years into the future. But you know,
38:04
Speaker 1: you know perfectly well and your listeners will understand the
38:08
Speaker 1: base of the arithmetic that when interest rates to zero,
38:10
Speaker 1: you're indifferent between a cash flow pash flow now and
38:14
Speaker 1: a cash flow in the future. The difference, of course,
38:17
Speaker 1: is in riskiness. The actual value if you can if
38:20
Speaker 1: you can poecast it will be will be the same.
38:22
Speaker 1: So we we've seen this massive revaluation of growth stops.
38:26
Speaker 1: So I had to say, I think that to some extent,
38:29
Speaker 1: that's the post hoc narrative that's woven around um you
38:34
Speaker 1: know what what In many ways ways there's aroundomness. You know,
38:37
Speaker 1: we're extraordinarily good producing stories to explain something that's already happened.
38:42
Speaker 1: Yet those same stories that tend to have no predicted value. So,
38:46
Speaker 1: you know, I thought it was interesting as we think
38:49
Speaker 1: about the value of growth stops and the relationship between
38:52
Speaker 1: price and value. Paper that I think hu R came
38:55
Speaker 1: out with a month or so ago looking at the
38:57
Speaker 1: influence of interest rates on the whole value growth dichotomy,
39:03
Speaker 1: and they found that value stops did not respond to
39:06
Speaker 1: higher interest rates. As we all fear so you know,
39:09
Speaker 1: we are thinking about the current economic environment, we're thinking
39:12
Speaker 1: about the impact with the pandemic, but we are apart
39:16
Speaker 1: from no just checking our belts embraces, we haven't taken
39:20
Speaker 1: any action. Quite fascinating. So looking at value, looking at
39:24
Speaker 1: international over the past decade, this is both before the
39:29
Speaker 1: pandemic and in the recovery since the markets bottomed in
39:33
Speaker 1: at the end of the first quarter, value has been
39:36
Speaker 1: getting trounched by growth. Growth is the big winner, and
39:40
Speaker 1: the US has more or lessment beating not only emerging
39:44
Speaker 1: markets but developed x US. Do you see that continuing?
39:50
Speaker 1: What what is more likely to reverse the past decade?
39:54
Speaker 1: Growth beating value or the US beating international. Well, we're
39:57
Speaker 1: you know, we're global, we're global investors, and we're global
40:00
Speaker 1: growth investors. So I want growth to out the form
40:03
Speaker 1: and I want the world to do at least well
40:05
Speaker 1: relative to the US. So I'm hopelessly biased, and I
40:09
Speaker 1: must say that over my now forty year career, my
40:12
Speaker 1: biggest flaw that I recognized quite early but didn't understand
40:15
Speaker 1: what the reasons. My biggest flaw is that, um yeah,
40:20
Speaker 1: I'm very optimistic about the future, but I'm very pessimistic
40:23
Speaker 1: about that the current and we know we now know
40:27
Speaker 1: from the kind of behavior or evolutionists. Why why Why
40:30
Speaker 1: that is that all of us are risk averse about
40:33
Speaker 1: the present and risk takes about the future. So again
40:40
Speaker 1: I find the ability to time these things zero. So
40:44
Speaker 1: my my guts tell me, and I have very little
40:48
Speaker 1: confidence in my guts to be worn, is that the
40:51
Speaker 1: rest of the world will turn around relative to the
40:53
Speaker 1: US before growth turns around relatives to value. And the
40:57
Speaker 1: reason is that I do think that the value grow
41:00
Speaker 1: of things at least something to do with the economic
41:02
Speaker 1: cycle and interest rates, and I think that the economic
41:05
Speaker 1: cycle is poor. I think that for obvious reasons, and
41:08
Speaker 1: I think that interest rates is going to stay lower
41:11
Speaker 1: for longer, which is, by the way, it's something that
41:12
Speaker 1: we've believed without too much conviction since the financial crisis.
41:18
Speaker 1: So you know, once again, the pandemic is revealed as
41:21
Speaker 1: continuing or accelerating trends that were already in place, which
41:25
Speaker 1: is an interesting issue when it comes to the rest
41:28
Speaker 1: of the world versus the US. I think one of
41:30
Speaker 1: the issues that the US has had, of the U
41:32
Speaker 1: S stock market or publicly traded stock market has had,
41:36
Speaker 1: is that many of the world's great growth companies are Americans,
41:39
Speaker 1: and increasingly they're they're what's driven overall market aggregates. So
41:43
Speaker 1: it's important to note that things like American small caps
41:46
Speaker 1: have also done pretty well over the last few years.
41:50
Speaker 1: So I think what we're going to see is that
41:54
Speaker 1: the broad market in the US will underperform the broad
41:57
Speaker 1: market outside the US, but that we may well continue
42:00
Speaker 1: to see the dominance and some of these big market
42:03
Speaker 1: cap cap names. But I have to say at some point,
42:07
Speaker 1: it's just a gut field that you know, it's been
42:09
Speaker 1: down so long it feels like up to me. So
42:13
Speaker 1: let me ask you a quick question about emerging markets.
42:17
Speaker 1: When you first started e M was a lot of
42:20
Speaker 1: materials and energy. Today that's transition to consumer brands and
42:25
Speaker 1: big Chinese technology companies. Talk about this transition a little
42:30
Speaker 1: bit and tell us what it might mean for investors
42:33
Speaker 1: going forward. I think it's for investors, it's a little
42:39
Speaker 1: bit dangerous, and it's something that we're worrying about at
42:41
Speaker 1: the moment and trying to formulate policies. You know, the
42:46
Speaker 1: the If you want to diversified global emerging market portfolio,
42:51
Speaker 1: you have to be careful at this stage because Chinese
42:54
Speaker 1: stocks dominate the market benchmarks, and the direction is that
42:58
Speaker 1: they're going to come to dominate it even more. So
43:00
Speaker 1: we're already at over and it looks like we're headed
43:04
Speaker 1: to towards sixties six five maybe even as the Chinese
43:09
Speaker 1: market that is available to foreigners invests in the benchmarks
43:13
Speaker 1: continues to broaden and deepen. So I think that for
43:17
Speaker 1: investors you have to be very careful about, you know,
43:21
Speaker 1: how you consider a diversified emerging market exposure. We're very
43:25
Speaker 1: much at the stage that we were at in Japan
43:29
Speaker 1: in the late eighties, where Japan dominated the non US
43:33
Speaker 1: bench marks. At one point, the Japanese market was six
43:36
Speaker 1: of six five percent. I think of the non US
43:40
Speaker 1: equity in debt and of the Japanese market, about a
43:43
Speaker 1: quarter was Japanese banks, which were poorly managed and trading
43:47
Speaker 1: at fifteen times book value. So a diversified exposure to
43:52
Speaker 1: non US markets was a very risky one. You know,
43:55
Speaker 1: I think that there are parallels with the dominance of
43:58
Speaker 1: China in the emerging market benchmarks, but they're not you know,
44:03
Speaker 1: his history, Rymes, it doesn't it doesn't repeat itself. One
44:06
Speaker 1: difference is that Chinese stops are not dramatically over priced
44:09
Speaker 1: as they were in Japan in the late So you know,
44:16
Speaker 1: a lot of what's happened in China for China to
44:19
Speaker 1: become such a large part of the benchmark hasn't been
44:21
Speaker 1: through price rising crisis rising. It's been through you more
44:26
Speaker 1: opportunities for investors, and that that's actually something that we've
44:29
Speaker 1: tried to take advantage of our hard in Luve America
44:31
Speaker 1: last two years. So I think that transition is important
44:34
Speaker 1: for investors when they're thinking about the riskiness of global
44:37
Speaker 1: emerging markets. What what that transition actually means for emerging
44:41
Speaker 1: markets is a much more difficult question, I think, And
44:44
Speaker 1: I just note that, you know, back in the early eighties,
44:47
Speaker 1: when I started investing in emerging markets before they were
44:50
Speaker 1: actually called emerging markets, you're looking at companies like Malaysia,
44:54
Speaker 1: the Philippines by the late eighties, Indonesia, but outside of
44:58
Speaker 1: Southeast Asia, it was South Africa, and you were just
45:01
Speaker 1: beginning to invest in a couple of Latin American countries,
45:06
Speaker 1: and we all thought of emerging markets as being warrants
45:09
Speaker 1: on the West. You know that if U s GDP
45:11
Speaker 1: grew a little bit more than expected, emerging markets would
45:14
Speaker 1: sort and obviously it was resources and resource consumptions that
45:19
Speaker 1: was the the common thread that tied the two together.
45:24
Speaker 1: We hoped in the two thousands that the rise of
45:28
Speaker 1: the emerging market middle class would mean that emerging markets
45:31
Speaker 1: would be less solitile, that they'd be less financially leveraged,
45:36
Speaker 1: and that the rise of spending of the expense of
45:40
Speaker 1: consumption would be helpful in broadening exposure to non non commodities.
45:48
Speaker 1: But that was all turned over with the rise of
45:50
Speaker 1: China and the massively rapid industrialization of China, and instead
45:55
Speaker 1: of the West being the common thread to commodities that
45:57
Speaker 1: drove the emerging markets, it was China. So you know,
46:01
Speaker 1: we haven't really seen the broadening of emerging markets that
46:05
Speaker 1: we'd hoped, we'd hope to see. I think that we
46:08
Speaker 1: are beginning to see it. I think that it will.
46:10
Speaker 1: It is something that's still still on become, but that
46:13
Speaker 1: the rise of China has to some extent masked what's
46:16
Speaker 1: happening elsewhere. But at the moment, you know, with the
46:18
Speaker 1: pandemic coming on, I think that you know, it's going
46:21
Speaker 1: to be a while before we see the good values
46:24
Speaker 1: that the apparent in some of the consumption stops in
46:27
Speaker 1: emerging markets being turned into stock market returns. So I
46:32
Speaker 1: have to get to my speed round questions. But before
46:35
Speaker 1: I do, a quick question. Outside of China, you mentioned Malaysia,
46:41
Speaker 1: What other countries are intriguing, India, Vietnam, Turkey? Does any
46:46
Speaker 1: specific country call out as well? This could be the
46:51
Speaker 1: If China is the new US, what's the new China.
46:57
Speaker 1: I've always thought that it would be Vietnam. You know,
46:59
Speaker 1: I first went to Vietnam to do investment work over
47:02
Speaker 1: twenty years ago, and I've followed it. It's got a
47:05
Speaker 1: large population, it's got a lot of the characteristics of
47:08
Speaker 1: underlying dynamism with a large or largeish internal market. But
47:14
Speaker 1: you know, governance has been an issue, Politics has been
47:16
Speaker 1: an issue. It's very unusual that you get this mixture
47:20
Speaker 1: that you get in China of top down government that
47:25
Speaker 1: where you may hate the politics, you may hate, you know,
47:28
Speaker 1: the lack of individual freedom, but where at the local
47:31
Speaker 1: level the ability to be an entrepreneur generate profits for
47:35
Speaker 1: yourself is really quite intense. I don't think there's anywhere
47:37
Speaker 1: else in the world like it that also has the
47:40
Speaker 1: ability to put the infrastructure that enables you know, economic
47:44
Speaker 1: growth and wealth creation at the same pace. I obviously
47:48
Speaker 1: can't think of another parallel quite quite fascinating. All right,
47:52
Speaker 1: so let's jump to our favorite questions are speed round.
47:55
Speaker 1: These are what we ask all our guests and hopefully
47:57
Speaker 1: it provides a little inside into the the man behind
48:02
Speaker 1: the portfolio. Um, tell us what you're streaming these days?
48:06
Speaker 1: What are you watching on Netflix or Amazon or whatever
48:10
Speaker 1: podcast you might be listening to? What what's keeping you
48:13
Speaker 1: entertained during lockdown? Um? Well, probably enough, the same things
48:18
Speaker 1: that keep me entertained, not during lockdown. I mean, it's
48:20
Speaker 1: a terrible thing to say, but you know, I live
48:23
Speaker 1: in the countryside in Buck's County, Pennsylvania, and I've got
48:27
Speaker 1: a large house, plenty of room for me and my wife.
48:29
Speaker 1: We miss our grandkids, but our life is mostly unchanged,
48:32
Speaker 1: our idea of an exciting times to sit in our
48:34
Speaker 1: arm chairs with our kindles. So but I did miss
48:37
Speaker 1: podcast and actually, in the last couple of weeks, which
48:39
Speaker 1: I used to listen to in the car on the
48:41
Speaker 1: way to it work. So in the last couple of
48:43
Speaker 1: weeks I've started going for an hour's walk every day
48:46
Speaker 1: and my favorite of the new Ones is the second
48:50
Speaker 1: series by Michael Lewis Um where he's from coaching coaching Yes,
48:57
Speaker 1: theories on refereeing. But apart from that, I'm just and too.
49:00
Speaker 1: You know, I listened to this podcast. I listened to
49:03
Speaker 1: Ted Sideyes, I listened to Patrick O'Shaughnessy. I listened to
49:07
Speaker 1: the standard behavioral finance or oriented type financial ones. I
49:14
Speaker 1: also listened to ones about sports, and I'm particularly interested
49:17
Speaker 1: in data analytics and football, so you know that overlap
49:21
Speaker 1: between sports and investment that I find so fascinating. I
49:25
Speaker 1: don't watch very much Netflix, don't watch very much TV.
49:29
Speaker 1: And it's not because I don't like it. I actually
49:31
Speaker 1: love it. I haven't got the self discipline, my attention wonders,
49:34
Speaker 1: and my kids used to get driven mad when I'd say,
49:37
Speaker 1: who's that guy? And they have to explain. I also,
49:41
Speaker 1: that's very funny bias against net Netflix for behavioral reasons.
49:45
Speaker 1: So it's an interesting thing. I used to love the
49:48
Speaker 1: idea of Netflix when you used to get posted DVDs
49:51
Speaker 1: and I was one of these people who, you know,
49:53
Speaker 1: would order my DVDs on a Sunday and I'd order,
49:57
Speaker 1: you know, nineteen sixties Strench movies with subtitles or you know,
50:00
Speaker 1: Japanese directors again with subtitles. But on Friday night, when
50:04
Speaker 1: it came to watching a movie, I wanted to watch
50:06
Speaker 1: Love Actually or some romantic comedy. And again I think
50:11
Speaker 1: you tend to see everything through behavioralized once you know
50:14
Speaker 1: about about this. This is the classic. In the short
50:17
Speaker 1: in the short term we want pats and sugars. That
50:19
Speaker 1: there are long term self once fruits and vegetables. So again,
50:23
Speaker 1: you know, in the in the short terms you want
50:25
Speaker 1: to watch a romantic comedy, your long term stulps says,
50:28
Speaker 1: watch something in intellectual. So I don't have as much Netflix.
50:32
Speaker 1: The only show I've watched in the last month has
50:34
Speaker 1: been something called The Great, which is a kind of
50:36
Speaker 1: rather surreal mixture between kind of dark comedy about Katherine
50:41
Speaker 1: the Great, which I think is on I forget. I
50:45
Speaker 1: think it's on Netflix. Huh. I'll definitely check that out.
50:49
Speaker 1: Tell us about your early mentors, who who influenced the
50:52
Speaker 1: way your career developed, who helped shape your investing philosophy. Well,
50:59
Speaker 1: I don't I don't mean to be I don't need
51:01
Speaker 1: to be dismissive, but the people that I worked with
51:04
Speaker 1: and for in the early stage of my career was
51:07
Speaker 1: during that time when investment management was about individual genius.
51:11
Speaker 1: It was about you know, people being smart, smarter than
51:14
Speaker 1: other people not being you know that you had to
51:16
Speaker 1: know more, you had to speed, be smarter, you had
51:19
Speaker 1: to you know. It wasn't about structure and discipline. So
51:22
Speaker 1: the people that I worked with that really were examples,
51:25
Speaker 1: and they were great people and I enjoyed them very
51:28
Speaker 1: much and they're treated me very very well. But everything
51:31
Speaker 1: I learned from them we've overturned at Harding Lovena. You know,
51:34
Speaker 1: I often say that if you look at anything about
51:37
Speaker 1: one of those firms that I worked at, which were
51:39
Speaker 1: successful firms, we do it the opposite at Harding Loveness.
51:42
Speaker 1: So they were kind of negative mentors, and I don't
51:44
Speaker 1: mean that to be rude about them. So I've very
51:48
Speaker 1: heavily relied on book learning and what what we've learned
51:53
Speaker 1: Hardy Lovena. And my longest standing relationship is with David Lovener,
51:57
Speaker 1: who has been a friend of mine since the eighteen
52:01
Speaker 1: and you know, business partner, close collaborator now for thirty years.
52:05
Speaker 1: So David, David would deny it, but I've learned a
52:08
Speaker 1: lot from David over the years. You mentioned you enjoy
52:12
Speaker 1: sitting in your easy chairs with a kindle in your hand.
52:16
Speaker 1: What what are some of the books you're reading now
52:19
Speaker 1: and what are some of your favorite books? Um? Well,
52:24
Speaker 1: I a lot of my favorite books will have been
52:26
Speaker 1: mentioned on your podcast before. I do need to mention
52:30
Speaker 1: that we are a great debt to Michael Morison. Um.
52:34
Speaker 1: You know I often said that it's remarkable that you
52:36
Speaker 1: can get his complete work for less than fifty bucks
52:38
Speaker 1: and you can learn everything that I've learned in forty
52:41
Speaker 1: years about decision making an investor. I give a shout
52:44
Speaker 1: out to Russaou and Shoemaker their book from two thousand
52:47
Speaker 1: and two. I think Winning Decisions, which I think is
52:50
Speaker 1: one of the best books about decision making and doing
52:53
Speaker 1: research and doesn't get a lot of attention. Um. I
52:56
Speaker 1: read a lot of novels, which is very personal. The
52:59
Speaker 1: best book I've read in the last few years, and
53:01
Speaker 1: probably the best book I've read in my life, was
53:05
Speaker 1: last year when I read Robert Carrow's four volume biography
53:09
Speaker 1: of L. B. J. Which sounds daunting. I think it
53:13
Speaker 1: must be three or four thousand pages in length. I
53:16
Speaker 1: read it on a Kindle, So I can't tell you
53:17
Speaker 1: exactly what it weighs, but it's a superbly written book
53:21
Speaker 1: which with often novelistic like descriptions of, for example, life
53:26
Speaker 1: in the Texas Hill Country in the early part of
53:28
Speaker 1: the twentieth century. But it's much more social and political
53:31
Speaker 1: history of the US in the first half of the
53:34
Speaker 1: twentieth century. It's brilliant on politics, it's brilliant on the
53:38
Speaker 1: political process. It's brilliant on corruption and the corruption of power.
53:44
Speaker 1: But above all, the third volume, Master of the Senate
53:49
Speaker 1: is brilliant on race and on the length that you know,
53:53
Speaker 1: twelve senators from the South went to keep institutionalized racism
53:58
Speaker 1: of the norm. So one book that I'm reading at
54:02
Speaker 1: the moment is actually I've started again and I've just
54:05
Speaker 1: finished the first volume, The Passage to Power. I think
54:10
Speaker 1: everybody should read it's it wasn't particularly topical when I
54:15
Speaker 1: read it, but I think it's topical now and I
54:18
Speaker 1: thoroughly recommend everybody read it. And if you can only
54:20
Speaker 1: bring yourself to read one, read Master of the Senate.
54:23
Speaker 1: And on the subject of institutionalized racism, I think everybody
54:26
Speaker 1: should read Dan Bower's book called American prison, which is
54:31
Speaker 1: so Dan Barrow's journalist who has a political point of view.
54:34
Speaker 1: I think he writes for Mother Jones, but he experienced
54:37
Speaker 1: incarceration in Iran for four years and then um put
54:42
Speaker 1: himself as a prison guard in the American penitentiary system.
54:46
Speaker 1: And the book has this very interesting structure of observations
54:50
Speaker 1: of the prison guard in the American penitentiary system today,
54:55
Speaker 1: and that's appalling, as you can imagine. But every other
54:59
Speaker 1: chapter is history of the penitentiary system, and I think
55:01
Speaker 1: that in itself is fascinating and it gives a lot
55:05
Speaker 1: of explanatory power as to you know, where we are
55:08
Speaker 1: today with mass incarceration in the United States, with incarceration,
55:13
Speaker 1: incarceration being dominated by African Americans. UM, and you know,
55:18
Speaker 1: I find that appalling. And I think that Carrows goes
55:22
Speaker 1: a long way to describing why racism is so institutionalized
55:26
Speaker 1: in this country, and Dan Bowert goes to explaining how
55:30
Speaker 1: it's reflected in our prison system. Quite quite fascinating. What
55:36
Speaker 1: what sort of advice would you give to a recent
55:39
Speaker 1: college graduate who was interested in a career in investment management. Well, firstly,
55:46
Speaker 1: I'd say, don't think that you know what career, what
55:50
Speaker 1: career you are going to be best at or have
55:52
Speaker 1: most fun out when you're a recent college graduate, so
55:56
Speaker 1: you know, give it a tribe, but be prepared to
55:58
Speaker 1: give it up. I think Van Eed or David David
56:01
Speaker 1: in Range talks a lot about about that business, a
56:04
Speaker 1: very good book on coreer planning. But if you are
56:07
Speaker 1: determined to be in investment investment management, I think you
56:10
Speaker 1: have to recognize that it's the industry that is both
56:14
Speaker 1: blessed and cursed. It's blessed by the fact that everything
56:17
Speaker 1: is relevant. So if you're great intellectual curiosity, which I
56:20
Speaker 1: think is necessary but not sufficient for being a good investor,
56:25
Speaker 1: everything is relevant. So you have license to go and
56:28
Speaker 1: find out anything anything you like. And I think that's
56:30
Speaker 1: a wonderful thing. But it's also a curse and that
56:33
Speaker 1: you don't know where to stop. And that's actually one
56:35
Speaker 1: of the lessons of that Rousseau and Shoemaker book, just
56:38
Speaker 1: finding out more. Just as the sake of finding out
56:41
Speaker 1: more makes you feel better about individual decisions, it gives
56:44
Speaker 1: you more confidence, but it doesn't help the accuracy or
56:47
Speaker 1: the validity of that decision. So be careful. But the
56:50
Speaker 1: most advice I can give you that I would give
56:53
Speaker 1: anybody is just stay honest. Don't let anyone compromise your integrity.
56:57
Speaker 1: You know, this is a fabulous industry to be and
57:00
Speaker 1: I've been very, very lucky that it's My career in
57:04
Speaker 1: time has been one where the investment industry was tiny
57:09
Speaker 1: to where it is today where it's huge. So you know,
57:12
Speaker 1: basically all you needed to do was to be sensible
57:15
Speaker 1: and stay honest. And I don't know that the industry
57:17
Speaker 1: is going to grow as much as it's grown over
57:19
Speaker 1: the last fourty years, but I do think it's going
57:22
Speaker 1: to be absolutely crystal just to stay honest and you
57:24
Speaker 1: at least give yourself a good chance of capitalizing on
57:28
Speaker 1: any success you may have. Quite quite fascinating and our
57:32
Speaker 1: final question, what do you know about the world of
57:35
Speaker 1: international investing today that you wish you knew when you
57:39
Speaker 1: were first starting out over three decades ago. The importance
57:45
Speaker 1: to me that the behavior of finance findings and or
57:48
Speaker 1: more generated decision making findings. It's a very very different
57:52
Speaker 1: world of investing today. You know, when when I started,
57:56
Speaker 1: I've had a good education. Um, you know, I was
57:59
Speaker 1: widely and I was kind of curious as a young guy,
58:03
Speaker 1: and I didn't know anything about stocks. Nothing nobody in
58:06
Speaker 1: my family had ever mentioned to stop, nobody had ever
58:08
Speaker 1: owned one. I barely knew how a bank worked. You know,
58:11
Speaker 1: today finances is finances per pervasive throughout the media and throughout,
58:18
Speaker 1: to some extent anyway, the education system. So you know,
58:22
Speaker 1: the world of investing is very, very different, but the
58:24
Speaker 1: world of human beings is very much the same. And
58:26
Speaker 1: I wish I'd known earlier on just how important it
58:29
Speaker 1: was not to be smarter and no more than everybody,
58:32
Speaker 1: but to be able to control your own behavior. But
58:35
Speaker 1: partly I found it fascinating, but also I think it's
58:37
Speaker 1: at the core of why why we've gone from being
58:41
Speaker 1: smart people who knew a lot to being intelligent investors.
58:46
Speaker 1: Huh makes a lot of sense. Thank you, Simon for
58:49
Speaker 1: being so generous with your time. We have been speaking
58:52
Speaker 1: with Simon Howard of Harding Love Nor which manages about
58:56
Speaker 1: seventy three billion dollars. If you enjoy this conversation, well,
59:00
Speaker 1: be sure to go to Apple, iTunes or Spotify, Overcast,
59:05
Speaker 1: stitcher wherever your finder pod are sold, and you can
59:08
Speaker 1: find any of the previous three hundred and fifty such
59:12
Speaker 1: conversations we've had over the past six years. It's it's
59:15
Speaker 1: actually this week is our six year anniversary. We love
59:18
Speaker 1: your comments, feedback and suggestions right to us at m
59:22
Speaker 1: IB podcast at Bloomberg dot net, Go to Apple iTunes,
59:26
Speaker 1: give us a review. Be sure to check out my
59:28
Speaker 1: weekly column on Bloomberg dot com slash Opinion. You can
59:32
Speaker 1: sign up for our daily reads at Rid Halts dot com.
59:36
Speaker 1: Follow me on Twitter at Rid Halts. I would be
59:39
Speaker 1: remiss if I did not thank our crack staff that
59:41
Speaker 1: helps put these conversations together each week. Maroufle is my
59:45
Speaker 1: audio engineer. Michael Boyle is my producer. Attica val Bround
59:51
Speaker 1: is our project manager. Michael Batnick is the head of research.
59:55
Speaker 1: I'm Barry Ritults. You've been listening to Masters in Business
59:59
Speaker 1: on Bloomberg Video