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