Simon Hallett on Investing and Soccer (Podcast)

running money on an international basis for many decades. He is uniquely insightful to discuss how to pick stocks, what the difference between growth and value is, and how to use both in order to identify companies most likely to perform the market. The track record of Harding Lovener's international funds has just trounced the ms c I innchmarked by two hundred and fifty basis points annually over decades. So

this isn't somebody speaking theoretically. They have actually put processes to work that have allowed them to dramatically outperform with no further ado. My conversation with Simon Howett, this is Master's in Business with Barry Ridholts on Bloomberg Radio. My special guest this week is Simon Howett. He is the co chief investment officer at Harding Lovener, a firm that manages about seventy three billion dollars in assets. He is also the majority owner of Plymouth Argyle of football club,

located in the UK. Simon Hallett, Welcome to Masters in Business. Thank you for having me. Very so, let's talk a little bit about your background. You earn your b A at Oxford and then you begin working in the financial services industry in London in the early nineteen eighties. Tell us about that era. It was actually the late seventies. I graduated in nineteen seventy seven and went to work for the Midland Bank, which was then one of the

big four clearing banks in England. UM in the early eighties I moved to investment management financially investing, let's say in Hong Kong. In London, that was an era of high interest rates. We were just coming off to financial crisis and the mid seventies, and when I moved to Hong Kong, we were just beginning in a property collapse. I moved there in nine one and the property market collapsed in ninety. In some of that year, um the

oil price was thirty two. It was about to go fall in half as well, So it was an era really of continuous crisis as far as far as I was concerned. Hong Kong in the nineteen eighties, that had to be a house a fire though, because Hong Kong was really ramping up there with a gateway to Asia, not just Japan, but China and a lot of the rest of it. What was your experiences like in Hong Kong. Well, it was the first time I've traveled anywhere other than

to France, so everything about it was tremendously exciting. As you say, it was a great time to be in Hong Kong. It was a few years before the reservation began to open up, but Hong Kong itself had just had a massive expansion in population as a result of immigration from China after the misery of England in the nineteen seventies. It was just amazing to be surrounded by people who often lived in great poverty, having just arrived from China, but being left to their own devices to

better their lives, almost always successfully. So you know, all the cliches about Hong Kong about it's you know that it's a culture of independence, it's a culture of trying hard to personal success were true, and I just found it tremendously exciting. So what do you make of what's been going on with Hong Kong the past few years, not only since the handover from UK, but increasingly aggressive

Beijing policy towards Tanka. I find it horrifying. You know, Hong Kong was very much left to its own devices. I thought that the sign a British Joint Declaration in the mid was going to be a treaty that guaranteed the independence of Hong Kong. Clearly that's being overcome, and I think it's not going to be good for Hong Kong is a place, and I worry about the future of the people that I know who are still there and the rest of the population. I don't think it's

going to be healthy for for Hong Kong. Quite interesting, So let's talk a little bit about your investing style. You're essentially your bottoms up fundamental stock picker. Since we're talking about the macro landscape, do you ignore what's going on in the background, Does it not enter the calculus or does that force you to modify the sectors and companies you're considering. No, we try very hard to ignore it.

We're investment people, so you know, we're kind of curious about the world, and we're opinionates, so we have opinions about the macroeconomic environment, but we tried very hard not to let it influence our portfolios. I actually like to quite something that you wrote four or five years ago, when you're asked about the economy and what you think you know, I think you your basic answer is, you know, why would you ask me, why do you think that my forecasts have any value? And why do you think

forecasts themselves have any value? And that's pretty much the view that we take. You know, the academic studies suggest there's very little correlation between let's say GDP and stock

market returns. I think it's interesting to discuss, you know, why there's little covariance between GDP growth and stock market returns, but in fact this there's not um Secondly, you can't forecast GDP, so it distresses me that the financial services industry devote so many resources to try and make forecast that it inaccurate and have no bearing upon as cust customers returns. So you know, I look upon macro economic forecasting as damaging too good investment returns. So no, we don't,

we don't, We don't bother with them at all. Having said that, we do think about them a little bit and thinking about expectations for how we should expect our portfolios to perform. So, you know, a good example what would be after the financial crisis, where you know, our expectations to the economy, such as they were, were that it was based upon Reinhardt and Rogoff. We thought it would be a long, hard slog to recover fully from

the financial crisis. We thought that, knowing a bit about people's psychology, that they'd start the year optimistic, they end the year pessimistic, and that that would lead to more market volatility. But we thought it would be a good environment for our kind of investing in high quality, long

duration growth companies, and we were We were right about that. Interestingly, we were comply wrong with our forecast of stock market volatility, and we're actually right with relying on the Reinhardt Rockoff forecast of the macro economy. So it's quite ironic that the thing that you know, we think we can't forecast at tour was the one we actually got right. I recall, I want to say it was December of oh seven that ran Hardt and Rogu came out with a short

white paper that looked at five previous financial crises. Now, remember the market peaked in oh seven. To come out with something like that in two thousand and seven was um was way way ahead of its time, and that white paper not only was prescient, it became the basis of eight hundred years of this time. It's different. They really had a handle on what financial crises due to stocks and economies. Did their research really influence how you look at at the recovery from a financial crisis like

OH eight or nine? Absolutely, I mean that view, but it would be a long, hard slog. Was entirely based upon their work, and I have to say that this is something that I look upon as typical of my entire career. I've been very open about things. We have relied very heavily on other people's work, on other people's

academic work informing our own views. Um. You know, I always say that I haven't had an original sort in my entire career, but I've been very very good at identifying useful thoughts from other people and implementing them in investing. Rein hot Rogoff was was a classic case. You know, we read the book, book became popular, it was available for fifteen bucks on Amazon, and it helped us with our expectations and our client communications for a decade. People

underestimate the power of the written word. I think it depend is mightier than the swords, and it's certainly true in the world of finance. And I think there's this relentless pursuit of originality. We all feel the pressure to be original, to be original thinkers, and I don't think it's necessary. I think, you know, there's so much good advice about how to behave how to invest out there, and what's what's the key to success in investing is taking that advice and are using it for the benefit

of your clients. I couldn't possibly agree more. Let's talk a little bit about the track record that Hardy Lovener has put together. The Global Equity portfolio since inception has outperformed ms CI by two d and fifty basis points annually. That's pretty interesting. Is this still the same methodology or philosophy that was used when you joined the firm back in what was um. The philosophy has not changed, but

the methods of the investment process has a lot. Our investment process today is much more structured, it's much more disciplined. We're much more objective about how we define the characteristics of the companies we followed, and the result has been a gradual shrinking of the freedom that portfolio manager has. I think that's one of the interesting things about the lessons from behavioral finance. What we've learned is that people need to control their behavior, but they find it difficult

to do so. So one of my roles as co chief investment Officer and previously chief equity officer has been that I've had to set out the rules and then make sure we stick to them. Of course, that's going against the financial services culture that a portfolio manager is the top dog in an investment process, and people don't

like having their freedom restricted. So the methodology has changed, and it's been a methodology that has been disciplined, it's been objective, and it's been reducing the autonomy of individuals. But the philosophy has been constant that we will focus exclusively on long duration, growth growth companies, and pay attention to the price at which there stops trade. So so

let's talk a little bit about the methodology. Your firm references four qualities for a company to be a potential portfolio holding, competitive advantage, quality management, financial strength, and sustainable growth. How do you quantify these? Some of them are kind of squishy, like like quality management. How do you determine who's a quality manager or not? And is that a subjective, squishy rating or do you come up with a way

to make it much more quantifiable. Yeah, the the squishi is that these four criteria isn't doubtedly the one that assess his management. And again, you know, thinking about how the process has changed over the last thirty years, we used to think we knew quality management when we saw it, and often that simply meant meant that we've met them and we like them. And you know, there's very little correlation between whether we like people and whether they're good

managers of corporations on behalf of their shareholders. So you know, we are today much more active in how we assess management. And just to give a little bit of detail on that particular one, we quite early on started using cash flow return on investment based on the work of people like Michael Mobson, not just to value companies, but to assess assess the abilities of management, not just to generate

free cash flow, about how they allocate it. We actually used to hold valuation system with some adjustments for our own beliefs, but we can use that to look at, for example, how management allocates capital, and for us that that's a very very important way of looking objectively at their track record. I think when you're investing for the long term in quality growth companies, obviously a lot of the value is in the future cash flows, but the past has to be some guide. You have to believe

that the past is some guide to the future. So a good track record is something that we like to see and we will use that to assess management. The other aspect of high quality management for US is corporate governance, which is essentially how those high returns on capital end up with shareholders. Are they retained in the company, are they paid out as dividends, are they distributed via buybacks, or are they used to further the interests of other stakeholders,

most noticeably, of course, the executives of the company. So corporate governance for us again is more than just a matter of sticking a finger in the air making a judgment. It's we have a series of checklists which have identified the factors that we think we are important in assessing overall levels of corporate governance. And I'm not going to pretend that all the companies in which we invest are perfect. One of the checklists, for example, asked questions about um

record of integrity, and they will be exclusionary. So if companies don't need a minimum standards, we won't. We won't, we won't follow them. So we have got more disciplined, we have got more structures, and I think when it

comes to allocating capital, we've got much more objective. But I will say that when it comes to assessing management, we also have an element of assessing their strategic vision, and that really would be from analysts making judgments, from reading transcripts, from interviewing managers and so on and so on. So the ark at Harding Lavena really has been from qualitative judgment towards objective judgment, and that that applies to

the four criteria that we use as well. So so I can certainly see financial strength being totally quantifiable and even sustainable growth. You can track that over time. What about competitive advantage? That's one of those sort of Warren Buffet Mote type things that also sounds a little subjective. How do you make that less squishy? We make it

less squishy by again being structured and disciplined. So we rely very heavily, not just on analyzes of competitive advantage, which is really an answer to the question what is it in this company does well that gives it an advantage in the industry in which which it competes, But we also look at the Michael Porter four forces structure of an industry to make sure that the company is operating in an industry where high margins can be protected.

So it's not always objective and quantitative, but it is structured and consistent across across the various sectors and geographies in which we invest, and you know, ultimately competitive advantage is seen in high margins and strong Peschelor return on investment,

which are sustainable over long periods of time. So again it's a mixture of trying to be disciplined and structured about where you're making judgments and trying to be objective about where you don't make judgments, and I think you know in some ways this is a feature of all research. We We are not ashamed that a lot of the inputs we use are backward looking, but backward the inputs are the ones that are facts subjects cause to an opinion about the value of accounting rules. I think that

people have described them as opinions, not facts. But at least they're more objective than forecasts, which of course the subject to buy it, So they're doing research. Trying to value companies for us is a mixture of looking backwards for objective facts and looking forward making forecasts, but recognizing that those forecasts are subjects very heavily to buy at these quite quite interesting. So Simon, you're the majority owner of the Plymouth Argyle football club. This raises a question,

why buy a soccer team? Is this an investment or a labor of love? It's certainly not an investment barrier, or if it is, it's the worst one I've ever made. It's the labor of clubs. It's not just any football club. This is the football club that I supported as a kid. I first stood on the terraces in six when I my family moved to Plymouth. So this is the team that I've been a fan of for most of my life, for fifty four years. So it's a labor of love and it's really a little bit of giving back to

the community in Plymouth. The role of the football club in local communities is probably greater than sports teams in America. They're deeply embedded, they have a long history. We have a community trust which is very active doing good works. And it's important to me that Plymouth Argyle be a vehicle for me to give back to the community in which I was raised and frankly that the community that

paids my education. You know, I've turned my education into you know, it's successful business that I've read the rewards off and the rate payers of Plymouth paid to my high school education and for my university education. So it's a way of giving back. And I should say that I don't like the idea that subs so entrepreneurs who make a fortune should get back. There's usually done it by selling bos and services the prices that people want

to pay. It seems crazy to me that people say that Bill Gates should get back when you think of all the good that his product has done in the world, so it should be a voluntary act. But for me, you know, I generated a return on the investment that the ratepayers, the taxpayers of Plymouth pay made, and I think some payback is appropriate. But it's also so it's a happy coincidence that it's also my boyhood club. So it's been great fun. So I understand, I'm a World

Cup fan. I understand generally how U K soccer clubs move up and down the different leagues. But for US ugly Americans who may not really understand first year, second yer, third year, can you give a little explanation. Lay In the US we have professional football teams, and we have college teams, we have Major League Baseball teams, and there are minor league teams and nary the twain shall meet. But UK cycer clubs they can move up and down from from league to league. Can you give that a

little explanation? Sure, So leagues here are closed systems, and the divisions within a league the mostly closed systems. You know, it's very unusual for a team to move from the American League East to the American League West, so obviously has happened in the past, but so they're closed systems. Leagues in professional sports throughout the world, not just in soccer and not just in England, are much more open. So let's say that let's talk about the four divisions

of English football. They're actually about a hundred divisions, but let's just talk about the top four divisions. If you think about divisions in the league being horizontal with no movements between central and western, in English football the leagues are hierarchical, so there's a progression from let's say the fourth tier up to the first tier, which is the English Premier League that people have prom really heard of.

So at the end of every season, teams in the division are ranked by their results and the best show go up to the next division and the bottom shoes go down. So it's terrified. So you know, the pip in football is not just about winning the division. It's about being in the top top few, so you get promoted and avoiding being in the bottom shows so you get relegated. And getting relegated has a massive emotional impact

as well as a financial impact. And you know, as as we know, losses, losses count more than gains, so in some ways the fear of relegation is greater than being glory associated with getting promoted. But it's a terrifying system. But the impact is that it makes almost every game meaningful. Loss of version applies not just to investors but the

football clubs. That's that's quite fascinating. So in the US there were complaints that you know, the perennial favorites for a long time, the Dallas Cowboy Ways in football, the New York Yankees in baseball. It was the teams that spent the most money. And even with the salary cap, the big market teams had an advantage because they could attract players that potentially would earn all these marketing um

and advertising endorsements. You're more likely to get that in New York or l A than you are and let's say Cleveland. How important is finances to the success of a team and is there any limitation on what the teams can spend other than how much their owners are willing to write checks for. There are limitations, but they can be got around by owners willing to write checks.

So we have financial fair play rules, but they're not terribly effectively enforced, and financial fragility of clubs in the lower divisions is quite a feature of the last twenty years, many have gone bankrupts, including my own eleven years ago, almost went went out of business. So it's a very interesting question about the role of money in success though,

And here's where it's like investing. You know, I mentioned that there's a lot of behavioral finance that's relevant to managing a football club, in particular when it comes to getting players. So what's clear And this sounds obvious, but it's not immediately obvious because football is a game like investing, where short term outcomes results for combination of luck and skill. But it's pretty clear that over a long long period, skill dominates luck and the most skillful players generate the

best results. Also, it's a reasonably efficient market, and the most skillful players tend to cost the most, but it's not at the edge it's a completely inefficient market. And there are all sorts of things that you'd recognize from the field of behavioral finance, where people make errors in over over paying for players. So people associate good players. There's repleentative touristic people associated good players with good clubs.

They assume that he's good players, he's played for a successful team, and they assume that he's a bad player if he's played for an unsuccessful team. So a player of equal ability who played for a top team will be more expensive than one who pays plays for a

bottom team. So similarly, people will extrapolate it's astonishing how often a guy will come out and score an unusual number of goals for for his long term record, and then we'll get traded following, which he means reverts and that you know, the price that was paid looks to be irrelevant. So when we're thinking about managing Plymouth Harker, we're thinking very very hard about these inefficiencies in the

market and how we can best use our resources. So I think that there is a role for thinking about market inefficiencies, thinking about how those inefficiencies are created by youth and behavior, and then exploiting them so that you can outperform essentially your financial resources. So is there any sort of moneyball for football yet? For for soccer? Have people come up with different ways to quantify the performance of players that perhaps are non standard and provide an

edge until everyone else figures it out? To me, the moneyball for soccer is moneyball. You know, the lessons in moneyball are applicable, not just too investing. It was a book that we sent to our clients. But also also in football, and there's been a progression in the use of data analytics from baseball to basketball, where they said it could never happen, it's now kind of beginning to creep into hockey and American football the NFL. So it's it's at the very beginning stages of being used in

um in soccer. And it's very very interesting to me that the two clubs that are most associated in England anyway with the use of data analytics are one very small, low budget club called Brentford, which actually in a couple of hours will know whether it's been promoted from the second tier to the Premier League, which is owned by a hedge fund manager who made his money out of sports betting, and he basically gathered data on soccer matches throughout the world and was able to assess the odds

of team may beating Team B and best on it. Accordingly, so he bought Brentford and has used data analytics essentially for recruiting in the way that I was describing previously,

very very effectively. At the other end of the scale, Liverpool Football Club, who at the moment are as they like to say, Champions of Everything are owned by John Henry from New England Sports Group, which is also the owner of the And there's the link straight back to Moneyball with c O Stein, you know, being Billy beings number two at the Oakland Days. So the moneyball effect, I mean people refer to the moneyball effect on football.

But again what's fascinating is that it's just like as described in Moneyball, and just as I described in the changes in our investment process Harding Lubna. The use of data analytics is a way of becoming more objective in assessing players and overcoming biases in the same way that the use of objective data is a way of assessing

let's saying, corporate management and overcoming your biases. But the people, the practitioners resisted, And just as Billy being described with the scouts, I've experienced with my colleagues Harding Luvna, and I'm now experiencing with football people at FORMATAGA. We don't know about these things, but actually turning them into process

and applying them. Richard Sailor Michael Momson was telling me that Richards say Learn was observing at a Sports Analytic Conference recently that that everybody knew that three points is more than two points in basketball, and everybody can calculate your success rate. Yet it took the Golden State Warriors, i'd believe, to start shooting three points. You know, Larry Bird would concentrate on two points, whereas he could have increased the results for the Boston Celtics if you take

a more more three point shots. So turning what we know into practice is your key competitive advantage, in my view, is not the knowledge itself. And again at our go as I'd like to say, one of the things that I think it will help us is that we have a football management team that's young, it's fairly in experience, it's very very willing to learn, so they are fully prepared to embrace data analytics in helping them recruit players.

I have one last soccer question for you, and it's about Theater of the Greens, the park where the Argyles play, destroyed in World War Two by German bombers during the Blitz. How closely located is the current stadium to where the original I think it was late nineteenth century stadium was erected. It's on the same site we're we've been at home park Um since nineteen Actually, Plymouth is a naval port and Plymouth and Portsmouth are the two big naval ports

on the south coast of Britain. So Plymouth was completely destroyed during the war. You know, it's very heavily bombed. And the the Argur Stadium is only a couple of miles from the city center. In fact, it's on a hill in the park and if you look out you can see the what's called Plymouth Sound, which is where the ships live. So actually it's quite funny in a not particularly funny way. We've just completely refurbished our very his or at Grandstand, which dated from the early fifties

and was getting very dilapidated. And when we were doing that, one of our warriors was that we would do unexploded bombs. Luckily we didn't. Wow, that's quite amazing. Let's talk a little bit about your process. I read in an interview you did some years ago, I think it was with Kate Welling that you were quote relentlessly bottoms up. What does that mean? Relentlessly bottom up? And is that a way for investors to get better than market returns? Well,

we think. So by relentlessly bottoms up, I mean that we don't allow beliefs and our forecasts or other people's forecasts about the macro economic environment to effect stop selection or portfolio construction. So, as I said before, we do let it. We do think about the macro economic environment and how we should expect our portfolios to behave in

certain regimes. But our core belief is that I focusing on high quality companies that can grow their own ins over long periods of time, and paying attention to the price you pay for them, you're going to generate reasonable returns that have a good probability of being in a set of the market if you can control poor investing behavior. We believe that there's a difference between price and value, and that price converges on value over time, but that

that convergence is at an unpredictable pace. We also believe that it's important to assess value, but that it's very, very difficult. We all know that the value of security is the discounting present value of the cashalists associated, where the appropriate rate for discounting as some combination of risk free rate and equity wrist premium. But we don't really know what the proper rest free rate is, or what the proper equity risk premium is. Let alone can we

accurately forecast cash flows. So assessing value is very, very difficult, but we think we have to do it. Always reminds me of that line from ken Arrow about his weather forecast during World War Two when he told the general his weather forecasts were useless and he should ignore them, and the general staff told ken Arrow that the general knew that his forecasts were useless, but he needed them for planning purposes. So, you know, we recognize that our

valuations are inaccurate, but we need them. And our essential belief is that if you get the valuation wrong and therefore the price you pay for a company is too high, that growth will fail you out and give you a return over a long holding period. So that that's why we want growth, That's why that's how we think about value. And then quality for us is partly a function of

our personalities. We tend to be rather conservative risk reverse people, and you know, we recognize that if a return is minus a d percent in any series, then your long term return is going to be zero. So for us, high quality means you know something about high margins. It

also means about ability to send those margins. It means something about management and corporate governance, as we've discussed, But essentially, it means that the riskiness in a company is relatively low and we're not going to get scared out of setting it at the wrong time. What we didn't recognize thirty years ago when the firm started was that quality was a factor that was going to be recognized by the academics as a permanent or allegedly permanent source of return.

We just thought it was something that appealed to us and would help us generate the returns that we needed for our clients. So you guys were farmer French before farmer French discovered quality. That's that's kind of interesting. Let's stick with the topic of growth. How do you define sustainable growth and how can you identify that in advance.

It's easy to say, you look at how much Amazon and Google have grown their earnings for the past twenty years, but how do you do that in two thousand and two or two thousand and ten looking out a couple of decades. Well, we didn't, you know. Now, we we invest on the kind of spectrum from value to growth.

And at one end of the spectrum, deep value is buying companies, you know, the kind of Ben Graham security analysis way where you're getting you know, you're paying pennies in the pound or cents in the dollar for assets. And at the other end, high growth is where a company goes public with just a great idea. For us, growth is the mixture of quality and growth is neither at the extreme of one end nor at the extreme

of the growth end. So we do own the companies such as Amazon which don't have earnings, but they have massive cash flows, but we haven't earned it for twenty years. I think we've earned it for several years, but not

not several decades. So no, if companies just have a bright idea, we're not going to be able to forecast and we're going to say they're not going to meet our financial strength criterion, where financial strength doesn't just mean low leverage, but it means having access to capital in a way that sustained. And we look upon bank capital

as being rather volatile. Let's say, you know, there's the old story about a bank, bank or something who lends you, lends you an umbrella when the sunshine takes it away when it starts to rain. I think there's an element of truth in there. So we like companies that are relatively that have financial strength of generating their own cash flow, or at least have sufficient reserves to tide them over the time when they're going to be generating cash flows.

But look, this is we So we tend not to try to identify the massively fast growing companies, but to generate high returns, and to generate the type of returns we've we've generated over three decades. You don't need to have port photos that are exclusively in those kinds of companies that they've been very fashionable over the last two years and particularly over the last three or four months. But the classic company for us is I always say in Nest Late. We've owned nest Late for thirty years.

It never um very rarely grows earnings in more than fifteen He usually grows earnings at seven or eight percent um. It reinvests its cash flows in the thirty years. Annual thirty years, the annualized returns on Nest Late are about, you know, massively more than our portfolios, by the way, and much more than the market. So it's that ability to compound reasonable growth over long periods of time that never gets dramatically over priced in the market. And it's

really where the core of our returns have been. And again it comes back to behavior behavioral issues. One of our clients asked one of my colleagues once why we should pay us an investment teed for thirty years to just sit on nest late and my my colleagues answer was what you wouldn't have done. And I think that restraint in behavior whenever he's yelling at you to trade, trade trade has been a key to our success. Our holding period is over five years and that's consistent across

all our strategies. You know. So for us, successful investing is Charlie Mander said, it is a matter of finding a bunch of good companies and sitting on your behind trouble as most people can't sit on there behind for so long. Yeah, to say the very least. So let's talk a little bit about the current macro environments, which is somewhat unique in in at least the past centuries investing history. I guess you have to go back to

to find something similar. How do you look at the pandemic the lockdown, how well certain countries like South Korea or Japan or Germany have managed it, and how poorly certain countries like the US or Brazil have been managing it. Does that impact where you think about putting capital or the type of companies you might want to investment in

m in the short term. When the pandemic hit and it looked like we were possibly going to be tasting our depression, we did do a kind of relook at all the companies in our portfolio to make sure that they had the financial strength, just to double check that they had the financial strength to withstand a period of let's say two years of zero positive cashlows, so that

that was one immediate impact. In the longer term, I guess for us, the issue is about valuation and how we should think about interest rates approaching the zero bound. You know, as I mentioned, we do care about price, We do calculate value, and interest rates that are closed to zero do very strange things for value, particularly, do strange things for the value of growth of growth stops.

And I think that part of the justification for what we've seen happened in market since the pandemic really took hold has been about you know, the revaluation of cash flows that many many years into the future. But you know, you know perfectly well and your listeners will understand the base of the arithmetic that when interest rates to zero, you're indifferent between a cash flow pash flow now and a cash flow in the future. The difference, of course,

is in riskiness. The actual value if you can if you can poecast it will be will be the same. So we we've seen this massive revaluation of growth stops. So I had to say, I think that to some extent, that's the post hoc narrative that's woven around um you know what what In many ways ways there's aroundomness. You know, we're extraordinarily good producing stories to explain something that's already happened.

Yet those same stories that tend to have no predicted value. So, you know, I thought it was interesting as we think about the value of growth stops and the relationship between price and value. Paper that I think hu R came out with a month or so ago looking at the influence of interest rates on the whole value growth dichotomy, and they found that value stops did not respond to

higher interest rates. As we all fear so you know, we are thinking about the current economic environment, we're thinking about the impact with the pandemic, but we are apart from no just checking our belts embraces, we haven't taken any action. Quite fascinating. So looking at value, looking at international over the past decade, this is both before the pandemic and in the recovery since the markets bottomed in at the end of the first quarter, value has been

getting trounched by growth. Growth is the big winner, and the US has more or lessment beating not only emerging markets but developed x US. Do you see that continuing? What what is more likely to reverse the past decade? Growth beating value or the US beating international. Well, we're you know, we're global, we're global investors, and we're global growth investors. So I want growth to out the form and I want the world to do at least well

relative to the US. So I'm hopelessly biased, and I must say that over my now forty year career, my biggest flaw that I recognized quite early but didn't understand what the reasons. My biggest flaw is that, um yeah, I'm very optimistic about the future, but I'm very pessimistic about that the current and we know we now know from the kind of behavior or evolutionists. Why why Why that is that all of us are risk averse about the present and risk takes about the future. So again

I find the ability to time these things zero. So my my guts tell me, and I have very little confidence in my guts to be worn, is that the rest of the world will turn around relative to the US before growth turns around relatives to value. And the reason is that I do think that the value grow of things at least something to do with the economic cycle and interest rates, and I think that the economic

cycle is poor. I think that for obvious reasons, and I think that interest rates is going to stay lower for longer, which is, by the way, it's something that we've believed without too much conviction since the financial crisis. So you know, once again, the pandemic is revealed as continuing or accelerating trends that were already in place, which is an interesting issue when it comes to the rest

of the world versus the US. I think one of the issues that the US has had, of the U S stock market or publicly traded stock market has had, is that many of the world's great growth companies are Americans, and increasingly they're they're what's driven overall market aggregates. So it's important to note that things like American small caps have also done pretty well over the last few years.

So I think what we're going to see is that the broad market in the US will underperform the broad market outside the US, but that we may well continue to see the dominance and some of these big market cap cap names. But I have to say at some point, it's just a gut field that you know, it's been down so long it feels like up to me. So let me ask you a quick question about emerging markets. When you first started e M was a lot of materials and energy. Today that's transition to consumer brands and

big Chinese technology companies. Talk about this transition a little bit and tell us what it might mean for investors going forward. I think it's for investors, it's a little bit dangerous, and it's something that we're worrying about at the moment and trying to formulate policies. You know, the the If you want to diversified global emerging market portfolio, you have to be careful at this stage because Chinese stocks dominate the market benchmarks, and the direction is that

they're going to come to dominate it even more. So we're already at over and it looks like we're headed to towards sixties six five maybe even as the Chinese market that is available to foreigners invests in the benchmarks continues to broaden and deepen. So I think that for investors you have to be very careful about, you know, how you consider a diversified emerging market exposure. We're very much at the stage that we were at in Japan in the late eighties, where Japan dominated the non US

bench marks. At one point, the Japanese market was six of six five percent. I think of the non US equity in debt and of the Japanese market, about a quarter was Japanese banks, which were poorly managed and trading at fifteen times book value. So a diversified exposure to non US markets was a very risky one. You know, I think that there are parallels with the dominance of China in the emerging market benchmarks, but they're not you know,

his history, Rymes, it doesn't it doesn't repeat itself. One difference is that Chinese stops are not dramatically over priced as they were in Japan in the late So you know, a lot of what's happened in China for China to become such a large part of the benchmark hasn't been through price rising crisis rising. It's been through you more opportunities for investors, and that that's actually something that we've tried to take advantage of our hard in Luve America

last two years. So I think that transition is important for investors when they're thinking about the riskiness of global

emerging markets. What what that transition actually means for emerging markets is a much more difficult question, I think, And I just note that, you know, back in the early eighties, when I started investing in emerging markets before they were actually called emerging markets, you're looking at companies like Malaysia, the Philippines by the late eighties, Indonesia, but outside of Southeast Asia, it was South Africa, and you were just

beginning to invest in a couple of Latin American countries, and we all thought of emerging markets as being warrants on the West. You know that if U s GDP grew a little bit more than expected, emerging markets would sort and obviously it was resources and resource consumptions that was the the common thread that tied the two together.

We hoped in the two thousands that the rise of the emerging market middle class would mean that emerging markets would be less solitile, that they'd be less financially leveraged, and that the rise of spending of the expense of consumption would be helpful in broadening exposure to non non commodities. But that was all turned over with the rise of China and the massively rapid industrialization of China, and instead of the West being the common thread to commodities that

drove the emerging markets, it was China. So you know, we haven't really seen the broadening of emerging markets that we'd hoped, we'd hope to see. I think that we are beginning to see it. I think that it will. It is something that's still still on become, but that the rise of China has to some extent masked what's

happening elsewhere. But at the moment, you know, with the pandemic coming on, I think that you know, it's going to be a while before we see the good values that the apparent in some of the consumption stops in emerging markets being turned into stock market returns. So I have to get to my speed round questions. But before I do, a quick question. Outside of China, you mentioned Malaysia, What other countries are intriguing, India, Vietnam, Turkey? Does any

specific country call out as well? This could be the If China is the new US, what's the new China. I've always thought that it would be Vietnam. You know, I first went to Vietnam to do investment work over twenty years ago, and I've followed it. It's got a large population, it's got a lot of the characteristics of underlying dynamism with a large or largeish internal market. But you know, governance has been an issue, Politics has been

an issue. It's very unusual that you get this mixture that you get in China of top down government that where you may hate the politics, you may hate, you know, the lack of individual freedom, but where at the local level the ability to be an entrepreneur generate profits for yourself is really quite intense. I don't think there's anywhere else in the world like it that also has the ability to put the infrastructure that enables you know, economic

growth and wealth creation at the same pace. I obviously can't think of another parallel quite quite fascinating. All right, so let's jump to our favorite questions are speed round. These are what we ask all our guests and hopefully it provides a little inside into the the man behind the portfolio. Um, tell us what you're streaming these days? What are you watching on Netflix or Amazon or whatever podcast you might be listening to? What what's keeping you

entertained during lockdown? Um? Well, probably enough, the same things that keep me entertained, not during lockdown. I mean, it's a terrible thing to say, but you know, I live in the countryside in Buck's County, Pennsylvania, and I've got a large house, plenty of room for me and my wife. We miss our grandkids, but our life is mostly unchanged, our idea of an exciting times to sit in our

arm chairs with our kindles. So but I did miss podcast and actually, in the last couple of weeks, which I used to listen to in the car on the way to it work. So in the last couple of weeks I've started going for an hour's walk every day and my favorite of the new Ones is the second series by Michael Lewis Um where he's from coaching coaching Yes, theories on refereeing. But apart from that, I'm just and too. You know, I listened to this podcast. I listened to

Ted Sideyes, I listened to Patrick O'Shaughnessy. I listened to the standard behavioral finance or oriented type financial ones. I also listened to ones about sports, and I'm particularly interested in data analytics and football, so you know that overlap between sports and investment that I find so fascinating. I don't watch very much Netflix, don't watch very much TV. And it's not because I don't like it. I actually

love it. I haven't got the self discipline, my attention wonders, and my kids used to get driven mad when I'd say, who's that guy? And they have to explain. I also, that's very funny bias against net Netflix for behavioral reasons. So it's an interesting thing. I used to love the idea of Netflix when you used to get posted DVDs and I was one of these people who, you know, would order my DVDs on a Sunday and I'd order, you know, nineteen sixties Strench movies with subtitles or you know,

Japanese directors again with subtitles. But on Friday night, when it came to watching a movie, I wanted to watch Love Actually or some romantic comedy. And again I think you tend to see everything through behavioralized once you know about about this. This is the classic. In the short in the short term we want pats and sugars. That there are long term self once fruits and vegetables. So again, you know, in the in the short terms you want to watch a romantic comedy, your long term stulps says,

watch something in intellectual. So I don't have as much Netflix. The only show I've watched in the last month has been something called The Great, which is a kind of rather surreal mixture between kind of dark comedy about Katherine the Great, which I think is on I forget. I think it's on Netflix. Huh. I'll definitely check that out. Tell us about your early mentors, who who influenced the

way your career developed, who helped shape your investing philosophy. Well, I don't I don't mean to be I don't need to be dismissive, but the people that I worked with and for in the early stage of my career was during that time when investment management was about individual genius. It was about you know, people being smart, smarter than other people not being you know that you had to know more, you had to speed, be smarter, you had

to you know. It wasn't about structure and discipline. So the people that I worked with that really were examples, and they were great people and I enjoyed them very much and they're treated me very very well. But everything I learned from them we've overturned at Harding Lovena. You know, I often say that if you look at anything about one of those firms that I worked at, which were successful firms, we do it the opposite at Harding Loveness. So they were kind of negative mentors, and I don't

mean that to be rude about them. So I've very heavily relied on book learning and what what we've learned Hardy Lovena. And my longest standing relationship is with David Lovener, who has been a friend of mine since the eighteen and you know, business partner, close collaborator now for thirty years. So David, David would deny it, but I've learned a lot from David over the years. You mentioned you enjoy sitting in your easy chairs with a kindle in your hand.

What what are some of the books you're reading now and what are some of your favorite books? Um? Well, I a lot of my favorite books will have been mentioned on your podcast before. I do need to mention that we are a great debt to Michael Morison. Um. You know I often said that it's remarkable that you can get his complete work for less than fifty bucks and you can learn everything that I've learned in forty

years about decision making an investor. I give a shout out to Russaou and Shoemaker their book from two thousand and two. I think Winning Decisions, which I think is one of the best books about decision making and doing research and doesn't get a lot of attention. Um. I read a lot of novels, which is very personal. The best book I've read in the last few years, and probably the best book I've read in my life, was last year when I read Robert Carrow's four volume biography

of L. B. J. Which sounds daunting. I think it must be three or four thousand pages in length. I read it on a Kindle, So I can't tell you exactly what it weighs, but it's a superbly written book which with often novelistic like descriptions of, for example, life in the Texas Hill Country in the early part of the twentieth century. But it's much more social and political history of the US in the first half of the twentieth century. It's brilliant on politics, it's brilliant on the

political process. It's brilliant on corruption and the corruption of power. But above all, the third volume, Master of the Senate is brilliant on race and on the length that you know, twelve senators from the South went to keep institutionalized racism of the norm. So one book that I'm reading at the moment is actually I've started again and I've just

finished the first volume, The Passage to Power. I think everybody should read it's it wasn't particularly topical when I read it, but I think it's topical now and I thoroughly recommend everybody read it. And if you can only bring yourself to read one, read Master of the Senate. And on the subject of institutionalized racism, I think everybody should read Dan Bower's book called American prison, which is so Dan Barrow's journalist who has a political point of view.

I think he writes for Mother Jones, but he experienced incarceration in Iran for four years and then um put himself as a prison guard in the American penitentiary system. And the book has this very interesting structure of observations of the prison guard in the American penitentiary system today,

and that's appalling, as you can imagine. But every other chapter is history of the penitentiary system, and I think that in itself is fascinating and it gives a lot of explanatory power as to you know, where we are today with mass incarceration in the United States, with incarceration, incarceration being dominated by African Americans. UM, and you know,

I find that appalling. And I think that Carrows goes a long way to describing why racism is so institutionalized in this country, and Dan Bowert goes to explaining how it's reflected in our prison system. Quite quite fascinating. What what sort of advice would you give to a recent

college graduate who was interested in a career in investment management. Well, firstly, I'd say, don't think that you know what career, what career you are going to be best at or have most fun out when you're a recent college graduate, so you know, give it a tribe, but be prepared to give it up. I think Van Eed or David David in Range talks a lot about about that business, a

very good book on coreer planning. But if you are determined to be in investment investment management, I think you have to recognize that it's the industry that is both blessed and cursed. It's blessed by the fact that everything is relevant. So if you're great intellectual curiosity, which I think is necessary but not sufficient for being a good investor, everything is relevant. So you have license to go and find out anything anything you like. And I think that's

a wonderful thing. But it's also a curse and that you don't know where to stop. And that's actually one of the lessons of that Rousseau and Shoemaker book, just finding out more. Just as the sake of finding out more makes you feel better about individual decisions, it gives you more confidence, but it doesn't help the accuracy or the validity of that decision. So be careful. But the most advice I can give you that I would give

anybody is just stay honest. Don't let anyone compromise your integrity. You know, this is a fabulous industry to be and I've been very, very lucky that it's My career in time has been one where the investment industry was tiny to where it is today where it's huge. So you know, basically all you needed to do was to be sensible

and stay honest. And I don't know that the industry is going to grow as much as it's grown over the last fourty years, but I do think it's going to be absolutely crystal just to stay honest and you at least give yourself a good chance of capitalizing on any success you may have. Quite quite fascinating and our final question, what do you know about the world of international investing today that you wish you knew when you

were first starting out over three decades ago. The importance to me that the behavior of finance findings and or more generated decision making findings. It's a very very different world of investing today. You know, when when I started, I've had a good education. Um, you know, I was widely and I was kind of curious as a young guy, and I didn't know anything about stocks. Nothing nobody in my family had ever mentioned to stop, nobody had ever

owned one. I barely knew how a bank worked. You know, today finances is finances per pervasive throughout the media and throughout, to some extent anyway, the education system. So you know, the world of investing is very, very different, but the world of human beings is very much the same. And I wish I'd known earlier on just how important it was not to be smarter and no more than everybody,

but to be able to control your own behavior. But partly I found it fascinating, but also I think it's at the core of why why we've gone from being smart people who knew a lot to being intelligent investors. Huh makes a lot of sense. Thank you, Simon for being so generous with your time. We have been speaking with Simon Howard of Harding Love Nor which manages about

seventy three billion dollars. If you enjoy this conversation, well, be sure to go to Apple, iTunes or Spotify, Overcast, stitcher wherever your finder pod are sold, and you can find any of the previous three hundred and fifty such conversations we've had over the past six years. It's it's actually this week is our six year anniversary. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net, Go to Apple iTunes, give us a review. Be sure to check out my

weekly column on Bloomberg dot com slash Opinion. You can sign up for our daily reads at Rid Halts dot com. Follow me on Twitter at Rid Halts. I would be remiss if I did not thank our crack staff that helps put these conversations together each week. Maroufle is my audio engineer. Michael Boyle is my producer. Attica val Bround is our project manager. Michael Batnick is the head of research. I'm Barry Ritults. You've been listening to Masters in Business on Bloomberg Video