You're listening to TIP.
You're listening to the Richer Wiser Happier podcast, where your host, William Green, interviews the world's greatest investors and explores how to win in markets and life.
This show is not investment advice.
It's intended for informational and entertainment purposes only.
All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities.
Now for your host, William Green.
Hi, folks.
I'm thrilled to welcome back a very special guest on today's episode of the podcast, Matthew McLennan, who's here to explore with us an extremely timely and important subject namely, how can investors like you and I navigate this acutely uncertain time and build resilient wealth for many years to come.
Matt oversees a vast amount of money about 130 billion as head of the global value team at First Eagle Investments.
He's also a portfolio manager of First Eagle's global value, global equity, international value, international equity and US value strategists.
He joined First Eagle back in 2008 after 14 years at Goldman Sachs, and he was handpicked by the investing legend Jean-Marie Eveillard to become his successor at First Eagle.
Matt was a very central character in my book Richer Wiser Happier, where I profiled him and Jean-Marie in a chapter titled The Resilient Investor.
In my book, I describe Matt as one of the world's most influential investors and one of the most thoughtful
I've been a senior advisor to the global value team at First Eagle since 2021 and I've been hugely fortunate to spend a great deal of time chatting with Matt over the last five years.
Along the way, he's become a good friend and I've come to regard him not only as one of the smartest people in the investment world, but actually also as one of the nicest.
I'm sorry to embarrass you, Matt, but anyway.
Welcome, Matt.
It's really lovely to see you.
Thank you so much, William.
And thank you for the wisdom that you've shared with us.
I appreciate it.
So we're speaking at a particularly interesting time, this moment of really heightened risk and extreme uncertainty, when the world is in extraordinary turmoil.
And I wondered if you could start just by describing the geopolitical and economic environment we find ourselves in now and how it illustrates one of your fundamental beliefs, which is that financial markets are inherently uncertain, that they're part of a complex, nonlinear system that's wildly unpredictable.
Yeah, well, you hit the nail on the head there, William.
I think the core dynamic that's been at work here for a big part of the last decade frankly, has been this what I would refer to as this bipolar hegemonic standoff, if you will, between the Eurasian heartland, and you could look at that as an aggregation of China, Russia and satellites such as Iran and North Korea.
On the other hand, the United States and its traditional allies.
And When you sort of think about a geopolitical dynamic like that, where you have one system that is based on democracy and copyrights and has its own Judeo-Christian history and legacy, and another system that has more comfort in an authoritarian bent and draws upon different religious and value systems, you get a very complex series of potential outcomes in that situation.
And this is not with one having any regard to whether one system is better than the other.
It's just recognition of the fact that you had two very different systems operating at scale.
And I always like to go back to some of the source texts on this problem.
And I think the classic of all times is Thucydides' history of the Peloponnesian War, which looked at the ultimate battle between Athens and Sparta and what inspired that.
But There's a lot of wisdom in that book.
I think technology has obviously changed in the 2000 plus years since the book was written and the means of warfare have changed.
But the tenets of human judgment have remained largely unchanged.
And one of the things that Thucydides did well in this book is he warned against being overly certain about the outcome of any war.
Just to give you a sense of some of the things he said in the writing.
He said zeal is always at its height at the commencement of an undertaking.
And he said, let us never be elated by the fatal hope of war being quickly ended.
And in a different part of the book he said you know, war of all things proceeds least upon definite ways.
And I think these are lessons that have rung true.
And I recall reading a piece in the last couple of days from Neil Ferguson, who you know as well.
And he was looking at some historical analyses where there were battles around geographic choke points.
And one that's particularly sensitive to me, if you will, as someone with Australian heritage, is the Battle of Gallipoli in World War I, which was the Dardanelles, and where Winston Churchill went in to try and control this choke point, quite confident with all guns ablaze on the ships, and where the Ottomans managed to hold off the British in what was a surprising upset.
And so I think We have a dynamic at play here that's not just centered around Iran, but these two different hegemonic value systems and today centered around a geographic choke point which the incumbent has various advantages in disrupting.
I guess add to that this notion that, you know, energy is at the center of all of this.
And Dan Yergin in his book, The Prize, which I think is a great book, sort of talks about this notion that, you know, energy is not just a commodity, you know, it's the foundation of the modern world.
And so when the energy price comes into question in a geopolitical situation, it has ramifications beyond just the realm of that conflict.
So I think, as I look at this situation, I would just make the observation that the winds of war are not highly foreseeable.
I think, As one can objectively say, that the US and Israel had degraded Iran's strike capacity, whether it's ballistic missiles or drones, quite substantially.
Iran is obviously resorting to asymmetric methods to fight its cause.
And what we don't know is whether the regime is going to fold and something more constructive to dialogue will emerge, or whether they will succeed for a time in this asymmetric closure of the straight urban moves.
And I think the latter, of course, would be very meaningfully negative for markets.
And one piece of perspective I would just add, at the risk of going on too long here William, is that, Even if we assess that the odds of a quick resolution or some sort of drawn out affair are hard to predict and are equally balanced, markets came into this moment with low risk perception.
Credit spreads were below average, earnings multiples above average.
And sovereign balance sheets came into this moment with some degree of stretch.
Fiscal deficits are larger than average.
And so I would just say, even if uncertainty implies symmetric possibilities for the outcome here, the market outcome could be asymmetric because of where we came into the situation.
In my book I quote your description of the perennial challenge facing you and other fund managers, where you said to me every day you're trying to understand how the world works bottom up, top down and you're trying to synthesize it in a way that's different from the consensus.
At the end of the day, we're paid to see the world through a different prism.
And I'm curious, since the war with Iran broke out, I think on February 28th, how you've gone about the process of trying to understand the consequences and implications and opportunities for investors.
What your process actually is.
At a time like this, when it's very fast moving, it's very confusing, it's very uncertain.
And you're racing in a sense to try to separate the signal from the noise.
And you're talking to lots of different people, because you're unusually well connected with people like Neil Ferguson, the great historian, but also other investors, fund managers who are very well informed about Middle East and security, and the like.
And so it's all this kind of puzzle that you're trying to solve in real time, to decide what it all means for your portfolio, for your stocks, for gold, for energy and the like.
What's the process looked like for you over the last few weeks, as you've been trying to solve this puzzle?
Well, markets often act in strange ways.
So I think what's interesting when you observe how markets have traded this year is that, if I would look at the integrated oil stocks, for example, or the gold market, both of these sectors rose ahead of the conflict commencing.
And so it was as if these large markets, one as a monetary commodity and one as a sort of utility commodity, if you will were somewhat prescient in their pricing.
And so, interestingly enough, even though the price of oil itself has spiked since the initiation of proceedings, Gold has been sort of volatile.
It's down a little bit.
It's trying to sort of price, if you will.
The second order consequences of maybe the Fed keeping rates where they are for longer than expected.
And And to the extent that some energy stocks have gone up in advance of this, they may not have been as elastic to higher oil prices as people might think, or they might not be pricing much duration to it.
So sometimes the market reaction can be quite different from what you're actually perceiving as happening in terms of the acute shortage that's evolving here.
Beneath the surface of the market.
I think the market has acted reflexively here to discount those kinds of industries that might be most immediately impacted by higher energy prices, whether it's discretionary goods, luxury goods, for example, where consumers may feel that their purse is constrained by higher oil prices, or whether it's a range of staples that will have higher input costs, or whether it's paint companies or fragrances companies that are going to have to deal with higher energy prices.
And the markets likewise discounted currencies of countries that they perceive to be most sensitive to natural gas imports from that region.
So we've seen the Eurozone a little weaker, some of the Asian currencies a little weaker.
Now, the question is, what do you do about all of that?
The problem is, given the uncertainty that I described, in response to the first question.
If you're going to trade on that information, you're implicitly making a judgment on how things resolve themselves.
And I think that's a difficult thing to do.
And so the first, I guess, point I really want to get across here is that it takes a crisis like this to remind you that you have to be positioned in advance of the crisis, as opposed to trying to judge it real time during a crisis.
And when markets have low risk perception, as they have had, we make a point in terms of our portfolio construction, of being willing to really emphasize companies that have strong market position and evaluation margin of safety and traveling the journey with a little bit of ballast, whether it's in some cash as deferred purchasing power, or gold as a potential hedge.
And so I think, for us, interestingly enough, some of the volatility in this moment has really enabled us to purchase some of the securities we were already purchasing before the crisis, but at an accelerated rate, particularly those that and not implicitly a bet on which way the crisis is going to evolve or not.
Whereas I think most of the attention of the market is focused on the extent to which a stock is discounting their view of how this war is going to play out.
And I think that's a more difficult game to play, given the uncertainty around how these things tend to play out.
Does this period remind you of other periods historically?
Like when you look back say, at the 70s, where there was obviously an oil shock and stagflation and the like.
How does this feel different or similar?
And what's the risk?
That we end up in another period period like the 70s.
That was pretty devastating for a lot of investors.
The 70s was definitely a difficult period because it came expectationally on the heels of the 60s.
And the 60s was a great time for equity investors.
You had the nifty 50 growth stocks were trading at huge multiples as people sort of figured that that would pay for itself in the fullness of time.
And then you know somewhat analogous today.
We started to have fiscal issues in the late 70s, in the late 60s.
Back then, it was due to the Vietnam War.
And today it was sort of essentially the hangover of the COVID-related stimulus and the inability to kind of reset the fiscal picture in a wake of COVID.
But in both periods you had larger fiscal deficits than you'd had for a while, which meant that the stock of government debt was growing at a faster clip.
And the government debt is nothing other than a promise to print more money in the future unless there's a credible path to paying it down.
And so expectationally in the late 60s, as today you're laying the groundwork for what could be a more inflationary dynamic.
And then at the same time, you had these rising tensions in the monetary equilibrium.
Back then, it was the breakdown of the Bretton Woods Agreement.
And I'd say the last couple of years, it's been the breakdown of the QE experiment.
We went from zero interest rates to bond yields, starting to have to price this fiscal picture more realistically.
And that's been incredibly disruptive to bond markets, as it was to currency markets in the early 1970s.
And now we have this geopolitical dynamic, which is an overlay to all of that.
Now, the one thing that's, I guess, constructive versus the early 70s is that our dependence on energy today is a lot lower than it was in terms of oil, specifically natural gas. oil in totality.
And so our sensitivity to this moment may be a little less than it was back then, but we're still sensitive.
It's still the world's most consumed commodity.
And so if this situation is not resolved in the near future, it is going to have some implications.
And even if the Strait of Hormuz were to open in the next week, It would still take another month or two to bring back the full amount of supply that we saw.
There's been some damage to facilities.
When you close in an oil field or you close, shut down an LNG facility, you can't just turn it back on.
It takes time to prep those fields or those facilities so that they can come back on.
And it takes time to rebuild trust. for shipping and insurance and all these sorts of things.
And so I think we have to acknowledge that some similarities to the 1970s, given the current backdrop.
And clearly, we've also had a kind of a heated political environment as we did in the early 1970s.
And so, I think history doesn't necessarily repeat as Mark Twain says that it can rhyme.
And I think that One other thing to sort of throw into the mix here William, is that the huge data center build out that's going on is really transforming, if you will, what was a big capital light sector of the economy into a more capital intensive sector.
And so this is increasing the demand for physical materials at the very time that all of these other pressures occur.
Going on.
And so were we to see a broader commodities cycle that could exacerbate the kind of analogy that you're alluding to.
And that decade as a whole saw equity market valuations decline from close to 20 times earnings to below 10 times earnings.
Obviously, gold and oil did well, and cash did okay in nominal terms. but it was a difficult decade.
And as Ray Dalio said at Bridgewater, you know, stagflation is the ultimate wealth destroyer.
My sense is always that you're incredibly well informed about geopolitical pressures and risks and domestic political risks and also economic risks.
And I've sometimes debated with you this whole question of like to what extent it's actually even worth thinking about these macroeconomic issues, given how unpredictable they are.
And I wonder if you could just unpack that for us, because it feels like there's a real nuance here, right?
That you're not trying to make predictions by being aware of these possibilities.
It's more about positioning yourself to be resilient in the face of multiple possible scenarios.
Can you unpack that for us?
I'm not doing your philosophy justice here.
Well, you've kind of nailed it quite well there William, in the sense that it's less about trying to predict what's going to happen in the next six or nine months and more about being open-minded to the range of outcomes being broader than expected.
And I think that often involves casting a wary eye to what can go wrong, as Sean Murray used to say, who ran the fund's so successfully for a very long time.
And I think if you just look at the history of big recessions, depressions, and inflations over time, they've often tended to originate from exogenous shocks, whether they were energy shocks or whether they were wars or whether they were pandemics or plagues and the like.
So I think just being open-minded to the fact that the range of outcomes at any given point in time is larger than just an extrapolation of the near-term conditions would suggest it makes one more willing to travel the route with a little bit more safety.
And I think for us, when I think about I think investing is done best when it's purposeful.
And if your purpose in investing is resilient wealth creation, you can't not think about the kinds of things that could go wrong.
It doesn't mean you're going to nail the timing of it.
It doesn't mean that you're going to be perfectly exposed in the moment to it.
But it does mean that if there is a sustained shock to the system, you hopefully have the portfolio structure that can endure it.
And, As you and I have discussed in the past, the philosophy that we take to this is so much more like being a business gardener, if you will, than an active trader of securities in any given moment.
And if you're a gardener, you're trying to build a garden that can endure the unexpected.
You have to expect various seasons, you have to expect the odd plague or pestilence, and You have to be mindful of fire risk and all sorts of other hazards in order to curate something that is beautiful over the long term.
You used a word recently, when we were at the first Eagle offsite a few weeks ago that I hadn't really thought about much, where we were talking about diversification and you used the word instead, variegation.
Can you explain the concept of variegation as this kind of key analytical framework and how it's subtly different from diversification?
Thanks for asking that.
Sometimes the choice of words can matter a lot.
And diversification often has a kind of almost sort of sterile and statistical illusion.
It's almost like Just own 100 securities and you'll be diversified, or own the market portfolio and you'll be diversified.
But sometimes that's not the case because the market portfolio can be very concentrated in a given sector at a certain point in time.
Think back to the late 80s, when Japan was the largest country in the NFCI world because of the bubble there, or the late 90s, when tech was the largest sector, because of the bubble or finance in 2007 and 2008.
And if you look at those moments in history, just being statistically diversified was actually exposing you to bubble risk, whereas variegation is kind of different.
And it's more in line with the notion of being a business gardener, which is, if you think of a garden, what makes a garden beautiful is its non-uniformity, in a sense that it has different trees, different pockets, different experiences.
And not only does that make it beautiful, but it makes the system resilient.
And so, When we think of variegation, we think about it this way.
There's a certain thread of continuity that links all of our stock investments, and that is that we like scarcity of market position, whether it's the assets a company owns, or whether it's their market share position or their capability in a certain arena.
Scarcity in either a real or an intangible asset.
But what's important to us when we put a portfolio together is this notion of variegation that we want intentional non-uniformity.
We want different industry exposures.
We want different country exposures.
And when you look at our portfolio, we tend to be quite diffuse in our exposures, but not in a way that just mimics the market.
So the market, while diversified statistically, is over 70 in the US, whereas we're not going to take that much risk on a single country.
The market is very concentrated in tech stocks, some of which we like, but we're not going to take that much risk on one sector.
The market doesn't necessarily have a defensive ballast element to it.
Like gold, which we intentionally do, but we maintain a limit on the size of that investment so that it doesn't dominate our returns.
And so variation, to us, is part of the curation.
It's intentionally bringing non-uniformity to a portfolio, but in a way that's distinct from just naive diversification.
And finally, I'll just make the point that it brings intent to the notion that we don't want our portfolio to be a unidimensional theme.
So we're not a Mag7 portfolio or we're not just a long Europe portfolio.
In acknowledging uncertainty, want to have many sources of scarcity value in the portfolio so that they can come to fruition at different times and different seasons.
I want this discussion to give people a framework for how to think about building resilient wealth, so that they have a kind of survival guide for the next decade.
And so I want to explore in some depth the different aspects of how we can set ourselves up to survive and prosper in these perilous times.
And so, just to go back a little bit, it feels like the first thing in terms of mindset is simply the recognition that things are truly unpredictable and that, if that's the case, safety and survival become a priority.
And I was very struck.
I was looking back at something you once said to me, where you said You want to be structured to participate in the march of mankind but survive the dips along the way.
And then I was thinking.
The other day I looked back at an old email that I had sent you.
That was a wonderful quote from Peter Bernstein from an interview that my friend Jason Zweig did with him back in 2004.
And Bernstein said, survival is the only road to riches.
You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.
And then he said diversification is an explicit recognition of ignorance.
And I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place.
I want to make sure I'm exposed to it.
And there's a lot to unpack there.
But I wonder if you could just talk about the primacy of just focusing on survival, on avoiding disaster.
Yeah.
Well, I always like to come back to Seneca's quote, where Seneca said if a man knows not to which port he sails, no wind is favorable.
And so I think it really pays to know the destination in advance of setting out on the journey.
And knowing that the goal is to participate in the march of humankind but to survive crises along the way is a good sort of guiding light.
It tells you, rather like the sailor in Seneca's boat, that you need to travel a journey with some ballast.
And so that is why even though we're primarily business buyers.
Typically we might have 20 25, 15 of the portfolio in a combination of cash for short-term deferred purchasing power and gold as long-term purchasing power.
So it's almost analogous to the ballast when you set out on a sailing journey, knowing that you're going to encounter unexpected storms from time to time and knowing what your destination is.
And then I think it also informs us about the kinds of businesses that we want to be owners of.
I mentioned earlier that We like there to be some scarcity in the nature of the assets a company controls.
Because if you control a real asset that's well-positioned, well-located and advantaged, it'll either garner premium rents or premium margins relative to an industry.
And so you might go through business cycles, but you're likely to survive.
The second thing is if it's not a business that involves real assets.
If you have a high market share position, it's going to give you scale economies in whatever matters for the unit economics of that business, whether it's advertising or sales cost density or whether it's the network of distribution that you have overall.
And so market share advantage gives you lower fixed costs, better margins, but also an element of better pricing power, again acknowledging that you're going to face stormy conditions from time to time.
These kinds of businesses help you make it to the other side.
Also, I would say that businesses that have scarcity either the assets they own or their market position tend to have the capacity to be predators when times get tough.
Because they are going to survive and they're likely still generating some cash flow, they can consolidate their market position to counter cyclically.
And that's an unusual position to be in.
And even if you're not investing in augmenting your market position, you have the option value of buying back stock when it's depressed if you have the strong capacity to generate free cash flow.
So At First Eagle, aside from traveling the journey with Symballast, this notion of scarcity in the position of a company is critical for us because it gives us that positive fundamental convexity.
And the key element that has to go alongside with those is a valuation margin of safety.
If you acknowledge that the future is uncertain, when you buy into a company, don't buy on the presumption that you can forecast decades of growth into the future.
Buy at a valuation where not a lot of growth has been priced at all, such that if growth occurs, you get the benefit of that largely for free.
And this comes back to your comment about diversification or, as we would refer to it variegation, being a source of opportunity, because if you haven't paid for growth and you've got variegation in the portfolio, something's actually going to do well, perhaps unexpectedly.
And you're going to capture the value of that if you haven't paid a high price.
And so it provides you with a sort of free source of optionality.
Now, if I compare that to an alternative strategy, which I would refer to not as a resilient wealth creation, but The attempt at extreme wealth creation, it's often a very different approach that investors might take.
They're going to be more concentrated, often thematically very focused.
And they're going to tend to focus on situations where they perceive there to be a lot of option value beyond the apparent value today, either because they see a large addressable market that the market's not fully pricing, or they might be buying a deep cyclical that's very cheap relative to the trailing peak level of its earnings.
Now, that is an alluring strategy to a number of people.
They want to get wealthy quickly.
The problem with that strategy is that it's very difficult to execute with discipline.
It's very difficult to take people with you on that journey, given the volatility that it entails.
And most out-of-money options tend to expire either worthless or less than the premium that you paid for them.
And so one has to be careful when one looks at the track record of people who've built a lot of wealth through extreme concentration and betting on out of the money optionality.
There's an element of survivorship bias in that.
You're looking at the people who have survived out of the many thousands of people who've tried it and have not.
And so I think the point you made about the power of diversification or, as in our case variegation, is a powerful one if the journey is to get there safely.
Let's take a quick break and hear from today's sponsors.
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You have a very brilliant deputy, Christian Heck, who you introduced me to a while back or had dinner with not long ago.
And then I was chatting to him after the recent offsite, after one of the investors there spoke.
He was saying to me that I often focus in my interviews on people with very concentrated portfolios.
And he said you're really falling into the trap of survivorship bias because you're focusing on the handful of brilliant ones who also got lucky and survived.
And he said to me a really fascinating thing that has stuck with me, where he said During World War II, for example, if you owned a diversified portfolio of companies that people can't do without, historically you've done well over time.
I thought that was such an interesting observation that I hadn't really thought about to the extent that I should have done that.
If you have these companies that people can't do without and you have quite a lot of them you'll sort of be okay whatever happens.
Yeah, you know, I'm glad Christian had that conversation with you.
And yes, he's very talented along with Julian, Manish, Kimball, the whole team.
One of the great, actual sources of joy I have coming to work every day is being surrounded by a wonderful team of people.
And I think one of the things that's interesting about having a great team is at the individual level on the team.
They can feel that they're allocating capital on a fairly concentrated way.
But a kind of a source of an additional layer of variegation in our portfolio is that we have different individuals focused on different subsectors of the market.
So they get the benefits of specialization, but at a portfolio level, we're ensuring variegation.
And as to your comment about owning businesses that are necessary during turbulent times, can't help but notice the portrait that's sitting behind you, which is of Warren Buffett.
And I recall reading in his letter to shareholders in 2024 he made an interesting comment that he said we'll typically have more than half of our wealth invested in equities because businesses can adapt to monetary instability as long as they're selling products that are demanded by the citizenry.
And this is a really important insight that you know Price equilibrium can be disrupted, whether it's an oil price shock or whether it's fiscal issues or monetary issues over time.
But companies are adaptive entities.
And as long as their products are desired to use Warren Buffett's terms by the citizenry, they can reprice their business in the fullness of time.
Now it doesn't mean you'll be protected.
In the short term.
You could have a few quarters of difficult earnings, but good businesses tend to adapt.
And he said by way of contrast, having higher yielding cash is no protection necessarily against the runaway currency.
And he identified that fiscal fall is usually the source of that.
And so ironically, some of the comments that Warren made in his annual report quite aligned to our thinking and to the way in which you framed that question.
One of the phrases that you've used over the years that I don't think I had sufficiently quizzed you about, because it's a really interesting idea, is positional assets, where you've talked about things like art and wine and prime real estate in places like Manhattan or even iconic brands as positional assets.
Can you unpack that for us?
Because I think there's something really important there that I've never really fully understood myself, that I need to internalize better.
Yeah, so often things in life or real truth tends to be paradoxical in nature.
And I think one of the things that people are taught in business school is that the risk-free asset is a treasury bill or a short duration treasury security, because the principal is guaranteed and the coupon is guaranteed.
And you could think of these as fixed principal assets.
On the other hand, you have assets that may not actually yield any cash flow today.
Think about a classic old master's piece of art that is by a well-respected painter.
It doesn't have a cash flow attached to it.
So In traditional finance theory, it doesn't have anything to discount.
It doesn't have a value.
Gold or a vacant block of land are also positional assets that in traditional finance theory are kind of hard to think about from a valuation standpoint.
But the interesting thing about these assets is that sometimes reality in the fullness of time can be quite different from what you would think about these assets in the near-term future.
So a treasury has a fixed coupon, has a fixed principle, but what it doesn't have is fixed supply.
So, ultimately, what's the asset of the government?
The asset of the government is the ability to tax its citizens.
And there's probably a real level of taxation that's optimal, beyond which it starts to negatively impact the productivity of the economy.
Or if it's too low, you might not have social stability, which could impact property rights and the health of the economy.
The government has a certain real ability to tax.
If it starts running big deficits on a sustained basis, it's essentially printing more fixed claims on that real asset.
And John Cochran, the economist, makes the point in his book The Fiscal Theory of the Price Level that it's almost like a share split.
Basically, if you keep issuing debt against the same real asset, the real value of that debt must go down.
So the irony of fixed principal and fixed coupon assets is that while they may be risk-free in the short term, they can be quite risky in the long term because they're not fixed in supply.
On the other hand, with a positional asset, it's its fixity of supply that can make it a better store of real long-term value, even though it may be fluctuating in value in the short term and not offer a lot of cash flow in the short term.
And so a vacant block of land in a great city or on a great beach is ultimately going to be cyclical, but it's going to reflect the purchasing power of people who'd like to build a house on that land long term.
So it's going to participate real income growth over time, perhaps in a more secure way than a treasury where you don't know the future supply growth of treasuries.
The same can be said for gold.
The total stock of gold above ground a couple hundred thousand tons.
It could pretty much fit into a – as Max Belmont, who's one of the portfolio managers on our bull funders, figured out, it could pretty much – if you took the center court at the US Open and you cubed it, that would pretty much contain all of the gold that's ever been mined.
It's a fixed positional asset.
And the amount of new gold being mined every year, it was only about 1.5% of that cube.
And the central banks and private investors and people who desire jewelry are competing for that fixed positional asset.
And so, over time, even though it's volatile in the short term, its value has accreted with the wealth of the people competing for it.
And so it's been a better store of value long-term.
And in some way, businesses are somewhere in between.
A great business has a bit of both, right?
It can generate cash flow today.
And if its market position is preserved for a long time, It can participate in the income growth of its customers over time and be a good store of value.
So the best businesses combine free cash flow, and preservation of purchasing power long-term.
But the tricky thing with businesses are that all businesses ultimately have some amount of fade risk.
New businesses get created, eat into the profit pool.
And so businesses are kind of a.
They're productive assets but they have long-term fade risk and sort of like a melting ice cube.
And you want to try and identify those businesses which have a slow melt rate.
And then hopefully you approach a positional asset.
But I think if you would look at a chart that sort of showed 50 60 years of financial history, you'd see that the cumulative return on treasury bills was slow and steady, around 5 annualized, with limited volatility.
The problem being that the cumulative rate of growth in government debt has been much higher than 5.
And so while you've had a steady return, you've had an erosion of purchasing power.
On the other hand, something like gold was volatile, but it's kept pace with the growth in the stock of government debt.
And so it's been a better store of real value.
So that's what I think about when I think about fixed principal assets versus fixed positional assets.
And I think one has to be open-minded to the possibility that an asset that doesn't have cash flow today can have value today if people are going to compete for it as part of their nominal pool of wealth.
It's hard to remember in some ways, given how successful gold has turned out to be over the last four years or so.
When you built a large position in gold a long time ago, it was very, very contrarian.
And people like Buffett were saying how foolish it was to own gold.
And I wonder if you could just give us a sense of what you realized early on.
Some of your wisest and smartest peers necessarily didn't view as so important about gold.
And also just the emotional difficulty of making this very large, very contrarian investment that for years you kind of didn't get rewarded for.
So I guess, if I had to pin it down to one thing and first let me just give credit to my predecessor, Jean-Marie Ebiard, who had always invested some amount of the fund in gold and had recognized that, in extremis, gold has value as a potential hedge and it has a kind of a real monetary value to it
And Jean-Marie had often said, gold is not a commodity, gold is money.
And I think the criticism of gold from many luminaries has been that it's inert, it's useless.
But I think the paradox of that is that the utility of gold as a potential hedge is its uselessness as a commodity, because it's chemically inert.
It naturally lasts forever.
And because it's not used primarily as a commodity, it has less sensitivity to the business cycle.
So a commodity that doesn't last forever, that rusts or rots or fades, is produced for use.
So whether you're talking about oil or copper or iron ore, it's going to have volatility that tracks the business cycle.
The inertness of gold gives it a naturally lower sensitivity to the business cycle and a naturally longer duration.
In fact, because it's inert, it's also innate.
And not much is innate. in life.
Great businesses, as we discussed before, they need to be managed to avoid fade risk.
Even people's recent interest in Bitcoin, the Bitcoin system needs to be managed.
You need to attract a vibrant community of miners for the system to self-perpetuate.
Sovereigns have to be managed.
An economy has to be fiscally sound and monetarily sound for sovereign paper to have value over the long term.
Commercial real estate has to be managed, but gold is innate.
And I think when we looked at a series of alternatives, we didn't find much else that was innate and also scarce and dense, so easy to store.
And if you were to look at a periodic table, most of the other similarly dense materials are not many very useful in superalloys or in catalytic converters or, as they get heavier radioactive, and often they're brittle and not malleable.
And so, their suitability as a defensive hedge is less.
And so I guess the best way that the insight that I came to my mind is that gold is essentially defensive land.
It is the most defensive land and it's in scarce supply.
And unlike traditional land that is landlocked to a given community, gold is mobile.
And so it gets competed for globally.
And so I guess I just came to a conclusion that the equilibrium value of gold over time would pace with nominal wealth, even though it's going to be cyclical.
And so it wasn't a brilliant insight per se.
It was just a common sense observation, and one for which I really owe a debt of gratitude to Jean-Marie and many other members of the team who've studied this asset.
And I will also make the point that because we appreciate gold, it doesn't mean that we're gold bugs perpetually gold for its role as potential ballast in our portfolios.
But if you think about our approach to stock selection, which is combining both scarcity and evaluation margin of safety, the same applies to gold.
If you buy gold after it's done very well for a very long period of time, it will remain a scarce asset.
But if it doesn't have a valuation margin of safety, it can go a decade or two in the wilderness in terms of its real return character, as it sort of converges on sort of long-term norms.
And I would say, as gold has recovered from being rather depressed relative to the value of equities and relative to the value of government debt outstanding, to being more rationally valued,
The risk reward for gold is now more symmetrical than it was when it was at a much lower valuation.
We still have a decent commitment to gold in our portfolio.
It's still a mid-teens percentage of our portfolios if we combine bullion and gold miners together.
But I will point out that on pockets of strength sometimes we'll sell some gold here and there so that it doesn't become an outsized position in our portfolio.
Just the same way, a bank might have 15 of its assets in tier one capital and then look to lend out the majority of its portfolio in productive loans.
It's not necessarily going to want to build 30 or 40.
T1 Capital.
Over time, it's going to want to deploy that as productively as possible.
And there is a state of the world where, if gold had done exceptionally well and equities have collapsed and gold is expensive relative to history, that we might choose to recycle more gold into the ownership of equities on very advantageous terms, in which case our gold position could come down from mid-teens to the mid-single digits.
We might feel the need for less ballast if risk assets are being very compellingly valued.
And so I don't want to convey a notion that we're permaballs or we're gold bugs per se, but we've thought a lot about this question and it still serves a valuable role in our portfolio.
But I just want to highlight for investors that, having done well for some time, the risk-reward is more symmetric than it might've been a couple of years ago.
I want to go back to this idea of looking for very resilient businesses for scarce assets that are likely to do well even in relatively difficult environments.
When you look at specific companies that you own both domestically or abroad, whether it's a Becton Dickinson or a FEMSA or a Hoshizaki or a Grupo Mexico or, you know, SLB Workday, things like that.
Can you take a couple of them that embody the kind of durability and resilience that we've been discussing?
And this is not as stock picks because this is a fast moving world.
And by the time this comes out in a few weeks, who knows what the price will be.
But it's much more to illustrate the kind of qualities you look for in a business.
So I mentioned earlier on that one of the challenges for the US equity market coming into this moment of geopolitical crisis was that risk perception was low.
But that's a top-down observation.
Bottom-up, risk perception is not uniform.
And one area that had been quite out of favor has been healthcare.
But not every healthcare company is created like.
And I think you mentioned Beckton Dickinson in that list of companies that you cited from our portfolio.
And I think that's a good example of what we do, because Beckton Dickinson is a company that has really honed its focus over the last few years.
They spun out their diabetes business into a new company called Emvector.
They recently spun into a reverse Morris Trust in exchange for a stake in Waters, their biosciences and diagnostics business.
And they've really focused their business in on what is a world-leading franchise for syringes and catheters.
So every time you go to a hospital, it's likely you're going to encounter a syringe or a catheter.
And they have more than half the world market for syringes and catheters.
And so it's a company that has... very strong market share position.
And as for what I mentioned to you before, that gives it certain scale economies in manufacturing in RD and it's embedded in the hospital system.
And so they are closest to the patients.
They have the ability to participate in what I would call a regenerative feedback loop.
They know what technology can be added to the syringe oil catheter to make it more efficacious over time, because they're closest to it in the most number of locations.
And it's a very strong company that's very free cash flow generative.
And because health has been out of favor, it's available at 12 to 13 times earnings.
And so if you invert that PE ratio, that's an 8 earnings yield, which basically means that the market's not expecting much by way of growth for this company at all.
Yet if we think back to the conversation I had about positional assets, they have a very strong position.
And over time, as more and more medications not in pill form but are biologicals, syringes and catheters become more important.
And I would add that they're adding more software and systems technology in the hospital to deliver these things more efficiently.
You can imagine AI being used such that a nurse doesn't have to walk in to monitor your dosing every hour and to look at how you're doing with that dose level.
It could be monitored remotely and instantaneously.
And so...
That's a good example of a business that has scarce intangible assets, high market share.
And it's almost like a royalty on a small slice of the world economy where the market's not really expecting a lot of growth.
And the company, having brought focus to the business, is now able to use a decent amount of its free cash flow to pay healthy dividends and to buy back stock at these depressed valuations.
Robert Leonard That word royalty is a really interesting one that you often use.
I often think of the phrase you've used in the past about how you put together a collection of eclectic royalties.
Can you unpack that?
Because I think it's a really elegant insight that a lot of people don't really think about.
And as you're putting together your variegated portfolio, That idea of this kind of collection of eclectic royalties seems like a really elegant insight.
If you could explain what's going on there.
Well, someday, sometimes in investing, and I think often mundane can be beautiful.
Almost everyone wants an opinion on AI. because it's the focal point of market.
That's the focal point of society right now.
And so, by definition, trying to predict which company is going to be the greatest AI beneficiary is going to be a more competitive enterprise than identifying a company that really has a strong position in a small slice of the world economy.
And that's what we really mean by an eclectic royalty.
And another stock you mentioned there was Hoshizaki, which I view as quite the eclectic royalty.
It's the world leader in commercial ice machines.
So if you go to a restaurant or a hotel or a stadium, more likely than not you'll find a Hoshizaki ice machine there.
And this is a niche technology where they've developed a reputation for the best quality.
And given their scale, they have the ability to produce quality at reasonable cost.
And around that core, They've been able to add to that royalty.
They've expanded into other areas of the kitchen, the commercial kitchen.
And the company is listed in Japan.
It's not a household name.
And so it doesn't trade at a premium valuation.
In fact, right now today, the company trades at about eight to nine times the EBITDA, which is well below where most LVO activity has been done in the last few years in the private markets.
And in fact, they have a competitor in Germany called Rational that trades at 20 times EBITDA.
And so it's an undemanding valuation, a strong market position.
It is an eclectic royalty.
And This is a situation where management have been great stewards of the business long-term.
They've really focused in on what they do best.
They're very strong in that.
And they're now at the margin focusing more on capital allocation.
And so if you have a royalty...
It matters not just that you maintain that market position but you do something sensible with the cash flow.
Increasingly, they're using their free cash flow to pay dividends and buy back stock, which is quite different from a decade or two ago.
The norm in Japan was to hoard the capital.
They have a very strong balance sheet but increasingly they're able to pay good dividends and buy back stock and make small bolt-on acquisitions that give them complementary products to where their core royalty is income is, if you will.
It's not a royalty in the sense that you're getting a percentage of the revenues in a fixed sense, but it's a de facto royalty, given the strength of their market share position.
And it is certainly eclectic.
It feels like you're.
I don't know if this is the right image, but it feels like you become kind of a toll collector in all of these different industries around the world.
That's the mental model for us.
I mean, I think you give an analogy if you just had a sequence of numbers 1 2 3 4 5, up to 3000, only a certain percentage of those numbers are going to be what I would call prime numbers.
Most numbers are derivatives of other numbers.
They're multiples of other numbers.
And a great business is almost like a prime number, right?
So, by definition, there are several thousand companies that we could invest in around the world, but maybe only 10 of those are primes that really hold that scarce market position.
And I would say, at any given point in time, most of those prime businesses are going to be quite fully valued because they're prime businesses.
But I think this is where knowing what you're looking for makes a big difference.
Because, if I could give you an analogy, if you were just looking to buy a prime piece of real estate for yourself, you'd be frustrated most of the time that the apartment you want to buy is too expensive.
But if you knew the prime piece of real estate you'd be willing to live in in any of the 400 major metropolitan areas of the world at any given point in time, something would be happening somewhere that would give you the opportunity to buy your dream home at a reasonable price.
And so, by virtue of knowing exactly what we're looking for, But by having a global universe across all industries, we can essentially wait.
Let time do the work for good businesses to come into a valuation zone because of some difficult exogenous environment.
And so ours is a waiting game.
It's almost like the business gardener is waiting for the right time to plant the seed.
And once we've bought, it might take us a decade to get a business we like at the right price.
We then look to own it for the next decade.
And so the cycle time is incredibly long for trying to do this at a reasonable price.
Yeah, there's so much that's important there that I want to unpack.
But this emphasis on patience seems absolutely critical and central to what you do.
This willingness to wait a long time until companies become cheap enough for you to buy them, and then your willingness to hold them typically, I think, on average for about a decade.
And you once said to me that no commodity is in scarcer supply or more valuable than patience.
Can you just talk about difficulties of being patient in an increasingly hyperactive and impatient world where most investors simply aren't willing to wait that long?
It really is difficult psychologically in a sense because we're wired in annual cycle time.
If you think about the process of growing up, going through primary school, you go from one grade to another, and then You go through college, one year to another, and then you finally get your job and you get your annual review.
We're kind of wired in annual cycle time and people want results over the next year or often sooner.
People are inherently impatient.
And yet, interestingly enough, Some of the, I think, most reliable sources of outperformance in markets take a lot of time to play out.
Going back to the analogy of the garden, stuff that grows quickly isn't necessarily the best.
I mean Moliere, the French playwright, said that the best fruit comes from the trees that are slowest to grow, or something along those lines.
And I think that is true in the world of investing, because if you think about the benefits of a scarce market position the cash flow generation cycle that I talked about before those benefits pricing power and more free cash flow don't really make a huge difference in any given quarter, or even that much over a year, but they do accumulate over a decade.
And if you're trying to align yourself to management teams that are either founders or think like founders, or families that have your generational perspective.
Sensible capital allocation decisions don't always look like the hot choice in any given moment.
But they sure make a difference over a decade by making sure that you're not taking a dollar cash flow and deploying it into something speculative or unrelated to your business, sticking to your knitting or distributing the free cash flow or buying back stock when it's out of favor.
Those things on a cumulative basis over a decade can make a big difference.
And likewise the degree to which a business has incumbency advantage back to the melting ice cube analogy.
If it has a slower melt rate than the typical business in the short term doesn't really affect sentiment that much.
But over a decade... just being more of a positional asset will make a difference.
You're more likely to participate in the wealth pool a decade from today.
And then finally, if an element of the investing approach is seeking a valuation margin of safety, The 2 or 3 incremental earnings yield or free cash flow yield you get today by demanding a margin of safety doesn't really dominate return in the short term.
And in fact, in the short term, what dominates returns is shifts in sentiment.
Risk on, risk off.
They beat the quarter.
They haven't beat the quarter.
The Iran war is over or it's still going.
These things dominate in the short term.
But over the long term, the power of arithmetic is ineluctable.
And so if you have a higher earnings yield or free cash flow yield and the business does grind out growth arithmetically, your returns will converge over time on that.
But arithmetic takes a long time to become statistically significant.
And so all of these things require patience.
Yet, I don't know what the number is off the top of my head.
If you were to look at the average turnover of a mutual fund or a hedge fund, it probably implies less than a one-year holding period.
That's renting a business.
That's not owning a business.
And some people do that very well.
And I'm the first to acknowledge that we don't have a monopoly on the right way to think, but that's not something we do well.
We've basically said we are going to be patient investors because that's where we see more reliable ability to add value.
A challenge is obviously keeping clients with you on that journey.
And there can be years at a time where that is not rewarded by markets.
And so part of the value we hope to add to our clients is staying true to a philosophy, even though in the short term it may not be the hot dog.
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How did you handle it emotionally during that long period of 12 years or so I guess, maybe even longer, maybe 15 years where it was just much easier to make heady amounts of money if you invested in mega cap tech and growth stocks in the US?
And here were you being kind of prudent and global and patient and buying kind of dowdier stuff that was less glamorous.
How did you actually handle it psychologically, just being in the desert for that long?
Well, firstly, you have to acknowledge that it's not easy.
Anyone who tells you that it's easy to handle that is probably just insensitive to the cues of the environment around them.
And I think there were times when it was tough.
And a team of people around you are doing something that you think is prudent stewardship.
And when people outside that team feel like they're being let down because you're not participating in what's doing very well.
That can be painful, because it's one of those moments where you feel like you're doing the right thing, but there's no exogenous reward.
And then I think you have to step back from it then and say, well, What gave us conviction?
I think firstly, it's that the knowledge that ultimately arithmetic does play out.
As long as the businesses you bought weren't fading at a faster rate than the typical business, and you bought them at decent prices and they had something special about them that would accumulate and manifest itself, perhaps unpredictably, which it did to a certain extent over the last 18 months.
And one analogy I've given is it's almost like you're making popcorn and you put the corn kernels in the microwave or in the pot and you heat them up.
It's very difficult to predict which popcorn is going to pop and when.
But if the process has integrity, then most of it's going to work out okay.
You'll have a few things that fizzle.
And so One of the things that helped us get through that period was really focusing on the process, focusing on the task at hand.
And, in fact, having conversations with folks like yourself that get you to think more broadly about why it is that you do what you do.
And there's a book that kind of impacted me in this regard, which was The Snow Leopard by Peter Matheson.
And this is a book that you and I talked about.
It's an interesting book because here is this individual who suffered an enormous personal loss and he goes off in search of the snow leopard.
He doesn't know whether he will find the snow leopard or not.
But at the end, it's not about whether that mission was accomplished per se.
It was actually about understanding that it's the task itself that matters, and the reward is in doing something well.
And so we spent a lot of time as a team thinking about, are we doing our research well?
Are we really thinking about business competitive advantage thoughtfully?
Are we thinking about how to value intangible assets?
And are we staying true to a time-tested approach?
And I think focusing on the quality of the process is really the core source of stamina and realizing that it's not about getting exogenous rewards at all points through time, but there's something super satisfying to doing something that's intrinsically worthwhile and having it rewarded episodically and then, if anything, selfishly.
We're probably luckier than a lot of other professions.
I think of the art world Where, by definition, if you are a cutting edge artist, it may be generations before the value of your work is truly perceived.
And so we're kind of fortunate that it can happen within a lifetime.
I've been thinking a lot in the last few days about the snow leopard.
Before you know, in preparation for this conversation,
And you and I had exchanged some notes on it back, I think in probably 2023, where I think I gave it to you.
And you then read it in a weekend, of course, being a much more diligent student than I am and sent me a bunch of notes on it.
I was looking over some of the quotes that had appealed to both of us, one of which gets at exactly what you were just saying.
Where Matheson is, you know, going in these very brutally difficult mountain environments?
I guess it was in the Himalayas, right?
If I remember correctly, looking for the snow leopard.
And so he's accompanied by all of these local shoppers who are carrying everything.
And he says the Sherpas are alert for ways in which to be of use, yet are never insistent, far less servile.
Since they are paid to perform a service, why not do it as well as possible?
Yet their dignity is unassailable, for the service is rendered for its own sake.
It is the task, not the employer, that is served.
I thought that was really interesting.
It's a lovely insight, right?
It is a wonderful insight.
And I think, as he goes on this journey, there's almost two elements of the journey that he has to come to terms with.
One is he has to become comfortable with himself.
And one of the things I think that's critically important in investing is that you have to be investing in a philosophy and with a group of people where you can be comfortable in your own skin.
Some people are great at a more focused, more high-octane form of investing.
Other people don't want to take any risk at all and just sit in cash and are willing to suffer the erosion of purchasing power because of that.
But knowing who you are is important.
And I think he has some beautiful expressions in that book where he was becoming comfortable with himself basically.
And I think the term that he used was washing away the thorns and thickets of fears and prejudices, anger and expectations, to just be comfortable with who you are.
And I think the other thing that happened in that book is that, Despite all of the issues that he'd been going through in the lead up to going on this journey, he sort of arrived at a simple destination where he was able to just stare and wonder at the beauty of the world around him.
And I think that's one of the things that's most motivating in the investment world, because I often say to my kids I can't imagine doing a job that's more interesting.
I have wonder for the things that I get to learn all the time.
You travel the world, visiting different companies, trying to craft the code, one stock at a time, and then you try to make sense of events.
Nothing could be more interesting.
And just the wonder of being able to observe that is its own reward and source of staying power.
And so I thought the book was very valuable.
And in fact it's a great book for its brevity as well and thus my capacity to read it in the weekend.
Yeah, there's also a beautiful audio version.
I think maybe abridged slightly that he read himself as an old man in this really gravelly kind of broken voice.
So it's an old man looking back on a period where he was kind of broken and was going into the mountains looking for himself.
And it adds a sort of extra emotional layer to hear him reading it.
But there's something lovely also in the descriptions about the snow leopard, where He says at one point perhaps in the days left to us we shall never see the snow leopard, but it seems certain that the leopard will see us.
And then he says later if the snow leopard should manifest itself, then I'm ready to see the snow leopard.
If not, then somehow, and I don't understand this instinct even now I'm not ready to perceive it, in the same way that I'm not ready to resolve my koan like a Zen koan.
And in the not seeing, I am content that the snow leopard is, that it is here, that it's frosty eyes watch us from the mountain.
That is enough.
And it sounds a bit esoteric, but I was wondering what you made of that, this sense that there's this sort of mystery, this thing that we go out and seek and maybe we'll never solve it.
Maybe we'll never solve the puzzle.
Well, sometimes the act of seeking something makes it erode into the horizon, and I think the snow leopard is a good metaphor for that, because it senses your presence.
And so, like a good Zen koan, the only resolution to the puzzle is to become at peace with the fact that you may never see it, because that's its inherent specialness, its ability to obey and, And I think,
That passage to me captures his coming to terms, his wisdom.
And it's like many things in life that you try your best to become better, but you can't necessarily touch an asymptote.
And in fact there was a good book written by University of Chicago I think it was economics professor Galanson, called Young Geniuses and Old Masters and it was, you know, centered on the art world, but it It was about, you know.
He came into analyzing art, sort of analytically saying, with the question of like when artists paint their best work.
And I guess his hypothesis was it was going to be when they're in sort of their late 30s, early 40s, when they had enough experience but they still had energy that they were going to create their most valuable works.
And he looked at the history of artists over time and He found something that was quite different, but it was bimodal, that typically young artists had a stunning new insight and their best works were their first.
Or there were old masters who were chasing the equivalent of the snow leopard.
Never got there, were iterating towards something and their last work was their best.
And I think, at least for those of us who haven't been fortunate enough to have a stunning insight in our early years, there's at least the hope that you can chase some asymptote into your later years.
Another book that we've discussed a lot in recent years is by Ian McGilchrist.
This brilliant Scottish polymath, who was a fellow of All Souls College at Oxford and an Oxford literature professor, and then, inspired by Oliver Sacks, if I remember correctly gave up being a literature professor and became a neuroscientist with this deep passion for philosophy and music.
And he wrote this book, The Matter with Things, which is subtitled Our Brains, Our Delusions and the Unmaking of the World, which I've dipped into many times.
But Matt, being a much better student and a more persistent person, read and sent me his notes on like 2000 pages of this book, or something like that.
Maybe not quite as much, 1,500, 2,000.
It was a big book.
This is not as brief as The Snow Leopard.
Why did that have such a profound effect on you?
It definitely rewarded the investment of time.
I think it's a brilliant book.
And he, as you mentioned, is a polymath.
He's worked in different fields from neuroscience and philosophy.
And it's a great book and it's stunning in its breadth.
If I could do with the injustice of trying to condense a couple thousand pages into a key insight.
That really sort of stuck with me is that you know we've grown up in a time sort of following the Scottish Enlightenment, where linear reductionist thinking was, is the perceived path forward.
And I think AI is the ultimate manifestation of that that we can construct these models to predict the next word that are going to solve all of our problems.
And I guess he starts out the book with an analysis of left brain versus right brain behavior.
And in fact What we sort of think of as the scientific revolution and this kind of reductionist, critical thinking approach is a very left brain activity.
The right side of the brain behaves very differently, and he provides multiple examples of this, where it's basically about nonlinear pattern recognition.
And a lot of psychological disorders are really involving patients that have overactive left brains and are missing basic pattern recognition, empathy and other things associated with the right brain.
One of the things that was sort of striking there is that the right brain has the ability to recognize what he would sort of term, sort of flow and emergence in systems.
And the role that we as humans have actually in actualizing potentiality and in perceiving beauty, sort of like Peter Matheson on his journey into the mountains in search of the snow leopard.
And I think it's a profound book and it's full of very thought-provoking discussions.
But I think it really helped me deepen the analytical understanding of why thinking about investing as a business garden makes sense.
Basically because the market is not a machine.
The market can't be sort of digitized and reduced to very specific models.
It's an emergent system, and it's inherently complex in nature.
And so you know, I think you have to work with the elements, like Seneca's sailor, if you will.
You know, rather than imagine that you sit outside the system and you can predict the wind with precision, etc.
And I think This book was just so rich in its range of intellectual inquiry and so rigorous in its sourcing that it's kind of like a lifetime of learning.
And it reminded me when I read Montesquieu's L'esprit de la loi, The Spirit of the Laws, which is a great book written in the 1700s about different forms of government.
In the preface Montesquieu, the French philosopher, basically said don't.
Don't read quickly what has taken me 20 years to put together.
And I think this is a book that I've not just read once, but I've gone back to long tracks and reread, and reread again.
And I think it's a wonderful work.
And I think you can't help but be influenced by it once you've read it in depth.
I think one of the things that's curious and thought provoking is that a lot of the great investors do seem to be left brain dominated rationalists right.
Like you look at someone like Charlie Munger.
You look at someone like Ray Dalio.
I remember Dalio talking about the markets as a I won't do him justice, but talking about it markets as a machine where, if you really could study the cause and effect relationships in enough detail, you'd be able to chase it all down and it would all become incredibly logical and like entirely logical.
And I just think, not to diminish Ray, who's brilliant, but I just think it's not true.
It may actually be really useful in practical terms to guide you through a complex world, to have this kind of system, this very rational system and framework to see the world.
But I think one of the challenges is this question of how you harness the strengths of the right brain and avoid the limitations of linear left brain thinking.
And I'm way above my pay grade here, but I wonder if you had thoughts about that.
Well, I think one of the challenges for thinking about markets in a linear sense and Ian McGilchrist provides a bit of an analogy to this
I think he was talking about an ant colony, for example.
Linear relationships only relate to slicing time in a small moment.
So what I mean by that?
If you look at an ant colony from above, It's a complex system that seems very self-organized, but it's quite different.
You know at the level of the ant colony.
You just you know The ants are going out looking for food and they leave a pheromone trail when they find it and other ants pursue that.
But then if you drill down another level and you get into the cellular dynamics of the ants, it's a complex system as well.
And so where you slice that system to think about cause and effect and correlations impacts your sense of correlations.
And so I think the same can be said in systems like the market, where the underlying economy is complex, and then markets are another layer of complexity because they incorporate expectations about the future of the economy.
And so it's the interplay of complex expectations and complex reality which is sort of complexity squared.
An author who had a big impact on me early on was Steve Wolfram, who wrote a book called The New Kind of Science and basically showed pretty conclusively that unless the system is obviously simple, it's inherently computationally irreducible and inherently almost equivalent to randomness.
And so...
I think there's enough of a complexity threshold crossed in markets that, even if there are deterministic elements, they're very hard to basically rely on.
And I think I would say Charlie Munger, who you've mentioned, and Ray Dalio.
Even though they had very disciplined left-brain models, I would say both of them also have big sort of pattern recognition.
You know, Charlie talked about the Lollapalooza effects and he was very focused on the dynamics of incentives and human behavior and those kinds of elements and the role of empathy and understanding.
And so he did have both.
And I'd say you know, Ray often sees the bigger picture in terms of the evolution of different systems.
You know, we were talking before about China and the US.
Ray's had strong thoughts on that.
And I think on the role of gold and the history of fiat money.
And so I think, On the one hand, they are looking at historical correlations, but on the other hand, I've found both of them to be very thoughtful about some of the bigger patterns that are at play.
My own take on it is that sometimes you've got to think about the elements of a system that might have a skew to them over time.
While a system may be unpredictable in the short term, Something like fiat money has agency costs.
It's easier to stimulate in times of crisis, run big deficits, run zero interest rates, than to do the opposite in good times.
No one wants to take away the punch bowl.
And so, even though currencies go through cycles and interest rates go through cycles, over time, Most forms of man-made money have died eventually or been diluted substantially.
There's a point that Ray's made as well.
And so, I think number one, you have to hang on to angles that persist through the noise.
They're inherently behavioral in nature.
And number two, you have to resist the temptation of trying to predict everything all the time.
And that brings us all the way back to where we started this conversation, which is the current events in the world and trying to develop a portfolio that can endure through uncertainty.
And I think just recognizing uncertainty is almost like recognizing that you might not see the snow leopard.
It will certainly see you, just like uncertainty will certainly impact you.
But I think if you can structure your affairs to endure it.
That's perhaps the learning that I've taken from all of this reading.
Rather than sort of getting too arcane about the detail, I think the central learning is that focus on getting down the slope safely.
I think one of the reasons why McGilchrist probably has resonated deeply for both you and me is that he's so not reductionist.
He's able to see every side, in a way, partly because I think he was so steeped in literature and music and philosophy, as well as in science.
And so he's a beautiful combination of these things.
And I remember, I think that I've always loved listening to him talk.
He's just got the most beautiful mind and There was a wonderful interview that Sam Harris once did with him on the Making Sense podcast.
And Harris, who's brilliant but kind of annoys me, you know, said.
You know, Harris was always obviously like the smartest guy in his class and was used to everyone, you know, conceding to his arguments.
And you know he launched into this very kind of dismissive diatribe about people who believe in some kind of afterlife.
And McGilchrist who, despite Harris's intelligence, just clearly another order of intelligence and wisdom just came in really beautifully, in this lovely kind of gentle way and talking about how little we know.
I wrote this down because I loved it so much.
He said, it really behooves us all to be rather humble.
And then he started to explain how even something like what we know about matter and consciousness is vanishingly small.
And he said, I mean, the more we know about matter, the more mysterious it becomes.
The reductionist philosophers and biologists come to us and say we think it can all be explained by physics and they think they're being very hard-nosed.
And in truth, he said, it's all rather complicated.
I thought it was just lovely.
It was like this reminder from the smartest guy, this great polymath, saying it really behooves us all to be rather humble.
There's a great lesson in that.
And I think if you don't bring humility to investing, you don't really require a margin of safety or you don't ask for a margin of safety.
If you think you can predict the future, you're going to pay out for it.
Therefore, you're more likely than not to make mistakes, because you're going to be more inclined to value something on your subjective view of the future over your objective knowledge of what the price is today and what the market position is today and how long something's been around already.
I think having a degree of humility is almost a condition precedent to being a prudent investor.
It steers you in the direction of finding scarce assets and waiting to buy them with a margin of safety and price.
I think without having an element of humility, you don't feel the need to do that.
And there are some people who don't have humility but have incredible ability and that manage to survive in the markets that way.
But I would say that's probably going to be the minority of people.
And so if you're approaching markets from the standpoint of it not being your primary profession, or even if it is your primary profession, I think being honest with yourself about what you know and what you don't know is a profoundly important place to start.
Yeah, I remember.
I think it was Fred Martin, this great investor, who'd come of age in the late 60s and early 70s and had endured that period.
He once said to me, there are two types of investor.
There are humble investors and investors who are about to be humbled.
And he had sort of seen it very vividly.
Well, it is a business that humbles you over time.
And that's in some ways part of the beauty of the business, because it basically weeds out those people who are committed to it for the long term versus who dabble in the short term and until late.
They experience their first disappointing outcome.
And I think, As I mentioned earlier, I think it's to me one of the most interesting jobs I can conceive of.
And yet, it's produced a lot of challenge along the way.
And I think that it's that duality that's probably essential.
I think the reward comes through that learning from upsets in the journey and making sure every mistake is an asset, ultimately because you've learned from it rather than expecting that you'll have no mistakes.
It'd be nice to not have mistakes but I think that's not a realistic expectation.
There was a lovely quote that you had sent me a few years back from McGilchrist's book on exactly this, on this topic of adversity, where he said nothing good is achieved without a degree of adversity being overcome.
Health resilience courage skill knowledge, virtue and wisdom are no exceptions.
As Seneca is famed to have put it, a gemstone is not polished without friction, nor is a man without adversities.
And it seems like the market is this kind of beautiful microcosm of life sort of embodies that principle, right?
It really does.
And I think At the beginning of our conversation we talked about Churchill's efforts in the Dardanelles and the Battle of Gallipoli in World War I.
That was a huge loss for him because he had really sort of forged ahead laterally with that.
But when we think of Churchill today we really think of what he did in World War II and what, what a difference he made in history and what a leader he was.
But I think having survived that adversity probably had a profound impact on him in later years.
I always remember I think it was in his that sort of short autobiography about his early years where, if I remember this rightly, he talked about going into battle at one point and I'm probably messing this up, but I think he should have had a sword And, because he had dislocated his shoulder at some point, was still injured, he had a Mauser pistol and, as a result, survived.
And it was one of these things where he drew this lesson from it that sometimes you know these things that seem like great adversity at the time it turns out actually that was the thing that saved you.
And it just sort of reminded me there's also so much luck in this stuff.
Remember how he used to go on the roof of the war rooms in London during the Blitz?
And there's something incredibly courageous about it.
But he could also have been killed in both of those things.
And then the course of World War II would have been totally different.
And so those sort of alternative histories remind you that actually things might not go your way and you better be pretty careful.
No, it's so true, and it reminds you that the fate of an entire country can rest on a random action.
And so...
You have to be mindful of that in analyzing history or in thinking about the inevitability of an outcome.
And that's the key trait of a complex system is that the outcome is very sensitive to the input, and a nanosecond of change in decision could lead to a totally different outcome, not just for that person, but for a whole society.
So, if we're looking back and trying to sum up a lot of the things that we've discussed in this conversation to give our listeners a kind of playbook for how to survive in uncertain times in a world where so many things can go wrong,
If we try to list some of the lessons, it's right.
Accept uncertainty, recognize that things are uncertain and they may not turn out well.
Have some ballast in cash and gold or something, some anti-fragile portfolio, portion of your portfolio.
Own some stocks that are likely to be more durable and resilient not necessarily the hottest, sexiest things, but likely to be durable.
What else?
I don't want to put words in your mouth, but I'm just trying to keep score for our listener.
I mean, I think you've hit on some of the key points here.
I think I would just say that it's not just about identifying businesses that have some kind of scarcity to their market position or the assets they own, but being sensitive to your entry point from a valuation standpoint.
Ultimately, you're most likely to benefit from those businesses growing if you haven't paid much for the growth.
And so it's having both scarcity and value in a stock pick that helps position you for uncertainty.
And I think just realizing that there's no silver bullet.
If you want no risk and you just sit out in cash, just know that over time the growth rate of government debt is likely to exceed the yield on that cash and that you'll you won't have risk short-term, but long-term you have the risk of impairing your purchasing power.
So the amount of cash that we would sit on in our portfolios, if that seems logically inconsistent, is only that which we think we could realistically deploy in a market drawdown.
Because if you have cash that you can deploy in a crisis, then the return on that cash isn't just the yield, but it's the option value of being able to buy a great business at a great price.
You have to be able to deploy it within a cycle or so in order to get that option value to exceed the dilution to cash that's coming from the supply of government bonds growing faster than the yield over time.
And so being measured in cash is one part of it.
We talked about the role of gold in our portfolios, but even that is going to be sensitive long-term to the valuation of gold.
And I think the other thing to recognize is that uncertainty, to the extent it exists, will happen to you.
You will have drawdowns.
There will be states of the world where you suffer loss, but at the underlying, businesses have staying power and the arithmetic of the investments makes sense and you have some balance that you can deploy in those weak moments.
You're going to be okay long-term.
And I think that's the key thing.
I think the final thing is just the willingness to stick to it, stick to an approach, as opposed to feeling that you have to do what is hot today.
Because what is hot today is rather ephemeral and often results in stunningly disappointing returns when the market's focus shifts to something else or too much capacity goes into a new industry and low returns are generated on that capital.
There's so much to unpack there.
I think also, I mean, one of my great lessons from watching you is that you're also, much as you're obsessed with the game and you enjoy this game, you also have kind of a rich life outside the game as well.
And I remember you once saying to me maybe it's actually kind of helpful to do lots of travel as well and read lots of books and stuff like that.
And it sort of opens your mind more and actually helps you as an investor.
And before I let you go, can you just talk about that a little?
Because I think it's such a competitive game that there's this.
You have to sacrifice a great deal in certain ways to win it.
And I'm always struck when I look at your life, right?
There's tremendous sustained intensity of effort and drive and discipline that's required just the amount of travel and the amount of reading to stay on top of the material.
But I'm wondering how you actually set yourself up so that you also have a rich life, so that You're learning other stuff but you're also pacing yourself for a long-term investment journey.
And you're not just kind of burning yourself out in some blaze over 15 years.
So if I spent a lot of time sitting in front of my computer screen thinking, reading financial statements and the like, but if that's all you did, it could become a rather left brain activity to the discussion we were having earlier about in the Gilchrist.
I think if the goal is to promote pattern recognition, to see the world in perhaps a way that's different from other people, I think having interests outside that field of linear inquiry is really, really important.
I can't tell you, just as I think about, I'm a very casual player of backgammon.
It's a fun game and humbling as well.
But I think Many of the patterns that emerge in backgammon have provided sort of analogies for me to how to think about portfolio construction.
Or, you know, I love researching the great wines of the world.
And studying the great winemakers has informed how I think about the job of being a business gardener the selectivity, the curation, the patience.
Seeing that in a different field has helped me better appreciate what it might take in my field.
I have an enormous debt of gratitude to my wife, Melanie, who has kept me socially active.
Otherwise, I might just be so left to my devices, my books and my financial statements.
And in doing so, She's exposed me to a myriad of different ways of looking at the world at any given point in time, and I think that's also very important.
And travel is the same in a sense, because if you're going to Tokyo, or you're going to Seoul, or you're going to Paris, you're going to see the world through a different lens from just sitting in your seat in New York all the time.
I think, whether it's trying to sort of learn a new sport.
You know, I tried my hand at picking up sculling, something I hadn't done since high school.
When my daughter started getting golf lessons, I got a couple of golf lessons.
And, you know, these are things that I may never be great at.
But when you take your neural wiring to a level where you're not comfortable at something Again, I think it broadens the range.
And so the way I would look at this William, if I can sort of summarize it is just being monolithically focused on the task at hand, as wonderful as that is, tends to produce more left brain thinking.
By having this other... engagement with the world in the limited spare time that you do.
But being open-minded to broad fields of engagement is good for the right brain activity.
And I think it helps the art side of our business.
Yeah, absolutely.
And And it's worth it in its own right.
Anyway, there's that beautiful line from McGilchrist, right?
I think he said, I suspect, that the appreciation of beauty is one of the things life is for, which is kind of lovely, right.
Yeah, just.
You go to a museum, follow an artist who was painting 300 years ago and research that appreciating that beauty across time is incredibly rewarding.
And indeed in the Goldcrest sites and a number of philosophers that have come up with the notion that humans basically exist as a form of complex evolution, so that the universe can perceive itself.
And I think, Whether you're looking for beauty in a business or in an evaluation entry point, or an old master painting, or the way you play a sport or a game, or the relationships that you have, I think that is a uniquely human endeavor to find what's wonderful around you.
Yeah, the sense of wonder.
I got that very much from his book.
He had a beautiful quote from Abraham Heschel, who wrote this book on Shabbat, on the Sabbath, a famous book, who said, and I'll end with his words he said Mankind will not perish for want of information, but only for want of appreciation.
The beginning of our happiness lies in the understanding that a life without wonder is not worth living.
Kind of beautiful, right?
It's beautiful.
And one of the things that I find so motivational is I come to the office is that we have a team of people here who are in search of their own wonder and their different industries and their own personal lives.
And I think when you get a team of people doing that for a long period of time together, it's quite powerful.
I think cumulative team years is a really important element of our business.
Building the guild as I think about it, and that sort of shared experience helps you think about what another person may be, the way another person might be looking at a problem.
They might understand your biases better than you do.
And I think that's another element that's really important to creating an investment operation.
Some investment operations are inherently kind of lone wolf operations like the free solo climber.
They're just very individualistic endeavors.
But I think, given the nature of our approach, that requires a degree of variation.
It's a team-based approach.
And I think that's an important thing to reflect on.
Yeah.
Much to reflect on here.
I've really enjoyed chatting with you as ever, Matt.
It's a great joy.
And thank you for everything I said to you recently.
I.
We went out for dinner recently and I was just like God, you've just enriched my life in so many ways.
So thank you.
I'm really happy to have you in my life.
It's just been a really great gift.
Thank you, William.
And for the listeners here.
I think hopefully you all have picked up.
The books that so moved me were actually recommendations of William's.
And so I think there's it's important to surround yourself with people who help expand the way you think.
And so thank you, William.
Thanks so much.
All right.
Lovely to see you.
See you again soon.
Thank you.
Take care.
Thanks for listening to TIP.
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