In Good Company with Nicolai Tangen - Paul Singer: Activist Investing, Market Risks and Avoiding Losses

Episode Date: February 26, 2025

This week, Nicolai Tangen sits down with Paul Singer, legendary investor and founder of Elliott investment Management, one of the world's most influential activist investors. Singer shares insights from his remarkable career spanning several decades, discussing how activist investing works, why companies need external pressure for change, and his philosophy of never losing money. He opens up about major investment cases, while offering sharp observations on current markets, which he sees as "just about as risky as I've ever seen." The 80-year-old Singer also shares his views on crypto, AI valuations, and his advice to young people. The conversation offers a rare glimpse into the mind of one of investing's most successful and determined practitioners.In Good Company is hosted by Nicolai Tangen, CEO of Norges Bank Investment Management. New full episodes every Wednesday, and don't miss our Highlight episodes every Friday.The production team for this episode includes Isabelle Karlsson and PLAN-B's Niklas Figenschau Johansen, Sebastian Langvik-Hansen and Pål Huuse. Background research was conducted by Kristian Haga.Watch the episode on YouTube: Norges Bank Investment Management - YouTubeWant to learn more about the fund? The fund | Norges Bank Investment Management (nbim.no)Follow Nicolai Tangen on LinkedIn: Nicolai Tangen | LinkedInFollow NBIM on LinkedIn: Norges Bank Investment Management: Administrator for bedriftsside | LinkedInFollow NBIM on Instagram: Explore Norges Bank Investment Management on Instagram Hosted on Acast. See acast.com/privacy for more information.

Hi everybody, I'm Nicolai Tangen of the Norwegian Sovereign Wealth Fund. And today we are hosting an investor legend, Paul Singer, who founded Elliot Asset Management and probably the most important activist investor in the world. Paul, warm welcome. Thank you. What is activist investing? Activist investing is taking a position largely in an equity security of a company and trying to engage with the company to improve outcomes, control or influence outcomes, better outcomes

to unlock value. It could be management changes that are requested. It could be capital structure changes, finance strategies and tactics, anything that will make the company earn more money, be better positioned, more rationally deploy assets. Why do you have to do this? Don't companies do this themselves? Well, as you know, the trend away from active investing, and by active investing, I don't necessarily mean activist.

Active investing just means you open the mail from the company in which you invest, you try to figure it out, you try to understand the company in which you invest, you try to figure it out, you try to understand the company's strategy and maybe you'll call the company up and lob in some suggestions. But active investing is next to passive investing or index investing. Index investing now accounts for a plurality of money that's managed, particularly equity money around the world. What kind of steps do you take?

Some of the steps are very prosaic. We develop ideas from a variety of sources. Given our position in the marketplace, sometimes people bring us ideas, sometimes the street brings us ideas, sometimes we ferret out ideas ourselves. The first thing we do is in an iterative process, we develop a set of questions, different from every, in every industry, and run down the questions. We talk to a lot of people, former employees, customers, Wall Street analysts. A consequence parenthetically of the trend towards index investing is that there's less

coverage, research coverage from Wall Street. And when I say Wall Street, I mean the global investment banking firms and firms that supply research. But we try to become as informed as possible. We try to ascertain the local landscape in terms of culture, in terms of the culture of capitalism and the culture of corporate control, corporate change. We try to understand the board of directors and the management, how they got there, what their strategies are,

why they're failing. I mean, we don't get involved with highly successful companies that can't be improved really. So what is your perfect situation? The perfect situation is a company, And this exists. You may be surprised to hear it, but it exists. A company which has an open door. And by open door, what I mean is something's been going on for a long time. The founder or one generation from the founder feels a moral obligation to the local shareholders or the original shareholders or the family, doesn't want to give up, doesn't want to give up the long-standing strategy or capital structure or alignment or location of headquarters. Any one of a number of reasons why when we come knocking, we not infrequently find what I'm accurately calling an open door. In an open door, it's a different discussion. But if we're right, I mean, we're not always right,

of course, on the details of our strategies, and sometimes we're just plain wrong. But if we're right and there's a segment, an important segment of the leadership, the board of directors, the management, who actually agree with that, then it's a fairly smooth path to getting things done. How many smooth ones do you have for the ones who are not so smooth? I mean, generally speaking, how do companies react when Paul Singer knocks on the door? Yeah, yeah, it's a very interesting question because one thing that is just crystal clear and endemic,

hardly anyone tries to stiff arm us, hardly anyone. There's the occasional, and there's a playbook for that. We have one firm, one fund, and it's large. Is it like $70 billion? Like 72 right now. $72 billion. And we have the wherewithal to back our thesis and pursue our approach. So everyone, almost everyone, sorry, picks up the phone. The advisors all tell them, Elliot, you should pick up the phone.

You should engage with these people. They're deal makers. We're deal makers. And you hear them out. And they do. And so some of the approaches are under the radar screen. Some of the approaches we will file, we will disclose a position. Others, we don't disclose to the public, we disclose to the company that we have a position.

Depends on the rules and it depends on what our strategy might be. But a discussion, a detailed discussion of, and a deck, writing decks like piles of paper large piles of paper. Yeah with Graphs and terrible. What does it mean to be a dealmaker? Well, in other words, we're not we're not crusaders we're not we're not just speaking to hear ourselves speak we're not Engaged to read about ourselves in the FT tomorrow morning. We have a goal, we have a thesis. If our thesis is right and the company takes steps, which is not always, I would say getting all of our requests is not rare, but it's not dominant as the dominant outcome, but we're generally pretty right and the things we suggest generally are accretive to value.

And so the company that engages with us, it's a minority of those companies which stiff arm us. I mean, knock down, drag out, proxy fights or lengthy litigations doesn't really help anybody. But sometimes it happens. What's the ratio of successful outcomes versus not so successful outcomes? Well, since I'm going to define successful as we get a meaningful percentage of what we ask for and the stock reflects it, not just in 20 minutes, but I mean, you know, over a period of time, that we actually, our ideas actually add value. It's the only way we can maintain our reputation that gets the stock to say, oh, Elliot's in this, here's their thesis, nobody else has been able

to unlock that key, the stock is worth more. And of course, it's not a question of short-termism because the actual short-termism doesn't add value to anyone really, but it's not short-termism when the market instantly, overnight or in a couple of days or a few days, understands that you are adding long-term value. You're adding enterprise value. The strategy is better. Your ability to compete is better. In what proportion of the cases do you think you are adding value if you measure it in

that way? Well, the proportion of cases in which we're adding value is, I believe, close to a hundred. The proportion of cases in which it's reflected in action, movement of structure, capital structure, et cetera, directors, is probably, this is just a guess, but it's a majority, it's like 70%. Right. Something like that.

It's not 90, it's not 80, I think. So for instance, last year you took action against Starbucks. You know, I don't want to be a wordsmith here. Okay, let's phrase it differently. But I didn't take it actually. No, no, but it's important. You made an investment in Starbucks. It's important to at least get this right in our minds because the media loves battle

and they love to take down successful investors, rich people, whatever. So the colorful way that it's generally framed is attack. But let's cycle back to near the beginning of our conversation this morning. Fewer and fewer, literally fewer and fewer people are acting like owners and fewer and fewer companies are accepting the notion that the owners have anything to say to the management and the board. It's kind of shocking. And therefore, we are among, certainly in terms of numbers, among a short list of people who do call for accountability. And when we win, the shareholders win. The days of green mail are long gone. Yeah.

Pay off. The days of green mail are long gone. So you make an investment in Starbucks and you initiated a change in strategy. So they changed the CEO, changed strategy, and you made money. Do you think you're making society a better place? It's not the... I mean, I have a variety of political and philosophical and philanthropic outlets for my compensation. And I do think we do make the world a better place, not in every single situation, but this style of investing, it enhances the possibility and the probability that enterprises can service their customers. Competition is good, having multiple outlets is useful.

We happen to, I mean, I'll tell you the most basic answer to your question. There are layers of answer to your question, but at the most basic level. We have like a hundred universities, We have hospitals. We have charitable trusts Yeah, and among the elements of what I just told you is because of our We're not a an activist fund and everything else is window dressing We are an absolute return fund. Yeah. Yeah, so you make the point means that you want to make money

Whatever the market does right now. That's the point. Which means that you want to make money whatever the market does. Right. And so the meaning of that, to your latest question, is in the infrequent and now a distant memory in the infrequent, seriously adverse financial market environments, these people have very few investment outlets that actually perform on that.

Sometimes things don't go your way, right? What are the characteristics of the investments which don't go the way you want? Do they have something in common? Sometimes it's bad luck, but more frequently it's we missed something. We missed, or the hedges weren't, they weren't the right hedges. The tracking arrow was much more than we expected. At the beginning of my career, 1977 to like 1987, hedging was much more simple because we were long a convertible bond and short the stock into which the convertible was convertible. So that's very straightforward and tracking error wasn't really a factor. We've become much more sophisticated in hedging, in creating bespoke hedges for different kinds

of trades. But even those don't work out exactly all the time. But sometimes the worst trades, and I don't mind mentioning them, it's kind of a form of therapy and a pedagogical exercise. The worst trades are the trades that you misunderstand the risk. You put it into the wrong category. I'll give you two brief examples, one moderately horrifying and the other really, really bad. The one that's moderately horrifying is a peer

who will remain nameless sold us a late stage bankruptcy in a de-inking plant, somewhere in the Northern United States. Late stage denotes the risks are mostly gone in a complicated workout bankruptcy process, and the de-inking was their business. You know, waste paper and you're gonna de-ink it and use it again, and that's good for the environment, it's good for the human race, it's good for the galaxy.

Suffice it to say that it wasn't late stage. There were important bankruptcy elements that hadn't been settled, and the de-inking plant didn't really work. So aside from hating the person that sold it to me, it's just a mistake. And we lost. It wasn't that big a position, but we were much smaller. And the really bad one, which was that? That was an arbitrage position in Japanese index-linked bonds, inflation-linked bonds.

Now this arbitrage was perfect. JGBs, Japanese government bonds, full faith and credit, against JGBs that had the, as I recall, the principal amount adjusted for actual CPI movements. The Japanese CPI, Consumer Price Index, never moved much. It was bouncing around zero for decades back then. We're talking about 2007-8, 2006-7-8. Hardly ever dipped tiny bit below zero for a month or something, but it was running plus a little. When we got involved in that horrible trade, a dealer showed it to us, and the dealer had

several other people in the trade. The pricing was minus 2% inflation per year for seven years. Minus 2%. It's the kind of thing where you look around the trading room and ship it in. Right? Okay. So, to make a long story short, a long painful story short, that thing went from an implied in the prices minus 2% per year at the worst minus 4.5% per year. To make this very, very straightforward in terms of arithmetic, the JGBI, the inflation linker, went down 30% in price.

That trip to where we still held it, we lost a gob of money, and it was going to mature just six years or so in the future, but we had lost like 30% of the principle. And these things are marked to market every day. So that calls to action a different set of skills for money managers. A number of people were sold out of that position because when you misunderstand the risk and lever something up that you never should have levered up that way because you misunderstood the essential characteristic, you can have devastating losses. I had a lot of pressure to one-one the trade, but I kept the trade. It was in 08. There were a lot of do or die

positions back then. Tell me about it. I was there. Why is it so important for you not to lose money? Where does the risk aversion come from? It's a great question. Elliot was formed in 77. When I was accepted after college to Harvard Law School, the greatest moment of my dad's life, he was a retail pharmacist, chemist, whatever. And he was sure I was going to be some really big shot. And he was sure that I had to learn how to invest, because I was going to be a financial big shot. I was a psychology major in college.

And I had no idea why I was going to law school, but Harvard Law School was. Sounds good. Might as well. And I think my psychology background titillated the admissions committee. And so the way my father and I dealt with my training was—and he's a retail pharmacist. He's in the drugstore every day, 12 hours a day. We traded speculative mining stocks and tech stocks. And I promise you, you could not name a way to lose money that Dad and I did not hone

to the finest edge. Short selling, long puts, short calls. I was an early adopter of the CBOE, the options exchange. And that culminated in a catastrophic loss in the 74 bear market, where I was in long stocks that I was certain, because of my intellect, I had done the research, I certainly would go up and I held them on margin. At one point, and I'm talking about $50,000 from my mom's special stash in the bottom of the dresser drawers, at one point it was down 88%. So my desire never to lose money again

was a combination of wanting to get my mother's, my parents' money back and the feeling of real devastation. I mean, losing base and my best friends, $10,000 here and $20,000. So when we formed Elliott with, when I realized that I could manage money and make money all the time, the convertible hedging was a very good strategy, very under-serviced, high standstill rate of return, no really good valuation models.

It was all on the fly and all relationships with the street. And along the way, so what I just said is not the full answer to your question. Along the way, what I observed was that when people have losses, meaningful losses, they tend to lose their minds. They tend to lose their judgments. Their sloppiness in accepting the state of play of the world when the skies are blue turns into a clutching darkness

when the headlines and the stories and their friends are in trouble and suffering terrible losses. And so I knew that judgment is impaired. I also knew that if you could keep your, not only your head and your judgment intact, but your capital intact, these rare periods of time when there are special opportunities, I mean those last few weeks in 2008, unbelievable. Everything got cheap and then they collapsed. I mean, seriously, go back and look at it. Go back and look at it.

So if you had the constitutional as well as ability by permission as well as the capital, the access capital to take advantage of those opportunities, that's a pretty cool thing to do. So if you don't lose large amounts of money, so the capital is like a ratchet effect, you make a buck, you keep it, you try to make another one. My clients never held me to a benchmark. Obviously you have to make some money. The brilliance of our approach is that

We don't benchmark ourselves It's it's what I just told you it's don't lose money and whatever's left Hopefully it's a rate of return. It's interesting how formative it is if you lose money early on in your career I mean is Stephen Schwartzman talks about the same thing, right? How you lose your clients' money early on and you just decide you're never going to do it again. You talked about your father. Are you still trying to make your father proud?

I appreciate him probably is not alive anymore, but. You know, he was proud of me no matter what to be perfectly candid about it. No, I'm not doing it to make my father proud. No, I keep doing it because I think we do it well. Is it fun? Are you having fun? No. You're not having fun? You don't think it's fun? Oh, I don't think it's fun. I think skiing is fun, snowmobiling is great fun, sailing is fun.

You're 80, but what, and so if you don't think it's fun, you're 80 years old. You've done it for 50 years, you're one of the most successful people ever. Why do you continue to do it if you don't think it's fun? I get this question, and the reason I basically... This is a little different, this format, but the reason I basically get this question is that I dig in. I'm enthusiastic about it. I get into it. It can't be boring. If you think about what you read about in the newspaper, which is largely distorted, hypothetically, you say, wow, they're doing all kinds of different things. There's no cookie cutter thing at Elliott.

So there's challenges and sometimes it's, you know, we never have a position profit celebration, never. You never celebrate success? No. I mean, we, you know, hey, well done in an email. No cake, no champagne. No cake, no champagne. No, no, no, no. But what I wanna say on this topic of fun is

you can't get bored by not losing serious money. The reason for burnout is sharply diminished. That's what happens. I mean, it's not just horrible divorce or terrible tragedy in the family. It's burnout is, I think, largely people just are drained of emotional energy by adversity and you can't predict markets. So that's another dominant cause of me seeking never to lose money. Because if I want to be risk averse, I have to be risk averse all the time.

What does age and experience bring to your investment process? In our lines of business, if someone is not burnt out or bored or fading in terms of capacity, the experience and wisdom is so, so needed. In today's world especially, the layer of understanding beyond the spreadsheet and the horrible lawyers telling you you have a 95% chance of winning that antitrust suit and then you lose and You get dark and hostile thoughts to all of your advisors So It's that I don't know. I don't like this one

Why Paul why? Just don't like it talking, you also took on Argentina. What happened there? Argentina, somewhere in the late 90s, early 00s, the debt started trading down into the 80s and then 70s. It was still paying. And many people thought that they would go default, and we didn't.

We didn't, we knew that they had a history of default, three, four times in 150 years. We also knew that they were coming out of World War II, I think the seventh, maybe the eighth, the largest economy in the world. So, you know, lots lots of resources lots of capacity. We didn't think it was a good idea And we didn't think they would default they defaulted and the bonds And we bought performing bonds the bond started collapsing

And it was a long time. I remember the exact time. It was a long time before they Gave their first offer. Now, sovereign restructurings come in different flavors. And I don't want to oversimplify, but I think my categories are broadly right. There's a category of countries that have nothing and you're not going to get anything and you're just being annoying by going after them. So Argentina is a real country and after some period of time, I think it was in years, an extraordinary period of time for I think it was in years, an extraordinary period of time for sovereign restructuring, they came in with a 29-cent deal, maybe it was 30, 30 cents.

Now, a 30-cent recovery deal for sovereign restructuring is a number that might be appropriate for a Guatemala or a Honduras or something, Ecuador, I don't know. But Argentina, 25% of the holders, and the bonds kept, the debt kept plunging. 25% of the holders held out. The country said, if you don't accept this offer, you get nothing. So they got a few percent more in a second try at the same offer, like three years later, at the end of those two offers, there were like 60,000 bondholders, including like five hedge funds, of which Elliott was the largest and by that time our basis was down into the teens or 20s whatever 30s. I don't know It had kept trading down and down and down and it was just

In litigation for a long time to just take this thing take you 15 years 15 years Well, that's pretty That's pretty patient. I would argue no, it's not patient. I tell you why. They never accepted our never sat down with us. They were an example, and there have been some in the corporate area, they were an example of just stubborn, haughty, entitled. I mean, the nerve of us, you know... No, but I love the fact that you don't think it's patient because I'm 58, I make an investment, I hope I'm going to get returned before I'm 73.

Yeah, but we weren't patient. We had no place to go. Patience is not sitting, you know, metaphorically speaking, shackled to... No, no, sure. Absolutely. Absolutely. What are the state of stock markets today? Just about as risky as I've ever seen. The long period of time since the last major market event has lulled people into thinking

that they'll always be bailed out, that there'll never be another bear market of 1974, 1987, 2008, 2007, 2008. Leverage is building and building. Risk-taking is building. Those statements apply also to governments. It's absolutely astonishing, this NERP, the negative interest rate policy in Europe and Japan and Switzerland, and ZERP for what, 10 years in the US? It added to ZERP, you added these shockingly high spending deficits.

We're talking about deep recession type spending programs, spending deficits, support programs, at a time when there was no real recession. I'm talking about, I'm actually talking about during COVID also, but after COVID, you know, this year, this fiscal year, over its skis in terms of practical value being brought to users. I mean, there are users and there will be additional uses, but it's way exaggerated. How do you read the crypto markets?

A point that we have recently made is that it is true that central bank money is conjured out of thin air. Doesn't exist. But what also is true about central bank money is that it is sovereign, it has sovereign support. You pay the taxes, you pay your army in that money. To the extent that governments embrace cryptos, this crypto or that crypto or all the cryptos or several of the cryptos, they are embracing alternatives to sovereign money.

And therefore, is the money supply going hog wild now? Because of all these cryptos and all of the support of governments So what are the potential implications for the the dollar as the world's reserve currency? That's the point if Governments are supporting or endorsing cryptos, it's an alternative to the dollar as the reserve currency. And countries around the world are, as you know, not happy with the privilege that the U.S. government asserts as the reserve currency country of the world.

They'd like alternatives. Now, isn't that interesting? They'd like alternatives. The dollar sits there astride the world with all the abuses of that astrideness, and the And the US itself is conjuring or supporting an alternative to the dollar. It makes my head spin. How do you relax? Skiing, snowmobiling, sailing, hiking, biking, music. Why is music important for you?

I like rock music and I have a couple of bands. So you play in the bands? Mm-hmm. Keyboards. Proper rock and roll? Yes. You mean as distinguished from hip-hop? No, I'm just asking.

As distinguished from Lonnie Donaghan? Yes, proper rock and roll. Cool. What do you read? I used to read science fiction, but I mostly read trade, books, research. That's kind of overwhelming at this point, given how complex markets are. It's, so I don't have time to read fiction anymore. What is your advice to young people? Young people who are interested in Wall Street or young people in general.

Young people who would like to go into business. My advice to those people has been and is unchanged over a long period of time, that I value a broad, classic liberal education. They should not take business courses in college. They should take as much history, political science, philosophy, religion, as they can fit in. So what I try to convey is you can specialize in business, the tools of business and trading. I mean now hedge funds, private equity, venture capital, high tech, whatever. I mean that's the golden goose. But in all of that, what comes out if you specialize too soon, you get this narrow, deep skill set, and you're not equipped for the things that are actually happening in

the world. And so I think that stood me in good stead, and being a lawyer has stood me in good stead. Although my partner is not a lawyer, he thinks like a lawyer, which is good. Well, Paul, I think these are great pieces of advice. Study liberal arts, broaden out, don't lose money, and keep rocking until you're 80. No, not until you're 80. Until you can't do it anymore. It's been a great pleasure. Thank you.