Invest Like the Best with Patrick O'Shaughnessy - Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169]

Episode Date: April 21, 2020

My guest today is Manny Stotz, the founder of Kingsway Capital. Manny is one of the leading investors in Frontier Markets, investing in equities in countries like Egypt, Bangladesh, and Pakistan. We discuss the opportunity in these markets from all angles: demographics, valuations, sectors and beyond. It is important to note that we recorded this conversation before COVID, and these markets have fallen 30% without a similar rebound in prices that we’ve seen in the U.S. As you listen you’ll hear why this may be relevant for the companies Manny focuses on and may accentuate the opportunity in Frontier Markets even relative to the numbers quoted in this conversation. Listeners will know my interest in Frontier Markets runs deep, so I was excited to have one of the categories leading investors join me. Please enjoy my conversation with Manny Stotz. This episode is brought to by Koyfin. For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag   Show Notes 2:07 – (First question) – How Kingsway was conceived, their focus on frontier emerging markets, and his career path 11:57 – What are the best company builders good at when it comes to fostering a brand 18:30 – How country-specific factors impact the tailwind 25:43 – How markets are faring in these special circumstances 32:09 – Building a book in many of the markets they trade-in 37:10 – Understanding your edge in frontier markets, showing up 39:59 – Importance of solid distribution for the companies he invests in 42:12 – Concentration in various markets 44:10 – Moving beyond consumer brands in these markets 47:14 – Some of the most interesting countries they are looking into and the country business model             47:42 – Guns, Germs, and Steel: The Fates of Human Societies             47:44 – Civilization: The West and the Rest             47:46 – Why Nations Fail: The Origins of Power, Prosperity, and Poverty 53:21 – New topics he’s excited to learn about that will impact his business over the next 10-20 years 55:37 – Best way for people to get involved and invest in these markets 58:17 – Kindest thing anyone has done for him Learn More For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on Twitter at @patrick_oshag

This episode is brought to you by Coifin. I've become very interested in the best software tools in investing. And when I asked Twitter for the best Bloomberg alternative, the overwhelming winner was an excellent new product called Coifin. It's a web-based platform that lets you analyze stocks, ETFs, mutual funds, and other asset classes in one place. I've been using it every day to track what's going on in the market, and I think if you try it, you will too.

Coifin has a ton of high-quality data, powerful functionality, and a clean interface. The best part is that it's free. You can sign up at www.coiffin.com. A-O-Y-F-I-N.com. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money.

You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaughnessy is the CEO of O'Shaunicee Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy asset management may maintain positions and the securities discussed in this podcast. My guest today is Manny Stoats, the founder of Kingsway Capital. Mani is one of the leading investors in frontier markets, investing in equities in countries like Egypt, Bangladesh, and

Pakistan. We discussed the opportunity in these markets from all angles, demographics, valuations, sectors, and beyond. It's important to note that we recorded this conversation before the COVID pandemic, and these markets have fallen 30% more without a similar rebound in prices that we've seen in the U.S. As you listen, you'll hear why this may be relevant for the companies Manny focuses on and may accentuate the opportunity in frontier markets, even relative to the numbers quoted in this conversation. Listeners will know my interest in frontier markets runs deep, so I was excited to have one of the categories leading investors join me. Please enjoy my conversation with Manny Stotes.

So, Manny, we're going to discuss what I think is one of the most interesting thing happening in markets today, which is incredible divergence between the performance of the U.S. equity market and basically everything else around the world. The result of 2019 was great for the U.S., but it was entirely multiple expansion, basically no fundamental growth. The rest of the world is completely different. So what I'd like you to begin by doing is describing a little bit who Kingsway is why you started this style of investing fund. And then I want to dive into what could be an incredible global opportunity. Sure. Well, first of all, Patrick, thank you so much for having me on this. As I said to you earlier, I was quite hesitant to do anything on the record, which is not our style.

We believe there's no glory in this business, but only results. And hence, we don't even have a website. But I do agree with your sort of high-level observation that there is a very interesting moment in time where, again, the U.S. market has done so incredibly. well, the rest of the world has not, and there are certain individual geographies that are entirely bombed out. I happen to be an investor in those geographies. So Kingsway was conceived just over six years ago. We are an investor in what we call frontier emerging markets. So the idea is basically, if you look at the kind of bigger emerging markets of today, whether that's China

or India, Brazil, and so forth. So we've studied a lot of the wealth creation in these markets, and of course, it's been absolutely spectacular. The Chinese equity market basically didn't exist, something like 20 odd years ago, and it's now shy of $10 trillion. India's market cap is $2.5 trillion or so. And, of course, that's just the public equity. And if you just look at the wealth creation in emerging markets, it's been nothing short of remarkable. And so frontier markets are the ideas basically in terms of look at the level of GDP per capita,

look at the level of consumption per capita, look at the level of market caps, both in absolute dollars, but also in terms of multiple, those are countries which are basically 10 to 15 years behind, in my mind, behind the bigger emerging markets and throw some names out there. So we look at kind of Vietnam downwards. So Vietnam is one of the most developed countries we're in. Our biggest country is Bangladesh, which I'll talk a little bit about. We're in Pakistan, we're in the Middle East, we're in sub-Saharan Africa. The way I came to this journey perhaps is interesting to some. So I'm not from any of these countries myself. I'm from Black Forest, Germany, which is a lovely but rather provincial part of the world.

Grew up there, a humble middle class background. Dad's an engineer, mom, psychologist, so they're academics, but had very little or nothing really to do with big business, let alone global finance. I was sort of ambitious, entrepreneurial, and slightly naive as a teenager. And the disclaimer is, I guess, not much has changed. So I had two big goals in life. One was to change the world. Second was to make lots and lots of money.

And realized pretty quickly it's hard individually, let alone together. but I was stubborn, wanted to do both. So the first idea or insight was to swap the order around. I think that was the right call. It's hard enough and almost impossible in changing the world first. And the second insight, I guess, was to get some inspiration, who's got the most credibility on those two subjects, which I was fortunate enough to get some lists, which exists for that.

And the good news was the top spot on both lists was occupied by the same person, who was Bill Gates at the time, largely unchanged. So the good news, it's not mutually exclusive. The bad news was I couldn't invent anything useful at all. So I had to settle for second or third best and came across Warren Buffett, aged something like 16, 17 or so. And I didn't understand anything about investing. And, of course, apart from being a great investor, which he is,

he's got this incredible gift of explaining complex things in a very easy to understand way, which was very helpful to me. And I still didn't understand very much, apart from one insight that if you have a high return for many, many, many, many years and that's taken off a lot of time, but then you don't need to start with very much. And that suited me well. I had no capital, lots of time. I said, okay, let's figure out returns.

How does that work? Let me in a journey of reading everything. I get my hands on. Keep that up to this day. And then I got very lucky in life. I got a full scholarship at the Lund School of Economics, LLC, paid for by a Greek airline billionaire called Stelios Hagiano. So curious case where the Greek was paying for the German.

I've reminded him, we've returned that favor largely by now. But it was a really big stroke of luck. And I think luck is very important, both in life and an investor. and recognizing it and so forth. It's really changed my life in the most positive way. Both personally, I met my wife in London, and we've got two lovely daughters, one on the way, but also professionally.

Basically, I was able to follow my interest that was building around business and investing, not only in theory, but reading everything, but in practice by working with and four practitioners. And that's what I did every free summer and every minute in between. A bunch of internships, investment banking, and private equity, at hedge funds. And then I ended up at Goldman Sachs,

for my sense. As one does. As one does, yes. So I signed that contract in late 2007 when arguably Goldman was on top of the world. And I didn't join the investment bank, but the internal hedge fund of Goldman Sachs, Goldman Sachs Investment Partners, which is effectively a successor group to what the proprietary equity investment business had been for something like 30 years. Bob Rubin started this in the 80s. Under the banner of risk arbitrage became equities arbitrage, became principal strategies. Many founders of large, investment firms have come out of that group from the folks behind Farallon and Taconic and the Lampert, Perry with that the whole TCI gang more lately, Danny Ock or Eric Mindich

or the Soroban people. So that's kind of the training, very fundamental. I'm trying to figure out whether it makes a great business from scratch and analyzing, modeling that a lot of detail. And then having a stock picker's hat on, but being trained across the capill structure. And so, yeah, I joined that team. I thought I had arrived. And nine months later, we almost went bust as a firm.

And in hindsight, there was a good experience for me because number one, of course, I had so much to learn and you learn a lot more in a dislocated market. Number two, I had no money personally to lose, was still kind of paying back modest amount of student debt and so forth and living off the scholarship savings. Number three, I was far too cheap to get rid of, basically. And number four, if there was any ego, which I probably was, having sort of overachieved, I think landed a job at Goldman, like that was dealt with very quickly. And it's a humble business. So being humble early and often. Early and often is, I think, a good thing. Now, I enjoyed my time at Goldman, I learned a ton, was a generalist, spent time in all sorts of industries,

starting everything that's listed in Germanic Europe, so chemicals and autos and suppliers and industrial companies, cement plants, and spend a lot of time. Then also on healthcare and TMT and branded consumer goods. And I guess if I had any insights at that time, it was the appreciation of quality. quality in terms of business quality, where I think it's a very important idea that I want to flesh out a little bit. But basically, the more time I spend with lower quality businesses, so industry is the more appreciate the benefits of quality. And secondly, I appreciate the fact that you want to seek inefficient markets pretty early on. Europe arguably is more inefficient than the

US. And so we had some interesting situations there, but there was an early appreciation as well. And of course, you know, I got somewhat disenchanted with some of the flaws of the Goldman sort of a way of investing. I mean, there's, again, only good things to say in terms of the people who were smart and terrific and supportive. But basically, I would argue there's somewhat of a lack of coherent investment philosophy. There's no sort of North Star that is what are we really believe in. So it's putting a bunch of some of the smartest people, you know, in the business, and give them all the tools and let them make money. Very decentralized. I call it the acrobat model, running your winners, cutting your losers. And I guess, I also appreciate the fact that there's no

extra medal or prize anywhere in the world for making money and more complex. complicated way. There's no style points. They were doing a lot of complicated things. They allegedly invented capital structure arbitrage with Fisher Black in the 80s. And they were very proud of the fact when I did something complicated and it worked. And I kind of said to myself, there's no style points. It's actually, it shouldn't be more complicated. And it is. And there's elegance and simplicity. So basically the two big ideas, and you know, there were issues with, I guess, things like Time Horizon and alignment and so forth, which I don't need to go into. But yeah, the two big ideas I've had, I guess, that instead of being an acrobat, I want to be rather a

very long-term owner of the very, very best businesses, let them compound for me get out of the way. And secondly, to do that in inefficient markets. And so basically, having studied this idea of quality in different sectors, and maybe it's time to define this, what I mean by quality, which, you know, a lot of people say, oh, this is a great business, is a good business. But what do you actually mean by that? So I think it's very important to have a consistent and concise definition for that. By far, I mean, that's not the only one, and I haven't come up with it. Let me give you mine. For me, the very best businesses in the abstract are businesses that have the ability to sustain a high return on invested capital without debt and for reasons we can understand.

And they can sustain that with a moat that comes from largely intangible rather than physical assets because physical assets are easier to replicate with an intangible assets. So I could, I don't know, explain the Coca-Cola company with that in that framework. You have basically high margins and low capital intensity. Why you've got high margins? while you're turning caffeine, water and sugar, free commodities, which costs very little into coke. And that's 65 gross, 35% operating margins. And your CAPEX to sales is only 4%.

Why? Of course, you need a sort of soft drinks plant, but if you look at it, you're really only selling what's chemically nothing but caffeine and sugar water. And it turns out you don't need a lot of capital to create that. And of course, what you're really selling is the trust, the idea that this is the best sugar in the world, the one you grow up with, the one you love, it makes you happy and so forth. And turns out selling trust or selling ideas is not very capital intensive. Can we talk very specifically about what you look for on the intangible side?

Obviously, brand is incredibly important, but there's lots of what goes into a brand. So talk to me about the deep specifics of what you think the best company builders are good at in terms of creating and reinvesting in brand and maybe some things that you look to avoid. So basically, you've got this high margins of turning commodities in the brands and you've got low capital intensity of selling trust. You marry those two, you get a high return invested capital, which is protected by a mode from intangibles, but brand arguably is the most important. In Coke's case, Coke's the second most spoken word in human language. It's okay, Coke taxi, apparently. I mean, it's hard to measure, but I'm not talking English. So if you think about that for a second, it's an incredible mode.

I mean, if someone gave me $10 billion to compete with Coke, it's not about me setting up a scale, bigger, more cost-effective soft drinks plan. I can literally order the kit. That's not that expensive and so forth. but it's about me convincing 7.5 billion people on the planet that Manny's Coke is now better, which is, I would say, impossible. And the other insight about brands or intangibles at large is there's no scrapage value. So if you gave me 10 billion to compete with Coke and I don't succeed, I won't be able to give you. Can't sell it off.

Yeah, 60 cents on the dollar and sorry, it's all down the drain. So virgin cola is literally worthless. And so because there's no scrapage value, the barriers to compete with great brands or intangible businesses are so high. CEO of Colgate told me once you sort of 2X, the relative market shift. of the next biggest competitor. It's yours to screw up, basically. It's almost game over. So what makes a great brand and a great category, I would say?

By the way, there's other intangible assets which are important. Of course, in consumer companies case, it's distribution, market share, shelf space, consumer trust. In Koch's case, specifically, it's also the kind of IP, that of course, the recipe and so forth. But I agree, brand is the most important because it is, of course, inside the minds of your consumers. So I think having, of course, a very strong brand recall, ideally with...

People buy these products out of loyalty, habit, dare I say addiction. And of course, we're all creatures of habit. That's true for seven and a half billion of us. You stick something into your mouth onto your body. It's a private place. You want to have a brand. It's human nature. It's not a Western idea at all.

And if anything, the consumers in my countries, a lot more brand loyal than you and I. I look at a Coke and saying, oh, this is a scarcely sort of chemical drink full of sugar and whatnot. The consumer in Bangladesh will say, oh, this is the same drink. I don't know, the present United States drinks. You know, I've arrived in the consumer society and so forth. and the alternative is hazardous or unbranded. So it's a very strong, I think, human trade to be using brands and trusting brands. But there's a couple of important insights what makes a good brand, what makes a good category.

So one is the frequency of use. How often do you brush your teeth? Two maximum three times a day. And, you know, that's a pretty good category. And so coffee, I don't know, two, three, four times a day, some people more. Coke has famously no taste memories. So again, you can drink a lot of coke without getting too tired of it. And then there's some categories which have less free.

frequency of use, but are quite powerful when you experience them or consume them, like alcoholic beverages in that category, which is more like once or twice a week, once in twice a month, but when you do it, it's a social lubricant, and these are, of course, pretty good businesses. So I would say in order to create a brand, you know, you need, of course, time. You need a consumer product that has a clear function, which I think any consumer product needs to have. The function for coffee is pretty clear. You want to, of course, kind of become more awake and present.

function of alcoholic beverages again, you want to kind of descend together typically with others into like a slightly different state of mind. So you need, of course, very clever advertising and ideally that's basically sticking in people's brains. And then you want to keep doing that, basically. You want to basically the flywheel of these businesses is when you reinvest a portion of your top line into advertising, promotion or other intangible assets like distribution. So basically, let's say you spend 10 percentage points of your revenue into intangible, And let's say we've got a situation in Tanzania where we've got a brewer that has something like 85% market share. And so let's say, and the competitors got 15.

So let's say this company spends for using round numbers 10 percentage points of their revenue into reinvesting into brand distribution, other intangible assets. Now that's eight and a half points of that entire market. That's more than half of the other guy's top line. So for them to ever match you dollar for dollar, it's virtually impossible unless they want to be gross margin negative. And even if they did, you could raise from 10 to 12 percent and make a little less money, but still be widely profitable. And you can sort of buy the pot, which is kind of why there's sort of this equilibrium, once you're sort of two to three X, the next competitor, it's almost game over if you're

well invested. And I think that's an important insight. I mean, there's a lot of talk about the end of brands and so forth and these brand and consumer goods companies in the Western world. I have my own view on that. It's not a day-to-day worry for me, given Bangladesh, we're very far away from that. But it's definitely true in my mind that these high-quality businesses have a I think very strong advantages for long-term investors, and I would point to three of them.

Number one, I would argue there's a superior long-term return to be had as an owner of a higher-quality business. Even if you pay a little more, let me lay it out to you mathematically. If you've got a business that has, say, 100 of capital and 20% return on capital, and can sustain that, that's by my definition. So next year, you've got 120. Now, if you then can sustain the 20% return on capital, and you can reinvest the 120% and 20% you've got 144 the year after. So whatever the market pays for this today or tomorrow,

whether it's public or private, it shouldn't matter either. It must be true that in 10 years from now, you've got a much bigger pile of money as an owner of that business, then as an owner of a business that can generate and sustain 10% a year, even if you pay a little more for that. So that's kind of the first point. The second point is not as obvious, perhaps, but just as important, is the lower probability of loss, a lower risk of impairment of capital. That's basically due to the fact that, again, these businesses sell products that people buy out of loyalty habit.

There's a addiction. The wallet shrinks the stomach doesn't. It's very defensive in terms of volumes, even if there's a recession or some sort of attraction in economic growth or consumption. These are gently impacted typically. They've got pricing power. They can pass on multi-cost inflation. They've got no debt, so they can't go bust. So the combination of lower risk of permanent loss and superior long-term return is sort of the magic trick.

And then the third one is what I kind of touched a bit earlier is fine if you believe one and two, but how on earth what's the best business 10 years from now? And the answer is I don't know that, but I have a high degree of conviction and data. that suggests that the best businesses, if well invested, if the management team looks after their brands and redeploys access profits into growing the mode of the business and growing the business, the best businesses tend to stay the best businesses or even get better. And that's due to this fly wheel I mentioned earlier.

Another really important circle in your interesting Venn diagram is the tailwind that results from the countries in which you're invested, specifically the demographics, the age profile of the countries, their economic trajectory, I think of, again, of Bill Gates and sort of the Hans Rossling, factfulness idea of countries emerging from poverty or very low per capita income or GDP and the sort of opportunity that creates in these consumer businesses. So I'd love to go there now. And then we'll come back to things like even more kind of nuance like distribution and why

that matters and trading and position building. But let's first talk about this really important tailwind. Yeah. And maybe I'll weave that into my personal journey. So I sit at Golden Sacks at this very high-powered investment team and really get pregnant with two big ideas. of being an acrobat to be a long-term owner of the very, very best businesses, and again, the brand and consumer goods industry, which is by far not the only industry that has great quality franchises, but of course there's an unusual rich amount of them. They have so delivered Métis forever, the global best sort of brand and consumer companies. Mittines forever isn't bad, of course. There's no shame in getting rich slowly at all. The most important thing is

to get and stay rich, and these businesses have been, because, wildly successful at that. But I guess I was a young man in a hurry looking for 20s. And I found 20s in the emerging market consumer. That's India, Brazil or Indonesia. So there were, you could have had 20 plus IRAs for 30 plus years, basically. The challenge with that done was in the Rivier mirror, of course, these were already been compounding for a very, very long time. They've become very large, absolute dollar market caps and were high valuations on big profitability numbers. So while that is not over, I think it's hard to see another 10, let alone 100 or 200 X from there, which is what happened in the last 20, 30 years. So that led me to look at frontier markets. And again,

I mentioned the kind of countries earlier. So, of course, it's no surprise to kind of look at the things like demographics and economic growth. But let me put some high-level numbers on that. So basically, the countries that I'm sort of focused on are home to roughly 3 billion people. We know which is bigger than India and China combined today. So it's a very large part of the global population, roughly 40%. So if you look at the world, if I look at the world, where I look at the world today is there's 1.3 billion people in the developed world, so-called, North America, Western Europe, Australia, Japan. There's another, I call it 3 billion people or so in the brick emerging markets,

and I don't necessarily like that definition, but let's use that as a sort of helpful categorization. So, most of them, of course, in Indian China. And then there's another 3 billion people, which are sort of my people. And we're going to go from 7.5 to 9.5 billion in next sort of my investing career. And all the extra 2 billion will come from my markets, one extra billion from Africa alone. So the demographics are pretty staggering and scary, actually. So the average number of kids per mother in Nigeria is like six.

That's the average. And the average age of these populations is around the 19 or 20 mark. So it's like this pyramid. So they are by far the fastest growing populations. Then there are the fastest growing economies. Bangladesh is sort of growing real GDP over 8%. It's the fastest growing economy in all of Asia. Probably the biggest beneficiary of the US-China trade spat,

given they have a strong advantage in labor cost. It's roughly a quarter of Chinese and half of Vietnamese wages. They've already taken share in the last few years, but that's accelerating now, given, of course, tariffs on China. And so the next point is, so apart from demographics and GDP per capita growth is the question, how does GDP per capita growth translate into the growth in brand consumer goods consumption? And that's a nonlinear relationship. Some people call it the S-curve. Nestle has this framework, calls it the hot zone.

Basically, the idea is that at a dollar a day, you're not a customer yet. And for two reasons. One, the dollar amount is too small, but secondly, the savings rates are quite high. because of irregularity of income. It's not like a dollar, dollar a day. It's nothing for, I don't know, two weeks, and suddenly $14 because of some random one-off construction or rickshaw job or whatever temp work it might be.

And so the small dollar amounts and up to 50% savings rates of that. And then what happens, you go from one to two to three, overtime, dollars per day. You typically then go hand in hand with some sort of more regular income. So you've got higher dollar amounts on lower variance. Exactly. And lower savings rates. So it frees up discretionary spend.

Now, you basically have got a clear hierarchy of needs. First, anything to eat, to drink, to wash yourself with, unbranded, you're in the informal sector. Then you buy the mobile phone, and then you buy brands. And that happens really between three to five bucks a day, depending on the category. Some of the sin categories start earlier, but then tail off also earlier. Is that tobacco and alcohol, just kind of as a general rule of thumb? Don't shoot the messenger, but that's clearly the human psyche, I guess, has a tendency to start with these categories very early. Makeup starts a little bit later, but then has longer runway.

So, but yeah, there's definitely sort of tobacco, alcohol, biscuits, snacks, confectionery, and other food and beverage categories are sort of starting earlier. And then sort of cosmetics and consumer healthcare and things like that. I start a bit later. So basically, you've got demographic driver. You got the GDP per capita driver. You've got the bottom of the S curve. So putting this all together, you get this very strong structural tailwind.

The other way to describe it, I guess, is what's the greatest force in the universe? I would argue it's sort of, apart from compound interest, perhaps, it's the kind of willingness and desire for everything. single human being have a better life for themselves, their kids and their family. This is what built, after all, the United States as well. And you shouldn't bet against that even if the government's not helpful, which it typically isn't. There's three billion people waking up every morning with that idea. And so that's just this powerful force and way that these businesses are benefiting from. And yeah, and so the other good thing, of course, is that the problems that brand and consumer goods companies have in the developed world, where they have, whether it's

Walmart as a customer, which squeezes you both on margins and worldly capital terms, or now, Amazon, similar, I guess, and of course can do private label and stuff like that. That doesn't exist in these markets. There's not even supermarkets yet. So the formal retail penetration will be something like 5%, which means you've got not only higher margins, but you've got also lower capital intensity because you've got either lower, sometimes even negative working capital for branded consumer goods companies. And bigger modes, because you can't just show up and plug into Walmart, you have to literally build distribution to a million points of sale. Mom and pop shops, they pay you cash. They have no bargaining power against you. So secondly, we have

course, not at all affected by this Better for You, the venture-funded, sort of whatever, almond milk competition, right? That's not the case. No almond milk competition. No. And lastly, you know, of course, these markets are cheap and these stocks are cheap. And I think that's, of course, these are the most inefficient equity markets in the world, I would argue. And of course, the runway is very long. And I would argue that these businesses that we invest in are, there's still a little bit more expensive, let's say, than the average market multiple or something like that, or whatever the telco might trade it or something. But I don't think that people appreciate having the local investors we compete against,

shall not that many, they will always know more about their home country, but they will, I think, I would argue, know slightly less about the long-term sort of compounding trajectory of these, and the strength of these modes of these high-quality branding consumer businesses. And I would stress that we're not wedded to this idea of it's not about consumption, consumption, consumption, versus what quality, quality, quality, we just want to own the best, not the rest, both in terms of businesses and people who run those, and we find opportunities increasingly in healthcare, in education, and perhaps most excitingly in internet-enabled businesses. So we're going to segue for a minute to talk about the sort of capital and market and investing flows

and how that's affected everything, because I think what's so stark about this opportunity is I first started getting interested in it maybe two, three years ago. And a lot of the same things could have been said. And yet it's been sort of a lousy outcome ever since. And almost all of that is what I would call a derating, meaning the multiples of of the stocks have gone down considerably in many cases, even while the businesses are growing extremely nicely. So I'd love you to talk through the dynamics around how capital is flowing, how investors are getting washed out and redeemed upon, kind of like the behind the scenes, away from the businesses, more the market side of things. Yeah. No, that's been a tough period

for these markets and for us investors, although I think it's a huge opportunity. And basically what happened was this is a relatively nascent asset class. I mean, although you're talking about 40% of global population, you talk in 15% of global GDP, both fastest growing again, you're only talking about 50 basis points or so of global equity market cap. And again, I would bet that those will be much bigger numbers. What has happened basically is that the frontier markets started really to be on investors' radar just before, I guess, the global financial crisis in the mid-late 2000s. And of course, we had this. this large crash, which was Western-induced financial crisis, that of course also led to a drawdown

in these markets. But these markets have never recovered from that, and they have never received a single dollar of QE money, quite the opposite. They've actually... tighter conditions, right? Yeah, exactly. So let me kind of try to explain that a little bit. So basically, after the global financial crisis, which was a similar drawdown to what had in the S&P, and now I'm talking about the MSEI Frontier Index, which is not a great index at all. We don't pay much attention to it, other than it's sort of a measure of popularity for the I think that's fair to say. And so we're now still roughly 50% below the pre-crisis highs of 2007-8 and just hovering above 09 lows. 2009. This is 11 years ago. So we have

50% lower than we were 12 years ago and sort of just above 09 lows. So it's kind of 800 on the S&P. So their divergence has been spectacular. When we started the firm just over six years ago, it was already pretty wide discrepancy there. And the first 18 months were actually pretty smooth. There were modest inflows into these markets. I guess people realized that there's already big diversions ongoing. The markets were up something like 20% in the first 18 months of us doing this were up twice that. It was relatively calm. And then really starting in late 2014, big cracks started to appear.

And this kind of bear market started in earnest where people worried about China hot landing, number one. Number two, the commodity price collapsed. And frontier and emerging markets in aggregate might be seen as a commodity play, which might or might not be true. What we're doing is very, very different. Our companies turn commodities in the brands where effectively short commodities and long stomachs. They use fuel for distribution. And you can see it in the earnings numbers.

The earnings numbers weren't all impacted by, if anything, like lower commodity prices led to an expansion in margins. The top line was slightly soft because of low inflation, but that's okay. And so that was the second problem. The third problem is then these many merger market currencies became very weak or devalued and the dollar's been super strong. And I think the dollar is actually one of the most important macro variables in the We're stock pickers, not macro or country pickers, but we have to worry about single country risk and currency is the biggest piece of that. And then the other big issue, I guess, has been how QE has kind of worked, basically has sucked a lot of liquidity out of rest of the world back into the dollar.

That has been definitely a big driver. But the real biggest problem for me or for these markets has been the structure of markets and how other market participants were setting up affairs, which was basically with daily liquidity funds. So the vast majority of Frontier Market are Africa funds and so forth will be used to its daily liquidity. And those were the biggest. They raised a bunch of money in the sort of aftermath of the financial crisis. So Templeton allegedly had $13 billion in frontier markets, which is now down to something like a couple hundred. So it's been literally not 50 or 70, but 80, 90 percent decline in terms of flows. And it's pretty much across the board.

So that, yeah, there's been an ocean of forced selling, basically, pretty aggressively at discounts. at any price. And it's been a vicious cycle because, let's say, you've got a daily liquidity fund and you report everything to Bloomberg or Reuters. People can ascertain. And we did this and we know the brokers doing this. You look at how much was the AUM last month as this month, how much explained by returns, how much explained by... Come self-fulfilling. Yeah. And then what do you own? And then the bits drop from here to there. And you need to sell. You need to hit some of those bits. You have another bad NAV print next month and more redemptions. And the same thing happens again. That's been going on for aggressively, especially in 15 and 16.

17 was a bit of a respite and the markets came back. Nicely, we thought that was the end when we felt pretty good at ourselves, having loaded the boat in 15 and 16 with more stock at pretty attractive prices. And then Trump starts a trade war, everything is down again, 20 plus percent again. Now, earnings are up every year. In some cases, are accelerating, like Bangladesh's case. Trump is, I guess, bad news for emerging markets as a whole with China and stuff, but Bangladesh is accelerating.

I can tell you that much. And so where the situation of multiples have kind of halved or even more than halved, in some cases sort of 70% derating across the board probably closer to 50%. We started out, these businesses were kind of half of Indian valuations. India, of course, has, it's kind of the market we studied the most in terms of the bigger emerging markets given has the most similar profile in terms of the conditions on the ground and so forth. The big difference is that the Indian equity market, I would argue, is much more efficient.

You've got more analysts covering, I don't know, State Bank of India than covering J.P. Morgan equity. And as a result, I guess, especially large caps in India, have pretty highly valued, especially the highest quality businesses, including consumer businesses that we own. So they're trading sort of between 40 and 60 times earnings. We started out, we're like kind of in the low 20s, basically P. And now we're kind of half of that, basically, like low teens. And so we think that's very attractive on an absolute basis. But I would agree with your observation that even on a relative basis, it's even more attractive. And I had other options in life. And the reason I'm very excited about about 2020s, because where can you find really high-quality businesses that are

secularly growing, that have very high returns on capital, very strong modes, and where can you find those that attract evaluations for reasons that you understand and are comfortable with? Can you talk a bit about the difficulty of building a book in these markets? So we in the U.S. take for granted the lack of frictions around even building very large positions, say, in my business as an asset manager, it's almost trivial. I think that's probably less true in some of these markets. So I'd love to hear a bit about that side of the business, actually building substantial positions in these stocks.

Those markets trade very differently than, yes, let's say the U.S. equity market. So you can't put an order and go to lunch and expect to get filled. So I first need to solve a problem of trading, settling, and custody. So that's already not trivial. So when I was a Goldman getting pregnant with this idea, I tried to buy myself some shares, PA in some of these markets. And turns out Goldman can't do it. And that's a good tell because most money center banks won't be able to do. that, given these markets are so small and irrelevant, frankly, for Western Money Center banks.

And so the vast majority of capital world, it doesn't even get the physical access. You need to get that plumbing right. And once you got that, the next problem is, how do you find the shares? There's, of course, the daily liquidity, but it's really the wrong metric because 10% of what any of these stocks trade will be sort of what you would call liquidity, where basically 80TV, but 90% is in the block market. So these are basically almost like OTC blocks of stock that need to find, both in the side and you define block buyers on the selling side. And for that, you've got to have the

real capability that we've built, which basically, so it's a challenge, but also an opportunity. It can be a source of edge. And I would argue we've built a sourcing edge, and that's a lasting competitive advantage for us as a firm. We think a lot about what is our own competitive advantage and how do we grow that. And it's the same vein. I mean, our competitive advantage is intangible assets, like our relationships on both sides of the balance sheet. We've got terrific LPs, got terrific portfolio companies. We want to be there of go-to shareholder for anything strategic. Of course, we're long-term, which can't be said for most people in these markets.

We have a lot of domain expertise and so forth, and we're sometimes actively helping our companies to execute and grow the grow value. And then we have a sourcing edge. And so on that, so basically, as I said, 90% in the block market. So what you have to do, you have to, of course, travel to these countries. So I go once to the moon area, equivalent distance traveled. and there's a handful of us. And then you meet with those portfolio companies, their competitors, the suppliers,

you do mystery shopping and things like that, and maybe meet the advertisers. And then you also meet with the five or ten biggest holders of some of these shares. And those are either government-related pension funds. These are local asset managers or banks, insurance companies, or individuals or families. So Bangladesh there's a group called ICB,

which is an investment corporation of Bangladesh. They own half the market. And they got these shares for free. And every June 30th, they need to raise capital. to fund their commitments. And they don't care whether they sell the teleco, the cement company, the bank, or the biscuit company. So it's a matter of then having that relationship.

And we are one of the biggest investors in Bangladesh. We own, I think, something like one and a half, even up to 2% of the entire stock market there. So, by the these markets are tiny. I'll go into that if you want. But I think it's fascinating just to look at the absolute dollar market cap of these countries. Bangladesh will be kind of $35 billion, all of it.

India. Tesla gained that much in market cap this morning. Exactly. Right. So India in the year 2000 was $80 billion. Today it's $2.5 trillion. And it hasn't gone up 30x because there's been some issues, but it's been a good performing market.

But the kind of businesses that we're talking about, the best brand consumer businesses, whether that's Godrich or Britannia or Dabor or Mariko and these other companies, so ITC and even Nestler. So that's kind of been 50 to 100 baggers or some instance, 200 baggers over that period. So in Bangladesh today is $35 billion. That's similar to Nigeria, Egypt,

Pakistan will be slightly bigger, like not more than 40, 50 each. Kenya's 20, Tanzania, has 5 billion, all of it, right? So it's literally staggering. But yeah, sourcing, so because these markets are small and, of course, illiquid, but I would point out that the liquidity is just different. So it's all blocks. So you have to find owners of stock that are willing to entertain the idea of working with you. And the conversation is typically we are large investors in your country.

I'd love to do more. We've got, I think your country holds a lot of prospects, but we struggle with liquidity. And if you phrase it that way, then, oh, here's a cup of tea. Here's a biscuit. Let's talk about it. Okay, how can we help? That's worked for us.

And just hustling. I went to Kampala, Uganda, bought 8% of BAT Uganda at like five times earnings. And I was the only guys that were walking to the office of that guy and asked politely whether there's a transaction to be done. And there are no fools. He sold this for basically a 20% dividend yield to me, not because he doesn't think it's going to be a good return, but he is building a real estate project over there. has 18 months paybacks and so forth.

And so because the cost of capital is so high in these countries, there's our capital is so dear that we'll find bargains from local sellers that are meeting our cost of capital, but because they can do even more interesting things, we will never do real estate in Kampala. So you find things like that. I think it's so interesting. I love contrast in markets.

And you talk to investors here in the U.S. and the sorts of edges that they are trying to source through insane modeling and information gathering. I mean, literally you're talking about showing up. Like, just like go there and walk into someone's office. That's the edge. Yeah, I would say it's a fair point. I think it's very important to know what your edge is.

I mean, the most important advice I got when I started Kingsway was from, I hope you doesn't mind me saying this. Our biggest day one investor was Howard Marks, the founder of Oak Tree Capital, who's, of course, been terrific and effectively become a philosopher. So he told me, many, if you want to win any game, whether it's sports or investing, you have to be a good athlete and you're a great athlete here, but there's so many others. The difference between best and the second best and the third best is very, very small. So more importantly than that, you have to choose a game that's stacked in your favor.

Seek inefficient markets, basically. For them, it was junk bonds in the 70s or 80s when Moody's came out and said there's no price, not even one cent on the dollar you should ever pay for non-investment-grade security, which we know is a whole lot of rubbish. And the same way, and you could look at frontier markets, there's people out there, I'm sure, saying there's no price, not even whatever. One-time earnings and 90-per-dividend yield that you should own for pay for Pakistani stock, which I would argue will be a whole lot of rubbish.

Yeah, so basically our edge is, I would say, what I said earlier, so I would say we have a slightly more sophisticated investment philosophy and process, although that would be a commodity in the U.S., but it's not a commodity there. We have a longer time horizon. We've got a sourcing edge. We've got an information advantage. There's no database for transcripts.

There's no quality cell-side research at all. So it's very old school. You get the annual reports from the stock exchange, from the companies, sometimes dust them off from certain archives, and then you then build a model. Now, having then all the data, which is hard to get, and we've built a library of transcripts and so forth, which is proprietary. Once you have the data to make a judgment called that these are good businesses, that's again, I don't think, I wish there was my USP, whether anyone who has solid financial sort of fundamental investing training can do that. But then buying the shares is difficult.

And being able to hold or even to add on weakness. And it's taxing. These countries look pretty scary to some people, another source of competitive advantage of my German passport. I was choked that, you know, it's pretty neutral. we've got the most visa-free countries in the world, and you show up there. If I was American, blonde, female, I mean, I would have a much more difficult time. Three quarters of these countries are Muslim countries. You need to be able to have, I don't know, grow a beard, sacrifice your liver once in a while with these tycoons.

And Pakistan is a good example, but not even Indians get a visa because they don't get along. Americans watch homeland, so there's no interest in going to Pakistan. None of my Jewish friends would have sat in a foot in the place either. So who's going to do it? Some of the best investors I've ever met were either or a combination of American, Jewish, Indian, you're shutting out a lot of smart people. So no one goes, basically. That's, I think, definitely easier to have a large and sustainable edge in my markets,

but it's the sacrifices you have to travel a lot. So I think you've obviously focused tremendously with your capital on businesses everyone understands. We've talked about biscuit companies and tobacco companies and consumer beverage companies going back to this idea of intangibles beyond brand. what else is important? So you mentioned distribution. I'd love to hear your thoughts there. What does that mean? If you say a company in one of these markets has built a great distribution network and strategy, what specifically does that mean to you in terms of quality? So first you ask for how many number of outlets you reach, right? In let's say Bangladesh, there's probably a million five max outlets

in the entire country. That's already a lot. And so how much do they reach? So a percentage of coverage, whether they do this directly or indirectly by wholesalers, how does this rank against the competition. How much is there still to do in terms of getting coverage higher? Then how does the working capital work, basically? Do they give credit? Do they get paid cash? As I said earlier, like the vast majority of our companies are paid cash by their customers. And of course, they have got 30, 60 or 90 days on their own payables. So that can lead to a negative working capital. And of course, how much distribution margin they're giving away. And there's a tradeoff there between margins and working capital. And how much turnover there is in the sales force, how many salespeople

they have. So there's a lot of quantitative, I would say, metrics that you can look at. And on the qualitative side, it's just that they realize the distribution is not a kind of nice to have, but it's actually a source of mode. Because of this idea, let's say, again, sticking with biscuits in Bangladesh, you've got these million mom and pop stores. So Mondalus is not in Bangladesh for a couple of reasons. I mean, there's import duties, but even beyond that, their products are not made for their price points. So it's a chicken neck problem for them. If they came to Bangladesh, they would need to first build the distribution, but they don't have the brand yet, and they don't have manufacturing the brand first and the distribution yet. So that kind of, you've got to

have both at the same time, which is chicken egg. If you have it already, it's a huge advantage. You can push more products over time through distribution. I mean, in a biscuit company's case, it's in the first, just most basic biscuits, then it's peanut butter biscuits. It's Oreo-type sandwich cookies. It's candy. One day will be chocolate. And then they're savory. There's instant noodles. So you can branch out into adjacent categories and push them through the same distribution, and of course, that's going to be a very long runway for growth. How concentrated are you willing to get in these markets? So you've mentioned a lot of the countries and the categories. I guess I wouldn't be able to give an intelligent guess on

the number of stocks in the portfolio or position limits or anything like that. We're quite concentrated. I mean, I'm sure there's more concentrated funds than us, but we definitely can look in the mirror and say we're living true to the idea of punch card investing, basically. So our biggest position is around a quarter of the fund. A second position is 20 or percent. So the top three are basically over 60%. So we own call it 10 or a dozen stocks, depending we've got as small. It's like some foothold positions in some names for reasons I can go into. But basically I call it dozen stocks. And this is informed by the idea of quality again. If you believe what I said earlier about the benefits of quality being so important,

then it must be true that the outcome for the long term in the very first best business is going to be way superior than the investment outcome of the fifth best. And then you couple that idea with the fact that our single biggest sources of risk is country risk, I would argue within country risk FX, then why on earth would I buy, I don't know, the fifth best business in Nigeria, if you can have the first best. So they're both in Nigeria. So if Nigeria kind of flows up, which happened, you have a drawdown in both, but if you've got a bigger drawdown in the lesser one, if Nigeria recovers or does well, you make less. So basically the idea is to buy the best, not the rest. First best, maybe if the difference is close, the first and the second best in each

country, and then do it over a lot of countries, so you diversify the single country risk without diversifying or diluting the quality of your portfolio. What do you think the natural extension is from here away from just consumer staples, I guess I would call it consumer brands? I love the idea, maybe that we talked about the first time we met in Connecticut, about this sort of construction of the indexes. If you look at like MSCI's emerging markets or even the frontier markets index, I think the EM1 has Alibaba and Tencent are some crazy percentage of that index, but that's not really necessarily going to, they're not going to benefit to the same degree of this kind of factfulness idea

of the emergence from a dollar to three to five dollars. It's not the same profile. So index exposure may not really capture the idea here. Do you talk about that a little bit and then where we go from consumer in these markets? I fully agree. I mean, I don't know what's going on at MCI, but they clearly have very different ideas of what makes a frontier market, like Kuwait, for instance, would be, I think one of the biggest index weights in the frontier market. It's like 30%. I think Kuwait's like 30%.

Something like that. And Kuwait is a country which has, of course, oil wealth, and as a result, GDP per capita are higher than the United States. And so that's not really what we're after. We're looking. Bangladesh is a real frontier market where people live on two or three dollars a day. And there's half the U.S. population, so 170 million people. The country's the size of New York State, it's super dense. And people literally going from there, two or three to four or five dollars a day. And then Kuwait is very, very different. So we need a lot of stomachs. We need a large population. So below 40 million people, it's generally not that interesting. to us. So typically our countries will be between 40 to 200 million people, large consumer

categories, which have good characteristics, dominant market leaders. And yeah, on the Alibaba and Tencent point, I mean, there haven't been yet very large internet-enabled businesses been either built or gone public, but we think that's going to happen, basically. Of course, China Internet is always going to be in a very different animal and unique in its own right, given the sheer size of the market, the pace of adoption, the fact that it's final. and rigged for the locals and so forth. There are some countries like that in my world, although best example of that would probably be Iran, which is sanctioned,

but that's exactly like China, firewall and so forth. And the internet activity there is out of control, but of course we can't invest there unless you have a new president or new policy to that, to that extent. But there's definitely other internet-related businesses that are being built, whether it's in payments, whether it's in sort of online classifieds, especially both horizontal and some verticals like property, or other areas which I think are going to be very fertile hunting grounds for long-term investors

like us. And the leap of faith there, right? It's actually not different in my mind because, again, I said earlier, the best businesses for me are not, we're not a consumer-staple investor. We like quality for reasons I explained. And whether you have high margins and low-capitensity in the high-returner capital that's sustained by brand or distribution or network effects, we can make that leap of faith pretty easily. And I would argue some of the world's best businesses today, and especially in the United

States are digitally enabled businesses. It turns out that it's much easier to move bits than to move atoms. The marginal cost of production is zero for software. You've got distribution through mobile phones, and those have arrived in our markets with a vengeance. I mean, even before the smartphone came along, you had pretty high mobile penetration, which happened pretty rapidly. And now the smartphone penetration is caught up. I mean, Pakistan went from zero smartphones to 60 million in the last couple years. We've been doing this only. So it's been pretty astronomical. So we're looking increasingly for the best digitally enabled businesses there. I don't think you'll see a tens of non-Aliababa, and I see coming out of our markets, but you definitely

see some interesting local champions. Anything you find the odd quirky market that will produce some pretty big businesses. We've mentioned Bangladesh a few times. To highlight a few other countries that you find especially interesting and maybe what is so interesting about them specific to that country. As I said, so we're stock pickers, not country pickers. Ideally, a frontier market doesn't stay a frontier market, but develops. And so we spend a lot of time thinking about and reading all the literature on the question, what is it that makes countries succeed and fail and what happen if they do? And there's tons of literature on this. I mean, starting from guns, germs and steel, which are Diamond or Neil Ferguson's, the West and the rest. And best probably is this Darren Osmoglu

book about One Nations fail. But I think the common thread on all of those is that you have, it's really, it's not about geography, it's not about religion or ethnicity. It's about effectively institutions, the quality of institutions, especially property rights and the courts that protect those. And if you've got bad institutions, I mean, the way you understand it, I guess, is pretty obvious. If you're an entrepreneur, an investor, or salary man, if you can't be sure to keep the fruits of your investment entrepreneurship or work, whether it's arbitrary dictatorship on one hand or communism on the other hand, it's not a good model, basically, and it hasn't worked. You don't need democracy, which is a controversial thing to say, but look at Singapore,

Look at China, arguably, right? So you can't have a lot of development and wealth creation without democracy, as long as you've got property rights and courts that protect those. What we are benefiting a lot from in our universe is the fact that most of those countries are former British colonies. So they're part of the Commonwealth. The British left the imprint of English law, English court system, and legal system protected property rights.

So that's true for basically Bangladesh, Pakistan. That's true for big parts of the Middle East. That's true for much of Africa. That's a good situation and a good setup. Now, of course, are there problems? There are lots of problems. I mean, especially headlines, politics and riots and terrorist attacks and so forth. But we find generally the gap between perception reality being kind of bad headlines and good bottom lines.

That's pretty, I think, an interesting theme. Again, stocks are cheap because the headlines are bad, but you're not buying the headlines. You're buying the bottom lines. Some of our LPs are some of the biggest brand consumer goods families who have been, of course, in this business for not only decades, but generations. And they've seen everything happen to them from, I mean, They have owned these businesses through World War II. They own them through nationalizations and XYZ emerging market and currencies and so forth. And interesting insight, like one of families who is in a beer business at their most proffler market in the world is Papua New Guinea.

I didn't see that coming. I thought it was surprising to me, Papua New Guinea. What do you know about Papua New Guinea? Cannibalism. So yeah, but here I laid out for you. You've got big enough population, not even that big, but it's young population hot climate, which is good for beer. But here it comes as one brewery, 60-od percent margins or so. Now I'm from Germany, we drink 120 liters for every man, woman and child.

Present company included, there's 82 million of us. We're pretty rich and it's a safe place to the business, but no one makes money in beer. There's five and a thousand brewers everywhere that has one. So the point is, like, it's not the largest market, but it's the least competitive and it's the larger of market that has the best profit pool. Even if the headlines are bad, the bottom lines can be very good. Now, it's probably different for companies or industries where either God or government sets the price, God being commodity related to companies or government being anything highly regulated. but for branding consumer goods companies, that's definitely a pattern.

And so, yeah, as this long way of saying, it's basically that there's a framework that we have developed to understand what makes countries succeed and fail. And the key question for me is, what is the business model of the country? I wouldn't argue that you absolutely need one, but it is helpful if you do. And Bangladesh turns out to have really strong business model, which I think has got a sustainable, competitive advantage and will be sort of a development miracle in the making. And what's the business model? Well, I said it earlier.

it's basically the most competitive local labor force on the planet. Again, quarter of Chinese and half of Vietnamese wages. As a result of that, you have, it's manufacturing and export focused. You've got a current account surplus from exports, which financing fiscal deficits. So you basically don't need to borrow, especially in dollars, which would be the Achilles seal for any of these countries to pile up U.S. dollar debt that they can't print. And then the currency will be under pressure. So that's not the case in Bangladesh. Then it's the secondly, it's a very democratic source of wealth creation.

It's literally millions and millions and millions of factory workers going from one to two or three to four dollars a day. That's trickling down to consumption. It's very inclusive growth. And that's different to, let's say, in Nigeria, which has a business model arguably that it will be described as three and a half million barrels of oil a day. And that's not such a good business model in our mind because, A, it's cyclical, both in prices, of course, but also in volume because all the oil is in the south where a bit of insurgency going on. And there's literally a dozen, 12, rather than 12 million people who make all that money. And they spend it in London, not in Lagos. it manifests itself in crazy ways.

I mean, there's more private planes in Nigeria than there's commercial planes. So there's a huge inequality. And so basically we either want to be invested in structurally strong countries like a Bangladesh where we can be really big. So we've got just under a third of our fund in Bangladesh in two of the best companies there. And that's kind of almost like a buy and hold for as long as the eye can see. Or you have these more cyclical countries which have less good of a business model. And that includes, I mean, yeah, if I have to contrast.

So Bangladesh for me, in my mind, the macro is better than India. Although I'm very bullish in India and we don't invest there, largely because of valuation reasons and so forth. But I think the macro is better there. I think it's almost, it could be like Korea, which has been a massive development miracle, like one of the less talked about once, but the Korean development model was very special. And I think Pakistan is sort of following more like the path of Indonesia, a very large Muslim country, a bit of chaos going on, but too big to fail. It's a nuclear power, which is, for us at least, is a good thing. given the failure as an option, basically there. Egypt is in that category.

Egypt has a more diversified economy. It's got tourism. It's got the Suez Canal. It's got 100 million people. But these countries are more cyclical. So basically there you want to invest, of course, either after devaluation, which you've done in Egypt's case, or if you see one coming, then, of course, you sell out entirely or you reduce exposure to a point that you're comfortable heading that.

So, yeah, that's, I mean, I can talk a bit more about this idea of country business model, but the problem with that is they don't teach that in business school. You have to do it yourself. You have to literally read everything you can get. From talking to you a couple of times, it's clear you're one of the constant learning type people, endlessly curious about these markets and markets in general. What topic areas are you most excited to learn about right now? So a lot of what we've discussed, you know extremely well. What are some things that you think might affect your investment outcomes over the next 20 years?

You're sprinting up the learning curve on now. So definitely we're trying to learn at least one new business model in sort of a year. I definitely want to spend a lot more time on digital businesses. I mean, I've only followed peripherally what's been going on in the US with software and things. And I understand consumer internet businesses, I would argue well because I'm a consumer and user of those. But what's happened in SaaS, for instance, has been pretty crazy and it's perhaps not quite as relevant for us. But there are software companies in our markets. Although you could argue that it's going to become a more global game at the same time.

Let's see what happens with China, US, the sort of bifurcation. Most of our countries arguably will end up somewhat in the Chinese orbit. They're the biggest one-belt, one-one road countries, and that might come with strings attached. And I would speculate one of them could be that they're going to use less U.S. software, but more their own or Chinese software. And so I want to learn a bit more about that. What makes these businesses great and how I think about those. FinTech, especially as well. Sure, payments, I'm sure.

Yeah, exactly. Payments is, I think, the holy grail in these markets, and we've seen what's happening in China. I think the payment volume in China is like 200% of GDP every year. So that's a staggering number. and it came out of nowhere. And the reason is bigger than GDP is that the transactional economy, of course, is bigger than the producing economy because the velocity of that. And so I want to learn that as we invested in a small way in one payment company in Egypt,

that's just gone public. But there's loads of others there. And fintech, I think, is a bit complicated because everyone's getting involved. The banks are getting involved. The telecoms are getting involved. The regulators are getting involved. The Chinese are getting involved and Facebook's getting involved potentially. Yeah, the big theme here certainly is figuring out for every company

how to get into the payment flow. and make that part of your revenue model. So it's a fascinating space. This has been, again, highlighting one of the most interesting setups, investing in business setups in the world right now that literally nobody talks about because, despite its enormous size of population and businesses, because of how well the U.S. is done. And so I really appreciate the outline, the overview, certainly in the camp that thinks this is somewhere to look. For those that can't become Kingsway investors, which is virtually everybody out there, and we've talked about the flaws of, say, an MSCI, emerging market frontier index, what would you recommend they do? Is it just a learning exercise?

Are there places that they can go as a next step if they're interested in this opportunity? First of all, thank you for the kind words. I would say, first of you can't do this with a huge amount of capital. And of course, we've been blessed with having LPs and the especially family offices and individuals, as well as a handful of endowments and foundations, but mostly the smaller ones, given the sheer constraints on capacity there, that it's quite limited. We have called it $1 billion on the management. So that works in over a dozen or so countries and stocks. And we've been pretty aggressive in playing offense in this part of the cycle.

So, yeah, I would say, I mean, we of course have to give existing investors preference. We don't want to manage a lot more money than we do today. I would definitely stay away from the indices because that's, yeah, I mean, full of strange construction. Yeah, companies with questionable corporate governance or low-quality business models and getting weird MSEI, weird countries in there that have very different things going on. I would say we need all the help we can get in a sense that, again, it feels to me like we're the last man standing, which is one of the reasons I wanted to want to do this podcast, because

someone wanted to, if you close your eyes and say, where can I see 20 plus IRAs for 30 plus years, which is kind of 10x in 10 years, 100 X in 20 years, and inshallah, you know, 1,000x and 30, it sounds absolutely crazy, but that's what happened. Anyone young aspiring investor out there who is not afraid of these countries and wants to sort of build wealth? Yeah, exactly. I think this is a good time to launch a fund. We're happy to be helpful, like, again, selfishly because, again, we're the only ones left, and we need more, we need at some point foreign money to come back to these markets.

That'll be good. And I think it will be a very good outcome for the size of the price is very large. I think that was kind of the key reasons why I went down this road. I had other options in life, why far throwing the towel quite the opposite, where actually and you just get getting going. And so I think, yeah, you can either, of course, set up a fund and invest in these markets directly yourself, or you can even in some markets you can access them with your sort of prime brokers or something like that. So happy to, again, be helpful and point people in the right direction,

how you can settle in trade stocks in Bangladesh. And of course, for those who are far too big for this, can own this through, I guess, whether it's global consumer goods companies, Nestle's and all these markets and so people like that or all the global internet companies, frankly. I mean, Google and Facebook are hovering money out of my markets. And so, of course, that's probably those are people's portfolios. It's an exciting time, and we'll have amazing 2020s. And, yeah, I'm happy to answer any questions or be helpful.

If people want to learn more about it. So my closing question for everybody is to ask for the kindest thing that anyone's ever done for you. I would probably highlight free if I'm allowed more than one. Sure, yeah. So I'm a young parent and two little daughters, one on the way. And combining with the trap and all that, and I take parenting very seriously. it's been taxing. So I would argue the first one is my parents that have put me on this on this earth and then looked after me during times when I was probably not always nice to them.

I think that's clearly a big sacrifice. I think, and only, I think, parents themselves can understand. Secondly, my wife, I guess, to say yes when I asked her to marry me and she's now doing the heavy lift on our kids. And that's, again, something that I think needs to be mentioned. And then lastly, again, I would point to if I think back on my life, there's been a very many positive influences and mentors and help. But the fact that I got the scholarship has been, I think, pretty life-changing. And I'm sure it would have been fine in Germany.

But I would never have the opportunities professionally or personally that I have now. So my wife and I, he's given a dozen scholarships to the LSC. And starting on a small way to give back ourselves, which in Kingsway, the name of the firm is actually after the street that LSC is on. So I own a lot to a scholarship donor and to the school at large. And so I'm starting in very small ways to have. forgotten about the other goal. Well, wonderful. Great place to end. Great bookend to the conversation.

Thank you for your time. Pleasure. Thanks so much. Hey, everyone. Patrick here again. To find more episodes of InvestorFieldguide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month. You can also follow me on Twitter at Patrick underscore Oshag, O-S-H-A-G. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best.

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