The Joe Walker Podcast - The World According To A Maverick, Beach-Biding Stock Picker - John Hempton

Episode Date: July 8, 2019

John Hempton is a renowned short seller and the Founder and Chief Investment Officer at Australian-based hedge fund...See omnystudio.com/listener for privacy information.

Wow, Swagmen and Swagettes, just wow. I am very excited to share this conversation with you. I don't always put out a three-hour episode. The last time I did was with legendary short-seller Mark Cohodes, and that has been my most popular episode to date. Funnily enough, Mark Cohodes inspired parts of the career of and is friends with our guest in this episode. You've heard our guest on this podcast before,

and you may have heard about him elsewhere. Billionaire Bill Ackman once called him certifiably crazy. Malcolm Turnbull gave him over a million dollars to invest. Netflix starred him in the Dirty Money series for his work shorting fraud valiant pharmaceuticals. He refers to himself as an eccentric, but I call him idiosyncratically brilliant. Our guest is Australia's fraud-busting, beach-biting short-seller, John Hempton. John is the founder and chief investment officer of Bronte Capital, an Australian-based hedge fund. In 2018, a year which ended with carnage for many hedge funds around the world, Bronte posted a 20.2% return after fees. John is an absolute legend in my books. And this

time around, we go into his background and how he developed his techniques in the dark arts of short selling. I'm not going to say any more about him because we cover so much in the conversation you're about to hear. But before I throw to that conversation, a quick piece of news from me, I was recently approached by a sponsor to advertise on the podcast. As you guys know, there hasn't been any advertising on this show for a long time. All the content is free. I don't put anything behind premium paywalls. And it was a very, let's say, enticing offer.

The show, while it's still quite unquote undiscovered to an extent, has a large enough audience where it could make some serious money from adverts and it was a very tough decision. Ultimately, I turned the sponsor down because it wasn't something, well, the product wasn't something I truly believe in. Without naming the company, who were very nice to me throughout the negotiations, the product is summaries of non-fiction books, which you can read in a very short period of time. And as I wrestled with it, I thought if a non-fiction book is truly worth reading, you should go to the primary source, that is the book itself, without intermediation and read it in all of its nuance and detail.

And if it is being intermediated to you, that should be by a subject matter expert at least. So that's why it felt a bit icky going with this sponsor. The reason I tell you this story, while I don't share much about the operational details behind the podcast, is because I want you to know how seriously I take this and how much I value your time. This isn't some side hustle and the conversations will always be the most important thing about this show. So I turned a big sponsor down. It never feels good turning money down and I want to vent about it, which I've just done. So thank you for indulging me and thank you for letting me share that story. But without much further ado,

let's throw to this fantastic conversation with John Hempton. Enjoy. John Hempton, thanks for joining me. Glad to be here. After the last time we met, I sent a message to Mark Ahotis and said that I thought you were one of the smartest people I've ever met. And he wrote back, ha, known him forever. He's a talker. That's funny because Mark is also one of the smartest people I know, but Mark is a funny guy. Mark is my model on how to pick stocks and my model on how not to run a portfolio. He is so good.

Almost everything Mark touches turns to shit, which is actually the highest compliment you can give a short seller. But it's almost everything. And that's a problem because mark is all in all the time yeah right and i mark for instance was short one of my favorite short stamps.com and he was shorted at a hundred dollars on the way up and he still short it at a hundred bucks on the way down and in fact he's still down money though not very much money and the reason is as it goes up his position became bigger and bigger and bigger

and eventually he had to cry uncle and cover some of it so he covered some and then it went down again it's down below where he started but he still hasn't made any money yeah if he'd taken a tiny position he would never make as much money in the end but he wouldn't be down now and my guess is that the risk-weighted return would be better if you were as good at selecting stocks as mark and as conservative as my business partner sim. The abominable no-man. Right. Yeah, I mean, Simon's job is to tone down my enthusiasms. And he's very good at that, right?

And in some sense, you know, as you do this game for longer and longer, you realize that a lot of the game is stock selection but a lot more of the game is portfolio management and if you look at mark cohodes his stock selection is fantastic and his portfolio management lesser if you look at, well, my old boss, Ken Nielsen, who's a truly great stock picker, but his stock selection isn't as good as Mark Cahody's. His results are an awful lot better. And I think the reason his results are an awful lot better is straight out portfolio management.

It's like somewhere along the line, I decided that what I really wanted to do was pick shorts like Mark, manage a portfolio like Kev. And I don't think I'm as good at either of those things as those people. I don't think I'm as good at stock picking as Mark and I don't think I'm as good at portfolio management as some other people. I don't think I'm as good at stock picking as Mark and I don't think I'm as good at portfolio management as some other people. But in fact, the combined result is actually really quite nice and we're very happy with it. But portfolio management and position sizing turns out to be for keeps. And retail investors, and I figure a lot of the audience here is retail investors

they're very into the stock selection and they're not so good at the latter and i it's a dull conversation but it's one we should have one day yeah we'll come back to this but uh first i just want to help situate you for our listeners. And that means going a little bit into your background, which is probably not the most enjoyable thing for you. But we'll touch on a few salient moments. And I actually want to begin with Adelaide. You didn't grow up in Adelaide? I grew up in Sydney. I chased a supervisor to Adelaide. I went to Adelaide University and had the old guy, J.J. Pinkus, who was the head of school in Adelaide, my supervisor for honours. And it was actually a ridiculous honour working for him. J.J. was, I guess, one of the three smartest people I've ever managed to work for. But JJ had written a grand total of like six economic papers to be a professor.

Every one of his co-authors was a Nobel Prize winner. It just seemed to be that he managed to write really good stuff with really good people and at a rate of about one paper every five years. So this guy was your economics professor at Adelaide University? Yeah, he supervised my honours thesis. Okay. And I'd walk over glass for JJ in those days. Why did you decide to study in Adelaide if you grew up in Sydney? JJ.

JJ. Okay. Simple as that. Well, how did you first meet this guy? Well, I did the first three years at ANU and I saw him at the conference, giving a talk, and I thought, okay, I got it. Yeah. I chased him to Adelaide. So my undergrad is ANU, but the degree actually says Adelaide because that's where I got the honours degree.

Ah. It's a little illusion. I only lived in Adelaide for a year. Good place, though. Yeah, I liked it. Not particularly exciting on a little illusion. I only lived in Adelaide for a year. Good place, though. Yeah, I liked it. Not particularly exciting on a Thursday night. No. Not like Canberra.

Well, actually, Canberra was better. So you would have gone to Mooseheads back in the day? No. No. But mostly it was because I did a lot of hiking, and Canberra is like the world's best place to do some hiking from, and Adelaide just isn't. You know, Adelaide is 300 kilometres of wheat farms

before you get anywhere interesting. Yeah. Did a lot of climbing when I was in Adelaide because it was four hours to Arapoles and four and a half hours to Wilpena Pound. And there's a whole lot of rock climbing at Wilpena Pound, and Arapoles is just wonderful. Now, the next smartest person you worked for...

Was Ken Henry. Was Ken Henry. Tell me about that. Look, Ken... I worked in tax policy division of the Treasury and tax policy has got this ability to become ridiculously technical very fast. And the question is, can you deal with the technical and see the big picture at the same time? And Ken could.

And Ken also worked out that I was very good at some of the technical stuff. So I became this expert on tax avoidance. And tax avoidance is like the world's best accounting training. And the reason it's the world's best accounting training is that you get a whole lot of documents which might or might not contain a tax avoidance scheme. And nobody is going to tell you how they work. There's a jet flying here, depreciation taken in two countries because the plane is partly owned in two countries. There's a leverage structure because the plane is financed. There happens to be a boat in this structure as well, just for good measure.

Now these are really good things because the ownership of them is not very clear and their jurisdiction is not very clear. If you have a tractor, the tractor works in Australia, it should be owned in Australia, it should be depreciated in Australia. If you have a plane, if you're not very careful, the income will be earned in a tax haven and the depreciation will be earned in Australia. And there were structures put together by investment bankers in Sydney that achieved roughly that. But nobody was going to tell you how those structures worked. And the ATO would come to us with a bunch of documents, often names redacted, found on some subpoena. And they'd say to the Treasury,

there's a giant tax avoidance scheme in here and we need a legislative solution. And Ken sort of nurtured me through the process of learning how to do that. And it turns out this actually, it turns out a lot of the time if you say, you know, the gap income is 50 million and the taxable income is 50,000. The tax office naturally assumes that it's not getting taxed on 50 million. And the truth might be, well, the gap income is fake. And if the gap income is fake, then why are they doing that? Well, to fool the stock market. And the most famous example, of course, is that Allen Bond in its bond corp in the penultimate year of being listed before it went broke, made $400 million profit and paid $750,000 in tax.

And there was story after story after story in the Sydney Morning Herald, and probably in The Age, about how, you know, Bond Corp was earning all this money and not paying any tax. And every one of those stories, every single one of them was false. The truth was that Bond Corp wasn't earning any money. Tax it, you say $400 million income. I don't see any income. And that turned out to be the ways that those, quote, tax avoidance schemes worked turned out to be one of the great revelations in my life because I learned how you fake your income. Right. And that tended to stand me in good stead later as a short seller. Now, while you were working at the ATO, you were doing... It wasn't at the ATO, I was at the Treasury. Sorry, at the ATO you were doing it wasn't at the ATO I was at the Treasury sorry at the

Treasury the there's a status Canberra thing going on here you see the ATO is a line department and the Treasury is a policy department I got to write cabinet minutes and meeting notes and I actually got to watch the decision making process in some, I got to watch how the sausage was being made. Now, the truth is, of course, that legislation and sausages are two things that you shouldn't see being made. But it was still interesting. Yeah. So Treasury, sorry. Treasury.

That was a tip of the slung. No, no, no. But you see, even 20-something years after I left the public service, I have that little public service hierarchy left in me. You work at the tax office? You work at the Treasury? Oh, tell me about your job. And there are equivalent status piles, like the people at the Department of Foreign Affairs all think that they're better than everybody else right and it's really hard to get into right because you're gonna travel the world and meet interesting people. It's sexy. It's sexy yeah right. Treasury is also very hard to get into. In my day it was genuinely a quality department and the quality was led by some really high

quality people but you know Ted Evans who was the secretary in those days, was a pretty grand man. And Ken was just a genius. So while you were working at Treasury, you were doing some trading on the side. Yeah, well, I met a girl at those days. There's always a girl in there. I met a girl in those days that had inherited some money in the

US. Not a lot of money, but enough that you'd want to think seriously about how it was managed, or in this case, mismanaged. And so I sort of got interested in trying to work out how to manage it better. And as a result, I also started trading my own money on the side and it's fair to say that genius is a bull market the stock market went up in the Australian stock market went up every single year I was at the treasury this is of course due to the fantastic economic policies that I was pushing but right but nonetheless the stock market went up every single year and my returns were very solidly double digit. And they weren't double digit by a little bit.

They were double digit by a lot. And to be entirely honest about it, I was a complete stark raving idiot. Now, fortunately, I think I worked out that I was an idiot by about 1999. And if I hadn't worked out that I was an idiot by 1999, 2000, and that Dumont would have told me that. But in fact, I was quite well positioned. But you can very easily fool yourself into believing you're smarter than you are by a bull market. And the only thing that really saved me was that I started reading economic history books and stock market history books. And there's a bookshelf in this

office which has a hundred of them on the shelf. You don't have to read all 100, right? If you read all 100, you'll wind up a pessimistic bear like me, always waiting for the next crash. But you do need to read five. What are they? It actually doesn't really matter which five. Oh, okay, right. Right? You just need to know that things have a history of blowing up.

So, I mean, I could throw a few at you, but it's choose your own. My pet favourite is one that's out of print at the moment, and I lent my copy to someone and haven't got it back. Always happens. Right, which is called The Money Miners by Trevor Sykes. And it's a book about the 1967 to 69 nickel boom in Australia, which is a particularly obscure subject, but it's also these days known as the Poseidon boom

because Poseidon went from $0.02 to $250 before it went bankrupt. So it was one of Australia's three asset price bubbles, the first being the Melbourne land bubble. Right. There have been more than that, but they're the really big ones. Yeah, according to John Simon of the RBA. Yeah, they're the really big ones. The big ones.

Now, the money miners has a little line in the middle of it. It's describing the most wild-ass boom you could ever imagine, something that made the dot-com. And people who go out scratching for nickel and know nothing about geology getting stupidly rich. And they're getting stupidly rich, of course, of selling stocks. But it looks like their deposit is one quarter of 1% nickel. Well, one quarter of 1% nickel ain't mineable. You've got to crush a lot of rock to get a little bit of nickel.

But these are really exciting times. And in the middle of it, there's a sentence. It's about 60% of the way through the book and says, did somebody ring a bell? And of course nobody did. And Trevor Sykes points out that that's the exact top and from here on in it's down and what's really interesting is the 20 pages after somebody rang a bell or didn't ring a bell are just like the 20 pages before they're completely crazy wild ass booms it's just the

direction from here on is down and two months later it was down 20 percent but it still looked like it was a wild ass boom and yeah it all collapsed in the end there are other books once in golconda is particularly good fun never heard of it there's another book by the same author i think think, called The Go-Go Years, which is easier to find. If you're academically inclined, but I find it harder reading, Kindlebergers, Manias and Crashes is a good idea. Popular Delusions and the Madness of Crowds is an okay idea. And there's a chapter in there on Nicholas Flamel. The Alchemist.

The Alchemist. And Nicholas Flamel, of course, was only known to me before elsewhere from harry potter movies of course right but um yes there's it's quite clear that um jk rowling had read manias and crashes because some of the details in the harry potter books had read um extraordinary popular delusions extraordinary popular Harry Potter books. Had read Extraordinary Popular Delusions. Yeah, Extraordinary Popular Delusions. Mackay's book. Mackay, yeah. He plagiarised a lot from a German source for his tulip mania. There was a bit in that that was very sensational. I didn't know that.

Yeah. But, you know, it's a fun book. This time is different, Rogoff and Reinhardt? Yeah. But the answer is, you know, pick five gotcha okay right and the reason you got to pick five any five is that you just need to know the patterns of human nature yeah right because you will hit a period where everything looks rosy and then everything looks shit. And it wasn't rosy, and in fact it wasn't shit at the end either.

There's just... This is inherent in human nature. And yeah, I mean, some asset bubbles are bigger than others. The idea that Australia only ever had three asset bubbles is kind of quaint in my view, but it may be true that we only had three ridiculously off the scale, enormous ones. There was some bubbly behaviour in the early 19th century. We had a depression in the 1840s, I think.

We had one in the 1890s too. Well, the 1890s is one of the clear examples, one of the three, but I just mean, I'm trying to think of something else. The Melbourne property bubble. Yeah. And it's interesting because it's called the Melbourne property bubble, but it was really a Melbourne and Sydney property bubble as well. Yeah. But it was stronger in Melbourne. It was definitely stronger in Melbourne, but prices still doubled.

Melbourne was in 1885, probably the richest city in the world per capita. Yeah. And the bubble took that to its illogical limit. There's a fantastic book called The land boomers by michael cannon i've not read it but again as i say yeah reading five is compulsory yeah but so reading 30 is not gotcha so to to come back to this point um you you did really well but it was a bull market what you said sort of reminds me of a quote of steve eisman's when he was talking about the 2000s crash uh and the great recession uh he was criticizing wall street and he said that they mistook leverage for genius

yeah bull market gets risk mistaken for genius leverage gets mistaken for genius leverage in a bull market is really mistaken for genius leverage gets mistaken for genius leverage in a bull market is really mistaken for genius yeah right i mean leverage i have a slogan here which is that leverage is for the very young and the reason is that leverage works most of the time if you find something that's sensibly priced just sensiblyibly priced, not crazily priced, and you lever up into it, you'll probably make money. And if the stock market's middle of the range, and if the stock market is 100% of GDP market cap, which it will be at some stage again, I'm thinking S&P to US GDP, S&P market cap to US GDP.

It's gone as low as 70 in recent years. It's gone as high as 140 or 150 or whatever it is. I don't know what it is at the moment. But if it's in the middle of the range and you leave yourself, you'll probably get rich. In fact, that works nine times out of 10. Now, when you're 23, getting your first million dollars together is ridiculously hard. It's just ridiculously hard. Once you've got it together, you must never risk it. Hence my slogan, it's for the very young.

You do it when you're 23 and you don't do it again. Now, I know people who have been bussed every cycle. One or two of them on Twitter. And they're just sort of go-go, right? And they don't have that slogan in their head every boom they get rich and every bus they give it all back again and the trick of course is the personality type that says yeah i'm going to have the foot to the floorboards and then i'm going to stop and then i'm going to drive like my grandmother for the rest of my life right and it just doesn't seem sensible right it's just not the way humans are wired but it's

the way you should be wired if you're 22 leverages for the very young yep so by the late 90s when you i stopped when you realized this you stopped you'd made about nine hundred thousand dollars yeah depending on how you valued a little bit of property i owned i was either a millionaire or not a millionaire and how old were you late 20s and this is not including the the money from the girl who yeah this is not including the money it was i well to do. Now, had the market been different the previous three years, I could have got myself into terrible trouble. I mean, I really was stupid. And I used leverage and I did all sorts of things like that.

You got margin loans? Oh, I had margin loans. I had all sorts. I tended to buy speculative things on margin loans. I worked out ways of leveraging myself up even further. It all worked beautifully. Right. And I was so stupid.

It was insane. And my slogan leverages for the very young applies to my own life. But I applied it by accident. Right. I just worked. And my slogan, Leverage is for the very young, applies to my own life. But I applied it by accident. I just started reading enough textbooks and my leverage came down. And then by sort of 1999, I could see fraud everywhere. And my particular one was VoiceNet. And you will be just a weirdo if you remember VoiceNet. But VoiceNet was a speech recognition software company listed in Australia that actually made the ASX 300, I think.

It had a market cap of about $700 million, which in Australia is not a small market cap. It sold software in Chile, and it said publicly that they had a Chilean telephone company as one of their biggest customers. The accounts showed software sales in Chile, and we later worked out that they had a shop in Chile selling shrink-wrapped Microsoft software, which they called software sales. And I guess the auditor could sign off, well, you know, you're selling copies of Microsoft Windows, they could sign off that as software sales. But they're not software sales in the sense that I develop software which has a zero marginal cost and I sold it. I'm just a retailer. They told people that they had sold stuff to a Chilean telephone company and one of my friends could speak Spanish and decided he was going to ring up every Chilean telephone company

and ask them if they bought any software. I think that person, although I haven't confirmed, is somebody who calls themselves Oddlot on Twitter. I'm just suspicious it's the same person. Anyway, Oddlot, I'll call him, worked out that they were lying. and this was the first time i saw a widely discussed open register stock that was a complete out and out fraud it was actually the first thing i ever shorted right the time and it took me ages to work out how to short it and i was so naive that i shorted like $5,000 worth because I didn't know whether it would work or not. And it worked, of course.

So you were disbelieving probably momentarily. Was there any self-doubt or were you certain this was a fraud? Oh, no, I was certain this was a fraud. Right. We, by this stage, worked out that all their software sales, which were shrink-wrapped Microsoft software, right, and we'd worked out that their biggest customer did not exist. Now, when you say we, is that Platinum?

No, this was before I worked at Platinum. Yeah, I'll come to that later. This was Oddlot and Simon, who now works with me and myself, right. We were on a prototype stock chat board called The Chimes, which has since ceased to exist. But we – Simon likes to think that I was a doyen of The Chimes, and I probably was. But that's how Simon and I met each other. It was a prototype stock chat board.

Simon's the other half of Bronte Capital. Yeah. But it was collectively the working group of the chimes that worked it out. And was the chimes... And Odd Lot was called Odd Lot on the chimes as well. Was it an international chat board or just Australia? No, well, it tended to focus on Australian stocks. Yeah.

Right. And ASIC didn't like it, actually, right, because it was run by somebody who had a record of going bankrupt in the previous cycle. But the chimes was actually an important part of my life because it was the first time I got to talk to a lot of other people about stocks. And it's also the first time that I started reading all this stuff. And it was the first time that I worked out that there were frauds. And there were ones that weren't frauds as such, but they were pretty suspicious, like Davnet. And Davnet was another $700 million company.

It even got a $250 million investment from a Japanese telco and it did this wonderful thing of setting up telescopes on buildings so that they could use five they could use lasers rather than fiber optic cable to give fast internet to that building this is an idea that just doesn't fly these days weirdly Meade telescopes who make beautiful retail telescopes you know i have i have a five inch telescope at home made by mead mead at one stage had a market cap of hundreds and hundreds of millions of dollars and it was because it was making telescopes to put on buildings that were being used for internet transfer all right rather than you know fiber optic looping the building which is what you would do now.

And this stuff was absurd. Now, Davnet had wired a few buildings, and on the basis of wiring a few buildings, it had almost a billion dollars market cap. The family that control it are still multi-millionaires. They've sold all the stock. The stock, of course, went to zero. It wasn't a fraud. it was just a hype merchant whereas voice net was a pretty evil fraud voice net also became a central stock

in my life later because it was the way that i met mark cohotes yeah so tell us about the email that changed your life. Ah, Mark used to run a radio show called Facts from the Other Side of the Tracks. And I've got to say it in Mark's accent. He used to say it in the most ridiculous American drawl. And Facts from the Other Side of the Tracks used to just take pot shots at stocks all the time. And in fact, Mark was wrong about some of them. For instance, he had a short on Whole Foods at one stage and that didn't work out very well right Whole Foods became a phenomena but it was an expensive leveraged grocery store at the time and Mark didn't believe in expensive

leveraged grocery stores he was wrong but on the one the the stock that he talked about most was a company called learn out and houseby and learn out and houseby was the biggest flat fraud in the world in the dot-com era and mark you know pointing the finger at learn out and houseby was the sort of tech equivalent of pointing the finger at enron all right was a really big-name company. Now, it did speech recognition software. And in 1999, you could walk into a room which would be covered in servers, and they'd have nice neon flashing lights,

sort of like a server farm from a 1999 James Bond film. Nobody thinks about a server farm anymore. They're just sort of boxes that Google or Amazon put somewhere. And they're very dark, but this one had lots of flashing lights, just for show. And you could speak into a microphone, and it would demonstrate the holy grail of speech recognition. And the holy grail is you speak into the microphone, it recognizes the speech, it then puts it through a translation program, so it translates it to

another language, and then puts it through a speaking program. And the translation program was rudimentary, and the speaking program was rudimentary. But it was demonstrating the holy grail, which is that you can speak into a phone in one language and it will speak out of the phone in another language and this thing had Microsoft and Intel as investors and it was basically the hottest tech stock in Europe. In fact there was a European stock exchange called the E-Stack which was meant to list sort of US European tech stocks as a competitor to Silicon Valley. And LearnOut and Housebee was the biggest stock on the East Deck. And we now know that it was a complete Wizard of Oz type fraud. There was no speech recognition software.

There was a guy literally behind the curtain typing. Pay no attention to that man behind the curtain. And this was for their demonstrations? Yes. Every one of the demonstrations was fake, but they had managed to fool both Microsoft and Intel. And if they had fooled Microsoft and Intel to say this was a fraud, it was kind of remarkable.

Mark Cahodes was running around saying, this thing's a fraud. And Microsoft has just put $ million dollars or whatever the number was in and you presume that microsoft know how to do due diligence on a software company and don't waste their 500 million dollars right and in that those days microsoft could do no wrong remember the tech stock bubble had been going on and on and on nor could intel and they'd also put in half a billion dollars or whatever it was none of it existed it was all stolen now learn out and houseby did a one month road show with with voice net in australia and it turns out x post that voicenet was selling software to learn out and houseby and learn out houseby was selling software to voicenet

right and they were both counting it as sales but in fact nothing was going between them at all right it's just fake sales on both sides but if i spent a month on the road with you and you're a complete fraudster, I'd work it out. Learn Out and Houseby willingly spent a month on the road with VoiceNet. And VoiceNet was a complete fraud. We could prove that fairly easily. So my assumption was that Learn Out and Houseby must also be a complete fraud. And I wrote this all out, including the proof that VoiceNet was a complete fraud and sent it to Mark Cahodes, who I'd never heard of except from the radio show. And Mark sent back an email, which he doesn't remember, but which changed my

life, which said, congratulations, you have proof number 28. And in fact, he was right. He really did have 27 different proofs that LearnOut and Houseby was a fraud. 27 different ways of working it out. And he had this massive oversized position in LearnOut and Houseby. And he was working all day, every day on Learn Out and Houseby. And I'm struggling to work out why he was working all day, every day on Learn Out and Houseby, because he already knew it was a fraud. There wasn't anything else that he could learn, right? It's like, you know, this was his sort of...

My attitude to this is, yeah, you've worked that one out next stock please yeah right and then i want to split the position but mark started the year 2006 short learn out and house and it was a ten dollar stock and by october it was a one cent stock and ten dollars to one cent in 10 months looks like a pretty good return to me as a short seller, except, and the except is that it went via $65. And if you're 6% short at $10, you're 36% short at $60, except that your capital's gone from $100 to $70. So you're 36 on $70, which is a bit over 50% short, which means your dear friends at Morgan Stanley or whoever whoever or interactive brokers are closing

down your account and what would be really annoying here is not only do they close your account down and put you out of business but you're right now Mark wasn't going to get put out of business on this he's not that silly but he bought it all the way up and he bought it and he bought it and he bought it and you know there's a top ticket $65 I'm gonna guess that that was Mark Cahody's buying and then he got then as it goes back down he sells some more and he sells it and he sells it and he sells it and he sells it and he sells it and he likes me to remind people that he made a profit and he did he made about 1% of his fund and he made 100% of the profit between $2 and zero.

And I thought to myself, this is the greatest feat of stock picking I've ever seen, right? To pick the biggest fraud in the world in the dot-com era, sitting in an office somewhere and just working out that microsoft and intel have been deceived it was the greatest single piece of stock picking i've ever seen and not make much money and it's like if you'd made this a 60-bit position and found five more of them ah you make more money right if you had attached it to a long position, so you'd used the money you made in LearnOut and Housebee when it was to buy real companies, let's just stick to tech. When LearnOut and Housebee went to zero, Amazon was the buyer of

the century. It had already dropped 70% before it goes up another 100-fold. And if you'd paired buying really quality tech and shorting real shit tech and you'd managed to risk, your returns were pretty astonishing. And so the question was, you know, that was right at the core of Bronte when we set it up, was how do you manage the portfolio buying really quality stocks and fund it by shorting shit? And how do you industrialize the search for shit so that you don't spend all day producing proofs number two, three, four, five, six, and 28, right? You really just want, yeah, look look i know it's a fraud next one please and next one please and

next one please and you know simon is kind of good at disciplining me this you know we have a short we put 50 bips on it's up threefold or fourfold it's now a two percent short and by this stage i've done lots of work on it because you know it's bit me in the face and simon will say you've got to cover some and i'd say but it's the best short i know and he says there's 25 more out there go find them you're being lazy and now we don't even have that discussion simon just raises his eyebrows. And I know what the end of that discussion is. I just got to go out and find another five shorts.

And he's right. I was just being lazy. Decent portfolio management means a lot of good positions that are balanced. And that's actually hard work right and you know as a retail investor you might get you might get a good position every now and again right but working out what to do with it is hard and working out how to fit it into a portfolio that doesn't leave you at tears in tears once a cycle is also hard. And in my ideal world, I have a computerized Mark Cohodes. And the reason why it's a computerized Mark Cohodes is it takes all his unbelievable stock selection

and it industrializes it. And by industrializing it, I can diversify it and de industrializes it and by industrializing it i can diversify it and de-risk it right mark is still my model for the best stock selector i've ever seen right he's uncannily good at it he is absolutely not my model on how to run a portfolio and that's fine you know mark is mark is full on right you're you're never gonna have a boring time with mark cahotis i got pretty drunk the first time i met him only the first time i mean there is there's one speed here. The funniest thing is I was flicking through Mark's photos at one stage and realizing that because he's just so gas fun, he hangs around all sorts of other gas fun people.

So I'm flicking through there, and there he is jamming a guitar or trying to sing with Bruce Springsteen. And I'm thinking, you know, why is Bruce Springsteen with this weird finance guy? And the answer is because he's gas fun. He's just the sweetest guy you've ever met. Yeah. Right.

But he is not my model on how, you know, that learn out and house be, where he was spectacularly right. More right than you could imagine. Weren't they so certain they'd hacked or they tapped into the Wi-Fi at one of these presentations? Is that story true? That's one of the stories I've heard. Right. I think it's true, right, which is that they'd worked out

that there was Wi-Fi signal going around, which meant that there was somebody behind a curtain typing at the right time. Whether that's true or not, I don't know. But there were, I mean, there was so many proofs that this thing was fraud. And the weirdest thing is Mark was laying the entire fraud out in late 1999.

And the stock only went up another sixfold right and the market was completely crazy in 1999 and then it was double triple quadruple sixfold but but crazy crazy doesn't follow the rules of maths six times five is 30 six times crazy is just crazy yeah so it's not you know there's a mathematical term for that where you know six times x is still just x yeah right only works with zero but it also works with crazy six times so the pernicious thing about frauds is that if you can make up a lot of your earnings with the stroke of a pen why not why why make them 10 million want to make them yeah well i mean the the famous example of course is brie x and brie x is a stock that gives me nightmares there are at least three books written on Brie X, and I've read them all.

And the reason I've read them all is that there was actually a bad movie made about Brie X, too, starring Matthew McGonaghy, called Gold. Right. Right. But Brie X was a gold mine in Borneo. And it was, to be honest, just a standard Canadian garden variety of gold mining fraud. And I perfectly happily short these with $300 million market cap, but I just short 10 basis points of them. So one-tenth of 1% or one-fifth of 1% of my portfolio. And the idea is that they go to zero with monotonous

regularity and you should eventually be able to clip these one fifths of 1%. And if you do it enough times, you make money. Except that every now and again, you're short, you know, the classic is you've got a fake gold mine. It has a million ounces in the ground. It has a market cap of $300 million. But there's no gold there, really. It's going to zero. So you're short your one-fifth of 1% of it, and you probably make it. Except that Brie X's fake 1 million ounces became a fake 180 million ounces.

Brie X was, by a factor of of three the biggest gold mine ever found in human history. The market cap went to 35 billion, which as you might notice is more than 100 times my $300 million stock. So if I'd shorted it and stayed shorted even my one-fifth of one percent would have become a five or six percent position and i would have been forced to cover it if i'd been really stupid and shorted say three percent of it i would have been completely wiped out on a three percent position on which i'm right this is not much fun. When was this company around? The late 90s. Okay. Now, the whole story is more ridiculous than you can imagine. The chief geologist was a guy called Grusman who sold a lot of stock.

And Grusman almost certainly did the fraud. He just bought gold from local river panners. And he'd sprinkle that gold into the sample before he sent the sample off to the lab. And in retrospect, we know they were fraud because the gold that you find in hard rock is pointy, but the gold you find in the river is rounded, and all the gold in the sample was rounded,

so it didn't come from the hard rock. It was added afterwards. Now Grisman did cash a lot of stock and the money disappeared somewhere into the ether and the whole fraud unwound in part after Mr Grisman fell out of a helicopter and his body was eaten by tigers and never found again. No, I'm not joking. This actually happened with a $30 billion market cap company

where the geologist fell out of a helicopter and his body was eaten by tigers, never to be seen. But was that like the cover story for him disappearing? He's never been seen since. Why were there tigers under the helicopter? It's in Borneo. Okay. Right.

I mean, seriously. Right. under the helicopter it's in borneo okay right i mean seriously right you just you could if i made that up you wouldn't believe me right but yeah and the weirdest thing about the briex also has another lesson this thing had a market cap of 35 billion dollars and they needed 10 billion dollars to build the mine. This was going to be one of the biggest gold mines ever built. And in the process, Tommy Sahato helped himself by changing the license rules to 10% of the company. And this was one of the flagships of the Sahato regime's corruption in reality the sahato regime exposed themselves as globally corrupt to get 10 of a worthless fraud but nonetheless that's you know you

defraud you you um had fooled the indonesian government too but homes i think it was home state gold um had agreed to put $10 billion in. And before they actually put it in, they did some due diligence. And they drilled holes parallel to the Brie X holes one meter apart. So one hole goes straight down here for 400 meters. And that one contained 35 ounces of gold in the sample. Really rich. And another one exactly one meter apart drilled parallel. and that one contained 35 ounces of gold in the sample, really rich.

Another one, exactly one metre apart, drilled parallel, had no gold in it. And Briex and Homestake put out a little press release saying that they were withdrawing from the agreement having drilled two parallel holes and found no gold. The stock dropped 90%, right, from $30 billion to $3 billion, or two and a bit billion, it dropped 95%. It was almost just over $2 billion. And it was the short of its lifetime then, right, because by this stage, you knew it was a fraud two people had you know a reputable party had drilled parallel holes and walked away right the geologist had already fallen out of the helicopter the stock was down 90 but so what it was still going to drop 100. It took another sort of 15 weeks for the stock to go essentially asymptotically to zero.

And that's an interesting lesson because when was the best time to short it? Sure as hell weren't at $20 billion, right? Because if you shorted at $20 billion, it could go to $50. Right? The best time to short it was after the 90% drop. All you had to do was think logically about it right and people say there isn't free money sitting on the table but shorting brie x after the 90 drop was as close to free money as ever exists on wall street right it was straight to zero in 10 weeks right and no risk at this point you know the chief geologist is dead

and the reputable counterparty has said yeah we drilled the holes and there's no gold what could go wrong with that short that was sort of interesting because i'd probably have shorted it i'd have found the scummy people, shorter to 300 million on the way up and nursed a four or five percentage point loss. And we have sizing rules, you know, because the problem with a fraud is a fraud can go from, you know, 300 million to 30 billion and back to zero and 300 million silly and 3 billion is silly and 30 billion is silly, but it's not 10 times or 100 times as silly. But in fact, at 2 billion on the way not 10 times or 100 times as silly but in fact at 2 billion on the way down that was 100 times as silly there was no conceivable way that stock

was going up right by this stage it had been exposed as a souffle and to borrow the famous Paul Keating line a souffle does not rise twice in your 2000 he said that about a fellow politician it's one of the best lines ever you know he's just sort of this vacuous souffle he's all air a bit fancy though was that john hugheson no it wasn't it was andrew peacock yeah it was andrew peacock though you see in those days i was in canberra right so um i was sort of very familiar with what was going on then. Yeah. Right, the souffle doesn't rise twice. It's just one of these great lines.

I was reminiscing with Ken Henry a while back about it and Ken was pulling out other ones, right, that he remembered just from, you know, rehearsal lines because Ken was actually in Keating's office during part of that period. And Ken sort of remembers them in the most fond way. Keating would just pop out with these zingers after zinger after zinger.

In your December 2017 client letter, you said that... Oh, the wonderful letter. That was the letter that every retail investor avoided and about half a dozen professional investors thought was great. I point this out because it was a letter about portfolio management. And as I said at the very beginning of this, portfolio management's for keeps. It's what delineates the really good people.

And this was the only letter I ever wrote about portfolio management. And seriously, half a dozen big name hedge fund managers have emailed me and said how much they liked that letter. And not a single retail investor or single client emailed me with the same thing. Can I be the first retail? Yeah, okay.

Treat this as an email. All right, I will. But in that letter you wrote, quote, you would rather be Warren Buffett than even the best of the short sellers, end quote. Are you just alluding to what we just spoke about, which is that shorts aren't subject to the laws of gravity? Or is there another lesson in that? Look, a straight 100% short portfolio probably loses money,

no matter how good you are. And the reason is the sort of things that we short, a gold mine in Busan. Now, you don't know where Busan is, except I've just told you. It's in Borneo right or a biotech that cures that is a treatment for fragile x syndrome now you might know what fragile x syndrome is but i had to look it up um or a biotech that treats some rare children's disease that nobody's heard of and affects you know 400 kids but can get orphan drug statement status or a tech company in london that has a better way of searching videos that hasn't yet been demonstrated that's a real one

it's called blinks right and that went to zero now none of these things you don't own that biotech because you're really interested in fragile x syndrome and you don't own that gold mine because you're really interested in busang right you own them with a deep desire to get rich and a deep desire to get rich and fraud per se is a high beta activity nobody particularly desired to get rich in 2009 everybody desired to get rich in 2016 in 2009 they desired to stay solvent but in fact it was the right time to desire to get rich all right now the sort of benchmark beta of these stocks is about two can you just tell people what beta means means that if the market moves up 10 these things will move up 20 if the market moves down 10 these things will move down 20 now that's just short-term movement now let's just imagine you're the world's best short seller um I'm thinking Mark Cohodes, who's almost always right.

He was wrong about Whole Foods, but, you know, he's almost always right. Mark is short a bunch of these things. And on average, they'll go to zero over seven years. He's no good at picking the timing, right? In fact, if they go to zero over seven years, he should make 14% a year, which would be a very adequate return, thank you. Except that they go up and down on the way to zero. And up and down can be up and down a lot. And, you know, the learn out and house be thing is one of those but you know in

the last couple of months the stock markets up 10% I don't know why it's up 10% I promise you an awful lot of our shorts are up 20 all right I know why they're up 20 the answer is the stock markets up 10 all right they're just too data all right and so you start start 100% short and the stock market does its thing and you're now 120 short, except your capital's 80. So you're 120 on 80 short, which means you're 150% short, which means that you better start buying stock to get back to 100. You get back to 100 and in May this year, I don't know, maybe May this year is the month that the market goes down 10 and let's be you know you're a hero this time your stocks are down 25

all right in other words they've behaved worse than the market right um even the beta adjusted so you're now 75 short except your capital's 125 so you're three on three on five short which is 60% short you want to stay a short seller you better start selling stock and you get down to being a hundred short again now you'll note what's happened here every time the market goes up you get to buy and every time the market goes down you get to sell and this means you buy high and you sell low and if you buy high and sell low you don't make any money right it doesn't work very well on the street in fact i've sort of spent my life trying to avoid buying high and selling low it's a good

rule but if you um run a structural short book that's what's what what inevitably is going to happen to you and this buy high and sell low erodes your returns so you should be getting 14 a year because the stocks on average go to zero right and in fact you probably wind up with about zero right if you run a straight short book i don't think you can make money now if you run a competent long book you should make money. The idea at the core of Bronte was that I don't like this whip sawing on the short but we're actually very good at it. So what I want to do is run shorts against the longs and then whenever the market goes down the shorts give me cash. My longs have gone down too but they're high quality companies so i'm

fairly confident that they'll return and i've got a big whack of cash and guess what i can do i can buy longs at low prices and then when the market goes up again and if i can't find longs i'll just increase the shorts a little right and effectively i'll make the rebalancing effect work for me by having the shorts deliver me the cash at the right time that's the sort of portfolio idea at the core of bronte and there's a whole lot of maths around it and i've just hired a mathematician and the reason i've just hired a mathematician is we have a bunch of heuristic rules of thumb about how we should manage shorts we have 200 of them and the reason we have 200 of them is that i've tried to computerize mark cody's 200 heuristics

200 no 200 shorts oh sorry yeah i haven't really right yeah but my heuristics are very uh you know feel which way the wind is going right They're good. They're thought through. Portfolio management isn't. The December letter is highly thought through. But I've never modelled it to the intensity that I should. And so I've hired a mathematician to help me out here. So there will be an internal version of the December letter written in about two years' time, I suspect, which gets the material in our December portfolio management letter down pat.

Now, down pat is going to be questions about how do you time shorts better? And sometimes the timing rule is, you know, you just know, right? Like if you thought logically Bre x was the do of its life when it was down 95 and once you've worked that out the right size for this three or four percent right because it's not going to go up tenfold in your face and if it's not going to go up tenfold in your face you can be larger right so brie x should have been a large short right whereas brie x before it was exposed as a fraud has to be a small one and the reason it has to be a small one is that it can go 10x higher very quickly enron was the due of its life at 20 on the way down you know it was a very big struggle

from 80 to 20 and from 20 to zero extremely fast and at 20 on the way down the core had already been exposed the various off balance sheet arrangements the jedis and swish shoe barkers and death stars had all been exposed the banks had all already had their credit lines drawn and the counterparties were running away as fast as they could right at this point it was the do of its life um it's not often that the timing makes itself obvious most of the time our timing is rules of thumb and heuristics and we've hired a mathematician to try and make them better but you'll do very well just with the heuristics and the simple heuristics are don't be oversized in frauds right don't be oversized in any sector that could be frauds so if you know you can't be short five percent in one gold stock because it

could be brie x you can't be short 10 gold stocks because the cluster of them are correlated to each other and a cluster can move like one stock right but you can be you short if you can tolerate it because the whipsawing effect that I described. If you're 100% net short, 10% market movements do you in. If you're 50% net short, 20% market movements do you in. If you're 25% net short, 40% market movements do you in. But you're still being done in this bull market, right?

So don't be very net short. You can be net long. Then the other heuristics are, you know, when everybody's making money, when dumb people are making money, it's time to pretend that it's hard, or at least work out it's hard. And, you know, the bellboy is a famous thing

but you know if you can sell tech stocks to a financial planner in doncaster then it's probably time to stop buying tech stocks and it's not that i have a real problem with financial planners in doncaster but you know it's if they have gold rim spectacles then i really have a problem yeah right but you know there is a sort of they're the bellboy in our modern world now in 2011 bronte from memory it was usually around 50 to 60 basis points uh on average per short so you'd So you'd have up to 50 shorts. Yeah. If you have 200 now, does that mean on average you have 15 basis points?

Yes, it does. And there are several reasons. The first one is computerized Mark Cahodys gets better and better and better. So you've been scaling. We have a big, hairy, audacious goal here, which is to find every fraud in the world and short five basis points of it and do it with computers yeah now it's not a realistic goal does that mean does that mean you think that there's um 600 frauds in the world yep right yep there's a lot of bad people yeah right and the

stock market's an interesting place you know you and buy $5,000 worth of a stock as a retail investor all the time. And the person that's selling to you is invisible. And they might or might not be a related party to the holders. And if it is a related party, then they've got a very big incentive to sell the story. I mean, I'm not going to give $5,000 to anyone, but in the stock market, I seem to do it. It's an unbelievably good place for a fraudster to turn up.

Very anonymous. Yeah, and in the world there, it wouldn't surprise me that there were 600 i don't know but we can find 200 at the moment right um may it might also be that we can find 200 at the moment because we're very late in a bull market and there'll be another time when the bull market is smashed and i can only find 30. That's plausible. Right. But I don't know yet.

Yeah. Because we haven't had the computerized Mark Cahotis for that long. A piece of context for everyone listening at home, I think we might have missed this, but just to help all of that make sense, Bronte remains around 100% long and 30% short? More like 110 or 115 long. Okay. And we're currently more like 60% short.

Right. Now, the reason why we're more like 60% short is that I can find shorts really easily and I can find longs not at all. And in a different environment, if I can't find shorts and I can find longs, then I'm going to be longer. For a long time, you were net 70 percent long yeah and i started shrinking that in about 2016 okay and it's now 2019 so i've thought the market was overpriced for three years and it's done nothing but go up in a couple of blips right so i've been wrong yeah right but now part of the reason i i used to say it quite clearly which was if i could find shorts at will and longs not at all then i'm just going to reduce the net exposure now part of the problem is that computerized mark cohodes gets

better and better and better my fantasy is of course computerized marketing because mark is just the greatest person ever right right um but computerized mark cohodes gets better and better it's still nowhere near as good as the real thing and it doesn't drink as much but as it gets better we find shorts easier and I'm not sure whether the fact that we're finding them easily now is because we're better at finding them or because there are more out there so there are all sorts of you know illusions here but we sort of imagine a world where we can't find them and then we'll go back to being 100 long. Yeah.

Right? And there are various measures of how high the market is. One is a famous one which doesn't work anymore is how many Ben Graham stocks there are in the market, net-nets where you can liquidate them for cash. Japan is full of Ben Graham stocks. The rest of the world is not. And that measure worked for a long time.

You know, if you just looked at the proportion of stocks that were Ben Graham stocks and got long when that proportion was high and trimmed it off when it was low, you actually outperformed dramatically. The problem is there are no Ben graham stocks left and right and getting long in japan hasn't worked very well our particular measure of where the market is high or low is just how easily i how easily i can find shorts you know shorts with two three four hundred million market cap that are just bullshit complete bullshit and unfortunately at the moment i can find shorts with five billion market cap

that are complete bullshit that used to have 500 million market cap and you can understand what that does to your portfolio john i want to ask you one more background question and then come back to some of the finer points of short selling. The background question is in 1999, you started at Platinum Asset Management. It was January 2000, but yes. Okay, January 2000. Tell us how you got the job. Dumb luck. Absolute dumb luck.

I'd been working at ANZ bank and it wasn't much fun and i was talking with ken not with ken and ted evans about um moving back to canberra because i sort of missed it and i had a job interview lined up in canberra. I had applied for about a dozen jobs at fund managers, and I had literally not received a single interview. So you're about 29. Yeah. So I'd sent letters to Colonial and BT third-tier fund managers, and I hadn't received a single interview. And then I was sitting next to a woman on the ferry who turned out to be a headhunter, and I just chatted with her, and she said, I can get you an interview.

And so literally that day I had an interview with Keir Nielsen, and I walked out of the interview with a job and i remember him asking me what salary i expected and i said well you know i've got this thing lined up in canberra and this is what it earns so you know that's and he immediately added 20 000 to it and in retrospect i clearly undersold myself right because he upped it that year and upped it again the next year right but it was just dumb luck right i'd given up trying to find a job in finance markets and my cv was definitely you know non-stand But I just, and the other thing was that I literally didn't understand the structure of it. I didn't know what investment bankers did. I didn't, I didn't know what, you know, I didn't realize, for instance, how much more special the buy side was than the sell side.

All right. And I, it was, I knew who Keir Nielsen was, and this was sort of like the Australian equivalent of having your first interview being with Warren Buffett and him offering you the job. But it really was that left field. We planned to leave New Zealand, where I was working at the time. I was working at that time for New Zealand Treasury, which was probably the least satisfactory job I'd ever had. So you've gone from ANZ to New Zealand Treasury? Yeah, there's a woman involved in changing all these jobs. And all the while you're trying to get a job in finance, but it's not working. Yeah, I just couldn't get an interview.

Literally, I couldn't get my foot through the door now it turns out that you know in exchange i've been extremely liberal about granting interviews to people right um if people approach me on you on linkedin i tend to give them a five minute interview i have hired people from five minute interviews that became you know 45minute interviews that became, you know, 45-minute interviews that became three-day interviews. But nonetheless, we tend to interview everybody. You're not going to regret saying that? Probably going to regret saying that.

But I assure you that they're five-minute interviews. Okay. And they are harsh. Right. You are going, if you do apply apply off this you're going to get screwed over in the interview it just happens right it's the quid pro quo of interviewing everybody is that you have to be harsh right so yeah i have um there's one question which i guarantee you'll get which has come with your three best ideas okay right now the reason i ask that is a

it tells me what you're thinking and b i might steal your three best ideas it also turns out that surprisingly people have come with their three best ideas and i've responded by shorting two of them right but you know i'm going to ask that question so right but i'm not going to tell you the other questions i ask yeah right because that gives you a bit of prep yeah um but if you come with your three best ideas then then i learn something for my five or ten minutes right so it doesn't cost me anything right which is why i'm not going to regret saying anybody that sends me a application through linkedin will get at least a five minute chat that's clever it seems very positive some so it's a positive something for me right but you also have to acknowledge that if i'm going to interview 70 or 100 people

then i'm going to say nope sorry bang right and then I'm going to say, nope, sorry, bang, right? And I'm not going to explain why because I just don't have the time to explain why. Now, of the people that have interviewed that way, some I've hired and some I've farmed out to other fund managers. So there was a guy who worked for Platinum after I left and I just rang care and said, look, I'm not in a position to hire him, but you'd be interested. And in fact, there were two people that I sent that way and they both got serious interviews

and one of them got the job. So even though I didn't hire them, it wasn't a waste of their time. They broke into the industry. Now, the truth is that when I broke into the industry i i had no idea how to do it right i didn't even know how to fight right i wouldn't have i wouldn't have had the gumption to to approach an older version of myself via linkedin right um and there was a lot of dumb luck but what what do you think CARE liked about you in that interview? Oh, that's easy.

I was completely unprepared. Yeah. Their biggest position was NTT Dokema, or it might have been Japan Telcom NTT, was one of the pair of them. And that company had just invested $250 million in DAVNET and I thought they were gonna lose their money. And I ripped into the Japanese company saying,

look, it's run by Imberseals. I don't even remember which Japanese company, but I remember that they'd invested 250 million in DAVNET. And I laid out why it was run by Ember Seals. And then I laid out another stock, which I kind of liked, that turned out that he liked it and we both understood it. And picking on, finding out their largest holding and working out the bear case would be a pretty good start for an interview for most people. But in this case, I picked on their largest holding

and I didn't know it was their largest holding. And care is a really good guy. And a really good guy in financial markets likes to be told he's wrong. And likes rational arguments about why he's wrong. And the fact that I ripped apart his biggest holding. By accident. By accident.

Impressed him. Right. So, yeah, I walked it. I mean, it couldn't have been luckier. Yeah. Right. And the weirdest thing is, had I known it was their biggest holding, I wouldn't have ripped it apart. I wouldn't have had the courage.

But because I didn't know they held it, I had plenty of courage. That's interesting. Right. Incidentally, pro tip here, find out what their largest holding is when you get one of these interviews and try and work out the bear case. That's a good tip. If they don't like that, you don't want to work for them anyway. Right. That's a good tip. If they don't like that, you don't want to work for them anyway. Right?

Because you want to work for somebody who takes seriously the negative side of what they're doing. Right? In this game, you will make mistakes. Warren Buffett makes mistakes. The only broken notes that I read are broken notes that disagree with me. So the only broken notes that I've read this year seriously are the ones by the jp morgan analyst who hates ge stock he's actually mostly right which is sort of annoying right because i instinctively want to buy it and he lays out why you shouldn't i bought it anyway

but the reason i went and read him is he's so vehemently negative on the company that um i had to know incidentally the best broker notes are ones from fraudulent brokers you know any fraudulent brokers send me their notes right and the i read those all the time and the reason is that if a fraudulent broker is tipping it, you want to short it, right? This is part of the way you find shorts. This is computerized Mark Cahotis 101. Now, the real trick here is not shorting the stock.

It's working out that the broker is fraudulent. And one of these days, I've never done it. I'm going to give one of my junior staff a hundred thousand dollars to open accounts at five brokers and buy two thousand dollars worth of stock in each one and the object is he's not allowed to buy a stock unless the stock is available to short in other words he's got to narrow it down to things that we can actually trade and he will be rewarded for losing money the fastest that he can right and in order to lose money in stocks he can short he's got to go out right that are recommended by a broker he's got to go out and systematically find all the bad brokers all right i've never done this but this is of game of how do you get a junior to lose a hundred thousand dollars as fast as possible so how long was it between when you started looking for jobs in finance and

you finally landed this job with care in january 2000 two and a half years three years okay two and a half years we're losing hope at all oh i'd lost it i'd give given up. Right. Literally, I would never have applied for another job in finance had I not got the job working for Care. Right. I was past hope. The weirdest thing is I was clearly successful. I'd made a seven-figure amount of money. Right.

I'd learnt to turn off the brakes. I, in fact, had all the things that i would look for in a junior analyst if i came through the if a young me came through the door now i would hire me but i wouldn't have worked out how to get through the door i mean there is a there's an american way of getting through the door which is just go to an ivy league university yeah right you go to an Ivy League university. Yeah. Right? You go to an Ivy League university, you seem to get the interview. Yeah.

Right? I look at these, you know, at American hedge funds, I look at these 24-year-olds, 26-year-olds who are working, who are really, really smart, to be fair. But the range of opportunities that they had at age 26 was just not available to me right i just didn't know i didn't know that they existed right and you know i i'm not averse to hiring older people in part because there's a little bit of real world experience the latest hire i've got is older than me you know i've hired i've hired mathematician. He's an old guy. But he's a sensible old guy. But a sensible young guy would have been a really good hire too. We interviewed a few of those. Some of them scared us.

Some of the sensible young guys? Well, no, some of the young guys scared us. Oh, in what sense? I'm not going to give the whole game away, but pro tip, when the prospective employer takes you out to dinner, don't try to pick up the waitress. Ah, and were they just virile young guys or were they trying to impress you young guys? I can't tell.

Right. Right. all young guys or were they trying to impress you young guys i can't tell right right in in another pro tip which is if in finance if somebody asks you 30 questions the answer to at least seven of them should be i don't know yeah right if your answer to at least seven of them is not, I don't know, then I'm probably not going to hire you. If your answer to all of them is, I don't know, then... So you want the right balance of epistemic humility and knowledge. Yes. That's hard to achieve. And it's very hard to achieve with a 23-year-old.

You generally have to be beatyear-old. Right. You generally have to be beat up a little. Yep. Now, there's a view on Wall Street that people should, you know, people who work for funds shouldn't have their own PAs. They shouldn't be, right? And the SEC, for instance, has very strict rules about PAs. And I've come to the opposite conclusion. The right 23, if you hire a 24-year-old, he should have a PA. And the reason he should have a PA is that he's going to lose money because young

people are stupid. Unforced errors? Unforced errors. Just unforced error after unforced error after unforced error. Young people are stupid. I was too, don't worry. And the only reason I didn't lose a lot of money was that I read books at the right time. But the cheapest way of not losing money is learn the mistakes that other people make from books. The second cheapest way of not losing money is let your analysts lose it for you. So you let

these young people have their own personal account and trade it you want them to lose a little bit of money right right and the reason you want them to lose a little bit of money is that they can lose 50 grand it really really stings them yeah right you know a young person who earns 100 grand a year if he loses 50 that's diabolically nasty in the context of a billion dollar fund it doesn't matter right now i want him to learn his lesson on 50 grand preferably i'd rather he learned his lesson on books i cannot stress that. You have to read the five books. I don't care which five, actually. But you've just got to imbibe this stuff. But if you're not going to do that and you want to be in the industry, losing a little bit of

your own money actually helps. In the job interviews we gave, one of the strongest things that happened was that one of our candidates who we were marginal on had lost lost some money and he explained to us how he lost it and the mistakes he made and we thought that's great now next time learn it from a book yeah right but it's still great right um just like you know genius is a rising market and double genius is a rising market and and leverage right but you know losing a little bit of money is a good part of learning this business watching other people lose it and working out what their mistakes is is is cheaper and the easiest way to do that is with books but you, you know, I'm always a little bit fascinated when people screw up. Yeah.

You remind me of two adages. One is a wise man learns from others' mistakes and fool his own. Don't worry, you'll learn from your own as well. That's inevitable. And Seneca, I think he said, reading annexes others' lives to our own. Yeah, that's it. Actually, that's really it. Somebody poured a year or two years or three years of thinking into a book.

And you can absorb that three years of thinking in one afternoon or one day. Often, actually, you only need to read the first. I mean, a lot of books have one idea in it which they pound 50 different ways it could have just been a blog post it could have been a blog post yeah um you could read just the first couple of chapters and you probably get it um some of the you know the the best thing i've read all year is actually a blog post right and it's called what is amazon by a guy called cantor i've tweeted it a few times and there's more learning in that i actually knew almost everything in that blog post but it took me 10 years to work it out and cantor says it in one lovely 15,000 word blog post. You really should read it. It starts with the

sort of assumption that the world's best business is one that's going to develop global scale and share the benefit of that scale with their consumers. And the idea is that if you do that, you're going to be very, very big and nobody's going to be able to compete with you right and hence you will be very big fairly thin margin but okay and you know walmart did that and costco is doing that still and amazon is the global leader in that and then the second question is how the hell do you run such a business right and there are certain things like you should grow as fast as possible subject to the constraints you don't run out of cash because if you grow as fast as possible subject to the constraint, you don't run out of cash. You're going to get to this holy land before you get competitors there.

But that's easy to say. This post goes through meticulously all the steps that Amazon went through on that path. And it's a lot of learning. And if you want to do it, you know, if you put Mr. Cantor on for a podcast, I would listen very, very happily. And yeah, it's just a blog post. It's one idea taken to its logical limit.

And you could probably write a whole book on it and hammer the point home. But I've just read the blog post for you. Do you think one reason people don't, I mean, so many books are bought but not read, is the price tag? Like $30. No, no, the price tag is not $30. The price tag is 6 hours or 10 hours or 12 hours. Yeah, okay, right, right, right.

You can get samples for the first 5% of a book on Amazon. If you get through the sample and you've decided you want to read it, you should read it, right? My books bought but not read list is now, because of Amazon samples, is less than, you know, 30%. Books given to me and not read is over 70% or 80%. Right. Because, you know, I read the first chapter or two and it will do.

But the real price tag of a book is not $30. I get that. It's 10 hours. That's probably the main reason. But what I mean is that a $30 price tag signals a certain amount of value and people think, how could there be so much value in something worth just $30? They underestimate what they can learn.

Oh, yes. But correlation between price and value is not good in our society period yeah yeah right um and the way we assess that i mean at once at one level you, Amazon makes these things digital. Mm. Right? There's no volume there at all. Right?

It's like selling software. It's all air. Right? It's highly valuable air. Mm. I don't know. I mean, libraries are full of books that are read and they're free. Hmm.

Right? So, no, I don't think that's right, actually. I just think the real price tag is 10 hours. Yeah, time. Yeah, I agree with that. And the price tag is high. Yeah. Right? It's 10 hours you could be playing computer games

or going to the beach. Yeah. I want to briefly come back to Platinum. So, you know, Care's a legendary billion dollar net worth investor. And, you know, you're working- He's also a really fine individual, especially if you don't work for him. Yeah.

So, I want to come to that. So, I mean, you variously described him as a genius and a freak. And I know you admire and try to emulate his long side investing. But what lessons or anti-lessons did you learn and then apply to Bronte in terms of the way he set up his workplace? First on the stock selection. Sure, yep. On the stock selection,

Care asks a single question about a business, which is, what's it got? What is it about this business that makes me want to own it in two years, five years, 10 years, 15 years? If you cannot answer what's it got, don't even come to the second question. If you keep presenting him ideas and you can't answer that, you will be fired. He fires regularly. He's got various models of what's it got but essentially the pattern is a stock note which is a much more

formal experience at platinum than it is at bronte was 15 pages about the business one page about the management one sentence about the valuation if you understand what's it got the valuation model writes itself he was absolutely rigorous about testing that that's the really good part of care care has decent models about what's it got and he is prepared to go to any depth any depth at all to find industry understanding he runs intellectually one of the tightest shops you can imagine right the standard i remember going looking at other mutual fund groups after platinum and thinking you know this their standards are just low the second problem with care the second thing about care is care can do every job at platinum administrative

jobs computer whatever it is better than the person who doesn't he's just the freak and it i can't do every job at bronte better than people that here right i mean i hired a guy with a phd in physics because he's better at certain things than me. I hired a mathematician because he's a lot better at certain things than me. But care seems to be better than everybody. And he's not very good at imparting how to get that next step. His internal training is not very high and then the third problem is a personal one about ownership which is

well i only work this out after i work for care there's a wonderful book by david einhorn called fooling fooling some of the people all of the time or something. And David Einhorn talks about a no broken thesis rule. If you bought something because of X and X is not true, he just turfs the whole position. And I realized that if you have that rule, you de-emotionalize it. And platinum never de-emotionalized. It took forever to get a stock into the platinum portfolio. Convincing care of something was really, really hard. Then suppose you bought it because of X and you'd convince care that X was true. And X is not true and the stock is down 15%.

The right thing to do is to say, I was wrong and turf the stock is down 15%. The right thing to do is to say, I was wrong and turf the stock. Just turf it. The wrong thing to do is to change your story to defend the stock. And because going to care and saying, dear care, I was wrong is so hard, it's emotionally so draining.

Everybody wound up defending stocks that they shouldn't. And I would argue that Care Nielsen is possibly the best initial picker of stocks in the world, but in fact, not very good at managing the stocks once they're in his portfolio, because there isn't a process for saying I was wrong and therefore this is what I'm going to do. Now there's a consequence of this. What you really want your staff to do is try and get something in the portfolio that works really well and then prune it if it doesn't. And so you need them to be able to come to you and say I was wrong. And if they're able to come to you and say that they were wrong they must never be punished emotionally, psychologically, financially for telling you that they were wrong.

They should be rewarded. But then you also have to reward them for giving you good ideas and so you have this emotional problem which is that they get all the reward all the credit for good ideas and they get credit for bad ideas when they tell you that they were bad which means that essentially I have to take responsibility for the bad ideas and it's psychologically very hard to run a business where your staff get all the credit and you get all the responsibility. But that's what I've tried to do at Bronte. I've tried to take the really, really good bits of Keir Nielsen and get rid of the bad bits, just like I've tried to take the really good bits of Mark Cahode's and get rid of the bad bits. And I swear I'm nowhere near as good at picking a stock on the long side as Keir Nielsen. I think, and this has yet to be tested in a down draft, but I think I'm substantially better at

modifying the portfolio once the stock is in. And I think I'm substantially better at managing the portfolio than Mark Cahodes. I'm not as good at picking the stock as Mark Cahodes either. And that's taken me a lot of time. It also makes Bronte a very pleasant place to work. And the reason it's a very pleasant place to work and the reason it's a very pleasant place to work is the staff get all the credit and I get all the responsibility all right and from the staff's perspective that's just wonderful right but it does mean that they tell me that I'm wrong all the time and my job and to some degree their job is to try and pick holes in my arguments right so they're always you know nudging me

one of them David in particular has never gone a day without telling me I'm an idiot not in so many words but he tells me I'm wrong here here and here I can think of at least five things he's told me I'm wrong on today, and he's right about some of them. And that personality type that's always picking holes and whinging probably doesn't fit into a lot of firms, but they fit into Bronte really well. But this is sort of intellectualizing what Kerr did wrong right and i didn't think this through myself i thought it through after reading david einhorn's book the um no broken thesis rule in that book and how he described it was one of those great revelations in my life so staff at platinum at least while you were working there were were afraid to admit to Kerr that they were wrong,

so that created an incentive misalignment. I'm going to be blunt. I was afraid to tell Kerr I was wrong. Okay. Have you told him that since? Yes, but I'm still afraid to talk to him. He scares me, right? I mean, Kerr, I've known some really clever guys in my life.

JJ was great. Ken Henry was just astoundingly great. Care is astoundingly great. The latter two are just astonishing. But Ken was also a really, really good manager of people. And Care is not care is just better at everything that they do right and i know he's going to listen to this so i'm i'm sort of because somebody's going to point it out to him right you know somebody picking on his mistakes and it's hard to pick on his mistakes because care is just a genius.

Right, he's a, you would do an awful lot worse in life than go back through the letters that he wrote to share, you know, unit holders when he was at BT in the 80s and when he was at Platinum in the early 90s. And the high points of... He's just smart, like really smart and really good at it and actually quite humble about it, right? It's just he's prickly and he's scary.

He's intimidating. I was intimidated. I'd be less intimidated now because I'm a bit more comfortable in my own skin. I mean, to some degree, the first few years I was at Platinum, I felt like I was an imposter. Because I'd got this job by dumb luck. And they'd even made me a partner in the firm by dumb luck. I mean, you know, the idea that made me partner was essentially short Conceica. And short Conceica came at least in part from Monty Montgomery,

who was Mark Cahody's sidekick. Now, by the time I laid it out, I knew far more about Conceica than Monty did. But the idea wasn't mine. I stole it. Right? It's a good idea, though. Yeah. I knew more about it than, you know, to be fair about it, I spent three months working it out after Monty told me it was worth looking at. Right? And it was spectacularly worth looking at. Right? But,

you know, even then I felt like an imposter. Right? I have no pride about stealing other people's ideas. I still want to understand them. The reason you've got to understand them is if, you know, when I shorted Conceicao, it was $11 and it went $20, and then to zero. And had I not understood it, right, and known I was right, I would have covered it.

Instead, I added a little bit more. And if you just stole the idea without understanding the analysis, you'll get it wrong, you'll trade it badly. And so it's one thing to say I stole the idea and I did, but I did the analysis properly. And I understood it better than they did at the end of it. So Platinum Asset Management listed on the ASX in 2007? Yep.

And I left. Well, you essentially retired, I think, at the age of 39. Yeah, I had enough money just. I had enough money for what you'd call a good upper middle class retirement, but not rich. But what did you think you would be doing? Just drinking pina coladas on Bronte Beach all day? Well, actually, you know, at least part of it was I was de-care-ising. Right.

Working for care was both the best and the worst time of my life. Okay. I was utterly miserable by the end of it. And I was utterly miserable primarily because I didn't have the courage to deal with it properly. Right. to deal with it properly. I don't regret it. I do a little bit. I don't regret it because I learned a lot and he's a great man in that respect.

But he intimidated me and I felt like I was an imposter. It's not a happy process the other thing is to be frank about it you know i got bearish on u.s financials in really bearish in 2000 2005 and they just kept going up and i remember being and there was a stock that care actually pointed out that I just got spectacularly wrong, which was the big Dutch ABN AMRO. And I kept telling him what an awful business ABN AMRO was and how badly run it was. And then it got sold for $100 billion. And I remembered my last performance review at Platinum and Keir said, you're just wrong on that. And the answer was, well, I wasn't just wrong on that, the answer was well i wasn't just wrong on that right abn amro was worth zero and the people who bought it rbs and fortis both went effectively

blew up and became state wards right they paid 100 billion dollars for a piece of worthless shit and the net of borrowed money and the net effect of which was that they were both bailed out by the British and Dutch governments right but that was hard right being right and early right you know as that portfolio met the other thing is that I didn't have the long side to go with it right you need life's a portfolio too and I was doing too much shorting, and hence my returns looked awful. I mean, yeah, look, ABN AMRO was, was I right? Was I wrong? Who knows?

I lost a lot of money. And the other one that happened to us then was Royal Bank of Scotland, where Platinum was the biggest short in Royal Bank, not Royal Bank of Scotland, in Charter One Financial, which was also bought by Royal Bank of Scotland. And the worst day of my career was the day that Charter One was bought at a 35% premium. We were short about $100 million worth of it. It was a lot of money and it was $30 million down the drain. And I'd sort of pinned my career on this. And as it turns out, Royal Bank of, you know, Charter One was worth a big round donut and was essentially closed later.

And the credit losses were comical, right? This had branches in places where when they were trying to tidy it up, the liquidators were literally scared to walk in the streets. You know, places in America you don't want to walk in the streets, but they're not a lot of them. It's just Charter One Financial happened to be there. And Charter One's mortgage book wasn't bad. It was atrocious. It was as bad as anything. But I was short the stock and it was taken out for a 30% premium before it blew up all right and i was going through this sort of rough trot of being right and wrong and the truth is that you know you

solve that with a portfolio but as an analyst it was a very tough place to be you solve that with a good portfolio management Yeah. So I think your retirement must have lasted about one and a half years then before Bronte started. Yeah, look, at some point or other, I was working eight hours a day picking stocks. So I thought, fuck it, I'll do this for a living. And is it true you and Simon opened Bronte on the day Lehman Brothers collapsed? We had a seeding deal organized and we flew to America to get the seeding deal signed, and we arrived in America the day that Lehman collapsed. Ah, okay.

And so we walked around expecting people to give us money the week that Lehman collapsed. This wasn't going to happen. We refer it to our dumb and dumber moment. But yeah, it was kind of a spectacularly bad time to try and raise money. It was actually a particularly good time to start investing, but it was a hard time to raise money. The rest is history, I guess.

Yeah. Look, we started slow. We started with single-digit external millions. And I remember when we got to managing 21 million dollars one day and i went into my wife who's still in bed in the morning and because i just looked at the portfolio in the morning and it ticked over 21 and i jumped up and down star jumping saying 21 today 21 today right and you know I these days you know a good week swing is more than 21 million dollars yeah right but you know or at least a good month's

swing is more than 21 million dollars but when we got to 21 million dollars it was news to us yeah right you know starting a fund manager is i mean now that now that it's worked i'm you know i i can i can gloat a little bit you know it looks a little bit like if you look at the statistics it looks a little bit like the triumph of hope over experience. It was a tough time. Yeah. And it was a tough... I mean, I've since said that, you know, there are only two times to start a business.

One is in your 20s and one is in your 40s, but don't do it in your 30s. And the reason is in your 20s, you're too dumb to know the alternative. Yeah. And in your 40s, you may be financially established enough to deal with the five years of misery that you're about to inflict on yourself.

But in your 30s, you have young children. And five years of financial misery inflicted on a family with young children does not work. You really want to start in your 20s or your 40s, but not in your 30s yeah we've spoken a lot about how mark cojones is possibly the best stock picker in the world but people also regard you as one of the world's greatest short sellers and it would be rude if i didn't ask you some targeted questions i'm not as good at mark cojones but you are very very good i'm really not as good as mark so but we're better at portfolio management than mark so our numbers are better than Mark's. Yeah. Right. But he is a better stock picker. Yeah. But I do want to ask you some specific

questions about the short selling technique, putting aside the portfolio management now. And the first one's sort of an easy one, a fun one, I suppose. And that is, so you short frauds, fads and failures, but mostly frauds. Characterise the sort of person, the sort of scumbag you're looking for. Paint a portrait for us. Oh, there's different varieties. Yeah. But there's a broker who started his career at Stratton Oakmont, which is the firm in the wharf of Wall Street. If you worked at

Stratton Oakmont, you have demonstrated for, say, a year, you have demonstrated the ability to ring people up and sell them a worthless piece of shit. This is not a trivial skill, right? You know, being a con man is actually a trained skill in this case and these can be very good con men this guy disappeared for a whole lot of time and he's now the cfo of a biotech company okay i'm shorted almost without looking any further right and the reason i'm shorted is biotechs are places with vast amounts of inflated claims, which may or may not be true, but are completely untestable. But you have somebody who has a demonstrated experience in ringing people up and ripping them off and training in that. Now, that's a little bit harsh, but it's not far from the truth now it doesn't work all

the time either right for instance there was a tell and i'm not going to tell you what the tell was it was a particular person who we know was associated with 11 straight frauds and no successes. Or 11 straight zeros and no successes and some of those zeros we know to be frauds or we thought were frauds for some other reason. So we can't tell all 11 were frauds but there were 11 straight zeros and he's now associated with another stock which was in this case amaran which is a biotech test testing high purity fish oil for cardiovascular conditions and we had our usual 30 bps short we don't know anything about high purity fish oil and its effectiveness for cardiovascular. In fact, we knew nothing about this company at all, except that this one person was associated with them and the one person had previously been associated with 11 zeros, at least a few of which

we thought were frauds. And lo and behold, the phase three results come out. And the phase three results are very hard to fake in this case, because it's decentralized doctors reporting independently to the FDA. And everything is double-blinded, including to the doctor. So the doctor doesn't know what he should be reporting. And the results weren't good, they're astonishing. This high purity fish oil that they were testing probably has more effect on reducing heart attack than statins and statins are the biggest drugs in human history right um you know the the one that um pfizer sold blipitor, was a $10 billion revenue drug. Crestor is a multi-billion revenue drug. And it came out of the blue. The stock went up like 500%. As soon as we saw the results,

we covered it all. It was up 350, 400%, something in that range. It cost us more than 1% of the fund. Had we had a big position, you know, had we been 3% short, it would have been diabolical for us. We would have been down, you know, 12%, 15% in a day. Bang. And all we had was somebody who we had statistically shown was likely to be a scumbag. And we were wrong.

Now, the funny thing is we've got two other stocks associated with that same person. So what do we do about it now? Do you update in a Bayesian sense? Well, I do, except that, you know, it could be that the person involved is still a scumbag and that a good company accidentally walked into the scumbag and met them and hired them for some purpose,

in which case it could be dumb luck. Good things happen to bad people. Or it could be that fish oil for heart attack was a bogus idea that had been sampled around lots of times and you know this little company picked it up and miracle of miracle an idea that shouldn't have worked worked i don't understand the science well enough to make that assessment right it could be you know again good things happen to bad people yeah we genuinely don't know right but amarin you know immediately wound up with a billion billion multi-billion market cap and you know if you put a gun to my head now i'd

say i should be long it at five times the price i was once shorted right so the answer is, you know, what's my typical scumbag look like? Well, the answer is he's a recidivist. Okay. Right. We deal in guilt by association. Right. If you hang out with somebody who looks like a scumbag, you're probably a scumbag. Right.

Now, the truth is that that's only statistically right it's not good enough for a jury but it works for us right now sometimes that guilt by association you know if you get nine different associations you can be pretty sure each one of them is circumstantial and probably only a 70 chance right but you know and some people we know a geologist who i'm not going to name who has never signed off on a gold deposit we think was honest right now he lives in a jurisdiction with savage defamation laws right so i'm definitely not going to name him. Yeah. But, you know, next time he signs off on a gold deposit, we'll probably be short it. One day he's going to be hired by a real company

and we're going to lose money on it. Yeah. Right, but in a Bayesian sense, we know he's a scumbag. Yeah. So you have a database of these scumbags? Yeah, and we've got tools, for instance, that strip the SEC database every day, run it through name recognition software company, flag people. It's not as good as I'd like. And it's also putting in some accounting rules and some liquidity rules, etc. It's been a lot of software development. It sounds pretty unique.

Yeah, I don't want to tell you exactly how it's done, but the model is computerized Mark Cahodes. I just want to sort of bottle Mark, right, because he's the best stock picker I've ever seen. Yeah. Are all the scumbags men? No. Okay.

No. I mean, to pick one recently recently theranos was a woman yeah um there was well i i can't say it because it's in a defamation prone company country right i mean if australia no it could be i'm joking right the The UK has very bad defamation. Right. But there was another one that I can think of that was associated with a sortie arms dealer, but a woman. Right. And she had a company with a half billion dollar market cap that ceased to exist. But I think it's fair to say that most of the scumbags are men.

There are other groups. I mean, men are clearly overrepresented, and by a lot. There are other groups that are overrepresented, the most unlikely of which is Mormons. This is interesting. Right, and Mormons are 2% of the U.S. population and about 6% of Fortune 500 CEOs. And almost all of those Fortune 500 CEOs came up through a sales function.

Mormons are pound for pound the best sellers in the world. And the reason is as obvious as hell, which is that if you're 19 and you go missionary, because they will go out and be missionaries what is being a missionary it's selling religion door-to-door and in this case it's selling a pretty weird religion door-to-door if you can sell religion door-to-door you can sell anything yeah it's like the best training for a sales job that ever existed so it turns out that if i were hiring sales people in america that had a job where say the rejection rate was 95 right because you know being a being a billet having the ability to ring people up and just

have them be rude to you and then hang up and then do it again and again and again and again and again and again and again and not take it emotionally, that's hard. I couldn't do it. I'm too emotional a guy. I don't like rejection. But, you know, if you're a Mormon that sold religion door to door for two years, you know how to do that. Yeah. Now, it turns out that if I was hiring, you know, Salesforce for zero in America, my Salesforce would be 30% Mormon. Right.

And the reason it'd be 30% Mormon is just they know how to do that. They were trained when they were 19 and if you look at fortune 500s you know six percent six two percent of america of mormons six percent of fortune 500 ceos is the number i've always heard right they all came up through the sales function they pound pound the best sellers in human history and what percent dodgy frauds probably 10 wow right and the reason is that if you're going dodgy frauds in america anyway dodgy frauds? Probably 10. Wow. Right. And the reason is that if you're going... Dodgy frauds in America? Yeah, dodgy frauds in America.

Okay. Right. And the reason is that if you've got a dodgy fraud, right, and, you know, selling a fraud has 100% margin. Right. You just steal the money. Yeah. Right.

If you're doing something with 100% margin and you get 40 rejections and one acceptance, that's a great hit rate. Yeah. That's a really great hit rate. You'll get rich off that. Yeah. Right?

Because the gross margin is 100%. You trained for it, right? You know, being a missionary is absolute perfect training for being a scumbag later. It's also good training for being a zero salesman. I mean, I've tried to encourage zero to hire Mormons in America. And the reason is that I think they'd do better with their Mormons than they're doing with their current sales force.

They're cheaper and they're based in Salt Lake City, which is cheaper than Silicon Valley. Right? It's not that I, you know, if you train people to sell stuff guess what they'll sell stuff yep for good and for evil yep so i think you've seen this before i'm just gonna show you this again no i hope that wasn't too politically incorrect no no no not at all oh what the... The Bernie Madoff account. Yeah. Yeah, well.

Right, yes. Can you just explain that to people? And does stuff like that ever figure into your thinking when you're trying to track down frauds? Do you go into that sort of background information? That's one that I would really, really love to do. These are Bernie Madoff's golf scores. Yeah.

And I'm going to read a string of them. 87, 86, 85, 83, 85, 83, 85, 84, 89, 84, 86, 85, 80, 82, 87, 84, 84, 84, 86, 84. Now, nobody is that consistent at golf. Tiger Woods is nowhere near that's consistent at golf. And those are actually Bernie Madoff's golf scores. They are actually Bernie Madoff's golf scores, and they're a public database of golf scores. And there are people who have tried to work out

how many weekends a ceo is playing golf right but there is absolutely no way they were his golf scores he just made them up right they were a fraud and if somebody's faking their golf scores they're probably faking other things they just don't have any morality i wish i i mean known. So, no, we haven't done it. But there is a public database of people's golf scores. And, yeah, I'd love to actually raid the whole database and work out systematically who is faking their golf scores and short their stocks.

Yeah. It would work. It's another source of data. Please don't give all my ideas away. I've never done that one. I know I published it, but, you know but yada, yada, yada, 86, 86, 84, consistent returns, no volatility. We know the story.

It's kind of cute. It's really cute. It's a good fraud. I want to ask you about the Chinese species of frauds right now because I think that's very interesting, and it figures in Bronte's story. So in your June 2011 client letter, you wrote that, quote, by October last year, we were pretty sure that to a reasonable approximation,

every reverse merger Chinese stock in North America is a fraud, end quote. That's just extraordinary. It was extraordinary, but that was also the state of play. Right. My favorite version of this is sino forest sino forest was originally although everyone forgot it a reverse merger forestry company in canada if you go back to the first accounts it's actually obvious it's a fraud right and the reason it's obvious is you go look for the property plant and equipment line, and there wasn't one.

There was a property line, it was all forests. But you run a forestry operation, you must own a car, a four-wheel drive. At least. At least. You must own a chainsaw, because trees fall across roads. There are certain basic equipment that you have to have. The accounts literally failed any simple smell test. But in those days, it was a $50 million company and who cared,

or a $100 million company and who cared, right? It was just another penny stock reverse merger fraud. They got more sophisticated over time, and by the time it ended the accounts looked real enough right that is you had to be a real sophisticate to smell that they were wrong but at the end of it Sino Forest was a seven billion dollar company where insiders had sold over a billion dollars worth of shares, and which had borrowed $2 billion in the Hong Kong market to buy forests. And as far as I can tell, there was never more than about 15,000 hectares of forest. They claimed that there was 875,000 hectares. It became known in short seller circles as Sino Forest. Now the thing that amazes me about Sino Forest

is that they borrowed two billion dollars in the Hong Kong market to invest in forest and there was no forest. So that two billion dollars went into somebody's pocket. Now this isn't a small theft this isn't you know 20 million here we sort of have a big political scandal in australia about 80 million dollars paid in water rights to some suspicious looking cayman island company and we don't know all the facts but that's what it looks like this was two billion dollars yeah that's i'm now on the rich list, Rod. This is an amount that puts you on the world list of richest people. Yeah. Now, I've always looked for Alan Chan to be on the Forbes global billionaires list, but he's not there.

And the source of wealth, Alan Chan is the old CEO of Sino Forest, and the source of wealth should read stock fraud. He's not there. That said, no one was ever punished in China. No one went to jail. No one was arrested. The $2 billion was never tracked down. It's China, so I presume that Alan Chan doesn't have all of the $2 billion. He had to pay it to people up the line,

and some of it went all the way up the corrupt Chinese hierarchy. Otherwise, somebody might have gone to jail. But no one went to jail. Now, if the penalty for blatantly stealing $2 billion is that you get to keep $2 billion, or you get to keep half a billion dollars, and there's no other penalty, even after it's exposed, then guess what will happen? The answer is people will do it. Now, there's a second thing that's going on here, which is it was illegal and still is illegal

for most small businessmen to take money out of China. If I have a small widget company, let's pick one that makes organic fertilizer. If I were to list that in China, I would have renminbi. If I were to list it in the United States, I would have US dollars. Functionally, by listing the business in the United States, I would have US dollars. Functionally, by listing the business in the United States, I've taken money out of China. That's normally illegal. So in order to get your functional business listed in the US, you have to have broken the law or bribed someone so that the law doesn't apply to you. Now I look at a

hundred companies that are small companies doing things like making bromine or making concentrated fruit juice, Sky People fruit juice, or making organic fertilizer, China Agritech, or doing software for banks, Longtop. Every one of them is listed outside China and every one of them is presumably run by people who have either broken the law or the law doesn't apply to them. So that's your starting mark right at a reasonable approximation most of them are going to be fraud and most of them were put some dates on this for us the china fraud era well as they call it i think the china fraud era is now right right that is i don't think anything has fundamentally changed

except the market perception of these companies. Well, when did it begin at least? Well, I think right from the moment that there were Chinese companies listing in America, there were fraudulent Chinese companies listing in America. Okay. And there are still fraudulent chinese companies listing in america and some of them blow up every now and again there was one yangtze river logistics company

which has blown up recently but you know it's gone from a multi-billion market cap to token amounts and still got 200 million market cap and i'd short it except the borrow cost is 190 percent all right so you know i can't short it but there are plenty of them yeah right there was a particular period in 2011 when they were exposed and the reason was that that was before the chinese there was a period there where some of them were incredibly blatant and some were so blatant that you could prove they were a fraud without leaving your desk. My favorite one was one called Universal Travel, which was sort of a travel.com for China. And I tried to buy an air ticket on it and I proved that it couldn't. And then I managed to prove the show that they were listing tickets for a grand prix that had occurred two years prior right right and all they'd done is

stolen a website from somebody else but none of the back end worked yeah the whole thing was fictional right and it had a market cap of sort of 700 million and was just completely made up and the beauty of that one wasn't that it was a fraud it was a fraud that you could prove was a fraud without leaving your desk well that that brings me to another question i read in your may 2011 client letter you said that chinese frauds are the richest vein of non-market correlated profit Bronte has ever discovered. When we started, John could read the accounts of a reverse takeover stock and within 20 minutes determine it was a fraud. Oh, yeah.

Some of these were just really silly. But what were some of the other techniques? I'll give you an example. There was one called... There was one that made bromine. I mentioned it earlier, and I can't even remember the name of the stock. But it turned over its inventory 180 times a year.

The inventory number was incredibly low relative to COGS. So cost of goods sold was 180 times static inventory. Now, there's a bromine maker in america which had gone private right got you know been taken out by private equity or something before that called great lakes chemical it made exactly the same products and it turned over its inventory five times a year and then you think of the physical process of making bromine which involved treating and drying out brine and then and once you got it it was extremely reactive and dangerous right and there's another and I just the physical process couldn't be done in two days it took weeks right so it's not physically possible to turn the the trading stock

over 180 times a year right so we knew it was a fraud without looking. Now, somebody later went and photographed their plant and proved it was a fraud and went public, but we were shorted before that, and we were shorted on a five-minute look. And it was time and time again you could see this. Retailers with large receivables was another one. Fake receivables was a surprisingly common one.

Have you heard my fake receivable story? I'm not sure. I don't think so. I'm going to tell you my fake receivable story. Is it a Chinese story? No, it's not. It's an English one. But the example was retailers that were owed a lot of money. Now, there's no way that you could owe money to a retailer unless it has a lay-by business, right? Because you go in with your cash or your credit card,

you pull out money. If it's credit card, it's two days of turnover. So that, you know, the receivables should be two days of sales because, you know, the bank pays them in two days. If the year end is on a weekend, it might be three or four days of sales, but it's not 20 days of sales. Right. So when you saw a retailer with a large receivable, you knew the accounts were made up. Now, my favorite receivable story is a company called Cupid PLC, which was listed in the UK. And they did threaten to sue me when I went public over this, but they're long gone. So I think I can say this safely. When was this? Six six or seven years ago Cupid was a roll-up of dating sites and it used to its biggest site by

advertising was girls date for free and the model was that girls could sign up didn't cost them anything they could talk to anyone didn't cost them anything. They could talk to anyone, didn't cost them anything, hence lots of girls there, right? But boys had to pay. So when you wanted to talk to someone, you had to fork out. If you looked at the Alexa data, which isn't worth very much, there wasn't much traffic on that side. They also owned one that's still around called Uniform Dating, which tries to set girls up with firemen.

Right? You know, Uniform Dating. But it turned out that the only site that they had any traffic were various adult sites, of which the best-known one was one called Be Naughty. And Be Naughty, according to... was designed to set you up with women that wanted to cheat on their husbands. And hence it was sort of a girl's date for free thing too.

And it turns out that Be Naughty only had traffic in Australia, England, India and South Africa. So I don't understand why these countries are full of men that wanted to cheat on their husbands. And according to the Alexa data, the traffic was about 95% male. And I would be very surprised if it weren't 99.9% male. Because it was, you know, the equivalent of Ashley Madison. But it was an internet dating company. And this internet dating company had a balance sheet that looked like 30 million pounds of goodwill because it was a roll-up, 10 million pounds of property plant and equipment, 10 million pounds of receivables, and about 60 million of sales. That much in sales because it's online internet dating.

And I shorted it without looking any further. And the reason I shorted it without looking any further is I can't work out how you could owe money to it right because you pay for a credit card up front the only receivables which have a two days of wash and it had like two months of receivables and so I assumed the accounts were fake which wasn't a bad assumption so I shorted and then the stock went up and then went up a bit further so I got a bit annoyed, and I did some research. And doing some research essentially meant asking my wife's permission to join a bunch of adult dating sites.

This is an interesting conversation. My wife looked at me as if I was completely weird. She believed you that it was for research? She did, but the solution was that i gave her all the logins oh that's good and i let her help write the profiles yeah and we did fake male profiles and fake female profiles and all sorts of things but the most ridiculous profile was the most unattractive male we could think of and this was actually partly written by my wife so you know she's got the sense of humor not me but it was i was a 280 kilo or 620 pound computer programmer i used to have a good job but i couldn't

walk from office to office anymore so i now have a less good job and I work from home and my what my mum feeds me my favourite food which is pizza. Now I'm on the internet dating because my mum is sick she's also obese and she's not able to look after me very much so I now need somebody to help look after me. Now one of the questions was what's your most unusual feature and i said well you know some people say it's my body odor but it's not it's my eyes right they're sort of pink and strangely beautiful and the pink eyes it turns out were a symptom of my untreated gonorrhea which infected both my rectal and urinary passages right um it also accounted for my bad smell because I leaked a mixture of pus and fecal matter. Right.

And I just left this profile up, but I got about 40 age-appropriate women wanting to talk to me. Maybe they were all thinking, this guy has a great sense of humour, he's being so ironic. At this point, I worked out pretty firmly that the women were fake. Right. And then just to prove that the women were fake, this was a Scottish listed company. So I decided I'd go find the least populous spot in Scotland, which turns out to be an island in the Shetland Islands called Stosa Spur. And you won't know where Stosa Spur is. I probably know more about Stosa Spur because I actually tried to work out what the population was and their age.

There are eight of them, five men, three women. So I started inventing fake profiles that lived on Stosa Spur. And I discovered all these women on Stosa Spur who wanted to cheat on their husbands. And so I was going to blog about this. I never did, but I was going to talk about the randy women of Stosa Spur, who wanted to cheat on their husbands. And so I was going to blog about this. I never did, but I was going to talk about the randy women of Stosa Spur. Put out all the fake... Right?

You know what it is. It was a device for separating people from their money. Yeah. Right? I think the original business model was we set up fake profiles. The women interact with the men. The men hand over their credit card. And then, lo and behold, the Russian mafia three months later

strip your credit card of all its money. Right. And then that didn't work, so they just listed it. You know, the next set of victims is the people who buy Scottish stocks. Yeah. Right? But, you know, all of that was fun and games. The real tell was that it had 10 million pounds of receivables.

It was 9.6 million pounds if you really wish to go look. But, you know, it's kind of odd that I remember the balance sheet seven years later. Yeah. That sort of part and parcel of it. The question of, you know, how do you tell by just looking? The answer is, it's just sort of goddamn obvious if you think about it. It shouldn't have receivables. It shouldn't turn its trading stock 180 times a year.

The balance sheet makes no sense. Now, there are companies for which the balance sheet makes no sense, but I can't prove they're a fraud and they have real businesses like if somebody thinks that they understand the balance sheet of alibaba which is a you know 200 billion dollar company i'd fire them right just you just can't understand it yeah now the problem with that is that there's real stuff in there and fake stuff in there. In Alibaba's balance sheet? In Alibaba's accounts, yeah. And I don't know what to do about it.

I mean, the Charlie Mungus slogan applies, I think, which is that if you mix turds and raisins, they're still turds. And Alibaba, I think, is an example of turds and raisins. There are plenty of good raisins in there, though. So, you know, I'm wary about the short. They're normally short turds. So what do you think goes through the mind of someone like the Cupid CEO or whoever was listing it when the fraud is just that blatantly obvious?

Nobody was prosecuted. They sold a lot of stock. They made a lot of money. Okay. So it was pretty rational. Yeah, it's entirely rational. Yeah. I mean, it's not as blatant as SinoForest.

I mean, in the Cupid case, Cupid PLC case, there really was an online dating business and it really did have some revenue. And I don't know how much revenue. I know the accounts didn't make any sense. In other words, it was some raisins and a lot of turds. And it never got too big. It never got...

Whereas if you had done Sino Forest in the UK, with UK citizens, somebody would have been prosecuted, somebody would have gone to jail. If you'd done it in Australia even, ASIC is possibly the weakest securities regulator in the Western world outside Canada. Although there's some pretty world outside Canada. Right.

Although there's some pretty strict competition here. Yeah. Right. But if you'd done it in Australia, somebody would have gone to jail. Yeah. Right. But if you had done it in China,

yeah, steals $2 billion. The penalties he gets to keep half a billion. Right. Still a rich guy. No penalty. So Cupid PLC is a good example of how you can use a few heuristics to quickly determine whether something's a fraud.

Yeah, you just think through the business and does the business match the balance sheet? Yeah. And this happened a lot with the Chinese frauds. All over the place. They were just sloppy. So for a while there, you know, 2010, 2011,

for Bronte it was like shooting fish in a barrel. But at some point in Bronte's history, there was a point of inflection where they became a lot harder to knock off. Tell us about that. Yeah. I don't think they became any less fraudulent, right? Maybe the most blatant ones disappeared. The ones that you could prove were frauds without leaving your desk

had basically all gone. Yeah. The ones that were left were difficult frauds and because they were difficult frauds and some of them turned into real companies too so you know one of the point one of the exits for a fraud is that you use your high stock price to buy something fake it till you make it fake it till you make right and some of these companies turned real yeah right but we were overextended in this we had about 40 or 45 of the book short chinese frauds yeah and there was a single month where they went up 20 all of them across the board yeah and we went down eight on those all right and in fact there's actually there are sort of two

bad ish months in here there's a bad month that you can't see in our returns because it was July it happened intra month so we were up a long way halfway through July gave it all back and then a little bit, and then a lot more and then won it back. But the result of which, as you see, two mostly flat months. But in fact, there was a pretty gargantuan swing in there. And that swing caused us to take an awful lot of risk off, right, because we just looked at it and said, we're too far out here and weird things can happen.

And then there was another month in January 2012. And we've written about that month extensively. And if you read our letters from January to about June, we talk about all the changes we have in the portfolio to manage the risk. But the changes that we have in the portfolio increased the number of shorts and increased the diversity and decreased their size. And that was when we decided that computerized Mark Cahodes was inevitable. It was the only way that we could manage this bucking bronco of a portfolio that we'd created. We just had to stop it bucking by diversifying it. And to diversify it to the degree we wanted, we needed computers. So that was sort of a very big intellectual change in the way we ran Bronte. But what do you think changed in the environment in China?

No idea. Right. No idea at all. Well, at least one thing changed, which is that some of the frauds that were left had associations with the ruling parties. Right. And the ones that didn't

have associations were also the ones that busted okay right so that the politics of knocking them over changed but it was only after the event you know years later that i realized that in some cases the beneficiary was the was the child of somebody who or the grandchild of somebody who fought alongside Chairman Mao but you know being the grand child of somebody who fought alongside Chairman Mao

was a licence to commit fraud I only worked out the relationships years later when it happened we had no idea what had changed we just looked at the I only worked out the relationships years later. When it happened, we had no idea what had changed. We just looked at the environment and said, this has changed and it's changed in ways that could hurt us. We need to be more careful.

Yeah. And we're cognizant of all the ways that you can lose money and we decided we'd be more careful. And fundamentally, we didn't lose money. We produced a single month with minus six in it, but we didn't really lose money, right? You know, if you're producing 10% and 20% months and then you produce a minus six, nobody's going to complain. Nobody did, but we did.

We looked at it and said, we've got to change our risk profile fast. And we did. Changing to another story now, you became quite famous for shorting the drug company valiant and we're not going to rehash that story because people can it's so well portrayed in the netflix dirty money episode drug short um for people who want to check that out but there's one little story about it that i want to share with people who might not be diligent readers of your blog and that's the story of how you came across it because i think it's really neat um look it

actually flagged lots of ways okay valiant we flag bad people yeah inside valiant there are a lot of bad people right some of them are only bad circumstantially but the best one was a woman called norma provencia who had previously who was the chair of the audit committee and she had previously been the chair of an audit committee of a company called heartronic signal life and the ceo and co-founder of Heartronic Signal Life is currently in the federal pen for 12 years. And this is a pretty big red flag. It's not a red flag that says, I'm going to short the stock. And in fact, I'm not even sure

that Norma Provencio is guilty or not. I just know that she was associated with a fraud because that's what we did but that was enough to make us dig and dig and dig and dig and dig and then within days there were 25 other red flags right it didn't take a it but red flag number one was people interesting it's almost always people okay well i want to ask about one red flag in particular that's just about numbers. That table. Yeah.

The number thing was approved. Because this is really interesting. There was a table in Bill Ackman's slideshow telling you about why you should buy Valiant. Yeah. And this table came from another slideshow, which was presented by Valiant. And Valiant had about 200 drugs, and it wanted to tell you that the drugs were highly diversified. And it told us our top 10 drugs are 18% of sales,

and our next 10 drugs are 12% of sales. And from the moment I saw that table, I knew it must be a fraud. And the reason is that the top drugs to be 18% of sales, they have to average 1.8. And the next 10 drugs to be 12% of sales have to average next 1.2. So you've got to manage to fit 20 drugs or so between 1.2% of sales and 1.8% of sales. And none of them have got to be have got to be big enough that they take the thing out so a single drug at three percent of sales tends to stuff you sit down with a spreadsheet and try it you cannot you cannot randomly construct

the numbers in fact the mathematical rules about it are so tight that they have to be spaced almost dead evenly to make it work right so you know most things are distributed with lumps and tails and a power rule and things like that no statistical distribution looks like that and in fact the distribution is so tightly constrained that we thought it was impossible then we found some evidence that one drug is at least 3% of sales and then we knew it was completely cactus. But that single table was enough to prove that they were lying in their numbers. Now, once you've caught them lying once, you've got a problem, which is that the truth refers to one state only

and lies refer to a multitude, and you've proved they're lying. And now they've told you 50 other things. And some of them might be true and some might be lies, but you have no idea which. We found a lot more lies later. But all you needed, you know, a lot of that has the feeling of Mark Cahody's, you know, Welcome to Proof number 28. We had Proof number one. Yeah.

It was fine. Right. We had a bad bad director two or three other bad people and proof of lies about numbers short it you don't need any more now the reason we did a lot more and we did a lot more and it's well told in the that one that documentary was that we were being very public about it and And this was a $100 billion company. And shorting a $100 billion company saying it's a fraud, this was my learn-out in Houseby.

I had to be a bit loud. And I'm proud of it too, in the same way that Mark's proud of learn-out in Houseby. I made more money on it than Mark did. But even then, people look at it and say, why didn't you make more money? Why didn't you make 20, 30 percent of the portfolio? You knew it's the biggest fraud in the world.

Yeah. And the answer is, well, Mark found the biggest fraud in the world and almost destroyed him by being oversized. Right. We weren't going to make that mistake. John, let me finally come to the morality of short selling and i want to read a couple of paragraphs from your march 2010 client letter when you shorted a company called first solar which had come up with a radical new way to manufacture solar cells. And I'll quote... That was the least moral short ever. Mostly we short scumbags.

Yeah. And what we do is dilute the profits of scumbags. Yeah. First Solar was a really, really good company that was on the wrong side of history. Right. And the reason it was on the wrong side of history was that the Chinese worked out how to make cheaper solar cells and so you had this wonderful technology that was suddenly out of

the money and it was pretty clear that it was and the short worked fine right but it didn't go to zero and it didn't deserve to go to zero it was run by people who if they wanted to marry your daughter you would be thrilled and yeah I felt slightly dirty shorting it. Right. And the reason I felt slightly dirty was this good company. We don't short good companies normally. Partly I wrote it up because it was such a good company. Right.

That I felt bad and I thought my clients should know. Yeah. Right. That you could divorce yourself from your emotions like that. Look, my clients pay me to make money yeah right i don't want to forget the first job right but mostly making money you know sometimes making money might involve buying an indonesian tobacco stock that that cuts down rainforest to to cure smoke cure tobacco so they can addict young children. And maybe I'm not very comfortable with that.

And sometimes making money means shorting one of the greatest technology successes I've ever seen, which was First Solar. And I'm also not very comfortable with that. And generally, that's not what we do. We short low quality companies run by scumbags and we go long companies that are really well managed you know good businesses run by people you'd have marry their your daughter and i'm actually happy with that yeah so i'm not committed to it my first job is to make money yeah now i understand that first solar isn't the typical company you short but just let me quote from the letter because I think it opens up an interesting question. So, this is just a couple of paragraphs

that you and or Simon wrote back in 2010. So, quote, We do not wish failure on First Solar and if we are right, it could not have happened to a nicer company, no irony intended. Capitalism is not fair and technology investment is particularly unfair.

We don't make money from fairness. We make money from getting the business analysis right and betting on or against the right business. And in this case, we're betting against the most successful company in a massively important growth industry. If we are right, and we think we are, then we will make money from the demise of a company that has much improved the world. We like to think our business is noble, and it is sometimes. But in this case, we can see why people dislike short sellers. Their opinion, however, is not our business. That's exactly right.

This was one. It is the exception, not the rule. Mostly bad companies fail and good companies succeed but every now and again a good company is on the right on the wrong side of history first solar was a company that invented a new way of making solar cells it was well beating for a while and then the chinese made something cheaper and it was a good company and its massive success went away. And sometimes bad companies succeed, right? You know, an Indonesian tobacco company that cuts down rainforests to smoke, cure tobacco to addict to young children is a bad company. But it makes a shitload of money.

Yep. It's not, capitalism isn't fair right capitalism gives money i mean you people some people just born with skills that make more money some people happen to be in the right niches some businesses are just abnormally profitable for decades. And not through any particular moral advantage of the owners, but just because they're in the right place at the right time. Careers involve a lot of luck. If I hadn't sat next to that woman on the ferry, I'd have probably spent out my life as a mid-ranking public servant.

And was it fair that I had that luck of sitting next to the right person on the ferry? No, I was just in the right place at the right time. And I admittedly, you know, I'd worked hard and I was well prepared for a random job interview and it all worked very nicely. And if I'd been poorly prepared i would have been burnt off in five minutes too but if you don't acknowledge that the world involves some capricious luck and some capricious failures you're actually analyzing it wrong now you know mostly bad things happen to bad people and good things happen to good people.

But it's not entirely true. Sometimes good things happen to bad people and sometimes good things happen to bad people that we're short and we lose money. But I want to help you out here because... I acknowledge it. I felt sick about shorting that. I still feel sick about shorting that. But from a utilitarian perspective perspective is it really immoral because what you're doing is you're only taking an interest in the demise of the company but you're not actively bringing that about no I'm also reducing their access to capital markets because as I bid down the stock price a

little bit incrementally capital becomes more expensive right so you are you are having some counterfactual counterfactual effect okay right right moreover i went public on it which probably decreased their access to stock markets even further right right it's i was no hero yeah is tesla in this category or in a different category tesla was in this category and has moved to a different category something darker yeah tesla elon you have to give elon credit for something elon proved that internal combustion engines with computer controlled batteries could be better in almost every respect electronic engines with computer controlled batteries could be better in almost every respect. Electronic engines with computer-controlled batteries

could be better in every respect than an internal combustion engine. And in 25 years' time, I'm pretty sure that most cars sold will be electric and that most of the power generated for them will be solar. And in that process, we will have improved the world dramatically not a little bit but dramatically we will have taken greenhouse gases out and elon musk will go down as a hero in that respect and you know there's a star trek episode where that somebody's asked how they want to be remembered and they talk talk about the Wright brothers, Elon Musk and Zephyr Cochran.

And Zephyr Cochran invented warp drive if you're a Star Trekker, right? And Elon Musk doesn't belong there, but nonetheless, it's kind of amusing. That said, Elon didn't solve another problem, which is how do you mass market manufacture something as complicated as an automobile really cheaply and really accurately and toyota knows how to do that it's 40 50 years of development right and volkswagen know how to do that volkswagen make dirty polluting engines i drive a dirty diesel right but they sure as hell know how to manufacture well yeah and elon is behind the eight ball because it will be easier for volkswagen to copy elon's technology than it is for elon to catch up with up with Volkswagen's manufacturing prowess.

Moreover, the lack of manufacturing prowess meant that Elon could never deliver the $35,000 car, and he never has. He's put himself in a market somewhat above mid-range BMWs. He's just in a luxury car market. He's actually the biggest player he's got maintenance warranties up the you know misaccounted up the wazoo and he's saturated his market he's then over promised i mean he's promised things about self-drive that just are not true and he's promised things about ability to deliver cars at certain prices that are not true and the company has burnt a lot of cash and as he gets as it gets later and later in the piece the disconnect between what elon promises and the reality on the ground just widens and widens and widens and you know that's

not actually unusual in the late stage of a failure right in you know his entire being is around this thing and he's got to protect it and you know one way of protecting it is to make sure that the stock price stays high there's a second problem which is that he has margin loans and those margin loans are not small they're billions of dollars and if the stock tips below the strike price of the margin loans they'll be they're billions of dollars and if the stock tips below the strike price of the margin loans they'll be for selling and that could be nasty and so not only does he have to keep you know the story rolling but he has to keep the stock price above the margin line and there's a very big disconnect between what Elon says and what can actually be measured.

And, you know, there are famous examples like, you know, his solar roof tiles. When he bought SolarCity, he pitched this idea of, you know, solar cells in the shape of roof tiles. And three years later, we've not seen them. His self-drive claims are pretty dodgy. And there are lots of videos of people drive, you know, having self-drive cars that misbehave badly people have been compiling statistics of people who have died with these self-drive cars i don't know whether you know they would have died at a higher rate with self-drive

on and self-drive off i'm you know my guess is it's higher with self-drive on, but I really don't know. But the claims don't match. Self-drive, for instance, has just been oversold. And I sort of regard Elon as once pure raisins and now turds mixed with raisins. And I think the end game for turds mixed with raisins is still turds. And I'm short it in small quantity because mixed with raisins is still turds. And I'm short it in small quantity because it has red flax all over the place. But I still feel a little guilty about it, right? Because, you know, this isn't Shorting Valiant, which was just an evil company,

or even Mattel, which is an evil company. The toy company kills children. 30-something babies in the US. Yes. All right. But this is more like Shorting First Solar with Darth Vader in charge. You know, I'm not so upset about it as I was shorting for a solar. But I still wish he'd succeed and he won't.

I'm shorting because my job's to make money, not to wish he'd succeed. Just finally, someone asked me to ask you how you structure your days. I don't, as a general rule um okay days of the week um i have a beach house yeah and i tend to try and spend monday and friday at the beach house um in the old days this worked really well because my wife lived in sydney all the time and she'd come up to the beach house on Saturday lunchtime so we I would have all of Friday and all of Monday and half of Saturday alone and I worked and worked and worked and worked and worked like a Trojan all right there's just vast you know that was where my reading was done i had 30 hours of unreconstructed

unconstructed time that i could just read i might make a few phone calls but that was it my day then was read something go to the beach read something have lunch read something go to the beach read something watch a little bit of tv read something go to bed and that was incredibly productive and now my wife lives largely at the beach house because my son has left school and it's almost like i want to buy a beach house again somewhere a kilometer or two away so that i can have my unreconstructed you know unconstructed time back yeah work is very constrict you know very constrained tuesday mornings is portfolio meetings thursday mornings is idea meetings there's usually a bunch of um

tuesday wednesday nights are almost always talking to European companies. Thursday mornings are almost always talking to American companies. We've hired a wonderful woman called Kate Pike who organizes phone meetings for us all day. If any other fund managers need her, she's only working for us one day a week. I am going to utterly recommend her. It will change your life, I swear. It's a job for a fund manager but you know really good product um but the but even then you know my day is not that structured right it's just i'm in the office so do you think the idea generation comes from that uh unconstructed time where your mind can wander no the mistakes come from the unconstructed right

no no serious i joke a little bit about that but um no there's no idea generation as such yeah there's on the short side we've systemized it right you know follow bad people work out where they pop pop up. The idea generation is computerized Mark Cahodes. Yeah. On the long side, most of the ideas come by dumb luck. You're reading... I'll give you an example. We're long a company called Corbion,

a company on which I have some doubts. Stock's not performing particularly well. It hasn't cost us money. One of its products is algae that is particularly rich in DHA and omega fatty acids. Now, the reason you use this is that to farm salmon, you normally have to catch some wild fish right so that they get their fatty acids and it used to be sort of a kilo and a half of wild fish to produce one kilo of farmed fish and we're down to the other way around we're now down to half a kilo of wild fish to produce one kilo of farmed fish the rest of the food is largely things like soybean protein isolate made into a pellet. But the problem with soybean protein isolate is it misses lots of nutrients that go into the fish feed.

And one of those nutrients is these algae that are rich in omega-3 the idea is you grow the omega-3 by feeding algae sugar rather than go plunder the southern ocean for krill it's a cool idea now it's a cool idea and it should make a lot of money and the reason it should make a lot of money is it's a very small part of a big food food process and a little bit of algae allows you to displace a lot of fish and replace it with soy protein isolate which is cheap so it should be highly profitable but it's not really now there's a very big listed fish food factory in denmark which makes about 30 or 40% of the fish food for farmed salmon in Norway or in Scandinavia. And we've organized a phone call with them. And we're organizing it because we want to check up on Corbian.

But in the process, we're going to try and check up on every other additive for fish feed. And your ideal additive is something that is hard to reproduce, is a very small part of the process, but is critical in replacing a lot of value. So if, you know, there were only one algae maker and you only needed a few grams of algae per ton of fish feed, right, then you could charge a lot of money for the algae and then you'd be very profitable. We haven't found the ideal ideal additive we don't know whether we will find the ideal additive but in my dream world there's a small company somewhere with a market cap of 200 million that has an additive that's right because fish farming globally is a huge business that will have an additive that takes five percent out of the cost of fish feed globally and can charge astronomical sums and scale the business forever.

Will we find this business? No. Will I find it by reading? No. Will I find it by reading and talking to the Danish company? Maybe. Do I know what I'm looking for? You betcha, right?

And I betcha because I know models of businesses that work. Right. And I'm going back to the question, what's it got? And I sort of idealize what it's got is a small part of a big thing that you can charge a lot of money for. So the idea doesn't come to you, you know, when you're in the waves and you see a salmon or something. No.

It comes, what you need comes through the calls and the reading. Yeah. You read so you're prepped for the calls. Yeah. And the calls give you reading to do. Right. Right. It's an iterative process.

Yeah. And the weirdest thing is I could work on this for months and months and find nothing. Or I could find something on the set first call. I have no idea. Wow. Well, this has been so, so interesting and it's been a trove of value and information

for everyone listening. Just before we wrap up, for the young investors in the crowd, the retail investors, maybe especially people who don't have strong finance backgrounds yet, but want to break the into the industry is there anything we've left on the table any advice we haven't mentioned look if you're wanting if you're a young investor 10 companies that do a small but important part of a big process where you've just gone and checked it out riches and

niches diversified into 10, and with balance sheets that are not levered, will do you just fine for a portfolio. Do that, you will outperform the market. It's hard to do, right? If you do it well, you'll have three really good ideas for the first time you get an interview, right? Because one of the questions is,

give me your three best ideas, right you do it without leverage you'll stay around for tomorrow if you do it with leverage good luck to you just take the leverage off once you're rich enough right um as for getting interviews think like a businessman right if you're going to be a stock picker you know what is it about this business what's it got cares question is a really good question what's it got what is it about this business that's special that makes me want to own it in two years five years ten years and if you can't answer that question next stop please right now the as for short selling don't try to be Mark Cohodes. I promise you it's really hard.

And Care made more money than Mark. The right side of the trade is long. And I'm a short seller saying that. The right side of the trade is almost always long. Long quality. And quality in this case is I got a small niche niche i can make a lot of money out of it right and you know i'm sort of puzzled as to why this algae doesn't make money but i'm going to work it out well john hampton we wish you all the best with that thanks so much for

joining me bye for now thank you so much for listening me. Bye for now. Thank you so much for listening. I hope you enjoyed that conversation as much as I did. Three quick things before you go. Firstly, for show notes and links to everything discussed in that conversation, you can find those on my website, josephnoelwalker.com. That's my full name, J-O-S-E-P-H-N-O-E-L-W-A-L-K-E-R.com. Secondly, if you want to continue the conversation, you can find me on Twitter. My handle is at Joseph N Walker.

And finally, I would be so grateful if you left a rating or a review for the show on iTunes. I know everyone asks, but I need you. I need you to do it. I can't do it without you. And I do appreciate it. Until next week. Thanks again for listening. Ciao.