We Study Billionaires - The Investor’s Podcast Network - RWH023: Defensive Investing In Dangerous Times W/ Guy Spier

Starting point is 00:00:00 You're listening to TIP. Hi there, thanks so much for joining me for this episode of the richer, wiser, happier podcast. My guest today is Guy Speer, a renowned hedge fund manager who's run the Aquamarine Fund for the last quarter of a century. Since launching the fund in 1997, Guy has beaten the S&P 500 by 200 percentage points and the MSCI World Index by 364 percentage points. A lot of very smart and fiercely driven hedge fund managers have fallen by the wayside during that time. So the fact that Guy has not only survived but beaten the indexes is no small feat. This conversation is a special one for me because Guy is also one of my closest friends. I first encountered him when we were undergraduate

Starting point is 00:00:49 students at Oxford more than 30 years ago. He came first in his class in economics there, then got his MBA from Harvard Business School, and later set up show. as a hedge fund manager in New York City. I was also living in New York back then, working as a financial journalist for various magazines, so we used to get together fairly regularly for lunch in Manhattan, and I would bombard him with so many questions that he'd be utterly exhausted by the end of the meal. In any case, I became one of the first investors in Guy's Fund, and I've been invested in it for something like 22 years. I later became an advisor, his investment firm, and I edited his annual report for many years. But what really made us close

Starting point is 00:01:35 was that I helped him to write his memoir, The Education of a Value Investor, which was published in 2015. By then, Guy had left New York and was living in Switzerland, so I basically moved into his home in Zurich for several months while we raced to finish the book. Writing a book is an incredibly intense experience, and you never really forget it when you've been in the trenches. with someone in that way. So, as you can imagine, there's a great deal of candor and warmth in our conversations, because we've built up so much trust over so many years. It also helps that today's discussion took place in the comfort of his home in the Swiss Alps, with the two of us sitting together beside a log fire in his living room. In this conversation, Guy talks about

Starting point is 00:02:23 some of the biggest challenges he's wrestling with these days, including his fear that Russia's war in Ukraine could escalate creating a systemic risk for investors. He talks about how he's positioned his portfolio to survive and prosper in a particularly dangerous time of heightened geopolitical and economic risk. And he talks about what he does to maintain his emotional equilibrium so he can go about the task of trying to build long-term wealth in a calm and prudent way for decades to come. I hope you enjoy our conversation. much for joining us. You're listening to The Richer Wiser Happier Podcast, where your host, William Green,

Starting point is 00:03:09 interviews the world's greatest investors and explores how to win in markets and life. Hi folks, I'm absolutely delighted to bring you a truly unique episode of the Richer Wiser Happier Podcast. I'm here with my very old friend, Guy Speer, in the living room of his lovely home in Clostas. It's a beautiful ski resort in the Swiss Alps. It's snowing heavily outside today. So Guy should be out skiing and having fun, but instead it's here to chat with us about investing in life.

Starting point is 00:03:47 So Guy, thank you so much for joining us. It's a great pleasure to be here, William. And yes, it is snowing. But I think I'd be cross-country skiing today if I was out and not doing reading or investment research. I wanted to stop by asking you actually about living in Switzerland. You lived, I think, in London, Paris, New York, Zurich. You lived in Tehran, I think, as a child. at some point. You have Israeli, South African and German heritage. You're married to a Mexican. You speak

Starting point is 00:04:17 about five languages. So you're somewhat international. So I'm curious as to why you ended up settling in Switzerland of all places. And also more importantly, perhaps, how it helps you as an investor to live in this slow, beautiful, somewhat sedate, calm place. Isn't it fascinating? Where do you end up? And I think, I mean, I lived 18 years in New York City, and for the time that I was in New York City, I really did feel like I was a New Yorker, and I feel like I take that New York spirit that's deeply embedded inside me with me. But the problem that I found in New York City, which is nothing to do with the amazing city that it is, is that when I'd arrive somewhere, from somewhere, I'd be calm, and my nervous system would be calm for about a day or two.

Starting point is 00:05:08 And then suddenly my nervous system would be converted into kind of a jangling mess. And it's kind of summarized by this idea of a New York nanosecond. And the joke is that a New York nanosecond is the time that it takes between the lights in front of the taxi in front of you, turning from red to amber, and the taxi behind you starts hooting. And so there's a sense of sort of constant movement, which is incredible if you have a tendency towards melancholy or depression, but it would set me on edge, and I think my nervous system was constantly anxious. By contrast, what I found when I was in Switzerland was that all of the elements of the way Switzerland operates, and it basically, everything seems to operate like clockwork. If something

Starting point is 00:05:56 doesn't operate like clockwork, it's something that is almost newsworthy, was calming of my nervous system and put me in a stable, happy place. I think that I realize now that I've done, really well in institutional environments that take care of many details and of random factors and kind of put you in a kind of a box towards which allows you to go in the direction that you're going. So in New York, there isn't a box. There is infinite possibility and opportunity. And by contrast, what I found in Switzerland is that I was calm and able to focus on the things that I wanted to focus on. And the environment is so stable and is so stable and is so predictable that that enables me to focus on the stuff that I need to. I mean, at the end of

Starting point is 00:06:43 the day, what I keep telling to people is they say, isn't Switzerland boring? And the answer is yes, and that is really, really good because I need boring around me. I have enough things going on in my head that I don't need to worry, that I need an environment which doesn't distract me. But what I would say is that as you bring it up, if I think of New York, which is I think one of the best contrasts to Switzerland is that I used to say in New York you could never get lonely or unhappy because all you need to do is to go into the street and there's infinite inspiration and infinite opportunity. And so I think that there's a danger in a country like Switzerland that you can become

Starting point is 00:07:24 melancholy and the great news is in Switzerland is that you have very easy travel. So it's Switzerland as a base but with the opportunity to travel to places which are noisy and full of possibility and opportunity. You said something really interesting to me the other day as well. I was remarking on how beautiful the woodwork and the finish in this house is. And I've been staying with Guy for the last week here, probably wearing out my welcome at a certain point. Not at all, William.

Starting point is 00:07:52 And everything is so beautifully finished. The quality of everything is kind of extraordinary. And I was quizzing you about this and you said the people who are doing plumbing and electricity and woodwork, they're paying. something like $200 an hour here, that things are set up so that it'll last. So they charge a fortune for woodwork, but then it'll last forever. It'll be beautifully done. And it's interesting to me the parallel between that and your investing career where you're trying to find high quality companies that are going to endure. And I'm wondering how that culture of excellence, quality,

Starting point is 00:08:29 longevity helps in some way, how that's conducive for the type of investor that you are. It's really interesting that your appreciation of that comes from. So for the listeners' interest, William started asking me about the bathroom and the seals and the way the finish was done really to perfection. I mean, there's no way that you could change that. But where I started connecting to that was when I discovered a brand of furniture, that was in the Swiss offices and the Credit Swiss offices in New York, which is this company, USM, and USM furniture, for those who know it, is this incredibly durable, very simple lines and also infinitely variable in that you can reconstruct it in any way that you want.

Starting point is 00:09:19 So I think that I was drawn to that quality in Switzerland that wants to make things durable and practical. And exactly why it happened in Switzerland, I think it's got something to do with the mountains, but it's not just to do with the mountains, meaning that when you live in the mountains, especially the way it was historically, every winter you might be snowed in for six months. So you really had to be prepared and you had to plan for the way the winter would go and you'd have to have all the things that you needed for six months, because the only way to come in and out of the valley was through dangerous mountain passes where people potentially died from the cold or from the storms, from the winter storms.

Starting point is 00:10:02 But that is combined with this kind of, I'm sure that maybe you or other contemporaries of ours read Weber, Protestantism and the spirit of capitalism. And this guy Weber, who was a sociologist, studied the impact of Protestantism and that enlightenment view of religion on people. and there's this idea in Switzerland that you should blend in on the outside and the quality all comes from the inside. So those values run deep in Switzerland and I can't even start to try to describe exactly why they exist and how they exist. I think that I'm not sure that Switzerland inspires me to invest in those kinds of companies that have the same qualities more.

Starting point is 00:10:49 It's just that I am deeply drawn to that. And I think that, that when you're a scatterbrain the way I am, you would think that a scatterbrain is drawn to chaos, but we're not. We're drawn to things that we can rely on and they can be certain about. So whether it's Switzerland, whether it's my wife is incredibly structured in the way she lives her life. And then when it comes to companies, I know that I can lose my keys. Put them down. And five minutes later, I can't remember where I put them down. When you live in that kind of world, you need that quality and certainty and predictability of how something will function around you, and why would you not look for that in companies? So it's not so much that Switzerland inspires me to

Starting point is 00:11:33 look for that. It's that the qualities that I find in Switzerland are also the qualities I'm looking for in companies. And what actually I find remarkable is that there's such a clear parallel for me between the world that Warren and Charlie want to live in, and I'm drawn to that as well. I'm drawn to those mid-Western values. Warren and Charlie buy companies that are kind of set and forget in their ideal world. Because they have those qualities, so much in Switzerland is about set and forget. But so many other people don't seem to make the connection. I find it's surprising that there isn't a closer interaction between Swiss businesses and the mindset of Berkshire Hathaway. We've spent a lot of time in the last few days talking about this

Starting point is 00:12:18 very strange and slightly tumultuous period of boom, bubble and bust that we've gone through over the last few years. And you've been talking about how a lot of very smart, successful fund managers, including close friends of yours and mine, got sucked into a lot of these companies that seemed crazily overpriced, but were very high quality, in some cases at least very high quality, or at least at least very promising. And so we're here at this conference of yours, ValueX, or a lot of people come in from around the world, and it's kind of a nice barometer for the mood. And in recent years, you would have people come in and talking to you about why you should buy a company like Snowflake at 100 times revenues. And it was difficult.

Starting point is 00:13:03 It's been a tough time. And you had people telling you, you know, here's what's so wonderful about Cloudflare or Twilio or Carvanna or Rocco or Spotify or Netflix. And I'd like to talk for a while, actually about this strange period and how tempting it was, how intoxicating it was, how destabilizing it was, and also how you ended up resisting a lot of the temptation to pile into this stuff that was really very seductive because it had worked for several years. It was the way to make money. Yeah. And where that starts for me is at the very, very beginning of lockdown. And I remember being in Zurich and the share prices of some of these businesses that would benefit from lockdown, but we're all in the cloud and we're all this kind of SaaS-type business model,

Starting point is 00:13:53 were absolutely soaring. And one of the ones I remember was Zoom. And of course, we were all starting to use Zoom and I'd recently signed on to Zoom maybe in the year before. And the people who happened to have been in those businesses looked like utter geniuses. And I had always shied away from technology in general, but especially software companies that had, well, that were spending an enormous amount of money to grab market share, was the argument. And I was, I remember that I was invited to a launch with Eric Schmidt, with Monash and actually a former, a student at Stanford Business School, felt very privileged to be invited to the lunch. And Eric Schmidt just took it as non-questioning rule of business that there was of these new businesses is that there was market share

Starting point is 00:14:47 to be claimed or land to be staked, a bit like the American frontier west where they just let people ride as far as they could and all the land that they could see would be theirs. And any amount of money that you spent to do this land grab was okay. And Schmidt, just so people know, he had run Google, right? He was the chairman of Google. at the time. So he was no longer the CEO, I believe. And so I was kind of struck actually by we hold these truths to be self-evident. There was no other way to work in business. I mean, this was, and then there were people from my world, the value investing world, who had invested in such businesses with metrics and valuations that didn't make sense to me,

Starting point is 00:15:35 but they were being proven right, especially through that COVID period where the share prices of many of these businesses absolutely soared. And it went to companies that maybe didn't have this sort of cloud, winner takes all, winner takes most component, like Peloton, for example. So I remember that I changed my password because I was still in a mentality of other valuation models for which these kinds of businesses would be cast out immediately. And so I really spent quite a bit of time telling myself, guy, you've missed the boat, you're missing the boat. FOMO is something that spreads like wildfire through a population. I remember that I change in my password. So I often use passwords that I have to remember. I use them to kind of self-hypnotize

Starting point is 00:16:27 or to remind me of something. So maybe it's to have a positive attitude or to be happy or to take care of somebody. It's a wonderful way to kind of influence yourself because you keep having to bring it up and it kind of works its way into your subconscious. So I changed my passwords to remind me that I had to learn about these new rules of business, if you like. So that's the degree to which it got to me. So why did you change it too during this heated period? Because I remember years ago you had Warren as a password for one website. And so I guess that was a way of you kind of tilting the odds that you would behave in a high quality long-term way. Reminding myself. And for a certain period of time, because I felt like I had blotted my

Starting point is 00:17:12 copybook through my experience at D.H. Blair, the passwords were, or they had an element of trusted in them. So I wanted to be trusted. So I just wanted to work that word into my mind. I want to be trusted. So it would be trusted everywhere. And so, you know, I'm sure that this is not very good for me. Um, password security standards. There may be one password that will have to change right after this conversation. It's an element of the phrase. There are only a 200,000 people listening. You're okay, guy.

Starting point is 00:17:41 But I'll have time during production. But the phrase was new economy. And so rather than, and this was part of a longer phrase, but rather than ignore it and say, this is not a place that I need to ever look for investment ideas, to remind myself that this was something that I had to engage with seriously. and there was Hamilton Helmer, I think is his name, the seven laws of power, how to get power in business. I'm mangling the name of the book,

Starting point is 00:18:13 but I read that book two or three times because it was relevant to the kinds of shifts that had taken place, for example, when we had Netflix and over-the-top services, and this was again something that I had completely failed to focus on. But then whenever I dove into, so I had that. going on and in certain sense you can say I think that if I look at my mind so that whatever it was that was spreading like wildfire and a way of looking at the world and then accelerated by lockdowns and some of these businesses really did get a tailwind to their businesses and soared and then of course I you've got my password change so now I'm I'm saying no take these business seriously look at them

Starting point is 00:18:58 carefully, try and understand if there's a, if, if they are actually, if you understand them correctly, they are actually cheap. And it was extremely frustrating for me because I had pounded into myself enough over the previous 20 something years valuation criteria that I just couldn't get there on any of them. And it's not like I wasn't trying. And for example, in the case of Netflix, I saw these prodigious cash flows, and we all saw, I saw the subscriber growth, but at the same time, I saw them spending an enormous amount of content. Not only that, there was at some point where they did not do a share issuance, they did a convertible bond issuance, and all of this money was going into content. And so the big question arose,

Starting point is 00:19:47 at what rate should this content be amortized? And the company was being valued as if it didn't have to be amortized at all, meaning that the library was an evergreen library that would continue to generate the revenues that it was generating. And those seemed to be heroic assumptions to me. And for what it's worth, at one point, I rejected Disney for the same reason, because in these content companies, they're just sinking a huge amount of their free cash into movie assets, which are kind of these random assets, some turn into a franchise that lasts forever like Star Wars or Aladdin and others turn into something that was watched once and is rarely watched again. And you know, you just don't know where on that spectrum it sits. And in other businesses, some of them

Starting point is 00:20:34 weren't even cash flow positive. And so you had to go, Michael Mubusian has this wonderful piece where he talks about how to analyze businesses based on this idea of unit economics. And unit economics in a certain way we talk about Charlie Munger talks about how EBITDA is not a real measure of earnings. And this takes you one step further. Use the ruder term than that. That's true. Beginning with the word bull. Yeah. And, yes. But you're going one step further and you're saying, actually, free cash from operations doesn't matter. The only unit of analysis that counts is unit economics. So what is the cost of customer acquisition and what is the lifetime value of that customer? We're talking about lifetime value of the customer. You're making assumptions about what's going to

Starting point is 00:21:19 happen over the next 30 years. That is an extremely long time in businesses, which traditionally technology has been something that you can easily, or over time, constantly gets competed away by innovation. So can you really rely on those? Now, on the other side, it only dawned on me way after other people, and it was frustrating for me because I had friends. I'd gone and given a Google talk, invited by Sarah Madan, and I'd gotten to know people who worked in Google's cloud business. And what we understood from Amazon was that these cloud businesses have amazing modes, because once you're locked into that particular cloud, then it's very, very unlikely that you're going to want to shift. So a lot of these businesses, especially with the soaring share

Starting point is 00:22:13 prices, the people who said, well, unit economics is the way to do it, were being proved right. But I was enough of a dinosaur, let's say, that I just wasn't, I didn't feel safe updating my valuation models to that degree. And there's something where, you know, I mean, I think I brought it up to you over the last few days. If I go back to those beautiful days after the financial crisis when Monash calls me up and he says, you know, there's this amazing CEO and he's running a company called Fiat and Fiat's got a $4 billion market cap and $120 billion in revenues. And so you kind of say, you know, if this company can earn one or two or three percent on those revenues, which is a perfectly reasonable thing to expect, then this thing is potentially

Starting point is 00:23:00 trading at only one-time's earnings or not far from one-time's earnings. And that is a very, very safe low-to-the-ground valuation, which is grounded, if you like. And then you have these things which are kind of so far away from the underlying cash flows and you're kind of relying on these analyses like unit economics. And despite being desperately wanting to be able to say to myself that this made sense, I would find myself disappointed and in the way sort of my heart's sink. I remember listening to a podcast with the CEO of Roku. And I discovered on that podcast that Roku had, this man had a very close relationship with Reed Hastings, that Reed Hastings had invested in Roku. And I understood what over the top was doing. And I myself saw how little

Starting point is 00:23:52 I was watching, say, cable TV and how much I was looking at these various apps that appeared on my TV and allowed me to stream all sorts of things and that Roku was at the absolute center of this. And so I would excitedly then bring up the accounts of Roku. And I'd just be utterly disappointed to discover that I was looking at a $40 billion market capitalization and revenues of less than a billion. And with that, I was just almost unwilling to look further. It just, the idea of walking down into that cave or walking down that path made no sense to me at all.

Starting point is 00:24:29 And so I was stuck there and I wasn't able to invest in them while the people who were invested in them looked smarter and smarter and smarter. Just, you know, an interesting sort of question for any analyst or anybody who wants to succeed at doing fundamental analysis is to ask oneself, when do you stop and start searching down a different path? And there's a question, you know, should I have gone further down the unit economics analysis framework? should I have spent more time looking and understanding at and understanding Roku or Cloudflare is a similar kind of story. On the other side, and something that Monish has taught me a little bit to do, but I really could go much further, is that we often stop searching at the wrong point.

Starting point is 00:25:22 And I think that behooves me to go a little bit further despite the apparent high valuation, just to see where the analysis comes to and to try and understand. understand a little bit further. I think I probably stopped too soon, but it's kind of unbearable to me. I'd trained myself not to do that. On the other side, I think that if you take the Fiat example, I would have stopped the analysis and said, yeah, but it's loss making and the automobile industry is going through wrenching changes and this company nearly went bankrupt. So there are all sorts of reasons to stop the analysis from that side. And what you need to do is keep going just to see where you get to and to see if there's subsidiaries, for example, that, I mean, in the case of

Starting point is 00:26:02 fiat, even if you assumed, which it wasn't the case, that the whole of the traditional automobile industry was not worth anything. They had this jewel called Ferrari, which anybody who held the spun-out shares of Ferrari has got multiples of our original purchase price just from the spun-out shares. So sometimes something looks really ugly and you have to go further down the road. I think probably you're better off going into something that looks really ugly and seeing what's underneath and pushing your analysis through on that side, then trying to find reasons to sustain a valuation that doesn't make any sense. But on either side, one should not cut one's curiosity and try and push through further.

Starting point is 00:26:44 Why do you think these friends of ours who are really smart, really thoughtful investors got seduced and were able to suspend disbelief and suspend skepticism. I'm wondering slightly if in some ways it was that they learned the wrong lesson from the success of people like Bill Miller and Nick's sleep in buying things like Amazon that were very high quality and seeing value in a different type of company. If in a way they took some lesson from that sort of behavior and then forgot that Bill and Nick had bought things like Amazon incredibly cheap and then managed to hold it. they saw the quality and then rode them for many, many years. What do you think? Why did,

Starting point is 00:27:25 why did people suspend their disbelief? These are really talented investors. They're not mugs. Yeah. And I think that where I go to at its absolute core is that, so the one thing to be really clear about, I believe, is that any one of us is susceptible to this, including Warren Buffett. The idea that a human is not. susceptible to these moods or whatever it is that takes over, I think is a very, very bad conclusion to draw. We're all susceptible to it. And another way of looking at this very, very unusual development in human history is this concept of markets and stock markets and a price for some commodity or some asset whose value is disseminated across a population.

Starting point is 00:28:16 I mean, we certainly didn't evolve with that. We all know about the fact that. that our minds evolved to taste the berries and react positively if the berries didn't kill us and react negatively if they tasted bitter or did kill us. There's this very, very weird interaction that happens between stock market prices and human psychology and the underlying businesses that drive changing economics are in themselves changing. So the economics of the cloud, which is a new kind of economics, has never interacted with the human mind before.

Starting point is 00:28:47 And I think that we need to understand that the stock market or public markets are constantly changing interactions between prices, psychology, and the underlying economic environment, and it will constantly test the human mind in aggregate to find something that works. And so sooner or later, you've got this constant machine that is going to find something in enough human minds that when it's spread across them results in price action and reinforcements of things that are extremely unusual for a certain period of time. And this interaction between prices and psychology leads to this huge divergence between what is going on between the psychology and the price action and the underlying reality. So I think that my kind of like, I hope it's

Starting point is 00:29:40 a useful answer is that that will take over. any human mind in the same way that we can say that, you know, the virus, any kind of biological virus doesn't really make a distinction between, say, race, doesn't make a distinction between intelligence, it doesn't make a distinction between wealth. And you and I know that one of the great, it's one of these strange equalizing factors and a great weakness for very, very smart people is that if you've been through the university system, if you've done well at exams, if you've had all sorts of experiences that lead you to believe that you ought to be able to be successful, say, at investing, you come to believe that there are some things that you're not immune to.

Starting point is 00:30:23 And I think it's hard especially for smart people to really make ourselves aware that we're in a sense more susceptible to these market moods because we think we're so smart that we don't need to pay attention, if you like. So I think that's a kind of like trying to attempt a very, very basic explanation, which in fact doesn't explain much. It's just saying there's a weird interaction between psychology, prices, and underlying economic reality. But then I think that if you want to do dive into more of the weeds, it's something along the lines of what you're talking about that, you know, a brilliant guy realizes that he can, that it started with Costco, that Costco, despite appearing to be expensive was really very, very cheap. He then has the realization, and I'm

Starting point is 00:31:14 talking about Nick Sleep and Costco along with Zach, and then he has the realization that actually Amazon is Costco on steroids, and there's plenty that's been written about this, and he gets it right. And you're absolutely right that Amazon was never, in a sense, not profitable, and it was a point that was made to me recently by Nick that even at the time when the share price had declined dramatically. What they were doing was they were taking operating profits and pouring it into new businesses. So they had internally funded growth from a very, very early point. And some of the companies you mentioned were all externally funded growth. They were being funded by the capital markets. But if you study Nick Sleep, and it's in part my job, to study

Starting point is 00:32:00 what brings success to investors and to understand new approaches to bringing success in investing, then a natural thing to do in my shoes is to say, well, Nick found Amazon, how many other analogous investments are there? And I, myself, have had great success by looking at business models that have been successful, say, in the United States, and applying them in other countries, looking for credit rating agencies in other countries, looking for for for profit education companies in other countries or branded goods companies in other countries. And so it would be, have been very natural for those of my ilk to say what other Amazon.coms are there out there. But in the same way, you know, perception is a weird thing. So you're looking for those

Starting point is 00:32:47 qualities, you think you understand them, and then you go into another business and you think you've found them. Maybe you have, maybe you haven't. I think that a lot of the madness was that people really did believe that they'd found them. But actually they hadn't because there was only one Amazon, a very few, in the same way that maybe somebody sees one successful automobile company in the time of the century, but most of them ended up when going bankrupt. So it's a complex story, but I hope that that helps to some degree to maybe give some kind of an explanation. It also gives a sense of just how hard the game is. You're trying to see patterns and extrapolate from them and learn from examples of success, and you have to do it with a tremendous sense of nuance.

Starting point is 00:33:32 that it's our gift for patent recognition can also get us in tremendous trouble. Yes, and so this thing just turns on itself constantly. And, you know, maybe you, I know that you brought this up to me recently. It's one damned relatedness after another. There are also clearly sort of sweeps of market history. So we were coming out of a period. It's amazing how for how long the Ben Graham discount to book value or discount to two or three very simple measures, buying the lowest desal in valuation worked really, really well.

Starting point is 00:34:09 But it worked, and this is coming out of the Depression when all sorts of companies, nobody wanted to invest in the stock market, all sorts of companies were trading at discounts to very simple measures of liquidation value. And people like me and many other like me sort of just wished for the days when all you had to do was find one newspaper towns. But that was working less and less well. But what was extremely successful, starting with Warren, was looking for these better businesses and you have Rayne Cunniff and other firms looking for better businesses. It's a very natural transition, progression to go from looking for better businesses, high

Starting point is 00:34:45 returns on capital, high returns on incremental invested capital, not looking for, say, book value, but valuing the brands inside the business based on their intangible value and not tangible value because if you try and liquidate the brand, you're not going to get anything and then take it yet one step further into unit economics, lifetime value of the customer. And I remember with a good friend of ours going through the valuation of Salesforce. And Salesforce invests an enormous amount in marketing. They do these, I don't remember what the name of the conferences are, but they're incredible events where they invite speakers, because I've attended one.

Starting point is 00:35:27 in New York City, thousands of people attending, some amazing brand name speakers, there are amazing opportunities to learn not just about at its core of those conferences how to implement Salesforce in your business, but how to improve your life in any which way. But in order to reach a reasonable valuation for Salesforce, at the end of your model,

Starting point is 00:35:53 you had to take away those marketing expenses. You assume that they're no longer necessary and you have to make huge assumptions about how many customers leave you every year because that sort of determines the life cycle, how much you've invested now for the revenues that that customer is going to generate. And you had to make, well, we will discover whether there were heroic assumptions or not. Maybe there were not heroic assumptions, but I ended up having a debate in my own mind whether the assumption was heroic or not. And the decision as to whether that company was cheap or not would have actually turned on whether the assumptions

Starting point is 00:36:29 in the model were generous or conservative. And that's a whole new world that seems to me to have been kind of a step too far, at least when it comes to value investing and getting more. Now that I'm listening to your podcast, Fred Martin, who's repeated this word in such a phrase in such a beautiful way, prices what you pay, value is what you get. And the definition of value, ultimately, you can have it in your mind and a false valuation model can be reinforced in the market because of the price action that makes you look right for a number of years, makes you look smart, but then eventually gravity pulls it down to earth and you discover what value really is.

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Starting point is 00:41:38 Can you talk both about the checklist items that are practical ways to protect yourself against these kind of temptations. and also how putting yourself in a certain intellectual space and a certain ecosystem also is a key way of protecting ourselves from getting too carried away. Yeah, so the checklist item is an interesting riff on something that Warren Buffett has said. So we all know that Warren has said that he would not mind if the stock market was closed for 10 years. his valuation and his confidence in the value of the business is not reinforced by any particular price action or any particular quote. He looks to the results of the business. What are revenues,

Starting point is 00:42:26 how much cash is it generating, what are owner earnings, all of those good things. But what I realized when looking at some of these companies that were investing in the future of their business, not from operating earnings, but from money raised in the market, either through equity offerings or through debt offerings. And many of these companies had originated inside of venture capital firms where the venture capital firms would have fueled their growth by putting their partnership money into those companies. But then it seems like that continued in the public markets. And there were plenty of investors who were willing to show up based on their unit economic analysis or revenue growth and all sorts of other numbers to continue to fund

Starting point is 00:43:14 the growth of those companies. So they're taking money from the capital markets and they're investing it in operating losses because they're going for this. They believe that winner takes all or winner takes most and they want to grab market share and everybody believes this. And all of this is wonderful until the music stops and the capital markets aren't willing to fund your growth anymore, which seems to have happened. and for many companies in 2022. And then the company has to do some huge reorientation because they

Starting point is 00:43:47 have to restructure their business model based on internally generated cash flows. And what it seems to me is that in many cases, at that point, what appeared to be growth CAPEX or growth expenditure was actually an operating cost to the business. And the internal accounting up to that point implied that the business was profitable because they could characterize these new flows of capital coming in from the capital markets as CAPX and suddenly maybe it's not CAPX and maybe actually all the business or aspects of the business are actually not profitable. And so the simple checklist item that comes up is can the company fund all of its growth and all of its discretionary investment in potential new businesses for

Starting point is 00:44:39 from existing cash flows. And in a certain sense, what I'm saying is that venture capital is a world that I respect it deeply. There are people who do it really, really well, and it's spilled over into capital market, into public markets, but I very much want my investments not to be of the VC kind where capital markets are funding growth, but where growth is, if it's being funded, is being funded internally. So the simple question is, can the company fund all of that from internally generated resources, i.e., it can continue to grow, can continue to grow, even if the capital markets were closed. They don't need to rely on their interactions with the capital markets. And what comes up

Starting point is 00:45:24 for me, William, and this is why it's so valuable to do things like attend the Berkshire meetings and at the time to attend the Westco meetings, I know that you've attended the Daily Journal meetings. So a side trip organized at one of the Westco meetings was a visit to Seas Candies. So Chuck Huggins was still there and he led us on the tour of the Seas Candy Factory, which I should tell you is such a simple operation. I mean, this factory is not high tech at all. It reminds me of the tour that Monish and I and his daughter did of Mautai in China. And so I get this opportunity I'm super enthusiastic about, I mean, I'm not mad about

Starting point is 00:46:06 seize candies, but I can see what an amazing business this is. And we all know the stories about raising prices. And of course, you get frustrated because you say, why can't this business be in the west, east coast of the United States, in the middle of the country, why don't we take it to Switzerland? Why don't we convince the Brits? And I say, I start coming up with all these CAPEX projects for Chuck Huggins. And he just says, he first full said, we tried many of them. They didn't work. And he said at this point, Warren wants all of our excess cash to go straight to head office. But they would have had the opportunity to withhold cash from that they were generating and try stuff, but none of it worked. What's my point? Warren will allow the investee businesses

Starting point is 00:46:55 to make investments and not send cash up to head office to reinvest elsewhere. But what he's not going to do is he's going to look very carefully if he's actually sending cash down to the subsidiary companies. And effectively, the only company that I know that he regularly does that for is the energy business where he can be very certain that the new cash that he's sending down into that subsidiary is going to be invested at good rates of return in, I believe, I don't know the internal operations that well, probably every other business, he does not do that. So in a certain sense, I'm replying that rule to my investments in the public markets.

Starting point is 00:47:36 If you're looking to, if you're a company that I'm invested in and you're looking for to raise money, you're like Netflix and you go and do a bond issuance for $18 billion to invest in new content, that's a no-no. If you're such a good business, why can't you take your internally generated cash. Why can't you take the revenue that is coming from customers, pay all your expenses, and from what's left over, just use that to invest in new content. And if the CEO were to come to me and to say, ah, but we're doing a land grab and we need to raise this money so that we can go faster, then the answer to in my mind, not that I have to say this to the COs, well, you can't be that good a business. Because if you're under the

Starting point is 00:48:20 gun to grow so fast and otherwise things will. go south on you, you're obviously not that great. And there's businesses out there that are far more sedate and are reinvesting constantly in things that widen the moat and that enable them to go into adjacent spaces without having to tell a story to the stock market. So that's the checklist item. I took a long time over it and I took you on a little journey, but I hope I brought you back to the right spot. But I didn't answer the second part of the question, which I think was equally valuable. Yeah, the ecosystem.

Starting point is 00:48:54 Oh, yeah. So that in a certain sense is far easier to answer. And it's really, really important. So that checklist item is a way of me trying to train myself in a way of thinking that's going to stop me from making mistakes. And if I simply make that distinction and cut off all those companies that actually VC-type funded investments that are in the public markets, I'm going to save myself, I think, a lot of brain damage, a lot of hassle.

Starting point is 00:49:21 But the ecosystem for me, and I think, so I really, I think it's a shame. I think I have friends who would have benefited from attending the Berkshire Hathaway meetings every year. There's an idea that comes, I don't know where I read it first, but the Sabbath, the Jewish Sabbath, is a cathedral in time, and how is it held up? How does it sustain itself through time? How do people manage to keep the Sabbath? and the idea is that it's mountain ranges held up by threads.

Starting point is 00:49:55 And as you and I know that the rules around the Sabbath are, they're not infinite, but they go into enormous detail. You can ask yourself, why do they go into the enormous detail? There are rules for those of you listening who are not maybe that interested. There are rules where one should not pick up a pen if you're an extremely observant Jew, not because the pen itself is going to lead you to violate the Sabbath, but because it's an object whose only use would be to violate the Sabbath by writing. So don't even pick up the pen.

Starting point is 00:50:28 In a way, it's like not opening a Robin Hood account that you once said to me, move the candy away. You were saying to me the other day, why do you feel like you have to check your stocks every day? And I never seem to buy or sell them. I mean, I just sit on them. But it's really, I haven't seen. you once in the week that I've been here, check what's happening with your stocks. Yeah, no, I haven't

Starting point is 00:50:52 actually. I haven't and that's absolutely right. And so you're making the exact point. And once you find that rule, once I found a rule like that, then work on it and actually implement it. So whether it is visiting the Berkshire Hathaway meeting every year, simply the act of going to the Berkshire Hathaway meeting is going to put me into a better place or when I discovered that Nick's sleep and it was really beautiful. they have the most wonderful office just off the King's Road. You visited it, haven't you?

Starting point is 00:51:21 Yeah. So, you know, the first time I was, I say, I look for the Bloomberg monitor because I know he's got one. And it's like, it's on a low bench. And it's uncomfortable to look at. And Nick says, yeah, we don't want to look at it that often. And both he and Zach have talked about this.

Starting point is 00:51:39 So in my case, when I saw that, I canceled my subscription from Bloomberg for, I don't know, a period of time. But I gave it to our CFA, oh, Mark Chapman. I said, Mark, you look at the Bloomberg. Eventually, I decided that didn't work for me. But what I did do is those of the listeners who have experienced with the Bloomberg monitor is that you can set up these elaborate trading screens and change them to exactly the way you want it. And for a certain period, I played with that. And you can set it up in such a way that it launches one of those things automatically. And, you know, you have one or two monitors that are just like wall-to-wall carpeting of enormous amounts of data.

Starting point is 00:52:22 And I had this idea that I could structure it in a way that worked for me. And at some point, I realized, no, first of all, I'm not going to use that functionality on Bloomberg. It's just not useful for me. And actually, modus operandi is the, it's on my desk, but it's closed for a lot of the time. So that's what works for me. But it's, what's really important is that, and this is something again, And I just think that the Jewish way in halakha is really interesting. So again, forgive me if I'm diving down a Jewish rabbit hole.

Starting point is 00:52:53 Yeah, and halakha laws, basically. It's the laws that keep you on the straight and narrow so you don't mess up too much, hopefully. So here's a fascinating thing is that, so the listener might not be aware that the question arises, what if a devout Jewish person finds himself eating pork? know, the rabbis who are making, who try interpreting halakha don't step away and say, oh, then you've lost the game, you've sinned, that's that. Even in the way you break the halakha, there are better and worse ways to do it. They go in the Talmud into, if a man wants to commit adultery, how should he commit adultery? So that's not saying that adultery is a good

Starting point is 00:53:39 thing. It's saying that the God's presence or the divine presence never leaves you, the observation never leaves you, you are never, no matter how badly you behave, you are never removed from the obligation to improve your behavior. So if you apply that in investing, the point is, you know, I didn't do the Nick's Sleep solution. But if I'm putting the Bloomberg monitor on my desk, there are better and worse ways to do that. If you decide to open a Robin Hood account, there are better and worse ways to do that. If you decide to day trade, there are better and worse ways to do that. If I go to the Berkshire Hathaway meeting, you know, there are better and worse ways to do it. I can go to the Berkshire Hathaway meeting, as you know, from collaborating

Starting point is 00:54:24 with me on my book, I could go and hang out with a bunch of New York investment bankers who sat in the back and were kind of semi-critical of what was going on and called it a cult. or I could say, I need to imbibe as much of this as possible and find my group of Indian friends and queue up on the first day and sit at the very, very front. So these are all threads that hold up. And I can tell you that I got into a debate in my office over this and just to remind ourselves, how do you create a protection against getting caught up by the madness? And I said to my co-workers, if you think that I'm not capable of getting caught up in the phomo and the madness, you're wrong.

Starting point is 00:55:10 The only reason why I might not have been caught up this time is that I did enough of those other things. And before handing the mic back to you, I'll just leave everyone with one thought that almost haunts me, William. And I will never forget it. and I keep repeating it, and forgive me if you've heard it come out of my mouth before, at lunch with Warren, at the steakhouse in downtown, in Midtown Manhattan, Smith and Berlenskys, Warren says the words, and we'd been talking about my father and about how he had never gotten

Starting point is 00:55:46 into debt. And actually, we put a very, very, we're sitting in this place in clusters where we did take out a very insignificant mortgage, and my father was derisive, because we were, Because in his view, why on earth would you ever need to take any debt ever in your life? Just restrict by a smaller apartment, don't buy the apartment, whatever it is. And so we're discussing this with Warren. And just to bring up the context, we're talking about how when we lived in Israel, luxury in our family and the good life was to go to this hotel, the Danakadia, and get a cafe liajoir, get a sort of like chocolate-filled, cream-filled coffee with like a bomb.

Starting point is 00:56:25 It was so much fun. and it was a luxury on a weekend afternoon. And Warren says, just as a sort of side comment, yeah, I wouldn't want to get into debt ever because I don't want to discover what I'm capable of. And forgive me if you've heard this from me, but Warren Buffett, this is not some individual saying that he doesn't want to discover what he's capable of

Starting point is 00:56:47 if he allows himself to get into any significant amount of debt. So if Warren is worried about that, how worried should I be about all sorts of, of other things, not just about debt. If I hang out too much with people who have Robin Hood accounts, or so if Warren can get himself into the wrong environment, which would result in bad decisions, I certainly can. And I really do think that it's a constant work of channeling ourselves into a positive direction. And when we see a fork in the road, when we see an opportunity, you know, I gave this phrase to you, take the high roads and realize that

Starting point is 00:57:26 it's not just one decision. And this is something that, again, it comes through in Berkshire's in Warren's decision-making over all sorts of areas, assume that the decision you're making this one time, which seems to be insignificant, is repeated infinitely across your life and across the universe for you and what would the results be. And if it's positive, take it. But if it's not positive, then take the one that is less likely to lead to a bad place. So take the opposite. So, opportunity to go to the Berkshire Hathaway meeting. You know, what's really hard is that when you come to these FOMO new business models, it is my job to analyze that stuff.

Starting point is 00:58:10 So I can't just dismiss them out of hand and say, this is rat poison squared. I'm not going to do it. I have to examine it and decide whether for me it really is rat poison squared. And that's really hard because you have to go into those dangerous zones. you can't just stay in the safe and narrow. So, Guy, one of the things that's striking is that you've come through this period that was relatively dangerous, right? You managed to escape relatively unscathed from the crypto blowing up.

Starting point is 00:58:40 You didn't own any crypto. You managed to emerge unscathed from these hot overpriced tech stocks blowing up. The only positions you were taken in that new economy were pretty cautious ones. You bought a very small stake in Google. You bought a small stake, I think, a 1% percent. position in Twitter that then you managed to get out of when Elon Musk bought the company. But now that everything's come down, prices have come down, the valuations have come down, the bubble has burst. It's striking that you still haven't actually done anything.

Starting point is 00:59:09 You haven't managed to find anything to buy and you're sitting on, I think, about 10% in cash, which is the most I've seen you sitting on for years. And I'm wondering why? Why are you going so cautiously? Why are you finding so little to excite you in a period? where it's no longer so emballient and so crazy and so potentially delusional. Sometimes William, William asks the question, you ask the question with the confidence that the answer is just going to pop up and there's going to be some profound wisdom. And I'm not entirely sure exactly why.

Starting point is 00:59:47 So I can try and understand that. And before I try and understand that in real time, the myth, the fact that that's what, I'm doing doesn't mean that it's right. It just means that this particular human has reacted to his particular circumstances up to now in that way. I mean, I'm wondering if you, as just an old observer of you having been friends with you for 25 years or so, it feels a little bit like you're a little confused by what's going on in the world and you're a little bit shell-shocked by what just happened. And there's an element of you being slightly in your bomb shelter,

Starting point is 01:00:22 kind of peeking out now the light has emerged and trying to think, what do I do here? Yeah, so one thing that I can go into a little bit if you draw me on it is how companies that I yearned for, as that if only you had the right valuation, then I'd be excited about you. And we've mentioned it already, but I've yearned for Netflix. I've written about it. to read Hastings is an amazing level five leader. And I look at it now and it just doesn't excite me, as you say. And I don't see, I see more danger than opportunity.

Starting point is 01:01:00 And I think that's the case with many companies whose valuations have come down. I still don't, you know, it's either initiating a new position or selling something to buy them. And I don't find myself wanting to do that. I related to you a conversation that I had with my father. So fight, flight, freeze, kind of reptilian reactions that we all really ought to always be aware of inside of us. And something that has served me well is when mayhem happens or market mayhem happens, my natural reaction is to freeze. It's not a terrible place to be because stopwatch, observe, try and understand what's happening. and you'll notice that there are some trader types that when the market gets active and volatile,

Starting point is 01:01:45 they start trading a lot. So they perhaps going into frighten flight and freezes are perhaps a more rational place to be. And you say come out into the light, but I don't see that at all. I think that I was really struck by a Harvard Business School professor who came on a sort of briefing call with a group of people who's a Russia expert. He was really shell-shocked by the Ukraine. conflict and the increased probability of a nuclear exchange. And I had a conversation with my father about it where opportunities to de-escalate seem limited and possibilities for escalation

Starting point is 01:02:24 seem broad. And you've got on the one side, effectively you've got two superpowers or two systems in the world, authoritarian and liberal free democratic who are in conflict with each other over a shooting war. And at least on the NATO side, we're trying to pretend that we're not in a shooting war with Russia by making all these restrictions in terms of what arms we supply to the Ukrainians. But effectively, if you look at the underlying reality, it's two superpowers in conflict with each other and superpowers don't lose wars. So how is this going to end is something that is really scary, actually, and leads me to want to be incredibly cautious. And I don't want to you know, sort of be chicken nittle, the sky is falling on our heads, sell everything and go to

Starting point is 01:03:11 cash, so to speak. I think that the safest place to be is in the kinds of businesses that we're in. But I certainly don't want to, I'm feeling very cautious, extremely cautious. We're not through whatever the world is going through and we'll understand in retrospect what it was. You know, we're talking about a realignment of supply chain. So supply chains in the past, in this period of globalization that we've been in, perhaps since 1945, has been optimizing supply chains based on what is the lowest cost way to produce this good or commodity that we need. And the advent of COVID and rivalry between superpowers has meant that part of the reason why prices are going up is that supply chains are being reconfigured not for optimal costs,

Starting point is 01:03:59 but for resilience. And a resilient supply chain is probably more expensive. So we see I just read in the paper today that Germany had approved, I don't remember the name of the semiconductor company, but semiconductors being produced in Germany. We don't think of semiconductors being produced in Germany. We're talking about iPhones no longer being produced in China, but being produced in the United States.

Starting point is 01:04:22 So there are realignments that going on that lead me to want to just be cautious, to be really, really cautious. You were saying to me the other day that you actually feel like this is a bigger crisis than, say, the Asian contagion that you lived through in the late 90s or 9-11 or the global financial crisis. And it sort of took me it back in a way that you regard this as a more fundamental and potentially really systemic threat to investors. But I believe that I don't think it's hard to make the case that this is the biggest shift that is taking place in sort of global dynamics since World War II.

Starting point is 01:05:06 Because the breakup of the Soviet Union in 1989 and the release of all those Eastern Europe countries from Russia's grasp and effectively into the West and many of them into NATO was a kind of a happy growth period. You had the creation of the European Bank for Reconstruction and Development was one of the institutions. So many of these countries joined the EU, some of them joined NATO. You had this idea that one way or another, Russia and nuclear superpower was going to accept a reduced role in world affairs. And despite the fact that it's still an empire, it's a country disguising an empire with many subcultures and countries within it, that it was going to kind of go off into history as the way that other great empires have gone off into history like the Netherlands or the United Kingdom and accept a diminished role and a productive role and take its place amongst the nation states. And it did that, or it appeared

Starting point is 01:06:10 to be doing that. Until it seems like one way or another, Russia decided that it wasn't, that fate was not acceptable to it. And actually, Crimea had to be part of Russia and potentially Ukraine and I understand that in their maximalist version they would retake the Balkans. And so suddenly we have raw superpower conflict. And that is since World War II, we haven't had that really, it seems to me. And yeah, I feel like, I don't know how that works out. And I really do buy into this book that I read by Henry Kissinger, World Order the World. It's a realist view of world affairs. the world tends to order. Countries, even if they disagree, power blocks, superpowers, even if they fundamentally disagree, find a way to order in the same way that we found a way

Starting point is 01:06:59 to live side by side with the Soviet Union, even though the Soviet Union had an ideology that wanted to turn the world communist, and the rest, many of us, didn't want that. But exactly how that falls out right now, we don't know. And maybe that's just overly, overly, overly cautious. I was talking, we're at Value X, I was talking to somebody who has had Russian shares frozen. And we have, we know that Russian assets in Western Europe are being frozen and in the United States. And at least we have deep respect for property rights, such deep respect for property rights, that we will freeze Russian oligarchs assets, say, but we won't expropriate them. And it causes a big legal issue for us is that if we expropriate,

Starting point is 01:07:48 one set of people based on foreign policy, then who else would be appropriate? The property principle is extremely important to Western civilization. But the property principle does not apply strongly in Russia, doesn't apply so strongly in any other civilization. We have a huge cross-holding of assets, whether it's at the level of my portfolio where I own assets in China, sometimes directly, not to mention multinationals that own assets. And now, it would be utterly destructive and would reduce wealth in the world very significantly if national powers were to start questioning people's property rights in different jurisdictions and not just a freezing property is already bad enough.

Starting point is 01:08:36 But how can I know that that's not going to unfold? It's not going to unfold in that way. And if it is going to unfold in that way, and what, you know, I'm not a historian, but I'm aware that a triggering event in 1914 resulted in a series of dominoes falling the way the history has been explained to me that World War I happened and that nobody really wanted World War I want to happen, but one thing led to another. And I can sort of think of it a bit like an avalanche. And we're kind of having these mini avalanches right now.

Starting point is 01:09:08 How bad is it going to get? and if one thing leads to another, my father does not see a way to de-escalate the war that's going on in Ukraine. So maybe it continues to escalate by a series of involuntary steps, where at each step, the entity is doing what it thinks it ought to be right, in the same way that many people right now are crying out for supplying Ukraine with the arms that it needs to win, but maybe that is just an escalation against a superpower that cannot allow itself to lose with huge strategic depth. I know I'm talking about things I don't really understand. And I don't think anybody really understands them, but there are people who know a lot more about these things than I do.

Starting point is 01:09:47 But where is that going? Well, I think you're also more sensitive to these things, partly because your family has been so deeply affected by this kind of history, right? Because you had family in Germany that lost their fortune during the Holocaust. You had family in South Africa on your mother's side that left South Africa during trouble times there, you have family in Israel. So you're very, you're very keenly aware of the way in which big global events can affect investors in extremely surprising way. So maybe you're just more sensitized. And if we just go into one of one of those family histories,

Starting point is 01:10:31 if we just go, forget about the Holocaust and what happened post-1938, 1939, but you take my in Germany in 1931, 32, and they were living the good life. Life is good as we have here, prosperous life, full of opportunity. And by a series of remarkable events, this man who tried a putt in Munich has suddenly won power. And by 1936, my grandfather can no longer practice law and his properties have been, their properties are being expropriated one way or other, and there are any chances to leave. So how do we imagine the unimaginable? That was unimaginable to them. And in their case, all of their assets were in Germany. If by some reason they would have had lots of assets outside of Germany, life would have been a lot better because they would

Starting point is 01:11:24 have been able to recover. In fact, it would have just been a case of moving country. Going back to one of your original questions, no doubt, I've been drawn to the United States as a country of extraordinary strategic depth where world events are unlikely to affect you in that way. And I've been drawn to Switzerland as an island of calm and an island where property rights and individual rights have been respected for a very, very long period of time. So, yeah, and, you know, we, I worship at the Church of Berkshire Hathaway and Warren Buffett and Ben Graham and value investing, but that can only take place within a framework that allows it to happen. And I have to be aware that potentially that framework gets destroyed. And maybe that's a 1% probability or less,

Starting point is 01:12:10 way less, but it's still possible. And I want to survive that on the other side. And it's worth saying that in my view of the world, shorting things, betting against, betting that things will go down is not a particularly useful way of protecting yourself, because ultimately you're relying on the system to pay you out on your short bet. And you need to be able to enforce that short bet. And maybe you'll be able to, but maybe you won't. And so sort of buying insurance, it's actually setting yourself up in such a way that if you have a very bad outcome for the next 20 or 30 years, you can still do fine, if you like. And so if I buy a new company, especially if it's outside of Western Europe, North America, then, you know, by definition,

Starting point is 01:12:58 I'm going out some way on my risk curve. So what do they talk about? Risk on and risk off in some circle. So you're increasing the risk in some way. And you're increasing the complexity of the portfolio and you're increasing the number of events that can affect you. And yes, you're potentially diversifying as well. But we've been through a period of global growth,

Starting point is 01:13:21 globalization, optimization of supply chains, you know, people supplying all sorts of goods from all over the world. And I pray and hope that that will continue because it's the predicate of so much of the wealth that's been created. But what if that doesn't happen? It's interesting how heavily exposed you are, not only to the US, but actually to China and India. And you were talking to me the other day about how part of your reaction to this period of tremendous turmoil and heightened risk is to bet on big, powerful, almost. unshakable economies like the US. You have a position in Switzerland in Nestle that you've owned forever, but no other Western European stocks. And then you have big exposure to China

Starting point is 01:14:09 through things like B.Y and the like Alibaba. And then you own stuff in India. And I'm curious how you think about this question of investing in places like China that seem pretty fraught in some ways as actually a sensible place to be in a dangerous world. Look, we're dealing in hypotheticals that go way out, and I can't claim that my reasoning is watertight, bulletproof, the only way to look at it. So I can talk about why I think I'm making sensible decisions, but it could still turn out that in the light of new developments, that there was a better way to organize oneself. So China needs the world, I've said in other places, and it started off with General Motors,

Starting point is 01:15:03 what's good for General Motors is good for the United States and vice versa. What's good for beer moths like Alibaba, Tencent, BYD is good for China, and because it drives increased rising incomes in China, what's good for China is good for those. companies, what's good for the world is good for those companies. And I think that Chinese Communist Party, Chinese leadership understands that I was very heartened by the way in which they pragmatically lifted their COVID restrictions when they realized it wasn't serving their population. And so they're clearly making rational decisions. And, you know, the most beautiful version of globalization is that, and it's part of why, you know, just to dive into places anywhere where

Starting point is 01:15:49 there's conflict, if you take the Israeli-Palestinian or Israeli-Arab conflict, the minute you get trade between nations, economic interest means that political conflict and military conflict kind of recede because it's in nobody's interest. China anyway has an enlightened leadership to the best that I can tell. And the more economically intertwined China is with the rest of the world, the less interest or this sort of rivalry between different ways of organizing the world's economy, whether it's under authoritarian leadership the way China has or under liberal democratic leadership, the way we have in Western Europe and North America, recedes. And so I think that they are rational. But my simplistic sense of it is that while China will act in its

Starting point is 01:16:37 economic interests, also in the sphere of allowing foreign investors to make money in China, I really worry about the smaller countries who may be like mice trodden under the feet of elephants. And so it seems to me that China is unlikely to be as volatile a place as, say, Indonesia or the Philippines or other places where there's small countries moving around between elephants. You took a big hit last year from BYD, which was a very successful investment of yours that then maybe the valuation got a bit ahead of itself. or maybe people decided that China was a much riskier and less pleasant place to be invested than they had previously believed. And you also took a bit of a hit in India where you'd had a very successful investment in an energy company, India and energy exchange. And it really gets at an important question about patience and the willingness not to sell your winners. you at one point I remember Monash had sold his position in Ferrari's entire position.

Starting point is 01:17:43 You sold half and now Monash looks back and it's like, guy, you never should have sold any of it. Can you talk about this painful subject of whether you just ride out the volatility for a stock like BYD or a stock like Indian Energy Exchange or Ferrari and you just hold it for as long as you can or whether you should be trimming when you've got big gains? How do you think through this really difficult and conflicted issue? Yeah.

Starting point is 01:18:15 And I find myself wanting to reach for a cheap response, which is badly. And maybe badly is human that all humans unable to think clearly about these things because in large part you're dealing with all sorts of uncertainties and complexity that is beyond any particular human to optimize. it is very possible, William, that we focus on the humans who, it's not that they took those decisions well, it's that the humans, the people who lost on those decisions and not the ones that we focus on. And so we never, and I just keep going back to Fuled by Randomness by Nassim Talib, where we always have to bear in mind that the phenomenon we're looking at, there may be

Starting point is 01:18:59 a process in the world that throws up only these successful examples and the non-successful examples are not visible to us. And those successful examples appear to be the products of extraordinary skill. And the individual who's successful through it feels skillful, but actually there was, and they probably not just feels, they are skillful, but there was an element of luck that that enabled that success. So in the Berkshire case, we can take the example of Coca-Cola, where that investment has been held through an enormous period of time. But there was a period where Coca-Cola got to a valuation of 40 or 50 times earnings. And then a few years later, when the company's share price has come down significantly,

Starting point is 01:19:46 Warren confesses to the annual general meeting that it was probably a mistake to hold onto it. And he should have sold it. And we all know the example of Nick Sleep and Amazon, but there's an interesting history that perhaps could be written there where in your book, you describe how at certain point Nick took half his money off the table, while I think that Zach left his money on the table, two divergent paths, which one was the right one? And it's really, really hard when you have, so in both of those cases, BYD and India Energy Exchange, the position has appreciated enormously in the portfolio. They're worth multiples of

Starting point is 01:20:28 the original investment. And so the question arises when you see the valuation get ahead of itself, when perhaps risks on the horizon, at least to near-term earnings, are loom greater relative to the valuation, should you trim or not. And on the one side, you have Charlie Munger who says it's hard enough to buy a good business once, let alone twice, don't water the weeds and trim the roses, hold on to them, be the guy who was Berkshire Hathaway until that moment when it really was very, very highly valued and more in regrettelling or Amazon, where until recent history, the thing to do was to hold on. So that's clearly one aspect. And the other side is that the volatility can be painful.

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Starting point is 01:24:44 Funds Perspectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. You and I were driving the other day from your home in Zurich to this house in the mountains here in clostas. And you were telling me how you drive very slowly and you'll probably have it to drive 35 in a 50, I guess, kilometer an hour area.

Starting point is 01:25:10 And I was saying to you, that's a pretty interesting insight. into where you are at the moment psychologically, that I, as someone who over the years, I tell you when I think you're getting too swaggering and overconfident and when you're unreasonably defensive and too shaken and that you actually should not be so apologetic because actually you've done really well and your returns good. I was saying to you, I feel like you're more timid at the moment than you need to be.

Starting point is 01:25:37 I'm not saying this as any insight into the situation in Ukraine or anywhere else. I just think there's something about you that slightly, not in fetal position, but slightly dented and bruised. And it really does raise these interesting questions about the illusion that we have that an investor is some kind of icy, rational, dispassionate operator. And you and I have talked a lot about this over the years that actually one of the most important things is to manage your own emotional craziness and to have this self-awareness. Can you talk a bit more about how you actually do that? Because it's tough, right? I mean,

Starting point is 01:26:24 I said to you when I came last week, I said, you seem a little lonely, you seem a little sad, a little, a little deflated. And, you know, your wife and kids were in London because they were on half term from school. And so Laurie, your lovely wife who's now here in Clostas was with the kids. And it's just, it's a fascinating kind of microcosm of the reality of what you're dealing with as an investor that you want to be this cold, dispassionate, icily, unemotional person. But in fact, you're dealing with things like feeling bruised because you're stopped, just halfed or feeling sad because your wife is in London with the kids and you're not able to hang out with them. Can you talk about this, this question, how to manage your own emotional vulnerability?

Starting point is 01:27:06 Yeah, of course, and it's so extraordinarily important, and every person's emotions span come from a very different place. As you and I are both close observers of Monash, and I mean, you've traveled with him in India. I've traveled with Monash in India, and I don't think that I will ever fully understand the way Monash's internal landscape operates, which is really, really different from mine, for example. And for what it's worth, we cannot, I cannot, none of us can look at Monash and say, well, I need to operate the way he does because I will never be able to reconstruct that internal emotional landscape. I think that what comes up for me when we talk about my emotional landscape is if I just stay with that point before I come to what I'm about to say about me is that it's no good observing an

Starting point is 01:28:06 investor and saying, I should be the same or I should do the same. One thing that we never know is when they talk about XYZ company stock investment, what proportion of their portfolio it is. It makes a huge difference if that particular thing is 1%, 10%, 100%. And even though we can try and reconstruct their perspective, we don't really know that perspective. You might know of somebody who has a very concentrated position in XYZ portfolio that they run, but actually that portfolio is a minuscule part of their net worth, or maybe it is in a fee structure that they're making so much more money out of the fees that actually that position serves as a way to advertise what they're doing. So it's very, very hard to get anybody else's perspective. That's the really,

Starting point is 01:28:53 really important. If I go to my own perspective and we take my mood a week ago and it's lifted probably dramatically or significantly, we have to take into account a number of things. We've talked about, and just in very rough sense, we can talk about the war in Ukraine and concerns and conversations with my father. We can talk about these two positions that have declined, having gone up many times in India and China. We can talk about my wife had been away from me for a number of days, and I'd lived through a number of dark days in Zurich. All of those factor into the mental landscape that I'm in. And I think that the answer for all of us, or at least the answer for me, is to, excuse me,

Starting point is 01:29:39 to cultivate a kind of a balanced garden. And so the balanced garden's got to have some trees and it's got to have some shrubs and it's probably got to have a lawn. What do I mean by that? There's, you know, the balance in the family. There's the balance in my mood as a result of exposure to sunlight. And then there's also the degree to which our investments have a huge impact on my mood and the way I feel about the world.

Starting point is 01:30:06 In the case of India Energy Exchange, they're repurchasing shares right now in quite a large number. That feels great. I don't like the fact that their share price is down, obviously. It's not fun. But I love the fact that they're repurchasing shares. That is part of what affects my mood. And when I see that Warren is either repurchasing shares of Berkshire Hathaway or he's buying

Starting point is 01:30:30 a huge new position in Occidental Petroleum. And my first reaction on Occidental Petroleum was to say, Warren's getting into the oil business, doesn't he realize that the oil business is being hammered by every single possible regulation and it's hated by so many people as being a source of major carbon emissions? I saw a talk with the CEO of Occidental Petroleum and the voluntary measures that Occidental Petroleum is taken to become carbon neutral. And the understanding that the CEO of that company has, that it needs to be a responsible supplier of energy to the planet and to be a responsible supplier of energy, it needs to be a carbon neutral supply of energy to the planet. So it is working

Starting point is 01:31:15 very, very hard to see itself as a solution to the planet's climate problem. not as a contributor. They definitely don't have their head in the sand. And Warren clearly understood that. And I, I, there's, there's elements to that investment that, so reinforce me, make me feel good about our investment in Berkshire Hathaway, make me reinforce him or make me understand that Warren's still on top of his game and that I have hired the CEO of these assets who cost me next to nothing. So, you know, when I put an investment in the portfolio, one of the things I need to ask myself is, how is this going to affect my emotional garden, given what is going to happen? Our friend Monish laughs at me from my position in Nestle, but that Nestle position contributes to

Starting point is 01:32:06 my psychological health, if you like. And so planting that garden, along with one's real life circumstances is part of how I'm managing myself. I think that the worst for me in terms of psychology happened when I shorted a couple of stocks. And, you know, I read David Einhorn's end-year-end letter and he talked about his short portfolio and how he'd made money in his short portfolio. And I just, I'm not sure if it's admiration. It's probably awe that somebody like David Einhorn can keep his psychological balance, it seems, while having a significant short portfolio of whatever kind. And what I found with the three stocks that I shorted was that my world was upside down. It turned my world upside down. That cannot be good. And maybe if I'd gone to

Starting point is 01:32:57 work for some super duper hedge fund that knew how to short stocks, I would have learned how to manage my psychology in that way. And I think that going back to your previous question, I think that, And this is, for those who are interested, this is the kind of conversation that William and I would have offline, because William really has helped me manage my psychology. And I've actually come to understand, William, I don't know why this time, perhaps because you've helped me a little bit with meditation, I've become much more aware of your extraordinary sensitivity to what humans are feeling. So within hours of William being in my presence, he says, wow, you're little melancholy. I'm like, how the hell does he see that? And actually what I, what I, realize is that I am a little melancholy, but I hadn't realized it in myself until you'd said it. But so when something has risen multiple times and it's at all time highs and there's public exuberance about it, to be able to come in at that moment and say, you know, fast forward one year and this thing's down 50% will you not have regretted not selling a proportion of it? And that's an extraordinary discipline, which brings me back to, I'd invested in a company called White Mountains

Starting point is 01:34:13 Insurance, and the CEO was the former CEO of Geico, whose name escapes me. Jack Byrne. Jack Byrne is an amazing guy. White Mountains is redomisiled to Bermuda. I have an analyst meeting in New York, and Jack Byrne, who's decided to go full Bermuda, has got all of his management, many of them, addressed in Bermuda shorts at the Waldorf, And they're doing a share issuance. And they had acquired a company at 50% of book. And now they're doing a share issuance before the share price of White Mountains has risen to 100% of book. And the acquisition had been funded in part by Berkshire Hathaway.

Starting point is 01:34:56 And I go to Jack. It's one of those moments. I know that we've talked about it, William, these people who, where I'm just a minion, and he totally focuses me. And I say, why are you selling shares? Why are you diluting the wonderful returns that we're going to get? You know, this is not the time to sell. This is the time to double down, you know,

Starting point is 01:35:16 and we're in the middle of this Adani thing, which is kind of interesting in India. And he looks at me straight in the eyes, as we've discussed with Director of Berkshire Hathaway and Coca-Cola, takes me totally seriously, focuses on me, and he says, Guy, it's the right thing to do and Warren has blessed it, not only has Warren blessed it.

Starting point is 01:35:35 He's told me it's the right thing to do. Why? Because the share price had risen a lot. There was a certain amount of risk on the baron sheet, and it's better to reduce the risk on the baron sheet. And it's always hard to do a share issuance like that, because you kind of want to hold on to the future returns that you'll get if you don't do a share issuance.

Starting point is 01:35:57 In the same way that when you have highly appreciated stock, it's hard to sell it. And my point to you, William, in an offline conversation would be, feel free to remind me of that when I'm sitting on highly appreciated positions because what happens with most people is that they want to call you a genius. And so how good it is to have friends who will say, you know, you're not going to be such a freaking genius or you're not going to feel that great about yourself. How do you manage your psychology if it's down 50%? Can you guarantee it's not going to be down 50%. isn't it the discipline that you need to have to sell some of your position into this exuberance? So that's part of building that garden, isn't it? And William's allowing me to, I don't think it's meandering, but...

Starting point is 01:36:40 Well, there's a very important point that you raised there, which is that you've created a garden that can survive your own flaws, your own biases, your own periods of over-exuberance or fear or paralysis. I think that's an incredibly important idea that's worth emphasizing that it's not, it's creating an error resistant strategy so that when you're not operating at your best, it's going to be okay. Yeah. It's a really interesting idea. It's kind of an extension of this idea, Drunks and Bars, which is so powerful.

Starting point is 01:37:21 If we dispense with the idea of a rational operator inside our heads, and instead we, to mix metaphors, try to bowl with curtains. So try and set up those curtains. We're going to do far back. Yeah, with those rampers. Bowling with bumpers. Bolling with bumpers. Yeah.

Starting point is 01:37:38 And the thought that was coming to my mind, which is part of this, is, and it's a beautiful, I haven't heard John Alcan, the CEO of Exor say this in public, but I think in an interview written down, he talks about seeking out truth tellers. So when you're in a position of adulation, when any fund managers delivered a year of good returns, there's a certain amount of adulation that, of course, the fund manager wants to think it's normal. And the thing is, it's not normal. And so what you want to do is surround yourself with truth tellers. People who will burst through your bubble and help you to understand who you really are.

Starting point is 01:38:19 And allow you make sure that you don't start believing in your own might as touch. because it's not a Midas touch and bring you down to earth. And also bring you back up when you're feeling unreasonably embarrassed or upset or that you've somehow disappointed. So it's both ways. It's trying somehow to remain centered. Yeah. Yeah. And I think that what comes up for me is that you probably have done a better study of this than many or all is that the fund managers,

Starting point is 01:38:53 who have a bad year and then shut down the fund, I believe that they shut down the fund more because they can't take the psychological pain than the business is actually permanently damaged. And so if they could just stick with the psychological pain for long enough, they will recover. I had enormous psychological pain after 2008-9, and I remember one of the investors in the fund

Starting point is 01:39:20 and a friend from business school, he comes, I think, to by that time living in Zurich, and he takes me out for dinner. And he just wanted to make sure that I was going to stay in the game because he knew that if I stayed in the game, we would recover. And the great benefit for me is that I was forced to enforce. I had family interests in the fund that meant that overwhelming likelihood that I did stay in the game. But that was psychologically hard for me.

Starting point is 01:39:46 And I think that for some, it becomes so great that they decide to shut down the business. similar thing in early 2016 when horsehead had blown up and I came to visit you in Zurich. And I was reminding you of this the other day and you'd forgotten probably because it was too painful to remember where you said to me at some point that you could understand why sea captains would sometimes say, please relieve me of my command. And I said to you, do you hear what you're saying? And you said to me, and I have a weird memory for these sort of things, so I can remember the exact words. I can't remember where my car is usually, but I can remember this sort of thing. And you said to me, yeah, I'm saying, take me out of my pain. And I just think it's such a, it's such a powerful insight into how difficult it is to manage your

Starting point is 01:40:38 portfolio professionally, because you're subject to so much judgment. You're being, you're being judged the whole time. You feel like you've let down family and friends who are in the fund. It's so painful. And so it seems to me that one of the great advantages the investors like you have is at least you're self-aware. At least you're trying to look at yourself honestly and say, oh, wow, I'm not always going to be in an optimal state. So I better structure my portfolio in a way that can survive these emotional storms. Yeah.

Starting point is 01:41:12 I want to go down three different avenues. at the same time. When we get riled up, there's something important that we have to learn. So when I riled William up over writing for the FT, there's obviously associated pain there for William in one way or another that needs to be unpacked. And there may be a piece of wisdom or a piece of valuable insight for me in what I'm saying, but there's two things need to be kind is separated, I can dive into the way William you riled me up. And it's interesting, because we managed to successfully unpack it. So William is telling me that I need to, he thinks that I would benefit enormously from looking more closely at the way Fred Martin lives his life. And at

Starting point is 01:41:58 that point, I must confess that I had not listened to his podcast with William Green, which I greatly regret having not done. But the way William couches it triggers in me a reaction to people who are predictors of the future, who are forecasters and the whole band of forecasters who are always wrong, but always get paid to forecast something. Yeah, and this is because Fred has a, he'll look at where he thinks a company is going to be in seven years. And so this triggers in Guy, this fury, because it's like, well, no, people can't do that. And, and then, and so in a way, that perfectly legitimate point, um, which is debatable, but a legitimate objection, blinded you from the thing that I was trying to explain to you,

Starting point is 01:42:46 which is you should be looking at the portfolio of someone like this because he has a specialty in small-cap stocks, in mid-cap stocks, he's very smart, he's very disciplined. And if you're looking for 10 good stock ideas over the next 10 years, this is exactly the sort of pool that it would be smart to fish in. He should be, he should be at least on your, on your radar. But because you were so irritated by the way I put it. But I'm really proud of it because we navigated our way through that in part, I think, William, because you've done a lot more meditation than I have. But what William's reaction is to see the fire or to see that there's more heat than light being generated and he steps away and says, listen, I'm going to go for a walk or something like that, which created the space for me to realize what had triggered me and still triggered me. but set it aside to set aside the possibility that there's some wisdom there that is not getting

Starting point is 01:43:46 through because something has been inadvertently triggered, which we eventually got to. But just to bring it back to your reflecting on, for example, what I was saying to you in those incredibly painful moments is that again, my defensive reaction in this case is, so my defensive reaction in the Fred Martin scenario is that I want to focus on something about forecasting and associations I have for forecasting, which is really irrelevant to the point that you're making for me, but it got in the way. And that could have just been, that could have resulted if you would have taken mine and Williams training from university, would have gone into a super intellectual debate about something, thinking that we're very smart and getting nowhere. Instead, we managed

Starting point is 01:44:33 to navigate our way through and I listened to Fred's podcast, believe it or not, while ice skating, and an extraordinary guy. And actually, many similarities to my father, who's also a pilot. So really, really interesting. And William got that through. My defensiveness, when it comes to the financial crisis about bleeding from every orifice or wanting to be relieved of, quote, my command, is that I have suppressed the memory of what I said. And the memory that you're bringing up, William, is the most painful aspect of it. It's kind of like at the apex of everything that I was feeling

Starting point is 01:45:10 and kind of as a summary of it. You know, I can understand why a captain would want to be relieved of his command. By remembering that to me, and consider that I just suppressed it. It's like, oh, I'm this perfect person for whom that didn't happen, allows me to remember how bad it can get, and therefore take actions for it not to get that bad again. I don't think you want to voluntarily put yourself in positions in your portfolio

Starting point is 01:45:35 where you have this feeling of, I'd like to be relieved of my command. You don't want to be put into a position where you're saying things like, we're bleeding from every orifice. And so in a certain sense, remembering that to me now, surfacing that, accepting that I was the person who did that should allow me to not be in a position to do that in the future. how do you do that? No problem to have a position that goes down on you 90% if it's 1% of your portfolio. Big problem for a position to go down 90% if it's 25% of your portfolio. So part of it

Starting point is 01:46:09 is position sizing and it's not a perfect science. But I'm really amazed if you think of Warren at Berkshire Hathaway, how little risk in a certain way he takes and how quickly, how quick he is to remove something from his portfolio that presents the possibility of a loss. And we can think of the airlines where he just said, I don't ever want to be in a position where I have to own a company that goes cap and hand to the government. I'm selling it. And I believe that in the airlines, he had bought the position.

Starting point is 01:46:42 It had doubled in the crisis from COVID. It had halved again. And he sold it more or less at cost. But he was quick to do it. Or you see in the White Mountains example how in a certain way, aggressive he was to take risk off the table. And in part that's because he doesn't want to ever be in a position where he's asking, you would never want, as owners of the shares of Berkshire Hathaway, we would never want Warren calling Charlie and saying, I now understand what a captain feels like

Starting point is 01:47:11 when he says, I'd like to be relieved of my command. And how on earth can I expect to become better if I've suppressed, so ideally I would have not, have ever gotten to that position in with horsehead being such a large proportion, it was at its maximum size, I believe, maybe 10% of the portfolio. That's too high percentage to have a position be wiped out. Warren has invested in Australian insurance company that I believe was wiped out. It was kind of a fraudulent situation, but it was a 300 million pound investment, dollar investment, I don't remember exactly, of a much, much larger portfolio. But that was too large a proportion of the 10% was too larger proportion of aquamarine fund, and I'd forgotten about it. And you reminded me of it.

Starting point is 01:47:59 And so in another time when we have outsized positions, it's a very relevant question to ask, and if I can connect to that emotion that you've surfaced in me, I believe that I'm far more likely to take intelligent action that is difficult, but which takes risk off the table. Yeah, it could have helped you think about BYD, an Indian energy exchange, in a different way, not necessarily whether it was optimal in rational terms never to sell and just to keep riding these great performers that you think will do fantastically over the next 10, 20 years, but just to look at yourself and say,

Starting point is 01:48:36 what can I handle emotionally? Correct. And then also, Guy, there's an interesting question related to Monish, which is related to position sizing, which is Monish had this foray into Turkey, right, where he gets incredibly excited. about all these unbelievably cheap stocks in the midst of hyperinflation. And you were saying to me at the time,

Starting point is 01:48:59 I can't believe Monash doesn't understand, you know, the macroeconomics of this. And if he'd had a different education, maybe it would have been more sensitized to this stuff. Monash is quietly picking up stuff like Raysas that was like just absurdly cheap and now has made him a fortune. And it may actually be that you were right, given your temperament, not to buy something like Raysas. But I, but it, or maybe it should have been a 1% position. I don't know. Can you talk us through where you diverged from Monish on that? And when you look back on it now, even though it was the wrong decision in certain ways, not to buy racist, whether for you actually it was the right decision, given your temperament, your desire to survive and the like. So I'm going to take you through a set of

Starting point is 01:49:43 extremely rational, well-thought-out reasons why investments in Turkey should not make it into, say, my portfolio and I'm taking, I will take you through that, but the listener and William, you need to be aware that this may just be a rationalization of what is going on in my lower brain that is subconscious. How to make the decision bearable. Yeah. Exactly. And I think that before I go into that, it's really important to realize or to be aware that

Starting point is 01:50:14 if you have something that can go up 20x, but there's an enormous, there's potential for complete 100% downside, what is wrong with making it a 1% position? That's okay. And I think that in the circumstances of my very rational evaluation of the idea that I didn't want to be in Turkey, for some reason in my mind I was saying

Starting point is 01:50:36 that if I don't do 5%, I'm not going to do it at all. And 5% probably would have been too much for me, but there's nothing in the rulebook that says it couldn't have been a 1% position. My decision not to get involved in Turkey is to some degree based on my evaluation of the country, which is an authoritarian regime that imprisons journalists and has a history that is deeply problematic for me in that Turkey as a country seems to regularly suppress its history. It's suppressed. But China does the same, and yet you're heavily invested in China. Yes. That is a contradiction.

Starting point is 01:51:18 And so in Turkey, two of my greatest objections to the way they suppress history is the history of Christianity in Turkey. And one of the founding places of Christianity is Constantinople, but that history is suppressed. The history of the Armenian genocide is suppressed in a way that doesn't seem to be healthy. And to your point, William, a whole culture of the Uyghurs is being suppressed in China. and my experience of being in China is an attempt to talk political matters

Starting point is 01:51:47 with very, very intelligent people at Peking University and Tsinghua University so these are smart students is that it's met with a blank stare in that this is just not a subject it would be like you tried to talk to me about human cells

Starting point is 01:52:00 and human biology, for example, I barely understand what ATP is and some people who studied biochemistry you know a lot, but you'd meet with a blank stare. And my response to that, is that in part it's kind of my deep respect for Charlie Munger and Charlie Munger's statements that there are different ways to kill the mouse or kill the cat in the words of one of the Chinese leaders and that China has a system that works for it and that I have been indoctrinated

Starting point is 01:52:31 in a certain way by my education and I have to respect China's approach. although on the other hand I'm a big supporter of an organization called Yuan Watch where the founder has deep, deep issues and problems as many human rights organizations do with China's treatments of minorities like the Uyghurs. And in my reading of China is that and the ends ought not to justify the means.

Starting point is 01:52:59 That's a deep moral principle that I think that I've learned and in a certain way the conclusion in China is that because they're lifting so many people out of poverty, in a certain way the ends perhaps do justify the means, or there's an acceptance of that. There's also something about it being a superpower on a path to somewhere that creates stability and certainty for investing in that environment, whereas somehow when you're a medium or small-sized country that is engaging in human rights violations, it does get treated differently. And I know that my human rights friends would be very angry with me for saying this, but on a pure evaluation of investments,

Starting point is 01:53:41 I do think that that merits a different evaluation. A small country engaging in human rights violations is different. And yes, you brought up in the pause that in the case of Turkey, it seems to me that this populist leader who engages in many actions to ensure his power with the Muslim population or with a traditional population, if you like, is engaging in acts which appear to me to be economic insanity, including increasing the money supply and lowering interest rates in the face of raging hyperinflation. And what was explained to me just verbally in conversations with Monash is that effectively vast proportions of the economy are dollarized. And so the hyperinflation really doesn't have any impact at all in that when

Starting point is 01:54:31 you come to real estate contracts on significant pieces of real estates with foreign multinationals, the whole contract is priced in dollars. So it's moot point what the inflation rate is. But my conclusion was that a country like that can tip over the edge in one way or another. When I started observing Turkey, the Turkish army was kind of understood to be in control of the country and provided political and therefore economic stability for the country. But now there was this populist in charge and where could it go from there? It could go to some extraordinarily difficult places. I think that one of the extraordinary mental qualities I think both you and I admire in Monash is that he's able to go into such situations and see an unchangeable truth.

Starting point is 01:55:21 and he can wipe away all of that. All of those things that would make, he likes to joke about it, would make me go into a bomb shelter and focus on that thing. And that thing was that this was an entrepreneurial family that controlled the shares of this company who had very, very valuable real estate and very valuable relationships with people who wanted that real estate. And in retrospect, as best I understand, the unfolding of the wall. Ukraine and the call-up of troops in Russia has meant that many people have left Russia and

Starting point is 01:55:56 Turkey is one of the places that they've come to, driving up real estate values. So I had principled reasons for not wanting to be involved in Turkey, but I think that it behooves people like me to go into something like that and do the second and the third step of analysis. And I'm not sure if it will make it into my annual letter, but I think it is a mistake of a mission. I think it's worthy of analysis. And that does not mean that I have to go and become a huge investor in Turkey, but it's my job. I took a, I spent a lot of time trying to understand crypto. It was my job to understand crypto.

Starting point is 01:56:32 And if it was my job to understand crypto, we know what Charlie thinks of crypto. It's my job to understand Turkey in a much deeper way than I did. And to investigate, I'd rather be investigating Turkey and a company like Gracus than, or it's equally important for me to do that as it is to try and understand unit economics valuation models. And I didn't do that. And that doesn't mean I had to invest. We were talking about Monash the other day. And you told me about an email that he had sent you where you were talking about lessons from mutual friend Lee Lou, who made an early and immensely successful investment in B.YD. And you were talking about, so how are we going to do more of this? How are we going to find more companies like this?

Starting point is 01:57:15 And Monish sent you this remarkable reply where he was saying, well, look, nose to the grindstone. And he said, if I do 50 deep dives a year, then every four years or so, something like RAS will appear that's going to make a huge difference. And I've been talking to you a lot this last few days about how you set yourself up for the next 10 years. And we've been discussing this question of what do you actually need to make it a successful 10 year period? you're 25 years into the run of the Aquamarine Fund. It's been a very successful period. A lot of funds have died along the way. You've managed to survive and outperform the market.

Starting point is 01:57:54 But looking forward to the next 10 years, when you think about this question of how many deep dives you need, how many winners you need, whether you only need one big winner, one BYD, or you need five good ideas, how do you think about this question of what's actually going to determine your success over the next decade.

Starting point is 01:58:13 For the listeners' interest, you've driven, helped drive my thinking and its evolution. And so I like countries like Switzerland. I like structured environments. That doesn't mean that that can be any structure. It should be a structure that drives me towards my goals. And I realize now that if you take a Guy Speer 25 years ago or 15 years ago, I was able to operate as a lone wolf, if you like, on that. hunt for prey, on the hunt for the juicy stuff.

Starting point is 01:58:46 And I've been through a period where I've had to be regulated like we all do, and that actually initially smothered me in that the way the regulations were implemented by well-meaning people smothered that hunt for understandable reasons. The regulators in the world's developed financial markets decided that they had an interest in having a whole bunch of things in place around people like me. And that drew an enormous amount of energy away from me and took away from the ability to be a lone wolf hunting. What that message from Monash brings up is that,

Starting point is 01:59:26 now he does this naturally and he has a capacity to structure his life without having external structure, is that to succeed, you can't just be a lone wolf hunting the shining, shiniest thing that looks like it's going to be a success, you want to send up processes around you that enable you to do it. And when you bring up 50 company deep dives, in a certain way, it's applying a process, a sales funnel that you would normally apply to potential customers to investment ideas. And so he's setting up a funnel for himself. And he's very, very good.

Starting point is 02:00:01 He taught me a lot about how to set up a funnel, except the funnel is not, say, investors or buyers of your product, it's investment opportunities. And so I am excited, given where I am right now, to structure my environment such that those funnels are far better defined and are far more likely to lead me to juicy prey, to use the hunting wolf analogy. And that doesn't mean that it has to be one funnel, that the idea is only come in from one place. They can come in from multiple different kinds of source. What I've said in the past, people say, how do you find investment ideas? And my response was basically predicated on natural human curiosity. And it was this idea that new ideas, because they're new ideas, source themselves in unusual ways. If you're looking for

Starting point is 02:00:51 them in the same places, they're unlikely to source themselves. They're unlikely to be good ideas. So the example I've brought up in the past is that a company screens well, meaning that all the best ideas out of that particular screen have been picked off and are no longer in the screen. And what is left are all the things that, all the ideas that appear to look good in terms of the screen, but there are underlying factors that are no good. But unbridled curiosity looking everywhere also isn't going to cut it. So, you know, defining those processes of what are going to allow you. And I think that it's a huge shift in opinion. If you think of Monish, who really convinced me when I'd first met him

Starting point is 02:01:31 of this idea of not meeting management, it's a 180 degree turn to actually meet with management. And I'll never stop saying this. One of the most important things that anybody's read in my book should understand is that in my book I talk about not meeting management and that is wrong.

Starting point is 02:01:47 You should certainly meet management. Meet them at the right time in the right way and in a way that they can't influence you. So it's about being appropriately skeptical. And likewise, you have this extraordinary advantage as an investor that you have access to this incredible ecosystem of people coming at you and sharing ideas. So you'll hear Monish talking about RASAS. You'll hear Lelu talking about Mautai in the old days or BYD or really smart friends like Brian Lawrence and Josh Tarasoff and the like, Gyrish Baku, who I think came up with the idea for Chryssel many years ago. So in a way, the challenge is you've got to be open to all of this.

Starting point is 02:02:26 stuff and yet somehow remain discriminating enough, discerning enough, skeptical enough, that you do what works for you. Yeah, and structuring that information environment is an endless process of refinement. You know, when you talk about some of those people, they're some of the smartest people that I know, some of the deepest and thoughtful analysts of businesses. I went through a certain period where I was not embedded in such a wonderful group of people. and I assumed that if I'd heard the idea, it must be bad, because all of the people I was dealing with were D.H. Blair-type people, perhaps. And it required for me to update my model of the world to understand that actually I was embedded in a group of really, really discerning people.

Starting point is 02:03:09 When it comes to talking to CEOs, it's not just being skeptical. You this idea that the first idea in your brain is the one that sticks. So you want to do an appropriate amount of reading about them, about what they're saying, about what their company's doing. before you meet with them. So you can, the first idea, the first impression is from written materials that the company is produced before you speak to the company management. And that is the best way. It's not just about being skeptical. It's about arming yourself with knowledge that you compare to what the CEO or the CFO of the business is saying. But I think that, first of all, the question you asked me when you arrived is a really, really good question.

Starting point is 02:03:49 And it made me reevaluate William Green. So I probably pushed the world too much into, the world of literary types and mathematical types. William, and I say this, you have a very, very firm grasp of the mathematics of finding one or two good ideas a year and what they can do if they go up many times. I think that many people don't even have that mathematical grasp. And so William made a very... Guy is just trying to make up for the fact that he insulted my mathematical incompetence recently. Yeah, but I think that you overdo it, actually. You really overdo it. So it's easy to insult in a certain way because you kind of want to be insulted in it in the same way that I enjoy being insulted in my literary abilities. But it really, it reminded

Starting point is 02:04:31 me of how important it is to find those ideas, because as you said, that is what is going to drive the future much more than having a well-functioning team that complies with the regulations that we have to comply with, for example. Yeah, that stuff's really important too, but everything in a sense for you has to be oriented around finding a handful of great ideas over the next two years and that that means managing yourself, managing your ecosystem of friends and investors and managing your mood, managing your access to sunlight, managing your exercise. But it's, but it all in some ways is directed towards finding a handful of great ideas. Yeah. I want to turn this around because I think you're at the end of your questions. Okay, you can ask one final question

Starting point is 02:05:16 and then because we have about 23 people waiting for guy downstairs, I'm going to let you go after that. So one of the things, it's really been such an amazing time to spend with William, it's been more intense for me than usual. But William, I realize that you in the last few years have gone through a transformation of your ecosystem. And I just think it's, I have not understood the power of the platform that you now have underneath you. And I believe that it will continue to grow. but maybe it is interesting for everybody to hear the story of how you were a kind of a nameless, not completely nameless, but a less well-known figure, although extraordinarily talented writing for publications like Time and others, and that that kind of external structure

Starting point is 02:06:07 collapsed around you. And so in the past few years now, you have built your own platform and your own brand. And I'm just curious for you to describe what that feels like for you and where it's going from here. What happened to me is I had this pretty successful career as a journalist. And so I'd written for all of these publications starting very young for the New Yorker and the London Spectator and then the Economist and Time and Fortune and Forbes and stuff. And I felt kind of a big shot because I became an editor at Time. I edited the Asian edition of Time and then European Middle East and African edition. of time. And then I got laid off in the middle of the financial crisis. And then I spent a period of

Starting point is 02:06:50 time when I was sort of, when I was sort of lost and broken in some ways because the magazine business had collapsed and I had to reinvent myself. And in a sense, my closeness to, to you partly came from the fact that I helped you with writing the educational value investor at a time when I was incredibly bruised. And so, that was part of my reinvention. So I did that with you and then I helped as a ghostwriter on several other books. And in some miraculous way, it kind of led to this odd transformation in my life. And I then wrote The Great Minds of Investing, which led me to interview a lot of great investors again, which is something I'd always been passionate about, but it got away from while I was editing

Starting point is 02:07:36 the international editions of time. And then that led me to write richer, wiser, happier, which really enabled me to deepen some of the exploration that we'd had in your book, where you were talking about what does it actually mean to have a rich and successful life? How does investing fit into that? What can you learn from these people like Warren and Charlie? And so I kind of went deep on that, focusing on 40 or so people instead of just your career and what you'd learn from the great models in your career. and that has then spawned this podcast which enables me to continue having these questions with remarkable people like you or like Ray Dalio or Monish or so many extraordinary people and so for me it's just been fascinating to feel this thing unfold and to go from to I mean if there's any takeaway I think it's just we really don't know what's coming and

Starting point is 02:08:38 And so you have to have the flexibility to change. It goes back to saying Howard Marks talked to me about, where you have to accommodate yourself to reality as it is, not as you want it to be. And I think that's what both of us are trying to do, as investors, as writers in life. The game changes, and you're constantly having to say, well, this is the hand I've been dealt.

Starting point is 02:09:02 How am I going to play it wisely? Now I find myself in this beautiful position where thanks to Stig Broterson and Preston Piss, you founded the Investors Podcast Network, I get to enjoy these conversations and then to share what I've figured out from these conversations with great investors. So it's a total transformation,

Starting point is 02:09:25 but it's in some ways a continuation. It only makes sense when you look back at it. You must have had the same thing where you look back and you see how your period at D.H. Blair, where you got knocked off course, led to your discovery of Warren Buffett and this different way of doing business, and that led to you writing your book and setting up your fund. And it all seems almost logical and inevitable in retrospect. But while you're going through it, you're lost half the time, you're confused, you're failing. You know, it's like Churchill saying

Starting point is 02:10:00 that success is basically blundering from failure to failure without apparent loss. loss of confidence or something along those lines. So yeah, it's been a strange and interesting path. It's also to go to Psalm 23. You know, you kind of went through a career valley that I think it suddenly lasted five years, maybe even 10 years. And I think of Psalm 23, even I go through the valley of fear of the valley of death, something like that.

Starting point is 02:10:32 And she'll know no evil. That's the thing. And Winston Churchill says, if you find yourself in hell, you're probably the best thing to do is to just keep going. And I want to share something that I think is really interesting.

Starting point is 02:10:42 So when those brands collapsed and were no longer your kind of external scaffolding, so you should know that William prepares for six hours or more for every one of these interviews. Oh, no, days, days, days, yeah. And the quality of these interviews

Starting point is 02:11:01 is the result of that enormous amount of preparation. And William, through your training as a writer, you understand things that I will never understand like a narrative arc. And these podcasts, I believe, have a narrative arc from beginning to end. When we were writing, rewriting most of my book, William was explaining to me how a chapter has a narrative arc and there's a payoff at the end, but there's a setup at the beginning. So William, I think that what I discover is that the skills, you had highly honed skills,

Starting point is 02:11:35 skills as an editor and a writer for these publications, a discipline that is hard for people like me who pretend to be able to write, to understand. But then when that scaffolding fell away, those brands were no longer part of your life. There was a whole bunch of things that you had to kind of fend for yourself on, things that you're naturally less good at. And I think that those are things that for many people are skills that they have to get good at to break through a certain level of awareness of what their work is. And I think that what I'm pleased about in your story is that those things worked out sufficiently well, that now you can go back to using the very skills that were honed 10 years

Starting point is 02:12:19 ago as an editor of time, for example. I cannot, I mean, William, I sent William the 25th principle. And... This is in Guy's annual report, which I edit. And maybe one day, we will actually... do us a kind of a deep dive on what guy's writing looks like before William gets to it and after it. I don't think that anybody understands the precision that goes into making those prose so beautifully clear. And what happens is that we just think we're smart because we

Starting point is 02:12:52 understand what we're reading. We don't realize that there's an enormous amount of work that has gone into ensuring that the reader understands easily the ideas that are being conveyed. And Yes, Guy has some good ideas, but boy, is he bad at conveying them? You have no clue, actually, and I think it would be an interesting thing to do in the same way that this interview is probably easier to listen to because of the preparatory, precise and careful preparatory work that you've done. Thank you, Guy. I'm going to finish with one final conclusion based on what you just said, which is that I think sometimes people read your book or read my book or listen to us. speaking and think, oh, these guys have it figured out and they're smart or they've been successful or something. And I actually think what's really the truth that I draw from our careers

Starting point is 02:13:45 over the last 25 years is that we've been indomitably persistent despite all of the failures and setbacks and disappointments where, you know, you have a period like me getting laid off from time or the job I had afterwards which I detested or you're going through horsehead or the disappointment over resas or the worry over over the war in Ukraine. And the consistent thing, it goes back to something that Tom Gaynor said to me when I interviewed him during COVID, and he said, one foot in front of another. And I said to him, can you elaborate on that? And he's like, no, one foot in front of the other. That's what I've done all through my life. And it's what I'm doing now. And I think it's worth emphasizing this because there are lots of secret sources,

Starting point is 02:14:28 But really, the ultimate secret source is that tremendous perseverance, even when you feel a little lost. And when Guy and I were talking earlier this week about friends of his who've just taken a 75% hit and 80% hit in funds that they run or stocks that they manage, you were saying, what I tell them is be kind to yourself. You know, we're human. We make these mistakes and you pick yourself up and you move forward. Yeah. And before you allow us to close, I hope that you're okay with this ad lib question. William, I'm excited about the guests that you've had on the podcast, on your podcast. I have come to appreciate that you are very carefully selective about who you put on the podcast.

Starting point is 02:15:11 So you should know that every now and then I come up with people for William, that I think it would be cool for him to have on the podcast. And William has a way of dismissing my thoughts, which are kind of quite derisive and it's like, there's no chance. I know what it would have been like to be in an editorial committee with him. But can you just maybe talk about some of the guests that you've either got coming on or that you plan to have or you'd be interested to have and how you select them and why you're excited about them? I have an episode coming up with Ray Dalio that is really fascinating to me because it's given me an opportunity to go deep into, I've interviewed him before as a guest host on We Study Billioners, but engaging in his thoughts and his mind and figuring out, that's what I have to learn from Ray. that's been a really interesting process

Starting point is 02:15:57 and thinking about strengths that he has in terms of being honest about where he is in his life, about what his skills are, about where he has deficiencies, how he has to get other people around him to help and to compensate for things that he's not as strong as the honesty

Starting point is 02:16:14 and the self-awareness. So that's one where I think there's a great deal to learn. But what I find wonderful is in each of these interviews, There's this process of going into someone's mind, figuring out how they think about the world, and trying to explain the connection between how they invest and how they think and how they live. And so it's just, it's an endlessly rich area to delve into.

Starting point is 02:16:43 And I'm grateful that you've been with me on this journey for all these years trying to figure this stuff out. I'm grateful that we got to talk today at great length. And I'm going to let you go now because I know that you have people. waiting for you. But it's just been a real treat. And this conversation will be ongoing. And I'm looking forward to having it on the podcast in a few months' time or next year or whenever you can better, better do this again. It's so much fun, William. This is like life well lived, actually. Thank you. Take care. All right, folks, thanks so much for listening to today's conversation with my old friend Guy Speer. If you'd like to learn more from Guy,

Starting point is 02:17:20 you may want to check out his book, The Education of a Value Investor. He also has a podcast and a free newsletter, which goes out to about 20,000 subscribers. If you're like me and you can't get enough of this stuff, you may also want to go back and listen to the two-part conversation that I had with Guy on my podcast last year. The first episode is titled How to Build Enduring Wealth. The second is titled High Performance Habits. In any case, I'll include all of the links to these resources. in the show notes for today's episode, so it's easy for you to find everything. I'll be back very soon

Starting point is 02:17:56 with some fantastic guests, including Tom Gaynor, a superb long-term investor, who was a central character in my book, Richer Wiser, happier. In the meantime, please feel free to follow me on Twitter at William Green 72, and do let me know how you're enjoying the podcast. I'm always delighted to hear from you. Until then, take care and stay well. Make sure to subscribe to We Study Billionaires by the Investors Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com.

Starting point is 02:18:39 This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication. or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - RWH023: Defensive Investing In Dangerous Times W/ Guy Spier

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