Episode #501: John Davi, Astoria Advisors – Macro+Quant, Inflation & Global Diversification – Meb Faber Research – Stock Market and Investing Blog


Episode #501: John Davi, Astoria Advisors – Macro+Quant, Inflation & Global Diversification

Guest: John Davi is the CEO and CIO of Astoria Portfolio Advisors, which provides ETF managed portfolios and sub-advisory services.

Date Recorded: 9/14/2023  |  Run-Time: 55:34


Summary: In today’s episode, John walks through his macro plus quant approach to the markets. We touch on his entrance into the ETF space with two tickers I love: PPI & ROE. We also talk about global diversification, opportunities in Europe and Japan, and why he focuses on after-tax after-inflation returns.


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Links from the Episode:

  • 1:11 – Welcome John to the show
  • 3:21 – The origin story of Astoria Portfolio Advisors
  • 8:24 – Advisors at Future Proof are largely underweight on foreign investments, showing U.S. bias
  • 10:19 – Astoria’s approach to using alternatives
  • 17:01 – What led Astoria to launch ETFs?
  • 20:26 – PPI ETF uses quant screens to target inflation-sensitive sectors
  • 28:24 – ROE ETF combines quality, value, size factors; favors equally weighted S&P index
  • 33:57 – Why John is bullish on India
  • 35:06 – What belief John has that the majority of his peers disagree with
  • 37:05 – Challenging the notion of U.S.’s valuation premium
  • 39:38 – Importance of diversifying factors
  • 42:45 – Diversification and active management can outperform single-factor, low-cost options
  • 48:48 – Expensive stocks can underperform long-term, even if companies are strong; Research Affiliates post
  • 50:37 – John’s most memorable investment
  • Learn more about John: Astoria Portfolio Advisors

 

Transcript:

Welcome Message:

Welcome to The Med Faber Show where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer:

Med Faber is the co-founder and chief investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb:

What’s up everybody? We got a fun episode today. Our guest is John Davi, CEO and CIO of Astoria Portfolio Advisors, which provides ETF managed portfolios and sub advisory services. Today’s episode, John walks through his macro plus quant approach to the markets. We touch on his entrance into the ETF space with two tickers I love, PPI and ROE. We also talk about global diversification, opportunities in Europe and Japan and why he focuses on after tax, after inflation returns. Please enjoy this episode with John Davi.

Meb:

John, welcome to the show.

John:

Hey, Matt, good to be here. Thanks for having me.

Meb:

I’m excited to have you. I’ve kind of known you as the ETF guy even before ETF guys were around, but you spent a lot of time on what many would consider to be sort in the plumbing of traditional Wall Street. Tell us a little bit about that time back then when people called ETFs EFTs, they weren’t quite sure what they were. Give us a little background on those are early 2000’s, mid 2000’s period in your world.

John:

Yeah, so it was a really interesting time to be starting to work. I mean, you had the big internet bubble ETFs were just starting to be launched. Back then the ticker for the NAV of an ETF wasn’t a Spy IB, let’s say it was some random ticker. So did a lot of work with institutional investors on how do you get exposure to emerging markets. Again, EEM wasn’t around that back then, so you’d have to put together an optimized swap basket of ADRs and local futures to try and get exposure to emerging markets to equitize cash. No one knew back then that ETFs would be as successful as they are today. I think originally it was launched for institutional clients, but then was quickly adopted on the wealth management side by financial advisors. So even at Merrill Lynch, we were the quant guys that would be a responsible put together like ETS that would track our strategist views.

So we had some pretty well-known strategists. Richard Bernstein was the head of strategy, Dave Rosenberg, we were the quant group that would take their views and put together ETFs for financial advisors. Those ETF model portfolios are huge and massive now 20 years later, obviously. But yeah, it was a great place to work and a lot of famous research analysts. As I mentioned, Rich Bernstein, Dave Rosenberg, Steve Kim, even Henry Blodget was very big at the time. Steve Milanovich the tech analyst. So it was a great place to work and start and definitely was one of the earlier guys in the ETF ecosystem for sure.

Meb:

So you spent your time, you did your time working for some of these big giant firms, and then you said, “Okay, I have the goal, the naive optimism to be an entrepreneur and start my own shop.” Give us a little bit of the inspiration and tell us a little bit about your company today.

John:

So the goal was always to manage money and to join the buy side. I think as I got older in my mid-thirties, it was like I knew that if I had joined the hedge fund that your risk capital was going to be watched very closely if you have a down quarter. That’s something that Steve Kim had taught me quite a bit on is just make sure when you join the buy side, all your ducks in a row, you can take that career risk because it’s not easy. So I thought that I had developed, I thought an edge in ETF. I knew the tickers, I knew how they worked. I knew from working with providers how they constructed these portfolios. I spent a lot of time doing the index research, learning portfolio, construction, macro quant. So I just thought, “All right, here’s a chance for me to start my own company, join the buy side, be an entrepreneur, kind of do it all at once.” So a story of portfolio advisors launched in 2017. I put together the business plan back in 2014.

Meb:

How similar does it look? I always love looking back on business plans because so many successful companies and ideas… I joke looking back on kind of what we began as is nothing resembling today. Was yours pretty close or is it strayed quite a bit?

John:

The costs have come down. There’s been firms issue model portfolios for free, “for free,” not really true. They have their own underlying ETF management fees that they’re accruing interest on and fees. But yeah, I mean there’s a lot more competition now than it was back then, but we’ve developed a niche. We serve as an outsource CIO to independent financial advisors, RAs, firms sub half a billion, let’s say that really need a macro quant kind of strategist to develop their solutions. And not only that, but also to do the physical trading on their behalf.

Meb:

We’re going to get to some of you coming full circle, starting out really as ETF strategist, starting your own company and now launching two funds. But I want to hear a little bit about y’all’s framework because man, John, you put out a lot of content and coming from a content creator, I know how hard that is. Tell us a little bit about Astoria’s framework. So how do you approach the world? What are your main sort of levers when you’re building these model portfolios? Are you just doing a fancy 60/40 or is it a lot more involved in that?

John:

I think there’s kind of three buckets for how we determine our strategic asset allocation. So one is kind of the business cycle i.e., identify where we’re on the business cycle. Two, looking at earnings and valuations together. Valuations are a tool, not the only tool, but really kind of looking at those together. Is the stock cheap or is the country cheap, but are the earnings growing? So that’s a second input. And then third would be kind of sentiment. So those three things like where we in the business cycle, looking at earnings valuation and then third sentiment. That really dictates our strategic asset allocation. We have a dynamic overlay, so we’re going to use those three inputs, but then also use liquid alternatives as a way to kind of dampen our volatility. Essentially, Meb, what we’re looking to do is buy cheap assets where the earnings are growing, they’re cheaper than the market. There’s poor sentiment and there’s a clear catalyst for upside. We could talk about afterwards, but we kind of identify Europe and Japan as that strategic overlay let’s say.

Meb:

No, let’s hear about it now. I thought you were just going to say you have all your money [inaudible 00:07:56], but let’s hear about it. Where are some of the signals pointing and why? Let’s hear the thesis.

John:

So Europe is a country in a region where you’ve got strong earnings momentum, you’ve got positive estimate revisions, they’re cheap and you’ve got a catalyst for upside. The catalyst for upside is the fact that the three inputs I just mentioned, it’s very underweight in people’s portfolio. They’re much further behind the inflation cycle, the interest rate cycle. So that’s in overweight. Contrast that to us where all people want to do. And on your show, you’ve talked a lot about home country bias. All financial buyers want to do is own US, but if you look at the US story, you’re in an earnings recession. So earnings aren’t great. They’re very, very expensive. If you look at case Shiller P ratio, it’s 30, let’s say only people want to do is own the magnificent seven thinking that those are the only good stocks to own. So that’s an area where we, let’s say be underweight. So that’s kind of how we’re thinking about the US versus the rest of the world.

Meb:

Yeah, I mean looking at the sentiment, it is just down at this financial conference future-proof, and it feels like every advisor I talked to is either hugely underweight foreign and they just said, “Look, we haven’t owned any, we don’t want any for past decade.” And then the ones that do own it look pretty beat up and despondent and they’re almost looking for some comfort, but even then they’re almost looking for an excuse to get rid of it. They’re almost like the, “I can’t take it anymore.” Part of the sentiment, which it was pretty astonishing to me to feel how poor the sentiment is, but sentiment’s always a little squishy for me. It’s always hard to gauge exactly what it really feels like other than it was crazy extremes.

John:

There is a point in time in my career where emerging markets was the only kind of hot area where you wanted to invest in Dubai, Abu Dhabi, China, India, it was like-

Meb:

It feels like around ’06 in the timeline. To me that was a really ’05, ’06 was the bricks, was the SPAC. It’s not SPACs anymore. Now the AI of the day, if you were to do every year what the most popular topic was emerging markets, it’s hard to tell people to convey that today they’re just forgotten, but they were the AI of the day 15 years ago.

John:

Yeah, AI is interesting. If you look at the big banks on Wall Street, none of them were actually talking about AI in their year ahead outlooks. So it’s only September, so that was only nine months… Well, actually those sell side, and I worked on the sell side, I know they start putting those reports together in October of before year-end. But I would just say that investors have to look outside the US because I’ve seen periods in my career where it’s about other countries, Europe, Japan. So it’s not just a US home country bias in our portfolios for sure.

Meb:

All right, so you’re going against the grain a little bit owning some of those. What else? You mentioned the sort of alt or inflation basket. How do you approach that? Because that means a lot of different things, a lot of different people.

John:

So principally when we put together our pillars for investing, it’s like, okay, we believe in after tax, after inflation risk adjusted returns. So because we’re a physical sub-advisor and we manage money on behalf of other financial advisors, we’re always thinking about after tax. So tax loss harvesting is a big deal for our standpoint. What I tell people about inflation, obviously I’m very biased. We run an inflation strategy whether inflation’s two, whether it’s four, whether it’s nine, we tell people. Bogle, Vanguard world, invest for the long run, right? Siegel stocks for the long run. So 2% a year over 20, 30 years, I mean that can seriously compound. And then risk adjusted, that is a big thing. Having worked at a bank in ’08, Merrill Lynch was acquired in the very last minute. You learn about left tail risks on the sell side. I feel like the sell side, you focus on the left tail, the buy side, you focus on the right tail.

So just having that background working at a bank and then at a bank that was acquiring the last ninth in. So we do use alternatives and to your point, MAB alternatives that have very low correlations or ideally strongly negatively correlated. So there’s some strategies in ETFs where you get very negatively correlated longshore market neutral ETFs. Sometimes advisors come to me and say, ‘Oh, I own alternatives,” and it’s some mortgage read or something that’s positively correlated, high yield bonds. So those are the kind of three pillars for investing, and it’s about, I would say 10, 15% of a portfolio. So that’s kind of a little bit about investing.

Meb:

I was laughing as you’re talking about this because if future-proof Bill Gross was on stage and they’re talking about what’s your trades, what’s your portfolio? And he said, “40% of my portfolio today is in MLPs.” And I heard that and my jaw just kind of dropped because MLPs were also, there was a big cycle. Everyone was marketing MLPs was that like five years ago, and they’ve long since been forgotten because they struggled. But to hear someone like Bill who’s a billionaire, come and say darn near half his portfolios, MLPs was pretty funny. You mentioned after tax. I mean that’s a topic that certainly people I feel like talk about, but it doesn’t get enough appreciation really after tax, after expenses, risk adjusted. Really I feel like we live in a nominal world that everyone is really just looking at the nominal returns and underappreciated. I mean, I guess the serious crowd, I think it gets there, but I feel like that’s pretty underappreciated to hear on all those measures.

John:

I think the beauty of ETFs is that when you deal in those large Morningstar buckets, you’ve got so many different ETFs that can develop Europe, your emerging markets. If you’re in large cap, small cap in the US. So the beauty of ETFs is you just punting the basis down the road. So you swap out of one emerging market ETF into another that’s 90% correlated. So it’s great from that standpoint. It’s very rare to do. I think some of my peers, Meb, they’re just on different platforms and they put their asset allocation models on platforms, but those platforms, they’re not going to tax us harvest. How could they possibly know what the replacement ticker is? So when you use a sub-advisor like us and we’re bolted underneath you at the custodian like a Schwab for ATD, we’re going to do that systematically. So we’ve got full trading team, we’ve got back office, operations. I think that’s hugely important to do that for sure.

Meb:

Yeah, this is a little bit of a nerd alert, but one of the advantages of using ETFs too, usually across the board is the short lending revenue, which isn’t crazy on the numbers. In some cases it is crazy high, but usually it is a material amount, maybe five basis points, 10, 20. But when people spend so much time focused only on things like expense ratio, but this is an extra benefit that almost no one talks about or understands. So you guys got a lot going on this framework. Why don’t we spend just a little more time here and then we’re going to hop over to two particular ideas that are super interesting as you look around the world and as the strategic, here we are in almost Q4 of 2023, almost hard to say. So we’re mid-September right now recording this, what does the world look like as far as these allocations? You mentioned a little Europe and Japan. Japan has certainly seen a renewed interest. Anytime Uncle Warren Buffett is taking his jet somewhere at this age, it’s going to hit the media cycle. But what else are you guys thinking about?

John:

I think going into this year, basically everyone predicted that we were going to have an economic recession. There was going to be a DEF five moment for US equities. We were going to have a profits recession. So we told our investors, “Look, consensus trades rarely pan out, maybe one of those three things would happen, but not all three.” So we’re still in an earnings recession here in the US. We don’t have an economic recession and certainly we didn’t have a DEF com five 20% pullback in the S&P. I would say right now, if anything, this year’s market reaction didn’t necessarily make us overly bullish on the US when you’ve got investors crowded into just seven stocks. So we had no choice but to look overseas. When I look at the US, because it does make up 50% of the world. I would say that yeah, GDP is a lot stronger than what most people anticipated.

I think that the tight labor market and the consumer is kind of keeping things together. What we tell people is like, “Look, watch consumer’s health.” It’s now two years where they’re paying elevated prices for rent and for food grocery shop. The minute people lose their job, I think you start to get things a little bit more trickier. But what I think everyone missed and truly we missed, and I’m not afraid to say it, is there was about a trillion dollars of stimulus put into the economy, all these extension of student loan memorandum, Medicare, and you just can’t put a trillion dollars into the economy without having a positive reaction. And this is why we don’t just invest in macro because yes, there’s some macro stuff that’s pretty bad, PMIs, you’ve got the fiscal stimulus that supportive asset prices, but you really got to kind of marry the macro with the earnings. And there’s a good earnings story in Europe, Japan that you just don’t have in the US. So I think that’s crucial.

Meb:

All right, listeners, you heard it here first. All right, so we mentioned earlier coming full circle, you’ve been at this game for a long time. You said, “You know what? We got to do our own ETFs.” Tell us a little bit about the inspiration. Tell us a little bit about the experience. Was it nerve wracking? Was it piece of cake? Was it exciting? You now have two and then we’ll talk a little bit about the strategies behind both.

John:

Sure. And we’re the sub-advisor for both ETFs. So access investments, we partnered with them to launch the inflation strategy and then technically our other ETF is with Wes Gray’s firm and he’s technically the advisor, we’re the sub-advisor. So we just thought we’d keep that clean. It’s clear in the asset management industry you’ve got to have a strategy for ETFs. And when I worked on the sell side at Morgan Stanley, these big asset managers were even back in 2010, 2011, like, “Okay, are we going to get into this space? Are we not getting…” And you saw some of these guys came in just in the last few years, Capital Group launching only in the last year or two and having a lot of success for us it’s like, “Okay, could we bring assets to the table? We’re not going to launch ETF where we can’t put our clients assets behind it.”

So for us, the first ETF, the inflation strategy was very clear. We had to in March June 2020, it was very clear to us inflation was going to be a problem in my economics one-on-one class they taught me, “Okay, if you restrict supply, you increase demand, prices go up.” So you didn’t have to be like a quant or PhD to understand that we would have an inflation problem. I couldn’t believe what I was seeing. This is different from ’08 when the banks were bailed out, but all the money was given to the banks. It didn’t actually go in the real economy. Here, it was literally helicopter money in the streets and housing. So we told our investors, okay, let’s put 10% of your 60/40 or your 50/50 and let’s put together 10 different inflation linked ETFs that would help hedge your inflation risk if inflation would be your problem.

So we started doing that in September of 2020. And then we had known the guys that access investments and I had known them from prior life. So we said, “Look, we can scale this thing and it’s much more tax efficient when we’re making changes within the ETF as opposed to we’re balancing an SMA.” So we launched an inflation strategy in December of 2021, a very good experience, and we still think there’s a place where… Our mantra Meb, is that higher rates higher for longer. It’s now consensus. But we had this view two years ago that we’d be living in a higher interest rate world.

And then our second ETF, which is just more of a plain Jane kind of quality invest in ETF hundred stocks, equally weighted. That was more because of the concentration risk we’re seeing in the US marketplace. I’ve seen periods in my career where a few stocks dominate the indices in the late nineties, early 2000’s, and we were just uncomfortable with some of the own ETFs we were using just to super mega concentration risk and tech stocks and semiconductors. So that was the impetus we’d really have to get our backs behind it. That’s our unique position as a sub-advisor and we’re just going to put our client’s assets behind it and if we can do that, then we would launch more ETFs.

Meb:

All right. Well, let’s hear about it. The PPIs, the ticker, great ticker. You guys know I love my tickers. Tell us a little bit about what goes into the strategy. You guys just going YOLO long into cold calls or what’s the strategy entail?

John:

All right, so we run a quant screen and say, “Okay, what are the sectors that have the most sensitivity to higher and inflation going back decades and decades?” So those sectors tend to be historically energy materials and industrial stocks, financials as well. But you’ve got a stronger cohort with the energy and material stocks. So basically the strategy and it’s a global problem, inflation. So globally we’re going to own 40, 50 stocks, 10 in those four sectors, five US, five non-US generally speaking kind of equally weight. So it’s a multi-asset ETF because different asset classes will perform differently depending on where you are in the inflation cycle. So sometimes it’s just actual commodity equity, sometimes it’s just those energy stocks, material stocks, sometimes it’s physical commodities. There’s been periods of time even since we launched our strategy where there’s a positive carry for owning commodities.

Now there’s a cost, so it’s an active asset allocation, kind of like let’s say 70-80’s are pure equities, 10, 15% physical commodities, 10, 15% tips. The commodities and the tips tend to be other ETFs because just a lot easier as opposed to us rolling futures and buying individual CUSIPs. In the case of tips, inflation being such a highly nuanced strategy, we just thought that you need to be active and to have a great partner like Access that has deep experience in liquid alts and being an advisor and helping with the sales and market.

Meb:

We often say on the buy and hold side, the two areas that are lacking in most investor portfolios we see are one, obviously a global focus and two, is the real asset bucket. And almost every investor we see has really nothing in real assets. They typically may own a home personally, but as far as their actual portfolio, usually they have almost zero. And those two to me are kind of glaringly obvious. This cycle I think is starting to wake people up to that. But certainly the older cohort that remembers… My father-in-law if we’re moaning about our high mortgage, he was like, “Are you kidding me?” He’s like, “Mortgages back in the day could easily be double digits.” So I feel like the memory of inflation and certainly if you go around the rest of the world, inflation is something that is much more front of mind than it is in the US. And we’ll see, we’re kind of hanging out around that not too comfortable 4% range, which I think if that sticks around for a longer period of time, certainly will be a regime shift from the old days of zero to two.

John:

Yeah, well I think the last 15, 20 years has been about globalization, which is deflationary as you think about these complex issues like US-China relations and what’s going on with Taiwan onshore and reshoring. If you were a CEO of a large Fortune 500 company and your supply chains were stopped because of this China-COVID issue a couple years ago, you really got to have a strategy, “Okay, are you going to build your supply chain back in the US? And oh by the way, how long is that going to take? And oh, by the way, we have labor laws here in this country.” These are very complicated issues. We told investors that, look, I think all this stuff is going to be very inflationary. It’s going to be higher ticket for longer. If you just look at CPI in the seventies, CPI was above 5% for 10-15 years.

It was between five to 15, it fluctuated. And there’s some charts right now that people overlay the 70 CPI with now and they argued that inflation is going to be a little bit hotter. And we had two inflation prints this week as we filmed this podcast and they’ve both been hotter than expected, but yes, definitely it’s come down quite a bit from nine back to four let’s say or three. But the key is to get it back down to two, what does the fed do? Do they really catch and sink the economy and put everything into recession or they let it run at 3%? And my gut says… And you’re right in overseas they deal with inflation all the time. Think about Turkey, Russia, Brazil, they constantly have inflation problems, whereas we as a US country just not used to it, but I think the tide may shift in years to come.

Meb:

You get an added benefit right now, listeners of the sectors that John mentioned being pretty strong value contenders to materials, industrials, energy, financials, on and on, particularly in the United States. We’ve talked a lot about this and I’m still pretty firm in the camp of this being one of the best times ever to having a value tilt. You get kind of a double whammy here. You get value tilt and you also get this potential inflation exposure tilt. So we’ll see how it plays out, but I certainly like it. You got any crypto in here? The modern precious metals. I don’t really know what to think about that world. Is that a potential entrant current portfolio holding?

John:

It hasn’t been only because we try and stick to the research and we’re trying to be very quantitative and systematic and it’s a new phenomenon, cryptos. Conceptually it makes sense. Bitcoin is whatever 19 million has been mined, they only have 21 million coins in total. There’s going to be a reach. We would not be surprised if we see Bitcoin do better in years to come, but not because of its inflation just because it operates to its own beat. But I like what you said before about value stocks, because it is. The P ratio of our strategy is 10. You think about the US it’s like 20 times forward earnings. So if advisors bucket our strategy in the alternatives bucket, and it’s a compliment because if you’re going to run a 60/40 and have a lot of concentration in large cap index beta strategies, our fund, it’s underweight.

There’s a chart that’s floating around Twitter, it’s got Michael Kantrowitz… Actually we worked in Merrill Lynch quant research back in the late ’90’s and he shows you the sector weights of basically cyclicals, which is the four sectors we just talked about versus growth plus defensive. So that would be tech stocks, utility staples, and it’s at 100 year wides in terms of how much the S&P is dominated by growth plus defensive sectors versus cyclical. So we just tell people… And I’ll give credit to Nassim Taleb, he was on TV one time, he was like, “Look, you don’t time your car insurance or your home insurance.” And his argument was like, “Don’t time your disaster insurance.” I’d say.

We just take that to the next level and say, “Look, you should always have inflation insurance because A, they’re cheap right now.” I’ve seen periods in my career where these energy stocks are literally the biggest in the world. ExxonMobil was the biggest stock in the world for many, many years when I was starting my career and it doesn’t cost you a lot. It’s like a 10 P ratio. And there was some inverse correlation that we saw in our strategy last year where our strategy was up, but the S&P was down significantly. So it kind of works well and it carries well in the portfolio.

Meb:

All right, let’s hop over to ROE, another killer ticker man, two for two. What’s the thesis behind this strategy? What are you guys doing here?

John:

We’re multi asset investors and on the equity side we do believe in combining factors in your portfolio because the research shows that when you combine factors, you’ve historically been able to get higher up on the fish and frontier. So kind of owning a basket of quality, value, size, we do subscribe to that notion and there’s a lot of research and you’ve had Swedroe on your podcast and talking about this and other Rob Arnott. I would say that right now most people would be surprised if we said that the equally weighted S&P index has actually outperformed the S&P 500 index since 1999, which is when data goes back. And I’m not even sure why S&P doesn’t go back until the start of their index. They should and they’ve got the constituents.

Meb:

Well you can ask your buddy Wes to do it, those quants can certainly tease that out.

John:

The S&P equally weighted index, the index has actually outperformed the S&P 500 index since 1999. You’ve had some mega cap rallies.

Meb:

I think you can definitely go back on that. Looking at equal weight. Rob Arnott, who you mentioned has done a lot here in his book Fundamental index and the first step of anything where you just break that market cap link and the problem with market cap, it’s totally fine most of the time, but particularly when you get these boom environments. ’99, I’d argue today or even more so a couple years ago, but obviously Japan in the eighties is like the granddaddy, but it happens in sectors and countries as well. When you have these boom times, the market cap because there’s no tether to fundamentals goes nuts. So equal weighting severs that a little bit, but factor weighting, which is what you’re digging into, severs that even more because it gives you a tilt towards a certain characteristics, which historically have been very favorable. Okay, keep going.

John:

Yeah, so just the point here is the historical CAGR and all the past performance on dig a future results, but the historical CAGR of the equally weighted index is almost 9%, whereas the actual S&P historical CAGR since 1999 is about 5%. So you get almost like 400 basis points pick up based on history and that’s pretty substantial. So we just thought, okay, our current ETFs that we use, smart beta ETFs, index beta, depending on the demand that we have a range of strategies. Range of solutions. There’s just way too much concentration risk in just these seven stocks. So we thought, okay, we always want to be tilting towards quality, we like that, that’s our true north, but let’s just equally wait and we’re still using some other smart beta ETFs in our strategies and SMAs. So what we tell people is use it as a compliment, don’t replace your S&P 500 index ETF, use this as a compliment to augment and help diversify.

Meb:

You’re never going to get to 5 billion without telling them to replace all of the S&P, but I appreciate your candor. Talk to us a little bit about both these funds have been successful. Talk to us a little bit how you did it. How have these both been a success and what’s the plan on growing them going forward?

John:

Well, I would say content is important. So we produce quite a bit of content, we’re out loud and we do a lot of media, we write a lot of blogs, do videos and whatnot.

Meb:

Where does most of that sit, by the way, for the listeners who are new to you, where can they find most of that?

John:

It’s astoriaadvisors.com, that’s where most of our content is. I think for us as a sub-advisor, we’re always like, “Okay, what are we lacking in our portfolios? Where could there be a better solution? And then let’s look if we can improve the solution by launching a strategy.” So that’s really… We use ourselves as the litmus test. So you won’t see us go ahead and launch in some crypto ETF just because we’re just not set up that way. If we can use in our own models, we think that that is the first step in the decision tree. The second and future steps would be is there viability? We would hate to launch something and have to close it because then we miss forecasted, let’s say try and think about very long-term themes, things like inflation. We think that you should have an inflation strategy in perpetuity, whether it’s this year or next year, CPI goes back down to two, you should have it.

I think equally weighted and is very interested and certainly we’re not the first firm that equally weights. There’s been many other peers that launched WisdomTree. They made a lot of success by tilting away from mark cap, obviously Rob Arnott with what he does with his partners. So I think we try and look at a few different buckets and that’s essential. And content is huge for us. We have to be educating and advisors how to use it. So think about this, we get inbounds because we have existing advisors that we manage. So they’re constantly coming to us. “How does this fit in? How do I size it? How should I asset allocate?” So we don’t have any plans for additional strategies as of yet, but that’s been a good experience so far.

Meb:

So no more imminent ideas on the horizon it sounds like. I don’t know if I believe you. Well, let’s go back to markets a little bit. We’ve covered a little bit. You were on a podcast recently where you said you’re going to ask the next person on the podcast, if you had to pick one country to invest in the next 10 years, what would it be? So I’m turning it back around to you. What’s your one country if you got to close your eyes, hold your nose for the next decade?

John:

That’s a tough question, man.

Meb:

You asked it, not me. So you’re the author.

John:

It would probably be for me, and we’re thinking about sector size, style. We’re thinking about all these different asset allocation, but I pick one of the large emerging markets, something like India. I do think that there’s a ways to monetize a billion people in a country. I think China is very, very controversial. I have some peers of mines that are all about China. It’s good contrarian trade, everyone hates it, they’re cutting rates. But I think India is a way to kind of play that same concept but just it’s a little cleaner. I see a lot of value in that region of the world.

Meb:

We just did a podcast talking about India and tech, which went pretty deep on the topic. I still haven’t been, I need to get over there, but certainly fascinating country and opportunity. When you look at just the scale, it’s hard to fathom I think for most people in terms of just how many folks you have in that part of the world and certainly the potential is staggering. Another fun question we’d like to do for people, and I’m guessing as a New Yorker you’re going to have plenty of opinions, but what belief do you have that the vast majority of your peers, so call it two thirds, three quarters disagree with?

John:

It would definitely be the home country bias for sure. I spent a lot of my time traveling internationally when I worked on the sell side, I would go to meet with the Central Bank of Denmark and Japanese pension funds, Taiwanese life insurers. There’s such a home country bias here in the US and the rest of the world just doesn’t think that they’re much more global.

So I would say that along with the fact that everyone doesn’t want to own alternatives and they do serve a valuable place in your portfolios if you can pick the right strategy and if they’re cheap and if they’re implementable, there’s alternatives that are complicated, all sorts of tax issues and whatnot. But if you can find it in ETF wrapper and if it’s inversely correlated, it can really help. Because what I find for managing money is that in bull markets, clients are annoyed. They’re like, “Oh, the NASDAQ’s up 30, why is your 80/20 portfolio only up 10%?” Let’s say, but they really value when that NASDAQ index, which was only last year was down 30, 35 when you’re 60/40, 80/20 is down fraction of that. So having alternatives certainly helps in those bad years. And there’s a stat people feel the loss two times greater than they feel the gain when it comes to investing.

Meb:

What do you say to people and give us a little bit of feedback on the vibe on… You mentioned this home country bias, but so many other people I talked to, it’s like you brought up something that’s just so unpalatable. I was having a conversation with an advisor this week and they were talking about how the US deserves this current valuation premium to the rest of the world. And I said, “Yeah, maybe they do. It’s certainly at a huge premium right now.” And I said, “Well, just historically curious,” I said to this person, I said, “What do you think the historical valuation premium of the US over the rest of the world has been?” Because it’s a lot now. And they were trying to guess 20, 30% or something.

And I said, “Well, the answer is zero. The actual valuation premium is zero.” It just happens to be since 2009 you’ve had this era or regime where the US valuations have gone straight up and the rest of the world is kind of sideways and muddled along. It’s just most people think that a decade or 13 years is an infinite amount of time an investor’s lifetime, but in a timeline of markets it’s not that much. I was going to say, so give us a little like what do you say to people and how do you deal with these advisors and investors who are saying, “John, you’re kind of a moron. I’m all in US and I’m stomping everything. So what do you know?”

John:

Well, I would say that there’s periods of time where Japan, Europe, emerging markets can do significantly better than the US. The US should deserve a premium. We’ve got much better companies in general, I would say better technology, better healthcare companies. You just don’t have that in Europe, Japan, let’s say on a relative basis, US should deserve a premium. We have better companies, maybe better regulatory, better tax structure, but it shouldn’t deserve the premium that it has now. To play devil’s advocate, what I would say is that some of these other non-US markets, they do trend and they can exhibit some fair amount of momentum, which then you get into a timing issue. So we would just tell people, “Look, you should just own all of it, maybe tilt one way or another depending on your views. But definitely don’t try and time it or try and be tactical with it.” I think US should deserve a little bit of a premium, but I think if you’re looking to be fully invested, you should own both.

Meb:

So we’ve kind of danced around the world, talked about a lot of things. As we look out to 2024, anything we haven’t talked about that you think is particularly interesting that’s on your brain? Anything you’re excited about, you’re working on? I know you write so much that you look forward to the notes that you’re getting ready to put into production. What else are you thinking about that we haven’t really dug into today?

John:

I would just make a point about, we talked a little bit about Swedroe and he’s got this one book that we tend to give to advisors and we say, “Look, whatever we say about macro…” And we have a 50 slide deck cover of our website, story at advisors.com where we literally show people what our tilts are. A lot of the indicators that we look at, we’re very transparent. We will tilt towards a factor depending on where we’re on the cycle. But Swedroe’s book I think is for people that are really curious why you want to own something besides beta? Because the masses, the big Vanguard, State Street, they giveaway beta for free. So should you just build a portfolio of just zero cost beta equity and fixed income ETFs? And there is a lot of value in owning other factors. And Swedroe’s book I think is really seminal to how we invest, which in his book and he’s got data that goes back 75 years where he says, “Okay, a 25% allocation to the beta factor, the size factor value momentum gets you a sharp ratio of about 0.7.”

And momentum has similar sharp ratio but lower, it’s like about 0.6 let’s say. But momentum is very, very volatile, could have a good year and then a terrible year. So if you equal weight beta size value momentum, you get a 0.7 sharp ratio. Then his book and there’s a table says, “Okay, if you take those four factors and you add profitability, you get a 0.9 sharp ratio then if you substitute quality for profitability, and I don’t want to get into the weeds about the difference between those two, you get a sharp ratio of 1.1. Basically in the last two data points I mentioned, you’re getting almost triple the sharp ratio if you just own any one factor. So I know beta is great, it’s zero, but you really, for the efficient frontier standpoint, it’s good to own a lot of factors because there’s years when value will do better.

There’s years where small caps do better. Again, here we are Meb, right? Nobody wants to own small caps, nobody wants to own value. It’s just about large cap… Not even about beta, it’s about mega cap beta in the US only. So he’s got all these great stats, the odds of underperforming a strategy over a 1, 3, 5 year period and all the odds greatly are in your favor over long periods of time when you harvest a portfolio of factors. And I would just encourage listeners to just look away from just mega cap beta because I think in the next 1, 3, 5, 10, you’re going to find there’s other strategies, other stocks that do better.

Meb:

Yeah, I think well said. It seems to be thoughtful advice. So many people, they want to find the perfect factor, but this concept of combining an ensemble as some people call it or a group of factors, multifactor certainly I think can be a really thoughtful way to go about it because so many people get caught up in a binary world where all their decisions are in or out, this one, that one. When in reality the blend can still be much better and the composite can be much better than the individual alternative, which is this market cap entry price, but not something that necessarily, I think it’s cheap, but doesn’t mean it’s going to be a great thing.

John:

Yeah, just because it’s cheap doesn’t mean it’s good. You got to have more of a reason to own something. And honestly, I think the RA world, the ETF world, maybe firms like yours and mine, it’s just exacerbated this problem because now anyone can build a portfolio, you can build a portfolio from your laptop on the beach and think you’re getting a good solution because you’re not paying any commissions, you’re not paying any management fees. So we look at this not like, “Hey, this is not a fair type thing.” We say, “Look, we think there’s a great opportunity for active management.” And frankly, I think active management has a little bit of a tailwind from this standpoint. But the problem that we have or we see with active managers is a lot of them don’t take enough risk. So if you read Barron’s, the portfolio management section every week there are top stocks for whatever reason they like it.

They’re basically owing a lot of the stocks that are in the S&P in a similar weight. So you really got to do something different and think outside the box. And then of course you need to time it, you need to size it and then do take some risks. So we don’t have problems like with the zero management fee world and zero cost world, all the big guys giving models away for free. We think that’s exacerbating the problem and it’s given us an opportunity and our clients like it, we’ve had some success over the years by doing these three tenants, the restaurant across factors, using alternatives, investing for the long run, keeping our own costs low.

Meb:

Yeah, well said. One of the biggest problems I think in our world is the seduction or laziness of many investors to not really read past the headline. And what I mean by that is so many people like Twitter, it’s like, “Are you sure you want to comment on this? Have you actually read the article now?” But the headline of something, what I’m alluding to is the name of a fund and so many funds people, what’s the percentage that never read the prospectus? I don’t know, 99%. So thinking in terms of a lot of these funds that say there’s something, but in reality give you a closet index is where I’m going with this.

If you’re going to do a closet index, you definitely shouldn’t be paying more than five basis points because the index you can get for free, which you just mentioned. But so many of these funds, if you look at their history, either because they have raised a ton of assets, some of these funds that are 50 billion, it’s hard to concentrate at 50 billion certainly if you say you’re a small cap fund or something. So challenging investors to look past just the name of something when they buy it, I think is pretty great advice because so many times we talk to people who end up buying something that is not what they thought they were getting.

John:

So our two strategies, one, our inflation strategy, we have I think 52 positions, and then our other quality strategy has a hundred and I think a hundred’s a lot, but it is meant to be part of the core, whereas inflation is more kind of the alternatives satellite. What I would say is that we do run these quantitative stock portfolios, and we’ve been doing it since the firm started in 2017. We’ve always just owned in those quantitative stock portfolios, 40 stocks.

Meb:

Yeah, I think the flip side is that so many investors, they say they want to be concentrated, they say they want active, they say they want to look different, they say they want to put on these exposures as long as it goes up, as long as they’re right. And the concentration, as we know, works both ways. But to me, and drilling down really kind of nerdy is there’s a handful of tools, and I think our buddy Wes has one, but other sites that let you look into how much of the fund is really active share and what you’re paying for it. Meaning it may sound great that something is only 10 basis points, but if it’s giving you the closet index, well that’s pretty expensive, 10 basis points. But if something is 75 basis points, but it’s given you something that’s a pretty unique and differentiated and concentrated exposure, then it could be totally reasonable.

There’s a lot of deep sort of analytics you could do there. But that’s again, going down the list of things investors will do, that’s probably 10th on the list. But an easy way to do it often is just to pull up a chart and see how close to the S&P or whatever the index may be.

John:

Part of the reason for us, the impetus to launch a quality is that the S&P is being so concentrated by those seven stocks. Fine, we all get it. We all know it, but just remember, all these smart beta ETFs are all optimized against the S&P. So they may be smart beta in their name or their title, but they’re still going to give you an outsized position and exposure to Microsoft Apple. So we were just… I think it’s a unique period. I don’t think it stays that way if there’s all these charts on Twitter circulating about the top stocks in the index and how it’s evolved over time. And yeah, NVIDIA’s a great company. Apple’s a great company, but a great company doesn’t always make a good stock investment. So it’s a very unique period we’re in right now for sure.

Meb:

Well, certainly that example can be well documented from the late 1990s to today. There’s so many charts where you look at a lot of these stocks and there’s a lot of misconceptions too. People always say, “Well, no, those are stocks. They didn’t have earnings.” And actually they did. It was a lot of great companies and not only that, continue to increase their earnings for the better part of five, 10 years, but the stocks were so expensive relative to the underlying business that we had a Tweet the other day.

It was a research affiliates article, and we’ll put it in the show notes listeners, and this is a quote said, “How many of the 10 most valuable tech stocks in the world at the peak of the .com bubble beat the market by the time the next bull market peak in 2007? None. How many were ahead at the end of 2022, fully 23 years after the .com bubble crested, and the answer is only one, which was Microsoft.” So it can go a really long period buying these super expensive companies over time and 23 years is I think a lot longer than… And many of these still exist and are fantastic businesses, they’re just expensive stocks.

John:

And remember, Microsoft wasn’t in the original FANG index, just kind of crept up in there in the last few years. And I remember being on the sell side on trading floor, and Microsoft was like a value stock and everyone was trying to buy it because why is this down so much? Hasn’t gone up. It was for 10 years, I think before Satya came, the CEO, he revitalized that company, but it was just left for dead for 10 years. So that’s the cycle from a quant standpoint. You go from a value stock to growth, then momentum and then could go back down. So single stocks a very, very difficult to time for sure.

Meb:

John, what is your most memorable investment over your career?

John:

Memorable, good or bad?

Meb:

It can be either. It can be just whatever’s burned into the frontal lobe or your brain could be painful, could be wonderful, could be meaningless in terms of profit,

John:

I’ll give you a few. So probably the worst was in 1998, ’97, I was in a mutual fund company and I was in a call center processing trades and basically-

Meb:

Sounds exciting.

John:

Yeah, mutual funds. Basically there was a tech 100 mutual fund, or maybe it was like 40 stock mutual fund. And my little brother graduated from the eighth grade and he wanted me to invest his money and I bought the tech mutual fund and then it went down 40% because the NASDAQ index fell 80%. So I made them whole, but that was a very difficult kind of experience. So that’s on the bad side. On the good side-

Meb:

Yeah, I mean losing money for your family. I think probably all of us in our twenties, I imagine my crypto buddies that are younger can relate to this, but I don’t know what the attraction is to try to wrangle our friends and family into terrible investments. I certainly went through that in the late 90’s bubble and probably even a few times since then. But there’s a certain lure, and the hard part is on the downside, as you mentioned, mixing money with family is always such a painful and volatile combination. And this is one of the reasons when we talk about, we keep saying we’re going to write a book on this topic, but so many ways that parents as well as schools teach children to invest is really problematic.

These stock picking contests or parents say, “Hey, I’m going to give you child a thousand bucks. Let’s go pick a stock and we’ll talk about it.” And as the stock goes up, it gives them a bonding thing, they’re excited, the child’s proud looking for parental recognition, and then it goes down or they lose money and there’s this real emotion of shame and embarrassment. They don’t want to talk about it. And there’s probably better ways to organize that sort of concept and make it educational where it’s not something that just kind of teaches the wrong lesson, AKA that Robinhood app.

John:

Maybe they should read the quantitative approach to asset allocation.

Meb:

Your brother learned from it. You made him whole, very generous older brother, by the way. All right, give me the other one.

John:

On the good side, and this is a specific company just bought WisdomTree stock in, I forgot what year, but it was around 2, $3, somewhere around there. And this was before HDJ, DXJ and then sort the stock up to twenties. Still a shareholder of it, but just this concept of the average stock doesn’t actually go up in perpetuity. Maybe a basket of US larger, higher quality stock over time like an ETF. But to see a stock go from four to 20, I thought I was the smartest guy in the room, but it really taught me that when you invest in single names, you got to time it, you got to size it, and you got to have two decisions.

Two smart decisions and correct, you got the entry and the exit, and I think the exit is the most difficult part of it. It’s kind of not easy, but it’s a little bit easier to identify a good stock. But then the exit point is really, really difficult. So thought I was the smartest guy in the room, and it was a lesson to me like, okay, I find that I personally make more money when I do strategic asset allocation as opposed to just individual names. Individual names are much tougher.

Meb:

John, this has been a whirlwind tour. We talked about a lot. Definitely have you back on as the world turns. I think you mentioned it one more time, best place to find you guys.

John:

Astoriaadvisors.com.

Meb:

Perfect. Thanks so much for joining us today.

John:

Thank you, Meb. It’s been a blast.

Meb:

Podcast listeners will post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at [email protected]. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.

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Opinion: The Curious Case Of Vasundhara Raje And Shivraj Chouhan

It is baffling to see heavyweights like Vasundhara Raje Scindia and Shivraj Singh Chouhan shafted on their own turf by the BJP leadership. Election dates could be announced any day now for Rajasthan, Madhya Pradesh, Chhattisgarh and Telangana, but the states are in peak poll mode. Candidates are being named, senior leaders are being assigned the task of consolidating the party’s social base, and strategies are being formulated to counter the Congress in three states. Prime Minister Narendra Modi is addressing rallies and Amit Shah is handling strategy workshops with party workers but top state leaders aren’t seen anywhere. Their presence in these rallies is also negligible. There are instructions, apparently, that neither Shivraj Chouhan nor Vasundhara Scindia will be projected as chief minister candidates. The doctrine of collective leadership is being advocated.

This is a sure sign for Shivraj Chouhan and Vasundhara Raje that their time is up and the BJP is no longer willing to bet on them to win elections.

The two have dominated politics in their states for more than two decades. Vasundhara Raje Scindia proved to be a worthy successor to Bhairon Singh Shekhawat. A two-time Chief Minister of Rajasthan, she is the only charismatic leader with a pan-Rajasthan presence and a solid mass base. It’s not that the BJP has found another mass leader to replace Vasundhara Raje. Those being groomed as her likely successors are too lightweight and have no presence beyond their constituencies. They cannot be relied upon to win state elections for the party. Arjun Ram Meghwal, Gajendra Singh Shekhawat, Satish Punia, CP Joshi, and Om Birla are no match for Vasundhara Raje.

Shivraj Chouhan’s case is also curious. He is the leader who deserves credit for the BJP winning back Madhya Pradesh after the disastrous Chief Ministership of Uma Bharti. The BJP scored a massive win in 2003 after 10 years of Digvijaya Singh’s Congress government. However, Uma Bharti squandered the goodwill. Atal Bihari Vajpayee and LK Advani, then the BJP’s top two, removed Uma Bharti as Chief Minister. After a brief interregnum of Babu Lal Gaur, Shivraj Chouhan was given the responsibility of leading the party in the state. He took it up valiantly, not only consolidating his hold over the party but also winning two state elections and staying chief minister for 13 years. The mild-mannered leader was even seen as a candidate for a more prominent national role before the emergence of Modi. His downfall started after he failed to win the 2018 assembly election.

After the collapse of the Kamal Nath-led Congress government, Shivraj Chouhan returned as Chief Minister but his vastly depleted stock was evident. He had to compete with new leaders like Yogi Adityanath and imitate their style of governance. Shivraj lacked confidence in his fourth term as Chief Minister. It was whispered in power corridors that he did not enjoy the confidence of Modi-Shah in the way he had basked in the affection of Atal-Advani.

Shivraj is no Vasundhara Raje. He is not defiant. He is keeping up a brave face, knowing fully that his days are numbered in state politics. It is no coincidence that his rivals with Chief Ministerial aspirations are being chosen as candidates, yet his name is missing from the list. Narendra Singh Tomar is a central cabinet minister and Kailash Vijayvargiya has been a senior national general secretary of the party. Both aim to replace Shivraj Chouhan in the top post. Jyotiraditya Scindia, imported from the Congress, has been breathing down his neck ever since he joined the BJP three years ago. Like Vasundhara, Shivraj Chouhan is a mass leader who led from the front in past elections. Central leaders then were in subordinate roles. Curiously, this time he is struggling with rumours that he might not be allowed to contest assembly elections and may be drafted at the centre.

Like Vasundhara and Shivraj, Raman Singh is also languishing in the wilderness since he lost power in 2018 in Chhattisgarh. He was Chief Minister for 15 straight years. Surprisingly, today there are no takers for him. It seems that the BJP led by Narendra Modi is not interested in retaining him in a leadership role. The BJP in Chhattisgarh is today leaderless. There is no one to challenge the very active Bhupesh Baghel of the Congress. It is being said that the BJP has already given up in the state.

Three time-tested big leaders with a vast experience of winning elections for the BJP are benched and the party does not think to use them creatively to win. This is one of the biggest conundrums of today’s politics. The BJP has decided to go with collective leadership in all three states. No single face will be projected. I can understand that thanks to the overwhelming presence of Modi and the party’s total surrender to his authority, any revolt before the assembly elections is only a remote possibility. Gone are the days when Kalyan Singh in Uttar Pradesh, Shankar Singh Vaghela in Gujarat, Uma Bharti in Madhya Pradesh, and BS Yediyurappa in Karnataka could revolt against the leadership and float their own political outfits.

Atal-Advani were charismatic leaders, especially Atal Bihari Vajpayee. He and Advani groomed future leaders at the national level and also in states. Under them, the BJP had a galaxy of big leaders like Sushma Swaraj, Narendra Modi, Pramod Mahajan, Gopinath Munde, Yediyurappa, Ashwini Kumar, Uma Bharti, Shivraj Singh Chouhan, Kalyan Singh, Rajnath Singh, Arjun Munda, Raman Singh, Prem Kumar Dhumal, Madan Lal Khurana, Sahib Singh Verma, Yashwant Sinha, Sushil Modi, Ravi Shankar Prasad, Shankar Singh Vaghela, Manohar Parrikar, and Nitin Gadkari. They were promoted, trained and groomed by Atal-Advani and they all made significant contributions to the BJP’s growth.

Every leader wants their team and accordingly promotes leaders who can implement their vision. Modi, after taking on the reins of the party, has turned the BJP into an election machine always chasing out-of-the-box ways of winning. But unlike Atal-Advani, Modi does not believe in creating a second line of leadership. Under his leadership, senior leaders are uprooted and replaced by rootless wonders. The choice for the Chief Ministers in states like Gujarat, Uttarakhand, Himachal Pradesh, Haryana, Karnataka and Jharkhand is testimony to this new reality. The BJP, unlike in the past, no longer depends on its regional satraps to win elections. The party has complete faith that Modi’s Midas touch is enough to defeat rivals. Modi presents himself as destiny’s child and asks voters to vote for him. 

Recently, in Himachal Pradesh and Karnataka, he asked voters to forget who the BJP’s candidates were and vote for him as he was the only guarantee for the development of the state.

However, results in these states tell a different story – that voters want one of their own, who can represent regional aspirations and symbolise regional identity. They are willing to vote for Modi in national elections but not in states.

In this context, the treatment meted out to Shivraj Chouhan, Vasundhara and Raman Singh is mystifying. It bears deeper investigation into why such stalwarts are being sidelined and why the party has no use for them anymore.

(Ashutosh is author of ‘Hindu Rashtra’ and Editor, satyahindi.com.)

Disclaimer: These are the personal opinions of the author.

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Plaza Wires IPO Review – GMP, Price, Details & More

Plaza Wires IPO Review: Plaza wires  is coming up with the IPO which is set to be listed on the NSE and BSE. The IPO will be open for subscription on 29th September 2023, and closes on 4th October 2023.

In this Plaza Wires IPO Review, we will provide a comprehensive and in-depth analysis of the company’s operations, financials, GMP as well as the strengths and weaknesses. Keep reading  for more details!

Plaza Wires IPO Review – About The Company

Plaza Wires Limited, incorporated in 2006, is a company engaged in the manufacturing and selling of wires. It also markets and sells LT aluminium cables and fast-moving electrical goods under the flagship brand “PLAZA CABLES” and home brands such as “Action Wires” and “PCG”.

The company offers a wide range of products, including various types of wires and cables, as well as FMEG products such as electric fans, water heaters, switches and switchgears, PVC insulated electrical tape, and PVC conduit pipe & accessories. The key products in the wires and cables segment include building wires (also known as house wires), single & multicore round flexible industrial cables, and industrial cables.

The manufacturing unit of Plaza Wires is located in Baddi, Himachal Pradesh, with an installed production capacity of 1.2 million coils per annum.

Plaza Wires employs a variety of distribution channels to sell its products, depending on geography and industry norms. The business model includes a dealer & distribution network for product sales and promotion, including sales through C&F agents. Dealers & distributors are selected based on their sales network and market reputation. The company also secures government tenders for supply to government projects and conducts direct sales to infrastructure projects.

The company strategically directs 3.5% of its sales towards government contracts, while the vast majority, 96.4%, is focused on dealers, distributors, and direct sales.

In terms of revenue generation, 9.19% comes from aluminium cables, 84.87% is generated from copper and wire cables, and FMEG products generate 5.9% of the revenue.

Plaza Wires IPO – Industry Overview

The global wires and cables market, valued at $191.6 billion in 2022, is projected to reach $351.3 billion by 2032, growing at a compound annual growth rate (CAGR) of 6.30% during the forecast period from 2023 to 2032.

In India, the cables and wire industry plays a crucial role in the economy, contributing approximately 40-45% to the electrical industry. The industry’s rapid growth is fueled by urbanization, industrialization, and government investments in infrastructure development.

The Indian Cable and Wire (C&W) industry is projected to expand to ₹1,033bn in FY23. This growth is driven by increased government infrastructure spending and demand for building wires and power cables. Government schemes such as the Pradhan Mantri Sahaj Bijli Har Ghar Yojana (Saubhagya scheme) and Power for All are expected to boost demand by focusing on rural household electrification and Transmission & Distribution efficiencies. Additionally, commercial establishments and public utilities are expected to increase cabling demand.

The growth of renewable energy capacities will stimulate demand for solar cables and elastomeric cables used in windmill applications. In Tier I cities, the increasing demand and lack of open spaces for tower setup, along with rising demand from infrastructure projects like metro, have escalated the demand for Extra High Voltage (EHV) underground cables.

According to Resurgent India Limited, the Indian wires and cables industry has grown at a CAGR of approximately 13.68% over the last five years, reaching ₹788.00 billion in Fiscal 2021. The industry is expected to expand at a CAGR of approximately 14.50% to reach approximately ₹1550.00 billion by Fiscal 2026.

The Indian cable and wire industry’s growth is expected to continue in the coming years, driven by the government’s focus on infrastructure development, smart cities mission, and the increasing demand for electricity and telecom services.

Plaza Wires IPO Review – Financial Highlights

Plaza Wires has demonstrated a robust financial performance. The operational revenue has seen a substantial increase, rising from ₹145.5 crore in March 2021 to ₹182.4 crore in March 2023. 

Concurrently, the Profit After Tax (PAT) has grown from ₹4.2 crore in March 2021 to ₹7.5 crore in March 2023. The company’s net worth has followed an upward trajectory, escalating from ₹39.4 crore in 2021 to ₹53 crore in 2023.

In terms of liabilities, the company’s borrowings have decreased from ₹43.3 Crore in March 2021 to ₹39.68 crore in March 2023, improving the Debt to Equity ratio from 1.10 in March 2021 to 0.75 in March 2023. Furthermore, Plaza Wires reported a healthy Return on Equity (ROE) of 14.15% and a Return on Capital Employed (ROCE) of 15.57%

Financial Metrics 

(Source: RHP of the company)

Competitors of Plaza Wires

Key industry peers include Cords Cables Industries Ltd, Ultracab India Ltd, V Marc India Limited, Dynamic Cables Limited, and Paramount Communication Limited.

Strengths of the company :

  • The company boasts a wide distribution network across India, with over 1249 authorized dealers and distributors, and 3 branch offices in Rajasthan, Uttarakhand, and Uttar Pradesh. This network is strengthened by repeat relationships with key distributors and dealers.
  •  Plaza Wires Limited offers a diverse mix of products, including wires and cables, FMEG products such as electric fans, water heaters, switches and switchgears, PVC insulated tape, and PVC conduit pipe & accessories. This variety caters to a wide range of customer needs.
  •  The company excels in strategic marketing and brand building, investing in campaigns to enhance brand visibility and awareness. It engages key stakeholders through Electrician Meets, distributor & dealer meets, and customer-centric advertising, promoting brand loyalty and product quality.
  • Plaza Wires Limited plays a pivotal role in the communication, automotive, power, infrastructure, and household sectors. With India being the fastest-growing telecom market globally and the government’s ambitious housing initiatives, the demand for the company’s cable products is expected to remain strong.

Weaknesses of the company: 

  • The inability to construct the proposed manufacturing unit and expand the product portfolio within the estimated timeframe could hinder business expansion, cost reduction, competitive positioning, and profitability. Delays could lead to time and cost overruns, negatively impacting the business.
  •  The company’s production quantity and costs are heavily reliant on sourcing raw materials and packaging materials at acceptable prices. Price volatility and supply interruptions could adversely affect the business.
  •  Plaza wires  generates a significant portion of its sales from operations in Delhi, UP, Haryana, Kerala, and Uttarakhand, accounting for 75% of the revenue. Any demographic or economic changes in these regions could impact business operations.
  • The company’s financial health is predominantly dependent on the sale of its Wires and Cables products. Failure to anticipate customer preferences, ensure product quality, or adapt to reduced demand for these products could adversely affect the business.

Plaza Wires IPO Review – GMP

The  IPO for Plaza wires  is set at a price band of ₹51-₹54. The latest grey market price stands at ₹13. The IPO is projected to list at a premium of 24.07%, with an estimated listing price of ₹67.

Plaza wires IPO Review – Key IPO Information

Promoters: Mr. Sanjay Gupta and Mrs. Sonia Gupta are the promoters of the company 

Book Running Lead Manager: Pantomath capital advisors private limited 

Registrar to the Offer: Kfin technologies limited 

The Objective of the Issue:

The company intends to utilize the net proceeds from the issue towards the funding of the following objects:

  • Funding the capital expenditure towards setting up a new manufacturing unit for house wires, fire-resistant wires & cables, aluminum cables, and solar cables to expand the product portfolio.
  • Funding the working capital requirements of the company.
  • General corporate purposes.

In Closing

Cables are integral to the communication, power, infrastructure and automotive sectors. Plaza Wires has carved a niche in the domestic wire and cable industry by offering quality products at competitive prices. The company’s growth is fueled by favorable demographics and diversified portfolio.

As part of its future strategy, Plaza Wires plans to expand its manufacturing capabilities, increase the capacity to manufacture new products, and continue to broaden its brand in the wires and cables business as well as the FMEG business.

What do think the future holds for the company? Are you applying for the IPO? Let us know in the comments below.

Written By Niharika Jadhav

By utilizing the stock screener, stock heatmap, portfolio backtesting, and stock compare tool on the Trade Brains portal, investors gain access to comprehensive tools that enable them to identify the best stocks also get updated with stock market news, and make well-informed investment decisions.


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S&P 500 Turnaround: 3 Charts You Need To Watch

KEY

TAKEAWAYS

  • Rising Treasury yields have hurt growth stocks but buying opportunities could lie ahead
  • The stock market could bottom at the end of September and present buying opportunities
  • Watch Fibonacci levels, Equal Weighted S&P 500 Index, and market breadth for a reversal

Last week wasn’t the most optimistic on Wall Street. Even though the US economy is growing,  Federal Reserve Chairman Jerome Powell’s comments after the Fed meeting weren’t what investors wanted to hear. 

The Federal Reserve’s decision to keep interest rates steady at 5.25–5.50% wasn’t a surprise, but the possibility of higher rates for longer than expected could have caused the sell-off in the stock market following Chairman Powell’s comments. The broader equity indexes ended lower for the week, with the Nasdaq Composite ($COMPQ) hit the hardest—down 3.6%. 

Based on Powell’s comments, we can expect one more rate hike in 2023 and maybe only two rate cuts in 2024. In other words, it’ll take longer to lower rates, given that the GDP is projected to grow and the labor market remains tight. The lower-than-expected jobless claims number last week supports the possibility of inflation continuing for longer. 

Higher Interest Rates

Higher interest rates aren’t great for growth stocks. If Treasury yields continue to rise or remain high, future earnings of companies that tend to borrow money become less attractive. Higher borrowing costs hurt future cash flows, which could result in lower stock prices.

It’s worth watching the chart of the 10-Year Treasury Yield Index ($TNX). The chart below shows that yields have been on a relatively steep ascent and are continuing to move higher. The 10-year Treasury yield is above 4.5%, a level not seen since 2007. If yields continue to move higher, stocks could fall even further, especially the large-cap growth stocks.

CHART 1: TREASURY YIELDS CONTINUE TO RISE. Rising Treasury yields can be a headwind for growth stocks. Chart source: StockCharts.com. For educational purposes.

If you look at the weekly chart of the Nasdaq Composite with the $TNX overlay, it’s interesting to see that from March 2020 to November 2021, the index was moving higher with the $TNX. In November 2021, a few months before the Fed started raising interest rates, the two started diverging. The Nasdaq Composite has dropped below its 100-day moving average. If it breaks below this support and takes out the August low of 13,162, the September pullback could become a reality. 

The good news? It could present a buying opportunity. In a recent StockCharts TV episode of Charting Forward, three well-known technical analysts expressed their thoughts on how Q4 would unfold. All three agreed that the fourth quarter tends to be strong, with some sectors, such as Consumer Discretionary, Communication Services, Technology, Industrials, and Financials, likely to outperform. Commodities may also be coming off their base.

If you look at the markets now, your first thought might be it doesn’t seem like that’s likely to happen after a week. But it’s the stock market and it can turn on a dime. And given that this type of price action is typical in September, there’s a chance that the stock market could take off. All the more reason to watch the charts.

Charting Your Course With 3 Charts

Turning to the S&P 500, the weekly chart below displays that the index is at a critical support level at the 61.8% Fibonacci retracement level (using the January 2022 high and October 2022 low) and struggling to stay there. The 50% retracement level is an interesting one since it closely aligns with the support of the 100- and 50-week moving average. 

CHART 2: WATCH THE 61.8% AND 50% FIBONACCI RETRACEMENT LEVELS. Depending on how low the S&P 500 index goes, the Fibonacci retracement levels could be reversal points. The S&P 500 is struggling to hold the 61.8% level. The next few days should tell more about the index’s directional move. Chart source: StockCharts.com. For educational purposes.

If the S&P 500 breaks below the 61.8% Fib retracement level, the index could likely hit that 50% level of 4160. A reversal from either of these Fibonacci levels could present buying opportunities. 

Another chart to pay attention to is the S&P 500 Equal Weighted Index ($SPXEW). The index has been trending lower since the end of July. The chart below of $SPXEW is overlaid with the Invesco S&P 500 Top 50 ETF (XLG), a fund with pretty strong exposure to the Magnificent Seven stocks. The chart gives you a pretty good idea of how much the two diverge.  You can see that the two sometimes move closely, but other times, there’s a significant gap between the two. A reversal in $SPXEW or a narrowing of the gap between the two would be encouraging as we head into the end of September.

CHART 3: S&P 500 EQUAL WEIGHTED INDEX ($SPXEW) VS. INVESCO S&P 500 TOP 50 ETF (XLG). The gap between the two is pretty wide. Look for the gap between the two to narrow and a reversal in $SPXEW. Chart source: StockCharts.com. For educational purposes.

It’s worth viewing the market breadth indicators such as the Advance-Decline Line, the percentage of stocks trading above their 200-day moving average, and the Bullish Percent Index. The chart below displays that market breadth indicators are trending to the downside, meaning market breadth is narrowing. 

CHART 4: MARKET BREADTH INDICATORS SHOW THAT BREADTH IS NARROWING. The indicators need to reverse before confirming a turnaround in the broader market. Chart source: StockCharts.com. For educational purposes.

Final Thoughts

Let’s hope the stock market turns around in October and ends strongly in Q4. According to the Stock Trader’s Almanac 2023, October is a “jinx” month, but overall, especially in a pre-election year, October tends to start reversing after a terrible September and can be a great time to buy. The potential headwinds the stock market could face are rising interest rates, rising oil prices, and a possible government shutdown.


Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

Jayanthi Gopalakrishnan

About the author:
Jayanthi Gopalakrishnan is Director of Site Content at StockCharts.com. She spends her time coming up with content strategies, delivering content to educate traders and investors, and finding ways to make technical analysis fun. Jayanthi was Managing Editor at T3 Custom, a content marketing agency for financial brands. Prior to that, she was Managing Editor of Technical Analysis of Stocks & Commodities magazine for 15+ years.
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What Are Non-Farm Payrolls? Why is NFP Important?

Brief Summary: The nonfarm payrolls figure released by the US Department of Labor presents the number of new jobs created during the previous month, in all non-agricultural business, within the States. 

The payrolls figure can change significantly month on month, due to its high correlation with economic policy decisions made by the US Central Bank. The published number is closely watched by traders, and changes in their opinions tends to trigger volatility in the markets. Generally speaking, a high reading is seen as positive for the US economy, while a low reading is seen as negative.

Whether you’re a fundamental trader or primarily rely on technicals, the NFP report regularly creates large price-movements in the market that can affect your trading performance. Occasionally, the report can send shockwaves through the market if the actual number significantly differs from market expectations.

Understanding the NFP report and its details can have a tremendous impact on your bottom line. In this article, we’ll cover what NFP stands for, why it is so important, and how to trade it.

Why is NFP Important?

The non-farm payroll (NFP) report is a key economic report for the FX market. The headline number represents the number of added jobs over a month, excluding farm jobs, government jobs, employees of NGOs, and private household employees.

As such, the NFP report shows the strength of the US labour market over a given month and often creates enormous volatility in the currency market. The Federal Reserve follows the report closely to determine future adjustments to its monetary policy. A better-than-expected NFP report could signal that the economy is overheating and that the Fed needs to tighten monetary policy, i.e. hike interest rates, to cool the economy down.

Conversely, a lower-than-expected NFP number signals that the US labour market struggles and that the Fed could cut interest rates to support the economy. Besides the headline number, i.e. the number of new jobs added to the US economy, the report also includes two additional important numbers – the average hourly earnings and the unemployment rate.

Many market participants, traders, investors, and financial institutions around the world follow the report and base their trading decisions on its outcome. Understanding the NFP report can help Forex traders to take advantage of the large price swings caused by the report. The report can be successfully traded with simple technical tools on short-term timeframes, such as the 5-minute or 15-minute ones.

When is NFP Released?

The NFP number represents a part of the monthly US employment report, released at 8:30 a.m. Eastern Time (13:30 p.m. London time) on each first Friday of the month by the US Bureau of Labor Statistics. The only exception is when the first Friday falls on a major US holiday, such as the New Year when the report is postponed to the next Friday.

NFP Data: The Headline Number and Details

The US labor market report includes three major categories: the non-farm payrolls number, the average hourly earnings, and the unemployment rate. The NFP number is considered the most important release and the headline number of the monthly report, with many traders focusing solely on the NFP number.

The average hourly earnings report shows how much hourly earnings have changed during the previous month, in percentage terms. If the average hourly earnings are above market expectations, this usually signals that inflationary pressures could be building up and that the Fed could respond with a rate hike, supporting the US dollar. Similarly, if the average hourly earnings fall below expectations, this signals that the Fed could adopt a looser monetary policy and drive the US dollar down.

The unemployment rate shows the percentage of unemployed people during the previous month as a percentage of the total workforce. Just like with the other reports, a falling unemployment rate (better than expected) could support the US dollar, and a rising unemployment rate (lower than expected) could send the US dollar down as Fed easing bets increase. While the NFP number is considered the most important report out of those three, many Forex traders make the mistake to completely neglect the average hourly earnings and the unemployment rate when trading the US labour market report.

If the NFP number comes above market expectations but the details of the report are weak (hourly earnings and unemployment), then the US dollar could make an initial spike as algos try to take advantage of the headline number, only to completely reverse to its previous trading levels in the coming minutes. That’s why you should always pay attention to the complete report and read through all of its details before placing a trade based on the NFP. 

Which Pairs Are Most Affected?

The pairs that are most affected by the NFP report are pairs that include the US dollar as either the base currency or the counter currency. This includes EUR/USD, GBP/USD, USD/CAD, and USD/JPY, to name a few.

Before placing a trade, measure the average volatility of the pair you’re trading for previous NFP releases, and adjust your stop-loss and profit-targets accordingly. It doesn’t make sense to use the same stop-loss size for USD/CAD and GBP/USD, for example, as the volatility of GBP/USD is quite higher.

Since the NFP report is a widely-followed report, it doesn’t impact only the US dollar. Often, other currencies will also exhibit increased volatility right after the release of the NFP report.

Other Important Labour Reports

Besides the non-farm payrolls, traders and investors also follow other job-related indicators that may also lead to increased volatility in the markets. Since the Fed is closely following the labour market when making changes to interest rates, all job-related reports can impact the US dollar.

The ADP payrolls report is released in the same week as the NFP report, but on Wednesday – two days before the NFP. The report reveals important information about the health of the US labour market before the widely-followed NFP release.

However, bear in mind that those reports are not correlated: It’s not unusual that the ADP beats market expectations but the NFP comes in lower than expected, and vice-versa. Automatic Data Processing Inc. (ADP) is a firm that handles payroll data for about 20% of US private employment, giving the firm insight into the health and trends of the US labour market.

Final Words

The non-farm payroll report (NFP) is a key economic indicator that reveals important information about the health of the US labour market. The report is widely followed by all types of market participants, including retail traders, investors, hedge funds, and even the Federal Reserve which makes adjustments to its monetary policy based on the trend in the NFP. The report is released each first Friday of a month by the US Bureau of Labor Statistics, at 8:30 a.m. Eastern Time.

The headline number shows the number of added jobs to the US economy during the previous month, excluding farm employees, private household employees, and government jobs. To take the most advantage of the report, traders also need to follow the details of the report, including the average hourly earnings and the monthly unemployment rate.

If you decide to trade the actual news release, make sure to always use stop-losses and be prepared for large price movements immediately after the release. The volatility can often cause slippage and higher spreads, which are some drawbacks you need to pay attention to.

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Factbox-US government shutdown: What closes, what stays open? By Reuters


© Reuters. FILE PHOTO: The U.S. Capitol Building is seen in Washington, U.S., August 31, 2023. REUTERS/Kevin Wurm/File Photo

(Reuters) -U.S. government services would be disrupted and hundreds of thousands of federal workers furloughed without pay if Congress fails to provide funding for the fiscal year starting Oct. 1. Workers deemed “essential” would remain on the job, but without pay.

Many government agencies have not updated shutdown plans they have prepared in the past. Here is a guide to what would stay open and what would shut down:

MILITARY

The 2 million U.S. military personnel would remain at their posts, but roughly half of the Pentagon’s 800,000 civilian employees would be furloughed.

Contracts awarded before the shutdown would continue, and the Pentagon could place new orders for supplies or services needed to protect national security. Other new contracts, including renewals or extensions, would not be awarded. Payments to defense contractors such as Boeing (NYSE:), Lockheed Martin (NYSE:) and RTX, formerly known as Raytheon (NYSE:), could be delayed.

The Department of Energy’s National Nuclear Security Administration would continue maintaining nuclear weapons.

LAW ENFORCEMENT

According to the Justice Department’s 2021 contingency plan, agents at the FBI, the Drug Enforcement Administration (DEA) and other federal law enforcement agencies would remain on the job, and prison staffers would continue to work.

Criminal prosecutions, including the two federal cases against former President Donald Trump, would continue. Most civil litigation would be postponed.

Aid to local police departments and other grants could be delayed.

Border Patrol and immigration enforcement agents would continue to work, as would customs officers, according to the Department of Homeland Security’s 2022 plan. The Secret Service and the Coast Guard would also continue operations.

Most of the Federal Trade Commission’s consumer-protection workers would be furloughed, as would half of its antitrust employees.

FEDERAL COURTS

Federal courts have enough money to stay open until at least Oct. 13. Activities might be scaled back after that point. The Supreme Court would stay open as well.

TRANSPORTATION

Airport security screeners and air-traffic control workers would be required to work, according to recent contingency plans, though absenteeism could be a problem. Some airports had to suspend operations during a shutdown in 2019 when traffic controllers called in sick.

Training for new air traffic controllers would stop, which Transportation Secretary Pete Buttigieg has warned could worsen a shortage of qualified workers.

Some major infrastructure projects could face delays as environmental reviews and permitting would be disrupted, according to the White House.

FOREIGN AFFAIRS

U.S. embassies and consulates would remain open under the State Department’s 2022 shutdown plan. Passport and visa processing would continue as long as there were sufficient fees to cover operations. Nonessential official travel, speeches and other events would be curtailed.

Some foreign aid programs could run out of money as well.

NATIONAL PARKS AND NATURAL RESOURCES

It’s not clear how national parks, national monuments and other sites would be affected. Many remained open during a 2018-2019 shutdown, through restrooms and information desks were closed and waste disposal was halted. They were closed during a 2013 shutdown.

Wildfire fighting efforts would continue, according to the Agriculture Department’s 2020 contingency plan, though timber sales on national forest lands would be curtailed and fewer recreation permits would be issued.

SCIENCE

Scientific research would be disrupted as agencies like the National Institutes of Health, the National Science Foundation and the National Oceanographic and Atmospheric Administration (NOAA) would furlough most of their workers, according to recent contingency plans.

The National Aeronautics and Space Administration (NASA) would continue to support the International Space Station and track satellites, but 17,000 of its 18,300 employees would be furloughed.

Weather forecasts and fisheries regulation would continue, as would patent and trademark reviews. Tests of new drugs and medical devices would continue.

HEALTH

The Centers for Disease Control and Prevention (CDC) would continue to monitor disease outbreaks, though other public health activities could suffer as more than half of the agency’s workers would be furloughed.

The National Institutes of Health would furlough most of its staff and delay new clinical trials for medical treatments.

Healthcare services for veterans and Native Americans would continue.

Most inspections of hazardous waste sites and drinking water and chemical facilities would stop.

Food-safety inspections by the Food and Drug Administration (FDA) could be delayed.

FINANCIAL REGULATION

The Securities and Exchange Commission (SEC) would furlough roughly 90% of its 4,600 employees and suspend most activities, leaving only a skeleton staff to respond to emergencies.

Likewise, the Commodities and Futures Trading Commission (CFTC) would furlough almost all of its employees and cease oversight, enforcement and regulation, according to its 2021 plan.

The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency would continue as normal, as they are funded by industry fees rather than congressional appropriations.

ECONOMIC DATA

Important economic data reports from the Labor Department’s Bureau of Labor Statistics would be suspended, including the monthly unemployment report, due out on Oct. 6, and price reports due the following week. Reports from the Commerce Department’s Bureau of Economic Analysis and the Census Bureau could be suspended as well, including retail sales and housing starts.

SOCIAL SECURITY, MEDICARE AND OTHER BENEFITS

The Social Security Administration would continue to issue retirement and disability benefits, and payments would continue under the Medicare and Medicaid health programs.

Military veterans’ benefits would also continue, according to a 2021 contingency plan.

Food assistance administered through the Supplemental Nutrition Assistance Program could be affected, as grocery stores would not be able to renew their licenses.

TAX COLLECTION

The Internal Revenue Service (IRS) would operate as normal, and all 83,000 employees would continue to be paid because the agency’s funding would not expire.

DISASTER RESPONSE

The Federal Emergency Management Agency (FEMA) would risk running out of funds for disaster relief and long-term recovery projects.

EDUCATION

Pell Grants and student loans would continue to be paid, but could be disrupted as most Education Department employees would be furloughed, according to the agency’s 2021 plan.

A protracted shutdown could “severely curtail” aid to schools, universities and other educational institutions, the department says. It also could delay funds that are due to be awarded later in the year.

CHILD CARE

According to the White House, 10,000 children from low-income families would lose access to the Head Start preschool program.

SMALL BUSINESS SUPPORT

The Small Business Administration would not be able to issue any new loans, though loans for businesses hurt by natural disasters would continue.

LABOR

Workplace safety inspections would be limited and investigations into unfair pay practices would be suspended, according to the White House.

The ability of the National Labor Relations Board (NLRB) to mediate labor disputes would be curtailed because almost all of its 1,200 employees would be furloughed, according to a 2022 plan.

WHITE HOUSE

In the 2018-2019 shutdown, the White House furloughed 1,100 of 1,800 staff in the Executive Office of the President. Some offices, such as the National Security Council, continued at full strength, while others like the Office of Management and Budget (OMB) were scaled back sharply.

White House furloughs could make it harder to comply with the impeachment investigation of President Joe Biden, a Democrat, by Republicans in the House of Representatives.

MAIL DELIVERY

The U.S. Postal Service (USPS) would be unaffected as it does not depend on Congress for funding.

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Duc’s Daily Dozen

Focus on the USD today.

Starting with: https://www.wsj.com/finance/investi…rposig5g1sd&reflink=desktopwebshare_permalink

Oil News:

Low inquiry levels stemming from Saudi Arabia’s production cuts, reoccurring congestion in China, and seasonally declining demand have driven freight rates to their lowest since May 2022.

– Losing steam after their November 2022 peaks, freight rates from West Africa to East Asia have dropped to Worldscale 43.5, whilst Gulf-to-East Asia rates are even lower than that, with most recent deals done at w37.

– Saudi Arabia accounts for more than a quarter of VLCC deliveries, with more than 90% of Aramco exports taking place by means of VLCC tankers, hence the oversized impact of Saudi cuts on freight rates.

– Whilst the freight market expects depressed VLCC rates to recover later this year, so far there’s been little upside – quite the contrary with Suezmax tankers that bottomed out earlier this month and the Gulf-East Asia route strengthened from w75 to w90 over the past two weeks.

Market Movers

– UK oil major BP (NYSE:BP) intends to invest up to $11 billion in low-carbon fuels, renewables, and EV charging stations in Germany by 2030 as it seeks to expand in Europe’s largest economy.

– US refiner Valero Energy announced it had authorized a share repurchase of up to $2.5 billion, with no expiration date, in addition to the $2.5 billion already authorized earlier this February.

– French energy company TotalEnergies (NYSE:TTE) is reportedly in talks with Adani Green Energy to invest up to $700 million in the Indian firm’s clean energy projects, the first deal since Hindenburg Research’s short-selling recommendations.

Tuesday, September 19, 2023

News of shrinking US supply has only added bullish sentiment in oil markets, keeping ICE Brent and WTI around $95 and $93 per barrel, respectively. This week will bring about a flurry of macroeconomic news with central banks meeting in the United States, the United Kingdom, Japan, and other countries, potentially reminding the oil markets of the continued risk of a significant recession in Western economies.

Oil Majors Warn Peak Oil Demand Not Happening Soon. Defying the IEA’s calls of fossil fuel demand peaking by 2030, the CEOs of Saudi Aramco and ExxonMobil (NYSE:XOM) both said the energy transition will take longer than assumed and that oil and gas investment remained critical to stop prices soaring.

Geopolitical Risk Jumps As Azerbaijan Launches “Anti-Terrorist” Operations. The risk of a renewed conflict between Azerbaijan and Armenia has increased after Azerbaijan announced “anti-terrorist operations” in the Nagorno-Karabakh region. The move comes just days after Armenia’s Prime Minister expressed doubt over Russia’s ability to guarantee its security while struggling with its invasion of Ukraine.

IAEA Condemns Iran Ban on Nuclear Inspection. Iran’s nuclear program made headlines again after Tehran banned multiple IAEA inspectors assigned to the country, triggering an immediate condemnation from the UN watchdog as it investigates uranium traces at undeclared Iranian sites.

Chevron’s Australia Strikes Turn Real. Australia’s Offshore Alliance union of oil terminal workers said that workers at Chevron’s (NYSE:CVX) Gorgon and Wheatstone terminals had begun full-day strikes, with the government tribunal activated by the US major set to start hearings this Friday.

US Shale Output to Decline in October. According to the EIA’s Drilling Productivity Report, US shale output is on track to decline for the third month in a row in October, expected to come in at 9.393 million b/d, the lowest monthly level since May and some 85,000 b/d below the July peak.

China Needs New Import Quota Package. China’s private-sector refiners have started lobbying the Ministry of Commerce in Beijing to issue a fourth batch of crude import quotas, already running out of the 194-million-tonne allocation received in this year’s three quota allocations.

Saudi Arabia Buys Into Latin American Fuels. Saudi Arabia’s national oil company Saudi Aramco (TADAWUL:2222) agreed to purchase Chile’s main fuel distributor Esmax Distribucion, formerly known as Petrobras Chile, from private equity investor Southern Cross Group.

California Sues Oil Majors for Alleged Deception. The government of California sued five of the world’s top oil-producing companies – ExxonMobil, Shell, Chevron, BP, and ConocoPhillips – for allegedly covering up the truth about climate change, calling for the creation of an abatement fund.

Ireland Rejects LNG Terminal Plans. Ireland’s top planning body An Bord Pleanála has refused permission for a new liquefied natural gas terminal in county Kerry with a planned annual capacity of 8.25 bcm, saying the 700 million project would be contrary to the government’s net zero policy.

Prisoner Release Unfreezes Iran’s $6 Billion. In addition to higher oil prices and higher crude exports to China, the Iranian government finally tapped into the $6 billion of its funds frozen in South Korean banks after the US and Iran carried out their long-anticipated prisoner exchange this week.

Greenpeace Blocks Arrival of French LNG Unit. Activist group Greenpeace tried to prevent the Cape Ann tanker, refurbished as TotalEnergies’ (NYSE:TTE) latest FSRU to receive LNG cargoes off the coastal city of Le Havre, from entering the port, saying France needs to halt all new fossil fuel projects.

Australia’s Nuclear Switch Option Labelled a Fantasy. According to Australia’s Climate Change and Energy Minister Chris Bowen, the cost to replace the country’s coal-fuelled power plants with modular nuclear reactors would amount to $250 billion, alleviating calls for a swifter transition.

South African Drilling Delayed by Environment Appeals. Having hit multi-billion discoveries in neighboring Namibia, both TotalEnergies and Shell are unable to advance their offshore drilling in South Africa’s blocks 5, 6, and 7 after a series of appeals against their environmental authorization keep on stalling exploration drilling.

White House Wants Wider Pool of US Tankers. With the US fleet of commercial product tankers comprising a few dozen tankers that could be jeopardized in times of war, the US government-chartered 9 tankers so far this year to move oil products, paying up to $6 million per year for agreements that run until 2035.

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So I ended today with Mr flippe-floppe-flye, who touches indirectly on the important point concerning the USD.

The USD is now pretty much (re) correlated with the USD. Most (all) countries are energy importers. Most (except BRICS) pay for energy in USD. A higher WTI = higher demand for USD = USD chart heading higher.

A higher USD requires countries who don’t earn USD in exports to sell their currencies and buy USD = higher USD.
Those that do earn USD via exports, Japan for example as a non-BRICK has to either (a) sell Yen buy USD or (b) sell UST.

It is the selling UST that is the big issue: this pushes yields on UST higher and with Yellen and the Treasury needing to sell $2.7T in debt this year, will cause Treasury market instability. Not good for stocks. Very bad.

jog on
duc

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Spotlight EnerSys: Powering the Future of Stored Energy – Knowledge Leaders Capital

EnerSys is a leader in stored energy solutions. Based in Reading, Pennsylvania, this company makes batteries, chargers, and accessories for transportation, aerospace, and defense.

Credit: EnerSys

The company was founded in 1991 through a merger of Exide and Yuasa Corp. and has since made several strategic acquisitions to bolster its position in the energy storage industry. Notably, in 2000, Yuasa-Exide Inc. acquired the industrial division of GS Yuasa, and then changed its name to EnerSys. This was followed by a merger with the Hawker Group in 2002. Another significant acquisition was the Energy Storage Products Group of Invensys in 2002. Over the years, EnerSys has expanded its portfolio and global presence through various acquisitions, collaborations, and strategic decisions, solidifying its reputation as a leader in the energy storage domain. The name “EnerSys” signifies the company’s dedication to harnessing and storing energy, providing solutions that power various industries and applications worldwide.

Pioneering Breakthroughs in Stored Energy Solutions

One of the most notable technological innovations from EnerSys was the development of a Thin Plate Pure Lead (TPPL) technology. This battery technology has found applications across a myriad of sectors, including data centers, telecommunications, transportation, materials handling, and logistics. TPPL batteries, with their advanced design, offer unparalleled energy storage capabilities, making them a preferred choice for industries that demand efficient and reliable power solutions.The introduction of TPPL technology by EnerSys marked a significant shift in the energy storage landscape. Before this innovation, industries were often limited by the capabilities of traditional battery technologies, which could not meet the increasing demands for energy efficiency and longevity. With TPPL batteries, industries found a solution that not only offered longer life cycles but also ensured consistent performance under varying operational conditions.

From powering data centers that form the backbone of the digital world to ensuring uninterrupted operations in telecommunications, TPPL batteries have become synonymous with reliability. In the realm of transportation and logistics, these batteries aim to ensure that vehicles and equipment run efficiently, reducing downtime and operational costs. Furthermore, the versatility of TPPL technology has enabled EnerSys to cater to specific industry needs. For instance, in the telecommunications sector, where consistent power supply is crucial, TPPL batteries offer the resilience and reliability required to maintain network operations, even in challenging conditions.

Today, EnerSys boasts a diverse product portfolio tailored to meet the demands of various industries. Some of the firm’s prominent products include reserve power batteries, designed to provide power in the event of an outage. These are crucial for sectors like telecommunications, where consistent power is essential. Brands like PowerSafe®, DataSafe®, and Cyclon® are part of this category. Motive power batteries cater primarily to electric vehicles and industrial machinery, and these batteries provide the necessary power to keep operations running smoothly. Notable brands in this segment include Hawker®, NexSys®, and Ironclad®. In addition, EnerSys offers a range of chargers and accessories to ensure optimal performance and longevity of their products. Finally, EnerSys also produces batteries for specific applications, such as aerospace and defense, ensuring that even in the most critical situations, power remains uninterrupted. EnerSys is a dominant player in several product categories. Brands like PowerSafe® and Hawker® are industry frontrunners, known for their reliability and performance.

Truck iQ smart battery dashboard, credit: EnerSys

Research and Development

EnerSys’s approach to innovation is deeply rooted in its commitment to addressing the world’s growing energy demands. EnerSys products are not just energy storage solutions; they are sustainability products. In 2022 alone, the company produced more than 13 GWh of energy storage capacity, ensuring safe, affordable, and clean power for industries and people worldwide. This commitment to innovation is further evidenced by the company’s significant investment in R&D, with over $3.8 million allocated in 2022 to foster continuous improvement, enhance safety, and develop innovative new technologies. EnerSys’s Specialty Global segment engineers advanced, reliable energy storage solutions tailored to the unique needs of industries like long-haul trucking, aerospace, and climate resilience. These specialized solutions, powered by advanced lithium technologies and TPPL technology, underscore EnerSys’s commitment to pushing the boundaries of what’s possible in energy storage.

In the last five years, EnerSys has unveiled a series of groundbreaking products setting new standards for performance, efficiency, and sustainability. EnerSys expanded its NexSys® iON Lithium-ion battery line with the introduction of an 80 Volt model. This high-performance battery is designed for fast recharge, extended run times, and offers a high energy capacity in a compact design. It’s particularly beneficial for heavy-duty applications, especially for industries transitioning from LP- and diesel-fueled equipment to meet sustainability goals. In Jul of this year, EnerSys received full integration approval for its NexSys® TPPL battery technology across all equipment from the Hyster-Yale Group that comes equipped with Hyster Power Cellect™ or Yale Power Key™. This integration signifies the adaptability and compatibility of EnerSys’ products with leading industrial equipment. In June of this year, EnerSys and Verkor collaborated to explore the development of a Lithium-ion battery factory in the United States. This partnership underscores EnerSys’ commitment to expanding its lithium-ion battery production capabilities, catering to the growing demand for these batteries in various applications.

Commitment to a Sustainable Future

With over a century of experience in manufacturing energy storage and systems, EnerSys aims to be a global leader in the domain. EnerSys, through its products and ongoing research, aims to advance and accelerate the viability of a low-carbon economy. This Knowledge Leader’s energy storage solutions maximize the reliability of energy generated from renewable sources, even during peak demand. The firm actively supports global initiatives like RE100, which brings together influential businesses committed to 100% renewable energy.

Ironclad Deserthog, credit: EnerSys

Synergy for Success

EnerSys understands the importance of strategic partnerships in driving innovation and expanding its reach. The firm is engaged in some notable collaborations and partnerships. EnerSys achieved a significant milestone by receiving full integration approval for its NexSys® TPPL battery technology across all equipment from the Hyster-Yale Group equipped with Hyster Power Cellect™ or Yale Power Key™. This collaboration underscores the adaptability and compatibility of EnerSys’ products with leading industrial equipment manufacturers. EnerSys joined forces with Verkor to explore the development of a Lithium-ion battery factory in the United States. This partnership signifies EnerSys’ commitment to expanding its lithium-ion battery production capabilities, catering to the growing demand for these batteries in various applications. EnerSys expanded its motive power service offerings in the UK by acquiring Industrial Battery and Charger Services Limited. This acquisition not only strengthens EnerSys’ position in the UK market but also broadens its service capabilities, offering a more comprehensive range of solutions to its customers. EnerSys is actively supporting global initiatives like RE100, which brings together influential businesses committed to 100% renewable energy. By aligning with such initiatives, EnerSys is playing a role in promoting the use of renewable energy sources and ensuring a sustainable future.

This Knowledge Leader spotlight was generated using our AI engine with a series of prompts custom-developed by Knowledge Leaders Capital and designed to uncover the innovation strategies of companies we consider to be Knowledge Leaders. We have edited it for content, style, and length.

The following sources are examples of sources that may have been consulted in the preparation of this spotlight:

  • EnerSys Official Website
  • Macrotrends
  • Wikipedia: EnerSys

 As of 6/30/23, none of the securities mentioned were held in the Knowledge Leaders Strategy.

The information contained in our “Spotlights” is provided for informational purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy the securities or products mentioned and is not intended to be investment advice. Knowledge Leaders Capital may deviate from the investments or strategies implementation as discussed in the “Spotlights” and the opinions expressed therein are subject to change at any time for any reason without notice. Knowledge Leaders Capital makes no representations that the contents are appropriate for use in all locations, or that the transactions, securities, products, instruments, or services discussed are available or appropriate for sale or use in all jurisdictions or countries, or by all investors or counterparties. The reader should not assume that companies identified and discussed were or will be profitable.

The Knowledge Leaders investment process uses a proprietary methodology based on academic research. To create an intangible-adjusted financial history, we capitalize intangible investments—including R&D, advertising, brand development and employee training expenses—treating them as a company would tangible investments. Using these intangible-adjusted financial histories, we run each company through a proprietary Knowledge Leader screen. Companies that pass through every level of the screen emerge as Knowledge Leaders.

Past performance or historical trends are not necessarily indicative of future results.

Companies are selected for “Spotlights” based on high levels of innovation activities in their respective industries and illustrate innovation being employed across all sectors and geographies. Spotlight selection is separate from stock selection by the investment team. Spotlights are not necessarily representative of investment opportunities and can be selected regardless of investment performance or inclusion as a KLC holding.

 

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Fix the Economy, Stupid! – Daily Reckoning Australia

Most Australians are weighed down by the burden of rising living costs as our economy is slowly reeling from the chaos in the past three years. Our government and various institutions are not only not helping us but they’re saddling us with more problems. It’s clear that they don’t have our interests in mind. ‘The Voice’ is the latest example of selling us more troubles in the name of uniting our country. There’s a way to unite the country. It’s not hard…just fix the economy, stupid!

Since leaving Fox News, Tucker Carlson has gained a huge audience who want to hear him speak freely about many controversial issues. He posted a clip last week talking to supporters in a Michigan rally, where he exposed how politicians on both sides of the aisle wilfully ignore the people’s needs.

You can check it out here.

I’m sure there’re many of us in Australia who feel the same.

I reckon the vast majority of Australians believe their political leaders hardly care about their needs, preferring to serve those who lavish them with donations and favours.

The Governance Institute of Australia’s recently released its Ethics Index report showing the most and least trusted occupations.

Not surprisingly, the Federal and State politicians take second and third place as least trusted!

Perhaps our politicians should listen to what Tucker said and align their priorities to what ordinary Australians want.

Just fix the economy, stupid!

The betrayal of Australia by those most out of touch with reality

I’ve shown you in the article two weeks ago how the prosperity of the ordinary Australian household has declined since the turn of the millennium. People’s pay might’ve increased but they’re able to afford less. Meanwhile, rising property prices condemn would-be homeowners to a lifetime of paying down a massive debt, possibly into their retirement.

Many of you’ll never forget how the previous Governor of the Reserve Bank of Australia, Phillip Lowe, misled us all by saying in 2021 that there won’t be an interest rate rise until 2024.

What happened in the past 18 months? The interest rates increased from 0.1% to 4.1% now.

How are people coping with their living costs with this additional burden?

Then there’s the Morrison government and our state premiers who locked us down while letting big corporations continue operating during the Wuhan virus outbreak.

For the life of me, I don’t know how forcing the populace to shop only in big companies would stop the spread. Doesn’t it do the opposite?

So three years on, our economy is in shambles with many small businesses and households facing ruin. Meanwhile, big corporations and the rich are better off. Think about how many billionaires and millionaires have prospered thanks when asset prices went sky high.

Fact is, our economy is much worse today as we watch our leaders create more problems with their policies and proposals.

‘The Voice’ — A land grab in disguise

I’m going to exercise caution in approaching this. No doubt ‘The Voice’ is a controversial topic.

What is it that we’re voting for on 14 October?

For what I know, we’re asked to vote on two questions. The first is about whether we recognise the Aborigines and Torres Strait Islander people into our Constitution. The second question is yet to be disclosed.

Should we pass the referendum, it’ll give our government the mandate to declare that the Indigenous people be incorporated as Australian citizens.

Currently, Aborigines and Torres Strait Islanders are a separate people sharing the same land. And we’re recently hearing from many of the Aborigines and Torres Strait Islander people standing against it.

Now, my understanding is that the change in the Constitution takes away their sovereignty status. A ‘sweetener’ to the deal aimed at getting this over the line lies in the government being able to act on their behalf to reclaim their traditional land.

But do you trust the government will give the land back to the Indigenous people without pocketing a (big) chunk?

I’ll leave it for you to ponder.

What’s not thought through is the economic implication of changing the Constitution on the existing land rights. This’ll hurt the agriculture and mining sectors the most, and I’m sure other industries will experience it too.

The change could make possible for government to take away existing properties on the grounds that it belonged to certain Indigenous tribes and redistributing it as it sees fit. Similarly, it’ll complicate the planning and permitting process, reducing efficiency and bringing more controversies.

Not only could it negatively impact local business, but foreign businesses could think twice about coming here.

It’s not as benign as they’re selling it. And you can expect unintended consequences to come in truckloads, pun intended.

Protecting your interests and wealth of utmost importance

Australians are going to have to tough it out to make ends meet. It’s been hard and I believe it could get harder.

Let’s face it, politicians aren’t looking after us.

Unless you’re part of the small minority who have the clout to influence them. Most of us aren’t part of that club.

The only benefit we get for obeying them is the short-term warm and fuzzy feeling before we pick up the tab.

I believe it’s critical you take matters into your own hands.

The Australian dollar has been dropping sharply in the past two months. It means imports are going to cost more. This covers a lot of what we buy for our daily needs.

One consolation is that gold is worth more. That could help offset the hardships we face.

For the past two years, gold mining companies have trailed most industries because of a weak market sentiment, difficult mining conditions and a high oil price restricting their profitability.

But with economic headwinds blowing, I believe there’ll be a flight to safety and gold will have its day.

Take advantage of this now and it could pay off in the coming years.

You can do this with my investment newsletter service, The Australian Gold Report where I show you ideas on starting to build a precious metals portfolio now.

God Bless,

Brian Chu,
Editor, The Daily Reckoning Australia

All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.



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Episode #500: Soo Chuen Tan, Discerene – Contrarian, Long-Term Value Investing – Meb Faber Research – Stock Market and Investing Blog


Episode #500: Soo Chuen Tan, Discerene – Contrarian, Long-Term Value Investing

Guest: Soo Chuen Tan is President and portfolio manager at Discerene. Before founding the Firm, Soo Chuen was a Partner and Managing Director at Deccan Value Advisors. Prior to Deccan, Soo Chuen worked at the Baupost Group, Halcyon Asset Management, and McKinsey & Company.

Recorded: 8/21/2023  |  Run-Time: 1:02:39 


Summary: Today’s episode starts off with lessons from working under the great Seth Klarman at Baupost. Then we spend a lot of time around what the ideal structure is for an investment firm and how to build a true partnership with LP’s – and that even includes giving money back when there aren’t opportunities in the market.

Then we get into his investing philosophy. He answers broad questions like: what businesses actually have network effects? Does it matter if a certain business goes away tomorrow?


Sponsor: YCharts enables financial advisors to make smarter investment decisions and better communicate with clients. YCharts offers a suite of intuitive tools, including numerous visualizations, comprehensive security screeners, portfolio construction, communication outputs, and market monitoring. To start your free trial and be sure to mention “MEB ” for 20% off your subscription, click here. (New clients only). Mark your calendars for September 22nd because YCharts will be hosting a webinar to unveil Proposals and show off its full potential.


Comments or suggestions? Interested in sponsoring an episode? Email us [email protected]

Links from the Episode:

  • 1:26 – Welcome Soo Chuen to the show
  • 2:03 – Overview of Soo Chuen’s professional background
  • 4:43 – Launching Discerene at 33
  • 17:32 – Fostering 50-year investment partnerships
  • 24:11 – The decision to return capital in 2018 when he didn’t see attractive opportunities
  • 26:21 – Current investment strategies in 2023
  • 27:40 – Focusing on business potentials in Turkey, China, Argentina, and Japan
  • 36:06 – Evaluating investments based on predictability and sustainable competitive advantages
  • 44:33 – Reasons for ending long-term partnerships with companies
  • 49:53 – China’s valuation rollercoaster
  • 55:32 – Investing in specific companies, not entire countries, during high inflation
  • 58:28 – Soo Chuen’s most memorable investment
  • Learn more about Soo Chuen: Discerene

 

Transcript:

Welcome Message:

Welcome to The Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer:

Meb Faber is the co-founder and chief investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb:

Welcome, podcast listeners. We got a special episode today. Our guest is Soo Chuen Tan, founder and president of the Discerene Group, which has a fundamental, contrarian, long-term value investing philosophy. Today’s episode starts off with lessons learned from working under the great Seth Klarman at Baupost. We spend a lot of time around what the ideal structure is for an investing firm, how to build a true partnership with LPs, and that even includes giving money back when there aren’t opportunities in the market. Then we get into his investing philosophy. He answers broad questions like. “What businesses actually have network effects? Does it matter if a certain business goes away tomorrow?” This was such a fun episode. Special thanks to former guest, Chase Koch for helping make this episode happened. Please enjoy this episode with Discerene Management, Soo Chuen Tan. Soo Chuen, welcome to show.

Soo Chuen:

Meb, thanks for having me. I’m delighted. I’ve been listening to your show for a while and so looking forward to this.

Meb:

Where do we find you today?

Soo Chuen:

Simon Stanwick, Connecticut. Hang out in my office on Summer Street. It’s a beautiful day.

Meb:

For listeners, we just went through what I would describe as the most hyped hurricane ever here in Los Angeles. As a somewhat East Coaster, the one thing that did shake it up a little bit is the earthquake in the middle of it, which was actually a decent sized shaker, but we survived, so we’re here a little bit more damp. It’s the end of summertime. I’m excited to be talking to you today. We’re going to get into a lot. I want to hear a little bit about your background. You may be new to most of the listeners, so I want to hear a little bit of the origin story. Where do we begin? You want to begin? You worked at Baupost, is that right? Under Seth, is that correct?

Soo Chuen:

Before we dive into the background, just nothing I’m going to say here is a recommendation to buy or sell any security. We’re not going to top up performance and any investment decision should be through customary due diligence documents, legal tax, regulatory experts. I actually had to stop before Baupost. I joined a firm called Halcyon. They’ve changed their names since now called Barden Hill. It was a credit distress firm and frankly, that was my main value proposition. I had zero investing experience before business school. I didn’t come from a traditional banking, private equity, et cetera background, and so my value proposition for a hedge fund was I know law. I was lucky there was a guy at Halcyon called Richard Horowitz who was a mentor in learning just the basics of investing.

I always knew I wanted to be a value investor because I caught the investing bug. I wanted to think in terms of intrinsic value in terms of owning businesses for the long term. Even in credit distress there are different ways to do credit distress. You can buy things and then buy to a catalyst, buy to an exit, or you can buy something and hold it for 10 years. The different approaches to credit distress investing, I wanted to scratch the itch of just being a longer term investor, and that’s why I actually then moved to Baupost. That was my transition, Seth, of course, as a value investor, and I learned that so much of being a value investor is also just psychological, being contrarian. Thinking about greedy when I was fearful, fearful when I was greedy, the structure of the firm was important. Baupost has very long-term capital. It has a client base that allows it to be quite contrarian.

Those were actually eye-opening for me when I went. Then I then joined a startup called Deccan Value Investors. When I joined the firm was one year old and it was my chance to join a firm on the ground floor and see how a firm gets built and firm actually took off and raised a couple of billion dollars. We grew in terms of both assets and people and institutionalized and all of that. There was a lot of learning, not just on investing front, but just observing the business of money management, seeing how a firm actually grows and builds clients and builds a team and creates a process.

It was a different time. We’re talking about the mid-2000s, firms grew a lot quicker during the time, it was the Haiti of hedge funds, so it was in some ways a compressed kind of version of seeing how a firm grows. And obviously, because it was a much smaller team, there was less to hide, you had more responsibility and more autonomy, and it was also a firm that focused more on moss, so the mental model of understanding was helpful too. That was my experience at Deccan. So that was my next stop and then I launched the firm after that.

Meb:

So wait, here’s the great part. You’re like, “This is easy. I’ve seen this growth. It’s a piece of cake starting your own firm.” And then you have the same with every entrepreneur, but we say this for startup fund managers too. Everyone has to have the naive optimism that this is going to work out. And we say naive, because we all know that the majority fail, and this is a tough game that everyone plays, entrepreneurship coupled with capital markets. So, you had this naive optimism. What was the decision there? You wanted to call your own shots, you want to start your own biz? What was the inspiration?

Soo Chuen:

I was naive and I’m so glad I was. I mean, I didn’t notice statistics of fun failures and whatnot at the time, and I had seen, I joined a startup firm and it grew nicely over a very short period, so I didn’t know what I didn’t know. I was 32, I just turned 33 when I started this Discerene. I started the process in the fall of ’09, right after Lehman, and actually the firm got launched in June 2010, so it was kind of a nine-month period. To me it was like Lehman had just happened, things have blown up. Valuations are so compelling. This was a great time to actually invest. That was my thinking. Now, obviously there was a naivety in that process, because what I did in 2010 was say, “Hey, I want to take a blank sheet of paper and say, ‘If I had no constraints on how I would invest, what would that look like?’”

And I wanted to do something for 50 years. I said, I only want to start one firm. I wanted to build one firm. I was 32 at 82 to have a bunch of LPs, a bunch of teammates, a bunch of CEOs and CFOs that we had partnered with over 50-year period. We’re going to throw a big party for octogenarians and nonagenarians, and we’re going to say, “Look at this journey we’ve been on together.” I wanted that. I went to Berkshire Hathaway’s 50th anniversary. That was precisely what he had. And you had a bunch of doctors and dentists who had invested with him and became multimillionaires and they went to the 50th anniversary.

I said, “I want that, so how do I get there?” And so I took a blank sheet of paper and I wrote down, “Okay, here are the principles.” Now, from the investing perspective, I wanted to be fundamental, I wanted to be long-term, I wanted to be contrarian and I wanted to be global. Now, none of these things are new, fundamental, long-term, contrarian, global. You’re just describing value investing. At this point it’s almost elevated music because no one says what short-term traders, and we’re not fundamental, at least in stock picker land. But I was quite specific about what I meant about each of these terms. When I say fundamental, I meant owning businesses, not stocks, and that’s a qualitative distinction. The idea is if you own a business, and it can be a small business, you own a dealership, you own a restaurant, you own a laundromat, that business is going to go through good and bad times.

It’s kind of a given. Any business owner knows that, and it’s weird for any business owner to say, “Oh, well I own this car dealership and it’s going so well. Let me go buy another dealership. Oh, it’s going so badly, let me dump it and I’ll buy it back in two years.” No business owner thinks like that. Business owner thinks through cycle. And the idea is you understand the through cycle economics of the business, there’ll be good years, there’ll be bad years, but the question is how much money you’re going to put in and how much money will you get out over time? And the through cycle economics is not good, then don’t be in the business at all. But if you’re in the business, you expect that it’s going to have good years and bad years. That’s the idea of being fundamental.

Then being long-term is related to that. If you’re going to own a business through good and bad times, well, each business cycle is seven to 10 years. If you’re going to own it for more than one business cycle, we’re talking about a generational time horizon. So 2010, and you can imagine this was a little bit cultural, and you say, “I want to buy and hold businesses well, a generation.”

The third thing was being contrarian, and that I think is a necessary condition. That element of contrarian has gone away a little bit from how stock choose big stocks these days. But the idea of being contrarian is this, if you own a business for 20 years, the returns that you make are going to approximate the returns of the underlying business itself because you’re just owning a business, unless you pay an unfair price or it. You don’t pay a fair price, you pay an unfair price. But you don’t get unfair prices every day, so often unfair prices come from a fog of uncertainty.

Human beings don’t like uncertainty. Uncertainty breeds fear. Fear breeds sell offs. It’s a psychological thing. And the idea is during the points of uncertainty to actually be a provider of liquidity, and that uncertainty can be caused by anything. It can be company-specific. A company messes up, execution on a step, loses a big customer, you name it. It can be an industry. So for example, in 2010 when we launched the industry that was going through convulsions was the U.S. healthcare industry because the Affordable Care Act had just been passed and people didn’t know what that meant for payers and providers in the healthcare system. The uncertainty created these opportunities to buy mispriced companies in healthcare.

It could be a whole country, a recession, or you name it. Or it could be whole like a global pandemic. Whatever the uncertainty that creates fear and creates these sell offs and during those times to use a Buffett term to be the lead underwriter for the business. The idea of underwriting a business is almost an insurance term is, “At this price, sell the company to me, because I’m willing to hold it. Not because I want to flip it to somebody else, I’m willing to hold it at a price. I’m the final buyer of the business.”

Meb:

All of these launch goals sound noble at inception. Was this a easy launch? Like CalPERS receive you to say, “Okay, we hear you. Here’s a billion dollars.” Was this one of those types of launches or was this more like most of us who have to scratch and claw and bleed?

Soo Chuen:

Well, you can imagine this is right after Lehman had happened and what I just described to you was not the flavor of the day. I mean, the world has changed, but at the time it was low net, highly liquid. Hedge funds were not hedge enough to say would be concentrated long-term contrarian, profit of liquidity. And by the way, we also said it would be global and often of question switch on you and which army you’re going to cover the world, on what?

Meb:

The good news is, your comment about being contrarian is like, anything global since your launch has been contrarian, because S&Ps mowed down everything.

Soo Chuen:

Absolutely, you can imagine it wasn’t an easy launch at all. And again, the beauty of being idealistic and young and naive is you don’t realize how hard it is. And so we did it and we launched with $62 million of committed capital and we were frankly just lucky. A few people made the bet on us and it was not obvious. The bet wasn’t obvious at all. I was a partner at my previous one, but I wasn’t a portfolio manager. I didn’t have a standalone track record. I hadn’t built a business, I hadn’t built a team. So it’s not like you lift and experience PM from a bigger place and you back the person with money. It was not that at all. It was really just a bad on me and my good intentions. So, in some ways you look back and go, “Wow, the people who made that bet were pretty ballsy.”

Now, I made it even more difficult because my thesis was, “Look, all these things are easy to say, value investing principles, they’re hard to do, I believe 13 years later, I still believe.” It’s because there’s actually a structural issue with our industry in public markets. Funds have quarterly, annual, if you’re lucky, like two-year lockups. And here I was saying I want to be provider of liquidity for sellers. I wanted to compound over generational time horizon. I want to own businesses for a generation, how do you do that If you have one , two year capital? You just can’t do that.

No matter how well-intentioned you are, inevitably you get on this treadmill of trying to deliver returns on a year-to-year basis, especially in your early years, first year, second year, it’s like prove it to me. You are in a show me period for new funds. And I didn’t want to do that. I said, “Look, I want to invest long-term,” and I was serious about it. So, I said, “Let’s create a structure, which is highly unusual, with three year, five year and 10 year investor level gates. You can imagine, that’s kind of crazy.

Meb:

I like it. Very bold of you.

Soo Chuen:

The shortest is three years. And it’s not a three-year lock, it’s a three-year gate. What that means is, regardless of when investors come in, when they redeem, they get a third at the end of year one, a third at the end of year two, a third at. And that’s true even if they’ve invested with us for a decade when from the moment they put in redemption requests, it’s a third, a third, a third, and then the five years, 20% each year, then 10% each year.

In 2010 that was crazy, because funds who threw out gates got punished. And here we are saying we’re going to have investor level gates. But I also said, “Well, we also want to align incentives in terms of investment horizons.” So we created a structure on incentive allocations that’s unusual. We have three-year claw backs on incentive allocations.

So, any year the incentive allocation gets calculated, one that is paid out that year, one that is paid out the next year, one that is paid out the year after that and the amount is not paid out, it’s subject to claw back. It avoids the heads I win, tails I lose situation where funds make a lot of money on the way up and then you have a drawdown and no GP ever returns the incentive fees to folks. But we wanted to make that even, and make that … And we still have that. It’s 13 years later, we love it. Our LPs obviously love it.

Meb:

I bet they do.

Soo Chuen:

Our accountants hate us, because calculating three year claw back on its interface takes a long time. So there’s a lot of work that got created. So it was unusual. Then we wanted to keep management fees low, so there were a whole bunch of structural design terms that were quite different and quite counter cultural in 2010. Still quite counter cultural today. One thing I wish we did in 2010 that we didn’t do was to create a drawdown structure, which makes us even more unusual. So private equity firms have drawdown structures. We didn’t do that in 2010. We did that in 2018. So in 2018 we actually decided to return a whole bunch of our capital to LPs because we were not finding anything that we wanted to buy. We voluntarily wanted to return capital, but we wanted to call the capital back in the future.

And the way to do that was to create a drawdown structure where you sweep the cash to LPs, but then it goes in the capital commitment pool and then we get to call the capital back in the future for private equity. For prem This is a very standard structure, but for public markets it wasn’t. So we did that in 2018 and frankly with hindsight, looking back, I wish we did that earlier because it’s worked out really well.

Meb:

What year in the timeline were you able to take a breath and be like, “okay, this may work.” I know you had the optimism that it would always work, but how many years in before you’re like, “Okay, I feel good about this. We’re on the path.”

Soo Chuen:

I’m still waiting for that. One of the defining characteristics of a value investor is perpetual existential dread, knowing just how hard it is and knowing nothing’s a given. So, I say only half-jokingly, I think we’re 13 years old now, but it feels to us that there’s a lot of wood left to chop for us to get to where we want to get to. If you are aspiring to be buffered, you’re aspiring to put your head away types, you realize you just have a long way to go. I realize we’re still on this massive journey and we’re early on their journey.

And it’s not that flippant. I mean, it’s genuinely the case. I mean, look around us. There are not many firms that have a 50-year track record. It just doesn’t exist. Failure is almost, almost inevitable in our industry, which is if you kind of say in those stock terms, it should be scary and it should be a motivator. And I think that’s how we thought about it.

Meb:

If you look back, I mean, if I were to talk to all my aspiring investing buddies who want to start a fund, the number one mistake, and it’s number one through five probably is everyone sees the pot of gold at the end of the rainbow. They see what they want to do and they almost never give themselves enough runway where you mentioned 50 years, but God, I mean just think about 10 years. The amount of people that launch a fund in my world and then shut it down a year later. I’m like, “A year? It’s not even a unit of time to even consider. You need to be prepared for a decade. Who knows what could happen in a decade?” You had an interesting comment that you made that we’ve actually used a somewhat similar framework when we’re talking to people about portfolios. And this is, essentially you were talking about the blank slate, blank piece of paper where we often talk to investors and they have so much legacy, mental baggage accounting with their current portfolio.

They’re like, “Should I keep this? Should I sell this? I’ve had this stock for a while or this fund I inherited from my parents, or I got this in a divorce, oh, yada yada. Should I buy or sell it?” And I always say, “Take out a blank piece of paper and this is your ideal portfolio. If they don’t match up, there’s something wrong.” And then taxes are obviously consideration. But let’s go back to 2010. As you had that blank piece of paper, do you remember any of the names in there? What was the initial investments?

Soo Chuen:

One of our largest investments back in 2010 was a company called Wellpoint at the time. It’s changed its name a few times since, but it was a health insurance in the U.S. He owns a whole bunch of the Blue Cross Blue Shield plans. And it was again in the context of what we said about dislocations and we like dislocations. And you can remember at the time the Affordable Care Act commonly called Obamacare. People were worried about that would do to health insurance because you were estimating medical underwriting, you were capping MLRs and stuff like that. So there was a lot of uncertainty because of that. And that was one of the things that when we launched with, we were talking to day one investors and they asked What’s going to be your portfolio?

We talked about that and talked about the work on that. That’s one example. We own another consumer products company. We still own, actually we don’t own Wellpoint anymore. It’s changed since and whatnot. But we own a small little consumer products company in Singapore. So actually one of the first stocks we’ve ever bought, it’s our version of See’s Candies.

Meb:

Which I feel like everyone has that noble goal of holding investments for the long run and then all of a sudden you get a double, put 10 grand in, you got 20 grand, you’re like, “Oh, my god, how can I spend this? We can go on a vacation, we can buy a new house, we can do whatever this investment.” And so are there any best practices in your head, frameworks for how you hold onto those suckers for so long?

Soo Chuen:

You actually have to start, go all the way to just founding principles, almost kind of philosophy rather than process. You literally start with your LP base. What are the expectations? Because you can’t manage a portfolio in a vacuum. That was one of my theories, which is that what institutions bound what rules bound by the mandate that you create. And so what is the mandate? What is it that your LPs expect you to do? What we told the LPs, and I’m really proud that that’s the case today, is that we are literally going to invest it for 50 years. And this is a partnership for 50 years. Obviously, we were not locking the mouth of it, but the DNA was that. And so with the LPs we said, “Look, we’re partners. We’re going through business together.” We forget, funds are actually partnerships. Legally the structure is a partnership.

And back in the ’50s and ’60s, the Buffett Partnership, the Alfred Winslow Jones partnership, they were actually partnerships. It’s almost like people were creating JVs. There’s a general partner, and a limited partner, and then we’ll go into business together. It’s a JV, it’s a business. It happens to be an investing business, but it’s a business. Now, roll forward to 2010 and today. Funds look more like products. People buy this product, they buy that product, you get this stream of returns, you get this exposure, you get this correlation, et cetera, and you buy a product, you get your statements, you get your investor day, you get your chicken dinner, but you’re not really a partner of the funds you’re invested with. And so we said, “Look, change the DNA. Make this an investment partnership. Roll the clock back to 1950 and 1960. And if it’s a truly partnership, then the expectations are different. And expectations are different not just in the output but also the input if you treat your LPs as part of your team. And why not?”

I was 32 and I fancy myself to be thoughtful and hardworking and whatnot, but I’m one person, why wouldn’t you punch above your weight and use your LP base, the endowments and the family offices that were with you that often have far more resources than you and have them be part of your team and travel with you through this process? And what that means is when you’re analyzing a particular investment, whether it’s Wellpoint or a Greek investment that we’re in, you’re thinking of it like a permanent investment. “Do we want to buy this company?” And then because your LPs are traveling with you in that process and part of the decision making, once you make that investment, there’s a different level of buy-in, a different level of expectations, a different level of knowledge that your LP has about the investment itself, because they know how the decision-making process was. They just don’t see the output.

That requires a level of transparency and a way of running the firm that’s different from a typical investment firm. And by the way, it has to work both ways. If you think about LPs as part of our team and they help us and they’re part of working for their returns, we are also partners to them and part of their team and things that they’re worried about. It’s not always about us. It’s not often about us. A lot of LPs today are worried about China. You can bring your resources to bear and help them, so it works both ways. But that DNA, that expectation one, just sets the tone differently in terms of the way you manage the portfolio. That’s one. But two, the team itself, the Discerene team, the analysts of the team, often that tends to drive how decisions are made.

Why is that? If you create a team of analysts who want to come, create P&Ls, generate returns, get paid on those returns, the expectations are very different. You need activity. You don’t want to hire someone and they have nothing in their book for two, three years, because they’re going to leave if they’re not happy. And you have this constant churn in the portfolio because you need activity to justify the ambitions of the people on the team. If instead you create a team structure. And so the first layer of the stool is LPs, the second layer of the stool are the team where people expect to be here for 5, 10, 15, 20 years at the same firm, which is again, quite counter cultural and say, “You’re going to be here for 20 years and therefore when you make an investment you’re going to own that investment for 10, 20 years.” You begin to think differently about the decision-making process itself for making that investment.

The third leg of the stool is partnerships with CEOs and CFOs, and we think about that seriously, and here’s where my McKinsey background comes into play. You become sounding board and counselor to your CEOs and CFOs, and we actually tell them this. They don’t always believe it. We tell them, “We’re now shareholders, our fortunes are tied to yours and we’re married through good and bad times.” And they don’t believe it. No one ever believes it. But then they stock halves from there and we buy more. And we’re not yelling and screaming at them and we’re not asking them, “Why did you miss this number or why did you do that?” Instead, we’re saying, “Let’s talk about the business. Let’s talk about the process. Let’s talk about organization. Let’s talk about the things that you can do,” and travel with them through that.

Especially outside the U.S. that goes a long way, because in the U.S. it’s very common for someone to buy 2% of companies say, “I own 2% of your business.” In Asia, in Latin America, in continental Europe you can buy 2% of the stock. But from a DNA perspective it doesn’t make you a shareholder. It’s only with time if only for a while that they begin to treat you truly like a shareholder, truly like a partner. And then the conversation becomes more real, because a lot of conversations between CEOs and CFOs and analysts are a little bit like kabuki. Analysts are trying to predict a number. They’re trying to figure out whether their earnings are going to be good or bad or whatnot. And the CEO knows that that’s what the analyst is trying to get, but there’s only so much they can reveal. So there’s hinting, there’s signals, there’s tone.

It’s almost like theater and you’re like, “You don’t need a theater. If you own a business, you’re going to have multiple interactions. You’re going to talk about not just the good but the bad, but the challenges, et cetera.” And to change the tenor of that conversation. If you do all these three things, at a DNA level the expectation is that you’re going to own these businesses for a really long time, and that’s kind of a default expectation. Now, you don’t end up owning businesses forever, so the reason is you can be wrong. And once you set a DNA the way it is, the important thing is to create a DNA within a firm where you don’t just get merit to your ideas, it becomes the opposite. You have to create processes to say, “Revisit, revisit. Is our thesis still true?”

Because the default becomes the different, default is to hold it. And then you have to create processes to say, “Well, just make sure that you’re still right. Just make sure that you’re looking for [inaudible 00:24:22] confirming evidence.” And then because we have a drawdown structure, it changes the tenor of our decisions, because in most hedge funds you have to sell something to buy something, because it’s a fully invested portfolio. It’s a portfolio management tool. Here in this ring you want to buy something just call capital. It’s like a private equity firm. You still own everything that you own and then you just call capital to buy something else.

Meb:

I mean, was the first time you sent the capital back, that seems to me like 90% of people would have a very hard time doing that. Was that decision pained? Was it a struggle? What was that like first time you did that? You’re like, “You know what, I’m just going to give some of this back.”

Soo Chuen:

It was not easy. I mean, we were small at the time, so I’m trying to remember how big we were in 2018. But I remember that by 2019 we were a billion in total capital, 400 million was unfunded, meaning 400 million was not called. Only 600 million was called, so in 2018 we were even smaller than that.

Meb:

What are you guys now?

Soo Chuen:

We’re two billion in total assets. So it was hard. But everything’s habit. We’re big students of organizational culture and myth making in organizations and how myths take a life of its own and become part of the culture of the firm. The myth at this arena is we’re very picky about capital. We’re very careful about who we can bring on board. We treat conversations with LPs as partner recruitment processes, not just sales processes. It’s a two-way conversation on mutual fit. And then what we end up doing is if it’s not the right fit, we just don’t accept the partner. And we’ve done that. What that meant is, by 2018 there was a habit of thinking through these decisions. In 2018 cash was going up in the funds, because we were exiting. And we simply couldn’t find things that we wanted to buy, so the reinvestment risk was an issue.

And the luxury of having our structure is you can think in absolute terms, because obviously there are always things that are relatively cheap. In any portfolio that things are cheaper, that things are more expensive you can always buy the things that are relatively cheap. But we didn’t want to change the way we thought about things and to buy things in terms of relative value. We want things absolute value. So, things didn’t meet our absolute hurdle rate. So we’re like, “Well, I guess we should return the capital. That’s the most intellectually honest thing to do.” But frankly, just from a business perspective, we didn’t want to just return it and then have it be gone forever. We kind of wanted to have the kick we needed. We wanted to return the capital but have the right to call it back. And that’s why the decision that we made was to create a structure where the money that was returned became a legal capital commitment that we can call back in the future.

Meb:

Let’s talk a little bit about today. We are at the end of summertime, 2023. You’ve been in business for over a decade, congratulations. What’s the investing opportunity set look like today? Where are you finding ideas? Are you concentrated like Uncle Warren with half your portfolio in one stock? Do you guys short at all, credit default swaps?

Soo Chuen:

We do.

Meb:

Oh, okay. Let’s hear a little bit about what you guys are doing and the way you think about the world today?

Soo Chuen:

We run a long shot and a long one mandate, so two, so different. The longs are the longs and the same, but the hedge fund has shorts and credit default swaps. So, we do everything bottom up. We tend not to have top-down macro views. Or we do, but we think they’re worth what people pay for them. It’s just nothing, so phrased differently. I think we worry top down. We don’t need on the macro, but we always invest bottom up. We call stock by stock by stock. We’ve always been contrarian, so we still are. If you look at a portfolio today, we have a number of things in China, which is super contrarian. China blew up in 2021 and we backed the truck, and so we’re own a few things now. We have a number of investments in Turkey that we’ve held since 2018. You may recall 2018 was a tough year for Turkey. There was a selloff, the lira devalued.

Meb:

We just had Mohnish Pabrai on the podcast and we spent a little time talking about Turkey, which I feel like now that you too have mentioned it, that’s not a word that has entered most investors’ vocabulary over the past few years in China as well. I feel like China on the aggregate, most investors are going to respond to that phrase with a little bit of nausea, revulsion.

Soo Chuen:

Not a positive reaction. We’ve had investments in Argentina since 2012, but we actually backed the truck in 2019 right after Mercury lost and the [inaudible 00:28:46] came back into power. And so we’ve had that since 2019 and still hold it. We have some investments in Japan, but these investments we’ve had since 2011, since the Tōhoku earthquake. So they’re not new, but they’re still in the portfolio. It looks top down. We have this in this country, that in the country, but the actual process of getting there is totally bottom up. There’s a businesses that we like and when they get cheap and the cheapness can come from this macro dislocations and we say, “Hey, we actually really like the business, but for the dislocation we won’t have a chance to get them. And now because of this location, we do have a chance to buy them.” And then we just do.

These are often businesses that we’ve eyed for a long time. Often businesses that we love to own, we study businesses, we call this peacetime project. We just study businesses around the world. And then you have a list of businesses that we love to own, but we don’t get a chance to because we’re valuing business.

Meb:

It’s on your Christmas to-do list. You’re like, “I want this, just maybe not this year.” You got a whiteboard list of names that you’re interested in.

Soo Chuen:

We do.

Meb:

By the way, before we dive in, because you talk about, you’ve just named three countries that I think most people would never, ever invest in. When you do the portfolio allocation risk management, how many names do you own? Is there a max size? I’m trying to think about the diversification.

Soo Chuen:

Typically, we’ll have 25 to 30 names. That’s typical.

Meb:

Okay, so still pretty concentrated?

Soo Chuen:

Yeah, we’re actually higher than that today, primarily because of the bumper crop of 2020. Because of our structure, when we make a new investment, we don’t have to sell anything. We just call new capital and buy it. And so the number of names goes out when you do that. Large positions will be 10 to 15% of the portfolio. Today our top three positions are roughly 30% of the portfolio. Then top 10 could be 60% or so, and then that’s a longer tail. That’s the level of concentration. Average portfolio turnover is really low, low teens 10, 11, 12. So our average holding period is like seven, eight years on steady state.

But that average can go up over time, simply because we’re only 13 years old. By definition, the right side of the tail is locked at 13 years. The longest tenure company’s 13 years, but every year that goes by the right side of the tail becomes more like a normal distribution, so we have investments that we hold for longer. And hopefully over time our goal is to be longer and longer term. To push the boundaries in some thinking about businesses so that we can actually be even more removed from trading instincts in the market.

Meb:

I’m looking at your 13F, as one would do, and there’s a pretty wide dispersion of sectors. You got consumer discretionary, energy, industrials, finance, utilities, telecommunications. You got a little bit of everything. As you look around the world, the opportunity, is it pretty wide mandate as far as what interests you? Is there anything in particular you’re looking around this year where you’re like, “You know what? This theme or this industry is really something that is attracting us?” Or does it often end up more kind of top-down country geopolitics inspiration? How does it filter down?

Soo Chuen:

It’s none of the above. I’ll share with you a little bit about the process. In theory you can look at any company in the world, any geography, any industry. Frankly, any security. We’re not limited just equity. So really you can look at anything. The question then is, “Okay, what do you actually do?” Because I just said, “Average portfolio, 25 to 30 names. Average holding period, eight years.” What that means is in average year we make about four investments, period, across the team. We have a team of eight people. It’s soon going to be nine people on the team, because a new analyst is joining us next month. But what that means is one investment every two years per analyst, period. That’s the average.

Meb:

Is that a pretty good analyst filtering out by the way, in the interview process, be like, “Look, here’s the deal.”

Soo Chuen:

Oh yeah. Because we tell them that.

Meb:

I’m going to take one of your ideas in the next two years, and it might not be this year, so deal with it.

Soo Chuen:

And it could be three years from now, because it’s lumpy. And by the way, it’s not your idea, so I’ll tell you a little bit about that. Because analysts don’t pitch ideas here, so it’s just different. Because we’ve made so few investments, most of the time we’re doing what we call peacetime projects. We’re studying businesses, we’re not making investments. A wartime project for us is you’re actually figuring out what to make an investment or not. But peacetime, you’re studying the business. You’re studying the business, and the end product isn’t an investment. The end product is a memo describing the business. And then we price it and say, “Okay, this is the price at which we’re interested.”

And the price could be very different from what the stock is trading, it could be half of what the stock is trading. We’re not anchored to where that stock price happens to be. But because we make so few investments, most of the time we’re in peacetime, not wartime. Most of the time we’re the analysts that the team are just studying businesses, not pitching investment ideas. And when they study a business, there’s no view. There’s no like, “Oh, I’m studying a business because I’m interested in business.” You’re just given a business to study and you say, “Tell me what you think of it?”

Meb:

It’s like the intent of that to remove a little bit of the psychological attachment for these people where they have a bias as to what they would think about?

Soo Chuen:

Yeah, because it’s not the idea. What we do is there’s a wish list of companies we want to study. In 2010 that list was rather large. We’re now in 20, 23, 13 years later. Ironically, or maybe not, the list is longer than it was in 2010, because obviously you keep adding names to the list of companies that we would love to study, because we’re curious about it. The wish list of companies we want to study keeps getting longer and longer and longer, because again, the worlds are mandated. We can study any business. The question is, “Okay, what do we put on the list of companies we want to study?” Because it could be anything, right? So for example, I’ll give you an example of a project we studied a few years ago. It’s instant noodles in Asia.

Meb:

I had ramen last night. Let’s hear. Keep going.

Soo Chuen:

There you go. It’s interesting, because if you study instant noodles, every Asian country has different instant noodle brands. They don’t consume the same brands. The brand doesn’t travel, even across borders. The top instant noodles companies in Korea are different from top instant noodles company in Japan, it’s top from difference in China, it’s different from Thailand, it’s different from Malaysia, it’s different from Indonesia, it’s different from the Philippines. But it’s really interesting, because it’s like each industry is very local, but in each place the top brand has a very high share. And significantly higher than number two, and then significant higher than number three. The dispersion of market shares, there are a lot of commonalities across countries. Even though the initial conditions are different, the brands themselves are different. And the question is why? See, it’s almost like you ran a bunch of Monte Carlo simulations and you arrive at the same industry structure across multiple different industries, even though each industry is different from each other.

So, that’s interesting. It’s just an observation. It’s interesting. The question is, “So why? Why is that?” If you do a peacetime project, which we did, and by the way, we don’t own a single instant noodle company, but you do a peacetime project. You’re just trying to understand why the industry evolves the way it is. And the question is, “How much of it is structural? How much is necessary? How much is that?” It depends on accidents of history. How much of this. Depends on initial conditions, how much of it. Depends on distribution, et cetera. You do that project, and then the end product of the project is this big writeup describing the industry, describing the players, describing our assessments of different businesses. And then we just shelve it and then you just say, “Okay, at these prices we’ll be interested in these businesses.”

Now, in some cases you may never own them, but that’s okay. That’s kind of the rhythm of our work. The question is, “Okay, so how do we decide what companies to even do work on?” There’s a few things that we try to look for. The first question is, does this business have a reason to exist at all? Now, that’s an odd question because the business does exist, by definition, it’s a publicly traded company. It does exist, but we still ask that question. It’s almost a question a nine-year-old will ask, like, “Why does this business exist in the first place?” The thought experiment we run is, “Well, if the business disappeared from the face of the earth tomorrow, how different would the world be?” And if it’s not very different, we’re not that interested in the business. I’ll give an example.

Meb:

I was going to say, what’s a good example? You read my mind.

Soo Chuen:

Yeah, Lululemon is very successful. It’s very popular. But if Lululemon disappeared from the face of the earth tomorrow, I don’t think the world will be very different.

Meb:

No, they just, well, Vuori, Vuori is the one that everyone, at least a lot of people here in LA are wearing now.

Soo Chuen:

That’s a kind of existential question. That’s the first question. The second question we ask is, and then this is a term of art here, which is, “Does this business pass that Rip Van Winkle test? So the story of Rip Van Winkle, which is, you fall asleep. In our case, we say fall asleep, wake up 10 years from now. So sleeping sickness, your body stuck, you fell asleep. You wake up 10 years from now, can you reasonably predict what the business looks like in 10 years? And I’m not talking about predicting earnings because there’s no way you’re going to predict earnings of any company in 10 years. It’s almost impossible. But can you predict what a business looks like? What does it do? Who are his customers? What product, what service, what business model, what revenue model? Describe the business?

And if you can’t do that, then you have no business trying to own the business for 10 years. And you’d be surprised. I mean, 10 years is actually a long time. It’s not so easy to have that thought experiment and come up with the idea of something that you can reasonably predict what it looks like, let alone the earnings, what it looks like in 10 years. I’ll give you an example, and this may be controversial, but I think we would struggle to describe what Meta looks like as a company in 10 years.

Meb:

They would struggle to describe what it looks like probably.

Soo Chuen:

Yeah. And so if you’re intellectually honest about it, so if you say the interesting value of a business is the net present value is future cash flows. Obviously, it’s hard to predict cash flows of any business in 10 years. But if you don’t even know what a business looks like in 10 years, what does it do? How does it make money? How do you value it? Buffett likes to describe that, “The line between investing and speculation is a gray one.” And we agree, and you can cross it if you stray too far from the craft of actually investing and you run into the realm of speculation. Obviously, some value investors bought Meta because multiple cash flows are slow. But for us, it’s like if you’re intellectually honest about it, we struggle with that answer, to answer that question. And because if you struggle to answer that question, then it just goes into two hot pile.

It doesn’t mean that the company will fail. We don’t have a view. It just means that you don’t know enough just epistemically to actually be able to invest. That for us is an important part. The next question is, is it within our circle of competence? Now, that’s a more personal. For each investor the circle of competence is different. Buffett loves banks, for example, we don’t. I’m a big fan of Buffett, but we are not going to copy his bank investments because we don’t feel like. But at the same token we feel like we’re much more comfortable going into a country like Malaysia or Thailand or whatnot, because of frankly just our backgrounds and the backgrounds of the team.

Meb:

You got any Malaysian stocks today?

Soo Chuen:

We do, yeah.

Meb:

Good. Okay.

Soo Chuen:

And then, I guess probably the most important question is the question of moat, which is the barriers to entry around the business. And we think the word moat, which is another Buffett term. It has become almost like furniture in our industry, because you hear it so much. And sometimes people say quality, sometimes they mean a competitive advantage. Sometimes they say moat. But you hear it so much that it loses its power a little bit and it becomes a fuzzy concept. Sometimes it just means a higher RIC business. But really, if you take a step back, the concept of a moat is something quite specific. What is a moat? A moat is a barrier to entry around the business that allows a business that makes super normal profits to continue making super normal profits over time. And by the way, that’s actually an anomaly. It’s a statistical anomaly.

Because in a properly functioning capitalist society that shouldn’t happen. Profits should attract competition. That’s a signal. A business makes a lot of money. It makes high returns on capital. Other competitions should come in and compete a way that’s super normal returns. And returns go back to normal. By the way, that’s good for consumers, it’s good for capitalism. It’s not how capitalism is supposed to work. To have a business that makes super normal profits to continue making super normal profits for an extended period of time should be unusual. And it should be an interesting phenomenon. It’d be like, “Why is that happening?”

I’ll give you an example. Back in the ’80s there’s a whole bunch of companies that made super normal profits. Pull up the Fortune 500 companies, you look at, there’s a whole bunch of them. Now, in the ’80s, back in ’87 when the markets crashed in ’87, Buffett backed the truck on Coca-Cola. But he could have bought any number of other very successful companies at the time. He could have bought GE, he could have bought Xerox, he could have bought Eastman Kodak, he could have bought DuPont, he could have bought ExxonMobil. He could have bought any number of companies. Exxon, not ExxonMobil, at the time he bought Coca-Cola.

Now, roll forward, we’re in 2023, many of those companies I just described, GE, et cetera, they’re far less profitable. And then unit economies are, those businesses are far less attractive today than they were in 1987. But Coca-Cola is a stronger company today than it was in 1987. Yes, [inaudible 00:41:32] capital are as high as it was. So the question is why. It’s been almost 40 years, so what allows Coca-Cola to continue to enjoy the economics it does when so many other businesses don’t? And what did Buffett see at the time in 1980? A priori, it’s always easy to make investments a posterior, right?

But what he see at the time that allowed him to make that one decision instead of any other one that he could have made. He could very well have bought GE and said, “Look, GE is a great business. They’re number one and number two in every category they operated in. Jack Welch is a wonderful CEO.” But he didn’t do that. So why? Things are actually quite interesting things to study. And if you study it carefully, you realize it’s not as easy as people think.

I’ll give a topical thing. These days people like to talk about network effects as a moat. Businesses that have skill that we get skill. Why? Because it’s positive externalities. And sometimes it seems like meaning additional customers makes it more available to other customers, or sometimes it’s cross sided. Additional customers makes it more available to suppliers. And additional supplies mean more customer to customers. So two-sided network effects.

People talk about platforms, flywheels, any number of metaphors that people use on network effects. So, that has become a thing. And people talk about network effects as an indicator of high quality business or multi-business. Now, the honest truth is that network effects have been around for a very long time. It’s not new. It’s not technology. It’s not because of tech that there are network effects. We don’t think about it, but there’s a network effect to a mall. The fact that lots of people go to the mall makes it more attractive for vendors to be in the mall and more vendors go to the mall, the more people go to the mall, right? Network effects happen everywhere. In fact, if you open up the 1907 annual report of AT&T and you read it, they talk about the network effects of telephone. And how if more people use the telephone, it would be more useful to other people.

So, it’s not a new phenomenon. But if it was simply the case that businesses with network effects are good businesses, then you would think that a singing competition would be a good business. Why? Because American adult comes out. Lots of people watch it, because lots of people watch it a lot of talent want to be on it because there’s a big audience. And then you have the best singers on it, and you attract all the best singers, all the most talented [inaudible 00:43:38] be in the country. And because you have all the best talent, then there’ll be bigger and bigger and bigger audiences. So, it will never be the case that any other singing competition will come in and take share away from American Idol. You would expect that, but that’s not true. That’s not true. That wasn’t true in Clubhouse either when there were network effects are on Clubhouse.

That was not true in dating sites. Match.com didn’t become the whole industry. It’s not true of stock exchanges. Stock exchanges have massive network effects, but trading revenues earned by stock exchange just keep coming down over time. So the mere existence of network effects has not led to win a take on business. It has not precluded competition from coming in across multi-funded different businesses across time. So, clearly there’s something more to it than that. The act of studying that and doing enough empirical case studies and see what we learn about when network effects matter, when they don’t, what are the limits to it, et cetera, become important. And you can only do that if you have the luxury of time. And the thing about investing is people are often on this terminal. So you’re trying to prove out a thesis and all this business network effects, look at this food delivery company is X-percent market share, therefore it’s going to win.

And then you don’t actually have the time to take a step back and say, “Okay, let’s test the counterfactual. Let’s go study 10 different examples of businesses that got really big on a particular thing, but were not able to forecast the market. And why would they not be able to forecast the market?” Establishing the base rate of success for certain industries is important. And so, because of the way we’re structured and because of the time horizon that we can invest in, we can do that in a way that a lot of people can’t.

Meb:

Over the past decade plus, what’s the main way these companies that you want to partner with for 10 years, a year or two or even 10 years later, why do they usually get the boot?

Soo Chuen:

Three main reasons, from the most common to least common. The most common is, we’re wrong. This business is humbling, so you’re wrong a lot. You come up with some theory about the business, you come up with some theory about how the moat around the business works and you think you’ve done the empirical. You think you have a watertight case. And then subsequent developments make you revisit your thesis. A thesis is only a thesis if it’s falsifiable. Otherwise it’s just ideology. If you have a thesis about a business and you describe the thesis very careful about what our thesis is, then that must be disconfirmable. And the question is, what do you need to see for the disconfirm? And if you see it, you’re like, “Okay, well we just saw it.” And then you have to revisit it. And when you revisit it, you go, “Okay, something’s wrong here. We missed this, or we missed that.”

And sometimes it’s about the business. Sometimes it’s about the people. Sometimes it’s about culture. Sometimes it’s about strategy, strategic researcher making and game theory. So we try to kind of isolate what it is, and then we say, “Okay, well we’re wrong.” And if we’re wrong, we have to sell, and we do.

The second reason is Mr. Market gives us a price that we can’t say no to. Then you say, “Okay, well, thank you. We don’t think the company’s worth that and you want to pay that for it, fine.” And by the way, that sometimes is involuntary. So some of our companies have been taken out over time, and it’s not always that you don’t want to sell, but you have to sell.

The third reason is if we want to buy something better. Now, that happens very seldom, because of our structure. Because we often have dry powder, we have falling cash sitting on the sidelines with LPs. We can call capital. To sell something to buy something is something that you have to do when you run out of cash. And we’ve almost never, it’s not never, but almost never run out of cash, so we’ve almost never had to do that. But once in a while you’re like, “Okay, I really like this, but we need to sell something else to buy this.”

Meb:

How often does it, when you’re looking at some of these countries that seem a little farther afield than most investors’ wheelhouse, when is the geopolitical situation ever an invalidator? Because you just mentioned three countries that I think most investors would have just from headlines alone would have said, “No, this is no chance.” We spend a lot of time talking about global investing and I feel like I’ve been banging my head against the wall and people, I don’t feel like it really resonates that much. Largely because U.S. has been the death star of performance for, is that the right analogy?

Soo Chuen:

I think it’s a good one.

Meb:

It just killed everything. Anyway, is there anything that’s an invalidator, or is there things that you look, it’s mostly opportunities. How do you think about it?

Soo Chuen:

I’m also trained as a lawyer and understanding that the privilege of buying a security and saying, “I have rights,” is a privilege. It’s not a given. You buy a bundle of rights, you buy a bunch of protections, piece of equity gives you a bunch of protections. It’s not very strong protections. You have certain rights, governance rights, certain voting rights, et cetera, but you don’t have contractual rights, so cash flows, et cetera. So, understanding at the end of the day that modern capitalism sits on top of rule of law, sits on top of protection of property rights is something that we sometimes forget being practitioners as opposed to theoreticians. But it’s just true. It’s really important. And so because of that you have to be comfortable enough with just the structure, not necessarily the macroeconomics of the particular, like what interest is or inflations are. Just the structure of society in a particular country in order to say, “I’m willing to invest in a particular country at a price.”

Now, once you get over that threshold condition, obviously there’s still all sorts of macroeconomy environments, very different macroeconomies, some more stable than others, some political unrest situations, et cetera. There’s a whole range within our portfolio. The question then becomes, “Okay, what are the risks you’re taking? And then what’s the potential return?” Like I said, we had nothing or almost nothing in China for years and years and years and years and years. And the reason for that is because all the risks of investing in China were always there. It wasn’t like Taiwan wasn’t an issue of 10 years ago, five years ago. It wasn’t like China had different neighbors. It’s not just Taiwan. Everyone focuses on Taiwan today, but it’s not just Taiwan. So you have North Korea, you have the Spratly Islands, you have the LAC, which is the border with India.

You have Russia and Astro again before Ukraine. If you look at geopolitics with China, the issues where China have always been there and dittoed all the other things that people talk about today, which is the surfeit of institutions. China has a lack of well-developed institutions in China for peaceful transitions or power and stuff like that. That’s always been true and it’s always been something that China has had to deal with and continues to have to deal with. An aging population China has always to deal with. Underdeveloped governance infrastructure that China has always had to deal with that. It’s not new. None of these things are new, but all the things that were good about China that people were attracted to. A fast, rapidly rising middle class and educated population, infrastructure that’s probably punches way above its weight in terms of the sophistication of the infrastructure. Now, the way the market interprets the information is different, depending on the recency. Back when the Chinese internet stocks were trading at 50 times earnings were times when people were pointing to all the good things, which were always there and ignoring the things that could go wrong.

Meb:

We see this on Twitter, we’re talking about China more than anywhere, almost has been just this euphoria and depression as far as the valuations over the past 15 years. I mean, I don’t know the exact year, you probably know better than I do, but certainly 2007 people were clamoring for the BRICS and China and India, and at various points it’s been both sides.

Soo Chuen:

That’s true for EM as a whole, it’s not just China. It tells a story, probably the most topical story right now, but it’s true for all the BRICS. When we launched in 2010, we forget because time has passed. But in 2010, the consensus was the BRICS for the future. Asia was the future. Latin America was the future. The consensus was the U.S. was toast, Western Euro was toast, it was sclerotic. Governments were over levered, households were over levered. You have an aging population. Look at the demographic premium that Asia had. Young population, high savings rates, governments were not borrowing, governments were running trade surpluses. Didn’t have a lot of debt on the balance sheet, et cetera. So, the consensus was that it should actually, that’s the future. And that was how portfolios were constructed from the top down. The question we were asked in 2010 is switching, “You’re from Malaysia, you know Asia well.?” And I said, “Yes, I do.” “So why are you running to Greece and buying beaten down companies in Greece? This is not where your competitive advantage is.”

But the story has flipped. The bloom has fallen off the BRICS rows over the last 13 years, and there’s frankly been a hollowing out of the modern investment industry. Back in 2010 there was a lot more active money in EM. Now there’s more passive in EM. And even within active now, it’s all about the growth. People are still in EM and they want to buy crab and coupon and C limited and [inaudible 00:52:09]. If you draw the Venn diagram of active as opposed to passive EM value, that intersection of that keeps getting hollowed out. When I started my career and I made a list of thoughtful investors around the world, it included long only funds that had a lot of money in EM, like Third Avenue and First Eagle and First Pacific, and Southeastern and Brandis, and you name it.

There were a lot of long only investors who literally ventured around the world. But many of those big complexes have shrunk or gone out of our business and the money is being hollowed out of EM. As a result of that, you can see these dislocations in EM. Things sell off for just literally no good reason at all. I’ll give example. Back in 2020, during COVID we were shareholders with this company called Protelindo. We’re not shareholders anymore, but we were shareholders at the time. It’s the biggest tower company in Indonesia. It sold off in March 2020, and it literally, the trading of the stock got halted for a bit because it’s a circuit breaker in the Jakarta stock exchange. And there’s no reason why you should have hit a circuit breaker.

I mean, it’s a tower company. It signs tenure contracts with its customers. The tenure contracts are not related to usage of towers or anything like that. It’s just you get the same rent for your towers regardless of the macroeconomic environment. If you wanted to buy a COVID-proof business, this was one, but it’s not traded out aggressively anyway. And why? Because there’s probably some programmatic flows away from EM, risk off during the time. And if you have a relatively illiquid stock like this and when it sells off, there’s no natural buyer. Who’s the person in March 2020 saying, “I want to buy that stock.” We did, but there are not that many of us.

Meb:

Yeah, I was going to say, you.

Soo Chuen:

Yeah, the universe becomes small and then you have this market failure, this technical selloffs because there’s not enough buyers on the other side.

Meb:

What’s on your list? It can be country, stock, sector area, that’s like your white whale. You’re just like, “All right, this has been on our whiteboard. We want this sucker, we love the business. But son of a gun, it never trades down to valuations we want.” Is there anything in particular that fits that bill?

Soo Chuen:

I mean, there’s so many, right? As value investors, your eyes are often a lot bigger than your ability to pay. You want these wonderful businesses, but you want them at high IRRs. We’re not talking about IRS, and this is my complaint about IR. People talk about IRS, they mean buy and sell, right? And that’s IR. By the way, that’s not an IR, that’s an ERR. That’s an external rate of return. An IRR, which is an internal rate of return is the price I which you pay. And if you own the company forever, that’s the cash on cash return that you make. That’s the original definition of an internal rate of return is a rate of return without an external source of cash. If you can buy a really good business, like a Costco, and make a mid-teens IR on it, perpetually owning it forever, you back the truck, but you very seldom get it.

Often you get it because there’s something wrong in the company. The data Costco will offer the IR to us is when something went really wrong with the business. And then the question you have to ask is, “Well, is that structural or is that temporary? Can we underwrite? Can we not underwrite that?” And often it would not be so obvious. I mean, things are always obvious with hindsight, but at the time it would not be obvious, right? So, when Wellpoint was trading at $29 a share in 2009, it wasn’t obvious. With hindsight it was a lay, but at the time it wasn’t obvious. That’s just the nature of the beast. And at the times, do we have strong enough convictions in your underwriting on the structure of the business to say, “We think you’ll be okay. Notwithstanding the very real risk, the very real issues that is right in front of us, we can underwrite it.”

Most of the time we’re just looking at businesses saying, “I wish we can own this. I wish we can own that. I wish we can own this.” And when it gets to the price where we can actually own it, we’re going to be hemming and hawing. And it’s usually when things are the most uncomfortable that you know that that’s when you should actually make the investment.

Meb:

We’re definitely going to have to have you back at some point, because I got a lot more I want to talk to you about, but I got a few more questions we got to include in this. The first one is, two of the three names of countries you mentioned recently, the immediate disqualifier I feel like for most people they would say, “No, no, that country has really high inflation, it’s uninvestable.” Can you talk to that just briefly on, are there misconceptions there and how should people think about investing in stocks in countries like Turkey and Argentina that most people would say, “Oh my god, that’s crazy. No chance.”

Soo Chuen:

The beauty of what we do is, you don’t actually have to invest in a country, you invest in a particular company. That specific company is what you have to think about. And it depends on the business at the end of the day. If you own a business, often you have inflation, something happens, the currency halves and the inflation’s important in the country. So end start happening is there’s a disequilibrium, so in the country. And so why? Because there’s an equilibrium in which prices are set for a particular product based on certain purchasing power, based on certain cost structure, et cetera. And then there’s an external shock, your currency house, and therefore you have inflation import in the country. But the price that you were charging for the product yesterday is not no longer the same price that you should be charging tomorrow. The new equilibrium has to be set, maybe with less volume, maybe you sell less at a higher price, et cetera.

But that’s a disequilibrium. The question becomes, “Okay, in that disequilibrium, what do we think the earnings power of this particular business is once it goes back to equilibrium? Often there’s an offset, because if a business is moaty, it has elasticity of demand is not that high. So real earnings power goes down for the population, but income elasticity demand is not that high. And so you can raise prices and recover a lot of the earnings power, yet not lose enough volumes for it to make a difference. There could be substitutions into the product. People trading down to a particular product. The second order effect and you get to a new equilibrium from a micro perspective for that particular business. And so in some cases what tends to happen, it’s not like earnings are not affected, earnings of the business will be affected and inflation is not good generally for a country.

Buffett describes it as a tapeworm that destroys value for the overall economy. But two things happen, the stock price also crashes. So the question is, “Okay, what’s intrinsic value?” Increasing value went down by 20%, but the stock price halved or stock price went down 70% in real terms. And therefore a gap got created between value and price. And that’s how we think about it. At the end of the day, all you need to do is make an investment in that particular company and underwrite that business. You don’t necessarily need to care about the whole country. I mean Turkey as an example, right? Investments in Turkey have been actually fine for the last five years and we’re quite happy with how they’ve worked out. But it’s during a time where the Turkish lira has gone down 80% against the dollar, 80. If you just bought the Turkish lira, you’ve down 80. If you bought an index, you wouldn’t have done well. But in the end of the day we just bought those specific companies, and the companies have been fine. That’s how we think about it.

Meb:

I mean, and listeners, I mean I think the macro part I think a lot of people lose on currencies is, real currency returns, net inflation are usually “fairly stable over time.” Keyword being over time. Any given year they go to down 10, 20, 50%, but they adjust for that inflation. That’s why you see currencies in such countries that are high inflation typically decline relative to the dollar, but on average it nets out. And importantly, one of the best tailwinds, macro speaking, is when you have high inflation that comes down in a country that tends to be you actually really want to be investing where there is high inflation, but it’s reversing. All right, what’s been your most memorable investment? Good, bad in between? What’s burned in the brain?

Soo Chuen:

Hot to pick one, I’ll talk about one, which I think was a huge lesson for me. It’s an old company that I followed back in 2005. It’s called CP All Plc, C-P A-L-L P-L-C. It’s a convenience store in Thailand. And this is back even before I started this, right? First I visited that company in 2005, right after the coup d’etat in Thailand at the time. Thailand has had a coup since then, but at the time Thaksin Shinawatra was deposted and had got on a plane. And we saw this little convenience store chain. It’s called CP All Plc, that owns a bunch of 7-Eleven stores in Thailand. And the unit economies are really good and it’s all about distribution. It’s all about saturating the market, it’s all about creating logistics, et cetera. That makes it very difficult for others to replicate.

I got to know the business and got to really like it. The reason why it’s burning my brain is that I failed to see just how powerful the business model is. I really like the business. It was literally trading under 10 times earnings, so it was easy to say, “Look, at this price, you have a big margin of safety.” And it was growing like weed and it was all good and convert little competition and the macroeconomy was very bad. So it was under earning, but we thought it was going to be okay over time. That was the thinking. When I started this screen in 2010, I didn’t buy it. And it’s a mistake that I didn’t buy it because by 2010 when we launched, the stock price was totally different from where it was in 2005, and I thought it was too expensive.

Now, if you look at what the company has done since then, it’s done quite well. Notwithstanding, there’ve been a few missteps since the company has made. If you looked back at what I thought in 2010 and about how the business is going to grow, I significantly underappreciated the levers the company could pull in order to keep growing and to keep improving its unit economics.

Meb:

Hey man, it can be on the whiteboard and you can just say, “We’re waiting for you guys to muck something up and we’ll consider you again one day.”

Soo Chuen:

The learnings are more around the fact that you could be right on the moat around the business, which I think I was, and is not an efficient condition. There’s so much about the business that you can learn beyond just the moat, meaning the barriers to entry around it. And as civilian investors sometimes quite defensive. You think about the downside, anything about a business being protected, but you don’t think enough about what could be and what the lever that could pull are and cultural things and dynamic things that can be changed about the business. Endogenous thinks about the business. So, it’s been helpful to me, because often it’s the question that CPL is something I recall when I say, “Hey, just pay close attention to other levels that you can pay attention to.” Second order effects that aren’t order effects, and stuff like that. And it’s something that was 20 years old at this point, but it’s still an archetype of a mental model that you bring to bear and say, “Think about CP All Plc.”

Meb:

I love it. Little Post-it note. Soo Chuen, this was a tour de force around the globe. Is there anywhere people can find you? You guys got a website? What’s the best place to check in? Where do they go? Where do they find you?

Soo Chuen:

We have a website. It’s discerene.com.

Meb:

Soo Chuen, thanks so much for joining us today.

Soo Chuen:

Likewise, thanks very much for having me. It’s been a lot of fun and it’s been a privilege.

Meb:

Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at [email protected]. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.

 

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