How did you come to work at Baupost

• I worked at Bank of Boston (now BofA)

• Worked in a commercial lending group early on

• Worked at Chase Manhattan in Special Situations

• I got assigned to a loan trading desk; worked with a wonderful mentor who taught me about debt and the value of buying out of bankruptcy

• Worked in a group's proprietary capital group; headhunter; moved to boston; started doing mostly distressed at Baupost; then got into distressed

• Led the team that was managing our Lehmann investment

Baupost

• 4 investment teams - Real Estate group, Private Corporate team (PE investments but also debt or special situations), publics (public equity and credit / distressed group)

Do you want controlling positions?

• If we don't have explicit control, we'll have negative consent rights

• Baupost - wonderful clients that give us capital with a very flexible mandate; a portion of our capital is very very long duration

• We can tell a management team that we can own a business forever

• We can shape our capital to the situation - common equity, preferred, lenders with equity upside

Going from Analyst to President

• Being an analyst gives you some measure of credibility

• It helps you appreciate their experience; there's nothing quite like having an open position when things are not going well; trying to go to sleep in that situation is tough

• As a manager: Have to ask yourself - what are you going to be like on someone's worst day?

  • As an investor you WILL have bad days

  • To be a manager, you need to appreciate that experience

Market Efficiency - How has it changed over time?

• I think inefficiencies are built into the markets because you have humans

• Human beings have logic flaws, behavioral challenges

• Someone who owns a bond, company files for bankruptcy; in the investors mandate they can't own bonds so they become a forced seller

• Flow of information has increased; There are more people that are good at the job

• Competition has increased

Competition in Distressed

• There are a number of competitors we see regularly that are incredibly skilled and know how to work their way through complex situations

• Even in a frothy market there are interesting opportunities that present themselves

• Zero interest rates - gave a lot of mulligans to different companies; companies that had stress on their capital structures were able to bump along; there were plenty of instances that were idiosyncratic

• Steinhoff - south african retailer - significant accounting fraud; shook out a bunch of holders there; 

• Pacific Gas and Electric - wildfires caused massive devisation; PG&E filed for bankruptcy; a lot of capitulaiton

• Made a bunch of money in both of those opportunities

Q - When has it gone wrong? What is the most underrated skill set of an analyst? How do you get your hands around these big complex deals? 

How do you define value investing at baupost and how has it changed over times? How do you view hurdle rates?

• Graham and Dodd - positive skew with very clear downside protection

• We went into subprime and didn't know anything about it

• Investments in biotech space; idenyx - biotech; we realized that a company had a lot more IP than people realized

Q: How have things scaled over time?

• The nature of the discussion would be incredibly familiar

Baupost 40th anniversary

• We have protected capital for over 40 years

• Seth wants to stick around for another 10 years; we need to get that right

• We are probably going to see some change in management responsibility

• Risk management, hedging will sit on top

• We have one pool of capital managed opportunitistically; capital flows to where things are opportune; Baupost has 70+ operating partnerships with real estate side of business

• Private corporate team has gotten bigger over the last several years; 30% in public equities; 2010 - 50% in distressed credit

• People are generalist to a degree; the real estate team is generalist within real estate

• Public side - people may be experienced in distressed credit and do a bunch in distressed credit

• We've been in a benign credit market without a lot of broadbased bankruptcies; there were many opportunities that came up within that environment

  • PG&E - highly highly complex bankruptcy to understand

  • We bought claims that insurance companies were selling against burned houses; called sebrogation; a lot of people were selling these things; it was very complex to digest and so many insurance companies were willing to sell

  • Start to see the areas within the system to see where within credit will be  

Current views on SVB. Was the government's response correct?

• We didn't buy deposits; a lot of people didn't actually do it

• SVB taken over by regulators on friday and Sunday it was bailed out; 5-6 people working full time; Seth and Jim on a bunch of calls all weekend; there wasn't much that actually traded

• If I was the regulator I'd look at the system and say what's the least evil thing here; I think some people would argue that there wasn't enough pain. Bondholders and stockholders got wiped; AT1 holders were wiped - shareholders got recovery even though bonds didn't

• If I don't bail these out and create serial runs - the result will be a concentration of deposits in institutions that were too important to the system already; 40-60% of lending comes from regional banks

• Its going to take on a longer policy response; they probably have implictly guaranteed some deposits; they've left people with the impression that deposits are safe in any institutions; regional banks may end up taking more risk now

Implicit Guarantee on Deposits

• Fear seems to still be wide spread

• The market is constantly testing; like the raptors in jurassic park; 

Baupost 13F

• We have some smaller bank investments and private investments in banks

• Leveraged Financial institutions whether its insurance or banks; its really hard to underwrite - derivative exposure - hard to get deep conviction in downside risk; enormous moment of stress - a lot of the risks amplify themselves

Sovereign Debt Crisis Potential

• What excesses might have built up in the system as a result of having ultra low rates for long time

• SVB - a lot of people didn't predict it; people didn't think about very low rates hitting the bank system

• Probably some analog in the sovereign markets; countries that have budgets based on low rates persisting; a lot of places aren't able to tolerate these big jumps in interest rates

Investing on Macro Trends

• We are not macro investors

• We have to understand the macro backdrop; you need to be situationally aware

• We build our hedge book to protect ourselves from those situations

• We are not levered and hold a decent amount of cash; you want to be front footed and don;t want to be licking your wounds

• Hedge book - we were cushioned significantly by having great hedges

• We don't short individual securities - don't want a GME in the portfolio; we buy protection in the form of options; known amount in premiums we pay; gold options - protection against inflation; various rate options against other aspects of the portfolio

• If this bad thing happens how will this affect us?

• We have puts in one form or another

• We will do arbitrage positions; we do arbs; not a big thing we normally do; we'll short securities in those instances

• Hedges - we want to buy over time and assume that in those down years it pays off heavily; our clients want limited volatility in our results; its very helpful to be front footed in moments of dislocation

Advice for students / what keeps you excited?

• Try to go to a place that develops you; you always want to be around people that will help you learn

• You want to be at a place that has a fundamental ethical foundation

• The people that I work with get me excited to come to work

• I love the people that I work with; our clients are many large institutions - we are helping them

• Energized with taking a meaningful role into the next generation

What are the key principles in your creed?

• I only invest in fundamental theses where we see a fundamental reason we are above or below consensus

• Short side - tangible reason for surprise negatively

• Narrow the focus that will make it through our process

• Need to match terms and partners in terms of duration

• You need to be fully committed; when you launch, you are actually launching; our committment was full stop

• Picking people on our analyst team that love investing

Tiger style of investing - where do you see yourself similar or different from that type of investing?

• 20 longs

• 30-40 shorts

• We take a lot of active risk on the short side; have not reduced risk on the short side; we think short selling can make money for us; profit center for our ideas

• We don't do privates

• We're not in weird

• 50% of portfolio is international

• We don't do a lot of larger cap, TMT names; were in businesses that are in surprisingly high quality businesses

How do you think about your portfolio?

• Any observation you have could be relevant to your job; you can invest in a theme or name in any way expressing something you see in the world

• When you keep hearing about a theme over and over again - pay attention; maybe that's a new emerging theme

• Where we spend time - if you are in the weeds of new position - we are constantly doing checks; take the second level thought from that and start digging

• I just found out a commodity is in short supply; who might be the beneficiary of that; take that second order thinking that will lead you to other opportunities

• If people are doing a lot of home improvement - lowes and home depot are probably up - then what are the materials in home improvement, what are suppliers to home depot; who are there suppliers

Research Process

• We need a reason to have a surprise on why a company will outperform expectations

• We think these things are going to happen; the fundamental story is going to shift

• More likely that mid cap names are going to be a 1-2 product/region company; 100B market cap companies - those are going to be high quality but will take forever to create a differentiated view; its so large that there are so many business units in a corporate umbrella; every biz unit and be right on them all at the same time

• We won't be in biotechs; super interest rate sensitive businesses; oil prices

• Multiples and index valuation levels can be completely unknowable on the downside; on the downside, we feel strongly about earnings and free cash flow estimates; the downside is really knowing your company well; you know when to get out; being open to changing your mind

How do you think about long term view vs. dynamically sizing bets? Long side vs. short side?

• We have a five year view on everything we invest in

• We don't use long term horizon to be complacent in the short term; we need to take advantage of what happens in the interim; if i'm going to own something for 5 years; I should be able to trim when things are growing or buy more when its a great opportunity

• So we will buy or trim based on really knowing the companies

Shorting - some hedge funds are moving more away from it

• Price target is price target no matter how the stock got there

• You really really really need to what the market cares about for a company. If the market gives you a gift - take it

• We covered a short and two days later it was up 70%; if we didn't stay disciplined on our price target then we wouldve been really hurt

• Won't take a short larger than 5%; we don't size shorts at max at the beginning; if the short moves against you, you want to add

• Take profit when you can and not when you have to

• We are very unwilling to take short positions that are consensus shorts - we are not short names that are high short interest; the risk of a squeeze is too big; you aren't getting as much value when everyone is expecting a negative surprise

Launching in April 2019

• Opportunity feels like a punch in the face

• When things are going crazy; that has to be the opportunity to buy longs at low prices or push our shorts and hurt it

• Be greedy where others are being fearful; aggressively covering shorts when hitting target price; we did not change what we do

• Emotionally volatility is a gift; its not a punishment; expect things to move against you

10 year vision for bayberry?

• I have the world's most boring updates

• I am doing exactly what I want to do

• We hard closed to new capital; we wanted to be small; we've remained closed for years; how big I want the team; I want it all to be the exact same; we are not a firm that wants to grow and grow and grow; we're not trying to add new teams or new products; I want to be doing this exact job 30 years from now

• I want to get better at it

Advice to female investors

• Focusing on being the best investor you want to be in

• Just focus on where you can learn the most; work for people where you can learn the most; stick to what you like doing; find where you can see 

Q: Any advice for gaining credibility and attracting investors?

• Credibility comes with previous track record

• Need to make it very clear what your unique value proposition is; being very clear about what you are going to do and not going to do; 

• Investors invest in your for one thing; if I say I'm going to do x - I'm going to do x; being very clear that your partners know exactly what they own; you will hit a period of volaility good and bad

Favorite investing books

• Mindset is the number one book that I recommend to everyone

• You are handed mistakes every day; I can see every mistake I've ever made; learning to view your mistakes as a way of getting better; finding the interesting or good or bad things in the data;

• Learning to embrace uncertainty and failure or learning opportunity

Q: How do you think about diligencing companies outside the US when you are not in the country?

Q: Burford is one you've talked about in other podcasts. The company has not re-rated and you've owned it for 3 years for a while

Feel free to pepper me with questions

We are different than fundamental equity; its one of the least desired spaces in the HF industry; lots of competition - people doing roughly similar things; 

I spent my career in the credit markets; I joined just before credit derivatives; 1998 - russia defaulted; LTCM blew up; 

Saba Capital

• Its not fundamental credit either

• Russia and LTCM, 9/11; 3 months later enron, 7 months later was fraud of WorldCom

• Formative years were fairly tough; seeing credit getting upended everywhere

• Credit you get coupons and par or you don't; I was already less interested in how to be long or short a given credit type

• We are trying to figure out for interesting situations (as we did in credit suisse); that was not a challenging investment strategy; the credit spread itself - index of european financials with 33 companies; within november it was 2x the spread of the worst company and 9x the spread of the worst company

• For a range of outcomes - can we setup a trade in credit suisse that works across a range of scenarios

• Our strategy is to be in interesting, event driven situations where there are a range of outcomes; try to setup to be in a good spot; relative value - buy the debt and short unsecured debt; long and short the same company - different parts of the capital stack

• Bonds in a structure (mutual fund) vs. closed end fund; Adi Syndrom - closed end or open ended fund bonds; some original ideas in; we will do arbitrage; dedicated capital since the beginning

• We have tail protection

If there already is shakiness around a name - how do you price it?

• I don't predict the future but it was clear something was going to happen

• There comes a point where whether a bond matures in a month or five months or thirty years - its right before maturity; as a company migrates from solvent to insolvent; when solvent - we talk about it in spread terms; 

• Starts out as spreads; as it gets worse, the spread gets higher; risk of default in year one is higher than risk of default today; spreads are higehr the further out you go; 

• When maturity getting closer what matters and theres default; 30 year bond at 40 vs. 2 year bond at 75 for Greece; becomes about dollar price

• We thought the next two years are key; we went long risk to 10 year for low dollar price; short risk to 2 year; there was no negative carry; both at 450 bps; we set it up for dv01 vs. cv01

• I liked the idea of being long credit suisse but not for the first few years; we went long credit suisse for 10 years and short for 2 years; or im long credit suisse for 8 years in 2 years

• I put on all I could; I talked to reporters about us; it was a very obvious trade; if it got worse slowly that was the worst outcome

• This trade was obvious; people would not touch it but there was a way to profit; I didn't pay a cent but I owned a straddle

• If it got acquired, then credit suisse would go up

• If UBS buys credit suisse why do they trade at similar levels; if UBS spread were zero, both maturities would be at par; UBS is at 130; credit suisse at 220; when I did the trade it was at 440; its borught the 10 year up vs. the 2 year

Credit derivatives

• CDS, CDX (indices); there is a developed credit options market but only for indices; not specific stocks

• CDS you don't need to know a ton about the 

If we were interested in the space - how can we learn to do what boaz weinstein does? 

• Its not as retail friendly

• What I do its not esoteric, its mainstream

• If you summed up the amount of junk bonds in a given day, its not as much as credit derivatives on junk bonds

• Indices - Bridgewater, AQR, Blackrock, PIMCO - bond king wanted to learn new things; credit derivatives are amazingly liquid; only 900 companies on which they trade

• Banks need to hedge credit risk; banks will use indexes if there are no similar companies

• You can read about it but you learn it best at a desk like goldman or barclays

• Credit derivatives scare people because of the name derivative

• Warren buffett and Charlie munger hate derivatives but he sells a ton of derivatives; he was one of the biggest users of it; he was using them with us at Deutsche

Books or blogs to get smart on the space

• Some banks have written primers

• Summer intern - banks will have a teach in

• Sometimes the derivatives are better than longs

• There may be no bonds for a single company in a maturity bucket; selling the derivative to a bank that is selling the loan

Our firm manages 4.5B

• Last year we owned 6B in SPACs

• Credit derivatives are 

• We own 2B of closed end funds

Does the credit market sniff out things further than or quicker than equity markets?

• Nippon paper - tons of debt on it

• Stock had a market cap of 2B; slowly fell for 4-5 years

• Only in the last 20% of the decline did credit really pick up on it

• It imports coal to produce paper; stock was doing poorly; credit spread stayed basically the same the whole time; now the stocks down 50% and the credit spread jumps a bunch

• Investment grade companies are ignoring bad news because its investment grade

• Kohls had the same thing

Given the fallouts in recent weeks - what are credit derivatives markets telling you right now?

• What % can be liquidated in 120 days; the question is kind of silly; if we were answering that question in september 2008; in a normal world its all fine but most of the time you worry about it in a bad market and its awful

• If I swept the order book - how much could I get

• If bond liquidity is bad - the demand for CDS tends to go up; I'm normally in opposite zone world; 

• Prudential insurance - negotiated deal; they came to us with a price that was really high; he started really high; 20m deal; I sold it to him at even higher

• Simon property group, AIG - they all wanted more and more

Counterparty risk

• There is a clearinghouse; that is quasi government risk

• We have agreements with almost all banks; we post money into a third party trust

• Its kind of a nothing burger now

Starting your career now

• Its really important to come up with a very different approach

• Being in a new area is more important

• I certainly went into a place that was new

• There wasn't a big line of people that knew more about it than I did

• It doesnt have to be a frontier market; products that require sophistication and insurance

• We are looking at the CAT risk space; stone ridege

• Credit insurance taking tail risk - interested in learning more about CAT risk

• Arbol capital - using ML to try to price more exotic weather risk

• Citadel year - was 33% of the market that 

Hidenburg - how are they shorting Adani?

Lincoln national credit short but long the stock

• If I asked you - 2 companies A and B and gave you the same for everything; the stock of company B is much more volatile than A; which would you buy?? In credit, the higher vol company has a higher chance of defaulting; the higher chance of default you have to be compensated

• Lincoln national - the realized volaility was much higher; the credit spread was similar to met and pru; I'm going to short lincoln national; I'm owning an option when I short the credit; when you are long credit your are short an option

• Buy a little bit of stock in case things bounce back I'd short more

Why would you trade options when you could compound capital? What investors are most philosophically aligned?

• Long term capital gains are great

• Warren Buffett style worked super well when he started in 1950 and it worked well from 1950 to 2008; his returns are not so spectacular over the last 15 years

• What if they don't compound

• I'm going to go the best way to go long and short - normally CDS on the long side

• Need to have investors who like what you do; when you are doing very well - you'll get investors that love your comments, nod their head when things are going well; if they don't understand you, they will redeem; if you keep disappointing you get to a group that only really wants what you do

• We have a form of tail insurance that has done really well; investor I can cite is state of hawaii; we are there in there to be defensive and do well when there portfolio is doing poorly; harvest gains from us and invest in longs when markets are doing poorly; family offices; we are very hard to replicate

Closed end funds and SPACs

• Saba case - different products about cannibalizing

• 400B space for closed end funds; funds managed by blackrock and franklin templeton that own all sorts of stuff; because they are semi permanent capital - they may trade at premiums or discounts; almost everyone in it is a retail investor - we are the largest activist investor in closed end funds; 85% are closed end funds

Should Be buying cambria tail risk?

• I wouldn't invest in it; its doing a lot of things I have issues with

• Cambria lost money lost year; they buy out of th emoney puts; it lost money last year; you had the conservatism and it lost money

Democratization of investing and alternatives - B REIT

• Blackrock or Blackstone wants to sell stuff to more people so they call it democracy

• Here its the ability to sell shit to more people; does everyone need a private reit structure

• Really its to place illiquid investments into more homes

• Big asset manager - Baillee Gifford - private investments - the problem isnt that the underlyings went down; people don't believe they are marked correctly; you can buy a closed end fund but you have to worry about how spacex is marked in the fund; management turnover at high level; blackstone - cant believe real estate fund to hurt

• Closed end fund - retail driven product - I like working for my investors and like that small investors get to come along for the ride; we fight by the right to close discount; turn close end fund into a open end fund; I like our role there

• Once in a while, a manager will do something crazy; investor from china - you kill the chicken to save the monkey

• In front of a board election they changed the election rules; now you need 60% of the shares of the fund; lost in court and 

• CEFS; BRW - proud to say in 2022 - only fund that didn't have a negative net asset value

• Defining strength - putting 2 things together that are not normally together; on the run off the run; we can come up with a trade construction that crosses markets

• SPACs - people who are mandated to invest in fixed income - they can't buy SPACs

• SPACs - 10 $ in trust value; invested in US T bills; looking for innovating growth stock to buy; flying crads; biodegradable shopping bags; so much froth during the Cathie Wood peak (not a fan of her) touting; 

• SPACs who had not found an acquisition trading above 11; market went cold they were trading at 10.10

• When things were going to 9.60 - are they an equity product really? You really have t bills held in trust; never been a credit event in the history of SPACs; 1.25 years left; 9.60 - going to make 9.60 to 10 - 3.5%; single B had a spread of 3.25% above libor; Safe thing I can buy to fund the short; SPAC could be purchased at the same yield; buy triple A and short single B; long triple A effectively; banks let me lever spacs 10:1; paid in tail protection

• We accumulated 6.6b at the peak and go short 6.6B of high yield; high yield down 15%; spacs didn't go down at all; matured and came out of book quickly; I presented it like free short

Duration fund

Deutsche Bank

• Not the best run bank

• Reflexivity

• Nothing that the central banks

• Silvergate, silicon valley bank, signature

• The government - incredible amounts of money thrown at it; I was at the new york fed the week that lehman fell; I was running global credit at the time; the fed knows more or knows everything; 

• Ways to do it where you can't push the world into a global crisis; the fed doesn't know

• If they knew SVB was a problem - lets say they knew a lot about SVB - probably didnt appreciate the run it would cause of outflows; Kevin bacon - everythings fine when its so clearly not

• Deutsche threw me for a loop - highly levered institutions; banking crisis is far from over; there are a lot of losses in the commerical real estate portfolio of regional banks

Last comment

• You have never had a moment when you went to cash

• Theres enough things i can point to where theres a ton of unknowns 

• I would say - wouldn't it feel a chunk of money and put it in cash; cash is tail protection

• Wouldn't it feel nice to take chips on the table and have dry powder; I look at my entire investing career; I'm amazed about how many landmines we know about

• Equities are at a high multiple; hard landing

• Market might be fine but I don't remember an easier moment to take chips off the table

EDA - example

• Valuation in Cadence and Synopsys went crazy 2010-2022; 30 baggers

• Synopsis and Cadence - patience was rewarded if you waited to see your thesis played out; how much is cyclical vs. secular

• Defensible franchise that is incredibly valuable to its customer base

Do you believe the team will outperform the market?

10 Traits of superior active managers

• Historical performance

• Long-term investment horizon

  • Time horizon arbitrage; look out 3-5+ years

• Highly educated team

• Investment experience - more is better

• Collaborative teams outperform individual managers

  • Teams out performed individual managers by 40bps controlling for risk factors

• Focused strategies with fewer funds

  • Focus matters a lot

• Aligned incentives via fund ownership

  • High levels in personal investment in funds they manage - outperform

• Emphasis on investing assets rather than gathering assets

  • Lot of different ways to make money; direct sold funds need to rely on investment skill and didn't underperformed benchmarks

• Low expenses/fees

  • Higher fees - lower net returns

  • Negative correlation with pre-fee returns; higher fees affect the investment process

• Low trading costs 

  • Lowest quintile of aggregate trading costs had average returns above the average of higher cost

Article - old line investment firm called Dodge and Cox

• Peter Avanalli

• Be stodgy and make money; a lot of things have changed but we are still STAID

• 1906 - Whisdom of the crowds - key requirement were STAID

STAID

• Specialization

  • Our flavor is having analysts develop deep vertical expertise and develop multiple industries; want to surf and scuba dive

• Trust

• Aggregation

  • Intentionally designed processes

  • Contention around ideas; devils advocacy process - safe process to really disagree and have the gloves come off

  • How can we get out of biases?

  • We have multiple rounds of voting that are blind and electronic - what we are really trying to do is preserve open-mindedness

• Independence

  • Analyst can contribute on the first day and we can put in 1B in the first month

  • This is a humbling business

  • There is a tendency to have to arbitrate for yourself when you are getting outside your circle of competence; one person one voice; everyone participates in discussion; best ideas win - not the best debater, longest tenure, biggest title

• Diversity of Opinion 

  • Diverse mix of individuals, sectors, thoughts

Its tempting to drive investors compensation based on performance but real question is does compensation reward volatility or 

• We are right 51% of the time over the last 25 years

• SD - 15%; how many observations do you need to reject to actually accept the null hypothesis; you need 1100 data points

Principles with compensation systems

• Long term performance - not volatility

• Reward people for investment process and insight

• Sharing and contesting ideas - we really need to orient that competitive drive externally - try to do the best for the firm; we need to share as much as possible; but not be crazy about it

Habits to become a successful investor

• A lot of it is just basic blocking and tackling

• Need a way to document input, learning, and outcomes so that you actually become a document machine

• Principles I wish I started earlier

  • Pay attention to valuation - growth outperformed value for last 12 years; last century not so much; need to think about things probabilistically

  •  Keep a log of your investment thinking - everything from ideation to analysis to conclusion

  • Granular way to track evolution of how idea actually works; track assumptions and track forecasts; you really need to keep yourself honest

  • Short hand way of distilling your thinking - what do you actually think? Disaggregate returns between expected multiple change, sales growth, capital return/buybacks; where is the return coming from

  • Review a broad set of alternatives you don't own; opportunity cost of things we've not invested in is substantially higher than the things we haven't invested in; always need to check that you are keeping yourself honest

  • Track your conversations with management and other sources regularly; keep a file; 150,000 lines of notes on management conversations

Re-entering the workforce as investors

• If you find yourself

• First job is to develop your circle of competence; very real learning curve to that; that is job one

• The notion of patience and persistence is really important - don't just do something, stand there

  • If you think you have a winner; don't play around the margins that you snatch defeat from the jaws of victory

  • Really tough to do when you are just starting off

  • If things go south - having a pre-mortem is super helpful

What things learned more

• Compensation - CEO opted to give up next three years option grants and took tiered grants based on current price of equity; he was 63 at the time; had a really interesting franchise; profitability was at the peak for that franchise and he sold the business 12 months later

You REALLY need to climb out on a limb and be different

• Focus and differentiation

• With our investing - we are looking at a company in the middle east; haven't reported financials since 2021 - its a great opportunity; zero sell side coverage

• Naturally pockets where markets are less efficient

• EM is very interesting

• Where you can do research that drives you in a different direction than consensus thinking

  • Looking at Haleon last year

  • Spins increase focus; excess return is normally back end loaded - need to be patient with spins though; it was spun in july - fell 15% in august; potential liability in reward and allocation - since indemnification was a piece of the puzzle; evaluated the case and built the position; 

• Only as good as its recent work

• Haleon - 16x forward P/E isn't crazy for a good consumer health biz; some stuff to do with pro-forma from spin

• That is an example where common sense analysis underlies the bet; but once you develop a judgement advantage and apply different probabilities to it; 

• Illiquid security that no one is looking at

• Conventional wisdom could be right; Microsoft - differentiated perspective is less obvious

How do you stop expertise from becoming bias?

• Sometimes you need to re-pot yourself to another industry

• Starts you at the beginning again

• Complacency - one of the mistakes we made as a firm in the early 2000s; we were effectively out of anything in a tmt bubble; in 1999 or 2000; that was time release alpha; 2006 - we found ourselves in a situation where there were clouds on the horizon - a lot of the names we had had cyclical components and we underperformed the market

• We liked what we owned yesterday and its cheaper today so we should by more - but that analysis turned out to be deeply deeply flawed; we have lots of quant capabilities that help with that stuff but the whole point is to provide a check and balance

• You buy your portfolio every day

Books / readings on your strategy

• Reading in three buckets - complements what I do professionally

  • Economic history or financial history - Reinhart and Rogoff - 8 centuries of financial folly

  • Engages me in a casual way but its something that is intellectual candy - Ian stewart wrote Professor Stewarts Cabinet of Mathematical

  • Escapism - Frustrated theoretical physicist as an undergrad; lenny suskin - art friedman - retired software engineer; quantum mechanics class - quantum mechanics book; getting back in touch with routes

Q: When you think about the opportunity cost misses - what are the biggest