Are there any other 5 year trends outside of precious metals ? What do you think is the next gold going forward?
I have some theories of my own going forward and I’m buying some stuff but I’d really rather not jump in there. The problem is that the world wide economy is looking weak. Some countries are good and some are mediocre but a lot of countries are in really bad shape and it is really hard to get too optimistic on global GDP overall. I don’t think we’ll see global GDP decline much but it could muddle along for a decade. So it’s really hard to find real growth industries because the world is just not growing.
I think it’s more exciting to look at the specific economies that are really growing. You have places in Latin America and Asia that are really growing fast. These are small economies that are not as inter connected with the global economy yet and the asset prices are cheap. As an investor in these countries you can pick up a tailwind of GDP growth of 5 or 10% yoy. They are small economies and people don’t talk about them much but I think it’s exciting and that is really where I focus my energy now.
I’m sure there are a lot of over looked companies there.
Exactly, but I think you need that macro tailwind. Which means you need an economy that is growing 10% a year because then you are going to have growth in the economy and even more growth at the company level. It is just going to be really hard to find industries or companies that can grow in a stagnant economy so if you can focus on the few economies that are growing I think you will do quite well. There will always be a few countries out there doing well but you really want to have that tailwind.
Even harder to find companies that have yet to be discovered.
Right. Which is why some of these smaller economies are so much more interesting. Because $1b+ hedge funds can’t go there. A lot of the companies are $50-100m market cap or even smaller. It’s a place for people like me to figure out, not the big guys. So the pricing is much better.
How do you get around the communication and accounting standards?
You need to just go in there and not think of it like a western investor. You should spend a month or 2-3 weeks there and just approach it with an open mind. You should read my post on Mongolia if you haven’t yet.
I read that and I thought it was great. I thought there was a particularly interesting point regarding the accounting where you said at a certain point you need to just take a leap of faith and invest even if you don’t know what the accounting is yet.
There is accounting. There are numbers. There is research to do. If you go in there and make investments you have to assume that you are going to have a few problems. However, if in aggregate you buy the companies cheap you are likely going to do all right as a whole. Another important point is that if you are in a country, like Mongolia, where they don’ t have investors showing up and they don’t talk to shareholders and things aren’t all cleaned up and pretty in the accounting there is a good chance that there is no incentive for people to over state things like there is here. Besides, their motive is to understate things for taxes, not to overstate so that their stock options go up in value.
That is an interesting commentary you rarely hear about emerging markets. What do you guys think of technical analysis? Do you use anything like this?
It’s really hard when you are a fund trying to buy millions of shares of a small company and it is hard for you to really have a view on the chart pattern of a $50m market cap company. If you go in there and buy a few million dollars of stock your buying alone could dramatically affect the price action and impact the chart.
What do you like and dislike about being a hedge fund manager?
Just don’t like the marketing but I love everything else. I have been able to meet and work with some great people. I have learned a lot and I have gotten to travel all over the world. It is really a great thing in my mind. I just really don’t like dealing with marketing but nearly everything else is great.
I have some of the best investors in the world and some of them I talk to routinely. The marketing thing is just pointless though. You go to NY and do 50 meetings and get 4 or 5 guys who seem interested and at the end of 3-4 weeks of effort you get one guy who writes a check. I’ve gotten to the point where the fund is closed to new investors and I just don’t want to market and deal with nonsense. Marketing and sales used to take a quarter of my time and now I spend none of my time on that and it is the greatest thing ever.
The best way to grow assets is to put up consistent returns?
You know, I don’t even want to grow the fund. The fund is closed. It is funny though, since I’ve closed the fund I’ve had more investors than ever offering to give me money than when it was open. I’ve turned away lots of money. It’s a strange thing.
Is this because you don’t want the fund to get bigger and lower your opportunity set?
I just don’t want to deal with investors really. I had a bad experience in 2008 with a lot of redemptions and I just don’t want to repeat that. You know, if you are a big fund with large caps you can deal with redemptions by just selling and moving on. If you are a small cap guy though and own 5% to 30% of a company it is really hard to get redemptions. You create your own worst monster because as you sell you keep pushing it lower which is bad for everyone.
What advice would you give to someone else starting a small fund?
Just focus on the track record and ignore raising capital. Hire the best people you possibly can also. Don’t try to save money because it always costs more in the long run.
What’s the most profitable investment you’ve ever made?
That is hard to say. I was really early on uranium. I was in it before $16 and it went up to $145. The little producers naturally went up much more in percentage terms, so that was pretty amazing.
What was the worst investment you ever had?
Oh man…. we saw piles of FNM, LEH and BSC puts expire worthless. 2008 was the hardest year for me though, we started out good but then when equities started falling we began buying too soon. Something we liked a lot would be down 40% and then we’d buy some and it would go down another 75%. Those weren’t necessarily bad investments but it was painful. Shorting in general is just very very hard and stressful though. Most of my worst investments have been on the short side.
Any other memorable trades worth mentioning?
Energold was an interesting one. We had a big position that we started building early in 2007. At the end of 2008 it went from $5 to .55 and was trading at less than cash despite no debt and being fcf positive. When it went down to 0.55 we were buying and now it is back to about $3. I couldn’t believe it could be that cheap when it happened. I mean, it was trading at $5 and we thought it was cheap then. It was one of those rare gifts in the investment world. We missed it the first time because we weren’t aggressive enough in chasing after it. We just didn’t realize how good it was. Then we got a second chance. We got to buy shares at a fraction of our cost basis. It was crazy.
How do you generate ideas?
Mostly I am just lucky to have many friends who are smarter than me! I am always talking to people in the industry and that gets me lots of interesting companies to look at. Just asking who is taking market share, who is most respected, this is a great way to generate investment ideas. I never look to Wall Street though, I don’t talk to wall street analysts and I only know like a dozen fund managers. The less I am influenced by Wall Street the better in my mind.
How do you decide when to sell an investment?
That is a tough question as I always sell to soon; if someone bought only the companies I sold they would be a rich rich man! Generally I try to decide what to hold based on the opportunity set in front of me. Sometimes an idea goes up dramatically or something happens that changed your thesis and that makes the decision easier but generally I sell something when I have a better idea I’d rather put the capital into.
What do you do when you’ve had many investments in a row move against you?
Ultimately we are fundamental investors and when a stock gets cut in half that is when you realize if you know the company well or not. If you like a company at x price then at 0.5x you should like it even more. So when things move against us we try to buy more. We also always keep some cash around to help us in these situations. In the past we have used margin as well, although I am a bit scared of it, if deemed necessary I will margin up to be a buyer.
What is the largest position you have ever taken as a % of capital?
We’ve had a few big investments go our way. I remember putting 25% into US global and watching it go from $5 to $75. If you really want to generate outsized returns you need to put your high confidence trades on in big size so you are there when the time is right. We don’t typically take a small position. That is a test of your knowledge and conviction of the idea. If an idea we have is not worth putting at least 5% or more of our capital on then we will pass on it. If you are really doing your homework and you are disciplined then you will not find many opportunities worth purchasing. There are just so few truly amazing companies; they are so rare, that when you find them cheap you need to buy a lot of them. We very rarely just jump into a 25% position though. It usually starts out smaller and so we typically buy some because we like the business and our research shows the company is good. Then we go talk to management and are impressed and so we buy some more. Then we see how the next quarter goes and it is even ahead of what we thought they’d do, so we’ll buy even more. So a 25% position grows into that size. We measure the 25% of capital based on cost also, so if something goes up a bunch we don’t necessarily trim it just because it is up a lot. I think that is a mistake because if you trimming your larger positions you are inherently selling the investments that are working out best for you.
So far we have not gotten a 25% investment wrong. We have gotten a few 10% of capital ideas wrong though. We really only find a 25% of capital idea every couple years and so we know when we have something that is valuable when we do. We probably find an idea worthy of 5% of capital a few times a year, an idea worth 10% of capital maybe once a year if we are lucky but a 25% of capital idea comes along very rarely.
Do you think it was easier to make money in the markets now or 30-40 years ago?
I think it is a bit harder now since you need to do better research. Screening software and tools are free and so powerful now that if you want to find amazing situations you need to look for situations that don’t show up in financials because once the situation becomes apparent in the financials and shows the earnings power of the company then there are already 100 people looking at it. There are always opportunities though. One way to deal with competition is you can go to other countries. You can find companies at 1/3 book value, trading at a 2 p/e with 20% dividend yield if you go to the right countries and know where to look.
What is the best investing book ever written?
I read mostly history and biographies now. I used to read finance and accounting in the past but now much less frequently. If I had to pick one though I’d say
Marc Faber’s Tomorrow’s Gold is the best book ever for investing. That book really helps you understand big picture themes and it is very well written. You can make good money finding cheap companies and many investors do very well with this strategy. When you find a really cheap company you will generally double your money, which is not bad. However, to make 10x or more on your investment you need to find big picture themes as well. Once you get those big themes right, and then find companies that benefit from that with good management teams, that is how you get 5-10x+ returns on an idea.
What do you like to do in your free time?
I am lucky to do what I love so I have been able to blend my traveling and reading with my business. Most of my free time I spend reading and traveling. I will take a friend for a week or two and go see somewhere new and interesting. We will rent a car and drive around, meet with some companies and see some interesting stuff. I really like to travel, I am on the road at least a third of the time, and I enjoy reading so that is what I try to do as much as I can.
Do you think you’ll be investing professionally until you’re old or do you think you’ll hang up the hat and retire at some point?
I haven’t given it much thought. I am having a great time though and so I have no intent to retire anytime soon. Even if retired, I would probably continue to do this with my own money. Honestly, I am not sure what I would do if I retired but I really am having fun doing this.
