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Interview with Anthony Deden

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Transcript of Grant Williams in Conversation with Anthony Deden | Full Real Vision Interview.
Video at https://www.youtube.com/watch?v=a4_U6bS-cU4

Publicada em: Economia e finanças
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Interview with Anthony Deden

  1. 1. For me, the best part of my Real Vision journey has been the chance to refine my own investment 00:12 framework through a series of conversations with brilliant investors in every corner of 00:16 the globe. 00:18 In this series, I want to continue my education by digging deeper into the lives and careers 00:22 of my guests to try and learn how they think. 00:26 I want to understand the experiences that have shaped them, the failures they bounced 00:29 back from, and the lessons that those failures have taught them. 00:32 And I want to break down their success to find out what sets them apart. 00:37 I'm not looking for trade ideas or guesses about an unknowable future, but rather knowledge, 00:41 accumulated over the course of careers to try and make me a better investor. 00:46 And I want to share those conversations with you. 00:54 Several years ago, I was introduced to my guest today by mutual friends who'd entrusted 01:06 a significant portion of their savings to. 01:09 This man, they told me, invest in a way which is not only unlike the methods employed by 01:14 99% of money managers today, but also with an integrity and a methodology which is a 01:19 throwback to a time which is sadly almost vanished. 01:22 In the intervening period, as I've gotten to know my guest better, I spent a considerable
  2. 2. 01:28 amount of time trying to persuade him to sit down with me and share both his experience 01:32 and his investment philosophy with the Real Vision audience. 01:35 Sadly, each of my invitations has been met with a very polite, but very firm, no thank 01:41 you. 01:42 This was no surprise to me. 01:44 My guest has never before been interviewed, either in writing or on camera, and for good 01:49 reason. 01:50 He's a private man who prefers to spend his time reading and thinking, who invests far 01:54 from the spotlight, and with no care for either mainstream opinion or consensus strategies. 01:59 A year ago, I finally got to meet my guest, and I spent an evening I will never forget 02:04 listening to him talk about how he sees the world and how he thinks about the discipline 02:08 of investing. 02:09 That meeting made me more determined than ever to try and persuade him to break his 02:13 silence and give others the chance to learn from him as I had done. 02:16 Now, three years after I first approached him, he's very graciously agreed to talk to 02:21 me in front of the Real Vision cameras. 02:22
  3. 3. And so I'm excited to be traveling to the Swiss Alps to discover how his framework has 02:26 evolved over the years and see how he looks at the process of investing that which he 02:31 considers permanent, irreplaceable capital. 02:34 So please join me for a conversation with Tony Deden. 02:39 There are going to people that watch this who know you, and they're probably sitting 02:43 there thinking, why the hell is Tony Deden doing it? 02:45 And then they're going to people that don't know who, after this conversation, are going 02:49 to go, why the hell do I not know Tony Deden? 02:51 So I know this is the first time you've done one of these and I really appreciate the fact 02:55 that you've agreed to do it, because there's so many things I want to talk to you about. 03:01 As I love to do, particularly given the lack of visibility that you have, is to give people 03:07 a sense of your background, because it's an interesting one. 03:11 It's a varied one, and it's taken you all over the world. 03:14 So perhaps we could start just by talking a little bit about you and your life and your 03:19 background. 03:20 How much time do you have? 03:21 We have all the time in the world. 03:23 So you left Greece at an early age?
  4. 4. 03:25 Yes, when I was a young boy. 03:27 And I lived in America for nearly 30 years, first in California and then for many years 03:34 in Houston. 03:37 And I think I became, as American, as one could possibly ever become, even though for 03:45 all these years, I never really felt quite at home there. 03:50 Not that I feel at home anywhere else. 03:52 But then I was married there. 03:56 I had a family, and I had a wonderful time in the United States. 03:59 I've met some of the greatest people I've ever known in America, and I learned a great 04:05 deal. 04:06 And many years ago, I moved back here to Europe and I've lived in Switzerland now for many 04:12 years. 04:14 I have traveled a lot, mostly to learn and to observe, but I have not traveled as much 04:20 you have, for example. 04:22 I wouldn't wish that on you, anyway. 04:23 I think you've got the balance about right. 04:26 There's nothing extraordinary about my background. 04:29 I found myself in this work quite by accident. 04:34
  5. 5. Back in 1985, when I was asked to help a family with their investment affairs, passing of 04:42 a husband, or other situations, and one family became two and then three, et cetera. 04:51 So I found myself being an investment counselor without having the preparation or the background, 04:58 or I've never worked for a financial institution or bank. 05:02 I had to learn a great deal by the sheer desire to do the right thing. 05:12 So my background is not as extraordinary as you make it sound. 05:17 I think you, perhaps, flattered me a bit with your introduction. 05:20 But when you are an investment counselor to a family, and in essence, you are asked to 05:29 provide guidance for the entire wherewithal this family has, you come to the inevitable 05:37 observation, to start with that, this is all the wealth this family possesses and no one 05:43 is ever going to give them any more. 05:45 Yeah. 05:46 And there's a sense of irreplaceability to this capital. 05:50 So you have to start respecting it, respect the fact that it is really irreplaceable. 05:56 It represents a lifetime's worth of savings. 06:03 That is, that you must avoid the kind of error that would put this family out of business. 06:09 And you also learn fairly early on, something that takes men far longer to do-- that is, 06:17
  6. 6. it's easier to actually make money than to keep it. 06:22 Not merely on account of external issues, such as inflation, taxation. 06:26 But also internal things, error, imprudence, and other such factors. 06:36 It is a kind of different world than the fund manager has, where a fund manager, in essence, 06:40 has a undefined, unlimited amount of capital at his disposal, and if he loses part of that, 06:48 he can get others by changing his policy and his investment objectives to something more 06:55 desirable at the time. 06:57 I find it fascinating, the fact that the idea of family offices has grown so much in the 07:03 last 20 years. 07:05 When I was younger, yes, truly there were some very wealthy families that managed their 07:10 own affairs, but it was very rare. 07:14 And I often thought about the reasons that contributed to this, and I cannot help but 07:22 say that perhaps one of the reasons is that the investment management industry and the 07:27 banking industry have failed in their obligation and ability to protect and preserve the savings 07:37 of those who have accumulated some. 07:41 So what was it about you back then that led this first family to come to you and say, 07:50 please help us manage this wealth? 07:52
  7. 7. Well, there was a fellow. 07:53 He's passed, he's long gone now, who was like a mentor to me. 07:59 At the time, I must have been '30s or something like that, and he was in his '70s. 08:06 And he liked the way I thought. 08:09 I was on the board of finance company, and I was very curious about matters of money. 08:15 But I was always more interested in what could go wrong that what could go right. 08:20 Right. 08:21 And I always thought that what could go wrong was not necessarily of a quantitative nature, 08:27 like the stock market or the bond market, but the kind of decisions that one makes and 08:34 the impact of those decisions, both in the long and short-term, on the whole. 08:43 So he is the one who originally made introductions to one of two families, and he's the one who 08:49 sort of pushed me to pursue this. 08:53 How did you begin to form the framework that helped you invest, because I know that's changed 09:00 and morphed over the years? 09:02 But how did you begin to think of this? 09:05 What was your first perspective on it? 09:07 Well, initially, I did not know much. 09:11 I erred on the side of inaction.
  8. 8. 09:17 But then I made some friends, particularly with some large firms that I knew at the time, 09:22 and I learned about this idea of-- prevalent among investment management firms-- about 09:31 seeking to understand the investment objectives of their clients, and risk parameters, so 09:38 to speak, and designing some kind of a portfolio that is suitable to their needs. 09:46 At the time, it sounded really wonderful to me, because it was very structured and it 09:50 made a lot of sense. 09:52 I've since figured out that it's nonsense. 09:57 I had one or two friends among a Swiss bank in New York and I went to them for help. 10:08 I figured out how securities traded, how they do this, how banks settle securities, and 10:15 delivery against payment, and this sort of thing. 10:18 And then I came across this idea of value investing, the Graham-Dodd and Warren Buffett 10:22 type of things, that every American comes across from time to time. 10:28 I really was not aware of anything other than-- and I began reading some of these great investors 10:36 and others. 10:38 I was fascinated with the idea of value, as defined by such value practitioners, only 10:46 because it made sense, theoretically. 10:50
  9. 9. But it was a different world, and then came the crash of 2000, 1987, if you remember, 10:56 which did not really affect me a great deal because I had no exposure to the equities 11:02 market. 11:03 But then it created opportunities to invest, to deploy capital in 1988. 11:08 And then you have these great opportunities. 11:11 I had the great opportunity to find and to meet firms at their genesis of what later 11:18 became the technology issue. 11:22 But the problem is that I always knew I was operating in a vacuum of sorts, without really 11:28 guidance as to the fundamentals of things. 11:30 I always wondered what was the nature of money. 11:33 We measured our wealth in terms of money, but I couldn't figure out what money was in 11:40 itself. 11:41 I had questions about really fundamental things about the nature of interest rates. 11:49 And then I discovered economics in the Austrian tradition and the classical liberal tradition, 11:56 and I began reading. 12:00 And it changed my perspective a great deal, not in that economics makes you a different, 12:08 better investor, but it gives you a light with which to see the furniture in the middle 12:14
  10. 10. of a room in the dark. 12:15 Right. 12:16 That's more or less. 12:17 Right. 12:18 I borrowed this from James Grant. 12:21 So I became concerned with the nature of risk, the nature of value for what it was. 12:30 I became aware that the quantification that was largely embedded in the financial sector 12:35 was not really necessary. 12:38 And I felt that the only way to protect this capital-- and I had these kind of portfolios 12:43 that were standard back those days. 12:46 They used to call them a balanced portfolio, if you remember. 12:52 And I had defined their work around this idea of capital preservation, back in those days 12:59 when capital preservation meant the austerity of a bank trust department. 13:06 You are a fiduciary and you do things from fear of failure rather than cognizance of 13:15 this is the right thing to do. 13:17 But the idea of owning bonds and recapitalizing the income and having a first class collection 13:23 of equities, for example, and then taking part of this what remains and making some 13:33
  11. 11. meaningful speculations and things that matter, overall gave you a tremendous advantage. 13:41 And so the results were wonderful, but I didn't really understand quite why. 13:46 I felt, also, that this idea of organizing an investment portfolio around these so-called 13:55 unique special needs of each individual family was intellectually not quite consistent with 14:03 reality. 14:04 Because in essence, there's no need to shape an investment portfolio around a particular 14:12 person's idea of risk, because people's idea of risk is not necessarily real. 14:16 Risk, to most people, is the uncertainty of the unknown, the prices are going to break 14:23 down, or something like that. 14:26 To me, the risk was the idea of losing their capital permanently with no ability to ever 14:31 recover. 14:36 So I went to the 10, 12 families I had at the time and I said, I've changed my view 14:41 about investment management. 14:43 And henceforth, I'm going to have one investment policy that I think is appropriate to all, 14:50 and that is protecting and enhancing and deploying this capital permanently. 14:54 But the only issue is the time preference. 14:58
  12. 12. You have to have horizon. 14:59 You have to have a purpose to this capital long-term. 15:06 And they all said, OK. 15:08 So we scrapped the old investment management agreements and then set up new ones. 15:19 I think that was a necessary growth and a change, because as you learn more things, 15:25 you become able to acquire understanding of what it is you have, what it is you face, 15:34 better than you had before. 15:36 What did that change in strategy do to your portfolios? 15:40 Did you find it completely changed the composition of them? 15:44 Or did you kind of tinker around the edges, but really, it just gradually evolved over 15:50 time? 15:51 Was there a sudden, OK, now we've changed the mandate, the portfolio has to change considerably. 15:56 Well, starting at about 1996, '97 or so, I never saw these as a portfolio in the sense 16:11 that the word is used today. 16:13 I saw this as a collection of assets in the form of securities having a purpose, each 16:20 of the components having a subpurpose of it own. 16:24 And when you start seeing it this way, you become completely uninterested in what others 16:29 think about matters.
  13. 13. 16:33 The idea of having x percent in industrials and y percent here, and overweighting these 16:37 and underweighting that. 16:39 It's just complete madness. 16:40 It doesn't make any sense, any more than a car manufacturer thinks that he has to have 16:46 x percent of an automobile in glass or y percentage in steel, and et cetera. 16:51 It makes no sense. 16:53 So every company has a purpose. 16:56 It did change things somewhat because it allowed me to focus on what I thought was value in 17:05 the sense of irreplaceability. 17:11 So you take a replaceable capital and deploy it to irreplaceability assets. 17:18 But bonds remains still the hard core of the thing. 17:22 The thing with bonds is that I had two kinds of bonds that I invested in, governments and 17:28 junk. 17:29 Right. 17:30 I never quite bought in the corporate world. 17:34 Junk in the sense that it was not rated. 17:37 Yeah.Back in those days, in order to rate a bond, you had to pay money to the rating 17:41 agency, and many small issuers would do that. 17:46
  14. 14. So oftentimes you found issues that had $200 or $300 million in outstanding debt, unrated. 17:53 And because of that, it sold. 17:55 Oftentimes, it changed hands. 17:57 Extremely, incredibly good yields. 17:59 Real yields, in fact. 18:00 We had real yields back then. 18:02 Yes, I remember those days. 18:04 I think our children will never know what that is. 18:06 Yeah, I think so. 18:10 But then came the period of 1995, '96, '97, where-- monetary policy has always played 18:21 a role in financial matters, but all of a sudden the monetary policy became the driver 18:30 and industrial activity took a backseat to financial activity. 18:33 That was the beginning, I think. 18:36 Maybe I will disagree on that about the timing, but prices of securities were going up, independent 18:46 of economic results or economic activity. 18:50 And that's mostly in the United States, but the rest of the world followed along with 18:56 the American policy. 18:57 At some point, prices became untethered from the reality of the situation. 19:04 And I saw this in, possibly, in 1998, and I became 19:14
  15. 15. certain that there must be an error, and the error must be either outside or it could be 19:18 mine. 19:19 I couldn't see the fact that the world had changed. 19:20 And I went through a period of soul searching because, I felt, perhaps, I was too old-fashioned. 19:27 I had too many rigid ideas and the world was changing. 19:31 Remember, those were the days of Mr. Greenspan, who advocated a complete revolution in productivity, 19:37 and other such factors. 19:40 And I asked myself, perhaps I'm wrong. 19:43 Perhaps what I believe is wrong, and perhaps everyone else is right. 19:48 And now, it seems insignificant, but back then, it was an enormous burden on me, because 19:55 if I were wrong, that means my actions, or inactions, would have an effect on other people's 20:02 savings. 20:04 So I had to do something about it. 20:09 What you do in this case is sort of like when you get lost on the road and you don't know 20:14 where you are. 20:16 You might have a map. 20:18 The map doesn't help you unless you know where you are. 20:20 Right. 20:22 Right?
  16. 16. 20:23 So you have to retrace your steps in some way and go back to the very basics and try 20:29 to rethink the basic assumptions of what is real and what is not. 20:43 Most of us, when we are younger, we want to believe the authorities. 20:46 We want to believe the rating agencies. 20:48 We want to trust government statistics, or authorities of all sorts. 20:53 And it happens as you grow older, particularly in a setting like this, where you become convinced 21:00 that they all lie, and everything is phony and everything is false. 21:05 And I mean everything. 21:08 Yeah. 21:09 Everything. 21:10 So you go back and retrace your steps. 21:14 And I did that, and I did that with some friends and I rediscovered the fact that I was right. 21:21 The whole economic system-- financial system, rather, not economic-- as we knew it, it was 21:25 false. 21:26 That gave me a great deal of courage to acquire the kinds of things at the time that no one 21:33 wanted, and realize a lot of gains that were gained in the previous 15 years. 21:41 Yeah. 21:42 And what people didn't want at the time was oil. 21:45
  17. 17. It was copper, coal, gold, silver, and German government bonds. 21:53 Right, yes. 21:56 So by the time the system came to a crashing halt in 2001, '02, '03, whatever it was, it 22:04 became obvious that my sentiment about the relative value of this financial crisis was 22:13 correct. 22:14 But then it started a new era, where we re-inflated the system somehow. 22:20 And so all I'm saying to you is that we have gone, in my own brief lifetime so far-- 30 22:27 years of practice-- we have gone from booms to bust to booms and busts. 22:34 Now, if you are merely in front of a Bloomberg machine and you think that you can anticipate 22:40 these matters and you can anticipate interest rates and foreign exchange rates, you're deluding 22:47 yourself, because no one really knows when the next boom or bust will take place or where. 22:51 But the problem comes in not trying to impress your customers, but trying to protect what 22:58 you have spent years accumulating. 23:00 How do you do that? 23:04 That has always been difficult throughout the ages, but it has become phenomenally more 23:09 difficult, nearly impossible, if you practice within the framework that you have been used 23:20 to all these years.
  18. 18. 23:21 Think about that. 23:22 No, I agree. 23:24 When you went through the soul searching period, back in the the late '90s. 23:29 And you went away, and you sat down for a weekend, and you really went through every 23:33 assumption that you made and stress tested it. 23:36 First of all, to come out of that sure that you're right and everybody else is wrong, 23:45 that takes a lot of character, a lot of selfconfidence, and a lot of real belief, real belief, that 23:53 you came out knowing that. 23:54 And you acted accordingly. 23:55 You, essentially, sold everything in your portfolios. 23:59 I mean, that's taking action after a lot of soul searching. 24:04 Few people would have the courage to do that. 24:06 Your investors, your customers, obviously, they put their trust in you. 24:15 And here you are coming back to them saying, OK, everything I've been doing has to change. 24:22 How did they react to that? 24:25 You've built up a very strong bond relationship with these people by doing the right thing 24:30 over so many years. 24:32 Do you find that making such a drastic change causes some of them to say, Tony's lost the
  19. 19. 24:40 plot? 24:41 Or do people, having seen your track record and seen your performance say, wow, this is 24:45 serious? 24:46 Well, first of all, it is their capital and they have a right to find someone else to 24:51 help them. 24:53 I have no monopoly on ideas. 24:54 I think one or two perhaps did. 24:59 But I think I have always been eager to communicate this framework, the foundation of the principles, 25:09 or the framework that motivates actions. 25:12 In 1999, I worked very hard to produce and make a speech to our clients at the time. 25:22 And I wanted to show that the seeming prosperity that existed-- because if you go back and 25:30 look at, everything seemed to be so extraordinary at the time. 25:34 It was an illusion. 25:37 And this is very difficult to see, because-- I wrote my speech and I borrowed from James 25:43 Grant's, the title of his book, The Trouble With Prosperity, which he makes the same point. 25:48 You have this apparent prosperity, but unless you examine its causes, you don't know to 25:55 what extent it is real or it's a delusion. 26:01
  20. 20. If you gave me your American Express card and go out on a buying spree, and I can acquire 26:05 all kinds of goods, and everyone can see how wealthy I am because I'm wearing wonderful 26:11 clothes, I'm driving a great car. 26:13 In fact, I'm adding to the GDP. 26:16 Right. 26:17 But no one quite knows that the money has been borrowed from your credit card, right? 26:23 And to the extent that I don't have to pay it back, then it's real. 26:33 Words like integrity are thrown around like confetti these days, but I was captivated 26:37 by Tony's framework and the clarity and the simplicity of his thinking. 26:42 Tony's a deep-thinking, principled man, trying to assemble a collection of assets which cannot 26:46 only endure, but also withstand the pressures exerted upon them by time and turbulence. 26:51 And it struck me that perhaps this second definition of integrity, the notion of a soundly 26:57 constructed, durable, an unimpaired portfolio, has been lost in a world where monthly performance 27:01 has become the holy grail, and investor's time horizons have been compressed, in many 27:06 cases to the point of becoming a hindrance to effective money management. 27:10 Tony's ideas around endurance and permanence, with both capital and the assets selected 27:14
  21. 21. to represent it, fascinated me, and I wanted to dig deeper into how his framework evolved 27:19 and how he thought about building such a collection of assets. 27:23 You have this way of investing in permanence and endurance, and things that have been there 27:31 and will be there for a long time. 27:33 So just, if you can, describe how you think about that, and how you go about identifying 27:40 companies and people that you would invest in. 27:42 In the beginning of the QE period, the global QE period, I became convinced that the world, 27:50 the system, was going to destroy the nature of money itself. 27:56 I became convinced that the rules of the game had changed completely. 28:03 When the rules change, the basic framework with which you make a decision needs to change. 28:10 I remember back those days, post-2008, 2009, '10, '11. 28:17 Back in those days, virtually every economic-- financial agent, not economic-- wished that 28:22 things would go back to normal. 28:23 They thought that the pre-2008 was normal, which is not too error the truth. 28:28 But when the rules of the game change, the process with which you make decisions, the 28:37 process with which you act, the value of information, the value of inputs, must change with it. 28:44 I think that two things change. 28:46
  22. 22. Not only the rules of the game change, but the expectations of people were not commensurate 28:56 to the reality that existed. 28:58 So I felt, as perhaps others did, that the time had come for me to hang my wings, so 29:07 to speak, and leave the game. 29:11 I would not want to participate in an environment in which I had to do things because they were 29:15 expected rather than I thought was the right thing to do. 29:20 But the second most important thing that happened to me is that, as a result of that, I began 29:24 thinking about, if the rules of the game have changed enough, I cannot trust anything. 29:29 If you don't trust financial accounts, if you don't trust the ratings reports, if you 29:33 don't trust the government, if you don't trust the press, if everyone lies to you, literally-- 29:40 sort of like going to a restaurant where everything on the menu was poisoned, but you're hungry. 29:46 Right. 29:47 Right? 29:48 You have to do something. 29:51 And what you can do is exit the system, just exit completely. 29:59 The single thing that matter to me, if I am involved in a situation where, honestly, I 30:02 don't know what is real from what is not, I have to start re-examining what is real,
  23. 23. 30:07 what is really real versus what is not. 30:12 People talk about outstanding companies. 30:14 The word is used often by value investors. 30:16 The question is what is an outstanding company? 30:19 People talk about good management. 30:22 What is a good management? 30:24 No one can really define that. 30:26 People judge others and make value decisions with respect to so-called equities on the 30:34 basis of the success of the stock price. 30:39 I began thinking about what is it that is important. 30:44 And one of the things that I felt really, even though I lived in Europe at the time 30:48 and I had left in America, there is something extraordinary that takes place, and that is 30:54 we in America, and I say we, are quite keen to like what is faster and what is bigger 31:03 and what is better. 31:05 So often growth for the sake of growth overwhelms our modulation and our actions. 31:14 We think of growth stocks. 31:15 We think of growth industries. 31:18 We even use the word to grow, to grow earnings, which is to grow the company, et cetera. 31:25
  24. 24. But what if these measurements were wrong? 31:30 What if really what mattered is something other than bigger and better? 31:35 The second mental observation I made was that what really mattered was not that, but the 31:42 idea of enduring, endurance, the idea of durability. 31:49 I began looking at investments we owned that had a history of 100, 150, 200 years. 31:55 And you ask yourself, how could this have survived that long? 32:01 What were the ingredients that have contributed to their permanence? 32:07 Permanence is an illusion. 32:09 There's not really a fixed, where there's no such thing as permanence in our world, 32:14 but it's something we perhaps strive to. 32:18 And I think endurance is a better word to describe what I'm saying. 32:25 And all my life up until that point, I've been examining the idea of failure. 32:31 Failure on the part of others had been the principal expert from which I learned what 32:41 not to do or how not to think or what to examine or not. 32:46 I began thinking of those who survived. 32:48 We have survived the test of time. 32:52 Again, as a way of a textbook, thinking of those ingredients that about allowed them 32:58 to adapt to changes, survive wars, inflations, et cetera, the people, histories, generations, 33:08 et cetera.
  25. 25. 33:10 And it's hard to recognize those ingredients that allows a few to survive and endure. 33:19 Because if I'm going to protect earnings or savings that have been earned in prior years 33:25 for the future, whether it's for future consumption or a future generation, I have to deploy them 33:33 in a manner that is consistent with such enduring characteristics. 33:42 And so that was a monumental revelation to me, that some people have survived and have 33:49 adapted and have grown. 33:51 But many of these companies are, of course, privately held and they would never wish to 33:58 be listed on the stock exchange. 34:00 But others are listed, but only nominally, in the sense that they once had an offering 34:06 some 50, 60, 100 years ago, and they still have a few shares owned by non-family members. 34:13 And I discovered that I owned a few of these things, for reasons that were not purposeful. 34:20 So I began focusing on what endures and what is real, independent of the financial world 34:28 completely. 34:31 And so what did you find? 34:39 Because we do live in a financialized world, and finance for finances sake, and investing 34:48 has become all about making money, not necessarily capital preservation, not necessarily income.
  26. 26. 34:57 It's become, which stock is going to go up the most in the next six months to a year, 35:02 or whatever my timeframe is? 35:04 What did you find? 35:05 When you had this monumental moment and you started looking into these companies, what 35:10 was it that you found? 35:12 The first principle I operate from is the idea of exclusion. 35:15 I exclude whole swaths of things from my universe of things. 35:23 I think that, in the whole world, there are probably 150, 200 listed companies that I 35:29 would even consider owning a piece of. 35:34 It's a completely different way of looking at the world. 35:36 Well, they were all in my universe already. 35:39 I think that when you start examining what it is you own-- what happens if you're on 35:46 a ship that is going down, and you and your cabin men, you have five minutes to get out, 35:54 to get up to the deck. 35:56 You look at your possessions that are sitting in your cabinet. 35:59 You say, what's worth taking with me? 36:01 Right. 36:02 Not very many things, is it? 36:04 And this is what I did, in essence.
  27. 27. 36:07 Now, the thing is that if you do this with respect to your own savings, it's one thing. 36:12 But if you do this in an institutional setting, where other people are involved, that's a 36:17 little bit more difficult. 36:18 Because not only must you deal with the idea of what is right with respect to the capital 36:26 you are being entrusted, but you have to be concerned also with the expectations of other 36:30 people, or the expectations of others. 36:33 And this is quite significant, because I think that one of the things that is missing, and 36:41 one of the things that I have discovered, is that there is a substantial distinction 36:46 between people who are investors and people who are owners of businesses. 36:54 An owner in a business is far more interested in the survival, the first instance, than 37:01 its necessary monetary value. 37:04 No owner of a business wakes up every morning asking himself what he's worth. 37:09 He doesn't know what he's worth. 37:12 He's concerned with his products. 37:13 He's concerned his employees. 37:14 He's concerned with his suppliers. 37:15 She's upset with his customers.
  28. 28. 37:17 To do that, you have to have a time preference that is different from other people. 37:23 If you only own things that are quoted, you look at the quotation machine to give you 37:32 confidence in the fact that hey, I made a great decision yesterday, this thing wentup. 37:37 Right. 37:38 You have a falsity in your understanding. 37:39 You're an investor. 37:40 You're in something, hoping that it will go up. 37:44 You are making decisions based on expectations of what you think other people's expectations 37:50 are likely to be, based on their framework. 37:56 An investor is really one who generally will acquire something, hoping he will sell it 38:01 at a higher price. 38:03 And so all of the calculations, and all of the pseudo intellectual activity that goes 38:09 along with it, is based on this idea of price-- is this price high or low-- relevant to what 38:13 other people are going to think of it next year. 38:16 What is it likely to be next year, and why, et cetera. 38:20 Owners don't do this. 38:21 They're interested in building substance. 38:23
  29. 29. They're interested in building the productive base of the company, they're recapitalizing 38:27 the earnings, or whatever. 38:29 So the focus on wealth creation is different from that of an investor as an owner. 38:35 It is difficult for an investor to be an owner because you cannot have immediate liquidity. 38:41 If you and I owned a big farm where we grow carrots, we can't sell part of it tomorrow 38:46 because we want to finance a trip around the world. 38:50 Right. 38:51 And also, there's another element that is of significance here, and that is that there's 38:56 a very large gap in perception and temperament between an American, and perhaps, an English 39:06 speaking view of the world from, say, a continental European temperament view of the world. 39:15 I'm not familiar with the Asian world at all. 39:17 I've stayed out of it. 39:18 I can't do everything. 39:20 The idea of leveraging a balance sheet to buy back your shares so your earnings per 39:27 share go up is completely foreign where we are, for example. 39:31 It just doesn't happen, yet it is a financial tool in America. 39:44 The idea of having a fragile balance sheet for the sake of a higher gold price doesn't 39:53
  30. 30. lend itself to the idea of ownership. 39:57 An owner is really, very concerned with his balance sheet. 40:00 Yeah. 40:01 In fact, the balance sheet is perhaps more important than his income statement. 40:05 His ability to endure and survive is based on the strength of his balance sheet. 40:10 And the nature of the assets on the balance sheet is not just assets, but the nature of 40:15 the asset. 40:17 And so on account of the convenience of the English language, we speak in general terms 40:22 about financial matters and equities, et cetera, but the framework with which different people 40:30 in different countries make different decisions, in general, on a generalized basis, is very, 40:35 very different. 40:40 For us, it's even more difficult because we have shareholders from some 30 countries aroundthe world. 40:47 All have perhaps different cultural and different business expectations and framework. 40:59 But the important thing is that they are largely like-minded to what we aim to achieve. 41:08 As I said to someone recently, it's akin to the idea of if you are a captain of a ship, 41:18 it's nice to know that all of the passengers on board your ship are going to that same 41:22
  31. 31. destination. 41:23 Well, that's where they wish to go and that's where you started out going, and so they will 41:28 judge you eventually by having gotten there, rather than perhaps how long it took, because 41:34 you avoided certain weather, or other such things. 41:37 By the same token, this like-mindedness, I have come to conclude that it is a necessary 41:45 ingredient even in the deployment of capital. 41:52 And that is, if I am interested in acquiring a 5%, 10% of your enterprise as a participation, 42:01 I want to be absolutely certain that the motivation that you have as an owner and manager is similar 42:08 to that of mine. 42:09 I have an interest in you making the kind of decisions that will have an impact on thecompany 20, 30 years from now, rather than next quarter or next year. 42:22 So if your objectives and if your motivation is different than that of mine and the capital 42:26 that I deploy, then at some point, I'm going to be disappointed. 42:33 So like-mindedness, whether it is in a marriage, in a business, or in any enterprise, a principle 42:39 and important factor in doing the right thing in the right way. 42:46 Leonardo da Vinci once said that simplicity is the ultimate sophistication. 42:57 And as I listen to Tony talk about the carefully laid foundations of his investment framework 43:02
  32. 32. and what he looks for, in terms of both assets in which he may want to take an ownership 43:06 stake, and the families that he is the captain allows to board his metaphorical ship, I realize 43:12 that, at the end of the day, the simplicity of how Tony invests affords him the luxury 43:16 of being able to do so in a way that few professional managers today can. 43:21 I do what you would do with your own capital as an owner of that capital. 43:28 Yes. 43:29 The only thing I have is that I have purposefully extracted myself and our team and our organization 43:37 from the financial world. 43:38 That's all I've done. 43:40 So when you extract yourself from it, your vocabulary changes. 43:43 Your practice changes. 43:44 Your philosophy changes. 43:45 Everything changes. 43:46 Yeah. 43:47 You know the fellow Nicholas Taleb? 43:50 Yup. 43:51 Who wrote this famous-- he's written this, in my opinion, one of the most extraordinary 43:56 books I've ever read called Antifragile. 44:00 Yes.
  33. 33. 44:02 And in it, to many people, it would be a rambling thing, but it is the most extraordinary analysis 44:10 of those factors that lead to this kind of issues that we talked about, the ability to 44:16 survive, this robustness, or the ability to actually gain strength from a difficult environment 44:25 in which you are, this anti-fragilitism. 44:28 Anyway, these ideas have always existed in life, have always existed in the course of 44:34 events, have always existed in industry. 44:35 The people who do things where they don't exist is the financial. 44:43 So in order to understand them and appreciate them and embed them in your own thinking, 44:47 you have to exit the financial world completely. 44:49 Yeah. 44:50 That ability to own something, really own it for the long-term, has been taken away 44:56 by monthly liquidity and by how many basis points did you miss the benchmark by what 45:03 I'm going to redeem. 45:04 That has really made most people doing what you do, as stewards of other people's savings, 45:13 it's taken away the ability you have to own things. 45:16 It’s true. 45:18 You can't own something for a month. 45:20
  34. 34. This is really true. 45:21 That is called renting. 45:22 But earlier, I talked to you about the idea of like-mindedness, for example. 45:27 And so I'm serious about this, in a sense that I want to own a participation. 45:35 I don't call it a stock or equity. 45:38 I want to own a business participation in a business that is run by owners whose motivation 45:43 is the same as mine, who are responsible to their family and to their community and to 45:51 the capital that they employ, as much as I would have been if I owned the same enterprise. 45:56 So instead of owning 100%, I own 2%, 3%, 4%, 5%, 10% Sure. 46:02 But the missing 78%, 89%, 90% is owned by—One or two families. 46:08 Yeah. 46:09 Who have owned it for 50, 100, 150, 200 years. 46:16 I can sleep very well at night, which I think is more important than eating well. 46:20 Right. 46:21 You can go without food, but you can't go without sleep. 46:23 It also adds to the idea of what I said I consider important, is the enduring value 46:31 of something. 46:33 So when you think of value simply in financial terms of price-- price earnings, ratio, a
  35. 35. 46:40 price to book ratio-- all of these are accounting terms. 46:44 They also reflect what happened in the past. 46:48 So traditional EBITDA and price to earnings ratios, and all the things that people fixate 46:55 on, and guidance. 46:56 You and I have spoken previously about guidance and what happens when a company misses a guess 47:04 they made about what might happen at some point in the future. 47:07 Right. 47:08 How do you look on that sort of stuff? 47:10 Well, EBITDA is not traditional. 47:13 It existed when I was a young man. 47:15 Sure. 47:16 And the only reason EBITDA is around is on account of the ability to finance acquisition 47:22 to the credit. 47:23 We're an all for credit creation or there wouldn't be EBITDA. 47:27 Second, the real owners do not think of the value of business as a multiple of the cost 47:35 to generate before everything. 47:37 He says earnings before everything is so BBA. 47:43 Right. 47:44 Second, the idea of earnings, if you really quite think about it, is very important.
  36. 36. 47:49 Earnings are very important. 47:50 A company must be profitable. 47:52 And equally as much, it has to generate cash. 47:55 Profitability cannot be related only to accounting entries. 47:58 Yup. 47:59 But even though this is the case, the idea of profitability on any one period to another 48:04 is really a function of the oftentimes temporal events. 48:14 And so a price to earnings ratio is actually quite meaningful, somewhat, but it's not really 48:22 so essential, in terms of value. 48:27 So we don't really pay much of any attention to that. 48:30 I do want to see a recapitalization of earnings. 48:34 So I think, to us, perhaps earnings before interest and tax is a larger-- it's perhaps 48:45 more important, in the sense that it incorporates balance sheet components. 48:49 But also the compounding of that earnings to book value per share is a far more important 48:56 indicator of a company's ability to compound it, because that's really what wealth is. 49:01 Wealth is the compounding of earnings. 49:04 And you acquire machinery and equipment to allow you greater freedom in adding to that 49:10 pile.
  37. 37. 49:11 So you take from existing earnings and add to it. 49:13 This is really the nature of capitalism, the ability to satisfy the needs of a customer 49:18 and create an enduring enterprise that adds value to you. 49:26 Self-interest is the foundation of all. 49:29 Yes, right. 49:32 Also, today, largely in the United States, but this is increasingly more common here 49:39 in this continent, the emphasis is placed on the income statement, often to the complete 49:45 exclusion of the balance sheet. 49:48 I said to you earlier, I think the balance sheet is probably more primary, engaging this 49:58 idea of endurance. 50:00 But not on its own alone. 50:04 The components that are there must be examined, the nature of the asset, and their economic 50:10 value in the process. 50:13 So I think that most owners of businesses do exactly the same thing we're doing. 50:18 I don't think there's any difference. 50:19 No, but to your earlier point, you're aligned with the businesses in your motivation. 50:25 That's crucial. 50:26
  38. 38. Now, you asked me about this nonsense about earnings estimates and forecasts, and what 50:34 do they call them? 50:36 Forward guidance. 50:37 Forward guidance. 50:38 Yeah. 50:39 I mean, I think that every CEO that I know personally would tell you in person that they 50:47 have no clue. 50:49 And first of all, even if they did have a clue, why would they give you forward guidance? 50:54 There's nothing in it for them. 50:56 No, no, there's something for them, if they have the options involved. 51:00 Well, you're exactly right. 51:01 We're talking business owners here, not CEOs. 51:03 I mean, what is the purpose for having forward guidance? 51:06 The only purpose is the price of the stock. 51:10 And then therefore, the price of the stock becomes a product, so then it becomes a game. 51:16 So the focus is not on making something, the focus is on how to make money. 51:22 So the idea behind the business is money is made as a result of doing something well. 51:27 I mean, that's the principle foundational aspect of it, is you do well financially as 51:38
  39. 39. an individual because you contribute something worth-- someone else is willing to pay what 51:44 you contribute. 51:46 So to the extent that the only objective is to make money, or to acquire something of 51:53 a purpose, or reselling it, or what have you, you lose track of those essential components, 51:58 of this idea of independence and endurance that I spoke to you about. 52:03 It becomes a game. 52:04 Yeah. 52:05 I have a very different view of what people have towards the idea of diversification. 52:10 You screen because you have certain-- now computers. 52:18 When I was a young man, we didn't have computers. 52:19 And you couldn't do any of this stuff. 52:21 You had value line in America, and other such things in Europe. 52:24 In fact, I invested in companies who, in Europe, did not even want to give you their balance 52:31 sheet accounts. 52:33 We own 28 participations. 52:38 They all have a purpose. 52:40 Some of them are more core and more permanent than others. 52:44 Others are opportunistic or temporal, or whatever. 52:50 The idea of going out to try to find more, why would I want to do that, first of all?
  40. 40. 52:56 I once wrote a paper and I called it My Great Broom Theory. 53:03 And what I did is I went on the Bloomberg machine and I said, give me all the companies 53:07 in the world that are listed, the principal listing. 53:13 And the computer says, 78,522, for argument's sake. 53:16 I said, OK. 53:17 Now, I said, I really don't know anything about Africa, the Middle East, and say, South 53:28 America, and some places. 53:32 So I just wanted to reduce it to companies that are in North America, Western Europe, 53:37 and perhaps Australia, New Zealand. 53:40 Computer's says, OK, now you've got 48,226. 53:44 OK, that's good. 53:46 And then you say, OK, now give me companies that are financially solvent. 53:52 That means they have a right a current ratio-- at least on the current ratio basis-- of at 53:57 least 1. 53:58 It says 20,500 something. 54:00 I said great. 54:02 Now I said to myself, I would invest in nearly anything, nearly anything, except for businesses 54:09 that are finance related-- banks, insurance companies, mortgage companies.
  41. 41. 54:14 They're not interesting. 54:16 Yeah. 54:17 Take out all those companies. 54:19 OK, now you've got 10,500 and something. 54:22 All right, now, I said to myself, I really want to own something in a firm that is manageable, 54:30 or it's owned by-- so take anything away over $10 billion of market cap. 54:36 OK, and anything under, say, $100 million in market cap. 54:40 Just give me something. 54:42 8,500. 54:43 OK, now I said, give me companies who are-- this is true, you can do that today, or some 54:49 variation thereof-- that pay a dividend of more than one penny per share, at least one 54:54 penny. 54:55 I want some dividend, right? 54:56 Another thing. 54:58 Give me companies that have, I don't know, a debt to equity ratio of no more than x, 55:05 another thing. 55:06 Ends up that you end up with maybe 250, 300 out of all those. 55:11 And those are in all industries. 55:13 Yeah, sure. 55:15
  42. 42. Now, the possibility of finding anything worthwhile in there, it's really remote, I mean, at any 55:20 one point in time, right? 55:22 Yeah. 55:23 But what do you do is you learn about business. 55:26 Not about stocks, but about business. 55:29 You learn the food business, the fertilizer business, engineering. 55:34 You learn about specific endeavors, and you acquire an understanding-- a businessman who 55:39 grows, say, carrots. 55:40 I'm using this example. 55:42 Yeah. 55:43 He's completely uninterested in spending time learning about semiconductors. 55:49 Because no matter how much he knows, he will not ever know what could go wrong. 55:53 He knows carrots. 55:55 He knows what can go wrong in the carrot business. 55:57 He knows the components that contribute to successful carrot business. 56:02 So you can never tell me that there's a young man 25 years old, however many degrees he 56:07 may have from Harvard, who can sit in New York and know what can go wrong in some biotech 56:11 business in Japan or some machinery business in Spain. 56:16
  43. 43. He sees things superficially on financial information, on a superficial-- look at what 56:22 it looks like, or what it has looked like. 56:25 When you buy for the purpose of selling, you don't really need to understand what can go 56:29 wrong. 56:30 You see everything in terms of price. 56:31 That’s very true. 56:32 So we have a relatively important stake in the business of salmon farming, for argument's 56:39 sake. 56:40 Well, not just myself, perhaps, but we have a team that knows, more or less, everything 56:45 there is to know about salmon farming literally everywhere in the world. 56:50 We know what can go wrong. 56:52 We know where the strengths are. 56:55 We know where the abilities, where skill is. 56:59 And not just merely from what will happen in the price of say, salmon, today or tomorrow, 57:04 the demand or supply of it, but in terms of those ingredients that contribute to the long-term 57:09 viability of a business. 57:11 But we also pay to understand what could go wrong. 57:14 What could go wrong is really more important than what can go right, because over time, 57:17
  44. 44. even a marginally good business will profit, will do well. 57:22 So you really need to understand, you don't know what anything is worth until you know 57:28 what can go wrong. 57:29 Because we value things differently because we weigh components differently. 57:36 There's no such thing as valuation metrics based on some standardized formula, unless 57:40 you see it in connection with other issues. 57:43 So when you extract yourself from the financial world and you say, what is this salmon company 57:47 worth? 57:48 What if you were private? 57:49 Well, you don't have metrics there, or you can use elicit company metrics. 57:54 But what do I pay for this? 57:55 And what do I pay in that genuine economy, not in a distorted economy that we have today, 58:02 where the cost of money is zero. 58:04 So today, valuations of businesses have been distorted on account, again, of these distortions 58:09 in money. 58:11 And so this is a very difficult time to have, and this is why it's so important to have 58:20 your own subjective way of measuring and assessing value. 58:24
  45. 45. And part of this method includes the value that is imputed by elements of risk that are 58:31 unique to a particular business, a particular geographic location, and competitive advantage 58:39 or not. 58:40 So it's simple, but it isn't easy. 58:50 As Tony so beautifully put it, when you buy for the purpose of selling, you don't really 58:58 need to understand what can go wrong. 59:00 You see everything in terms of price. 59:04 Having a clear understanding of the kind of business you want to have an ownership in 59:07 is fast becoming a lost art. 59:09 Today, the focus is almost exclusively on price and the ability to make a profit on 59:13 a specific position, rather than finding an enterprise that offers a robust, sustainable 59:18 revenue stream to an investor. 59:21 Finding such businesses requires the diligence and discipline to look in places that most 59:25 mainstream investors shy away from, but it's the very fact that the times of business which 59:29 meet Tony's criteria are so rare, that creates the value opportunity. 59:33 So let's talk about scarcity. 59:35 Let's get back to that, the point of scarcity and why it's so important. 59:39
  46. 46. Well, I should tell you that in 2002, we formed an investment fund, which largely, over the 59:49 course of the next four or five years, I abandoned the private-- being an investment counselor-- 59:55 and just focused on this one fund. 59:57 And in 2010, we changed the character of this to being more akin to a holding company. 60:04 But the issue is it became very quite important when you are dealing with-- you're no longer 60:12 dealing with families, where every decision you made had an impact of them directly, because 60:18 we knew who they were. 60:20 But you were dealing with a pool of capital belonging to the very same people you had. 60:25 Whether it was an error or not, I had made this sentiment. Whether it was an error or not, I had made this sentiment. 60:30 I was giving the sentiment out that we would look after your savings, whatever you put 60:36 into this investment company, as if it was the only money in the world you had. 60:44 This was a wonderful thing because it not only focused our views on doing the right 60:50 thing for the whole, but it allowed a number of people to really keep into this investment 60:55 company the vast bulk, and some cases, all of their financial savings or wealth. 61:04 But this kind of policy does not lend itself to popularity, because people want to put
  47. 47. 61:10 you in a box, and they want to put a label on you. 61:15 And an honest investment practice does not lend itself to labels. 61:24 And they want to label you according to some predefined idea of what you are. 61:27 You are a value investor, or this, or the other. 61:31 And so it became really important in 2010, '11 or so-- I don't remember the year-- to 61:38 create not a slogan, but a defining characteristic of the practice that would allow someone to 61:49 focus on the essentials of it. 61:51 And we defined it by the word scarcity, and that scarcity is the most important law in 62:05 economics, in that no one can have all that they want. 62:12 Scarcity is a natural law. 62:14 It's just part of life. 62:16 There's scarcity in material goods, in resources- - everywhere you look at the scarcity, in 62:23 real savings, in terms of money, other than, perhaps, credit is being created. 62:28 But there's not just scarcity only in visible, tangible resources, there's also scarcity 62:33 and skill sets. 62:35 There's also scarcity among the kind of characteristics and character in men that you and I would 62:42 consider to be attractive. 62:43
  48. 48. So scarcity, in all of its permutations, is an important ingredient in any action that 62:50 deploys capital for the future. 62:55 What makes a Van Gogh painting valuable is not the canvas or the paint, but the fact 63:02 there is only one. 63:03 By the same token, there's a second component, which we call permanence. 63:08 I sometimes think we should have called it endurance, but nonetheless. 63:12 It's the idea of creating a framework not only within your collection of investments, 63:21 but by extension within each investment, the nature of the investment itself, and the people, 63:30 the participation that it represents, in the kind of policies and the kind of practice 63:38 and the kind of purposeful behavior that is designed to endure, rather than merely grow. 63:47 You can grow but become fragile and then die. 63:49 That's not interesting to me. 63:53 So if my mandate is to protect capital from both inflation, taxation, and bad decisions, 64:02 then the idea of seeking to find endurance is very important. 64:08 It's really important. 64:10 And the third part was the idea of independence. 64:14 So it was scarcity permanency. 64:17
  49. 49. And independence is even of significant value as well in the sense that much of what we 64:24 see today in our world is interdependent today. 64:29 We depend on so many external factors. 64:32 We depend on suppliers. 64:35 We depend on the light coming on when we turn on the switch. 64:41 We take it for granted that the light will come on. 64:44 We depend on the water company. 64:47 But more so, in a business sense, we depend on, perhaps, key suppliers, that often, perhaps, 64:59 their situation is not as strong as we think it is. 65:07 We have competitive pressures that come as a result of competition that would not have 65:11 been there had there not been credit. 65:14 So credit creation. 65:15 The debasement of money has created an environment in which there is falsity within the competitive 65:21 arena in which companies operate. 65:23 And in order to survive, they have to, more or less, adapt to the conditions. 65:29 So there's dependence on government for subsidies, or for tax abatements, or other such things. 65:35 Sometimes there's dependence on one customer. 65:37 So dependence makes a system fragile. 65:44
  50. 50. So the more independent an organism is from external weaknesses, the more likely is to 65:52 add to its endurance, or its strength. 65:54 So independence is very valuable, and is actually costly. 65:58 There's an element of freedom. 66:01 Freedom doesn't come free. 66:02 You have to work at it. 66:04 The threats to your freedom and to your liberty and to your independence are many, and they 66:09 change from time to time and from apple to apple. 66:12 But a successful practice in which seeks to protect, preserve, and enhance the patrimony 66:21 over many years is one that must be concerned with these three components. 66:29 We think with words. 66:34 The ancient Greeks said that the revisiting of definitions is the beginning of wisdom. 66:41 So today, we use words oftentimes without really thinking about their significance. 66:47 And oftentimes, words we use today have a different modern meaning than the word had 66:53 been used in an earlier era. 66:57 So we have to be careful about words. 66:59 I actually don't use the word wealth much at all. 67:04 I use the word savings. 67:06
  51. 51. And by that, I have a very precise meaningful for savings, that which is left over for production 67:15 after consumption, and the accumulated results of that savings over time. 67:23 I think that people make the error of considering anything with a bid to have value. 67:30 Well frankly, many of the things that have a bid on, they may have financial value but 67:35 have no economic value. 67:39 So distinguishing that which has economic value from that which is just a claim or a 67:51 loan or promise, is just merely a beginning. 67:56 Because even that which has real economic value, oftentimes, its value is fleeting or 68:00 is temporal. 68:03 This is why I think that, more than any other aspect of life, in investment practice, you 68:09 and I have to be incredibly discriminating, to a point of absurdity, actually, because 68:17 there are very few things that would fit in this very narrow and very constrained view 68:24 of the sanctity of savings that I think is important. 68:34 You appear to be an outlier in the modern way that people think of managing money. 68:40 But the truth is, you go back to an age before the noise, before this cacophonous din that 68:47 surrounded money management. 68:51
  52. 52. You're a throwback. 68:52 You're a throwback to real money management as it used to be, when people didn't have 68:56 70,000 stocks to choose from. 68:58 They had to invest their capital, they had to invest their savings, in a way that was 69:02 restricted by the universe they were presented with. 69:05 All you've done is go back to those first principles you talked about earlier on. 69:09 But to people watching this, you'll seem like some strange beast doing things in a strange 69:16 way.Well, I think there are a bit others. 69:19 But there are very few. 69:20 And in fact, I think there we're few is because this kind of practice is not really what is 69:27 wanted. 69:28 There's no demand on the part of man-- a man with money in his pocket-- for this sort of 69:36 practice, largely on account of the fact, but not only, that man's time preferences 69:42 changed over the years. 69:44 It's hardly anyone who works to provide for another generation. 69:49 People want to consume what they have. 69:51 They see their investments as an extension of their current account. 69:55 It isn't always true, but this debasement of money has changed. 70:05
  53. 53. It has had a moral impact on man's view of his savings or his world. 70:13 So there's really no demand for this at all, very, very nominal and minimal. 70:23 And I say this from experience. 70:25 Sure. 70:27 But what that does is it enables you to create a practice, create an investor base of, to 70:34 your point, like-minded people. 70:35 Because they are so few, and guys like you nowadays are so few, that eventually you find 70:41 each other. 70:42 And that creates itself a very robust practice that gives you that time preference, that 70:49 permanence of capital that enables you to do what you do. 70:52 The only way we would ever get permanence of capital as other holding companies have 70:57 is by listing our shares on a stock exchange and making shareholder liquidity subject to 71:05 exchange trading. 71:07 That allows us to fix our capital base and not our capital issue. 71:18 Now, of course, we-- shareholders-- can trade their shares with other shareholders or the 71:26 company buys back a few from time to time. 71:30 But capital changes. 71:32 I mean, they are insignificant. 71:33
  54. 54. I mean, we have maybe 1% a year change in our capital. 71:38 Right. 71:39 It's just, by modern standards it's tiny. 71:42 I think you are looking at the wrong thing by saying I'm strange, in that there have 71:48 been many families and others in the past, particularly in Europe-- Americans, if you 71:53 ask them about investment greats, investors, for example, they can name Warren Buffett, 71:58 for example, which is-- here on this continent, there are many. 72:03 And most of them are completely unknown, have no interest in promoting themselves, and they 72:09 have extraordinary records over generations in creating wealth in the form of a family 72:17 or a listed holding company. 72:22 When you start thinking about enriching yourself from the assets of those who are participants 72:32 in your scheme, then you are no longer an owner. 72:38 You become-- really that becomes a business in itself. 72:43 For example, our capital base is about 330 million. 72:50 If it was double, I would not make any money. 72:52 I would not see myself or any one of our team. 72:56 This is completely different from the world in which funds and others operate, where the 73:01 size of their capital pool is directly proportional to their income. 73:06
  55. 55. And very little of it has to do with long-term results. 73:10 Because people do come and go. 73:13 No one sees annualized rates of return over 20, 25 years, because no one hangs around 73:22 for 25 years. 73:24 Right, sure.But for each family alone on a personal basis, the results over 20, 25 years 73:33 matter a lot. 73:35 Finance gives you the tools with which to deceive oneself, to make it seemingly complicated 73:43 so you can razzle dazzle people and make them think somehow you know more than they do, 73:48 where on the average, the average man who worked very hard for what he earns probably 73:51 knows more than most investment advisers. 73:54 Yes. 73:55 No, it’s true. 73:56 Yes. 73:57 Well, this idea of industry first, finance second, has been turned on its head. 74:02 we don't think of-- we think of industries in financial terms now rather than think of 74:08 the industries themselves. 74:10 What is the business? 74:11 Who are the customers? 74:13
  56. 56. That's been turned completely on his head. 74:15 We now look at what are the earnings per share? 74:16 What are the forecasts for the next 12 months? 74:18 But this is really, truly an American observation. 74:23 I mean this-- you cannot generalize this around the world. 74:29 In America, it is generally true. 74:33 You won't find it among privately held firms. 74:35 There are some extraordinary companies, American privately held. 74:39 But in the United States generally, a listed company, their-- and I'm being unfair perhaps 74:45 by generalizing too much-- but even with just disclaimer, a listed company's principal business 74:52 is their stock. 74:53 Yes. 74:54 Nothing else. 74:55 What they do is an unnecessary complication to the idea of the stock going up. 75:03 And so because that's what the customers want. 75:09 If there were owners in these firms, there would not be any disputes about compensation. 75:13 Right. 75:15 Because an owner of a business knows very much well how to compensate. 75:20 An owner in a business doesn't take options on its common stock. 75:25
  57. 57. He owns it. 75:27 This idea of sustainability, think about the increasing use of the word sustainability. 75:35 The more unsustainable the system becomes, the more we talk about it. 75:39 The idea of corporate responsibility has become a very big business. 75:43 Owners don't need to be reminded to be responsible. 75:46 It is not uncommon for someone to be given somewhat of a tip of some kind, perhaps watching 75:56 CNBC or something and say, well, this must be a great idea. 76:00 I will put a $5,000, $10,000 in this and hope it works. 76:04 And they're likely to part with the $5,000, or $10,000, or $15,000 on the basis of a very, 76:10 very flimsy suggestion by someone, or just a hunch, or a hint. 76:17 The story is a real story about this man who often did this sort of thing. 76:21 But one day, he came to me, and he says, I need your help. 76:24 He says, there's going to be a dry-cleaning store in our neighborhood and I have a chance 76:31 to invest money. 76:32 And I said, well, that's wonderful. 76:33 He says, well, but I've got to do some research. 76:37 So he says, I went around, found out that the nearest dry cleaners is only 2 and 1/2 76:43 miles and they're very busy. 76:44 So there's likely to be demand for this cleaning shop. 76:47
  58. 58. I also went to industry to find out what the operating margins are for cleaning stores 76:53 and what is the nominal labor component versus the amortization, and equipment, and on and 77:01 on. 77:02 And so this man was a dentist, actually, he was a educated man by nominal standard. 77:08 The moment he had an opportunity to invest in something that was not quoted, and he didn't 77:13 really know what he would like to do, he became fascinated with the idea of being an owner 77:17 in a dry cleaners. 77:18 But he saw the necessity of understanding those ingredients that would otherwise contribute 77:25 to the success or failure of this investment. 77:28 Whereas on the other hand, because throwing money on a tip is the kind of thing that allows 77:35 you, well, the next day to sell it, or buy more, et cetera. 77:39 That liquidity gives you an excuse not to want to know anything, not to understand anything. 77:47 I think this-- for me, it was an incredibly interesting example of a microcosm of a larger 77:57 world. 77:58 Again, I think when you look through history, and people bought into their South Sea China, 78:05 South Sea Company in London, they brought in the Mississippi Bubble company in Paris 78:10
  59. 59. some years ago, man has always sought to become rich without work. 78:17 I'm not interested in that. 78:18 See, I'm not interested in the man who's already rich, who's already earned something and he 78:23 wants to keep it. 78:24 Those are different people. 78:26 Their needs are different. 78:28 Their world is different. 78:30 So if you have some money in your pocket, or some ability, and somebody wants to become 78:35 rich, there are a million places where you can go gamble from Las Vegas, to everywhere, 78:41 to Wall Street, to ETFs. 78:42 There's just an umpteen number of ways. 78:45 There are Bitcoins, Zipcoins. 78:47 There's just everything. 78:48 But for someone who has already acquired, that has the fruit of past labors at hand, 78:58 the tools with which you protect wealth are different from the tools that are needed to 79:06 create it to start with. 79:08 And so the tools are different, the framework is different, the objectives are different, 79:13 the methods are different, the language is different. 79:17 I have a habit of revisiting decisions-- good or bad-- over the years.
  60. 60. 79:20 And I go back and I ask myself, what is it that I should have seen that I didn't? 79:30 What was possible to see that one overlooks? 79:34 I also ask myself, what could I have seen that I didn't? 79:38 What did I see and how did I focus on this that others perhaps didn't? 79:45 The idea behind this is to be able to separate an element of luck and happenstance from skill. 79:53 Now, of course, since then, now I'm making a lot fewer decisions than I ever did in the 80:02 past. 80:03 You know, if I think back in those days, I would make 20 or 30 decisions-- investment 80:08 decisions, a year. 80:10 Today I'll make one, maybe two on a very busy year. 80:16 Right. 80:17 The ability, or the necessity to go back and examine decisions is necessary because it 80:25 adds, it hones your skills in understanding. 80:29 Because what you see is-- I've come to the conclusion that-- and perhaps we can talk 80:35 about this at some point-- that the unseen and the unmeasurable are more important than 80:40 the other kind. 80:41 And that has come from such observations over the years. 80:47
  61. 61. Things that kill you are often times things that you cannot measure or you cannot see, 80:52 generally with respect to people, perhaps. 80:58 Understanding not just the notion of risk itself, but the nature of, and the possible 81:02 places from which the kinds of risks that threaten a given investment may emerge, is 81:06 crucial, and frankly, something which is given far too little thought by the average investor 81:11 today. 81:12 In modern times, we distill risk down to a number. 81:15 And we call it volatility, because that's easier for most people to quantify. 81:19 But in doing so, we're ignoring the very nature of risk itself. 81:23 But as Tony and I walked in the snow, our conversation turned toward something he feels 81:27 is a vital component of any investment-- time preference. 81:32 This date farmer I met is Arab. 81:36 And he had inherited an orchard, right? 81:40 It's called an orchard? 81:41 Yes. --of roughly about 1,000 trees. 81:44 He showed me around. 81:45 And he showed me something like 100 trees that were recently planted. 81:52 And I said to him out of curiosity, I have this curiosity about, I said, how long will 81:59 it take for this to bear fruit?
  62. 62. 82:02 And he says, well, this particular variety, it will bear fruit in about 20 years. 82:07 But that's not good enough for the market. 82:09 It may be about 40 years before we can actually sell it. 82:12 I've never heard of this. 82:15 I did not know this. 82:16 Now, there are other date trees that could produce faster. 82:19 But anyway, so I said-- so all of a sudden, it became odd. 82:23 Because I looked at all these trees that were being harvested. 82:26 And you realize that he couldn't have possibly planted them. 82:30 Yes. 82:31 He said, oh, yes, yes, yes, that was my grandfather, and my father, great grandfather. 82:38 It was fascinating. 82:40 Why would a man do something today for which he will receive no reward in his lifetime? 82:48 The only reason he would do this if his time preference is so low that he's concerned about 82:54 his family's wealth a generation or two from now. 82:57 Because he receives no reward by planting a tree that will have no— You know, in your 83:03 world, they would call it an economic loss, a loss of opportunity, or god knows what they 83:07 would call it. 83:08
  63. 63. But he saw the world differently. 83:12 I'm in a supermarket and I see dates, I think about this story now. 83:15 And I'm sure there are other, similar kind of situations. 83:20 Everyone has heard me tell the story about Antoine Fievet, the chairman of Bel-- Fromagerie 83:25 Bel. 83:26 And the first time I met him, something had happened in the company that was notable. 83:34 Anyway, so I said, I want to congratulate you for something. 83:41 I don't remember what it was. 83:42 And he says, oh, Tony, you don't need to congratulate me. 83:45 I found myself in this family that several generations built this wall. 83:48 And I'm adding one or two bricks. 83:49 And I'm going to pass it on to someone else. 83:54 Think about what this man said. 83:56 I mean, I was instantly in love with this man. 83:58 It made no difference if he made cheese or made furniture. 84:03 He had a perspective of what his role was, a perspective of what his task was, that his 84:08 mission was to protect, to preserve, and to enhance what he was handed. 84:15 It was not the business of quickly selling it, and making money, and doing things. 84:18 They do make a great deal of money. 84:20
  64. 64. But they do make money as a result of making great products. 84:25 So how many people in the world can I find that I can buy 2%, 3%, 4%, 5% of their business 84:30 that think like that? 84:32 Because that way I can sleep very well at night. 84:34 And I can assure you the capital that I command and is deployed is going to be around 50 years 84:39 from now. 84:40 Correct. 84:41 And we touched on it earlier, but this comes back to people. 84:44 This is-- you can find a company that looks good, might come out of that screening you 84:48 did when you got 78,000 companies down to 150. 84:52 It then comes down to the people. 84:54 It comes down, because let's face it, every intergenerational company, I guess the biggest, 85:01 potential pitfall is you get that one generation where the kid comes in and he decides he wants 85:06 a Ferrari instead of the family business. 85:08 Sure. 85:09 Absolutely. 85:10 That's an unquantifiable risk. 85:11 This is, in fact, the norm more than an exception. 85:15 You probably-- you were a fund manager as well, for a while. 85:19
  65. 65. Yes, sure. 85:20 Did you go visit and talk to people? 85:21 I mean, this is not. 85:22 Not as many as you. 85:23 And not the same kind of people as you, because these were big companies. 85:27 Ah. 85:28 Oh, yes, you're right. 85:29 You ask them for their forward estimates. 85:31 Yes. 85:32 There you go. 85:33 There you go. 85:34 Something along those lines. 85:37 A lot of that stuff was private. 85:38 No, this has happened to me twice. 85:41 Once happened in the United States. 85:43 And the case I told you, it happened, you know, here in Europe, where I'm visiting briefly 85:53 with the man who runs the business who is a member of a family who owns a large stake. 86:04 And many times they are really involved in the production of things. 86:07 They are really not-- they don't drive a Rolls Royce or a series 6 BMW. 86:13 And so he says, how many shares you own of our firm? 86:18
  66. 66. I said, x. 86:20 So I don't remember what it was. 86:22 He said, by the way, what's our stock price nowadays? 86:25 Nowadays. 86:26 Yes. 86:27 Nowadays, yes. 86:29 And he was genuinely curious. 86:30 Because I mean, he could have found out. 86:33 But it didn't occur to him that it was necessary for him to know what the current price was. 86:38 And so oftentimes you see, for example, let me just give you-- I sometimes think about 86:43 this. 86:45 Yesterday, we have one holding in which someone sold 14 shares. 86:53 Right. 86:55 The prior closing price was 505 euro. 86:58 Yes? 86:59 Yes. 87:00 The new bid was 480, asking 540. 87:06 Ask 540, bid 480. 87:09 Somebody sold 14 shares at 540. 87:13 The last price came down 2 and 1/2%. 87:16
  67. 67. And I calculated that for the family that owns the company that translates to something 87:21 like 400 million euro worth of change. 87:25 Right. 87:26 Now imagine they were watching it. 87:27 It is immaterial. 87:30 For us, it was something like 600,000 of dollars or euros, or I don't know what. 87:35 But the fact is that the more often, the more frequently you look at something, the more 87:40 frequently you'll second guess why you own it and what else you could own instead. 87:45 Completely. 87:46 It's important to know that you work for people that are like minded with you. 87:52 You know? 87:53 I'm not doing this to become famous and rich. 87:57 And so if there are-- if we have 100 and say we have 117 shareholders in the firm, I want 88:05 to make sure-- I want to know-- that at least the majority of them understand what we do, 88:12 appreciate what we do, and then I feel confident in working for them. 88:17 I mean, I really feel a sense of pleasure in doing whatever we do for people who— 88:25 If they were strangers, or if they were people who were going somewhere else, or wanted something 88:28
  68. 68. else, or wanted excitement in life, I mean, we've been told many times, why don't you 88:32 leverage the portfolio? 88:36 Borrow money. 88:37 I've never done this. 88:38 Why don't you sell something short? 88:40 I've never done this before. 88:42 I don't even know how to do it. 88:44 Why don't you buy this, or why don't you take your reserves and buy treasury bills in, I 88:50 don't know, Zimbabwe? 88:51 The interest rate is higher. 88:53 We don't do any of these things. 88:55 If you're not happy, listen, there's so many people that would be happy to play with your 89:00 money. 89:01 I mean, this is not a competition. 89:02 But it comes down, once again, to people. 89:07 You have to make a judgment on the investors when they come in. 89:10 They have to make an adjustment. 89:11 Thsi is so rare. 89:13 No. 89:14 But they have to make an assessment of you. 89:17
  69. 69. And then you have to make an assessment of every management that you-- OK, you've got 89:21 28 investments. 89:22 That's 28 investments you have to evaluate. 89:23 Our shareholder turnover is much lower than our portfolio turnover. 89:28 Well, which itself is— I'm sure extremely low. 89:33 But there's a reason for that. 89:34 And it comes down to people. 89:35 It's because the people you invest in and the people who invest in you make judgments 89:43 that turn out to be, in the most part, correct about those people. 89:47 Right. 89:48 So how do you-- as that judgment of people is such an important component in both directions 89:54 of what you do. 89:55 It's also the hardest quantification to make successfully, because they're people. 90:01 Who really knows? 90:02 Yes. 90:03 It's also important that, for example, in my case, I have a wonderful team. 90:09 And I want to be able to pass on to another generation the ideas that are most valuable. 90:14 I mean, they all have their own personality, and they have their own temperament and all 90:24
  70. 70. that. 90:25 So you want to pass on ideas that matter. 90:29 And one of those ideas is the ability to judge other men. 90:35 And you can only do this with practice. 90:37 And you can only do this by observing things. 90:39 We have been known to make a completely reverse-- reversal-- on an investment we hold on the 90:48 basis of a single sentence that was uttered by a CEO or CFO that betrayed something that 90:57 I would not want to have. 90:58 So imagine you own the whole company, and your president of your company or the financial 91:04 officer comes in, gives you a report. 91:06 And in that report, he says something that you'd want to fire him on the spot. 91:12 Right? 91:13 Right. 91:14 And you would. 91:15 And you should. 91:16 In my case, I only own 1%. 91:20 You don't sit there and rationalize and say, well, that's not what he meant. 91:24 And the P ratio is good, and the IBITA is good, and the prospects are great, so we'll 91:29 hold it.
  71. 71. 91:30 No. 91:31 You get out. 91:32 I can tell you an incredible story. 91:34 I don't mind telling you the name, or actually, maybe I should. 91:39 It's a company that at one time in Brazil, it was the largest processor of chickens in 91:43 the world. 91:44 The company was called Sadia. 91:48 And I went to visit them in Sao Paolo. 91:51 Because this company not only produced chicken for the local market, but they also sold the 91:58 vast majority of breasts and other good components of the chicken to markets in the Middle East, 92:04 in Russia, and elsewhere. 92:06 They generated a great deal of foreign income, foreign exchange. 92:12 They grew their own wheat to feed. 92:14 They made their own chicken feed. 92:17 They were exceptional. 92:19 And there was a second generation. 92:21 And one day I went to visit. 92:25 And we owned a stake in it. 92:27 And I visited with the CFO. 92:30 The patriarch in the family was absent.
  72. 72. 92:33 He was not there. 92:34 And it was sad because I wanted to meet him. 92:36 The CFO said, ah, he says, if we had the ability to have access to the banking system so that 92:42 we can hedge our receivables from various countries, then we can-- this was 2000 something-- 92:53 we can make more money by being able to foresee. 92:57 Because we can foresee foreign exchange rates. 92:59 Only if we could work with an institution that would work with us in the forward market. 93:05 And the CFO insisted on telling me, spending 15 minutes telling me about this thing that 93:09 had nothing to do with chickens. 93:11 So I noted it. 93:14 Two years later, it was in the news, Sadia buys a 60% stake in a bank in Brazil. 93:21 Within 30 minutes, our entire stake was sold just on that announcement alone. 93:31 Within two years, the company was insolvent, out of business. 93:37 Look it up. 93:40 Why is it, I wonder, that stories such as that of Sadia's demise seems so unsurprising 93:44 today and yet Tony's response to that one announcement about the company buying a stake 93:48 in a bank catches one completely by surprise? 93:52
  73. 73. Tony's logic is simple, his action in selling his whole stake in the company completely 93:57 justifiable. 93:59 And yet it seems like a bold move instead of a prudent, fiduciary action. 94:02 This intense focus on the people responsible for the stewardship of a company in which 94:07 he has an investment is central to the way in which Tony identifies potential places 94:16 in which to deploy his irreplaceable capital. 94:18 But sometimes, even with this level of attention to detail, drastic and painful action can 94:22 be required. 94:23 How would you act if you owned the entire thing? 94:27 You walk into a business, and you meet the head of the business, or the head of development, 94:29 or the head of anything. 94:31 Ask yourself, if I own this entire thing, would I hire this guy to run it? 94:38 Right. 94:39 Yes. 94:40 That's a great question. 94:41 Now where is the formula to tell you that? 94:42 You're absolutely right. 94:43 But you have to-- it's your knowledge. 94:44 You have to look them in the eye. 94:45
  74. 74. And if the answer is no, why would you want to own 1,000 shares? 94:49 I don't disagree. 94:50 But how do you make that judgment without going to meet the man and talking to them. 94:56 And him, maybe on another day, you may have had a completely different conversation with 95:02 him. 95:03 Sometimes you don't have to meet them. 95:04 Sometimes what you can do is you can look at actions over 20, 30, 40 years, 50 years 95:10 and be absolutely certain that in the right time, they made the right decision for the 95:15 right reason in the right way. 95:17 And they've done this all their lives. 95:20 You don't need to meet them. 95:25 We have a fairly large investment in France, and I have never met-- actually, two-- I've 95:30 never met the people involved. 95:34 But I am extremely assured-- as much as I've done everything else-- that they are the right 95:41 people doing the right thing in the right way. 95:43 I'm sure. 95:44 On the other hand, I must tell you about an unbelievable error in judgment we made because 95:51 we bought a large stake in a company that, by all standards, had enormous value in it.
  75. 75. 95:57 And the people who run it said all the right word. 96:06 Blah, blah. 96:08 And it was not until a year or two later that, through sleuthing, really, we came to conclude 96:15 that what they said, and what they did, and how they acted were completely different. 96:20 And so no matter how valuable the company was, we exited. 96:24 And it was actually quite painful, mostly do my own ego. 96:29 Of course. 96:30 Yes. 96:31 Of course. 96:32 Because I had invested a lot into understanding this. 96:37 Today, you're suffering from a culture of unaccountability. 96:42 Look how many times you've heard recently the word transparency. 96:45 Everybody says this, huh? 96:47 When I was a young man, no one really knew the word transparency. 96:51 When a company is owned by an owner, there is no need for transparency. 96:57 Right? 96:58 Yes. 96:59 When a company is owned by someone who is responsible to the owner, that's all we need 97:04 is a responsibility. 97:05
  76. 76. We used to have this word. 97:07 No? 97:08 Now we have manufactured all this bureaucracy to satisfy our nominal need that things are 97:18 being reported, et cetera, et cetera. 97:20 Every fraud in the world had an audited, financial account. 97:24 Yes. 97:25 Everyone. 97:26 So that doesn't mean anything either, does it? 97:29 Nope. 97:30 No, it doesn't. 97:31 It doesn't. 97:32 This is an old business in making barrels for wines and spirits. 97:36 And the Francois family in France had controlled it for years. 97:41 But the son was a bit more ambitious. 97:43 And he saw opportunities in an industry that was being consolidated, principally, on account 97:49 of incompetence, particularly cooperages in Scotland. 97:54 Because it may sound a simple thing making a barrel, but it actually isn't. 97:58 It takes a lot of work, and you need to know what to do with the wood, the components. 98:05 You need to teach people how to do it. 98:06 It's really difficult. 98:07
  77. 77. But they're very traditional. 98:09 For example, this company relied mostly for most of its life on demand for barrels in 98:15 the Bordeaux and Burgundy regions in France. 98:18 And in fact, they have, I think, all the market there for that. 98:21 But they've grown. 98:22 Now, they have operations in Australia, in California, in Scotland, in South Africa. 98:25 Chile, I think. 98:26 I'm not on top of all those details. 98:31 But the point is that they have grown to be, really, the largest company of its kind in 98:35 the world, even though there are only, I don't know, $250 million in size. 98:42 And this is in a business that people will consider boring. 98:46 I mean, there's nothing sexy or exciting about making barrels. 98:50 But I tell you, they will be making the same barrels 50 years from now, and they will be 98:55 the very best at it. 98:56 And there will be 3, 4, or 5 times the size they are today. 99:01 But that's durability. 99:02 That's endurance that you talk about. 99:04 Finding these businesses that people think are boring because they don't leverage up 99:07 the balance sheet, they don't chase growth, they don't do all these things.
  78. 78. 99:11 Talking about durability and permanence, so I have to bring up the subject of gold. 99:15 Why do you have to? 99:16 Well, because I feel like it's a permanent asset. 99:19 It's a durable asset. 99:21 Why? 99:22 Well, I'm going on 6,000 years of history. 99:26 Maybe in one day it doesn't become permanent. 99:27 Maybe one day it doesn't come durable. 99:29 All the evidence so far point to it being that way. 99:32 Why are you asking me? 99:33 You know far more about it than I do. 99:35 I'm curious to see you views on it. 99:36 Because I know you have owned gold. 99:39 I suspect you probably still own some gold. 99:41 But I'm curious as to how you think about it within the framework that we've been discussing 99:44 today. 99:45 Because it's not a company. 99:46 It's not-- there isn't a man whose eye you can look into— It has no PE. 99:50 It has no PE. 99:52 It has no PE. 99:54
  79. 79. It has a P, but not an E. Right, right. 99:58 And the fact is that the P is in money, which, itself, we don't know what it's worth. 100:05 Well, I have had a fairly long history with gold, starting in 1998. 100:14 I've owned gold bullion for many years. 100:23 I think at one time I saw it as being incredibly mispriced. 100:30 And I saw it as an anomaly, thinking that somehow the market has-- occasionally, the 100:39 market misprices certain assets. 100:40 So what was it that made you think it was mispriced? 100:43 I had a curiosity about gold for the right reasons for a long time. 100:48 And I used to be an owner in Franco-Nevada since 1996 or thereabouts. 100:53 But I've never owned the bullion. 100:56 And Franco was in the business of royalties. 100:59 And it was an extraordinary business managed by incredibly good people. 101:07 But in 2001, I had a fortune to be a guest of Gold Fields in Johannesburg. 101:16 And as part of this thing, they gave us a tour of several facilities. 101:20 And I don't really know what mine we went to. 101:22 But I know at some point the man looked at us. 101:25 And he says, do you see this field over there? 101:27 There are 10,000 people that work 2 and 1/2 miles down. 101:31
  80. 80. And I stopped for a moment to consider the logistics of providing air, food, water, or 101:36 whatever living conditions for so many people down there. 101:39 And immediately I think of the capital that it takes to do that. 101:42 Well, I mean, this is not a small matter. 101:47 And then they took us in this shaft-- this elevator shaft-- that moves actually quite 101:52 fast. 101:53 And they took us all the way to the bottom of this pit. 101:55 And they gave us a tour of rock faces and all that. 102:00 And I remember we have this unbelievable feeling as I was coming up the elevator some hour 102:08 later that either the price of gold was mispriced-- it was selling at the time at $250, somewhere, 102:13 give or take $10-- or all of this capital that had been sunk here had to be written 102:19 off completely and forgotten. 102:22 And I thought of the idea that it was either one or the other. 102:26 There could not have been any rational solution in the middle. 102:31 Right. 102:32 It's either with nothing or a lot more than $250. 102:33 That's correct. 102:35 And I what I did is that I felt compelled that this was the time to buy it. 102:43 And I did not buy gold. 102:44
  81. 81. I bought shares in goldfields. 102:45 At the time, they were selling for $2 or something or less. 102:51 But a year or two later after the initial rebound had taken place and goldfields were 102:58 selling at $18 or $19, I decided that I would own gold-- the physical metal-- for different 103:05 reasons. 103:06 I would own it. 103:07 So I sold the equities. 103:11 And I bought shares in GLD, which I subsequently sold, because our shares in GLD for me did 103:18 not represent ownership in gold. 103:21 They represented the security that perhaps reflected its price. 103:24 I wanted to own the real thing, the same way a farmer down here doesn't own cattle futures. 103:31 He wants the real cattle. 103:34 He owns cows, yes. 103:36 So over the years, the component in gold in portfolio, of course, the price went up from 103:45 $250 to whatever, $1,600, et cetera, back down to $1,200. 103:50 Today it represents-- gold-- about 35% of our capital. 103:56 Physical metal. 103:57 But I should tell you, I mean, I don't own it with the idea that the price will go up. 104:04 So don't ask me where the price is going or when—No.
  82. 82. 104:06 I would never do that. 104:07 Because you're right. 104:08 It's unimportant. 104:09 I own it because had I not owned gold today, I would own treasury bills. 104:13 I would own short-term, commercial paper. 104:16 I would own cash deposits and other such things to provide me liquidity. 104:21 Because I think that, roughly, about 60-some percent of our capital is permanently invested. 104:30 Roughly, about 40%, of which 35% is gold, is in liquid. 104:35 I wanted liquid so I can exchange it for participations, likely what we have, in the future at some 104:41 point. 104:42 And I think any good investment operation, particularly it involves irreplaceable capital, 104:48 must have embedded in it a source of continuity, and substance, and reserves. 104:55 So in years ago, I would not hesitate to buy treasury bills, commercial paper, short-term 105:02 bonds, time deposits. 105:04 But I have come to believe that virtually all of those things I've just mentioned, they're 105:10 actually debt. 105:12 When you deposit money in the bank, the bank doesn't actually hold it in their vault there. 105:16 It's a liability of the bank.
  83. 83. 105:20 When you buy a treasury bill, you're buying somebody's debt. 105:22 And you call it an asset. 105:23 When you're buying a bond, it's actually a debt. 105:28 You call it an asset because it's got a CUSIP number or an ISIN number on it. 105:32 So I decided that I want my liquidity not to be somebody else's liability. 105:37 I want it to be an asset. 105:39 No. 105:40 OK. 105:41 That's interesting—So gold gives me what? 105:42 Scarcity. 105:43 It gives me permanence. 105:44 And it gives me independence from the financial system. 105:46 It gives me all those things—--all the things you're looking for— --in these three things. 105:50 Or look at it. 105:51 Let's do a present day hypothetical. 105:53 It is hypothetical, but still, let's give it a try. 105:57 But if you decided today, what would make you exchange your gold for something today? 106:02 I mean, I hate to say this to you today because I don't want anyone to sort of quote me on 106:08 it. 106:09
  84. 84. But today the nominal price of gold is, in fact, cheaper than it was when I first bought 106:13 it in 2001. 106:20 Now, if you buy it for the sake of profiting from a price rise, there's really nothing 106:27 wrong with this. 106:28 And I'm sure there are, in fact, there are many people in your organization who you've 106:32 talked to who know far more about it than I do. 106:39 My sentiment about gold is very simple. 106:41 It's something that I understand, something that I hold in a vault that I can see, something 106:47 that can be sold to anybody anywhere in the world at a moment's notice, something no one 106:51 actually owes me. 106:52 It's not a claim on anything. 106:54 It's not a promise for anything. 106:57 And there's a sense of peace that I possess by having financial strength that even central 107:04 banks don't do. 107:05 We own three tons of gold. 107:07 And at one time it was more gold than virtually every-- most-- central banks in the world 107:12 own. 107:13 Canada owns nothing, I think, or something. 107:15
  85. 85. : I'm willing to bet a substantial size of my assets that you don't own any Bitcoin, 107:19 nor will you ever own any Bitcoin. 107:21 Point is, I don't know what it is. 107:22 I don't know where it is. 107:24 I don't know what it looks like. 107:25 I mean, they have these little pictures of gold coins with a B on it. 107:28 And they talk about mining it. 107:31 So they've used all the elements-- superficial elements-- of having some sort of tangible— 107:41 I don't know what Bitcoin is. 107:42 Where do we find one? 107:43 Can I misplace it? 107:45 Do I lose it? 107:47 Where is it held? 107:50 So I don't want to own things I don't understand. 107:53 I don't care if it's going up. 107:55 It makes no difference. 107:58 From everything we talked about, I knew gold must have had a place in Tony's portfolio. 108:02 But even I was a little taken aback at just how large a part it played. 108:06 Upon reflection, however, and given the exceedingly small universe of companies which meet these 108:10
  86. 86. stringent investment criteria, it made more and more sense to me that gold would be the 108:14 perfect place to keep his liquid assets. 108:17 A world away from gold, Tony's search for long-term, investable opportunities requires 108:22 an understanding not just of an overall industry, or even individual business, but also of the 108:27 various, component parts that come together to create that which the world sees at face 108:32 value. 108:34 So I want to talk to you about something that is a common thread in similar conversations 108:38 we've had. 108:39 And that's the idea of the structure of production. 108:43 Because this is something that occurs time and time again. 108:46 And I'm interested in it because today people think one step down the line. 108:52 If an idea happens, they think, who's the beneficiary? 108:55 And once you get a sense of this structure production, and some of the examples that 109:00 you have of companies that you've found that are 3, 4, 5, 6, 7 steps down the production 109:05 line, just talk a little bit about that concept and how you use that to identify companies. 109:11 I don't think that we purposefully look for such a standing. 109:22 It's just a natural outcome of perhaps valuing the idea of scarcity a bit more than others.
  87. 87. 109:33 For example, a lot of people could-- perhaps I like to enjoy having a whiskey. 109:45 But a lot of people do make whiskey. 109:48 A lot of people make the glass and the bottle. 109:52 But how many people make the machine that makes the bottle? 109:58 Only one. 110:00 And you end up having a view that there is scarcity and oligopoly in certain areas that 110:12 have come as a result of some events or some reasons that are economic positions that are 110:23 impossible to compete with for a number of reasons. 110:27 So to the extent that these economic agents are wise and they can use their position to 110:34 do well, that idea of scarcity and technical expertise or position adds to the enduring 110:46 value of a company. 110:49 I would not want to participate in the securities of a company that does some commodity item, 110:58 even if it might have a large label on it, or some kind of a brand. 111:04 Because the barriers to entry are fairly low in most cases, or the general acceptance of 111:13 such a product is subject to the seasonal whims of the public, of the bias. 111:22 By the same token, I'm not interested in acquiring a stake in a company that provides aircraft 111:27 transport, or train transport, or truck.
  88. 88. 111:32 Because they have no operating leverage. 111:34 They're subject to inputs and costs that are above and beyond their control. 111:39 They are subject to government regulation. 111:43 And they don't represent the substance that I want to have. 111:48 Now, they may be fine for other people, but just not for me. 111:54 On the other hand, I mean, we spoke earlier about an investment we have EMS, in Switzerland. 112:01 Here is a company that produces polymers. 112:06 I mean, a lot of people can probably do the same things they do. 112:10 Nonetheless, here's a chemical company that has operating margins that are unheard of 112:15 in the chemical industry. 112:17 But only in the sense that they take this polymers-- polyamides, in this particular 112:21 case-- to create products that solve problems that no one has ever thought of, among the 112:28 many products, in fact, they make the little exciter that goes into every air bag in the 112:33 world. 112:34 We're not looking for the place they are in the structure of production as much as we're 112:40 looking for his uniqueness, this ability to have natural barriers to entry that are based 112:46 on a number of factors that are difficult to compete with. 112:52

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