Sir Chris Hohn podcast with Nicolai Tangen

A brief summary of a very interesting pod cast

I really enjoyed listening to this podcast - a brief summary it for those who do not have time to listen.

The first question posed to Chris is - what makes a good investment?

Chis suggests that is it not growth or ‘something new’ - it is high barriers to entry, or ‘moats’ as Warren Buffet calls them. Chris has invested in distressed assets, and assets with big discounts to replacement cost - but earnings power is unpredictable. A ‘good moat’ is sustainable, and if possible, the company has multiple moats. It is important that those moats are difficult to replace and compete with (replace - eliminates the business, and competition reduces profitability).

Many moats may be

1. Irreplaceable physical assets - Chris likes investing in infrastructure. Airports, for example - unlikely another one will be build - toll roads, rail roads, telecom tower..

2. IP - Intellectual property. Some technology is so advanced it is difficult to replicate. A good example is aircraft engines - only one new entrant in the last 50 years, & the last new entrant was GE. Installed base; Scale - network effect - VISA, META for eg; some good brands - customer switching cost.

Nicolai asks Chris if recurring profit is important - it is, but it is not that important. Chris thinks it is more about the predictability of when the profits occur. Chris gives the example of rating agencies - interesting because they are essential (when debt is reissued) - they do not have to grow at a fast rate. Volume and pricing. Growth in of itself is not good - he gives the example of Airlines. Lot of growth but not profitable. Low barriers to entry.

Capex. They discuss Airports, and the regulation of fees - some are regulated.some unregulated. Landing fees are, but the shops are not - so 70% of fees are unregulated. What ‘Trumps all’ is barriers to entry.

On price and volume. Most companies don’t know how to generate pricing power - a special group of companies can enact pricing increases above inflation - if you have the ‘moat’ (made me think of Apple, in the book ‘Start with Why’). Chris does not think investors generally consider this. Incremental pricing is a profit - low volume but high pricing power also valuable.

They discuss regulated companies - barriers to entry are high high, regulators will knock on your door if you make too much money. Competition but weak competition is good; apparent competition also good. He gives the example of Pratt & Whitney competing vs GE and Safran. P&W not nearly as good, with a lot of engines grounded, issues. In that business it is not just price, it is also reliability.

Chris has invested in Stock Exchanges in the past, but now their business has changed - a lot of their business is selling data so their profitability is less assured.

Long list of firms he would not invest in:

Banks - low quality of earnings, Equity to total assets over 100%, Opaque (gives the example of when he met the Credit Suisse chairman), & sooner or later someone not intelligent will take over - dash for growth (Anglo Irish) , pays out bonuses, non alignment of interests (Bear Stearns)

Auto Industry, Retail, Insurance, Commodity Manufacturers, Tobacco, Manufacturing, Asset Management, Airlines, Media, Advertising, Utilities

Why? Competitive markets - Investors need to understand the forces of competition and disruptive forces.

US Tech discussion - power of incumbency,

Chris highlights Microsoft (perked my interest since when I spoke with Will, co founder of Bluedot.org about which firm he would invest to to take advantage of Generative AI, Microsoft was one of his picks). Chris likes it because its power in bundling - ‘Office’. Microsoft teams saw off the challenge of Zoom. They have a small investment in Alphabet - risky - You Tube and Cloud is half the market cap; Chris thinks Alphabet will maintain its edge in the search engine business..but concedes there is a risk.

Nicolai asked Chris how AI will change things. Chris thinks AI is disruptive, and it is difficult to forecast. Call centres, Indian outsourcing coding firms will be much smaller. AI will increase productivity, and lower costs across business - with barriers to entry, there will still be profitable firms.

On Valuation, Chris said they don’t look at valuations to start with - look at barriers to entry, reference check on relevant people, in case they missing something; hear competing views. Their advantage is they are long term investors - US shareholders average holding period is 1 year, TCI holds shares for an average of 8 years. They take a private equity view of holding shares…

DCF. The longer you can look into the future, there is more value. Moody’s average revenue growth has been 10% pa over 100 years. Investors underestimate the value of compounding. He bought Moody’s shares from Warren Buffett at $50, took profit at $100, bought again at $150, and it is now $400. Multiple matters more than the growth.

Definition of Risk - not knowing what you are doing.

More good companies in the Public space than in Private Equity; large companies beat small companies - scale, cash, incumbency, switching costs.

When does TCI sell? View of intrinsic value - if its not as good. Conviction - do need to have conviction at all times. Confidence…talk is cheap.. Chris gives the example of the Yellow Pages company he bought which rallied to a EUR50 bio market cap and then went to 0 with the internet introduction. One can be wrong (my note - watch the Roger Federer video where he talks about only getting 54% of his first serves in yet he was still number 1 )

Chris talks about owning a Toll road with unregulated tolls vs owning a retailer - the thesis about the value stronger in the case of the toll road, and its backed by the asset. The concept of conviction - you have to be able to sleep at night. Permanent loss of Capital will kill you…

What makes a good investor? Chris suggests one should have humility, he always looks at the company fundamentals - most investors are looking at the market, catalysts etc, and have little knowledge of the company value.

TCI are longer term investors, concentrated portfolio, comprising 10-15 stocks. They are rarely short - discussion of Wirecard (one he was was short - but the first investor to short it did not survive..) Warren Buffet and Charlie Munger don’t short. Chris says people trust authority too much - notable in Wirecard. Independence of thought very important.

What is intuition - thinking without thinking, the opposite of intellect. Chris says he does use intuition more now. He mentions that he did quite his previous job on intuition to set up TCI - it did not feel right.. it is not the money. A lot of Portfolio managers are not stock pickers. Managers of Portfolio Managers…its not about the story…just the P&L and the stop loss. Chris is a stock picker. He never takes something at face value..a story is just a story. TCA they work in a team, focus on what matters..

‘Very few things matter, and most things don’t matter at all’. Very true in investing too. He thinks it is possible to train someone to be a good investor - John Armitage and Bill Bollinger were named as good investors (and mentors)

Nicolai asked about Activist investing…Chris said it is much more difficult now given the large number of passive shareholders, and its very difficult to succeed. Business always wins. He discusses ABN, where he made money, but the firm eventually went bankrupt (bought by RBS and Fortis); and the Safran takeover of Zodiac. Good result for Safran, but Chris and his GC were sued. Chris makes the point that they were only acting as owners. Governance does matter.

Corporate Culture at TCI. Investment team small - 7/8 people. Why not 100? Chris said he would lose his best people. 100 would be impersonal; best people don’t work for money - it is important how people are treated. At TCI one has to have an open mindset to be wrong. Philanthropy probably a positive - but have to ask the team. It started when Chris was working in a HF in NY, had a few good years and was told he would be paid $10 mio - to which he replied he did not want it. He did not understand it for 50 years….and he now does.

Discussion about soul vs personality. At essence, it is who we are - soul or consciousness. Fundamental nature of life - survive, desire to help, innate within everyone. Why doesn’t everyone practice this? Personality urge is for power, money etc.. Sooner or later - in this life or next - people realise that it does not give happiness, purpose or meaning. It could be a crisis which makes one realise this, death, disease or divorce. Look inward, is there a purpose, is there a meaning.

Nicolai asked Chris the origins of his philosophy. He is the son of a an immigrant - Chris said it made him an independent thinker, he felt different, gave him a good work ethic, a desire to achieve something.

The charitable foundation is valued at $6.5 bio, they give $500 mio per year, as well as Chris’s personal philanthropy. They discuss the various charities he supports - climate change (working on putting regulation in place), children’s health in Africa and India. for the cost of a $40 bottle of wine, a life can be save..$10 can stop someone developing blindness etc.

Chris makes the good point that if, on the whole, people were more aware of their soul more than their personality, the world would be a much better place to live in. Climate change, war, poverty would all be less. People would be less willing to burn down the planet now for their own gain.

The advice Chris would give a young person today - go on a spiritual path. His son thought soul was a myth but now understands.