Finding Value in an Upside-down World | Charles Heenan & Geoff Legg

In Episode 398 https://hiddenforces.io/podcasts/kennox-value-investing-charles-heenan-amp-geoff-legg/ of Hidden Forces, Demetri Kofinas speaks with Kennox Strategic Value Fund investment directors Charles Heenan and Geoff Legg about their investment framework and macro worldview. Known for their focus on top-quality, sector-leading companies, Charles and Geoff share valuable insights about what it takes to build and manage a portfolio with a long-term, value-driven perspective. This conversation explores the challenge of finding value in a world that seems to have gone absolutely insane. Not only are developed economies facing challenges and confronting headwinds that require us to think differently about investment risk, but many market participants seem to be increasingly indifferent to value as an anchor for assessing an asset's investment worthiness and the price they are willing to pay in order to own it. In the first hour, Demetri asks Charles Heenan and Geoff Legg about their value investment framework and how it informs—and is shaped by—their macro worldview. They also delve into the process and philosophy guiding their investment decisions, including how they are positioning themselves for a world characterized by structurally high inflation, geopolitical risk, and capital controls. In the second hour, the discussion takes a deeper dive into investment philosophy and the qualities required to be a successful investor. Topics include the distinction between luck and skill, the balance between action and patience, the importance of being risk-focused rather than optimizing for returns, and why the skills that generate success as an entrepreneur or founder could be detrimental to your performance as an investor. The audience also gets a first-hand look into Charles' and Geoff's rigorous process for evaluating potential investments. They share their perspectives on various sectors and asset classes, including energy companies, gold miners, telecom providers, retailers, and other businesses across the United States, Europe, and Asia. You can subscribe to our premium content and access our premium feed, episode transcripts, and Intelligence Reports at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, which includes Q&A calls with guests, access to special research and analysis, in-person events, and dinners, you can also do that on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed listening to today's episode of Hidden Forces, you can help support the show by doing the following: Subscribe on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 | YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg | Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP | Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces | SoundCloud https://soundcloud.com/hiddenforces | CastBox https://castbox.fm/channel/2629539 | RSS Feed http://hiddenforces.libsyn.com/rss Write us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Subscribe to our mailing list at https://hiddenforces.io/newsletter/ https://hiddenforces.io/ Producer & Host: Demetri Kofinas http://www.demetrikofinas.com/ Editor & Engineer: Stylianos Nicolaou Subscribe and Support the Podcast at https://hiddenforces.io https://hiddenforces.io/ Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 01/20/2025

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Demetri Kofinas?

  What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guests in this episode of Hidden Forces are Charles Heenan and Jeff Legg, the investment directors and founders of the Kennick Strategic Value Fund, a highly differentiated global equities portfolio of top-quality, sector-leading companies available on exceptional valuations. Today's conversation is about finding value in a world that seems to have gone absolutely insane.

• 0:44Demetri Kofinas?

  Not only are developed economies facing challenges and confronting headwinds that requires to think differently about investment risk, but many market participants themselves seem to be increasingly indifferent to value as an anchor for assessing the investment worthiness of an asset and the price they are willing to pay in order to own it. In the first hour, I asked Charles and Jeff about their value investment framework, how it informs and is informed by their macro worldview, while also touching on the process and philosophy by which they arrive at their investment decisions, including how to position their fund for a world of structurally high inflation, geopolitical risk, and capital controls.

• 1:24Demetri Kofinas?

  In the second hour, we dive much deeper into a discussion about investment philosophy and what it takes to be a great investor. We discussed the difference between luck and skill, action versus patience, what it means to be risk-focused as opposed to optimizing for returns, and why the skillset that may have made you money as an entrepreneur or founder could be detrimental to your performance as an investor. We also get a firsthand look into Charles and Jeff's rigorous process for evaluating potential investments and their views on various sectors and asset classes, including energy companies, gold miners, telcos, retailers, and other businesses spread across the United States, Europe, and Asia.

• 2:09Demetri Kofinas?

  If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io/subscribe. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q and A calls with guests, access to special research and analysis, in-person events, and dinners, you can also do that on our subscriber page. If you still have

• 2:51Demetri Kofinas?

  questions, feel free to send an email to [email protected] and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this profoundly thoughtful and incredibly value-added conversation with my guests, Charles Heenan and Jeff Legg.

• 3:33Demetri Kofinas?

  Charles Heenan and Jeff Legg, welcome to Hidden Forces.

• 3:37Speaker 01

  Thanks very much.

• 3:39Demetri Kofinas?

  It's exciting having both of you on the podcast. Your fund was introduced to me by Russell Napier, who is, I believe, on the Investment Committee of Kennex. And so my interest was, and I had told Russell this, that number one, listeners know how much I value Russell's framework, his views around financial repression, industrial policy, and national capitalism, which he defines as the use of national savings for national purposes, along with the changing world order and what it means for investors. And I was curious, in the last conversation we had, what other investors he followed or knew of who

• 4:18Demetri Kofinas?

  Who invested either in that style or who took lessons from or implemented things somewhat similar to how he thinks about the world. And he mentioned you among a number of of funds. So before we start, we're going to get into a lot today, guys. I want to talk about your background at first. We're going to talk about your investment framework, your macro framework. We're going to talk a little bit about philosophy, the philosophy of investing, your process, the companies you invest in, what you look for, asset classes and a few other miscellaneous questions. But again, before we get into all that, let's just give our audience a little bit of a background into you. Who are you? What's your experience, each of your experience as investors? And and what is the origin of Kennox's Strategic Value Fund? Charles, we can start with you if you like.

• 5:02Speaker 01

  Yeah, it's great. Thanks, Dmitry. I'm so I'm Canadian by accent. I was born in Montreal, Canada. I lived there the first half of my life up until I was 28 years old. I was in the industry and I got into the industry in the early 90s. It's a fascinating time to be in the industry. You know, you're talking about, yeah, pre the Asia crisis. You know, you had the peso problems. You had, you know, there's all sorts of things going on back then, but really enjoyed it. Then, you know, decided that I was interested in the industry. I found it fascinating, the combination between the analytical side where it meets the narrative. You know, this is about stories, but actually you can analyze the numbers and then try and put those two together.

• 5:46Speaker 01

  And then throw on top of that the uncertainty over time. So I am, I, you know, I really, I really enjoyed it. Got into the industry in the early 90s internationally. A couple of years in, I realized that what really drew me was the buy side. I like the practical side of making investments. You've got to own the decisions, you know? It's not just enough to say, we're going to do some analysis here. We actually need to do something about it. And then you've got to live with that for the next five or 10 or 15 years. So I quit my job in Canada and moved over to the UK and ended up working with a great investor called Angus Tullich. And we worked in the Asia Pac and emerging markets. I started in early 97, so a bit of economic history, Thailand goes down.

• 6:28Speaker 01

  The Thai markets and the Asia market go down in late ninety seven. Then you get into the full Asia crisis and LTCM and the Russia crisis in ninety eight. So fascinating time to be in the markets. So that got me into the into the buy side. And then I decided to set up Kenox. I'd been in the industry then for what twenty years. And I said, actually, now I have a clear, clear idea of how I think money should be run. And ideally, you do that as a boutique, you do that as an owner managed company. Because you, you know, we run one fund. This is exactly how we believe money should be run. And this is the easiest way to align as closely as we possibly can for our clients.

• 7:10Speaker 01

  So there you go, that's what twelve fifteen years in in under in a minute. But it gives you an idea of some of the thinking and some of the evolution for me. You know, ended up here in Edinburgh in Scotland, which is an amazing place to run money, international money. There's a lot, there's a good community, including Russell, who's been here for ages. Community of people, so there you go, there's the intro to sort of how this came about.

• 7:32Demetri Kofinas?

  And Jeffrey, what about you?

• 7:34Speaker 02

  So what my background is basically a long history of sitting maths exams. So I trained as an actuary in London, having done an undergraduate degree in maths and physics and a postgraduate degree in financial mathematics. And then just as I was graduating from or qualifying as an actuary, Charles approached me and said, do you want to join Kenox? So up until that point, it'd been sort of a very analytical background, but not at all in financial markets in terms of of being an investor. So Charles and I, Charles mentioned he moved to Edinburgh back in nineteen ninety seven. I also moved to Edinburgh in nineteen ninety seven, but as an undergraduate. So we knew each other socially, played sport together

• 8:16Speaker 02

  and kept in touch after I'd moved to London and and Charles had stayed up in here in Edinburgh. And when he wanted to set up his own fund and set up Kenox, he approached me and said, do you know anyone who you think might be interested in in joining me as an analyst? And I maintained that that was a leading question and he was hoping I might say yes, but I don't know that for sure. And the timing.

• 8:37Speaker 01

  He passed the test. He passed the test.

• 8:40Speaker 02

  I passed the test and it was good timing for me because I'd just qualified as an actuary. I was looking what I wanted to do. I was at Towers Perrin and they'd started outsourcing the work that they did on the investment side. So that was no longer an avenue there. And I'd taken an interest in it. So Charles sat me down, talked through how he invested. And it just made a lot of sense to me intuitively. So I joined Charles and have been brainwashed ever since into making sure that we're aligned in terms of how we think money should be run.

• 9:07Demetri Kofinas?

  Fantastic. Well, as I said, there is going to be a portion of this interview where we're going to discuss your investment philosophy. In addition to the framework conversation that we're going to get into shortly. One more historical question, or maybe a few. So you launched the fund in 2007. I also noticed that there was another fund that had been launched on the same date, around the same time called the Contrarian Global Value Fund. What is the through line between that fund and Kennex?

• 9:31Speaker 02

  So when Charles first launched the fund, I joined him on day one, if you like. So he'd done a lot of the work before the fund was launched. We first launched it with some money from an Australian client who seeded a fund for us. And we actually launched the fund in Australia. And that was called the Contrarian Global Fund. That was 2007. In 2009, we decided it was more helpful to be closer to our clients, not on essentially a 12-hour time difference. And so we bought the company back. So just the two of us owned it. We then have a chairman that joined us. So essentially three of us owned the business. And we launched the new fund in the UK. We'd launched it with exactly the same list of holdings that we had the Australian product.

• 10:13Speaker 02

  So there's two products there that tie together, but the investment philosophy and the investment team have been continuous throughout.

• 10:20Demetri Kofinas?

  So what was that like, launching a fund really at the beginning of the biggest financial crisis in 100 years?

• 10:27Speaker 01

  Yeah, you never, I mean, when we launched the original one in 07, you never really know what's coming. And, you know, it wasn't obvious. The one in 09 was, you know, halfway through. But I think it goes, you know, as you say, we'll get into this as we get into the philosophy. We actually, we tend to do quite well when life gets disrupted. That's when you get some amazing opportunities. So.

• 10:49Speaker 01

  You know, the fact that I joined Angus Tullock and that team on the Asia PAC in early 97, just before you had the Asia crisis, you know, the fact that we launched funds into the GFC, the Great Financial Crisis of 08, 09, and around then, that disruption seems, you know, 2022, I'm sure we'll get to this, 2022 was one of the toughest years for bonds and equities over the years. We had one of our top years, making money, not relative, absolute. You know, these types of dislocations really work for us, and I'm sure we'll get on to it as we go later on. How, how, how?

• 11:23Demetri Kofinas?

  And I understand that a significant amount of your personal wealth is also invested in the fund.

• 11:29Speaker 01

  Everything I've got in the stock market. You know, I do my asset allocation, which basically is my house, some cash, and the stock market. That's the assets I own, and everything in the stocks are in the fund. It's, you know, it's, like I said, we launched this business, it's a very small business, it's a very boutique. We want to be as aligned as possible to clients. So, you know, it just makes sense that you do something you really, really believe in, and find some people who would like to join you, who agree with those beliefs and want to join you in that. It's purity, it's lovely. It's the nice thing about being a small company is you're trying to make as few compromises we all need to make compromises in this world, and that's a good thing. But you try and make as few compromises, as few material compromises as you can. So, putting all the money in

• 12:13Speaker 01

  the fund. One of the things we love about that is it makes everyone a co-investor, everyone who's invested in the fund. We don't think of them as clients, we think of them clients and co-investors. They're people who are investing alongside us.

• 12:25Speaker 02

  The other thing to say there is it's a global fund. So, we can buy any company we want in the world. When Charles started running money, he was running an emerging markets fund. That might not be quite so appealing to put all of your wealth into. But essentially, if there's a stock that's listed, we can buy it, and that makes it easier for us. I'm the same as Charles. Various other asset classes, but in equities, everything I own is in the fund.

• 12:46Demetri Kofinas?

  So, let's transition now to investment framework, guys. Now, I'm going to ask this question generally, but you each can decide who wants to take it first, if you both want to answer it. And that has to do, again, investment framework, worldview. How would you describe your worldview? And how does that inform or is informed by your investment framework?

• 13:04Speaker 01

  So first and foremost, we're bottom-up stock pickers. And so we will happily, and the reason why we get on very well with Russell, who you know well, you've done this with several times, you know, we get on very well because we understand and can talk his language and we find that fascinating. But at the end of the day, what Russell does and what we do are very, very different in that he is commenting on the world and analyzing the world and we are analyzing companies. And we do, you know, bottom-up stock picking. And it's a lovely, lovely thing to do because we all know the incredible amounts of wealth and benefits that have been brought to our society by corporations and companies. Well, we buy stocks in those and hold on to them. You know, Jeff and I have been running, running this for 17 years.

• 13:47Speaker 01

  There's still companies we bought 17 years ago that are in the fund now. So, you know, we, you know, we're very keen to buy and hold and have a relationship with the companies. Point one. Point two, there's a lot of different ways to do this. And I think one of the reasons why you're, you're talking to us, Dimitri, is because we're such fascinating characters, I'm sure. But part another reason is because not many people have stuck to their knitting in value fund management. I mean, you started in the nineties and, you know, deep value contrarian investing, where there were a lot of people doing it. We've had such an incredible run over the last described 10, 20, 30 years. There are fewer and fewer people who are, you know, excited about going out and finding real bargains. And that's what we do.

• 14:32Speaker 01

  We go look for bargains. We want to find companies that we think we're getting a really, really attractive price. Now, we also want the highest quality we can possibly find. So that's the challenge. That's why we want the whole world out there and we only hold about 30 stocks. It's because we want to be super selective and we want to be very, very selective about, you know, finding the highest quality companies. And we can go on and on and on. But, you know, the first point is we're stock pickers. And the second point is you can have huge opportunities. The whole, when the herd all moves in one direction, they often can ignore, you know, they throw the baby out with the bathwater, so to speak. And that's, those are what we're looking for, those real bargains, those gems that are sitting out there.

• 15:17Speaker 02

  And maybe I would sort of extend on the investment framework and say that there's something that you have to believe to be an active manager. And that is that markets aren't efficient. If you believe that markets are efficient, by which I mean that the share prices reflect, accurately reflect all the information that's currently available, then you may as well be a passive investor. You may as well buy an index tracker, pay much lower fees, and you'll get the market returns. So clearly, we believe that the markets are inefficient. Actually, what I believe and we believe is that markets are reasonably efficient on a one-year view. So if you're just looking at what the market knows about what companies are going to do for the next 12 months, they're reasonably efficient. But markets are hopelessly inefficient

• 16:02Speaker 02

  if you're looking at what they're going to do over the next five years or 10 years. And this is essentially what brings us to being value investors, is that we believe that there are companies that are a fair reflection of the next 12 months of their operating performance, but are not priced correctly for the next five or 10 years. And if that's the view that you come with, then there's an obvious way of investing, and that is to find companies where the next 12 months doesn't look that good, and that's what the share price reflects. But if you do enough analysis about why the next 12 months don't look good, and just every now and then you can say, okay, I see that. I see that we call them a headwind, but I think that there's going to be a tailwind after that. So it's going to survive this next year that everybody accepts is going to be difficult, and that's why it's priced the way it is priced. And we can get it at a price that reflects that

• 16:47Speaker 02

  one-year view. And if we hold it for longer than that, if we hold it for five or 10 years, and we have a turnover on the fund, which is about 15%, which in itself means that we hold them on average for five or 10 years. If we can buy them when the price is reflecting a very negative 12 months and hold them until they're sitting in a period where they're actually doing very well, then we can get a bargain. So that's sort of a potted view of value investing if you're going to be a long-term owner of assets. We call it time arbitrage, essentially meaning if you're willing to hold assets for longer than the market is pricing them for, you can get a real bargain.

• 17:22Speaker 01

  And Dmitry, I'll go on to one more because I'm sure we'll dig deeper onto it. But the last one would be risk focus. And we, you know, we're conservative types. We're focused on protecting our wealth and that of our co-investors and growing it in that order, you know, less worried about get rich quick. So then we get back to the, what's our, you know, macro views and how we, you know, what's how we seeing the backdrop or the general economic and investing climate. The risks are enormous, absolutely enormous. But we have to be able to cook that into our bottom up stock picking and our contrarian, you know, finding contrarian ideas and finding bargains that other people aren't really looking at. And that's why we think, that's why we're very excited is because we think that all

• 18:04Speaker 01

  of that is aligning right now, aligning to be a golden opportunity. I'm sure we'll come to it later.

• 18:10Demetri Kofinas?

  Yeah. And, and, you know, to Jeff's point about time arbitrage, that's where leverage matters. And we'll have a chance to talk about that as well because I'm pretty, I'm pretty sure based on what I remember from reading that you guys don't use leverage in the fund. So just to stick with this part of the conversation about the efficient markets hypothesis and that, that asset price reflect all available information, ergo markets are efficient. Do markets go through periods where they are more or less efficient? And are we living through a phase now where markets are less efficient and partly because value investing in this particular framework has lost so much favor with investors? And what does that mean for generating opportunities for funds like yours?

• 18:53Speaker 01

  Yeah. I mean, amazing question. Cliff Asness, who, you know, is a well-known investor and commentator was in, he's written an article recently saying in his way back to 82, I believe he went to sort of in four decades, he's saying, this is the most inefficient market that he's ever seen. You know, so he's, he's gone at least 10 years on me in the industry, but no, it feels that way. I mean, I remember reading when I started in the industry in the nineties about the sixes, you know, you could get something on point six times book, 6% dividend yield and six times earnings. And if you just find that, you know, be a little bit selective, but actually just buy them all and you'll be fine. And I thought, wow, we will never see something like that ever again. Finding them all over the place now.

• 19:37Speaker 01

  So, you know, you can look up the Cliff Asness article. We agree with him. It does feel like it is enormously inefficient market. And I think it's a combination, I mean, we can move on to why, but yeah, no, I think it's enormously inefficient. And that's, you know, that is a wonderful, I call it a golden opportunity. It's a golden opportunity for what we do because we're able to look into those spots, the weaknesses in the market where people aren't. And that, you know, if you can do that and be patient, the opportunities right now, I think, look absolutely stunning.

• 20:10Speaker 02

  So I think there's a good reason why that's happened as well. And I think it's availability of information. So if you're a, an owner of a pension fund and you're going to someone else to invest it, you know, it's all the wealth that you have, however much that is, it's important to you. Twenty years ago, you'd have handed that to a fund manager, he would have bought funds or stocks for you. And you probably wouldn't have tracked it that closely in terms of what was held in those funds, what the underlying stocks were doing. You just look at the headline figures, you see if your fund manager is making a good return for you and you're reasonably happy if they are. Now, everybody has full access to the stock prices of every company that's in their fund. They can ring

• 20:52Speaker 02

  the fund manager and say, oh, that's interesting. You've put that stock in my fund, it's down 20%. Why do you own it? And what that's done is it's made it much, much harder for fund managers to buy stocks that they think are good value. Because that's typically looking at stocks where the share prices have fallen. And if your clients are constantly ringing you and say, look, I'm not a fund manager, I don't really know, but I think Apple's a great company, the share price is going up, that seems like something that you should be owning. However, what you've put in is X, Y, or Z, the share price is going down, I'm not hearing good press about it. Why have you bought it for me? Those are much, much harder conversations for a fund manager to have with their clients. And I think, you

• 21:32Speaker 02

  know, we always talk about in the short term, financial markets just reflect the weight of money. So where the money is flowing will reflect which share prices are going up and where it's flowing away from which share prices are going down. And so I think this availability of information to the end client, who isn't doing a lot of fundamental research on the fundamental valuations of those companies, if you ask somebody who Who's got their money in Apple? What's the P E ratio? How much am I paying for those earnings? They don't typically know that and nor are they interested. They just want to know whether the share price is going up or down. And so for that reason, amongst a number of others, but for me, that's the biggest reason. I think it's fair to say that markets are hugely inefficient. And momentum has had a wonderful time because share prices are going up are attracting more and more capital.

• 22:17Speaker 02

  But that is the opportunity for value investing in the longer term. Because the companies where money is flowing away from them, as Charles is saying, are getting back to those lovely valuations where you can play, you can pay very little for a good quality company.

• 22:30Demetri Kofinas?

  Yeah, I think that phrases what in the short term markets are a voting machine. In the long term, they're a weighing machine. So that's a very interesting observation that the availability of information and combined with poor investor education has led to fund managers feeling that the risk of underperformance outweighs the benefits of potentially outperforming the market. And so they become risk averse and so everyone kind of chases the average. In your experience, what other variables create the conditions in which a company's value can be significantly discounted relative to its stock price? On a consistent basis and the kind of way we're describing now, an environment that's inefficient. What else do you attribute this to?

• 23:11Speaker 01

  I mean, you know, I think we've lived through a phenomenal bit of history and you've got this confluence of benchmarking, you know, so everyone's getting benchmarked to the same thing. Benchmarking isn't terrible. Usually it doesn't make sense to make everyone benchmark to the same thing, but everyone gets benchmarked to the same thing. Also, I think it's dangerous to benchmark to a price benchmark if you're being, you know, a price index. If you're benchmarking to fundamentals, then the company becomes more profitable. More people loan it. It's an interesting one. If you benchmark to a price, Apple hasn't grown its earnings in three years and the share price is up, what, forty, fifty percent? Is that correct? And it is if more people then start benchmarking on the same thing.

• 23:56Speaker 01

  Passives, ditto. I mean, one of the biggest issues we've got right now is regulation, I'll come back to it, but one of the biggest issues is that there's been this Massive move to the number of investors Jeff was mentioning the ones balling out their their fund managers but what about the ones sitting at home on the any one of the trading apps that you can get nowadays a lot of those aren't fundamental investors they're trading on price and so you know between the benchmarking ETFs bull market and FOMO and and a lot of social media you end up with a huge number of investors who are no longer fundamental focused the price focused and that's where you can get this diversion that enormous now I'll give you one other point right now which is everyone else is also liquidity focused you know you

• 24:41Speaker 01

  need to have 100% liquidity now so basically only invest in the mega caps which has just given us the globe an enormous opportunity and things that are just a little bit below people's radar so the major fund managers a lot of the hedge funds a lot of the you know the major momentum traders and so on and so forth they need liquidity they need it to be able to get in and get out well if you can take a little bit longer term view and you're able to and we're you know we're a niche fund we think that's brilliant right now you want to be a niche fund you don't want to be running a super tanker because then you've got to buy what everyone else is buying right now the amazing amazing opportunities in the world and there's a couple of that in big cap awful ladder that are in small and mid cap they don't need to be micro cap and small and mid just many many people aren't looking there and put those together you

• 25:26Speaker 01

  you know you're just creating a sweet spot of opportunities but you know I believe this is you know we've never lived through this move to passive in the financial markets we've never seen as many people you know all except price benchmarking these are things that have never happened before I think that's creating a huge opportunity but other people looking at it say yeah but you know that it's never happened before it doesn't matter

• 25:47Demetri Kofinas?

  Yeah a couple of observations there first of all I love the fact that you mentioned how more and more investors are becoming really one way to say it is they're chasering lottery like returns there's a gambling mentality I've called this for years that financial nihilism and I think you know we continue to see this and we're actually recording this shortly after the president of the United States and his wife both launched meme coins on

• 26:09Speaker 01

  I saw that

• 26:10Demetri Kofinas?

  remarkable really in all in so many ways

• 26:13Speaker 01

  On inauguration day or was it yesterday?

• 26:15Demetri Kofinas?

  Right before right before yeah right before inauguration day a few days before inauguration day and of course that has created a persistently inefficient market and many people especially people with great trading acumen have been trading and making a lot of money So I think that's a great point. You know, also, I just want to say I love your point about benchmarking to the price versus benchmarking to cash flow or to some other way of valuing the company. It reminds me of a quote, Charles Goodhart, who had been on the podcast a few years ago, which is, I think, when a measure becomes a target, it ceases to become a good measure. So it matters what you benchmark to. We'll have a chance to go through more of these types of questions because I hope we can get through some of this stuff. There's so many things I want to ask. But let's go back to the to the frameworks. We talked a little bit about your investment framework. Let's now

• 26:59Demetri Kofinas?

  talk a little bit about your macro framework because this is where the conversation kind of aligns more closely with some of the discussions I've had with Russell Napier. Because the developed world has recently experienced the most significant bout of inflation in, I would say, roughly 40 years. I'm curious to know your sort of macro view. Again, you guys are value investors, but there is, I have heard you speak about macro, the bigger picture. What is your view on whether this was an exceptional event that was indeed transitory? Or if it was the opening salvo and ingu secular inflationary trend that's going to last for many more years? And how does that or does that not inform

• 27:40Demetri Kofinas?

  or factor into your analyses and process as value investors?

• 27:45Speaker 01

  Yeah, brilliant. I think you're absolutely spot on. I mean, what I find fascinating is how, so I've been in the market 30 years, you know, which is becoming a longer period of time. A lot of the people, when I came into the industry, have now moved on. Those 40 years, though, back to what you just mentioned, you know, the last time we saw major inflation, late 70s, early 80s, that could be a blip. And, you know, we might look back in that and say, wow, wasn't that an astounding economic period of economic history? And I think it's having the imagination and the sense of history. You need both. You need to have a sense of history and actually think back to periods, you know, Great Depression,

• 28:26Speaker 01

  back into the, you know, the gold standard of the late 19th century, be able to track back over the course of history and say, what is extraordinary and what will rhyme and what will repeat in history? Most of the time, it doesn't repeat, but it rhymes. Having that and then being able to think outside the box, you know, the, when we launched this fund, someone said, well, why don't you do some back testing? And we did very minimal. Jeff. Jeff did most of the backtesting. We did some very minimal backtesting, but you're saying, well, actually where we need to backtest is pre 1982 and there's practically no information for what we were trying to do back then. You know, it was, it became less useful. So many funds and things that launch to backtest, but only backtest in one, one sense of history.

• 29:09Speaker 01

  So, you know, our point is think long term and then be imaginative to see risks that can come up and hurt you. I was astounded when we went into GFC and you had quantitative easing and ZERP. I'm in zero interest rate policy. You know, this is, I never studied economics. I'm a practical person. I prefer economics was too theoretical to me. I never studied academic economics. I very, very much believe in practical economics, what you learn in markets all the time. And I looked at it and I said, well, how in heaven's name is that, is that possible to have, you know, quantitative easing and zero interest rate policy and then leave it for a decade? And I think that these are some of the biggest issues we have to answer.

• 29:53Speaker 01

  So when people say, well, you know, what do you think in the next ten years? Leverage and the stability of currencies, fiat currencies, two of the biggest backdrop. I mean, you just can't ignore that. You know, how many value investors I remember certainly in the, in the nineties, everyone said, oh, macro doesn't matter. Doesn't mean you can predict it, but let me tell you one thing. It definitely matters and it definitely matters if we are in period. I think your, your term, the economic nihilism is excellent because I do think it sums up potentially, you know, sums up the possibility that what we're living through right now is absolutely extraordinary. And everyone will say, you know, the only reason why we're not all panicking is because it hasn't stopped yet. It doesn't mean you shouldn't be prepared for it.

• 30:34Demetri Kofinas?

  Is that, just to tie it back, and then Jeff, I'd love to hear your thoughts, just to tie it back to process here. Is that what you mean when, I've heard you say this, is this what you mean when you say that economic history is one way that you source new ideas?

• 30:46Speaker 01

  Absolutely. Yeah, no, on to Jeff. I mean, no, absolutely. You have to have a context. I think it's really important to have a context for this. One of the contexts is stuff does change. You know, what we are doing is we are buying companies that are having headwinds. We, you know, we'll get into it. We often buy companies in a J curve. They're going through a tough operational time, but the price overreacts. And so you get something that's going through a difficult short-term period and the price goes down. You know, it goes off 20, earnings go off 20, 30%, and the share price goes down 50 or 80. You know, you say, well, if that turns and actually the, you know, the industry is right themselves. And that's what should happen when, if we're all rational players, we will take

• 31:26Speaker 01

  supply out of the game as supply comes off and demand recovers and things go back up again. That should happen. If we're living in a time where, you know, money is free and everything goes off in different directions, that has to give you opportunities and threats, you know, and problems. So absolutely 100%. But the back of our head is always saying, well, we know what's happened in the last year or two or three. We go and look at the last 20, you know, very clearly and often 30 years just for context. And then you even have to be able to track back and say, yeah, but this has been a time where we've gone, had extraordinary financial situations. Does that change again?

• 32:05Demetri Kofinas?

  So Jeff, I'm going to tack something on to this next question, which is going to be a compendium to the previous one. So feel free to sort of take it as one larger question about inflation. So I asked Charles before whether or not the inflation was transitory, whether it was an exceptional event or was the opening salvo of a new secular inflationary regime that's going to last for many more years. Feel free to answer that. But also in doing so, what are, in your view, are the structural drivers of inflation that you've identified this time around? And are we undervaluing or undercounting the role of technological innovation or innovative government policies, for example, what we're seeing in Argentina, to alter this otherwise inflationary trajectory?

• 32:47Speaker 02

  Yeah, I mean, I think the one thing I'd add to the first part of that question is, for what we do, the reason that inflation is so important is because it ultimately affects interest rates. And actually, what affects stock prices as we see them and actually affects what is the right way to invest is what happens to interest rates. So from a very simplistic level, if you just say there's two ways of investing, there's value investing, where you're investing in the way that we do, you're looking at companies that are having a harder time and you're paying much lower multiples of earnings to buy them. And the opposite end of the scale is growth investing, where potentially you don't even mind if it's profitable today, but if you can see a company that is going to grow those

• 33:30Speaker 02

  earnings stream very quickly over the next five, 10, 15 years, what does interest rates do to the correct, if you like, price of those two earnings streams? Well, if you have a very low interest rate and you assume that essentially what people are doing and they're discounting back future earnings and earnings profile to give you a price today, the higher the interest rate, the more your near term earnings are worth versus long term earnings. So if you're a growth company, your earnings stream or the bulk of it, maybe five, 10, 15 years in the future. If you have to discount that back at five or 6% interest rate, those are worth significantly less than if you discount them back at a 0% interest rate.

• 34:15Speaker 02

  So I think what we saw, and it sort of comes back to what we were talking about, about market efficiencies and why we think they're so inefficient at the moment. When we had zero interest rates, it makes complete sense for high growth companies to be worth almost an infinite amount. In fact, if you use zero as your discount rate, they are worth an infinite amount, providing you find a company that's going to continue growing earnings. What we're now starting to see is a more inflationary environment where, whether that's transitory or not, is a little bit harder to predict, but I think it's very unlikely we're going to switch back to an environment where we have 0% interest rates because of all the distortions it's caused. And yet, asset prices haven't yet changed to reflect that change in interest rate environment.

• 35:00Speaker 02

  So I think it's very difficult to say exactly what inflation is going to do. Certainly, I would hope you don't depend on my answer to it. But all the additional friction that we're putting into the system, whether that's tariffs, whether it's trade wars with different countries, the US wanting to create everything that it buys at home rather than importing it elsewhere and making it more expensive if you import it. All of those things, they make some sense in terms of making your own country more efficient and giving your own companies an advantage, but they will create an inflationary environment. And of course, we've built so much debt and we haven't really talked about debt. But debt on a country level, so government debt, they've printed money, they release bonds,

• 35:42Speaker 02

  you know, they need money or they spend money much quicker than they're getting it through tax intake and so on. That debt, governments have a huge, you know, governments have got a huge incentive to keep inflation at a rate that actually starts to bring down that debt level. So I think it's probably, you know, very low inflation or no inflation is transitory just because there's so much incentive to keep inflation. And I think that does mean that we're likely to have non-zero interest rates.

• 36:08Demetri Kofinas?

  Yeah, I mean, I just want to emphasize, it's a great point about money is free. I used to, another term I have often used to describe the changing investment landscape along with financial nihilism has been narrative investing because when money is free, what matters is who can tell the best story. And we have absolutely seen that, you know, Jim Chanos, the famous short seller, has often talked about the importance of TAM, total addressable market, in investor pitch decks. What's the optimal outcome? The optimal outcome becomes much more important in a world where money is free. So I think that's a really great point. The next question that follows naturally from this is, how does one position for such an inflationary world and why do you guys feel that you are well positioned for such

• 36:52Demetri Kofinas?

  an inflationary environment at KENEX?

• 36:54Speaker 01

  You know, the risk focus makes a huge difference. And right now, I would say there's two massive risks. One is the debt itself and one is the crowding effect. It's that, you know, it's a little bit of economic nihilism, but it's often the price-driven people, i.e. we've ended up with 75% of the index being in the US. And that's a very crowded trade. So we're just saying, you know, be careful of valuations, especially when interest rates could go up. And the second one is debt, you know, be very, very careful of debt. That is affecting the companies we own. So there's no leverage in the find you asked earlier if we leveraged, we're not a hedge fund or anything like that. There, you know, it is cash and equities only, and we basically run no cash right now. So,

• 37:39Speaker 01

  you know, it's basically equities. But even if you look on the balance sheets of our companies.

• 37:43Demetri Kofinas?

  That's fascinating because actually I've read through your documents and you talk about how you always kept roughly 20% of your money in cash. What does that suggest about how bullish you are at the moment?

• 37:54Speaker 01

  It was about, it was post pandemic that we said, listen, we're finding bargains, which is always important. You always find bargains anywhere in the world, but also they're uncorrelated. We're finding really interesting opportunities and they're just not the same. Listen, if I wanted to go put 100% of my, you know, four or five years ago, we had about 25% of the fund in energy majors, so i.e. the oil majors, although you got to call them energy majors because they're now obviously so much gas. But, you know, basically in those majors, 25%, we could have had 100% of the portfolio in that coming out of the GFC. It was lovely, but it's very correlated. And, you know, there's risks there that you don't want to take. We're trying to run a diversified focus, risk focused fund. So don't get down. The key is in the last few years, we've seen the opportunities open up enormously, but also

• 38:38Speaker 01

  the diversity in those opportunities. So no, we're very interested. You're right. We have up to 20% cash and for quite a long time, right up until, you know, until the pandemic, we ran up to 20% cash. It ranged between about eight and about 15 for most of the time. But, you know, we were running 8% cash. And then post pandemic, we're saying, whoa, well, this is all these bargains out there. You know, now is the time to go buying. If we're finding the right stuff, you know, we're pretty worried post pandemic that a lot of the bills that we had been writing as a society were coming due, you know, we'd run quantitative easing, that's increased risk. We're running big of fiscal deficits, that's increased risk. And we're pretty scared about what can happen economically. But if you're finding bargains and you're finding great companies and the opportunity is there.

• 39:23Speaker 01

  And you can offset those risks, especially those risks. That can go very well. So point one is, you know, focus on the debt, focus on the valuations. Valuation matters a lot. Jeff's talked about that already. Valuations matter a lot if inflation goes up. The other one is we're huge believers in the capital cycle. You know, we own quite a lot in energy because they hadn't been invested in energy. So there is a lot of questions around climate change and whether, you know, carbon they release and so on and so forth. But that makes a lot of sense, but actually if we still need the stuff and we've been under investing, then actually a small recovery in demand can lead to a very high increase in profits. And so that capital cycle can protect against inflationary environment.

• 40:05Speaker 01

  Listen, if we need the stuff and you happen to be one of the few people who want it and there's more demand than supply and there's no more supply coming on, doesn't really matter what inflation is, you've got pricing power. And that's what we're looking for. So the combination between those things.

• 40:18Demetri Kofinas?

  So value, debt, capital cycle. Let's focus in on value a second here. What are the most important attributes that you look for in companies that you believe are positioned to do well during periods of structurally high inflation? And where does something like cost control come in?

• 40:35Speaker 01

  Yeah, so pricing power in inflation, you know, you want pricing power. And again, that comes from, you know, what we're really looking for is you're trying to do the analysis on both sides. Like any, any company you look at, you have to consider everything. And so that is macro as well as micro. Yeah, you've got to have a context of what, you know, listen, if you're taking a huge amount of debt on and interest rate goes up, you have to be aware of that. You have to be aware if the currency goes crashing down, if, you know, the supply chain breaks, et cetera, et cetera. But what you're always trying to find is a company that has concrete competitive advantages. So you know why it was able to have a profitable niche. If you can then, you know, you make a guess at, at demand.

• 41:17Speaker 01

  Truthfully, it's an educated guess, but demand is awfully hard to, like financial markets. Demand changes quite quickly. And what you can see though, it's easier to make a proxy on supply. So what we always like to see is industries that have gone through a tough time and that takes time. And you can see supply coming off. That is a really interesting combination. But then you're looking for concrete competitive advantages. I'll give you an example. Stella is a nice little company that we have. We know their niche. We either they manufacture shoes. They literally make the shoes for the producers. They make some Nikes. It's about a third of their business and sport, other sports shoes. But what they tend to do is a very specialized, high design, high cost runs

• 42:02Speaker 01

  that are only run for a couple hundred thousand shoes. So normal runs are a couple million shoes for a large company like Nike and so on and so forth. Not many people can profitably make the bottom end. Then, of course, we've had this massive transition in the last few years in that, you know, many people are wearing thousand pound trainers, a thousand dollar, you know, running shoes, luxury running shoes, trainers, as we call them here in the UK. These guys got in very early and have a reputation and have their whole business set up to be able to do that. And once they've got one or two luxury brands who are saying, well, actually, this is a really interesting market for us. Who can do this? We're only going to go to the guys that we have already a reputation there. That gives them a concrete competitive advantage.

• 42:46Speaker 01

  It is seen by their competitors. It's seen by their clients. It's seen by everyone that they are good at this niche and people are very keen on that niche. Now, luxury brands tend to be paid quite well because they know how important it is. They're charging a premium. They have to be providing an excellent product. They're very, that's a concrete competitive advantage in the minds of the clients. These guys have a very, very strong reputation there. Anytime we can identify that, that's quite different to Sky New Zealand. Sky New Zealand is a streaming and satellite business. But again, you got a satellite and you got the dishes on someone's, on someone's hotel or house. It's a concrete competitive advantage. Every company we're looking for is that way.

• 43:29Demetri Kofinas?

  So I just want to go back to this question about attributes of companies that perform well in inflation. And Jeff, feel free to take it if you like. And I had specifically asked where does cost control rank? And you responded by mentioning pricing power. The reason I actually asked it that way is because it made an impression on me in one of my conversations with Russell several years ago, where he mentioned that in inflationary cycles, all companies, not all companies, but more companies have pricing power. What really becomes a challenge is cost control because costs are going up because it's an inflationary environment. And so that's why I asked it. So I want to just re-ask it again. Maybe that sort of recontextualizes it. But how important is it? How difficult is it to find companies that have cost control? Is that something that you look at? How do

• 44:12Demetri Kofinas?

  you go about that? That's sort of my question.

• 44:15Speaker 02

  I think it is one that's very difficult to tell. Everybody says that they've got cost control until they get hit by inflation and the costs go up. And you hear about it after the event. So one of the things that is helpful for us, obviously not overpaying, but also companies that have a reasonable history of defending margins. So Charles talked very briefly, we've got a number of tools, one of which is to look over 25 or 30 years of history of financial statements for each of the companies that we buy. So what we'll do, we pull numbers straight from Bloomberg. At this stage, not doing any research on it, just pulling the numbers from Bloomberg and saying, we want to look at the profit and loss, the balance sheet, and the cash flow statement for each of the

• 44:56Speaker 02

  last 25 or 30 years. No forward projections in those numbers because we don't really believe that anyone's very good at forecasting. Just look back 25 years and look at periods where we've had inflation, look at periods where earnings have fallen significantly, and ask the question, what's caused that to happen? And then by looking back in time, you're going to get a much better view for whether they can really defend margins in difficult times than you are by asking management or trying to project earnings two years forwards. And the analysts out there are all going to say, we've got a good idea of what's going to happen. You can see, wherever you get your data from, you can see one, two, three year projections. And they all essentially say that margins are going to stay

• 45:38Speaker 02

  Roughly the same in earnings and revenues are going to grow at five or 10% or whatever the number is. But actually, when you look back, you realise that's not the case. You know, you look forward and analyst views is always that things are very stable and things don't change that much. You look backwards and you realise the opposite is true. Things change all the time. And if you find the years that they had a tough time, you read the annual report the year before. Nobody's ever predicting that they're going to have a tough time the next year. But by looking backwards, you actually get a really good idea. How good have these companies been in these situations? If they haven't been very good. Then you can go and ask management what's different now to what you did back in nineteen ninety seven or whenever the last tough time. One other thing that I'd like to come back to that sort of we've mentioned a couple of times is is debt.

• 46:22Speaker 02

  Value investing generally invest in companies that have high debt. And the reason that's the case is because the prices fluctuate much more quickly. If you're a leveraged company, when things go well, the price goes very high. When things go poorly, you get squeezed and the price goes much lower. So you get deeper valuations in in companies that have a lot of debt. Two things that I'd say about that. One, just going back to why we invest the way that we do. We're buying companies that are going through a tough time. We're buying them thinking that the price might be efficient on that one year view, but isn't on a five year view. The hardest thing that we have to do is try and predict when it's going to go from that period of headwinds to that period of tailwinds.

• 47:04Speaker 02

  If we get that wrong by a couple of years, we'd love to buy companies where, you know, Charles mentioned the J curve. Things are about to get much better next year. We always think that when we buy them. If we get that wrong and it turns out to be two or three years until you get those tailwinds for that company. You buy highly leveraged companies with a lot of debt on the balance sheet and you get companies that go out of business altogether. So that's sort of fundamentally why we don't want to buy companies that have high leverage. Because it fits with our philosophy of taking advantage of that time arbitrage. But right now, we don't want to do it because, yes, interest rates have been a little bit higher for a couple of years now. But it's not until you roll over that debt that you see it hitting your margins and hitting your P and L.

• 47:45Speaker 02

  And I think until it does, it's amazing. But until actually that debt gets rolled over, you don't realise how much trouble some of those companies are in.

• 47:52Demetri Kofinas?

  So we're going to have a chance to go through a lot of this in the process section of this conversation. Just one more question about this question of cost control. One of the things that we saw during the pandemic that explained or that informed the transitory inflationary hypothesis, which was indeed true, is that there were supply chain disruptions. Is that something that you look at? In other words, how much control a company has over its supply chains, how vulnerable its supply chains are? Do you look to find companies that have less variability, that have more resiliency within their supply chains when looking to invest in anticipation of such an inflationary climate? Where does that factor in? And feel free to respond, whoever wants to take that.

• 48:30Speaker 01

  Yeah, I mean, without question, you're trying to identify where the weaknesses are in the story and the profit narrative. These guys are making profits because they're getting revenues. Their revenues then have to cover all the expenses. You're trying to estimate as much as possible where the cost pressures come. And generally, we think we can do that to a reasonable degree. But are we structurally building it around that, oh, we know for sure these costs are really stuck in? Again, I would come back to the concrete competitive advantages. You're looking at their cost base and saying, well, if they've got enough pricing power, that will give them an advantage. And we try and keep an eye on their costs

• 49:11Speaker 01

  as much as we possibly can. That's key. Supply chain is absolutely, you're aware of the risks. One of the things I quite like saying is, one of the great sayings in our industry is, you're not risk averse, because you're all taking risk. You have to manage your risks, and you have to try and be aware of your risks. And so it's very rare that stuff that's blown up on us hasn't been something that we'd never, never, never thought of before. You believe that it was a lesser likelihood of coming through, or it just came through when you didn't. So the supply chains, I mean, really tight supply chains is a risk. For instance, we own an interesting little retailer here in the UK. They're very

• 49:52Speaker 01

  low cost. They're selling, it's a dollar store equivalent, Target, those sorts of companies. Here in the UK, they've done extraordinarily well, but they import quite a lot from China. And that, that's a question we've gone through internally multiple times. We've gone to management multiple times. And at some point, you just have to say, well, for now, either we say it's not investable, or what do we like it or not? That one, for instance, on about 10x earning, has about a 10% historic dividend yield. So we're saying... As a midsize holding in our company, that's a risk we're willing to take, even though their supply chain, you know, if the Red Sea goes down, that is a delay for them. It's a cost increase for them. Those are things that you're aware of. We just have to be comfortable with the risks we're taking.

• 50:35Demetri Kofinas?

  You've mentioned correlation a number of times. We're going to have a chance to talk about it in the second hour during the part where we discuss process. Another guest who's been on the podcast a number of times, Daniel Paris, who runs the Federated Hermes Strategic Dividend Fund, often talks about how the dividend is, among other things, a good heuristic for value. What role does the dividend play? I know that you don't need the company to issue a dividend, you're not dividend focused, but what role does the dividend play in your investment framework?

• 51:04Speaker 02

  Yeah, I mean, it is a lovely valuation point to use, and it also, it shows discipline for the company, and it allows you to be paid to wait. So, you know, coming back to the same point again, the hardest thing we have to do is get timing right. If you're going to get a 5% dividend yield, or often higher, in fact, the average dividend yield on our stocks at the moment is 5%. If you're going to get 5% or perhaps slightly more, while you wait until the headwinds turn to tailwinds, that's a lovely situation to be in. You know, one of the ways to think about returns on equities is to break it down into the two sides. There's investment return, that's your dividend yield plus your earnings growth. So, easiest to think of it on one year, one year view, if you get paid a 5%

• 51:49Speaker 02

  dividend yield, and your earnings grow 5%, all things being equal, you make a 10% return on that company. That's your investment return. The second side of it is what we call the speculative return. And this is quoting research that was done by John Bogle way back when, 2013, I think, last time I saw, I don't know if he's updated it since, but last time I saw it. And the biggest fluctuating factor is the speculative return. So that's if your earnings multiple goes from 10 to 20, then you make a huge return on that company, even if the earnings have only grown at 5% and the dividend's been 5%. So you have your investment return and then your speculative return.

• 52:30Speaker 02

  What tends to happen over time is that the earnings multiple, so the speculative part of your return mean reverts. So companies get more expensive and then they get cheaper, they get more expensive. But broadly speaking, that fluctuates and it super inflates your returns for a period and then it deflates your returns for a period. So that comes back to the two main things that you can use to make returns in the long term. It's the dividend yield and the earnings growth. So as value investors, we're typically buying companies where the dividend yield is higher. So you've got a bit of a kickstart on the market there. If then by being selective, you can buy companies where you think, I actually understand that the earnings are depressed at the moment. That's why we're buying it right now. You can also get

• 53:13Speaker 02

  high growth on those earnings because you're buying them from a depressed starting point. This is sort of invest, value investing 101. What you're really trying to do is buy a company where you're getting a good dividend yield. You're getting a good earnings growth because you're buying it when the earnings are depressed. And then by buying it alone multiple, you can also get the speculative return on top if you're willing to sell it when that earnings multiple comes higher. So dividend yield for us is an important factor. We also, you know, coming back to that, being risk aware, we want management to be sensible. You know, if you're having a tough time, often when we're buying them, if your earnings are lower than they typically have been, if your cash flows aren't where you want them to be, cut the dividend. So this is something

• 53:55Speaker 02

  that we can do that income investors can't. In that situation, they have to sell the company. We're saying, actually, what we're witnessing here is a company that's doing something very sensible. We don't want them to take on debt to pay the dividend yield. We'd rather they cut the dividend yield in the short term, run the business sensibly, and then when the good times come back, pay the dividend again. So we don't have to buy companies, as you've rightly pointed out, we don't have to buy companies that pay a dividend. We don't have to buy companies that are constantly increasing the dividend, but we love them to pay it to us when things are going well.

• 54:27Speaker 01

  Sorry, I'm going to go one more just on it. I mean, I think, you know, it's so important, as Jeff said, due to one, the valuation metric, it tells you if it's undervalued or not, or indicates its value or not. And number two, it's management's choices, what they are doing with the money, and it is a strong indicator. And so, you know, it wouldn't be the top one for me, but it's top three, because I think it's absolutely, you know, inherent to what we do. And we've picked up many companies, I was mentioning Stella with a shoe manufacturer, that yielded 12% for about 18 months, a dividend yield of 12% for about 18 months. And you're saying, well, why?

• 55:02Demetri Kofinas?

  A lot easier to be patient if you're receiving 12%.

• 55:05Speaker 01

  Exactly, that's, exactly. So we think, I mean, it's absolutely enormous. So yeah, no, I think it's, you know, as you point out, we're not income investors, but for both those reasons, for valuation and for the respect from management and what their capital allocation is, it just makes for a very, very attractive return for risk-focused investors. You know, listen, if you're, back to your get-rich-quick or die-trying, it doesn't matter as much. Actually, if you're really worried about protecting your capital and protecting your buying power over the long term and making money, dividend can be very, very powerful.

• 55:39Demetri Kofinas?

  So, speaking of patience, I've been very patient because we're working through some of these core questions, but the ones I'm really excited about are going to come in the second hour with respect to philosophy and process. Very last question before we move to the second hour, guys, and that has to do with geopolitical risk. I've heard you say, Charles, it might have been you, it may have been Jeff, it might have been both of you, that you need to position your portfolio in a way that takes account of geopolitical risk. What do you mean and how do you accomplish that?

• 56:07Speaker 01

  You know, it's a huge challenge, but I think that, you know, the major point is that if you think about risk all the different places, that just can be, it can be very helpful. We talk about countercyclical. So, you know, there's many things that are procyclical, and the profits are going up, and the earnings are going up, and the price is going up, and you pile into that. It's called momentum. It's momentum investing. There's other things that are counter cyclical. You know, if you held, I'll never forget my dad, who is a lovely man, no longer with us, and a lawyer, but you know, one of the few bits of financial, he was a very wise investor. One of these says, listen, if you can offset some of your own risks, you know, you should probably own an energy company because that's one of your costs. As an individual, your cost is energy, and so they do well.

• 56:52Speaker 01

  Well, you can sort of think of the same thing at geopolitical risk. If the world blows up in energy terms, actually, something like Equinor, which is, you know, mostly gas, but some oil, energy assets just off of Norway, on the edge of Europe, that is an exceptionally well-placed asset. If things get really tricky in the Middle East, if they get even trickier in Russia and so on and so forth, having something in a safe jurisdiction that provides that, it's a way that you can offset some of those geopolitical risks. We try and just play that through all the way around the world. So we don't try and predict what's going to happen and then buy something. But we say, if it happens, can we have things in the portfolio that will do well?

• 57:34Speaker 01

  That counter cyclical mentality, and you know, and a classic one here is gold, you know, we have had and still hold some gold miners, and we can come back to that. That is a classic counter cyclical. When stuff gets tough, that's when you find out you want to own gold. Famous saying in the markets is, own 10% of your portfolio in gold and hope it never goes up. That's the type of mentality we have for the geopolitical.

• 57:58Demetri Kofinas?

  Well, we're gonna, I mean, that was one of my questions, gold's role, the energy sector, we're gonna have a chance to talk about asset classes as well as process and philosophy, as I mentioned, in the second hour. For anyone new to the program, Hidden Forces is listener-supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Charles and Jeff, head over to hiddenforces.io/subscribe and sign up to one of our three content tiers. All subscribers get access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device, using your favorite podcast app, just like you're listening to this episode right now.

• 58:43Demetri Kofinas?

  Guys, stick around, we're gonna move the rest of our conversation onto the premium feed.

• 58:49Demetri Kofinas?

  If you want to listen in on the rest of today's conversation, head over to hiddenforces.io/subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter @Kofinas and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.