Appearance
Sir Chris Hohn - In Good Company Transcript
Nikolai Tangen:
Hi everyone, I'm Nikolai Tangen and today we are joined by one of the best investors of all time actually.
So Chris Hohn, not only is this fund TCI one of the best and most successful funds that Europe has ever seen, but also the charity is one now one of the largest in the world.
So Chris, you continue to have an immense positive impact on the world.
Thanks for coming.
What makes a good investment?
Nikolai Tangen:
Let's start with the investment world.
What makes a good investment?
Sir Chris Hohn:
This is something a lot of people get wrong. They think it's about growth often or something new. Neither of those things in themselves to us matter by themselves.
The most important thing, let's say the types of investing that we do is high barriers to entry. The most that Warren Buffett has talked about.
Now before we dig into that, can a distressed asset of a piece of real estate that selling at half price because of a liquidation also be a good investment?
Yes.
So can there be a role for cheap average assets? Yeah, Let's call them low quality assets, which are trading at big discounts to replacement costs. That's the type of investing that can work that I've done in my time.
Cheap average businesses or cheap bad businesses. But I don't feel that I can have any confidence in that type of investing because the earnings power of those averages businesses is unpredictable.
Moats
Nikolai Tangen:
So what are good moats?
Sir Chris Hohn:
The most important answer is ones that are sustainable. And ideally you would have multiple moats, multiple pieces of defense.
Nikolai Tangen:
And you're saying modes is basically something that means that the business is difficult to replace. Difficult to compete with,
Sir Chris Hohn:
yes, and replace.
Substitution risk and competition risk.
Those long term become different, very difficult because why is it so important?
Competition kills profits.
That's as simple as that.
Substitution eliminates your business.
So we look at there are many, many moats.
One which most people don't look at, most of us don't really look at actually, interestingly, is irreplaceable physical assets.
We're in a world where people just look at earnings. They don't look at asset value or physical assets.
And so we like quite a bit of infrastructure.
Airports, for example, one of our investments which has been the airport group in Spain where the government of privatized, yes, Aena. And you just can never, they'll never build a second airport at Madrid or any other places.
These are natural monopolies. And so that also applies to toll roads and railroads and telecom towers. So there are many forms of infrastructure, transmission towers that are hard to compete with because then natural monopolies where.
Of course, some of these things can be overbuilt like cable. So there's a form of infrastructure.
But it's usually, you have to look at the details of case by case, very unusual to try to and usually go and get the planning to build a second airport, no economic case to it.
Nikolai Tangen:
I can't remember how long they've struggled to get an extra runway at Heathrow.
Sir Chris Hohn:
Exactly.
Planning and then roads is no economic case to build a second road or you don't have the land. So for different, literally, no.
So infrastructure is physical assets is one. A second is IP. Intellectual property.
That's right. And which is so advanced. That is very difficult to replicate.
Nikolai Tangen:
So what kind of intellectual property are you thinking?
Sir Chris Hohn:
One space we like is aircraft engines and there is a very complicated product because the materials complexity, the engines run at such high temperatures that metals melt.
And so many different things have to come together. Thousands and thousands of complex parts.
So that's one where that's a business where there are only two players in narrow body engines and two in wide body and there'd be no new entrants for more than 50 years.
The last new entrance was DE. And so that tells you something. There's a big industry, but it's so complex. Very hard to enter.
Another barrier to entry is installed base, which applies to the aircraft engine business.
Once those engines are there, they for various reasons, you get the spare parts business on it.
And another of barriers to entry is scale, although that's not a guarantee of competitive moat.
Network effects is another important barrier to entry. You can see this in assets like Visa, Meta, two examples of network effects
and brands are another barrier to entry. But I'm not saying every brand is powerful. But you know, you think about McDonald's, it has a value. There are some brands which are powerful and sustainable, but not all.
And I'll mention one more moat, which is customer switching costs. Take mission critical software. Once it's installed, companies are very reluctant to mess with it and switch because of the complexity.
Moody's and Recurring Revenue
Nikolai Tangen:
How important are recurring revenue streams for you when you look at businesses?
Sir Chris Hohn:
It is important, but the predictability of when they recur is not. Let me give you an example.
So what's most important for us is something slightly different, which is essential product or service. We don't like things which are discretionary.
So one space we've invested in for a long time is rating agencies.
Nikolai Tangen:
These are the people who basically give kind of character to different type of bonds.
Sir Chris Hohn:
Yeah. They say, is it good or bad?
The people who invest in bonds, they say, is it investment grade, non-investment grade, you give for research.
And if you like, bless it.
And there, you can actually defer an issue of pays for the rating, but they do have to refinance their bonds, which is a big part of it in any given year.
They can delay and defer, but eventually the debt has to be refinanced and rated.
So I think essential need is the bigger point, but usually our companies have recurring and predictable revenue streams of essential products.
Gowth and Earning Power
Nikolai Tangen:
And so do they have to grow?
Sir Chris Hohn:
Depending on valuation, not necessarily or that's not necessarily at a fast rate.
Growth can come from two forms, volume and price. So you have to break it down.
Now, why isn't growth as important as people, investors usually assume it to be?
Because you can have profitless growth.
The airline industry over a hundred years has had a lot of growth. Airline travel has grown at 5% a year. Continues to grow consistently, but airlines as a business, cumulatively and collectively have made almost minimal profits.
Despite growth, because they're very low barriers to entry. And so I would say growth without barriers to entry is not a combination that you want.
Nikolai Tangen:
Some of these businesses are quite capital intensive. Like it's not cheap to build an airport. Does that matter for you?
Sir Chris Hohn:
Well, you have to look like everything into the detail.
And all airports have a regulation on landing charges, but the non-landing charges are unregulated, the shops, the advertising, the VIP lounges, the parking. And the so-called dual till regulation. One till is regulated, one till is unregulated. And those are very low capital in intensity. It's in effect and high returns on capital.
They grow because there's more and more demand for travel.
And again, capital intensity by itself, it's part of the equation. But it tells you how valuable growth is.
It trumps all of this is the Barriers to entry.
Nikolai Tangen:
What about regulation? You've been big in things.
Sir Chris Hohn:
Yeah. I'll go into that.
But I want to go back to the, the point about growth can come from two forms, price and volume.
And most companies don't have pricing power. They can only price if they're lucky at inflation.
And that's why people don't focus on it. They don't even look at where growth comes from. They just assume it's volume plus inflation.
But there is a special group of super companies that can price above inflation. And that's, as Buffett taught, the test of whether you have the moat.
And this real pricing power above inflation can be very valuable because if you can price 1% above inflation and you have a 20% profit margin, your profits will grow 5% faster than revenue.
信息
注: 这里应该是利润增速比通胀高5%。
And people don't go into it or analyze it because there's so few companies that have it. But this is something we have, a lot of our investments have this.
Nikolai Tangen:
Because incremental pricing is pretty much all profits.
Sir Chris Hohn:
That's right.
And it's very potent if you have the lower your margin is.
So this is why you asked about growth and is it important.
If you're asking about volume growth, but I have low volume growth, but I have a lot of pricing growth. That's actually more important because of the leveraged effect of there's no cost associated with it.
Regulation
Nikolai Tangen:
Regulation.
You have been in a lot of regulated businesses. You mentioned airports, But you've been in Red Electric, which is like a electricity transmission company. You have done quite a few of these things.
Sir Chris Hohn:
Yes, I have.
And actually it's a general risk because if you have barriers too low, competition or substitution eliminates your business and your investment barriers too high, Regulators may come knocking on your door.
Every case is different. And the ideal case is that, there is competition, but a weak competition and the apparent competition.
Nikolai Tangen:
So tell me what is apparent competition?
Sir Chris Hohn:
Well, it's really weak competition and rational competition.
So the take some water examples. Pratt & Whitney competes with GE and Safran. It has a 25% share of new orders. It can as a product, but it's not nearly as good. It's got 35% of its engines grounded. Multiple technical problems. It's lost a lot of trust, but it's there competing and for new engines.
But price isn't the most important thing in this industry. Reliability is. And so struggles it has to raise prices because it's got lots of difficulties.
And sometimes where there is competition, that competition chooses not to compete. Generally speaking, not a specific industry, decides to be rational. And compete on non price-based approach.
And then the detail matters.
So you might have looked at Heathrow Airport and say that airport is fully regulated. Airports can't be good.
But if you look into the detail of Aena, it's a different animal. It has a piece that's regulated and a much bigger piece, 70% of the value, maybe more, which is unregulated. And so maybe the regulated business will give you a bond-like return, 7%, but the unregulated give you a much higher return.
Stock Exchanges
Nikolai Tangen:
The only group of businesses you've been very big in has been the stock exchanges. Both Deutsche Bursa, normal stock exchange and so on. In the past, yes. Why were they so good?
Sir Chris Hohn:
In the case of Deutsche Bursa, starting with that, they had a derivative business called UREX, which was a natural monopoly.
It was a network effect. This was the barrier to entry.
That liquidity of a marketplace for trading bond futures, European bond futures, the network effect of getting best prices in the most liquid market meant it became what it's termed a winner takes all or natural monopoly.
And once you have that liquidity, very hard to move people away. You can never compete on best price. And the stock exchange has that for a LCH Clearnet business, a clearing business.
And so where an exchange can, CME has it on US futures, establish this natural monopoly by being the first mover. The winner takes all, then these exchanges can be very good.
But of course they've changed now. London stock exchanges in many different businesses sells data and half their earnings are from data. And that's non-proprietary data, reselling non-proprietary data. So it has a vulnerability on that piece. They're no longer just what they used to be.
And then there was a lot of growth without capital. As people came and traded more, as capital markets grew, you grew without capital, which was very valuable.
Never Invest In Companies
Nikolai Tangen:
What other type of companies you would never invest in?
Sir Chris Hohn:
Yeah, that's a good question.
We have a long list of companies we don't invest in. We're very focused and we call them the risky and bad industries. And I have invested in some of these in the past, but I've learned.
Banks, sorry for that, there's a bank.
Nikolai Tangen:
We are not the banks, we are the central bank.
Sir Chris Hohn:
Central bank is good. But we don't like banks.
Nikolai Tangen:
And why not?
Sir Chris Hohn:
They're low quality of earnings because they're very leveraged and much more than people think, because people look at equity to risk weighted assets, but equity to total assets. Many banks have run it a hundred times.
And they're opaque.
Nikolai Tangen:
Oh, you can't look into the property.
Sir Chris Hohn:
You can't, I remember pre-financial crisis, I had a look at Credit Suisse and I sat down with the then CEO, Brady Dugan, and said, put his balance sheet in front of him from the annual accounts and said, you have a multi-trillion dollar balance sheet, can we walk through the line items? Because I don't understand it.
He said, I don't either. He was a very honest guy. I really liked him. Very honest.
Nikolai Tangen:
Okay, so banks, you don't do it. What else don't you do?
Sir Chris Hohn:
And the other reason for banks is, it's very important, you know, that sooner or later, you may find someone without a lot of intelligence comes to run them and then it can be toxic.
People going for growth. Anglo Irish bank, if you remember that one,
And they just can destroy the shareholders by getting bonuses. you know, Bear Stearns, you know, and non-alignment of interest with leverage and opacity.
Nikolai Tangen:
So what are the others?
Sir Chris Hohn:
The auto industry is obviously, a commodity, retail, insurance, the commodities, the commodity manufacturing, tobacco. The truth is, most things in manufacturing., So most industries, most industries are bad industries.
Nikolai Tangen:
So Chris, it doesn't leave a big universe.
Sir Chris Hohn:
Correct.
We say maybe there's 200 companies that we consider to be high quality and investable.
And I mean, I'll list you a couple more.
Traditional asset managers, bad businesses. Speaking as one, fossil fuel utilities, bad businesses, airlines, bad businesses, wireless telecom, bad businesses, we think media is bad, advertising agencies, you know, it's a very long list.
Because it's competitive and with existing players and new technologies.
And the one important thing that I've learned in my time in investing is investors underestimate the forces of competition and disruption.
Because they just look today, maybe there's a new company which has a first mover advantage, but then competition comes in, yeah, substitution and,
Microsoft
Nikolai Tangen:
where does it leave the big US tech companies now?
Sir Chris Hohn:
So there's a lot of power of incumbency. This is another important point.
So let's take a company, Microsoft, which we've invested in, and one of the barriers to entry is bundling, maybe because it creates a customer switching cost.
what do I mean by this?
So the office franchise, which we're all familiar with, has many products in it. Your applications, word processing, Excel, your email, security, different things. And they sell it as a bundle. They don't disaggregate it. And when a new product or a potential competitor enters, they can add it to the bundle.
So Zoom came out with video conferencing. And they could have potentially added all the things Microsoft does to that.
So Microsoft had to respond and they launched teams and they were able to distribute it through the bundle. Free to everybody.
And even though Zoom, some people believe it was a better product, or is a better product, Microsoft won that battle because they had the installed base, the incumbency, which we talked about. And high switching costs for, because once people are using their office software, they don't want to switch.
And so people started using teams. Something given to you free. Because it was good enough. It didn't have to be the best if it's free.
Alphabet
Nikolai Tangen:
What about the other tech companies?
Sir Chris Hohn:
We have a position in Alphabet and which is maybe a most risky investment where they're clearly, and it's just one of our smallest investments as a result.
Where we have some level of protection because there are businesses like YouTube and, and there're cloud business, which represent half the market cap today and cash and other things. So it isn't all search, but search is critical.
And, and so can they out innovate competition?
There's a risk of search fragmenting, as competitors come in and try to, but it's a question mark.
Well, we don't think so.
We think they have a lot of advantages of their data to have to offer higher quality search results. But competition is increasing.
AI
Nikolai Tangen:
Talking of which, how do you think AI will change the investment landscape here?
Sir Chris Hohn:
It's going to increase disruption in ways we can't even predict, but there are things like call centers and we'll all go bankrupt.
And another segment is Indian outsourcing companies. Who do coding and things like that. Demand for those services could collapse because AI can do coding, with half the people.
But AI will increase the productivity and lower the cost base of all companies. And so if you have a company with these barriers to entry, it's going to be worth more.
I think for generally competitive businesses, if you don't lead, you could become uncompetitive and be disrupted.
Valuation
Nikolai Tangen:
So now we have identified one of these companies, that say, I don't know, Aena, or Rolls Royce or Microsoft, how do you value these companies? What is your valuation tool?
Sir Chris Hohn:
We don't even look at that until we get comfortable that the barriers are so strong, it will be around now.
We'll do reference checks on relevant people, and see if we're missing something.
So when we were looking at investing in aircraft engines , we spoke to a former CEO of one of the competitive companies and he confirmed their thesis and actually said the margins should be much, much higher, and over time they will go there.
So that's one of the pieces of diligence.
We will assess management. Where I think it's important, but not critical if you have the right assets, ideally through meeting them, talk to competitors, get their view, look at competitive companies, look at the track record of the company.
And usually you don't understand everything and usually the things you find out are bad things. I think we'll discuss it with our team and we want to hear competing views.
We have some members of team are just inherently bearish. And they're good for testing the bear case. We always want to hear how could technology disrupt here or just what competition.
Nikolai Tangen:
Are you a bearish guy?
Sir Chris Hohn:
Not particularly.
Nikolai Tangen:
But what kind of valuation metrics do you look at PEs, cash flows? Do you do DCF's? Do you have like 50 page spreadsheets?
Sir Chris Hohn:
All of those, right. All of those, but not 50 pages.
But really honestly, one of the things we learned is, there's a really important point is that, we can have an advantage through long-termism.
Which is the average stock is held by an institutional investor by under a year or the stock market in the U S.
Long-termism and private equity approach
Nikolai Tangen:
How long do you hold it?
Sir Chris Hohn:
Average holding period of current portfolio is eight years.
That's real eight years. I'm not saying that's the limit. we've on average, some we've held for 13 years.
Some new investments like GE aerospace, two years, but the average weighted average holding period is eight years. But it could be 10, it could be 20.
Nikolai Tangen:
So, I love long-term, right? But how do you install that type of thinking into the organization?
Sir Chris Hohn:
If you are in the private equity world, that's normal. A private equity fund would hold an investment for their 10 year life funds normally or longer 12 years.
As you know.
It's an overused expression for some or misused, we take a private equity approach, ie that we have to hold the company forever because the stock market may be at a very bad prices when you want to sell. If you need to sell.
So I really think you need to have that approach. so the way we really like our longterm valuations, DCF, the most important things.
And here's the thing.
Moody's
Nikolai Tangen:
DCF, you take the cashflow and you discount it.
Sir Chris Hohn:
Yeah.
But here's the thing is, the longer you can look out, if you've got a great company, the more value there is.
Take a company we own Moody's. A rating agency. So it's been around a hundred years.
What do you think the average, I can ask you a question, make it fun.
What do you think the average of revenue growth over that hundred years has been?
Nikolai Tangen:
I'm going to look like a total fool, a hundred is long time, seven percent.
Sir Chris Hohn:
Ten. So you know, that's a very unusual number over a very long time period.
And so investors have always underestimated value, including myself.
And, I bought the stock during the financial crisis at 10 times earnings and I even bought shares when Warren Buffett was selling and he reduced his stake from 25% to, I think he's got 15% Berkshire had,
Nikolai Tangen:
Are you kind of secretly please having bought something cheap from Warren Buffett?
Sir Chris Hohn:
Yeah. But then I sold it.
I doubled, I doubled my money. I went from 10 times earnings to 20 and I sold it at a hundred dollars, bought it at 50 sold it on it. I thought I was clever.
And then, but the earnings kept compounding. I bought it back at $150. So now it's recently 500 now $400.
So because actually the intrinsic value compounding matters more than the stock price. If you have a great company, it will grow intrinsic value.
And the multiple, here's the thing about the multiples, they matter less than the growth when you look at it over a longer period, but most investors are unwilling or unable to invest on a longterm time horizon because either they don't know what they're doing, which interestingly goes back to what were, they think is risky, which goes back to what Warren Buffett when he was asked what the definition of risk was.
You know what he said?
Not knowing what you're doing.
Nikolai Tangen:
So really good nugget here is that if you buy something, which is really good, it doesn't quite matter what you pay for it because it will grow.
Sir Chris Hohn:
Secondary over a long, well, let's just say it like this, the multiple to a point.
Whether you buy it at, if it's growing, it's all maths.
You've got to look at the growth rate, the terminal multiple, all the amount of things.
But if it's increasing intrinsic value at a good rate, you will undervalue it if you look at it over a short horizon.
It can be saying it like that.
And if you're willing to hold it for a longterm and extract that intrinsic value growth, it'll be worth more to you than other people.
Public market vs Private market
Nikolai Tangen:
I've heard you say that there are more good companies in the public market than in the private markets. Why do you say that?
Sir Chris Hohn:
Because the companies that are sold to private equity are the ones that aren't as good.
Nikolai Tangen:
Are you sure? I mean, how do you, what do you base it?
Sir Chris Hohn:
Well, I'm saying to a couple of things. Let's dig into it. I know it upsets people who are private equity.
Nikolai Tangen:
I mean, we actually, I'm pretty pragmatic about this, but where do you get that?
Sir Chris Hohn:
I happen to think that large companies are more likely to beat small companies in an industry.
They have more money to compete, and in R&D, and scale, we talked earlier about scale being key and incumbency being key, and switching costs.
So, we think a small company that invents something new. We talked about Zoom. It can be crushed by a large company reasonably easily. They can copy.
Large companies are usually too big for private equity. Private equity can't buy visa. No, it's too big for them. So that's size, excludes private equity from large companies.
And if a public company is selling something to private equity, usually they're not selling their best businesses.
And I'd say private equity, like all asset management, is prone to the principal agency problem, where they are incentivized to gather assets.
Let's just say it like this.
The very best businesses in the public markets, I believe, are better than the top hundred companies in private equity.
When sell companies
Nikolai Tangen:
When do you sell a company?
Sir Chris Hohn:
When it's a view of intrinsic value is not as good as other things.
Nikolai Tangen:
What does that mean?
Sir Chris Hohn:
Not just value, but conviction.
So our philosophy, there are two components to it, intrinsic value. So the price still has to be at or below intrinsic value. But there's a second point, which isn't really focused on by many investors, which is conviction.
Nikolai Tangen:
So you lose faith in them.
Sir Chris Hohn:
No, I'm saying you need to have conviction when you invest in something at all times.
And what does that mean? You could call it confidence. What does that word mean? Because there's a saying, talk is cheap. You can say, and you could be wrong.
And so one of my first investments when I worked in New York for a hedge fund before starting TCI was in an Italian media company and Bain Capital bought control.
It was like a billion Euro valuation and it went to a 50 billion Euro valuation and then went to zero.
And the, and when I first invested, the internet didn't exist. And people thought yellow pages were a monopoly and they were.
And so the point is you can be wrong and certain industries, your risk of being wrong are higher.Technology is one of those areas.
Absolutely.
But if I own an airport, or a toll road, let's take a toll roads in that are unregulated, which there are some that we own. I'm less likely to be wrong than if I own a retailer. My chances of being wrong because are less because I have physical asset backing, substitution risk.
The thesis is much more obvious.
Because so this concept of conviction is very important. One investor said to me, I have to be able to sleep at night. It has to be sufficiently obvious.
Which, but you always have to, sounds contradictory to saying that, you can be wrong because what kills you as investor is permanent loss of capital.
Intrinsic value
Nikolai Tangen:
Absolutely.
I got a bit of a problem with the concept of intrinsic value as if there were some kind of objective truth.
Sir Chris Hohn:
Yeah, you're right. You know, we can't tell the forecast the future.
And so, to a high degree of accuracy, you can just say, which is why you can, and the longer you look out, the harder it is.
And so we look at more simpler tests sometimes.
Will the business be around?
Will we still fly airplanes in 30 years and will we want airline travel?
Will there be demand for it?
And so once, you know, so I agree with you. So I think that valuation is just approximate. We can just say in truth with confidence, we have a good or great business.
And as I'm saying, only a small subset of businesses can be predicted. Which are the most powerful ones, but exactly how they grow and unexpected events. You're right. There's no certainty.
What makes a good investor
Nikolai Tangen:
Let's move on to from companies to investors. And in terms of what makes a good investor, why are you a good investor?
Sir Chris Hohn:
Well, it's your words.
It's important to have humility.
But there was someone I knew who took me aside once and he said, Chris, you and I, he did reasonably well.
He said, we weren't the best investors. We just took the most risk.
So I just.
Nikolai Tangen:
It was not true, actually.
Sir Chris Hohn:
It was an interesting comment that makes you sometimes, when people say a joke, you, or something, you wonder, is it true?
But I was always willing to look at the company fundamentals and not try to guess the stock market and focus on macro or trading. So I was always fundamental.
Most investors are not fundamental. They trade actively. They look at data points. They say, what's the catalyst? They don't really know what the company does.
So I think the fundamental approach has been key. Long-termism is key.
Another thing we've done is concentration. We've owned a few things.
We may have 10 type holdings, 10 stocks, 15 stocks. We don't own a hundred things.
And I think another key point is intuition. We work with intuition, which is something that is a strange.
Intuition
Nikolai Tangen:
How do you use intuition?
Sir Chris Hohn:
It's been defined as thinking without thinking, which is the Buddhist would call a koan(公案), something that just doesn't make sense.
Nikolai Tangen:
We will come back to you Buddhist thought later
Sir Chris Hohn:
But it's a lot of people don't understand what intuition is. It's sort of opposite of ...
Nikolai Tangen:
I happen to have written my master's dissertation on this exact topic.
Sir Chris Hohn:
Okay. So you're one who does.
Then it's sort of the opposite of intellect.
Nikolai Tangen:
Well, it's pattern recognition in a way. You've seen it before.
Sir Chris Hohn:
Yeah, that's a word for it. Knowing.
It's all of the opposite of intellect.
So of course we'll do analysis, but then it's a higher level of intelligence than just intellect.
Nikolai Tangen:
But what do you have intuition about? Do you have the intuition about the people, the situation? What is it?
Sir Chris Hohn:
All of it.
All of it, is someone trustworthy or not trustworthy and the patterns, another thing.
And so, you know, we were rarely short, but we were short Wirecard.
Nikolai Tangen:
Yeah, I know. We're coming back to that.
Is your intuition now better than it was when you were younger?
Sir Chris Hohn:
Yeah, it was not in intuition so much before the last five to 10 years. It's been a change, but I think I always operated with at an intuitive level.
And it's not just stock picking, but when I decided to start my own fund.
You know, 21 years ago, I just had this intuition that I was in the wrong place and not doing what I was meant to do.
And it wasn't about money or anything, but it's when you know, when I met my wife, Kylie. There's a point where you just know. It isn't an intellectual thing.
Nikolai Tangen:
You know, this is called love. This is something else.
Sir Chris Hohn:
Well, yeah, love is not in the mind, but love should be intuitive. It's an example.
Nikolai Tangen:
Do you believe in, so if I'm your colleague, so I work now for you, I'm a junior analyst, I come to you and I say, Hey, Chris, I got this intuition. I think this looks really good.
Will you believe me?
Sir Chris Hohn:
No, we don't work like, cause here's the differences.
I've been a stock picker. So a lot of portfolio managers aren't portfolio managers. They're managers of managers.
And people like that say to me, there's only two truths, which is not the story that I hear, but the P&L and the stop-loss.
Cause they can't analyze the company themselves.
So no, we never take anything from anybody at face value. And we work in a team. That's something we didn't mention earlier, but the point is just a story.
What you have to focus on what matters. Because there was a spiritual teacher actually, he said something that applies to investing.
He said very few things matter and most things don't matter at all.
So investing, it's actually similar. you need to get out of the noise and just focus on the handful of things that matter.
Nikolai Tangen:
is it talent or can it be trained to become a good investor?
Sir Chris Hohn:
I think it can be trained. There's a judgment element of it. I think it can be trained for sure.
Nikolai Tangen:
We both have taken inspiration from some of the same people, right?
One of them is John Armitage, who I worked with.
Sir Chris Hohn:
Yeah. I love John. I consider him a friend.
When I was just starting out, he really, he's a great investor and he took me under his wing a little bit and cause I don't know anything?
And we had the same couple of same stocks.
The energy group was one and I didn't have the experience to know and that knowing and intuition comes with experience.
And so, yeah, I'm a fan of John's.
Activist investor
Nikolai Tangen:
Yeah.
Because most of the things I know about investments I learned from him and his partner, Bill Bollinger. So we have some of the same teachers here.
Moving on a bit.
So you were more considered an activist investor. So in your view, what is an activist investor doing?
Sir Chris Hohn:
It's a spectrum.
And from full blown hardcore, removing boards and CEOs and demanding the sale of a company to call it a soft activism, softer activism of trying to have relationship and dialogue with the company at a professional level, and where you understand their mindset and their thinking of the business, and engage, that could mean many things. I'd say today our relationships are generally very constructive with companies.
Nikolai Tangen:
So, but it wasn't always the way.
Sir Chris Hohn:
Yeah, it wasn't.
I learned.
Nikolai Tangen:
You've gone kind of from having been an aggressive tiger to becoming a bit more of a, you know, big lion.
Sir Chris Hohn:
Yeah.
Though no one thought like that when we started the fund, when we named it the children's investment fund, we thought, how are we going to compete with Tiger and Viking and more aggressive named funds.
But yeah, it is true.
I've learned that actually activism, hardcore activism is not a great thing.
It's very difficult to succeed because the vast proponents of today's investor base are passive, who don't actually get them to vote for something is very difficult and and all the power, you know, so active management is dying.
And so when I started, there was very little indexation. And so there was a more engaged active shelter base. And now indexation is limited the power of shareholders.
Nikolai Tangen:
But I mean, you were one of the most fared people in Europe.
Sir Chris Hohn:
But I was buying bad businesses long ago, like ABN AMRO putting up for sale through putting on the AGM of out to sell the company. And we made a lot of money. We made a billion dollars forcing the sale of it.
But in truth, the company was worthless, but was bought for 100 billion from three companies who all went bankrupt. Royal Bank of Scotland, Fortis and Antonveneta.
So they didn't know what they were doing. We didn't know what we were doing.
And it was all, you know, a madness. It was a, but it made money. But for those who sold.
But in truth, the fundamentals would trump everything. So a lot of activists end up being activists in bad businesses.
Nikolai Tangen:
But are you have stopped being an activist because you are more attracted to good companies or because you can't take control?
Sir Chris Hohn:
The business always wins. So it's pointless being an activist in a BE business.
And that said, we still engage in it in hardcore activism. We're an investment where we went on the board and pushed out chairman and some directors and the company is doing much better now.
And but that's an exception.
And I'd say that was a result of of a disastrous case in the company where we went on the board and they couldn't appoint a CEO. The board was divided and it was a real mess.
Nikolai Tangen:
What kind of personal toll does it take on you to be in this fight?
Sir Chris Hohn:
Let me give you an example.
A few years ago, it was six years or so, we owned shares in Safran where we still own them. We've held them for 13 years and it's a great company, aircraft engines and joint venture with GE Aerospace.
And they announced they were buying a company called Zodiac. And we thought French aerospace, we thought the price was ridiculous. Ten billion euros and they wanted to pay in shares.
we believe the shares were half price. So they were paying four or five times the intrinsic value.
And we undertook a very aggressive campaign and threatened the litigation and demanded a vote. And in the end, the company, the target was adding multiple profit warnings and became clear that we were right. And Safran went to Zodiac and said, we have to cut the price in half and pay in cash because TCI are forcing us.
And so that's what happened.
The stocks doubled, but we were sued by the seller for 100 million euros. Both me and my general counsel separately, he said, Chris, I'm not really sleeping much at night. You can afford it. I can't.
And so, yeah, I went into a Paris court and you it's not for the faint-hearted to do this.
Nikolai Tangen:
And do you enjoy a good argument?
Sir Chris Hohn:
No, I don't really enjoy fighting people any more. I never really did.
It was a something we began with Deutsche Borsa. And now I'd say what people call activism is really an exception to us.
So it's like, why did we get involved in that Zodiac? We were already a shareholder and something bad came out of the blue. It's like you walk home and someone attacks you to try to take your your wallet and you fight back.
And I say, do you enjoy a fight, Nikolay?
Nikolai Tangen:
No, but I'm not so sure I would fight back.
Sir Chris Hohn:
Should you choose to? Yeah, I'll ask you that question is, you would say, no, I don't enjoy fighting.
It's just I had no choice. I was fighting for my life.
So I put it like this. We act as owners. We always act as owners.
What does that mean? We were interested. We're engaged. We think we have a right to appoint directors. We have a legal right to it.
One thing we have learned is governance does matter.
Short Wirecard
Nikolai Tangen:
Which brings us to kind of the opposite, Wirecard.
It's a bad company which you shorted and shorting just for those people who don't know. It's you borrow shares, you sell it. The goal is that the share price should go down and you buy them back cheaper and hand them back, and make a profit.
So what's the I mean, in a few words, Wirecard. Yeah, just not to lose a very long and complicated story.
Sir Chris Hohn:
Yeah, high level.
We learned that shorting isn't a great business because you're going to be right, but not be able to hold it or fund the losses.
OK, so but Wirecard.
Nikolai Tangen:
Because if you are short and the share price goes up, you basically.
Sir Chris Hohn:
There's unlimited downside. And you have to fund the losses. This is what people don't realize.
You're going to be eventually right.
So the first guy to short Wirecard 20 years ago was a guy from Bronte Capital. And the stock went up 20, 30 times and went to zero.
But when that happened, he was interviewed by the media and they said, congratulations, you were right. But he said, no, I had to cover 19 years ago. I couldn't afford to fund those losses.
And so you have to understand the investor psychology. Very tough.
And I had a dinner once with Warren Buffett and he said he and Charlie looked at shorting.
Yeah, they studied it and they just said it was too hard because of that point of understanding investor psychology and the asymmetric risk and reward.
And so it's an exceptional thing.
But we looked at Wirecard and all the accounting games and then the Financial Times came out with all these articles. And I called the journalist, good guy. And I said, you're writing all this stuff. And he said, it's all true. I said, no one will listen to you. He said, everything's true. We stand by every word and then you just you could literally read it in the paper.
Nikolai Tangen:
The whole German establishment went in and supported the company.
Sir Chris Hohn:
Yeah, that's right.
In fact, the chairman was a former CFO of Deutsche Borse.
But there was a bit of pattern recognition where I remember at Harvard Business School, an accounting course I took and there were red flags.
When you do this, small auditor. Yeah.
No cash flow. Yeah.
And things like all their Asian businesses, the office was empty. Yeah.
So but I think to be a good investor, you need a certain independence of thought. And probably to be a good journalist as well. And that's why the funny thing is that the fraud was there in plain sight. And I think I learned to be an independent investor.
And the and so we went to see the CEO.
Actually, I sent two of my team to meet him and and they came back incredulous at this like pathetic demonstrations of technology and that they were shown.
And interestingly, there was a potential catalyst, which was the report about their accounting. And in the end, they just said it's garbage. And then the stock went up a lot.
And so actually, I tried to become an activist in this position.
I filed a formal criminal complaint for fraud in the Munich prosecutor's office because they said if I wasn't public about it, it would be viewed as market manipulation. And they were transparent about it. And that created chaos, but it forced some action.
You know, when it forced eventually an investigation.
And so because I didn't want to be like Bronte Capital where he just ran and ran. And so at some point, it really became obvious and it became a confidence game.
And I think that people trust authority too much. That sounds a strange thing. But they trusted the German establishment. That you had a board with the great and the good. And they weren't willing to believe the journalists.
Corporate Culture
Nikolai Tangen:
But we had a very good team at MBIM, which was on the same side of that. So really good.
Talking about trusting authority and so on and moving on to corporate culture at TCI. What is a corporate culture like in TCI? How many people are you?
Sir Chris Hohn:
You know, in the investment team, it's seven, eight people. We have a large back office.
Nikolai Tangen:
How do you work together?
Sir Chris Hohn:
We want so small, very small.
And it's collegiate. We've known each other a long time.
And there's something that we've built, which is an intangible trust.
Nikolai Tangen:
Why don't you have a hundred fund managers?
Sir Chris Hohn:
Good question.
Firstly, my best people, they would never stay.
They don't want to. It would be too impersonal. There's a human aspect to work.
People don't come to work. You know, the best people for money. They come to because they enjoy the environment.
And so it's really important how we treat people, how everyone treats each other. And I'll never hire someone without the blessing of my senior team. And because we could destroy the culture.
Nikolai Tangen:
And so I mean ice hokey teams are five and football teams are 11. Is there something magic with seven?
Sir Chris Hohn:
No, but it's small enough.
It would above 10. It would be too big.
Nikolai Tangen:
What do you look for when you hire? So now I'm applying for a job at TCI.
Sir Chris Hohn:
You meet everybody. You share the philosophy.
Nikolai Tangen:
What kind of questions you ask?
Sir Chris Hohn:
Yeah.
What makes a good business? All the things you talked about it? We ask for a case study or two.
And it becomes immediately obvious whether you know what you're doing when you share the philosophy.
But also it's not enough just to be a good investor. You have to want to work in a team. Not everybody wants that.
And you have to be able to get on with people in a way where you have to be open minded to being wrong. You can't be too dogmatic because so the personality does matter a lot.
Philanthropy
Nikolai Tangen:
Now you have a big share of the profit of the firm goes to the charitable foundation.
How?
Sir Chris Hohn:
Yes.
Well, actually, I give it to charities.
A lot of philanthropy I do directly. Often I give it to the foundation or co-invest with them. So yeah, one way or another, it goes to charity.
Nikolai Tangen:
Do you think it's important for your colleagues that you guys fund all this charitable?
Sir Chris Hohn:
No. I think they make a lot of money too.
Nikolai Tangen:
Or do you think it's irritating that you give away all the money?
Sir Chris Hohn:
They also earn good money and it's probably a positive thing.
I don't know definitively, but you'd have to ask them.
I can't say definitively.
But I give away everything I earn. I don't really care about money because other than its value in helping people.
Nikolai Tangen:
When did you learn about philanthropy? Who taught you?
Sir Chris Hohn:
When I was in New York working for a hedge fund, one point after about three or four years, it made, I don't know, two or three million dollars and they had done well and they said, you're going to get a 10 million dollar bonus.
And I just, this is in intuition, said I don't want it. I want to just give it to charity. And I created a US foundation and gave it to it.
And I didn't really understand it. What was driving me for 50 years.
I would meet with Bill Gates, did a lot of charitable work with him over the years and he would ask me, I couldn't answer the question.
And eventually I did understand it and better late than never as a soul urge that there's essence who we really are.
What we really are isn't the personality or the physical body, but soul or consciousness and that some would call it life. That's something that gives us life and will.
And that gave you, in the same way you, Nick, I had a desire or will to do something more with your life than just make money. And the fundamental nature of that, the soul is service, desire to help, to help ultimately humanity.
Nikolai Tangen:
Where did that come from?
Sir Chris Hohn:
It's innate within everyone. But yeah, for sure.
Nikolai Tangen:
So if it's innate with everyone, why don't more people do it?
Sir Chris Hohn:
Because they identify with their personality and less with, consider that like a user interface of the soul.
And the personalities basic urges desire, possessions, glamour, like power and money and other things like that.
And sooner or later people realize that doesn't really give, some would say, happiness, but actually there's more important things in life than happiness, purpose and meaning.
Nikolai Tangen:
But you say that sooner or later people, but I mean people don't.
Sir Chris Hohn:
I'm not saying in one life.
They may need many lives and that may be a strange thing for you to hear, to realize, yeah, I don't believe this is the only time we're here.
And eventually we'll learn that what we are, can be as a result of some crisis in your life, yeah, and death, disease or in my case the third D, divorce.
And it's then that they look inward and ask, well, what is their life about?
Is there a purpose? Is there a meaning?
And for me, I could never find any purpose or meaning in my life except service. And that is clearly something you could say it comes from within. And so that's my origins of my philanthropy.
Nikolai Tangen:
Do you think, I mean, you came from a working class family, right?
And your father was an immigrant. How do you think that shaped you?
Sir Chris Hohn:
It made me an independent thinker.
You always grew up as an outsider and you felt different. And it gave me a work ethic and a desire to achieve something. And so I think that was an important piece of my history here.
Nikolai Tangen:
Tell me about the foundation. What are the main priorities of the foundation now?
Because you said so it is now one of the largest foundations in the world, right?
Sir Chris Hohn:
We have about six and a half billion dollars in the foundation. And I also do philanthropy outside of that. And so between us, we're giving away over five hundred million dollars a year.
Two main areas, climate change and children's health in Africa and India.
On the health side, we focus on foundational issues.
Contraception is one. We can't get development or lifting people out of poverty if the women are having far more children than they want.
In Africa, fertility is nearly seven. And in many cases, it's not affordable.
Women don't have access or agency to contraception. And so for ten dollars cost for avoided pregnancy, you can help a poor woman have one less pregnancy if she wants. That's a remarkably high return on investment. There's almost nothing.
Another area is severe acute malnutrition, where I funded the creation of a company and I buy product for forty dollars a case of therapeutic food. Think of it as a fortified power bar. You can save a child's life. And there's a hundred million children with severe or acute malnutrition. Nearly half of all child deaths under five.
Neglected tropical diseases like trachoma. I fund trachoma surgeries where for fifty dollars you can fund a surgery which stops someone going blind irreversibly.
And there's millions of people with so little money. Ten dollars, forty dollars, fifty dollars. You can save a life or stop someone going blind.
It's remarkably, you know, when you get out for dinner, you might pay forty dollars for a bottle of wine. You wouldn't think, oh, I could save someone's life with this.
But that's the reality.
And so the HIV/AIDS we're very involved in as well.
Nikolai Tangen:
And on the climate side, what are the main areas there for you now?
Sir Chris Hohn:
We're trying to create infrastructure for the climate movement and regulation advocacy because nothing's going to be fixed if there isn't regulation.
We fund, and that's across the board and also technical assistance to governments who want to change but don't know how.
We are very active in Asia, if you don't operate in India and China, that's where Vietnam and all these countries, that's where all the emissions are growing.
Tax is another thing because if we're not advancing through tax, new technologies and subsidizing fossil fuels, which is what happens, we'll never change.
Methane is another one. We're in front of the methane hub and methane satellites and just many things.
Litigation, environmental litigation, we fund that.
So in a sense, there's activism there.
Nikolai Tangen:
So given all this, how do you read the backlash against ESG and the financial markets?
Sir Chris Hohn:
Well, I never really got involved in the S and the G, just the E.
So here I think it's a very dark thing that's going on where people are saying, some people are saying, in effect, burn down the planet as long as we can make money today.
And we don't care about future generations. We don't care about poor people in poor countries dying off. We only care about our country. And making money, as much money as we can today, to hell with the consequences.
And it's really back to what I was talking about, this distinction between soul and personality, that if it's a consciousness problem, it will never solve any of these problems, whether it's climate or poverty or war, if there isn't a change in the level of consciousness.
Nikolai Tangen:
So given that, and in order to finish off on a slightly uplifting note, what is your advice to young people on a spiritual path?
Sir Chris Hohn:
Go on a spiritual path, go on a stduy, and I would say the spiritual world is real.
Soul is, when I first mentioned this to my son, I think it was 20, he said, "Dad, soul is a myth."
He doesn't think that now.
It's definitely not.
And there are many paths to connect to it, and you can connect consciously to it.
And whether you go the long way, the short way, the easy way, the hard way, through suffering, you eventually come to learn that the spiritual world is not just real, but it's the whole thing.
And so that's the only source of real purpose and meaning and joy, which the world needs.
And I think that if you crack that, then everything else is easy.
Very good.
Nikolai Tangen:
Chris Hohn, we've talked a lot about purpose, meaning and joy, and what really matters in life.
Big thank you.
Sir Chris Hohn:
Thank you, Nick.