Mr Market, Europe, Dixon discussed on Capital Allocators
If you would ask that question in two thousand and eight I would have brought off a lot of important things but mostly to do with Mr Market. Here's the confirmation bias. They're suffering from. Here's the ambiguity of Persian. Here's the representatives zennis bias. Here's here are the things that are preventing them from seeing what we see and we want to take advantage of that and that would be our approach and it still is. But we've you've now realize actually reading through thinking fast and slow. Dan Economists Book. This is the Baylor's mentor. And he's the one that came up with a lot of these things things that we all do as human beings and I remember the most interesting passage to me and the whole book was talking about. How even he still commits these same errors himself itself? And so if Danny comments commits these errors himself. How do Dixon not going to? So what can I do. I can try to set up a culture where it's okay to make mistakes. It's okay to recognize those weaknesses in have investors with similar time horizon so that you're not affected by other folks as much as even if you don't think you're being Troubled by someone. That's asking you how you're doing the first week of the month. It's affecting you so if you have folks that don't ask those questions. It just interested in the process not that particular outcome Of this position then it's okay for us to be more objective about things back to the point about launching it the bad time we're anchored by large university endowment for our our launch and we had brexit a couple of months later. It was As you know certainly for us it was terrible are invested. Didn't call us once didn't check in didn't say how you doing. We had an update call maybe late August or September aid you. I bet you found some great ideas. Yeah we did. It was nice to how things we did obviously recover. But it's those times those periods especially kind of environment that we're all in now and even the markets have been going dead up if you've had the wrong kind of factor exposures or if you've had the wrong positions you get a lot of all tilleke and you have to have a stomach Ford. It's much easier if you recognize that. Hey this is what your investors are in for the and for the long term and also you can we do things ourselves to be bias our own decision making so that maybe the down days the down months. The down quarters down years aren't as bad as they would. Because we're objective about identifying we're making fundamental mistakes. Let's start breaking down strategy. You're playing in Europe. What's different about stock? I picking in Europe from say the. US The behavioral stuff's all the same. We all make the same mistakes. I have the same biases that I try to shed. My team tries to shed. Mr Market has the same Bisi say overreact. To bad news vivid recent information they under react to things which confirmed previous theses. That's good in Asia or Europe or the US and from a company level we tend to focus on more mid to large cap companies. And so when you have these multinational businesses very little difference in stock picking from that fundamental perspective I will say hey there's some nuance across different regions in terms of when you do have conversations with management teams or with suppliers or competitors if someone says maybe in Sweden it means jazz if someone says maybe in the UK it means no So you do have have a little bit of experience with that over the years and we've been doing it for so long that you know in some cases we're on our fourth or fifth management team. So that helps to some degree but broadly accounting systems are fairly reasonably harmonized is to spend a Lotta time by diving down these rabbit Abbott Holes of trying to figure out the exact specific line item. That was going to make my some of the parts model. Look good or bad but the more you're in this business is the more you realize. Your success in these positions is more different by what's happening to the fundamentals over the intermediate to long term and is Mr Market cottoned onto that yet or not. And and he hasn't if you're buying stock for prejudice seller as you build your portfolio. You get to win. And that's the way we look at it do you. Biases in terms of the kinds of stocks are looking for the. I probably do have a little value bias when I'm looking for and maybe that's the time that we all grew up in the kinds of things we read at a certain age and I'm sure someone started their careers in in two thousand eleven has the opposite buys. Why would you do that? Why wouldn't you buy all these great businesses which are going are all ICEES and exhilarating rate? So I have to guard for that and even though I do guard for it we still in having a value we kind of portfolio but we've been able to outperform not just value but the market overall. But but I think that's just a consequence of a having a very concentrated best ideas portfolio rather than something that's more diversified and sensitive to those factors and be. It's having this back to this culture thing where we've defined where we might lose money in particular positions then we're looking for information and if it's okay for me or for the guys has on my team to hold their hand up and say you know what my conviction this is lower. I just saw this thing happened. We wrote about this as a potential threat to the to the case and I wouldn't have seventy five percent conviction in this probably closer to sixty five now. What does that mean for expected returns and if it turns out it means that we should known as much of the stock or any of it will go and that doesn't matter to us if we bought it five five years ago or five seconds ago? I think we're really good at making sure. We have the portfolio that we WANNA have today as if we launched the fund today. Where do your ideas this come from? So we have a European universe. That's basically got seven hundred fifty companies with mark of a billion dollars in higher. We eliminate innate about half those the ones that are more top down nature so with this never any minors or emp companies or banks even in the portfolio. We try to stick to sectors where there's a lot of dispersion of returns lot of winners and losers within a sector so that can be industrials consumer media healthcare equipment technology and the analysts on the team will be assigned sectors. Here's our sub sectors within those groups in the Gulf for us in our investment process is to go through our research by sector and try to generate what we call the Alpha Europe focused list and that focus list is going to be a group of sixty to seventy five companies which we think will be the most dynamic in those sectors could be good could be bad. Hey defining dynamic doc that's as much art as science could be new management teams. It could be a change in strategy it could be a huge profit warning wherever when those baby out with the bathwater. And oh well maybe that's no reaction. Let's have a look. It could be a company meetings where we're having meeting with the CEO of a company and increasingly these conversations. We have the companies the most value added from those is actually hearing them talk about others in their sector in the ecosystem. They're much more open and less biased. When they're talking to you about like that so we could ideas through that? Oh let's do some more work on that and we'll put it through what we call our game process. was you just a four letter acronym. GAM and in the gather stage were just meeting with company's competitors suppliers. Everyone does that everyone everyone you talk to every manager out there as what we do we meet. We kicked the tires. Yes so what we all do that but moving into step a okay was any of this information helpful in hey stands for what analyze just analyze the information. Can we take anything out of this. Fire Hose of information that we've been bombarded with and pick out the right bits that that matter One of the analogies I use of if we have a bunch of cards on the table that are turned up and we know which we think we do a pretty good job trying to identify which two or three cards of the ones that matter. It's never ten cards. It's never overcomplicated. It's always two or three cards that matter two or three fundamental things about a business. We'll pick those cards out and start working on it and part of that process is to see if MR market picks up the same three cards if they do. There's nothing for us to do. But they're picking up different cards ignoring our cards. Then we you have a chance to see if we can be more objective about how we analyze these things and it's hard again back. Not overly quote. Ben Grab another one of my favorite quotes from his which he wrote in nineteen eighteen thirty four by the way the analyst must not be misled by the availability of a massive information into making elaborate studies of non essentials which is a long winded way. They've saying watch out for information overload. This is in nineteen thirty four. This is before real time quotes before CNBC before everyone's barking at you on the cell sizing by this and saw that and that's a real trick for the good analyst sort of okay. That doesn't matter that doesn't matter that does let's work on it in that process of analyzing the information. That's in front of you. How do you balance than being robust and thorough with focusing on the few things that matter I think think again? That's it's it's as much art as science to that whole process when we do that. Analysis will. We're not just trying to figure out what the things that matter will will. Almost build to models will build. Here's what the financial model will look like based on these three key drivers if certain company is launching a product which is going to do this or if third divesting of this which might mean that and we'll build a shadow model. This is kind of the short side. How with this company be a great short and by doing those things you start almost started helping each other out a bit in terms of flexing things a modeling things and seeing how we get to the crux of what's actually driving the story? And sometimes the things which affect the short case are different different variables than the things which might be affected by K.. So that helps and then putting all those things together we effectively emerged with conviction figure. You know if I so one hundred of these I think we'd get sixty five percent of them right. Seventy fifty five eighty. We'll never go higher than eight even if we think we have a sure thing but those then become probabilities as for us. And then we'll assign a probability to the by case into the cell case and combined with a few other metrics that helps us to come up with this notion of okay which of these names and the focus list. I actually are qualified to be in a best ideas portfolio. What do you constitute a thorough analysis of a company? It's basically the whole game process ossis. So it's you have to have a strong sector construct knowing what drives the competition knowing that an Amex of WHO's competing against to when how each of these companies in the group makes money and then it's a matter of staying on top of that and maintaining this framework as competition happens and businesses evolve and management teams come as management teams. Go and when we find things which are basically just changes. Hey this is the way things used to be. They're going to be different now. That is the kind of thing that makes us when a dive in and understand what is going to be different and as we do that ultimately we wanted to be expressed in some change in a financial financial metric it could be sales lie it could be the margins it can be earnings something in a a year from now two years from now two and a half years from now where we see the earnings or cash or whatever is going to drive Mr markets appetite if we see them potentially markedly surprising. The consensus investor. Then we have a chance to take advantage of that. So that's going to be a lot of financial model. We build financial models for all the companies in the focus. That's the that's the modeling rolling. And that's a fidelity thing it's a lot of managers thing but that's the only thing we did a lot of FIDO and it's still a big part of me and that's how I get the the conviction again. We don't try to get too to bog down in rabbit holes and say Oh if you do this and they do that and then they do that and then this happens in this might work it just more about going through the lies okay if these products are successful in from the doing the look like they might Ip. What could happen to Ernie's happened gross margins? How much does that fill down? We've been successful historically in a large automobile manufacturer that with Gary Is. CEO that embarked on a campaign of value creation and it was such a shock to the system for the people that were perishing the company they refuse to process it and then if you looked at what they were doing in their footprint there were changing around the kinds of cars they were making and we'd just a very simple stuff..