Drew Dickson Blending Behavior and Fundamentals at Albert Bridge Capital (First Meeting, EP.13)
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In the money game we learn how these holders of the keys to the kingdom allocate their time and their capital. You can keep up today by visiting. Capitol allocators PODCASTS DOT COM by guest on. Today's first smeeting is drew Dixon. The founder of Albert Bridge Capital and Chief Investment Officer of the Alpha Europe funds where he manages three hundred fifty million dollars dollars in European equities. Our conversation covers Druze early career across the Chicago School Fidelity and ox if and his perch in Europe we then go through Albert Bridges Investment Process Portfolio Construction Assessment of risk ward and client communication through blogging. Being and tweet all told Ju- offers a deep dive on how to blend fundamental research and behavioral finance in taking on the stock market. Today's show is sponsored by northern. Trust Front office solutions when I talked to investment teams in. 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Why don't you take me through your background and start with how you first got interested in investing? I was even as a kid in high school. Captivated the stock market and they might I purchase I think they were. At and T.. Twenty two and a half dollars strike calls probably paid forty or fifty dollars in commissions for a two hundred dollar option premium and learn the lessons about how to overpay and what things not Divi. What was it that got you to option before stock? I didn't have enough money to buy enough shares of stock so I thought that the thing is going up might as well just buy some calls literally the first trade and that was all during this sort of this is going way back in college. The market's going crazy. It's eighty six eighty seven and then when the market crashed at that point I was hooked. We had they can original copy your security analysis produced library and go back and read through dad trying to build all these models. Try to see where markets you're gonna go and all the silly stuff which hindsight is stupid and naive but it was always helping the captivated me so as I think progress in my career. That was always broadly the focus. And where did you get the formative education beyond paying twenty five percent of the cost efficient. Yeah I've always been interested in financial theory. Why did things work the way they work and interested in psychology and in the mid eighties late? Eighties early nineties. There was a heretic group of economists. One of them being Richard Taylor who was up a cornell at the time that was they were poking holes in this what was known as the efficient market theory still is and Eugene Fama this paragon and pillar of efficient market theory. Thought it was really interesting. What he was doing and he had an idea in the mid nineties? Let's is trying to get Richard Thaler down at University of Chicago. Let's have this place be the battleground for this efficient market versus behavioral debate. And I wanted to go back to business school and as as soon as I saw that happen as it well if I can get into Chicago. That's where I WANNA go. I WANNA be a part of that. I was lucky enough to be one of the. NBA's was able to take Pharma's promised course which allowed me to take dictators course on behavioral economics. He also taught a course of the NBA's that was more decision-making took that too. So I got yeah pretty close to him there. It was during the technical by NASA. This is ninety eight ninety nine and so we worked a little bit together outside of class on some other things and got to know each other. So from that point. Forward sort of Morpheus neo moment where you take the red pill or blue pill and I really fell into this behavioral finance whole to get myself unplugged from the Matrix Matrix. Not that I didn't really enjoy the financial side of things. The theoretical side of things in Pharma. I mean this guy outside of maybe Douglas Hoffstetter and Carl Carl Sagan. He's the smartest guy I've ever met. He's a French major for crying out loud. He's not like even a mathematician he and he's using credible person to learn from in that experience grounded than me as well and I love having the debate about this is an efficient market risk. And that's why there's returns. This is a real thing and that is creating these excess returns or neither but having having the training from both of them was very helpful and then the whole behavioral economics movement was something that is in fact increasingly become more and more a part of my investment processes I of been in the industry over these years. Let's walk through. Where did you go from Grad school than so from Grad School? I started off. As an analyst with fidelity investments is. I started started off in Hong Kong for the summer between my first and second year and then I came to the London Office fulltime almost exactly twenty years ago this year and fidelity our approach was to sort of cover a sector for twelve to eighteen months. Get to know it and then just as soon as you got a grasp things would move to another sector and I love that. That's what a by a design. It helps you to see a lot of different types of companies across different sectors. It changed to become a better portfolio manager. Now other folks have been successful capital for example with this sort of analysts for life model auto where you become a specialist. It's not my approach to things. Now we we wanted to be specialized in sectors but we also want to remember what the ultimate job is here. It's to pick stocks. It's not to become an expert in in that particular field. My initial stop was at Fidelity fulltime in the London office twenty years ago and was London back then by design it was by design both personally personally and professionally professionally. Fidelity's office in London was the one that was really to me very exciting. We were back then it was remember it was still deutschmarks French francs Lira. The euro was just getting ready to start. You could see this equity culture. Developing the German banks on everything in Germany you could see things getting spat out and so there was going to be a big big chance to do some stock picking in Europe which was exciting to me. Hong Kong was also super exciting but it was a little bit more of a top down market the money that flow into our funds in Asia. US retail investors at the time mostly. And if they're gonNA invest in the Pacific basin funded because they want emerging market exposure. That it's interesting. I like macroeconomics as well. But that's just a bit more top down. I'm I'm not a top down guy more of a bottom up guy so the office was interesting professionally from an interest perspective and also from a fidelity perspective and my wife's wife's Italian as well so being in the UK was kind of a halfway house between Italy and in the US and that was twenty years ago thinking we might be there for three to five years and it's been twenty. So what was your pathophysiology. So I covered several different sectors and it was there for a few more years and then I got lifted out of there by the guys at ox if brought an analyst with me over there at the time ox was a much smaller beast than it became later and it was much more focused on merger Arben Risk Garb and a great experience with those guys the little difference in philosophy trips of difference difference between fundamental investing in some of the more event or callous oriented stuff and then with a couple of other fidelity alumni thereafter. We manage money for the man group group externally and then combining all those experiences starting with the failure behavioral backbone and the deep die fundamental investing of Fidelity and the sort of more nimble. We'll focused investing that you do it. A Hedge Fund we put together Alpha Europe and in two thousand eight we launched our big fund are small fund at the time. What was it like launching in your own fund while it's exciting? I had been doing it in something. Similar smaller versions previously with oxygen and with the guys from fidelity and the whole goal was just to and it still is actually does away. We can do this a bit better a bit smarter and I hope I hope in ten years I can look back to this day and say well. I've look stupid but I was ten years ago. And if you stay on that path to try to get better and learn more and so with that though there's always been this overriding view that hey we're in the business. Generating Alpha were not market timers. We're not going to be dialing our gross up and down because we have a few of the market. This is about bottom up idiosyncratic stock picking can we identify businesses offices where we can objectively analyze information. WE'RE GATHERING NC if they're gonNA beat numbers let the fundamentals lead you and then let valuation. Come in to help you size. The positions positions we started off with a long short fund. The WORST TRACK RECORD OF WINDOW LAUNCH FUNDS I launched Alpha Europe originally as an independent company three months before the financial crisis showed up. We launched Albert Bridge three and a half years ago two months before Brexit but as it turned out we did reasonably well back in the day we made money in wait no nine and grew the business nicely but we were lacking something and this is part of the learning process for us. We by definition have best ideas portfolio playoff very concentrated positions. And it's going to sound Sort of sacrilegious. Some folks but we almost seek volatility. We want to be exposed idiosyncratic stories where there's is a lot of risk and if we can objectively analyze where Mr market might be overreacting or under reacting to particular developments in the business because of some behavioral behavioral bias. Then we can really jump on our fundamental research and help to drive conviction so by design the goal is to generate significant excess returns over two to the three years. But the folks that you WanNa manage money for when you do that have to have similar time rights is in any pm you speak to longer term money. We went longer money but in in our case. When you have your top ten positions are or seventy percent of your fund assets in your top five might be forty or forty five? You really need to have two and three year your four year five year money on your side people with similar aligned interest and that was something that I didn't recognize the importance of until after the financial crash and after we got on our feet and from a business perspective and that's what led to the merger with Perella Weinberg until what was that plan of attack at the time. Well at the time and Prela they have a big big brand in the banking business and at the time they didn't have a huge abandoned asset management but it was a known group particularly here in the US and our target audience for what we do is the US university diversity in a dominant cadre of long-term investors and with the front office. They had some very good guys the marketing team and and a really big platform platform. That was going to take some of the operational burden off of us. We made the decision to not be independent anymore but with this sort of independent player returned Dixon Capitals Office into Perella Weinberg this European Asset Management Office and with that began having conversations with Some of these longer term thinkers and one of the first things we did as as a lot of other london-based base funds even funds over here at done is the long book. Its own investable vehicle. The combination of having discussions with the longer term thinkers and having this vehicle where people could get exposure to Europe and best ideas without paying for the Beta component of those returns was aligned with how we think the world should work and very much aligned with how they think in terms of their long term goals so that was one of the first things we did there. But why don't you touch on the evolution of the Hedge Fund product for you and want you saw change that caused you to eventually move away from it well to be totally frank. It was more driven by just demand of what the investors is wanted from us. And what we did. We haven't wanted to really change our process at all through this evolution ourselves so having these long short routes I think have helped us as we as we transition into focusing entirely along only product. Now even Benjamin Graham said it himself you know every single issue can be cheating. One range endearing another. We have a strong view. You you shouldn't get married to your companies that good high quality companies. You just buy and hold forever. That's not our approach at all. It's much more driven by the fundamentals in the intermediate term. And so if we can come at it with the diligence and the deep dive that you would have from longshore perspective but then also be able to use these. Longshore tools is to help device ourselves one of my favorite tools that we have to help us think more clearly as we deep dive short cases and everything we WanNa buy and this is certainly certainly. It's a wonderful tool just to memorialize of you and help us establish that internally at the firm but it also is a great debasing tool for me for the guys on our team because if you're able able to write down hey here's where this could go wrong and have a culture where it's okay to identify. Something is wrong almost encourage it. Then if you've predefined you defy work and it's going to go wrong you're looking for it and one of the biggest biases we all suffer from. Is this confirmation bias where I did myself as an analyst. I probably still do it without realizing it. But it's certainly as an analyst at fidelity or Anoxia or earlier in my career if you tell your boss that. Hey this is the greatest idea ever. And you've done a deep diving at the management of Kazillion Times huge models written a gazillion notes. Your ego is tied to it being successful. You think you're smart if you make money you think you'll be rewarded. If this particular outcome is a positive one and that's silly and that's been something that I've think I've gotten better over the years and recognizing that in the not it used to many baseball analogies but we're trying to bat six fifty. We're trying to get almost two out of three right and if you can flip that on its head. It also means you're trying to get one out of three three wrong and if you have a culture where we can look at the portfolio and second which of these things are going to be wrong. Would you buy this size position in this company today if we launched the fund today can be encumbered by where we bought the stock. When we bought the soccer is actually have nothing to do with why we own it? When you take the lessons you learned from Dick Taylor your your various investment experiences? And then you go to apply to Albert Bridge what if you internalize in terms of how behavior impacts the way you invest. Well it's twofold this is again hopefully a positive evolution in my career. 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. What does this mean for gross margins for this business and you could see the cashless Tesla be spit out? Once you identify that and you see a consensus investor which is refusing even acknowledged that information. Well that's that's the double whammy. Those are the things that were more likely to be accurate on than things without both components. Show alongside of the modeling that you mentioned. You've also written a blog post taking the other side of DC F- analysis. Yeah so when we do the modeling again. This is a big change from how I started at fidelity but you know I would just do the deep dive. DCF Get everything from every angle build a model of my own way or this is how they should stay earnings not how they do state earnings. This is what it it really looks like. Let me get to the free. Cash flows in do the valuation where he can do here and what you end up with is something. That's very interesting and helpful in the private equity World Great. But that's not what we do. This is public markets. There's a price up there that is reflecting everyone else's view about this company. And how on earth can I compare. Hear what. My view is to everyone else's if I'm doing an entirely different way so I very quickly switched to sort of. Let's see how the company presents their numbers. Now there's all sorts of work we can do in the footnotes to to see if they're playing games or see if they're we can match up the free cash flows to the EIB to see if they're capitalizing. RND are doing those traditional tricks of fooling investors. And we can yes. That's a great great stuff to identify. But broadly were building models. We can easily update when they report and see how they're presenting the information to Mr Market. So that then as we do our own modeling we compare to what what people think to see if we're ahead or for behind him. Let that lead the thesis as we do it and then that turns to your E in game. Yeah that's the final hurdle the most important one and this is where we spent a lot of time trying to evaluate the consensus investor. In every manager you will say. Oh Yeah we do contrary and things where we try to do things differently. And and and I think from our perspective we've just very much codified that a little bit more in terms of our approach and if we find a great management team that has a wonderful business that is spinning out tons of cash flows or eventually well. It sounds like a nice setup for a company but if there's no Delta if there's no difference between our view in the market's view then my views the price is telling you this already now. The price might get higher. That's just because investor appetite for certain factors. That has nothing to do with idiosyncratic stock. Picking for me we've got to find that Delta and that can mean finding a mediocre ochre business that the market thinks is terrible it can be finding an excellent business that the market only thinks is good. It's it's a change and so in that East Age. We're spending a lot of time trying to segregate segregate. Okay here's the sell side. Here's the buy side. The sell side is very transparent. We see what their views are. We can read the research and see maybe where they're focused on the wrong things with the right things the Bisai. We spent a Lotta time going through the stock loan desks around London. Here's where people are short. We might even talk to friends who short the same names so to get a view for why they are are why they are negative and if we find information that makes us less convicted in our thesis. That's great whether we've made money lost money in the position but it's just as having a sense of the kinds of things that we think important of the market and hopefully if we've been objective about it then it allows us to see why Mr Market agrees or disagrees with us us and maybe they haven't been objective in. That's the case that we have a chance. What's an example of a situation where you felt like the market was focusing using on the wrong things? There's one of these biopsies. That's called ambiguity aversion. Why combine that with availability bias but? It's more of an overreaction thing that happens in the short terms so if you remember. BP Deepwater Horizon Stock cratered and it was terrible and it was bad news. Volkswagen in the diesel gate scandal. In Twenty fifteen stock was killed killed. And that's a great example to the stock sells off to ninety ninety five euros a share from one hundred sixty and the worst fears of what kind of fines they would end up having to pay. Hey turn out to be true. But by the time they wrote the cheques stocks back to one forty five one fifty one fifty five people double and triple count bad news. They get really really really scared and very recently we thought we had potential situation like that with bear which we say buyer in the UK. So I might flip back and forth to say the wrong way here but growing up. It's bare aspirin over there. It's buyer but it was very similar kind of move. The stock goes down about forty percent peak to trough just like BP did psych. Volkswagen Swagger did and we thought ourselves. This is another potential ambiguity aversion case where people are just selling this thing down and it is unknowable. It's hard to know what will the Ultimate Litigation Gatien liabilities be from these California courts elsewhere over roundup lifeless which they acquired those liabilities when they bought Monsanto but to us it was like. Hey this is history is to repeating itself and we kind of wanted to believe it but after doing a bit deeper dive into it and seeing some of the behavior of some of the peer group like actually maybe not as much as baked in as we thought but that that leads me to my new favorite bias which I talked about the original prices. Look for my favorite one now. Is The bias bias. People are now talking about behavioral finance so much and a lot of relatively new to it. They almost WANNA start looking as if there's definitely going to be a bias here you're biased to find a bias and so that's something we'll have to be cautious of as well. What are the other ones that you incorporate into your worth the biggest one and this is common and diversity? One is confirmation bias so we they all tend to find information which supports views that we already have. It's almost echo chamber kind of stuff and I did it as an analyst at fidelity and and I catch myself doing it now an example again. This is hypothetical example. But if you're long sap begin prize resource planning software manufacturer Asher in Germany. And let's say I'm short. Sap and we have our reasons why we're short and then we see Oracle have a profit warning competitor in this space if you're long sap and you sort sap you might have to completely different reputations of that same exact data point. If I'm short it I'll be like Oh. This is great it enterprise application spending falling. These guys are saying negative like Sheehan Year this foretells bad news for their biggest competitor in the space. But if you're long you but like this is awesome. I knew it. They're finally taking share from Oracle and I've got data points these investors that are switching forward. Sap and that's why Oracle Oracle messed. It's about us being objective about the information that comes to us and that's one of my favorite parts as you go through this name by name. How do a u turn it into a portfolio? Well we make sure we're following the same process across the sectors this game process so from a portfolio management perspective. As long as we've we've each day followed the same approach to sort of what constitutes and Albert Bridge idea then. It becomes more of an apples to apples. Comparison for me as I decide where to put capital. If I WANNA take some capital out of this name. Because rallied in the expected returns a fallen. I don't need to stay in the same sector because we follow the same process to get this focus list or to get this portfolio. Folio is another one of the post the blogs we wrote was I think it was called. Kelly was right and it has to do with The Kelly criterion basically how people size bats when they go to the Casino Zeno. Well there's ways to do this where it's also somewhat similar when you aggregate multiple securities in a portfolio and constructed so that each extra dollar is allocated hid the right place with. I don't WanNa make to scientific. Because if our conviction level changes our time horizon changes we go to the company and a little bit of our model changes that could affect things but broadly the decision of where to allocate capital is driven by those expected. Return so back to earlier question about the kinds of biases. We're trying to find. It can be something. That's got a confirmation bias. Hero era disposition effect here or an ambiguity aversion there but it's all driven by the fundamentals getting better than the market realizes where the expected returns are and as long as we follow the same thing process to get the idea into the focused. Then it makes it less difficult to allocate capital wisely. It sounds like a lot of the conviction that will lead into position. Sizing within the portfolio is very subjective. So how'd you come up with position waits for these names. It can be subjective. The end of the day. I think everything's always more subjective than we think it is. So what can we do to make it sort of less. So one is to build this short model in this model so we have a reasonable gauge. What the upside and downside could like an great or terrible scenario now those are kind of binary? I'm talk about a distribution different outcomes. We're talking very simply. Here's what it's worth it for right. Here's what it's worth it for dead wrong and then it's about asking ourselves. How long would it take Mr Market to wake up to this thesis? Space is GonNa take twenty four months or maybe there's some events coming it might take fifteen or eighteen was take thirty six because it's a long burn but once we have those factors in we can come up with this notion of annualized potential expected returns. And that's how we basically raped companies that are in the focus list and make sure allocating capital to the ones with the highest returns and by design. We do not care about overweight or underweight some particular sectors or countries if it turns out that we're finding no healthcare equipment when ideas and Switzerland and we don't own any healthcare crimen ideas and Switzerland. It's just it just the ideas that come through in Germany we are paying a little bit more attention now. Obviously to geographic equates as it relates to brexit widow when I have eighty percent of the portfolio in the UK might be the right thing to do but as we move toward that finally. Maybe we don't want to have too much of exposure exposure there in case things are crazy one way or the other as the market is moving around. How do you adjust your position sizing within say a group of the same names in the portfolio? So even even if we look at the things that have been our biggest contributors over many years our biggest contributors have been in the book for five years but they might be a five. I percents position in that. Might go up to eight and back down to four and out to nine. That's all driven by their expected. Returns and by the expected returns of the things around it in in that portfolio. Is this notion of making sure that we have the mindset that this is the portfolio we would today we lost the fund today and find security. That's you think. One hundred fifty euros a share and it's trading at one hundred and it's got downside. Eighty come up with an expected return metric if the stock goes from one hundred to one twenty while the expected return just fell. Aw by definition it must be do less capital than it was before in that capital can be moved somewhere else. How do you sink up? This notion that you're going to move position. Sizes is based on risk reward. which have to do with upside downside? which is going inevitably to be tied to something that looks like diaw model where most of your focus on the DCFS UCF is sort of understanding consensus? I'm kind of wondering about how you deal with the possibility of false precision though my whole post about dcf was that you do get this false position and it can start to sing whatever tune you wanted to sing because some bias. You have going to manage your team while you're GonNa make your dcf or you don't like to manage is your team you dcss kind of looked lousy but the fact is the DCF's the right answer to actually what the thing is worth and all these other things are just proxies for that so my view you in my experience and certainly the way I do things sometimes an EDP dour price earnings ratio of some of the parts can be a better proxy for that DCF answer than the DCF itself because it's less complicated so as we ended up having positions for a very long time Reisen for us. It's still consists of a bunch of short term time horizons presence. Are they going to be numbers over the next year or two. That is the primary focus on driving. Its inclusion the portfolio and then the hell we size it will then we'd be driven a bit it more by the actual okay what it will be the result of that if this company beat earnings by twenty percent in Prince this number in two thousand and twenty one. What kind of multiple will the market could pay for that? There's an absolute number that will use just based on any market environment. Here's why she'd be worth from a free cash flow perspective or what will be worth more relative. Here's your peer group. Here's where they trade to the Detroit premium or discount. What's it done? Historically what will you pay for it if it prints that number what will the market pay for it. That's the number that matters and that becomes the thing that helps sets our upside downside. How do you work with your team so with the team? We assign this actress to each of us. I still work as an analyst myself. We try to be pretty into fidelity thing try to be pretty independent. Broadly people can go within their sector and spend time whichever companies they want and the goal is to come up with things that might be the most interesting or dynamic and then in my interaction were basically basically. My goal is to make sure we're following the game. Make sure we're playing the game. Gather Analyse Molly evaluate. I might press it more on the short case to make sure that we're really focused on on that and encourage them to realize in myself that say we get two out of three stocks back to that earlier point right and listening next year. Five of our names are Sucking Alpha out of the portfolio and that will happen even if we get seventy five percent right five of these names are going to be terrible. which five are they? Let's try to find. Find out now. We're in the business of getting swept three right one other three wrong. All of our trouble is already in the portfolio. Let's go out and look at it this way where we get this right or wrong and we try to prevent my i. PCs drift their thesis drift. We just ride a lot. We memorialize our theses all day long just for our own internal consumption. What is our by the case? What is the foundation? What are the reasons? We own this stock and again going back earlier in my career. Some of the biggest lessons or mistakes for me it would be owning things for a period of time time particularly when they do well. You think you're doing great but then you ask yourself why do I still own this thing. All the reasons I bought it for have happened. I'm owning it because it's it's kind of gone up. And meanwhile there's other things where I could be doing work and spending time would be better use of that capital so just continually stay on at monitor that in almost insists that we have that process around the group. How do you think of the split of your mind? Share between behavioral analysis of stocks and underlying business fundamentals of. It's a great question that's evolved to. When I started off at Fidelity I was ninety? Five percent bottom up deep dive stock picking five percent. What's the market? You're getting wrong as I moved through. Oxygen and into Albert Bridge in two thousand eight probably had moved down toward eighty five eighty today it is still vast majority is up deep. Fundamental dive. Seventy seventy percent of the reason. Why is talkers in the portfolio? Is that we have picked information out. That helps us be confident that they're going to be number but twenty five thirty percent of it is this mismatch. Can we find the mismatch. Can we find this area where Mr Market is not just disagreeing with us but can we understand ny. Some of the scary times for me are when we don't know why I. Why is the market not paying attention? This we don't see a particular bias. We don't see any overreaction action we don't see these guys actually already kind of like it if you can't see the mismatch then we don't have the behavior alleged and so it's that back to the earlier point is that e stage. That's that's the WHO you have to jump over. And it's a continuous process. You have to keep upping over it. Where'd you get that information from to sort of capture that information analyze the information? The information is what is the market think. What is the market getting different from? Yeah yeah so we can bring in sell side coverage so we have a strong strong sense of the number of analysts covering stock. The number buys sells and holds. We can wait each of those differently. Sexy quite different in Europe. A whole doesn't have the same flavor there's a whole here in the. US interest what the analysts say. But we can make some adjustments for that and we'll come up with the notion of sell side broad likes or dislikes the company we do something similar with the buy nightside. Obviously there's a buyer for every seller but we can at least get a sense of what's happening by looking at short interest. How stales it getting? which kind of money is long or short certain companies and and as we aggregate those things were able to I think develop a pretty good sense of the kinds of things that people are paying attention to and one point I would make and this has been just a change in the market and it might even be more exacerbated by Mifid to now which is kind of decrease the amount of folks that are covering companies increasingly? Anyway I think there's almost been more of a melting between the sell side in the cell sites clients so when we see broker notes that we call it reverse broking in the UK. It almost feels like it's one other big clients that has pushed this analysts to convince them that here's the pieces that matters and they're out marketing that and we can kind of tell that that's the case. So that's nice for us because the the side becomes even a proxy for the buy side in some cases but this a key for us and again we also were contrary and hey everyone likes the stock. It's trading on thirty five times earnings. Let's be short. Or Hey this dachshund four and a half times earnings with a twenty percents recast people hate. It must be a by and that's I level stuff off. That doesn't get the job done you. You have to have a view that things are GonNa Change that this is going to get better than fundamentals are going to improve in the market. Doesn't want to see it if you have that mentality. Then maybe you get to avoid one value chapter you might not have avoided before you spend time early in your career in Asia Group in the US and a lot of time in Europe. Have you been able to determine that any of those three regions are just use the word easier than others to find inefficiency and stocks. Yeah they're all the same. I do think over here. We have a view that maybe things are less efficient speaking specifically typically about Europe and can't really comment on Asia's much now but still in Europe. We have a view. The things might be less efficient there than here and I'll tell you this that Europeans have the same view of Americans arrogance and from our perspective. It's difficult to pick stocks in both places. A lot of these rules had Do good fundamental research objectively. How how to not pretend that you're smarter than everybody else but just thinking more? Clearly I think those apply equally in both places I really do. You've mentioned your blog a few times and I thought it was particularly interesting looking at some of your past quarterly letters. How the mode of communication with your clients changed? Yeah I was laid to this I've always been a big writer. A thought pieces and I had an audience of three people for that. It was basically two people on my team. And maybe my wife and we would send it to our investors and part of it was Cathartic thing for me to be able to write because I like to write about investments in financial theory and Decision Making Behavioral Finance and we started sending more of those pieces out to our investors and decided that you know with this platform that may be easier just to set up a blog so people could subscribe to it and they can automatically get it and it would also force me to every two weeks right something and help to communicate to our investors in one of those De biasing tools if we can into a good job communicating with our partners about how we think and what we do well that lowers their discount rate about us and about the kinds of things we do and so the the original goal there was to do it that way in the to use twitter as sort of another distribution mechanism for making sure people knew we'd updated a blog post and I have to say it's kind of gone beyond that for me. I've met a lot of really smart people in finance twitter and if Morgan House. Alright something I'm going to read it like now and it really goes to helping me sort of continue learning and continue. Hopefully getting better what we do but but the blog. It's a fun thing thing for me and I. It's hopefully been helpful for our investors as well. I think probably WHO's us to talk about the story that you put out that got the most attention of all the things you've done in finance. So why don't you talk a little bit about that post. Yeah well. That post was more of a personal post that I I put out back in June then about my son. He had gone through some hard times as a teenager and I hesitated a bit if I wanted to put it out on twitter but in this case I was like well. This is a nice form. Maybe to get the word out for folks and it's basically a story about a struggling teenager who is at the depths that I wouldn't want any other parent you have to suffer with their kids and how he got himself out of it. And I wrote that post he allowed me to share it thankfully and I think he and Another fella that we became key in the story of helped a lot of kids and parents with that story. What's the name and that's what people can stay in the game? Stay in the game. All right true turned couple of closing questions. What's your favorite hobby? Your activity outside of work and family. Well I'm terrible at it but I love playing my guitar. That's that's my downtime. And even though I'm twenty years past my prime if there ever was a prime I still get a lot of peace out of shooting baskets outside so those two things. Thanks those are the two I. It must be an Indiana thing. That's the stuff at. What's your biggest pet peeve? Taxi drivers that take the wrong route. Is that happened more in New York or London. I'm not in New York. That got much in New York. It happens all the time but in London. These guys actually know where they're going guys with the knowledge in particular but even still I find a way to get upset about it if they take the wrong way you can ask anybody. It's it's terrible habit. Your biggest investment pet peeve. I've quite a few there to my biggest one. Now is probably that. There's a lot of back testing folks go back and look the way things behaved. And they're calling anything factor like three hundred different factors as if these were state variables of a hedging concern like bomber talked. About what the I kept him. Factors are things that either have to have a risk story related to them. And that's why they behave a certain way or a behavioral story. It can't be that that's something had a certain behavior over some period of time and that somehow means it's sustainable and it lasts forever so get specific it. More academic about defining what factors are and then we can move forward. Is there a particular factor. You hate the most right now. That people are calling a factor that you know. Is this the number like I'm a WHO it was John. Cochran may be talks about the factors zoo. And and and there's some new factors which to me fascinating betting against Beta this flies in the face of single factor cap em and. That's what the guys that I call it. It's similar to the low vol vall kind of factor where people theoretically stocks with a High Beta are supposed to move more higher than the market as the Marcos turns out of the way around and and this is something for Gene Pharma in the fish market crew to have to grapple with and it does beg the question of which you'll have plenty folks say that the cap and the whole structure was wrong in the first place from my perspective if found in French introduce value and introduce the small cap bias in a three factor model and the Marque Carl Hart a few years later introduces momentum those are the key wants really momentous may be more input certainly more important than size and maybe more important than value and then you get this slow vall betting against Beta stuff and the theories tougher for me to come up with why that might work quality qualities and other went. I is that a behavioral story or is that a is that a restore. It's tough. They seem to work the momentum. MM stuff I am convinced. There's no risk story for and that is an under reaction bias where people just refuse to process information which just confirms there. PBS News whether you're long short Hong Lemon Stein. Roe paper years ago called bad news travels slowly if you get information that doesn't jibe with what you believe before you just. I don't care I love seeing that. What reading you almost never miss? Well it's back to Morgan houses if he writes anything. I don't miss it and help me keep track of anything that I WANNA. I WanNa make sure I'm staying on top of I visit. Wisconsin abnormal returns website every single. It's the one thing I religiously if I go on holiday if I'm away I come back and I'll go back through Tuesday's links Mondays link Sunday's links make sure I see that because he's the world's best curator of the kind of information at least in the finance world and and other areas that interests me teaching from your parents as most stayed with you. It's teaching by example and it's civility and it's fairness it's having in civil discourse. My father's always been that way. My Mom's been that way now. I fail there all the time you can ask London taxi drivers but I'm working on it but the fairness one that on. I don't like it when things aren't fair. And that's been an overriding theme for me forever. That can be someone we call it q barging in the UK jumping the line. Someone jumps in front of your line at starbucks. That's not fair. Someone jumps in front of some kid at line to get into Yale because his parents often bunch of money. That's not fair either. I hate that kind of stuff last one. What life lesson of you learned that you wish you knew a lot earlier in life? I thought I knew it earlier in life but I didn't know it to the degree I do now. And it's the importance of relationships and of spending time with smart people. PEOPLE SMARTER THAN YOU. You can keep learning you. You can keep developing developing when you have. That is easy to in our industry. You can get bogged down in your world with your team and to the extent that you read that helps ups but by hanging out with smart people. It's just fun. It's invigorating and That's been something that I've I think. Even more important than I realized ten years ago drew. Thanks so much all right thanks for your time man. Thanks for listening to this episode. I hope you've found a nugget to take away and apply in your investing and your life life. If you'd like what you heard. Please tell a friend and maybe even right review on I. Tubes you'll help others discover the show and I thank you for it. Have a good one and next on this podcast is for informational purposes only and should not be relied lead upon us a basis for investment decisions all opinions expressed by guests on the show are solely their own opinion and do not necessarily reflect those their firm managers appearance on the show does not constitute an endorsement investment recommendation by Ted or capital alligators.