Episode #321: Rajiv Jain, GQG Partners, “The Only Way To Survive Long-Term Is To Be Adaptive”
Guest: Rajiv Jain is the Chairman and Chief Investment Officer of GQG Partners and also serves as the lead portfolio manager for all GQG Partners strategies. He commenced investment operations at GQG Partners in June 2016 and has over 25 years of investment experience.
Date Recorded: 5/26/2021
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Summary: In episode 321, we welcome our guest, Rajiv Jain, Chairman and Chief Investment Officer of GQG Partners, a boutique investment management firm focused on global and emerging markets equities.
In today’s episode, we hear how Rajiv is building an asset management firm for the future. We start with Rajiv’s early career as an emerging markets PM and the lessons he learned navigating the Tequila Crisis. Then we dive into his choice to venture out on his own and start a new firm focused on having skin in the game, a diverse team, and a long-term view. We talk about the different investment styles of the firm and how he’s positioned going forward.
As we wind down, we take a look around the world and hear Rajiv’s thoughts on emerging markets, Russia, India, and Asia.
All this and more in episode 321 with GQG Partner’s Rajiv Jain.
Links from the Episode:
- 0:39 – Sponsor: AcreTrader
- 1:32 – Intro
- 2:21 – Welcome to our guest, Rajiv Jain
- 3:20 – Early days trading stocks
- 5:14 – Rajiv’s first job in asset management
- 7:43 – Lessons from the 90s
- 9:23 – The importance of adaptability
- 15:11 – Becoming CIO in the early 2000s
- 17:30 – Warning signs ahead of the financial crisis
- 19:33 – Rajiv’s motivation for starting a new venture
- 21:22 – Foundational principles of GQG Partners
- 26:33 – Rajiv’s approach to portfolio construction
- 30:19 – Maintaining a competitive viewpoint
- 32:29 – Looking beyond the buy decision
- 34:13 – GQG’s positioning heading into the pandemic
- 35:42 – Developing a culture that welcomes disagreements
- 40:25 – Structural changes impacting valuations
- 42:10 – Risk management
- 44:41 – Russian stock market
- 49:52 – Interesting countries and sectors on the 2021 horizon
- 52:27 – Opportunities in the Indian stock market
- 57:30 – Unpopular investment beliefs
- 58:31 – The problem with ownership bias
- 1:00:19 – Lessons from memorable investments
- 1:02:24 – Learn more about GQG Partners
Transcript of Episode 321:
Welcome Message: Welcome to “The Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the Cofounder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Sponsor Message: Today’s episode is sponsored by AcreTrader. I’ve personally invested on AcreTrader and can say it is a very easy way to access one of my favorite investment asset classes, farmland.
AcreTrader is an investment platform that makes it simple to own shares of farmland and earn passive income, and you can start investing in just minutes online. AcreTrader provides access, transparency, and liquidity to investors, while handling all aspects of administration and property management so you can sit back and watch your investment grow.
We recently had the Founder of the company, Carter Malloy, back on the podcast for a second time in episode 312. Make sure you check out that great conversation. And if you’re interested in a deeper understanding, and for more information, on how to become a farmland investor through their platform, please visit acretrader.com/Meb.
And now, back to our great episode.
Meb: What’s up, friends? We have a killer show for you today. Our guest is the Chairman and Chief Investment Officer of GQG Partners, a boutique investment management firm focused on global and emerging markets equities.
In today’s show, we hear our guest is building an asset management firm for the future. We start with his early career, as an emerging markets PM, and lessons learned navigating the Tequila Crisis. Then we five into his decision to venture out on his own, start a new firm focused on having skin in the game, a diverse team, and a long-term view. We talk about the different investment styles of the firm and how he’s positioned right now. As we wind down, we take a look around the world and hear our guest’s thoughts on emerging markets, Russia, India, and Asia.
Please enjoy this episode with GQG Partners, Rajiv Jain.
Meb: Rajiv, welcome to the show.
Rajiv: Thanks, Meb. Good to be here.
Meb: Where do we find you?
Rajiv: Well, I’ve been in Fort Lauderdale for a decade, so I’m still hanging out here. It’s getting a little bit crowded here now, as you know. But, yeah, it’s Fort Lauderdale, Florida.
Meb: We were joking beforehand it’s been the venture capital/start-up/tech highway, moving to Fort Lauderdale, Miami, sunny weather of Florida. Too many bugs for me. I used to grow up going to visit, learned how to water-ski in a little town called Land O’ Lakes, outside of Tampa. A lot of bugs, it would be hard for me. But I love Florida in general, I need to get back to Miami.
You from Florida originally? Where did you start out?
Rajiv: Yeah, yeah. I was here 30 years ago. I’m originally from India. And then lived in New York for 20 years, and then decided to move to Florida back again a decade ago, 2010 actually. So yeah, it’s been a while.
Meb: You weren’t always running a multibillion-dollar asset manager. What was your entry point? You said you moved from India, where did you get started?
Rajiv: I got hooked onto trading stocks in high school. And that’s actually why I ended up here in the U.S. There wasn’t much of an industry in India in the late ’80s, early ’90s. So, I ended up coming here in 1990.
Meb: Do you remember any of the first names, take you way back to that time? Because for me I remember I was late ’90s, so E-Trade, Lucent Technologies, CMGI, all the bubble stocks from the ’90s, the GameStop’s of today. What were some of yours, do you remember?
Rajiv: I remember a company called CVD. I needed to call brokers to get codes and so on and so forth. Charlie-Victor-David, CVD. The company disappeared.
So, one of the fascinating things is that if you start early, there’s a good change that you’ll get wiped out early. I lost whatever I had in school, in college. So that was actually the best thing that could have happened because the chance of getting wiped out later goes on dramatically. So, and that was before the tech bubble, obviously, and the tech bubble came later on. So, it was a big biotech bubble in the early ’90s.
Meb: You managed to wipe out during a rip-roaring bull market, that’s impressive. I mean that’s even harder to do, almost, Rajiv. I at least had to wait to the bubble to explode to buy a bunch of options and implode all my money. But it’s a great lesson and it’s one that you…we mentioned on Twitter, when I said the best thing to possibly happen is you lose all your money when you’re young and don’t have any because it will leave those scars, that scar tissue that I think is pretty useful. Now it’s not pleasant, you never wish it upon someone particularly. But in retrospect, it’s a great learning experience.
Rajiv: Exactly. I think there were a few different ones in the early ’90s. I’m talking about ’90, ’91. It was obviously just after the S&L crisis. A bunch of other names blew up. But, so it was less of a bull market. I managed to be more specific. And as you said, it took quite a skill set to not make money in a bull market, and then still get wiped out.
Meb: All right. So, fast-forward, you didn’t give up. You said, “I’m going to stick with this.” Walk us forward a little bit.
Rajiv: As I graduated in ’93, I didn’t know anybody in Wall Street. So, I was in Florida, I said, “I have to go to New York.” And I really didn’t know anybody, and obviously in the industry Miami is in the first place…first port of call. So, I just picked up the CFA directory and started cold-calling people. And one of the calls taken was by the… at that time of UBS Asset Management. And for a strange reason he said, “Yeah, okay, come on, I’ll talk to you.” Malcolm Klinger. And that’s how I got my first job. Which was ’93, so three years after I came to the U.S. And then from there on.
So yeah, I think that is kind of fascinating that, depending on where you start, it can influence your thinking quite a bit. And one of the biggest lessons always has been that it doesn’t really matter whether you’re good at a particular aspect. But as long as you’re able to adapt and learn, you can actually still survive. And that was part of the adaptability. I didn’t know anybody, so I thought, “Let me just cold-call people.”
And the other aspect was how helpful people can be, I mean, to strangers. And a lot of people who were extremely helpful in sort of…in getting my foot in the door.
Meb: Wow. There’s so much already to talk about that I think is so instructive to the young folk. I mean I get probably a résumé a day from people, or the inquiries. And just even the effort to make, what you were talking about, the cold-calling, making the outreach. Where most that’s uncomfortable or they’re unwilling to do it already to try to get your foot in the door. Got a lot of stories, a lot of failures, about that as a young man trying to get a job, as well. I definitely learned what not to do.
All right, so you start the career. What is the focus at that time? Are you a junior analyst, are you working your way up through research or trading? What was kind of the progression?
Rajiv: I started more as a sort of quasi-quant, so I used to do a lot of quant work. I was always fascinated in terms of … what I think about as kind of the guardrails. So as sort of a semi-quant, but also doing the fundamental work on both global as well as U.S., so a generalist.
And then I ended up switching to Vontobel, where they hired me as a Deputy Portfolio Manager, a Co-PM, for some of the strategies there. Which, in hindsight, I thought, “Gee, it’s kind of late,” I was 26. I was surprised that I did manage to get a job as a PM in a relatively short time. I think the learning was tremendous because that was…within two months there was the Mexican Tequila Crisis, they call it. And running an emerging market fund, you really don’t know what hit you. Because you think that, “Oh, stocks are cheap,” and then you lose a short on the currency on top of that.
And the ’90s turned out to be quite instructive for me because I started my career in both U.S. as well as non-U.S. But because I became a PM of emerging first, I think I’d been living through the ’90s in one crisis after the other. The Tequila Crisis in December ’94, and then the Asian crisis ’97, then Russian crisis, and so on and so forth. And as you know, nobody made a dime in emerging markets in the ’90s. That actually turned out to be extremely helpful in sort of calibrating and adapting to the changing environment. Because if you’ve grown up in sort of a secular market, you feel that’s how the world is supposed to work.
So, I think it’s just coincidental, obviously, that it ended up that way. But I did get a lot of freedom to operate the way I wanted because it was a relatively small part of the books and nobody really cared.
Meb: I was going to say, 20-year-old, they’re probably just like, “Look, dude, no one cares about emerging markets, you can do no harm. What’s the worst that can happen? Let’s put somebody on this.” But even emerging markets, which have been largely out of favor for much of the past 10 years relative to the U.S., for the listeners that are older and remember that 2000 to 2007 period was rip-roaring, everyone wanted emerging markets. So, these things tend to come in and out of fashion. But the ’90s in particular, as you mention, massive sort of boom, busts, and opportunities in many of those countries.
What was the framework at that point? Were you guys just like, “Look, let’s just market cap weight, equal weight these companies,” or, “Let’s just buy the biggest”?
Was it old-school, like Templeton or other value-added fundamental research, where you’re Mobius, where you’re, like, on the plane every day to all these locales, boots on the ground? How did you guys go about it?
Rajiv: First of all, there wasn’t that much money to go around to have a vast team or something. I feel that there’s a huge benefit of starting at a smaller shop because you end up doing a bunch of different things. So, I started much more around the quantitative side, “Let’s find the best markets, and then look for the best names.” “Best names” in terms of classic backward-looking, high ROE, high margins, and so on and so forth.
Now, fast-forward to the Asian crisis and realize that none of the top-down work actually worked. The only reason I kind of did okay and survived the Asian crisis was because the stocks did okay. And that was quality-focused, high ROE, low leverage. And so that actually protected me. And that sort of started to position away from top-down, bottom-up to much more bottom-up-oriented. Because all the top-down work I did, which was a little bit disheartening because none of that worked. So that led to the transition towards much more bottom-up-oriented, good balance sheet, decent businesses, less valuation sensitivity. Which obviously worked okay into the dot-com, until that came around, and then obviously there was another transition after that.
So, I think that has been…if you ask me, that has been a key part of my, what I call, long-term survival, is simply seeing where and how the process doesn’t work and let’s see what we need to improve and change. And that adaptability, I feel, is critical for long-term survival, rather than saying, “I found a Holy Grail,” and we keep rinse, repeat. You know, growth, value, quality. So, and they’re the best place to learn from mistakes.
Meb: Do you have any memorable experiences, trades, investments from that period, like the late ’90s? Because, like you mention, it was so fraught with market downturns, but also rip-roaring returns in markets, as well, where some of these markets would be up over 100% in a year, or 200%. I recall some of these just crazy opportunities. Anything particular stick out during that period?
Rajiv: A bunch of them. I mean I remember how the Russians traded in ’90. There were a few names, but basically, well, market makers were some of the large banks. And as the markets started melting, they were no market makers. And they said, “Gee, they were liquid.” Well, they were liquid, they’re no long liquid. And that was a huge lesson in terms of, “Well, what does ‘liquidity’ truly mean?” And things, which are a few billion dollars all of a sudden, went from trading hundreds of millions of dollars a day to not even a few million a day. And I remember some of the Russian pink sheet names, which melted.
I remember there was another sort of Taiwanese…this is just around the Asian crisis, there was a closed-end fund which…not listed, in the London international exchange, or the GDRs as such. And that thing, there were no market makers, and the spreads are like 30%, 40%. And that should make anybody nervous. And by the way, these are relatively liquid names, how the market makers can disappear.
Meb: And that’s an opportunity, I think, for a lot of people, as they think about even over the past decade or two, even last year, certainly during the financial crisis, but this concept of people getting upside down on liquidity. I mean even with just this recent Archegos, with some of these names that have this beautiful escalator up, and then all of a sudden you’re like, “Wait, why is this large cap stock down 50% on no news?” And it’s simply supply, demand, sort of liquidity situation.
And so…but it’s not infrequent. And that’s kind of one of the bigger surprises in my careers, is, like, this kind of keeps always happening. And even the big boys, I mean if you remember back in the endowments in 2008, got completely upside down on this whole liquidity/illiquidity because of all the private equity and VC and real asset holdings that was a mismatch. So having that sort of powder or ability to take advantage of things when they get dislocated, I think, is one of the biggest opportunities and also biggest warnings not to do to get yourself in that situation. Because a forced seller is probably the single worst place to be in all of investing.
Rajiv: And the returns are just misleading, in a way. Because the other side, there is nobody to trade. That’s when you really get a sense of what is liquid, what is not liquid. I feel that a lot of folks don’t fully incorporate that, particularly in a bull market…to your point. It happens time and time again, and I’m sure it will happen again this time around, that when you have some of the names, you have 30, 40, 50 times revenue and they have “TAM” of X billion dollars.
I mean I was just laughing today, there was this Latin American company from Uruguay, which is not being valued at $5 billion-plus. GDP or Uruguay is $50 billion, and it was supposed to be the next PayPal…And you know there’s… And by the way, there are a lot of marquee hedge funds piled into this. And some of the most well-known hedge funds, you know that it is getting kind of late. And the question is, “Okay, what’s the other side of the trade? When this thing unravels, can you even leave the table?”
Meb: What do you mean? 20, 30 times sales sounds like a bargain. I mean we’re talking some of these 50, 60 times out there today. Come on, Rajiv, why are you being so frugal with your valuations? Uruguay is high on my vacation to-do list, so I’ll do some due diligence for you if I ever make it down there. I really want to get down to that part of South America.
Okay, so we’re now onto kind of the Internet bubble popping in the U.S., 2000. Where do we find you at that point?
Rajiv: I was running both sort of co-PM of international and emerging markets by then. So, one of the things that actually was quite remarkable was, some of you might remember, a company called Hikari Tsushin out of Japan. It’s still listed, by the way. And that is one of the most memorable ones, where one of my colleagues was so adamant why that’s the best name. And that, by the way, that literally went limit down. I remember clients calling me and saying, “Gee, is there a mispricing?” And I was thinking, “This is not a mispricing, it’s limit down.” And it was limit down for, by the way, 20 days.
So that was quite a remarkable learning experience, which led to sort of much more valuation discipline. So, one of the things that has helped me navigate over the years is just sort of recognizing there’s a mistake, and then cutting back.
So that led to my becoming a CIO in early 2002. And still running, at that point, just under a billion dollars, thereabouts. But the interesting thing is as soon as I became a CIO, because of performance issues in some of the larger funds at Vontobel at that time, I mean, 70% of clients quickly fired because for bad performance. A new CIO.
So that was quite an experience because having 70% of your clients walk away as soon as you’re running the show was not easy. I think that was, again…it was remarkable in a way. By the way, I think there’s an important lesson, in my opinion, from an investing perspective, is that you do get enough time to react to the changing environment. If the regimes are changing, you get enough indication. The problem is most of the people end up anchoring on the prior regime.
If you go back to 2000, 2002. So I was long a lot of tech names, still underperforming in ’99, but there was time in 2001 to react to the changing data points as the earnings estimates began to come down, and so on and so forth. So that, as you know, was the beginning of a new regime as such which lasted almost a decade.
Meb: All right, so financial crisis is next. You mention the ability to kind of shift gears. Was that something you thought the signs were starting to flash at the yellow at the intersection, was it something that it would be able to adapt to the sort of regime change? Because that was, I think in many ways, a pretty big shift, the 2000, a few different secular sort of cyclical markets mixed in over that period, but then you had this big daddy. Do you want to walk us through that period?
Rajiv: I mean from 2001 to 2007, thereabouts, financials was a big part of the work, and particularly European banks and some U.S. banks, too. Which kind of did okay. We didn’t have much of tech. In fact, it’s kind of fascinating that that era led to the whole shop being called a value shop, and now they call it a growth shop. So, I’ve been called a growth manager in the ’90s, and then value manager, and now growth manager. So, I’m probably one of the few ones who’s been branded differently over different periods. But same style, by the way. So, which is kind of fascinating, in a way, how folks do like to pigeonhole you in terms of, “Oh, gee, this is quality growth,” or “deep value,” or what have you.
Now, coming back to 2007, 2008. So, the financials, I think it was a relatively obvious one to exit financials. In the developed market book, not in emerging market book. I think the mistake I made was really not cutting back, not connecting dots, and cutting back some of the basic material and energy names that we had. So, I think that was a mistake in hindsight. Because if you have a financial system under pressure, then it will be hard for these somewhat cyclical areas to do well. And clearly they were a little bit frothy at that point.
So, if you ask me, that was a mistake. Financials, fine, we did cut back financials, but there were plenty of telltale signs. I mean, if you remember, Bear Stearns’ hedge funds blew up in, I believe, first quarter or March, April 2007. And Lehman went under in September 2008. There were plenty of rumblings by summer of 2007. So, there were telltale signs of potential problems. What I didn’t do well was connect the dots to the basic material and energy side, which you did have exposure to.
And the other part, I think, is the whole notion of people talk about consistency or backward-looking quality being the hallmark of quality names. And I always thought that that is much more the high ROE, consistency, and so on and so forth. It’s much more a function of the environment that you’ve been operating in rather than some inherent quality of the business.
So in, for example, the ’70s, if you bought Coca-Cola and so on and so forth, well, they didn’t exactly do well. And, in fact, what’s interesting is, I think, Gillette was trying to get into oil drilling at that point and Coca-Cola was trying to get into movies. So, from that vantage point, the issue of connecting the dots, kind of the marco…matters. And I think that, I believe, I didn’t appreciate enough until 2008 came along. If the financial system is under pressure, it’s very hard for the broader system to do well. And that’s how the legacy of that lasted over a decade after that.
Meb: So, you decide not to retire to the beaches of Florida and take up kite surfing or fishing, but rather to get started with an entirely new venture. What was the inspiration? Tell us a little bit about your company.
Rajiv: I was at Vontobel for a long time and the firm grew well. From 2002, when I took over, it was $300-odd million under management and we had net new money for 14-plus years. It was $50-plus billion, doing fine, performance was okay across all strategies, so on and so forth. But it was kind of feeling a little bit sort of constricted because, being part of a large European financial institution, the usual stuff begins to come in. And I’m very passionate about investing, I was no longer having fun. And my view is that the journey is what really matters. There’s no destination, the destination is six feet under. That’s the only destination everybody has. “It ain’t fun, so let’s kick it off again.”
And the other motivation was that, having learned a little bit over the years, “What is it that I would do different?” And, “Let’s start with a clean sheet of paper and redo it based on my personal mistakes.” By the way, so I didn’t bring anybody from our prior team. And the question was, “Okay, if this is the area I haven’t done well, how can I address that?” Because one of the fascinating things about investing is, unlike tennis, you can’t have somebody else play your backhand if your backhand is weak. But investing, you can have somebody else play your backhand.
So that puts the thought process, “This is a clean sheet of paper. Let’s set up one of the most client-aligned boutiques in the business based on the mistakes I’ve made. So, let’s keep what has worked and let’s avoid what has not worked and see if we can improve the game.” And that was quite thrilling in a way because rather than try to set something up to sell… Because a lot of the shops, I feel, are set up to sell rather than saying, “Okay, this is how I’m going to improve the game. Whether it works or not, time will tell.” That was the other motivation.
Meb: It echoes a phrase my mom loves to say, which is, “Life is not a dress rehearsal.” So, what were some of the foundational principles? You got this exciting opportunity to start from scratch and build the organization an entirely new image and philosophy you’re interested in. So, what was it?
Rajiv: Yeah. First of all, I think one basic aspect if investing is that it’s truly a privilege and honor to manage somebody else’s money. Based on my decision, somebody’sretirement might be at stake. And that easily gets… It’s not about performance, it’s not about anything. First of all, it’s preserve capital. So be careful because by the time the retiree gets the check, it’s too late to sort of say, “I’m going to start again.” It’s not like buying a widget. If the cell phone you buy doesn’t work, it’s not a life-changing event. You either give it back or you buy a new one. But the returns are bad.
So, I believe that investment boutiques should focus first and foremost on how to align ourselves to what clients do and what does “alignment” mean. That, first of all, I’ve committed to have a majority of my net worth, I’m talking about not liquid, entire net worth outside of the value of GQG now, invested in the products we offer to our clients. Not some separate vehicles, same exact vehicles. Tim Carver, who’s the CEO, he has maybe two-thirds or, I know, majority of his net worth, same like me. So, both CEO and myself have committed a majority of our net worth all to the same strategy, because you’ve got to eat your own cooking.
Number two, we don’t allow any personal trading of any sort. One of the dirty little secrets in the business is people spend a lot of time managing their own money, which looks very different from the clients’ money. There’s nothing wrong in managing your own money, but it’s got to be identical to what you’re doing for clients. So, I don’t have a single penny with any other private equity, long-short, long-only, venture capital, or what have you. That’s the commitment in terms of alignment.
Number two is that I was a Co-CEO at Vontobel, didn’t want to do that. Again, so I didn’t want to be a CEO or anything. I enjoy investing, so I’m a CIO, I’m not a CEO.
The other one is that it should focus only on longer-term performance. Which, by the way, kind of, to state the obvious, but… See, one of the fascinating things about this business is you can get average for free. Any other business, you don’t get an average free. You don’t get an average car for free, you don’t get an average cell phone for free, but you can get average management for basically free, maybe one basis point or something.
So, if you can’t add value, you’re not really needed in the long run. The whole investment organization should be entirely focused on that aspect. But it’s not about sort of saying, “This is…I’m the greatest investor,” or something. You need a little bit of humility to say, “Look, this is not about me being the greatest investor. It, first of all, is preserving somebody else’s capital, co-investing then with them, and then see if then you can do a reasonable job on top of that.
Meb: You mention a couple things in there. The first being it sounds so obvious, the skin in the game part. And I mirror what you were talking about and invest almost exclusively in our funds and strategies. But the average mutual fund manager has zero invested in their own funds. And that always surprises people, they’re like, “What do you mean you can’t?” And if you look at it as less than $100,000, it’s an even higher number. And to me that’s crazy, but whatever. That seems like an obvious conclusion because, as we know, incentives drive everything in our world.
And particularly…and I was talking about this last year, the last conference I went to pre-pandemic, or kind of during pandemic, was talking about this concept of, “Look, if you’re an active manager, the base case, like, the ‘Investing for Dummies,’ that world is a commodity, it’s free now.” And you mention a couple basis points. If you include short lending, it’s probably not only already free, but actually paying you to own a portfolio. That’s amazing, but also has a lot of implications. It means to pay someone to do more, like, they better be adding some sort of value. In the world we live in, which historically is just the closet indexing world, that is a rarity.
Okay, so the structure was important to kind of get right, as you mention. And what about the investment philosophy? How do you guys think about actually building portfolios, putting money to work, what kind of portfolios do you guys manage? All that good stuff.
Rajiv: So, the other thing was structuring the team. So, a vast majority of people have said, “Oh, gee, this is the same team I’ve worked on all my life.” And I’ve actually, based on my experience and mistakes, basically learning from mistakes, I said, “Okay, if this didn’t work, let’s try to change that.” So, I didn’t bring anybody from our prior team. And it’s like, “What can we do different?”
So, one of the things to try to do different was let’s make sure that people come from very diverse backgrounds. So, the folks, for example, who have long-short equities, long-short credit, value shops, growth shops, private equity, journalists, forensic accountant. So, it’s an extremely diverse group of thinkers. So that’s the first sort of part of the whole process.
And then the question is, what I would say, is kind of mom and apple pie. Quality business, sensible prices. Taking a long-term view. However, willing to adapt as the data points change.
So, while it’s easy to say our edge is long-time horizon, I think it’s a little bit too simplistic, in my opinion, to think that way. Yes, there are a lot more shorter-term …investors. However…it’s hard to take long-term only. And the fact is if you take a very long-term view… Well, Japanese corporates take a very long view, and that hasn’t turned out to be any better. So, the question is, “What point do you adapt and recognize your mistake?”
So, focus on the quality of business first, but eliminating the weaker companies. I think the biggest point of investing is, as Charley Ellis said, it’s a loser’s game. So, you got to cut the tail first. If you’re fishing in a better pond, you improve your odds. And I think it’s all about improving your odds.
So first, improve odds by cutting off weaker businesses relative to the industry or whatever. So I’ve owned commodities, financials, always the technology, software, so on and so forth.
So, everything should be investable. Because one of the notions that quality doesn’t include cyclicals I find a little bit strange. Consistency of earnings is not always the hallmark of quality, because that could be a function of the environment that you were in. As you know, a lot of…you mention CMGI and JDSUs of this world. People thought they were quality, and they no longer were quality as the tech downturn started in the 2000s. And I wouldn’t be surprised if it kind of happens again this time around.
So, cyclicals should be very investable, the question is the barriers to entry. So, get the barriers to entry right to the extent you can, and then see if you have a sense of where the business might be heading three, four years out.
Meb: So, you talk about an approach to investing that you mention a couple times. It’s funny, people characterize you in different ways, depending on the cycle. We once had a fund that I think was in seven different Morningstar categories over the course of its lifetime. So, like, hard to pigeonhole. And this concept of value, I think everyone in their head thinks of the old Graham net-net, like just dirt-cheap sort of stocks, but even Buffett evolved. And you talk a little bit about this, too, is value and growth is really two sides of the same coin.
So, talk to us a little bit about the whole value, growth, and we can expand a little bit into the third pillar that I think you guys focus particularly on, which is the quality side. The floor is yours.
Rajiv: First of all, when you talk quality, it’s about, as I said, the barriers to entry, how high the barriers to entry are. And that might mean a lot of cycles, that might mean a lot of software names or tech or what have you. Technology today is a lot less cyclical than it used to be 20 years ago. The quality is meaningfully different.
Now, once you’re done with that, then the question is, “What’s a sustainable growth rate five years out? And what are we willing to pay for that?” But that’s a function of what the outlook would be beyond five years. Because if the business outlook could change dramatically, the multiples will collapse.
Now, that’s relatively…I wouldn’t say it’s standard or obvious, I think. But it’s not…and I feel this is one of the edges we have, is that, “Are we reacting enough to the changing data points?” Because think of it this was, as, like, driving. When you’re going from New York to Washington, D.C., you kind of know where you’re heading. However, would it take it 3 hours, 5 hours, or 10 hours? You can’t predict that because it depends on the road conditions.
So, in market terms, if inflation goes high and interest rates go creep up, let’s say, to 3%, 3.5% 10-year Treasury, would some of the software names, and we own a bunch of them, would be valued at the same multiples or our experience of the last decade has colored our longer-term view of what the multiples should be? Now, the problem is I’m not here predicting that, because nobody can predict that. The question is, “Are you reacting? And how do you incorporate that?”
So, the first part is let’s get to the quality of businesses at that point, based on recent history, based on projection, and so on and so forth. Once you own them, then the second leg is, “Okay, how would you change your opinion?” And that part, I feel, is where things tend to go wrong. Because we all the work on the buy side before buying. The question is, “What are the data points you would need to see when you sell the name, or what has to happen?” And my view is that…is frankly when people say, “Oh, we sell when funds have deteriorated,” that’s where I dump all my mistakes. That’s basically acknowledgement of the fact that, “Okay, this is where I didn’t really quite understand what was happening.” And so all the “fundamentals” changed.
I personally think the better view is just have a competitive viewpoint of the names. In other words, just like a sports team, you force rank every name every day. So, if you remove it and somehow it has become a bad name, but maybe there’s another name which looks much better. So, to simply say that we buy a name here, it gets to fair value X many years, we sell it and we recycle it, that’s not how the world really does operate. I mean some businesses just stop growing. But at what point do you pull the plug? It’s very hard.
So rather than saying we sell when there’s a fundamental change, my view is just force rank everything almost on a daily basis. And just like a sports team. If you have a bench and you monitor a bunch of names and you see the fundamentals improving in one name more, maybe you sell it and you bought yesterday. That’s perfectly fine, because that allows you to adapt.
So, if you go back to, let’s say, the GFC. the environment post-GFC has been dramatically different. A vast majority of growth shops that we talk about today, including quality growth shops, didn’t really do well pre-GFC. In fact, there’s a whole new breed of growth shops, which are doing well today, a vast majority didn’t survive the dot-com collapse.
Meb: It’s like I don’t see that many old bold traders.
Meb: It’s funny you mention that. My favorite extreme example is always the short volatility option sellers. Those guys will put together, like, a beautiful three, four-year track record during benign environments where they make 2% a month every single month, sharp ratio of three, it somehow ends up attracting a few hundred million dollars, and then they print the down 50% to 90%, or 100%, which it’s had the case over the last few years, washes it all out, rinse, repeat over and over again. Which, back to your commentary, these cycles, in my mind, in regimes, sometimes they’re quick and sometimes they last for years and decades.
The experience of Japan, my goodness. The ’80s, and then they used to call it the Lost Decade, but then we had to call it the Lost Decades because it was three. And it’s in a world of Robin Hood and day trading and people looking at things on a daily basis, it’s hard to have that perspective.
You touched on something we really got into a few months ago on social, which was 99% of the effort people, I think, put into investing is the buy decision. “What should we buy?,” when to buy it, stressing out about it. And almost no one, I think we did a Twitter poll on this, sort of established or thought about how to exit at the time of the buy, they just buy it and they say, “Okay, well, let’s just see how it goes, let’s wing it.” And you have problems on both sides, you have problems if it does really well and you have problems if it does really poorly because emotions just get involved and you didn’t have a process.
And one of the things that is really thoughtful you mentioned is seeking out that evidence to the contrary. I mean how many investors listening, if you’re long bitcoin or short Tesla, as two good examples, you just spend all day online looking for confirming evidence? It’s like you’re only following people that have the same views. It’s not what you should be doing, it’s literally the opposite, is spending all day trying to kill your thesis. But no one does that. Or only maybe the old successful investors do, but most people I know don’t.
Let’s talk a little bit about you guys got started with the new company and now you manage a gazillion dollars in the mid-teens. I think 2016, you said, seemed like a nice, benign period for a few years, and then, wham, 2020 came along. Walk us through that period. What was it like, what were you guys sort of experiencing? Any major turnover? Did you guys just kind of close your eyes, put the ostrich portfolio, put your head in the sand, or was it a pretty active year? Walk us through what it was like.
Rajiv: Sometimes I’m a little bit envious of folks who say, “Look, we believe these are fantastic businesses and they’ll be around forever and happily ever after.” Because I feel that, you know, it’s kind of almost like a Rip Van Winkle portfolio, you’re happy until you disappear. And I think the more… is maybe living a little more in an uncomfortable zone. Because my view is that if you’re not sure how deep the valley is, whether it’s 10 feet, 1,000 feet, just back off.
And if you go back to 2019 and ’20, we actually were becoming fairly constructive on corporate earnings growth. And again, it’s much more data-dependent. You know, the better opportunity was, for example, some of the European banks. For the first time, I bought an airline last quarter of 2019. Talk about perfect timing. So, of all the years, I buy an airline in the last quarter of 2019. Because nobody would have timed that better, by the way. As January evolved, I mean, one of the analysts said, “Look, this…why is this … hitting in China? You may want to pay attention to that.” This is early the first week of January or something. And obviously, having lived through the SARS, I said, “Maybe, if nothing else, let’s start cutting back.” So, we started cutting back the airlines in January and February, thereabouts. And then February came along and we started looking…
And by the way, we have also a team whose job is nothing else but criticize everything we do. Their compensation is structured around that.
Meb: Oh, man. That’s awesome. Spend a little time on that real quick. Not to interrupt you, but that’s such a cool idea. Tell us a little more.
Rajiv: Yeah, I think because, as you said, the incentive is always to high-five each other and agree. In fact, I’ve read people who basically would eliminate anybody who disagrees with you because, “Oh, this is our style. This is A, B, C. You have to walk exactly the same dotted line.” Which I personally find a little bit crazy because then there’s no disagreement. I mean you all behave like lemmings and you’ll jump out of the window somewhere down the line because there’s nobody to disagree.
So, for that I think it’s better to just structure the team differently. One who’s incentivized and compensated to disagree with you. So, in other words, their bonus is dependent on if they like something, they basically own the name, too. By default, they disagree with you. And unless you share in the compensation, it won’t work. Because, I mean, whose bread I eat his the song I sing. They’re not…nobody is going to disagree with you if they know that, “Yeah, yeah, ask them to disagree, we’re not devil’s advocates,” but really what you want is you already made a decision to buy, on an ongoing basis.
So that is part of… And if you want to make sure that’s documented, which we document, by the way, the disagreements. And I think that has been instrumental in forming the culture, where disagreements are actually appreciated and documented just to make sure what the disagreements are.
So, every name… And when our client meetings, by the way, say, “Would you like this name?,” I say, “I like it, but this so-and-so person on the team hates,” you should talk to both. Because on balance, all we’re trying to do is get the odds in your favor. In other words, if the odds are, let’s say, to make a, hypothetical number, 60% positive, 40% negative, that’s all you need. In fact, once you get to 80%, 90% conviction, you, in my opinion, you’re no longer objective. So, if it will work, it will work ridiculously well. Like the fans over the last decade, the true believers did very well. The question is, “Will they be able to get off the train when there’s time to get off the train?” People like me always are sort of doubting Jacks and never have the same upside because you’re always sort of checking, cross-checking, questioning, cutting back on data points. So that’s why I thought it was important.
By the way, that is part of the restructuring I thought about doing when setting up the GQG, that it has to be done. It’s hard to change with existing people, by the way. You almost have to gut the team. Which is why I didn’t want to bring anyone from the prior team, because cultures are hard to change. So that is part and parcel, it’s embedded in how we think. There’s a lot of self-criticism that happens and is documented.
Meb: We’re here in 2021, let’s talk a little bit about what the world looks like now. How are you guys thinking about the world? Is it a treasure trove of opportunities? Is it a dangerous, fraught dungeon of booby traps? Is it a mix? Is there any particular places, sectors you guys like? What’s the world look like in May 2021?
Rajiv: Yeah, it’s always confusing, but it’s particularly confusing now. Because let me paint you two scenarios. Number one is that we remain in this inflation in transitory. Although I would wonder, “Okay, what is not transitory?” Everything is temporary, at the end of the day. So, define “transitory.” The ’70s were transitory, too, but it lasted a decade, which is enough to kill you if you’re long high-multiple names. But if you remain in a low inflation environment, then the prior regime stays. Then the software names, the SaaS names, for example, other technology names, fairly high-multiple tech names, is the place you want to be because there’s “digital transformation.” Although the evidence seems to be rather scarce in terms of any expiration, by the way. So, I think there’s a lot of narrative, but…there’s a lot of talk, not enough walk.
On the other side is if inflation does pick up because there are structural changes happening. The supply chains are shifting away from China, China is no longer exporting deflation. They might be exporting a little bit of inflation because of the pollution control leading to shutting down some of the excess capacity leads to tighter supplies. If that happens and inflation ticks up a little bit, does it mean there could be a massive shift in the leadership, in the markets? And by the way, I’m not predicting one or the other, but I’m saying that to me it’s equally likely. It will be dangerous for your financial health to assume one would happen. And I don’t know which one, by the way. And I think, sitting here and now, you can make an equally convincing case for either/or.
And that is the trickiest part here. Which is why I feel sometimes that maybe it’s just easy to say, “Nope, it will not happen, this transitory inflation, and we are still betting on,” as you mention, “30 times price of revenue with X billion TAM.” And obviously these companies know expenses because even the EBITDA is adjusted EBITDA. I have an accounting background, so maybe I’m finicky on the accounting side.
Even the revenue, by the way, is…sometimes these days, which is fascinating. But as you know, if interest rates do tick up, even a little bit, for a whole host of reasons, again I’m not predicting that, it doesn’t mean that the leadership change could be rather dramatic. And if you see signs of that, by the way, if that happens, what sectors immediately got hit when inflation ticked up?
The other part is from a valuation perspective there are certain cyclical areas which are actually now looking attractive. Why? Because there are structural changes happening in those industries. So, we have to incorporate that in thinking.
So, what has happened on a portfolio level, to make a long story short, is we’ve been net-sellers of technology. We actually underweight technology in almost all our portfolios, except emerging markets. Our exposure to financials has gone up, our exposure to some of the industrials has gone up a little bit, so at the margin. By the way, this has been happening for five, six months. Again, without making a big call either way. Because macro has to be a switch off, it is not a switch on. You don’t buy because of good macro.
But that is part of risk management, too. How could you not incorporate that? Because if inflation is running at, let’s say, 3.5%, 4%, there’s plenty of evidence that certain industries, while they do have pricing power, the multiples that you’re paying for those businesses would shrink. Because the fact that multiples have expanded in the last year and a half, two years, why wouldn’t they revert back to where they were just two years ago?
Meb: We think about, like, the last year, there seems to at least be three kind of waypoints we talked about where there was obviously the bottom in March of the stock markets, the interest rate in the U.S. sort of bottoming in the summertime, and then the election, of course. And you can kind of target returns on various sort of shifts since then, and certain this year some of those themes have accelerated.
Do you guys think in terms of countries or sectors at all, as you bucket your ideas, where you’re like, “Look, how does the macro play into that?” Or is it purely bottom-up and wherever it falls, it falls? Or is it like, “Look, we actually love China right now,” or Russia? Or is it just because you’re looking at the stocks and that’s where the path leads you?
Rajiv: Yeah, so it is bottom-up primarily. However, there is a macro…what I call a macro switch off. So, for example, we actually find a lot of opportunity in Russia. In fact, even in emerging markets our portfolio has shifted away from Asia towards non-Asian markets and …developed markets. So, while you’re finding more opportunities in emerging markets, at the global level, by the way, our exposure to Asia in general has gone down, non-Asia has gone up.
However, there is macro risk. There’s sanction risk in Russia, for example. Now we’re seeing the regulatory risk come back with a vengeance in China. And I think it will be naive to assume that doesn’t matter. Because there’s a difference when people talk about U.S. regulatory risk and Amazon and Google, and so on and so forth. Well, there’s a subtle difference. Which is that Biden or, for that matter, Trump couldn’t have done anything to Amazon without going through the court system. Some checks and balances. In China, if Xi Jinping calls, or somebody calls, Tencent, guess what. When they say, “Jump,” the answer is, “Okay, how high?” And you’re seeing that and there’s regulatory onslaught that’s actually meaningful, not every company would be impacted.
So, there is…is it macro or micro? I don’t know. To us, it’s pretty bottom-up, but it’s really coming from the macro perspective, or top-down perspective. So, we do try to incorporate that as a risk management tool, kind of a gut check.
The second part is at the portfolio construction level. I’ve seen time and time again that there’s an implicit bet without seeming like an explicit bet. Let me give an example. If you want financials, industrials, commodities last three, four years, there was an implicit bet. It was not sort of deep valley portfolio only, you were making a bet on global recovery. And that is a part, which has to be part of risk management, that, “Is that the bet you really want to make?” In other words, what is the end outcome of those businesses and how much exposure do you want in that specific area? In other words, if economies do well, they’ll do well. But if the economies don’t do well, could there be much more correlation than you think?
So, if you own a big tech portfolio today, outside of semis, you’re making an implicit bet, let’s say, at 50% in software today. And I’ve seen portfolios, by the way, people running multibillion dollars. Well, there’s an implicit bet that inflation will remain low and interest rates won’t move. You like it or not, they will react a similar way. But if inflation does tick up or interest rates do tick up, you might be surprised because, as you rightly pointed out, 20 times revenue is not the norm. These businesses are perfectly fine at 10 times or maybe 7 times revenue. And there’s a lot of downside if a macro environment changes. And, you know, I think I’ve tried to incorporate that from a risk management perspective in our portfolio construction.
Meb: You mention Russia. And Russia, for various reasons, seems to elicit some emotional responses from investors. And followers and listeners, we bring up the fact that, and I’d like to hear what your sort of thesis is there, but we talk about how Russia stocks versus U.S. stocks, it surprises a lot of people. Because U.S. has been romping and rolling sort of bull market for a while. The Russian stock market, over the last five, six years, has either matched or outpaced the U.S. Despite that, if you look at a lot of the valuations of the underlying companies or even the market as a whole relative to that period, the multiples have been actually fairly flat versus the U.S., which has been driven by a lot of multiple expansion. And now you go back further, obviously the U.S. has creamed Russia. But you have a scenario where we look at the long-term valuations in Russia’s single digits in many of them versus the U.S., which is, depending on the broad exposure, pretty expensive.
Is this just an energy trade, is this something that you think is just so hated and unloved that it’s an opportunity, or what is it?
Rajiv: At the end of the day, when you’re investing anywhere, the question is, “How do you get paid as an investor?” And there are only two ways to get paid. One is your business growth delivers you the earnings throughout a dividend or what have you. The second one is the perception about the business changes.
So, if you look at the information technology sector within the S&P 500, worse is the healthcare sector within the S&P 500. The earnings, with the exception of the last couple years, earnings have been remarkably similar. However, information technology has been rerated quite dramatically. It’s not that it’s growing that much faster. Expectations are higher, but the growth hasn’t been that dramatically faster.
So, the question in Russia is the growth is a little bit slower, but you get paid back as a dividend. And that has been a big part of the total return story. The interesting thing is because the valuations are so low, that means if then the company is paying out 60% or even 100% earnings, a lot of…a whole bunch of Russian companies pretty much stayed their pay-out ratio, they’re going to pay X percent of earnings as a dividend payer.
Which I think is fantastic, that should be music to anybody, any investor’s, ears. That, for example, there’s a Russian gold stock bullion. They say they’re going to pay out 100% of true free cash flow to you. And the cost of exploration is like $400 an ounce. So, guess what. That kind of becomes like a gold-plated bond. In other words, as gold goes up, the dividend pay-out is going to go up. So, you’re capturing the dividend.
And I think that aspect, as you mention, Russia is kind of unique where it’s still fairly underappreciated. People talk about corporate governance, that’s part of emerging markets. You’re not going to get U.S. or Switzerland-like corporate governance and trade at seven times earnings, like would be such. But on the other side in China, you do get a lot of similar issues. Maybe not as heavy-handed that you might expect. Although people … what happened to Russian in 2003… and Yokos. But there are more than enough cases in China…And by the way, we have significant exposure to China. So, but the valuations are paying for that, there’s no margin of safety. So ironically, and people are surprised with this stat, that if you look at the last 20-plus years, Russia has actually outperformed China on a total return basis, if you just trip out a couple of names, the Alibaba’s, the Tencents.
So, it actually hasn’t been that, from an emerging market perspective, because the companies, it’s not just oil and gas, but there are some financials, which are quite attractive. We don’t really have tech exposure, but some of the commodity names, they’re by far the lowest cost producers of those commodities. And you’re not going to have the EV or renewable revolution without those commodities. But they pay out all of their earnings of free cash flow as dividend, so you actually get paid a lot.
Meb: I’m smiling as you’re talking about that because I’m like most investors listening from the U.S. are like, “What are dividends?” And dividend yield in the U.S. is so low, it’s almost like a foreign concept at this point. But in Russia, and a lot of emerging markets, as you mention, you can still find companies three, four, five, six and north dividend payers. Emerging markets are going to be emerging markets. It’s like you can’t expect them to magically, like you mention, have a lot of the governance. But I also laugh, some of the times when you’re talking about governance, and companies in the U.S. are often just as guilty and government is just as unpredictable and unreliable of legislative changes, and sort of on and on. You see some of the things that happen.
I used to always laugh when people were like, “I invested in U.S. because of stable geopolitics,” and I’m like, “My goodness.” That is an interesting perspective. Because if you travel anywhere else in the world and think that the U.S. has stable geopolitics, that’s humorous.
All right, so any other countries or sectors or stocks? You’re welcome to talk about individual stocks if you like that you think are particularly interesting, dangerous, worrisome. Anything on your brain as we look to the horizon here in 2021?
Rajiv: As you know, I grew on a U.S. and global portfolio, too, so it’s not only emerging markets. In fact, you have a major part of the book, actually 80% of the book, is developed markets. And if you look at…we still quite like the financial in both U.S. and Europe. Technology, by the way when we were sitting here three, four years ago, in the global book we had like 45% technology. I mean, we’re down to like mid to high teens.
So, we do feel that areas that will be, A, quite a bit of restructuring has happened. So, you know that there’s a lot of consolidation, which has taken place in those industries. Hence the profitability going forward is going to be stronger for longer, but the markets aren’t fully incorporating that. Because, it’s interesting, we were talking before the show that there’s this company out of Uruguay, which is not being valued, at $5 billion. By the way, that might be 35, maybe 40 times forward revenue, we don’t know yet. That is an indication of the excess capital that is going in.
One of the reasons why countries like Russia have decent returns is because there’s no capital going in there. If you have a monopolistic position there, guess what. Nobody is trying to set up a new Russian steel plant. Not going to happen. And that leads to higher returns on capital. So, at the industry level, we feel that industry there has struggled for the last decade, they probably will have a better return pattern than they get credit for, on a selective basis, because there’s not much capital going in, nobody is setting up. But the ESG factors are raising the barriers to entry. Try and get an approval… I mean you’ll be surprised to know that there’s not been a single new greenfield steel plant set up in India for the last 15 years. It takes forever to get approvals there now.
So, the barriers to entry are beginning to shift. While software, I don’t think there’s a problem getting funding. Some of the things that are getting funding, it’s just mind-boggling. Whether it’s China or U.S., it doesn’t matter.
So, we feel that the center of gravity is beginning to shift, we are in early days of where the returns are going to be. And that could be industrials, that could be some financials, that could be other areas. And if interest rates go up, they’ll be icing on the cake. So, if you were sitting here from 2001, 2007, we had no technology. In the last decade or so we have quite a bit of technology, but now I feel that the tide is turning away from future return perspective. Some of those businesses tend to be a little more cyclical. But they were also cyclical because economic growth was lower. So, if the growth picks up, they may no longer be as cyclical. On the other side, where the capital has gone in a massive way, the returns might be lower because there’s so much capital sloshing out.
Meb: You mention India. Pandemic sort of aside, what’s the opportunity set look like there? You have massive emerging market population market that’s growing. Is there a lot of opportunity in the stock market there today, contrasted with your experience there in the ’80s?
Rajiv: Obviously there’s a risk of me being bias. But our exposure in India, if we’re sitting here five, six years ago, was, in the global portfolio, around mid-teen level. It went down to basically zero. Now it’s beginning to go up. Because one of the things, which is happening, is that the recovery pre this last wave was actually very strong. If you look at February, March in India, it was always 100%, 200%, 300%. And by the way, there wasn’t much of a stimulus. They don’t have the money to stimulate anyway, so there was no…stimulus wasn’t an issue. Because there was no money. But their recovery was almost 100%, 200%, 300% as of February and early March, the activity level. And we feel, as you talk to vast sort of areal banks and so on and so forth, the underlying demand picks up. Because banks typically give a very good pulse. This doesn’t mean you have to own banks, by the way, just to be clear.
So, when you talk about financials, it doesn’t mean you have to own a financial, big bank, but it does give you a sense of what’s happening. And that is why there’s a good chance the growth could be stronger coming out of this, because the banking systems globally are coming out in much better shape than GFC. So, India is no different than banking, the non-performing loan situation has improved quite a bit. So, we do feel that the recovery is going to be a little bit stronger. On the other side, if you look at what has done well, that’s true in emerging markets across the board.
But a lot of steady Eddies…India, 55, 60 times earnings. Nestlé India, 70, 75 times earnings. Asian Paints, 60 times earnings.
So, the valuations have gone in a total gaga territory. And not just in developed markets, in emerging markets, also. Companies that have got a much more steady-Eddie growth. And I think that’s where the opportunity is shifting away from.
Meb: As we find ourselves here, almost summertime, anything on your brain that you’re particularly excited or worried about as you think about markets and look to the future?
Rajiv: “Excited” maybe is the wrong word. Because “exciting” could be good or bad. So, I would say a bad excitement is that there are obvious signs of frothiness everywhere. It’s not just on crypto or software, but there’s just Robin Hood… You go in every area. And by the way, that’s not a U.S.-only phenomenon that’s happening. The marginal lending or aggressive retail participation, IPO pipeline, and so on and so forth, is beginning to drive … a little bit. These are not signs of an early part of the cycle, these are signs of a late part of the cycle.
The question and the worry is, and I’m not predicting that, “What happens if inflation turns up a little less transitory and next summer we’re still talking about three handles on inflation, not two handles?” And if that happens and the real rates go back to what the norm is, I don’t think the markets are ready for that. And the problem is we can only do so much. You don’t turn the portfolio over because you expect the world to be this or that. I feel a better way is keep reacting to the data points, and then keep adjusting, keep adjusting, keep adjusting, rather than making these 5, 10-year forecasts one way or the other. But anybody with a little longer-term horizon should be worried because that could mean change in leadership.
And I think, so, the most aggressive growth shops… And by the way, if you look at the data, the top 20 percentile of U.S. stocks, if you break them simply by price to sales, they are way above the dot-come bubble. They have come down recently, but they’re still a bubble-ish level. So, the question is, “What happens there?” And by the way, there are some large cap names, so these are not micro cap. So, the difference between, in some ways it is better than dot-com, but in a number of ways it’s actually worse because it’s happening at a much larger sort of market cap spectrum than even then. And that will have a ripple-through effect in a lot of different areas. That does have me a little bit worried.
Meb: The inflation concept of if you look historically market-wide at levels, when you’re in that sort of safe, warm, and fuzzy zone of, let’s call it, one to three percent, historically speaking, in the U.S. and elsewhere, you have investors paying the highest earnings multiples. Like they’re willing to pay more for things to be kind of cozy. And really when you start to creep up above sort of that three, four, five percent zone, the valuations, at least historically, start to fall off a cliff. And the path to that, as you sort of alluded to, depending on what interest rates do, creates a very uncomfortable situation for traditional sort of 60-40 sort of investments set in the U.S., and potentially elsewhere. But that’s a market environment that most people haven’t really experienced, with bonds and stocks sort of all of a sudden correlated again for the first time in a while, it’s a little uncomfortable.
Speaking of uncomfortable, we have an old thread where I talk about investment beliefs that I hold that the majority…or I said the vast majority of my peers, as investment professionals, don’t hold. So, let’s say like 75% of your peers don’t believe something that you believe in. Is there anything in particular? We talked about a few, I think, today, philosophical ideas. That you particularly believe at your core that most of your compatriots don’t. And it could be simple or it could be super weird, but anything come to mind?
Rajiv: I think the biggest one probably would be that everything is temporary and the only way to survive long-term is to be adaptive. There’s nothing permanent in this world. So, let’s not assume about one trend or the other. And the problem is we can’t predict the duration of that.
So, if you have that mindset, that this too shall end, then chances are you’ll be more open to reacting to it rather than saying, “No, it will be fine.” And there’s a big price I’m paying for that, by the way. The results won’t be as good. Because if you truly believe in something way down, like a religious belief, “I’m going to own Microsoft until whatever.” And full disclosure, if you do own Microsoft, then chances are you’ll make more money. Versus saying, “Gee, I don’t know,” and the data points turn and you react to it. And that could be style, that could be stocks, that could be sectors, that could be countries, it could be anything.
So that, I would say, probably summarizes everything, that you’ve got to be a little more… My personal belief, if this is temporary, then you need to be able to adapt without trying to predict what’s going to happen, but be receptive to change as it happens.
Meb: The hard part in a real-world example we like to allude to that I think people can really relate to is that emotional attachment, particular once you buy something. And the analogy we like to make is you don’t think this is true if you go buy a stock or a market or an asset class. Like everyone loves to get attached emotionally to one asset, whether, again, that’s bitcoin, Tesla, or gold stocks or dividend stocks or U.S. or Russia, whatever it may be. And I say if you don’t think you’ve become seriously emotional and psychologically biased to that and have a different approach once you own it, go walk into your garage and go look at all the crap that you own that there are no way in the world you would go buy again if you were to clean the garage and say, “Okay, here’s $1,000,” or, for some of y’all, probably $10,000 of junk sitting in there. Otherwise, why would you keep it?
So, the same thinking, I think, really applies to a portfolio. The example we used to give is say, “Look, take out a white piece of paper.” And you did this firm-wide, which is kind of amazing, given where you guys are, but also applies to your individual portfolio. And say, “All right, if I’m going to start from scratch, what would it look like today?” And then compare it to what you own and why is it so different, if it is. So many people own these legacy funds or investments that no way in the world would they buy today if given a blank slate.
So anyway, that mindset though is hard to refresh. We have become the inertia of just getting stuck in these old beliefs and ownership that it’s hard to think otherwise.
Rajiv: Yeah, exactly.
Meb: All right, my man. Look, we’ve held you for a long time. If you look back over your career, I imagine there have been thousands of investments, any particular that stick out as the most memorable, good, bad, in between?
Rajiv: It’s fascinating. I’ll give you a story. There was a former Japanese client. He’s a client now, actually. “Former” like he was a client before, too. A few years ago, three years ago, they came over and they had a list of almost all the trades going back, my trades, 20-plus years. And they said, he said, “We would like to discuss some of these with you.” This is 20 years, thousands of trades, okay? Actually, 22 years, 23 years. I don’t know where they got the data, by the way.
So, and I was looking back over the weekend, the weekend before the meeting, and I said I was embarrassed. “I can’t believe I would do these kinds of mistakes.” It’s just fascinating. And I was saying, “Man, I’m surprised I’m still in the business.” So rather than one mistake, it’s just shocking that, despite making all these mistakes on an ongoing basis, as long as you’re willing to adapt and learn and adapt and learn, you could still do okay.
So, it’s just not one large mistake. There’s a bunch of them, by the way. There’s like the energy names in 2008, I wish I had cut back sooner because we did sell out of financials. The dot-com. There are a laundry list, every market cycle there are a bunch of names. You always go back and see, “I could have, I should have.” From Tequila Crisis on, by the way. There was Tequila Crisis, Asian crisis, Russian crisis. I mean a laundry list of crises that now I’ve run money through.
So yeah, I think that’s the good news, also, is that you can still survive, as long as you don’t let one or two large mistakes define you, you don’t anchor too much. And yeah, some sort of risk managing tool where you’re willing to cut your loss.
Meb: I think this topic, and we talk a lot about it in somewhat of a slightly different phrase, but the concept of just surviving and not getting taken out of the game is, like, the most important rule. That applies to so many things in life, but particularly with investing and bankroll management. The really only number one rule is you just can’t go to zero to take out the whole bankroll. But there’s always a lot of seduction out there of tantalizing investments that come across the plate every day that certainly can get you there quicker than others.
Rajiv, it’s been a lot of fun. Where do people find you if they’re interested in your funds, what you’re up to, writings, reports, all that good stuff, commentaries, where do they go?
Rajiv: Well, they could reach out at gqgpartners.com. And obviously we’re based out of Fort Lauderdale, so more than a few people are now coming back this way. So, but yeah, GQG Partners, they’ll find us.
Meb: Awesome, Rajiv.
Rajiv: This was great fun.
Meb: Thanks so much for joining us today.
Rajiv: It’s great to be here.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at Mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at email@example.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.