Inside Contrarius’ Contrarian Global Equity Strategy

Hello and welcome to the Investment Markets podcast, where we aim to discuss investment matters that impact self-directed investors. I'm your host, Darren Connolly, CEO at Investment Markets. And with me today is Simon Raubenheimer, a director at Contrarius Investment Management and chair of Contrarius' Research, Portfolio Construction and ESG Committee. Today we are going to discuss investment matters relating to investing in global equities. However, before we get into it, I need to remind you that this is general advice and general information only, and nothing in this podcast should be construed as an investment recommendation. You will need to decide what is right for you. Welcome, Simon. Now, the name may be a little bit of a giveaway, but can you provide the audience with a little bit of an introduction into Contrarius, how the business came about, and your role within it?

Great. Well, thank you, Darren, for having us. It's really nice to be able to speak to you. Contrarius was founded in 2008 by Stephen Mildenhall. Our track record starts at the 1st of January 2009. Stephen's background is he's originally from South Africa and he worked at Allan Gray, which is a company that a lot of our Australian clients would know, an affiliate of the Australian Allan Gray. And Stephen joined Allan Gray in the late 90s and actually became the youngest ever chief investment officer at the ripe age of 29.

That's pretty young.

That's pretty young, yeah. No, he showed exceptional talent from a very early age. He's an absolute investing prodigy. And so he joined in the late 90s. And he actually hired me at Allan Gray in 2002. I joined Allan Gray as an investment analyst in February 2002. And I worked closely with Stephen for my first five or six years at Allan Gray, where I basically learned kind of all my foundational knowledge, everything I've learned about investing. I really learned to a large extent from Stephen. Stephen left South Africa in 2007 to set up a global fund management business. As I said, the business was set up in 2008. Our track record starts in 2009. And Stephen's objective really was to start a business that looked very different to the other kind of asset management businesses that we were seeing globally. Very few asset managers are brave enough to look different to the herd. And when we look across their portfolios, You're seeing a lot of similar names, very little deviation from the benchmark. And I think Stephens opportunity to start a business that is truly contrarian and truly different with the emphasis on truly. And that's paid off for our clients. So since we launched the funds, as I said, our track record starts on as at the 1st of January, 2009. So since we've launched, our equity fund is at 12 fold. And had you put your money into the average sort of benchmark or the MSCI world index, which is the benchmark for our equity fund, you would have made seven times your money, six and a half, seven times your money. Had you given your money to the average manager, you would have probably grown your money fourfold. So we've outperformed quite handsomely. It has paid off.

So Simon, can I just confirm you did say 12 times?

12 times for our Contrarius Global Equity Fund since inception, which translates into roughly a four alpha net of fees.

That's a pretty remarkable result.

Yeah. And we live and die by our performance. And we are very proud of our history. And that's really what we strive to. Our goal is to generate meaningful outperformance of both our benchmarks as well as the average managers. And so we are pretty unapologetic about trying to deliver really strong, positive returns. And as I say, deliver meaningful wealth to our clients.

So, if we think about the returns there, which are obviously very strong, in practical terms, what does being contrarian actually mean? Because as you said, most investment managers, they get penalized if they're sort of out of step with the herd. You've obviously taken a different position. So can you just tease that out for us a little bit and just what does it mean from a day-to-day perspective when you're running the money?

Right, sure. So I guess it's popular to say that we're contrarian. We see a lot of managers say that. But when you look at their returns, they don't deviate much from their benchmark. When you look at what they hold, either companies or sectors, they look pretty similar to each other and they look pretty similar to the big passive indices. We think to be properly contrarian, so we've set the business up very consciously Well, firstly, I guess it's in the name. So our business is called Contrarius. That's literally what it says on the box.

It's very clear positioning.

Exactly. It's explicit. I guess it's a commitment. It's a promise that we've made to our clients to look very different. And you couldn't be more explicit than having it in your name. So it's very intentional. Our company is owned by the staff and by our founder Stephen. So, you know, I'm a shareholder in the business as are a lot of the other senior people in the business. We don't have a parent company to report to. We aren't part of a listed company that have to chase quarterly targets or six monthly numbers. We're not part of an insurance group or a bank. So we really have the freedom from a sort of even an ownership position to manage money in the way that we think will result in the best outcomes for our clients.

And maybe think a little bit longer term.

And think longer term, exactly. So we are very, very focused on long term thinking. So we, when we look at shares, we take a four year view. And this is increasingly rare in an age where sort of average holding periods are down to maybe a couple of months at best, if you're on the institutional side. So, it's in the name, it's the ownership structure of the business. We spend a lot of time recruiting contrarian and sort of independently minded people. At the end of the day, at least for now, it still is very much a people business until the robots take over. But so we spend a lot of time on recruiting the caliber of people that we think would flourish in an environment where independence is very highly valued. So we look for people that are critical thinkers, that are inquisitive, that are passionate about financial markets. And we spend a lot of time on trying to get those people to attract those skills to our business. Now it doesn't, of course, always work out. So we have quite a high staff turnover at the junior levels in our business, but we have an incredible stability at the senior level where people have really bought into the contrarian mindset and the contrarian philosophy. So it really permeates down into the business. There are a lot of things we do that are different to our competitors. We've spoken about sort of a very long-term perspective. Some of the smaller things we do that are very different to our peer group include things like, for example, we don't meet with company management.

At all?

At all. Unless it's on issues relating to ESG. So we will speak to management on ESG if there's a governance concern or something that we're about to vote on at an upcoming annual general meeting. There we would engage with management, but then only on those matters relating to ESG. So we don't speak to them about the company or about the business or the prospects or or whatever else. And the reason for that, I guess, is that a lot of management teams are very charismatic. They're good storytellers. They're very convincing. So, you meet with them and it starts affecting your independence, potentially clouding your judgment. And we don't want to threaten our objectivity So, we prefer to look at the cold, hot facts at the numbers at their track records. And to be fair, there is a lot of information out there on all public companies. We follow their transcripts. Whenever they report their results, we go through those in a lot of detail. So, there is a lot of information out there and we prefer to look at the numbers and the publicly available information than spend our time meeting with management. We don't deal with sell-side brokers at all, so we don't receive research from investment houses or sell-side brokerage companies. All our research is performed by our own in-house research team. We have 35 staff across the company, but 19 of them perform investment-related research, and all our research is completely in-house. And we don't share our research externally. We really think that that's the heart of our business. That's what our clients pay us for. And that's how we generate ideas that we think are independent of what the broader market thinks. In a nutshell, we are willing to be very, very different. How it works in practice is these 19 analysts, as I said, we hire independent minded people and then what we do is we physically separate them into our various offices. So I'm based in Jersey, which is where the investment manager is based. And we can touch on that a little bit later, but we have people doing research at Jersey, we have people doing research in Windsor, and we have people doing research in Bermuda. And the reason for that is that the one thing asset managers potentially could succumb to is groupthink. If you have a big team sitting together, you've often got sort of a dominant kind of personality who convinces everyone of their view of the world or their ideas. So what we do is we separate into each of our own geographies and we allow the various people to do their own research completely autonomously and independently of what the other offices may or are looking at. And we then meet regularly to discuss those ideas.

So you've separated out the analysts and the research process. I assume they're all conducting their analysis within a certain value framework. Would that be correct?

Well, yeah, so we are very valuation cognizant. So we spend a lot of time trying to figure out what the intrinsic values of each of the businesses that we think are potentially attractive are. That's effectively what they spend 95% of their time on, on trying to assess the intrinsic value of their business. In terms of finding ideas, we don't screen. So, a lot of other asset managers screen for certain factors.

Oh, that was going to be my next question.

And we don't do that at all. In fact, we think by screening, you are potentially herded into the same type of stocks that everyone else looks at. And those opportunities by then would long be arbitraged away. In fact, I would say you would probably be better off if you did run a screen, a conventional screening by valuation metric or ROE or return on invested capital, all the metrics that everyone else looks at. You'd probably be better off screening and then kind of flipping that list around and picking the stocks that screen worst. And the reason I say so is that a lot of the businesses we've invested in in the past would actually have screened really, really badly. So a classic example of a type of stock that we liked was a company called the New York Times. Now, the New York Times went through a very difficult period in the early 2000s. Revenues between 2006 and 2011 halved, so from $3 billion to less than $1.5 billion. And of course you had the great financial crisis, but revenues even post the GFC never picked up. And the share price fell from $50 to below $10 a share. Value managers hated the share because along with the collapse in revenues, profits collapsed and it looked incredibly expensive on traditional valuation metrics.

It would have screened out on most metrics.

It was screened out on all the value metrics. And because the business wasn't growing, revenues, as I say, halved over a five-year period. All the growth screens would have also screened the business out. So the growth people hated it, the value people hated it, the quality people hated it. And we saw the collapse in the share price. And we thought, let's look at this in a little bit more detail. And what we figured out around 2010, 2011 is that the management of the New York Times had incubated a digital business, which at the time was tiny. They didn't split the numbers out. They at the time disclosed their revenue as comprising of advertising and subscription revenues. And both of those just collapsed. They didn't show the digital business separately. But when we dug a little bit deeper into that digital business, we realized that actually the economics of that digital business are so much better than the economics of the traditional print business. In the first instance, it cut your costs massively. You didn't have to print physical newspapers anymore, and you didn't have to deliver big kind of piles of newspapers to various offices and locations around mainly New York. It also opened up your target addressable market, like went from basically just where you could handle over the papers to effectively global at the push of a button. You could be sitting in the middle of India and become a New York Times subscriber. So it's a fantastic proposition for the New York Times business who now had a direct relationship with their clients. They knew what their clients were interested in. They could send them targeted advertising. And it's a fantastic proposition for the clients because all of a sudden, well, you don't have to wait for tomorrow's newspaper to see yesterday's news. You could get the live news as it happened. You know, you could refresh your app and you'd see the latest, very latest news. You'd have interactive charts, you could have videos, you could have podcasts, you could have all sorts of things. So, it's a win for the company, it's a win for the consumer, but it was tiny in the business and no screen would ever have picked this up. And we saw that, hang on, this is potentially game changing. So we invested in the New York Times and it's only in 2012 that management actually for the first time separated out the digital business, which was tiny at the time, but showed tremendous potential. And it wasn't long before the share price rose fivefold, despite the fact that traditional advertising and subscription revenues kept falling, the growth in the digital business offset that, and the share price went in a very short space of time back to over $50 a share. And it's one of many such examples that we've managed to take advantage of in the past. Warner Music is another one, moved from physical feedies to streaming. News Corp, another example listed here in Australia, went again from traditional print to digital. with a focus on property, which lends itself even more to a kind of a digital format. And the list goes on. Even nowadays, businesses like Paramount Skydance or Warner Brothers Discovery are moving from traditional linear cable television to a Netflix-like streaming model. So, those are things that you would never see on a screen. But you'd have to dig a little bit deeper to find those opportunities. So, we have these 19 analysts who look for those type of opportunities. So, you really have to be kind of close to the businesses and kind of look at the operations on a granular level in order to identify those.

And I guess there's opportunity in disruption. I guess there always is when business models change. But sometimes the business models don't bounce back, right? So typically there could be a collapse in customers, revenue, profit, or whatever it might be. But the business doesn't bounce back. So how do you account for those kind of value traps? to make sure that actually in the New York Times sense is the digital business fails. And actually you've bought into something where it keeps going down.

Yeah, that's a good question. I guess your best defense against a value trap is to buy into a business that is growing its intrinsic value on a per share basis. And There are a number of ways that business can do that. One is by growing revenue. So even if you overpay slightly for a business, if a business continues to grow, at some point it grows into its valuation. So we actually quite like businesses that grow, unlike a lot of value managers. We think that's maybe one thing traditional value managers miss is just the benefits of a business that continues to grow into the future. But you can have businesses growing by generating cash, reinvesting that cash at a high rate to return into its business or buying back shares and growing the value of the business on a per share basis. You can have a business that is highly innovative and comes up with a new technology that might not yet be reflected in revenue, but is incredibly valuable. So we think Tesla currently is an example of one such business. So there are a number of ways we think that management can grow the intrinsic value of those businesses that'll protect investors against the risk of a potential value trap. Now, as I said, to find those opportunities, you have to be pretty close to the businesses because as we know, the future is inherently unpredictable. We don't know what will happen tomorrow and bad things can happen to the best of companies and no company grows its intrinsic value in a straight line. And I guess it's the job of those analysts to assess whether any setbacks are of a temporary nature. Is it a short term blip or is it actually a permanent impairment, structural change? And I think, you know, in order to assess that you have to be very, very close to the businesses. You have to know not just the business, you have to know the industry that it operates in. You have to know its competitive position, know what its competitors are up to. Suppliers are up to potential clients. risk of technological disruption. And I guess at the end of the day, and this is maybe not a very sexy answer, but there's no substitute for hard work. You just have to know your business really, really well in order to get as close to the truth. In other words, as close to the true intrinsic value of that business as possible. in order to assess whether that's actually growing. And to your point on disruption, I think the risk of value traps is incredibly prevalent in today's day and age with the rate of change that we're seeing. And we can maybe touch on AI later, but we think AI is incredibly disruptive, not just to individual businesses. AI will disrupt entire industries. And there are a number of things happening at the present that will disrupt businesses that historically would have had amazing track records. And you look at auto parts businesses like the O'Reilly's group or AutoZone, smart management, great track record, but with the car fleet shifting away from internal combustion vehicles to EVs. You know, an internal combustion engine has 2000 moving parts more and EV has 20. So, what's the outlook for, you know, spare parts for servicing for all those things on an EV versus an internal combustion car? In fact, even more so, if you look at places like Austin, Texas or California, our cars are driving themselves. We think those cars will be a lot safer in time and probably actually already are than human drivers who are actually notoriously bad at driving. I mean, we killed 40,000 people on the roads every year in the US in car accidents. And we think a robot or an autonomous car will do a way better job than even the best of humans. So, what happens to short-term insurers in that environment? What happens to software as a service business in an age where IT teams can build their own software using large language models? What happens to bookings.com or Expedia where your AI agent will cut out the middleman, bypass the bookings or the Expedias and go straight to the source and book your trip for you. Those things are not science fiction anymore. Those are becoming real. And I guess the big risk is that a lot of managers are going to look at a lot of these shares that previously would be highly rated and with great historic track records. And they'll say, but look, we're paying a very low multiple for these businesses. So, And we're actually paranoid about those businesses being disrupted. I mean, a long-term track record, Kodak may have had the best track record ever for many, many years until it gets disrupted and that track record all of a sudden goes out the window. It's like the old blockbuster story as well. Exactly, exactly. So we are paranoid, especially in this day and age, knowing what we know about the power of this ascending AI technology.

So Simon, what kind of challenges does that then present if you're a value investor? So you're looking at this technology that's going to be very disruptive. There'll be some winners, there'll be some losers. It's good, but it's going to operate across lots of industries. As a value investor, how do you go, it's going to be this company, not that company that we're going to put our money into.

Let me give you our current framework. So this is in our portfolios, I guess the way we manage money at this point in time, there are really kind of three pillars to that. The first pillar is, to your point, is trying to find the AI winners. Yeah, everyone seems to think AI is in a bubble. You can't open the AFR or the FT or The Economist without 20 articles about AI bubbles. In fact, I think hardly ever do you see the word AI without it being preceded by the word bubble. We think AI is not in a bubble. And we think for the simple reason that everyone seems to think it is a bubble. And if everyone thinks it's a bubble, it's probably not. Markets climb a wall of worry, right? A bubble will come when no one expects it. It'll be something that no one's seeing or talking about. So, we don't think AI is in a bubble. And in fact, we think there's a risk of people... Everyone's looking at the sort of fiber and IT bubble of the late 90s and early 2000s. And we think there's a risk of people overfitting what they're seeing today with the trends of the late 90s. We actually think there are far more differences than there are similarities between now and the late 90s. So we don't think AI is in a bubble. We think this technology is actually truly revolutionary. And we think the implications are extremely profound and I think 99% of people haven't yet cottoned on to just how big this really is. So, we want to find the winners in AI. Now, you have to be pretty humble. As I said to my earlier point, the future is inherently unknowable, and we may change our mind on all these things. But we think at this point in time, given that we're expecting between $3 and $4 trillion probably of infrastructure spend on artificial intelligence over let's call it the next 10 years, we think at the moment there's a lot of value in the infrastructure layer. But again, we are contrarian, and we want to look for opportunities that are maybe less obvious. And we can find a number of companies exposed to this infrastructure boom that are trading at still very, very low multiples. For example, companies like Dell is probably trading on less than 13 times forward earnings.

Sorry, 13?

13, 13. That's right. Yeah, and actually they've updated their recent growth guidance and the next five years look amazing for Dell. Managements are incredibly optimistic, founder-led, super smart guy, heavily incentivized to make it work and co-invested along with our clients.

Because the S&P is over 20 now.

Well over 20, yeah. So you've got Dell at 13, you've got the memory chip makers, and we think memory will be a massive growth area. And it's already starting, you're already starting to see their order books are full, their pricing is going up really strongly. And we think memory will be a big beneficiary. Data center is the game, current game in town. we think the future actually lies in a far more decentralized. So, inference currently happens in data center. We think going forward, inference will move to the edge. I think the next big wave will be robotics and physical AI. So, you'll have more and more inference being done in your smart device in your house. I mean, I think all electronic devices in future will at some point be intelligent. So, whether it's in your car or a humanoid robot or your fridge, the latency that will be required by... You won't be able... In a car, for example, you're going to have to do super fast real-time calculations. You can't send data back and forth between a data center. So, you're going to have You're going to have, you'll have decentralized inference happening on the edge. And we think the demands for memory will just go through the roof structurally, will be far, far stronger than any period we've ever seen in history. And you're buying companies like SK Hynix on probably between eight to nine times earnings forward. and you're buying Micron on 12 times earnings for big beneficiaries. We also like the turnaround play, a company like Intel. Nvidia has recently taken a stake in Intel. The US government has recently taken a stake in Intel. It's a company of national strategic importance to the US. New management, super smart guy, seemingly, we think he's saying and doing the right things at the moment, so that's something we'd be happy to underwrite. Even companies like TSMC in Taiwan trading at, we think, low 20s, which is given the quality of the business and the barriers to entry, just their technological lead on the competition. We think that's a fantastic price. And then you're also finding Chinese AI companies that are trading at a third of the valuations of US companies. And then we think possibly the biggest beneficiary of all is a company like Tesla. So the whole world is looking at Tesla's car sales. We think the car business makes up I don't know, maybe 10 or 20% of the business. Tesla is actually far more than an automotive company. And we think Tesla will benefit from the convergence of artificial intelligence, autonomous driving, green energy, and robotics. We think each of those will be a tidal wave in the future. And Tesla really gives us front row seats to the convergence of all four of those technology run by probably, whether you love or hate his politics, but probably the most impressive business person of our generation. And so those are the type of opportunities that we are seeing in AI. Now, of course, we run a diversified fund. We don't manage an AI fund. So, AI is one leg of three legs. The second leg is to try and find companies that won't be disrupted by artificial intelligence, but that have businesses that will be sustained throughout. And there are a number of examples there. I spoke about the media companies that are transitioning from legacy to on-demand streaming. So Paramount, Warner Brothers, Skydance. And then, for example, luxury goods companies, so businesses like Kering, we own recently Burberry and the Swatch Group, for example, which has massive hidden assets on its balance sheet that we think are hiding in plain sight. Net cash of two billion Swiss franc, property of four billion Swiss franc, and inventory of seven billion Swiss franc, no debt. So you just add those three, excuse me, you just add those three assets and you get to 13 billion Swiss franc. The market cap of the business is only eight. So it's trading at a discount to its three biggest assets. And it has fantastic brands like Omega, Blancpain, Breakaway. And you paying nothing for those. So we're still finding incredible opportunities in businesses that won't get disrupted by AI. We're looking at biotech companies. The biotech sector has been very weak. We've seen a lot of opportunities there. So we're pretty excited about those areas too. And then I guess the third pillar of those three pillars is back again to the value traps. So, there we are incredibly paranoid to avoid companies that we think will be disrupted. And we think the most insidious traps or landmines there are companies that actually in the short term benefit from artificial intelligence. So, you'll read the transcript of Duolingo and they'll talk about how they benefit from AI and they can integrate into their business to cut costs. But In a few years time, AI will take your whole business away. So for the next little bit, it might look fantastic until it's gone. So we think those are the risks that we're trying to avoid. And that's really the framework in terms of which we... But again, to my earlier point, you have to be pretty humble about these things and we have our eyes very open. And I guess one defense we have is if you change your mind, you have to just be brutal. cut your loss and move on. Your first loss is your best loss. And especially in this world where things change so rapidly, you can't get wedded to a position or a stock. You want to paint yourself into a corner and you want to be dynamic, you want to be nimble, you want to be flexible. I think that's very important.

So in talking to a lot of managers, everybody talks about growth momentum, particularly in the States with the tech stocks. But actually what I'm reading here is from a value point of view, there is a welter of opportunity out there if you just go looking for it.

That's right. Yeah. We're very optimistic about the future and we are still seeing, you know, despite all this bubble talk, we are still finding incredible value out there and we're optimistic about the outlook for the returns of our fund.

So if we can just come back to the global balance fund for a second. How do you decide the balance between equities, fixed income, commodities, or any other asset classes that you might want to touch within or invest in within that fund?

Sure. So a balanced fund can be anywhere between zero and 75% invested in shares. Given our previous points, we continue to think that shares will provide the best returns going forward. And that's ultimately our goal is to deliver the best absolute returns to our clients. So we think at least at the moment, and in fact have been for a while, near the 75%, so between 70 and 75% in equities as opposed to bonds. That said, of secondary concern are of course, we want to protect the capital that's in there. We're looking at correlations between asset classes. On the fixed income side, we keep it very simple. We only invest in government bonds and only kind of big US government bonds, pretty much in it's really a duration call, 30 years, 10 years or cash. We keep it very simple. We don't risk any money in bonds. Again, it's down to what we expect over the next four years. So it's driven by our return expectation over the next four years. And on the fixed income side, we look at the big variables, inflation, we look at growth, we look at employment, we look at what the Fed's doing. So, that informs how much we would allocate to bonds. I think, given what we've said about artificial intelligence, I think possibly, maybe the near term, things might be a little bit bumpy as you're rolling out all this infrastructure spend. Longer term, we think AI is incredibly deflationary. And actually, incredibly pro-growth. If you just consider GDP as a function of your population and your GDP per capita, so you multiply those and you get the GDP of a country. Now imagine your population, all of a sudden, how much more productive can I be with AI? I'm already a lot more productive. I'm using these tools and we've actually got very senior people in our business building AI tools for us to use in the business. And we're seeing the productivity improvements. It's unbelievable. So you multiply that and so we think it'll be very pro-growth and very deflationary. So I think five, 10, 15 years out, we think inflation could be way lower than it is today. And growth rates could be far higher. So actually longer term, we're not that bearish on bonds, but we think the better opportunities will be in equities.

And if we turn to the Global Equity Fund, which doesn't replicate a benchmark, can you just give us a little bit of a sense of that as to why that is the case and then what are the implications for that for investors.

Yeah, I mean, I guess the obvious implications are we look very different to everyone else. I mean, we buy shares that are misunderstood or that are unloved. We often hold shares that are heavily criticized by the mainstream media. So, big challenges having conversations with clients and telling them what it is we're seeing in the businesses that we think other people might be missing.

Do these conversations happen to be about Tesla?

Some of them are, some of them are, absolutely. So I guess that's probably from an operational point of view, that is quite a big obstacle. We have to communicate with our clients and we have to work hard at demonstrating why we think certain of the stocks that we own are, why they're mispriced in the market. So that I would say is probably one of the bigger challenges.

But would it be fair to say that investors who want performance around the benchmark are probably not coming to you in the first place?

That's right. That's right. So, I think what a lot of investors do is they would use us as like a satellite kind of manager. They would have a chunk of their money sitting in the lowest possible cost index tracking fund. But then in order to differentiate themselves a little bit, they'd use us to manage a portion of money that can deviate massively from the benchmark.

So I'm getting my benchmark here.

You're getting your benchmark here. You want to outperform a little bit. You want to look exactly like everyone else. And so you bring us in because our correlations to the benchmark are...

So I assume they can fluctuate quite substantially over time?

Certainly, certainly versus the benchmark. Yeah. Yeah.

And how do you, um, how do you measure risk in your funds then? What, what particular metrics are you particularly focused on? Because there is, there's risk and then, and then there's return and effectively what you're saying is you're focused on doing things a little bit different and focusing on those sort of contrarian opportunities for the return that they may provide.

That's right.

So what are you focused on on the risk side?

So I can tell you what we don't do. We don't track volatility or any of the related metrics like

Well, again, you've been contrarian.

Sharp ratios or anything else. I think there are two reasons for that. I think the one reason is that we actually don't think volatility over the long term, we don't see as a significant risk. In fact, I would argue that volatility is probably the price of admission. If you want to look truly different, I mean, a company that's misunderstood or unloved by its very nature tend to be fairly volatile. It's a backward looking metric. We may hypothetically, two years ago, we may have held the most volatile share in the world, but our portfolio in a year's time or in two years time could look substantially different to what it was two years ago. And hypothetically in two years time, we could have the most stable portfolio in the world. So what does it tell you that we were the most volatile and now the most stable? I mean, it's It's a backward-looking metric. And the minute you start spending too much time measuring all these things, you start managing to what we think are suboptimal outcomes. What's measured gets managed. And we want to find the best opportunities that can deliver the best possible returns going forward. So you don't do that by managing for things like volatility. I remind myself that if you zoom out, big picture, volatility is just a squiggle on a line. And to get stressed out about every single little downturn would be to, you know, it would firstly be a very stressful way to live. And secondly, you'd probably be doing kind of making all the wrong decisions at the wrong point in the cycle. I remind myself that over a long period of time, the line should go from the bottom left to the top right. and that's my job. And everything else is just noise. Ultimately, there are three things that matter. It's the price you pay, it's the potential distribution, and the price you sell it. Everything else is noise, literally. So we focus just on the important things in order to deliver the best returns to clients. And I guess things like Sharpe ratios and things just don't factor into that conversation. In fact, I would take a step further even and say, I wake up every morning thinking, sort of thanking my stars for volatility. I mean, when we look at shares, volatility gives you an opportunity, provides you an opportunity to buy companies that are ordinarily quite expensive when they are temporarily unloved.

Isn't that being a value investor?

Well, I guess that is kind of what it is. And a classic example was Nvidia earlier this year. Nvidia went from kind of when DeepSeek was launched, Nvidia fell from $180 a share to below 100. It's a company that we have followed closely over a number of years and in fact had owned back in 2012. And this gave us an opportunity to buy back into a business that we greatly admire, managed by a CEO who's incredibly impressive at a PE in the sort of, call it the mid-twenties on a forward basis. The share price today is back at over 200. If it wasn't for volatility, we wouldn't be getting those opportunities. So we actually embrace volatility. It's an opportunity. We don't really see it as a risk.

Volatility is your friend.

The friend of the long-term investor, absolutely. It might be the enemy of someone who's focused on the next week.

Yeah. Yeah. Understood. This is a good way of pitching it. So would it be true to say then that your investors who are in your funds, they don't come to you to talk about volatility in markets? Or do you explain it in the way you just have?

We do have these conversations. It's important for our clients to be aligned with us. And We think by and large over the last, let's call it 17 years, we've earned our clients' trust. They've seen our returns and ultimately we're in the trust business, right? If you give someone your life savings to manage, it's a very important and it's a very big responsibility. So we work very hard at earning that trust. And we would hope that most of our clients understand this and are happy with that.

That's awesome. I assume it hasn't all been plain sailing for the business. Maybe there has been some volatility, if I can put it that way. I'm sure not every decision has gone exactly how you thought it was. Can you give us maybe an example or two of some lessons that you've learned over the last 17 years?

Sure. Apple, Microsoft, Nvidia, Google/Alphabet, Oracle, Cisco, the New York Times, that's seven shares. That was our top 10 in 2012. Those were seven of our top 10 shares. By far the biggest mistake we've ever made was selling those. We should have just gone to the beach in 2012 and done absolutely nothing. So, I guess there's one big lesson is, I guess we've underestimated the extent to which great businesses can compound. It would have been difficult to predict things like AI and all the sort of things that happened subsequent to that. But I I think we do think about that long and hard. I don't think the market sort of recognizes, I think the difference between a high quality and a low quality business in reality is actually far greater than the valuation difference that you're seeing in financial markets. I guess another interesting data point if we dig back into our own archives is the COVID period. So we went into COVID heavily exposed to oil and gas stocks, particularly offshore oil drillers. Those companies were trading at cents on the dollar, literally at, I don't know, 10% of their replacement costs. The problem is that they had debt and they were exposed to a single commodity beyond their control. And when the whole world shut down in 2020, people stopped kind of flying and traveling, transport stopped and that's 60% of oil demand. And the oil price briefly went to below zero. And these companies were drilling for oil and they had debt on their balance sheets. And we held these companies, I mean, they fell precipitously. But at some point we realized that a lot of them weren't going to make it. So, we took a very difficult decision to sell out and kind of roll over at mid-defeat and move on. And we did that, very painful, and actually subsequent to us selling a few months later, a lot of those businesses did end up, not all, Transocean for example, survived, but a lot of those businesses did end up filing for chapter 11. So there we should have maybe acted sooner, but fortunately we did act and we did something that was actually quite difficult to do. The story has a slightly happier ending in that a few months later, those businesses emerged from bankruptcy after equity holders got wiped out, bondholders took a big bath. But those companies came back with restructured balance sheet, in many cases, net cash, no debt. And we were able to buy back into those businesses, those very same businesses that hurt us so much, just kind of a couple of months before. Again, a very difficult thing to do psychologically. How do you explain to a client that this share that's cost us so much money last year, we've now got back into the share. But we were able to do that and the shares subsequently rallied quite strongly. Now you contrast that with actually same COVID period. We also owned consumer discretionary stocks in the US, physical like retailers. So companies like the Signet Group, which is the largest jewelry retailer in the US or or the Michaels company, which is a seller of kind of back to school arts and crafts type of things, or Macy's, the department store. And when COVID happened, these stores were all forced to shut. And fortunately in that case, management were able to kind of pivot the businesses from physical retailers to curbside pickups. And they started online divisions and there were various things they could do to keep the businesses going. And in that case, if we applied our learnings from oil and gas, you'd say, well, we should have just, again, taken the first knock, got out and moved in. In that case, we actually doubled down. I mean, a lot of those share prices completely collapsed. Like Signet fell from $100 to five. And the Michaels company fell from over 20 to below one. And we doubled down on those businesses because we thought they would survive. And survive they did. In fact, it wasn't much longer, six, eight months later, maybe the next year, that the Michaels company got bought up by a private equity company at $22 a share. And Signet went from five to back over $100 a share. So, you know, I think it's, you know, Signet and Michaels are both two of the probably in our top five contributors to best performers in the fund since inception because we double down at the right point. So for the oil and gas companies, the wrong thing to do was to double down. But for the consumer discretionary stocks, the right thing to do was to double down. So it's very difficult to apply these universal kind of learnings because things are always different. It's never quite the same. History does rhyme, but it doesn't repeat exactly. And you've also got to remember that markets are complex adaptive systems. So, you know, you can't be too wedded to the past. I think kind of we look forward and we just try to find the best opportunities without kind of allowing our past mistakes to cloud our judgment.

And the general volatility in life. business life will create those opportunities. I think that's not going to change. If anything it's going to get even more volatile or more disruptive.

Certainly that's the trend at the moment.

Maybe just to finalize, apart from the examples that you gave which were great, are there any other sort of more general lessons as a value investor that you would put on the table for the audience to consider?

I can tell you one thing kind of that I think about quite a lot, just for me, myself, something I'm grappling with is there's a temptation to be overly pessimistic. And I guess it's a hardwired evolutionary trait.

AI is going to take all our jobs.

That's right. I mean, if you went back 10,000 years, the sort of overly cautious pessimists probably survived, whereas the irrational optimist got eaten. And so you can see from an evolutionary basis, it's sort of quite hardwired into us. Intellectually, it's very seductive to be pessimistic. But it makes for terrible investors. The best investors, the best company managers tend to be optimists. These are the people that are driving the world forward. So, it's something in my own life that I have to work at every single day because you open a newspaper and it's just all pessimism. And it's very easy to get caught into this.

Sales headlines, headlines.

Headlines and... Exactly. So that's something to me is something that I think is a big, big lesson is to not get carried away by all this pessimism. If you look at, again, zooming out bigger picture, we've seen tremendous improvements. And at any point in history, there were probably a million good reasons why you should be pessimistic. And the same voices that are shouting, AI bubble, AI bubble. We're shouting AI bubble, AI bubble when Nvidia was a trillion dollars. They said it was expensive. When it was two, they said it was expensive. It's now $5 trillion. They're saying it's expensive. I mean, one day they might be right and they'll say, oh, I told you so, but that's when Nvidia falls from 10 to $8 trillion. So avoid the big headlines, avoid the pessimistic stories, avoid 90% of all the news. There probably is 10% of the news is actually really important. And I guess there you have to double down and focus very, very deeply on those sort of news items that are really critical and ignore everything else. And that to me is a big lesson.

So a good one for investors to take away as well, to think longer term.

That's right.

And I think there was a quote I saw that as a human being, this is the number one time to be alive in the history of our civilization.

There's no doubt. Statistically, that's completely true.

Maybe that's a good positive to finish up on. Simon, thank you very much for your insights today. It was awesome. Thank you very much.

Thank you very much, Darren. It's been an absolute pleasure. Great conversation. Thank you.

Thank you also to everyone for listening. For more insights like this, and to search, find, and compare hundreds of investment opportunities in one place for free, like the contrarius funds, please go to investmentmarket.com.au.